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Private Letter Ruling Number: 202107007 Internal Revenue Service November 17, 2020 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202107007 Release Date: 2/19/2021 Index Number: 1092.05-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:FIP:2 PLR-112076-20 Date: November 17, 2020 Dear *******: This is in reply to a request for a private letter ruling, dated May 19, 2020, and supplemental correspondence, seeking an extension of time for Taxpayer to make a mixed straddle account election under section 1.1092(b)-4T(f)(1) of the Temporary Income Tax Regulations ("Election") to establish one or more mixed straddle accounts for its taxable year ending Date 1. FACTS Taxpayer is treated as a partnership for federal income tax purposes and is engaged in the business of trading in securities. Taxpayer represents that, through entities disregarded for federal income tax purposes, it has been entering into straddles and making timely Elections since Year 1. However, Taxpayer failed to make the Election for Year 2 by the due date of Date 2. Taxpayer has an internal tax department that provides tax and related services to Taxpayer including the preparation and filing of federal and state tax returns for Taxpayer and affiliated entities. Taxpayer's internal tax department uses Software to track the various federal, state, local, and foreign tax filing obligations for Taxpayer and its affiliates. Taxpayer represents that it intended to make the Election to establish one or more mixed straddle accounts for Year 2 by Date 2; however, its business has been substantially disrupted by the global COVID-19 pandemic. Three days prior to Date 2, Taxpayer implemented an immediately effective, mandatory work from home policy for all non-essential employees. Virtually all the members of the tax department immediately began working from home, which significantly disrupted the performance of their professional duties. In addition to the disruptions caused by the COVID-19 pandemic, recent statutory changes also contributed to Taxpayer's failure to timely file the Election. Section 2006 of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, Pub. L. No. 114-41, 129 Stat. 443, 457 (2015), ("Surface Act") changed the due date for filing a partnership return from the fifteenth day of the fourth month of the taxable year to the fifteenth day of the third month of the taxable year. Following the enactment of the Surface Act, Software used by Taxpayer's tax department was updated to reflect the new filing date for Form 1065 ( U.S. Return of Partnership Income ), but the corresponding due date for filing Form 6781 ( Gains and Losses From Section 1256 Contracts and Straddles ) was inadvertently not updated. For the taxable years occurring between the enactment of the Surface Act and Year 2, Taxpayer filed the Elections before the due date of its federal income tax returns, and thus did not rely on the due date that was recorded in Software. However, because of the business disruptions occurring in Year 2, the Election was not filed before the due date of Taxpayer's federal income tax return. This in turn resulted in Taxpayer missing the filing deadline for the Election because Software had not been properly updated to reflect the new, correct due date for the Election. On Date 3, Taxpayer discovered that no Election had been filed for Year 2. Following this discovery, Taxpayer's internal tax department corrected the inaccurate due date information for making the Election in Software to prevent a similar mistake from being made in the future. LAW AND ANALYSIS Section 1.1092(b)-4T(a) generally permits a taxpayer to elect (in accordance with paragraph (f) of section 1.1092(b)-4T) to establish one or more "mixed straddle accounts." Section 1.1092(b)-4T(b) defines a mixed straddle account to mean an account for determining gains and losses from all positions held as capital assets in a designated class of activities by the taxpayer at the time the taxpayer elects to establish a mixed straddle account. Section 1.1092(b)-4T(f)(1) generally provides that, except as otherwise provided, the election to establish one or more mixed straddle accounts for a taxable year must be made by the due date (without regard to any extensions) of the taxpayer's income tax return for the immediately preceding taxable year (or part thereof). Section 1.1092(b)-4T(f)(1) further provides that if a taxpayer begins trading or investing in positions in a new class of activities during a taxable year, the election with respect to the new class of activities must be made by the taxpayer by the later of the due date of the taxpayer's income tax return for the immediately preceding taxable year (without regard to any extensions), or 60 days after the first mixed straddle in the new class of activities is entered into. Section 1.1092(b)-4T(f)(1) also provides that if an election is made after the time specified above, the election will be permitted only if the Commissioner concludes that the taxpayer had reasonable cause for failing to make a timely election. Because section 1.1092(b)-4T(f)(1) provides specific guidance about making a late mixed straddle account election, the rules generally applicable to late elections described in section 301.9100-3 do not apply to this late mixed straddle account election. Section 1.1092(b)-4T(f)(2) sets forth the manner for making the election, including that the election is to be made on Form 6781. CONCLUSION Based on the facts and representations submitted, we conclude that Taxpayer has shown reasonable cause for failing to timely make the Election. Therefore, we grant Taxpayer's request for an extension of time to make the Election for one or more mixed straddle accounts for Year 2. This extension will expire 30 days from the date of this letter. The Election must be made in the manner prescribed in section 1.1092(b)-4T(f)(2) and filed with the Director having audit jurisdiction over Taxpayer's federal income tax return. Except as specifically ruled upon above, no opinion is expressed as to the tax treatment of any transactions under the provisions of any other sections of the Internal Revenue Code ("Code") or Income Tax Regulations which may be applicable thereto, or the tax treatment of any conditions existing at the time of or effects resulting from the transaction. Specifically, no opinion is expressed concerning whether the positions designated by Taxpayer as the class of activities is a permissible designation under section 1.1092(b)-4T(b)(2). This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. In accordance with the Power of Attorney on file with this office, copies of this letter are being sent to your authorized representatives. Sincerely, Andrea M. Hoffenson Andrea M. Hoffenson Chief, Branch 2 Office of the Associate Chief Counsel (Financial Institutions and Products)
Internal Revenue Service - Information Release IR-2023-138 Security Summit: Tax pros should remain vigilant against phishing emails and cloud-based attacks August 1, 2023 Media Relations Office Washington, D.C. www.IRS.gov/newsroom Media Contact: 202.317.4000 Public Contact: 800.829.1040 Security Summit: Tax pros should remain vigilant against phishing emails and cloud-based attacks IR-2023-138, August 1, 2023 WASHINGTON -- In the third installment of a special series, the Security Summit partners warned tax professionals to be aware of evolving phishing scams and cloud-based schemes designed to steal sensitive taxpayer information. The IRS and its Security Summit partners - state tax agencies and the nation's tax industry - continue to see a steady stream of attacks aimed at the nation's tax professional community to steal sensitive tax and financial information from clients. "We continue to see a relentless string of attempts from scammers to obtain sensitive tax professional information," said IRS Commissioner Danny Werfel. "Identity thieves and fraudsters continue to look for new and inventive ways into tricking tax pros. These scams can be subtle and sophisticated, and tax pros should not let down their guard to protect their clients and their businesses." This is the third release in a five-part " Protect Your Client; Protect Yourself " summer series from the Security Summit, a public-private partnership that works to protect the tax system against tax-related identity theft and fraud. The weekly news release series and the IRS Nationwide Tax Forums, which continue later this month in Washington, D.C., San Diego and Orlando, provide important information to help protect sensitive taxpayer data that tax professionals hold while also protecting their business from identity thieves. This marks the eighth year that the Security Summit partners have worked to raise awareness about these issues through the " Protect Your Clients; Protect Yourself " campaign. Phishing, spear phishing and whaling One of the most common threats facing tax pros are f phishing and related scams. These are designed to trick the recipient into disclosing personal information such as passwords, bank account numbers, credit card numbers or Social Security numbers. Tax professionals and taxpayers should be aware of different phishing terms and what the scams might look like: - Phishing/Smishing - Phishing emails or SMS/texts (known as "smishing") attempt to trick the recipient into clicking a suspicious link, filling out information or downloading a malware file. Often phishing attempts are sent to multiple email addresses at a business or agency increasing the chance someone will fall for the trick. - Spear phishing - A specific type of phishing scam that bypasses emailing large groups at an organization, but instead identifies potential victims and delivers a more realistic email known as a "lure." These types of scams can be trickier to identify since they don't occur in large numbers. They single out individuals, can be specialized and make the email seem more legitimate. These can pose as a potential client for a tax professional, luring the practitioner into sharing sensitive information. - Whaling - Whaling attacks are very similar to spear phishing, except these attacks are generally targeted to leaders or other executives with access to secure large amounts of information at an organization or business. Whaling attacks can also target people in payroll offices, human resource personal and financial offices. Security Summit partners continue to see instances where tax professionals have been particularly vulnerable to emails posing as potential clients. The criminals use this technique to trick practitioners into opening email links or attachments that infect computer systems with the potential to steal client information. Similar schemes are seen with whaling situations where scammers try to obtain large amount of information with legitimate looking email requests. "The complexity and realism of all these schemes can really catch tax pros and many others off-guard," Werfel said. "Scammers can be quite creative and resourceful. We urge the tax community to remain vigilant as well as taxpayers and anyone else with sensitive financial information." Warning signs of scams Regardless of the type of phishing attempt, tax pros can protect themselves or their organization by being aware of these scams and looking for warning signs like: - An unexpected email or text claiming to come from a known or trusted source such as a colleague, bank, credit card company, cloud storage provider, tax software provider or even the IRS and other government agencies. - A false narrative often with an urgent tone urging the receiver to open a link or attachment. - An email address, number or link that's misspelled or has a different domain name or URL (irs. com vs. IRS. gov ). Cloud-based schemes can ruin a summer day Tax professionals using cloud-based systems that store information or run tax preparation software should use multi-factor authentication to help safeguard that data. Specifically, the Security Summit continues to see attacks that take advantage of cloud-based systems and compromise personal information. Multi-factor authentication options provide an additional layer of security to access a system by using a phone, text messages or tokens. Since email is easier for identity thieves to access, having these layers of security helps guard against potential vulnerabilities. Additional Resources For tax professionals who are victim of any of these schemes or identity theft, IRS urges them to quickly contact their IRS Stakeholder Liaison to provide details of the situation. Quickly reporting these incidents can not only protect the tax pro's clients, it can also help provide critical information timely that can help prevent these attacks from hitting others in the tax community. Tax professionals should review IRS Publication 4557, Safeguarding Taxpayer Data PDF, for more information. Other resources include Small Business Information Security: The Fundamentals PDF, by the National Institute of Standards and Technology and the IRS' Identity Theft Central pages for tax pros. Publication 5293, Data Security Resource Guide for Tax Professionals PDF, provides a compilation of data theft information available on IRS.gov. The IRS also encourages tax professionals to stay connected to the IRS for its latest updates and alerts through subscriptions to e-News for Tax Professionals and its social media sites.
Private Letter Ruling Number: 202338008 Internal Revenue Service April 4, 2023 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Exempt Organizations Examinations Number: 202338008 Release Date: 9/22/2023 Date: 04/04/2023 Taxpayer ID number (last 4 digits): Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: Last day to file petition with United States Tax Court UIL: 501.03-00 CERTIFIED MAIL - Return Receipt Requested Dear ****: Why we are sending you this letter This is a final determination that you don't qualify for exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3), effective **, **. Your determination letter dated **, ** is revoked. Our adverse determination as to your exempt status was made for the following reasons: Organizations described in IRC Section 501(c)(3) and exempt under IRC Section 501(a) must be both organized and operated exclusively for charitable, educational, or other exempt purposes within the meaning of IRC Section 501(c)(3). You have not demonstrated that you are operated exclusively for charitable, educational, or other exempt purposes within the meaning of IRC Section 501(c)(3) and that no part of your net earnings inure to the benefit of private shareholders or individuals. You failed to respond to repeated reasonable requests to allow the Internal Revenue Service to examine your records regarding your receipts, expenditures, or activities as required by IRC sections 6001, 6033(a)(1) and Rev.Rul. 59-95, 1959-1 C.B. 627. Organizations that are not exempt under IRC Section 501 generally are required to file federal income tax returns and pay tax, where applicable. For further instructions, forms and information please visit IRS.gov. Contributions to your organization are no longer deductible under IRC Section 170. What you must do if you disagree with this determination If you want to contest our final determination, you have 90 days from the date this determination letter was mailed to you to file a petition or complaint in one of the three federal courts listed below. How to file your action for declaratory judgment If you decide to contest this determination, you can file an action for declaratory judgment under the provisions of Section 7428 of the Code in either: - The United States Tax Court, - The United States Court of Federal Claims, or - The United States District Court for the District of Columbia You must file a petition or complaint in one of these three courts within 90 days from the date we mailed this determination letter to you. You can download a fillable petition or complaint form and get information about filing at each respective court's website listed below or by contacting the Office of the Clerk of the Court at one of the addresses below. Be sure to include a copy of this letter and any attachments and the applicable filing fee with the petition or complaint. You can eFile your completed U.S. Tax Court petition by following the instructions and user guides available on the Tax Court website at ustaxcourt.gov/dawson.html. You will need to register for a DAWSON account to do so. You may also file your petition at the address below: United States Tax Court 400 Second Street, NW Washington, DC 20217 ustaxcourt.gov The websites of the U.S. Court of Federal Claims and the U.S. District Court for the District of Columbia contain instructions about how to file your completed complaint electronically. You may also file your complaint at one of the addresses below: US Court of Federal Claims 717 Madison Place, NW Washington, DC 20439 uscfc.uscourts.gov US District Court for the District of Columbia 333 Constitution Avenue, NW Washington, DC 20001 dcd.uscourts.gov Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory judgment under IRC Section 7428. We'll notify the appropriate state officials (as permitted by law) of our determination that you aren't an organization described in IRC Section 501(c)(3). Information about the IRS Taxpayer Advocate Service The IRS office whose phone number appears at the top of the notice can best address and access your tax information and help get you answers. However, you may be eligible for free help from the Taxpayer Advocate Service (TAS) if you can't resolve your tax problem with the IRS, or you believe an IRS procedure just isn't working as it should. TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Contact your local Taxpayer Advocate Office at: Internal Revenue Service Taxpayer Advocate Office Or call TAS at 877-777-4778. For more information about TAS and your rights under the Taxpayer Bill of Rights, go to taxpayeradvocate.IRS.gov. Do not send your federal court pleading to the TAS address listed above. Use the applicable federal court address provided earlier in the letter. Contacting TAS does not extend the time to file an action for declaratory judgment. Where you can find more information Enclosed are Publication 1, Your Rights as a Taxpayer, and Publication 594, The IRS Collection Process, for more comprehensive information. Find tax forms or publications by visiting IRS.gov/forms or calling 800-TAX-FORM (800-829-3676). If you have questions, you can call the person shown at the top of this letter. If you prefer to write, use the address shown at the top of this letter. Include your telephone number, the best time to call, and a copy of this letter. You may fax your documents to the fax number shown above, using either a fax machine or online fax service. Protect yourself when sending digital data by understanding the fax service's privacy and security policies. Keep the original letter for your records. Sincerely, ** for Lynn A. Brinkley Director, Exempt Organizations Examinations Enclosures: Publication 1 Publication 594 Publication 892 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Exempt Organizations Examinations Date: November 16, 2022 Taxpayer ID number: Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: Address: Internal Revenue Service Attn: Manager's contact information: Name: ID number: Telephone: Response due date: CERTIFIED MAIL -- Return Receipt Requested Dear **: Why you're receiving this letter We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we propose to revoke your tax-exempt status as an organization described in Internal Revenue Code (IRC) Section 501(c)(3). If you agree If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an organization described in IRC Section 501(c)(3) for the periods above. After we issue the final adverse determination letter, we'll announce that your organization is no longer eligible to receive tax deductible contributions under IRC Section 170. If you disagree 1. Request a meeting or telephone conference with the manager shown at the top of this letter. 2. Send any information you want us to consider. 3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after the meeting or after we consider the information. The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case. For your protest to be valid, it must contain certain specific information, including a statement of the facts, applicable law, and arguments in support of your position. For specific information needed for a valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn't apply now that we've issued this letter. 4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities) if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the IRS. If you're considering requesting technical advice, contact the person shown at the top of this letter. If you disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as explained above. A decision made in a technical advice memorandum, however, generally is final and binding on Appeals. If we don't hear from you If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final adverse determination letter. Contacting the Taxpayer Advocate Office is a taxpayer right The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778. For additional information You can get any of the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person shown at the top of this letter. Sincerely, ** for Lynn A. Brinkley Acting Director Exempt Organizations Examinations Enclosures: Form 886-A and Attachments Form 6018 Issue: Whether **, ** (Taxpayer) continues to qualify for exemption from Federal income tax under section 501(a) of the Internal Revenue Code (Code) as a charitable organization described in Code section 501(c)(3). Facts: Taxpayer was incorporated in the State of ** on **, **, under the state's nonprofit corporation law. In **, Taxpayer filed Form **, **, with the Internal Revenue Service (IRS). The Form ** application is signed by ** as the Executive Director according to the declaration on page **. ** of the Form ** requires applicant organizations to list the names, titles and mailing addresses of all officers, directors, and trustees. ** is listed in ** with a mailing address of **, **, **. ** other individuals, ** and **, are also listed in **. ** has the title Finance Director with an address in **, **. ** has the title Managing Director, and his mailing address is **, **. Public records maintained by the State of ** show that ** is the registered agent for Taxpayer. The address in **, ** furnished for ** on Form ** also appears as the registered office street address on state records. The address in **, corresponds to a ** (**) ** which offers mailbox services. A copy of the pertinent website content posted by or on behalf of the ** is appended as Exhibit A. As described in Exhibit A, the following mailbox services are offered by ** at its ** located at **, **: - A real street address in lieu of a P.O. Box. - Package and mail receipt notifications - Mail holding and forwarding - Call-in mail check The mailing address provided for Taxpayer on Form ** is **, **, **. This is the same address furnished for **, the Managing Director. The mailing address furnished by Taxpayer on its Form ** for both the organization and ** also corresponds to a ** which offers mailbox services. A copy of the pertinent website content posted by or on behalf of the ** located in ** is appended as Exhibit B. In its Form **, Taxpayer attested that it is both organized and operated exclusively for charitable purposes. Taxpayer did not furnish a copy of its Certificate of Incorporation since the organizing document is not required to be filed with the ** Form **. Based on the representations and attestations made by Taxpayer in its Form **, the IRS issued a favorable determination letter dated **, **, granting Taxpayer recognition of exemption under section 501(c)(3) of the Code effective **, **. Taxpayer was classified as a public charity under sections 509(a)(1) and 170(b)(1)(A)(vi) of the Code based on its attestation regarding public support in ** of the Form **. IRS records show that Taxpayer filed Form **, **, for the ** and ** calendar tax years. Taxpayer filed Form ** in lieu of a Form ** or Form ** return. The organization indicated on Form ** that its gross receipts are normally $ ** or less. The address reported by Taxpayer on its Forms ** is the same address reported on the Form ** - **, **, **. In **, the Tax Exempt and Governmental Entities (TE/GE) division of the IRS selected Taxpayer for examination of its books and records covering the ** calendar year. The notice of examination package, which is dated **, **, consists of IRS letter **, Form **, ** (**), Publication 1, Your Rights as a Taxpayer, Notice 609, Privacy Act Notice, and Publication 3498-A, The Examination Process (Audits by Mail). The notice of examination package was mailed to Taxpayer at the last known address on file for the organization, which is as follows: As noted on page ** of the **-page ** issued with the examination notice, the examination of Taxpayer's books and records is intended to verify that the organization: 1. Operates in accordance with section 501(c)(3) of the Code 2. Is eligible to file Form ** based on gross receipts, and 3. Filed all required returns including information returns. As part of standard audit procedures, the IRS examiner requested that Taxpayer furnish certain records and information needed to determine whether the organization is operating in furtherance of charitable and other exempt purposes described in section 501(c)(3) of the Code. ** # ** issued to Taxpayer on **, **, requests copies of the following records and information covering the ** calendar year under examination: - Chart of accounts - General ledger - Adjusted trial balance - Cash disbursements journal. - Monthly bank statements for Taxpayer's primary operating (checking) account together with canceled checks or check images furnished by the bank. - Monthly statements for all credit cards that may have been issued to Taxpayer. - Minutes of meetings held by Taxpayer's Board of Directors and committees of the Board. - Internal policies and procedures regarding the handling and recording of cash donations. - Lease agreements and other information relating to any office or other facility used by Taxpayer to conduct activities. - Contracts and other arrangements with individuals and/or organizations which solicit and raise funds for Taxpayer including, but not limited to, professional fundraising organizations. - The organization's website address, if any, and the identity of the party that hosts the website. If no website is maintained, Taxpayer was requested to provide copies of records which describe the activities conducted in **. In the absence of formal marketing and fundraising materials, Taxpayer was asked to provide a statement describing the activities, services, programs, and events conducted by the organization in **. - Information regarding the accounting software used by Taxpayer for preparation of its books and records. The response due date for ** # was **, **. Taxpayer did not respond to the ** or otherwise contact the IRS examiner or the group manager by the due date. In accordance with established IRS procedures, a follow-up "Delinquency Notice" letter was issued to Taxpayer with a copy of ** # on **, **, with a response due date of **, **. The delinquency notice states, in part, that if the organization does not fully respond to the ** by the response due date, the IRS will propose revocation of Taxpayer's exempt status. The delinquency notice was not returned by the post office as undeliverable. Taxpayer did not respond to the delinquency notice or otherwise contact the IRS examiner. Neither the IRS examiner nor the group manager subsequently received any of the requested records and information from ** or any other officer or director of Taxpayer. There is no evidence that Taxpayer is an affiliate or chapter of any other exempt organization or network of charities that operate within the United States. Taxpayer did not identify a website on Form ** filed for ** and **. A search of online account records maintained by the State of **, Office of **, shows that Taxpayer's franchise tax was involuntarily ended. Accordingly, Taxpayer's registration or certificate with the state was ended as a result of a tax forfeiture or administrative forfeiture by the ** Secretary of State. A copy of the entity status search secured by the IRS examiner on **, **, is appended as Exhibit C. Applicable Law: Section 501(c)(3) of the Code provides that an organization organized and operated exclusively for charitable or educational purposes is exempt from Federal income tax, provided no part of its net earnings inures to the benefit of any private shareholder or individual. Section 1.501(c)(3)-1(a)(1) of the Treasury Regulations states that to be exempt as an organization described in section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in such section - charitable, religious, educational, scientific, literary, testing for public safety, or for the prevention of cruelty to children or animals. If an organization fails to meet either the organizational test or the operational test, it is not exempt. Section 1.501(c)((3)-1(c) of the regulations describes the operational test requirements for 501(c)(3) exemption. The operational test focuses on how the organization is actually operated, regardless of whether it is properly organized for tax-exempt purposes. Section 1.501(c)(3)-1(c)(1) of the regulations provides that an organization will be regarded as "operated exclusively" for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in section 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. This is referred to as the "primary activities" test. Section 1.501(c)(3)-1(c)(2) of the regulations provides that an organization is not operated exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals. Section 511 of the Code imposes a tax at corporate rates under section 11 on the unrelated business taxable income of certain tax-exempt organizations. Section 6001 of the Code provides, in part, that every person liable for any tax imposed by this title, or for the collection thereof, shall keep such records, render such statements, make such returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Whenever in the judgment of the Secretary it is necessary, he may require any person, by notice served upon such person or by regulations, to make such returns, render such statements, or keep such records, as the Secretary deems sufficient to show whether or not such person is liable for tax under this title. Section 1.6001-1(c) of the regulations provides that in addition to such permanent books and records as are required by paragraph (a) of this section with respect to the tax imposed by section 511 on unrelated business income of certain exempt organizations, every organization exempt from tax under section 501(a) shall keep such permanent books of account or records, including inventories, as are sufficient to show specifically the items of gross income, receipts and disbursements. Such organizations shall also keep such books and records as are required to substantiate the information required by section 6033. See section 6033 and regulations sections 1.6033-1 through 1.6033-3. Section1.6001-1(e) of the regulations provides that the books or records required by this section shall be kept at all times available for inspection by authorized internal revenue officers or employees and, shall be retained as long as the contents thereof may be material in the administration of any internal revenue law. Section 6033 of the Code provides, in general, that every organization exempt under IRC 501(a) shall file an annual return, stating specifically the items of gross income, receipts, and disbursements, and such other information for the purpose of carrying out the Internal Revenue laws as the Secretary may by forms of regulations prescribe, and shall keep such records, render under oath such statements, make such other returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Section 6033 of the Code provides an exception to the annual filing requirement in the case of an organization described in section 501(c) (other than a private foundation or a supporting organization described in section 509(a)(3)) the gross receipts of which in each taxable year are normally not more than $50,000. See section 1.6033-2(g)(1)(iii) of the regulations. Section 1.6033-2(g)(5) of the regulations provide that an organization that is not required to file an annual return by virtue of the gross receipts exception must submit an annual electronic notice notification as described in section 6033(i) of the Code. Section 1.6033-2(i)(2) of the regulations provides that every organization which is exempt from tax, whether or not it is required to file an annual information return, shall submit such additional information as may be required by the Internal Revenue Service for the purpose of inquiring into its exempt status and administering the provisions of subchapter F (section 501 and following), chapter 1 of subtitle A of the Code and section 6033. Rev.Rul. 59-95, 1959-1 C.B. 627, concerns an exempt organization that was requested to produce a financial statement and statement of its operations for a certain year. However, its records were so incomplete that the organization was unable to furnish such statements. The Service held that the failure or inability to file the required information return or otherwise to comply with the provisions of section 6033 of the Code and the regulations which implement it, may result in the termination of the exempt status of an organization previously held exempt, on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status. Organization's Position: Taxpayer's position is unknown at this time. Government's Position: Analysis The facts indicate that Taxpayer received recognition of exemption under section 501(c)(3) of the Code in ** based on information presented in its Form **. Taxpayer attested that it is both organized and operated exclusively for charitable purposes. The TE/GE division of the IRS maintains an examination program for exempt organizations to determine whether they are complying with statutory requirements regarding their tax-exempt status, the proper filing of returns, and other tax reporting matters. Taxpayer filed Form **, **, for the ** calendar year. Taxpayer was selected for audit to ensure that the organization's activities and operations align with their approved exempt status and to verify that the filing of Form ** was proper based on the organization's gross receipts. Section 6001 of the Code and the regulations thereunder impose requirements on exempt organizations to keep books and records to substantiate information required under section 6033 of the Code. Although Taxpayer filed an ** in lieu of a return, the organization is nevertheless required to produce records and other information requested by the IRS to verify that it operates in furtherance of its exempt purpose. See regulations section 1.6033-2(i)(2). As part of standard audit procedures, the IRS examiner requested basic financial records including books of account, minutes of Board meetings and records and information pertaining to Taxpayer's activities. Such records and information are needed to verify whether Taxpayer continues to be operated exclusively for one or more of the exempt purposes specified in section 501(c)(3) of the Code. Taxpayer failed to respond to repeated reasonable requests to allow the IRS to examine its books and records including its receipts, disbursements, and other items required to be kept and maintained pursuant to sections 6001 and 6033(a)(1) of the Code. Accordingly, Taxpayer has failed to meet the requirements of section 501(c)(3) of the Code and sections 1.501(c)(3)-1(a) and 1.501(c)(3)-1(c) of the regulations, in that the organization has not established that it is operated exclusively for exempt purposes and that no part of its net earnings inures to the benefit of private shareholders or individuals. See also Rev.Rul. 59-95. Conclusion: For the reasons stated above, the IRS has determined that Taxpayer is no longer exempt from Federal income tax under section 501(a) of the Code as an organization described in Code section 501(c)(3). The IRS is proposing to revoke Taxpayer's 501(c)(3) tax-exempt status effective **, **, the **** calendar year under examination. Please note that this Form 886-A, Explanation of Items, which is also known as the revenue agent report (RAR), constitutes an integral part of the attached 30-day letter #3618. Please refer to the attached letter #3618 for additional information including appeals rights and other options available to the organization and, the instructions for how to respond.
Private Letter Ruling Number: 202052035 Internal Revenue Service August 6, 2020 DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE 1100 Commerce Street, MC 4920DAL Dallas, TX 75242 TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION Number: 202052035 Release Date: 12/24/2020 UIL: 501.07-00 Date: August 6, 2020 Taxpayer ID Number: Form: For Tax Period(s) Ending: Person to Contact: Identification Number: Telephone Number: Fax Number: CERTIFIED MAIL -- Return Receipt Requested LAST DAY FOR FILING A PETITION WITH THE TAX COURT: Dear *****: This is a final determination explaining why your organization does not qualify as an organization described in Internal Revenue Code (IRC) section 501(c)(7) for the tax period(s) listed above. In the future, if you believe your organization qualifies for tax-exempt status and would like a determination letter from the Internal Revenue Service, you can request a determination by filing Form 1024, Application for Recognition of Exemption Under Section 501(a), or Form 1024-A, Application for Recognition of Exemption Under Section 501(c)(4) of the Internal Revenue Code (as applicable) and paying the required user fee. Our adverse determination as to your exempt status was made for the following reasons: You do not meet the requirements for exemption under IRC section 501(c)(7). You meet neither the gross income test nor the facts and circumstances test. You receive the majority of your income from sources outside of your membership by engaging in substantial, nontraditional, recurring trade or business activity outside of your membership. Therefore, you do not operate substantially for pleasure, recreation, or other nonprofitable purposes. We propose to disqualify your self-declared tax-exempt status under IRC section 501(c)(7) for the years ending December 31, 20XX and December 31, 20XX. Organizations that are not exempt under IRC Section 501 generally are required to file federal income tax returns and pay tax, where applicable. For further instructions, forms, and information please visit www.irs.gov. If you decide to contest this determination, you may file an action for declaratory judgment under the provisions of IRC Section 7428 in one of the following three venues: 1) United States Tax Court, 2) the United States Court of Federal Claims, or 3) the United States District Court for the District of Columbia. A petition or complaint in one of these three courts must be filed within 90 days from the date this determination was mailed to you. Please contact the clerk of the appropriate court for rules and the appropriate forms for filing petitions for declaratory judgment by referring to the enclosed Publication 892. You may write to the courts at the following addresses: United States Tax Court 400 Second Street, NW Washington, DC 20217 U.S. Court of Federal Claims 717 Madison Place, NW Washington, DC 20439 U.S. District Court for the District of Columbia 333 Constitution Ave., N.W. Washington, DC 20001 Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory judgment under IRC Section 7428. You may be eligible for help from the Taxpayer Advocate Service (TAS). TAS is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 1-877-777-4778. Taxpayer Advocate assistance can't be used as substitute for established IRS procedures, formal appeals processes, etc. The Taxpayer Advocate is not able to reverse legal or technically correct tax determination, nor extend the time fixed by law that you have to file a petition in Court. The Taxpayer Advocate can, however, see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling. You can get any of the forms or publications mentioned in this letter by calling 800-TAX-FORM (800-829-3676) or visiting our website at www.irs.gov/forms-pubs. If you have any questions about this letter, please contact the person whose name and telephone number are shown in the heading of this letter. Sincerely, Sean E. O'Reilly Director, EO Examinations Enclosures: Publication 892 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Date: December 10, 2019 Taxpayer ID number: Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: Address: Manager's contact information: Name: ID number: Telephone: Response due date: CERTIFIED MAIL -- Return Receipt Requested Dear ***: Why you're receiving this letter We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that your organization doesn't qualify as an organization described in Internal Revenue Code (IRC) Section 501(c)(7). This letter is not a determination of your tax-exempt status under IRC Section 501 for any period other than the tax periods above. If you agree If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an organization described in IRC Section 501(c)(7) for the periods above. If you disagree 1. Request a meeting or telephone conference with the manager shown at the top of this letter. 2. Send any information you want us to consider. 3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after the meeting or after we consider the information. The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case. For your protest to be valid, it must contain certain specific information, including a statement of the facts, applicable law, and arguments in support of your position. For specific information needed for a valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn't apply now that we've issued this letter. 4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities) if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the IRS. If you're considering requesting technical advice, contact the person shown at the top of this letter. If you disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as explained above. A decision made in a technical advice memorandum, however, generally is final and binding on Appeals. If we don't hear from you If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final adverse determination letter. In the future, if you believe your organization qualifies for tax-exempt status and would like a status determination letter from the IRS, you can request a determination by filing Form 1024, Application for Recognition of Exemption Under Section 501(a), and paying the required user fee. Contacting the Taxpayer Advocate Office is a taxpayer right The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778. For additional information You can get any of the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person shown at the top of this letter. Sincerely, *** for Maria Hooke Director, Exempt Organizations Examinations Enclosures: Form 886-A Form 6018 Publication 892 Publication 3498 ISSUE Whether the *** qualifies for self-declared tax-exempt status under Internal Revenue Code (IRC) section 501(c)(7) when it derives significant income from a substantial, nontraditional, ongoing business activity outside of its membership. FACTS The ***, hereinafter referred to as the Club, was formed as an association in the ***. The Club has never been issued a determination letter by the Internal Revenue Service (IRS) and has been filing its exempt organization returns as a self-declared organization since ***. The Club's calendar year ends on December 31. The Club provides pleasure and recreation to hunters and marksmen in the practical shooting of firearms. Additionally, its activities include education in the use of firearms as well as the promotion of natural resource conservation. Its educational activities include presentations by its members and state/local officials about firearm use and safety. Its conservation activities include being a good steward of its land as well as participating in an ongoing program directed by the *** Department of Natural Resources where the efficacy of a treatment for an invasive tree species is being tested. The Club is a membership organization that has active members and retired members possessing the same voting rights. The use of the Club is for members and bona fide guests. The Club receives modest amounts of income from membership dues, interest earned on deposits in a savings account, and land rented for crop production. Its primary income source is royalties from the leasing of its land. LAW Prior to its amendment in 1976, IRC section 501(c)(7) provided exemption from federal income tax for social clubs organized exclusively for pleasure, recreation, and other nonprofitable purposes where no part of the club's net earnings inures to the benefit of any private shareholder. Subsequently, Public Law 94-568 amended the "exclusive" provision to read "substantially' in order to allow an IRC § 501(c)(7) organization to receive up to 35 percent of its gross receipts, including investment income, from sources outside its membership without losing its tax-exempt status. The Committee Reports for Public Law 94-568 (Senate Report No. 94-1318 2d Session, 1976-2 C.B. 597) further states; (a) Within the 35 percent amount, not more than 15 percent of the gross receipts should be derived from the use of a social club's facilities or services by the general public. This means that an exempt social club may receive up to 35 percent of its gross receipts from a combination of investment income and receipts from nonmembers, so long as the latter do not represent more than 15 percent of total receipts. (b) Thus, a social club may receive investment income up to the full 35 percent of its gross receipts if no income is derived from nonmembers' use of club facilities. (c) In addition, the Committee Report states that where a club receives unusual amounts of income, such as from the sale of its clubhouse or similar facilities, that income is not to be included in the 35 percent formula. The Committee Reports for Public Law 94-568 state that it is not "intended that these organizations should be permitted to receive, within the 15 or 35 percent allowances, income from the active conduct of businesses not traditionally carried on by these organizations." This language means that Congress intended that exempt social clubs should not be permitted to receive income from activities not conducted in furtherance of their exempt purposes. Therefore, a club that engages in nontraditional business activity can jeopardize its exempt status even when its gross receipts are within the permissible limits. Revenue Ruling 58-589, 1958-2 C.B. 266 states that a social club's business activity will defeat exemption unless such activity is incidental, trivial or nonrecurrent; which the IRS has interpreted to mean "insubstantial" for this purpose. Treasury Regulation section 1.501(c)(7)-1(b) states that a club which engages in business, such as making its social and recreational facilities available to the general public or by selling real estate, timber, or other products, is not organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes, and is not exempt under section 501(a). However, an incidental sale of property will not deprive a club of its exemption. Revenue Ruling 66-149, 1966-1 C.B. 146 provided that a social club is not exempt from federal income tax as an organization described in IRC section 501(c)(7) if it regularly derives a substantial part of its income from nonmember sources such as, for example, dividends and interest on investments. In this instance, the club's funds were invested primarily for the purpose of producing income through dividends, interest, or capital appreciation. It was evident that 1) such income was regularly derived from nonmember sources, 2) that the income was received in fulfillment of and pursuant to a profit motive, and 3) that the income from investments was substantial in relation to total income. Revenue Ruling 69-220, 1969-1 C.B. 154 held that a social club that receives a substantial portion of its income from the rental of property and uses such income to defray operating expenses and to improve and expand its facilities is not exempt under IRC section 501(c)(7). Santee Club v. White, 87 F.2d 5 (1936) held that, where a club engages in income producing transactions which are not a part of the club purposes, exemption will not be denied because of incidental, trivial, or nonrecurrent activities such as sales of property no longer adapted to the club's purpose. National Mah Jongg League v. U.S., 75 F.Supp. 769 (1947) stated that a corporation that was organized for the purpose of promoting the game of Mah Jongg; where its income from memberships was insufficient to meet expenses and where the corporation engaged in the commercial enterprise of selling to the public lists and tiles where the income therefrom enabled the corporation to meet its deficit, carry on without an increase of dues or curtailment of operations, and accumulate a surplus which was donated to charity, was not operated exclusively for social purposes or charitable purposes. *** Therefore, the corporation was not exempt from federal income tax under IRC section 501(c)(7) or IRC section 501(c)(3). United States of America v. Fort Worth Club of Fort Worth, Texas, 345 F.2d 52, 57 (5th Cir. 1965) held that a social club which derived over half of its receipts, in amounts of hundreds of thousands of dollars, from profitable outside business was not exempt from federal income taxes on grounds it was organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes. The court declared that for a social club to qualify for exemption under IRC section 501(c)(7), its outside profits must be 1) strictly incidental to club activities, not a result of an outside business, and 2) either negligible or nonrecurring GOVERNIVIENT'S POSITION Utilizing the guidance provided in Public Law 94-568, as well as previous revenue rulings and court cases, the Service prescribes two tests that a club can use to demonstrate it is organized substantially for pleasure, recreation, and other nonprofitable purposes; a "gross receipts" test and a "facts and circumstances" test. - The gross receipts test is an income test where its limitations reflect those of Public Law 94-568: - Clubs may receive up to 35 percent of their gross receipts, including investment income, from sources outside of their membership - Within the 35 percent limitation, no more than 15 percent of gross receipts may be derived from nonmember use of club facilities and/or services If a club's income sources are within these limits, the club will be considered to be operated substantially for pleasure, recreation, and other nonprofitable purposes. - If a club's income sources are outside of the limits of the gross receipts test, then the club may still be able to show through facts and circumstances that substantially all of its activities are for pleasure, recreation, and other nonprofitable purposes. The Club's testing results are as follows: 20XX - Gross Receipts Test -- fail - 0 = gross receipts from sources outside of the club's membership - 0 = total gross receipts - 0 / = 0% - Facts and Circumstances Test -- fail - For a social club, the leasing of land for o is a nontraditional business activity o is an ongoing/recurring business activity o is not an insubstantial business activity o does not further an exempt purpose 20XX - Gross Receipts Test -- fail - 0 = gross receipts from sources outside of the club's membership - 0 = total gross receipts - 0 / = 0.00% - Facts and Circumstances Test -- fail - For a social club, the leasing of land for o is a nontraditional business activity o is an ongoing/recurring business activity o is not an insubstantial business activity o does not further an exempt purpose The Club is like the organization in Revenue Ruling 66-149 that did not qualify for exemption under IRC section 501(c)(7) because it regularly derives income from nonmember sources that is substantial in relation to its total income. The Club is like the organization in Revenue Ruling 69-220 that did not qualify for exemption under IRC section 501(c)(7) because it receives a substantial portion of its income from sources other than members. The Club is not similar to the organization in Santee Club v. White because its royalties from its oil and gas lease are not incidental, not trivial and are recurring. The Club is similar to the organization in National Mah Jongg League v. U.S because the majority of the Club's revenue is from oil and gas lease royalties where its royalty income exceeds the income from its members many times over. The revenue from royalties is recurring and more than incidental. While the Club may have been organized for pleasure, recreation, and other nonprofitable purposes, its revenues show that it is not operating for these purposes. Per United States of America v. Fort Worth Club of Fort Worth, Texas, the Club's royalty income must be incidental to the Club's activities and either negligible or nonrecurring. Instead, the Club's royalty income is both recurring and substantial. As prescribed in Treasury Regulation section 1.501(c)(7)-1(b), the Club is engaging in business activities and is therefore not organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes. TAXPAYER'S POSITION In ***, the Club recognized it no longer qualified as exempt under IRC section 501(c)(7). As a result, it filed a 20XX Form 1120, U.S. Corporation Income Tax Return, with the IRS; and intended to do the same in future years. However, the IRS returned this 20XX Form 1120 to the Club with correspondence indicating that the Club must continue filing Form 990-series returns because it was a tax-exempt organization. Therefore, the Club continued filing Form 990-series returns along with their related Forms 990-T, Exempt Organization Business Income Tax Return. The Club has not yet been presented with this report. However, it has communicated that it agrees with the disqualification of its tax-exempt status under IRC section 501(c)(7). CONCLUSION The Club does not meet the requirements for exemption under IRC section 501(c)(7). It meets neither the gross income test nor the facts and circumstances test. The Club receives the majority of its income from sources outside of its membership by ***** engaging in a substantial, nontraditional, recurring trade or business. Therefore, the Club does not operate substantially for pleasure, recreation, or other nonprofitable purposes. We propose to disqualify the Club's self-declared tax-exempt status under IRC section 501(c)(7) for the years ending December 31, 20XX and December 31, 20XX.
Internal Revenue Service - Information Release IR-2022-78 Identity stolen? Request an Identity Protection PIN from the IRS April 11, 2022 Media Relations Office Washington, D.C. www.IRS.gov/newsroom Media Contact: 202.317.4000 Public Contact: 800.829.1040 Identity stolen? Request an Identity Protection PIN from the IRS IR-2022-78, April 11, 2022 WASHINGTON -- The Internal Revenue Service today reminded all taxpayers - particularly those who are identity theft victims - of an important step they should take to protect themselves from tax fraud. Some identity thieves use taxpayers' information to file fraudulent tax returns. By requesting Identity Protection PINs from the Get an IP PIN tool on IRS.gov, taxpayers can prevent thieves from claiming tax refunds in their names. Identity Protection PINs and how to get one An IP PIN is a six-digit number the IRS assigns to an individual to help prevent the misuse of their Social Security number or Individual Taxpayer Identification Number (ITIN) on federal income tax returns. The IP PIN protects the taxpayer's account, even if they're no longer required to file a tax return, by rejecting any e-filed return without the taxpayer's IP PIN Taxpayers should request an IP PIN: - If they want to protect their SSN or ITIN with the IRS, - If they want to protect their dependent's SSN or ITIN with the IRS, - If they think their SSN, ITIN or personal information was exposed by theft or fraudulent acts or - If they suspect or confirm they're a victim of identity theft. Taxpayers can go to IRS.gov/getanippin to complete a thorough authentication check. Once authentication is complete, an IP PIN will be provided online immediately. A new IP PIN is generated every year for added security. Once an individual is enrolled in the IP PIN program, there's no way to opt-out. The IRS may automatically assign an IP PIN if the IRS determines the taxpayer's a victim of tax-related identity theft. The taxpayer will receive a notification confirming the tax-related ID theft incident along with an assigned IP PIN for future tax-return filings. Taxpayers will either receive a notice with their new IP PIN every year in early January for the next filing season or they must retrieve their IP PIN by going to IRS.gov. Tax-related identity theft and how to handle it Tax-related identity theft occurs when someone uses a taxpayer's stolen SSN to file a tax return claiming a fraudulent refund. In the vast majority of tax-related identity theft cases, the IRS identifies a suspicious tax return and pulls the suspicious return for review. The IRS then sends a letter to the taxpayer and won't process the tax return until the taxpayer responds. Depending on the situation, the taxpayer will receive one of three letters asking them to verify their identity: - Letter 5071C, asks them to use an online tool to verify their identity and tell the IRS if they filed the return in question. - Letter 4883C, asks the taxpayer to call the IRS to verify their identity and tell the IRS if they filed the return. - For those who have been a victim of a data breach, they may receive Letter 5747C and be asked to verify their identity in-person at a Taxpayer Assistance Center. If the taxpayer receives any of these letters, they don't need to file an Identity Theft Affidavit (Form 14039). Instead, they should follow the instructions in the letter. When to file an Identity Theft Affidavit If a taxpayer hasn't heard from the IRS but suspects tax-related identity theft, they should complete and submit a Form 14039, Identity Theft Affidavit PDF. Signs of possible tax-related identity theft include: - A taxpayer can't e-file their tax return because a duplicate tax return was filed using their Social Security number. (Check that there's no error in the SSN, such as transposed numbers.) - A taxpayer can't e-file because a dependent's Social Security number or ITIN was already used by someone on another return without the taxpayer's knowledge or permission. (Also check that the SSN or ITIN is correct and be sure the dependent hasn't filed a separate tax return.) - A taxpayer receives a tax transcript in the mail they did not request. - A taxpayer receives a notice from a tax preparation software company confirming an online account was created in their name, and they did not create one. - A taxpayer receives a notice from their tax preparation software company that their existing online account was accessed or disabled when they took no action. - A taxpayer receives an IRS notice informing them that they owe additional tax, or their refund was offset to a balance due, or that they have had collection actions taken against them for a year they did not earn any income or file a tax return. - The IRS sends a taxpayer a notice indicating that the taxpayer received wages or other income from an employer for whom they didn't work. - The taxpayer was assigned an Employer Identification Number (EIN), but they did not request or apply for an EIN. The IRS will work to verify the legitimate taxpayer, clear the fraudulent return from the taxpayer's account and, generally, place a special marker on the account that will generate an IP PIN each year for the taxpayer who is a confirmed victim. For information about tax-related identity theft, see Identity Protection: Prevention, Detection and Victim Assistance and IRS Identity Theft Victim Assistance: How It Works on IRS.gov. The Federal Trade Commission website also includes information about tax-related identity theft. Signs of non-tax-related identity theft; no need to file form 14039 Non-tax-related identity theft occurs when someone uses stolen or lost personal identifiable information (PII) to open credit cards, obtain mortgages, buy a car or open other accounts without their victim's knowledge. Potential evidence of non-tax-related identity theft can include: - An individual receives balance due bills from companies with whom they didn't conduct business, magazine subscriptions they didn't order, notifications of a mortgage statement and/or credit cards for which they didn't apply. - An individual receives notices of unemployment benefits for which they didn't apply. - An individual receives a Notice CP 01E, Employment Identity Theft. - An individual receives a Form W-2 or 1099 from a corporation or employer from whom they did not receive the income reported and they have not received a notice or letter from the IRS questioning them about that income. - A taxpayer can't e-file because a dependent's SSN or ITIN was already used by someone who is known to the taxpayer but is not the parent or legal guardian, and the taxpayer did not provide permission for that person to claim the dependent. For additional information about this issue, see Publication 1819, Divorce and non-custodial, separated, or never married parents PDF. Victims of non-tax-related identity theft don't need to report these incidents to the IRS but should take steps to protect against the type of identity theft they've experienced.
Private Letter Ruling Number: 202406001 Internal Revenue Service February 13, 2023 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202406001 Release Date: 2/9/2024 Index Number: 118.01-00, 305.04-00, 2501.00-00, 2511.00-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:CORP:2 PLR-102666-23 Date: February 13, 2023 Dear ******: This letter responds to your authorized representative's letter dated August 10, 2022, requesting rulings under sections 118, 305, 2501, 2511, 2512, and 2702 of the Internal Revenue Code (the "Code"). The information provided in that letter and in later correspondence is summarized below. The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party. This office has not verified any of the material submitted in support of the request for rulings, but such material is subject to verification on examination. Summary of Facts Company is a State A corporation and the parent of an affiliated group of corporations that files a consolidated U.S. federal income tax return on a calendar year basis. Company was incorporated in Year 1. Company is engaged in Business A. Executive is an executive of Company. On Date 1, Executive established Trust 1 for the benefit of Family Member. Also on Date 1, Executive established Trust 2 for the benefit of the Family Beneficiaries. On Date 2 and Date 4, Executive established Trust 3 and Trust 4, respectively, for the benefit of Family Member. On Date 3, Executive established Trust 5 for the benefit of Person 1. Also on Date 2, Executive established GRAT (Grantor Retained Annuity Trust) 1 for the benefit of Executive and Person 1. On Date 8, Executive established GRAT 2 and GRAT 3 for the benefit of Executive, Person 2, Person 3, Person 4, and a trust, not part of this ruling request, for Person 2, Person 3, and Person 4. On Date 9, Executive established GRAT 4 for the benefit of Trust 2. Trust 1, Trust 2, Trust 3, Trust 4, Trust 5, GRAT 1, GRAT 2, GRAT 3, and GRAT 4 are hereinafter referred to collectively as "Trusts". Executive's interest in GRAT 4 is a "qualified interest" under section 2702(b). Executive's interests in GRAT 1, GRAT 2, and GRAT 3 are not subject to the special valuation rules of section 2702(a) because the beneficiaries of GRAT 1, GRAT 2, and GRAT 3 are not members of Executive's family as defined in section 2702(e) and section 2704(c)(2). On Date 5, Company formed LLC, which is disregarded as an entity separate from Company for U.S. federal income tax purposes. LLC was formed for Company Purpose. However, Company is not required under the operating agreement to use LLC for Company Purpose and may dissolve LLC at any time. Company has three classes of common stock outstanding: Stock A, Stock B, and Stock C. Stock A is widely held and, since Date 7, has been publicly traded on the Exchange. The shares of Stock A and Stock B are identical other than the voting power. Each share of Stock B has a times the voting power of each share of Stock A. Stock B is held, in part, by Executive and GRATs 1 through 4, and Trusts 1 through 4. Trust 5 owns shares of Stock A. All of the issued shares of Stock C are held by LLC and are not considered outstanding for U.S. federal income tax purposes. Stock C has no voting rights except as otherwise required by law. Upon the transfer to a holder other than LLC or another subsidiary of Company, shares of Stock C will automatically convert on a share-for-share basis into shares of Stock A. On Date 6, Company made an initial contribution of b newly-issued shares of Stock C to LLC. On Date 10, Company announced that its board of directors approved a share repurchase program with authorization to purchase Company's Stock A at the discretion of Company's management (the "Share Repurchase Program"). None of the Contributing Shareholders (defined below) have participated in the Share Repurchase Program. The Share Repurchase Program and the Proposed Transaction are each driven by separate valid business purposes. Executive, Trusts, and Company intend to enter into a binding agreement ("Agreement") wherein Executive and Trusts will each surrender c percent (valued at approximately $d) of their shares of Stock A or Stock B, as the case may be, to Company. Company will subsequently retire those contributed shares and will transfer a like number of newly issued shares of Stock C to LLC. Proposed Transaction For what are represented to be valid business purposes, the following transaction has been proposed (the "Proposed Transaction"): (i) Trusts and Executive (each a " Contributing Shareholder ", and collectively, the " Contributing Shareholders ") will contribute in one or more installments a portion of their Stock A or Stock B to the capital of Company for the benefit of LLC. Executive intends to contribute stock of an amount equal to approximately $d or c percent of shares of Stock B owned by Executive. The Trusts will contribute a number of shares to Company that is proportionate on a percentage basis to the number of shares contributed by Executive (collectively, the " Contribution ") or approximately c percent of their shares of Stock A or Stock B, as the case may be, to the capital of Company. The Contributing Shareholders and Company will enter into a binding agreement pursuant to which the Contribution will be effected (the " Contribution Agreement " or " Agreement "). The Contribution may take place in more than one installment. The Contributing Shareholders and Company will enter into a new Contribution Agreement for each separate contribution, if any. The shareholders of Company other than the Contributing Shareholders are referred to as the " Non-Contributing Shareholders ". (ii) When Company receives shares from Contributing Shareholders pursuant to the Contribution Agreement, Company will retire such shares and transfer a like number of newly issued shares of Stock C to LLC. (iii) LLC will use cash derived from Stock C for Company Purpose. (iv) Company owns all of the membership interests of the LLC and therefore will control the policies of LLC related to the Company Purpose. Representations Company and the Contributing Shareholders make the following representations regarding the Proposed Transaction: (a) The Contributing Shareholders will not receive any consideration from Company with respect to the surrender of their stock to the capital of Company in the Proposed Transaction. (b) The stock surrendered to the capital of Company in the Proposed Transaction will be canceled and such stock or similar shares of stock of Company will not be returned to the Contributing Shareholders following the Proposed Transaction. (c) Company does not intend to fund LLC with property other than Stock C or cash. (d) GRAT 1, GRAT 2, GRAT 3, and GRAT 4 each have the terms necessary to satisfy the requirements to be a qualified interest under § 25.2702-3 of the Gift Tax Regulations. (e) There is no plan to transfer the shares of Stock C to any employee or independent contractor in connection with the performance of services within the meaning of section 83 or otherwise. (f) The Contributing Shareholders are not related to any of the Non-Contributing Shareholders such that stock ownership of a Contributing Shareholder would be attributed to a Non-Contributing Shareholder pursuant to section 318(a)(1) or section 267(c)(2). (g) There is no reason to believe that any of the stock purchases pursuant to the Share Repurchase Program will be taxed as dividends to the participating shareholders and there is no reason to believe that such stock purchases are dividends within the meaning of sections 301 and 302. (h) The Proposed Transaction is an isolated transaction that is not related to any other past or future transactions. (i) The Proposed Transaction is motivated solely by the Contributing Shareholders' and Company's business considerations and is not motivated by any intent to confer a U.S. federal income tax benefit on any shareholder, including as a substitute for a dividend. (j) The Proposed Transaction is not part of a plan to periodically increase the proportionate share of any shareholder in the assets or earnings and profits of Company. (k) There is no plan for the Contributing Shareholders to make contributions to Company that are not otherwise described herein. (l) If the Contributions pursuant to the Proposed Transaction occur in more than one installment, the final contribution will occur within a e month period of the first contribution. (m)Persons 1 through 4 are not employees of Company or Executive. Transactional Rulings Based solely on the information and representations submitted, we rule as follows: (1) The surrenders of Stock A or Stock B by the Contributing Shareholders to Company in the Proposed Transaction are a non-taxable contribution to the capital of Company and accordingly, the Contributing Shareholders will not recognize gain or loss on such contribution. See Commissioner v. Fink, 483 U.S. 89 (1987). (2) Each Contributing Shareholder's basis in the shares surrendered in the Proposed Transaction will be allocated to the Contributing Shareholder's basis in their remaining shares. See Commissioner v. Fink, 483 U.S. 89 (1987). (3) Company's receipt of shares of Stock A or B from the Contributing Shareholders will not be taxable to Company. See section 118(a). (4) The Non-Contributing Shareholders will not recognize any income as a result of the Proposed Transaction and the Contributing Shareholders' surrender of shares to Company will not be treated as a distribution of property to the Non-Contributing Shareholders. See Treas.Reg. §§ 1.305-3(b)(3) and 1.305-3(e), Example (13). See also Rev.Rul. 77-19, 1979-1 C.B. 83. Gift Tax Rulings Ruling 5 Under section 2501(a)(1) of the Code, tax is imposed for each calendar year on the transfer of property by gift during such calendar year by any individual, resident, or nonresident. Under section 2511(a), the tax imposed by section 2501 shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible. Under section 2512(b), where property is transferred for less than an adequate and full consideration in money or money's worth, then the amount by which the value of the property exceeded the value of the consideration shall be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year. Section 25.2511-1(c)(1) of the Gift Tax Regulations provides that any transaction in which an interest in property is gratuitously passed or conferred upon another, regardless of the means or device employed, constitutes a gift subject to tax. Under § 25.2511-1(g)(1), the gift tax is not applicable to a transfer for a full and adequate consideration in money or money's worth, or to ordinary business transactions, described in § 25.2512-8. Under § 25.2511-1(h), a transfer of property by B to a corporation generally represents gifts by B to the other individual shareholders of the corporation to the extent of their proportionate interests in the corporation. Under § 25.2512-8, a sale, exchange, or other transfer of property made in the ordinary course of business (a transaction which is bona fide, at arm's length, and free from any donative intent), will be considered as made for an adequate and full consideration in money or money's worth. In Rev.Rul. 80-196, 1980-2 C.B. 32, two shareholders transferred stock to three employees as a bonus in consideration of past services to the corporation. The two shareholders were not related to the three employees, nor did any special personal relationship exist between the shareholders and the three employees. The ruling holds, for gift tax purposes, that the transfers to the three employees were in the ordinary course of business under § 25.2512-8 because the transfers were motivated by a valid business reason, that is, retaining valuable personnel in the employment of the corporation. Therefore, the transfers were not subject to gift tax. In Anderson v. Commissioner, 8 T.C. 706 (1947), senior executives of a corporation sold shares to junior executives as part of a plan to shift management responsibilities to the junior executives. The Tax Court held that the sale was not subject to gift tax because it was made in the ordinary course of business. See Galluzzo v. Commission, 43 T.C.M. 199 (T.C. 1981). Company is owned by Executive, Trusts, and Non-Contributing Shareholders. In Agreement, Executive and Trusts agree to surrender shares to Company in order to fund LLC. By entering into Agreement, Executive and Trusts are increasing the value of the shares held by the Non-Contributing Shareholders. For gift tax purposes, this transfer is characterized as an indirect transfer of property from Executive and Trusts to Non-Contributing Shareholders. See §§ 25.2511-1(c)(1) and 25.2511-1(h). See also Rev.Rul. 71-443, 1971 C.B. 337; Bosca v. Commissioner, T.C. Memo. 1998-251; Kincaid v. United States, 682 F.2d 1220 (5 th Cir. 1982); Estate of Trenchard, T.C. Memo. 1995-121. Under § 25.2512-8, a transfer of property made in the ordinary course of business (a transaction which is bona fide, at arm's length, and free from any donative intent), will be considered as made for adequate and full consideration in money or money's worth. Under the facts presented in this ruling, the transfer made through Agreement satisfies all three of the requirements to be considered as made in the ordinary course of business. First, Agreement is for the bona fide business purpose of furthering Company Purpose. Second, the transfer from Executive and Trusts to Non-Contributing Shareholders is at arm's length because the transaction is a business transaction, the parties act in their own self-interest and are not subject to pressure from the other parties, and the Non-Contributing Shareholders are not related to Executive or Trusts. Finally, the transfer is made without donative intent because the transfer is made for the sole purpose of furthering Company Purpose. Accordingly, the indirect transfer from Executive and Trusts to the Non-Contributing Shareholders is deemed to be made for adequate and full consideration in money or money's worth. Therefore, based on the facts presented and the representations made, the transfers made to the Non-Contributing Shareholders pursuant to Agreement do not constitute gifts from Executive or Trusts. By entering into Agreement, each party is increasing the value of the shares held by others (i.e., Executive is increasing the value of the shares held by Trusts, Trusts are increasing the value of shares held by Executive, and each individual trust is increasing the value of each other individual trust). The transfers between Executive and Trusts are not at arm's length, and, therefore, they are not made in the ordinary course of business. However, under Agreement, Executive and Trusts are each surrendering an equal proportion of their shares of Company, and, consequently, the value of the indirect transfers made by each of the parties to the Agreement will be equal to the value of the indirect transfers received by each party. Accordingly, the indirect transfers made from Executive to Trusts and from Trusts to Executive (and each other trust) are made for full and adequate consideration in money or money's worth. Therefore, based on the facts presented and the representations made, the Contributing Shareholders will not be subject to gift tax under sections 2501, 2511, 2512, and regulations thereunder as a result of the Proposed Transaction. Ruling 6 Section 2702(a)(1) provides that solely for purposes of determining whether a transfer of an interest in trust to (or for the benefit of) a member of the transferor's family is a gift (and the value of such transfer), the value of any interest in such trust retained by the transferor or any applicable family member (as defined in section 2701(e)(2)) shall be determined as provided in section 2702(a)(2). Section 2702(a)(2)(A) provides that the value of any retained interest which is not a qualified interest shall be treated as being zero. Section 2702(b) provides that the term "qualified interest" means: (1) any interest which consists of the right to receive fixed amounts payable not less frequently than annually, (2) any interest which consists of the right to receive amounts which are payable not less frequently than annually and are a fixed percentage of the fair market value of the property in the trust (determined annually), and (3) any noncontingent remainder interest if all of the other interests in the trust consist of interests described in paragraph (1) or (2). Section 25.2702-2(a)(6) provides, in part, that a qualified interest means a qualified annuity interest, a qualified unitrust interest, or a qualified remainder interest. Section 25.2702-3(b)(1) provides that an interest is a qualified annuity interest only if it meets the requirements of this paragraph and § 25.2702-3(d). A qualified annuity interest is an irrevocable right to receive a fixed amount. The annuity amount must be payable to (or for the benefit of) the holder of the annuity interest at least annually. Under § 25.2702-3(d)(3), the governing instrument must prohibit distributions from the trust to or for the benefit of any person other than the holder of the qualified annuity or unitrust interest during the term of the qualified interest. The terms of GRAT 4 prohibit distributions to anyone other than Executive during the term of Executive's interest in GRAT 4 in accordance with § 25.2702-3(d)(3). Under the terms of Agreement, the contribution of shares to Company and resulting indirect transfer from GRAT 4 to Executive and Non-Contributing Shareholders will be made for adequate and full consideration in money or money's worth within the meaning of § 25.2511-1(g)(1). Accordingly, such transfers are not characterized as distributions from GRAT 4. These transfers are deemed investments because GRAT 4 receives or is deemed to receive value in money or money's worth equal to the transfer. As a result, GRAT 4 will not violate the terms of the trust instruments or the requirement under § 25.2702-3(d)(3) prohibiting a distribution for the benefit of any person other than Executive during the term of Executive's qualified interest. Therefore, based on the facts presented and the representations made, Executive's interest in GRAT 4 will not cease to qualify as a qualified interest under § 25.2702-3 or otherwise under section 2702(b) as a result of the Proposed Transaction. Caveats Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. Procedural Statements This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representatives. A copy of this letter must be attached to any income tax return to which it is relevant. Alternatively, taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter ruling. Sincerely, Gerald B. Fleming Senior Technician Reviewer, Branch 2 (Corporate) cc:
Revenue Ruling 2024-06 Internal Revenue Service 2024-10 I.R.B. 688 Section 6621.--Determination of Rate of Interest 26 CFR 301.6621-1: Interest rate. Rev. Rul. 2024-6 Section 6621 of the Internal Revenue Code establishes the interest rates on overpayments and underpayments of tax. Under section 6621(a)(1), the overpayment rate is the sum of the federal short-term rate plus 3 percentage points (2 percentage points in the case of a corporation), except the rate for the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the sum of the federal short-term rate plus 0.5 of a percentage point. Under section 6621(a)(2), the underpayment rate is the sum of the federal short-term rate plus 3 percentage points. Section 6621(c) provides that for purposes of interest payable under section 6601 on any large corporate underpayment, the underpayment rate under section 6621(a)(2) is determined by substituting "5 percentage points" for "3 percentage points." See section 6621(c) and section 301.6621-3 of the Regulations on Procedure and Administration for the definition of a large corporate underpayment and for the rules for determining the applicable date. Section 6621(c) and section 301.6621-3 are generally effective for periods after December 31, 1990. Section 6621(b)(1) provides that the Secretary will determine the federal short-term rate for the first month in each calendar quarter. Section 6621(b)(2)(A) provides that the federal short-term rate determined under section 6621(b)(1) for any month applies during the first calendar quarter beginning after that month. Section 6621(b)(3) provides that the federal short-term rate for any month is the federal short-term rate determined during that month by the Secretary in accordance with section 1274(d), rounded to the nearest full percent (or, if a multiple of 1/2 of 1 percent, the rate is increased to the next highest full percent). Notice 88-59, 1988-1 C.B. 546, announced that in determining the quarterly interest rates to be used for overpayments and underpayments of tax under section 6621, the Internal Revenue Service will use the federal short-term rate based on daily compounding because that rate is most consistent with section 6621 which, pursuant to section 6622, is subject to daily compounding. The federal short-term rate determined in accordance with section 1274(d) during January 2024 is the rate published in Revenue Ruling 2024-3, 2024-6 IRB 646, to take effect beginning February 1, 2024. The federal short-term rate, rounded to the nearest full percent, based on daily compounding determined during the month of January 2024 is 5 percent. Accordingly, an overpayment rate of 8 percent (7 percent in the case of a corporation) and an underpayment rate of 8 percent are established for the calendar quarter beginning April 1, 2024. The overpayment rate for the portion of a corporate overpayment exceeding $10,000 for the calendar quarter beginning April 1, 2024, is 5.5 percent. The underpayment rate for large corporate underpayments for the calendar quarter beginning April 1, 2024, is 10 percent. These rates apply to amounts bearing interest during that calendar quarter. Sections 6654(a)(1) and 6655(a)(1) provide that the underpayment rate established under section 6621 applies in determining the addition to tax under sections 6654 and 6655 for failure to pay estimated tax for any taxable year. Thus, the 8 percent rate also applies to estimated tax underpayments for the second calendar quarter beginning April 1, 2024. Pursuant to section 6621(b)(2)(B), in determining the addition to tax under section 6654 for any taxable year for an individual, the federal short-term rate that applies during the third month following the taxable year also applies during the first 15 days of the fourth month following the taxable year. See Rev. Rul. 2023-22, 2023-49 IRB 1301 (8 percent rate for the first quarter of 2024). In addition, pursuant to section 6603(d)(4), the rate of interest on section 6603 deposits is 5 percent for the second calendar quarter in 2024. Interest factors for daily compound interest for annual rates of 5.5 percent, 7 percent, 8 percent and 10 percent are published in Tables 64, 67, 69 and 73 of Rev.Proc. 95-17, 1995-1 C.B. 618, 621, 623, and 627. Annual interest rates to be compounded daily pursuant to section 6622 that apply for prior periods are set forth in the tables accompanying this revenue ruling. DRAFTING INFORMATION The principal author of this revenue ruling is Casey R. Conrad of the Office of the Associate Chief Counsel (Procedure and Administration). For further information regarding this revenue ruling, contact Mr. Conrad at (202) 317-6844 (not a toll-free call). * The asterisk reflects the interest factors for daily compound interest for annual rates of 0.5 percent published in Appendix A of this Revenue Ruling.
Revenue Procedure 2021-49 Internal Revenue Service 2021-49 I.R.B. 838 26 CFR 601.105: Examination of returns and claims for refund, credit or abatement; determination of correct tax liability. (Also Part I, §§ 704, 705, 1502; 1.1502-32.) Rev. Proc. 2021-49 SECTION 1. PURPOSE.01 This revenue procedure provides guidance for partnerships and consolidated groups regarding amounts excluded from gross income (tax exempt income) and deductions relating to the Paycheck Protection Program (PPP) and certain other COVID-19 relief programs. More specifically: (1) This revenue procedure provides guidance for partners and their partnerships regarding: (a) allocations under § 704(b) of the Internal Revenue Code (Code) of tax exempt income arising from the forgiveness of PPP Loans, the receipt of certain grant proceeds, or the subsidized payment of certain principal, interest and fees; (b) allocations under § 704(b) of the Code of deductions resulting from expenditures attributable to the use of forgiven PPP Loans or certain grant proceeds, or subsidized payments of certain interest and fees; and (c) the corresponding adjustments to be made with respect to the partners' bases in their partnership interests under § 705 of the Code. (2) This revenue procedure also provides guidance under § 1502 of the Code and § 1.1502-32 of the Income Tax Regulations regarding the corresponding basis adjustments for stock of subsidiary members of consolidated groups as a result of tax exempt income arising from certain forgiven PPP Loans, grant proceeds, or subsidized payment of certain principal, interest and fees..02 For guidance on the timing of tax exempt income arising from forgiven PPP Loans, see Rev. Proc. 2021-48, 2021-49 I.R.B. ___, released on November 18, 2021. SECTION 2. BACKGROUND.01 CARES Act. (1) Overview. The PPP is a loan program administered by the U.S. Small Business Administration (SBA) and the Administrator of the SBA (Administrator) as part of the SBA's "7(a) Loan Program" under § 7(a) of the Small Business Act (15 U.S.C. § 636(a)). 1 Congress established the PPP to assist small businesses nationwide adversely affected by the COVID-19 emergency in paying payroll costs and other eligible expenses. 2 Under the PPP, the Administrator may guarantee the full principal amount of a "covered loan," as defined in § 7(a)(36)(A)(ii) of the Small Business Act, which for purposes of the PPP is a loan made under the PPP to an "eligible recipient," as defined in § 7(a)(36)(A)(iv) of the Small Business Act, during the period beginning on February 15, 2020, and ending on May 31, 2021 (PPP First Draw Loan). 3 A PPP First Draw Loan may be forgiven under § 7A of the Small Business Act. ****** 1 See §§ 1102 and 1106 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Public Law 116-136, 134 Stat. 281, 286-94, 297-301 (Mar. 27, 2020), as amended by §§ 2 and 3 of the Paycheck Protection Program Flexibility Act of 2020, Public Law 116-142, 134 Stat. 641 (June 5, 2020); the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) enacted as Title III of Division N of the Consolidated Appropriations Act, 2021 (CAA), Public Law 116-220, 134 Stat. 1182 (Dec. 27, 2020); § 276 of the COVID-related Tax Relief Act of 2020 (COVID Tax Relief Act), enacted as Subtitle B of Title II of Division N of the CAA; and the PPP Extension Act of 2021, Public Law 117-6, 135 Stat. 250 (Mar. 30, 2021). Section 304(b)(1)(A) of the Economic Aid Act redesignated § 1106 of the CARES Act (15 U.S.C. § 9005) as § 7A and transferred redesignated § 7A to be inserted to appear after § 7 of the Small Business Act (15 U.S.C. § 636). 2 See Business Loan Program Temporary Changes; Paycheck Protection Program, 85 FR 20811 (Apr. 15, 2020). 3 See § 7(a)(2) of the Small Business Act and § 2 of the PPP Extension Act of 2021. **** (2) Authorization of lenders to participate in PPP. Section 1109(b) of the CARES Act allows the Department of the Treasury (Treasury Department), the Farm Credit Administration, and other Federal financial regulatory agencies to authorize bank and nonbank lenders, including insured credit unions, to participate in loans made under the PPP and provide PPP loans under § 1109 (Section 1109 Loans). 4 Under § 1109(d)(2)(D) of the CARES Act, regulations establishing the terms and conditions of Section 1109 Loans must provide for forgiveness of Section 1109 Loans under terms and conditions that, to the maximum extent practicable, are consistent with the terms and conditions for loan forgiveness of PPP First Draw Loans under § 1106 of the CARES Act. **** 4 134 Stat., at 304-306. **** (3) Emergency EIDL Grants. Section 1110(e) of the CARES Act allows an eligible entity that applied for an Economic Injury Disaster Loan (EIDL) under § 7(b)(2) of the Small Business Act (15 U.S.C. § 636(b)(2)) in response to COVID-19 to request that the Administrator provide an advance that is not more than $10,000 (an Emergency EIDL Grant). An applicant is not required to repay any amount of an Emergency EIDL Grant, even if the applicant is subsequently denied an EIDL under § 7(b)(2) of the Small Business Act or a PPP loan under § 7(a) of the Small Business Act. See § 1110(e)(5) of the CARES Act. (4) Principal and interest payments of covered loans. Section 1112(c) of the CARES Act requires the Administrator to pay the principal, interest, and any associated fees with respect to covered loans in regular servicing status made before the date of enactment of the CARES Act, whether or not on deferment, and covered loans made within six months after the enactment of the CARES Act. Covered loans under this provision include loans: (a) guaranteed by the SBA under the 7(a) Loan Program (including Community Advantage Loans but excluding PPP First Draw Loans) or under the 504 Loan Program established under title V of the Small Business Investment Act of 1958 (15 U.S.C. § 695 et seq.), and (b) SBA microloan products made by an intermediary to certain small businesses using loans or grants received under § 7(m) of the Small Business Act (15 U.S.C. § 636(m))..02 Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (1) PPP Second Draw Loans. Section 311 of the Economic Aid Act amended § 7(a) of the Small Business Act to authorize Paycheck Protection Program Second Draw Loans (PPP Second Draw Loans) as covered loans under the same terms, conditions, and processes as PPP First Draw Loans. See § 7(a)(37)(B) of the Small Business Act (as added by § 311(a) of the Economic Aid Act). Congress authorized the PPP Second Draw Loans to further assist those small businesses nationwide that continue to be adversely affected by the COVID-19 emergency. Similar to a PPP First Draw Loan, the Administrator is permitted to guarantee the full principal amount of a PPP Second Draw Loan made under the PPP to an "eligible entity," as defined in § 7(a)(37)(A)(iv) of the Small Business Act, that has used or will use the full amount of a PPP First Draw Loan on or before the expected date on which the subsequent loan is disbursed to the eligible entity, and a PPP Second Draw Loan may be forgiven under § 7(a)(37)(J) of the Small Business Act (as added by § 311(a) of the Economic Aid Act). An individual or entity that receives a PPP First Draw Loan, a PPP Second Draw Loan, and/or a Section 1109 Loan, each a "PPP Loan" and collectively "PPP Loans," may be eligible to receive forgiveness of the principal amount of the PPP Loan up to an amount (loan forgiveness amount) equal to the costs incurred and payments made during the "covered period," as defined in § 7A(a)(4) of the Small Business Act, for the following "eligible expenses": (1) payroll costs, (2) interest on a covered mortgage obligation, (3) any covered rent obligation payment, (4) any covered utility payment, (5) covered operations expenditures, (6) covered property damage costs, (7) covered supplier costs, and (8) covered worker protection expenditures. 5 However, an individual or entity's loan forgiveness amount may be reduced under "PPP loan forgiveness reduction rules" if the individual or entity experiences reductions in full-time equivalent employees or employee salary and wages during the covered period and the individual or entity does not qualify for any of the statutory or regulatory exemptions from the PPP loan forgiveness reduction rules. 6 **** 5 See § 7A(a) of the Small Business Act (as amended by § 304(b)(2) of the Economic Aid Act). 6 See § 7A(d) of the Small Business Act (as amended by § 304(b)(2) of the Economic Aid Act) and Business Loan Program Temporary Changes; Paycheck Protection Program - Loan Forgiveness Requirements and Loan Review Procedures as Amended by Economic Aid Act, 86 F.R. 8290 (Feb. 5, 2021). ****** (2) Shuttered Venue Operator Grants. Section 324(b) of the Economic Aid Act authorizes the SBA to make initial and supplemental grants to certain "eligible persons or entities," which include live venue operators and promoters, theatrical producers, live performing arts organization operators, museum operators, motion picture theater operators, and talent representatives (Shuttered Venue Operator Grants). See § 324(a) of the Economic Aid Act (defining the term "eligible person or entity"). (3) Extension of Emergency EIDL Grants program and Targeted EIDL Advances. Section 331 of the Economic Aid Act extends the Emergency EIDL Grant program to allow covered entities, as defined under paragraph (a)(2) of that section, to request to receive a total of $10,000 under § 1110(e) of the CARES Act, without regard to whether the covered entity's EIDL under § 7(b)(2) of the Small Business Act is, or was, approved or accepted and without regard to whether the covered entity received a PPP Loan (Targeted EIDL Advances). The covered entity is not required to repay any amount of the Emergency EIDL Grant, including the portion (if any) that comprises a Targeted EIDL Advance. See § 1110(e) of the CARES Act; § 331(b)(2)(A) of the Economic Aid Act..03 COVID Tax Relief Act. (1) Forgiveness of PPP Loans. (a) Overview. Section 276(a) of the COVID Tax Relief Act amended § 7A(i) of the Small Business Act (as redesignated, transferred, and inserted by § 304(b)(1)(A) of the Economic Aid Act) to provide guidance regarding the Federal income tax treatment of the forgiveness of PPP First Draw Loans. Section 276(b) of the COVID Tax Relief Act provides substantially similar guidance with regard to PPP Second Draw Loans, as do § 278(a)(1) and (2) of the COVID Tax Relief Act with regard to Section 1109 Loans. (b) Federal income tax treatment. Specifically, § 7A(i) of the Small Business Act and §§ 276(b) and 278(a)(1) and (2) of the COVID Tax Relief Act, as applicable, provide that, generally for purposes of the Code, no amount is included in the gross income of an eligible recipient or an eligible entity, as appropriate, by reason of the forgiveness of a PPP Loan and no deduction is denied, no tax attribute is reduced, and no basis increase is denied, by reason of such exclusion from gross income. Those sections also provide that, for eligible recipients and eligible entities, as appropriate, that are partnerships or S corporations, any amount excluded from gross income under § 7A(i) of the Small Business Act or § 276(b) or § 278(a)(3) of the COVID Tax Relief Act, as applicable, is treated as tax exempt income for purposes of §§ 705 and 1366 of the Code. Section 7A(i) of the Small Business Act and §§ 276(b) and 278(a)(3) of the COVID Tax Relief Act further provide that, except as provided by the Secretary of the Treasury or her delegate (Secretary), any increase in the adjusted basis of a partner's interest in a partnership under § 705 of the Code with respect to amounts treated as tax exempt income under § 7A(i) of the Small Business Act, § 276(b) of the COVID Tax Relief Act, or § 278(a) of the COVID Tax Relief Act, as applicable, equals the partner's distributive share of deductions resulting from costs giving rise to the forgiveness of the PPP Loans. (2) Emergency EIDL Grants and Targeted EIDL Advances. Section 278(b)(1) and (2) of the COVID Tax Relief Act provide that any Emergency EIDL Grant or Targeted EIDL Advance is not included in the gross income of the person that receives such advance or funding, and no deduction is denied, no tax attribute is reduced, and no basis increase is denied, by reason of such exclusion from gross income. Section 278(b)(3) of the COVID Tax Relief Act provides that, in the case of a partnership or an S corporation that receives such advance or funding, any amount excluded from gross income under § 278(b)(1) of the COVID Tax Relief Act is treated as tax exempt income for purposes of §§ 705 and 1366 of the Code and that the Secretary is to prescribe rules for determining a partner's distributive share of any such advance or funding for purposes of § 705 of the Code. (3) Subsidy for certain loan payments. Section 278(c)(1) and (2) of the COVID Tax Relief Act provide that any payment described in § 1112(c) of the CARES Act is not included in the gross income of the person on whose behalf such payment is made, and no deduction is denied, no tax attribute is reduced, and no basis increase is denied, by reason of such exclusion from gross income. Section 278(c)(3)(A) of the COVID Tax Relief Act provides that, in the case of a partnership or S corporation on whose behalf a payment described in § 1112(c) of the CARES Act is made, any amount excluded from gross income under § 278(c)(1) of the COVID Tax Relief Act is treated as tax exempt income for purposes of §§ 705 and 1366 of the Code. Section 278(c)(3)(B) of the COVID Tax Relief Act provides that, except as provided by the Secretary, any increase in the adjusted basis of a partner's interest in a partnership under § 705 of the Code with respect to any such payment equals the sum of the partner's distributive share of deductions resulting from interest and fees described in § 1112(c) of the CARES Act and the partner's share, as determined under § 752 of the Code, of principal described in § 1112(c) of the CARES Act. (4) Shuttered Venue Operator Grants. Section 278(d)(1) and (2) of the COVID Tax Relief Act provide that any Shuttered Venue Operator Grant is not included in the gross income of the person that receives such grant, and no deduction is denied, no tax attribute is reduced, and no basis increase is denied, by reason of such exclusion from gross income. Section 278(d)(3) of the COVID Tax Relief Act provides that, in the case of a partnership or an S corporation that receives a Shuttered Venue Operator Grant, any amount excluded from gross income under § 278(d)(1) of the COVID Tax Relief Act is treated as tax exempt income for purposes of §§ 705 and 1366 of the Code, and the Secretary is to prescribe rules for determining a partner's distributive share of any such grant for purposes of § 705 of the Code..04 American Rescue Plan. (1) Supplemental Targeted EIDL Advances. (a) Overview. Section 5002(b)(2)(B) of the ARP requires the Administrator to make additional Targeted EIDL Advances to covered entities that (1) have suffered an economic loss of greater than 50 percent and (2) employ not more than 10 employees (Supplemental Targeted EIDL Advances). The terms "covered entity" and "economic loss" have the meanings given the terms in § 331(a) of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act. See § 5002(a)(2) of the ARP. The amount of a Supplemental Targeted EIDL Advance equals $5,000, and is provided to a covered entity in addition to any Emergency EIDL Grant or Targeted EIDL Advance that the covered entity may have received. (b) Federal income tax treatment. Section 9672(1) and (2) of the ARP provide that any Supplemental Targeted EIDL Advance is not included in the gross income of the person that receives such advance, and no deduction is denied, no tax attribute is reduced, and no basis increase is denied, by reason of such exclusion from gross income. Section 9672(3) of the ARP provides that, in the case of a partnership or an S corporation that receives a Supplemental Targeted EIDL Advance, any amount excluded from gross income under § 9672(1) of the ARP is treated as tax exempt income for purposes of §§ 705 and 1366 of the Code, and the Secretary is to prescribe rules for determining a partner's distributive share of any such amount for purposes of § 705 of the Code. (2) Restaurant Revitalization Grants. (a) Overview. Section 5003(c) of the ARP requires the Administrator to make grants (Restaurant Revitalization Grants) of up to $10 million in the aggregate ($5 million in the aggregate per location) to eligible entities (including restaurants, food stands and food trucks, bars, and other similar establishments, but not including, among other prohibited recipients, publicly traded companies or chains of 20 or more locations) and affiliated businesses to cover pandemic-related revenue losses. See § 5003(a)(2), (4), and (7) of the ARP (defining "affiliated business," "eligible entity," and "pandemic-related revenue loss," respectively). The amount of any Restaurant Revitalization Grant is limited to the eligible entity's pandemic-related revenue loss, as determined pursuant to § 5003(a)(7) of the ARP and any guidance issued by the SBA, which is reduced by any amounts received through a PPP First Draw Loan or a PPP Second Draw Loan in 2020 or 2021. See § 5003(c)(4)(B)(i) and (a)(7) of the ARP. In addition, any amount of a Restaurant Revitalization Grant made to an eligible entity based on estimated receipts that is greater than the actual gross receipts of the eligible entity in 2020 must be returned to the Treasury Department. See § 5003(c)(4)(B)(ii) of the ARP. (b) Return of Funds to the Treasury Department. If an eligible entity that receives a Restaurant Revitalization Grant fails to use all grant funds or permanently ceases operations on or before the last day of the covered period, the eligible entity must return to the Treasury Department any funds that the eligible entity did not use for allowable expenses. See § 5003(c)(6) of the ARP. Section 5003(c)(5) of the ARP describes "allowable expenses" as including, among other expenses, payroll costs, payments of principal or interest on any mortgage obligation, rent payments, utilities, maintenance expenses, supplies, operational expenses, paid sick leave, and any other expenses that the Administrator determines to be essential to maintaining the eligible entity. See § 5003(c)(5) of the ARP (enumerating permitted uses of funds made available through a Restaurant Revitalization Grant). The covered period began on February 15, 2020, and ends on December 31, 2021, or a date to be determined by the Administrator that is not later than two years after the date of enactment of § 5003 of the ARP. See § 5003(a)(3) of the ARP. (c) Federal income tax treatment. Section 9673(1) and (2) of the ARP provide that any Restaurant Revitalization Grant received from the Administrator is not included in the gross income of the person that receives such grant, and no deduction is denied, no tax attribute is reduced, and no basis increase is denied, by reason of such exclusion from gross income. Section 9673(3) of the ARP provides that, in the case of a partnership or an S corporation that receives a Restaurant Revitalization Grant, except as otherwise provided by the Secretary, any amount excluded from gross income under § 9673(1) of the ARP is treated as tax exempt income for purposes of §§ 705 and 1366 of the Code, and the Secretary is to prescribe rules for determining a partner's distributive share of any such amount for purposes of § 705 of the Code..05 Relevant Provisions under Subchapter K of the Code (1) Partner's distributive share. Section 704(b) of the Code provides that a partner's distributive share of income, gain, loss, deduction, or credit (or item thereof) is determined in accordance with the partner's interest in the partnership (determined by taking into account all facts and circumstances), if (1) the partnership agreement does not provide as to the partner's distributive share of income, gain, loss, deduction, or credit (or item thereof), or (2) the allocation to a partner under the agreement of income, gain, loss, deduction, or credit (or item thereof) does not have substantial economic effect. In order for an allocation to have economic effect, it must be consistent with the underlying economic arrangement of the partners. This means in the event that there is an economic benefit or economic burden that corresponds to an allocation, the partner to whom the allocation is made must receive such economic benefit or bear such economic burden. See § 1.704-1(b)(2)(ii)( a ) of the Income Tax Regulations. (2) Determination of basis of partner's interest. Section 705(a)(1) of the Code provides that the adjusted basis of a partner's interest in a partnership is increased by the sum of the partner's distributive share for the taxable year and prior taxable years of (A) taxable income of the partnership as determined under § 703(a) of the Code, (B) income of the partnership exempt from tax under Title 26, and (C) the excess of the deductions for depletion over the basis of the property subject to depletion. Under § 705(a)(2) and (3) of the Code, a partner's adjusted basis in a partnership interest is decreased (but not below zero) by distributions by the partnership as provided in § 733 of the Code and by the sum of the partner's distributive share for the taxable year and prior taxable years of (A) losses of the partnership and (B) expenditures of the partnership not deductible in computing its taxable income and not properly chargeable to capital account; and decreased (but not below zero) by the amount of the partner's deduction for depletion for any partnership oil and gas property to the extent such deduction does not exceed the proportionate share of the adjusted basis of such property allocated to such partner under § 613A(c)(7)(D) of the Code..06 Relevant Provisions under Subchapter S of the Code (1) Determination of S corporation shareholder's Federal income tax liability. Section 1366(a)(1) of the Code provides, in part, that, in determining the Federal income tax of an S corporation shareholder under chapter 1 of the Code for the shareholder's taxable year in which the taxable year of the S corporation ends (or for the final taxable year of a shareholder who dies, or of a trust or estate which terminates, before the end of the S corporation's taxable year), there is taken into account the shareholder's pro rata share of the corporation's-- (a) items of income (including tax exempt income), loss, deduction (including expenses related to tax exempt income, whether deductible or non-deductible), or credit the separate treatment of which could affect the liability for tax of any shareholder; and (b) nonseparately computed income or loss. (2) Positive basis adjustments to stock of S corporation shareholders. Section 1367(a)(1) of the Code provides, in part, that the basis of each shareholder's stock in an S corporation is increased for any period by the sum of the items of income described in § 1366(a)(1)(A) of the Code determined with respect to that shareholder for such period. Consequently, amounts excluded from gross income under § 7A(i) of the Small Business Act, § 276(b) of the COVID Tax Relief Act, and § 278(a) through (d) of the COVID Tax Relief Act are taken into account in accordance with each S corporation shareholder's pro rata share under § 1366(a)(1)(A), and accordingly increase the basis of the shareholder's stock in the S corporation under § 1367(a)(1)..07 Relevant Provisions in the Consolidated Return Regulations (1) Tax exempt income. Section 1.1502-32(b)(2) provides for adjustments to the basis in the stock of a member of a consolidated group (as defined in § 1.1502-1(h)) that is a subsidiary of one or more members (S), including positive adjustments for tax exempt income. See § 1.1502-32(b)(2)(ii). S's tax exempt income is defined as its income and gain which is taken into account but permanently excluded from its gross income under applicable law and which increases, directly or indirectly, the basis of its assets (or an equivalent amount). Section 1.1502-32(b)(3)(ii)(A). (2) COD income. Section 1.1502-32(b)(3)(ii)(C)( 1 ) provides that excluded discharge-of-indebtedness income (that is, excluded COD income) is treated as tax exempt income only to the extent the discharge is applied to reduce tax attributes attributable to any member of the group under § 108 or § 1017 of the Code, or § 1.1502-28 (implementing § 108 in a consolidated group). As described in section 2.03 of this revenue procedure, § 7A(i) of the Small Business Act, and §§ 276(b) and 278(a)(1) and (2) of the COVID Tax Relief Act, as applicable, provide that no amount is included in the gross income of a borrower by reason of forgiveness of a PPP Loan, and that no deduction is denied, no tax attribute is reduced, and no basis increase is denied, by reason of such exclusion from gross income. SECTION 3. SCOPE This revenue procedure applies to a taxpayer that is described in section 3.01, 3.02, 3.03, 3.04, or 3.05 of this revenue procedure (Covered Taxpayer)..01 A partnership or a member of a consolidated group that-- (1) Received a PPP Loan; and (2) Received partial or complete forgiveness of the PPP Loan such that, in accordance with § 7A(i) of the Small Business Act, or §§ 276(b) or 278(a)(1) of the COVID Tax Relief Act, as applicable, the forgiveness amount is not included in the gross income of the eligible recipient, entity, or borrower..02 A partnership for which the SBA made payments with respect to a covered loan under § 1112(c) of the CARES Act..03 A partnership that received an Emergency EIDL Grant, a Targeted EIDL Advance, or a Shuttered Venue Operator Grant..04 A partnership that received a Supplemental Targeted EIDL Advance..05 A partnership that received a Restaurant Revitalization Grant. SECTION 4. ALLOCATION OF CERTAIN PARTNERSHIP ITEMS AND PARTNERSHIP INTEREST BASIS ADJUSTMENTS.01 Treatment for Covered Taxpayers that are partnerships. If a Covered Taxpayer that is a partnership satisfies all of the applicable requirements provided in section 4.02 of this revenue procedure, and complies with all information reporting requirements described in section 6 of this revenue procedure, the Internal Revenue Service (IRS) will treat the Covered Taxpayer's allocation of amounts treated as tax exempt income and allocation of deductions described in section 4.02(1), (2), (3), or (4) of this revenue procedure (as the case may be) as determined in accordance with § 704(b) of the Code. Under § 705(a) of the Code, a partner's basis in its interest is increased by the partner's distributive share of tax exempt income and is decreased by the partner's distributive share of deductions described in section 4.02(1), (2), (3), or (4) of this revenue procedure..02 Requirements for Covered Taxpayers that are partnerships. (1) Requirements for the allocation of deductions and amounts treated as tax exempt income arising in connection with the forgiveness of a PPP Loan. A Covered Taxpayer that is a partnership satisfies the requirements of this section 4.02(1) if all of the following conditions are met: (a) The allocation of deductions resulting from expenditures giving rise to the forgiveness of a PPP Loan is determined under § 1.704-1(b)(3), according to the partners' overall economic interests in the partnership. (b) The allocation of amounts treated as tax exempt income under § 7A(i) of the Small Business Act, § 276(b) of the COVID Tax Relief Act, or § 278(a) of the COVID Tax Relief Act, as applicable, is made in accordance with the allocation of the deductions described in section 4.02(1)(a) of this revenue procedure. (c) If any expenditure giving rise to the forgiveness of a PPP Loan is required to be capitalized under the Code (capitalized expenditure), the allocation of amounts treated as tax exempt income under § 7A(i) of the Small Business Act, § 276(b) of the COVID Tax Relief Act, or § 278(a) of the COVID Tax Relief Act, as applicable, is made in accordance with the allocation of the deemed loss, as provided in this section 4.02(1)(c), with respect to the capitalized expenditure's basis. Solely for purposes of this revenue procedure, the deemed loss with respect to the capitalized expenditure's basis is treated as a loss allowable as a deduction and is equal to the amount of loss that would be recognized if the property to which the capitalized expenditure relates were treated as disposed of in a fully taxable transaction for no consideration (hypothetical transaction) and, with respect to each partner, the allocation of the deemed loss associated with the capitalized expenditure's basis is determined under § 1.704-1(b)(3), according to the partners' overall economic interests in the partnership. The hypothetical transaction and resulting deemed loss are solely for purposes of determining the manner in which tax exempt income described in this section 4.02(1)(c) is allocated to the partnership's partners. (2) Requirements for the allocation of deductions and amounts treated as tax exempt income arising in connection with payments made by the SBA on behalf of the taxpayer with respect to a covered loan under § 1112(c) of the CARES Act. A Covered Taxpayer that is a partnership satisfies the requirements of this section 4.02(2) if all of the following conditions are met: (a) The allocation of deductions resulting from payments of interest and fees described in § 1112(c) of the CARES Act is determined under § 1.704-1(b)(3), according to the partners' overall economic interests in the partnership. (b) The allocation of amounts treated as tax exempt income under § 278(c) of the COVID Tax Relief Act attributable to interest and fees described in § 1112(c) of the CARES Act is made in accordance with the allocation of the deductions described in section 4.02(2)(a) of this revenue procedure. (c) The allocation of amounts treated as tax exempt income under § 278(c) of the COVID Tax Relief Act attributable to payments of principal described in § 1112(c) of the CARES Act is made in accordance with each partner's share of the liability under § 752 of the Code and the regulations thereunder. (d) If any expenditure related to the payment of interest and fees described in § 1112(c) of the CARES Act is required to be treated as a capitalized expenditure, the allocation of amounts treated as tax exempt income under § 278(c) of the COVID Tax Relief Act is made in accordance with the allocation of the deemed loss, as described in section 4.02(1)(c) of this revenue procedure, with respect to the capitalized expenditure's basis. Upon the hypothetical transaction, the allocation of the deemed loss is determined under § 1.704-(1)(b)(3), according to the partners' overall economic interests in the partnership. The hypothetical transaction and resulting deemed loss are solely for purposes of determining the manner in which tax exempt income described in this section 4.02(2)(d) is allocated to the partnership's partners. (3) Requirements for the allocation of deductions and amounts treated as tax exempt income arising in connection with the taxpayer receiving an Emergency EIDL Grant, Targeted EIDL Advance, or a Shuttered Venue Operator Grant. A Covered Taxpayer that is a partnership satisfies the requirements of this section 4.02(3) if all of the following conditions are met: (a) The allocation of deductions resulting from the expenditure of proceeds of an Emergency EIDL Grant, a Targeted EIDL Advance, or a Shuttered Venue Operator Grant is determined under § 1.704-1(b)(3), according to the partners' overall economic interests in the partnership. (b) The allocation of amounts treated as tax exempt income under § 278(b) and (d) of the COVID Tax Relief Act is made in accordance with the allocation of the deductions described in section 4.02(3)(a) of this revenue procedure. (c) If any expenditure paid with the proceeds from an Emergency EIDL Grant, a Targeted EIDL Advance, or a Shuttered Venue Operator Grant is required to be treated as a capitalized expenditure, the allocation of amounts treated as tax exempt income under § 278(b) and (d) of the COVID Tax Relief Act is made in accordance with the allocation of the deemed loss, as described in section 4.02(1)(c) of this revenue procedure, with respect to the capitalized expenditure's basis. Upon the hypothetical transaction, the allocation of the deemed loss is determined under § 1.704-(1)(b)(3), according to the partners' overall economic interests in the partnership. The hypothetical transaction and resulting deemed loss are solely for purposes of determining the manner in which tax exempt income described in this section 4.02(3)(c) is allocated to the partnership's partners. (4) Requirements for the allocation of deductions and amounts treated as tax exempt income arising in connection with the taxpayer receiving a Supplemental Targeted EIDL Advance or a Restaurant Revitalization Grant. A Covered Taxpayer that is a partnership satisfies the requirements of this section 4.02(4) if all of the following conditions are met: (a) The allocation of deductions resulting from the expenditure of proceeds of a Supplemental Targeted EIDL Advance or a Restaurant Revitalization Grant is determined under § 1.704-1(b)(3), according to the partners' overall economic interests in the partnership. (b) The allocation of amounts treated as tax exempt income under §§ 9672 and 9673 of the ARP is made in accordance with the allocation of the deductions described in section 4.02(4)(a) of this revenue procedure. (c) If any expenditure paid with the proceeds from a Supplemental Targeted EIDL Advance or a Restaurant Revitalization Grant is required to be treated as a capitalized expenditure, the allocation of amounts treated as tax exempt income under §§ 9672 and 9673 of the ARP is made in accordance with the allocation of the deemed loss, as described in section 4.02(1)(c) of this revenue procedure, with respect to the capitalized expenditure's basis. Upon the hypothetical transaction, the allocation of the deemed loss is determined under § 1.704-(1)(b)(3), according to the partners' overall economic interests in the partnership. The hypothetical transaction and resulting deemed loss are solely for purposes of determining the manner in which tax exempt income described in this section 4.02(4)(c) is allocated to the partnership's partners..03 Amended Returns. If a taxpayer has filed an original or amended Federal income tax return or information return, as applicable, for a taxable year ending after March 27, 2020, the taxpayer may file an amended return or an administrative adjustment request under § 6227 of the Code, as applicable, that reflects application of this revenue procedure. See Rev. Proc. 2021-50, 2021-49 I.R.B.___, released November 18, 2021, allowing eligible partnerships to file amended partnership returns under this revenue procedure if the requirements of section 3 of Rev. Proc. 2021-50 are met. SECTION 5. STOCK BASIS ADJUSTMENTS REGARDING COVERED TAXPAYERS THAT ARE MEMBERS OF CONSOLIDATED GROUPS With regard to a Covered Taxpayer that is a member of a consolidated group, the IRS will treat any amount excluded from gross income under § 7A(i) of the Small Business Act, § 276(b) of the COVID Tax Relief Act, or § 278(a)(1) of the COVID Tax Relief Act, as applicable, as tax exempt income for purposes of § 1.1502-32(b)(2)(ii). A Covered Taxpayer that is a member of a consolidated group may rely on the IRS treatment provided by this section 5 only if the consolidated group attaches a signed statement to its consolidated tax return indicating that all Covered Taxpayers in the consolidated group are relying on this section 5 and reporting consistently. SECTION 6. INFORMATION REPORTING BY PARTNERSHIPS THAT ARE COVERED TAXPAYERS A Covered Taxpayer that is a partnership must report to the IRS all partnership items described in section 4 of this revenue procedure that the Commissioner of Internal Revenue or the Commissioner's delegate may require in forms, instructions, or other guidance. SECTION 7. EFFECTIVE DATE A taxpayer may apply this revenue procedure for any taxable year ending after March 27, 2020. SECTION 8. DRAFTING INFORMATION The principal authors of this revenue procedure are Katherine A. Waibler and Michael R. Gould of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue procedure, contact Katherine A. Waibler at (202) 317-5056, and, regarding § 1.1502-32, Robert H. Liquerman at (202) 317-3181.
Private Letter Ruling Number: 202152011 Internal Revenue Service September 28, 2021 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202152011 Release Date: 12/30/2021 Index Number: 2010.00-00, 2010.04-00, 9100.00-00, 9100.35-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:PSI:B04 PLR-108853-21 Date: September 28, 2021 Legend Decedent = --Spouse: = --Date = --Dear ------------: This letter responds to a letter dated March 22, 2021, submitted on behalf of Decedent's estate, requesting an extension of time pursuant to § 301.9100-3 of the Procedure and Administration Regulations to make an election. Decedent's estate is requesting to make an election under § 2010(c)(5)(A) of the Internal Revenue Code (a "portability" election) to allow a decedent's surviving spouse to take into account that decedent's deceased spousal unused exclusion (DSUE) amount. The information submitted for consideration is summarized below. Decedent died on Date, survived by Spouse. It is represented that based on the value of Decedent's gross estate and taking into account any taxable gifts, Decedent's estate is not required under § 6018(a) to file an estate tax return (Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return). It is further represented that there is an unused portion of Decedent's applicable exclusion amount and that a portability election is required to allow Spouse to take into account that amount (the "DSUE" amount)). A portability election is made upon the timely filing of a complete and properly prepared estate tax return, unless the requirements for opting out are satisfied. See § 20.2010-2(a)(2) of the Estate Tax Regulations. For various reasons, an estate tax return was not timely filed and a portability election was not made. After discovery PLR-108853-21 2 of this, Decedent's estate submitted this request for an extension of time under § 301.9100-3 to make a portability election. LAW AND ANALYSIS Section 2001(a) imposes a tax on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States. Section 2010(a) provides that a credit of the applicable credit amount shall be allowed to the estate of every decedent against the tax imposed by § 2001. Section 2010(c)(1) provides that the applicable credit amount is the amount of the tentative tax that would be determined under § 2001(c) if the amount with respect to which such tentative tax is to be computed were equal to the applicable exclusion amount. On December 17, 2010, Congress amended § 2010(c), effective for estates of decedents dying and gifts made after December 31, 2010, to allow portability of a decedent's unused applicable exclusion amount between spouses. Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, § 303, 124 Stat. 3296, 3302 (2010). Section 2010(c)(2) provides that the applicable exclusion amount is the sum of the basic exclusion amount, and, in the case of a surviving spouse, the DSUE amount. Section 2010(c)(3) provides the basic exclusion amount available to the estate of every decedent, an amount to be adjusted for inflation annually after calendar year 2011. Section 2010(c)(4) defines the DSUE amount to mean the lesser of (A) the basic exclusion amount, or (B) the excess of -- (i) the applicable exclusion amount of the last deceased spouse of the surviving spouse, over (ii) the amount with respect to which the tentative tax is determined under § 2001(b)(1) on the estate of such deceased spouse. Section 2010(c)(5)(A) provides that a DSUE amount may not be taken into account by a surviving spouse under § 2010(c)(2) unless the executor of the estate of the deceased spouse files an estate tax return on which such amount is computed and makes an election on such return that such amount may be so taken into account. The election, once made, shall be irrevocable. No election may be made if such return is filed after the time prescribed by law (including extensions) for filing such return. Section 20.2010-2(a)(1) provides that the due date of an estate tax return required to elect portability is nine months after the decedent's date of death or the last day of the period covered by an extension (if an extension of time for filing has been obtained). Further, an extension of time under § 301.9100-3 to make a portability election may be granted in the case of an estate that is not required to file an estate tax return under PLR-108853-21 3 § 6018(a), as determined solely based on the value of the gross estate and any adjusted taxable gifts (and without regard to § 20.2010-2(a)). Under § 301.9100-1(c), the Commissioner has discretion to grant a reasonable extension of time under the rules set forth in §§ 301.9100-2 and 301.9100-3 to make a regulatory election, or a statutory election (but no more than six months except in the case of a taxpayer who is abroad), under all subtitles of the Internal Revenue Code except subtitles E, G, H, and I. Section 301.9100-3 provides the standards the Commissioner will use to determine whether to grant an extension of time to make an election whose due date is prescribed by a regulation (and not expressly provided by statute). Requests for relief under § 301.9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and that granting relief will not prejudice the interests of the government. In this case, based on the representation as to the value of the gross estate and any adjusted taxable gifts, the time for filing the portability election is fixed by the regulations. Therefore, the Commissioner has discretionary authority under § 301.9100-3 to grant an extension of time for Decedent's estate to elect portability, provided Decedent's estate establishes it acted reasonably and in good faith, the requirements of §§ 301.9100-1 and 301.9100-3 are satisfied, and granting relief will not prejudice the interests of the government. Information, affidavits, and representations submitted on behalf of Decedent's estate explain the circumstances that resulted in the failure to timely file a valid election. Based solely on the information submitted and the representations made, we conclude that the requirements of §§ 301.9100-1 and 301.9100-3 have been satisfied. Therefore, we grant an extension of time of 120 days from the date of this letter in which to make the portability election. The election should be made by filing a complete and properly prepared Form 706 and a copy of this letter, within 120 days from the date of this letter, with the Department of the Treasury, Internal Revenue Service, Kansas City, MO 64999. For purposes of electing portability, a Form 706 filed by Decedent's estate within 120 days from the date of this letter will be considered to be timely filed. If it is later determined that, based on the value of the gross estate and taking into account any taxable gifts, Decedent's estate is required to file an estate tax return pursuant to § 6018(a), the Commissioner is without authority under § 301.9100-3 to grant an extension of time to elect portability and the grant of the extension referred to in this letter is deemed null and void. See § 20.2010-2(a)(1). We neither express nor imply any opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. In particular, we PLR-108853-21 4 express no opinion as to the DSUE amount to be potentially taken into account by Spouse. Any claimed DSUE amount will be included in the applicable exclusion amount of Spouse only to the extent that Spouse can substantiate such amount and will be subject to determination by the Director's office upon audit of relevant Federal gift or estate tax returns. See § 20.2010-3(c)(1) and (d). The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination. This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. In accordance with the Power of Attorney on file with this office, we have sent a copy of this letter to your authorized representative. Sincerely, Associate Chief Counsel Passthroughs & Special Industries /S/ By: _____________________________ Leslie H. Finlow Senior Technician Reviewer, Branch 4 Office of the Associate Chief Counsel (Passthroughs & Special Industries) Enclosure (1) Copy for § 6110 purposes cc:
Private Letter Ruling Number: 202140012 Internal Revenue Service July 12, 2021 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202140012 Release Date: 10/8/2021 Index Number: 1400Z.02-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:ITA:B05 PLR-106237-21 Date: July 12, 2021 Dear *******: This ruling responds to Taxpayer's request for a letter ruling dated Date 1. Specifically, Taxpayer requests an extension under section 301.9100-1 and section 301.9100-3 of the Income Tax Regulations to (1) make a timely election under section 1.1400Z2(a)-1(a)(2)(i) to be certified as a qualified opportunity fund (QOF), as defined in section 1400Z-2(d) of the Internal Revenue Code; and (2) for the taxpayer to be treated as a QOF, effective as of the month the taxpayer was formed in Year 1, as provided under section 1400Z-2(d) of the Code and section 1.1400Z2(d)-1(a) of the Income Tax Regulations. FACTS Taxpayer is a limited liability company, organized under the laws of State B on Date 2. Taxpayer is treated as a partnership for Federal income tax purposes. Taxpayer is an accrual method taxpayer with a tax year end December 31. Taxpayer was organized for the purpose of investing in qualified opportunity zone property as defined in section 1400Z-2(d)(2) of the Internal Revenue Code. Taxpayer's sole investment is in Entity. Taxpayer represents that Entity is a qualified opportunity zone business, as defined in section 1.1400Z2(d)-1(d)(1) of the Income Tax Regulations. In connection with the formation of Taxpayer, Manager employed Lawyer to provide legal services and sought Advisor's assistance by asking specific tax questions. Manager represents that they have significant experience within the real estate industry and are well-versed in matters of real estate taxation. According to the affidavits and additional information provided to us, Manager and Lawyer never discussed forming a QOF. Manager was unaware of the requirement to file Form 8996, Qualified Opportunity Fund with the Taxpayer's timely filed Year 1 Federal income tax return for Taxpayer to self-certify QOF status and be treated as a QOF as of the month Taxpayer was formed. Manager mistakenly believed that Taxpayer was not required to file a Federal income tax return for Year 1, as Taxpayer had no activity. As a result, Taxpayer failed to file its Federal income tax return and Form 8996 by the due date. Upon discovering that the election had not been timely filed, Advisor was enlisted by Taxpayer to file its Federal income tax return and pursue relief under sections 301.9100-1 and 301.9100-3. On Date 4, Advisor filed Taxpayer's Year 1 Federal income tax return and Form 8996. LAW AND ANALYSIS Section 1400Z-2(e)(4)(A) directs the Secretary to prescribe regulations for rules for the certification of QOFs. Section 1.1400Z2(d)-1(a)(2)(i) of the Income Tax Regulations provides that the self-certification of a QOF must be timely-filed and effectuated annually in such form and manner as may be prescribed by the Commissioner of Internal Revenue in the Internal Revenue Service forms or instructions, or in publications or guidance published in the Internal Revenue Bulletin. To self-certify as a QOF, a taxpayer must file Form 8996 with its tax return for the year to which the certification applies. The Form 8996 must be filed by the due date of the Federal income tax return (including extensions). The information provided indicates that Taxpayer did not file its Form 8996 by the due date of its Federal income tax return (including extensions) due to Advisor's failure to file the income tax return. Section 1.1400Z2(d)-1(a)(2)(i) sets forth the manner and timing for electing to be a QOF and electing to self-certify as a QOF. As such, these elections are regulatory elections, as defined in section 301.9100-1(b). According to section 301.9100- 3(a), requests for extensions of time for regulatory elections that do not meet the requirements of section 301.9100-2 (automatic extensions) must be made under the rules of section 301.9100-3. Additionally, requests for relief subject to section 301.9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good faith, and that the granting of relief will not prejudice the interests of the Government. Under section 301.9100-3(b) a taxpayer is deemed to have acted reasonably and in good faith if the taxpayer requests relief before the failure to make the regulatory election is discovered by the Service, failed to make the election, because after exercising reasonable diligence (taking into account the taxpayer' s experience and the complexity of the return or issue), the taxpayer was unaware of the necessity for the election, or reasonably relied on a qualified tax professional, and the tax professional failed to make, or advise the taxpayer to make the election. However, a taxpayer is not considered to have reasonably relied on a qualified tax professional if the taxpayer knew or should have known that the professional was not competent to render advice on the regulatory election or was not aware of all relevant facts. In addition, section 301.9100-3(b)(3) provides that a taxpayer is deemed not to have acted reasonably and in good faith if the taxpayer - i. seeks to alter a return position for which an accuracy-related penalty has been or could be imposed under § 6662 at the time the taxpayer requests relief, and the new position requires or permits a regulatory election for which relief is requested; ii. was fully informed in all material respects of the required election and related tax consequences but chose not to make the election; or iii. uses hindsight in requesting relief. If specific facts have changed since the original deadline that make the election advantageous to a taxpayer, the Service will not ordinarily grant relief. Section 301.9100-3(c)(1) provides that the Commissioner will grant a reasonable extension of time to make the regulatory election only when the interests of the Government will not be prejudiced by the granting of relief. Section 301.9100-3(c)(1)(i) provides that the interest of the Government are prejudiced if granting relief would result in a taxpayer having a lower tax liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made (taking into account the time value of money). Section 301.9100-3(c)(1)(ii) provides that the interests of the Government are ordinarily prejudiced if the taxable year in which the regulatory election should have been made or any taxable year that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under § 6501(a) before the taxpayer's receipt of a ruling granting relief under this section. Based on the facts and information submitted and the representations made, we conclude that Taxpayer has acted reasonably and in good faith, and that the granting of relief would not prejudice the interests of the government. Accordingly, based solely on the facts and information submitted, and the representations made in the ruling request, Taxpayer has satisfied the requirements of the regulations for the granting of relief and Taxpayer's Form 8996, filed on Date 4, is considered timely filed. This ruling is based upon facts and representations submitted by Taxpayer and accompanied by a penalty of perjury statement executed by all appropriate parties. This office has not verified any of the material submitted in support of the request for a ruling. However, as part of an examination process, the Service may verify the factual information, representations, and other data submitted. Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. Specifically, we express no opinion, either express or implied, concerning whether any investments made into the taxpayer are qualifying investments as defined in section 1.1400Z2(a)-1(b)(34) or whether the taxpayer meets the requirements under section 1400Z-2 and the regulations thereunder to be a QOF. We express no opinion regarding the tax treatment of the instant transaction under the provisions of any other sections of the Code or regulations that may be applicable, or regarding the tax treatment of any conditions existing at the time of, or effects resulting from, the instant transaction. This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representative. A copy of this letter must be attached to any income tax return to which it is relevant. Alternatively, taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter ruling. The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination. Sincerely, Shareen S. Pflanz Chief, Branch 5 Office of Associate Chief Counsel (Income Tax and Accounting) cc:
Private Letter Ruling Number: 202343019 Internal Revenue Service July 27, 2023 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202343019 Release Date: 10/27/2023 Index Number: 2501.00-00, 2601.00-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:PSI:04 PLR-102060-23 Date: July 27, 2023 Dear ******: This letter responds to your authorized representative's letter dated December 27, 2022, and subsequent correspondence, requesting rulings concerning the federal gift and generation-skipping transfer tax consequences of a court-approved settlement agreement. FACTS The facts submitted and representations made are as follows. Settlor died testate on Date 1, a date prior to September 25, 1985. Settlor's Will consists of the original instrument dated Date 2, a first codicil dated Date 3, a second codicil dated Date 4, a third codicil dated Date 5, and a fourth codicil dated Date 6 (collectively, Settlor's Will). At his death, Article Fourth of Settlor's Will created separate trusts for the benefit of his three children, Child 1, Child 2, and Child 3 (collectively, Children), their spouses, and their descendants: Trust A for the benefit of Child 1; Trust B for the benefit of Child 2; and Trust C for the benefit of Child 3. In addition to the trusts for the primary benefit of Children, Article Third of Settlor's Will created a marital trust for Settlor's wife, Spouse, which granted Spouse a testamentary general power of appointment over any trust property remaining in the marital trust at the time of her death. Spouse exercised her power of appointment under Article VII of Spouse's Will, dated Date 7, with a first codicil dated Date 8 (collectively, Spouse's Will). Pursuant to Spouse's Will, upon Spouse's death on Date 9, the remaining property of the marital trust was divided into three separate trusts for the benefit of Children, their spouses, and their descendants: Trust D for the benefit of Child 1; Trust E for the benefit of Child 2; and Trust F for the benefit of Child 3. Section 8 of Article VI of Spouse's Will provides that to the extent not specifically stated otherwise, all trusts created by Spouse's Will would be governed by the provisions of Settlor's Will. Child 3 died on Date 10, leaving no surviving spouse or descendants. Upon Child 3's death, the property held in Trust C was divided into two equal shares and each share distributed to Trust A and Trust B. Similarly, the property of Trust F was divided into two equal shares and each share distributed to Trust D and Trust E. On Date 11, pursuant to a State Court order, Trust D for the primary benefit of Child 1 was divided into six separate trusts for the benefit of Child 1's six children and their respective descendants, as well as Child 1 and Child 1's spouse: Trust D1 for the benefit of Grandchild 1; Trust D2 for the benefit of Grandchild 2; Trust D3 for the benefit of Grandchild 3; Trust D4 for the benefit of Grandchild 4; Trust D5 for the benefit of Grandchild 5; and Trust D6 for the benefit of Grandchild 6. On Date 12, pursuant to a State Court order, Trust A for the primary benefit of Child 1 was divided into six separate trusts for the benefit of Child 1's six children and their respective descendants, as well as Child 1 and Child 1's spouse: Trust A1 for the benefit of Grandchild 1; Trust A2 for the benefit of Grandchild 2; Trust A3 for the benefit of Grandchild 3; Trust A4 for the benefit of Grandchild 4; Trust A5 for the benefit of Grandchild 5; and Trust A6 for the benefit of Grandchild 6. In a companion State Court order on the same date, Trust B for the primary benefit of Child 2 and Trust E for the primary benefit of Child 2, were divided into two separate trusts for the benefit of Child 2's two children, Grandchild 7 and Grandchild 8 and their respective descendants, as well as Child 2 and Child 2's spouse. The divided trusts were subsequently merged into two trusts known as Trust BE1 for the benefit of Grandchild 7 and Trust BE2 for the benefit of Grandchild 8. Article Fourth of Settlor's Will governs the distribution provisions of Trust A, Trust B, Trust D, Trust E, Trusts A1 through A6, Trusts D1 through D6, and Trusts BE1 and BE2 (collectively, the Family Trusts). Until a trust for whom a grandchild is named terminates, the Trustee has discretion to make distributions of income from such trust to the grandchild. The portion of income not distributed may be accumulated or may be distributed to the grandchild's spouse, the surviving parents of the grandchild, and the descendants of grandchild, in whole or in part, in the discretion of the Trustee. Trustee has unfettered discretion to make distributions of principal to a grandchild for whom a trust is established. A trust for whom a grandchild is named shall terminate upon the later to occur of the death of the grandchild or the grandchild's spouse, if any, and at such time the share for such grandchild shall be distributed to the descendants of such grandchild, per stirpes. Section 4 of Article Fifth of Settlor's Will provides that any trust established pursuant to Settlor's Will shall cease and terminate upon the expiration of twenty-one years after the death of the last surviving of Settlor's descendants who were in being at the time of Settlor's death, and if at the expiration of this period any property is still held in trust, such property shall immediately be distributed to and among the persons receiving or entitled to have the benefit of the income therefrom in equal shares. Pursuant to Article Fourth of Settlor's Will, if a grandchild of Settlor dies without a living spouse or descendants, the trust principal of such grandchild's trust will be distributed to Settlor's other descendants. Section 3 of Article Fifth of Settlor's Will provides as follows: The words "children" and "descendants" shall be deemed to refer to issue of the body born in lawful wedlock and to children adopted by legal proceedings of public record and to their children and descendants so defined. Of Settlor's eight grandchildren, Grandchild 5 and Grandchild 7 currently have biological descendants. Grandchild 2 adopted Adoptee 1 and Grandchild 3 adopted Adoptee 2 and Adoptee 3. Each adopted individual was adopted after reaching the age of majority (collectively, Adult Adoptees). The Trustee of each Family Trust is Trust Company. On Date 13, Trustee filed a petition with the State Court requesting an order construing the terms "children" and "descendants" under Section 3 of Article Fifth of Settlor's Will to determine whether individuals adopted as adults qualify as "descendants" under Settlor's Will. A controversy exists among the descendants of Settlor as to whether the Adult Adoptees are "descendants" of Settlor under Settlor's Will. If the Adult Adoptees are considered descendants of Settlor, the number of potential remainder beneficiaries increases and affects the per stirpital shares at the time of final distribution of the Family Trusts. On Date 14, State Court issued a memorandum opinion and order for evidentiary hearing to determine whether Grandchild 2 and/or Grandchild 3 functioned as parents to the Adult Adoptees before they reached age 18, based on State Law 1, which was enacted after Settlor's date of death. Grandchild 1, joined by other family members, filed a motion for summary judgment and amendment of the Date 14 order in objection to the State Court's application of State Law 1 rather than the law at the time of Settlor's date of death. State Law 1 provides that in construing a dispositive provision of a transferor who is not the adoptive parent, an adoptee is not considered the child of the adoptive parent unless the adoptive parent functioned as a parent of the adoptee before the adoptee reached 18 years of age. State Law 2 provides that the effective date of the title of State Law 1 is Date 15, a date that is after Settlor's date of death, and applies to any proceedings in court then pending or thereafter commenced regardless of the time of the death of decedent except to the extent that in the opinion of the court the former procedure should be made applicable in a particular case in the interest of justice or because of infeasibility of application of the procedure of the title. Over several years, the interested parties engaged in substantial litigation and other proceedings in preparation for trial, including filing cross motions for summary judgment, extensive discovery, and voluntary mediation. Based on the issue before State Court, the outcome of the litigation would be that the Adult Adoptees are determined to be or not be descendants of Settlor. After several attempts to resolve the contested issues, on Date 16 the parties entered into a Settlement Agreement resolving the litigation regarding the status of the Adult Adoptees as descendants of Settlor. The Settlement Agreement was revised on Date 17 (Revised Settlement Agreement). Both the Settlement Agreement and the Revised Settlement Agreement were approved by order of State Court and contingent upon receipt of a favorable private letter ruling from the Internal Revenue Service (IRS). All parties to the agreement were represented by legal counsel. The Revised Settlement Agreement provides for certain payments to and for the benefit of Adoptee 1. It provides that the amount of $a will be distributed outright and in cash to Adoptee 1 from Trusts A1 through A6 and Trusts D1 through D6 (each trust distributing $b). In addition, the amount of $a will be distributed outright and in cash to Grandchild 2 (adoptive parent of Adoptee 1) from Trust A2 and Trust D2 (each trust for the primary benefit of Grandchild 2 and each distributing $c), whereupon Grandchild 2, as settlor and transferor, will immediately establish (and contribute the $a in cash to) a special needs trust for the primary benefit of Adoptee 1. Finally, the amount of $d will be distributed outright and in cash to Adoptee 1 from Trust A2 and Trust D2 (each trust distributing $e). Upon receipt of cash in the amounts of $a and $d, Adoptee 1, as settlor and transferor, will immediately establish (and contribute the sum of $a and $d in cash to) a revocable trust for his primary benefit. The Revised Settlement Agreement provides for certain payments to and for the benefit of Adoptee 2 and Adoptee 3. It provides that the amount of $a will be distributed outright and in cash to each of Adoptee 2 and Adoptee 3 from Trusts A1 through A6 and Trusts D1 through D6 (each distributing $b). Further, after the cash distributions to Adoptee 2 and Adoptee 3 are made, the assets then making up Trust A3 and Trust D3 (collectively referred to going forward as the Grandchild 3 Settlement Trusts), each for the primary benefit of Grandchild 3 (adoptive parent of Adoptee 2 and Adoptee 3), will be kept separate and segregated from the assets of any other Family Trust. No further additions shall be made to the Grandchild 3 Settlement Trusts from any other Family Trust by reason of the death of any beneficiary of those other Family Trusts. Except for certain excluded property related to agricultural land and business interests in entities whose primary holding is agricultural land (Excluded Property), Adoptee 2 and Adoptee 3 are the named beneficiaries of the Grandchild 3 Settlement Trusts. Upon the death of the survivor of Child 1's spouse, Grandchild 3, and Grandchild 3's spouse, the remaining assets of the Grandchild 3 Settlement Trusts, less the Excluded Property, will be distributed in equal shares to Adoptee 2 and Adoptee 3, or all to the survivor. Adoptee 2 and Adoptee 3 have a testamentary power to appoint such individual's respective share of the Grandchild 3 Settlement Trusts to or for the benefit of such individual's spouse or descendants. If Adoptee 2 or Adoptee 3 does not exercise such power of appointment but has living descendants, the Trustee shall distribute such individual's respective share to such descendants, per stirpes. Any asset appointed under the terms of the Revised Settlement Agreement (including the assets of the Grandchild 3 Settlement Trusts) may not extend the time for vesting of that asset beyond a period of twenty-one years after the death of the last surviving descendant of Settlor who was in being on Date 18. Any remaining assets of the Grandchild 3 Settlement Trusts not otherwise distributed (including the Excluded Property) shall be distributed according to Settlor's Will without regard to any surviving Adult Adoptees or their descendants. Under the Revised Settlement Agreement, all claims by the Adult Adoptees with regard to Settlor and Settlor's Spouse's trusts and estates are resolved and, after obtaining a favorable private letter ruling from the IRS, Trustee will agree to dismiss the petition filed in State Court with prejudice and all parties will agree that State Court can enter the dismissal without awarding costs to any party and without further notice. It is represented that each Family Trust was irrevocable on September 25, 1985, and that there were no additions, constructive or actual, after that date. You have requested the following rulings: 1. The Revised Settlement Agreement, the State Court order approving the Revised Settlement Agreement, and the implementation and distributions made in accordance with the Revised Settlement Agreement, will not cause any of the Family Trusts to lose their status as trusts exempt from GST tax for purposes of chapter 13 of the Code. 2. Entering into the Revised Settlement Agreement will not cause any party to the Settlement Agreement to be treated as having made a gift to any other individual for purposes of chapter 12 of the Code. LAW AND ANALYSIS Ruling 1 Section 2601 imposes a tax on every generation-skipping transfer (GST), which is defined under § 2611 as a taxable distribution, a taxable termination, and a direct skip. Under § 1433(a) of the Tax Reform Act of 1986 (Act) and § 26.2601-1(a) of the Generation-Skipping Transfer Tax Regulations, the GST tax is generally applicable to GSTs made after October 22, 1986. However, under § 1433(b)(2)(A) of the Act and § 26.2601-1(b)(1)(i), the tax does not apply to a transfer under a trust (as defined in § 2652(b)) that was irrevocable on September 25, 1985, but only to the extent that such transfer is not made out of corpus added to the trust after September 25, 1985 (or out of income attributable to corpus so added). Section 26.2601-1(b)(4) provides rules for determining when a modification, judicial construction, settlement agreement, or trustee action with respect to a trust that is exempt from the GST tax under § 26.2601-1(b)(1), (b)(2), or (b)(3) will not cause the trust to lose its exempt status. The rules of § 26.2601-1(b)(4) are applicable only for purposes of determining whether an exempt trust retains its exempt status for GST tax purposes. They do not apply in determining, for example, whether the transaction results in a gift subject to gift tax, or may cause the trust to be included in the gross estate of a beneficiary, or may result in the realization of capital gain for purposes of § 1001. Section 26.2601-1(b)(4)(i)(B) provides that a court-approved settlement of a bona fide issue regarding the administration of a trust or the construction of terms of the governing instrument will not cause an exempt trust to be subject to the provisions of chapter 13, if -- ( 1 ) The settlement is the product of arm's length negotiations; and ( 2 ) The settlement is within the range of reasonable outcomes under the governing instrument and applicable state law addressing the issues resolved by the settlement. A settlement that results in a compromise between the positions of the litigating parties and reflects the parties' assessments of the relative strengths of their positions is a settlement that is within the range of reasonable outcomes. In the present case, each Family Trust was created and was irrevocable before September 25, 1985. It is represented that no additions, constructive or actual, have been made to any of the Family Trusts on or after September 25, 1985. Consequently, each Family Trust is currently exempt from GST tax. In this case, each party was represented by separate legal counsel. The prospective beneficiaries had distinct and adverse economic and administrative interests. The parties were involved in protracted and substantial litigation to resolve the issue of the identity of Settlor's descendants under Settlor's Will. Settlement negotiations were carried out over several years until the Revised Settlement Agreement was reached. The parties have obtained State Court approval of the Revised Settlement Agreement pending the issuance of this private letter ruling. We conclude that the Revised Settlement Agreement constitutes a settlement of a bona fide issue regarding construction of the terms "children" and "descendants" in Settlor's Will. We further conclude that the terms of the Revised Settlement Agreement are the product of arm's length negotiations. Finally, we conclude that the Revised Settlement Agreement represents a compromise between the positions of the interested parties and reflects the assessments of the relative strengths of their positions; therefore, we additionally conclude that the Revised Settlement Agreement is within the range of reasonable outcomes under the governing instrument and the applicable State law addressing the issues resolved by the Revised Settlement Agreement. Accordingly, based on the facts submitted and the representations made, we rule that the Revised Settlement Agreement, the State Court order approving the Revised Settlement Agreement, and the implementation and distributions made in accordance with the Revised Settlement Agreement, will not cause any of the Family Trusts to lose their status as trusts exempt from GST tax for purposes of chapter 13 of the Code. Ruling 2 Section 2501 imposes a tax for each calendar year on the transfer of property by gift during such calendar year by any individual. Section 2511 provides that the tax imposed by § 2501 applies whether the transfer is in trust or otherwise, direct or indirect, and whether the property transferred is real or personal, tangible or intangible. Section 25.2511-1(c)(1) of the Gift Tax Regulations provides that any transaction in which an interest in property is gratuitously passed or conferred upon another, regardless of the means or device employed, constitutes a gift subject to tax. Whether an agreement settling a dispute is effective for gift tax purposes depends on whether the settlement is based on a valid enforceable claim asserted by the parties and, to the extent feasible, produces an economically fair result. See Ahmanson Foundation v. United States, 674 F.2d 761, 774-775 (9 th Cir. 1981). Thus, state law must be examined to ascertain the legitimacy of each party's claim. A settlement that fairly reflects the relative merits and economic values of the various claims asserted by the parties and reaches a settlement that is within a range of reasonable settlements will not result in a transfer for gift tax purposes. As discussed above, the Revised Settlement Agreement represents the resolution of a bona fide controversy among the family members as beneficiaries of Settlor's Will. All interested parties have been represented in the proceedings that culminated in the Court Order approving the Revised Settlement Agreement. Further, based on the facts as presented, the terms of the Revised Settlement Agreement are the product of arm's length negotiations among all the interested parties. We conclude that the Revis ed Settlement Agreement reflects the rights of the parties under the applicable law of State that would be applied by the highest court of State. Accordingly, based on the facts submitted and representations made, we rule that implementation of the Revised Settlement Agreement will not result in a gift under § 2501 by the parties to the Revised Settlement Agreement. Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representative. The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination. Sincerely, Karlene M. Lesho Karlene M. Lesho Chief, Branch 4 Office of Associate Chief Counsel (Passthroughs and Special Industries) Enclosures Copy for § 6110 purposes cc:
Notice 2024-07 Internal Revenue Service 2024-2 I.R.B. 355 Relief from Additions to Tax for Certain Taxpayers' Failure to Timely Pay Income Tax for Taxable Years 2020 and 2021 Notice 2024-7 SECTION I. PURPOSE This notice provides relief for certain taxpayers from additions to tax for the failure to pay income tax with respect to certain income tax returns for taxable years 2020 and 2021. These additions to tax for the failure to pay income tax will be waived or, to the extent previously assessed or paid, will be abated, refunded, or credited to other outstanding tax liabilities, as described in section III of this notice. Section III.D of this notice describes situations in which the relief provided in this notice does not apply. SECTION II. BACKGROUND Section 6651(a)(2) of the Internal Revenue Code (Code) 1 generally imposes an addition to the tax owed by a taxpayer for the failure to pay the amount shown as tax on a return required to be filed by the taxpayer, on or before the date prescribed for payment of such tax, including any extension of time for payment. Section 6651(a)(3) generally imposes an addition to the tax owed by the taxpayer for the failure to pay the amount required to be shown on a return that is not so shown within 21 calendar days from the date of notice and demand or 10 business days if the amount in the notice and demand is $100,000 or greater. Sections 6651(a)(2) and 6651(a)(3) apply to returns required to be filed under the authority of any provision of subchapter A of chapter 61 of the Code, (for example, §§ 6012 through 6017 requiring the filing of income tax returns) and do not apply to information returns required to be filed or furnished under part III of such subchapter (that is, §§ 6031 through 6056 of the Code). Sections 6651(a)(2) and 6651(a)(3) do not apply if the taxpayer can show that the failure to pay the tax shown or required to be shown on the return is due to reasonable cause and not due to willful neglect. ****** 1 Unless otherwise specified, all "Section" or "§" references are to sections of the Code. **** When a taxpayer does not fully pay a tax liability, the Internal Revenue Service (IRS) sends an initial balance due notice, which includes Notices CP14 and CP161. 2 An initial balance due notice informs the taxpayer of the amount of tax owed and instructs the taxpayer how to pay the tax liability. If the taxpayer does not pay the tax liability after receiving the initial notice, the IRS normally sends the taxpayer certain automated reminder notices. **** 2 Notice CP14, Notice of Tax Due and Demand for Payment, Balance Due $5 or More, No Math Error, is issued to a taxpayer who owes money on unpaid taxes, states the amount of tax owed, including interest and penalties, and requests payment within 21 days. Notice CP161, Balance Due - Request for Payment or Notice of Unpaid Balance, is issued to a taxpayer who has an unpaid balance due, and explains how the IRS calculated the amount due, and states the taxpayer should contact the IRS within 10 days if the taxpayer believes the IRS has made a mistake or to contact the IRS to make a payment arrangement. **** On March 13, 2020, the President of the United States declared a national emergency in response to the ongoing Coronavirus Disease 2019 (COVID-19) pandemic. 3 The same day, the President also issued an emergency declaration under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C. 5121 et seq. (Emergency Declaration). 4 The Emergency Declaration instructed the Secretary of the Treasury "to provide relief from tax deadlines to Americans who have been adversely affected by the COVID-19 emergency, as appropriate, pursuant to 26 U.S.C. 7508A(a)." In response, the Department of the Treasury (Treasury Department) and the IRS issued a series of notices and other guidance to provide relief to affected taxpayers. **** 3 Proclamation 9994, 85 F.R. 15337 (March 18, 2020). 4 March 13, 2020, letter from the President to Secretaries of the Departments of Homeland Security, the Treasury, and Health and Human Services and the Administrator of the Federal Emergency Management Agency, available at https://trumpwhitehouse.archives.gov/briefings-statements/letter-president-donald-j-trump-emergency-determination-stafford-act/. ****** On February 9, 2022, the IRS announced in IRS News Release IR-2022-31 (IR-2022-31) the temporary suspension of the mailing of certain automated reminder notices. The IRS did not suspend the mailing of initial balance due notices. The additions to tax for the failure to pay taxes owed under §§ 6651(a)(2) and 6651(a)(3) continued to accrue for taxpayers who did not fully pay their balance due. The IRS will fully resume issuing automated reminder notices in calendar year 2024 for balances due for taxable years 2021 and earlier, thereby resuming the normal notice process for these taxable years. The Treasury Department and the IRS have determined that the relief described in section III of this notice will help certain taxpayers, who were not sent reminder notices during the temporary suspension of certain automated reminder notices, meet their Federal tax obligations. SECTION III. GRANT OF RELIEF Taxpayers described in section III.A of this notice (eligible taxpayers) who have filed tax returns specified in section III.B of this notice (eligible returns) will have the accrual of additions to tax for the failure to pay taxes owed for taxable year 2020 or 2021 waived for the relief period described in section III.C (relief period) or, to the extent previously assessed or paid, will have such additions to tax automatically abated, refunded, or credited to other outstanding tax liabilities, as appropriate, for the relief period. There is no need for taxpayers to request this relief. The IRS will issue a notice to each eligible taxpayer that reflects the updated amount owed and any refund or credit resulting from the automatic abatement. The relief granted in this notice applies to additions to tax under §§ 6651(a)(2) and 6651(a)(3) for the failure to pay taxes owed, but does not apply to any amount of interest that accrues as a result of any underpayment. A. Eligible Taxpayers The relief granted in this notice is available only to eligible taxpayers for accruals of additions to tax under §§ 6651(a)(2) and 6651(a)(3) for the failure to pay during the relief period. An "eligible taxpayer" is any taxpayer: - Whose assessed income tax for taxable year 2020 or 2021, as of December 7, 2023, is less than $100,000, excluding any applicable additions to tax, penalties, or interest; - Who was issued an initial balance due notice (including, but not limited to Notice CP14 or Notice CP161) on or before December 7, 2023, for taxable year 2020 or 2021; and - Who is otherwise liable during the relief period for accruals of additions to tax for the failure to pay under § 6651(a)(2) or 6651(a)(3) with respect to an eligible return for taxable year 2020 or 2021. B. Eligible Returns The relief granted in this notice is available only to eligible taxpayers who have filed an eligible return. An "eligible return" is one of the following income tax returns: 1. Income Tax Returns of Individuals: - Form 1040, U.S. Individual Income Tax Return - Form 1040-C, U.S. Departing Alien Income Tax Return - Form 1040-NR, U.S. Nonresident Alien Income Tax Return - Form 1040-PR, Declaración de la Contribución Federal sobre el Trabajo por Cuenta Propia - Form 1040-SR, U.S. Tax Return for Seniors - Form 1040-SS, U.S. Self-Employment Tax Return 2. Income Tax Returns of Trusts, Estates, Certain Taxable Corporations, and Certain Tax-Exempt Organizations: - Form 1120, U.S. Corporation Income Tax Return - Form 1120-C, U.S. Income Tax Return for Cooperative Associations - Form 1120-F, U.S. Income Tax Return of a Foreign Corporation - Form 1120-FSC, U.S. Income Tax Return of Foreign Sales Corporation - Form 1120-H, U.S. Income Tax Return for Homeowners Associations - Form 1120-L, U.S. Life Insurance Company Income Tax Return - Form 1120-ND, Return for Nuclear Decommissioning Funds and Certain Related Persons - Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return - Form 1120-POL, U.S. Income Tax Return for Certain Political Organizations - Form 1120-REIT, U.S. Income Tax Return for Real Estate Investment Trusts - Form 1120-RIC, U.S. Income Tax Return for Regulated Investment Companies - Form 1120-S, U.S. Income Tax Return for an S Corporation - Form 1120-SF, U.S. Income Tax Return for Settlement Funds (Under Section 468B) - Form 1041, U.S. Income Tax Return for Estates and Trusts - Form 1041-N, U.S. Income Tax Return for Electing Alaska Native Settlement Trusts - Form 1041-QFT, U.S. Income Tax Return for Qualified Funeral Trusts - Form 990-T, Exempt Organization Business Income Tax Return C. Relief Period For purposes of the relief granted in this notice, the "relief period" is the period that begins on the date the IRS issued an initial balance due notice to the eligible taxpayer, or February 5, 2022, whichever is later, and ends on March 31, 2024. Eligible taxpayers will remain liable for any addition to tax for the failure to pay tax that accrued before or after the relief period. Eligible taxpayers will also remain liable for interest that accrues during the relief period as a result of any underpayment of tax for taxable year 2020 or 2021. D. Exceptions to Relief The relief described in this notice does not apply to any addition to tax, penalty, or interest that is not specifically listed in the grant of relief under section III of this notice. In addition, the relief described in section III of this notice is not available with respect to any return for which the penalty for fraudulent failure to file under § 6651(f) or the penalty for fraud under § 6663 applies. The relief described in section III of this notice also does not apply to any addition to tax for the failure to pay in an offer in compromise under § 7122 that is accepted by the IRS because acceptance of the offer conclusively settles all of the liabilities in the offer under § 301.7122-1(e)(5) of the Procedure and Administration Regulations (26 CFR part 301). Finally, the relief described in section III of this notice does not apply to any addition to tax for the failure to pay that is settled in a closing agreement under § 7121 or finally determined in a judicial proceeding. SECTION IV. DRAFTING INFORMATION The principal author of this notice is Jamie Song of the Office of the Associate Chief Counsel (Procedure and Administration). For further information regarding this notice, contact Jamie Song at (202) 317-6845 (not a toll-free number).
Treasury Decision 9963 Internal Revenue Service 2022-34 I.R.B. 145 26 CFR 1.754-1: Time and manner of making elections to adjust basis of partnership property T.D. 9963 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 Streamlining the Section 754 Election Statement AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final regulations. SUMMARY: This document contains final regulations relating to the requirements for making a valid election to adjust the basis of partnership property in the case of a distribution of property by the partnership or a transfer of an interest in the partnership. These regulations affect partnerships and their partners by removing a regulatory burden in making an election to adjust the basis of partnership property. DATES: Effective date: These regulations are effective on August 5, 2022. Applicability date: For dates of applicability, see§1.754-1(d). FOR FURTHER INFORMATION CONTACT: Charles D. Wien, at (202) 317-5279 (not a toll-free number). SUPPLEMENTARY INFORMATION: Background This document contains amendments to the Income Tax Regulations (26 CFR part 1) under section 754 of the Internal Revenue Code (Code). Section 754 provides that if a partnership files an election (section 754 election), in accordance with regulations prescribed by the Secretary of the Treasury or her delegate (Secretary), the basis of partnership property shall be adjusted, in the case of a distribution of property, in the manner provided in section 734 and, in the case of a transfer of a partnership interest, in the manner provided in section 743. The section 754 election applies with respect to all distributions of property by the partnership and to all transfers of interests in the partnership during the taxable year with respect to which the election was filed and all subsequent taxable years. The section 754 election may be revoked by the partnership, subject to such limitations as may be provided by regulations prescribed by the Secretary. Section 1.754-1(b) prescribes the requirements for making the section 754 election. Generally, a partnership makes the section 754 election in a written statement (section 754 election statement) filed with the partnership return (whether filed electronically or on paper) for the taxable year during which the distribution or transfer occurs. For the section 754 election to be valid, the return must be filed not later than the time prescribed for filing the return for such taxable year, including extensions. Under§1.754-1(b) of the existing regulations, one of the partners must sign the section 754 election statement. On October 12, 2017, the Department of the Treasury (Treasury Department) and the IRS published a notice of proposed rulemaking (REG-116256-17) in the Federal Register (82 FR 47408) to remove the signature requirement from§1.754-1(b). The IRS did not receive any substantive written public comments in response to the notice of proposed rulemaking. No public hearing was requested or held. Therefore, the proposed regulations are adopted by this Treasury decision without change. Special Analyses I. Regulatory Planning and Review These regulations are not subject to review under section 6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) between the Treasury Department and the Office of Management and Budget regarding review of tax regulations. II. Regulatory Flexibility Act It is hereby certified that these regulations will not have a significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act (5 U.S.C. chapter 6). This certification is based on the fact that these regulations reduce the information currently required to be collected in making an election to adjust the basis of partnership property and thereby will reduce burden on small entities. Accordingly, a regulatory flexibility analysis is not required. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking preceding these regulations was submitted to the Chief Counsel for the Office of Advocacy of the Small Business Administration for comment on its impact on small business, and no comments were received from the Chief Counsel for the Office of Advocacy of the Small Business Administration. III. Unfunded Mandates Reform Act Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a state, local, or tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. This rule does not include any Federal mandate that may result in expenditures by state, local, or tribal governments, or by the private sector in excess of that threshold. IV. Executive Order 13132 Federalism Executive Order 13132 (entitled "Federalism") prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on state and local governments, and is not required by statute, or preempts state law, unless the agency meets the consultation and funding requirements of section 6 of the Executive Order. These proposed regulations do not have federalism implications and do not impose substantial direct compliance costs on state and local governments or preempt state law within the meaning of the Executive Order. V. Paperwork Reduction Act Under the Paperwork Reduction Act (44 U.S.C. 3501 et seq.), an agency may not conduct or sponsor and a person is not required to respond to a collection of information unless it displays a valid control number assigned by the Office of Management and Budget. The information collection described in this final rule has been assigned control number 1545-0123. Drafting Information The principal author of these regulations is Charles D. Wien of the Office of the Associate Chief Counsel (Passthroughs and Special Industries). However, other personnel from the Treasury Department and the IRS participated in their development. List of Subjects in 26 CFR part 1 Income taxes, Reporting and recordkeeping requirements. Adoption of Amendments to the Regulations Accordingly, 26 CFR part 1 is amended as follows: PART 1-INCOME TAXES Paragraph 1. The authority citation for part 1 is amended by adding an entry for§1.754-1 in numerical order to read as follows: Authority: 26 U.S.C. 7805 * * * Section 1.754-1 also issued under 26 U.S.C. 754. Par. 2. Section 1.754-1 is amended by revising the fourth sentence of paragraph (b)(1) and adding paragraph (d) to read as follows:§1.754-1 Time and manner of making election to adjust basis of partnership property. (b) * * * (1) * * * The statement required by this paragraph (b)(1) must set forth the name and address of the partnership making the election and contain a declaration that the partnership elects under section 754 to apply the provisions of section 734(b) and section 743(b). * * * (d) Applicability date. The fourth sentence of paragraph (b)(1) of this section applies to taxable years ending on or after August 5, 2022. Taxpayers may, however, apply the fourth sentence of paragraph (b)(1) of this section to taxable years ending before August 5, 2022. Approved: June 7, 2022. Douglas W. O'Donnell, Deputy Commissioner for Services and Enforcement. Lily Batchelder, Assistant Secretary of the Treasury (Tax Policy). (Filed by the Office of the Federal Register on August 8, 2022, 08:45 a.m., and published in the issue of the Federal Register for August 5, 2022, 87 FR 47931)
Private Letter Ruling Number: 202052026 Internal Revenue Service August 6, 2020 DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE 1100 Commerce Street, MC 4920DAL Dallas, TX 75242 TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION Number: 202052026 Release Date: 12/24/2020 UIL: 501.03-00 Date: August 6, 2020 Taxpayer ID Number: Form: Tax Period(s) Ending: Person to Contact: Identification Number: Telephone Number: Fax Number: CERTIFIED MAIL -- Return Receipt Requested LAST DAY FOR FILING A PETITION WITH THE TAX COURT: Dear *****: This is a final determination that you do not qualify for exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3), effective January 1, 20XX. Your determination letter dated November 19XX is revoked. Our adverse determination as to your exempt status was made for the following reason(s): Organizations described in IRC Section 501(c)(3) and exempt under Section 501(a) must be both organized and operated exclusively for exempt purposes, and no part of their net earnings may inure to the benefit of private shareholders or individuals. The transfer of money to **, the sole trustee of the Foundation, constituted inurement. As such, you failed to meet the requirements of IRC Section 501(c)(3) and Treasury Regulations Section 1.501(c)(3)-1(a), in that you have not established that you were organized and operated exclusively for exempt purposes, and that no part of your net earnings inured to the benefit of private shareholders or individuals. Organizations that are not exempt under IRC Section 501 generally are required to file federal income tax returns and pay tax, where applicable. For further instructions, forms, and information please visit www.irs.gov. Because you were a private foundation as of the effective date of the adverse determination, you are considered to be a taxable private foundation until you terminate your private foundation status under section 507 of the Internal Revenue Code. In addition to your income tax return, you must also continue to file Form 990-PF, Return of Private Foundation or Section 4941(a)(1) Trust Treated as a Private Foundation, by the 15th day of the fifth month after the end of your annual accounting period. Contributions to your organization are no longer deductible under IRC Section 170. If you decide to contest this determination, you may file an action for declaratory judgment under the provisions of IRC Section 7428 in one of the following three venues: 1) United States Tax Court, 2) the United States Court of Federal Claims, or 3) the United States District Court for the District of Columbia. A petition or complaint in one of these three courts must be filed within 90 days from the date this determination was mailed to you. Please contact the clerk of the appropriate court for rules and the appropriate forms for filing petitions for declaratory judgment by referring to the enclosed Publication 892. You may write to the courts at the following addresses: United States Tax Court 400 Second Street, NW Washington, DC 20217 U.S. Court of Federal Claims 717 Madison Place, NW Washington, DC 20439 U.S. District Court for the District of Columbia 333 Constitution Ave., N.W. Washington, DC 20001 Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory judgment under section 7428 of the Internal Revenue Code. We'll notify the appropriate state officials (as permitted by law) of our determination that you aren't an organization described in IRC Section 501(c)(3). You may be eligible for help from the Taxpayer Advocate Service (TAS). TAS is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 1-877-777-4778. Taxpayer Advocate assistance can't be used as substitute for established IRS procedures, formal appeals processes, etc. The Taxpayer Advocate is not able to reverse legal or technically correct tax determination, nor extend the time fixed by law that you have to file a petition in Court. The Taxpayer Advocate can, however, see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling. Organizations that are not exempt under IRC Section 501 generally are required to file federal income tax returns and pay tax, where applicable. For further instructions, forms, and information please visit www.irs.gov. You can get any of the forms or publications mentioned in this letter by calling 800-TAX-FORM (800-829-3676) or visiting our website at www.irs.gov/forms-pubs. If you have questions you can contact the person listed at the top of this letter. Sincerely, Sean E. O'Reilly Director, EO Examinations Enclosures: Publication 892 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Date: March 25, 2020 Taxpayer ID number: Form: Tax periods ended: Person to contact: ID number: Telephone: Fax: Address: Managers contact information: Name: ID number: Telephone: Response due date: CERTIFIED MAIL - Return Receipt Requested Dear ***: Why you're receiving this letter We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we propose to revoke your tax-exempt status as an organization described in Internal Revenue Code (IRC) Section 501(c)(3). If you agree If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an organization described in IRC Section 501(c)(3) for the periods above. After we issue the final adverse determination letter, we'll announce that your organization is no longer eligible to receive tax deductible contributions under IRC Section 170. If you disagree 1. Request a meeting or telephone conference with the manager shown at the top of this letter. 2. Send any information you want us to consider. 3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after the meeting or after we consider the information. The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case. For your protest to be valid, it must contain certain specific information, including a statement of the facts, applicable law, and arguments in support of your position. For specific information needed for a valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn't apply now that we've issued this letter. 4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities) if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the IRS. If you're considering requesting technical advice, contact the person shown at the top of this letter. If you disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as explained above. A decision made in a technical advice memorandum, however, generally is final and binding on Appeals. If we don't hear from you If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final adverse determination letter. Contacting the Taxpayer Advocate Office is a taxpayer right The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxspayeradvocate.irs.gov or call 877-777-4778. For additional information You can get any of the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person shown at the top of this letter. Sincerely, Christopher M. Holmes for Maria Hooke Director, EO Examinations Enclosures: Form 886-A Form 6018 ISSUE Whether the transfer of money from *** ("Foundation") to ***, the sole trustee of the Foundation, constituted inurement. As such, revocation of the Foundation's exempt status is warranted. FACTS Foundation's Background, Activities and Financial Information The Foundation is a trust created by the Last Will and Testament (Will) dated January 21, 19XX, of ***. See Section 8(c) of the Will. The Foundation's purposes are supporting the arts and providing scholarship to creative and original musicians, composers and lyricists. Following the death of ***, the Foundation was formed on March 22, 19XX. In May 19XX, the Foundation applied and was recognized as a private non-operating foundation under Internal Revenue Code (IRC) Section 501(c)(3) and 509(a) in November 19XX. The Foundation is operated on a calendar year basis. The Foundation has made no distributions since ***. Per ***, the Foundation had few activities in the last few years. *** was looking into fundraising programs and building a web site to promote the Foundation's profile. Due to the high cost, *** did not go through with the plan. The Foundation reports the following financial information on its Form 990-PF. In the years under audit, the Foundation did not have separate accounting records. The Foundation maintains a bank account at ***. The Foundation relied on receipts and disbursements reported on its *** annual statement to prepare the Form 990-PF. The annual statement reveals the following transfers to and from the *** bank account. *** then treated $0 of the $0 as his salary. The remaining $0 was for reimbursement of expenses. The Foundation did not furnish or file a Form W-2 or 1099-M ISC to report the salary. About In his Will, *** named ***, his friend, as the sole trustee of the Foundation. *** has been the sole trustee of the Foundation since inception. Article 8, Section (c)(8), of the Will provides, " I authorize and empower ***, by instrument in writing duly acknowledged, or by will duly admitted to probate, to appoint any citizen of the United States or any corporation having fiduciary powers to be successor to him as Trustee of the Foundation, and to revoke any such appointment prior to the time such successor has undertaken his duties and to appoint a different successor." Although his wife *** is not a trustee, she also has access to the Foundation's bank account. *** states that she is the one paying the bills and transferring money to the *** bank account. Transfers of Money from the Foundation to *** During the meeting on February 4, 20XX, *** stated that in 20XX, they experienced financial hardship. *** began drawing fund from the Foundation for salary. Per ***, the Foundation's outside accountant later advised ***. *** to treat the amounts withdrew in excess of trustee salary as loan. *** recalls hearing the accountant verbally advising *** that he could draw amounts equaled to 0 to 0 percent of the Foundation assets for salary. The salary could increase if the Foundation generates more revenue. In the fax transmittal dated March 12, 20XX, *** recanted the disclosure above and stated that ***. *** business manager *** advised that *** could borrow from the Foundation. The amounts withdrawn were documented as a loan not as salary by *** and then given to *** for official accounting by *** did not provide written records to support the above disclosure. *** passed away in 20XX. The examining agent requested a written loan agreement in Information Document Request #1 and #2. During the meeting on February 4, 20XX, *** stated that there was no written loan agreement and unable to provide the agreement. In the fax transmittal dated March 12, 20XX, *** recanted the above statement and stated that *** cannot confirm whether there was a written loan agreement. *** put up no collaterals for the loan. *** confirmed neither the Foundation nor *** established a fixed schedule of repayments. Since 20XX, *** neither accrued nor paid interest on the loans. *** stated that *** made repayments when financially able. The Form 990-PF shows the following year-end loan balances. Separately, *** provided a schedule showing loan balance dating back to 20XX. The schedule is reproduced below. 20XX Beginning balance: $0 20XX Loan to date: $0 Below were additional money transferred from the Foundation to *** in 20XX and 20XX. LAW IRC Section 501(c)(3) provides for exemption from Income Tax for corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office. Treasury Regulations (Regs.) Section 1.501(c)(3)-1(a)(1) provides that, in order to be exempt as an organization described in section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in such section. If an organization fails to meet either the organizational test or the operational test, it is not exempt. Regs. Section 1.501(c)(3)-1(c)(2) provides that an organization is not operated exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals. Regs. Section 1.501(a)-1(c) defines the words private shareholder or individual in section 501 as persons having a personal and private interest in the activities of the organization. The courts have broadly construed the term net earnings to include more than gross receipts minus disbursements as shown on the organization's books and records. Founding Church of Scientology v. U.S., 412 F.2d 1197 (Ct.Cl. 1969), involved a classic across-the-board channeling of an organization's funds to those in control of the organization. In that case, a wide variety of devices were employed, including fees, commissions, excessive rental payments, loans and excessive salaries, to divert the organization's funds to its founder, L. Ron Hubbard, and his immediate family. The principle of inurement was neatly summarized when the Court stated, "what emerges from these facts is the inference that the Hubbard family was entitled to make ready personal use of the corporate earnings." In John Marshall Law School v. U.S., 228 Ct.Cl. 902 (1981), the Court ruled that interest-free and unsecured loans to insiders constituted inurement. The Court detailed with particularity each of a series of interest-free and unsecured loans used by the Fensters to purchase a home and furnish it. Although one of the loans was evidenced by a promissory note, the note made no provision for a definite repayment schedule. TAXPAYER'S POSITION The Foundation's position is not known. GOVERNMENT'S POSITION Regs. Section 1.501(c)(3)-1(a)(1) provides that an organization must be both organized and operated exclusively for one or more of the purposes. If an organization fails to meet either the organizational test or the operational test, it is not exempt. An organization is not operated exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals. Regs. Section 1.501(c)(3)-1(c)(2). See also Founding Church of Scientology v. U.S. and John Marshall Law School v. U.S. The facts of this case are similar to those of Founding Church of Scientology v. U.S. In Founding Church of Scientology v. U.S., the Court noted, "what emerges from these facts is the inference that the Hubbard family was entitled to make ready personal use of the corporate earnings." The Court ruled that the use of the corporate earnings constituted inurement. In this case, the *** readily and conveniently used the Foundation's bank account as if it was theirs. They withdraw money from the Foundation's bank account as needed. While the *** repaid some of the money, the unpaid amount remain substantial. As of the end of 20XX, the unpaid amount totaled $0. The forms, amounts, and infrequency of repayments raise doubt whether *** is able to make future repayments. The *** personal uses of the Foundation's money derived the Foundation of the ability to generate income on the money. The Foundation could have invested the $ *** in certificate of deposit (CD) to generate interest income. The Foundation was not able to do that because it no longer has that $ ***. All the while, the *** paid zero interest to the Foundation for using the $ *** The facts of this case are also similar to those of John Marshall Law School v. U.S. The Court detailed with particularity each of a series of interest-free and unsecured loans used by the Fensters to purchase a home and furnish it. The Court ruled the interest-free and unsecured loans to the Fensters constituted inurement. In this case, the *** treated the money they withdrew from the Foundation as loans. Yet, they accrued and paid zero interest on the loans since ***. They also put up no collaterals to secure the loans. The Foundation has little recourses in the event the *** decided not to repay the loans. CONCLUSION Based on the above facts, it is concluded that the Foundation' net earnings have inured to the benefits of its insiders, the *****. The Foundation's tax-exempt status should be revoked. Since the Foundation is a trust, it is required to file a Form 1041, Income Tax Return of Estates and Trusts, for all future years. In addition to the Form 1041, the Foundation is required to file the Form 990-PF as a taxable private foundation for all future years.
Private Letter Ruling Number: 202052041 Internal Revenue Service May 5, 2020 DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE 1100 Commerce Street, MC 4920DAL Dallas, TX 75242 TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION Number: 202052041 Release Date: 12/24/2020 UIL: 501.03-00 Date: May 5, 2020 Taxpayer ID Number: Form: Tax Period(s) Ending: Person to Contact: Identification Number: Telephone Number: Fax Number: CERTIFIED MAIL -- Return Receipt Requested LAST DAY FOR FILING A PETITION WITH THE TAX COURT: Dear *****: This is a final determination that you do not qualify for exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3), effective July 1, 20XX. Your determination letter dated October 17, 20XX is revoked. Our adverse determination as to your exempt status was made for the following reasons: Organizations described in IRC Section 501(c)(3) and exempt under Section 501(a) must be both organized and operated exclusively for exempt purposes. You have not demonstrated that you are operated exclusively for charitable, educational, or other exempt purposes within the meaning of Section 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. You have not established that you have operated exclusively for an exempt purpose. As such, you failed to meet the requirements of IRC Section 501(c)(3) and Treasury Regulations Section 1.501(c)(3)-1(a), in that you have not established that you were organized and operated exclusively for exempt purposes and that no part of your earnings inured to the benefit of private shareholders or individuals. Contributions to your organization are no longer deductible under IRC Section 170. Organizations that are not exempt under IRC Section 501 generally are required to file federal income tax returns and pay tax, where applicable. For further instructions, forms, and information please visit www.irs.gov. If you decide to contest this determination, you may file an action for declaratory judgment under the provisions of IRC Section 7428 in one of the following three venues: 1) United States Tax Court, 2) the United States Court of Federal Claims, or 3) the United States District Court for the District of Columbia. A petition or complaint in one of these three courts must be filed within 90 days from the date this determination was mailed to you. Please contact the clerk of the appropriate court for rules and the appropriate forms for filing petitions for declaratory judgment by referring to the enclosed Publication 892. You may write to the courts at the following addresses: United States Tax Court 400 Second Street, NW Washington, DC 20217 US Court of Federal Claims 717 Madison Place, NW Washington, DC 20005 U.S. District Court for the District of Columbia 333 Constitution Ave., NW Washington, DC 20001 Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory judgment under IRC Section 7428. We'll notify the appropriate state officials (as permitted by law) of our determination that you aren't an organization described in IRC Section 501(c)(3). You may be eligible for help from the Taxpayer Advocate Service (TAS). TAS is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 1-877-777-4778. Taxpayer Advocate assistance can't be used as substitute for established IRS procedures, formal appeals processes, etc. The Taxpayer Advocate is not able to reverse legal or technically correct tax determination, nor extend the time fixed by law that you have to file a petition in Court. The Taxpayer Advocate can, however, see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling. You can get any of the forms or publications mentioned in this letter by calling 800-TAX-FORM (800-829-3676) or visiting our website at www.irs.gov/forms-pubs. If you have any questions about this letter, please contact the person whose name and telephone number are shown in the heading of this letter. Sincerely, Maria D. Hooke Director, EO Examinations Enclosures: Publication 892 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Exempt Organizations Examinations Date: June 20, 2019 Taxpayer Identification Number: Form: Tax Year(s) Ended: Person to Contact: Employee ID: Telephone: Fax: Manager's Contact Information: Employee ID: Telephone: Response Due Date: CERTIFIED MAIL -- Return Receipt Requested Dear **: Why you're receiving this letter We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we propose to revoke your tax-exempt status as an organization described in Internal Revenue Code (IRC) Section 501(c)(3). If you agree If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an organization described in IRC Section 501(c)(3) for the periods above. After we issue the final adverse determination letter, we'll announce that your organization is no longer eligible to receive tax deductible contributions under IRC Section 170. If you disagree 1. Request a meeting or telephone conference with the manager shown at the top of this letter. 2. Send any information you want us to consider. 3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after the meeting or after we consider the information. The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case. For your protest to be valid, it must contain certain specific information, including a statement of the facts, applicable law, and arguments in support of your position. For specific information needed for a valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn't apply now that we've issued this letter. 4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities) if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the IRS. If you're considering requesting technical advice, contact the person shown at the top of this letter. If you disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as explained above. A decision made in a technical advice memorandum, however, generally is final and binding on Appeals. If we don't hear from you If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final adverse determination letter. Contacting the Taxpayer Advocate Office is a taxpayer right The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778. For additional information You can get any of the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person shown at the top of this letter. Sincerely, for Maria Hooke Director, Exempt Organizations Examinations Enclosures: Form 886-A Form 6018 Form 4621-A Pub 892 Pub 3498 Issues: Whether the exempt status of *** (henceforth referred to as "organization" "the Organization") should be revoked, effective July 1, 20XX because it is failed to meet the operational test under Internal Revenue Code (IRC) Section 501(c)(3)? Facts: Application for Exemption: The organization applied for tax-exempt status by filing the Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, on ***. In Part III of the Form 1023 the organization stated that they are organized and operated exclusively to further a charitable purpose and that they have not conducted and will not conduct prohibited activities that violate prohibitions and restrictions under section IRC 501(c)(3). In Part VIII Line 22 of the Form 1023 the organization stated that it planned to provide scholarships, fellowships, educational loans, or other educational grants to individuals, including grants for travel, study, or other similar purposes. Articles of Incorporation: The organization incorporated on *** and was approved, as a Nonprofit Corporation, under the laws of ** State. Article two of the Articles of Incorporation states that this corporation is a nonprofit public benefit corporation and is not organized for the private gain of any person. It is organized under the Nonprofit ** Corporation Law for charitable purposes. The specific purpose for which this corporation is organized are to provide hockey equipment and education of the game to children in ** County. Article Four(a) of the Articles of Incorporation states this corporation is organized and operated exclusively for charitable purposes within the meaning of section 501(c)(3) of the Internal Revenue Code. Bylaws: The organization stated in its Bylaws, the organization was formed for the following purposes: - To encourage and support the development of youth hockey and to help provide a structure for instruction and educate the public about the game. To engage in collection, refurbishment and redistribution of used hockey equipment to youth that have a need and to award scholarship to young hockey athletes. - To provide hockey equipment and education of the game to children in *** county. Exemption Letter: The organization was granted tax-exempt status as a 501(c)(3) on **, with an effective date of ** as evidenced L947 issued to the organization on **. Form 990-EZ and Reported Activities: The Form 990-EZ, Short Form Return of Organization Exempt from Income, filed by the organization for the year beginning July 1, 20XX through June 30, 20XX described the organizations primary exempt purpose as: to provide scholarships and equipment to young hockey athletes. Form 990-EZ, Part III, line 28, describes the organizations primary exempt purpose as: to provide scholarships and equipment to young athletes. In the review of the Form 990-EZ there were no amounts identified as scholarships. Per a review of the expenses listed on Form 990, no scholarship activities were conducted in the year of examination. Organization Response to IDR #1 and #2 on Activities In its response to the Information Document Request #1 and #2 the organization provides the following as to the activities conducted by the organization: 1. The organization described its activities in general as: "We are a diverse and committed group of people who have joined together to form **. The goal is to support youth hockey and do good works in the community in many different ways. We are structed as a 501(c)(3), nonprofit organization, and funds ourselves by the generosity of our individual ** members. We also accept matching corporate donations, and work with other sponsors who believe in and support our cause. 2. The organization also stated that they conduct road trips as an organization to watch hockey games live and in-person. The organization provided the following with respect to the trips: "Road trips are exactly what they sound like. We have a group of people who sign up and pay to go to these locations and watch hockey games." 3. The organization stated they conduct a ** activity to collect used hockey equipment at various locations to refurbish it and prepare it for kids around the world that cannot afford to buy their own equipment to play hockey. The organization works with primarily ** ice rinks. These ice rinks have kid leagues of all different ages and skills. The organization works with several different coaches of these leagues to determine who needs help with getting equipment and that is primary how the know whom to offer the refurbished equipment. The income description summarized the noncash donations received from the ** activities in the amount of $0. 4. The organization stated they have a scholarship program for students that are hockey players. The scholarships are awarded for equipment, hockey team and league expenses. 5. The organization stated they conduct tail gate parties which are gatherings they have on Sundays before the ** Home games. The ** are the ** which are a professional ice hockey team. The organization conducted nine of these throughout the year. The organization provided the following with respect to the tail gate activities: "Tail gate parties are gatherings we have on Sundays before the ** home games at ** on ** in **." 6. The organization stated that they conduct watch parties to gather and watch the when they are traveling and playing hockey in various other cities. The gatherings are at local restaurants. The board members do the planning based on what the hockey schedule is each season. The organization conducted five of these throughout the year. The organization provided the following with respect to the watch party activities: "Watch parties are gatherings we have to watch the ** when they are traveling and playing hockey in various other cities. We are holding these gatherings at either ** on ** in ** or ** and ** on** in **." The organization was asked to provide more detail regarding the road trip activities it conducted for the year. The organization stated that it conducted two of these road trips a year. That these activities place an emphasis on the sport of hockey. That they include people of all ages, 0 people total, two were under the age of 0, seven are members and the rest not. That the ages are from 0-0. The organization provided that all their trips include multi-generational participation and 2 or 3 family groups and that they are one big happy family". Trial Balance: The Trial Balance provided by the organization in response to Information Document Request #1 listed road trip income of $0 and Road Trip expense of $0. CHART DELETED Profit & Loss statement: The Profit & Loss statement provided by the organization in response to Information Document Request #1 listed road trip income of $0 and Road Trip expense of $0. CHART DELETED Law: Internal Revenue Code (IRC) Section 501(c)(3) provides an exemption for any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation, and which does not participate in, or intervene in, any political campaign on behalf of (or in opposition to) any candidate for public office. Treasury Regulation Section 1.501(c)(3)-1(a)(1) states that in order to qualify under section 501(c)(3) of the Code, an organization must be both organized and operated exclusively for one or more exempt purposes. If an organization fails to meet either the organizational or operational test, it is not exempt. Treasury Regulation Section 1.501(c)(3)-1(c)(1) provides that an organization will be regarded as operating exclusively for exempt purposes if it engages primarily in activities that accomplish exempt purposes specified in section 501(c)(3) of the code. An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose. Revenue Ruling 67-327, 1967-2 CB 187 - A nonprofit organization formed for the purpose of arranging group tours for students and faculty of a university to allow them to travel abroad and which has no other activities is not entitled to exemption from Federal income tax under section 501(c)(3) of the Internal Revenue Code of 1954. In Better Business Bureau of Washington, D.C. v. United States, 326 U.S. 279 (1945), the Supreme Court determined that the presence of a single non-exempt purpose, if substantial in nature, will destroy exemption under Section 501(c)(3) regardless of the number or importance of any other exempt purposes. In Haswell v. United States, 500 F.2d 1133, (Ct.Cl. 1974), cert denied, 419 US 1107 (1975), the court held that 16.6% to 20.5% over a two-year period was a strong indication of substantiality but that the method of measurement was only one acceptable method of measurement. In Malat V. Riddle, 383 U.S. 569 (1966), the court held that the term "primary" means more than 50%. Taxpayer's Position: Taxpayer's position is unknown at this time. Government's Position: That the exempt status of ** (henceforth referred to as "organization" "the Organization") should be revoked, effective July 1, 20XX because it is failed to meet the operational test under Internal Revenue Code (IRC) Section 501(c)(3). Under IRC Section 501(c)(3) there are two main tests for qualification for exempt status: the operational test and the organizational test. In order to be exempt under this section, an organization must be organized and operated exclusively for purposes described in section 501(c)(3). Internal Revenue Code (IRC) Section 501(c)(3) provides an exemption for any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals Treasury Regulation Section 1.501(c)(3)-1(c)(1) provides that an organization will be regarded as operating exclusively for exempt purposes if it engages primarily in activities that accomplish exempt purposes specified in section 501(c)(3) of the code. An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose. The organizations activities were evaluated to determine whether the activities met the definition of charitable as provided by the IRC. In order to be deemed charitable, an activity must fall under one of the following categories: religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals. Here the organization conducted the following activities in the year of examination: - Road Trips (** and **) - Tailgate Parties - Watch Parties The description of the activities as provided by the organization demonstrates that only the Second Skate activities were conducted in furtherance of charitable purposes. The road trips, tailgate parties, and watch parties were all activities conducted by the organization in support of the ** (**) team, the **. These activities were conducted for the benefit of the individuals to join together in attending games, watch parties, or tailgate parties and/or the ** team itself. The organization conducted activities that substantially bound together individuals by a common interest directed towards activities that were social in nature for pleasure and recreational purposes and did not benefit any charitable class of individual. Therefore, the government has determined that these activities were not charitable in nature and will be considered non-exempt activities when calculating the organization's primary purpose and its activities which are not in furtherance of an exempt purpose. Here the government reviewed the activities of the organization to ensure that the organization meets the operational test as outlined in Treasury Regulation Section 1.501(c)(3)-1(c)(1). The organization stated that it conducted the following activities in the year of examination: - Scholarships - Road Trips (** and **) - Tailgate Parties - Watch Parties Per a review of the financials and documentation provided throughout the audit the organization expended the following amounts for each activity it conducted in the year of examination: - *** ($0.00) - Scholarships ($0.00) - Road Trips ($0.00) - Fundraising ($0.00) - Administrative Expenses ($0.00) Per review of the profit and loss statement of the organization the organization expended a total of $0.00 for the year of examination. Based on the financial information provided, the organization's exempt activities (second skate and scholarship activities) totaled 0.00% of its total activities. Alternatively, the government has calculated the organization's activities that are not in furtherance of an exempt purpose to be 0.00% of its total activities based on its expenditures. As evaluated on an expenditure basis, the government has determined that the organization conducts more than an insubstantial amount of its activities that are not in furtherance of an exempt purpose amount of non-exempt activity and that its primary purpose no longer continues to be charitable in nature. The government also reviewed the activities of the organization on the bases of the number of times they were conducted in the year of examination. As outlined above, the organization stated that it conducted the following activities in the year of examination: - Scholarships - Road Trips - Tailgate Parties - Watch Parties Per a review of the documentation provided by the organization throughout the audit, the organization conducted the following activities in the year of examination: - *** (One event) - Scholarships (Not conducted) - Road Trips (Two Road trips) - Tailgate Parties (Nine Tailgate Parties) - Watch Parties (Five Watch Parties) Based on the information provided, the organization conducted a total of 0 events throughout the year. The exempt activities that further an exempt purpose (second skate and scholarship activities) totaled 0.00% of its total activities. Alternatively, the government has calculated the organization's activities not in furtherance of an exempt purpose to be 0.00% of its total activities based on its expenditures. As evaluated on an event basis, the government has determined that the organization conducts more than an insubstantial amount of its activities that are not in furtherance of an exempt purpose and that its primary purpose no longer continues to be charitable in nature. In order to take both expenditures for activities and number of events conducted into consideration in one calculation the government has averaged both the exempt and non-exempt figures calculated above to determine the overall percentage of charitable versus non-charitable functions as follows: - Non-exempt: 0.00% - Exempt: 0.00% Here, the organization does not meet the requirements of Section 1.501(c)(3)-1(c)(1) of the regulations, which requires them to engage primarily in activities which accomplish one or more exempt purposes. Since the organization is operating substantially for social and recreational purposes (non-exempt purposes) and are not operating exclusively for charitable, educational, religious or scientific purposes. Therefore, it is the position of the government that the organization failed the operational test under IRC Section 501(c)(3) and should have its exemption revoked effective July 1, 20XX. Conclusion: Based on the facts and information provided, **** does not qualify for exemption under section 501(c)(3) of the Internal Revenue Code. You failed to establish that you are organized and operated exclusively for exempt purposes within the meaning as set forth under IRC section 501(c)(3) as you failed to meet the operational test therein. During our examination we determined that you operate for a substantial non-exempt, social and recreational purpose, with minimal benefit to the general public. Accordingly, your organization's exempt status is revoked effective July 1, 20XX. If you agree please sign, date, and return the attached Form 6018 by July 17, 20XX Form 1120, U.S. Corporation Income Tax Return, should be filed for the tax periods after July 1, 20XX.
Private Letter Ruling Number: 202329008 Internal Revenue Service April 26, 2023 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202329008 Release Date: 7/21/2023 Index Number: 168.00-00, 9100.00-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: (202) 317-3467 Refer Reply To: CC:ITA:B04 PLR-123899-22 Date: April 26, 2023 Dear ******: This letter responds to Taxpayer's request, dated Date 1, requesting an extension of time under §§ 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations to make an election under § 168(h)(6)(F)(ii) of the Internal Revenue Code (Code) not to be treated as a tax-exempt controlled entity as of Date 2. FACTS Taxpayer is a domestic corporation incorporated under the laws of State. Taxpayer uses the calendar year as its annual accounting period and the accrual method of accounting. Exempt Organization, a tax-exempt organization under § 501(c)(3) of the Code, owns more than 50 percent in value of the stock of Taxpayer. Taxpayer therefore is a tax-exempt controlled entity within the meaning of § 168(h)(6)(F)(iii) of the Code. Taxpayer is a general partner of Partnership and owns x percent of Partnership. Partnership was formed to acquire, construct, operate, lease, and otherwise manage residential rental property in a manner that qualifies for the federal low-income housing credit. The partnership agreement provides that no portion of the property held by Partnership is or will be treated as tax-exempt use property within the meaning of § 168(h). On Date 3, Partnership placed in service property that was eligible to be depreciated for federal income tax purposes. Once the property was placed in service, Partnership consistently has treated the depreciable property as if the § 168(h)(6)(F)(ii) election had been timely made for Year. Taxpayer relied on Firm to prepare and file the necessary forms and elections for Year. Although Firm provided Taxpayer a certificate stating that the §168(h)(6)(F)(ii) election will be made with Taxpayer's return for Year, Firm inadvertently omitted the election from Taxpayer's timely filed return for Year. The missed election was discovered when the limited partner in Partnership requested a copy of the election for its files. APPLICABLE LAW Section 167(a) of the Code generally provides for a depreciation deduction for property used in a trade or business. Under § 168(g), the alternative depreciation system must be used for any tax-exempt use property as defined in § 168(h). Section 168(h)(6)(F)(i) provides generally that any tax-exempt controlled entity is treated as a tax-exempt entity for purposes of § 168(h)(6). Section 168(h)(6)(A) provides that, for purposes of § 168(h), if any property not tax-exempt use property is owned by a partnership having both a tax-exempt entity and a nontax-exempt entity as partners and any allocation to the tax-exempt entity is not a qualified allocation, then an amount equal to such tax-exempt entity's proportionate share of such property is treated as tax-exempt use property. Under §168(h)(6)(F)(iii)(I), a corporation (without regard to that subparagraph and § 168(h)(2)(E)) constitutes a "tax-exempt controlled entity" if 50 percent or more (in value) of the corporation's stock is held by one or more tax-exempt entities (other than a foreign person or entity). In the case of tiered partnerships and other entities, § 168(h)(6)(E) applies similar rules. Under § 168(h)(6)(F)(ii), a tax-exempt controlled entity can elect not to be treated as a tax-exempt entity. Once made, the election is irrevocable and will bind all tax-exempt entities holding an interest in the tax-exempt controlled entity. Under § 301.9100-7T(a)(2)(i) of the Procedure and Administration Regulations, a §168(h)(6)(F)(ii) election must be made by the due date of the tax return for the first taxable year for which the election is to be effective. Section 301.9100-7T(a)(3)(i) provides that the § 168(h)(6)(F)(ii) election must be made by attaching a statement to the tax return for the taxable year for which the election is to be effective. Section 301.9100-1(c) provides that the Commissioner of Internal Revenue has the discretion to grant a reasonable extension of time to make a regulatory election. Section 301.9100-1(b) defines the term "regulatory election" as including any election for which a regulation prescribes the due date. The § 168(h)(6)(F)(ii) election is a regulatory election. Sections 301.9100-1 through 301.9100-3 provide the standards the Commissioner will use to determine whether to grant an extension of time to make a regulatory election. Section 301.9100-3(a) provides that a request for an extension of time for a regulatory election (other than automatic extensions of time covered in § 301.9100-2) will be granted when the taxpayer provides evidence (including affidavits) to establish that the taxpayer acted reasonably and in good faith and granting relief will not prejudice the interests of the government. Section 301.9100-3(b)(1) provides that a taxpayer is deemed to have acted reasonably and in good faith if the taxpayer: (i) requests relief before the failure to make the regulatory election is discovered by the Internal Revenue Service (Service); (ii) failed to make the election because of intervening events beyond the taxpayer's control; (iii) failed to make the election because, after exercising due diligence, the taxpayer was unaware of the necessity for the election; (iv) reasonably relied on the written advice of the Service; or (v) reasonably relied on a qualified tax professional, and the tax professional failed to make, or advise the taxpayer to make, the election. Under § 301.9100-3(b)(3), a taxpayer will not be considered to have not acted reasonably and in good faith if the taxpayer: (i) seeks to alter a return position for which an accuracy-related penalty could be imposed under § 6662 at the time the taxpayer requests relief, and the new position requires or permits a regulatory election for which relief is requested; (ii) was fully informed of the required election and related tax consequences, but chose not to file the election; or (iii) uses hindsight in requesting relief. If specific facts have changed since the original deadline that make the election advantageous to a taxpayer, the Service will not ordinarily grant relief. Section 301.9100-3(c)(1) provides that the Service will grant a reasonable extension of time only when doing so will not prejudice the interests of the Government. The interests of the Government are prejudiced if granting relief would result in a taxpayer having a lower tax liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made. ANALYSIS The facts submitted by Taxpayer indicate that Taxpayer intended at the outset to make the § 168(h)(6)(F)(ii) election, that its failure to make the election on a timely-filed return was inadvertent, and that Taxpayer is not using hindsight in requesting relief. Moreover, Taxpayer requested this relief before failure to make the election was discovered by the Service. Finally, Taxpayer acted reasonably in and good faith, and the interests of the government will not be prejudiced by the granting of relief under § 301.9100-3. CONCLUSION Based solely on the facts as represented and the applicable law, we conclude that the request for relief under § 301.9100-3 should be granted. Taxpayer is granted an extension of 60 days from the date of this letter to file an amended return making the election under § 168(h)(6)(F)(ii). Taxpayer must attach a copy of this ruling letter to its amended return. If Taxpayer files its amended return electronically, it may satisfy this requirement by attaching a statement to its amended return that provides the date and control number of this letter ruling. This ruling is based upon information and representations submitted by Taxpayer. While this office has not verified any of the material submitted in support of the request for a ruling, it is subject to verification on examination. Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. Specifically, this ruling grants an extension of time to make a §168(h)(6)(F)(ii) election; however, this ruling does not address whether taxpayer is eligible to make the election. This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides that it may not be used or cited as precedent. Pursuant to the Form 2848, Power of Attorney and Declaration of Representative, on file, we are sending a copy of this letter to Taxpayer's authorized representative. Sincerely, /s/ Stephen J. Toomey Stephen J. Toomey Senior Counsel, Branch 4 Office of the Associate Chief Counsel (Income Tax & Accounting) Enclosure Copy for § 6110 purposes cc:
Treasury Decision 9967 Internal Revenue Service 2022-44 I.R.B. 385 26 CFR 1.42-15, 26 CFR 1.42-19 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 T.D. 9967 Section 42, Low-Income Housing Credit Average Income Test Regulations AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final and temporary regulations. SUMMARY: This document contains final and temporary regulations setting forth guidance on the average income test for purposes of the low-income housing credit. If a building is part of a residential rental project that satisfies this test, the building may be eligible to earn low-income housing credits. These final and temporary regulations affect owners of low-income housing projects, tenants in those projects, and State or local housing credit agencies that monitor compliance with the requirements for low-income housing credits. DATES: Effective date: These regulations are effective on October 12, 2022. Applicability date: For the applicability date of the temporary regulations, see §1.42-19T(f). FOR FURTHER INFORMATION CONTACT: Dillon Taylor at (202) 317-4137. SUPPLEMENTARY INFORMATION: Background This document contains amendments to the Income Tax Regulations (26 CFR part 1) under section 42 of the Internal Revenue Code (the Code). The Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085 (1986 Act), created the low-income housing credit under section 42 of the Code. Section 42(a) provides that the amount of the low-income housing credit for any taxable year in the credit period is an amount equal to the applicable percentage (effectively, a credit rate) of the qualified basis of each qualified low-income building. Section 42(c)(1)(A) provides that the qualified basis of any qualified low-income building for any taxable year is an amount equal to (i) the applicable fraction (determined as of the close of the taxable year) of (ii) the eligible basis of the building (determined under section 42(d)). Section 42(c)(1)(B) defines applicable fraction as the smaller of the unit fraction or floor space fraction. The unit fraction is the number of low-income units in the building over the number of residential rental units (whether or not occupied) in the building. The floor space fraction is the total floor space of low-income units in the building over the total floor space of residential rental units (whether or not occupied) in the building. Subject to certain exceptions set forth in section 42(i)(3)(B), a low-income unit is defined in section 42(i)(3) as any unit in a building if the unit is rent-restricted and the individuals occupying the unit meet the income limitation under section 42(g)(1) that applies to the project of which the building is a part. Section 42(d)(1) and (2) define the eligible basis of a new building or an existing building, respectively. Section 42(c)(2) defines a qualified low-income building as any building which is part of a qualified low-income housing project at all times during the compliance period (the period of 15 taxable years beginning with the first taxable year of the credit period). To qualify as a low-income housing project, one of the section 42(g) minimum set-aside tests, as elected by the taxpayer, must be satisfied. Prior to the enactment of the Consolidated Appropriations Act of 2018, Pub. L. 115-141, 132 Stat. 348 (2018 Act), section 42(g) set forth two minimum set-aside tests, known as the 20-50 test and the 40-60 test. If a taxpayer elects to apply the 20-50 test, at least 20 percent of the residential units in the project must be both rent-restricted and occupied by tenants whose gross income is 50 percent or less of the area median gross income (AMGI). If a taxpayer elects to apply the 40-60 test, at least 40 percent of the residential units in the project must be both rent-restricted and occupied by tenants whose gross income is 60 percent or less of AMGI. The 2018 Act added section 42(g)(1)(C), which contains a third minimum set-aside test option--the average income test. If a taxpayer elects to apply the average income test, a project meets the minimum requirements of the average income test if 40 percent or more of the residential units in the project are both rent-restricted and occupied by tenants whose income does not exceed the imputed income limitation designated by the taxpayer with respect to the specific unit. (In the case of a project described in section 142(d)(6), "40 percent" in the preceding sentence is replaced with 25 percent.) Section 42(g)(1)(C)(ii)(I)-(III) provides special rules relating to the income limitation for the average income test. Specifically, unlike the 20-50 and 40-60 tests, section 42(g)(1)(C)(ii)(I) requires the taxpayer to designate each unit's imputed income limitation that is taken into account for purposes of the average income test. Section 42(g)(1)(C)(ii)(II) requires the average of the imputed income limitations designated under section 42(g)(1)(C)(ii)(I) not to exceed 60 percent of AMGI. Finally, section 42(g)(1)(C)(ii)(III) requires the imputed income limitation designated for any unit to be 20, 30, 40, 50, 60, 70, or 80 percent of AMGI. Generally, under section 42(g)(2)(D)(i), if the income for the occupant of a low-income unit rises above the relevant income limitation, the unit continues to be treated as a low-income unit if the income of the occupant had initially met the income limitation and the unit continues to be rent-restricted. Section 42(g)(2)(D)(ii), however, provides an exception to the general rule in the case of the 20-50 test or the 40-60 test. Under this exception, the unit ceases to be treated as a low-income unit if two disqualifying conditions occur. - The first condition is that the occupant's income increases above 140 percent of the income limitation applicable under section 42(g)(1) (applicable income limitation). - The second condition is that a new occupant whose income exceeds the applicable income limitation occupies any residential rental unit in the building of a comparable or smaller size. In the case of a deep rent skewed project described in section 142(d)(4)(B) of the Code "170 percent" is substituted for "140 percent" in applying the applicable income limitation under section 42(g)(1), and the second condition is that any low-income unit in the building is occupied by a new resident whose income exceeds 40 percent of AMGI. The exception contained in section 42(g)(2)(D)(ii) is referred to as the next available unit rule. See also §1.42-15 of the Income Tax Regulations. The 2018 Act added a new next available unit rule in section 42(g)(2)(D)(iii), (iv), and (v) for situations in which the taxpayer has elected the average income test. Under this new rule, a unit ceases to be a low-income unit if two slightly different disqualifying conditions are met: - First, the income of an occupant of a low-income unit increases above 140 percent of the greater of (i) 60 percent of AMGI, or (ii) the imputed income limitation designated by the taxpayer with respect to the unit; and - Second, a new occupant whose income exceeds the applicable imputed income limitation occupies any other residential rental unit in the building that is of a comparable or smaller size. The applicable imputed income limitation for this purpose depends upon whether the unit being occupied was a low-income unit before becoming vacant. o If the new tenant occupies a unit that was taken into account as a low-income unit prior to becoming vacant, section 42(g)(2)(D)(v)(I) provides that the applicable imputed income limitation is the limitation designated with respect to the unit. o If the new tenant occupies a market-rate unit, section 42(g)(2)(D)(v)(II) provides that the applicable imputed income limitation is "the imputed income limitation which would have to be designated with respect to such unit under [section 42(g)(1)(C)(ii)(I)] in order for the project to continue to meet the requirements of [section 42(g)(1)(C)(ii)(II)]." (Those requirements mandate that the "average of the imputed income limitations designated under [section 42(g)(1)(C)(ii)(I)] shall not exceed 60 percent of" AMGI.) Section 42(g)(2)(D)(iv) also provides a next available unit rule for deep rent skewed projects that elect the average income test. Under section 42(g), once a taxpayer elects to use a particular set-aside test for a project, that election is irrevocable. Thus, if a taxpayer had previously elected to use the 20-50 test or the 40-60 test, the taxpayer may not subsequently elect to use the average income test. Under section 42(g)(4), the rules of sections 142(d)(2)(B) through (E), 142(d)(3) through (7), and 6652(j) of the Code apply to determine whether any project is a qualified low-income housing project and whether any unit is a low-income unit. Section 42(m)(1) provides that the owners of an otherwise-qualifying building are not entitled to the housing credit dollar amount that is allocated to the building unless, among other requirements, the allocation is pursuant to a qualified allocation plan (QAP). A QAP provides standards by which a State or local housing credit agency (Agency) is to make these allocations. Under section 42(m)(1)(B)(iii), a QAP must contain a procedure that the Agency or its agent will follow in monitoring noncompliance with low-income housing credit requirements and in notifying the IRS of any such noncompliance. See §1.42-5 of the Income Tax Regulations for rules implementing this requirement. On October 30, 2020, the Department of Treasury (Treasury Department) and the IRS published a notice of proposed rulemaking (NPRM) (REG-119890-18) in the Federal Register (85 FR 68816) proposing regulations setting forth guidance on the average income test under section 42(g)(1)(C). The Treasury Department and the IRS received 98 comments, including requests to testify at a public hearing on the proposed regulations and written testimony for the public hearing. On March 24, 2021, the Treasury Department and the IRS held a public hearing on the proposed regulations. Fifteen taxpayers provided testimony at the hearing. After consideration of the comments received and the testimony provided, the proposed regulations are adopted as modified by this Treasury Decision. The major areas of comment and the revisions to the proposed regulations are discussed in the following Summary of Comments and Explanation of Revisions. The comments are available for public inspection at www.regulations.gov or upon request. Other minor, non-substantive modifications that were made to the proposed regulations and adopted in these final regulations are not discussed in the Summary of Comments and Explanation of Revisions. In addition, the Treasury Department and the IRS are publishing in this Treasury Decision temporary regulations containing recordkeeping and reporting requirements that are needed to facilitate administrability of, and compliance with, changes made in the final regulations. Those changes were based on comments received on the proposed rule. These requirements are described in this preamble along with the substantive rules contained in the final regulations. The text of these temporary regulations also serves as the text of the proposed regulations (REG-113068-22) set forth in the notice of proposed rulemaking on this subject in the Proposed Rules section of this issue of the Federal Register. Summary of Comments and Explanation of Revisions These final regulations and temporary regulations set forth guidance on the average income test under section 42(g)(1)(C). I. Section 1.42-15, Next Available Unit Rule for the Average Income Test The proposed regulations updated the next available unit provisions in §1.42-15 to reflect the new set-aside based on the average income test and to take into account section 42(g)(2)(D)(iii), (iv), and (v). One commentator recommended that no changes be made to the proposed regulations concerning the next available unit rule when the proposed regulations are finalized. No other comments were received on the next available unit rule. While no comments requested changes, the final regulations for the next available unit rule were revised to be consistent with changes made to the provisions in §1.42-19, which are described in section II of this Summary of Comments and Explanation of Revisions. The final regulations include revisions to the two limitations in §1.42-15(c)(2)(iv) related to the imputed income designation of the next available unit, which relate to the limitations described in section 42(g)(2)(D)(v). The final regulations provide taxpayers with administrable rules and objective standards to apply when determining the designation of the next available unit. The first limitation in §1.42-15(c)(2)(iv)(A) applies to units that met all of the requirements in §1.42-19(b)(1)(i) through (iii) prior to becoming vacant. In other words, the unit was rent-restricted, the occupants satisfied the imputed income limitation for the unit (or the unit's low-income status continued under section 42(g)(2)(D)), and no other provision in section 42 or the regulations thereunder denied low-income status to the unit. For those units, which would have had a designated imputed income limitation prior to vacancy, the limitation is the unit's designated imputed income limitation. This rule is equivalent to the rule in the proposed regulations, which interpreted the definition of low-income unit as including only the requirements in §1.42-19(b)(1)(i) through (iii). The second limitation in §1.42-15(c)(2)(iv)(B) requires a taxpayer, in the case of any other unit (such as a market-rate unit), to limit the imputed income limitation to a designation that will not cause the average of all imputed income designations of residential units in the project to exceed 60 percent of AMGI. This ensures that the next available unit is designated in such a way that maintains compliance with the averaging requirement in section 42(g)(2)(C)(ii)(II). This revision to the second limitation was necessary because the proposed regulations relied on a reference to the mitigating action provisions, which were removed from the final regulations as explained in section II.B. of this Summary of Comments and Explanation of Revisions. Additionally, these final regulations provide that, if multiple units are over-income at the same time in a project that has elected the average income set-aside (average income project) and that has a mix of low-income and market-rate units, then the taxpayer need not comply with the next available unit rule in a specific order with respect to occupancy. Instead, renting any available comparable or smaller vacant unit to a qualified tenant maintains all over-income units' status as low-income units until the next comparable or smaller unit becomes available (or, in the case of a deep rent skewed project, the next low-income unit becomes available). The final regulations include an example illustrating the application of this rule. Note, the order in which units are designated, however, may affect the qualified group that is used for computing the applicable fraction. See further discussion in section II.B of this Summary of Comments and Explanation of Revisions. II. §1.42-19, Average Income Test A. Requirements to satisfy the average income test 1. Proposed regulations approach to the average income test The proposed regulations provided that a project for residential rental property meets the requirements of the average income test under section 42(g)(1)(C) if (1) 40 percent or more (25 percent or more in the case of a project described in section 142(d)(6)) of the residential units in the project are both rent-restricted and occupied by tenants whose income does not exceed the imputed income limitation designated by the taxpayer with respect to the respective unit; (2) the taxpayer designated the imputed income limitations in the manner provided in §1.42-19(b) of the proposed regulations; and (3) the average of the designated imputed income limitations of the low-income units in the project does not exceed 60 percent of AMGI. The proposed regulations would have required taxpayers to complete, not later than the close of the first taxable year of the credit period, the initial designation of imputed income limitations for all of the units taken into account for the average income test. Under the proposed regulations, the 60 percent of AMGI limit on the average of designated imputed income limitations applied to all of the low-income units in the project. The requirement as so interpreted did not take into account whether fewer than all of those units could constitute a group of at least 40 percent of the residential units in the project such that the average of the limitations of the units in that group averaged to no more than 60 percent of AMGI. In some cases, this interpretation magnified the adverse consequences of a single unit's failure to maintain low-income status. For example, under the proposed regulations, a unit losing low-income status would remove that unit's imputed income limitation from the computation of the average, but not impact the low-income status of any other units. If that unit's limitation was less than 60 percent of AMGI, the loss of the unit could cause the average of the remaining low-income units to rise above 60 percent of AMGI. That noncompliant average would cause the entire project to fail the average income test and therefore fail to be a qualified low-income housing project. In light of the potential adverse consequences of the rule, the proposed regulations provided for mitigating actions the taxpayer could take within 60 days of the close of the year for which the average income test might be violated. 2. Comments on the proposed set-aside rule Many commenters disagreed with the adequacy of the proposed mitigation actions and with the correctness of the underlying interpretation of the average income test, which required testing of all low-income units. i. Inadequacy of the proposed mitigation actions Commenters noted that the mitigation possibilities in the proposed regulations depended on the taxpayer both appreciating that the entire project might be jeopardized by a problem with a particular unit and knowing how to deploy the mitigation actions. Commenters also suggested that the mitigation proposal incorporated such a rigid deadline that even alert and well-advised taxpayers might be unable to timely take mitigating actions to be eligible to receive credits for their projects. ii. Invalidity of the underlying interpretation Commenters' central concern was the invalidity, as they saw it, of the underlying interpretation of the average income test. Under the interpretation in the proposed regulations, a single unit's falling out of compliance could result in the complete loss of tax credits for the entire project, or at least loss of credits for an entire year. Commenters noted that this result flowing from the interpretation in the proposed regulations suggested the invalidity of the interpretation. Several commenters observed that the proposed regulations imposed on projects electing the average income test a higher standard than that required for satisfying the other set-aside elections. Under the 20-50 test and 40-60 test, one noncompliant unit could not cause an entire project to fail the set-aside test if, without taking the noncompliant unit into account, there remained a sufficient number of compliant units to meet the statutory minimum percentage of all residential units. The commenters, therefore, concluded that the interpretation in the proposed regulations regarding the average income test could not have been the intent of Congress. Most commenters recommended that the average income test be satisfied if any group of 40 percent of the units in the project have designations whose average does not exceed 60 percent of AMGI. In general, these commenters correctly asserted that the average income test is a minimum set-aside test, and, therefore, a project should meet the test if the minimum requirements of the test are satisfied, even if low-income units not necessary for the minimum are noncompliant. Other commenters noted that even though the project should additionally meet an overall average test of no more than 60 percent of AMGI across all low-income units (as required by the proposed regulations), relief should nevertheless be built into the requirement. Thus, if a unit is out of compliance, causing the project-wide average to go above 60 percent of AMGI, the failure should be considered noncompliance for that unit only, and only that non-compliant unit should be subject to credit adjustment and recapture. They urged that this noncompliance should not be a violation of the minimum set-aside, provided that at least 40 percent of the units' designations still meet the 60 percent average. This suggested approach, however, could create problems similar to those in the proposed regulations because one unit's noncompliance could cause the overall average of the remaining low-income units to rise above 60 percent of AMGI. For this reason, the comment was not adopted, but it was considered in connection with developing the final regulations' rules for determining low-income units and a building's applicable fraction, as is discussed later. Some commenters believed that the average income test is satisfied as long as the original imputed income limitations of designated low-income units average to 60 percent, and 40 percent or more of those units continue to be rent-restricted and meet their respective imputed income limitations. Thus, the average must be met initially, but subsequently, the requirement is permanently satisfied, regardless of any changes in circumstances related to occupancy. Commenters suggested that a general anti-abuse rule could be adopted to allow the IRS to disregard designations made in bad faith. The Treasury Department and the IRS do not agree that the averaging requirement of section 42(g)(1)(C)(ii)(II) is concerned only with the original designations. Like the other minimum set-aside tests, the average income test is an ongoing requirement for a project to maintain its status as a qualified low-income housing project. A project failing to maintain an average of 60 percent or less of AMGI across at least 40 percent of its residential units that qualify as low-income units violates the requirement. This is consistent with a plain reading of the statute, as the imputed income limitations of the units taken into account (meaning, counted for purposes of meeting the average income test) must not exceed 60 percent of AMGI. Section 42(g)(1)(C)(ii)(I) and (II). The rejected suggestion would allow an original imputed income limit designation of a subsequently disqualified unit to satisfy compliance with the minimum set-aside test throughout the entire compliance period. Treating such a situation as compliant would effectively waive the rule that a project consistently maintain its level of affordability--a central requirement of the low-income housing credit. Moreover, adoption of a general anti-abuse rule would miss many non-compliant situations, would increase administrative complexity for the IRS and the Agencies and would potentially create uncertainty for taxpayers. A separate comment recommended that an out-of-compliance unit should maintain its designation if the owner can demonstrate due diligence when completing the initial income certification. The Treasury Department and the IRS disagree with the suggestion that an out-of-compliance unit should not lose its designation if the owner can demonstrate due diligence when completing the initial income certification. Demonstrating due diligence upon initial income certification is not sufficient to satisfy ongoing compliance requirements. Further, similar to a general anti-abuse rule proposed by another commenter, this approach would increase administrative complexity for the IRS and Agencies and could potentially create uncertainty for taxpayers. 3. The final regulations' interpretation of the average income test In response to the comments received, the Treasury Department and the IRS have revised their interpretation of the set-aside rule and incorporated the revised interpretation in the final regulations. In making these revisions, the Treasury Department and the IRS considered the plain language of section 42(g)(1)(C) as well as the definition of low-income unit for projects electing the average income test. When section 42(g)(1)(C)(i) and the special rules in section 42(g)(1)(C)(ii)(I) and (II) are read together, the taxpayer satisfies the average income test if at least 40 percent of the building's residential units are eligible to be low-income units and have designated imputed income limitations that collectively average 60 percent or less of AMGI. A project satisfying this minimum requirement satisfies the average income test. Thus, the final regulations have been revised so that it is no longer necessary to consider all low-income units in a project for residential rental property when determining whether the average income test is met. While making this change, the Treasury Department and the IRS also considered the definition of "low-income unit" in a project electing the average income test, and the final regulations provide a clarifying definition of this term. As the final regulations no longer require a taxpayer to consider all of the low-income units in a project in order to satisfy the minimum set-aside requirement, the issue for consideration is whether a project's election of the average income test has any impact on whether a unit that is rent-restricted and whose occupants satisfy the imputed income limitation designated for the unit qualifies as a low-income unit as that term is defined in section 42(i)(3). This determination is relevant for the average income test as well as for purposes of the other provisions of the low-income housing credit, including a building's applicable fraction as explained later. In defining the term "low-income unit," section 42(i)(3)(A)(ii) requires that the individuals occupying the unit meet the income limitation applicable under section 42(g)(1) to the project of which the building is a part. With respect to the 20-50 and the 40-60 minimum set-asides, there is no difficulty in applying this language to specific units. Every unit in the project has an identical income limitation, namely the income limitation embodied in the set-aside test that the taxpayer elected for that project. If the taxpayer elects the 20-50 test, then the income limitation for each unit is 50% of AMGI. If the taxpayer elects the 40-60 test, the income limitation for each unit is 60% of AMGI. For a project electing the average income test, however, the reference to "the income limitation applicable to the project" poses a challenge because income limitations will typically vary among the units in the project. In addition, pursuant to section 42(g)(1)(C)(ii)(II), the average of the designated imputed income limitations for the units taken into account for meeting the minimum set-side test must not exceed 60% of AMGI. As a result, for purposes of the average income test, the fact that the occupants of a unit satisfy the imputed income limitation designated for that unit does not by itself establish that the unit satisfies the requirements in section 42(i)(3)(A). The Treasury Department and the IRS considered interpreting the language in section 42(i)(3)(A)(ii) as referring only to the income limitation designated for a specific unit. Such an interpretation would be consistent with the approach under the 20-50 and 40-60 tests where a single unit's noncompliance does not impact the low-income status of any other low-income units in the project. It would also be in accord with many comments that argue the low-income status of one unit should not impact the status of other units if those other units meet their respective income limitations. In a project electing the average income test, however, it is insufficient to read "the income limitation applicable under [section 42(g)(1)] to the project" as referring only to the designated imputed income limitation applicable to a unit. Under the average income test, a unit's status as a low-income unit for purposes of the set-aside and the applicable fraction depends not only on its own attributes but also on the income limitations of other units that are taken into account for these purposes. In contrast, under the historic set-asides, knowing that a unit satisfies the income limitation applicable to the unit is sufficient to know that the unit meets the project's income limitation for purposes of the minimum set-aside test and a building's applicable fraction. This interpretation means that to qualify as a low-income unit in a project electing the average income test, a residential unit, in addition to meeting the other requirements to be a low-income unit under section 42(i)(3), must be part of a group of units such that the average of the imputed income limitations of the units in the group does not exceed 60 percent of AMGI. Thus, to provide clarity on the definition of low-income unit for a project electing the average income test, the final regulations include a definition of low-income unit that takes into account whether the unit is a member of a group of units with a compliant average limitation. This definition of low-income unit in the final regulations is in accord with the definition of low-income unit as originally described in the Conference Report for the Tax Reform Act of 1986 (1986 Conference Report): A low-income unit includes any unit in a qualified low-income building if the individuals occupying such unit meet the income limitation elected for the project for purposes of the minimum set-aside requirement and if the unit meets the gross rent requirement, as well as all other requirements applicable to units satisfying the minimum set-aside requirement. 2 H.R. Conf. Rep. 99-841, 99th Cong., 2d Sess., II-94-95. In that explanation, it is required that a low-income unit meet "all other requirements applicable to units satisfying the minimum set-aside test." Although the average income test was not in existence at the time of the 1986 Conference Report, it is apparent that Congress wanted to avoid creating one standard for low-income units that qualified their projects as part of the 20-50 and 40-60 minimum set-asides and a different standard for any other low-income units that played some other role in the same project. Thus, it is consistent with how low-income units are defined under the 20-50 and 40-60 minimum set-aside tests for these final regulations to require all low-income units in an average income project to satisfy a consistent and equal set of standards--standards that, in the average income context, incorporate the average income limitations of the group of which the units are a part. Accordingly, under the final regulations, a project for residential rental property meets the requirements of the average income test if the taxpayer's project contains a qualified group of units that constitutes 40 percent or more (25 percent or more in the case of a project described in section 142(d)(6)) of the residential units in the project. Section 1.42-19(b)(2)(i) requires the units in a qualified group to, first, individually satisfy the criteria that would qualify each unit as a low-income unit under the 20-50 or 40-60 set-asides. Specifically, the rules in §1.42-19(b)(1)(i) through (iii) require that each unit be rent-restricted, occupants of the unit meet the income limitation for the unit, and no other provision in section 42 or the regulations thereunder denies low-income status to the unit (including section 42(i)(3)(B)-(E)). In addition, §1.42-19(b)(2)(ii) requires that the average of the designated imputed income limitations of the units in the group not exceed 60 percent of AMGI. The group of units must be identified as required in §1.42-19(b)(3)(i). A taxpayer identifies the units in the group by recording the units in the taxpayer's books and records, and the taxpayer must communicate that annual identification to the applicable Agency as required in §§1.42-19(b)(3)(iii) and 1.42-19T(c)(1) of the associated temporary regulations. See further description in section II.C of this Summary of Comments and Explanation of Revisions. These revisions provide more flexibility for meeting the average income test than had been available under the proposed regulations. Most importantly, the revised rules limit the impact of one unit's noncompliance on the ability of a project to satisfy the average income test. The status of additional units beyond the minimum number of units needed to satisfy the test does not impair satisfaction of the average income test as discussed in section II.B of this Summary of Comments and Explanation of Revisions. By removing the proposed requirement applicable to all low-income units and thus allowing a project to satisfy the average income test if it contains a qualified group of units meeting the minimum requirements, the final regulations generally avoid the outsized impact that one unit's loss of low-income status could have under the proposed regulations. The interpretation of the average income set-aside in the final regulations is consistent with the majority of comments on this issue. In addition, this interpretation creates more parallels between the average income test and the 20-50 and 40-60 tests. Under either of those latter tests, when there are more than the minimum number of low-income units, one unit going out of compliance would not cause a project to fail the minimum set-aside test. Similarly, under the final regulations, one unit's loss of low-income status will not jeopardize the entire project's status as a qualified low-income housing project subject to the average income test if there are a sufficient number of remaining units that comprise a qualified group of units that satisfy the minimum set-aside. B. Determining qualified groups of units for use in applicable fraction determinations 1. Role of the applicable fraction under section 42 As mentioned earlier, the amount of low-income housing credits earned by a building in a taxable year depends on a computation that includes a number called the building's "applicable fraction" for that year. This fraction is based on the number and size of the low-income and non-low-income units in the building and can be thought of as an indicator of the extent to which the building is dedicated to affordable housing. Thus, the applicable fraction plays a role both in determining credits during the credit period and in demonstrating continued dedication to affordable housing during the extended use period. See section 42(h)(6)(B)(i). 2. The proposed regulations' resolution of issues posed by computation of the applicable fraction in an average income project The proposed regulations provided an approach to addressing continuous compliance with the average income requirement by using the same group of low-income units for both satisfying the minimum set-aside requirement and determining the applicable fraction. The proposed regulations also provided for a removed unit, which was a low-income unit identified by the taxpayer that was not taken into account for purposes of the set-aside test or the applicable fraction but was taken into account for purposes of reducing recapture. As described earlier in this Summary of Comments and Explanation of Revisions, taxpayers strongly criticized the set-aside rule. In response, the final regulations both allow the minimum set-aside test to be satisfied by any qualified group of units that is no smaller than the statutory minimum (40 percent) and also add a clarifying definition of "low-income unit" for projects electing the average income test. To implement the statutory requirement regarding the average of the imputed income limitations of residential units in a project, this clarifying definition is sensitive to the imputed income limitations of the other residential units in the same group. The approach in the final regulations for the average income test differs from the other two set-asides in that the final regulations allow for a distinction between the group of low-income units taken into account for satisfying the minimum set-aside and the (usually larger) group of units taken into account for computing credits. However, under the final regulations, the units included in both groups are subject to the same standards. Congress acknowledged the absence of such a distinction in the 20-50 and 40-60 tests in its discussion of the low-income housing credit in the 1986 Conference Report: Qualified residential rental projects must remain as rental property and must satisfy the minimum set-aside requirement, described above, throughout a prescribed compliance period. Low-income units comprising the qualified basis on which additional credits are based are required to comply continuously with all requirements in the same manner as units satisfying the minimum set-aside requirements. Units in addition to those meeting the minimum set-aside requirement on which a credit is allowable also must continuously comply with the income requirement. 2 H.R. Conf. Rep. 99-841, 99th Cong., 2d Sess., II-95. Thus, under the 20-50 and 40-60 tests, units included in qualified basis in addition to those needed to satisfy the minimum set-aside must meet the same requirements as the units used to satisfy the minimum set-aside. This application under the 20-50 and 40-60 tests is straightforward, however, because all low-income units have to be at or less than a single elected AMGI standard, either 50 percent or 60 percent of AMGI (assuming other requirements are met). Under either test, the minimum set-aside units and any additional low-income units are effectively interchangeable, so there was no need to clarify treatment between the groups. For the average income test, however, units are not interchangeable because they have a range of imputed income limitations and cannot be evaluated in isolation because there is an income averaging requirement in section 42(g)(1)(C)(ii)(II). By stating that additional units beyond those meeting the minimum set-aside test must continuously comply with the income requirement, the 1986 Conference Report identified the necessity of developing a common standard for all residential units in projects electing the 20-50 and 40-60 tests. As discussed in section II.A.3 of this Summary of Comments and Explanation of Revisions, this principle is reflected in the final regulations' definition of low-income units, and it impacts the treatment of units that may be taken into account for computing a building's applicable fraction. 3. Comments on determining the applicable fraction In the context of the 20-50 or 40-60 minimum set-asides, commenters noted, non-compliance by one or more units (for example, not being suitable for occupancy) reduces a building's applicable fraction only with respect to the units that are non-compliant as of the taxpayer's year end. These commenters recommended similar treatment in the average income context. They advocated evaluating eligibility of units for inclusion in the applicable fraction on a unit-by-unit basis (that is, taking into account only facts about the particular unit, without taking into account the designated imputed income limitation of other units). In the context of removed units, some comments argued that the proposed applicable fraction treatment of these units amounted to "double counting." Not only did the proposed regulations exclude the noncompliant unit from the computation of the applicable fraction of the building containing the unit, but by taking into account the average of the group's income limitations, they could force a taxpayer to exclude one or more compliant units from the applicable fraction(s) of the building(s) containing the compliant unit(s). The Treasury Department and the IRS considered the proposal to include units in applicable fraction computations on a unit-by-unit basis but did not adopt it. To be sure, that proposal would preserve the requirement that units satisfying the set-aside requirement must have income limitations whose average does not exceed 60 percent of AMGI. The proposal, however, would not apply this average requirement to the units that are taken into account for the project's applicable fractions. The proposed approach would thus be inconsistent with the language of section 42(c)(1)(C)(i), which provides that the numerator of the applicable fraction is number of "low-income units" in the building. As explained earlier in the discussion of the average income test, the definition of low-income unit for a project electing the average income test necessarily includes the requirement that the average of the designated income limitations of the units taken into account as low-income units includes that the average designated income limitations of the units not exceed 60% of AMGI. In addition, the failure to apply the average income limitation in determining the applicable fraction would allow a taxpayer to include units in the qualified basis even if they are a majority of the units in a project and their average limitation greatly exceeds 60 percent of AMGI. If accepted, the proposal would have allowed a taxpayer to give appropriate income limitations to 40 percent of a project's units but to designate limitations of 80 percent of AMGI for all the remaining low-income units in the project and receive credits for all of these units. In the context of determining what units to include in the applicable fraction, another commenter recommended revising the proposed regulations to include an exception for units that are not habitable due to a casualty loss, such as from a fire in the unit. The commenter asserted that because the noncompliance was not the fault of taxpayer, the regulations should not require the taxpayer to remove another unit from an applicable fraction to offset the noncompliance associated with the casualty loss. The Treasury Department and the IRS did not adopt this suggestion. An approach that requires a determination of fault would create additional complexity for taxpayers, Agencies, and the IRS. In addition, while the 20-50 and 40-60 set-asides do not have the same issue, adopting rules allowing for special treatment in the case of casualties would necessitate a broader section 42 regulatory project. 4. Determination of the applicable fraction in the final regulations Under the final regulations, the determination of a group of units to be taken into account in the applicable fractions for the buildings in a project follows the same approach as determining a group of units to be taken into account for purposes of the set-aside test. Essentially, a taxpayer can determine this group of units by including the low-income units identified for the average income test, and any other residential units that can qualify as low-income units if they are part of a group of units such that the average of the imputed income limitations of all of the units in the group does not exceed 60 percent of AMGI. If the average exceeds 60 percent of AMGI, then the group is not a qualified group. For example, if a unit was designated at 80 percent of AMGI and if including that unit in an otherwise qualified group of units causes the average of the imputed income limitations of the group to exceed 60 percent of AMGI, then the taxpayer cannot include the 80 percent unit in the otherwise qualified group. Only the otherwise qualified group of units, without the 80 percent unit, is a qualified group of units used to determine the project's buildings' applicable fractions. Once a qualified group of units in a project has been identified for a taxable year, the applicable fraction for each building in the project is computed using the units that are in both the qualified group and the building at issue. (Although the qualified group of units for a project must have an average limitation no greater than 60 percent of AMGI, this is not true of the average limitation of the units used to compute the applicable fraction of individual buildings in the project.) This method of determining a building's applicable fraction applies both for ascertaining low-income housing credits earned for a year in the credit period and for complying with the extended use requirement in section 42(h)(6)(B)(i). The Treasury Department and the IRS determined that the approach to determining the applicable fraction in the final regulations better aligns with the 20-50 and 40-60 set-aside tests than the approach in the proposed regulations in that it creates parallel requirements for both "minimum set-aside units" and any "additional units" that may contribute to earning low-income housing credits. This rule in the final regulations is also consistent with the description of the low-income units and the principle regarding set-aside units and additional units in the other set-aside tests that is described in the 1986 Conference Report discussion quoted earlier. The rule is also consistent with comments stating that the low-income units in a project should have an overall average that does not exceed 60 percent of AMGI. The potential downside of this approach to an owner is that if one unit loses low-income status, then it is possible that other units' status as low-income units may be impacted. Specifically, an owner may have to exclude one or more otherwise qualifying units from the qualified group of units for use in applicable fraction determinations for the group to retain an average income limitation that does not exceed 60% of AMGI. This, however, will not always be the case. For example, if a unit designated at 60, 70, or 80 percent of AMGI loses low-income status and no other changes occurred, then the owner could maintain the required average limitation of the qualified group of units without excluding any of the other units from the qualified group of units that had been taken into account in the previous year. Also, as is discussed later, in some cases a unit may be included in the qualified group of units after its income limitation has been designated or redesignated to a lower income limitation. 5. Proposed regulations' special rule for determining the applicable fraction for purposes of recapture The proposed regulations, in some cases, would have caused a compliant low-income unit with a relatively high-income limitation not to have been taken into account in computing low-income housing credits earned for a year in the credit period. The mechanisms for achieving this result were called "mitigating actions" and "removed units". To minimize recapture, the proposed regulations would have included these units in the computations underlying section 42(j) so that the units' inclusion avoided having their absence contribute to recapture of credits. As described in section II.B.6. of this Summary of Comments and Explanation of Revisions, however, the Treasury Department and the IRS deleted the mitigating actions concept from the final regulations. For this reason, the final regulations do not include the proposed regulations' rule related to recapture. 6. Deletion of Mitigating Actions from Final Regulations As described previously, the proposed regulations would have created a risk that, in some situations, one unit losing its low-income status could have caused an entire project to fail the average income test. To reduce that risk, the proposed regulations described two possible mitigating actions that a taxpayer could have taken to avoid disqualifying the project. Because the final regulations differ from the proposed regulations in a way that avoids that risk, there is no longer a need for mitigating actions. For this reason, the final regulations do not include rules related to mitigating actions. C. Recordkeeping and Reporting Requirements In response to comments on the proposed rule, the final rule provides significant flexibility regarding the qualified group of units used to satisfy the average income set-aside and the qualified group of units used for purposes of computing the applicable fraction. Providing the requested flexibility necessitates that the taxpayer have the discretion and responsibility to make these identifications and that the contemporary identification of the units be unambiguous. Specifically, to implement the changes made in response to the comments on the proposed rule, §1.42-19(b)(3) of the final regulations provides that a taxpayer separately identifies (i) units in the qualified group of units used for satisfying the average income set-aside and (ii) units in the qualified group for purposes of the applicable fractions. Section 1.42-19T(c)(1) of the temporary regulations requires that this be done by recording these identifications in the taxpayer's books and records (where the identification must be retained for a period not shorter than the record retention requirement under §1.42-5(b)(2)) and by communicating that identification annually to the applicable Agency. These rules promote certainty and administrability. The rules, in conjunction with the other procedures provided in §1.42-19T(c)(3), will allow taxpayers, Agencies, and the IRS to more easily verify the status, including the average imputed income limitation, of the qualified group of units used for purposes of satisfying the average income set-aside and the qualified group of units used for purposes of determining the applicable fraction(s). In addition, taxpayers are required to report specified information to Agencies and to maintain records in sufficient detail to establish the accuracy of the project's applicable fractions, the satisfaction of the average income set-aside, and compliance with requirements in section 42 and the applicable regulations. Section 1.6001-1 requires the keeping of records "sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown by such person in any return of such tax or information." See §§ 1.6001-1 and 1.42-5. D. Designation of Imputed Income Limitations and Identification of Units Section 42(g)(1)(C)(ii) contains substantive requirements for income limitations applicable in the average income test. Specifically, the taxpayer must designate the imputed income limitation for each unit taken into account under the average income test; the average of those imputed income limitations cannot exceed 60 percent of AMGI; and the designated imputed income limitation of any unit must be 20, 30, 40, 50, 60, 70, or 80 percent of AMGI. That statutory provision, however, does not contain procedural requirements to specify the manner in which taxpayers must designate the imputed income limitation of units. Filling this gap, the proposed regulations added procedural requirements that a taxpayer must designate each imputed income limitation in accordance with: (1) any procedures established by the IRS in forms, instructions, or publications or in other guidance published in the Internal Revenue Bulletin pursuant to §601.601(d)(2)(ii)( b ); and (2) any procedures established by the Agency that has jurisdiction over the low-income housing project that contains the units to be designated, to the extent that those Agency procedures are consistent with IRS guidance and the governing regulations. No negative comments were submitted regarding these provisions, but, on review, and in conjunction with other revisions made based on comments received, the Treasury Department and the IRS determined that more detailed designation rules were needed to promote certainty and administrability. Section 1.42-19T(c)(3)(iv) of the temporary regulations provides that a taxpayer designates a unit's imputed income limitation by recording the limitation in its books and records, where it must be retained for a period not shorter than the record retention requirement under §1.42-5(b)(2). The final regulations require the initial designation of a unit to be made no later than when a unit is first occupied as a low-income unit. See §1.42-19(c)(3)(i). Under §1.42-19T(c)(3)(iv) of the temporary regulations, the designation must also be communicated annually to the applicable Agency, and the applicable Agency may establish the time and manner in which information is provided to it. See §1.42-19T(c)(2)(i). In the context of the final regulations' provision of significant flexibility with respect to satisfying the average income test and identifying a qualified group of units, these designation and identification rules will facilitate taxpayer access to this additional flexibility. Providing a specific method of designation will give taxpayers more certainty than the proposed regulations as to how to meet the statutory requirement of designation. The rule will also benefit administration by ensuring a contemporaneous record of designation, without creating a significant burden on taxpayers. The final regulations also revise timing of the designation so that it is no longer required by the end of the first year of the credit period, and instead is based on when a unit is first occupied as a low-income unit. This rule better aligns the timing of designation with the rental of low-income units and should allow a taxpayer to make designations after having a chance to evaluate the market for a particular unit. Finally, requiring annual communication of the information to the applicable Agency will help the Agency determine whether a project is in compliance with the requirements of section 42. The temporary regulations give flexibility to Agencies to determine the best time and manner for taxpayers to communicate the information so each Agency can ensure the system best serves that particular Agency with minimal burden. Importantly, the temporary regulations also provide Agencies with the discretion, on a case-by-case basis, to waive in writing any failure to comply with the temporary regulations' recordkeeping and reporting requirements. See § 1.42-19T(c)(4). The waiver may be done up to 180 days after discovery of the failure, whether by taxpayer or Agency. At the discretion of the applicable Agency, this waiver may treat the relevant requirements as having been satisfied. In providing Agencies with the ability to waive and the timeline for waiving, the Treasury Department and the IRS considered comments made in response to the proposed regulations regarding the rules for "removed units" and the timing for completing "mitigating actions." In response to the proposed regulations' rules on removed units, Agencies commented that they do not have authority to determine the tax consequences of noncompliance with respect to the requirements of section 42, and, instead, Agencies are only responsible for determining the existence of noncompliance itself. The ability of Agencies to waive the failure to comply with the procedural requirements provided by the final regulations is not inconsistent with the scope of Agency responsibility, and the IRS itself will ultimately determine the tax consequences of noncompliance. With respect to timing, many commenters suggested that a 60-day period in which to take mitigating actions beginning on the first day after the year of noncompliance was too short and began before the noncompliance may be known. Commenters recommended various time periods, and also suggested that the time period run from the time of discovery of the noncompliance. Although the Agency waiver rule in the temporary regulations involves a different situation, commenters' recommendations provide valuable information regarding Agencies' need for a sufficient period of time to consider whether to grant the waiver and that this time period should begin when the failure to comply is discovered. Thus, the temporary regulations provide that the period to provide a waiver is the 180-day period after discovery of the failure to comply by taxpayer or Agency. E. Timing of designation of income limitations One commenter expressed concern that, in some situations, a multiple-building project claims the section 42 credit beginning in two different years depending on when the different buildings in the project are fully leased, and thus, the credit period for one building in the project may begin in one taxable year and the credit period for a second building in the same project may begin during the subsequent taxable year. In such a situation, the commenter requested, the regulations should permit the taxpayer to make unit designations at the end of the respective taxable years in which the credit period begins for each building in the same project. The final regulations require a designation of the imputed income limitation for a unit by the time the unit is first occupied as a low-income unit, which could take place in different taxable years for different units. This rule also allows conversion of a market-rate unit to low-income status, with designation of an income limitation occurring any time before it is first occupied as a low-income unit. Thus, the final regulations provide the flexibility that may be needed by multiple-building projects. In addition, as described later, the final regulations permit the changing of a unit's imputed income limitation in certain circumstances. For an unoccupied unit that is subject to a change in imputed income limitation, the final regulations provide that the taxpayer must designate the unit's changed imputed income limitation prior to occupancy of that unit. For an occupied unit that is subject to a change in imputed income limitation, the taxpayer must designate the unit's changed imputed income limitation prior to the end of the taxable year in which the change occurs. F. Changing a Unit's Imputed Income Designation 1. The proposed regulations on changes to income designations In general, the proposed regulations did not allow income limitations to be changed after they had been designated. The preamble to the proposed regulations, however, requested comments on an alternative mitigating approach for situations in which a unit losing status as a low-income unit had caused the average of unit limitations to rise above 60 percent of AMGI as of the close of a taxable year. The mitigating approach would have allowed the taxpayer to redesignate the imputed income limitation of a low-income unit to return the average of unit limitations to 60 percent of AMGI or lower. 2. Comments seeking ability to change designations Numerous commenters disagreed with the proposed regulations' disallowance of modifying the designated imputed income limitation of a unit. In general, these commenters stressed that greater flexibility to change unit designations would align with what multiple Agencies had been pursuing to implement existing State and local policies. Some commentators observed that the proposed regulations may conflict with other Federal or State laws or programs that, in certain cases, require rental housing to accommodate a tenant's need to move to another unit. Additionally, some commentators noted that after enactment of section 42(g)(1)(C), some Agencies adopted their own guidance with which the subsequently published proposed regulations were in conflict. Multiple commenters recommended that the final regulations allow taxpayers to modify unit designations if the Agency with jurisdiction over the project at issue allows for that in its policies and the Agency consents to the change. A different commenter suggested that the final regulations should allow taxpayers to adjust imputed income limitation designations over time, provided that the taxpayer's adjusted designations continue to satisfy the requirements of the average income test (that is, at all times 40 percent of the units remain rent-restricted and occupied by tenants whose income does not exceed the imputed income limitation designated by the owner, and the average of the imputed income limitation designations does not exceed 60 percent of AMGI in any given year). 3. Final regulations on changing designations of income limitations The Treasury Department and the IRS agree with taxpayers that the final regulations should allow greater flexibility in changes in unit designations than the proposed regulations did. Because not all Agencies may want the exact same standards for permitting redesignations, the final regulations address these taxpayer concerns by providing Agencies significant flexibility in determining procedures. Under the final regulations, a taxpayer may change the imputed income limitation designation of a previously designated low-income unit in any of the following circumstances: (1) In accordance with any procedures established by the IRS in forms, instructions, or guidance published in the Internal Revenue Bulletin pursuant to §601.601(d)(2)(ii)( b ) of this chapter. (2) In accordance with an Agency's publicly available written procedures, if those procedures are available to all of the Agency's projects that have elected the average income test. (3) To enhance protections set forth in the Americans With Disabilities Act of 1990 (ADA), Pub. L. 101-336, 104 Stat. 328; the Fair Housing Amendments Act of 1988, Pub. L. 100-430, 102 Stat.1619; the Violence Against Women Act of 1994, Pub. L. 103-322, 108 Stat. 1902; the Rehabilitation Act of 1973, Pub. L. 93-112, 87 Stat. 394; or any other State, Federal, or local law or program that protects tenants and that is identified by the IRS or an Agency in a manner described in (1) or (2) above. The tenant protections that apply to an average-income project and that redesignation may enhance do not necessarily have any specific connection to section 42. For example, the protections may be ones that apply to all multifamily rental housing, or they may apply to the project at issue because some congressionally authorized spending supported the project with Federal financial assistance. Even if a tenant protection does not legally apply to a particular average-income project but does apply to analogous multifamily rental housing, the owner of the project may redesignate income limitations to implement the protection for the project's residents. (4) To enable a current income-qualified tenant to move to a different unit within a project keeping the same income limitation (and thus the same maximum gross rent), with the newly occupied unit and the vacated unit exchanging income limitations. (5) To restore the required average income limitation for purposes of identifying a qualified group of units either for purposes of satisfying the average income set-aside or for purposes of identifying the units to be used in computing applicable fraction(s). This rule is limited to newly designated, or redesignated, units that are vacant or are occupied by a tenant that would satisfy the new, lower imputed income limitation. Also, the temporary regulations provide that a taxpayer effects a change in a unit's imputed income limitation by recording the limitation in its books and records, where it must be retained for a period not shorter than the record retention requirement under §1.42-5(b)(2). See §1.42-19T(d)(2). The new designation must also be communicated to the applicable Agency in the time and manner required by the applicable Agency and must become part of the annual report to the Agency of income designations. As part of its discretion to specify the manner of communicating the new designation, the Agency may, if it wishes, require identification of the justification for the redesignation. The prior designation must be retained in the books and records for the period specified in §1.42-19T(c)(3)(iv). These requirements for redesignations are consistent with those for initial designation of a unit's imputed income limitation and, similarly, are intended to increase both certainty and administrability with respect to redesignations. G. Applicability Dates Three commenters recommended that the final regulations should provide relief for projects that have elected the average income minimum set-aside prior to the publication of the final rule. These commenters suggested that taxpayers that elected the average income test before the finalization of the regulations did so based on a set of expectations that may be in conflict with how the final regulations actually work. For example, one commenter stated that the final regulations should provide taxpayers the opportunity to choose a different minimum set-aside. Section 42 provides that an election of a minimum set-aside is irrevocable. Therefore, these final regulations do not permit taxpayers to change a minimum set-aside election. In general, the final regulations apply to taxable years beginning after December 31, 2022. Section 1.42-19(f)(2) provides rules for residential units in projects that were already occupied prior to the applicability date of the regulations. The final regulations in both §§1.42-15(i)(2) and 1.42-19(f)(3) also contain provisions that make them more broadly available for taxpayers that desire their application. For taxable years prior to the first taxable year to which these regulations apply, taxpayers may rely on a reasonable interpretation of the statute in implementing the average income test for taxable years to which these regulations do not apply. H. Good Cause For the reasons discussed above, the Treasury Department and the IRS consider the recordkeeping and reporting requirements contained in the temporary regulations to be a logical outgrowth of the proposed rule. In any event, the Treasury Department and the IRS determine that there would be good cause to issue the temporary regulations contained in this Treasury Decision without additional notice and the opportunity for public comment. This action may be taken pursuant to section 553(b)(3)(B) of the Administrative Procedure Act, which provides that advance notice and the opportunity for public comment are not required with respect to a rulemaking when an "agency for good cause finds (and incorporates the finding and a brief statement of reasons therefor in the rules issued) that notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest." Under the "public interest" prong of 5 U.S.C. 553(b)(3)(B), the good cause exception appropriately applies where notice-and-comment would harm, defeat, or frustrate the public interest, rather than serving it. It would frustrate the public interest to delay the applicability date of the regulations until the recordkeeping and reporting requirements have received additional notice and comment. Taxpayers are seeking to rely on the substantive final regulations as soon as possible, and taxpayers cannot do so prior to the applicability date of the requirements in the temporary regulations. In general, these substantive final regulations provide significant flexibility with respect to satisfying the average income test, identifying a qualified group of units for use in the average income set-aside test and applicable fraction determinations, and changing the imputed income limitation designations of residential units. This increased flexibility was in response to taxpayer comments on the proposed regulations, including taxpayer complaints about burdens in the proposed regulations. The increased regulatory flexibility, in turn, necessitates these recordkeeping and reporting requirements to enhance administrability and certainty for the taxpayers and Agencies that will be taking advantage of the flexibility. In addition, these requirements are minimally burdensome. The recordkeeping requirements are similar to existing recordkeeping requirements for low-income housing projects, and Agencies may specify the time and manner of communication of regulatorily required information and may waive any failure to comply. There is also good cause to find notice is "unnecessary" within the meaning of 5 U.S.C. 553(b)(3)(B). The Treasury Department and the IRS are responding to commenters by providing the flexibility they sought, which requires enhanced tracking to prevent abuse. The recordkeeping additions do not alter the substance of the basic rule provisions, which are a logical outgrowth of the NPRM. And because the recordkeeping requirements provide what is minimally necessary to ensure compliance and oversight, soliciting further comment would not alter these minimal recordkeeping requirements. Accordingly, the Treasury Department and the IRS have determined that notice is unnecessary and that it is in the public interest to allow expedited reliance on the recordkeeping and reporting requirements contained in the temporary regulations. At the same time, as set forth above, the Treasury Department and the IRS are soliciting comments on the recordkeeping and reporting requirements in the notice of proposed rulemaking published contemporaneously with this final rule. At the time of publication, the Office of Management and Budget (OMB) has considered and approved these recordkeeping and reporting requirements under the Paperwork Reduction Act so that taxpayers can rapidly access the flexibility provided in these final regulations regarding the average income test. Special Analyses Regulatory Planning and Review - Economic Analysis Executive Orders 12866 and 13563 direct agencies to assess costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. These final regulations have been designated as subject to review under Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) (MOA) between the Treasury Department and the Office of Management and Budget (OMB) regarding review of tax regulations. The Office of Information and Regulatory Affairs has designated these final regulations as significant under section 1(b) of the MOA. A. Background The Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085, created the low-income housing credit under section 42 of the Code. Section 42(a) provides that the credit amount earned by a qualified low-income building depends on the number of low-income units in the building, among other factors. Among other requirements, a low-income unit as defined in section 42(i)(3) must be rent-restricted, and the individuals occupying the unit must meet the income limitation applicable to the project of which the building is a part. To qualify as a low-income housing project, one of the section 42(g) minimum set-aside tests, as elected by the taxpayer, must be satisfied. Prior to the enactment of the Consolidated Appropriations Act of 2018, Pub. L. 115-141, 132 Stat. 348 (2018 Act), section 42(g) set forth two minimum set-aside tests, known as the 20-50 test and the 40-60 test. Under the 20-50 test, at least 20 percent of the residential units in the project must be both rent-restricted and occupied by tenants whose gross income is 50 percent or less of AMGI. Under the 40-60 test, at least 40 percent of the residential units in the project must be both rent-restricted and occupied by tenants whose gross income is 60 percent or less of AMGI. To be rent restricted, a unit must have maximum gross rent no more than 30 percent of the unit's income limitation. The 2018 Act added section 42(g)(1)(C), which contains a third minimum set-aside test--the average income test. A project meets the minimum requirements of the average income test if 40 percent or more of the residential units in the project are both rent-restricted and occupied by tenants whose income does not exceed the imputed income limitation designated by the taxpayer with respect to the specific unit. (In the case of a project described in section 142(d)(6), 40 percent in the preceding sentence is replaced by 25 percent.) For a project to meet the average income test, among other criteria, the average of the imputed income limitations must not exceed 60 percent of AMGI. B. Baseline The Treasury Department and the IRS have assessed the benefits and costs of these final regulations relative to a no-action baseline reflecting anticipated Federal income tax-related behavior in the absence of these regulations. C. Economic Analysis These final regulations provide guidance on the average income test under section 42(g)(1)(C). Despite the absence of this guidance, between 2018 and 2022 approximately 200 taxpayers elected the average income test for projects containing, in the aggregate, just over 2,000 buildings. With the benefit of this guidance, we project that an additional 100 taxpayers will elect the average income test annually, for around 1,000 buildings in aggregate, relative to a baseline scenario of no guidance. These final regulations are expected to increase election of the average income test because the regulations will reduce uncertainty regarding the interpretation of 42(g)(1)(C). Absent these regulations, some taxpayers might shy away from the average income test, fearing adverse tax consequences if their interpretation of the statute is determined to be incorrect as well as lost time and expense for litigation, even if their interpretation is eventually confirmed. Instead, these or other taxpayers would elect either the 20-50 test or the 40-60 test. Projects electing the average income test may be more financially stable and more likely to be mixed income than if they had to rely on the 20-50 or 40-60 tests; however, in aggregate, the final regulations are expected to have essentially no immediate effect on the number of affordable housing units produced. The pool of potential low-income housing credits allocated by state housing agencies is capped annually and is generally oversubscribed. Thus any increase in allocated credits flowing to projects electing the average income test is expected to be offset by a concomitant reduction in credits flowing to projects electing one of the other two set-aside tests. Despite having no measurable impact on the stock of affordable housing, these final regulations will likely have some economic effect. First, there will likely be a minor efficiency gain to taxpayers electing the average income set-aside compared to the situation of taxpayers that, in the absence of this guidance, would experience uncertainty interpreting section 42(g)(1)(C). These taxpayers may save on consulting fees or hours of effort. Second, there may be a minor efficiency gain from avoiding time spent in litigation regarding the interpretation of section 42(g)(1)(C). These are unambiguous benefits of providing the final regulations, even if quantitatively small. Third, there may be costs associated with the record-keeping requirements of these final regulations. In Section II of these Special Analyses, we estimate that the annual paperwork burden for this regulation is $676,712 in aggregate. These costs fall upon low-income housing tax credit (LIHTC) building owners who choose to incur them when electing the average income test. Less directly, the final regulations will likely result in a marginal geographic redistribution in the location of LIHTC-supported housing, away from densely populated areas and towards more sparsely populated ones. Absent an option to elect the average income test, property owners seeking LIHTCs must rely on either the 20-50 or 40-60 tests. These tests set a single income standard for all LIHTC-generating units in a building. For a building to be financially feasible, its owners must be confident that there is a sufficiently large pool of potential renters having incomes in these relatively narrow ranges (just under 50 or 60 percent of AMGI). These conditions are more easily met in densely populated areas. In contrast, with income averaging, developers have leeway to establish a variety of income limitations in a building. Thus, in a sparsely populated area where there are not enough people in the relatively narrow required range of incomes to support a 20-50 or 40-60 building, an average income building may be financially feasible. Despite the low population density, the wider range of potential tenant incomes may enable the building owner to fill the low-income units with qualifying tenants from that vicinity. That ability could make the difference in whether or not the project is feasible. To be sure, most of the effect of the average income test on the geographic distribution of affordable housing is a direct consequence of statutory amendments to section 42 made by the 2018 Act, independent of this regulatory guidance. However, to the extent that the final regulations encourage some taxpayers to use the average income test who otherwise would not, the regulations reinforce the statutory effect. The end result is a marginal transfer of economic well-being from renters and LIHTC property developers in densely populated areas towards renters and LIHTC property developers in sparsely populated areas. II. Paperwork Reduction Act The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA) requires that a Federal agency obtain the approval of OMB before collecting information from the public, whether such collection of information is mandatory, voluntary, or required to obtain or retain a benefit. The collections of information contained in these regulations has been approved by OMB under control number 1545-0988. The collections of information that are needed for certainty and administrability of the final regulations are included in §1.42-19T of the temporary regulations. Section 1.42-19T(c)(1) provides recordkeeping and reporting requirements related to the identification of a qualified group of units for each of (i) satisfaction of the average income set-aside test and (ii) applicable fraction determinations. Section 1.42-19T(c)(2) provides reporting requirements to the Agency with jurisdiction over a project. Section 1.42-19T(c)(3)(iv) provides recordkeeping and reporting requirements related to designations of the imputed income limitations for residential units. Section 1.42-19T(d)(2) provides recordkeeping and reporting requirements related to changing a unit's designated imputed income limitation. This information in the collections of information will generally be used by the IRS and Agencies for tax compliance purposes and by taxpayers to facilitate proper reporting and compliance. Specifically, the collections of information in §1.42-19T apply to taxpayer owners of projects that receive the low-income housing credit and elect the average income set-aside. With respect to the recordkeeping requirements in §1.42-19T(c)(3)(iv) and (d)(2) and section 42(g)(1)(C)(ii)(I) requires that the taxpayer designate the imputed income limitations of the units taken into account for purposes of the average income test. Thus, the recordkeeping requirements that are provided allow for a process of designation that will result in a reliable record of both the original designations of the imputed income limitations of low-income units and any redesignations of units' limitations within a project. The recordkeeping rules in §1.42-19T(c)(1) with respect to a qualified group of units are similarly needed to ensure there is a reliable record to show that the units used for purposes of the average income set-aside test, and for determining a building's applicable fraction were part of a group of units within the project whose average designated imputed income limitations do not exceed 60 percent of AMGI. This limitation is consistent with the requirement in section 42(g)(1)(C)(ii)(II). The annual reporting requirements in §1.42-19T(c)(1) and (3) and (d)(2) are also similar in substance to other annual certifications required of taxpayers. For example, minimum certifications by taxpayers are required in qualified allocation plans as provided in §1.42-5(c). The reporting requirements in these final regulations also provide added flexibility by allowing the applicable Agency to determine the time and manner that the reporting is made under §1.42-19T(c)(2)(i). Also, §1.42-19T(c)(4) gives Agencies the ability to waive any failure of reporting on a case-by-case basis. A summary of paperwork burden estimates follows: Estimated number of respondents: Approximately 200 taxpayers elected the average income test for just over 2,000 buildings between 2018 and 2022. When viewed annually, we project that approximately 100 additional taxpayers will have eligible buildings and 1,000 additional buildings will be eligible under the average income test. Estimated burden per response: We estimate that identifying which units are for use in the average income set-aside test and applicable fraction determinations and designating a unit's imputed income limitation takes an average of 15 minutes per unit. Based on an estimated average of 15 units per building and an average 15 minutes of time per unit, an impacted taxpayer will incur an average of 225 minutes per building to record the additional designations due to the flexibility under the regulations for the average income test. Total average annual burden for recording the designations per building is 11,250 hours (15 units x 15 minutes x 3,000 buildings). Taxpayers are also required to report redesignation of units, and why they are required to redesignate units during the year. For purposes of this analysis, we assume that an average of 4 units per building will be redesignated annually. We estimate each redesignation will take an average of 10 minutes. Thus, we estimate the average number of minutes per year to record redesignations for an impacted taxpayer to be 40 minutes per building for a total average annual burden of 2,000 hours (40 minutes x 3,000 buildings). In addition, we estimate an annual reporting burden related to the expanded flexibility rules to average 20 minutes per impacted taxpayer for a total burden of 100 hours (20 minutes x 300 taxpayers). Estimated frequency of response: Annual. Estimated total burden hours: The annual burden hours for this regulation is estimated to be 13,350 hours. Using a monetization rate of $50.69 per hour (2020 dollars), the burden for this regulation is $676,712 for impacted taxpayers. A Federal 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 control number. III. Regulatory Flexibility Act Pursuant to the Regulatory Flexibility Act (RFA) (5 U.S.C. chapter 6), it is hereby certified that this final regulation will not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that, prior to the publication of this final regulation and before the enactment of the 2018 Act, taxpayers were already required to satisfy either the 20-50 test or the 40-60 test, as elected by the taxpayer, in order to qualify as a low-income housing project. The 2018 Act added a third minimum set-aside test (the average income test) that taxpayers may elect. This final regulation sets forth requirements for the average income test, and the costs associated with the average income test are similar to the costs associated with the 20-50 test and 40-60 test. In addition, affected taxpayers, including some who end up not electing the average income test will incur minimal costs in reading and understanding the regulations. The Treasury Department and the IRS estimate that the burden involved in reading and understanding the regulations will be approximately 3 to 5 hours and largely will be borne by advisors and trade media. A portion of the cost to such advisors and trade media will be passed on to taxpayers. As described in more detail in the Paperwork Reduction Act section of this preamble, approximately 200 taxpayers elected the average income test between 2018 and 2022. When that figure is viewed annually, the Treasury Department and the IRS project that approximately 100 additional taxpayers will elect the average income test due to the final regulations. For the 300 taxpayers affected, the annual burden hours for this regulation is estimated in the Paperwork Reduction Act analysis to be 13,350 hours. Thus, the average annual burden hours amount to 44.5 hours per affected small entity. This estimate reflects all recordkeeping and reporting requirements associated with the final regulations, including (i) identifying which units are for use in the average income set-aside test, (ii) identifying which units are for use in applicable fraction determinations, (iii) designating a unit's imputed income limitation, (iv) reporting redesignation of units, (v) reporting reasons why units are redesignated, and (vi) the reporting burden related to the expanded flexibility rules. Monetized at $50.69 per hour (2020 dollars), the average annual burden hours represent a cost of $2,256 per affected small entity. This amount is likely quite small relative to the entity's revenue. A precise estimate of typical revenue is not possible with the data available to the Treasury Department and the IRS. However, the Treasury Department and the IRS estimate that the typical annual LIHTC allocation to an affected entity is between $125,000 and $1,450,000. Relative to these sums, the $2,256 annual cost of the regulations is not a significant economic impact. Accordingly, it is hereby certified that these regulations will not have a significant economic impact on a substantial number of small entities within the meaning of section 601(6) of the RFA. For the applicability of the RFA to the temporary regulations, refer to the Special Analyses section of the preamble to the notice of proposed rulemaking published in the Proposed Rules section in this issue of the Federal Register. IV. Section 7805(f) Pursuant to section 7805(f), the proposed regulation was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business, and no comments were received. The Treasury Department and the IRS also requested comments from the public. V. Unfunded Mandates Reform Act Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a State, local, or tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. This final rule does not include any Federal mandate that may result in expenditures by State, local, or tribal governments, or by the private sector in excess of that threshold. VI. Executive Order 13132: Federalism Executive Order 13132 (Federalism) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on State and local governments, and is not required by statute, or preempts State law, unless the agency meets the consultation and funding requirements of section 6 of the Executive order. These regulations do not have federalism implications and do not impose substantial direct compliance costs on State and local governments or preempt State law within the meaning of the Executive order. VII. Congressional Review Act Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.), the Office of Information and Regulatory Affairs designated this rule as not a "major rule," as defined by 5 U.S.C 804(2). Drafting Information The principal authors of these regulations are Dillon Taylor, Office of the Associate Chief Counsel (Passthroughs and Special Industries), and Michael J. Torruella Costa, formerly at Office of the Associate Chief Counsel (Passthroughs and Special Industries). However, other personnel from the Treasury Department and the IRS participated in their development. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Adoption of Amendments to the Regulations Accordingly, 26 CFR part 1 is amended as follows: PART 1--INCOME TAXES Paragraph 1. The authority citation for part 1 is amended by adding in numerical order entries for §§ 1.42-19 and 1.42-19T to read, in part, as follows: Authority: 26 U.S.C. 7805 * * * Section 1.42-15 also issued under 26 U.S.C. 42(n); * * * * * Section 1.42-19 also issued under 26 U.S.C. 42(n); Section 1.42-19T also issued under 26 U.S.C. 42(n); * * * * * Par. 2. Section 1.42-0 is amended by: 1. In the introductory text, removing "1.42-18" and adding "1.42-19" in its place. 2. In §1.42-15: i. Revising paragraph (c). ii. Adding paragraphs (c)(1) and (2) and (c)(2)(i) through (iv). iii. Revising paragraph (i). iv. Adding paragraphs (i)(1) and (2). 3. Adding a heading and entries for §1.42-19. The additions and revisions read as follows: §1.42-0 Table of contents. * * * * * §1.42-15 Available unit rule. * * * * * (c) Exceptions. (1) In general. (2) Rental of next available unit in case of the average income test. (i) Basic rule. (ii) No requirement to comply with the next available unit rule in a specific order. (iii) Deep rent skewed projects. (iv) Limitation. * * * * * (i) Applicability dates. (1) In general. (2) Applicability dates under the average income test. * * * * * §1.42-19 Average income test. (a) Average income set-aside. (b) Definition of low-income unit and qualified group of units. (1) Definition of low-income unit. (2) Definition of qualified group of units. (3) Identification of qualified groups of units. (i) Average income set-aside test. (ii) Applicable fraction determinations. (iii) Identification of units. (c) Procedures. (1) [Reserved] (2) [Reserved] (3) Designation of imputed income limitations. (i) Timing of designation. (ii) 10-percent increments. (iii) Continuity. (iv) [Reserved] (4) [Reserved] (d) Changing a unit's designated imputed income limitation. (1) Permitted changes. (i) Federally permitted changes. (ii) Housing credit agency (Agency)-permitted changes. (iii) Certain laws. (iv) Tenant movement. (v) Restoring compliance with average income requirements. (2) [Reserved] (e) Examples. (f) Applicability dates. (1) General rule. (2) Designations of occupied units. (3) Applicability of this section to taxable years beginning before January 1, 2023. Par. 3. Section 1.42-15 is amended by: 1. Revising the definition of Over-income unit in paragraph (a). 2. In paragraph (c): i. Revising the heading. ii. Designating the text as paragraph (c)(1) and adding a heading for newly designated paragraph (c)(1). 3. Adding paragraph (c)(2). 4. In paragraph (i): i. Revising the heading. ii. Designating the text as paragraph (i)(1). 5. In newly designated paragraph (i)(1): i. Adding a heading. ii. Removing "This section" and adding "Except for paragraph (c)(2) of this section, this section" in its place. 6. Adding paragraph (i)(2). The revisions and additions read as follows: §1.42-15 Available unit rule. (a) * * * Over-income unit means, in the case of a project with respect to which the taxpayer elects the requirements of section 42(g)(1)(A) or (B) (that is, the 20-50 or 40-60 tests), a low-income unit in which the aggregate income of the occupants of the unit increases above 140 percent of the applicable income limitation under section 42(g)(1)(A) and (B), or above 170 percent of the applicable income limitation for deep rent skewed projects described in section 142(d)(4)(B). In the case of a project with respect to which the taxpayer elects the requirements of section 42(g)(1)(C) (that is, the average income test), over-income unit means a residential unit described in §1.42-19(b)(1)(i) through (iii) in which the aggregate income of the occupants of the unit increases above 140 percent (170 percent in case of deep rent skewed projects described in section 142(d)(4)(B)) of the greater of 60 percent of area median gross income or the imputed income limitation designated with respect to the unit under §1.42-19(b). * * * * * (c) Exceptions --(1) In general. * * * (2) Rental of next available unit in case of the average income test --(i) Basic rule. In the case of a project with respect to which the taxpayer elects the average income test, if a unit becomes an over-income unit within the meaning of paragraph (a) of this section, that unit ceases to be described in §1.42-19(b)(1)(ii) if-- (A) Any residential rental unit (of a size comparable to, or smaller than, the over-income unit) is available, or subsequently becomes available, in the same low-income building; and (B) That available unit is occupied by a new resident whose income exceeds the limitation described in paragraph (c)(2)(iv) of this section. (ii) No requirement to comply with the next available unit rule in a specific order. Where multiple units in a building are over-income units at the same time-- (A) The order in which available units are occupied makes no difference for purposes of complying with the rules in this section (next available unit rule); and (B) In making imputed income limitation designations, the taxpayer must take into account the limitations described in paragraphs (c)(2)(iii) and (iv) of this section. (iii) Deep rent skewed projects. In the case of a project described in section 142(d)(4)(B) with respect to which the taxpayer elects the average income test, if a unit becomes an over-income unit within the meaning of paragraph (a) of this section, that unit ceases to be a unit described in §1.42-19(b)(1)(ii) if-- (A) Any residential unit described in §1.42-19(b)(1)(i) through (iii) is available, or subsequently becomes available, in the same low-income building; and (B) That unit is occupied by a new resident whose income exceeds the lesser of 40 percent of area median gross income or the imputed income limitation designated with respect to that unit. (iv) Limitation. The limitation described in this paragraph (c)(2)(iv) is-- (A) In the case of a unit that was described in §1.42-19(b)(1)(i) through (iii) prior to becoming vacant, the imputed income limitation designated with respect to the available unit for the average income test under §1.42-19(b); and (B) In the case of any other unit, the highest imputed income limitation that could be designated (consistent with section 42(g)(1)(C)(ii)(III)) for that available unit under §1.42-19(c) such that the average of all imputed income designations of residential units in the project does not exceed 60 percent of area median gross income (AMGI). (v) Example. The operation of paragraph (c)(2) of this section (that is, the next available unit rule for the average income test) is illustrated by the following example. (A) Facts. ( 1 ) A single-building housing project received an allocation of housing credit dollar amount for 10 low-income units. The taxpayer who owns the project constructs the building with 10 identically sized units and elects the average income test. In the first year, the taxpayer intended to have 8 units that will qualify as low-income units (within the meaning of §1.42-19(b)(1)), and 2 units that are market-rate units. The taxpayer properly and timely designates the imputed income limitations for the 8 units as follows: 4 units at 80 percent of AMGI; and 4 units at 40 percent of AMGI. Table 1 to Paragraph (c)(2)(v)(A)( 1 ) ( 2 ) In the first taxable year of the credit period (Year 1), the project is fully leased and occupied by income-qualified residents in Units ##1-4 and 6-9. In Year 2, Unit #1 and Unit #6 become over-income. The tenant residing in Unit #5 vacated that unit. Taxpayer then designated an imputed income limitation of 40 percent of AMGI for Unit #5. Later in Year 2, the tenant residing in Unit #10 vacated that unit. Taxpayer designated an imputed income limitation of 80 percent of AMGI for Unit #10. After those designations, Unit #10 was occupied by a new income-qualified tenant, and then later, Unit #5 was occupied by a new income-qualified resident. (B) Analysis. Taxpayer sought to maintain the status of the over-income units (Unit #1 and Unit #6) as units described in §1.42-19(b)(1)(ii). As the then-market rate units (Units ##5 and 10) became available to rent, Taxpayer designated imputed income limitations for them at 40 percent and 80 percent of AMGI, respectively. Immediately after each designation, the average of the designations in the project does not exceed 60 percent AMGI. Pursuant to the rule in paragraph (c)(2)(ii) of this section, when there are multiple over-income units, Taxpayer is not required to rent the next-available units in a specific order, even though they may have different imputed income limitations. Thus, Taxpayer complied with the rules of the next available unit rule, and Unit #1 and Unit #6 maintain status as units described in §1.42-19(b)(1)(ii). (i) Applicability dates --(1) In general. * * * (2) Applicability dates under the average income test. The requirements of the second sentence of the definition of over-income unit in paragraph (a) of this section and paragraph (c)(2) of this section apply to taxable years beginning after December 31, 2022. A taxpayer may choose to apply this section to a taxable year beginning after October 12, 2022, and before January 1, 2023, provided that the taxpayer chooses to apply §1.42-19 to the same taxable year. Par. 4. Section 1.42-19 is added to read as follows: §1.42-19 Average income test. (a) Average income set-aside. A project for residential rental property satisfies the average income test in section 42(g)(1)(C) for a taxable year if the project contains a qualified group of units (within the meaning of paragraph (b)(2) of this section) that constitutes 40 percent or more of the residential units in the project. (In the case of a project described in section 142(d)(6), "40 percent" in the preceding sentence is replaced with "25 percent.") (b) Definition of low-income unit and qualified group of units --(1) Definition of low-income unit. For purposes of this section, a residential unit is a low-income unit if and only if- (i) Such unit is rent-restricted (as defined in section 42(g)(2)); (ii) The individuals occupying such unit satisfy the imputed income limitation of that unit designated by the taxpayer in accordance with paragraphs (c)(3) and (d) of this section and with §1.42-19T(c) and (d), or the unit meets the requirements under section 42(g)(2)(D); (iii) No provision in section 42 (including section 42(i)(3)(B)-(E)) or in the regulations under section 42 denies low-income status to that unit; and (iv) The unit is part of a qualified group of units under paragraph (b)(2) of this section. (2) Definition of qualified group of units. A group of residential units is a qualified group of units for a taxable year if and only if-- (i) Each unit in the group satisfies the requirements of paragraphs (b)(1)(i) through (iii) of this section; and (ii) The average of the imputed income limitations of all of the units in the group does not exceed 60 percent of area median gross income (AMGI). (3) Identification of qualified groups of units --(i) Average income set-aside test. For each taxable year in the extended use period, the taxpayer must identify a qualified group of units that constitute 40 percent or more of the residential units in the project. The requirements in paragraph (b)(3)(iii) of this section apply to these identifications. (ii) Applicable fraction determinations. For each taxable year in the extended use period, the taxpayer must identify a qualified group of units to be used in determining the applicable fractions for the buildings in the project. (A) Identification of the units in the qualified group of units used for determining applicable fractions. The residential units that are identified for purposes of this paragraph (b)(3)(ii) include the units that, under paragraph (b)(3)(i) of this section, are included in the qualified group of units identified for purposes of the set-aside qualification of the project. The taxpayer may identify additional units for inclusion in the group of units used in determining the applicable fractions for buildings in the project provided that the resulting group is a qualified group of units within the meaning of paragraph (b)(2) of this section. (B) Computing applicable fractions of buildings. For a taxable year, the applicable fraction of a building in a project is computed using the units that are in the particular building and that are also in the qualified group of units for the project identified for purposes of this paragraph (b)(3)(ii). The units included in the applicable fraction of a building do not have to be a qualified group of units on their own. See Example 4 of paragraph (e) of this section. (iii) Identification of units. The recordkeeping and reporting requirements in §1.42-19T(c)(1) apply both to the identification of units that is required by paragraph (b)(3)(i) of this section and the identification of units that is described in paragraph (b)(3)(ii) of this section. (c) Procedures. (1) - (2) [Reserved] (3) Designation of imputed income limitations --(i) Timing of designation. (A) Before a unit is first occupied as a low-income unit, or, except as provided in paragraph (c)(3)(i)(B) of this section, is first occupied under a changed income limit, the taxpayer must designate the unit's imputed income limitation or changed imputed income limitation. (B) For an occupied unit that is subject to a change in imputed income limitation pursuant to paragraph (d) of this section, the taxpayer must designate the unit's changed imputed income limitation not later than the end of the taxable year in which the change occurs. (ii) 10-percent increments. Under section 42(g)(1)(C)(ii)(III), a designation is valid only if it is one of the following: 20 percent, 30 percent, 40 percent, 50 percent, 60 percent, 70 percent, or 80 percent of AMGI. (iii) Continuity. Except as provided in paragraph (d) of this section, the imputed income limitation of a residential unit does not change. (iv) [Reserved] (4) [Reserved] (d) Changing a unit's designated imputed income limitation --(1) Permitted changes. Notwithstanding paragraph (c)(3)(iii) of this section, the taxpayer may change the imputed income limitation of a unit in the following circumstances subject to the timing of designation requirement in paragraph (c)(3)(i)(B) of this section. (i) Federally permitted changes. Permission for the change is contained in IRS forms, instructions, or guidance published in the Internal Revenue Bulletin pursuant to §601.601(d)(2)(ii)( b ) of this chapter. (ii) Housing credit agency (Agency)-permitted changes. The Agency with jurisdiction of the project has issued public written guidance that provides conditions for a permitted change and that applies to all average income test projects under the jurisdiction of the Agency. (iii) Certain laws. The change in designation is required or appropriate to enhance protections contained in the following, as amended-- (A) The Americans with Disabilities Act of 1990 (ADA), Pub. L. 101-336, 104 Stat. 328, 42 U.S.C. 12101, et seq.; (B) The Fair Housing Amendments Act of 1988, Pub. L. 100-430, 102 Stat.1619, 42 U.S.C. 3601, et seq.; (C) The Violence Against Women Act of 1994, Pub. L. 103-322, 108 Stat. 1902, 34 U.S.C. 12291, et seq.; (D) The Rehabilitation Act of 1973, Pub. L. 93-112, 87 Stat. 394, 29 U.S.C. 701, et seq.; or (E) Any other State, Federal, or local law or program that protects tenants and that is identified pursuant to paragraph (d)(1)(i) or (ii) of this section. (iv) Tenant movement. If a current income-qualified tenant moves to a different unit in the project - (A) The unit to which the tenant moves has its imputed income designation, if any, changed to the limitation of the unit from which the tenant is moving; and (B) The vacated unit takes on the prior limitation, if any, of the tenant's new unit. (v) Restoring compliance with average income requirements. If one or more units lose low-income status or if there is a change in the imputed income limitation of some unit and if either event would cause a previously qualifying group of units to cease to be described in paragraph (b)(2)(ii) of this section, then the taxpayer may designate an imputed income limitation for a market-rate unit or may reduce the existing imputed income limitations of one or more other units in the project in order to restore compliance with the average income requirement. The rule in this paragraph (d)(1)(v) may be applied to market-rate, vacant, or low-income units, but, in the case of occupied units, the current tenants must qualify under the new, lower imputed income limitation. (2) [Reserved] (e) Examples. The operation of this section is illustrated by the following examples. (1) Example 1 --(i) Facts. (A) A single-building housing project received an allocation of housing credit dollar amount. The taxpayer who owns the project elects the average income test, intending for the 10-unit building to have 100 percent low-income occupancy. The taxpayer properly and timely designates the imputed income limitations for the 10 units as follows: 5 units at 80 percent of AMGI; and 5 units at 40 percent of AMGI. Also, for the first credit year, the taxpayer follows proper procedure in identifying 4 units as the qualified group of units that are to be used for qualifying under the average income set-aside (Units ##1, 2, 6, and 7). Additionally, for the first credit year, the taxpayer follows proper procedure in identifying all 10 units as the qualified group of units that are to be used for the applicable fraction determination. All of the units in the project are described in paragraphs (b)(1)(i) through (iii) of this section. Table 1 to Paragraph (e)(1)(i)(A) (B) In the first taxable year of the credit period (Year 1), the project is fully leased and occupied. (ii) Analysis. The identified groups are qualified groups under paragraph (b)(2) of this section. All units in both of the groups are described in paragraphs (b)(1)(i) through (iii) of this section, and the averages of the imputed income limitations of both the 4-unit group (Units ##1, 2, 6, and 7) and the 10-unit group do not exceed 60 percent of AMGI. (A) Average income set-aside. The project qualifies under the average income set-aside because the identified group of 4 units (Units ##1, 2, 6, and 7) is a qualified group of units that comprise at least 40% of the residential units in the project. (B) Qualified basis. All 10 units in the identified qualified group of units are used in the applicable fraction determination when calculating qualified basis for purposes of determining the annual credit amount under section 42(a). (2) Example 2 --(i) Facts. Assume the same facts as Example 1 of paragraph (e)(1) of this section. In Year 2, Unit #6 (which has a designated imputed income limitation of 40 percent of AMGI) becomes uninhabitable. Repair work on Unit #6 is completed in Year 3. For Year 2, Taxpayer identifies the following as a qualified group of units that are to be used for both the set-aside requirement and the applicable fraction determination: Units ##1-4 and 7-10. For Year 3, Taxpayer identifies all 10 units as the qualified group of units that are to be used for the set-aside requirement and the applicable fraction determination. (ii) Analysis. For Year 2, the identified group is a qualified group under paragraph (b)(2) of this section. All 8 units in the group are described in paragraphs (b)(1)(i) through (iii) of this section, and the average of the imputed income limitations of the 8 units in the group of units does not exceed 60 percent of AMGI. (A) Average income set-aside. For Year 2, the project qualifies for the average income set-aside because the project contains a qualified group of units that comprises at least 40% of the residential units in the project. (B) Qualified basis. To determine qualified basis in Year 2, the 8 units in the identified qualified group of units are used in the applicable fraction determination when calculating qualified basis for purposes of determining the annual credit amount under section 42(a). Unit #6 could not have been identified in the qualified group of units for use in the applicable fraction determination because its lack of habitability prevents it from being a low-income unit. Further, Taxpayer could not have identified all 9 of the habitable units to be used in the qualified group of units for the applicable fraction determination because the average of imputed income limitations of those 9 exceeds 60 percent of AMGI. Taxpayer had a choice of which of Units ##1-5 it was going to not identify for use in the applicable fraction determination. Omitting any one of them reduces the average limitation of the remaining group of 8 units to an amount that does not exceed 60 percent of AMGI. Given taxpayer's decision to leave out Unit #5, Units ##1, 2, 3, 4, 7, 8, 9, and 10 are taken into account in the applicable fraction. (C) Recapture. At the close of Year 2, Unit #6's unsuitability for occupancy precludes it from being described in paragraph (b)(1)(iii) of this section. Unit #6's resulting failure to be a low-income unit prevents it from being in a qualified group for purposes of computing the applicable fraction. The decline in the applicable fraction yields a decline in qualified basis, which results in credit recapture under section 42(j) for Year 2. Additionally, Unit #5 is not a low-income unit because the taxpayer did not include it in the qualified group of units identified for determining the building's applicable fraction. The exclusion of Unit #5 from the qualified group of units further reduces the applicable fraction for Year 2 and so reduces qualified basis for that year as well. Thus, this exclusion increases the credit recapture amount under section 42(j). (D) Restoration of habitability and of qualified basis. As described in the facts in paragraph (e)(2)(i) of this section, in Year 3, after repair work is complete, the formerly uninhabitable Unit #6 is again occupied by a qualified tenant at the same imputed income limitation, and the Taxpayer identifies all 10 units as the qualified group of units that are to be used for the set-aside requirement and the applicable fraction determination. The identified group is a qualified group under paragraph (b)(2) of this section. All 10 units in the group are described in paragraphs (b)(1)(i) through (iii) of this section, and the average of the imputed income limitations of the 10 units in the group of units does not exceed 60 percent of AMGI. For Year 3, all 10 units are included in the qualified group of units for purposes of the average income set-aside test and are a qualified group of units for the applicable fraction determination. (3) Example 3 --(i) Facts. Assume the same facts as Example 2 of paragraph (e)(2) of this section, except that the income for the tenant residing in Unit #5 has declined so that tenant's income does not exceed 60 percent of AMGI. For Year 2, taxpayer timely redesignates Unit #5 pursuant to the rule in paragraph (d)(1)(v) of this section so that the imputed income limitation is 60 percent of AMGI instead of 80 percent of AMGI. Taxpayer also makes revisions so that Unit #5 is rent-restricted under the redesignated imputed income limitation. Taxpayer identifies 9 units (Units ##1-5 and 7-10) as the qualified group of units that are to be used for the set-aside requirement and the applicable fraction determination. Table 2 to Paragraph (e)(3)(i) (ii) Analysis. For Year 2, the identified group is a qualified group under paragraph (b)(2) of this section. All 9 units in the group are described in paragraphs (b)(1)(i) through (iii) of this section, and the average of the imputed income limitations of the 9 units in the group of units does not exceed 60 percent of AMGI. (A) Average income set-aside. For Year 2, project contains a qualified group of units that comprises at least 40% of the residential units in the project. (B) Qualified basis. To determine qualified basis, all 9 units in the identified qualified group of units are used in the applicable fraction determination when calculating qualified basis for purposes of determining the annual credit amount under section 42(a). Unit #6 could not have been identified in the qualified group of units for use in the applicable fraction determination because its lack of habitability prevents it from being a low-income unit. Thus, Units ##1, 2, 3, 4, 5, 7, 8, 9, and 10 are taken into account in the applicable fraction determination. (C) Recapture. At the close of Year 2, the amount of the qualified basis is less than the amount of the qualified basis at the close of Year 1, because Unit #6's unsuitability for occupancy prohibits it from being a low-income unit. Unit #6's failure to be a low-income unit results in a credit recapture amount under section 42(j) for Year 2 related to Unit #6. Because Units ##1-5 and 7-10 are all included in the qualified group of units for use in the applicable fraction determination, Units ##1-5 and 7-10 are included in qualified basis for Year 2 when determining the recapture amount. (4) Example 4 --(i) Facts. (A) A multiple-building housing project consisting of two buildings received an allocation of housing credit dollar amount, and the taxpayer who owns the project elects the average income test. The taxpayer intends for the buildings (each containing 5 units) to have 100 percent low-income occupancy. The taxpayer properly and timely designates the imputed income limitations for the 10 units in Buildings 1 and 2 as follows: Building A contains 2 units at 80 percent of AMGI and 3 units at 40 percent of AMGI; and Building B contains 2 units at 40 percent of AMGI and 3 units at 80 percent of AMGI. Table 3 to Paragraph (e)(4)(i)(A) (B) In the first taxable year of the credit period (Year 1), the project is fully leased and occupied. Also, for the first credit year, the taxpayer follows proper procedure in identifying all 10 units as a qualified group of units for the minimum set-aside and the applicable fraction determination. (ii) Analysis. For Year 1, the identified group is a qualified group under paragraph (b)(2) of this section. All 10 units in the group are described in paragraphs (b)(1)(i) through (iii) of this section, and the average of the imputed income limitations of the 10 units in the group of units does not exceed 60 percent of AMGI. (A) Average income test. The multiple-building project meets the average income test as the project contains a qualified group of units that comprises at least 40% of the residential units in the project. The fact that the average of the income limitations of the units in Building B exceeds 60 percent of AMGI does not impact this result. (B) Qualified basis. To determine qualified basis, all 10 units in the identified qualified group of units across Building A and Building B are used in the applicable fraction determination when calculating qualified basis of each building for purposes of determining the annual credit amount under section 42(a). The fact that the average of the units in Building B exceeds 60 percent of AMGI does not impact the applicable fraction of Building B because the average of the identified group of units across both buildings does not exceed 60 percent of AMGI. (5) Example 5 --(i) Facts. A single-building housing project received an allocation of housing credit dollar amount, and the taxpayer who owns the project elects the average income test. During Year 2 of the credit period, the tenant residing in a unit with a designated imputed income limitation of 40 percent of AMGI moves to a market-rate unit within the same project. The tenant's income continues to be at or below 40 percent of AMGI. (ii) Analysis. Under the rule in paragraph (d)(1)(iv) of this section, when the current income-qualified tenant moves to a different unit in the project, the unit to which the tenant moves is eligible for the taxpayer to designate as a unit with a designated imputed income limitation of 40 percent of AMGI. If the taxpayer makes those designations, the unit vacated by the tenant takes on the prior limitation, if any, of the tenant's new unit. In this situation, the vacated unit formerly occupied by the tenant is now a market-rate unit. (6) Example 6 --(i) Facts. A single-building housing project received an allocation of housing credit dollar amount, and the taxpayer who owns the project elects the average income test. During Year 2 of the credit period, the disability status under the ADA of a tenant changes, and therefore under the provisions of the ADA, the tenant now needs to reside in a different unit with different accommodations. The tenant currently resides in a unit with a designated imputed income limitation of 40 percent of AMGI. A unit that would meet the tenant's needs is available on the first-floor of the building, but it was previously a low-income unit with a designated imputed income limitation of 70 percent of AMGI and thus a higher maximum gross rent than the tenant's current unit. The tenant moves to the first-floor unit. (ii) Analysis. The tenant's move was required under the ADA. Accordingly, the taxpayer is permitted to change the designation of the imputed income limitation of the first-floor unit so that the unit's designation is 40 percent of AMGI. Under paragraph (d)(1)(iv) of this section, the vacated unit takes on the prior limitation of 70 percent of AMGI of the tenant's new unit. (f) Applicability dates -(1) In general. Except as provided in paragraph (f)(3) of this section, this section applies to taxable years beginning after December 31, 2022. (2) Designations of occupied units. (i) If a residential unit is occupied at the end of the most recent taxable year ending before the first taxable year to which this section applies and if the unit is to be taken into account as a low-income unit under this section as of the beginning of the first taxable year to which this section applies, then not later than the first day of such first taxable year, the taxpayer must designate an imputed income limitation for the unit. The first taxable year to which this section applies means the first taxable year beginning after December 31, 2022, if paragraph (f)(1) of this section applies, or the taxable year described in paragraph (f)(3) of this section if the taxpayer chooses to apply paragraph (f)(3) of this section. (ii) The designation required by paragraph (f)(2)(i) of this section must comply with paragraph (c)(3)(ii) of this section and §1.42-19T(c)(3)(iv), without taking into account §1.42-19T(c)(4). Section 1.42-19T(c)(2) applies to these designations, except that the Agency may allow the notification to be made along with any other notifications for the first taxable year beginning after December 31, 2022. (iii) The designated imputed income limitation for the unit may not be less than the income that the current occupant of the unit had when that occupancy began. (3) Applicability of this section to taxable years beginning before January 1, 2023. A taxpayer may choose to apply this section to a taxable year beginning after October 12, 2022, and before January 1, 2023, provided that the taxpayer chooses to apply §1.42-15 to the same taxable year. Par. 5. Section 1.42-19T is added to read as follows: §1.42-19T Average income test (temporary). (a) - (b) [Reserved] (c) Procedures --(1) Identification of low-income units for use in the average income set-aside test or the applicable fraction determination --(i) In general. For a taxable year, a taxpayer must follow the procedures described in paragraph (c)(1)(ii) of this section to identify-- (A) A qualified group of units that satisfy the average income set-aside test; and (B) A qualified group of units used to determine the applicable fraction. (ii) Recording and communicating. The procedures described in this paragraph (c)(1)(ii) are-- (A) Recording the identification in its books and records, where the identification must be retained for a period not shorter than the record retention requirement under §1.42-5(b)(2); and (B) Communicating the annual identifications to the applicable housing credit agency (Agency) as provided in paragraph (c)(2) of this section. (2) Notifications to the Agency with jurisdiction over a project --(i) Agency flexibility. An Agency may establish the time and manner in which information is annually provided to it. (ii) Example. An Agency may allow a taxpayer to describe a current year's information by reporting differences from the previous year's information or by reporting that there are no such differences. Various Agencies may choose to apply this manner of reporting to the identity of a qualified group of units for use in the average income set-aside or applicable fraction determination, or the imputed income limits designated for the various units in a project. (3) Designation of imputed income limitations. (i) - (iii) [Reserved] (iv) Recording, retention, and annual communications related to designations. A taxpayer designates a unit's imputed income limitation by recording the limitation in its books and records, where it must be retained for a period not shorter than the record retention requirement under §1.42-5(b)(2). The preceding sentence applies both to units whose first occupancy is as a low-income unit and to previously market-rate units that are converted to low-income status. The designation must also be communicated annually to the applicable Agency as provided in paragraph (c)(2) of this section. (4) Waiver for failure to comply with procedural requirements. On a case-by-case basis, the Agency has the discretion to waive in writing any failure to comply with the requirements of paragraph (c)(1) or (2) or (c)(3)(iv) of this section up to 180 days after discovery of the failure, whether by taxpayer or Agency. If an Agency exercises this discretion, then the relevant requirements are treated as having been satisfied. In such a case, the tax consequences under this section correspond to that deemed satisfaction. (d) Changing a unit's designated imputed income limitation. (1) [Reserved] (2) Process for changing a unit's designated imputed income limitation. The taxpayer effects a change in a unit's imputed income limitation by recording the limitation in its books and records, where it must be retained for a period not shorter than the record retention requirement under §1.42-5(b)(2). The new designation must also be communicated to the applicable Agency as provided in paragraph (c)(2) of this section and must become part of the annual report to the Agency of income designations. The prior designation must be retained in the books and records for the period specified in paragraph (c)(3)(iv) of this section. A designation under this paragraph (d)(2) is considered to be made in a manner consistent with paragraph (c)(3) of this section. (e) [Reserved] (f) Applicability dates -(1) In general. Except as provided in paragraph (f)(3) of this section, this section applies to taxable years beginning after December 31, 2022. (2) Designations of occupied units. (i) If a residential unit is occupied at the end of the most recent taxable year ending before the first taxable year to which this section applies and if the unit is to be taken into account as a low-income unit under this section as of the beginning of the first taxable year to which this section applies, then not later than the first day of such first taxable year, the taxpayer must designate an imputed income limitation for the unit. The first taxable year to which this section applies means the first taxable year beginning after December 31, 2022, if paragraph (f)(1) of this section applies, or the taxable year described in paragraph (f)(3) of this section if the taxpayer chooses to apply paragraph (f)(3) of this section. (ii) The designation required by paragraph (f)(2)(i) of this section must comply with §1.42-19(c)(3)(ii) and paragraph (c)(3)(iv) of this section, without taking into account paragraph (c)(4) of this section. Paragraph (c)(2) of this section applies to these designations, except that the Agency may allow the notification to be made along with any other notifications for the first taxable year beginning after December 31, 2022. (iii) The designated imputed income limitation for the unit may not be less than the income that the current occupant of the unit had when that occupancy began. (3) Applicability of this section to taxable years beginning before January 1, 2023. A taxpayer may choose to apply this section to a taxable year beginning after October 12, 2022, and before January 1, 2023, provided that the taxpayer chooses to apply §1.42-15 to the same taxable year. (4) Expiration date. The applicability of this section expires on October 7, 2025. Paul J. Mamo, Assistant Deputy Commissioner for Services and Enforcement. Approved: September 30, 2022. Lily L. Batchelder, Assistant Secretary (Tax Policy). (Filed by the Office of the Federal Register on October 7, 2022, 11:15 a.m., and published in the issue of the Federal Register for October 12, 2022, 87 F.R. 61489)
Private Letter Ruling Number: 202052039 Internal Revenue Service December 10, 2019 DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE 1100 Commerce Street, MC 4920DAL Dallas, TX 75242 TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION Date: December 10, 2019 Number: 202052039 Release Date: 12/24/2020 UIL: 501.03-00 EIN: Person to Contact: Identification Number: Telephone Number: Fax Number: CERTIFIED MAIL -- Return Receipt Requested LAST DAY FOR FILING A PETITION WITH THE TAX COURT: Dear *****: This is a final determination that you do not qualify for exemption from federal income tax under section 501(a) of the Internal Revenue Code (the "Code") as an organization described in section 501(c)(3), effective January 1, 20XX. Your determination letter dated August 4, 20XX is revoked. Our adverse determination as to your exempt status was made for the following reasons: You failed to respond to repeated reasonable requests to allow the Internal Revenue Service to examine your records regarding your receipts, expenditures, and activities as required by sections 6001 and 6033(a)(1) of the Code and Rev.Rul. 59-95, 1959-1 C.B. 627. You also did not respond to questions about the nature of your activities. Accordingly, you failed to meet the requirements of section 501(c)(3) of the Code and Treasury Regulation section 1.501(c)(3)-1(a), in that you have not established that you are operated exclusively for exempt purposes and that no part of your net earnings inures to the benefit of private shareholders or individuals. Organizations that are not exempt under section 501 of the Code generally are required to file federal income tax returns and pay tax, where applicable. For further instructions, forms, and information please visit www.irs.gov. Contributions to your organization are no longer deductible under section 170 of the Code. If you decide to contest this determination, you may file an action for declaratory judgment under the provisions of section 7428 of the Code in one of the following three venues: 1) United States Tax Court, 2) the United States Court of Federal Claims, or 3) the United States District Court for the District of Columbia. A petition or complaint in one of these three courts must be filed within 90 days from the date this determination was mailed to you. Please contact the clerk of the appropriate court for rules and the appropriate forms for filing petitions for declaratory judgment by referring to the enclosed Publication 892. You may write to the courts at the following addresses: United States Tax Court 400 Second Street, NW Washington, DC 20217 U.S. Court of Federal Claims 717 Madison Place, NW Washington, DC 20005 U.S. District Court for the District of Columbia 333 Constitution Ave., N.W. Washington, DC 20001 Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory judgment under section 7428 of the Code. We'll notify the appropriate state officials (as permitted by law) of our determination that you aren't an organization described in section 501(c)(3) of the Code. You may be eligible for help from the Taxpayer Advocate Service (TAS). TAS is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 1-877-777-4778. Taxpayer Advocate assistance can't be used as substitute for established IRS procedures, formal appeals processes, etc. The Taxpayer Advocate is not able to reverse legal or technically correct tax determination, nor extend the time fixed by law that you have to file a petition in Court. The Taxpayer Advocate can, however, see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling. You can get any of the forms or publications mentioned in this letter by calling 800-TAX-FORM (800-829-3676) or visiting our website at www.irs.gov/forms-pubs. If you have questions, you can contact the person listed at the top of this letter. Sincerely, Maria D. Hooke Director, EO Examinations Enclosures: Publication 892 Department of the Treasury Internal Revenue Service Date: July 1, 2019 Taxpayer Identification Number: Form: Tax year(s) ended: Person to contact/ ID number: Contact numbers: Toll Free Long Distance Fax: Manager's name/ ID number: Manager's contact number: Response due date: Certified Mail - Return Receipt Requested Dear ***: Why you are receiving this letter We propose to revoke your status as an organization described in section 501(c)(3) of the Internal Revenue Code (Code). Enclosed is our report of examination explaining the proposed action. What you need to do if you agree If you agree with our proposal, please sign the enclosed Form 6018, Consent to Proposed Action -- Section 7428, and return it to the contact person at the address listed above (unless you have already provided us a signed Form 6018). We'll issue a final revocation letter determining that you aren't an organization described in section 501(c)(3). After we issue the final revocation letter, we'll announce that your organization is no longer eligible for contributions deductible under section 170 of the Code. If we don't hear from you If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final revocation letter. Failing to respond to this proposal will adversely impact your legal standing to seek a declaratory judgment because you failed to exhaust your administrative remedies. Effect of revocation status If you receive a final revocation letter, you'll be required to file federal income tax returns for the tax year(s) shown above as well as for subsequent tax years. What you need to do if you disagree with the proposed revocation If you disagree with our proposed revocation, you may request a meeting or telephone conference with the supervisor of the IRS contact identified in the heading of this letter. You may also file a protest with the IRS Appeals office by submitting a written request to the contact person at the address listed above within 30 calendar days from the date of this letter. The Appeals office is independent of the Exempt Organizations division and resolves most disputes informally. For your protest to be valid, it must contain certain specific information including a statement of the facts, the applicable law, and arguments in support of your position. For specific information needed for a valid protest, please refer to page one of the enclosed Publication 892, How to Appeal an IRS Decision on Tax-Exempt Status, and page six of the enclosed Publication 3498, The Examination Process. Publication 3498 also includes information on your rights as a taxpayer and the IRS collection process. Please note that Fast Track Mediation referred to in Publication 3498 generally doesn't apply after we issue this letter. You also may request that we refer this matter for technical advice as explained in Publication 892. Please contact the individual identified on the first page of this letter if you are considering requesting technical advice. If we issue a determination letter to you based on a technical advice memorandum issued by the Exempt Organizations Rulings and Agreements office, no further IRS administrative appeal will be available to you. Contacting the Taxpayer Advocate Office is a taxpayer right You have the right to contact the office of the Taxpayer Advocate. Their assistance isn't a substitute for established IRS procedures, such as the formal appeals process. The Taxpayer Advocate can't reverse a legally correct tax determination or extend the time you have (fixed by law) to file a petition in a United States court. They can, however, see that a tax matter that hasn't been resolved through normal channels gets prompt and proper handling. You may call toll free 1-877-777-4778 and ask for Taxpayer Advocate assistance. If you prefer, you may contact your local Taxpayer Advocate at: For additional information If you have any questions, please call the contact person at the telephone number shown in the heading of this letter. If you write, please provide a telephone number and the most convenient time to call if we need to contact you. Thank you for your cooperation. Sincerely, For Maria Hooke Director, Exempt Organizations Examinations Enclosures: Report of Examination Form 6018 Form 886-A Copy of State Website Publication 892 Publication 3498-A Date of Notice: July 1, 20XX Issues: Whether *** (the organization), which qualified for exemption from Federal income tax under Section 501(c)(3) of the Internal Revenue Code, should be revoked due to its failure to respond and produce records to verify that they are organized and operated exclusively for one or more of the purposes specified in IRC Section 501(c)(3)? Facts: *** applied for tax-exempt status by filing the Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, on *** and was granted tax-exempt status as a 501(c)(3) on *** with an effective date of *** An organization exempt under 501(c)(3) needs to be organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary or educational purposes and to foster national and amatuer sports competition. The organization was selected for audit to ensure that the activities and operations align with their approved exempt status. The organization failed to respond to the Internal Revenue Service attempts to obtain information to perform an audit of Form 990-N for the tax year December 31, 20XX. The organization has not filed a Form 990 series return for the tax year December 31, 20XX. The Form 1023-EZ application list the phone number of 772-462-1071 for the contact person and director/treasurer. Per the State of *** web-site, it lists the organization as in good standing, copy attached from state web-site. - Correspondence for the audit was as follows: o Letter 3606 (Rev. 6-2012) with attachments, was mailed to the organization on November 19, 20XX, with a response date of December 19, 20XX. This letter was not return by the post office as being undeliverable. o Letter 3606 (Rev. 6-2012) with attachments, was mailed certified to the organization again with a more complete address including the room number on February 1, 20XX, with a response date of March 4, 20XX, Article Number ***. Per the United States Postal Service (USPS) tracking, this was received and signed for on February 11, 20XX at 11:23 am. o Letter 5798 (10-2016), granting 1 ST extension, was mailed to the organization, on April 2, 20XX, with a respond date of April 16, 20XX. This letter was not return by the post office as being undeliverable o Letter 5077-B (1-2017), TE/GE IDR Delinquency Notice, was mailed certified to the organization, on May 22, 20XX, with a respond date of June 12, 20XX, Article Number ***. This letter was signed for on May 28, 20XX and a return receipt was received on June 4, 20XX. - Telephone contact for the audit was as follows: o December 4, 20XX, Tax Compliance Officer (TCO) called the phone number listed on the Form 1023-EZ application for the Director/Treasurer of the organization of 772-462-1071 and received VMS. Left a message for an officer of the organization to return my phone call. o Government shutdown from December 21, 20XX through January 25, 20XX. o January 30, 20XX, Tax Compliance Officer attempted to contact Director/Treasurer again with phone number given on the form 1023-EZ. That number is no longer a working number. Through external research located a few different phone numbers for different officers, including the Director/President, ***, another Director/President, *** and the Director/Secretary, ***. I had to leave a voice message with each phone number. o January 31, 20XX, TCO received a phone message from a ***, who indicated she is the current Treasurer of the organization. She indicated the organization did not receive the initial letter 3606 letter with attachments. She asked to add the room number *** to the address and they should get the letter. I explained we would reissue the initial letter for their response. o February 21, 20XX, TCO had not received any call back indicating the treasurer receive our letter. I left a voice message on the treasurer's phone number ***. o March 6, 20XX, TCO still had not received a call back from the treasurer of the organization. TCO called the phone number for the treasurer again, *** and was able to reach the secretary. She indicated she had received the letter 3606 (Rev. 6-2012) and had not had time to respond to all that we had requested. She thought by the next week she would have an idea when she would have it completed. o March 18, 20XX, TCO still had not received response nor call back from the treasurer of the organization indicating when they would/did respond. TCO left another voice message with the treasurer, *** asking for the status of the organization's reply. o March 27, 20XX, still no reply from the secretary or organization in response to the letter sent out or several phone messages left. Located work number for the treasurer and left a voice message there as well to have secretary call. o April 2, 20XX, TCO was able to reach the treasurer of the organization. She said she had been too busy to respond to our request. I gave her a 10-work day time to respond and she said she would get it done and fax me the information. o April 19, 20XX, the treasurer of the organization called to get our address to mail us the information since it was too large to fax. She indicated she would put information in the mail later today or no later than Monday, April 22, 20XX. o May 1, 20XX, still no reply in the mail. TCO called and reached the treasurer of the organization again. She wanted to go over all the information once again to see what we needed, which makes the appearance the organization has yet to put together the information we have requested for so long. Once again, the secretary said she would fax the information to the TCO within the next day or two. o May 9, 20XX, with the information from the organization being pass due the TCO called the treasurer once more and had to leave a voice message. o May 14, 20XX, after leaving another message on the treasurer's phone she called back indicating she faxed the information to us on *****. After checking the E-faxes, the TCO told the treasurer that no such fax was received. The treasurer had a meeting to attend and would re-fax the information to us after the meeting. o May 17, 20XX, no E-fax was received by the TCO for this organization's response to our audit. The TCO called and left a message to contact him as soon a possible or procedures for revocation would be started. o June 6, 20XX, the TCO made one last attempt to contact the treasurer before sending the Letter 3618 (6-2012) 30-day proposed revocation. TCO left a voice message that has not had a response. Law: Internal Revenue Code (IRC) §501(c)(3) of the Code provides that an organization organized and operated exclusively for charitable or educational purposes is exempt from Federal income tax, provided no part of its net earnings inures to the benefit of any private shareholder or individual. IRC §511 of the Internal Revenue Code imposes a tax at corporate rates under section 11 on the unrelated business taxable income of certain tax-exempt organizations. IRC §6001 of the Code provides that every person liable for any tax imposed by this title, or for the collection thereof, shall keep such records, render such statements, make such returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Whenever in the judgment of the Secretary it is necessary, he may require any person, by notice served upon such person or by regulations, to make such returns, render such statements, or keep such records, as the Secretary deems sufficient to show whether or not such person is liable for tax under this title. IRC §6033(a)(1) of the Code provides, except as provided in section 6033(a)(2), every organization exempt from tax under section 501(a) shall file an annual return, stating specifically the items of gross income, receipts and disbursements, and such other information for the purposes of carrying out the internal revenue laws as the Secretary may by forms or regulations prescribe, and keep such records, render under oath such statements, make such other returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Treasury Regulations (Regulation) 1.501(c)(3)-1 In order to be exempt under §501(c)(3) the organization must be both organized and operated exclusively for one or more of the purposes specified in the section. (religious, charitable, scientific, testing for public safety, literary or educational). Regulation §1.501(c)(3)-1(a)(1) of the regulations states that in order to be exempt as an organization described in section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in such section. If an organization fails to meet either the organizational test or the operational test, it is not exempt. Regulation 1.501(c)(3)-1(c)(1) of the regulations provides that an organization will not be regarded as "operated exclusively" for one or more exempt purposes described in section 501(c)(3) of the Code if more than an insubstantial part of its activities is not in furtherance of a 501(c)(3) purpose. Accordingly, the organization does not qualify for exemption under section 501(c)(3) of the Code. Regulation §1.6001-1(c) of the Code provides that such permanent books and records as are required by paragraph (a) of this section with respect to the tax imposed by section 511 on unrelated business income of certain exempt organizations, every organization exempt from tax under section 501(a) shall keep such permanent books of account or records, including inventories, as are sufficient to show specifically the items of gross income, receipts and disbursements. Such organizations shall also keep such books and records as are required to substantiate the information required by section 6033. See section 6033 and §§ 1.6033-1 through 1.6033-3. Regulation §1.6001-1(e) of the Code provides that the books or records required by this section shall be kept at all time available for inspection by authorized internal revenue officers or employees, and shall be retained as long as the contents thereof may be material in the administration of any internal revenue law. Regulation §1.6033-1(h)(2) of the regulations provides that every organization which has established its right to exemption from tax, whether or not it is required to file an annual return of information, shall submit such additional information as may be required by the district director for the purpose of enabling him to inquire further into its exempt status and to administer the provisions of subchapter F (section 501 and the following), chapter 1 of the Code and section 6033. Regulation §1.61-1 of the regulations provides that Gross income means all income from whatever source derived, unless excluded by law. Gross income includes income realized in any form, whether in money, property, or services. Income may be realized, therefore, in the form of services, meals, accommodations, stock, or other property, as well as in cash. Rev.Rul. 59-95, 1959-1 C.B. 627, concerns an exempt organization that was requested to produce a financial statement and statement of its operations for a certain year. However, its records were so incomplete that the organization was unable to furnish such statements. The Service held that the failure or inability to file the required information return or otherwise to comply with the provisions of section 6033 of the Code and the regulations which implement it, may result in the termination of the exempt status of an organization previously held exempt, on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status. Organization's Position Taxpayer's position is unknown at this time. Government's Position Based on the above facts, the organization did not respond to verify that they are organized and operated exclusively for one or more of the purposes specified in IRC Section 501(c)(3). If an organization fails to meet either the organizational test or the operational test, it is not exempt. In accordance with the above-cited provisions of the Code and regulations under sections 6001 and 6033, organizations recognized as exempt from federal income tax must meet certain reporting requirements. These requirements relate to the filing of a complete and accurate annual information (and other required federal tax forms) and the retention of records sufficient to determine whether such entity is operated for the purposes for which it was granted tax-exempt status and to determine its liability for any unrelated business income tax. Section 1.6033-1(h)(2) of the regulations specifically state that exempt organizations shall submit additional information for the purpose on enabling the Internal Revenue Service to inquire further into its exempt status. Using the rationale that was developed in Revenue Ruling 59-95, the Organization's failure to provide requested information should result in the termination of exempt status. Conclusion: Based on the foregoing reasons, the organization does not qualify for exemption under section 501(c)(3) and its tax-exempt status should be revoked. It is the IRS's position that the organization failed to establish that it meets the reporting requirements under IRC §§ 6001 and 6033 to be recognized as exempt from federal income tax under IRC § 501(c)(3). Furthermore, the organization has not established that it is observing the conditions required for the continuation of its exempt status or that it is organized and operated exclusively for an exempt purpose. Accordingly, the organization's exempt status is revoked effective January 1, 20XX Form 1120, U.S. Corporation Income Tax Return, should be filed for the tax periods after January 1, 20XX.
Proposed Regulation REG-115559-23 Internal Revenue Service 2023-42 I.R.B. 1082 Excise Tax on Designated Drugs; Procedural Requirements REG-115559-23 AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking. SUMMARY: This document contains proposed regulations that would provide guidance on how taxpayers will report liability for the excise tax imposed on manufacturers, producers, or importers of certain designated drugs. The proposed regulations affect manufacturers, producers, and importers of designated drugs that sell such drugs during certain statutory periods. The proposed regulations also would except such tax from semimonthly deposit requirements. DATES: Written or electronic comments and requests for a public hearing must be received by December 1, 2023. Requests for a public hearing must be submitted as prescribed in the " Comments and Requests for a Public Hearing " section. ADDRESSES: Commenters are strongly encouraged to submit public comments electronically via the Federal eRulemaking Portal at https://www.regulations.gov (indicate IRS and REG-115559-23) by following the online instructions for submitting comments. Requests for a public hearing must be submitted as prescribed in the "Comments and Requests for a Public Hearing" section. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The Department of the Treasury (Treasury Department) and the IRS will publish for public availability any comments submitted to the IRS's public docket. Send paper submissions to: CC:PA:LPD:PR (REG-115559-23), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, contact Jacob W. Peeples, James S. Williford, or Michael H. Beker at (202) 317-6855 (not a toll-free number); concerning the submission of comments and/or requests for a public hearing, contact Vivian Hayes by phone at (202) 317-5306 (not a toll-free number) or by email at publichearings@irs.gov (preferred). SUPPLEMENTARY INFORMATION: Background This document contains proposed regulations that would amend the Excise Tax Procedural Regulations (26 CFR part 40) and add a new part 47 to 26 CFR chapter 1 to contain the "Designated Drugs Excise Tax Regulations " related to the excise tax imposed by section 5000D of the Internal Revenue Code (Code) on certain sales by manufacturers, producers, or importers of designated drugs (section 5000D tax). Section 5000D, added to chapter 50A of the Code by section 11003 of Public Law 117-169, 136 Stat. 1818 (August 16, 2022), commonly known as the Inflation Reduction Act of 2022 (IRA), imposes an excise tax on the sale by the manufacturer, producer, or importer (taxpayer) of any designated drug during a day that falls within a period described in section 5000D(b). Because chapter 50A is a new chapter of the Code, the existing regulations that prescribe the procedural rules applicable to most excise taxes do not apply to chapter 50A. Notice 2023-52 (2023-35 I.R.B. 650) announces that the Treasury Department and the IRS intend to propose regulations addressing substantive and procedural issues related to the section 5000D tax. These proposed regulations address return filing and other procedural requirements related to the section 5000D tax as set forth in Notice 2023-52. The Treasury Department and the IRS will issue a separate notice of proposed rulemaking to address substantive issues related to the section 5000D tax. Explanation of Provisions I. Proposed Amendments to 26 CFR part 40 These proposed regulations would apply the Excise Tax Procedural Regulations in 26 CFR part 40 to excise taxes imposed by chapter 50A of the Code (and thus to the section 5000D tax), with some limited exceptions. A. Proposed amendments to§40.0-1 Section 40.0-1(a) provides generally that the regulations in part 40 set forth administrative rules relating to the excise taxes imposed by chapters 31 through 34, 36, 38, 39, and 49 of the Code. Proposed§40.0-1(a) would amend that provision by adding chapter 50A of the Code to the list of Code chapters subject to the part 40 regulations. B. Proposed amendments to§40.6011(a)-1 Section 40.6011(a)-1(a)(1) provides that the return of tax to which part 40 applies must be made on Form 720, Quarterly Federal Excise Tax Return, according to the instructions applicable to the form. Section 40.6011(a)-1(a)(2) provides, in part, that a return must be filed for the first calendar quarter in which liability for tax is incurred (or tax must be collected and paid over) and for each subsequent calendar quarter, whether or not liability is incurred (or tax must be collected and paid over) during that subsequent quarter, until a final return under§40.6011(a)-2 is filed. Proposed§40.6011(a)-1(d) would provide that a return that reports liability imposed by section 5000D must be made for a period of one calendar quarter, and that a return must be filed for each calendar quarter in which liability for the section 5000D tax is incurred. Therefore, under these proposed regulations, taxpayers would be required to report any section 5000D tax liability on Form 720; however, taxpayers would not be required to file subsequent returns for quarters in which they incur no section 5000D tax liability. C. Proposed amendments to§40.6302(c)-1 Section 40.6302(c)-1(a) provides that except as provided by statute or by§40.6302(c)-1(e), each person required under§40.6011(a)-1(a)(2) to file a quarterly return must make a deposit of tax for each semimonthly period (as defined in§40.0-1(c)) in which tax liability is incurred. Section 40.6302(c)-1(e) provides a list of taxes that are excepted from the semimonthly deposit requirement. Proposed§40.6302(c)-1(e)(1)(vi) would add the section 5000D tax to the list of taxes that are excepted from the semimonthly deposit requirement. Therefore, under these proposed regulations, taxpayers with section 5000D tax liability would not be required to make semimonthly deposits of the section 5000D tax. II. Proposed Addition of 26 CFR part 47 In addition to proposing the addition of a new part 47 to 26 CFR chapter 1, proposed§47.5000D-1 would provide an introductory provision under part 47 that would designate 26 CFR part 47 as the "Designated Drugs Excise Tax Regulations." Proposed Applicability Dates These proposed regulations, once adopted as final regulations in a Treasury Decision published in the Federal Register, are proposed to apply to calendar quarters beginning on or after October 1, 2023. Taxpayers may rely on these proposed regulations for such returns beginning on October 1, 2023, and before the date that a Treasury Decision published in the Federal Register adopts these regulations as final regulations. Special Analyses I. Regulatory Planning and Review--Economic Analysis Pursuant to the Memorandum of Agreement, Review of Treasury Regulations under Executive Order 12866 (June 9, 2023), tax regulatory actions issued by the IRS are not subject to the requirements of section 6 of Executive Order 12866, as amended. Therefore, a regulatory impact assessment is not required. II. Paperwork Reduction Act The collections of information contained within these proposed regulations will be submitted to the Office of Management and Budget (OMB) for review in accordance with the Paperwork Reduction Act (PRA) (44 U.S.C. 3507(d)). See 5 CFR 1320.11. The Treasury Department and the IRS request comments on the information collection burdens related to the proposed regulations. Commenters are strongly encouraged to submit public comments electronically. Written comments and recommendations for the proposed information collection should be sent to https://www.reginfo.gov/public/do/PRAMain, with copies to the IRS. To find this particular information collection, select "Currently under Review - Open for Public Comments" and then use the search function. Submit electronic submissions for the proposed information collection to the IRS via email at pra.comments@irs.gov (indicate REG-115559-23 in the subject line). Comments on the collection of information must be received by December 1, 2023. Comments are specifically requested concerning: Whether the proposed collections of information are necessary for the proper performance of the functions of the IRS, including whether the information will have practical utility; The accuracy of the estimated burden associated with the proposed collections of information (see below); How the quality, utility, and clarity of the information to be collected may be enhanced; How the burden of complying with the proposed collections of information may be minimized, including through the application of automated collection techniques or other forms of information technology; and Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information. The collections of information in these proposed regulations relate to reporting and recordkeeping requirements that will allow section 5000D taxpayers to meet their tax reporting obligations. The collections of information would generally be used by the IRS for tax compliance purposes and by taxpayers to facilitate proper tax reporting and compliance. The reporting and recordkeeping requirements are covered within the form and instructions for Form 720. IRS is seeking OMB approval on the statutorily required revisions to the form. Therefore, collection requirements will be submitted to OMB under control number 1545-0023. Because the section 5000D tax is a new tax that has never been reported to the IRS, the Treasury Department and the IRS do not have historical data on the number of affected taxpayers. The Centers for Medicare and Medicaid Services (CMS) has selected 10 drugs for price negotiation for initial price applicability year 2026. CMS will select for negotiation a limited number of drugs for each initial price applicability year after that, as outlined in the IRA. Further, manufacturers, producers, and importers of such drugs may or may not become subject to section 5000D tax liability. Based on the foregoing, the IRS estimates that there will be between 0 and 50 taxpayers during the next 3 years. If a taxpayer has a section 5000D tax liability, it would be required to file Form 720 to report such liability. Form 720 is a quarterly return. A taxpayer would only be required to file Form 720 during calendar quarters in which the taxpayer has a section 5000D tax liability. Therefore, a taxpayer that has a section 5000D tax liability in one calendar quarter but not in subsequent calendar quarters would only be required to file one Form 720. The respondents with regard to the section 5000D tax are manufacturers, producers, and importers of certain drugs. The Treasury Department and the IRS estimate the annual burden of the collections of information as follows (these estimates, which are for PRA purposes only, are based on the high end of the range of possible taxpayers and the high end of the range of the frequency of responses, in which a taxpayer would have tax liability in all four calendar quarters): Estimated frequency of responses: Quarterly. Estimated number of responses: 50. Estimated burden time per respondent: 6.9 hours. Estimated total annual reporting burden: 1,380 hours. A Federal 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 control number assigned by OMB. Books or records relating to a collection of information must be retained if their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by section 6103. III. Regulatory Flexibility Act Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is hereby certified that these proposed regulations will not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that the section 5000D tax is imposed only when certain drug manufacturers, producers, and importers sell certain drugs during periods described in section 5000D(b). The periods described in section 5000D(b) relate to benchmarks in the Medicare Drug Price Negotiation Program, which involves only certain drugs with high Medicare expenditures. If any section 5000D tax liability arises, the taxpayers will primarily not be small entities. As noted earlier, data is not readily available about the number of taxpayers affected, but the number is likely to be limited, in part due to the limited number of drugs selected for the Drug Price Negotiation Program in any particular year. In addition, these proposed regulations will assist taxpayers in meeting their tax reporting obligations by providing clarity on how to report section 5000D tax liability, which will make it easier for taxpayers to comply with section 5000D. Therefore, these proposed regulations will not create additional obligations for, or impose a significant economic impact on, small entities, and a regulatory flexibility analysis under the Regulatory Flexibility Act is not required. Notwithstanding this certification, the Treasury Department and the IRS welcome comments on the impact of these proposed regulations on small entities. IV. Section 7805(f) Pursuant to section 7805(f) of the Code, these proposed regulations have been submitted to the Chief Counsel for the Office of Advocacy of the Small Business Administration for comment on its impact on small business. V. Unfunded Mandates Reform Act Section 202 of the Unfunded Mandates Reform Act of 1995 requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a State, local, or Tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. These proposed regulations do not include any Federal mandate that may result in expenditures by State, local, or Tribal governments, or by the private sector, in excess of that threshold. V. Executive Order 13132: Federalism Executive Order 13132 (Federalism) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on State and local governments, and is not required by statute, or preempts State law, unless the agency meets the consultation and funding requirements of section 6 of the Executive order. These proposed regulations do not have federalism implications, do not impose substantial direct compliance costs on State and local governments, and do not preempt State law within the meaning of the Executive order. Statement of Availability of IRS Documents The IRS Notice cited in this preamble is published in the Internal Revenue Bulletin (or Cumulative Bulletin) and is available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at https://www.irs.gov. Comments and Requests for a Public Hearing Before these proposed amendments to the regulations are adopted as final regulations, consideration will be given to comments that are submitted timely to the IRS as prescribed in the preamble under the ADDRESSES heading. The Treasury Department and the IRS request comments on all aspects of the proposed regulations. Any comments submitted will be made available at https://www.regulations.gov or upon request. A public hearing will be scheduled if requested in writing by any person who timely submits electronic or written comments. Requests for a public hearing are also encouraged to be made electronically. If a public hearing is scheduled, notice of the date and time for the public hearing will be published in the Federal Register. Drafting Information The principal author of these regulations is Jacob W. Peeples of the Office of the Associate Chief Counsel (Passthroughs & Special Industries). However, other personnel from the Treasury Department and the IRS participated in their development. List of Subjects 26 CFR Part 40 Excise taxes, Reporting and recordkeeping requirements. 26 CFR Part 47 Excise taxes. Proposed Amendments to the Regulations Accordingly, the Treasury Department and the IRS propose to amend 26 CFR chapter I, subchapter D, as follows: PART 40--EXCISE TAX PROCEDURAL REGULATIONS Paragraph 1. The authority citation for part 40 continues to read in part as follows: Authority: 26 U.S.C. 7805. Par. 2. Section 40.0-1 is amended by revising paragraphs (a) and (e) to read as follows:§40.0-1 Introduction. (a) In general. The regulations in this part are designated the Excise Tax Procedural Regulations. The regulations in this part set forth administrative provisions relating to the excise taxes imposed by chapters 31 through 34, 36, 38, 39, 49, and 50A of the Internal Revenue Code (Code) (except for the chapter 32 tax imposed by section 4181 (firearms tax) and the chapter 36 taxes imposed by sections 4461 (harbor maintenance tax) and 4481 (heavy vehicle use tax)), and to floor stocks taxes imposed on articles subject to any of these taxes. Chapter 31 relates to retail excise taxes; chapter 32 to manufacturers' excise taxes; chapter 33 to taxes imposed on communications services and air transportation services; chapter 34 to taxes imposed on certain insurance policies; chapter 36 to taxes imposed on transportation by water; chapter 38 to environmental taxes; chapter 39 to taxes imposed on registration-required obligations; chapter 49 to taxes imposed on indoor tanning services; and chapter 50A to taxes imposed on designated drugs. References in this part to taxes also include references to the fees imposed by sections 4375 and 4376 of the Code. See parts 43, 46 through 49, and 52 of this chapter for regulations related to the imposition of tax. (e) Applicability dates --(1) Paragraph (a). Paragraph (a) of this section applies to returns required to be filed under§40.6011(a)-1 for calendar quarters beginning on or after October 1, 2023. For rules that apply before October 1, 2023, see 26 CFR part 40, revised as of April 1, 2023. (2) Paragraphs (b) and (c). Paragraphs (b) and (c) of this section apply to returns for calendar quarters beginning after March 31, 2013. For rules that apply before March 31, 2013, see 26 CFR part 40, revised as of April 1, 2012. (3) Paragraph (d). Paragraph (d) of this section applies to returns for calendar quarters beginning on or after January 19, 2021. For rules that apply before January 19, 2021, see 26 CFR part 40, revised as of April 1, 2020. Par. 3. Section 40.6011(a)-1 is amended by: 1. Revising the first sentence of paragraph (a)(2)(i). 2. Adding paragraphs (d) and (e). The revision and additions read as follows:§40.6011(a)-1 Returns. (a) * * * (2) * * * (i) * * * Except as provided in paragraphs (b) through (d) of this section, the return must be made for a period of one calendar quarter. * * * (d) Tax on designated drugs. A return that reports liability imposed by section 5000D must be made for a period of one calendar quarter. A return must be filed for each calendar quarter in which liability for the tax imposed by section 5000D is incurred. There is no requirement that a return be filed for a calendar quarter in which there is no liability imposed by section 5000D. (e) Applicability dates --(1) Paragraph (a)(2)(i). Paragraph (a)(2)(i) of this section applies to returns filed for calendar quarters beginning on or after October 1, 2023. For rules that apply before October 1, 2023, see 26 CFR part 40, revised as of April 1, 2023. (2) Paragraph (c). See paragraph (c)(2) of this section. (3) Paragraph (d). Paragraph (d) of this section applies to returns filed for calendar quarters beginning on and after October 1, 2023. Par. 4. Section 40.6302(c)-1 is amended by: 1. Revising paragraphs (e)(1)(iv) and (v). 2. Adding paragraph (e)(1)(vi). 3. Revising paragraph (f). The revisions and addition read as follows:§40.6302(c)-1 Deposits. (e) * * * (1) * * * (iv) Sections 4375 and 4376 (relating to fees on health insurance policies and self-insured insurance plans); (v) Section 5000B (relating to indoor tanning services); and (vi) Section 5000D (relating to designated drugs). (f) Applicability dates --(1) Paragraphs (a) through (d). Paragraphs (a) through (d) of this section apply to deposits and payments made after March 31, 2013. For rules that apply before March 31, 2013, see 26 CFR part 40, revised as of April 1, 2012. (2) Paragraph (e). Paragraph (e) of this section applies to calendar quarters beginning on or after October 1, 2023. For rules that apply before October 1, 2023, see 26 CFR part 40, revised as of April 1, 2023. Par. 5. Add part 47 to read as follows: PART 47--DESIGNATED DRUGS EXCISE TAX REGULATIONS Sec. 47.5000D-0 Table of contents. 47.5000D-1 Introduction. 47.5000D-2 - 47.5000D-3 [Reserved] Authority: 26 U.S.C. 7805. Section 47.5000D-1 also issued under 26 U.S.C. 5000D.§47.5000D-0 Table of contents. This section lists the table of contents for§§47.5000D-1 through 47.5000D-3.§47.5000D-1 Introduction. (a) In general. (b) Applicability date.§§47.5000D-2 and 47.5000D-3 [Reserved]§47.5000D-1 Introduction. (a) In general. The regulations in this part are designated the Designated Drugs Excise Tax Regulations. The regulations in this part relate to the tax imposed by section 5000D of the Internal Revenue Code. See part 40 of this chapter for regulations relating to returns, payments, and other procedural rules applicable to this part. (b) Applicability date. This section applies to returns filed for calendar quarters beginning on or after October 1, 2023.§§47.5000D-2 - 47.5000D-3 [Reserved] Douglas W. O'Donnell, Deputy Commissioner for Services and Enforcement. (Filed by the Office of the Federal Register September 27, 2023, 11:15 a.m., and published in the issue of the Federal Register for October 02, 2023, 88 FR 67690)
Private Letter Ruling Number: 202129017 Internal Revenue Service April 27, 2021 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities PO Box 2508 Cincinnati, OH 45201 Number: 202129017 Release Date: 7/23/2021 Date: April 27, 2021 Employer ID number: Form you must file: 1120 Tax years: All Person to contact: Name: ID number: Telephone: UIL Number: 501.03-00, 501.03-21, 501.36-01 Dear *****: This letter is our final determination that you don't qualify for exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3). Recently, we sent you a proposed adverse determination in response to your application. The proposed adverse determination explained the facts, law, and basis for our conclusion, and it gave you 30 days to file a protest. Because we didn't receive a protest within the required 30 days, the proposed determination is now final. Because you don't qualify as a tax-exempt organization under IRC Section 501(c)(3), donors generally can't deduct contributions to you under IRC Section 170. We may notify the appropriate state officials of our determination, as required by IRC Section 6104(c), by sending them a copy of this final letter along with the proposed determination letter. You must file the federal income tax forms for the tax years shown above within 30 days from the date of this letter unless you request an extension of time to file. For further instructions, forms, and information, visit www.irs.gov. We'll make this final adverse determination letter and the proposed adverse determination letter available for public inspection after deleting certain identifying information, as required by IRC Section 6110. Read the enclosed Notice 437, Notice of Intention to Disclose, and review the two attached letters that show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Notice 437 on how to notify us. If you agree with our deletions, you don't need to take any further action. If you have questions about this letter, you can call the contact person shown above. If you have questions about your federal income tax status and responsibilities, call our customer service number at 800-829-1040 (TTY 800-829-4933 for deaf or hard of hearing) or customer service for businesses at 800-829-4933. Sincerely, Stephen A. Martin Director, Exempt Organizations Rulings and Agreements Enclosures: Notice 437 Redacted Letter 4034 Redacted Letter 4038 Department of the Treasury Internal Revenue Service P.O. Box 2508 Cincinnati, OH 45201 Date: February 2, 2021 Employer ID number: Contact person/ID number: Contact telephone number: Contact fax number: UIL: 501.03-00 501.03-21 501.36-01 Legend: B = State C = Date D = Name p percent = Number q percent = Number r percent = Number s percent = Number t dollars = Amount Dear **: We considered your application for recognition of exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a). We determined that you don't qualify for exemption under IRC Section 501(c)(3). This letter explains the reasons for our conclusion. Please keep it for your records. Issues Do you qualify for exemption under IRC Section 501(c)(3)? No, for the reasons stated below. Facts You incorporated in the state of B on C. Your Articles of Organization indicate your purpose is to make ** research accessible to everyone by providing affordable research tools. You rely on state law for dissolution provisions. In your application for exemption, you described the two main activities that you participate in. The first and primary activity is the design, development, and distribution of generally free web-based research management software called D. The software is created by your software engineers, uploaded to your secure computer servers and made available to all researchers. You describe D as an easy-to-use project management tool for scientific researchers. Researchers use the free web-based software to track and monitor experiment participants even outside of the traditional laboratory setting. Your second activity is to promote STEM education in grades * to * by providing students with workshops and activities that let them use D and conduct their own research projects. Specifically, you provide worksheets, lesson plans, and occasional training or workshops; the teachers at participating schools conduct the activities with the students as part of the school's curriculum. You indicated that your primary activity of maintaining and improving D will take p percent of your time. Preparation of lesson plans for your secondary activity will take up q percent of your time. You will spend the remainder of your time on administrative work and business development. You contract with external organizations to manage various aspects of the software and customer service. Currently, one of contracted software development companies is partially owned by one your Directors, but they are not allowed to participate in deliberations and voting on the transactions. You state that all activities are focused on promoting scientific research and discovery. You enable scientific researchers to expand the scope and efficacy of their research by providing them with innovative tools that have not previously existed. Due to the high costs of collecting data and managing research projects, research has previously not been easily accessible. With D's affordability and ease of use, you make health research accessible to everyone, from large academic labs to a financially limited college student looking to try out a project. Although not created for use in testing for commercial products, D can be used for such purposes. For example, the software could be used by pharmaceutical labs as a tool for drug or clinical testing depending on the type of testing and what metrics they are measuring. The software does abide by all data regulations regarding health information (i.e. HIPAA). In addition to helping research professionals, you believe that more students would choose to pursue academic research if they actually had a chance to experience scientific discovery. D promotes research as a possible career path by setting up classes and activities for students. You anticipate that all activities will be funded by revenue generated from D, which includes fees for using a "professional" version of the D software. You may also receive consulting fees for helping implement customized programs within schools. Lastly, you will also accept donations and apply for foundation and government grants. As part of your application, you indicated that you operate a freemium software as a service model, meaning most users won't pay anything but some accounts (professional research labs, pharmaceutical labs, etc.) will pay for extended services. Advantages of the professional plan over the free personal plan include additional storage space, unlimited number of projects, unlimited number of participants in a user's study, unlimited hardware raw data access, advanced security monitoring, advance customer support, and audit trail (for clinical trial use). A yearly subscription is t dollars per person. If an institution wants to buy in bulk, you may offer a discounted bulk price. You also offer the free professional version to students from low-income school systems or neighborhoods. All other students get substantial discount pricing on professional subscriptions. You believe in personal data ownership. All data collected through the D platform is owned by the individual, and they have complete control over what they want to do with their data. Individual users own any intellectual property that may result from their research. Users are not required to share or make widely available the results of their research. However, many users are part of institutions that do have requirements to make their research results available to all. Users can also choose to donate their anonymized collected data to your D open database, which is accessible for free to all, in order to provide researchers with access to ** datasets to further their research. Law IRC Section 501(c)(3) exempts from taxation any corporation organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals, provided no part of the net earnings of which inures to the benefit of any private shareholder or individual. Treasury Regulation Section 1.501(c)(3)-1(a)(1) provides that, in order to be exempt as an organization described in IRC Section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in such section. If an organization fails to meet either the organizational or operational test, it is not exempt. Treas.Reg. Section 1.501(c)(3)-1(b)(1)(i) provides that an organization is organized exclusively for one or more exempt purposes only if its articles of organization: (a) Limit the purposes of such organization to one or more exempt purposes; and (b) Do not expressly empower the organization engage, otherwise than as an insubstantial part of its activities, in activities that in themselves are not in furtherance of one or more exempt purposes. Treas.Reg. Section 1.501(c)(3)-1(b)(1)(iv) provides that in no case shall an organization be considered to be organized exclusively for one or more exempt purposes, if, by the terms of its articles, the purposes for which such organization is created are broader than the purposes specified in IRC Section 501(c)(3). Treas.Reg. Section 1.501(c)(3)-1(c)(1) provides that an organization will be regarded as "operated exclusively" for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in IRC Section 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. Section 1.501(c)(3)-1(d)(5)(i) provides that a scientific organization must be organized and operated in the public interest. Therefore, the term scientific, as used in IRC Section 501(c)(3), includes the carrying on of scientific research in the public interest. "Research," when taken alone, is a word with various meanings; it is not synonymous with scientific; and the nature of particular research depends upon the purpose which it serves. For research to be scientific, within the meaning of Section 501(c)(3), it must be carried on in furtherance of a scientific purpose. The determination as to whether research is scientific does not depend on whether such research is classified as fundamental or basic as contrasted with applied or practical. Treas.Reg. Section 1.501(c)(3)-1(d)(5)(ii) provides that scientific research does not include activities of a type ordinarily carried on as an incident to commercial or industrial operations, as, for example, the ordinary testing or inspection of materials or products or the designing or construction of equipment, buildings, etc. Treas.Reg. Section 1.501(c)(3)-1(d)(5)(iii) provides that scientific research will be regarded as carried on in the public interest: (a) If the results of such research (including any patents, copyrights, processes, or formula resulting from such research) are made available to the public on a nondiscriminatory basis; (b) If such research is performed for the United States, or any of its agencies or instrumentalities, or for a State or political subdivision thereof; or (c) If such research is directed toward benefiting the public. The following are examples of scientific research which will be considered as directed toward benefiting the public, and, therefore, which will be regarded as carried on in the public interest: (1) scientific research carried on for the purpose of aiding in the scientific education of college or university students; (2) scientific research carried on for the purpose of obtaining scientific information, which is published in a treatise, thesis, trade publication, or in any other form that is available to the interested public; (3) scientific research carried on for the purpose of discovering a cure for a disease; or (4) scientific research carried on for the purpose of aiding a community or geographical area by attracting new industry to the community or area or by encouraging the development of, or retention of, an industry in the community or area. Treas.Reg. Section 1.501(c)(3)-1(e)(1) provide that an organization may meet the requirements of IRC Section 501(c)(3) although it operates a trade or business as a substantial part of its activities, if the operation of such trade or business is in furtherance of the organization's exempt purpose or purposes and if the organization is not organized or operated for the primary purpose of carrying on an unrelated trade or business, as defined in Section 513. Rev.Rul. 68-373,1968-2 C.B. 206, described an organization whose primary activity was clinically testing drugs for commercial pharmaceutical companies to comply with the Food and Drug Administration's requirements that drugs be tested for safety and efficacy before they can be marketed was not engaged in scientific research. The Ruling stated that clinical testing is an activity ordinarily carried on as an incident to a pharmaceutical company's commercial operations. The fact that the testing must be done by highly qualified professionals does not change its basic nature. The testing does not constitute scientific research within the meaning of Treas.Reg. Section 1.501(c)(3)-1(d)(5)(i). The organization failed to qualify for exemption from Federal income tax under IRC Section 501(c)(3). Rev.Rul. 69-526, 1969-2 C.B. 115, describes an organization formed by a group of physicians specializing in heart disease, to research the causes of heart defects and publish treatments, that qualified for exemption under IRC Section 501(c)(3). In this ruling, patients were referred to the organization by physicians and welfare agencies when it appeared that their condition merited special study and evaluation. Each patient underwent a medical examination to determine whether their condition fell within the scope of the organization's research goals. If the patient's case met the criteria, the patient was accepted without regard to their ability to pay. The data collected from the patient studies is used by the organization in the development of new methods and procedures for preventing and treating heart defects. The results of the research, as well as any medical procedures derived, were made public through publication. The organization's research could only be performed by individuals with advanced scientific and/or technical expertise -- i.e., cardiologists. The results of the organization's research were publicly disseminated and add to the knowledge of internal medicine, specifically the causes and treatments for heart disease. Based upon the above, the Service held that the organization's research activities were scientific under Section 501(c)(3). Rev.Rul. 71-506, 1971-2 C.B. 233, describes an engineering society formed to engage in scientific research in the areas of heating, ventilating, and air conditioning ("HVAC") for the public that qualified as a scientific research organization under IRC Section 501(c)(3). The Service found that the organization was comprised of HVAC engineers, architects, educators and others who have a professional interest in HVAC -- with full membership in the organization limited to persons with 8 years of experience in the science related to HVAC. The organization's research was conducted by a full-time paid staff in the organization's own laboratory. Typical subjects of investigation for the organization included the effects of solar radiation through various materials, the phenomena of heat flow and transfer, development of data on air friction, the problems of panel heating, and the physiological effects of air conditioning upon the human body. The organization's research was devoted exclusively to the development of data on basic physical phenomena, which data can be used by anyone. The organization published a regular journal and maintained a library where its data, and specifically scores of model codes of minimal standards for HVAC, are stored for public review. The Service concluded that this organization engaged in scientific research. Rev.Rul. 71-529, 1971-2 C.B. 234, determined that an organization that provided assistance in the management of participating colleges' and universities' endowment or investment funds for a charge substantially below cost qualified for recognition under IRC Section 501(c)(3). The organization restricted its membership to Section 501(c)(3) organizations, and its board of directors was composed of representatives from member organizations. The organization obtained grants from independent charitable organizations to cover operating expenses and only charged members a nominal fee representing less than 15% of the total costs of operation for its services. The ruling found that, by providing the services described above, the organization performed an essential function for charitable organizations. Furthermore, by performing this function at substantially below cost, the organization performed a charitable activity within the meaning of Section 501(c)(3). Rev.Rul. 72-369, 1972-2 C.B. 245, determined that an organization formed to provide managerial and consulting services at cost to unrelated exempt organizations did not qualify for recognition under IRC Section 501(c)(3). The organization provided managerial and consulting services for Section 501(c)(3) organizations at cost. The ruling found that providing managerial and consulting services on a regular basis for a fee was a trade or business ordinarily conducted for profit. Furthermore, the ruling explained that an organization does not qualify for recognition merely because its operations are not conducted for the purpose of producing a profit. Rather, providing services at cost lacked the donative element necessary to establish the activity as charitable. Accordingly, the ruling held that the organization did not qualify for recognition under Section 501(c)(3). In Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279, 66 S.Ct. 112, 90 L.Ed. 67, 1945 C.B. 375 (1945), the Supreme Court held that the presence of private benefit, if substantial in nature, will destroy an organization's tax-exempt status regardless of the organization's other charitable purposes or activities. In B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352 (1978), the Tax Court determined that an organization that sold consulting services to nonprofit and exempt organizations interested in rural-related policy and program development operated a trade or business ordinarily carried on for profit. The burden rested on petitioner to prove that it did not operate "a consulting business of the sort which is ordinarily carried on by commercial ventures organized for profit." The court stated that "competition with commercial firms is strong evidence of the predominance of nonexempt commercial purposes." Accordingly, the court determined that petitioner "completely failed to demonstrate that its own services, or the services provided by its consultants, [were] not in competition with commercial businesses such as personnel agencies, consulting referral services, real estate agents, housing rental services, banks, loan companies, trash disposal firms, or environmental consulting companies." Furthermore, petitioner did not conduct other substantial charitable activities. Other factors that counted against petitioner included that petitioner's financing did not resemble that of a typical IRC Section 501(c)(3) organization and that petitioner failed to limit its services to Section 501(c)(3) organizations. Therefore, the court determined that petitioner failed to qualify for recognition under Section 501(c)(3). In American Campaign Academy v. Commissioner, 92 T.C. 1053 (1989), the Tax Court determined that the American Campaign Academy, a training program for political campaign professionals, operated for the private benefit of the Republican party because its curriculum was tailored to Republican interests, its graduates worked for Republican candidates and incumbents, and it was financed by Republican sources. The Tax Court defined private benefit as "nonincidental benefits conferred on disinterested persons that serve private interests." Private benefits included "advantage; profit; privilege; gain; [or] interest." Application of law IRC Section 501(c)(3) and Treas.Reg. Section 1.501(c)(3)-1(a)(1) set forth two main tests for an organization to be recognized as exempt. An organization must be both organized and operated exclusively for purposes described in Section 501(c)(3). Based on the information you provided in your application and supporting documentation, we conclude that you fail both tests. Your Articles of Incorporation do not include a purpose clause that limits your purposes to one or more exempt purposes. The purposes for which you were created are broader than the purposes specified in IRC Section 501(c)(3), specifically to make ***** research accessible to everyone by providing affordable research tools. Therefore, you did not establish that you have valid a purpose provision. As a result, you have not satisfied the organizational test described in Treas.Reg. Sections 1.501(c)(3)-1(b)(1)(i) and (iv). You are also not described in IRC Section 501(c)(3) because you fail the operational test. Specifically, you are not operated exclusively for an exempt purpose as described in Treas.Reg. Section 1.501(c)(3)-1(c)(1). The presence of a single non-exempt purpose, if substantial in nature, will destroy exemption under Section 501(c)(3) regardless of the number or importance of any other exempt purposes. Better Business Bureau of Washington, D.C. v. United States, 326 U.S. 279, 66 S.Ct. 112, 90 L.Ed. 67, 1945 C.B. 375 (1945). The facts show you are not operated exclusively for scientific purposes, but also for the substantial nonexempt commercial purpose of providing research management software for the public at large. You claim to qualify for tax-exemption as a scientific research organization for your activities that are related to the design, development, and distribution of research management software. For an organization to qualify as an IRC Section 501 (c)(3) scientific research organization, the organization must (1) engage in scientific research; (2) the scientific research must not include activities that are incidental to commercial or industrial operations; and, (3) the scientific research must be undertaken in the public's interest. Treas.Reg. Section 1.501(c)(3)-1(d)(5). Under the first element, the organization seeking exempt status as a scientific research organization must be engaging in scientific research. Treas.Reg. Section 1.501(c)(3)-1(d)(5). For research to be "scientific," within the meaning of IRC Section 501(c)(3), it must be carried on in furtherance of a 'scientific' purpose. Treas.Reg. Section 1.501(c)(3)-1(d)(5)(i). Although the Regulations provide that research that is scientific can be practical or applied as well as fundamental or theoretical, the term "scientific" is not clearly identified in either the Code or the Treasury Regulations. However, several revenue rulings and cases have interpreted "science" and "scientific" in terms of scientific research for IRC Section 501(c)(3) purposes. For example, in Rev.Rul. 71-506, 1971-2 C.B. 233, the Service held that an engineering society qualified as a scientific research organization under IRC Section 501(c)(3). The organization was operated to engage in scientific research in the areas of heating, ventilation, and air conditioning ("HVAC") for the public benefit. In another example, the Service held that an organization fon-ned by a group of physicians specializing in heart disease to research the causes of heart defects and publish treatments, qualified under Section 501(c)(3). Rev.Rul. 69-526, 1969-2 C.B. 115. Based upon the above law, you do not meet the first and second elements for recognition as a scientific research organization under IRC Section 501(c)(3) because you do not engage in scientific research and your software development activities are of a type incident to commercial or industrial operations. Unlike the organizations described above, you are not utilizing objective scientific methods to formulate or verify facts or natural laws, or to search for a demonstrable truth. You do not propose a hypothesis pertaining to the verification of facts or natural laws. You do not utilize scientific methods to test this hypothesis and objectively record the results of your experimentation. Finally, you do not objectively evaluate your research results and publish the findings for the public to utilize. Instead, you design, develop, and distribute research management software. This activity can best be described as routine product development, which is a type incident to commercial operations. Under Treas.Reg. Section 1.501(c)(3)-1(d)(5)(ii), scientific research does not include activities carried on as an incident to commercial or industrial operations, such as the design or improvement of goods or services. For example, in Rev.Rul. 68-373, 1968-2 C.B. 206, the Service held that an organization that engaged in clinical testing of pharmaceuticals by highly qualified personnel was not a scientific research organization under IRC Section 501(c)(3) but rather was engaging in ordinary testing necessary to comply with standards to bring the pharmaceuticals to market. Here, you are engaging in software development similar to what a commercial software company engages in to develop new products to be competitive in the market. In addition, the software you develop can be used by others for any purpose, including testing for commercial products and clinical testing by pharmaceutical labs. As such, a substantial part of your activities are incidental to commercial operations and are not exempt under IRC Section 501(c)(3). Finally, you do not meet the third element for a scientific research organization, which requires that scientific research to be directed toward benefiting the public. Treas.Reg. Section 1.501(c)(3)-1(d)(5)(iii). Your research does not exclusively benefit the public. First, users of your software own the results of their research and are not required to publish the results of their research. See Treas.Reg. Section 1.501(c)(3)-1(d)(5)(iii)(a). Rather, you make your software available to the public for their personal consumption, similar to the release of a commercial product, not the publication of scientific research. Second, your research is not performed for the United States. See Treas.Reg. Section 1.501(c)(3)-1(d)(5)(iii)(b). Third, your research is not exclusively carried on for the purpose of aiding in the scientific education of college or university students; obtaining scientific information, which is published in a treatise, thesis, trade publication, or in any other form that is available to the interest public; discovering a cure for a disease; or aiding a community or geological by attracting new industry to the community or area or by encouraging the development of, or retention of, an industry in the community or area. See Treas.Reg. Section 1.501(c)(3)-1(d)(5)(iii)(c). Production of Q benefits users, including commercial labs and pharmaceutical companies. Therefore, you do not qualify under IRC Section 501(c)(3) as a scientific research organization. An organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than private interest. Treas.Reg. Section 1.501(c)(3)-1(d)(1)(ii). Private benefit has been defined as "nonincidental benefits conferred on disinterested persons that service private interests." American Campaign Academy v. Commissioner, 92 T.C. 1053 (1989). "Prohibited private benefit may include an 'advantage; profit; privilege; gain; [or] interest.'" Id. It is the organization's burden to establish that it is not organized or operated for the benefit of private interests such as designated individuals, the creator or his family, shareholders of the organization, or persons controlled, directly or indirectly, by such private interests. Treas.Reg. Section 1.501(c)(3)-1(d)(1)(ii). You benefit the private interests of users by providing research management software that assists researchers with their own projects, whether the projects be educational, recreational, or commercial. Thus, you are operated for private rather than public interests in violation of IRC Section 501(c)(3). Your primary activity is providing research management software, which is a trade or business ordinarily carried on for profit. See B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352 (1978). An organization may be recognized as tax-exempt even though it operates a trade or business as a substantial part of its activities if certain conditions are met. Treas.Reg. Section 1.501(c)(3)-1(e). For example, management and consulting services are trades or businesses ordinarily conducted for profit. Rev.Rul. 72-369; Rev.Rul. 71-529; B.S.W Group, 70 T.C. 352. Nonetheless, Rev.Rul. 71-529 held that an organization that provided assistance in the management of participating colleges and universities' endowment or investment funds for a charge substantially below cost qualified for recognition under IRC Section 501(c)(3). However, unlike this organization, you intend to provide your services to any interested person or organization, not just Section 501(c)(3) organizations. Furthermore, you fail to establish that you provide your services at substantially below cost. Your position You submitted amendments to your original application, in which you state you have been re-prioritizing your efforts to help provide schools with a STEM program that can be launched whether the students are experiencing in-person, hybrid, or remote learning. Your D STEM education programs for schools will promote inquiry-based learning and allow students to practice a hands-on approach to learning science. Students will cover the entire research process, from selecting a topic, hypothesis and protocol design, to data collection, data analysis, and presenting their project. As part of your belief in accessibility, your program is free to access for all students and schools. You will also offer add-on services for schools that require a more tailored service, such as events, seminars, implementation, etc. These add-on services will have a cost since you need to over the cost of staff. You now state that the first activity of maintaining and improving the D software will take r percent of your time and the preparation of STEM education programs will take around s percent of the total time. The remaining time will be used for administrative work, fundraising, etc. You now state that your activities will be funded from three main sources. First is from public donations and government grants. Second will be from revenue generated from fees for using premium add-on features in the D software. Third will be fees for add-on services to schools. You amended your statement of revenue and expenses to reflect both an increase in donations and salaries and wage expense. Our response to your position You failed to provide any additional information from which it can be concluded that your activities exclusively further or advance a purpose described in IRC Section 501(c)(3). Although you have revised the anticipated amount of time you will devote to the design, development, and distribution of D software, this activity serves a substantial non-exempt purpose Therefore, denial of your request for tax-exempt status is reasonable. Conclusion Based on the facts and circumstances presented, you do not qualify for exemption from federal income tax as an organization described in IRC Section 501(c)(3). You are not organized or operated exclusively for exempt purposes as set forth in Section 501(c)(3). By providing research management software to anyone for any purpose, you are operating for a substantial non-exempt purpose. Your operations are not exclusively charitable and resemble those of a trade or business. If you agree If you agree with our proposed adverse determination, you don't need to do anything. If we don't hear from you within 30 days, we'll issue a final adverse determination letter. That letter will provide information on your income tax filing requirements. If you don't agree You have a right to protest if you don't agree with our proposed adverse determination. To do so, send us a protest within 30 days of the date of this letter. You must include: - Your name, address, employer identification number (EIN), and a daytime phone number - A statement of the facts, law, and arguments supporting your position - A statement indicating whether you are requesting an Appeals Office conference - The signature of an officer, director, trustee, or other official who is authorized to sign for the organization or your authorized representative - The following declaration: For an officer, director, trustee, or other official who is authorized to sign for the organization: Under penalties of perjury, I declare that I have examined this request, or this modification to the request, including accompanying documents, and to the best of my knowledge and belief, the request or the modification contains all relevant facts relating to the request, and such facts are true, correct, and complete. Your representative (attorney, certified public accountant, or other individual enrolled to practice before the IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if they haven't already done so. You can find more information about representation in Publication 947, Practice Before the IRS and Power of Attorney. We'll review your protest statement and decide if you gave us a basis to reconsider our determination. If so, we'll continue to process your case considering the information you provided. If you haven't given us a basis for reconsideration, we'll send your case to the Appeals Office and notify you. You can find more information in Publication 892, How to Appeal an IRS Decision on Tax-Exempt Status. If you don't file a protest within 30 days, you can't sock a declaratory judgment in court later because the law requires that you use the IRC administrative process first (IRC Section 7428(b)(2). Where to send your protest Send your protest, Form 2848, if applicable, and any supporting documents to the applicable address: U.S. mail: Internal Revenue Service EO Determinations Quality Assurance Mail Stop 6403 P.O. Box 2508 Cincinnati, OH 45201 Street address for delivery service: Internal Revenue Service EO Determinations Quality Assurance 550 Main Street, Mail Stop 6403 Cincinnati, OH 45202 You can also fax your protest and supporting documents to the fax number listed at the top of this letter. If you fax your statement, please contact the person listed at the top of this letter to confirm that they received it. You can get the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person listed at the top of this letter. Contacting the Taxpayer Advocate Service The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or if you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778. Sincerely, Stephen A. Martin Director, Exempt Organizations Rulings and Agreements
Private Letter Ruling Number: 202351013 Internal Revenue Service September 25, 2023 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities PO Box 2508 Cincinnati, OH 45201 Release Number: 202351013 Release Date: 12/22/2023 UIL Code: 501.03-00. 501.03-33 Date: 09/25/2023 Employer ID number: Tax years: Person to contact: Dear ****: This letter is our final determination that you don't qualify for exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3). Recently, we sent you a proposed adverse determination in response to your application. The proposed adverse determination explained the facts, law, and basis for our conclusion, and it gave you 30 days to file a protest. Because we didn't receive a protest within the required 30 days, the proposed determination is now final. Because you don't qualify as a tax-exempt organization under IRC Section 501(c)(3), donors generally can't deduct contributions to you under IRC Section 170. We may notify the appropriate state officials of our determination, as required by IRC Section 6104(c), by sending them a copy of this final letter along with the proposed determination letter. You must file the federal income tax forms for the tax years shown above within 30 days from the date of this letter unless you request an extension of time to file. For further instructions, forms, and information, visit www.irs.gov. We'll make this final adverse determination letter and the proposed adverse determination letter available for public inspection after deleting certain identifying information, as required by IRC Section 6110. Read the enclosed Letter 437, Notice of Intention to Disclose - Rulings, and review the two attached letters that show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Letter 437 on how to notify us. If you agree with our deletions, you don't need to take any further action. If you have questions about this letter, you can call the contact person shown above. If you have questions about your federal income tax status and responsibilities, call our customer service number at 800-829-1040 (TTY 800-829-4933 for deaf or hard of hearing) or customer service for businesses at 800-829-4933. Sincerely, Stephen A. Martin Director, Exempt Organizations Rulings and Agreements Enclosures: Letter 437 Redacted Letter 4034 Redacted Letter 4038 Department of the Treasury Internal Revenue Service PO Box 2508 Cincinnati, OH 45201 Date: August 1, 2023 Employer ID number: Person to contact: Name: ID number: Telephone: Fax: UIL: 501.03-00 501.03-33 Legend: W = treatment X = date Y = state Dear **: We considered your application for recognition of exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a). We determined that you don't qualify for exemption under IRC Section 501(c)(3). This letter explains the reasons for our conclusion. Please keep it for your records. Issues Do you qualify for exemption under IRC Section 501(c)(3)? No, for the reasons stated below. Facts You submitted Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. You attest that you were incorporated in Y on X. You attest that you have the necessary organizing document, that your organizing document limits your purposes to one or more exempt purposes within the meaning of IRC Section 501(c)(3), that your organizing document does not expressly empower you to engage in activities, other than an insubstantial part, that are not in furtherance of one or more exempt purposes, and that your organizing document contains the dissolution provision required under Section 501(c)(3). You attest that you are organized and operated exclusively to further charitable purposes. You attest that you have not conducted and will not conduct prohibited activities under IRC Section 501(c)(3). Specifically, you attest you will: - Refrain from supporting or opposing candidates in political campaigns in any way - Ensure that your net earnings do not inure in whole or in part to the benefit of private shareholders or individuals - Not further non-exempt purposes (such as purposes that benefit private interests) more than insubstantially - Not be organized or operated for the primary purpose of conducting a trade or business that is not related to your exempt purpose(s) - Not devote more than an insubstantial part of your activities attempting to influence legislation or, if you made a Section 501(h) election, not normally make expenditures in excess of expenditure limitations outlined in Section 501(h) - Not provide commercial-type insurance as a substantial part of your activities You describe yourself on Form 1023-EZ as a W school clinic created to assist in the training and preparation of students, their guidance and clinical training, in the field of W and ** medicine. Detailed information was subsequently requested. You assist students attending a W school with school-related expenses not covered by the school or their tuition. You describe the W program as intensive and expensive and the school as for-profit. The school-related expenses include books, gowns, and **. Additionally, your goal is to pay, on behalf of the students, the class fees associated with other classes required for state certification not offered by the school. You will also financially sponsor one-day programs at the school with guest speakers. You operate out of the school, however, the school administration does not exercise any control over you, nor do you share officers with the school. You were formed and are governed by an employee of the school. Your activities will be conducted out of the school. You will be directly interacting with the students through the provision of materials and financial assistance. Students make you aware of their needs as it relates to their classes. You work to aid them in acquiring books, supplies, and funds to cover their other school related expenses. The assistance you provide is available to all enrolled students at the school without regard to financial need. You are seeking tax-exempt status because the for-profit school is unable to receive tax-deductible donations. The only benefit accruing to the for-profit school is that more students will be able to remain in school and complete their education. The more students that complete their education, the better it is for the school and the students. You anticipate receiving tax-deductible donations to support your activities. Your expenses include purchasing materials for students such as gowns, ****, books, and sanitation supplies. If revenues permit, you plan to provide grants to students to assist with their other school expenses. You also hope to put materials such as books and handouts in the school's library and create hyperlinks to allow students to conduct off-campus research. You want to reduce the students' school related expenses by supplying materials to them at no charge, arrange for guest speakers, and cover their other education-related expenses. Law IRC Section 501(c)(3) provides, in part, for the exemption from federal income tax of organizations organized and operated exclusively for charitable, religious, or educational purposes, no part of the net earnings of which inures to the benefit of any private shareholder or individual. Treasury Regulation Section 1.501(c)(3)-1(a)(1) provides that to qualify under IRC Section 501(c)(3), an organization must be both organized and operated exclusively for one or more exempt purposes. If an organization fails to meet either the organizational or operational test, it is not exempt. Treas.Reg. Section 1.501(c)(3)-1(c)(1) provides 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 IRC Section 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. Section 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or operate exclusively for one or more exempt purposes unless it serves a public rather than private interest. To meet this requirement, it is necessary for an organization to establish that it is not organized or operated for benefit of private interests such as designated individuals. Revenue Ruling 56-304, 1956-2 C.B. 306, describes an organization that qualified for exemption under IRC Section 501(c)(3). It made distributions to individuals based on financial need. The distributions were made on a true charitable basis in furtherance of the purpose for which the organization was formed. The organization maintained adequate records and case histories to show the name and address of each recipient of aid, the amount distributed to each recipient, the purpose for which the aid was given, the manner in which the recipient was selected, and the relationship, if any, between the recipients and the governing board, a grantor or corporation controlled by a grantor, or a substantial contributor. Revenue Ruling 67-367, 1967-2 C.B. 188, describes an organization that provides educational assistance to pre-selected, specifically named individuals; it did not qualify for exemption under IRC Section 501(c)(3) because it was serving private interests rather than public charitable interests. Revenue Ruling 68-489, 1968-2 CB 210, held that an organization will not jeopardize its exemption under IRC Section 501(c)(3) even though it distributes funds to nonexempt organizations, provided it retains control and discretion over use of the funds for Section 501(c)(3) purposes. The exempt organization ensured use of the funds for Section 501(c)(3) purposes by limiting distributions to specific projects that are in furtherance of its own exempt purposes. It retains control and discretion as to the use of the funds and maintains records establishing that the funds were used for Section 501(c)(3) purposes. In Church in Boston v. Commissioner, 71 T.C. 102 (1978), the court upheld the denial of exemption on an organization that made grants to individuals. The organization asserted that its grants were made in furtherance of a charitable purpose: to assist the poor. The organization was unable to furnish any documented criteria which would demonstrate the selection process of a deserving recipient, the reason for specific amounts given, or the purpose of the grant. The only documentation contained in the administrative record was a list of grants made during one of the three years in question which included the name of the recipient, the amount of the grant, and the "reason" for the grant. The court held that this information was insufficient in determining whether the grants were made in furtherance of an exempt purpose. Application of law You do not meet the requirements for recognition of tax exemption under IRC Section 501(c)(3) because you fail the operational test as described in Treas.Reg Section 1.501(c)(3)-1(a)(1). Your activities are not charitable within the meaning of Section 501(c)(3) because you are not aiding a charitable class of individuals; assistance is provided to all enrolled students regardless of need. You are providing support to designated individuals and to a lesser degree, a for-profit entity. For this reason, you are not operating exclusively for exempt purposes as described in Treas.Reg. Section 1.501(c)(3)-1(c)(1). You are unlike the organization described in Revenue Ruling 68-489 as you have provided no evidence that you retained control and discretion over the use of your funds awarded for attending the school. You have only indicated you work to aid in assisting students in obtaining needed items such as books and supplies. You were unable to produce documentation showing how you ensured funds were used for 501(c)(3) purposes. As seen in Revenue Ruling 56-304 an organization should maintain records and case histories to establish that expenditures are made on behalf of a charitable class of individuals. When operating to provide funds to pre-selected, specifically named individuals the organization in Revenue Ruling 67-367 failed to qualify for exemption under IRC Section 501(c)(3) because it was serving private rather than public charitable interests. By offering financial assistance to any student in attendance at the W school you are providing funds to pre-selected individuals as any student can receive funding. An organization applying for exemption under Section 501(c)(3) must establish it is not operated for the benefit of private interests. By providing funds to cover costs of a for-profit school you are serving the private interests of designated individuals (students) as well as the school in a more then incidental manner. Unless an organization exclusively serves a public interest it is not operated for one or more exempt purposes as defined in Treas.Reg. Section 1.501(c)(3)-1(d)(1)(ii). In Church in Boston the court upheld the denial of exemption on an organization that made grants to individuals when information was insufficient in determining whether the grants were made in an objective and nondiscriminatory manner and whether the distribution of such grants was made in furtherance of an exempt purpose. Like the organization in that ruling, your method of distributing grants shows no manner of objective selection and you've provided no documentation demonstrating your distributions have furthered an exempt purpose. You provided no criteria for why grants were awarded outside of being a student of the school, and no reasoning behind the amounts given such as documented financial need. The selection and distribution is based only on enrollment status versus a structured application and review process. There is a lack of documentation demonstrating the process and reasoning behind the distribution of funds and for this reason we cannot determine these were used for IRC Section 501(c)(3) purposes. Conclusion Based on the above facts and analysis, you do not satisfy the operational test under IRC Section 501(c)(3), therefore, you do not qualify for exemption under Section 501(c)(3). Your activities more than incidentally serve private rather than exclusively public interests under Section 501(c)(3). If you agree If you agree with our proposed adverse determination, you don't need to do anything. If we don't hear from you within 30 days, we'll issue a final adverse determination letter. That letter will provide information on your income tax filing requirements. If you don't agree You have a right to protest if you don't agree with our proposed adverse determination. To do so, send us a protest within 30 days of the date of this letter. You must include: - Your name, address, employer identification number (EIN), and a daytime phone number - A statement of the facts, law, and arguments supporting your position - A statement indicating whether you are requesting an Appeals Office conference - The signature of an officer, director, trustee, or other official who is authorized to sign for the organization or your authorized representative - The following declaration: For an officer, director, trustee, or other official who is authorized to sign for the organization: Under penalties of perjury, I declare that I have examined this request, or this modification to the request, including accompanying documents, and to the best of my knowledge and belief, the request or the modification contains all relevant facts relating to the request, and such facts are true, correct, and complete. Your representative (attorney, certified public accountant, or other individual enrolled to practice before the IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if they haven't already done so. You can find more information about representation in Publication 947, Practice Before the IRS and Power of Attorney. We'll review your protest statement and decide if you gave us a basis to reconsider our determination. If so, we'll continue to process your case considering the information you provided. If you haven't given us a basis for reconsideration, we'll send your case to the Appeals Office and notify you. You can find more information in Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. If you don't file a protest within 30 days, you can't seek a declaratory judgment in court later because the law requires that you use the IRC administrative process first (IRC Section 7428(b)(2)). Where to send your protest Send your protest, Form 2848, if applicable, and any supporting documents to the applicable address: U.S. mail: Internal Revenue Service EO Determinations Quality Assurance Mail Stop 6403 PO Box 2508 Cincinnati, OH 45201 Street address for delivery service: Internal Revenue Service EO Determinations Quality Assurance 550 Main Street, Mail Stop 6403 Cincinnati, OH 45202 You can also fax your protest and supporting documents to the fax number listed at the top of this letter. If you fax your statement, please contact the person listed at the top of this letter to confirm that they received it. You can get the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person listed at the top of this letter. Contacting the Taxpayer Advocate Service The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or if you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778. Sincerely, Stephen A. Martin Director, Exempt Organizations Rulings and Agreements
Chief Counsel Advice Number: 202023006 Internal Revenue Service March 6, 2020 Office of Chief Counsel Internal Revenue Service memorandum CC:PA:01 POSTF-122858-18 Number: 202023006 Release Date: 6/5/2020 UILC: 6511.03-00, 6511.03-02, 6511.00-00 date: March 06, 2020 to: Ruth M. Spadaro Acting Area Counsel - Philadelphia (Large Business & International) from: Kathryn A. Zuba Associate Chief Counsel (Procedure & Administration) subject: Taxpayer Refund Period of Limitations for Overpayment Attributable to NOL This Chief Counsel Advice responds to your request for assistance asking whether Taxpayer's claim for refund was timely where Taxpayer carried back a Year 11 net operating loss (NOL), reducing income in the carryback year, which generated a minimum tax credit in the carryback year that Taxpayer carried forward to create an overpayment in a third year. You asked whether the limitations period for claiming a refund was open in that third year, and in particular whether the special period of limitations for refunds of overpayments attributable to NOL carrybacks applies to Taxpayer's overpayment. For the reasons explained below, we conclude that the period for claiming a refund was open and Taxpayer's claim for refund was timely filed. ISSUE Whether a claim for refund is timely where the overpayment at issue arises from an NOL carryback that triggers payment of alternative minimum tax, which in turn generates a minimum tax credit, which is carried forward to create the overpayment. Specifically, is such a claim for refund "attributable to" the NOL for purposes of the special period of limitations under section 6511(d)(2)? CONCLUSION Yes, the overpayment is "attributable to" the NOL for purposes of section 6511(d)(2), and the claim for refund is timely. Limited caselaw supports an interpretation of the phrase "attributable to" an NOL carryback to include any overpayment that results from a chain of causation beginning with an NOL carryback. The legislative history of section 6511(d)(2) and its predecessor statute also supports this interpretation. The legislative history also shows that section 6501(h)--the assessment period of limitations counterpart to section 6511(d)(2)--should be read consistently with section 6511(d)(2), and caselaw under section 6501(h) supports tracing deficiencies through a chain back to an originating NOL. Therefore, the overpayment is attributable to the NOL carryback if it can be traced through a chain of causation to the NOL carryback. FACTS ****** In Year 10, Taxpayer entered into settlement agreements resolving present and future asbestos personal-injury claims. The agreement was approved on Date 1, Year 10. As a result of this agreement, Taxpayer paid a total of Amount 1, Amount 2 of which was paid in Year 11. Taxpayer's Amount 2 payment generated an NOL in Year 11 of which approximately Amount 3 qualified as a product-liability specified liability loss under former section 172(b)(1)(C) and (f)(1)(A) (2015) that could be carried back to each of the ten years before the loss year. 1 On Date 1, Year 12, Taxpayer filed an amended return carrying the Year 11 NOL back to Year 1. The NOL carryback triggered an Amount 4 alternative minimum tax (AMT) liability for Year 1, which Taxpayer paid (before the NOL carryback, Taxpayer owed no AMT for its Year 1). Paying the AMT for Year 1 generated a minimum tax credit (MTC) that Taxpayer carried forward to Year 3 pursuant to former section 53 (it could not be used in Year 2), 2 resulting in an overpayment and claim for refund in Year 3. On Date 1, Year 12, Taxpayer filed a claim for refund of the Year 3 overpayment under section 6511(d)(2) as "attributable to" the NOL carryback from Year 11. When the refund claim was filed, the general period of limitations under section 6511(a) for Year 3 had expired. ***** 1 Former section 172(b)(1)(C) and 172(f)(1)(A) permitted extended carryback periods for a broad class of "specified liability losses" arising by operation of federal or state law. These carryback provisions were repealed by section 13302(b)(2) and (c)(2) of the Tax Cuts and Jobs Act, Pub. L. No. 115-97, effective for tax years ending after December 31, 2017. 2 The corporate AMT (and, in turn, the ability to carry forward the corporate AMT under section 53) was repealed by section 12001(a) of the Tax Cuts and Jobs Act, Pub. L. No. 115-97, effective for tax years beginning after December 31, 2017. ***** LAW AND ANALYSIS 1. Overview Section 6511 sets forth the periods of limitations that apply to claims for credits and refunds. The general period of limitations requires a taxpayer to make a claim for credit or refund of overpaid tax within three years after filing a return or two years after paying the tax, whichever is later. I.R.C. § 6511(a). Sections 6511(d)(2)-(4) provide special periods for cases in which a credit or refund results from overpayments that are "attributable to" certain tax events. In particular, section 6511(d)(2) provides that if a "claim for credit or refund relates to an overpayment attributable to a net operating loss carryback or a capital loss carryback," then in lieu of the general three-year period for filing claims for credit or refund, which runs from the date of filing of the return for the year of the overpayment, the period generally "shall be that period which ends three years after" the due date of the return for the year in which the loss arose. When an NOL carryback reduces income in the carryback year, as it did here for Year 1, and that reduction in income, in turn, frees up or creates a credit that is carried to another year and generates an overpayment in that other year, here, Year 3, the issue of whether the overpayment in the other year is "attributable to" the net operating loss carryback under section 6511(d)(2) has been subject to inconsistent interpretations for many years. One interpretation is that an overpayment is only "attributable to" the tax attribute immediately causing the overpayment (here, the MTC carryforward for Year 1), and not to attributes further up a causal chain, an interpretation referred to in this memorandum as "immediate cause." A second interpretation is that an overpayment is "attributable to" any tax attribute to which the overpayment can be traced, referred to in this memorandum as "tracing." A third interpretation, the "originating cause" view, is that the overpayment is only attributable to the tax attribute that originally started the chain of causation (here, the NOL carryback from Year 11). Neither the Code nor the regulations define how the term "attributable to" in section 6511 should be interpreted. Accordingly, the primary interpretive sources are caselaw and legislative history. a. Caselaw considering "attributable to" under the refund provisions of section 6511 Only one case has squarely addressed the question of whether, under section 6511(d)(2), an overpayment is "attributable to" an NOL carryback that frees up a credit that is carried to another year and creates the overpayment. Marshalltown Savings and Loan Assn. v. United States, 92-1 USTC P50,100 (S. D. Iowa 1991). In Marshalltown, the taxpayer filed a refund claim for the 1980 tax year on January 12, 1987. The claim was based on a net operating loss for 1985 that was carried back to 1979 under former section 172. The NOL carryback freed up an investment tax credit (ITC) in 1979 that the taxpayer sought to carry forward to 1980 to generate the refund. When the refund claim was filed, the general limitations period for 1980 had expired but the section 6511(d)(2) period for 1980 remained open if the refund was, through the ITC, "attributable to" the NOL. Marshalltown held that the 1980 overpayment was "attributable to" the NOL carryback from 1985 under section 6511(d)(2) (in effect holding it was attributable to the originating cause), the opinion contains no analysis and is an order that was not officially reported and thus of little or no precedential value, (although it has been discussed in at least two other cases). Section 6511(d)(3), a provision of section 6511 that also includes the language "attributable to," was addressed in Trusted Media Brands, Inc. v. United States, 2017-2 USTC P50, 359 (S.D.N.Y. 2017), aff'd, 899 F.3d 175 (2d Cir. 2018). The district court construed the term "attributable to" as part of an alternative rationale to support the conclusion that the taxpayer's refund claim was time-barred. The taxpayer relied on section 901(a) and Treas.Reg. §1.901-1(d), which cross-references the extended ten-year limitations period in section 6511(d)(3), to amend its 2002 return on December 14, 2011 and change its treatment of creditable foreign taxes from a foreign tax credit (FTC) for 2002 to a foreign tax deduction. 3 Taxpayer change increased the taxpayer's NOL for 2002, which the taxpayer carried back to 1997, freeing up FTCs for that year that the taxpayer carried back to 1995 to generate the overpayment for which it claimed a refund. ***** 3 Taxpayers may generally elect to claim a credit under section 901 for foreign taxes paid or to deduct those taxes from income under section 164. The credit and deduction are mutually exclusive. I.R.C. § 275(a)(4); Treas.Reg. § 1.901-1(h)(2). ***** In its primary holding, the district court adopted the government's argument that the ten-year limitations period under section 6511(d)(3) did not apply to allow a refund to be claimed based on a deduction for foreign taxes. Rather, the court held that section 6511(d)(3) was limited to refund claims "attributable to" foreign tax credits. 4 Because the taxpayer was arguing that the 1995 overpayment was attributable to a foreign tax deduction in 2002 and not a foreign tax credit, the district court held that section 6511(d)(3) did not apply to extend the statute for ten years from 2002. Taxpayer holding does not interpret the phrase "attributable to" in sections 6511(d)(2) or (3). ***** 4 Because the extended period under section 6511(d)(2) for claiming a 1995 refund based on an NOL carryback from 2002 had expired by December 14, 2011 under any interpretation of "attributable to," the taxpayer did not rely on, and the court did not consider, application of that statute. ***** In the alternative, the government in Trusted Media argued that because the immediate cause of the 1995 overpayment was the foreign tax credit carryback, the refund claim was only "attributable to" the 1997 foreign tax credits and not the 2002 NOL (which was increased by changing foreign tax credits to deductions). Because the refund claim was not filed until 2011, the extended ten-year limitations period in section 6511(d)(3), measured from the due date of the 1997 return, had run. The district court agreed with this alternative immediate-cause argument, but the Second Circuit affirmed on the basis of the primary holding without addressing it. In Electrolux Holdings, Inc. v. United States, 491 F.2d 1327 (Fed. Cir. 2007) the Federal Circuit appeared to reject the interpretation of section 6511(d)(2) that allows overpayments to be traced through a chain of causation to a NOL carryback, but as the court pointed out, the overpayment at issue in Electrolux did not actually arise from a chain of causation. In Electrolux, the taxpayer had long-term capital losses in 1994 that it sought to carry back to 1993 (it had no additional capital gains in 1991 and 1992) under section 1212(a)(1)(A) for a refund and then to carry forward the long-term capital losses from 1994 not used up in 1993 to the 1995 through 1998 tax years to generate overpayments and refunds in those years. The government agreed that the limitations period for 1993 remained open because the refund for that year was "attributable to" the 1994 loss carryback under section 6511(d)(2). The government argued, however, that the 1995 refund was not attributable to the loss carryback. 5 Recognizing that First Chicago Corp. v. Commissioner, 742 F.2d 1102 (7th Cir. 1984), rev'g 80 T.C. 648 (1983) 6 and Marshalltown supported the view that overpayments originating from an NOL carryback can be traced to the carryback under section 6511(d)(2), the Federal Circuit distinguished First Chicago and Marshalltown from Electrolux as cases involving a true chain of causation. In a true chain-of-causation scenario, an NOL carryback releases another tax attribute (such as a foreign tax credit, minimum tax credit or general business credit) in the carryback year that is carried to another year to create an overpayment. In Electrolux, the court ruled that the long-term capital losses arrived at 1995 by means of a single tax mechanism--a carryforward from 1994--and that it was the loss in 1994 and not the carryback to 1993 that led to the loss being carried forward to 1995 to generate the overpayment. The present case, in contrast, involves an NOL and a minimum tax credit carryforward, and is therefore analogous to First Chicago and Marshalltown from which the Electrolux court distinguished its case. ***** 5 The taxpayer had signed an agreement under section 6511(c) to extend the deficiency and refund limitations period for 1994, but had not signed any agreement for 1995, so the limitations period for 1995 under section 6511(a) had lapsed at the time of the taxpayer's refund claim. For 1996-1998, the general refund limitations period in section 6511(a) remained open, so those tax years were not at issue. 6 Discussed infra. ***** b. Caselaw considering "attributable to" under the parallel deficiency provisions of section 6501 The Seventh Circuit has held that "attributable to" in section 6501(h) should be interpreted broadly to encompass a tax attribute to which a deficiency can be traced. First Chicago, 742 F.2d 1102. In First Chicago, the taxpayer received a tentative refund for 1971 as a result of carrybacks (investment tax credits (ITC) and capital losses) from 1974. The IRS later determined that the taxpayer had a deficiency in 1972 because the reduction in income tax liability in 1971 from the carrybacks reduced a minimum tax credit carryover from 1971 to 1972, resulting in an increase in the taxpayer's minimum tax liability for 1972. In a split opinion, the Tax Court had rejected the government's argument that the assessment was timely because the deficiency for 1972 was attributable to the carrybacks. The majority opinion reasoned that the assessment period of limitations under section 6501(h) (and section 6501(j), relating to ITC carrybacks) would only apply to underpayments where the carrybacks were the immediate cause of the deficiency. The Tax Court's dissenting opinion, which the Seventh Circuit adopted, reasoned that because the deficiency for 1972 could be traced through the 1971 AMT carryforward to the 1974 carrybacks (the originating cause), the deficiency was "attributable to" the carrybacks even though the carrybacks were not the immediate cause. The dissent cited language in the 1945 legislative history to section 6501 regarding the scope of "attributable to" with respect to a taxpayer's ability to claim refunds, consistent with that history's statements that the refund limitations period and deficiency assessment provisions of sections 6511 and 6501 were to be read consistently. First Chicago establishes two points. First, it interprets section 6501(h)--which is parallel to section 6511(d)(2) and uses the phrase "attributable to" language--broadly, allowing deficiencies to be traced to a tax attribute beyond the immediate cause of the deficiency. Second, the opinion recognizes that the legislative history of the 1945 Act that supports reading sections 6511(d)(2) and 6501(h) consistently. Therefore, First Chicago's interpretation of the term "attributable to" under section 6511(h) supports a finding that the same term in section 6511(d)(2) should be interpreted to permit an overpayment that can be traced to a tax attribute other than the immediate cause of the overpayment. In Herman Bennett Co. v. Commissioner, 65 T.C. 506 (1975), the Tax Court addressed cascading tax attributes in the context of section 6501(j), which provides a special assessment limitations period for "any portion of a credit carryback from a taxable year attributable to," among other items, an NOL carryback from a subsequent taxable year. The taxpayer in Herman Bennett incurred an NOL in 1969, which it carried back to 1966. The NOL carryback released an ITC for 1966, which the taxpayer carried back to 1963 to generate a refund in that year, which was, after it was paid, determined to be erroneous because the maximum ITC had already been allowed for 1963. The court held that the limitations period for assessing the erroneous refund remained open because the released ITC was "attributable to" the 1969 NOL. 7 Rejecting the taxpayer's effort to isolate the refund to its "source" or immediate cause ( i.e., the ITC carryback), the court noted that "the issue is whether the investment credit carryback may be traced directly to the net operating loss carryback." Id. at 510. ***** 7 The government can recover an erroneous refund by bringing suit against the taxpayer within the time period set forth in section 6532(b) or, if the assessment limitations period under section 6501 remains open, by making an assessment under section 6201. ***** 2. Legislative History a. Legislative History of Section 6511(d)(2) Consistent with caselaw supporting the view that an overpayment can be attributable to a tax attribute other than the immediate cause, the legislative history of section 6511(d)(2) shows Congress's intent that the phrase "attributable to" be interpreted to include an overpayment that arises from a chain of causation originating from an NOL carryback. The predecessor to section 6511(d)(2) was enacted as part of the Tax Adjustment Act of 1945, P.L. 79-172 (the Act). Section 5(b) of the Act added section 322(b)(6) to the 1939 Code to provide that if a claim for credit or refund relates to an overpayment attributable to an NOL carryback or an unused excess profits credit carryback, then in lieu of the general limitations period, the period is three years from the due date of the return for the year of the NOL or unused excess profits credit that results in the carryback. Section 5(e) of the Act added a corresponding provision relating to deficiency assessments. Taxpayer latter provision, which is the predecessor to current section 6501(h), provided that a deficiency attributable to an NOL carryback or an unused excess profits credit carryback may be assessed at any time before the expiration of the period in which a deficiency may be assessed for the year of the claimed NOL or unused excess profits credit resulting in such carryback. See 1945 C.B. 537-538. The House Committee report for the Act included the following discussion of these amendments: For purposes of section 322(b)(6), as well as for purposes of all other amendments made by the bill, an overpayment of excess profits tax resulting from an unused excess profits credit carry-back which itself is produced, or which is increased in amount, by a net operating loss carry-back, is to be considered as attributable to the net operating loss carry-back to the extent it is produced or increased. In such case, therefore, the period within which claim for credit or refund of excess profits tax may be filed, or credit or refund allowed or made, will be coextensive with the period within which claim for credit or refund may be filed, or credit or refund allowed or made, with respect to the year of the net operating loss. H. Rep. 79-849, 79th Cong. 1st Sess. 1945 C.B. 585-587 (emphasis added). The House Committee report shows that Congress intended the words "attributable to" to encompass not only claims relating directly to the carryback year but also claims relating to other years to which a freed-up credit from the carryback year was carried. Taxpayer intent supports an interpretation of section 6511(d)(2), as the successor section to section 322(b)(6), that considers an overpayment arising from a chain of causation begun by an NOL carryback to be attributable to the NOL carryback. Because the phrase "attributable to" has remained unchanged from its enactment as section 322(b)(6), the legislative history of the Act supports this interpretation of section 6511(d)(2). 8 ***** 8 See Commissioner v. Bilder, 369 U.S. 499, 505 (1962) ("So too the conclusion in this case, which turns on the construction of the identical words re-enacted as part of s 213, must be based on an examination of the legislative history of this provision of the 1954 Code."); see also Hart v. United States, 585 F.2d 1025, 1029 (Ct.Cl. 1978). ***** b. Legislative History of Section 6501(h) In addition to the express explanation of the scope of the phrase "attributable to" in the legislative history of section 6511(d)(2), the legislative history of section 6501(h) also establishes that Congress intended there to be symmetry between the limitations period for the assessment of deficiencies attributable to NOL carrybacks and the limitations period for credit or refund of overpayments attributable to NOL carrybacks. Subsection (e) of section 5 of the bill adds a new subsection (d) to section 276 of the Code, relating to the period within which assessments may be made. Such new section 276(d) provides that a deficiency attributable to a net operating loss carry-back or an unused excess profits carry-back, including those amounts which may be assessed pursuant to the provisions of section 3780(b) and (c), may be assessed at any time prior to the expiration of the period within which a deficiency may be assessed with respect to the taxable year of the claimed net operating loss or unused excess profits credit resulting in such carry-back. Thus, as in the case of credits or refunds, the period for making assessments is made coextensive with the period within which assessments may be made with respect to the taxable year of the claimed loss or unused excess profits credit. H. Rep. 79-849, 79th Cong. 1st Sess. 1945 C.B. 588 (emphasis added). Section 6501(h) is the successor to former section 276(d) and is the companion provision to section 6511(d)(2), the successor to former section 322(b)(6). 9 Section 6501(h) provides the special limitations period for an assessment of a deficiency attributable to the application to the taxpayer of a net operating loss carryback or a capital loss carryback, which parallels section 6511(d)(2)'s special period for a refund of an overpayment attributable to the same. Because Congress intended treatment of the limitations periods for assessments and refund claims attributable to NOLs to be the same, the term "attributable to" in section 6511(d)(2) is best interpreted in the same way that that term in section 6501(h) is interpreted. ***** 9 Section 6501(h) was inadvertently omitted when the 1954 Code was enacted, but was added retroactively by the Technical Amendments Act of 1958, P.L. 85-866. ***** c. "Attributable to" in Section 6511(d)(3) and (4) Two other subparagraphs of section 6511(d) include the phrase "attributable to"-- sections 6511(d)(3) and (d)(4). Nothing in either section should be construed to contradict interpreting "attributable to" across the statutory scheme of assessment and refund periods of limitation to permit tracing of an overpayment through a chain of causation to an originating tax attribute. Section 6511(d)(3) provides, in part, that when "the claim for credit or refund relates to an overpayment attributable to any taxes paid or accrued to any foreign country," the limitations period is ten years from the due date of the return for the year in which the foreign taxes were paid or accrued. Although both provisions include the phrase "attributable to," unlike section 6511(d)(2), the legislative history of section 6511(d)(3) does not indicate how the enacting Congress intended for section 6511(d)(3) to operate when an FTC causes a chain of causation. Taxpayer lack of guidance in the Congressional record neither supports nor detracts from the view that an overpayment arising from a chain of causation originating with an FTC carryback should be attributable to the FTC carryback under section 6511(d)(3). Section 6511(d)(4) was enacted in 1962, 17 years after section 6511(d)(2), and provided an extended limitations period for claims related to overpayments attributable to investment tax credit carrybacks (now labeled business credit carrybacks). Section 6511(d)(4) now provides, in a parenthetical added in 1967, that, when an NOL or capital loss (CL) carryback gives rise to a credit that is carried back to an earlier year, the refund period of limitations is three years from the loss year: If the claim for credit or refund relates to an overpayment attributable to a credit carryback, in lieu of the 3-year period of limitation prescribed in subsection (a), the period shall be that period which ends 3 years after the time prescribed by law for filing the return (including extensions thereof) for the taxable year of the unused credit which results in such carryback (or, with respect to any portion of a credit carryback from a taxable year attributable to a net operating loss carryback, capital loss carryback, or other credit carryback from a subsequent taxable year, the period shall be that period which ends 3 years after the time prescribed by law for filing the return, including extensions thereof, for such subsequent taxable year) or the period prescribed in subsection (c) in respect of such taxable year, whichever expires later. I.R.C. § 6511(d)(4) (emphasis added). The parenthetical in section 6511(d)(4) could be construed to preclude a similar interpretation of "attributable to" in section 6511(d)(2), as the latter provision lacks comparable parenthetical language addressing credits released by NOLs or capital loss carrybacks. Arguably, if a broad reading of "attributable to" were intended, there would be no need for Congress to have included the emphasized parenthetical in section 6511(d)(4) because section 6511(d)(2) would be broad enough to encompass the cases described in that parenthetical. The parenthetical is better understood, however, as simply illustrating that under the amendment enacted in 1967, taxpayers could now carry back excess credits freed up by NOL carrybacks and not as suggesting that a contrary meaning should be read into section 6511(d)(2) and (d)(3). When section 6511(d)(4) was first enacted, in the Revenue Act of 1962, P.L. No. 87-834, Congress simultaneously amended section 46(b)(3) of the Code to permit a three-year carryback of any excess credit. But the Act specifically provided that such a carryback would not apply in a cascading scenario where the excess credit arose by reason of an NOL carryback. I.R.C. § 46(b)(3) (1964). Section 2(a) of The Bank Holding Company Act of 1967, P.L. 90-225, then revised the substantive carryback rules to permit a credit freed by an NOL carryback to itself be carried back and simultaneously revised section 6511(d)(4) by inserting the above-referenced parenthetical. The original language in former section 46 makes clear that Congress was aware of the prospect of cascading refund claims, albeit in a context when the potential for conflicting limitations periods was limited. In that context, the better interpretation of the parenthetical added to section 6511(d)(4) in 1967 is as reflecting the expansion of section 46 to include credit carrybacks caused by NOL carrybacks, but not as otherwise modifying, limiting, or commenting on how "attributable to" should be interpreted in other parts of section 6511. Furthermore, to read the parenthetical in section 6511(d)(4) as limiting the scope of the term "attributable to" in section 6511(d)(2) would create a conflict within section 6501 on how to interpret "attributable to" there. The 1967 Act that added the parenthetical to section 6511(d)(4) also added comparable language to the assessment limitations statute by amending section 6501(j), governing deficiencies attributable to credit carrybacks (initially, ITC carrybacks and, later, general business credit carrybacks). 10 The added language clarifies that when a deficiency is attributable to a general business credit carryback that is, in turn, attributable to an NOL carryback from a subsequent taxable year, the assessment period for the year of the NOL applies to the deficiency attributable to the credit carryback. I.R.C. § 6501(j). Any argument that the section 6511(d)(4) parenthetical limits the scope of the term "attributable to" would contradict the Seventh Circuit's interpretation of the term in the context of section 6501(h), which interpretation the Seventh Circuit adopted despite comparable language in section 6501(j). First Chicago, 742 F.2d at 1102. ***** 10 "[O]r with respect to any portion of a credit carryback from a taxable year attributable to a net operating loss carryback, capital loss carryback, or other credit carryback from a subsequent taxable year, at any time before the expiration of the period within which a deficiency for such subsequent taxable year may be assessed." I.R.C § 6501(j)(1). ******* Understood in this context, neither section 6511(d)(3) nor the parenthetical in section 6511(d)(4) should be construed as inconsistent with an interpretation of "attributable to" that permits tracing the overpayment through a cascading chain to an originating tax attribute. 3. Revenue Rulings In Rev.Rul. 71-533, the IRS addressed a situation in which a taxpayer incurred an NOL in 1969, which the taxpayer carried back to 1966. The NOL carryback freed up FTCs originally claimed for 1966, which the taxpayer then carried back to 1964 to generate a refund. Without considering whether the overpayment could also be considered attributable to the NOL carryback, the ruling concluded that the refund claim was subject to the ten-year limitations period of section 6511(d)(3), which ran from the 1966 taxable year in which the creditable foreign taxes were originally claimed as a credit. The ruling referenced Rev.Rul. 68-150, which held that the period in section 6511(d)(3)(A) applies to "claims for credit or refund based on the correction of mathematical errors in the computation of taxes subject to the provisions of that section... or any other adjustments to the size of the foreign tax credit." Recently, Rev.Rul. 2020-8 suspended Rev.Rul. 71-533 and suspended Rev. Rul. 68-150 in part because these earlier revenue rulings may not reflect the correct interpretation of section 6511(d)(2) as discussed in this memorandum. Conclusion Although not uniform, caselaw generally supports an interpretation of the phrase "attributable to" to include the tax attribute that started a chain of causation resulting in an overpayment. In addition, the legislative history of section 6511(d)(2) and its predecessor statute shows that Congress intended the term "attributable to" in that section to encompass any overpayment that can be traced to the NOL carryback when an NOL carryback begins a chain of causation involving other tax attributes. Furthermore, First Chicago and the legislative history of section 6501(h) show that the term "attributable to" should be construed alike in both sections 6501 and 6511 for assessing deficiencies or allowing refunds arising from NOL and capital loss carrybacks. Because Taxpayer's Year 3 overpayment can be traced through a chain of causation arising from the Year 11 NOL carryback, the overpayment is "attributable to" the NOL for purposes of section 6511(d)(2), and Taxpayer gets the benefit of the special period of limitations under section 6511(d)(2). Therefore, Taxpayer's refund claim is timely. Please call Marshall French at (202) 317-6845 or Isaac Brooks Fishman at (202) 317-6844 if you have any further questions.
Revenue Ruling 2023-17 Internal Revenue Service 2023-37 I.R.B. 798 Section 6621.--Determination of Rate of Interest 26 CFR 301.6621-1: Interest rate. Rev. Rul. 2023-17 Section 6621 of the Internal Revenue Code establishes the interest rates on overpayments and underpayments of tax. Under section 6621(a)(1), the overpayment rate is the sum of the federal short-term rate plus 3 percentage points (2 percentage points in the case of a corporation), except the rate for the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the sum of the federal short-term rate plus 0.5 of a percentage point. Under section 6621(a)(2), the underpayment rate is the sum of the federal short-term rate plus 3 percentage points. Section 6621(c) provides that for purposes of interest payable under section 6601 on any large corporate underpayment, the underpayment rate under section 6621(a)(2) is determined by substituting "5 percentage points" for "3 percentage points." See section 6621(c) and section 301.6621-3 of the Regulations on Procedure and Administration for the definition of a large corporate underpayment and for the rules for determining the applicable date. Section 6621(c) and section 301.6621-3 are generally effective for periods after December 31, 1990. Section 6621(b)(1) provides that the Secretary will determine the federal short-term rate for the first month in each calendar quarter. Section 6621(b)(2)(A) provides that the federal short-term rate determined under section 6621(b)(1) for any month applies during the first calendar quarter beginning after that month. Section 6621(b)(3) provides that the federal short-term rate for any month is the federal short-term rate determined during that month by the Secretary in accordance with section 1274(d), rounded to the nearest full percent (or, if a multiple of 1/2 of 1 percent, the rate is increased to the next highest full percent). Notice 88-59, 1988-1 C.B. 546, announced that in determining the quarterly interest rates to be used for overpayments and underpayments of tax under section 6621, the Internal Revenue Service will use the federal short-term rate based on daily compounding because that rate is most consistent with section 6621 which, pursuant to section 6622, is subject to daily compounding. The federal short-term rate determined in accordance with section 1274(d) during July 2023 is the rate published in Revenue Ruling 2023-13, 2023-32 IRB 413, to take effect beginning August 1, 2023. The federal short-term rate, rounded to the nearest full percent, based on daily compounding determined during the month of July 2023 is 5 percent. Accordingly, an overpayment rate of 8 percent (7 percent in the case of a corporation) and an underpayment rate of 8 percent are established for the calendar quarter beginning October 1, 2023. The overpayment rate for the portion of a corporate overpayment exceeding $10,000 for the calendar quarter beginning October 1, 2023, is 5.5 percent. The underpayment rate for large corporate underpayments for the calendar quarter beginning October 1, 2023, is 10 percent. These rates apply to amounts bearing interest during that calendar quarter. Sections 6654(a)(1) and 6655(a)(1) provide that the underpayment rate established under section 6621 applies in determining the addition to tax under sections 6654 and 6655 for failure to pay estimated tax for any taxable year. Thus, the 8 percent rate also applies to estimated tax underpayments for the fourth calendar quarter beginning October 1, 2023. In addition, pursuant to section 6603(d)(4), the rate of interest on section 6603 deposits is 5 percent for the fourth calendar quarter in 2023. Interest factors for daily compound interest for annual rates of 5.5 percent, 7 percent, 8 percent and 10 percent are published in Tables 16, 19, 21 and 25 of Rev.Proc. 95-17, 1995-1 C.B. 570, 573, 575, and 579. Annual interest rates to be compounded daily pursuant to section 6622 that apply for prior periods are set forth in the tables accompanying this revenue ruling. DRAFTING INFORMATION The principal author of this revenue ruling is Casey R. Conrad of the Office of the Associate Chief Counsel (Procedure and Administration). For further information regarding this revenue ruling, contact Mr. Conrad at (202) 317-6844 (not a toll-free call).
Private Letter Ruling Number: 202249012 Internal Revenue Service September 8, 2022 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202249012 Release Date: 12/9/2022 Index Number: 9100.00-00, 9100.22-00, 951A.00-00, 951A.02-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:INTL:B02 PLR-109338-22 Date: September 08, 2022 Dear ****: This letter responds to a letter dated May 9, 2022, submitted on behalf of X by its authorized representatives, requesting an extension of time under Treas.Reg. §301.9100-3 of the Procedure and Administration Regulations for X to file a global intangible low-taxed income (GILTI) high-tax exclusion election (GILTI HTE Election) under Treas.Reg. §1.951A-2(c)(7)(viii) with respect to CFC, X's controlled foreign corporation (as defined in section 957(a)) (a CFC), for the CFC inclusion year (as defined in Treas.Reg. §1.951A-1(f)(1)) that ends with or within X's U.S. shareholder inclusion year (as defined in Treas.Reg. §1.951A-1(f)(7)), Tax Year 1. FACTS X, a domestic corporation, is the sole owner and controlling domestic shareholder (as defined in Treas.Reg. §1.964-1(c)(5)) of CFC. X's federal tax compliance was the responsibility of its Controller and President but X had engaged the tax consulting and tax return preparation services of an accounting firm to supplement its tax function. X timely filed (before the issuance of the final GILTI HTE Election regulations 1 ) a Form 1120 for Tax Year 1. **** 1 T.D. 9902, 85 FR 44620. Before the filing of X's original Form 1120 for Tax Year 1, X could not make the GILTI HTE Election because the GILTI HTE Regulations had not been finalized and the election was not available. As such, X had not discussed the effect of the election with its accounting firm. ****** During the preparation of X's Form 1120 for Tax Year 2, X's accounting firm informed X of the availability and benefit of making a GILTI HTE Election on an amended return for Tax Year 1. At this point (before the 24-month period described in Treas.Reg. §1.951A-2(c)(7)(viii)(A)(2)(ii) had expired), X directed its accounting firm to prepare the amended return. Once the accounting firm finalized the amended return and the GILTI HTE Election (on a date after the 24-month period described in Treas.Reg. §1.951A-2(c)(7)(viii)(A)(2)(ii) had expired), X reviewed, signed, and filed it. Neither X nor its accounting firm knew that X's amended return had to be filed within the 24-month period described in Treas.Reg. §1.951A-2(c)(7)(viii)(A)(2)(ii) for the GILTI HTE Election to be valid. X's accounting firm discovered the error after X had filed its amended return when the timeliness of the election arose with respect to another tax client. As of the filing of the request, X had not received any correspondence from the IRS relating to the amended return or the GILTI HTE Election for Tax Year 1. X represents that granting the relief requested will not result in X having a lower tax liability in the aggregate for all affected years than X would have had if the election had been timely made. X also represents that the effect of the election is an increase to the amount of an NOL carryforward into open tax years and the election could not produce any underpayment in any closed year. Further, X is the only U.S. shareholder (as defined in section 951(b)) of CFC in the CFC group (as defined in Treas.Reg. §1.951A-2(c)(7)(viii)(E)(2)); X is the only taxpayer affected by the GILTI HTE Election; and each of X's affected tax years remain open for assessment as of the date of this letter. LAW AND ANALYSIS Section 951A(a) provides that a U.S. shareholder of any CFC for any taxable year of the U.S. shareholder must include in gross income the shareholder's GILTI for that taxable year. Section 951A(b) provides that the term GILTI means, with respect to any U.S. shareholder for any taxable year of such U.S. shareholder, the excess (if any) of such shareholder's net CFC tested income for such taxable year, over such shareholder's net deemed tangible income return for such taxable year. Section 951A(c)(1) generally provides that the term "net CFC tested income" means, with respect to any U.S. shareholder for any taxable year of such U.S. shareholder, the excess (if any) of the aggregate of such shareholder's pro rata share of the tested income of each CFC with respect to which such shareholder is a U.S. shareholder for such taxable year of such U.S. shareholder, over the aggregate of such shareholder's pro rata share of the tested loss of each CFC with respect to which such shareholder is a U.S. shareholder for such taxable year of such U.S. shareholder. Section 951A(c)(2)(A) provides that the term "tested income" means, with respect to any CFC for any taxable year of such CFC, the excess (if any) of the gross income of such corporation determined without regard to certain items of income, including any gross income excluded from the foreign base company income (as defined in section 954) and the insurance income (as defined in section 953) of such corporation by reason of section 954(b)(4), over the deductions (including taxes) properly allocable to such gross income under rules similar to the rules of section 954(b)(5) (or to which such deductions would be allocable if there were such gross income). Section 1.951A-2(c)(7)(i) generally provides that for purposes of determining the tested income of a CFC, a tentative gross tested income item (determined under §1.951A-2(c)(7)(ii)(A)) qualifies for the exception described in section 954(b)(4) only if a GILTI HTE Election is effective with respect to the CFC for the CFC inclusion year (as defined in §1.951A-1(f)(1)) and the tentative tested income item with respect to the tentative gross tested income item was subject to an effective rate of foreign tax that is greater than 90 percent of the maximum rate of tax specified in section 11. Section 1.951A-2(c)(7)(viii) provides that the GILTI HTE Election is made by the controlling domestic shareholder with respect to a CFC for a CFC inclusion year by filing the statement required under §1.964-1(c)(3)(ii) with a timely filed original federal income tax return, or with an amended federal income tax return, for the U.S. shareholder inclusion year of each controlling domestic shareholder in which or with which such CFC inclusion year ends; providing any notices required under §1.964-1(c)(3)(iii); and providing any additional information required by applicable administrative pronouncements. Section 1.951A-2(c)(7)(viii)(A)(2)(i) generally provides that a controlling domestic shareholder may make the election with an amended federal income tax return, duly filed within 24 months of the unextended due date of the original federal income tax return for the U.S. shareholder inclusion year with or within which the CFC inclusion year ends. Section 1.951A-2(c)(7)(viii)(D) provides that a GILTI HTE Election is valid only if all of the requirements in Treas.Reg. §1.951A-2(c)(7)(viii)(A) are satisfied. Section 301.9100-1(c) provides that the Commissioner may grant a reasonable extension of time to make a regulatory election, or a statutory election (but no more than six months except in the case of a taxpayer who is abroad), under all subtitles of the Internal Revenue Code, except subtitles E, G, H, and I. Section 301.9100-1(b) defines the term "regulatory election" as an election whose due date is prescribed by a regulation published in the Federal Register or a revenue ruling, revenue procedure, notice, or announcement published in the Internal Revenue Bulletin. Section 301.9100-2 provides automatic extensions of time for making certain elections. Section 301.9100-3 provides rules for requesting extensions of time for regulatory elections that do not meet the requirements of Treas.Reg. §301.9100-2. It provides that these requests for relief are granted when the taxpayer provides the evidence (including affidavits) to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and the grant of relief will not prejudice the interests of the Government. A taxpayer is deemed to have acted reasonably and in good faith if, among other reasons, the taxpayer failed to make the election because, after exercising reasonable diligence (taking into account the taxpayer's experience and the complexity of the return or issue), the taxpayer was unaware of the necessity for the election. Treas.Reg. §301.9100-3(b)(iii). A taxpayer is also deemed to have acted reasonably and in good faith if the taxpayer reasonably relied on a qualified tax professional, including a tax professional employed by the taxpayer, and the tax professional failed to make, or advise the taxpayer to make, the election. Treas.Reg. §301.9100-3(b)(v). Section §301.9100-1(a) provides that the granting of an extension of time for making an election is not a determination that a taxpayer is otherwise eligible to make the election or that a taxpayer has complied with the other requirements for a valid election. CONCLUSION Based on the facts provided and representations made, we conclude that the requirements of Treas.Reg. §§301.9100-1 and 301.9100-3 have been satisfied. X is hereby granted an extension of time of one hundred twenty (120) days to make a GILTI HTE Election with respect to CFC for the CFC inclusion year that ends with or within X's U.S. shareholder inclusion year. Therefore, the GILTI HTE Election filed by X for CFC for Tax Year 1 is deemed timely. The ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for ruling, it is subject to verification on examination. Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. A copy of this letter must be attached to any income tax return to which it is relevant. Alternatively, taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter ruling. In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representative. Sincerely, /s/ Larry R. Pounders Larry R. Pounders Senior Counsel, Branch 2 (International) cc:
Private Letter Ruling Number: 202305017 Internal Revenue Service November 9, 2022 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities P.O. Box 2508 Cincinnati, OH 45201 Release Number: 202305017 Release Date: 2/3/2023 UIL Code: 501.03-00, 501.03-30 Date: 11/09/2022 Employer ID number: Form you must file: 1120 Tax years: All Person to contact: Dear ****: This letter is our final determination that you don't qualify for exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3). Recently, we sent you a proposed adverse determination in response to your application. The proposed adverse determination explained the facts, law, and basis for our conclusion, and it gave you 30 days to file a protest. Because we didn't receive a protest within the required 30 days, the proposed determination is now final. Because you don't qualify as a tax-exempt organization under IRC Section 501(c)(3), donors generally can't deduct contributions to you under IRC Section 170. We may notify the appropriate state officials of our determination, as required by IRC Section 6104(c), by sending them a copy of this final letter along with the proposed determination letter. You must file the federal income tax forms for the tax years shown above within 30 days from the date of this letter unless you request an extension of time to file. For further instructions, forms, and information, visit www.irs.gov. We'll make this final adverse determination letter and the proposed adverse determination letter available for public inspection after deleting certain identifying information, as required by IRC Section 6110. Read the enclosed Letter 437, Notice of Intention to Disclose - Rulings, and review the two attached letters that show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Letter 437 on how to notify us. If you agree with our deletions, you don't need to take any further action. If you have questions about this letter, you can call the contact person shown above. If you have questions about your federal income tax status and responsibilities, call our customer service number at 800-829-1040 (TTY 800-829-4933 for deaf or hard of hearing) or customer service for businesses at 800-829-4933. We sent a copy of this letter to your representative as indicated in your power of attorney. Sincerely, Stephan A. Martin Director, Exempt Organizations Rulings and Agreements Enclosures: Letter 437 Redacted Letter 4034 Redacted Letter 4038 cc: Department of the Treasury Internal Revenue Service PO Box 2508 Cincinnati, OH 45201 Date: August 18, 2022 Employer ID number: Person to contact: Name: ID number: Telephone: Fax: UIL: 501.03-00 501.03-30 Legend: D = Date E = State G = Date h dollars = Amount j = Number Dear **: We considered your application for recognition of exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a). We determined that you don't qualify for exemption under IRC Section 501(c)(3). This letter explains the reasons for our conclusion. Please keep it for your records. Issues Do you qualify for exemption under IRC Section 501(c)(3)? No, for the reasons stated below. Facts You submitted Form 1023-EZ, Streamline Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code You attest that you were incorporated on D in the state of E. You attest that you have the necessary organizing document, that your organizing document limits your purposes to one or more exempt purposes within the meaning of the IRC Section 501(c)(3), that your organizing document does not expressly empower you to engage in activities, other than an insubstantial part, that are not in furtherance of one or more exempt purposes, and that you organizing document contains the dissolution provision required under Section 501(c)(3). You attest that you are organized and operated exclusively to further charitable purposes. You attest that you have not conducted and will not conduct prohibited activities under IRC Section 501(c)(3). Specifically, you attest you will: - Refrain from supporting or opposing candidates in political campaigns in any way - Ensure that your net earnings do not inure in whole or in part to the benefit of private shareholders or individuals - Not further non-exempt purposes (such as purposes that benefit private interests) more than insubstantially - Not be organized or operated for the primary purpose of conducting a trade or business that is not related to your exempt purpose(s) - Not devote more than an insubstantial part of your activities attempting to influence legislation or, if you made a Section 501(h) election, not normally make expenditures in excess of expenditure limitations outlined in Section 501(h) - Not provide commercial-type insurance as a substantial part of your activities You described your mission or most significant activity as "Hunting Organization." During review of your Form 1023-EZ, detailed information was requested supplemental to the above attestations. This information shows you are a membership hunting club. Members are given the opportunity to hunt year-round for all legal game such as wild hogs, dear, turkey, squirrels, bear, and other wild game on land leased by you. The participants of these activities include members of your club, potential members, youths, and any member of the public interested in game and fish hunting. The activities are conducted on the land you lease. The types of activities conducted are based on the hunting season and the particular quarter as well as any needs for hunting and weapon training. The percentage of time spent on your activities is mainly on a quarterly basis and weekends. During the winter quarter no specific activities are conducted. Members and interested members visit the lodge and facilities to locate a potential hunting location. The spring quarter is used for cleanup, repairs and rifle and gun activities. This includes practicing shooting, conducting gun classes, and conducing classes on the rules and regulations for the upcoming hunting season. You also educate new members and kids on the rules and regulations of hunting and rifle safety. During the summer quarter you carry on the same activities as spring quarter and prepare for the hunting season in fall. The major season for your activities is the fall season. This is when members are allowed to hunt and utilize the hunting lodge and area. The only activity during this season is practicing shooting and conducting land scouting for good hunting areas. Your major source of income is membership fees. New membership is based on recommendation of existing members and voted on by the entire club membership. You charge club dues of g dollars per year for existing and new members. These dues are used to support operating expenses and collected by G of every year Your club includes over j acres of land, and no other activities are conducted on the property outside scheduled events. Law IRC Section 501(c)(3) provides for the recognition of exemption of organizations that are organized and operated exclusively for charitable, educational, or other enumerated purposes as specified in the statute. No part of the net earnings may inure to the benefit of any private shareholder or individual. Treasury Regulation Section 1.501(c)(3)-1(a)(1) provides that, in order to be exempt as an organization described in IRC Section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in such section. If an organization fails to meet either the organizational test or the operational test, it is not exempt Treas.Reg. Section 1.501(c)(3)-1(d)(1)(ii) states that an organization is not organized or operated exclusively for one or more exempt purpose unless it serves a public rather than a private interest. It must not be operated for the benefit of designated individuals or the persons who created it. Revenue Ruling 65-64, 1965-1 C.B. 241, upheld the exemption under IRC Section 501(c)(7), a nonprofit membership organization that provided hunting and fishing facilities for its members through the propagation and stocking fish and game on the club property. The organization's purposes were the maintenance of a club for the promotion of fellowship, recreation, hunting, fishing and similar sports among its members, their families and bona fide guests, and the conservation of fish and game. Revenue Ruling 66-273, 1966-2 C.B. 222, held that a nonprofit organization may qualify for exemption under IRC Section 501(c)(4) where it provides a community with facilities for rifle, pistol, and shotgun practice and instructions in the safe handling and proper care of weapons. The general public was permitted full use of the organization's facilities, which were also available free of charge to units of the armed services of the United States and for their use in conducting required training classes, to local law enforcement officers, and to junior rifle organizations. The ruling concluded that providing a community with supervised facilities for firearm shooting, giving instructions in the safe handling and proper care of guns, and teaching better marksmanship are considered activities that promote the common good and general welfare of the community under Section 501(c)(4). Revenue Ruling 69-175, 1969-1 C.B. 149, describes an organization created to provide bus transportation for school children to a tax-exempt private school. The organization was formed by the parents of pupils attending the school. The organization provided transportation to and from the school for those children whose parents belonged to the organization. Parents were required to pay an initial family fee and an additional annual charge for each child. The Service determined that "when a group of individuals associate to provide a cooperative service for themselves, they are serving a private interest." In Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279 (1945), the Supreme Court determined the activities of the organization were aimed at promoting the prosperity and standing of the business community, and therefore served **** In Schoger Foundation v. Commissioner, 76 T.C. 380 (1981), it was held that if an activity serves a substantial non-exempt purpose, the organization does not qualify for exemption even if the activity also furthers an exempt purpose. In Media Sports League, Inc. v. Commissioner, T.C. Memo 1986-568, the Tax Court addressed an organization that arranged football, softball, volleyball, and other games among its members with membership open to all persons over age twenty-one without regard to their skills in the sport. The organization offered members informal instruction in the fundamentals of each sport, but members were not required to receive instruction or to participate in any athletic activities. The Tax Court held that the organization was not exempt from federal income tax under IRC Section 501(c)(3) because the social and recreational interests of its members constituted a substantial purpose, which is not an exempt one under Section 501(c)(3). Application of law IRC Section 501(c)(3) and Treas.Reg. Section 1.501(c)(3)-1(a)(1) set forth two main tests for an organization to be recognized as exempt. An organization must be both organized and operated exclusively for purposes described in IRC Section 501(c)(3). Based on the information you provided in your application and supporting documentation, we conclude you do not meet the operational test. You are not described in IRC Section 501(c)(3) because you fail the operational test. Specifically, you are not operated exclusively for an exempt purpose as described in Treas.Reg. Section 1.501(c)(3)-1(c)(1). The facts show you are not operated exclusively for charitable and educational purposes, but for the social and recreational purposes of members. Specifically, you are operating a hunting club in order for your members to use at their convenience throughout the year. You do not meet the provisions of Treas.Reg. Section 1.501(c)(3)-1(d)(1)(ii) because you are not operating exclusively for public purposes; rather, you are serving the private interests of your members. You collect dues and use that revenue to provide social and recreational events for your members. Although you provide some educational classes, they are for the benefit of your members and are only a small part of your overall activities. Your members benefit more than incidentally from the events you conduct. You have not differentiated your activities from those that are organizations exempt under IRC Section 501(c)(7) as described in Rev.Rul. 65-64. You have not provided evidence that you are doing any more that operating a club for the private interests of your members. You are similar to the organization described in Rev.Rul. 66-273. Through conducting hunting and weapon practice and instructions in the safe handling of weapons for members, you are doing more to promote the common good and general welfare of the community under IRC Section 501(c)(4) than operating exclusively for Section 501(c)(3) purposes. You are like the organization described in Revenue Ruling 69-175, a substantial part of your activities is carried on for the benefit of your members. You collect dues from your members and these dues are used to support operating expenses of your hunting club. This serves a private interest rather than a public interest. Like the organizations in the court cases, Better Business Bureau of Washington, D.C., Inc. v. United States, Schoger Foundation v. Commissioner, and Media Sports League, Inc. v. Commissioner, you do not qualify under IRC Section 501(c)(3). You do provide some educational classes, but your activities are mainly open to your members. You serve a substantial non-exempt purpose of serving the private interests of your members. Conclusion Based on the facts and circumstances presented, you do not qualify for exemption from federal income tax as an organization described in IRC Section 501(c)(3). You are not operated exclusively for exempt purposes as set forth in Section 501(c)(3). Specifically, more than an insubstantial part of your activities consists of operating a membership-based hunting club for the benefit of your members. This is neither exclusively educational nor charitable. If you agree If you agree with our proposed adverse determination, you don't need to do anything. If we don't hear from you within 30 days, we'll issue a final adverse determination letter. That letter will provide information on your income tax filing requirements. If you don't agree You have a right to protest if you don't agree with our proposed adverse determination. To do so, send us a protest within 30 days of the date of this letter. You must include: - Your name, address, employee identification number (EIN), and a daytime phone number - A statement of the facts, law, and arguments supporting your position - A statement indicating whether you are requesting an Appeals Office conference - The signature of an officer, director, trustee, or other official who is authorized to sign for the organization or your authorized representative - The following declaration: For an officer, director, trustee, or other official who is authorized to sign for the organization: Under penalties of perjury, I declare that I have examined this request, or this modification to the request, including accompanying documents, and to the best of my knowledge and belief, the request or the modification contains all relevant facts relating to the request, and such facts are true, correct, and complete. Your representative (attorney, certified public accountant, or other individual enrolled to practice before the IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if they haven't already done so. You can find more information about representation in Publication 947, Practice Before the IRS and Power of Attorney. We'll review your protest statement and decide if you gave us a basis to reconsider our determination. If so, we'll continue to process your case considering the information you provided. If you haven't given us a basis for reconsideration, we'll send your case to the Appeals Office and notify you. You can find more information in Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. If you don't file a protest within 30 days, you can't seek a declaratory judgment in court later because the law requires that you use the IRC administrative process first (IRC Section 7428(b)(2)). Where to send your protest Send your protest, Form 2848, if applicable, and any supporting documents to the applicable address: U.S. mail: Internal Revenue Service EO Determinations Quality Assurance Mail Stop 6403 PO Box 2508 Cincinnati, OH 45201 Street address for delivery service: Internal Revenue Service EO Determinations Quality Assurance 550 Main Street, Mail Stop 6403 Cincinnati, OH 45202 You can also fax your protest and supporting documents to the fax number listed at the top of this letter. If you fax your statement, please contact the person listed at the top of this letter to confirm that they received it. You can get the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person listed at the top of this letter. Contacting the Taxpayer Advocate Service The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or if you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778. We sent a copy of this letter to your representative as indicated in your power of attorney. Sincerely, Stephen A. Martin Director, Exempt Organizations Rulings and Agreements cc:
Private Letter Ruling Number: 202110030 Internal Revenue Service October 30, 2020 DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE 1100 Commerce Street, MC 4920DAL Dallas, TX 75242 TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION Number: 202110030 Release Date: 3/12/2021 UIL: 501.03-00 Date: October 30, 2020 Taxpayer ID Number: Form: Tax Period(s) Ending: Person to Contact: Identification Number: Telephone Number: Fax Number: CERTIFIED MAIL - Return Receipt Requested LAST DAY FOR FILING A PETITION WITH THE TAX COURT: Dear *****: This is a final determination that you do not qualify for exemption from federal income tax under Internal Revenue Code (IRC) Section 501 (a) as an organization described in IRC Section 501(c)(3), effective August 29, 20XX. Your determination letter dated June 3, 20XX is revoked. Our adverse determination as to your exempt status was made for the following reasons: Organizations described in IRC Section 501(c)(3) and exempt from tax under Section 501 (a) must be both organized and operated exclusively for exempt purposes. You have failed to produce documents or otherwise demonstrate that you are operated exclusively for exempt purposes and that no part of your net earnings inure to the benefit of private shareholders or individuals. You failed to respond to repeated requests to allow the Internal Revenue Service to examine your records regarding your receipts, expenditures, or activities as required by Sections 6001 and 6033(a)(1) and the regulations thereunder. As such, you failed to meet the requirements of IRC Section 501(c)(3) and Treasury Regulations Section 1.501(c)(3)-1(a), in that you have not established that you were organized and operated exclusively for exempt purposes. Contributions to your organization are no longer deductible under IRC Section 170. Organizations that are not exempt under IRC Section 501 generally are required to file federal income tax returns and pay tax, where applicable. For further instructions, forms, and information please visit www.irs.gov. If you decide to contest this determination, you may file an action for declaratory judgment under the provisions of IRC Section 7428 in one of the following three venues: 1) United States Tax Court, 2) the United States Court of Federal Claims, or 3) the United States District Court for the District of Columbia. A petition or complaint in one of these three courts must be filed within 90 days from the date this determination was mailed to you. Please contact the clerk of the appropriate court for rules and the appropriate forms for filing petitions for declaratory judgment by referring to the enclosed Publication 892. You may write to the courts at the following addresses: United States Tax Court 400 Second Street, NW Washington, DC 20217 U.S. Court of Federal Claims 717 Madison Place, NW Washington, DC 20005 U.S. District Court for the District of Columbia 333 Constitution Ave., N.W. Washington, DC 20001 Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory judgment under IRC Section 7428. We'll notify the appropriate state officials (as permitted by law) of our determination that you aren't an organization described in IRC Section 501(c)(3). You may be eligible for help from the Taxpayer Advocate Service (TAS). TAS is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 1-877-777-4778. Taxpayer Advocate assistance can't be used as substitute for established IRS procedures, formal appeals processes, etc. The Taxpayer Advocate is not able to reverse legal or technically correct tax determination, nor extend the time fixed by law that you have to file a petition in Court. The Taxpayer Advocate can, however, see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling. You can get any of the forms or publications mentioned in this letter by calling 800-TAX-FORM (800-829-3676) or visiting our website at www.irs.gov/forms-pubs. If you have any questions about this letter, please contact the person whose name and telephone number are shown in the heading of this letter. Sincerely, Sean E. O'Reilly Director, Exempt Organizations Examinations Enclosures: Publication 892 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Date: 04/03/2020 Taxpayer ID number: Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: Managers contact information: Name: ID number: Telephone: Response due date: CERTIFIED MAIL -- Return Receipt Requested Dear ***: Why you're receiving this letter We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we propose to revoke your tax-exempt status as an organization described in Internal Revenue Code (IRC) Section 501(c)(3) If you agree If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an organization described in IRC Section 501(c)(3) for the periods above. If you disagree 1. Request a meeting or telephone conference with the manager shown at the top of this letter. 2. Send any information you want us to consider. 3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after the meeting or after we consider the information. The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case. For your protest to be valid, it must contain certain specific information, including a statement of the facts, applicable law, and arguments in support of your position. For specific information needed for a valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn't apply now that we've issued this letter. 4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities) if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the IRS. If you're considering requesting technical advice, contact the person shown at the top of this letter. If you disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as explained above. A decision made in a technical advice memorandum, however, generally is final and binding on Appeals. If we don't hear from you If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final adverse determination letter. Contacting the Taxpayer Advocate Office is a taxpayer right The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778. Additional information You can get any of the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person shown at the top of this letter. Sincerely, Maria Hooke Director, Exempt Organizations Examinations Enclosures: Form 886-A Form 4621-A Form 6018 Pub 892 Pub 3498 ISSUE: *** revocation as an Internal Revenue Code (IRC) 501(c)(3) organization. FACTS: *** submitted their Articles of Dissolution/Articles of Termination and received their Certificate of Termination from the State of *** of *** State *** on August 29, 20XX. *** did not respond to requests for initial interview for examination of tax year ended December 31, 20XX. The initial interview for examination request occurred on December 23, 20XX on Information Document Request #1 by Certified Mail # ***. *** did not respond to requests to terminate the tax-exempt status IRC 501(c)(3) on December 30, 20XX, which was included on Information Document Request #2 sent by Certified Mail # ***. LAW: IRC 501(c)(3) exempts from Federal income tax: corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting to influence legislation (except as otherwise provided in subsection (i)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of any candidate for public office. IRC 6104 Publicity of information required from certain exempt organizations and certain trusts. (c) Publication to State officials (1) General rule for charitable organizations In the case of any organization which is described in section 501(c)(3) and exempt from taxation under section 501(a), or has applied under section 508(a) for recognition as an organization described in section 501(c)(3), the Secretary at such times and in such manner as he may by regulations prescribe shall-- (A) notify the appropriate State officer of a refusal to recognize such organization as an organization described in section 501(c)(3), or of the operation of such organization in a manner which does not meet, or no longer meets, the requirements of its exemption, (B) notify the appropriate State officer of the mailing of a notice of deficiency of tax imposed under section 507 or chapter 41 or 42, and (C) at the request of such appropriate State officer, make available for inspection and copying such returns, filed statements, records, reports, and other information, relating to a determination under subparagraph (A) or (B) as are relevant to any determination under State law. (2) Disclosure of proposed actions related to charitable organizations (A) Specific notifications in the case of an organization to which paragraph (1) applies, the Secretary may disclose to the appropriate State officer-- (i) a notice of proposed refusal to recognize such organization as an organization described in section 501(c)(3) or a notice of proposed revocation of such organization's recognition as an organization exempt from taxation, (ii) the issuance of a letter of proposed deficiency of tax imposed under section 507 or chapter 41 or 42, and (iii) the names, addresses, and taxpayer identification numbers of organizations which have applied for recognition as organizations described in section 501(c)(3). (B) Additional disclosures Returns and return information of organizations with respect to which information is disclosed under subparagraph (A) may be made available for inspection by or disclosed to an appropriate State officer. (C) Procedures for disclosure Information may be inspected or disclosed under subparagraph (A) or (B) only-- (i) upon written request by an appropriate State officer, and (ii) for the purpose of, and only to the extent necessary in, the administration of State laws regulating such organizations. Such information may only be inspected by or disclosed to a person other than the appropriate State officer if such person is an officer or employee of the State and is designated by the appropriate State officer to receive the returns or return information under this paragraph on behalf of the appropriate State officer. (D) Disclosures other than by request The Secretary may make available for inspection or disclose returns and return information of an organization to which paragraph (1) applies to an appropriate State officer of any State if the Secretary determines that such returns or return information may constitute evidence of noncompliance under the laws within the jurisdiction of the appropriate State officer. (a) Inspection of applications for tax exemption or notice of status. (1) Public inspection. (A) Organizations described in section 501 or 527 [IRC Sec. 501 or 527]. If an organization described in section 501(c) or (d) [IRC Sec. 501(c) or (d)] is exempt from taxation under section 501(a) [IRC Sec. 501(a)] for any taxable year or a political organization is exempt from taxation under section 527 [IRC Sec. 527] for any taxable year, the application filed by the organization with respect to which the Secretary made his determination that such organization was entitled to exemption under section 501(a) [IRC Sec. 501(a)] or notice of status filed by the organization under section 527(i) [IRC Sec. 527(i)], together with any papers submitted in support of such application or notice, and any letter or other document issued by the Internal Revenue Service with respect to such application or notice shall be open to public inspection at the national office of the Internal Revenue Service. In the case of any application or notice filed after the date of the enactment of this subparagraph, a copy of such application or notice and such letter or document shall be open to public inspection at the appropriate field office of the Internal Revenue Service (determined under regulations prescribed by the Secretary). Any inspection under this subparagraph may be made at such times, and in such manner, as the Secretary shall by regulations prescribe. After the application of any organization for exemption from taxation under section 501(a) [IRC Sec. 501(a)] has been opened to public inspection under this subparagraph, the Secretary shall, on the request of any person with respect to such organization, furnish a statement indicating the subsection and paragraph of section 501 [IRC Sec. 501] which it has been determined describes such organization. (B) Pension, etc., plans. The following shall be open to public inspection at such times and in such places as the Secretary may prescribe: (i) any application filed with respect to the qualification of a pension, profit-sharing, or stock bonus plan under section 401(a) or 403(a) [IRC Sec. 401(a) or 403(a)], an individual retirement account described in section 408(a) [IRC Sec. 408(a)], or an individual retirement annuity described in section 408(b) [IRC Sec. 408(b)], (ii) any application filed with respect to the exemption from tax under section 501(a) [IRC Sec. 501(a)] of an organization forming part of a plan or account referred to in clause (i), (iii) any papers submitted in support of an application referred to in clause (i) or (ii), and (iv) any letter or other document issued by the Internal Revenue Service and dealing with the qualification referred to in clause (i) or the exemption from tax referred to in clause (ii). Treasury Reg. 1.501(c)(3)-1(b)(4) (a) Organizational and operational tests. (1) In order to be exempt as an organization described in section 501(c)(3) [26 USCS § 501(c)(3)], an organization must be both organized and operated exclusively for one or more of the purposes specified in such section. If an organization fails to meet either the organizational test or the operational test, it is not exempt. (2) The term exempt purpose or purposes, as used in this section, means any purpose or purposes specified in section 501(c)(3) [26 USCS § 501(c)(3)], as defined and elaborated in paragraph (d) of this section. (b) Organizational test--(1) In general. (i) An organization is organized exclusively for one or more exempt purposes only if its articles of organization (referred to in this section as its articles) as defined in subparagraph (2) of this paragraph: (a) Limit the purposes of such organization to one or more exempt purposes; and (b) Do not expressly empower the organization to engage, otherwise than as an insubstantial part of its activities, in activities which in themselves are not in furtherance of one or more exempt purposes. (4) Distribution of assets on dissolution. An organization is not organized exclusively for one or more exempt purposes unless its assets are dedicated to an exempt purpose. An organization's assets will be considered dedicated to an exempt purpose, for example, if, upon dissolution, such assets would, by reason of a provision in the organization's articles or by operation of law, be distributed for one or more exempt purposes, or to the Federal Government, or to a State or local government, for a public purpose, or would be distributed by a court to another organization to be used in such manner as in the judgment of the court will best accomplish the general purposes for which the dissolved organization was organized. However, an organization does not meet the organizational test if its articles or the law of the State in which it was created provide that its assets would, upon dissolution, be distributed to its members or shareholders. TAXPAYER'S POSITION: Taxpayer has not responded to any mail sent to business address or returned any calls made to the business telephone of record in IRS system of records. The only action the taxpayer has taken is filing Articles of Dissolution/Articles of Termination and receiving their Certificate of Termination from the State of *** of *** State *** on August 29, 20XX. This action by the taxpayer indicates they are no longer acting as tax-exempt organization IRC 501(c)(3). GOVERNMENT'S POSITION: *** has not substantiated they are tax-exempt organization according to the requirements of IRC 501(c)(3) and Treasury Reg. 1.501(c)(3)-1(b)(4). The taxpayer has not substantiated they were organized exclusively for one or more exempt purposes with its assets dedicated to an exempt purpose. When they dissolved organization on August 29, 20XX, per Reg. 1.501(c)(3)-1(b)(4) the assets were required to be distributed to one or more exempt purpose organizations, or to the Federal Government, or to a State or local government, for a public purpose. They have not responded to letters mailed to taxpayer by the IRS. The organizations action of filing Articles of Dissolution/Articles of Termination and receiving their Certificate of Termination from the State of *** of *** State *** on August 29, 20XX, substantiates *** as no longer meeting the requirements of IRC 501(c)(3) and substantiates they have decided not to act as a tax-exempt organization. They did not properly dissolve organization, per Internal Revenue Service on August 29, 20XX. Taxpayer did not file final form 990, submit a written statement of disposition of assets, submit a dissolution document, submit documentation of the distribution of the assets to qualified IRC 501(c)(3) organizations. They do not qualify to terminate organization, because they did not file the following: final form 990, submit a written statement of disposition of assets, or submit a dissolution document, when they filed the above document on August 29, 20XX. These items are required to terminate organizations as tax exempt. *** no longer qualifies as an IRC 501(c)(3) organization, because they have not substantiated, they meet the requirements of IRC 501(c)(3) and Treasury Reg. 1.501(c)(3)-1(b)(4), specifically organizing and operating exclusively for one or more purposes, and distribution of assets on dissolution to and tax-exempt organization. CONCLUSION: ***** does not qualify as an IRC 501(c)(3) organization, because they have not substantiated, they qualify as an IRC 501(c)(3) organization. Taxpayers are required to maintain their IRC 501(c)(3) status and they have not substantiated they maintained their status by submitting the items requested on Information Document Request #1 & #2. They do not meet the requirements of an IRC 501(c)(3) tax exempt organization or the requirements of the Treasury e.g. 1.501(c)(3)-1(b)(4). They meet the definition of organization requiring revocation of their IRC 501(c)(3) tax exempt status.
Internal Revenue Service - Information Release IR-2022-179 IRS reminds taxpayers of upcoming filing extension deadline; Free File remains open until Nov. 17 October 14, 2022 Media Relations Office Washington, D.C. www.IRS.gov/newsroom Media Contact: 202.317.4000 Public Contact: 800.829.1040 IRS reminds taxpayers of upcoming filing extension deadline; Free File remains open until Nov. 17 IR-2022-179, October 14 2022 WASHINGTON -- The Internal Revenue Service reminds taxpayers today that those who requested an extension of time to file their 2021 income tax return that the deadline is Monday, October 17. IRS Free File remains open until November 17 for those who still need to file their 2021 tax returns. This includes those who qualify for the Child Tax Credit, Recovery Rebate Credit or Earned Income Tax Credit but haven't yet filed a 2021 tax return to claim them. IRS Free File is a public-private partnership between the IRS and tax preparation software industry leaders who provide their brand-name products for free. There are eight Free File products available in English and two in Spanish. IRS Free File provides two ways for taxpayers to prepare and file their 2021 federal income tax return online for free: - IRS Partner Sites. Traditional IRS Free File provides free online tax preparation and filing options on IRS partner sites. Individual taxpayers whose adjusted gross income (AGI) is $73,000 or less qualify for any IRS Free File partner offers. Free File lets individuals electronically prepare and file their federal income tax online using guided tax preparation. - Free Fillable Forms. For taxpayers whose AGI is greater than $73,000, there's the Free File Fillable Forms option. It provides electronic federal tax forms that can be filled out and filed online for free. To use this option, taxpayers should know how to prepare their own tax return. Always start at IRS.gov: - From the homepage, select File Your Taxes for Free. - Use the IRS Free File Lookup Tool to narrow the list of providers or the Browse All Offers page to see a full list of providers. - Follow the link to the chosen IRS Free File provider's website. Taxpayers who requested the six-month filing extension should complete their tax returns and file on or before the October 17 deadline. The IRS Free File program gives eligible taxpayers an opportunity to file their taxes and claim the 2021 Recovery Rebate Credit, their full Child Tax Credit, the Earned Income Tax Credit or other valuable credits for which they qualify. The IRS reminds taxpayers that the fastest way to get a tax refund is to file electronically and choose direct deposit. Prior year returns can only be filed electronically by registered tax preparers for the two previous tax years. Otherwise, taxpayers must print, sign and mail prior year returns. The IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualifications lists qualified local preparers. Free File to stay open until Nov. 17 to help refund filers eligible for stimulus, Child Tax Credit, EITC Starting this week, the Internal Revenue Service is sending letters to more than 9 million individuals and families who appear to qualify for a variety of key tax benefits but did not claim them by filing a 2021 federal income tax return. Many in this group may be eligible to claim some or all of the 2021 Recovery Rebate Credit, the Child Tax Credit, the Earned Income Tax Credit and other tax credits depending on their personal and family situation. The special reminder letters, which will be arriving in mailboxes over the next few weeks, are being sent to people who appear to qualify for the Child Tax Credit, Recovery Rebate Credit or Earned Income Tax Credit but haven't yet filed a 2021 return to claim them. The letter, printed in both English and Spanish, provides a brief overview of each of these three credits. These and other tax benefits were expanded under last year's American Rescue Plan Act and other recent legislation. Even so, the only way to get the valuable benefits is to file a 2021 tax return. Often, individuals and families can get these expanded tax benefits, even if they have little or no income from a job, business or other source. This means that many people who don't normally need to file a tax return should do so this year, even if they haven't been required to file in recent years. People can file a tax return even if they haven't yet received their letter. The IRS reminds people that there's no penalty for a refund claimed on a tax return filed after the regular April 2022 tax deadline. The fastest and easiest way to get a refund is to file an accurate return electronically and choose direct deposit. To help people claim these benefits, without charge, Free File will remain open for an extra month this year, until November 17, 2022. Available only at IRS.gov/FreeFile, Free File enables people whose incomes are $73,000 or less to file a return online for free using brand-name software. Free File is sponsored by the Free File Alliance, a partnership between the IRS and the tax-software industry.
Private Letter Ruling Number: 202019006 Internal Revenue Service February 4, 2020 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202019006 Release Date: 5/8/2020 Index Number: 9100.00-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:ITA:B06 PLR-100307-20 Date: February 04, 2020 Dear ********: This letter is in reply to a request for a private letter ruling made by Taxpayer. Taxpayer requests an extension of time under sections 301.9100-1(c) and 301.9100-3 of the Procedure and Administration Regulations to file Form 3115, Application For Change in Accounting Method, for Tax Year on behalf of Applicants. FACTS Taxpayer is a domestic S corporation which wholly owns Applicants, each a qualified subchapter S subsidiary. Taxpayer files a Form 1120-S, U.S. Income Tax Return for an S Corporation. Taxpayer and Applicants use an accrual method of accounting and have a 52-53-week tax year that ends on the last Saturday in December. Taxpayer retained the services of Accounting Firm to review Applicants' present methods of accounting under section 263A of the Internal Revenue Code for the Tax Year Federal tax return. Accounting Firm determined that two accounting method changes should be made and that these could be implemented via the automatic change procedures set forth in Rev. Proc. 2015-13, 2013-5 I.R.B. 419. Accounting Firm accordingly prepared the two automatic accounting method changes requests for Tax Year. These two changes are: A change in Applicants' method "to comply with the new definition of Section 471 costs under [section] 1.263A-1(d)(2)" of the Income Tax Regulations. A change in Applicants' method to "recharacterize certain costs presently treated as additional Section 263A costs as Section 471 costs, as defined by [section] 1.263A-1(d)(2)". Taxpayer prepared and timely filed its Federal income tax return for Tax Year. Included in this filing, was the original Form 3115 that included both accounting method changes. Also, the accounting method changes were reflected on the Federal income tax return filed for Tax Year. Accounting Firm "represented to" Taxpayer that it would file the duplicate copy of Form 3115 with the appropriate office at the Internal Revenue Service (IRS). However, the required copy of Form 3115 was not filed due to an "internal miscommunication" among Accounting Firm personnel. Accounting Firm discovered the mistake within days and informed Taxpayer. Shortly thereafter, Taxpayer engaged Accounting Firm to file this request for an extension of time under sections 301.9100-1(c) and 301.9100-3. RULINGS REQUESTED Taxpayer requests an extension of time for filing the copy of the original Form 3115, which was attached to Taxpayer's Federal income tax return for Tax Year under sections 301.9100-1(c) and 301.9100-3. LAW AND ANALYSIS Section 301.9100-1(c) provides that the Commissioner has the discretion to grant a reasonable extension of time under the rules set forth in sections 301.9100-2 and 301.9100-3 to make certain regulatory elections. Section 301.9100-1(b) defines a regulatory election as an election whose due date is prescribed by regulations published in the Federal Register, or in a revenue ruling, revenue procedure, notice, or announcement published in the Internal Revenue Bulletin. Section 301.9100-2 provides for automatic extensions of time for making certain elections. Section 301.9100-3 provides for extensions of time for making elections that do not meet the requirements of section 301.9100-2. The requested accounting method changes are regulatory elections as defined under section 301.9100-1(b) because the due date of the changes are prescribed in section 1.446-1(e) and Section 6.03(3)(a) of Rev. Proc. 2015 -13, 2013-5 I.R.B. 419. Taxpayer's request must be analyzed under the requirements of section 301.9100-3 because the automatic provisions of section 301.9100-2 are not applicable. Requests for relief under section 301.9100-3 will be granted when a taxpayer provides evidence to establish to the satisfaction of the Commissioner (1) that the taxpayer acted reasonably and in good faith, and (2) that granting relief will not prejudice the interest of the government. See section 301.9100-3(a). Section 301.9100-3(b)(1) provides that a taxpayer is deemed to have acted reasonably and in good faith if the taxpayer: (i) requests relief before the failure to make a regulatory election is discovered by the IRS; (ii) failed to make the election because of intervening events beyond the taxpayer's control; (iii) failed to make the election because, after exercising reasonable diligence, the taxpayer was unaware of the necessity of the election; (iv) reasonably relied on written advice of the IRS; or (v) reasonably relied on a qualified tax professional, including a tax professional employed by the taxpayer, and the tax professional failed to make, or advise the taxpayer to make, the election. Section 301.9100-3(b)(3) provides that a taxpayer is deemed not to have acted reasonably and in good faith if the taxpayer: (i) seeks to alter a return position for which an accuracy-related penalty has been or could be imposed under section 6662 at the time the taxpayer requests relief and the new position requires or permits a regulatory election for which relief is requested; (ii) was informed in all material respects of the required election and related tax consequences and chose not to file the election; or (iii) uses hindsight in requesting relief. Section 301.9100-3(c)(i) provides, that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made (taking into account the time value of money). The section also provides that, if the tax consequences of more than one taxpayer are affected by the election, the government's interests are prejudiced if extending the time for making the election may result in the affected taxpayers, in the aggregate, having a lower tax liability than if the election had been timely made Further, section 301.9100-3(c)(1)(ii) provides, in part, that the interests of the government are ordinarily prejudiced if the taxable year in which the regulatory election should be been made, or any taxable years that would have been affected by the election had it been timely made, are closed by the period of limitations on assessment under section 6501(a) before the taxpayer's receipt of a ruling granting relief under this section. CONCLUSION On the basis of Taxpayer's representations, we conclude that the requirements of sections 301.9100-1(c) and 301.9100-3 have been satisfied. Accordingly, we hereby grant an extension of time for Taxpayer to file the copy of Form 3115. This copy must be identical to the original Form 3115 that had been timely filed. This extension shall be for a period of 45 days from the date of this ruling. Except as expressly set forth above, this office neither expresses nor implies any opinion concerning any tax consequences of the facts described above under any other provision of the Code or regulations. This ruling merely permits Taxpayer to file a copy of Form 3115 late. We have no opinion as to whether any of the accounting method changes discussed in this private letter ruling can be implemented via the automatic change procedures set forth in Rev. Proc. 2015-13 or whether the changes should be approved by a director in connection with the examination of Taxpayer's Federal income tax return. We express no opinion as to whether Taxpayer or Applicants are properly accounting for any items of income or expense generated as a result of transactions with any related party, as defined under § 267(b). Furthermore, we have no opinion whether both accounting changes may be implemented on only one Form 3115. If applicable, this relief under sections 301.9100-1(c) and 301.9100-3, is disregarded for purposes of determining the amounts of all section 965 elements of all United States shareholders of Taxpayer if the relief otherwise would change the amount of any section 965 element of any such United States shareholder. See section 1.965-4(c)(1). The ruling contained in this letter is based upon information and representations submitted by Taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of this request for an extension of time to file the required copy of Form 3115, all material is subject to verification on examination. This ruling is directed only to Taxpayer who requested it. Section 6110(k)(3) provides that it may not be used or cited as precedent. In accordance with the power of attorney on file with this office, a copy of this letter is being sent to each of Taxpayer's authorized representatives. Sincerely, Cheryl L. Oseekey Senior Counsel, Branch 6 Office of Associate Chief Counsel (Income Tax & Accounting) cc:
Private Letter Ruling Number: 202001024 Internal Revenue Service August 8, 2019 DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE 1100 Commerce Street, MC 4920DAL Dallas, TX 75242 TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION Date AUG 08 2019 Number: 202001024 Release Date: 1/3/2020 EIN: Person to Contact: Identification Number: Telephone Number: Fax: UIL: 501.03-00 CERTIFIED MAIL- Return Receipt Requested LAST DAY FOR FILING A PETITION WITH THE TAX COURT: Dear ******: This is a final determination that you do not qualify for exemption from federal income tax under Internal Revenue Code (the "Code") section 501(a) as an organization described in Code section 501(c)(3), effective January 01, 20XX. Your determination letter dated September 06, 20XX revoked. Our adverse determination as to your exempt status was made for the following reasons: You did not respond to our requests for information about your finances and activities necessary to complete the examination. You have not demonstrated that you are organized and operated exclusively for exempt purposes within the meaning of Internal Revenue Code section 501(c)(3). As such, you failed to meet the requirements of I.R.C. § 501(c)(3) and Treasury Regulation §1.501(c)(3)-1(a), in that you have not established that you were organized and operated exclusively for exempt purposes and that no part of your earnings inured to the benefit of private shareholders or individuals. Contributions to your organization are no longer deductible under section 170 of the Internal Revenue Code. Organizations that are not exempt under section 501 generally are required to file federal income tax returns and pay tax, where applicable. For further instructions, forms, and information please visit www.irs.gov. Organizations that are not exempt under section 501 generally are required to file federal income tax returns and pay tax, where applicable. For further instructions, forms, and information please visit www.irs.gov. If you deckle to contest this determination, you may file an action for declaratory judgment under the provisions of section 7428 of the Code in one of the following three venues: 1) United States Tax Court, 2) the United States Court of Federal Claims, or 3) the United States District Court for the District of Columbia. A petition or complaint in one of these three courts must be filed within 90 days from the date this determination was mailed to you. Please contact the clerk of the appropriate court for rules and the appropriate forms for filing petitions for declaratory judgment. Please refer to the enclosed Publication 892 for additional information. You may write to the courts at the following addresses: United States Tax Court 400 Second Street, NW Washington, DC 20217 US Court of Federal Claims 717 Madison Place, NW Washington, DC 20005 U.S. District Court for the District of Columbia 333 Constitution Ave., N.W. Washington, DC 20001 Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory judgment under section 7428 of the Internal Revenue Code. You may be eligible for help from the Taxpayer advocate Service (TAS). TAS is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 1-877-777-4778. If you have any questions about this letter, please contact the person whose name and telephone number are shown in the heading of this letter. Sincerely yours, Maria Hooke Director, EO Examinations Enclosures: Publication 892 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Division Exempt Organizations Examination Date: 08/21/2018 Taxpayer ID number: Form: Tax periods ended: Person to contact: Employee ID: Telephone number: Fax: Address: Manager's contact information: Employee ID number: Telephone number: Response due date: CERTIFIED MAIL -- Return Receipt Requested Dear ****: Why you're receiving this letter If you agree If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an organization described in IRC Section 501(c)(3) for the periods above. If you disagree 1. Request a meeting or telephone conference with the manager shown at the top of this letter. 2. Send any information you want us to consider. 3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after the meeting or after we consider the information. The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case. For your protest to be valid, it must contain certain specific information, including a statement of the facts, applicable law, and arguments in support of your position. For specific information needed for a valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn't apply now that we've issued this letter. 4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities) if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the IRS. If you're considering requesting technical advice, contact the person shown at the top of this letter. If you disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as explained above. A decision made in a technical advice memorandum, however, generally is final and binding on Appeals. If we don't hear from you If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final adverse determination letter. Contacting the Taxpayer Advocate Office is a taxpayer right The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778. Additional information You can get any of the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person shown at the top of this letter. Sincerely, for Maria Hooke Director, Exempt Organizations Examinations Enclosures: Form 886-A Form 6018 Issues Whether **** (Organization) continues to qualify for exemption from Federal income tax under Internal Revenue (IRC) section (Sec.) 501(c)(3). Facts The Organization's Form 1023- Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code was received by the Internal Revenue Service on May 9, 20XX. The Organization stated on Form 1023, it was organized and operated exclusively for charitable and educational purposes. Specifically, the organization will (a) combat juvenile delinquency, (b) instruct and train youth for improving or developing their skills and capabilities and (c) providing relief to the poor, distressed and underprivileged. The Organization received its determination letter dated September 6, 20XX, granting the Organization exempt status under IRC Section 501(c)(3), with an effective date of March 23, 20XX. According to the Articles of Incorporation and Bylaws, the organization's specific purpose is to provide a summer camp program for abused, neglected and abandoned teens. Address Information The Organization's website state the Organization's address is ****. The Form 990 for the periods ending December 31, 20XX & 20XX show the Organization's address as ****. Internal Revenue Service internal information confirms the Organization's address as the same stated on the Organization's website and Forms 990. According to the **** Secretary of State website, **** status is suspended as of April 26, 20XX. The **** Secretary of State website states "Suspended" means, the business entity's powers, rights and privileges which include the right to use the entity's name in ****, were suspended or forfeited in the ****. The Organization was selected for audit to ensure the organization's activities and operations align with its approved exempt status. The Organization failed to respond to the Internal Revenue service attempts to obtain information to perform an audit on Form 990 for period ending December 31, 20XX. The following are the Agent's attempts to contact the Organization. 1. On July 17, 20XX, the Agent mailed Letter 3611 (initial contact letter), Information Document Request and Publication 1 to ****. 2. On July 26, 20XX the Agent was unable to contact an officer of the Organization, so, the Agent called the management company that prepared the 20XX Form 990 (to obtain officer contact information only). The Organization states on its 20XX Form 990, the management company has permission to discuss Form 900. An individual at the management company stated they no longer work with the Organization and did not provide any contact information. 3. On July 26, 20XX, the Agent called the phone number listed on foundation's website and a left a message for Organization's president, ****. 4. On September 27, 20XX, the Agent resent Letter 3611, Information Document Request and Publication 1 by mail to ****. Additionally, Form 4759-postal tracer was sent to the Postmaster in **** for verification of the address. 5. On October 5, 20XX, the Agent called the phone number shown on the organization's website and left a message for the Organization's President, ****. The Agent received a telephone call by an unidentified individual who asked for the Agent's IRS identification number and hung up. The Agent called the number shown on the caller ID; the Agent's call went directly to **** voicemail. So, the Agent left another voicemail and stated, "I am with the Internal Revenue Service, please give me a call back to discuss the initial contact letter and IDR sent to ****, I will provide you with the IRS phone number to verify my identification number and employee status". The Agent received no response from the president. 6. On October 10, 20XX, Form 4759-postal tracer (see item 4 above) was returned and confirmed the mail is delivered to the address given. Additionally, the Form 4759-postal tracer provide the boxholder's street address was provided, it is ****. 7. On October 23, 20XX, the Agent called the number on the organization's website and the left another message to discuss an initial interview location, time and information needed. 8. On October 24, 20XX, the Agent mailed Letter 3611, Information Document Request and Publication 1 to the **** address. 9. On October 29, 20XX, the mail (See item 8) sent to **** was returned and stated undeliverable, unable to forward and return to sender. 10. On November 8, 20XX, the Agent mailed Letter 3611, Information Document Request and Publication 1, by Certified Mail to **** and to ****. 11. On November 16, 20XX, a U.S. Postal Services Certified Mail Receipt was returned and signed by **** confirming receipt and delivery of Letter 3611, Information Document request and Publication 1 to ****. (see item 10 above) 12. On November 17, 20XX, Letter 3611, Information Document Request and Publication 1 sent to **** was returned, unable to forward and refused. (see item 10) No further communication was made and no information was provided by Organization or its President. The Organization did not provide evidence to support its conducting activities in furtherance of its exempt purpose. Law Internal Revenue Code Section (IRC Sec.) 501(c)(3) provides that an organization organized and operated exclusively for charitable or educational purposes is exempt from Federal income tax, provided no part of its net earnings inures to the benefit of any private shareholder or individual. IRC Sec. 11(a) imposes a tax for each taxable year on the taxable income of every corporation. IRC Sec. 11(b)(1) provides the amount of the tax imposed by subsection (a, which shall be the sum of: -- IRC Sec. 11(b)(1)(A) 15 percent of so much of the taxable income as does not exceed $50,000, -- IRC Sec. 11(b)(1)(B) 25 percent of so much of the taxable income as exceeds $50,000 but does not exceed $75,000, -- IRC Sec. 11(b)(1)(C) 34 percent of so much of the taxable income as exceeds $75,000 but does not exceed $10,000,000, and -- IRC Sec. 11(b)(1)(D) 35 percent of so much of the taxable income as exceeds $10,000,000. IRC Sec. 511 imposes a tax at corporate rates under Section 11 on the unrelated business taxable income of certain tax-exempt organizations, including those described in section 501(c)(3). IRC Sec. 162(a) allows as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including: -- IRC Sec. 162(a)(1) - a reasonable allowance for salaries or other compensation for personal services actually rendered; -- IRC Sec. 162(a)(2) - traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business; and -- IRC Sec. 162(a)(3) - rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity. IRC Sec. 6001 provides that every person liable for any tax imposed by this title, or for the collection thereof, shall keep such records, render such statements, make such returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Whenever in the judgment of the Secretary it is necessary, he may require any person, by notice served upon such person or by regulations, to make such returns, render such statements, or keep such records, as the Secretary deems sufficient to show whether or not such person is liable for tax under this title. IRC Sec. 6020(a) states that if any person shall fail to make a return required by this title or by regulations prescribed thereunder, but shall consent to disclose all information necessary for the preparation thereof, then, and in that case, the Secretary may prepare such return which being signed by such person, may be received by the Secretary as the return of such person. IRC Sec. 6020(b)(1) states that if any person fails to make any return required by any Internal Revenue law or regulation made thereunder at the time prescribed therefore, or makes, willfully or otherwise, a false or fraudulent return, the Secretary shall make such return from his own knowledge and from such information as he can obtain through testimony or otherwise. IRC Sec. 6020(b)(2) states that any return so made and subscribed by the Secretary shall be prima facie good and sufficient for all legal purposes. IRC Sec. 6033(a)(1) provides, except as provided in section 6033(a)(2), every organization exempt from tax under section 501(a) shall file an annual return, stating specifically the items of gross income, receipts and disbursements, and such other information for the purposes of carrying out the internal revenue laws as the Secretary may by forms or regulations prescribe, and keep such records, render under oath such statements, make such other returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Treasury Regulation Section (Regulation Sec.) 1.501(c)(3)-1(a) states in order to be exempt under §501(c)(3), the organization must be both organized and operated exclusively for one or more of the purposes specified in the section (religious, charitable, scientific, testing for public safety, literary or educational). Regulation Sec. 1.501(c)(3)-1(a)(1) states that in order to be exempt as an organization described in section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in such section. If an organization fails to meet either the organizational test or the operational test, it is not exempt. Regulation Sec. 1.501(c)(3)-1(c)(1) provides that an organization will not be regarded as "operated exclusively" for one or more exempt purposes described in section 501(c)(3) of the Code if more than an insubstantial part of its activities is not in furtherance of a 501(c)(3) purpose. Accordingly, the organization does not qualify for exemption under section 501(c)(3) of the Code. Regulation Sec. 1.61-1 provides that gross income means all income from whatever source derived, unless excluded by law. Gross income includes income realized in any form, whether in money, property, or services. Income may be realized, therefore, in the form of services, meals, accommodations, stock, or other property, as well as in cash. Regulation Sec. 1.6001-1(c) provides that such permanent books and records as are required by paragraph (a) of this section with respect to the tax imposed by section 511 on unrelated business income of certain exempt organizations, every organization exempt from tax under section 501(a) shall keep such permanent books of account or records, including inventories, as are sufficient to show specifically the items of gross income, receipts and disbursements. Such organizations shall also keep such books and records as are required to substantiate the information required by Section 6033. See IRC Sec. 6033 and Regulation Sec. 1.6033-1 through 1.6033-3. Regulation Sec. 1.6001-1(e) provides that the books or records required by this section shall be kept at all times available for inspection by authorized Internal Revenue Service officers or employees and shall be retained as long as the contents thereof may be material in the administration of any Internal Revenue law. Regulation Sec. 1.6033-1(h)(2) provides that every organization which has established its right to exemption from tax, whether or not it is required to file an annual return of information, shall submit such additional information as may be required by the district director for the purpose of enabling him to inquire further into its exempt status and to administer the provisions of subchapter F (Section 501 and the following), Chapter 1 and Section 6033 of the Code. Revenue Ruling 59-95, 1959-1 C.B. 627 concerns an exempt organization that was requested to produce a financial statement and statement of its operations for a certain year; however, its records were so incomplete that the organization was unable to furnish such statements. The Service held that the failure or inability to file the required information return or otherwise to comply with the provisions of section 6033 of the Code and the regulations which implement it, may result in the termination of the exempt status of an organization previously held exempt, on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status. Organization's Position The Organization failed to provide information as requested through correspondence and during a conversation with the President. Government's Position The Organization failed to provide information and/ or documentation to support that it is conducting activities in furtherance of its exempt status, which was requested by correspondences. Therefore, exempt status of Organization should be revoked and Form 1120, U.S. Corporation Income Tax Return, should be filed for 20XX and each year thereafter as long as the organization remains subject to Federal income tax. If the proposed revocation becomes final, appropriate State officials will be notified of such action in accordance with Section 6104(c) of the Internal Revenue Code. Conclusion Since the organization was not operating exclusively for the exempt purpose under IRC Section 501(c)(3), for which it obtained its exempt status, its Federal tax-exempt status under such section should be revoked effective January 1, 20XX. ****** is liable for filing Form 1120 U.S. Corporation Income Tax Return for the tax year ended December 31, 20XX and all years thereafter.
Private Letter Ruling Number: 202116003 Internal Revenue Service July 13, 2020 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202116003 Release Date: 4/23/2021 Index Number: 2601.01-00, 2501.01-00, 2033.00-00, 1001.00-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:PSI:B04 PLR-101896-20 Date: July 13, 2020 Dear *******: This letter responds to your authorized representative's letter, dated December 5, 2019 and other correspondence, requesting income, estate, gift, and generation-skipping transfer (GST) tax rulings regarding the construction of Trust to correct scrivener's errors and resolve the ambiguities in Trust's terms. The facts and representations made are as follows: On Date 1, Donor established Trust, a revocable trust, for the benefit of Spouse, and issue. Trust was most recently amended on Date 2, a date prior to September 25, 1985. On Date 3, a date prior to September 25, 1985, Donor died, and Trust became irrevocable. The trustees represent that no additions, actual or constructive, have been made to Trust after that date. Trust is governed by the laws of State. Article III of Trust provides, in relevant part, that upon the death of Spouse, the trustees are directed to divide the corpus of Trust and to establish as many separate trusts, equal in value, as there are children of Donor who are living or who are deceased leaving issue at the time of Donor's death. The trustees are to pay the net income from each trust to the referred child living at Donor's death and to the issue then living of a deceased child ( per stirpes ) at least as often as quarterly. Additionally, the trustees are to pay over or apply for the benefit of each beneficiary so much of the principal of that beneficiary's trust as the trustees, in the exercise of their uncontrolled discretion, deem needful or desirable for the education of that beneficiary, and for medical, surgical, hospital, or other institutional care. Article IV provides, in relevant part, that upon the death of Donor's children who survive him, the Trustees are to retain the balance of any undistributed income and/or principal in trust upon the same terms of trust as heretofore recited in Article III for the then living issue of the deceased child ( per stirpes ) until no great-grandchild of Donor (who is descended from that child) is living and under the age of a years (provided that same does not violate the Rule Against Perpetuities). At which time, the trust for that great-grandchild's share shall terminate and the undistributed income and principal shall be paid over outright and free from all trusts to that great-grandchild's then living issue by right of representation, and in default of such issue, to the Donor's then living issue (per stirpes) provided that any beneficiary so receiving property and then a beneficiary under another trust hereunder shall not receive his share outright but shall have it added to such other trusts. In default of any issue of Donor, the property shall be distributed as provided in Article X. The provisions of this Article IV shall also apply to a share for the issue of any child of the donor who may predecease the donor. Article V provides, in relevant part, that during the minority and after attaining majority of any beneficiary of the several trusts hereinabove created, the trustees are to pay over to each beneficiary so much of the income and principal of that beneficiary's trust as the trustees, in the exercise of their uncontrolled discretion, deem needful or desirable for the maintenance, support, and education of that beneficiary or of any member of that beneficiary's immediate family. Article X provides that in the event that Donor's children survive Donor, but all die without leaving issue surviving then the principal and undistributed income of the trust is to be paid over to two specified charities. Spouse died on Date 4. Pursuant to the terms of Trust, Trust has been divided into three trusts, for the three children of Donor: Trust 1 for the benefit of Beneficiary 1, Trust 2 for the benefit of Beneficiary 2, and Trust 3 for the benefit of Beneficiary 3. Due to various scrivener's errors, Article IV contains certain ambiguities. Article IV refers to trusts for a great-grandchild's share even though there is no direction in the instrument to further divide a trust for Donor's child. The trust language provides no indication of when a great-grandchild's share is to be established. Furthermore, the trust for each child is to terminate when the great-grandchild reaches the age of a and then the trustees are directed to distribute that great-grandchild's share to his or her living issue, rather than directly to that great-grandchild, who may still be alive at that point. Finally, if any of the great-grandchildren have no issue, the property will be divided among Donor's issue, per stirpes, which will cause property to be distributed to other family lines, even when there are still living descendants in that family line. On Date 5, the trustees of Trust 2 filed an equity complaint in State Court for a judicial construction to correct the scrivener's errors and resolve the ambiguities in the trust instrument. In connection with the equity complaint, the three children of Donor have each executed affidavits swearing that it is their respective understanding that Donor intended that Trust property be held in trust for future generations, to divide into separate trusts for each grandchild (not great-grandchild) upon a child's death, and to benefit a child's family line as long as there were descendants living in that family line. Furthermore, it is their understanding that the separate trusts were intended to terminate on the deaths of Donor's grandchildren and to be paid out to great-grandchildren. On Date 6, State Court ruled that Article IV of Trust instrument, due to scrivener's errors, contained patent ambiguities, and that those errors are contrary to the intent of Donor. State Court issued an order, contingent on the trustees obtaining a favorable private letter ruling from the Internal Revenue Service, that amended Article IV. The amended Article IV provides, in relevant part, that upon the death of the children of Donor, the trustees are directed to divide the balance of any undistributed income and/or principal of such child's share so as to establish as many separate trusts, equal in value, as there are grandchildren (descended from that child) then living or then deceased with issue then living, and retain the share of each such grandchild in trust. Until the Termination Date, the Trustees are to pay the net income from each such trust to such grandchild at least as often as quarterly, and, in addition, so much of the principal to or for the benefit of such grandchild as the Trustees in the exercise of their uncontrolled discretion deem needful or desirable for each person's education and medical, surgical, hospital or institutional care. The Termination Date for each such trust shall be the later of (i) the date of death of the grandchild for whom the trust was set apart and (ii) the date on which no living beneficiary of such trust who is a great-grandchild of Donor is under the age of a years (provided that the same does not violate the Rule Against Perpetuities). On the Termination Date, the undistributed income and principal of such trust is to be paid over outright and free from all trusts to that grandchild's then living issue per stirpes, and in default of such issue, to the deceased child's then living issue per stirpes, and in default of such issue, to Donor's then living issue per stirpes, provided that any beneficiary so receiving property who is then a beneficiary under another trust hereunder shall not receive his share outright but shall have it added to such other trust. In default of any issue of Donor, the property shall be distributed as provided in Article X. The provisions of this Article IV shall also apply to a share for the issue of any child of Donor who may predecease Donor. Notwithstanding the foregoing, and consistent with the Rule Against Perpetuities, if any property is held in any trust hereunder 21 years after the death of the survivor of Donor's issue as are living on the date of my death, the Trustees shall distribute all such property held in such trust outright and free of trust as directed above, as though the Termination Date had then occurred. You have requested the following rulings: 1) The amendment to Trust, pursuant to State Court's order, will not cause Trust 2 to lose its status as exempt from the provisions of chapter 13 of the Internal Revenue Code or cause distributions from Trust or terminations of interests in Trust to be subject to the GST tax; 2) The amendment to Trust, pursuant to State Court's order, will not cause any beneficiary to be treated as making a taxable gift of any portion of Trust 2; 3) The amendment to Trust, pursuant to State Court's order, will not cause any portion of Trust 2 to be includible in the gross estate of any beneficiary prior to termination; and 4) The amendment to Trust, pursuant to State Court's order, will not give rise to taxable income or cause any beneficiary to recognize gain or loss from a sale or other disposition of property. LAW AND ANALYSIS Ruling 1 Section 2601 of the Internal Revenue Code imposes a tax on every GST, which is defined under § 2611 as a taxable distribution, a taxable termination, and a direct skip. Under § 1433 of the Tax Reform Act of 1986 (Act), the GST tax is generally applicable to generation-skipping transfers made after October 22, 1986. However, under § 1433(b)(2)(A) of the Act and § 26.2601-1(b)(1)(i) of the Generation-Skipping Transfer Tax Regulations, the tax does not apply to a transfer under a trust that was irrevocable on September 25, 1985, provided no additions (actual or constructive) were made to the trust after that date. Section 26.2601-1(b)(2) provides that the GST tax does not apply to any generation-skipping transfer under a will or other revocable trust executed before October 22, 1986, provided that the document in existence on October 21, 1986, is not amended at any time after October 21, 1986, in any respect which results in the creation of, or an increase in the amount of, a generation-skipping transfer, and the decedent dies before January 1, 1987. This paragraph also provides that the rules contained in § 26.2601-1(b)(1)(iii) apply to any will or revocable trust within the scope of this paragraph. Section 26.2601-1(b)(4)(i) provides rules for determining when a modification, judicial construction, settlement agreement, or trustee action with respect to a trust that is exempt from the GST tax under § 26.2601-1(b) will not cause the trust to lose its exempt status. The regulation provides that the rules contained in the paragraph are applicable only for purposes of determining whether an exempt trust retains its exempt status for GST tax purposes. The rules do not apply in determining, for example, whether the transaction results in a gift subject to gift tax, or may cause the trust to be included in the gross estate of a beneficiary, or may result in the realization of capital gain for purposes of § 1001. Section 26.2601-1(b)(4)(i)(C) provides that a judicial construction of a governing instrument to resolve an ambiguity in the terms of the instrument or to correct a scrivener's error will not cause an exempt trust to be subject to the GST provisions if: (1) the judicial action involves a bona fide issue; and (2) the construction is consistent with applicable state law that would be applied by the highest court of the state. Section 26.2601-1(b)(4)(i)(E), Example 3 considers a situation where, in 1980, Grantor established an irrevocable trust for the benefit of Grantor's children, A and B, and their issue. The trust is to terminate on the death of the last to die of A and B, at which time the principal is to be distributed to their issue. However, the provision governing the termination of the trust is ambiguous regarding whether the trust principal is to be distributed per stirpes, only to the children of A and B, or per capita among the children, grandchildren, and more remote issue of A and B. In 2002, the trustee files a construction suit with the appropriate local court to resolve the ambiguity. The court issues an order construing the instrument to provide for per capita distributions to the children, grandchildren, and more remote issue of A and B living at the time the trust terminates. The court's construction resolves a bona fide issue regarding the proper interpretation of the instrument and is consistent with applicable state law as it would be interpreted by the highest court of the state. Therefore, the trust will not be subject to the GST tax. In Commissioner v. Estate of Bosch, 387 U.S. 456 (1967), the Court considered whether a state trial court's characterization of property rights conclusively binds a federal court or agency in a federal estate tax controversy. The Court concluded that the decision of a state trial court as to an underlying issue of state law should not be controlling when applied to a federal statute. Rather, the highest court of the state is the best authority on the underlying substantive rule of state law to be applied in the federal matter. If there is no decision by that court, then the federal authority must apply what it finds to be state law after giving "proper regard" to the state trial court's determination and to relevant rulings of other courts of the state. In this respect, the federal agency may be said, in effect, to be sitting as a state court. State Statute provides that a court may intervene in the administration of a trust to the extent its jurisdiction is invoked by an interested person or as provided by law. The Supreme Court of State has ruled that a court may require a trust to be reformed on clear and decisive proof that the instrument fails to embody the settlor's intent because of scrivener's error. To ascertain the settlor's intent, a court looks to the trust instrument as a whole and the circumstances known to the settlor on execution. Citation 1. In addition, courts may accept extrinsic evidence, such as an attorney's affidavit, that demonstrates that there has been a mistake. Citation 2. In this case, an examination of the relevant Trust instruments, affidavits, and representations of the parties indicate that Donor intended that Trust property be held in trust for future generations, to be divided into separate trusts for each grandchild upon a child's death, and to benefit a child's family line as long as there were descendants living in that family line. This intent was not carried out in the Trust instrument agreement due to scrivener's error. The proposed judicial action will remedy these bona fide issues. As discussed above, the proposed judicial action is consistent with applicable State law that would be applied by the highest court of State. Accordingly, based on the facts presented and the representations made, we rule that the proposed amendment to Trust, pursuant to State Court's order, will not cause Trust 2 to lose its status as exempt from the provisions of chapter 13 or cause distributions from Trust or terminations of interests in Trust to be subject to the GST tax. Ruling 2 Section 2501(a) imposes a gift tax for each calendar year on the transfer of property by gift during the year by an individual. Section 2511 provides that the gift tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible. Section 2512(a) provides that if the gift is made in property, the value thereof at the date of the gift is considered the amount of the gift. Section 2512(b) provides that where property is transferred for less than an adequate consideration in money or money's worth, then the amount by which the value of the property exceeded the value of the consideration is deemed a gift. In this case, an examination of the relevant Trust instruments, affidavits, and representations of the parties indicate that Donor intended that Trust property be held in trust for future generations, to be divided into separate trusts for each grandchild upon a child's death, and to benefit a child's family line as long as there were descendants living in that family line. This intent was not carried out in the Trust instrument agreement due to scrivener's error. The proposed amendment to the language of Trust does not constitute an exercise by Donor of any right to an interest in Trust or control over Trust property. The purpose of the proposed amendment is to correct the scrivener's error, not to alter or modify the trust instrument. Accordingly, based on the facts presented and the representations made, we conclude that the amendment of Trust is consistent with applicable State law that would be applied in the highest court of State. Thus, we rule that the proposed amendment to Trust, pursuant to State Court's order, will not cause any beneficiary to be treated as making a taxable gift of any portion of Trust 2. Ruling 3 Section 2001(a) provides that a tax is imposed on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States. Section 2033 provides that the value of the gross estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death. Section 2036(a) provides, generally, that the value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death: (1) the possession or enjoyment of, or the right to the income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom. Section 2038(a)(1) provides that the value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in the case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power (in whatever capacity exercisable) by the decedent alone or by the decedent in conjunction with any other person (without regard to when or from what source the decedent acquired such power), to alter, amend, revoke, or terminate, or where any such power is relinquished during the 3-year period ending on the date of the decedent's death. In order for §§ 2036 and 2038 to apply, the decedent must have made a transfer of property of any interest therein (except in the case of a bona fide sale for adequate and full consideration in money or money's worth) under which the decedent retained an interest in, or power over, the income or corpus of the transferred property. In this case, an examination of the relevant Trust instruments, affidavits, and representations of the parties indicate that Donor intended that Trust property be held in trust for future generations, to be divided into separate trusts for each grandchild upon a child's death, and to benefit a child's family line as long as there were descendants living in that family line. This intent was not carried out in the Trust instrument agreement due to scrivener's error. The proposed amendment to the language of Trust does not constitute an exercise by Donor of any right to an interest in Trust or control over Trust property. The purpose of the proposed amendment is to correct the scrivener's error, not to alter or modify the trust instrument. Accordingly, based on the facts presented and the representations made, we conclude that the amendment of Trust is consistent with applicable State law that would be applied in the highest court of State. Thus, we rule that the proposed amendment to Trust, pursuant to State Court's order, will not cause any portion of Trust 2 to be includible in the gross estate of any beneficiary prior to termination. Ruling 4 Section 61(a)(3) provides that gross income includes all income from whatever source derived, including gains derived from dealings in property and under § 61(a)(15), from an interest in a trust. Section 1001(a) provides that the gain from the sale or other disposition of property shall be the excess of the amount realized over the adjusted basis provided in § 1011 for determining gain, and the loss shall be the excess of the adjusted basis provided in § 1011 for determining loss over the amount realized. Section 1001(b) provides that the amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received. Under § 1001(c) the entire amount of gain or loss on the sale or exchange of property shall be recognized, except as otherwise provided. Section 1.1001-1(a) of the Income Tax Regulations provides that except as otherwise provided in subtitle A of the Code, the gain or loss realized from the exchange of property for other property differing materially either in kind or in extent, is treated as income or as loss sustained. An exchange of property results in the realization of gain or loss under § 1001 if the properties exchanged are materially different. Cottage Savings Association v. Commissioner, 499 U.S. 554 (1991). A material difference exists when the exchanged properties embody legal entitlements different in kind or extent or if they confer different rights and powers. Id. at 565. Accordingly, based on the information submitted and the representations made in the ruling request, we conclude that there will be no sale or other disposition because there will be no transfer of money or property. The beneficiaries will possess the same interests before and after State Court's order. The proposed changes to Trust clarify the original intent of Donor and do not create material differences in the interests of the beneficiaries. Accordingly, neither the trusts nor their beneficiaries will recognize gain or loss under § 1001 after issuance of State Court's order. The proposed amendments to Trust will not cause Trust 2, or its beneficiaries to recognize any gain or loss from sale or other disposition of property under §§ 61 and 1001. In accordance with the Power of Attorney on file with this office, we have sent a copy of this letter to your authorized representatives. Except as expressly provided herein, we neither express nor imply any opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination. This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides that it may not be used or cited as precedent. Sincerely, Melissa C. Liquerman ___________________ Melissa C. Liquerman Chief, Branch 4 Office of the Associate Chief Counsel (Passthroughs & Special Industries) Enclosures: Copy for § 6110 purposes Copy of this letter cc:
Private Letter Ruling Number: 202242019 Internal Revenue Service September 17, 2020 DEPARTMENT OF THE TREASURY TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION Number: 202242019 Release Date: 10/21/2022 Date: September 17, 2020 Taxpayer ID Number: Form: For Tax Period(s) Ending: Person to Contact: Identification Number: Telephone Number: UIL: 501.07-00 CERTIFIED MAIL -- Return Receipt Requested LAST DAY FOR FILING A PETITION WITH THE TAX COURT: This is a final determination that you do not qualify for exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(7) for the tax period(s) above. Your determination letter dated **** is revoked. Our adverse determination as to your exempt status was made for the following reasons: You have not established that you are operated substantially for pleasure and recreation of your members or other non-profitable purposes and no part of the earnings inures to the benefit of private shareholder within the meaning of IRC Section 501(c)(7). You have made your recreational and social facilities available to the general public. You have exceeded the non-member income test for tax year ending ** Organizations that are not exempt under IRC Section 501 generally are required to file federal income tax returns and pay tax, where applicable. For further instructions, forms, and information please visit www.irs.gov. If you decide to contest this determination, you may file an action for declaratory judgment under the provisions of IRC Section 7428 in one of the following three venues: 1) United States Tax Court, 2) the United States Court of Federal Claims, or 3) the United States District Court for the District of Columbia. A petition or complaint in one of these three courts must be filed within 90 days from the date this determination was mailed to you. Please contact the clerk of the appropriate court for rules and the appropriate forms for filing petitions for declaratory judgment by referring to the enclosed Publication 892. You may write to the courts at the following addresses: United States Tax Court 400 Second Street, NW Washington, DC 20217 U.S. Court of Federal Claims 717 Madison Place, NW Washington, DC 20439 U.S. District Court for the District of Columbia 333 Constitution Ave., N.W. Washington, DC 20001 Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory judgment under IRC Section 7428. You may be eligible for help from the Taxpayer Advocate Service (TAS). TAS is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 1-877-777-4778. Taxpayer Advocate assistance can't be used as substitute for established IRS procedures, formal appeals processes, etc. The Taxpayer Advocate is not able to reverse legal or technically correct tax determination, nor extend the time fixed by law that you have to file a petition in Court. The Taxpayer Advocate can, however, see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling. You can get any of the forms or publications mentioned in this letter by calling 800-TAX-FORM (800-829-3676) or visiting our website at www.irs.gov/forms-pubs. If you have any questions, you can contact the person listed at the top of this letter. Sincerely, Sean E. O'Reilly Director, Exempt Organizations Examinations Enclosures: Publication 892 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Date: 05/06/2020 Taxpayer ID number: Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: Address: Manager's contact information: Name: ID number: Telephone: Response due date: CERTIFIED MAIL -- Return Receipt Requested Dear **: Why you're receiving this letter We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we propose to revoke your tax-exempt status as an organization described in Internal Revenue Code (IRC) Section 501(c)(7). If you agree If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an organization described in IRC Section 501(c)(7) for the periods above. If you disagree 1. Request a meeting or telephone conference with the manager shown at the top of this letter. 2. Send any information you want us to consider. 3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after the meeting or after we consider the information. The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case. For your protest to be valid, it must contain certain specific information, including a statement of the facts, applicable law, and arguments in support of your position. For specific information needed for a valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn't apply now that we've issued this letter. 4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities) if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the IRS. If you're considering requesting technical advice, contact the person shown at the top of this letter. If you disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as explained above. A decision made in a technical advice memorandum, however, generally is final and binding on Appeals. If we don't hear from you If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final adverse determination letter. Contacting the Taxpayer Advocate Office is a taxpayer right The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778. Additional information You can get any of the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person shown at the top of this letter. Sincerely, Russell T. Renwicks For Maria Hooke Director, Exempt Organizations Examinations Enclosures: Form 886-A Form 6018 ISSUE: Does ** continue to qualify for exemption from Federal income tax under section 501(c)(7) of the Internal Revenue Code as a Social Club? FACTS: ** was incorporated in the state of ** on **. The stated exempt purpose was to operate a ** and ** for the members of a ** association known as the **, **, ** The proposed activities were to conduct social events for the Council, and to purchase, take, hold, **, **, ** for the purpose of owning and operating a ** and **. The articles of incorporation include a clause that states upon the dissolution of the corporation, all assets remaining after the payment of debts will become ** of ** in the City of **, **. The bylaws for ** states that "Any member of ** of the ** shall be considered members of **." The Form ** flied for the tax period ending ** states that **, ** was the property-owning entity and had provided the facility for the ** of ** and the **. The ** of ** is a ** organization considered tax-exempt under section 501(c)(8) of the Internal Revenue Code (IRC). The ** is also a ** organization considered tax-exempt under IRC section 501(c)(8). ** was formerly exempt under IRC section 501(c)(8) as a ** organization but had filed for exemption under IRC section 501(c)(7) as a social club on **. The Form **, Application for Recognition of Exemption Under Section 501(a), filed by ** states that the primary activities are the ownership of property for the ** of ** and ** Charitable Activities, and to provide a facility for the operation of a weekly ** where ** percent of the proceeds are provided to the ** of ** for charitable donations. The organization was granted exemption under Internal Revenue Code Section 501(c)(7) on ** effective **. The Determination Letter 947 included the statement that "A section 501(c)(7) organization is permitted to receive up to 35 percent of its gross receipts, including investment income, from sources outside of its membership without losing its tax-exempt status. Of the 35 percent, not more that 15 percent of the gross receipts may be derived from the use of the club's facilities or services by the general public. Income in excess of these limits may jeopardize your continued tax-exempt status." On **, ** sold the building and the land to ** of **. The purchase price was $ **. ** received ** $ ** of the proceeds in cash. The remaining $ ** was credited to fees, taxes, etc. The organization deposited the $ ** received in cash into a money market account with ** in **. On ** withdrew the $ ** and deposited it into their account with **. On **, ** wrote and issued check ** to ** in the amount of ** $ **. The notation on the check indicates that is was for a donation to the new **. The donation was made in accordance with the dissolution clause included in the articles of incorporation that states upon the dissolution of the corporation, all assets remaining after the payment of debts will become the property of ** in the City **. The determination specialist had granted exemption under IRC section 501(c)(7) based on the governing documents provided. The ** (regular shares) was set up for the deposits of investment income earned from the ** money market account. The money market account was closed after the withdrawal of the $ ** that was donated to the **. The $ ** in investment income reported on the Form ** for the tax period ending ** was from the ** bank account. No other income was reported on the Form ** as all membership dues were paid to the ** of **. ** had similarly reported $ ** in investment income as the only income received for the tax period ending **. The investment income received by ** since the sale of ** represents ** percent of its gross receipts. The organization has not conducted any social activities since ** was sold on **. The only activity currently conducted by the organization is providing donations to the ** of ** and the ** for their activities. LAW: Section 501(c)(7) of the Internal Revenue Code provides for exemption from Federal income tax of clubs organized for pleasure, recreation, and other nonprofitable purposes, substantially all of the activities of which are for such purposes and no part of the net earnings of which inures to the benefit of any private shareholder. Section 1.501(c)(7)-1(a) of the Income Tax Regulations states that "The exemption provided by section 501(a) for organizations described in section 501(c)(7) applies only to clubs which are organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes, but does not apply to any club if any part of its net earnings inures to the benefit of any private shareholder. In general, this exemption extends to social and recreation clubs which are supported solely by membership fees, dues, and assessments. However, a club otherwise entitled to exemption will not be disqualified because it raises revenue from members through the use of club facilities or in connection with club activities." IRC 501(c)(7) was amended in 1976 by Public Law 94-568 to allow organizations to receive a greater amount of nonmember income without jeopardizing their exempt status. Prior to passage of this law, IRC 501(c)(7) provided exemption for social clubs organized exclusively for pleasure, recreation and other nonprofitable purposes. That law substituted the word "substantially" for "exclusively." The Committee reports show that this wording change was intended to make it clear that social clubs may receive outside income, without losing their exempt status. However, the Committee reports also specified clearly defined limits on this outside income, which if exceeded then invoke the application of a facts and circumstances test. The audit standard of Rev.Proc. 71-17 has been effectively raised, as of October 21, 1976, to allow social clubs to receive up to 35% of their gross receipts, including investment income, from sources outside their membership without losing their exempt status. Within this 35%, no more than 15% of gross receipts may be derived from nonmember use of club facilities and/or services. Gross receipts are defined for this purpose as those receipts from normal and usual activities that have been traditionally conducted by the club or by other social and recreational clubs of the same general type. For example, in the case of country clubs, gross receipts include receipts from activities traditionally conducted by country clubs. Unusual amounts of income, such as from the sale of a clubhouse or similar facility are not to be included in either the gross receipts of the club or in the permitted 35 or 15 percent allowances. It should be emphasized that gross receipts from the conduct of a nontraditional business or other activity previously forbidden may not be included within the percentage guidelines. The conduct of a business not traditionally carried on by social clubs unless it is insubstantial, trivial, and nonrecurrent, should preclude exemption. The committee reports provide that an organization described in section 501(c)(7) is permitted to receive up to 35 percent of its gross receipts from nonmember sources, including investment income, as long as the nonmember gross income does not represent more than 15 percent of total gross receipts. See S. Rep. No. 94-1318, 94th Cong., 2d Sess. 4 (1976); 1976-2 C.B. 597, 599. See also H.R. Rep. No. 94-1353, 94th Cong. 2d. Sess. 4 (1976). Where the permitted levels of nonmember source income are exceeded, all facts and circumstances will be taken into account in determining whether the social club continues to qualify for exempt status. Thus the 15% and 35% rules are essentially safe-harbors. TAX PAYER POSITION: The treasurer for ** stated that all members of ** are members of **, and that **, in conjunction with **, have hosted several activities since the sale of **, including a ** (open to the general public as well as members), a **, a **, and a **. The food was paid for from donations from ** and proceeds were donated to the **. The organization indicated that it is in agreement with the Government's position that the organization does not qualify for exemption from Federal income tax under section 501(c)(7) of the Internal Revenue Code as a Social Club. GOVERNMENT POSITION: We are proposing the revocation of the Tax-Exempt Status of ** due to the fact that ** percent of the gross receipts received by the organization is from investment income and has exceeded the ** and ** percent safe harbor that is provided by Public Law 94-568. In addition, ** has not conducted any social activities since ** was sold on **. The only activity currently conducted by the organization is providing donations to the ** of ** and the ** for their activities. The Service will not pursue the sale of ** issue based on several factors. **, the proceeds of the sale were donated to the **, as required by the dissolution clause included in the Articles of Incorporation. The determination specialist had granted exemption under IRC section 501(c)(7) based on the governing documents provided. In addition, the actual social activities were conducted by the ** of **, and not by the 501(c)(7) organization. The primary purpose of the 501(c)(7) organization was to hold title to ** as the local the ** of ** was prohibited from owning **. The organization should probably have been granted exemption under IRC 501(c)(2) as a title holding corporation instead of an IRC 501(c)(7) social club. Based on the information provided, it is recommended that the exempt status of the organization be revoked effective ****.
Internal Revenue Service - Fact Sheet FS-2022-27 IRS updates frequently asked questions to assist those claiming the 2021 Recovery Rebate Credit April 2022 Internal Revenue Service Media Relations Office Washington, D.C. Media Contact: 202.317.4000 Public Contact: 800.829.1040 www.irs.gov/newsroom IRS updates frequently asked questions to assist those claiming the 2021 Recovery Rebate Credit FS-2022-27, April 2022 This Fact Sheet updates frequently asked questions (FAQs) for the 2021 Recovery Rebate Credit. Individuals who did not qualify for, or did not receive, the full amount of the third Economic Impact Payment may be eligible to claim the 2021 Recovery Rebate Credit based on their 2021 tax year information. This update modifies Questions 1, 5, 8 and 9, Topic F: Receiving the Credit on a 2021 Tax Return. These FAQs are being issued to provide general information to taxpayers and tax professionals as expeditiously as possible. Accordingly, these FAQs may not address any particular taxpayer's specific facts and circumstances, and they may be updated or modified upon further review. Because these FAQs have not be en published in the Internal Revenue Bulletin, they will not be relied on or used by the IRS to resolve a case. Similarly, if an FAQ turns out to be an inaccurate statement of the law as applied to a particular taxpayer's case, the law will control the taxpayer's tax liability. Nonetheless, a taxpayer who reasonably and in good faith relies on these FAQs will not be subject to a penalty that provides a reasonable cause standard for relief, including a negligence penalty or other accuracy-related penalty, to the extent that reliance results in an underpayment of tax. Any later updates or modifications to these FAQs will be dated to enable taxpayers to confirm the date on which any changes to the FAQs were made. Additionally, prior versions of these FAQs will be maintained on IRS.gov to ensure that taxpayers, who may have relied on a prior version, can locate that version if they later need to do so. More information about reliance is available. These FAQs were announced in IR-2022-83. 2021 Recovery Rebate Credit Questions and Answers Background If you didn't get the full amount of the third Economic Impact Payment, you may be eligible to claim the 2021 Recovery Rebate Credit and must file a 2021 tax return-even if you don't usually file taxes - to claim it. Your 2021 Recovery Rebate Credit will reduce any tax you owe for 2021 or be included in your tax refund. If your income is $73,000 or less, you can file your federal tax return electronically for free through the IRS Free File Program. The fastest way to get your tax refund is to file electronically and have it direct deposited, contactless and free, into your financial account. You can have your refund direct deposited into your bank account, prepaid debit card or mobile app and will need to provide routing and account numbers. If you didn't get the full amounts of the first and second Economic Impact Payments, you may be eligible to claim the 2020 Recovery Rebate Credit and must file a 2020 tax return - even if you don't usually file taxes - to claim it. DO NOT include any information regarding the first and second Economic Impact Payments or the 2020 Recovery Rebate Credit on your 2021 return. Below are frequently asked questions about the 2021 Recovery Rebate Credit, separated by topic. Please do not call the IRS. - Topic A: General Information - Topic B: Claiming the Recovery Rebate Credit if you aren't required to file a 2021 tax return - Topic C: Eligibility for claiming a Recovery Rebate Credit on a 2021 tax return - Topic D: Claiming the 2021 Recovery Rebate Credit - Topic E: Calculating the 2021 Recovery Rebate Credit - Topic F: Receiving the Credit on a 2021 tax return - Topic G: Finding the third Economic Impact Payment Amounts to calculate the 2021 Recovery Rebate Credit - Topic H: Correcting issues after the 2021 tax return is filed 2021 Recovery Rebate Credit -- Topic A: General Information Q A1. How does the 2021 Recovery Rebate Credit differ from the 2020 Recovery Rebate Credit? (added January 13, 2022) A1. 2020 Recovery Rebate Credit: The first two rounds of Economic Impact Payments were advance payments of 2020 Recovery Rebate Credits claimed on a 2020 tax return. The IRS issued the first and second rounds of Economic Impact Payments in 2020 and in early 2021. See 2020 Recovery Rebate Credit Questions and Answers. 2021 Recovery Rebate Credit: The third round of Economic Impact Payments, including the plus-up payments, were advance payments of the 2021 Recovery Rebate Credit claimed on a 2021 tax return. The IRS began issuing the third round of Economic Impact Payments in March 2021 and continued through December 2021. In addition, the third payments differ from the earlier payments in several respects: - Payment amounts are different. The maximum credit is $1,400 per person, including all qualifying dependents claimed on a tax return. Typically, this means a single person with no dependents will have a maximum credit of $1,400, while married taxpayers who file a joint return that claims two qualifying dependents will have a maximum credit of $5,600. - Qualifying dependents expanded. Unlike the 2020 Recovery Rebate Credits and first two rounds of Economic Impact Payments, the 2021 Recovery Rebate Credit and third round of Economic Impact Payments include additional amounts for all dependents, not just children under 17. Eligible individuals will get up to $1,400 for each qualifying dependent claimed on their return, including older relatives like college students, adults with disabilities, parents, and grandparents. - Income thresholds changed. The credit amount begins to be reduced at the same income thresholds as the 2020 Recovery Rebate Credits, for example with adjusted gross income of more than $75,000 if filing as single or $150,000 if filing as married filing jointly. However, the 2021 Recovery Rebate Credit amount is fully reduced to $0 more quickly. For example, individuals can't claim any credit with adjusted gross income of $80,000 or more if filing as single or $160,000 or more for if filing as married filing jointly. Due to these new income limitations, some individuals won't be eligible to claim the 2021 Recovery Rebate Credit even if they received a 2020 stimulus payment. Q A2. What were Plus-Up Payments? (added January 13, 2022) A2. Some eligible individuals received more than one third Economic Impact Payment. The IRS sent additional or plus-up payments to people who: - Received a third Economic Impact Payment based on a 2019 tax return or information received from the Social Security Administration, Railroad Retirement Board, or the Department of Veterans Affairs, and - Filed a 2020 tax return which allowed a greater third Economic Impact Payment but only if the 2020 return was processed by Dec 1, 2021. For example, you may have gotten a plus-up payment if your income was less in 2020 compared to 2019 or you added a dependent on your 2020 return. We automatically evaluated your eligibility for plus-up payments after we processed your 2020 return. We sent plus-up payments separately from your 2020 tax refund and previous Economic Impact Payments. We issued weekly plus-up payments to eligible taxpayers until December 31, 2021, the deadline set by law to make Economic Impact Payments. Individuals who did not receive the full amount of the third Economic Impact Payment, including the plus-up payments, may be eligible to claim the 2021 Recovery Rebate Credit on their 2021 tax return. Q A3. Will the IRS send me a letter or notice about the third Economic Impact Payment? (updated February 17, 2022) A3. Yes, the IRS mailed Notice 1444-C, Your Third Economic Impact Payment, to the address we had on file for you. The IRS sent separate letters to people who received a plus-up payment. Through March 2022, the IRS will send Letter 6475, Your 2021 Economic Impact Payment(s), to confirm the total amount of the third Economic Impact Payment and any plus-up payments you received for tax year 2021. If you received joint payments with your spouse, the letter shows the total amount of your half of the payment. Each spouse may receive their letter at different times. If filing a joint return in 2021, include both amounts when calculating the 2021 Recovery Rebate Credit. If you file separate 2021 tax returns, each of you must enter your half of the amount of the payment, which is shown on your own Letter 6475, when calculating any 2021 Recovery Rebate Credit you may be eligible to claim on your own return. Please keep any IRS notices/letters you receive related to the third round of Economic Impact Payments with your tax records and refer to it when you file your 2021 tax return. Individuals can also view the total amount of their third Economic Impact Payments through their individual Online Account. If you and your spouse received joint payments, each of you will need to sign into your own account to retrieve your separate amounts. Q A4. Returning a Payment: What should I do to return an Economic Impact Payment that was received as a direct deposit or a paper check? (added January 13, 2022) A4. You should return the payment as described below. If the payment was a paper check: 1. Write "Void" in the endorsement section on the back of the check. 2. Mail the voided Treasury check immediately to the appropriate IRS location listed below. 3. Don't staple, bend, or paper clip the check. 4. Include a brief explanation stating the reason for returning the check. If the payment was a paper check and you have cashed it, or if the payment was a direct deposit: 1. Submit a personal check, money order, etc., immediately to the appropriate IRS location listed below. 2. Make the check/money order made payable to "U.S. Treasury" 3. Write Third EIP, and the Social Security Number (or individual taxpayer identification number) of the recipient of the check. 4. Include a brief explanation of the reason for returning the EIP. For your paper check, here are the IRS mailing addresses to use based on the state: Q A5. How do I return an Economic Impact Payment (EIP) that was received as an EIP Card (debit card) if I don't want the payment re-issued? (added January 13, 2022) A5. If you received your EIP as a debit card and want to return the money to the IRS and NOT have the payment reissued, send the card along with a brief explanation stating you don't want the payment and do not want the payment re-issued to: Money Network Cardholder Services 2900 Westside Parkway Alpharetta, GA 30004 Q A6 My address has changed or is incorrect. How can I update it to get my 2021 Recovery Rebate Credit? (added February 17, 2022) A6. The easiest way to update your address with the IRS is to file your 2021 tax return with your current address. The best way to file a complete and accurate 2021 tax return is to file electronically. If you did not receive your third Economic Impact Payment in 2021, or received less than the full amount, you may be eligible to claim the Recovery Rebate Credit when you file your 2021 return. The safest and fastest way to get a tax refund (which would include your Recovery Rebate Credit) is to combine electronic filing with direct deposit. For other ways to update your address with the IRS, see How do I notify the IRS my address has changed? 2021 Recovery Rebate Credit -- Topic B: Claiming the 2021 Recovery Rebate Credit if you aren't required to file a tax return Q B1. I used the Non-Filers tool last year and don't usually file a tax return. What should I do to claim a 2021 Recovery Rebate Credit? (added January 13, 2022) A1. If you're eligible - and either didn't qualify for a third Economic Impact Payment or got less than the full amount -you'll need to file a 2021 tax return to claim the Recovery Rebate Credit even if you otherwise are not required to file a tax return. The best way to file a complete and accurate 2021 tax return is to file electronically. The tax preparation software will ask you questions about your income, credits and deductions and will help you figure your 2021 Recovery Rebate Credit. If your income is $73,000 or less, you can use brand-name software to prepare and file your Federal tax return electronically for free with IRS Free File. IRS Free File is a great option for people who are only filing a tax return - even if you don't usually file taxes - to claim the 2021 Recovery Rebate Credit. Visit IRS.gov/filing for details about IRS Free File, Free File Fillable Forms or finding a trusted tax professional. The safest and fastest way to get a tax refund (which would include your Recovery Rebate Credit) is to combine electronic filing with direct deposit. Q B2. I do not have a filing requirement, but I think I qualify for more than I received for the third Economic Impact Payment. How can I file for the Recovery Rebate Credit? (added January 13, 2022) A2. If you're eligible - and either didn't receive the full amount of the third Economic Impact Payment or if you think you qualify for a Recovery Rebate Credit that is more than the amount of the third Economic Impact Payment you received - you'll need to file a 2021 tax return to claim the Recovery Rebate Credit even if you otherwise are not required to file a tax return. The best way to file a complete and accurate 2021 tax return is to file electronically in 2022. The tax preparation software will ask you questions about your income, credits and deductions and will help you figure your 2021 Recovery Rebate Credit. If your income is $73,000 or less, you can use brand-name software to prepare and file your Federal tax return electronically for free with IRS Free File. IRS Free File is a great option for people who are only filing a tax return - even if you don't usually file taxes - to claim the Recovery Rebate Credit. Visit IRS.gov/filing for details about IRS Free File, Free File Fillable Forms or finding a trusted tax professional. The safest and fastest way to get a tax refund (which would include your Recovery Rebate Credit) is to combine electronic filing with direct deposit. Q B3. What information do I need to provide to claim the 2021 Recovery Rebate Credit? (added January 13, 2022) A3. If you file electronically, the tax preparation software will ask you for specific information. No matter how you file, you will need to do the following to claim the 2021 Recovery Rebate Credit: - Compute the 2021 Recovery Rebate Credit amount using tax preparation software, or the line 30 worksheet found in 2021 Form 1040 and Form 1040-SR Instructions. - Enter the computed amount from the worksheet onto line 30, Recovery Rebate Credit, of your 2021 Form 1040 or Form 1040-SR. Reminder: Complete direct deposit information on line 35b-35d or check the box on line 35a and complete Form 8888 if you want to split your refund for deposit into more than one account or buy a U.S. Savings Bond. Direct deposit is the safest and fastest way to receive your refund. If you don't choose direct deposit, a paper check will be mailed to you. See FAQ B7. How can I get a direct deposit if I don't have a bank account? Free tax return preparation is also available for those who qualify. Q B4. Should I include income on the return even if I am not usually required to file? (added January 13, 2022) A4. Yes, you may be eligible to claim additional tax credits if you have earned income and include all your income with the information about a spouse or any dependents on your tax return. Filing your 2021 tax return electronically is the fastest and most accurate way for you to file. If your income is $73,000 or less, you can use brand-name software to prepare and file your Federal tax return electronically for free with IRS Free File. You can also file electronically with commercial tax preparation software. The tax preparation software will ask you questions about your income, credits and deductions and will help you figure your 2021 Recovery Rebate Credit and any other credits that may apply to you. Q B5. I am filing electronically, and the software asks me to enter my prior year Adjusted Gross Income (AGI) to submit my return. Where do I find this information? (updated February 17, 2022) A5. When preparing your taxes and filing electronically, you must sign and validate your electronic tax return by entering your prior-year Adjusted Gross Income (AGI) or your prior-year Self-Select PIN. - If you successfully used the Non-Filers tool last year to register for an advance Child Tax Credit payment or claim a 2020 Recovery Rebate Credit, enter "$1" as the prior year AGI verification. - If you did not use the Non-Filers tool last year and you did not file an electronic or a paper 2020 Form 1040 or Form 1040-SR, you should enter "$0" as the prior year AGI verification. - If you filed an electronic or a paper 2020 Form 1040 or Form 1040-SR, enter the AGI amount from line 11 of the submitted 2020 Form 1040 or Form 1040-SR as the prior year AGI verification. To find the AGI amount, you can also view or create your online account and access Tax Records. Q B6. Can I use IRS Free File to file a tax return - even if I don't usually file taxes - to claim a 2021 Recovery Rebate Credit? (added January 13, 2022) A6. Yes. IRS Free File online is especially valuable for people who do not have a tax filing obligation. These are people whose taxable income is below certain income levels. For example, single people with income below $12,550, the amount of the standard deduction, would have no filing obligation if they had no other special tax issues. Eligible individuals who did not get a third Economic Impact Payment or got less than the full amount, must file a 2021 tax return - even if they do not usually file a tax return - to claim the 2021 Recovery Rebate Credit. Even if you don't have a computer, you can access IRS Free File and file your tax return on your smart phone. Here's how it works if you do not have a 2021 tax filing requirement and file in 2022: 1. Go to IRS.gov/freefile. 2. Select "Choose an IRS Free File Offer" blue button. 3. Select "Browse all offers" and look for a product that has no minimum income requirement. 4. Select the product that best meets your needs, and you will be automatically redirected to the company's website. 5. Answer the tax product questions to complete your tax return, accurately report your taxable income, if any. 6. If you have no taxable income, simply answer the questions including those requesting information needed to compute the 2021 Recovery Rebate Credit. 7. Complete the information for your refund, sign the tax return electronically and file the tax return electronically. Individuals who do not have a tax filing obligation who use IRS Free File may find they are eligible for additional tax benefits such as the Earned Income Tax Credit, or EITC. Free File uses easy interview-based software products to walk you through the tax filing process step-by-step to help ensure you get all the tax benefits you are due. Q B7. How can I get a direct deposit if I don't have a bank account? (added January 13, 2022) A7. Filing electronically and having your refund sent via direct deposit is the fastest and safest way to receive your money. If you don't have a bank account, visit the FDIC website or the National Credit Union Association using their Credit Union Locator Tool for information on where to find a bank or credit union that can open an account online and how to choose the right account for you. If you are a veteran, see the Veterans Benefits Banking Program (VBBP) for access to financial services at participating banks. If you have a prepaid debit card, you may be able to have your refund applied to the card. Many reloadable prepaid cards or mobile payment apps have account and routing numbers that you could provide to the IRS. You would need to check with the financial institution to ensure your card can be used and to obtain the routing number and account number, which may be different from the card number. Note: Any previously issued Economic Impact Payment debit card is not a reloadable card. Q B8. I don't usually file a tax return and used the new Child Tax Credit Non-filer Sign-up Tool in 2021. Am I also eligible to claim a 2021 Recovery Rebate Credit? (added January 13, 2022) A8. Most eligible people already received their 2021 Recovery Rebate Credit in advance as third Economic Impact Payments, including those who successfully used the Non-Filers tool. We used the information you entered in the Child Tax Credit Non-Filer Sign-up Tool to calculate and send to eligible people the Third Economic Impact Payment. If you didn't qualify for a third Economic Impact Payment or got less than the full amount and would like to know if you're eligible for the 2021 Recovery Rebate Credit, see FAQ Eligibility Requirements: What are the eligibility requirements for the credit? Q B9. I'm not sure how much of the 2021 Recovery Rebate Credit I'm eligible for. If I enter the wrong amount, what will happen? (added January 13, 2022) A9. When you file your 2021 tax return, your tax preparation software or the line 30 worksheet found in the 2021 Form 1040 and Form 1040-SR Instructions can help you figure your Recovery Rebate Credit amount. You will need to know the amount of your third Economic Impact Payment and any plus-up payments. Log into your Online Account to look up these amount(s) or you may also refer to the Notice 1444-C, Your Third Economic Impact Payment. In early 2022, we'll send Letter 6475 confirming the total amount of the third Economic Impact Payment and any plus-up payments you received for tax year 2021. If you figure your 2021 Recovery Rebate Credit incorrectly, the IRS will calculate the credit for you only if you do not enter $0 or leave line 30 of your 2021 Form 1040 or Form 1040-SR blank. Otherwise, we'll make the correction to your tax return and continue processing your return. The IRS will not contact you before making this correction, and you will not be required to provide any additional information. If we need to correct your return, it may take longer to process, which may also slow your tax refund. We will send you a notice explaining any change made to your return. See Topic H: Correcting issues after the 2021 tax return is filed for more information. DO NOT file an amended tax return. Q B10. What will happen if I enter $0 for the credit and that amount is incorrect or I leave line 30 of 2021 Form 1040 or Form 1040-SR blank? (added January 13, 2022) A10. The IRS will not calculate and correct your entry if you enter $0 or leave the line blank for the Recovery Rebate Credit. Instead, the IRS will treat your entry of $0 or blank as your decision not to claim the Recovery Rebate Credit. See Topic H: Correcting issues after the 2021 tax return is filed for more information. 2021 Recovery Rebate Credit -- Topic C: Eligibility for claiming a Recovery Rebate Credit on a 2021 tax return QC1. Eligibility Requirements: What are the eligibility requirements for the credit? (added January 13, 2022) A1. The eligibility requirements for the 2021 Recovery Rebate Credit are the same as they were for the third Economic Impact Payments, except that the credit eligibility and amount are based on your 2021 tax year information. Third Economic Impact Payments were based on your 2019 or 2020 tax year information. If you didn't qualify for third Economic Impact Payment or did not receive the full amount, may be eligible to claim the 2021 Recovery Rebate Credit based on your 2021 tax information. If you received the full amount for the third Economic Impact Payment, you won't need to include any information about it when you file your 2021 tax return. You received the full amount of your third Economic Impact Payment if the total amount was: - $1,400 for an eligible individual who has a valid Social Security number (SSN) ($2,800 for married couples filing a joint return if both spouses have a valid SSN or if one spouse has a valid SSN and one spouse was an active member of the U.S. Armed Forces at any time during the taxable year) plus - $1,400 for each qualifying dependent who has a valid SSN or Adoption Taxpayer Identification Number (ATIN) issued by the IRS Generally, if you were a U.S. citizen or U.S. resident alien in 2021, you were not a dependent of another taxpayer, and you either have a valid SSN or claim a dependent who has a valid SSN or ATIN, you are eligible to claim the 2021 Recovery Rebate Credit. You may also be eligible if you file a joint return with your spouse, you or your spouse were a U.S. citizen or U.S. resident alien in 2021, and either you, your spouse, or both of you, have a valid SSN or you claim a dependent who has a valid SSN or ATIN. Your credit amount will be reduced by the amount of your third Economic Impact Payment. It is then reduced if the adjusted gross income (AGI) amount on line 11 of your 2021 Form 1040 or Form 1040-SR is more than: - $150,000 if married and filing a joint return or filing as a qualifying widow or widower - $112,500 if filing as head of household or - $75,000 for all others. No credit is allowed when AGI is at least the following amount: - $160,000 if married and filing a joint return or if filing as a qualifying widow or widower - $120,000 if filing as head of household or - $80,000 for all others. For example, a single person with no dependents and an AGI of $77,500 will have a maximum credit of $700 (half the full amount). Married taxpayers who file a joint return that claims two qualifying dependents and an AGI of $155,000 will have a maximum credit $2,800 (again, half the full amount). You aren't eligible to claim the 2021 Recovery Rebate Credit if any of the following apply: - You could be claimed as a dependent on another taxpayer's 2021 tax return - You're a nonresident alien. - You don't have a valid SSN issued to you by the due date of your tax return and you don't claim a dependent who has a valid SSN or ATIN. Also, estates, trusts, and individuals who died before January 1, 2021 do not qualify for the 2021 Recovery Rebate Credit. If your income is $73,000 or less, you can file your federal tax return electronically for free through the IRS Free File Program. The fastest way to get your tax refund is to file electronically and have it direct deposited, contactless and free, into your financial account. You can have your refund direct deposited into your bank account, prepaid debit card or mobile app and will need to provide routing and account numbers. Q C2. Not Eligible for Third Economic Impact Payments: If I wasn't eligible for a third Economic Impact Payment, am I not eligible to claim the 2021 Recovery Rebate Credit? (added January 13, 2022) A2. If you were not eligible for the full third Economic Impact Payment, you may be eligible to claim the 2021 Recovery Rebate Credit since it's based on your 2021 tax return information. Third Economic Impact Payments were based on your 2019 or 2020 tax information. Factors that may affect eligibility for the 2021 Recovery Rebate Credit include: Income change: Some people may have received less than the full third Economic Impact Payment because their adjusted gross income was too high. Lower income in 2021 could make you eligible to claim the 2021 Recovery Rebate Credit. Qualifying dependent: If an individual became your dependent in 2021, including by birth or adoption, you may be eligible to claim the 2021 Recovery Rebate Credit for the dependent on your 2021 tax return that you file in 2022. No longer a dependent: Individuals who were claimed or could be claimed as a dependent on someone else's tax return for 2019 or 2020 may now be eligible if they can't be claimed as a dependent on someone else's tax return for 2021. Social Security number: Individuals who did not have a Social Security number in 2021 but are issued one by the due date of their 2021 tax return (including an extension if the extension was requested by the due date) may now be eligible. You'll claim the 2021 Recovery Rebate Credit when you file your 2021 tax return. If your income is $73,000 or less, you can file your federal tax return electronically for free through the IRS Free File Program. The fastest way to get your tax refund is to file electronically and have it direct deposited, contactless and free, into your financial account. You can have your refund direct deposited into your bank account, prepaid debit card or mobile app and will need to provide routing and account numbers. Q C3. Change in Eligibility: If I received a third Economic Impact Payments and, based on my 2021 tax return, I'm no longer eligible, do I need to pay that money back? (added January 13, 2022) A3. No, if you qualified for a third payment based on your 2019 or 2020 tax return, the law doesn't require you to pay back all or part of the payment you received based on the information reported on your 2021 tax return. Q C4. Social Security Number Requirement: Do I need to have an SSN to claim the credit? (added January 13, 2022) A4. Generally, yes. One eligibility requirement for the 2021 Recovery Rebate Credit is that you must have a valid SSN or claim a dependent who has a valid SSN or Adoption Taxpayer Identification Number issued by the IRS. A valid SSN for the 2021 Recovery Rebate Credit is one that is issued by the Social Security Administration by the due date of your 2021 tax return (including an extension if you requested the extension by the due date). If you file jointly with your spouse and only one individual has a valid SSN, you can claim up to $1,400 for the spouse who has a valid SSN and up to $1,400 for each qualifying dependent claimed on the tax return. If neither spouse has a valid SSN, you can claim only up to $1,400 for each qualifying dependent claimed on the tax return. Active Military: If either spouse is an active member of the U.S. Armed Forces at any time during the taxable year, only one spouse needs to have a valid SSN for the couple to receive up to $2,800 for themselves, plus up to $1,400 for each qualifying dependent. Q C5. Social Security Number Spouses Filing Jointly: My spouse has an SSN and I have an ITIN. Are we eligible to claim the credit? (added January 13, 2022) A5. If you file jointly with your spouse and only one individual has a valid SSN, you can claim up to $1,400 for the spouse who has a valid SSN and up to $1,400 for each qualifying dependent claimed on the tax return. If neither spouse has a valid SSN, you can claim only up to $1,400 for each qualifying dependent claimed on the tax return. A valid SSN for the credit is one that is issued by the Social Security Administration by the due date of your tax return (including an extension if you request the extension by the due date). Active Military: If either spouse is an active member of the U.S. Armed Forces at any time during the taxable year, only one spouse needs to have a valid SSN for the couple to receive up to $2,800 for themselves, plus up to $1,400 for each qualifying dependent. Q C6. Social Security number Spouses Filing Jointly if one spouse is a member of the military: My spouse has an SSN and I have an ITIN. Are we eligible for the credit? (added January 13, 2022) A6. If either spouse is an active member of the U.S. Armed Forces at any time during the taxable year, only one spouse needs to have a valid SSN for the couple to claim up to $2,800 for themselves, plus up to $1,400 for each qualifying dependent. If spouses file separately, the spouse who has an SSN may claim the 2021 Recovery Rebate Credit; the other spouse without a valid SSN will not qualify unless claiming a qualifying dependent on the tax return. Q C7. Dependents: Who's considered a qualifying dependent for the 2021 Recovery Rebate Credit? (added January 13, 2022) A7. If you can be claimed as a dependent on someone else's 2021 tax return, then you cannot claim a dependent on your tax return. You also can't claim the 2021 Recovery Rebate Credit. The 2021 Recovery Rebate Credit includes up to an additional $1,400 for each qualifying dependent you claim on your 2021 tax return. A qualifying dependent is a dependent who has a valid Social Security number (SSN) or Adoption Taxpayer Identification Number issued by the IRS. A valid SSN for the 2021 Recovery Rebate Credit is one that is issued by the Social Security Administration by the due date of your 2021 tax return (including an extension if you requested the extension by the due date). To claim a person as a dependent on your tax return, that person must be your qualifying child or qualifying relative. A child is your qualifying child if the following conditions are met: - Relationship to you: The child is your son, daughter, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, half-brother, half-sister, or a descendant of any of them (for example, grandchild, niece, or nephew). - Age: The child was: o under age 19 at the end of the tax year and younger than you, o under age 24 at the end of the tax year, a student, and younger than you, or o any age and permanently and totally disabled. - Citizenship: The child's a U.S. citizen, U.S. national, U.S. resident alien, or a resident of Canada or Mexico. - Residency: The child lived with you for more than half of the tax year. For exceptions to this requirement, see Residency Test in Publication 501, Dependents, Standard Deduction, and Filing Information. - Support: The child didn't provide over half of his or her own support for the tax year. - Tax return: The child doesn't file a joint return for the year (or files it only to claim a refund of withheld income tax or estimated tax paid). A person is your qualifying relative if the following conditions are met: - The person can't be your qualifying child or the qualifying child of any other taxpayer. - The person either is related to you in one of several ways or lived with you all year as a member of your household (and your relationship must not violate local law). - The person is a U.S. citizen, U.S. national, U.S. resident alien, or a resident of Canada or Mexico. - The person's gross income for the year must be less than $4,300. (Exceptions exist if the person is disabled.) - You must provide more than half of the person's total support for the year. (Exceptions exist for multiple support agreements, children of divorced or separated parents, and parents who live apart.) - The person doesn't file a joint return for the year (or files it only to claim a refund of withheld income tax or estimated tax paid). To claim a person as a dependent on your tax return, that person must be your qualifying child or qualifying relative. See Whom May I Claim as a Dependent? to determine if you can claim someone as a dependent. Q C8. Dependents: Is a child born, adopted, or placed into my foster care in 2021 a qualifying dependent for the 2021 Recovery Rebate Credit? (added January 13, 2022) A8. Yes. The third Economic Impact Payment in 2021 did not include payments for these children because it was based on information from your 2020 or 2019 tax return, but you may claim a 2021 Recovery Rebate Credit for them if they are a qualifying dependent and you're eligible for the credit. You may claim a 2021 Recovery Rebate Credit for the qualifying dependent, if you're eligible, on your 2021 tax return that you will file in 2022. To claim a person as a dependent on your tax return, that person must be your qualifying child or qualifying relative. See Whom May I Claim as a Dependent? to determine if you can claim someone as a dependent. Q C9. Dependents: I didn't receive the Economic Impact Payment because I was claimed as a dependent on someone else's 2020 return. Can I claim the Recovery Rebate Credit if I'm not a dependent in 2021? (added January 13, 2022) A9. Maybe. If you were claimed as a dependent on someone else's tax return for 2020, you were not eligible for the third Economic Impact Payment. If no one can claim you as a dependent for 2021 and you are otherwise eligible, you can claim the 2021 Recovery Rebate Credit on your 2021 tax return. Married persons who didn't receive the third Economic Impact Payment should determine their eligibility for the Recovery Rebate Credit when filing their 2021 tax return. You and your spouse can't be claimed as a dependent on someone else's return for the 2021 tax year if you claim the 2021 Recovery Rebate Credit on a joint tax return that you and your spouse file together. See Joint Return Test under Dependents in Publication 501, Dependents, Standard Deduction, and Filing Information. If you file electronically, the tax preparation software will help you figure your 2021 Recovery Rebate Credit. Visit IRS.gov/filing for details about IRS Free File, Free File Fillable Forms, free VITA or TCE tax preparation sites in your community or finding a trusted tax professional. The Recovery Rebate Credit Worksheet in the 2021 Form 1040 and Form 1040-SR instructions can also help calculate the credit. QC10. Incarcerated Individuals: Can I claim the credit if I was incarcerated in 2021? (added January 13, 2022) A10. Yes. Individuals will not be denied the 2021 Recovery Rebate Credit solely because they are incarcerated. An incarcerated individual may claim a 2021 Recovery Rebate Credit if all eligibility requirements are met and the individual files a 2021 tax return - even if not required to file - to claim the credit. Q C11. Deceased Individuals: Are individuals who died during 2021 eligible for the 2021 Recovery Rebate Credit? (added January 13, 2022) A11. An individual who died in 2021 or in 2022 and did not receive the full amount of the third Economic Impact Payment may be eligible for the 2021 Recovery Rebate Credit if the individual met the eligibility requirements while alive. An individual who died prior to January 1, 2021 does not qualify for the 2021 Recovery Rebate Credit. Q C12. Social Security Number (SSN) Dependents: I don't have a valid SSN, but I have a dependent who does. May I claim a 2021 Recovery Rebate Credit for my dependent? (added January 13,2022) A12. A dependent who has a valid SSN is a qualifying dependent. You can claim up to $1,400 for each qualifying dependent claimed on your tax return, even if you do not have a valid SSN, but you must meet all other eligibility and income requirements. For example, if you file as head of household and your adjusted gross income is $120,000 or more you would not qualify for any credit for you or your qualifying dependent. If your income was under $120,000, you are a U.S. resident alien and not a dependent on another taxpayer's 2021 return, you can't claim $1,400 for yourself, but you may still claim up to $1,400 for each dependent you claimed on your return who has a valid SSN. You can claim the 2021 Recovery Rebate Credit for your qualifying dependent by filing a 2021 tax return. If you file electronically, the tax preparation software will help you figure your 2021 Recovery Rebate Credit. Visit IRS.gov/filing for details about IRS Free File, Free File Fillable Forms, free VITA or TCE tax preparation sites in your community or finding a t rusted tax professional. The Recovery Rebate Credit Worksheet in the 2021 Form 1040 and Form 1040-SR instructions can also help calculate the credit. Q C13. U.S. Territory Residents: Can I claim a 2021 Recovery Rebate Credit if I was a bona fide resident of a U.S. territory in 2021? (added January 13, 2022) A13. No, you may not claim the credit from the IRS. Instead, tax authorities in U.S. territories will provide the Recovery Rebate Credit to eligible residents. Individuals who were territory residents in 2021 should direct questions about the third Economic Impact Payments received or the 2021 Recovery Rebate Credit to the tax authorities in the territories where they reside. 2021 Recovery Rebate Credit -- Topic D: Claiming the 2021 Recovery Rebate Credit Q D1. How to Claim: How do I claim the 2021 Recovery Rebate Credit? (updated February 8, 2022) A1. You must file a 2021 tax return to claim a Recovery Rebate Credit, even if you are otherwise not required to file a tax return. Your 2021 Recovery Rebate Credit will reduce any tax you owe for 2021 or be included in your tax refund. File electronically and tax preparation software will help you figure your Recovery Rebate Credit. The Recovery Rebate Credit Worksheet in the 2021 Form 1040 and Form 1040-SR instructions can also help determine if you are eligible for the credit. If your income is $73,000 or less, you can file your federal tax return electronically for free through the IRS Free File Program. The fastest way to get your tax refund is to file electronically and have it direct deposited, contactless and free, into your financial account. You can have your refund direct deposited into your bank account, prepaid debit card or mobile app and will need to provide routing and account numbers. Q D2. The IRS hasn't finished processing my 2020 tax return. Can I file my 2021 tax return - even if I don't usually file taxes - to claim the 2021 Recovery Rebate Credit if I did not get my full amount of the third Economic Impact Payment? (updated February 8, 2022) A2. Yes. If you did not receive the full amount of the third Economic Impact Payment and you are eligible for the 2021 Recovery Rebate Credit, you can file your 2021 tax return - even if you don't usually file taxes - to claim the credit even if your 2020 tax return hasn't finished processing. Your 2021 Recovery Rebate Credit will reduce any tax you owe for 2021 or be included in your tax refund. NOTE: By law, the IRS cannot issue third Economic Impact Payments after December 31, 2021. Avoid processing delays that can slow your refund by filing a complete and accurate tax return. You will need the total amount of your third Economic Impact payment and any plus-up payments to claim the 2021 Recovery Rebate Credit. You can find this amount in your Online Account. You may also refer to Notice 1444-C, Your Third Economic Impact Payment, which shows the amount of the third payment. Through March 2022, we'll send Letter 6475 confirming the total amount of the third Economic Impact Payment and any plus-up payments you received in 2021. Any third Economic Impact Payments you received will reduce the amount of the Recovery Rebate Credit you claim on your tax return. File your 2021 tax return electronically and the tax preparation software will help you figure your 2021 Recovery Rebate Credit. Your Recovery Rebate Credit will reduce any tax you owe for 2021 or be included in your tax refund, and can be direct deposited into your financial account. You can use a bank account, prepaid debit card or alternative financial products for your direct deposit. You will need to provide routing and account numbers. Visit IRS.gov/filing for details about IRS Free File, Free File Fillable Forms or finding a trusted tax professional. The Recovery Rebate Credit Worksheet in the 2021 Form 1040 and Form 1040-SR instructions can also help calculate the credit. See the special instructions to Validate Your 2021 Electronic Tax Return if you need help. Q D3. I'm not required to file a return for 2021, and I received my third Economic Impact Payment based on my 2021 federal benefits, but it did not include amounts for my spouse or qualifying dependents. Should I file a 2021 tax return - even if I don't usually file taxes - to get an additional amount? (added January 13, 2022) A3. Yes. If you did not receive the full amount of the third Economic Impact Payment, you must file a 2021 tax return to claim a 2021 Recovery Rebate Credit even if you are otherwise not required to file. This includes amounts for your spouse, if eligible, and qualifying dependents reported on your 2021 tax return for whom you did not receive a third payment. Your 2021 Recovery Rebate Credit will reduce any tax you owe for 2021 or be included in your tax refund. If your income is $73,000 or less, you can file your federal tax return electronically for free through the IRS Free File Program. The fastest way to get your tax refund is to file electronically and have it direct deposited, contactless and free, into your financial account. You can have your refund direct deposited into your bank account, prepaid debit card or mobile app and will need to provide routing and account numbers. Q D4. What is the quickest way to get the 2021 Recovery Rebate Credit? (added January 13, 2022) A4. You must file a 2021 tax return - to claim a 2021 Recovery Rebate Credit, even if you are otherwise not required to file a tax return. Your 2021 Recovery Rebate Credit will reduce any tax you owe for 2021 or be included in your tax refund. The fastest and most accurate way for you is to file is electronically where the tax preparation software will help you figure your 2021 Recovery Rebate Credit. Visit IRS.gov/filing for details about IRS Free File, Free File Fillable Forms or finding a trusted tax professional. The Recovery Rebate Credit Worksheet in the 2021 Form 1040 and Form 1040-SR instructions can also help determine if you are eligible to claim the credit. The fastest way to get your tax refund is to file electronically and have it direct deposited, contactless and free, into your financial account. You can have your refund direct deposited into your bank account, prepaid debit card or mobile app and will need to provide routing and account numbers. Q D5. Where can I get help completing my 2021 tax return for the 2021 Recovery Rebate Credit if I can't do it myself? (added January 13, 2022) A5. If you are unable to or choose not to use the IRS Free File or Free File Fillable Forms to file your 2021 tax return -even if you don't usually file taxes - to claim the 2021 Recovery Rebate Credit, there are various types of tax return preparers, including certified public accountants, enrolled agents, attorneys and others who can assist you in filing your return. See Need someone to prepare your tax return? For information on how to choose the right preparer for you. Q D6. Where can I find the amount of my Third Economic Impact Payment? (updated February 15, 2022) A6. To find the amount of your Economic Impact Payments, check: Your Online Account: This is an online IRS application that allows you to securely access your individual account information. The amount of your third Economic Impact Payment is shown on the Tax Records tab/page under the section "Economic Impact Payment Information." If you and your spouse received joint payments, each of you will need to sign into your own account to retrieve your separate amounts. IRS letters: We mailed Notice 1444-C that shows the third Economic Impact Payment to the address we have on file. If you received a joint payment with your spouse, the letter shows the total amount of payments. If you file separate 2021 tax returns, each of you must enter half of the amount of the payment. Letter 6475: Through March 2022, we'll send this letter confirming the total amount of the third Economic Impact Payment and any plus-up payments you received for tax year 2021. If you and your spouse received joint payments, each of you will receive your own letter showing half of the third payment. Each spouse may receive their letter at different times. If filing a joint return in 2021, include both amounts when calculating the 2021 Recovery Rebate Credit. If you file separate 2021 tax returns, each of you must enter your half of the payment amount, which is shown on your own Letter 6475, when calculating any 2021 Recovery Rebate Credit you may be eligible to claim on your own return. Your 2021 account transcript: You can request this online or by mail using Get Transcript. You may also call us at 800-908-9946 to have one sent by mail or you can submit Form 4506-T. If you received joint payments with your spouse, the transcript shows the total amount of each payment under the primary taxpayer. If you file separate 2021 tax returns, each of you must enter half of the amount of the payment. 2021 Recovery Rebate Credit -- Topic E: Calculating the 2021 Recovery Rebate Credit Q E1. How do I figure the credit? (added January 13, 2022) A1. You must file a 2021 tax return to claim a 2021 Recovery Rebate Credit, even if you usually don't file a tax return. See the 2021 Recovery Rebate Credit FAQs -- Topic B: Claiming the Recovery Rebate Credit if you aren't required to file a tax return. To figure the credit on your tax return, you will need to know the amount of any third Economic Impact Payments you received. This includes any plus-up payments. Log into your online account to find your Economic Impact Payment amounts. You can also refer to IRS Notice 1444-C mailed to your address of record. In January 2022, we'll send Letter 6475 confirming the total amount of the third Economic Impact Payment and any plus-up payments you received for tax year 2021. See: Where can I find the amount of my Third Economic Impact Payment? The fastest and most accurate way for you is to file is electronically where the tax preparation software will help you figure your 2021 Recovery Rebate Credit. You can also use the Recovery Rebate Credit Worksheet in the 2021 Form 1040 and Form 1040-SR instructions to help determine if you are eligible for the credit. Q E2. Errors: Will the IRS figure the credit for me on my 2021 tax return? What happens if I claim an incorrect amount? (added January 13, 2022) A2. If you're eligible, you'll need to file a 2021 tax return to claim the 2021 Recovery Rebate Credit even if you aren't required to file a tax return. Line 30 on 2021 Form 1040 and Form 1040-SR is used to claim the Recovery Rebate Credit. File a complete and accurate return - even if you don't usually file taxes - to avoid processing delays that slow your tax refund. The IRS will not calculate the Recovery Rebate Credit for you or correct your entry if you enter $0 or leave the line blank for the credit. If you make a mistake on the Line 30 amount ($1 or more), we will calculate the correct amount of the Recovery Rebate Credit, correct your tax return, and continue processing it. This will delay the processing of your return. We will send you a notice explaining any changes we make. To calculate and claim the Recovery Rebate Credit, you'll need the amounts of any third Economic Impact Payments, including plus-up payments that you received. Log into your online account to find your third Economic Impact Payment amounts. You can also refer to IRS Notice 1444-C mailed to your address of record. In early 2022, we'll send Letter 6475 confirming the total amount of the third Economic Impact Payment and any plus-up payments you received for tax year 2021. See: Where can I find the amount of my Third Economic Impact Payment? File electronically and the tax preparation software will help you figure your 2021 Recovery Rebate Credit. Visit IRS.gov/filing for details about IRS Free File, Free File Fillable Forms or finding a trusted tax professional. The Recovery Rebate Credit Worksheet in the2021 Form 1040 and Form 1040-SR instructions can also help determine if you are eligible to claim the credit and the amount to enter on line 30. Your 2021 Recovery Rebate Credit will reduce any tax you owe for 2021 or be included in your tax refund. The fastest way to get your tax refund is to file electronically and have it direct deposited, contactless and free, into your financial account. You can have your refund direct deposited into your bank account, prepaid debit card or mobile app and will need to provide routing and account numbers. Q E3. Worksheet: Am I required to complete the 2021 Recovery Rebate Credit Worksheet? (added January 13, 2022) A3. There is no need to claim the 2021 Recovery Rebate Credit or complete the worksheet if you received the full amount of the third Economic Impact Payment. If you didn't receive the full amount of the third Economic Impact Payment, then the 2021 Recovery Rebate Credit Worksheet will help you find out how much of the credit you qualify for when filing your 2021 tax return. Completing the worksheet is not required, but it may be helpful for you to use it and keep it for your records. To calculate and claim the 2021 Recovery Rebate Credit, you'll need to know the amounts of any third Economic Impact Payments you received. This includes any plus-up payments. Log into your online account to find your third Economic Impact Payment amounts. You can also refer to IRS Notice 1444-C mailed to your address of record. In early 2022, we'll send Letter 6475 confirming the total amount of the third Economic Impact Payment and any plus-up payments you received in 2021. See: Where can I find the amount of my Third Economic Impact Payment? Your 2021 Recovery Rebate Credit will reduce any tax you owe for 2021 or be included in your tax refund. If your income is $73,000 or less, you can file your federal tax return electronically for free through the IRS Free File Program. The fastest way to get your tax refund is to file electronically and have it direct deposited, contactless and free, into your financial account. You can have your refund direct deposited into your bank account, prepaid debit card or mobile app and will need to provide routing and account numbers. Q E4. Deadline: Will I still be able to claim the credit if I file my tax return after the filing deadline? (added January 13, 2022) A4. Your 2021 tax refund will include your 2021 Recovery Rebate Credit. To claim any refund, you generally must file your tax return within 3 years from the date the return was due (including extensions if you requested the extension by the due date) to get that refund. This includes any amount of the 2021 Recovery Rebate Credit included in your refund. Q E5. Not Required to File a Return: How do I claim the credit if I'm not required to file a 2021 tax return? (added January 13, 2022) A5. The only way to get a Recovery Rebate Credit is to file a 2021 tax return, even if you are otherwise not required to file a tax return. The fastest and most accurate way for you is to file is electronically where the tax preparation software will help you figure your 2021 Recovery Rebate Credit. Visit IRS.gov/filing for details about IRS Free File, Free File Fillable Forms or finding a trusted tax professional. The Recovery Rebate Credit Worksheet in the 2021 Form 1040 and Form 1040-SR instructions can also help determine if you are eligible to claim the credit. Your 2021 Recovery Rebate Credit will reduce any tax you owe for 2021 or be included in your tax refund. The fastest way to get your tax refund is to file electronically and have it direct deposited, contactless and free, into your financial account. You can have your refund direct deposited into your bank account, prepaid debit card or mobile app and will need to provide routing and account numbers. See the Claiming the Recovery Rebate Credit if you aren't required to file a tax return FAQ section. Q E6. Joint Return Deceased Spouse: How do I complete the 2021 Recovery Rebate Credit Worksheet if I received joint Economic Impact Payments with my spouse who died before January 1, 2021? (added January 13, 2022) A6. If your spouse died before January 1, 2021, and you received third Economic Impact Payments that included an amount for your deceased spouse, return the decedent's portion of the payment as described in Does someone who died qualify for the payment? If you did not get the full amount for the third Economic Impact Payment, you may be eligible to claim the 2021 Recovery Rebate Credit. Do not include your deceased spouse's portion of the Economic Impact Payment (no more than $1,400) on the worksheet when filing your 2021 tax return. You should only include your portion of the payment and the amount for any qualifying children on the worksheet. If your 2021 tax return has been processed and you didn't claim the credit on your return but are eligible for it, you must file an amended return to claim the credit. See the 2021 Recovery Rebate Credit FAQs -- Topic G: Correcting issues after the 2021 tax return is filed. Q E7. Joint Return Deceased Spouse: How do I complete the 2021 Recovery Rebate Credit Worksheet if my spouse died in 2021? (updated February 17, 2022) A7. If you are filing your 2021 return with your deceased spouse as married filing jointly, you should enter $2,800 on line 6 of the worksheet (if you answered "Yes" to question 2 or 3 in the worksheet). Also include the amount of any third Economic Impact Payments you both received on line 13 of the worksheet. Please refer to the 2021 Form 1040 and Form 1040-SR instructions for more information. Q E8. Joint Return: What if I'm filing a joint return with my spouse this year and my spouse received a third Economic Impact Payment, but I did not? (added January 13, 2022) A8. If you did not receive the full amount for the third Economic Impact Payment and you and your spouse meet all the eligibility requirements based on your 2021 tax return, you may claim the 2021 Recovery Rebate Credit. The only way to get a 2021 Recovery Rebate Credit is to file a 2021 tax return, even if you are otherwise not required to file a tax return. When you answer the tax preparation software questions or complete the 2021 Recovery Rebate Credit Worksheet for a joint tax return with your spouse, enter the combined third Economic Impact Payment amounts you and your spouse received. Your 2021 Recovery Rebate Credit will reduce any tax you owe for 2021 or be included in your tax refund. If your income is $73,000 or less, you can file your federal tax return electronically for free through the IRS Free File Program. The fastest way to get your tax refund is to file electronically and have it direct deposited, contactless and free, into your financial account. You can have your refund direct deposited into your bank account, prepaid debit card or mobile app and will need to provide routing and account numbers. Q E9. Federal Benefits Recipients: I'm a federal benefits recipient who didn't receive a third Economic Impact Payment and who is not required to file a 2021 tax return. How do I claim the credit? (added January 13, 2022) A9. The only way to get a 2021 Recovery Rebate Credit is to file a 2021 tax return, even if you are otherwise not required to file a tax return. The fastest and most accurate way for you is to file is electronically where the tax preparation software will help you figure your Recovery Rebate Credit. Visit IRS.gov/filing for details about IRS Free File, Free File Fillable Forms or finding a trusted tax professional. The Recovery Rebate Credit Worksheet in the 2021 Form 1040 and Form 1040-SR instructions can also help determine if you are eligible to claim the credit. Your 2021 Recovery Rebate Credit will reduce any tax you owe for 2021 or be included in your tax refund. The fastest way to get your tax refund is to file electronically and have it direct deposited, contactless and free, into your financial account. You can have your refund direct deposited into your bank account, prepaid debit card or mobile app and will need to provide routing and account numbers. Q E10. Third Economic Impact Payment Reporting: Do I have to report my third Economic Impact Payment as income on my 2021 tax return? (added January 13, 2022) A10. No, the third payment is not includible in your 2021 gross income. You should not include the payments as income on your Federal income tax return or pay income tax on them. They will not affect your income for purposes of determining eligibility for federal government assistance or benefit programs. Q E11. Joint Economic Impact Payments: What if my spouse and I received a joint third Economic Impact Payment and we are not filing a joint 2021 tax return? (added January 13, 2022) A11. When third Economic Impact Payments were jointly issued to two spouses, each spouse must claim half the payment when calculating the 2021 Recovery Rebate Credit if they are not filing their 2021 tax return jointly. Each spouse must enter half the payment in the tax preparation software or on the 2021 Recovery Rebate Credit Worksheet. If filing a joint return, you will include the total amount of the third payment issued to you and your spouse. The fastest and most accurate way for you is to file is electronically where the tax preparation software will help you figure your 2021 Recovery Rebate Credit. Visit I RS.gov/filing for details about IRS Free File, Free File Fillable Forms or finding a trusted tax professional. The Recovery Rebate Credit Worksheet in the 2021 Form 1040 and Form 1040-SR instructions can also help determine if you are eligible for the credit. Log into your online account to view the amounts of your third Economic Impact Payments. You can also refer to your Notice 1444-C, Your Third Economic Impact Payment, which shows the amount of the third payment. In early 2022, we'll send Letter 6475 confirming the total amount of the third Economic Impact Payment and any plus-up payments you received in 2021. See: Where can I find the amount of my Third Economic Impact Payment? Q E12. Joint Economic Impact Payments: What if my Economic Impact Payment was sent to my ex-spouse and I never received my half? (added January 13, 2022) A12. When a third Economic Impact Payment was issued jointly to two spouses, each spouse is treated as receiving half the payment. When determining any 2021 Recovery Rebate Credit, each spouse must enter half the payment in the tax preparation software or on the 2021 Recovery Rebate Credit Worksheet. NOTE: If the third Economic Impact Payment was based on a return was filed without your consent, refer to Missing Economic Impact Payment: If I didn't receive the third Economic Impact Payments because a 2019 or 2020 joint return was filed in my name without my consent, can I claim the 2021 Recovery Rebate Credit? The fastest and most accurate way to file is electronically where the tax preparation software will help you figure your 2021 Recovery Rebate Credit. Visit IRS.gov/filing for details about IRS Free File, Free File Fillable Forms or finding a trusted tax professional. The Recovery Rebate Credit Worksheet in the 2021 Form 1040 and Form 1040-SR instructions can also help determine if you are eligible for the credit. Log into your online account to view the amounts of your third Economic Impact Payments. You can also refer to your Notice 1444-C, Your Third Economic Impact Payment, which shows the amount of the third payment. In early 2022, we'll send Letter 6475 confirming the total amount of the third Economic Impact Payment and any plus-up payments you received in 2021. See: Where can I find the amount of my Third Economic Impact Payment? Q E13. EIP Card Not Activated: I received an EIP card for my third Economic Impact Payment but didn't activate it to use the funds. Can I claim the full amount of the credit? (added January 13, 2022) A13. No, you must reduce your 2021 Recovery Rebate Credit amount by the amount of third Economic Impact Payments that were loaded on the EIP cards. Whether you have activated your card is not relevant to the requirement that your 2021 Recovery Rebate Credit amount be reduced by the amount of the third Economic Impact Payment. Your EIP card will continue to be available for use once you properly activate it. If not activated, no action will be taken on the card until it expires. The funds will remain valid on the card and accessible once you activate the card. The funds will not be returned to the IRS, unless you return the card to MetaBank(R). If your card is lost or destroyed, you can request a replacement by contacting MetaBank(R), N.A., at 800-240-8100 (option 2 from the main menu). For more information, visit EIPcard.com. Q E14. Filing Status Change: My filing status in 2021 is different from that in 2020. Does this affect the amount of the credit I can claim? (added January 13, 2022) A14. Maybe. When a third Economic Impact Payment was issued jointly to two spouses, each spouse is treated as receiving half the payment. If your filing status for 2021 changed to or from Married Filing Jointly or if you remarried in 2021, each spouse should include their half of the third Economic Impact Payment when entering information into the tax preparation software or completing the worksheet to determine the amount of the 2021 Recovery Rebate Credit. Q E15. Dependents: Can my 2021 Recovery Rebate Credit include an amount for a qualifying dependent if the dependent received the third Economic Impact Payment or someone else received the third Economic Impact Payment for the dependent? (added January 13, 2022) A15. Yes, if you meet the eligibility requirements to claim the 2021 Recovery Rebate Credit. The amount of your credit may include up to $1,400 for a qualifying dependent you are claiming on your 2021 return. Note: Qualifying dependents expanded for 2021 Recovery Rebate Credit. Unlike the 2020 Recovery Rebate Credit, the 2021 credit includes additional amounts for all dependents, not just children under 17. Eligible individuals can claim the 2021 credit based on all of their qualifying dependents claimed on their return, including older relatives like college students, adults with disabilities, parents, and grandparents. When you answer the tax preparation software questions or complete the 2021 Recovery Rebate Credit Worksheet, include only the third Economic Impact Payment amounts issued to you (and your spouse, if filing a 2021 joint return). Do not include third Economic Impact Payment amounts issued to anyone else, even if their payments included amounts for an individual who is your qualifying dependent for 2021. See: Where can I find the amount of my Third Economic Impact Payment? Your 2021 Recovery Rebate Credit will reduce any tax you owe for 2021 or be included in your tax refund. If your income is $73,000 or less, you can file your federal tax return electronically for free through the IRS Free File Program. The fastest way to get your tax refund is to file electronically and have it direct deposited, contactless and free, into your financial account. You can have your refund direct deposited into your bank account, prepaid debit card or mobile app and will need to provide routing and account numbers. Q E16. Who's a qualifying dependent for the Recovery Rebate Credit? (added January 13, 2022) A16. The 2021 Recovery Rebate Credit includes up to an additional $1,400 for each qualifying dependent you claim on your 2021 tax return. A qualifying dependent is a dependent who has a valid Social Security number (SSN) or Adoption Taxpayer Identification Number issued by the IRS. A valid SSN for the 2021 Recovery Rebate Credit is one that is issued by the Social Security Administration by the due date of your 2021 tax return (including an extension if you requested the extension by the due date). To claim a person as a dependent on your tax return, that person must be your qualifying child or qualifying relative. If you can be claimed as a dependent on someone else's 2021 tax return, then you cannot claim a dependent on your tax return. You also can't claim the 2021 Recovery Rebate Credit. See Topic C: Eligibility for claiming a Recovery Rebate Credit on a 2021 tax return for more information. Q E17. Dependents: My third Economic Impact Payments included an amount for a dependent who was not my dependent in 2021. I have another qualifying dependent, born in 2021 to claim on my 2021 tax return who wasn't my qualifying dependent for the third Economic Impact Payment. Will I receive a 2021 Recovery Rebate Credit for the qualifying dependent born in 2021 who I will claim as a dependent for 2021? (added January 13, 2022) A17. The third Economic Impact Payment was an advance payment of the 2021 Recovery Rebate Credit. To issue the Economic Impact Payments as quickly as possible, applicable laws allowed the IRS to use your 2020 tax information. If your 2020 tax return was not on file, the IRS used your 2019 tax return information. Generally, if you had the same number of qualifying dependents on your 2020 tax return that you'll have on your 2021 tax return - even if they are not the same dependents - it's likely we already issued you the full amount of the 2021 Recovery Rebate Credit as the third Economic Impact Payment. If you were issued the full amount of the third Economic Impact Payment, you won't be eligible to claim the 2021 Recovery Rebate Credit for your dependent born in 2021 even though that child is a qualifying dependent for the credit. You were issued the full amount of the Recovery Rebate Credit if the third Economic Impact Payment was $1,400 ($2,800 if married filing jointly for 2021) plus $1,400 for the number of qualifying dependents you had in 2021. If you didn't receive the full amount of the third Economic Impact Payment and you meet all the eligibility requirements based on your 2021 tax return, you may claim the 2021 Recovery Rebate Credit. Q E18. Why have I received a letter indicating I haven't activated a debit card for my Economic Impact Payment? (added February 17, 2022) A18. If your Economic Impact Payment was sent on an EIP Card but you had not activated your card as of February 1, 2022, a letter was sent reminding you to activate your card or to request a replacement if you threw the debit card away. The EIP cards were originally mailed in 2021 to some people who were eligible for an Economic Impact Payment and would have otherwise received a check. The EIP Card was sent in a white envelope with a return address of "Economic Impact Payment Card," and displays the U.S. Department of the Treasury Seal. The card has the Visa name on the front and the issuing bank, MetaBank(R), N.A. on the back. Information included with the EIP card explains that this is your Economic Impact Payment. Once the card is activated, people can transfer the funds to a bank account, get cash surcharge-free at an In-Network ATM or request a Money Network(R) Balance Refund Check. This is a check from MetaBank(R) for the amount on your card. For more information, visit EIPcard.com or call MetaBank Customer Service at 800-240-8100 (24 hours a day, 7 days a week). Additional information, including answers to frequently asked questions and other resources, is available at IRS.gov/coronavirus. For more information about claiming the 2021 Recovery Rebate Credit see Q E13. EIP Card Not Activated: I received an EIP card for my third Economic Impact Payment but didn't activate it to use the funds. Can I claim the full amount of the credit? 2021 Recovery Rebate Credit -- Topic F: Receiving the Credit on a 2021 Tax Return Q F1. Credit Delivery: How and when can I expect to get my 2021 credit? (updated April 13, 2022) A1. If you didn't qualify for the third Economic Impact Payment or did not receive the full amount, you may be eligible to claim the 2021 Recovery Rebate Credit based on your 2021 tax information. If you are eligible for the 2021 Recovery Rebate Credit, the credit amount will reduce the amount of tax you owe for 2021. Generally, if the Recovery Rebate Credit amount is more than the tax you owe, it will be included as part of your 2021 tax refund. You will receive your 2021 Recovery Rebate Credit included in your refund after your 2021 tax return is processed. If you requested a trace of any third Economic Impact Payment and the trace confirms you did not receive the payment, the IRS will adjust the amount of Recovery Rebate Credit claimed on your 2021 tax return and will send any overpayment. If your income is $73,000 or less, you can file your federal tax return electronically for free through the IRS Free File Program. The fastest way to get your tax refund is to file electronically and have it direct deposited, contactless and free, into your financial account. You can have your refund direct deposited into your bank account, prepaid debit card or mobile app and will need to provide routing and account numbers. You can check the status of your refund under Where's My Refund? Generally, you will receive your refund within 3 weeks if you file electronically. If you mail your return you should check the IRS Operations page for updates on processing times. If the IRS identifies an error in your calculation for this (or anything else reported on your return), it could cause a delay while we make any necessary corrections. Q F2. Back Taxes: Will the credit be applied to back taxes I owe? (added January 13, 2022) A2. The 2021 Recovery Rebate Credit amount will not be applied to past due federal income tax debts. Generally, tax refunds are applied to tax you owe on your return or your outstanding federal income tax liability. If you claim a 2021 Recovery Rebate Credit, and your return reflects a tax refund - the refund amount associated with the 2021 Recovery Rebate Credit will not be applied to a federal income tax liability. Q F3. Government Debts: Will the credit offset debts I owe to other government agencies? (added January 13, 2022) A3. Yes, the 2021 Recovery Rebate Credit can be reduced to pay debts owed to other Federal government agencies (separate from federal income tax debt) as well as to state agencies. Keep in mind that the credit is part of your tax refund and your tax refund is subject to any offset. Q F4. Refunds or Tax Owed: How does the credit affect my tax refund or amount owed? (added January 13, 2022) A4. Your 2021 Recovery Rebate Credit will reduce any tax you owe for 2021 or be included in your tax refund. The most accurate way for you is to file is electronically where the tax preparation software will help you figure your 2021 Recovery Rebate Credit. Visit IRS.gov/filing for details about IRS Free File, Free File Fillable Forms or finding a trusted tax professional. The 2021 Recovery Rebate Credit Worksheet in the 2021 Form 1040 and Form 1040-SR instructions can also help determine if you are eligible for the credit. The fastest way to get your tax refund is to file electronically and have it direct deposited, contactless and free, into your financial account. You can have your refund direct deposited into your bank account, prepaid debit card or mobile app and will need to provide routing and account numbers. Q F5. Tax Return Processing: Will it take longer to process my 2021 tax return if I claim the credit? (updated April 13, 2022) A5. Claiming the 2021 Recovery Rebate Credit on your tax return will not delay the processing of your tax return. However, it is important that you claim the correct amount. If you claim the 2021 Recovery Rebate Credit on line 30 and miscalculate the amount of credit you are eligible to receive, the IRS will adjust your return and send a notice explaining the changes made. If you are due a refund it may be delayed while we make any necessary corrections. To figure the credit amount, you will need to know the amount(s) of any third Economic Impact Payments you received. Log into your online account to find your third Economic Impact Payment amounts. You may also refer to Notice 1444-C, Your Third Economic Impact Payment, which shows the amount of the third payment. In early 2022, we'll send Letter 6475 confirming the total amount of the third Economic Impact Payment and any plus-up payments you received in 2021. See: Where can I find the amount of my Third Economic Impact Payment? The fastest and most accurate way to get your tax refund is to file electronically where the tax preparation software will help you figure your Recovery Rebate Credit. Visit IRS.gov/filing for details about IRS Free File, Free File Fillable Forms, free VITA or TCE tax preparation sites in your community or finding a trusted tax professional. The Recovery Rebate Credit Worksheet in the 2021 Form 1040 and Form 1040-SR instructions can also help determine if you are eligible for the credit. Your 2021 Recovery Rebate Credit will reduce any tax you owe for 2021 or be included in your tax refund. Q F6. Missing Economic Impact Payment: If I didn't receive the third Economic Impact Payments because a 2019 or 2020 joint return was filed in my name without my consent, can I claim the 2021 Recovery Rebate Credit? (added January 13, 2022) A6. You may be able to claim the Recovery Rebate Credit if you can establish in writing that the return was signed under duress, your signature was forged, the return was filed without your consent, or you were not legally married at the end of the year on which the third payment was based. We issued the third payments based on information from your 2020 tax return, or, if that wasn't available, your 2019 return. To show that you could not resist your spouse's demands and signed under duress, you can provide written documentation to support your claim that the joint election was invalid. You may submit a separate return for the prior year if you had a filing requirement or provide a statement signed and sworn under penalties of perjury that you didn't need to file a tax return for the prior year or that the return was filed without your consent. Q F7. Repayment: I received a third Economic Impact Payment. Do I need to pay back all or some of the payments if, based on the information reported on my 2021 tax return, I don't qualify for the amount that I already received? (added January 13, 2022) A7. No, if you qualified for a third payment based on your 2019 or 2020 tax return, the law doesn't require you to pay back all or part of the payment you received based on the information reported on your 2021 tax return. Q F8. Missing Economic Impact Payment: I received my third payment by check, but it was lost, stolen, or destroyed. How do I get a new one? (updated April 13, 2022) A8. If you received your third payment by check and it was lost, stolen, or destroyed, you should contact the IRS as soon as possible to request a payment trace so the IRS can determine if your payment was cashed. See How do I request a payment trace to track my third Economic Impact Payment? If a trace is initiated and it is determined you did not receive the third payment, the IRS will update your account to indicate you did not receive the third payment, but the IRS cannot reissue your payment. Instead, you must claim the 2021 Recovery Rebate Credit on your 2021 tax return if eligible. If you already filed your 2021 tax return and the trace is complete confirming that you did not receive the third payment, the IRS will adjust your 2021 Recovery Rebate Credit, even if you entered $0 on line 30 or left it blank. After your 2021 Recovery Rebate Credit is adjusted, you will be sent a check for any overpayment and a letter explaining the change. You have two options if you are filing a 2021 tax return and believe you did not receive the amount of the third payment reported by the IRS: 1. Use the amount reported by the IRS on Letter 6475 or from your IRS Online Account to calculate the Recovery Rebate Credit amount on line 30. Separately contact the IRS to trace the third payment amount you did not receive. Once the third payment trace is completed, you and the IRS will receive notification of the account where the third payment was sent and the amount or a copy of the cashed check. 2. Use the amount of the third payment you believe you received to calculate the Recovery Rebate Credit amount on line 30. If your calculation does not match the IRS calculation, the processing of the return will be delayed, the Recovery Rebate Credit amount will be adjusted to match IRS records, and you'll receive a notice that includes a telephone number to contact if you disagree with the change to the return. If you contact the IRS and disagree with the changes made, the IRS will conduct a trace of the third payment, if necessary. Once the payment trace is completed, you and the IRS will receive notification of the account where the third payment was sent to and its amount or a copy of the cashed check. When you receive the results of the payment trace: - If the payment trace indicates the third payment amount was sent by direct deposit to your account and was not returned to the IRS, the third payment will not be reissued, and no further action is necessary. - If the payment trace indicates that a check was cashed, the Treasury Department's Bureau of the Fiscal Service will send you a claim package that includes a copy of the cashed check. Follow the instructions for completing the claim package if the check is not signed by you. - If the payment trace results in a direct deposit being returned to the IRS or indicates you didn't cash the check for a third payment amount, the IRS will adjust the 2021 Recovery Rebate Credit amount on the return and issue any overpayment. Q F9. Missing Economic Impact Payment: How do I request a payment trace to track my third Economic Impact Payments? (updated April 13, 2022) A9. If your payment was issued as a direct deposit, your first step is to check with your bank and make sure they didn't receive a deposit. You should only request a payment trace to track your payment if you received a notice saying a payment was issued to you or if your Online Account shows a payment amount greater than $0 and you have not received it. Do not request a payment trace to determine if you were eligible for a payment or to confirm the amount of payment you should have received. Note: If you have a foreign address, there may be international service disruptions at the United States Postal Service (USPS) or the foreign country you are in due to the COVID-19 pandemic. See the USPS Service Alerts page and check with your local consulate for more information. The fastest way to initiate a trace is to contact the IRS by calling us at 800-919-9835. How we process your claim We'll process your claim for a missing payment in one of two ways: - If a trace is initiated and the IRS determines that the check wasn't cashed or a payment was not deposited into an account held by you and your spouse, the IRS will credit your account for that payment, but the IRS cannot reissue your payment. Instead, you will need to claim the 2021 Recovery Rebate Credit on your 2021 tax return if eligible. - If the check was cashed or the payment was issued, the Treasury Department's Bureau of the Fiscal Service will send you a claim package. Follow the instructions for completing the claim package. The Treasury Department's Bureau of the Fiscal Service will review your claim before determining whether the payment can be reversed, and your Recovery Rebate Credit adjusted. Note: If you are filing your 2021 tax return before your trace is complete, you have two options when completing the Recovery Rebate Credit Worksheet or answering Economic Impact Payment questions in the tax software: 1. Use the amount reported by the IRS on Letter 6475 or from your IRS Online Account to calculate the Recovery Rebate Credit amount on line 30. Separately contact the IRS to trace the third payment amount you did not receive. Once the third payment trace is completed, you and the IRS will receive notification of the account where the third payment was sent and the amount or a copy of the cashed check. 2. Use the amount of the third payment you believe you received to calculate the Recovery Rebate Credit amount on line 30. If your calculation does not match the IRS calculation, the processing of the return will be delayed, the Recovery Rebate Credit amount will be adjusted to match IRS records, and you'll receive a notice that includes a telephone number to contact if you disagree with the change to the return. If you contact the IRS and disagree with the changes made, the IRS will conduct a trace of the third payment, if necessary. Once the payment trace is completed, you and the IRS will receive notification of the account where the third payment was sent to and its amount or a copy of the cashed check. When you receive the results of the payment trace: - If the payment trace indicates the third payment amount was sent by direct deposit to your account and was not returned to the IRS, the third payment will not be reissued, and no further action is necessary. - If the payment trace indicates that a check was cashed, the Treasury Department's Bureau of the Fiscal Service will send you a claim package that includes a copy of the cashed check. Follow the instructions for completing the claim package if the check is not signed by you. - If the payment trace results in a direct deposit being returned to the IRS or indicates you didn't cash the check for a third payment amount, the IRS will adjust the 2021 Recovery Rebate Credit amount on the return and issue any overpayment. - If you are unable to contact us by phone to initiate a trace, you can mail or fax a completed Form 3911, Taxpayer Statement Regarding Refund PDF. Reminder: DO NOT request a trace until you receive a notice stating a payment was issued to you or your IRS Online Account shows a payment was issued. To complete the Form 3911: - Write "EIP3" on the top of the form to identify the payment you want to trace. - Complete the form answering all refund questions as they relate to your Economic Impact Payment. - When completing item 7 under Section 1: o Check the box for "Individual" as the Type of return o Enter "2021" as the Tax Period o Do not write anything for the Date Filed - Sign the form. If you file married filing jointly, both spouses must sign the form. You will generally receive a response 6 weeks after we receive your request for a payment trace, but there may be delays due to limited staffing. Get up-to-date status on affected IRS operations and services. Do not mail or fax Form 3911 if you have already requested a trace by phone. Mail or fax the form to: Note: Do not send anything other than a Form 3911 to the fax numbers below. 2021 Recovery Rebate Credit -- Topic G: Finding the Third Economic Impact Payment Amount to Calculate the 2021 Recovery Rebate Credit Q G1. Who needs to know their third Economic Impact Payment amount when they file their 2021 tax return? (added January 13, 2022) A1. If you didn't qualify for a third Economic Impact Payment or got less than the full amount, you may be eligible to claim the 2021 Recovery Rebate Credit based on your 2021 tax year information. If you're eligible, you'll need to file a 2021 tax return even if you don't usually file a tax return. Your 2021 Recovery Rebate Credit will reduce any tax you owe for 2021 or be included in your tax refund. Anyone eligible to claim the 2021 Recovery Rebate Credit needs to know their third Economic Impact Payment amount, including any plus-up payments, to correctly calculate the credit. Spouses filing a joint return for 2021 need to know the payment amounts for both spouses in order to claim the credit. You don't need to claim the Recovery Rebate Credit on your 2021 tax return if you were issued the full amount of that credit through the third round of Economic Impact Payments. You were issued the full amount of the Recovery Rebate Credit if your third Economic Impact Payment was $1,400 ($2,800 if married filing jointly for 2021) plus $1,400 for each qualifying dependent reported on your 2021 tax return. If filing your return electronically, the tax preparation software will help you accurately figure your 2021 Recovery Rebate Credit. Visit IRS.gov/filing for details about IRS Free File, Free File Fillable Forms, free VITA or TCE tax preparation sites in your community or finding a trusted tax professional. The Recovery Rebate Credit Worksheet in the 2021 Form 1040 and Form 1040-SR instructions can also help determine if you are eligible to claim the credit. Q G2. Where can I find the amount of my third Economic Impact Payments to help me calculate the 2021 Recovery Rebate Credit? (updated February 17, 2022) A2. You can find the amount of the third Economic Impact Payments in one of the following ways: - Your online account. It's an online IRS application that allows you to securely access your individual account information. The amounts of your third Economic Impact Payments are shown on the Tax Records tab/page under the section "Economic Impact Payment Information". If you and your spouse received joint payments, each of you will need to sign into your own online account to retrieve your separate amounts. - Your Notice 1444-C, Your Third Economic Impact Payment, which shows the amount of the third payment. If you received joint payments with your spouse, the letters show the total amount of each payment. If you file separate 2021 tax returns, each of you must enter half of the amount of the payment shown on Notice 1444-C. Individuals who received plus-up payments received a separate Notice 1444-C after each payment was issued. - Letter 6475, Your 2021 Economic Impact Payment(s). Through March 2022, we'll send this letter confirming the total amount of the third Economic Impact Payment and any plus-up payments you received for tax year 2021. If you and your spouse received joint payments, each of you will receive your own letter showing half of the third payment. Each spouse may receive their letter at different times. If filing a joint return in 2021, include both amounts when calculating the 2021 Recovery Rebate Credit. If you file separate 2021 tax returns, each of you must enter your half of the payment, which is shown on your own Letter 6475, when calculating any 2021 Recovery Rebate Credit you may be eligible to claim on your own return. - Your 2021 account transcript, which you can request online or by mail using Get Transcript. You may also call our automated phone transcript service at 800-908-9946 for it be sent by mail or you can submit Form 4506-T. If you received joint payments with your spouse, the transcript shows the total amount of each payment under the primary taxpayer. If you file separate 2021 tax returns, each of you must enter half of amount of the payment. Q G3. What if my online account or letter shows I was issued a payment, but I never received one? (added January 13, 2022) A3. There are several possibilities for why your account shows you were issued a third Economic Impact Payment even though you did not receive one. - You were issued an EIP Card and inadvertently discarded it not realizing it was your Economic Impact Payment. You may request a free replacement through MetaBank(R) Customer Service by calling 800-240-8100 and following the prompts for a lost or discarded card. Please see the Economic Impact Payment Information Center -- Topic E: EIP Cards for more information. - Your payment was made to a bank account or address you shared with a spouse. See How do I request a Payment Trace to track my third Economic Impact Payment? - If your payment was returned by the post office or financial institution and hasn't been credited back to your account yet. - If none of the scenarios above apply and you never received your payment even though your online account or letter show it was issued to you Q G4. How do I access my online account? (added January 13, 2022) A4. You can access your online account through a secure login at IRS.gov/account. You can also find the online account application by going to the IRS.gov homepage and clicking on "Sign in to your Account". Q G5. I received joint Economic Impact Payments with my spouse. Does my online account include my spouse's amount? (added January 13, 2022) A5. No, your account online will show only your portion of the payments. Your spouse will need to sign into their own account to retrieve their portion of the payments. Q G6. Does my online account show whether I received more than one third Economic Impact Payment? (added January 13, 2022) A6. The 2021 Tax Records tab will show the total amount of the third payments you received including any plus-up payments. Any plus up payment will not be shown separately. Q G7. Why can't I access Get My Payment? (added February 17, 2022) A7. The IRS has issued all first, second and third Economic Impact Payments. Therefore, you can no longer use the Get My Payment application to check your payment status. To find the amounts of your Economic Impact Payments, log into your Online Account and go to the Tax Records page. You can also refer to Letter 6475, Your 2021 Economic Impact Payment(s), or notices the IRS mailed after the payments were issued. - The first and second payment amounts can help you accurately calculate any 2020 Recovery Rebate Credit you may be eligible to claim on your 2020 tax return. - The third payment amount can help you accurately calculate any 2021 Recovery Rebate Credit you may be eligible to claim on your 2021 tax return. For additional information regarding the credit, see Recovery Rebate Credit. Q G8. Does Where's My Refund provide my Economic Impact Payment information? (added February 17, 2022) AG8. Where's My Refund does not provide the status or amount of your Economic Impact Payments. It does provide the status of your tax refund, which may include any 2021 Recovery Rebate Credit you claimed on your 2021 tax return. To find the amounts of your Economic Impact Payments, log into your Online Account and go to the Tax Records page. You can also refer to Letter 6475, Your 2021 Economic Impact Payment(s), or notices the IRS mailed after the payments were issued. - The first and second payment amounts can help you accurately calculate any 2020 Recovery Rebate Credit you may be eligible to claim on your 2020 tax return. - The third payment amount can help you accurately calculate any 2021 Recovery Rebate Credit you may be eligible to claim on your 2021 tax return. For additional information regarding the credit, see Recovery Rebate Credit. 2021 Recovery Rebate Credit -- Topic H: Correcting issues after the 2021 tax return is filed Q H1. I'm eligible for a 2021 Recovery Rebate Credit but did not claim it on my 2021 tax return. Do I need to amend my 2021 tax return? (added January 13, 2022) A1. Yes, if you didn't claim the credit on your original tax return you will need to file an Amended U.S. Individual Income Tax Return, Form 1040-X, to claim it. The IRS will not calculate the 2021 Recovery Rebate Credit for you if you did not enter any amount on your original tax return, or you entered $0. Use the Interactive Tax Assistant, Should I File an Amended Return?, to help determine if you should amend your original tax return. If you need to file an amended return - even if you don't usually file taxes - to claim the 2021 Recovery Rebate Credit, use the worksheet in the 2021 instructions for Form 1040 and 1040-SR to determine the amount of your credit. Enter the amount on the Refundable Credits section of the 1040-X and include "Recovery Rebate Credit" in the Explanation of Changes section. If you filed your 2021 return electronically and need to file an amended return, you may be able to file Form 1040-X electronically. If you did not file your 2021 return electronically, you will need to submit a paper version of the Form 1040-X and should follow the instructions for preparing and mailing the paper form. Use the Where's My Amended Return? online tool to check the status of your amended return. The tool works for paper and electronic amended returns. DO NOT file an amended tax return if you entered an incorrect amount for the 2021 Recovery Rebate Credit on your tax return. If you entered an amount other than $0 on line 30 but made a mistake in calculating the amount, the IRS will calculate the correct amount of the 2021 Recovery Rebate Credit, make the correction to your tax return, and continue processing your return. If a correction is needed, there may be a delay in processing your return and the IRS will send you a notice explaining any change made. To check the status of your refund from your original return, check Where's My Refund? Q H2. I received a notice indicating I made an error when calculating the 2021 Recover Rebate Credit on my return. How do I respond? (added January 13, 2022) A2. DO NOT file an amended tax return with the IRS. If you entered an amount other than $0 on line 30 but made a mistake in calculating the amount, the IRS will calculate the correct amount of the 2021 Recovery Rebate Credit, make the correction to your tax return, and continue processing your return. If a correction is needed, there may be a delay in processing your return and the IRS will send you a notice explaining any change made. If you agree with the changes we made, no response or action is required. If you disagree, you can call us at the toll-free number listed on the top right corner of your notice. If the IRS agrees to make a change to the amount of Recovery Rebate Credit you are owed and it results in a refund, you may check the status of your refund from your original return using Where's My Refund? If you did not enter an amount on line 30 of your 2021 Form 1040 or Form 1040-SR or entered $0, see I'm eligible for a 2021 Recovery Rebate Credit but did not claim it on my 2021 tax return. Do I need to amend my 2021 tax return? Q H3. I filed my 2021 return electronically, but made a mistake calculating my 2021 Recovery Rebate Credit. Will my return be rejected? (added January 13, 2022) A3. No, the IRS will not reject your tax return if you made an error in calculating your 2021 Recovery Rebate Credit. DO NOT file an amended tax return with the IRS. If you entered an amount greater than $0 on line 30 and made a mistake on the amount, the IRS will calculate the correct amount of the Recovery Rebate Credit, make the correction to your tax return and continue processing your return. If a correction is needed, there may be a delay in processing your return and the IRS will send you a notice explaining any change made. If the IRS agrees to make a change to the amount of Recovery Rebate Credit you are owed and it results in a refund, you may check the status of your refund from your original return using Where's My Refund? Q H4. I received a Notice CP10, CP11, CP12, CP13, CP16, CP23, CP24 or CP25 saying there was an issue with my 2021 Recovery Rebate Credit. What do I need to do? (added January 13, 2022) A4. If you agree with the changes we made, no response is required. If you disagree, you can call us at the toll-free number listed on the top right corner of your notice. Q H5. I received a notice saying that my 2021 Recovery Rebate Credit was changed because I was claimed as a dependent on another taxpayer's 2021 return. What do I need to do? (added January 13, 2022) A5. If you filed a 2021 return and checked the box stating you can be claimed as a dependent by another taxpayer, you do not qualify for the 2021 Recovery Rebate Credit. To claim the 2021 Recovery Rebate Credit, you cannot be a dependent of another person. If you agree with the changes we made, no response or action is required. The notice is informing you that the IRS already adjusted your return and disallowed the 2021 Recovery Rebate Credit. If you disagree, you can call us at the toll-free number listed on the top right corner of your notice. Q H6. I received a notice saying my 2021 Recovery Rebate Credit was changed because there was an issue with my (or my spouse's or qualifying dependent's) Social Security number (SSN) or Individual Taxpayer Identification Number (ITIN). What do I need to do? (added January 13, 2022) A6. If you, your spouse, and qualifying children have a valid Social Security number and entered it on your return, compare the number and name entered with what is on the Social Security card. If this information does not match or it was left blank on your 2021 return, the amount associated with that identification number would be denied. If you agree with the changes we made, no response or action is required. If you disagree, read the following to help determine if any action is needed: - If you identify an error in the tax return entry, contact the IRS at the number provided on your notice and have a copy of the Social Security card(s) available. - If the information entered on the 2021 tax return matches the Social Security card or you have recently changed your name and did not update it with the Social Security Administration (SSA), please contact the SSA to confirm the information they have on file is accurate. If one spouse has not been issued a Social Security number by the due date of your return (including extensions) and you file a joint return, your 2021 Recovery Rebate Credit should not include the portion for the spouse who does not have the required Social Security number, unless one of you was an active member of the U.S. Armed Forces in 2021. If one of you was an active member of the U.S. Armed Forces in 2021 and you were denied the 2021 Recovery Rebate Credit for the spouse without the required Social Security number, contact the IRS and have a copy of your 2021 military Form W-2, Wage and Tax Statement, available for further verification. A contact phone number for assistance is on the top right corner of your letter or notice. You are allowed up to $1,400 for a qualifying dependent claimed on your return, even if neither you nor your spouse (if married) has a Social Security number. If your dependent does not have a valid SSN or an Adoption Taxpayer Identification Number (ATIN) issued by the IRS, you are not allowed any 2021 Recovery Rebate Credit for the dependent. However, if an SSN or ATIN is issued to your dependent, contact the IRS with their SSN or ATIN to have the 2021 additional credit issued. A contact phone number for assistance is on the top right corner of your letter or notice. Q H7. I received a notice saying my 2021 Recovery Rebate Credit was changed because I forgot to include a Social Security number for a dependent. What do I need to do? (added January 13, 2022) A7. If your dependent has a valid Social Security number or an Adoption Taxpayer Identification Number issued by the IRS and you forgot to enter it on your return, call us at the phone number on the top right corner of your letter or notice. Have a copy of the Social Security cards or ATIN available. If you agree with the changes we made, no response or action is required. Q H8. I received a notice saying my 2021 Recovery Rebate Credit was changed because there was an issue with my qualifying dependent's last name. What do I need to do? (added January 13, 2022) A8. Compare the information you entered on your 2021 return for your dependent against the Social Security card. If the name and number entered on the return does not match what is on the card, the credit will be denied for that dependent. If you agree with the changes we made, no response or action is required. If you identify an error in the tax return entry and therefore disagree with the changes, contact the IRS at the number provided on your notice and have a copy of the Social Security card(s) available. If the information entered on the tax return matches the Social Security card or you have recently changed your dependent's last name and did not update it with the Social Security Administration (SSA), please contact the SSA prior to contacting the IRS to confirm that the information they have on file is accurate. Q H9. I received a notice saying my 2021 Recovery Rebate Credit was changed because my qualifying dependent did not meet the requirements. What do I need to do? (added January 13, 2022) A9. If your dependent does not meet the qualifying dependent requirements for a 2021 Recovery Rebate Credit, you do not need to take any action or call the IRS. The IRS has already adjusted your credit and notice is to inform you of the change. If you disagree, you can call us at the toll-free number listed on the top right corner of your notice. For additional eligibility information, see Eligibility Requirements: Who's considered a qualifying dependent for the 2021 Recovery Rebate Credit ? Q H10. I received a notice saying my 2021 Recovery Rebate Credit was changed because my adjusted gross income was too high. What do I need to do? (added January 13, 2022) A10. The 2021 Recovery Rebate Credit has the same income limitations as the third Economic Impact Payments. No credit is allowed if the adjusted gross income (AGI) amount on line 11 of your 2021 Form 1040 or Form 1040-SR is at least: - $160,000 if married and filing a joint return or if filing as a qualifying widow or widower - $120,000 if filing as head of household or - $80,000 for all others. Your 2021 Recovery Rebate Credit amount will be reduced if the adjusted gross income (AGI) amount is less than these amounts above but is more than: - $150,000 if married and filing a joint return or filing as a qualifying widow(er) - $112,500 if filing as head of household or - $75,000 for all others. You do not need to take any action; the IRS has already adjusted your credit. The notice was to inform you of the change. No further action or calls are necessary. If you disagree, you can call us at the toll-free number listed on the top right corner of your notice. IRS-FAQ
Revenue Procedure 2021-28 Internal Revenue Service 2021-27 I.R.B. 5 26 CFR 1.168(i)-4: Changes in use. (Also Part I, §§ 163(j), 168, 446; 1.446-1, 1.163(j)-9.) Rev. Proc. 2021-28 SECTION 1. PURPOSE This revenue procedure provides guidance under § 202 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTRA), enacted as Division EE of the Consolidated Appropriations Act, 2021, Pub. L. No. 116-260, 134 Stat. 1182 (December 27, 2020). Section 202 of the TCDTRA retroactively provides a recovery period of 30 years under the alternative depreciation system in § 168(g) (ADS) of the Internal Revenue Code (Code) for certain residential rental property, as defined in § 168(e)(2)(A) of the Code, placed in service before January 1, 2018, held by an electing real property trade or business as defined in § 163(j)(7)(B) of the Code, and not previously subject to the ADS. This revenue procedure explains how a taxpayer changes its method of computing depreciation under § 168(g) of the Code for such property to comply with § 202 of the TCDTRA. This revenue procedure also modifies Rev. Proc. 2019-08, 2019-03 I.R.B. 347, which provides guidance under § 168(g) of the Code related to certain property held by an electing real property trade or business. Finally, this revenue procedure modifies Rev. Proc. 2019-43, 2019-48 I.R.B. 1107, which provides the list of automatic changes in methods of accounting, to expand the applicability of automatic changes for a change in use of certain depreciable property. SECTION 2. BACKGROUND.01 Alternative depreciation system under § 168(g) for residential rental property. (1) Prior to amendment by §§ 13204 and 13205 of Public Law 115-97, 131 Stat. 2054 (2017), commonly referred to as the Tax Cuts and Jobs Act (TCJA), § 168(g)(1) of the Code provided that the depreciation deduction provided by § 167(a) of the Code is determined under the ADS for: (A) any tangible property that during the taxable year is used predominantly outside the United States; (B) any tax-exempt use property; (C) any tax-exempt bond financed property; (D) any imported property covered by an Executive order under § 168(g)(6) of the Code; and (E) any property to which an election under § 168(g)(7) of the Code applies. Sections 13204(a)(3)(A) and 13205(a) of the TCJA amended § 168(g)(1) of the Code by requiring the depreciation deduction provided by § 167(a) of the Code to be determined under the ADS for the following additional property: nonresidential real property, residential rental property, and qualified improvement property held by an electing real property trade or business as defined in § 163(j)(7)(B) of the Code; and any property with a recovery period of 10 years or more that is held by an electing farming business as defined in § 163(j)(7)(C) of the Code. These amendments apply to taxable years beginning after December 31, 2017, without regard to when the property is or was placed in service. See TCJA § 13204(b)(2) and § 13205(b). (2) Prior to amendment by the TCJA, the table of recovery periods under § 168(g)(2)(C) of the Code provided that the recovery period under the ADS was 40 years for residential rental property. Section 13204(a)(3)(C) of the TCJA amended that table by providing that the ADS recovery period is 30 years for residential rental property. Prior to the enactment of the TCDTRA, this amendment applied only to property placed in service after December 31, 2017. See TCJA § 13204(b)(1). (3) Therefore, although the TCJA added residential rental property held by an electing real property trade or business to the list of property to which the ADS is applicable, the change in recovery period from 40 years to 30 years for all residential rental property applied only to property placed in service after December 31, 2017. See TCJA § 13204(b)(1) and (2). (4) Section 202 of the TCDTRA amended § 13204(b) of the TCJA to add new § 13204(b)(3) of the TCJA. Section 13204(b)(3) of the TCJA provides that in the case of any residential rental property (i) that was placed in service before January 1, 2018, (ii) that is held by an electing real property trade or business, as defined in § 163(j)(7)(B) of the Code (electing real property trade or business), and (iii) for which § 168(g)(1)(A) through (E) of the Code did not apply prior to January 1, 2018, the amendments made by § 13204(a)(3)(C) of the TCJA apply to taxable years beginning after December 31, 2017. Accordingly, such residential rental property has a 30-year recovery period under the ADS for taxable years beginning after December 31, 2017. (5) Unless otherwise provided, all references hereinafter in this revenue procedure to § 168(g) of the Code are references to § 168(g) of the Code as in effect on December 28, 2020, the day after the enactment date of the TCDTRA..02 Rev. Proc. 2019-08. (1) On January 14, 2019, the Department of Treasury (Treasury Department) and the Internal Revenue Service (IRS) published Rev. Proc. 2019-08 to provide guidance, in part, on the recovery period under the ADS for residential rental property placed in service before 2018 and on how taxpayers can change their computation of depreciation to the ADS for certain properties held by electing real property trades or businesses. (2) Section 4.01(1) of Rev. Proc. 2019-08 provides that the recovery period under the table in § 168(g)(2)(C) of the Code is 30 years for residential rental property placed in service by the taxpayer after December 31, 2017, and 40 years for residential rental property placed in service by the taxpayer before January 1, 2018. To comply with § 202 of the TCDTRA, section 6 of this revenue procedure modifies section 4.01 of Rev. Proc. 2019-08 to provide that the 30-year recovery period also applies to certain residential rental property placed in service before January 1, 2018, and held by an electing real property trade or business for taxable years beginning after December 31, 2017. (3) Sections 4.02(1) and 4.02(2)(a) of Rev. Proc. 2019-08 provide that for the election year (that is, the first taxable year for which a trade or business makes an election under § 163(j)(7)(B) and the regulations thereunder), the electing real property trade or business must begin depreciating nonresidential real property, residential rental property, and qualified improvement property in accordance with the ADS. This rule applies to such properties placed in service by the electing real property trade or business in the election year and all subsequent taxable years (newly-acquired property), and to such properties placed in service by the electing real property trade or business in taxable years beginning before the election year (existing property). Pursuant to section 4.02(2)(b) of Rev. Proc. 2019-08, a change in use occurs under § 168(i)(5) and § 1.168(i)-4(d) of the Income Tax Regulations for existing property as a result of an election under § 163(j)(7)(B). Therefore, depreciation for such property is determined in accordance with the rules under § 1.168(i)-4(d)..03 Method of accounting. (1) Section 446(e) and § 1.446-1(e)(2) require a taxpayer to secure the consent of the Commissioner of Internal Revenue (Commissioner) before changing a method of accounting for Federal income tax purposes. Section 1.446-1(e)(3)(ii) authorizes the Commissioner to prescribe administrative procedures setting forth the limitations, terms, and conditions necessary to permit a taxpayer to obtain consent to change a method of accounting. (2) Section 2.05 of Rev. Proc. 2015-13, 2015-5 I.R.B 419, 425, provides that a taxpayer may not request, or otherwise make, a retroactive change in method of accounting, unless specifically authorized by the Commissioner or by statute. (3) Section 1.446-1(e)(2)(ii)( d )( 3 )( ii ) provides that a change in computing depreciation or amortization allowances in the taxable year in which the use of an asset changes in the hands of the same taxpayer is not a change in method of accounting. See also § 1.168(i)-4(f). (4) Section 1.446-1(e)(2)(ii)( d )( 5 )( iii ) provides that a change from an impermissible method of computing depreciation to a permissible method of computing depreciation for an asset results in a § 481(a) adjustment. (5) With the enactment of the TCDTRA, immediate guidance is needed under § 168(g) of the Code for taxpayers who are affected by the retroactive effective date of § 13204(b)(3) of the TCJA. Accordingly, this revenue procedure permits taxpayers to file an amended Federal income tax return or information return, administrative adjustment request under § 6227 of the Code (AAR), or a Form 3115, Application for Change in Accounting Method, to change their method of computing depreciation of certain residential rental property held by an electing real property trade or business to use a 30-year ADS recovery period and, if such property is included in a general asset account, to change their general asset account treatment for such property to comply with § 1.168(i)-1(h)(2). See section 4.04 of this revenue procedure for the procedures to change to a 30-year recovery period. (6) The Treasury Department and the IRS are aware that some taxpayers may have elected to be an electing real property trade or business for their taxable year beginning in 2019 (2019 taxable year), and thereby changed to a 40-year ADS recovery period for residential rental property placed in service before 2018 under the change in use rules for the 2019 taxable year. The Treasury Department and the IRS also are aware that some of those taxpayers may not have made the adjustments to general asset accounts under the change in use rules in § 1.168(i)-1(h)(2) for the 2019 taxable year. To the extent those taxpayers have not yet filed their Federal income tax return or Form 1065, U.S. Return of Partnership Income, for the taxable year beginning in 2020, the change to the 30-year recovery period for residential rental property to comply with the TCDTRA or to the method of accounting provided in § 1.168(i)-1(h)(2) would be made on an amended Federal income tax return or information return, or an AAR, as applicable. See Rev. Rul. 90-38, 1990-1 C.B. 57 (a taxpayer adopts an impermissible method of accounting for a material item by treating the item in the same way in determining the gross income or deductions in two or more consecutively filed Federal income tax returns). However, consistent with section 4 of Rev. Proc. 2007-16, 2007-1 C.B. 358, this revenue procedure provides these taxpayers with the option of changing to a 30-year recovery period or to the method of accounting provided in § 1.168(i)-1(h)(2) by filing a Form 3115 in lieu of an amended Federal income tax return or information return, or an AAR. See sections 4.01(2) and 4.04(2) of this revenue procedure for the procedures to change to a 30-year recovery period by filing a Form 3115. See sections 4.02(3) and 4.04(2) of this revenue procedure for the procedures to change to the method of accounting provided in § 1.168(i)-1(h)(2)..04 Earnings and profits. In the case of tangible property to which § 168 applies, § 312(k)(3)(A) provides that the adjustment to earnings and profits for depreciation for any taxable year generally is determined under the ADS within the meaning of § 168(g)(2). If a change in use occurs for such property under § 168(i)(5) and § 1.168(i)-4 for Federal income tax purposes, the adjustment to earnings and profits for depreciation under § 312(k)(3)(A) for such property beginning for the year of change, as defined in § 1.168(i)-4(a), is determined under the ADS in accordance with § 1.168(i)-4. However, if the depreciation method and recovery period for such property under the ADS are the same before and after the change in use for § 312(k)(3)(A), the adjustment to earnings and profits for depreciation under § 312(k)(3)(A) is not affected by the change in use. SECTION 3. SCOPE.01 In general. This revenue procedure applies to residential rental property: (1) that was placed in service by (a) the taxpayer before January 1, 2018, or (b) the transferor of the residential rental property before January 1, 2018, if the acquisition of such property by the transferee-taxpayer is subject to § 168(i)(7) as provided in section 3.03 of this revenue procedure; (2) that is held by an electing real property trade or business; and (3) that was not subject to § 168(g)(1)(A), (B), (C), (D), or (E) prior to January 1, 2018, in the hands of (a) the taxpayer or (b) the transferor if the acquisition of such property by the transferee-taxpayer is subject to § 168(i)(7) as provided in section 3.03 of this revenue procedure..02 Exclusions. This revenue procedure does not apply to: (1) A taxpayer that makes an election under § 163(j)(7)(B) and the regulations thereunder on its Federal income tax return or information return for a taxable year ending after December 27, 2020. See section 4.02(2) of Rev. Proc. 2019-08 for the method of changing depreciation for residential rental property or other depreciable property for the election year and for subsequent taxable years; (2) A taxpayer that makes a late election under § 163(j)(7)(B) on an amended Federal income tax return, amended Form 1065, or an AAR, as applicable, filed after December 27, 2020, pursuant to section 4 of Rev. Proc. 2020-22, 2020-18 I.R.B. 745. See sections 4.02 and 4.03 of Rev. Proc. 2020-22 for the method of changing depreciation for residential rental property or other depreciable property; or (3) A taxpayer that withdraws the election under § 163(j)(7)(B) pursuant to section 5 of Rev. Proc. 2020-22. See section 5.02 of Rev. Proc. 2020-22 for the method of changing depreciation for residential rental property or other depreciable property..03 Transferor in a § 168(i)(7)(B) transaction. (1) Section 168(i)(7)(A) provides that, in the case of any property transferred in a transaction described in § 168(i)(7)(B), the transferee is treated as the transferor for purposes of computing the depreciation deduction determined under § 168 with respect to so much of the basis in the hands of the transferee as does not exceed the adjusted basis in the hands of the transferor. As a result, where the transferee-taxpayer acquires residential rental property in a transaction described in § 168(i)(7)(B) (for example, §§ 351 and 721) and such residential rental property was placed in service by the transferor, the transferee-taxpayer is treated as placing in service the residential rental property on the same date as the transferor, but only for the portion of the transferee-taxpayer's basis in such property that does not exceed the transferor's adjusted depreciable basis (as defined in § 1.168(b)-1(a)(4)) in such property. Similarly, where the transferee-taxpayer acquires residential rental property in a transaction described in § 168(i)(7)(B) and such residential rental property was placed in service by the transferor and was subject to § 168(g)(1)(A), (B), (C), (D), or (E) before January 1, 2018, in the hands of the transferor, the property is treated as being subject to § 168(g)(1)(A), (B), (C), (D), or (E) before January 1, 2018, in the hands of the transferee-taxpayer, but only for the portion of the transferee-taxpayer's basis in such property that does not exceed the transferor's adjusted depreciable basis in such property. Therefore, where the transferee-taxpayer acquires residential rental property in a transaction described in § 168(i)(7)(B), the determination under sections 3.01(1) and (3) of this revenue procedure must be made by taking into account the transferee-taxpayer, the transferor, or both as described above, but only for the portion of the transferee-taxpayer's basis in such property that does not exceed the transferor's adjusted depreciable basis of this property..04 Examples. The following examples illustrate section 3 of this revenue procedure. (1) Example 1. In January 2016, B purchased and placed in service a residential rental property at a cost of $1,000,000. B depreciates the residential rental property under the general depreciation system of § 168(a) (GDS) by using the straight-line method, a 27.5-year recovery period, and the mid-month convention. In January 2018, B and D form an equal partnership, BD. D contributes cash to BD, and B contributes the residential rental property to BD. The contribution of the residential rental property by B to BD is a transaction described in § 721. At the time of the contribution, B's adjusted basis in the residential rental property was $928,790. Pursuant to § 723, BD's basis in the residential rental property contributed by B is $928,790. On its Form 1065 for the 2019 taxable year, BD makes an election under § 163(j)(7)(B) and the regulations thereunder to be an electing real property trade or business. Because the contribution of the residential rental property by B to BD is a transaction described in § 168(i)(7)(B), § 168(i)(7)(A) and section 3.03 of this revenue procedure apply. To the extent of BD's basis of $928,790 in the residential rental property, BD is treated as placing in service such property in January 2016 and as depreciating such property under the GDS before January 1, 2018. Accordingly, this residential rental property is within the scope of section 3.01 of this revenue procedure and is subject to the 30-year recovery period under the ADS beginning in the 2019 taxable year, which is the election year. (2) Example 2. The facts are the same as in Example 1, except B made an election under § 168(g)(7) on its timely filed 2016 Federal income tax return to depreciate the residential rental property under the ADS by using the straight-line method, a 40-year recovery period, and the mid-month convention. As a result, B's adjusted basis in the residential rental property was $951,040 at the time of the contribution and BD's basis in the residential rental property contributed by B is $951,040. Because the contribution of the residential rental property by B to BD is a transaction described in § 168(i)(7)(B), § 168(i)(7)(A) and section 3.03 of this revenue procedure apply. To the extent of BD's basis of $951,040 in the residential rental property, BD is treated as placing in service such property in January 2016 and such property is treated as being subject to § 168(g)(1)(E) in the hands of BD before January 1, 2018. Accordingly, this residential rental property is not within the scope of section 3.01 of this revenue procedure and continues to be subject to the 40-year recovery period under the ADS. (3) Example 3. In January 2016, C purchased and placed in service a residential rental property at a cost of $1,000,000. C made an election under § 168(g)(7) on its timely filed 2016 Federal income tax return to depreciate the residential rental property under the ADS by using the straight-line method, a 40-year recovery period, and the mid-month convention. In January 2017, C transfers this residential rental property to X Corporation in exchange for 80 percent of its only class of stock, plus cash of $10,000. The transfer of the residential rental property by C to X Corporation is a transaction described in § 351, and C recognized gain of $10,000 on such transfer. At the time of the transfer, C's adjusted basis in the residential rental property was $976,040. Pursuant to § 362(a), X Corporation's basis in the residential rental property transferred by C is $986,040. For the 2017 taxable year, X Corporation depreciates its excess basis of $10,000 ($986,040-$976,040) in the residential rental property under the GDS by using the straight-line method, a 27.5-year recovery period, and the mid-month convention. On its Federal income tax return for the 2018 taxable year, X Corporation makes an election under § 163(j)(7)(B) and the regulations thereunder to be an electing real property trade or business. Because the transfer of the residential rental property by C to X Corporation is a transaction described in § 168(i)(7)(B), § 168(i)(7)(A) and section 3.03 of this revenue procedure apply. To the extent of X Corporation's basis of $976,040 in the residential rental property, X Corporation is treated as placing in service such property in January 2016 and such property is treated as being subject to § 168(g)(1)(E) in the hands of X Corporation before January 1, 2018, and, accordingly, this residential rental property with a basis of $976,040 is not within the scope of section 3.01 of this revenue procedure and continues to be subject to the 40-year recovery period under the ADS. X Corporation is treated as placing in service its excess basis of $10,000 ($986,040-$976,040) in the residential rental property, in January 2017 and as depreciating such property under the GDS before January 1, 2018. Accordingly, this residential rental property with an excess basis of $10,000 is within the scope of section 3.01 of this revenue procedure and is subject to the 30-year recovery period under the ADS beginning in the 2018 taxable year, which is the election year. SECTION 4. CHANGE IN METHOD OF COMPUTING DEPRECIATION FOR RESIDENTIAL RENTAL PROPERTY HELD BY AN ELECTING REAL PROPERTY TRADE OR BUSINESS.01 Impermissible method to permissible method of determining depreciation. (1) In general. Beginning with the election year, an electing real property trade or business within the scope of section 3 of this revenue procedure must depreciate residential rental property within the scope of section 3 of this revenue procedure in accordance with the ADS using a 30-year recovery period. For such property, a change in use occurs under § 168(i)(5) and § 1.168(i)-4(d) for the election year and depreciation for the election year and each subsequent taxable year is determined in accordance with § 1.168(i)-4(d)(4) or § 1.168(i)-4(d)(5)(ii)(B), as applicable. If an electing real property trade or business within the scope of section 3 of this revenue procedure does not depreciate residential rental property within the scope of section 3 of this revenue procedure under the ADS using a 30-year recovery period for the election year and the subsequent taxable year in accordance with § 1.168(i)-4(d)(4) or § 1.168(i)-4(d)(5)(ii)(B), as applicable, then that trade or business has adopted an impermissible method of accounting for depreciation for that residential rental property. As a result, a change from that impermissible method of accounting to a method of accounting for depreciation under which the electing real property trade or business determines depreciation for the residential rental property in accordance with § 1.168(i)-4(d)(4) or § 1.168(i)-4(d)(5)(ii)(B), as applicable, by using the straight-line method, the 30-year recovery period, and the mid-month convention under the ADS is a change in method of accounting under § 446(e). See § 1.446-1(e)(2)(ii)( d )( 2 )( i ). An electing real property trade or business within the scope of section 3 of this revenue procedure may change from the impermissible method of determining depreciation to the permissible method of determining depreciation for residential rental property within the scope of section 3 of this revenue procedure in accordance with section 4.04 of this revenue procedure. (2) Electing real property trade or business has not adopted a method of accounting for the residential rental property. For residential rental property that is within the scope of section 3 of this revenue procedure and held by a trade or business that is within the scope of section 3 of this revenue procedure and that made the election under § 163(j)(7)(B) and the regulations thereunder for the taxable year immediately preceding the year of change, as defined in section 3.19 of Rev. Proc. 2015-13 (1-year residential rental property), the electing real property trade or business may change from the impermissible method of determining depreciation to the permissible method of determining depreciation for the 1-year residential rental property. This change may be accomplished by filing a Form 3115 in accordance with section 4.04(2) of this revenue procedure, provided the § 481(a) adjustment reported on the Form 3115 includes the amount of any adjustment attributable to all property, including the 1-year residential rental property, subject to the Form 3115. Alternatively, the electing real property trade or business may change its depreciation for the 1-year residential rental property by filing an amended Federal income tax return or information return, or an AAR, as applicable, for the election year provided the amended Federal income tax return or information return, or AAR, as applicable, is filed prior to the date the electing real property trade or business files its Federal income tax return or information return for the taxable year succeeding the election year..02 Impermissible method to permissible method of general asset account treatment. (1) In general. If the residential rental property is within the scope of section 3 of this revenue procedure and is included in a general asset account, an electing real property trade or business within the scope of section 3 of this revenue procedure must change to the general asset account treatment for such property provided in § 1.168(i)-1(h)(2) for the election year. If an electing real property trade or business within the scope of section 3 of this revenue procedure does not change to such general asset account treatment for the election year and the subsequent taxable year, then that trade or business has adopted an impermissible method of accounting for general asset account treatment of that residential rental property. As a result, a change from that impermissible method of accounting to the method of accounting provided in § 1.168(i)-1(h)(2) is a change in method of accounting under § 446(e). See § 1.446-1(e)(2)(ii)( d )( 2 )( vi ). An electing real property trade or business within the scope of section 3 of this revenue procedure may make this change in method of accounting for residential rental property within the scope of section 3 of this revenue procedure in accordance with section 4.04 of this revenue procedure. (2) Ordering rules. If, for the same taxable year, an electing real property trade or business within the scope of section 3 of this revenue procedure makes the change in method of accounting described in section 4.01 of this revenue procedure and also makes the change in method of accounting described in this section 4.02 for the same residential rental property, the taxpayer applies the change in method of accounting described in section 4.01 of this revenue procedure first. (3) Electing real property trade or business has not adopted a method of accounting for the residential rental property. For residential rental property that is within the scope of section 3 of this revenue procedure, is included in a general asset account, and is held by a trade or business that is within the scope of section 3 of this revenue procedure and that made the election under § 163(j)(7)(B) and the regulations thereunder in the taxable year immediately preceding the year of change, as defined in section 3.19 of Rev. Proc. 2015-13 (1-year residential rental property), the electing real property trade or business may change to the method of accounting provided in § 1.168(i)-1(h)(2) for the 1-year residential rental property. This change is accomplished by filing a Form 3115 in accordance with section 4.04(2) of this revenue procedure. Alternatively, the electing real property trade or business may change to the method of accounting provided in § 1.168(i)-1(h)(2) for the 1-year residential rental property by filing an amended Federal income tax return or information return, or an AAR, as applicable, for the election year provided the amended Federal income tax return or information return, or AAR, as applicable, is filed prior to the date the electing real property trade or business files its Federal tax return or information return for the taxable year succeeding the election year..03 Retroactive change in method of accounting. The Commissioner allows an electing real property trade or business within the scope of section 3 of this revenue procedure to make the change in methods of accounting described in sections 4.01(1) and 4.02(1) of this revenue procedure retroactively for residential rental property within the scope of section 3 of this revenue procedure under section 4.04(1) of this revenue procedure for a limited period of time, provided the electing real property trade or business files the amended Federal income tax return(s) or information return(s), or AAR(s), as applicable, within the time and manner provided in section 4.04(1) of this revenue procedure. A Form 3115 is not required to be filed with such amended Federal income tax return(s) or information return(s), or AAR(s)..04 Changing to the permissible method of determining depreciation. The electing real property trade or business within the scope of section 3 of this revenue procedure may change from the impermissible methods of accounting to the permissible methods of accounting described in sections 4.01(1) and 4.02(1) of this revenue procedure for residential rental property within the scope of section 3 of this revenue procedure by filing either: (1) Except as provided in Rev. Proc. 2021-29, 2021-27 I.R.B. 12, released on www.irs.gov on June 17, 2021, regarding the time to file amended returns by a partnership subject to the centralized partnership audit regime enacted as part of the Bipartisan Budget Act of 2015 (BBA partnership), an amended Federal income tax return or amended Form 1065 for the election year on or before April 15, 2022, but in no event later than the applicable period of limitations on assessment for the taxable year for which the amended return is being filed. In the case of a BBA partnership that chooses not to file an amended Form 1065 as permitted under Rev. Proc. 2021-29 or that cannot file an amended Form 1065 because the date for doing so has expired under Rev. Proc. 2021-29, the BBA partnership may file an AAR for the election year on or before April 15, 2022, but in no event later than the applicable period of limitations on making adjustments under § 6235 for the reviewed year as defined in § 301.6241-1(a)(8) of the Procedure and Administration Regulations. This amended return or Form 1065, or AAR, must include the adjustment to taxable income for the change in determining depreciation of the residential rental property and any collateral adjustments to taxable income or to tax liability. Such collateral adjustments also must be made on original or amended Federal income tax returns or Forms 1065, or AARs, for any affected succeeding taxable years. If the residential rental property is included in a general asset account, the taxpayer also must make the adjustments in § 1.168(i)-1(h)(2)(ii) and (iii)(B); or (2) A Form 3115 under the automatic change procedures or non-automatic change procedures, as applicable, in Rev. Proc. 2015-13 (or any successor). If the electing real property trade or business is eligible to make this method change under the automatic change procedures-- (a) The method change described in section 4.01 of this revenue procedure is described in section 6.05 of Rev. Proc. 2019-43, 2019-48 I.R.B. 1107 (or any successor), as modified by section 5.02 of this revenue procedure. The § 481(a) adjustment for such method change as of the first day of the year of change is calculated as though the change in use occurred for the residential rental property in the election year; and (b) The method change described in section 4.02 of this revenue procedure is described in section 6.04 of Rev. Proc. 2019-43 (or any successor), as modified by section 5.02 of this revenue procedure. This change is made on a modified cut-off basis, as defined in § 1.446-1(e)(2)(ii)( d )( 5 )( iii ). SECTION 5. MODIFICATION TO REV. PROC. 2019-43.01 In general. Section 6.04 of Rev. Proc. 2019-43 provides the procedures for obtaining automatic consent to change the method of accounting for general asset account treatment of MACRS property due to a change in the use. Section 6.05 of Rev. Proc. 2019-43 provides the procedures for obtaining automatic consent to change the method of accounting for depreciation due to a change in the use of MACRS property..02 Modifications to existing automatic changes. (1) Section 6.01(1)(c)(viii) of Rev. Proc. 2019-43 is modified to read as follows: (viii) any depreciable property for which the use changes in the hands of the same taxpayer. See § 1.446-1(e)(2)(ii)( d )( 3 )( ii ). But see sections 6.04 and 6.05 of this revenue procedure for changing to the methods of accounting provided in § 1.168(i)-1(c)(2)(ii)(I) or § 1.168(i)-1(h)(2), and § 1.168(i)-4, respectively. However, an original Form 3115 for a change in method of accounting described in section 6.04 of this revenue procedure and section 4.02 of Rev. Proc. 2021-28, 2021-27 I.R.B. 5, may be filed under this section 6.01 instead of section 6.04 of this revenue procedure if the original Form 3115 was filed before June 17, 2021, and such change was made on a modified cut-off basis pursuant to section 6.04(3)(a) of this revenue procedure. Also, an original Form 3115 for a change in method of accounting described in section 6.05 of this revenue procedure and section 4.01 of Rev. Proc. 2021-28, 2021-27 I.R.B. 5, may be filed under this section 6.01 instead of section 6.05 of this revenue procedure if the original Form 3115 was filed before June 17, 2021, and the § 481(a) adjustment for such change was determined in accordance with section 6.05(4) of this revenue procedure. (2) Section 6.04 of Rev. Proc. 2019-43, as modified by section 6.02(2) of Rev. Proc. 2020-25, 2020-19 I.R.B. 785, is modified as follows: (a) Section 6.04(1)(b) is redesignated as section 6.04(1)(c). (b) New section 6.04(1)(b) is added to read as follows: (b) Taxpayer has not adopted a method of accounting for the item of property. If a taxpayer does not satisfy section 6.04(1)(a) of this revenue procedure for an item of MACRS property because a change in the use of this item of MACRS property occurred in the taxable year immediately preceding the year of change (1-year change in use property), the taxpayer may change from the impermissible method for general asset account treatment to the permissible method provided in § 1.168(i)-1(c)(2)(ii)(I) or § 1.168(i)-1(h)(2) for the 1-year change in use property by filing a Form 3115. Alternatively, the taxpayer may change from the impermissible method for general asset account treatment to the permissible method provided in § 1.168(i)- 1(c)(2)(ii)(I) or § 1.168(i)-1(h)(2) for a 1-year change in use property by filing an amended Federal income tax return or information return, or an administrative adjustment request under § 6227 (AAR), as applicable, for the year of change in the use of such property provided such filing occurs prior to the date the taxpayer files its Federal income tax return or information return for the taxable year succeeding the year of change in the use of such property. (c) Redesignated section 6.04(1)(c) is modified to read as follows: (c) Inapplicability. (i) The change described in section 6.04(1)(a) of this revenue procedure does not apply to any property to which section 4.05 of Rev. Proc. 2020-22, 2020-18 I.R.B. 745, applies unless the taxpayer and property are within the scope of Rev. Proc. 2021-28, 2021-27 I.R.B. 5. (See sections 4.02 and 4.03 of Rev. Proc. 2020-22, as applicable, for making such change for such property.); and (ii) The change described in section 6.04(1)(a) of this revenue procedure does not apply to any property to which section 5.04 of Rev. Proc. 2020-22, 2020-18 I.R.B. 745, applies. (See section 5.02 of Rev. Proc. 2020-22 for making such change for such property.). (d) Sections 6.04(2) through (5) are redesignated as sections 6.04(3) through (6). (e) New section 6.04(2) is added to read as follows: (2) Certain eligibility rules inapplicable. (a) In general. The eligibility rule in section 5.01(1)(d) of Rev. Proc. 2015-13, 2015-5 I.R.B. 419, does not apply to a taxpayer making this change. (b) Special rule. The eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13, 2015-5 I.R.B. 419, does not apply to a taxpayer within the scope of section 3 of Rev. Proc. 2021-28, 2021-27 I.R.B. 5, making this change for any residential rental property within the scope of section 3 of Rev. Proc. 2021-28, 2021-27 I.R.B. 5, for a taxable year beginning in 2019, 2020, 2021, or 2022. (f) Redesignated section 6.04(3)(b) is modified to read as follows: (b) Reduced filing requirement for qualified small taxpayers. A qualified small taxpayer, as defined in section 6.01(4)(b) of this revenue procedure, is required to complete only the following information on Form 3115 (Rev. December 2018) to make this change: (i) The identification section of page 1 (above Part I); (ii) The signature section at the bottom of page 1; (iii) Part I; (iv) Part II, all lines except lines 13, 15b, 16, 17, and 19; (v) Part IV, line 25; and (vi) Schedule E, all lines except lines 1, 4c, 5, 6, 7b, and 7c. (g) Redesignated section 6.04(4) is modified to read as follows: (4) Concurrent automatic change. (a) A taxpayer making this change for more than one asset for the same year of change should file a single Form 3115 for all such assets. (b) A taxpayer making this change and a change under section 6.05, section 6.12(3)(b), and/or section 6.15 of this revenue procedure for the same year of change should file a single Form 3115 for all such changes and must enter the designated automatic accounting method change numbers for the changes on the appropriate line on the Form 3115. See section 6.03(1)(b) of Rev. Proc. 2015-13 for information on making concurrent changes. (3) Section 6.05 of Rev. Proc. 2019-43, as modified by section 6.02(3) of Rev. Proc. 2020-25, is modified as follows: (a) Section 6.05(1)(b) is redesignated as section 6.05(1)(c). (b) New section 6.05(1)(b) is added to read as follows: (b) Taxpayer has not adopted a method of accounting for the item of property. If a taxpayer does not satisfy section 6.05(1)(a)(i) of this revenue procedure for an item of MACRS property because a change in the use of this item of MACRS property occurred in the taxable year immediately preceding the year of change (1-year change in use property), the taxpayer may change from the impermissible method of determining depreciation to the permissible method of determining depreciation provided in § 1.168(i)-4 for the 1-year change in use property by filing a Form 3115 for this change, provided the § 481(a) adjustment reported on the Form 3115 includes the amount of any adjustment that is attributable to all property (including the 1-year change in use property) subject to the Form 3115. Alternatively, the taxpayer may change from the impermissible method of determining depreciation to the permissible method of determining depreciation provided in § 1.168(i)-4 for a 1-year change in use property by filing an amended Federal income tax return or information return, or an administrative adjustment request under § 6227 (AAR), as applicable, for the year of change in the use of such property provided such filing occurs prior to the date the taxpayer files its Federal income tax return or information return for the taxable year succeeding the year of change in the use of such property. (c) Redesignated section 6.05(1)(c) is modified to read as follows: (c) Inapplicability. (i) The change described in section 6.05(1)(a)(i) of this revenue procedure does not apply to any property to which section 4.05 of Rev. Proc. 2020-22, 2020-18 I.R.B. 745, applies unless the taxpayer and property are within the scope of Rev. Proc. 2021-28, 2021-27 I.R.B. 5. (See sections 4.02 and 4.03 of Rev. Proc. 2020-22, as applicable, for making such change for such property.); (ii) The change described in section 6.05(1)(a)(i) of this revenue procedure does not apply to any property to which section 5.04 of Rev. Proc. 2020-22, 2020-18 I.R.B. 745, applies. (See section 5.02 of Rev. Proc. 2020-22 for making such change for such property.); and (iii) The change described in this section 6.05 does not apply to any property that is not owned by the taxpayer at the beginning of the year of change. (d) Sections 6.05(2) through (6) are redesignated as sections 6.05(3) through (7). (e) New section 6.05(2) is added to read as follows: (2) Certain eligibility rules inapplicable. (a) In general. The eligibility rule in section 5.01(1)(d) of Rev. Proc. 2015-13, 2015-5 I.R.B. 419, does not apply to a taxpayer making this change. (b) Special rule. The eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13, 2015-5 I.R.B. 419, does not apply to a taxpayer within the scope of section 3 of Rev. Proc. 2021-28, 2021-27 I.R.B. 5, making this change for any residential rental property within the scope of section 3 of Rev. Proc. 2021-28, 2021-27 I.R.B. 5, for a taxable year beginning in 2019, 2020, 2021, or 2022. (f) Redesignated section 6.05(3) is modified to read as follows: (3) Reduced filing requirement for qualified small taxpayers. A qualified small taxpayer, as defined in section 6.01(4)(b) of this revenue procedure, is required to complete only the following information on Form 3115 (Rev. December 2018) to make this change: (a) The identification section of page 1 (above Part I); (b) The signature section at the bottom of page 1; (c) Part I; (d) Part II, all lines except lines 13, 15b, 16, 17, and 19; (e) Part IV, all lines except line 25; and (f) Schedule E, all lines except lines 1, 4c, 5, 6, 7b, and 7c. (g) Redesignated section 6.05(5) is modified to read as follows: (5) Concurrent automatic change. (a) A taxpayer making this change for more than one asset for the same year of change should file a single Form 3115 for all such assets and provide a single net § 481(a) adjustment for all the changes included in that Form 3115. If one or more of the changes in that single Form 3115 generate a negative § 481(a) adjustment and other changes in that same Form 3115 generate a positive § 481(a) adjustment, the taxpayer may provide a single negative § 481(a) adjustment for all the changes that are included in that Form 3115 generating such adjustment and a single positive § 481(a) adjustment for all the changes that are included in that Form 3115 generating such adjustment. (b) A taxpayer making this change and a change under section 6.04, section 6.12(3)(b), and/or section 6.15 of this revenue procedure for the same year of change should file a single Form 3115 for all such changes and must enter the designated automatic accounting method change numbers for the changes on the appropriate line on the Form 3115. See section 6.03(1)(b) of Rev. Proc. 2015-13 for information on making concurrent changes. SECTION 6. MODIFICATION TO REV. PROC. 2019-08 New section 4.01(3) of Rev. Proc. 2019-08 is added to read as follows: (3) Residential rental property held by an electing real property trade or business. Notwithstanding section 4.01(1) of this revenue procedure, the recovery period under the table in § 168(g)(2)(C) for taxable years beginning after December 31, 2017, is 30 years for residential rental property that: (a) was placed in service by (i) the taxpayer before January 1, 2018, or (ii) the transferor of the residential rental property before January 1, 2018, if the acquisition of such property by the transferee-taxpayer is subject to § 168(i)(7), (b) is held by an electing real property trade or business as defined in § 163(j)(7)(B) and the regulations thereunder, and (c) was not subject to § 168(g)(1)(A), (B), (C), (D), or (E) prior to January 1, 2018, in the hands of (i) the taxpayer or (ii) the transferor if the acquisition of such property by the transferee-taxpayer is subject to § 168(i)(7). See Rev. Proc. 2021-28, 2021-27 I.R.B. 5, for further guidance. In particular, see section 3.03 of Rev. Proc. 2021-28 regarding the rules applicable to acquisitions of residential rental property subject to § 168(i)(7). SECTION 7. EFFECT ON OTHER DOCUMENTS.01 Section 4.01 of Rev. Proc. 2019-08 is modified..02 Sections 6.01, 6.04, and 6.05 of Rev. Proc. 2019-43 are modified. SECTION 8. EFFECTIVE DATE This revenue procedure is effective June 17, 2021. SECTION 9. DRAFTING INFORMATION The principal author of this revenue procedure is Jaime C. Park of the Office of Associate Chief Counsel (Income Tax & Accounting). For further information regarding this revenue procedure contact Patrick Clinton at (202) 317-4651 (not a toll-free number).
Private Letter Ruling Number: 202021019 Internal Revenue Service February 21, 2020 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202021019 Release Date: 5/22/2020 Index Number: 953.06-00, 9100.00-00 [Third Party Communication: Date of Communication: Month DD, YYYY] Person To Contact: ID No. Telephone Number: Refer Reply To: CC:INTL:B02 PLR-126155-19 PLR-126156-19 PLR-126157-19 Date: February 21, 2020 Dear ********: This is in response to a letter received by our office on November 1, 2019, submitted on behalf of Taxpayer by its authorized representative, requesting an extension of time under Treas. Reg. § 301.9100-3 to make the election provided under section 953(d) for Year 1 with respect to FC1, FC2, and FC3. The ruling contained in this letter is predicated upon facts and representations submitted by Taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. This office has not verified any of the material submitted in support of the request for a ruling. Verification of the factual information, representations, and other data may be required as part of the audit process. FACTS Each of FC1, FC2, and FC3 (collectively referred to as "Taxpayers") is organized and regulated as an insurance company under the laws of Country X. Taxpayers began their operations on Date 1. Taxpayers derive all of their business from insuring U.S. risks. Taxpayers retained Professional Advisor for assistance with all aspects of Taxpayers' U.S. income tax compliance. The employees of Professional Advisor were qualified tax professionals. Professional Advisor prepared Taxpayers' U.S. federal income tax returns for Year 1, each of which included a section 953(d) election to be treated as a domestic corporation. Due to a miscommunication, Professional Advisor was under the impression that Taxpayers had already obtained an approval from the IRS for their section 953(d) election for Year 1. However, Taxpayers understood that Professional Advisor was responsible for filing the section 953(d) election statement with the IRS. As a result, neither the Professional Advisor nor Taxpayers sent a section 953(d) election statement to the IRS pursuant to Notice 89-79, 1989-2 C.B. 392, and Rev. Proc. 2003-47, 2003-28 C.B. 55. Taxpayers represent that they relied on Professional Advisor to file all the necessary income tax elections, including the section 953(d) election for Taxpayers to be treated as a domestic corporation for Year 1. Because of the miscommunication, Taxpayers represent that Professional Advisor failed to advise Taxpayers of the consequences of failing to make a section 953(d) election with respect to Year 1. Taxpayers' failure to make the section 953(d) election was not discovered by the IRS before Taxpayers submitted their ruling request. In addition, Taxpayers represent that they do not seek to alter a return position for which the accuracy-related penalty has been or could have been imposed under section 6662 at the time Taxpayers requested relief. Taxpayers represent that they intended to make the section 953(d) election for Year 1. Finally, Taxpayers represent that they have not used hindsight to seek an extension of time to make the election. Taxpayers represent that granting relief will not result in a lower tax liability than they would have had if they had filed the section 953(d) election timely. LAW AND ANAYLSIS Under section 953(d), certain foreign insurance companies may elect to be treated as domestic corporations for U.S. tax purposes. The substantive and procedural rules for making a section 953(d) election are contained in Notice 89-79, 1989-2 C.B. 392, and Rev. Proc. 2003-47, 2003-2 C.B. 55. Rev. Proc. 2003-47 provides that the election must be filed by the due date prescribed in section 6072(b) (including extensions) for the U.S. income tax return that is due if the election becomes effective. Rev. Proc. 2003-47, section 4.04(2). In addition, an electing corporation must use the calendar year as its annual accounting period for U.S. tax purposes, unless it joins in the filing of a consolidated return and adopts the parent corporation's tax year. Notice 89-79, section 1. In the present situation, Rev. Proc. 2003-47 fixes the time to make the election under section 953(d). Therefore, the Commissioner has discretionary authority under Treas. Reg. § 301.9100-1(c) to grant Taxpayers an extension of time, provided that Taxpayers satisfy the standards set forth under Treas. Reg. § 301.9100-3(a). Treas. Reg. § 301.9100-3(a) provides that requests for relief will be granted when the taxpayer provides the evidence to establish to the satisfaction of the Commissioner that it "acted reasonably and in good faith" and that "the grant of relief will not prejudice the interests of the Government." Under Treas. Reg. § 301.9100-3(b)(1), a taxpayer is deemed to have acted reasonably and in good faith if it: (i) Requests relief before the failure to make the regulatory election is discovered by the Internal Revenue Service; (ii) Failed to make the election because of intervening events beyond the taxpayer's control; (iii) Failed to make the election because, after exercising reasonable diligence (taking into account the taxpayer's experience and complexity of the return or issue), the taxpayer was unaware of the necessity for the election; (iv) Reasonably relied on the written advice of the Internal Revenue Service; or (v) Reasonably relied on a qualified tax professional, including a tax professional employed by the taxpayer, and the tax professional failed to make, or advise the taxpayer to make, the election. Under Treas. Reg. § 301.9100-3(b)(3), a taxpayer is deemed not to have acted reasonably and in good faith if it: (i) Seeks to alter a return position for which an accuracy-related penalty has been or could be imposed under section 6662 at the time the taxpayer requests relief and the new position requires or permits a regulatory election for which relief is requested; (ii) Was informed in all material respects of the required election and related tax consequences, but chose not to file the election; or (iii) Uses hindsight in requesting relief. The Commissioner will grant a reasonable extension of time to make a regulatory election only when the interests of the Government will not be prejudiced by the granting of relief. Treas. Reg. § 301.9100-3(c)(1). The interests of the Government are prejudiced if granting relief would result in a taxpayer having a lower tax liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made (taking into account the time value of money). Treas. Reg. § 301.9100-3(c)(1)(i). Treas. Reg. § 301.9100-1(a) cautions that granting an extension of time to make an election is not a determination that the taxpayer is otherwise eligible to make the election. CONCLUSION Based solely on the facts and information submitted, Taxpayers qualify for an extension of time to make the elections under section 953(d). Taxpayers are deemed to have acted in good faith, as defined by Treas. Reg. § 301.9100-3(b), and the grant of relief will not prejudice the interests of the Government. Accordingly, Taxpayers are granted an extension of time of 60 days from the date of this ruling letter to make the section 953(d) election, in accordance with the procedural rules set forth in Rev. Proc. 2003-47, to be treated as a domestic corporation for U.S. federal income tax purposes effective for Year 1. The above extension of time is conditioned on Taxpayers' tax liability (if any) being not lower, in the aggregate, for all years to which the section 953(d) election applies than it would have been if the election had been timely filed (taking into account the time value of money). No opinion is expressed as to Taxpayers' tax liability for the years involved. No opinion is expressed or implied concerning the federal income tax consequences of any other aspect of this or other transactions or item of income. Further, the granting of the above extension is not a determination that Taxpayers are eligible to make the section 953(d) election. Also, no ruling is granted with respect to Taxpayers' entity classification for federal income tax purposes. This ruling is directed only to the taxpayers who requested it. Section 6110(k)(3) provides that it may not be used or cited as precedent. Pursuant to a power of attorney on file in this office, a copy of this ruling letter is being furnished to your authorized representative. Sincerely, Kristine A. Crabtree Senior Technical Reviewer, Branch 2 Office of Associate Chief Counsel (International) cc:
Internal Revenue Service - Information Release IR-2020-140 IRS reminds members of the U.S. Armed Forces of special tax breaks, helpful resources as the July 15 tax deadline approaches July 7, 2020 Media Relations Office Washington, D.C. www.IRS.gov/newsroom Media Contact: 202.317.4000 Public Contact: 800.829.1040 IRS reminds members of the U.S. Armed Forces of special tax breaks, helpful resources as the July 15 tax deadline approaches IR-2020-140, July 7, 2020 WASHINGTON The Internal Revenue Service today encouraged members of the military and their families to learn more about the special tax benefits available to them as the July 15 tax filing season deadline approaches. Most military bases offer free tax preparation and filing assistance during the tax filing season. Some also offer free tax help after the July tax filing deadline. Some of these programs may be impacted by the current COVID-19 so it's best to check first. Service members who prepare their own tax return qualify to e-file their federal return for free using IRS Free File if their income in 2019 was below $69,000. All military members and some qualified veterans may use MilTax, a free tax service from the Department of Defense and Military OneSource. The IRS also offers Free Fillable Forms which can completed online and then filed electronically regardless of income amount. "Military members serving our country at home and abroad earn the IRS' highest appreciation and ongoing support," said IRS Commissioner Chuck Rettig. "We have resources available at IRS.gov that detail the special circumstances that can affect tax payment and return filing deadlines for military personnel and their families. We encourage them to visit our website. We are also very proud of the many veterans employed by and part of the IRS team." IRS Publication 3, Armed Forces Tax Guide, is a free booklet filled with valuable information and tips designed to help service members and their families take advantage of all the tax benefits allowed by law. Several key benefits are outlined below. - Combat pay is partially or fully tax-free. Service members serving in support of a combat zone or in a qualified hazardous duty area may also qualify for this exclusion. In addition, U.S. citizens or resident aliens, such as spouses, that worked as contractors or employees of contractors supporting the U.S. Armed Forces in designated combat zones, may now qualify for the foreign earned income exclusion. - Members of the military who serve or have served in a combat zone or in contingency operations outside the United States, may qualify for an extension of at least 180 days to file and pay their taxes. - The Earned Income Tax Credit is worth up to $6,660. Low- and moderate-income service members who receive nontaxable combat pay can use a special computation method that may boost the EITC, meaning they may owe less tax or get a larger refund. A service member and their spouse can each choose to have their nontaxable combat pay included in their earned income for purposes of the EITC. Service members are encouraged to select the option that best benefits them. - Those who served in the Sinai Peninsula of Egypt may qualify for combat zone tax benefits retroactive to June 2015. Under the Tax Cuts and Jobs Act (TCJA) members of the U.S. Army, U.S. Navy, U.S. Marines, U.S. Air Force, and U.S. Coast Guard who performed services in the Sinai Peninsula can now claim combat zone tax benefits. - Dependent care assistance programs for military personnel are excludable benefits and not included in the military member's income. - The moving expenses deduction is suspended in tax years 2018 through 2025, except for certain Service members. Active duty Service members who move pursuant to a permanent change of station order may still claim this deduction. Also, Service members who move due to a permanent change of station order may exclude from tax any moving reimbursements they receive. Both spouses normally must sign a joint income tax return, but if one spouse is absent due to certain military duty or conditions, the other spouse may be able to sign for him or her. A power of attorney is required in other instances. A military installation's legal office may be able to help. The IRS has a special page on IRS.gov with Tax Information for Members of the U.S. Armed Forces.
Private Letter Ruling Number: 202343026 Internal Revenue Service August 2, 2023 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202343026 Release Date: 10/27/2023 Index Number: 9100.00-00, 1400Z.02-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:ITA:B04 PLR-103300-23 Date: August 02, 2023 Dear ****: This letter responds to Taxpayer's request, dated Date 4, and supplemental correspondence. Specifically, Taxpayer requests an extension of time to file Forms 8996, Qualified Opportunity Fund, for purposes of making the election, under section 1.1400Z2(d)-1(a)(2)(i) of the Income Tax Regulations, (1) to be certified as a qualified opportunity fund (QOF), as defined in section 1400Z-2(d) of the Internal Revenue Code 1 (Code), and (2) to be treated as a QOF, effective as of the month Taxpayer was formed, as provided under section 1400Z-2(d) and section 1.1400Z2(d)-1(a). **** 1 Unless otherwise specified, all "section" references are to sections of the Internal Revenue Code or the Treasury Regulations (26 CFR Part 1) or (26 CFR Part 301). ****** This letter is being issued electronically in accordance with Rev.Proc. 2023-1, 2023-1 I.R.B. 1. A paper copy will not be mailed to Taxpayer. FACTS According to the facts and representations provided, Taxpayer was organized as a limited liability company on Date 1 under the laws of State Y and is classified as a partnership for U.S. federal income tax purposes. Taxpayer was organized for the purpose of being a qualified opportunity fund and to invest in qualified opportunity zone property. Taxpayer relied on Tax Advisor to advise on the manner of making a proper election for Taxpayer to be treated as a QOF as of the month Taxpayer was formed for Year 1 and Year 2. Taxpayer provided Tax Advisor with all pertinent facts necessary to make the elections. Due to administrative challenges and insufficient internal control procedures, Tax Advisor did not timely file Taxpayer's Forms 8996 for Year 1 or Year 2. On Date 2, Tax Advisor was acquired by Parent Company and recommenced operations as Accounting Firm. Taxpayer retained Accounting Firm as its tax preparer and advisor beginning Date 2. Accounting Firm discovered that Forms 8996 for Year 1 and Year 2 had not been timely filed on or about Date 3 while preparing Taxpayer's Year 3 tax return. LAW AND ANALYSIS Section 1400Z-2(e)(4)(A) directs the Secretary to prescribe regulations for rules for the certification of QOFs. Section 1.1400Z2(d)-1(a)(2)(i) provides that the self-certification of a QOF must be timely-filed and effectuated annually in such form and manner as may be prescribed by the Commissioner of Internal Revenue in the IRS forms or instructions, or in publications or guidance published in the Internal Revenue Bulletin. To self-certify as a QOF, a taxpayer must file Form 8996 with its tax return for the year to which the certification applies. The Form 8996 must be filed by the due date of the tax return (including extensions). The information provided indicates that Taxpayer did not file its Forms 8996 by the due date of its Year 1 or Year 2 income tax returns (including extensions) as a result of an administrative lapse by Tax Advisor. Section 1.1400Z2(d)-1(a)(2)(i) sets forth the manner and timing for electing to be a QOF and electing to self-certify as a QOF. As such, these elections are regulatory elections, as defined in section 301.9100-1(b). Sections 301.9100-1 through 301.9100-3 provide the standards the Commissioner will use to determine whether to grant an extension of time to make a regulatory election. Section 301.9100-3(a) provides that requests for extensions of time for regulatory elections (other than automatic extensions covered in section 301.9100-2) will be granted when the taxpayer provides evidence (including affidavits) to establish that the taxpayer acted reasonably and in good faith and the grant of relief will not prejudice the interests of the Government. Section 301.9100-3(b)(1) provides that a taxpayer is deemed to have acted reasonably and in good faith if the taxpayer-- (i) requests relief before the failure to make the regulatory election is discovered by the Service; (ii) failed to make the election because of intervening events beyond the taxpayer's control; (iii) failed to make the election because, after exercising reasonable diligence, the taxpayer was unaware of the necessity for the election; (iv) reasonably relied on the written advice of the Service; or (v) reasonably relied on a qualified tax professional, and the professional failed to make, or advise the taxpayer to make, the election. In addition, section 301.9100-3(b)(3) provides that a taxpayer is deemed not to have acted reasonably and in good faith if the taxpayer-- (i) seeks to alter a return position for which an accuracy-related penalty has been or could be imposed under section 6662 at the time the taxpayer requests relief, and the new position requires or permits a regulatory election for which relief is requested; (ii) was fully informed in all material respects of the required election and related tax consequences but chose not to make the election; or (iii) uses hindsight in requesting relief. If specific facts have changed since the original deadline that make the election advantageous to a taxpayer, the Service will not ordinarily grant relief. Section 301.9100-3(c)(1) provides that the Commissioner will grant a reasonable extension of time to make the regulatory election only when the interests of the Government will not be prejudiced by the granting of relief. Section 301.9100-3(c)(1)(i) provides that the interests of the Government are prejudiced if granting relief would result in a taxpayer having a lower tax liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made (taking into account the time value of money). Section 301.9100-3(c)(1)(ii) provides that the interests of the Government are ordinarily prejudiced if the taxable year in which the regulatory election should have been made or any taxable year that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under section 6501(a) before the taxpayer's receipt of a ruling granting relief under this section. CONCLUSION Based on the facts and information submitted in connection with this request, we conclude Taxpayer has acted reasonably and in good faith, and that the granting of relief will not prejudice the interests of the Government. Accordingly, Taxpayer is granted 60 days from the date of this letter to file Forms 8996 for Year 1 and Year 2 to make the election to self-certify as a QOF under section 1400Z-2 and section 1.1400Z2(d)-1(a)(2)(i) as of the month in which Taxpayer was formed. The elections must be made on completed Forms 8996 and attached to Taxpayer's respective amended tax returns for Year 1 and Year 2. This ruling is based upon facts and representations submitted by Taxpayer and accompanied by penalty of perjury statements executed by the appropriate parties. This office has not verified any of the material submitted in support of the request for a ruling. However, as part of an examination process, the Service may verify the factual information, representations, and other data submitted. This ruling addresses the granting of section 301.9100-3 relief as applied to the elections to self-certify Taxpayer as a QOF by filing Forms 8996 for Year 1 and Year 2. Except as expressly provided herein, no opinion is either expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. Specifically, we have no opinion, either express or implied, concerning whether any investments made into Taxpayer are qualifying investments as defined in section 1.1400Z2(a)-1(b)(34) or whether Taxpayer meets the requirements and structure under section 1400Z-2 and the regulations thereunder to be a QOF. In addition, we also express no opinion on whether any interest owned in any entity by Taxpayer qualifies as qualified opportunity zone property, as defined in section 1400Z-2(d)(2), or whether such entity would be treated as a qualified opportunity zone business, as defined in section 1400Z-2(d)(3). We express no opinion regarding the tax treatment of the instant transaction under the provisions of any other sections of the Code or regulations that may be applicable, or regarding the tax treatment of any conditions existing at the time of, or effects resulting from, the instant transaction. We express no opinion as to whether Taxpayer's Year 1 or Year 2 Federal income tax returns are considered timely filed. A copy of this letter must be attached to any tax return to which it is relevant. Alternatively, taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter ruling. This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides that it may not be used or cited as precedent. Enclosed is a copy of the letter ruling showing the deletions proposed to be made when it is disclosed under section 6110. Pursuant to the Form 2848, Power of Attorney and Declaration of Representation, on file, we are sending a copy of this letter to Taxpayer's authorized representatives. Sincerely, Stephen J. Toomey Senior Counsel, Branch 4 Office of Associate Chief Counsel (Income Tax & Accounting) cc:
Private Letter Ruling Number: 202239002 Internal Revenue Service June 30, 2022 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202239002 Release Date: 9/30/2022 Index Number: 167.22-01 Third Party Communication: Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:PSI:B06 PLR-100347-22 Date: June 30, 2022 Dear *******: This letter responds to your letter, dated December 17, 2021, requesting a ruling on the application of the depreciation normalization requirements with respect to the computation of accumulated deferred income taxes in its calculation of rate base. FACTS Taxpayer is a State A corporation files a consolidated federal income tax return on a calendar year basis with its affiliates, including its Parent, a State B Corporation. All of the common stock of Taxpayer is owned by Company A. The stock of Company A is owned a% by Company B and b% by Fund A, an otherwise unrelated party and wholly-owned subsidiary of Company C a Country A company. The stock of Company B is owned c% by Company D and d% by Company C. Company D is wholly-owned by Parent. Taxpayer is an integrated utility that is engaged primarily in generating, transmitting, distributing and selling electric energy to retail customers in City A and neighboring areas within State A and is subject to regulatory authority of Commission A and Commission B. Taxpayer formed Utility DevCo, a wholly-owned disregarded entity for federal income tax purposes, with a contribution of cash. Utility DevCo entered into a membership interest purchase and project development agreement providing for the acquisition of ProjectCo on Date 1 for $e. ProjectCo, a limited liability company, is a wholly-owned subsidiary of Company G and is developing Facility. Facility is a f-megawatt solar project with a g MWh DC battery energy storage system (BESS) located in County of State A. On Date 2, Taxpayer filed with Commission A an application for a certificate of authority to acquire, construct, own, and operate Facility and an application for approval of affiliated interest agreements related to ownership and operation of Facility. The Facility is expected to be placed in service in Year A. Taxpayer also expects that the Facility will qualify for the investment tax credit. Taxpayer will form Utility Sub, a corporation for federal income tax purposes, with a capital contribution of cash. Utility Sub and Taxpayer will create Utility Sponsor, a partnership for federal income tax purposes, with capital contributions. Utility Sponsor will form Partnership, a partnership for federal income tax purposes, with one or more unrelated unnamed partners with capital contributions of cash pursuant to an equity capital contribution agreement. Utility DevCo will sell all of the membership interests of ProjectCo to Partnership prior to the date that the Facility is placed in service. ProjectCo will be disregarded for federal income tax purposes. Partnership will execute a limited liability company operating agreement (LLCOA) that will allocate cash and property distributions; profits, losses, and tax credits; and other rights/responsibilities between Utility Sponsor and one or more investor-partners (referred to herein as "Partner"). ProjectCo will file for and is expected to receive market-based rate authority from Commission B allowing it to make any sales of electricity, capacity, and ancillary services at market-based rates into the wholesale market, rather than at cost-based rates with a regulated rate of return. From the date of commercial operations, ProjectCo will sell the electricity produced by Facility directly to the wholesale electricity markets administered by RTO. ProjectCo will not sell energy to Taxpayer and there will not be a power purchase agreement between ProjectCo and Taxpayer. Taxpayer will acquire electricity from the wholesale electricity markets at market prices as administered by RTO. The timing and volumes of purchased power will be determined based on demand for power by Taxpayer's customers in the normal course of business operations and without regard to the timing and volumes of power sold by ProjectCo. Such transactions to serve customer load will occur at market prices as administered by RTO. Taxpayer and ProjectCo will enter into a capacity agreement and contract for differences agreement with a term of h years. Under this contract, Taxpayer will pay ProjectCo a fixed price related to a notional amount of power, the operating capacity of the BESS, as tested, and an efficiency rate factor based on the minimum guaranteed efficiency rate for the BESS and actual efficiency, and the expected value of renewable energy certificates (RECs) and RTO zonal resource credits (ZRCs) resulting from operation of the Facility. The notional amount of power will correspond to the actual volume power generated by the Facility. In return, ProjectCo will pay Taxpayer a market-based amount related to the same amount of power and provide the RECs and ZRCs from the operation of the Facility. The market-based amount is expected to be based on the RTO-settled price for electricity at point of generator interconnection near City B. The portion of the contract not related to RECs or ZRCs will be financially settled and not allow for settlements with physical delivery of power. Such amounts will be netted into a single monthly settlement to be paid (or received) by Taxpayer to (or from) ProjectCo. ProjectCo will secure Commission B approval to enter into this contract, and Taxpayer will secure Commission A approval to enter into this contract. As described above, Taxpayer represents that the net settlement terms of this contract are not based on cost-of-service, rate-of-return ratemaking. RECs are a means to track progress towards and compliance the renewable portfolio standards (RPS) of a particular jurisdiction. State A does not have an RPS and Taxpayer is not currently subject to an RPS. However, any corporation, business, nonprofit or individual may purchase RECs to meet their renewable energy objectives. Taxpayer expects that the RECs resulting from generation of solar energy by the Facility will be tracked through the System or a similar system. The ownership of RECs created by the Facility are assigned to Taxpayer via the contract described above. Taxpayer may either retain the RECs associated with the Facility or sell them. Taxpayer intends to retire RECs associated with the Facility. The contract also assigns the RTO ZRCs from the Facility to Taxpayer. RTO requires member load-serving entities (LSEs) such as Taxpayer to maintain sufficient electric capacity rights such that the LSE can reasonably be expected to deliver electricity to meet customer demand. The RTO capacity obligation of an LSE for a given RTO capacity year (i.e., June through May) is based on forecasted peak demand plus a planning reserve margin. An LSE may satisfy its RTO capacity obligation with power generation facilities that it owns or by acquiring additional capacity through bilateral transactions with other market participants or by bidding on capacity in RTO's annual planning resource auction. For any given RTO capacity year (June-May), if a LSE has more than enough capacity resources to cover its forecasted peak demand and planning reserve margin, the LSE may sell its excess capacity through bilateral transactions with other market participants or may offer capacity in RTO's planning resource auction. Market participants utilize RTO ZRCs to transact in RTO capacity rights. To the extent that actual annual net capacity revenues (or expenses) vary from the amounts reflected in Taxpayer's basic rates and charges for service, such variance is returned to (or recovered from) customers through an adjustment to retail rates in Taxpayer's existing capacity adjustment mechanism (rider), resulting in a credit or surcharge to Taxpayer's retail customers after an annual reconciliation regulatory proceeding. Commission B has jurisdiction with respect to the RTO capacity market. Such regulation does not involve cost-of-service, rate-of-return regulation. RTO ZRCs created by a generation facility may be transferred separately from the energy generated by the power plant. The RTO ZRCs resulting from operation of the Facility will be transferred as a separate transaction from the energy. Specifically, the contract directly assigns the ownership of RTO ZRCs attributable to the Facility to Taxpayer. Partnership intends to treat RTO ZRCs resulting from operation of the Facility as self-created intangibles for federal income tax purposes and to apply Treas.Reg. Sec. 1.263(a)-4 to such RTO ZRCs. As part of the proceedings with Commission A, Taxpayer is requesting that it be able to include the unrecovered cost of its investment in Partnership in rate base and that it be able to recover the cost of its investment in Partnership ratably over the expected life of the investment in Partnership. ProjectCo filed a petition with Commission A on Date 3, requesting Commission A to enter an order declining to exercise its jurisdiction over ProjectCo's construction, ownership, and operation of the Facility. On Date 4, parties in ProjectCo State A proceeding submitted a proposed order to Commission A. On Date 5, Commission A issued a final order for Case. The final order resulted in the approval of the proposed ratemaking (except as described in the next sentence) and in Commission A declining to exercise authority over ProjectCo or Partnership. Commission A approved Taxpayer's estimated cost of the Facility and established a cap on cost recovery and associated 50/50 sharing with respect to costs in excess of the approved amount, subject to the ability of Taxpayer to seek approval additional cost recovery in limited circumstances (i.e., due to force majeure, unforeseeable conditions at the site, supply chain disruptions that impact the import of foreign-sourced materials and changes in law or regulation). RULINGS REQUESTED 1. The Facility owned by Partnership will not be public utility property under § 168(i)(10) and former § 46(f)(5) and, thus, Partnership will not be subject to the deferred tax normalization rules of § 168(i)(9) or the ITC normalization rules of former § 46(f) with respect to the Facility. 2. The Facility will not be treated as public utility property owned by Taxpayer or Partner and, thus, neither Taxpayer nor Partner will be subject to the deferred tax normalization rules of § 168(i)(9) with respect to the Facility. 3. The ITC with respect to the Facility will not be subject to the ITC normalization rules of former § 46(f) by Taxpayer or Partner. 4. Partnership will not be engaged in an automatically excepted regulated utility trade or business under Treas.Reg. Sec. 1.163(j)-1(b)(15)(i)(A) but will be eligible to make an election under Treas.Reg. Sec. 1.163(j)-1(b)(15)(iii)(C) to treat its trade or business as an electing regulated utility trade or business under Treas.Reg. Sec. 1.163(j)-1(b)(15)(i)(B). Making such election would have no effect on the application of the deferred tax normalization rules of § 168(i)(9), the ITC normalization rules of former § 46(f) or any of the first three conclusions of this ruling. LAW AND ANALYSIS First Ruling Section 168(f)(2) provides that the depreciation deduction determined under § 168 shall not apply to any public utility property (within the meaning of § 168(i)(10)) if the taxpayer does not use a normalization method of accounting. Section 168(i)(10) defines, in part, public utility property as property used predominantly in the trade or business of the furnishing or sale of electrical energy if the rates for such furnishing or sale, as the case may be, have been established or approved by a State or political subdivision thereof, by any agency or instrumentality of the United States, or by a public service or public utility commission or other similar body of any State or political subdivision thereof. Prior to the Revenue Reconciliation Act of 1990, § 168(i)(10) defined public utility property by means of a cross reference to § 167(l)(3)(A). Section 167(l)(3)(A) as then in effect contained the same definition of public utility property that is currently in § 168(i)(10). Section 1.167(l)-1(b) provides that under § 167(l)(3)(A), property is public utility property during any period in which it is used predominantly in a § 167(l) public utility activity. The term "section 167(l) public utility activity" means, in part, the trade or business of the furnishing or sale of electrical energy if the rates for such furnishing or sale, as the case may be, are regulated, i.e., have been established or approved by a regulatory body described in § 167(l)(3)(A). The term "regulatory body described in § 167(l)(3)(A)" means a State (including the District of Columbia) or political subdivision thereof, any agency or instrumentality of the United States, or a public service or public utility commission or other body of any State or political subdivision thereof similar to such a commission. The term "established or approved" includes the filing of a schedule of rates with a regulatory body which has the power to approve such rates, though such body has taken no action on the filed schedule or generally leaves undisturbed rates filed by Taxpayer. The definitions of public utility property contained in § 168(i)(10) and former § 46(f)(5) are essentially identical. Pursuant to § 50(d)(2), rules similar to the rules of former § 46(f), as in effect on November 5, 1990, continue to determine whether an asset is public utility property for purposes of the investment tax credit normalization rules. As in effect at that time, former § 46(f)(5) defined public utility property by reference to former § 46(c)(3)(B). The regulations under former § 46 (of continuing applicability by virtue of § 50(d)(2)), specifically § 1.46-3(g)(2)(iii), contains an expanded definition of regulated rates. This expanded definition embodies the notion of rates established or approved on a rate of return basis; where rate of return includes a fair return on the taxpayer's investment in providing such goods and services. Furthermore, rates are not "regulated" if they are established or approved on the basis of maintaining competition within an industry, insuring adequate service to customers of an industry, or charging "reasonable" rates within an industry. In addition to the definition in the § 46 regulations, there is an expressed reference to rate of return in § 1.167(l)-1(h)(6)(i). The operative rules for normalizing timing differences relating to use of different methods and periods of depreciation are only logical in the context of rate-of-return regulation. The normalization method, which must be used for public utility property to be eligible for the depreciation allowance available under § 168, is defined in terms of the method the taxpayer uses in computing its tax expense for purposes of establishing its cost of service for ratemaking purposes and reflecting operating results in its regulated books of account. Therefore, for purposes of application of the normalization rules, the definition of public utility property is the same for purposes of the investment tax credit and depreciation. Thus, under both the depreciation and investment tax credit normalization rule definitions, a facility must meet three requirements to be considered public utility property: (1) It must be used predominantly in the trade or business of the furnishing or sale of, inter alia, electrical energy; (2) The rates for such furnishing or sale must be established or approved by a State or political subdivision thereof, any agency or instrumentality of the United States, or by a public service or public utility commission or similar body of any State or political subdivision thereof; and (3) The rates so established or approved must be determined on a rate-of-return basis. Facility will be used by Partnership predominantly in the trade or business of the furnishing or sale of electric energy. Therefore, Facility will meet the first requirement. In addition, the sales of electricity by Partnership will be under the jurisdiction of Commission B. Therefore, Facility will also meet the second requirement. However, as described above, the rates for the sale of electricity produced by Facility and sold to RTO are determined under the market-based rate authority of Commission B and not on a cost-of-service or rate-of-return basis. Accordingly, the Facility does not meet the third requirement and we thus conclude that the Facility owned by Partnership will not be public utility property within the meaning of § 168(i)(10) and former § 46(f)(5). Second and Third Ruling Section 1.167(l)-3(c) provides, in relevant part, that if property held by a partnership is not public utility property in the hands of the partnership but would be public utility property if an election were made under § 761 to be excluded from partnership treatment, then § 167(l) shall be applied by treating the partners as directly owning the property in proportion to their partnership interests. Therefore, § 1.167(l)-3(c) first considers whether such property is public utility property at the partnership level. If not, it then considers whether such property would be public utility property at the partner level, but only if the partnership is of a type that the partners are eligible to elect out of partnership treatment under § 761. As discussed above with respect to the first ruling request, Facility is not considered public utility property in the hands of the Partnership. In addition, Taxpayer represents that Taxpayer and Partner are ineligible under § 761 to elect out of partnership treatment. The inability of Taxpayer and Partner to make such an election removes Facility from possible § 1.167(l)-3(c) consideration in the hands of Partner and Taxpayer. Accordingly, based solely on Taxpayer's representations, we conclude that Facility is not treated as public utility property owned by Taxpayer or Partner under § 168(i)(10) or § 1.167(l)-3(c). Therefore, the ITC with respect to the Facility will not be subject to the ITC normalization rules of former § 46(f) by Taxpayer or Partner. Fourth Ruling Section 163(j)(1) limits the amount allowed as a deduction for any taxable year for business interest expense interest paid or accrued on indebtedness properly allocable to a trade or business. Section 163(j)(7)(A)(iv) provides that, for purposes of defining a trade or business under § 163(j), the term "trade or business" does not include the trade or business of the furnishing or sale of electrical energy, water, or sewage disposal services; gas or steam through a local distribution system; or transportation of gas or steam by pipeline, if the rates for such furnishing or sale, as the case may be, have been established or approved by a State or political subdivision thereof, by any agency or instrumentality of the United States, by a public service or public utility commission or other similar body of any State or political subdivision thereof, or by the governing or ratemaking body of an electric cooperative. Treas.Reg. Sec. 1.163(j)-1(b)(15)(i) defines the term "excepted regulated utility trade or business" as one of three trades or businesses: a trade or business as defined in Treas.Reg. Sec. 1.163(j)-1(b)(15)(i)(A) (an "automatically excepted regulated utility trade or business"); a trade or business as defined in Treas.Reg. Sec. 1.163(j)-1(b)(15)(i)(B) (an "electing regulated utility trade or business"); or a trade or business as defined in Treas.Reg. Sec. 1.163(j)-1(b)(15)(i)(C) (a "designated excepted regulated utility trade or business"). Treas.Reg. Sec. 1.163(j)-1(b)(15)(i)(A) defines an "automatically excepted regulated utility trade or business" as a trade or business that furnishes or sells, electrical energy, water, or sewage disposal services; gas or steam through a local distribution system; or transportation of gas or steam by pipeline, but only to the extent that the rates for the furnishing or sale of such items, have been established or approved by a State or political subdivision thereof, by any agency or instrumentality of the United States, or by a public service or public utility commission or other similar body of any State or political subdivision thereof and are determined on a cost of service and rate of return basis; or have been established or approved by the governing or ratemaking body of an electric cooperative. Treas.Reg. Sec. 1.163(j)-1(b)(15)(i)(B) defines an "electing regulated utility trade or business" is defined as a trade or business that makes a valid election under Treas.Reg. Sec. 1.163(j)-1(b)(15)(iii). Treas.Reg. Sec. 1.163(j)-1(b)(15)(i)(C) defines a "designated excepted regulated utility trade or business" as a trade or business that that is specifically designated by the Secretary in guidance published in the Federal Register or the Internal Revenue Bulletin as an excepted regulated utility trade or business. Treas.Reg. Sec. 1.163(j)-1(b)(15)(iii) provides that a trade or business that is not an automatically excepted regulated utility trade or business or a designated excepted regulated utility trade or business and that furnishes or sells items described in Treas.Reg. Sec. 1.163(j)-1(b)(15)(i)(A)(1) (i.e., electrical energy, water, or sewage disposal services; gas or steam through a local distribution system; or transportation of gas or steam by pipeline) is eligible to make an irrevocable election to be an excepted regulated utility trade or business to the extent that the rates for furnishing or selling such items have been established or approved by a regulatory body described in Treas.Reg. Sec. 1.163(j)-1(b)(15)(i)(A)(2)(i). As described above, Partnership will set the rates it charges RTO for electricity to be produced by Facility under the market-based rate authority of Commission B (not on a cost-of-service or rate-of-return basis). Accordingly, we conclude that Partnership is not an automatically excepted regulated utility trade or business under Treas.Reg. Sec. 1.163(j)-1(b)(15)(i)(A). Partnership will predominantly use Facility in the trade or business of the furnishing or sale of electric energy. In addition, Partnership will be under the jurisdiction of Commission B. Therefore, Partnership is eligible to make an irrevocable election to be an excepted regulated utility trade or business under Treas.Reg. Sec. 1.163(j)-1(b)(15)(iii). In the preamble to the final § 163(j) regulations, it states that: The rules set forth in the final regulations are limited solely to the determination of an 'excepted regulated utility trade or business' for purposes of section 163(j)(7)(A)(iv). As a result of this limited application, the rules in the final regulations are not applicable to the determination of 'public utility property' or the application of the normalization rules within the meaning of section 46(f), as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990, section 168(i)(9) and (10) and the regulations thereunder, or to the determination of any depreciation allowance available under sections 167 and 168. T.D. 9905, 85 Fed. Reg. 56686, 56696 (Sep. 14, 2020). Accordingly, making such election would have no effect on the application of the deferred tax normalization rules of § 168(i)(9), the ITC normalization rules of former § 46(f) or any of the first three conclusions of this ruling. Except as explicitly determined above, no opinion is expressed or implied concerning the federal income tax consequences of the matters described above under any other provisions of the Code (including other subsections of § 168). Specifically, Taxpayer has not requested a ruling regarding whether the Partnerships will be respected as partnerships for federal income purposes nor provided partnership agreements for Partnerships. Accordingly, nothing in this letter should be construed as providing a ruling or other determination that the Partnerships will be respected as partnerships or that any purported owner will be respected as a partner for federal income tax purposes. In addition, we note that, while we have concluded that "Partner" is not subject to either the deferred tax or ITC normalization rules under the facts described above, no person may legally rely on a ruling not issued to that person This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3) provides that it may not be used or cited as precedent. This ruling is based upon information and representations submitted on behalf of Taxpayer and accompanied by penalty of perjury statements executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for a ruling, it is subject to verification on examination. This letter is being issued electronically in accordance with Rev.Proc. 2020-29, 2020-21 I.R.B. 859. A paper copy will not be mailed to Taxpayer. Sincerely, Patrick S. Kirwan Branch Chief, Branch 6 (Passthroughs & Special Industries) cc:
Private Letter Ruling Number: 202214010 Internal Revenue Service January 10, 2022 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202214010 Release Date: 4/8/2022 Index Number: 2010.04-00, 9100.35-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:PSI:04 PLR-117554-21 Date: January 10, 2022 Dear *******: This letter responds to a letter dated August 18, 2021, and additional correspondence submitted on behalf of Decedent's estate, requesting an extension of time pursuant to § 301.9100-3 of the Procedure and Administration Regulations to make an election. Decedent's estate is requesting to make an election under § 2010(c)(5)(A) of the Internal Revenue Code (a "portability" election) to allow a decedent's surviving spouse to take into account that decedent's deceased spousal unused exclusion (DSUE) amount. The information submitted for consideration is summarized below. Decedent died on Date, survived by Spouse. It is represented that based on the value of Decedent's gross estate and taking into account any taxable gifts, Decedent's estate is not required under § 6018(a) to file an estate tax return (Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return). It is further represented that there is an unused portion of Decedent's applicable exclusion amount and that a portability election is required to allow Spouse to take into account that amount (the "DSUE" amount). A portability election is made upon the timely filing of a complete and properly prepared estate tax return, unless the requirements for opting out are satisfied. See § 20.2010-2(a)(2) of the Estate Tax Regulations. For various reasons, an estate tax return was not timely filed and a portability election was not made. After discovery of this, Decedent's estate submitted this request for an extension of time under § 301.9100-3 to make a portability election. LAW AND ANALYSIS Section 2001(a) imposes a tax on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States. Section 2010(a) provides that a credit of the applicable credit amount shall be allowed to the estate of every decedent against the tax imposed by § 2001. Section 2010(c)(1) provides that the applicable credit amount is the amount of the tentative tax that would be determined under § 2001(c) if the amount with respect to which such tentative tax is to be computed were equal to the applicable exclusion amount. On December 17, 2010, Congress amended § 2010(c), effective for estates of decedents dying and gifts made after December 31, 2010, to allow portability of a decedent's unused applicable exclusion amount between spouses. Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, § 303, 124 Stat. 3296, 3302 (2010). Section 2010(c)(2) provides that the applicable exclusion amount is the sum of the basic exclusion amount, and, in the case of a surviving spouse, the DSUE amount. Section 2010(c)(3) provides the basic exclusion amount available to the estate of every decedent, an amount to be adjusted for inflation annually after calendar year 2011. Section 2010(c)(4) defines the DSUE amount to mean the lesser of (A) the basic exclusion amount, or (B) the excess of -- (i) the applicable exclusion amount of the last deceased spouse of the surviving spouse, over (ii) the amount with respect to which the tentative tax is determined under § 2001(b)(1) on the estate of such deceased spouse. Section 2010(c)(5)(A) provides that a DSUE amount may not be taken into account by a surviving spouse under § 2010(c)(2) unless the executor of the estate of the deceased spouse files an estate tax return on which such amount is computed and makes an election on such return that such amount may be so taken into account. The election, once made, shall be irrevocable. No election may be made if such return is filed after the time prescribed by law (including extensions) for filing such return. Section 20.2010-2(a)(1) provides that the due date of an estate tax return required to elect portability is nine months after the decedent's date of death or the last day of the period covered by an extension (if an extension of time for filing has been obtained). Further, an extension of time under § 301.9100-3 to make a portability election may be granted in the case of an estate that is not required to file an estate tax return under § 6018(a), as determined solely based on the value of the gross estate and any adjusted taxable gifts (and without regard to § 20.2010-2(a)). Under § 301.9100-1(c), the Commissioner has discretion to grant a reasonable extension of time under the rules set forth in §§ 301.9100-2 and 301.9100-3 to make a regulatory election, or a statutory election (but no more than six months except in the case of a taxpayer who is abroad), under all subtitles of the Internal Revenue Code except subtitles E, G, H, and I. Section 301.9100-3 provides the standards the Commissioner will use to determine whether to grant an extension of time to make an election whose due date is prescribed by a regulation (and not expressly provided by statute). Requests for relief under § 301.9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and that granting relief will not prejudice the interests of the government. In this case, based on the representation as to the value of the gross estate and any adjusted taxable gifts, the time for filing the portability election is fixed by the regulations. Therefore, the Commissioner has discretionary authority under § 301.9100-3 to grant an extension of time for Decedent's estate to elect portability, provided Decedent's estate establishes it acted reasonably and in good faith, the requirements of §§ 301.9100-1 and 301.9100-3 are satisfied, and granting relief will not prejudice the interests of the government. Information, affidavits, and representations submitted on behalf of Decedent's estate explain the circumstances that resulted in the failure to timely file a valid election. Based solely on the information submitted and the representations made, we conclude that the requirements of §§ 301.9100-1 and 301.9100-3 have been satisfied. Therefore, we grant an extension of time of 120 days from the date of this letter to make the portability election. The election should be made by filing a complete and properly prepared Form 706 and a copy of this letter, within 120 days from the date of this letter, with the Service Center at the following address: Department of the Treasury, Internal Revenue Service Center, Kansas City, MO 64999. For purposes of electing portability, a Form 706 filed by Decedent's estate within 120 days from the date of this letter will be considered to be timely filed. If it is later determined that, based on the value of the gross estate and taking into account any taxable gifts, Decedent's estate is required to file an estate tax return pursuant to § 6018(a), the Commissioner is without authority under § 301.9100-3 to grant an extension of time to elect portability and the grant of the extension referred to in this letter is deemed null and void. See § 20.2010-2(a)(1). We neither express nor imply any opinion concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. In particular, we express no opinion as to the DSUE amount to be potentially taken into account by Spouse. Any claimed DSUE amount will be included in the applicable exclusion amount of Spouse only to the extent that Spouse can substantiate such amount and will be subject to determination by the Director's office upon audit of relevant Federal gift or estate tax returns. See § 20.2010-3(c)(1) and (d). The rulings contained in this letter are based upon information and representations submitted by the Taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination. This ruling is directed only to the Taxpayer requesting it. Section 6110(k)(3) provides that it may not be used or cited as precedent. In accordance with the Power of Attorney on file with this office, we have sent a copy of this letter to your authorized representative. Sincerely, Associate Chief Counsel (Passthroughs & Special Industries) Karlene M. Lesho By: Karlene M. Lesho Senior Technician Reviewer, Branch 4 Office of the Associate Chief Counsel (Passthroughs & Special Industries) Enclosure Copy for § 6110 purposes cc:
Private Letter Ruling Number: 202133005 Internal Revenue Service March 3, 2021 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202133005 Release Date: 8/20/2021 Index Number: 61.00-00, 661.00-00, 643.00-00, 1001.00-00, 1015.00-00, 1223.00-00, 2601.00-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:PSI:4 PLR-119283-20 Date: March 03, 2021 Dear *******: This responds to your authorized representative's letter dated August 26, 2020, and subsequent correspondence, in which you request rulings concerning the income tax and generation-skipping transfer (GST) tax consequences of a division and modification of Trust 1. FACTS The facts and representations submitted are as follows: On Date 1, Grantor 1 and Grantor 2 established Trust 1, an irrevocable trust for the benefit of Grantors' descendants. In each of Year 1 through Year 4, Grantor 1 and Grantor 2 transferred cash and/or property to Trust 1. Grantor 1 and Grantor 2 allocated GST exemption to all transfers to Trust 1 on timely filed Forms 709, United States Gift (and Generation-Skipping Transfer) Tax Returns. Trust 1 holds member interests and limited partner interests in entities that own passive investments and non-operated oil and gas working interests and related royalty interests. Trust 1 is administered under the laws of State. Article III, section 3.1 of Trust 1 provides that the trustees, in their sole and absolute discretion, may distribute to Grantors' descendants the principal and income of Trust 1 for support, maintenance, health, and education. In addition, subject to the provisions of section 7.17, an Independent Trustee, or majority of the trustees qualifying as an Independent Trustee under § 674(c) of the Internal Revenue Code (Code), may distribute to Grantors' descendants so much of the trust estate, both principal and income, as the trustee shall determine. Section 3.2 provides each descendant of Grantors a limited right to withdraw; such right takes priority over distributions under section 3.1. Article IV, section 4.1 of the trust instrument provides that upon the death of the last to die of Grantor 1 and Grantor 2, the trustee shall divide Trust 1 into x separate trusts of equal value, one for the benefit of each child of Grantors and that child's descendants. If a child (or his or her descendants) receives distributions pursuant to section 3.1, the value of the property distributed under section 3.1 shall be included in the value of the trust created for that child for purposes of determining the value of the child's trust under section 4.1. If a child dies without descendants prior to the date of death of the last to die of Grantor 1 and Grantor 2, the deceased child's share shall be allocated pro rata among the other trusts created under section 4.1. If, after the death of the last to die of Grantor 1 or Grantor 2, either (A) a child for whom a trust is created dies without descendants, or (B) the descendants of such child die without descendants, that trust will terminate and the trust estate shall be distributed in accordance with section 4.4. Section 4.2 provides that, following the division in section 4.1, the trustees, in their sole and absolute discretion, may distribute the principal and income of a separate trust to the child for whom the separate trust was created and the child's descendants for support, maintenance, health and education. In addition, an Independent Trustee, as defined in § 674(c) of the Code, may distribute to the child and the child's descendants so much of the trust estate, both principal and income, as the trustee shall determine. Section 4.3 provides that except as otherwise provided in section 4.1, the trusts created under the governing instrument of Trust 1, shall terminate twenty (20) years after the date of death of the last survivor of the descendants of Grantors' parents who are alive on the date of execution of Trust 1. Section 4.4 provides that following the termination of Trust 1, the trust estate shall be allocated and distributed: (A) In equal shares, per stirpes, to the then living descendants of the child for whom such trust was created. (B) If a child for whom such trust was created dies prior to the termination of such trust without descendants, such trust estate shall be distributed to such one or more members of a group consisting of Grantors' descendants or trusts for the benefit of Grantors' descendants in such manner, and proportions as such child may appoint by will by making special reference to this power in such will. (C) If a child for whom such trust was created dies prior to the termination of such trust without descendants and such trust estate is not effectively appointed, such trust estate shall be distributed in equal shares to the remaining trusts created under the governing instrument of Trust 1 for the benefit of Grantors' other children. (D) If the trusts created under the governing instrument of Trust 1 for the benefit of Grantors' other children no longer exist, such trust estate shall be distributed in equal shares, per stirpes, to the Grantors' descendants. (E) If none of the Grantors' descendants are alive at the termination of a trust, the trust estate shall be distributed to the Grantors' heirs. Article V provides that the trustee of Trust 1 may distribute to a contingent trust any portion of Trust 1 which, upon termination, would be distributable to a beneficiary (including an heir) who is under twenty-one (21) years of age. The trustee of such a trust may make discretionary distributions to the beneficiary of principal and income for support, maintenance, health, or education. The contingent trust will terminate when the beneficiary reaches twenty-one (21) years of age. Upon termination, the trust estate shall be distributed to the beneficiary, if living, or to his heirs as part of his probate estate. Article VII, section 7.1 of the trust agreement establishes the original trustees of Trust 1. Section 7.1(A) provides for the appointment of successor trustees if the original trustees should fail, cease, or refuse to act as a trustee of Trust 1. Section 7.1(B) provides for the appointment of trustees following the division of the Taxpayer into x trusts pursuant to section 4.1. Article IX, section 9.3 provides that the term "Descendants" means the legitimate children of the person designated and the legitimate lineal descendants of such children, and includes any person adopted before attaining age eighteen (18) and the adopted person's legitimate lineal descendants. A posthumous child shall be considered as living at the death of his or her parent. Upon termination of Trust 1, whenever a distribution is to be made to the descendants of any person, or whenever a trust estate is to be divided into shares for the descendants of any person, the property being distributed or divided shall be divided into as many shares as there are then living children of a person and deceased children of the person who left descendants who are then living. Each living child (if any) shall take one share and the share of each deceased child shall be divided among his or her then living descendants in the same manner. State Law 1 provides that a trustee may, unless expressly prohibited by the terms of the instrument establishing the trust, divide a trust into two or more separate trusts. State Law 2 provides in subsection (a) that on petition of a trustee or a beneficiary, a court may order that the trustee be changed, that the terms of the trust be modified, that the trustee be directed or permitted to do acts that are not authorized or that are forbidden by the terms of the trust, that the trustee be prohibited from performing acts required by the terms of the trust, or that the trust be terminated in whole or in part, if: (1) the purposes of the trust have been fulfilled or have become illegal or impossible to fulfill; (2) because of circumstances not known to or anticipated by the settlor, the order will further the purposes of the trust; (3) modification of administrative, non-dispositive terms of the trust is necessary or appropriate to prevent waste or impairment of the trust's administration; (4) the order is necessary or appropriate to achieve the settlor's tax objectives or to qualify a distributee for governmental benefits and is not contrary to the settlor's intentions; or (5) subject to subsection (d): (A) continuance of the trust is not necessary to achieve any material purpose of the trust; or (B) the order is not inconsistent with a material purpose of the trust. Subsection (d) provides that the court may not take the action permitted by subsection (a)(5) unless all beneficiaries of the trust have consented to the order or are deemed to have consented to the order. On Date 2, Grantor 1 died. Grantor 1 is survived by Grantor 2, their x children, and grandchildren, and a great-grandchild. As Grantors' family has grown in number and has become more diverse, the financial needs and objectives of the Trust 1 beneficiaries have diverged. The current beneficiaries of Trust 1 have agreed that it is in their collective best interest for Trust 1 to be divided into x separate and independent trusts, one for the benefit of each child of Grantors and that child's descendants, prior to the death of Grantor 2 (Early Division). The governing instrument of Trust 1 does not prohibit the Early Division of Trust 1. On Date 3, the trustees and current beneficiaries of Trust 1, together with other interested parties, entered into an agreement (Settlement Agreement) in which all parties agreed to take all actions necessary to accomplish the Early Division. In accordance with the Settlement Agreement, on Date 4, the trustees of Trust 1 petitioned Court 1 to approve the Early Division, and related modifications to sections 4.1, 4.3, 4.4 of Trust 1, modification of section 7.1 (related to the appointment of co-trustees and successor trustees), and addition of a new section 7.1A (related to the appointment of an Investment Trustee). On Date 5, the trustees' petition was transferred to Court 2 to be consolidated with a pending case regarding Trust 2. On Date 6, the trustees amended their petition to include a request that Court 2 declare the Settlement Agreement valid and enforceable. On Date 7, Court 2 issued Partial Judgment. The Partial Judgment approves the Early Division, modification of section 7.1, and addition of a new section 7.1A. In addition, Partial Judgment provides for the following amendments to Trust 1: (1) Section 4.1 is amended to provide for the division of Trust 1 into x separate trusts upon the earlier of an Early Division (as later defined in section 4.1) or the death of the last to die of Grantor 1 and Grantor 2. In addition, a new paragraph is added at the end of section 4.1 and immediately preceding section 4.2, to provide that, notwithstanding the other provisions of Trust 1 including section 4.1, if the trust estate is divided into separate and distinct trusts for the benefit of each of Grantors' children and their respective descendants prior to the death of the last of Grantor 1 and Grantor 2 to die (Early Division), the trust estate shall not be further divided as a result of the death of the last to die of the Grantors, and any reference to a division of a trust pursuant to section 4.1 or upon the death of the last of Grantor 1 and Grantor 2 to die shall instead reference the Early Division; provided, however, such an Early Division shall not (a) delay the vesting of a beneficial interest in the trust estate, or (b) shift a beneficial interest in the trust estate to any beneficiaries who occupy a lower generation than the person or persons who held the beneficial interest prior to the Early Division. For example, a primary beneficiary's exercise of his or her testamentary power of appointment set forth in section 4.4(B) shall not be effective if the primary beneficiary does not survive both Grantor 1 and Grantor 2. (2) Section 4.3 is amended to provide that the separate trusts created under Article IV shall terminate upon the death of the primary beneficiary for whom such trust was created. Notwithstanding any other provision of Trust 1, the trusts created under Trust 1 shall terminate no later than twenty (20) years after the date of death of the last survivor of the descendants of Grantors' parents who are alive on the date of execution of this agreement, at which point the remaining trust estate of each of the trusts shall be distributed, outright and free of trust, to the respective primary beneficiaries of such trusts. (3) Section 4.4 is amended to provide that, except as otherwise provided, following the death of the primary beneficiary for whom such trust was created, the trust estate shall be distributed: (A) To that person's descendants (to be divided in the manner set forth in section 9.3), subject to the provisions of section 4.4(F) below. (B) lf the primary beneficiary for whom such trust was created does not have descendants then living, such trust estate shall be distributed to such one or more members of a group consisting of Grantors' descendants or trusts for the benefit of Grantors' descendants in such shares, manner, and proportions as such primary beneficiary may appoint by will making specific reference to this power in such will. (C) If the primary beneficiary for whom such trust was created does not have descendants then living, such person was a descendant of the Grantors, and such trust estate is not effectively appointed, then such trust estate shall be distributed to the descendants of that person's nearest ancestor who was one of Grantors' descendants and who has descendants then living, subject to the provisions of section 4.4(F). (D) If none of these persons are then living, to Grantors' descendants (to be divided in the manner set forth in section 9.3), subject to the provisions of section 4.4(F). (E) If none of the Grantors' descendants are alive at the termination of a trust, the trust estate shall be distributed to the Grantors' heirs, subject to the Contingent Trust provisions of Article V. (F) Subject to a beneficiary's exercise of a power of appointment as set forth above, any portion of a trust estate that, upon the termination of Trust 1, would be distributable to a beneficiary that is the primary beneficiary of a trust governed by this agreement then in existence instead shall be distributed to the trustee of such trust as an addition to its trust estate. In addition, subject to a beneficiary's exercise of a power of appointment as set forth above, any portion of a trust estate that, upon the termination of Trust 1 would be distributable to one of Grantors' descendants for whom no trust governed by this agreement is then in existence instead shall be retained by the trustee as the initial trust estate of a separate trust for such beneficiary, and such trust shall also be governed by the provisions of Article IV. The Partial Judgment will become effective upon entry of a final judgment, and the trustees of Trust 1 represent that Trust 1 will not be divided until Court 2 enters a final judgment. In addition, the trustees represent that Trust 1 currently has an inclusion ratio of zero for GST tax purposes, that all previous distributions from Trust 1 have been made on a pro-rata basis to each of the x family lines, and that the assets of Trust 1 are to be allocated to the newly-created trusts on a pro-rata basis. Moreover, the trustees represent that the interests of the beneficiaries of Trust 1 will not be materially altered by the division of Trust 1 into the newly-created trusts, that each newly-created trust will have different primary beneficiaries, and that each newly-created trust will be separately managed and administered. RULINGS REQUESTED 1. The pro-rata transfer of assets from Trust 1 into the newly-created trusts will not result in treating any property of Trust 1 as paid, credited, or distributed for purposes of § 661 or § 1.661-2(f), and thus will not result in the realization of any income, gain, or loss under § 661 or § 662 by Trust 1, the newly-created trusts, or a beneficiary of any of the trusts. 2. The pro-rata transfer of assets from Trust 1 into the newly-created trusts will not result in the realization of any income, gain, or loss to Trust 1, the newly-created trusts, or a beneficiary of any of the trusts under § 61 or § 1001. 3. The newly-created trusts will be treated as separate trusts for federal income tax purposes pursuant to § 643(f). 4. The tax basis that the newly-created trusts will have in the assets of Trust 1 immediately after the transfer of such assets from Trust 1 will be the same as the tax basis of Trust 1 in such assets immediately before the transfer. 5. Each historic asset of Trust 1 will have the same holding period immediately after the transfer to the newly-created trusts that it had immediately before the transfer. 6. On the division of Trust 1 into the newly-created trusts, each of the newly-created trusts will succeed to and take into account an equal portion of any net operating loss carryforward, net capital loss, and other tax attributes including passive activity losses and credit carryforwards and statutory depletion deductions, of Trust 1. Each asset transferred by Trust 1 to the newly-created trusts will have the same tax attributes immediately after the division that it had immediately before the division. 7. The GST tax exempt status of Trust 1 under chapter 13 of the Code will not be affected by either (a) the Early Division of Trust 1, or (b) the modification of Trust 1. RULINGS 1 & 2 Section 61(a) defines gross income as all income from whatever source derived. Section 61(a)(3) provides that gross income includes gains derived from dealings in property and, under § 61(a)(15), from an interest in a trust. Section 661(a) provides that in any taxable year a deduction is allowed in computing the taxable income of a trust (other than a trust to which subpart B applies), for the sum of (1) the amount of income for such taxable year required to be distributed currently; and (2) any other amounts properly paid or credited or required to be distributed for such taxable year. Section 1.661(a)-2(f) of the Income Tax Regulations provides that gain or loss is realized by the trust or estate (or the other beneficiaries) by reason of a distribution of property in kind if the distribution is in satisfaction of a right to receive a distribution of a specific dollar amount, of specific property other than that distributed, or of income as defined under § 643(b) and the applicable regulations, if income is required to be distributed currently. Section 662 provides that there shall be included in the gross income of a beneficiary to whom an amount specified in § 661(a) is paid, credited, or required to be distributed (by an estate or trust described in § 661), the sum of the following amounts: (1) the amount of income for the taxable year required to be distributed currently to such beneficiary, whether distributed or not; and (2) all other amounts properly paid, credited, or required to be distributed to such beneficiary for the taxable year. Section 1001(a) provides that the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in § 1011 for determining gain, and the loss shall be the excess of the adjusted basis provided in § 1011 for determining loss over the amount realized. Section 1001(b) provides that the amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received. Under § 1001(c), except as otherwise provided in subtitle A, the entire amount of gain or loss, determined under § 1001, on the sale or exchange of property shall be recognized. Section 1.1001-1(a) provides that the gain or loss realized from the conversion of property into cash, or from the exchange of property for other property differing materially either in kind or in extent, is treated as income or loss sustained. Section 1.1001-1(h)(1) provides that the severance of a trust (including without limitation a severance that meets the requirements of § 26.2642-6 or of § 26.2654-1(b) of this chapter) is not an exchange of property for other property differing materially either in kind or in extent if -- (i) An applicable state statute or the governing instrument authorizes or directs the trustee to sever the trust, and (ii) Any non-pro rata funding of the separate trusts resulting from the severance... whether mandatory or in the discretion of the trustee, is authorized by an applicable state statute or governing instrument. A partition of jointly owned property is not a sale or other disposition of property where the co-owners of the joint property sever their joint interests but do not acquire a new or additional interest as a result of the transaction. Thus, neither gain nor loss is realized on a partition. See Rev. Rul. 56-437, 1956-2 C.B. 507. Cottage Savings Ass'n v. Commissioner, 499 U.S. 554 (1991), addresses the issue of when a sale or exchange has taken place that results in the realization of gain or loss under § 1001. In Cottage Savings, a financial institution exchanged its interests in one group of residential mortgage loans for another lender's interests in a different group of residential mortgage loans. The two groups of mortgages were considered "substantially identical" by the agency that regulated the financial institution. Consequently, based on the facts submitted and the representations made, the pro-rata transfer of assets from Trust 1 to the newly-created trusts will not result in a sale or exchange, or other disposition, of any property for purposes of § 1001(a), and thus no gain or loss will be recognized by the beneficiaries or the trusts on the division for purposes of § 61(a)(3) or § 1001(c). We further conclude that the pro-rata transfer of assets from Trust 1 to the newly-created trusts is not a distribution under § 661 or § 1.661(a)-2(f) and therefore not included in the gross income of any newly-created trust beneficiary under § 662. It is consistent with the Supreme Court's opinion in Cottage Savings to find that the interests of the beneficiaries, after a pro-rata distribution, of the newly-created trusts do not materially differ from the interests in Trust 1. RULING 3 Section 643(f) provides that, for purposes of subchapter J of chapter 1 of subtitle A, under regulations prescribed by the Secretary, two or more trusts shall be treated as one trust if (1) such trusts have substantially the same grantor or grantors and substantially the same primary beneficiary or beneficiaries, and (2) a principal purpose of such trusts is the avoidance of the tax imposed by chapter 1. Section 1806(b) of the Tax Reform Act of 1986 provides that § 643(f) shall apply to taxable years beginning after March 1, 1984; except that, in the case of a trust that was irrevocable on March 1, 1984, it shall apply only to that portion of the trust that is attributable to contributions of corpus after March 1, 1984. It is represented that the newly-created trusts will each have different beneficiaries. We conclude that as long as the newly-created trusts created by the pro-rata transfer of assets from Trust are separately managed and administered, they will be treated as separate trusts for federal income tax purposes. RULINGS 4, 5 & 6 Section 1015(a) provides that if the property was acquired by gift, the basis shall be the same as it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift, except that if the basis (adjusted for the period before the date of the gift as provided in § 1016) is greater than the fair market value of the property at the time of the gift then for the purpose of determining loss the basis shall be the fair market value. Section 1015(b) provides that if property is acquired after December 31, 1920, by a transfer in trust (other than a transfer in trust by a gift, bequest, or devise), the basis shall be the same as it would be in the hands of the grantor increased in the amount of gain or decreased in the amount of loss recognized to the grantor on such transfer. Section 1.1015-2(a)(1) provides that in the case of property acquired after December 31, 1920, by transfer in trust (other than by transfer in trust by gift, bequest, or devise), the basis of property so acquired is the same as it would be in the hands of the grantor increased in the amount of gain or decreased in the amount of loss recognized to the grantor on the transfer under the law applicable to the year in which the transfer was made. If the taxpayer acquired the property by transfer in trust, this basis applies whether the property is in the hands of the trustee or the beneficiary, and whether acquired prior to termination of the trust and distribution of the property, or thereafter. Section 1223(2) provides that, in determining the period for which the taxpayer has held property however acquired, there shall be included the period for which such property was held by any other person, if under chapter 1 of subtitle A such property has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as it would have in the hands of such other person. See also § 1.1223-1(b). Based on the facts submitted and the representations made, we conclude that because § 1001 does not apply to the pro rata transfer of assets from Trust 1 into the newlycreated trusts, under § 1015 the basis of the newly-created trust assets will be the same after pro-rata transfer of assets from Trust 1 as the basis of those assets before the transfer. We further conclude that each asset transferred by Trust 1 to the newlycreated trusts will have the same holding period in the hands of the newly-created trusts as it had in Trust 1. Finally, we conclude that on the division of property from Trust 1 to the newly-created trusts, the newly-created trusts will succeed to and take into account, pro-rata, any net operating loss carryforward, net capital loss, and other tax attributes, including passive activity losses, credit carryforwards, and statutory depletion deductions, of Trust 1. RULING 7 Section 2601 provides that a tax is imposed on every generation-skipping transfer (GST) made by a "transferor" to a skip person. Under § 1433(a) of the Tax Reform Act of 1986 (Act) and § 26.2601-1(a) of the Generation-Skipping Transfer Tax Regulations, the GST tax is generally applicable to GSTs made after October 22, 1986. However, under § 1433(b)(2)(A) of the Act and § 26.2601-1(b)(1)(i), the tax does not apply to a transfer from a trust if the trust was irrevocable on September 25, 1985, and no addition (actual or constructive) was made to the trust after that date. Section 2631(a) provides that for purposes of determining the inclusion ratio, every individual shall be allowed a GST exemption amount which may be allocated by such individual (or his executor) to any property with respect to which such individual is the transferor. Section 26.2601-1(b)(4)(i) provides rules for determining when a modification, judicial construction, settlement agreement, or trustee action with respect to a trust that is exempt from the GST tax will not cause the trust to lose its exempt status. The regulation provides that the rules contained in the paragraph are generally applicable only for purposes of determining whether an exempt trust retains its exempt status for GST tax purposes. Unless the regulations specifically provide otherwise, the rules do not apply in determining, for example, whether the transaction results in a gift subject to gift tax, or may cause the trust to be included in the gross estate of a beneficiary, or may result in the realization of capital gain for purposes of § 1001. Section 26.2601-1(b)(4)(i)(D) provides that a modification of the governing instrument of an exempt trust by judicial reformation, or nonjudicial reformation that is valid under applicable state law, will not cause an exempt trust to be subject to the tax if the modification does not shift a beneficial interest in the trust to any beneficiary who occupies a lower generation (as defined in § 2651) than the person or persons who held the beneficial interest prior to the modification, and the modification does not extend the time for vesting of any beneficial interest in the trust beyond the period provided for in the original trust. A modification of an exempt trust will result in a shift in beneficial interest to a lower generation beneficiary if the modification can result in either an increase in the amount of a GST or the creation of a new GST. A modification that is administrative in nature that only indirectly increases the amount transferred will not be considered to shift a beneficial interest in the trust. Section 26.2601-1(b)(4)(i)(E), Example 5, describes a situation where, in 1980, grantor established an irrevocable trust for the benefit of his two children, A and B, and their issue. Under the terms of the trust, the trustee has the discretion to distribute income and principal to A, B, and their issue in such amounts as the trustee deems appropriate. On the death of the last to die of A and B, the trust principal is to be distributed to the living issue of A and B, per stirpes. In 2002, the appropriate local court approved the division of the trust into two equal trusts, one for the benefit of A and A's issue and one for the benefit of B and B's issue. The trust for A and A's issue provides that the trustee has the discretion to distribute trust income and principal to A and A's issue in such amounts as the trustee deems appropriate. On A's death, the trust principal is to be distributed equally to A's issue, per stirpes. If A dies with no living descendants, the principal will be added to the trust for B and B's issue. The trust for B and B's issue is identical (except for the beneficiaries) and terminates at B's death at which time the trust principal is to be distributed equally to B's issue, per stirpes. If B dies with no living descendants, principal will be added to the trust for A and A's issue. The example concludes that the division of the trust into two trusts does not shift any beneficial interest in the trust to a beneficiary who occupies a lower generation (as defined in § 2651) than the person or persons who held the beneficial interest prior to the division. In addition, the division does not extend the time for vesting of any beneficial interest in the trust beyond the period provided for in the original trust. Therefore, the two partitioned trusts resulting from the division will not be subject to the provisions of chapter 13. In § 26.2601-1(b)(4)(i)(E), Example 10, considers the following situation: In 1980, grantor established an irrevocable trust for the benefit of grantor's issue, naming a bank and five other individuals as trustees. In 2002, the appropriate local court approves a modification of the trust that decreases the number of trustees which results in lower administrative costs. The modification pertains to the administration of the trust and does not shift a beneficial interest in the trust to any beneficiary who occupies a lower generation (as defined in § 2651) than the person or persons who held the beneficial interest prior to the modification. In addition, the modification does not extend the time for vesting of any beneficial interest in the trust beyond the period provided for in the original trust. Therefore, the trust will not be subject to the provisions of chapter 13. No guidance has been issued concerning judicial modifications that may affect the status of trusts that are exempt from GST tax because sufficient GST exemption was allocated to the trust to result in an inclusion ratio of zero. At a minimum, a modification that would not affect the GST status of a grandfathered trust should similarly not affect the exempt status of such a trust. In this case, the division and modifications to sections 4.1, 4.3, and 4.4 are similar to those in Example 5 of § 26.2601-1(b)(4)(i)(E). The Early Division of Trust 1 will result in x newly-created trusts, one for the family line of each child of Grantor 1 and Grantor 2. After the division and modification: (i) section 4.2, which governs distributions during the lifetime of each child and more remote descendant of Grantors, is the same as in the original Trust 1, although limited to a family line; (ii) under section 4.3, each newlycreated trust (and trusts created under the terms of each newly-created trust) will terminate no later than Trust 1 terminates under its original terms; and (iii) under section 4.4, which governs distributions at the death of a child and more remote descendants of Grantors, the distributees of property on termination of each newly-created trust (and trusts created under the terms of each newly-created trust) will be the same as the distributees of property under the original terms of Trust 1. Thus, the Early Division of Trust 1 and pro-rata allocation of Trust 1 assets among the x newly-created trusts will not shift a beneficial interest in Trust 1 to any beneficiary who occupies a lower generation than the person or persons who held the beneficial interest prior to the Early Division. In addition, the Early Division will not extend the time for the vesting of any beneficial interest in the newly-created trusts beyond the period provided for the vesting of that beneficial interest under the original terms of Trust 1. The modification to section 7.1 and the addition of section 7.1A resemble those in Example 10 of § 26.2601-1(b)(4)(i)(E). The modification and addition pertain to the administration of Trust 1 and do not shift a beneficial interest in Trust 1 to any beneficiary who occupies a lower generation (as defined in § 2651) than the person or persons who held the beneficial interest prior to the modification and addition. Furthermore, the modification and addition do not extend the time for vesting of any beneficial interest in Trust 1 beyond the period provided for under the original terms of Trust 1. Accordingly, based on the facts submitted and the representations made, the division of Trust 1 in accordance with Partial Judgment into the x newly-created trusts and the pro-rata allocation of Trust 1 assets will not affect the status of Trust 1 or the newly-created trusts as exempt from the GST tax. Likewise, neither the division nor the pro-rata allocation of assets will cause a distribution from, or termination of any interest in Trust 1 or any of the newly-created trusts to be subject to the GST tax. Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination. This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representative. Sincerely, Leslie H. Finlow Leslie H. Finlow Senior Technician Reviewer, Branch 4 Office of the Associate Chief Counsel (Passthroughs & Special Industries) Enclosures (2) Copy of this letter Copy for § 6110 purposes cc:
Proposed Regulation REG-105595-23 Internal Revenue Service 2023-27 I.R.B. 1194 Notice of Proposed Rulemaking Elective Payment of Advanced Manufacturing Investment Credit REG-105595-23 AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking and notice of public hearing. SUMMARY: This document contains proposed regulations concerning the elective payment election of the advanced manufacturing investment credit under the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act of 2022. The proposed regulations describe rules for the elective payment election, including special rules applicable to partnerships and S corporations, repayment of excessive payments, and basis reduction and recapture. In addition, the proposed regulations provide rules related to an IRS pre-filing registration process that taxpayers wanting to make the elective payment election would be required to follow. These proposed regulations affect taxpayers eligible to make the elective payment election of the advanced manufacturing investment tax credit in a taxable year. This document also provides notice of a public hearing on the proposed regulations. DATES: Written or electronic comments must be received by August 14, 2023. The public hearing on these proposed regulations is scheduled to be held on August 24, 2023, at 10 a.m. ET. Requests to speak and outlines of topics to be discussed at the public hearing must be received by August 14, 2023. If no outlines are received by August 14, 2023, the public hearing will be cancelled. Requests to attend the public hearing must be received by 5 p.m. ET on August 22, 2023. The public hearing will be made accessible to people with disabilities. Requests for special assistance during the hearing must be received by August 21, 2023. ADDRESSES: Commenters are strongly encouraged to submit public comments electronically. Submit electronic submissions via the Federal eRulemaking Portal at https://www.regulations.gov (indicate IRS and REG-105595-23) by following the online instructions for submitting comments. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The Department of the Treasury (Treasury Department) and the IRS will publish for public availability any comments submitted electronically and comments submitted on paper to its public docket. Send hard copy submissions to: CC:PA:LPD:PR (REG-105595-23), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. FOR FURTHER INFORMATION CONTACT: Concerning this proposed regulation, Lani M. Sinfield at (202) 317-5871 (not a toll-free number); concerning submissions of comments and or the public hearing, Vivian Hayes at (202) 317-6901 (not a toll-free number) or by email to publichearings@irs.gov (preferred). SUPPLEMENTARY INFORMATION: Background Section 48D was added to the Internal Revenue Code (Code) on August 9, 2022, by section 107(a) of the CHIPS Act of 2022 (CHIPS Act), which was enacted as Division A of the CHIPS and Science Act of 2022, Public Law 117-167, 136 Stat. 1366, 1393. Section 48D established the advanced manufacturing investment credit (section 48D credit) and section 48D(d) allows taxpayers (other than partnerships and S corporations) to elect to treat the amount of the section 48D credit determined under section 48D(a) as a payment against their Federal income tax liabilities. Section 48D(d) also provides special rules relating to elective payments to partnerships and S corporations and directs the Secretary of the Treasury or her delegate (Secretary) to provide rules for making elections under section 48D and to require information or registration necessary for purposes of preventing duplication, fraud, improper payments, or excessive payments under section 48D. Section 48D applies to qualified property placed in service after December 31, 2022, and, for any property the construction of which began prior to January 1, 2023, only to the extent of the basis thereof attributable to the construction, reconstruction, or erection of such qualified property after August 9, 2022 (the date of enactment of the CHIPS Act). See section 107(f)(1) of the CHIPS Act. On March 23, 2023, the Treasury Department and the IRS published in the Federal Register (88 FR 17451) a notice of proposed rulemaking (REG-120653-22), which contains proposed regulations to implement the general provisions relating to the section 48D credit (March 2023 proposed regulations). The March 2023 proposed regulations included proposed definitions of various statutory terms, including "eligible taxpayer," "qualified property," "advanced manufacturing facility," and "semiconductor." The March 2023 proposed regulations also proposed rules under section 48D regarding the beginning of construction requirement; proposed rules requiring pre-filing registration with the IRS in advance of filing an elective payment election; and proposed rules implementing the "applicable transaction" credit recapture rules under section 50(a)(3) of the Code. In addition, the March 2023 proposed regulations requested comments on potential issues with respect to the elective payment election provisions under section 48D(d) that may require guidance. This document contains proposed amendments to the Income Tax Regulations (26 CFR part 1) to implement the statutory provisions of section 48D(d) and revise the rules in proposed§ 1.48D-6 of the March 2023 proposed regulations. In the Rules and Regulations section of this issue of the Federal Register, the Treasury Department and the IRS are issuing temporary regulations under§ 1.48D-6T that implement the pre-filing registration process described in proposed§ 1.48D-6 of the proposed regulations. The temporary regulations require taxpayers that want to elect the elective payment of the section 48D credit to register with the IRS through an IRS electronic portal in advance of the taxpayer filing the return on which the election under section 48D is made. I. Overview of elective payment election under section 48D Section 48D(d)(1) allows a taxpayer to elect to treat the section 48D credit determined for the taxpayer for a taxable year as a payment against the tax imposed by subtitle A of the Code (that is, treated as a payment of Federal income tax) equal to the amount of the credit rather than a credit against the taxpayer's Federal income tax liability for that taxable year (elective payment election). II. Section 48D rules for partnerships and S corporations Section 48D(d)(2)(A) provides special rules for partnerships (as defined in section 761(a)) and for S corporations (as defined in section 1361(a)(1) of the Code). Section 48D(d)(2)(A)(i) provides that, in the case of any credit determined with respect to any property held directly by a partnership or S corporation, any election under section 48D(d)(1) is to be made by such partnership or S corporation and must be made in such manner as the Secretary may provide. If such partnership or S corporation makes an election under section 48D(d)(1), (1) the Secretary will make a payment to such partnership or S corporation equal to the amount of such credit, (2) section 48D(d)(3) is applied with respect to the credit before determining any partner's distributive share, or S corporation shareholder's pro rata share, of such credit, (3) any credit amount with respect to which the election in section 48D(d)(1) is made is treated as tax exempt income for purposes of sections 705 and 1366 of the Code, and (4) a partner's distributive share of such tax exempt income is based on such partner's distributive share of the otherwise applicable credit for each taxable year. III. Special rules Section 48D(d)(2)(B) requires the elective payment election to be made no later than the due date (including extensions of time) of the tax return for the taxable year for which the election is made. The elective payment election is irrevocable once made and applies with respect to any credit for the taxable year for which the election is made. Section 48D(d)(2)(E) provides that, as a condition of, and prior to, any amount between treated as a payment by or to the taxpayer, the Secretary may require such information or registration as the Secretary deems necessary or appropriate for purposes of preventing duplication, fraud, improper payments, or excessive payments. Section 48D(d)(2)(F) provides rules relating to excessive payments. In the case of any amount treated as a payment which is made by the taxpayer under section 48D(d)(1), or the amount of the payment made pursuant to section 48D(d)(2)(A), that the Secretary determines constitutes an excessive payment, the tax imposed on such taxpayer by chapter 1 of the Code, for the taxable year in which such determination is made must be increased by an amount equal to the sum of (1) the amount of any payment treated as made by or to the taxpayer which the Secretary determines constitutes an excessive payment, (2) plus 20 percent of such excessive payment. The increase equal to 20 percent of the excessive payment does not apply if the taxpayer demonstrates to the satisfaction of the Secretary that the excessive payment resulted from reasonable cause. Section 48D(d)(2)(F)(iii) defines "excessive payment" as, with respect to property for which an elective payment election is made for any taxable year, an amount equal to the excess of (I) the amount treated as a payment made by the taxpayer under section 48D(d)(1) or the amount of the payment made pursuant to section 48D(d)(2)(A)(i) over (II) the amount of the credit which, without application of section 48D(d), would be otherwise allowable under section 48D(a) (determined without regard to section 38(c)) with respect to such property for such taxable year. Section 48D(d)(3) provides a denial of double benefit rule. It states that, in the case of a taxpayer making an elective payment election with respect to the credit determined under section 48D(a), such credit is reduced to zero and is deemed to have been allowed to the taxpayer for such taxable year for any other purposes under the Code. Section 48D(d)(5) provides basis reduction and recapture rules. It states that rules similar to the rules of section 50(a) and (c) of the Code apply with respect to amounts treated as a payment made by a taxpayer under section 48D(d)(1) and any payment made pursuant to section 48D(d)(2)(A). Section 48D(d)(6) authorizes the Secretary to issue regulations or other guidance determined to be necessary or appropriate to carry out the elective payment election provisions of section 48D(d), including (A) regulations or other guidance providing rules for determining a partner's distributive share of the tax exempt income described in section 48D(d)(2)(A)(i) and (B) guidance to ensure that the amount treated as a payment under section 48D(d)(1) or payment made under section 48D(d)(2)(A)(i) is commensurate with the amount of the section 48D credit that generally would be otherwise allowable (determined without regard to section 38(c) of the Code). Explanation of Provisions I. Rules for Making Elective Payment Elections A. In general These proposed regulations revise§1.48D-6(a)(1) and (2) of the March 2023 proposed regulations to clarify that an elective payment election may only be made on an original return of tax filed not later than the due date (including extensions of time) for the return for the taxable year for which the section 48D credit is determined and in the manner as provided in guidance, and must include any required completed source credit form(s) with respect to the qualified property, a completed Form 3800, General Business Credit, and any additional information, including supporting calculations, required in instructions to the relevant forms. An original return would include a superseding return filed on or before the due date (including extensions). No elective payment election would be permitted to be made or revised on an amended return or by filing an administrative adjustment request under section 6227 of the Code. There also would be no relief available under§§ 301.9100-1 through 301.9100-3 of the Procedure and Administration Regulations (26 CFR part 301) for an elective payment election that is not timely filed. These proposed regulations would further provide that a taxpayer makes the elective payment election with respect to any section 48D credit determined with respect to such taxpayer in accordance with section 48D(d)(1), and the taxpayer must include a statement with the election attesting under penalties of perjury that the taxpayer claiming to be an eligible taxpayer is not a foreign entity of concern and has not made an applicable transaction during the taxable year that the qualified property is placed in service, and will not claim a double benefit (within the meaning of section 48D(d)(3) and§ 1.48-6(d)(2)(ii)(B) and (C) and (e)) with respect to any elective payment election made by the taxpayer. II. Denial of Double Benefit These proposed regulations revise§1.48D-6(a)(4) of the March 2023 proposed regulations by explaining the application of the section 48D(d)(3) denial of a double benefit rule and addressing the methodology for determining the amount of an elective payment, reducing the section 48D credit amount to zero, and treating the section 48D credit as a credit allowed for the taxable year for all other purposes of the Code with respect to taxpayers other than partnerships or S corporations. The proposed application of the denial of a double benefit rule is redesignated as proposed§1.48D-6(e). The methodology with respect to a payment made to a partnership or S corporation is provided in proposed§1.48D-6(d)(2)(ii)(B), as described in part III of this Explanation of Provisions. A taxpayer (other than a partnership or S corporation) making an elective payment election applies section 48D(d)(3) by taking the following steps. First, the taxpayer would compute the amount of the tax liability (if any) for the taxable year, without regard to general business credits (GBCs), that is payable on the due date of the tax return (without regard to extensions), and the amount of the Federal income tax liability that may be offset by GBCs pursuant to the limitation based on the amount of tax under section 38 (Step 1). Second, the taxpayer would compute the allowed amount of the GBCs carryforwards carried to the taxable year plus the amount of current year GBCs (including the section 48D credit) allowed for the taxable year under section 38 (that is, in accordance with all the rules in section 38, including the ordering rules provided in section 38(d)). Since the election would be required to be made on an original return filed before the due date (including extensions of time) for the taxable year for which the section 48D credit is determined, any GBC carryback would not be considered when determining the elective payment amount for the taxable year (Step 2). Third, the taxpayer would apply the GBCs allowed for the taxable year as computed in Step 2, including those attributable to the section 48D credit as GBCs, against the tax liability computed in Step 1. Fourth, the taxpayer would identify the amount of any excess or unused current year GBC, as defined under section 39, attributable to current year section 48D credit(s) for which the taxpayer is making an elective payment election. The amount of such unused section 48D credits would be treated as a payment against the tax imposed by subtitle A for the taxable year with respect to which such credits are determined (rather than having them available for carryback or carryover) (net elective payment amount) (Step 4). Fifth, the taxpayer would reduce the section 48D credit(s) for which an elective payment election is made by the amount (if any) allowed as a general business credit under section 38 for the taxable year, as provided in Step 3, and by the net elective payment amount (if any) that is treated as a payment against tax, as provided in Step 4, which results in the section 48D credit(s) being reduced to zero. The proposed regulations would provide, consistent with section 48D(d)(3), that the full amount of the section 48D credits for which an elective payment election is made is deemed to have been allowed for all other purposes of the Code, including, but not limited to, the basis reduction and recapture rules imposed by section 50 and the calculation of any underpayment of estimated taxes under sections 6654 and 6655 of the Code. The Treasury Department and the IRS request comments on whether future guidance should expand or clarify the methodology that a taxpayer follows to compute the amount of its elective payment. Comments are also requested on additional Code sections under which it may be necessary to consider the section 48D credit to have been deemed to have been allowed for the taxable year in which an elective payment election is made. III. Partnership and S Corporations A. Overview Section 48D(d)(2)(A)(i) provides that, in the case of any credit determined with respect to any property held directly by a partnership or S corporation, any election under section 48D(d)(1) is to be made by such partnership or S corporation and must be made in such manner as the Secretary may provide. If such partnership or S corporation makes an election under section 48D(d)(1), the special rules of section 48D(d)(2)(A)(i)(I) through (IV) apply. In that regard, proposed§1.48D-6(d)(2)(ii) would provide that (1) the IRS will make a payment to such partnership or S corporation equal to the amount of such credit; (2) before determining any partner's distributive share, or shareholder's pro rata share, of such credit, such credit is reduced to zero and is, for any other purposes under the Code, deemed to have been allowed solely to such entity (and not allocated by such entity, or otherwise allowed, to any partner or shareholder) for such taxable year; (3) any amount with respect to which the election under section 48D(d)(1) is made is treated as tax exempt income for purposes of sections 705 and 1366; and (4) a partner's distributive share of such tax exempt income is equal to such partner's distributive share of its otherwise allocable basis in the qualified property as determined under§ 1.48D-2(h)(2)(i) for such year. The tax exempt income is taken into account by the partnership or S corporation at the same time as the underlying credit would have been taken into account by the partnership or S corporation absent an elective payment election. Such tax exempt income resulting from such election is treated as received or accrued, including for purposes of sections 705 and 1366 of the Code, as of the date the qualified property is placed in service with respect to the partnership or S corporation. The proposed regulations provide an example illustrating this rule. Because it is the section 48D credits, and not the tax exempt income, that arise from the conduct of the trade or business, the proposed regulations would treat the tax exempt income resulting from an elective payment election by a partnership or an S corporation as arising from an investment activity and not from the conduct of a trade or business within the meaning of section 469(c)(1)(A). As such, the tax exempt income would not be treated as passive income to any partners or shareholders who do not materially participate within the meaning of section 469(c)(1)(B). In response to stakeholder comments, the Treasury Department and the IRS clarify here that there are no restrictions imposed under section 48D or the section 48D regulations on how a partnership or S corporation that receives a payment from the IRS pursuant to an elective payment election may use the cash payment in its operations (including when it makes distributions to its distributions to its partners or shareholders). Section 48D(d)(6)(B) requires that the Secretary issue regulations or other guidance to ensure that the amount of a payment under section 48(D)(2)(A)(i)(I) to a partnership or S corporation is commensurate with the amount of the credit that would otherwise be allowable (without regard to section 38(c)). Therefore, proposed§1.48D-6(d)(6) would provide that, in determining the section 48D credit amount that will result in a payment to a partnership or S corporation, the partnership or S corporation must compute the amount of the section 48D credit allowable (without regard to section 38(c)) as if an elective payment election were not made. Because a partnership or S corporation is not subject to section 469 (that is, section 469 applies at the partner or shareholder level), the amount of the credit determined with respect to any qualified property owned by a partnership or S corporation is not subject to limitation by section 469. However, section 49 generally impacts the amount of a credit determined with respect to a qualified property. Proposed§1.48D-6(d)(6)(ii) provides rules for the application of section 49 to a partnership or S corporation. The proposed regulations would provide that any amount of section 48D credit determined with respect to the qualified property held directly by a partnership or S corporation must be determined by the partnership or S corporation taking into account the section 49 at-risk rules at the partner or shareholder level as of the close of the taxable year in which the qualified property is placed in service. Thus, if the credit base of the qualified property is limited to a partner or shareholder by section 49, then the amount of the section 48D credit determined by the partnership or S corporation is also limited. The proposed regulations would provide that a partnership or S corporation that makes an elective payment election must request from each of its partners or shareholders, respectively, that is subject to section 49, the amount of such partner's or shareholder's nonqualified nonrecourse financing with respect to the qualified property as of the close of the taxable year in which the property is placed in service. Additionally, the partnership or S corporation would attach to its tax return for the taxable year in which the property is placed in service, the amount of each partner's or shareholder's section 49 limitation with respect to the qualified property. The Treasury Department and the IRS request comments as to whether (1) any information or reporting requirements are needed for partnerships and S corporations to apply these rules when determining the amount of the section 48D credit for which an elective payment election can be made by a partnership or S corporation or (2) any additional clarifications are needed regarding how the at-risk rules apply to the determination of the section 48D credit by a taxpayer. B. BBA Partnership Many partnerships are subject to the centralized partnership audit regime found in subchapter C of chapter 63 of the Code as amended by the Bipartisan Budget Act of 2015 (BBA). 2 In connection with the implementation of section 48D, the Treasury Department and the IRS identified several areas of the BBA regulations that require updates to administer section 48D in the case of a partnership subject to the BBA (BBA partnership). Section 6221 of the Code provides that any adjustment to a partnership-related item with respect to a BBA partnership, and any tax attributable thereto, is assessed and collected at the partnership-level except to the extent provided under the BBA. The BBA outlines centralized audit procedures which generally must be followed before the IRS can adjust a partnership-related item (as defined in§ 301.6241-1). Accordingly, the notice of proposed rulemaking (REG-101607-23) found in the Proposed Rules of this issue of the Federal Register, which primarily relates to proposed rules under section 6417, would add a new paragraph (j) to§ 301.6241-7 to provide that an election by a BBA partnership under section 48D(d) can be adjusted outside of the BBA audit rules. Proposed§1.48D-6(d)(7) would cross-reference to proposed§ 301.6241-7(j) for rules applicable to payments made to BBA partnerships. ****** 1 See section 1101 of the BBA, Public Law 114-74, 129 Stat. 584, 625-638 (2015), as amended by section 411 of the Protecting Americans from Tax Hikes Act of 2015, Public Law 114-113, 129 Stat. 2242, 3121 (2015), and sections 201 through 207 of the Tax Technical Corrections Act of 2018, Public Law 115-141, 132 Stat. 348, 1171-1183 (2018). ****** IV. Pre-filing Registration Requirements and Additional Information Proposed§1.48D-6(b)(1) would provide the mandatory pre-filing registration process that, except as provided in guidance, a taxpayer must complete as a condition of, and prior to, any amount being treated as a payment against the tax imposed under§1.48D-6(a)(1), or an amount paid to a partnership or S corporation pursuant to§1.48D-6(d)(2)(ii)(A). A taxpayer would be required to use the pre-filing registration process to register each qualified investment in an advanced manufacturing facility. A taxpayer that does not obtain a registration number or report the registration number on its annual tax return with respect to an advanced manufacturing facility would be ineligible to receive any elective payment amount with respect to the amount of any section 48D credit determined with respect to that advanced manufacturing facility. However, completion of the pre-filing registration requirements and receipt of a registration number would not, by itself, mean that the taxpayer would be eligible to receive a payment with respect to the section 48D credits determined with respect to the advanced manufacturing facility. The pre-filing registration requirements are proposed to be that a taxpayer: (1) must complete the registration process electronically through the IRS electronic portal and in accordance with the instructions provided therein, unless otherwise provided in guidance; (2) must satisfy the registration requirements and receive a registration number prior to making a section 48D(d)(1) elective payment election on the taxpayer's tax return for the taxable year at issue; (3) is required to obtain a registration number for each qualified investment in an advanced manufacturing facility with respect to which a section 48D credit will be determined and for which the taxpayer wishes to make a section 48D(d)(1) elective payment election; and (4) provide the specific information required to be provided as part of the pre-filing registration process. The provision of such information, which includes information about the taxpayer and about the qualified investment in an advanced manufacturing facility that would allow the IRS to prevent duplication, fraud, improper payments, or excessive payments under section 48D. For example, verifying information about the taxpayer would allow the IRS to mitigate the risk of fraud or improper payments to entities that are not eligible taxpayers. Information about the taxpayer's taxable year would allow the IRS to ensure that an elective payment election is timely made on the entity's annual tax return. Information about the advanced manufacturing facility, including its address and coordinates (longitude and latitude), supporting documentation, beginning of construction date, and placed in service date would allow the IRS to mitigate the risk of duplication, fraud, and improper payments for properties that are not advanced manufacturing facilities. Proposed§1.48D-6(b)(7)(i) provides that, after a taxpayer completes pre-filing registration with respect to each qualified investment in an advanced manufacturing facility with respect to which the taxpayer intends to elect a section 48D(d) elective payment election for the taxable year, the IRS will review the information provided and will issue a separate registration number for each qualified investment for which the taxpayer provided sufficient verifiable information. Proposed§1.48D-6(b)(7)(ii) would provide that a registration number is valid only for the taxable year for which it is obtained. Proposed§1.48D-6(c)(7)(iii) would provide that, if an elective payment election will be made with respect to qualified investment in an advanced manufacturing facility for a taxable year for which a registration number under this section has been obtained for a prior taxable year, the taxpayer must renew the registration each subsequent year in accordance with applicable guidance, including attesting that all the facts previously provided are still correct or updating any facts that are relevant in calculating the amount of the section 48D credit. Proposed§1.48D-6(b)(7)(iv) would provide that, if facts change with respect to the qualified investment in an advanced manufacturing facility for which a registration number has been previously obtained, the taxpayer must amend the registration to reflect these new facts. The regulations would provide, for example, that if the facility previously registered for an elective payment election undergoes a change of ownership (incident to a corporate reorganization or an asset sale) such that the new owner has a different employer identification number (EIN) than the owner who obtained the original registration, the original owner would be required to amend the original registration to disassociate its EIN from the advanced manufacturing facility and the new owner must submit an original registration (or if the new owner previously registered other advanced manufacturing facilities, must amend its original registration) to associate the new owner's EIN with the previously registered advanced manufacturing facility. Lastly, proposed§1.48D-6(b)(7)(v) would provide that the taxpayer would be required to include the registration number of the advanced manufacturing facility on the taxpayer's annual return for the taxable year for an election under proposed§1.48D-6(a)(1). The IRS will treat an elective payment election as ineffective with respect to any section 48D credit determined with respect to the advanced manufacturing facility for which the taxpayer does not include a valid registration number on the annual tax return. The corresponding temporary regulations under§ 1.48D-6T(b) published in the Rules and Regulations section of this edition of the Federal Register, which are identical to those that would apply under proposed§ 1.48D-6(b), apply to taxable years ending on or after June 21, 2023, and expire on June 12, 2026. V. Special Rules These proposed regulations amend the proposed rules relating to excessive payment and basis reduction and recapture under REG-120653-22 by adding examples of excessive payment, clarifying the basis reduction and recapture notice requirement and renumbering the affected paragraphs as§1.48D-6(f) and (g), respectively. A. Excessive payment Proposed§1.48D-6(f)(4) provides an example of excessive payment, including the year in which the tax is imposed and the calculation of the additional 20 percent tax. The Treasury Department and the IRS request comments on whether additional guidance on excessive payments is needed. B. Basis reduction and recapture Proposed§1.48D-6(g)(1) would provide that rules similar to the rules of section 50(a) and (c) apply for purposes of section 48D. Proposed§1.48D-6(g)(2)(i) provides that the adjusted basis of property generally must be reduced by the amount of the section 48D credit determined with respect to property for which the taxpayer has made an election under section 48D(d)(1). Proposed§1.48D-6(g)(2)(ii) would provide a similar basis reduction rule for partnerships or S corporations making an election under section 48D(d)(1). Proposed§1.48D-6(g)(2)(iii) would clarify the application of the basis adjustment rule under section 50(c)(5) to take into account adjustments made under proposed§1.48D-6(e)(2)(ii) for partners and S corporation shareholders of such partnerships or S corporations. Proposed§1.48D-6(g)(3) would clarify that any reporting of recapture is made on the taxpayer's annual return in the manner prescribed by the IRS in any guidance. In addition, the excessive payment rules operate separately from the recapture rules. The excessive payment rules apply where the credit amount reported on the original credit source form by the taxpayer was excessive. Recapture of a tax credit occurs when the original tax credit reported would have been correct without the occurrence of a subsequent recapture event. Thus, recapture events under section 50(a) do not result in an excessive payment. Proposed Applicability Dates Proposed§ 1.48D-6 is proposed to apply to taxable years ending on or after the date the Treasury decision adopting these regulations as final regulations is published in the Federal Register. Taxpayers may rely on these proposed regulations for elective payments of section 48D credit amounts after December 31, 2022, in taxable years ending before the date the Treasury decision adopting these regulations as final regulations is published in the Federal Register, provided the taxpayers follow the proposed regulations in their entirety and in a consistent manner with respect to all elections made under section 48D(d). Special Analyses I. Paperwork Reduction Act The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) ("PRA") generally requires that a federal agency obtain the approval of the Office of Management and Budget (OMB) before collecting information from the public, whether such collection of information is mandatory, voluntary, or required to obtain or retain a benefit. 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 control number. The collections of information in these proposed regulations contain reporting and recordkeeping requirements. The recordkeeping requirements mentioned within these proposed regulations are considered general tax records under§ 1.6001-1(e). These records are required for the IRS to validate that taxpayers have met the regulatory requirements and are entitled to make an elective payment election. For PRA purposes, general tax records are already approved by OMB under 1545-0074 for individuals and 1545-0123 for business entities. These proposed regulations also mention reporting requirements related to making elections as detailed in§ 1.48D-6. These elections will be made by eligible taxpayers as part of filing a return (such as the appropriate Form 1040, Form 1120, Form 1120-S, or Form 1065), including filling out the relevant source credit form and completing the Form 3800. These forms are approved under 1545-0074 for individuals and 1545-0123 for business entities. These proposed regulations also describe recapture procedures as detailed in proposed§ 1.48D-6 that are required by section 48D(d)(5). The reporting of a recapture event will still be required to be reported using Form 4255, Recapture of Investment Credit. This form is approved under 1545-0074 for individuals and 1545-0123 for business entities. These proposed regulations are not changing or creating new collection requirements for recapture not already approved by OMB. These proposed regulations mention the reporting requirements to complete pre-filing registration with the IRS to be able to make an elective payment election in proposed§ 1.48D-6. For further information concerning the registration and where to submit comments on the collection of information and the accuracy of the estimated burden, and suggestions for reducing this burden, please refer to the preamble to the corresponding temporary regulations (T.D. 9975) published in the Rules and Regulations section of this issue of the Federal Register. For burden estimates associated with the pre-filing registration requirement as detailed in proposed§1.48D-6, see the preamble to the corresponding temporary regulations. These proposed regulations are not changing or creating new collection requirements beyond the requirements that are being reviewed and approved by OMB under the temporary regulations. II. Regulatory Flexibility Act In accordance with the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is hereby certified that these proposed regulations will not have a significant economic impact on a substantial number of small entities. Although these temporary regulations may affect small entities, data are not readily available about the number of small entities affected. The economic impact of these proposed regulations is not likely to be significant. Section 1.48D-6T(b) implements the statutory authority granted by section 48D(d)(2)(E) that authorizes the IRS to require such information or registration as the Secretary deems necessary for purposes of preventing duplication, fraud, improper payments, or excessive payments. These proposed regulations will assist small entities wanting to make the elective payment election under section 48D(d). Notwithstanding this certification, the Treasury Department and the IRS welcome comments on the impact of these temporary regulations on small entities. III. Section 7805(f) Pursuant to section 7805(f), these proposed regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business. IV. Unfunded Mandates Reform Act Section 202 of the Unfunded Mandate Reform Act of 1995 requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a State, local, or Tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars (updated annually for inflation). These proposed regulations do not include any Federal mandate that may result in expenditures by State, local, or Tribal governments, or by the private sector in excess of that threshold. V. Executive Order 13132: Federalism Executive Order 13132 (Federalism) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on State and local governments, and is not required by statute, or preempts State law, unless the agency meets the consultation and funding requirements of section 6 of the Executive order. These proposed regulations do not have federalism implications and do not impose substantial, direct compliance costs on State and local governments or preempt State law within the meaning of the Executive order. VII. Regulatory Planning and Review Pursuant to the Memorandum of Agreement, Review of Treasury Regulations under Executive Order 12866 (June 9, 2023), tax regulatory actions issued by the IRS are not subject to the requirements of section 6 of Executive Order 12866, as amended. Therefore, a regulatory impact assessment is not required. Comments and Public Hearing Before these proposed amendments to the regulations are adopted as final regulations, consideration will be given to comments that are submitted timely to the IRS as prescribed in this preamble under the ADDRESSES section. The Treasury Department and the IRS request comments on all aspects of the proposed regulations. All comments will be made available at www.regulations.gov or upon request. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. Announcement 2023-16, 2023-20 I.R.B. 854 (May 15, 2023), provides that public hearings will be conducted in person, although the IRS will continue to provide a telephonic option for individuals who wish to attend or testify at a hearing by telephone. Any telephonic hearing will be made accessible to people with disabilities. A public hearing has been scheduled for August 24, 2023, beginning at 10 a.m. ET, in the Auditorium at the Internal Revenue Building, 1111 Constitution Avenue, NW., Washington, DC, unless no outlines are received by August 14, 2023. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to comment by telephone at the hearing must submit written or electronic comments and an outline of the topics to be discussed as well as the time to be devoted to each topic by August 14, 2023, as prescribed in the preamble under the ADDRESSES section. If no outline of the topics to be discussed at the hearing is received by August 14, 2023, the public hearing will be cancelled. If the public hearing is cancelled, a notice of cancellation of the public hearing will be published in the Federal Register. A period of ten minutes will be allocated to each person for making comments. After the deadline for receiving outlines has passed, the IRS will prepare an agenda containing the schedule of speakers. Copies of the agenda will be made available: (1) at the hearing, (2) at https://www.regulations.gov, search IRS and REG-105595-23, or (3) by emailing a request to publichearings@irs.gov. Please put "REG-105595-23 Agenda Request" in the subject line of the email. Individuals who want to testify in person at the public hearing must send an email to publichearings@irs.gov to have your name added to the building access list. The subject line of the email must contain the regulation number REG-105595-23 and the language TESTIFY In Person. For example, the subject line may say: Request to TESTIFY In Person at Hearing for REG-105595-23. Individuals who want to testify by telephone at the public hearing must send an email to publichearings@irs.gov to receive the telephone number and access code for the hearing. The subject line of the email must contain the regulation number REG-105595-23 and the language TESTIFY Telephonically. For example, the subject line may say: Request to TESTIFY Telephonically at Hearing for REG-105595-23. Individuals who want to attend the public hearing in person without testifying must also send an email to publichearings@irs.gov to have your name added to the building access list. The subject line of the email must contain the regulation number REG-105595-23 and the language ATTEND In Person. For example, the subject line may say: Request to ATTEND Hearing In Person for REG-105595-23. Requests to attend the public hearing must be received by 5 p.m. EST on August 22, 2023. Individuals who want to attend the public hearing by telephone without testifying must also send an email to publichearings@irs.gov to receive the telephone number and access code for the hearing. The subject line of the email must contain the regulation number REG-105595-23 and the language ATTEND Hearing Telephonically. For example, the subject line may say: Request to ATTEND Hearing Telephonically for REG-105595-23. Requests to attend the public hearing must be received by 5 p.m. EST on August 22, 2023. Hearings will be made accessible to people with disabilities. To request special assistance during a hearing please contact the Publications and Regulations Branch of the Office of Associate Chief Counsel (Procedure and Administration) by sending an email to publichearings@irs.gov (preferred) or by telephone at (202) 317-6901 (not a toll-free number) at least August 21, 2023. Statement of Availability of IRS Documents Guidance cited in this preamble is published in the Internal Revenue Bulletin and is available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at https://www.irs.gov. Drafting Information The principal author of this proposed regulation is Lani M. Sinfield, Office of the Associate Chief Counsel (Passthroughs and Special Industries), IRS. However, other personnel from the Treasury Department and the IRS participated in their development. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Proposed Amendments to the Regulations Accordingly, the Treasury Department and the IRS propose to amend 26 CFR part 1 as follows: PART 1--INCOME TAXES Paragraph. 1. The authority citation for part 1 is amended by adding an entry for§1.48D-6 in numerical order to read in part as follows: Authority: 26 U.S.C. 7805 * * * Section 1.48D-6 also issued under 26 U.S.C. 48D(d)(6). Par. 2. Section 1.48D-6, as proposed to be added by 88 FR 17451, March 23, 2023, is revised to read as follows:§1.48D-6 Elective payment election. (a) Elective payment election --(1) In general. A taxpayer, after successfully completing the pre-filing registration requirements under paragraph (b) of this section, may make an elective payment election with respect to any section 48D credit determined with respect to such taxpayer in accordance with section 48D(d)(1) of the Internal Revenue Code (Code) and this section. A taxpayer, other than a partnership or S corporation, that makes an elective payment election in the manner provided in paragraph (c) of this section will be treated as making a payment against the Federal income taxes imposed by subtitle A of the Code (subtitle A) for the taxable year with respect to which a section 48D credit is determined equal to the amount of the section 48D credit with respect to any qualified property otherwise allowable to the taxpayer (determined without regard to section 38(c) of the Code). The payment described in section 48D(d)(1) and this paragraph (a)(1) will be treated as made on the later of the due date (determined without regard to extensions) of the return of tax imposed by subtitle A for the taxable year or the date on which such return is filed. (2) Partnerships and S corporations. See paragraph (d) of this section for special rules regarding elective payment elections under section 48D(d) applicable to partnerships and S corporations. (3) Irrevocable. Any election under section 48D(d)(1) and this section, once made, will be irrevocable and, except as otherwise provided, will apply with respect to any amount of section 48D credit for the taxable year for which the election is made. (b) Pre-filing registration required --(1) In general. Pre-filing registration by any taxpayer (including a partnership or an S corporation) in accordance with this paragraph (b) is a condition that must be successfully completed prior to making an elective payment election under section 48D(d)(1) and this section with respect to qualified property placed in service by the taxpayer as part of an advanced manufacturing facility of an eligible taxpayer. An elective payment election will not be effective with respect to the section 48D credit determined with respect to any such qualified property placed in service by any taxpayer unless the taxpayer received a valid registration number for the taxpayer's qualified investment in the advanced manufacturing facility of an eligible taxpayer in accordance with this paragraph (b) and provided the registration number for each qualified investment in each advanced manufacturing facility on its Form 3800, General Business Credit, attached to the tax return in accordance with guidance. -- guidance -- Federal Register -- However, completion of the pre-filing registration requirements and receipt of a registration number does not, by itself, mean the taxpayer is eligible to receive a payment with respect to any section 48D credit determined with respect to the qualified property. (2) Manner of registration. Unless otherwise provided in guidance, a taxpayer must complete the pre-filing registration process electronically through the IRS electronic portal and in accordance with the instructions provided therein. (3) Members of a consolidated group -- (4) Timing of pre-filing registration. A taxpayer must satisfy the pre-filing registration requirements of this paragraph (b) and receive a registration number under paragraph (b)(6) of this section prior to making any elective payment election under this section on the taxpayer's tax return for the taxable year at issue. (5) Each qualified investment in an advanced manufacturing facility must have its own registration number. A taxpayer must obtain a registration number for each qualified investment in an advanced manufacturing facility of an eligible taxpayer with respect to which an elective payment election is made. (6) Information required to complete the pre-filing registration process. Unless modified in future guidance, a taxpayer must provide the following information to the IRS to complete the pre-filing registration process: (i) The taxpayer's general information, including its name, address, taxpayer identification number, and type of legal entity; (ii) Any additional information required by the IRS electronic portal; (iii) The taxpayer's taxable year, as determined under section 441 of the Code; (iv) The type of annual return(s) normally filed by the taxpayer with the IRS; (v) A list of each qualified investment in an advanced manufacturing facility that the taxpayer intends to use to determine a section 48D credit for which the taxpayer intends to make an elective payment election; (vi) For each qualified investment in an advanced manufacturing facility listed in paragraph (b)(6)(v) of this section, any further information required by the IRS electronic portal, such as: (A) The type of qualified investment in the advanced manufacturing facility; (B) Physical location (that is, address and coordinates (longitude and latitude) of the advanced manufacturing facility); (C) Any supporting documentation relating to the construction, reconstruction or acquisition of the advanced manufacturing facility (such as, State and local government permits to operate the advanced manufacturing facility, certifications, and evidence of ownership that ties to the land deed, lease, or other documented right to use and access any land upon which the advanced manufacturing facility is constructed or housed); (D) The beginning of construction date and the placed in service date of any qualified property that is part of the advanced manufacturing facility; (E) The source of funds the taxpayer used to acquire the qualified property with respect to which the qualified investment was made; and (F) Any other information that the taxpayer or entity believes will help the IRS evaluate the registration request; (vii) The name of a contact person for the taxpayer. The contact person is the person whom the IRS may contact if there is an issue with the registration. The contact person must either: (A) Possess legal authority to bind the taxpayer; or (B) Must provide a properly executed power of attorney on Form 2848, Power of Attorney and Declaration of Representative; (viii) A penalties of perjury statement, effective for all information submitted as a complete application, and signed by a person with personal knowledge of the relevant facts that is authorized to bind the registrant; and (ix) Any other information the IRS deems necessary for purposes of preventing duplication, fraud, improper payments, or excessive payments under this section that is provided in guidance. (7) Registration number --(i) In general. The IRS will review the information provided and will issue a separate registration number for each qualified investment in an advanced manufacturing facility of an eligible taxpayer for which the taxpayer making the registration provided sufficient verifiable information. (ii) Registration number is only valid for one year. A registration number is valid only with respect to the taxpayer that obtained the registration number under this section and only for the taxable year for which it is obtained. (iii) Renewing registration numbers. If an elective payment election will be made with respect to any section 48D credit determined with respect to a qualified investment in an advanced manufacturing facility for a taxable year after a registration number under this section has been obtained, the taxpayer must renew the registration for that subsequent year in accordance with applicable guidance, including attesting that all the facts previously provided are still correct or updating any facts. (iv) Amendment of previously submitted registration information if a change occurs before the registration number is used. As provided in instructions to the pre-filing registration portal, if specified changes occur with respect to a qualified investment in an advanced manufacturing facility for which a registration number has been previously obtained, a taxpayer must amend the registration (or may need to submit a new registration) to reflect these new facts. For example, if an eligible taxpayer that is the owner of an advanced manufacturing facility previously registered for an elective payment election for a section 48D credit determined with respect to that advanced manufacturing facility and the advanced manufacturing facility undergoes a change of ownership (incident to a corporate reorganization or an asset sale) such that the new owner has a different employer identification number (EIN) than the owner who obtained the original registration, the original owner of the advanced manufacturing facility must amend the original registration to disassociate its EIN from the advanced manufacturing facility and the new owner must submit separately an original registration (or if the new owner previously registered other qualified investments or advanced manufacturing facilities, must amend its original registration) to associate the new owner's EIN with the previously registered advanced manufacturing facility. (v) Registration number is required to be reported on the return for the taxable year of the elective payment election. The taxpayer must include the registration number of the qualified investment in the advanced manufacturing facility on the taxpayer's return as provided in this paragraph (b) for the taxable year. The IRS will treat an elective payment election as ineffective with respect to a section 48D credit determined with respect to a qualified investment in an advanced manufacturing facility for which the taxpayer does not include a valid registration number on the annual return. (c) Time and manner of election --(1) In general. Any elective payment election under section 48D(d)(1) and this section with respect to any section 48D credit determined with respect to a taxpayer's qualified investment must-- (i) Be made on the taxpayer's original return of tax (including a superseding return) filed not later than the due date (including extensions of time) for the taxable year for which the section 48D credit is determined and the election is made in the manner prescribed by the IRS in guidance; (ii) Include any required completed source credit form(s), a completed Form 3800, and any additional information required in instructions, including supporting calculations; (iii) Provide on the completed Form 3800 a valid registration number for the qualified investment that is placed in service as part of an advanced manufacturing facility of an eligible taxpayer; (iv) Include a statement attesting under the penalties of perjury that-- (A) The taxpayer claiming to be an eligible taxpayer is not a foreign entity of concern within the meaning of§1.48D-2(f)(2) and has not made an applicable transaction as defined in§1.50-2(b)(3) during the taxable year that the qualified property is placed in service; and (B) The taxpayer will not claim a double benefit (within the meaning of section 48D(d)(3) and paragraphs (d)(2)(ii)(B) and (C) and (e) of this section) with respect to any elective payment election made by the taxpayer; and (v) Be made not later than the due date (including extensions of time) for the taxable year for which the election is made, but in no event earlier than May 8, 2023. -- Limitations -- (d) Special rules for partnerships and S corporations --(1) In general. If a partnership or S corporation directly holds any property for which an advanced manufacturing investment credit is determined, any election under this section must be made by the partnership or S corporation. No election under section 48D(d) and this section by any partner or shareholder is allowed. (2) Election --(i) Time and manner of election. An elective payment election by a partnership or S corporation is made at the same time and in the same manner, and subject to the pre-filing registration and other requirements for the election to be effective, as provided in paragraphs (b) and (c) of this section. (ii) Effect of election. If a partnership or S corporation makes an elective payment election with respect to a section 48D credit, the following rules will apply: (A) The Internal Revenue Service will make a payment to such partnership or S corporation equal to the amount of such credit, determined in accordance with paragraph (d)(6) of this section (unless the partnership or S corporation owes a Federal tax liability, in which case the payment may be reduced by such tax liability); (B) Before determining any partner's distributive share, or S corporation shareholder's pro rata share, of such credit, such credit is reduced to zero and is, for any other purposes under the Code, deemed to have been allowed solely to such entity (and not allocated or otherwise allowed to its partners or shareholders) for such taxable year; and (C) Any partner's or S corporation shareholder's share of any qualified investment in an advanced manufacturing facility for which an elective payment election has been made for the taxable year, is reduced to zero for such taxable year. (iii) Coordination with sections 705 and 1366. Any amount with respect to which the election is made is treated as tax exempt income for purposes of sections 705 and 1366 of the Code. (iv) Partner's distributive share. A partner's distributive share of such tax exempt income is equal to such partner's distributive share of its otherwise allocable basis in qualified property under§1.48D-2(h)(2)(i) for such taxable year. (v) S corporation shareholder's pro-rata share. An S corporation shareholder's pro rata share (as determined under section 1377(a) of the Code) of such tax exempt income is taken into account by the S corporation shareholder in the taxable year (as determined under sections 444 and 1378(b) of the Code) in which the section 48D credit is determined and is based on the shareholder's otherwise apportioned basis in qualified property under§1.48D-2(h)(2)(ii) for the taxable year. (vi) Timing of tax exempt income. Such tax exempt income resulting from such election is treated as received or accrued, including for purposes of sections 705 and 1366 of the Code, as of the date the qualified property is placed in service with respect to the partnership or S corporation. (3) Disregarded entity ownership. In the case of a qualified property held directly by an entity disregarded as separate from a partnership or S corporation for Federal income tax purposes, such qualified property will be treated as held directly by the partnership or S corporation for purposes of making an elective payment election. (4) Electing partnerships in tiered structures. If a partnership (upper-tier partnership) is a direct or indirect partner of a partnership that makes an elective payment election and directly or indirectly receives an allocation of tax exempt income resulting from the elective payment election made by the partnership, the upper-tier partnership must determine its partners' distributive shares of such tax exempt income in proportion to each partner's distributive share of its otherwise allocable basis in qualified property under§1.48D-2(h)(2)(i) for such taxable year. (5) Character of tax exempt income. Tax exempt income resulting from an elective payment election by an S corporation or a partnership is treated as arising from an investment activity and not from the conduct of a trade or business within the meaning of section 469(c)(1)(A). As such, the tax exempt income is not treated as passive income to any partners or shareholders who do not materially participate within the meaning of section 469(c)(1)(B). (6) Determination of amount of the section 48D credit --(i) In general. In determining the amount of the section 48D credit that will result in a payment under paragraph (d)(2)(ii)(A) of this section, the partnership or S corporation must compute the amount of the credit allowable (without regard to section 38(c)) as if an elective payment election were not made. Because a partnership or S corporation is not subject to section 469 (that is, section 469 applies at the partner or shareholder level), the amount of the credit determined by a partnership or S corporation is not subject to limitation by section 469. Because the section 48D credit is an investment credit under section 46, sections 49 and 50 apply to limit the amount of the credit. (ii) Application of section 49 at-risk rules to determination of section 48D credit for partnerships and S corporations. Any amount of section 48D credit determined with respect to qualified property held directly by a partnership or S corporation must be determined by the partnership or S corporation taking into account the section 49 at-risk rules at the partner or shareholder level as of the close of the taxable year in which the qualified property is placed in service. Thus, if the credit base of a qualified property is limited to a partner or S corporation shareholder by section 49, then the amount of the section 48D credit determined by the partnership or S corporation is also limited. A partnership or S corporation that directly holds qualified property must request from each of its partners or shareholders, respectively, that is subject to section 49, the amount of such partner's or shareholder's nonqualified nonrecourse financing with respect to the qualified property as of the close of the taxable year in which the property is placed in service. Additionally, the partnership or S corporation must attach to its tax return for the taxable year in which the qualified property is placed in service, the amount of each partner's or shareholder's section 49 limitation with respect to any qualified property. Changes to at-risk amounts under section 49 for partners or S corporation shareholders after the close of the taxable year in which the qualified property is placed in service do not impact the section 48D credit determined by the partnership or S corporation, but do impact the partner(s) or S corporation shareholder(s) as provided in paragraph (d)(6)(iii) of this section. (iii) Changes in at-risk amounts under section 49 at partner or shareholder level. A partner or shareholder in a partnership or S corporation, respectively, must apply the rules under section 49 at the partner or shareholder level if there is a change in nonqualified nonrecourse financing with respect to the partner or shareholder after the close of the taxable year in which the qualified property is placed in service and the section 48D credit is determined. If there is an increase in nonqualified nonrecourse financing to a partner, any adjustment under the rules of section 49(b) is calculated based on the partner's share of the basis (or cost) of the qualified property to which the section 48D credit was determined in accordance with§1.48D-2(h)(2)(i). If there is an increase in nonqualified nonrecourse financing to a shareholder, any adjustment under the rules of section 49(b) is calculated based on the shareholder's pro rata share of the basis (or cost) of the qualified property to which the section 48D was determined in accordance with§1.48D-2(h)(2)(ii). If there is a decrease in nonqualified nonrecourse financing, any increase in the credit base is taken into account by the partner or shareholder as provided under section 49, and any resulting credit is not eligible for an elective payment election under section 48D(d). (7) Partnerships subject to subchapter C of chapter 63 of the Code. See§301.6241-7(j) of this chapter for rules applicable to payments made to partnerships subject to subchapter C of chapter 63 of the Code for a partnership taxable year. (8) Example. The following example illustrates the rules of this paragraph (d). (i) Example. P is a calendar-year partnership consisting of partners A and B, each 50% owners. P constructs Facility A, an advanced manufacturing facility, at V. P completes the pre-filing registration with respect to Facility A at V for 2024 in accordance with paragraph (b) of this section. In 2024, P places in service qualified property which is part of Facility A at V. P timely files its 2024 Form 1065 and properly makes the elective payment election in accordance with paragraph (c) of this section. On its Form 1065, P properly determines that the amount of section 48D credit with respect to the qualified property placed in service at Facility A for 2024 is $100,000. The IRS processes P's return and makes a $100,000 payment to P. Before determining A's and B's distributive shares, P reduces the section 48D credit to zero. However, for other purposes of the Code, the $100,000 section 48D credit is deemed to have been allowed to P for 2024. The $100,000 is treated as tax exempt income for purposes of section 705, and A's and B's distributive shares of such tax exempt income is based on each partner's otherwise allocable basis in qualified property under§1.48D-2(h)(2)(i) for the 2024 taxable year ($50,000 each). A's and B's basis in their partnership interests and capital accounts will be appropriately adjusted to take into account basis adjustments made to the qualified property under section 50(c)(5) and§1.704-1(b)(2)(iv)( j ). See paragraph (g)(2) of this section. The tax exempt income received or accrued by P as a result of the elective payment election is treated as received or accrued, including for purposes of section 705, as of date P placed in service the qualified property in 2024. (ii) [Reserved] (e) Denial of double benefit --(1) In general. In the case of a taxpayer making an election under section 48D(d) and this section with respect to any section 48D credit determined under section 48D(a) and§ 1.48D-1, such credit is reduced to zero and is, for any other purposes under the Code, deemed to have been allowed to the taxpayer for such taxable year. Paragraphs (e)(2) and (3) of this section explain the application of the section 48D(d)(3) denial of a double benefit rule to a taxpayer (other than a partnership or S corporation). The application of section 48D(d)(3) to a partnership or S corporation is provided in paragraphs (d)(2)(ii)(B) and (C) of this section. (2) Application of the denial of double benefit rule. A taxpayer (other than a partnership or S corporation) making an elective payment election applies section 48D(d)(3) by taking the following steps: (i) Compute the amount of the Federal income tax liability (if any) for the taxable year, without regard to the general business credit under section 38 (GBC), that is payable on the due date of the tax return (without regard to extensions), and the amount of the Federal income tax liability that may be offset by GBCs pursuant to the limitation based on the amount of tax under section 38. (ii) Compute the amount of the GBCs carryforwards carried to the taxable year plus the amount of the current year GBCs (including the current section 48D credit) allowed for the taxable year under section 38. Because the election must made on an original return of tax for the taxable year for which the section 48D credit is determined, any business credit carrybacks are not considered when determining the elective payment amount for the taxable year. (iii) Apply the GBCs allowed for the taxable year as computed under paragraph (e)(2)(ii) of this section, including those attributable to the section 48D credit as GBC, against the tax liability computed in paragraph (e)(2)(i) of this section. (iv) Identify the amount of any excess or unused current year GBC, as defined under section 39, attributable to current year section 48D credit for which the taxpayer is making an elective payment election. Treat the amount of such unused section 48D credit as a payment against the tax imposed by subtitle A for the taxable year with respect to which such credit is determined (rather than having them available for carryback or carryover) (net elective payment amount). (v) Reduce the section 48D credit for which an elective payment election is made by the amount (if any) allowed as a general business credit under section 38 for the taxable year, as provided in paragraph (e)(2)(iii) of this section, and by the net elective payment amount (if any) that is treated as a payment against tax, as provided in paragraph (e)(2)(iv) of this section, which results in the section 48D credit being reduced to zero. (3) Use of the section 48D credit for other purposes. The full amount of the section 48D credit for which an elective payment election is made is deemed to have been allowed for all other purposes of the Code, including, but not limited to, the basis reduction and recapture rules imposed by section 50, and the calculation of any underpayment of estimated taxes under sections 6654 and 6655 of the Code. (4) Examples. The following examples illustrate the rules of this paragraph (e). (i) Example 1. Z Corp is a calendar-year C corporation. Z Corp places in service qualified property which is part of an advanced manufacturing facility in June of 2024. Z Corp completes the pre-filing registration in accordance with this section and receives a registration number for the qualified property. Z Corp timely files its 2024 Form 1120 on April 15, 2025, properly making the elective payment election with respect to the section 48D credit in accordance with this section. On its return, Z Corp properly determines that it has $500,000 of tax imposed by subtitle A of the Code (see paragraph (e)(2)(i) of this section). For simplicity, assume the maximum amount of GBCs that can be claimed for the taxable year is $375,000. Z Corp properly determines that the amount of the section 48D credit determined with respect to the qualified property (its GBC for the taxable year) is $100,000 (see paragraph (e)(2)(ii) of this section. Under paragraph (e)(2)(iii) of this section, the section 48D credit reduces Z Corp's tax liability to $400,000. Z Corp pays its $400,000 tax liability on April 15, 2025. Because there is no unused section 48D credit, paragraph (e)(2)(iv) of this section does not apply. Under paragraph (e)(2)(v) of this section, the $100,000 of section 48D credit is reduced by the $100,000 of section 48D credit claimed as GBCs for the taxable year, which results in the section 48D credit being reduced to zero. However, the $100,000 of section 48D credit is deemed to have been allowed to Z Corp for 2024 for all other purposes of the Code under paragraph (e) of this section. (ii) Example 2. Assume the same facts as in paragraph (e)(4)(i) of this section ( Example 1 ), except that Z Corp has $80,000 of tax imposed by subtitle A (paragraph (e)(2)(i) of this section). Z Corp's GBC credit is still $100,000 (paragraph (e)(2)(ii) of this section). For simplicity, assume the maximum amount of GBCs that can be claimed for the taxable year under section 38(c) is $60,000. Z Corp uses $60,000 of its section 48D credit against its tax liability under paragraph (e)(2)(iii) of this section. Z Corp's net elective payment amount is $40,000 determined under paragraph (e)(2)(iv) of this section. Z Corp reduces the elective payment amount by the $60,000 claimed against tax in paragraph (e)(2)(iii) of this section and by the $40,000 net elective payment amount determined in paragraph (e)(2)(iv) of this section, resulting in the applicable credit being reduced to zero (paragraph (e)(2)(v) of this section). When the IRS processes Z Corp's 2024 Form 1120, the net elective payment amount results in a $40,000 refund to Z Corp. However, for other purposes of the Code, the $100,000 section 48D credit is deemed to have been allowed to Z Corp for 2024 (paragraph (e) of this section). Even though Z Corp did not owe tax after applying the net elective payment amount against its net tax liability, Z Corp may be subject to the section 6655 penalty for failure to pay estimated income tax. The net elective payment is not an estimated tax installment, rather it is treated as a payment made at the filing of the return. (f) Excessive payment --(1) In general. Except as provided in paragraph (f)(2) of this section, in the case of any amount treated as a payment which is made by the taxpayer under section 48D(d)(1) and paragraph (a) of this section, or any payment made pursuant to section 48D(d)(2)(A)(i)(II) and paragraph (d) of this section, with respect to any property, which amount the Commissioner determines constitutes an excessive payment as defined in paragraph (f)(3) of this section, the tax imposed on such taxpayer by chapter 1 of the Code for the taxable year in which such determination is made is increased by an amount equal to the sum of-- (i) The amount of such excessive payment; plus (ii) An amount equal to 20 percent of such excessive payment. (2) Reasonable cause. Paragraph (f)(1)(ii) of this section will not apply if the taxpayer demonstrates to the satisfaction of the Commissioner that the excessive payment resulted from reasonable cause. (3) Excessive payment defined. For purposes of section 48D(d) and this paragraph (f), the term excessive payment means, with respect to any property for which an election is made under section 48D(d) and this section for any taxable year, an amount equal to the excess of-- (i) The amount treated as a payment which is made by the taxpayer pursuant to section 48D(d)(1) and paragraph (a) of this section, or any payment made by the Commissioner pursuant to section 48D(d)(2)(A)(I)(i) and paragraph (d) of this section, with respect to such property for such taxable year; over (ii) The amount of the section 48D credit which, without application of section 48D(d) and this section, would be otherwise allowable (determined without regard to section 38(c)) under section 48D(a) and the section 48D regulations with respect to such property for such taxable year. (4) Example s. The following example illustrates the principles of this paragraph (f). (i) Example. A Corp is a calendar-year C corporation. A Corp places in service qualified property which is part of Facility A, an advanced manufacturing facility in 2023. A Corp properly completes the pre-filing registration in accordance with paragraph (b) of this section and receives a registration number for the advanced manufacturing facility. A Corp timely files its 2023 Form 1120, properly providing the registration number for Facility A and otherwise complying with paragraph (c) of this section. On its return, Corp A calculates that the amount of the section 48D credit with respect to the qualified property is $100,000 and that the net elective payment amount is $100,000. Corp A receives a refund in the amount of $100,000. In 2025, the IRS determines that the amount of the section 48D credit properly allowable to Corp A in 2023 with respect to Facility A (as determined pursuant to§1.48D-1(b) and without regard to the limitation based on tax in section 38(c)) was $60,000. Corp A is not able to show reasonable cause for the difference. The excessive payment amount is $40,000 ($100,000 treated as a payment - $60,000 allowable amount). In 2025, the tax imposed under chapter 1 on Corp A is increased in the amount of $48,000 ($40,000+ (20% * $40,000 = $8,000). (ii) [Reserved] (g) Basis reduction and recapture --(1) In general. The rules in section 50(a) and (c) of the Code apply with respect to elective payments under paragraphs (a) and (d) of this section. (2) Basis adjustment --(i) In general. If a section 48D credit is determined with respect to property for which a taxpayer makes an election under section 48D(d)(1), then the adjusted basis of the property shall be reduced by the amount of the section 48D credit determined for which the taxpayer made an election under section 48D(d)(1). (ii) Basis adjustment by partnership or S corporation. If an advanced manufacturing investment credit is determined with respect to property for which a partnership or S corporation makes an election under section 48D(d)(1), then the adjusted basis of the property shall be reduced by the amount of the advanced manufacturing investment credit determined with respect to the property held by the partnership or S corporation, for which the IRS made a payment to the partnership or S corporation pursuant to section 48D(d)(2)(A)(i)(I). (iii) Basis adjustment of partners and S corporation shareholders. The adjusted basis of a partner's interest in a partnership, and stock in an S corporation, shall be appropriately adjusted pursuant to section 50(c)(5) to take into account adjustments made under paragraph (g)(2)(ii) of this section in the basis of property held by the partnership or S corporation, as the case may be. (3) Recapture reporting. Any reporting of recapture is made on the taxpayer's annual return in the manner prescribed by the IRS in any guidance. (h) Applicability date. This section applies to property that is placed in service after December 31, 2022, and during a taxable year ending on or after date of publication of final rule. Douglas W. O'Donnell, Deputy Commissioner for Services and Enforcement. (Filed by the Office of the Federal Register June 14, 2023, 11:15 a.m., and published in the issue of the Federal Register for June 21, 2023, FR ***)
Private Letter Ruling Number: 202239009 Internal Revenue Service July 1, 2022 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202239009 Release Date: 9/30/2022 Index Number: 1400Z.02-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:ITA:B04 PLR-100605-22 Date: July 01, 2022 Dear *****: This letter responds to Taxpayer's request dated Date 5. Specifically, Taxpayer requests relief under Treasury Regulation §§ 301.9100-1 and 301.9100-3 to allow Taxpayer's Form 8996, Qualified Opportunity Fund, filed on Date 2 to be treated as timely for purposes of making an election to: (1) self-certify as a qualified opportunity fund (QOF), as defined in section 1400Z-2(d) of the Internal Revenue Code (Code) and (2) be treated as a QOF, effective as of the month the Taxpayer was formed, as provided under section 1400Z-2(d) and Treas.Reg. § 1.1400Z2(d)-1(a). This letter ruling is being issued electronically in accordance with Rev. Proc. 2020-29, 2020-21 I.R.B. 859. A paper copy will not be mailed to Taxpayer. FACTS Based on the information provided, including the additional information provided on Date 6, Taxpayer has represented that Taxpayer, a partnership organized as a ****, was formed as a QOF on Date 1 for the purpose of investing in qualified opportunity zone property as defined in section 1400Z-2(d)(2). In or around Month 1, Taxpayer engaged Advisor to prepare Taxpayer's partnership federal income tax return for Year 1, its first year of operation. Taxpayer conducted no business activities and generated no revenues during Year 1, although Taxpayer has represented that it had invested in qualified opportunity zone property during Year 1. The information provided indicates that Advisor was tasked with preparing and timely filing Taxpayer's Federal income tax return and all related forms and elections to self-certify Taxpayer as a QOF, and to treat Taxpayer as a QOF as of the month Taxpayer was formed. According to the affidavits, representations, including the additional information provided on Date 6, Taxpayer and Advisor were aware of the requirement to file Form 8996 with the Taxpayer's timely filed federal income tax return for Year 1 for the Taxpayer to self-certify QOF status and to be treated as a QOF as of the month Taxpayer was formed. Additionally, Advisor was retained by Taxpayer so that Taxpayer could comply with the Form 8996 requirements and Advisor was expected to file a request for an automatic extension of time for Taxpayer's federal income tax return for Year 1. However, due to an administrative error at Advisor's accounting firm, Advisor failed to file for an automatic extension on behalf of Taxpayer. On Date 2, Advisor filed Taxpayer's federal income tax return, with a Form 8996 to self-certify taxpayer as a QOF. On Date 3, Taxpayer was notified of a late-filing penalty for Taxpayer's income tax return for Year 1. As a result, Taxpayer became aware that its Form 8996 had not been timely filed. LAW AND ANALYSIS Section 1400Z-2(e)(4)(A) directs the Secretary to prescribe regulations for rules for the certification of QOFs. Treas.Reg. § 1.1400Z2(d)-1(a)(2)(i) provides that the self-certification of a QOF must be timely-filed and effectuated annually in such form and manner as may be prescribed by the Commissioner of Internal Revenue in the Internal Revenue Service forms or instructions, or in publications or guidance published in the Internal Revenue Bulletin. To self-certify as a QOF, a taxpayer must file Form 8996, Qualified Opportunity Fund, with its tax return for the year to which the certification applies. The Form 8996 must be filed by the due date of the tax return (including extensions). The information provided indicates that the Taxpayer did not file its Form 8996 by the due date of its income tax return due to Advisor's failure to file a request for an automatic extension of time for Taxpayer's federal income tax return. Taxpayer filed its first federal income tax return and Form 8996 on Date 2, the due date that would have applied if Advisor had filed a timely request for an automatic extension. Section 1.1400Z2(d)-1(a)(2)(i) sets forth the manner and timing for electing to be a QOF and electing to self-certify as a QOF. As such, these elections are regulatory elections, as defined in Treas.Reg. § 301.9100-1(b). According to Treas.Reg. § 301.9100-3(a), requests for extensions of time for regulatory elections that do not meet the requirements of Treas.Reg. § 301.9100-2 (automatic extensions) must be made under the rules of Treas.Reg. § 301.9100-3. Treas.Reg. §§ 301.9100-1 through 301.9100-3 provide the standards that the Service will use to determine whether to grant an extension of time to make a regulatory election. Treas.Reg. § 301.9100-3(a) provides that requests for extensions of time for regulatory elections (other than automatic changes covered in Treas.Reg. § 301.9100-2) will be granted when the taxpayer provides evidence (including affidavits) to establish that the taxpayer acted reasonably and in good faith and granting relief will not prejudice the interests of the Government. Treas.Reg. § 301.9100-3(b)(1) provides that a taxpayer is deemed to have acted reasonably and in good faith if the taxpayer-- (i) Requests relief before the failure to make the regulatory election is discovered by the Service; (ii) Failed to make the election because of intervening events beyond the taxpayer's control; (iii) Failed to make the election because, after exercising reasonable diligence, the taxpayer was unaware of the necessity for the election; (iv) Reasonably relied on the written advice of the Service; or (v) Reasonably relied on a qualified tax professional, and the professional failed to make, or advise the taxpayer to make, the election. Under Treas.Reg. § 301.9100-3(b)(3), a taxpayer will not be considered to have acted reasonably and in good faith if the taxpayer-- (i) Seeks to alter a return position for which an accuracy-related penalty could be imposed under section 6662 at the time the taxpayer requests relief and the new position requires a regulatory election for which relief is requested; (ii) Was fully informed of the required election and related tax consequences, but chose not to file the election; or (iii) Uses hindsight in requesting relief. If specific facts have changed since the original deadline that make the election advantageous to a taxpayer, the Service will not ordinarily grant relief. Treas.Reg. § 301.9100-3(c) provides that the Service will grant a reasonable extension of time only when the interests of the Government will not be prejudiced by the granting of relief. The interests of the Government are prejudiced if granting relief would result in a taxpayer having a lower tax liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made (taking into account the time value of money). Treas.Reg. § 301.9100-3(c)(1)(ii) provides that the interests of the government are ordinarily prejudiced if the taxable year in which the regulatory election should have been made or any taxable year that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under section 6501(a) before the taxpayer's receipt of a ruling granting relief under this section. CONCLUSION Based on the facts and information submitted and the representations made, we conclude that Taxpayer has acted reasonably and in good faith, and that the granting of relief would not prejudice the interests of the Government. Accordingly, Taxpayer has satisfied the requirements of the regulations for the granting of relief, and Taxpayer's late-filed Form 8996, certifying the Taxpayer as a QOF as of the month the Taxpayer was formed, will be considered timely filed, provided it is received by the appropriate service center no later than 60 days from the date of this letter ruling. The ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination. This ruling addresses the granting of Treas.Reg. § 301.9100-3 relief as applied to the election to self-certify the Taxpayer as a QOF by filing Form 8996 for Year 1. Specifically, we have no opinion, either express or implied, concerning whether any investments made into Taxpayer are qualifying investments as defined in Treas.Reg. § 1.1400Z2(a)-1(b)(34) or whether, at any time, Taxpayer met or meets the requirements under section 1400Z-2 and the regulations thereunder to be a QOF. We express no opinion regarding the tax treatment of the instant transaction under the provisions of any other sections of the Code or regulations that may be applicable, or regarding the tax treatment of any conditions existing at the time of, or effects resulting from, the instant transaction. A copy of this letter must be attached to any tax return to which it is relevant. Alternatively, taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter ruling. This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides that it may not be used or cited as precedent. Enclosed is a copy of the letter ruling showing the deletions proposed to be made when it is disclosed under section 6110. Pursuant to the Form 2848, Power of Attorney and Declaration of Representation, on file, we are sending a copy of this letter to Taxpayer's authorized representative. Sincerely, Lisa Mojiri-Azad Senior Technician Reviewer, Branch 4 (Income Tax & Accounting) cc:
Private Letter Ruling Number: 202053008 Internal Revenue Service October 2, 2020 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202053008 Release Date: 12/31/2020 Index Number: 856.00-00, 9100.00-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:FIP:B02 PLR-110928-20 Date: October 02, 2020 Dear *******: This letter responds to a letter dated April 10, 2020, and subsequent correspondence, submitted on behalf of Taxpayer (in its capacity as the successor-in-interest to Trust) and Taxpayer's subsidiaries Corporation A, Corporation B, Corporation C, Corporation D, Corporation E, and Corporation F (the subsidiaries collectively, the Corporations). Taxpayer and the Corporations request an extension of time under sections 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations to file elections to treat each of the Corporations as a taxable REIT subsidiary (TRS) of Taxpayer under section 856(l) of the Internal Revenue Code (the Code) effective Date 3. FACTS Taxpayer intends to elect to be treated as a real estate investment trust (REIT) under sections 856 through 859 of the Code beginning with its initial taxable year ending Date 9. Taxpayer was formed on Date 1 and made a valid and timely election to be treated as an association taxable as a corporation for U.S. federal income tax purposes effective Date 5. On Date 2, Trust was formed as a State limited liability company and made a valid and timely election to be treated as an association taxable as a corporation for U.S. federal income tax purposes effective Date 3. Immediately prior to Date 5, Taxpayer and Trust were wholly owned directly or indirectly by Holdco. Taxpayer and Trust were both formed to be REITs. Taxpayer was formed to indirectly own certain hotel properties and lease them to its TRSs pursuant to section 856(d)(8)(B). On Date 5, Taxpayer acquired substantially all of the properties held by Trust, including the Corporations, in a reorganization that Taxpayer represents is described in section 368(a)(1)(F) (the Transaction). Taxpayer represents that, as a result of the Transaction, Taxpayer became a successor-in-interest to Trust for U.S. federal income tax purposes. Accordingly, Date 3, the first day of the tax year ending Date 9 for Trust, became the first day of the tax year ending Date 9 for Taxpayer. Taxpayer and Trust generally relied on the advice of their outside tax counsel regarding qualification as a REIT, including for all filing obligations. Taxpayer and Trust also relied on their outside tax counsel regarding the tax consequences of the Transaction. Law Firm X was Taxpayer's and Trust's outside tax counsel in Month 1 of Year. At the time of the Transaction, it was intended that each of Taxpayer and Trust would qualify as a REIT for Year. It was also intended that the Corporations would be treated as TRSs before and after the Transaction as part of the Taxpayer-Trust ownership structure. However, Law Firm X failed to advise Taxpayer and Trust that the Transaction was a reorganization under section 368(a)(1)(F), with the result that Taxpayer became a successor-in-interest to Trust. Law Firm X also failed prior to Date 4 to advise Trust to make (with the Corporations) section 856(l) TRS elections via Form 8875, Taxable REIT Subsidiary Election, to treat the Corporations as TRSs of Trust. In order to be effective Date 3, the elections needed to have been filed on or before Date 4. Despite the fact that Date 4 had passed without the elections having been filed and that the Transaction had already occurred, on Date 6 Law Firm X rendered an unqualified opinion that each of Taxpayer and Trust would qualify as a REIT for Year. In Month 2 of Year, Accounting Firm was performing an audit of Taxpayer and Trust and discovered that Trust and the Corporations had failed to make section 856(l) TRS elections for the Corporations. Upon discovery of this failure, on Date 8, Trust and the Corporations made section 856(l) TRS elections for the Corporations with the earliest possible effective date of Date 7. Because Taxpayer and Trust had not yet been advised that Taxpayer had become a successor-in-interest to Trust as a result of the Transaction, these elections were not only untimely, but also were incorrectly filed by Trust rather than by Taxpayer. Subsequently, Taxpayer and Trust engaged Law Firm Y as their outside tax counsel. In Month 3 of Year, Law Firm Y advised Taxpayer and Trust of the correct tax consequences of the Transaction, and advised Taxpayer to request relief under sections 301.9100-1 and 301.9100-3 to extend the time to file section 856(l) TRS elections for the Corporations effective Date 3. REPRESENTATIONS Taxpayer makes the following representations in connection with this request for an extension of time: 1. The request for relief was filed by Taxpayer before the failure to make the regulatory elections were discovered by the Service. 2. Granting the relief will not result in Taxpayer having a lower tax liability in the aggregate for all years to which the regulatory elections apply than Taxpayer would have had if the elections had been timely made (taking into account the time value of money). 3. Taxpayer did not seek to alter a return position for which an accuracy-related penalty has been or could have been imposed under Code section 6662 at the time Taxpayer requested relief and the new position requires or permits regulatory elections for which relief is requested. 4. Being fully informed of the required regulatory elections and related tax consequences, Taxpayer did not choose to not file the elections. 5. Taxpayer and the Corporations are not using hindsight in making the decision to seek the relief requested. No specific facts have changed since the due date for making the elections that make the elections advantageous to Taxpayer or the Corporations. 6. The period of limitations on assessment under Code section 6501(a) has not expired for Taxpayer and the Corporations for the taxable year in which the elections should have been filed, nor for any taxable year(s) that would have been affected by the elections had they been timely filed. 7. Taxpayer has not yet filed a federal income tax return for Year. In addition, affidavits on behalf of Taxpayer and the Corporations have been provided as required by section 301.9100-3(e)(2) and (3). LAW AND ANALYSIS Section 856(l) provides that a REIT and a corporation (other than a REIT) may jointly elect to treat such corporation as a TRS. To be eligible for treatment as a TRS, section 856(l)(1) provides that the REIT must directly or indirectly own stock in the corporation, and the REIT and the corporation must jointly elect such treatment. The election is irrevocable once made, unless both the REIT and the subsidiary consent to its revocation. In addition, section 856(l) specifically provides that the election, and any revocation thereof, may be made without the consent of the Secretary. In Announcement 2001-17, 2001-1 C.B. 716, the Service announced the availability of new Form 8875, Taxable REIT Subsidiary Election. According to the Announcement, this form is to be used for taxable years beginning after 2000 for eligible entities to elect treatment as a TRS. The instructions to Form 8875 provide that the subsidiary and the REIT can make the election at any time during the taxable year. However, the effective date of the election depends on when the Form 8875 is filed. The instructions further provide that the effective date cannot be more than 2 months and 15 days prior to the date of filing the election, or more than 12 months after the date of filing the election. If no date is specified on the form, the election is effective on the date the form is filed with the Service. Section 301.9100-1(c) provides that the Commissioner has discretion to grant a reasonable extension of time to make a regulatory election, or a statutory election (but no more than 6 months except in the case of a taxpayer who is abroad), under all subtitles of the Code except subtitles E, G, H, and I. Section 301.9100-1(b) defines a regulatory election as an election whose due date is prescribed by regulations or by a revenue ruling, a revenue procedure, a notice, or an announcement published in the Internal Revenue Bulletin. Section 301.9100-3(a) through (c)(1) sets forth rules that the Service generally will use to determine whether, under the particular facts and circumstances of each situation, the Commissioner will grant an extension of time for regulatory elections that do not meet the requirements of section 301.9100-2. Section 301.9100-3(a) provides that requests for relief subject to this section will be granted when the taxpayer provides the evidence (including affidavits described in section 301.9100-3(e)) to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and the grant of relief will not prejudice the interests of the Government. Section 301.9100-3(b) provides that a taxpayer is deemed to have acted reasonably and in good faith if the taxpayer (i) requests relief under this section before the failure to make the regulatory election is discovered by the Service; (ii) failed to make the election because of intervening events beyond the taxpayer's control; (iii) failed to make the election because, after exercising reasonable diligence (taking into account the taxpayer's experience and the complexity of the return or issue), the taxpayer was unaware of the necessity for the election; (iv) reasonably relied on the written advice of the Service; or (v) reasonably relied on a qualified tax professional, including a tax professional employed by the taxpayer, and the tax professional failed to make, or advise the taxpayer to make, the election. A taxpayer will be deemed to have not acted reasonably and in good faith if the taxpayer (i) seeks to alter a return position for which an accuracy-related penalty has been or could be imposed under section 6662 at the time the taxpayer requests relief and the new position requires or permits a regulatory election for which relief is requested; (ii) was informed in all material respects of the required election and related tax consequences, but chose not to file the election; or (iii) uses hindsight in requesting relief. Section 301.9100-3(c)(1) provides that a reasonable extension of time to make a regulatory election will be granted only when the interests of the Government will not be prejudiced by the granting of relief. Section 301.9100-3(c)(1)(i) provides that the interests of the Government are prejudiced if granting relief would result in the taxpayer having a lower tax liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made (taking into account the time value of money). Section 301.9100-3(c)(1)(ii) provides that the interests of the Government are ordinarily prejudiced if the taxable year in which the regulatory election should have been made or any taxable years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under section 6501(a) before the taxpayer's receipt of a ruling granting relief under this section. CONCLUSION Based on the information submitted and representations made, we conclude that Taxpayer, as the successor-in-interest to Trust, and the Corporations have satisfied the requirements for granting a reasonable extension of time to elect under section 856(l) to treat each Corporation as a TRS of Taxpayer effective Date 3. Accordingly, Taxpayer, as the successor-in-interest to Trust, and the Corporations have 90 calendar days from the date of this letter to make the intended elections to treat each Corporation as a TRS of Taxpayer effective Date 3. CAVEATS This ruling is limited to the timeliness of the filing the Form 8875. This ruling's application is limited to the facts, representations, and Code and regulation sections cited herein. Except as provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. In particular, no opinion is expressed or implied regarding whether the Transaction was a reorganization under section 368(a)(1)(F). Further, no opinion is expressed or implied regarding whether Taxpayer otherwise qualifies as a REIT, or whether any Corporation otherwise qualifies as a TRS of Taxpayer under part II of subchapter M of chapter 1 of the Code. No opinion is expressed with regard to whether the tax liability of Taxpayer is not lower in the aggregate for all years to which the elections apply than such tax liability would have been if the elections had been timely made (taking into account the time value of money). Upon audit of the U.S. federal income tax returns involved, the director's office will determine such tax liability for the years involved. If the director's office determines that such tax liability is lower, that office will determine the federal income tax effect. This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3) provides that it may not be used or cited as precedent. In accordance with the power of attorney on file with this office, a copy of this letter is being sent to your authorized representative. Sincerely, ___________________________ Bernard J. Audet, Jr. Assistant to the Branch Chief, Branch 2 Office of Associate Chief Counsel (Financial Institutions & Products) cc:
Private Letter Ruling Number: 202405011 Internal Revenue Service November 6, 2023 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Release Number: 202405011 Release Date: 2/2/2024 UIL Code: 501.03-00 Date: November 6, 2023 Taxpayer ID number (last 4 digits): Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: Last day to file petition with United States Tax Court: Tuesday, February 6, 2024 CERTIFIED MAIL - Return Receipt Requested Dear ****: Why we are sending you this letter This is a final determination that you don't qualify for exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3), effective **. Your determination letter dated **, is revoked. Our adverse determination as to your exempt status was made for the following reasons: You ceased operations and conducting exempt activities tinder internal Revenue Code (IRC) Section 501(c)(3) This causes you to fail the operational test required under IRC Section 501(c)(3). Thus, because you are no longer operating and/or conducting exempt activities, you do not meet the requirements of IRC Section 501(c)(3) and Treasury Regulations Section 1.501(c)(3)-1. In addition, you did not submit your articles of dissolution nor did you formally dissolve with the State, as specified within IRC Section 6043(b) and Treasury Regulations Section 1.6043-3. Organizations that are not exempt under IRC Section 501 generally are required to file federal income tax returns and pay tax, where applicable. For further instructions, forms and information please visit IRS.gov. Contributions to your organization are no longer deductible under IRC Section 170. What you must do if you disagree with this determination If you want to contest our final determination, you have 90 days from the date this determination letter was mailed to you to file a petition or complaint in one of the three federal courts listed below. How to file your action for declaratory judgment If you decide to contest this determination, you can file an action for declaratory judgment under the provisions of Section 7428 of the Code in either: - The United States Tax Court, - The United States Court of Federal Claims, or - The United States District Court for the District of Columbia You must file a petition or complaint in one of these three courts within 90 days from the date we mailed this determination letter to you. You can download a fillable petition or complaint form and get information about filing at each respective court's website listed below or by contacting the Office of the Clerk of the Court at one of the addresses below. Be sure to include a copy of this letter and any attachments and the applicable filing fee with the petition or complaint. You can eFile your completed U.S. Tax Court petition by following the instructions and user guides available on the Tax Court website at ustaxcourt.gov/dawson.html. You will need to register for a DAWSON account to do so. You may also file your petition at the address below: United States Tax Court 400 Second Street, NW Washington, DC 20217 ustaxcourt.gov The websites of the U.S. Court of Federal Claims and the U.S. District Court for the District of Columbia contain instructions about how to file your completed complaint electronically. You may also file your complaint at one of the addresses below: US Court of Federal Claims 717 Madison Place, NW Washington, DC 20439 uscfc.uscourts.gov US District Court for the District of Columbia 333 Constitution Avenue, NW Washington, DC 20001 dcd.uscourts.gov Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory judgment under IRC Section 7428. Information about the IRS Taxpayer Advocate Service The IRS office whose phone number appears at the top of the notice can best address and access your tax information and help get you answers. However, you may be eligible for free help from the Taxpayer Advocate Service (TAS) if you can't resolve your tax problem with the IRS, or you believe an IRS procedure just isn't working as it should. TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Contact your local Taxpayer Advocate Office at: Internal Revenue Service Or call TAS at 877-777-4778. For more information about TAS and your rights under the Taxpayer Bill of Rights, go to taxpayeradvocate.IRS.gov. Do not send your federal court pleading to the TAS address listed above. Use the applicable federal court address provided earlier in the letter. Contacting TAS does not extend the time to file an action for declaratory judgment. Where you can find more information Enclosed are Publication 1, Your Rights as a Taxpayer, and Publication 594, The IRS Collection Process, for more comprehensive information. Find tax forms or publications by visiting IRS.gov/forms or calling 800-TAX-FORM (800-829-3676). If you have questions, you can call the person shown at the top of this letter. If you prefer to write, use the address shown at the top of this letter. Include your telephone number, the best time to call, and a copy of this letter. You may fax your documents to the fax number shown above, using either a fax machine or online fax service. Protect yourself when sending digital data by understanding the fax service's privacy and security policies. Keep the original letter for your records. Sincerely, Lynn A. Brinkley Director, Exempt Organizations Examinations Enclosures: Publication 1 Publication 594 Publication 892 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Date: 9/19/2023 Taxpayer ID number: Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: Address: Manager's contact Information: Name: ID number: Telephone: Response due date: October 4, 2023 CERTIFIED MAIL -- Return Receipt Requested Dear **: Why you're receiving this letter We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we propose to revoke your tax exempt status as an organization described in Internal Revenue Code (IRC) Section 501(c)(3). If you agree If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an organization described in IRC Section 501(c)(3) for the periods above. After we issue the final adverse determination letter, we'll announce that your organization is no longer eligible to receive tax deductible contributions under IRC Section 170. If you disagree 1. Request a meeting or telephone conference with the manager shown at the top of this letter. 2. Send any information you want us to consider. 3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after the meeting or after we consider the information. The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case. For your protest to be valid, it must contain certain specific information, including a statement of the facts, applicable law, and arguments in support of your position. For specific information needed for a valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn't apply now that we've issued this letter. 4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities) if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the IRS. If you're considering requesting technical advice, contact the person shown at the top of this letter. If you disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as explained above. A decision made in a technical advice memorandum, however, generally is final and binding on Appeals. If we don't hear from you If you don't respond to this proposal within 15 calendar days from the date of this letter, we'll issue a final adverse determination letter. Contacting the Taxpayer Advocate Office is a taxpayer right The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778. Additional information You can get any of the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms pubs or by calling 800 TAX FORM (800-829-3676). If you have questions, you can contact the person shown at the top of this letter. Sincerely, For Lynn A. Brinkley Director, Exempt Organizations Examinations Enclosures Form 886-A Form 4621-A Form 6018 Publication 892 Publication 3498 ISSUES: Whether ** continues to qualify as an exempt organization under IRC Section 501(c)(3). FACTS: ** ("**") is incorporated under the laws of the State of ** as a non-profit corporation on **. The foundation was granted exemption under Internal Revenue Code 501(c)(3) by Form M-0714 dated **. ** is classified as a supporting organization with the meaning of Section 509(a)(3). The Form 990-EZ Short Form Return of Organization Exempt from Income Tax for tax year ending **, filed by ** was selected for examination to ensure that the organization's activities and operations were in compliance with IRC Section 501(c)(3). According to Form 990-EZ, ** primary exempt purpose is to ** in **, **. An examination for tax year ending ** was opened. Initial contact letter 6031 was sent with Form 4564 Information Document Request, Publication 1, Publication 5295, and Notice 609 on ** with a response due date of **. The correspondence requested a copy of any amendments to governing instruments including Articles, Constitution and By laws, made to date, meeting minutes, financial data to reconcile the Form 990-EZ to the organization's books and records. ** responded to the initial Form 4564 Information Document Request on **. The ** spoke to **, ** and **, **. ** indicated that organization has terminated and Form 990-EZ tax year ending ** was their final return. ** gave the phone number for ** and requested that ** communicate with **. ** on the termination process of this examination. ** spoke to **. ** and discussed the required documentaries to be submitted for the organization to properly terminate its exempt status. ** sent Form 4564 Information Document Request # ** on ** with a response due date of ** to **, **, via secured email. Form 4564 Information Document Request # ** requested the following documentation: 1. According to Form 990EZ tax return ending ** and our telephone conversation, dated **, ** has terminated with final tax return filed ending **. ** transferred its assets to **. Please provide documentation for the transfer of assets to **, for example, bank statements, canceled checks and written statement of disposition of assets. ** '** 2. Copy of Articles of Dissolution and proof of filing with the state of **. ** called and spoke to **, **, on **, and inquired about the response to Form 4564 IDR # **. ** requested more time to gather and submit the required documents. ** and ** agreed to an extension of **. On **, ** called and spoke to **, **. ** stated that ** needed more time to obtain the required documentation pertaining to Form 4564 IDR# **. An agreed extension was set for **. On **, ** received an email from **, **, that stated the ** needed to contact **, **/**, ** stated that **. ** indicated that ** would handle providing the required documents in response to Form 4564 IDR # **. On **, ** called and spoke to **, **. Discussed F4564-IDR # ** and the ** documents that were requested. ** stated that ** would submit the documents by **, **. ** requested F4564-IDR# ** be sent to email: On **, ** emailed a response to F4564-IDR # ** which included the following documents: 1. Letter from the Secretary of the State of ** - Administrative Dissolution or Revocation for a Non-Profit Corporation, dated **. (See **). 2. Copy of partial Bylaws of **, dated **, which highlighted Article **. Dissolution Sections: Article **. Dissolution 3. Documents on Disposition of Assets, Letter - Summary of Contributions, dated between ** to **. Letter - Summary of Contributions and copies of checks and transfer wires that documented distributions totaling $ ** to **, an organization exempt under IRC 501(c)(3). (See **). On **, ** called and spoke to **, **/**. ** discussed and explained that ** must file Articles of Dissolution with the State of ** to properly terminate its existence. ** further explained that once the Articles of Dissolution are filed, a complete copy of the Articles of Dissolution with proof of filing with the state, such as a "**" stamp should be sent to the **. ** stated that ** needed to inquire about the filing of Articles of Dissolution and would follow up with ** by ** On **, ** emailed the following documents: 1. A copy of Form 990-EZ Short Form Return of Organization Exempt from Income Tax for tax year ending **. (See **). 2. Copy of sanitized ** meeting minutes dated ** and **. (See ** and **). ** called and spoke to ** on **, **. ** explained the requirement to file Articles of Dissolution with State of ** to properly terminate the organization's existence. ** further explained the difference between termination and revocation ** stated that ** would respond by ** about Articles of Dissolution. The organization's former representative declared that the organization had no operational or financial activities since **. ** discussed revocation with the organization's former representative on ** and ** understood the difference between an organization's voluntary termination of its existence and Internal Revenues Service's (IRS') proposed revocation as organization is no longer operating for an exempt purpose. On **, ** sent an email stating that ** spoke to an employee with the Secretary of the State office who told ** that Articles of Dissolution were not filed by **, and the State administratively dissolved or revoked the non-profit corporation of **. ** submitted a copy of the ** Secretary of the State document - Administrative Dissolution or Revocation for a Non-Corporation, dated **. ** expressed that the employee of the Secretary of the State office indicated that ** does not need to file Articles of Dissolution because the State had administratively dissolved it non-profit corporation. (See **). The ** review the ** Secretary of State ** website **, there was a section on that provided the following description of Administrative Dissolution: ** is declining to file an Articles of Dissolution with the Secretary of the State of ** to properly terminate its existence and, is accepting State of ** Administrative Dissolution or Revocation for a Non-Profit Corporation, dated **, as its official Article of Dissolution. Based on ** Form 990-EZ Short Form Return of Organization Exempt from Income Tax for tax year ending **, notated it to be their final return and terminating its exempt status, meeting minutes dated **; indicating to file final return for the ** tax year ending **, and discussion with **, the organization had not been in operation since **. LAW: Internal Revenue Code §501(c)(3) provides that an organization organized and operated exclusively for charitable or educational purposes is exempt from Federal income tax, provided no part of its net earnings inures to the benefit of any private shareholder or individual. Treasury Regulation Section 1.501(c)(3) 1(a) In order to be exempt under §501(c)(3) the organization must be both organized and operated exclusively for one or more of the purposes specified in the section. (Religious, charitable, scientific, testing for public safety, literary or educational). Treasury Regulation Section 1.501(c)(3)-1(a)(1) states that, in order to be exempt as an organization described in Section 501(c)(3) of the Code, an organization must be both organized and operated exclusively for one or more of the purposes specified in such section. If an organization fails to meet either the organizational test or the operational test, it is not exempt. Treasury Regulation Section 1.501(c)(3)-1(b)(4) holds that an organization is not organized exclusively for one or more exempt purposes unless its assets are dedicated to an exempt purpose. An organization's assets will be considered dedicated to an exempt purpose, for example, if, upon dissolution, such assets would, by reason of a provision in the organization's articles or operation of law, be distributed for one or more exempt purposes. Treasury Regulation Section 1.501(c)(3)-1(c)(1) provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in Section 501(c)(3) of the Code. An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose. Treasury Regulation Section 1.501(c)(3)-1(d)(i) states that an organization may be exempt as an organization described in 501(c)(3) if it is organized and operated exclusively for one or more of the following purposes: religious, charitable, scientific, testing for public safety, literary, educational, or prevention of cruelty to children or animals. Treasury Regulation Section 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest. Rev.Rul. 58-617, 1958-2 C.B. 260, holds that Rulings and determinations letters granting exemption from Federal income tax to an organization described in section 501(a) of the Internal Revenue Code of 1954, to which contributions are deductible by donors in computing their taxable income in the manner and to the extent provided by section 170 of the Code, are effective only so long as there are no material changes in the character of the organization, the purposes for which it was organized, or its methods of operation. The District Director of Internal Revenue for the district in which the organization is located must be advised immediately of any such changes in order that a determination may be made as to the effect the changes may have upon the exempt status of the organization See generally sections 1.501(a)-1 and 1.6033-1 of the Income Tax Regulations. Failure to comply with this requirement may result in serious consequences to the organization for the reason that the ruling or determination letter holding the organization exempt may he revoked retroactively to the date of the changes affecting its exempt status, depending upon the circumstances involved, and subject to the limitations on retroactivity of revocation found in section 503 of the Code. TAXPAYER'S POSITION: Whether ** continues to qualify as an exempt organization under IRC Section 501(c)(3). It is the position of ** that the organization has terminated its existence through the following actions: 1. ** filed a final return, Form 990-EZ Short Form Return of Organization Exempt from Income Tax for tax year ending **. 2. All the assets of the organization have boon distributed to ** and copies of checks. 3. ** has been administratively dissolved by the State of **. They are relying on statements from an employee of the Secretary of State of ** that it is not necessary to file Articles of Dissolution. GOVERNMENT'S POSITION: Whether ** continues to qualify as an exempt organization under IRC Section 501(c)(3). As demonstrated in Rev.Rul. 58-617, an organization's exempt status will remain in effect only so long as there are no material changes in the character of the organization, the purposes for which it was organized, or its methods of operation. During the year under examination, the organization did not conduct any activities exempt under IRC 501(c)(3). In fact, ** has been inactive and has no plans for future activities. The only activities during the year were wrapping up the organization and distributing the assets. As such, ** had failed to meet the operational requirements to continue its exemption status under IRC 501(c)(3). During the course of this examination, you have informed the IRS that you have terminated the organization. In IDR # ** you were informed of the termination procedures which included: (1) filing a final return; (2) providing documentation of the distribution of the assets; and (3) submitting Articles of Dissolution with the State of **. In response you indicated that your Form 990-EZ for the year ended ** was your final return, and you provided documentation that your final assets were distributed to another organization exempt under IRC 501(c)(3). You did not submit the Articles of Dissolution because your position is that it is not required. Since you have not filed Articles of Dissolution with the State of **, your corporate existence has not been terminated. According to the State of **, ** Administrative dissolution does not mean that your corporation has ceased its existence. Thus, ** has failed to properly terminate its existence CONCLUSION: Based on the information provided, the organization had not conducted any activities since it ceased operations during the ** year ended **. In addition, you did not properly terminate your organization's existence described in Section 501(c)(3) of the Code. Based on the foregoing reasons, ** does not qualify for exemption from Federal income tax under Section 501(c)(3) of the Internal Revenue Code and its tax-exempt status should be revoked. Accordingly, the organization's exempt status is revoked effective ****.
Private Letter Ruling Number: 202016006 Internal Revenue Service October 30, 2019 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202016006 Release Date: 4/17/2020 Index Number: 2044.00-00, 2056.07-00, 2511.00-00, 2519.00-00, 2522.00-00, 2523.06-01, 4941.00-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:PSI:04 PLR-111092-19 Date: October 30, 2019 Dear ******: This letter responds to your authorized representative's letter of March 28, 2019, and subsequent correspondence, requesting rulings on the gift, estate, and excise tax consequences of a proposed transaction. FACTS The facts and representations submitted are summarized as follows: On Date 1, Decedent created Revocable Trust, which was amended and restated on Date 2, and further amended on Date 3, Date 4, Date 5, and Date 6. Revocable Trust became irrevocable upon Decedent's death on Date 7. Article V, Paragraph 5.1(e) of Revocable Trust, as amended, provides that upon Decedent's death, after making specific devises including gifts in further trust to Individual 1, Individual 2, and Individual 3 (collectively, Individuals' Trusts), the trustee shall distribute the entire remaining trust estate, including undistributed income, if any to Spouse to be held in further trust known as Marital Trust, as provided in Paragraph 5.1(f). If Spouse is deceased, then the trustee shall hold the remaining trust estate in trust and establish Charitable Trust. Bank is the current trustee (Trustee) of Marital Trust, Charitable Trust, and Irrevocable Trust, discussed below. Upon the death of Individual 1, and before the entire principal of Individual 1's Trust estate has been distributed, the trustee shall distribute the trust estate then held in trust as provided in Paragraph 5.1(e), i.e., to Marital Trust while Spouse is living, and if Spouse is deceased, to Charitable Trust. The provisions for Individual 2 and Individual 3 are identical. Paragraph 5.1(f) governs Marital Trust. The trustee shall pay the entire net income from Marital Trust to Spouse annually in quarterly or more frequent installments during Spouse's lifetime and from the date of Decedent's death. In addition, the trustee shall pay to or for Spouse's benefit such sums from the principal of Marital Trust as in the sole discretion of the trustee shall be necessary or advisable from time to time for the health, maintenance, and support of Spouse. Paragraph 5.1(f)(3) specifically authorizes the personal representative of Decedent's estate to elect to have all of Marital Trust treated as qualified terminable interest property (QTIP) for federal estate tax purposes. Upon the death of Spouse, the trustee of Marital Trust shall transfer the principal of the trust estate to or for the benefit of such members of a class consisting of Spouse's lineal descendants, as Spouse may by Spouse's last will and testament appoint by specific reference to this power provided that such amount does not exceed x percent of the total value of the trust estate. This power shall not be exercised in favor of Spouse or Spouse's estate or Spouse's creditors or the creditors of Spouse's estate. The trustee shall hold and dispose the balance of the trust estate in Charitable Trust, as provided in Paragraph 5.2. Paragraph 5.2 governs Charitable Trust. Under Paragraph 5.2(b), Charitable Trust is created and shall be operated exclusively for religious, charitable, scientific, literary, or educational purposes within the meaning of § 501(c)(3) of the Internal Revenue Code (Code). The trustee is to distribute the net income annually, or more frequently to such religious, charitable, educational, and scientific organizations that are qualified public charities under §§ 501(c)(3) and 509 and in such amounts as a committee may determine in its sole discretion. Article VII, Paragraph 7.2(e) of Revocable Trust provides that the trustee of any trust created by this trust agreement shall be authorized for tax, administrative or investment purposes to: (i) divide any trust established hereunder, based upon the fair market values of the trust property at the time of division, into two or more separate trusts, the dispositive provisions of which shall, except as otherwise expressly provided here, be identical to those applicable to the trust prior to division. The trustee may divide any trust into separate trusts consisting of portions that for federal generation-skipping transfer (GST) tax purposes either have inclusion ratios of zero or one. On Date 5, Decedent created Irrevocable Trust for the benefit of Spouse. Irrevocable Trust provides that the trustee shall pay the entire net income of the trust estate at least annually to Spouse during Spouse's life. In addition, the trustee shall pay, from the principal of the trust estate, to or for Spouse's benefit, such sums as may be required for Spouse's health, education, support, and maintenance. Spouse shall have the power to require the trustee either to make property held in Irrevocable Trust productive of income or to convert the same into productive property within a reasonable time. Irrevocable Trust provides that Decedent, as settlor, will elect to treat the property in Irrevocable Trust as QTIP that qualifies for the marital deduction by the timely filing of a federal gift tax return. Upon Spouse's death, the trustee shall distribute the trust estate (or remainder thereof) then held in trust to the trustee of Charitable Trust. Bank and Spouse were the initial co-trustees of Irrevocable Trust and, currently, Bank is the sole Trustee. On Date 8, Decedent timely filed Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, to report the gifts to Irrevocable Trust. On the return, Decedent elected to treat all of the property in Irrevocable Trust as QTIP under § 2523(f). On Date 9, Trustee divided Marital Trust into GST Exempt Marital Trust and GST Non-Exempt Marital Trust. The terms of GST Exempt Marital Trust and GST Non-Exempt Marital Trust are identical to Marital Trust. On Date 10, Bank, as executor of Decedent's estate, timely filed Decedent's Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. On Date 11, Bank filed a supplemental Form 706. On the returns, Bank elected to treat all of the property in Marital Trust, as divided into GST Exempt Marital Trust and GST Non-Exempt Marital Trust, as QTIP under § 2056(b)(7). Prior to Decedent's death, Decedent and Spouse were living apart and became estranged. After Decedent's death, Bank opened Decedent's probate estate in the probate court in State. Spouse filed a Petition for Revocation in the probate court challenging Decedent's will on grounds of lack of testamentary capacity and undue influence by the Bank. Subsequently, the parties filed actions in two circuit courts, Court 1 and Court 2. After substantial litigation, the parties entered into a Settlement Agreement, dated Date 11. The primary purpose of the Settlement Agreement is to terminate Irrevocable Trust and Marital Trust and to preserve the trust funds to meet Decedent's intent to provide for Spouse and Charitable Trust. Under the Settlement Agreement, the parties agree to the following: 1. Spouse shall receive a principal distribution from Irrevocable Trust in the amount of $y in consideration for her resignation as co-trustee of Irrevocable Trust and in resolution of Spouse's claims for attorney's fees, costs, demands for principal invasion, and disputed co-trustee fees. 2. Spouse shall receive from Irrevocable Trust in exchange for her income interest therein, cash equal to the present value of her lifetime income interest in Irrevocable Trust as determined under § 25.2512-5 of the Gift Tax Regulations, as of the date of termination of Irrevocable Trust based upon (i) the § 7520 interest rate then in effect, (ii) the age of Spouse at that time, and (iii) the fair market value, as reported by Bank, as Trustee, of the assets of Irrevocable Trust as of the date of termination, less any and all liabilities and accrued and unpaid expenses of administration. 3. The balance of Irrevocable Trust shall be distributed to Charitable Trust. 4. Spouse shall receive from Marital Trust in exchange for her income interest therein, cash equal to the present value of her lifetime income interest in Marital Trust as determined under § 25.2512-5 as of the date of termination of Marital Trust based upon (i) the § 7520 interest rate then in effect, (ii) the age of Spouse at that time, and (iii) the fair market value, as reported by Bank, as Trustee, of the assets of Marital Trust as of the date of termination, less any and all liabilities and accrued and unpaid expenses of administration. 5. The balance of Marital Trust shall be distributed to Charitable Trust. 6. Until the disposition of Spouse's lifetime income interests, Spouse shall receive from both Irrevocable Trust and Marital Trust a minimum income distribution of $z, with the balance of the trust income to be paid at termination or in December of each year until termination. 7. Spouse shall disclaim, effective immediately following the termination, all of her interests in Revocable Trust and Individuals' Trusts created thereunder, causing the property remaining in such trusts upon the death of each Individual to pass to Charitable Trust and not Spouse, even if Spouse is living at that time. Courts 1 and 2 approved the Settlement Agreement on Date 12 and 13, respectively. Except for the distribution of y to Spouse and Spouse's resignation as co-trustee, the terms of the Settlement Agreement are subject to the issuance of a favorable private letter ruling by the Internal Revenue Service. Bank and Spouse represent that no deduction has been or will be allowed under § 170, 545(b)(2), 642(c), 2055, 2106(a)(2), or 2522 for any contribution, bequest, legacy, devise, or transfer to, or payment or set-aside by, Charitable Trust, made prior to the contemplated exchange. 1 ***** 1 Bank initially claimed an erroneous charitable deduction under § 170 with respect to a nominal contribution to Charitable Trust made for the purpose of enabling Charitable Trust to be a party to the Settlement Agreement; however, Bank timely filed an amended return that did not claim a deduction under § 170. ******* Under Statute 1, a nonjudicial settlement agreement among the trustee and trust beneficiaries is valid only to the extent the terms and conditions could be properly approved by the court. A nonjudicial settlement may not be used to produce a result not authorized by other provisions of this code, including, but not limited to, terminating or modifying a trust in an impermissible manner. Any interested person may request the court to approve or disapprove a nonjudicial settlement agreement. Statute 2 provides that a person may disclaim, in whole or in part, conditionally or unconditionally, any interest in or power over property, including a power of appointment. You request the following rulings: 1. The entire Irrevocable Trust constitutes QTIP under § 2523(f). 2. Each of GST Exempt Marital Trust and GST Non-Exempt Marital Trust constitute QTIP under § 2056(b)(7). 3. The principal distribution of $y from Irrevocable Trust to Spouse for maintenance and support does not constitute a disposition under § 2519 by Spouse for any part of her qualifying income interest in Irrevocable Trust. 4. Spouse's proposed dispositions of her qualifying income interests in Irrevocable Trust, GST Exempt Marital Trust, and GST Non-Exempt Marital Trust will constitute dispositions to which § 2519 applies. 5. Spouse's proposed dispositions of her qualifying income interests in Irrevocable Trust, GST Exempt Marital Trust, and GST Non-Exempt Marital Trust will not result in gifts by Spouse of those interests under § 2511 because Spouse will receive the present value of her qualifying income interest in each trust. 6. Spouse will receive gift tax deductions under § 2522 for any property deemed gifted by her to Charitable Trust pursuant to § 2519 upon the disposition of her qualifying income interests in Irrevocable Trust, GST Exempt Marital Trust, and GST Non-Exempt Marital Trust. 7. The disclaimer under State law by Spouse of her remote contingent remainder interests in Individual 1 Trust, Individual 2 Trust, and Individual 3 Trust will not result in any gifts by Spouse. 8. The property of Irrevocable Trust, GST Exempt Marital Trust, and GST Non-Exempt Marital Trust deemed transferred under § 2519 will not be includible in Spouse's gross estate under § 2044. 9. The dispositions by Spouse of her qualifying income interests in Irrevocable Trust, GST Exempt Marital Trust, and GST Non-Exempt Marital Trust do not constitute acts of self-dealing under § 4941. LAW Rulings 1 through 8 Section 2001(a) imposes a tax on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States. Section 2044(a) provides that the value of the gross estate shall include the value of any property in which the decedent had a qualifying income interest for life. Section 2044(b) provides that § 2044(a) applies to any property if a deduction was allowed with respect to the transfer of such property to the decedent under § 2056(b)(7) and § 2519 did not apply with respect to a disposition by the decedent of part or all of such property. Section 2056(a) provides that, for purposes of the tax imposed by § 2001, the value of the taxable estate shall, except as limited by § 2056(b), be determined by deducting from the value of the gross estate an amount equal to the value of any interest in property which passes or has passed from the decedent to the surviving spouse, but only to the extent that such interest is included in determining the value of the gross estate. Section 2056(b)(7)(B)(i) defines the term "qualified terminable interest property" as property: (I) which passes from the decedent; (II) in which the surviving spouse has a qualifying income interest for life as defined in § 2056(b)(7)(B)(ii); and (III) to which an election under § 2056(b)(7) applies. Section 2056(b)(7)(B)(ii) provides that the surviving spouse has a qualifying income interest for life if: (I) the surviving spouse is entitled to all the income from the property, payable annually or at more frequent intervals, or has a usufruct interest for life in the property; and (II) no person has a power to appoint any part of the property to any person other than the surviving spouse. Section 2056(b)(7)(B)(v) provides that an election under § 2056(b)(7) with respect to any property shall be made by the executor on the return of tax imposed by § 2001. Such an election, once made, shall be irrevocable. Section 20.2056(b)-7(b)(4)(i) of the Estate Tax Regulations provides that, in general, the election referred to in § 2056(b)(7)(B)(i)(III) and (v) is made on the return of tax imposed by § 2001. Section 2501(a)(1) imposes a tax on the transfer of property by gift by an individual. Section 2511(a) provides, in part, that the tax imposed by § 2501 shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible. Section 25.2511-1(c)(1) of the Gift Tax Regulations provides that the gift tax applies to gifts indirectly made. Thus, any transaction in which an interest in property is gratuitously passed or conferred upon another, regardless of the means or device employed, constitutes a gift subject to tax. Section 25.2511-2(a) provides that the gift tax is a primary and personal liability of the donor, is an excise upon his act of making the transfer, is measured by the value of the property passing from the donor, and attaches regardless of the fact that the identity of the donee may not then be known or ascertainable. Section 2512(a) provides that if the gift is made in property, the value thereof at the date of the gift is considered the amount of the gift. Section 2512(b) provides that where property is transferred for less than an adequate and full consideration in money or money's worth, the amount by which the value of the property exceeded the value of the consideration shall be deemed a gift. Section 25.2512-8 provides that transfers reached by the gift tax are not confined to those only which, being without a valuable consideration, accord with the common law concept of gifts, but embrace as well sales, exchanges, and other dispositions of property for a consideration to the extent that the value of the property transferred by the donor exceeds the value in money or money's worth of the consideration given therefor. However, a sale, exchange, or other transfer of property made in the ordinary course of business (a transaction which is bona fide, at arm's length, and free from any donative intent), will be considered as made for an adequate consideration in money or money's worth. Section 2519(a) provides that for purposes of chapter 11 and chapter 12, any disposition of all or part of a qualifying income interest for life in any property to which § 2519(a) applies is treated as a transfer of all interests in the property other than the qualifying income interest. Section 2519(b) provides that § 2519(a) applies to any property if a deduction was allowed with respect to the transfer of such property to the donor under § 2056(b)(7), or under § 2523(f). Section 25.2519-1(a) provides that a transfer of all or a portion of the income interest of the spouse in QTIP is a transfer by the spouse under § 2511. Section 25.2519-1(c)(1) provides that the amount treated as a transfer under § 2519 upon a disposition of all or part of a qualifying income interest for life in QTIP is equal to the fair market value of the entire property subject to the qualifying income interest, determined on the date of the disposition (including any accumulated income and not reduced by any amount excluded from total gifts under § 2503(b) with respect to the transfer creating the interest), less the value of the qualifying income interest in the property on the date of the disposition. The gift tax consequences of the disposition of the qualifying income interest are determined separately under § 25.2511-2. Section 25.2519-1(e) provides that the exercise by any person of a power to appoint qualified terminable interest property to the donee spouse is not treated as a disposition under § 2519, even though the donee spouse subsequently disposes of the appointed property. Section 25.2519-1(g), Example 1, describes a situation where, under D's will, a personal residence valued for estate tax purposes at $250,000 passes to S for life, and after S's death to D's children. D's executor made a valid election to treat the property as qualified terminable interest property. During 1995, when the fair market value of the property is $300,000 and the value of S's life interest in the property is $100,000, S makes a gift of S's entire interest in the property to D's children. The example concludes that pursuant to § 2519, S is treated as making a gift in the amount of $200,000 ( i.e., the fair market value of the qualified terminable interest property of $300,000 less the fair market value of S's qualifying income interest in the property of $100,000). In addition, under § 2511, S makes a gift of $100,000 (i.e., the fair market value of S's income interest in the property). Section 25.2519-1(g), Example 2, the facts are the same as in Example 1 except that during 1995, S sells S's income interest in the property to D's children for $100,000. Pursuant to § 2519, S is treated as making a gift of $200,000 ($300,000 less $100,000, the value of the qualifying income interest in the property). S does not make a gift of the income interest under § 2511, because the consideration received for S's income interest is equal to the value of the income interest. Section 2522(a) provides that in computing taxable gifts for the calendar year, there shall be allowed as a deduction the amount of all gifts made during such year to or for the use of charitable organizations described in § 2522(a). Section 2522(c)(1) provides that no deduction is allowed under § 2522 for a gift to or for the use of an organization or trust described in § 508(d) or § 4948(c)(4) subject to conditions specified in such sections. Section 2523(a) provides that where a donor transfers during the calendar year by gift an interest in property to a donee who at the time of the gift is the donor's spouse, there shall be allowed as a deduction in computing taxable gifts for the calendar year an amount with respect to such interest equal to its value. Section 2523(b) provides, in part, that where, on the lapse of time, on the occurrence of an event or contingency, or on the failure of an event or contingency to occur, such interest transferred to the spouse will terminate or fail, no deduction shall be allowed with respect to such interest if the donor retains in himself, or transfers or has transferred (for less than an adequate and full consideration in money or money's worth) to any person other than such donee spouse (or the estate of such spouse), an interest in such property, and if by reason of such retention or transfer the donor (or his heirs or assigns) or such person (or his heirs or assigns) may possess or enjoy any part of such property after such termination or failure of the interest transferred to the donee spouse. Section 2523(f)(1) provides that in the case of qualified terminable interest property, for purposes of § 2523(a), such property shall be treated as transferred to the donee spouse, and for purposes of § 2523(b)(1), no part of such property shall be considered as retained in the donor or transferred to any person other than the donee spouse. Section 2523(f)(2) provides that the term "qualified terminable interest property" means any property which is transferred by the donor spouse, in which the donee spouse has a qualifying income interest for life, and to which an election under § 2523(f)(4) applies. Section 2523(f)(3) provides that, for purposes of this subsection, rules similar to the rules of clauses (ii), (iii), and (iv) of § 2056(b)(7)(B) shall apply. Section 2523(f)(4)(A) provides that an election under § 2523(f) with respect to any property shall be made on or before the date prescribed by § 6075(b) for filing a gift tax return with respect to the transfer (determined without regard to § 6019(2)) and shall be made in such manner as the Secretary shall by regulations prescribe. Section 2523(f)(4)(B) provides that an election under this subsection, once made, shall be irrevocable. ANALYSIS Ruling 1 In this case, the terms of Irrevocable Trust provide that Spouse is entitled to all the income from the property in the trust, at least annually, during Spouse's lifetime. Further, no person will have a power to appoint any part of the property in Irrevocable Trust to any person other than Spouse. On a timely filed Form 709, Decedent elected to treat the assets of Irrevocable Trust as QTIP under § 2523(f). Accordingly, based upon the facts submitted and the representations made, we conclude that the entire Irrevocable Trust constitutes QTIP under § 2523(f). Ruling 2 In this case, the terms of Marital Trust, which was divided into GST Exempt Marital Trust and GST Non-Exempt Marital Trust, provide that Spouse is entitled to all the income from the property in the trust, at least annually, during Spouse's lifetime. Further, no person will have a power to appoint any part of the property in Marital Trust to any person other than Spouse. The terms of GST Exempt Marital Trust and GST Non-Exempt Marital Trust are identical to Marital Trust. Decedent's estate elected to treat the assets of Marital Trust as QTIP under § 2056(b)(7)(i). Accordingly, based upon the facts submitted and the representations made, we conclude that the entire Marital Trust, as divided into GST Exempt Marital Trust and GST Non-Exempt Marital Trust, constitutes QTIP under § 2056(b)(7)(B). Ruling 3 Spouse and Bank, as Trustees of Marital Trust and Irrevocable Trust, have been involved in substantial and continuing litigation. Pursuant to the provisions of Irrevocable Trust, Trustee possessed the power to appoint property from Irrevocable Trust to Spouse as may be required for Spouse's health, education, support, and maintenance. Under the terms of the Settlement Agreement, Trustee will distribute to Spouse $y, pursuant to the discretionary authority granted by Irrevocable Trust. The Courts' Orders, approving the Settlement Agreement, provide that the distribution of principal to Spouse was authorized under the provisions of Irrevocable Trust. As discussed above, Irrevocable Trust constitutes QTIP under § 2523(f)(2). The distribution to Spouse was made pursuant to a power to appoint QTIP to the donee spouse. See § 25.2519-1(e). Accordingly, based upon the facts submitted and the representations made, we conclude that the principal distribution of $y from Irrevocable Trust to Spouse for maintenance and support does not constitute a disposition under § 2519 by Spouse for any part of her qualifying income interest in Irrevocable Trust. Ruling 4 Section 2519(a) applies to any property if a deduction was allowed with respect to the transfer of such property to the donor under § 2056(b)(7), or under § 2523(f). As discussed above, a deduction was allowed under § 2056(b)(7) for property transferred to Marital Trust and under § 2523(f) for property transferred to Irrevocable Trust. Accordingly, based on the facts submitted and the representations made, Spouse's proposed disposition of her qualifying income interests in Irrevocable Trust, GST Exempt Marital Trust, and GST Non-Exempt Marital Trust will constitute dispositions to which § 2519 applies. Rulings 5 and 6 In this case, pursuant to the Settlement Agreement, Spouse will receive from Marital Trust in exchange for her income interest therein, cash equal to the present value of her lifetime interest in Marital Trust as determined under § 25.2512-5 as of the date of termination of Marital Trust based upon (i) the § 7520 interest rate then in effect, (ii) the age of Spouse at that time, and (iii) the fair market value, as reported by Bank as Trustee, of the assets of Marital Trust as of the date of termination, less any and all liabilities and accrued and unpaid expenses of administration. Accordingly, Spouse shall not transfer any portion of her income interest in the trusts. Based on the facts submitted and the representations made, Spouse's proposed disposition of her qualifying income interests in Irrevocable Trust, GST Exempt Marital Trust, and GST Non-Exempt Marital Trust will not result in gifts by Spouse of those interests under § 2511 because Spouse will receive the present value of her qualifying income interest in each trust. In this case, Spouse is treated as having transferred all interests in the property held in Irrevocable Trust, GST Exempt Marital Trust, and GST Non-Exempt Marital Trust, other than the qualifying income interest in each trust. Pursuant to the Settlement Agreement, these interests will be transferred to Charitable Trust. Charitable Trust will receive property equal to the full value of the respective remainder interest in Irrevocable Trust, GST Exempt Marital Trust, and GST Non-Exempt Marital Trust. Assuming Charitable Trust is an organization described in § 2522(a), the transfers by Spouse under § 2519 will qualify for the gift tax charitable deduction under § 2522(a). Accordingly, based on the facts submitted and the representations made, Spouse will receive gift tax deductions under § 2522 for any property deemed gifts by her to Charitable Trust pursuant to § 2519 upon the disposition of her qualifying income interests in Irrevocable Trust, GST Exempt Marital Trust, and GST Non-Exempt Marital Trust. Ruling 7 Individual 1, Individual 2, and Individual 3 are the life beneficiaries of a trust created for his or her benefit under Revocable Trust. Pursuant to the provisions of Settlement Agreement, Spouse will disclaim under State law her interest in the remote contingent remainder interests in each Individuals' Trusts. The proposed disclaimer provides that any remainder in each Individuals' Trusts will pass directly to Charitable Trust. In exchange for the disclaimer of Spouse's interest in the remote contingent remainder interests in each Individuals' Trust, Spouse received the agreement of Charitable Trust to the terms of the Settlement Agreement. The disclaimer was a bargained for element of Settlement Agreement, which was bona fide, at arm's length and free from any donative intent, and the consideration received by Spouse for her disclaimer was adequate and full consideration in money or money's worth. See § 25.2512-8. Settlement Agreement provides a result that is within a range of reasonable settlements, that is, the interests to be received by the parties (both as to the nature of the interests and their economic value) reflect the enforceable rights of the parties. Therefore, Spouse is not deemed to have made a gift of any interest in the remote contingent remainder interests of Individual 1 Trust, Individual 2 Trust, and Individual 3 Trust because Spouse received full and adequate consideration for Spouse's disclaimer of those interests. Accordingly, based on the facts submitted and the representations made, the disclaimer by Spouse under State law of her remote contingent remainder interests in Individual 1 Trust, Individual 2 Trust, and Individual 3 Trust will not result in any gifts by Spouse. Ruling 8 As stated above, the termination of Irrevocable Trust, GST Exempt Marital Trust, and GST Non-Exempt Marital Trust pursuant to the Settlement Agreement will result in Spouse making a deemed gift, under § 2519, of the entire fair market value of the assets in Irrevocable Trust, GST Exempt Marital Trust, and GST Non-Exempt Marital Trust and Marital Trust, as determined on the date of the disposition, less the value of the qualifying income interest. Section 2044(b)(2) provides that § 2044(a) does not apply to any property if § 2519 applies to the disposition of part or all of that property prior to Spouse's death. Therefore, based on the facts submitted and the representations made, the property of Irrevocable Trust, GST Exempt Marital Trust, and GST Non-Exempt Marital Trust deemed transferred under § 2519 will not be includible in Spouse's gross estate under § 2044(a) because of the application of § 2044(b)(2). Ruling 9 Section 509(a) provides that, with certain exceptions not relevant to this analysis, for purposes of the Internal Revenue Code, the term "private foundation" means a domestic or foreign organization described in section 501(c)(3). Section 4941(a)(1) imposes a 10 percent tax on each act of self-dealing between a disqualified person and a private foundation, which shall be paid by any disqualified person (other than a foundation manager acting only as such) who participates in the act of self-dealing. Section 4941(d)(1)(A) provides that "self-dealing" includes any direct or indirect sale or exchange, or leasing, of property between a private foundation and a disqualified person. Section 4946(a)(1) provides that for purposes of subchapter A of chapter 42, the term "disqualified person" includes, with respect to a private foundation, a person who is a substantial contributor to the foundation, and a member of the family of such a substantial contributor. Section 4946(a)(2) provides that "substantial contributor" means a person who is described in § 507(d)(2). Section 507(d)(2)(A) provides that the term "substantial contributor" means any person who contributed or bequeathed an aggregate amount of more than $ 5,000 to the private foundation, if such amount is more than 2 percent of the total contributions and bequests received by the foundation before the close of the taxable year of the foundation in which the contribution or bequest is received by the foundation from such person. In the case of a trust, the term "substantial contributor" also means the creator of the trust. Section 4947(a)(1) provides that for purposes of § 4941 and other provisions of chapter 42 of the Code, a trust which is not exempt from taxation under § 501(a), all of the unexpired interests in which are devoted to one or more of the purposes described in section 170(c)(2)(B), and for which a deduction was allowed under § 170, 545(b)(2), 642(c), 2055, 2106(a)(2), or 2522, shall be treated as an organization described in § 501(c)(3). Section 53.4941(d)-1(a) of the Foundation and Similar Excise Taxes Regulations provides that the term "self-dealing" does not include a transaction between a private foundation and a disqualified person where the disqualified person status arises only as a result of such transaction. For example, the bargain sale of property to a private foundation is not a direct act of self-dealing if the seller becomes a disqualified person only by reason of his becoming a substantial contributor as a result of the bargain element of the sale. Rev. Rul. 72-243, 1972-1 C.B. 233, provides that the proceeds received by the life tenant of a trust, in consideration for the transfer of the life tenant's entire interest in the trust to the remainder beneficiary, are treated as an amount realized from the sale or exchange of a capital asset under § 1222. The transaction pursuant to the Settlement Agreement, in which Spouse will receive the present value of her life income interests in Irrevocable Trust and Marital Trust, and Charitable Trust will receive the remaining trust assets, may be regarded in substance as an indirect exchange between Spouse and Charitable Trust similar to the one described in Rev. Rul. 72-243. Charitable Trust was not funded upon Decedent's death by Decedent, and no deduction has been or will be allowed under § 170, 545(b)(2), 642(c), 2055, 2106(a)(2), or 2522 with respect to Charitable Trust prior to the contemplated exchange. Therefore, prior to the exchange, Charitable Trust is not a trust described in § 4947(a)(1). As discussed above, Spouse will receive a gift tax deduction under § 2522 of more than $5,000 for the property deemed transferred by her to Charitable Trust (which will exceed 2 percent of all contributions to Charitable Trust), causing Charitable Trust to be subject to § 4947(a)(1) at that time. Spouse will be a disqualified person with respect to Charitable Trust when the Settlement Agreement is executed, as a substantial contributor to Charitable Trust and as a family member of the creator of Charitable Trust. Section 53.4941(d)-1(a) provides, however, that the term "self-dealing" does not include a transaction between a private foundation and a disqualified person where the disqualified person status arises only as a result of such transaction. Accordingly, § 4941 will not apply to the indirect exchange between Spouse and Charitable Trust pursuant to the Settlement Agreement in which Spouse will receive the present value of her life income interest in Irrevocable Trust, GST Exempt Marital Trust, and GST Non-Exempt Marital Trust, and Charitable Trust will receive the remaining trust assets. Based on the facts submitted and the representations made, we conclude that the indirect exchange between Spouse and Charitable Trust pursuant to the Settlement Agreement will not be treated as an act of self-dealing under § 4941. Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination. In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representative. Sincerely, Lorraine E. Gardner Lorraine E. Gardner Senior Counsel, Branch 4 Office of Associate Chief Counsel (Passthroughs & Special Industries) Enclosures (2) Copy for § 6110 purposes Copy of this letter
Private Letter Ruling Number: 202017016 Internal Revenue Service January 28, 2020 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202017016 Release Date: 4/24/2020 Index Number: 853.00-00, 853.01-00, 9100.00-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:FIP:B01 PLR-101771-20 Date: January 28, 2020 Dear ********: This ruling responds to a letter dated December 27, 2019 submitted on behalf of Taxpayer. Taxpayer requests an extension of time under sections 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations to make an election under section 853 of the Internal Revenue Code (the "Code") for the taxable year ended on Date 1. FACTS Taxpayer is registered as a non-diversified, closed-end investment company under the Investment Company Act of 1940, as amended, and has elected to be taxed as a regulated investment company ("RIC") under part I of subchapter M of chapter 1 of the Code. Taxpayer uses the calendar year as its taxable year and an accrual method of accounting for U.S. federal income tax purposes. For its taxable year ended Date 1, Taxpayer represents that it satisfied the requirements of section 853 and qualified to pass through to its shareholders the deduction or credit for the foreign taxes Taxpayer paid. Taxpayer contracts with Manager to provide or procure administrative and other services, including the preparation and filing of domestic and foreign tax reports and monitoring Taxpayer's compliance with all applicable tax laws and regulations. Manager is permitted to contract with other entities to fulfill its duties to Taxpayer and has contracted with Contractor to prepare and file for Taxpayer domestic and foreign tax reports, including income tax returns, and monitor compliance with subchapter M and all other applicable tax laws and regulations. Contractor, on behalf of Taxpayer, timely filed on Date 2 Taxpayer's Form 1120-RIC, U.S. Federal Income Tax Return for Regulated Investment Companies, for its taxable year ended Date 1. On this Form 1120-RIC, Taxpayer indicated that it met the requirements of section 853(a) and section 901(k) and elected to pass through to its shareholders the deduction or credit for foreign taxes that Taxpayer paid (Schedule K, item 10a). Consistent with that election, Taxpayer's Form 1120-RIC did not reflect a deduction (line 12) or a credit (Schedule J, line 3a) for Taxpayer's foreign taxes, and it did include Taxpayer's foreign taxes as an addition to the dividends paid deduction under section 853(b)(1)(B) (Schedule A, line 6). The Form 1120-RIC, however, was filed without Form 1118, Foreign Tax Credit--Corporations, attached thereto. Taxpayer became aware of the failure to include Form 1118 with its Form 1120-RIC on Date 3. Prior to the time that the return was due, the employee responsible for filing Taxpayer's federal income tax return, on behalf of Contractor, and the supervising employee responsible for reviewing the return, left the department. Because of the departures, the remaining employees responsible for filing the return on behalf of Contractor did not realize that a Form 1118 was not attached to Taxpayer's Form 1120-RIC when it was filed. Because Taxpayer's Form 1118 was not timely filed with Taxpayer's Form 1120-RIC, Taxpayer cannot make a timely election under section 853 absent the requested relief. In all taxable years prior to the taxable year ended Date 1, Taxpayer has qualified for and elected to pass through the foreign taxes it has paid in a given taxable year to its shareholders and properly included Form 1118 supporting such an election with its timely filed Form 1120-RIC. Taxpayer makes the following additional representations in connection with its request for an extension of time: 1. The request for relief was filed before the failure to make the regulatory election was discovered by the Service. 2. Granting the relief requested will not result in Taxpayer having a lower U.S. federal tax liability in the aggregate for all years to which the election applies than Taxpayer would have had if the election had been timely made (taking into account the time value of money). 3. Taxpayer does not seek to alter a return position for which an accuracy-related penalty has been or could have been imposed under section 6662 of the Code at the time Taxpayer requested relief and the new position requires or permits the regulatory election for which relief is requested. 4. Being fully informed of the required regulatory election and related tax consequences, Taxpayer did not choose to not file the election. 5. Taxpayer is not using hindsight in making the decision to seek the relief requested. No specific facts have changed since the due date for making the election that make the election advantageous to Taxpayer. 6. The period of limitations on assessment under section 6501(a) has not expired for Taxpayer for the taxable year in which the election should have been filed, nor for any taxable year(s) that would have been affected by the election had the election been timely filed. In addition, affidavits on behalf of Taxpayer and Manager have been provided as required by sections 301.9100-3(e)(2) and (3). LAW AND ANALYSIS Section 853(a) provides that a RIC, more than 50 percent of the value (as defined in section 851(c)(4)) of whose total assets at the close of the taxable year consist of stock or securities in foreign corporations, and which meets the requirements of section 852(a) for the taxable year, may elect the application of section 853 for the taxable year with respect to certain taxes paid by the RIC during the taxable year to foreign countries and possessions of the United States. Section 853(b)(1) provides that the effect of the election is to deny an electing RIC any deduction under section 164(a) or any credit under section 901 for these taxes. The electing RIC is allowed an addition to its dividends paid deduction for the taxable year for the amount of these taxes. Section 853(b)(2) further describes the effect of the election by providing that each shareholder of the RIC shall include in gross income and treat as paid by him his proportionate share of these taxes. Each shareholder shall treat as gross income from sources within the respective foreign countries and possessions of the United States the sum of his proportionate share of these taxes and the portion of any dividend paid by the RIC which represents income derived from sources within foreign countries and possessions of the United States. Section 853(c) provides that the amount to be treated by the shareholder as his proportionate share of taxes paid to any foreign country or possession of the United States, and gross income derived from sources within any foreign country or possession PLR-101771-20 4 of the United States, shall not exceed the amounts so reported by the RIC in a written statement furnished to the shareholder. Sections 1.853-4(a) and (b) of the Income Tax Regulations provide that an election under section 853 must be made not later than the time prescribed for filing the return (including extensions thereof), and is irrevocable with respect to the dividend (or portion thereof), and the foreign taxes paid with respect thereto, to which the election applies. Section 1.853-4(c) requires that certain information pertinent to the election, including, among other things, the date, form and contents of its notice to its shareholders, shall accompany the RIC' s timely filed federal income tax return for the taxable year on or with a modified Form 1118. Section 301.9100-1(c) provides that the Commissioner has discretion to grant a reasonable extension of time to make a regulatory election, or a statutory election (but no more than 6 months except in the case of a taxpayer who is abroad), under all subtitles of the Code except subtitles E, G, H, and I. Section 301.9100-1(b) defines a regulatory election as an election whose due date is prescribed by regulations or by a revenue ruling, a revenue procedure, a notice, or an announcement published in the Internal Revenue Bulletin. Section 301.9100-3(a) through (c)(1) sets forth rules that the Service generally will use to determine whether, under the particular facts and circumstances of each situation, the Commissioner will grant an extension of time for regulatory elections that do not meet the requirements of section 301.9100-2. Section 301.9100-3(a) provides that requests for relief subject to this section will be granted when the taxpayer provides the evidence (including affidavits described in section 301.9100-3(e)) to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and the grant of relief will not prejudice the interests of the Government. Section 301.9100-3(b) provides that a taxpayer is deemed to have acted reasonably and in good faith if the taxpayer (i) requests relief under this section before the failure to make the regulatory election is discovered by the Service; (ii) failed to make the election because of intervening events beyond the taxpayer's control; (iii) failed to make the election because, after exercising reasonable diligence (taking into account the taxpayer's experience and the complexity of the return or issue), the taxpayer was unaware of the necessity for the election; (iv) reasonably relied on the written advice of the Service; or (v) reasonably relied on a qualified tax professional, including a tax professional employed by the taxpayer, and the tax professional failed to make, or advise the taxpayer to make, the election. A taxpayer will be deemed to have not acted reasonably and in good faith if the taxpayer (i) seeks to alter a return position for which an accuracy-related penalty has been or could be imposed under section 6662 at the time the taxpayer requests relief and the new position requires or permits a regulatory election for which relief is requested; (ii) was informed in all material respects PLR-101771-20 5 of the required election and related tax consequences, but chose not to file the election; or (iii) uses hindsight in requesting relief. Section 301.9100-3(c)(1) provides that a reasonable extension of time to make a regulatory election will be granted only when the interests of the Government will not be prejudiced by the granting of relief. Section 301.9100-3(c)(1)(i) provides that the interests of the Government are prejudiced if granting relief would result in the taxpayer having a lower tax liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made (taking into account the time value of money). Section 301.9100-3(c)(1)(ii) provides that the interests of the Government are ordinarily prejudiced if the taxable year in which the regulatory election should have been made or any taxable years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under section 6501(a) before the taxpayer's receipt of a ruling granting relief under this section. CONCLUSIONS Based on the information submitted and representations made we conclude that Taxpayer has satisfied the requirements for granting a reasonable extension of time to elect under section 853 for the taxable year ended on Date 1. Accordingly, Taxpayer has 90 days from the date of this letter to make its intended election. This ruling is limited to the timeliness of the filing of the election in section 853 of the Code. This ruling's application is limited to the facts, representations, Code sections, and regulations cited herein. No opinion is expressed with regard to whether Taxpayer otherwise qualifies as a RIC under subchapter M of chapter 1 of the Code. No opinion is expressed with regard to whether the tax liability of Taxpayer is not lower in the aggregate for all years to which the election applies than such tax liability would have been if the election had been timely made (taking into account the time value of money). Upon audit of the federal income tax returns involved, the director's office will determine such tax liability for the years involved. If the director's office determines that such tax liability is lower, that office will determine the federal income tax effect. This ruling is directed only to the taxpayer that requested it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. In accordance with the terms of a power of attorney on file in this office, copies of this letter are being sent to your authorized representatives. Sincerely, _________________________ Steven Harrison Branch Chief, Branch 1 Office of Associate Chief Counsel (Financial Institutions and Products) cc:
Internal Revenue Service - Information Release IR-2024-51 IRS: San Diego area taxpayers impacted by severe storms, flooding qualify for tax relief; various deadlines postponed to June 17 February 27, 2024 Media Relations Office Washington, D.C. www.IRS.gov/newsroom Media Contact: 202.317.4000 Public Contact: 800.829.1040 IRS: San Diego area taxpayers impacted by severe storms, flooding qualify for tax relief; various deadlines postponed to June 17 IR-2024-51, Feb. 27, 2024 WASHINGTON -- The Internal Revenue Service announced today tax relief for individuals and businesses in parts of California affected by severe storms and flooding that began on Jan. 21. These taxpayers now have until June 17, 2024, to file various federal individual and business tax returns and make tax payments. The IRS is offering relief to any area designated by the Federal Emergency Management Agency (FEMA). Currently, this includes San Diego County. Individuals and households that reside or have a business in this locality qualify for tax relief. The same relief will be available to any other California localities added later to the disaster area. The current list of eligible localities is always available on the disaster relief page on IRS.gov. Filing and payment relief The tax relief postpones various tax filing and payment deadlines that occurred from Jan. 21, 2024, through June 17, 2024 (postponement period). As a result, affected individuals and businesses will have until June 17, 2024, to file returns and pay any taxes that were originally due during this period. This means, for example, that the June 17, 2024, deadline will now apply to: - Individual income tax returns and payments normally due on April 15, 2024. - 2023 contributions to IRAs and health savings accounts for eligible taxpayers. - 2024 estimated tax payments normally due on April 15, 2024. - Quarterly payroll and excise tax returns normally due on Jan. 31 and April 30, 2024. - Calendar-year partnership and S corporation returns normally due on March 15, 2024. - Calendar-year corporation and fiduciary returns and payments normally due on April 15, 2024. - Calendar-year tax-exempt organization returns normally due on May 15, 2024. Also, penalties for failing to make payroll and excise tax deposits due on or after Jan. 21, 2024, and before Feb. 5, 2024, will be abated as long as the deposits were made by Feb. 5, 2024. The IRS disaster relief page has details on other returns, payments and tax-related actions qualifying for relief during the postponement period. The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. These taxpayers do not need to contact the agency to get this relief. It is possible an affected taxpayer may not have an IRS address of record located in the disaster area, for example, because they moved to the disaster area after filing their return. In these kinds of unique circumstances, the affected taxpayer could receive a late filing or late payment penalty notice from the IRS for the postponement period. The taxpayer should call the number on the notice to have the penalty abated. In addition, the IRS will work with any taxpayer who lives outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are located in the affected area. Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 866-562-5227. This also includes workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization. Reminder about extensions The IRS urges anyone who needs an additional tax-filing extension, beyond June 17, 2024, for their 2023 federal income tax return to request it electronically by April 15, 2024. Though a disaster-area taxpayer qualifies to request an extension between April 15, 2024, and June 17, 2024, a request filed during this period can only be submitted on paper. Whether requested electronically or on paper, the taxpayer will then have until Oct. 15, 2024, to file, though payments are still due on June 17, 2024. Visit IRS.gov/extensions for details. Additional tax relief Individuals and businesses in a federally declared disaster area who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2024 return normally filed next year), or the return for the prior year (2023, normally filed this year). Taxpayers have extra time - up to six months after the due date of the taxpayer's federal income tax return for the disaster year (without regard to any extension of time to file) - to make the election. For individual taxpayers, this means Oct. 15, 2025. Be sure to write the FEMA declaration number - 4758-DR on any return claiming a loss. See Publication 547, Casualties, Disasters, and Thefts, for details. Qualified disaster relief payments are generally excluded from gross income. In general, this means that affected taxpayers can exclude from their gross income amounts received from a government agency for reasonable and necessary personal, family, living or funeral expenses, as well as for the repair or rehabilitation of their home, or for the repair or replacement of its contents. See Publication 525, Taxable and Nontaxable Income, for details. Additional relief may be available to affected taxpayers who participate in a retirement plan or individual retirement arrangement (IRA). For example, a taxpayer may be eligible to take a special disaster distribution that would not be subject to the additional 10% early distribution tax and allows the taxpayer to spread the income over three years. Taxpayers may also be eligible to make a hardship withdrawal. Each plan or IRA has specific rules and guidance for their participants to follow. The IRS may provide additional disaster relief in the future. The tax relief is part of a coordinated federal response to the damage caused by these storms and is based on local damage assessments by FEMA. For information on disaster recovery, visit DisasterAssistance.gov.
Treasury Decision 9943 Internal Revenue Service 2021-5 I.R.B. 577 T.D. 9943 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 Additional Guidance Regarding Limitation on Deduction for Business Interest Expense AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final regulations. SUMMARY: This document contains final regulations that provide additional guidance regarding the limitation on the deduction for business interest expense under section 163(j) of the Internal Revenue Code (Code) to reflect amendments made by the Tax Cuts and Jobs Act and the Coronavirus Aid, Relief, and Economic Security Act. Specifically, the regulations address the application of the limitation in contexts involving passthrough entities, regulated investment companies (RICs), and controlled foreign corporations. The regulations also provide guidance regarding the definitions of real property development, real property redevelopment, and syndicate. The regulations affect taxpayers that have business interest expense, particularly passthrough entities, their partners and shareholders, as well as foreign corporations and their United States shareholders. The regulations also affect RICs that have business interest income, RIC shareholders that have business interest expense, and corporations that are members of a consolidated group. DATES: Effective date: The regulations are effective on January 13, 2021. Applicability dates: For dates of applicability, see §§1.163-15(b), 1.163(j)-1(c)(4), 1.163(j)-2(k), 1.163(j)-6, 1.163(j)-7(m), 1.163(j)-10(f), 1.469-11(a)(1) and (4), and 1.1256(e)-2(d). FOR FURTHER INFORMATION CONTACT: Concerning §1.163-15, or 1.163(j)-2(d)(3), Nathaniel Kupferman, (202) 317-4855, or James Williford, (202) 317-3225; concerning §1.163(j)-1(b)(1)(iv), §1.163(j)-2(b)(3)(iii) or (iv) or §1.163(j)-10, John B. Lovelace, (202) 317-5357; concerning §1.163(j)-1(b)(22) or (b)(35), Steven Harrison, (202) 317-6842, or Michael Chin, (202) 317-6842; concerning §1.163(j)-6, §1.469-4 or §1.469-9, Vishal Amin, Brian Choi, or Jacob Moore, (202) 317-5279; concerning §1.163(j)-7, Azeka J. Abramoff, (202) 317-3800, or Raphael J. Cohen, (202) 317-6938; concerning §1.1256(e)-2, Pamela Lew, (202) 317-7053 (not toll-free numbers). SUPPLEMENTARY INFORMATION: Background I. Statutory Background This document contains amendments to the Income Tax Regulations (26 CFR part 1) under sections 163 (in particular, section 163(j)), 469, and 1256(e) of the Code. Section 163(j) was amended by Public Law 115-97, 131 Stat. 2054 (December 22, 2017), commonly referred to as the Tax Cuts and Jobs Act (TCJA), and the Coronavirus Aid, Relief, and Economic Security Act, Public Law 116-136, 134 Stat. 281 (March 27, 2020) (CARES Act). Section 13301(a) of the TCJA amended section 163(j) by removing prior section 163(j)(1) through (9) and adding section 163(j)(1) through (10). The provisions of section 163(j) as amended by section 13301 of the TCJA are effective for taxable years beginning after December 31, 2017. The CARES Act further amended section 163(j) by redesignating section 163(j)(10), as amended by the TCJA, as new section 163(j)(11), and adding a new section 163(j)(10) providing special rules for applying section 163(j) to taxable years beginning in 2019 or 2020. Section 163(j) generally limits the amount of business interest expense (BIE) that can be deducted in the current taxable year (sometimes referred to in this preamble as the current year). Under section 163(j)(1), the amount allowed as a deduction for BIE is limited to the sum of (1) the taxpayer's business interest income (BII) for the taxable year; (2) 30 percent of the taxpayer's adjusted taxable income (ATI) for the taxable year (30 percent ATI limitation); and (3) the taxpayer's floor plan financing interest expense for the taxable year (in sum, the section 163(j) limitation). As further described later in this Background section, section 163(j)(10), as amended by the CARES Act, provides special rules relating to the 30 percent ATI limitation for taxable years beginning in 2019 or 2020. Under section 163(j)(2), the amount of any BIE that is not allowed as a deduction in a taxable year due to the section 163(j) limitation is treated as business interest paid in the succeeding taxable year. The section 163(j) limitation applies to all taxpayers, except for certain small businesses that meet the gross receipts test in section 448(c) of the Code and certain trades or businesses listed in section 163(j)(7) (excepted trades or businesses). More specifically, section 163(j)(3) provides that the section 163(j) limitation does not apply to any taxpayer that meets the gross receipts test under section 448(c), other than a tax shelter prohibited from using the cash receipts and disbursements method of accounting under section 448(a)(3). Under section 163(j)(7), the excepted trades or businesses are the trade or business of providing services as an employee, electing real property businesses, electing farming businesses, and certain regulated utility businesses. Section 163(j)(4) provides special rules for applying section 163(j) in the case of passthrough entities. Section 163(j)(4)(A) requires that the section 163(j) limitation be applied at the partnership level, and that a partner's ATI be increased by the partner's share of excess taxable income, as defined in section 163(j)(4)(C), but not by the partner's distributive share of income, gain, deduction, or loss. Section 163(j)(4)(B) provides that the amount of partnership BIE exceeding the section 163(j)(1) limitation is carried forward at the partner level as excess business interest expense (EBIE). Section 163(j)(4)(B)(ii) provides that EBIE allocated to a partner and carried forward is available to be deducted in a subsequent year only to the extent that the partnership allocates excess taxable income to the partner. As further described later in this Background section, section 163(j)(10), as amended by the CARES Act, provides a special rule for EBIE allocated to a partner in a taxable year beginning in 2019. Section 163(j)(4)(B)(iii) provides rules for the adjusted basis in a partnership of a partner that is allocated EBIE. Section 163(j)(4)(D) provides that rules similar to the rules of section 163(j)(4)(A) and (C) apply to S corporations and S corporation shareholders. Section 163(j)(5) and (6) define "business interest" and "business interest income," respectively, for purposes of section 163(j). Generally, these terms include interest expense and interest includible in gross income that is properly allocable to a trade or business (as defined in section 163(j)(7)) and do not include investment income or investment expense within the meaning of section 163(d). The legislative history states that "a corporation has neither investment interest nor investment income within the meaning of section 163(d). Thus, interest income and interest expense of a corporation is properly allocable to a trade or business, unless such trade or business is otherwise explicitly excluded from the application of the provision." H. Rept. 115-466, at 386, fn. 688 (2017). Section 163(j)(8) defines ATI as the taxable income of the taxpayer (1) computed without regard to items not properly allocable to a trade or business; BIE and BII; net operating loss (NOL) deductions; deductions for qualified business income under section 199A; and deductions for depreciation, amortization, and depletion with respect to taxable years beginning before January 1, 2022, and (2) computed with such other adjustments as provided by the Secretary of the Treasury or his delegate (Secretary). As noted previously, section 163(j)(1) includes floor plan financing interest in computing the amount of deductible business interest. Section 163(j)(9) defines "floor plan financing interest" and "floor plan financing indebtedness." These provisions allow taxpayers incurring interest expense for the purpose of securing an inventory of motor vehicles held for sale or lease to deduct the full expense without regard to the section 163(j) limitation. Under section 163(j)(10)(A)(i), the amount of BIE that is deductible under section 163(j)(1) for taxable years beginning in 2019 or 2020 is computed using 50 percent, rather than 30 percent, of the taxpayer's ATI for the taxable year (50 percent ATI limitation). A taxpayer may elect not to apply the 50 percent ATI limitation to any taxable year beginning in 2019 or 2020, and instead apply the 30 percent ATI limitation. This election must be made separately for each taxable year. Once the taxpayer makes the election, the election may not be revoked without the consent of the Secretary. See section 163(j)(10)(A)(iii). Sections 163(j)(10)(A)(ii)(I) and 163(j)(10)(A)(iii) provide that, in the case of a partnership, the 50 percent ATI limitation does not apply to partnerships for taxable years beginning in 2019, and the election to not apply the 50 percent ATI limitation may be made only for taxable years beginning in 2020, and may be made only by the partnership. Under section 163(j)(10)(A)(ii)(II), however, a partner treats 50 percent of its allocable share of a partnership's EBIE for 2019 as BIE in the partner's first taxable year beginning in 2020 that is not subject to the section 163(j) limitation (50 percent EBIE rule). The remaining 50 percent of the partner's allocable share of the partnership's EBIE remains subject to the section 163(j) limitation applicable to EBIE carried forward at the partner level. A partner may elect out of the 50 percent EBIE rule. Section 163(j)(10)(B)(i) allows a taxpayer to elect to substitute its ATI for the last taxable year beginning in 2019 (2019 ATI) for the taxpayer's ATI for a taxable year beginning in 2020 (2020 ATI) in determining the taxpayer's section 163(j) limitation for the taxable year beginning in 2020. Section 163(j)(11) provides cross-references to provisions requiring that electing farming businesses and electing real property businesses excepted from the section 163(j) limitation use the alternative depreciation system (ADS), rather than the general depreciation system, for certain types of property. The required use of ADS results in the inability of these electing trades or businesses to use the additional first-year depreciation deduction under section 168(k) for those types of property. II. Published Guidance On April 16, 2018, the Department of the Treasury (Treasury Department) and the IRS published Notice 2018-28, 2018-16 I.R.B. 492, which described regulations intended to be issued under section 163(j). On December 28, 2018, the Treasury Department and the IRS (1) published proposed regulations under section 163(j), as amended by the TCJA, in a notice of proposed rulemaking (REG-106089-18) (2018 Proposed Regulations) in the Federal Register (83 FR 67490), and (2) withdrew the notice of proposed rulemaking (1991-2 C.B. 1040) published in the Federal Register on June 18, 1991 (56 FR 27907 as corrected by 56 FR 40285 (August 14, 1991)) to implement rules under section 163(j) before its amendment by the TCJA. On September 14, 2020, the Treasury Department and the IRS published final regulations under section 163(j) and other sections in the Federal Register (85 FR 56686) (T.D. 9905) to finalize most sections of the 2018 Proposed Regulations. Concurrently with the publication of T.D. 9905, the Treasury Department and the IRS published additional proposed regulations under section 163(j) in a notice of proposed rulemaking (REG-107911-18) in the Federal Register (85 FR 56846) (2020 Proposed Regulations) to provide additional guidance regarding the section 163(j) limitation in response to certain comments received in response to the 2018 Proposed Regulations and to reflect the amendments made by the CARES Act. The 2020 Proposed Regulations provided proposed rules: for allocating interest expense associated with debt proceeds of a partnership or S corporation to supplement the rules in §1.163-8T regarding the allocation of interest expense for purposes of section 163(d) and (h) and section 469 (proposed §§1.163-14 and 1.163-15); amending the definition of ATI and permitting certain RICs to pay section 163(j) interest dividends (proposed §1.163(j)-1); amending the rules for applying section 163(j)(4) to partnerships and S corporations (proposed §1.163(j)-6); re-proposing the proposed rules for applying the section 163(j) limitation to foreign corporations and United States shareholders (proposed §1.163(j)-7) and to foreign persons with effectively connected income (proposed §1.163(j)-8); amending the definition of real property trade or business (proposed §1.469-9); amending the rules for determining tax shelter status and providing guidance on the election to use 2019 ATI to determine 2020 section 163(j) limitation (proposed §§1.163(j)-2 and 1.1256(e)-2); and amending the corporate look-through rules as applicable to tiered structures (proposed §1.163(j)-10). All written comments received in response to the 2020 Proposed Regulations are available at www.regulations.gov or upon request. After consideration of the comments received, this Treasury decision adopts most of the 2020 Proposed Regulations as revised in response to the comments, which are described in the Summary of Comments and Explanation of Revisions section. The Treasury Department and the IRS plan to finalize other portions of the 2020 Proposed Regulations separately, to allow additional time to consider the comments received. On April 27, 2020, the Treasury Department and the IRS published Revenue Procedure 2020-22, 2020-18 I.R.B. 745, to provide the time and manner of making a late election, or withdrawing an election, under section 163(j)(7)(B) to be an electing real property trade or business or under section 163(j)(7)(C) to be an electing farming business for taxable years beginning in 2018, 2019, or 2020. Revenue Procedure 2020-22 also provides the time and manner of making or revoking elections provided by the CARES Act under section 163(j)(10) for taxable years beginning in 2019 or 2020. These elections are: (1) to not apply the 50 percent ATI limitation under section 163(j)(10)(A)(iii); (2) to use the taxpayer's 2019 ATI to calculate the taxpayer's section 163(j) limitation for any taxable year beginning in 2020 under section 163(j)(10)(B); and (3) for a partner to elect out of the 50 percent EBIE rule under section 163(j)(10)(A)(ii)(II). Summary of Comments and Explanation of Revisions I. Overview The Treasury Department and the IRS received approximately 20 written comments in response to the 2020 Proposed Regulations. Most of the comments addressing the 2020 Proposed Regulations are summarized in this Summary of Comments and Explanation of Revisions section. However, comments merely summarizing or interpreting the 2020 Proposed Regulations generally are not discussed in this preamble. Additionally, comments outside the scope of this rulemaking are generally not addressed in this Summary of Comments and Explanation of Revisions section. The Treasury Department and the IRS continue to study comments on certain issues related to section 163(j), including issues that are beyond the scope of the final regulations, and may discuss those comments if future guidance on those issues is published. The final regulations retain the same basic structure as the 2020 Proposed Regulations, with the revisions described in this Summary of Comments and Explanation of Revisions section. II. Notice 89-35 and Comments on and Changes to Proposed §1.163-15: Debt Proceeds Distributed From Any Taxpayer Account or From Cash Section 1.163-15 of the 2020 Proposed Regulations supplemented the rules in §1.163-8T, temporary regulations issued prior to TCJA, regarding debt proceeds distributed from any taxpayer account or from cash proceeds. Consistent with section VI of Notice 89-35, 1989-1 C.B. 675, proposed §1.163-15 provided that taxpayers may treat any expenditure made from an account of the taxpayer, or from cash, within 30 days before or after debt proceeds are deposited in any account of the taxpayer, or received in cash, as made from such proceeds. Section 1.163-14 of the 2020 Proposed Regulations related to sections I-V of Notice 89-35. The Treasury Department and the IRS received no comments with respect to proposed §1.163-15. Accordingly, the final regulations adopt this section unchanged. Additional consideration is being given to §1.163-14, which is not being finalized in these final regulations; thus Notice 89-35 remains in effect. III. Comments on and Changes to §1.163-1: Definitions A. Adjustments to Tentative Taxable Income Part III.A.1.a of this Summary of Comments and Explanation of Revisions section provides an overview of the negative adjustments to tentative taxable income in §1.163(j)-1(b)(1)(ii)(C) through (E) and the alternative computations for those negative adjustments in proposed §1.163(j)-1(b)(1)(iv)(B) and (E). Part III.A.1.b of this Summary of Comments and Explanation of Revisions section provides an overview of the special rules in §1.163(j)-1(b)(1)(iv)(A), (C), and (D) for the application of §1.163(j)-1(b)(1)(ii)(C) through (E). Part III.A.2 of this Summary of Comments and Explanation of Revisions section summarizes the comments received on §1.163(j)-1(b)(1)(ii)(C) through (E) and the alternative computations in proposed §1.163(j)-1(b)(1)(iv)(B) and (E). Part III.A.3 of this Summary of Comments and Explanation of Revisions section summarizes the comments received on the special rules in §1.163(j)-1(b)(1)(iv)(A), (C), and (D). In response to comments received, the final regulations provide a number of clarifications to the ATI computation and provide new examples demonstrating their application. 1. Overview a. Section 1.163(j)-1(b)(1)(ii)(C) through (E) and Proposed §1.163(j)-1(b)(1)(iv)(B) and (E) Section 1.163(j)-1(b)(43) provides that tentative taxable income is the amount to which adjustments are made in computing ATI. Section 1.163(j)-1(b)(1)(i) provides for certain additions to tentative taxable income in computing ATI. For example, §1.163(j)-1(b)(1)(i)(D) provides that, subject to the rule in §1.163(j)-1(b)(1)(iii), any depreciation under section 167, section 168, or former section 168 for taxable years beginning before January 1, 2022, is added back to tentative taxable income to compute ATI. Section 1.163(j)-1(b)(1)(i)(E) and (F) provide similar rules for amortization and depletion, respectively. Section 1.163(j)-1(b)(1)(ii) provides for certain subtractions from (or negative adjustments to) tentative taxable income in computing ATI. For example, §1.163(j)-1(b)(1)(ii)(C) provides that, if property is sold or otherwise disposed of, the greater of the allowed or allowable depreciation, amortization, or depletion of the property for the taxpayer (or, if the taxpayer is a member of a consolidated group, the consolidated group) for taxable years beginning after December 31, 2017, and before January 1, 2022 (such years, the EBITDA period), with respect to such property is subtracted from tentative taxable income. Section 1.163(j)-1(b)(1)(ii)(D) provides that, with respect to the sale or other disposition of stock of a member of a consolidated group by another member, the investment adjustments under §1.1502-32 with respect to such stock that are attributable to deductions described in §1.163(j)-1(b)(1)(ii)(C) are subtracted from tentative taxable income. Section 1.163(j)-1(b)(1)(ii)(E) provides that, with respect to the sale or other disposition of an interest in a partnership, the taxpayer's distributive share of deductions described in §1.163(j)-1(b)(1)(ii)(C) with respect to property held by the partnership at the time of such sale or other disposition is subtracted from tentative taxable income to the extent such deductions were allowable under section 704(d). See the preamble to T.D. 9905 for a discussion of the rationale for these adjustments. The preamble to T.D. 9905 noted that, in the 2018 Proposed Regulations, §1.163(j)-1(b)(1)(ii)(C) incorporated a "lesser of" standard. In other words, the lesser of (i) the amount of gain on the sale or other disposition of property, or (ii) the amount of depreciation deductions with respect to such property for the EBITDA period, was required to be subtracted from tentative taxable income to determine ATI. As explained in the preamble to T.D. 9905, commenters raised several questions and concerns regarding this "lesser of" standard. T.D. 9905 removed the "lesser of" approach due in part to concerns that this approach would be more difficult to administer than the approach reflected in T.D. 9905. However, the Treasury Department and the IRS recognize that, in certain cases, the "lesser of" approach might not create administrative difficulties for taxpayers. Thus, the 2020 Proposed Regulations permitted taxpayers to choose whether to compute the amount of their adjustment upon the disposition of property, member stock, or partnership interests using a "lesser of" standard. See proposed §1.163(j)-1(b)(1)(iv)(B) and (E). The Treasury Department and the IRS requested comments on the "lesser of" approach, including how such an approach should apply to dispositions of member stock and partnership interests. The comments received on the "lesser of" approach are summarized in part III.A.2 of this Summary of Comments and Explanation of Revisions section. b. Section 1.163(j)-1(b)(1)(iv)(A) through (D) Section 1.163(j)-1(b)(1)(iv) provides special rules for the application of §1.163(j)-1(b)(1)(ii)(C) through (E). Section 1.163(b)(1)(iv)(A)( 1 ) provides that, for purposes of §1.163(j)-1(b)(1)(ii)(C) through (E), the term "sale or other disposition" does not include a transfer of an asset to an acquiring corporation in a transaction to which section 381(a) of the Code applies, except as otherwise provided in §1.163(j)-1(b)(1)(iv)(A). Section 1.163(j)-1(b)(1)(iv)(A)( 2 ) provides that, for purposes of §1.163(j)-1(b)(1)(ii)(C) and (D), the term "sale or other disposition" excludes all intercompany transactions, within the meaning of §1.1502-13(b)(1)(i). This provision reflects the general treatment of a consolidated group as a single entity for purposes of section 163(j). Section 1.163(j)-1(b)(1)(iv)(A)( 3 ) provides that, notwithstanding any other rule in §1.163(j)-1(b)(1)(iv)(A) (including the rule regarding section 381(a) transactions), any transaction in which a member leaves a consolidated group is treated as a "sale or other disposition" for purposes of §1.163(j)-1(b)(1)(ii)(C) and (D), unless the transaction is an acquisition described in §1.1502-13(j)(5)(i)(A). Section 1.163(j)-1(b)(1)(iv)(B) provides that, for purposes of §1.163(j)-1(b)(1)(ii)(C) through (E), the amount of a consolidated group's adjustment under §1.163(j)-1(b)(1)(ii)(C) is computed by reference to the depreciation, amortization, or depletion deductions of the group. The 2020 Proposed Regulations added §1.163(j)-1(b)(1)(iv)(B)( 2 ) to clarify the computation under proposed §1.163(j)-1(b)(iv)(E)( 1 ) for consolidated groups. Section 1.163(j)-1(b)(1)(iv)(C) provides successor asset rules for certain intercompany transactions. More specifically, if deductions described in §1.163(j)-1(b)(1)(ii)(C) are allowed or allowable to a consolidated group member (S), the depreciable property or S's stock is transferred to another member (S1), and the transferor's basis in the S1 stock received in the intercompany transaction is determined, in whole or in part, by reference to its basis in the transferred property or S stock, then the S1 stock is treated as a successor asset for purposes of the negative adjustments to tentative taxable income upon the disposition of member stock. Section 1.163(j)-1(b)(1)(iv)(D) contains anti-duplication rules. For example, §1.163(j)-1(b)(1)(iv)(D)( 2 ) provides that depreciation, amortization, or depletion deductions allowed or allowable for a corporation for a consolidated return year of a group are disregarded in applying §1.163(j)-1(b)(1)(iv)(D) to a separate return year of that corporation. Section 1.163(j)-1(b)(1)(iv)(D)( 2 ) also provides an example in which S deconsolidates from a consolidated group (Group 1) (thereby triggering an adjustment under §§1.163(j)-1(b)(1)(ii)(D) and 1.163(j)-1(b)(1)(iv)(A)( 3 )) and then sells the depreciable property. The example states that no further adjustment is required under §1.163(j)-1(b)(1)(ii)(C) upon the asset disposition with regard to the amounts included in Group 1. 2. Comments on §1.163(j)-1(b)(1)(ii)(C) through (E) and Proposed §1.163(j)-1(b)(1)(iv)(B) and (E) a. Adoption of a "lesser of" standard Several commenters contended that the final regulations should continue to allow taxpayers to choose whether to compute the amount of their adjustment upon the disposition of property, member stock, or partnership interests using a "lesser of" standard, as in proposed §1.163(j)-1(b)(1)(iv)(B) and (E). Commenters asserted that such an approach would ameliorate the adverse impact of the subtractions from tentative taxable income in §1.163(j)-1(b)(1)(ii)(C) through (E). One commenter further asserted that a "lesser of" option is preferable to the approach in T.D. 9905 because the latter could create an incentive for taxpayers to retain assets solely because the adverse tax consequences of disposing of the assets outweigh the cost of keeping the assets. The Treasury Department and the IRS agree with these comments, and the final regulations retain a "lesser of" option for purposes of the negative adjustments to tentative taxable income in §1.163(j)-1(b)(1)(ii)(C) through (E). The final regulations also update the special rules in §1.163(j)-1(b)(1)(iv)(A), (C), and (D) to add cross-references to the "lesser of" computations in §1.163(j)-1(b)(1)(iv)(B) and (E). b. Modification of the "lesser of" standard Several commenters also recommended modifications to the "lesser of" rules in proposed §1.163(j)-1(b)(1)(iv)(B) and (E). For example, one commenter stated that the proposed "lesser of" approach is likely to be less accurate for dispositions of member stock or partnership interests than for asset dispositions because the gain prong of the "lesser of" computation in either case is based on the gain in the member stock or partnership interests, respectively, rather than on the gain that would be recognized on the sale of the underlying assets. The Treasury Department and the IRS received recommendations regarding several alternative approaches. Under one alternative, the negative adjustment under the gain prong of the "lesser of" computation for dispositions of member stock or partnership interests would equal the amount of the negative adjustment if the assets of the subsidiary or partnership were sold. However, the commenter acknowledged that this "deemed asset sale" approach could create unnecessary administrative difficulties and lead to valuation disputes by requiring asset valuations upon dispositions of member stock or partnership interests. Among other alternative approaches, a commenter recommended that the gain prong of the "lesser of" computation for dispositions of member stock should be based on the excess of tax depreciation over economic depreciation with respect to the underlying assets. The commenter based this approach on the theory that only stock gain that reflects non-economic depreciation should give rise to a negative basis adjustment. The commenter who recommended this approach suggested several different computational methods for this alternative approach, but acknowledged that this approach likely would not be appropriate for certain types of assets (for example, real estate or purchased goodwill) because metrics that might be used under this approach, such as earnings and profits basis or book value, would not be a good proxy for fair market value for such assets. Another commenter recommended revising the proposed "lesser of" computation for dispositions of partnership interests such that certain negative adjustments would be made at the partnership level and others would be made at the partner level. After considering these comments, the Treasury Department and the IRS have determined that the proposed "lesser of" computations strike a proper balance between accuracy and administrability. In particular, as one commenter noted, there would be unnecessary administrative complexity under the first suggested alternative approach. This complexity includes the need for separate asset valuations that would be costly and may be subject to dispute, resulting in additional controversy between taxpayers and the IRS. The second proposed approach would require an accurate determination of economic depreciation. However, as the commenter acknowledged, there is no single, simple method for accurately determining economic depreciation. Additionally, with regard to economic depreciation, different types of assets depreciate at different rates, and some assets, such as land or certain improvements to land, may not depreciate at all. As a result, basing the gain prong of the "lesser of" computation on non-economic depreciation would create less certainty, and would not clearly be a more accurate approach, than the proposed "lesser of" standard. Requiring certain adjustments at the partner level and other adjustments at the partnership level also would add further complexity to the "lesser of" computations. Thus, the final regulations adopt the approach in proposed §1.163(j)-1(b)(1)(iv)(B) and (E). However, the Treasury Department and the IRS acknowledge that gain on upper-tier member stock generally becomes further removed from asset gain at each additional tier within a consolidated group. Therefore, for purposes of the "lesser of" computation in §1.163(j)-1(b)(1)(iv)(E)( 2 ), the final regulations provide that the only stock gain that is relevant is the gain that is deemed recognized on the stock of the member holding the item of property (or the stock of a successor). The Treasury Department and the IRS appreciate the comments received on the proposed "lesser of" rules and will continue to consider these comments for purposes of potential future guidance. c. Limitation of negative adjustments to tax benefit from adding back depreciation, amortization, and depletion deductions to tentative taxable income The additions to tentative taxable income for depreciation, amortization, and depletion deductions during the EBITDA period (see §1.163(j)-1(b)(1)(i)(D) through (F), respectively) do not necessarily increase a taxpayer's ability to deduct BIE. For example, the taxpayer's section 163(j) limitation already may be sufficiently high to permit a deduction of all of the taxpayer's BIE even without such additions to tentative taxable income. Commenters have stated that, in such a situation, the adjustments in §1.163(j)-1(b)(1)(ii)(C) through (E) and proposed §1.163(j)-1(b)(1)(iv)(B) and (E) could inappropriately decrease the amount of the taxpayer's BIE deduction in the year the property, member stock, or partnership interest is sold because the taxpayer derived no benefit from the adjustment under §1.163(j)-1(b)(1)(i)(D) through (F) in a prior taxable year. The commenters asserted that this detrimental outcome is inconsistent with both congressional intent and the statement in the preamble to T.D. 9905 that §1.163(j)-1(b)(1)(ii)(C) through (E) and proposed §1.163(j)-1(b)(1)(iv)(B) and (E) are intended to ensure that the positive adjustment to tentative taxable income for depreciation deductions results in a timing benefit. See part II.A.5 of the Summary of Comments and Explanation of Revisions in the preamble to T.D. 9905. Moreover, if a taxpayer that did not benefit from a positive adjustment under §1.163(j)-1(b)(1)(i)(D) through (F) were required to reduce its tentative taxable income in the year of disposition, the negative adjustment could put the taxpayer in a worse position than if the depreciation, amortization, or depletion deductions were not added back to tentative taxable income in the first place. The commenters thus recommended providing that a negative adjustment under §1.163(j)-1(b)(1)(ii)(C) through (E) and proposed §1.163(j)-1(b)(1)(iv)(B) and (E) is required only to the extent the prior-year addback under §1.163(j)-1(b)(1)(i)(D) through (F) resulted in an increase in deductible BIE. The Treasury Department and the IRS agree with this recommendation. Thus, the final regulations provide that a negative adjustment to tentative taxable income under §1.163(j)-1(b)(1)(ii)(C) through (E) or §1.163(j)-1(b)(1)(iv)(B) or (E) is reduced to the extent the taxpayer establishes that the additions to tentative taxable income under §1.163(j)-1(b)(1)(i)(D) through (F) in a prior taxable year did not result in an increase in the amount allowed as a deduction for BIE for such year. The final regulations also provide examples illustrating the application of this rule. d. Capitalized depreciation T.D. 9905 provides that, for the additions to tentative taxable income in §1.163(j)-1(b)(1)(i), amounts of depreciation, amortization, or depletion that are capitalized under section 263A of the Code (collectively, capitalized depreciation) during the taxable year are deemed to be included in the computation of the taxpayer's tentative taxable income for such year, regardless of when the capitalized amount is recovered. See §1.163(j)-1(b)(1)(iii). Thus, a taxpayer makes a positive adjustment to tentative taxable income under §1.163(j)-1(b)(1)(i)(D) through (F) when the taxpayer capitalizes the depreciation, amortization, or depletion, rather than later when the capitalized amount is recovered (for example, through cost of goods sold). Commenters requested clarification regarding the application of §§1.163(j)-1(b)(1)(ii)(C) through (E) and 1.163(j)-1(b)(1)(iv) to capitalized depreciation. For example, commenters asked whether the adjustments in §1.163(j)-1(b)(1)(ii)(C) and proposed §1.163(j)-1(b)(iv)(B) and (E) occur upon the disposition of the depreciated property or upon the disposition of the property into which the depreciation was capitalized. A commenter asked the same question regarding the application of the successor asset rules in §1.163(j)-1(b)(1)(iv)(C). A commenter also requested clarification as to how the negative adjustments in §1.163(j)-1(b)(1)(ii)(D) and proposed §1.163(j)-1(b)(1)(iv)(E)( 2 ) apply to capitalized depreciation because there are no basis adjustments under §1.1502-32 when depreciation is capitalized. The Treasury Department and the IRS have determined that a negative adjustment under §1.163(j)-1(b)(1)(ii)(C) or proposed §1.163(j)-1(b)(1)(iv)(B) or (E) would be required upon the sale or other disposition of property with respect to which depreciation, amortization, or depletion was allowed or allowable during the EBITDA period, because it is the allowed or allowable depreciation, amortization, or depletion of that property that is added back to tentative taxable income. The final regulations have been modified accordingly. For the same reason, the final regulations also clarify that the successor asset rules in §1.163(j)-1(b)(1)(iv)(C) would apply if such property subsequently were transferred to another member (S1) in an intercompany transaction in which the transferor receives S1 stock. The Treasury Department and the IRS are continuing to consider how the negative adjustments in §1.163(j)-1(b)(1)(ii)(D) and proposed §1.163(j)-1(b)(1)(iv)(E)( 2 ) apply to capitalized depreciation. A commenter also expressed concern that, if a taxpayer does not elect to apply T.D. 9905 retroactively, then capitalized depreciation arising in taxable years beginning before November 13, 2020, would not be added back to tentative taxable income, but negative adjustments under §1.163(j)-1(b)(1)(ii)(C) through (E) still would be required for any "allowable" depreciation, including capitalized depreciation, if the relevant property, member stock, or partnership interest were disposed of in a year to which T.D. 9905 applies. The commenter thus recommended that negative adjustments under §1.163(j)-1(b)(1)(ii)(C) through (E) and proposed §1.163(j)-1(b)(1)(iv)(B) and (E) not apply to capitalized depreciation amounts that were incurred in a taxable year that began before November 13, 2020, unless the taxpayer included a positive adjustment reflecting such amounts in calculating its tentative taxable income. As discussed in part III.A.2.c of this Summary of Comments and Explanation of Revisions section, the final regulations adopt the recommendation that a negative adjustment to tentative taxable income under §1.163(j)-1(b)(1)(ii)(C) through (E) and proposed §1.163(j)-1(b)(1)(iv)(B) and (E) be reduced to the extent the taxpayer establishes that the additions to tentative taxable income under §1.163(j)-1(b)(1)(i)(D) through (F) in a prior taxable year resulted in no increase in deductible BIE in that year. If a taxpayer does not elect to apply T.D. 9905 retroactively, the taxpayer will have no additions to tentative taxable income under §1.163(j)-1(b)(1)(i)(D) through (F) in a prior taxable year (and, thus, no increase in deductible BIE in that year) with respect to capitalized depreciation. Because the final regulations already address the commenter's concern, the Treasury Department and the IRS have not incorporated the commenter's specific recommendation. e. Dispositions by consolidated groups The final regulations also revise §§1.163(j)-1(b)(1)(iv)(A)( 2 ), 1.163(j)-1(b)(1)(iv)(B)( 2 ), and 1.163(j)-1(b)(1)(iv)(E) to clarify that the amount of gain taken into account by a consolidated group upon a "sale or other disposition" includes the net gain the group would take into account, including as a result of intercompany transactions. One commenter contended that this clarification is needed to ensure that the amount of gain taken into account by a consolidated group for purposes of the negative adjustments in proposed §§1.163(j)-1(b)(1)(iv)(B)( 2 ) and 1.163(j)-1(b)(1)(iv)(E) is the same regardless of whether the property, member stock, or partnership interest is sold in an intercompany transaction before leaving the group (that is, to achieve single-entity treatment of the group). For example, assume that S would recognize $100 of gain upon the sale of property to a nonmember. However, rather than sell the property directly to a nonmember, S first might sell the property to member B and recognize $60 of gain, and B then could sell the property to the nonmember and recognize an additional $40 of gain. In either case, the group would recognize a net gain of $100 in relation to the property, and that same $100 should be relevant in determining the amount of any negative adjustment to ATI. 3. Comments on §1.163(j)-1(b)(1)(iv)(A), (C), and (D) a. Section 1.163(j)-1(b)(1)(iv)(A) Commenters questioned why, under the rules for deconsolidating transactions in §1.163(j)-1(b)(1)(iv)(A)( 3 ), the exception to "sale or other disposition" treatment is limited to whole-group acquisitions described in §1.1502-13(j)(5)(i)(A) and does not also include whole-group acquisitions that take the form of reverse acquisitions, as described in §1.1502-13(j)(5)(i)(B). The Treasury Department and the IRS did not intend this exception to exclude transactions described in §1.1502-13(j)(5)(i)(B), and the final regulations revise §1.163(j)-1(b)(1)(iv)(A)( 3 ) to correct this typographical error. The Treasury Department and the IRS received another comment regarding the exceptions to "sale or other disposition" treatment for whole-group acquisitions in §1.163(j)-1(b)(1)(iv)(A)( 3 ) and for section 381 transactions in §1.163(j)-1(b)(1)(iv)(A)( 1 ) (see the summary in part III.A.1.b of this Summary of Comments and Explanation of Revisions section). The commenter noted that the tax law generally treats the successor in a section 381 transaction (and the acquiring group in a whole-group acquisition) as stepping into the shoes of the acquired entity (or group). However, the commenter also noted that §1.163(j)-1(b)(1)(iv)(A) does not expressly provide that the acquiring entity (or group) steps into the shoes of the acquired entity (or group) for purposes of the negative adjustments in §§1.163(j)-1(b)(1)(ii)(C) through (E) and 1.163(j)-1(b)(1)(iv)(B) and (E). The commenter recommended clarifying this point. The Treasury Department and the IRS agree with the commenter. Thus, the final regulations clarify this point by expressly stating that the acquiring corporation in a section 381 transaction and the surviving group in a transaction described in §1.1502-13(j)(5)(i) is treated as a successor to the distributor or transferor corporation or the terminating group, respectively, for purposes of §§1.163(j)-1(b)(1)(ii)(C) through (E) and 1.163(j)-1(b)(1)(iv)(B) and (E) of this section. A commenter also noted that the "lesser of" computation for dispositions of member stock in proposed §1.163(j)-1(b)(1)(iv)(E)( 2 ) could be misconstrued as overriding the rules for negative adjustments to a group's tentative taxable income in the case of deconsolidating transactions subject to §1.163(j)-1(b)(1)(iv)(A)( 3 ). Under this erroneous interpretation, if a sale or other disposition resulted in a deconsolidation, the "lesser of" computation would apply solely with respect to the member stock that was sold, even though the deconsolidation rules in §1.163(j)-1(b)(1)(iv)(A)( 3 ) would treat the transaction as a disposition of all of the departing member's stock. Thus, the "lesser of" computation would not reflect the full amount of gain recognized upon the complete disposition of the departing member's stock. The Treasury Department and the IRS did not intend the "lesser of" rule in proposed §1.163(j)-1(b)(1)(iv)(E)( 2 ) to override the rules for deconsolidating transactions. The regulations under section 163(j) generally treat a consolidated group as a single entity; thus, the rules for deconsolidations in §1.163(j)-1(b)(1)(iv)(A)( 3 ) treat the date of a member's deconsolidation as the appropriate time to make adjustments to tentative taxable income with regard to all of that member's stock. Thus, the final regulations clarify §1.163(j)-1(b)(1)(iv)(A)( 3 ) to provide that any transaction in which a member leaves a consolidated group is treated as a taxable disposition of all stock of the departing member held by any member of the consolidated group for purposes of §1.163(j)-1(b)(1)(ii)(C) and (D) and §1.163(j)-1(b)(1)(iv)(B), (E)( 1 ), and (E)( 2 ), unless the transaction is described in §1.1502-13(j)(5)(i). A commenter also suggested that nonrecognition transactions in which a member leaves a consolidated group should not be treated as a "sale or other disposition" for purposes of the negative adjustments in §1.163(j)-1(b)(1)(ii)(C) and (D) and proposed §1.163(j)-1(b)(1)(iv)(B) and (E). The final regulations do not accept this comment because, under the single-entity theory of consolidated groups in the section 163(j) regulations, such negative adjustments should be made when a member deconsolidates, regardless of the form of the deconsolidation transaction, other than in a whole-group acquisition described in §1.1502-13(j)(5)(i). In other words, because the section 163(j) regulations generally treat a consolidated group as a unified taxpayer, any adjustments to ATI related to property should occur when the item of property leaves the group. This result should be consistent whether the property is disposed of directly by a group member or whether the property leaves the group upon the deconsolidation of a member. The Treasury Department and the IRS also received a comment that the gain prong of the proposed "lesser of" computation could yield unintended results for certain nonrecognition transactions. Under T.D. 9905, dispositions are treated as "sales or other dispositions" for purposes of the negative adjustments under §1.163(j)-1(b)(1)(ii)(C) through (E) unless an express exception applies. As previously discussed in this part III.A.3.a of this Summary of Comments and Explanation of Revisions section, T.D. 9905 provides exceptions for section 381 transactions and whole-group acquisitions. However, T.D. 9905 does not provide an exception to "sale or other disposition" treatment for other nonrecognition transactions, such as transactions to which section 351 or section 721 applies. The commenter noted that the "lesser of" computations in proposed §1.163(j)-1(b)(1)(iv)(B) and (E) could be construed to suggest that a taxpayer would have no negative adjustment under these provisions if the taxpayer transferred an asset in a transaction to which section 351 or section 721 applies. The Treasury Department and the IRS did not intend the proposed "lesser of" computations to create additional exceptions to "sale or other disposition" treatment for purposes of the negative adjustments required under §1.163(j)-1(b)(1)(ii)(C) through (E). Thus, the final regulations clarify that the disposition of property, member stock, or partnership interests in a transaction other than a deconsolidation (the treatment of which is addressed in §1.163(j)-1(b)(1)(iv)(A)( 3 )) that is a nonrecognition transaction other than a section 381 transaction is treated as a taxable disposition for purposes of the gain prong of the "lesser of" computation. b. Section 1.163(j)-1(b)(1)(iv)(C) As noted in part III.A.1.b of this Summary of Comments and Explanation of Revisions section, the successor asset rules in §1.163(j)-1(b)(1)(iv)(C) apply to certain intercompany transactions. For example, assume that S (a member of the P group) acquires a depreciable asset and fully depreciates the asset under section 168(k). P then contributes its S stock to S1 (another member of the P group) in exchange for S1 stock in a transaction to which section 351 applies. In this case, the S1 stock is a successor asset to the S stock. Moreover, if P sells its S1 stock to a third party in a transaction that causes both S1 and S to deconsolidate, the transaction is treated as a taxable disposition of both the S1 stock and the S stock for purposes of §§1.163(j)-1(b)(1)(ii)(C) and (D) and 1.163(j)-1(b)(1)(iv)(B) and (E). See §1.163(j)-1(b)(1)(iv)(A)( 3 ). In that case, both the actual sale of the S1 stock and the disposition of the S stock on its deconsolidation pursuant to §1.163(j)-1(b)(1)(iv)(A)( 3 ) could produce negative adjustments to ATI. Application of the anti-duplication rule in §1.163(j)-1(b)(1)(iv)(D) effectively would mean that the total subtraction from ATI would equal the greater of the two stock gains (if any). One commenter agreed with this reading of the regulations but suggested that an example would be helpful to clarify the interaction of these multiple rules. The Treasury Department and the IRS agree with this suggestion, and the final regulations include an example illustrating the operation of these rules. c. Section 1.163(j)-1(b)(1)(iv)(D) Commenters have stated that the anti-duplication rule in §1.163(j)-1(b)(1)(iv)(D)( 2 ) is unclear, does not properly support the example in that paragraph, and does not take into account the exception to the deconsolidation rule in §1.163(j)-1(b)(1)(iv)(A)( 3 ). For example, a commenter stated that it is unclear whether the operative rule, which does not reference §1.163(j)-1(b)(1)(ii)(C), actually supports the conclusion in the example, which references §1.163(j)-1(b)(1)(ii)(C). Another commenter requested clarification that the anti-duplication rule in §1.163(j)-1(b)(1)(iv)(D)( 2 ) does not apply to a whole-group acquisition, which is not treated as a "sale or other disposition" for purposes of §1.163(j)-1(b)(1)(ii)(C) through (E). See §1.163(j)-1(b)(1)(iv)(A)( 3 ). The Treasury Department and the IRS agree with these comments and have revised §1.163(j)-1(b)(1)(iv)(D)( 2 ) to clarify the application of this provision. The Treasury Department and the IRS also have clarified the application of §1.163(j)-1(b)(1)(iv)(D)( 1 ), including by clarifying that the paragraph contains two separate rules, rather than one rule and one example. A commenter also requested examples illustrating the application of the anti-duplication rule in §1.163(j)-1(b)(1)(iv)(D) when the taxpayer's negative adjustment under the "lesser of" computation is based on gain recognized rather than on depreciation deductions taken during the EBITDA period. The final regulations add an example to §1.163(j)-1(b)(1)(viii) to illustrate the application of this rule. B. Dividends from Regulated Investment Company (RIC) Shares If a RIC has certain items of income or gain, part 1 of subchapter M and other Code provisions provide rules under which a RIC may pay dividends that a shareholder in the RIC may treat in the same manner (or a similar manner) as the shareholder would treat the underlying item of income or gain if the shareholder realized it directly. Like the preamble to the 2020 Proposed Regulations, this preamble refers to this treatment as "conduit treatment." The 2020 Proposed Regulations provide rules under which a RIC that earns BII may pay section 163(j) interest dividends. The total amount of a RIC's section 163(j) interest dividends for a taxable year is limited to the excess of the RIC's BII for the taxable year over the sum of the RIC's BIE for the taxable year and the RIC's other deductions for the taxable year that are properly allocable to the RIC's BII. The 2020 Proposed Regulations provide that a RIC shareholder that receives a section 163(j) interest dividend may treat the dividend as interest income for purposes of section 163(j), subject to holding period requirements and other limitations. The Treasury Department and the IRS received one comment requesting that the proposed rules providing this treatment be finalized. These final regulations adopt those proposed rules. A few commenters requested that conduit treatment be extended to funds other than RICs, such as foreign regulated investment funds and foreign money market funds, so that investors in those funds may treat earnings from those funds as interest income to the extent the earnings can be traced to interest income of the funds. These final regulations do not adopt these recommendations. The Treasury Department and the IRS received similar recommendations in response to the 2018 Proposed Regulations, and they were not adopted in T.D. 9905. As explained in the preamble to T.D. 9905, there are significant differences between the rules governing income inclusions in respect of passive foreign investment companies (PFICs), such as foreign money market funds, and RICs. These significant differences would require a different mechanical approach if conduit treatment were extended to PFICs and present additional policy considerations. The Treasury Department and the IRS continue to study this comment and these issues. Another commenter requested that conduit treatment be extended to allow shareholders in real estate investment trusts (REITs) to treat REIT dividends as interest income, to the extent that the income earned by the REIT is interest income. The Treasury Department and the IRS continue to consider this comment. IV. Comments on and Changes to Proposed §1.163(j)-6: Application of the Business Interest Expense Deduction Limitations to Partnerships and Subchapter S Corporations A. Overview Section 1.163(j)-6 provides rules for applying section 163(j) to partnerships, S corporations and their owners. As described in this part IV of the Summary of Explanation of Revisions section, the Treasury Department and the IRS continue to study aspects of proposed §1.163(j)-6. Accordingly, the final regulations reserve on §§1.163(j)-6(e)(6) (partnership deductions capitalized by a partner), (h)(4) (partner basis adjustments upon liquidating distributions), (h)(5) (partnership basis adjustments upon partner dispositions), (j) (tiered partnerships), and (l)(4)(iv) (S corporation deductions capitalized by an S corporation shareholder). These paragraphs of the 2020 Proposed Regulations are retained in proposed form and may be relied on to the extent provided in the Applicability Dates section of this preamble. B. Trading Partnerships The 2020 Proposed Regulations addressed the application of section 163(j) to partnerships engaged in a trade or business activity of trading personal property (including marketable securities) for the account of owners of interests in the activity, as described in §1.469-1T(e)(6) (trading partnership). Specifically, the 2020 Proposed Regulations included a rule requiring a partnership engaged in a trading activity (i.e., trade or business activities described in section 163(d)(5)(A)(ii) and illustrated in Revenue Ruling 2008-12, 2008-1 C.B. 520 (March 10, 2008)) to bifurcate its interest expense from the trading activity between partners that are passive investors (taxpayers that do not materially participate in the activity within the meaning of section 469) in the trading activity and all other partners, and subject only the portion of the interest expense that is allocable to the non-passive investors to limitation under section 163(j) at the partnership level. The portion of interest expense from the trading activity allocable to passive investors is subject to limitation under section 163(d) at the partner level, as provided in section 163(d)(5)(A)(ii). Accordingly, proposed §1.163(j)-1(c)(1) and (2) include rules applicable to trading partnerships that modify the definitions of BII and BIE to effectuate this bifurcation. In addition, proposed §1.163(j)-6(d)(4) requires that a trading partnership bifurcate all of its other items of income, gain, loss and deduction from its trading activity between partners that are passive investors and all other partners. The portion of the partnership's other items of income, gain, loss or deduction from its trading activity properly allocable to the passive investors in the partnership will not be taken into account at the partnership level as items from a trade or business for purposes of applying section 163(j) at the partnership level. Instead, all such partnership items properly allocable to passive investors will be treated as items from an investment activity of the partnership, for purposes of sections 163(j) and 163(d). As stated in the preamble to 2020 Proposed Regulations, this approach, in order to be effective, presumes that a trading partnership generally will possess knowledge regarding whether its individual partners are passive investors in its trading activity. Because no rules currently exist requiring a partner to inform the partnership whether the partner has grouped activities of the trading partnership with other activities of the partner outside of the partnership, the 2020 Proposed Regulations include a revision to the section 469 activity grouping rules to provide that any activity described in section 163(d)(5)(A)(ii) may not be grouped with any other activity of the partner, including any other activity described in section 163(d)(5)(A)(ii). In response to the decision to bifurcate interest expenses from a trading activity, one commenter stated that the bifurcation approach was inconsistent with section 163(j)(5). According to the comment, the statute does not support the partnership having BIE for some partners and investment interest expense for others. Rather, once a partnership determines that it is investment interest expense that same interest expense cannot also be BIE of the partnership. The commenter read section 163(j) to mean that if a partnership is engaged in a trade or business that is not a passive activity and with respect to which certain owners do not materially participate, then the interest expense allocable to the partnership's trade or business is investment interest and section 163(j) does not apply to any of the interest expense. Alternatively, the commenter recommended that, to the extent the Treasury Department and the IRS determine that materially participating partners should be subject to limitation under either section 163(d) or section 163(j), a rule similar to that for corporate partners should be adopted. Under such a rule, a trading partnership would treat all of its interest expense as investment interest expense at the partnership level with respect to all of its partners, and the interest expense allocable to a non-passive investor would be recharacterized as BIE by such non-passive investor. This approach, according to the commenter, would achieve a similar result as the proposed bifurcation approach while eliminating the administrative complexities associated with a partnership having to determine whether each of its partners is materially participating. As stated in the preamble to the 2020 Proposed Regulations, the Treasury Department and the IRS considered treating all interest expense of a trading partnership as investment interest expense but concluded that it was inconsistent with the intent of section 163(j) to limit BIE of a partnership. The commenter's alternative approach also is inconsistent with the statute because it ignores the fact that the trading partnership is engaged in trade or business and, therefore, any BIE should be subject to section 163(j). Such an approach would further diverge from the application of section 163(j), particularly with respect to business interest carryforwards. Partnership BIE that is limited under section 163(j)(4) is carried forward by the partner as EBIE and is not treated as paid or accrued in succeeding taxable years until the partner receives ETI from the same partnership. Under the commenter's approach, the partner, if subject to section 163(j), would treat the interest expense as paid or accrued in the succeeding tax year under section 163(j)(2) without requiring an allocation of ETI or excess BII (EBII) from the partnership. The bifurcation approach in the 2020 Proposed Regulations, and in these final regulations, preserves the partnership-level application of section 163(j) for those partners who are non-passive investors in the trade or business of the partnership as well as the carryover rules applicable at the partner-level. Another commenter suggested an alternative under which section 163(j) would be applied at the partnership level and any EBIE would be allocated to the partners. Any direct or indirect partner that is a non-passive investor in the partnership's trading activity would continue to apply the rules of section 163(j) to the EBIE received from the partnership. For partners who did not materially participate in the partnership's trading activity, any allocated EBIE from the partnership would be fully deductible subject to any partner-level section 163(d) limitation. Under this approach, any EBIE received by a passive investor would be treated as paid or accrued in the current year and not subject to the carryover rules under section 163(j)(4)(B). The Treasury Department and the IRS do not adopt this comment as the approach is inconsistent with the statutory language and intent of section 163(j)(5) because the second sentence of section 163(j)(5) specifically states that BIE shall not include investment interest expense. Several commenters opposed the revision of the grouping rule under section 469 to prohibit the grouping of trading activities. Proposed §1.469-4(d)(6) provides that a trading activity described in section 163(d)(5)(A)(ii) may not be grouped with any other activity of the taxpayer, including another trading activity. One commenter observed that such a rule would discourage trading funds from using multiple partnerships because it may result in partners never being able to demonstrate material participation in the trading activity under the 500 hour test or any other material participation test (i.e., §1.469-5T(a)) for any one partnership, even though the partner would materially participate in a properly grouped activity. Another acknowledged the administrative burden associated with partnerships evaluating the activities of their passive partners but highlighted that partnerships were already required to collect details about partner's tax status in similar situations. A third suggested that the grouping rule could be modified to permit a partner to group activities provided the partner provides sufficient information to the partnership to enable it to identify the taxpayer as a materially participating partner. The Treasury Department and the IRS do not adopt these recommendations because the rules under section 469 adequately address these concerns. Activity under section 469 is broadly defined to be a trade or business under section 162 and the rules further provide for grouping by a partnership or S corporation. As addressed previously, for the bifurcation method to be effective, modification of the section 469 grouping rules is necessary to avoid potential abuse and to allow the trading partnership to presume that an individual partner is a passive investor in the trading activity based solely on the partnership's understanding as to the lack of work performed in the trading activity. Additionally, if grouping were allowed, then passive partners could group their other trade or business activities, in which they materially participate, with their trading activity in order to become a material participant as to the trading activity, thus, avoiding the section 163(d) limit at the partner level. The final regulations clarify that this grouping rule applies only to individuals, estates, trusts, closely held C corporations, and personal service corporations that may directly or indirectly own interests in trading activities described in §1.469-1T(e)(6) and subject to section 163(d)(5)(ii). One commenter observed that the proposed regulations do not discuss a tiered partnership structure with respect to the material participation rules. The Treasury Department and the IRS determined that such a rule is not needed. The bifurcation approach in proposed §1.163(j)-1(c)(1) and (2) applies where interest income or expense is allocable to one or more partners that do not materially participate (within the meaning of section 469), as described in section 163(d)(5)(A)(ii). Thus, in a tiered structure where interest is not allocable to one or more partners that do not materially participate, the rules in §1.163(j)-6(c)(1) and (2) do not apply and the interest expense is subject to the rules under section 163(j)(4). The same commenter recommended the final regulations provide that if a partner that has EBIE ceases to materially participate in a later taxable year, the EBIE would be allowed in a later year subject to any section 163(d) limitation; and conversely, if a passive investor partner has a section 163(d) investment carryover and then materially participates in a later taxable year, the 163(d) carryover would be allowed subject to any partner-level section 163(j) limitation. In light of concerns with partners shifting between participating and not participating in the trading activity in order to unsuspend EBIE, the Treasury Department and the IRS determined that such a rule is not warranted. One commenter requested transition relief for trading partnerships that may have relied on the statement contained in the preamble to the 2018 Proposed Regulations that the BIE of the partnership allocable to trading activity will be subject to section 163(j) at the entity level, even if the interest expense is later subject to limitation under section 163(d) at the individual partner level. Partnerships that relied on the 2018 Proposed Regulations may have allocated EBIE to partners who do not materially participate in the trading activity of the partnership. Under the final regulations, partnerships carrying on trading activities do not allocate ETI or EBII from trading activities to their partners who do not materially participate in those activities. Rather, any interest expense and all other items from such activities allocable to these partners will be treated as items derived from an investment activity of the partnership. As a result, passive investors that were previously allocated EBIE from the trading partnership generally will not be allocated any ETI or EBII from that partnership in future years against which they can offset the EBIE. The Treasury Department and the IRS agree that relief should be accorded to partners of trading partnerships that do not materially participate in the trading activity and that relied on the statement in the preamble to the 2018 Proposed Regulations. Accordingly, a transition rule is provided in the final regulations to permit passive investors in a partnership engaged in a trading activity to deduct EBIE allocated to them from the partnership in any taxable year ending prior to the effective date of the final regulations without regard to the amount of ETI or EBII that may be allocated by the partnership to the partner in the first taxable year ending on or after the effective date of these final regulations. For purposes of this transition rule, any EBIE that is no longer subject to disallowance under section 163(j) solely as a result of this transition rule will not be subject to limitation or disallowance under section 163(d). In such case, the partnership treated the interest expense as business interest expense for purposes of calculating its limitation under section 163(j). The treatment of interest expense by the partnership as BIE in prior years is not affected by this transition rule. Accordingly, the rule in section 163(j)(5) that interest expense cannot be treated as both BIE and investment interest expense would still apply, and the BIE of the partnership cannot be treated as investment interest expense of the partner in future years. The commenter also observed that a corporate partner is never subject to section 163(d) regardless of material participation and requested clarification whether section 163(j) applies to a trading partnership's corporate partner at the partner or partnership level. The Treasury Department and the IRS have determined that the regulations as proposed adequately addressed this situation. Generally, a corporate partner is not a passive investor subject to section 163(d)(5)(A)(ii); therefore, the rules under proposed §1.163(j)-6(c) would not apply. In the 2020 Proposed Regulations, the Treasury Department and the IRS requested comments regarding whether similar rules should be adopted with respect to S corporations that also may be involved in trading activities, and whether such rules would be compatible with subchapter S. One commenter recommended that the final regulations provide that an S corporation engaged in a trading activity be required to bifurcate its interest expense between shareholders who materially participate in the trading activity and shareholders who do not materially participate and apply section 163(j) to the former and section 163(d) to the latter at the S corporation level. The Treasury Department and the IRS appreciate this recommendation but, as acknowledged by the commenter, the implementation of such a rule would require different allocations of S corporation income and other items among shareholders of the S corporation. Unlike partnerships, S corporations must allocate items pro rata to the shareholders, in accordance with their respective percentages of stock ownership in the corporation. See generally section 1377(a)(1). Therefore, with regard to S corporations, the Treasury Department and the IRS have determined that (i) section 163(d) should continue to be applied at the shareholder level, and (ii) as provided by section 163(j)(4)(A) and (D), section 163(j) should continue to be applied at the S corporation level. Consequently, the final regulations do not incorporate the commenter's recommendation. C. Treatment of Business Interest Income and Business Interest Expense with Respect to Lending Transactions Between a Partnership and a Partner (Self-Charged Lending Transactions) The 2020 Proposed Regulations provide that, in the case of a self-charged lending transaction between a lending partner and a borrowing partnership in which the lending partner owns a direct interest, any BIE of the borrowing partnership attributable to a self-charged lending transaction is BIE of the borrowing partnership for purposes of proposed §1.163(j)-6(n). However, to the extent the lending partner receives interest income attributable to the self-charged lending transaction and also is allocated EBIE from the borrowing partnership in the same taxable year, the lending partner may treat such interest income as an allocation of EBII from the borrowing partnership in that taxable year, but only to the extent of the lending partner's allocation of EBIE from the borrowing partnership in the same taxable year. To prevent the potential double counting of BII, the lending partner includes interest income re-characterized as EBII only once when calculating the lending partner's own section 163(j) limitation. In cases where the lending partner is not a C corporation, to the extent that any interest income exceeds the lending partner's allocation of EBIE from the borrowing partnership for the taxable year, and such interest income otherwise would be properly treated as investment income of the lending partner for purposes of section 163(d) for that year, such excess amount of interest income will continue to be treated as investment income of the lending partner for that year for purposes of section 163(d). One commenter generally supported the approach for self-charged lending transactions provided in the 2020 Proposed Regulations and expected that many taxpayers may benefit from this rule. However, the commenter noted that the rule applies only to self-charged lending transactions where the lending partners directly own interests in the borrowing partnerships and stated that this rule is too narrow. The commenter recommended that the rule be broadened to include loans to a partnership by other members in the same consolidated group as a corporate partner. In addition, the commenter recommended that the rule for self-charged lending transactions should be expanded to include lending partners in upper-tier partnerships who make loans to lower-tier partnerships. The commenter stated that in both cases, the interest expense would ultimately flow up to the same taxpayer that recognizes the interest income. The Treasury Department and the IRS have determined that the rule for self-charged lending transactions should be adopted in the final regulations without change. With respect to the recommendation that the self-charged lending rule should apply to indirect lenders in tiered-partnership situations, the Treasury Department and the IRS concluded that adopting a rule to allow interest income of a partner in an upper-tier partnership that lent money to a lower-tier partnership to offset EBIE that may be suspended in a lower-tier partnership would add undue complexity to these rules, and such rules would likely become more difficult to administer, particularly with respect to large and complex multi-tiered entity structures. With respect to the recommendation to extend the rule to apply to corporate partners where the lender is a member of the same consolidated group of corporations, the Treasury Department and the IRS continue to consider whether this would be appropriate for inclusion in future guidance. The Treasury Department and the IRS are also considering additional guidance that would limit the application of the self-charged interest rule to a lender that is subject to tax under section 511, due to the special rules that apply to the calculation of unrelated business taxable income under section 512. See §1.512(a)-6. The Treasury Department and the IRS solicited comments in the 2020 Proposed Regulations regarding whether the rule for self-charged lending transactions between partnerships and lending partners (or a similar rule) should apply to, lending transactions between S corporations and lending shareholders. No comments were received in response to this solicitation. The pro rata allocation requirements applicable to S corporations make adopting rules similar to those provided for partnership self-charged lending transactions difficult to apply and could potentially impact the eligibility requirements under subchapter S. Accordingly, the final regulations do not provide such a rule. D. CARES Act Partnership Rules The 2020 Proposed Regulations provide special rules for partners and partnerships for taxable years beginning in 2019 or 2020 under section 163(j)(10) as enacted by the CARES Act. Proposed §1.163(j)-6(g)(4) provides that 50 percent of any EBIE allocated to a partner for any taxable year beginning in 2019 is treated as BIE paid or accrued by the partner in the partner's first taxable year beginning in 2020 (referred to in the 2020 Proposed Regulations as §1.163(j)-6(g)(4) business interest expense). The amount that is treated as BIE paid or accrued by the partner in the partner's 2020 taxable year is not subject to a section 163(j) limitation at the partner level. The 2020 Proposed Regulations further provide that if a partner disposes of its interest in the partnership in the partnership's 2019 or 2020 taxable year, the amount treated as BIE paid or accrued by the partner under proposed §1.163(j)-6(g)(4) is deductible by the partner and thus does not result in a basis increase under §1.163(j)-6(h)(3). The 2020 Proposed Regulations state that a taxpayer may elect to not have §1.163(j)-6(g)(4) apply, and provide two examples illustrating these rules in §§1.163(j)-6(o)(35) and (o)(36). The Treasury Department and the IRS specifically requested comments on these proposed rules and on whether further guidance was necessary. One commenter agreed with the approach taken in the 2020 Proposed Regulations, but requested that the final regulations clarify that an election out of the 50 percent EBIE rule is made by a partner with respect to each partnership in which the partner holds an interest. The commenter stated that partners may have different reasons to elect out of the 50 percent EBIE rule and that by allowing partners to make the election out with respect to each partnership, partners will have greater flexibility in managing their tax consequences. The Treasury Department and the IRS agree with this comment. Thus, the final regulations clarify that partners may elect out of the 50 percent EBIE rule on a partnership by partnership basis. Another commenter requested confirmation with respect to an aspect of the example in §1.163(j)-6(o)(36). In the example, the partner is allocated EBIE in 2018 and 2019 and sells its partnership interest in 2019. The commenter requested confirmation that the partner would not deduct 50 percent of the EBIE since the sale of the partnership interest occurred in 2019, resulting in a gain/loss recognition event during the 2019 taxable year, and there would be no basis in the partnership for the partner to deduct 50 percent of the 2019 EBIE. The Treasury Department and the IRS believe that the example, as drafted in the proposed regulations, represents a correct interpretation of the regulations and are therefore finalizing the example without change. However, these final regulations clarify that §1.163(j)-6(g)(4) business interest expense can be deducted by the disposing partner except to the extent that the business interest expense is negative section 163(j) expense as defined in §1.163(j)-6(h)(1) immediately before the disposition. Under the example in §1.163(j)-6(o)(36), the partner treats 50 percent of 2019 EBIE ($10 x 50%) as §1.163(j)-6(g)(4) business interest expense. Section 1.163(j)-6(g)(4) provides that if a partner disposes of a partnership interest in the partnership's 2019 or 2020 taxable year, the partner can deduct the §1.163(j)-6(g)(4) business interest expense and there is no basis increase under §1.163(j)-6(h)(3) for this amount. Thus, unless the partner elects out of the 50 percent EBIE rule, the partner would have a $25 loss (instead of a $30 loss) from the sale of its partnership interest in 2019 and $5 of deductible BIE that is not subject to a section 163(j) limitation at the partner level. The Treasury Department and the IRS received one comment on proposed §1.163(j)-6(d)(5). This commenter stated that the proposed regulations disregard the "11-step approach" in §1.163(j)-6(f)(2), and instead point to different mechanics of a tiered partnership allocation rule under proposed §1.163(j)-6(j)(9). The commenter recommended additional guidance and examples on the application of the proposed regulations to non-tiered partnerships and partnerships that historically allocate all items pro rata. In light of this comment, and in light of the fact that the tiered partnership rules in the proposed regulations are not being finalized at this time, the Treasury Department and the IRS believe that a simpler method for a partnership to take into account 2019 ATI in 2020 is warranted. Therefore, these final regulations prescribe a simplified method that applies when a partnership uses its 2019 section 704 income, gain, loss, and deduction amounts in determining its 2020 allocable ATI and include an illustrative example. V. Comments on and Changes to Proposed §1.163(j)-7: Application of the Section 163(j) Limitation to Foreign Corporations and United States Shareholders A. Overview Section 1.163(j)-7 provides rules for applying section 163(j) to relevant foreign corporations and their United States shareholders (U.S. shareholders). As described in this part V of the Summary of Comments and Explanation of Revisions section, the Treasury Department and the IRS continue to study aspects of proposed §1.163(j)-7. Accordingly, the final regulations reserve on §1.163(j)-7(c)(2)(iii) (treating a CFC group as single C corporation for purposes of allocations to an excepted trade or business) and (iv) (treating a CFC group as single taxpayer for purposes of treating amounts as interest), (f)(2) (ordering rule when a CFC group member has ECI), and (j) (computation of ATI of certain United States shareholders of applicable CFCs), and related definitions in §1.163(j)-7(k). These paragraphs of the 2020 Proposed Regulations are retained in proposed form and may be relied on to the extent provided in the Applicability Dates section. B. Negative Adjusted Taxable Income of CFC Group Members Proposed §1.163(j)-7(c) provided rules for applying section 163(j) to CFC group members. Proposed §1.163(j)-7(c)(2)(i) provided that a single section 163(j) limitation is computed for a specified period of a CFC group based on the sum of the current-year business interest expense, disallowed BIE carryforwards, BII, floor plan financing interest expense, and ATI of each CFC group member. For this purpose, the ATI and other items of a CFC group member were generally computed on a separate-entity basis. Proposed §1.163(j)-7(c)(2)(i). Under the general rule of §1.163(j)-1(b)(1)(vii), ATI of a taxpayer cannot be less than zero (no-negative ATI rule). Two comments were received regarding the application of the no-negative ATI rule with respect to CFC groups and CFC group members. One of the comments stated that it is unclear how the rule applies to CFC group members. Both comments asserted that the no-negative ATI rule should apply with respect to the CFC group, rather than each separate CFC group member. As a result, the ATI of a CFC group would generally be reduced by the negative ATI of CFC group members, if any. One comment noted that consolidated groups have a single ATI amount, which takes into account losses of consolidated group members. Another comment noted that, if negative ATI of CFC group members is not taken into account, CFC group members could be required to deduct BIE in a taxable year in which the sum of the CFC group members' tested losses exceed the sum of their tested income; the comment questioned whether this result is appropriate, noting that it would often be more beneficial to carry forward the disallowed BIE to the subsequent taxable year in light of the fact that tested losses cannot be carried forward to subsequent taxable years. The Treasury Department and the IRS agree that the ATI of CFC group members should take into account amounts less than zero for purposes of determining the ATI of a CFC group. Accordingly, the final regulations provide that the no-negative ATI rule applies with respect to the ATI of a CFC group, rather than a CFC group member. C. Transactions Between CFC Group Members In general, intragroup transactions are taken into account for purposes of computing a CFC group's section 163(j) limitation. However, proposed §1.163(j)-7(c)(2)(ii) provided an anti-abuse rule that disregarded an intragroup transaction between CFC group members if a principal purpose of entering into the transaction was to affect the CFC group's or a CFC group member's section 163(j) limitation by increasing or decreasing the CFC group or a CFC group member's ATI. Some comments requested a broader rule that would permit taxpayers to elect annually to disregard BII and BIE between CFC group members for purposes of applying section 163(j). The comments asserted that this election would reduce the compliance burden on taxpayers. The final regulations do not provide an election to disregard intragroup BII and BIE. The effect of the requested election would be to allow a deduction for all intragroup BIE and to cause the section 163(j) limitation applicable to other BIE (that is, BIE with respect to debt that is not between members of a CFC group) to be determined without regard to intragroup BII. Although the requested election would not affect the total amount of deductible BIE within the CFC group, it would change the location of the deduction within the CFC group (that is, the CFC group member for which a deduction is allowed). Moving a BIE deduction from one CFC group member to another may have significant Federal income tax consequences. For example, the location of a CFC group's interest deduction can affect the amount of a CFC group member's subpart F income and tested income (or tested loss) and, therefore, the amount of a U.S. shareholder's income inclusion under section 951(a) or 951A(a), respectively. Thus, the requested election could be used to inappropriately manipulate the impact of BIE deductions within a CFC group. However, the final regulations expand the anti-abuse rule so that it may apply not only to certain intragroup transactions that affect ATI but also to intragroup transactions entered into with a principal purpose of affecting a CFC group or a CFC group member's section 163(j) limitation by increasing the CFC group or a CFC group member's BII. This rule is intended to prevent taxpayers from artificially increasing the total amount of BII and BIE within a CFC group for a specified period in order to shift disallowed BIE from one CFC group member to another or change the timing of deductions of BIE. For example, a payment of BIE by a payor CFC group member to a payee CFC group member will generally result in an equal increase in the CFC group's section 163(j) limitation (and therefore the amount of deductible BIE) as a result of the increase in the CFC group's BII. However, the increase in the CFC group's section 163(j) limitation is not necessarily allocated to the payor. Instead, under the ordering rules of §1.163(j)-7(c)(3), the additional section 163(j) limitation would be allocated first to the payee to the extent it has BIE, and then may be allocated to other CFC group members. This type of transaction would be subject to the anti-abuse rule if it was entered into with a principal purpose of increasing the amount of BIE deductible by other CFC group members. D. High-Tax Exceptions 1. Application of section 163(j) to Controlled Foreign Corporations with high-taxed income One comment suggested that the Treasury Department and the IRS consider a special rule for the application of section 163(j) to CFC group members that are subject to the subpart F high-tax exception under §1.954-1(d) or the GILTI high-tax exclusion under §1.951A-2(c)(7) (together, high-tax exceptions). For example, the comment suggested a multi-step approach under which section 163(j) would first be applied to CFC group members on a separate-entity basis for the purpose of applying the high-tax exceptions, and then ATI and BIE of CFC group members subject to the high-tax exceptions could be excluded in computing the CFC group's section 163(j) limitation. The Treasury Department and the IRS have determined that applying section 163(j) first to each CFC group member on a separate-entity basis, then applying the high-tax exceptions, and then reapplying section 163(j) to a CFC group by excluding income eligible for the high-tax exceptions, would significantly increase the administrative and compliance burdens of section 163(j) and therefore reduce the benefits of making a CFC group election. Furthermore, such an approach would be inconsistent with the general concept and purpose of a consolidated approach to the CFC group election; for example, it would increase the relevance of the location of intragroup debt and ATI within a CFC group and could inappropriately enhance the effective foreign tax rate of such income. Accordingly, the final regulations do not adopt this recommendation. 2. Disallowed business interest expense carryforwards and the high-tax exceptions Section 163(j) and the section 163(j) regulations generally apply to determine the deductibility of BIE of a relevant foreign corporation (which includes an applicable CFC) in the same manner as those provisions apply to determine the deductibility of BIE of a domestic C corporation. Section 1.163(j)-7(b). One comment requested that the Treasury Department and the IRS confirm that a CFC to which the high-tax exceptions apply can still have a disallowed BIE carryforward. The high-tax exception does not modify the rules for determining the section 163(j) limitation or the amount of an applicable CFC's disallowed BIE carryforward. See part V.D.1 of this Summary of Comments and Explanation of Revisions section. Accordingly, an applicable CFC may have disallowed BIE carryforwards if the applicable CFC is subject to a high-tax exception in the taxable year(s) in which the disallowed BIE carryforwards arose. E. Allocation of CFC Group Items to an Excepted Trade or Business Proposed §1.163(j)-7(c)(2)(iii) provided that, for purposes of allocating items to an excepted trade or business under §1.163(j)-10, all CFC group members are treated as a single C corporation. Similarly, proposed §1.163(j)-7(c)(2)(iv) provided that, for purposes of determining whether certain amounts are treated as interest within the meaning of §1.163(j)-1(b)(22), all CFC group members are treated as a single taxpayer. Several comments addressed the method of allocating items of a CFC group member to an excepted trade or business under §1.163(j)-10. The Treasury Department and the IRS continue to study the proper method for allocating CFC group members' items to an excepted trade or business and when it is appropriate to treat a CFC group as a single entity. The Treasury Department and the IRS may address these issues in future guidance and will consider the comments at that time. Accordingly, the final regulations reserve on §1.163(j)-7(c)(2)(iii) and (iv). F. Limitation on Pre-group Disallowed Business Interest Expense Carryforwards 1. Pre-group disallowed business interest expense carryforwards attributable to specified group members The 2020 Proposed Regulations provided special rules relating to disallowed BIE carryforwards of a CFC group member that arose in a taxable year before it joined the CFC group (pre-group disallowed BIE carryforwards). Under proposed §1.163(j)-7(c)(3)(iv)(A)( 1 ), a CFC group member cannot deduct pre-group disallowed BIE carryforwards in excess of the cumulative section 163(j) pre-group carryforward limitation. This limitation is determined in a manner similar to the limitation on the use of carryovers of a member of a consolidated group arising in a separate return limitation year (SRLY). See §1.1502-21(c). One comment requested that the limitation on pre-group disallowed BIE carryforwards be removed, because it increases the compliance burden on taxpayers and any potential for loss trafficking could adequately be addressed by an anti-abuse rule. Alternatively, if this request is not adopted, the comment requested that the limitation on pre-group disallowed BIE carryforwards not apply to disallowed BIE carryforwards that arose in a taxable year in which a CFC group election was available but prior to the first taxable year for which the CFC group election was in effect. The comment asserted that applying the limitation to such carryforwards is inappropriate because there is no loss trafficking concern unless a CFC is acquired from outside the group. The Treasury Department and the IRS have determined that it would be inappropriate for the limitation on deduction of pre-group disallowed BIE carryforwards to be replaced with an anti-abuse rule focused on loss trafficking. Loss trafficking concerns may arise anytime the ATI or BII of one CFC group member is used to allow a deduction for BIE of another CFC group member attributable to a taxable year before the other CFC group member joined the CFC group. As a result, the final regulations retain the limitation on the deduction of pre-group disallowed BIE carryforwards. 2. Application of section 382 to CFCs joining or leaving a CFC group As a general matter, the SRLY limitations described in §§1.1502-21(c) and 1.163(j)-5(d) do not apply to a member of a consolidated group if their application would result in an overlap with the application of section 382 (SRLY overlap rule). See §§1.1502-21(g)(1) and 1.163(j)-5(f). One comment requested clarification as to whether section 382 applies to a CFC that does not have ECI. The comment generally supported the limitation on pre-group disallowed BIE carryforwards but suggested that, if section 382 applies to CFCs, a rule similar to the SRLY overlap rule should be adopted to prevent the limitation on pre-group disallowed BIE carryforwards from applying to a CFC group member if its application would result in an overlap with the application of section 382. Section 382, by its terms, applies to the disallowed BIE carryforwards of foreign corporations regardless of whether they have ECI. However, the Treasury Department and the IRS continue to study certain aspects of the application of sections 163(j) and 382 to foreign corporations, including the possible application of a SRLY overlap rule to applicable CFCs joining or leaving a CFC group, as well as the computation of any relevant section 382(a) limitation. The Treasury Department and the IRS may address these issues in future guidance and will consider the comments at that time. G. Specified Groups and Specified Group Members 1. The 80-percent ownership threshold Proposed §1.163(j)-7(d) provided rules for determining a specified group and specified group members. A specified group includes one or more chains of applicable CFCs connected through stock ownership with a specified group parent, but only if the specified group parent owns stock meeting the requirements of section 1504(a)(2)(B) (which requires 80 percent ownership by value) in at least one applicable CFC, and stock meeting the requirements of section 1504(a)(2)(B) in each of the applicable CFCs (except the specified group parent) is owned by one or more of the other applicable CFCs or the specified group parent. Indirect ownership through a partnership or through a foreign estate or trust is taken into account for this purpose. Some comments requested that the ownership threshold for applying this rule be reduced to 50 percent, or "more than 50 percent," in order to make the rule consistent with the ownership rules in sections 957 and 954(d)(3). The comments asserted that a lower threshold would reduce the compliance burden of applying section 163(j) to CFCs on a separate-entity basis, would allow joint ventures to be included in the CFC group, and could prevent taxpayers from manipulating their ownership interests in order to break affiliation and exclude entities from the CFC group. One comment noted that local regulatory restrictions may prevent a U.S. shareholder from owning 80 percent of the stock in a CFC. Another comment requested that the ownership threshold be reduced to 50 percent with respect to a CFC that has only one U.S. shareholder. The comment asserted that, if a CFC has only one U.S. shareholder, there is no concern of potentially inconsistent treatment by different shareholders and there would be no need for additional procedural requirements (for example, a requirement to provide notice to other shareholders). Alternatively, the comment suggested that a specified group parent that is a qualified U.S. person be permitted to elect to treat a CFC as a CFC group member if it meets the 50 percent (but not the 80 percent) ownership threshold, even if the specified group parent is not the sole U.S. shareholder. The Treasury Department and the IRS have determined that it would be inappropriate to reduce the specified group ownership threshold below 80 percent. The application of section 163(j) to a CFC group is modeled on the rules for applying section 163(j) to a U.S. consolidated group under §1.163(j)-5. Accordingly, the definition of a specified group is generally consistent with the definition of an affiliated group under section 1504. In certain respects, the rules of §1.163(j)-7(c) have the effect of treating a CFC group as a single entity for purposes of section 163(j). Such treatment is not appropriate for CFCs that do not share at least 80 percent common ownership, that is, CFCs that are not highly related. Moreover, because one CFC group member's ATI and BII can be used by other CFC group members to deduct BIE, reducing the specified ownership threshold would increase the potential for one CFC group member to disproportionately benefit, or suffer a detriment, from the attributes of another CFC group member even though those CFCs are not highly related. As an alternative, one comment requested that a U.S. shareholder be permitted to take into account its pro rata share of CFC attributes in computing the CFC group section 163(j) limitation without regard to the percentage of the U.S. shareholder's ownership interest. This approach is not adopted in the final regulations because it would require different U.S. shareholders to calculate the section 163(j) limitation differently and separately track disallowed BIE carryforwards with respect to the same CFC. 2. Clarifications to rules for determining a specified group and specified group members The final regulations make several clarifying changes to the rules for determining a specified group and specified group members. First, the definition of specified group in §1.163(j)-7(d)(2)(i) is modified to clarify that a specified group may exist when a qualified U.S. person directly owns all of its applicable CFCs rather than owning one or more chains of applicable CFCs. Second, the definition of specified group member in §1.163(j)-7(d)(3) is modified to clarify that there must be at least two applicable CFCs in a specified group in order for any applicable CFC to be a specified group member and for a CFC group election to be available. Finally, the rule in §1.163(j)-7(d)(2)(vii) (concerning when a specified group ceases to exist) is modified to clarify that references to the common parent in §1.1502-75(d)(1), (d)(2)(i) through (d)(2)(ii), and (d)(3)(i) through (d)(3)(iv) are treated as references to the specified group parent. This is the case even if the specified group parent is a qualified U.S. person and therefore not included in the specified group. H. CFC Group Election 1. Timing and revocation of the CFC group election Proposed §1.163(j)-7(e) provided rules and procedures for treating specified group members as CFC group members and for determining a CFC group. Proposed §1.163(j)-7(e)(5) provided rules for making and revoking a CFC group election. Under the 2020 Proposed Regulations, a CFC group election could not be revoked with respect to any specified period of the specified group that begins during the 60-month period following the last day of the first specified period for which the election was made. Similarly, once revoked, a CFC group election could not be made again with respect to any specified period of the specified group that begins during the 60-month period following the last day of the first specified period for which the election was revoked. The preamble to the proposed regulations requested comments as to whether a specified group that does not make a CFC group election when it first comes into existence (or for the first specified period following 60 days after the date of publication of the Treasury decision adopting the 2020 Proposed Regulations as final in the Federal Register ) should be precluded from making the CFC group election for the following 60-month period. Some comments requested that taxpayers be permitted to make or revoke the CFC group election on an annual basis, due to the difficulty of predicting the effect of the election five years in advance (including the potential for changes in fact or law that could interact adversely with the CFC group election). The comments noted that, although the election is favorable in most cases, it could have unfavorable consequences in some circumstances. Some comments recommended against imposing a 60-month waiting period on specified groups for which a CFC group election is not made for the first specified period in which a specified group exists (or the specified period beginning 60 days after the regulations are finalized), because taxpayers may lack the resources or information to determine whether to make the election for the first taxable year in which it is available. Furthermore, some comments asked for clarification concerning when the 60-month period begins if a CFC group election is made or revoked with respect to a prior specified period. Finally, one comment recommended that the Treasury Department and the IRS consider providing an exception to the 60-month rule that would allow a CFC group election to be revoked when there is a "change in control." The comment did not suggest a definition of change in control. The Treasury Department and the IRS have determined that taxpayers should not be permitted to revoke the CFC group election for a specified period beginning within 60 months after the specified period for which it is made or to make the CFC group election for a specified period beginning within 60 months after the specified period for which it is revoked. The CFC group rules are based in part on the consolidated return rules, which do not allow affiliated groups that have elected to file a consolidated return to discontinue the filing of a consolidated return without the consent of the Commissioner (which generally requires a showing of good cause). See §1.1502-75(c). In addition, if a corporation ceases to be a member of a consolidated group, that corporation generally is not permitted to rejoin the consolidated group before the 61st month beginning after its first taxable year in which it ceased to be a member of the group. Section 1504(a)(3)(A). Moreover, an annual election would enable taxpayers to use section 163(j) to inappropriately control the timing of BIE deductions. In general, the CFC group election is intended, in large part, to reduce taxpayer burden, including compliance costs and costs that might otherwise be incurred to restructure the location of debt within a CFC group solely for purposes of section 163(j), and to permit allocation of a CFC group's section 163(j) limitation to CFC group members with BIE. The CFC group election is not intended to allow taxpayers to select the most favorable result in every taxable year. The Treasury Department and the IRS agree that it is not necessary to impose the 60-month waiting period on specified groups that have neither made nor revoked a CFC group election. Accordingly, the final regulations do not impose a 60-month waiting period on a specified group for which a CFC group election is not made for the first specified period in which a specified group exists (or the specified period beginning 60 days after the regulations are finalized). The final regulations provide, consistent with the 2020 Proposed Regulations, that the 60-month period begins after the last day of the specified period for which the election was made or revoked. See §1.163(j)-7(e)(5). Therefore, if an election is made or revoked with respect to a specified period, the 60-month period begins to run on the day after the end of that specified period. Finally, the Treasury Department and the IRS continue to study whether an exemption to the 60-month rule for revoking a CFC group election is appropriate when the ownership of the CFC group changes but the specified group continues and, therefore, the CFC group would also otherwise continue absent an exemption. 2. Disclosure required for taxable years in which a CFC group election is in effect Under the 2020 Proposed Regulations, a designated U.S. person makes a CFC group election by attaching a statement to its relevant Federal income tax or information return. Proposed §1.163(j)-7(e)(5)(iv). However, the 2020 Proposed Regulations did not require a statement to be filed for taxable years following the taxable year for which an election is made. In order to facilitate ongoing disclosure of the computation of the CFC group 163(j) limitation in subsequent taxable years, the final regulations provide that (in accordance with publications, forms, instructions, or other guidance) each designated U.S. person must attach a statement to its relevant Federal income tax or information return for each of its taxable years that includes the last day of a specified period of a specified group for which a CFC group election is in effect. See §1.163(j)-7(e)(6). The CFC group election remains in effect even if the required statement is not filed. I. CFC Group Members with Effectively Connected Income Proposed §1.163(j)-7(f) provided that if a CFC group member has income that is effectively connected with the conduct of a U.S. trade or business (ECI), then ECI items and related attributes of the CFC group member are not included in the calculation of the section 163(j) limitation of the CFC group or in the allocation of the limitation among CFC group members, but are treated as items of a separate CFC (ECI deemed corporation) that is not treated as a CFC group member. A comment requested clarification concerning the proper method for allocating assets between the CFC group member and the ECI deemed corporation, which is relevant to the allocation of BII and BIE to an excepted trade or business under §1.163(j)-10. As discussed in part VI of this Summary of Comments and Explanation of Revisions section, the Treasury Department and the IRS continue to study the application of section 163(j) to foreign corporations with ECI. The Treasury Department and the IRS may address these issues in future guidance and will consider the comment at that time. Before the issuance of such guidance, taxpayers should use a reasonable method for allocating assets between the CFC group member and the ECI deemed corporation. The method must be consistently applied to all CFC group members and each specified period of the CFC group after the first specified period in which it is applied. In addition, because the Treasury Department and the IRS continue to study the application of section 163(j) to foreign corporations with ECI, the final regulations reserve on §1.163(j)-7(f)(2) (ordering rule with §1.163(j)-8 when a CFC group member has ECI). J. ATI Computation of an Applicable CFC 1. Foreign Income Taxes The 2020 Proposed Regulations provided that, for purposes of computing the ATI of a relevant foreign corporation for a taxable year, tentative taxable income takes into account a deduction for foreign income taxes. Proposed §1.163(j)-7(g)(3). The preamble to the 2020 Proposed Regulations requested comments on whether, and the extent to which, the ATI of a relevant foreign corporation should be determined without regard to a deduction for foreign income taxes. Some comments asserted that all foreign income taxes, or foreign income taxes imposed by the country in which a CFC is organized or a tax resident, should not be taken into account as a deduction for purposes of computing a CFC's ATI. The comments asserted that not taking into account a deduction for such foreign income taxes would provide parity between CFCs and domestic corporations, which do not deduct Federal income taxes (but may deduct state and foreign taxes) in determining their ATI. Other comments noted that, if a domestic corporation elects to claim a foreign tax credit, the deduction for foreign income taxes is disallowed under section 275(a)(4) and is not taken into account in determining the domestic corporation's ATI. Therefore, disregarding a CFC's deduction for foreign income taxes would conform the ATI of a CFC with that of a domestic corporation doing business through a foreign branch that elects to credit foreign income taxes. Another comment asserted that foreign income taxes should not be deducted to the extent a CFC's U.S. shareholders elect to credit foreign income taxes. Finally, several comments suggested that the proposed rule penalizes CFCs operating in high-tax jurisdictions. The Treasury Department and the IRS agree that it is appropriate to determine the ATI of a relevant foreign corporation without regard to a deduction for foreign income taxes that are eligible to be claimed as a foreign tax credit. Accordingly, the final regulations provide that no deduction for foreign income taxes (within the meaning of §1.960-1(b)) is taken into account for purposes of determining the ATI of a relevant foreign corporation. Thus, regardless of whether an election is made to claim a credit for these foreign income taxes, the foreign income taxes do not reduce ATI. 2. Anti-abuse rule Proposed §1.163(j)-7(g)(4) provided that, if certain conditions are met, when one specified group member or applicable partnership (specified borrower) pays interest to another specified group member or applicable partnership (specified lender), and the payment is BIE to the specified borrower and income to the specified lender, then the ATI of the specified borrower is increased by the amount necessary for the BIE of the specified borrower not to be limited under section 163(j). A partnership is an applicable partnership if at least 80 percent of the interests in capital or profits is owned, in the aggregate, directly or indirectly through one or more other partnerships, by specified group members of the same specified group. The final regulations provide that, for purposes of determining whether a partnership is an applicable partnership, a partner's interests in the profits and capital of the partnership are determined in accordance with the rules and principles of §1.706-1(b)(4)(ii) through (iii). K. Safe Harbor Proposed §1.163(j)-7(h) provided a safe-harbor election for stand-alone applicable CFCs and CFC groups. If the safe-harbor election is in effect for a taxable year of a stand-alone applicable CFC or specified taxable year of a CFC group member, no portion of the BIE of the stand-alone applicable CFC or of each CFC group member, as applicable, is disallowed under section 163(j). The safe-harbor election is intended to reduce the compliance burden with respect to applicable CFCs that would not have disallowed BIE if they applied section 163(j) by allowing taxpayers in general to use subpart F income and GILTI items in lieu of ATI. In general, the safe-harbor election measures whether BIE is less than or equal to the sum of 30 percent of the applicable CFC's subpart F income and GILTI (not to exceed the applicable CFC's taxable income), taking into account only amounts attributable to a non-excepted trade or business. The preamble to the 2020 Proposed Regulations requested comments on appropriate modifications, if any, to the safe-harbor election that would further the goal of reducing the compliance burden on stand-alone applicable CFCs and CFC groups that would not have disallowed BIE if they applied the section 163(j) limitation. In this regard, comments requested that the safe harbor be expanded to cover applicable CFCs and CFC groups that have BII that is greater than or equal to BIE. The comments noted that an application of section 163(j) would not disallow any BIE of an applicable CFC or CFC group that has net BII. The Treasury Department and the IRS agree that it is appropriate for the safe-harbor to be expanded as requested because an application of section 163(j) in this case would not disallow any BIE. Accordingly, the final regulations provide that a safe-harbor election may be made with respect to a stand-alone applicable CFC or CFC group if its BIE does not exceed either (i) its BII, or (ii) 30 percent of the lesser of its eligible amount (in general, the sum of the applicable CFC's subpart F income and GILTI, taking into account only items properly allocable to a non-excepted trade or business) or its qualified tentative taxable income (that is, the applicable CFC's tentative taxable income determined by taking into account only items properly allocable to a non-excepted trade or business). Thus, under the final regulations, if either a stand-alone applicable CFC or a CFC group has BII that is greater than or equal to its BIE, it is not necessary to determine its qualified tentative taxable income or eligible amount in order to make the safe-harbor election. However, consistent with the 2020 Proposed Regulations, the election may not be made for a CFC group that has pre-group disallowed BIE carryforwards. In addition, consistent with the changes described in part V.B of the Summary of Comments and Explanation of Revisions section (providing that negative ATI of a CFC group member is taken into account for purposes of computing the CFC group's section 163(j) limitation), the determination of the eligible amount of a stand-alone applicable CFC or a CFC group has been modified to account for tested losses, if any, of an applicable CFC. See §1.163(j)-7(h)(3). Rather than providing a formula for calculating each component of the eligible amount, the final regulations rely on existing rules under sections 951, 951A, 245A (to the extent provided in section 964(e)(4)), and 250 to determine the taxable income a domestic corporation would have had if it wholly owned the stand-alone applicable CFC or CFC group members and had no other assets or income. See §1.163(j)-7(h)(3). L. Increase in Adjusted Taxable Income of United States Shareholders Proposed §1.163(j)-7(j) provided rules that increase a U.S. shareholder's ATI by a portion of its specified deemed inclusions (as defined in §1.163(j)-1(b)(1)(ii)(G)). Several comments were received on these rules. The Treasury Department and the IRS continue to study the method for determining the portion of the specified deemed inclusions of a U.S. shareholder that should increase its ATI. The Treasury Department and the IRS may address this issue in future guidance and will consider the comments at that time. Accordingly, the final regulations reserve on §1.163(j)-7(j). VI. Comments on and Changes to Proposed §1.163(j)-8: Application of the Business Interest Deduction Limitation to Foreign Persons with Effectively Connected Income Proposed §1.163(j)-8 provides rules for applying section 163(j) to a nonresident alien individual or foreign corporation with ECI. The Treasury Department and the IRS continue to study methods of determining the amount of deductible BIE and disallowed business interest expense carryforwards that are allocable to ECI, such as the ATI ratio defined in proposed §1.163(j)-8(c)(1)(ii) and the interaction of proposed §1.163(j)-8 with the tiered partnership rules in proposed §1.163(j)-6(j). The Treasury Department and the IRS anticipate addressing these issues in future guidance and will consider the comments at that time. Accordingly, the final regulations continue to reserve on §1.163(j)-8. VII. Comments on and Changes to Proposed §1.469-9: Definition of Real Property Trade or Business Section 469(c)(7)(C) defines real property trade or business by reference to eleven types of trades or businesses that are not defined in the statute. The 2020 Proposed Regulations, in response to questions about the application of section 469(c)(7)(C) to timberlands, provided definitions for two terms - real property development and real property redevelopment - to further clarify what constitutes a real property trade or business. One commenter questioned why the preamble to the 2020 Proposed Regulations references the definition of "farming" in section 464(e), when the term "farming business" in section 163(j)(7)(C) is defined by reference to section 263A(e)(4) rather than to section 464(e). The commenter further noted that a section 263A(e)(4) "farming business" excludes not only timber but also any evergreen tree which is more than 6 years old at the time severed from the roots. The commenter posited that there is no reason why such trees should be treated differently from timber for section 163(j) purposes. The Treasury Department and the IRS have concluded that no change is required to the definition of real property trade or business and that the definitions of "real property development" and "real property redevelopment" in proposed §1.469-9(b)(2)(ii)(C) and (D) should be adopted in the final regulations without change. However, it should be noted that §1.469-9(b)(2)(i)(B) references section 464(e) to exclude farming activities from the definition of real property trade or business for purposes of section 469(c)(7)(C). In promulgating §1.469-9(b)(2)(i)(B), the Treasury Department and the IRS determined that the term "farming" as provided in section 464(e) is the most appropriate definition for purposes of section 469(c)(7). Section 464(e) generally excludes the cultivation and harvesting of trees (except those bearing fruit or nuts) from the definition of "farming." Accordingly, the Treasury Department and the IRS note that the term "timberland" as used in §1.469-9(b)(2)(ii)(C) and (D) includes evergreen trees (including those described in section 263A(e)(4)). Therefore, to the extent the evergreen trees may be located on parcels of land covered by forest, the Treasury Department and the IRS have concluded that the business activities of cultivating and harvesting such evergreen trees may be properly considered as a component of a "real property development" or "real property redevelopment" trade or business under the final regulations, and no additional clarification is needed in this regard. To the extent that any business activities of cultivating or harvesting evergreen trees do not explicitly fall within these two definitions, then such business activities may otherwise qualify under one or more of the other terms provided in section 469(c)(7)(C). Providing a definition for any of the remaining undefined terms in section 469(c)(7)(C) is beyond the scope of the final regulations. VIII. Comments on and Changes to Proposed §1.163(j)-10 A. Proposed Limitation on Corporate Look-Through Rules For purposes of determining the extent to which a shareholder's basis in the stock of a domestic non-consolidated C corporation or CFC is allocable to an excepted or non-excepted trade or business under §1.163(j)-10, §1.163(j)-10(c)(5)(ii)(B) provides several look-through rules whereby the shareholder "looks through" to the corporation's basis in its assets. The application of these look-through rules may produce distortive results in certain situations. For example, assume Corporation X's basis in its assets is split equally between X's excepted and non-excepted trades or businesses, and that (as a result) X has a 50 percent exempt percentage applied to its interest expense. However, rather than operate its excepted trade or business directly, X operates its excepted trade or business through a wholly owned, non-consolidated subsidiary (Corporation Y), and each of X and Y borrows funds from external lenders. Assuming for purposes of this example that neither the anti-avoidance rule in §1.163(j)-2(h) nor the anti-abuse rule in §1.163(j)-10(c)(8) applies, Y's interest expense would not be subject to the section 163(j) limitation because Y is engaged solely in an excepted trade or business. Moreover, a portion of X's interest expense also would be allocable to an excepted trade or business by virtue of the application of the look-through rule in §1.163(j)-10(c)(5)(ii)(B)(2) to X's basis in Y's stock. The anti-avoidance rule in §1.163(j)-2(h) and the anti-abuse rule in §1.163(j)-10(c)(8) would preclude the foregoing result in certain circumstances. However, proposed §1.163(j)-10(c)(5)(ii)(D)( 2 ) would modify the look-through rule for domestic non-consolidated C corporations and CFCs to limit the potentially distortive effect of this look-through rule on tiered structures in situations to which the anti-avoidance and anti-abuse rules do not apply. More specifically, proposed §1.163(j)-10(c)(5)(ii)(D)( 2 ) would modify the look-through rule for non-consolidated C corporations to provide that, for purposes of determining a taxpayer's basis in its assets used in excepted and non-excepted trades or businesses, any such corporation whose stock is being looked through may not itself apply the look-through rule (Limited Look-Through Rule). For example, P wholly and directly owns S1, which wholly and directly owns S2. Each of these entities is a non-consolidated C corporation to which the small business exemption does not apply. In determining the extent to which its interest expense is subject to the section 163(j) limitation, S1 may look through the stock of S2 for purposes of allocating S1's basis in its S2 stock between excepted and non-excepted trades or businesses. However, in determining the extent to which P's interest expense is subject to the section 163(j) limitation, S1 may not look through the stock of S2 for purposes of allocating P's basis in its S1 stock between excepted and non-excepted trades or businesses. Several commenters objected to the Limited Look-Through Rule. One commenter stated that the Limited Look-Through Rule should not be finalized because it would penalize taxpayers that incur debt at the holding company level but hold excepted trade or business assets through tiers of non-consolidated subsidiaries (such as CFCs) for non-tax reasons. The commenter contended that this result is especially distortive in regulated industries, such as utilities, in which debt financing at the operating-entity level may be limited or prohibited by regulators. Another commenter noted that the Limited Look-Through Rule potentially conflicts with the single C corporation approach for CFCs under proposed §1.163(j)-7(c)(2)(iii). The Treasury Department and the IRS remain concerned that application of the look-through rules in §1.163(j)-10 to non-consolidated C corporations may produce distortive results in certain situations. However, as stated in the preamble to the 2020 Proposed Regulations, the Treasury Department and the IRS are aware that taxpayers are organized into multi-tiered structures for legitimate, non-tax reasons and that it may be commercially difficult or impossible for taxpayers to limit or reduce the number of tiers in many cases. The Treasury Department and the IRS have therefore determined that such multi-tiered structures should be able to apply the look through rules in §1.163(j)-10. However, the Treasury Department and the IRS have also determined that the application of the look through rules in §1.163(j)-10 is inappropriate in cases where a principal purpose of a multi-tiered structure is to benefit from distortion under those rules. Thus, the final regulations replace the Limited Look-Through Rule with an anti-abuse rule providing that, for purposes of applying the look-through rules in §1.163(j)-10(c)(5)(ii)(B) and (C) to a non-consolidated C corporation (upper-tier entity), that upper-tier entity may not apply those look-through rules to a lower-tier non-consolidated C corporation if a principal purpose for borrowing funds at the upper-tier entity level or adding an upper-tier or lower-tier entity to the ownership structure is increasing the amount of the taxpayer's basis allocable to excepted trades or businesses. For example, P wholly and directly owns S1 (the upper-tier entity), which wholly and directly owns S2. Each of S1 and S2 is a non-consolidated C corporation to which the small business exemption does not apply, and S2 is engaged in an excepted trade or business. With a principal purpose of increasing the amount of its basis allocable to excepted trades or businesses, P has S1 (rather than S2) borrow funds from a third party. S1 may not look through the stock of S2 (and may not apply the asset basis look-through rule described in §1.163(j)-10(c)(5)(ii)(B)( 2 )( iv )) for purposes of P's allocation of its basis in its S1 stock between excepted and non-excepted trades or businesses; instead, S1 must treat its stock in S2 as an asset used in a non-excepted trade or business for that purpose. However, S1 may look through the stock of S2 for purposes of S1's allocation of its basis in its S2 stock between excepted and non-excepted trades or businesses. B. 80-Percent Ownership Threshold in §1.163(j)-10(c)(7)(i) A commenter recommended eliminating the 80-percent ownership threshold in §1.163(j)-10(c)(7)(i) for applying the look-through rules in §1.163(j)-10(c)(5)(ii) to non-consolidated C corporations. More specifically, the commenter recommended providing that interest expense allocable to an equity interest in an entity engaged in an electing real property trade or business (RPTOB) be treated as allocated to an electing RPTOB to the extent the assets of that entity are attributable to an electing RPTOB, regardless of the level of the equity interest. The commenter stated that, because a less-than-80-percent interest in a subsidiary corporation is treated as allocable to a "trade or business" for purposes of the section 163(j) limitation, it is appropriate to treat the stock of that corporation as allocable to an electing RPTOB if the subsidiary corporation is an electing RPTOB, without regard to an ownership threshold. As stated in the preamble to the 2018 Proposed Regulations, the Treasury Department and the IRS have determined that non-consolidated entities generally should not be aggregated for purposes of applying the section 163(j) limitation. Moreover, as stated in the preamble to T.D. 9905, the Treasury Department and the IRS have determined that an 80-percent ownership threshold is appropriate for domestic non-consolidated C corporations because, unlike a partnership, a corporation generally is respected as an entity separate from its owner(s) for tax purposes and, unlike a partnership or an S corporation, a C corporation is not taxed as a flow-through entity. Thus, the final regulations do not accept the commenter's recommendation. C. Application of Look-Through Rules to Small Businesses Section 1.163(j)-10(c)(5)(ii)(D) provides that a taxpayer may not apply the look-through rules in §1.163(j)-10(c)(5)(ii) to a partnership, S corporation, or non-consolidated C corporation that is eligible for the small business exemption under section 163(j)(3) and §1.163(j)-2(d)(1), unless that entity elects under §1.163(j)-9 for a trade or business to be an electing RPTOB or an electing farming business. Under §1.163(j)-9(b)(2)(i), an exempt small business entity that conducts a RPTOB may make a "protective election" for its RPTOB to be an excepted trade or business. A commenter noted that, if a taxpayer indirectly holds an interest in an electing RPTOB through an exempt upper-tier partnership that does not conduct an excepted trade or business, the taxpayer would be ineligible to allocate the taxpayer's interest expense to the electing RPTOB under T.D. 9905. To ensure that the owners of an exempt small business entity are treated consistently regardless of the entity's overall capital structure, the commenter recommended either (i) allowing the owners of an exempt small business entity to apply the look-through rules without the need for a "protective election" to be an excepted trade or business, or (ii) allowing the small business entity to elect to opt into the look-through rules. The Treasury Department and the IRS appreciate the comments received on the application of the look-through rules to small businesses. These comments concern provisions in T.D. 9905 that were not revised in the 2020 Proposed Regulations, and the Treasury Department and the IRS have determined that addressing these comments would exceed the scope of the final regulations. However, the Treasury Department and the IRS will continue to consider these comments for purposes of potential future guidance. D. Alternative to Asset Basis Allocation A commenter recommended amending §1.163(j)-10 to permit taxpayers to use a fair market value allocation method when determining allocations of BIE for purposes of section 163(j). To discourage taxpayers from shifting allocation methods, the commenter recommended that a fair market value allocation election be irrevocable absent consent from the IRS. As explained in the preamble to T.D. 9905, disputes between taxpayers and the IRS over the fair market value of an asset are a common and costly occurrence. Moreover, in the TCJA, Congress repealed the use of fair market value in the apportionment of interest expense under section 864 of the Code (see section 14502(a) of the TCJA). As noted in the preamble to T.D. 9905, Congress stated that the ability to elect to allocate interest expense under section 864 on the basis of fair market value of assets has led to inappropriate results and needless complexity. For these and other reasons, the Treasury Department and the IRS continue to believe that allocating interest expense based on relative amounts of asset basis is more appropriate than a regime based on the relative fair market value of assets. Thus, the final regulations do not accept this comment. Applicability Dates These final regulations apply to taxable years beginning on or after March 22, 2021. See additional discussion in part VI of the Special Analyses addressing the Congressional Review Act. Some provisions regarding the choice to apply the final regulations to taxable years beginning before the applicability date have changed from the 2020 Proposed Regulations. Commenters noted that these provisions in the 2020 Proposed Regulations were complicated. More specifically, in the 2020 Proposed Regulations, retroactive application of certain provisions requires application of all of the section 163(j) regulations contained in T.D. 9905, some or all of the provisions in these final regulations, and other specified provisions. Additionally, most provisions had to be applied to subsequent taxable years once applied for a taxable year (subsequent year application). As provided in this section, to simplify the applicability date provisions and provide certainty to taxpayers, these final regulations, except as otherwise described later in this Applicability Dates section, require taxpayers choosing to apply the final regulations to a taxable year beginning before the applicability date to apply the section 163(j) regulations contained in T.D. 9905 as modified by these final regulations, along with other specified provisions, and require subsequent year application. Except for §§1.163-15 and 1.1256(e)-2, pursuant to section 7805(b)(7), taxpayers and their related parties, within the meaning of sections 267(b) (determined without regard to section 267(c)(3)) and 707(b)(1), may choose to apply the rules of these final regulations to a taxable year beginning after December 31, 2017, 1 and before March 22, 2021, provided that they consistently apply the section 163(j) regulations contained in T.D. 9905 as modified by these final regulations and, if applicable, §§1.263A-9, 1.263A-15, 1.381(c)(20)-1, 1.382-1, 1.382-2, 1.382-5, 1.382-6, 1.382-7, 1.383-0, 1.383-1,1.469-9, 1,469-11, 1.704-1, 1.882-5, 1.1362-3, 1.1368-1, 1.1377-1, 1.1502-13, 1.1502-21, 1.1502-36, 1.1502-79, 1.1502-90, 1.1502-91 through 1.1502-99 (to the extent they effectuate the rules of §§1.382-2, 1.382-5, 1.382-6, and 1.383-1), and 1.1504-4 contained in T.D. 9905 as modified by these final regulations to that taxable year and each subsequent taxable year. ****** 1 Under the 2020 Proposed Regulations, for purposes of determining applicability dates, the term "related party" has the meaning provided in sections 267(b) and 707(b)(1). Section 267(c)(3) broadens the scope of related parties under section 267(b) by potentially treating individual partners in a partnership as related to a corporation owned by the partnership, even if the individual partners own only a small interest in the partnership. The Treasury Department and the IRS have determined that this broad scope is unnecessary in this context and may impede the ability of certain taxpayers to choose to apply the regulations to pre-applicability taxable years. Accordingly, under these final regulations, for purposes of determining applicability dates, the term "related party" is determined without regard to section 267(c)(3). **** Pursuant to section 7805(b)(7), taxpayers and their related parties, within the meaning of sections 267(b) (determined without regard to section 267(c)(3)) and 707(b)(1), may apply the provisions of §1.163-15 or 1.1256(e)-2 of the final regulations for a taxable year beginning after December 31, 2017, and before March 22, 2021, provided that they consistently apply the rules in §1.163-15 or 1.1256(e)-2, as applicable, to that taxable year and each subsequent taxable year. Alternatively, taxpayers and their related parties, within the meaning of sections 267(b) (determined without regard to section 267(c)(3)) and 707(b)(1), may rely on the rules in the 2020 Proposed Regulations to the extent provided in the 2020 Proposed Regulations. To the extent that a rule in the 2020 Proposed Regulations is not finalized in these final regulations, taxpayers and their related parties, within the meaning of sections 267(b) (determined without regard to section 267(c)(3)) and 707(b)(1), may rely on that rule for a taxable year beginning on or after March 22, 2021, provided that they consistently follow all of the rules in the 2020 Proposed Regulations that are not being finalized to that taxable year and each subsequent taxable year beginning on or before the date the Treasury decision adopting that rule as final is applicable or other guidance regarding continued reliance is issued. Statement of Availability of IRS Documents The IRS Notices, Revenue Rulings, and Revenue Procedures cited in this document are published in the Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at http://www.irs.gov. Special Analyses I. Regulatory Planning and Review - Economic Analysis Executive Orders 13771, 13563, and 12866 direct agencies to assess costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits, including potential economic, environmental, public health and safety effects, distributive impacts, and equity. Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, reducing costs, harmonizing rules, and promoting flexibility. For purposes of E.O. 13771 this rule is regulatory. These final regulations have been designated by the Office of Information and Regulatory Affairs (OIRA) as subject to review under Executive Order 12866 pursuant to the Memorandum of Agreement (MOA, April 11, 2018) between the Treasury Department and the Office of Management and Budget (OMB) regarding review of tax regulations. OIRA has designated these regulations as economically significant under section 1(c) of the MOA. Accordingly, the OMB has reviewed these regulations. A. Need for the final regulations The Tax Cuts and Jobs Act (TCJA) substantially modified the statutory rules of section 163(j) to limit the amount of net business interest expense that can be deducted in the current taxable year. Because this limitation on deduction for business interest expense is relatively new, taxpayers would benefit from regulations that explain key terms and calculations. The Treasury Department and the IRS published proposed regulations in December 2018 (2018 Proposed Regulations) and published final regulations in September 2020 (T.D. 9905) to finalize most sections of the 2018 Proposed Regulations. Concurrently with the publication of T.D. 9905, the Treasury Department and the IRS published proposed regulations (2020 Proposed Regulations) to provide additional section 163(j) limitation guidance to T.D. 9905 in response to certain comments to the 2018 Proposed Regulations. The final regulations are needed to bring clarity to instances where the meaning of the statute was unclear and to respond to comments received on the 2020 Proposed Regulations. B. Background and Overview Section 163(j), substantially revised by the TCJA, provides a set of statutory rules that impose a limitation on the amount of business interest expense that a taxpayer may deduct for Federal tax purposes. This limitation does not apply to businesses with gross receipts of $25 million or less (inflation adjusted). This provision has the general effect of putting debt-financed investment by businesses on a more equal footing with equity-financed investment, a treatment that Congress believed would lead to a more efficient capital structure for firms. See Senate Budget Explanation of the Bill as Passed by SFC (2017-11-20) at pp. 163-4. Subsequently, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) amended section 163(j) to provide special rules relating to the ATI limitation for taxable years beginning in 2019 or 2020. C. Economic Analysis 1. Baseline In this analysis, the Treasury Department and the IRS assess the economic effects of the final regulations relative to a no-action baseline reflecting anticipated Federal income tax-related behavior in the absence of the final regulations. 2. Summary of Economic Effects The final regulations provide certainty and clarity to taxpayers regarding terms and calculations that are contained in section 163(j), which was substantially modified by TCJA. In the absence of this clarity, the likelihood that different taxpayers would interpret the rules regarding the deductibility of business interest expense (BIE) differently would be exacerbated. In general, overall economic performance is enhanced when businesses face more uniform signals about tax treatment. Certainty and clarity over tax treatment also reduce compliance costs for taxpayers. For those situations where taxpayers would generally adopt similar interpretations of the statute even in the absence of guidance, the final regulations provide value by helping to ensure that those interpretations are consistent with the purpose of the statute. For example, the final regulations may specify a tax treatment that few or no taxpayers would adopt in the absence of specific guidance. The Treasury Department and the IRS project that the final regulations will have an annual economic effect greater than $100 million ($2020) relative to the no-action baseline. This determination is based on the substantial volume of business interest payments in the economy 2 and the general responsiveness of business investment to effective tax rates, 3 one component of which is the deductibility of interest expense. Based on these two factors, even modest changes in the deductibility of interest payments (and in the certainty of that deductibility) provided by the final regulations, relative to the no-action baseline, can be expected to have annual effects greater than $100 million. This claim is particularly likely to hold for the first set of general section 163(j) guidance that is promulgated following major legislation, such as TCJA, and for other major guidance, which the Treasury Department and the IRS have determined includes the final regulations. **** 2 Interest deductions in tax year 2013 for corporations, partnerships, and sole proprietorships were approximately $800 billion. 3 See E. Zwick and J. Mahon, "Tax Policy and Heterogeneous Investment Behavior," at American Economic Review 2017, 107(1): 217-48 and articles cited therein. ****** Regarding the nature of the economic effects, the Treasury Department and the IRS project that the final regulations will increase investment in the United States and increase the proportion that is debt-financed, relative to the no-action baseline. They have further determined that these effects are consistent with the intent and purpose of the statute. Because the final regulations are projected to lead to a decrease in Federal tax revenue relative to the no-action baseline, there may be an increase in the Federal deficit relative to the no-action baseline. This may lead to a decrease in investment by taxpayers not directly affected by these final regulations, relative to the no-action baseline. This effect should be weighed against the enhanced efficiency arising from the clarity and enhanced consistency with the intent and purpose of the statute provided by these regulations. The Treasury Department and the IRS have determined that the final regulations provide a net benefit to the U.S. economy relative to the no-action baseline. The Treasury Department and the IRS have not undertaken more precise quantitative estimates of these effects because many of the definitions and calculations under section 163(j) are new and many of the economic decisions that are implicated by these final regulations involve highly specific taxpayer circumstances. The Treasury Department and the IRS do not have readily available data or models to estimate with reasonable precision the types and volume of different financing arrangements that taxpayers might undertake under the final regulations versus the no-action baseline. In the absence of such quantitative estimates, the Treasury Department and the IRS have undertaken a qualitative analysis of the economic effects of the final regulations relative to the no-action baseline and relative to alternative regulatory approaches. This analysis is presented in Part I.C.3 of this Special Analyses. No comments on the economic analysis of the 2020 Proposed Regulations were received. 3. Economic Effects of Specific Provisions a. Definition of Interest T.D. 9905 set forth several categories of amounts and transactions that generate interest for purposes of section 163(j). The final regulations provide further guidance on the definition of interest relevant to the calculation of interest expense and interest income. In particular, the final regulations provide rules under which the dividends paid by a regulated investment company (RIC) that earns net business interest income (BII) (referred to as section 163(j) interest dividends) are to be treated as interest income by the RIC's shareholders. That is, under the final regulations, certain interest income earned by the RIC and paid to a shareholder as a dividend is treated as if the shareholder earned the interest income directly for purposes of section 163(j). These final regulations clarify that reported dividends paid by RICs can include designations of BII for the purposes of the section 163(j) limitation. This clarification makes clear that investment through RICs is treated, for purposes of the section 163(j) limitation, similarly to investment through other possible debt instruments. To the extent that taxpayers believed, in the absence of the final regulations, that dividends paid by RICs are not treated as BII for the purposes of the section 163(j) limitation, then taxpayers may respond to the final regulations by increasing investment in RICs. The Treasury Department and the IRS have determined that this treatment is consistent with the intent and purpose of the statute. Affected Taxpayers. The Treasury Department and the IRS have determined that the rules regarding section 163(j) interest dividends will potentially affect approximately 10,000 RICs. The Treasury Department and the IRS do not have readily available data on the number of RIC shareholders that would receive section 163(j) interest dividends that the shareholder could treat as BII for purposes of the shareholder's section 163(j) limitation. They further do not have data on the volume of dividends that would be eligible for this treatment. b. Provisions related to Partnerships i. Trading Partnerships Section 163(j) limits the deductibility of interest expense at the partnership level. The final regulations address commenter concerns about the interaction between this section 163(j) limitation and the section 163(d) partner level limitation on interest expense that existed prior to TJCA. Under logic described in the preamble to the 2018 Proposed Regulations, section 163(j) limitations would apply at the partnership level while section 163(d) limitations would apply at the partner level and these tests would be applied independently. Commenters suggested and the Treasury Department and the IRS have agreed that the correct interpretation of the statute is to exempt interest expense that is limited at the partner level by section 163(d) from the partnership-level section 163(j) limitation in accordance with the language of section 163(j)(5). The final regulations provide that interest expense at the partnership level that is allocated to non-materially participating partners subject to section 163(d) is not included in the section 163(j) limitation calculation of the partnership. Generally, the section 163(d) limitation is more generous than the section 163(j) limitation. Relative to the 2018 Proposed Regulations, this change may encourage these partners to incur additional interest expense because they will be less likely to be limited in their ability to use it to offset other income. Commenters argued that exempting from section 163(j) any interest expense allocated to non-materially participating partners subject to section 163(d) will treat this interest expense in the same way as the interest expense generated through separately managed accounts, which are not subject to section 163(j) limitations. The Treasury Department and the IRS project that the final regulations will result in additional investment in trading partnerships and generally higher levels of debt in any given trading partnership relative to the 2018 Proposed Regulations. Because investments in trading partnerships may be viewed as economically similar to investments in separately managed accounts arrangements, they further project that the final regulations, by making the tax treatments of these two arrangements generally similar, will improve U.S. economic performance relative to the no-action baseline. Number of Affected Taxpayers. The Treasury Department and the IRS have determined that the rules regarding trading partnerships will potentially affect approximately 275,000 partnerships, not including their partners. This number was reached by determining, using data for the 2017 taxable year, the number of Form 1065 and Form 1065-B filers that (1) completed Schedule B to Form 1065 and marked box b, c, or d in question 1 to denote limited partnership, limited liability company, or limited liability partnership status; and (2) have a North American Industry Classification System (NAICS) code starting with 5231 (securities and commodity contracts intermediation and brokerage), 5232 (securities and commodity exchanges), 5239 (other financial investment activities), or 5259 (other investment pools and funds). Additionally, the Treasury Department and the IRS have determined that the rules regarding publicly traded partnerships will potentially affect approximately 80 partnerships, not including their partners. This number was reached by determining, using data for the 2017 taxable year, the number of Form 1065 and 1065-B filers with gross receipts exceeding $25 million that answered "yes" to question 5 on Schedule B to Form 1065 denoting that the entity is a publicly traded partnership. The Treasury Department and the IRS do not have readily available data on the number of filers that are tax shelters that are potentially affected by these provisions. ii. Self-charged Lending The 2018 Proposed Regulations requested comments on the treatment of lending transactions between a partnership and a partner (self-charged lending transactions). Suppose that a partnership receives a loan from a partner and allocates the resulting interest expense to that partner. Prior to TCJA, the interest income and interest expense from this loan would net precisely to zero on the lending partner's tax return. Under section 163(j) as revised by TCJA, however, the partnership's interest expense deduction may now be limited. Therefore, in absence of specific regulatory guidance, the lending partner may receive interest income from the partnership accompanied by less-than-fully-offsetting interest expense. Instead, the lending partner would receive excess business interest expense (EBIE), which would not be available to offset his personal interest income. This outcome has the effect of increasing the cost of lending transactions between partners and their partnerships relative to otherwise similar financing arrangements. To avoid this outcome, the final regulations treat the lending partner's interest income from the loan as excess business interest income (EBII) from the partnership, but only to the extent of the partner's share of any EBIE from the partnership for the taxable year. This allows the interest income from the loan to be offset by the EBIE. The business interest expense (that is, BIE) of the partnership attributable to the lending transaction will thus be treated as BIE of the partnership for purposes of applying section 163(j) to the partnership. The Treasury Department and the IRS expect that the final regulations will lead a higher proportion of self-charged lending transactions in partnership financing, relative to the no-action baseline. In a self-charged lending transaction, the lending partner is on both sides of the transaction. It is the lender and, through the partnership, the borrower. Because of this, debt from self-charged lending transactions is generally viewed as less risky than traditional debt, as both the lender and the borrower are incentivized to repay the loan without default. Therefore, the Treasury Department and the IRS believe that the better policy choice is to not subject self-charged lending transactions to section 163(j). The Treasury Department and the IRS further project that the final regulations will increase the proportion of partnership financing that is debt-financed relative to the no-action baseline. The Treasury Department and the IRS have determined that these effects are consistent with the intent and purpose of the statute. Number of Affected Taxpayers. The Treasury Department and the IRS do not have readily available data to determine the number of taxpayers affected by rules regarding self-charged interest because no reporting modules currently connect these payments by and from partnerships. c. Provisions related to Controlled Foreign Corporations (CFCs) i. How to Apply Section 163(j) when CFCs have shared ownership T.D. 9905 clarified that section 163(j) and the section 163(j) regulations generally apply to determine the deductibility of a CFC's BIE for tax purposes in the same manner as these provisions apply to a domestic corporation. The final regulations provide additional rules and guidance as to how section 163(j) applies to CFCs, including when CFCs have shared ownership and are eligible to be members of CFC groups. The Treasury Department and the IRS considered three options with respect to the application of section 163(j) to CFC groups. The first option was to apply the 163(j) limitation to CFCs on a stand-alone basis, regardless of whether CFCs have shared ownership. However, if section 163(j) were applied on a stand-alone basis, business interest deductions of individual CFCs might be limited by section 163(j) even when, if calculated on a group basis, business interest deductions would not be limited. Taxpayers could restructure or "self-help" to mitigate the effects of the section 163(j) limitation. Such an option would lead to restructuring costs for the taxpayer (relative to the third option, described later) with no corresponding economically productive activity. The second option, which was proposed in the 2018 Proposed Regulations, was to allow an election to treat related CFCs in a similar manner as partnerships with respect to their U.S. shareholders. Under this option, while the section 163(j) rules would still be computed at the individual CFC level, the business interest expense of each CFC group member that was subject to section 163(j) was limited to its share of the net business interest expense of the CFC group, and the "excess taxable income" of a CFC could be passed up from lower-tier CFCs to upper-tier CFCs and U.S. shareholders in the same group. Excess taxable income is the amount of income by which a CFC's ATI exceeds the threshold amount of ATI below which there would be disallowed BIE. Comments to the 2018 Proposed Regulations suggested that computing a section 163(j) limitation for each CFC and rolling up CFC excess taxable income would be burdensome for taxpayers, especially since some multinational organizations have hundreds of CFCs. In addition, comments noted that the ability to pass up excess taxable income would encourage multinational organizations to restructure such that CFCs with low interest payments and high ATI are lower down the ownership chain and CFCs with high interest payments and low ATI are higher up in the chain of ownership. Similar to the first option, this restructuring would impose costs on taxpayers without any corresponding productive economic activity. The third option, which is adopted by the Treasury Department and the IRS in the final regulations, was to allow taxpayers to elect to apply the section 163(j) rules to CFC groups on an aggregate basis, similar to the rules applicable to U.S. consolidated groups. This option was suggested by many comments and is the approach taken in the final regulations. Under this option, a single section 163(j) limitation is computed for a CFC group by summing the items necessary for this computation (for example, current-year BIE and ATI) across all CFC group members. The CFC group's limitation is then allocated to each CFC member using allocation rules similar to those that apply to U.S. consolidated groups. The choice to use the consolidated approach versus the stand-alone entity approach may affect the amount of interest that can be deducted. The amount of interest that can be deducted may affect the amount of subpart F income and tested income for purposes of determining the amount of inclusions under sections 951 and 951A. However, the consolidated approach applies only for purposes of computing the section 163(j) limitation and not for purposes of applying any other Code provision, such as section 951 or 951A. This option reduces the compliance burden on taxpayers in comparison to applying the section 163(j) rules on an individual CFC basis and calculating the excess taxable income to be passed up from lower-tier CFCs to higher-tier CFCs. In comparison to the first and second options, this option also removes the incentive for taxpayers to undertake costly restructuring, since the location of interest payments and ATI among CFC group members will not affect the interest disallowance for the group. The Treasury Department and the IRS have not estimated this difference in compliance costs because they do not have readily available data or models to do so. The final regulations also set out a number of rules to govern membership in a CFC group. These rules specify which CFCs can be members of the same CFC group, how CFCs with U.S. effectively connected income (ECI) should be treated, and the timing for making or revoking a CFC group election. These rules provide clarity and certainty to taxpayers regarding the CFC group election for section 163(j). In the absence of these regulations, taxpayers may make financing decisions or undertake restructuring based on differential interpretations of the appropriate tax treatment, an outcome that is generally inefficient relative to decisions based on the more uniform interpretation provided by the final regulations. Number of Affected Taxpayers. The set of taxpayers affected by this rule includes any taxpayer with ownership in a CFC that is a member of a CFC group that has average gross receipts over a three-year period in excess of $25 million. The Treasury Department and the IRS estimate that there are approximately 7,500 taxpayers with two or more CFCs based on counts of e-filed tax returns for tax years 2015-2017. This estimate includes C corporations, S corporations, partnerships, and individuals with CFC ownership. ii. Foreign income taxes and ATI of a CFC The 2020 Proposed Regulations provided that the ATI of a CFC is determined by taking into account a deduction for foreign income taxes. The preamble to the 2020 Proposed Regulations requested comments on whether, and the extent to which, the ATI of a CFC should be determined without regard to a deduction for foreign income taxes. The final regulations provide that the ATI of a CFC is determined without regard to a deduction for foreign income taxes that are eligible to be claimed as a foreign tax credit. Thus, regardless of whether an election is made to claim a credit for these foreign income taxes, the foreign income taxes do not reduce ATI. The Treasury Department and the IRS considered three options, based on comments received, in determining the extent to which foreign income taxes paid by a CFC should be taken into account in determining its ATI. The first option would not take into account a deduction for foreign income taxes imposed by the national government of the country in which a CFC is organized or a tax resident, but would take into account a deduction for taxes imposed by sub-national levels of government. This would result in treating a CFC in an analogous manner to a domestic corporation, which does not deduct Federal income taxes (but may deduct state and foreign taxes) in determining its ATI. However, this option would result in the ATI of a CFC being determined in a different manner than the ATI of a domestic corporation doing business through a foreign branch that elects to credit foreign income taxes (as discussed in the next option). Furthermore, this option would increase (relative to the next option) the administrative and compliance burdens of taxpayers required to determine which foreign income taxes paid by a CFC are imposed by a national government and which are imposed by sub-national levels of government. The second option considered would not take into account foreign income taxes for which an election is made to claim a foreign tax credit. This option would conform the ATI of a CFC with that of a domestic corporation doing business through a foreign branch. If a domestic corporation doing business through a foreign branch elects to claim a foreign tax credit, the deduction for foreign income taxes is disallowed under section 275(a)(4) and is not taken into account in determining the domestic corporation's ATI. However, unlike a foreign branch that has a single owner, a CFC may have multiple shareholders. Because the election to credit foreign income taxes is made at the shareholder-level, this option would require a CFC to determine which of its shareholders elects to credit foreign income taxes, thereby increasing the administrative and compliance burdens. Furthermore, some shareholders of a CFC may elect to credit foreign income taxes, while other shareholders of the CFC may not elect or may not be eligible to elect a credit (for example, because the shareholder is a foreign corporation). Since the section 163(j) limitation is determined at the CFC-level, rather than on a shareholder-by-shareholder basis, this option could result in one shareholder being affected by the election of an unrelated shareholder of the same CFC, an outcome that would generally lead to economically inefficient decision-making. The third option, which is adopted by the Treasury Department and the IRS in the final regulations, does not take into account a deduction for foreign income taxes that are eligible to be claimed as a foreign tax credit for purposes of calculating a CFC's ATI, regardless of whether the CFC's U.S. shareholders have made an election to claim a foreign tax credit. Relative to the first and second options, this option minimizes the administrative and compliance burden of determining ATI of a CFC, and also results in the greatest amount of ATI and section 163(j) limitation. In addition, this option does not treat CFCs located in high-tax countries differently than CFCs located in low-tax countries. Otherwise similar CFCs will have similar ATIs regardless of their foreign income taxes. In this way, the rule does not penalize U.S. shareholders of CFCs with high foreign taxes. Number of Affected Taxpayers. The population of affected taxpayers includes any taxpayer that is a U.S. shareholder of a CFC. The Treasury Department and the IRS estimate that there are approximately 10,000 to 11,000 affected taxpayers based on a count of e-filed tax returns for tax years 2015-2017. These counts include C corporations, S corporations, partnerships, and individuals with CFC ownership that meet a $25 million three-year average gross receipts threshold. The Treasury Department and the IRS do not have readily available data on the number of filers that are tax shelters that are potentially affected by these provisions. d. Election to use 2019 ATI to determine 2020 section 163(j) limitation for consolidated groups The final regulations provide that if a taxpayer filing as a consolidated group elects to substitute its 2019 ATI for its 2020 ATI, that group can use the consolidated group ATI for the 2019 taxable year, even if membership of the consolidated group changed in the 2020 taxable year. For example, suppose consolidated group C has three members in the 2019 taxable year, P, the common parent of the consolidated group, and S1 and S2, which are both wholly owned by P. In the 2019 taxable year, each member of consolidated group C had $100 of ATI on a stand-alone basis, and that consolidated group C had $300 of ATI. In the 2020 taxable year, consolidated group C sells all of the stock of S2 and acquires all of the stock of a new member, S3. In the 2019 taxable year, S3 had $50 in ATI on a stand-alone basis. Under the final regulations, consolidated group C may elect to use $300 in ATI from 2019 as a substitute for its ATI in the 2020 taxable year. The Treasury Department and the IRS considered as an alternative basing the 2019 ATI on the membership of the consolidated group in the 2020 taxable year. In the example in the previous paragraph, this approach would subtract out the $100 in ATI from S2 and add the $50 in ATI from S3, for a total of $250 in 2019 ATI that could potentially be substituted for 2020 ATI for consolidated group C. This approach would add burden to taxpayers relative to the final regulations by requiring additional calculations and tracking of ATI on a member-by-member basis to determine the amount of 2019 ATI that can be used in the 2020 taxable year without providing any general economic benefit. In addition, the 2019 tax year will have closed for most taxpayers by the time the final regulations will be published. This implies that a final rule based on the consolidated group composition in the 2019 taxable year to calculate the amount of 2019 ATI that can be used in the 2020 taxable year will, relative to the alternative approach of using the composition in the 2020 taxable year, reduce the incentive for taxpayers to engage in costly mergers, acquisitions, or divestures to achieve a favorable tax result for those taxpayers for whom the 2020 taxable year has not closed by the time the final regulations are published. Number of Affected Taxpayers. The Treasury Department and the IRS estimate that approximately 34,000 corporate taxpayers filed a consolidated group tax return for tax year 2017. This represents an upper-bound of the number of taxpayers affected by the final rule as not all consolidated groups would need to calculate the amount of section 163(j) interest limitation in tax years 2019 and 2020. II. Paperwork Reduction Act The collection of information in the final regulations has been submitted to the OMB for review in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) (PRA). An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid OMB control number. Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and return information are confidential, as required by section 6103 of the Code. iv. Collections of Information The collections of information subject to the PRA in the final regulations are in §§1.163(j)-6(d)(5), 1.163(j)-6(g)(4), 1.163(j)-7(e)(5)(iv), 1.163(j)-7(e)(6), and 1.163(j)-7(h)(5). The collections of information in §§1.163(j)-6(d)(5) and 1.163(j)-6(g)(4) are required to make two elections relating to changes made to section 163(j) by the CARES Act. The election under §1.163(j)-6(d)(5) is for a passthrough taxpayer to use the taxpayer's ATI for the last taxable year beginning in 2019 as its ATI for any taxable year beginning in 2020, in accordance with section 163(j)(10)(B). The election under §1.163(j)-6(g)(4) relates to EBIE of a partnership for any taxable year beginning in 2019 that is allocated to a partner. Section 163(j)(10)(A)(ii)(II) provides that, unless the partner elects out, in 2020, the partner treats 50 percent of the EBIE as not subject to the section 163(j) limitation. If the partner elects out, the partner treats all EBIE as subject to the same limitations as other EBIE allocated to the partner. Revenue Procedure 2020-22 describes the time and manner for making these elections. For both elections, taxpayers make the election by timely filing a Federal income tax return or Form 1065, including extensions, an amended Federal income tax return, amended Form 1065, or administrative adjustment request, as applicable. More specifically, taxpayers complete the Form 8990, "Limitation on Business Interest Expense under Section 163(j)," using the taxpayer's 2019 ATI and/or not applying the rule in section 163(j)(10)(ii)(II), as applicable. No formal statements are required to make these elections. Accordingly, the reporting burden associated with the collections of information in §§1.163(j)-6(d)(5) and 1.163(j)-6(g)(4) will be reflected in the IRS Form 8990 PRA Submissions (OMB control number 1545-0123). The collections of information in §1.163(j)-7 are required for taxpayers (1) to make or revoke an election under §1.163(j)-7(e)(5)(iv) to apply section 163(j) to a CFC group (CFC group election) and to file an annual information statement to demonstrate how the CFC group calculated its section 163(j) limitation under §1.163(j)-7(e)(6) (annual information statement), or (2) to make an annual election to exempt a CFC or CFC group from the section 163(j) limitation under §1.163(j)-7(h)(5) (safe-harbor election). The CFC group election or revocation of the CFC group election are made by attaching a statement to the US shareholder's annual return. Similarly, the annual information statement must be attached to the US shareholder's annual return. The CFC group election remains in place until revoked and may not be revoked for any period beginning before 60 months following the period for which it is initially made. The safe-harbor election is made on an annual basis. Under §1.964-1(c)(3)(i), to make an election on behalf of a foreign corporation, the controlling domestic shareholder provides a statement with its return and notice of the election to the minority shareholders under §1.964-1(c)(3)(ii) and (iii). See also §1.952-2(b)-(c). These collections are necessary to ensure that the election is properly effectuated, and that taxpayers properly report the amount of interest that is potentially subject to the limitation. B. Future Modifications to Forms to Collect Information At this time, the Treasury Department and the IRS are considering modifications to the Form 8990, "Limitation on Business Interest Expense IRC 163(j)," with regard to the elections under section 163(j)(10) regarding the election under §§1.163(j)-6(d)(5) and 1.163(j)-6(g)(4), the CFC group election, annual information statement, and safe-harbor election. Any modifications to Form 8990 would not be effective until the form cycle for the 2021 taxable year. For the PRA, the reporting burden of Form 8990 is associated with OMB control number 1545-0123. In the 2018 Proposed Regulations, Form 8990 was estimated to be required by fewer than 92,500 taxpayers. If an additional information collection requirement is imposed through these regulations in the future, for purposes of the PRA, any reporting burden associated with these regulations will be reflected in the aggregated burden estimates and the OMB control numbers for general income tax forms or the Form 8990, "Limitation on Business Interest Expense Under Section 163(j)". The forms are available on the IRS website at: In addition, when available, drafts of IRS forms are posted for comment at https://a pps.irs.gov/app/picklist/list/draftTaxForms.htm. IRS forms are available at https://www.irs.gov/forms-instructions. Forms will not be finalized until after they have been approved by OMB under the PRA. C. Burden Estimates The following estimates for the collections of information in the final regulations are based on the most recently available Statistics of Income (SOI) tax data. For the collection of income in §1.163(j)-6(d)(5), where a passthrough taxpayer elects to use the taxpayer's ATI for the last taxable beginning in 2019 as the taxpayer's ATI for any taxable year beginning in 2020, the most recently available 2017 SOI tax data indicates that, on the high end, the estimated number of respondents is 49,202. This number was determined by examining, for the 2017 tax year, Form 1065 and Form 1120-S filers with greater than $26 million in gross receipts that have reported interest expense, and do not have an NAICS code that is associated with a trade or business that normally would be excepted from the section 163(j) limitation. For the collection of information under §1.163(j)-6(g)(4), in which a partner elects out of treating 50 percent of any EBIE allocated to the partner in 2019 as not subject to a limitation in 2020, the Treasury Department and the IRS estimate that only taxpayers that actively want to reduce their deductions will make this election. The application of the base erosion minimum tax under section 59A depends, in part, on the amount of a taxpayer's deductions. Accordingly, the Treasury Department and the IRS estimate that taxpayers that are subject to both the base erosion minimum tax under section 59A and section 163(j) are the potential filers of this election. Using the 2017 SOI tax data, the Treasury Department estimates that 1,182 firms will make the election. This estimate was determined by examining three criteria: first, the number of taxpayers subject to section 59A, namely, C corporations with at least $500,000,000 in gross receipts, second, the portion of those taxpayers that do not have an NAICS code associated with a trade or business that is generally not subject to the section 163(j) limitation (2211 (electric power generation, transmission and distribution), 2212 (natural gas distribution), 2213 (water, sewage and other systems), 111 or 112 (farming), 531 (real property)), and, third, the portion of taxpayers satisfying the first two criteria that received a Form K-1, "Partner's Share of Income, Deductions, Credits, etc." The reporting burdens associated with the information collections in §§1.163(j)-6(d)(5) and 1.163(j)-6(g)(4) are included in the aggregated burden estimates for OMB control numbers 1545-0074 in the case of individual filers and 1545-0123 in the case of business filers. The overall burden estimates associated with those OMB control numbers are aggregate amounts that relate to the entire package of forms associated with the applicable OMB control number and will in the future include, but not isolate, the estimated burden of the tax forms that will be created or revised as a result of the information collections in these regulations. No burden estimates specific to §§1.163(j)-6(d)(5) and 1.163(j)-6(g)(4) of the final regulations are currently available. The Treasury Department and the IRS request comments on all aspects of the forms that reflect the information collection burdens related to the final regulations, including estimates for how much time it would take to comply with the paperwork burdens related to the forms described and ways for the IRS to minimize the paperwork burden. For the collections of information in §1.163(j)-7, namely the CFC group election and annual statement, and the safe-harbor election, and the corresponding notice under §1.964-1(c)(3)(iii), the most recently available 2017 SOI tax data indicates that, on the high end, the estimated number of respondents is 4,980 firms. This number was determined by examining, for the 2017 tax year, Form 1040, Form 1120, Form 1120-S, and Form 1065 filers with greater than $26 million in gross receipts that filed a Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, where an interest expense amount was reported on Schedule C of the Form 5471. The estimated number of respondents that could be subject to the collection of information for the CFC group or safe-harbor election is 4,980. The estimated annual burden per respondent/recordkeeper varies from 0 to 30 minutes, depending on individual circumstances, with an estimated average of 15 minutes. The estimated total annual reporting and/or recordkeeping burden is 1,245 hours (4,980 respondents * 15 minutes). The estimated annual cost burden to respondents is $95 per hour. Accordingly, we expect the total annual cost burden for the CFC group election and safe-harbor election statements to be $118,275 (4,980 .25 $95). III. Regulatory Flexibility Act It is hereby certified that the final regulations will not have a significant economic impact on a substantial number of small entities. This certification can be made because the Treasury Department and the IRS have determined that the number of small entities that are affected as a result of the regulations is not significant. These rules do not disincentivize taxpayers from their operations, and any burden imposed is not significant because the cost of implementing the rules, if any, is low. As discussed in the 2018 Proposed Regulations, section 163(j) provides exceptions for which many small entities will qualify. First, under section 163(j)(3), the limitation does not apply to any taxpayer, other than a tax shelter under section 448(a)(3), which meets the gross receipts test under section 448(c) for any taxable year. A taxpayer meets the gross receipts test under section 448(c) if the taxpayer has average annual gross receipts for the 3-taxable year period ending with the taxable year that precedes the current taxable year that do not exceed $26,000,000. The gross receipts threshold is indexed annually for inflation. Because of this threshold, the Treasury Department and the IRS project that entities with 3-year average gross receipts below $26 million will not be affected by these regulations except in rare cases. Section 163(j) provides that certain trades or businesses are not subject to the limitation, including the trade or business of performing services as an employee, electing real property trades or businesses, electing farming businesses, and certain utilities as defined in section 163(j)(7)(A)(iv). Under the 2018 Proposed Regulations, taxpayers that otherwise qualified as real property trades or businesses or farming businesses that satisfied the small business exemption in section 448(c) were not eligible to make an election to be an electing real property trade or business or electing farming business. Under T.D. 9905, however, those taxpayers are eligible to make an election to be an electing real property trade or business or electing farming business. Additionally, T.D. 9905 provides that certain utilities not otherwise excepted from the limitation can elect for a portion of their non-excepted utility trade or business to be excepted from the limitation. Any economic impact on any small entities as a result of the requirements in the final regulations, not just the requirements that impose a PRA burden, is not expected to be significant because the cost of implementing the rules, if any, is low. The Treasury Department and the IRS do not have readily available data on the number of filers that are tax shelters, as defined in section 448(a)(3), that are potentially affected by these provisions. As described in more detail earlier in this preamble, the final regulations cover several topics, including, but not limited to, self-charged interest, the treatment of section 163(j) in relation to trader funds, the impact of section 163(j) on publicly traded partnerships, and the application of section 163(j) to United States shareholders of controlled foreign corporations. The Treasury Department and the IRS do not have readily available data to determine the number of taxpayers affected by rules regarding self-charged interest because no reporting modules currently connect these payments by and from partnerships. Additionally, the Treasury Department and the IRS do not have readily available data to determine the number of taxpayers affected by rules regarding debt proceeds distributed from a taxpayer account or from cash. However, the rules do not impose a significant paperwork or implementation cost burden on taxpayers. Under Notice 89-35, taxpayers have been required to maintain books and records to properly report the tax treatment of interest. The rules in §1.163-15 are a finalization of the rules in section VI of Notice 89-35, which extends the period in §1.163-8T(c)(4)(iii)(B) from 15 to 30 days to determine whether debt proceeds have been distributed from a particular account. As shown in the following table, the Treasury Department and the IRS estimate that approximately 276 trading partnerships will be affected by these rules. The table was calculated using data for the 2018 taxable year, the number of Form 1065 and Form 1065-B filers, with more than $26 million in gross receipts but less than the amount considered to be a small entity for purposes of this Regulatory Flexibility Act analysis, that (1) completed Schedule B to Form 1065 and marked box b, c, or d in question 1 to denote limited partnership, limited liability company or limited liability partnership status; and (2) have a North American Industry Classification System (NAICS) code starting with 5231 (securities and commodity contracts intermediation and brokerage), 5232 (securities and commodity exchanges), 5239 (other financial investment activities) or 5259 (other investment pools and funds). Additionally, the Treasury Department and the IRS have determined that the rules regarding publicly traded partnerships might affect approximately 71 taxpayers. This number was reached by determining, using data for the 2018 taxable year, the number of Form 1065 and 1065-B filers with gross receipts exceeding $25 million that answered "yes" to question 5 on Schedule B to Form 1065 denoting that the entity is a publicly traded partnership. As noted earlier, the final regulations do not impose any new collection of information on these entities. These final regulations actually assist small entities in meeting their filing obligations by providing definitive advice on which they can rely. For the section 163(j)(10) elections for passthrough taxpayers under final §§1.163(j)-6(d)(5) and 1.163(j)-6(g)(4), most small taxpayers do not need to make the elections because, as discussed above, they are not subject to the section 163(j) limitation. For small taxpayers that are subject to the limitation, the cost to implement the election is low. Pursuant to Revenue Procedure 2020-22, these passthrough taxpayers simply complete the Form 8990 as if the election has been made. Accordingly, the burden of complying with the elections, if needed, is no different than for taxpayers who do not make the elections. The persons potentially subject to final §1.163(j)-7 are U.S. shareholders of one or more CFCs for which BIE is reported, and that (1) have average annual gross receipts for the 3-taxable year period ending with the taxable year that precedes the current taxable year exceeding $26,000,000, and (2) want to make the CFC group election or safe-harbor election. Section 1.163(j)-7 of the final regulations requires such taxpayers to attach a statement to their return providing basic information regarding the CFC group or standalone CFC. As discussed in the PRA section of this preamble, the reporting burden for both statements is estimated at 0 to 30 minutes, depending on individual circumstances, with an estimated average of 15 minutes for all affected entities, regardless of size. The estimated monetized burden for compliance is $95 per hour. Accordingly, the Secretary certifies that the rule will not have a significant economic impact on a substantial number of small entities. Pursuant to section 7805(f), the notice of proposed rulemaking preceding this final rule was submitted to the Chief Counsel for the Office of Advocacy of the Small Business Administration for comment on its impact on small business. No comments on the notice were received from the Chief Counsel for the Office of Advocacy of the Small Business Administration. IV. Unfunded Mandates Reform Act Section 202 of the Unfunded Mandates Reform Act of 1995 requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a state, local, or tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. These final regulations do not include any Federal mandate that may result in expenditures by state, local, or tribal governments, or by the private sector in excess of that threshold. V. Executive Order 13132: Federalism Executive Order 13132 (entitled "Federalism") prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on state and local governments, and is not required by statute, or preempts state law, unless the agency meets the consultation and funding requirements of section 6 of the Executive Order. These final regulations do not have federalism implications and do not impose substantial direct compliance costs on state and local governments or preempt state law within the meaning of the Executive Order. VI. Congressional Review Act The Administrator of OIRA has determined that this is a major rule for purposes of the Congressional Review Act (5 U.S.C. 801 et seq.) (CRA). Under section 801(3) of the CRA, a major rule takes effect 60 days after the rule is published in the Federal Register. Notwithstanding this requirement, section 808(2) of the CRA allows agencies to dispense with the requirements of section 801 when the agency for good cause finds that such procedure would be impracticable, unnecessary, or contrary to the public interest and the rule shall take effect at such time as the agency promulgating the rule determines. Pursuant to section 808(2) of the CRA, the Treasury Department and the IRS find, for good cause, that a 60-day delay in the effective date is unnecessary and contrary to the public interest. These final regulations resolve ambiguity with respect to the statute and certain aspects of the 2020 Proposed Regulations, prevent abuse through the application of several anti-abuse rules, and grant taxpayer relief that would not be available based solely on the statute. Following the amendments to section 163(j) by the TCJA, the Treasury Department and the IRS published the proposed regulations to provide certainty to taxpayers. In particular, as demonstrated by the wide variety of public comments in response to the proposed regulations received after the publication of the final regulations, taxpayers continue to express uncertainty regarding the proper application of the statutory rules and the final regulations under section 163(j). This uncertainty extends to the application of a number of important temporary provisions in section 163(j) enacted as part of the CARES Act that were intended to provide relief for taxpayers impacted by COVID-19. The final regulations provide rules that are relevant to the application of these taxpayer-favorable provisions. Certainty with respect to these temporary provisions is essential so that taxpayers can accurately model the impact of these provisions on their liquidity in order to make timely informed business decisions during the limited periods in which these provisions are in place. Furthermore, in order to make informed business decisions, taxpayers will need to consider the potentially complex interaction of these temporary provisions, and section 163(j) more generally, with other Code provisions (for example, sections 59A, 172, and 250), which further heightens the need for prompt guidance. Consistent with Executive Order 13924 (May 19, 2020), the Treasury Department and the IRS have therefore determined that an expedited effective date of the final regulations would "give businesses the confidence they need to re-open by providing guidance on what the law requires." 85 FR 31353-4. Accordingly, the Treasury Department and the IRS have determined that the rules in this Treasury decision will take effect on the date it is filed with the Office of the Federal Register for public inspection. Drafting Information The principal authors of these regulations are Susie Bird, Charlie Gorham, Nathaniel Kupferman, Jaime Park, Sophia Wang, and James Williford (Income Tax & Accounting), Vishal Amin, Brian Choi, Jacob Moore, Adrienne M. Mikolashek, and William Kostak (Passthroughs and Special Industries), Azeka J. Abramoff and Raphael J. Cohen (International), Russell G. Jones and John B. Lovelace (Corporate), and William Blanchard, Michael Chin, Steven Harrison, and Pamela Lew (Financial Institutions & Products). Other personnel from the Treasury Department and the IRS participated in their development. Statement of Availability of IRS Documents IRS Revenue Procedures, Revenue Rulings notices, and other guidance cited in this document are published in the Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at https://www.irs.gov. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Amendments to the Regulations Accordingly, 26 CFR part 1 is amended as follows: PART 1 - INCOME TAXES Paragraph 1. The authority citation for part 1 continues to read in part as follows: Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.163-15 is added to read as follows: §1.163-15 Debt Proceeds Distributed from Any Taxpayer Account or from Cash. (a) In general. Regardless of paragraphs (c)(4) and (5) of §1.163-8T, in the case of debt proceeds deposited in an account, a taxpayer that is applying §1.163-8T or §1.163-14 may treat any expenditure made from any account of the taxpayer, or from cash, within 30 days before or 30 days after debt proceeds are deposited in any account of the taxpayer as made from such proceeds to the extent thereof. Similarly, in the case of debt proceeds received in cash, a taxpayer that is applying §1.163-8T or §1.163-14 may treat any expenditure made from any account of the taxpayer, or from cash, within 30 days before or 30 days after debt proceeds are received in cash as made from such proceeds to the extent thereof. For purposes of this section, terms used have the same meaning as in §1.163-8T(c)(4) and (5). (b) Applicability date. This section applies to taxable years beginning on or after March 22, 2021. However, taxpayers and their related parties, within the meaning of sections 267(b) (determined without regard to section 267(c)(3)) and 707(b)(1), may choose to apply the rules in this section to a taxable year beginning after December 31, 2017, and before March 22, 2021, provided that those taxpayers and their related parties consistently apply all of the rules in this section to that taxable year and each subsequent taxable year. Par. 3. Section 1.163(j)-0 is amended by: 1. Adding entries for §§ 1.163(j)-1(b)(1)(iv)(A)( 4 ) and 1.163(j)-1(b)(1)(iv)(B)( 1 ) and ( 2 ). 2. Revising the entry for §1.163(j)-1(b)(1)(iv)(C). 3. Adding entries for §1.163(j)-1(b)(1)(iv)(E) through (G). 4. Revising the entries for §1.163(j)-1(b)(22)(iii)(F) and (b)(35). 5. Adding entries for §§1.163(j)-1(c)(4), 1.163(j)-2(b)(3)(i) through (iv), and 1.163(j)-2(d)(3). 6. Revising the entries for §§1.163(j)-2(k) and 1.163(j)-6(c)(1) through (3). 7. Adding entries for §§1.163(j)-6(c)(4), 1.163(j)-6(d)(3) through (5), 1.163(j)-6(e)(5) and (6), 1.163(j)-6(f)(1)(iii), 1.163(j)-6(g)(4), and 1.163(j)-6(l)(4)(iv). 8. Revising the entries for §§1.163(j)-6(n) and (p), 1.163(j)-7(c) through (f) and (h) through (m). 9. Adding entries for §1.163(j)-7(g)(3) and (4). 10. Revising the entries for §§1.163(j)-10(c)(5)(ii)(D) and 1.163(j)-10(f). The revisions and additions read as follows: §1.163(j)-0 Table of Contents. §1.163(j)-1 Definitions. (b) * * * (1) * * * (iv) * * * (A) * * * ( 4 ) Nonrecognition transactions. (B) * * * ( 1 ) In general. ( 2 ) Application of the alternative computation method. (C) Successor rules. ( 1 ) Successor assets. ( 2 ) Successor entities. (E) Alternative computation method. ( 1 ) Alternative computation method for property dispositions. ( 2 ) Alternative computation method for dispositions of member stock.( 3 ) Alternative computation method for dispositions of partnership interests. (F) Cap on negative adjustments. ( 1 ) In general. ( 2 ) Example. (G) Treatment of depreciation, amortization, or depletion capitalized under section 263A. (22) * * * (iii) * * * (F) Section 163(j) interest dividends. ( 1 ) In general. ( 2 ) Limitation on amount treated as interest income. ( 3 ) Conduit amounts. ( 4 ) Holding period. ( 5 ) Exception to holding period requirement for money market funds and certain regularly declared dividends. (35) Section 163(j) interest dividend. (i) In general. (ii) Reduction in the case of excess reported amounts. (iii) Allocation of excess reported amount. (A) In general. (B) Special rule for noncalendar year RICs. (iv) Definitions. (A) Reported section 163(j) interest dividend amount. (B) Excess reported amount. (C) Aggregate reported amount. (D) Post-December reported amount. (E) Excess section 163(j) interest income. (v) Example. (c) * * * (4) Paragraphs (b)(1)(iv)(A)( 2 ) through ( 4 ), (B) through (G), (b)(22)(iii)(F), and (b)(35). §1.163(j)-2 Deduction for business interest expense limited. (b) * * * (3) * * * (i) In general. (ii) Short taxable years. (iii) Transactions to which section 381 applies. (iv) Consolidated groups. (d) * * * (3) Determining a syndicate's loss amount. (k) Applicability dates. (1) In general. (2) Paragraphs (b)(3)(iii), (b)(3)(iv), and (d)(3). §1.163(j)-6 Application of the business interest deduction limitation to partnerships and subchapter S Corporations (c) * * * (1) Modification of business interest income for partnerships. (2) Modification of business interest expense for partnerships. (3) Transition rule. (4) Character of business interest expense. (d) * * * (3) Section 743(b) adjustments and publicly traded partnerships. (4) Modification of adjusted taxable income for partnerships. (5) Election to use 2019 adjusted taxable income for taxable years beginning in 2020. (e) * * * (5) Partner basis items, remedial items, and publicly traded partnerships. (6) [Reserved]. (f) * * * (1) * * * (iii) Exception applicable to publicly traded partnerships. (g) * * * (4) Special rule for taxable years beginning in 2019 and 2020. (l) * * * (4) * * * (iv) [Reserved]. (n) Treatment of self-charged lending transactions between partnerships and partners. (o) * * * (p) Applicability dates. (1) In general. (2) Paragraphs (c)(1) and (2), (d)(3) through (5), (e)(5), (f)(1)(iii), (g)(4), (n), and (o)(24) through (29), and (34) through (36). §1.163(j)-7 Application of the section 163(j) limitation to foreign corporations and United States shareholders. (c) Application of section 163(j) to CFC group members of a CFC group. (1) Scope. (2) Calculation of section 163(j) limitation for a CFC group for a specified period. (i) In general. (ii) Certain transactions between CFC group members disregarded. (iii) [Reserved] (iv) [Reserved] (3) Deduction of business interest expense. (i) CFC group business interest expense. (A) In general. (B) Modifications to relevant terms. (ii) Carryforwards treated as attributable to the same taxable year. (iii) Multiple specified taxable years of a CFC group member with respect to a specified period. (iv) Limitation on pre-group disallowed business interest expense carryforward. (A) General rule. ( 1 ) CFC group member pre-group disallowed business interest expense carryforward. ( 2 ) Subgrouping. ( 3 ) Transition rule. (B) Deduction of pre-group disallowed business interest expense carryforwards. (4) Currency translation. (5) Special rule for specified periods beginning in 2019 or 2020. (i) 50 percent ATI limitation applies to a specified period of a CFC group. (ii) Election to use 2019 ATI applies to a specified period of a CFC group. (A) In general. (B) Specified taxable years that do not begin in 2020. (d) Determination of a specified group and specified group members. (1) Scope. (2) Rules for determining a specified group. (i) Definition of a specified group. (ii) Indirect ownership. (iii) Specified group parent. (iv) Qualified U.S. person. (v) Stock. (vi) Options treated as exercised. (vii) When a specified group ceases to exist. (3) Rules for determining a specified group member. (e) Rules and procedures for treating a specified group as a CFC group. (1) Scope. (2) CFC group and CFC group member. (i) CFC group. (ii) CFC group member. (3) Duration of a CFC group. (4) Joining or leaving a CFC group. (5) Manner of making or revoking a CFC group election. (i) In general. (ii) Revocation by election. (iii) Timing. (iv) Election statement. (v) Effect of prior CFC group election. (6) Annual information reporting. (f) Treatment of a CFC group member that has ECI. (1) In general. (2) [Reserved] (g) * * * (3) Treatment of certain foreign income taxes. (4) Anti-abuse rule. (i) In general. (ii) ATI adjustment amount. (A) In general. (B) Special rule for taxable years or specified periods beginning in 2019 or 2020. (iii) Applicable partnership. (h) Election to apply safe-harbor. (1) In general. (2) Eligibility for safe-harbor election. (i) Stand-alone applicable CFC. (ii) CFC group. (iii) Currency translation. (3) Eligible amount. (i) Stand-alone applicable CFC. (ii) CFC group. (iii) Additional rules for determining an eligible amount. (4) Qualified tentative taxable income. (5) Manner of making a safe-harbor election. (i) In general. (ii) Election statement. (6) Special rule for taxable years or specified periods beginning in 2019 or 2020. (i) - (j) [Reserved] (k) Definitions. (1) Applicable partnership. (2) Applicable specified taxable year. (3) ATI adjustment amount. (4) [Reserved] (5) [Reserved] (6) CFC group. (7) CFC group election. (8) CFC group member. (9) [Reserved] (10) Cumulative section 163(j) pre-group carryforward limitation. (11) Current group. (12) Designated U.S. person. (13) ECI deemed corporation. (14) Effectively connected income. (15) Eligible amount. (16) Former group. (17) Loss member. (18) Payment amount. (19) Pre-group disallowed business interest expense carryforward. (20) Qualified tentative taxable income. (21) Qualified U.S. person. (22) Relevant period. (23) Safe-harbor election. (24) Specified borrower. (25) Specified group. (26) Specified group member. (27) Specified group parent. (28) Specified lender. (29) Specified period. (i) In general. (ii) Short specified period. (30) Specified taxable year. (31) Stand-alone applicable CFC. (32) Stock. (l) Examples. (m) Applicability dates. (1) General applicability date. (2) Exception. (3) Early application. (i) Rules for paragraphs (b) and (g)(1) and (2) of this section. (ii) Rules for certain other paragraphs in this section. (4) Additional rules that must be applied consistently. (5) Election for prior taxable years. §1.163(j)-10 Allocation of interest expense, interest income, and other items of expense and gross income to an excepted trade or business. (c) * * * (5) * * * (ii) * * * (D) Limitations on application of look-through rules. ( 1 ) Inapplicability of look-through rule to partnerships or non-consolidated C corporations to which the small business exemption applies. ( 2 ) Limitation on application of look-through rule to C corporations. (f) Applicability dates. (1) In general. (2) Paragraph (c)(5)(ii)(D)( 2 ). Par. 4. Section 1.163(j)-1 is amended by: 1. In paragraph (b)(1)(iv)(A)( 1 ), adding the text "and paragraphs (b)(1)(iv)(B) and (E)" after the text "paragraphs (b)(1)(ii)(C), (D), and (E)". 2. Revising paragraphs (b)(1)(iv)(A)( 2 ) and ( 3 ). 3. Adding paragraph (b)(1)(iv)(A)( 4 ). 4. Revising paragraphs (b)(1)(iv)(B), (C), and (D). 5. Adding paragraphs (b)(1)(iv)(E), (F), and (G). 6. Revising paragraphs (b)(1)(viii)(A) through (D). 7. Adding paragraph (b)(1)(viii)(E). 8. Adding paragraphs (b)(22)(iii)(F) and (b)(35). 9. In paragraph (c)(1), removing "paragraphs (c)(2) and (3)" from the first sentence and adding "paragraphs (c)(2), (3), and (4)" in its place. 10. Adding paragraph (c)(4). The revisions and additions read as follows: §1.163(j)-1 Definitions. (b) * * * (1) * * * (iv) * * * (A) * * * ( 2 ) Intercompany transactions. For purposes of paragraphs (b)(1)(ii)(C) and (D) and paragraphs (b)(1)(iv)(B) and (b)(1)(iv)(E)( 1 ) and ( 2 ) of this section, the term sale or other disposition excludes all intercompany transactions, within the meaning of §1.1502-13(b)(1)(i), to the extent necessary to achieve single-entity taxation of the consolidated group. ( 3 ) Deconsolidations. Notwithstanding any other rule in this paragraph (b)(1)(iv)(A), any transaction in which a member (S) leaves a consolidated group (selling group), including a section 381(a) transaction described in paragraph (b)(1)(iv)(A)( 1 ) of this section, is treated as a taxable disposition of all S stock held by any member of the selling group for purposes of paragraphs (b)(1)(ii)(C) and (D) and paragraphs (b)(1)(iv)(B) and (b)(1)(iv)(E)( 1 ) and ( 2 ) of this section, unless the transaction is described in §1.1502-13(j)(5)(i). Following S's deconsolidation, any subsequent sales or dispositions of S stock by the selling group do not trigger further adjustments under paragraphs (b)(1)(ii)(C) and (D) and paragraphs (b)(1)(iv)(B) and (b)(1)(iv)(E)( 1 ) and ( 2 ) of this section. If a transaction is described in §1.1502-13(j)(5)(i), the transaction is not treated as a sale or other disposition for purposes of paragraphs (b)(1)(ii)(C) and (D) and paragraphs (b)(1)(iv)(B) and (b)(1)(iv)(E)( 1 ) and ( 2 ) of this section. See also the successor rules in paragraph (b)(1)(iv)(C) of this section. ( 4 ) Nonrecognition transactions. The disposition of property, member stock (other than in a deconsolidation described in paragraph (b)(1)(iv)(A)( 3 ) of this section), or partnership interests in a nonrecognition transaction, other than a section 381(a) transaction described in paragraph (b)(1)(iv)(A)( 1 ) of this section, is treated as a taxable disposition of the property, member stock, or partnership interest disposed of for purposes of paragraph (b)(1)(iv)(E)( 1 )( i ), (b)(1)(iv)(E)( 2 )( i ), and (b)(1)(iv)(E)( 3 )( i ) of this section, respectively. For example, if a taxpayer transfers property to a wholly owned, non-consolidated subsidiary, the transfer of the property is treated as a taxable disposition for purposes of paragraph (b)(1)(iv)(E)( 1 )( i ) of this section notwithstanding the application of section 351. (B) Deductions by members of a consolidated group --( 1 ) In general. If paragraph (b)(1)(ii)(C), (D), or (E) of this section applies to adjust the tentative taxable income of a consolidated group, and if the consolidated group does not use the alternative computation method in paragraph (b)(1)(iv)(E) of this section, the amount of the adjustment under paragraph (b)(1)(ii)(C) of this section equals the greater of the allowed or allowable depreciation, amortization, or depletion of the property, as provided under section 1016(a)(2), for the consolidated group for the taxable years beginning after December 31, 2017, and before January 1, 2022, with respect to such property. ( 2 ) Application of the alternative computation method. If paragraph (b)(1)(ii)(C), paragraph (b)(1)(ii)(D), or paragraph (b)(1)(ii)(E) of this section applies to adjust the tentative taxable income of a consolidated group, and if the consolidated group uses the alternative computation method in paragraph (b)(1)(iv)(E) of this section, the amount of the adjustment computed under paragraph (b)(1)(iv)(E)( 1 )( i ), paragraph (b)(1)(iv)(E)( 2 )( i ), or paragraph (b)(1)(iv)(E)( 3 )( i ) of this section must take into account the net gain that would be taken into account by the consolidated group, including from intercompany transactions, determined by treating the sale or other disposition as a taxable transaction (see paragraphs (b)(1)(iv)(A)( 3 ) and ( 4 ) of this section regarding deconsolidations and certain nonrecognition transactions, respectively). (C) Successor rules --( 1 ) Successor assets. This paragraph (b)(1)(iv)(C)( 1 ) applies if deductions described in paragraph (b)(1)(ii)(C) of this section are allowed or allowable to a consolidated group member (S) and either the depreciable property or S's stock is subsequently transferred to another member (S1) in an intercompany transaction in which the transferor receives S1 stock. If this paragraph (b)(1)(iv)(C)( 1 ) applies, and if the transferor's basis in the S1 stock received in the intercompany transaction is determined, in whole or in part, by reference to its basis in the depreciable property or the S stock, the S1 stock received in the intercompany transaction is treated as a successor asset for purposes of paragraph (b)(1)(ii)(D) and (b)(1)(iv)(E)( 2 ) of this section. Thus, except as otherwise provided in paragraph (b)(1)(iv)(D) of this section, the subsequent disposition of either the S1 stock or the S stock (or both) may require the application of the adjustment rules of paragraph (b)(1)(ii)(D) or paragraph (b)(1)(iv)(E)( 2 ) of this section. ( 2 ) Successor entities. The acquiring corporation in a section 381(a) transaction to which the exception in paragraph (b)(1)(iv)(A)( 1 ) of this section applies is treated as a successor to the distributor or transferor corporation for purposes of paragraphs (b)(1)(ii)(C) through (E) and (b)(1)(iv)(B) and (E) of this section. Therefore, for example, in applying paragraphs (b)(1)(ii)(C) through (E) and (b)(1)(iv)(B) and (E) of this section, the acquiring corporation is treated as succeeding to the allowed or allowable items of the distributor or transferor corporation. Similarly, the surviving group in a transaction described in §1.1502-13(j)(5)(i) to which the exception in paragraph (b)(1)(iv)(A)( 3 ) of this section applies is treated as a successor to the terminating group for purposes of paragraphs (b)(1)(ii)(C) through (E) and (b)(1)(iv)(B) and (E) of this section. (D) Anti-duplication rule --( 1 ) In general. The aggregate of the subtractions from tentative taxable income of a consolidated group under paragraphs (b)(1)(ii)(C) through (E) or paragraphs (b)(1)(iv)(E)( 1 ) through ( 3 ) of this section with respect to an item of property (including with regard to dispositions of successor assets described in paragraph (b)(1)(iv)(C)( 1 ) of this section) cannot exceed the aggregate amount of the consolidated group members' deductions described in paragraph (b)(1)(ii)(C) of this section with respect to such item of property. In addition, once an item of property is no longer held by any member of a consolidated group (whether or not an adjustment to the tentative taxable income of the group is made under paragraph (b)(1)(ii)(C) of this section with respect to the direct or indirect disposition of that property), no further adjustment to the group's tentative taxable income is made under paragraph (b)(1)(ii)(D) or paragraph (b)(1)(iv)(E)( 2 ) of this section in relation to the same property with respect to any subsequent stock disposition. (2) Adjustments following deconsolidation. If a corporation (S) leaves a consolidated group (Group 1) in a transaction that requires an adjustment under paragraph (b)(1)(ii)(D) or paragraph (b)(1)(iv)(E)( 2 ) of this section, no further adjustment is required under paragraph (b)(1)(ii)(C) or (E) or paragraph (b)(1)(iv)(E) of this section in a separate return year (as defined in §1.1502-1(e)) of S with respect to depreciation, amortization, or depletion deductions allowed or allowable to Group 1. See paragraph (b)(1)(iv)(A) of this section for special rules regarding the meaning of the term "sale or other disposition" for purposes of the adjustments required under paragraphs (b)(1)(ii)(C) through (E) and paragraphs (b)(1)(iv)(B) and (E) of this section. For example, assume that S deconsolidates from Group 1 in a transaction not described in §1.1502-13(j)(5)(i) after holding property for which depreciation, amortization, or depletion deductions were allowed or allowable in Group 1. On the deconsolidation, S and Group 1 would adjust tentative taxable income with regard to that property. See paragraphs (b)(1)(iv)(A)( 3 ), (b)(1)(ii)(D), and (b)(1)(iv)(E)( 2 ) of this section. If, following the deconsolidation, S sells the property referred to in the previous sentence, no subtraction from tentative taxable income is made under paragraph (b)(1)(ii)(C) or paragraph (b)(1)(iv)(E)( 1 ) of this section during S's separate return year with regard to the amounts included in Group 1. See paragraphs (b)(1)(iv)(A)( 3 ), (b)(1)(ii)(D), and (b)(1)(iv)(E)( 2 ) of this section. (E) Alternative computation method. If paragraph (b)(1)(ii)(C), (D), or (E) of this section applies to adjust the tentative taxable income of a taxpayer, the taxpayer may compute the amount of the adjustments required by such paragraph using the formulas in paragraph (b)(1)(iv)(E)( 1 ), ( 2 ), and ( 3 ) of this section, respectively, provided that the taxpayer applies such formulas to all dispositions for which an adjustment is required under paragraph (b)(1)(ii)(C), (D), or (E) of this section. For special rules regarding the treatment of deconsolidating transactions and nonrecognition transactions, see paragraph (b)(1)(iv)(A)( 3 ) and ( 4 ) of this section, respectively. For special rules regarding the application of the formulas in paragraph (b)(1)(iv)(E)( 1 ), ( 2 ), and ( 3 ) of this section by consolidated groups, see paragraph (b)(1)(iv)(B)( 2 ) of this section. ( 1 ) Alternative computation method for property dispositions. With respect to the sale or other disposition of property, the lesser of: ( i ) Any gain recognized on the sale or other disposition of such property by the taxpayer (or, if the taxpayer is a member of a consolidated group, the consolidated group); and ( ii ) The greater of the allowed or allowable depreciation, amortization, or depletion of the property, as provided under section 1016(a)(2), for the taxpayer (or, if the taxpayer is a member of a consolidated group, the consolidated group) for the taxable years beginning after December 31, 2017, and before January 1, 2022, with respect to such property. ( 2 ) Alternative computation method for dispositions of member stock. With respect to the sale or other disposition by a member of a consolidated group of stock of another member for whom depreciation, amortization, or depletion was allowed or allowable with regard to an item of property (or stock of any successor to that member), the lesser of: ( i ) Any gain recognized on the sale or other disposition of such stock; and ( ii ) The investment adjustments under §1.1502-32 with respect to such stock that are attributable to deductions described in paragraph (b)(1)(ii)(C) of this section. The investment adjustments referred to in this paragraph (b)(1)(iv)(E)( 2 )( ii ) include investment adjustments replicated in stock of members that are successor entities. ( 3 ) Alternative computation method for dispositions of partnership interests. With respect to the sale or other disposition of an interest in a partnership, the lesser of: ( i ) Any gain recognized on the sale or other disposition of such interest; and ( ii ) The taxpayer's (or, if the taxpayer is a consolidated group, the consolidated group's) distributive share of deductions described in paragraph (b)(1)(ii)(C) of this section with respect to property held by the partnership at the time of such sale or other disposition to the extent such deductions were allowable under section 704(d). (F) Cap on negative adjustments --( 1 ) In general. A subtraction from (or negative adjustment to) tentative taxable income that is required under paragraph (b)(1)(ii)(C), (D), or (E) or paragraph (b)(1)(iv)(B) or (E) of this section is reduced to the extent the taxpayer establishes that the positive adjustments to tentative taxable income under paragraphs (b)(1)(i)(D) through (F) of this section in a prior taxable year did not result in an increase in the amount allowed as a deduction for business interest expense for such year. The extent to which the positive adjustments under paragraphs (b)(1)(i)(D) through (F) of this section resulted in an increase in the amount allowed as a deduction for business interest expense in a prior taxable year (such amount of positive adjustments, the negative adjustment cap ) is determined after taking into account all other adjustments to tentative taxable income under paragraph (b)(1)(i) and (ii) of this section for that year, as established through books and records. The amount of the negative adjustment cap for a prior taxable year is reduced in future taxable years to the extent of negative adjustments under paragraphs (b)(1)(ii)(C) through (E) and paragraphs (b)(1)(iv)(B) and (E) of this section with respect to the prior taxable year. ( 2 ) Example. A is a calendar-year individual taxpayer engaged in a trade or business that is neither an excepted trade or business nor eligible for the small business exemption. A has no disallowed business interest expense carryforwards. In 2021, A has $100x of business interest expense, no business interest income or floor plan financing interest expense, and $400x of tentative taxable income. After taking into account the adjustments to tentative taxable income under paragraph (b)(1)(i) and (ii) of this section other than positive adjustments under paragraphs (b)(1)(i)(D) through (F) of this section, A has tentative taxable income of $450x. A increases its tentative taxable income by $30x (from $450x to $480x) under paragraph (b)(1)(i)(D) of this section to reflect $30x of depreciation deductions with respect to Asset Y in 2021. Thus, for 2021, A would have a section 163(j) limitation of $135x ($450x x 30 percent) without regard to adjustments under paragraphs (b)(1)(i)(D) through (F) of this section. After the application of paragraph (b)(1)(i)(D) of this section, A has a section 163(j) limitation of $144x ($480x x 30 percent). In 2022, A sells Asset Y at a gain of $50x. Under paragraph (b)(1)(iv)(F)( 1 ) of this section, A is not required to reduce its tentative taxable income in 2022 under paragraph (b)(1)(ii)(C) through (E) or paragraph (b)(1)(iv)(E) of this section. As established by A, the $30x addition to tentative taxable income under paragraph (b)(1)(i)(D) of this section resulted in no increase in the amount allowed as a deduction for business interest expense in 2021. (G) Treatment of depreciation, amortization, or depletion capitalized under section 263A. Paragraphs (b)(1)(ii)(C) through (E) of this section and this paragraph (b)(1)(iv) apply with respect to the sale or other disposition of property to which paragraph (b)(1)(iii) of this section applies. For example, if a taxpayer with depreciable machinery capitalizes the depreciation into inventory under section 263A, paragraph (b)(1)(ii)(C) or paragraph (b)(1)(iv)(E) of this section (and, if the taxpayer is a consolidated group, paragraph (b)(1)(iv)(B) of this section) applies upon the disposition of the machinery, subject to the cap in paragraph (b)(1)(iv)(F) of this section. Similarly, the successor asset rules in paragraph (b)(1)(iv)(C)( 1 ) of this section would apply if the depreciable machinery subsequently were transferred to another member (S1) in an intercompany transaction in which the transferor received S1 stock. (viii) * * * (A) Example 1 --( 1 ) Facts. In 2021, A purchases a depreciable asset (Asset X) for $30x and fully depreciates Asset X under section 168(k). For the 2021 taxable year, A establishes that its ATI before adding back depreciation deductions with respect to Asset X under paragraph (b)(1)(i)(D) of this section is $130x, and that its ATI after adding back depreciation deductions with respect to Asset X under paragraph (b)(1)(i)(D) of this section is $160x. A incurs $45x of business interest expense in 2021. In 2024, A sells Asset X to an unrelated third party for $25x. ( 2 ) Analysis. A's section 163(j) limitation for 2021 is $48x ($160x × 30 percent). Thus, all $45x of A's business interest expense incurred in 2021 is deductible in that year. Under paragraph (b)(1)(ii)(C) of this section, A must subtract $30x from its tentative taxable income in computing its ATI for its 2024 taxable year. Alternatively, under paragraph (b)(1)(iv)(E)( 1 ) of this section, A must subtract $25x (the lesser of $30x or $25x ($25x - $0x)) from its tentative taxable income in computing its ATI for its 2024 taxable year. However, the negative adjustments under paragraphs (b)(1)(ii)(C) and (b)(1)(iv)(E)( 1 ) of this section are both subject to the negative adjustment cap in paragraph (b)(1)(iv)(F) of this section. Under that paragraph, A's negative adjustment under either paragraph (b)(1)(ii)(C) or paragraph (b)(1)(iv)(E)( 1 ) of this section is capped at $20x, or $150x (the amount of ATI that A needed in order to deduct all $45x of business interest expense in 2021) minus $130x (the amount of A's tentative taxable income in 2021 before adding back any amounts under paragraph (b)(1)(i)(D) through (F) of this section). As established by A, the additional $10x ($30x - $20x) of depreciation deductions that were added back to tentative taxable income in 2021 under paragraph (b)(1)(i)(D) of this section did not increase A's business interest expense deduction for that year. ( 3 ) Transfer of assets in a nonrecognition transaction to which section 381 applies. The facts are the same as in paragraph (b)(1)(viii)(A)( 1 ) of this section, except that, rather than sell Asset X to an unrelated third party in 2024, A merges with and into an unrelated third party in 2024 in a transaction described in section 368(a)(1)(A) in which no gain is recognized. As provided in paragraph (b)(1)(iv)(A)( 1 ) of this section, the merger transaction is not treated as a ''sale or other disposition'' for purposes of paragraph (b)(1)(ii)(C) or paragraph (b)(1)(iv)(E)( 1 ) of this section. Thus, no adjustment to tentative taxable income is required in 2024 under paragraph (b)(1)(ii)(C) or paragraph (b)(1)(iv)(E)( 1 ) of this section. ( 4 ) Transfer of assets in a nonrecognition transaction to which section 351 applies. The facts are the same as in paragraph (b)(1)(viii)(A)( 1 ) of this section, except that, rather than sell Asset X to an unrelated third party in 2024, A transfers Asset X to B (A's wholly owned subsidiary) in 2024 in a transaction to which section 351 applies. The section 351 transaction is treated as a "sale or other disposition" for purposes of paragraphs (b)(1)(ii)(C) and (b)(1)(iv)(E)( 1 ) of this section, and it is treated as a taxable disposition for purposes of paragraph (b)(1)(iv)(E)( 1 ) of this section. See paragraph (b)(1)(iv)(A)( 1 ) and ( 4 ) of this section. However, the negative adjustments under paragraphs (b)(1)(ii)(C) and (b)(1)(iv)(E)( 1 ) of this section are both subject to the negative adjustment cap in paragraph (b)(1)(iv)(F) of this section. Thus, A must subtract $20x from its tentative taxable income in computing its ATI for its 2024 taxable year. (B) Example 2 --( 1 ) Facts. In 2021, S purchases a depreciable asset (Asset Y) for $30x and fully depreciates Asset Y under section 168(k). P reduces its basis in its S stock by $30x under §1.1502-32 to reflect S's depreciation deductions with respect to Asset Y. For the 2021 taxable year, the P group establishes that its ATI before adding back S's depreciation deductions with respect to Asset Y under paragraph (b)(1)(i)(D) of this section is $130x, and that its ATI after adding back S's depreciation deductions with respect to Asset Y under paragraph (b)(1)(i)(D) of this section is $160x. The P group incurs $45x of business interest expense in 2021. In 2024, P sells all of its S stock to an unrelated third party at a gain of $25x. ( 2 ) Analysis. The P group's section 163(j) limitation for 2021 is $48x ($160x × 30 percent). Thus, all $45x of the P group's business interest expense incurred in 2021 is deductible in that year. Under paragraph (b)(1)(ii)(D) of this section, the P group must subtract $30x from its tentative taxable income in computing its ATI for its 2024 taxable year. Alternatively, under paragraph (b)(1)(iv)(E)( 2 ) of this section, the P group must subtract $25x (the lesser of $30x or $25x) from its tentative taxable income in computing its ATI for its 2024 taxable year. However, the negative adjustments under paragraphs (b)(1)(ii)(D) and (b)(1)(iv)(E)( 2 ) of this section are both subject to the negative adjustment cap in paragraph (b)(1)(iv)(F) of this section. Under that paragraph, the P group's negative adjustment under either paragraph (b)(1)(ii)(D) or paragraph (b)(1)(iv)(E)( 2 ) of this section is capped at $20x, or $150x (the amount of ATI the P group needed in order to deduct all $45x of business interest expense in 2021) minus $130x (the amount of the P group's tentative taxable income in 2021 before adding back any amounts under paragraph (b)(1)(i)(D) through (F) of this section). As established by the P group, the additional $10x ($30x - $20x) of depreciation deductions that were added back to tentative taxable income in 2021 under paragraph (b)(1)(i)(D) of this section did not increase the P group's business interest expense deduction for that year. ( 3 ) Disposition of less than all member stock. The facts are the same as in paragraph (b)(1)(viii)(B)( 1 ) of this section, except that, in 2024, P sells half of its S stock to an unrelated third party. The results are the same as in paragraph (b)(1)(viii)(B)( 2 ) of this section. See paragraph (b)(1)(iv)(A)( 3 ) of this section. Thus, the P group must subtract $20x from its tentative taxable income in computing its ATI for its 2024 taxable year. No further adjustment under paragraphs (b)(1)(ii)(C) and (D) or paragraphs (b)(1)(iv)(E)( 1 ) and ( 2 ) of this section is required if P subsequently sells its remaining S stock or if S subsequently disposes of Asset Y. See paragraphs (b)(1)(iv)(A)( 3 ) and (b)(1)(iv)(D) of this section. ( 4 ) Intercompany transfer; disposition of successor assets --( i ) Adjustments in 2024. The facts are the same as in paragraph (b)(1)(viii)(B)( 1 ) of this section, except that, rather than sell all of its S stock to an unrelated third party in 2024, P transfers all of its S stock to T in 2024 in a transaction to which section 351 applies and, in 2025, P sells all of its T stock to an unrelated third party at a gain of $40x. As provided in paragraph (b)(1)(iv)(A)( 2 ) of this section, P's intercompany transfer of its S stock to T is not a ''sale or other disposition'' for purposes of paragraph (b)(1)(ii)(D) or paragraph (b)(1)(iv)(E)( 2 ) of this section. Thus, no adjustment to tentative taxable income is required in 2024 under paragraph (b)(1)(ii)(D) or paragraph (b)(1)(iv)(E)( 2 ) of this section. ( ii ) Adjustments in 2025. Pursuant to paragraph (b)(1)(iv)(C)( 1 ) of this section, P's stock in T is treated as a successor asset for purposes of paragraph (b)(1)(ii)(D) and (b)(1)(iv)(E)( 2 ) of this section. Moreover, P's sale of its T stock causes both T and S to deconsolidate. Thus, under paragraph (b)(1)(iv)(A)( 3 ) of this section, the transaction is treated as a taxable disposition of all of the T stock and all of the S stock held by all members of the P group. Under the anti-duplication rule in paragraph (b)(1)(iv)(D) of this section, the total amount of gain recognized for purposes of paragraph (b)(1)(iv)(E)( 2 )( i ) of this section is $40x, the greater of the gain on the disposition of the T stock ($40x) or on the disposition of the S stock ($25x). However, the negative adjustments under paragraph (b)(1)(iv)(E)( 2 ) of this section are subject to the negative adjustment cap in paragraph (b)(1)(iv)(F) of this section. Thus, the P group must subtract $20x from its tentative taxable income in computing its ATI for its 2025 taxable year. ( 5 ) Alternative computation and non-deconsolidating disposition of member stock. The facts are the same as in paragraph (b)(1)(viii)(B)( 1 ) of this section, except that, in 2024, P sells just ten percent of its S stock to an unrelated third party at a gain of $2.5x. Under paragraph (b)(1)(iv)(E)( 2 ) of this section, the lesser of P's gain recognized on the sale of the S stock ($2.5x) and the investment adjustments under §1.1502-32 with respect to the S stock P sold ($3x) is $2.5x, an amount less than the $20x limitation under paragraph (b)(1)(iv)(F) of this section. Thus, the P group must subtract $2.5x from its tentative taxable income in computing its ATI for its 2024 taxable year. ( 6 ) Non-deconsolidating disposition of member stock followed by asset disposition. The facts are the same as in paragraph (b)(1)(viii)(B)( 5 ) of this section, except that, in 2025, S sells Asset Y to an unrelated third party for a gain of $20x. Under paragraph (b)(1)(iv)(E)( 1 ) of this section, the amount of the adjustment in 2025 is the lesser of two amounts. The first amount is the amount of S's gain recognized on the sale of Asset Y ($20x). See paragraph (b)(1)(iv)(E)( 1 )( i ) of this section. The second amount is the amount of depreciation with respect to Asset Y (see paragraph (b)(1)(iv)(E)( 1 )( ii ) of this section), reduced by the amount of depreciation previously taken into account in the computation under paragraph (b)(1)(iv)(E)( 2 )( ii ) of this section ($30x - $3x, or $27x). See paragraph (b)(1)(iv)(D)( 1 ) of this section. Thus, the amount of the adjustment under paragraphs (b)(1)(iv)(D) and (b)(1)(iv)(E)( 1 ) of this section is $20x. In turn, this amount is subject to the negative adjustment cap under paragraph (b)(1)(iv)(F), which, after accounting for the negative adjustment on the earlier sale of S stock in 2024, is $17.5x ($20x - $2.5x). Accordingly, the P group must subtract $17.5x from its tentative taxable income in computing its ATI for its 2025 taxable year. (C) Example 3 --( 1 ) Facts. The facts are the same as in paragraph (b)(1)(viii)(B)( 1 ) of this section, except that, in 2024, S sells Asset Y to an unrelated third party for $25x and, in 2025, P sells all of its S stock to an unrelated third party at a gain of $25x. (2) Analysis. The results are the same as in paragraph (b)(1)(viii)(B)( 2 ) of this section. Thus, the P group must subtract $20x from its tentative taxable income in computing its ATI for its 2024 taxable year. P's sale of all of its S stock in 2025 is a ''sale or other disposition'' for purposes of paragraph (b)(1)(ii)(D) and (b)(1)(iv)(E)( 2 ) of this section. However, pursuant to paragraph (b)(1)(iv)(D)( 1 ) of this section, no further adjustment to the P group's tentative taxable income is required in 2025 under paragraph (b)(1)(ii)(D) or paragraph (b)(1)(iv)(E)( 2 ) of this section. ( 3 ) Disposition of S stock prior to S's asset disposition. The facts are the same as in paragraph (b)(1)(viii)(C)( 1 ) of this section, except that, in 2024, P sells all of its S stock to an unrelated third party at a gain of $25x and, in 2025, S sells Asset Y to an unrelated third party for $25x. The results are the same as in paragraph (b)(1)(viii)(B)( 2 ) of this section. Thus, the P group must subtract $20x from its tentative taxable income in computing its ATI for its 2024 taxable year. Pursuant to paragraph (b)(1)(iv)(D)( 2 ) of this section, no adjustment to the acquiring group's tentative taxable income is required in 2025 under paragraph (b)(1)(ii)(C) or paragraph (b)(1)(iv)(E)( 1 ) of this section. ( 4 ) Deconsolidation of S in nonrecognition transaction. The facts are the same as in paragraph (b)(1)(viii)(C)( 3 ) of this section, except that, rather than sell all of its S stock to an unrelated third party, P causes S to merge with and into an unrelated third party in a transaction described in section 368(a)(1)(A). As provided in paragraph (b)(1)(iv)(A)( 3 ) of this section, the merger transaction is treated as a taxable disposition of all of P's stock in S for purposes of paragraphs (b)(1)(ii)(D) and (b)(1)(iv)(E)( 2 ) of this section because S leaves the P group. Thus, the results are the same as in paragraph (b)(1)(viii)(C)( 3 ) of this section. (D) Example 4 --( 1 ) Facts. P wholly owns T, which wholly owns S. In 2021, S purchases a depreciable asset (Asset Z) for $30x and fully depreciates Asset Z under section 168(k). T reduces its basis in its S stock, and P reduces its basis in its T stock, by $30x under §1.1502-32 to reflect S's depreciation deductions with respect to Asset Z. For the 2021 taxable year, the P group establishes that its ATI before adding back S's depreciation deductions with respect to Asset Z under paragraph (b)(1)(i)(D) of this section is $130x, and that its ATI after adding back S's depreciation deductions with respect to Asset Z under paragraph (b)(1)(i)(D) of this section is $160x. The P group incurs $45x of business interest expense in 2021. In 2024, T sells all of its S stock to an unrelated third party at a gain of $25x. In 2025, P sells all of its T stock to an unrelated third party at a gain of $40x. ( 2 ) Analysis. The results are the same as in paragraph (b)(1)(viii)(B)( 2 ) of this section. Thus, the P group must subtract $20x from its tentative taxable income in computing its ATI for its 2024 taxable year. Pursuant to paragraph (b)(1)(iv)(D)( 1 ) of this section, no negative adjustment to the P group's tentative taxable income is required in 2025 under paragraph (b)(1)(ii)(D) or paragraph (b)(1)(iv)(E)( 2 ) of this section. ( 3 ) Disposition of T stock in 2024. The facts are the same as in paragraph (b)(1)(viii)(D)( 1 ) of this section, except that, in 2024, P sells all of its T stock to another consolidated group at a gain of $40x and, in 2025, T sells all of its S stock to an unrelated party at a gain of $25x. Whereas the transaction described in paragraph (b)(1)(viii)(B)( 4 ) of this section is treated as a taxable disposition of both the T stock and the S stock, only the actual disposition of the T stock in the transaction described in this paragraph (b)(1)(viii)(D)( 3 ) is treated as a taxable disposition for purposes of paragraphs (b)(1)(ii)(D) and (b)(1)(iv)(E)( 2 ) of this section. See paragraph (b)(1)(iv)(A)( 3 ) of this section. However, the results are the same as in paragraph (b)(1)(viii)(B)( 2 ) and (b)(1)(viii)(B)( 4 ) of this section because of the negative adjustment cap in paragraph (b)(1)(iv)(F) of this section. Thus, the P group must subtract $20x from its tentative taxable income in computing its ATI for its 2024 taxable year. Pursuant to paragraph (b)(1)(iv)(D) of this section, no negative adjustment to the acquiring group's tentative taxable income is required in 2025 under paragraph (b)(1)(ii)(D) or paragraph (b)(1)(iv)(E)( 2 ) of this section. (E) Example 5 --( 1 ) Facts. In 2021, A purchases Assets X and Y for $30x and $80x, respectively, and fully depreciates each asset under section 168(k). For the 2021 taxable year, A establishes that its ATI before adding back depreciation deductions with respect to Assets X and Y under paragraph (b)(1)(i)(D) of this section is $150x, and that its ATI after adding back depreciation deductions with respect to Assets X and Y under paragraph (b)(1)(i)(D) of this section is $260x. A incurs $75x of business interest expense in 2021. In 2024, A sells Assets X and Y to an unrelated third party for $40x and $90x, respectively. ( 2 ) Analysis. A's section 163(j) limitation for 2021 is $78x ($260x × 30 percent). Thus, all $75x of A's business interest expense incurred in 2021 is deductible in that year. Under paragraph (b)(1)(ii)(C) of this section, A must subtract $110x ($30x + $80x) from its tentative taxable income in computing its ATI for its 2024 taxable year. Alternatively, under paragraph (b)(1)(iv)(E)( 1 ) of this section, A must subtract $30x with respect to Asset X (the lesser of $30x or $40x ($40x - $0x)), and $80x with respect to Asset Y (the lesser of $80x or $90x ($90x - $0x)), from its tentative taxable income in computing its ATI for its 2024 taxable year. However, the negative adjustments under paragraphs (b)(1)(ii)(C) and (b)(1)(iv)(E)( 1 ) of this section are both subject to the negative adjustment cap in paragraph (b)(1)(iv)(F) of this section. Under that paragraph, A's negative adjustment in 2024 under either paragraph (b)(1)(ii)(C) ($110x) or paragraph (b)(1)(iv)(E)( 1 ) (also $110x) of this section is limited to $100x. This amount equals $250x (the amount of ATI that A needed in order to deduct all $75x of business interest expense in 2021) minus $150x (the amount of A's tentative taxable income in 2021 before adding back any amounts under paragraph (b)(1)(i)(D) through (F) of this section). As established by A, the additional $10x ($110x - $100x) of depreciation deductions that were added back to tentative taxable income in 2021 under paragraph (b)(1)(i)(D) of this section did not increase A's business interest expense deduction for that year. ( 3 ) Sale of assets in different taxable years. The facts are the same as in paragraph (b)(1)(viii)(E)( 1 ) of this section, except that A sells Asset Y to an unrelated third party for $90x in 2025. Under paragraph (b)(1)(ii)(C) of this section, A must subtract $30x from its tentative taxable income in computing its ATI for its 2024 taxable year. Alternatively, under paragraph (b)(1)(iv)(E)( 1 ) of this section, A must subtract $30x (the lesser of $30x or $40x ($40x - $0x)) from its tentative taxable income in computing its ATI for its 2024 taxable year. Because A's negative adjustment cap for its 2021 taxable year is $100x (see paragraph (b)(1)(viii)(E)( 2 ) of this section), A's negative adjustment in 2024 of $30x is not reduced under paragraph (b)(1)(iv)(F) of this section. In 2025, A must subtract $80x from its tentative taxable income under paragraph (b)(1)(ii)(C) of this section in computing its ATI. Alternatively, under paragraph (b)(1)(iv)(E)( 1 ) of this section, A must subtract $80x (the lesser of $80x or $90x ($90x - $0x)) from its tentative taxable income in computing its ATI for its 2025 taxable year. However, the negative adjustments under paragraphs (b)(1)(ii)(C) and (b)(1)(iv)(E)( 1 ) of this section are both subject to the negative adjustment cap in paragraph (b)(1)(iv)(F) of this section. Moreover, A's negative adjustment cap for its 2021 taxable year is reduced from $100x to $70x to reflect A's $30x negative adjustment in 2024. See paragraph (b)(1)(iv)(F) of this section. Thus, A's negative adjustment for 2025 under either paragraph (b)(1)(ii)(C) or paragraph (b)(1)(iv)(E)( 1 ) of this section is reduced from $80x to $70x. As established by A, the additional $10x ($110x - $100x) of depreciation deductions that were added back to tentative taxable income in 2021 under paragraph (b)(1)(i)(D) of this section did not increase A's business interest expense deduction for that year. (22) * * * (iii) * * * (F) Section 163(j) interest dividends --( 1 ) In general. Except as otherwise provided in this paragraph (b)(22)(iii)(F), a section 163(j) interest dividend is treated as interest income. ( 2 ) Limitation on amount treated as interest income. A shareholder may not treat any part of a section 163(j) interest dividend as interest income to the extent the amount of the section 163(j) interest dividend exceeds the excess of the amount of the entire dividend that includes the section 163(j) interest dividend over the sum of the conduit amounts other than interest-related dividends under section 871(k)(1)(C) and section 163(j) interest dividends that affect the shareholder's treatment of that dividend. ( 3 ) Conduit amounts. For purposes of paragraph (b)(22)(iii)(F)( 2 ) of this section, the term conduit amounts means, with respect to any category of income (including tax-exempt interest) earned by a RIC for a taxable year, the amounts identified by the RIC (generally in a designation or written report) in connection with dividends of the RIC for that taxable year that are subject to a limit determined by reference to that category of income. For example, a RIC's conduit amount with respect to its net capital gain is the amount of the RIC's capital gain dividends under section 852(b)(3)(C). ( 4 ) Holding period. Except as provided in paragraph (b)(22)(iii)(F)( 5 ) of this section, no dividend is treated as interest income under paragraph (b)(22)(iii)(F)( 1 ) of this section if the dividend is received with respect to a share of RIC stock-- ( i ) That is held by the shareholder for 180 days or less (taking into account the principles of section 246(c)(3) and (4)) during the 361-day period beginning on the date which is 180 days before the date on which the share becomes ex-dividend with respect to such dividend; or ( ii ) To the extent that the shareholder is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property. ( 5 ) Exception to holding period requirement for money market funds and certain regularly declared dividends. Paragraph (b)(22)(iii)(F)( 4 )( i ) of this section does not apply to dividends distributed by any RIC regulated as a money market fund under 17 CFR 270.2a-7 (Rule 2a-7 under the 1940 Act) or to regular dividends paid by a RIC that declares section 163(j) interest dividends on a daily basis in an amount equal to at least 90 percent of its excess section 163(j) interest income, as defined in paragraph (b)(35)(iv)(E) of this section, and distributes such dividends on a monthly or more frequent basis. (35) Section 163(j) interest dividend. The term section 163(j) interest dividend means a dividend paid by a RIC for a taxable year for which section 852(b) applies to the RIC, to the extent described in paragraph (b)(35)(i) or (ii) of this section, as applicable. (i) In general. Except as provided in paragraph (b)(35)(ii) of this section, a section 163(j) interest dividend is any dividend, or part of a dividend, that is reported by the RIC as a section 163(j) interest dividend in written statements furnished to its shareholders. (ii) Reduction in the case of excess reported amounts. If the aggregate reported amount with respect to the RIC for the taxable year exceeds the excess section 163(j) interest income of the RIC for such taxable year, the section 163(j) interest dividend is-- (A) The reported section 163(j) interest dividend amount; reduced by (B) The excess reported amount that is allocable to that reported section 163(j) interest dividend amount. (iii) Allocation of excess reported amount --(A) In general. Except as provided in paragraph (b)(35)(iii)(B) of this section, the excess reported amount, if any, that is allocable to the reported section 163(j) interest dividend amount is that portion of the excess reported amount that bears the same ratio to the excess reported amount as the reported section 163(j) interest dividend amount bears to the aggregate reported amount. (B) Special rule for noncalendar year RICs. In the case of any taxable year that does not begin and end in the same calendar year, if the post-December reported amount equals or exceeds the excess reported amount for that taxable year, paragraph (b)(35)(iii)(A) of this section is applied by substituting "post-December reported amount" for "aggregate reported amount," and no excess reported amount is allocated to any dividend paid on or before December 31 of such taxable year. (iv) Definitions. The following definitions apply for purposes of this paragraph (b)(35): (A) Reported section 163(j) interest dividend amount. The term reported section 163(j) interest dividend amount means the amount of a dividend distribution reported to the RIC's shareholders under paragraph (b)(35)(i) of this section as a section 163(j) interest dividend. (B) Excess reported amount. The term excess reported amount means the excess of the aggregate reported amount over the RIC's excess section 163(j) interest income for the taxable year. (C) Aggregate reported amount. The term aggregate reported amount means the aggregate amount of dividends reported by the RIC under paragraph (b)(35)(i) of this section as section 163(j) interest dividends for the taxable year (including section 163(j) interest dividends paid after the close of the taxable year described in section 855). (D) Post-December reported amount. The term post-December reported amount means the aggregate reported amount determined by taking into account only dividends paid after December 31 of the taxable year. (E) Excess section 163(j) interest income. The term excess section 163(j) interest income means, with respect to a taxable year of a RIC, the excess of the RIC's business interest income for the taxable year over the sum of the RIC's business interest expense for the taxable year and the RIC's other deductions for the taxable year that are properly allocable to the RIC's business interest income. (v) Example --(A) Facts. X is a domestic C corporation that has elected to be a RIC. For its taxable year ending December 31, 2021, X has $100x of business interest income (all of which is qualified interest income for purposes of section 871(k)(1)(E)) and $10x of dividend income (all of which is qualified dividend income within the meaning of section 1(h)(11) and would be eligible for the dividends received deduction under section 243, determined as described in section 854(b)(3)). X has $10x of business interest expense and $20x of other deductions. X has no other items for the taxable year. On December 31, 2021, X pays a dividend of $80x to its shareholders, and reports, in written statements to its shareholders, $71.82x as a section 163(j) interest dividend; $10x as dividends that may be treated as qualified dividend income or as dividends eligible for the dividends received deduction; and $72.73x as interest-related dividends under section 871(k)(1)(C). Shareholder A, a domestic C corporation, meets the holding period requirements in paragraph (b)(22)(iii)(F)( 4 ) of this section with respect to the stock of X, and receives a dividend of $8x from X on December 31, 2021. (B) Analysis. X determines that $18.18x of other deductions are properly allocable to X's business interest income. X's excess section 163(j) interest income under paragraph (b)(35)(iv)(E) of this section is $71.82x ($100x business interest income - ($10x business interest expense + $18.18x other deductions allocated) = $71.82x). Thus, X may report up to $71.82x of its dividends paid on December 31, 2021, as section 163(j) interest dividends to its shareholders. X may also report up to $10x of its dividends paid on December 31, 2021, as dividends that may be treated as qualified dividend income or as dividends that are eligible for the dividends received deduction. X determines that $9.09x of interest expense and $18.18x of other deductions are properly allocable to X's qualified interest income. Therefore, X may report up to $72.73x of its dividends paid on December 31, 2021, as interest-related dividends under section 871(k)(1)(C) ($100x qualified interest income - $27.27x deductions allocated = $72.73x). A treats $1x of its $8x dividend as a dividend eligible for the dividends received deduction and no part of the dividend as an interest-related dividend under section 871(k)(1)(C). Therefore, under paragraph (b)(22)(iii)(F)( 2 ) of this section, A may treat $7x of the section 163(j) interest dividend as interest income for purposes of section 163(j) ($8x dividend - $1x conduit amount = $7x limitation). (c) * * * (4) Paragraphs (b)(1)(iv)(A)(2) through (4), (B) through (G), (b)(22)(iii)(F), and (b)(35). Paragraphs (b)(1)(iv)(A)( 2 ) through ( 4 ), (b)(1)(iv)(B) through (G), (b)(22)(iii)(F), and (b)(35) of this section apply to taxable years beginning on or after March 22, 2021. Taxpayers and their related parties, within the meaning of sections 267(b) (determined without regard to section 267(c)(3)) and 707(b)(1), may choose to apply the rules in paragraphs (b)(1)(iv)(A)( 2 ) through ( 4 ), (b)(1)(iv) (B) through (G), (b)(22)(iii)(F), and (b)(35) of this section to a taxable year beginning after December 31, 2017, and before March 22, 2021, provided that those taxpayers and their related parties consistently apply all of the rules in the section 163(j) regulations contained in T.D. 9905 (§§1.163(j)-0 through 1.163(j)-11, effective November 13, 2020) as modified by T.D. 9943 (effective January 13, 2021), and, if applicable, §§1.263A-9, 1.263A-15, 1.381(c)(20)-1, 1.382-1, 1.382-2, 1.382-5, 1.382-6, 1.382-7, 1.383-0, 1.383-1, 1.469-9, 1.469-11, 1.704-1, 1.882-5, 1.1362-3, 1.1368-1, 1.1377-1, 1.1502-13, 1.1502-21, 1.1502-36, 1.1502-79, 1.1502-91 through 1.1502-99 (to the extent they effectuate the rules of §§1.382-2, 1.382-5, 1.382-6, and 1.383-1), and 1.1504-4 contained in T.D. 9905, as modified by T.D. 9943, to that taxable year and all subsequent taxable years. Par. 5. Section 1.163(j)-2 is amended by: 1. Adding paragraphs (b)(3)(iii) and (iv) and (d)(3). 2. Redesignating paragraph (k) as paragraph (k)(1). 3. Adding a new subject heading for paragraph (k). 4. Revising the subject heading of newly redesignated paragraph (k)(1). 5. Adding paragraph (k)(2). The revisions and additions read as follows: §1.163(j)-2 Deduction for business interest expense limited. (b) * * * (3) * * * (iii) Transactions to which section 381 applies. For purposes of the election described in paragraph (b)(3)(i) of this section, and subject to the limitation in paragraph (b)(3)(ii) of this section, the 2019 ATI of the acquiring corporation in a transaction to which section 381 applies equals the amount of the acquiring corporation's ATI for its last taxable year beginning in 2019. (iv) Consolidated groups. For purposes of the election described in paragraph (b)(3)(i) of this section, and subject to the limitation in paragraph (b)(3)(ii) of this section, the 2019 ATI of a consolidated group equals the amount of the consolidated group's ATI for its last taxable year beginning in 2019. (d) * * * (3) Determining a syndicate's loss amount. For purposes of section 163(j), losses allocated under section 1256(e)(3)(B) and §1.448-1T(b)(3) are determined without regard to section 163(j). See also §1.1256(e)-2(b). (k) Applicability dates. (1) In general.* * * (2) Paragraphs (b)(3)(iii), (b)(3)(iv), and (d)(3). Paragraphs (b)(3)(iii) and (iv) and (d)(3) of this section apply to taxable years beginning on or after March 22, 2021. However, taxpayers and their related parties, within the meaning of sections 267(b) (determined without regard to section 267(c)(3)) and 707(b)(1), may choose to apply the rules in paragraphs (b)(3)(iii), (b)(3)(iv), and (d)(3) of this section to a taxable year beginning after December 31, 2017, and before March 22, 2021, provided that those taxpayers and their related parties consistently apply all of the rules in paragraphs (b)(3)(iii) and (iv) of this section and the rules in the section 163(j) regulations contained in T.D. 9905 (§§1.163(j)-0 through 1.163(j)-11, effective November 13, 2020) as modified by T.D. 9943 (effective January 13, 2021), and, if applicable, §§1.263A-9, 1.263A-15, 1.381(c)(20)-1, 1.382-1, 1.382-2, 1.382-5, 1.382-6, 1.382-7, 1.383-0, 1.383-1, 1.469-9, 1.469-11, 1.704-1, 1.882-5, 1.1362-3, 1.1368-1, 1.1377-1, 1.1502-13, 1.1502-21, 1.1502-36, 1.1502-79, 1.1502-91 through 1.1502-99 (to the extent they effectuate the rules of §§1.382-2, 1.382-5, 1.382-6, and 1.383-1), and 1.1504-4 contained in T.D. 9905 as modified by T.D. 9943, for that taxable year and for each subsequent taxable year. Par. 6. Section 1.163(j)-6 is amended by: 1. Adding paragraphs (c)(1) and (2). 2. Redesignating paragraph (c)(3) as paragraph (c)(4). 3. Adding new paragraph (c)(3) and paragraphs (d)(3) through (5) and (e)(5). 4. Adding paragraphs (f)(1)(iii) and (g)(4). 5. Adding paragraph (n). 6. Adding paragraphs (o)(24) through (26), reserved paragraphs (o)(27). through (33), and paragraphs (o)(34) through (36). 7. Redesignating paragraph (p) as paragraph (p)(1), revising the subject heading of paragraph (p), and adding a subject heading for newly designated paragraph (p)(1). 8. Adding paragraph (p)(2). The revisions and additions read as follows: §1.163(j)-6 Application of the section 163(j) limitation to partnerships and subchapter S corporations. (c) * * * (1) Modification of business interest income for partnerships. The business interest income of a partnership generally is determined in accordance with §1.163(j)-1(b)(4). However, to the extent that interest income of a partnership that is properly allocable to trades or businesses that are per se non-passive activities is allocated to partners that do not materially participate (within the meaning of section 469), as described in §1.469-1T(e)(6) and subject to section 163(d)(5)(A)(ii), such interest income shall not be considered business interest income for purposes of determining the section 163(j) limitation of a partnership pursuant to §1.163(j)-2(b). A per se non-passive activity is an activity that is not treated as a passive activity for purposes of section 469 regardless of whether the owners of the activity materially participate in the activity. (2) Modification of business interest expense for partnerships. The business interest expense of a partnership generally is determined in accordance with §1.163(j)-1(b)(3). However, to the extent that interest expense of a partnership that is properly allocable to trades or businesses that are per se non-passive activities is allocated to partners that do not materially participate (within the meaning of section 469), as described in §1.469-1T(e)(6) and subject to section 163(d)(5)(A)(ii), such interest expense shall not be considered business interest expense for purposes of determining the section 163(j) limitation of a partnership pursuant to §1.163(j)- 2(b). (3) Transition rule. With respect to a partner in a partnership engaged in a trade or business described in §1.469-1T(e)(6) and subject to section 163(d)(5)(A)(ii), if such partner had been allocated EBIE from the partnership with respect to the trade or business described in §1.469-1T(e)(6) and subject to section 163(d)(5)(A)(ii) in any prior taxable year in which the partner did not materially participate, such partner may treat such excess business interest expense not previously treated as paid or accrued under §1.163(j)-6(g)(2) as paid or accrued by the partner in the first taxable year ending on or after the effective date of the final regulations and not subject to further limitation under section 163(j) or 163(d). (d) * * * (3) Section 743(b) adjustments and publicly traded partnerships. Solely for purposes of §1.163(j)-6, a publicly traded partnership, as defined in §1.7704-1, shall treat the amount of any section 743(b) adjustment of a purchaser of a partnership unit that relates to a remedial item that the purchaser inherits from the seller as an offset to the related section 704(c) remedial item. For this purpose, §1.163(j)-6(e)(2)(ii) applies. See Example 25 in paragraph (o)(25) of this section. (4) Modification of adjusted taxable income for partnerships. The adjusted taxable income of a partnership generally is determined in accordance with §1.163(j)-1(b)(1). However, to the extent that the items comprising the adjusted taxable income of a partnership that are properly allocable to trades or businesses that are per se non-passive activities are allocated to partners that do not materially participate (within the meaning of section 469), as described in section 163(d)(5)(A)(ii), such partnership items shall not be considered adjusted taxable income for purposes of determining the section 163(j) limitation of a partnership pursuant to §1.163(j)-2(b). (5) Election to use 2019 adjusted taxable income for taxable years beginning in 2020. In the case of any taxable year beginning in 2020, a partnership may elect to apply this section by substituting its adjusted taxable income for the last taxable year beginning in 2019 for the adjusted taxable income for such taxable year (post-election ATI or 2019 ATI). See §1.163(j)-2(b)(4) for the time and manner of making or revoking this election. An electing partnership determines each partner's allocable ATI (as defined in paragraph (f)(2)(ii) of this section) by using the partnership's 2019 section 704 income, gain, loss, and deduction as though such amounts were recognized by the partnership in 2020. See Example 34 in paragraph (o)(34) of this section. (e) * * * (5) Partner basis items, remedial items, and publicly traded partnerships. Solely for purposes of §1.163(j)-6, a publicly traded partnership, as defined in §1.7704-1, shall either allocate gain that would otherwise be allocated under section 704(c) based on a partner's section 704(b) sharing ratios, or, for purposes of allocating cost recovery deductions under section 704(c), determine a partner's remedial items, as defined in §1.163(j)-6(b)(3), based on an allocation of the partnership's asset basis (inside basis) items among its partners in proportion to their share of corresponding section 704(b) items (rather than applying the traditional method, described in §1.704-3(b)). See Example 24 in paragraph (o)(24) of this section. (f) * * * (1) * * * (iii) Exception applicable to publicly traded partnerships. Publicly traded partnerships, as defined in §1.7704-1, do not apply the rules in paragraph (f)(2) of this section to determine a partner's share of section 163(j) excess items. Rather, publicly traded partnerships determine a partner's share of section 163(j) excess items by applying the same percentage used to determine the partner's share of the corresponding section 704(b) items that comprise ATI. (g) * * * (4) Special rule for taxable years beginning in 2019 and 2020. In the case of any excess business interest expense of a partnership for any taxable year beginning in 2019 that is allocated to a partner under paragraph (f)(2) of this section, 50 percent of such excess business interest expense (§1.163(j)-6(g)(4) business interest expense) is treated as business interest expense that, notwithstanding paragraph (g)(2) of this section, is paid or accrued by the partner in the partner's first taxable year beginning in 2020. Additionally, §1.163(j)-6(g)(4) business interest expense is not subject to the section 163(j) limitation at the level of the partner. For purposes of paragraph (h)(1) of this section, any §1.163(j)-6(g)(4) business interest expense is, similar to deductible business interest expense, taken into account before any excess business interest expense. This paragraph applies after paragraph (n) of this section. If a partner disposes of a partnership interest in the partnership's 2019 or 2020 taxable year, §1.163(j)-6(g)(4) business interest expense is deductible by the partner (except to the extent that the business interest expense is negative section 163(j) expense as defined in §1.163(j)-6(h)(1) immediately prior to the disposition) and thus does not result in a basis increase under paragraph (h)(3) of this section. See Example 35 and Example 36 in paragraphs (o)(35) and (o)(36), respectively, of this section. A partner may elect to not have this provision apply with respect to each partnership interest held by the partner on an interest by interest basis. The rules and procedures regarding the time and manner of making, or revoking, such an election are provided in Revenue Procedure 2020-22, 2020-18 I.R.B. 745, and may be further modified through other guidance (see §§601.601(d) and 601.602 of this chapter). (n) Treatment of self-charged lending transactions between partnerships and partners. In the case of a lending transaction between a partner (lending partner) and partnership (borrowing partnership) in which the lending partner owns a direct interest (self-charged lending transaction), any business interest expense of the borrowing partnership attributable to the self-charged lending transaction is business interest expense of the borrowing partnership for purposes of this section. If in a given taxable year the lending partner is allocated excess business interest expense from the borrowing partnership and has interest income attributable to the self-charged lending transaction (interest income), the lending partner is deemed to receive an allocation of excess business interest income from the borrowing partnership in such taxable year. The amount of the lending partner's deemed allocation of excess business interest income is the lesser of such lending partner's allocation of excess business interest expense from the borrowing partnership in such taxable year or the interest income attributable to the self-charged lending transaction in such taxable year. To prevent the double counting of business interest income, the lending partner includes interest income that was treated as excess business interest income pursuant to this paragraph (n) only once when calculating its own section 163(j) limitation. To the extent an amount of interest income received by a lending partner is attributable to a self-charged lending transaction, and is deemed to be an allocation of excess business interest income from the borrowing partnership pursuant to this paragraph (n), such an amount of interest income will not be treated as investment income for purposes of section 163(d). In cases where the lending partner is not a C corporation, to the extent that any interest income exceeds the lending partner's allocation of excess business interest expense from the borrowing partnership for the taxable year, and such interest income otherwise would be properly treated as investment income of the lending partner for purposes of section 163(d) for that year, such excess amount of interest income will continue to be treated as investment income of the lending partner for that year for purposes of section 163(d). See Example 26 in paragraph (o)(26) of this section. (o) * * * (24) Example 24 --(i) Facts. On January 1, 2020, L and M form LM, a publicly traded partnership (as defined in §1.7704-1), and agree that each will be allocated a 50 percent share of all LM items. The partnership agreement provides that LM will make allocations under section 704(c) using the remedial allocation method under §1.704-3(d). L contributes depreciable property with an adjusted tax basis of $4,000 and a fair market value of $10,000. The property is depreciated using the straight-line method with a 10-year recovery period and has 4 years remaining on its recovery period. M contributes $10,000 in cash, which LM uses to purchase land. Except for the depreciation deductions, LM's expenses equal its income in each year of the 10 years commencing with the year LM is formed. LM has a valid section 754 election in effect. (ii) Section 163(j) remedial items and partner basis items. LM sells the asset contributed by L in a fully taxable transaction at a time when the adjusted basis of the property is $4,000. Under §1.163(j)-6(e)(2)(ii), solely for purposes of §1.163(j)-6, the tax gain of $6,000 is allocated equally between L and M ($3,000 each). To avoid shifting built-in gain to the non-contributing partner (M) in a manner consistent with the rule in section 704(c), a remedial deduction of $3,000 is allocated to M (leaving M with no net tax gain), and remedial income of $3,000 is allocated to L (leaving L with total tax gain of $6,000). (25) Example 25 --(i) Facts. The facts are the same as Example 24 in paragraph (o)(24) of this section except the property contributed by L had an adjusted tax basis of zero. For each of the 10 years following the contribution, there would be $500 of section 704(c) remedial income allocated to L and $500 of remedial deductions allocated to M with respect to the contributed asset. A buyer of M's units would step into M's shoes with respect to the $500 of annual remedial deductions. A buyer of L's units would step into L's shoes with respect to the $500 of annual remedial income and would have an annual section 743(b) deduction of $1,000 (net $500 of deductions). (ii) Analysis. Pursuant to §1.163(j)-6(d)(2)(ii), solely for purposes of §1.163(j)-6, a buyer of L's units immediately after formation of LM would offset its $500 annual section 704(c) remedial income allocation with $500 of annual section 743(b) adjustment (leaving the buyer with net $500 of section 743(b) deduction). As a result, such buyer would be in the same position as a buyer of M's units. Each buyer would have net deductions of $500 per year, which would not affect ATI before 2022. (26) Example 26 --(i) Facts. X and Y are partners in partnership PRS. In Year 1, PRS had $200 of excess business interest expense. Pursuant to §1.163(j)-6(f)(2), PRS allocated $100 of such excess business interest expense to each of its partners. In Year 2, X lends $10,000 to PRS and receives $1,000 of interest income for the taxable year (self-charged lending transaction). X is not in the trade or business of lending money. The $1,000 of interest expense resulting from this loan is allocable to PRS's trade or business assets. As a result, such $1,000 of interest expense is business interest expense of PRS. X and Y are each allocated $500 of such business interest expense as their distributive share of PRS's business interest expense for the taxable year. Additionally, in Year 2, PRS has $3,000 of ATI. PRS allocates the items comprising its $3,000 of ATI $0 to X and $3,000 to Y. (ii) Partnership-level. In Year 2, PRS's section 163(j) limit is 30 percent of its ATI plus its business interest income, or $900 ($3,000 x 30 percent). Thus, PRS has $900 of deductible business interest expense, $100 of excess business interest expense, $0 of excess taxable income, and $0 of excess business interest income. Pursuant to §1.163(j)-6(f)(2), $400 of X's allocation of business interest expense is treated as deductible business interest expense, $100 of X's allocation of business interest expense is treated as excess business interest expense, and $500 of Y's allocation of business interest expense is treated as deductible business interest expense. (iii) Lending partner. Pursuant to §1.163(j)-6(n), X treats $100 of its $1,000 of interest income as excess business interest income allocated from PRS in Year 2. Because X is deemed to have been allocated $100 of excess business interest income from PRS, and excess business interest expense from a partnership is treated as paid or accrued by a partner to the extent excess business interest income is allocated from such partnership to a partner, X treats its $100 allocation of excess business interest expense from PRS in Year 2 as business interest expense paid or accrued in Year 2. X, in computing its limit under section 163(j), has $100 of business interest income ($100 deemed allocation of excess business interest income from PRS in Year 2) and $100 of business interest expense ($100 allocation of excess business interest expense treated as paid or accrued in Year 2). Thus, X's $100 of business interest expense is deductible business interest expense. At the end of Year 2, X has $100 of excess business interest expense from PRS ($100 from Year 1). X treats $900 of its $1,000 of interest income as investment income for purposes of section 163(d). (27) - (33) [Reserved] (34) Example 34 --(i) Facts. X and Y are equal partners in partnership PRS. Further, X and Y share the profits of PRS equally. In 2019, PRS had ATI of $100. Additionally, in 2019, PRS had $100 of section 704(b) income which was allocated $50 to X and $50 to Y (PRS did not have any section 704(c) income in 2019). In 2020, PRS's only items of income, gain, loss or deduction was $1 of trade or business income, which it allocated to X pursuant to section 704(c). (ii) Partnership-level. In 2020, PRS makes the election described in §1.163(j)-6(d)(5) to use its 2019 ATI in 2020. As a result, PRS has $100 of ATI in 2020. PRS does not have any business interest expense. Therefore, PRS has $100 of excess taxable income in 2020. (iii) Partner-level allocations. PRS allocates its $100 of excess taxable income to X and Y pursuant to §1.163(j)-6(f)(2). To determine each partner's share of the $100 of excess taxable income, PRS must determine each partner's allocable ATI (as defined in §1.163(j)-6(f)(2)(ii)). Because PRS made the election described in §1.163(j)-6(d)(5), PRS must determine the allocable ATI of each of its partners pursuant to paragraph (d)(5). Specifically, PRS determines each partner's share of allocable ATI based on PRS's 2019 section 704 income, gain, loss, and deduction. PRS had $100 of section 704(b) income in 2019 which was allocated $50 to X and $50 to Y. Therefore, in 2020, X and Y are both allocated $50 of excess taxable income (50% x $100). (35) Example 35 --(i) Facts. X, a partner in partnership PRS, was allocated $20 of excess business interest expense from PRS in 2018 and $10 of excess business interest expense from PRS in 2019. In 2020, PRS allocated $16 of excess taxable income to X. (ii) Analysis. X treats 50 percent of its $10 of excess business interest expense allocated from PRS in 2019 as §1.163(j)-6(g)(4) business interest expense. Thus, $5 of §1.163(j)-6(g)(4) business interest expense is treated as paid or accrued by X in 2020 and is not subject to the section 163(j) limitation at X's level. Because X was allocated $16 of excess taxable income from PRS in 2020, X treats $16 of its $25 of excess business interest expense as business interest expense paid or accrued pursuant to §1.163(j)-6(g)(2). X, in computing its limit under section 163(j) in 2020, has $16 of ATI (as a result of its allocation of $16 of excess taxable income from PRS), $0 of business interest income, and $16 of business interest expense ($16 of excess business interest expense treated as paid or accrued in 2020). Pursuant to §1.163(j)-2(b)(2)(i), X's section 163(j) limit in 2020 is $8 ($16 x 50 percent). Thus, X has $8 of business interest expense that is deductible under section 163(j). The $8 of X's business interest expense not allowed as a deduction ($16 business interest expense subject to section 163(j), less $8 section 163(j) limit) is treated as business interest expense paid or accrued by X in 2021. At the end of 2020, X has $9 of excess business interest expense from PRS ($20 from 2018, plus $10 from 2019, less $5 treated as paid or accrued pursuant to §1.163(j)-6(g)(4), less $16 treated as paid or accrued pursuant to §1.163(j)-6(g)(2)). (36) Example 36 --(i) Facts. X is a partner in partnership PRS. At the beginning of 2018, X's outside basis in PRS was $100. X was allocated $20 of excess business interest expense from PRS in 2018 and $10 of excess business interest expense from PRS in 2019. X sold its PRS interest in 2019 for $70. (ii) Analysis. X treats 50 percent of its $10 of excess business interest expense allocated from PRS in 2019 as §1.163(j)-6(g)(4) business interest expense. Thus, $5 of §1.163(j)-6(g)(4) business interest expense is treated as paid or accrued by X in 2020 and is not subject to the section 163(j) limitation at X's level. Pursuant to paragraph (h)(3) of this section, immediately before the disposition, X increases the basis of its PRS interest from $70 to $95 (add back of $20 of EBIE from 2018 and $5 of remaining EBIE from 2019). Thus, X has a $25 section 741 loss recognized on the sale ($70 - $95). (p) Applicability dates. (1) In general. * * * (2) Paragraphs (c)(1) and (2), (d)(3) through (5), (e)(5), (f)(1)(iii), (g)(4), (n), and (o)(24) through (29), and (34) through (36). Paragraphs (c)(1) and (2), (d)(3) through (5), (e)(5), (f)(1)(iii), (g)(4), (n), and (o)(24) through (29), and (34) through (36) of this section apply to taxable years beginning on or after March 22, 2021. However, taxpayers and their related parties, within the meaning of sections 267(b) (determined without regard to section 267(c)(3)) and 707(b)(1), may choose to apply the rules in paragraphs (c)(1) and (2), (d)(3) through (5), (e)(5), (f)(1)(iii), (g)(4), (n), and (o)(24) through (29), and (34) through (36) to a taxable year beginning after December 31, 2017, and before March 22, 2021, provided that those taxpayers and their related parties consistently apply all of the rules in T.D. 9905 (§§1.163(j)-0 through 1.163(j)-11, effective November 13, 2020) as modified by T.D. 9943 (effective January 13, 2021), and, if applicable, §§1.263A-9, 1.263A-15, 1.381(c)(20)-1, 1.382-1, 1.382-2, 1.382-5, 1.382-6, 1.382-7, 1.383-0, 1.383-1, 1.469-9, 1.469-11, 1.704-1, 1.882-5, 1.1362-3, 1.1368-1, 1.1377-1, 1.1502-13, 1.1502-21, 1.1502-36, 1.1502-79, 1.1502-91 through 1.1502-99 (to the extent they effectuate the rules of §§1.382-2, 1.382-5, 1.382-6, and 1.383-1), and 1.1504-4 contained in T.D. 9905 as modified by T.D. 9943, for that taxable year and for each subsequent taxable year. Par. 7. Section 1.163(j)-7 is amended by revising paragraph (a), adding paragraphs (c) through (f), (g)(3) and (4), (h), (k), and (l), and revising paragraph (m) to read as follows: §1.163(j)-7 Application of the section 163(j) limitation to foreign corporations and United States shareholders. (a) Overview. This section provides rules for the application of section 163(j) to relevant foreign corporations and United States shareholders of relevant foreign corporations. Paragraph (b) of this section provides the general rule regarding the application of section 163(j) to a relevant foreign corporation. Paragraph (c) of this section provides rules for applying section 163(j) to CFC group members of a CFC group. Paragraph (d) of this section provides rules for determining a specified group and specified group members. Paragraph (e) of this section provides rules and procedures for treating a specified group member as a CFC group member and for determining a CFC group. Paragraph (f) of this section provides rules regarding the treatment of a CFC group member that has ECI. Paragraph (g) of this section provides rules concerning the computation of ATI of an applicable CFC. Paragraph (h) of this section provides a safe harbor that exempts certain stand-alone applicable CFCs and CFC groups from the application of section 163(j) for a taxable year. Paragraphs (i) and (j) of this section are reserved. Paragraph (k) of this section provides definitions that apply for purposes of this section (see also §1.163(j)-1 for additional definitions). Paragraph (l) of this section provides examples illustrating the application of this section. (c) Application of section 163(j) to CFC group members of a CFC group --(1) Scope. This paragraph (c) provides rules for applying section 163(j) to a CFC group and a CFC group member. Paragraph (c)(2) of this section provides rules for computing a single section 163(j) limitation for a specified period of a CFC group. Paragraph (c)(3) of this section provides rules for allocating a CFC group's section 163(j) limitation to CFC group members for specified taxable years. Paragraph (c)(4) of this section provides currency translation rules. Paragraph (c)(5) of this section provides special rules for specified periods beginning in 2019 or 2020. (2) Calculation of section 163(j) limitation for a CFC group for a specified period --(i) In general. A single section 163(j) limitation is computed for a specified period of a CFC group. For purposes of applying section 163(j) and the section 163(j) regulations, the current-year business interest expense, disallowed business interest expense carryforwards, business interest income, floor plan financing interest expense, and ATI of a CFC group for a specified period equal the sums of each CFC group member's respective amounts for its specified taxable year with respect to the specified period. A CFC group member's current-year business interest expense, business interest income, floor plan financing interest expense, and ATI for a specified taxable year are generally determined on a separate-company basis. For purposes of determining the ATI of a CFC group, §1.163(j)-1(b)(1)(vii) (providing that ATI cannot be less than zero) applies with respect to the ATI of the CFC group but not the ATI of any CFC group member. (ii) Certain transactions between CFC group members disregarded. Any transaction between CFC group members of a CFC group that is entered into with a principal purpose of affecting a CFC group or a CFC group member's section 163(j) limitation by increasing or decreasing a CFC group or a CFC group member's ATI or business interest income for a specified taxable year is disregarded for purposes of applying section 163(j) and the section 163(j) regulations. (3) Deduction of business interest expense --(i) CFC group business interest expense --(A) In general. The extent to which a CFC group member's current-year business interest expense and disallowed business interest expense carryforwards for a specified taxable year that ends with or within a specified period may be deducted under section 163(j) is determined under the rules and principles of §1.163(j)-5(a)(2) and (b)(3)(ii), subject to the modifications described in paragraph (c)(3)(i)(B) of this section. (B) Modifications to relevant terms. For purposes of paragraph (c)(3)(i)(A) of this section, the rules and principles of §1.163(j)-5(b)(3)(ii) are applied by-- ( 1 ) Replacing "§1.163(j)-4(d)(2)" in §1.163(j)-5(a)(2)(ii) with "§1.163(j)-7(c)(2)(i)"; ( 2 ) Replacing the term "allocable share of the consolidated group's remaining section 163(j) limitation" with "allocable share of the CFC group's remaining section 163(j) limitation"; ( 3 ) Replacing the terms "consolidated group" and "group" with "CFC group"; ( 4 ) Replacing the term "consolidated group's remaining section 163(j) limitation" with "CFC group's remaining section 163(j) limitation"; ( 5 ) Replacing the term "consolidated return year" with "specified period"; ( 6 ) Replacing the term "current year" or "current-year" with "current specified period" or "specified taxable year with respect to the current specified period," as the context requires; ( 7 ) Replacing the term "member" with "CFC group member"; and ( 8 ) Replacing the term "taxable year" with "specified taxable year with respect to a specified period." (ii) Carryforwards treated as attributable to the same taxable year. For purposes of applying the principles of §1.163(j)-5(b)(3)(ii), as required under paragraph (c)(3)(i) of this section, CFC group members' disallowed business interest expense carryforwards that arose in specified taxable years with respect to the same specified period are treated as disallowed business interest expense carryforwards from taxable years ending on the same date and are deducted on a pro rata basis, under the principles of §1.163(j)-5(b)(3)(ii)(C)( 3 ), pursuant to paragraph (c)(3)(i) of this section. (iii) Multiple specified taxable years of a CFC group member with respect to a specified period. If a CFC group member has more than one specified taxable year (each year, an applicable specified taxable year ) with respect to a single specified period of a CFC group, then all the applicable specified taxable years are taken into account for purposes of applying the principles of §1.163(j)-5(b)(3)(ii), as required under paragraph (c)(3)(i) of this section, with respect to the specified period. The portion of the section 163(j) limitation allocable to disallowed business interest expense carryforwards of the CFC group member that arose in taxable years before the first applicable specified taxable year is prorated among the applicable specified taxable years in proportion to the number of days in each applicable specified taxable year. (iv) Limitation on pre-group disallowed business interest expense carryforward -- (A) General rule --( 1 ) CFC group member pre-group disallowed business interest expense carryforward. This paragraph (c)(3)(iv) applies to pre-group disallowed business interest expense carryforwards of a CFC group member. The amount of the pre-group disallowed business interest expense carryforwards described in the preceding sentence that may be included in any CFC group member's business interest expense deduction for any specified taxable year under this paragraph (c)(3) may not exceed the aggregate section 163(j) limitation for all specified periods of the CFC group, determined by reference only to the CFC group member's items of income, gain, deduction, and loss, and reduced (including below zero) by the CFC group member's business interest expense (including disallowed business interest expense carryforwards) taken into account as a deduction by the CFC group member in all specified taxable years in which the CFC group member has continuously been a CFC group member of the CFC group ( cumulative section 163(j) pre-group carryforward limitation ). ( 2 ) Subgrouping. In the case of a pre-group disallowed business interest expense carryforward, a pre-group subgroup is composed of the CFC group member with the pre-group disallowed business interest expense carryforward (the loss member ) and each other CFC group member of the loss member's CFC group (the current group ) that was a member of the CFC group in which the pre-group disallowed business interest expense carryforward arose and joined the specified group of the current group at the same time as the loss member. A CFC group member that is a member of a pre-group subgroup remains a member of the pre-group subgroup until its first taxable year during which it ceases to be a member of the same specified group as the loss member. For purposes of this paragraph (c), the rules and principles of §1.163(j)-5(d)(1)(B) apply to a pre-group subgroup as if the pre-group subgroup were a SRLY subgroup. ( 3 ) Transition rule. Solely for purposes of paragraph (c)(3)(iv)(A)( 2 ) of this section, a CFC group includes a group of applicable CFCs for which a CFC group election was made under guidance under section 163(j) published on December 28, 2018. Therefore, if the requirements of paragraph (c)(3)(iv)(A)( 2 ) of this section are satisfied, a group of applicable CFCs described in the preceding sentence may be treated as a pre-group subgroup. (B) Deduction of pre-group disallowed business interest expense carryforwards. Notwithstanding paragraph (c)(3)(iv)(A)( 1 ) of this section, pre-group disallowed business interest expense carryforwards are available for deduction by a CFC group member in its specified taxable year only to the extent the CFC group has remaining section 163(j) limitation for the specified period after the deduction of current-year business interest expense and disallowed business interest expense carryforwards from earlier taxable years that are permitted to be deducted in specified taxable years of CFC group members with respect to the specified period. See paragraph (c)(3)(i) of this section and §1.163(j)-5(b)(3)(ii)(A). Pre-group disallowed business interest expense carryforwards are deducted on a pro rata basis (under the principles of paragraph (c)(3)(i) of this section and §1.163(j)-5(b)(3)(ii)(C)( 4 )) with other disallowed business interest expense carryforwards from taxable years ending on the same date. (4) Currency translation. For purposes of applying this paragraph (c), items of a CFC group member are translated into a single currency for the CFC group and back to the functional currency of the CFC group member using the average exchange rate for the CFC group member's specified taxable year. The single currency for the CFC group may be the U.S. dollar or the functional currency of a plurality of the CFC group members. (5) Special rule for specified periods beginning in 2019 or 2020 --(i) 50 percent ATI limitation applies to a specified period of a CFC group. In the case of a CFC group, §1.163(j)-2(b)(2) (including the election under §1.163(j)-2(b)(2)(ii)) applies to a specified period of the CFC group beginning in 2019 or 2020, rather than to a specified taxable year of a CFC group member. An election under §1.163(j)-2(b)(2)(ii) for a specified period of a CFC group is not effective unless made by each designated U.S. person. Except as otherwise provided in this paragraph (c)(5)(i), the election is made in accordance with Revenue Procedure 2020-22, 2020-18 I.R.B. 745. For purposes of applying §1.964-1(c), the election is treated as if made for each CFC group member. (ii) Election to use 2019 ATI applies to a specified period of a CFC group --(A) In general. In the case of a CFC group, for purposes of applying paragraph (c)(2) of this section, an election under §1.163(j)-2(b)(3)(i) is made for a specified period of a CFC group beginning in 2020 and applies to the specified taxable years of each CFC group member with respect to such specified period, taking into account the application of paragraph (c)(5)(ii)(B) of this section. The election under §1.163(j)-2(b)(3)(i) does not apply to any specified taxable year of a CFC group member other than those described in the preceding sentence. An election under §1.163(j)-2(b)(3)(i) for a specified period of a CFC group is not effective unless made by each designated U.S. person. Except as otherwise provided in this paragraph (c)(5)(ii)(A), the election is made in accordance with Revenue Procedure 2020-22, 2020-18 I.R.B. 745. For purposes of applying §1.964-1(c), the election is treated as if made for each CFC group member. (B) Specified taxable years that do not begin in 2020. If a specified taxable year of a CFC group member with respect to the specified period described in paragraph (c)(5)(ii)(A) of this section begins in 2019, then, for purposes of applying paragraph (c)(2) of this section, §1.163(j)-2(b)(3) is applied to such specified taxable year by substituting "2018" for "2019" and "2019" for "2020." If a specified taxable year of a CFC group member with respect to the specified period described in paragraph (c)(5)(ii)(A) of this section begins in 2021, then, for purposes of applying paragraph (c)(2) of this section, §1.163(j)-2(b)(3) is applied to such specified taxable year by substituting "2020" for "2019" and "2021" for "2020." (d) Determination of a specified group and specified group members --(1) Scope. This paragraph (d) provides rules for determining a specified group and specified group members. Paragraph (d)(2) of this section provides rules for determining a specified group. Paragraph (d)(3) of this section provides rules for determining specified group members. (2) Rules for determining a specified group --(i) Definition of a specified group. Subject to paragraph (d)(2)(ii) of this section, the term specified group means one or more applicable CFCs or chains of applicable CFCs connected through stock ownership with a specified group parent (which is included in the specified group only if it is an applicable CFC), but only if-- (A) The specified group parent owns directly or indirectly stock meeting the requirements of section 1504(a)(2)(B) in at least one applicable CFC; and (B) Stock meeting the requirements of section 1504(a)(2)(B) in each of the applicable CFCs (except the specified group parent) is owned directly or indirectly by one or more of the other applicable CFCs or the specified group parent. (ii) Indirect ownership. For purposes of applying paragraph (d)(2)(i) of this section, stock is owned indirectly only if it is owned under section 318(a)(2)(A) through a partnership or under section 318(a)(2)(A) or (B) through an estate or trust not described in section 7701(a)(30). (iii) Specified group parent. The term specified group parent means a qualified U.S. person or an applicable CFC. (iv) Qualified U.S. person. The term qualified U.S. person means a United States person described in section 7701(a)(30)(A) or (C). For purposes of this paragraph (d), members of a consolidated group that file (or that are required to file) a consolidated U.S. Federal income tax return are treated as a single qualified U.S person and individuals described in section 7701(a)(30)(A) whose filing status is married filing jointly are treated as a single qualified U.S. person. (v) Stock. For purposes of this paragraph (d)(2), the term stock has the same meaning as "stock" in section 1504 (without regard to §1.1504-4, except as provided in paragraph (d)(2)(vi) of this section) and all shares of stock within a single class are considered to have the same value. Thus, control premiums and minority and blockage discounts within a single class are not taken into account. (vi) Options treated as exercised. For purposes of this paragraph (d)(2), options that are reasonably certain to be exercised, as determined under §1.1504-4(g), are treated as exercised. For purposes of this paragraph (d)(2)(vi), options include call options, warrants, convertible obligations, put options, and any other instrument treated as an option under §1.1504-4(d), determined by replacing the term "a principal purpose of avoiding the application of section 1504 and this section" with "a principal purpose of avoiding the application of section 163(j)." (vii) When a specified group ceases to exist. The principles of §1.1502-75(d)(1), (d)(2)(i) and (ii), and (d)(3)(i) through (iv) apply for purposes of determining when a specified group ceases to exist. Solely for purposes of applying these principles, references to the common parent are treated as references to the specified group parent and each applicable CFC that is treated as a specified group member for a taxable year with respect to a specified period is treated as affiliated with the specified group parent from the beginning to the end of the specified period, without regard to the beginning or end of its taxable year. (3) Rules for determining a specified group member. If two or more applicable CFCs are included in a specified group on the last day of a taxable year of each applicable CFC that ends with or within a specified period, then each applicable CFC is a specified group member with respect to the specified period for its entire taxable year ending with or within the specified period. If only one applicable CFC is included in a specified group on the last day of its taxable year that ends with or within the specified period, it is not a specified group member. If an applicable CFC has multiple taxable years that end with or within a specified period, this paragraph (d)(3) is applied separately to each taxable year to determine if the applicable CFC is a specified group member for such taxable year. (e) Rules and procedures for treating a specified group as a CFC group --(1) Scope. This paragraph (e) provides rules and procedures for treating a specified group member as a CFC group member and for determining a CFC group for purposes of applying section 163(j) and the section 163(j) regulations. (2) CFC group and CFC group member --(i) CFC group. The term CFC group means, with respect to a specified period, all CFC group members for their specified taxable years. (ii) CFC group member. The term CFC group member means, with respect to a specified taxable year and a specified period, a specified group member of a specified group for which a CFC group election is in effect. However, notwithstanding the prior sentence, a specified group member is not treated as a CFC group member for a taxable year of the specified group member beginning before January 1, 2018. (3) Duration of a CFC group. A CFC group continues until the CFC group election is revoked, or there is no longer a specified period with respect to the specified group. A failure to provide the information described in paragraph (e)(6) of this section does not terminate a CFC group election. (4) Joining or leaving a CFC group. If an applicable CFC becomes a specified group member for a specified taxable year with respect to a specified period of a specified group for which a CFC group election is in effect, the CFC group election applies to the applicable CFC and the applicable CFC becomes a CFC group member. If an applicable CFC ceases to be a specified group member for a specified taxable year with respect to a specified period of a specified group for which a CFC group election is in effect, the CFC group election terminates solely with respect to the applicable CFC. (5) Manner of making or revoking a CFC group election --(i) In general. An election is made or revoked under this paragraph (e)(5) ( CFC group election ) with respect to a specified period of a specified group. A CFC group election remains in effect for each specified period of the specified group until revoked. A CFC group election that is in effect with respect to a specified period of a specified group applies to each specified group member for its specified taxable year that ends with or within the specified period. The making or revoking of a CFC group election is not effective unless made or revoked by each designated U.S. person. (ii) Revocation by election. A CFC group election cannot be revoked with respect to any specified period beginning before 60 months following the last day of the specified period for which the election was made. Once a CFC group election has been revoked, a new CFC group election cannot be made with respect to any specified period beginning before 60 months following the last day of the specified period for which the election was revoked. (iii) Timing. A CFC group election must be made or revoked with respect to a specified period of a specified group no later than the due date (taking into account extensions, if any) of the original Federal income tax return for the taxable year of each designated U.S. person in which or with which the specified period ends. (iv) Election statement. To make or revoke a CFC group election for a specified period of a specified group, each designated U.S. person must attach a statement to its relevant Federal income tax or information return in accordance with publications, forms, instructions, or other guidance. The statement must include the name and taxpayer identification number of all designated U.S. persons, a statement that the CFC group election is being made or revoked, as applicable, the specified period for which the CFC group election is being made or revoked, and the name of each CFC group member and its specified taxable year with respect to the specified period. The statement must be filed in the manner prescribed in publications, forms, instructions, or other guidance. (v) Effect of prior CFC group election. A CFC group election is made solely pursuant to the provisions of this paragraph (e)(5), without regard to whether a CFC group election described in guidance under section 163(j) published on December 28, 2018, was in effect. (6) Annual information reporting. Each designated U.S. person must attach a statement to its relevant Federal income tax or information return for each taxable year in which a CFC group election is in effect that contains information concerning the computation of the CFC group's section 163(j) limitation and the application of paragraph (c)(3) of this section to the CFC group in accordance with publications, forms, instructions, or other guidance. (f) Treatment of a CFC group member that has ECI --(1) In general. If a CFC group member has ECI in its specified taxable year, then for purposes of section 163(j) and the section 163(j) regulations-- (i) The items, disallowed business interest expense carryforwards, and other attributes of the CFC group member that are ECI are treated as items, disallowed business interest expense carryforwards, and attributes of a separate applicable CFC (such deemed corporation, an ECI deemed corporation ) that has the same taxable year and shareholders as the applicable CFC; and (ii) The ECI deemed corporation is not treated as a specified group member for the specified taxable year. (2) [Reserved]. (g) * * * (3) Treatment of certain foreign income taxes. For purposes of computing the ATI of a relevant foreign corporation for a taxable year, no deduction is taken into account for any foreign income tax (as defined in §1.960-1(b), but substituting the phrase "relevant foreign corporation" for the phrase "controlled foreign corporation"). (4) Anti-abuse rule --(i) In general. If a specified group member of a specified group or an applicable partnership ( specified lender ) includes an amount ( payment amount ) in income and such amount is attributable to business interest expense incurred by another specified group member or an applicable partnership of the specified group ( specified borrower ) during its taxable year, then the ATI of the specified borrower for the taxable year is increased by the ATI adjustment amount if-- (A) The business interest expense is incurred with a principal purpose of reducing the Federal income tax liability of any United States shareholder of a specified group member (including over other taxable years); (B) Absent the application of this paragraph (g)(4), the effect of the specified borrower treating all or part of the payment amount as disallowed business interest expense would be to reduce the Federal income tax liability of any United States shareholder of a specified group member; and (C) Either no CFC group election is in effect with respect to the specified group or the specified borrower is an applicable partnership. (ii) ATI adjustment amount --(A) In general. For purposes of this paragraph (g)(4), the term ATI adjustment amount means, with respect to a specified borrower and a taxable year, the product of 3 1/3 and the lesser of the payment amount or the disallowed business interest expense, computed without regard to this paragraph (g)(4). (B) Special rule for taxable years or specified periods beginning in 2019 or 2020. For any taxable year of an applicable CFC or specified taxable year of a CFC group member with respect to a specified period for which the section 163(j) limitation is determined based, in part, on 50 percent of ATI, in accordance with §1.163(j)-2(b)(2), paragraph (g)(4)(ii)(A) of this section is applied by substituting "2" for "3 1/3." (iii) Applicable partnership. For purposes of this paragraph (g)(4), the term applicable partnership means, with respect to a specified group, a partnership in which at least 80 percent of the interests in profits or capital is owned, directly or indirectly through one or more other partnerships, by specified group members of the specified group. For purposes of this paragraph (g)(4)(iii), a partner's interest in the profits of a partnership is determined in accordance with the rules and principles of §1.706-1(b)(4)(ii) and a partner's interest in the capital of a partnership is determined in accordance with the rules and principles of §1.706-1(b)(4)(iii). (h) Election to apply safe-harbor --(1) In general. If an election to apply this paragraph (h)(1) ( safe-harbor election ) is in effect with respect to a taxable year of a stand-alone applicable CFC or a specified taxable year of a CFC group member, as applicable, then, for such year, no portion of the applicable CFC's business interest expense is disallowed under the section 163(j) limitation. This paragraph (h) does not apply to excess business interest expense, as described in §1.163(j)-6(f)(2), until the taxable year in which it is treated as paid or accrued by an applicable CFC under §1.163(j)-6(g)(2)(i). Furthermore, excess business interest expense is not taken into account for purposes of determining whether the safe-harbor election is available for a stand-alone applicable CFC or a CFC group until the taxable year in which it is treated as paid or accrued by an applicable CFC under §1.163(j)-6(g)(2)(i). (2) Eligibility for safe-harbor election --(i) Stand-alone applicable CFC. The safe-harbor election may be made for the taxable year of a stand-alone applicable CFC only if, for the taxable year, the business interest expense of the applicable CFC is less than or equal to either-- (A) The business interest income of the applicable CFC; or (B) 30 percent of the lesser of the eligible amount or the qualified tentative taxable income of the applicable CFC. (ii) CFC group. The safe-harbor election may be made for the specified period of a CFC group only if, for the specified period, no CFC group member has any pre-group disallowed business interest expense carryforward and the business interest expense of the CFC group for the specified period is less than or equal to either-- (A) The business interest income of the CFC group; or (B) 30 percent of the lesser of the eligible amount or the qualified tentative taxable income of the CFC group. (iii) Currency translation. For purposes of applying this paragraph (h), BII, BIE, and qualified tentative taxable income of a stand-alone applicable CFC or a CFC group must be determined using the U.S. dollar. If BII, BIE, or any items of income, gain, deduction, or loss that are taken into account in computing qualified tentative taxable income are maintained in a currency other than the U.S. dollar, then those items must be translated into the U.S. dollar using the average exchange rate for the taxable year or the specified taxable year, as applicable. (3) Eligible amount --(i) Stand-alone applicable CFC. The eligible amount of a stand-alone applicable CFC for a taxable year is the sum of the amounts a domestic corporation would include in gross income under sections 951(a)(1)(A) and 951A(a), reduced by any deductions that would be allowed under section 245A (by reason of section 964(e)(4)) or section 250(a)(1)(B)(i), determined as if the domestic corporation has a taxable year that ends on the last date of the taxable year of the stand-alone applicable CFC, it wholly owns the stand-alone applicable CFC throughout the CFC's taxable year, it does not own any assets other than stock in the stand-alone applicable CFC, and it has no other items of income, gain, deduction, or loss. (ii) CFC group. The eligible amount of a CFC group for a specified period is the sum of the amounts a domestic corporation would include in gross income under sections 951(a)(1)(A) and 951A(a), reduced by any deductions that would be allowed under section 245A (by reason of section 964(e)(4)) or section 250(a)(1)(B)(i), determined as if the domestic corporation has a taxable year that is the specified period, it wholly owns each CFC group member throughout the CFC group member's specified taxable year, it does not own any assets other than stock in the CFC group members, and it has no other items of income, gain, deduction, or loss. (iii) Additional rules for determining an eligible amount. For purposes of paragraphs (h)(3)(i) and (ii) of this section, the amounts that would be included in gross income of a United States shareholder under sections 951(a)(1)(A) and 951A(a), and any corresponding deductions that would be allowed under section 245A (by reason of section 964(e)(4)) or section 250(a)(1)(B)(i), are determined by taking into account any elections that are made with respect to the applicable CFC(s), including under §1.954-1(d)(5) (relating to the subpart F high-tax exception) and §1.951A-2(c)(7)(viii) (relating to the GILTI high-tax exclusion). These amounts are also determined without regard to any section 163(j) limitation on business interest expense and without regard to any disallowed business interest expense carryovers. In addition, those amounts are determined by only taking in account items of the applicable CFC(s) that are properly allocable to a non-excepted trade or business under §1.163(j)-10. (4) Qualified tentative taxable income. The term qualified tentative taxable income means, with respect to a taxable year of a stand-alone applicable CFC, the applicable CFC's tentative taxable income, and with respect to a specified period of a CFC group, the sum of each CFC group member's tentative taxable income for the specified taxable year; provided that for purposes of this paragraph (h)(4), tentative taxable income is determined by taking into account only items properly allocable to a non-excepted trade or business under §1.163(j)-10. (5) Manner of making a safe-harbor election --(i) In general. A safe-harbor election is an annual election made under this paragraph (h)(5) with respect to a taxable year of a stand-alone applicable CFC or with respect to a specified period of a CFC group. A safe-harbor election that is made with respect to a specified period of a CFC group is effective with respect to each CFC group member for its specified taxable year. A safe-harbor election is only effective if made by each designated U.S. person with respect to a stand-alone applicable CFC or a CFC group. A safe-harbor election is made with respect to a taxable year of a stand-alone applicable CFC, or a specified period of a CFC group, no later than the due date (taking into account extensions, if any) of the original Federal income tax return for the taxable year of each designated U.S. person, respectively, in which or with which the taxable year of the stand-alone applicable CFC ends or the specified period of the CFC group ends. (ii) Election statement. To make a safe-harbor election, each designated U.S. person must attach to its relevant Federal income tax return or information return a statement that includes the name and taxpayer identification number of all designated U.S. persons, a statement that a safe-harbor election is being made pursuant to §1.163(j)-7(h) and a calculation that substantiates that the requirements for making the election are satisfied, and the taxable year of the stand-alone applicable CFC or the specified period of the CFC group, as applicable, for which the safe-harbor election is being made in accordance with publications, forms, instructions, or other guidance. In the case of a CFC group, the statement must also include the name of each CFC group member and its specified taxable year that ends with or within the specified period for which the safe-harbor election is being made. The statement must be filed in the manner prescribed in publications, forms, instructions, or other guidance. (6) Special rule for taxable years or specified periods beginning in 2019 or 2020. In the case of a stand-alone applicable CFC, for any taxable year beginning in 2019 or 2020, paragraph (h)(2)(i) of this section is applied by substituting "50 percent" for "30 percent." In the case of a CFC group, for any specified period beginning in 2019 or 2020, paragraph (h)(2)(ii)(A) of this section is applied by substituting "50 percent" for "30 percent." (k) Definitions. The following definitions apply for purposes of this section. (1) Applicable partnership. The term applicable partnership has the meaning provided in paragraph (g)(4)(iii) of this section. (2) Applicable specified taxable year. The term applicable specified taxable year has the meaning provided in paragraph (c)(3)(iii) of this section. (3) ATI adjustment amount. The term ATI adjustment amount has the meaning provided in paragraph (g)(4)(ii) of this section. (4) - (5) [Reserved]. (6) CFC group. The term CFC group has the meaning provided in paragraph (e)(2)(i) of this section. (7) CFC group election. The term CFC group election means the election described in paragraph (e)(5) of this section. (8) CFC group member. The term CFC group member has the meaning provided in paragraph (e)(2)(ii) of this section. (9) [Reserved]. (10) Cumulative section 163(j) pre-group carryforward limitation. The term cumulative section 163(j) pre-group carryforward limitation has the meaning provided in paragraph (c)(3)(iv)(A)( 1 ) of this section. (11) Current group. The term current group has the meaning provided in paragraph (c)(3)(iv)(A)( 2 ) of this section. (12) Designated U.S. person. The term designated U.S. person means-- (i) With respect to a stand-alone applicable CFC, each controlling domestic shareholder, as defined in §1.964-1(c)(5)(i) of the applicable CFC; or (ii) With respect to a specified group, the specified group parent, if the specified group parent is a qualified U.S. person, or each controlling domestic shareholder, as defined in §1.964-1(c)(5)(i), of the specified group parent, if the specified group parent is an applicable CFC. (13) ECI deemed corporation. The term ECI deemed corporation has the meaning provided in paragraph (f)(1)(i) of this section. (14) Effectively connected income. The term effectively connected income (or ECI ) means income or gain that is ECI, as defined in §1.884-1(d)(1)(iii), and deduction or loss that is allocable to, ECI, as defined in §1.884-1(d)(1)(iii). (15) Eligible amount. The term eligible amount has the meaning provided in paragraph (h)(3)(i) of this section. (16) Former group. The term former group has the meaning provided in paragraph (c)(3)(iv)(A)( 2 ) of this section. (17) Loss member. The term loss member has the meaning provided in paragraph (c)(3)(iv)(A)( 2 ) of this section. (18) Payment amount. The term payment amount has the meaning provided in paragraph (g)(4)(i) of this section. (19) Pre-group disallowed business interest expense carryforward. The term pre-group disallowed business interest expense carryforward means, with respect to a CFC group member and a specified taxable year, any disallowed business interest expense carryforward of the CFC group member that arose in a taxable year during which the CFC group member (or its predecessor) was not a CFC group member of the CFC group. (20) Qualified tentative taxable income. The term qualified tentative taxable income has the meaning provided in paragraph (h)(4) of this section. (21) Qualified U.S. person. The term qualified U.S. person has the meaning provided in paragraph (d)(2)(iv) of this section. (22) Relevant period. The term relevant period has the meaning provided in paragraph (c)(3)(iv)(A)( 2 ) of this section. (23) Safe-harbor election. The term safe-harbor election has the meaning provided in paragraph (h)(1) of this section. (24) Specified borrower. The term specified borrower has the meaning provided in paragraph (g)(4)(i) of this section. (25) Specified group. The term specified group has the meaning provided in paragraph (d)(2)(i) of this section. (26) Specified group member. The term specified group member has the meaning provided in paragraph (d)(3) of this section. (27) Specified group parent. The term specified group parent has the meaning provided in paragraph (d)(2)(iii) of this section. (28) Specified lender. The term specified lender has the meaning provided in paragraph (g)(4)(i) of this section. (29) Specified period --(i) In general. Except as otherwise provided in paragraph (k)(29)(ii) of this section, the term specified period means, with respect to a specified group-- (A) If the specified group parent is a qualified U.S. person, the period ending on the last day of the taxable year of the specified group parent and beginning on the first day after the last day of the specified group's immediately preceding specified period; or (B) If the specified group parent is an applicable CFC, the period ending on the last day of the specified group parent's required year described in section 898(c)(1), without regard to section 898(c)(2), and beginning on the first day after the last day of the specified group's immediately preceding specified period. (ii) Short specified period. A specified period begins no earlier than the first date on which a specified group exists. A specified period ends on the date a specified group ceases to exist under paragraph (d)(2)(vii) of this section. If the last day of a specified period, as determined under paragraph (k)(29)(i) of this section, changes, and, but for this paragraph (k)(29)(ii), the change in the last day of the specified period would result in the specified period being longer than 12 months, the specified period ends on the date on which the specified period would have ended had the change not occurred. (30) Specified taxable year. The term specified taxable year means, with respect to an applicable CFC that is a specified group member of a specified group and a specified period, a taxable year of the applicable CFC that ends with or within the specified period. (31) Stand-alone applicable CFC. The term stand-alone applicable CFC means any applicable CFC that is not a specified group member. (32) Stock. The term stock has the meaning provided in paragraph (d)(2)(v) of this section. (l) Examples. The following examples illustrate the application of this section. For each example, unless otherwise stated, no exemptions from the application of section 163(j) are available, no foreign corporation has ECI, and all relevant taxable years and specified periods begin after December 31, 2020. (1) Example 1. Specified taxable years included in specified period of a specified group --(i) Facts. As of June 30, Year 1, USP, a domestic corporation, owns 60 percent of the common stock of FP, which owns all of the stock of FC1, FC2, and FC3. The remaining 40 percent of the common stock of FP is owned by an unrelated foreign corporation. FP has a single class of stock. FP acquired the stock of FC3 from an unrelated person on March 22, Year 1. The acquisition did not result in a change in FC3's taxable year or a close of its taxable year. USP's interest in FP and FP's interest in FC1 and FC2 has been the same for several years. USP has a taxable year ending June 30, Year 1, which is not a short taxable year. Each of FP, FC1, FC2, and FC3 are applicable CFCs. Pursuant to section 898(c)(2), FP and FC1 have taxable years ending May 31, Year 1. Pursuant to section 898(c)(1), FC2 and FC3 have taxable years ending June 30, Year 1. (ii) Analysis --(A) Determining a specified group and specified period of the specified group. Pursuant to paragraph (d) of this section, FP, FC1, FC2, and FC3 are members of a specified group, and FP is the specified group parent. Because the specified group parent, FP, is an applicable CFC, the specified period of the specified group is the period ending on June 30, Year 1, which is the last day of FP's required year described in section 898(c)(1), without regard to section 898(c)(2), and beginning on July 1, Year 0, which is the first day following the last day of the specified group's immediately preceding specified period (June 30, Year 0). See paragraph (k)(29)(i)(B) of this section. (B) Determining the specified taxable years with respect to the specified period. Pursuant to paragraph (d)(3) of this section, because each of FP and FC1 are included in the specified group on the last day of their taxable years ending May 31, Year 1, and such taxable years end with or within the specified period ending June 30, Year 1, FP and FC1 are specified group members with respect to the specified period ending June 30, Year 1, for their entire taxable years ending May 31, Year 1, and those taxable years are specified taxable years. Similarly, because each of FC2 and FC3 are included in the specified group on the last day of their taxable years ending June 30, Year 1, and such taxable years end with or within the specified period ending June 30, Year 1, FC2 and FC3 are specified group members with respect to the specified period ending June 30, Year 1, for their entire taxable years ending June 30, Year 1, and those taxable years are specified taxable years. The fact that FC3 was acquired on March 22, Year 1, does not prevent FC3 from being a specified group member with respect to the specified period for the portion of its specified taxable year before March 22, Year 1. (2) Example 2. CFC groups --(i) Facts. The facts are the same as in Example 1 in paragraph (l)(1)(i) of this section except that, in addition, a CFC group election is in place with respect to the specified period ending June 30, Year 1. (ii) Analysis. Because a CFC group election is in place for the specified period ending June 30, Year 1, pursuant to paragraph (e)(2)(ii) of this section, each specified group member is a CFC group member with respect to its specified taxable year ending with or within the specified period. Accordingly, FP, FC1, FC2, and FC3 are CFC group members with respect to the specified period ending June 30, Year 1, for their specified taxable years ending May 31, Year 1, and June 30, Year 1, respectively. Pursuant to paragraph (e)(2)(i) of this section, the CFC group for the specified period ending June 30, Year 1, consists of FP, FC1, FC2, and FC3 for their specified taxable years ending May 31, Year 1, and June 30, Year 1, respectively. Pursuant to paragraph (c)(2) of this section, a single section 163(j) limitation is computed for the specified period ending June 30, Year 1. That section 163(j) calculation will include FP and FC1's specified taxable years ending May 31, Year 1, and FC2 and FC3's specified taxable years ending June 30, Year 1. (3) Example 3. Application of anti-abuse rule --(i) Facts. USP, a domestic corporation, owns all of the stock of CFC1 and CFC2. Thus, USP is the specified group parent of a specified group, the specified group members of which are CFC1 and CFC2. USP has a calendar year taxable year. All specified group members also have a calendar year taxable year and a functional currency of the U.S. dollar. CFC1 is organized in, and a tax resident of, a jurisdiction that imposes no tax on certain types of income, including interest income. With respect to Year 1, USP expects to pay no residual U.S. tax on its income inclusion under section 951A(a) (GILTI inclusion amount) and expects to have unused foreign tax credits in the category described in section 904(d)(1)(A). A CFC group election is not in effect for Year 1. With a principal purpose of reducing USP's Federal income tax liability in subsequent taxable years, on January 1, Year 1, CFC1 loans $100x to CFC2. On December 31, Year 1, CFC2 pays interest of $10x to CFC1 and repays the principal of $100x. Absent the application of paragraph (g)(4)(i) of this section, all $10x of CFC2's interest expense would be disallowed business interest expense and, therefore, CFC2 would have $10x of disallowed business interest expense carryforward to Year 2. In Year 2, CFC2 disposes of one of its businesses at a substantial gain that gives rise to tested income (within the meaning of section 951A(c)(2)(A) and §1.951A-2(b)(1)). As a result of the gain being included in the ATI of CFC2, absent the application of paragraph (g)(4)(i) of this section, CFC2 would be allowed to deduct the entire $10x of disallowed business interest expense carryforward and therefore reduce the amount of its tested income. Also, USP would pay residual U.S. tax on its GILTI inclusion amount in Year 2, without regard to the application of paragraph (g)(4)(i) of this section. (ii) Analysis. The $10x of business interest expense paid in Year 1 is a payment amount described in paragraph (g)(4)(i) of this section because it is between specified group members, CFC1 and CFC2. Furthermore, the requirements of paragraphs (g)(4)(i)(A), (B), and (C) of this section are satisfied because the $10x of business interest expense is incurred with a principal purpose of reducing USP's Federal income tax liability; absent the application of paragraph (g)(4)(i) of this section, the effect of CFC2 treating the $10x of business interest expense as disallowed business interest expense in Year 1 would be to reduce USP's Federal income tax liability in Year 2; and no CFC group election is in effect with respect to the specified group in Year 1. Because the requirements of paragraphs (g)(4)(i)(A), (B), and (C) of this section are satisfied, CFC2's ATI for Year 1 is increased by the ATI adjustment amount, or $33.33x, which is the amount equal to 3 1/3 multiplied by $10x (the lesser of the payment amount of $10x and the disallowed business interest expense of $10x). As a result, the $10x of business interest expense is not disallowed business interest expense of CFC2 in Year 1, and therefore does not give rise to a disallowed business interest expense carryforward to Year 2. (m) Applicability dates --(1) General applicability date. Except as provided in paragraph (m)(2) of this section, this section applies for a taxable year of a foreign corporation beginning on or after November 13, 2020. (2) Exception. Paragraphs (a), (c)(1), (c)(2)(i) and (ii), and (c)(3) through (5), (d), (e), (f)(1), (g)(3) and (4), (h), and (k)(1) through (3), (6) through (8), and (10) through (32) of this section apply for a taxable year of a foreign corporation beginning on or after March 22, 2021. (3) Early application --(i) Rules for paragraphs (b) and (g)(1) and (2) of this section. Taxpayers and their related parties, within the meaning of sections 267(b) (determined without regard to section 267(c)(3)) and 707(b)(1), may choose to apply the rules in paragraphs (b) and (g)(1) and (2) of this section for a taxable year beginning after December 31, 2017, and before November 13, 2020, provided that those taxpayers and their related parties consistently apply all of those rules and the rules described in paragraph (m)(4) of this section for that taxable year. If a taxpayer and its related parties apply the rules described in paragraph (m)(4) of this section, as contained in T.D. 9905 (§§1.163(j)-0 through 1.163(j)-11, effective November 13, 2020), they will be considered as applying the rules described in paragraph (m)(4) of this section for purposes of this paragraph (m)(3)(i). (ii) Rules for certain other paragraphs in this section. Taxpayers and their related parties, within the meaning of sections 267(b) (determined without regard to section 267(c)(3)) and 707(b)(1), may choose to apply the rules in paragraphs (a), (c)(1), (c)(2)(i) and (ii), and (c)(3) through (5), (d), (e), (f)(1), (g)(3) and (4), (h), and (k)(1) through (3), (6) through (8), and (10) through (32) of this section for a taxable year beginning after December 31, 2017, and before March 22, 2021, provided that those taxpayers and their related parties consistently apply all of those rules and the rules described in paragraph (m)(4) of this section for that taxable year and for each subsequent taxable year. If a taxpayer and its related parties apply the rules described in paragraph (m)(4) of this section, as contained in T.D. 9905 (§§1.163(j)-0 through 1.163(j)-11, effective November 13, 2020) as modified by T.D. 9943 (effective January 13, 2021),they will be considered as applying the rules described in paragraph (m)(4) of this section for purposes of this paragraph (m)(3)(ii). (4) Additional rules that must be applied consistently. The rules described in this paragraph (m)(4) are the section 163(j) regulations and, if applicable, §§1.263A-9, 1.263A-15, 1.381(c)(20)-1, 1.382-1, 1.382-2, 1.382-5, 1.382-6, 1.382-7, 1.383-0, 1.383-1, 1.469-9, 1.469-11, 1.704-1, 1.882-5, 1.1362-3, 1.1368-1, 1.1377-1, 1.1502-13, 1.1502-21, 1.1502-36, 1.1502-79, 1.1502-91 through 1.1502-99 (to the extent they effectuate the rules of §§1.382-2, 1.382-5, 1.382-6, and 1.383-1) and 1.1504-4. (5) Election for prior taxable years and specified periods. Notwithstanding paragraph (e)(5)(iii) or (h)(5)(i) of this section, in the case of a specified period of a specified group or a taxable year of a stand-alone applicable CFC that ends with or within a taxable year of a designated U.S. person ending before November 13, 2020, a CFC group election or a safe-harbor election may be made on an amended Federal income tax return filed on or before the due date (taking into account extensions, if any) of the original Federal income tax return for the first taxable year of each designated U.S. person ending on or after November 13, 2020. Par. 8. Section 1.163(j)-10 is amended by: 1. Redesignating paragraph (c)(5)(ii)(D) as paragraph (c)(5)(ii)(D)( 1 ). 2. Adding a subject heading for paragraph (c)(5)(ii)(D). 3. Adding paragraph (c)(5)(ii)(D)( 2 ). 4. Redesignating paragraph (f) as paragraph (f)(1). 5. Adding a subject heading for paragraph (f). 6. Revising the subject heading for redesignated paragraph (f)(1). 7. Adding paragraph (f)(2). The revisions and additions read as follows: §1.163(j)-10 Allocation of interest expense, interest income, and other items of expense and gross income to an excepted trade or business. (c) * * * (5) * * * (ii) * * * (D) Limitations on application of look-through rules. * * * ( 2 ) Limitation on application of look-through rule to C corporations. Except as provided in §1.163(j)-9(h)(4)(iii) and (iv) (for a REIT or a partnership making the election under §1.163(j)-9(h)(1) or (7), respectively), for purposes of applying the look-through rules in paragraph (c)(5)(ii)(B) and (C) of this section to a non-consolidated C corporation (upper-tier entity), that upper-tier entity may not apply these look-through rules to a lower-tier non-consolidated C corporation if a principal purpose for borrowing funds at the upper-tier entity level or adding an upper-tier or lower-tier entity to the ownership structure is increasing the amount of the taxpayer's basis allocable to excepted trades or businesses. For example, P wholly and directly owns S1 (the upper-tier entity), which wholly and directly owns S2. Each of S1 and S2 is a non-consolidated C corporation to which the small business exemption does not apply, and S2 is engaged in an excepted trade or business. With a principal purpose of increasing the amount of basis allocable to its excepted trades or businesses, P has S1 (rather than S2) borrow funds from a third party. S1 may not look through the stock of S2 (and may not apply the asset basis look-through rule described in paragraph (c)(5)(ii)(B)( 2 )( iv ) of this section) for purposes of P's allocation of its basis in its S1 stock between excepted and non-excepted trades or businesses; instead, S1 must treat its stock in S2 as an asset used in a non-excepted trade or business for that purpose. However, S1 may look through the stock of S2 for purposes of S1's allocation of its basis in its S2 stock between excepted and non-excepted trades or businesses. (f) Applicability dates. (1) In general. * * * (2) Paragraph (c)(5)(ii)(D)(2). The rules contained in paragraph (c)(5)(ii)(D)( 2 ) of this section apply for taxable years beginning on or after March 22, 2021. However, taxpayers may choose to apply the rules in paragraph (c)(5)(ii)(D)( 2 ) of this section to a taxable year beginning after December 31, 2017, and before March 22, 2021, provided that those taxpayers and their related parties consistently apply all of the rules in the section 163(j) regulations as contained in T.D. 9905 (§§1.163(j)-0 through 1.163(j)-11, effective November 13, 2020) as modified by T.D. 9943 (effective January 13, 2021), and, if applicable, §§1.263A-9, 1.263A-15, 1.381(c)(20)-1, 1.382-1, 1.382-2, 1.382-5, 1.382-6, 1.383-0, 1.383-1, 1.469-9, 1.704-1, 1.882-5, 1.1362-3, 1.1368-1, 1.1377-1, 1.1502-13, 1.1502-21, 1.1502-79, 1.1502-91 through 1.1502-99 (to the extent they effectuate the rules of §§1.382-2, 1.382-5, 1.382-6, and 1.383-1), and 1.1504-4 contained in T.D. 9905 as modified by T.D. 9943, to that taxable year and each subsequent taxable year. Par. 9. Section 1.469-4 is amended by adding paragraph (d)(6) to read as follows: §1.469-4 Definition of activity. (d) * * * (6) Activities described in section 163(d)(5)(A)(ii). With respect to any taxpayer that is an individual, trust, estate, closely held C corporation or personal service corporation, an activity described in §1.469-1T(e)(6) and subject to section 163(d)(5)(A)(ii) that involves the conduct of a trade or business which is not a passive activity of the taxpayer and with respect to which the taxpayer does not materially participate may not be grouped with any other activity or activities of the taxpayer, including any other activity described in §1.469-1T(e)(6) and subject to section 163(d)(5)(A)(ii). Par. 10. Section 1.469-9 is amended by adding paragraphs (b)(2)(ii)(A) and (B) to read as follows: §1.469-9 Rules for certain rental real estate activities. (b) * * * (2) * * * (ii) * * * (A) Real property development. The term real property development means the maintenance and improvement of raw land to make the land suitable for subdivision, further development, or construction of residential or commercial buildings, or to establish, cultivate, maintain or improve timberlands (that is, land covered by timber-producing forest). Improvement of land may include any clearing (such as through the mechanical separation and removal of boulders, rocks, brush, brushwood, and underbrush from the land); excavation and gradation work; diversion or redirection of creeks, streams, rivers, or other sources or bodies of water; and the installation of roads (including highways, streets, roads, public sidewalks, and bridges), utility lines, sewer and drainage systems, and any other infrastructure that may be necessary for subdivision, further development, or construction of residential or commercial buildings, or for the establishment, cultivation, maintenance or improvement of timberlands. (B) Real property redevelopment. The term real property redevelopment means the demolition, deconstruction, separation, and removal of existing buildings, landscaping, and infrastructure on a parcel of land to return the land to a raw condition or otherwise prepare the land for new development or construction, or for the establishment and cultivation of new timberlands. Par. 11. Section 1.469-11 is amended by revising paragraphs (a)(1) and (4) to read as follows: §1.469-11 Applicability date and transition rules. (a) * * * (1) The rules contained in §§1.469-1, 1.469-1T, 1.469-2, 1.469-2T, 1.469-3, 1.469-3T, 1.469-4, but not §1.469-4(d)(6), 1.469-5 and 1.469-5T, apply for taxable years ending after May 10, 1992. The rules contained in §1.469-4(d)(6) apply for taxable years beginning on or after March 22, 2021. However, taxpayers and their related parties, within the meaning of sections 267(b) (determined without regard to section 267(c)(3)) and 707(b)(1), may choose to apply the rules in §1.469-4(d)(6) to a taxable year beginning after December 31, 2017, and before March 22, 2021, provided that those taxpayers and their related parties consistently apply all of the rules in the section 163(j) regulations as contained in T.D. 9905 (§§1.163(j)-0 through 1.163(j)-11, effective November 13, 2020) as modified by T.D. 9943 (effective January 13, 2021), and, if applicable, §§1.263A-9, 1.263A-15, 1.381(c)(20)-1, 1.382-1, 1.382-2, 1.382-5, 1.382-6, 1.383-0, 1.383-1, 1.469-9, 1.704-1, 1.882-5, 1.1362-3, 1.1368-1, 1.1377-1, 1.1502-13, 1.1502-21, 1.1502-79, 1.1502-91 through 1.1502-99 (to the extent they effectuate the rules of §§1.382-2, 1.382-5, 1.382-6, and 1.383-1), and 1.1504-4 contained in T.D. 9905 as modified by T.D. 9943, to that taxable year and each subsequent taxable year. (4) The rules contained in §1.469-9(b)(2), other than paragraphs (b)(2)(ii)(A) and (B), apply to taxable years beginning on or after November 13, 2020. Section 1.469-9(b)(2)(ii)(A) and (B) applies to taxable years beginning on or after March 22, 2021. However, taxpayers and their related parties, within the meaning of sections 267(b) (determined without regard to section 267(c)(3)) and 707(b)(1), may choose to apply the rules in §1.469-9(b)(2), other than paragraphs (b)(2)(ii)(A) and (B), to a taxable year beginning after December 31, 2017, and on or before November 13, 2020 and may choose to apply the rules in §1.469-9(b)(2)(ii)(A) and (B) to taxable years beginning after December 31, 2017, and before March 22, 2021, provided that those taxpayers and their related parties consistently apply all of the rules in the section 163(j) regulations contained in T.D. 9905 (§§1.163(j)-0 through 1.163(j)-11, effective November 13, 2020) as modified by T.D. 9943 (effective January 13, 2021), and, if applicable, §§1.263A-9, 1.263A-15, 1.381(c)(20)-1, 1.382-1, 1.382-2, 1.382-5, 1.382-6, 1.383-0, 1.383-1, 1.469-9, 1.704-1, 1.882-5, 1.1362-3, 1.1368-1, 1.1377-1, 1.1502-13, 1.1502-21, 1.1502-79, 1.1502-91 through 1.1502-99 (to the extent they effectuate the rules of §§1.382-2, 1.382-5, 1.382-6, and 1.383-1), and 1.1504-4, contained in T.D. 9905 as modified by T.D. 9943, to that taxable year and each subsequent taxable year. Par. 12. Section 1.1256(e)-2 is added to read as follows: §1.1256(e)-2 Special rules for syndicates. (a) Allocation of losses. For purposes of section 1256(e)(3), syndicate means any partnership or other entity (other than a corporation that is not an S corporation) if more than 35 percent of the losses of such entity during the taxable year are allocated to limited partners or limited entrepreneurs (within the meaning of section 461(k)(4)). (b) Determination of loss amount. For purposes of section 1256(e)(3), the amount of losses to be allocated under paragraph (a) of this section is calculated without regard to section 163(j). (c) Example. The following example illustrates the rules in this section: (1) Facts. Entity is an S corporation that is equally owned by individuals A and B. A provides all of the goods and services provided by Entity. B provided all of the capital for Entity but does not participate in Entity's business. For the current taxable year, Entity has gross receipts of $5,000,000, non-interest expenses of $4,500,000, and interest expense of $600,000. (2) Analysis. Under paragraph (b) of this section, Entity has a net loss of $100,000 ($5,000,000 minus $5,100,000) for the current taxable year. One half (50 percent) of this loss is allocated to B, a limited owner. Therefore, for the current taxable year, Entity is a syndicate within the meaning of section 1256(e)(3)(B). (d) Applicability date. This section applies to taxable years beginning on or after March 22, 2021. However, taxpayers and their related parties, within the meaning of sections 267(b) (determined without regard to section 267(c)(3)) and 707(b)(1), may choose to apply the rules in this section for a taxable year beginning after December 31, 2017, and before March 22, 2021, provided that those taxpayers and their related parties consistently apply all of the rules of this section to that taxable year and each subsequent taxable year. Sunita Lough, Deputy Commissioner for Services and Enforcement. Approved: December 30, 2020. David J. Kautter, Assistant Secretary of the Treasury (Tax Policy). (Filed by the Office of the Federal Register on January 13, 2021, 4:15 p.m., and published in the issue of the Federal Register for January 19, 2020, 85 F.R. 5496)
Private Letter Ruling Number: 202332015 Internal Revenue Service May 17, 2023 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Box 2508 Cincinnati, OH 45201 Number: 202332015 Release Date: 8/11/2023 Date: 05/17/2023 Employer ID number: Form you must file: Tax years: Person to contact: UIL: 501.03-00, 501.03-30 Dear ****: This letter is our final determination that you don't qualify for exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3). Recently, we sent you a proposed adverse determination in response to your application. The proposed adverse determination explained the facts, law, and basis for our conclusion, and it gave you 30 days to file a protest. Because we didn't receive a protest within the required 30 days, the proposed determination is now final. Because you don't qualify as a tax-exempt organization under IRC Section 501(c)(3), donors generally can't deduct contributions to you under IRC Section 170. We may notify the appropriate state officials of our determination, as required by IRC Section 6104(c), by sending them a copy of this final letter along with the proposed determination letter. You must file the federal income tax forms for the tax years shown above within 30 days from the date of this letter unless you request an extension of time to file. For further instructions, forms, and information, visit www.irs.gov. We'll make this final adverse determination letter and the proposed adverse determination letter available for public inspection after deleting certain identifying information, as required by IRC Section 6110. Read the enclosed Letter 437, Notice of Intention to Disclose - Rulings, and review the two attached letters that show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Letter 437 on how to notify us. If you agree with our deletions, you don't need to take any further action. If you have questions about this letter, you can call the contact person shown above. If you have questions about your federal income tax status and responsibilities, call our customer service number at 800-829-1040 (TTY 800-829-4933 for deaf or hard of hearing) or customer service for businesses at 800-829-4933. Sincerely, Stephen A. Martin Director, Exempt Organizations Rulings and Agreements Enclosures: Letter 437 Redacted Letter 4034 Redacted Letter 4038 Department of the Treasury Internal Revenue Service PO Box 2508 Cincinnati, OH 45201 Date: 03/13/2023 Employer ID number: Person to contact: Name: ID number: Telephone: Fax UIL: 501.03-00 501.03-30 Legend: W = Date X = Date Y = Names Z = Location Dear **: We considered your application for recognition of exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a). We determined that you don't qualify for exemption under IRC Section 501(c)(3). This letter explains the reasons for our conclusion. Please keep it for your records. Issues Do you qualify for exemption under IRC Section 501(c)(3)? No, for the reasons stated below. Facts You submitted Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code on W. You attest that you are an unincorporated association, and you were formed on X. You attest that you have the necessary organizing document, that your organizing document limits your purposes to one or more exempt purposes within the meaning of IRC Section 501(c)(3), that your organizing document does not expressly empower you to engage in activities, other than an insubstantial part, that are not in furtherance of one or more exempt purposes, and that your organizing document contains the dissolution provision required under Section 501(c)(3). You attest that you are organized and operated exclusively to further charitable purposes. You attest that you have not conducted and will not conduct prohibited activities under IRC Section 501(c)(3). Specifically, you attest you will: - Refrain from supporting or opposing candidates in political campaigns in any way - Ensure that your net earnings do not inure in whole or in part to the benefit of private shareholders or individuals - Not further non-exempt purposes (such as purposes that benefit private interests) more than insubstantially - Not be organized or operated for the primary purpose of conducting a trade or business that is not related to your exempt purpose(s) - Not devote more than an insubstantial part of your activities attempting to influence legislation or, if you made a Section 501(h) election, not normally make expenditures in excess of expenditure limitations outlined in Section 501(h) - Not provide commercial-type insurance as a substantial part of your activities On your Form 1023-EZ, you state that you are a not-for-profit organization dedicated to providing a safe and organized space for hosting family reunion events, fundraisers and activities aimed at fostering continued family growth. After review of your Form 1023-EZ, detailed information regarding your activities was requested. You are a membership organization whose members consist of Y. Your activities involve hosting family reunions and family gathering events, as well as conducting activities including, but not limited to, cookouts, cultural events, talent shows, etc., with the members of Y being considered the participants. You will conduct these activities in various locations depending on what is decided by the reunion chairs for the event year. Most of your events will be held in Z, where the roots of Y align. You will aim to gather and have these activities once a year. You will charge fees to family members based on the cost of the activities planned and the age of participants. You will charge children and disabled adults a lesser rate than traditional adults. Your source of revenue comes exclusively from family dues. Your expenditures are for grocery foods, the **** and propane, catering food, visiting local landmarks, tents and trash removal, and T-shirts. You will carry over any remaining funds to help cover costs for the next event. Finally, you provided your bylaws as your organizing document which were adopted on X, which is the date you attested that you were formed. Your bylaws state your purpose is to improve the quality of family reunion events and activities. They also state under the heading "Description" that "The Association is organized for charitable, educational, religious or scientific purposes within the meaning of IRC Section 501(c)(3)." Law IRC Section 501(c)(3) provides for the recognition of exemption of organizations that are organized and operated exclusively for religious, charitable, or other purposes as specified in the statute. No part of the net earnings may inure to the benefit of any private shareholder or individual. Treasury Regulation Section 1.501(c)(3)-1(a)(1) states that, to be exempt as an organization described in IRC Section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in such section. If an organization fails to meet either the organizational test or the operational test, it is not exempt. Treas.Reg. Section 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized and operated exclusively for charitable purposes unless it serves a public rather than a private interest. Treas.Reg. Section 1.501(c)(3)-1(d)(2) provides that the term "charitable" is used in IRC Section 501(c)(3) in its generally accepted legal sense and includes, among other things, lessening the burdens of government, relief of the poor and distressed or of the underprivileged, advancement of education or science, erection or maintenance of public buildings, monuments, or works, and promotion of social welfare by organizations designed to accomplish any of the above purposes, or in part to defend human and civil rights secured by law. Revenue Ruling 67-367, 1967-2 C.B. 188, describes an organization whose sole activity was the operation of a "scholarship plan" for making payments to pre-selected, specifically named individuals. The organization did not qualify for exemption under IRC Section 501(c)(3) because it was serving the private interests of its subscribers rather than public or charitable interests. Revenue Ruling 69-175, 1969-1 C.B. 149, describes an organization created to provide bus transportation for school children to a tax-exempt private school. The organization was formed by the parents of pupils attending the school. The organization provided transportation to and from the school for those children whose parents belonged to the organization. Parents were required to pay an initial family fee and an additional annual charge for each child. The Service determined that "when a group of individuals associate to provide a cooperative service for themselves, they are serving a private interest." In Callaway Fam. Assoc. Inc. v. Commr. of Internal Revenue, 71 T.C. 340 (Tax 1978), the petitioner argues that there are "hundreds, perhaps thousands" of individuals who would become linked by participation in its association. However, even though "family" may refer to many individuals with a common heritage, their interests, because of the size and diversity of the group, do not become a "public" interest. The mere number of activities accomplish an exempt purpose. Whether there were 6 or 600 members, it is evident that they joined only because the purposes and activities of the organization were "for" and "about" Callaway. In Schoger Foundation v. Commissioner, 76 T.C. 380 (1981), it was held that if an activity serves a substantial non-exempt purpose, the organization does not qualify for exemption even if the activity also furthers an exempt purpose. In Minnesota Kingsmen Chess Association v. Commissioner, T.C. Memo 1983-495, the organization sponsored chess tournaments, provided chess magazines and books to libraries, offered free chess lessons, and published a newsletter that primarily contained reports of past tournaments and announcements of future ones. The petitioner sought exemption under Section 501(c)(3) because its purposes and activities were described as educational. The court found that the promotion of chess tournaments furthered a substantial recreational purpose, even though individual participants may have received some educational benefits. In St. Louis Science Fiction Limited v. Commissioner, 49 TCM 1126, 1985-162, the Tax Court held that a science fiction society failed to qualify for tax-exempt status under IRC Section 501(c)(3). Although many of the organization's functions at its annual conventions (the organization's principal activity) were educational, its overall agenda was not exclusively educational. A substantial portion of convention affairs were social and recreational in nature. Application of law You do not meet the requirements for recognition of tax exemption under IRC Section 501(c)(3) because you fail the operational test as described in Treas.Reg. Section 1.501(c)(3)-1(a)(1). You do not meet the operational test under IRC Section 501(c)(3) because you are not operated exclusively for charitable purposes as required under Treas.Reg. Section 1.501(c)(3)-1(c)(1). You conduct an activity that provides direct benefits to members of Y that is more than insubstantial in nature. You are not operated exclusively for charitable purposes as required by Treas.Reg. Section 1.501(c)(3)-1(d)(2). You do not serve a public interest as required by Treas.Reg. Section 1.501(c)(3)-1(d)(1)(ii) because you are operating for the benefit of Y, and therefore you are serving a private interest. You are like the organization described in Revenue Ruling 67-367. Like that organization, your activities serve to benefit your members which consist of Y rather than for the benefit of the public. For example, you are hosting family reunions and family gathering events and activities including, but not limited to, cookouts, cultural events, talent shows, etc., with the members of Y being considered the participants. This illustrates that your activities are directed toward pre-selected individuals. You are like the organization described in Revenue Ruling 69-175. The group of parents in Rev.Rul. 69-175 provided a cooperative service for themselves and thus served their own private interests. Like that organization, you were formed to host family reunion activities specifically for members of Y. Similar to the organization in Callaway Fam. Assoc, your activities are centered around a specific family, which is Y, and therefore you are serving the private interests of Y. Although you may conduct some exempt activities, you have a single nonexempt purpose that is substantial in nature. This precludes you from qualifying for exemption under IRC Section 501(c)(3) as explained in Schoger Foundation v. Commissioner. You are like the organizations described in Minnesota Kingsmen Chess Association and St. Louis Science Fiction Limited in that are than an insubstantial amount of your activities is devoted to non-501(c)(3) purposes. While there may be educational activities at your events, the recreational and social purposes are substantial and outweigh any of the IRC Section 501(c)(3) purposes that you may further. Conclusion Based on the facts presented, you do not qualify for exemption from federal income tax as an organization described in IRC Section 501(c)(3). You are not operated exclusively for exempt purposes as set forth in Section 501(c)(3). You are operated to further the private interests of Y and are operating for a substantial non-exempt purpose. If you agree If you agree with our proposed adverse determination, you don't need to do anything. If we don't hear from you within 30 days, we'll issue a final adverse determination letter. That letter will provide information on your income tax filing requirements. If you don't agree You have a right to protest if you don't agree with our proposed adverse determination. To do so, send us a protest within 30 days of the date of this letter. You must include: - Your name, address, employer identification number (EIN), and a daytime phone number - A statement of the facts, law, and arguments supporting your position - A statement indicating whether you are requesting an Appeals Office conference - The signature of an officer, director, trustee, or other official who is authorized to sign for the organization or your authorized representative - The following declaration: For an officer, director, trustee, or other official who is authorized to sign for the organization: Under penalties of perjury, I declare that I have examined this request, or this modification to the request, including accompanying documents, and to the best of my knowledge and belief, the request or the modification contains all relevant facts relating to the request, and such facts are true, correct, and complete. Your representative (attorney, certified public accountant, or other individual enrolled to practice before the IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if they haven't already done so. You can find more information about representation in Publication 947, Practice Before the IRS and Power of Attorney. We'll review your protest statement and decide if you gave us a basis to reconsider our determination. If so, we'll continue to process your case considering the information you provided. If you haven't given us a basis for reconsideration, we'll send your case to the Appeals Office and notify you. You can find more information in Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. If you don't file a protest within 30 days, you can't seek a declaratory judgment in court later because the law requires that you use the IRC administrative process first (IRC Section 7428(b)(2)). Where to send your protest Send your protest, Form 2848, if applicable, and any supporting documents to the applicable address: U.S. mail: Internal Revenue Service EO Determinations Quality Assurance Mail Stop 6403 PO Box 2508 Cincinnati, OH 45201 Street address for delivery service: Internal Revenue Service EO Determinations Quality Assurance 550 Main Street, Mail Stop 6403 Cincinnati, OH 45202 You can also fax your protest and supporting documents to the fax number listed at the top of this letter. If you fax your statement, please contact the person listed at the top of this letter to confirm that they received it. You can get the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person listed at the top of this letter. Contacting the Taxpayer Advocate Service The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or if you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778. Sincerely, Stephen A. Martin Director, Exempt Organizations Rulings and Agreements
Internal Revenue Service - Information Release IR-2021-13 IRS reminds taxpayers to make final estimated tax payment for 2020 January 14, 2021 Media Relations Office Washington, D.C. www.IRS.gov/newsroom Media Contact: 202.317.4000 Public Contact: 800.829.1040 IRS reminds taxpayers to make final estimated tax payment for 2020 IR-2021-13, January 14, 2021 WASHINGTON Taxpayers who paid too little tax during 2020 can still avoid a tax-time bill and possible penalties by making a quarterly estimated tax payment now, directly to the Internal Revenue Service. The deadline for making a payment for the fourth quarter of 2020 is Friday, January 15, 2021. Income taxes are pay-as-you-go. This means that by law, taxpayers are required to pay most of their taxes during the year as income is received. There are two ways to do this: - Withholding from paychecks, pension payments, Social Security benefits or certain other government payments including unemployment compensation in some cases. This is how most people pay most of their tax. - Making quarterly estimated tax payments throughout the year to the IRS. Self-employed people and investors, among others, often pay tax this way. Either method can help avoid a surprise tax bill at tax time and the accompanying penalties that often apply. If a taxpayer failed to make required quarterly estimated tax payments earlier in the year, making a payment to cover these missed payments, as soon as possible, will usually lessen and may even eliminate any possible penalty. The IRS recommends that everyone check their possible tax liability by using the IRS Tax Withholding Estimator. This online tool allows taxpayers to see if they are withholding the right amount and find out if they need to make an estimated tax payment. Form 1040-ES, available on IRS.gov, includes a worksheet for figuring the right amount to pay as well. This is especially important for anyone who owed taxes when they filed their 2019 return. Taxpayers in this situation may include those who itemized in the past, two wage-earner households, employees with non-wage sources of income and those with complex tax situations. Taxpayers who owed taxes when they last filed and who did not adjust their 2020 withholding may find that they owe taxes again, and even a penalty, when they file their 2020 return next year. Making a quarterly estimated tax payment now can help. Taxpayers should know: - Most income is taxable, so taxpayers should gather income documents such as Forms W-2 from employers, Forms 1099 from banks and other payers, and records of virtual currencies or other income. This also includes unemployment income, refund interest and income from the gig economy. - Unemployment compensation is taxable income. If you received unemployment compensation and the state did not withhold federal income taxes, an estimated tax payment should be made. In addition, various financial transactions, especially late in the year, can often have an unexpected tax impact. Examples include year-end and holiday bonuses, stock dividends, capital gain distributions from mutual funds and stocks, bonds, virtual currency, real estate or other property sold at a profit. Publication 505, Tax Withholding and Estimated Tax, has additional details, including worksheets and examples, that can be especially helpful to those who have dividend or capital gain income, owe alternative minimum tax or self-employment tax, or have other special situations. The fastest and easiest ways to make an estimated tax payment is to do so electronically using IRS Direct Pay, the IRS2Go app or the Treasury Department's Electronic Federal Tax Payment System ( EFTPS ). For information on other payment options, visit IRS.gov/payments. If paying by check, be sure to make the check payable to the "United States Treasury." Though it's too early to file a 2020 return, it's never too early to get ready for the tax-filing season ahead. For more tips and resources, check out the Get Ready page on IRS.gov.
Internal Revenue Service - Information Release IR-2022-128 IRS continues work on inventory of tax returns; original tax returns filed in 2021 to be completed this week June 21, 2022 Media Relations Office Washington, D.C. www.IRS.gov/newsroom Media Contact: 202.317.4000 Public Contact: 800.829.1040 IRS continues work on inventory of tax returns; original tax returns filed in 2021 to be completed this week IR-2022-128, June 21, 2022 WASHINGTON -- Following intensive work during the past several months, the Internal Revenue Service announced today that processing on a key group of individual tax returns filed during 2021 will be completed by the end of this week. Due to issues related to the pandemic and staffing limitations, the IRS began 2022 with a larger than usual inventory of paper tax returns and correspondence filed during 2021. The IRS took a number of steps to address this, and the agency is on track to complete processing of originally filed Form 1040 (individual tax returns without errors) received in 2021 this week. Business paper returns filed in 2021 will follow shortly after. The IRS continues to work on the few remaining 2021 individual tax returns that have processing issues or require additional information from the taxpayer. As of June 10, the IRS had processed more than 4.5 million of the more than 4.7 million individual paper tax returns received in 2021. The IRS has also successfully processed the vast majority of tax returns filed this year: More than 143 million returns have been processed overall, with almost 98 million refunds worth more than $298 billion being issued. IRS employees continue working hard to process these and other tax returns filed in the order received. The IRS continues to receive current and prior-year individual returns and related correspondence as people file extensions, amended returns and a variety of business tax returns. To date, more than twice as many returns await processing compared to a typical year at this point in the calendar year, although the IRS has worked through almost a million more returns to date than it had at this time last year. And a greater percentage of this year's inventory awaiting processing is comprised of original returns which, generally, take less time to process than amended returns. To work to address the unprocessed inventory by the end of this year, the IRS has taken aggressive, unprecedented steps to accelerate this important processing work while maintaining accuracy. This effort included significant, ongoing overtime for staff throughout 2022, creating special teams of employees focused solely on processing aged inventory, and expediting hiring of thousands of new workers and contractors to help with this ongoing effort. Additionally, the IRS has greatly improved the process for taxpayers whose paper and electronically filed returns were suspended during processing for manual review and correction - referred to as error resolution. Last filing season, an IRS tax examiner could correct an average of 70 tax returns with errors per hour. Thanks to new technology implemented this filing season, 180 to 240 returns can now be corrected per hour. As of June 12, 2021, there were 8.9 million tax returns in error resolution. As of June 10, 2022, there were just 360,000 returns awaiting correction. The IRS will continue its intense effort to make progress on processing these paper returns in the months ahead. "IRS employees have been working tirelessly to process these tax returns as quickly as possible and help people who are waiting on refunds or resolution of an account issue," said IRS Commissioner Chuck Rettig. "Completing the individual returns filed last year with no errors is a major milestone, but there is still work to do. We remain focused on doing everything possible to expedite processing of these tax returns, and we continue to add more people to this effort as our hiring efforts continue this summer." Rettig emphasized that adding sustained funding increases for the IRS will help the agency add more employees to process tax returns and answer phones as well as help improve technology and ensure fair enforcement of the tax laws. "Taxpayers and tax professionals deserve the absolute highest-quality service from the nation's tax system," Rettig said. "Long-term and consistent funding for the agency is critical to ensuring the IRS is prepared for future tax seasons. It's also critical for the IRS to be ready to answer the call for the nation during the next crisis, just as the agency did delivering three rounds of historic stimulus payments and advance Child Tax Credit payments during the pandemic." The IRS reminds millions of taxpayers who have not yet filed their 2021 tax returns this year - including those who requested an extension until October 17 - to make sure they file their returns electronically with direct deposit to avoid delays. People who use e-file avoid the delays facing those who file paper returns; e-filed returns with no errors are typically processed in 21 days. The IRS also urges people to file as soon as they are ready. There is no need to wait until the last minute before the October 17 extension deadline. Filing sooner avoids potential delays for taxpayers, and it also assists the larger ongoing IRS efforts to complete processing tax returns this year. Additional details on processing and other operations are available on a special page on IRS.gov
Private Letter Ruling Number: 202416014 Internal Revenue Service January 22, 2024 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Box 2508 Cincinnati, OR 45201 Release Number: 202416014 Release Date: 4/19/2024 UIL Code: 501.00-00, 501.33-00, 501.35-00 Date: 01/22/2024 Employer ID number: Form you must file: 1120 Tax years: All Person to contact: Dear ****: This letter is our final determination that you don't qualify for exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3). Recently, we sent you a proposed adverse determination in response to your application. The proposed adverse determination explained the facts, law, and basis for our conclusion, and it gave you 30 days to file a protest. Because we didn't receive a protest within the required 30 days, the proposed determination is now final. Because you don't qualify as a tax-exempt organization under IRC Section 501(c)(3), donors generally can't deduct contributions to you under IRC Section 170. We may notify the appropriate state officials of our determination, as required by IRC Section 6104(c), by sending them a copy of this final letter along with the proposed determination letter. You must file the federal income tax forms for the tax years shown above within 30 days from the date of this letter unless you request an extension of time to file. For further instructions, forms, and information, visit www.irs.gov. We'll make this final adverse determination letter and the proposed adverse determination letter available for public inspection after deleting certain identifying information, as required by IRC Section 6110. Read the enclosed Letter 437, Notice of Intention to Disclose - Rulings, and review the two attached letters that show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Letter 437 on how to notify us. If you agree with our deletions, you don't need to take any further action. If you have questions about this letter, you can call the contact person shown above. If you have questions about your federal income tax status and responsibilities, call our customer service number at 800-829-1040 (TTY 800-829-3933 for deaf or hard of hearing) or customer service for businesses at 800-829-4933. Sincerely, Stephen A. Martin Director, Exempt Organizations Rulings and Agreements Enclosures: Letter 437 Redacted Letter 4034 Redacted Letter 4038 Department of the Treasury Internal Revenue Service PO Box 2508 Cincinnati, OH 45201 Date: 11/8/2023 Employer ID number: Person to contact: Name: ID number: Telephone: Fax: UIL: 501.03-00 501.33-00 501.35-00 Legend: B = State C = Date Dear **: We considered your application for recognition of exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a). We determined that you don't qualify for exemption under IRC Section 501(c)(3). This letter explains the reasons for our conclusion. Please keep it for your records. Issues Do you qualify for exemption under IRC Section 501(c)(3)? No, for the reasons stated below. Facts You incorporated in the state of B on C. According to your Articles of Incorporation, you were formed to provide aspiring first-time home buyers with a free financial and mortgage literacy program and to provide counseling to meet mortgage lending guidelines. Your goal is to help individuals and families improve their financial position and credit history in order to purchase homes. You will offer budgeting, financial literacy and credit review programs to families at no cost. You offer your services to any potential client who seeks your types of services. The public is aware of your services through your website. Your services are explained to potential clients at an initial interview and if the client agrees, you will meet subsequently with the client. You begin with a budget and financial literacy review and to ensure your client understands the various terms and processes involved in home ownership. You request the client provide copies of two years of tax returns, two most recent pay stubs, two months of bank statements, 401k quarterly statement, and proof of residency to determine the client's credit worthiness. You will provide a detailed budget analysis which involves current and potential debt to income, monthly net gain/loss. You also provide annual projections and highlight their overall net worth. You estimate a minimum of two-three conversations will need to take place prior to suggesting an approach. You explained that these meetings serve as your educational component. You use the Fair Credit Reporting Act to ensure the information stated on the client's major credit bureau reports is accurate and complete. While you typically dispute erroneous accounts and balances in writing, it is possible the client will need to communicate with creditors to confirm the validity of certain information. After their credit worthiness is ascertained, you determine whether a client should lease or purchase a property. Once an approach is agreed upon by the client to lease or purchase a home, they would interact with your co-director, who is a licensed realtor in B and a nearby state. The client would sign a "Working with Real Estate Agents Disclosure" if they choose to do so. At that point the co-director would represent the clients regarding lease or purchase contracts and negotiations. If a client needs assistance entering a lease agreement for a property not owned or controlled by you, it is reasonable to presume there would be interactions with the property owner or assignees. Both of your officers would be present at the signing/closing to assist in the transaction. You and your co-director will share the responsibility of soliciting grants, donations, and prospecting homes to acquire that fall in the budget range for low-income families. If a property needs rehabilitation, you will hire contractors to make the repairs. If you are unable to obtain sufficient grants and donations to carry-out all activities, small business loans will be considered as alternative funding sources. Your governing body consists of two related individuals who are both compensated. Your director has a B.S. degree in accounting, worked as a mortgage loan originator and is currently a notary public. Your co-director is a licensed realtor with several years practice as a licensed realtor, has experience as a mortgage processor, is a licensed housing counselor and property manager. Your co-director will receive the commissions that are usual and customary compensation for real estate sales and leases and is listed as the preferred realtor on your website. You have not yet obtained any fixed assets and will rely on donations of property, government grants, or loans. Your highest expenses consist of directors' compensation, real estate acquisition, rehab expenses, and occupancy. Your financial information does not show that you dedicate any revenues to activities involving educational or counseling programs or allocate any expenses to the training of employees to provide educational or counseling programs. Your website states that: - You are there to relieve first time home buyers of the stress by providing financial literacy along with several years of real estate experience. - You want individuals/families to be as prepared as possible for their home buying adventure. - You will provide individuals/families with the common terminology and guidelines to make sure they buy their new home with confidence and comfort. - Through understanding budget, credit, employment, and mortgage criteria will give them a head start on the qualification process with one of your lending partners. - Once an individual/family has been approved for a mortgage, your preferred realtor will work for to find the home that meets their family's needs for the best price. Your website further states you will provide other services consisting of - General Notary & Witness - Loan Closing Agent - Apostille Processing - Courier In the future, when you are in the financial position to do so, you will solicit existing real estate, and funding to purchase and rehabilitate real estate, to provide affordable housing to families whose household income is less than the county median. You will maintain ownership of said properties until individuals are in a position to purchase. They would be responsible for the cost to acquire the homes plus the cost of rehabilitation, closing costs, appraisals, etc. You explained that you would not seek to profit from the sale of homes. Law IRC Section 501(c)(3) provides for the recognition of exemption of organizations that are organized and operated exclusively for religious, charitable, or other purposes as specified in the statute. No part of the net earnings may inure to the benefit of any private shareholder or individual. IRC Section 501(q) provides that organizations which provide "credit counseling services" as a substantial purpose shall not be exempt from taxation under Section 501(a) unless they are described in Sections 501(c)(3) or 501(c)(4) and they are organized and operated in accordance with the following requirements: (1)(A) The organization- (i) provides credit counseling services tailored to the specific needs and circumstances of consumers, (ii) makes no loans to debtors (other than loans with no fees or interest) and does not negotiate the making of loans on behalf of debtors, (iii) provides services for the purpose of improving a consumer's credit record, credit history, or credit rating only to the extent that such services are incidental to providing credit counseling services, and (iv) does not charge any separately stated fee for services for the purpose of improving any consumer's credit record, credit history, or credit rating. (1)(B) The organization does not refuse to provide credit counseling services to a consumer due to the inability of the consumer to pay, the ineligibility of the consumer for debt management plan enrollment, or the unwillingness of the consumer to enroll in a debt management plan. (1)(C) The organization establishes and implements a fee policy which-- (i) requires any fees charged to a consumer for services are reasonable, (ii) allows for the waiver of fees if the consumer is unable to pay, and (iii) except to the extent allowed by state law, prohibits charging any fee based in whole or in part on a percentage of the consumer's debt, the consumer's payments to be made pursuant to a debt management plan, or the projected or actual savings to the consumer resulting from enrolling in a debt management plan. (1)(D) At all times the organization has a board of directors or other governing body- (i) which is controlled by persons who represent the broad interests of the public, such as public officials acting in their capacities as such, persons having special knowledge or expertise in credit or financial education, and community leaders, (ii) not more than 20 percent of the voting power of which is vested in persons who are employed by the organization or who will benefit financially, directly, or indirectly, from the organization's activities (other than through the receipt of reasonable directors' fees or the repayment of consumer debt to creditors other than the credit counseling organization or its affiliates), and (iii) not more than 49 percent of the voting power of which is vested in persons who are employed by the organization or who will benefit financially, directly, or indirectly, from the organization's activities (other than through the receipt of reasonable directors' fees). Section 501(q)(4)(A) defines, for purposes of Section 501(q), the term "credit counseling services" to mean (i) the providing of educational information to the general public on budgeting, personal finance, financial literacy, saving and spending practices, and the sound use of consumer credit; (ii) the assisting of individuals and families with financial problems by providing them with counseling; or (iii) a combination of the activities described above. Treasury Regulation Section 1.501(c)(3)-1(a)(1) states that, to be exempt as an organization described in IRC Section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in such section. If an organization fails to meet either the organizational test or the operational test, it is not exempt. Treas.Reg. Section 1.501(c)(3)-1(c)(1) provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in IRC Section 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. Section 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private purpose. To meet this requirement, it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests. Treas.Reg. Section 1.501(c)(3)-1(d)(2) defines the term charitable as including the relief of the poor and distressed or of the underprivileged, advancement of education and science, and the promotion of social welfare by organizations designed to lessen neighborhood tensions, to eliminate prejudice and discrimination, or to combat community deterioration. The term "charitable" also includes lessening of the burdens of government. Treas.Reg. Section 1.501(c)(3)-1(d)(3) provides that the term "educational" refers to: a. The instruction or training of the individual for the purpose of improving or developing his capabilities; or b. The instruction of the public on subjects useful to the individual and beneficial to the community. In Revenue Ruling 69-441, 1969-2 C.B. 115, the Service found that a nonprofit organization formed to help reduce personal bankruptcy by informing the public on personal money management and aiding low-income individuals and families with financial problems was exempt under Section 501(c)(3). Its board of directors was comprised of representatives from religious organizations, civic groups, labor unions, business groups, and educational institutions. In Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279 (1945), the Supreme Court held that the presence of a single non-exempt purpose, if substantial in nature, will destroy the exemption regardless of the number or importance of truly exempt purposes. the requirements under Section 501(c)(3) because you fail the operational test. In Consumer Credit Counseling Service of Alabama, Inc. v. United States, 78-2 U.S.T.C. 9660 (D.D.C. 1978), the court held that an organization that provided free information on budgeting, buying practices, and the sound use of consumer credit qualified for exemption from income tax because its activities were charitable and educational. Application of Law Operational Test IRC Section 501(a) provides for the exemption from federal income tax for organizations described in Section 501(c)(3). As stated in Treas.Reg. Section 1.501(c)(3)-1(a)(1), an organization must be both organized and operated exclusively for purposes described in Section 501(c)(3). You do not meet the requirements under Section 501(c)(3) because you fail the operational test as explained below. To satisfy the operational test, an organization must be operated exclusively for one or more exempt purposes specified in IRC Section 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. Section 1.501(c)(3)-1(c)(1). You do not meet Treas.Reg. Section 1.501(c)(3)-1(d)(1)(ii) which provides that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private purpose. You offer your credit counseling services to any potential client who wishes to qualify to purchase a home. This shows you serve the private interests of the clients. Therefore, you are not operated exclusively for an exempt purpose as provided in Section 501(c)(3) and you fail the operational test as provided in Treas.Reg. Section 1.501(c)(3)-1(c)(1). You are operated for a substantial nonexempt purpose in contravention of the requirements of Treas.Reg. Section 1.501(c)(3)-1(c)(1). In Better Business Bureau of Washington, D.C., Inc., the United States Supreme Court provided that "the presence of a single [nonexempt] purpose, if substantial in nature, will destroy the exemption regardless of the number or importance of truly [exempt] purposes". Your Activities Are Not Exclusively Charitable You have not demonstrated that your activities further a charitable purpose within the meaning of Treas.Reg. Section 1.501(c)(3)-1(d)(2). Your activities do not further a charitable purpose because you do not limit your services to a specific charitable class. You provide credit counseling services to anyone who requests your assistance in order to assist them in qualifying to buy a home. Accordingly, you are unlike the organizations described in Consumer Credit Counseling Service of Alabama and Rev.Rul. 69-441, which aided low-income individuals and families who have financial problems, thereby relieving the poor and distressed. Your Activities Are Not Educational You do not operate a substantive, ongoing counseling, or public educational program. You state you begin with a budget and financial literacy review to ensure your client understands the various terms and processes involved in home ownership. You estimate a minimum of **** will need to take place prior to suggesting an approach. These meetings you explained serve as your educational component. You are not like the organizations in Consumer Credit Counseling Service of Alabama and Rev.Rul. 69-441 because you have not shown that you provide educational programs that are structured to improve the borrower's understanding of their financial problems or their skills in solving them. Your goal is to help individuals and families improve their financial position and credit history in order to purchase homes. You have not shown that your activities are designed to provide instruction or training "useful to the individual and beneficial to the community" within the meaning of Treas.Reg. Section 1.501(c)(3)-1(d)(3)(i). Thus, you are not operated exclusively for educational purposes within the meaning of IRC Section 501(c)(3). You Do Not Meet IRC Section 501(q) You do not meet the requirements of IRC Section 501(q) because of the following: - You do not meet IRC Section 501(q)(1)(A)(i) because you do not provide credit counseling services tailored to the specific needs and circumstances of consumers. You do not conduct initial or follow-up meetings with potential borrowers to gather information to understand their particular financial situation or needs, or to council individuals on how to improve their financial situations. Your goal is to gather financial information only to the extent to assist any individual to qualify for a mortgage. - You do not meet IRC Section 501(q)(1)(A)(iii). You only provide credit counseling services for the purpose of improving a client's credit record, credit history, or credit rating so the client can qualify to buy a home. - You do not meet IRC Section 501(q)(1)(D)(ii) because both your board members are compensated. Your governing body does not comply with this Section because it requires that at all times the organization must have a board of directors or other governing body not more than 20 percent of the voting power of which is vested in persons who are employed by the organization or who will benefit financially, directly, or indirectly, from the organization's activities, because both your board members will benefit financially from your operations. Therefore, had you established that you otherwise met the requirements of IRC Section 501(c)(3), your failure to satisfy the requirements of Section 501(q) would prevent you from being exempt from taxation under Section 501(a). Conclusion You have not shown that you meet the requirements for recognition of tax exemption under IRC Section 501(c)(3). You are not operated exclusively for a tax-exempt purpose as specified under Section 501(c)(3). Your primary purpose is to help individuals and families improve their financial position and credit history in order to purchase homes. You are also serving private interests. Furthermore, you do not meet the requirements of Section 501(q) because you do not operate a substantive, ongoing program of public education or counseling, and your entire board is compensated. Therefore, you fail to qualify for exemption under Section 501(c)(3). If you agree If you agree with our proposed adverse determination, you don't need to do anything. If we don't hear from you within 30 days, we'll issue a final adverse determination letter. That letter will provide information on your income tax filing requirements. If you don't agree You have a right to protest if you don't agree with our proposed adverse determination. To do so, send us a protest within 30 days of the date of this letter. You must include: - Your name, address, employer identification number (EIN), and a daytime phone number - A statement of the facts, law, and arguments supporting your position - A statement indicating whether you are requesting an Appeals Office conference - The signature of an officer, director, trustee, or other official who is authorized to sign for the organization or your authorized representative - The following declaration: For an officer, director, trustee, or other official who is authorized to sign for the organization: Under penalties of perjury, I declare that I have examined this request, or this modification to the request, including accompanying documents, and to the best of my knowledge and belief, the request or the modification contains all relevant facts relating to the request, and such facts are true, correct, and complete. Your representative (attorney, certified public accountant, or other individual enrolled to practice before the IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if they haven't already done so. You can find more information about representation in Publication 947, Practice Before the IRS and Power of Attorney. We'll review your protest statement and decide if you gave us a basis to reconsider our determination. If so, we'll continue to process your case considering the information you provided. If you haven't given us a basis for reconsideration, we'll send your case to the Appeals Office and notify you. You can find more information in Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. If you don't file a protest within 30 days, you can't seek a declaratory judgment in court later because the law requires that you use the IRC administrative process first (IRC Section 7428(b)(2)). Where to send your protest Send your protest, Form 2848, if applicable, and any supporting documents to the applicable address: U.S. mail: Internal Revenue Service EO Determinations Quality Assurance Mail Stop 6403 PO Box 2508 Cincinnati, OH 45201 Street address for delivery service: Internal Revenue Service EO Determinations Quality Assurance 550 Main Street, Mail Stop 6403 Cincinnati, OH 45202 You can also fax your protest and supporting documents to the fax number listed at the top of this letter. If you fax your statement, please contact the person listed at the top of this letter to confirm that they received it. You can get the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person listed at the top of this letter. Contacting the Taxpayer Advocate Service The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or if you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778. Sincerely, Stephen A. Martin Director, Exempt Organizations Rulings and Agreements
Treasury Decision 9953 Internal Revenue Service 2021-39 I.R.B. 430 26 CFR 31.3131-1T, 26 CFR 31.3132-1T & 26 CFR 31.3134-1T: Recapture of credits under the American Rescue Plan Act T.D. 9953 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 31 Recapture of Excess Employment Tax Credits under the American Relief Plan Act of 2021 AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Temporary regulations. SUMMARY: This document sets forth temporary regulations under sections 3131, 3132, and 3134 of the Internal Revenue Code (Code), added by sections 9641 and 9651 of the American Rescue Plan Act of 2021. These temporary regulations authorize the assessment of any erroneous refund of the tax credits paid under sections 3131, 3132 (including any increases in those credits under section 3133), and 3134 of the Code. The text of these temporary regulations also serves as the text of the proposed regulations (REG-109077-21) set forth in the notice of proposed rulemaking on this subject in the Proposed Rules section of this issue of the Federal Register. DATES: Effective date: These temporary regulations are effective on September 10, 2021. Applicability date: For date of applicability, see §§ 31.3131-1T, 31.3132-1T, and 31.3134-1T of these temporary regulations. FOR FURTHER INFORMATION CONTACT: Concerning these temporary regulations, NaLee Park at 202-317-6798. SUPPLEMENTARY INFORMATION: Background The Families First Coronavirus Response Act (Families First Act), Pub. L. 116-127, 134 Stat. 178 (March 18, 2020), the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Pub. L. 116-136, 134 Stat. 281 (March 27, 2020), the COVID-related Tax Relief Act of 2020 (Tax Relief Act), enacted as Subtitle B of Title II of Division N of the Consolidated Appropriations Act, 2021, Pub. L. 116-260, 134 Stat.1182 (December 27, 2020), the Taxpayer Certainty and Disaster Relief Tax Act of 2020 (Relief Act), enacted as Division EE of the Consolidated Appropriations Act, 2021, and the American Rescue Plan Act of 2021 (the ARP), Pub. L. 117-2, 135 Stat. 4 (March 11, 2021), provide relief to taxpayers from economic hardships resulting from the Coronavirus Disease 2019 (COVID-19). As described below, this relief includes employment tax credits for certain wages paid by employers. I. Paid Sick and Family Leave Credits The Emergency Paid Sick Leave Act (EPSLA) and the Emergency Family and Medical Leave Expansion Act (EFMLEA), enacted as Divisions E and C of the Families First Act, respectively, generally required employers with fewer than 500 employees to provide paid leave due to certain circumstances related to COVID-19. Sections 7001 and 7003 of the Families First Act generally provided that non-governmental employers subject to the paid leave requirements under EPSLA and EFMLEA were entitled to fully refundable tax credits to cover the wages paid for leave taken for those periods of time during which employees are unable to work or telework for specified reasons related to COVID-19, plus allocable qualified health plan expenses. Although the requirement to provide employees with paid leave under EPSLA and EFMLEA expired December 31, 2020, the tax credits for qualified leave wages paid for periods of leave taken beginning on April 1, 2020, and ending on December 31, 2020, were extended by the Tax Relief Act through March 31, 2021, for paid leave that would have satisfied the requirements of EPSLA and EFMLEA. The ARP added sections 3131 through 3133 of the Code, which extend the refundable tax credits for paid leave to non-governmental employers with fewer than 500 employees, and certain governmental entities 1 without regard to the number of employees, that provide paid sick and family leave for specified reasons related to COVID-19 with respect to periods of leave beginning on April 1, 2021, through September 30, 2021. The paid sick leave credit and the paid family leave credit (collectively, "paid sick and family leave credits") under sections 3131 through 3133 are available to eligible employers that provide employees with paid leave that would have satisfied the requirements of EPSLA and EFMLEA, with certain modifications made pursuant to the ARP. 1 Section 9641 of the ARP added sections 3131(f)(5) and 3132(f)(5) to the Code, which extend paid sick and family leave credits to certain governmental employers (without regard to the number of employees). However, the credits are not allowed for the government of the United States, or any agency or instrumentality of the United States government, except for an organization described in section 501(c)(1) of the Code and exempt from tax under section 501(a) of the Code. Under section 3131, a credit is available to eligible employers who pay qualified sick leave wages to an employee for up to 80 hours leave provided during the period beginning April 1, 2021, and ending September 30, 2021, if the employee is unable to work or telework because the employee: (1) is subject to a Federal, State, or local quarantine or isolation order related to COVID-19; (2) has been advised by a health care provider to self-quarantine due to concerns related to COVID-19; (3) is experiencing symptoms of COVID-19 and seeking a medical diagnosis, is seeking or awaiting the results of a diagnostic test for, or a medical diagnosis of, COVID-19 and the employee has been exposed to COVID-19 or the employee's employer has requested the test or diagnosis, or the employee is obtaining immunization related to COVID-19 or recovering from any injury, disability, illness, or condition related to the immunization; (4) is caring for an individual who is subject to a Federal, State, or local quarantine or isolation order related to COVID-19, or has been advised by a health care provider to self-quarantine due to concerns related to COVID-19; (5) is caring for a son or daughter of such employee if the school or place of care of the son or daughter has been closed, or the child care provider of the son or daughter is unavailable, due to COVID-19 precautions; or (6) is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services (HHS) in consultation with the Secretaries of the Treasury and Labor. The Secretary of HHS has specified, after consultation with the Secretaries of Treasury and Labor, that a substantially similar condition is one in which the employee takes leave: to accompany an individual to obtain immunization related to COVID-19, or to care for an individual who is recovering from any injury, disability, illness, or condition related to the immunization. 2 2 For more information on the paid sick and family leave credits, including who is an "individual" for purposes of this "substantially similar" condition, see Tax Credits for Paid Leave Under the American Rescue Plan Act of 2021 for Leave After March 31, 2021 \| Internal Revenue Service (irs.gov) at https://www.irs.gov/newsroom/tax-credits-for-paid-leave-under-the-american-rescue-plan-act-of-2021-for-leave-after-march-31-2021. If an employee is unable to work or telework for reasons related to COVID-19 described in (1), (2), or (3) above, qualified sick leave wages are wages paid at the employee's regular rate of pay or, if higher, the Federal minimum wage or any applicable State or local minimum wage, up to a maximum of $511 per day and $5,110 in the aggregate. If an employee is unable to work or telework for reasons related to COVID-19 described in (4), (5), or (6) above, qualified sick leave wages are two-thirds of the wages paid at the employee's regular rate of pay or, if higher, the Federal minimum wage or any applicable State or local minimum wage, up to a maximum of $200 per day and $2,000 in the aggregate. Under section 3132, a credit is available to eligible employers who pay qualified family leave wages to an employee for up to 12 weeks of paid family leave provided during the period beginning April 1, 2021, and ending September 30, 2021, if the employee is unable to work or telework due to any of the conditions for which eligible employers may provide paid sick leave. Qualified family leave wages are two-thirds of the wages paid at the employee's regular rate of pay, up to a maximum of $200 per day and $12,000 in the aggregate. An eligible employer may not receive the paid family leave credit for the same wages for which it received the paid sick leave credit. Further, an eligible employer that receives the credits for qualified sick leave wages under section 3131 of the Code and qualified family leave wages under section 3132 of the Code (collectively, "qualified leave wages") may not receive the employee retention credit allowed under section 2301 of the CARES Act or section 3134 of the Code based on the same wages. For the second calendar quarter of 2021, if an eligible employer receives the employee retention credit under section 2301 of the CARES Act based on wages paid that are also qualified leave wages on which the employer may claim the paid sick and family leave credits, the employer must reduce any paid sick and family leave credits by the amount of the credit allowed under section 2301 of the CARES Act that is attributable to those same wages. See sections 3131(f)(3) and 3132(f)(3). For the third and fourth calendar quarters of 2021, any qualified leave wages eligible employers take into account for purposes of the paid sick and family leave credits may not be taken into account for purposes of the employee retention credit under section 3134 of the Code. See section 3134(c)(3)(D). The paid sick and family leave credits are also reduced by the amount of the credit allowed under section 41 (the credit for increasing research activities) with respect to wages taken into account for determining both the credit under section 41 and the paid sick and family leave credits. In addition, any wages taken into account in determining paid sick and family leave credits cannot be taken into account as wages for purposes of the credits under sections 45A, 45P, 45S, and 51. See sections 3131(f)(3) and 3132(f)(3). Sections 3131(f)(2) and 3132(f)(2) provide that, for purposes of sections 3131 and 3132, respectively, the term "wages" means wages as defined in section 3121(a), determined without regard to paragraphs (1) through (22) of section 3121(b), and compensation as defined in section 3231(e), determined without regard to the sentence in section 3231(e)(1) that begins "Such term does not include remuneration". Eligible employers are entitled to receive a credit equal to the amount of qualified leave wages paid under sections 3131 and 3132. Under sections 3131(d) and 3132(d), the credit is increased by the eligible employer's cost of maintaining health insurance coverage allocable to the qualified leave wages ("allocable qualified health plan expenses"). Under sections 3131(e) and 3132(e), the credit is also increased by certain amounts paid under collectively bargained agreements by the eligible employer that are properly allocable to the qualified leave wages ("certain collectively bargained contributions"), subject to the daily and aggregate credit limitations. The credits for the qualified leave wages and the collectively bargained contributions combined cannot exceed the $511 daily and $5110 aggregate limitation or $200 daily and $2000 aggregate limitation for paid sick leave and the $200 daily and $12,000 aggregate limitation for paid family leave. However, the credit for the allocable qualified health expenses is in addition to the credit for the qualified leave wages and not subject to the daily and aggregate credit limitations. Under sections 3131 and 3132, qualified leave wages are subject to the taxes imposed on employers by sections 3111(a) (employer's share of social security tax), 3111(b), and 3221(a), but section 3133(a) provides that the paid sick and family leave credits under sections 3131 and 3132 are increased by the amount of the taxes imposed by sections 3111(a), 3111(b), and 3221(a) on qualified leave wages. The paid sick and family leave credits under sections 3131 and 3132 are allowed against the taxes imposed on employers under section 3111(b) (the Hospital Insurance tax (Medicare tax)), and against so much of the taxes imposed under section 3221(a) (the Railroad Retirement Tax Act Tier 1 tax) as are attributable to the rate in effect under section 3111(b), as applicable, on all wages and compensation paid to all employees, and any credit amounts in excess of these taxes are treated as an overpayment to be refunded under sections 6402(a) and 6413(b) of the Code. See sections 3131(b)(4)(A), 3131(f)(1), 3132(b)(3)(A), and 3132(f)(1). II. Employee Retention Credit Section 2301 of the CARES Act, as originally enacted, provides for an employee retention credit for eligible employers, including tax-exempt organizations, that pay qualified wages, including certain health plan expenses, to some or all employees after March 12, 2020, and before January 1, 2021. Section 206 of the Relief Act adopted amendments and technical changes to section 2301 of the CARES Act for qualified wages paid after March 12, 2020, and before January 1, 2021, primarily expanding eligibility for certain employers to claim the credit. Section 206 of the Relief Act is effective retroactive to the effective date of section 2301 of the CARES Act. Section 207 of the Relief Act, which is effective for calendar quarters beginning after December 31, 2020, further amends section 2301 of the CARES Act to extend the application of the employee retention credit to qualified wages paid after December 31, 2020, and before July 1, 2021, and to modify the calculation of the credit amount for qualified wages paid during that time. Section 9651 of the ARP enacted section 3134 of the Code, effective for calendar quarters beginning after June 30, 2021, to provide an employee retention credit for qualified wages paid after June 30, 2021, and before January 1, 2022. The Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) will continue to monitor potential legislation related to the employee retention credit that may impact certain rules described in this preamble. The employee retention credit is available to any employer carrying on a trade or business during a calendar quarter that meets the requirements to be an eligible employer under section 3134, which include experiencing a full or partial suspension of business operations due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19, experiencing a decline in gross receipts, or qualifying as a recovery startup business. For eligible employers that averaged more than 500 full-time employees (within the meaning of section 4980H) during 2019 (large eligible employers), qualified wages are wages and compensation (including allocable qualified health plan expenses), up to $10,000 per employee per calendar quarter, paid to employees for the time during which they are not providing services due to a full or partial suspension of business operations or a decline in gross receipts. For eligible employers that averaged 500 full-time employees or fewer during 2019 (small eligible employers), and for severely financially distressed employers as defined in section 3134(c)(3)(C)(ii) that are also large eligible employers, qualified wages are the wages and compensation (including allocable qualified health plan expenses), up to $10,000 per employee per calendar quarter, paid with respect to an employee (regardless of whether the employee is performing services) during any period in the calendar quarter in which the business operations are fully or partially suspended due to a governmental order or during any calendar quarter in which the employer is experiencing a decline in gross receipts. If an employer was not in existence in 2019, an employer may use the average number of full-time employees in 2020 rather than 2019. If an employer is an eligible employer due to being a recovery startup business, the maximum aggregate employee retention credit the employer may claim in a calendar quarter is $50,000. In the third and fourth calendar quarters of 2021, a recovery startup business that is a small eligible employer may treat all wages paid with respect to an employee during the quarter as qualified wages. See Notice 2021-49. The same wages or compensation cannot be counted for both the paid sick and family leave credits under sections 3131 and 3132 and the employee retention credit under section 3134. Qualified wages for the employee retention credit also do not include any wages taken into account under sections 41, 45A, 45P, 45S, 51, and 1396 of the Code. See section 3134(c)(3)(D). Additionally, qualified wages do not include amounts taken into account as payroll costs for Paycheck Protection Program loan forgiveness and certain grants. See section 3134(h). Section 3134(c)(4)(A) provides that, for purposes of section 3134, the term "wages" means wages as defined in section 3121(a) 3 and compensation as defined in section 3231(e). 3 For purposes of certain governmental organizations or entities as described in section 3134(f)(2) of the Code, wages as defined in section 3121(a) are determined without regard to paragraphs (5), (6), (7), (10), and (13) of section 3121(b) (except with respect to services performed in a penal institution by an inmate thereof). The employee retention credit under section 3134 is equal to 70 percent of qualified wages paid. The credit is allowed against the taxes imposed on employers under section 3111(b), first reduced by any tax credits allowed under sections 3131 and 3132, and against so much of the taxes imposed under section 3221(a) as are attributable to the rate in effect under section 3111(b), as applicable, first reduced by any credits allowed under sections 3131 and 3132, on all wages and compensation paid to all employees. Any credit amounts in excess of these taxes are treated as an overpayment that shall be refunded under sections 6402(a) and 6413(b) of the Code. III. Refundability of Credits Sections 3131(b)(4)(A), 3132(b)(3)(A), and 3134(b)(3) provide that if the amount of the paid sick and family leave credits (which would include any increases in the credits under section 3133(a)) and employee retention credit exceeds the taxes imposed under section 3111(b) and so much of the taxes imposed under section 3221(a) as are attributable to the rate in effect under section 3111(b), as applicable, for any calendar quarter, after application of the other credits previously applied, such excess shall be treated as an overpayment that shall be refunded under sections 6402(a) and 6413(b). Section 6402(a) generally provides that, within the applicable period of limitations, overpayments may be credited against any liability in respect of an internal revenue tax on the part of the person who made the overpayment and any remaining balance refunded to such person. Section 6413(b) provides that if more than the correct amount of employment tax imposed by sections 3101, 3111, 3201, 3221, or 3402 is paid or deducted and the overpayment cannot be adjusted under section 6413(a) 4, the amount of the overpayment shall be refunded (subject to the applicable statute of limitations) as the Secretary may prescribe in regulations. 4 Section 6413(a) addresses interest-free adjustments of overpayments. The section provides that if more than the correct amount of employment tax imposed by section 3101, 3111, 3201, 3221, or 3402 is paid with respect to any payment of remuneration, proper adjustments with respect to both the tax and the amount to be deducted, shall be made, without interest, in such manner and at such times as the Secretary may by regulations prescribe. The IRS revised Form 941, Employer's Quarterly Federal Tax Return, Form 943, Employer's Annual Federal Tax Return for Agricultural Employees, Form 944, Employer's Annual Federal Tax Return, and Form CT-1, Employer's Annual Railroad Retirement Tax Return, so that employers may use these returns to claim the paid sick and family leave credits under sections 3131 through 3133 and the employee retention credit under section 3134. The revised employment tax returns allow for any of these credits in excess of the taxes imposed under section 3111(b) and so much of the taxes imposed under section 3221(a) as are attributable to the rate in effect under section 3111(b), as applicable, to be credited against other employment taxes and then for any remaining balance to be credited or refunded to the employer in accordance with section 6402(a) or section 6413(b). IV. Advance Payment of Credits and Erroneous Refunds Sections 3131(b)(4)(B) and 3132(b)(3)(B) provide that, in anticipation of the paid sick and family leave credits under these sections (which would include any increases in the credits under section 3133(a)), including any refundable portions, these credits are to be advanced, according to forms and instructions provided by the Secretary, up to the total allowable amount of the credits and subject to applicable limits for the calendar quarter. Section 3134(j)(2) provides that eligible employers for which the average number of full-time employees (within the meaning of section 4980H) employed by the eligible employer during 2019 was not greater than 500 may elect for any calendar quarter to receive an advance payment of the employee retention credit for the quarter in an amount not to exceed 70 percent of the average quarterly wages paid in calendar year 2019. To implement the advance payment provisions, employers that are eligible to receive an advance of the tax credits may use IRS Form 7200, Advance Payment of Employer Credits Due To COVID-19, to request an advance of the paid sick and family leave credits and the employee retention credit. Employers are required to reconcile any advance payments claimed on Form 7200 with total credits claimed and total taxes due on their employment tax returns. A refund or credit of any portion of these tax credits, regardless of whether they are advanced, to a taxpayer in excess of the amount to which the taxpayer is entitled is an erroneous refund that the employer must repay. V. Assessment Authority Section 6201 authorizes the Secretary to determine and assess tax liabilities including interest, additional amounts, additions to the tax, and assessable penalties. However, the general authority to assess tax liabilities under section 6201(a) does not provide for the assessment of any non-rebate 5 portion of an erroneous refund of a refundable tax credit, which may include a portion of the credits available under sections 3131, 3132, and 3134, if the refund exceeds the amounts to which an employer is properly entitled. While these types of erroneous refunds are generally recovered or recaptured through agreed upon voluntary repayments, setoff, or through litigation, the Code in some instances, such as in sections 3131, 3132, and 3134, provides for the administrative recapture of these non-rebate refunds either by directly authorizing assessment of the erroneous non-rebate refunds or by authorizing the promulgation of regulations or other guidance to do so. 5 As a general matter, "non-rebate" refers to the portion of any refund of a tax credit that exceeds the IRS's determination of the recipient's tax liability (i.e., the remaining portion of the refund that is paid to the recipient after the refund has been applied to the recipient's tax liability). Specifically, with regard to the paid sick and family leave credits, sections 3131(g) and 3132(g) provide, in relevant part, that the Secretary will provide such regulations or other guidance as may be necessary to carry out the purposes of the credits, including regulations or other guidance to prevent the avoidance of the purposes of the limitations under this provision and to recapture the benefit of the credit in cases where there is a subsequent adjustment to the credit. See sections 3131(g)(1), 3131(g)(4), 3132(g)(1), and 3132(g)(4). With regard to the employee retention credit, section 3134(j)(3)(B) allows for the direct assessment of certain erroneous refunds of advanced portions of the credit by providing that if a small eligible employer specified in section 3134(j)(2) receives excess advance payments of the credit, then the taxes imposed under section 3111(b) or so much of the taxes imposed under section 3221(a) as are attributable to the rate in effect under section 3111(b), as applicable, for the calendar quarter are increased by the amount of the excess. Section 3134(m)(3) further provides that the Secretary will issue such forms, instructions, regulations, and other guidance as are necessary to prevent the avoidance of the purposes of the limitations under section 3134. On July 29, 2020, temporary regulations (TD 9904) amending the Employment Tax Regulations under sections 3111 and 3221 to provide for the recapture of erroneous refunds of the paid sick and family leave credits under the Families First Act and erroneous refunds of the employee retention credit under the CARES Act, pursuant to the authority granted under these acts to prescribe those regulations, were published in the Federal Register (85 FR 45514). A notice of proposed rulemaking (REG-111879-20) cross-referencing the temporary regulations was published in the Federal Register on the same day (85 FR 45551). Because the ARP did not amend the Families First Act or CARES Act to extend the paid leave credits and employee retention credit provided thereunder, but rather enacted new Code sections that provide for similar credits, the temporary regulations in TD 9904 do not apply to the credits under the ARP. Therefore, separate regulations are required to provide for the recapture of the erroneous refund of these credits pursuant to the authority granted under sections 3131, 3132, and 3134. Accordingly, this document amends the Employment Tax Regulations (26 CFR part 31) by adding temporary regulations under new sections 3131, 3132, and 3134 of the Code. Concurrent with the publication of this Treasury decision, the Treasury Department and the IRS are publishing in the Proposed Rules section of this issue of the Federal Register a notice of proposed rulemaking (REG-109077-21) on this subject that cross-references the text of these temporary regulations. See section 7805(e)(1). Interested persons are directed to the ADDRESSES and Comments and Requests for a Public Hearing sections of the preamble to REG-109077-21 for information on submitting public comments or requesting a public hearing on the proposed regulations. Explanation of Provisions Sections 3131(b)(3), 3131(b)(4)(A), 3131(f)(1), 3132(b)(2), 3132(b)(3)(A), 3132(f)(1), 3134(b)(2), 3134(b)(3), and 3134(c)(1) provide that the credits described in these sections are taken against the taxes imposed under section 3111(b) and so much of the taxes imposed under section 3221(a) as are attributable to the rate in effect under section 3111(b), as applicable, (although for the employee retention credit, the taxes are first reduced by any paid sick and family leave credits). Additionally, if the amount of the credits exceeds these taxes for any calendar quarter, then the excess shall be treated as an overpayment to be refunded or credited under sections 6402(a) and 6413(b). Any credits claimed that exceed the amount to which the employer is entitled and that are actually credited or refunded by the IRS are considered to be erroneous refunds of these credits. Section 3134(j)(3)(B) provides that if a small eligible employer specified in section 3134(j)(2) receives excess advance payments of the credit, then the taxes imposed under section 3111(b) or so much of the taxes imposed under section 3221(a) as are attributable to the rate in effect under section 3111(b), as applicable, for the calendar quarter are increased by the amount of the excess. These temporary regulations provide that erroneous refunds of these credits are treated as underpayments of the taxes imposed under section 3111(b) and so much of the taxes imposed under section 3221(a) as are attributable to the rate in effect under section 3111(b), as applicable. These temporary regulations authorize the IRS to assess any credits erroneously credited, paid, or refunded in excess of the amount allowed as if those amounts were taxes imposed under section 3111(b) and so much of the taxes imposed under section 3221(a) as are attributable to the rate in effect under section 3111(b), as applicable, subject to assessment and administrative collection procedures. This allows the IRS to prevent the avoidance of the purposes of the limitations under the credit provisions and to recover the erroneous refund amounts efficiently, while also preserving administrative protections afforded to taxpayers with respect to contesting their tax liabilities under the Code and avoiding unnecessary costs and burdens associated with litigation. These assessment and administrative collection procedures may apply in the normal course in processing employment tax returns that include advances in excess of claimed credits and in examining returns for excess claimed credits. These assessment and administrative collection procedures do not replace the existing recapture methods, but rather represent an alternative method available to the IRS. Specifically, these temporary regulations provide that any amount of the credits for qualified leave wages and certain collectively bargained contributions under sections 3131 and 3132, plus any amount of credits for qualified health plan expenses under sections 3131(d) and 3132(d), and including any increases in these credits under section 3133, and any amount of the employee retention credit for qualified wages under section 3134 of the Code that are erroneously refunded or credited to an employer shall be treated as underpayments of the taxes imposed under section 3111(b) and so much of the taxes imposed under section 3221(a) as are attributable to the rate in effect under section 3111(b), as applicable, by the employer and may be administratively assessed and collected in the same manner as the taxes. These temporary regulations provide that the determination of any amount of credits erroneously refunded must take into account any credit amounts advanced to an employer under the process established by the IRS in accordance with sections 3131(b)(4)(B), 3132(b)(3)(B) and 3134(j)(2). In certain situations, third-party payors claim tax credits on behalf of their common law employer clients. These temporary regulations address this situation by providing that employers against which an erroneous refund of credits may be assessed as an underpayment include persons treated as the employer under sections 3401(d), 3504, and 3511, consistent with their liability for the employment taxes against which the credits applied. Sections 3131(h) and 3132(h) provide that the paid sick and family leave credits apply to wages paid with respect to a period of leave taken beginning on April 1, 2021 and ending on September 30, 2021. Section 3134(n) provides that the employee retention tax credit applies to wages paid after June 30, 2021, and before January 1, 2022. Pursuant to section 7805(b)(2) of the Code, these temporary regulations are permitted to apply before the dates provided under section 7805(b)(1), including the date on which these temporary regulations are filed with the Federal Register, because these temporary regulations are being issued within 18 months of the date of the enactment of the relevant statutory provisions. Accordingly, these temporary regulations apply to all credits under sections 3131 and 3132, including any increases to the credits under section 3133, credited or refunded on or after April 1, 2021, including advanced refunds, as well as all credits under section 3134 that are credited or refunded on or after July 1, 2021, including advanced refunds. These applicability dates correspond to the effective dates of the statutory sections that provide for these credits and that authorize guidance to allow for the administrative recapture of erroneous refunds of these credits. Special Analyses The Office of Management and Budget's Office of Information and Regulatory Analysis has determined that these temporary regulations are not significant and not subject to review under section 6(b) of Executive Order 12866. Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), the Secretary certifies that these temporary regulations will not have a significant economic impact on a substantial number of small entities because these temporary regulations impose no compliance burden on any business entities, including small entities. Although these temporary regulations will apply to all employers eligible for the tax credits under sections 3131, 3132, and 3134, including small businesses and tax-exempt organizations with fewer than 500 employees, and will therefore be likely to affect a substantial number of small entities, the economic impact will not be significant. These temporary regulations do not affect the employer's employment tax reporting or the necessary information to substantiate entitlement to the credits. Rather, these temporary regulations merely implement the statutory authority granted under sections 3131(g), 3132(g), and 3134(m) that authorize the IRS to assess, reconcile, and recapture any portion of the credits erroneously credited, paid, or refunded in excess of the actual amount allowed as if the amounts were taxes imposed under section 3111(b) and so much of the taxes imposed under section 3221(a) as are attributable to the rate in effect under section 3111(b), as applicable, subject to assessment and administrative collection procedures. Notwithstanding this certification, the Treasury Department and the IRS invite comments on any impact these temporary regulations would have on small entities. Pursuant to section 7805(f), these temporary regulations have been submitted to the Chief Counsel of the Office of Advocacy of the Small Business Administration for comment on its impact on small business. The Treasury Department and the IRS have determined that there is good cause to issue these regulations as temporary regulations. Employers were required to file Form 941, Employer's Quarterly Federal Tax Return, for the second quarter of calendar year 2021 by July 31, 2021, as required by section 6071 of the Code and Treas. Reg. § 31.6071(a)-1. Employers use Form 941 to claim paid sick and family leave credits and the employee retention credit, as well as to report any advance of these credits they received during the calendar quarter. In filing their second quarter 2021 Form 941, some employers may have already received, as an advance, refund amounts in excess of the credits to which they are entitled. In addition to the statutory authority provided by section 3134(j)(3) with regard to erroneous advance refunds of the employee retention credit, these temporary regulations authorize the assessment of any erroneous refunds of the credits. Without these temporary regulations, in some instances the IRS may not be able to avoid bringing costly and burdensome litigation to recover the erroneous refunds. Further, comments are being solicited in the cross-referenced notice of proposed rulemaking that is in this issue of the Federal Register, and any comments will be considered before final regulations are issued. Statement of Availability of IRS Documents IRS notices and other guidance cited in this preamble are published in the Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at http://www.irs.gov. Drafting Information The principal author of these temporary regulations is NaLee Park, Office of the Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes). However, other personnel from the Treasury Department and the IRS participated in the development of these temporary regulations. List of Subjects in 26 CFR Part 31 Employment taxes, Income taxes, Penalties, Pensions, Railroad retirement, Reporting and recordkeeping requirements, Social security, Unemployment compensation. Adoption of Amendments to the Regulations Accordingly, 26 CFR part 31 is amended as follows: PART 31--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE Paragraph 1. The authority citation for part 31 is amended by adding entries for §§31.3131-1T, 31.3132-1T, and 31.3134-1T in numerical order to read in part as follows: Authority: 26 U.S.C. 7805. Section 31.3131-1T also issued under 26 U.S.C. 3131(g). Section 31.3132-1T also issued under 26 U.S.C. 3132(g). Section 31.3134-1T also issued under 26 U.S.C. 3134(m)(3). Par. 2. Section 31.3131-1T is added to read as follows: §31.3131-1T Recapture of credits. (a) Recapture of erroneously refunded credits. Any amount of credits for qualified sick leave wages under section 3131(a), including any increase to the amount of the credits under sections 3131(d), 3131(e), and 3133, that are treated as overpayments and refunded or credited to an employer under section 6402(a) or section 6413(b) and to which the employer is not entitled, resulting in an erroneous refund to the employer, shall be treated as an underpayment of the taxes imposed under section 3111(b) and so much of the taxes imposed under section 3221(a) as are attributable to the rate in effect under section 3111(b), as applicable, and may be assessed and collected by the Secretary in the same manner as the taxes. (b) Advance credit amounts erroneously refunded. The determination of any amount of credits erroneously refunded as described in paragraph (a) of this section must take into account any amount of credits advanced to an employer under the process established by the Internal Revenue Service in accordance with sections 3131(b)(4)(B) and 3131(g)(6). (c) Third party payors. For purposes of this section, employers against whom an erroneous refund of the credits under section 3131 (including any increases in those credits under section 3133), can be assessed as an underpayment of the taxes imposed under section 3111(b) and so much of the taxes imposed under section 3221(a) as are attributable to the rate in effect under section 3111(b), as applicable, include persons treated as the employer under sections 3401(d), 3504, and 3511, consistent with their liability for the section 3111(b) or 3121(a) taxes against which the credit applied. (d) Applicability date. This section applies to all credit refunds under section 3131 (including any increases in those credits under section 3133), advanced or paid on or after April 1, 2021. Par. 3. Section 31.3132-1T is added to read as follows: §31.3132-1T Recapture of credits. (a) Recapture of erroneously refunded credits. Any amount of credits for qualified family leave wages under sections 3132, including any increase to the amount of the credits under sections 3132(d), 3132(e), and 3133, that are treated as overpayments and refunded or credited to an employer under section 6402(a) or section 6413(b) and to which the employer is not entitled, resulting in an erroneous refund to the employer, shall be treated as an underpayment of the taxes imposed under section 3111(b) and so much of the taxes imposed under section 3221(a) as are attributable to the rate in effect under section 3111(b), as applicable, and may be assessed and collected by the Secretary in the same manner as the taxes. (b) Advance credit amounts erroneously refunded. The determination of any amount of credits erroneously refunded as described in paragraph (a) of this section must take into account any amount of credits advanced to an employer under the process established by the Internal Revenue Service in accordance with sections 3132(b)(3)(B) and 3132(g)(6). (c) Third party payors. For purposes of this section, employers against whom an erroneous refund of the credits under section 3132 (including any increases in those credits under section 3133), can be assessed as an underpayment of the taxes imposed under section 3111(b) and so much of the taxes imposed under section 3121(a) as are attributable to the rate in effect under section 3111(b), as applicable, include persons treated as the employer under sections 3401(d), 3504, and 3511, consistent with their liability for the section 3111(b) or 3121(a) taxes against which the credit applied. (d) Applicability date. This section applies to all credit refunds under section 3132 (including any increases in those credits under section 3133) advanced or paid on or after April 1, 2021. Par. 4. Section 31.3134-1T is added to read as follows: §31.3134-1T Recapture of credits. (a) Recapture of erroneously refunded credits. Any amount of credits for qualified wages under section 3134 of the Code that is treated as an overpayment and refunded or credited to an employer under section 6402(a) or section 6413(b) of the Code and to which the employer is not entitled, resulting in an erroneous refund to the employer, shall be treated as an underpayment of the taxes imposed under section 3111(b) and so much of the taxes imposed under section 3221(a) as are attributable to the rate in effect under section 3111(b), as applicable, and may be assessed and collected by the Secretary in the same manner as the taxes. (b) Advance credit amounts erroneously refunded. The determination of any amount of credits erroneously refunded as described in paragraph (a) of this section must take into account any amount of credits advanced to an employer under the process established by the Internal Revenue Service in accordance with sections 3134(j) and 3134(m). (c) Third party payors. For purposes of this section, employers against whom an erroneous refund of the credits under section 3134 can be assessed as an underpayment of the taxes imposed under section 3111(b) and so much of the taxes imposed under section 3121(a) as are attributable to the rate in effect under section 3111(b), as applicable, include persons treated as the employer under sections 3401(d), 3504, and 3511, consistent with their liability for the section 3111(b) or 3121(a) taxes against which the credit applied. (d) Applicability date. This section applies to all credit refunds under section 3134 advanced or paid on or after July 1, 2021. Douglas W. O'Donnell, Deputy Commissioner for Services and Enforcement. Approved: August 18, 2021. Mark J. Mazur, Acting Assistant Secretary of the Treasury (Tax Policy). (Filed by the Office of the Federal Register on September 7, 2021, 8:45 a.m., and published in the issue of the Federal Register for September 8, 2021, 86 FR 50295)
Revenue Procedure 2024-24 Internal Revenue Service 2024-21 I.R.B. 1214 26 CFR 601.201: Rulings and determination letters. (Also Part I,§§ 355, 1.355-1.) Rev. Proc. 2024-24 SECTION 1. PURPOSE.01 In General. This revenue procedure provides procedures for requesting private letter rulings from the Internal Revenue Service (IRS) regarding certain matters pertaining to Section 355 Transactions..02 Representations, Information, and Analysis. The procedures set forth in this revenue procedure include-- (1) Representations, information, and analysis that taxpayers must submit to request rulings regarding a Section 355 Transaction; and (2) Additional representations, information, and analysis that taxpayers must submit to request rulings regarding a Divisive Reorganization, including with regard to the following matters: (a) Controlled's Assumption of Distributing Liabilities (including Distributing Contingent Liabilities). (b) Distributing's distribution of Section 361 Consideration to shareholders of Distributing. (c) Distributing's transfer of Section 361 Consideration to a creditor of Distributing to satisfy Distributing Debt. (d) Exchanges of Section 361 Consideration for Distributing Debt using an Intermediary. (e) Direct issuances of Distributing Debt by Distributing to an Intermediary. (f) Payments by Controlled to Distributing made subsequent to the Control Distribution Date (that is, Post-Distribution Payments). (g) A Delayed Distribution of Controlled stock or securities. (h) A Retention (that is, of Controlled stock or securities)..03 Defined Terms. Capitalized terms used in this revenue procedure are defined in the Appendix to this revenue procedure..04 References. Unless otherwise specified, all "section" or "§" references are to sections of the Code or the Treasury Regulations. As the context requires, references to revenue rulings or to other revenue procedures include references to successor revenue rulings or revenue procedures, as applicable. SECTION 2. BACKGROUND.01 Section 355 Transactions. (1) In general. A transaction intended to qualify under§ 355 and related provisions of the Code may occur either as a separate Section 355(c) Distribution or as part of a Divisive Reorganization. Distributing may distribute all of its Controlled stock and securities (if any) or may retain some Controlled stock or securities after the Control Distribution Date. Section 355 Transactions may occur without recognition of gain or loss to Distributing, and without gain, loss, or income to Distributing's shareholders, if the requirements of§ 355 and other relevant provisions of the Code and Treasury Regulations are satisfied. (2) Section 355(c) Distributions. A Section 355(c) Distribution is not in pursuance of a plan of reorganization. Therefore, unlike a Divisive Reorganization, a Section 355(c) Distribution does not permit Distributing to satisfy Distributing Debt by distributing Section 361 Consideration to its creditors without recognition of gain or loss. (3) Divisive Reorganizations. In a Divisive Reorganization, Distributing transfers assets to Controlled in exchange for Section 361 Consideration. Controlled also may Assume Distributing Liabilities, generally without Distributing recognizing gain or loss (subject to possible application of§ 357(b) (the principal purpose for the Liability Assumption is to avoid Federal income tax or there is no bona fide business purpose) and§ 357(c) (Assumption of an amount of Liabilities greater than the total adjusted basis of assets transferred)). To complete the Divisive Reorganization, Distributing distributes Controlled stock (or Controlled stock and securities) to its shareholders. Distributing also may distribute other Section 361 Consideration to its shareholders, or to Distributing's creditors in satisfaction of Distributing Debt held by those creditors, without recognition of gain or loss (subject to requirements and limitations in§ 361(b) (possible gain but no loss recognition on asset transfer) and§ 361(c) (possible gain but no loss recognition on distribution of Section 361 Consideration other than Controlled stock or other Qualified Property)). (a) Section 361(b)(1)(A). Under§ 361(b)(1)(A), if Distributing receives money or Other Property from Controlled in exchange for Distributing assets in a Divisive Reorganization, Distributing does not recognize gain on the exchange if Distributing distributes the money or Other Property in pursuance of the plan of reorganization. For example,§ 361(b)(1)(A) provides that, if Distributing receives money or Other Property from Controlled (for example, a Controlled note), Distributing would need to transfer that Controlled note to its shareholders or creditors, rather than cash or property other than the Controlled note, to qualify for nonrecognition treatment under§ 361(b)(1)(A). Consistent with the legislative history of§ 361(b), Distributing does not qualify for nonrecognition treatment on the receipt of money or Other Property under the statutory language of§ 361(b)(1)(A) unless Distributing "acts merely as a conduit in passing the proceeds" (that is, the money or Other Property) to its shareholders. S. Rep. No. 398, 68th Cong., 1st Sess. 16 (Apr. 10, 1924). The statutory requirements mandated by§ 361(b) help ensure that Distributing is not permitted to convert money or Other Property for any period of time into a discretionary fund that is invested in Distributing's business, thereby achieving the economic result of a sale of Controlled (in whole or in part) without recognition of gain or loss. (b) Enactment of§ 361(b)(3) and (c)(3). Congress enacted§ 361(b)(3) and (c)(3) to overrule the U.S. Supreme Court's holding in Minnesota Tea Co. v. Helvering, 302 U.S. 609 (1938), and therefore permit Distributing to qualify for nonrecognition treatment on the transfer of assets to Controlled even if Distributing transfers the money, Other Property, or Controlled securities received in the transaction from Controlled to Distributing's creditors in connection with the Divisive Reorganization. See S. Rep. No. 445 (Aug. 3, 1988), at 393 ("The bill amends prior law by providing that transfers of property to creditors in satisfaction of the corporation's indebtedness in connection with the reorganization are treated as distributions pursuant to the plan of reorganization for this purpose.... This overrules the holding in Minnesota Tea.... The bill also provides that the transfer of qualified property by a corporation to its creditors in satisfaction of indebtedness is treated as a distribution pursuant to the plan of reorganization." (emphasis added)). Based on this legislative history, this revenue procedure reflects the views of the Department of the Treasury (Treasury Department) and the IRS, that the phrases "pursuant to the plan of reorganization" and "in connection with the reorganization" are coextensive in scope. (i) Obligations pursuant to contingent payment debt instruments are indebtedness for Federal income tax purposes. Distributing's obligations pursuant to "contingent payment debt instruments" (subject to§ 1.1275-4) are Distributing Debts and not Distributing Contingent Liabilities, because they constitute Debt under general principles of Federal income tax law. (ii) Contingent Liabilities are not indebtedness for Federal income tax purposes. Distributing's Liabilities of the type described in Rev. Rul. 95-74, 1995-2 C.B. 36 ( held, transferor's environmental liabilities assumed in a§ 351 transfer of business assets were not "liabilities" for§ 357(c) purposes and, therefore, were deductible by transferee as incurred) and in Pacific Transport Co. v. Commissioner, 483 F.2d 209 (9th Cir. 1973) (claim for cargo lost at sea pending against seller of shipping business; buyer's payment to settle claim held capitalized; the fact that "liability was contingent and unliquidated...is of no significance") are Distributing Contingent Liabilities and not Distributing Debt, because they are not Debt under general principles of Federal income tax law. (4) Retention of Controlled stock or securities. (a) Qualification for nonrecognition treatment. If Distributing distributes an amount of stock in Controlled constituting control within the meaning of§ 368(c), but retains Controlled stock or securities, under§ 355(a)(1)(D)(ii), the distribution does not qualify for nonrecognition treatment under§ 355 unless Distributing establishes to the satisfaction of the Secretary of the Treasury (through the IRS by delegation) that the retention by Distributing was not in pursuance of a plan having as one of its principal purposes the avoidance of Federal income tax, which effectively creates a rebuttable presumption that any retention evidences a plan to achieve a Federal income tax avoidance purpose. Accordingly, if a principal purpose of a retention was to avoid Federal income tax, the retention could violate the requirements of§ 355(a)(1)(D)(ii) even if the taxpayer established that a business purpose existed for the retention. (b) Business purpose ordinarily requires distribution of all Controlled stock and securities. Section 1.355-2(e)(2) provides that "[o]rdinarily, the corporate business purpose or purposes for the distribution will require the distribution of all of the stock and securities of the controlled corporation." (c) Factors for determining whether Retention is not a tax-avoidance purpose. (i) Primary indicia. Long-standing revenue rulings indicate that the IRS will not view a Retention to be in pursuance of a plan having as one of its principal purposes the avoidance of Federal income tax if the following requirements are satisfied: (1) a genuine separation of the corporate entities will be effected; (2) the Retention will not enable Distributing to maintain practical control of Controlled; and (3) a sufficient business purpose for the Retention is established. See generally Rev. Rul. 75-321, 1975-2 C.B. 123 (retention of five percent of Controlled's stock to ensure Distributing has sufficient collateral to obtain short-term financing for its business was not in pursuance to a plan having as one of its principal purposes the avoidance of Federal income tax; no overlapping directors, officers, or key employees, and no continuing arrangements between Distributing and Controlled) (emphasis added); Rev. Rul. 75-469, 1975-2 C.B. 126 (retention of Controlled security to be held by bank as collateral for a loan to Distributing on behalf of Controlled was not in pursuance to a plan having as one of its principal purposes the avoidance of Federal income tax; no retained Controlled stock, no overlapping directors, officers, or key employees, and no continuing arrangements between Distributing and Controlled). (ii) Continuing relationships. Based on the factors described in section 2.01(4)(c)(i) of this revenue procedure, the degree of continuing relationships between Distributing and Controlled will significantly inform a determination of whether a Retention would be in pursuance of a plan having as one of its principal purposes the avoidance of Federal income tax. See generally Rev. Rul. 75-321; Rev. Rul. 75-469. (d) Plan of reorganization. Treasury Regulations provide guidance regarding the meaning and scope of the term "plan of reorganization." First,§ 1.368-2(g) provides the following: The term plan of reorganization has reference to a consummated transaction specifically defined as a reorganization under section 368(a). The term is not to be construed as broadening the definition of reorganization as set forth in section 368(a), but is to be taken as limiting the nonrecognition of gain or loss to such exchanges or distributions as are directly a part of the transaction specifically described as a reorganization in section 368(a). Moreover, the transaction, or series of transactions, embraced in a plan of reorganization must not only come within the specific language of section 368(a), but the readjustments involved in the exchanges or distributions effected in the consummation thereof must be undertaken for reasons germane to the continuance of the business of a corporation a party to the reorganization. Section 368(a) contemplates genuine corporate reorganizations which are designed to effect a readjustment of continuing interests under modified corporate forms. Second,§ 1.368-1(c) provides the following additional guidance: A plan of reorganization must contemplate the bona fide execution of one of the transactions specifically described as a reorganization in section 368(a) and for the bona fide consummation of each of the requisite acts under which nonrecognition of gain is claimed. Such transaction and such acts must be an ordinary and necessary incident of the conduct of the enterprise and must provide for a continuation of the enterprise. A scheme, which involves an abrupt departure from normal reorganization procedure in connection with a transaction on which the imposition of tax is imminent, such as a mere device that puts on the form of a corporate reorganization as a disguise for concealing its real character, and the object and accomplishment of which is the consummation of a preconceived plan having no business or corporate purpose, is not a plan of reorganization. (Emphasis added.) The Treasury Department and the IRS are of the view that, for purposes of this revenue procedure and the private letter ruling program, this guidance determines compliance with the plan of reorganization requirement. For purposes of this revenue procedure and the private letter ruling program, the Treasury Department and the IRS are of the view that the case law addressing the satisfaction of the plan of reorganization requirement, taken together, fails to provide sufficient consistency or clarity necessary for the administration and enforcement of the requirements that govern Divisive Reorganizations and related transactions..02 Prior Revenue Procedures. (1) Distributing Debt issued in close temporal proximity to the Divisive Reorganization. (a) No-rule position of Rev. Proc. 2013-3. In 2013, the Treasury Department and the IRS stated that private letter rulings no longer would be issued on whether§ 355 or§ 361 applies to Distributing's distribution of Controlled stock or securities in exchange for, and in retirement of, putative Distributing Debt, if such Debt was issued in anticipation of the distribution. See section 5.01(10) of Rev. Proc. 2013-3, 2013-1 I.R.B. 113. In particular, the Treasury Department and the IRS published the no-rule position due to the significant potential that Distributing Debt issued in close temporal proximity to the Divisive Reorganization could fail to qualify for nonrecognition treatment under§ 361 (for example, because of a failure of the substance of the transaction to comply with the statutory requirements of§ 361). (b) Modification of no-rule position. Rev. Proc. 2017-38, 2017-22 I.R.B. 1258, modified Rev. Proc. 2017-3, 2017-1 I.R.B. 130, the successor to Rev. Proc. 2013-3, to remove this no-rule position because it was determined that issuing rulings in this area would be in the interest of sound tax administration, while noting that the IRS continued to study matters concerning issues in this area. See section 3 of Rev. Proc. 2017-38. The Treasury Department and the IRS continue to be of the view that entertaining ruling requests on such transactions will facilitate the IRS's ability to administer all relevant provisions of the Code with regard to Section 355 Transactions. Consistent with section 3 of Rev. Proc. 2017-38, the Treasury Department and the IRS are continuing to study the application of the Code, as well as general principles of Federal income tax law (including substance over form, agency, or other relevant theories), to the issuance of Debt in close temporal proximity with a Divisive Reorganization. The Treasury Department and the IRS are of the view that Distributing Debt issued in close temporal proximity of the Divisive Reorganization raises the concerns that resulted in the publication of the 2013 no-rule position. See section 3.05(5)(d)(iii) of this revenue procedure. (2) Significant issue rulings. (a) Rev. Proc. 2013-32. Rev. Proc. 2013-32, 2013-28 I.R.B. 55, provided that private letter rulings no longer would be issued on the Federal income tax consequences of various corporate transactions, including transactions intended to qualify as Section 355 Transactions, but instead would be issued only on significant issues presented in those transactions. The IRS's current ruling policies in this area are described in Rev. Proc. 2024-1, 2024-1 I.R.B. 1, and Rev. Proc. 2024-3, 2024-1 I.R.B. 143. (b) Rev. Proc. 2024-1 and Rev. Proc. 2024-3. Rev. Proc. 2024-1, 2024-1 I.R.B. 1, and Rev. Proc. 2024-3, 2024-1 I.R.B. 143, removed the no-rule position on the Federal income tax consequences of various corporate transactions and eliminated the issuance of rulings on significant issues, including with respect to Section 355 Transactions. See section 16 of Rev. Proc. 2024-1; section 1.02 of Rev. Proc. 2024-3. The Treasury Department and the IRS determined that a broader-scoped private letter ruling program would increase taxpayer certainty regarding the Federal income tax consequences of corporate transactions, enhance the visibility of the Treasury Department and the IRS with regard to current market practices, and ultimately result in a better-informed guidance process. In addition, the IRS determined that providing such rulings would be in the interest of sound tax administration. (3) Procedures for requesting private letter rulings regarding Section 355 Transactions. (a) Rev. Proc. 2017-52. Rev. Proc. 2017-52 provides procedures for requesting private letter rulings regarding Section 355 Transactions and superseded Rev. Proc. 96-30, 1996-1 C.B. 696. Rev. Proc. 2017-52 established a pilot program to issue private letter rulings that address the general Federal income tax consequences of a Section 355 Transaction. Rev. Proc. 2017-52 also provides procedures for requesting rulings that address the general Federal income tax consequences of a Section 355 Transaction and clarifies procedures for requesting rulings on significant issues presented in those transactions. This revenue procedure modifies Rev. Proc. 2017-52. See generally section 4.01(1) of this revenue procedure. (b) Rev. Proc. 2018-53. Rev. Proc. 2018-53, 2018-43 I.R.B. 667, described the procedures for requesting rulings on issues relating to the assumption or satisfaction of Distributing Debt (as defined therein) in Divisive Reorganizations and the representations, information, and analysis to be submitted in those requests. Section 2 of Rev. Proc. 2018-53 reiterated that the Treasury Department and the IRS continue to study issues relating to the assumption and satisfaction of Distributing's obligations in Divisive Reorganizations. This revenue procedure supersedes Rev. Proc. 2018-53. SECTION 3. APPLICATION AND PROCEDURES.01 Ruling Requests to Which Procedures Apply. (1) Section 355 Transactions. (a) In general. This revenue procedure provides certain procedures for taxpayers requesting rulings on Section 355 Transactions, including representations, information, and analysis to be submitted with those requests. See generally section 3.03 of this revenue procedure. (b) Procedures for rulings on matters not addressed by Rev. Proc. 2017-52. This revenue procedure provides additional procedures for requesting rulings on the following matters that are not addressed by Rev. Proc. 2017-52: (i) Delayed Distributions. The IRS will entertain requests for rulings that Distributions over a period of time are, as applicable, "part of the distribution" (within the meaning of§ 355(a)(1)(D)), or "in pursuance of the plan of reorganization" (within the meaning of§ 361). See generally section 3.03(3) of this revenue procedure (setting forth representations, information, and analysis that must be submitted for such requested rulings). (ii) Retained Controlled Stock (or Securities). The IRS will entertain requests for rulings regarding the application of§ 355(a)(1)(D)(ii) (Retentions). See generally section 3.03(4) of this revenue procedure (setting forth representations, information, and analysis that must be submitted for such requested rulings). (2) Divisive Reorganizations. (a) Scope of rulings. A taxpayer proposing to engage in a Divisive Reorganization may request rulings that no gain or loss will be recognized to Distributing upon-- (i) Controlled's Assumption of a Distributing Liability, including a Distributing Contingent Liability, under§ 357(a); (ii) Distributing's receipt of Section 361 Consideration from Controlled, including Post-Distribution Payments, under§ 361(b); and (iii) Distributing's distribution to a Distributing shareholder of Section 361 Consideration that consists of Controlled stock or other Qualified Property, or Distributing's transfer to a Distributing creditor of that consideration to satisfy Distributing Debt, under§ 361(c). (b) Characterization of obligation. (i) Relevance of characterization. The characterization of an obligation relevant to the request as a Debt, as a Liability that is not a Debt, or as not a Liability, for Federal income tax purposes determines the application of the Code and Treasury Regulations to, and the Federal income tax consequences of, a Divisive Reorganization. Therefore, the characterization of an obligation for Federal income tax purposes determines the representations, information, and analysis to be submitted in accordance with section 3.03 of this revenue procedure. (ii) Procedure if characterization of obligation not entirely free from doubt. If the characterization of an obligation for Federal income tax purposes is not entirely free from doubt, the taxpayer must submit a description of the obligation and information and analysis explaining the taxpayer's conclusion regarding the characterization of the obligation. See section 5.17(1) of Rev. Proc. 2024-1 (providing that "an Associate office may issue letter rulings [i]f the letter ruling request presents an issue for which the answer seems clear by applying the statute, regulations, and applicable case law to the facts or for which the answer seems reasonably certain but not entirely free from doubt"). If a ruling depends, directly or indirectly, on the characterization of an obligation, the taxpayer must provide information and analysis sufficient for the IRS to determine the characterization of the obligation for Federal income tax purposes. (3) Section 355 Transactions involving§ 368(a)(1)(G). This revenue procedure does not describe specific procedures for requesting rulings addressing the Federal income tax consequences of divisive reorganizations described in§ 368(a)(1)(G). The Treasury Department and the IRS request comments regarding appropriate representations, information, and analysis that should be required for the issuance of such rulings. The Treasury Department and the IRS will consider these comments for purposes of future guidance..02 Procedures. (1) Procedures for requests for rulings common to both Section 355(c) Distributions and Divisive Reorganizations. In any request for rulings described in section 3.01(1) of this revenue procedure, the taxpayer must submit the representations, information, and analysis set forth in Rev. Proc. 2017-52 and in section 3.03 of this revenue procedure. Unless otherwise modified by this revenue procedure, the taxpayer must submit such representations, information, and analysis in accordance with the procedures provided by Rev. Proc. 2017-52. (2) Procedures for requests for rulings regarding§§ 357 and 361 for Divisive Reorganizations. In any request for rulings described in section 3.01(2) of this revenue procedure, the taxpayer must submit the representations, information, and analysis set forth in Rev. Proc. 2017-52 and in sections 3.03 through 3.05 of this revenue procedure. Unless otherwise modified by this revenue procedure, the taxpayer must submit such representations, information, and analysis in accordance with the procedures provided by section 3 of Rev. Proc. 2017-52. (3) Representations. (a) Requirement to provide all representations. Except as provided by section 3.02(3)(b) of this revenue procedure, each numbered representation set forth in section 3.03 or section 3.05 of this revenue procedure must be submitted precisely in the language requested. (b) Sole exception. If the taxpayer cannot submit any representation set forth in section 3.03 or section 3.05 of this revenue procedure precisely as requested, the taxpayer must provide an explanation for why it would not be possible to provide that representation in the language requested. Variations of the language of such representations may delay processing the ruling request and will not be accepted unless the taxpayer submits reasons satisfactory to the Associate Chief Counsel (Corporate)..03 Representations, Information, and Analysis in All Requests for Rulings on Section 355 Transactions. (1) Overview. The following requirements apply to all representations, information, and analysis required by this revenue procedure. (a) Requirements. If the taxpayer requests a ruling on any Section 355 Transaction, the taxpayer must submit the representations, information, and analysis set forth in section 3 of Rev. Proc. 2017-52 and the Appendix thereto (except to the extent superseded in this revenue procedure). The taxpayer also must submit the representations, information, and analysis set forth in this section 3.03. A taxpayer requesting a ruling on a Divisive Reorganization also must submit the representations, information, and analysis set forth in sections 3.04 and 3.05 of this revenue procedure. (b) Knowledge standard. With regard to all representations, information, and analysis required by this revenue procedure, the taxpayer must satisfy all such requirements in accordance with the standard set forth in section 8.05(4) of Rev. Proc. 2024-1 ("Under penalties of perjury, I declare that I have examined this information, including accompanying documents, and, to the best of my knowledge and belief, the information contains all the relevant facts relating to the request for the information, and such facts are true, correct, and complete.") or successor revenue procedure. (2) Delayed Distributions. (a) Scope of rulings. The IRS may entertain requests for rulings that a series of Distributions of Controlled stock (or Controlled stock and securities) over a period of time is, as applicable, "part of the distribution" (within the meaning of§ 355(a)(1)(D)), or "in pursuance of the plan of reorganization" (within the meaning of§ 361). To obtain a ruling that all the Controlled stock (or Controlled stock and securities) distributed to Distributing's shareholders and securityholders qualifies for nonrecognition (and non-inclusion) treatment under§ 355, the taxpayer must submit one of the ALTERNATIVE REPRESENTATIONS in section 3.03(2)(b) of this revenue procedure, the information set forth in section 3.03(2)(c) of this revenue procedure, and the analysis set forth in section 3.03(2)(d) of this revenue procedure. See section 3.03(3) of this revenue procedure for the treatment of Retained Controlled Stock (or Securities). (b) ALTERNATIVE REPRESENTATIONS. As applicable, submit one of the following ALTERNATIVE REPRESENTATIONS: (i) ALTERNATIVE REPRESENTATION 1A. Distributing will distribute on the same date all the stock and securities of Controlled, and any options (or similar instruments) to acquire stock or securities of Controlled, that it holds immediately before the First Distribution. (ii) ALTERNATIVE REPRESENTATION 1B. The Distribution Period will be no longer than the period of time necessary to complete all Distributions, but in any event the Final Distribution Date will be no later than 12 months after the First Distribution Date. (c) Information. (i) General requirement. The taxpayer must submit information on the expected percentage of Controlled stock or securities that will not be distributed in the First Distribution and the expected duration of the Distribution Period. (ii) Delay longer than 90 days. If the Final Distribution Date will take place more than 90 days after the First Distribution Date, the taxpayer also must submit summaries of the following information: (A) The expected percentage of Controlled stock or securities that will not be distributed within 90 days of the First Distribution and the duration of the Distribution Period. (B) The business reasons for this percentage and duration (including any regulatory, business, or market constraints that require the extended duration). (d) Analysis. (i) In general. The taxpayer must submit relevant facts and analysis to establish that each Distribution is, as applicable, "part of the distribution" (within the meaning of§ 355(a)(1)(D)) or "in pursuance of the plan of reorganization" (within the meaning of§ 361). (ii) Treatment of passage of time. In administering the private letter ruling program, the IRS will not treat the length of time between Distributions referred to in ALTERNATIVE REPRESENTATION 1B alone as preventing a Distribution from being "part of the distribution" (within the meaning of§ 355(a)(1)(D)) or from being "in pursuance of the plan of reorganization" (within the meaning of§ 361). However, the IRS will consider the length of time between Distributions as a primary factor for determining whether, as applicable, a Distribution is "part of the distribution" (within the meaning of§ 355(a)(1)(D)), or "in pursuance of the plan of reorganization" (within the meaning of§ 361). (e) Effect on Rev. Proc. 2017-52. This section 3.03(2) supersedes representation 2 in section 3 of the Appendix to Rev. Proc. 2017-52. (3) Retained Controlled Stock (or Securities). (a) Scope of rulings. The IRS will entertain requests for rulings regarding the application of§ 355(a)(1)(D)(ii) (relating to Retained Controlled Stock (or Securities)). (i) General ruling on Retained Controlled Stock (or Securities). The IRS will entertain a request for a ruling that a Retention will not be in pursuance of a plan having as one of its principal purposes the avoidance of Federal income tax (within the meaning of§ 355(a)(1)(D)(ii)). (ii) Section 355 Transactions involving Delayed Distributions and Retentions. With regard to the same Section 355 Transaction, the IRS will entertain a request for rulings that-- (A) A Delayed Distribution of Controlled stock or securities will be, as applicable, "part of the distribution" (within the meaning of§ 355(a)(1)(D)) or "in pursuance of the plan of reorganization" (within the meaning of§ 361); and (B) A Retention of Controlled stock or securities that are not included in a request for ruling described in section 3.03(3)(a)(ii)(A) of this revenue procedure (that is, the remaining Controlled stock or securities not distributed as "part of the distribution" (within the meaning of§ 355(a)(1)(D)) or "in pursuance of the plan of reorganization" (within the meaning of§ 361)) in the Section 355 Transaction) will not be in pursuance of a plan having as one of its principal purposes the avoidance of Federal income tax (within the meaning of§ 355(a)(1)(D)(ii)). (b) General procedures. (i) Requirements for ruling. To obtain a ruling that a Retention will satisfy the requirements of§ 355(a)(1)(D)(ii), the taxpayer must-- (A) Submit REPRESENTATIONS 2 through 6, as required by section 3.03(3)(c) of this revenue procedure (except as provided in section 3.03(3)(e)(iv) of this revenue procedure); (B) Submit all information and analysis required by section 3.03(3)(d) of this revenue procedure; and (C) Satisfy the principal purpose standard set forth by section 3.03(3)(e) of this revenue procedure. (ii) Certain Distributing Related Person ownership treated as Distributing ownership. For purposes of this section 3.03(3), Controlled stock, Controlled securities, options (or similar instruments) to acquire Controlled stock or securities, or Controlled stock or securities acquired upon exercise of an option (or settlement of any similar instrument) held, directly or indirectly, by any Distributing Related Person (determined immediately before the Control Distribution Date) that is part of the DSAG will be treated as Retained Controlled Stock (or Securities). (iii) Clarification regarding rulings under§§ 355(a)(1)(D) and 361. The IRS will not entertain a simultaneous request for the rulings described in section 3.03(3)(a)(ii)(A) and (B) of this revenue procedure with respect to the same Controlled stock or securities. Instead, the IRS will entertain a ruling either that such stock or securities is-- (A) Distributed by Distributing as "part of the distribution" (within the meaning of§ 355(a)(1)(D)) or "in pursuance of the plan of reorganization" (within the meaning of§ 361); or (B) Retained by Distributing (within the meaning of§ 355(a)(1)(D)(ii)). (c) REPRESENTATIONS. Submit the following REPRESENTATIONS if there is a Retention: (i) REPRESENTATION 2. After the Control Distribution Date, the Controlled stock will be widely held. (ii) REPRESENTATION 3. Each business purpose for the Retention exists as of the time of the Retention and is not speculative or otherwise contingent upon events that potentially could occur after the Control Distribution Date. (iii) REPRESENTATION 4. None of Distributing's directors, officers, or key employees will serve as a director, an officer, or a key employee of Controlled during the period in which Distributing retains Retained Controlled Stock (or Securities). In the event that the taxpayer does not submit this REPRESENTATION 4, see section 3.03(3)(e)(iv) of this revenue procedure (providing procedures regarding overlapping directors, officers, or key employees). (iv) REPRESENTATION 5. Any Retained Controlled Stock (or Securities) will be disposed of as soon as a disposition is warranted, consistent with the business purpose or purposes specified in response to the relevant request for information in section 3.03(3) of Rev. Proc. 2024-24, but in any event, not later than five years after the Control Distribution Date. (v) REPRESENTATION 6. Distributing will vote any Retained Controlled Stock, and any other Controlled stock with respect to which it has voting power, in proportion to the votes cast by Controlled's other shareholders of the same class (other than Distributing Related Persons). For example, if, after the Control Distribution Date, the other shareholders of the same class of Controlled stock (other than Distributing Related Persons) vote 70 percent in favor of, and 30 percent against, a matter, Distributing would be required to vote its Controlled stock 70 percent in favor of, and 30 percent against, the matter. (d) Information. (i) General information. The taxpayer must submit the following information: (A) The number of shares and percentage of each class of stock in, and the principal amount of each series of securities of, Controlled to be held by Distributing after the Control Distribution Date. (B) A description of any options or similar instruments to acquire Controlled stock or securities that Distributing will hold after the Control Distribution Date. (C) An explanation for why the Retention is necessary, including a description of each business reason for the Retention and any other cause for the Retention that is not a business reason (for example, taking an investment position in Retained Controlled Stock). (D) The expected duration of the Retention and the timing for each disposition of Retained Controlled Stock (or Securities), with reference to a specific period or events. (ii) Information regarding Federal income tax benefit. (A) In general. The taxpayer must submit information describing any Federal income tax benefit resulting from, or any advantage relating to the Federal income tax treatment of-- (I) The Retention; and (II) The disposition of the Retained Controlled Stock (or Securities). (B) Examples of relevant Federal income tax benefits and advantages. Examples of the Federal income tax benefits and advantages referred to in section 3.03(3)(d)(ii)(A) of this revenue procedure with regard to a Retention include the following: (I) Anticipated recognition of loss (or gain that is offset by expiring loss) on a disposition of Controlled stock or securities (directly or indirectly). (II) Ineligibility for nonrecognition of gain or loss upon a distribution of Controlled stock or securities, including stock subject to§ 355(a)(3)(B) and§ 1.355-2(g). (III) Any other Federal income tax benefit or advantage, including a reduction of the amount of Federal income tax that otherwise would have resulted from the Section 355 Transaction, that results (directly or indirectly) from the Retention. (e) Satisfaction of "a principal purpose" standard. (i) Rebuttable presumption. The existence of a Retention effectively creates a rebuttable presumption that the Retention is in pursuance of a plan having as one of its principal purposes the avoidance of Federal income tax. To rebut this presumption, the taxpayer must establish to the satisfaction of the Associate Chief Counsel (Corporate) that the Retention is not in pursuance of a plan having as one of its principal purposes the avoidance of Federal income tax. (ii) Factors significantly indicative of impermissible Retention. The following factors provide significant indicia that a Retention will be in pursuance of a plan having as one of its principal purposes the avoidance of Federal income tax. (A) A Federal income tax benefit or advantage referred to in section 3.03(3)(d)(ii)(A) of this revenue procedure (including any example set forth in section 3.03(3)(d)(ii)(B) of this revenue procedure). (B) One or more overlapping key employees between the DSAG and CSAG (determined immediately after the Control Distribution). (C) One or more overlapping directors or officers between Distributing and Controlled (determined immediately after the Control Distribution). (D) The existence of continuing contractual agreements between the DSAG and CSAG that include provisions that are not arm's-length. (iii) Procedures regarding existence of one or more factors. (A) Existence of one factor. The IRS will apply significantly increased scrutiny to any ruling request regarding a Retention that involves the existence of any factor described in section 3.03(3)(e)(ii) of this revenue procedure. (B) Existence of two or more factors. In the event that two or more of the factors described in section 3.03(3)(e)(ii) of this revenue procedure exist with regard to a Retention, the taxpayer must establish to the satisfaction of the Associate Chief Counsel (Corporate) that-- (I) A business exigency exists that outweighs those factors and directly causes the need for the Retention; and (II) In light of that business exigency, the Retention should not be viewed as in pursuance of a plan having as one of its principal purposes the avoidance of Federal income tax. (iv) Procedures regarding overlapping directors, officers, or key employees. (A) In general. In the event that the taxpayer does not submit REPRESENTATION 4 precisely in the language requested, the IRS may issue favorable rulings, based upon all relevant facts and circumstances, regarding the application of§ 355(a)(1)(D)(ii) if the taxpayer has submitted REPRESENTATIONS 3, 5, and 6. (B) Controlled business requirement. The IRS may issue a favorable ruling if a director, officer, or key employee of Distributing serves as a director, officer, or key employee of Controlled solely to accommodate Controlled's business needs. (C) Limitation on overlap. The number of overlapping Distributing directors must not constitute a majority of Controlled's board, and the duration of the overlap must be for an identified, limited period of time. For purposes of calculating compliance with this requirement, each overlapping Distributing officer is treated as an overlapping Distributing director. (v) General analysis. Except as otherwise provided by section 3.03(3)(e)(iii)(B) of this revenue procedure, submit analysis to establish the following: (A) The Retention should not be viewed as in pursuance of a plan having as one of its principal purposes avoiding Federal income tax. (B) There is a sufficient business purpose for any such Retention or disposition, and the Retention or disposition is consistent with the business purpose for the Distribution. (4) Retention of Controlled Debt. (a) REPRESENTATION. If Controlled will owe Debt to Distributing after the Control Distribution Date, submit the following REPRESENTATION 7: No Debt owed by Controlled, or by any Controlled Related Person, to Distributing, or to any Distributing Related Person, after the Control Distribution will constitute stock or securities. (b) Information. The taxpayer must submit information describing any Debt to be owed by Controlled (or by any Controlled Related Person) to Distributing (or to any Distributing Related Person) after the Control Distribution Date and analysis that establishes that any such Debt does not constitute stock or securities. (c) Effect on Rev. Proc. 2017-52. REPRESENTATION 7 supersedes representation 4 in section 3 of the Appendix to Rev. Proc. 2017-52. (5) Solvency and viability of Distributing and Controlled. (a) REPRESENTATIONS. Submit the following REPRESENTATIONS: (i) REPRESENTATION 8. Immediately after the Control Distribution Date, the fair market value of the assets of Distributing and Controlled will, in each case, exceed the Amount of its Liabilities. (ii) REPRESENTATION 9. Immediately after the Control Distribution Date, Controlled will be adequately capitalized and, therefore, is expected to (A) have the means to satisfy all its Liabilities incurred as part of the Plan of Reorganization with regard to the Divisive Reorganization, including any securities and other Debt issued as Section 361 Consideration and any Distributing Liabilities that Controlled Assumes, and (B) continue as an economically viable entity, taking solely into account solely the Liabilities described in clause (A) (including, in the case of a pre-existing Controlled, any pre-existing Liabilities) as they come due. For the avoidance of doubt, the expectations described in clauses (A) and (B) of REPRESENTATION 9 are the expectations of the taxpayer. For purposes of this REPRESENTATION 9, Controlled is not treated as satisfying a Liability as a result of Controlled refinancing that Liability. (b) Information. Submit information and analysis to support the taxpayer's ability to provide REPRESENTATIONS 8 and 9. The taxpayer may submit projections and other financial information to establish the accuracy and reasonableness of REPRESENTATIONS 8 and 9. (c) Effect on Rev. Proc. 2017-52. REPRESENTATION 8 supersedes representation 21 in section 3 of the Appendix to Rev. Proc. 2017-52. (6) Additional information and analysis. Submit information and analysis to establish that, under general principles of Federal income tax law, the transactions should not be recast, recharacterized, or otherwise treated as one or more transactions that would not qualify under the relevant provisions of the Code..04 General Information and Analysis in Requests for Rulings on Divisive Reorganizations. In a request for a ruling on a Divisive Reorganization (in addition to all requirements imposed by sections 3.03 and 3.05 of this revenue procedure) the taxpayer must submit the following information and analysis: (1) Information that describes-- (a) Each Distributing Debt that will be satisfied with Section 361 Consideration or other Distributing Liability that will be Assumed by Controlled (including the relevant terms of the instruments, agreements, and arrangements that evidence the Distributing Debt or other Distributing Liability and the date or dates on which the Distributing Debt or other Distributing Liability was incurred); (b) The Section 361 Consideration that will be distributed to Distributing's shareholders or transferred to Distributing's creditors in satisfaction of Distributing Debt; and (c) The transactions that will implement-- (i) Controlled's Assumption of each Distributing Liability to be Assumed; (ii) Each distribution of Section 361 Consideration to Distributing's shareholders; and (iii) Each transfer of Section 361 Consideration to Distributing's creditors in satisfaction of Distributing Debt. (2) Information and analysis to establish that-- (a) Any Assumption of a Distributing Liability by Controlled will be subject to§ 357; and (b) Any transfer of Section 361 Consideration by Distributing to its creditors in satisfaction of Distributing Debt will be in connection with the Divisive Reorganization, and any distribution of Section 361 Consideration to Distributing's shareholders will be in pursuance of the Plan of Reorganization..05 Representations, Information, and Analysis in Requests for Rulings on Divisive Reorganizations. A taxpayer that requests a ruling on matters pertaining to a Divisive Reorganization must submit the applicable representations, information, and analysis set forth in Rev. Proc. 2017-52 (except to the extent superseded in this revenue procedure), in sections 3.03 and 3.04 of this revenue procedure, and in this section 3.05. (1) Scope of Plan of Reorganization. (a) REPRESENTATIONS. Submit the following REPRESENTATIONS: (i) REPRESENTATION 10. Each specific step of the Proposed Transaction will be specified and described clearly in the Plan of Reorganization, including any step of the Proposed Transaction the execution of which is a contemplated possibility by any party to the Proposed Transaction but that is properly included as part of the Plan of Reorganization. For purposes of this REPRESENTATION 10, a contemplated possibility with regard to a specific step of the Proposed Transaction includes a step that is subject to any contingency or alternative. (ii) REPRESENTATION 11. Each specific step of the Proposed Transaction is (i) necessary to effectuate the business purposes of the Proposed Transaction, (ii) carried out for reasons germane to the continuance of the business of each corporation a party to the Proposed Transaction, and (iii) directly a part of the Proposed Transaction. (iii) REPRESENTATION 12. Before the first step of the Proposed Transaction, each party to the Proposed Transaction will have adopted the Plan of Reorganization for the Proposed Transaction. (b) Analysis. The taxpayer must establish that each specific step of the Proposed Transaction is part of the Plan of Reorganization with regard to the Proposed Transaction. (c) Documentation. The taxpayer must submit as an exhibit to the ruling request a copy of the Plan of Reorganization with regard to the Proposed Transaction. For the avoidance of doubt, an adequate description of each specific step within the meaning of REPRESENTATION 10 must identify each party to such step. Similar to ruling request exhibits that contain public filings with regard to a proposed transaction (such as filings with the Securities and Exchange Commission), the IRS will accept copies of the Plan of Reorganization that are marked as "draft." In order to provide all relevant rulings with regard to the Proposed Transaction, once the Plan of Reorganization is finalized, the IRS will accept a copy of that document through a supplemental submission. (2) Distributing as Obligor. (a) REPRESENTATION. Submit the following REPRESENTATION 13: Distributing is the Obligor of (i) each Distributing Debt that will be satisfied with Section 361 Consideration and (ii) each other Distributing Liability (including each Distributing Contingent Liability) that will be Assumed by Controlled. (b) Information and analysis. With regard to each Distributing Debt or other Distributing Liability described in REPRESENTATION 13, the taxpayer must submit the following: (i) Information regarding any co-obligation, guarantee, indemnity, surety, make-well, keep-well, or similar arrangement, including security provided by any person other than Distributing. (ii) Analysis to establish that, taking into account any such arrangement, Distributing is the Obligor of that Distributing Debt or other Distributing Liability (including a Distributing Contingent Liability) for Federal income tax purposes. (3) Asset basis limitations. (a) REPRESENTATION. Submit the following REPRESENTATION 14: The total adjusted basis of the assets transferred by Distributing to Controlled will equal or exceed the sum of-- (i) The total amount of the Liabilities Assumed by Controlled (within the meaning of§ 357(d)); and (ii) The total amount of any money and the fair market value of any Other Property (regardless of whether the money or Other Property is distributed to Distributing's shareholders or transferred to Distributing's creditors). (b) Information. If the taxpayer does not submit REPRESENTATION 14, the taxpayer must submit information regarding the amounts referred to in REPRESENTATION 14 and the computation of any gain to be realized and recognized in the transaction. (c) Effect on Rev. Proc. 2017-52. This section 3.05(3) supersedes representation 18 in section 3 of the Appendix to Rev. Proc. 2017-52. (4) Holders of Distributing Debt or other Distributing Liabilities. (a) ALTERNATIVE REPRESENTATIONS. As applicable, submit one of the following ALTERNATIVE REPRESENTATIONS: (i) Holder not a Related Person. If the holder of Distributing Debt or other Distributing Liabilities is not a Related Person, submit the following ALTERNATIVE REPRESENTATION 15A: No holder of a Distributing Debt that will be satisfied with Section 361 Consideration, or of a Distributing Liability that will be Assumed by Controlled (including a Distributing Contingent Liability), is a Distributing Related Person or a Controlled Related Person. (ii) Holder of Distributing Debt a Related Person. If the holder of a Distributing Debt that will be satisfied with Section 361 Consideration is a Distributing Related Person, submit the following ALTERNATIVE REPRESENTATION 15B: If any Section 361 Consideration is received by a creditor of Distributing that is a Distributing Related Person, that Section 361 Consideration will be transferred no later than the date that is 12 months after the First Distribution Date to a creditor of that Distributing Related Person to satisfy Debt owed by that Distributing Related Person to that creditor. The creditor described in the preceding sentence (that is, the ultimate creditor) will not be a Distributing Related Person or a Related Person with regard to any Distributing Related Person. In addition, all Debt for which Section 361 Consideration will be exchanged as part of the series of transfers described in this REPRESENTATION 15B will have been in existence as of the Earliest Applicable Date. For purposes of this REPRESENTATION 15B, the status of a person as a Distributing Related Person, or a Related Person with regard to any Distributing Related Person, is determined at the time at which that person receives Section 361 Consideration in a transfer described in this REPRESENTATION 15B. (iii) Applicability of revenue procedure. All relevant provisions of this revenue procedure apply to all the transactions that will implement the series of transfers of Section 361 Consideration required by ALTERNATIVE REPRESENTATION 15B (as potentially modified under section 3.05(4)(b)(ii) of this revenue procedure). (b) Information and analysis. (i) Complete description of transfers. If the taxpayer submits ALTERNATIVE REPRESENTATION 15B, the taxpayer must describe the steps and timing of all the transactions that will implement the series of transfers of the Section 361 Consideration required by ALTERNATIVE REPRESENTATION 15B (as potentially modified under section 3.05(4)(b)(ii) of this revenue procedure). (ii) Modification of representation. ALTERNATIVE REPRESENTATION 15B may be modified solely to reflect one or more series of intermediate transfers of Section 361 Consideration between Distributing Related Persons to satisfy Debts (including the initial Distributing Debt), if that series of intermediate transfers-- (A) Culminates in a transfer of Section 361 Consideration to a creditor that is not a Distributing Related Person or a Related Person with regard to any Distributing Related Person; and (B) Satisfies all other requirements described in ALTERNATIVE REPRESENTATION 15B. (iii) Application of consolidated return regulations. The taxpayer must submit information and analysis to address any potential application of the Treasury Regulations under§ 1502. (5) Intermediaries. (a) In general. If an Intermediary will acquire historical Distributing Debt (as determined in accordance with section 3.05(8) of this revenue procedure) to be satisfied with Section 361 Consideration, the taxpayer must submit the REPRESENTATIONS required by section 3.05(5)(b) of this revenue procedure, the information required by section 3.05(5)(c) of this revenue procedure, and the analysis required by section 3.05(5)(d) of this revenue procedure. (b) REPRESENTATIONS. Submit the following REPRESENTATIONS: (i) REPRESENTATION 16. No holder of a Distributing Debt that will be satisfied with Section 361 Consideration, or of other Distributing Liability (including a Distributing Contingent Liability) that will be Assumed by Controlled, will hold the Debt or other Liability for the benefit of Distributing, Controlled, a Distributing Related Person, or a Controlled Related Person. For purposes of this REPRESENTATION 16, a collateral benefit received by Distributing from an arrangement with an Intermediary (for example, facilitation of a transfer of Section 361 Consideration in satisfaction of Distributing Debt) will not be treated as the Intermediary holding Distributing Debt for the benefit of Distributing, Controlled, or any Distributing Related Person or Controlled Related Person. (ii) Direct issuances generally prohibited. As applicable, submit one of the following ALTERNATIVE REPRESENTATIONS: (A) General prohibition. Submit ALTERNATIVE REPRESENTATION 17A: An Intermediary will not acquire Distributing Debt (that will be satisfied with Section 361 Consideration) from Distributing, from Controlled, or from any Distributing Related Person or Controlled Related Person. (B) Sole exception. Submit ALTERNATIVE REPRESENTATION 17B: All Distributing Debt directly acquired by an Intermediary from Distributing (that will be satisfied with Section 361 Consideration) will be acquired before the Earliest Applicable Date. For the avoidance of doubt, one example of a direct acquisition of Distributing Debt by an Intermediary from Distributing would be an issuance by Distributing of a Distributing Debt to the Intermediary in exchange for cash. (iii) REPRESENTATION 18. Each exchange of Section 361 Consideration for Distributing Debt between Distributing and an Intermediary will be effectuated based on terms and conditions arrived at by the parties bargaining at arm's length. (iv) REPRESENTATION 19. Neither Distributing, nor Controlled, nor any Distributing Related Person or Controlled Related Person, will participate in any profit gained by Intermediary upon an exchange of Section 361 Consideration; nor will any such profit be limited by agreement or other arrangement. (v) REPRESENTATION 20. The Intermediary will (i) act for its own account, and (ii) bear the risk of loss with respect to (A) the Distributing Debt and (B) any subsequent sale or other disposition of Section 361 Consideration transferred to the Intermediary to satisfy the Distributing Debt. REPRESENTATION 20 cannot be submitted if the Intermediary enters into a variable pricing agreement or similar arrangement with Distributing (or Controlled, a Distributing Related Person, or a Controlled Related Person) with regard to any Section 361 Consideration. An agreement or arrangement described in the preceding sentence could involve, for example, "true-up" payments, forward exchange agreements, or any other similar agreement or arrangement. A collateral benefit received by Distributing from an arrangement with an Intermediary (for example, facilitation of exchanges of Section 361 Consideration for Distributing Debt) will not be considered inconsistent with this representation. (c) Information. A taxpayer must submit the following information: (i) The name of each Intermediary and a description of the terms of all agreements, understandings, and arrangements pertaining to the proposed transactions or any related transactions between the Intermediary and Distributing (or Controlled or any Distributing Related Person or Controlled Related Person). The description of the terms must include-- (A) The terms of any Distributing Debt, Distributing stock, or Section 361 Consideration to be acquired by the Intermediary; and (B) The terms of all agreements, understandings, and arrangements relating to those acquisitions. (ii) A description of any co-obligation, guarantee, indemnity, surety, make-well, keep-well, or similar arrangement, including-- (A) Security provided to the Intermediary by Distributing (or by Controlled, or any Distributing Related Person or Controlled Related Person); or (B) Any other undertaking that results in the protection of the Intermediary against the risk of loss with regard to the Section 361 Consideration or Distributing Debt. (iii) The length of time expected to elapse between the Intermediary's acquisition of a Distributing Debt and the satisfaction of that Debt with Section 361 Consideration. (iv) Information to establish that the exchange of Section 361 Consideration for Distributing Debt between Distributing and the Intermediary will be effectuated based on terms and conditions arrived at by the parties bargaining at arm's length. (d) Analysis. (i) Consistency with representations. The taxpayer must provide analysis to establish that the terms of all agreements, understandings, and arrangements with an Intermediary, and all activities by that Intermediary, are consistent with REPRESENTATIONS 16 through 20. In particular, REPRESENTATIONS 16 through 20 will not be treated as provided by the taxpayer unless the taxpayer provides analysis that establishes that the Intermediary is a creditor of Distributing and participates as a principal for its own account in the exchange with Distributing, and that the transfer of Section 361 Consideration to the Intermediary should be respected and not recast or recharacterized under any principles of Federal income tax law (including the substance over form doctrine), agency, or any similar theory. (ii) Agreement, understanding, or arrangement. An agreement, understanding, or arrangement, and an Intermediary's activities, will not be considered to be inconsistent with any of REPRESENTATIONS 16 through 20 solely because the agreement, understanding, or arrangement is entered into before, at the same time as, or after the Intermediary acquires Distributing Debt. However, the analysis described in section 3.05(5)(d)(i) of this revenue procedure must establish that an agreement, understanding, or arrangement entered into before, or at the same time as, the Intermediary acquires Distributing Debt satisfies all requirements set forth in§ 361, particularly by taking into account general principles of Federal income tax law (including substance over form), agency, or other relevant theory. (iii) Period during which an Intermediary holds Distributing Debt. The shortness of time during which an Intermediary will hold the Distributing Debt will not be considered inconsistent with any of REPRESENTATIONS 16 through 20. However, if a short time is expected to elapse between an Intermediary's acquisition of a Distributing Debt and the satisfaction of that Debt with Section 361 Consideration, the analysis described in section 3.05(5)(d)(i) of this revenue procedure must establish that the expected short time should not cause the form of the transactions to be recast for Federal income tax purposes. The IRS will consider the length of time between an Intermediary's acquisition of a Distributing Debt and the satisfaction of that Debt with Section 361 Consideration as a primary factor in determining whether the form of the transactions should be recast for Federal income tax purposes. For the avoidance of doubt, the shorter the length of time between an Intermediary's acquisition of a Distributing Debt and the satisfaction of that Debt with Section 361 Consideration, the greater the scrutiny the IRS will apply to the ruling request. (iv) Plan of Reorganization. (A) In general. The taxpayer must provide analysis to establish that the exchange of Distributing Debt for Section 361 Consideration contemplated by any agreement, understanding, or arrangement between Intermediary and Distributing (or Controlled or any Distributing Related Person or Controlled Related Person) will be in pursuance of the Plan of Reorganization. (B) Consistency with Plan of Reorganization procedures. The analysis required by section 3.05(5)(d)(iv)(A) of this revenue procedure must incorporate similar representations, information, and procedures to those required by section 3.05(1) of this revenue procedure for determining whether a Distribution is "in pursuance of the plan of reorganization" (within the meaning of§ 361). (6) Distributing Debt and other Distributing Liabilities must be historical. (a) REPRESENTATION. Submit the following REPRESENTATION 21: Distributing incurred each Distributing Debt that will be satisfied with Section 361 Consideration, and each Distributing Liability that will be Assumed by Controlled (except with regard to any Distributing Contingent Liability), before the Earliest Applicable Date. (b) Amount of Debt. For purposes of REPRESENTATION 21, the Amount of Debt incurred by Distributing under a revolving credit agreement or similar arrangement on the Earliest Applicable Date, rather than the maximum Amount that could be incurred by Distributing under that arrangement, is the Amount incurred by Distributing. (7) Distributing Contingent Liabilities. (a) REPRESENTATION. Submit the following REPRESENTATION 22: Each Distributing Contingent Liability to be Assumed by Controlled is economically attributable to the period of time ending on the Contribution Date. (b) Continuing activities. The taxpayer is not foreclosed from submitting REPRESENTATION 22 even if, after the Earliest Applicable Date, Distributing continues to engage in the same type of activities that generated the Distributing Contingent Liability (and, therefore, the specific Amount included in the projection required by section 3.03(5)(b) of this revenue procedure) described in REPRESENTATION 22. In this case, the taxpayer must submit a description of the continuing activities and explain the effect of these continuing activities on the Contingent Liability. (8) Limitation to historical average Distributing Debt. (a) REPRESENTATION. Submit the following REPRESENTATION 23: The total Amount of Distributing Debt that will be satisfied with Section 361 Consideration or Assumed by Controlled will not exceed the historical average of the total Amount of Distributing Debt owed to persons other than Distributing Related Persons. This historical average of the total Amount of Debt was determined pursuant to section 3.05(8)(b) of Rev. Proc. 2024-24. (b) Historical average Amount. (i) In general. The historical average of the total Amount of Distributing Debt described in REPRESENTATION 23 is determined based on the Distributing Debt outstanding as of the close of the eight fiscal quarters that ended or will end immediately before the Earliest Applicable Date, taking into account the limitation described in section 3.05(8)(b)(ii) of this revenue procedure. (ii) Distributing Debt held by Distributing Related Person. If the taxpayer provides ALTERNATIVE REPRESENTATION 15B, the historical average of the total Amount of Distributing Debt owed to persons other than Distributing Related Persons described in REPRESENTATION 23 must include an Amount equal to the lesser of the following: (A) The Amount of Distributing Debt held by the Distributing Related Person that directly holds the Distributing Debt (that is, the first Distributing Related Person described in ALTERNATIVE REPRESENTATION 15B ); and (B) The Amount of Debt held by the ultimate creditor described in ALTERNATIVE REPRESENTATION 15B. (iii) Adjustments. The total Amount of Distributing Debt to be satisfied with Section 361 Consideration or assumed by Controlled, and the historical average described in section 3.05(8)(b)(i) of this revenue procedure (determined in accordance with REPRESENTATION 23 ), each must be adjusted to prevent duplication or omission of Debt or any other distortion. The taxpayer must submit information and analysis to explain any such adjustments and establish that such adjustments were made to prevent duplication or omission of Debt or any other distortion. (9) Distribution of Qualified Property, money, and Other Property. (a) REPRESENTATIONS. Submit the following REPRESENTATIONS: (i) REPRESENTATION 24. All Qualified Property, money, and Other Property transferred, by Controlled to Distributing in pursuance of the Plan of Reorganization will be distributed by Distributing to its shareholders in pursuance of the Plan of Reorganization or transferred to its creditors in connection with the Divisive Reorganization. (ii) REPRESENTATION 25. No money or Other Property that is transferred by Controlled to Distributing in pursuance of the Plan of Reorganization will be distributed by Distributing to its shareholders in pursuance of the Plan of Reorganization or transferred to its creditors in connection with the Divisive Reorganization on a date that is earlier than the First Distribution Date. (b) Information. The taxpayer must submit the following information: (i) A description of any Qualified Property, money, or Other Property to be transferred by Controlled to Distributing. (ii) A description of the transactions in which Distributing will distribute the Qualified Property, money, or Other Property to its shareholders or transfer the Qualified Property, money, or Other Property to its creditors. (c) Analysis. The taxpayer must submit analysis to establish that any Qualified Property (to the extent not part of a Retention), money, or Other Property to be transferred by Controlled to Distributing in pursuance of the Plan of Reorganization will be distributed by Distributing to its shareholders in pursuance of the Plan of Reorganization or transferred to its creditors in connection with the reorganization. (d) Additional information. If the taxpayer does not submit REPRESENTATION 25, the taxpayer must submit-- (i) Information describing any transaction involving Qualified Property, money, or Other Property transferred by Controlled to Distributing that will not be distributed or transferred as described in REPRESENTATION 25; and (ii) Analysis of the Federal income tax treatment of any transaction described in section 3.05(9)(d)(i) of this revenue procedure. (e) Effect on Rev. Proc. 2017-52. REPRESENTATION 25 supersedes representations 19 and 20 in section 3 of the Appendix to Rev. Proc. 2017-52. (10) Delayed transfers to creditors in satisfaction of Distributing Debt in connection with the Plan of Reorganization. (a) REPRESENTATIONS. With respect to any transfer of Section 361 Consideration in satisfaction of Distributing Debt that is intended to be in connection with the Plan of Reorganization, submit the following REPRESENTATIONS: (i) REPRESENTATION 26. There are one or more substantial business reasons for any delay in transferring Section 361 Consideration to Distributing's creditors in satisfaction of Distributing Debt more than 90 days after the First Distribution Date. (ii) REPRESENTATION 27. With the exception of Post-Distribution Payments, all transfers of Section 361 Consideration by Distributing to Distributing's creditors in satisfaction of Distributing Debt will be made no later than 12 months after the First Distribution Date. (b) Additional REPRESENTATION. If a possibility exists that Distributing will receive a Post-Distribution Payment, submit the following REPRESENTATION 28: Distributing will use a segregated account to deposit any Post-Distribution Payment that Distributing receives from Controlled. Not later than 90 days after the date on which Distributing receives a Post-Distribution Payment from Controlled, Distributing will distribute that Post-Distribution Payment (including any interest earned on the segregated account) to its shareholders or transfer that Post-Distribution Payment to its creditors in satisfaction of Distributing Debt that was in existence as of the Earliest Applicable Date. For the avoidance of doubt, the Distributing Debt described in this REPRESENTATION 28 must be Distributing Debt that is identified in REPRESENTATION 23 and included in the determination of the historical average of the total Amount of Distributing Debt under REPRESENTATION 23. (c) Information and analysis. (i) Delay beyond 90 days; 12-month distribution period. (A) Requirements. With regard to REPRESENTATIONS 27 and 28, the taxpayer must submit information and analysis to establish-- (I) The substantial business reasons for any delay in satisfying Distributing Debt beyond 90 days after the First Distribution Date; and (II) That the satisfaction of Distributing Debt more than 90 days thereafter, will be in connection with the Plan of Reorganization. (B) Documentation. Except with regard to the Plan of Reorganization, documentation of the matters described in section 3.05(10)(c)(i)(A) of this revenue procedure should be submitted only if requested by the IRS. (ii) Post-Distribution Payments. With regard to REPRESENTATION 28, the taxpayer must submit information and analysis to establish the following: (A) In character, the Post-Distribution Payment will constitute Section 361 Consideration and not, for example, a payment for goods or services separate from the Divisive Reorganization. See Arrowsmith v. Comm'r, 344 U.S. 6 (1952). (B) Whether, as of the First Distribution Date, the fair market value of Distributing's right to receive the Post-Distribution Payment will be reasonably ascertainable (within the meaning of that phrase, as used in Burnet v. Logan, 283 U.S. 404, 413 (1931)), and the Post-Distribution Payment will be properly accounted for when the Post-Distribution Payment is received. See Burnet v. Logan, 283 U.S. at 413 ("The consideration for the sale was $2,200,000 in cash and the promise of future money payments wholly contingent upon facts and circumstances not possible to foretell with anything like fair certainty. The promise was in no proper sense equivalent to cash. It had no ascertainable fair market value. The transaction was not a closed one.");§ 1.1001-1(a), (g)(2)(ii). (C) Whether Distributing will account for its right to receive the Post-Distribution Payment under the installment method. See generally§ 15a.453-1(c)(1) (regarding contingent payment obligations). (11) Effect of transaction related to Divisive Reorganization on Controlled securities. (a) If any transaction related to the Divisive Reorganization may affect the terms of any Controlled securities received by Distributing in pursuance of the Plan of Reorganization, submit the following REPRESENTATION 29: No transaction (or series of transactions) that is directly or indirectly related to the Divisive Reorganization will result in a deemed exchange, pursuant to§ 1.1001-3, of any Controlled securities received by Distributing in pursuance of the Plan of Reorganization. Controlled will continue as the Obligor of any such securities after any such transaction or series of transactions. (b) Information and analysis. The taxpayer must describe any change, resulting from or in connection with the related transaction, in the terms of any Controlled securities or other Qualified Property received by Distributing in pursuance of the Plan of Reorganization, and must submit analysis to support the conclusion that no such change will constitute a deemed exchange pursuant to§ 1.1001-3. In addition, the taxpayer must submit analysis to support the conclusion that Controlled will continue as the Obligor of any such securities or other Qualified Property after any such transaction or series of transactions. For this purpose, Rev. Rul. 98-27, 1998-1 C.B. 1159, is not relevant to determine whether any such transaction or series of transactions should cause the Divisive Reorganization to be recast because that revenue ruling addresses solely whether Controlled was a "controlled corporation" immediately before the Distribution under§ 355(a). See also generally Rev. Rul. 98-44, 1998-2 C.B. 315. (12) No replacement of Distributing Debt. (a) REPRESENTATION. Submit the following REPRESENTATION 30: Neither Distributing nor any Distributing Related Person (determined immediately after the Control Distribution), will replace, directly or indirectly, any Amount of Distributing Debt that will be satisfied with Section 361 Consideration with borrowing that Distributing or any Distributing Related Person (determined immediately after the Control Distribution) anticipates or is committed to, directly or indirectly, before the Control Distribution Date. (b) Treatment of borrowing. If the taxpayer does not submit REPRESENTATION 30, and the requirements set forth in section 3.02(3) of this revenue procedure are not satisfied, the IRS will consider issuing a favorable ruling only if the taxpayer establishes one of the following: (i) The borrowing is incurred in the ordinary course of business pursuant to a revolving credit agreement or similar arrangement that is unrelated, and would have been incurred without regard, to the Section 355 Transaction or any transaction related to the Section 355 Transaction. (ii) The borrowing results from an event, unrelated to the Section 355 Transaction and not in the ordinary course of business of Distributing, directly arising from changed circumstances that were not anticipated prior to the Control Distribution Date (that is, unrelated to the Section 355 Transaction or any transaction related to the Section 355 Transaction). (c) Information and analysis. The purpose of REPRESENTATION 30, and the information and analysis required by this section 3.05(12)(c), is to establish that the application of§ 361 to the proposed transactions is consistent with the text and purpose of§ 361, so that issuing a private letter ruling would be in the interest of sound tax administration. See section 2.01(4) of this revenue procedure. Accordingly, the taxpayer must submit the following information and analysis: (i) Revolving credit agreement or a similar arrangement. (A) Scope. This section 3.05(12)(c)(i) applies if Distributing or any Distributing Related Person (determined immediately after the Control Distribution) is a borrower pursuant to a revolving credit agreement or similar arrangement in existence as of the Earliest Applicable Date. (B) Requirements. If this section 3.05(12)(c)(i) applies, to rely on the exception described in section 3.05(12)(b)(i) of this revenue procedure, the taxpayer must submit information and analysis to establish that any increase either in the Amount of borrowing provided for therein or the actual Amount borrowed-- (I) Did not occur in connection with the Section 355 Transaction, and would have occurred without regard to the Section 355 Transaction or any transaction related to the Section 355 Transaction; and (II) Was incurred in the ordinary course of business (that is, demonstrably independent of the Section 355 Transaction or any transaction related to the Section 355 Transaction). (ii) Event arising from unanticipated, changed circumstances. (A) Scope. This section 3.05(12)(c)(ii) applies if Distributing or a Distributing Related Person (determined immediately after the Control Distribution) is a prospective or an actual borrower as a result of an event described in section 3.05(12)(b)(ii) of this revenue procedure. (B) Requirements. If this section 3.05(12)(c)(ii) applies, to rely on the exception described in section 3.05(12)(b)(ii) of this revenue procedure, the taxpayer must submit information and analysis to establish that-- (I) The event did not occur in the ordinary course of business of Distributing or in connection with the Section 355 Transaction and the borrowing would have been incurred without regard to the Section 355 Transaction or any transaction related to the Section 355 Transaction; and (II) The event directly arose from changed circumstances that were unanticipated prior to the Control Distribution Date (that is, demonstrably independent of the Section 355 Transaction or any transaction related to the Section 355 Transaction). (13) Assumption of Distributing Liabilities. (a) Ruling on Assumption of a Distributing Liability. The IRS will entertain a request for a ruling that a transaction or series of transactions pursuant to an agreement or arrangement between Distributing and Controlled constitutes an Assumption of a Distributing Liability. (b) REPRESENTATIONS. If the taxpayer requests a ruling described in section 3.05(13)(a) of this revenue procedure, the taxpayer must submit the following REPRESENTATIONS, information, and analysis. Separate REPRESENTATIONS must be submitted with respect to each Liability or group of Liabilities. If any transaction described in section 3.05(13)(a) of this revenue procedure will occur at the same time as or after a related Section 355 Transaction, the REPRESENTATIONS in this section 3.05(13)(b) and the information and analysis required by section 3.05(13)(c) of this revenue procedure must be submitted both as of immediately after the Section 355 Transaction at issue and as of immediately after each such transaction. (i) REPRESENTATION 31. No payment by Controlled to satisfy a Distributing Liability (including a Distributing Contingent Liability) that Controlled Assumes will be made, directly or indirectly, to Distributing or to a Distributing Related Person or made in any manner that results in Distributing or a Distributing Related Person having legal or practical dominion or control over any part of the payment. See section 3.05(13)(e)(ii) of this revenue procedure for information regarding the facts and circumstances analysis regarding the "legal or practical dominion or control standard." (ii) REPRESENTATION 32. Controlled has agreed, and is expected, to satisfy each Distributing Liability (including each Distributing Contingent Liability) that Controlled Assumes. (iii) REPRESENTATION 33. The Assumption of each Distributing Liability (including each Distributing Contingent Liability) that Controlled Assumes will have been provided for in an agreement entered into between Distributing and Controlled before the First Distribution Date. (iv) REPRESENTATION 34. Each Distributing Liability (including each Distributing Contingent Liability) that Controlled Assumes will have been incurred in the ordinary course of business and will be associated with Controlled's assets and business. (v) REPRESENTATION 35. All payments in satisfaction of each Distributing Contingent Liability will be made as soon as practicable after the amounts of those payments are substantially determined. (c) Information and analysis. Submit the following information and analysis: (i) A description of each Distributing Liability to be Assumed by Controlled, including the circumstances in which the Distributing Liability was incurred. (ii) A description of each agreement or arrangement at issue, including the rights and obligations of Distributing, Controlled, and any other parties. If a payment will be made to a trust, an escrow agent, or a person in a similar role, submit information and analysis to establish that neither Distributing nor any Distributing Related Person will have legal or practical dominion or control over any part of the payment. (d) Additional information and analysis relating to Assumption of a Distributing Contingent Liability. If Controlled will Assume a Distributing Contingent Liability, the taxpayer must submit the following additional information and analysis: (i) A description of each Distributing Contingent Liability to be Assumed by Controlled, including the circumstances in which the Distributing Contingent Liability was incurred, the length of time expected before amounts to be paid will be substantially determined, the relationship of the Distributing Contingent Liability to Controlled's business and assets, and the current and anticipated disclosure of the Distributing Contingent Liability on financial statements of Distributing, Controlled, any Distributing Related Person, or any Controlled Related Person. (ii) A statement as to whether Distributing or Controlled (or another person) will deduct or capitalize, under its respective method of accounting, payments to satisfy the Assumed Liability. See Rev. Rul. 95-74. (e) Dominion or control. (i) Segregated account is within legal or practical dominion or control. A payment may be considered to be within Distributing's legal or practical dominion or control even if made to a segregated account of Distributing, a Distributing Related Person, or any person through which Distributing or a Distributing Related Person can direct the treatment or disposition of the payment. (ii) Facts and circumstances analysis. Based on all the facts and circumstances, a payment may be considered not to be in Distributing's legal or practical dominion or control if-- (A) The payment is dedicated to the satisfaction of a Liability that was a Distributing Liability (including a Distributing Contingent Liability) identified in an agreement described in REPRESENTATION 33; (B) The payment is made to an independent trustee or escrow agent that is not affiliated with Distributing; (C) The payment is not made to any account of Distributing, a Distributing Related Person, or any person through which Distributing or a Distributing Related Person could direct the payment, regardless of the brevity, or transitory nature, of the period in which the payment is in such an account; (D) The parties will treat any income, gain, or loss on the payment proceeds as income, gain, or loss to Controlled; and (E) Any excess of the payment amount (and any income or gain thereon) over the amount paid to satisfy the Liability will revert to Controlled. (f) Consequences of legal or practical dominion or control of Distributing or Distributing Related Person. If Controlled makes a payment to satisfy a Distributing Liability, and any part of the payment is made to Distributing or to a Distributing Related Person, or is made in a manner that results in any part of the payment being within the legal or practical dominion or control of Distributing or a Distributing Related Person, one of the following three consequences will result: (i) Section 361 Consideration. The IRS may rule that the payment constitutes Section 361 Consideration and not a payment of an Assumed Liability. Consequently, all representations, information, and analysis required by this revenue procedure will apply to that payment of Section 361 Consideration (including such representations, information, and analysis regarding Post-Distribution Payments). (ii) Plan of Reorganization. The IRS may rule that the payment is not made in connection with the Plan of Reorganization. (iii) No ruling. The IRS may decline to rule on the issues. (g) Effect on Rev. Proc. 2017-52. REPRESENTATION 34 supersedes representation 17 in section 3 of the Appendix to Rev. Proc. 2017-52. (14) No avoidance of Federal income tax. (a) REPRESENTATIONS. Submit the following REPRESENTATIONS: (i) REPRESENTATION 36. No Assumption by Controlled of any Distributing Liability (including a Distributing Contingent Liability) will have as a principal purpose (1) the avoidance of Federal income tax or (2) any other purpose that is not a bona fide business purpose (within the meaning of§ 357(b)(1)). (ii) REPRESENTATION 37. No proposed transaction or series of transactions will have as a principal purpose the avoidance of any requirement or limitation in§ 357 or§ 361. (b) Information and analysis. The taxpayer must submit information and analysis to establish that REPRESENTATIONS 36 and 37 are accurate. SECTION 4. EFFECT ON OTHER DOCUMENTS.01 Rev. Proc. 2017-52. Rev. Proc. 2017-52 is modified by deleting Representations 2, 4, and 17 through 21 in section 3 of the Appendix..02 Rev. Proc. 2018-53. Rev. Proc. 2018-53 is superseded. SECTION 5. EFFECTIVE DATE This revenue procedure will apply to all ruling requests postmarked or, if not mailed, received by the IRS after May 31, 2024. SECTION 6. PAPERWORK REDUCTION ACT The collections of information in this revenue procedure have been reviewed and approved by the Office of Management and Budget (OMB) in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545-1522. 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 section 3. This information is required to determine whether a taxpayer would qualify for tax-free treatment to the extent allowed under§§ 357 and 361. The collections of information are required to obtain a benefit. The likely respondents are corporations that control another corporation, as well as the management of the corporation the stock of which is being distributed or of the corporation that controls the corporation the stock of which is being distributed. The estimated total annual reporting burden for Rev. Proc. 2024-1 is 316,020 hours. The estimated annual burden per respondent for Rev. Proc. 2024-1 varies from 1 to 200 hours, depending on individual circumstances, with an estimated average of 80 hours. The estimated number of respondents is 3,956. The estimated total annual reporting burden for this revenue procedure adds 955 hours to the burden imposed by Rev. Proc. 2024-1, Rev. Proc. 2017-52, which is modified by this revenue procedure, and Rev. Proc. 2018-53, which is superseded by this revenue procedure. The estimated annual burden per respondent for this revenue procedure varies from 5 to 50 hours, depending on individual circumstances, with an estimated average of 15 hours. The estimated number of additional respondents added to Rev. Proc. 2024-1 and Rev. Proc. 2018-53 by this revenue procedure is 2, increasing the estimated number of respondents to Rev. Proc. 2024-1 to 3,958. The estimated average burden for Rev. Proc. 2024-1, Rev. Proc. 2017-52, and Rev. Proc. 2018-53, as increased by this revenue procedure, is 0 hours. The estimated annual frequency of responses is on occasion. Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue tax law. Generally tax returns and tax return information are confidential, as required by 26 U.S.C. 6103. SECTION 7. DRAFTING INFORMATION The principal author of this revenue procedure is Grid Glyer of the Office of the Associate Chief Counsel (Corporate). For further information regarding this revenue procedure, please contact Mr. Glyer at (202) 317-3181. APPENDIX SECTION 1. GENERAL.01 Overview. The terms defined in section 2 of this Appendix are used solely for purposes of this revenue procedure. No inference, implication, or presumption of the meaning of any term used in the Code, Treasury Regulations, or any other guidance of the Treasury Department or the IRS should be drawn or made by reason of any definition provided in section 2 of this Appendix..02 Defined Terms in Ruling Requests. (1) In general. In requests for rulings to which this revenue procedure applies, taxpayers must include a statement confirming that these defined terms are used. (2) Modifications. (a) Conditions. A taxpayer is permitted to modify the definition of any term defined in section 2 of the Appendix only if-- (i) the taxpayer identifies and describes the modification; (ii) the modification to the definition does not alter any material requirements of this revenue procedure; and (iii) the definition does not involve, in whole or in part, an expression of Federal tax law (in other words, the taxpayer is not permitted to modify a legal standard that is incorporated into the definition). (b) Consequences. If a taxpayer modifies the definition of any term that is used in a representation, the taxpayer is treated as failing to submit precisely the requested language of the representation, as required by section 3.02(3) of this revenue procedure. Variations of the language of the representations may delay processing the ruling request and will not be accepted unless reasons satisfactory to the Associate Chief Counsel (Corporate) are submitted. The degree to which the definition of a term is material to a representation, the greater the scrutiny that will be applied to any proposed deviation from that definition in reviewing the ruling request. (3) Additional defined terms. Taxpayers are encouraged to use additional defined terms where appropriate. SECTION 2. DEFINITIONS.01 Amount. Determinations of Amount and other determinations required by this section 2.01 must be made as of the Earliest Applicable Date (unless otherwise specified in this revenue procedure): (1) With regard to Debt. Except as provided in section 2.01(2) of this Appendix, with regard to Debt, the term Amount means adjusted issue price (as defined in§ 1.1275-1(b)). See also§ 1.446-2. (2) With regard to certain convertible Debt. With regard to Debt with a conversion option described in§ 1.1275-4(a)(4), if the conversion option is reasonably certain to be exercised, the term Amount means the fair market value of the instrument. The determination of whether a conversion option is reasonably certain to be exercised is based on all the facts and circumstances, including those described in§ 1.1504-4(g) (to the extent relevant). For purposes of the preceding sentence, the safe harbors described in§ 1.1504-4(g)(3) do not apply. (3) With regard to other Liabilities. With regard to any Liability that is not Debt, the term Amount means the amount of cash that a willing assignor would pay to a willing assignee to Assume the Liability in an arm's-length transaction..02 Assume; Assumption. With respect to a Liability, the terms Assume, Assumption, and similar terms have the meaning of "assumed" as set forth in§ 357(d)..03 Code. The term Code means the Internal Revenue Code of 1986, as amended..04 Contingent Liability. The term Contingent Liability means a Liability (other than a Debt) that includes one or more contingent payments..05 Control Distribution. The term Control Distribution means a distribution of Controlled stock, or of Controlled stock and securities, as a result of which Distributing has distributed an amount of Controlled stock constituting "control" (within the meaning of§ 368(c))..06 Control Distribution Date. The term Control Distribution Date means the date of the Control Distribution..07 Controlled. The term Controlled means the controlled corporation described in§ 355(a)(1)(A)..08 Controlled Debt. The term Controlled Debt means Debt for which Controlled is the Obligor..09 Controlled Related Person. The term Controlled Related Person means a Related Person with regard to Controlled..10 CSAG. The term CSAG means the SAG of which Controlled is the common parent. If no CSAG exists, the term CSAG refers to Controlled..11 Debt. The term Debt means a Liability pursuant to an instrument or a contractual arrangement that constitutes debt under general principles of Federal income tax law. See§ 1.1275-1(d)..12 Delayed Distribution. The term Delayed Distribution means a Distribution that takes place after the First Distribution Date and is intended to be "part of the Distribution" (within the meaning of§ 355(a)(1)(D)) or "in pursuance of the plan of reorganization" (within the meaning of§ 361), as applicable..13 Distributing. The term Distributing means the distributing corporation described in§ 355(a)(1)(A). As the context requires, a reference to Distributing may include a reference to more than one Controlled (for example, in the case of a Split-Up, as defined in section 2.11 of the Appendix to Rev. Proc. 2017-52)..14 Distributing Contingent Liability. The term Distributing Contingent Liability means a Contingent Liability for which Distributing is the Obligor..15 Distributing Debt. (1) In general. The term Distributing Debt means Debt for which Distributing is the Obligor. (2) Inclusions. The term Distributing Debt includes a Debt that Distributing Assumed as Obligor in a transaction to which§ 381(a) does apply only if that Debt was issued prior to the Earliest Applicable Date..16 Distributing Liability. (1) In general. The term Distributing Liability means a Liability for which Distributing is the Obligor. (2) Inclusions. The term Distributing Liability includes a Liability that Distributing Assumed as Obligor in a transaction to which§ 381(a) does apply only if that Liability was incurred prior to the Earliest Applicable Date..17 Distributing Related Person. The term Distributing Related Person means a Related Person with respect to Distributing..18 Distribution. The term Distribution means a distribution, or one of a series of planned distributions, of Controlled stock, or of Controlled stock and securities, intended to qualify as a Section 355 Transaction..19 Distribution Date. If all Distributions comprising an intended Section 355 Transaction take place on one date-- (1) The term Distribution Date means that date; and (2) Each of the terms First Distribution Date, Control Distribution Date, and Final Distribution Date refers to the Distribution Date..20 Distribution Period. The term Distribution Period means the period of time that-- (1) Begins immediately before the First Distribution; and (2) Ends immediately after the Final Distribution..21 Divisive Reorganization. The term Divisive Reorganization means a series of transactions that qualify as a reorganization described in§§ 355(a) and 368(a)(1)(D)..22 DSAG. The term DSAG means the SAG of which Distributing is the common parent. If no DSAG exists, the term DSAG refers to Distributing..23 Earliest Applicable Date. (1) In general. The term Earliest Applicable Date means the date that is 60 days before the earliest of the following dates-- (a) The date of the first public announcement (as defined in§ 1.355-7(h)(10)) of the Divisive Reorganization or a similar transaction; (b) The date of entry by Distributing into a binding agreement to engage in the Divisive Reorganization or a similar transaction; and (c) The date of approval of the Divisive Reorganization or a similar transaction by the board of directors of Distributing. (2) Similar transaction. For purposes of section 2.23(1) of this Appendix, a transaction is a similar transaction if it would have effected a direct or indirect separation of all, or a significant portion of, the same assets as the Divisive Reorganization that is the subject of the taxpayer's ruling request. Cf.§ 1.355-7(h)(12) and (13) (describing the terms "similar acquisition (not involving a public offering)" and "similar acquisition involving a public offering," respectively)..24 Final Distribution. The term Final Distribution means the last Distribution in a series of planned Distributions..25 Final Distribution Date. The term Final Distribution Date means the date of the Final Distribution..26 First Distribution. The term First Distribution means the earliest Distribution in a series of planned Distributions..27 First Distribution Date. The term First Distribution Date means the date of the First Distribution..28 Intermediary. (1) In general. The term Intermediary means an investment bank or other person that-- (a) Is not a Distributing Related Person or a Controlled Related Person; and (b) Provides capital or financial services to Distributing or Controlled, directly or indirectly, to facilitate the Section 355 Transaction. (2) Inclusion. The term Intermediary includes a Related Person of the Intermediary..29 Liability. (1) In general. The term Liability means a Debt, a Contingent Liability, or any other fixed or contingent obligation, without regard to whether the obligation otherwise has been taken into account for Federal income tax purposes. For example, a Liability of a person includes a Liability described in Rev. Rul. 80-323, 1980-2 C.B. 124 (in transfer of partnership interest qualifying under§ 351(a), transferor's share of partnership Liabilities considered an Assumed Liability for purposes of§ 357(c) and as money received for purposes of§ 358(d)). (2) Certain obligations incurred in ordinary course of business. An obligation incurred in the ordinary course of business pursuant to a bilateral contract generally is not a Liability. However, such an obligation may be a Liability, in whole or in part, if it is reflected in the financial statement of the obligor as a liability, reserve, or similar item..30 Obligor. With respect to a Liability, the term Obligor means the person that has agreed, and is expected, as determined on the basis of all facts and circumstances, to satisfy the Liability, taking into account all relevant provisions of the Code (including the principles of§ 357(d) (liability treated as Assumed)), Treasury Regulations, and general principles of Federal income tax law, including the substance-over-form doctrine. See, for example, Plantation Patterns, Inc. v. Comm'r, 462 F.2d 712 (5th Cir. 1972), cert. denied, 409 U.S. 1076 (1972); Intergraph Corp. v. Comm'r, 106 T.C. 312, 323 (1996), aff'd, 121 F.3d 723 (11th Cir. 1997)..31 Other Property. The term Other Property means Section 361 Consideration other than Qualified Property and money..32 Plan of Reorganization. The term Plan of Reorganization has the meaning given the term in§ 1.368-2(g), taking into account§ 1.368-1(c)..33 Post-Distribution Payment. The term Post-Distribution Payment means a transfer of money or Other Property by Controlled to Distributing that-- (1) Distributing receives from Controlled subsequent to the Control Distribution Date; and (2) For Federal tax purposes, constitutes Section 361 Consideration and not, for example, a payment for goods or services separate from the Divisive Reorganization..34 Proposed Transaction. The term Proposed Transaction means the aggregate transaction that consists of all the specific steps-- (1) For which a ruling is requested; (2) That the IRS determines to be relevant to determine whether to issue a requested ruling described in section 2.34(1) of this Appendix; and (3) Included in the Plan of Reorganization, the submission of which is required by section 3.05(1)(c) of this revenue procedure..35 Qualified Property. The term Qualified Property has the meaning provided in§§ 355(c)(2)(B) and 361(c)(2)(B)..36 Related Person. The term Related Person, with regard to a person, means a person that is related to that person within the meaning of§ 267(b) or§ 707(b)(1)..37 Retained Controlled Stock; Retained Controlled Stock (or Securities). The terms Retained Controlled Stock and Retained Controlled Stock (or Securities) mean, as applicable, Controlled stock, Controlled securities, options or similar instruments to acquire Controlled stock or securities, or Controlled stock or securities acquired upon exercise of an option or settlement of any similar instrument, that Distributing does not intend to distribute or otherwise dispose of-- (1) As "part of the Distribution" (within the meaning of§ 355(a)(1)(D)); or (2) "in pursuance of the plan of reorganization" (within the meaning of§ 361)..38 Retention. The term Retention means the continued ownership by Distributing of Retained Controlled Stock (or Securities) after the Control Distribution Date..39 SAG. The term SAG means a separate affiliated group (as defined in§ 355(b)(3)(B))..40 Section 355 Transaction. The term Section 355 Transaction means either a Section 355(c) Distribution or a Divisive Reorganization..41 Section 355(c) Distribution. The term Section 355(c) Distribution means a Distribution that qualifies under§ 355(a) (or so much of§ 356 as relates to§ 355) and§ 355(c)..42 Section 361 Consideration. (1) In general. The term Section 361 Consideration means the consideration received by Distributing from Controlled in exchange for property transferred by Distributing to Controlled in a Divisive Reorganization. (2) Inclusions. The term Section 361 Consideration includes Controlled stock, Controlled securities, Controlled non-security Debt, money, and Other Property. (3) Exclusion. The term Section 361 Consideration does not include an Assumption of a Liability described in§ 357(a)..43 Treasury Regulations. The term Treasury Regulations means the provisions of 26 CFR chapter 1.
Private Letter Ruling Number: 202338024 Internal Revenue Service April 4, 2023 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Exempt Organizations Examinations Number: 202338024 Release Date: 9/22/2023 UIL: 501.03-00 Date: 04/04/2023 Taxpayer ID number (last 4 digits): Form: Tax periods ended: Person to contact Name: ID number: Telephone: Fax: Last day to file petition with United States Tax Court: CERTIFIED MAIL - Return Receipt Requested Dear ****: Why we are sending you this letter This is a final determination that you don't qualify for exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3), effective **. Your determination letter dated **, is revoked. Our adverse determination as to your exempt status was made for the following reasons: Organizations described in IRC Section 501(c)(3) and exempt under IRC Section 501(a) must be both organized and operated exclusively for charitable, educational, or other exempt purposes within the meaning of IRC Section 501(c)(3). You have not demonstrated that you are operated exclusively for charitable, educational, or other exempt purposes within the meaning of IRC Section 501(c)(3) and that no part of your net earnings inure to the benefit of private shareholders or individuals. You failed to respond to repeated reasonable requests to allow the Internal Revenue Service to examine your records regarding your receipts, expenditures, or activities as required by IRC sections 6001, 6033(a)(1) and Rev.Rul. 59-95, 1959-1 C.B. 627. Organizations that are not exempt under IRC Section 501 generally are required to file federal income tax returns and pay tax, where applicable. For further instructions, forms and information please visit IRS.gov. Contributions to your organization are no longer deductible under IRC Section 170. What you must do if you disagree with this determination If you want to contest our final determination, you have 90 days from the date this determination letter was mailed to you to file a petition or complaint in one of the three federal courts listed below. How to file your action for declaratory Judgment If you decide to contest this determination, you can file an action for declaratory judgment under the provisions of Section 7428 of the Code in either: - The United States Tax Court, - The United States Court of Federal Claims, or - The United States District Court for the District of Columbia You must file a petition or complaint in one of these three courts within 90 days from the date we mailed this determination letter to you. You can download a fillable petition or complaint form and get information about filing at each respective court's website listed below or by contacting the Office of the Clerk of the Court at one of the addresses below. Be sure to include a copy of this letter and any attachments and the applicable filing fee with the petition or complaint. You can eFile your completed U.S. Tax Court petition by following the instructions and user guides available on the Tax Court website at ustaxcourt.gov/dawson.html. You will need to register for a DAWSON account to do so. You may also file your petition at the address below: United States Tax Court 400 Second Street, NW Washington, DC 20217 ustaxcourt.gov The websites of the U.S. Court of Federal Claims and the U.S. District Court for the District of Columbia contain instructions about how to file your completed complaint electronically. You may also file your complaint at one of the addresses below: US Court of Federal Claims 717 Madison Place, NW Washington, DC 20439 uscfc.uscourts.gov US District Court for the District of Columbia 333 Constitution Avenue, NW Washington, DC 20001 dcd.uscourts.gov Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory judgment under IRC Section 7428. We'll notify the appropriate state officials (as permitted by law) of our determination that you aren't an organization described in IRC Section 501(c)(3). Information about the IRS Taxpayer Advocate Service The IRS office whose phone number appears at the top of the notice can best address and access your tax information and help get you answers. However, you may be eligible for free help from the Taxpayer Advocate Service (TAS) if you can't resolve your tax problem with the IRS, or you believe an IRS procedure just isn't working as it should. TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Contact your local Taxpayer Advocate Office at: Or call TAS at 877-777-4778. For more information about TAS and your rights under the Taxpayer Bill of Rights, go to taxpayeradvocate.IRS.gov. Do not send your federal court pleading to the TAS address listed above. Use the applicable federal court address provided earlier in the letter. Contacting TAS does not extend the time to file an action for declaratory judgment. Where you can find more information Enclosed are Publication 1, Your Rights as a Taxpayer, and Publication 594, The IRS Collection Process, for more comprehensive information. Find tax forms or publications by visiting IRS.gov/forms or calling 800-TAX-FORM (800-829-3676). If you have questions, you can call the person shown at the top of this letter. If you prefer to write, use the address shown at the top of this letter. Include your telephone number, the best time to call, and a copy of this letter. You may fax your documents to the fax number shown above, using either a fax machine or online fax service. Protect yourself when sending digital data by understanding the fax service's privacy and security policies. Keep the original letter for your records. Sincerely, ** for Lynn A. Brinkley Director, Exempt Organizations Examinations Enclosures: Publication 1 Publication 594 Publication 892 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Exempt Organizations Examinations Date: November 17, 2022 Taxpayer ID number: Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: Address: Manager's contact information: Name: ID number: Telephone: Response due date: CERTIFIED MAIL -- Return Receipt Requested Dear **: Why you're receiving this letter We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we propose to revoke your tax-exempt status as an organization described in Internal Revenue Code (IRC) Section 501(c)(3). If you agree If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an organization described in IRC Section 501(c)(3) for the periods above. After we issue the final adverse determination letter, we'll announce that your organization is no longer eligible to receive tax deductible contributions under IRC Section 170. If you disagree 1. Request a meeting or telephone conference with the manager shown at the top of this letter. 2. Send any information you want us to consider. 3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after the meeting or after we consider the information. The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case. For your protest to be valid, it must contain certain specific information, including a statement of the facts, applicable law, and arguments in support of your position. For specific information needed for a valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn't apply now that we've issued this letter. 4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities) if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the IRS. If you're considering requesting technical advice, contact the person shown at the top of this letter. If you disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as explained above. A decision made in a technical advice memorandum, however, generally is final and binding on Appeals. If we don't hear from you If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final adverse determination letter. Contacting the Taxpayer Advocate Office is a taxpayer right The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpaveradvocate.irs.gov or call 877-777-4778. For additional information You can get any of the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person shown at the top of this letter. Sincerely, ** for Lynn A. Brinkley Acting Director Exempt Organizations Examinations Enclosures: Form 886-A and Attachments Form 6018 Issue: Whether ** (hereinafter referred to as "Taxpayer") continues to qualify for exemption from Federal income tax under section 501(a) of the Internal Revenue Code (Code) as a charitable organization described in Code section 501(c)(3). Facts: Taxpayer was incorporated in the ** on **, under the state's Not-for-Profit Corporation Law. Taxpayer's organizing document, the Certificate of Incorporation, was filed with ** State and provides for the following purpose in the Third article: "The purpose for which the corporation is formed is any purpose for which corporations may be organized under the Not-For-Profit Corporation Law as a charitable corporation." The ninth article of Taxpayer's organizing document provides that the organization is organized exclusively for charitable, religious, educational, and scientific purposes under section 501(c)(3) of the Code, or corresponding section of any future federal tax code. The ninth article of Taxpayer's organizing document also provides for a dissolution clause intended to allow Taxpayer to satisfy the organizational requirements for Federal exemption. Taxpayer's organizing document identifies ** as the incorporator, President, and Treasurer, with an address in **. The seventh article of Taxpayer's organizing document lists the initial three directors of the organization. In addition to **, Taxpayer's initial directors include ** and **, both of whom reside in the **. In **, Taxpayer filed **, with the Internal Revenue Service (IRS). The ** application is signed by **as the Managing Director. The mailing address furnished for Taxpayer on its ** application is: Taxpayer's address in ** corresponds to a United Parcel Service (UPS) retail store which offers mailbox services. According to information posted by UPS on the Internet, the retail store located at ** offers the following mailbox services: - A real street address in lieu of a P.O. Box. - Package and mail receipt notifications - Mail holding and forwarding - Call-in mail check A copy of the pertinent website content posted by or on behalf of the UPS store located in ** is appended as Exhibit A. The ** application is accompanied by a conformed copy of Taxpayer's organizing document and several attachments providing narrative responses to certain questions in **. According to the attachments providing a narrative description of past, present, and planned activities as requested in Parts IV and VI of **, Taxpayer states the following: Based on the ** application and accompanying records filed by Taxpayer, the IRS issued a favorable determination letter dated **, granting Taxpayer recognition of exemption under section 501(c)(3) of the Code effective **. Taxpayer was classified as a public charity under sections 509(a)(1) and 170(b)(1)(A)(vi) of the Code based on its planned fundraising programs and projected financial support. IRS records show that Taxpayer filed **, for the ** through ** calendar tax years, inclusive. Taxpayer filed ** in lieu of a ** or ** return. The organization indicated on ** that its gross receipts are normally $ **. The address reported by Taxpayer on its ** is the same address reported on the ** application - **. In **, the Tax Exempt and Governmental Entities (TE/GE) division of the IRS selected Taxpayer for examination of its books and records covering the **calendar year. The notice of examination package, which is dated **, consists of IRS letter #6031, Form 4564, Information Document Request (IDR), Publication 1, Your Rights as a Taxpayer, Notice 609, Privacy Act Notice, and Publication 3498-A, The Examination Process (Audits by Mail). The notice of examination package was mailed to Taxpayer at the last known address on file for the organization which is as follows: As noted on page 1 of the 2-page IDR issued with the examination notice, the examination of Taxpayer's books and records is intended to verify that the organization: 1. Operates in accordance with section 501(c)(3) of the Code 2. Is eligible to file ** based on gross receipts, and 3. Filed all required returns including information returns. As part of standard audit procedures, the IRS examiner requested that Taxpayer furnish certain records and information needed to determine whether the organization is operating in furtherance of charitable and other exempt purposes described in section 501(c)(3) of the Code. IDR #1 issued to Taxpayer on **, requests copies of the following records and information covering the ** calendar year under examination: - Chart of accounts - General ledger - Adjusted trial balance - Cash disbursements journal. - Monthly bank statements for Taxpayer's primary operating (checking) account together with canceled checks or check images furnished by the bank. - Monthly statements for all credit cards that may have been issued to Taxpayer under a corporate account. - Minutes of meetings held by Taxpayer's Board of Directors and committees of the Board. - Internal policies and procedures regarding the handling and recording of cash donations. - Lease agreements and other information relating to any office or other facility used by Taxpayer to conduct activities. - Contracts and other arrangements with individuals and/or organizations which solicit and raise funds for Taxpayer including, but not limited to, professional fundraising organizations. - The organization's website address, if any, and the identity of the party that hosts the website. If no website is maintained, Taxpayer was requested to provide copies of records which describe the activities conducted in **. In the absence of formal marketing and fundraising materials, Taxpayer was asked to provide a statement describing the activities, services, programs, and events conducted by the organization in **. - Information regarding the accounting software used by Taxpayer for preparation of its books and records. The response due date for IDR #1 was **. Taxpayer did not respond to the IDR or otherwise contact the IRS examiner or the group manager by the due date. In accordance with established IRS procedures, a follow-up "Delinquency Notice" letter was issued to Taxpayer with a copy of IDR #1 on **, with a response due date of **. The delinquency notice states, in part, that if the organization does not fully respond to the IDR by the response due date, the IRS will propose revocation of Taxpayer's exempt status. The delinquency notice was not returned by the post office as undeliverable. Taxpayer did not respond to the delinquency notice or otherwise contact the IRS examiner. Neither the IRS examiner nor the group manager subsequently received any of the requested records and information from ** or any other officer or director of Taxpayer. Despite its name, there is no evidence that Taxpayer is an affiliate or chapter of the ** network of charities that operate within the United States. ** maintains a website which allows users to search for local chapters. Taxpayer is not among the local or state chapters listed. Taxpayer first reported a website address ** in section E of the ** filed with the IRS for **. The IRS examiner was not able to locate the website domain address referenced by Taxpayer. The ** filed by Taxpayer for all other years, including the ** calendar year under exam, do not reference any website address. A search of the ** corporate database on **, which provides information on the status of entities incorporated under ** state law, shows that Taxpayer is an active entity. See Exhibit B. Applicable Law: Section 501(c)(3) of the Code provides that an organization organized and operated exclusively for charitable or educational purposes is exempt from Federal income tax, provided no part of its net earnings inures to the benefit of any private shareholder or individual. Section 1.501(c)(3)-1(a)(1) of the Treasury Regulations states that to be exempt as an organization described in section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in such section - charitable, religious, educational, scientific, literary, testing for public safety, or for the prevention of cruelty to children or animals. If an organization fails to meet either the organizational test or the operational test, it is not exempt. Section 1.501(c)((3)-1(c) of the regulations describes the operational test requirements for 501(c)(3) exemption. The operational test focuses on how the organization is actually operated, regardless of whether it is properly organized for tax-exempt purposes. Section 1.501(c)(3)-1(c)(1) of the regulations provides that an organization will be regarded as "operated exclusively" for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in section 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. This is referred to as the "primary activities" test. Section 1.501(c)(3)-1(c)(2) of the regulations provides that an organization is not operated exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals. Section 511 of the Code imposes a tax at corporate rates under section 11 on the unrelated business taxable income of certain tax-exempt organizations. Section 6001 of the Code provides, in part, that every person liable for any tax imposed by this title, or for the collection thereof, shall keep such records, render such statements, make such returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Whenever in the judgment of the Secretary it is necessary, he may require any person, by notice served upon such person or by regulations, to make such returns, render such statements, or keep such records, as the Secretary deems sufficient to show whether or not such person is liable for tax under this title. Section 1.6001-1(c) of the regulations provides that in addition to such permanent books and records as are required by paragraph (a) of this section with respect to the tax imposed by section 511 on unrelated business income of certain exempt organizations, every organization exempt from tax under section 501(a) shall keep such permanent books of account or records, including inventories, as are sufficient to show specifically the items of gross income, receipts and disbursements. Such organizations shall also keep such books and records as are required to substantiate the information required by section 6033. See section 6033 and regulations sections 1.6033-1 through 1.6033-3. Section1.6001-1(e) of the regulations provides that the books or records required by this section shall be kept at all times available for inspection by authorized internal revenue officers or employees and, shall be retained as long as the contents thereof may be material in the administration of any internal revenue law. Section 6033 of the Code provides, in general, that every organization exempt under IRC 501(a) shall file an annual return, stating specifically the items of gross income, receipts, and disbursements, and such other information for the purpose of carrying out the Internal Revenue laws as the Secretary may by forms of regulations prescribe, and shall keep such records, render under oath such statements, make such other returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Section 6033 of the Code provides an exception to the annual filing requirement in the case of an organization described in section 501(c) (other than a private foundation or a supporting organization described in section 509(a)(3)) the gross receipts of which in each taxable year are normally not more than $50,000. See section 1.6033-2(g)(1)(iii) of the regulations. Section 1.6033-2(g)(5) of the regulations provide that an organization that is not required to file an annual return by virtue of the gross receipts exception must submit an annual electronic notice notification as described in section 6033(i) of the Code. Section 1.6033-2(i)(2) of the regulations provides that every organization which is exempt from tax, whether or not it is required to file an annual information return, shall submit such additional information as may be required by the Internal Revenue Service for the purpose of inquiring into its exempt status and administering the provisions of subchapter F (section 501 and following), chapter 1 of subtitle A of the Code and section 6033. Rev.Rul. 59-95, 1959-1 C.B. 627, concerns an exempt organization that was requested to produce a financial statement and statement of its operations for a certain year. However, its records were so incomplete that the organization was unable to furnish such statements. The Service held that the failure or inability to file the required information return or otherwise to comply with the provisions of section 6033 of the Code and the regulations which implement it, may result in the termination of the exempt status of an organization previously held exempt, on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status. Organization's Position: Taxpayer's position is unknown at this time. Government's Position: Analysis The facts indicate that Taxpayer received recognition of exemption under section 501(c)(3) of the Code in ** based on information presented in its ** application and accompanying attachments. The TE/GE division of the IRS maintains an examination program for exempt organizations to determine whether they are complying with statutory requirements regarding their tax-exempt status, the proper filing of returns, and other tax reporting matters. Taxpayer filed **, an electronic notice, for the ** calendar year. Taxpayer was selected for audit to ensure that the organization's activities and operations align with their approved exempt status and to verify that the filing of ** was proper based on the organization's gross receipts. Section 6001 of the Code and the regulations thereunder impose requirements on exempt organizations to keep books and records to substantiate information required under section 6033 of the Code. Although Taxpayer filed an ** in lieu of a **, the organization is nevertheless required to produce records and other information requested by the IRS to verify that it operates in furtherance of its exempt purpose. See regulations section 1.6033-2(i)(2). As part of standard audit procedures, the IRS examiner requested basic financial records including books of account, minutes of Board meetings and records and information pertaining to Taxpayer's activities. Such records and information are needed to verify whether Taxpayer continues to be operated exclusively for one or more of the exempt purposes specified in section 501(c)(3) of the Code. Taxpayer failed to respond to repeated reasonable requests to allow the IRS to examine its books and records including its receipts, disbursements, and other items required to be kept and maintained pursuant to sections 6001 and 6033(a)(1) of the Code. Accordingly, Taxpayer has failed to meet the requirements of section 501(c)(3) of the Code and sections 1.501(c)(3)-1(a) and 1.501(c)(3)-1(c) of the regulations, in that the organization has not established that it is operated exclusively for exempt purposes and that no part of its net earnings inures to the benefit of private shareholders or individuals. See also Rev.Rul. 59-95. Conclusion: For the reasons stated above, the IRS has determined that Taxpayer is no longer exempt from Federal income tax under section 501(a) of the Code as an organization described in Code section 501(c)(3). The IRS is proposing to revoke Taxpayer's 501(c)(3) tax-exempt status effective **, the **** calendar year under examination. Please note that this Form 886-A, Explanation of Items, which is also known as the revenue agent report (RAR), constitutes an integral part of the attached 30-day letter #3618. Please refer to the attached letter #3618 for additional information including appeal rights and other options available to the organization and, the instructions for how to respond.
Internal Revenue Service - Information Release IR-2020-109 IRS reminder: June 15 tax deadline postponed to July 15 for taxpayers who live and work abroad June 2, 2020 Media Relations Office Washington, D.C. www.IRS.gov/newsroom Media Contact: 202.317.4000 Public Contact: 800.829.1040 IRS reminder: June 15 tax deadline postponed to July 15 for taxpayers who live and work abroad IR-2020-109, June 2, 2020 WASHINGTON - The Internal Revenue Service today reminded people who live and work abroad that they have until Wednesday, July 15, 2020, to file their 2019 federal income tax return and pay any tax due. The usual deadline is June 15. This extension was included in a wide range of Coronavirus-related relief announced in early April. The extension generally applies to all taxpayers who have an income tax filing or payment deadline falling on or after April 1, 2020, and before July 15, 2020. This means that anyone, including Americans who live and work abroad, nonresident aliens and foreign entities with a U.S. filing and payment requirement, have until July 15 to file their 2019 federal income tax return and pay any tax due. Visit IRS.gov/coronavirus for details. Need more time beyond July 15? Individual taxpayers who need additional time to file beyond the July 15 deadline can request a filing extension to Oct. 15 in one of two ways: - Filing Form 4868 through their tax professional, tax software or using the Free File link on IRS.gov. - Submitting an electronic payment with Direct Pay, Electronic Federal Tax Payment System or by debit, credit card or digital wallet options and selecting Form 4868 or extension as the payment type. The automatic extension of time to file will process when taxpayers pay all or part of their taxes, electronically, by the July 15 due date. An extension to file is not an extension to pay. Taxes are still due by July 15. Businesses that need additional time to file income tax returns must file Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns. Combat zone extension Members of the military qualify for an additional extension of at least 180 days to file and pay taxes if either of the following situations apply: - They serve in a combat zone or they have qualifying service outside of a combat zone or - They serve on deployment outside the United States away from their permanent duty station while participating in a contingency operation. This is a military operation that is designated by the Secretary of Defense or results in calling members of the uniformed services to active duty (or retains them on active duty) during a war or a national emergency declared by the President or Congress. Deadlines are also extended for individuals serving in a combat zone or a contingency operation in support of the Armed Forces. This applies to Red Cross personnel, accredited correspondents, and civilian personnel acting under the direction of the Armed Forces in support of those forces. Spouses of individuals who served in a combat zone or contingency operation are generally entitled to the same deadline extensions with some exceptions. Extension details and more military tax information is available in IRS Publication 3, Armed Forces' Tax Guide. IRS.gov assistance 24/7 Tax help is available 24/7 on IRS.gov. The IRS website offers a variety of online tools to help taxpayers answer common tax questions. For example, taxpayers can search the Interactive Tax Assistant, Tax Topics, Frequently Asked Questions, and Tax Trails to get answers to common questions. Go to IRS.gov/payments for electronic payment options. More information The IRS will post frequently asked questions on IRS.gov/coronavirus and will provide updates as soon as they are available. - About Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad - About Publication 519, U.S. Tax Guide for Aliens - IRS.gov/covidtaxdeadlines
Private Letter Ruling Number: 202417022 Internal Revenue Service January 30, 2024 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Release Number: 202417022 Release Date: 4/26/2024 UIL Code: 501.03-00 Date: January 30, 2024 Taxpayer ID number (last 4 digits): Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: Last day to file petition with United States Tax Court: April 29, 2024 CERTIFIED MAIL - Return Receipt Requested Dear ****: Why we are sending you this letter This is a final determination that you don't qualify fir exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3), effective **. Your determination letter dated ** is revoked. Our adverse determination as to your exempt status was made for the following reasons: You are not organized exclusively for one or more exempt purposes. Your articles of organization do not limit your purposes to one or more exempt purposes. Your articles of organization also expressly empower you to engage, as a substantial part of your activities, in activities which themselves are not in furtherance of one or more exempt purposes. Your assets are also not dedicated to an exempt purpose. Your articles of organization, as well as the operation of law, do not provide that your assets will be distributed upon dissolution for one or more exempt purposes, or to the Federal Government, or to a State or local government, for a public purpose, or will be distributed by a court to another organization to be used in such manner as in the judgment of the court will best accomplish such purposes. You are operated for the benefit of sponsors and vendors in the cannabis industry, and the provision of these benefits is substantial and more than incidental. Accordingly, you are operated for the benefit of private interests. In addition, you facilitate the distribution, sale, and possession, among other things, of a controlled substance by promoting cannabis vendors at a festival. As a result, you further a substantial non-exempt purpose. Your festival and other related activities also further substantially, if not primarily, recreational, social, and entertainment purposes. You also did not produce adequate financial records, demonstrate that you keep such records, or file a required information return or electronic notice. You have failed to establish that you are observing the conditions required for continuation of exempt status. You have not demonstrated that you are operated exclusively for one or more exempt purposes and that no part of your earnings inures to the benefit of any private shareholder or individual. Organizations that are not exempt under IRC Section 501 generally are required to file federal income tax returns and pay tax, where applicable. For further instructions, forms and information please visit IRS.gov. Contributions to your organization are no longer deductible under IRC Section 170. What you must do if you disagree with this determination If you want to contest our final determination, you have 90 days from the date this determination letter was mailed to you to file a petition or complaint in one of the three federal courts listed below. How to file your action for declaratory judgment If you decide to contest this determination, you can file an action for declaratory judgment under the provisions of Section 7428 of the Code in either: - The United States Tax Court, - The United States Court of Federal Claims, or - The United States District Court for the District of Columbia You must file a petition or complaint in one of these three courts within 90 days from the date we mailed this determination letter to you. You can download a fillable petition or complaint form and get information about filing at each respective court's website listed below or by contacting the Office of the Clerk of the Court at one of the addresses below. Be sure to include a copy of this letter and any attachments and the applicable filing fee with the petition or complaint. You can eFile your completed U.S. Tax Court petition by following the instructions and user guides available on the Tax Court website at ustaxcourt.gov/dawson.html. You will need to register for a DAWSON account to do so. You may also file your petition at the address below: United States Tax Court 400 Second Street, NW Washington, DC 20217 ustaxcourt.gov The websites of the U.S. Court of Federal Claims and the U.S. District Court for the District of Columbia contain instructions about how to file your completed complaint electronically. You may also file your complaint at one of the addresses below: US Court of Federal Claims 717 Madison Place, NW Washington, DC 20439 uscfc.uscourts.gov US District Court for the District of Columbia 333 Constitution Avenue, NW Washington, DC 20001 dcd.uscourts.gov Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory judgment under IRC Section 7428. Information about the IRS Taxpayer Advocate Service The IRS office whose phone number appears at the top of the notice can best address and access your tax information and help get you answers. However, you may be eligible for free help from the Taxpayer Advocate Service (TAS) if you can't resolve your tax problem with the IRS, or you believe an IRS procedure just isn't working as it should. TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Contact your local Taxpayer Advocate Office at: Internal Revenue Service Taxpayer Advocate Office Or call TAS at 877-777-4778. For more information about TAS and your rights under the Taxpayer Bill of Rights, go to taxpayeradvocate.IRS.gov. Do not send your federal court pleading to the TAS address listed above. Use the applicable federal court address provided earlier in the letter. Contacting TAS does not extend the time to file an action for declaratory judgment. Where you can find more information Enclosed are Publication 1, Your Rights as a Taxpayer, and Publication 594, The IRS Collection Process, for more comprehensive information. Find tax forms or publications by visiting IRS.gov/forms or calling 800-TAX-FORM (800-829-3676). If you have questions, you can call the person shown at the top of this letter. If you prefer to write, use the address shown at the top of this letter. Include your telephone number, the best time to call, and a copy of this letter. You may fax your documents to the fax number shown above, using either a fax machine or online fax service. Protect yourself when sending digital data by understanding the fax service's privacy and security policies. Keep the original letter for your records. Sincerely, Lynn A. Brinkley Director, Exempt Organizations Examinations Enclosures: Publication 1 Publication 594 Publication 892 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Date: June 21, 2023 Taxpayer ID number: Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: Address: Manager's contact information: Name: ID number: Telephone: Response due date: July 21, 2023 CERTIFIED MAIL -- Return Receipt Requested Dear **: Why you're receiving this letter We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we propose to revoke your tax-exempt status as an organization described in Internal Revenue Code (IRC) Section 501(c)(3). If you agree If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an organization described in IRC Section 501(c)(3) for the periods above. After we issue the final adverse determination letter, we'll announce that your organization is no longer eligible to receive tax deductible contributions under IRC Section 170. If you disagree 1. Request a meeting or telephone conference with the manager shown at the top of this letter. 2. Send any information you want us to consider. 3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after the meeting or after we consider the information. The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case. For your protest to be valid, it must contain certain specific information, including a statement of the facts, applicable law, and arguments in support of your position. For specific information needed for a valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn't apply now that we've issued this letter. 4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities) if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the IRS. If you're considering requesting technical advice, contact the person shown at the top of this letter. If you disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as explained above. A decision made in a technical advice memorandum, however, generally is final and binding on Appeals. If we don't hear from you If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final adverse determination letter. Contacting the Taxpayer Advocate Office is a taxpayer right The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778. Additional information You can get any of the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person shown at the top of this letter. Sincerely, For Lynn A. Brinkley Director, Exempt Organizations Examinations Enclosures: Form 6018 Form 4621-A Form 886-A Publication 892 Publication 3498 ISSUES: Does ** qualify for exemption from Federal income tax under Section 501(c)(3) of the Internal Revenue Code. FACTS: The Internal Revenue Service ("IRS") received Form 1023-EZ, Streamline Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code ("Form 1023-EZ") from ** ("** signed by ** Director, on ** ** checked the box to attested that ** have completed the Form 1023-EZ Eligibility Worksheet in the current instructions, are eligible to apply for exemption using Form 1023-EZ and have read and understand the requirements to be exempt under section 501(c)(3). In the current Instructions to Form 1023-EZ included acceptable language for the purpose clause in the organizing document: The organization is organized exclusively for charitable, religious, educational, and scientific purposes under section 501(c)(3) of the Internal Revenue Code, or corresponding section of any future federal tax code. In addition, included in the instructions was acceptable language that ** organizing document does not expressly empower ** to engage, otherwise than as an insubstantial part of ** activities, in activities that in themselves are not in furtherance of one or more exempt purposes described in section 501(c)(3): No part of the net earnings of the corporation shall inure to the benefit of, or be distributable to its members, trustees, officers, or other private persons, except that the corporation shall be authorized and empowered to pay reasonable compensation for services rendered and to make payments and distributions in furtherance of the purposes described in section 501(c)(3). No substantial part of the activities of the corporation shall be the carrying on of propaganda, or otherwise attempting to influence legislation, and the corporation shall not participate in, or intervene in (including the publishing or distribution of statements) any political campaign on behalf of or in opposition to any candidate for public office. Notwithstanding any other provision of these articles, the corporation shall not carry on any other activities not permitted to be carried on (a) by a corporation exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code, or (b) by a corporation, contributions to which are deductible under section 170(c)(2) of the Internal Revenue Code, or the corresponding section of any future federal tax code. Also included in the instructions was acceptable language for the dissolution clause in the organizing document: Upon the dissolution of this organization, assets shall be distributed for one or more exempt purposes within the meaning of section 501(c)(3) of the Internal Revenue Code, or corresponding section of any future federal tax code, or shall be distributed to the federal government, or to a state or local government, for a public purpose. ** attested that ** were incorporated on ** in the state of ** attested that ** have the necessary organizing document, that ** organizing document limits ** purposes to one or more exempt purposes within the meaning of Section 501(c)(3) of the Code, that ** organizing document does not expressly empower ** to engage in activities, other than an insubstantial part, that are not in furtherance of one or more exempt purposes, and that ** organizing document contains the dissolution provision required under Section 501(c)(3). ** also attested that ** are organized and operated exclusively to further charitable purposes. Specifically, ** attested ** will: - Refrain from supporting or opposing candidates in political campaigns in any way; - Ensure that your net earnings do not inure in whole or in part to the benefit of private shareholders or individuals; - Not further non-exempt purposes (such as purposes that benefit private interests) more than insubstantially; - Not be organized or operated for the primary purpose of conducting a trade or business that is not related to your exempt purpose(s); - Not devote more than an insubstantial part of your activities attempting to influence legislation or, if you made a Section 501(h) election, not normally make expenditures in excess of expenditure limitations outlined in Section 501(h); - Not provide commercial-type insurance as a substantial part of your activities. In addition, ** specific activities in ** Form 1023-EZ Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code is described as an alliance/advocacy organization, based on the NTEE Code. ** attested that ** are organized and operated exclusively to further the purposes to charitable and educational. ** signed Form 1023EZ did not have a description of ** activities. ** checked the boxes on ** Form 1023-EZ Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, to attest that ** have not conducted and will not conduct activities that violate these prohibitions and restrictions: ** responded no to each of the following: - Do you or will you attempt to influence legislation? - Do you or will you pay compensation to any of your officers, directors, or trustees? - Do you or will you donate fund to or pay expenses for individual(s)? - Do you or will you conduct activities or provide grant or other assistance to individual(s) or organization(s) outside the United States? - Do you or will you engage in financial transactions (for example, loans, payments, rents, etc.) with any of your officers, directors, or trustee, or any entities they own or control? - Do you or will you have unrelated business gross income of $1,000 or more during a tax year? - Do you or will you operate bingo or other gaming activities? - Do you or will you provide disaster relief? Form 1023-EZ Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, Foundation Classification, ** attested that ** normally receive more than one-third of ** support from a combination of gifts, grants, contributions, membership fees, and gross receipts (from permitted sources) from activities related to ** exempt functions and normally receive not more than one-third of ** support from investment income and unrelated business taxable income. Section 509(a)(2). ** (** was granted exemption within the meaning of Section 501(c)(3) by letter 5436 dated ** with an effective date of ** was classified as a public charity within the meaning of Section 509(a)(2). The Form 990-N Electronic Notice (e-Postcard) for tax year ending ** filed by ** was selected for examination to ensure that the organization's activities and operations were in compliance with Section 501(c)(3). An examination for tax year ending ** was opened. Initial contact letter 6031was sent with Form 4564 Information Document Request, Publication 1, Publication 5146, and Notice 609 on ** with a response due date of ** The correspondence requested a copy of any amendments to governing instruments including Articles, Constitution and By-laws, made to date, meeting minutes, financial data to reconcile the Form 990-N Electronic Notice (e-Postcard) to the organization's books and records. ** responded to the initial Form 4564 Information Document Request on ** The ** received a copy of Articles of Incorporation, Bylaws, meeting minutes and Form ** Corporate Name. The Articles of Incorporation included the following purpose clause: Charitable, Educational, and Civic There was no dissolution clause. Bylaws Notated Article ** Purpose, Objective and Scope in ** adopted bylaws: ** Purpose. The purpose of the ** is as follows: Section ** Objectives. The ** shall: ** following: Section ** shall be changed to: ** is as follows: In addition, ** of the Bylaws shall be changed to: On **, the ** called ** inquired about missing financial records and verbally asked for a list of Board of Directors. ** stated that ** would fax the requested documents to the ** by **. ** Former ** called and left a voice message on **. ** called and spoke to ** on **. ** explained that ** did not have financial records for the tax year ending ** due to COVID pandemic. ** discussed ** purpose and activities, which is to help ** celebrate the ** by the creation and organization of the ** stated that ** has financial information for tax year ending ** ** sent Letter 5968 Notification to Expand Audit to an Additional Tax Year, Form 4564 Information Document Request ** dated ** with a response due date of ** The letter included the agreed scheduled date and time of **, ** at ** for audit field visit. The attached Information Documents Request ** included a request for the following documentation: - a copy of any amendments to governing instruments including Articles, Constitution and By-laws, made to date, - general ledger for tax year ending ** - provide copy of Form 990 Return of Organization Exempt from Income Tax for tax year ending ** - Form 990 tax reconciliation, copies of all bank statements, list of Board of Directors and a brief written description of activities to include time spent and how it furthers exempt purpose. - Also requested listings and documentation of events held for and/or on the behalf of ** - provide detailed description of any business activities and/or support from, or to related organization, and provide brochures, advertisements, and public event information; and documentation pertaining to the activities and purpose of ** ** responded to Form 4564 Information Document request ** on ** by emailing a ** (outside) information application/account to access IDR response. ** called ** to explain that outside account cannot be opened due to security violations. ** stated that ** would email requested documents via ** Notated that as of ** did not send requested documents pertaining to Form 4564 Information Request Document Examination field visit An audit field visit was conducted on **, at ** at the former ** home address. In attendance: **, **, ** from IRS in ** (helping with transition and the audit) and ** Bookkeeper. An interview was conducted of the organization's activities. According to the officers, the organization promoted the ** by creating and operating the ** in ** thereby, contracting with vendors/businesses in the ** and coordinating all productions to operate a ** event. The primary activity was an ** street ** that included entertainment, food, and vendors related to the ** The vendors set up ** to introduce their business and educate about their products and the benefits of ** Provided was an advertisement of the event held in ** and ** included a flyer that stated, "** & **. ** The flyer included the following information: - Held at ** in ** at ** & ** - The ** with ** S - ** & ** is ** - RSVP at ** - Information on research **'s conducted. States that it reaches audience that are influential, ** - ** to make the plans for their ** to enjoy ** events. - Highlights: Attendees ** event page views ** on ** and earned ** - ** provided an advertisement for ** The ** details the following: New this year: The ** was not held in ** due to Covid. According to the ** there was a ** of **** See *** Information Documentation Request ** was discussed and provided was the following documentation: - A list of sponsors who donated to participate in the **** The list displayed company name, category, contact name, contact email, amounts, status, notes, more notes, contracts sent, signed contract and amount paid. The following is the list of company names, category and amount paid: See - A *** list. The list details the products and services need to conduct a **** The list includes line items, category, estimated cost, vendor, actual cost, notes, and paid. See - *** Income Statement for ** through ** and Balance Sheet for ** through **** See - Bank statements dated ***, **, and **** See - One Form W-9 Request for Taxpayer Identification Number and Certification, name: *** signed and dated on ***. See - A list of Board of Directors. See There was *** since ** does not have a facility. The ** takes place in the street that is closed off along **, between ** and **, side street outside of ** area. On ** Information Document Request ** was sent by secure email to ** with a response due date of ** The following information was requested: 1. The financial statement for tax year ending ** has an estimated cost of $ ** and an actual cost of $ **. The estimated and actual budget is $ **. Please provide documentations of amounts received from sponsors, i.e., receipts, invoices, contracts, canceled checks, and bank statements from ** through ** did not respond to Form 4564 Information Document Request ** dated ** with a response due date of ** On ** Information Document Request ** was sent by secure email to ** with a response due date of ** The following information was requested: 1. Please provide documentation on income for tax year ending ** i.e., receipts, invoices, contracts, canceled checks, and bank statements from ** through ** for the following items: ** Contribution $ Other Contribution $ Vendor Refunds $ 2. Please provide documentation on expenses incurred for tax year ending ** i.e., receipts, invoices, contracts, canceled checks, and bank statements from ** through ** for the following items: Rent $ Professional and legal fees $ Non-Employee Insurance $ Utilities $ 3. We discussed Form 990 tax return ending ** at the field audit visit, ** stated it does not have a copy of stated tax return. Per our telephone conversation, dated ** we discussed again about Form 990 tax return ending ** state it will search again to locate its copied Form 990 tax return ending ** Please provide a copy Form 990 tax return ending ** ** did not respond to Form 4564 Information Document Request ** and ** dated ** with a response due date of ** On **, ** called ** and left a voice message for a return call to inquire about access to IDR ** and ** and if organization have any questions. ** did not respond to Form 4564 Information Document Request ** and ** dated ** with a response due date of ** ** called and spoke to ** on **, inquired about response to IDR ** and ** stated that ** would fax the response on **. No response to IDR ** and ** received on **. On **, ** called ** and left a voice message for a return call. ** spoke to ** on **. Explained letter 907-A TE/GE Request to Extend Statute, Form 872 Consent to Extend the Time to Assess Tax and was sent by secured email with a response due date of **. ** spoke to ** on **, to inquire about Form 872. ** stated that ** couldn't locate passcode for secured email and needed more time to review and respond. ** gave passcode for secured email and an extension date of **. ** submitted a written response to Form 872 on **. In the written response, respectfully requested that Form 4564 Information Document Request for the period ending ** (IDR ** be withdrawn and that Form 4564 Information Document Request for the period ending ** (IDR ** is given a 30-day statute of limitation extension past its original statute date of ** ** called ** on **, **, and received a response to F872 on **. There was no success in response to Form 4564 Information Document Request ** and **** See LAW: Internal Revenue Code §501(c)(3) provides that an organization organized and operated exclusively for charitable or educational purposes is exempt from Federal income tax, provided no part of its net earnings inures to the benefit of any private shareholder or individual. Treasury Regulation Section 1.501(c)(3)-1(a) In order to be exempt under §501(c)(3) the organization must be both organized and operated exclusively for one or more of the purposes specified in the section. (Religious, charitable, scientific, testing for public safety, literary or educational). Treasury Regulation Section 1.501(c)(3)-1(a)(1) states that, in order to be exempt as an organization described in Section 501(c)(3) of the Code, an organization must be both organized and operated exclusively for one or more of the purposes specified in such section. If an organization fails to meet either the organizational test or the operational test, it is not exempt. Treasury Regulation Section 1.501(c)(3)-1(b)(4) holds that an organization is not organized exclusively for one or more exempt purposes unless its assets are dedicated to an exempt purpose. An organization's assets will be considered dedicated to an exempt purpose, for example, if, upon dissolution, such assets would, by reason of a provision in the organization's articles or operation of law, be distributed for one or more exempt purposes. Treasury Regulation Section 1.501(c)(3)-1(c)(1) provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in Section 501(c)(3) of the Code. An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose. Treasury Regulation Section 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest. Internal Revenue Code §6001 provides that every person liable for any tax imposed by this title, or for the collection thereof, shall keep such records, render such statements, make such returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Whenever in the judgment of the Secretary it is necessary, he may require any person, by notice served upon such person or by regulations, to make such returns, render such statements, or keep such records, as the Secretary deems sufficient to show whether or not such person is liable for tax under this title. Treasury Regulation Section §1.6001-1(c) provides that such permanent books and records as are required by paragraph (a) of this section with respect to the tax imposed by section 511 on unrelated business income of certain exempt organizations, every organization exempt from tax under section 501(a) shall keep such permanent books of account or records, including inventories, as are sufficient to show specifically the items of gross income, receipts, and disbursements. Such organizations shall also keep such books and records as are required to substantiate the information required by section 6033. See section 6033 and §§ 1.6033-1 through 1.6033-3. Treasury Regulation Section §1.6001-1(e) provides that the books or records required by this section shall be kept at all times available for inspection by authorized internal revenue officers or employees and shall be retained as long as the contents thereof may be material in the administration of any internal revenue law. Internal Revenue Code §6033(a)(1) provides, except as provided in section 6033(a)(2), every organization exempt from tax under section 501(a) shall file an annual return, stating specifically the items of gross income, receipts and disbursements, and such other information for the purposes of carrying out the internal revenue laws as the Secretary may by forms or regulations prescribe, and keep such records, render under oath such statements, make such other returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Rev.Rul. 59-95, 1959-1 C.B. 627, concerns an exempt organization that was requested to produce a financial statement and statement of its operations for a certain year. However, its records were so incomplete that the organization was unable to furnish such statements. The Service held that the failure or inability to file the required information return or otherwise to comply with the provisions of section 6033 of the Code and the regulations which implement it, may result in the termination of the exempt status of an organization previously held exempt, on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status. Rev.Rul. 75-384, 1975-2 C.B. 204, holds that a nonprofit organization, whose purpose was to promote world peace, disarmament, and nonviolent direct action, did not qualify for exemption under Section 501(c)(3) or (c)(4). The organization's primary activity was to sponsor antiwar protest demonstrations in which demonstrators were urged to violate local ordinances and commit acts of civil disobedience. Citing the law of trusts, the ruling stated that all charitable organizations are subject to the requirement that their purposes cannot be illegal or contrary to public policy. In Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 179 (1945), the Supreme Court held that the presence of a single non-exempt purpose, if substantial in nature, will destroy a claim for exemption regardless of the number or importance of truly exempt purposes. In Harding Hospital, Inc. v. United States, 505 F.2d 1068, 1071 (6th Cir. 1974), the court held that an organization has the burden of proving that it satisfies the requirements of the particular exemption statute. The court noted that whether an organization has satisfied the operational test is a question of fact. TAXPAYER'S POSITION: Does *** qualify for exemption from Federal income tax under Section 501(c)(3) of the Internal Revenue Code. No written position has been provided at this time. GOVERNMENT'S POSITION: Does ** qualify for exemption from Federal income tax under Section 501(c)(3) of the Internal Revenue Code. ** does not meet the requirements for recognition of tax exemption under IRC Section 501(c)(3) because it failed the organizational and operational test as described in Treas.Reg. Section 1.501(c)(3)-1(a)(1). In addition, ** did not meet the requirements of IRC section 6033, by not providing records requested during the examination. Organizational Test The Form 1023-EZ instructions included acceptable language which ** did not include in ** Articled of Incorporation. The language of ** organizing document does not sufficiently limit ** purposes to those specifically described in Section 501(c)(3) or permanently dedicate ** assets to purposes specifically described in Section 501(c)(3) as required for tax exemption as an organization described under Section 501(c)(3). ** organizing documents are not in compliance with the attestation that organizing documents must limit ** purpose to one or more exempt purposes within Section 501(c)(3); does not expressly empower ** to engage, otherwise than as an insubstantial part of ** activities, in activities that in themselves are not in furtherance of one or more exempt purposes; and that ** organizing document contains the dissolution provision required under section 501(c)(3). ** Articles of Incorporation from the state of ** indicated they were filed on ** and show purpose as charitable, educational, and civic. The word civic is not a purpose, which is not a specific purpose included in Treasury Regulation Section 1.501(c)(3)-1(a) as a purpose under IRC 501(c)(3). Additionally, the Form 1023-EZ instructions included acceptable language for a dissolution clause and ** Articles has no provisions in the document for the disposition of assets upon dissolution. Operational test ** are not operated exclusively for exempt purposes under Section 501(c)(3) of the Code. An organization can be recognized as exempt under Section 501(c)(3) of the Code only if it shows that it is both organized and operated exclusively for charitable, educational, or other exempt purposes. If an organization fails to meet either the organizational test or the operational test, it is not exempt. Treas.Reg. Section 1.501(c)(3)-1(a)(1). ** do not satisfy the operational test of Treas.Reg. Section 1.501(c)(3)-1(c). Whether an organization operates exclusively in furtherance of an exempt purpose is a question of fact. An organization seeking tax exempt status under Section 501(c)(3) of the Code carries the burden of proving that it satisfies the requirements of the statute. See Harding Hospital, 505 F.2d at 1071. Only an insubstantial portion of the activity of an exempt organization may further a nonexempt purpose. As the Supreme Court held in Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. at 283 the presence of a single nonexempt purpose, if substantial in nature, will destroy the exemption regardless of the number or importance of truly exempt purposes. The creation and operation of an ** promoting ** is not exclusively educational under section 501(c)(3) of the Internal Revenue Code. ** have not demonstrated that the ** with ** performances, beer garden, food, and ** vendors is educational. The event appears to be for entertainment purposes and not to convey an educational benefit to the community. While the organization described in Revenue Ruling 75-384 had the goal of educating the public on the benefits of topics such as world peace and disarmament, its primary means of meeting their goals precluded them from receiving exemption under section 501(c)(3). Their activities were deemed to induce or encourage the commission of criminal acts by means of civil disobedience by planning or sponsoring these events intentionally. As the ruling states, highlighting the law of trusts, all charitable trusts (and by implication all charitable organizations) are subject to the requirement that their purposes may not be illegal or contrary to public policy. While ** may currently be legal in the state ** reside, it is currently not recognized as legal by federal law. Current federal law prohibits the use of ** and ** except in limited circumstances; those limited circumstances do not include its use for ** The fact that ** state legalized distribution of ** and ** to a limited extent is not determinative because under federal law, distribution of ** is illegal. Because ** advocate and engage in activities that contravene federal law, ** serve a substantial nonexempt purpose. Despite any educational or charitable purposes, ** may plan to achieve through ** activities, ** are promoting an illegal activity under federal law. Therefore, ** are not operating for an exclusive purpose within the meaning of Section 501(c)(3) of the Code. In addition, ** is not operated in accordance with Treas.Reg. Section 1.501(c)(3)-1(c)(1) because it is operated for a substantial nonexempt private purpose. The books and records show ** are operated for the benefit of ** vendors, which are professionals and businesses (sponsors) in the ** Sponsors contributed to the planning and operation of the ** called "** These sponsors contribute to setup ** and ** at the ** to promote the interest of ** For example, ** contributed $ ** to have a regular ** near the "** Director of Sales, contributed $ ** for ** and ** Director of Sales, contributed ** to have a ** and ** The sponsors must sign a contract. ** books and records also illustrate that ** are operated to serve the private interests of ** vendors, which are professionals and businesses in the ** in contravention to Treas.Reg. Section 1.501(c)(3)-1(d)(1)(ii). Failure to provide records In accordance with the above-cited provisions of the Internal Revenue Code and Treasury Regulations under Sections 6001 and 6033, organizations recognized as exempt from federal income tax must meet certain reporting requirements. These requirements relate to the filing of a complete and accurate information return (and other required federal tax forms) and the retention of records sufficient to determine whether such entity is operated for the purposes for which it was granted tax-exempt status and to determine its liability for any unrelated business income tax. ** did not provide sufficient books and records and documentation to support financial transactions-sponsor listing for tax year ending ** such as receipts, invoices, contracts, canceled checks, and bank statements from ** through ** did not provide documentation to support the income statement and balance sheet for tax year ending ** such as receipts, invoices, contracts, canceled checks, and bank statements from ** through ** The organization stated that it filed a return for tax year ending ** but could not produce a copy of the return. IRS research indicate that ** did not file a return (Form 990 or F990-N Electronic Notice (e-Postcard)) for tax year ending ** CONCLUSION: Based on the information provided, ** do not qualify for exemption because ** are not organized and operated exclusively for purposes described in Section 501(c)(3) of the Code. ** failed the organizational test because ** organizing document purpose is not limited to purposes in Treasury Regulation Section 1.501(c)(3)-1(a). Also, since ** organizing document does not include a dissolution clause, ** assets are not dedicated to an exempt purpose as required by Treasury Regulation section 1.501(c)(3)-(b)(4). ** failed the operational test because ** are engaging in the promotion of an activity that is considered illegal by federal law. In addition, ** serve the private interests of businesses engaged in the sale of ** and ** Additionally, it is the IRS's position that the organization failed to meet the reporting requirements under Sections 6001 and 6033 to be recognized as exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code. Therefore, ** do not qualify for exemption under Section 501(c)(3) of the Code. Based on the foregoing reasons, ** does not qualify for exemption from Federal income tax under Section 501(c)(3) of the Internal Revenue Code and its tax-exempt status should be revoked. Accordingly, the organization's exempt status is revoked effective ****
Treasury Decision 9898 Internal Revenue Service 2020-25 I.R.B. 935 26 CFR §1.6033-2 T.D. 9898 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 Guidance Under Section 6033 Regarding the Reporting Requirements of Exempt Organizations AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final regulation. SUMMARY: This document contains final regulations updating information reporting regulations under section 6033 that are generally applicable to organizations exempt from tax under section 501(a) to reflect statutory amendments and certain grants of reporting relief for tax-exempt organizations required to file an annual Form 990 or 990 - EZ information return that have been made since the previous regulations were adopted. The final regulations affect tax-exempt organizations. DATES: Effective date: The final regulations contained in this document are effective on May 28, 2020. Applicability date: For dates of applicability, see §1.6033-2(l)(2). FOR FURTHER INFORMATION CONTACT: Office of the Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes) at (202) 317-3150 (not a toll-free number). SUPPLEMENTARY INFORMATION: Background Subject to various exceptions, section 6033(a)(1) of the Internal Revenue Code (Code) requires every organization exempt from taxation under section 501(a) (tax-exempt organization) to file an annual return, stating specifically the items of gross income, receipts, and disbursements, and such other information for the purpose of carrying out the internal revenue laws as the Secretary of the Treasury or his delegate (Secretary) may by forms or regulations prescribe, and keep such records, render under oath such statements, make such other returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. This requirement also applies to certain political organizations described in section 527(e)(1) (section 527 organizations). The annual information returns required under section 6033 are Forms 990, "Return of Organization Exempt From Income Tax;" 990-EZ, "Short Form Return of Organization Exempt From Income Tax;" 990-PF, "Return of Private Foundation;" and 990-BL, "Information and Initial Excise Tax Return for Black Lung Benefit Trusts and Certain Related Persons." Annual returns filed by tax-exempt organizations, section 527 organizations, nonexempt private foundations described in section 6033(d), and section 4947(a)(1) trusts (which are both treated as organizations described in section 501(c)(3) for this purpose) are information returns intended to help ensure that the filing organizations comply with applicable federal tax laws. Most information on these annual returns is available for public inspection under section 6104. Section 6033(a)(3) provides a list of organizations that are excepted from the filing requirements imposed under section 6033(a)(1). Specifically, section 6033(a)(3)(A)(ii) provides that section 6033(a)(1) shall not apply to any organization (other than a private foundation) that is described in section 6033(a)(3)(C) whose gross receipts are not normally more than $5,000 annually. The list of organizations provided in section 6033(a)(3)(C) includes certain fraternal beneficiary societies, orders or associations described in section 501(c)(8); certain organizations described in section 501(c)(3) (such as religious organizations and educational organizations described in section 170(b)(1)(A)(ii)); and organizations described in section 501(c)(1) that are corporations wholly owned by the United States or any agency or instrumentality thereof or wholly-owned subsidiaries of such corporations. Section 6033(a)(3)(B) provides discretionary authority to the Secretary to relieve any organization required to file under section 6033(a)(1) (other than supporting organizations described in section 509(a)(3)) from filing an information return where he determines that such filing is "not necessary to the efficient administration of the internal revenue laws." Section 6033(b) provides a list of items that are generally required to be furnished annually by organizations described in section 501(c)(3), "at such time and in such manner as the Secretary may by forms or regulations prescribe." The statutory list of items generally required to be furnished annually has been amended by Congress from time to time to account for additional requirements of organizations described in section 501(c)(3). For example, section 6033(b) was updated by the Taxpayer Bill of Rights 2, Public Law 104-168, in 1996 to include items in sections 6033(b)(10) (relating to taxes imposed on certain lobbying and political expenditures by organizations described in section 501(c)(3)) and 6033(b)(11) (relating to taxes imposed with respect to an organization, an organization manager, or any disqualified person under section 4958). Section 6033(g) provides that a section 527 organization that has gross receipts of $25,000 or more for a taxable year 1 shall file an annual return containing the information required by section 6033(a)(1) for organizations exempt from taxation under section 501(a). The statute authorizes the Secretary to modify the information required to be reported to require only information that is necessary for purposes of carrying out section 527 and such other information as the Secretary deems necessary to carry out the provisions of section 6033(g). ******* 1 In the case of a qualified State or local political organization described in section 527(e)(5), $25,000 is replaced by $100,000. ***** Section 6033(h) provides additional reporting requirements for controlling organizations, within the meaning of section 512(b)(13). Section 6033(h) requires controlling organizations to include on their returns any (1) interest, annuities, royalties, or rents received from each controlled entity (within the meaning of section 512(b)(13)), (2) any loans made to each such controlled entity, and (3) any transfers of funds between such controlling organization and each such controlled entity. Section 6033(k) provides additional reporting requirements for sponsoring organizations described in section 4966(d)(1). Section 6033(k) requires each such organization to report on its annual return (1) the total number of donor advised funds (as defined in section 4966(d)(2)) it owns at the end of such taxable year, (2) the aggregate value of assets held in such funds at the end of such taxable year, and (3) the aggregate contributions to and grants made from such funds during such taxable year. Section 6033(l) provides additional reporting requirements for supporting organizations described in section 509(a)(3). Section 6033(l) requires each supporting organization to report on its annual return: (1) The supported organizations (as defined in section 509(f)(3)) with respect to which such organization provides support; (2) whether the organization meets the requirements of clause (i), (ii), or (iii) of section 509(a)(3)(B); and (3) a certification that the organization meets the requirements of section 509(a)(3)(C). The general rule regarding confidentiality of returns is found in section 6103, which provides that returns and return information shall be confidential, and, except as authorized by the Code, no person having access to this information shall disclose any return or return information obtained by that person in any manner. Section 6104 provides an exception to the general rule regarding confidentiality of returns. In general, under section 6104(b), the Secretary must make the annual returns filed under section 6033 available to the public. However, section 6104(b) does not authorize the Secretary to disclose to the public the name or address of any contributor to any tax-exempt organization except a private foundation (as defined in section 509(a), including a trust described in section 4947(a)(1) that is treated as a private foundation) or a section 527 organization. Section 301.6104(b)-1(b)(2) provides that although the names and addresses are not to be disclosed, the amounts of contributions to an organization shall be made available for public inspection unless the disclosure of such information can reasonably be expected to identify any contributor. In addition to the required disclosure of annual returns by the Secretary, section 6104(d) and §301.6104(d)-1 require certain tax-exempt organizations to provide their annual information returns to a member of the public upon request. Similar to the restrictions on disclosing contributor information placed on the Secretary by section 6104(b), section 6104(d)(3)(A) provides that an organization, other than a private foundation or a section 527 organization, is not required to disclose the names and addresses of its contributors. The Treasury Regulations in effect prior to this Treasury Decision (prior regulations), which remain largely unchanged, reflected many of the statutory requirements of section 6033. Consistent with section 6033(a)(1), §1.6033-2(a)(1) of the regulations provides that "except as provided in section 6033(a)(3) and paragraph (g) [of §1.6033-2], every organization exempt from taxation under section 501(a) shall file an annual information return specifically setting forth its items of gross income, gross receipts and disbursements, and such other information as may be prescribed in the instructions, issued with respect to the return." Although the information to be reported for any particular tax year is set forth in the forms and instructions for each such year, §1.6033-2(a)(2)(ii) of the regulations also provides a list of "information generally required to be furnished by an organization exempt under section 501(a)" on the annual return, which generally tracks section 6033(b). 2 However, the list in the prior regulations had not been updated to reflect certain information that the statute generally requires to be reported because the statute had been amended following the original issuance of the regulations. Specifically, items in sections 6033(b)(10) (relating to taxes imposed on certain lobbying and political expenditures by organizations described in section 501(c)(3)) and 6033(b)(11) (relating to taxes imposed with respect to an organization, an organization manager, or any disqualified person under section 4958) were not reflected in the prior regulations. ***** 2 The list in the regulations includes, but is not limited to, gross income for the year; dues and assessments from members and affiliates for the year; expenses incurred within the year attributable to gross income; disbursements (including prior years' accumulations) made within the year for the purposes for which it is exempt; a balance sheet showing its assets, liabilities, and net worth as of the beginning and end of such year; the total of the contributions, gifts, grants and similar amounts received by it during the taxable year; the names and addresses of all officers, directors, or trustees (or any person having responsibilities or powers similar to those of officers, directors or trustees) of the organization; and certain compensation and payment information. See §1.6033-2(a)(2)(ii). ***** Two provisions of the prior regulations expanded upon the statute with regard to the reporting of certain contributor information. First, section 6033(b)(5) requires organizations described in section 501(c)(3) generally to provide on the annual information return filed with the IRS the names and addresses of persons who contribute $5,000 or more during the taxable year. Section 1.6033-2(a)(2)(ii)(F) of the prior regulations had extended this requirement beyond section 501(c)(3) organizations to all organizations exempt from taxation under section 501(a). Second, §1.6033-2(a)(2)(iii)(D) of the prior regulations provided that organizations described in section 501(c)(7) (social clubs), section 501(c)(8) (fraternal beneficiary societies), or section 501(c)(10) (domestic fraternal societies) generally must report the name of each person who contributes more than $1,000 to be used exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals. Incorporating the statutory filing exceptions of section 6033(a)(3), §1.6033-2(g)(1) provides a list of organizations that are not required to file an annual return under section 6033(a)(1). Within that list, §1.6033-2(g)(1)(iii) previously provided that certain specified organizations described in section 6033(a)(3)(C) whose gross receipts are generally not more than $5,000 annually are not required to file the return required under section 6033(a)(1). Further, §1.6033-2(g)(6) provides that the Commissioner may relieve any organization or class of organizations (other than a supporting organization described in section 509(a)(3)) from filing, in whole or in part, the annual return required under section 6033 if the Commissioner "determines that such returns are not necessary for the efficient administration of the internal revenue laws." Accordingly, other than with regard to supporting organizations, section 6033 and the regulations under section 6033 provide the Commissioner with broad discretionary authority to determine what information must be reported and to grant relief, in whole or in part, from the annual filing requirements of tax-exempt organizations if the Commissioner determines that the information is not necessary for the efficient administration of the internal revenue laws. For decades, the Commissioner has exercised discretion under section 6033(a)(3)(B) and §1.6033-2(g)(6) to relieve organizations of filing requirements under section 6033 through subregulatory guidance such as revenue procedures and annual information return instructions including, for example, Rev. Proc. 95-48, 1995-2 C.B. 418, which grants reporting relief for governmental units and affiliates of governmental units, and Rev.Proc. 96-10, 1996-1 C.B. 577, which relieves from a filing requirement under section 6033(a) certain organizations that are operated, controlled, or supervised by one or more churches, integrated auxiliaries, or conventions or associations of churches. (Both revenue procedures are discussed further in Part VI of the Summary of Comments and Explanation of Provisions section of this preamble.) Revenue Procedure 83-23, 1983-1 C.B. 687, represents another exercise of this discretion. In that revenue procedure, the Department of the Treasury (Treasury Department) and the IRS increased to $25,000 the minimum amount of gross receipts normally required to be received in a year by an organization exempt under section 501(a) to trigger a filing requirement under section 6033(a). That revenue procedure also expanded the group of tax-exempt organizations not required to file an annual information return due to a gross receipts threshold beyond those listed in section 6033(a)(3)(C). Revenue Procedure 2011-15, 2011-3 I.R.B. 322, further increased this gross receipts threshold amount to $50,000 for most organizations exempt under section 501(a). 3 Revenue Procedure 2011-15 also relieved most foreign organizations and organizations formed in a United States possession from a filing requirement under section 6033(a) if their gross receipts from sources within the United States do not exceed the $50,000 threshold and if they have no significant activity (including lobbying and political activity and the operation of a trade or business, but excluding investment activity) in the United States. ***** 3 An organization that is not required to file an annual return by virtue of Rev. Proc. 2011-15 must submit a Form 990-N e-Postcard annually in electronic format as described in section 6033(i)(1). Rev. Proc. 2011-15, section 3.03. ***** Similarly, consistent with past exercises of authority under section 6033 and the prior regulations, the Treasury Department and the IRS issued Rev. Proc. 2018-38, 2018-31 I.R.B. 280, granting tax-exempt organizations required to file the Form 990 or Form 990-EZ, other than organizations described in section 501(c)(3), relief from reporting the names and addresses of contributors on Schedules B, "Schedule of Contributors," filed with Form 990 or 990-EZ (or completing the similar portions of Part IV of the Form 990-BL). Revenue Procedure 2018-38 also provided that organizations described in sections 501(c)(7), (8), or (10) need not provide the names and addresses of persons who contributed more than $1,000 during the taxable year to be used for exclusively charitable purposes on their annual information returns required under section 6033. Revenue Procedure 2018-38 did not affect the information required to be reported on Forms 990, 990-EZ, or 990-PF by organizations described in section 501(c)(3) (which for purposes of section 6033 include nonexempt charitable trusts described in section 4947(a)(1) and nonexempt private foundations described in section 6033(d)) or section 527 organizations. On July 30, 2019, the United States District Court for the District of Montana set aside Rev. Proc. 2018 - 38 on procedural grounds because, in the court's view, the notice and comment procedures of the Administrative Procedure Act applied and Rev. Proc. 2018 - 38 had not been subject to such notice and comment. See Bullock, et al. v. IRS, 401 F.Supp.3d 1144 (D. Mont. Jul. 30, 2019). However, the court emphasized that its ruling did not implicate the merits of the revenue procedure and that "the substance" of the Commissioner's ultimate decision on reporting the names and addresses of contributors "remains subject to the Commissioner's discretion." Id. at 1154, 1159. On September 10, 2019, the Treasury Department and the IRS published a notice of proposed rulemaking (REG-102508-16) in the Federal Register (84 FR 47447) containing proposed regulations under section 6033 (2019 proposed regulations). The Treasury Department and the IRS received 8,387 written and electronic comments responding to the 2019 proposed regulations. Comments are available at www.regulations.gov or upon request. A public hearing on the 2019 proposed regulations was held on February 7, 2020. After consideration of all comments received on the 2019 proposed regulations and the testimony presented at the public hearing, this Treasury Decision adopts the proposed regulations with minor modifications, as described in the Summary of Comments and Explanation of Provisions. Summary of Comments and Explanation of Provisions I. Overview The 2019 proposed regulations proposed to modify the regulations under section 6033 to align them with certain statutory amendments to section 6033 that had not previously been reflected in the regulations, and to update them to encompass certain instances in which the Commissioner has previously exercised discretion under the statute and regulations to relieve organizations, in whole or in part, from the filing requirements set forth in section 6033 or in the regulations issued under section 6033. Specifically, the proposed changes included the following: (1) Adding items listed in section 6033(b)(10) and (11), as applicable, to the list of items generally required to be reported and adding other statutory reporting requirements for controlling organizations, sponsoring organizations, and supporting organizations; (2) amending the gross receipts threshold (with an additional requirement for foreign organizations and United States possession organizations) that triggers a filing requirement under section 6033 for tax-exempt organizations (other than private foundations and supporting organizations); (3) clarifying that section 527 organizations with gross receipts greater than $25,000 generally are subject to the reporting requirements under section 6033(a)(1) as if they were exempt from taxes under section 501(a); and (4) specifying that only organizations described in section 501(c)(3) and section 527 organizations generally would continue to be required to provide names and addresses of contributors on their Forms 990, Forms 990-EZ, and Forms 990-PF. The following sections address these proposed changes in more detail, summarize the comments received on the proposed changes, provide the responses of the Treasury Department and the IRS to the comments, and describe the final regulation adopted in this Treasury Decision. II. Items Required in Annual Information Returns In the 2019 proposed regulations, the Treasury Department and the IRS proposed to amend §1.6033-2(a)(2)(ii) by adding two new provisions to reflect information to be furnished annually that had been added to section 6033(b) but that had not yet been added to the list in the regulations of items generally required to be reported on an organization's annual information return. These items of information are listed in section 6033(b)(10) (relating to taxes imposed on certain lobbying and political expenditures by organizations described in section 501(c)(3)) and 6033(b)(11) (relating to taxes imposed with respect to an organization, an organization manager, or any disqualified person on any excess benefit transaction under section 4958). In addition, a cross-reference to §1.6033-2(a)(1) was proposed to be added to the introductory sentence of §1.6033-2(a)(2)(ii). The Treasury Department and the IRS also proposed to incorporate into the regulations the statutory reporting requirements found in section 6033(h) for controlling organizations (as defined in section 512(b)(13)), section 6033(k) for sponsoring organizations (as defined in section 4966(d)(1)), and section 6033(l) for supporting organizations (as defined in section 509(a)(3)). The Treasury Department and the IRS did not receive any comments on these additions to §1.6033-2. This Treasury Decision adopts these provisions from the 2019 proposed regulations without change. III. Gross Receipts Filing Threshold Consistent with the discretionary authority granted by section 6033(a)(1)(B), the Treasury Department and the IRS previously determined that the efficient administration of the tax laws does not require the filing of returns by organizations that are exempt under section 501(a) (other than private foundations and supporting organizations) that normally have less than $50,000 in gross receipts annually, except for foreign organizations and organizations formed in a United States possession that have significant activity (including lobbying and political activity and the operation of a trade or business, but excluding investment activity) in the United States. See Rev. Proc. 2011-15. In the 2019 proposed regulations, the Treasury Department and the IRS proposed to amend §1.6033-2(g)(1)(iii) to reflect the $50,000 gross receipts filing threshold currently in effect, rather than the $5,000 gross receipts threshold found in section 6033(a)(3)(A)(ii), and the application of the $50,000 threshold to organizations other than those listed in section 6033(a)(3)(C). The Treasury Department and the IRS received two comments expressing support for amending the regulations to reflect the $50,000 threshold and one comment stating, without explaining why, that organizations with annual gross receipts normally not more than $50,000 but more than $25,000 ought to be required to file a return. As discussed earlier in this section III, the Treasury Department and the IRS increased the filing threshold from $25,000 to $50,000 in 2011 based on a consideration of the needs of tax administration. The Treasury Department and the IRS continue to consider the $50,000 threshold to strike an appropriate balance between the efficient use of resources for both tax-exempt organizations and the IRS, and ensuring compliance with the tax laws by tax-exempt organizations. Organizations with gross receipts below the threshold must continue to file Form 990-N under section 6033(i). Accordingly, the final regulations provide that the gross receipts threshold for all organizations (other than private foundations and supporting organizations) formed in the United States is $50,000. The final regulations also incorporate the previously granted relief from the filing requirement under section 6033(a) for foreign organizations and organizations formed in a United States possession (other than private foundations and supporting organizations) that is reflected in Rev. Proc. 2011-15. In the 2019 proposed regulations, the Treasury Department and the IRS also proposed to amend §1.6033-2(g)(6) to clarify that the Commissioner has authority to provide further relief (including possible further increases in filing thresholds) through forms, instructions to forms, or guidance published in the Internal Revenue Bulletin. The Treasury Department and the IRS did not receive any comments on this proposed clarification, and the final regulations incorporate the language as proposed. IV. Clarifying the Treatment of Section 527 Organizations In the 2019 proposed regulations, the Treasury Department and the IRS proposed to add §1.6033-2(a)(5) to state the current requirement that section 527 organizations, subject to the filing exceptions provided by section 6033(g)(3) or as permitted under section 6033(g)(4), follow the reporting requirements under section 6033(a)(1) in the same manner as tax-exempt organizations, except to the extent that the Commissioner revises those requirements as appropriate to carry out the purposes of section 527. Proposed §1.6033-2(a)(5) would also state the current requirement that section 527 organizations, like organizations described in section 501(c)(3), must continue to report the names and addresses of certain contributors on the section 527 organizations' annual Forms 990 or Forms 990-EZ. The Treasury Department and the IRS did not receive comments on this clarification of the treatment of section 527 organizations in §1.6033-2(a)(5). This Treasury Decision adopts these provisions from the 2019 proposed regulations without change. The Treasury Department and the IRS received one comment requesting that all qualified state and local political organizations described in section 527(e)(5) be exempted from annual filing requirements. Section 6033(g)(1) generally requires a section 527 organization to file an annual information return if it has annual gross receipts of $25,000 or more for the taxable year (subject to mandatory exceptions in section 6033(g)(3)) but provides a higher threshold of $100,000 or more of gross receipts for qualified state and local political organizations. Under section 6033(g)(4), the Secretary has discretionary authority to relieve any section 527 organization from filing an information return if the Secretary determines that such filing is "not necessary to the efficient administration of the internal revenue laws." Because the filing threshold for qualified state and local political organizations under section 6033(g)(1) already is higher than the threshold that applies to organizations exempt from tax under section 501(a), the Treasury Department and the IRS do not adopt this suggestion. V. Reporting of Names and Addresses of Contributors As stated in the 2019 proposed regulations, section 6033 does not specify that the names and addresses of contributors to tax-exempt organizations, other than those described in section 501(c)(3), be reported on annual information returns. Consistent with the Secretary's broad discretion under section 6033(a) to set forth information reporting requirements ''for the purpose of carrying out the internal revenue laws... by forms or regulations,'' § 1.6033-2(a)(2)(ii) lists items that are generally required to be included in the annual filings of organizations exempt under section 501(a). In the 2019 proposed regulations, the Treasury Department and the IRS proposed to amend the regulations to specify that the need to provide the names and addresses of substantial contributors will generally apply only to tax-exempt organizations described in section 501(c)(3), and to remove reference to the provision of names of certain contributors to organizations described in sections 501(c)(7), (8), and (10). The proposed regulations did not alter the existing requirement contained in Schedule B of the Form 990 and 990-EZ for tax-exempt organizations to report annually the amounts of contributions from each substantial contributor, or the existing requirement to maintain the names and addresses of substantial contributors should the IRS need this information on a case-by-case basis. In proposing to exercise this discretion, the Treasury Department and the IRS sought to balance the IRS's need for the information for tax administration purposes against the costs and risks associated with reporting of the information. The majority of the comments the Treasury Department and the IRS received in response to the 2019 proposed regulations concerned the general requirement for reporting of names and addresses of substantial contributors. 4 This information is reported on Schedule B, "Schedule of Contributors," to Forms 990, 990-EZ, or 990-PF. The next several sections of this preamble summarize and respond to those comments. ***** 4 No comments were received specifically addressing the removal of the requirement to provide the names of certain contributors to organizations described in sections 501(c)(7), (8), and (10). However, most comments did not distinguish between types of tax-exempt organizations affected by the proposed changes, and some of the issues discussed are applicable to the specific change to reporting requirements of organizations described in sections 501(c)(7), (8), and (10). ***** a. IRS Need for Annual Reporting of Names and Addresses of Substantial Contributors for Tax Administration Purposes Some commenters favoring the proposed changes stated that the IRS does not need the names and addresses of substantial contributors to tax-exempt organizations to which the relief extends to be reported annually, and expected that other information contained in Forms 990 or 990-EZ would be adequate for administration of the Code. Commenters favoring the proposed changes also noted that the names and addresses are still required to be maintained and the IRS can obtain that information on examination. These commenters asserted that such an approach is more appropriately tailored to the IRS's need for the information than a blanket reporting requirement. Several other commenters opposing the proposed changes asserted instead that the IRS would not be as efficient in enforcing federal tax laws without direct access to the names and addresses of substantial contributors to the tax-exempt organizations affected by the proposed rule. These commenters asserted that information contained elsewhere in Forms 990 and 990-EZ were not adequate substitutes for information contained in Schedule B for purposes of evaluating private benefit or enforcing political activity limits on organizations described in section 501(c)(4). Some commenters also asserted that obtaining contributor names and addresses on examination was not a sufficient substitute for having the information on hand for the following reasons. Some commenters suggested that requesting the information on examination could be a "tip-off" to the organization that it is under additional scrutiny, leading the organization to hide assets and destroy or falsify evidence. Some commenters suggested that Schedule B contains information that helps the IRS initially determine whether or not it should conduct an examination. And some commenters suggested that requesting information on an ad hoc basis is not efficient for the IRS or affected tax-exempt organizations. The concerns expressed by commenters opposing the proposed changes are misplaced. As explained in the preamble to the 2019 proposed regulations, the IRS does not need the names and addresses of substantial contributors to tax-exempt organizations not described in section 501(c)(3) to be reported annually on Schedule B of Form 990 or Form 990-EZ in order to administer the internal revenue laws. For the specific purpose of evaluating possible private benefit or inurement or other potential issues relating to qualification for exemption, the IRS can obtain sufficient information from other elements of the Form 990 or Form 990-EZ and can obtain the names and addresses of substantial contributors, along with other information, upon examination, as needed. In light of the inefficiencies involved in collecting, maintaining, and redacting this information if it were reported annually, the Treasury Department and the IRS do not agree with comments suggesting that requiring affected tax-exempt organizations to provide name and address information of substantial contributors upon examination is less efficient for the IRS and affected tax-exempt organizations. Moreover, as noted in the proposed regulations, the primary utility of the names and addresses of substantial contributors arises during the examination process. While some commenters suggested that such information could be used before an examination to determine whether an examination is warranted, the IRS takes various factors into account when deciding whether to select a case for examination, and the IRS's process for selection would not be affected by this change. Since examinations are initiated by prescribed correspondence, the taxpayer will already know of the IRS's compliance interest before receiving the request for the particular information. Therefore, the Treasury Department and the IRS have determined that the annual collection of the names and addresses of substantial contributors to tax-exempt organizations, other than organizations described in section 501(c)(3), is not necessary for the efficient administration of the internal revenue laws. Instead, requiring all tax-exempt organizations to report the amounts of contributions from each substantial contributor on the Schedule B of the Form 990 and 990-EZ, as well as requiring them to maintain the names and addresses of substantial contributors should the IRS need this information on a case-by-case basis, is sufficient for the efficient administration of the Code. b. Privacy and Risk of Disclosure Commenters supporting the proposed changes relating to the furnishing of certain contributors' names and addresses expressed general concerns about the privacy of contributors to tax-exempt organizations. While the IRS is statutorily required to maintain the confidentiality of contributor names and addresses pursuant to section 6104(b), some commenters expressed concern that such information may accidentally be disclosed or that IRS systems could be breached. Some commenters also discussed the risk of disclosure by state authorities to the extent contributor names and addresses are shared by the IRS with an appropriate state officer consistent with section 6104(c). A few commenters also expressed concern that politically or ideologically motivated IRS employees could leak contributor names and addresses or select certain contributors for additional tax scrutiny. In contrast, however, some commenters, who opposed the proposed changes eliminating the requirement to report certain contributor names and addresses, asserted that the risk of disclosure is insubstantial. The IRS takes seriously its duty to protect confidential information as required by section 6103 and to enforce the internal revenue laws with integrity and fairness to all. However, reporting the names and addresses of substantial contributors on an annual basis poses a risk of inadvertent disclosure of information that is not open to public inspection because information on Schedule B generally must be redacted from an otherwise disclosable information return. The IRS has experienced incidents of inadvertent disclosure and has taken other steps to reduce future occurrences of such disclosures. By removing the general requirement to report names and addresses of substantial contributors to tax-exempt organizations not described in section 501(c)(3), the final regulations further reduce the risk of inadvertent disclosure of names and addresses of contributors for such organizations. Without a tax administration need to collect this information on an annual basis, the Treasury Department and the IRS have determined this change in affected tax-exempt organizations' reporting obligations furthers the steps already taken to protect confidential taxpayer information. c. Harassment of Contributors and Related Constitutional Concerns Commenters supporting the proposed change also discussed, often in connection with the risk-of-disclosure issue, the concern that supporters of certain causes or organizations face possible reprisals (such as harassment, threats of violence, or economic retribution) if their status as contributors is revealed publicly. Additional commenters discussed the concern that fear of exposure and fear of reprisal may have a "chilling effect," discouraging or deterring potential contributors from giving to certain tax-exempt organizations and reducing public participation in organizations benefiting social welfare. Many of these commenters believed this "chilling effect" implicates constitutional rights such as freedom of speech and freedom of association. Other commenters opposing the proposed change asserted that requiring reporting to the IRS of substantial contributors' names and addresses is constitutional, citing federal appellate court decisions upholding state laws requiring that charitable organizations provide state regulators with copies of unredacted Schedules B. 5 ***** 5 Citizens United v. Schneiderman, 882 F.3d 374 (2d Cir. 2018); Center for Competitive Politics v. Harris, 784 F.3d 1307 (9th Cir. 2015). ***** The Treasury Department and the IRS note that the names and addresses of substantial contributors provided to the IRS are generally required to be kept confidential in accordance with section 6103. By removing the general requirement to report annually names and addresses of substantial contributors to organizations exempt under section 501(a) but not described in section 501(c)(3), the final regulations reduce the risk of inadvertent disclosure of names and addresses of contributors for such organizations and thereby address concerns expressed by some commenters regarding potential adverse consequences of any such public disclosures. d. Compliance Burden on Affected Tax-Exempt Organizations and Associated Costs on the IRS Some commenters supporting the proposed changes to the general requirement to report names and addresses of substantial contributors mentioned an expectation that the changes would reduce the compliance burden on affected tax-exempt organizations, allowing such organizations to spend more time and resources on their missions. Commenters also expressed an expectation that the proposed changes would reduce the burden on the IRS associated with the redaction of information as required by section 6104(b). Other commenters opposed the proposed changes regarding the general requirement to report names and addresses of substantial contributors, stating that both the compliance costs associated with reporting contributor names and addresses and the IRS burden associated with redacting such information are insubstantial. Some commenters further argued that the proposed changes would lead to an increase in compliance costs for tax-exempt organizations as individual states, no longer able to rely on Schedule B information obtained from the IRS, would develop their own disparate reporting requirements. The Treasury Department and the IRS agree with certain commenters that limiting the general requirement to report names and addresses of substantial contributors will reduce costs with respect to federal tax compliance. While it is true that all tax-exempt organizations will continue to be required to maintain records regarding their substantial contributors, removing the annual reporting requirement will lessen their overall compliance burden. In addition, this change will obviate the need for an affected tax-exempt organization to redact name and address information if the tax-exempt organization must provide its Schedule B to a member of the public if requested under section 6104(b). Particularly for smaller tax-exempt organizations with limited resources, few dedicated staff, and less access to advisors regarding the rules governing tax-exempt organizations eliminating this requirement will be beneficial. Without a tax administration need for annually reporting name and address information, the Treasury Department and the IRS determined that it is valuable to save tax-exempt organizations the administrative burdens of reporting and redacting it. While some commenters have suggested that some states may choose to impose their own reporting requirements, thereby increasing the compliance burden on tax-exempt organizations, the Treasury Department and the IRS expect that each state can determine the appropriateness of the burdens it may impose in light of its own tax administration needs. Similarly, the potential burden on the IRS associated with redacting Schedule B information is lessened when fewer organizations are required to report names and addresses on Schedule B. This reduction in burden, when combined with the lack of tax administration need discussed earlier in this preamble, supports specifying that the need to provide the names and addresses of substantial contributors will generally apply only to organizations described in section 501(c)(3), as provided in the statute. e. Extension of Relief to Organizations Described in Section 501(c)(3) A few commenters supported the proposed changes, but also requested that the Treasury Department and the IRS extend the relief from reporting the names and addresses of substantial contributors to organizations described in section 501(c)(3). One commenter asserted that the IRS had exceeded its statutory authority by requiring the reporting of the names and addresses of substantial contributors to organizations described in section 501(c)(3) (other than private foundations). That commenter contends that the Secretary only has the authority to request the names and addresses of substantial contributors as that term is defined in section 507(d)(2). This definition, according to the commenter, would limit the existence of substantial contributors solely to contributors to private foundations and would require that a contributor have provided more than two percent of the total contributions to the organization over its lifetime. The Treasury Department and the IRS do not agree with this interpretation of section 6033(b). Section 507(d)(2) specifically limits the application of the definition of "substantial contributor" found therein to section 507(d)(1). Section 6033 does not incorporate the definition of substantial contributor found in section 507(d)(2) and provides the Secretary with broad discretion to prescribe information to be collected on an annual return that is necessary for carrying out the purposes of the Code. Accordingly, consistent with section 6033(b), the Treasury Department and the IRS have the authority to continue to require that organizations described in section 501(c)(3) report the names and addresses of substantial contributors on Schedule B. The Treasury Department and the IRS decline to extend the relief from reporting names and addresses of substantial contributors to organizations described in section 501(c)(3) in this final regulation. f. Campaign Finance Enforcement Commenters opposing the proposed changes to the general requirement to report names and addresses of substantial contributors commonly invoked concerns about the use of tax-exempt entities, including by special interests, to anonymously influence elections and enable improper interference in U.S. elections. Commenters asserted that the proposed changes would lead to an increase in the flow of money into U.S. elections through organizations described in sections 501(c)(4) and (6). Several commenters also suggested that the changes would make it more difficult to detect foreign spending or federal contractor spending on U.S. elections in violation of federal campaign finance laws. One commenter discussed 52 U.S.C. 30111(f), asserting that Congress had directed the IRS to "consult and work with" the Federal Election Commission (FEC) on rulemakings regarding campaign finance matters. Other commenters supporting the proposed changes stated that there are other, better measures in place to track foreign spending on U.S. elections than Schedule B and that it is unlikely that contributors who are intending to violate campaign finance laws will use foreign addresses or otherwise make clear their violation in a manner subject to reporting to the IRS on Schedule B. Commenters also stated that the IRS generally cannot share Schedule B information with the agencies charged with enforcing campaign finance laws. As stated in the preamble to the 2019 proposed regulations, the Treasury Department and the IRS reiterate that Congress has not authorized the IRS to enforce campaign finance laws. Schedule B reflects the enforcement needs related to the Code, not the campaign finance laws. Furthermore, section 6103 generally prohibits the IRS from disclosing any names and addresses of organizations' substantial contributors to federal agencies for non-tax investigations, including campaign finance matters, except in narrowly prescribed circumstances. 6 ***** 6 The confidentiality and disclosure of tax returns and return information in both tax and non-tax investigations is governed by section 6103. Section 6103 contains several provisions authorizing the disclosure of returns and return information to Federal law enforcement agencies under prescribed circumstances after meeting specified procedural requirements. For example, these include disclosures to DOJ for the investigation and prosecution of non-tax Federal crimes via an ex parte court order or via a request from the highest ranking official of a Federal agency or the highest officials within DOJ and in the course of an investigation after referral to and approval by DOJ as a Grand Jury Tax Investigation. In the context of states, sections 6103 and 6104 authorize disclosure of certain returns and return information to the states for specified purposes. Generally, section 6103(d) authorizes disclosure to state tax agencies for state tax administration purposes only, while section 6104(c) permits disclosure of return information, in the case of organizations other than those described in section 501(c)(1) or (3), to an appropriate state officer to the extent necessary in administering state laws relating to the solicitation or administration of charitable funds or charitable assets of such organizations, if certain requirements are met. Some states may also independently obtain contributor information from the organizations. ***** With regard to coordination with the FEC, section 30111(f) of title 52 does not require the IRS to consult with the FEC on regulations issued by the IRS under the Code. Instead, section 30111 of title 52 authorizes the FEC to prescribe rules, regulations, and forms to carry out the provisions of the Federal Election Campaign Act and requires the FEC to consult with the IRS when "prescribing such rules under this section." This final regulation is prescribed by the IRS, not by the FEC; and, it is prescribed under section 7805 of title 26, not section 30111 of title 52. Finally, the Treasury Department and the IRS note that the change in reporting of the names and addresses of substantial contributors will have no effect on information currently available to the public. Sections 6103 and 6104 prohibit the IRS from publicly disclosing the names and addresses of contributors to tax-exempt organizations (other than private foundations). With respect to such tax-exempt organizations, any names and addresses of substantial contributors on Schedule B are not made public and disclosure restrictions generally prohibit making such information available for use by other agencies for their enforcement purposes. 7 ***** 7 See note 6. ***** g. Impact on States Some commenters opposing the proposed changes discussed the impact on the state taxing and other authorities that may use Schedule B information shared by the IRS pursuant to sections 6103(d) or 6104(c). 8 In these comments, which included a comment from the attorneys general of nineteen states 9 and the District of Columbia, commenters discussed the states' use of Schedule B information for purposes related to state tax administration, enforcement of state-level campaign finance law, and enforcement of state-level consumer protection law. Commenters claimed that no longer receiving Schedule B information from the IRS would require a reorientation of processes that would cost the states time and money. A few commenters also referenced a history of cooperation between the IRS and state tax regulators in this area. ***** 8 Note that some commenters are unclear as to how the states obtained the Schedule B information. Information that a state obtains directly from a tax-exempt organization as part of its state filing is not information disclosed by the IRS under either section 6103 or section 6104. 9 The nineteen attorneys general represented the states of New Jersey, New York, California, Connecticut, Colorado, Delaware, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Minnesota, Nevada, New Mexico, Oregon, Pennsylvania, Rhode Island, and Virginia. ***** Other commenters in favor of the proposed changes asserted that states are not allowed to use Schedule B information for non-tax purposes and that states, in any event, did not need Schedule B information for the efficient administration of state tax laws. A comment from eleven state attorneys general 10 asserted that states would not be negatively impacted by the proposed rule because they do not rely on the Schedule B data for enforcement efforts and can receive the information through targeted examinations. ***** 10 The eleven attorneys general represented the states of Arizona, Alabama, Alaska, Indiana, Kansas, Louisiana, Oklahoma, South Carolina, Tennessee, Texas, and West Virginia. ******* The Treasury Department and the IRS reiterate that the Code limits the purposes for which states may use returns or return information obtained from the IRS. When states receive returns or return information under section 6103(d), the use of that information is limited to the administration of state tax laws. When states receive returns or return information under section 6104(c), the use of that information is limited by statute to administering state laws relating to the solicitation or administration of charitable funds or charitable assets of such organizations. Use of returns or return information received from the IRS under these sections for purposes other than those listed above (for example, for the enforcement of campaign finance laws or consumer protection laws) is not consistent with states' authorized use under sections 6103(d) and 6104(c). While some states may use name and address information for those authorized purposes, the divergent comments from state attorneys general indicate that the desire to obtain such information, and the purpose for doing so, may differ from state to state. To the extent that any state determines that the burdens of collecting and maintaining such information are justified by its own needs, such a state is free to require reporting of such information to the state and to maintain the information at the state's own expense. h. Conclusion As explained in the preamble to the 2019 proposed regulations, in exercising the discretion to relieve tax-exempt organizations not described in section 501(c)(3) of the obligation to annually report the names and addresses of substantial contributors, the Treasury Department and the IRS seek to balance the IRS's need for the information for tax administration purposes against the burden and risks associated with reporting of the information. The Treasury Department and the IRS have concluded that the IRS does not need the names and addresses of substantial contributors to tax-exempt organizations not described in section 501(c)(3) to be reported annually on Schedule B of Form 990 or Form 990-EZ in order to administer the internal revenue laws. In light of the risks and burden associated with requiring the annual reporting of such information, this Treasury Decision revises the regulations under section 6033 to remove the general requirement for tax-exempt organizations not described in sections 501(c)(3) or 527 to report annually the names and addresses of substantial contributors. This Treasury Decision revises §1.6033-2(a)(2)(ii)(F) to provide that organizations described in section 501(c)(3) generally are required to provide names and addresses of contributors of more than $5,000 on their Forms 990, 990-EZ, and 990-PF. Similarly, §1.6033-2(a)(2)(iii)(D) is revised to remove the requirement to provide the names of contributors who contribute over $1,000 for a specific charitable purpose to organizations described in sections 501(c)(7), (8), and (10). Additionally, as discussed earlier in this preamble, section 527 organizations must continue to report the names and addresses of substantial contributors. Tax-exempt organizations must continue to report the amounts of contributions from each substantial contributor as well as maintain the names and addresses of their substantial contributors in their books and records in accordance with section 6001 and §1.6001-1(a) and (c) in order to permit the IRS to efficiently administer the internal revenue laws through examinations of specific taxpayers. The records retained will enable organizations to substantiate upon examination the number of certain contributors and the amounts of their contributions and, if needed, to address any concerns identified during the examination for which the identity of the substantial contributors would be relevant. VI. Rev. Proc. 95 - 48 and Rev. Proc. 96-10 In the preamble to the 2019 proposed regulations, the Treasury Department and the IRS requested comments on any other grants of section 6033 reporting relief announced in past exercises of the Commissioner's discretion that should be incorporated into the regulations or any other clarifications to reflect statutory changes since the original promulgation of §1.6033-2. In light of the 2006 amendment to section 6033(a)(3)(B), which proscribes the Commissioner's ability to exercise discretion to relieve from filing any organization described in section 509(a)(3), the Treasury Department and the IRS requested comments on the continued applicability of Rev. Proc. 96-10, 1996-1 C.B. 138, which relieves from a filing requirement under section 6033(a) certain organizations that are operated, controlled, or supervised by one or more churches, integrated auxiliaries, or conventions or associations of churches. The Treasury Department and the IRS received five comments requesting that the filing exception contained in Rev. Proc. 96-10 be incorporated into the regulations or that the Treasury Department and the IRS simply refrain from obsoleting Rev. Proc. 96-10. One commenter suggested that certain organizations are described in Rev. Proc. 96-10 and continue to rely appropriately on the filing exception provided in that revenue procedure because they are not supporting organizations described in section 509(a)(3). This Treasury Decision does not incorporate the provisions of Rev. Proc. 96-10 into the final regulations. The Treasury Department and the IRS continue to study the applicability of Rev. Proc. 96-10, which is not withdrawn with the issuance of this Treasury Decision. However, the Treasury Department and the IRS note that organizations for which public charity status is dependent on being described in section 509(a)(3) are not eligible to rely on the filing relief provided in Rev. Proc. 96-10. The Treasury Department and the IRS also requested comments on Rev. Proc. 95-48, 1995-2 C.B. 418, which grants reporting relief for governmental units and affiliates of governmental units. The Treasury Department and the IRS received one comment asserting that reporting relief granted under Rev. Proc. 95-48 is inappropriate because a government affiliate's decision to seek the benefits of exemption under section 501(c)(3) calls for it accepting the burdens of that status as well. This Treasury Decision does not incorporate the provisions of Rev. Proc. 95-48 into the final regulations and the Treasury Department and the IRS continue to consider whether the reporting relief in this revenue procedure should be updated. VII. Technical Corrections This Treasury Decision conforms the paragraph structure throughout §1.6033-2 to the current Code of Federal Regulations paragraph level structure. Previously, the fourth level of the paragraph structure utilized a lower-case letter (e.g., §1.6033-2(a)(2)(ii)(a)). This Treasury Decision modifies all fourth level letters to be upper-case (e.g., §1.6033-2(a)(2)(ii)(A)). For consistency with these amendments, this Treasury Decision also modifies §§1.401-1, 56.4911-9, and 56.4911-10 to correct certain cross-references to §1.6033-2. Additionally, throughout §1.6033-2, this Treasury Decision makes certain other non-substantive changes. VIII. Applicability Dates Consistent with the applicability dates in the 2019 proposed regulations, the final regulations apply as of May 28, 2020. Pursuant to section 7805(b)(7), an organization may choose to apply the paragraphs listed in §1.6033-2(l)(2) to returns filed after September 6, 2019. Effect on Other Documents The following publication is obsolete as of May 28, 2020: Rev. Proc. 2018-38 (2018-31 I.R.B. 280). Special Analyses I. Regulatory Planning and Review This regulation is not subject to review under section 6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) between the Department of the Treasury and the Office of Management and Budget regarding review of tax regulations. II. Paperwork Reduction Act The collection of information contained in these final regulations is reflected in the collection of information for Forms 990 and 990-EZ that have been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act (44 U.S.C. 3507(c)) under control number 1545-0047. To the extent there is a decrease in burden as a result of this change, the decrease in burden will be reflected in the updated burden estimates for Forms 990 and 990-EZ included in this control number. The requirement to maintain records to substantiate information on the Form 990 or 990-EZ is already contained in the burden associated with the control number for those forms and remains unchanged. The paperwork burden estimate for tax-exempt organizations is reported under OMB control number 1545-0047, which represents a total estimated burden time, including all other related forms and schedules for corporations, of 52 billion hours and total estimated monetized costs of $4.17 billion ($2017). The burden estimates provided in the OMB control number are aggregate amounts that relate to the entire package of forms associated with the OMB control number, and will in the future include, but not isolate, the estimated burden of these regulations. These numbers are therefore unrelated to the future calculations needed to assess the burden removed by adoption of these regulations. The Treasury Department and the IRS urge readers to recognize that these numbers are duplicates and to guard against overcounting the burden. No burden estimates specific to these regulations are currently available. The Treasury Department has not estimated the burden related to the requirements under these regulations. The current status of the Paperwork Reduction Act submissions related to these regulations is provided in the following table. 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. Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and return information are confidential, as required by 26 U.S.C. 6103. III. Regulatory Flexibility Act It is hereby certified that these final regulations will not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that these regulations reflect statutory requirements and reporting relief previously announced through forms, instructions to forms, or guidance published in the Internal Revenue Bulletin. The collection of information contained in these regulations instead maintains a current recordkeeping obligation while removing a filing burden. Accordingly, this rule will not have a significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act (5 U.S.C. chapter 6). Pursuant to section 7805(f), the proposed regulations preceding these final regulations were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business, and no comments were received. Drafting Information The principal authors of these regulations are personnel from the Office of the Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes). However, other personnel from the Treasury Department and the IRS participated in their development. Statement of Availability of IRS Documents IRS revenue procedures and other guidance cited in this document are published in the Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at http://www.irs.gov. List of Subjects 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. 26 CFR Part 56 Public Charity Excise Taxes Amendments to the Regulations Accordingly, 26 CFR parts 1 and 56 are amended as follows: PART 1--INCOME TAXES Paragraph 1. The authority citation for part 1 continues to read in part as follows: Authority: 26 U.S.C. 7805 * * * Par. 2. In §1.401-1, revise the last sentence of paragraph (e)(2) to read as follows: § 1.401-1 Qualified pension, profit-sharing, and stock bonus plans. * * * * * (e) * * * (2) * * * For information required to be furnished periodically by an employer with respect to the qualification of a plan, see §§ 1.404(a)-2, and 1.6033-2(a)(2)(ii)(I). Par. 3. Section 1.6033-2 is amended by: 1. Revising the section heading; 2. In paragraph (a)(2)(ii) introductory text, removing "The" and adding "Subject to paragraph (a)(1) of this section, the" in its place; 3. Redesignating paragraph (a)(2)(ii)( a ) through ( l ) as paragraphs (a)(2)(ii)(A) through (L) respectively; 4. In newly redesignated paragraph (a)(2)(ii)(F), revising the first and last sentences; 5. Revising newly redesignated paragraph (a)(2)(ii)(H); 6. Redesignating paragraphs (a)(2)(ii)(K) and (L) as paragraphs (a)(2)(ii)(M) and (N); 7. Adding new paragraphs (a)(2)(ii)(K) and (L); 8. Revising the last sentence of paragraph (a)(2)(iii) introductory text; 9. Redesignating paragraphs (a)(2)(iii)( a ) through ( d ) as paragraphs (a)(2)(iii)(A) through (D) respectively; 10. Revising the last sentence of newly redesignated paragraph (a)(2)(iii)(B); 11. Revising redesignated paragraph (a)(2)(iii)(C); 12. Revising the first sentence of newly redesignated paragraph (a)(2)(iii)(D)( 1 ); 13. Redesignating paragraphs (a)(2)(iv)( a ) and ( b ) as paragraphs (a)(2)(iv)(A) and (B) respectively; 14. Revising the next to last sentence in paragraph (a)(4); 15. Adding paragraphs (a)(5) through (8); 16. Revising paragraph (d)(5) introductory text and the last sentence of paragraph (d)(5)(ii); 17. Revising paragraph (g)(1)(iii); 18. Removing "or" at the end of paragraph (g)(1)(vi); 19. Removing the period at the end of paragraph (g)(1)(vii) and adding "; or" in its place; 20. Adding paragraph (g)(1)(viii); 21. Revising paragraph (g)(3); 22. Adding paragraph (g)(5); 23. Adding a sentence at the end of paragraph (g)(6); 24. Redesignating paragraph (k) as paragraph (l); 25. Adding a new paragraph (k); and 26. Revising newly redesignated paragraph (l). The revisions and additions read as follows: § 1.6033-2 Returns by exempt organizations and returns by certain nonexempt organizations. (a) * * * (2) * * * (ii) * * * (F) The total of the contributions, gifts, grants, and similar amounts received by it during the taxable year, and, in the case of an organization described in section 501(c)(3), the names and addresses of all persons that contributed, bequeathed, or devised $5,000 or more (in money or other property) during the taxable year. * * * For special rules with respect to contributors and donors, see paragraph (a)(2)(iii) of this section. * * * * * (H) A schedule showing the compensation and other payments made to each person whose name is required to be listed pursuant to paragraph (a)(2)(ii)(G) of this section during the calendar year ending within the organization's annual accounting period, or during such other period as prescribed by publication, form, or instructions. * * * * * (K) In the case of an organization described in section 501(c)(3), the respective amounts (if any) of the taxes imposed on the organization, or any organization manager of the organization, during the taxable year under any of the following provisions (and the respective amounts (if any) of reimbursements paid by the organization during the taxable year with respect to taxes imposed on any such organization manager under any of such provisions): ( 1 ) Section 4911 (relating to tax on excess expenditures to influence legislation); ( 2 ) Section 4912 (relating to tax on disqualifying lobbying expenditures of certain organizations); and ( 3 ) Section 4955 (relating to taxes on political expenditures of section 501(c)(3) organizations), except to the extent that, by reason of section 4962, the taxes imposed under such section are not required to be paid or are credited or refunded. (L) In the case of organizations described in section 501(c)(3), (4), or (29), the respective amounts (if any) of-- ( 1 ) The taxes imposed with respect to the organization on any organization manager, or any disqualified person, during the taxable year under section 4958 (relating to taxes on excess benefit transactions); and ( 2 ) Reimbursements paid by the organization during the taxable year with respect to taxes imposed under such section, except to the extent that, by reason of section 4962, the taxes imposed under such section are not required to be paid or are credited or refunded. * * * * * (iii) * * * In providing the names and addresses of contributors and donors under paragraph (a)(2)(ii)(F) of this section: * * * * * (B) * * * In such case, unless the organization has actual knowledge that a particular employee gave more than $5,000 (and in excess of 2 percent if paragraph (a)(2)(iii)(A) of this section is applicable), the organization need report only the name and address of the employer, and the total amount paid over by the employer. (C) Separate and independent gifts made by one person in a particular year need be aggregated to determine whether his contributions and bequests exceed $5,000 (and are in excess of 2 percent if paragraph (a)(2)(iii)(A) of this section is applicable), only if such gifts are of $1,000 or more. (D)( 1 ) Organizations described in section 501(c)(7), (8), or (10) that receive contributions or bequests to be used exclusively for purposes described in section 170(c)(4), 2055(a)(3), or 2522(a)(3), must attach a schedule with respect to all gifts that aggregate more than $1,000 from any one person showing the total amount of the contributions or bequests from each such person, the specific purpose or purposes for which such amount was received, and the specific use or uses to which such amount was put. * * * * * * * * (4) * * * Similarly, for purposes of paragraph (a)(2)(ii)(D) of this section, the purposes for which a section 4947(a)(1) trust or a nonexempt private foundation is organized shall be treated as the purposes for which it is exempt. * * * (5) Political organizations, as defined by section 527(e)(1), that have gross receipts of $25,000 or more for the taxable year (or in the case of a qualified State or local political organization, as defined in section 527(e)(5), that has gross receipts of $100,000 or more for the taxable year) generally must comply with the requirements of section 6033 and this section in the same manner as organizations exempt from tax under section 501(a), except to the extent that the Commissioner may modify such requirements through forms, instructions to forms, or guidance published in the Internal Revenue Bulletin as appropriate for carrying out the purposes of section 527. For the purposes of this section, all references to organizations exempt from tax under section 501(a) shall include political organizations referred to in section 6033(g), other than those referred to in section 6033(g)(3) and except to the extent the Commissioner exercises discretion under section 6033(g)(4). This discretion may be exercised through forms, instructions to forms, or guidance published in the Internal Revenue Bulletin. In addition to the reporting requirements applicable to organizations exempt under section 501(a), such political organizations generally must report the names and addresses of all persons that contributed, bequeathed, or devised $5,000 or more (in money or other property) during the taxable year. (6) Each controlling organization (within the meaning of section 512(b)(13)) that is subject to the requirements of section 6033(a) shall include on its annual return such information required by that return regarding-- (i) Any interest, annuities, royalties, or rents received from each controlled entity (within the meaning of section 512(b)(13)); (ii) Any loans made to each such controlled entity; and (iii) Any transfers of funds between such controlling organization and each such controlled entity. (7) Every organization described in section 4966(d)(1) shall, on its annual return for the taxable year-- (i) List the total number of donor advised funds (as defined in section 4966(d)(2)) it owns at the end of such taxable year; (ii) Report the aggregate value of assets held in such funds at the end of such taxable year; and (iii) Report the aggregate contributions to and grants made from such funds during such taxable year. (8) Every organization described in section 509(a)(3) shall, on its annual return-- (i) List the supported organizations (as defined in section 509(f)(3)) with respect to which such organization provides support; (ii) Specify whether the organization meets the requirements of clause (i), (ii), or (iii) of section 509(a)(3)(B); and (iii) Certify that the organization meets the requirements of section 509(a)(3)(C). * * * * * (d) * * * (5) In providing the information required by paragraphs (a)(2)(ii)(F), (G), and (H) of this section, such information may be provided: * * * (ii) * * * A central or parent organization shall indicate whether it has provided such information in the manner described in paragraphs (d)(5)(i) or (ii) of this section, and may not change the manner in which it provides such information without the consent of the Commissioner. * * * * * (g) * * * (1) * * * (iii) Except as provided in paragraph (g)(1)(viii) of this section, an organization described in section 501(c) (other than a private foundation or a supporting organization described in section 509(a)(3)) the gross receipts of which in each taxable year are normally not more than $50,000 (as described in paragraph (g)(3) of this section); * * * * * (viii) A foreign organization (described in paragraph (k)(1) of this section) or a United States possession organization (described in paragraph (k)(2) of this section) (other than a private foundation or a supporting organization described in section 509(a)(3))-- (A) The gross receipts of which in each taxable year from sources within the United States (as determined under paragraph (k)(3) of this section) are normally not more than $50,000 (as described in paragraph (g)(3) of this section); and (B) That has no significant activity (including lobbying and political activity and the operation of a trade or business, but excluding investment activity) in the United States. * * * * * (3) For purposes of paragraphs (g)(1)(iii) and (viii) of this section, the gross receipts (as defined in paragraph (g)(4) of this section) of an organization are normally not more than $50,000 if: (i) In the case of an organization that has been in existence for 1 year or less, the organization has received, or donors have pledged to give, gross receipts of $75,000 or less during the first taxable year of the organization; (ii) In the case of an organization that has been in existence for more than one but less than 3 years, the average of the gross receipts received by the organization in its first 2 taxable years is $60,000 or less; and (iii) In the case of an organization that has been in existence for 3 years or more, the average of the gross receipts received by the organization in the immediately preceding 3 taxable years, including the year for which the return would be required to be filed, is $50,000 or less. * * * * * (5) An organization that is not required to file an annual return by virtue of paragraphs (g)(1)(iii) and (viii) of this section must submit an annual electronic notification as described in section 6033(i). See §1.6033-6. (6) * * * This discretion may be exercised through forms, instructions to forms, or guidance published in the Internal Revenue Bulletin. * * * * * (k) Foreign organizations and United States possession organizations --(1) Foreign organization. For purposes of this section, a foreign organization is any organization not described in section 170(c)(2)(A). (2) United States possession organization. For purposes of this section, a United States possession organization is any organization created or organized in a possession of the United States. (3) Source of funds. For purposes of paragraph (g)(1)(viii) of this section, the source of an organization's gross receipts from gifts, grants, contributions or membership fees is determined by applying the rules found in §53.4948-1(b) of this chapter. For purposes of paragraph (g)(1)(viii) of this section, the source of an organization's gross receipts other than gifts, grants, contributions, and membership fees is determined by applying the rules in sections 861 through 865 and the regulations in this part issued under section 861 through 865. For purposes of applying this paragraph (k)(3) regarding United States possession organizations, a United States person does not include individuals who are bona fide residents of a United States possession. (l) Applicability date --(1) Generally. This section applies to returns filed on or after January 30, 2020. Section 1.6033-2T (as contained in 26 CFR part 1, revised April 2019) applies to returns filed before January 30, 2020. (2) Paragraphs (a)(2)(ii)(F), (a)(2)(iii)(D)( 1 ), (g)(1)(iii) and (viii), and (g)(3) of this section apply to annual information returns filed after May 28, 2020. Under section 7805(b)(7) an organization may choose to apply the paragraphs listed in this paragraph (l)(2) to returns filed after September 6, 2019. PART 56 - PUBLIC CHARITY EXCISE TAXES Par. 4. The authority citation for part 56 continues to read in part as follows: Authority: 26 U.S.C. 7805 * * * § 56.4911-9 [Amended] Par. 5. In §56.4911-9, amend paragraphs (d)(2) and (3) and (d)(4) introductory text by removing the language "1.6033-2(a)(2)(ii)( k )" and adding in its place "1.6033-2(a)(2)(ii)(M)". § 56.4911-10 [Amended] Par. 6. In §56.4911-10, amend paragraph (f)(1) by removing the language "1.6033-2(a)(2)(ii)( k )" and adding in its place "1.6033-2(a)(2)(ii)(M)." Sunita Lough, Deputy Commissioner for Services and Enforcement. Approved: May 20, 2020 David J. Kautter, Assistant Secretary of the Treasury (Tax Policy). (Filed by the Office of the Federal Register on May 26, 2020, 4:15 p.m., and published in the issue of the Federal Register for May 28, 2020, 85 F.R. 31959)
Private Letter Ruling Number: 202319024 Internal Revenue Service January 12, 2023 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Release Number: 202319024 Release Date: 5/12/2023 UIL Code: 501.07-00 Date: 01/12/2023 Taxpayer ID number (last 4 digits): Forms: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: Last day to file petition with United States Tax Court: 04/12/2023 CERTIFIED MAIL - Return Receipt Requested Dear ****: Why we are sending you this letter This is a final determination that you don't qualify for exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(7), for the tax periods above. Your determination letter dated ** is revoked. Our adverse determination as to your exempt status was made for the following reasons: You have not established that you operated substantially for the pleasure and recreation of your members or for other nonprofitable purposes and no part of the net earnings inures to the benefit of any private shareholder within the meaning of IRC Section 501(c)(7) because you have exceeded the 35% limit on gross receipts for non-member income for tax year ending **. (Public Law 94-568) Furthermore, you exceeded the permissible 35% limit on gross receipts of non-member income in the tax years ending ** and **, establishing a pattern of non-compliance. Organizations that are not exempt under Internal Revenue Code (IRC) Section 501 generally are required to file federal income tax returns and pay tax, where applicable. For further instructions, forms and information please visit IRS.gov. What you must do if you disagree with this determination If you want to contest our final determination, you have 90 days from the date this determination letter was mailed to you to file a petition or complaint in one of the three federal courts listed below. How to file your action for declaratory judgment If you decide to contest this determination, you can file an action for declaratory judgment under the provisions of Section 7428 of the Code in either: - The United States Tax Court, - The United States Court of Federal Claims, or - The United States District Court for the District of Columbia You must file a petition or complaint in one of these three courts within 90 days from the date we mailed this determination letter to you. You can download a finable petition or complaint form and get information about filing at each respective court's website listed below or by contacting the Office of the Clerk of the Court at one of the addresses below. Be sure to include a copy of this letter and any attachments and the applicable filing fee with the petition or complaint. You can eFile your completed U.S. Tax Court petition by following the instructions and user guides available on the Tax Court website at ustaxcourt.gov/dawson.html. You will need to register for a DAWSON account to do so. You may also file your petition at the address below: United States Tax Court 400 Second Street, NW Washington, DC 20217 ustaxcourt.gov The websites of the U.S. Court of Federal Claims and the U.S. District Court for the District of Columbia contain instructions about how to file your completed complaint electronically. You may also file your complaint at one of the addresses below: US Court of Federal Claims 717 Madison Place, NW Washington, DC 20439 uscfc.uscourts.gov US District Court for the District of Columbia 333 Constitution Avenue, NW Washington, DC 20001 dcd.uscourts.gov Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory judgment under IRC Section 7428. Information about the IRS Taxpayer Advocate Service The IRS office whose phone number appears at the top of the notice can best address and access your tax information and help get you answers. However, you may be eligible for free help from the Taxpayer Advocate Service (TAS) if you can't resolve your tax problem with the IRS, or you believe an IRS procedure just isn't working as it should. TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Contact your local Taxpayer Advocate Office at: Internal Revenue Service Taxpayer Advocate Office Or call TAS at 877-777-4778. For more information about TAS and your rights under the Taxpayer Bill of Rights, go to taxpayeradvocate.IRS.gov. Do not send your federal court pleading to the TAS address listed above. Use the applicable federal court address provided earlier in the letter. Contacting TAS does not extend the time to file an action for declaratory judgment. Where you can find more information Enclosed are Publication 1, Your Rights as a Taxpayer, and Publication 594, The IRS Collection Process, for more comprehensive information. Find tax forms or publications by visiting IRS.gov/forms or calling 800-TAX-FORM (800-829-3676). If you have questions, you can call the person shown at the top of this letter. If you prefer to write, use the address shown at the top of this letter. Include your telephone number, the best time to call, and a copy of this letter. You may fax your documents to the fax number shown above, using either a fax machine or online fax service. Protect yourself when sending digital data by understanding the fax service's privacy and security policies. Keep the original letter for your records. Sincerely, Lynn A. Brinkley Acting Director, Exempt Organizations Examinations Enclosures: Publication 1 Publication 594 Publication 892 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Date: March 10, 2022 Taxpayer ID number: Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: Address: Manager's contact information: Name: ID number: Telephone: Response due date: April 07, 2022 CERTIFIED MAIL -- Return Receipt Requested Dear **: Why you're receiving this letter We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we propose to revoke your tax-exempt status as an organization described in Internal Revenue Code (IRC) Section 501(c)(7). If you agree If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an organization described in IRC Section 501(c)(7) for the periods above. After we issue the final adverse determination letter, we'll announce that your organization is no longer eligible to receive tax deductible contributions under IRC Section 170. If you disagree 1. Request a meeting or telephone conference with the manager shown at the top of this letter. 2. Send any information you want us to consider. 3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after the meeting or after we consider the information. The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case. For your protest to be valid, it must contain certain specific information, including a statement of the facts, applicable law, and arguments in support of your position. For specific information needed for a valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn't apply now that we've issued this letter. 4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities) if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the IRS. If you're considering requesting technical advice, contact the person shown at the top of this letter. If you disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as explained above. A decision made in a technical advice memorandum, however, generally is final and binding on Appeals. If we don't hear from you If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final adverse determination letter. Contacting the Taxpayer Advocate Office is a taxpayer right The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778. For additional information You can get any of the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person shown at the top of this letter. Sincerely, Lynn A. Brinkley Director, Exempt Organizations Examinations Enclosures: Form 886-A Form 6018 ISSUE Whether **, located in **, **, continues to qualify for exemption under Section 501(c)(7) of the Internal Revenue Code? FACTS The EO was granted tax-exempt status under Internal Revenue Code Section § 501(c)(7) as an organization described in § 501(c)(7). The organization conducted its operations out of **, **. According to its Bylaws, the purposes of the EO are as follows. This association shall not, except to an insubstantial degree, engage in any activities that are not in furtherance of the primary purpose of the association. The organization filed Form 1024, Application for Recognition of Exemption under Sections 501(a) and stated the organization's purpose and activities are as follows: We have had ** parties to promote Memberships at members home, set up tables at numerous **, in order to sell memberships. Help ** with names and addresses of **. Participated at ** and had a float in the ** to promote membership. The originally filed ** for ** shows the following: On **, the Power of Attorney provided board meetings minutes via fax which discuss the organization's activities for periods **, to **. The board members would meet ** times a year, to provide an update on the organization's financial status and discussion of scholarship recipients and requirements. No other documentation was provided. On **, a telephone interview was held with the Power of Attorney. During the interview, it was stated, "The organization's primary activities include receiving donations and issuing scholarships to students who attend **. Total scholarships issued to the students would be $ ** to $ ** per year. In prior years, the organization held alumni dinners and class reunions with members, to promote membership and to earn contributions. Investment income is the primary source of income for the organization, contributions are winding down and alumni dinners did not take place last year. The last alumni dinner was held ** years ago. Also, there are less in person interactions with the other members due to covid. Also, the organization does not know whether they will continue conducting social activities". The organization did not receive exempt function income such as dues, fees, charges or other amounts paid by members for the taxable year and the subsequent years the Form ** was filed. The organization reported the following sources and amounts of revenue for the periods ending on **, and **: Based on conducting an analysis of gross receipts, it has been noted that the organization received * % from nonmember and Investment income. LAW IRC § 501(c)(7) exempts from federal income tax clubs organized for pleasure, recreation, and other non-profitable purposes, substantially all of the activities of which are for such purposes and not part of the net earnings of which inures to the benefit of any private shareholder. Section 1.501(c)(7) of the Regulations provides that, in general, the exemption extends to social and recreation clubs supported solely by membership fees, dues and assessments. However, a club that engages in a business, such as making its social and recreational facilities open to the general public, is not organized and operated exclusively for pleasure, recreation and other non-profitable purposes, and is not exempt under section 501(a). Prior to its amendment in 1976, IRC § 501(c)(7) required that social clubs be operated exclusively for pleasure, recreation and other nonprofitable purposes. Public Law 94-568 amended the "exclusive" provision to read "substantially' in order to allow an IRC § 501(c)(7) organization to receive up to 35 percent of its gross receipts, including investment income, from sources outside its membership without losing its tax-exempt status. The Committee Reports for Public Law 94-568 (Senate Report No. 94-1318 2d Session, 1976-2 C.B. 597) further states: (a) Within the 35 percent amount, not more than 15 percent of the gross receipts should be derived from the use of a social club's facilities or services by the general public. This means that an exempt social club may receive up to 35 percent of its gross receipts from a combination of investment income and receipts from non-members, so long as the latter do not represent more than 15 percent of total receipts. (b) Thus, a social club may receive investment income up to the full 35 percent of its gross receipts if no income is derived from non-members' use of club facilities. (c) In addition, the Committee Report states that where a club receives unusual amounts of income, such as from the sale of its clubhouse or similar facilities, that income is not to be included in the 35 percent formula. To compute the gross receipts test, the Committee Reports that accompanied P.L. 94-568, state that social clubs shouldn't receive, within the 15 or 35 percent allowances, any income from nontraditional business activities. S. Rep. No. 94-1318 (1976). When an organization's nontraditional income causes the organization to exceed the 15 or 35 percent allowances, consider whether the organization continues to substantially operate for exempt purposes. Revenue Ruling 66-149 holds a social club as not exempt as an organization described in IRC § 501(c)(7) where it derives a substantial part of its income from non-member sources. Revenue Ruling 60-324 states by making its social facilities available to the general public the club cannot be treated as being operated exclusively for pleasure, recreation or other non-profitable purposes. Revenue Procedure 71-17 sets forth the guidelines for determining the effect of gross receipts derived from the general public's use of a social club's facilities on exemption under IRC § 501(c)(7). Where nonmember income from the usage exceeds the standard as outlined in this Revenue procedure, the conclusion reached is that there is a non-exempt purpose and operating in this manner jeopardizes the organization's exempt status. ORGANIZATION'S POSITIONS Taxpayer's position has not been provided. GOVERNMENT'S POSITION Based on the examination, the organization does not qualify for exemption as a social club described in IRC §501(c)(7) and Treas.Reg. §1.501(c)(7) which provides that in general, this exemption extends to social and recreation clubs which are supported solely by membership fees, dues, and assessments. The organization has exceeded the 35% of non-member and investment income threshold outlines in Public Law 94-568. The committee reports of Public Law 94-568 states a social club may received investment income up to the full 35% of its gross receipts if no income is derived from non-members' use of club facilities. The organization did not receive income from non-members' use of club facilities. However, investment income was * % of the organization's gross receipts which exceeds the 35% threshold of income from outside of membership. Accordingly, it is proposed that the organization's tax-exempt status be revoked effective **. CONCLUSION The ** no longer qualifies for exemption under § 501(c)(7) of the Code as your nonmember income has exceeded the 35% of non- member and investment income threshold on a continuing basis. Therefore, it is proposed that your exempt status under § 501(c)(7) of the Code be revoked effective ****.
Private Letter Ruling Number: 202113008 Internal Revenue Service May 8, 2020 DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE 1100 Commerce Street, MC 4920 DAL Dallas, TX 75242 TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION Number: 202113008 Release Date: 4/2/2021 UIL: 501-03.00 Date: May 8, 2020 Taxpayer ID Number: Form: Tax Period(s) Ending: Person to Contact: Identification Number: Telephone Number: Fax Number: CERTIFIED MAIL -- Return Receipt Requested LAST DAY FOR FILING A PETITION WITH THE TAX COURT: Dear *****: This is a final determination that you do not qualify for exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3), effective May 1, 20XX. Your determination letter dated June 22, 20XX is revoked. Our adverse determination as to your exempt status was made for the following reasons: Organizations described in IRC Section 501(c)(3) of the Code and exempt under Section 501(a) must be both organized and operated exclusively for exempt purposes. You have not demonstrated that you are operated exclusively for charitable, educational, or other exempt purposes within the meaning of Section 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. You have not established that you have operated exclusively for an exempt purpose. As such, you failed to meet the requirements of IRC Section 501(c)(3) and Treasury Regulations Section 1.501(c)(3)-1(a), in that you have not established that you were organized and operated exclusively for exempt purposes and that no part of your earnings inured to the benefit of private shareholders or individuals. Contributions to your organization are no longer deductible under IRC Section 170. Organizations that are not exempt under IRC Section 501 generally are required to file federal income tax returns and pay tax, where applicable. For further instructions, forms, and information please visit www.irs.gov. If you decide to contest this determination, you may file an action for declaratory judgment under the provisions of IRC Section 7428 in one of the following three venues: 1) United States Tax Court, 2) the United States Court of Federal Claims, or 3) the United States District Court for the District of Columbia. A petition or complaint in one of these three courts must be filed within 90 days from the date this determination was mailed to you. Please contact the clerk of the appropriate court for rules and the appropriate forms for filing petitions for declaratory judgment by referring to the enclosed Publication 892. You may write to the courts at the following addresses: United States Tax Court 400 Second Street, NW Washington, DC 20217 U.S. Court of Federal Claims 717 Madison Place, NW Washington, DC 20005 U.S. District Court for the District of Columbia 333 Constitution Ave., N.W. Washington, DC 20001 Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory judgment under IRC Section 7428. We'll notify the appropriate state officials (as permitted by law) of our determination that you aren't an organization described in IRC Section 501(c)(3). You may be eligible for help from the Taxpayer Advocate Service (TAS). TAS is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 1-877-777-4778. Taxpayer Advocate assistance can't be used as substitute for established IRS procedures, formal appeals processes, etc. The Taxpayer Advocate is not able to reverse legal or technically correct tax determination, nor extend the time fixed by law that you have to file a petition in Court. The Taxpayer Advocate can, however, see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling. You can get any of the forms or publications mentioned in this letter by calling 800-TAX-FORM (800-829-3676) or visiting our website at www.irs.gov/forms-pubs. If you have any questions about this letter, please contact the person whose name and telephone number are shown in the heading of this letter. Sincerely, Maria D. Hooke Director, EO Examinations Enclosures: Publication 892 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Exempt Organizations Examinations Date: May 22, 2019 Taxpayer Identification Number: Form: Tax Year(s) Ended: Person to Contact: Employee ID: Telephone: Fax: Manager's Contact Information: Employee ID: Telephone: Response Due Date: CERTIFIED MAIL -- Return Receipt Requested Dear **: Why you're receiving this letter We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we propose to revoke your tax-exempt status as an organization described in Internal Revenue Code (IRC) Section 501(c)(3). If you agree If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an organization described in IRC Section 501(c)(3) for the periods above. After we issue the final adverse determination letter, we'll announce that your organization is no longer eligible to receive tax deductible contributions under IRC Section 170. If you disagree 1. Request a meeting or telephone conference with the manager shown at the top of this letter. 2. Send any information you want us to consider. 3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after the meeting or after we consider the information. The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case. For your protest to be valid, it must contain certain specific information, including a statement of the facts, applicable law, and arguments in support of your position. For specific information needed for a valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn't apply now that we've issued this letter. 4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities) if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the IRS. If you're considering requesting technical advice, contact the person shown at the top of this letter. If you disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as explained above. A decision made in a technical advice memorandum, however, generally is final and binding on Appeals. If we don't hear from you If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final adverse determination letter. Contacting the Taxpayer Advocate Office is a taxpayer right The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpaveradvocate.irs.gov or call 877-777-4778. For additional information You can get any of the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person shown at the top of this letter. Sincerely, for Maria Hooke Director, Exempt Organizations Examinations Enclosures: Form 886-A Form 6018 Pub 892 Pub 3498-A ISSUES Whether the exempt status of ** (the Organization) under IRC § 501(c)(3) should be revoked, effective May 1, 20XX because it is not organized and operated exclusively for exempt purposes within the meaning of section 501(c)(3) and Treas. Reg. § 1.501(c)(3)-1(b)? FACTS Organizational Test ** filed Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, on May 1, 20XX. In a determination letter dated June 22, 20XX, the Internal Revenue Service granted ** tax exempt status under IRC § 501(c)(3) as a public charity as described in IRC § 170(b)(1)(A)(vi). An organization is organized exclusively for one or more exempt purposes only if its articles of organization limit the purposes of such organization to one or more exempt purposes and do not empower them to engage, otherwise than as an insubstantial part of its activities, in activities which in themselves are not in furtherance of one or more exempt purposes. ** attested that their organizing document contains the dissolution provision required under § 501(c)(3) or that they did not need an express dissolution provision in their organizing document because they rely on the operation of state law in the state in which they are formed for their dissolution provision. ** checked the box to attest that they have the organizing document necessary for the organizational structure indicated above. The Articles of Incorporation the Tax Compliance Officer (TCO) obtained from ** do not limit the purpose of the organization to one or more exempt purposes. The organization was established for private benefit and offers no public purpose. Their articles of incorporation state "the corporation is organized as a charitable organization that will provide financial assistance for medical treatment, personal circumstances and other related matters to the families of ** who are suffering from financial hardships on account of medical or other needs and to raise awareness of the diseases, their causes, effects and treatments which might affect its members." Membership is limited to members ** and their families. Membership is not open to the public. Operational Test Charitable organizations must show that they engage in activities which accomplish its exempt purpose, its net earnings do not inure to the benefit of private shareholders or individuals, and it does not expend a substantial part of its resources attempting to influence legislation or political campaigns, and it serves a valid purpose that confers public benefit. ** failed to establish their activities accomplish an exempt purpose. ** failed provide documentation to prove no private shareholders or individuals benefitted from the earnings of the organization. ** failed to establish the public benefits from their organization's activities. Correspondence and Information Document Requests (IDR) Charitable organizations are required to keep sufficient records to establish the amount of gross income, deductions, credits, or other matters required to be shown on a tax return. They are required to submit them to the IRS upon request. - February 13, 20XX: Letter 3606 was sent with IDR #1. The due date was March 16, 20XX. The TCO requested organizing documents, meeting minutes, detailed description of all activities conducted, records of gross receipts, workpapers used to prepare the return, and a copy of the general ledger. The TCO stated, "the following documentation does not need to be provided immediately. Please be prepared to provide them, as they may be requested at a future date." The items listed were calendar of events for all fundraisers, volunteer information, contract and payment information, raffle payouts, records of payments received, source documents to include receipts, statements, invoices, cancelled checks, credit card statements, bank statements, documentation regarding possible political contributions, records for grants issued, and documentation establishing how the awards were granted. - February 25, 20XX: Letter 5798 was sent. The negotiated due date was April 30, 20XX. - April 16, 20XX: Fax received from **, the Power of Attorney for **. "Regarding the Information Document Request, following are: Organizing documents, minutes of board meetings from 5/20XX to 4/20XX, Description of specific purpose for which the organization was formed." o The minutes of board meetings was actually a summary of meeting minutes, not the contemporaneous records. - April 29, 20XX: Fax received from **. "Following please find: Description of activities, information regarding contributions, profit and loss balance sheet, tie-in to tax return, general ledger." o The description of activities was a brief outline. o ** provided a handwritten document of last names with a number written beside them. Per **, these are the contributions members make directly from their checking account. - May 1, 20XX: Letter 5077-B was sent with IDR #2. The due date was for May 16, 20XX. The TCO requested meeting minutes, records of gross receipts, a written explanation along with supporting documentation for possible political contributions, records for fundraising events, and records for raffles conducted. o ** provided a written statement explaining the possible political contributions were donations made to the organization from various political campaigns. ** failed to provide the actual meeting minutes, records of gross receipts, volunteer information, contracts, payment information, raffle gross receipts and payouts, records of grants awarded, and proof of exempt activities. LAW IRC § 501(c)(3) Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office shall be exempt from taxation. IRC § 509(a)(2) an organization which--(A) normally receives more than one-third of its support in each taxable year from any combination of -- (i) gifts, grants, contributions, or membership fees, and (ii) gross receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities, in an activity which is not an unrelated trade or business (within the meaning of section 513), not including such receipts from any person, or from any bureau or similar agency of a governmental unit (as described in section 170(c)(1)), in any taxable year to the extent such receipts exceed the greater of $5,000 or 1 percent of the organization's support in such taxable year, from persons other than disqualified persons (as defined in section 4946) with respect to the organization, from governmental units described in section 170(c)(1), or from organizations described in section 170(b)(1)(A) (other than in clauses (vii) and (viii)), and (B) normally receives not more than one-third of its support in each taxable year from the sum of--(i) gross investment income (as defined in subsection (e)) and (ii) the excess (if any) of the amount of the unrelated business taxable income (as defined in section 512) over the amount of the tax imposed by section 511. IRC § 170(v)(1)(A)(vi) an organization referred to in subsection (c)(2) which normally receives a substantial part of its support (exclusive of income received in the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501(a)) from a governmental unit referred to in subsection (c)(1) or from direct or indirect contributions from the general public. Treasury Regulation § 1.501(c)(3)-1 (b) Organizational test--(1) In general. (i) An organization is organized exclusively for one or more exempt purposes only if its articles of organization (a) Limit the purposes of such organization to one or more exempt purposes; and (b) Do not expressly empower the organization to engage, otherwise than as an insubstantial part of its activities, in activities which in themselves are not in furtherance of one or more exempt purposes. (c) Operational test--(1) Primary activities. An organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in section 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. (2) Distribution of earnings. An organization is not operated exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals. Treasury Regulation § 1.501(a)-1 (c) Private shareholder or individual defined. The words private shareholder or individual in section 501 refer to persons having a personal and private interest in the activities of the organization. Treasury Regulation § 1.6001-1 (a) In general. Except as provided in paragraph (b) of this section, any person subject to tax under subtitle A of the Code (including a qualified State individual income tax which is treated pursuant to section 6361(a) as if it were imposed by chapter 1 of subtitle A), or any person required to file a return of information with respect to income, shall keep such permanent books of account or records, including inventories, as are sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown by such person in any return of such tax or information. (c) Exempt organizations. In addition to such permanent books and records as are required by paragraph (a) of this section with respect to the tax imposed by section 511 on unrelated business income of certain exempt organizations, every organization exempt from tax under section 501(a) shall keep such permanent books of account or records, including inventories, as are sufficient to show specifically the items of gross income, receipts and disbursements. Such organizations shall also keep such books and records as are required to substantiate the information required by section 6033. See section 6033 and §§ 1.6033-1 through 1.6033-3. (e) Retention of records. The books or records required by this section shall be kept at all times available for inspection by authorized internal revenue officers or employees, and shall be retained so long as the contents thereof may become material in the administration of any internal revenue law. Rev. Rul. 59-95, 1959-1 C.B. 627 An exempt organization was requested to produce a financial statement and statement of its operations for a certain year. However, its records were so incomplete that the organization was unable to furnish such statements. The Service held that the failure or inability to file the required information return or otherwise to comply with the provisions of section 6033 of the Code and the regulations which implement it, may result in the termination of the exempt status of an organization previously held exempt, on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status. COURT CASES For organization to pass operational test in order to obtain tax exempt status, it must engage primarily in activities which accomplish one or more of exempt purposes, organization's net earnings may not inure to benefit of private shareholders or individuals, organization must not expend substantial part of resources attempting to influence legislation or political campaigns, and organizations seeking exemption from taxes must serve valid public purpose and confer public benefit. Nationalist Movement v. C.I.R., 1994, 37 F.3d 216, certiorari denied 115 S.Ct. 1256, 513 U.S. 1192, 131 L.Ed.2d 136. The requisite purpose of tax-exempt status does not consist simply of a charitable motive, i.e., a desire that charitable benefit ultimately result from the organization's activities, but rather requires that the organization is operated to accomplish that purpose. Partners in Charity, Inc. v. Commissioner of Internal Revenue, No. 1701-11X. August 26, 2013. If an organization fails to meet either the organizational test or the operational test, it is not exempt for purposes of section 501(a). Furthermore, the burden of proof is on petitioner to overcome the grounds set forth in respondent's notice of determination. Gen. Conf of the Free Church v. Commissioner, 71 T.C. 920, 926 (1979), Hancock Academy of Savannah, Inc. v. Commissioner, supra at 492. TAXPAYER'S POSITION 1. Taxpayer's position is unknown at this time. GOVERNMENT'S POSITION That ** doesn't meet the definition of a public charity described in IRC § 170(b)(1)(A)(vi) or IRC § 509(a)(2) and the tax-exempt status should be revoked for all years beginning on or after May 1, 20XX. Under Treasury Regulation § 1.501(c)(3)-1: a. An organization is organized exclusively for one or more exempt purposes only if its articles of organization limit the purposes of such organization to one or more exempt purposes; and do not expressly empower the organization to engage, otherwise than as an insubstantial part of its activities, in activities which in themselves are not in furtherance of one or more exempt purposes. b. An organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in section 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. c. An organization is not operated exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals. ** bears the burden of proving entitlement to their tax-exempt status. They failed to do so. ** failed to substantiate they meet the organizational and operational tests. They failed to substantiate inurement does not exist within the organization. Therefore, it is the government's position does not meet the definition of a public charity as described in IRC § 170(b)(1)(A)(vi) or IRC § 509(a)(2) and their tax-exempt status should be revoked. CONCLUSION Based on the foregoing reasons, **** does not qualify for exemption under IRC § 501(c)(3) and its tax-exempt status should be revoked. It is the IRS's position that the organization failed to establish that it meets the reporting requirements under IRC §§ 6001 and 6033 to be recognized as exempt from federal income tax under IRC § 501(c)(3). Furthermore, the organization has not established that it is observing the conditions required for the continuation of its exempt status or that it is organized and operated exclusively for an exempt purpose. Accordingly, the organization's exempt status is revoked effective May 1, 20XX. Form 1120, US. Corporation Income Tax Return, should be filed for the tax periods after May 1, 20XX.
Private Letter Ruling Number: 202101007 Internal Revenue Service Date: not given Department of the Treasury Internal Revenue Service Appeals Office Number: 202101007 Release Date: 1/8/2021 Date: Person to contact: Name: Employee ID number: Telephone: Fax: Hours: Employer ID number: Uniform issue list (UIL): 501.04-02 Certified Mail Dear *****: This is a final adverse determination that you do not qualify for exemption from federal income tax under Internal Revenue Code (the "Code") Section 501(a) as an organization described in Section 501(c)(3) of the Code. We made the adverse determination for the following reasons: You have not demonstrated that you will be operated exclusively for charitable, educational or other exempt purposes as required by section 501(c)(3) of the Internal Revenue Code. Your are organized and operated for a substantial non-exempt purpose of producing, selling, and distribution of medications. Contributions to your organization are not deductible under Section 170 of the Code. You're required to file federal income tax returns on Forms 1041, U.S. Income Tax Return for Estates and Trusts. Mail your form to the appropriate Internal Revenue Service Center per the form's instructions. You can get forms and instructions by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). We'll make this letter and the proposed adverse determination letter available for public inspection under Section 6110 of the Code after deleting certain identifying information. We provided to you, in a separate mailing, Notice 437, Notice of Intention to Disclose. Please review the Notice 437 and the documents attached that show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in Notice 437. If you decide to contest this determination, you can file an action for declaratory judgment under the provisions of Section 7428 of the Code in either: - The United States Tax Court, - The United States Court of Federal Claims, or - The United States District Court for the District of Columbia You must file a petition or complaint in one of these three courts within 90 days from the date we mailed this determination letter to you. Contact the clerk of the appropriate court for rules and the appropriate forms for filing petitions for declaratory judgment. You can write to the courts at the following addresses: United States Tax Court 400 Second Street, NW Washington, DC 20217 US Court of Federal Claims 717 Madison Place, NW Washington, DC 20005 US District Court for the District of Columbia 333 Constitution Avenue, NW Washington, DC 20001 Note: We will not delay processing income tax returns and assessing any taxes due even if you file a petition for declaratory judgment under Section 7428 of the Code. Please refer to the enclosed Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status, for more information about the Appeals process. You also have the right to contact the Taxpayer Advocate Service (TAS). TAS is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778. TAS assistance is not a substitute for established IRS procedures, such as the formal appeals process. TAS cannot reverse a legally correct tax determination, or extend the time fixed by law that you have to file a petition in a United States Court. If you have questions, contact the person at the top of this letter. Sincerely, Appeals Team Manager Enclosures: Publication 892 cc: Department of the Treasury Internal Revenue Service P.O. Box 2508 Cincinnati, OH 45201 Date: October 17, 2018 Employer ID number: Contact person/ID number: Contact telephone number: Contact fax number: UIL: 501.00-00 501.03-00 501.03-03 501.03-30 501.36-01 Legend: B = Date C = State D = LLC E = Date F = Individual Dear ***: We considered your application for recognition of exemption from federal income tax under Section 501(a) of the Internal Revenue Code (the Code). Based on the information provided, we determined that you don't qualify for exemption under Section 501(c)(3) of the Code. This letter explains the basis for our conclusion. Please keep it for your records. Issue Do you qualify for exemption under Section 501(c)(3) of the Code? No, for the reasons described below. Facts You formed as a trust on B in the State of C. F is your sole and initial Trustee. Your Trust Agreement states that you are organized and operated so that you may qualify for exemption from federal income tax under Section 501(c)(3) of the Code. Your Trust states that the purpose for which you are organized is charitable. Specifically, you will offer ***. According to your Trust Agreement you are authorized and empowered to form and organize one or more nonprofit subsidiary entities that are treated as "disregarded entities" under applicable federal tax law. Accordingly, you formed D on E in the State of C and you are the sole member of D. F is the manager of D. The Operating Agreement of D states that D's principal purpose is to function as your wholly owned entity and to pursue your purpose. You, through D, seek to develop and manufacture ***. From time to time, you may make grants to other charitable organizations that support ***. Initially, expect to be primarily funded with loans from F. The interest rate on any future loan(s) from F may not exceed the current published applicable federal rate. According to your proposed budgets for the next *** years, you expect to be primarily funded from the sale of ***. By your *** year of operations, you project that the sale of ***. Law Section 501(c)(3) of the Code provides for the exemption from federal income tax of corporations organized and operated exclusively for charitable or educational purposes, provided no part of the net earnings inures to the benefit of any private shareholder or individual. Treasury Regulation Section 1.501(c)(3)-1(a)(1) provides that, in order to be exempt as an organization described in Section 501(c)(3), an organization must be both organized and operated exclusively for one or more exempt purposes. If an organization fails to meet either the organizational test or the operational test, it is not exempt. Treas. Reg. Section 1.501(c)(3)-1(c)(1) provides that an organization operates exclusively for exempt purposes only if it engages primarily in activities that accomplish exempt purposes specified in Section 501(c)(3) of the Code. An organization will not be operated exclusively for exempt purposes if more than an insubstantial part of its activities are not in furtherance of an exempt purpose. Treas. Reg. Section 1.501(c)(3)-1(d)(2) defines charitable as it is used in its generally accepted legal sense. It continues to describe the generally accepted legal sense as the relief of the poor and distressed, advancement of religion, advancement of education or science, erection or maintenance of public buildings, lessening the burdens of government, or promoting social welfare if its an organization designed to accomplish one of the above causes or to lessen neighborhood tensions, defend human and civil rights, or combat community deterioration and juvenile delinquency. Treas. Reg. Section 1.501(c)(3)-1(d)(5)(i) states that a scientific organization may meet the requirements of Section 501(c)(3) only if it serves a public rather than a private interest. Treas. Reg. Section 1.501(c)(3)-1(d)(5)(ii) states that scientific research does not include activities of a type ordinarily carried on as an incident to commercial or industrial operations, as, for example, the ordinary testing or inspection of materials or products or the designing or construction of equipment, buildings, etc. Treas. Reg. Section 1.501(c)(3)-1(d)(5)(iii) provides that scientific research will be regarded as carried on in the public interest if the results of such research (including any patents, copyrights, processes, or formulae resulting therefrom) are made available to the public on a nondiscriminatory basis. Treas. Reg. Section 1.501(c)(3)-1(d)(5)(iv) provides that an organization will not be regarded as organized and operated for the purpose of carrying on scientific research in the public interest and, consequently, will not qualify under Section 501(c)(3) as a scientific organization if such organization retains (directly or indirectly) the ownership or control of more than an insubstantial portion of the patents, copyrights, processes, or formulae resulting from its research and does not make such patents, copyrights, processes, or formulae available to the public on a nondiscriminatory basis. Treas. Reg. Section 1.501(c)(3)-1(e)(1) provides that an organization which is organized and operated for the primary purpose of carrying on an unrelated trade or business is not exempt under Section 501(c)(3) of the Code. 42 United States Code ("U.S.C.") 14401(a)(2) states that assisted suicide, euthanasia, and mercy killing have been criminal offenses throughout the United States and, under current law, it would be unlawful to provide services in support of such illegal activities. 42 U.S.C. 14401(b) states that federal funds may not be used to pay for items and services (including assistance) the purpose of which is to cause (or assist in causing) the suicide, euthanasia, or mercy killing of any individual. Revenue Ruling 71-447, 1971-2 C.B. 230, states that under common law, the term "charity" encompasses all three major categories of religious, educational, and charitable purposes. All charitable trusts, educational or otherwise, including religious trusts, are subject to the requirement that the purpose of the trust may not be illegal or contrary to public policy. Citing Restatement (Second) Trusts, (1959) Sec. 377, Comment c: "A Trust for a purpose the accomplishment of which is contrary to public policy, although not forbidden by law, is invalid." Rev. Rul. 75-384, 1975-2 C.B. 204, holds that a nonprofit organization, whose purpose was to promote world peace, disarmament, and nonviolent direct action, did not qualify for exemption under Sections 501(c)(3) or 501(c)(4) of the Code. The organization's primary activity was to sponsor antiwar protest demonstrations in which demonstrators were urged to violate local ordinances and commit acts of civil disobedience. Citing the law of trusts, the ruling stated that all charitable organizations are subject to the requirement that their purposes cannot be illegal or contrary to public policy. The law of trusts states that an intended trust or trust provision is invalid if its purpose is unlawful, its performance calls for the commission of a criminal or tortious act, or it is contrary to public policy. In Better Business Bureau v. United States, 326 U.S. 279 (1945), the court held that an organization is not operated exclusively for charitable purposes, and thus will not qualify for exemption under Section 501(c)(3), if it has a single non-charitable purpose that is substantial in nature. This is true regardless of the number or importance of the organization's charitable purposes. In Green v. Connally, 330 F.Supp. 1150 (1971), the court discussed multiple cases that limited tax benefits such as the dependency deduction, the business expense deduction, and the charitable deduction due to violation of federal or state laws. "Before considering the more particular subject of charities, we refer to the general and well-established principle that the Congressional intent in providing tax deductions and exemptions is not construed to be applicable to activities that are... illegal." It went on to say that all charitable trusts, educational or otherwise, are subject to the requirement that the purpose of the trust may not be illegal or contrary to public policy. This elementary principle, was restated as follows in the Restatement (Second) of Trusts Section 377, Comment c (1959): "A trust for a purpose the accomplishment of which is contrary to public policy, although not forbidden by law, is invalid." This public policy doctrine operates as a necessary exception to or qualifier of the precept that in general trusts for education are considered to be for the benefit of the community. Otherwise, for example, Fagin's school for pickpockets would qualify for a charitable trust. In the Federation Pharmacy Services Inc. v. Commissioner, 625 F.2d 804 (8th Cir. 1980), the Tax Court stated we fail to see how the fact that [an organization] happens to deal in drugs can convert it to a Section 501(c)(3) organization. If it could be so converted, then so could a store which sells orthopedic shoes, crutches, health foods, or any other product beneficial to health. We do not believe that the law requires that any organization whose purpose is to benefit health, however remotely, is automatically entitled, without more, to the desired exemption. We have been cited no evidence that Congress intended to exercise its grace in such an expansive manner. In Bob Jones University v. United States, 461 U.S. 574 (1983), the Supreme Court held that racially discriminatory education is contrary to public policy, and therefore, the University could not be viewed as providing public benefit within the charitable concept. In Regan v. Taxation with Representation, 461 U.S. 540 (1983), the Supreme Court held that both tax exemptions and tax deductibility are a form of subsidy that is administered through the tax system. In IHC Health Plans, Inc. v. Commissioner, 325 F.3d 1188 (10th Cir. 2003), the selling of health services or goods, at a discount, is not, of itself, a charitable purpose. Many profit-making organizations sell at a discount. Nor does the fact that the petitioner seeks to sell its drugs at cost alter the result; so does an old-fashioned cooperative, yet it is not entitled to classification as charitable. Application of law Treas. Reg. Section 1.501(c)(3)-1(a)(1) provides that, in order to be exempt an organization described in Section 501(c)(3) of the Code, an organization must be both organized and operated exclusively for one or more exempt purposes. As explained in Treas. Reg. Section 1.501(c)(3)-1(c)(1), an organization operates exclusively for exempt purposes only if it engages primarily in activities that accomplish exempt purposes specified in Section 501(c)(3) of the Code. You fail the operational test because your activities are not exclusively charitable, as defined in Treas. Reg. Section 1.501(c)(3)-1(d)(2) because the development, manufacture, and distribution of medical aid in dying medication, is illegal at the federal level. Your activities are a type ordinarily carried on as a commercial operation through your wholly owned entity, which seeks to develop, manufacture, import, and distribute ***. Accordingly, you are not engaged in scientific research within the meaning of Treas. Reg. Section 1.501(c)(3)-1(d)(5)(ii). You have failed to establish that you have any plans or intent to publish research or otherwise make your research or findings available to the public on a non-discriminatory basis. Therefore, your research cannot be regarded as carried on in the public interest as required by Treas. Reg. Section 1.501(c)(3)-1(d)(5)(iii). Because your research does not serve a public interest as described in Treas. Reg. Section 1.501(c)(3)-1(5), you are not exempt under Section 501(c)(3) of the Code. *** This is not considered carried on a manner that is for the public interest and does not qualify as scientific research as described in Treas. Reg. Section 1.501(c)(3)-1(d)(5)(iv) under Section 501(c)(3) of the Code. Federal law does not recognize any health benefits of what is described as "assisted suicide" in 42 U.S.C. Section 14401(a)(2). Federal law, under 42 U.S.C. Section 14401(b), prohibits federal funds to be used to pay for items and services (including assistance) the purpose of which is to cause (or assist in causing) the suicide, euthanasia, or mercy killing of any individual. As stated in Regan, both tax exemption and tax deductibility are a form of federal subsidy. Also, stated in Green, tax deductions and exemptions are not designed to be applicable to activities that are illegal. Because you engage in activities that contravene federal law, you are not exempt. In the tax code, charity is interpreted in its generally accepted legal sense as described in Section 1.501(c)(3)-1(d)(2). This includes the requirement for all charitable trusts that their purposes may not be illegal or contrary to public policy as explained in Rev. Rul. 71-447. This ruling is further clarified by Rev. Rul. 75-384, which provides that an organization that induces or encourages the commission of criminal acts cannot be exempt under Section 501(c)(3) of the Code since it violates the common understanding of a charitable trust. These principles were later upheld in the Supreme Court case Bob Jones University, where in reaching its decision, the Court indicated that entitlement to tax exemption depends on meeting certain common law standards of charity; namely, that an institution seeking tax-exempt status must serve a public purpose and not be contrary to established public policy. Since you are operated to support those engaging in the federally illegal act of providing medical aid in dying medicine, you cannot be exempt under Section 501(c)(3). You are not operated exclusively for exempt purposes because you are formed to advance the development of a ***. Treas. Reg. Section 1.501(c)(3)-1(e)(1). As held in Better Business Bureau, the presence of a single non-exempt purpose if substantial in nature, will destroy the exemption regardless of the number or importance of truly exempt purposes. Your provision of medical aid in dying medicine is a substantial non-exempt purpose, which precludes you from exemption. Your development, manufacture, import, and sale of *** charitable purpose. Like Federation Pharmacy Services Inc., the distribution of medication does not automatically cause you to qualify as a Section 501(c)(3) organization. As explained in IHC Health Plans, selling health services or goods at a discount, is not, of itself, a charitable purpose. You anticipate that by your *** year of operations all of your revenue will come from the sale of ***. Even if you were to make the medication more easily obtainable or cheaper, this does not automatically convert your activity to one that is charitable. If it could so be converted, then so could a store which sells orthopedic shoes, health foods, or any other product beneficial to health as explained in Federation Pharmacy Services Inc. Without more, the law does not require that any organization whose purpose is to benefit health is automatically entitled to exemption. Therefore, even if we were to assume that *** were providing a health benefit to the community, without more, selling medication to qualified individuals is not an exclusively charitable activity and you do not qualify for exemption under Section 501(c)(3) of the Code. Your position Your charitable purpose is to offer ***. You assert that medical aid in dying is legal under federal law by citing Gonzales v. Oregon, 546 U.S. 243 (2006), which held that doctors are permitted to prescribe regulated drugs for medical aid in dying under state law that permits the procedures. This holding is based on principles of federalism, delegation of the states of the regulation of the medical profession under the states' police powers, and consideration of "public interest." *** You assert that Gonzales v. Oregon is relevant because the Supreme Court rejected the tactic to interpret federal law and that the court found that states are free to resolve the question for themselves. The United States Constitution contains no explicit delegation of authority for the federal government to regulate medical aid in dying. There are currently no federal laws or regulations that make the practice of medical aid in dying illegal. You cited Aid to Artisans, and stated that the presence of profitmaking activities is not, per se, a bar to qualification of an organization as exempt if the activities further or accomplish an exempt purpose. You said that Treas. Reg. Section 1.501(c)(3)-1(e)(1) provides that an organization may meet the requirements of Section 501(c)(3) although it operates a trade or business as a substantial part of its activities, if the operation of such trade of business is in further of the organization's purpose. You said that you satisfy both the statutory and case law standards because you function as an "ecosystem" whereby the proceeds from the sale ***. Additionally, you cited Rev. Rul. 79-17, which provides that alleviating the physical and mental distress of the terminally ill is a qualifying charitable purpose under Section 501(c)(3) of the Code. Our response to your position You cited Gonzales v. Oregon and said that medical aid in dying is legal under federal law if state law permits it. In this case, the court determined that the U.S. Attorney General can't enforce the federal Controlled Substances Act against the physicians who prescribed the drugs in compliance with Oregon state law. This case was regarding the legality of the physicians prescribing medicine, not whether or not their activities were tax exempt. As indicated previously, 42 U.S.C. Section 14401(a)(2) states that assisted suicide, euthanasia, and mercy killing have been criminal offenses throughout the U.S. and, under current law, it would be unlawful to provide services in support of such illegal activities. Conducting a federally illegal activity does not further any exempt purpose. Although you said that you do not operate a trade or business, Treas. Reg. Section 1.501(c)(3)-1(e)(1) provides that an organization may meet the requirements of Section 501(c)(3), if the operation of such trade of business is in further of an exempt purpose. The first hurdle is that you must be exclusively furthering an exempt purpose. Manufacturing, distributing and selling *** is not an exempt purpose, so with that alone you do not qualify for exemption. Even if it were an exempt purpose, it is illegal at the federal level, which is another bar to exemption. Conclusion Your activity of enabling***** through the development, facilitation, and distribution of certain medication, is illegal under federal law. Because you support and engage in activities that contravene federal law, you are not exempt under Section 501(c)(3) of the Code. In addition, your development and distribution of medication, without more, furthers a substantial non-exempt purpose. For these reasons, you do not qualify for exemption under Section 501(c)(3). If you don't agree You have a right to file a protest if you don't agree with our proposed adverse determination. To do so, you must send a statement to us within 30 days of the date of this letter. The statement must include: - Your name, address, employer identification number (EIN), and a daytime phone number - A copy of this letter highlighting the findings you disagree with - An explanation of why you disagree, including any supporting documents - The law or authority, if any, you are relying on - The signature of an officer, director, trustee, or other official who is authorized to sign for the organization, or your authorized representative - One of the following declarations: For an officer, director, trustee, or other official who is authorized to sign for the organization: Under penalties of perjury, I declare that I examined this protest statement, including accompanying documents, and to the best of my knowledge and belief, the statement contains all relevant facts and such facts are true, correct, and complete. For authorized representatives: Under penalties of perjury, I declare that I prepared this protest statement, including accompanying documents, and to the best of my knowledge and belief, the statement contains all relevant facts and such facts are true, correct, and complete. Your representative (attorney, certified public accountant, or other individual enrolled to practice before the IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if he or she hasn't already done so. You can find more information about representation in Publication 947, Practice Before the IRS and Power of Attorney. We'll review your protest statement and decide if you provided a basis for us to reconsider our determination. If so, we'll continue to process your case considering the information you provided. If you haven't provided a basis for reconsideration, we'll forward your case to the Office of Appeals and notify you. You can find more information about the role of the Appeals Office in Publication 892, How to Appeal an IRS Decision on Tax-Exempt Status. If you don't file a protest within 30 days, you can't seek a declaratory judgment in court at a later date because the law requires that you use the IRS administrative process first (Section 7428(b)(2) of the Code). Where to send your protest Please send your protest statement, Form 2848, if needed, and any supporting documents to the applicable address: U.S. mail: Internal Revenue Service EO Determinations Quality Assurance Room 7-008 P.O. Box 2508 Cincinnati, OH 45201 Street address for delivery service: Internal Revenue Service EO Determinations Quality Assurance 550 Main Street, Room 7-008 Cincinnati, OH 45202 You can also fax your statement and supporting documents to the fax number listed at the top of this letter. If you fax your statement, please contact the person listed at the top of this letter to confirm that he or she received it. If you agree If you agree with our proposed adverse determination, you don't need to do anything. If we don't hear from you within 30 days, we'll issue a final adverse determination letter. That letter will provide information on your income tax filing requirements. You can find all forms and publications mentioned in this letter on our website at www.irs.gov/formspubs. If you have questions, you can contact the person listed at the top of this letter. Sincerely, Stephen A. Martin Director, Exempt Organizations Rulings and Agreements Enclosure: Publication 892
Notice 2022-31 Internal Revenue Service 2022-29 I.R.B. 85 Guidance Regarding the Changes Made by the American Rescue Plan Act to the Election of Alternative Minimum Funding Standards for Community Newspaper Plans under Section 430(m) Notice 2022-31 I. Purpose This notice provides guidance regarding the changes made by section 9707 of the American Rescue Plan Act of 2021 (the ARP), Pub. L. 117-2, 135 Stat. 4 (March 11, 2021) to the election of alternative minimum funding standards under section 430(m) of the Internal Revenue Code (Code) for a defined benefit pension plan that is a community newspaper plan or any other plan that is sponsored by an eligible newspaper plan sponsor. II. Background Section 430(m) of the Code was added by section 115 of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), enacted as Division O of the Further Consolidated Appropriations Act, 2020, Pub. L. 116-94, 133 Stat. 2534 (2019). 1 Section 430(m) provides alternative minimum funding standards that may be elected for certain community newspaper plans and other defined benefit plans sponsored by members of a controlled group that includes the sponsor of the community newspaper plan. Pursuant to section 430(m)(2), as added by the SECURE Act, any election to apply section 430(m) is to be made at such time and in such manner as prescribed by the Secretary, and once an election is made with respect to a plan year, it will apply to all subsequent plan years unless revoked with the consent of the Secretary. Under section 115(c) of the SECURE Act, section 430(m) of the Code applies to plan years ending after December 31, 2017. ****** 1 Section 115(b) of the SECURE Act also added section 303(m) to the Employee Retirement Income Security Act of 1974, Pub. L. 93-406 (88 Stat. 829), as amended (ERISA). Section 303(m) of ERISA provides rules that generally are parallel to the rules of section 430(m) of the Code, and section 9707 of the ARP includes amendments to section 303(m) of ERISA that are parallel to the amendments made to section 430(m) of the Code. Under section 101 of Reorganization Plan No. 4 of 1978, 5 U.S.C. App., as amended, and section 3002(c) of ERISA, the Secretary of the Treasury has interpretive jurisdiction over the subject matter addressed in this notice for purposes of ERISA, as well as the Code. Thus, the provisions of this notice relating to section 430 of the Code also apply for purposes of section 303 of ERISA. **** Notice 2020-60, 2020-36 I.R.B. 514, provides guidance regarding the election to apply the alternative minimum funding standards of section 430(m). Notice 2020-60 also provides additional flexibility to facilitate retroactive elections under section 430(m) (including deemed immaterial treatment under section 436 for changes in a plan's adjusted funding target attainment percentage due to an election to apply section 430(m)) and provides instructions for completing Schedule SB, "Single-Employer Defined Benefit Plan Actuarial Information," of Form 5500, "Annual Return/Report of Employee Benefit Plan," to reflect the election. Section 9707 of the ARP revised section 430(m) in a number of ways, including by modifying the requirements for eligibility to make an election to apply section 430(m). Prior to the ARP, section 430(m)(1) provided that the election to apply the alternative minimum funding standards of section 430(m) was made by the plan sponsor of a community newspaper plan under which no participant has had an increase in accrued benefits after December 31, 2017 (whether because of service or compensation), and the election applied to all other defined benefit plans sponsored by any member of that plan sponsor's controlled group as of December 20, 2019 (the date of enactment of the SECURE Act). As amended by section 9707 of the ARP, section 430(m)(1) now provides that the election to apply section 430(m) is made by an eligible newspaper plan sponsor of a plan under which no participant has had an increase in accrued benefits after April 2, 2019 (whether because of service or compensation), and the election applies only to the plan for which the election is made. Section 430(m)(2)(A) was added to define an "eligible newspaper plan sponsor" as the plan sponsor of a community newspaper plan. 2 Under section 430(m)(2)(B), the definition of an eligible newspaper plan sponsor also includes a member of the controlled group of a plan sponsor described in the preceding sentence (determined as of December 20, 2019) if that member is in the trade or business of publishing one or more newspapers, and that member sponsored the plan for which it is making the election as of April 2, 2019. Section 430(m) as amended by the ARP is effective for plan years ending after December 31, 2017 (the same as the original effective date of section 430(m) under the SECURE Act). **** 2 Section 430(m)(5)(A), as revised by section 9707 of the ARP, includes minor changes to the definition of community newspaper plan (which was formerly in section 430(m)(4)(A)). Section 430(m)(5)(B) defines the term "newspaper" to exclude any newspaper that: is not in general circulation, is published (on newsprint or electronically) less frequently than 3 times per week, has not ever been regularly published on newsprint, or does not have a bona fide list of paid subscribers. ****** III. Modifications to Notice 2020-60 In light of the changes to section 430(m) made by the ARP, this notice modifies the guidance provided in Notice 2020-60. Any guidance provided in Notice 2020-60 that is not addressed in this notice continues to apply. A. Definition of a community newspaper plan The term "community newspaper plan" means any plan to which section 430 applies that is maintained as of December 31, 2018, by an employer that satisfies the following three conditions: - The employer maintains the plan on behalf of participants and beneficiaries with respect to employment in the trade or business of publishing one or more newspapers which were published by the employer at any time during the 11-year period ending on December 20, 2019; - The employer is either: (1) Not a company the stock of which is publicly traded (on a stock exchange or in an over-the-counter market), and is not controlled, directly or indirectly, by such a company, or (2) Controlled, directly or indirectly, during the entire 30-year period ending on December 20, 2019, by individuals who are members of the same family, and does not publish or distribute a daily newspaper that is carrier-distributed in printed form in more than five States; and - The employer is controlled, directly or indirectly-- (1) By one or more persons residing primarily in a State in which the community newspaper has been published on newsprint or carrier-distributed, (2) During the entire 30-year period ending on December 20, 2019, by individuals who are members of the same family, (3) By one or more trusts, the sole trustees of which are persons described in (1) or (2), or (4) By a combination of persons described in (1), (2), or (3). Section 430(m)(5)(C) provides a definition of "control" for purposes of these rules. Under that provision, a first person is treated as controlled by a second person if the second person possesses, directly or indirectly, the power to direct or cause the direction and management of the first person (including the power to elect a majority of the members of the board of directors of that person) through the ownership of voting securities. B. Definition of eligible newspaper plan sponsor and applicability of election to controlled group members The term "eligible newspaper plan sponsor" means an employer that sponsors any of the following plans: - A community newspaper plan, or - A defined-benefit plan sponsored by the employer as of April 2, 2019, provided that the employer is a member of the same controlled group as the plan sponsor of a community newspaper plan, and the employer is in the trade or business of publishing one or more newspapers. Under section 430(m)(1) as originally enacted, an election to apply section 430(m) made by a plan sponsor of a community newspaper plan also applies to any plan sponsored by any member of its controlled group, and section IV.D of Notice 2020-60 provides rules for determining how long that election continues to apply to a plan sponsored by a controlled group member. Because amended section 430(m) now requires a separate election to be made by each plan sponsor, the rules of section IV.D under Notice 2020-60 no longer apply. If an eligible newspaper plan sponsor that is not the sponsor of a community newspaper plan elects to apply section 430(m), that election will continue to apply (unless revoked) until the plan year following the plan year in which the employer ceases to be an eligible newspaper plan sponsor. Thus, the election ceases to apply beginning with the plan year following the plan year in which the controlled group member either leaves the controlled group or is no longer in the trade or business of publishing newspapers. Section IV.C of Notice 2020-60 provides that a sponsor of a community newspaper plan that has made an election to apply section 430(m) to its plan may request permission to revoke that election under section 430(m) using the procedures for obtaining a private letter ruling set forth in Rev.Proc. 2020-4, 2020-1 I.R.B. 148, or its successor. Pursuant to this notice, other eligible newspaper plan sponsors may request permission to revoke an election under section 430(m) using those same procedures. C. Renumbering of paragraphs of section 430(m) The numbering of several paragraphs of section 430(m) that are referenced in Notice 2020-60 has been changed by the enactment of the ARP. Those references in Notice 2020-60 are replaced as follows: - The reference to section 430(m)(2) is replaced by a reference to section 430(m)(3). - References to section 430(m)(3) are replaced by references to section 430(m)(4). - References to section 430(m)(5) are replaced by references to section 430(m)(6). D. Manner and content of election Pursuant to the amendments made by the ARP, an election to apply section 430(m) that was made by a sponsor of a community newspaper plan no longer applies to other defined benefit plans sponsored by members of the sponsor's controlled group. Therefore, this notice modifies the manner of the election set forth in section IV.A of Notice 2020-60 to eliminate the requirement to notify other controlled group members of the election (so that the election need only be provided to the plan's enrolled actuary and the plan administrator). An election to apply section 430(m) to a plan must be made by a sponsor of that plan, and that election does not apply to other plans. The information that must be included in the election set forth in section IV.A of Notice 2020-60 is modified by this notice. The election now must include the following: - The name and Employer Identification Number (EIN) of the employer, - The name and plan number of the plan, - The first plan year for which the election applies, - The date as of which the employer first sponsored the plan, - The date as of which benefit accruals ceased under the plan, - The name of the newspaper(s) published by the employer, and - A certification that the sponsor of the community newspaper plan satisfies the trade or business standard in section 430(m)(5)(A)(i) and satisfies the ownership and control standards under section 430(m)(5)(A)(ii) and (iii). If the employer is an eligible newspaper plan sponsor but is not the sponsor of a community newspaper plan, the election must also include the following: - A certification that, as of December 20, 2019, the employer was a member of a controlled group that includes the sponsor of a community newspaper plan and that the employer is in the trade or business of publishing one or more newspapers, and - The name and EIN of the employer that is the sponsor of the community newspaper plan. If a plan sponsor made an election to apply section 430(m) on or after March 11, 2021, and that election did not comply with the requirements set forth in this section III.D, the plan sponsor must make a new election that complies with these requirements no later than September 15, 2022, in order to retain the election. The Appendix to this notice sets forth a model for the written section 430(m) election. This model replaces the model election in Notice 2020-60. E. Extension of time to make retroactive section 430(m) elections and associated funding balance elections Section VI of Notice 2020-60 provides flexibility in several areas to facilitate retroactive section 430(m) elections in light of the retroactive effective date of section 430(m). Section VI.A of Notice 2020-60 provides an exception to the general timing rule restricting changes in actuarial assumptions after they have been established for a plan year, to allow an election to apply section 430(m) to be made for a plan year for which Schedule SB has already been filed. In order to fully reflect the impact of the reduced minimum funding requirement resulting from a retroactive section 430(m) election, section VI.B of Notice 2020-60 provides an extended period of time for certain plan sponsor elections to increase the plan's prefunding balance and to revoke an election to use the plan's prefunding balance or funding standard carryover balance (or reduce the portion of that balance to which an election applied). Pursuant to section VI of Notice 2020-60, the extended deadline for the actions was December 31, 2020. Like the original provisions of section 430(m) of the Code, the provisions of section 430(m), as revised by section 9707 of the ARP, apply to plan years ending after December 31, 2017. As a result of the changes made to section 430(m) of the Code by the ARP, some plan sponsors that publish newspapers and that were not previously eligible to make an election to apply section 430(m) may now be eligible. In addition, some plan sponsors that were eligible to elect to apply section 430(m) may not have made that election because of the effect of the election on other controlled group members and may now wish to do so. To facilitate retroactive section 430(m) elections and to fully reflect the impact of the reduced minimum funding requirement resulting from a retroactive section 430(m) election, the guidance in section VI of Notice 2020-60 is modified by substituting September 15, 2022, for December 31, 2020, as the extended deadline for the actions specified in that section. IV. Plan Sponsors That Applied the Pre-ARP Provisions of Section 430(m) Under section 430(m) prior to the amendments made by the ARP, if an election to apply section 430(m) was made by a plan sponsor of a community newspaper plan, that election also applied to all other defined benefit plans sponsored by members of the controlled group. However, after the amendments made by the ARP, the election to apply section 430(m) is made separately for each plan and is available only to a plan sponsor that is in the trade or business of publishing one or more newspapers. If the sponsor of a community newspaper plan made an election to apply section 430(m) prior to the enactment of the ARP (that is, prior to March 11, 2021), and a plan sponsored by a member of that sponsor's controlled group is eligible for an election to apply section 430(m) after the amendments made by the ARP, that member will be deemed to have made an election to apply section 430(m) after the amendments made by the ARP. Thus, if that member wishes to continue applying section 430(m) for its plan, it does not need to make a new election. However, if that member does not wish to apply section 430(m) for its plan, then this notice grants automatic approval to revoke that deemed election retroactively for all previous plan years for which the election applied, provided that the plan sponsor provides written notice of the revocation to the plan's actuary and plan administrator no later than September 15, 2022, and, for all plan years for which the election has been revoked, amended Forms 5500 with the revocation reflected on revised Schedules SB are filed no later than October 17, 2022. For a member that revokes this deemed section 430(m) election for all years for which it applies, the elections described in section IV of Notice 2021-48, 2021-33 I.R.B. 305 (relating to timing of implementation of certain statutory changes made by the ARP) are considered timely if they are made no later than October 17, 2022, and the actions described in sections V.A through V.C of Notice 2021-48 (permitting an extended time for certain changes relating to a plan's funding balances) are considered timely if they are completed by that date. If the sponsor of a community newspaper plan made an election to apply section 430(m) prior to the enactment of the ARP (that is, prior to March 11, 2021), and a plan sponsored by a member of that sponsor's controlled group is not eligible for an election to apply section 430(m) after the amendments made by the ARP (for example, the sponsor of that plan is not in the trade or business of publishing a newspaper, or a participant accrued a benefit under that plan after April 2, 2019, and before the original election to apply section 430(m) was made), then the plan's minimum required contribution under section 430 must be redetermined, and the plan may not be compliant with section 436. However, the IRS will not treat such a plan as failing to satisfy qualification requirements or minimum funding requirements merely because the plan sponsor does not apply the changes made to section 430(m) by the ARP until the first plan year that begins after March 11, 2021. V. Effect on Other Documents Notice 2020-60 is modified. Paperwork Reduction Act The collections of information contained in this notice 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 1545-2095. 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 notice are in the Appendix of this notice. The collections of information are required for a plan sponsor to elect to apply the alternative minimum funding standards under section 430(m). The collections of information are mandatory for those plan sponsors making a new election to apply section 430(m) to a plan. The likely respondents are sponsors of defined benefit plans whose eligibility to apply section 430(m) was affected by the enactment of the ARP or who have become eligible not to apply a section 430(m) election that was made by a controlled group member prior to the enactment of the ARP. Any potential changes on burden will be reported through the renewal of the current OMB approval numbers. Estimates of the annualized cost to respondents are not available at this time. Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by section 6103. Drafting information The principal author of this notice is Tom Morgan of the Office of the Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes). However, other personnel from the IRS participated in the development of this guidance. For further information regarding this notice, contact Mr. Morgan or Linda Marshall at 202-317-6700 (not a toll-free number). Appendix Model election As an officer of the employer sponsoring a community newspaper plan as defined in section 430(m)(5) of the Internal Revenue Code, or an officer of another eligible newspaper plan sponsor as defined in section 430(m)(2)(B), I hereby elect to apply the alternative minimum funding standards under section 430(m)(4), beginning with the plan year beginning _______. I also provide the following information about the employer and plan and hereby certify that the plan sponsor of the community newspaper plan meets the trade or business standard described in section 430(m)(5)(A)(i) and the ownership and control standards under section 430(m)(5)(A)(ii) and (iii) as set forth below: Information about the employer and plan: - Name of employer - Employer Identification Number (EIN) of employer - Name of plan for which election is made - Plan number - Date as of which employer first sponsored the plan - Date as of which benefit accruals ceased - Name of newspapers published by the employer - Name and EIN of the sponsor of the community newspaper plan (if the election is being made by an eligible newspaper plan sponsor described in section 430(m)(2)(B)) Certifications relating to trade or business, ownership, and control: - For an employer that sponsors a community newspaper plan: o The employer maintains the plan on behalf of participants and beneficiaries with respect to employment in the trade or business of publishing one or more newspapers which were published by the employer at any time during the 11-year period ending on December 20, 2019; o The employer sponsoring the community newspaper plan is (indicate all that apply): (1) Not publicly traded, and is not controlled, directly or indirectly, by a publicly traded company ____, or (2) Controlled, directly or indirectly, during the entire 30-year period ending on December 20, 2019, by individuals who are members of the same family, and does not publish or distribute a daily newspaper that is carrier-distributed in printed form in more than five States____; and o The employer is controlled directly or indirectly (indicate all that apply): (1) By one or more persons residing primarily in the state in which the community newspaper is published or carrier-distributed ____ (2) For not less than the 30-year period ending on December 20, 2019, by individuals who are members of the same family ____ (3) By one or more trusts, the sole trustees of which are persons described in (1) or (2) ____ (4) By a combination of persons described in (1), (2), or (3) ____ - For an eligible newspaper plan sponsor described in section 430(m)(2)(B): o As of December 20, 2019, the employer is a member of a controlled group that includes the sponsor of a community newspaper plan o The employer is in the trade or business of publishing one or more newspapers Signature of employer __________________________ Date ______ Name ________________________ Title______________________
Private Letter Ruling Number: 202250004 Internal Revenue Service September 15, 2022 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202250004 Release Date: 12/16/2022 Index Number: 163.10-13, 9100.00-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: ID No. Telephone Number: Refer Reply To: CC:ITA:B02 PLR-105939-22 Date: September 15, 2022 Dear ****: This letter responds to your correspondence dated Date 2, requesting an extension of time under §§ 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations for Taxpayer to make the real property trade or business election under § 163(j)(7)(B) of the Internal Revenue Code, § 1.163(j)-9 of the Income Tax Regulations, and Rev.Proc. 2020-22, 2020-18 I.R.B. 745 ("RPTOB Election"), with respect to its real property trade or business for its taxable year ended Date 1 ("the Year 1 taxable year"). 1 This letter ruling is being issued electronically, as permissible under sections 7.02(2) and 9.04(3) of Rev.Proc. 2022-1, 2022-1 I.R.B. 1, 33, 49. **** 1 Taxpayer executed a Form 872, "Consent to Extend the Time to Assess Tax," to extend the limitations period for the Year 1 taxable year to Date 4. ****** FACTS Taxpayer operates as a real estate and investment advisory services company. Taxpayer's real estate business consists of both active real estate operations and passive real estate investments owned either directly or indirectly through entities classified as partnerships or disregarded for U.S. Federal income tax purposes. Taxpayer's real estate business includes all aspects of real estate ownership, including acquisitions and divestments, leasing, property management, financing, capital improvements, and facility maintenance. In Month 1, Taxpayer decided to make a late RPTOB Election with respect to its real property trade or business for its Year 1 taxable year, on an amended income tax return, pursuant to section 4 of Rev.Proc. 2020-22. Taxpayer had engaged Accounting Firm to provide tax compliance and tax advisory services for the relevant tax years. These services included tax return preparation and tax advisory services on various tax matters, including the application of the limitation on business interest expense under § 163(j). In Month 2, Taxpayer also engaged Accounting Firm to prepare an amended tax return for its Year 1 taxable year in order to make a late RPTOB Election pursuant to Rev.Proc. 2020-22. The Accounting Firm senior manager and partner responsible for preparation of Taxpayer's Year 3 income tax return and the statement required for Taxpayer's amended return for Year 1 mistakenly believed that the late RPTOB Election could be filed on Taxpayer's amended Year 1 tax return no later than Date 3, the end of the applicable period of limitations on assessment for the Year 1 taxable year. The reason for this error was a misinterpretation of the language in section 4 of Rev.Proc. 2020-22, which established the deadline for filing a late RPTOB Election. The actual deadline for filing a late RPTOB Election for the Year 1 taxable year was October 15, 2021. Accounting Firm had communicated the erroneous filing deadline to Taxpayer, and Taxpayer relied on the filing deadline provided by Accounting Firm. The income tax returns for Year 2 and Year 3 included statements indicating Taxpayer's intention to make a late RPTOB Election for Year 1 under Rev.Proc. 2020-22. The Accounting Firm senior manager and partner serving Taxpayer did not discover their misinterpretation with regard to the deadline for filing Taxpayer's Year 1 amended tax return to make a late RPTOB election pursuant to Rev.Proc. 2020-22 until Month 3, after the October 15, 2021 deadline had passed. In Month 4, Accounting Firm advised taxpayer to request relief under §§ 301.9100-1 and 301.9100-3 for an extension of time to make the RPTOB Election, and Taxpayer requested that Accounting Firm prepare and file a request for relief. LAW & ANALYSIS Section 163(j)(1)(A) limits a taxpayer's deduction for "business interest." The term "business interest" means any interest paid or accrued on indebtedness property allocable to a "trade or business." § 163(j)(5). The term "business interest," however, does not include "any electing real property trade or business." § 163(j)(7)(A)(ii). An "electing real property trade or business" is any trade or business that is described in § 469(c)(7)(C) and that makes an election under § 163(j)(7)(B). Section 1.163(j)-9(d)(1) provides that a taxpayer makes a RPTOB Election by attaching a statement to the taxpayer's timely filed original Federal income tax return, including extensions. Section 4.02 of Rev.Proc. 2020-22 allows certain taxpayers to make a late RPTOB Election for a taxable year beginning in 2018, 2019, or 2020 on an amended federal income tax return. In general, section 4.02 of Rev.Proc. 2020-22 requires the amended federal income tax return for the Year 1 taxable year to be filed by October 15, 2021. Sections 301.9100-1 through 301.9100-3 provide the standards the Commissioner will use to determine whether to grant an extension of time to make an election. Section 301-9100-1(c) provides that the Commissioner has discretion to grant a reasonable extension of time under the rules set forth in §§ 301.9100-2 and 301.9100-3 to make certain regulatory elections. Section 301.9100-1(b) defines a "regulatory election" as an election whose due date is prescribed by a regulation published in the Federal Register, or a revenue ruling, revenue procedure, notice or announcement published in the Internal Revenue Bulletin. Section 301.9100-3(a) provides that requests for relief under § 301.9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith and that granting relief will not prejudice the interests of the Government. Section 301.9100-3(b)(1) provides that a taxpayer is deemed to have acted reasonably and in good faith if the taxpayer: (i) requests relief before the failure to make the regulatory election is discovered by the Service; (ii) failed to make the election because of intervening events beyond the taxpayer's control; (iii) failed to make the election because, after exercising reasonable diligence (taking into account the taxpayer's experience and the complexity of the return at issue), the taxpayer was unaware of the necessity for the election; (iv) reasonably relied on the written advice of the Service; or (v) reasonably relied on a qualified tax professional, including a tax professional employed by the taxpayer, and the tax professional failed to make, or advise the taxpayer to make, the election. Section 301.9100-3(b)(3) provides that a taxpayer will not be deemed to have acted reasonably and in good faith if the taxpayer: (i) seeks to alter a return position for which an accuracy-related penalty has been or could be imposed under § 6662 at the time the taxpayer requests relief, and the new position requires or permits a regulatory election for which relief is requested; (ii) was informed in all material respects of the required election and related tax consequences, but chose not to file the election; or (iii) uses hindsight in requesting relief. Section 301.9100-3(c)(1) provides that an extension of time to make a regulatory election will be granted only when the interests of the Government are not prejudiced by the granting of relief. The interests of the Government are prejudiced if granting relief would result in a taxpayer having a lower tax liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made (taking into account the time value of money). Section 301.9100-3(c)(1)(i). The interests of the Government are ordinarily prejudiced if the taxable year in which the regulatory election should have been made or any taxable years that would have been affected by the election had it been timely made are closed by the period of limitations under § 6501(a) before the taxpayer's receipt of a ruling granting relief under this section. Section 301.9100-3(c)(1)(ii). Taxpayer's election is a regulatory election as defined in § 301.9100-1(b) because the requirements and due date of the election are prescribed in section 4 of Rev.Proc. 2020-22. The Commissioner has the authority under §§ 301.9100-1 and 301.9100-3 to grant an extension of time to file a regulatory election. CONCLUSION Based solely on the information provided and representations made, we conclude that Taxpayer acted reasonably and in good faith and granting relief will not prejudice the interests of the Government. In so doing, we likewise conclude that Taxpayer has met the requirements of §§ 301.9100-1 and 301.9100-3. Taxpayer is granted an extension of 60 calendar days from the date of this letter ruling to amend its tax return for Year 1 to make the RPTOB Election, pursuant to § 163(j) and the regulations thereunder. Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. In particular, we are not expressing any opinion concerning whether Taxpayer qualifies to make the RPTOB Election, and we are not expressing any opinion concerning whether any property of Taxpayer qualifies for the RPTOB Election. Moreover, we also are not expressing any opinion concerning whether Taxpayer is within the scope of Rev.Proc. 2020-22. This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. A copy of this letter must be attached to any income tax return to which it is relevant. Taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter ruling. The ruling contained in this letter is based upon information and representations submitted by Taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination. Sincerely, Robert A. Martin Senior Technician Reviewer, Branch 2 (Income Tax & Accounting) Enclosure: Copy for § 6110 purposes cc:
Private Letter Ruling Number: 202052030 Internal Revenue Service May 8, 2020 DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE 1100 Commerce Street, MC 4920DAL Dallas, TX 75242 TAX EXEMPT AND GOVERMENT ENTITIES DIVISION Number: 202052030 Release Date: 12/24/2020 UIL: 501.03-00 Date: May 8, 2020 Taxpayer ID Number: Form: Tax Period(s) Ending: Person to Contact: Identification Number: Telephone Number: Fax Number: CERTIFIED MAIL -- Return Receipt Requested LAST DAY FOR FILING A PETITION WITH THE TAX COURT: Dear *****: This is a final determination that you do not qualify for exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3), effective February 1, 20XX. Your determination letter dated August 5, 20XX is revoked. Our adverse determination as to your exempt status was made for the following reasons: Organizations described in IRC Section 501(c)(3) and exempt under Section 501(a) must be both organized and operated exclusively for exempt purposes. You have not demonstrated that you are operated exclusively for charitable, educational, or other exempt purposes within the meaning of Section 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. You have not established that you have operated exclusively for an exempt purpose. As such, you failed to meet the requirements of IRC Section 501(c)(3) and Treasury Regulations Section 1.501(c)(3)-1(a), in that you have not established that you were organized and operated exclusively for exempt purposes and that no part of your earnings inured to the benefit of private shareholders or individuals. Contributions to your organization are no longer deductible under IRC Section 170. Organizations that are not exempt under IRC Section 501 generally are required to file federal income tax returns and pay tax, where applicable. For further instructions, forms, and information please visit www.irs.gov. If you decide to contest this determination, you may file an action for declaratory judgment under the provisions of IRC Section 7428 in one of the following three venues: 1) United States Tax Court, 2) the United States Court of Federal Claims, or 3) the United States District Court for the District of Columbia. A petition or complaint in one of these three courts must be filed within 90 days from the date this determination was mailed to you. Please contact the clerk of the appropriate court for rules and the appropriate forms for filing petitions for declaratory judgment by referring to the enclosed Publication 892. You may write to the courts at the following addresses: United States Tax Court 400 Second Street, NW Washington, DC 20217 US Court of Federal Claims 717 Madison Place, NW Washington, DC 20005 U.S. District Court for the District of Columbia 333 Constitution Ave., N.W. Washington, DC 20001 Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory judgment under IRC Section 7428. We'll notify the appropriate state officials (as permitted by law) of our determination that you aren't an organization described in IRC Section 501(c)(3). You may be eligible for help from the Taxpayer Advocate Service (TAS). TAS is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 1-877-777-4778. Taxpayer Advocate assistance can't be used as substitute for established IRS procedures, formal appeals processes, etc. The Taxpayer Advocate is not able to reverse legal or technically correct tax determination, nor extend the time fixed by law that you have to file a petition in Court. The Taxpayer Advocate can, however, see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling. You can get any of the forms or publications mentioned in this letter by calling 800-TAX-FORM (800-829-3676) or visiting our website at www.irs.gov/forms-pubs. If you have any questions about this letter, please contact the person whose name and telephone number are shown in the heading of this letter. Sincerely, Maria D. Hooke Director, EO Examinations Enclosures: Publication 892 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Date: 11/18/2019 Taxpayer ID number: Form: Tax periods ended: Person to contact: ID number: Telephone: Fax: Address: Manager's contact Information: ID number: Telephone: Response due date: CERTIFIED MAIL -- Return Receipt Requested Dear ***: Why you're receiving this letter We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we propose to revoke your tax-exempt status as an organization described in Internal Revenue Code (IRC) Section 501(c)(3). If you agree If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an organization described in IRC Section 501(c)(3) for the periods above. If you disagree 1. Request a meeting or telephone conference with the manager shown at the top of this letter. 2. Send any information you want us to consider. 3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after the meeting or after we consider the information. The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case. For your protest to be valid, it must contain certain specific information, including a statement of the facts, applicable law, and arguments in support of your position. For specific information needed for a valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn't apply now that we've issued this letter. 4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities) if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the IRS. If you're considering requesting technical advice, contact the person shown at the top of this letter. If you disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as explained above. A decision made in a technical advice memorandum, however, generally is final and binding on Appeals. If we don't hear from you If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final adverse determination letter. Contacting the Taxpayer Advocate Office is a taxpayer right The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778. Additional information You can get any of the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person shown at the top of this letter. Sincerely, Maria Hooke Director, Exempt Organizations Examinations Enclosures: Form 886-A Form 6018 Publication 892 Publication 3498 ISSUE: Whether *** continues to qualify for exemption as an organization described in the Internal Revenue Code (IRC) Section 501(c)(3). FACTS: *** was incorporated under the laws of the State of *** as a non-profit corporation on March 10, 20XX for the purpose of the following: "The organization is organized, and at all times hereafter shall be operated, exclusively for the benefit of, to perform the functions of, or to carry out the purposes of the *** Foundation. The Corporation shall make periodic charitable distributions and grants exclusively to the ***. On August 5, 20XX, *** was recognized to be exempt from federal income tax as an organization described in IRC Section 501(c)(3). The organization was classified under 509(a)(3) as a Type I supporting organization. During an interview on October 4, 20XX, the organization's confirmed the following: - The organization was expecting a large donation in order for the organization to become operational - The donation was never actually received - The organization continues to file the appropriate Form 990 series return in order to maintain exemption - The organization has never been operational due to lack of funding - The organization would like to continue to keep its exemption status until funding is secured - No formal plan is in place to secure funding LAW: IRC § 501(c)(3) exempts from federal income tax organizations which are organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office. IRC § 509(a)(3) of the Code provides, in part, that the term "private foundation" does not include an organization which is organized, and at all times thereafter is operated, exclusively for the benefit of, to perform the functions of, or to carry out the purposes of one or more specified exempt organizations described in sections 509(a)(1) and 509(a)(2) of the Code; and is operated, supervised, or controlled by or in connection with one or more organizations described in sections 509(a)(1) and 509(a)(2). Treasury Regulations § 1.501(c)(3)-1(d)(i) states that an organization may be exempt as an organization described in 501(c)(3) if it is organized and operated exclusively for one or more of the following purposes: religious, charitable, scientific, testing for public safety, literary, educational, or prevention of cruelty to children or animals. Treasury Regulations § 1.501(c)(3)-1(a)(1) of the regulations provides that in order to be exempt as an organization described in section 501(c)(3) of the Code, the organization must be one that is both organized and operated exclusively for one or more of the purposes specified in that section. Treasury Regulations § 1.501(c)(3)-1(b) of the regulations provides that in order to be exempt as an organization described in section 501(c)(3) of the Code, the organization must pass the organizational test. The organizational test requires an appropriate purpose and dissolution statement limited to the organization's exempt purpose. Treasury Regulations § 1.501(c)(3)-1(c)(1) of the regulations provides that an organization will be regarded as "operated exclusively" for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in section 501(c)(3). Section 1.509(a)-4(e)(1) of the regulations provides that a supporting organization will be regarded as "operated exclusively" to support one or more specified publicly supported organizations only if it engages solely in activities which support or benefit the specified publicly supported organizations. Such activities may include making payments to or for the use of, or providing services or facilities for, individual members of the charitable class benefited by the specified publicly supported organization. In Make a Joyful Noise, Inc. v. Commissioner, 56 T.C.M. 1003 (1989), the Court concluded that the petitioner was not described in IRC 501(c)(3). The petitioner was organized in order to operate a camp for disadvantaged children and elderly citizens. While the organization maintained this goal, during its more than five years of operation, no progress was made towards its accomplishment. Initially the organization conducted its own bingo games. In response to a change in state law, the organization conducted bingo games on behalf of other organizations. The Court found that the petitioner was principally engaged in the conduct of bingo games and did not meet its burden of proof to show that it operated exclusively for the exempt purposes described in IRC Section 501(c)(3). In Community Education Foundation v Commissioner of Internal Revenue, the Court concluded that the petitioner was not described in IRC 501(c)(3). The petitioner was organized to hold town hall meetings, national workshops and congressional forums. However, the petitioner did not meaningfully organize or allocate resources for any of those activities. Since the organization failed to engage in activities in accordance with its exempt purpose, the organization's tax exempt status was revoked. TAXPAYER'S POSITION: Taxpayer's position has not been provided. GOVERNMENT'S POSITION: Treasury Regulations § 1.501(c)(3)-1(c)(1) of the regulations provides that an organization will be regarded as "operated exclusively" for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in section 501(c)(3). The organization cannot operate exclusively for one or more exempt purpose if it is not engaging in any activity. The organization has not been operational for about 0 years. There is no formal plan in place to establish funding to make the organization operational. The organization cannot pass the operational test when the organization is inactive or not operational. CONCLUSION: ***** no longer qualifies for exemption under 501(c)(3) of the Code because it does not pass the operational test. The effective revocation date will be February 1, 20XX. If you agree to this conclusion, please sign the attached Forms. If you disagree please submit a statement of your position.
Revenue Procedure 2020-35 Internal Revenue Service 2020-29 I.R.B. 82 NOTE. This revenue procedure will be reproduced as the next revision of IRS Publication 1179, General Rules and Specifications for Substitute Forms 1096, 1098, 1099, 5498, and Certain Other Information Returns. Forms and instructions. (Also, Part 1, Sections 101, 162(f), 170, 199A, 220, 223, 401(a), 403(a), 403(b), 408, 408A, 457(b), 529, 529A, 530, 853A, 1400Z-1, 1400Z-2, 1441, 6041, 6041A, 6042, 6043, 6044, 6045, 6047, 6049, 6050A, 6050B, 6050D, 6050E, 6050H, 6050J, 6050N, 6050P, 6050Q, 6050R, 6050S, 6050U, 6050W, 6050X, 6050Y, 6071, 1.402A-2, 1.408-5, 1.408-7, 1.408-8, 1.408A-7, 1.1441-1 through 1.1441-5, 1.1471-4, 1.6041-1, 1.6042-2, 1.6042-4, 1.6043-4, 1.6044-2, 1.6044-5, 1.6045-1, 1.6045-2, 1.6045-4, 1.6047-1, 1.6047-2, 1.6049-4, 1.6049-6, 1.6049-7, 1.6050A-1, 1.6050B-1, 1.6050D-1, 1.6050E-1, 1.6050H-1, 1.6050H-2, 1.6050J-1T, 1.6050N-1, 1.6050P-1, 1. 6050S-1, 1.6050S-3, 1.6050W-1, 1.6050W-2, 1.6050Y-1, 1.6050Y-2, 1.6050Y-3.) Rev. Proc. 2020-35 Part 1 General Information Section 1.1 - Overview of Revenue Procedure 2020-35/What's New 1.1.1 The purpose of this revenue procedure is to set forth the 2020 requirements for: Purpose - Using official Internal Revenue Service (IRS) forms to file information returns with the IRS, - Preparing acceptable substitutes of the official IRS forms to file information returns with the IRS, and - Using official or acceptable substitute forms to furnish information to the recipients. 1.1.2 This revenue procedure contains specifications for these information returns: Which Forms Are Covered? 1.1.3 For purposes of this revenue procedure, a substitute form or statement is one that is not published Scope by the IRS. For a substitute form or statement to be acceptable to the IRS, it must conform to the official form or the specifications outlined in this revenue procedure. Do not substitute any substitute forms or statements listed above to the IRS for approval. Privately published forms may not state, "This is an IRS approved form." Filers making payments to certain recipients during a calendar year are required by the Internal Revenue Code (the Code) to file information returns with the IRS for these payments. These filers must also provide this information to their recipients. In some cases, this also applies to payments received. See Part 4 for specifications that apply to recipient statements (Generally Copy B). In general, section 6011 of the Code contains the requirements for filers of information returns. A filer must file information returns electronically or on paper. A filer who is requested to file 250 or more information returns of any one type during a calendar year must file those returns electronically. Caution. Financial institutions that are required to report payments made under chapter 3 or 4 must file Forms 1042-S electronically, regardless of the number of forms to file. Note. If you file electronically, do not file the same returns on paper. Although not required, small volume filers (fewer than 250 returns during a calendar year) may file the forms electronically. See the requirements for filing information returns (and providing a copy to a payee) in the 2020 General Instructions for Certain Information Returns and the 2020 Instructions for Form 1042-S. In addition, see the current revision of Publication 1220, Specifica- tions for Electronic Filing of Forms 1097, 1098, 1099, 3921, 3922, 5498, and W-2G, for electronic filing through the IRS FIRE system. 1.1.4 The IRS prints and provides the forms on which various payments must be reported. See Sec- For More tion 5.3, later, for ordering forms and instructions. Alternatively, filers may prepare substitute copies Information of these IRS forms and use such forms to report payments to the IRS. - The Internal Revenue Service/Information Returns Branch (IRS/IRB) maintains a central- ized customer service call site to answer questions related to information returns (Forms W-2, W-3, W-2c, W-3c, 1099 series, 1096, etc.). You can reach the call site at 866-455-7438 (toll-free) or outside the U.S. 304-263-8700 (not a toll-free number). Persons with a hearing or speech disability with access to TTY/TDD equipment can call 304-579-4827 (not a toll- free number). You may also send questions to the call site via the internet at mccirp@irs. gov. Note. IRS/IRB does not process information returns which are filed on paper forms. See Publication 1220 for information on waivers and extensions of time. - For other tax information related to business returns or accounts, call 800-829-4933. Persons with hearing or speech disabilities with access to TTY/TDD equipment can call 800-829- 4059 to ask tax account questions or to order forms and publications. Note. Further information impacting Publication 1179, such as issues arising after its final release, will be posted on IRS.gov at IRS.gov/pub1179. 1.1.5 The following changes have been made to this year's revenue procedure. For further information What's New about each form listed below, see the separate reporting instructions. Redesigned Form 1099-MISC. Due to the creation of Form 1099 NEC, we have revised form Form 1099-MISC and rearranged box numbers for reporting certain information. For the latest filing infor- mation, see IRS.gov/Form1099-MISC. New Form 1099-NEC. Beginning with tax year 2020, use Form 1099-NEC to report nonemploy- ee compensation. See part C in the 2020 General Instructions for Certain Information Returns at IRS.gov/forms-pubs/about-form-1099, and Form 8809 at IRS.gov/forms-pubs/about-form-8809 for information on extensions of time to file. See part M in the 2020 General Instructions for Certain Information Returns for information on extensions of time to furnish recipient statements. To ease statement furnishing requirements, Copies B, C, 1, and 2 have been made fillable online in a PDF format available at IRS.gov/Form1099MISC and IRS.gov/Form1099NEC. You can com- plete these copies online for furnishing statements to recipients and for retaining in your own files. Form 1099-PATR. Numbered reporting box changes. New boxes were added and existing boxes were renumbered, retitled, and/or repurposed to allow for reporting information to patrons needed for section 199A. See the revised instructions for boxes 2, 5, 6, 7, 8, and 9. Box 13 title and content change. Box 13 has been renamed and the instructions have been updat- ed accordingly. Box 13. Specified Cooperatives. For more information, see IRS.gov/Form1099- PATR. Continuous use. Form 1097-BTC, Form 1098-C, Form 1098-F, Form 1098-MA, Form 1098-Q, Form 1099-CAP, Form 1099-LS, Form 1099-LTC, Form 1099-OID, Form 1099-Q, Form 1099- SA, and Form 1099-SB and their instructions have been converted from annual updates to contin- uous use. These forms and their instructions will be updated as required. For more information, see the Guide to Information Returns, in the 2020 General Instructions for Certain Information Returns at IRS.gov/forms-pubs/about-form-1099. Exhibits. All of the exhibits in this publication were updated to include all of the 2020 revisions of those forms that have been revised. Editorial changes. We made editorial changes throughout, including updated references. Redun- dancies were eliminated as much as possible. Section1.2 - Definitions 1.2.1 Form recipient means the person to whom you are required by law to furnish a copy of the offi- Form Recipient cial form or information statement. The form recipient may be referred to by different names on various Forms 1099 and related forms ("beneficiary," "borrower," "debtor," "donor," "employee," "filer," "homeowner," "insured," "participant," "payee," "payer," "payer/borrower," "payment re- cipient," "policyholder," "seller," "shareholder," "student," "transferor," or, in the case of Form W-2G, the "winner"). See Section 1.3.4. 1.2.2 Filer means the person or organization required by law to file with the IRS a form listed in Sec- Filer tion 1.1.2 with the IRS. A filer may be a payer, creditor, payment settlement entity, recipient of mortgage or student loan interest payments, educational institution, broker, barter exchange, per- son reporting real estate transactions; a trustee or issuer of any educational or ABLE Act savings account, individual retirement arrangement, or medical savings account; a lender who acquires an interest in secured property or who has reason to know that the property has been abandoned; a corporation reporting a change in control and capital structure or transfer of stock to an employee; certain donees of motor vehicles, boats, and airplanes; or an acquirer or issuer of a life insurance contract. 1.2.3 Substitute form means a paper substitute of Copy A of an official form listed in Section 1.1.2 that Substitute Form completely conforms to the provisions in this revenue procedure. Substitute form recipient statement means a paper or electronic statement of the information re- 1.2.4 ported on a form listed in Section 1.1.2. For the remainder of this revenue procedure, we will refer Substitute Form Recipient to this as a recipient statement. This statement must be furnished to a person (form recipient), as Statement (recipient defined under the applicable provisions of the Code and the applicable regulations. statement) 1.2.5 Composite substitute statement means one in which two or more required statements (for exam- Composite Substitute ple, Forms 1099-INT and 1099-DIV) are furnished to the recipient on one document. However, Statement each statement must be designated separately and must contain all the requisite Form 1099 infor- mation except as provided under Section 4.2. A composite statement may not be filed with the IRS. Section 1.3 - General Requirements for Acceptable Substitute Forms 1096, 1097-BTC, 1098, 1099, 3921, 3922, 5498, W-2G, and 1042-S 1.3.1 Paper substitutes for Form 1096 and Copy A of Forms 1097-BTC, 1098, 1099, 3921, 3922, 5498, Introduction W-2G, and 1042-S that completely conform to the specifications listed in this revenue procedure may be privately printed and filed as returns with the IRS. The reference to the Department of the Treasury - Internal Revenue Service should be included on all such forms. If you are uncertain of any specification, and want it clarified, you may submit a letter citing the specification, stating your understanding and interpretation of the specification, and enclosing an example of the form (if appropriate) to: Internal Revenue Service Attn: Substitute Forms Program SE:W:CAR:MP:P:TP 1111 Constitution Ave. NW Room 6554 Washington, DC 20224 Note. Allow at least 30 days for the IRS to respond. You may also contact the Substitute Forms enter "Substitute Forms" on the Subject Forms 1096, 1097-BTC, 1098, 1099, 3921, review and possible change. Therefore, - vately printed substitutes. 1.3.2 Some Forms 1097-BTC, 1098, 1099, 3921, 3922, 5498, W-2G, and 1042-S that include logos, Logos, Slogans, and slogans, and advertisements may not be recognized as important tax documents. A payee may not Advertisements recognize the importance of the payee copy for tax reporting purposes due to the use of logos, slogans, and advertisements. Accordingly, the IRS has determined that logos, slogans, and advertising are not allowed on the payee copies of the above forms, on Copy A filed with the IRS, on Form 1096, with the follow- ing exceptions: - The exact name of the payer, broker, or agent, primary trade name, trademark, service mark, or symbol of the payer, broker, or agent, an embossment or watermark on the information return and payee copies that is a representation of the name, a primary trade name, trademark, service mark, or symbol of the payer, broker, or agent, that is; - Presented in any typeface, font, stylized fashion, or print color normally used by the payer, broker, or agent, and used in a non intrusive manner, and; - As long as these items do not materially interfere with the ability of the recipient to recognize, understand, and use the tax information on the payee copies. The IRS e-file logo on the IRS official payee copies may be included, but is not required, on any of the substitute form copies. The information return and payee copies must clearly identify the payer's name associated with its employer identification number. Logos and slogans may be used on permissible enclosures, such as a check or account statement, other than information returns and payee copies. If you have comments about the restrictions on including logos, slogans, and advertising on infor- mation returns and payee copies, send your comments to: Internal Revenue Service Attn: Substitute Forms Program SE:W:CAR:MP:P:TP 1111 Constitution Ave. NW Room 6554 Washington, DC 20224 or email them to substituteforms@irs.gov 1.3.3 Proposed substitutes of Copy A must be exact replicas of the official IRS form with respect to Copy A Specifications layout and content. Proposed substitutes for Copy A that do not conform to the specifications in this revenue procedure are not acceptable. Further, if you file such forms with the IRS, you may be subject to a penalty for failure to file a correct information return under section 6721 of the Code. The amount of the penalty is based on when you file the correct information return. Penalties. The amounts of the penalty for returns required to be filed in 2020 is shown in Penalties in the 2020 General Instructions for Certain Information Returns. You can access the penalties section at IRS.gov/instructions/i1099gi#idm140065029227536. 1.3.4 Copy B and Copy C of the following forms must contain the information in Part 4 to be consid- Copy B and Copy C ered a "statement" or "official form" under the applicable provisions of the Code. The format of Specifications this information is at the discretion of the filer with the exception of the location of the tax year, form number, form name, and the information for the composite Form 1099 statements as outlined under Section 4.2. Copy B, of the forms below, is for the following recipients. Copy C of the following forms is for the following recipients. Note. On Copy C, Form 1099-LTC, you may reverse the locations of the policyholder's and the insured's name, street address, city, state, and ZIP code for easier mailing. Part 2 Specifications for Substitute Forms 1096 and Copies A of Forms 1098, 1099, 3921, 3922, and 5498 (All Filed With the IRS) Section2.1 - Specifications 2.1.1 Due to the very low volume of paper Forms 1097-BTC, 1098-C, 1098-F, 1098-MA, 1099-A, Online Fillable Forms 1099-CAP, 1099-LTC, 1099-NEC, 1099-Q, 1099-QA, 1099-SA, 3922, 5498-ESA, 5498-QA, and 5498-SA received and processed by the IRS each year, these forms have been converted to fillable online PDFs. Note. The instructions for substitute Forms 1042-S, also a fillable online format, are found sepa- rately in Part 5. These forms in their fillable format can be found at IRS.gov/formspubs. All the instructions regarding the substitute forms found in Part 1, and Sections 2.1.2, the 2.1.7, 2.1.9, and 2.1.10, and the remainder of this publication, unless specified differently immediately below, remain in effect if you are going to produce the online fillable forms as paper or online substitute forms. - Copy A of privately printed substitutes of the forms listed above must be exact replicas of the official forms with respect to layout and content. Use the official form, found on IRS.gov, printed actual size on an 8 1⁄2 inches by 11 inches sheet of paper. The forms will print one to a page. - All printing must be in high quality nongloss black ink. - Paper for Copy A must be white chemical wood bond, or equivalent, 20-pound (basis 17 x 22- 500), plus or minus 5% (0.05); or offset book paper, 20 pound (basis 25 x 38-500). No optical brighteners may be added to the pulp or paper during manufacture. The paper must consist of principally bleached chemical wood pulp or recycled printed paper. It must also be suitably sized to accept ink without feathering. Note. If you want to print the forms as they formerly appeared to save paper, with the exception of Forms 1097-BTC (printed 2-to-a-page) and 1098-C (single form page), they are all printed 3-to-a- page. Follow the 3-to-a-page measurements in Section 6. Form 1098-C can be found at IRS.gov/ Form 1098C. Print the form to actual size, no scaling. 2.1.2 Form identifying numbers (for example, 9191 for Form 1099-DIV) must be printed in nonreflec- General Requirements tive black carbon-based ink in print positions 15 through 19 using an optical character recognition (OCR) A font. The checkboxes to the right of the form identifying numbers must be 10-point box- es. The "VOID" checkbox is in print position 25 (1.9 inches from left vertical line of the form). The "CORRECTED" checkbox is in print position 33 (2.7 inches from left vertical line of the form). Measurements are generally from the left edge of the paper, not including the perforated strip. The substitute form Copy A must be an exact replica of the official IRS form with respect to layout and content. To determine the correct form measurements, see Exhibits A through CC at the end of this publication. Hot wax and cold carbon spots are not permitted on any of the internal form piles. These spots are permitted on the back of a mailer top envelope ply. Use of chemical transfer paper for Copy A is acceptable. The Government Printing Office (GPO) symbol must be deleted. 2.1.3 Color and paper quality for Copy A (cut sheets and continuous pinfeed forms) as specified by JCP Color and Paper Quality Code 0-25, dated November 29, 1978, must be white 100% bleached chemical wood, OCR bond produced in accordance with the following specifications. Note. Reclaimed fiber in any percentage is permitted provided the requirements of this standard are met. 2.1.4 Chemical transfer paper is permitted for Copy A only if the following standards are met. Chemical Transfer Paper - Only chemically backed paper is permitted for Copy A. Front and back chemically treated paper cannot be processed properly by machine. - Carbon-coated forms are not permitted. - Chemically transferred images must be black. All copies must be clearly legible. Fading must be minimized to assure legibility. 2.1.5 All print on Copy A of Forms 1097-BTC, 1098, 1098-C, 1098-E, 1098-MA, 1098-Q, 1098T, 1099-A, Printing 1099-B, 1099-C, 1099-DIV, 1099-G, 1099-INT, 1099-K, 1099-LS, 1099-MISC, 1099-NEC, 1099- OID, 1099-PATR, 1099-Q, 1099-R, 1099-S, 1099-SB, 3921, 3922, 5498, and the print on Form 1096 above the statement, "Return this entire page to the Internal Revenue Service. Photocopies of not acceptable." must be in Flint J-6983 red OCR dropout ink or an exact match. However, the four-digit form identifying number must be nonreflective carbon-based black ink in OCR A font. The shaded areas of any substitute form should generally correspond to the format of the official form. The printing for the Form 1096 jurat statement and the text that follows may be in any shade or tone of black ink. Black ink should only appear on the lower part of the reverse side of Form 1096, where it will not bleed through and interfere with scanning. Note. The instructions on the front and back of Form 1096, which include filing addresses, must be printed. Separation between fields must be 0.1 inch. Other printing requirements are discussed in Sections 2.1.5 through 2.1.9. 2.1.6 You must initiate, or have, a quality control program to assure OCR ink density. Readings will be OCR made when printed on approved 20 lb. white OCR bond with a reflectance of not less than 80% Specifications (0.80). Black ink must not have a reflectance greater than 15% (.15). These readings are based on requirements of the "BancTec IntelliScan XDS" Optical Scanner using Flint J-6983 red OCR dropout ink or an exact match. The following testers and ranges are acceptible: Important information: The forms produced under these specifications must be guaranteed to function properly when processed through High Speed Scan-Optics 9000 mm scanners. Forms require precision spacing, printing, and trimming. Density readings on the solid J-6983 (red) must be between the ranges of 0.95 to 0.90. The optimal scanning range is 0.93. Density readings on the solid black must be between the ranges of 112 to 108. The optimal scanning range is 110. Note. The readings are taken using an Ex-Rite 500 series densitometer, in status T with Absolute or - paper setting under an Illuminate 5000 Kelvin Watt Light. You must maintain print contrast specification of ink and densitometer reflectivity reading throughout the entire production run. - MacBeth PCM-II. The tested Print Contrast Signal (PCS) values when using the MacBeth PCM-II tester on the "C" scale must range from.01 minimum to.06 maximum. - Kidder 082A. The tested PCS values when using the Kidder 082A tester on the Infra Red (IR) scale must range from.12 minimum to.21 maximum. White calibration disc must be 100%. Sensitivity must be set at one (1). - Alternative testers must be approved by the IRS to establish tested PCS values. You may obtain approval by writing to the following address. Commissioner of Internal Revenue Attn: SE:W:CAR:MP:P:TP Business Publishing - Tax Products 1111 Constitution Ave. NW Room 6554 Washington, DC 20224 2.1.7 Type must be substantially identical in size and shape to the official form. All rules are either Typography 1/2-point or 3/4-point. Rules must be identical to those on the official IRS form. Note. The form identifying number must be non-reflective carbon-based black ink in OCR A font. 2.1.8 Generally, three Copies A of Forms 1098, 1099, 3921, 3922 are contained on a single page Dimensions (3-to-a-page), 8 inches wide (without 1 inches any snap-stubs and/or pinfeed holes) by 11 inches deep. Exceptions. Forms 1097-BTC, 1098, 1098-Q, 1099-B, 1099-DIV, 1099-INT, 1099-K, 1099- MISC, 1099-NEC, 1099-OID, 1099-R, and 5498 contain two copies on a single page (2-to-a- page). Forms 1098-C and 1042-S are single-page documents. There is a 0.33 inch top margin from the top of the corrected box, and 0.2 to 0.25 inch right margin, with a +/- 1/20 (0.05) inch tolerance for the right margin. If the right and top margins are properly aligned, the left margin for all forms will be correct. All margins must be free of print. See Exhibits A through CC in Part 6 for correct form measurements. These measurements are constant for certain Forms 1098, 1099, and 5498. These measurements are shown only once in this publication, on Form 1097-BTC ( Exhibit B ) 2-to-a-page and on Form 1098-E ( Exhibit E ) 3-to-a-page. Exceptions to these measurements, and form-specific measure- ments are shown on the rest of the exhibits. The depth of the individual trim size of each 3-to-a-page form must be 3 2/3 inches, the same depth as the official form, unless otherwise indicated. The depth of the individual trim size of each 2-to-a-page form is 5 1/2 inches. 2.1.9 Copy A (3-to-a-page and 2-to-a-page) of privately printed continuous substitute forms Perforation be perforated at each 11 inches page depth. No perforations are allowed between forms on the Copy A page. Exception. Copy A of Form W-2G may be perforated. The words "Do Not Cut or Separate Forms on this Page" must be printed in red dropout ink (as required by form specifications) between 3-to-a-page or 2-to-a-page. This statement should not be included after the last form on the page. Separations are required between all the other individual copies (Copies B and C, and Copies 1 and 2 of Forms 1099-B, 1099-DIV, 1099-G, 1099-INT, 1099-K, 1099-MISC, 1099-NEC, 1099- OID, 1099-R, and Copy D for Forms 1099-LS, 1099-LTC, 1099-R, 1042-S) in the set. Any recipient copies printed on a single sheet of paper must be easily separated. The best method of separation is to provide perforations between the individual copies. Each copy should be easily distinguished, whatever method of separation is used. Note. Perforation does not apply to printouts of copies that are furnished electronically to recipi- ents (as described in Regulations section 31.6051-1(j)). However, these recipients should be cau tioned to carefully separate any copies. See Section 4.6.1, later, for information on electronically furnishing statements to recipients. 2.1.10 You must include the OMB Number on Copies A and Form 1096 in the same location as on the Required Inclusions/ official form. Exclusions The following Privacy Act and Paperwork Reduction Act Notice phrases must be printed on Copy A of the forms as follows. It must also be printed on the Copy C, D, or E of the form retained by the filer. - "For Privacy Act and Paperwork Reduction Act Notice, see the current version of the General Instructions for Certain Information Returns" on Forms 3921 and 3922. - "For more information and the Privacy Act and Paperwork Reduction Act Notice, see the 2020 General Instructions for Certain Information Returns" on Form 1096. - "For Privacy Act and Paperwork Reduction Act Notice, see instructions" on Form 1042-S. - "For Privacy Act and Paperwork Reduction Act Notice, see the 2020 General Instructions for Certain Information Returns " must be printed on all other forms listed in Section all 1.1.2. A postal indicia may be used if it meets the following criteria: - It is printed in the OCR ink color prescribed by the form. - No part of the indicia is within one print position of the scannable area. The printer's symbol (GPO) must not be printed on substitute Copy A. Instead, the employer identification number (EIN) or the vendor code of the form's printer must be entered in place of the Catalog Number (Cat. No.). The 4-digit vendor code, preceded by four zeros and a slash, for example, 0000/9876, must appear in 12-point Arial font, or a close approximation, on Copy A only of Forms 1096, 1098-BTC, 1098, 1099, 3921, 3922, 5498, and W2-G. The vendor code is used to identify the forms producer. Vendor codes can be obtained free of charge from the National Asso- ciation of Computerized Tax Processors (NACTP) via email at president@nactp.org. The use of a vendor code is recommended. Note. Vendor codes from the NACTP are required by those companies producing the 1099 family of forms (Forms 1096, 1097-BTC, 1098, 1099, 3921, 3922, 5498, and W-2G) as part of a product for resale to be used by multiple issuers. Issuers developing 1099 family forms to be used only for their individual company do not require a vendor code. The Cat. No. shown on the forms is used for IRS distribution purposes and should not be printed on any substitute forms. The form must not contain the statement "IRS approved" or any similar statement. Section 2.2 - Instructions for Preparing Paper Forms That Will Be Filed With the IRS 2.2.1 The form recipient's name, street address, city, state, ZIP code, and telephone number (if required) Recipient Information should be typed or machine printed in black ink in the same format as shone on the official IRS form. The city, state, and ZIP code must be on the same line. The following rules apply to the form recipient's name(s). - The name of the appropriate form recipient must be shown on the first or second name line in the area provided for the form recipient's name. - No descriptive information or other name may precede the form recipient's name. - Only one form recipient's name may appear on the first name line of the form. - If multiple recipients' names are required on the form, enter on the first name line the recipi- ent name that corresponds to the recipient taxpayer identification number (TIN) shown on the form. Place the other form recipients' names on the second name line (only 2 name lines are allowable). Because certain states require that trust accounts be provided in a different format, filers should generally provide information returns reflecting payments to trust accounts with the: - Trust's employer identification number (EIN) in the recipient's TIN area, - Trust's name on the recipient's first name line, and - Name of the trustee on the recipient's second name line. Although handwritten forms will be accepted, the IRS prefers that filers type or machine print data entries. Also, filers should insert data as directed by shading, or in the middle of blocks, well separated from other printing and guidelines, and take measures to guarantee clear, dark black, sharp images. Photocopies are not acceptable. Truncating payee identification number on payee statements. Where permitted, filers may truncate a payee's identification number (social security number (SSN), individual taxpayer iden- tification number (ITIN), adoption taxpayer identification number (ATIN), or other employer identi- fication number (EIN)) on the payee statement (including substitute and composite substitute statements) furnished to the payee in paper form or electronically. Generally, the payee statement is that copy of an information return designated "Copy B" on the form. To truncate where allowed, replace the first 5 digits of the 9-digit number with asterisks () or Xs (for example, an SSN xxx- xx-xxxx would appear on the paper payee statement as --xxxx or XXX-XX-xxxx). See Treasury Decision 9675, 2014-31 I.R.B. 242, available at IRS.gov/irb/2014-31_IRB#TD-9675. Caution. Recipient TINs must not be truncated on Copy A filed with the IRS. 2.2.2 Use the account number box on all Forms 1098, 1099, 3921, 3922, 5498, and W-2G for an account Account Number Box number designation when required by the official IRS form. The account number is required if you have multiple accounts for a recipient for whom you are filing more than one information return of the same type. Additionally, the IRS encourages you to include the recipients' account numbers on paper forms if your system of records uses the account number rather than the name or TIN for identification purposes. Also, the IRS will include the account number in future notices to you about backup withholding. If you are using window envelopes to mail statements to recipients and using reduced rate mail, be sure the account number does not appear in the window. The Postal Service may not accept these for reduced rate mail. Exception. Form 1098-T can have third-party provider information. 2.2.3 - Machine-printed forms should be printed using a 6 lines/inch option, and should be printed Specifications and in 10 pitch pica (10 print positions per inch) or 12 pitch elite (12 print positions per inch). Restrictions Proportional spaced fonts are unacceptable. - Substitute forms prepared in continuous or strip form must be burst and stripped to conform to the size specified for a single sheet before they are filed with the IRS. The size specified does not include pin feed holes. Pin feed holes must not be present on forms filed with the IRS. - Do not use a felt tip marker. The machine used to "read" paper forms generally cannot read this ink type. - Do not use dollar signs ($), ampersands (&), asterisks (), commas (,), or other specified char - acters in the numbered money boxes. Exception. Use decimal points to indicate dollars and cents (for example, 2000.00 is acceptable). - Do not use apostrophes ('), asterisks (), or other special characters on the payee name line. - Do not fold Forms 1097-BTC, 1098, 1099, 3921, 3922, or 5498 mailed to the IRS. Mail these forms flat in an appropriately sized envelope or box. Folded documents cannot be readily moved through the machine used in IRS processing. - Do not staple Forms 1096 to the transmitted returns. Any staple holes near the return code number may impair the IRS's ability to machine scan the type of documents. - Do not type other information on Copy A. - Do not cut or separate the individual forms on the sheet of forms of Copy A (except Forms W-2G). 2.2.4 Mail completed paper forms to the IRS service center shown in the Instructions for Form 1096 Where To File and in the 2020 General Instructions for Certain Information Returns. Specific information needed to complete the forms mentioned in this revenue procedure are given in the specific form instruc- tions. A chart showing which form must be filed to report a particular payment is included in the 2020 General Instructions for Certain Information Returns. Part 3 Specifications for Substitute Form W-2G Section 3.1 - General 3.1.1 The following specifications give the format requirements for substitute Form W2-G (Copy A Purpose only), which is filed with the IRS. A filer may use a substitute Form W-2G to file with the IRS (referred to as "substitute Copy A"). The substitute form must be an exact replica of the official form with respect to layout and content. Section 3.2 - Specifications for Copy A of Form W-2G 3.2.1 You must follow these specifications when printing substitute Copy A of the Form W-2G. Substitute Form W-2G (Copy A) Caution. The payee's TIN (SSN, ITIN, ATIN, or EIN) must not be truncated on Copy A of Form W2-G. Part 4 Substitute Statements to Form Recipients and Form Recipient Copies Section4.1 - Specifications 4.1.1 If you do not use the official IRS form to furnish statements to recipients, you must furnish an Introduction acceptable substitute statement. Information presented in substitute statements should be in a point size large enough to be easily read by recipients. To be acceptable, your substitute statement must comply with the rules in this Part. If you are furnishing a substitute form, see Regulations sections 1.6042-4, 1.6044-5, 1.6049-6, and 1.6050N-1 to determine how the following statements must be provided to recipients for most Forms 1099-DIV and 1099-INT, all Forms 1099-OID and 1099-PATR, and Form 1099-MISC, or 1099-S for royalties. Generally, information returns may be furnished electronically with the consent of the recipient. See Section 4.6.1. Note. A trustee of a grantor-type trust may choose to file Forms 1099 and furnish a statement to the grantor under Regulations sections 1.671-4(b)(2)(iii) and (b)(3)(ii). The statement required by those regulations is not subject to the requirements outlined in this section. 4.1.2 Substitute Statements to Recipients for Certain Forms 1099-B, 1099- DIV, The rules in this section apply to Form 1099-B, 1099-DIV, (except for section 404(k) dividends), 1099-INT, 1099-OID, and 1099-INT (except for interest reportable under section 6041), 1099-OID, and 1099-PATR only. 1099-PATR You may furnish form recipients with Copy B of the official Form 1099 or a substitute Form 1099 (recipient statement) if it contains the same information as the official IRS form (such as aggregate amounts paid to the form recipient, any backup withholding, the name, address, and TIN of the person making the return, and any other information required by the official form). Information not required by the official form should not be included on the substitute form except for state in- come tax withholding information. But see section 4.3 regarding additional information that may be included on substitute and composite Forms 1099-B, such as basis for noncovered securities. Note. Many of the information returns now include boxes for providing state withholding infor- mation as part of the official form, with additional copies for convenience. Payers may, however, provide the state withholding information separately (such as on a separate page or section) in order to assist the payee with completing a state income tax return that requires the attachment of any information return that includes state withholding amounts and payer numbers. Exception for supplementary information. The substitute form may include supplementary in- formation that will assist the payee with completing his or her tax return. Such information could include expense and cost basis factors related to the reporting for widely held fixed investment trusts (WHFITs), as required under Regulations section 1.671-5. The substitute statement should disclose to the payee that such supplementary information is not furnished to the IRS. See Section 4.3 for additional requirements when providing supplemental information with the Form 1099-B that is not furnished to the IRS. Form 1099-B. For transactions reportable on Form 8949, brokers that use substitute statements should segregate dispositions of noncovered securities from covered securities, and further segre- gate long-term and short-term dispositions of covered securities. They may also segregate long- term from short-term dispositions of noncovered securities, to the extent that date acquired is known. For 2020 dispositions, the substitute Form 1099-B may have up to five separate sections, each with a heading identifying which securities are included in the list, and each separately totaled. Each section, after totaling or within the heading for the section, should indicate how to report the transactions on Form 8949, as indicated. 1. Short-term transactions for which basis is reported to the IRS--Report on Form 8949, Part I, with Box A checked. 2. Short-term transactions for which basis is not reported to the IRS--Report on Form 8949, Part I, with Box B checked. 3. Long-term transactions for which basis is reported to the IRS--Report on Form 8949, Part II, with Box D checked. 4. Long-term transactions for which basis is not reported to the IRS--Report on Form 8949, Part II, with Box E checked. 5. Transactions for which basis is not reported to the IRS and for which short-term or long-term determination is unknown (to Broker). You must determine short-term or long-term based on your records and report on Form 8949, Part I, with Box B checked, or on Form 8949, Part II, with Box E checked, as appropriate. For each section, each transaction may include information not reported to the IRS, such as basis, date acquired, and gain or loss. Therefore, for short-term dispositions where basis was not report- ed to the IRS, basis and date acquired may be shown just as it would be shown for short-term dispositions where basis was reported to the IRS. For 2020 dispositions, each of the applicable sections must have Sales Price and Cost or Other Basis (if known) separately totaled. Net gain or loss, if included for any of the sections, may also be totaled. Brokers may also use substitute Form 1099-B for transactions that are not directly reported on Form 8949. Examples include transactions involving regulated futures contracts, foreign curren- cy contracts, and section 1256 option contracts. Any additional sections created for this purpose should be segregated from those transactions directly reportable on Form 8949. The substitute form requirements in the following paragraphs also apply to Form 1099-B. Forms 1099-INT, DIV, OID, and PATR. A substitute recipient statement for Form 1099-INT, 1099-DIV, 1099-OID, or 1099-PATR must comply with the following requirements. - Box captions and numbers that are applicable must be clearly identified, using the same word- ing and numbering as on the official form. - The recipient statement (Copy B) must contain all applicable recipient instructions as pro- vided on the front and back of the official IRS form. You may provide those instructions on a separate sheet of paper. - The box "Federal income tax withheld" caption must be in boldface type or otherwise high- lighted on the recipient statement. - The recipient statement must contain the Office of Management and Budget (OMB) number as shown on the official IRS form. See Section 5.2. - The recipient statement must contain the tax year (for example, 2020), form number (for example, Form 1099-INT), and form name (for example, Interest Income) of the official IRS Form 1099. This information must be displayed prominently together in one area of the statement. For example, the tax year, form number, and form name could be shown in the upper right part of the statement. Each copy must be appropriately labeled (such as Copy B, For Recipient). See Section 4.5.2 for applicable labels and arrangement of assembly of forms. Note. Do not include the words "Substitute for" or "in lieu of" on the recipient statement. - Layout and format of the statement is at the discretion of the filer. However, the IRS encour- ages the use of boxes so that the statement has the appearance of a form and can be easily distinguished from other nontax statements. - Each recipient statement of Forms 1099-B, 1099-DIV, 1099-INT, 1099-OID, and 1099-PATR must include the direct access telephone number of an individual who can answer questions about the statement. Include that telephone number conspicuously anywhere on the recipient statement. A mutual fund family may furnish one statement (for example, one piece of paper) on which it reports the dividend income earned by a recipient from multiple funds within the family of mu- tual funds, as required by Form 1099-DIV. However, each fund and its earnings must be stated separately. The statement must contain an instruction to the recipient that each fund's dividends and name, not the name of the mutual fund family, must be reported on the recipient's tax return. The statement cannot contain an aggregate total of all funds. In addition, a mutual fund family may furnish a single statement (as a single filer) for Forms 1099-INT, 1099-DIV, and 1099-OID information (see Section 4.2.1, later). Each fund and its earnings must be stated separately. The statement must contain an instruction to the recipient that each fund's earnings and name, not the name of the mutual fund family, must be reported on the recipient's tax return. The statement cannot contain an aggregate total of all funds. You may enter a total of the individual accounts listed on the statement only if they have been paid by the same payer. For example, if you are listing interest paid on several accounts by one financial institution on Form 1099-INT, you may also enter the total interest amount. You may also enter a date next to the corrected box if that box is checked. 4.1.3 Statements to form recipients for Forms 1097-BTC, 1098, 1098-C, 1098-E, 1098-F, 1098-MA Substitute Statements to 1098-Q, 1098-T, 1099-A, 1099-C, 1099-CAP, 1099-G, 1099-K, 1099-LS, 1099-LTC, 1099- Recipients for Certain MISC, 1099-NEC, 1099-Q, 1099-QA, 1099-R, 1099-S, 1099-SA, 1099-SB, 3921, 3922, 5498, Forms 1098, 1099, 5498, 5498-ESA, 5498-QA, 5498-SA, W-2G, 1099-DIV (only for section 404(k) dividends reportable and W-2G under section 6047), and 1099-INT (only for interest of $600 or more made in the course of a trade or business reportable under section 6041) can be copies of the official forms or an acceptable substitute. Caution. The IRS does not require a donee to use Form 1098-C as the written acknowledgment for contributions of motor vehicles, boats, and airplanes. However, if you choose to use copies of Form 1098-C or an acceptable substitute as the written acknowledgment, then you must follow the requirements of this section. To be acceptable, a substitute recipient statement must meet the following requirements. - The tax year, form number, and form name must be the same as the official form and must be displayed prominently together in one area on the statement. For example, they may be shown in the upper right part of the statement. - The statement must contain the same information as the official IRS form, such as aggregate amounts paid to the form recipient, any backup withholding, the name, address, and TIN of the filer and of the recipient, and any other information required by the official form. - Each substitute recipient statement for Forms W-2G, 1097-BTC, 1098, 1098-C, 1098-E, 1098-F, 1098-T, 1099-A, 1099-C, 1099-CAP, 1099-DIV, 1099-G (excluding state and local income tax refunds), 1099-K, 1099-INT, 1099-LS, 1099-LTC, 1099-MISC (excluding fishing boat proceeds), 1099-NEC, 1099-Q, 1099-R (for qualified long-term care insurance contract under combined arrangements only), 1099-S, 1099-SA, 1099-SB, and 5498-SA must include the direct access telephone number of an individual who can answer questions about the statement. - Include the telephone number conspicuously anywhere on the recipient statement. Although not required, payers reporting on Forms 1099-QA, 1099-R (payments other than qualified long-term care insurance contracts under combined arrangements), 3921, 3922, 5498, 5498- ESA, and 5498-QA are encouraged to furnish telephone numbers at which recipients of the form(s) can reach a person familiar with the information reported. - All applicable money amounts and information, including box numbers required to be report- ed to the form recipient, must be titled on the recipient statement in substantially the same manner as those on the official IRS form. The box caption "Federal income tax withheld" must be in boldface type on the recipient statement. Exception. If you are reporting a payment as "Other income" in box 3 of Form 1099-MISC, you may substitute appropriate language for the box title. For example, for payments of accrued wages and leave to a beneficiary of a deceased employee, you might change the title of Box 3 to "bene- ficiary payments" or something similar. Note. You cannot make this change on Copy A. - If federal income tax is withheld and shown on Form 1099-R or W-2G, Copy B and Copy C must be furnished to the recipient. If federal income tax is not withheld, only Copy C of Forms 1099-R and W-2G must be furnished. However, for Form 1099-R, instructions similar to those on the back of the official Copy B and Copy C of Form 1099-R must be furnished to the recipient. For convenience, you may choose to provide both Copies B and C of Form 1099-R to the recipient. - Y ou must provide appropriate instructions to the form recipient similar to those on the offi- cial IRS form, to aid in the proper reporting on the form recipient's income tax return. For payments reported on Forms 1099-B and 1099-CAP, the requirement to include instructions substantially similar to those on the official IRS form, may be satisfied by providing form recipients with a single set of instructions for all Forms 1099-B and 1099-CAP statements required to be furnished in a calendar year. - If you use carbonless sets to produce recipient statements, the quality of each copy in the set must meet the following standards. 1. All copies must be clearly legible. 2. All copies must be able to be photocopied. 3. Fading must not diminish legibility and the ability to be photocopy. - In general, black chemical transfer inks are preferred, but other colors are permitted if the above standards are met. Hot wax and cold carbon spots are not permitted on any of the inter- nal form plies. The back of a mailer top envelope ply may contain these spots. - You may use a Settlement Statement (under the Real Estate Settlement Procedures Act of 1974 (RESPA)) for Form 1099-S. The Settlement Statement is acceptable as a written state- ment to the transferrer if you include the legend for Form 1099-S found in Section 4.4.2 and indicate which information on the Settlement Statement is being reported to the IRS on Form 1099-S. - For reporting state income tax withholding and state payments, you may add an additional box(es) to recipient copies, as appropriate. In addition, the state withholding information may be provided separately and apart from the other information in the event the recipient must attach a copy to the recipient's tax return. Note. You cannot make this change on Copy A. - On Copy C of Form 1099-LTC, you may reverse the location of the policyholder's and the insured's name, street address, city, state, and ZIP code for easier mailing. - If an institution insurer uses a third-party service provider to file Form 1098-T, then in addi- tion to the institution or insurer's name, address, and telephone number, the same information may be included for the third-party service provider in the space provided on the form. - Forms 1099-A and 1099-C transactions, if related, may be combined on Form 1099-C. 4.1.4 Copies B, C, D, 1, and 2, as applicable, to be furnished to recipients and kept in the filers' records, Online Fillable Copies B, C, have been made online fillable at IRS.gov/forms-instructions for many forms referenced in these D, 1, and 2 instructions. See the separate instructions for Forms 1098, 1098-E & T, 1098-F, 1098-Q, 1099-A & C, 1099-B, 1099-DIV, 1099-G, 1099-INT & OID, 1099-K, 1099-LS, 1099-MISC, 1099-NEC, 1099-PATR, 1099-R & 5498, 1099-S, 1099-SB, and 3921. Section 4.2 - Composite Statements 4.2.1 A composite recipient statement is permitted for reportable payments consisting of the proceeds Composite Substitute of brokerage and barter transactions, dividends, interest, original issue discount, patronage divi- Statements for Certain dends, and royalties. The following forms may be included on a composite substitute statement, Forms 1099-B, 1099- DIV, when one payer is reporting more than one of these payments during a calendar year to the same 1099-INT, 1099-MISC, form recipient. 1099-OID, 1099-PATR, and 1099- S - Form 1099-B. - Form 1099-DIV (except for section 404(k) dividends). - Form 1099-INT (except for interest reportable under section 6041). - Form 1099-MISC (only for royalties or substitute payments in lieu of dividends and interest). - Form 1099-OID. - Form 1099-PATR. - Form 1099-S (only for royalties). Generally, do not include any other Form 1099 information (for example, 1099-A or 1099-C) on a composite statement with the information required on the forms listed in the preceding sentence. Although the composite recipient statement may be on one sheet, the format of the composite recipient statement must satisfy the following requirements in addition to the requirements listed earlier in Sections 4.1.2, 4.3, and 4.4, as applicable. - All information pertaining to a particular type of payment must be located and blocked to- gether on the form and separate from any information covering other types of payments included on the form. For example, if you are reporting interest and dividends, the Form 1099-INT information must be presented - The composite recipient statement must prominently display the form number and form name of the official IRS form together in one area at the beginning of each appropriate block of information. The tax year must only be placed on each block of information if it is not prom- inently displayed elsewhere on the page on which the information appears. - Any information required by the official IRS forms that would otherwise be repeated in each information block is required to be listed only once in the first information block on the com- posite form. For example, there is no requirement to report the name of the filer in each infor- mation block. This rule does not apply to any money amounts (for example, federal income tax withheld) or to any other information that applies to money amounts. - A composite statement is an acceptable - ient's tax obligation with respect to the were furnished separately on an official 4.2.2 A composite recipient statement for the forms specified in Section 4.1.2 or 4.1.3 is permitted when Composite Substitute one filer is reporting more than one type of payment during a calendar year to the same form re- Statements to Recipients for cipient. A composite statement is not allowed for a combination of forms listed in Sections 4.1.2 Forms Specified in Sections and 4.1.3. 4.1.2 and 4.1.3 Exceptions: - Substitute payments in lieu of dividends or interest reported in box 8 of Form 1099-MISC may be reported on a composite substitute statement with Form 1099-DIV. - Form 1099-B information may be reported on a composite form with the forms specified in Section 4.1.2 as described in Section 4.2.1. - Royalties reported on Form 1099-MISC or 1099-S may be reported on a composite form only with the forms specified in Section 4.1.2. Although the composite recipient statement may be on one sheet, the format of the composite re- cipient statement must satisfy the requirements listed in Section 4.2.1 as well as the requirements in Section 4.1.3. A composite statement of Forms 1098 and 1099-INT (for interest reportable under section 6049) is not allowed. Section 4.3 - Additional Information for Substitute and Composite Forms 1099-B 4.3.1 A filer may include Form 1099-B information on a composite form with the forms listed in Sec- General Requirements for tion 4.1.2. Therefore, supporting, explanatory, or comparable relevant information for covered Presenting Additional Form and noncovered lots on the 1099-B portion of the composite statement can be included. This in- 1099-B formation includes display on the payee statement of data elements such as basis for noncovered Information lots, explanatory remarks on permissible basis adjustments for covered lots, descriptions of the type of transaction (merger, buy to close, redemption, etc.), identification of contingent payment debt obligations, and lot relief methods. If you wish to provide additional information to the investor on the same substitute recipient Form 1099-B, the form must follow the rules set forth in this Section 4.3 and should clearly delineate how the information is presented. Any information presented should make reference to its corre- sponding number on the official form, as appropriate. You should clearly categorize each type of information you are reporting. 4.3.2 An additional separate legend is required that explains exactly which pieces of information are Added Legend for and which are not reported to the IRS, to the extent, if any, the information is not already identi- Providing Additional fied as not being reported to the IRS, as described in Section 4.1.2. It should clearly explain how 1099-B Information the information is presented. You may present this legend in a way that is consistent with your design as long as it clearly indicates which information is being provided to the IRS. Additionally, a reminder to taxpayers that they are ultimately responsible for the accuracy of their tax returns is also required. Section 4.4 - Required Legends 4.4.1 Form 1098 recipient statements (Copy B) must contain the following legends: Required Legends for Forms 1098 - Form 1098 1. "The information in boxes 1 through 10 is important tax information and is being fur- nished to the IRS. If you are required to file a return, a negligence penalty or other sanc- tion may be imposed on you if the IRS determines that an underpayment of tax results because you overstated a deduction for the mortgage interest or for these points, reported in boxes 1 and 6; or because you did not report the refund of interest (box 4), or because you claimed a nondeductible item." 2. Caution. "The amount shown may not be fully deductible by you. Limits based on the loan amount and the cost and value of the secured property may apply. Also, you may only deduct interest to the extent it was incurred by you, actually paid by you, and not reimbursed by another person." - Form 1098-C: Copy B - "In order to take a deduction of more than $500 for this contribution, you must attach this copy to your federal tax return. Unless box 5a or 5b is checked, your deduction cannot exceed the amount in box 4c. " Copy C - "This information is being fur- nished to the IRS unless box 7 is checked. - Form 1098-E: "This is important tax information and is being furnished to the IRS. IF you are required to file a return, a negligence penalty or other sanction may be imposed on you if the IRS determines that an underpayment of tax results because you overstated a deduction for student loan interest." - Forms 1098-F and 1098-MA: "This is important tax information and is being furnished to the IRS." - Form 1098-Q: "This information is being furnished to the IRS." - Form 1098-T: "This is important tax information and is being furnished to the IRS. This form must be used to complete Form 8863 to claim education credits. Give it to the tax preparer or use it to prepare the tax return." 4.4.2 - Forms 1099-A, 1099-C, 1099-CAP, and 1099-K: Copy B - "This is important tax information Required Legends for and is being furnished to the IRS. If you are required to file a return, a negligence penalty or Forms 1099 and W-2G other sanction may be imposed on you if taxable income results from this transaction and the IRS determines that it has not been reported." - Forms 1099-B, 1099-DIV, 1099-G, 1099-INT, 1099-MISC, 1099-NEC, 1099-OID, 1099- PATR, 1099-Q, and 1099-QA: Copy B - "This is important tax information and is being furnished to the IRS. If you are required to file a return, a negligence penalty or other sanction may be imposed on you if this income is taxable and the IRS determines that it has not been reported." - Form 1099-LS: Copy B - "This is important tax information and is being furnished to the IRS. If you are required to file a return, a negligence penalty or other sanction may be imposed on you if this item is required to be reported and the IRS determines that it has not been report- ed." Copy C - "Copy C is provided to you for information only. Only the payment recipient is required to report this information on a tax return." - Form 1099-LTC: Copy B - "This is important tax information and is being furnished to the IRS. If you are required to file a return, a negligence penalty or other sanction may be im- posed on you if this item is required to be reported and the IRS determines that it has not been reported." Copy C - "Copy C is provided to you for information only. Only the policyholder is required to report this information on a tax return." - Form Copy B - "Report this income on your federal tax return. If this form 1099-R: shows federal income tax withheld in box 4, attach this copy to your return." Copy C - "This information is being furnished to the IRS." - Forms 1099-S and 1099-SB: Copy B - "This is important tax information and is being fur- nished to the IRS. If you are required to file a return, a negligence penalty or other sanction may be imposed on you if this item is required to be reported and the IRS determines that it has not been reported." - Form 1099-SA: Copy B - "This information is being furnished to the IRS." - Form W-2G Copy B: - "This information is being reported to the IRS. Report this income on your federal tax return. If this form shows federal income tax withheld in box 4, attach this copy to your return." Copy C - "This is important tax information and is being furnished to the IRS. If you are required to file a return, a negligence penalty or other sanction may be imposed on you if this income is taxable and the IRS determines that it has not been reported." 4.4.3 - Form 1097-BTC: Copy B - "This is important tax information and is being furnished to the Required Legends for IRS. If you are required to file a return, a negligence penalty or other sanction may be im- Forms 1097-BTC, 3921, posed on you if an amount of tax credit exceeding the amount reported on this form is claimed 3922, and 5498 on your income tax return." - Form 3921: Copy B - "This is important tax information and is being furnished to the IRS. If you are required to file a return, a negligence penalty or other sanction may be imposed on you if this item is required to be reported and the IRS determines that it has not been reported." Copy C - "This copy should be retained by the corporation whose stock has been transferred under Section 422(b)." - Form 3922: Copy B - "This is important tax information and is being furnished to the IRS." Copy C - "This copy should be retained by the corporation." - Form 5498: Copy B - "This information is being furnished to the IRS." Note. If you do not provide another statement to the participant because no contributions were made for the year, the statement of the fair market value, and any required minimum distribution of the account, must contain this legend and a designation of which information is being provided to the IRS. - Forms 5498-ESA, 5498-QA, and 5498-SA: Copy B - "This information is being furnished to the IRS." Section 4.5 - Miscellaneous Instructions for Copies B, C, D, E, 1, and 2 4.5.1 Copies B, C, and in some cases D, E, 1, and 2 are included in the official assembly for the conve- Copies nience of the filer. You are not legally required to include all these copies with the privately printed substitute forms. Furnishing Copy B, and in some cases Copy C, will satisfy the legal requirement to provide statements of information to form recipients. Note. If an amount of federal income tax withheld is shown on Form 1099-R or W-2G, Copy B (to be attached to the tax return) and Copy C must be furnished to the recipient of Copy D (Forms 1099-R and W-2G) may be used for payer records. Only Copy A should be filed with the IRS. 4.5.2 Copy A ("For Internal Revenue Service Center") of all forms must be on top. The rest of the as- Arrangement of Assembly sembly must be arranged, from top to bottom, as follows: 4.5.3 Instructions for perforation of forms can be found in Section 2.1.8, earlier. Perforations Section 4.6 - Electronic Delivery of Recipient Statements 4.6.1 If you are required to furnish a written statement (Copy B or an acceptable substitute) to a recipi- Electronic Recipient ent, then you may furnish the statement electronically instead of on paper. This includes furnishing Statements the statement to recipients of Forms 1098, 1098-E, 1098-F, 1098-MA, 1098-Q, 1098-T, 1099-A, 1099-B, 1099-C, 1099-CAP, 1099-DIV, 1099-G, 1099-INT, 1099-K, 1099-LS, 1099-LTC, 1099- MISC, 1099-NEC, 1099-OID, 1099-PATR, 1099-Q, 1099-QA, 1099-R, 1099-S, 1099-SA, 1099- SB, 1042-S, 3921, 3922, 5498, 5498-ESA, 5498-QA, and 5498-SA. It also includes Form W-2G (except for horse and dog racing, jai alai, sweepstakes, wagering pools, and lotteries). Note. Until further guidance is issued, you cannot furnish Form 1098-C electronically. Perforation (see Section 2.1.9, earlier) does not apply to printouts of copies of forms that are furnished elec- tronically to recipients. However, recipients should be cautioned to carefully separate the copies. If you meet the requirements listed in Sections 4.6.2 and 4.6.3, you are treated as furnishing the statement timely. 4.6.2 The recipient must consent in the affirmative to receiving the statement electronically and not Consent have withdrawn the consent before the statement is furnished. The consent by the recipient must be made electronically in a way that shows that he or she can access the statement in the electronic format in which it will be furnished. You must notify the recipient of any hardware or software changes prior to furnishing the statement. A new consent to receive the statement electronically is required after the new hardware or software is put into service. Prior to furnishing the statements electronically, you must provide the recipient a statement with the following statements promi- nently displayed. - If the recipient does not consent to receive the statement electronically, a paper copy will be provided. - The scope and duration of the consent. For example, whether the consent applies to every year the statement is furnished or only for the February 1, 2021 (February 16 for Forms 1099- B, 1099-S, and 1099-MISC with payments reported in box 8 or 10) immediately following the date of the consent. - How to obtain a paper copy after giving consent. - How to withdraw the consent. The consent may be withdrawn at any time by furnishing the withdrawal in writing (electronically or on paper) to the person whose name appears on the statement. Confirmation of the withdrawal will also be in writing (electronically or on paper). - Notice of termination. The notice must state under what conditions the statements will no longer be furnished to the recipient. - Procedures to update the recipient's information. - A description of the hardware and software required to access, print, and retain a statement, and a date the statement will no longer be available on the website. 4.6.3 Additionally, you must: Format, Posting, and Notification - Ensure the electronic format contains all the required information and complies with the guidelines in this document; - Post, on or before the February 1, 2021 (February 16 for Forms 1099-B, 1099-S, and 1099- MISC with payments reported in box 8 or 10) due date, the applicable statement on a website accessible to the recipient through October 15 of that year; and - Inform the recipient, electronically or by mail, of the posting and how to access and print the statement. For more information, see Regulations section 31.6051-1(j). For electronic furnishing of: - Forms 1098-E and 1098-T, see Regulations sections 1.6050S-2 and 1.6050S-4; - Form 1099-K, see Regulations section 1.6050W-2; - Forms 1099-QA and 5498-QA; - Forms 1099-R, 1099-SA, 1099-Q, 5498, 5498-ESA, and 5498-SA, see Notice 2004-10, 2004-1 C.B. 433; and - Form 1042-S, see Regulations section 1.1461-1(c)(1)(i). Part 5 Additional Instructions for Substitute Forms 1097- BTC, 1098, 1099, 5498, W-2G, and 1042-S Section 5.1 - Paper Substitutes for Form 1042-S 5.1.1 Paper substitutes of Copies A, B, C, and D must be identical to the Form 1042-S, Foreign Person's Paper Substitutes U.S. Source Income Subject to Withholding, and may be privately printed without prior approval from the Internal Revenue Service. Caution. On the bottom of Copy B, left align the following text: (keep for your records) and right align the following text: Form 1042-S (2020). Note. Copies A, B, C, and D of Form 1042-S may not contain multiple income types for the same recipient, that is, multiple rows of the top boxes 1-11 of the form. Only Copy E, retained by the withholding agent, can contain multiple income types. 5.1.2 Form 1042-S is subject to annual review and possible change. Withholding agents and form sup- Revisions pliers are cautioned against overstocking supplies of the privately printed substitutes. 5.1.3 Copies of the official form for the reporting year may be obtained from most IRS offices. The Obtaining Copies IRS provides only cut sheets of these forms. Continuous fan-fold/pin-fed forms are not provided. 5.1.4 - Only original forms may be filed with the IRS. Photocopies are not acceptable. Instructions For Withholding Agents - The term "Recipient's U.S. TIN" for an individual means the SSN, ITIN, or ATIN, consisting of nine digits separated by hyphens as follows: 000-00-0000. For all other recipients, the EIN or qualified intermediary employer identification number (QI-EIN). The QI-EIN designation in- cludes a withholding foreign partnership employer identification number (WP-EIN), and a with- holding foreign trust employer identification number (WT-EIN). The EIN and QI-EIN consist of nine digits separated by a hyphen as follows: 000-00-0000. The TIN must be in one of these formats. Note. Digits must be separated by hyphens on paper statements in the formats listed. - The term "Recipient's GIIN" means the global intermediary identification number assigned to a recipient that is a participating foreign financial institution (FFI) (including a reporting Model 2 FFI), registered deemed-compliant FFI (including a reporting Model 1 FFI), or oth- er entity for chapter 4 purposes. Note. A GIIN consists of nineteen characters as follows: XXXXXX.XXXXX.XX..XXX (6 characters followed by a period, 5 characters followed by a period, 2 characters followed by a period, and 3 final characters). - Withholding agents are requested to type or machine print whenever possible, provide quality data entries on the forms (that is, use black ink and insert data in the middle of blocks well separated from other printing and guidelines), and take other measures to guarantee a clear, sharp image. Withholding agents are not required, however, to acquire special equipment solely for the purpose of preparing these forms. - The "UNIQUE FORM IDENTIFIER," "AMENDED," and "AMENDED NO." boxes must be printed at the top center of the form under the title. - Substitute forms prepared in continuous or strip form must be burst and stripped to conform to the size specified for a single form before they are filed with the IRS. The dimensions are found in Section 5.1.5 next. Computer cards are acceptable provided they meet all require- ments regarding layout, content, and size. - The OMB number must be printed in the format "OMB No. 1545-0056." 5.1.5 Substitute Form 1042-S Format Requirements Section 5.2 - OMB Requirements for All Forms in This Revenue Procedure 5.2.1 The Paperwork Reduction Act (the Act) of 1995 (P.L. 104-13) requires that: OMB Requirements - OMB approves all IRS tax forms that are subject to the Act. Each IRS form contains (in or near the upper right corner) the OMB approval number, if any. (The official OMB numbers may be found on the official IRS printed forms and are also shown on the forms in the exhibits in Part 6. ); - Each IRS form (or its instructions) states: 1. Why the IRS needs the information, 2. How it will be used, and 3. Whether or not the information is required to be furnished to the IRS. This information must be provided to any users of official or substitute IRS forms or instructions. 5.2.2 The OMB requirements for substitute IRS forms are: Substitute Form Requirements - Any substitute form or substitute statement to a recipient must show the OMB number as it appears on the official IRS form, - For Copy A, the OMB number must appear exactly as shown on the official IRS form. For any copy other than Copy A, the OMB number must use one of the following formats. 1. OMB No. 1545-xxxx (preferred), or 2. OMB # 1545-xxxx (acceptable). Caution. These requirements do not apply to substitute Forms 1042-S. See Section 5.1.4, earlier. 5.2.3 All substitute forms must state the Privacy Act and Paperwork Reduction Act Notice as listed in Required Explanation to Section 2.1.10, earlier. Users If no instructions are provided to users of your forms, you must furnish them with the exact text of the Privacy Act and Paperwork Reduction Act Notice. Section 5.3 - Ordering Forms and Instructions You can order official IRS Forms (Forms 1096, 1098, 1099, W-2G, 1042-S, and most other forms mentioned in this publication), instructions, and information copies of federal tax material by going to IRS.gov/OrderForms. Note. Some forms on the Internet are intended as information only and may not be submitted as an official IRS form (for example, most Forms 1099, W-2, and W-3). Unless otherwise instructed, Form 1096 and Copy A of 1098 series, 1099 series, 5498 series, and Forms 3921 and 3922 cannot be used for filing with the IRS when printed from a conventional printer. These forms contain drop-out ink requirements as described in Part 2 of this publication. Exception. Forms 1097-BTC, 1098-C, 1098-MA, 1099-CAP, 1099-LTC, 1099-Q, 1099-QA, 1099-SA, 3922, 5498-ESA, 5498-QA, 5498 - SA, and 1042-S can be printed in black ink as speci- fied in Sections 2.1.1 in and 5.1.5, earlier. Section 5.4 - Effect on Other Revenue Procedures 5.4.1 Revenue Procedure 2019-24, 2019-29, I.R.B. 353, dated July 15, 2019, is superseded by this Other Revenue Procedures revenue procedure. Part 6 Exhibits Section 6.1 - Exhibits of Forms in this Revenue Procedure 6.1.1 Exhibits A through CC illustrate some of the specifications that were discussed earlier in this reve- Purpose nue procedure. The dimensions apply to the actual size forms, but the exhibits have been reduced in size. Generally, the illustrated dimensions apply to all like forms. For example, Exhibit E shows 11.00 inches from the top edge to the bottom edge of Form 1098-E and.85 inches between the bottom rule of the top form and the top rule of the second form on the page. These dimensions apply to all forms that are printed 3-to-a-page. Exhibit B contains the general measurements for forms printed 2-to-a-page. All 2-to-a-page forms, except Form 1099-B, are 4.5 inches in height within the border lines. Form 1099-B is 4.67 inches in height within the border lines. Exhibit E contains the general measurements for forms printed 3-to-a-page. All 3-to-a-page forms are 2.83 inches in height within the border lines. The printed area of all forms is 7.3 inches wide. All of the exhibits in this publication were updated to include all of the 2020 revisions for those forms that have been revised. 6.1.2 Keep in mind the following guidelines when printing substitute forms. Guidelines - Closely follow the specifications to avoid delays in processing the forms. - Always use the specifications as outlined in this revenue procedure and illustrated in the ex- hibits. - Do not add the text line "Do Not Cut or Separate Forms on This Page" to the bottom form. This will be inconsistent with the specifications. 6.2 The following exhibits provide specifications for the forms listed in Section 1.1.2. Exhibits A, B, Exhibits and E contain the general measurements for all of the forms. The remaining exhibits represent the images and may contain unique measurements as required by the form.
Private Letter Ruling Number: 202345012 Internal Revenue Service March 1, 2023 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Release Number: 202345012 Release Date: 11/10/2023 UIL Code: 501.03-00 Date: 03/01/2023 Taxpayer ID number (last 4 digits): Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: Last day to file petition with United States Tax Court: 05/30/2023 CERTIFIED MAIL - Return Receipt Requested Dear ****: Why we are sending you this letter This is a final determination that you don't qualify for exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3), effective **, **. Your determination letter dated **, **, is revoked. Our adverse determination as to your exempt status was made for the following reasons: You have not demonstrated that you are operated exclusively for charitable, educational, or other exempt purposes within the meaning of IRC Section 501(c)(3) and that no part of your net earnings inure to the benefit of private shareholders or individuals. You failed to respond to repeated reasonable requests to allow the Internal Revenue Service to examine your records regarding your receipts, expenditures, or activities as required by IRC Sections 6001, 6033(a)(1) and Revenue Ruling 59-95, 1959-1 C.B. 627. Organizations that are not exempt under IRC Section 501 generally are required to file federal income tax returns and pay tax, where applicable. For further instructions, forms and information please visit IRS.gov. Contributions to your organization are no longer deductible under IRC Section 170. What you must do if you disagree with this determination If you want to contest our final determination, you have 90 days from the date this determination letter was mailed to you to file a petition or complaint in one of the three federal courts listed below. How to file your action for declaratory judgment If you decide to contest this determination, you can file an action for declaratory judgment under the provisions of Section 7428 of the Code in either: - The United States Tax Court, - The United States Court of Federal Claims, or - The United States District Court for the District of Columbia You must file a petition or complaint in one of these three courts within 90 days from the date we mailed this determination letter to you. You can download a finable petition or complaint form and get information about filing at each respective court's website listed below or by contacting the Office of the Clerk of the Court at one of the addresses below. Be sure to include a copy of this letter and any attachments and the applicable filing fee with the petition or complaint. You can eFile your completed U.S. Tax Court petition by following the instructions and user guides available on the Tax Court website at ustaxcourt.gov/dawson.html. You will need to register for a DAWSON account to do so. You may also file your petition at the address below: United States Tax Court 400 Second Street, NW Washington, DC 20217 ustaxcourt.gov The websites of the U.S. Court of Federal Claims and the U.S. District Court for the District of Columbia contain instructions about how to file your completed complaint electronically. You may also file your complaint at one of the addresses below: US Court of Federal Claims 717 Madison Place, NW Washington, DC 20439 uscfc.uscourts.gov US District Court for the District of Columbia 333 Constitution Avenue, NW Washington, DC 20001 dcd.uscourts.gov Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory judgment under IRC Section 7428. Information about the IRS Taxpayer Advocate Service The IRS office whose phone number appears at the top of the notice can best address and access your tax information and help get you answers. However, you may be eligible for free help from the Taxpayer Advocate Service (TAS) if you can't resolve your tax problem with the IRS, or you believe an IRS procedure just isn't working as it should. TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Contact your local Taxpayer Advocate Office at: Internal Revenue Service Taxpayer Advocate Office Telephone: Fax: Or call TAS at 877-777-4778. For more information about TAS and your rights under the Taxpayer Bill of Rights, go to taxpayeradvocate.IRS.gov. Do not send your federal court pleading to the TAS address listed above. Use the applicable federal court address provided earlier in the letter. Contacting TAS does not extend the time to file an action for declaratory judgment. Where you can find more information Enclosed are Publication 1, Your Rights as a Taxpayer, and Publication 594, The IRS Collection Process, for more comprehensive information. Find tax forms or publications by visiting IRS.gov/forms or calling 800-TAX-FORM (800-829-3676). If you have questions, you can call the person shown at the top of this letter. If you prefer to write, use the address shown at the top of this letter. Include your telephone number, the best time to call, and a copy of this letter. You may fax your documents to the fax number shown above, using either a fax machine or online fax service. Protect yourself when sending digital data by understanding the fax service's privacy and security policies. Keep the original letter for your records. Sincerely, Lynn A. Brinkley Director, Exempt Organization Examinations Enclosures: Publication 1 Publication 594 Publication 892 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Date: June 23, 2022 Taxpayer ID number: Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: Address: Manager's contact information: Name: ID number: Telephone: Response due date: July 25, 2022 CERTIFIED MAIL -- Return Receipt Requested Dear **: Why you're receiving this letter We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we propose to revoke your tax-exempt status as an organization described in Internal Revenue Code (IRC) Section 501(c)(3). If you agree If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an organization described in IRC Section 501(c)(3) for the periods above. After we issue the final adverse determination letter, we'll announce that your organization is no longer eligible to receive tax deductible contributions under IRC Section 170. If you disagree 1. Request a meeting or telephone conference with the manager shown at the top of this letter. 2. Send any information you want us to consider. 3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after the meeting or after we consider the information. The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case. For your protest to be valid, it must contain certain specific information, including a statement of the facts, applicable law, and arguments in support of your position. For specific information needed for a valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn't apply now that we've issued this letter. 4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities) if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the IRS. If you're considering requesting technical advice, contact the person shown at the top of this letter. If you disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as explained above. A decision made in a technical advice memorandum, however, generally is final and binding on Appeals. If we don't hear from you If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final adverse determination letter. Contacting the Taxpayer Advocate Office is a taxpayer right The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778. For additional information You can get any of the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person shown at the top of this letter. Sincerely, ** for Lynn A. Brinkley Acting Director Exempt Organizations Examinations Enclosures: Form 886-A Form 6018 Issue: Whether ** continues to qualify for exemption from Federal income tax under section 501(a) of the Internal Revenue Code (Code) as a charitable organization described in Code section 501(c)(3). Facts: ** was incorporated under the ** of the State of ** on **, **. The Articles of Incorporation filed with ** provides, in article 4b, that the specific purpose for which ** was formed is to focus on education, financial stability and good health, the building blocks of a good life, a strong community and a better society. Article 5 of **'s organizing document contains additional provisions that specify, in pertinent part, that the corporation is organized and operated exclusively for the purposes set forth in article 4 within the meaning of Internal Revenue Code section 501(c)(3). Article 5 also provides for a dissolution clause intended to allow ** to satisfy the organizational requirements for Federal exemption. ** Articles of Incorporation identifies the incorporator as **. ** is also appointed as the registered agent for ** with a street address of **, **, **, **. A copy of ** Articles of Incorporation, which was secured as a public document from the state website, is appended as Exhibit A. In **, ** filed Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, with the Internal Revenue Service (IRS). The address provided for the organization is ** - **, **, ** is one of ** individuals listed as directors in Part I of Form 1023-EZ, which requires applicant organizations to list the names, titles and mailing addresses of all officers, directors, and trustees. ** is designated as the Managing Director of **. ** signed the Form 1023-EZ. ** is identified as the executive director with an address in **, **. The third individual is listed as a director of ** with an address in **, ** different from the one referenced above for the organization. In its Form 1023-EZ application, ** attested that it is both organized and operated exclusively for charitable purposes. ** erroneously listed its incorporation date as **, **, in Part II, item 3 of Form 1023-EZ. ** did not furnish a copy of its Articles of Incorporation since the organizing document is not required to be filed with the streamlined Form 1023-EZ application. Based on the representations and attestations made by ** in its Form 1023-EZ, the IRS issued a favorable determination letter dated **, **, granting ** recognition of exemption under section 501(c)(3) of the Code effective **, **. ** was classified as a public charity under sections 509(a)(1) and 170(b)(1)(A)(vi) of the Code based on its attestation regarding public support in Part IV of the Form 1023-EZ. IRS records show that ** filed Form 990-N, Electronic Notice (e-Postcard), beginning with the ** calendar year. ** filed Form 990-N in lieu of a Form 990 or Form 990-EZ return. The organization indicated on Form 990-N that its gross receipts are normally $50,000 or less. In **, the Tax Exempt and Governmental Entities (TE/GE) division of the IRS selected for examination of its books and records covering the ** calendar year. The notice of examination package, which is dated **, **, consists of IRS letter #6031, Form 4564, Information Document Request (IDR), Publication 1, Your Rights as a Taxpayer, Notice 609, Privacy Act Notice, and Publication 3498-A, The Examination Process (Audits by Mail). The notice of examination package was mailed to ** at the last known address on file for the organization which is as follows: The last known address on file for ** is the same address provided by the organization on its Form 1023-EZ application and on the Forms 990-N filed with the IRS. The address furnished by ** corresponds to a ** retail store which offers **. A copy of the pertinent website content posted by or on behalf of the ** store is appended as Exhibit B. As described in Exhibit B, the following ** are offered by ** at its retail store located at - A real street address in lieu of a P.O. Box. - Package and mail receipt notifications - Mail holding and forwarding - Call-in mail check As noted on page 1 of the 2-page IDR issued with the examination notice, the examination of **'s books and records is intended to verify that the organization: 1. Operates in accordance with section 501(c)(3) of the Code 2. Is eligible to file Form 990-N based on gross receipts, and 3. Filed all required returns including information returns. As part of standard audit procedures, the IRS examiner requested that ** furnish certain records and information needed to determine whether the organization is operating in furtherance of charitable and other exempt purposes described in section 501(c)(3) of the Code. IDR #1 issued to ** on **, **, requests copies of the following records and information covering the ** calendar year under examination: - Chart of accounts - General ledger - Adjusted trial balance - Cash disbursements journal. - Monthly bank statements for ** primary operating (checking) account together with canceled checks or check images furnished by the bank. - Monthly statements for all credit cards that may have been issued to **. - Minutes of meetings held by ** Board of Directors and committees of the Board. - Internal policies and procedures regarding the handling and recording of cash donations. - Lease agreements and other information relating to any office or other facility used by to conduct activities. - Contracts and other arrangements with individuals and/or organizations which solicit and raise funds for ** including, but not limited to, professional fundraising organizations. - The organization's website address, if any, and the identity of the party that hosts the website. If no website is maintained, ** was requested to provide copies of records which describe the activities conducted in **. In the absence of formal marketing and fundraising materials, ** was asked to provide a statement describing the activities, services, programs, and events conducted by the organization in **. - Information regarding the accounting software used by ** for preparation of its books and records. Due to the Covid-19 pandemic, ** was given additional time to compile and furnish the records and information requested by the IRS examiner. The response due date on the IDR was **, **. The notice of examination package was not returned by the post office as undeliverable. Neither the IRS examiner nor his group manager received any of the requested records and information from **. The IRS examiner was not otherwise contacted by an officer, director, or any other individual associated with the organization. In accordance with established IRS procedures, a follow-up "Delinquency Notice" letter was issued to ** with a copy of IDR #1 on **, **. The letter was sent by certified mail and the post office confirmed delivery to the last known address on file for **. The delinquency notice states, in part, that if the organization does not fully respond to the IDR by the response due date, the IRS will propose revocation of ** tax-exempt status. The response due date referenced on the delinquency letter is **, **. ** did not respond to the delinquency notice or otherwise contact the IRS examiner. A search of the State of ** corporate database, which provides information on the status of entities incorporated under ** state law, shows that ** corporate charter remains in effect but that the state considers the organization to be inactive as of **, **. See the attachment secured from the state website labeled Exhibit C. The address provided by ** to the State of ** for both the principal office of the organization and the agent for service of process is **, **, **, **. See Exhibit C. This address corresponds to the one found for Mailbox, a retail store which offers ** for its customers including a ** and ** services. A copy of the pertinent website content posted for ** is appended as Exhibit D. Despite its name, there is no evidence that ** is an affiliate or chapter of the ** network of charities that operate within the United States and abroad. The ** organization maintains a website which allows users to search for local chapters. ** is not among the local or state chapters listed. The ** Form 990-N filed by ** with the IRS in ** identifies a website address (**) in section E. The IRS examiner was not able to locate the website domain address referenced on the ** Form 990-N. The Form 990-N filed by ** does not identify any website address. Applicable Law: Section 501(c)(3) of the Code provides that an organization organized and operated exclusively for charitable or educational purposes is exempt from Federal income tax, provided no part of its net earnings inures to the benefit of any private shareholder or individual. Section 1.501(c)(3)-1(a)(1) of the Treasury Regulations states that to be exempt as an organization described in section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in such section - charitable, religious, educational, scientific, literary, testing for public safety, or for the prevention of cruelty to children or animals. If an organization fails to meet either the organizational test or the operational test, it is not exempt. Section 1.501(c)((3)-1(c) of the regulations describes the operational test requirements for 501(c)(3) exemption. The operational test focuses on how the organization is actually operated, regardless of whether it is properly organized for tax-exempt purposes. Section 1.501(c)(3)-1(c)(1) of the regulations provides that an organization will be regarded as "operated exclusively" for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in section 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. This is referred to as the "primary activities" test. Section 1.501(c)(3)-1(c)(2) of the regulations provides that an organization is not operated exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals. Section 511 of the Code imposes a tax at corporate rates under section 11 on the unrelated business taxable income of certain tax-exempt organizations. Section 6001 of the Code provides, in part, that every person liable for any tax imposed by this title, or for the collection thereof, shall keep such records, render such statements, make such returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Whenever in the judgment of the Secretary it is necessary, he may require any person, by notice served upon such person or by regulations, to make such returns, render such statements, or keep such records, as the Secretary deems sufficient to show whether or not such person is liable for tax under this title. Section 1.6001-1(c) of the regulations provides that in addition to such permanent books and records as are required by paragraph (a) of this section with respect to the tax imposed by section 511 on unrelated business income of certain exempt organizations, every organization exempt from tax under section 501(a) shall keep such permanent books of account or records, including inventories, as are sufficient to show specifically the items of gross income, receipts and disbursements. Such organizations shall also keep such books and records as are required to substantiate the information required by section 6033. See section 6033 and regulations sections 1.6033-1 through 1.6033-3. Section1.6001-1(e) of the regulations provides that the books or records required by this section shall be kept at all times available for inspection by authorized internal revenue officers or employees and, shall be retained as long as the contents thereof may be material in the administration of any internal revenue law. Section 6033 of the Code provides, in general, that every organization exempt under IRC 501(a) shall file an annual return, stating specifically the items of gross income, receipts, and disbursements, and such other information for the purpose of carrying out the Internal Revenue laws as the Secretary may by forms of regulations prescribe, and shall keep such records, render under oath such statements, make such other returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Section 6033 of the Code provides an exception to the annual filing requirement in the case of an organization described in section 501(c) (other than a private foundation or a supporting organization described in section 509(a)(3)) the gross receipts of which in each taxable year are normally not more than $50,000. See section 1.6033-2(g)(1)(iii) of the regulations. Section 1.6033-2(g)(5) of the regulations provide that an organization that is not required to file an annual return by virtue of the gross receipts exception must submit an annual electronic notice notification as described in section 6033(i) of the Code: Section 1.6033-2(i)(2) of the regulations provide that every organization which is exempt from tax, whether or not it is required to file an annual information return; shall submit such additional information as may be required by the Internal Revenue Service for the purpose of inquiring into its exempt status and administering the provisions of subchapter F (section 501 and following), chapter 1 of subtitle A of the Code and section 6033. Rev.Rul. 59-95, 1959-1 C. B. 627, concerns an exempt organization that was requested to produce a financial statement and statement of its operations for a certain year However, its records were so incomplete that the organization was unable to furnish such statements. The Service held that the failure or inability to file the required information return or otherwise to comply with the provisions of section 6033 of the Code and the regulations which implement it, may result in the termination of the exempt status of an organization previously held exempt, on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status. Organization's Position: ** position is unknown at this time. Government's Position: Analysis The facts indicate that ** received recognition of exemption under section 501(c)(3) of the Code in ** based on information presented in its Form 1023-EZ application, including attestations made by the organization regarding its formation and operations. The TE/GE division of the IRS maintains an examination program for exempt organizations to determine whether they are complying with statutory requirements regarding their tax-exempt status, the proper filing of returns, and other tax reporting matters. ** filed Form 990-N, an electronic notice, with the IRS for the ** calendar year. ** was selected for audit to ensure that the organization's activities and operations align with their approved exempt status and to verify that the filing of Form 990-N was proper based on the organization's gross receipts. Section 6001 of the Code and the regulations thereunder impose requirements on exempt organizations to keep books and records to substantiate information required under section 6033 of the Code. Although ** filed an electronic notice in lieu of a return, the organization is nevertheless required to produce records and other information requested by the IRS to verify that it operates in furtherance of its exempt purpose. See regulations section 1.6033-2(i)(2). ** failed to respond to repeated reasonable requests to allow the IRS to examine its books and records including its receipts, disbursements, and other items required to be kept and maintained pursuant to sections 6001 and 6033(a)(1) of the Code. Accordingly, ** has failed to meet the requirements of section 501(c)(3) of the Code and sections 1.501(c)(3)-1(a) and 1.501(c)(3)-1(c) of the regulations, in that the organization has not established that it is operated exclusively for exempt purposes and that no part of its net earnings inures to the benefit of private shareholders or individuals. See also Rev.Rul. 59-95, 1959-1 C.B. 627. Conclusion: For the reasons stated above, the IRS has determined that ** is no longer exempt from Federal income tax under section 501(a) of the Code as an organization described in Code section 501(c)(3). The IRS is proposing to revoke ** 501(c)(3) tax-exempt status effective **, **. This date corresponds to the effective date of exemption shown on the IRS determination letter for ** dated **, ****. Please note that this Form 886-A, Explanation-of items, which is also known as the revenue agent report (RAR), constitutes an integral part of the attached 30-day letter #3618. Please refer to the attached letter #3618 for additional information including appeals rights and other options available to the organization and, the instructions for how to respond.
Internal Revenue Service - Information Release IR-2023-218 IRS, Security Summit partners announce 8th annual National Tax Security Awareness Week begins Nov. 27; focus on raising awareness among taxpayers, tax pros on security tips to protect against identity theft, scams November 17, 2023 Media Relations Office Washington, D.C. www.IRS.gov/newsroom Media Contact: 202.317.4000 Public Contact: 800.829.1040 IRS, Security Summit partners announce 8th annual National Tax Security Awareness Week begins Nov. 27; focus on raising awareness among taxpayers, tax pros on security tips to protect against identity theft, scams IR-2023-218, Nov. 17, 2023 WASHINGTON -- The Internal Revenue Service, along with its Security Summit partners in state tax agencies and the nation's tax industry, today announced a special week focusing taxpayer and tax professional awareness on protecting sensitive financial information against identity thieves as the holidays and the 2024 tax season approach. The 8th annual National Tax Security Awareness Week takes place this year from Nov. 27 - Dec. 1, marking an annual campaign by the Security Summit, a coalition of the IRS, state tax administrators, tax software companies, the tax professional community and others in the larger tax community. The group formed in 2015 to combat tax-related identity theft through better public-private sector coordination as well as strengthening internal protections and raising awareness about security threats. With the holiday shopping season underway and tax season fast approaching, the Security Summit partners are alerting taxpayers and tax professionals to take extra steps to protect their financial and tax information during this critical period. During the holiday season, people face the heightened risk of identity theft as criminals ramp up efforts to trick people into sharing sensitive personal information including through email, text message and social media. Identity thieves can use the information to try filing false tax returns and stealing refunds. "This security week highlights ways for taxpayers and tax professionals to protect themselves against rapidly evolving identity theft schemes to steal tax and other financial data," said IRS Commissioner Danny Werfel. "The Security Summit effort is an innovative way that the IRS, the states and the private-sector tax industry work together to protect taxpayers and the tax community. Protecting taxpayers is an important priority for the IRS, and the National Tax Security Awareness Week provides helpful information to taxpayers to help us in the ongoing battle against identity thieves." To help combat this threat, the Summit partner's National Tax Security Awareness Week features a week-long series of educational efforts to educate and inform taxpayers and tax professionals on how to defend against identity theft and other scams. The campaign includes: - Daily press releases during the week of Nov. 27 highlighting specific National Tax Security Awareness issues that can protect taxpayers and tax professionals form evolving identity theft and tax schemes. - Social media awareness on X (formerly Twitter), Facebook, Instagram and YouTube. Follow @IRSTaxSecurity, @IRSnews and #TaxSecurity on X for the latest information. - Special educational materials, including e-posters and IRS publications, will also be available for use by Summit partners and others interested in sharing information. - A special webinar for tax professionals will be held on Nov. 30 " Developing a Written Information Security Plan." The Written Information Security Plan PDF or WISP is a 28-page, easy-to-understand document developed by and for tax and industry professionals to keep customer and business information safe and secure. The IRS and Summit partners are focused on combating identity thieves and their increasingly sophisticated scams. Identity thieves often impersonate the IRS and others in the tax community using fake emails, texts and online scams. These schemes frequently use recent tragedies or imitate charitable groups to coax people into sharing sensitive financial data, which can lead to tax-related identity theft. "The Security Summit has made incredible strides to protect taxpayers across the nation, but identity thieves continue to evolve," said Peter Barca, who serves as the Federation of Tax Administrators Board of Trustees president and Wisconsin Department of Revenue secretary. "We encourage taxpayers, businesses and tax professionals to remain on guard against these threats, and the information in National Tax Security Awareness Week can help." A key tool in identifying and defending against these scams is the Identity Theft Information Sharing and Analysis Center (ISAC) developed by IRS and Security Summit partners to better identify and coordinate against fraudsters. As the group has strengthened defenses inside the tax system to spot emerging scams, identity thieves continue to look for ways to obtain sensitive personal financial information to file fraudulent tax returns. That has made tax professionals, whose business it is to have valuable tax information, a key target for scam artists. "Even with all of the success made by the Security Summit to protect taxpayers and the tax system from identity thieves, more work remains to be done. Consumers and tax professionals play an important role in this effort; protecting their important information will also help the Security Summit partners in the battle against identity theft," said Julie Magee, one of the original participants in the Security Summit and Tax Regulatory Affairs Lead for Cash App Taxes. With International Fraud Awareness Week wrapping up this week, the Security Summit partners remind taxpayers that the awareness effort is a year-round effort in the tax community. The special National Tax Security Awareness Week that begins Nov. 27 provides extra awareness for taxpayers as the holidays and the 2024 tax season approach. Highlights this year include: National Tax Security Awareness Week 2023 highlights Cyber Monday: Online safety The IRS and the Security Summit partners remind people to take these basic steps when shopping online: - Use anti-virus software with anti-malware; ensure it includes a firewall to prevent intrusions. - Use strong and unique passwords for all accounts. - Use multi-factor authentication whenever possible. - Shop only secure websites with the padlock icon and "https" in the web address. - Don't shop on unsecured or public Wi-Fi. Tips for tax professionals to protect their clients, including special Nov. 30 webinar planned As identity thieves continue targeting tax professionals, the IRS and the Summit partners urge practitioners to review the "Taxes-Security-Together" Checklist, including: - Use multi-factor authentication to protect tax software accounts. - Use a Virtual Private Network if working remotely. - Create a written data security plan as required by federal law. - The IRS also reminds the tax community that the Federal Trade Commission this summer updated their safeguards standards and now requires tax professionals to use multi-factor authentication to protect client information. - Know about phishing and phone scams, including "spearphishing" schemes where identity thieves pose as new clients in messages to tax professionals. - Create data security and data theft recovery plans. - The tax professional part of the week will also be highlighted by the special 10:30 a.m. ET webinar on Nov. 30. The IRS and Jared Ballew, one of the Summit members who helped develop the WISP, will conduct the session. Ballew serves as Vice President of Government Relations at Taxwell, representing Drake Software and TaxAct. He conducted special IRS Nationwide Tax Forum sessions this summer to standing-room-only audiences. "These security plans provide valuable tips and information to help tax pros develop an effective plan that's appropriate for their business," Ballew said. "The Security Summit partners continue to urge tax pros to make sure they have a strong security plan in place, and the WISP is a great place to start for many practices." Identity theft/IRS IP PIN program Taxpayers who can verify their identities online may opt into the IRS Identity Protection PIN program - a tool taxpayers can use to protect themselves - and their tax refund from identity thieves. Here's what taxpayers need to know: - The IP PIN is a six-digit code known only to the individual and the IRS. It provides another layer of protection for taxpayers' Social Security numbers on tax returns. - Use the Get an Identity Protection PIN (IP PIN) tool at IRS.gov/ippin to immediately get an IP PIN. - Never share the IP PIN with anyone but a trusted tax provider. Help for tax professionals, small businesses Most cyberattacks are aimed at small businesses with fewer than 100 employees. To help this important group, the Security Summit offers some important information during National Tax Security Awareness Week, including: - Learn about best security practices for small businesses. - A Business Identity Theft Affidavit, Form 14039-B, is available for businesses to report theft to the IRS. - Beware of various scams, especially the W-2 scam that attempts to steal employee income information. - Check out the "Business" section on IRS' Identity Theft Central. Earlier this year, the Summit's Protect Your Clients; Protect Yourself campaign encouraged tax professionals to focus on fundamentals and to watch out for emerging vulnerabilities for those practitioners. The effort also reminded tax professionals about important resources available for tax professionals. Additional resources for taxpayers, businesses In addition to reviewing IRS Publication 4557, Safeguarding Taxpayer Data PDF, tax professionals can also get help with security recommendations by reviewing Small Business Information Security: The Fundamentals PDF, by the National Institute of Standards and Technology. The IRS Identity Theft Central pages for tax pros, individuals and businesses have important details as well. The IRS and Security Summit partners also share YouTube videos on security steps for taxpayers. The videos can be viewed or downloaded at Easy Steps to Protect Your Computer and Phone and Security Measures Help Protect Against Tax-Related Identity Theft. Employers can share Publication 4524, Security Awareness for Taxpayers PDF, with their employees and customers, and tax professionals can share with clients.
Treasury Decision 9896 Internal Revenue Service 2020-18 I.R.B. 681 26 CFR 1.245A(e)-1, 1.267A-1 through 1.267A-7, 1.1503(d)-1, 1.1503(d)-3, 1.1503(d)-7, 1.1503(d)-8, 1.6038-2, 1.6038-3, 1.6038A-2, 301.7701-3. T.D. 9896 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 1 and 301 Rules Regarding Certain Hybrid Arrangements AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Final regulations. SUMMARY: This document contains final regulations providing guidance regarding hybrid dividends and certain amounts paid or accrued pursuant to hybrid arrangements, which generally involve arrangements whereby U.S. and foreign tax law classify a transaction or entity differently for tax purposes. This document also contains final regulations relating to dual consolidated losses and entity classifications to prevent the same deduction from being claimed under the tax laws of both the United States and a foreign jurisdiction. Finally, this document contains final regulations regarding information reporting to facilitate the administration of certain rules in the final regulations. The final regulations affect taxpayers that would otherwise claim a deduction related to such amounts and certain shareholders of foreign corporations that pay or receive hybrid dividends. DATES: Effective date: These regulations are effective on April 8, 2020. Applicability dates: For dates of applicability, see §§1.245A(e)-1(h), 1.267A-7, 1.1503(d)-8(b), 1.6038-2(m), 1.6038-3(l), 1.6038A-2(g), and 301.7701-3(c). FOR FURTHER INFORMATION CONTACT: Tracy Villecco at (202) 317-6933 or Tianlin (Laura) Shi at (202) 317-6936 (not toll-free numbers). SUPPLEMENTARY INFORMATION: Background Sections 245A(e) and 267A were added to the Internal Revenue Code ("Code") by the Tax Cuts and Jobs Act, Pub. L. No. 115-97 (2017) (the "Act"), which was enacted on December 22, 2017. On December 28, 2018, the Department of the Treasury ("Treasury Department") and the IRS published proposed regulations (REG-104352-18) under sections 245A(e), 267A, 1503(d), 6038, 6038A, 6038C, and 7701 in the Federal Register (83 FR 67612) (the "proposed regulations"). Terms used but not defined in this preamble have the meaning provided in the final regulations. A public hearing on the proposed regulations was scheduled for March 20, 2019, but it was not held because no speaker outlines were submitted to the IRS by the due date for submission, March 15, 2019. The Treasury Department and the IRS received written comments with respect to the proposed regulations. Comments received outside the scope of this rulemaking are generally not addressed but may be considered in connection with future regulations. All written comments received in response to the proposed regulations are available at www.regulations.gov or upon request. Summary of Comments and Explanation of Revisions I. Overview The final regulations retain the basic approach and structure of the proposed regulations, with certain revisions. This Summary of Comments and Explanation of Revisions section discusses the revisions as well as comments received in response to the solicitation of comments in the proposed regulations. II. Comments and Revisions to Proposed §1.245A(e)-1 - Special Rules for Hybrid Dividends A. Background Section 245A(e) and the proposed regulations neutralize the double non-taxation effects of a hybrid dividend or tiered hybrid dividend through either denying the section 245A(a) dividends received deduction with respect to the dividend or requiring an inclusion under section 951(a)(1)(A) ("subpart F inclusion") with respect to the dividend, depending on whether the shareholder receiving the dividend is a domestic corporation or a controlled foreign corporation ("CFC"). The proposed regulations require that certain shareholders of a CFC maintain a hybrid deduction account with respect to each share of stock of the CFC that the shareholder owns, and provide that a dividend received by the shareholder from the CFC is a hybrid dividend or tiered hybrid dividend to the extent of the sum of those accounts. A hybrid deduction account with respect to a share of stock of a CFC reflects the amount of hybrid deductions of the CFC that have been allocated to the share. In general, a hybrid deduction is a deduction or other tax benefit allowed to a CFC (or a related person) under a relevant foreign tax law for an amount paid, accrued, or distributed with respect to an instrument of the CFC that is stock for U.S. tax purposes. B. Hybrid deductions 1. Current Use of Deduction or Other Tax Benefit One comment requested that for a deduction or other tax benefit allowed under a relevant foreign tax law to be a hybrid deduction, it must be used currently under the relevant foreign tax law and, thus, currently reduce foreign tax liability. The comment noted that a current use might not occur if, for example, the CFC has other deductions or losses under the relevant foreign tax law, or all of a CFC's income is exempt income (for example, if the CFC is a holding company and all of its income benefits from a 100 percent participation exemption). The comment asserted that absent a current use of a deduction, double non-taxation does not occur. The Treasury Department and the IRS have determined that it would not be appropriate for a deduction or other tax benefit to be a hybrid deduction only to the extent it is used currently. Even though a deduction or other tax benefit may not be used currently, it could be used in another taxable period - for example, as a result of a net operating loss carrying over to a subsequent taxable year - and thus could produce double non-taxation. In addition, it could be complex or burdensome to determine whether a deduction or other tax benefit is used currently (because it could, for example, require a factual analysis of how particular deductions offset items of gross income under the relevant foreign tax law) and then, to the extent not used currently, track the deduction or other tax benefit so that it is added to a hybrid deduction account only once it is in fact used. Accordingly, the final regulations do not adopt the comment, and the regulations clarify that a deduction or other tax benefit may be a hybrid deduction regardless of whether it is used currently under the relevant foreign tax law. See §1.245A(e)-1(d)(2). 2. Coordination with Foreign Disallowance Rules i. Thin capitalization and other rules A comment requested that a deduction or other tax benefit not be a hybrid deduction if under the relevant foreign tax law the deduction or other tax benefit is disallowed under a thin capitalization rule or a rule similar to section 163(j). Similar to the comment discussed in part II.B.1 of this Summary of Comments and Explanation of Revisions section, the comment asserted that such a disallowed deduction or other tax benefit does not produce double non-taxation. The final regulations do not adopt the comment for reasons similar to those discussed in part II.B.1 of this Summary of Comments and Explanation of Revisions section. For example, a thin capitalization rule or a rule similar to section 163(j) may suspend rather than disallow a deduction, and thus may not prevent eventual double non-taxation. Moreover, because a thin capitalization rule or a rule similar to section 163(j) generally applies to all otherwise allowable deductions, it would be unduly complex and burdensome to determine the extent to which an amount disallowed under such a rule relates to a particular otherwise allowable deduction. Accordingly, the final regulations do not adopt the comment, and the regulations clarify that the determination of whether a deduction or other tax benefit is allowed is made without regard to a rule that disallows or suspends deductions if a certain ratio or percentage is exceeded. See §1.245A(e)-1(d)(2)(ii)(A). ii. Foreign hybrid mismatch rules The proposed regulations do not provide rules to take into account the application of foreign hybrid mismatch rules - that is, hybrid mismatch rules under the relevant foreign tax law. Accordingly, if such hybrid mismatch rules deny a deduction to neutralize a deduction/no-inclusion ("D/NI") outcome, then, because the deduction is not allowed under the relevant foreign tax law, the deduction cannot be a hybrid deduction under the proposed regulations. The Treasury Department and the IRS have concluded that, in certain cases, whether a deduction or other tax benefit is a hybrid deduction should be determined without regard to foreign hybrid mismatch rules (and thus without regard to whether such rules disallow the deduction). The determination should be made in this manner in cases in which there is a close temporal connection between the amount giving rise to the deduction or other tax benefit and the payment of the amount as a dividend for U.S. tax purposes. In these cases, in order to prevent a D/NI outcome, the participation exemption under section 245A(a) should not apply to the dividend, as opposed to the participation exemption applying to the dividend to the extent that the foreign hybrid mismatch rules disallow a deduction for the amount in order to neutralize a D/NI outcome. This approach more closely aligns the rules of section 245A(e) with the approach set forth in the OECD/G20 report, Neutralising the Effects of Hybrid Mismatch Arrangements, Action 2: 2015 Final Report (the "Hybrid Mismatch Report"). Such an approach avoids potential circularity or other issues in cases in which the application of foreign hybrid mismatch rules depends on whether an amount will be included in income under U.S. tax law. See Hybrid Mismatch Report, para. 35 and Ex. 2.3. In addition, this approach is consistent with an approach suggested in a comment (which was received before the proposed regulations were issued but after the proposed regulations had been substantially developed) with respect to section 245A generally. Accordingly, the final regulations provide that the determination of whether a relevant foreign tax law allows a deduction or other tax benefit for an amount is made without regard to the application of foreign hybrid mismatch rules, provided that the amount gives rise to a dividend for U.S. tax purposes or is reasonably expected for U.S. tax purposes to give rise to a dividend that will be paid within 12 months after the taxable period in which the deduction or other tax benefit would otherwise be allowed. See §1.245A(e)-1(d)(2)(ii)(B). As an example, assume that but for foreign hybrid mismatch rules, a CFC would be allowed a deduction under the relevant foreign tax law for an amount paid or accrued pursuant to an instrument issued by the CFC and treated as stock for U.S. tax purposes. If the amount is an actual payment that gives rise to a dividend for U.S. tax purposes (or the amount is an accrual but is reasonably expected to give rise to a dividend for U.S. tax purposes that will be paid within 12 months after the taxable period for which the deduction would otherwise be allowed), then the amount generally gives rise to a hybrid deduction regardless of whether the foreign hybrid mismatch rules may disallow a deduction for the amount. If, on the other hand, the amount would give rise to a dividend in a later period, then the amount would not give rise to a hybrid deduction to the extent that the foreign hybrid mismatch rules disallow a deduction for the amount. 3. Effect of Withholding Taxes Under the proposed regulations, the determination of whether a deduction or other tax benefit is a hybrid deduction is generally made without regard to whether the amount is subject to withholding tax under the relevant foreign tax law. But see proposed §1.245A(e)-1(g)(2), Example 2 (illustrating that withholding taxes imposed pursuant to an integration or imputation system may prevent a deduction or other tax benefit from being a hybrid deduction). A comment asserted that, to prevent double-taxation, a deduction or other tax benefit under a relevant foreign tax law should not be a hybrid deduction to the extent the amount giving rise to the deduction or other tax benefit is subject to withholding tax under such tax law. The purpose of withholding taxes generally is not to address mismatches in tax outcomes, but rather to allow the source jurisdiction to retain its right to tax the payment. For example, in many cases withholding taxes are imposed on payments not giving rise to D/NI concerns, such as nondeductible dividends. In addition, had Congress generally intended for withholding taxes to be taken into account for purposes of section 245A(e), it could have included in section 245A(e) a rule similar to the one in section 59A(c)(2)(B), which was enacted at the same time as section 245A(e). Thus, the Treasury Department and the IRS have concluded that withholding taxes generally should not be viewed as neutralizing a D/NI outcome. In addition, generally taking withholding taxes into account for purposes of determining whether a deductible amount gives rise to a hybrid deduction could raise administrability issues if the amount is subject to withholding taxes at the time of payment (with the result that the amount is not added to a hybrid deduction account at that time) but the taxes are refunded in a later period; in these cases it could be difficult or burdensome to retroactively add the amount to the hybrid deduction account and make corresponding adjustments. Accordingly, the final regulations do not adopt this comment. See also part II.B.5 of this Summary of Comments and Explanation of Revisions section (deductions or other tax benefits pursuant to imputation systems or other regimes intended to relieve double-taxation). 4. Deductions with Respect to Equity The proposed regulations provide that a hybrid deduction includes a deduction with respect to equity, such as a notional interest deduction ("NID"). See proposed §1.245A(e)-1(d)(2)(i)(B). The preamble to the proposed regulations explains that NIDs are hybrid deductions because they raise concerns similar to those raised by traditional hybrid instruments. Several comments asserted that NIDs should not be hybrid deductions because NIDs do not involve sufficient hybridity so as to be within the intended scope of section 245A(e). These comments noted that NIDs are generally available tax concessions that reflect tax policy decisions, and that NIDs are typically allowed without regard to dividend distributions, if any. Another comment asserted that because NIDs are the equivalent of a lower tax rate on profits, any policy concerns with NIDs are appropriately addressed by the global intangible low-taxed income regime ("GILTI") under section 951A. Other comments raised concerns that treating NIDs as hybrid deductions departs from the Hybrid Mismatch Report (and thus the approaches taken by other countries to implement the Report) and, as a result, could impair the competiveness of U.S. multinational groups. As an alternative to not treating NIDs as hybrid deductions, some comments suggested other approaches. For example, a comment suggested that the final regulations reserve on whether NIDs are hybrid deductions so that, to the extent NIDs are viewed as providing inappropriate results, NIDs can be addressed on a multilateral basis. Other comments suggested that only NIDs resulting from an actual payment, accrual, or distribution should constitute hybrid deductions. Lastly, comments suggested that the final regulations treat NIDs as hybrid deductions on a delayed basis, or only if the NIDs are allowed with respect to an instrument issued after a certain date, to allow taxpayers to restructure certain instruments or undertake other restructurings. The Treasury Department and the IRS have concluded that NIDs should be hybrid deductions, without regard to whether NIDs result from an actual payment, accrual, or distribution. First, because NIDs offset income but generally do not give rise to a corresponding income inclusion, NIDs produce double non-taxation, and such double non-taxation can occur regardless of whether NIDs result from an actual payment, accrual, or distribution. Second, the double non-taxation resulting from NIDs is in general a result of a mismatch in how different tax laws view an instrument of a CFC; that is, the relevant foreign tax law views the instrument as generating amounts similar to interest - to minimize the disparate treatment of debt and equity - and, were the tax law of the United States (the investor jurisdiction of the CFC) to similarly view the instrument as generating amounts treated as interest, there would generally be a corresponding income inclusion in the United States. Such double non-taxation resulting from the mismatch in the treatment of an instrument is the fundamental policy concern underlying section 245A(e). Moreover, including NIDs in the definition of a hybrid deduction is consistent with the broad language of section 245A(e)(4)(B), which refers to any "deduction (or other tax benefit)." Thus, the final regulations generally retain the approach of the proposed regulations and treat NIDs as hybrid deductions. However, in response to comments, the final regulations provide that only NIDs allowed to a CFC for taxable years beginning on or after December 20, 2018, are hybrid deductions. See §1.245A(e)-1(d)(2)(iv). The Treasury Department and the IRS have determined that this delay (relative to the proposed regulations) is appropriate in order to account for restructurings intended to eliminate or minimize hybridity. 5. Deductions Pursuant to Imputation Systems or Other Regimes Intended to Relieve Double-Taxation In the case of a deduction or other tax benefit relating to or resulting from a distribution by a CFC with respect to an instrument treated as stock for purposes of a relevant foreign tax law, a special rule under the proposed regulations provides that the deduction or other tax benefit is a hybrid deduction only to the extent that it has the effect of causing the earnings that funded the distribution to not be included in income or otherwise subject to tax under such tax law. See proposed §1.245A(e)-1(d)(2)(i)(B). As noted in the preamble to the proposed regulations, this special rule ensures that deductions or other tax benefits allowed pursuant to certain integration or imputation systems, including through systems implemented in part through the imposition of withholding taxes, do not constitute hybrid deductions. The final regulations clarify the operation of this special rule. First, the final regulations clarify that the special rule only applies to deductions or other tax benefits relating to or resulting from a distribution by the CFC that is a dividend for purposes of the relevant foreign tax law. See §1.245A(e)-1(d)(2)(i)(B). Thus, for example, the special rule does not apply to NIDs as to which withholding tax is imposed under the relevant foreign tax law, because the imposition of withholding tax in these cases is not pursuant to an integration or imputation system (as such systems generally only apply to dividends) and, instead, may be imposed to provide parity between NIDs and an actual interest payment. Second, the final regulations clarify that the imposition of withholding tax pursuant to an integration or imputation system can reduce or eliminate the extent to which dividends paid deductions (as well as other similar tax benefits) give rise to a hybrid deduction. See id.; see also §1.245A(e)-1(g)(2), Example 2, alt. facts (imposition of withholding tax at a rate less than the tax rate at the which dividends paid deduction is allowed only prevents a portion of the deduction from being a hybrid deduction). Lastly, the final regulations clarify that, as a result of the special rule, dividends received deductions allowed pursuant to regimes intended to relieve double-taxation within a group do not constitute hybrid deductions. See §1.245A(e)-1(d)(2)(i)(B). 6. Deductions or Other Tax Benefits Allowed to a Person Related to the CFC Under the proposed regulations, a hybrid deduction of a CFC includes certain deductions or other tax benefits allowed under a relevant foreign tax law to a person related to the CFC (such as a shareholder of the CFC). See proposed §1.245A(e)-1(d)(2). The proposed regulations provide that relatedness is determined by reference to the rules of section 954(d)(3) (defining a related person based on ownership of more than 50 percent of interests in entities). See proposed §1.245A(e)-1(f)(4). A comment asserted that, although in certain cases it may be appropriate to treat a deduction or other tax benefit allowed to a related person as a hybrid deduction, the related person rule raises issues, including compliance issues, because it could be burdensome to determine whether any person related to a CFC receives certain deductions or other tax benefits. Accordingly, the comment recommended that the rule be narrowed in certain respects. For example, the comment suggested increasing the threshold for relatedness to 80 percent, including because such a threshold would be consistent with certain other areas of the Code such as the provisions involving consolidated groups. In addition, the comment suggested that a deduction or other tax benefit allowed to a related person be a hybrid deduction only if criteria in addition to those in the proposed regulations are satisfied, such as if (i) treating the deduction or other tax benefit as a hybrid deduction does not result in double-counting, and (ii) the IRS affirmatively demonstrates that, absent treating the deduction or other tax benefit as a hybrid deduction, double non-taxation would occur. Lastly, the comment asserted that the related person rule could inappropriately treat as a hybrid deduction a dividends received deduction, an impairment loss deduction, or a market-to-market deduction allowed to a shareholder. The Treasury Department and the IRS have determined that, because a deduction or other tax benefit allowed to a person related to a CFC may be economically equivalent to the CFC having been allowed a deduction or other tax benefit, or may otherwise produce a D/NI outcome, the related person rule is necessary to carry out the purpose of section 245A(e). The final regulations therefore retain this rule, including defining relatedness by reference to section 954(d)(3), a well-established standard applicable to controlled foreign corporations and consistent with section 267A, which similarly addresses hybrid mismatches. See section 267A(b)(2) (defining related person by reference to section 954(d)(3)). However, recently-issued final regulations under section 954(d)(3) narrow the definition of relatedness for section 954(d)(3) purposes by providing that relatedness is determined without regard to "downward" attribution. See TD 9883, 84 FR 63802. The Treasury Department and the IRS have determined that narrowing the definition of relatedness in this manner addresses the comment's concerns about potential burdens. In addition, the final regulations clarify that only deductions allowed under a relevant foreign tax law to a person related to a CFC may be hybrid deductions of the CFC; in general, a relevant foreign tax law is a foreign tax law under which the CFC is subject to tax. See §1.245A(e)-1(d)(2)(i) and (f)(5). Thus, for example, in the case of a CFC and a corporate shareholder of the CFC that are tax residents of different foreign countries, a dividends received deduction allowed to the corporate shareholder under its tax law for a dividend received from the CFC is not a hybrid deduction of the CFC. 1 ******* 1 As an additional example, in the case of a CFC and a corporate shareholder of the CFC that are tax residents of different foreign countries, an exclusion (similar to the exclusion for previously taxed earnings and profits under section 959) allowed to the corporate shareholder under its tax law upon a distribution by the CFC of earnings and profits previously taxed under such tax law by reason of an anti-deferral regime is not a hybrid deduction of the CFC. ***** The final regulations do not adopt the comment's suggestion to include additional criteria to the related person rule. The Treasury Department and the IRS have concluded that other aspects of the final regulations generally address the comment's double-counting concerns. See part II.B.5 (deductions or other tax benefits pursuant to imputation systems or other regimes intended to relieve double-taxation) and part II.C.3 (discussing an anti-duplication rule) of this Summary of Comments and Explanation of Revisions section. In addition, the Treasury Department and the IRS have concluded that requiring the IRS to affirmatively demonstrate double non-taxation would impose an excessive burden on the IRS and raise significant administrability concerns, particularly because the taxpayer may have better access to information (including information regarding the application of foreign tax law) than the IRS. Lastly, the final regulations clarify that a hybrid deduction of a CFC does not include an impairment loss deduction or a mark-to-market deduction allowed to a shareholder of the CFC with respect to its stock of the CFC. This is because such deductions do not relate to or result from an amount paid, accrued, or distributed with respect to an instrument issued by the CFC, and are not deductions allowed to the CFC with respect to equity. See §1.245A(e)-1(d)(2)(i)(B). 7. Relevant Foreign Tax Law The proposed regulations define a relevant foreign tax law as, with respect to a CFC, any regime of any foreign country or possession of the United States that imposes an income, war profits, or excess profits tax with respect to income of the CFC, other than a foreign anti-deferral regime under which an owner of the CFC is liable to tax. See proposed §1.245A(e)-1(f). In some countries, however, income taxes imposed by a subnational authority of the country (for example, a state, province, or canton of the country) may constitute a significant portion of a tax resident's overall income tax burden in the country. Accordingly, the Treasury Department and the IRS have determined that, in cases in which subnational income taxes of a country are covered taxes under an income tax treaty between the country and the United States (and therefore are likely to represent a significant portion of the overall income tax paid in the country), the tax law of the subnational authority should be treated as a tax law of a foreign country for purposes of section 245A(e). Thus, under the final regulations, a relevant foreign tax law may include a tax law of a political subdivision or other local authority of a foreign country. See §1.245A(e)-1(f)(5). C. Hybrid deduction accounts 1. Nexus Between Hybrid Dividends and Hybrid Deductions Under the proposed regulations, a dividend received by a United States shareholder ("U.S. shareholder") from a CFC is generally a hybrid dividend to the extent of the sum of the U.S. shareholder's hybrid deduction accounts with respect to each share of stock of the CFC, even if the dividend is paid on a share that has not had any hybrid deductions allocated to it. See proposed §1.245A(e)-1(b)(2). As explained in the preamble to the proposed regulations, this approach is intended to prevent the avoidance of the purposes of section 245A(e). One comment noted that the hybrid deduction account approach in the proposed regulations appropriately safeguards against certain abuse. However, the comment and others asserted that, at least in certain cases, the approach is overbroad and could lead to inappropriate results, including causing a dividend to be a hybrid dividend even though a hybrid deduction was not allowed for the amount to which the dividend is attributable but instead was allowed for another amount. The comments recommended alternative approaches. Under some alternatives, an exception or similar rule would provide that a dividend is not a hybrid dividend to the extent that the distributed earnings and profits are attributable to earnings and profits that did not benefit from a hybrid deduction, or to the extent that the transactions giving rise to the dividend did not give rise to a hybrid deduction. For example, in the case of a dividend paid by a lower-tier CFC to an upper-tier CFC pursuant to a non-hybrid instrument, followed by a dividend paid by the upper-tier CFC to a domestic corporation pursuant to a hybrid instrument, the dividend paid by the upper-tier CFC would not be a hybrid dividend to the extent it is composed of earnings and profits (i) attributable to earnings and profits of the lower-tier CFC, and (ii) not offset under the upper-tier CFC's tax law by the upper-tier CFC's hybrid deductions (which might occur, for example, if, by reason of a participation exemption, the upper-tier CFC excludes from income the dividend paid by the lower-tier CFC). Or, deemed dividends such as a dividend under section 1248(a), or a dividend arising as a result of a compensatory payment for the surrender of a loss pursuant to a foreign group relief or similar regime, generally would not be a hybrid dividend, as the transactions giving rise to such deemed dividends typically do not give rise to a deduction or other tax benefit under a relevant foreign tax law. Under another alternative, the hybrid deduction account approach in the proposed regulations would not apply to an amount if there is a legal obligation to pay it within 36 months (and the parties reasonably expect it to be so paid). In these cases, the comment recommended that the amount simply be subject to section 245A(e) once paid, such that it would not affect a hybrid deduction account - that is, the account would neither be increased at the time a deduction for the amount is allowed, nor decreased at the time of payment. The Treasury Department and the IRS have concluded that the hybrid deduction account approach under the proposed regulations appropriately carries out the purposes of section 245A(e), and prevents the avoidance of section 245A(e), in an administrable manner. Alternative approaches, such as those suggested by the comments, could be difficult to administer or could lead to inappropriate results. For example, the approach under the proposed regulations obviates the need (as would be the case under some of the alternatives) for complex analyses or rules tracking which particular earnings and profits benefited from a hybrid deduction, and how those earnings and profits are distributed to particular shareholders. In addition, excepting certain types of dividends from section 245A(e) could defer, potentially long-term, the application of section 245A(e), as those dividends would reduce (or in some cases eliminate) the CFC's earnings and profits and thereby might cause a subsequent distribution pursuant to a hybrid instrument to be described in section 301(c)(2) or (3) (rather than giving rise to a dividend subject to section 245A(e)). Further, if a 36-month approach like the one suggested in the comment were to apply, then additional rules would be necessary to ensure that, upon certain subsequent transfers of stock of the CFC, the transferee appropriately applies section 245A(e) when an amount to which the hybrid deduction account approach did not apply is paid. Accordingly, the final regulations do not adopt these comments. 2. Reduction for Certain Amounts Included in Income by U.S. Shareholders Under the proposed regulations, a hybrid deduction account is reduced only to the extent that an amount in the account gives rise to a hybrid dividend or a tiered hybrid dividend. See proposed §1.245A(e)-1(d). The preamble to the proposed regulations requests comments on whether hybrid deductions attributable to a subpart F inclusion or an amount included in income under section 951A ("GILTI inclusion amount") should not increase a hybrid deduction account, or, alternatively, on whether a hybrid deduction account should be reduced by distributions of previously taxed earnings and profits, and the effect of any deemed paid foreign tax credits associated with such inclusions. In response to the comment request, some comments suggested that subpart F inclusions or GILTI inclusion amounts (or a distribution of previously taxed earnings and profits) provide a dollar-for-dollar reduction of a hybrid deduction account. However, another comment noted that a dollar-for-dollar reduction could give rise to inappropriate results because the inclusions may not be fully taxed in the United States, given foreign tax credits associated with the amounts or, in the case of a GILTI inclusion amount, the deduction under section 250. The comment thus suggested that, as part of the end-of-year adjustments to a hybrid deduction account, the account be reduced by certain subpart F inclusions or GILTI inclusion amounts with respect to that year, but only to the extent that such amounts are fully taxed in the United States (determined by accounting for foreign tax credits and the section 250 deduction). Another comment suggested that a hybrid deduction not be added to the hybrid deduction account to the extent that the deduction relates to an amount directly included in U.S. income (for example, under section 882). Finally, comments suggested that, to avoid double-taxation, a hybrid deduction account should also be reduced when an amount is included in a U.S. shareholder's gross income under sections 951(a)(1)(B) and 956 by reason of the application of section 245A(e) to the hypothetical distribution described in §1.956-1(a)(2). Section 245A(e) is generally intended to ensure that to the extent earnings and profits of a CFC have not been subject to foreign tax as a result of certain hybrid arrangements, earnings and profits of the CFC of an equal amount will, once distributed as a dividend, be "included in income" in the United States (that is, taken into account in income and not offset by, for example, a deduction or credit particular to the inclusion). To the extent the earnings and profits are so included by other means (for example, as a subpart F inclusion or GILTI inclusion amount), with the result that the double non-taxation effects of the hybrid arrangement are neutralized, section 245A(e) need not apply to a corresponding amount of earnings and profits. Accordingly, in these cases, the Treasury Department and the IRS have determined that hybrid deduction accounts with respect to stock of the CFC - which are generally intended to represent earnings and profits of the CFC that have neither been subject to foreign tax nor yet included in income in the United States - should be reduced. A separate notice of proposed rulemaking published in the Proposed Rules section of this issue of the Federal Register (REG-106013-19) provides rules to this effect, which taxpayers may rely on before the regulations described therein are effective. These rules are consistent with the comment recommending that a hybrid deduction account be reduced by amounts included in gross income under sections 951(a)(1)(B) and 956, as well as the comment recommending an account be reduced by certain subpart F inclusions or GILTI inclusion amounts, to the extent fully taxed in the United States. The Treasury Department and the IRS have determined that it would be too complex to adjust hybrid deduction accounts based on the extent to which under a relevant foreign tax law a hybrid deduction offsets certain types of income (such as effectively connected income subject to tax under section 882), and thus the final regulations do not adopt the comment suggesting such an approach. 3. Rules Regarding Transfers of Stock Because hybrid deduction accounts are maintained with respect to stock of a CFC, the proposed regulations provide rules that take into account transfers of stock of a CFC, including transfers pursuant to certain nonrecognition exchanges and liquidations. See proposed §1.245A(e)-1(d)(4). In general, and depending on the type of transaction pursuant to which the transfer occurs, the transferee succeeds to the transferor's hybrid deduction accounts with respect to the transferred stock, or hybrid deduction accounts with respect to the transferred stock are tacked onto successor or similar interests. However, if the stock is transferred to a person that is not required to maintain a hybrid deduction account, such as an individual or a foreign corporation that is not a CFC, the hybrid deduction account generally terminates. Although a comment noted that these rules generally provide for appropriate results, the comment (and others) recommended that the rules be modified to address certain issues involving transfers of stock. First, a comment recommended that the rules address certain distributions of stock under section 355. The comment suggested that the balance of a hybrid deduction account with respect to stock of the distributing CFC be allocated to a hybrid deduction account with respect to stock of the controlled CFC in a manner similar to how basis in stock of the distributing CFC is allocated to stock of the controlled CFC under section 358. The Treasury Department and the IRS agree that allocation rules should apply with respect to certain section 355 distributions, but have concluded that the allocation should be consistent with how earnings and profits of the distributing CFC are allocated between the distributing CFC and the controlled CFC. The final regulations thus provide a rule to this effect. See §1.245A(e)-1(d)(4)(iii)(B)( 4 ). This rule, like the other rules in §1.245A(e)-1(d)(4)(iii)(B) that adjust hybrid deduction accounts upon certain nonrecognition transactions, is in addition to the general rule of §1.245A(e)-1(d)(4)(iii)(A), pursuant to which an acquirer of stock of a CFC generally succeeds to the transferor's hybrid deduction accounts with respect to the stock. Accordingly, if the section 355 distribution involves a pre-existing controlled CFC, the shareholder's hybrid deductions accounts with respect to the controlled CFC immediately after the distribution are generally equal to the sum of (i) the hybrid deduction accounts with respect to the controlled CFC to which the shareholder succeeds under the rules of §1.245A(e)-1(d)(4)(iii)(A), and (ii) the portions of the hybrid deduction accounts with respect to the distributing CFC that are allocated to hybrid deduction accounts with respect to stock of the controlled CFC under §1.245A(e)-1(d)(4)(iii)(B)( 4 ). Second, a comment suggested that the final regulations adopt an anti-duplication rule to address cases in which a liquidation of a lower-tier CFC into an upper-tier CFC would in effect result in a duplication of hybrid deductions. For example, the comment noted that if the upper-tier CFC and lower-tier CFC have issued "mirror" hybrid instruments, then hybrid deduction accounts with respect to shares of stock of the upper-tier CFC would already reflect amounts attributable to hybrid deductions of the lower-tier CFC, with the result that, upon the liquidation of the lower-tier CFC, it would not be appropriate to increase hybrid deduction accounts with respect to shares of stock of the upper-tier CFC by the hybrid deductions of the lower-tier CFC. The Treasury Department and the IRS agree with this comment. However, rather than addressing this duplication issue only in the context of transfers of stock of a CFC, the final regulations provide a general anti-duplication rule. See §1.245A(e)-1(d)(2)(iii). This rule generally ensures that when deductions or other tax benefits under a relevant foreign tax law are in effect duplicated at different tiers, the deductions or other tax benefits only give rise to a hybrid deduction of the higher-tier CFC. Thus, in the mirror hybrid instrument example, the deduction allowed to the upper-tier CFC, but not the deduction allowed to the lower-tier CFC, would be a hybrid deduction, provided that the deductions arise under the same relevant foreign tax law. Lastly, a comment requested clarification that, when a section 338(g) election is made with respect to a CFC target, the shareholder of the new target does not succeed to a hybrid deduction account with respect to a share of stock of the old target. The comment asserted that such a result is appropriate because the old target is generally treated as transferring all of its assets to an unrelated person, and the new target is generally treated as acquiring all of its assets from an unrelated person. The Treasury Department and the IRS agree with this comment because, in general, the new target does not inherit any of the earnings and profits of the old target and, as a result, no distributions by the new target could represent a distribution of earnings and profits of the old target sheltered from foreign tax by reason of hybrid deductions incurred by the old target. Accordingly, the final regulations clarify that, in connection with an election under section 338(g), a hybrid deduction account with respect to stock of the old target generally does not carry over to stock of the new target. See §1.245A(e)-1(d)(4)(iii)(B)( 5 ). 4. Mid-Year Transfers of Stock Under the proposed regulations, if there is a transfer of stock of a CFC during the CFC's taxable year, then the determinations and adjustments that would otherwise be made at the close of the CFC's taxable year are generally made at the close of the date of the transfer. See proposed §1.245A(e)-1(d)(5). A comment requested clarification regarding how, in such cases, a hybrid deduction account with respect to a share of stock of the CFC is adjusted on the date of transfer, and whether hybrid dividends and tiered hybrid dividends that arise during the post-transfer period affect such adjustments. In response to this comment, the final regulations provide additional rules that, in general, adjust the hybrid deduction account based on the number of days in the taxable year within the pre-transfer period to the total number of days in the taxable year. See §1.245A(e)-1(d)(5). The rules also coordinate the end-of-the year adjustments and the adjustments that must be made on the transfer date. See Id. 5. Applicability Date The proposed regulations provide that proposed §1.245A(e)-1, including the hybrid deduction account rules, applies to distributions made after December 31, 2017. However, the preamble to the proposed regulations explains that if proposed §1.245A(e)-1 is finalized after June 22, 2019, then §1.245A(e)-1 will apply only to distributions made during taxable years ending on or after the date the proposed regulations were issued (December 20, 2018). Some comments requested that, given that the statutory language of section 245A(e) does not include the concept of an account, the hybrid deduction account rules apply on a prospective basis to provide taxpayers time to comply with the rules and to prevent harsh results. One comment suggested that the rules apply only to distributions made after the proposed regulations were issued, and another suggested that the rules apply only to distributions made after December 31, 2018. The final regulations provide that the hybrid deduction account rules apply to distributions made after December 31, 2017, provided that such distributions occur during taxable years ending on or after the date the proposed regulations were issued. See §1.245A(e)-1(h)(1). The Treasury Department and the IRS have determined that it would not be appropriate to delay the applicability date of the hybrid deduction account rules because the enactment of section 245A(e) provided notice that D/NI outcomes involving instruments that are stock for U.S. tax purposes - including D/NI outcomes involving a deduction or other tax benefit allowed for an amount on a particular date and a payment of a corresponding amount of earnings and profits as a dividend for U.S. tax purposes on a later date - would be neutralized under section 245A(e) (including in conjunction with the regulatory authority under section 245A(g)), and the hybrid deduction account rules are necessary to ensuring such D/NI outcomes are so neutralized. D. Miscellaneous issues 1. Treatment of Amounts under Tax Law of another Foreign Country Under the proposed regulations, a tiered hybrid dividend means an amount received by a CFC ("receiving CFC") from another CFC to the extent that the amount would be a hybrid dividend under the proposed regulations if the receiving CFC were a domestic corporation. See proposed §1.245A(e)-1(c)(2). As noted in the preamble to the proposed regulations, whether a dividend is a tiered hybrid dividend is determined without regard to how the amount is treated under the tax law of which the receiving CFC is a tax resident (or under any other foreign tax law). Similarly, whether a deduction or other tax benefit allowed to a CFC (or a related person) under a relevant foreign tax law is a hybrid deduction is determined without regard to how the amount is treated under another foreign tax law. Comments suggested that the treatment of an amount under another foreign tax law be taken into account in two cases. First, a comment recommended an exception pursuant to which a dividend is not a tiered hybrid dividend to the extent that the receiving CFC includes the dividend in income under its tax law (or is subject to withholding tax under the payer CFC's tax law). The comment suggested that this approach only apply, however, to the extent that the inclusion (or withholding tax) is at a tax rate at least equal to the rate at which the hybrid deduction was allowed. The comment noted that such an approach could prevent double-taxation, though it might also result in additional complexity. The Treasury Department and the IRS have determined that not taking into account the treatment of an amount under the receiving CFC's tax law (or other foreign tax law), as provided in the proposed regulations, is consistent with the plain language of section 245A(e)(2). In addition, the Treasury Department and the IRS have concluded that such an exception could give rise to inappropriate results in certain cases. For example, if the exception applied without regard to tax rates, then an inclusion by the receiving CFC at a low tax rate applicable to all income would discharge the application of section 245A(e) to a dividend even though the payer CFC deducted the amount at a high tax rate. See also part III.C.1 of this Summary of Comments and Explanation of Revisions section (discussing the effect of inclusions in another foreign country). Moreover, and as noted by the comment, a comparative tax rate test would create complexity and administrability issues - for example, it would require that hybrid deduction accounts track the tax rate at which the CFC (or a related person) was allowed a hybrid deduction. Accordingly, the final regulations do not adopt this comment. Second, a comment suggested that, in cases involving tiers of CFCs that are tax residents of different foreign countries, a deduction or other tax benefit allowed to the upper-tier CFC under a relevant foreign tax law not be a hybrid deduction to the extent that the deduction or other tax benefit offsets an amount that the upper-tier CFC includes in its income and that is attributable to a hybrid deduction of a lower-tier CFC. 2 For example, the comment noted that, in the case of back-to-back hybrid instruments involving CFCs that are tax residents of different foreign countries (pursuant to which, for U.S. tax purposes, the lower-tier CFC pays a dividend to the upper-tier CFC and the upper-tier CFC pays a dividend to a domestic corporation), in effect only a single D/NI outcome occurs if under its tax law the upper-tier CFC includes in income the amount paid by the lower-tier CFC. The comment asserted that, in such a case, the deduction allowed to the upper-tier CFC should not be treated as a hybrid deduction because, by reason of treating the amount paid by the lower-tier CFC as a tiered hybrid dividend, the D/NI outcome associated with the arrangement is neutralized. The final regulations do not adopt this comment because it would be inconsistent with the statute, which does not take into account the overall effect of a deduction or other tax benefit under the relevant foreign tax law. In addition, the Treasury Department and the IRS have determined that such an exception would be complex and would give rise to administrability issues because it could require, for example, a factual analysis of how particular deductions offset items of gross income under a relevant foreign tax law. Moreover, pursuant to rules described in a separate notice of proposed rulemaking published in the Proposed Rules section of this issue of the Federal Register (REG-106013-19), the subpart F inclusion arising by reason of the upper-tier CFC receiving the tiered hybrid dividend will, to an extent, generally reduce the hybrid deduction accounts with respect to stock of the upper-tier CFC. ***** 2 In these cases, the anti-duplication rule described in part II.C.3 of this Summary of Comments and Explanation of Revisions section, which applies only to certain deductions or tax benefits under the same relevant foreign tax law, would not apply. ***** 2. Application of Tiered Hybrid Dividend Rule to Non-Corporate U.S. Shareholders If an upper-tier CFC receives a tiered hybrid dividend from a lower-tier CFC, and a domestic corporation is a U.S. shareholder of both CFCs, then, notwithstanding any other provision of the Code (i) the tiered hybrid dividend is treated for purposes of section 951(a)(1)(A) as subpart F income of the upper-tier CFC, (ii) the U.S. shareholder must include in gross income its pro rata share of the subpart F income, and (iii) the rules of section 245A(d) apply to the amount included in the U.S. shareholder's gross income. See proposed §1.245A(e)-1(c)(1). A comment requested that the final regulations address how the tiered hybrid dividend rule applies with respect to a non-corporate U.S. shareholder of the upper-tier CFC. The final regulations provide that the tiered hybrid dividend rule applies only as to a domestic corporation that is a U.S. shareholder of both the upper-tier CFC and the lower-tier CFC. See §1.245A(e)-1(c)(1). Thus, for example, if a domestic corporation and a U.S. individual equally own all of the stock of an upper-tier CFC, and the upper-tier CFC receives a tiered hybrid dividend from a wholly-owned lower-tier CFC, the tiered hybrid dividend rule does not apply to cause a subpart F inclusion to the individual U.S. shareholder (though the dividend may otherwise result in a subpart F inclusion to the individual U.S. shareholder). If the dividend does not give rise to a subpart F inclusion to the individual U.S. shareholder, the earnings associated with the dividend would generally be subject to full U.S. tax when distributed to the individual as a dividend because individuals are not allowed a deduction under section 245A(a) and, as a result, it would be inappropriate for the tiered hybrid dividend rule to have applied to the individual. 3. Upper-Tier CFCs Required to Maintain Hybrid Deduction Accounts Under the proposed regulations, an upper-tier CFC is generally a specified owner of shares of stock of a lower-tier CFC, and thus the upper-tier CFC must maintain hybrid deduction accounts with respect to those shares. See proposed §1.245A(e)-1(d)(1) and (f)(5). However, in certain cases there may not be a domestic corporation that is a U.S. shareholder of the upper-tier CFC. For example, the only U.S. shareholders of the upper-tier CFC may be individuals, with the result that section 245A(e)(2) would not apply to a dividend received by the upper-tier CFC from the lower-tier CFC. Or, the upper-tier CFC may be a CFC solely by reason of the repeal of the limitation on the "downward" attribution rule under section 958(b)(4), with the result that even if a dividend received by the upper-tier CFC from the lower-tier CFC were a tiered hybrid dividend, there would be no meaningful U.S. tax consequence because no U.S. shareholder would have a subpart F inclusion with respect to the upper-tier CFC. To obviate the need for hybrid deduction accounts to be maintained in these cases, the final regulations provide that an upper-tier CFC is a specified owner of shares of stock of a lower-tier CFC only if, for purposes of sections 951 and 951A, a domestic corporation that is a U.S. shareholder of the upper-tier CFC owns (within the meaning of section 958(a), but for this purpose treating a domestic partnership as foreign) one or more shares of stock of the upper-tier CFC. See §1.245A(e)-1(f)(6). The Treasury Department and the IRS expect that when proposed regulations under section 958 (REG-101828-19, 84 FR 29114) are finalized, the rule described in the preceding sentence treating a domestic partnership as foreign will be removed, as it will no longer be necessary. See proposed §1.958-1(d)(1). 4. Anti-Avoidance Rule The proposed regulations include an anti-avoidance rule that requires appropriate adjustments to be made, including adjustments that would disregard a transaction or arrangement, if a transaction or arrangement is engaged in with a principal purpose of avoiding the purposes of the proposed regulations. As an example, the anti-avoidance rule disregards a transaction or arrangement that is undertaken to affirmatively fail to satisfy the holding period requirement under section 246, such as the sale of lower-tier CFC stock before satisfying the holding period, if a principal purpose of the transaction or arrangement is to avoid the tiered hybrid dividend rules. A comment suggested that the anti-avoidance rule should not apply to a sale of lower-tier CFC stock before satisfying the holding period if the sale is to an unrelated party, even though the timing of the sale may be driven by tax considerations. Another comment requested clarification that the anti-avoidance rule does not apply to disregard a transaction pursuant to which the hybrid nature of an arrangement is eliminated (for example, a restructuring of a hybrid instrument into a non-hybrid instrument, so as to eliminate the accrual of a hybrid deduction under a relevant foreign tax law). The Treasury Department and the IRS have determined that the anti-avoidance rule should not be limited to transactions or arrangements with related parties, as otherwise transactions or arrangements with unrelated parties could lead to the avoidance of section 245A(e) and the regulations thereunder. Accordingly, the final regulations retain the anti-avoidance rule in the proposed regulations, and thus whether the anti-avoidance rule applies to a transaction or arrangement depends solely on a principal purpose of the transaction or arrangement for the avoidance of section 245A(e) and the regulations thereunder and does not take into account the status of a counter party. See §1.245A(e)-1(e). The Treasury Department and the IRS agree, however, with the comment asserting that the anti-avoidance rule should not apply to disregard a restructuring of a hybrid arrangement into a non-hybrid arrangement and, accordingly, the rule is modified to this effect. See id. III. Comments and Revisions to Proposed §§1.267A-1 through 1.267A-7 - Certain Payments Involving Hybrid and Branch Mismatches A. Background The proposed regulations disallow a deduction for any interest or royalty paid or accrued ("specified payment") to the extent the specified payment produces a D/NI outcome as a result of a hybrid or branch arrangement. The proposed regulations also disallow a deduction for a specified payment to the extent the specified payment produces an indirect D/NI outcome as a result of the effects of an offshore hybrid or branch arrangement being imported into the U.S. tax system. Finally, the proposed regulations disallow a deduction for a specified payment to the extent the specified payment produces a D/NI outcome and is made pursuant to a transaction a principal purpose of which is to avoid the purposes of the regulations under section 267A. B. Hybrid and branch arrangements 1. Arrangements Giving Rise to Long-Term Deferral i. In general Several provisions of the proposed regulations address long-term deferral, which results when there is deferral beyond a taxable period ending more than 36 months after the end of the specified party's taxable year. For example, to address long-term deferral arising as a result of different ordering or other rules under U.S. and foreign tax law, a hybrid transaction includes an instrument a payment with respect to which is interest for U.S. tax purposes but a return of principal for purposes of the tax law of a specified recipient of a payment. See proposed §1.267A-2(a)(2). In addition, the proposed regulations deem a specified payment as made pursuant to a hybrid transaction if differences between U.S. tax law and the taw law of a specified recipient of the payment (such as differences in tax accounting treatment) result in more than a 36-month deferral between the time the deduction would be allowed under U.S. tax law and the time the payment is taken into account in income under the specified recipient's tax law. See id. Further, a D/NI outcome is considered to occur with respect to a specified payment if under a relevant foreign tax law the payment is not included in income within the 36-month period. See proposed §1.267A-3(a)(1). One comment supported these provisions, on balance, noting that long-term deferral can create D/NI outcomes that should be neutralized by section 267A, but recommending certain of the modifications discussed in this part III.B.1 of the Summary of Comments and Explanation of Revisions section. Other comments suggested that the provisions be eliminated, because according to such comments they are potentially burdensome or are not appropriate since a D/NI outcome should not be viewed as occurring if the amount will eventually be included in income; in addition, one comment asserted that the provision dealing with mismatches in tax accounting treatment is neither supported by section 267A nor within the regulatory authority granted under section 267A(e). However, some comments also noted that the burden concerns could be addressed by adopting certain of the comments discussed in this part III.B.1 of the Summary of Comments and Explanation of Revisions section. The Treasury Department and the IRS have determined that the final regulations should retain the long-term deferral provisions because long-term deferral can in effect create D/NI outcomes and, absent such provisions, hybrid arrangements could be used to achieve results inconsistent with the purposes of section 267A. See S. Comm. on the Budget, Reconciliation Recommendations Pursuant to H. Con. Res. 71, S. Print No. 115-20, at 389 (2017) (expressing concern with hybrid arrangements that "achieve double non-taxation, including long-term deferral."). In addition, the Treasury Department and the IRS have concluded that the provisions are consistent with section 267A and the broad regulatory authority thereunder. In particular, the Treasury Department and the IRS have concluded that deeming mismatches in tax accounting treatment to be hybrid transactions is consistent with section 267A(c) (defining a hybrid transaction), because in these cases a specified payment is deductible interest under U.S. tax law on a particular date whereas it is not includible interest under the foreign tax law until a later date. Therefore, the final regulations retain the long-term deferral provisions but, in response to comments, modify the provisions as discussed in this part III.B.1 of the Summary of Comments and Explanation of Revisions section. ii. Recovery of basis or principal One comment requested that, in the case of a specified payment that is treated as a recovery of basis or principal under the tax law of a specified recipient, the final regulations clarify whether the specified recipient is considered to include the payment in income. The comment asserted that basis or principal should be viewed as a "generally applicable" tax attribute such that recovery of basis or principal should not create a D/NI outcome and, therefore, the specified recipient should be considered to include the payment in income. The Treasury Department and the IRS have determined that basis or principal recovery can give rise to long-term deferral and thus can create a D/NI outcome. For example, consider a specified payment that is made pursuant to an instrument treated as indebtedness for U.S. tax purposes and equity for purposes of the tax law of a specified recipient, and that is treated as interest for U.S. tax purposes and a recovery of basis (under a rule similar to section 301(c)(2)) for purposes of the specified recipient's tax law. If section 267A were to not apply in such a case, then the specified party would generally be allowed a deduction at the time of the specified payment but the specified recipient would not have a taxable inclusion at that time and, indeed, might not have a taxable inclusion, if any, for an extended period. Accordingly, the final regulations clarify that a recovery of basis or principal can create a D/NI outcome. See §1.267A-3(a)(1)(ii). However, as discussed in parts III.B.1.iii (discussing a rule reducing a no-inclusion by certain amounts that are repayments of principal for U.S. tax purposes but included in income for foreign tax purposes) and III.B.1.iv (discussing hybrid sale/license transactions) of this Summary of Comments and Explanation of Revisions section, the final regulations modify the long-term deferral provisions. The Treasury Department and the IRS expect that these modifications will in many cases prevent a specified payment from being a disqualified hybrid amount when the payment is treated as a recovery of basis or principal under the tax law of a specified recipient. iii. Defining long-term deferral; reduction of no-inclusion by certain amounts Some comments noted that under the proposed regulations, to determine whether long-term deferral occurs with respect to a specified payment, the specified party must know at the time of the payment if, under the tax law of a specified recipient, the payment will be taken into account and included in income within the 36-month period. The comments stated that in certain cases this could be difficult or burdensome, including because, after the payment is made, the specified party might need to monitor the payment during the 36-month period to ensure that it is in fact taken into account and included in income (and, if it is not so taken into account and included, the specified party might need to amend its tax return to reflect a disallowance of the deduction). The comments suggested addressing these concerns by providing for a reasonable expectation standard, based on whether, at the time of the specified payment, it is reasonable to expect that the payment will be taken into account and included in income within the 36-month period. The Treasury Department and the IRS agree with these comments and, thus, the final regulations provide rules to such effect. See §§1.267A-2(a)(2)(ii)(A) and 1.267A-3(a)(1)(i). Comments also suggested that, to address certain cases in which there are different ordering or other rules under U.S. tax law and the tax law of a specified recipient, certain amounts related to a specified payment be aggregated for purposes of determining whether long-term deferral occurs. For example, under such an approach, if a year 1 $100x specified payment is interest for U.S. tax purposes and a return of principal for purposes of a specified recipient's tax law, but a year 2 $100x payment is a repayment of principal for U.S. tax purposes and interest for purposes of the specified recipient's tax law (and is included in income by the specified recipient), then there is no long-term deferral with respect to the year 1 payment and, as a result, the payment is not a disqualified hybrid amount. The Treasury Department and the IRS generally agree that the year 1 $100x specified payment should not be a disqualified hybrid amount. However, rather than addressing through an aggregation rule, which could give rise to uncertainty in certain cases, the final regulations provide a special rule pursuant to which a specified recipient's no-inclusion with respect to a specified payment is reduced by certain amounts that are repayments of principal for U.S. tax purposes but included in income by the specified recipient. See §1.267A-3(a)(4); see also §1.267A-6(c)(1)(vi). iv. Hybrid sale/license transactions Some comments suggested that hybrid sale/license transactions not be subject to the hybrid transaction rule. A hybrid sale/license transaction can occur, for example, when a specified payment is treated as a royalty for U.S. tax purposes, and a contingent payment of consideration for the purchase of intangible property under the tax law of a specified recipient. In such a case, if under the specified recipient's tax law the payment is treated as a recovery of basis, then a D/NI outcome would occur. Accordingly, if the specified payment is considered made pursuant to a hybrid transaction, then the payment would generally be a disqualified hybrid amount. Comments asserted that these transactions should be excluded because they are common, may be unavoidable, and are not abusive. The Treasury Department and the IRS have determined that in many cases there might not be a significant difference between the results occurring under a hybrid sale/license transaction and the results that would occur were the specified recipient's tax law to (like U.S. tax law) also view the transaction as a license and the specified payment as a royalty. For example, if the specified recipient's tax law were to view the transaction as a license and the specified payment as a royalty, then the payment could be offset by an amortization deduction attributable to the basis of the intangible property. In such a case, the amortization deduction - a generally available deduction or other tax attribute - would not prevent the specified recipient from being considered to include the payment in income. See §1.267A-3(a)(1). Thus, regardless of whether the transaction is a hybrid sale/license or an actual license, the specified payment could under the specified recipient's tax law be offset by basis or a deduction that is a function of basis. These cases are generally distinguishable from ones in which a transaction is a hybrid debt instrument, because tax laws typically do not provide amortization or similar deductions with respect to indebtedness. Accordingly, the Treasury Department and the IRS have concluded that it is appropriate to exempt hybrid sale/license transactions from the hybrid transaction rule. The final regulations thus provide a rule to this effect. See §1.267A-2(a)(2)(ii)(B). v. Other modifications or clarifications Comments suggested several other modifications to the long-term deferral provisions. First, although one comment generally supported a bright-line standard for measuring long-term deferral because it provides certainty, other comments suggested modifying the standard for measuring long-term deferral, either by lengthening the period to, for example, 120 months, or defining long-term deferral as an unreasonable period of time based on all the facts and circumstances. The final regulations do not adopt these comments because the Treasury Department and the IRS have concluded that, in general, a bright-line 36-month standard appropriately distinguishes between short-term and long-term deferral and avoids administrability issues that would likely arise if long-term deferral were based on a subjective standard (such as an "unreasonable" period of time). See also Hybrid Mismatch Report para. 56 (bright-line safe harbor pursuant to which inclusions within a 12-month period are not considered to give rise to long-term deferral). Second, a comment suggested that, to balance the benefits of the bright-line standard with the resulting cliff effects, the final regulations provide a rule, similar to section 267(a)(3), that defers a deduction for a specified payment until taken into account under the foreign tax law. The final regulations do not adopt this approach because it would be inconsistent with the plain language of section 267A, which provides for the disallowance of a deduction at the time of the payment, and not a deferral of a deduction. In addition, the Treasury Department and the IRS have determined that, if such an approach were adopted, tracking rules would be necessary and such rules would create additional complexity and administrative burden. Third, a comment requested that the final regulations clarify that if a specified payment will never be recognized under the tax law of a specified recipient (because, for example, such tax law does not impose an income tax), then the long-term deferral provision does not apply so as to deem the payment as made pursuant to a hybrid transaction. Finally, a comment requested clarification that a specified payment is treated as included in income if the payment is included in income in a prior taxable period. The Treasury Department and the IRS agree with these comments, and the final regulations thus include these clarifications. See §1.267A-2(a)(2)(ii)(A); §1.267A-3(a)(1)(i). 2. Interest-Free Loans An interest-free loan includes, for example, an instrument that is treated as indebtedness under both U.S. tax law and the tax law of the holder of the instrument but provides no stated interest. If the issuer is allowed an imputed interest deduction, but the holder is not required to impute interest income, the instrument would give rise to a D/NI outcome. Because the imputed interest deduction is not regarded under the tax law of the holder of the instrument, the disregarded payment rule of the proposed regulations treats the imputed interest as a disregarded payment and, accordingly, a disqualified hybrid amount to the extent it exceeds dual inclusion income. A comment noted that the Hybrid Mismatch Report generally does not disallow deductions for imputed interest payments, such as interest imputed with respect to interest-free loans, and that imputed interest raises issues that should be further considered on a multilateral basis. The comment thus suggested that the final regulations generally reserve on whether imputed interest is subject to section 267A. The final regulations do not adopt this comment because imputed interest can give rise to D/NI outcomes that are no different than D/NI outcomes produced by other hybrid and branch arrangements. However, to more clearly address these transactions, and because interest-free loans are similar to hybrid transactions and are unlikely to involve dual inclusion income, the final regulations address imputed interest under the hybrid transaction rule, rather than the disregarded payment rule. See §1.267A-2(a)(4). The rules in the final regulations addressing interest-free loans and similar arrangements apply for taxable years beginning on or after December 20, 2018. See §1.267A-7(b)(1). 3. Disregarded Payments i. Dual inclusion income In general, the proposed regulations provide that a disregarded payment is a disqualified hybrid amount to the extent it exceeds the specified party's dual inclusion income. For this purpose, an item of income of a specified party is dual inclusion income only if it is included in the income of both the specified party and the tax resident or taxable branch to which the disregarded payment is made (as determined under the rules of §1.267A-3(a)). See proposed §1.267A-2(b)(3). A comment suggested that the final regulations address whether an item of income is dual inclusion income even though, as a result of a participation exemption, patent box, or other exemption regime, it is not included in the income of the tax resident or taxable branch to which the disregarded payment is made. The Treasury Department and the IRS have concluded that an item of income of a specified party should be dual inclusion income even though, by reason of a participation exemption or other relief particular to a dividend, it is not included in the income of the tax resident or taxable branch to which the disregarded payment is made, provided that the application of the participation exemption or other relief relieves double-taxation (rather than results in double non-taxation). The final regulations are thus modified to this effect. See §1.267A-2(b)(3)(ii); see also §1.267A-6(c)(3)(iv). The final regulations provide a similar rule in cases in which an item of income of a specified party is included in the income of the tax resident or taxable branch to which the disregarded payment is made but not included in the income of the specified party by reason of a dividends received deduction (such as the section 245A(a) deduction). These rules do not apply to items that are excluded from income under a patent box or similar regime because, to the extent the payer of the item is allowed a deduction for the item under its tax law, the deduction and the exclusion, together, result in double non-taxation. See also Hybrid Mismatch Report para. 126. ii. Exception for payments otherwise taken into account under foreign law Under the proposed regulations, a special rule ensures that a specified payment is not a deemed branch payment to the extent the payment is otherwise taken into account under the home office's tax law in such a manner that there is no mismatch. See proposed §1.267A-2(c)(2). Absent such a rule, a deduction for a deemed branch payment could be disallowed even though it does not give rise to a D/NI outcome. Thus, for example, if under an applicable treaty a U.S. taxable branch is deemed to pay an amount of interest or royalty to the home office that is not regarded under the home office's tax law, the payment is nevertheless not a deemed branch payment to the extent that under the home office's tax law a corresponding amount of interest or royalties is allocated and attributable to the U.S. taxable branch and therefore is not deductible. See id. However, the proposed regulations do not provide a similar special rule in analogous cases involving disregarded payments. For example, assume FX1, a tax resident of Country X, owns FX2, also a tax resident of Country X, and FX2 has a U.S. taxable branch ("USB"). Further, assume that FX1 borrows from a bank and on-lends the proceeds to FX2, and that pursuant to such transactions FX1 pays $100x of interest to the bank and FX2 pays $100x of interest to FX1 but, as a consequence of the Country X consolidation regime, FX2's payment to FX1 is treated as a disregarded transaction between group members. Lastly, assume that the entire $100x of FX2's payment of interest to FX1 is allocable to USB's effectively connected income under section 882 and thus is a specified payment under proposed §1.267A-5(b)(3). Under the proposed regulations, USB's specified payment of interest would be a disregarded payment, regardless of whether the payment is otherwise taken into account under Country X tax law. The specified payment would otherwise be taken into account under Country X tax law if, for example, FX1's payment of interest to the bank were allocated and attributed to USB and were therefore not deductible. Cf. §1.267A-2(c)(2). To provide symmetry between the disregarded payment rule and the deemed branch payment rule, the final regulations add to the disregarded payment rule a special rule similar to the special rule in the deemed branch payment context. See §1.267A-2(b)(2)(ii)(B). 4. Payments by U.S. Taxable Branches i. Allocation of interest expense to U.S. taxable branches The proposed regulations provide that a U.S. taxable branch of a foreign corporation is considered to pay or accrue interest allocable under section 882(c)(1) to effectively connected income of the U.S. taxable branch. See proposed §1.267A-5(b)(3). The proposed regulations include rules to identify the manner in which a specified payment of a U.S. taxable branch is considered made. See id. For directly allocable interest described in §1.882-5(a)(1)(ii)(A), or a U.S. booked liability described in §1.882-5(d)(2), a direct tracing approach applies; for any excess interest, the U.S. taxable branch is treated as paying or accruing interest to the same persons and pursuant to the same terms that the home office paid or accrued such interest on a pro-rata basis. See id. As explained in the preamble to the proposed regulations, these rules are necessary to determine whether a U.S. taxable branch's specified payment is made pursuant to a hybrid or branch arrangement (for example, made pursuant to a hybrid transaction or to a reverse hybrid). The proposed regulations do not, however, contain rules for tracing a foreign corporation's distributive share of interest expense when the foreign corporation is a partner in a partnership that has a U.S. asset, as described in §1.882-5(a)(1)(ii)(B), or rules for tracing interest that is determined under the separate currency pools method, as described in §1.882-5(e). The final regulations therefore provide that, like directly allocable interest and U.S. booked liabilities, a U.S. taxable branch must use a direct tracing approach to identify the person to whom interest described in §1.882-5(a)(1)(ii)(B) or §1.882-5(e) is payable. See §1.267A-5(b)(3)(ii)(A). In addition, the Treasury Department and the IRS have determined that a consistent approach should apply for purposes of identifying a U.S. branch interest payment in order to avoid treating similarly situated taxpayers differently under section 267A. Accordingly, similar to the tracing rules provided in the final regulations under section 59A, the final regulations provide that foreign corporations should use U.S. booked liabilities to identify the person to whom an interest expense is payable, without regard to which method the foreign corporation uses to determine its interest expense under section 882(c)(1). See id.; see also §1.59A-3(b)(4)(i)(B). ii. Interaction with income tax treaties Under the proposed regulations, the deemed branch payment rule addresses a D/NI outcome when, under an income tax treaty, a deductible payment is deemed to be made by a permanent establishment to its home office (or another branch of the home office) and offsets income not taxable to the home office, but the payment is not taken into account under the tax law of the home office or other branch. See proposed §1.267A-2(c)(2). A deemed branch payment is a notional payment that arises from applying Article 7 (Business Profits) of certain U.S. income tax treaties, which takes into account only the profits derived from the assets used, risks assumed and activities performed by the permanent establishment to determine the business profits that may be taxed where the permanent establishment is situated. See, for example, the U.S. Treasury Department Technical Explanation to the income tax convention between the United States and Belgium, signed November 27, 2006 ("[T]he OECD Transfer Pricing Guidelines apply, by analogy, in determining the profits attributable to a permanent establishment."). A comment questioned whether the deemed branch payment rule is a treaty override because it creates a new condition on the allowance of a deduction for purposes of computing the business profits of a U.S. permanent establishment based upon an intervening change in U.S. law. The comment noted that the deemed branch payment rule affects the allocation of taxing rights of business profits under the treaty. Another comment raised a similar concern and requested that the deemed branch payment rule be withdrawn because it is inconsistent with U.S. income tax treaty obligations. The Treasury Department and the IRS have determined that the deemed branch payment rule is not a treaty override and is consistent with U.S. income tax treaty obligations. The treaties that allow notional payments under Article 7 take into account interbranch transactions and value such interbranch transactions using the most appropriate arm's length methodology. Once expenses are either allocated or determined under arm's length principles to be taken into account in determining the business profits of the permanent establishment under Article 7, domestic limitations on deductibility of such expenses may apply in the same manner as they would if the amounts were paid by a domestic corporation. In other words, sections 163(j), 267(a)(3), and 267A generally apply to the same extent to the notional payments as they would to actual interest payments by a domestic subsidiary to a foreign parent. The commentary to paragraph 2 of Article 7 of the OECD Model Tax Convention adopts a comparable interpretation. See Para. 30 and 31 of the commentary to para. 2 of Article 7 of the OECD Model Tax Convention. Accordingly, the final regulations retain the deemed branch payment rule. 5. Reverse Hybrids i. Fiscally transparent A reverse hybrid is an entity that is fiscally transparent for purposes of the tax law of the country in which it is established but not for purposes of the tax law of an investor of the entity. See §1.267A-2(d)(2). Under the proposed regulations, whether an entity is fiscally transparent with respect to an item of income is determined under the principles of §1.894-1(d)(3)(ii) and (iii). See proposed §1.267A-5(a)(8). The final regulations provide special rules to address certain cases in which, given §1.894-1(d)(3)'s definition of fiscally transparent, an entity might not be considered a reverse hybrid under the proposed regulations with respect to a payment received by the entity, even though neither the entity nor an investor of the entity take the payment into account in income, with the result that the payment gives rise to a D/NI outcome. Pursuant to the special rules, an entity is considered fiscally transparent with respect to the payment under the tax law of the country where it is established if, under such tax law, the entity allocates the payment to an investor, with the result that under such tax law the investor is viewed as deriving the payment through the entity. See §1.267A-5(a)(8)(i); see also §1.267A-6(c)(5)(vi). A similar rule applies for purposes of determining whether the entity is fiscally transparent with respect to the payment under an investor's tax law. See §1.267A-5(a)(8)(ii). Lastly, to address the fact that under §1.894-1(d)(3)(ii), certain collective investment vehicles and similar arrangements may not be considered fiscally transparent under the tax law of the country where established, a special rule provides that such arrangements are considered fiscally transparent under the tax law of the establishment country if neither the arrangement nor an investor is required to take the payment into account in income. See §1.267A-5(a)(8)(iii); see also §1.894-1(d)(5), Example 7. ii. Current-year distributions from reverse hybrid Under the proposed regulations, when a specified payment is made to a reverse hybrid, it is generally a disqualified hybrid amount to the extent that an investor does not include the payment in income. See proposed §1.267A-2(d)(1). For this purpose, whether an investor includes the specified payment in income is determined without regard to a subsequent distribution by the reverse hybrid. See proposed §1.267A-3(a)(3). As explained in the preamble to the proposed regulations, although a subsequent distribution may be included in the investor's income, the distribution may not occur for an extended period and, when it does occur, it may be difficult to determine whether the distribution is funded from an amount comprising the specified payment. A comment noted that if a reverse hybrid distributes all of its income during a taxable year, then current year distributions should be taken into account for purposes of determining whether an investor of the reverse hybrid includes in income a specified payment made to the reverse hybrid. The comment asserted that not doing so would be unduly harsh and could create unwarranted disparities between cases involving current year distributions and anti-deferral inclusions (which are taken into account for purposes of determining whether an investor includes in income a specified payment). The comment also suggested that the final regulations reserve on whether subsequent year distributions are taken into account. The Treasury Department and the IRS agree with the comment that current year distributions should be taken into account in cases in which the reverse hybrid distributes all of its income during the taxable year. The final regulations thus provide that in these cases a portion of a specified payment made to the reverse hybrid during the taxable year is considered to relate to each of the current year distributions from the reverse hybrid. As a result, to the extent that an investor includes in income a current year distribution, the investor is treated as including in income a corresponding portion of a specified payment made to the reverse hybrid during the year. See §1.267A-3(a)(3). The Treasury Department and the IRS have determined that it would be too complex to take into account current year distributions in cases in which the reverse hybrid does not distribute all of its income during the taxable year, as in these cases stacking or similar rules would likely be needed to determine the extent that a specified payment is considered to relate to a distribution. For similar reasons, the Treasury Department and the IRS have determined that it would be too complex to take into account subsequent year distributions. iii. Multiple investors The final regulations clarify the application of the reverse hybrid rule in cases in which an investor of the reverse hybrid owns only a portion of the interests of the reverse hybrid and does not include in income a specified payment made to the reverse hybrid. In these cases, given the "as a result of" test, only the no-inclusion of the investor that occurs for its portion of the payment may give rise to a disqualified hybrid amount. For example, consider a case in which a $100x specified payment is made to a reverse hybrid 60% of the interests of which are owned by a Country X investor (the tax law of which treats the reverse hybrid as not fiscally transparent) and 40% of the interests of which are owned by a Country Y investor (the tax law of which treats the reverse hybrid as fiscally transparent). If the Country X investor does not include any portion of the payment in income, then $60x of the payment would generally be a disqualified hybrid amount under the reverse hybrid rule, calculated as $100x (the no-inclusion that actually occurs with respect to the Country X investor) less $40x (the no-inclusion that would occur with respect to the Country X investor absent hybridity). See §§1.267A-2(d) and 1.267A-6(c)(5)(iv). iv. Inclusion by taxable branch in country in which reverse hybrid is established The final regulations provide an exception pursuant to which the reverse hybrid rule does not apply to a specified payment made to a reverse hybrid to the extent that, under the tax law of the country in which the reverse hybrid is established, a taxable branch the activities of which are carried on by an investor of the reverse hybrid includes the payment in income. See §1.267A-2(d)(4). The Treasury Department and the IRS have determined that, in these cases, the inclusion in the establishment country generally prevents a D/NI outcome and thus it is appropriate for an exception to apply. C. Exceptions relating to disqualified hybrid amounts 1. Effect of Inclusion in another Foreign Country Under the proposed regulations, a specified payment generally is a disqualified hybrid amount to the extent that a D/NI outcome occurs with respect to any foreign country as a result of a hybrid or branch arrangement, even if the payment is included in income in another foreign country (a "third country"). See also part III.C.2 of this Summary of Comments and Explanation of Revisions section (exceptions for amounts included or includible in income in the United States). Absent such a rule, an inclusion of a specified payment in income in a third country would discharge the application of section 267A even though a D/NI outcome occurs in a foreign country as a result of a hybrid or branch arrangement. The preamble to the proposed regulations expresses particular concern with cases in which the third country imposes a low tax rate. Comments requested that this rule be eliminated because requiring an income inclusion in multiple jurisdictions is not necessary or appropriate to prevent a D/NI outcome. One of these comments asserted that the rule is unfair and does not effectively prevent rate arbitrage. The comments further asserted that the rule is inconsistent with the policies of section 267A, other provisions of the Code (such as section 894(c) and §1.894-1(d)), and the Hybrid Mismatch Report. One comment stated that the rule is neither included in section 267A nor permissible under the regulatory authority under section 267A(e). Although the comments noted potential concerns associated with an income inclusion in a low-tax third country discharging the application of section 267A, the comments suggested addressing the concerns through the anti-avoidance rule included in the proposed regulations. Alternatively, a comment suggested retaining the general approach of the proposed regulations but permitting an inclusion in a third country to discharge the application of section 267A if the inclusion satisfies a rate test (for example, to the extent the inclusion is at a tax rate at least equal to the U.S. tax rate or the tax rate of the foreign country in which the no-inclusion occurs). The Treasury Department and the IRS have determined that the approach of the proposed regulations should be retained to prevent the avoidance of section 267A by routing a specified payment through a low-tax third country, and to prevent the use of a hybrid or branch arrangement from placing a taxpayer in a better position than it would have been in absent the arrangement. In addition, the Treasury Department and the IRS have concluded that the rule is consistent with section 267A and the broad regulatory authority thereunder. Finally, the Treasury Department and the IRS have concluded that relying on the anti-avoidance rule would give rise to uncertainty and be an insufficient remedy, and that a rate test would also be an insufficient remedy because it would give rise to additional complexity and would require taking into account tax rates, which is beyond the scope of hybrid mismatch rules. 2. Amounts Included or Includible in Income in the United States The proposed regulations provide rules that, in general, ensure that a specified payment is not a disqualified hybrid amount to the extent it is included in the income of a tax resident of the United States or a U.S. taxable branch, or is taken into account by a U.S. shareholder under the subpart F or GILTI rules. See proposed §1.267A-3(b). Several comments suggested retaining these rules, but revising them in certain respects. One comment suggested revising the rules relating to amounts taken into account under subpart F so that the determination is made without regard to the earnings and profits limitation under section 952. Another comment noted that the rules relating to amounts taken into account under GILTI could potentially give rise to rate arbitrage (for example, if the rate on the GILTI inclusion amount is in effect reduced by reason of the deduction under section 250(a)(1)(B), and the deduction for the specified payment offsets income that is not eligible for a reduced rate). 3 Finally, a comment suggested an exception for specified payments received by a qualified electing fund (as described in section 1295) and taken into account by a tax resident of the United States under section 1293. ***** 3 For instance, in the case of a structured arrangement pursuant to which a domestic corporation (US1) makes a specified payment to a CFC of an unrelated domestic corporation (US2), a deduction allowed to US1 for the specified payment would offset income subject to tax at the full U.S. corporate tax rate, whereas US2's GILTI inclusion attributable to the payment would generally be subject to tax at a reduced rate by reason of the deduction under section 250(a)(1)(B). ***** The Treasury Department and the IRS agree with these recommendations, and thus the final regulations provide rules to such effect. See §1.267A-3(b)(3) through (5). 3. Effect of Withholding Taxes on a Specified Payment Under the proposed regulations, the determination of whether a deduction for a specified payment is disallowed under section 267A is made without regard to whether the payment is subject to U.S. source-based tax under section 871 or 881 and such tax has been deducted and withheld under section 1441 or 1442. The preamble to the proposed regulations explains that withholding tax policies are unrelated to the policies underlying hybrid arrangements and, because the approach of the proposed regulations is consistent with the Hybrid Mismatch Report, it may improve the coordination of section 267A with hybrid mismatch rules of other countries. In response to a request for comments in the proposed regulations, several comments recommended that withholding taxes be taken into account for purposes of section 267A. For example, comments suggested that to the extent the United States imposes withholding tax on a specified payment, section 267A generally should not apply to the payment because, otherwise, the payment may be effectively taxed twice by the United States (once as a result of the withholding tax, and second as a result of the denial of a deduction for the payment). The comments also asserted that such an approach would generally be consistent with the policies underlying the exceptions in §1.267A-3(b) (certain amounts not treated as disqualified hybrid amounts to extent included or includible in income). Although one comment acknowledged that adopting an approach to withholding taxes that is inconsistent from the Hybrid Mismatch Report could raise potential coordination concerns, it recommended further work be undertaken on a multilateral level to avoid such issues and to ensure that economic double taxation does not occur. The Treasury Department and the IRS have determined that it would not be appropriate for withholding taxes to be taken into account for purposes of section 267A. The purpose of withholding taxes is generally not to address mismatches in tax outcomes but, rather, to allow the source jurisdiction to retain its right to tax a payment. In addition, and as explained in the preamble to the proposed regulations, taking withholding taxes into account could create issues regarding how section 267A interacts with foreign hybrid mismatch rules - for example, a foreign country with hybrid mismatch rules may not treat the imposition of U.S. withholding taxes on a specified payment as neutralizing a D/NI outcome and may therefore apply a secondary or defensive rule requiring the payee to include the payment in income. Moreover, had Congress intended for withholding taxes to be taken into account for purposes of section 267A, it could have added a rule similar to the one in section 59A(c)(2)(B), which was enacted at the same time as section 267A. Finally, providing an exception for withholding taxes could raise administrability issues in cases in which a specified payment is subject to U.S. withholding taxes at the time of payment (with the result that a deduction for the payment is not disallowed under section 267A at that time) but the taxes are refunded in a later period; in these cases, it could be difficult or burdensome to retroactively deny the deduction and make corresponding adjustments. Thus, the Treasury Department and the IRS have determined that the exceptions in §1.267A-3(b) should generally be limited to inclusions similar to those described in the flush language of section 267A(b)(1) (inclusions under section 951(a)), which, unlike U.S. source income that is subject to withholding taxes, are included in the U.S. tax base on a net basis. Accordingly, the final regulations do not adopt the comment. D. Disqualified imported mismatch amounts 1. In General Under the proposed regulations, an "imported mismatch rule" prevents the effects of an offshore hybrid arrangement from being imported into the U.S. taxing jurisdiction through the use of a non-hybrid arrangement. Pursuant to this rule, a specified payment is generally a disqualified imported mismatch amount, and therefore a deduction for the payment is disallowed, to the extent that the payment is (i) an imported mismatch payment, and (ii) income attributable to the payment is directly or indirectly offset by a hybrid deduction of a tax resident or taxable branch. See proposed §1.267A-4(a). The extent that a hybrid deduction directly or indirectly offsets income attributable to an imported mismatch payment is determined pursuant to a series of operating rules, including ordering rules, funding rules, and a pro rata allocation rule. See proposed §1.267A-4(c) and (e). Under these rules, a hybrid deduction is considered to offset income attributable to an imported mismatch payment only if the imported mismatch payment directly or indirectly funds the hybrid deduction. See proposed §1.267A-4(c). Some comments asserted that the imported mismatch rule is complex and could be difficult to administer. These comments suggested various ways to address these concerns. One comment suggested removing the imported mismatch rule because of the complexity and administrability concerns and also because, according to the comment, the rule exceeds the authority granted under section 267A. Another comment suggested modifying the rule such that an imported mismatch payment is a disqualified imported mismatch amount only if the income attributable to the payment is offset by a hybrid deduction that as a factual matter is connected to the payment; thus, under this approach, the operating rules under the proposed regulations would generally be replaced with a broader facts and circumstances inquiry, possibly supplemented by rebuttable presumptions. Other comments suggested modifications to specific aspects of the imported mismatch rule, such as the operating rules. The Treasury Department and the IRS have concluded that the general approach of the imported mismatch rule under the proposed regulations should be retained, and that the rule is consistent with the grant of regulatory authority under section 267A(e)(1) (regarding regulations to address conduit arrangements involving hybrid transactions or hybrid entities). The Treasury Department and the IRS have determined that the operating rules under the proposed regulations provide more certainty than under alternative approaches, such as determining disqualified imported mismatch amounts based on a factual tracing of hybrid deductions to imported mismatch payments. In addition, the Treasury Department and the IRS have determined that the general approach under the proposed regulations promotes parity between similarly situated taxpayers. For example, in the case of one taxpayer with an imported mismatch payment factually linked to a hybrid deduction and another taxpayer with an imported mismatch payment not factually linked to a hybrid deduction, only the first taxpayer's payment would be a disqualified imported mismatch amount under a factual tracing approach, even though as an economic matter (and taking into account the fungibility of money) the income attributable to each taxpayer's payment may be offset by a hybrid deduction. Further, the general approach under the proposed regulations is consistent with the approach recommended under the Hybrid Mismatch and Branch Mismatch reports, which would better align these rules with hybrids mismatch rules of other jurisdictions to ensure that imported mismatches are adequately addressed and do not result in a single hybrid deduction giving rise to a disallowance in more than one jurisdiction. See Hybrid Mismatch Report Recommendation 8; see also OECD/G20, Neutralising the Effects of Branch Mismatch Arrangements, Action 2: Inclusive Framework on BEPS (July 2017) Recommendation 5. However, in response to comments, the final regulations modify certain aspects of the imported mismatch rule in order to reduce complexity and facilitate compliance and administration of the rule. These modifications and others are discussed in parts III.D.2 through 5 of this Summary of Comments and Explanation of Revisions section. 2. Imported Mismatch Payments Several comments suggested that the imported mismatch rule could result in double U.S. taxation in certain cases. For example, assume US1, a domestic corporation, owns all the interests of each of US2, a domestic corporation, and FX, a tax resident of Country X that is a CFC for U.S. tax purposes. Also assume that FX owns all the interests of FY, a tax resident of Country Y that is a disregarded entity for U.S. tax purposes. Lastly, assume that US2 makes a $100x non-hybrid specified payment to FY, and that FY incurs a $100x hybrid deduction. In such a case, according to the comments, treating US2's payment as a disqualified imported mismatch amount could result in double U.S. taxation, as the United States would be disallowing US2 a deduction for the payment even though the entire amount is indirectly included in US1's income as a subpart F inclusion. The comments thus requested modifying the imported mismatch rule such that it does not apply in cases like these. The Treasury Department and the IRS agree with these comments. As a result, the final regulations revise the definition of an imported mismatch payment, which under the proposed regulations is defined as any specified payment to the extent not a disqualified hybrid amount. Under the final regulations, a specified payment is an imported mismatch payment only to the extent that it is neither a disqualified hybrid amount nor included or includible in income in the United States (as determined under the rules of §1.267A-3(b)). See §1.267A-4(a)(2)(v). Thus, in the example in the previous paragraph, none of US2's payment would be an imported mismatch payment, calculated as $100x (the amount of the payment) less $0 (the disqualified hybrid amount with respect to the payment), less $100x (the amount of the payment that is included or includible in income in the United States). Accordingly, none of the payment would be subject to disallowance under the imported mismatch rule. 3. Hybrid Deductions i. Deductions constituting hybrid deductions Under the proposed regulations, for a deduction allowed to a tax resident or taxable branch under its tax law to be a hybrid deduction, it generally must be one that would be disallowed if such tax law contained rules substantially similar to the rules under §§1.267A-1 through 1.267A-3 and 1.267A-5. See proposed §1.267A-4(b). A comment requested guidance on how this standard applies when the tax law of a tax resident or taxable branch contains hybrid mismatch rules. The comment posited several approaches, including (i) not treating deductions allowed to such a tax resident or taxable branch under its tax law as a hybrid deduction, or (ii) treating deductions allowed to a such a tax resident or taxable branch under its tax law as a hybrid deduction if the deduction would be disallowed if such tax law contained rules nearly identical to those under section 267A. The comment recommended the first approach. The Treasury Department and the IRS have determined that the first approach could give rise to inappropriate results. For example, in the case of a deduction allowed to a foreign tax resident under its tax law with respect to an interest-free loan, the deduction would not be a hybrid deduction under the first approach if the tax resident's tax law contains hybrid mismatch rules, even though the deduction would be disallowed under section 267A were section 267A to apply to the deduction. The Treasury Department and the IRS believe that these results could lead to avoidance of the purposes of section 267A. That is, the first approach could incentivize taxpayers to implement certain offshore hybrid arrangements and import the effects of the arrangement into the U.S. taxing jurisdiction, even though a deduction would be disallowed under section 267A were the arrangement to involve the U.S. taxing jurisdiction directly. Accordingly, the final regulations do not adopt this approach. However, in response to the comment, the final regulations provide an exclusive list of deductions that constitute hybrid deductions with respect to a tax resident or taxable branch the tax law of which contains hybrid mismatch rules. See §1.267A-4(b)(2)(i). This list, which represents deductions that would be disallowed under section 267A but may be allowed under the hybrid mismatch rules of the foreign country, includes deductions with respect to (i) equity, (ii) interest-free loans (and similar arrangements), and (iii) amounts that are not included in income in a third foreign country. Thus, in the case of a tax resident or taxable branch the tax law of which contains hybrid mismatch rules, a taxpayer need only consider these three types of arrangements when determining whether the tax resident or taxable branch has hybrid deductions for purposes of the imported mismatch rule. The Treasury Department and the IRS have concluded that this approach increases certainty and improves the administration of the imported mismatch rule. ii. NIDs Under the proposed regulations, a hybrid deduction includes NIDs allowed to a tax resident under its tax law. See proposed §1.267A-4(b). The comments regarding NIDs in the context of section 267A were substantially similar to the comments regarding NIDs in the context of section 245A(e). See part II.B.4 of this Summary of Comments and Explanation of Revisions section. Thus, for reasons similar to the reasons discussed in that section, the final regulations generally retain the approach of the proposed regulations regarding NIDs, but provide that only NIDs allowed to a tax resident under its tax law for accounting periods beginning on or after December 20, 2018, are hybrid deductions. See §1.267A-4(b)(2)(iii). In addition, a comment suggested that including NIDs as a hybrid deduction conflicts with nondiscrimination provisions of income tax treaties that require interest and royalties paid by U.S. residents to residents of the other treaty country be deductible under the same conditions as if they had been paid to a resident of the United States. See, for example, paragraph (4) of Article 23 (Nondiscrimination) of the income tax convention between the United States and Belgium, signed November 27, 2006. However, the U.S. Treasury Department Technical Explanation of Article 23 of the U.S.-Belgium income tax treaty provides that "... the common underlying premise [in each paragraph of the Article] is that if the difference in treatment is directly related to a tax-relevant difference in the situations of the domestic and foreign persons being compared, that difference is not to be treated as discriminatory...." In this case, the disallowance of a deduction is dependent solely on differences in U.S. tax law and the tax law of an imported mismatch payee (or certain other foreign parties), and the tax benefits allowed to the imported mismatch payee (or certain other foreign parties) under foreign tax law. Payments to related domestic persons would always be governed by the same Federal tax laws, and domestic law does not provide hybrid deductions, including NIDs, to domestic persons. Accordingly, the Treasury Department and the IRS have concluded that including NIDs as a hybrid deduction does not conflict with the nondiscrimination provision of applicable U.S. income tax treaties. The proposed regulations do not provide a rule pursuant to which NIDs are hybrid deductions only to the extent that the double non-taxation produced by the NIDs is a result of hybridity. However, consistent with other aspects of the section 267A regulations, the Treasury Department and the IRS have concluded that such a rule is appropriate and the final regulations therefore provide a rule to this effect. See §1.267A-4(b)(1)(ii). Thus, for example, in the case of a tax resident all the interests of which are owned by an investor that is a tax resident of another country, NIDs allowed to the tax resident are not hybrid deductions if the tax law of the investor has a pure territorial regime (that is, only taxes income from domestic sources) or if such tax law does not impose an income tax. iii. Deemed branch payments Under the proposed regulations, a hybrid deduction of a taxable branch includes a deduction that would be disallowed if the tax law of the taxable branch contained a provision substantially similar to proposed §1.267A-2(c) (regarding deemed branch payments). See proposed §1.267A-4(b). Proposed §1.267A-2(c) generally disallows a deduction for a deemed branch payment of a U.S. taxable branch only if the tax law of the home office provides an exclusion or exemption for income attributable to the branch. Proposed §1.267A-2(c) thus provides a simpler standard than the dual inclusion income standard of proposed §1.267A-2(b) (regarding disregarded payments). The simpler standard applies for deemed branch payments because these payments may arise due to simply operating a U.S. trade or business (as opposed to disregarded payments that typically result from structured tax planning), as well as because, given that U.S. permanent establishments cannot consolidate or otherwise share losses with U.S. taxpayers, there is a more limited opportunity for a deduction for such payments to offset non-dual inclusion income. A comment noted that under a tax law of a foreign country a taxable branch could be permitted to consolidate or otherwise share losses with a tax resident of that country. The comment thus questioned whether, in the imported mismatch context, it is appropriate for the deemed branch payment rule to apply the branch exemption standard, rather than the dual inclusion income standard. The Treasury Department and the IRS have concluded that, in the imported mismatch context, the dual inclusion income standard should apply in cases in which the tax law of the taxable branch permits a loss of the taxable branch to be shared with a tax resident or another taxable branch, because in these cases the excess of the taxable branch's deemed branch payments over its dual inclusion income could offset non-dual inclusion income. The final regulations therefore provide a rule to this effect. See §1.267A-4(b)(2)(ii). iv. Hybrid deductions of CFCs Under the proposed regulations, only a tax resident or taxable branch that is not a specified party can incur a hybrid deduction. See proposed §1.267A-4(b). Similarly, under the proposed regulations, only a tax resident or a taxable branch that is not a specified party can make a funded taxable payment. See proposed §1.267A-4(c)(3). This approach was generally intended to ensure that section 267A does not result in double U.S. taxation in cases of specified payments involving CFCs, because payments to CFCs are generally includible in income in the United States and payments by CFCs are generally subject to disallowance as disqualified hybrid amounts. A comment noted that this approach could lead to inappropriate results in certain cases. For example, it could lead to the avoidance of the imported mismatch rule through the use CFCs that are not wholly-owned by tax residents of the United States. The comment therefore recommended that the final regulations provide that CFCs can incur hybrid deductions and make funded taxable payments. However, to prevent double U.S. taxation, the comment suggested that a payment by a CFC not give rise to a hybrid deduction or a funded taxable payment to the extent that the payment gives rise to an increase in the U.S. tax base. The Treasury Department and the IRS agree with the comment and the final regulations therefore provide that CFCs can incur hybrid deductions and make funded taxable payments. See §1.267A-4(b)(1) and (c)(3)(v). The final regulations also provide rules to ensure that a hybrid deduction or funded taxable payment of a CFC does not include an amount that is a disqualified hybrid amount or included or includible in income in the United States (as determined under the rules of §1.267A-3(b)). See §1.267A-4(b)(2)(iv) and (c)(3)(v)(C). However, in the case of a disqualified hybrid amount of a CFC that is only partially owned by tax residents of the United States (or a disqualified hybrid amount a deduction for which would be allocated and apportioned to income not subject to U.S. tax), only a portion of the disqualified hybrid amount prevents a payment of the CFC from giving rise to a hybrid deduction or a funded taxable payment, as disallowing the CFC a deduction for the disqualified hybrid amount will only partially increase the U.S. tax base (or will not increase the U.S. tax base at all). See §1.267A-4(g). A new example illustrates these rules. See §1.267A-6(c)(11). 4. Setoff Rules i. Funded taxable payments Under the proposed regulations, for an imported mismatch payment to indirectly fund a hybrid deduction, the imported mismatch payee must directly or indirectly make a funded taxable payment to the tax resident or taxable branch that incurs the hybrid deduction. See proposed §1.267A-4(c)(3). A comment requested that the final regulations clarify that, for a payment to be a funded taxable payment, it must be included in income of a tax resident or taxable branch. The Treasury Department and the IRS agree with the comment and the final regulations thus provide a clarification to this effect. See §1.267A-4(c)(3)(v)(B). ii. Hybrid deduction first offsets imported mismatch payment with closest nexus to deduction Under the proposed regulations, when there are multiple imported mismatch payments, a hybrid deduction is first considered to offset income attributable to the imported mismatch payment that has the closest nexus to the hybrid deduction. See proposed §§1.267A-4(c)(2) and 1.267A-6(c)(10). For example, in the case of two imported mismatch payments, one of which is made pursuant to a transaction entered into pursuant to the same plan pursuant to which the hybrid deduction is incurred (a "factually-related imported mismatch payment") and the other of which is not a factually-related imported mismatch payment, the hybrid deduction is first considered to offset income attributable to the factually-related imported mismatch payment. As an additional example, in the case of two imported mismatch payments, one of which is directly connected to a hybrid deduction (because the imported mismatch payee with respect to the payment is the tax resident or taxable branch that incurs the hybrid deduction) and the other of which is indirectly connected to the hybrid deduction (because the imported mismatch payee with respect to the payment makes a funded taxable payment to the tax resident or taxable branch that incurs the hybrid deduction), the hybrid deduction is first considered to offset income attributable to the imported mismatch payment that is directly connected to the hybrid deduction. The final regulations retain this approach and provide two clarifications. First, the final regulations clarify that an imported mismatch payment is a factually-related imported mismatch payment - and therefore is given priority in terms of funding the hybrid deduction over other imported mismatch payments - only if a design of the plan or series of related transactions pursuant to which the hybrid deduction is incurred was for the hybrid deduction to offset income attributable to the payment. See §1.267A-4(c)(2)(i). Second, the final regulations clarify that when there are multiple imported mismatch payments that are indirectly connected to the tax resident or taxable branch that incurs the hybrid deduction, the hybrid deduction is first considered to offset income attributable to an imported mismatch payment that is connected, through the fewest number of funded taxable payments, to the tax resident or taxable branch that incurs the hybrid deduction. See §1.267A-4(c)(3)(vii) and (viii). For example, in the case of back-to-back imported mismatch payments, the first such payment is given priority over more removed imported mismatch payments. iii. Relatedness requirement Under the proposed regulations, a hybrid deduction offsets income attributable to an imported mismatch payment only if the tax resident or taxable branch that incurs the hybrid deduction is related to the imported mismatch payer (or is a party to a structured arrangement pursuant to which the payment is made). See proposed §1.267A-4(a). A comment requested that, for an imported mismatch payment to indirectly fund a hybrid deduction and thus be offset by the deduction, the imported mismatch payee (and, if applicable, each intermediary tax resident or taxable branch in the chain of funded taxable payments) must be related to the imported mismatch payer (or a party to a structured arrangement pursuant to which the payment is made). The Treasury Department and the IRS agree with the comment and the final regulations therefore provide rules to this effect. See §1.267A-4(c)(3)(ii) and (iv). 5. Coordination with Foreign Imported Mismatch Rules i. Certain payments deemed to be imported mismatch payments The proposed regulations coordinate the U.S. imported mismatch rule with foreign imported mismatch rules, in order to prevent the same hybrid deduction from resulting in deductions for non-hybrid payments being disallowed under imported mismatch rules in more than one jurisdiction. In general, the proposed regulations do so through a special rule pursuant to which certain payments by non-specified parties are deemed to be imported mismatch payments (the "Deemed IMP Rule"). See proposed §1.267A-4(f). In certain cases, the effect of the Deemed IMP Rule is that the rule reduces the extent to which a payment of a specified party is considered to fund a hybrid deduction (and therefore reduces the extent to which the hybrid deduction is considered to offset the income attributable to the imported mismatch payment). For example, a hybrid deduction may be considered directly funded by a payment of a non-specified party, rather than indirectly funded by a payment of a specified party; or, a hybrid deduction may be considered pro rata funded by a payment of a specified party and a payment of a non-specified party, rather than solely funded by the payment of the specified party. Under the proposed regulations, the Deemed IMP Rule applies only to payments by a tax resident or taxable branch the tax law of which contains hybrid mismatch rules, and only to the extent that pursuant to an imported mismatch rule under such tax law, the tax resident or taxable branch is denied a deduction for all or a portion of the payment. Comments recommended modifying the Deemed IMP Rule so that it takes into account payments subject to disallowance under a foreign imported mismatch rule, rather than payments a deduction for which is actually denied under the foreign imported mismatch rule. According to a comment, this would obviate the need for taxpayers to apply all foreign imported mismatch rules before the U.S. imported mismatch rule, determine which payments are ones for which a deduction is disallowed under the foreign rules, and then treat those payments as imported mismatch payments for purposes of the U.S. imported mismatch rule. The Treasury Department and the IRS generally agree with these comments and the final regulations therefore modify the Deemed IMP Rule to this effect. See §1.267A-4(f)(2). However, as discussed in part III.D.5.ii of this Summary of Comments and Explanation of Revisions section, the final regulations adjust the application of the imported mismatch rule in certain cases, in order to prevent the Deemed IMP Rule from giving rise to inappropriate results. ii. Special rules for applying imported mismatch rule In cases in which the U.S. imported mismatch rule treats a deduction as a hybrid deduction but a foreign imported mismatch rule does not, the Deemed IMP Rule could give rise to inappropriate results. For example, consider a case in which FW, a tax resident of Country W, owns all the interests of FX, a tax resident of Country X, which owns all the interests of FZ, a tax resident of Country Z (the tax law of which contains hybrid mismatch rules), and FZ owns all the interests of US1, a domestic corporation. Assume that US1 makes a non-hybrid interest payment to FZ (which FZ includes in income), FZ makes a non-hybrid interest payment to FX (which FX includes in income), FX makes a payment to FW that is considered a hybrid deduction for purposes of the U.S. imported mismatch rule, and no other payments are made during the accounting period. Further, assume that FZ's payment is subject to disallowance under the Country Z imported mismatch rule, but that the Country Z imported mismatch rule does not treat FX's deduction as a hybrid deduction (for example, because it is with respect to an interest-free loan). If pursuant to the Deemed IMP Rule FZ's payment were deemed to be an imported mismatch payment, then, given that FZ's payment has a closer nexus to FX's hybrid deduction than US1's payment, the hybrid deduction would, for purposes of the U.S. imported mismatch rule, offset only the income attributable to FZ's payment. The Deemed IMP Rule would thus lead to neither the United States nor Country Z neutralizing the D/NI outcome produced by the hybrid arrangement, thereby creating a result contrary to the purpose of the rule. To address this concern, the final regulations provide that the U.S. imported mismatch rule is first applied by taking into account only certain hybrid deductions - that is, deductions that are unlikely to be treated as hybrid deductions for purposes of a foreign hybrid mismatch rule. See §1.267A-4(f)(1). The final regulations provide an exclusive list of such hybrid deductions, which covers the hybrid deductions similar to those on the list discussed in part III.D.3.i of this Summary of Comments and Explanation of Revisions section. See id. In addition, for purposes of applying the imported mismatch rule in this manner, the Deemed IMP Rule does not apply. Consequently, such hybrid deductions are considered to offset only income attributable to imported mismatch payments of specified parties. This approach generally ensures that a foreign imported mismatch rule does not turn off the U.S. imported mismatch rule in cases in which the foreign imported mismatch rule is unlikely to neutralize the D/NI outcome produced by the hybrid arrangement. For all other hybrid deductions, the imported mismatch rule is applied by taking into account the Deemed IMP Rule. See §1.267A-4(f)(2). This generally ensures that, for deductions that are likely to be treated as hybrid deductions for both the U.S. and a foreign imported mismatch rule, there is a coordination mechanism to mitigate the likelihood of double-tax. iii. Payments to a country the tax law of which contains hybrid mismatch rules Several comments suggested a special rule pursuant to which an imported mismatch payment is exempt from the U.S. imported mismatch rule if the tax law of the imported mismatch payee contains hybrid mismatch rules. According to the comments, such an approach would generally rely on an imported mismatch rule of the imported mismatch payee to neutralize the effects of offshore hybrid arrangements that have a closer nexus to the country of the imported mismatch payee than the United States. The final regulations do not incorporate a special rule to this effect because the Treasury Department and the IRS have determined that such a rule could give rise to inappropriate results similar to those discussed in part III.D.5.ii of this Summary of Comments and Explanation of Revisions section. In addition, the Treasury Department and the IRS have concluded that when the U.S. imported mismatch rule is applied by taking into account the Deemed IMP Rule, the Deemed IMP Rule - in conjunction with other portions of the imported mismatch rule, such as the ordering and funding rules (including the waterfall approach) - generally obviates the need for the special rule. That is, when a hybrid deduction has a closer nexus to the country of the imported mismatch payee than the United States, the hybrid deduction is generally considered to offset income attributable to the imported mismatch payee's payment, rather than income attributable to the specified party's payment. As a result, the U.S. imported mismatch rule in effect relies on an imported mismatch rule of the imported mismatch payee to neutralize the effect of the offshore hybrid arrangement. See §1.267A-6(c)(10)(iv) and (c)(12). iv. Priority for certain amounts disallowed under foreign imported mismatch rule One comment suggested a new coordination rule pursuant to which, to the extent that a foreign tax resident or taxable branch is disallowed a deduction for a payment under a foreign imported mismatch rule, the U.S. imported mismatch rule generally considers a hybrid deduction to offset income attributable to that payment before offsetting income attributable to other payments. Such an approach would in effect provide as a credit against the U.S. imported mismatch rule amounts disallowed under a foreign imported mismatch rule. According to the comment, such an approach would mitigate the chance of double tax and would be appropriate if the main purpose of the U.S. imported mismatch rule is to participate with the international community in neutralizing the effects of hybrid arrangements (as opposed to protecting the integrity of the U.S. tax base). The final regulations do not adopt this comment. The Treasury Department and the IRS have concluded that when a hybrid deduction has a closer nexus to the United States than a foreign country, the U.S. imported mismatch rule - rather than the foreign imported mismatch rule - should apply to neutralize the effects of the offshore hybrid arrangement. In addition, the Treasury Department and the IRS have determined that, for purposes of administrability, the U.S. imported mismatch rule should not require an analysis of amounts actually disallowed under a foreign imported mismatch rule. See also part III.D.5.i of this Summary of Comments and Explanation of Revisions section. E. Other issues 1. Definition of Interest As explained in the preamble to the proposed regulations, the definition of interest in proposed §1.267A-5(a)(12) is based on, and is similar in scope as, the definition of interest contained in the proposed regulations under section 163(j); no comments were received on this definition. However, the Treasury Department and IRS received numerous comments on the definition of interest in the proposed regulations under section 163(j). Taking into account those comments, the final regulations modify the definition of interest for section 267A purposes in certain respects. For example, in view of comments recommending modification of the hedging rules, the final regulations under section 267A do not include rules requiring adjustments to the amount of interest expense to reflect the impact of derivatives that alter a taxpayer's effective cost of borrowing. See §1.267A-5(a)(12). As another example, in view of comments regarding the treatment of swaps with nonperiodic payments, the final regulations provide exceptions for cleared swaps and for non-cleared swaps subject to margin or collateral requirements. See §1.267A-5(a)(12)(ii). 2. Structured Payments Treated as Interest In order to address certain structured transactions, the proposed regulations provide that structured payments are treated as specified payments and therefore are subject to section 267A. See proposed §1.267A-5(b)(5)(i). Under the proposed regulations, structured payments include certain payments related to, or predominantly associated with, the time value of money, and adjustments for amounts affecting the effective cost of funds. See proposed §1.267A-5(b)(5)(ii). A comment noted that under the proposed regulations it is unclear in certain cases whether structured payments are treated as identical to interest for purposes of section 267A. The comment suggested that the final regulations address this ambiguity, including by providing that structured payments are treated as identical to interest or including structured payments within the definition of interest. The Treasury Department and the IRS agree with the comment, and thus the final regulations clarify that structured payments are treated as identical to interest for purposes of section 267A. See §1.267A-5(b)(5)(i). In addition, the final regulations modify the definition of a structured payment in light of comments that the Treasury Department and the IRS received regarding the definition of interest in the proposed regulations under section 163(j). Under proposed §1.267A-5(b)(5)(ii), certain amounts that are closely related to interest and that affect the economic cost of funds, such as commitment fees, debt issuance costs, and guaranteed payments, are treated as structured payments. The final regulations do not specifically include these items as part of the definition of structured payments; instead, the final regulations provide an anti-avoidance rule under which any expense or loss that is economically equivalent to interest is treated as a structured payment for purposes of section 267A if a principal purpose of structuring the transaction is to reduce an amount incurred by the taxpayer that otherwise would have been treated as interest or as a structured payment under §1.267A-5(a)(12) or (b)(5)(ii). See §1.267A-5(b)(5)(ii)(B). 3. Coordination with Capitalization and Recovery Provisions A comment noted that in certain cases a structured payment may not be deductible under the Code and, instead, the payment may be capitalized and give rise to amortization or depreciation deductions. The comment suggested that the final regulations clarify how section 267A applies to such payments, including whether the payments are treated as "paid or accrued" for purposes of the regulations and whether amortization or depreciation deductions for the payments are subject to disallowance under section 267A. The comment asserted that the disallowance of deductions relating to capitalized costs should be limited to structured payments. The final regulations provide that section 267A applies to a structured payment, including a capitalized cost, in the same manner as if it were an amount of interest paid or accrued. See §1.267A-5(b)(5)(i). In addition, the final regulations coordinate section 267A with the capitalization and recovery provisions of the Code. See §1.267A-5(b)(1)(iii). Pursuant to this rule, to the extent a specified payment is described in §1.267A-1(b) (that is, a disqualified hybrid amount, a disqualified imported mismatch amount, or one to which the section 267A anti-avoidance rule applies), a deduction for the payment is considered permanently disallowed for all purposes of the Code and, therefore, the payment is not taken into account for purposes of any capitalization and recovery provision. See id. But see §1.267A-5(b)(4) (a payment for which a deduction is disallowed may still reduce the corporation's earnings and profits). This rule is not limited to structured payments because the Treasury Department and the IRS have determined that, if the rule were so limited, deductions for other specified payments could inappropriately give rise to D/NI outcomes through, for example, depreciation or amortization deductions. 4. Structured Arrangements i. Definition Under the proposed regulations, an arrangement is a structured arrangement if either (i) a pricing test is satisfied, meaning that a hybrid mismatch is priced into the terms of the arrangement, or (ii) a principal purpose test is satisfied, meaning that, based on all the facts and circumstances, a hybrid mismatch is a principal purpose of the arrangement. See proposed §1.267A-5(a)(20). A comment suggested that the principal purpose test could be difficult to apply, as it requires a subjective analysis of actual motivation or intent. In addition, the comment noted that in certain cases it might not be clear whose actual motivation or intent controls for purposes of the test. Thus, the comment suggested replacing the principal purpose test with an objective test, such as a test that analyzes whether the arrangement was designed to produce the hybrid mismatch. Further, the comment suggested incorporating a "reason to know" standard into the structured arrangement rules, such that a tax resident or taxable branch would not be considered a party to a structured arrangement if the tax resident or taxable branch (or a related party) could not reasonably have been expected to be aware of the hybrid mismatch. Lastly, the comment noted that having a pricing test as an independent test could potentially lead to confusion if the other test (that is, the principal purpose test or the design test) also takes into account pricing considerations. The Treasury Department and the IRS agree with this comment. Thus, the final regulations provide for an objective design test, incorporate a reason to know standard, and incorporate the pricing test into the design test. See §1.267A-5(a)(20). ii. Applicability date A comment asserted that it may be difficult or costly to unwind a structured arrangement between unrelated parties. In order to facilitate restructuring of these arrangements, the comment suggested transitional relief for specified payments made pursuant to structured arrangements entered into on or before December 20, 2018 (or, alternatively, before December 22, 2017, the date of the Act). For example, the comment suggested that specified payments made pursuant to such arrangements be subject to section 267A beginning January 1, 2021. The Treasury Department and the IRS have determined that, to facilitate restructurings intended to eliminate or minimize hybridity for structured arrangements entered into before December 22, 2017, the final regulations should apply to specified payments made pursuant to such an arrangement only for taxable years beginning after December 31, 2020. The final regulations therefore provide a rule to this effect. See §1.267A-7(b)(2). 5. De Minimis Exception The proposed regulations include a de minimis exception that exempts a specified party from the application of section 267A for any taxable year for which the sum of the specified party's interest and royalty deductions (plus interest and royalty deductions of any related specified parties) is below $50,000. See proposed §1.267A-1(c). This $50,000 threshold takes into account a specified party's interest or royalty deductions without regard to whether the deductions involve hybrid arrangements and therefore, absent the de minimis exception, would be disallowed under section 267A. See id. A comment suggested that the $50,000 threshold instead should apply to the total amount of interest or royalty deductions involving hybrid or branch arrangements. The comment suggested that such an approach would produce more equitable results between similarly situated taxpayers. The Treasury Department and the IRS agree with the comment, and the final regulations thus modify the de minimis exception to this effect. See §1.267A-1(c). In addition, for purposes of clarity, and because certain specified payments may not be deductible under the Code (but, instead, may be capitalized and give rise to other deductions, such as amortization or depreciation, or loss), the final regulations replace the reference in the de minimis exception to interest or royalty deductions with a reference to specified payments. 6. Tax Law of a Country The proposed regulations define a tax law of a country to include statutes, regulations, administrative or judicial rulings, and treaties of the country. See proposed §1.267A-5(a)(21). However, as discussed in part II.B.7 of this Summary of Comments and Explanation of Revisions section, the Treasury Department and the IRS have determined that it is appropriate to take into account a country's subnational tax laws when such laws impose income taxes that are covered taxes under an income tax treaty with the United States (and therefore are likely to comprise a significant amount of a taxpayer's overall tax burden in that country). The final regulations therefore provide that the tax law of a country includes the tax law of a political subdivision or other local authority of a country, provided that income taxes imposed under such a subnational tax law are covered by an income tax treaty between that country and the United States. See §1.267A-5(a)(21). 7. Specified Parties Under the proposed regulations, a specified party includes a CFC for which there are one or more U.S. shareholders that own (within the meaning of section 958(a)) at least ten percent of the stock of the CFC. See proposed §1.267A-5(a)(17). However, the Treasury Department and the IRS have determined that in certain cases involving CFCs the definition of specified party could be overbroad. For example, under the proposed regulations, a CFC wholly owned by a domestic partnership is a specified party, even if all the partners of the partnership are foreign persons. The final regulations thus provide that a CFC is a specified party only if there is a tax resident of the United States that, for purposes of sections 951 and 951A, owns (within the meaning of section 958(a), but for this purpose treating a domestic partnership as foreign) at least ten percent of the stock of the CFC. The Treasury Department and the IRS expect that when proposed regulations under section 958 (REG-101828-19, 84 FR 29114) are finalized, the rule described in the preceding sentence treating a domestic partnership as foreign will be removed, as it will no longer be necessary. See proposed §1.958-1(d)(1). 8. Coordination with Section 163(j) The proposed regulations provide a rule to coordinate section 267A with other provisions of the Code. See proposed §1.267A-5(b)(1). A comment requested that the final regulations clarify that section 267A applies to a specified payment before section 163(j) applies to the payment. The final regulations provide a clarification to this effect. See §1.267A-5(b)(1)(ii). In addition, the final regulations clarify that to the extent a specified payment is not described in §1.267A-1(b) at the time it is subject to section 267A, the payment is not again subject to section 267A at a subsequent time. See §1.267A-5(b)(1)(i). For example, if for the taxable year in which a specified payment is paid the payment is not described in §1.267A-1(b) but under section 163(j) a deduction for the payment is deferred, the payment is not again subject to section 267A in the taxable year for which section 163(j) no longer defers the deduction. 9. Anti-Avoidance Rule The proposed regulations include an anti-avoidance rule, which provides that a specified party's deduction for a specified payment is disallowed to the extent it gives rise to a D/NI outcome, and a principal purpose of the plan or arrangement is to avoid the purposes of the regulations under section 267A. See proposed §1.267A-5(b)(6). One comment supported a purpose-based anti-avoidance rule, in general, but questioned whether the rule was appropriate in the context of the section 267A regulations - which sets forth detailed rules regarding the hybrid or branch arrangements addressed by section 267A - and whether the rule appropriately balances fairness and administrability. The comment also raised concerns that the anti-avoidance rule may be overly broad because it neither requires hybridity nor that the D/NI outcome be the cause of hybridity. Finally, the comment requested a clearer distinction between the structured arrangement rule and the anti-avoidance rule, and recommended that the anti-avoidance rule focus on the use of a specific structure or terms in order to accomplish a D/NI outcome while avoiding the application of the regulations. The Treasury Department and the IRS have determined that it is appropriate for the final regulations to retain a general anti-avoidance rule because, even in the context of specific rules that target hybrid and branch arrangements, such rules might be circumvented in a manner that is contrary to the purposes of the section 267A regulations. However, the Treasury Department and the IRS agree with the comment that the anti-avoidance rule should focus on the terms or structure of an arrangement and require that the D/NI outcome produced is a result of a hybrid or branch arrangement. The final regulations thus provide rules to this effect. See §1.267A-5(b)(6). 10. Effect of Disallowance on Earnings and Profits The proposed regulations provide that the disallowance of a deduction under section 267A does not affect a corporation's earnings and profits. See proposed §1.267A-5(b)(4). Thus, a corporation's earnings and profits may be reduced as a result of a specified payment for which a deduction is disallowed under section 267A. One comment stated that this rule is generally appropriate. However, the comment questioned whether the rule is appropriate in the context of a CFC, as the reduction of the CFC's earnings and profits may, because of the limit in section 952(c)(1), limit or prevent a subpart F inclusion with respect to the CFC, thereby negating the effect of disallowing the CFC's deduction. The Treasury Department and the IRS agree with the comment and, accordingly, the final regulations adopt an anti-avoidance rule. See §1.267A-5(b)(4). Pursuant to this rule, for purposes of section 952(c)(1) or §1.952-1(c), a CFC's earnings and profits are not reduced by a specified payment for which a deduction is disallowed if a principal purpose of the transaction giving rise to the specified payment is to reduce or limit the CFC's subpart F income. See id. IV. Comments and Revisions to Dual Consolidated Loss Rules and Entity Classification Rules A. Domestic reverse hybrids To address double-deduction outcomes that result from domestic reverse hybrid structures, the proposed regulations require, as a condition to a domestic entity electing to be treated as a corporation under §301.7701-3(c), that the domestic entity agree to be treated as a dual resident corporation for purposes of section 1503(d) for taxable years in which certain requirements are satisfied. See proposed §301.7701-3(c)(3). A comment agreed with the policy rationale for subjecting domestic reverse hybrids to the section 1503(d) regulations, and recommended that losses of domestic reverse hybrids be treated as dual consolidated losses. However, the comment expressed concern that the approach of the proposed regulations might establish a precedent allowing for a check-the-box election to be conditioned on consenting to any rule, which the comment asserted would be contrary to sound tax policy. Nonetheless, the comment stated that the section 1503(d) regulations are closely connected to the check-the-box regime, and acknowledged that a consent approach had been noted in a comment on regulations under section 1503(d) that were proposed in 2005. See TD 9315, 74 FR 12902. The comment recommended that, rather than the approach of the proposed regulations, the Treasury Department and the IRS directly subject domestic reverse hybrids to section 1503(d) or, if the Treasury Department and the IRS were to determine that there is not sufficient authority to do so, seek a legislative amendment. The Treasury Department and the IRS have determined that it is appropriate to condition a check-the-box election on consenting to be subject to the section 1503(d) regulations because the double-deduction concerns that result from domestic reverse hybrid structures are closely connected to the check-the-box regime. Moreover, as explained in the preamble to the proposed regulations, the approach of the proposed regulations is narrowly tailored such that the consent applies only for taxable years in which it is likely that losses of the domestic consenting corporation could result in a double-deduction outcome. The Treasury Department and the IRS have therefore determined that the approach of the proposed regulations is appropriate and consistent with ensuring that the check-the-box regime does not result in double-deduction outcomes. Accordingly, the final regulations retain the approach of the proposed regulations regarding domestic reverse hybrids. B. Disregarded payments made to domestic corporations The preamble to the proposed regulations describes certain structures involving payments from foreign disregarded entities to their domestic corporate owners that are regarded for foreign tax purposes but disregarded for U.S. tax purposes. The preamble notes that these disregarded payment structures are not addressed under the current section 1503(d) regulations but give rise to significant policy concerns that are similar to those arising under sections 245A(e), 267A, and 1503(d). In addition, the preamble states that the Treasury Department and the IRS are studying these structures and request comments. In response to this request, one comment was received. The Treasury Department and the IRS continue to study disregarded payment structures and the comment, and may in the future issue guidance addressing these structures. In addition, the Treasury Department and the IRS are studying other issues and comments received regarding the section 1503(d) regulations, such as an issue involving the interaction of the section 1503(d) regulations and the matching rule under §1.1502-13(c). Special Analyses I. Regulatory Planning and Review - Economic Analysis Executive Orders 13771, 13563, and 12866 direct agencies to assess costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. For purposes of Executive Order 13771, this rule is regulatory. The Office of Information and Regulatory Affairs has designated the proposed regulations as significant under section 1(b) of the Memorandum of Agreement. between the Treasury Department and the Office of Management and Budget (OMB) regarding review of tax regulations (April 11, 2018). Accordingly, the OMB has reviewed the final regulations. A. Background Multinational corporations (MNCs) that have operations in both the U.S. and foreign countries can engage in so-called "hybrid arrangements." In some instances, the MNC structures its U.S. and foreign operations in a way that exploits differences between foreign tax rules and U.S. tax rules. By using particular organizational structures or financial instruments, the MNC can avoid paying taxes in one or both jurisdictions. Hybrid arrangements refer to particular strategies for achieving this type of tax outcome. Hybrid arrangements may be "hybrid entities" or "hybrid instruments." A hybrid entity is a business that is treated as a flow-through or so-called disregarded entity for U.S. tax purposes and as a corporation for foreign tax purposes. A "reverse hybrid entity" is a business that is treated as a corporation for U.S. tax purposes, but as a flow-through entity for foreign tax purposes. For example, a foreign parent could own a domestic limited liability partnership that elects to be treated as a corporation under U.S. tax law 4 but is viewed as a partnership under foreign tax law. In this situation, the domestic subsidiary could be entitled to a deduction for U.S. tax purposes for interest payments it makes to the foreign parent, but the foreign country would not tax the interest income of the foreign parent because it treats it as payment between a partnership and a partner. In plain language, the result is that this portion of income would not be taxed in either country. This outcome is possible because of both the difference in the recognized business structure across countries (for the same business) and differences in the tax treatment applied to different business structures. ***** 4 Treasury and IRS regulations contain a so-called "check-the-box" provision under which certain taxpayers can choose whether they are treated as a corporation or as a partnership or disregarded entity. It is this election that facilitates the creation of hybrid entities. ***** A similar result is possible under a hybrid instrument. A hybrid instrument is a financial instrument with characteristics of both debt and equity. Because the instrument has a mix of characteristics, one country may treat the instrument as debt while another country may treat it as equity. An example is "perpetual debt," which the United States generally treats as equity and which many other countries treat as debt. If a foreign affiliate of a U.S.-based MNC issues perpetual debt to a U.S. holder, the interest payments made to the U.S. holder would be tax deductible in the foreign jurisdiction (if the foreign country treats perpetual debt as debt) and could potentially be eligible for a dividends received deduction (DRD) in the United States, which treats perpetual debt as equity. Again, the result is that this portion of income would not be taxed in either country. The double non-taxation produced by hybrid instruments or deductible payments made by or to a hybrid entity is often referred to as a "deduction/no-inclusion outcome" (D/NI outcome). The Act introduced two new provisions that affect the treatment of these hybrid arrangements. New section 245A(e) disallows the DRD for any dividend received by a U.S. shareholder from a controlled foreign corporation if the dividend is a hybrid dividend. In addition, section 245A(e) treats hybrid dividends between controlled foreign corporations with a common U.S. shareholder as subpart F income. The statute defines a hybrid dividend as an amount received from a controlled foreign corporation for which a deduction would be allowed under section 245A(a) and for which the controlled foreign corporation received a deduction or other tax benefit in a foreign country. The disallowance of the DRD for hybrid dividends and the treatment of hybrid dividends as subpart F income neutralize the D/NI outcome produced by hybrid dividends. The Act also added section 267A of the Code, which denies a deduction for any disqualified related party amount paid or accrued as a result of a hybrid transaction or by, or to, a hybrid entity. The statute defines a disqualified related party amount as any interest or royalty paid or accrued to a related party where there is no corresponding inclusion to the related party in the foreign tax jurisdiction or where the related party is allowed a deduction with respect to such amount in the foreign tax jurisdiction. The statute's definition of a hybrid transaction is any transaction where there is a mismatch in tax treatment between the U.S. and the other foreign jurisdiction. Similarly, a hybrid entity is any entity which is treated as fiscally transparent (that is, a flow-through or disregarded entity) for U.S. tax purposes but not for purposes of the foreign tax jurisdiction, or vice versa. The statute provides regulatory authority to address overly broad or under-inclusive applications of section 267A. The Treasury Department and the IRS previously issued proposed regulations under sections 245A(e), 267A, 1503(d), 6038, 6038A, 6038C, and 7701 on December 20, 2018. B. Overview of the final regulations These final regulations provide clarity to taxpayers regarding the determination and tracking of hybrid dividends. They also provide clarity and guidance on the disallowance of deductions for interest or royalties paid as a result of hybrid or branch arrangements. 1. Section 245A(e) Section 245A(e) applies in certain cases in which a CFC pays a hybrid dividend, which is a dividend paid by the CFC for which the CFC received a deduction or other tax benefit under foreign tax law (a hybrid deduction). The proposed regulations provide rules for identifying hybrid deductions and hybrid dividends. They further require taxpayers to maintain "hybrid deduction accounts" by which taxpayers would track those hybrid deductions. These accounts would allow for CFCs to track the amounts of hybrid deductions across sources and years and properly reduce the amounts when they are considered to give rise to inclusions under U.S. tax law. The final regulations largely retain the decisions made in the proposed regulations and provide additional clarity on what is a hybrid deduction and how the hybrid deduction account rules operate. 2. Section 267A Section 267A disallows a deduction for interest or royalties paid or accrued in certain transactions involving a hybrid arrangement. Congress intended this provision to address cases in which the taxpayer is provided a deduction under U.S. tax law, but the payee does not have a corresponding income inclusion under foreign tax law (the D/NI outcome). See S. Comm. on the Budget, Reconciliation Recommendations Pursuant to H. Con. Res. 71, S. Print No. 115-20, at 389 (2017). The proposed regulations disallow a deduction under section 267A only to the extent that the D/NI outcome is a result of a hybrid arrangement. Consistent with the grant of regulatory authority to address overly broad applications of section 267A, the proposed regulations provide several exceptions to section 267A in order to refine the scope of the provision and minimize burdens on taxpayers, and further provide de minimis rules that except small taxpayers from section 267A. Finally, the proposed regulations address the treatment of a comprehensive set of arrangements that give rise to D/NI outcomes to close off potential avenues for additional tax avoidance by applying the rules of section 267A to branch mismatches, reverse hybrids, certain transactions with unrelated parties that are structured to achieve D/NI outcomes, certain structured transactions involving amounts similar to interest, and imported mismatches. The final regulations largely retain these decisions while providing additional clarity for taxpayers. C. Need for the final regulations Because the Act introduced new sections to the Code to address hybrid entities and hybrid instruments, a number of the relevant terms and necessary calculations that taxpayers are currently required to apply under the statute can benefit from greater specificity. The final regulations provide taxpayers with interpretive guidance and clarifications on which types of arrangements are subject to the statute and the effect of the application of the statute to such arrangements. D. Economic analysis 1. Baseline The Treasury Department and the IRS have assessed the benefits and costs of the final regulations relative to a no-action baseline reflecting anticipated Federal income tax-related behavior in the absence of these regulations. 2. Summary of Economic Effects These final regulations provide certainty and clarity to taxpayers regarding (i) the determination and tracking of hybrid dividends; and (ii) the deductibility of interest or royalties paid as a result of hybrid or branch arrangements. In the absence of this clarity, the likelihood that different taxpayers would interpret the rules regarding hybrid payments differently would be exacerbated. In general, overall economic performance is enhanced when businesses face more uniform signals about tax treatment. Certainty and clarity over tax treatment generally also reduce compliance costs for taxpayers. For those statutory provisions for which similar taxpayers would generally adopt similar interpretations of the statute even in the absence of guidance, the final regulations provide value by helping to ensure that those interpretations are consistent with the intent and purpose of the statute. For example, the final regulations may specify a tax treatment that few or no taxpayers would adopt in the absence of specific guidance. The Treasury Department and the IRS projected that the proposed regulations would have annual economic effects of less than $100 million (2018$) if they were to be finalized. The final regulations differ from the proposed regulations primarily by incorporating certain changes that reduce administrative and compliance costs (relative to the proposed regulations) without substantially altering the final regulations' effectiveness (with regard to the intent and purpose of the statute). The assessment that the annual economic effects of the final regulations will be less than $100 million, relative to the no-action baseline, is unchanged. The Treasury Department and the IRS undertook a rough estimate of the economic effects of the final regulations. As explained later, we estimate that roughly 9,000 unique taxpayers are potentially affected by the regulations. We assumed that the effect of the final regulations would be the denial of between 1 and 4 percent of the interest paid deductions by these potentially affected taxpayers; these are deductions that we assumed would be denied beyond those that would be disallowed under the no-action baseline. 5 The Treasury Department and the IRS note that because the presence of a hybrid arrangement is not reported on a tax return, we do not have any specific data on the percent of interest paid deductions that are not allowed by the statute nor on the incremental portion of deductions that would not be allowed specifically by these final regulations. We further do not have readily available data or results from the academic literature to determine whether the assumed 1 to 4 percent range is accurate. We have selected these percentages to illustrate a plausible calculation of the final regulations' economic effects. 6 ***** 5 While section 267A applies to both interest and royalty deductions, the Treasury Department and IRS do not have readily available data on royalty deductions. 6 These percentages are comparable to estimates provided in OECD Measuring and Monitoring BEPS, Action 11 - 2015 Final Report. https://doi.org/10.1787/9789264241343-en. ***** We assume that taxpayers will respond to the disallowance of hybrids by substituting towards other tax-reduction strategies. These strategies must necessarily be less beneficial to the taxpayer than the hybrid arrangements because otherwise the taxpayer would have adopted those strategies under the baseline. The Treasury Department and the IRS do not have readily available data or models to estimate the cost or availability of these tax strategies for particular taxpayers. In this exercise for the final regulations, we assume that taxpayers will effectively continue to be able to claim between 85 to 100 percent of the disallowed interest deductions through alternative tax-reduction strategies. This results in a net disallowance of interest deductions of between 0 and 0.6 percent. We next applied Treasury Department models to confidential tax data for tax year 2017 to calculate average effective tax rates for these potentially affected taxpayers. 7 Because taxpayers are assumed to be unable to fully offset the disallowed interest deductions under the final regulations, their effective tax rates will rise. We modeled taxpayers' average effective tax rates with and without the assumed range of denied interest paid deductions that would result from the final regulations to estimate the changes in effective tax rates attributable to the final regulations. ***** 7 Because the most recently available complete tax data available for this exercise are from 2017, we multiplied average effective tax rates by 21/35 to reflect the 21 percent corporate tax rate that applies to these final regulations relative to the 35 percent rate that applied in 2017. Because effective tax rates are not readily defined for taxpayers with zero or negative taxable income, our model assumes the effective rate to be the statutory rate for those taxpayers. ***** As a final step, we applied an estimate of the semi-elasticity of taxable income (0.2) to the range of estimated increases in the effective tax rates. 8 The result is an estimate of the reduction in taxable income for these taxpayers that results from their response to higher effective tax rates. ***** 8 The semi-elasticity measures the percent change in taxable income that results from a one percentage point change in the effective tax rate. The parameter used for this exercise reflects the fact that this income is generally considered to be a supernormal return to investment. Supernormal income is highly inelastic. ***** Based on these assumptions and modeling, the Treasury Department and the IRS estimate that the change in economic activity as a result of these final regulations, relative to the no-action baseline, is a decline of between $0 and $83 million (2019$) per year, with this number growing over time at the real rate of growth of taxable income. This approach does not capture many other important economic effects of the final regulations: (1) Under this approach, there is an increase in Federal tax revenue relative to the no-action baseline but the calculations do not include the effect of this increase on the rest of the United States economy. For example, an increase in Federal tax revenue resulting from these final regulations would either reduce the deficit or allow reductions in other taxes, and these changes would have their own set of economic effects. Incorporating these effects would reduce the net decline in economic activity that we estimate. Indeed, if the elasticity of taxable income were the same across all taxpayers and if Federal tax revenue were held constant, the particular economic effects estimated here would be zero except for any change in compliance costs, relative to the baseline. (2) This estimate does not account for the improved efficiency in the affected sectors that would result from the certainty and clarity provided by the final regulations, relative to the no-action baseline. Incorporating this factor would reduce the net decline in economic activity that we estimate and could lead the average estimate of economic effects to be positive rather than negative. (3) Finally, this estimate does not include any reduction in economically wasteful planning and monitoring (by taxpayers) of the amount of foregone hybrid arrangements. To the extent that taxpayers use hybrid arrangements solely for tax shifting and those arrangements are economically unproductive, our assumed range should include a negative end; that is, there may be an increase in real economic activity as a result of the final regulations. Incorporating this effect would reduce the net decline in economic activity that we estimate. The Treasury Department and the IRS have not undertaken more precise quantitative estimates of the economic effects the final regulations because we do not have readily available data or models to estimate with reasonable precision (i) the types or volume of hybrid arrangements that taxpayers would likely use under these regulations, under the no-action baseline, or under alternative regulatory approaches; nor (ii) the effects of those hybrid arrangements on businesses' overall economic performance, including possible differences in compliance costs. In the absence of such quantitative estimates, the Treasury Department and the IRS have undertaken a qualitative analysis of the economic effects of the final regulations relative to the no-action baseline and relative to alternative regulatory approaches. This analysis is presented in part I.D.4 of this Special Analyses section. 3. Number and Characteristics of Affected Taxpayers The Treasury Department and the IRS project that the upper bound of taxpayers likely to be affected by section 245A(e) is 2,000 and the upper bound likely to be affected by section 267A is 8,000. 9 These estimates are based on the top 10 percent of taxpayers (by gross receipts) that filed a domestic corporate income tax return with a Form 5471 attached (therefore potentially affected by section 245A(e)), or that filed a domestic corporate income tax return with a Form 5472, "Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business," or Form 8865, "Return of U.S. Persons With Respect to Certain Foreign Partnerships," attached or a foreign corporate income tax return with a Form 5472 attached (therefore potentially affected by section 267A) for tax year 2017. 10 These estimates are upper bounds of the number of large corporations affected because they are based on all transactions, even though only a portion of such transactions involve hybrid arrangements. The tax data do not report whether these reported dividends or deductions were part of a hybrid arrangement because such information was not relevant for calculating tax prior to the Act. ***** 9 Approximately 1,000 taxpayers are affected by both sections, so the number of taxpayers affected by at least one provision is approximately 9,000. 10 Because of the complexities involved, primarily only large taxpayers engage in hybrid arrangements. The estimate that the top 10 percent of otherwise-relevant taxpayers (by gross receipts) are likely to engage in hybrid arrangements is based on the judgment of the Treasury Department and IRS. ***** The Treasury Department and the IRS also projected the types of taxpayers affected. We project that the population of taxpayers affected by section 267A and the final regulations under section 267A will seldom include U.S.-based companies as these companies are taxed under the new GILTI regime as well as subpart F. Instead, section 267A and the final regulations apply predominantly to U.S. affiliates of foreign-headquartered companies that employ hybrid arrangements to shift income out of the U.S. The Treasury Department and the IRS project that section 245A(e) applies primarily to U.S.-based companies. The amounts of dividends affected, however, are not likely to be large because a large portion of distributions will be treated as previously taxed earnings and profits due to the operation of both the GILTI regime and the transition tax under section 965, and such distributions are not subject to section 245A(e). 4. Economic Effects of Specific Provisions i. Delayed basis for hybrid deduction characterizations In the proposed regulations under section 245A(e), taxpayers were instructed that notional interest deductions (NIDs) allowed to a CFC would be considered hybrid deductions. The final regulations retain this characterization, but on a delayed basis (relative to the proposed regulations). Thus, the final regulations provide that only NIDs allowed to a CFC for taxable years beginning on or after December 20, 2018, are hybrid deductions for purposes of section 245A(e). Similarly, the final regulations provide that NIDs give rise to hybrid arrangements for section 267A purposes starting for accounting periods beginning on or after December 20, 2018. In addition, transition relief is provided for structured arrangements (that is, certain arrangements among unrelated parties) entered into before the enactment of the Act, such that section 267A does not apply to payments made pursuant to such arrangements until taxable years beginning after December 31, 2020. These delays provide affected taxpayers more time (relative to the proposed regulations) to restructure instruments, seek alternative investment arrangements, or otherwise take into account the application of the relevant rules to structured arrangements or arrangements involving NIDs. These delays may, in some circumstances, allow taxpayers to unwind current financial arrangements in a less costly way than they would if no such delay were provided. Allowing a delay in the characterization of certain hybrid deductions will lower the compliance costs (relative to the proposed regulations) for some taxpayers. Taxpayers commented that accounting for those deductions back to the beginning of 2018 would be difficult, and the delay offered by the final regulations obviates the need to account for those deductions back to the beginning of 2018. In addition, the delay provided by the final regulations may facilitate restructurings (for example, the unwinding of certain structured arrangements) such that, following the delay, fewer taxpayers will incur hybrid deductions. However, the reduction in compliance costs (relative to the proposed regulations) as a result of that delay will only be temporary, as the regime for those instruments as specified under the proposed regulations and as retained for the final regulations will take effect after the delay period. ii. De minimis exception The proposed regulations provided a de minimis rule that exempted a specified party from the application of 267A for any taxable year in the which the sum of the party's interest and royalty deductions (plus interest and royalty deductions of certain related persons) is below $50,000 (regardless of hybridity). The final regulations keep this threshold but specify that the deductible payments only count towards the de minimis threshold if they are from hybrid arrangements. Without this exception, two taxpayers with the same value of hybrid deductions (under $50,000) might be treated differently simply because one taxpayer operated in an industry with more royalties or interest payments than the other, with these royalties or interest payments arising as a normal course of business in that industry rather than as a tax-avoidance mechanism. Under the final regulations, the de minimis exception focuses only on payments the statute is looking to limit, the hybrid payments themselves, as opposed to all interest and royalties. This enhanced focus will potentially allow small firms to make decisions in their best economic interest as opposed to needing to structure contracts and payments (that did not even involve hybrid arrangements) in a way that would avoid exceeding the de minimis threshold. This provision expands the pool of taxpayers excepted from the hybrid provisions of the statute, relative to the proposed regulations. The Treasury Department and the IRS do not have readily available data to provide a reasonably precise projection of the number of taxpayers that would be affected by the de minimis provision under the final regulations. iii. Timing differences under section 245A(e) For some taxpayers and some transactions, there may be a timing difference between when a CFC pays an amount constituting a dividend for U.S. tax purposes and when the CFC receives a deduction or other tax benefit (a hybrid deduction) for the amount in a foreign jurisdiction. Tax regulations are necessary to make clear whether a deduction is considered a hybrid deduction and thus whether a dividend is considered a hybrid dividend in such situations. In the absence of such guidance, taxpayers could be uncertain about the tax treatment of certain dividends, an uncertainty that may result in an inefficient pattern of financing across taxpayers. The proposed regulations addressed the timing difference by requiring the establishment of "hybrid deduction accounts" and specifying rules to be used for these accounts. These accounts are to be maintained across years so that hybrid deductions that accrue in one year will be matched up with dividends arising in a different year, thus providing clear rules for when a dividend is a hybrid dividend and generally ensuring that income is neither doubly taxed nor doubly non-taxed. The final regulations reaffirm this approach, and add additional guidance and clarifications as necessary, such as guidance regarding mid-year stock transfers and what types of deductions and other tax benefits are hybrid deductions. The final regulations also respond to a comment that suggested that a deduction could only be a hybrid deduction if it was currently used to reduce foreign tax. The final regulations determined that such an interpretation would not be appropriate, and provide additional clarity that a deduction can be a hybrid deduction regardless of whether it is currently used under relevant foreign tax law. Were the final regulations to adopt the approach of the commenter, taxpayers would be required to undertake potentially burdensome analyses regarding the extent that a deduction is used currently under foreign tax law and, to the extent not used currently, track the deduction across other tax years so as to ensure that, when the deduction is ultimately used, it becomes a hybrid deduction at that point. iv. Determination of a hybrid dividend under section 245A(e) The proposed regulations required taxpayers to maintain hybrid deduction accounts. A hybrid deduction account generally reflects the amount of deductions or other tax benefits allowed to the CFC (or a person related to the CFC) under a foreign tax law with respect to instruments of the CFC that U.S. tax law views as stock, and thus generally reflects an amount of earnings of a CFC sheltered from foreign tax by reason of a hybrid arrangement. The proposed regulations provided that a dividend received by a domestic corporation that is a U.S. shareholder from a CFC is a hybrid dividend to the extent of the balance of the U.S. shareholder's hybrid deduction accounts with respect to its stock of the CFC. Some comments suggested modifications to this approach. The final regulations retain the approach in the proposed regulations, with small revisions made in part to respond to certain comments. One option for revising the approach in response to comments was to provide exceptions to the definition of a hybrid dividend such that certain dividends cannot be hybrid dividends, such as some dividends arising by reason of a transaction that under the foreign tax law does not give rise to a deduction (for example, a sale of stock that gives rise to a section 1248(a) dividend). However, the Department of Treasury and IRS decided not to adopt this approach because the dividend, to the extent of the balance of the hybrid deduction accounts, is likely composed of earnings that were sheltered from foreign tax by reason of a hybrid arrangement and is therefore one for which Congress did not intend that the section 245A(a) deduction be available. A second option was to provide an exception to when the hybrid deduction account rules apply, such that certain amounts (such as amounts that will be paid within 36-months from when the deduction is allowed under the foreign tax law) are not taken into account for purposes of determining a hybrid deduction account but instead are treated as hybrid dividends when paid. While such an approach might address D/NI outcomes resulting from hybrid arrangements in a tailored manner, it would also increase complexity and compliance burden, because it would in effect require two regimes under section 245A(e): the hybrid deduction account rules and separate tracking rules for cases in which an amount is excepted from the hybrid deduction account rules. The third option, and the one adopted by the final regulations was to retain the approach of the proposed regulations, and thus continue to treat a dividend as a hybrid dividend to the extent of the balance of the U.S. shareholder's hybrid deduction accounts with respect to its shares of stock of the CFC. This option both avoids incentivizing double non-taxation and avoids the complexities of needing multiple accounts. v. No inclusion in a third country under section 267A The proposed regulations generally deny a deduction for an interest or royalty payment if the payment is not included in income in a foreign country by reason of a hybrid arrangement, regardless of whether the payment is included in income in a different foreign country (a "third country"). Absent such an approach, payments involving hybrid arrangements could be funneled through low-tax countries, with an inclusion in the low-tax country turning off section 267A even though a no-inclusion occurs in a high-tax country by reason of a hybrid arrangement. Some comments suggested modifications to this approach. The final regulations retain the approach of the proposed regulations. One option for responding to comments was to allow an inclusion in the third country to turn off section 267A. Although this would be a simple approach, it would permit inclusions in a low-taxed country to turn off section 267A even though a no-inclusion occurs in a high-tax country. Such an approach could thus incentivize certain hybrid arrangements, as it could allow parties to achieve a better tax result through a hybrid arrangement than they would have had the arrangement not existed with no corresponding productive economic activity. A second option was to only allow an inclusion in the third country to turn off section 267A if the third country's tax rate is at least equal to a certain rate (for example, the U.S. tax rate, or the tax rate of the foreign country where the no-inclusion occurs). This approach would result in additional complexity, and would key the application of the hybrid rules on minimum effective rates of tax, which is beyond the scope of anti-hybrid rules. A third option was to not allow an inclusion in a third country to turn off section 267A. The final regulations adopt this approach, as it prevents inclusions in low-tax countries from turning off section 267A and thus prevents hybrid arrangements from being used to reduce U.S. tax without any accompanying productive economic activity. The Treasury Department and the IRS have determined that the advantages of this approach outweigh the drawbacks, including potential instances of double-taxation, relative to other regulatory approaches. First, absent the approach, payments could be routed through low-tax countries in a manner that would turn off section 267A, thus giving rise to at least partial double non-taxation and tax planning opportunities. Second, the approach is less complex - and easier to administer - than a more precise one which would calibrate the disallowed deduction based on the amount of tax avoided by reason of the hybrid arrangement (which would have to in part take into account relevant tax rates). Third, these types of structures are generally planned in advance and thus the approach would deter behavior. In particular, it would be relatively easy for taxpayers to avoid these structures and it is unlikely that taxpayers would have these structures arise by accident. vi. Conduit arrangements/imported mismatches Section 267A(e)(1) provides regulatory authority to apply the rules of section 267A to conduit arrangements and thus to disallow a deduction in cases in which income attributable to a payment is directly or indirectly offset by an offshore hybrid deduction. Under the proposed regulations, the Treasury Department and the IRS implemented rules that applied to so-called imported mismatch payments. These rules are generally similar to the Organization of Economic Cooperation and Development's Base Erosion and Profit Shifting project's (BEPS) imported mismatch rules. See Hybrid Mismatch Report Recommendation 8; see also Branch Mismatch Report Recommendation 5. Some commenters suggested that the proposed regulations were too complex and would be difficult to comply with. However, the Treasury Department and IRS decided in the final regulations that the approach taken in the proposed regulations was appropriate. The first advantage of this approach is that it provides certainty to taxpayers over a greater range of arrangements about whether a deduction will or will not be disallowed under the rule relative to other possible regulatory approaches. A second advantage of this approach is that it helps ensure that income is not subject either to double non-taxation or double taxation. This approach minimizes the chances of double taxation because it is modeled off the BEPS approach, which is being implemented by other countries, and it also contains explicit rules to coordinate with foreign tax law. Coordinating with the global tax community reduces opportunities for tax avoidance that is not otherwise economically productive. As noted in the preamble to the proposed regulations, although such an approach involves greater complexity than alternative regulatory approaches, the Treasury Department and IRS expect the benefits of this approach's comprehensiveness, administrability, and conduciveness to taxpayer certainty, to be substantially greater than the complexity burden in comparison with available alternative approaches. vii. Deemed branch payments and branch mismatch payments The proposed regulations expand the application of section 267A to certain transactions involving branches. This treatment was necessary to ensure that taxpayers could not avoid section 267A by engaging in transactions that were economically similar to the hybrid arrangements that are covered by the statute. If these types of arrangements were not addressed, some firms would have likely used branch structures to avoid paying U.S. tax. In some cases, these structures would have been created solely to avoid section 267A, resulting in potential efficiency loss. The final regulations maintain the position of the proposed regulations. viii. Exceptions for income included in U.S. tax and GILTI inclusions Section 267A(b)(1) provides that deductions for interest and royalties that are paid to a CFC and included under section 951(a) in income (as subpart F income) by a United States shareholder of such CFC are not subject to disallowance under section 267A. The statute does not state whether section 267A applies to a payment that is included directly in the U.S. tax base (for example, because the payment is made directly to a U.S. taxpayer or a U.S. taxable branch), or a payment made to a CFC that is taken into account under GILTI (as opposed to being included as subpart F income) by such CFC's United States shareholders. However, the grant of regulatory authority in section 267A(e) includes a specific mention of exceptions in "cases which the Secretary determines do not present a risk of eroding the Federal tax base." See section 267A(e)(7)(B). Payments that are included directly in the U.S. tax base or that are included in GILTI do not give rise to a D/NI outcome and, therefore, in the proposed regulations, it was deemed consistent with the policy of section 267A and the grant of authority in section 267A(e) to exempt them from disallowance under section 267A. Several comments suggested small revisions to this provision to avoid potential arbitrage, and such small revisions were made in the final regulations while maintaining the overall approach to income included in U.S. tax and GILTI inclusions. ix. Link between hybridity and D/NI The proposed regulations limited disallowance to cases in which the no-inclusion portion of the D/NI outcome is a result of hybridity as opposed to a different feature of foreign tax law, such as a general preference for royalty income. Disallowing hybrid arrangements in which the D/NI outcome was not the result of hybridity would have forced taxpayers to undertake potentially costly restructuring of arrangements with no change in outcome, since the hybridity was irrelevant to the D/NI outcome. The final regulations maintain this position. x. Timing differences under section 267A A similar timing issue that was addressed for section 245A(e) arises under section 267A. Here, there may be a timing difference between when the deduction is otherwise permitted under U.S. tax law and when the payment is included in the payee's income under foreign tax law. The legislative history to section 267A indicates that in certain cases such timing differences can lead to "long term deferral" and that such long-term deferral should be treated as giving rise to a D/NI outcome. Examples of such long-term deferral include cases in which under the foreign tax law the payment is a recovery of principal or basis, or the payment is pursuant to a hybrid sale/license transaction. The Treasury Department and IRS decided to address only certain timing differences -- namely, long-term timing differences, in the proposed regulations. The proposed regulations generally denied a deduction for an interest or royalty payment if, under foreign tax law, the payment is not included in the payee's income within 36-months. Some comments suggested modifications to this approach. The final regulations retain this overall approach but with small revisions, made in part to respond to certain comments. One option for responding to comments was to not address long-term deferral, because it will eventually reverse over time. Although this would be a simpler approach than the option adopted for the final regulations, the Treasury Department and IRS did not adopt this approach because, as indicated in the legislative history, long-term deferral can be equivalent to a permanent exclusion, and could lead to widespread avoidance. A second option was to continue to address long-term deferral but to not treat recovery of basis or principal as creating long-term deferral to the extent that the transaction giving rise to the basis, or the transaction pursuant to which the principal funds were generated, did not involve a hybrid arrangement. Although such an approach might be conceptually pure, it would raise significant practical and administrative difficulties. It would also be inconsistent with other areas of the Code, in that basis generally provides a dollar-for-dollar offset against income, as opposed to providing an offset against income only to the extent that the inclusion that generated the basis was at a tax rate at least equal to the tax rate at which the income is taken into account. The final option was to address long-term deferral but provide targeted modifications to excuse transactions unlikely to give rise to double non-taxation concerns - for example, hybrid sale/license cases, or cases in which different ordering or recovery rules under U.S. and foreign tax law reverse within 36-months. 11 The final regulations adopt this approach, because it strikes an appropriate balance between administrability and ensuring that similar economic activities were taxed similarly. ***** 11 Other areas of the Code similarly adopt a 36-month period for administrability purposes. See, for example, §1.884-1(g) (36-month period for testing whether a foreign corporation is eligible to claim an exemption from, or a reduced rate of, branch profits tax); §1.7874-10 (36-month period for measuring whether prior distributions should be taken into account for purposes of the non-ordinary course distribution rule). ***** II. Paperwork Reduction Act The collections of information in the final regulations with respect to sections 245A(e) and 267A are in §§1.6038-2(f)(13) and (14), 1.6038-3(g)(3), and 1.6038A-2(b)(5)(iii). These collections of information retain the collections of information in the proposed regulations, with a minor refinement to §1.6038-2(f)(14) to ensure that the IRS may require the reporting of certain information that will facilitate compliance with section 245A(e) and §1.245A(e)-1. The collection of information in §1.6038-2(f)(14) requires a U.S. person that controls a foreign corporation that pays or receives a hybrid dividend or tiered hybrid dividend under section 245A(e) during an annual accounting period to provide information about the hybrid dividend or tiered hybrid dividend on Form 5471, "Information Return of U.S. Persons With Respect to Certain Foreign Corporations," (OMB control number 1545-0123), as the form and its instructions may prescribe. Section 1.6038-2(f)(14) was revised to ensure that the IRS may require the reporting of certain information that will facilitate compliance with section 245A(e) and §1.245A(e)-1 (such as information about hybrid deduction accounts). For purposes of the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)) ("PRA"), the reporting burden associated with §1.6038-2(f)(14) will be reflected in the PRA submission associated with Form 5471 (see chart at the end of this part II of this Special Analyses section for the status of the PRA submission for Form 5471). The estimated number of respondents for the reporting burden associated with §1.6038-2(f)(14) is based on a percentage of large taxpayers that file income tax returns with a Form 5471 attached and Schedule I, "Summary of Shareholder's Income From Foreign Corporations," completed because only filers that are controlling U.S. shareholders of CFCs that pay or receive a dividend would be subject to the information collection requirements. As provided below, the IRS estimates the number of affected filers to be 2,000. As explained in the preamble to the proposed regulations, the remaining collections of information in §§1.6038-2(f)(13), 1.6038-3(g)(3), and 1.6038A-2(b)(5)(iii) will facilitate compliance with section 267A and the final regulations thereunder. For purposes of the PRA, the reporting burdens associated with §§1.6038-2(f)(13), 1.6038-3(g)(3), and 1.6038A-2(b)(5)(iii) will be reflected in the PRA submissions associated with Form 5471, Form 8865, "Return of U.S. Persons With Respect to Certain Foreign Partnerships," (OMB control number 1545-1668), and Form 5472, "Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business," (OMB control number 1545-0123), respectively (see chart at the end of this part II of this Special Analyses section for the status of the PRA submissions for Forms 5471, 8865, and 5472). The estimated number of respondents for the reporting burdens associated with §§1.6038-2(f)(13), 1.6038-3(g)(3), and 1.6038A-2(b)(5)(iii) is based on a percentage of large taxpayers that file income tax returns with a Form 5471 (Schedule G, Other Information), Form 8865, or Form 5472 attached. The IRS estimates the number of affected filers to be the following. Source: IRS data (MeF, DCS, and Compliance Data Warehouse) The current status of the PRA submissions related to the tax forms that will be revised as a result of the information collections in the final regulations is provided in the accompanying table. As described above, the reporting burdens associated with the information collections in §§1.6038-2(f)(13) and (14) and 1.6038A-2(b)(5)(iii) are included in the aggregated burden estimates for OMB control number 1545-0123, which represents a total estimated burden time for all forms and schedules for corporations of 3.157 billion hours and total estimated monetized costs of $58.148 billion ($2017). The overall burden estimates provided for OMB control number 1545-0123 are aggregate amounts that relate to the entire package of forms associated with the OMB control number and will in the future include but not isolate the estimated burden of the tax forms that will be revised as a result of the information collections in the proposed regulations. These burden estimates are therefore not accurate for future calculations needed to assess the burden imposed by the proposed regulations. These burden estimates have been reported for other regulations related to the taxation of cross-border income. The Treasury Department and IRS urge readers to recognize that many of the burden estimates reported for regulations related to taxation of cross-border income are duplicates and to guard against overcounting the burden that international tax provisions impose. No burden estimates specific to the final regulations are currently available. The Treasury Department and IRS have not identified any burden estimates, including those for new information collections, related to the requirements under the final regulations. The Treasury Department and the IRS estimate PRA burdens on a taxpayer-type basis rather than a provision-specific basis. Those estimates capture both changes made by the Act and those that arise out of discretionary authority exercised in the final regulations. The Treasury Department and the IRS request comments on all aspects of information collection burdens related to the final regulations, including estimates for how much time it would take to comply with the paperwork burdens described above for each relevant form and ways for the IRS to minimize the paperwork burden. Proposed revisions (if any) to these forms that reflect the information collections contained in these final regulations will be made available for public comment at https://apps.irs.gov/app/picklist/list/draftTaxForms.html and will not be finalized until after these forms have been approved by OMB under the PRA. III. Regulatory Flexibility Act It is hereby certified that this final rule will not have a significant economic impact on a substantial number of small entities within the meaning of section 601(6) of the Regulatory Flexibility Act (5 U.S.C. chapter 6). The small entities that are subject to §§1.6038-2(f)(13), 1.6038-3(g)(3), and 1.6038A-2(b)(5)(iii) are small entities that are controlling U.S. shareholders of a CFC that is disallowed a deduction under section 267A, small entities that are controlling fifty-percent partners of a foreign partnership that makes a payment for which a deduction is disallowed under section 267A, and small entities that are 25 percent foreign-owned domestic corporations and disallowed a deduction under section 267A, respectively. In addition, the small entities that are subject to §1.6038-2(f)(14) are controlling U.S. shareholders of a CFC that pays or receives a hybrid dividend or a tiered hybrid dividend. A controlling U.S. shareholder of a CFC is a U.S. person that owns more than 50 percent of the CFC's stock. A controlling fifty-percent partner is a U.S. person that owns more than a fifty-percent interest in the foreign partnership. A 25 percent foreign-owned domestic corporation is a domestic corporation at least 25 percent of the stock of which is owned by a foreign person. The Treasury Department and the IRS estimate that 15 taxpayers with gross receipts below $25 million (or $41.5 million for financial entities) would potentially be affected by these regulations. 12 These are taxpayers who filed a domestic corporate income tax return in 2016 with gross receipts below $25 million (or $41.5 million for financial entities) and that (i) attached either a Form 5471 (therefore potentially affected by section 245A(e)) or a Form 5472 (therefore potentially affected by section 267A) and (ii) reported on Form 5471 dividends received by the domestic corporation from the foreign corporation, or on Form 5472 interest or royalty payments by the domestic corporation; and (iii) in the case of interest or royalties reported on Form 5472, the interest and royalty payments were above the $50,000 de minimis threshold for section 267A. The de minimis exception under section 267A excepts many small entities from the application of section 267A for any taxable year for which the sum of its interest and royalty deductions (plus interest and royalty deductions of certain related persons) involving hybrid arrangements is below $50,000. This estimate of 15 potentially affected taxpayers with gross receipts below the stated thresholds is less than 2 percent of potentially affected taxpayers of all sizes. ***** 12 This estimate is limited to those taxpayers who report gross receipts above $0. ******* The Treasury Department and the IRS cannot readily identify from these data amounts that are paid pursuant to hybrid arrangements because those amounts are not separately reported on tax forms. Thus, dividends received as reported on Form 5471, and interest and royalty expenses as reported on Form 5472, are an upper bound on the amount of hybrid arrangements by these taxpayers. The Treasury Department and the IRS estimated the upper bound of the relative cost of the statutory and regulatory hybrids provisions, as a percentage of revenue, for these taxpayers as (i) the statutory tax rate of 21 percent multiplied by dividends received as reported on Form 5471 and or interest and royalty payments as reported on Form 5472, divided by (ii) the taxpayer's gross receipts. Based on this calculation, the Treasury Department and the IRS estimate that the upper bound of the relative cost of these statutory and regulatory provisions is above 3 percent for more than half but fewer than all of the 15 entities identified in the preceding paragraph. Because this estimate is an upper bound, a smaller subset of these taxpayers (including potentially zero taxpayers) is likely to have a cost above three percent of gross receipts. Therefore, the Treasury Department and the IRS project that a substantial number of domestic small business entities will not be subject to §1.6038-2(f)(13) or (14), §1.6038-3(g)(3), or §1.6038A-2(b)(5)(iii). Accordingly, the Treasury Department and the IRS project that §1.6038-2(f)(13) or (14), §1.6038-3(g)(3), or §1.6038A-2(b)(5)(iii) will not have a significant economic impact on a substantial number of small entities. Drafting Information The principal authors of the final regulations are Shane M. McCarrick and Tracy M. Villecco of the Office of Associate Chief Counsel (International). However, other personnel from the Treasury Department and the IRS participated in the development of the final regulations. List of Subjects 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. 26 CFR Part 301 Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income taxes, Penalties, Reporting and recordkeeping requirements. Amendments to the Regulations Accordingly, 26 CFR parts 1 and 301 are amended as follows: PART 1--INCOME TAXES Paragraph 1. The authority citation for part 1 is amended by adding sectional authorities for §§1.245A(e)-1 and 1.267A-1 through 1.267A-7 in numerical order and revising the entry for §1.6038A-2 to read in part as follows: Authority: 26 U.S.C. 7805 * * * Section 1.245A(e)-1 also issued under 26 U.S.C. 245A(g). Sections 1.267A-1 through 1.267A-7 also issued under 26 U.S.C. 267A(e). Section 1.6038A-2 also issued under 26 U.S.C. 6038A and 6038C. Par. 2. Section 1.245A(e)-1 is added to read as follows: §1.245A(e)-1 Special rules for hybrid dividends. (a) Overview. This section provides rules for hybrid dividends. Paragraph (b) of this section disallows the deduction under section 245A(a) for a hybrid dividend received by a United States shareholder from a CFC. Paragraph (c) of this section provides a rule for hybrid dividends of tiered corporations. Paragraph (d) of this section sets forth rules regarding a hybrid deduction account. Paragraph (e) of this section provides an anti-avoidance rule. Paragraph (f) of this section provides definitions. Paragraph (g) of this section illustrates the application of the rules of this section through examples. Paragraph (h) of this section provides the applicability date. (b) Hybrid dividends received by United States shareholders --(1) In general. If a United States shareholder receives a hybrid dividend, then-- (i) The United States shareholder is not allowed a deduction under section 245A(a) for the hybrid dividend; and (ii) The rules of section 245A(d) (disallowance of foreign tax credits and deductions) apply to the hybrid dividend. See paragraph (g)(1) of this section for an example illustrating the application of paragraph (b) of this section. (2) Definition of hybrid dividend. The term hybrid dividend means an amount received by a United States shareholder from a CFC for which, without regard to section 245A(e) and this section as well as §1.245A-5T, the United States shareholder would be allowed a deduction under section 245A(a), to the extent of the sum of the United States shareholder's hybrid deduction accounts (as described in paragraph (d) of this section) with respect to each share of stock of the CFC, determined at the close of the CFC's taxable year (or in accordance with paragraph (d)(5) of this section, as applicable). No other amount received by a United States shareholder from a CFC is a hybrid dividend for purposes of section 245A. (3) Special rule for certain dividends attributable to earnings of lower-tier foreign corporations. This paragraph (b)(3) applies if a domestic corporation directly or indirectly (as determined under the principles of §1.245A-5T(g)(3)(ii)) sells or exchanges stock of a foreign corporation and, pursuant to section 1248, the gain recognized on the sale or exchange is included in gross income as a dividend. In such a case, for purposes of this section-- (i) To the extent that earnings and profits of a lower-tier CFC gave rise to the dividend under section 1248(c)(2), those earnings and profits are treated as distributed as a dividend by the lower-tier CFC directly to the domestic corporation under the principles of §1.1248-1(d); and (ii) To the extent the domestic corporation indirectly owns (within the meaning of section 958(a)(2), and determined by treating a domestic partnership as foreign) shares of stock of the lower-tier CFC, the hybrid deduction accounts with respect to those shares are treated as the domestic corporation's hybrid deduction accounts with respect to stock of the lower-tier CFC. Thus, for example, if a domestic corporation sells or exchanges all the stock of an upper-tier CFC and under this paragraph (b)(3) there is considered to be a dividend paid directly by the lower-tier CFC to the domestic corporation, then the dividend is generally a hybrid dividend to the extent of the sum of the upper-tier CFC's hybrid deduction accounts with respect to stock of the lower-tier CFC. (4) Ordering rule. Amounts received by a United States shareholder from a CFC are subject to the rules of section 245A(e) and this section based on the order in which they are received. Thus, for example, if on different days during a CFC's taxable year a United States shareholder receives dividends from the CFC, then the rules of section 245A(e) and this section apply first to the dividend received on the earliest date (based on the sum of the United States shareholder's hybrid deduction accounts with respect to each share of stock of the CFC), and then to the dividend received on the next earliest date (based on the remaining sum). (c) Hybrid dividends of tiered corporations --(1) In general. If a CFC (the receiving CFC ) receives a tiered hybrid dividend from another CFC, and a domestic corporation is a United States shareholder with respect to both CFCs, then, notwithstanding any other provision of the Code-- (i) For purposes of section 951(a) as to the United States shareholder, the tiered hybrid dividend is treated for purposes of section 951(a)(1)(A) as subpart F income of the receiving CFC for the taxable year of the CFC in which the tiered hybrid dividend is received; (ii) The United States shareholder includes in gross income an amount equal to its pro rata share (determined in the same manner as under section 951(a)(2)) of the subpart F income described in paragraph (c)(1)(i) of this section; and (iii) The rules of section 245A(d) (disallowance of foreign tax credit, including for taxes that would have been deemed paid under section 960(a) or (b), and deductions) apply to the amount included under paragraph (c)(1)(ii) of this section in the United States shareholder's gross income. See paragraph (g)(2) of this section for an example illustrating the application of paragraph (c) of this section. (2) Definition of tiered hybrid dividend. The term tiered hybrid dividend means an amount received by a receiving CFC from another CFC to the extent that the amount would be a hybrid dividend under paragraph (b)(2) of this section if, for purposes of section 245A and the regulations in this part under section 245A (except for section 245A(e)(2) and this paragraph (c)), the receiving CFC were a domestic corporation. A tiered hybrid dividend does not include an amount described in section 959(b). No other amount received by a receiving CFC from another CFC is a tiered hybrid dividend for purposes of section 245A. (3) Special rule for certain dividends attributable to earnings of lower-tier foreign corporations. This paragraph (c)(3) applies if a CFC directly or indirectly (as determined under the principles of §1.245A-5T(g)(3)(ii)) sells or exchanges stock of a foreign corporation and pursuant to section 964(e)(1) the gain recognized on the sale or exchange is included in gross income as a dividend. In such a case, the rules of paragraph (b)(3) of this section apply, by treating the CFC as the domestic corporation described in paragraph (b)(3) of this section and substituting the phrase "sections 964(e)(1) and 1248(c)(2)" for the phrase "section 1248(c)(2)" in paragraph (b)(3)(i) of this section. (4) Interaction with rules under section 964(e). To the extent a dividend described in section 964(e)(1) (gain on certain stock sales by CFCs treated as dividends) is a tiered hybrid dividend, the rules of section 964(e)(4) do not apply as to a domestic corporation that is a United States shareholder of both of the CFCs described in paragraph (c)(1) of this section and, therefore, such United States shareholder is not allowed a deduction under section 245A(a) for the amount included in gross income under paragraph (c)(1)(ii) of this section. (d) Hybrid deduction accounts --(1) In general. A specified owner of a share of CFC stock must maintain a hybrid deduction account with respect to the share. The hybrid deduction account with respect to the share must reflect the amount of hybrid deductions of the CFC allocated to the share (as determined under paragraphs (d)(2) and (3) of this section), and must be maintained in accordance with the rules of paragraphs (d)(4) through (6) of this section. (2) Hybrid deductions --(i) In general. The term hybrid deduction of a CFC means a deduction or other tax benefit (such as an exemption, exclusion, or credit, to the extent equivalent to a deduction) for which the requirements of paragraphs (d)(2)(i)(A) and (B) of this section are both satisfied. (A) The deduction or other tax benefit is allowed to the CFC (or a person related to the CFC) under a relevant foreign tax law, regardless of whether the deduction or other tax benefit is used, or otherwise reduces tax, currently under the relevant foreign tax law. (B) The deduction or other tax benefit relates to or results from an amount paid, accrued, or distributed with respect to an instrument issued by the CFC and treated as stock for U.S. tax purposes, or is a deduction allowed to the CFC with respect to equity. Examples of such a deduction or other tax benefit include an interest deduction, a dividends paid deduction, and a notional interest deduction (or similar deduction determined with respect to the CFC's equity). However, a deduction or other tax benefit relating to or resulting from a distribution by the CFC that is a dividend for purposes of the relevant foreign tax law is considered a hybrid deduction only to the extent it has the effect of causing the earnings that funded the distribution to not be included in income (determined under the principles of §1.267A-3(a)) or otherwise subject to tax under such tax law. Thus, for example, upon a distribution by a CFC that is treated as a dividend for purposes of the CFC's tax law to a shareholder of the CFC, a dividends paid deduction allowed to the CFC under its tax law (or a refund to the shareholder, including through a credit, of tax paid by the CFC on the earnings that funded the distribution) pursuant to an integration or imputation system is not a hybrid deduction of the CFC to the extent that the shareholder, if a tax resident of the CFC's country, includes the distribution in income under the CFC's tax law or, if not a tax resident of the CFC's country, is subject to withholding tax (as defined in section 901(k)(1)(B)) on the distribution under the CFC's tax law. As an additional example, upon a distribution by a CFC to a shareholder of the CFC that is a tax resident of the CFC's country, a dividends received deduction allowed to the shareholder under the tax law of such foreign country pursuant to a regime intended to relieve double-taxation within the group is not a hybrid deduction of the CFC (though if the CFC were also allowed a deduction or other tax benefit for the distribution under such tax, such deduction or other tax benefit would be a hybrid deduction of the CFC). See paragraphs (g)(1) and (2) of this section for examples illustrating the application of paragraph (d) of this section. (ii) Coordination with foreign disallowance rules. The following special rules apply for purposes of determining whether a deduction or other tax benefit is allowed to a CFC (or a person related to the CFC) under a relevant foreign tax law: (A) Whether the deduction or other tax benefit is allowed is determined without regard to a rule under the relevant foreign tax law that disallows or suspends deductions if a certain ratio or percentage is exceeded (for example, a thin capitalization rule that disallows interest deductions if debt to equity exceeds a certain ratio, or a rule similar to section 163(j) that disallows or suspends interest deductions if interest exceeds a certain percentage of income). (B) Except as provided in this paragraph (d)(2)(ii)(B), whether the deduction or other tax benefit is allowed is determined without regard to hybrid mismatch rules, if any, under the relevant foreign tax law that may disallow such deduction or other tax benefit. However, whether the deduction or other tax benefit is allowed is determined with regard to hybrid mismatch rules under the relevant foreign tax law if the amount giving rise to the deduction or other tax benefit neither gives rise to a dividend for U.S. tax purposes nor, based on all the facts and circumstances, is reasonably expected to give rise to a dividend for U.S. tax purposes that will be paid within 12 months from the end of the taxable period for which the deduction or other tax benefit would be allowed but for the hybrid mismatch rules. For purposes of this paragraph (d)(2)(ii)(B), the term hybrid mismatch rules has the meaning provided in §1.267A-5(b)(10). (iii) Anti-duplication rule. A deduction or other tax benefit allowed to a CFC (or a person related to the CFC) under a relevant foreign tax law for an amount paid, accrued, or distributed with respect to an instrument issued by the CFC is not a hybrid deduction to the extent that treating it as a hybrid deduction would have the effect of duplicating a hybrid deduction that is a deduction or other tax benefit allowed under such tax law for an amount paid, accrued, or distributed with respect to an instrument that is issued by a CFC at a higher tier and that has terms substantially similar to the terms of the first instrument. For example, if an upper tier CFC issues to a corporate United States shareholder a hybrid instrument (the "upper tier instrument"), a lower tier CFC issues to the upper tier CFC a hybrid instrument that has terms substantially similar to the terms of the upper tier instrument (the "mirror instrument"), the CFCs are tax residents of the same foreign country, and the upper tier CFC includes in income under its tax law (as determined under the principles of §1.267A-3(a)) amounts accrued with respect to the mirror instrument, then a deduction allowed to the lower tier CFC under such foreign tax law for an amount accrued pursuant to the mirror instrument is not a hybrid deduction (but a deduction allowed to the upper tier CFC under the foreign tax law for an amount accrued with respect to the upper tier instrument is a hybrid deduction). (iv) Application limited to items allowed in taxable years ending on or after December 20, 2018; special rule for deductions with respect to equity. A deduction or other tax benefit, other than a deduction with respect to equity, allowed to a CFC (or a person related to the CFC) under a relevant foreign tax law is taken into account for purposes of this section only if it was allowed with respect to a taxable year under the relevant foreign tax law ending on or after December 20, 2018. A deduction with respect to equity allowed to a CFC under a relevant foreign tax law is taken into account for purposes of this section only if it was allowed with respect to a taxable year under the relevant foreign tax law beginning on or after December 20, 2018. (3) Allocating hybrid deductions to shares. A hybrid deduction is allocated to a share of stock of a CFC to the extent that the hybrid deduction (or amount equivalent to a deduction) relates to an amount paid, accrued, or distributed by the CFC with respect to the share. However, in the case of a hybrid deduction that is a deduction with respect to equity (such as a notional interest deduction), the deduction is allocated to a share of stock of a CFC based on the product of-- (i) The amount of the deduction allowed for all of the equity of the CFC; and (ii) A fraction, the numerator of which is the value of the share and the denominator of which is the value of all of the stock of the CFC. (4) Maintenance of hybrid deduction accounts --(i) In general. A specified owner's hybrid deduction account with respect to a share of stock of a CFC is, as of the close of the taxable year of the CFC, adjusted pursuant to the following rules. (A) First, the account is increased by the amount of hybrid deductions of the CFC allocated to the share for the taxable year. (B) [Reserved] (C) Third, the account is decreased by the amount of hybrid deductions in the account that gave rise to a hybrid dividend or tiered hybrid dividend during the taxable year. If the specified owner has more than one hybrid deduction account with respect to its stock of the CFC, then a pro rata amount in each hybrid deduction account is considered to have given rise to the hybrid dividend or tiered hybrid dividend, based on the amounts in the accounts before applying this paragraph (d)(4)(i)(C). (ii) [Reserved] (iii) Acquisition of account and certain other adjustments --(A) In general. The following rules apply when a person (the acquirer ) directly or indirectly through a partnership, trust, or estate acquires a share of stock of a CFC from another person (the transferor ). ( 1 ) In the case of an acquirer that is a specified owner of the share immediately after the acquisition, the transferor's hybrid deduction account, if any, with respect to the share becomes the hybrid deduction account of the acquirer. ( 2 ) In the case of an acquirer that is not a specified owner of the share immediately after the acquisition, the transferor's hybrid deduction account, if any, is eliminated and accordingly is not thereafter taken into account by any person. (B) Additional rules. The following rules apply in addition to the rules of paragraph (d)(4)(iii)(A) of this section. ( 1 ) Certain section 354 or 356 exchanges. The following rules apply when a shareholder of a CFC (the CFC, the target CFC; the shareholder, the exchanging shareholder ) exchanges stock of the target CFC for stock of another CFC (the acquiring CFC ) pursuant to an exchange described in section 354 or 356 that occurs in connection with a transaction described in section 381(a)(2) in which the target CFC is the transferor corporation. ( i ) In the case of an exchanging shareholder that is a specified owner of one or more shares of stock of the acquiring CFC immediately after the exchange, the exchanging shareholder's hybrid deduction accounts with respect to the shares of stock of the target CFC that it exchanges are attributed to the shares of stock of the acquiring CFC that it receives in the exchange. ( ii ) In the case of an exchanging shareholder that is not a specified owner of one or more shares of stock of the acquiring CFC immediately after the exchange, the exchanging shareholder's hybrid deduction accounts with respect to its shares of stock of the target CFC are eliminated and accordingly are not thereafter taken into account by any person. ( 2 ) Section 332 liquidations. If a CFC is a distributor corporation in a transaction described in section 381(a)(1) (the distributor CFC ) in which a controlled foreign corporation is the acquiring corporation (the distributee CFC ), then each hybrid deduction account with respect to a share of stock of the distributee CFC is increased pro rata by the sum of the hybrid deduction accounts with respect to shares of stock of the distributor CFC. ( 3 ) Recapitalizations. If a shareholder of a CFC exchanges stock of the CFC pursuant to a reorganization described in section 368(a)(1)(E) or a transaction to which section 1036 applies, then the shareholder's hybrid deduction accounts with respect to the stock of the CFC that it exchanges are attributed to the shares of stock of the CFC that it receives in the exchange. ( 4 ) Certain distributions involving section 355 or 356. In the case of a transaction involving a distribution under section 355 (or so much of section 356 as it relates to section 355) by a CFC (the distributing CFC ) of stock of another CFC (the controlled CFC ), the balance of the hybrid deduction accounts with respect to stock of the distributing CFC is attributed to stock of the controlled CFC in a manner similar to how earnings and profits of the distributing CFC and controlled CFC are adjusted. To the extent the balance of the hybrid deduction accounts with respect to stock of the distributing CFC is not so attributed to stock of the controlled CFC, such balance remains as the balance of the hybrid deduction accounts with respect to stock of the distributing CFC. ( 5 ) Effect of section 338(g) election --( i ) In general. If an election under section 338(g) is made with respect to a qualified stock purchase (as described in section 338(d)(3)) of stock of a CFC, then a hybrid deduction account with respect to a share of stock of the old target is not treated as (or attributed to) a hybrid deduction account with respect to a share of stock of the new target. Accordingly, immediately after the deemed asset sale described in §1.338-1, the balance of a hybrid deduction account with respect to a share of stock of the new target is zero; the account must then be maintained in accordance with the rules of paragraph (d) of this section. ( ii ) Special rule regarding carryover FT stock. Paragraph (d)(4)(iii)(B)( 5 )( i ) of this section does not apply as to a hybrid deduction account with respect to a share of carryover FT stock (as described in §1.338-9(b)(3)(i)). A hybrid deduction account with respect to a share of carryover FT stock is attributed to the corresponding share of stock of the new target. (5) Determinations and adjustments made during year of transfer in certain cases. This paragraph (d)(5) applies if on a date other than the date that is the last day of the CFC's taxable year a United States shareholder of the CFC or an upper-tier CFC with respect to the CFC directly or indirectly (as determined under the principles of §1.245A-5T(g)(3)(ii)) transfers a share of stock of the CFC, and, during the taxable year, but on or before the transfer date, the United States shareholder or upper-tier CFC receives an amount from the CFC that is subject to the rules of section 245A(e) and this section. In such a case, the following rules apply: (i) As to the United States shareholder or upper-tier CFC and the United States shareholder's or upper-tier CFC's hybrid deduction accounts with respect to each share of stock of the CFC (regardless of whether such share is transferred), the determinations and adjustments under this section that would otherwise be made at the close of the CFC's taxable year are made at the close of the date of the transfer. When making these determinations and adjustments at the close of the date of the transfer, each hybrid deduction account described in the previous sentence is pursuant to paragraph (d)(4)(ii)(A) of this section increased by a ratable portion (based on the number of days in the taxable year within the pre-transfer period to the total number of days in the taxable year) of the hybrid deductions of the CFC allocated to the share for the taxable year, and pursuant to paragraph (d)(4)(ii)(C) of this section decreased by the amount of hybrid deductions in the account that gave rise to a hybrid dividend or tiered hybrid dividend during the portion of the taxable year up to and including the transfer date. Thus, for example, if a United States shareholder of a CFC exchanges stock of the CFC in an exchange described in §1.367(b)-4(b)(1)(i) and is required to include in income as a deemed dividend the section 1248 amount attributable to the stock exchanged, then: as of the close of the date of the exchange, each of the United States shareholder's hybrid deductions accounts with respect to a share of stock of the CFC is increased by a ratable portion of the hybrid deductions of the CFC allocated to the share for the taxable year (based on the number of days in the taxable year within the pre-transfer period to the total number of days in the taxable year); the deemed dividend is a hybrid dividend to the extent of the sum of the United States shareholder's hybrid deduction accounts with respect to each share of stock of the CFC; and, as the close of the date of the exchange, each of the accounts is decreased by the amount of hybrid deductions in the account that gave rise to a hybrid dividend during the portion of the taxable year up to and including the date of the exchange. (ii) As to a hybrid deduction account described in paragraph (d)(5)(i) of this section, the adjustments to the account as of the close of the taxable year of the CFC must take into account the adjustments, if any, occurring with respect to the account pursuant to paragraph (d)(5)(i) of this section. Thus, for example, if an acquisition of a share of stock of a CFC occurs on a date other than the date that is the last day of the CFC's taxable year and pursuant to paragraph (d)(4)(iii)(A)( 1 ) of this section the acquirer succeeds to the transferor's hybrid deduction account with respect to the share, then, as of the close of the taxable year of the CFC, the account is increased by a ratable portion of the hybrid deductions of the CFC allocated to the share for the taxable year (based on the number of days in the taxable year within the post-transfer period to the total number of days in the taxable year), and, decreased by the amount of hybrid deductions in the account that gave rise to a hybrid dividend or tiered hybrid dividend during the portion of the taxable year following the transfer date. (6) Effects of CFC functional currency --(i) Maintenance of the hybrid deduction account. A hybrid deduction account with respect to a share of CFC stock must be maintained in the functional currency (within the meaning of section 985) of the CFC. Thus, for example, the amount of a hybrid deduction and the adjustments described in paragraphs (d)(4)(i)(A) and (B) of this section are determined based on the functional currency of the CFC. In addition, for purposes of this section, the amount of a deduction or other tax benefit allowed to a CFC (or a person related to the CFC) is determined taking into account foreign currency gain or loss recognized with respect to such deduction or other tax benefit under a provision of foreign tax law comparable to section 988 (treatment of certain foreign currency transactions). (ii) Determination of amount of hybrid dividend. This paragraph (d)(6)(ii) applies if a CFC's functional currency is other than the functional currency of a United States shareholder or upper-tier CFC that receives an amount from the CFC that is subject to the rules of section 245A(e) and this section. In such a case, the sum of the United States shareholder's or upper-tier CFC's hybrid deduction accounts with respect to each share of stock of the CFC is, for purposes of determining the extent that a dividend is a hybrid dividend or tiered hybrid dividend, translated into the functional currency of the United States shareholder or upper-tier CFC based on the spot rate (within the meaning of §1.988-1(d)) as of the date of the dividend. (e) Anti-avoidance rule. Appropriate adjustments are made pursuant to this section, including adjustments that would disregard the transaction or arrangement, if a transaction or arrangement is undertaken with a principal purpose of avoiding the purposes of section 245A(e) and this section. For example, if a specified owner of a share of CFC stock transfers the share to another person, and a principal purpose of the transfer is to shift the hybrid deduction account with respect to the share to the other person or to cause the hybrid deduction account to be eliminated, then for purposes of this section the shifting or elimination of the hybrid deduction account is disregarded as to the transferor. As another example, if a transaction or arrangement is undertaken to affirmatively fail to satisfy the holding period requirement under section 246(c)(5) with a principal purpose of avoiding the tiered hybrid dividend rules described in paragraph (c) of this section, the transaction or arrangement is disregarded for purposes of this section. This paragraph (e) will not apply, however, to disregard (or make other adjustments with respect to) a transaction pursuant to which an instrument or arrangement that gives rise to hybrid deductions is eliminated or otherwise converted into another instrument or arrangement that does not give rise to hybrid deductions. (f) Definitions. The following definitions apply for purposes of this section. (1) The term controlled foreign corporation (or CFC ) has the meaning provided in section 957. (2) The term domestic corporation means an entity classified as a domestic corporation under section 7701(a)(3) and (4) or otherwise treated as a domestic corporation by the Internal Revenue Code. However, for purposes of this section, a domestic corporation does not include a regulated investment company (as described in section 851), a real estate investment trust (as described in section 856), or an S corporation (as described in section 1361). (3) The term person has the meaning provided in section 7701(a)(1). (4) The term related has the meaning provided in this paragraph (f)(4). A person is related to a CFC if the person is a related person within the meaning of section 954(d)(3). See also §1.954-1(f)(2)(iv)(B)( 1 ) (neither section 318(a)(3), nor §1.958-2(d) or the principles thereof, applies to attribute stock or other interests). (5) The term relevant foreign tax law means, with respect to a CFC, any regime of any foreign country or possession of the United States that imposes an income, war profits, or excess profits tax with respect to income of the CFC, other than a foreign anti-deferral regime under which a person that owns an interest in the CFC is liable to tax. If a foreign country has an income tax treaty with the United States that applies to taxes imposed by a political subdivision or other local authority of that country, then the tax law of the political subdivision or other local authority is deemed to be a tax law of a foreign country. Thus, the term includes any regime of a foreign country or possession of the United States that imposes income, war profits, or excess profits tax under which-- (i) The CFC is liable to tax as a resident; (ii) The CFC has a branch that gives rise to a taxable presence in the foreign country or possession of the United States; or (iii) A person related to the CFC is liable to tax as a resident, provided that under such person's tax law the person is allowed a deduction for amounts paid or accrued by the CFC (because the CFC is fiscally transparent under the person's tax law). (6) The term specified owner means, with respect to a share of stock of a CFC, a person for which the requirements of paragraphs (f)(6)(i) and (ii) of this section are satisfied. (i) The person is a domestic corporation that is a United States shareholder of the CFC, or is an upper-tier CFC that would be a United States shareholder of the CFC were the upper-tier CFC a domestic corporation (provided that, for purposes of sections 951 and 951A, a domestic corporation that is a United States shareholder of the upper-tier CFC owns (within the meaning of section 958(a), and determined by treating a domestic partnership as foreign) one or more shares of stock of the upper-tier CFC). (ii) The person owns the share directly or indirectly through a partnership, trust, or estate. Thus, for example, if a domestic corporation directly owns all the shares of stock of an upper-tier CFC and the upper-tier CFC directly owns all the shares of stock of another CFC, the domestic corporation is the specified owner with respect to each share of stock of the upper-tier CFC and the upper-tier CFC is the specified owner with respect to each share of stock of the other CFC. (7) The term United States shareholder has the meaning provided in section 951(b). (g) Examples. This paragraph (g) provides examples that illustrate the application of this section. For purposes of the examples in this paragraph (g), unless otherwise indicated, the following facts are presumed. US1 is a domestic corporation. FX and FZ are CFCs formed at the beginning of year 1, and the functional currency (within the meaning of section 985) of each of FX and FZ is the dollar. FX is a tax resident of Country X and FZ is a tax resident of Country Z. US1 is a United States shareholder with respect to FX and FZ. No distributed amounts are attributable to amounts which are, or have been, included in the gross income of a United States shareholder under section 951(a). All instruments are treated as stock for U.S. tax purposes. Only the tax law of the United States contains hybrid mismatch rules. (1) Example 1. Hybrid dividend resulting from hybrid instrument --(i) Facts. US1 holds both shares of stock of FX, which have an equal value. One share is treated as indebtedness for Country X tax purposes ("Share A"), and the other is treated as equity for Country X tax purposes ("Share B"). During year 1, under Country X tax law, FX accrues $80x of interest to US1 with respect to Share A and is allowed a deduction for the amount (the "Hybrid Instrument Deduction"). During year 2, FX distributes $30x to US1 with respect to each of Share A and Share B. For U.S. tax purposes, each of the $30x distributions is treated as a dividend for which, without regard to section 245A(e) and this section as well as §1.245A-5T, US1 would be allowed a deduction under section 245A(a). For Country X tax purposes, the $30x distribution with respect to Share A represents a payment of interest for which a deduction was already allowed (and thus FX is not allowed an additional deduction for the amount), and the $30x distribution with respect to Share B is treated as a dividend (for which no deduction is allowed). (ii) Analysis. The entire $30x of each dividend received by US1 from FX during year 2 is a hybrid dividend, because the sum of US1's hybrid deduction accounts with respect to each of its shares of FX stock at the end of year 2 ($80x) is at least equal to the amount of the dividends ($60x). See paragraph (b)(2) of this section. This is the case for the $30x dividend with respect to Share B even though there are no hybrid deductions allocated to Share B. See paragraph (b)(2) of this section. As a result, US1 is not allowed a deduction under section 245A(a) for the entire $60x of hybrid dividends and the rules of section 245A(d) (disallowance of foreign tax credits and deductions) apply. See paragraph (b)(1) of this section. Paragraphs (g)(1)(ii)(A) through (D) of this section describe the determinations under this section. (A) At the end of year 1, US1's hybrid deduction accounts with respect to Share A and Share B are $80x and $0, respectively, calculated as follows. ( 1 ) The $80x Hybrid Instrument Deduction allowed to FX under Country X tax law (a relevant foreign tax law) is a hybrid deduction of FX, because the deduction is allowed to FX and relates to or results from an amount accrued with respect to an instrument issued by FX and treated as stock for U.S. tax purposes. See paragraph (d)(2)(i) of this section. Thus, FX's hybrid deductions for year 1 are $80x. ( 2 ) The entire $80x Hybrid Instrument Deduction is allocated to Share A, because the deduction was accrued with respect to Share A. See paragraph (d)(3) of this section. As there are no additional hybrid deductions of FX for year 1, there are no additional hybrid deductions to allocate to either Share A or Share B. Thus, there are no hybrid deductions allocated to Share B. ( 3 ) At the end of year 1, US1's hybrid deduction account with respect to Share A is increased by $80x (the amount of hybrid deductions allocated to Share A). See paragraph (d)(4)(i)(A) of this section. Because FX did not pay any dividends with respect to either Share A or Share B during year 1 (and therefore did not pay any hybrid dividends or tiered hybrid dividends), no further adjustments are made. See paragraph (d)(4)(i)(C) of this section. Therefore, at the end of year 1, US1's hybrid deduction accounts with respect to Share A and Share B are $80x and $0, respectively. (B) At the end of year 2, and before the adjustments described in paragraph (d)(4)(i)(C) of this section, US1's hybrid deduction accounts with respect to Share A and Share B remain $80x and $0, respectively. This is because there are no hybrid deductions of FX for year 2. See paragraph (d)(4)(i)(A) of this section. (C) Because at the end of year 2 (and before the adjustments described in paragraph (d)(4)(i)(C) of this section) the sum of US1's hybrid deduction accounts with respect to Share A and Share B ($80x, calculated as $80x plus $0) is at least equal to the aggregate $60x of year 2 dividends, the entire $60x dividend is a hybrid dividend. See paragraph (b)(2) of this section. (D) At the end of year 2, US1's hybrid deduction account with respect to Share A is decreased by $60x, the amount of the hybrid deductions in the account that gave rise to a hybrid dividend or tiered hybrid dividend during year 2. See paragraph (d)(4)(i)(C) of this section. Because there are no hybrid deductions in the hybrid deduction account with respect to Share B, no adjustments with respect to that account are made under paragraph (d)(4)(i)(C) of this section. Therefore, at the end of year 2 and taking into account the adjustments under paragraph (d)(4)(i)(C) of this section, US1's hybrid deduction account with respect to Share A is $20x ($80x less $60x) and with respect to Share B is $0. (iii) Alternative facts - notional interest deductions. The facts are the same as in paragraph (g)(1)(i) of this section, except that for each of year 1 and year 2 FX is allowed $10x of notional interest deductions with respect to its equity, Share B, under Country X tax law (the "NIDs"). In addition, during year 2, FX distributes $47.5x (rather than $30x) to US1 with respect to each of Share A and Share B. For U.S. tax purposes, each of the $47.5x distributions is treated as a dividend for which, without regard to section 245A(e) and this section as well as §1.245A-5T, US1 would be allowed a deduction under section 245A(a). For Country X tax purposes, the $47.5x distribution with respect to Share A represents a payment of interest for which a deduction was already allowed (and thus FX is not allowed an additional deduction for the amount), and the $47.5x distribution with respect to Share B is treated as a dividend (for which no deduction is allowed). The entire $47.5x of each dividend received by US1 from FX during year 2 is a hybrid dividend, because the sum of US1's hybrid deduction accounts with respect to each of its shares of FX stock at the end of year 2 ($80x plus $20x, or $100x) is at least equal to the amount of the dividends ($95x). See paragraph (b)(2) of this section. As a result, US1 is not allowed a deduction under section 245A(a) for the $95x hybrid dividend and the rules of section 245A(d) (disallowance of foreign tax credits and deductions) apply. See paragraph (b)(1) of this section. Paragraphs (g)(1)(iii)(A) through (D) of this section describe the determinations under this section. (A) The $10x of NIDs allowed to FX under Country X tax law in year 1 are hybrid deductions of FX for year 1. See paragraph (d)(2)(i) of this section. The $10x of NIDs is allocated equally to each of Share A and Share B, because the hybrid deduction is with respect to equity and the shares have an equal value. See paragraph (d)(3) of this section. Thus, $5x of the NIDs is allocated to each of Share A and Share B for year 1. For the reasons described in paragraph (g)(1)(ii)(A)( 2 ) of this section, the entire $80x Hybrid Instrument Deduction is allocated to Share A. Therefore, at the end of year 1, US1's hybrid deduction accounts with respect to Share A and Share B are $85x and $5x, respectively. (B) Similarly, the $10x of NIDs allowed to FX under Country X tax law in year 2 are hybrid deductions of FX for year 2, and $5x of the NIDs is allocated to each of Share A and Share B for year 2. See paragraphs (d)(2)(i) and (d)(3) of this section. Thus, at the end of year 2 (and before the adjustments described in paragraph (d)(4)(i)(C) of this section), US1's hybrid deduction account with respect to Share A is $90x ($85x plus $5x) and with respect to Share B is $10x ($5x plus $5x). See paragraph (d)(4)(i) of this section. (C) Because at the end of year 2 (and before the adjustments described in paragraph (d)(4)(i)(C) of this section) the sum of US1's hybrid deduction accounts with respect to Share A and Share B ($100x, calculated as $90x plus $10x) is at least equal to the aggregate $95x of year 2 dividends, the entire $95x of dividends are hybrid dividends. See paragraph (b)(2) of this section. (D) At the end of year 2, US1's hybrid deduction accounts with respect to Share A and Share B are decreased by the amount of hybrid deductions in the accounts that gave rise to a hybrid dividend or tiered hybrid dividend during year 2. See paragraph (d)(4)(i)(C) of this section. A total of $95x of hybrid deductions in the accounts gave rise to a hybrid dividend during year 2. For the hybrid deduction account with respect to Share A, $85.5x in the account is considered to have given rise to a hybrid deduction (calculated as $95x multiplied by $90x/$100x). See paragraph (d)(4)(i)(C) of this section. For the hybrid deduction account with respect to Share B, $9.5x in the account is considered to have given rise to a hybrid deduction (calculated as $95x multiplied by $10x/$100x). See paragraph (d)(4)(i)(C) of this section. Thus, following these adjustments, at the end of year 2, US1's hybrid deduction account with respect to Share A is $4.5x ($90x less $85.5x) and with respect to Share B is $0.5x ($10x less $9.5x). (iv) Alternative facts - deduction in branch country --(A) Facts. The facts are the same as in paragraph (g)(1)(i) of this section, except that for Country X tax purposes Share A is treated as equity (and thus the Hybrid Instrument Deduction does not exist, and under Country X tax law FX is not allowed a deduction for the $30x distributed in year 2 with respect to Share A). However, FX has a branch in Country Z that gives rise to a taxable presence under Country Z tax law, and for Country Z tax purposes Share A is treated as indebtedness and Share B is treated as equity. Also, during year 1, for Country Z tax purposes, FX accrues $80x of interest to US1 with respect to Share A and is allowed an $80x interest deduction with respect to its Country Z branch income. Moreover, for Country Z tax purposes, the $30x distribution with respect to Share A in year 2 represents a payment of interest for which a deduction was already allowed (and thus FX is not allowed an additional deduction for the amount), and the $30x distribution with respect to Share B in year 2 is treated as a dividend (for which no deduction is allowed). (B) Analysis. The $80x interest deduction allowed to FX under Country Z tax law (a relevant foreign tax law) with respect to its Country Z branch income is a hybrid deduction of FX for year 1. See paragraphs (d)(2)(i) and (f)(5) of this section. For reasons similar to those discussed in paragraph (g)(1)(ii) of this section, at the end of year 2 (and before the adjustments described in paragraph (d)(4)(i)(C) of this section), US1's hybrid deduction accounts with respect to Share A and Share B are $80x and $0, respectively, and the sum of the accounts is $80x. Accordingly, the entire $60x of the year 2 dividend is a hybrid dividend. See paragraph (b)(2) of this section. Further, for the reasons described in paragraph (g)(1)(ii)(D) of this section, at the end of year 2 and taking into account the adjustments under paragraph (d)(4)(i)(C) of this section, US1's hybrid deduction account with respect to Share A is $20x ($80x less $60x) and with respect to Share B is $0. (2) Example 2. Tiered hybrid dividend rule; tax benefit equivalent to a deduction --(i) Facts. US1 holds all the stock of FX, and FX holds all 100 shares of stock of FZ (the "FZ shares"), which have an equal value. The FZ shares are treated as equity for Country Z tax purposes. At the end of year 1, the sum of FX's hybrid deduction accounts with respect to each of its shares of FZ stock is $0. During year 2, FZ distributes $10x to FX with respect to each of the FZ shares, for a total of $1,000x. The $1,000x is treated as a dividend for U.S. and Country Z tax purposes, and is not deductible for Country Z tax purposes. If FX were a domestic corporation, then, without regard to section 245A(e) and this section as well as §1.245A-5T, FX would be allowed a deduction under section 245A(a) for the $1,000x. Under Country Z tax law, 75% of the corporate income tax paid by a Country Z corporation with respect to a dividend distribution is refunded to the corporation's shareholders (regardless of where such shareholders are tax residents) upon a dividend distribution by the corporation. The corporate tax rate in Country Z is 20%. With respect to FZ's distributions, FX is allowed a refundable tax credit of $187.5x. The $187.5x refundable tax credit is calculated as $1,250x (the amount of pre-tax earnings that funded the distribution, determined as $1,000x (the amount of the distribution) divided by 0.8 (the percentage of pre-tax earnings that a Country Z corporation retains after paying Country Z corporate tax)) multiplied by 0.2 (the Country Z corporate tax rate) multiplied by 0.75 (the percentage of the Country Z tax credit). Under Country Z tax law, FX is not subject to Country Z withholding tax (or any other tax) with respect to the $1,000x dividend distribution. (ii) Analysis. As described in paragraphs (g)(2)(ii)(A) and (B) of this section, the sum of FX's hybrid deduction accounts with respect to each of its shares of FZ stock at the end of year 2 is $937.5x and, as a result, $937.5x of the $1,000x of dividends received by FX from FZ during year 2 is a tiered hybrid dividend. See paragraphs (b)(2) and (c)(2) of this section. The $937.5x tiered hybrid dividend is treated for purposes of section 951(a)(1)(A) as subpart F income of FX and US1 must include in gross income its pro rata share of such subpart F income, which is $937.5x. See paragraph (c)(1) of this section. This is the case notwithstanding any other provision of the Code, including section 952(c) or section 954(c)(3) or (6). In addition, the rules of section 245A(d) (disallowance of foreign tax credits and deductions) apply with respect to US1's inclusion. See paragraph (c)(1) of this section. Paragraphs (g)(2)(ii)(A) through (C) of this section describe the determinations under this section. The characterization of the FZ stock for Country X tax purposes (or for purposes of any other foreign tax law) does not affect this analysis. (A) The $187.5x refundable tax credit allowed to FX under Country Z tax law (a relevant foreign tax law) is equivalent to a $937.5x deduction, calculated as $187.5x (the amount of the credit) divided by 0.2 (the Country Z corporate tax rate). The $937.5x is a hybrid deduction of FZ because it is allowed to FX (a person related to FZ), it relates to or results from amounts distributed with respect to instruments issued by FZ and treated as stock for U.S. tax purposes, and it has the effect of causing the earnings that funded the distributions to not be included in income under Country Z tax law. See paragraph (d)(2)(i) of this section. $9.375x of the hybrid deduction is allocated to each of the FZ shares, calculated as $937.5x (the amount of the hybrid deduction) multiplied by 1/100 (the value of each FZ share relative to the value of all the FZ shares). See paragraph (d)(3) of this section. The result would be the same if FX were instead a tax resident of Country Z (and not Country X), FX were allowed the $187.5x refundable tax credit under Country Z tax law, and under Country Z tax law FX were to not include the $1,000x in income (because, for example, Country Z tax law provides Country Z resident corporations a 100% exclusion or dividends received deduction with respect to dividends received from a resident corporation). See paragraph (d)(2)(i) of this section. (B) At the end of year 2, and before the adjustments described in paragraph (d)(4)(i)(C) of this section, the sum of FX's hybrid deduction accounts with respect to each of its shares of FZ stock is $937.5x, calculated as $9.375x (the amount in each account) multiplied by 100 (the number of accounts). See paragraph (d)(4)(i) of this section. Accordingly, $937.5x of the $1,000x dividend received by FX from FZ during year 2 is a tiered hybrid dividend. See paragraphs (b)(2) and (c)(2) of this section. (C) At the end of year 2, each of FX's hybrid deduction accounts with respect to its shares of FZ is decreased by the $9.375x in the account that gave rise to a hybrid dividend or tiered hybrid dividend during year 2. See paragraph (d)(4)(i)(C) of this section. Thus, following these adjustments, at the end of year 2, each of FX's hybrid deduction accounts with respect to its shares of FZ stock is $0, calculated as $9.375x (the amount in the account before the adjustments described in paragraph (d)(4)(i)(C) of this section) less $9.375x (the adjustment described in paragraph (d)(4)(i)(C) of this section with respect to the account). (iii) Alternative facts - imputation system that taxes shareholders. The facts are the same as in paragraph (g)(2)(i) of this section, except that under Country Z tax law the $1,000x dividend to FX is subject to a 30% gross basis withholding tax, or $300x, and the $187.5x refundable tax credit is applied against and reduces the withholding tax to $112.5x. The $187.5x refundable tax credit provided to FX is not a hybrid deduction because FX was subject to Country Z withholding tax of $300x on the $1,000x dividend (such withholding tax being greater than the $187.5x credit). See paragraph (d)(2)(i) of this section. If instead FZ were allowed a $1,000x dividends paid deduction for the $1,000x dividend (and FX were not allowed the refundable tax credit) and the dividend were subject to 5% gross basis withholding tax (or $50x), then $750x of the dividends paid deduction would be a hybrid deduction, calculated as the excess of $1,000x (the dividends paid deduction) over $250x (the amount of income that under Country Z tax law would produce an amount of tax equal to the $50x of withholding tax, calculated as $50x, the amount of withholding tax, divided by 0.2, the Country Z corporate tax rate). See paragraph (d)(2)(i) of this section. (h) Applicability dates --(1) In general. Except as provided in paragraph (h)(2) of this section, this section applies to distributions made after December 31, 2017, provided that such distributions occur during taxable years ending on or after December 20, 2018. However, taxpayers may apply this section in its entirety to distributions made after December 31, 2017 and occurring during taxable years ending before December 20, 2018. In lieu of applying the regulations in this section, taxpayers may apply the provisions matching this section from the Internal Revenue Bulletin (IRB) 2019-03 (https://www.irs.gov/pub/irs-irbs/irb19-03.pdf) in their entirety for all taxable years ending on or before April 8, 2020. (2) [Reserved] Par. 3. Sections 1.267A-1 through 1.267A-7 are added to read as follows: Sec. 1.267A-1 Disallowance of certain interest and royalty deductions. 1.267A-2 Hybrid and branch arrangements. 1.267A-3 Income inclusions and amounts not treated as disqualified hybrid amounts. 1.267A-4 Disqualified imported mismatch amounts. 1.267A-5 Definitions and special rules. 1.267A-6 Examples. 1.267A-7 Applicability dates. §1.267A-1 Disallowance of certain interest and royalty deductions. (a) Scope. This section and §§1.267A-2 through 1.267A-5 provide rules regarding when a deduction for any interest or royalty paid or accrued is disallowed under section 267A. Section 1.267A-2 describes hybrid and branch arrangements. Section 1.267A-3 provides rules for determining income inclusions and provides that certain amounts are not amounts for which a deduction is disallowed. Section 1.267A-4 provides an imported mismatch rule. Section 1.267A-5 sets forth definitions and special rules that apply for purposes of section 267A. Section 1.267A-6 illustrates the application of section 267A through examples. Section 1.267A-7 provides applicability dates. (b) Disallowance of deduction. This paragraph (b) sets forth the exclusive circumstances in which a deduction is disallowed under section 267A. Except as provided in paragraph (c) of this section, a specified party's deduction for any interest or royalty paid or accrued (the amount paid or accrued with respect to the specified party, a specified payment ) is disallowed under section 267A to the extent that the specified payment is described in this paragraph (b). See also §1.267A-5(b)(5) (treating structured payments as interest paid or accrued for purposes of section 267A and the regulations in this part under section 267A). A specified payment is described in this paragraph (b) to the extent that it is-- (1) A disqualified hybrid amount, as described in §1.267A-2 (hybrid and branch arrangements); (2) A disqualified imported mismatch amount, as described in §1.267A-4 (payments offset by a hybrid deduction); or (3) A specified payment for which the requirements of the anti-avoidance rule of §1.267A-5(b)(6) are satisfied. (c) De minimis exception. Paragraph (b) of this section does not apply to a specified party for a taxable year in which the sum of the specified party's specified payments that but for this paragraph (c) would be described in paragraph (b) of this section is less than $50,000. For purposes of this paragraph (c), specified parties that are related (within the meaning of §1.267A-5(a)(14)) are treated as a single specified party. §1.267A-2 Hybrid and branch arrangements. (a) Payments pursuant to hybrid transactions --(1) In general. If a specified payment is made pursuant to a hybrid transaction, then, subject to §1.267A-3(b) (amounts included or includible in income), the payment is a disqualified hybrid amount to the extent that-- (i) A specified recipient of the payment does not include the payment in income, as determined under §1.267A-3(a) (to such extent, a no-inclusion ); and (ii) The specified recipient's no-inclusion is a result of the payment being made pursuant to the hybrid transaction. For purposes of this paragraph (a)(1)(ii), the specified recipient's no-inclusion is a result of the specified payment being made pursuant to the hybrid transaction to the extent that the no-inclusion would not occur were the specified recipient's tax law to treat the payment as interest or a royalty, as applicable. See §1.267A-6(c)(1) and (2) for examples illustrating the application of paragraph (a) of this section. (2) Definition of hybrid transaction --(i) In general. The term hybrid transaction means any transaction, series of transactions, agreement, or instrument one or more payments with respect to which are treated as interest or royalties for U.S. tax purposes but are not so treated for purposes of the tax law of a specified recipient of the payment. Examples of a hybrid transaction include an instrument a payment with respect to which is treated as interest for U.S. tax purposes but, for purposes of a specified recipient's tax law, is treated as a distribution with respect to equity or a recovery of principal with respect to indebtedness. (ii) Special rules --(A) Long-term deferral. A specified payment is deemed to be made pursuant to a hybrid transaction if the taxable year in which a specified recipient of the payment takes the payment into account in income under its tax law (or, based on all the facts and circumstances, is reasonably expected to take the payment into account in income under its tax law) ends more than 36 months after the end of the taxable year in which the specified party would be allowed a deduction for the payment under U.S. tax law. In addition, if the tax law of a specified recipient of the specified payment does not impose an income tax, then such tax law does not cause the payment to be deemed to be made pursuant to a hybrid transaction under this paragraph (a)(2)(ii)(A). See §1.267A-6(c)(8) for an example illustrating the application of this paragraph (a)(2)(ii)(A) in the context of the imported mismatch rule. (B) Royalties treated as payments in exchange for property under foreign law. In the case of a specified payment that is a royalty for U.S. tax purposes and for purposes of the tax law of a specified recipient of the payment is consideration received in exchange for property, the tax law of the specified recipient is not treated as causing the payment to be made pursuant to a hybrid transaction. (C) Coordination with disregarded payment rule. A specified payment is not considered made pursuant to a hybrid transaction if the payment is a disregarded payment, as described in paragraph (b)(2) of this section. (3) Payments pursuant to securities lending transactions, sale-repurchase transactions, or similar transactions. This paragraph (a)(3) applies if a specified payment is made pursuant to a repo transaction and is not regarded under a foreign tax law, but another amount connected to the payment (the connected amount ) is regarded under such foreign tax law. For purposes of this paragraph (a)(3), a repo transaction means a transaction one or more payments with respect to which are treated as interest (as defined in §1.267A-5(a)(12)) or a structured payment (as defined in §1.267A-5(b)(5)(ii)) for U.S. tax purposes and that is a securities lending transaction or sale-repurchase transaction (including as described in §1.861-2(a)(7)), or other similar transaction or series of related transactions in which legal title to property is transferred and the property (or similar property, such as securities of the same class and issue) is reacquired or expected to be reacquired. For example, this paragraph (a)(3) applies if a specified payment arising from characterizing a repo transaction of stock in accordance with its substance (that is, characterizing the specified payment as interest) is not regarded as such under a foreign tax law but an amount consistent with the form of the transaction (such as a dividend) is regarded under such foreign tax law. When this paragraph (a)(3) applies, the determination of the identity of a specified recipient of the specified payment under the foreign tax law is made with respect to the connected amount. In addition, if the specified recipient includes the connected amount in income (as determined under §1.267A-3(a), by treating the connected amount as the specified payment), then the amount of the specified recipient's no-inclusion with respect to the specified payment is correspondingly reduced. Further, the principles of this paragraph (a)(3) apply to cases similar to repo transactions in which a foreign tax law does not characterize the transaction in accordance with its substance. See §1.267A-6(c)(2) for an example illustrating the application of this paragraph (a)(3). (4) Payments pursuant to interest-free loans and similar arrangements. In the case of a specified payment that is interest for U.S. tax purposes, the following special rules apply: (i) The payment is deemed to be made pursuant to a hybrid transaction to the extent that-- (A) Under U.S. tax law, the payment is imputed (for example, under section 482 or 7872, including because the instrument pursuant to which it is made is indebtedness but the terms of the instrument provide for an interest rate equal to or less than the risk-free rate or the rate on sovereign debt with similar terms in the relevant foreign currency); and (B) A tax resident or taxable branch to which the payment is made does not take the payment into account in income under its tax law because such tax law does not impute any interest. The rules of paragraph (b)(4) of this section apply for purposes of determining whether the specified payment is made indirectly to a tax resident or taxable branch. (ii) A tax resident or taxable branch the tax law of which causes the payment to be deemed to be made pursuant to a hybrid transaction under paragraph (a)(4)(i) of this section is deemed to be a specified recipient of the payment for purposes of paragraph (a)(1) of this section. (b) Disregarded payments --(1) In general. Subject to §1.267A-3(b) (amounts included or includible in income), the excess (if any) of the sum of a specified party's disregarded payments for a taxable year over its dual inclusion income for the taxable year is a disqualified hybrid amount. See §1.267A-6(c)(3) and (4) for examples illustrating the application of paragraph (b) of this section. (2) Definition of disregarded payment --(i) In general. The term disregarded payment means a specified payment to the extent that, under the tax law of a tax resident or taxable branch to which the payment is made, the payment is not regarded (for example, because under such tax law it is a payment involving a single taxpayer or members of a group) and, were the payment to be regarded (and treated as interest or a royalty, as applicable) under such tax law, the tax resident or taxable branch would include the payment in income, as determined under §1.267A-3(a). (ii) Special rules --(A) Foreign consolidation and similar regimes. A disregarded payment includes a specified payment that, under the tax law of a tax resident or taxable branch to which the payment is made, is a payment that gives rise to a deduction or similar offset allowed to the tax resident or taxable branch (or group of entities that include the tax resident or taxable branch) under a foreign consolidation, fiscal unity, group relief, loss sharing, or any similar regime. (B) Certain payments of a U.S. taxable branch. In the case of a specified payment of a U.S. taxable branch, the payment is not a disregarded payment to the extent that under the tax law of the tax resident to which the payment is made the payment is otherwise taken into account. See paragraph (c)(2) of this section for an example of when an amount may be otherwise taken into account. (C) Coordination with other hybrid and branch arrangements. A disregarded payment does not include a deemed branch payment described in paragraph (c)(2) of this section, a specified payment pursuant to a repo transaction or similar transaction described in paragraph (a)(3) of this section, or a specified payment pursuant to an interest-free loan or similar transaction described in paragraph (a)(4) of this section. (3) Definition of dual inclusion income --(i) In general. With respect to a specified party, the term dual inclusion income means the excess, if any, of-- (A) The sum of the specified party's items of income or gain for U.S. tax purposes that are included in the specified party's income, as determined under §1.267A-3(a) (by treating the items of income or gain as the specified payment; and, in the case of a specified party that is a CFC, by treating U.S. tax law as the CFC's tax law), to the extent the items of income or gain are included in the income of the tax resident or taxable branch to which the disregarded payments are made, as determined under §1.267A-3(a) (by treating the items of income or gain as the specified payment); over (B) The sum of the specified party's items of deduction or loss for U.S. tax purposes (other than deductions for disregarded payments), to the extent the items of deduction or loss are allowable (or have been or will be allowable during a taxable year that ends no more than 36 months after the end of the specified party's taxable year) under the tax law of the tax resident or taxable branch to which the disregarded payments are made. (ii) Special rule for certain dividends. An item of income or gain of a specified party that is included in the specified party's income but not included in the income of the tax resident or taxable branch to which the disregarded payments are made is considered described in paragraph (b)(3)(i)(A) of this section to the extent that, under the tax resident's or taxable branch's tax law, the item is a dividend that would have been included in the income of the tax resident or taxable branch but for an exemption, exclusion, deduction, credit, or other similar relief particular to the item, provided that the party paying the item is not allowed a deduction or other tax benefit for it under its tax law. Similarly, an item of income or gain of a specified party that is included in the income of the tax resident or taxable branch to which the disregarded payments are made but not included in the specified party's income is considered described in paragraph (b)(3)(ii)(A) of this section to the extent that, under U.S. tax law, the item is a dividend that would have been included in the income of the specified party but for a dividends received deduction with respect to the dividend (for example, a deduction under section 245A(a)), provided that the party paying the item is not allowed a deduction or other tax benefit for it under its tax law. See §1.267A-6(c)(3)(iv) for an example illustrating the application of this paragraph (b)(3)(ii). (4) Payments made indirectly to a tax resident or taxable branch. A specified payment made to an entity an interest of which is directly or indirectly (determined under the rules of section 958(a) without regard to whether an intermediate entity is foreign or domestic, or under substantially similar rules under a tax resident's or taxable branch's tax law) owned by a tax resident or taxable branch is considered made to the tax resident or taxable branch to the extent that, under the tax law of the tax resident or taxable branch, the entity to which the payment is made is fiscally transparent (and all intermediate entities, if any, are also fiscally transparent). (c) Deemed branch payments --(1) In general. If a specified payment is a deemed branch payment, then the payment is a disqualified hybrid amount if the tax law of the home office provides an exclusion or exemption for income attributable to the branch. See §1.267A-6(c)(4) for an example illustrating the application of this paragraph (c). (2) Definition of deemed branch payment. The term deemed branch payment means, with respect to a U.S. taxable branch that is a U.S. permanent establishment of a treaty resident eligible for benefits under an income tax treaty between the United States and the treaty country, any amount of interest or royalties allowable as a deduction in computing the business profits of the U.S. permanent establishment, to the extent the amount is deemed paid to the home office (or other branch of the home office), is not regarded (or otherwise taken into account) under the home office's tax law (or the other branch's tax law), and, were the payment to be regarded (and treated as interest or a royalty, as applicable) under the home office's tax law (or other branch's tax law), the home office (or other branch) would include the payment in income, as determined under §1.267A-3(a). An amount may be otherwise taken into account for purposes of this paragraph (c)(2) if, for example, under the home office's tax law a corresponding amount of interest or royalties is allocated and attributable to the U.S. permanent establishment and is therefore not deductible. (d) Payments to reverse hybrids --(1) In general. If a specified payment is made to a reverse hybrid, then, subject to §1.267A-3(b) (amounts included or includible in income), the payment is a disqualified hybrid amount to the extent that-- (i) An investor, the tax law of which treats the reverse hybrid as not fiscally transparent, does not include the payment in income, as determined under §1.267A-3(a) (to such extent, a no-inclusion ); and (ii) The investor's no-inclusion is a result of the payment being made to the reverse hybrid. For purposes of this paragraph (d)(1)(ii), the investor's no-inclusion is a result of the specified payment being made to the reverse hybrid to the extent that the no-inclusion would not occur were the investor's tax law to treat the reverse hybrid as fiscally transparent (and treat the payment as interest or a royalty, as applicable). See §1.267A-6(c)(5) for an example illustrating the application of paragraph (d) of this section. (2) Definition of reverse hybrid. The term reverse hybrid means an entity (regardless of whether domestic or foreign) that is fiscally transparent under the tax law of the country in which it is created, organized, or otherwise established but not fiscally transparent under the tax law of an investor of the entity. (3) Payments made indirectly to a reverse hybrid. A specified payment made to an entity an interest of which is directly or indirectly (determined under the rules of section 958(a) without regard to whether an intermediate entity is foreign or domestic, or under substantially similar rules under a tax resident's or taxable branch's tax law) owned by a reverse hybrid is considered made to the reverse hybrid to the extent that, under the tax law of an investor of the reverse hybrid, the entity to which the payment is made is fiscally transparent (and all intermediate entities, if any, are also fiscally transparent). (4) Exception for inclusion by taxable branch in establishment country. Paragraph (d)(1) of this section does not apply to a specified payment made to a reverse hybrid to the extent that a taxable branch located in the country in which the reverse hybrid is created, organized, or otherwise established (and the activities of which are carried on by one or more investors of the reverse hybrid) includes the payment in income, as determined under §1.267A-3(a). (e) Branch mismatch payments --(1) In general. If a specified payment is a branch mismatch payment, then, subject to §1.267A-3(b) (amounts included or includible in income), the payment is a disqualified hybrid amount to the extent that-- (i) A home office, the tax law of which treats the payment as income attributable to a branch of the home office, does not include the payment in income, as determined under §1.267A-3(a) (to such extent, a no-inclusion ); and (ii) The home office's no-inclusion is a result of the payment being a branch mismatch payment. For purposes of this paragraph (e)(1)(ii), the home office's no-inclusion is a result of the specified payment being a branch mismatch payment to the extent that the no-inclusion would not occur were the home office's tax law to treat the payment as income that is not attributable a branch of the home office (and treat the payment as interest or a royalty, as applicable). See §1.267A-6(c)(6) for an example illustrating the application of paragraph (e) of this section. (2) Definition of branch mismatch payment. The term branch mismatch payment means a specified payment for which the following requirements are satisfied: (i) Under a home office's tax law, the payment is treated as income attributable to a branch of the home office; and (ii) Either-- (A) The branch is not a taxable branch; or (B) Under the branch's tax law, the payment is not treated as income attributable to the branch. (f) Relatedness or structured arrangement limitation. A specified recipient, a tax resident or taxable branch to which a specified payment is made, an investor, or a home office is taken into account for purposes of paragraphs (a), (b), (d), and (e) of this section, respectively, only if the specified recipient, the tax resident or taxable branch, the investor, or the home office, as applicable, is related (as defined in §1.267A-5(a)(14)) to the specified party or is a party to a structured arrangement (as defined in §1.267A-5(a)(20)) pursuant to which the specified payment is made. §1.267A-3 Income inclusions and amounts not treated as disqualified hybrid amounts. (a) Income inclusions --(1) General rule. For purposes of section 267A, a tax resident or taxable branch includes in income a specified payment to the extent that, under the tax law of the tax resident or taxable branch-- (i) It takes the payment into account (or has taken the payment into account, or, based on all the facts and circumstances, is reasonably expected to take the payment into account during a taxable year that ends no more than 36 months after the end of the specified party's taxable year) in its income or tax base at the full marginal rate imposed on ordinary income (or, if different, the full marginal rate imposed on interest or a royalty, as applicable); and (ii) The payment is not reduced or offset by an exemption, exclusion, deduction, credit (other than for withholding tax imposed on the payment), or other similar relief particular to such type of payment. Examples of such reductions or offsets include a participation exemption, a dividends received deduction, a deduction or exclusion with respect to a particular category of income (such as income attributable to a branch, or royalties under a patent box regime), a credit for underlying taxes paid by a corporation from which a dividend is received, and a recovery of basis with respect to stock or a recovery of principal with respect to indebtedness. A specified payment is not considered reduced or offset by a deduction or other similar relief particular to the type of payment if it is offset by a generally applicable deduction or other tax attribute, such as a deduction for depreciation or a net operating loss. For purposes of this paragraph (a)(1)(ii), a deduction may be treated as being generally applicable even if it arises from a transaction related to the specified payment (for example, if the deduction and payment are in connection with a back-to-back financing arrangement). (2) Coordination with foreign hybrid mismatch rules. Whether a tax resident or taxable branch includes in income a specified payment is determined without regard to any defensive or secondary rule contained in hybrid mismatch rules, if any, under the tax law of the tax resident or taxable branch. For purposes of this paragraph (a)(2), a defensive or secondary rule means a provision of hybrid mismatch rules that requires a tax resident or taxable branch to include an amount in income if a deduction for the amount is not disallowed under the payer's tax law. However, a defensive or secondary rule does not include a rule pursuant to which a participation exemption or similar relief particular to a dividend is inapplicable as to a dividend for which the payer is allowed a deduction or other tax benefit under its tax law. Thus, a defensive or secondary rule does not include a rule consistent with recommendation 2.1 in Chapter 2 of OECD/G-20, Neutralising the Effects of Hybrid Mismatch Arrangements, Action 2: 2015 Final Report (October 2015). (3) Inclusions with respect to reverse hybrids. With respect to a tax resident or taxable branch that is an investor of a reverse hybrid, whether the investor includes in income a specified payment made to the reverse hybrid is determined without regard to a distribution from the reverse hybrid (or the right to a distribution from the reverse hybrid triggered by the payment). However, if the reverse hybrid distributes all of its income during a taxable year, then, for that year, the determination of whether an investor includes in income a specified payment made to the reverse hybrid is made with regard to one or more distributions from the reverse hybrid during the year, by treating a portion of the specified payment as relating to each distribution during the year. For purposes of this paragraph (a)(3), the portion of the specified payment that is considered to relate to a distribution is the lesser of-- (i) The specified payment multiplied by a fraction, the numerator of which is the amount of the distribution and the denominator of which is the aggregate amount of distributions from the reverse hybrid during the taxable year; and (ii) The amount of the distribution multiplied by a fraction, the numerator of which is the specified payment and the denominator of which is the sum of all specified payments made to the reverse hybrid during the taxable year. (4) Inclusions with respect to certain payments pursuant to hybrid transactions. This paragraph (a)(4) applies to a specified payment that is interest and that is made pursuant to a hybrid transaction, to the extent that, under the tax law of a specified recipient of the payment, the payment is a recovery of basis with respect to stock or a recovery of principal with respect to indebtedness such that, but for this paragraph (a)(4), a no-inclusion would occur with respect to the specified recipient. In such a case, an amount that is a repayment of principal for U.S. tax purposes and that is or has been paid (or, based on all the facts and circumstances, is reasonably expected to be paid) by the specified party pursuant to the hybrid transaction (such amount, the principal payment ) is, to the extent included in the income of the specified recipient, treated as correspondingly reducing the specified recipient's no-inclusion with respect to the specified payment. For purposes of this paragraph (a)(4), whether the specified recipient includes the principal payment in income is determined under paragraph (a)(1) of this section, by treating the principal payment as the specified payment and the taxable year period described in paragraph (a)(1) as being composed of taxable years of the specified recipient ending no more than 36 months after the end of the specified party's taxable year during which the specified payment is made (as opposed to, for example, being composed of taxable years of the specified recipient ending no more than 36 months after the end of the specified party's taxable year during which the principal payment is reasonably expected to be made). Moreover, once a principal payment reduces a no-inclusion with respect to a specified payment, it is not again taken into account for purposes of applying this paragraph (a)(4) to another specified payment. See §1.267A-6(c)(1)(vi) for an example illustrating the application of this paragraph (a)(4). (5) Deemed full inclusions and de minimis inclusions. A preferential rate, exemption, exclusion, deduction, credit, or similar relief particular to a type of payment that reduces or offsets 90 percent or more of the payment is considered to reduce or offset 100 percent of the payment. In addition, a preferential rate, exemption, exclusion, deduction, credit, or similar relief particular to a type of payment that reduces or offsets 10 percent or less of the payment is considered to reduce or offset none of the payment. (b) Certain amounts not treated as disqualified hybrid amounts to extent included or includible in income for U.S. tax purposes --(1) In general. A specified payment, to the extent that but for this paragraph (b) it would be a disqualified hybrid amount (such amount, a tentative disqualified hybrid amount ), is reduced under the rules of paragraphs (b)(2) through (4) of this section, as applicable. The tentative disqualified hybrid amount, as reduced under such rules, is the disqualified hybrid amount. See §1.267A-6(c)(3) and (7) for examples illustrating the application of paragraph (b) of this section. (2) Included in income of United States tax resident or U.S. taxable branch. A tentative disqualified hybrid amount is reduced to the extent that a specified recipient that is a tax resident of the United States or a U.S. taxable branch takes the tentative disqualified hybrid amount into account in determining its gross income. (3) Includible in income under section 951(a)(1)(A). A tentative disqualified hybrid amount is reduced to the extent that the tentative disqualified hybrid amount is received by a CFC and includible under section 951(a)(1)(A) (determined without regard to properly allocable deductions of the CFC, qualified deficits under section 952(c)(1)(B), and the earnings and profits limitation under §1.952-1(c)) in the gross income of a United States shareholder of the CFC. However, if the United States shareholder is a domestic partnership, then the amount includible under section 951(a)(1)(A) in the gross income of the United States shareholder reduces the tentative disqualified hybrid amount only to the extent that a tax resident of the United States would take into account the amount. (4) Includible in income under section 951A(a). A tentative disqualified hybrid amount is reduced to the extent that the tentative disqualified hybrid amount increases a United States shareholder's pro rata share of tested income (as determined under §§1.951A-1(d)(2) and 1.951A-2(b)(1)) with respect to a CFC, reduces the shareholder's pro rata share of tested loss (as determined under §§1.951A-1(d)(4) and 1.951A-2(b)(2)) of the CFC, or both. However, to the extent that a deduction for the tentative disqualified hybrid amount would be allowed to a tax resident of the United States or a U.S. taxable branch, or would be allowed to a CFC but would be allocated and apportioned to gross income of the CFC that is gross income taken into account in determining subpart F income (as described in section 952) or gross income that is effectively connected (or treated as effectively connected) with the conduct of a trade or business in the United States (as described in §1.882-4(a)(1)), the reduction provided under this paragraph (b)(4) is equal to the reduction that would be provided under this paragraph (b)(4) but for this sentence multiplied by the difference of 100 percent and the percentage described in section 250(a)(1)(B). (5) Includible in income under section 1293. A tentative disqualified hybrid amount is reduced to the extent that the tentative disqualified hybrid amount is received by a qualified electing fund (as described in section 1295) and is includible under section 1293 in the gross income of a United States person that owns stock of that fund. However, if the United States person is a domestic partnership, then the amount includible under section 1293 in the gross income of the United States person reduces the tentative disqualified hybrid amount only to the extent that a tax resident of the United States would take into account the amount. §1.267A-4 Disqualified imported mismatch amounts. (a) Disqualified imported mismatch amounts --(1) Rule. An imported mismatch payment is a disqualified imported mismatch amount to the extent that, under the set-off rules of paragraph (c) of this section, the income attributable to the payment is directly or indirectly offset by a hybrid deduction incurred by a foreign tax resident or foreign taxable branch that is related to the imported mismatch payer (or that is a party to a structured arrangement pursuant to which the payment is made). See §1.267A-6(c)(8) through (12) for examples illustrating the application of this section. (2) Definitions of certain terms. The following definitions apply for purposes of this section: (i) A foreign tax resident means a tax resident that is not a tax resident of the United States. (ii) A foreign taxable branch means a taxable branch that is not a U.S. taxable branch. (iii) An imported mismatch payee means, with respect to an imported mismatch payment, a foreign tax resident or foreign taxable branch that includes the payment in income, as determined under §1.267A-3(a). (iv) An imported mismatch payer means, with respect to an imported mismatch payment, the specified party. (v) An imported mismatch payment means a specified payment to the extent that it is neither a disqualified hybrid amount nor included or includible in income in the United States. For purposes of this paragraph (a)(2)(v), a specified payment is included or includible in income in the United States to the extent that, if the payment were a tentative disqualified hybrid amount (as described in §1.267A-3(b)(1)), it would be reduced under the rules of §1.267A-3(b)(2) through (5). (b) Hybrid deduction --(1) In general. A hybrid deduction means any of the following: (i) A deduction allowed to a foreign tax resident or foreign taxable branch under its tax law for an amount paid or accrued that is interest (including an amount that would be a structured payment under the principles of §1.267A-5(b)(5)(ii)) or royalty under such tax law, to the extent that a deduction for the amount would be disallowed if such tax law contained rules substantially similar to those under §§1.267A-1 through 1.267A-3 and 1.267A-5. Such a deduction is a hybrid deduction regardless of whether or how the amount giving rise to the deduction would be recognized under U.S. tax law. (ii) A deduction allowed to a foreign tax resident or foreign taxable branch under its tax law with respect to equity (including deemed equity), such as a notional interest deduction (or similar deduction determined with respect to the foreign tax resident's or foreign taxable branch's equity). However, a deduction allowed to a foreign tax resident or foreign taxable branch with respect to equity is a hybrid deduction only to the extent that an investor of the foreign tax resident, or the home office of the foreign taxable branch, would include the amount in income if, for purposes of the investor's or home office's tax law, the amount were interest paid by the foreign tax resident ratably (by value) with respect to the interests of the foreign tax resident, or interest paid by the foreign taxable branch to the home office. For purposes of this paragraph (b)(1)(ii), the rules of §1.267A-3(a) apply to determine the extent that an investor or home office would include an amount in income, by treating the amount as the specified payment. (2) Special rules --(i) Foreign tax law contains hybrid mismatch rules. In the case of a foreign tax resident or foreign taxable branch the tax law of which contains hybrid mismatch rules, only the following deductions allowed to the foreign tax resident or foreign taxable branch under its tax law are hybrid deductions: (A) A deduction described in paragraph (b)(1)(i) of this section, to the extent that the deduction would be disallowed if the foreign tax resident's or foreign taxable branch's tax law-- ( 1 ) Contained a rule substantially similar to §1.267A-2(a)(4) (payments pursuant to interest-free loans and similar arrangements); or ( 2 ) Did not permit an inclusion in income in a third country to discharge the application of its hybrid mismatch rules as to the amount giving rise to the deduction when the amount is not included in income in another country as a result of a hybrid or branch arrangement. (B) A deduction described in paragraph (b)(1)(ii) of this section (deductions with respect to equity). (ii) Dual inclusion income used to determine hybrid deductions arising from deemed branch payments in certain cases. In the case of a foreign taxable branch the tax law of which permits a loss of the foreign taxable branch to be shared with a tax resident or taxable branch (without regard to whether it is in fact so shared or whether there is a tax resident or taxable branch with which the loss can be shared), a deduction allowed to the foreign taxable branch for an amount that would be a deemed branch payment were such tax law to contain a provision substantially similar to §1.267A-2(c) is a hybrid deduction to the extent of the excess (if any) of the sum of all such amounts over the foreign taxable branch's dual inclusion income (as determined under the principles of §1.267A-2(b)(3)). The rule in this paragraph (b)(2)(ii) applies without regard to whether the tax law of the home office provides an exclusion or exemption for income attributable to the branch. (iii) Certain deductions are hybrid deductions only if allowed for an accounting period beginning on or after December 20, 2018. A deduction described in paragraph (b)(1)(ii) of this section (deductions with respect to equity), or a deduction that would be disallowed if the foreign tax resident's or foreign taxable branch's tax law contained a rule substantially similar to §1.267A-2(a)(4) (payments pursuant to interest-free loans and similar arrangements), is a hybrid deduction only if allowed for an accounting period beginning on or after December 20, 2018. (iv) Certain deductions of a CFC are not hybrid deductions. A deduction that but for this paragraph (b)(2)(iv) would be a hybrid deduction is not a hybrid deduction to the extent that the amount paid or accrued giving rise to the deduction is-- (A) A disqualified hybrid amount (but subject to the special rule of paragraph (g) of this section); or (B) Included or includible in income in the United States. For purposes of this paragraph (b)(2)(iv)(B), an amount is included or includible in income in the United States to the extent that, if the amount were a tentative disqualified hybrid amount (as described in §1.267A-3(b)(1)), it would be reduced under the rules of §1.267A-3(b)(2) through (5). (v) Loss carryovers. A hybrid deduction for a particular accounting period includes a loss carryover from another accounting period, but only to the extent that a hybrid deduction incurred in an accounting period ending on or after December 20, 2018, comprises the loss carryover. (c) Set-off rules --(1) In general. In the order described in paragraph (c)(2) of this section, a hybrid deduction directly or indirectly offsets the income attributable to an imported mismatch payment to the extent that, under paragraph (c)(3) of this section, the payment directly or indirectly funds the hybrid deduction. The rules of paragraphs (c)(2) and (3) of this section are applied by taking into account the application of paragraph (c)(4) of this section (adjustments to ensure that amounts not taken into account more than once). (2) Ordering rules. The following ordering rules apply for purposes of determining the extent that a hybrid deduction directly or indirectly offsets income attributable to imported mismatch payments. (i) First, the hybrid deduction offsets income attributable to a factually-related imported mismatch payment that directly or indirectly funds the hybrid deduction. For purposes of this paragraph (c)(2)(i), a factually-related imported mismatch payment means an imported mismatch payment that is made pursuant to a transaction, agreement, or instrument entered into pursuant to the same plan or series of related transactions that includes the transaction, agreement, or instrument pursuant to which the hybrid deduction is incurred, provided that a design of the plan or series of related transactions was for the hybrid deduction to offset income attributable to the payment (as determined under the principles of §1.267A-5(a)(20)(i), by treating the offset as the "hybrid mismatch" described in §1.267A-5(a)(20)(i)). (ii) Second, to the extent remaining, the hybrid deduction offsets income attributable to an imported mismatch payment (other than a factually-related imported mismatch payment) that directly funds the hybrid deduction. (iii) Third, to the extent remaining, the hybrid deduction offsets income attributable to an imported mismatch payment (other than a factually-related imported mismatch payment) that indirectly funds the hybrid deduction. (3) Funding rules. The following funding rules apply for purposes of determining the extent that an imported mismatch payment directly or indirectly funds a hybrid deduction. (i) The imported mismatch payment directly funds a hybrid deduction to the extent that the imported mismatch payee incurs the hybrid deduction. (ii) The imported mismatch payment indirectly funds a hybrid deduction to the extent that the imported mismatch payee is allocated the hybrid deduction, and provided that the imported mismatch payee is related to the imported mismatch payer (or is a party to a structured arrangement pursuant to which the imported mismatch payment is made). (iii) The imported mismatch payee is allocated a hybrid deduction to the extent that the imported mismatch payee directly or indirectly makes a funded taxable payment to the foreign tax resident or foreign taxable branch that incurs the hybrid deduction. (iv) An imported mismatch payee indirectly makes a funded taxable payment to the foreign tax resident or foreign taxable branch that incurs a hybrid deduction to the extent that a chain of funded taxable payments connects the imported mismatch payee, each intermediary foreign tax resident or foreign taxable branch, and the foreign tax resident or foreign taxable branch that incurs the hybrid deduction, and provided that each intermediary foreign tax resident or foreign taxable branch is related to the imported mismatch payer (or is a party to a structured arrangement pursuant to which the imported mismatch payment is made). (v) The term funded taxable payment means an amount paid or accrued by a foreign tax resident or foreign taxable branch under its tax law (other than an amount that gives rise to a hybrid deduction), to the extent that-- (A) The amount is deductible (but, if such tax law contains hybrid mismatch rules, determined without regard to a provision substantially similar to this section); (B) Another foreign tax resident or foreign taxable branch includes the amount in income, as determined under §1.267A-3(a) (by treating the amount as the specified payment); and (C) The amount is neither a disqualified hybrid amount (but subject to the special rule of paragraph (g) of this section) nor included or includible in income in the United States. For purposes of this paragraph (c)(3)(v)(C), an amount is included or includible in income in the United States to the extent that, if the amount were a tentative disqualified hybrid amount (as described in §1.267A-3(b)(1)), it would be reduced under the rules of §1.267A-3(b)(2) through (5). (vi) If a deduction or loss that is not incurred by a foreign tax resident or foreign taxable branch is directly or indirectly made available to offset income of the foreign tax resident or foreign taxable branch under its tax law, then, for purposes of this paragraph (c), the foreign tax resident or foreign taxable branch to which the deduction or loss is made available and the foreign tax resident or foreign taxable branch that incurs the deduction or loss are treated as a single foreign tax resident or foreign taxable branch. For example, if a deduction or loss of one foreign tax resident is made available to offset income of another foreign tax resident under a tax consolidation, fiscal unity, group relief, loss sharing, or any similar regime, then the foreign tax residents are treated as a single foreign tax resident for purposes of this paragraph (c). (vii) An imported mismatch payee that directly makes a funded taxable payment to the foreign tax resident or foreign taxable branch that incurs a hybrid deduction is allocated the hybrid deduction before the hybrid deduction (to the extent remaining) is allocated to an imported mismatch payee that indirectly makes a funded taxable payment to the foreign tax resident or foreign taxable branch that incurs the hybrid deduction. (viii) An imported mismatch payee that, through a chain of funded taxable payments consisting of a particular number of funded taxable payments, indirectly makes a funded taxable payment to the foreign tax resident or foreign taxable branch that incurs a hybrid deduction is allocated the hybrid deduction before the hybrid deduction (to the extent remaining) is allocated to an imported mismatch payee that, through a chain of funded taxable payments consisting of a greater number of funded taxable payments, indirectly makes a funded taxable payment to the foreign tax resident or foreign taxable branch that incurs the hybrid deduction. (4) Adjustments to ensure amounts not taken into account more than once. To the extent that the income attributable to an imported mismatch payment is directly or indirectly offset by a hybrid deduction, the imported mismatch payment, the hybrid deduction, and, if applicable, each funded taxable payment comprising the chain of funded taxable payments connecting the imported mismatch payee, each intermediary foreign tax resident or foreign taxable branch, and the foreign tax resident or foreign taxable branch that incurs the hybrid deduction is correspondingly reduced; as a result, such amounts are not again taken into account under this section. (d) Calculations based on aggregate amounts during accounting period. For purposes of this section, amounts are determined on an accounting period basis. Thus, for example, the amount of imported mismatch payments made by an imported mismatch payer to a particular imported mismatch payee is equal to the aggregate amount of all such payments made by the imported mismatch payer during the accounting period. (e) Pro rata adjustments. Amounts are allocated on a pro rata basis if there would otherwise be more than one permissible manner in which to allocate the amounts. Thus, for example, if multiple imported mismatch payers make an imported mismatch payment to a single imported mismatch payee, the sum of such payments exceeds the hybrid deduction incurred by the imported mismatch payee, and the payments are not factually-related imported mismatch payments, then a pro rata portion of each imported mismatch payer's payment is considered to directly fund the hybrid deduction. See §1.267A-6(c)(9) and (12) for examples illustrating the application of this paragraph (e). (f) Special rules regarding manner in which this section is applied --(1) Initial application of this section. This section is first applied without regard to paragraph (f)(2) of this section and by taking into account only the following hybrid deductions: (i) A hybrid deduction described in paragraph (b)(1)(i) of this section, to the extent that-- (A) The deduction would be disallowed if the foreign tax resident's or foreign taxable branch's tax law contained a rule substantially similar to §1.267A-2(a)(4) (payments pursuant to interest-free loans and similar arrangements); or (B) The paid or accrued amount giving rise to the deduction is included in income in a third country but is not included in income in another country as a result of a hybrid or branch arrangement. (ii) A hybrid deduction described in paragraph (b)(1)(ii) of this section (deductions with respect to equity). (2) Subsequent application of this section takes into account certain amounts deemed to be imported mismatch payments. After this section is applied pursuant to the rules of paragraph (f)(1) of this section, the section is then applied by taking into account only hybrid deductions other than those described in paragraph (f)(1) of this section. In addition, when applying this section in the manner described in the previous sentence, for purposes of determining the extent to which the income attributable to an imported mismatch payment is directly or indirectly offset by a hybrid deduction, an amount paid or accrued by a foreign tax resident or foreign taxable branch that is not a specified party is deemed to be an imported mismatch payment (and such foreign tax resident or foreign taxable branch and a foreign tax resident or foreign taxable branch that includes the amount in income, as determined under §1.267A-3(a), by treating the amount as the specified payment, are deemed to be an imported mismatch payer and an imported mismatch payee, respectively) to the extent that-- (i) The tax law of such foreign tax resident or foreign taxable branch contains hybrid mismatch rules; and (ii) The amount is subject to disallowance under a provision of the hybrid mismatch rules substantially similar to this section. See §1.267A-6(c)(10) and (12) for examples illustrating the application of paragraph (f)(2) of this section. (g) Special rule regarding extent to which a disqualified hybrid amount of a CFC prevents a hybrid deduction or a funded taxable payment. A disqualified hybrid amount of a CFC is taken into account for purposes of paragraph (b)(2)(iv)(A) or (c)(3)(v)(C) of this section (certain deductions not hybrid deductions or funded taxable payments to the extent the amount giving rise to the deduction is a disqualified hybrid amount) only to the extent of the excess (if any) of the disqualified hybrid amount over the sum of the amounts described in paragraphs (g)(1) through (3) of this section. See §1.267A-6(c)(11) for an example illustrating the application of this paragraph (g). (1) The disqualified hybrid amount to the extent that, if allowed as a deduction, it would be allocated and apportioned to residual CFC gross income (as described in §1.951A-2(c)(5)(iii)(B)) of the CFC. (2) The disqualified hybrid amount to the extent that, if allowed as a deduction, it would be allocated and apportioned (under the rules of section 954(b)(5)) to gross income that is taken into account in determining the CFC's subpart F income (as described in section 952 and §1.952-1), multiplied by the difference of 100 percent and the percentage of stock (by value) of the CFC that, for purposes of sections 951 and 951A, is owned (within the meaning of section 958(a), and determined by treating a domestic partnership as foreign) by one or more tax residents of the United States that are United States shareholders of the CFC. (3) The disqualified hybrid amount to the extent that, if allowed as a deduction, it would be allocated and apportioned (under the rules of §1.951A-2(c)(3)) to gross tested income of the CFC (as described in section 951A(c)(2)(A) and §1.951A-2(c)(1)), multiplied by the difference of 100 percent and the percentage of stock (by value) of the CFC that, for purposes of sections 951 and 951A, is owned (within the meaning of section 958(a), and determined by treating a domestic partnership as foreign) by one or more tax residents of the United States that are United States shareholders of the CFC. §1.267A-5 Definitions and special rules. (a) Definitions. For purposes of §§1.267A-1 through 1.267A-7 the following definitions apply. (1) The term accounting period means a taxable year, or a period of similar length over which, under a provision of hybrid mismatch rules substantially similar to §1.267A-4, computations similar to those under §1.267A-4 are made under a foreign tax law. (2) The term branch means a taxable presence of a tax resident in a country other than its country of residence as determined under either the tax resident's tax law or such other country's tax law. (3) The term branch mismatch payment has the meaning provided in §1.267A-2(e)(2). (4) The term controlled foreign corporation (or CFC ) has the meaning provided in section 957. (5) The term deemed branch payment has the meaning provided in §1.267A-2(c)(2). (6) The term disregarded payment has the meaning provided in §1.267A-2(b)(2). (7) The term entity means any person as described in section 7701(a)(1), including an entity that under §§301.7701-1 through 301.7701-3 of this chapter is disregarded as an entity separate from its owner, other than an individual. (8) The term fiscally transparent means, with respect to an entity, fiscally transparent with respect to an item of income as determined under the principles of §1.894-1(d)(3)(ii) and (iii), without regard to whether a tax resident (either the entity or interest holder in the entity) that derives the item of income is a resident of a country that has an income tax treaty with the United States. In addition, the following special rules apply with respect to an item of income received by an entity: (i) The entity is fiscally transparent with respect to the item under the tax law of the country in which the entity is created, organized, or otherwise established if, under that tax law, the entity does not take the item into account in its income (without regard to whether such tax law requires an investor of the entity, wherever resident, to separately take into account on a current basis the investor's respective share of the item), and the effect under that tax law is that an investor of the entity is required to take the item into account in its income as if the item were realized directly from the source from which realized by the entity, whether or not distributed. (ii) The entity is fiscally transparent with respect to the item under the tax law of an investor of the entity if, under that tax law, an investor of the entity takes the item into account in its income (without regard to whether such tax law requires the investor to separately take into account on a current basis the investor's respective share of the item) as if the item were realized directly from the source from which realized by the entity, whether or not distributed. (iii) The entity is fiscally transparent with respect to the item under the tax law of the country in which the entity is created, organized, or otherwise established if-- (A) That tax law imposes a corporate income tax; and (B) Under that tax law, neither the entity is required to take the item into account in its income nor an investor of the entity is required to take the item into account in its income as if the item were realized directly from the source from which realized by the entity, whether or not distributed. (9) The term home office means a tax resident that has a branch. (10) The term hybrid mismatch rules means rules, regulations, or other tax guidance substantially similar to section 267A, and includes rules the purpose of which is to neutralize the deduction/no-inclusion outcome of hybrid and branch mismatch arrangements. Examples of such rules would include rules based on, or substantially similar to, the recommendations contained in OECD/G-20, Neutralising the Effects of Hybrid Mismatch Arrangements, Action 2: 2015 Final Report (October 2015), and OECD/G-20, Neutralising the Effects of Branch Mismatch Arrangements, Action 2: Inclusive Framework on BEPS (July 2017). (11) The term hybrid transaction has the meaning provided in §1.267A-2(a)(2). (12) The term interest means any amount described in paragraph (a)(12)(i) or (ii) of this section that is paid or accrued, or treated as paid or accrued, for the taxable year or that is otherwise designated as interest expense in paragraph (a)(12)(i) or (ii) of this section. (i) In general. Interest is an amount paid, received, or accrued as compensation for the use or forbearance of money under the terms of an instrument or contractual arrangement, including a series of transactions, that is treated as a debt instrument for purposes of section 1275(a) and §1.1275-1(d), and not treated as stock under §1.385-3, or an amount that is treated as interest under other provisions of the Internal Revenue Code (Code) or the regulations in this part. Thus, interest includes, but is not limited to, the following-- (A) Original issue discount (OID); (B) Qualified stated interest, as adjusted by the issuer for any bond issuance premium; (C) OID on a synthetic debt instrument arising from an integrated transaction under §1.1275-6; (D) Repurchase premium to the extent deductible by the issuer under §1.163-7(c); (E) Deferred payments treated as interest under section 483; (F) Amounts treated as interest under a section 467 rental agreement; (G) Forgone interest under section 7872; (H) De minimis OID taken into account by the issuer; (I) Amounts paid in connection with a sale-repurchase agreement treated as indebtedness under Federal tax principles; (J) Redeemable ground rent treated as interest under section 163(c); and (K) Amounts treated as interest under section 636. (ii) Swaps with significant nonperiodic payments --(A) In general. Except as provided in paragraphs (a)(12)(ii)(B) and (C) of this section, a swap with significant nonperiodic payments is treated as two separate transactions consisting of an on-market, level payment swap and a loan. The loan must be accounted for by the parties to the contract independently of the swap. The time value component associated with the loan, determined in accordance with §1.446-3(f)(2)(iii)(A), is recognized as interest expense to the payor. (B) Exception for cleared swaps. Paragraph (a)(12)(ii)(A) of this section does not apply to a cleared swap. The term cleared swap means a swap that is cleared by a derivatives clearing organization, as such term is defined in section 1a of the Commodity Exchange Act (7 U.S.C. 1a), or by a clearing agency, as such term is defined in section 3 of the Securities Exchange Act of 1934 (15 U.S.C. 78c), that is registered as a derivatives clearing organization under the Commodity Exchange Act or as a clearing agency under the Securities Exchange Act of 1934, respectively, if the derivatives clearing organization or clearing agency requires the parties to the swap to post and collect margin or collateral. (C) Exception for non-cleared swaps subject to margin or collateral requirements. Paragraph (a)(12)(ii)(A) of this section does not apply to a non-cleared swap that requires the parties to meet the margin or collateral requirements of a Federal regulator or that provides for margin or collateral requirements that are substantially similar to a cleared swap or a non-cleared swap subject to the margin or collateral requirements of a Federal regulator. For purposes of this paragraph (a)(12)(ii)(C), the term Federal regulator means the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), or a prudential regulator, as defined in section 1a(39) of the Commodity Exchange Act (7 U.S.C. 1a), as amended by section 721 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Public Law No. 111-203, 124 Stat. 1376, Title VII. (13) The term investor means, with respect to an entity, any tax resident or taxable branch that directly or indirectly (determined under the rules of section 958(a) without regard to whether an intermediate entity is foreign or domestic, or under substantially similar rules under a tax resident's or taxable branch's tax law) owns an interest in the entity. (14) The term related has the meaning provided in this paragraph (a)(14). A tax resident or taxable branch is related to a specified party if the tax resident or taxable branch is a related person within the meaning of section 954(d)(3), determined by treating the specified party as the "controlled foreign corporation" referred to in section 954(d)(3) and the tax resident or taxable branch as the "person" referred to in section 954(d)(3). In addition, for the purposes of this paragraph (a)(14), a tax resident that under §§301.7701-1 through 301.7701-3 of this chapter is disregarded as an entity separate from its owner for U.S. tax purposes, as well as a taxable branch, is treated as a corporation. See also §1.954-1(f)(2)(iv)(B)( 1 ) (neither section 318(a)(3), nor §1.958-2(d) or the principles thereof, applies to attribute stock or other interests). (15) The term reverse hybrid has the meaning provided in §1.267A-2(d)(2). (16) The term royalty includes amounts paid or accrued as consideration for the use of, or the right to use-- (i) Any copyright, including any copyright of any literary, artistic, scientific or other work (including cinematographic films and software); (ii) Any patent, trademark, design or model, plan, secret formula or process, or other similar property (including goodwill); or (iii) Any information concerning industrial, commercial or scientific experience, but does not include-- (A) Amounts paid or accrued for after-sales services; (B) Amounts paid or accrued for services rendered by a seller to the purchaser under a warranty; (C) Amounts paid or accrued for pure technical assistance; or (D) Amounts paid or accrued for an opinion given by an engineer, lawyer or accountant. (17) The term specified party means a tax resident of the United States, a CFC (other than a CFC with respect to which there is not a tax resident of the United States that, for purposes of sections 951 and 951A, owns (within the meaning of section 958(a), and determined by treating a domestic partnership as foreign) at least ten percent (by vote or value) of the stock of the CFC), and a U.S. taxable branch. Thus, an entity that is fiscally transparent for U.S. tax purposes is not a specified party, though an owner of the entity may be a specified party. For example, in the case of a payment by a partnership, a domestic corporation that is a partner of the partnership is a specified party and a deduction for its allocable share of the payment is subject to disallowance under section 267A. (18) The term specified payment has the meaning provided in §1.267A-1(b). (19) The term specified recipient means, with respect to a specified payment, any tax resident that derives the payment under its tax law or any taxable branch to which the payment is attributable under its tax law (or any tax resident that, based on all the facts and circumstances, is reasonably expected to derive the payment under its tax law, or any taxable branch to which, based on all the facts and circumstances, the payment is reasonably expected to be attributable under its tax law). The principles of §1.894-1(d)(1) apply for purposes of determining whether a tax resident derives (or is reasonably expected to derive) a specified payment under its tax law, without regard to whether the tax resident is a resident of a country that has an income tax treaty with the United States. There may be more than one specified recipient with respect to a specified payment. (20) The terms structured arrangement and party to a structured arrangement have the meaning set forth in this paragraph (a)(20). (i) Structured arrangement. A structured arrangement means an arrangement with respect to which one or more specified payments would be a disqualified hybrid amount (or a disqualified imported mismatch amount) without regard to the relatedness limitation in §1.267A-2(f) (or without regard to the phrase "that is related to the specified party" in §1.267A-4(a)) (either such outcome, a hybrid mismatch ), provided that, based on all the facts and circumstances (including the terms of the arrangement), the arrangement is designed to produce the hybrid mismatch. Facts and circumstances that indicate the arrangement is designed to produce the hybrid mismatch include the following: (A) The hybrid mismatch is priced into the terms of the arrangement, including-- ( 1 ) The pricing of the arrangement is different from what the pricing would have been absent the hybrid mismatch; ( 2 ) Features that alter the terms of the arrangement, including its return if the hybrid mismatch is no longer available; or ( 3 ) A below-market return absent the tax effects or benefits resulting from the hybrid mismatch. (B) The arrangement is marketed as tax-advantaged where some or all of the tax advantage derives from the hybrid mismatch. (C) The arrangement is marketed to tax residents of a country the tax law of which enables the hybrid mismatch. (ii) Party to a structured arrangement. A party to a structured arrangement means a tax resident or taxable branch that participates in the structured arrangement. For purposes of this paragraph (a)(20)(ii), in the case of a tax resident or a taxable branch that is an entity, the tax resident's or taxable branch's participation in a structured arrangement is imputed to its investors. However, a tax resident or taxable branch is considered to participate in the structured arrangement only if-- (A) The tax resident or taxable branch (or a related tax resident or taxable branch) could, based on all the facts and circumstances, reasonably be expected to be aware of the hybrid mismatch; and (B) The tax resident or taxable branch (or a related tax resident or taxable branch) shares in the value of the tax benefit resulting from the hybrid mismatch. (21) The term tax law of a country includes statutes, regulations, administrative or judicial rulings, and income tax treaties of the country. If a country has an income tax treaty with the United States that applies to taxes imposed by a political subdivision or other local authority of that country, then the tax law of the political subdivision or other local authority is deemed to be a tax law of a country. When used with respect to a tax resident or branch, tax law refers to-- (i) In the case of a tax resident, the tax law of the country or countries where the tax resident is resident; and (ii) In the case of a branch, the tax law of the country where the branch is located. (22) The term taxable branch means a branch that has a taxable presence under its tax law. (23) The term tax resident means either of the following: (i) A body corporate or other entity or body of persons liable to tax under the tax law of a country as a resident. For purposes of this paragraph (a)(23)(i), an entity that is created, organized, or otherwise established under the tax law of a country that does not impose a corporate income tax is treated as liable to tax under the tax law of such country as a resident if under the corporate or commercial laws of such country the entity is treated as a body corporate or a company. A body corporate or other entity or body of persons may be a tax resident of more than one country. (ii) An individual liable to tax under the tax law of a country as a resident. An individual may be a tax resident of more than one country. (24) The term United States shareholder has the meaning provided in section 951(b). (25) The term U.S. taxable branch means a trade or business carried on in the United States by a tax resident of another country, except that if an income tax treaty applies, the term means a permanent establishment of a tax treaty resident eligible for benefits under an income tax treaty between the United States and the treaty country. Thus, for example, a U.S. taxable branch includes a U.S. trade or business of a foreign corporation taxable under section 882(a) or a U.S. permanent establishment of a tax treaty resident. (b) Special rules. For purposes of §§1.267A-1 through 1.267A-7, the following special rules apply. (1) Coordination with other provisions --(i) In general. Except as provided in paragraph (b)(1)(ii) of this section, a specified payment is subject to section 267A after the application of any other applicable provisions of the Code and regulations in this part. Thus, the determination of whether a deduction for a specified payment is disallowed under section 267A is made with respect to the taxable year for which a deduction for the payment would otherwise be allowed for U.S. tax purposes. See, for example, sections 163(e)(3) and 267(a)(3) for rules that may defer the taxable year for which a deduction is allowed. See also §1.882-5(a)(5) (providing that provisions that disallow interest expense apply after the application of §1.882-5). In addition, provisions that characterize amounts paid or accrued as something other than interest or royalties, such as §1.894-1(d)(2), govern the treatment of such amounts and therefore such amounts would not be treated as specified payments. Moreover, to the extent that a specified payment is not described in §1.267A-1(b) when it is subject to section 267A, the payment is not again subject to section 267A at a later time. For example, if for the taxable year in which a specified payment is paid the payment is not described in §1.267A-1(b) but under section 163(j) a deduction for the payment is deferred, the payment is not again subject to section 267A in the taxable year for which section 163(j) no longer defers the deduction. (ii) Section 267A applied before certain provisions. In addition to the extent provided in any other applicable provision of the Code or regulations in this part, section 267A applies before the application of sections 163(j), 461(l), 465, and 469. (iii) Coordination with capitalization and recovery provisions. To the extent a specified payment is described in §1.267A-1(b), a deduction for the payment is considered permanently disallowed for all purposes of the Code and regulations in this part and, therefore, the payment is not taken into account for purposes of computing costs that are required to be capitalized and recovered through depreciation, amortization, cost of goods sold, adjustment to basis, or similar forms of recovery under any applicable provision of the Code or in regulations in this part. Thus, for example, to the extent an interest or royalty payment is a specified payment described in §1.267A-1(b), the payment is not capitalized and included in inventory cost or added to basis under section 263A. As an additional example, to the extent that a debt issuance cost is a specified payment described in §1.267A-1(b), it is neither capitalized under section 263 or the regulations in this part under section 263 nor recoverable under §1.446-5. (iv) Specified payments arising in taxable years beginning before January 1, 2018. Section 267A does not apply to a specified payment that is paid or accrued in a taxable year beginning before January 1, 2018, regardless of whether under a provision of the Code or regulations in this part (for example, section 267(a)(3)) a deduction for the payment is deferred to a taxable year beginning after December 31, 2017, or whether the payment is carried over to another taxable year and under another provision of the Code (for example, section 163(j)) is considered paid or accrued in such taxable year. (2) Foreign currency gain or loss. Except as set forth in this paragraph (b)(2), section 988 gain or loss is not taken into account under section 267A. Foreign currency gain or loss recognized with respect to a specified payment is taken into account under section 267A to the extent that a deduction for the specified payment is disallowed under section 267A, provided that the foreign currency gain or loss is described in §1.988-2(b)(4) (relating to exchange gain or loss recognized by the issuer of a debt instrument with respect to accrued interest) or §1.988-2(c) (relating to items of expense or gross income or receipts which are to be paid after the date accrued). If a deduction for a specified payment is disallowed under section 267A, then a proportionate amount of foreign currency loss under section 988 with respect to the specified payment is also disallowed, and a proportionate amount of foreign currency gain under section 988 with respect to the specified payment reduces the amount of the disallowance. For purposes of this paragraph (b)(2), the proportionate amount is the amount of the foreign currency gain or loss under section 988 with respect to the specified payment multiplied by a fraction, the numerator of which is the amount of the specified payment for which a deduction is disallowed under section 267A and the denominator of which is the total amount of the specified payment. (3) U.S. taxable branch payments --(i) Amounts considered paid or accrued by a U.S. taxable branch. For purposes of section 267A, a U.S. taxable branch is considered to pay or accrue an amount of interest or royalty equal to either-- (A) The amount of interest or royalty allocable to effectively connected income of the U.S. taxable branch under section 873(a) or 882(c)(1), as applicable; or (B) In the case of a U.S. taxable branch that is a U.S. permanent establishment of a treaty resident eligible for benefits under an income tax treaty between the United States and the treaty country, the amount of interest or royalty allowable in computing the business profits attributable to the U.S. permanent establishment. (ii) Treatment of U.S. taxable branch payments --(A) Interest. Interest considered paid or accrued by a U.S. taxable branch of a foreign corporation under paragraph (b)(3)(i) of this section (the "U.S. taxable branch interest payment") is treated as a payment directly to the person to which the interest is payable, to the extent it is paid or accrued with respect to a liability described in §1.882-5(a)(1)(ii)(A) or (B) (resulting in directly allocable interest) or with respect to a U.S. booked liability, as described in §1.882-5(d)(2). If the U.S. taxable branch interest payment exceeds in the aggregate the interest paid or accrued on the U.S. taxable branch's directly allocable interest and interest paid or accrued on U.S. booked liabilities, the excess amount is treated as paid or accrued by the U.S. taxable branch on a pro-rata basis to the same persons and pursuant to the same terms that the home office paid or accrued interest, excluding any directly allocable interest or interest paid or accrued on a U.S. booked liability. The rules of this paragraph (b)(3)(ii) for determining to whom interest is paid or accrued apply without regard to whether the U.S. taxable branch interest payment is determined under the method described in §1.882-5(b) through (d) or the method described in §1.882-5(e). (B) Royalties. Royalties considered paid or accrued by a U.S. taxable branch under paragraph (b)(3)(i) of this section are treated solely for purposes of section 267A as paid or accrued on a pro-rata basis by the U.S. taxable branch to the same persons and pursuant to the same terms that the home office paid or accrued such royalties. (C) Permanent establishments and interbranch payments. If a U.S. taxable branch is a permanent establishment in the United States, the principles of the rules in paragraphs (b)(3)(ii)(A) and (B) of this section apply with respect to interest and royalties allowed in computing the business profits of a treaty resident eligible for treaty benefits. This paragraph (b)(3)(ii)(C) does not apply to interbranch interest or royalty payments allowed as deduction under certain U.S. income tax treaties (as described in §1.267A-2(c)(2)). (4) Effect on earnings and profits. The disallowance of a deduction under section 267A does not affect whether the amount paid or accrued that gave rise to the deduction reduces earnings and profits of a corporation. However, for purposes of section 952(c)(1) and §1.952-1(c), a CFC's earnings and profits are not reduced by a specified payment a deduction for which is disallowed under section 267A, if a principal purpose of the transaction pursuant to which the payment is made is to reduce or limit the CFC's subpart F income. (5) Application to structured payments --(i) In general. For purposes of section 267A and the regulations in this part under section 267A, a structured payment (as defined in paragraph (b)(5)(ii) of this section) is treated as interest. Thus, a structured payment is treated as subject to section 267A and the regulations in this part under section 267A to the same extent as if the payment were an amount of interest paid or accrued. (ii) Structured payment. A structured payment means any amount described in paragraph (b)(5)(ii)(A) or (B) of this section. (A) Substitute interest payments. A substitute interest payment described in §1.861-2(a)(7) is treated as a structured payment for purposes of section 267A, unless the payment relates to a sale-repurchase agreement or a securities lending transaction that is entered into by the payor in the ordinary course of the payor's business. This paragraph (b)(5)(ii)(A) does not apply to an amount described in paragraph (a)(12)(i)(I) of this section. (B) Amounts economically equivalent to interest --( 1 ) Principal purpose to reduce interest expense. Any expense or loss economically equivalent to interest is treated as a structured payment for purposes of section 267A if a principal purpose of structuring the transaction(s) is to reduce an amount incurred by the taxpayer that otherwise would have been described in paragraph (a)(12) or (b)(5)(ii)(A) of this section. For purposes of this paragraph (b)(5)(ii)(B)( 1 ), the fact that the taxpayer has a business purpose for obtaining the use of funds does not affect the determination of whether the manner in which the taxpayer structures the transaction(s) is with a principal purpose of reducing the taxpayer's interest expense. In addition, the fact that the taxpayer has obtained funds at a lower pre-tax cost based on the structure of the transaction(s) does not affect the determination of whether the manner in which the taxpayer structures the transaction(s) is with a principal purpose of reducing the taxpayer's interest expense. For purposes of this paragraph (b)(5)(ii)(B), any expense or loss is economically equivalent to interest to the extent that the expense or loss is-- ( i ) Deductible by the taxpayer; ( ii ) Incurred by the taxpayer in a transaction or series of integrated or related transactions in which the taxpayer secures the use of funds for a period of time; ( iii ) Substantially incurred in consideration of the time value of money; and ( iv ) Not described in paragraph (a)(12) or (b)(5)(ii)(A) of this section. ( 2 ) Principal purpose. Whether a transaction or a series of integrated or related transactions is entered into with a principal purpose described in paragraph (b)(5)(ii)(B)( 1 ) of this section depends on all the facts and circumstances related to the transaction(s). A purpose may be a principal purpose even though it is outweighed by other purposes (taken together or separately). Factors to be taken into account in determining whether one of the taxpayer's principal purposes for entering into the transaction(s) include the taxpayer's normal borrowing rate in the taxpayer's functional currency, whether the taxpayer would enter into the transaction(s) in the ordinary course of the taxpayer's trade or business, whether the parties to the transaction(s) are related persons (within the meaning of section 267(b) or 707(b)), whether there is a significant and bona fide business purpose for the structure of the transaction(s), whether the transactions are transitory, for example, due to a circular flow of cash or other property, and the substance of the transaction(s). (6) Anti-avoidance rule. A specified party's deduction for a specified payment is disallowed to the extent that both of the following requirements are satisfied: (i) The payment (or income attributable to the payment) is not included in the income of a tax resident or taxable branch, as determined under §1.267A-3(a) (but without regard to the deemed full inclusion rule in §1.267A-3(a)(5)). (ii) A principal purpose of the terms or structure of the arrangement (including the form and the tax laws of the parties to the arrangement) is to avoid the application of the regulations in this part under section 267A in a manner that is contrary to the purposes of section 267A and the regulations in this part under section 267A. §1.267A-6 Examples. (a) Scope. This section provides examples that illustrate the application of §§1.267A-1 through 1.267A-5. (b) Presumed facts. For purposes of the examples in this section, unless otherwise indicated, the following facts are presumed: (1) US1, US2, and US3 are domestic corporations that are tax residents solely of the United States. (2) FW, FX, and FZ are bodies corporate established in, and tax residents of, Country W, Country X, and Country Z, respectively. They are not fiscally transparent under the tax law of any country. They are not specified parties. (3) Under the tax law of each country, interest and royalty payments are deductible. (4) The tax law of each country provides a 100 percent participation exemption for dividends received from non-resident corporations. (5) The tax law of each country, other than the United States, provides an exemption for income attributable to a branch. (6) Except as provided in paragraphs (b)(4) and (5) of this section, all amounts derived (determined under the principles of §1.894-1(d)(1)) by a tax resident, or attributable to a taxable branch, are included in income, as determined under §1.267A-3(a). (7) Only the tax law of the United States contains hybrid mismatch rules. (c) Examples --(1) Example 1. Payment pursuant to a hybrid financial instrument --(i) Facts. FX holds all the interests of US1. FX also holds an instrument issued by US1 that is treated as equity for Country X tax purposes and indebtedness for U.S. tax purposes (the FX-US1 instrument). On date 1, US1 pays $50x to FX pursuant to the instrument. The amount is treated as an excludible dividend for Country X tax purposes (by reason of the Country X participation exemption) and as interest for U.S. tax purposes. (ii) Analysis. US1 is a specified party and thus a deduction for its $50x specified payment is subject to disallowance under section 267A. As described in paragraphs (c)(1)(ii)(A) through (C) of this section, the entire $50x payment is a disqualified hybrid amount under the hybrid transaction rule of §1.267A-2(a) and, as a result, a deduction for the payment is disallowed under §1.267A-1(b)(1). (A) US1's payment is made pursuant to a hybrid transaction because a payment with respect to the FX-US1 instrument is treated as interest for U.S. tax purposes but not for purposes of Country X tax law (the tax law of FX, a specified recipient that is related to US1). See §1.267A-2(a)(2) and (f). Therefore, §1.267A-2(a) applies to the payment. (B) For US1's payment to be a disqualified hybrid amount under §1.267A-2(a), a no-inclusion must occur with respect to FX. See §1.267A-2(a)(1)(i). As a consequence of the Country X participation exemption, FX includes $0 of the payment in income and therefore a $50x no-inclusion occurs with respect to FX. See §1.267A-3(a)(1). The result is the same regardless of whether, under the Country X participation exemption, the $50x payment is simply excluded from FX's taxable income or, instead, is reduced or offset by other means, such as a $50x dividends received deduction. See §1.267A-3(a)(1). (C) Pursuant to §1.267A-2(a)(1)(ii), FX's $50x no-inclusion gives rise to a disqualified hybrid amount to the extent that it is a result of US1's payment being made pursuant to the hybrid transaction. FX's $50x no-inclusion is a result of the payment being made pursuant to the hybrid transaction because, were the payment to be treated as interest for Country X tax purposes, FX would include $50x in income and, consequently, the no-inclusion would not occur. (iii) Alternative facts - multiple specified recipients. The facts are the same as in paragraph (c)(1)(i) of this section, except that FX holds all the interests of FZ, which is fiscally transparent for Country X tax purposes, and FZ holds all of the interests of US1. Moreover, the FX-US1 instrument is held by FZ (rather than by FX) and US1 makes its $50x payment to FZ (rather than to FX); the payment is derived by FZ under its tax law and by FX under its tax law and, accordingly, both FZ and FX are specified recipients of the payment. Further, the payment is treated as interest for Country Z tax purposes and FZ includes it in income. For the reasons described in paragraph (c)(1)(ii) of this section, FX's no-inclusion causes the payment to be a disqualified hybrid amount. FZ's inclusion in income (regardless of whether Country Z has a low or high tax rate) does not affect the result, because the hybrid transaction rule of §1.267A-2(a) applies if any no-inclusion occurs with respect to a specified recipient of the payment as a result of the payment being made pursuant to the hybrid transaction. (iv) Alternative facts - preferential rate. The facts are the same as in paragraph (c)(1)(i) of this section, except that for Country X tax purposes US1's payment is treated as a dividend subject to a 4% tax rate, whereas the marginal rate imposed on ordinary income is 20%. FX includes $10x of the payment in income, calculated as $50x multiplied by 0.2 (.04, the rate at which the particular type of payment (a dividend for Country X tax purposes) is subject to tax in Country X, divided by 0.2, the marginal tax rate imposed on ordinary income). See §1.267A-3(a)(1). Thus, a $40x no-inclusion occurs with respect to FX ($50x less $10x). The $40x no-inclusion is a result of the payment being made pursuant to the hybrid transaction because, were the payment to be treated as interest for Country X tax purposes, FX would include the entire $50x in income at the full marginal rate imposed on ordinary income (20%) and, consequently, the no-inclusion would not occur. Accordingly, $40x of US1's payment is a disqualified hybrid amount. (v) Alternative facts - no-inclusion not the result of hybridity. The facts are the same as in paragraph (c)(1)(i) of this section, except that Country X has a pure territorial regime (that is, Country X only taxes income with a domestic source). Although US1's payment is pursuant to a hybrid transaction and a $50x no-inclusion occurs with respect to FX, FX's no-inclusion is not a result of the payment being made pursuant to the hybrid transaction. This is because if Country X tax law were to treat the payment as interest, FX would include $0 in income and, consequently, the $50x no-inclusion would still occur. Accordingly, US1's payment is not a disqualified hybrid amount. See §1.267A-2(a)(1)(ii). The result would be the same if Country X instead did not impose a corporate income tax. (vi) Alternative facts - indebtedness under both tax laws but different ordering rules give rise to hybrid transaction; reduction of no-inclusion by reason of inclusion of a principal payment. The facts are the same as in paragraph (c)(1)(i) of this section, except that the FX-US1 instrument is indebtedness for both U.S. and Country X tax purposes. In addition, the $50x date 1 payment is treated as interest for U.S. tax purposes and a repayment of principal for Country X tax purposes. On date 1, based on all the facts and circumstances (including the terms of the FX-US1 instrument, the tax laws of the United States and Country X, and an absence of a plan pursuant to which FX would dispose of the FX-US1 instrument), it is reasonably expected that on date 2 (a date that is within 36 months after the end of the taxable year of US1 that includes date 1), US1 will pay a total of $200x to FX and that, for U.S. tax purposes, $25x will be treated as interest and $175x as a repayment of principal, and, for Country X tax purposes, $75x will be treated as interest (and included in FX's income) and $125x as a repayment of principal. US1's $50x specified payment is made pursuant to a hybrid transaction and, but for §1.267A-3(a)(4), a $50x no-inclusion would occur with respect to FX. See §§1.267A-2(a)(2) and 1.267A-3(a)(1). However, pursuant to §1.267A-3(a)(4), FX's inclusion in income with respect to $50x of the date 2 amount that is a repayment of principal for U.S. tax purposes is treated as correspondingly reducing FX's no-inclusion with respect to the specified payment. As a result, as to US1's $50x specified payment, a no-inclusion does not occur with respect to FX. See §1.267A-3(a)(4). Therefore, US1's $50x specified payment is not a disqualified hybrid amount. See §1.267A-2(a)(1)(i). (2) Example 2. Payment pursuant to a repo transaction --(i) Facts. FX holds all the interests of US1, and US1 holds all the interests of US2. On date 1, US1 and FX enter into a sale and repurchase transaction. Pursuant to the transaction, US1 transfers shares of preferred stock of US2 to FX in exchange for $1,000x, subject to a binding commitment of US1 to reacquire those shares on date 3 for an agreed price, which represents a repayment of the $1,000x plus a financing or time value of money return reduced by the amount of any distributions paid with respect to the preferred stock between dates 1 and 3 that are retained by FX. On date 2, US2 pays a $100x dividend on its preferred stock to FX. For Country X tax purposes, FX is treated as owning the US2 preferred stock and therefore is the beneficial owner of the dividend. For U.S. tax purposes, the transaction is treated as a loan from FX to US1 that is secured by the US2 preferred stock. Thus, for U.S. tax purposes, US1 is treated as owning the US2 preferred stock and is the beneficial owner of the dividend. In addition, for U.S. tax purposes, US1 is treated as paying $100x of interest to FX (an amount corresponding to the $100x dividend paid by US2 to FX). Further, the marginal tax rate imposed on ordinary income under Country X tax law is 25%. Moreover, instead of a participation exemption, Country X tax law provides its tax residents a credit for underlying foreign taxes paid by a non-resident corporation from which a dividend is received; with respect to the $100x dividend received by FX from US2, the credit is $10x. (ii) Analysis. US1 is a specified party and thus a deduction for its $100x specified payment is subject to disallowance under section 267A. As described in paragraphs (c)(2)(ii)(A) through (D) of this section, $40x of the payment is a disqualified hybrid amount under the hybrid transaction rule of §1.267A-2(a) and, as a result, $40x of the deduction is disallowed under §1.267A-1(b)(1). (A) Although US1's $100x interest payment is not regarded under Country X tax law, a connected amount (US2's dividend payment) is regarded and derived by FX under such tax law. Thus, FX is considered a specified recipient with respect to US1's interest payment. See §1.267A-2(a)(3). (B) US1's payment is made pursuant to a hybrid transaction because a payment with respect to the sale and repurchase transaction is treated as interest for U.S. tax purposes but not for purposes of Country X tax law (the tax law of FX, a specified recipient that is related to US1), which does not regard the payment. See §1.267A-2(a)(2) and (f). Therefore, §1.267A-2(a) applies to the payment. (C) For US1's payment to be a disqualified hybrid amount under §1.267A-2(a), a no-inclusion must occur with respect to FX. See §1.267A-2(a)(1)(i). As a consequence of Country X tax law not regarding US1's payment, FX includes $0 of the payment in income and therefore a $100x no-inclusion occurs with respect to FX. See §1.267A-3(a). However, FX includes $60x of a connected amount (US2's dividend payment) in income, calculated as $100x (the amount of the dividend) less $40x (the portion of the connected amount that is not included in income in Country X due to the foreign tax credit, determined by dividing the amount of the credit, $10x, by 0.25, the tax rate in Country X). See §1.267A-3(a). Pursuant to §1.267A-2(a)(3), FX's inclusion in income with respect to the connected amount correspondingly reduces the amount of its no-inclusion with respect to US1's payment. Therefore, for purposes of §1.267A-2(a), FX's no-inclusion with respect to US1's payment is $40x ($100x less $60x). See §1.267A-2(a)(3). (D) Pursuant to §1.267A-2(a)(1)(ii), FX's $40x no-inclusion gives rise to a disqualified hybrid amount to the extent that FX's no-inclusion is a result of US1's payment being made pursuant to the hybrid transaction. FX's $40x no-inclusion is a result of US1's payment being made pursuant to the hybrid transaction because, were the sale and repurchase transaction to be treated as a loan from FX to US1 for Country X tax purposes, FX would include US1's $100x interest payment in income (because it would not be entitled to a foreign tax credit) and, consequently, the no-inclusion would not occur. (iii) Alternative facts - structured arrangement. The facts are the same as in paragraph (c)(2)(i) of this section, except that FX is a bank that is unrelated to US1. In addition, the sale and repurchase transaction is a structured arrangement and FX is a party to the structured arrangement. The result is the same as in paragraph (c)(2)(ii) of this section. That is, even though FX is not related to US1, it is taken into account with respect to the determinations under §1.267A-2(a) because it is a party to a structured arrangement pursuant to which the payment is made. See §1.267A-2(f). (3) Example 3. Disregarded payment --(i) Facts. FX holds all the interests of US1. For Country X tax purposes, US1 is a disregarded entity of FX. During taxable year 1, US1 pays $100x to FX pursuant to a debt instrument. The amount is treated as interest for U.S. tax purposes but is disregarded for Country X tax purposes as a transaction involving a single taxpayer. During taxable year 1, US1's only other items of income, gain, deduction, or loss are $125x of gross income (the entire amount of which is included in US1's income) and a $60x item of deductible expense. The $125x item of gross income is included in FX's income, and the $60x item of deductible expense is allowable for Country X tax purposes. (ii) Analysis. US1 is a specified party and thus a deduction for its $100x specified payment is subject to disallowance under section 267A. As described in paragraphs (c)(3)(ii)(A) and (B) of this section, $35x of the payment is a disqualified hybrid amount under the disregarded payment rule of §1.267A-2(b) and, as a result, $35x of the deduction is disallowed under §1.267A-1(b)(1). (A) US1's $100x payment is not regarded under the tax law of Country X (the tax law of FX, a related tax resident to which the payment is made) because under such tax law the payment involves a single taxpayer. See §1.267A-2(b)(2) and (f). In addition, were the tax law of Country X to regard the payment (and treat it as interest), FX would include it in income. Therefore, the payment is a disregarded payment to which §1.267A-2(b) applies. See §1.267A-2(b)(2). (B) Under §1.267A-2(b)(1), the excess (if any) of US1's disregarded payments for taxable year 1 ($100x) over its dual inclusion income for the taxable year is a disqualified hybrid amount. US1's dual inclusion income for taxable year 1 is $65x, calculated as $125x (the amount of US1's gross income that is included in FX's income) less $60x (the amount of US1's deductible expenses, other than deductions for disregarded payments, that are allowable for Country X tax purposes). See §1.267A-2(b)(3). Therefore, $35x is a disqualified hybrid amount ($100x less $65x). See §1.267A-2(b)(1). (iii) Alternative facts - non-dual inclusion income arising from hybrid transaction. The facts are the same as in paragraph (c)(3)(i) of this section, except that US1 holds all the interests of FZ (a specified party that is a CFC) and US1's only item of income, gain, deduction, or loss during taxable year 1 (other than the $100x payment to FX) is $80x paid to US1 by FZ pursuant to an instrument treated as indebtedness for U.S. and Country Z tax purposes and equity for Country X tax purposes (the US1-FZ instrument). The $80x is treated as interest for Country Z and U.S. tax purposes (the entire amount of which is included in US1's income) and is treated as an excludible dividend for Country X tax purposes (by reason of the Country X participation exemption). Paragraphs (c)(3)(iii)(A) and (B) of this section describe the extent to which the specified payments by FZ and US1, each of which is a specified party, are disqualified hybrid amounts. (A) The hybrid transaction rule of §1.267A-2(a) applies to FZ's payment because the payment is made pursuant to a hybrid transaction, as a payment with respect to the US1-FZ instrument is treated as interest for U.S. tax purposes but not for purposes of Country X's tax law (the tax law of FX, a specified recipient that is related to FZ). As a consequence of the Country X participation exemption, an $80x no-inclusion occurs with respect to FX, and such no-inclusion is a result of the payment being made pursuant to the hybrid transaction. Thus, but for §1.267A-3(b), the entire $80x of FZ's payment would be a disqualified hybrid amount. However, because US1 (a tax resident of the United States that is also a specified recipient of the payment) takes the entire $80x payment into account in its gross income, no portion of the payment is a disqualified hybrid amount. See §1.267A-3(b)(2). (B) The disregarded payment rule of §1.267A-2(b) applies to US1's $100x payment to FX, for the reasons described in paragraph (c)(3)(ii)(A) of this section. In addition, US1 has no dual inclusion income for taxable year 1 because, as a result of the Country X participation exemption, no portion of FZ's $80x payment to US1 (which is derived by FX under its tax law) is included in FX's income. See §§1.267A-2(b)(3) and 1.267A-3(a). Therefore, the entire $100x payment from US1 to FX is a disqualified hybrid amount, calculated as $100x (the amount of the payment) less $0 (the amount of dual inclusion income). See §1.267A-2(b)(1). (iv) Alternative facts - dual inclusion income despite participation exemption. The facts are the same as in paragraph (c)(3)(iii) of this section, except that the US1-FZ instrument is treated as indebtedness for U.S. tax purposes and equity for Country Z and Country X tax purposes. In addition, the $80x paid to US1 by FZ is treated as interest for U.S. tax purposes (the entire amount of which is included in US1's income), a dividend for Country Z tax purposes (for which FZ is not allowed a deduction or other tax benefit), and an excludible dividend for Country X tax purposes (by reason of the Country X participation exemption). For the reasons described in paragraph (c)(3)(iii)(A) of this section, the hybrid transaction rule of §1.267A-2(a) applies to FZ's payment but no portion of the payment is a disqualified hybrid amount. In addition, the disregarded payment rule of §1.267A-2(b) applies to US1's $100x payment to FX, for the reasons described in paragraph (c)(3)(ii)(B) of this section. US1's dual inclusion income for taxable year 1 is $80x. This is because the $80x paid to US1 by FZ is included in US1's income and, although not included in FX's income, it is a dividend for Country X tax purposes that would have been included in FX's income but for the Country X participation exemption, and FZ is not allowed a deduction or other tax benefit for it under Country Z tax law. See §1.267A-2(b)(3)(ii). Therefore, $20x of US1's $100x payment is a disqualified hybrid amount ($100x less $80x). See §1.267A-2(b)(1). (4) Example 4. Payment allocable to a U.S. taxable branch --(i) Facts. FX1 and FX2 are foreign corporations that are bodies corporate established in and tax residents of Country X. FX1 holds all the interests of FX2, and FX1 and FX2 file a consolidated return under Country X tax law. FX2 has a U.S. taxable branch ("USB"). During taxable year 1, FX2 pays $50x to FX1 pursuant to an instrument (the "FX1-FX2 instrument"). The amount paid pursuant to the instrument is treated as interest for U.S. tax purposes but, as a consequence of the Country X consolidation regime, is treated as a disregarded transaction between group members for Country X tax purposes. Also during taxable year 1, FX2 pays $100x of interest to an unrelated bank that is not a party to a structured arrangement (the instrument pursuant to which the payment is made, the "bank-FX2 instrument"). FX2's only other item of income, gain, deduction, or loss for taxable year 1 is $200x of gross income. Under Country X tax law, the $200x of gross income is attributable to USB, but is not included in FX2's income because Country X tax law exempts income attributable to a branch. Under U.S. tax law, the $200x of gross income is effectively connected income of USB. Further, under section 882(c)(1), $75x of interest is, for taxable year 1, allocable to USB's effectively connected income. USB has neither liabilities that are directly allocable to it, as described in §1.882-5(a)(1)(ii)(A), nor U.S. booked liabilities, as defined in §1.882-5(d)(2). (ii) Analysis. USB is a specified party and thus any interest or royalty allowable as a deduction in determining its effectively connected income is subject to disallowance under section 267A. Pursuant to §1.267A-5(b)(3)(i)(A), USB is treated as paying $75x of interest, and such interest is thus a specified payment. Of that $75x, $25x is treated as paid to FX1, calculated as $75x (the interest allocable to USB under section 882(c)(1)) multiplied by 1/3 ($50x, FX2's payment to FX1, divided by $150x, the total interest paid by FX2). See §1.267A-5(b)(3)(ii)(A). As described in paragraphs (c)(4)(ii)(A) and (B) of this section, the $25x of the specified payment treated as paid by USB to FX1 is a disqualified hybrid amount under the disregarded payment rule of §1.267A-2(b) and, as a result, a deduction for that amount is disallowed under §1.267A-1(b)(1). (A) USB's $25x payment to FX1 is not regarded under the tax law of Country X (the tax law of FX1, a related tax resident to which the payment is made) because under such tax law it is a disregarded transaction between group members. See §1.267A-2(b)(2) and (f). In addition, were the tax law of Country X to regard the payment (and treat it as interest), FX1 would include it in income. Therefore, the payment is a disregarded payment to which §1.267A-2(b) applies. See §1.267A-2(b)(2). (B) Under §1.267A-2(b)(1), the excess (if any) of USB's disregarded payments for taxable year 1 ($25x) over its dual inclusion income for the taxable year is a disqualified hybrid amount. USB's dual inclusion income for taxable year 1 is $0. This is because, as a result of the Country X exemption for income attributable to a branch, no portion of USB's $200x item of gross income is included in FX2's income. See §1.267A-2(b)(3). Therefore, the entire $25x of the specified payment treated as paid by USB to FX1 is a disqualified hybrid amount, calculated as $25x (the amount of the payment) less $0 (the amount of dual inclusion income). See §1.267A-2(b)(1). (iii) Alternative facts - deemed branch payment. The facts are the same as in paragraph (c)(4)(i) of this section, except that FX2 does not pay any amounts during taxable year 1 (thus, it does not pay the $50x to FX1 or the $100x to the bank). However, under an income tax treaty between the United States and Country X, USB is a U.S. permanent establishment and, for taxable year 1, $25x of royalties is allowable as a deduction in computing the business profits of USB and is deemed paid to FX2. Under Country X tax law, the $25x is not regarded. Accordingly, the $25x is a specified payment that is a deemed branch payment. See §§1.267A-2(c)(2) and 1.267A-5(b)(3)(i)(B). In addition, the entire $25x is a disqualified hybrid amount for which a deduction is disallowed because the tax law of Country X provides an exclusion or exemption for income attributable to a branch. See §1.267A-2(c)(1). (5) Example 5. Payment to a reverse hybrid --(i) Facts. FX holds all the interests of US1 and FY, and FY holds all the interests of FV. FY is an entity established in Country Y, and FV is an entity established in Country V. FY is fiscally transparent for Country Y tax purposes but is not fiscally transparent for Country X tax purposes. FV is fiscally transparent for Country X tax purposes. On date 1, US1 pays $100x to FY. The payment is treated as interest for U.S. tax purposes and Country X tax purposes. (ii) Analysis. US1 is a specified party and thus a deduction for its $100x specified payment is subject to disallowance under section 267A. As described in paragraphs (c)(5)(ii)(A) through (C) of this section, the entire $100x payment is a disqualified hybrid amount under the reverse hybrid rule of §1.267A-2(d) and, as a result, a deduction for the payment is disallowed under §1.267A-1(b)(1). (A) US1's payment is made to a reverse hybrid because FY is fiscally transparent under the tax law of Country Y (the tax law of the country in which it is established) but is not fiscally transparent under the tax law of Country X (the tax law of FX, an investor that is related to US1). See §1.267A-2(d)(2) and (f). Therefore, §1.267A-2(d) applies to the payment. The result would be the same if the payment were instead made to FV. See §1.267A-2(d)(3). (B) For US1's payment to be a disqualified hybrid amount under §1.267A-2(d), a no-inclusion must occur with respect to FX, an investor the tax law of which treats FY as not fiscally transparent. See §1.267A-2(d)(1)(i). Because FX does not derive the $100x payment under Country X tax law (as FY is not fiscally transparent under such tax law), FX includes $0 of the payment in income and therefore a $100x no-inclusion occurs with respect to FX. See §1.267A-3(a). (C) Pursuant to §1.267A-2(d)(1)(ii), FX's $100x no-inclusion gives rise to a disqualified hybrid amount to the extent that it is a result of US1's payment being made to the reverse hybrid. FX's $100x no-inclusion is a result of the payment being made to the reverse hybrid because, were FY to be treated as fiscally transparent for Country X tax purposes, FX would include $100x in income and, consequently, the no-inclusion would not occur. The result would be the same if Country X tax law instead viewed US1's payment as a dividend, rather than interest. See §1.267A-2(d)(1)(ii). (iii) Alternative facts - inclusion under anti-deferral regime. The facts are the same as in paragraph (c)(5)(i) of this section, except that, under a Country X anti-deferral regime, FX takes into account $100x attributable to the $100x payment received by FY. If under the rules of §1.267A-3(a) FX includes the entire attributed amount in income (that is, if FX takes the amount into account in its income at the full marginal rate imposed on ordinary income and the amount is not reduced or offset by certain relief particular to the amount), then a no-inclusion does not occur with respect to FX. As a result, in such a case, no portion of US1's payment would be a disqualified hybrid amount under §1.267A-2(d). (iv) Alternative facts - multiple investors. The facts are the same as in paragraph (c)(5)(i) of this section, except that FX holds all the interests of FZ, which is fiscally transparent for Country X tax purposes; FZ holds all the interests of FY, which is fiscally transparent for Country Z tax purposes; and FZ includes the $100x payment in income. Thus, each of FZ and FX is an investor of FY, as each directly or indirectly holds an interest of FY. See §1.267A-5(a)(13). A $100x no-inclusion occurs with respect to FX, an investor the tax law of which treats FY as not fiscally transparent. FX's no-inclusion is a result of the payment being made to the reverse hybrid because, were FY to be treated as fiscally transparent for Country X tax purposes, then FX would include $100x in income (as FZ is fiscally transparent for Country X tax purposes). Accordingly, FX's no-inclusion is a result of US1's payment being made to the reverse hybrid and, consequently, the entire $100x payment is a disqualified hybrid amount. However, if instead FZ were not fiscally transparent for Country X tax purposes, then FX's no-inclusion would not be a result of US1's payment being made to the reverse hybrid and, therefore, the payment would not be a disqualified hybrid amount under §1.267A-2(d). (v) Alternative facts - portion of no-inclusion not the result of hybridity. The facts are the same as in paragraph (c)(5)(i) of this section, except that the $100x is viewed as a royalty for U.S. tax purposes and Country X tax purposes, and Country X tax law contains a patent box regime that provides an 80% deduction with respect to certain royalty income. If the royalty payment would qualify for the Country X patent box deduction were FY to be treated as fiscally transparent for Country X tax purposes, then only $20x of FX's $100x no-inclusion would be the result of the payment being paid to a reverse hybrid, calculated as $100x (the no-inclusion with respect to FX that actually occurs) less $80x (the no-inclusion with respect to FX that would occur if FY were to be treated as fiscally transparent for Country X tax purposes). See §1.267A-2(d)(1)(ii) and 1.267A-3(a)(1)(ii). Accordingly, in such a case, only $20x of US1's payment would be a disqualified hybrid amount under §1.267A-2(d). (vi) Alternative facts - payment to a discretionary trust --(A) Facts. The facts are the same as in paragraph (c)(5)(i) of this section, except that FY is a discretionary trust established in, and a tax resident of, Country Y (and as a result, FY is generally not fiscally transparent for Country Y tax purposes under the principles of §1.894-1(d)(3)(ii)). In general, under Country Y tax law, FX, an investor of FY, is not required to separately take into account in its income US1's $100x payment received by FY; instead, FY is required to take the payment into account in its income. However, under the trust agreement, the trustee of FY may, with respect to certain items of income received by FY, allocate such an item to FY's beneficiary, FX. When this occurs, then, for Country Y tax purposes, FY does not take the item into account in its income, and FX is required to take the item into account in its income as if it received the item directly from the source from which realized by FY. For Country X tax purposes, FX in all cases does not take into account in its income any item of income received by FY. With respect to the $100x paid from US1 to FY, the trustee allocates the $100x to FX. (B) Analysis. FY is fiscally transparent with respect to US1's $100x payment under the tax law of Country Y (the tax law of the country in which FY is established). See §1.267A-5(a)(8)(i). In addition, FY is not fiscally transparent with respect to US1's $100x payment under the tax law of Country X (the tax law of FX, the investor of FY). See §1.267A-5(a)(8)(ii). Thus, FY is a reverse hybrid with respect to the payment. See §1.267A-2(d)(2) and (f). Therefore, for reasons similar to those discussed in paragraphs (c)(5)(ii)(B) and (C) of this section, the entire $100x payment is a disqualified hybrid amount. (6) Example 6. Branch mismatch payment --(i) Facts. FX holds all the interests of US1 and FZ. FZ owns BB, a Country B branch that gives rise to a taxable presence in Country B under Country Z tax law but not under Country B tax law. On date 1, US1 pays $50x to FZ. The amount is treated as a royalty for U.S. tax purposes and Country Z tax purposes. Under Country Z tax law, the amount is treated as income attributable to BB and, as a consequence of County Z tax law exempting income attributable to a branch, is excluded from FZ's income. (ii) Analysis. US1 is a specified party and thus a deduction for its $50x specified payment is subject to disallowance under section 267A. As described in paragraphs (c)(6)(ii)(A) through (C) of this section, the entire $50x payment is a disqualified hybrid amount under the branch mismatch rule of §1.267A-2(e) and, as a result, a deduction for the payment is disallowed under §1.267A-1(b)(1). (A) US1's payment is a branch mismatch payment because under Country Z tax law (the tax law of FZ, a home office that is related to US1) the payment is treated as income attributable to BB, and BB is not a taxable branch (that is, under Country B tax law, BB does not give rise to a taxable presence). See §1.267A-2(e)(2) and (f). Therefore, §1.267A-2(e) applies to the payment. The result would be the same if instead BB were a taxable branch and, under Country B tax law, US1's payment were treated as income attributable to FZ, the home office, and not BB. See §1.267A-2(e)(2). (B) For US1's payment to be a disqualified hybrid amount under §1.267A-2(e), a no-inclusion must occur with respect to FZ. See §1.267A-2(e)(1)(i). As a consequence of the Country Z branch exemption, FZ includes $0 of the payment in income and therefore a $50x no-inclusion occurs with respect to FZ. See §1.267A-3(a). (C) Pursuant to §1.267A-2(e)(1)(ii), FZ's $50x no-inclusion gives rise to a disqualified hybrid amount to the extent that it is a result of US1's payment being a branch mismatch payment. FZ's $50x no-inclusion is a result of the payment being a branch mismatch payment because, were the payment to not be treated as income attributable to BB for Country Z tax purposes, FZ would include $50x in income and, consequently, the no-inclusion would not occur. (7) Example 7. Reduction of disqualified hybrid amount for certain amounts includible in income --(i) Facts. US1 and FW hold 60% and 40%, respectively, of the interests of FX, and FX holds all the interests of FZ. Each of FX and FZ is a specified party that is a CFC. FX holds an instrument issued by FZ that it is treated as equity for Country X tax purposes and as indebtedness for U.S. tax purposes (the FX-FZ instrument). On date 1, FZ pays $100x to FX pursuant to the FX-FZ instrument. The amount is treated as a dividend for Country X tax purposes and as interest for U.S. tax purposes. In addition, pursuant to section 954(c)(6), the amount is not foreign personal holding company income of FX and, under section 951A, the amount is gross tested income (as described in §1.951A-2(c)(1)) of FX. Further, were FZ allowed a deduction for the amount, it would be allocated and apportioned to gross tested income (as described in §1.951A-2(c)(1)) of FZ. Lastly, Country X tax law provides an 80% participation exemption for dividends received from nonresident corporations and, as a result of such participation exemption, FX includes $20x of FZ's payment in income. (ii) Analysis. FZ, a CFC, is a specified party and thus a deduction for its $100x specified payment is subject to disallowance under section 267A. But for §1.267A-3(b), $80x of FZ's payment would be a disqualified hybrid amount (such amount, a "tentative disqualified hybrid amount"). See §§1.267A-2(a) and 1.267A-3(b)(1). Pursuant to §1.267A-3(b), the tentative disqualified hybrid amount is reduced by $48x. See §1.267A-3(b)(4). The $48x is the tentative disqualified hybrid amount to the extent that it increases US1's pro rata share of tested income with respect to FX under section 951A (calculated as $80x multiplied by 60%). See §1.267A-3(b)(4). Accordingly, $32x of FZ's payment ($80x less $48x) is a disqualified hybrid amount under §1.267A-2(a) and, as a result, $32x of the deduction is disallowed under §1.267A-1(b)(1). (iii) Alternative facts - United States shareholder is a domestic partnership. The facts are the same as in paragraph (c)(7)(i) of this section, except that US1 is a domestic partnership, 90% of the interests of which are held by US2 and the remaining 10% of which are held by an individual that is a nonresident alien (as defined in section 7701(b)(1)(B)). Thus, although each of US1 and US2 is a United States shareholder of FX, only US2 has a pro rata share of any tested item of FX. See §1.951A-1(e). In addition, $43.2x of the $80x tentative disqualified hybrid amount increases US2's pro rata share of the tested income of FX (calculated as $80x multiplied by 60% multiplied by 90%). Thus, $36.8x of FZ's payment ($80x less $43.2x) is a disqualified hybrid amount under §1.267A-2(a). See §1.267A-3(b)(4). (8) Example 8. Imported mismatch rule - direct offset --(i) Facts. FX holds all the interests of FW, and FW holds all the interests of US1. FX holds an instrument issued by FW that is treated as equity for Country X tax purposes and indebtedness for Country W tax purposes (the FX-FW instrument). FW holds an instrument issued by US1 that is treated as indebtedness for Country W and U.S. tax purposes (the FW-US1 instrument). In accounting period 1, FW pays $100x to FX pursuant to the FX-FW instrument. The amount is treated as an excludible dividend for Country X tax purposes (by reason of the Country X participation exemption) and as interest for Country W tax purposes. Also in accounting period 1, US1 pays $100x to FW pursuant to the FW-US1 instrument. The amount is treated as interest for Country W and U.S. tax purposes and is included in FW's income. The FX-FW instrument was not entered into pursuant to the same plan or series of related transactions pursuant to which the FW-US1 instrument was entered into. (ii) Analysis. US1 is a specified party and thus a deduction for its $100x specified payment is subject to disallowance under section 267A. US1's $100x payment is neither a disqualified hybrid amount nor included or includible in income in the United States. See §1.267A-4(a)(2)(v). In addition, FW's $100x deduction is a hybrid deduction because it is a deduction allowed to FW that results from an amount paid that is interest under Country W tax law, and were Country W law to have rules substantially similar to those under §§1.267A-1 through 1.267A-3 and 1.267A-5, a deduction for the payment would be disallowed (because under such rules the payment would be pursuant to a hybrid transaction and FX's no-inclusion would be a result of the hybrid transaction). See §§1.267A-2(a) and 1.267A-4(b). Under §1.267A-4(a)(2), US1's payment is an imported mismatch payment, US1 is an imported mismatch payer, and FW (the foreign tax resident that includes the imported mismatch payment in income) is an imported mismatch payee. The imported mismatch payment is a disqualified imported mismatch amount to the extent that the income attributable to the payment is directly or indirectly offset by the hybrid deduction incurred by FW (a foreign tax resident that is related to US1). See §1.267A-4(a)(1). Under §1.267A-4(c)(1), the $100x hybrid deduction directly or indirectly offsets the income attributable to US1's imported mismatch payment to the extent that the payment directly or indirectly funds the hybrid deduction. The entire $100x of US1's payment directly funds the hybrid deduction because FW (the imported mismatch payee) incurs at least that amount of the hybrid deduction. See §1.267A-4(c)(3)(i). Accordingly, the entire $100x payment is a disqualified imported mismatch amount under §1.267A-4(a)(1) and, as a result, a deduction for the payment is disallowed under §1.267A-1(b)(2). (iii) Alternative facts - long-term deferral. The facts are the same as in paragraph (c)(8)(i) of this section, except that the FX-FW instrument is treated as indebtedness for Country X and Country W tax purposes, and FW does not pay any amounts pursuant to the instrument during accounting period 1. In addition, under Country W tax law, FW is allowed to deduct interest under the FX-FW instrument as it accrues, whereas under Country X tax law FX does not take into account in its income interest under the FX-FW instrument until the interest is paid. Further, FW accrues $100x of interest during accounting period 1, and FW will not pay such amount to FX for more than 36 months after the end of accounting period 1. The results are the same as in paragraph (c)(8)(ii) of this section. That is, FW's $100x deduction for the accrued interest is a hybrid deduction, see §§1.267A-2(a), 1.267A-3(a), and 1.267A-4(b), and the income attributable to US1's $100x imported mismatch payment is offset by the hybrid deduction for the reasons described in paragraph (c)(8)(ii) of this section. As a result, a deduction for the payment is disallowed under §1.267A-1(b)(2). The result would be the same even if the FX-FW instrument is expected to be redeemed or capitalized before the $100x of interest is paid such that FX will never take into account in its income (and therefore will not include in income) the $100x of interest. (iv) Alternative facts - notional interest deduction. The facts are the same as in paragraph (c)(8)(i) of this section, except that there is no FX-FW instrument and thus FW does not pay any amounts to FX during accounting period 1. However, during accounting period 1, FW is allowed a $100x notional interest deduction with respect to its equity under Country W tax law. Pursuant to §1.267A-4(b)(1)(ii), FW's notional interest deduction is a hybrid deduction. The results are the same as in paragraph (c)(8)(ii) of this section. That is, the income attributable to US1's $100x imported mismatch payment is offset by FW's hybrid deduction for the reasons described in paragraph (c)(8)(ii) of this section. As a result, a deduction for the payment is disallowed under §1.267A-1(b)(2). The result would be the same if the tax law of Country W contains hybrid mismatch rules because FW's deduction is a deduction with respect to equity. See §1.267A-4(b)(2)(i). (v) Alternative facts - foreign hybrid mismatch rules prevent hybrid deduction. The facts are the same as in paragraph (c)(8)(i) of this section, except that the tax law of Country W contains hybrid mismatch rules, and under such rules FW is not allowed a deduction for the $100x that it pays to FX pursuant to the FX-FW instrument. The $100x paid by FW therefore does not give rise to a hybrid deduction. See §1.267A-4(b). Accordingly, because the income attributable to US1's payment to FW is not directly or indirectly offset by a hybrid deduction, the payment is not a disqualified imported mismatch amount. Therefore, a deduction for the payment is not disallowed under §1.267A-1(b)(2). (9) Example 9. Imported mismatch rule - indirect offsets and pro rata allocations --(i) Facts. FX holds all the interests of FZ, and FZ holds all the interests of US1 and US2. FX has a Country B branch that, for Country X and Country B tax purposes, gives rise to a taxable presence in Country B and is therefore a taxable branch ("BB"). Under the Country B-Country X income tax treaty, BB is a permanent establishment entitled to deduct expenses properly attributable to BB for purposes of computing its business profits under the treaty. In addition, BB is deemed to pay a royalty to FX for the right to use intangibles developed by FX equal to cost plus y%. The deemed royalty is a deductible expense properly attributable to BB under the Country B-Country X income tax treaty. For Country X tax purposes, any transactions between BB and X are disregarded. The deemed royalty is $80x for accounting period 1. Country B tax law does not permit a loss of a taxable branch to be shared with a tax resident or another taxable branch. In addition, an instrument issued by FZ to FX is properly reflected as an asset on the books and records of BB (the FX-FZ instrument). The FX-FZ instrument is treated as indebtedness for Country X, Country Z, and Country B tax purposes. In accounting period 1, FZ pays $80x to FX pursuant to the FX-FZ instrument; the amount is treated as interest for Country X, Country Z, and Country B tax purposes, and is treated as income attributable to BB for Country X and Country B tax purposes (but, for Country X tax purposes, is excluded from FX's income as a consequence of the Country X exemption for income attributable to a branch). Further, in accounting period 1, US1 and US2 pay $60x and $40x, respectively, to FZ pursuant to instruments that are treated as indebtedness for Country Z and U.S. tax purposes; the amounts are treated as interest for Country Z and U.S. tax purposes and are included in FZ's income. Lastly, neither the instrument pursuant to which US1 pays the $60x nor the instrument pursuant to which US2 pays the $40x was entered into pursuant to a plan or series of related transactions that includes the transaction or agreement giving rise to BB's deduction for the deemed royalty. (ii) Analysis. US1 and US2 are specified parties and thus deductions for their specified payments are subject to disallowance under section 267A. Neither of the payments is a disqualified hybrid amount, nor is either of the payments included or includible in income in the United States. See §1.267A-4(a)(2)(v). In addition, BB's $80x deduction for the deemed royalty is a hybrid deduction because it is a deduction allowed to BB that results from an amount paid that is treated as a royalty under Country B tax law (regardless of whether a royalty deduction would be allowed under U.S. law), and were Country B tax law to have rules substantially similar to those under §§1.267A-1 through 1.267A-3 and 1.267A-5, a deduction for the payment would be disallowed because under such rules the payment would be a deemed branch payment and Country X has an exclusion for income attributable to a branch. See §§1.267A-2(c) and 1.267A-4(b). Under §1.267A-4(a)(2), each of US1's and US2's payments is an imported mismatch payment, US1 and US2 are imported mismatch payers, and FZ (the foreign tax resident that includes the imported mismatch payments in income) is an imported mismatch payee. The imported mismatch payments are disqualified imported mismatch amounts to the extent that the income attributable to the payments is directly or indirectly offset by the hybrid deduction incurred by BB (a foreign taxable branch that is related to US1 and US2). See §1.267A-4(a). Under §1.267A-4(c)(1), the $80x hybrid deduction directly or indirectly offsets the income attributable to the imported mismatch payments to the extent that the payments directly or indirectly fund the hybrid deduction. Paragraphs (c)(9)(ii)(A) and (B) of this section describe the extent to which the imported mismatch payments directly or indirectly fund the hybrid deduction. (A) Neither US1's nor US2's payment directly funds the hybrid deduction because FZ (the imported mismatch payee) does not incur the hybrid deduction. See §1.267A-4(c)(3)(i). To determine the extent to which the payments indirectly fund the hybrid deduction, the amount of the hybrid deduction that is allocated to FZ must be determined. See §1.267A-4(c)(3)(ii). FZ is allocated the hybrid deduction to the extent that it directly or indirectly makes a funded taxable payment to BB (the foreign taxable branch that incurs the hybrid deduction). See §1.267A-4(c)(3)(iii). The $80x that FZ pays pursuant to the FX-FZ instrument is a funded taxable payment of FZ to BB. See §1.267A-4(c)(3)(v). Therefore, because FZ makes a funded taxable payment to BB that is at least equal to the amount of the hybrid deduction, FZ is allocated the entire amount of the hybrid deduction. See §1.267A-4(c)(3)(iii). (B) But for US2's imported mismatch payment, the entire $60x of US1's imported mismatch payment would indirectly fund the hybrid deduction because FZ is allocated at least that amount of the hybrid deduction. See §1.267A-4(c)(3)(ii). Similarly, but for US1's imported mismatch payment, the entire $40x of US2's imported mismatch payment would indirectly fund the hybrid deduction because FZ is allocated at least that amount of the hybrid deduction. See §1.267A-4(c)(3)(ii). However, because the sum of US1's and US2's imported mismatch payments to FZ ($100x) exceeds the hybrid deduction allocated to FZ ($80x), pro rata adjustments must be made. See §1.267A-4(e). Thus, $48x of US1's imported mismatch payment is considered to indirectly fund the hybrid deduction, calculated as $80x (the amount of the hybrid deduction) multiplied by 60% ($60x, the amount of US1's imported mismatch payment to FZ, divided by $100x, the sum of the imported mismatch payments that US1 and US2 make to FZ). Similarly, $32x of US2's imported mismatch payment is considered to indirectly fund the hybrid deduction, calculated as $80x (the amount of the hybrid deduction) multiplied by 40% ($40x, the amount of US2's imported mismatch payment to FZ, divided by $100x, the sum of the imported mismatch payments that US1 and US2 make to FZ). Accordingly, $48x of US1's imported mismatch payment, and $32x of US2's imported mismatch payment, are disqualified imported mismatch amounts under §1.267A-4(a)(1) and, as a result, deductions for such amounts are disallowed under §1.267A-1(b)(2). (iii) Alternative facts - loss made available through foreign group relief regime. The facts are the same as in paragraph (c)(9)(i) of this section, except that FZ holds all the interests in FZ2, a body corporate that is a tax resident of Country Z, FZ2 (rather than FZ) holds all the interests of US1 and US2, and US1 and US2 make their respective $60x and $40x payments to FZ2 (rather than to FZ). Further, in accounting period 1, a $10x loss of FZ is made available to offset income of FZ2 through a Country Z foreign group relief regime. Pursuant to §1.267A-4(c)(3)(vi), FZ and FZ2 are treated as a single foreign tax resident for purposes of §1.267A-4(c) because a loss that is not incurred by FZ2 (FZ's $10x loss) is made available to offset income of FZ2 under the Country Z group relief regime. Accordingly, the results are the same as in paragraph (c)(9)(ii) of this section. That is, by treating FZ and FZ2 as a single foreign tax resident for purposes of §1.267A-4(c), BB's hybrid deduction offsets the income attributable to US1's and US2's imported mismatch payments to the same extent as described in paragraph (c)(9)(ii) of this section. (10) Example 10. Imported mismatch rule - ordering rules and rule deeming certain payments to be imported mismatch payments --(i) Facts. FX holds all the interests of FW, and FW holds all the interests of US1, US2, and FZ. FZ holds all the interests of US3. FX transfers cash to FW in exchange for an instrument that is treated as equity for Country X tax purposes and indebtedness for Country W tax purposes (the FX-FW instrument). FW transfers cash to US1 in exchange for an instrument that is treated as indebtedness for Country W and U.S. tax purposes (the FW-US1 instrument). The FX-FW instrument and the FW-US1 instrument were entered into pursuant to a plan a design of which was for deductions incurred by FW pursuant to the FX-FW instrument to offset income attributable to payments by US1 pursuant to the FW-US1 instrument. In accounting period 1, FW pays $125x to FX pursuant to the FX-FW instrument; the amount is treated as an excludible dividend for Country X tax purposes (by reason of the Country X participation exemption regime) and as interest for Country W tax purposes. Also in accounting period 1, US1 pays $50x to FW pursuant to the FW-US1 instrument; US2 pays $50x to FW pursuant to an instrument treated as indebtedness for Country W and U.S. tax purposes (the FW-US2 instrument); US3 pays $50x to FZ pursuant to an instrument treated as indebtedness for Country Z and U.S. tax purposes (the FZ-US3 instrument); and FZ pays $50x to FW pursuant to an instrument treated as indebtedness for Country W and Country Z tax purposes (FW-FZ instrument). The amounts paid by US1, US2, US3, and FZ are treated as interest for purposes of the relevant tax laws and are included in the income of FW (in the case of US1's, US2's and FZ's payment) or FZ (in the case of US3's payment). Lastly, neither the FW-US2 instrument, the FW-FZ instrument, nor the FZ-US3 instrument was entered into pursuant to a plan or series of related transactions that includes the transaction pursuant to which the FX-FW instrument was entered into. (ii) Analysis. US1, US2, and US3 are specified parties (but FZ is not a specified party, see §1.267A-5(a)(17)) and thus deductions for US1's, US2's, and US3's specified payments are subject to disallowance under section 267A. None of the specified payments is a disqualified hybrid amount, nor is any of the payments included or includible in income in the United States. See §1.267A-4(a)(2)(v). Under §1.267A-4(a)(2), each of the payments is an imported mismatch payment, US1, US2, and US3 are imported mismatch payers, and FW and FZ (the foreign tax residents that include the imported mismatch payments in income) are imported mismatch payees. The imported mismatch payments are disqualified imported mismatch amounts to the extent that the income attributable to the payments is directly or indirectly offset by FW's $125x hybrid deduction. See §1.267A-4(a)(1) and (b). Under §1.267A-4(c)(1), the $125x hybrid deduction directly or indirectly offsets the income attributable to the imported mismatch payments to the extent that the payments directly or indirectly fund the hybrid deduction. Paragraphs (c)(10)(ii)(A) through (C) of this section describe the extent to which the imported mismatch payments directly or indirectly fund the hybrid deduction and are therefore disqualified hybrid amounts for which a deduction is disallowed under §1.267A-1(b)(2). (A) First, the $125x hybrid deduction offsets the income attributable to US1's imported mismatch payment, a factually-related imported mismatch payment that directly funds the hybrid deduction. See §1.267A-4(c)(2)(i). The entire $50x of US1's payment directly funds the hybrid deduction because FW (the imported mismatch payee) incurs at least that amount of the hybrid deduction. See §1.267A-4(c)(3)(i). Accordingly, the entire $50x of the payment is a disqualified imported mismatch amount under §1.267A-4(a)(1). (B) Second, the remaining $75x hybrid deduction offsets the income attributable to US2's imported mismatch payment, a factually-unrelated imported mismatch payment that directly funds the remaining hybrid deduction. See §1.267A-4(c)(2)(ii). The entire $50x of US2's payment directly funds the remaining hybrid deduction because FW (the imported mismatch payee) incurs at least that amount of the remaining hybrid deduction. See §1.267A-4(c)(3)(i). Accordingly, the entire $50x of the payment is a disqualified imported mismatch amount under §1.267A-4(a)(1). (C) Third, the remaining $25x hybrid deduction offsets the income attributable to US3's imported mismatch payment, a factually-unrelated imported mismatch payment that indirectly funds the remaining hybrid deduction. See §1.267A-4(c)(2)(iii). The imported mismatch payment indirectly funds the remaining hybrid deduction to the extent that FZ (the imported mismatch payee) is allocated the remaining hybrid deduction. See §1.267A-4(c)(3)(ii). FZ is allocated the remaining hybrid deduction to the extent that it directly or indirectly makes a funded taxable payment to FW (the tax resident that incurs the hybrid deduction). See §1.267A-4(c)(3)(iii). The $50x that FZ pays to FW pursuant to the FW-FZ instrument is a funded taxable payment of FZ to FW. See §1.267A-4(c)(3)(v). Therefore, because FZ makes a funded taxable payment to FW that is at least equal to the amount of the remaining hybrid deduction, FZ is allocated the remaining hybrid deduction. See §1.267A-4(c)(3)(iii). Accordingly, $25x of US3's payment indirectly funds the $25x remaining hybrid deduction and, consequently, $25x of US3's payment is a disqualified imported mismatch amount under §1.267A-4(a)(2). (iii) Alternative facts - amount deemed to be an imported mismatch payment. The facts are the same as in paragraph (c)(10)(i) of this section, except that US1 is not a domestic corporation but instead is a body corporate that is only a tax resident of Country E (hereinafter, "FE") (thus, for purposes of this paragraph (c)(10)(iii), the FW-US1 instrument is instead issued by FE and is the "FW-FE instrument"). In addition, the tax law of Country E contains hybrid mismatch rules and the $50x FE pays to FW pursuant to the FW-FE instrument is subject to disallowance under a provision of the hybrid mismatch rules substantially similar to §1.267A-4. Pursuant to §1.267A-4(f)(2), the $50x that FE pays to FW pursuant to the FW-FE instrument is deemed to be an imported mismatch payment for purposes of determining the extent to which the income attributable to an imported mismatch payment is offset by FW's hybrid deduction (a hybrid deduction other than one described in §1.267A-4(f)(1)). The results are the same as in paragraphs (c)(10)(ii)(B) and (C) of this section. That is, by treating the $50x that FE pays to FW as an imported mismatch payment, and for reasons similar to those described in paragraphs (c)(10)(ii)(A) through (C) of this section, $50x of FW's $125x hybrid deduction offsets income attributable to FE's imported mismatch payment, $50x of the remaining $75x hybrid deduction offsets income attributable to US2's imported mismatch payment, and the remaining $25x hybrid deduction offsets income attributable to US3's imported mismatch payment. Accordingly, the entire $50x of US2's payment is a disqualified imported mismatch amount, and $25x of US3's payment is a disqualified imported mismatch amount. (iv) Alternative facts - amount deemed to be an imported mismatch payment and "waterfall" approach. The facts are the same as in paragraph (c)(10)(i) of this section, except that FZ holds all of the interests of US3 indirectly through FE, a body corporate that is only a tax resident of Country E (hereinafter, "FE"), and US3 makes its $50x payment to FE (rather than to FZ); such amount is treated as interest for Country E tax purposes and is included in FE's income. In addition, during accounting period 1, FE pays $50x to FZ pursuant to an instrument; such amount is treated as interest for Country E and Country Z tax purposes, and is included in FZ's income. Further, the tax law of Country E contains hybrid mismatch rules and the $50x FE pays to FZ pursuant to the instrument is subject to disallowance under a provision of the hybrid mismatch rules substantially similar to §1.267A-4. For purposes of determining the extent to which the income attributable to an imported mismatch payment is directly or indirectly offset by a hybrid deduction, the $50x that FE pays to FZ is deemed to be an imported mismatch payment (and FE and FZ are deemed to be an imported mismatch payer and imported mismatch payee, respectively). See §1.267A-4(f)(2). With respect to US1 and US2, the results are the same as described in paragraphs (c)(10)(ii)(A) and (B) of this section. No portion of US3's payment is a disqualified imported mismatch amount because, by treating the $50x that FE pays to FZ as an imported mismatch payment, the remaining $25x of FW's hybrid deduction offsets income attributable to FE's imported mismatch payment. This is because the remaining $25x of FW's hybrid deduction is indirectly funded solely by FE's imported mismatch payment (as opposed to also being funded by US3's imported mismatch payment), as FZ (the imported mismatch payee with respect to FE's payment) directly makes a funded taxable payment to FW, whereas FE (the imported mismatch payee with respect to US3's payment) indirectly makes a funded taxable payment to FW. See §1.267A-4(c)(3)(ii) through (v) and (vii). (11) Example 11. Imported mismatch rule - hybrid deduction of a CFC --(i) Facts. FX holds all the interests of US1, and FX and US1 hold 80% and 20%, respectively, of the interests of FZ, a specified party that is a CFC. US1 also holds all the interests of US2, and FX also holds all the interests of FY. FY is an entity established in Country Y, and is fiscally transparent for Country Y tax purposes but is not fiscally transparent for Country X tax purposes. In accounting period 1, US2 pays $100x to FZ pursuant to an instrument (the FZ-US2 instrument). The amount is treated as interest for U.S. tax purposes and Country Z tax purposes, and is included in FZ's income; in addition, for U.S. tax purposes, the amount is foreign personal holding company income of FZ. Also in accounting period 1, FZ pays $100x to FY pursuant to an instrument (the FY-FZ instrument). The amount is treated as interest for U.S. tax purposes and Country Z tax purposes, and none of the amount is included in FX's income. Under Country Z tax law, FZ is allowed a deduction for its entire $100x payment. Under §1.267A-2(d), the entire $100x of FZ's payment is a disqualified hybrid amount (by reason of being made to a reverse hybrid) and, as a result, a deduction for the payment is disallowed under §1.267A-1(b)(1); in addition, if a deduction were allowed for the $100x, it would be allocated and apportioned (under the rules of section 954(b)(5)) to gross subpart F income of FZ. Lastly, the FZ-US2 instrument was not entered into pursuant to a plan or series of related transactions that includes the transaction pursuant to which the FY-FZ instrument was entered into. (ii) Analysis. US2 is a specified party and thus a deduction for its $100x specified payment is subject to disallowance under section 267A. As described in paragraphs (c)(11)(ii)(A) through (C) of this section, $80x of US2's payment is a disqualified imported mismatch amount for which a deduction is disallowed under §1.267A-1(b)(2). (A) $80x of US2's specified payment is an imported mismatch payment, calculated as $100x (the amount of the payment) less $0 (the disqualified hybrid amount with respect to the payment) less $20 (the amount of the payment that is included or includible in income in the United States). See §1.267A-4(a)(2)(v). US2 is an imported mismatch payer and FZ (a foreign tax resident that includes the imported mismatch in income) is an imported mismatch payee. See §1.267A-4(a)(2). (B) But for §1.267A-4(b)(2)(iv), the entire $100x deduction allowed to FZ under its tax law would be a hybrid deduction. See §§1.267A-2(d) and 1.267A-4(b)(1). However, pursuant to §1.267A-4(b)(2)(iv), only $80x of the deduction is a hybrid deduction, calculated as $100x (the deduction to the extent that it would be a hybrid deduction but for §1.267A-4(b)(2)(iv)) less $20x (the extent that FZ's payment giving rise to the deduction is a disqualified hybrid amount that is taken into account for purposes of §1.267A-4(b)(2)(iv)(A)), less $0 (the extent that FZ's payment giving rise to the deduction is included or includible in income in the United States). See §1.267A-4(b)(2)(iv). The $20x disqualified hybrid amount that is taken into account for purposes of §1.267A-4(b)(2)(iv)(A) is calculated as $100x (the extent that FZ's payment is a disqualified hybrid amount) less $80x ($100x, the disqualified hybrid amount to the extent that, if allowed as a deduction, it would be allocated and apportioned to gross subpart F income, multiplied by 80%, the difference of 100% and the percentage of the stock (by value) of FZ that is owned by US1)). See §1.267A-4(g). (C) The $80x hybrid deduction offsets the income attributable to US2's imported mismatch payment, an imported mismatch payment that directly funds the hybrid deduction. See §1.267A-4(c)(2)(ii). The entire $80x of US2's imported mismatch payment directly funds the hybrid deduction because FZ (the imported mismatch payee) incurs at least that amount of the hybrid deduction. See §1.267A-4(c)(3)(i). Accordingly, the entire $80x of US2's imported mismatch payment is a disqualified imported mismatch amount under §1.267A-4(a)(1). (12) Example 12. Imported mismatch rule - application first with respect to certain hybrid deductions, then with respect to other hybrid deductions --(i) Facts. FX holds all the interests of FZ, and FZ holds all the interests of each of US1 and FE. The tax law of Country E contains hybrid mismatch rules. FX holds an instrument issued by FZ that is treated as equity for Country X tax purposes and indebtedness for Country Z tax purposes (the FX-FZ instrument). In accounting period 1, FZ pays $10x to FX pursuant to the FX-FZ instrument. The amount is treated as an excludible dividend for Country X tax purposes (by reason of the Country X participation exemption) and as interest for Country Z tax purposes. Also in accounting period 1, FZ is allowed a $90x notional interest deduction with respect to its equity under Country Z tax law. In addition, in accounting period 1, US1 pays $100x to FZ pursuant to an instrument (the FZ-US1 instrument); the amount is treated as interest for U.S. tax purposes and Country Z tax purposes, and is included in FZ's income. Further, in accounting period 1, FE pays $40x to FZ pursuant to an instrument (the FZ-FE instrument); the amount is treated as interest for Country E and Country Z tax purposes, is included in FZ's income, and is subject to disallowance under a provision of Country E hybrid mismatch rules substantially similar to §1.267A-4. Lastly, neither the FZ-US1 instrument nor the FZ-FE instrument was entered into pursuant to a plan or series of related transactions that includes the transaction pursuant to which the FX-FZ instrument was entered into. (ii) Analysis. US1 is a specified party and thus a deduction for its $100x specified payment is subject to disallowance under section 267A. As described in paragraphs (c)(12)(ii)(A) through (D) of this section, $92x of US1's payment is a disqualified imported mismatch amount for which a deduction is disallowed under §1.267A-1(b)(2). (A) The entire $100x of US1's specified payment is an imported mismatch payment. See §1.267A-4(a)(2)(v). US1 is an imported mismatch payer and FZ (a foreign tax resident that includes the imported mismatch payment in income) is an imported mismatch payee. See §1.267A-4(a)(2). (B) FZ has $100x of hybrid deductions (the $10x deduction for the payment pursuant to the FX-FZ instrument plus the $90x notional interest deduction). See §1.267A-4(b). Pursuant to §1.267A-4(f)(1), §1.267A-4 is first applied by taking into account only the $90x hybrid deduction consisting of the notional interest deduction; in addition, for purposes of applying §1.267A-4 in this manner, FE's $40x payment is not treated as an imported mismatch payment. Thus, the $90x hybrid deduction offsets the income attributable to US1's imported mismatch payment, an imported mismatch payment that directly funds the hybrid deduction. See §1.267A-4(c)(2)(ii). Moreover, $90x of US1's imported mismatch payment directly funds the hybrid deduction because FZ (the imported mismatch payee) incurs at least that amount of the hybrid deduction. See §1.267A-4(c)(3)(i). (C) Section §1.267A-4 is next applied by taking into account only the $10x hybrid deduction consisting of the deduction for the payment pursuant to the FX-FZ instrument. See §1.267A-4(f)(2). When applying §1.267A-4 in this manner, and for purposes of determining the extent to which the income attributable to an imported mismatch payment is directly or indirectly offset by a hybrid deduction, FE's $40x payment is treated as an imported mismatch payment. See §1.267A-4(f)(2). In addition, US1's imported mismatch payment is reduced from $100x to $10x. See §1.267A-4(c)(4). But for FE's imported mismatch payment, the entire $10x of US1's imported mismatch payment would directly fund the $10x hybrid deduction because FZ incurred at least that amount of the hybrid deduction. See §1.267A-4(c)(3)(i). Similarly, but for US1's imported mismatch payment, the entire $40x of FE's imported mismatch payment would directly fund the $10x hybrid deduction because FZ incurred at least that amount of the hybrid deduction. See §1.267A-4(c)(3)(i). However, because the sum of US1's and FE's imported mismatch payments to FZ ($50x) exceeds the hybrid deduction incurred by FZ ($10x), pro rata adjustments must be made. See §1.267A-4(e). Thus, $2x of US1's imported mismatch payment is considered to directly fund the hybrid deduction, calculated as $10x (the amount of the hybrid deduction) multiplied by 20% ($10x, the amount of US1's imported mismatch payment to FZ, divided by $50x, the sum of the imported mismatch payments that US1 and FE make to FZ). Similarly, $8x of FE's imported mismatch payment is considered to directly fund the hybrid deduction, calculated as $10x (the amount of the hybrid deduction) multiplied by 80% ($40x, the amount of FE's imported mismatch payment to FZ, divided by $50x, the sum of the imported mismatch payments that US1 and FE make to FZ). Accordingly, $2x of FZ's $10x hybrid deduction offsets income attributable to US1's $10x imported mismatch payment, and $8x of the hybrid deduction offsets income attributable to FE's $40x imported mismatch payment. (D) Therefore, $92x of US1's imported mismatch payment is a disqualified imported mismatch amount, calculated as $90x (the amount that is a disqualified imported mismatch amount determined by applying §1.267A-4 in the manner set forth in §1.267A-4(f)(1)) plus $2x (the amount that is a disqualified imported mismatch amount determined by applying §1.267A-4 in the manner set forth in §1.267A-4(f)(2)). See §1.267A-4(a)(1) and (f). (iii) Alternative facts - amount deemed to be an imported mismatch payment solely funds hybrid instrument deduction. The facts are the same as in paragraph (c)(12)(i) of this section, except that FZ holds all of the interests of US1 indirectly through FE, and US1 makes its $100x payment to FE (rather than to FZ); such amount is treated as interest for U.S. and Country E tax purposes, and is included in FE's income. Moreover, FE pays $100x to FZ (rather than $40x); such amount is included in FZ's income, and is subject to disallowance under a provision of Country E hybrid mismatch rules substantially similar to §1.267A-4. As described in paragraphs (c)(12)(iii)(A) through (D) of this section, $90x of US1's payment is a disqualified imported mismatch amount for which a deduction is disallowed under §1.267A-1(b)(2). (A) The entire $100x of US1's specified payment is an imported mismatch payment. See §1.267A-4(a)(2)(v). US1 is an imported mismatch payer and FE (a foreign tax resident that includes the imported mismatch payment in income) is an imported mismatch payee. See §1.267A-4(a)(2). (B) FZ has $100x of hybrid deductions. See §1.267A-4(b). Pursuant to §1.267A-4(f)(1), §1.267A-4 is first applied by taking into account only the $90x hybrid deduction consisting of the notional interest deduction; in addition, for purposes of applying §1.267A-4 in this manner, FE's $100x payment is not treated as an imported mismatch payment. Thus, the $90x hybrid deduction offsets the income attributable to US1's imported mismatch payment, an imported mismatch payment that indirectly funds the hybrid deduction. See §1.267A-4(c)(2)(iii). The imported mismatch payment indirectly funds the hybrid deduction because FE (the imported mismatch payee) is allocated the deduction, as FE makes a funded taxable payment (the $100x payment to FZ) that is at least equal to the amount of the deduction. See §1.267A-4(c)(3)(ii), (iii), and (v). (C) Section §1.267A-4 is next applied by taking into account only the $10x hybrid deduction consisting of the deduction for the payment pursuant to the FX-FZ instrument. See §1.267A-4(f)(2). For purposes of applying §1.267A-4 in this manner, FE's $100x payment is reduced from $100x to $10x, and similarly US1's imported mismatch payment is reduced from $100x to $10x. See §1.267A-4(c)(4). Further, FE's $10x payment is treated as an imported mismatch payment. See §1.267A-4(f)(2). The entire $10x of FE's imported mismatch payment directly funds the hybrid deduction because FZ (the imported mismatch payee with respect to FE's imported mismatch payment) incurs at least that amount of the hybrid deduction. See §1.267A-4(c)(3)(i). Accordingly, the $10x hybrid deduction offsets the income attributable to FE's imported mismatch payment, and none of the income attributable to US1's imported mismatch payment. (D) Therefore, $90x of US1's imported mismatch payment is a disqualified imported mismatch amount, calculated as $90x (the amount that is a disqualified imported mismatch amount determined by applying §1.267A-4 in the manner set forth in §1.267A-4(f)(1)) plus $0 (the amount that is a disqualified imported mismatch amount determined by applying §1.267A-4 in the manner set forth in §1.267A-4(f)(2)). See §1.267A-4(a)(1) and (f). §1.267A-7 Applicability dates. (a) General rule. Except as provided in paragraph (b) of this section, §§1.267A-1 through 1.267A-6 apply to taxable years ending on or after December 20, 2018, provided that such taxable years begin after December 31, 2017. However, taxpayers may apply the regulations in §§1.267A-1 through 1.267A-6 in their entirety for taxable years beginning after December 31, 2017, and ending before December 20, 2018. In lieu of applying the regulations in §§1.267A-1 through 1.267A-6, taxpayers may apply the provisions matching §§1.267A-1 through 1.267A-6 from the Internal Revenue Bulletin (IRB) 2019-03 (https://www.irs.gov/pub/irs-irbs/irb19-03.pdf) in their entirety for all taxable years ending on or before April 8, 2020. (b) Special rules. The following special rules apply regarding applicability dates: (1) Sections 1.267A-2(a)(4) (payments pursuant to interest-free loans and similar arrangements), (b) (disregarded payments), (c) (deemed branch payments), and (e) (branch mismatch transactions), 1.267A-4 (imported mismatch rule), and 1.267A-5(b)(5) (structured payments), except as provided in paragraph (b)(5) of this section, apply to taxable years beginning on or after December 20, 2018. (2) Section 1.267A-5(a)(20) (defining structured arrangement), as well as the portions of §§1.267A-1 through 1.267A-3 that relate to structured arrangements and that are not otherwise described in paragraph (b) of this section, apply to taxable years beginning on or after December 20, 2018. However, in the case of a specified payment made pursuant to an arrangement entered into before December 22, 2017, §1.267A-5(a)(20), and the portions of §§1.267A-1 through 1.267A-3 that relate to structured arrangements and that are not otherwise described in paragraph (b) of this section, apply to taxable years beginning after December 31, 2020. (3) Except as provided in paragraph (b)(4) of this section, the rules provided in §1.267A-5(a)(12)(ii) (swaps with significant nonperiodic payments) apply to notional principal contracts entered into on or after April 8, 2021. However, taxpayers may apply the rules provided in §1.267A-5(a)(12)(ii) to notional principal contracts entered into before April 8, 2021. (4) For a notional principal contract entered into before April 8, 2021, the interest equivalent rules provided in §1.267A-5(b)(5)(ii)(B) (applied without regard to the references to §1.267A-5(a)(12)(ii)) apply to a notional principal contract entered into on or after April 8, 2020. (5) Section 1.267A-5(b)(5)(ii)(B) (interest equivalent rules) applies to transactions entered into on or after April 8, 2020. Par. 4 Section 1.1503(d)-1 is amended by: 1.In paragraph (b)(2)(i), removing the word "and". 2.In paragraph (b)(2)(ii), removing the second period and adding in its place "; and". 3.Adding paragraph (b)(2)(iii). 4.Redesignating paragraph (c) as paragraph (d). 5.Adding new paragraph (c). 6.In newly redesignated paragraph (d)(1), removing the language "(c)" and "(c)(2)" and adding the language "(d)" and "(d)(2)" in their places, respectively. 7.In the first sentence of newly redesignated paragraph (d)(2)(ii) introductory text, removing the language "(c)(2)(i)" and adding the language "(d)(2)(i)" in its place. The additions read as follows: §1.1503(d)-1 Definitions and special rules for filings under section 1503(d). (b) * * * (2) * * * (iii) A domestic consenting corporation (as defined in §301.7701-3(c)(3)(i) of this chapter), as provided in paragraph (c)(1) of this section. See §1.1503(d)-7(c)(41) for an example illustrating the application of section 1503(d) to a domestic consenting corporation. (c) Treatment of domestic consenting corporation as a dual resident corporation --(1) Rule. A domestic consenting corporation is treated as a dual resident corporation under paragraph (b)(2)(iii) of this section for a taxable year if, on any day during the taxable year, the following requirements are satisfied: (i) Under the tax law of a foreign country where a specified foreign tax resident is tax resident, the specified foreign tax resident derives or incurs (or would derive or incur) items of income, gain, deduction, or loss of the domestic consenting corporation (because, for example, the domestic consenting corporation is fiscally transparent under such tax law). (ii) The specified foreign tax resident bears a relationship to the domestic consenting corporation that is described in section 267(b) or 707(b). See §1.1503(d)-7(c)(41) for an example illustrating the application of paragraph (c) of this section. (2) Definitions. The following definitions apply for purposes of this paragraph (c). (i) The term fiscally transparent means, with respect to a domestic consenting corporation or an intermediate entity, fiscally transparent as determined under the principles of §1.894-1(d)(3)(ii) and (iii), without regard to whether a specified foreign tax resident is a resident of a country that has an income tax treaty with the United States. (ii) The term specified foreign tax resident means a body corporate or other entity or body of persons liable to tax under the tax law of a foreign country as a resident. Par. 5. Section 1.1503(d)-3 is amended by adding the language "or (3)" after the language "paragraph (e)(2)" in paragraph (e)(1) introductory text and adding paragraph (e)(3) to read as follows: §1.1503(d)-3 Foreign use. (e) * * * (3) Exception for domestic consenting corporations. Paragraph (e)(1) of this section will not apply so as to deem a foreign use of a dual consolidated loss incurred by a domestic consenting corporation that is a dual resident corporation under §1.1503(d)-1(b)(2)(iii). §1.1503(d)-6 [Amended] Par. 6. Section 1.1503(d)-6 is amended by: 1. Removing the language "a foreign government" and "a foreign country" in paragraph (f)(5)(i) and adding the language "a government of a country" and "the country" in their places, respectively. 2. Removing the language "a foreign government" in paragraph (f)(5)(ii) and adding the language "a government of a country" in its place. 3. Removing the language "the foreign government" in paragraph (f)(5)(iii) and adding the language "a government of a country" in its place. Par. 7. Section 1.1503(d)-7 is amended by: 1. Designating Examples 1 through 40 of paragraph (c) as paragraphs (c)(1) through (40), respectively. 2. In newly designated paragraphs (c)(1) through (40), removing "Alternative Facts" and adding "Alternative facts" in its place wherever it appears. 3. For each newly designated paragraph listed in the table, remove the language in the ''Remove'' column and add in its place the language in the ''Add'' column: 4. In newly designated paragraphs (c)(29)(i)(A) and (c)(38)(i)(A), adding headings to the tables. 5. Adding paragraph (c)(41). The additions read as follows: §1.1503(d)-7 Examples. (c) * * * (29) * * * (i) * * * (A) * * * Table 1 to paragraph (c)(29)(i)(A) (38) * * * (i) * * * (A) Table 2 to paragraph (c)(38)(i)(A) (41) Example 41. Domestic consenting corporation--treated as dual resident corporation --(i) Facts. FSZ1, a Country Z entity that is subject to Country Z tax on its worldwide income or on a residence basis and is classified as a foreign corporation for U.S. tax purposes, owns all the interests in DCC, a domestic eligible entity that has filed an election to be classified as an association. Under Country Z tax law, DCC is fiscally transparent. For taxable year 1, DCC's only item of income, gain, deduction, or loss is a $100x deduction and such deduction comprises a $100x net operating loss of DCC. For Country Z tax purposes, FSZ1's only item of income, gain, deduction, or loss, other than the $100x loss attributable to DCC, is $60x of operating income. (ii) Result. DCC is a domestic consenting corporation because by electing to be classified as an association, it consents to be treated as a dual resident corporation for purposes of section 1503(d). See §301.7701-3(c)(3) of this chapter. For taxable year 1, DCC is treated as a dual resident corporation under §1.1503(d)-1(b)(2)(iii) because FSZ1 (a specified foreign tax resident that bears a relationship to DCC that is described in section 267(b) or 707(b)) derives or incurs items of income, gain, deduction, or loss of DCC. See §1.1503(d)-1(c). FSZ1 derives or incurs items of income, gain, deduction, or loss of DCC because, under Country Z tax law, DCC is fiscally transparent. Thus, DCC has a $100x dual consolidated loss for taxable year 1. See §1.1503(d)-1(b)(5). Because the loss is available to, and in fact does, offset income of FSZ1 under Country Z tax law, there is a foreign use of the dual consolidated loss in year 1. Accordingly, the dual consolidated loss is subject to the domestic use limitation rule of §1.1503(d)-4(b). The result would be the same if FSZ1 were to indirectly own its DCC stock through an intermediate entity that is fiscally transparent under Country Z tax law, or if an individual were to wholly own FSZ1 and FSZ1 were a disregarded entity. In addition, the result would be the same if FSZ1 had no items of income, gain, deduction, or loss, other than the $100x loss attributable to DCC. (iii) Alternative facts - DCC not treated as a dual resident corporation. The facts are the same as in paragraph (c)(41)(i) of this section, except that DCC is not fiscally transparent under Country Z tax law and thus under Country Z tax law FSZ1 does not derive or incur items of income, gain, deduction, or loss of DCC. Accordingly, DCC is not treated as a dual resident corporation under §1.1503(d)-1(b)(2)(iii) for year 1 and, consequently, its $100x net operating loss in that year is not a dual consolidated loss. (iv) Alternative facts - mirror legislation. The facts are the same as in paragraph (c)(41)(i) of this section, except that, under provisions of Country Z tax law that constitute mirror legislation under §1.1503(d)-3(e)(1) and that are substantially similar to the recommendations in Chapter 6 of OECD/G-20, Neutralising the Effects of Hybrid Mismatch Arrangements, Action 2: 2015 Final Report (October 2015), Country Z tax law prohibits the $100x loss attributable to DCC from offsetting FSZ1's income that is not also subject to U.S. tax. As is the case in paragraph (c)(41)(ii) of this section, DCC is treated as a dual resident corporation under §1.1503(d)-1(b)(2)(iii) for year 1 and its $100x net operating loss is a dual consolidated loss. Pursuant to §1.1503(d)-3(e)(3), however, the dual consolidated loss is not deemed to be put to a foreign use by virtue of the Country Z mirror legislation. Therefore, DCC is eligible to make a domestic use election for the dual consolidated loss. Par. 8. Section 1.1503(d)-8 is amended by removing the language "§1.1503(d)-1(c)" and adding in its place the language "§1.1503(d)-1(d)" wherever it appears in paragraphs (b)(3)(i) and (iii) and adding paragraphs (b)(6) and (7) to read as follows: §1.1503(d)-8 Effective dates. (b) * * * (6) Rules regarding domestic consenting corporations. Section 1.1503(d)-1(b)(2)(iii) and (c), as well §1.1503(d)-3(e)(1) and (3), apply to determinations under §§1.1503(d)-1 through 1.1503(d)-7 relating to taxable years ending on or after December 20, 2018. For taxable years ending before December 20, 2018, see §1.1503(d)-3(e)(1) as contained in 26 CFR part 1 revised as of April 1, 2018. (7) Compulsory transfer triggering event exception. Section 1.1503(d)-6(f)(5)(i) through (iii) applies to transfers that occur on or after December 20, 2018. For transfers occurring before December 20, 2018, see §1.1503(d)-6(f)(5)(i) through (iii) as contained in 26 CFR part 1 revised as of April 1, 2018. However, taxpayers may consistently apply §1.1503(d)-6(f)(5)(i) through (iii) to transfers occurring before December 20, 2018. Par. 9. Section 1.6038-2 is amended by adding paragraphs (f)(13) and (14) and (m)(3) to read as follows: §1.6038-2 Information returns required of United States persons with respect to annual accounting periods of certain foreign corporations. (f) * * * (13) Amounts involving hybrid transactions or hybrid entities under section 267A. If for the annual accounting period, the corporation pays or accrues interest or royalties for which a deduction is disallowed under section 267A and the regulations in this part under section 267A of the Internal Revenue Code, then Form 5471 (or successor form) must contain such information about the disallowance in the form and manner and to the extent prescribed by the form, instruction, publication, or other guidance. (14) Hybrid dividends under section 245A(e). If for the annual accounting period, the corporation pays or receives a hybrid dividend or a tiered hybrid dividend under section 245A(e) and the regulations in this part under section 245A(e) of the Internal Revenue Code, then Form 5471 (or successor form) must contain such information about the hybrid dividend or tiered hybrid dividend in the form and manner and to the extent prescribed by the form, instruction, publication, or other guidance. Form 5471 (or successor form) must also contain any other information relating to the rules of section 245A(e) and the regulations in this part under section 245A(e) of the Internal Revenue Code (including information related to a specified owner's hybrid deduction account), as prescribed by the form, instruction, publication, or other guidance. (m) * * * (3) Rules relating to certain hybrid arrangements. Paragraphs (f)(13) and (14) of this section apply with respect to information for annual accounting periods beginning on or after December 20, 2018. Par. 10. Section 1.6038-3 is amended by: 1. Adding paragraph (g)(3). 2. Redesignating paragraph (1) at the end of the section as paragraph (l). 3. In newly redesignated paragraph (l), revising the heading and adding a sentence at the end. The additions and revision read as follows: §1.6038-3 Information returns required of certain United States persons with respect to controlled foreign partnerships (CFPs). (g) * * * (3) Amounts involving hybrid transactions or hybrid entities under section 267A. In addition to the information required pursuant to paragraphs (g)(1) and (2) of this section, if, during the partnership's taxable year for which the Form 8865 is being filed, the partnership paid or accrued interest or royalties for which a deduction is disallowed under section 267A and the regulations in this part under section 267A, the controlling fifty-percent partners must provide information about the disallowance in the form and manner and to the extent prescribed by Form 8865 (or successor form), instruction, publication, or other guidance. (l) Applicability dates. * * * Paragraph (g)(3) of this section applies for taxable years of a foreign partnership beginning on or after December 20, 2018. Par. 11. Section 1.6038A-2 is amended by adding paragraph (b)(5)(iii) and adding a sentence at the end of paragraph (g) to read as follows: §1.6038A-2 Requirement of return. (b) * * * (5) * * * (iii) If, for the taxable year, a reporting corporation pays or accrues interest or royalties for which a deduction is disallowed under section 267A and the regulations in this part under section 267A, then the reporting corporation must provide such information about the disallowance in the form and manner and to the extent prescribed by Form 5472 (or successor form), instruction, publication, or other guidance. (g) * * * Paragraph (b)(5)(iii) of this section applies with respect to information for annual accounting periods beginning on or after December 20, 2018. PART 301--PROCEDURE AND ADMINISTRATION Paragraph 12. The authority citation for part 301 continues to read in part as follows: Authority: 26 U.S.C. 7805 * * * Par. 13. Section 301.7701-3 is amended by revising the sixth sentence of paragraph (a) and adding paragraph (c)(3) to read as follows: §301.7701-3 Classification of certain business entities. (a) In general. * * * Paragraph (c) of this section provides rules for making express elections, including a rule under which a domestic eligible entity that elects to be classified as an association consents to be subject to the dual consolidated loss rules of section 1503(d). * * * (c) * * * (3) Consent to be subject to section 1503(d) --(i) Rule. A domestic eligible entity that elects to be classified as an association consents to be treated as a dual resident corporation for purposes of section 1503(d) (such an entity, a domestic consenting corporation ), for any taxable year for which it is classified as an association and the condition set forth in §1.1503(d)-1(c)(1) of this chapter is satisfied. (ii) Transition rule -- deemed consent. If, as a result of the applicability date (see paragraph (c)(3)(iii) of this section) relating to paragraph (c)(3)(i) of this section, a domestic eligible entity that is classified as an association has not consented to be treated as a domestic consenting corporation pursuant to paragraph (c)(3)(i) of this section, then the domestic eligible entity is deemed to consent to be so treated as of its first taxable year beginning on or after December 20, 2019. The first sentence of this paragraph (c)(3)(ii) does not apply if the domestic eligible entity elects, on or after December 20, 2018 and effective before its first taxable year beginning on or after December 20, 2019, to be classified as a partnership or disregarded entity such that it ceases to be a domestic eligible entity that is classified as an association. For purposes of the election described in the second sentence of this paragraph (c)(3)(ii), the sixty month limitation under paragraph (c)(1)(iv) of this section is waived. (iii) Applicability date. The sixth sentence of paragraph (a) of this section and paragraph (c)(3)(i) of this section apply to a domestic eligible entity that on or after December 20, 2018 files an election to be classified as an association (regardless of whether the election is effective before December 20, 2018). Paragraph (c)(3)(ii) of this section applies as of December 20, 2018. Sunita Lough, Deputy Commissioner for Services and Enforcement. Approved: February 26, 2020. David J. Kautter, Assistant Secretary of the Treasury (Tax Policy). (Filed by the Office of the Federal Register on April 7, 2020, 8:45 a.m., and published in the issue of the Federal Register for April 8, 2020, 85 F.R. 19802)
Internal Revenue Service - Information Release IR-2023-105 IRS alerts businesses, tax-exempt groups of warning signs for misleading Employee Retention scams; simple steps can avoid improperly filing claims May 25, 2023 Media Relations Office Washington, D.C. www.IRS.gov/newsroom Media Contact: 202.317.4000 Public Contact: 800.829.1040 IRS alerts businesses, tax-exempt groups of warning signs for misleading Employee Retention scams; simple steps can avoid improperly filing claims IR-2023-105, May 25, 2023 WASHINGTON -- As aggressive marketing continues, the Internal Revenue Service today renewed an alert for businesses to watch out for tell-tale signs of misleading claims involving the Employee Retention Credit. The IRS and tax professionals continue to see a barrage of aggressive broadcast advertising, direct mail solicitations and online promotions involving the Employee Retention Credit. While the credit is real, aggressive promoters are wildly misrepresenting and exaggerating who can qualify for the credits. The IRS has stepped up audit and criminal investigation work involving these claims. Businesses, tax-exempt organizations and others considering applying for this credit need to carefully review the official requirements for this limited program before applying. Those who improperly claim the credit face follow-up action from the IRS. "The aggressive marketing of the Employee Retention Credit continues preying on innocent businesses and others," said IRS Commissioner Danny Werfel. "Aggressive promoters present wildly misleading claims about this credit. They can pocket handsome fees while leaving those claiming the credit at risk of having the claims denied or facing scenarios where they need to repay the credit." The Employee Retention Credit (ERC), also sometimes called the Employee Retention Tax Credit or ERTC, is a legitimate tax credit. Many businesses legitimately apply for the pandemic-era credit. The IRS has added staff to handle ERC claims, which are time-consuming to process because they involve amended tax returns. "This continual barrage of marketing by advertisers means many invalid claims are coming into the IRS, which also means it takes our hard-working employees longer to get to the legitimate Employee Retention Credits," Werfel said. "The IRS understands the importance of these credits, and we appreciate the patience of businesses and tax professionals as we continue to work hard to get valid claims processed as quickly as possible while also protecting against fraud." The IRS has been issuing warnings about aggressive ERC scams since last year, and it made the agency's list this year of the Dirty Dozen tax scams that people should watch out for. This is an ongoing priority area in many ways, and the IRS continues to increase compliance work involving ERC. The IRS has trained auditors examining ERC claims posing the greatest risk, and the IRS Criminal Investigation division is working to identify fraud and promoters of fraudulent claims. The IRS reminds anyone who improperly claims the ERC that they must pay it back, possibly with penalties and interest. A business or tax-exempt group could find itself in a much worse cash position if it has to pay back the credit than if the credit was never claimed in the first place. So, it's important to avoid getting scammed. When properly claimed, the ERC is a refundable tax credit designed for businesses that continued paying employees while shut down due to the COVID-19 pandemic or that had a significant decline in gross receipts during the eligibility periods. The credit is not available to individuals. Warning signs of aggressive ERC marketing There are important tips that people should be wary of involving the Employee Retention Credit. Warning signs to watch out for include: - Unsolicited calls or advertisements mentioning an "easy application process." - Statements that the promoter or company can determine ERC eligibility within minutes. - Large upfront fees to claim the credit. - Fees based on a percentage of the refund amount of Employee Retention Credit claimed. This is a similar warning sign for average taxpayers, who should always avoid a tax preparer basing their fee on the size of the refund. - Aggressive claims from the promoter that the business receiving the solicitation qualifies before any discussion of the group's tax situation. In reality, the Employee Retention Credit is a complex credit that requires careful review before applying. - The IRS also sees wildly aggressive suggestions from marketers urging businesses to submit the claim because there is nothing to lose. In reality, those improperly receiving the credit could have to repay the credit - along with substantial interest and penalties. These promoters may lie about eligibility requirements. In addition, those using these companies could be at risk of someone using the credit as a ploy to steal the taxpayer's identity or take a cut of the taxpayer's improperly claimed credit. How the promoters lure victims The IRS continues to see a variety of ways that promoters can lure businesses, tax-exempt groups and others into applying for the credit. - Aggressive marketing. This can be seen in countless places, including radio, television and online as well as phone calls and text messages. - Direct mailing. Some ERC mills are sending out fake letters to taxpayers from the non-existent groups like the "Department of Employee Retention Credit." These letters can be made to look like official IRS correspondence or an official government mailing with language urging immediate action. - Leaving out key details. Third-party promoters of the ERC often don't accurately explain eligibility requirements or how the credit is computed. They may make broad arguments suggesting that all employers are eligible without evaluating an employer's individual circumstances. For example, only recovery startup businesses are eligible for the ERC in the fourth quarter of 2021, but promoters fail to explain this limit. Again, the promoters may not inform taxpayers that they need to reduce wage deductions claimed on their business' federal income tax return by the amount of the Employee Retention Credit. This causes a domino effect of tax problems for the business. - Payroll Protection Program participation. In addition, many of these promoters don't tell employers that they can't claim the ERC on wages that were reported as payroll costs if they obtained Paycheck Protection Program loan forgiveness. How businesses and others can protect themselves The IRS reminded businesses, tax-exempt groups and others being approached by these promoters that there are simple steps that can be taken to protect themselves from making an improper Employee Retention Credit. - Work with a trusted tax professional. Eligible employers who need help claiming the credit should work with a trusted tax professional; the IRS urges people not to rely on the advice of those soliciting these credits. Promoters who are marketing this ultimately have a vested interest in making money; in many cases they are not looking out for the best interests of those applying. - Don't apply unless you believe you are legitimately qualified for this credit. Details about the credit are available on IRS.gov, and again a trusted tax professional - not someone promoting the credit - can provide critical professional advice on the ERC. - To report ERC abuse, submit Form 14242, Report Suspected Abusive Tax Promotions or Preparers. People should mail or fax a completed Form 14242, Report Suspected Abusive Tax Promotions or Preparers PDF, and any supporting materials to the IRS Lead Development Center in the Office of Promoter Investigations. Mail: Internal Revenue Service Lead Development Center Stop MS5040 24000 Avila Road Laguna Niguel, California 92677-3405 Fax: 877-477-9135 Properly claiming the ERC There are very specific eligibility requirements for claiming the ERC. These are technical areas that require review. They can claim the ERC on an original or amended employment tax return for qualified wages paid between March 13, 2020, and Dec. 31, 2021. However, to be eligible, employers must have: - Sustained a full or partial suspension of operations due to orders from an appropriate governmental authority limiting commerce, travel or group meetings because of COVID-19 during 2020 or the first three quarters of 2021, - Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021, or - Qualified as a recovery startup business for the third or fourth quarters of 2021.
Internal Revenue Service - Information Release IR-2022-182 IRS provides tax inflation adjustments for tax year 2023 October 18, 2022 Media Relations Office Washington, D.C. www.IRS.gov/newsroom Media Contact: 202.317.4000 Public Contact: 800.829.1040 IRS provides tax inflation adjustments for tax year 2023 IR-2022-182, October 18 2022 WASHINGTON -- The Internal Revenue Service today announced the tax year 2023 annual inflation adjustments for more than 60 tax provisions, including the tax rate schedules and other tax changes. Revenue Procedure 2022-38 PDF provides details about these annual adjustments. New for 2023 The Inflation Reduction Act extended certain energy related tax breaks and indexed for inflation the energy efficient commercial buildings deduction beginning with tax year 2023. For tax year 2023, the applicable dollar value used to determine the maximum allowance of the deduction is $0.54 increased (but not above $1.07) by $0.02 for each percentage point by which the total annual energy and power costs for the building are certified to be reduced by a percentage greater than 25 percent. The applicable dollar value used to determine the increased deduction amount for certain property is $2.68 increased (but not above $5.36) by $0.11 for each percentage point by which the total annual energy and power costs for the building are certified to be reduced by a percentage greater than 25 percent. Highlights of changes in Revenue Procedure 2022-38: The tax year 2023 adjustments described below generally apply to tax returns filed in 2024. The tax items for tax year 2023 of greatest interest to most taxpayers include the following dollar amounts: - The standard deduction for married couples filing jointly for tax year 2023 rises to $27,700 up $1,800 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $13,850 for 2023, up $900, and for heads of households, the standard deduction will be $20,800 for tax year 2023, up $1,400 from the amount for tax year 2022. - Marginal Rates: For tax year 2023, the top tax rate remains 37% for individual single taxpayers with incomes greater than $578,125 ($693,750 for married couples filing jointly). The other rates are: 35% for incomes over $231,250 ($462,500 for married couples filing jointly); 32% for incomes over $182,100 ($364,200 for married couples filing jointly); 24% for incomes over $95,375 ($190,750 for married couples filing jointly); 22% for incomes over $44,725 ($89,450 for married couples filing jointly); 12% for incomes over $11,000 ($22,000 for married couples filing jointly). The lowest rate is 10% for incomes of single individuals with incomes of $11,000 or less ($22,000 for married couples filing jointly). - The Alternative Minimum Tax exemption amount for tax year 2023 is $81,300 and begins to phase out at $578,150 ($126,500 for married couples filing jointly for whom the exemption begins to phase out at $1,156,300). The 2022 exemption amount was $75,900 and began to phase out at $539,900 ($118,100 for married couples filing jointly for whom the exemption began to phase out at $1,079,800). - The tax year 2023 maximum Earned Income Tax Credit amount is $7,430 for qualifying taxpayers who have three or more qualifying children, up from $6,935 for tax year 2022. The revenue procedure contains a table providing maximum EITC amount for other categories, income thresholds and phase-outs. - For tax year 2023, the monthly limitation for the qualified transportation fringe benefit and the monthly limitation for qualified parking increases to $300, up $20 from the limit for 2022. - For the taxable years beginning in 2023, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements increases to $3,050. For cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount is $610, an increase of $40 from taxable years beginning in 2022. - For tax year 2023, participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,650, up $200 from tax year 2022; but not more than $3,950, an increase of $250 from tax year 2022. For self-only coverage, the maximum out-of-pocket expense amount is $5,300, up $350 from 2022. For tax year 2023, for family coverage, the annual deductible is not less than $5,300, up from $4,950 for 2022; however, the deductible cannot be more than $7,900, up $500 from the limit for tax year 2022. For family coverage, the out-of-pocket expense limit is $9,650 for tax year 2023, an increase of $600 from tax year 2022. - For tax year 2023, the foreign earned income exclusion is $120,000 up from $112,000 for tax year 2022. - Estates of decedents who die during 2023 have a basic exclusion amount of $12,920,000, up from a total of $12,060,000 for estates of decedents who died in 2022. - The annual exclusion for gifts increases to $17,000 for calendar year 2023, up from $16,000 for calendar year 2022. - The maximum credit allowed for adoptions for tax year 2023 is the amount of qualified adoption expenses up to $15,950, up from $14,890 for 2022 Items unaffected by indexing: By statute, certain items that were indexed for inflation in the past are currently not adjusted. - The personal exemption for tax year 2023 remains at 0, as it was for 2022, this elimination of the personal exemption was a provision in the Tax Cuts and Jobs Act. - For 2023, as in 2022, 2021, 2020, 2019 and 2018, there is no limitation on itemized deductions, as that limitation was eliminated by the Tax Cuts and Jobs Act. - The modified adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit provided in § 25A(d)(2) is not adjusted for inflation for taxable years beginning after December 31, 2020. The Lifetime Learning Credit is phased out for taxpayers with modified adjusted gross income in excess of $80,000 ($160,000 for joint returns).
Private Letter Ruling Number: 202041007 Internal Revenue Service July 16, 2020 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities PO Box 2508 Cincinnati, OH 45201 Number: 202041007 Release Date: 10/9/2020 UIL Number: 501.00-00, 501.33-00, 501.35-00 Date: July 16, 2020 Employer ID number: Form you must file: Tax years: Person to contact: Name: ID number: Telephone: Dear *****: This letter is our final determination that you don't qualify for exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3). Recently, we sent you a proposed adverse determination in response to your application. The proposed adverse determination explained the facts, law, and basis for our conclusion, and it gave you 30 days to file a protest. Because we didn't receive a protest within the required 30 days, the proposed determination is now final. Because you don't qualify as a tax-exempt organization under IRC Section 501(c)(3), donors generally can't deduct contributions to you under IRC Section 170. We may notify the appropriate state officials of our determination, as required by IRC Section 6104(c), by sending them a copy of this final letter along with the proposed determination letter. You must file the federal income tax forms for the tax years shown above within 30 days from the date of this letter unless you request an extension of time to file. For further instructions, forms, and information, visit www.irs.gov. We'll make this final adverse determination letter and the proposed adverse determination letter available for public inspection after deleting certain identifying information, as required by IRC Section 6110. Read the enclosed Notice 437, Notice of Intention to Disclose, and review the two attached letters that show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in the Notice 437 on how to notify us. If you agree with our deletions, you don't need to take any further action. If you have questions about this letter, you can call the contact person shown above. If you have questions about your federal income tax status and responsibilities, call our customer service number at 800-829-1040 (TTY 800-829-4933 for deaf or hard of hearing) or customer service for businesses at 800-829-4933. Sincerely, Stephen A. Martin Director, Exempt Organizations Rulings and Agreements Enclosures: Notice 437 Redacted Letter 4034 Redacted Letter 4038 Department of the Treasury Internal Revenue Service P.O. Box 2508 Cincinnati, OH 45201 Date: May 8, 2020 Employer ID number: Contact person/ID number: Contact telephone number: Contact fax number: UIL: 501.00-00 501.33-00 501.35-00 Legend: B = Date C = Date D = Brand F = Name G = LLC w percent = Number x percent = Number Dear *****: We considered your application for recognition of exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a). We determined that you don't qualify for exemption under IRC Section 501(c)(3). This letter explains the reasons for our conclusion. Please keep it for your records. Issues Do you qualify for exemption under IRC Section 501(c)(3)? No, for the reasons stated below. Facts You were incorporated on B in the State of C. Your Articles of Incorporation state that you are organized exclusively for charitable, religious, educational, and scientific purposes. You will train, support, and serve males in the community in the core standards and beliefs of the D Brand. You will draw males to the organization using the influence gained from promoting a character you call the F. You will conduct online and one-on-one mentoring, after school programs, school and church partnerships, community sports events, and community service missions. To become an organization that males want to join, you will use the impact of entertainment and technology that displays an F in movies, videos, books, comics, games, and social media to gain influence and capture the attention of your target audience and the community. Once males are drawn to the F, you will use your influence to draw them to your services. You have created several websites that point to the D brand along with several books labeled as D curriculum. You use a book authored by your founder. You are currently pursuing the creation of your first promotional video and movie which will be used to highlight the D brand and F. G is a for-profit organization formed as an LLC. You and G were formed by your founder to operate together. You state that G is your partner organization and it is the combination of you and G that will impact the community. Both you and G are promoting the same brand and overall vision. G holds the rights to the trademarked D logo and D brand. G will help you to create movies, documentaries, comics, courses, and materials that will help promote the brand so you can reach your target audience. Your founder serves as your President and Managing Director as well as the CEO of G. You will have an agreement with G based on specific industry standards by which designers, programmers, and contractors are paid. Your application states that you will use a third party and your conflict of interest policy to make certain your founder doesn't specifically make decisions on the personal rates paid to him by you. However, you also stated later in your application that you would use industry professionals within you and G to understand how professionals are paid for specific jobs to make sure you are not overpaying for services rendered. Your financial information shows revenue from gifts, grants, and contributions as well as from membership fees, other income (sale of online courses and training), sales income, and group membership fees. The majority of your expenses are for salaries and program expenses. Salaries are for a marketing director, producer/production company, office help and miscellaneous contractors, and the executive director. Program expenses include marketing video production, film production, and mentoring program. Film and video production accounts for approximately w percent and mentoring accounts for approximately x percent of program expenses. We requested more information on your relationship with G. When we asked if G has any other customers, you stated that the ultimate goal is for G to support you and all your endeavors. Additionally, you may conduct activities on behalf of G such as fund raising and promoting the F as a brand when it benefits both you and G (gaining exposure for you and gaining sales for G). G is currently finalizing an online brotherhood community and mentoring organization where it will sell its books, online courses, and mentoring services to the general public. G is focusing on reaching as many customers and organizations it can with content intended to mentor males and gain exposure for the D brand. G will be the face of the D brand by selling products, services, and reaching males to display what an F looks like. You will be the hand of the D brand by serving the community, joining males together, and sending them into the community to display what an F does. In regard to differentiating between you and G, you said you will make sure that those that have been asking how to support your mission can go to the website of G and select a link with your name and be directed to your website which will purposely have a different look and feel. You will also have a statement promoting G's events, products and sales that mentions a portion of all sales will go to support you and your community impact projects. You consistently refer to yourself as the "non-profit side" and "non-profit arm" while you refer to G as the "for-profit side" and "for profit arm." You intend to begin to fundraise for the movie using revenue from G's sales of books, products, and other items. G will carry the bulk of the production while you will assist in raising funds and attracting investors to the project. You are currently unsure who will own the rights to the movie. Law IRC Section 501(c)(3) provides, in part, for the exemption from federal income tax organizations organized and operated exclusively for charitable, religious or educational purposes, no part of the net earnings of which inures to the benefit of any private shareholder or individual. Treasury Regulation Section 1.501(c)(3)-1(a)(1) states that, in order to be exempt as an organization described in Section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in such section. If an organization fails to meet either the organizational test or the operational test, it is not exempt. Treas.Reg. Section 1.501(c)(3)-1(c)(1) provides 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 such exempt purposes specified in Section 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. Section 1.501(c)(3)-1(d)(1)(ii) provides an applicant must show that it serves a public rather than a private interest and specifically that it is not organized or operated for the benefit of private interests, such as designated individuals, the creator or his family, shareholders of the organization, or persons controlled, directly or indirectly, by such private interests. Treas.Reg. Section 1.501(c)(3)-1(d)(1)(iii), Example 3, describes an organization that is deemed to violate the restriction on private benefit due to their arrangement with a related for-profit entity, regardless of whether the payments to the related for-profit entity are reasonable. Revenue Ruling 76-206, 1976-1 C.B. 154, describes a nonprofit organization formed to generate community interest in the retention of classical music programs by a local for-profit radio station by seeking program sponsors, encouraging continuation of contracts by existing sponsors, urging the public to patronize the sponsors, soliciting subscriptions to the station's program guide, and distributing materials promoting the classical music programs. The organization did not qualify for exemption from federal income tax under IRC Section 501(c)(3) because the activities tended to increase the station's revenues. In Better Business Bureau of Washington, D.C. v. U.S., 326 U.S. 279 (1945), the Supreme Court held that "the presence of a single non-exempt purpose, if substantial in nature, will destroy the exemption regardless of the number or importance of truly exempt purposes." In est of Hawaii v. Commissioner, 71 T.C. 1067 (1979), several for-profit est organizations exerted significant indirect control over est of Hawaii, a nonprofit entity, through contractual arrangements. The Tax Court concluded that the for-profits were able to use the nonprofit as an "instrument" to further their for-profit purposes. The question for the Tax Court was not whether petitioner's payments to the for-profits were excessive but whether the for-profits benefited substantially from petitioner's operations. The Tax Court noted that petitioner provided a substantial private benefit to the for-profit corporations. Petitioner "was simply the instrument to subsidize the for-profit corporations and not vice versa and had no life independent of those corporations." Accordingly, the Tax Court held that est of Hawaii did not qualify for exemption under IRC Section 501(c)(3). In P.L.L Scholarship Fund v. Commissioner, 82 T.C. 196 (1984), the Tax Court held that a nonprofit organization which operated bingo games on the premises of a for-profit business while it conducted its regular business activity, the sale of food and beverages, and turned over its profits to various scholarship funds, could not be regarded as "operated exclusively" for one or more exempt purposes because more than an insubstantial part of its activities was not in furtherance of an exempt purpose. Petitioner's activities were, in substantial part, designed to enhance the profitability of the business. Petitioner argued that its operations and the business's were separate because the receipts from the bingo games and the receipts from food and beverage sales were accounted for separately; and that, because no cash payments were made by the petitioner to the business for either rent or wages, that all of the petitioner's activities were for an exempt purpose. The Tax Court, however, found that the activities of the petitioner and business were so interrelated as to be functionally inseparable, regardless of the manner of accounting of receipts and disbursements. In Church by Mail, Inc. v. Commissioner, 765 F.2d 1387 (9th Cir. 1985), the United States Court of Appeals affirmed a Tax Court decision that private benefit prevented the organization from meeting the operational test under Section 501(c)(3). The critical inquiry was not whether particular contractual payments to a related for-profit organization were reasonable or excessive, but instead whether the entire enterprise was carried on in such a manner that the for-profit organization benefited substantially from the operation of the Church. In International Postgraduate Medical Foundation v. Commissioner, TCM 1989-36 (1989), the Tax Court considered the qualification for exemption under Section 501(c)(3) of the Code of a nonprofit corporation that conducted continuing medical education tours. The Tax Court found that a substantial purpose of the petitioner was benefiting the for-profit travel agency. It concluded that: "When a for-profit organization benefits substantially from the manner in which the activities of a related organization are carried on, the latter organization is not operated exclusively within the meaning of Section 501(c)(3), even if it furthers other exempt purposes." A substantial purpose of the applicant's operations was to increase the income of the for-profit travel agency. In KJ's Fund Raisers, Inc. v. Commissioner, T.C. Memo. 1997-424 (1997), aff'd. 82 AFTR 2d 7092, (2nd Cir. 1998), the Tax Court held that while the organization raised money for charitable purposes, it also operated for the substantial benefit of private interests. The organization operated for the substantial private benefit of KJ's Place and its owners. Application of law You are not described in IRC Section 501(c)(3) because you are not operated exclusively for exempt purposes. You do not meet the provisions of Treas.Reg. 1.501(c)(3)-1(a)(1) because you do not meet the operational test, failing the requirement of Treas.Reg. Section 1.501(c)(3)-1(c)(1) that no more than an insubstantial part of your activities is devoted to a non-exempt purpose. Specifically, the facts show that you are not operating exclusively for exempt purposes because you serve private interests, rather than public interests as required by Treas.Reg. 1.501(c)(3)-1(d)(1)(ii). Your activities substantially benefit G. Like Example 3 in Treas.Reg. Section 1.501(c)(3)-1(d)(1)(iii), you violate the restriction on private benefit due to your arrangement with G. You are like the organization in Rev.Rul. 76-206 because you serve a private rather than a public interest by enabling G to increase revenues. You and G were created to operate together and promote the same brand and overall vision. The brand name and much of the intellectual property is owned by either your founder or G. You are G's only customer. G creates materials that you will use in your programs but that will also boost G's brand and sales. Although there may be some charitable and educational purposes served by your mentoring and other programs, the private benefit to G is more than incidental. The ruling quotes "where an organization is serving both public and private interests, the private benefit must be clearly incidental to the overriding public interest. A contrary finding will indicate the organization is serving a private interest." Similarly, as noted in Better Business Bureau of Washington, D.C., a single non-exempt purpose will destroy exemption regardless of the number or importance of truly exempt purposes. The fact that you may have a charitable or educational purpose does not cure the existence of the substantial non-exempt purpose of furthering G's financial interests. Additionally, you are like the organization described in International Postgraduate Medical Foundation, because G, a for-profit organization, benefits substantially from your activities even if you further other exempt purposes. You are like KJ's Fund Raisers, Inc. because, although you may raise money for charitable purposes, you are also operated for the substantial benefit of G. Further, like P.L.L. Scholarship Fund, you cannot be regarded as "operated exclusively" for one or more exempt purposes because more than an insubstantial amount of your activities are not in furtherance of an exempt purpose. Your activities are, in substantial part, designed to enhance the profitability of G. Your activities are so interrelated with G that it is difficult to clearly distinguish between you and G. You are like the organization in est of Hawaii v. Commissioner because you are dependent on one for-profit entity, G, for your operations. You and G operate together and partner to create and promote the materials used by both you and G. Your operations benefit a for-profit organization more than insubstantially, regardless of whether payments to the for-profit are excessive. You are similar to Church by Mail, Inc, because your operations substantially benefit G. Conclusion Based on the above, we conclude that you fail to meet the operational test of IRC Section 501(c)(3). You have a substantial non-exempt purpose of serving the private interests of G. Accordingly, you are not exempt under Section 501(c)(3). If you agree If you agree with our proposed adverse determination, you don't need to do anything. If we don't hear from you within 30 days, we'll issue a final adverse determination letter. That letter will provide information on your income tax filing requirements. If you don't agree You have a right to protest if you don't agree with our proposed adverse determination. To do so, send us a protest within 30 days of the date of this letter. You must include: - Your name, address, employer identification number (EIN), and a daytime phone number - A statement of the facts, law, and arguments supporting your position - A statement indicating whether you are requesting an Appeals Office conference - The signature of an officer, director, trustee, or other official who is authorized to sign for the organization or your authorized representative - The following declaration: For an officer, director, trustee, or other official who is authorized to sign for the organization: Under penalties of perjury, I declare that I have examined this request, or this modification to the request, including accompanying documents, and to the best of my knowledge and belief, the request or the modification contains all relevant facts relating to the request, and such facts are true, correct, and complete. Your representative (attorney, certified public accountant, or other individual enrolled to practice before the IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if they haven't already done so. You can find more information about representation in Publication 947, Practice Before the IRS and Power of Attorney. We'll review your protest statement and decide if you gave us a basis to reconsider our determination. If so, we'll continue to process your case considering the information you provided. If you haven't given us a basis for reconsideration, we'll send your case to the Appeals Office and notify you. You can find more information in Publication 892, How to Appeal an IRS Decision on Tax-Exempt Status. If you don't file a protest within 30 days, you can't seek a declaratory judgment in court later because the law requires that you use the IRC administrative process first (IRC Section 7428(b)(2). Where to send your protest Send your protest, Form 2848, if applicable, and any supporting documents to the applicable address: U.S. mail: Internal Revenue Service EO Determinations Quality Assurance Mail Stop 6403 P.O. Box 2508 Cincinnati, OH 45201 Street address for delivery service: Internal Revenue Service EO Determinations Quality Assurance 550 Main Street, Mail Stop 6403 Cincinnati, OH 45202 You can also fax your protest and supporting documents to the fax number listed at the top of this letter. If you fax your statement, please contact the person listed at the top of this letter to confirm that they received it. You can get the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person listed at the top of this letter. Contacting the Taxpayer Advocate Service The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or if you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778. Sincerely, Stephen A. Martin Director, Exempt Organizations Rulings and Agreements
Private Letter Ruling Number: 202336009 Internal Revenue Service May 23, 2023 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202336009 Release Date: 9/8/2023 Index Number: 9100.00-00, 7872.05-00 Third Party Communication: None Date of Communication: Not Applicable Person To Contact: Telephone Number: Refer Reply To: CC:FIP:B02 PLR-123089-22 Date: May 23, 2023 Dear ****: This ruling responds to a letter dated November 21, 2022, and subsequent correspondence, submitted on behalf of Taxpayer. Taxpayer requests an extension of time under sections 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations to make a written representation under section 1.7872-15(d)(2) of the Income Tax Regulations to elect to treat otherwise noncontingent payments on split-dollar loans that are nonrecourse to the borrower as noncontingent. FACTS Taxpayer is an employee of Employer, a non-profit healthcare corporation that is a tax-exempt organization under section 501(c)(3) of the Internal Revenue Code (the "Code"). In Year, Employer met with a consulting team from Company to consult on matters relating to employee recognition and retention. Company recommended and assisted with implementing a split-dollar life insurance plan ("SDP") for key employees of Employer. Neither Employer nor Taxpayer had prior experience with or knowledge of SDPs. Employer contracted Company to serve as the SDP third-party administrator in Month 1. Company was responsible for administering, implementing, and providing ongoing guidance related to the SDP and the loans thereunder. These responsibilities included set-up of the SDP, document preparation, and advising on document execution. Taxpayer represents that both Employer and Taxpayer reasonably relied on Company's expertise regarding the SDP including all information, representations, conclusions, and assistance, and that Company was aware of this reliance. Company intended for the SDP to be subject to the regulations under section 1.7872-15 ("Split-Dollar Regulations") and designed the plan to utilize nonrecourse premium loans to the employee participants secured by life insurance policies owned by each employee (the "SDP Loans"). Taxpayer is an employee participant in the SDP and in Year, Taxpayer received Taxpayer's first SDP Loan. Taxpayer represents that each of Taxpayer's SDP Loans has stated interest equal to the applicable federal rate and is not a "below-market split-dollar loan" under the Split-Dollar Regulations. Company projected that the proceeds of the insurance policies securing each SDP Loan are sufficient to pay all interest and principal due on that SDP Loan. Taxpayer also represents that a reasonable person would expect that all payments under each of Taxpayer's SDP Loans will be made. The due date for making Taxpayer's written representation was Date. In Month 2, Company advised Employer that the parties to a SDP Loan were required to make a written representation pursuant to section 1.7872-15(d)(2)(i) and (ii) and file a copy of the representation with their tax returns for the years SDP Loans were made to avoid having the payments treated as contingent payments for purposes of the Split-Dollar Regulations. Taxpayer represents that they were informed of this requirement by Employer. However, in the process of providing the initial SDP execution documents, Company and Employer inadvertently failed to provide Taxpayer with the written representation for execution. In Month 3, Company provided executed documents under the SDP to Employer counsel for review. During the review, it was discovered that Company had inadvertently failed to provide Taxpayer and Employer with the written representation necessary to make the section 1.7872-15(d)(2) election for Taxpayer's SDP Loans. The written representation was subsequently prepared by Employer counsel and executed by both Taxpayer and Employer in Month 4. Taxpayer represents that Taxpayer has been accounting for the SDP Loans as though the written representation was timely made. 1 **** 1 Employer has also requested relief under sections 301.9100-1 and 301.9100-3. ****** Taxpayer makes the following additional representations: 1. Granting the relief will not result in Taxpayer having a lower tax liability in the aggregate for all years to which the regulatory election applies than Taxpayer would have had if the election had been timely made (taking into account the time value of money). 2. Taxpayer is not seeking to alter a return position for which an accuracy related penalty has been or could have been imposed under section 6662 at the time Taxpayer requested relief and the new position requires or permits a regulatory election for which relief is requested. 3. Being fully informed of the required regulatory election and related tax consequences, the Taxpayer did not choose to not make the election. 4. Taxpayer is not using hindsight in requesting relief. No facts have changed between the time the election should have been made and the time this request for relief was filed that would make the election advantageous to Taxpayer. 5. The request for relief was filed before the failure to make the regulatory election was discovered by the Service. 6. Although the period of limitations on assessment under section 6501(a) of the Code has expired for the taxable year at issue, an affidavit from an independent auditor certifying that the interests of the Government are not prejudiced under the standards of section 301.9100-3(c)(1)(i) by a ruling granting relief has been provided. Affidavits on behalf of Taxpayer have been provided as required by section 301.9100-3(e). LAW AND ANALYSIS Section 1.7872-15(d)(1) provides that, except as provided in section 1.7872-15(d)(2), if a payment on a split-dollar loan is nonrecourse to the borrower, the payment is a contingent payment for purposes of section 1.7872-15. Section 1.7872-15(d)(2)(i) provides that an otherwise noncontingent payment on a split-dollar loan that is nonrecourse to the borrower is not a contingent payment under section 1.7872-15 if the parties to the split-dollar life insurance arrangement represent in writing that a reasonable person would expect that all payments under the loan will be made. Section 1.7872-15(d)(2)(ii) describes the time and manner requirements for providing the written representation required by section 1.7872-15(d)(2)(i). Section 1.7872-15(d)(2)(ii) provides, in part, that the written representation must be signed by both the borrower and lender not later than the last day (including extensions) for filing the Federal income tax return of the borrower or lender, whichever is earlier, for the taxable year in which the lender makes the first split-dollar loan under the split-dollar life insurance arrangement. This representation must include the names, addresses, and taxpayer identification numbers of the borrower, lender, and any indirect participants. Unless otherwise stated therein, this representation applies to all subsequent split-dollar loans made pursuant to the split-dollar life insurance arrangement. Each party should retain an original of the representation as part of its books and records and should attach a copy of the representation to its Federal income tax return for any taxable year in which the lender makes a loan to which the representation applies. Section 301.9100-1(b) defines "election" to include an application for relief in respect of tax; a request to adopt, change, or retain an accounting method or accounting period. The term does not include an application for an extension of time for filing a return under section 6081. "Regulatory election" is defined as an election whose due date is prescribed by regulations or by a revenue ruling, a revenue procedure, a notice, or an announcement published in the Internal Revenue Bulletin. Section 301.9100-1(c) provides that the Commissioner has discretion to grant a reasonable extension of time to make a regulatory election, or a statutory election (but no more than 6 months except in the case of a taxpayer who is abroad), under all subtitles of the Code except subtitles E, G, H, and I. Section 301.9100-3(a) through (c)(1) sets forth rules that the Service generally will use to determine whether, under the particular facts and circumstances of each situation, the Commissioner will grant an extension of time for regulatory elections that do not meet the requirements of section 301.9100-2. Section 301.9100-3(a) provides that requests for relief subject to section 301.9100-3 will be granted when the taxpayer provides the evidence (including affidavits described in section 301.9100-3(e)) to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and the grant of relief will not prejudice the interests of the Government. Section 301.9100-3(b) provides that a taxpayer generally is deemed to have acted reasonably and in good faith if the taxpayer (i) requests relief under section 301.9100-3 before the failure to make the regulatory election is discovered by the Service; (ii) failed to make the election because of intervening events beyond the taxpayer's control; (iii) failed to make the election because, after exercising reasonable diligence (taking into account the taxpayer's experience and the complexity of the return or issue), the taxpayer was unaware of the necessity for the election; (iv) reasonably relied on the written advice of the Service; or (v) reasonably relied on a qualified tax professional, including a tax professional employed by the taxpayer, and the tax professional failed to make, or advise the taxpayer to make, the election. A taxpayer will be deemed to have not acted reasonably and in good faith, however, if the taxpayer (i) seeks to alter a return position for which an accuracy-related penalty has been or could be imposed under section 6662 at the time the taxpayer requests relief and the new position requires or permits a regulatory election for which relief is requested; (ii) was informed in all material respects of the required election and related tax consequences, but chose not to file the election; or (iii) uses hindsight in requesting relief. Section 301.9100-3(c)(1) provides that a reasonable extension of time to make a regulatory election will be granted only when the interests of the Government will not be prejudiced by the granting of relief. Section 301.9100-3(c)(1)(i) provides that the interests of the Government are prejudiced if granting relief would result in the taxpayer having a lower tax liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made (taking into account the time value of money). Similarly, if the tax consequences of more than one taxpayer are affected by the election, the Government's interests are prejudiced if extending the time for making the election may result in the affected taxpayers, in the aggregate, having a lower tax liability than if the election had been timely made. Section 301.9100-3(c)(1)(ii) provides that the interests of the Government are ordinarily prejudiced if the taxable year in which the regulatory election should have been made or any taxable years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under section 6501(a) before the taxpayer's receipt of a ruling granting relief under section 301.9100-3. The Service may condition a grant of relief on the taxpayer providing the Service with a statement from an independent auditor (other than an auditor providing an affidavit pursuant to section 301.9100-3(e)) certifying that the interests of the Government are not prejudiced under the standards set forth in section 301.9100-3(c)(1)(i). CONCLUSION Based on the information submitted and representations made, we conclude that Taxpayer has satisfied the requirements for granting a reasonable extension of time to make the written representation under section 1.7872-15(d)(2). Accordingly, the fully executed written representation made in Month 4 will be deemed to have been timely made. Provided that a copy of the fully executed written representation is attached to Taxpayer's Federal income tax return for the taxable year in which this letter is received, the written representation will be deemed effective beginning in Year. In accordance with section 1.7872-15(d)(2)(ii), a copy of the written representation should be attached to Taxpayer's tax return for any subsequent taxable year in which Employer makes a SDP Loan to Taxpayer to which the written representation applies. This ruling is limited to the timeliness of making a written representation under section 1.7872-15(d)(2). This ruling's application is limited to the facts, representations, and Code and regulation sections cited herein. Except as provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. Specifically, no opinion is expressed with regard to whether Taxpayer satisfied the other requirements under section 1.7872-15(d)(2)(i) and (ii), the loan treatment requirements under section 1.7872-15(a)(2), or whether payments under each SDP Loan are otherwise noncontingent payments for purposes of section 1.7872-15. No opinion is expressed with regard to whether the SDP Loans are below-market loans for purposes of section 7872 of the Code and section 1.7872-15 of the Regulations. No opinion is expressed with regard to whether the tax liability of Taxpayer is not lower in the aggregate for all years to which the election applies than such tax liability would have been if the election had been timely made (taking into account the time value of money). Upon audit of the Federal income tax returns involved, the director's office will determine such tax liability for the years involved. If the director's office determines that such tax liability is lower, that office will determine the Federal income tax effect. This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representative. Sincerely, Andrea M. Hoffenson Andrea M. Hoffenson Branch Chief, Branch 2 Office of the Associate Chief Counsel (Financial Institutions and Products) cc:
Action on Decision Number 2020-001 Internal Revenue Service March 16, 2020 IRB 2020-12 March 16, 2020 THIS DOCUMENT IS NOT TO BE RELIED UPON OR OTHERWISE CITED AS PRECEDENT BY TAXPAYERS ACTION ON DECISION Subject: Paychex Business Solutions, LLC, et al., v. United States of America, 2017 WL 2692843 (M.D. Fla. 2017). Issue: Whether control over the bank account from which wage payments are made is sufficient for an entity to be a section 3401(d)(1) 1 statutory employer. ******* 1 Unless otherwise noted, all section references are to the Internal Revenue Code. ***** Discussion: For the years at issue, Paychex Business Solutions, LLC. et al. (Plaintiffs) were professional employer organizations (PEOs) headquartered in Florida and licensed by the State of Florida. Plaintiffs entered into a client service agreement (CSA) with each client company (client) in order to provide employer payroll functions and certain human resource functions. The CSAs provided that Plaintiffs assumed full responsibility for the reporting, collection, and payment of employment taxes 2 to the Internal Revenue Service (IRS) with respect to the clients' employees. With respect to payroll processes, typically, Plaintiffs obtained certain payroll information from clients two days prior to the date on which the clients' employees were paid. The clients would submit the employees' hours and rates of pay to the Plaintiffs for the pay period at issue. Plaintiffs, who had Forms W-4 and knowledge of payroll deductions and garnishments for the employees, calculated the appropriate amount of wages and employment taxes. Thereafter, Plaintiffs would initiate a debit to the clients' bank accounts via automated clearing house (ACH), which would include amounts for the employees' compensation and employment taxes. While the ACH process did not ensure that Plaintiffs received payment from the clients prior to the issuance of payroll checks or direct deposits to the clients' employees, the clients' submission of hour and wage data triggered the process for payment of wages. The clients remained liable for those payments if the funds were insufficient to satisfy the ACH, though Plaintiffs would have to seek payments from the clients through collection actions, which did not guarantee payment from the clients. Also, Plaintiffs required a small percentage of their clients to pay the invoice by wire payment, rather than ACH, because Plaintiffs had concerns about the clients' financial conditions. ***** 2 "Employment taxes" refers to Federal Insurance Contributions Act (FICA) (consisting of both social security and Medicare taxes), Federal Unemployment Tax Act (FUTA), and Income Tax Withholding (ITW), although references to "withholding" only apply to FICA and ITW. ***** The Service and Plaintiffs agreed that Plaintiffs are not the common law employers of the clients' employees. Plaintiffs considered themselves to be the statutory employers of the clients' employees under section 3401(d)(1) and filed Forms 941-X, Adjusted Employer's QUARTERLY Federal Tax Return or Claim for Refund, claiming refunds of the overpayment of the employer's portion of the social security tax due to the restart of the social security tax wage base applicable to wages paid by Plaintiffs. The IRS denied Plaintiffs' claims for refunds, and Plaintiffs filed suit in federal district court. 3 ***** 3 During the course of the litigation, the parties agreed that Plaintiffs erroneously restarted the social security taxable wage base for the employees. See Pls.' Mot. For Recons. ¶ 2. However, the Service did not concede the Plaintiffs' entitlement to a refund because, among other things, Plaintiffs were not the employer and they had not properly substantiated the refund claim. ***** The court identified the issue before it as "who--Plaintiffs or the client companies--had control over the payment of wages to the worksite employees" (emphasis added) and concluded that the Plaintiffs were the statutory employers of the clients' employees under section 3401(d)(1) because they "actually controlled the [bank] accounts from which the wage payments were made." Section 3401(d) defines the term "employer" for federal income tax withholding purposes as "the person for whom an individual performs or performed any service, of whatever nature, as the employee of such person, except that (1) if the person for whom the individual performs or performed the services does not have control of the payment of wages for such services, the term "employer" (except for purposes of subsection (a)) means the person having control of the payment of such wages..." 4 When the exception in paragraph (1) applies, liability for employment taxes due on wages shifts from the common law employer to the person in control of the payment of those wages. ***** 4 FICA does not contain a definition of employer similar to the definition contained in section 3401(d)(1) relating to income tax withholding. However, in Otte v. United States, 419 U.S. 43 (1974), the Supreme Court held that a person who is an employer under section 3401(d)(1), relating to income tax withholding, is also an employer for purposes of withholding the employee's share of FICA under section 3102. The Otte decision has been extended to provide that the person having control of the payment of the wages is also an employer for purposes of section 3111, which imposes the FICA tax on employers, and section 3301 (Federal Unemployment Tax Act (FUTA) tax). See In re Armadillo Corp., 410 F. Supp. 407 (D. Colo. 1976), affd, 561 F.2d 1382 (10th Cir. 1977); In re The Laub Baking Co., 642 F.2d 196, 199 (6th Cir.1981). ***** The exception consists of a two-part test that must be satisfied in order for a person other than the common law employer to be the "employer": (1) the common law employer must not have control of the payment of wages and (2) the other person must have control of the payment of wages. See Century Indem. Co. v. Riddell, 317 F.2d 681 (9 th Cir. 1963). The court failed to determine that the clients did not have control of the payment of wages, a critical precursor element needed in order for the special rule of section 3401(d)(1) to apply. In Riddell at 691, the court considered a situation in which an employer and surety had joint control stating, "Here, neither has sole control, but neither is the subcontractor without any such control. As stated in the Simpson case, both criteria must be met. Literally, the exception of Section 1621(d)(1) [(the predecessor to section 3401(d)] does not cover such a situation. If construction is called for, then it must be in accordance with the legislative intent above indicated, which calls for a narrow construction of the exception, and broad construction of the general terms covering the common law employer's responsibilities." Before reaching the second question of whether another person has control of the payment of wages, the court must first determine that the common law employer "does not have control of the payment of wages." For example, if wages, such as certain types of pensions or retirement payments, are contributed to a trust by an employer and subsequently paid by the trust to employees or former employees, but the employer has no legal control over the retirement payments, the trust is the employer under section 3401(d)(1) with respect to those payments. See Treas. Reg. § 31.3401(d)-1(f). Similarly, awards in a class action settlement for back wages are often paid through a fund or by an attorney. In each instance, the fund or the attorney is typically the section 3401(d)(1) employer for employment tax liability purposes, because even though the amounts were initially paid to the fund or the attorney by the common law employer, the common law employer no longer has control of those payments. See e.g., STA of Baltimore -- ILA Container Royalty Fund v. United States, 621 F.Supp. 804 F.2d 296 (4th Cir. 1986); FSA 1996 WL 33321014 (June 21, 1996). The language of the statute also indicates that a determination of the control of the payment of wages is on a payment-by-payment basis; a third party payor might have legal control over one payment of wages but not with regard to other payments. Congress specifically addressed the exception to section 1621(d) in the legislative history. The conference report accompanying The Current Tax Payment Act of 1943 explains that the exception in paragraph (d)(1) was enacted "to cover certain special cases, such as the... case of the person making payment of wages in situations where the wage payments are not under the control of the person for whom the services... were performed." H.R. Rep. No. 78-510 at 31 (1943) (Conf. Rep.) The report further states that this exception is "designed solely to meet unusual situations and not intended as a departure from the basic purpose to centralize responsibility for withholding, returning, and paying the tax and furnishing receipts." Id. 5 ***** 5 See also Sen. Rep. No. 78-221 at 19-20 (1943). ***** Consistent with the legislative history, the IRS has narrowly construed what it means to be in control of the payment of wages under section 3401(d)(1). 6 Treas.Reg. §31.3401(d)-1(h) explains that the "special definitions of the term 'employer'... are designed solely to meet special or unusual situations. They are not intended as a departure from the basic purpose." The regulations further clarify that the term control means legal control of the payment of wages. See Treas.Reg. § 31.3401(d)-1(f). Whether an entity has legal control of the payment of wages is determined by considering the facts and circumstances related to each payment of wages. The IRS will continue to take the position that an entity is not in control of the payment of wages if the payment of wages is contingent upon, or proximately related to, the entity having received funds from the common law employer. ***** 6 Several courts have also interpreted the language of section 3401(d)(1) narrowly. See Century Indem. Co. v. Riddell, 317 F.2d at 691 (The legislative history "indicate[s] an intent on the part of Congress to impose a narrow construction upon" the exception of section 1621(d)(1).) United States v. Garami, 184 B.R. 834 (M.D. Fla. 1995) (finding that when a third party received funds from its client prior to paying payroll to the client's employees, the contractual agreement to pay the client's employment taxes did not relieve the client of the obligation to pay those taxes); In re Professional Security Services, 162 B.R. 901 (Bankr. M.D. Fla. 1993) (finding that the client company was still in control of the payment of wages because the leasing company did not issue checks to pay wages unless it first received payment from the client company). ***** The narrow scope of "control" in section 3401(d)(1), and most importantly the need for the common law employer to have no control over the payment of wages in order to trigger the application of section 3401(d)(1) is further evidenced by the recent promulgation of regulations under section 3504, a provision of the Code that imposes employment tax liability on a third party payor ("fiduciary, agent or other person") that has "the control, receipt, custody, or disposal of, or pays" wages to an employer's employees, without affecting the continuing liability of the employer. Under those regulations, in situations in which the third party payor does not meet the legal conditions necessary to be a section 3401(d)(1) employer, yet it enters into a service agreement 7 under which it performs the employment tax obligations of the common law employer with regard to wages it pays to individuals performing services for the common law employer, the third party payor is "designated to perform the acts required of an employer with respect to the wages... paid" and is liable (along with the common law employer) for employment taxes on such wages. Treas.Reg. § 31.3504-2(a) and (d)(3). ***** 7 A service agreement is an agreement pursuant to which the payor: (A) Asserts it is the employer (or "co-employer") of the individual(s) performing services for the client; (B) Pays wages or compensation to the individual(s) for services the individual(s) perform for the client; and (C) Assumes responsibility to collect, report, and pay, or assumes liability for, any taxes applicable under subtitle C of the Code with respect to the wages or compensation paid by the payor to the individual(s) performing services for the client. Treas.Reg. § 31.3504-2(b)(2). ***** In explaining the need for those regulations, the IRS stated the following in the preamble to the proposed regulations: In certain instances, an employer may mistakenly believe it is relieved of employment tax liabilities merely because it has entered into an agreement with a third-party payor (for example, a PEO or employee leasing company) for assistance in fulfilling its employment tax obligations. However, an employer remains liable for employment taxes irrespective of any agreement it may enter into that purports to place the employment tax obligations and liabilities with the payor, except in the limited circumstances when the payor satisfies the conditions to be liable under section 3401(d)(1). In this regard, status as the employer of the worker is determined based on all the facts and circumstances under the common law test (or under other specific Code provisions related to particular types of employees, such as corporate officers). Neither claims by a payor that it is the employer (or "co-employer") of the worker for federal employment tax or other purposes nor the fact that the payor may file employment tax returns under its own EIN are determinative under the Code for purposes of identifying the employer liable for employment taxes. The regulations demonstrate that the requirements to trigger their application to a third party payor--including payment of wages and entering into a service agreement pursuant to which the third party payor assumes responsibility for employment taxes-- establish concurrent liability for the third party payor but are not enough to trigger a transfer of sole liability under section 3401(d)(1). In promulgating the regulations, the Department of the Treasury and the IRS explained that a third party payor (typically a PEO) may not use a service agreement to transfer liability; such a contract generally will not relieve the common law employer of its control over the payment of wages so as to trigger the application of section 3401(d)(1). 8 ***** 8 Subsequent to issuance of these regulations, Congress enacted legislation in this area to specifically provide conditions that must be met to transfer liability through a services agreement. See section 3511, Treas.Reg. § 31.3511, section 7705, and Treas.Reg. § 301.7705. ***** The IRS disagrees with the court's conclusions and its characterization that whether a person is a section 3401(d)(1) employer turns on whether that person has exclusive control over the bank account from which wages are paid. The IRS also disagrees with the court's citation to the cases 9 used in support of its position that the person or entity that controls the bank account from which wages are paid is the section 3401(d)(1) statutory employer. Those cases are all distinguishable from Paychex, as none of them involved situations in which a third party served merely as a conduit. Rather, the cases cited by the court involved third-parties who paid the employees of their clients with their own funds or involved other distinguishing facts such as related entities paying wages from a pooled account. ***** 9 See, e.g., Winstead v. United States, 109 F.3d 989 (4th Cir. 1997); Consolidated Flooring Services v. United States, 38 Fed.Cl. 450 (Ct.Cl. 1997). See also Southwest Restaurant Systems, Inc. v. IRS, 607 F.2d 1237 (9th Cir. 1979). ***** Plaintiffs were merely acting as conduits through which wages and taxes were paid since, in almost all instances, Plaintiffs received the funds from their clients before issuing paychecks to the clients' employees. Consistent with the IRS's longstanding position, absent statutory authority, an employer may not simply delegate or contract away its taxing responsibilities. See Earthmovers, Inc. v. U.S., 199 B.R. 62, 68 (Bankr M.D. Fla 1996); United States v. Garami, 184 B.R. at 838. See also Treas. Regs. § 31.3504-2, § 31.3401(d)-1(h), and § 31.3401(d)-1(f) Recommendation: Nonacquiescence The court failed to apply the language of the underlying statute and disregarded Congressional intent and case law by expanding the scope of section 3401(d)(1) beyond it's intended narrow purpose. 10 As a threshold matter, a statutory employer may exist only when the common law employer does not have control over the payment of wages. In this case the clients and not the Plaintiffs had control over the payment of the wages as in almost all instances the Plaintiffs received the funds from their clients before issuing paychecks to the clients' employees and the clients remained liable for the amount of the payments if the funds were insufficient to satisfy the ACH. Moreover, the court did not apply the correct standard in determining the type of control necessary to trigger the exception under section 3401(d)(1). The focus should have been on control of the payment of wages, not control of the bank account used in the process. The IRS' position is that an entity is not in control of the payment of wages within the meaning of section 3401(d)(1) if the payment of wages is contingent upon, or proximately related to, the entity having first received funds from the common law employer. The IRS will continue to litigate this issue in this court and in other courts. ***** 10 Although we disagree with the decision of the court, we did not appeal due to other considerations. ******* _______________________________ Elliot M. Rogers Attorney (Employment Taxes) Reviewers: MLD JC _______________________________ Approved: MICHAEL J. DESMOND Chief Counsel Internal Revenue Service By: _______________________________ Victoria A. Judson Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes) THIS DOCUMENT IS NOT TO BE RELIED UPON OR OTHERWISE CITED AS PRECEDENT BY TAXPAYERS
Private Letter Ruling Number: 202319023 Internal Revenue Service January 12, 2023 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Release Number: 202319023 Release Date: 5/12/2023 UIL Code: 501.04-00 Date: 01/12/2023 Taxpayer ID number (last 4 digits): Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: Last day to file petition with United States Tax Court: 04/12/2023 CERTIFIED MAIL - Return Receipt Requested Dear ****: Why we are sending you this letter This is a final determination explaining why your organization doesn't qualify as an organization described in Internal Revenue Code (IRC) Section 501(c)(4) for the tax periods above. In the future, if you believe your organization qualifies for tax-exempt status and would like a determination letter from the Internal Revenue Service, you can request a determination by filing Form 1024, Application for Recognition of Exemption Under Section 501(a), or Form 1024-A, Application for Recognition of Exemption Under Section 501(c)(4) of the IRC, (as applicable) and paying the required user fee. Our adverse determination as to your exempt status was made for the following reasons: You have failed to establish that you were operated exclusively for the promotion of social welfare or engaged in promoting in some way the common good and general welfare of the people of the community within the meaning of IRC Section 501(c)(4). You have failed to produce documents or otherwise establish that you are not organized primarily for profit and that no part of your net earnings inures to the benefit of any private shareholder or individual. Organizations that are not exempt under IRC Section 501 generally are required to file federal income tax returns and pay tax, where applicable. For further instructions, forms and information please visit IRS.gov. What you must do if you disagree with this determination If you want to contest our final determination, you have 90 days from the date this determination letter was mailed to you to file a petition or complaint in one of the three federal courts listed below. How to file your action for declaratory judgment If you decide to contest this determination, you can file an action for declaratory judgment under the provisions of Section 7428 of the Code in either: - The United States Tax Court, - The United States Court of Federal Claims, or - The United States District Court for the District of Columbia You must file a petition or complaint in one of these three courts within 90 days from the date we mailed this determination letter to you. You can download a fellable petition or complaint form and get information about filing at each respective court's website listed below or by contacting the Office of the Clerk of the Court at one of the addresses below. Be sure to include a copy of this letter and any attachments and the applicable filing fee with the petition or complaint. You can eFile your completed U.S. Tax Court petition by following the instructions and user guides available on the Tax Court website at ustaxcourt.gov/dawson.html. You will need to register for a DAWSON account to do so. You may also file your petition at the address below: United States Tax Court 400 Second Street, NW Washington, DC 20217 ustaxcourt.gov The websites of the U.S. Court of Federal Claims and the U.S. District Court for the District of Columbia contain instructions about how to file your completed complaint electronically. You may also file your complaint at one of the addresses below: US Court of Federal Claims 717 Madison Place, NW Washington, DC 20439 uscfc.uscourts.gov US District Court for the District of Columbia 333 Constitution Avenue, NW Washington, DC 20001 dcd.uscourts.gov Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory judgment under IRC Section 7428. Information about the IRS Taxpayer Advocate Service The IRS office whose phone number appears at the top of the notice can best address and access your tax information and help get you answers. However, you may be eligible for free help from the Taxpayer Advocate Service (TAS) if you can't resolve your tax problem with the IRS, or you believe an IRS procedure just isn't working as it should. TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Contact your local Taxpayer Advocate Office at: Internal Revenue Service Taxpayer Advocate Office Or call TAS at 877-777-4778. For more information about TAS and your rights under the Taxpayer Bill of Rights, go to taxpayeradvocate.IRS.gov. Do not send your federal court pleading to the TAS address listed above. Use the applicable federal court address provided earlier in the letter. Contacting TAS does not extend the time to file an action for declaratory judgment. Where you can find more information Enclosed are Publication 1, Your Rights as a Taxpayer, and Publication 594, The IRS Collection Process, for more comprehensive information. Find tax forms or publications by visiting IRS.gov/forms or calling 800-TAX-FORM (800-829-3676). If you have questions, you can call the person shown at the top of this letter. If you prefer to write, use the address shown at the top of this letter. Include your telephone number, the best time to call, and a copy of this letter. You may fax your documents to the fax number shown above, using either a fax machine or online fax service. Protect yourself when sending digital data by understanding the fax service's privacy and security policies. Keep the original letter for your records, Sincerely, Lynn A. Brinkley Acting Director, Exempt Organizations Examinations Enclosures: Publication 1 Publication 594 Publication 892 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Date: 04/13/2022 Taxpayer ID number: Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: Address: Managers contact information: Name: ID number: Telephone: Response due date: 05/13/2022 CERTIFIED MAIL -- Return Receipt Requested Dear **: Why you're receiving this letter We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that your organization doesn't qualify as an organization described in Internal Revenue Code (IRC) Section 501(c)(4). This letter is not a determination of your tax-exempt status under IRC Section 501 for any period other than the tax periods above. If you agree If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an organization described in IRC Section 501(c)(4) for the periods above. If you disagree 1. Request a meeting or telephone conference with the manager shown at the top of this letter. 2. Send any information you want us to consider. 3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after the meeting or after we consider the information. The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case. For your protest to be valid, it must contain certain specific information, including a statement of the facts, applicable law, and arguments in support of your position. For specific information needed for a valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn't apply now that we've issued this letter. 4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities) if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the IRS. If you're considering requesting technical advice, contact the person shown at the top of this letter. If you disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as explained above. A decision made in a technical advice memorandum, however, generally is final and binding on Appeals. If we don't hear from you If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final adverse determination letter. In the future, if you believe your organization qualifies for tax-exempt status and would like a status determination letter from the IRS, you can request a determination by filing Form 1024, Application for Recognition of Exemption Under Section 501(a), and paying the required user fee. Contacting the Taxpayer Advocate Office is a taxpayer right The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778. Additional information You can get any of the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person shown at the top of this letter. Sincerely, Christopher M. Holmes for Lynn A. Brinkley Acting Director, Exempt Organizations Examinations Enclosures: Form 4621-A Form 886-A Form 6018 Publication 892 Publication 3498 ISSUES: Whether ** qualifies to be exempt under section 501(c)(4) of the Internal Revenue Code ("IRC"). FACTS: Background ** (**) was incorporated in the state of ** by ** on **. The one-page article of incorporation states: - the ** name is **, a ** Non Profit Religious Corporation, - its specific purpose is "to provide religious education programs and to continue development of religious educations", and - it is organized and operated exclusively for charitable purpose within the meaning of IRC section 501(c)(3). Per the Internal Revenue Service's ("Service") records, no Form 1023, Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code, has been filed for the **. Form ** (e-Postcard) Beginning with the ** fiscal year, ending **, the ** began submitting Form **, and selected that it was exempt under IRC section 501(c)(4). Per the Service's records, no Form 8976, Notice of Intent to Operate Under Section 501(c)(4), notifying the Service of its intent to operate as a section 501(c)(4) organization has been filed by the **. Examination An information document request was sent to the ** by the initial examining revenue agent on **. No response was received from the ** and a delinquency notice was sent on **. Additionally, the ** was notified of the Service's intent to make third party contacts in a letter sent on **. The subsequent examining revenue agent ("agent") attempted to locate the ** officers, for the present and prior exam years, and was able to locate **, the primary officer listed on the ** Form **. A third-party summons for ** testimony and available records was hand delivered to his last known personal residence on **. Interview On **, an individual answering to the name of ** presented himself to the agent at the Service office located in **. Upon examining his identification, the agent determined that this was not ** but an acquaintance. The interview was rescheduled to the following day. ** presented himself on **, for an interview and to provide available documents. Key points taken from the interview were: - changes to the ** accreditation authority caused a rush in the creation of post-secondary schools, - ** stated he had incorporated the ** and multiple other organizations with the state of ** at the behest of individuals that he declined to name, - he was asked to help due to his familiarity with the school accreditation process, - he was involved in the filing of the Forms **, - ** also goes by the name **, - the ** address was owned by an associate of **, who allowed him to use various suite numbers for mailing purposes based on vacancy, - the ** address was a mailbox set up by ** to handle the dissolution of the **, - the ** address is a residential rental property owned by **, and - the ** had never been active. ** stated that he was a consultant and not involved in the day-to-day operations for the **. When asked to list any of the other board members or provide the name of the individual who enlisted his services, ** stated he did not remember or declined to answer. LAW: IRC section 501(c)(4)(A) exempts from Federal income tax civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare, or local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality, and the net earnings of which are devoted exclusively to charitable, education, or recreational purposes. Section 1.501(c)(4)-1(a)(2)(i) of the Federal Tax Regulations states that an organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community. An organization embraced within this section is one which is operated primarily for the purpose of bringing about civic betterments and social improvements. TAXPAYER'S POSITION: The ** position is unknown at this time; however, the ** has dissolved with the state of ** as of **. GOVERNMENT'S POSITION: It is the government's position that the ** has failed to meet the requirements to be exempt under IRC section 501(c)(4). The articles of incorporation and the interview indicates that the ** was not created for the exclusive promotion of social welfare. Additionally, there was no evidence that the ** engaged in any activity that supported its exempt purpose. CONCLUSION: Based upon the facts and circumstances, ** has failed to meet the requirements for an organization exempt under IRC Section 501(c)(4). The government proposes that the ** be disqualified for the tax period ending ****.
Private Letter Ruling Number: 202339022 Internal Revenue Service April 4, 2023 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Exempt Organizations Examinations Release Number: 202339022 Release Date: 9/29/2023 UIL Code: 501.03-00 Date: 04/04/2023 Taxpayer ID number (last 4 digits): Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: Last day to file petition with United States Tax Court: 07/03/2023 CERTIFIED MAIL - Return Receipt Requested Dear ****: Why we are sending you this letter This is a final determination that you don't qualify for exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3), effective **, **. Your determination letter dated **, **, is revoked. Our adverse determination as to your exempt status was made for the following reasons: Organizations described in IRC Section 501(c)(3) and exempt under IRC Section 501(a) must be both organized and operated exclusively for charitable, educational, or other exempt purposes within the meaning of IRC Section 501(c)(3). You have not demonstrated that you are operated exclusively for charitable, educational, or other exempt purposes within the meaning of IRC Section 501(c)(3) and that no part of your net earnings inure to the benefit of private shareholders or individuals. You failed to respond to repeated reasonable requests to allow the Internal Revenue Service to examine your records regarding your receipts, expenditures, or activities as required by IRC sections 6001, 6033(a)(1) and Rev.Rul. 59-95, 1959-1 C.B. 627. Further, you are not organized exclusively for exempt purposes as required by Treas.Reg. Section 1.501(c)(3)-1(b). Organizations that are not exempt under IRC Section 501 generally are required to file federal income tax returns and pay tax, where applicable. For further instructions, forms and information please visit IRS.gov. Contributions to your organization are no longer deductible under IRC Section 170. What you must do if you disagree with this determination If you want to contest our final determination, you have 90 days from the date this determination letter was mailed to you to file a petition or complaint in one of the three federal courts listed below. How to file your action for declaratory judgment If you decide to contest this determination, you can file an action for declaratory judgment under the provisions of Section 7428 of the Code in either: - The United States Tax Court, - The United States Court of Federal Claims, or - The United States District Court for the District of Columbia You must file a petition or complaint in one of these three courts within 90 days from the date we mailed this determination letter to you. You can download a fillable petition or complaint form and get information about filing at each respective court's website listed below or by contacting the Office of the Clerk of the Court at one of the addresses below. Be sure to include a copy of this letter and any attachments and the applicable filing fee with the petition or complaint. You can eFile your completed U.S. Tax Court petition by following the instructions and user guides available on the Tax Court website at ustaxcourt.gov/dawson.html. You will need to register for a DAWSON account to do so. You may also file your petition at the address below: United States Tax Court 400 Second Street, NW Washington, DC 20217 ustaxcourt.gov The websites of the U.S. Court of Federal Claims and the U.S. District Court for the District of Columbia contain instructions about how to file your completed complaint electronically. You may also file your complaint at one of the addresses below: US Court of Federal Claims 717 Madison Place, NW Washington, DC 20439 uscfc.uscourts.gov US District Court for the District of Columbia 333 Constitution Avenue, NW Washington, DC 20001 dcd.uscourts.gov Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory judgment tinder IRC Section 7428. We'll notify the appropriate state officials (as permitted by law) of our determination that you aren't an organization described in IRC Section 501(c)(3). Information about the IRS Taxpayer Advocate Service The IRS office whose phone number appears at the top of the notice can best address and access your tax information and help get you answers. However, you may be eligible for free help from the Taxpayer Advocate Service (TAS) if you can't resolve your tax problem with the IRS, or you believe an IRS procedure just isn't working as it should. TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Contact your local Taxpayer Advocate Office at: Internal Revenue Service Taxpayer Advocate Office Or call TAS at 877-777-4778. For more information about TAS and your rights under the Taxpayer Bill of Rights, go to taxpayeradvocate.IRS.gov. Do not send your federal court pleading to the TAS address listed above. Use the applicable federal court address provided earlier in the letter Contacting TAS does not extend the time to file an action for declaratory judgment. Where you can find more information Enclosed are Publication 1, Your Rights as a Taxpayer, and Publication 594, The IRS Collection Process, for more comprehensive information. Find tax forms or publications by visiting IRS.gov/forms or calling 800-TAX-FORM (800-829-3676). If you have questions, you can call the person shown at the top of this letter. If you prefer to write, use the address shown at the top of this letter. Include your telephone number, the best time to call, and a copy of this letter. You may fax your documents to the fax number shown above, using either a fax machine or online fax service. Protect yourself when sending digital data by understanding the fax service's privacy and security policies. Keep the original letter for your records. Sincerely, for Lynn A. Brinkley Director, Exempt Organizations Examinations Enclosures: Publication 1 Publication 594 Publication 892 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Exempt Organizations Examinations Date: November 10, 2022 Taxpayer ID number: Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: Address: Internal Revenue Service Attn: Manager's contact information: Name: ID number: Telephone: Response due date: December 12, 2022 CERTIFIED MAIL -- Return Receipt Requested Dear **: Why you're receiving this letter We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we propose to revoke your tax-exempt status as an organization described in Internal Revenue Code (IRC) Section 501(c)(3). If you agree If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an organization described in IRC Section 501(c)(3) for the periods above. After we issue the final adverse determination letter, we'll announce that your organization is no longer eligible to receive tax deductible contributions under IRC Section 170. If you disagree 1. Request a meeting or telephone conference with the manager shown at the top of this letter. 2. Send any information you want us to consider. 3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after the meeting or after we consider the information. The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case. For your protest to be valid, it must contain certain specific information, including a statement of the facts, applicable law, and arguments in support of your position. For specific information needed for a valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn't apply now that we've issued this letter. 4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities) if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the IRS. If you're considering requesting technical advice, contact the person shown at the top of this letter. If you disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as explained above. A decision made in a technical advice memorandum, however, generally is final and binding on Appeals. If we don't hear from you If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final adverse determination letter. Contacting the Taxpayer Advocate Office is a taxpayer right The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778. For additional information You can get any of the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person shown at the top of this letter. Sincerely, ** for Lynn A. Brinkley Acting Director Exempt Organizations Examinations Enclosures: Form 886-A and Attachments Form 6018 Issue: Whether **, ** (Taxpayer) continues to qualify for exemption from Federal income tax under section 501(a) of the Internal Revenue Code (Code) as a charitable organization described in Code section 501(c)(3). Facts: Taxpayer was incorporated in the State of ** on **, **, under the state's nonprofit corporation law. The Articles of Incorporation filed with ** provides for the following corporate purpose: "To provide food, clothing, transportation, housing and financial assistance to individuals and their families. From their ** all the way to **, our mission is to improve the lives of everyone **, by also providing emotional support to their entire family. ** is, and will always be, a charitable organization." Taxpayer' Articles of Incorporation do not contain any other language regarding the purpose and activities of the organization. Taxpayer's organizing document contains no provision that limits its purposes or activities to those exempt purposes described in section 501(c)(3) of the Code. Furthermore, the organizing document does not contain a dissolution clause setting forth the manner in which the organization's assets are to be distributed in the event of dissolution of the corporation. Taxpayer's Articles of Incorporation identifies ** incorporators - **, **, and **. ** is also appointed as the statutory agent for Taxpayer with an address of **, **, **. A copy of Taxpayer's organizing document is appended as Exhibit A. The mailing address in ** furnished by ** as the Taxpayer's statutory agent corresponds to a ** (**) ** which offered mailbox services. According to information posted by ** on the Internet, the retail store located at ** in **, ** has **. ** typically offer the following mailbox services: - A real street address in lieu of a P.O. Box. - Package and mail receipt notifications - Mail holding and forwarding - Call-in mail check In **, Taxpayer filed Form **, **, with the Internal Revenue Service (IRS). The Form ** is signed by ** as the Executive Director according to the declaration on page ** of the Form **. **, **, and ** are each listed in ** of the Form ** which requires ** organizations to list the names, titles and mailing addresses of all officers, directors, and trustees. The mailing address for ** corresponds to the one reported on Taxpayer's organizing document - **, **, **, **. ** is listed as a director with a mailing address in **, **. The mailing address for **, the Managing Director, is the same address furnished for Taxpayer which is as follows: Taxpayer's address in ** corresponds to a ** which offers mailbox services. A copy of the pertinent website content posted by or on behalf of the ** located in ** in ** is appended as Exhibit B. In its Form **, Taxpayer attested that it is both organized and operated exclusively for charitable purposes. Taxpayer did not furnish a copy of its Articles of Incorporation since the organizing document is not required to be filed with the ** Form **. Based on the representations and attestations made by Taxpayer in its Form **, the IRS issued a favorable determination letter dated **, **, granting Taxpayer recognition of exemption under section 501(c)(3) of the Code effective **, **. Taxpayer was classified as a public charity under sections 509(a)(1) and 170(b)(1)(A)(vi) of the Code based on its attestation regarding public support in ** of the Form **. IRS records show that Taxpayer filed Form **, **, for the ** through ** calendar tax years, inclusive. Taxpayer filed Form ** in lieu of a Form ** or Form ** return. The organization indicated on Form ** that its gross receipts are normally $ ** or less. In **, the Tax Exempt and Governmental Entities (TE/GE) division of the IRS selected Taxpayer for examination of its books and records covering the ** calendar year. The notice of examination package, which is dated **, **, consists of IRS letter #6031, Form **, ** (**), Publication 1, Your Rights as a Taxpayer, Notice 609, Privacy Act Notice, and Publication 3498-A, The Examination Process (Audits by Mail). The notice of examination package was mailed to Taxpayer at the last known address on file for the organization, which is as follows: As noted on page of the ** -page ** issued with the examination notice, the examination of Taxpayer's books and records is intended to verify that the organization: 1. Operates in accordance with section 501(c)(3) of the Code 2. Is eligible to file Form ** based on gross receipts, and 3. Filed all required returns including information returns. As part of standard audit procedures, the IRS examiner requested that Taxpayer furnish certain records and information needed to determine whether the organization is operating in furtherance of charitable and other exempt purposes described in section 501(c)(3) of the Code. ** # ** issued to Taxpayer on **, **, requests copies of the following records and information covering the ** calendar year under examination: - Chart of accounts - General ledger - Adjusted trial balance - Cash disbursements journal. - Monthly bank statements for Taxpayer's primary operating (checking) account together with canceled checks or check images furnished by the bank. - Monthly statements for all credit cards that may have been issued to Taxpayer. - Minutes of meetings held by Taxpayer's Board of Directors and committees of the Board. - Internal policies and procedures regarding the handling and recording of cash donations. - Lease agreements and other information relating to any office or other facility used by Taxpayer to conduct activities. - Contracts and other arrangements with individuals and/or organizations which solicit and raise funds for Taxpayer including, but not limited to, professional fundraising organizations. - The organization's website address, if any, and the identity of the party that hosts the website. If no website is maintained, Taxpayer was requested to provide copies of records which describe the activities conducted in **. In the absence of formal marketing and fundraising materials, Taxpayer was asked to provide a statement describing the activities, services, programs, and events conducted by the organization in **. - Information regarding the accounting software used by Taxpayer for preparation of its books and records. The response due date for ** # was **, **. Taxpayer did not respond to the ** or otherwise contact the IRS examiner or the group manager by the due date. In accordance with established IRS procedures, a follow-up "Delinquency Notice" letter was issued to Taxpayer with a copy of ** # ** on **, **, with a response due date of **, **. The delinquency notice states, in part, that if the organization does not fully respond to the ** by the response due date, the IRS will propose revocation of Taxpayer's exempt status. The delinquency notice was not returned by the post office as undeliverable. Taxpayer did not respond to the delinquency notice or otherwise contact the IRS examiner. Neither the IRS examiner nor the group manager subsequently received any of the requested records and information from ** or any other officer or director of Taxpayer. There is no evidence that Taxpayer is an affiliate or chapter of any other exempt organization or network of charities that operate within the United States. The ** Form ** filed by Taxpayer with the IRS references a website address (**) in section E. The IRS examiner was unable to find the website domain listed by Taxpayer on its ** Form **. Taxpayer did not identify a website address on Form ** filed for subsequent years. A search of the State of **'s corporate database, which provides information on the status of entities incorporated under ** state law, shows that Taxpayer is an active entity as of **, **. See Exhibit C. In **, state public records show that Taxpayer updated the address for its statutory agent, **. See Exhibit D. The current address provided for the statutory agent, **, **, **, also corresponds to a ** which offers mailbox services including a street address. See Exhibit E attached. Applicable Law: Section 501(c)(3) of the Code provides that an organization organized and operated exclusively for charitable or educational purposes is exempt from Federal income tax, provided no part of its net earnings inures to the benefit of any private shareholder or individual. Section 1.501(c)(3)-1(a)(1) of the Treasury Regulations states that to be exempt as an organization described in section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in such section - charitable, religious, educational, scientific, literary, testing for public safety, or for the prevention of cruelty to children or animals. If an organization fails to meet either the organizational test or the operational test, it is not exempt. Section 1.501(c)(3)-1(b)(1)(i) of the regulations provides that an organization is organized exclusively for one or more exempt purposes only if its articles of organization (as defined in subparagraph (2)) limit its purposes to one or more exempt purposes and do not expressly empower it to engage, otherwise than as an insubstantial part of its activities, in activities which in themselves are not in furtherance of one or more exempt purposes. Section 1.501(c)(3)-1(b)(1)(iv) of the regulations provides that in no case shall an organization be considered to be organized exclusively for one or more exempt purposes if, by the terms of its articles, the purposes for which such organization is created are broader than the purposes specified in section 501(c)(3). The fact that the actual operations of such an organization have been exclusively in furtherance of one or more exempt purposes shall not be sufficient to permit the organization to meet the organizational test. Similarly, such an organization will not meet the organizational test as a result of statements or other evidence that the members thereof intend to operate only in furtherance of one or more exempt purposes. Section 1.501(c)(3)-1(b)(2) of the regulations provides that the term "articles of organization" or "articles" includes the trust instrument, the corporate charter, the articles of association, or any other written instrument by which an organization is created. Section 1.501(c)(3)-1(b)(4) of the regulations provides that an organization is not organized exclusively for one or more exempt purposes unless its assets are dedicated to an exempt purpose. An organization's assets will be considered dedicated to an exempt purpose, for example, if, upon dissolution, such assets would, by reason of a provision in the organization's articles or by operation of law, be distributed for one or more exempt purposes, or to the Federal government, or to a State or local government, for a public purpose, or would be distributed by a court to another organization to be used in such manner as in the judgment of the court will best accomplish the general purposes for which the dissolved organization was organized. However, an organization does not meet the organizational test if its articles or the law of the State in which it was created provide that its assets would, upon dissolution, be distributed to its members or shareholders. Rev.Proc. 82-2, 1982-1 C.B. 367 identifies the states and the circumstances in which the IRS will not require an express provision for the distribution of assets upon dissolution in an exempt organization's articles of organization to satisfy the organizational test requirement described in section 1.501(c)(3)-1(b)(4) of the regulations. Section 3.03 of the revenue procedure lists eight states which have statutes applicable to nonprofit charitable corporations that will satisfy the provisions of regulations section 1.501(c)(3)-1(b)(4). The State of ** is included among the eight listed states. Section 1.501(c)((3)-1(c) of the regulations describes the operational test requirements for 501(c)(3) exemption. The operational test focuses on how the organization is actually operated, regardless of whether it is properly organized for tax-exempt purposes. Section 1.501(c)(3)-1(c)(1) of the regulations provides that an organization will be regarded as "operated exclusively" for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in section 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. This is referred to as the "primary activities" test. Section 1.501(c)(3)-1(c)(2) of the regulations provides that an organization is not operated exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals. Section 511 of the Code imposes a tax at corporate rates under section 11 on the unrelated business taxable income of certain tax-exempt organizations. Section 6001 of the Code provides, in part, that every person liable for any tax imposed by this title, or for the collection thereof, shall keep such records, render such statements, make such returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Whenever in the judgment of the Secretary it is necessary, he may require any person, by notice served upon such person or by regulations, to make such returns, render such statements, or keep such records, as the Secretary deems sufficient to show whether or not such person is liable for tax under this title. Section 1.6001-1(c) of the regulations provides that in addition to such permanent books and records as are required by paragraph (a) of this section with respect to the tax imposed by section 511 on unrelated business income of certain exempt organizations, every organization exempt from tax under section 501(a) shall keep such permanent books of account or records, including inventories, as are sufficient to show specifically the items of gross income, receipts and disbursements. Such organizations shall also keep such books and records as are required to substantiate the information required by section 6033. See section 6033 and regulations sections 1.6033-1 through 1.6033-3. Section1.6001-1(e) of the regulations provides that the books or records required by this section shall be kept at all times available for inspection by authorized internal revenue officers or employees and, shall be retained as long as the contents thereof may be material in the administration of any internal revenue law. Section 6033 of the Code provides, in general, that every organization exempt under IRC 501(a) shall file an annual return, stating specifically the items of gross income, receipts, and disbursements, and such other information for the purpose of carrying out the Internal Revenue laws as the Secretary may by forms of regulations prescribe, and shall keep such records, render under oath such statements, make such other returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Section 6033 of the Code provides an exception to the annual filing requirement in the case of an organization described in section 501(c) (other than a private foundation or a supporting organization described in section 509(a)(3)) the gross receipts of which in each taxable year are normally not more than $50,000. See section 1.6033-2(g)(1)(iii) of the regulations. Section 1.6033-2(g)(5) of the regulations provide that an organization that is not required to file an annual return by virtue of the gross receipts exception must submit an annual electronic notice notification as described in section 6033(i) of the Code. Section 1.6033-2(i)(2) of the regulations provides that every organization which is exempt from tax, whether or not it is required to file an annual information return, shall submit such additional information as may be required by the Internal Revenue Service for the purpose of inquiring into its exempt status and administering the provisions of subchapter F (section 501 and following), chapter 1 of subtitle A of the Code and section 6033. Rev.Rul. 59-95, 1959-1 C.B. 627, concerns an exempt organization that was requested to produce a financial statement and statement of its operations for a certain year. However, its records were so incomplete that the organization was unable to furnish such statements. The Service held that the failure or inability to file the required information return or otherwise to comply with the provisions of section 6033 of the Code and the regulations which implement it, may result in the termination of the exempt status of an organization previously held exempt, on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status. Organization's Position: Taxpayer's position is unknown at this time. Government's Position: Analysis The facts indicate that Taxpayer received recognition of exemption under section 501(c)(3) of the Code in ** based on information presented in its Form **. Taxpayer attested that it is both organized and operated exclusively for charitable purposes. The TE/GE division of the IRS maintains an examination program for exempt organizations to determine whether they are complying with statutory requirements regarding their tax-exempt status, the proper filing of returns, and other tax reporting matters. Taxpayer filed Form **, an **, with the IRS for the ** calendar year. Organizational Test Not Met Taxpayer was incorporated in the State of ** as evidenced by the Articles of Incorporation appended as Exhibit A. Taxpayer's organizing document does not contain an express dissolution clause typically required for organizations exempt under section 501(c)(3) of the Code. However, pursuant to Rev.Proc. 82-2 cited above, Taxpayer is deemed to satisfy the organizational test requirement described in section 1.501(c)(3)-1(b)(4) of the regulations. The State of ** is included among the states that have enacted statutes that comply with Federal exemption requirements regarding dissolution by nonprofit corporations. Taxpayer's corporate purpose as specified in its organizing document is to provide food, clothing, transportation, housing, and financial assistance to individuals ** and their families. Such purpose is broader than the exempt purposes specified in Code section 501(c)(3) and can be accomplished by activities that are not exclusively charitable in nature. Taxpayer's organizing document contains no provision that limits its purposes or activities to those exempt purposes described in section 501(c)(3) of the Code. Accordingly, Taxpayer has not satisfied the organizational test requirements. See sections 1.501(c)(3)-1(b)(1)(i) and (iv) of the regulations. Operational Test Not Met Taxpayer was selected for audit to ensure that the organization's activities and operations align with their approved exempt status and to verify whether Taxpayer was eligible to file Form based on gross receipts. Section 6001 of the Code and the regulations thereunder impose requirements on exempt organizations to keep books and records to substantiate information required under section 6033 of the Code. Although Taxpayer filed an ** in lieu of a return, the organization is nevertheless required to produce records and other information requested by the IRS to verify that it operates in furtherance of its exempt purpose. See regulations section 1.6033-2(i)(2). As part of standard audit procedures, the IRS examiner requested basic financial records including books of account, minutes of Board meetings and records and information pertaining to Taxpayer's activities. Such records and information are needed to verify whether Taxpayer continues to be operated exclusively for one or more of the exempt purposes specified in section 501(c)(3) of the Code. Taxpayer failed to respond to repeated reasonable requests to allow the IRS to examine its books and records including its receipts, disbursements, and other items required to be kept and maintained pursuant to sections 6001 and 6033(a)(1) of the Code. Accordingly, Taxpayer has failed to meet the requirements of section 501(c)(3) of the Code and sections 1.501(c)(3)-1(a) and 1.501(c)(3)-1(c) of the regulations, in that the organization has not established that it is operated exclusively for exempt purposes and that no part of its net earnings inures to the benefit of private shareholders or individuals. See also Rev.Rul. 59-95. Conclusion: For the reasons stated above, the IRS has determined that Taxpayer is no longer exempt from Federal income tax under section 501(a) of the Code as an organization described in Code section 501(c)(3). The IRS is proposing to revoke Taxpayer's 501(c)(3) tax-exempt status effective **, **, the **** calendar year under examination. Please note that this Form 886-A, Explanation of Items, which is also known as the revenue agent report (RAR), constitutes an integral part of the attached 30-day letter #3618. Please refer to the attached letter #3618 for additional information including appeals rights and other options available to the organization and, the instructions for how to respond.
Internal Revenue Service - Information Release IR-2020-160 IRS unveils "Dirty Dozen" list of tax scams for 2020; Americans urged to be vigilant to these threats during the pandemic and its aftermath July 16, 2020 Media Relations Office Washington, D.C. www.IRS.gov/newsroom Media Contact: 202.317.4000 Public Contact: 800.829.1040 IRS unveils "Dirty Dozen" list of tax scams for 2020; Americans urged to be vigilant to these threats during the pandemic and its aftermath IR-2020-160, July 16, 2020 WASHINGTON -- The Internal Revenue Service today announced its annual "Dirty Dozen" list of tax scams with a special emphasis on aggressive and evolving schemes related to coronavirus tax relief, including Economic Impact Payments. This year, the Dirty Dozen focuses on scams that target taxpayers. The criminals behind these bogus schemes view everyone as potentially easy prey. The IRS urges everyone to be on guard all the time and look out for others in their lives. "Tax scams tend to rise during tax season or during times of crisis, and scam artists are using pandemic to try stealing money and information from honest taxpayers," said IRS Commissioner Chuck Rettig. "The IRS provides the Dirty Dozen list to help raise awareness about common scams that fraudsters use to target people. We urge people to watch out for these scams. The IRS is doing its part to protect Americans. We will relentlessly pursue criminals trying to steal your money or sensitive personal financial information." Taxpayers are encouraged to review the list in a special section on IRS.gov and be on the lookout for these scams throughout the year. Taxpayers should also remember that they are legally responsible for what is on their tax return even if it is prepared by someone else. Consumers can help protect themselves by choosing a reputable tax preparer. The IRS urges taxpayers to refrain from engaging potential scammers online or on the phone. The IRS plans to unveil a similar list of enforcement and compliance priorities this year as well. An upcoming series of press releases will emphasize the illegal schemes and techniques businesses and individuals use to avoid paying their lawful tax liability. Topics will include such scams as abusive micro captives and fraudulent conservation easements. Here are this year's "Dirty Dozen" scams: Phishing: Taxpayers should be alert to potential fake emails or websites looking to steal personal information. The IRS will never initiate contact with taxpayers via email about a tax bill, refund or Economic Impact Payments. Don't click on links claiming to be from the IRS. Be wary of emails and websites they may be nothing more than scams to steal personal information. IRS Criminal Investigation has seen a tremendous increase in phishing schemes utilizing emails, letters, texts and links. These phishing schemes are using keywords such as "coronavirus," "COVID-19" and "Stimulus" in various ways. These schemes are blasted to large numbers of people in an effort to get personal identifying information or financial account information, including account numbers and passwords. Most of these new schemes are actively playing on the fear and unknown of the virus and the stimulus payments. (For more see IR-2020-115, IRS warns against COVID-19 fraud; other financial schemes.) Fake Charities: Criminals frequently exploit natural disasters and other situations such as the current COVID-19 pandemic by setting up fake charities to steal from well-intentioned people trying to help in times of need. Fake charity scams generally rise during times like these. Fraudulent schemes normally start with unsolicited contact by telephone, text, social media, e-mail or in-person using a variety of tactics. Bogus websites use names similar to legitimate charities to trick people to send money or provide personal financial information. They may even claim to be working for or on behalf of the IRS to help victims file casualty loss claims and get tax refunds. Taxpayers should be particularly wary of charities with names like nationally known organizations. Legitimate charities will provide their Employer Identification Number (EIN), if requested, which can be used to verify their legitimacy. Taxpayers can find legitimate and qualified charities with the search tool on IRS.gov. Threatening Impersonator Phone Calls: IRS impersonation scams come in many forms. A common one remains bogus threatening phone calls from a criminal claiming to be with the IRS. The scammer attempts to instill fear and urgency in the potential victim. In fact, the IRS will never threaten a taxpayer or surprise him or her with a demand for immediate payment. Phone scams or "vishing" (voice phishing) pose a major threat. Scam phone calls, including those threatening arrest, deportation or license revocation if the victim doesn't pay a bogus tax bill, are reported year-round. These calls often take the form of a "robocall" (a text-to-speech recorded message with instructions for returning the call). The IRS will never demand immediate payment, threaten, ask for financial information over the phone, or call about an unexpected refund or Economic Impact Payment. Taxpayers should contact the real IRS if they worry about having a tax problem. Social Media Scams: Taxpayers need to protect themselves against social media scams, which frequently use events like COVID-19 to try tricking people. Social media enables anyone to share information with anyone else on the Internet. Scammers use that information as ammunition for a wide variety of scams. These include emails where scammers impersonate someone's family, friends or co-workers. Social media scams have also led to tax-related identity theft. The basic element of social media scams is convincing a potential victim that he or she is dealing with a person close to them that they trust via email, text or social media messaging. Using personal information, a scammer may email a potential victim and include a link to something of interest to the recipient which contains malware intended to commit more crimes. Scammers also infiltrate their victim's emails and cell phones to go after their friends and family with fake emails that appear to be real and text messages soliciting, for example, small donations to fake charities that are appealing to the victims. EIP or Refund Theft: The IRS has made great strides against refund fraud and theft in recent years, but they remain an ongoing threat. Criminals this year also turned their attention to stealing Economic Impact Payments as provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Much of this stems from identity theft whereby criminals file false tax returns or supply other bogus information to the IRS to divert refunds to wrong addresses or bank accounts. The IRS recently warned nursing homes and other care facilities that Economic Impact Payments generally belong to the recipients, not the organizations providing the care. This came following concerns that people and businesses may be taking advantage of vulnerable populations who received the payments. These payments do not count as a resource for determining eligibility for Medicaid and other federal programs They also do not count as income in determining eligibility for these programs. See IR-2020-121, IRS alert: Economic Impact Payments belong to recipient, not nursing homes or care facilities for more. Taxpayers can consult the Coronavirus Tax Relief page of IRS.gov for assistance in getting their EIPs. Anyone who believes they may be a victim of identity theft should consult the Taxpayer Guide to Identity Theft on IRS.gov. Senior Fraud: Senior citizens and those who care about them need to be on alert for tax scams targeting older Americans. The IRS recognizes the pervasiveness of fraud targeting older Americans along with the Department of Justice and FBI, the Federal Trade Commission, the Consumer Financial Protection Bureau (CFPB), among others. Seniors are more likely to be targeted and victimized by scammers than other segments of society. Financial abuse of seniors is a problem among personal and professional relationships. Anecdotal evidence across professional services indicates that elder fraud goes down substantially when the service provider knows a trusted friend or family member is taking an interest in the senior's affairs. Older Americans are becoming more comfortable with evolving technologies, such as social media. Unfortunately, that gives scammers another means of taking advantage. Phishing scams linked to Covid-19 have been a major threat this filing season. Seniors need to be alert for a continuing surge of fake emails, text messages, websites and social media attempts to steal personal information. Scams targeting non-English speakers: IRS impersonators and other scammers also target groups with limited English proficiency. These scams are often threatening in nature. Some scams also target those potentially receiving an Economic Impact Payment and request personal or financial information from the taxpayer. Phone scams pose a major threat to people with limited access to information, including individuals not entirely comfortable with the English language. These calls frequently take the form of a "robocall" (a text-to-speech recorded message with instructions for returning the call), but in some cases may be made by a real person. These con artists may have some of the taxpayer's information, including their address, the last four digits of their Social Security number or other personal details - making the phone calls seem more legitimate. A common one remains the IRS impersonation scam where a taxpayer receives a telephone call threatening jail time, deportation or revocation of a driver's license from someone claiming to be with the IRS. Taxpayers who are recent immigrants often are the most vulnerable and should ignore these threats and not engage the scammers. Unscrupulous Return Preparers: Selecting the right return preparer is important. They are entrusted with a taxpayer's sensitive personal data. Most tax professionals provide honest, high-quality service, but dishonest preparers pop up every filing season committing fraud, harming innocent taxpayers or talking taxpayers into doing illegal things they regret later. Taxpayers should avoid so-called "ghost" preparers who expose their clients to potentially serious filing mistakes as well as possible tax fraud and risk of losing their refunds. With many tax professionals impacted by COVID-19 and their offices potentially closed, taxpayers should take particular care in selecting a credible tax preparer. Ghost preparers don't sign the tax returns they prepare. They may print the tax return and tell the taxpayer to sign and mail it to the IRS. For e-filed returns, the ghost preparer will prepare but not digitally sign as the paid preparer. By law, anyone who is paid to prepare or assists in preparing federal tax returns must have a Preparer Tax Identification Number (PTIN). Paid preparers must sign and include their PTIN on returns. Unscrupulous preparers may also target those without a filing requirement and may or may not be due a refund. They promise inflated refunds by claiming fake tax credits, including education credits, the Earned Income Tax Credit (EITC) and others. Taxpayers should avoid preparers who ask them to sign a blank return, promise a big refund before looking at the taxpayer's records or charge fees based on a percentage of the refund. Taxpayers are ultimately responsible for the accuracy of their tax return, regardless of who prepares it. Taxpayers can go to a special page on IRS.gov for tips on choosing a preparer. Offer in Compromise Mills: Taxpayers need to wary of misleading tax debt resolution companies that can exaggerate chances to settle tax debts for "pennies on the dollar" through an Offer in Compromise (OIC). These offers are available for taxpayers who meet very specific criteria under law to qualify for reducing their tax bill. But unscrupulous companies oversell the program to unqualified candidates so they can collect a hefty fee from taxpayers already struggling with debt. These scams are commonly called OIC "mills," which cast a wide net for taxpayers, charge them pricey fees and churn out applications for a program they're unlikely to qualify for. Although the OIC program helps thousands of taxpayers each year reduce their tax debt, not everyone qualifies for an OIC. In Fiscal Year 2019, there were 54,000 OICs submitted to the IRS. The agency accepted 18,000 of them. Individual taxpayers can use the free online Offer in Compromise Pre-Qualifier tool to see if they qualify. The simple tool allows taxpayers to confirm eligibility and provides an estimated offer amount. Taxpayers can apply for an OIC without third-party representation; but the IRS reminds taxpayers that if they need help, they should be cautious about whom they hire. Fake Payments with Repayment Demands: Criminals are always finding new ways to trick taxpayers into believing their scam including putting a bogus refund into the taxpayer's actual bank account. Here's how the scam works: A con artist steals or obtains a taxpayer's personal data including Social Security number or Individual Taxpayer Identification Number (ITIN) and bank account information. The scammer files a bogus tax return and has the refund deposited into the taxpayer's checking or savings account. Once the direct deposit hits the taxpayer's bank account, the fraudster places a call to them, posing as an IRS employee. The taxpayer is told that there's been an error and that the IRS needs the money returned immediately or penalties and interest will result. The taxpayer is told to buy specific gift cards for the amount of the refund. The IRS will never demand payment by a specific method. There are many payment options available to taxpayers and there's also a process through which taxpayers have the right to question the amount of tax we say they owe. Anytime a taxpayer receives an unexpected refund and a call from us out of the blue demanding a refund repayment, they should reach out to their banking institution and to the IRS. Payroll and HR Scams: Tax professionals, employers and taxpayers need to be on guard against phishing designed to steal Form W-2s and other tax information. These are Business Email Compromise (BEC) or Business Email Spoofing (BES). This is particularly true with many businesses closed and their employees working from home due to COVID-19. Currently, two of the most common types of these scams are the gift card scam and the direct deposit scam. In the gift card scam, a compromised email account is often used to send a request to purchase gift cards in various denominations. In the direct deposit scheme, the fraudster may have access to the victim's email account (also known as an email account compromise or "EAC"). They may also impersonate the potential victim to have the organization change the employee's direct deposit information to reroute their deposit to an account the fraudster controls. BEC/BES scams have used a variety of ploys to include requests for wire transfers, payment of fake invoices as well as others. In recent years, the IRS has observed variations of these scams where fake IRS documents are used in to lend legitimacy to the bogus request. For example, a fraudster may attempt a fake invoice scheme and use what appears to be a legitimate IRS document to help convince the victim. The Direct Deposit and other BEC/BES variations should be forwarded to the Federal Bureau of Investigation Internet Crime Complaint Center (IC3) where a complaint can be filed. The IRS requests that Form W-2 scams be reported to: phishing@irs.gov (Subject: W-2 Scam). Ransomware: This is a growing cybercrime. Ransomware is malware targeting human and technical weaknesses to infect a potential victim's computer, network or server. Malware is a form of invasive software that is often frequently inadvertently downloaded by the user. Once downloaded, it tracks keystrokes and other computer activity. Once infected, ransomware looks for and locks critical or sensitive data with its own encryption. In some cases, entire computer networks can be adversely impacted. Victims generally aren't aware of the attack until they try to access their data, or they receive a ransom request in the form of a pop-up window. These criminals don't want to be traced so they frequently use anonymous messaging platforms and demand payment in virtual currency such as Bitcoin. Cybercriminals might use a phishing email to trick a potential victim into opening a link or attachment containing the ransomware. These may include email solicitations to support a fake COVID-19 charity. Cybercriminals also look for system vulnerabilities where human error is not needed to deliver their malware. The IRS and its Security Summit partners have advised tax professionals and taxpayers to use the free, multi-factor authentication feature being offered on tax preparation software products. Use of the multi-factor authentication feature is a free and easy way to protect clients and practitioners' offices from data thefts. Tax software providers also offer free multi-factor authentication protections on their Do-It-Yourself products for taxpayers.
Private Letter Ruling Number: 202224005 Internal Revenue Service March 22, 2022 Internal Revenue Service Department of the Treasury Washington, DC 20224 Number: 202224005 Release Date: 6/17/2022 Index Number: 263.16-00; 9100.00-00 [Third Party Communication: Date of Communication: Month DD, YYYY] Person To Contact: ID No. Telephone Number: Refer Reply To: CC:ITA:B01 PLR-119868-21 Date: March 22, 2022 Dear *******: This letter responds to your letter ruling request dated Date 1 submitted on behalf of Taxpayer. Taxpayer requests a ruling under Treas.Reg. §§ 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations to grant it an extension of time to make a late election with respect success-based fees described under Rev.Proc. 2011-29, 2011-1 C.B. 746, which requires that a statement be attached to a taxpayer's original Federal income tax return for the taxable year of election. Facts Sub 1 is a US Corporation and wholly owned subsidiary of Sub 2 and member of the Parent. On Date 2, Sub 1 acquired all the outstanding stock of Taxpayer in a taxable transaction ("Transaction"). Effective Date 3, Taxpayer and its wholly owned US corporations became includable corporations in Parent's US federal consolidated tax return. In connection with the Transaction, Taxpayer incurred $a of success-based fees for services performed in the process of investigation or otherwise pursuing the Transaction. Taxpayer engaged Financial Advisor 1 to assist in soliciting and evaluating proposals from potential counterparties, as well as analyzing, structuring, and negotiating the financial aspects of the Transaction. In connection with those services, Taxpayer agreed to pay Financial Advisor 1 a percentage of the Transaction value, contingent upon the consummation of the Transaction. Taxpayer deducted 70% of the $b contingent fee on their Tax Year short period return and capitalized the remaining 30% of that fee on that return. Taxpayer also engaged Financial Advisor 2 to provide financial advisory services consisting of due diligence, transaction negotiations, financial advisory, and the preparation of fairness opinions with respect to the Transaction. Taxpayer agreed to pay Financial Advisor 2 a fee equal to a percentage of the aggregate consideration paid to acquire Taxpayer if the Transaction was consummated. However, under the agreement with Financial Advisor 2, the percentage fee calculated was reduced by non-contingent amounts paid by Taxpayer to Financial Advisor 2 for fairness opinions that Taxpayer was required to pay whether the Transaction was consummated or not. The net contingent amount (less the non-contingent fairness opinion fees) was treated as success-based fees by Taxpayer, with 70% being deducted and 30% being capitalized on Taxpayer's short period return. Following the Transaction, Taxpayer's and Parent's combined tax departments had the responsibility of tax compliance for Taxpayer's Tax Year returns. Taxpayer engaged Firm to review its Federal income tax return for Tax Year. Parent also engaged Firm to perform an analysis of the transaction costs, including success-based fees incurred by Taxpayer in association with the Transaction. A draft schedule prepared by Firm for Taxpayer set forth the success-based fees, including the portions that were deductible and capitalizable for Financial Advisor 1 and Financial Advisor 2. Internal memos also evidence Taxpayer's intent to make the election. Taxpayer intended to make the election timely, and, except for the inclusion of the election statement, the return was completed consistent with the election being made. On Date 4, Taxpayer filed its Federal income tax return that reported success-based fees in accordance with Rev.Proc. 2011-29. However, due to an inadvertent oversight by Taxpayer's internal and external tax professionals, the election statement was not included with the filed return, and as such, a proper Rev Proc. 2011-29 safe-harbor election was not made. On Date 5, in preparing Federal income tax return information f or Sub 1, Firm noticed the omission of the statement regarding success-based fees on Taxpayer's earlier filed return. This was discovered prior to any discovery by the Internal Revenue Service. Taxpayer then submitted its request for this ruling on Date 1. As part of its request for an extension of time to file the election statement, Taxpayer submitted detailed affidavits from individuals having knowledge or information about the events that led to the failure to attach the required election statement to Taxpayer's tax return as well as regarding the discovery of that failure. Law & Analysis Section 263(a)(1) of the Internal Revenue Code and § 1.263(a)-2(a) of the Income Tax Regulations provide that no deduction shall be allowed for any amount paid out for property having a useful life substantially beyond the taxable year. In the case of an acquisition or reorganization of a business entity, costs that are incurred in the process of acquisition and that produce significant long-term benefits must be capitalized. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 89-90 (1992); Woodward v. Commissioner, 397 U.S. 572, 575-576 (1970). Under § 1.263(a)-5, a taxpayer must capitalize an amount paid to facilitate a business acquisition or reorganization transaction described in § 1.263(a)-5(a). In general, an amount is paid to facilitate a transaction described in § 1.263(a)-5(a) if the amount is paid in the process of investigating or otherwise pursuing the transaction. Whether an amount is paid in the process of investigating or otherwise pursuing the transaction is determined based on all the facts and circumstances. See § 1.263(a)-5(b)(1). Section 1.263(a)-5(f) provides that an amount paid that is contingent on the successful closing of a transaction described in § 1.263(a)-(5)(a) is presumed to facilitate the transaction and, thus, must be capitalized. A taxpayer may rebut this presumption by maintaining sufficient documentation to establish that a portion of the fee is allocable to activities that do not facilitate the transaction and thus may be deductible. This documentation must be completed on or before the due date of the taxpayer's timely filed original federal income tax return (including extensions) for the taxable year during which the transaction closes. To reduce controversy between the Internal Revenue Service (the "Service") and taxpayers over the documentation required to allocate success-based fees between the activities that facilitate the transaction and activities that do not facilitate the transaction, the Service issued Rev.Proc. 2011-29. Section 4.01 of Rev.Proc. 2011-29 states that the Service will not challenge a taxpayer's allocation of a success-based fee between activities that facilitate the transaction described in § 1.263(a)-5(e)(3) and activities that do not facilitate the transaction if the taxpayer: (1) treats 70 percent of the amount of the success-based fee as an amount that does not facilitate the transaction; (2) capitalizes the remaining 30 percent as an amount that does facilitate the transaction; and (3) attaches a statement to its original federal income tax return for the taxable year the success-based fee is paid or incurred, stating that the taxpayer is electing the safe harbor, identifying the transaction, and stating the success-based fee amounts that are deducted and capitalized. The revenue procedure applies to covered transactions described in § 1.263(a)-5(e)(3), which includes, inter alia, a taxable acquisition of an ownership interest in a business entity (whether the taxpayer is the acquirer in the acquisition or the target of the acquisition) if, immediately after the acquisition, the acquirer and the target are related within the meaning of § 267(b) or § 707(b). See § 1.263(a)-5(e)(3)(ii). Sections 301.9100-1 through 301.9100-3 provide the standards the Commissioner will use to determine whether to grant an extension of time to make an election. Section 301.9100-1(b) defines a "regulatory election" as an election whose due date is prescribed by a regulation published in the Federal Register, or a revenue ruling, revenue procedure, notice or announcement published in the Internal Revenue Bulletin. Section 301.9100-1(c) provides that the Commissioner, in exercising his discretion, may grant a reasonable extension of time under the rules set forth in § 301.9100-3 to make a regulatory election under all subtitles of the Internal Revenue Code except subtitles E, G, H, and I. Section 301.9100-2 provides automatic extensions of time for making certain elections. Section 301.9100-3 sets forth extensions of time for making elections that do not meet the requirements of § 301.9100-2. Section 301.9100-3(a) provides that requests for relief under this section will be granted when the taxpayer provides evidence (including affidavits described in the regulations) to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith and that granting relief will not prejudice the interests of the Government. Section 301.9100-3(b)(1) provides, in general, that a taxpayer is deemed to have acted reasonably and in good faith if the taxpayer: (i) requests relief before the failure to make the regulatory election is discovered by the Service; (ii) failed to make the election because of intervening events beyond the taxpayer's control; (iii) failed to make the election because, after exercising reasonable diligence (taking into account the taxpayer's experience and the complexity of the return at issue), the taxpayer was unaware of the necessity for the election; (iv) reasonably relied on the written advice of the Service; or (v) reasonably relied on a qualified tax professional, including a tax professional employed by the taxpayer, and the tax professional failed to make, or advise the taxpayer to make, the election. Section 301.9100-3(b)(3) provides that a taxpayer will be deemed to have not acted reasonably and in good faith if the taxpayer: (i) seeks to alter a return position for which an accuracy-related penalty has been or could be imposed under § 6662 at the time the taxpayer requests relief, and the new position requires or permits a regulatory election for which relief is requested; (ii) was informed in all material respects of the required election and related tax consequences, but chose not to file the election; or (iii) uses hindsight in requesting relief. Section 301.9100-3(c)(1) provides that the interests of the Government are prejudiced if granting relief would result in a taxpayer having a lower tax liability in the aggregate for all taxable years affected by the election than the taxpayer would have had if the election had been timely made (taking into account the time value of money). The interests of the Government are ordinarily prejudiced if the taxable year in which the regulatory election should have been made or any taxable years that would have been affected by the election had it been timely made are closed by the period of limitations on assessment under § 6501(a) before the taxpayer's receipt of a ruling granting relief under this section. Taxpayer represents that, for federal income tax purposes, the Transaction was a taxable acquisition of Taxpayer by Parent. Taxpayer further represents that, upon the closing of the Transaction, Taxpayer and Parent were related within the meaning of § 267(b). Accordingly, Taxpayer represents that the Transaction is a covered transaction described in § 1.263(a)-5(e)(3)(ii). The election Taxpayer seeks to make is a regulatory election, as defined in § 301.9100-1(b), because the due date of the election is prescribed by Rev.Proc. 2011-29. The Commissioner has the authority under § 301.9100-1 and 301.9100-3 to grant an extension of time to file a late regulatory election. Taxpayer is requesting permission with this ruling request to attach the election statement to its Tax Year tax return, by amending its original filed return and superseding it with a return with the proper election statement completed and attached. Taxpayer represents that it intended to take advantage of the safe harbor provisions of Rev.Proc. 2011-29, filed its return for Tax Year reflecting those provisions, but failed to include the required election statement. Taxpayer is not using hindsight in requesting relief. Taxpayer represents that the return for the taxable year is not under examination and that the failure to file the election statement was not discovered by the Service. Thus, under § 301.9100-3(b)(1)(i), Taxpayer will be deemed to have acted reasonably and in good faith. Taxpayer also represents that none of the circumstances listed in § 301.9100-3(b)(3) apply. Section 2.04 of Rev.Proc. 2011-29 provides that a taxpayer's method for determining the portion of a success-based fee that facilitates a transaction and the portion that does not facilitate a transaction is a method of accounting under § 446. Regulatory elections, relating to methods of accounting, are subject to special rules. § 301.9100-3(c)(2). However, Taxpayer is not seeking to change its method of accounting for the success-based fees, only to file the election statement required by section 4.01(3) of Rev.Proc. 2011-29. Further, based on the facts represented by Taxpayer, granting an extension will not prejudice the interests of the Government. Conclusion Based upon our analysis of the facts as represented, we conclude that Taxpayer acted reasonably and in good faith and granting relief will not prejudice the interests of the government. Accordingly, the requirements of Treas.Reg. §§301.9100-1 and 301.9100-3 have been met. Taxpayer is granted an extension of 60 days from the date of this ruling to file the statement required by section 4.01(3) of Rev.Proc. 2011-29, stating that it is electing the safe harbor for success-based fees, identifying the transaction, and stating the success-based fee amounts that are deducted and capitalized. The ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by penalty of perjury statements executed by the appropriate parties. This office has not verified any of the materials submitted in support of the request for a ruling and the information materials are subject to verification on examination. Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. In particular, no opinion is expressed or implied as to whether Taxpayer properly included the correct costs as its success-based fees subject to the election, or whether the Transaction is within the scope of Rev.Proc. 2011-29. This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. A copy of this letter must be attached to any income tax return to which it is relevant. Alternatively, taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter ruling. In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representatives. We are also sending a copy of this letter to the appropriate operating division director. Sincerely yours, Patrick White Senior Counsel, Branch 1 Office of Associate Chief Counsel (Income Tax and Accounting) cc:
Proposed Regulation REG-116475-19 Internal Revenue Service 2020-37 I.R.B. 553 Notice of Proposed Rulemaking Rollover Rules for Qualified Plan Loan Offset Amounts REG-116475-19 AGENCY: Internal Revenue Service (IRS), Treasury ACTION: Notice of proposed rulemaking. SUMMARY: This document sets forth proposed regulations relating to amendments made to section 402(c) of the Internal Revenue Code (Code) by section 13613 of the Tax Cuts and Jobs Act, Public Law 115-97 (131 Stat. 2054) (TCJA). Section 13613 of TCJA provides an extended rollover period for a qualified plan loan offset, which is a type of plan loan offset. These regulations affect participants, beneficiaries, sponsors, and administrators of qualified employer plans. DATES: Written or electronic comments and requests for a public hearing must be received by October 5, 2020. ADDRESSES: Commenters are strongly encouraged to submit public comments electronically. Submit electronic submissions via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-116475-19) by following the online instructions for submitting comments. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The IRS expects to have limited personnel available to process public comments that are submitted on paper through mail. Until further notice, any comments submitted on paper will be considered to the extent practicable. The Department of the Treasury (Treasury Department) and the IRS will publish for public availability any comment received to its public docket, whether submitted electronically or in hard copy. Send hard copy submissions to CC:PA:LPD:PR (REG-116475-19), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington D.C. 20044. FOR FURTHER INFORMATION CONTACT: Concerning the proposed amendments to the regulations, Naomi Lehr at (202) 317-4102, Vernon Carter at (202) 317-6799, or Pamela Kinard at (202) 317-6000; concerning submissions of comments and requests for a hearing, Regina Johnson at (202) 317-5177 (not toll-free numbers). SUPPLEMENTARY INFORMATION: Background This document sets forth proposed amendments to 26 CFR part 1, by adding §1.402(c)-3 to the Income Tax Regulations solely to reflect changes to section 402(c) of the Code, as amended by section 13613 of TCJA. On December 20, 2019, the Further Consolidated Appropriations Act of 2020, Public Law 116-94 (133 Stat. 2534) (the Act), was enacted. Section 114 of Division O of the Act, titled "Setting Every Community Up for Retirement Enhancement Act of 2019" (SECURE Act), amended section 401(a)(9) of the Code by changing the required beginning date applicable to section 401(a) plans and other eligible retirement plans described in section 402(c)(8). The Treasury Department and IRS anticipate providing separate guidance on section 114 of the SECURE Act, including amending §1.402(c)-2 to reflect changes made by the SECURE Act and to add new level designations for each paragraph in the questions and answers to satisfy Federal Register requirements. It is anticipated that the proposed §1.402(c)-3 will be combined with §1.402(c)-2 in connection with that project (including replacing Q&A-9 of §1.402(c)-2 with paragraph (a) of proposed §1.402(c)-3). 1. Plan Loans, Eligible Rollover Distributions, and Plan Loan Offset Amounts Section 72(p)(1) provides that if, during any taxable year, a participant or beneficiary receives (directly or indirectly) any amount as a loan from a qualified employer plan (as defined in section 72(p)(4)(A)), 1 such amount shall be treated as having been received by the individual as a distribution from the plan. For certain plan loans, section 72(p)(2) provides an exception to the general treatment of loans as distributions under section 72(p)(1). ****** 1 Under section 72(p)(4), a qualified employer plan means a qualified plan, a section 403(a) annuity plan, a section 403(b) plan, and any governmental plan. **** For the exception under section 72(p)(2) to apply so that a plan loan is not treated as a distribution under section 72(p)(1) for the taxable year in which the loan is received, the loan generally must satisfy three requirements: (1) The loan, by its terms, must satisfy the limits on loan amounts, as described in section 72(p)(2)(A); (2) The loan, by its terms, generally must be repayable within 5 years, as described in section 72(p)(2)(B); and (3) The loan must require substantially level amortization over the term of the loan, as described in section 72(p)(2)(C). Section 401(a)(31) requires that a plan qualified under section 401(a) provide for the direct transfer of eligible rollover distributions. A similar rule applies to section 403(a) annuity plans, section 403(b) tax-sheltered annuities, and section 457 eligible governmental plans. See generally sections 403(a)(1), 403(b)(10), and 457(d)(1)(C). Sections 402(c)(3) and 408(d)(3) provide that any amount distributed from a qualified plan or individual retirement account or annuity (IRA) will be excluded from income if it is transferred to an eligible retirement plan no later than the 60th day following the day the distribution is received. A similar rule applies to section 403(a) annuity plans, section 403(b) tax-sheltered annuities, and section 457 eligible governmental plans. See generally sections 403(a)(4)(B), 403(b)(8)(B), and 457(e)(16)(B). Sections 402(c)(3)(B) and 408(d)(3)(I) provide that the Secretary may waive the 60-day rollover requirement "where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the individual subject to such requirement." See generally Rev. Proc. 2016-47, 2016-37 I.R.B. 346, which sets forth a self-certification procedure that taxpayers may use in certain circumstances to claim a waiver of the 60-day deadline for completing a rollover under section 402(c)(3)(B) or 408(d)(3)(I), and Rev. Proc. 2020-4, 2020-1 I.R.B. 148, which sets forth procedures that taxpayers may use to request a waiver of the 60-day rollover deadline by submitting a request for a private letter ruling. 2 **** 2 Note that the 60-day rollover deadline can also be extended to provide temporary relief during a disaster or an emergency response. For example, in response to the COVID-19 pandemic, Notice 2020-23, 2020-18 I.R.B. 742, extended the 60-day rollover deadline to July 15, 2020, for distributions made between April 1, 2020, and July 14, 2020. **** Section 1.402(c)-2, Q&A-3(a), provides that, unless specifically excluded, an eligible rollover distribution means any distribution to an employee (or to a spousal distributee described in §1.402(c)-2, Q&A-12(a)) of all or any portion of the balance to the credit of the employee in a qualified plan. Section 1.402(c)-2, Q&A-3(b), provides that certain distributions (for example, required minimum distributions under section 401(a)(9)) are not eligible rollover distributions. Section 1.402(c)-2, Q&A-9(a), provides that a distribution of a plan loan offset amount (as defined in §1.402(c)-2, Q&A-9(b)) is an eligible rollover distribution if it satisfies §1.402(c)-2, Q&A-3. Thus, an amount not exceeding the plan loan offset amount may be rolled over by the employee (or spousal distributee) to an eligible retirement plan within the 60-day period described in section 402(c)(3), unless the plan loan offset amount fails to be an eligible rollover distribution for another reason. Section 1.402(c)-2, Q&A-9(b), provides that a distribution of a plan loan offset amount is a distribution that occurs when, under the plan terms governing the loan, the employee's accrued benefit is reduced (offset) in order to repay the loan. This may occur when, for example, the terms governing a plan loan require that, in the event of an employee's termination of employment or request for a distribution, the loan is to be repaid immediately or treated as in default. A plan loan offset may also occur when, under the terms of the plan loan, the loan is canceled, accelerated, or treated as if it is in default (for example, if the plan treats a loan as in default upon an employee's termination of employment or within a specified period thereafter). See also §1.72(p)-1, Q&A-13(a)(2). Because a plan loan offset is an actual distribution for purposes of the Code, not a deemed distribution under section 72(p), a plan loan offset cannot occur prior to a distributable event. See generally §1.72(p)-1, Q&A-13(b). 2. Qualified Plan Loan Offset Amounts Section 13613 of TCJA amended section 402(c)(3) of the Code to provide an extended rollover deadline for qualified plan loan offset (QPLO) amounts (as defined in section 402(c)(3)(C)(ii)). 3 Any portion of a QPLO amount (up to the entire QPLO amount) may be rolled over into an eligible retirement plan by the individual's tax filing due date (including extensions) for the taxable year in which the offset occurs. **** 3 In addition to TCJA, other statutory provisions may extend the period to roll over a plan loan offset. For example, section 2202(a) of the Coronavirus Aid, Relief, and Economic Security Act, Public Law 116-136, 134 Stat. 281 (2020) (CARES Act), permits an individual to receive from an eligible retirement plan up to $100,000 for a coronavirus-related distribution (which may include a plan loan offset that otherwise meets the requirements to be a coronavirus-related distribution). A qualified individual with a coronavirus-related distribution (which may be included in gross income ratably over the 3-year period beginning with the taxable year of the distribution) may recontribute up to the amount of the distribution to an applicable eligible retirement plan in which the individual is a beneficiary and to which a rollover can be made. For further information relating to the interaction of section 2202 of the CARES Act and plan loan offsets, see Notice 2020-50, 2020-28 I.R.B. 35. ****** A QPLO amount is defined in section 402(c)(3)(C)(ii) as a plan loan offset amount that is treated as distributed from a qualified employer plan to an employee or beneficiary solely by reason of: (1) The termination of the qualified employer plan, or (2) The failure to meet the repayment terms of the loan from such plan because of the severance from employment of the employee. In addition, section 402(c)(3)(C)(iv) provides that the extended rollover period will not apply "to any plan loan offset amount unless such plan loan offset amount relates to a loan to which section 72(p)(1) does not apply by reason of section 72(p)(2)." Section 301.9100-2(b) of the regulations provides rules for automatic six-month extensions to make regulatory or statutory elections. Under this rule, a taxpayer will receive an automatic extension of 6 months from the due date of a return, excluding extensions, to make elections that otherwise must be made by the due date of the return plus extensions, provided that: (1) The taxpayer's return was timely filed for the year the election should have been made; and (2) The taxpayer takes appropriate corrective action within the six-month period. Section 301.9100-2(b) further provides that paragraph (b) does not apply to regulatory or statutory elections that must be made by the due date of the return excluding extensions. Explanation of Provisions 1. In General These proposed regulations add §1.402(c)-3 to take into account changes to the rollover rules made by section 13613 of TCJA with respect to QPLO amounts. As an initial matter, the proposed regulations confirm that a QPLO is a type of plan loan offset; accordingly, most of the general rules relating to plan loan offset amounts apply to QPLO amounts. For example, the rule that a plan loan offset amount is an eligible rollover distribution applies to a QPLO amount. In addition, the rules in §1.401(a)(31)-1, Q&A-16 (guidance concerning the offering of a direct rollover of a plan loan offset amount), and §31.3405(c)-1, Q&A-11 (guidance concerning special withholding rules with respect to plan loan offset amounts), applicable to plan loan offset amounts in general, apply to QPLO amounts. The proposed regulations provide examples to illustrate the interaction of the special rules for QPLOs with the general rules for plan loan offsets. 2. Rollover Period for Plan Loan Offset Amounts, Including QPLO Amounts Consistent with §1.402(c)-2, Q&A-9, the proposed regulations provide that a distribution of a plan loan offset amount that is an eligible rollover distribution and not a QPLO amount may be rolled over by the employee (or spousal distributee) to an eligible retirement plan (as defined in section 402(c)(8)(B)) within the 60-day period set forth in section 402(c)(3)(A). While a plan loan offset generally is subject to this 60-day rollover period, there are special rules for the waiver of the 60-day rollover deadline. For further discussion of the special rules, see the Background section of this preamble. Consistent with the amended provisions of section 402(c)(3)(C), the proposed regulations provide that a distribution of a plan loan offset amount that is an eligible rollover distribution and a QPLO amount may be rolled over by the employee (or spousal distributee) to an eligible retirement plan through the period ending on the individual's tax filing due date (including extensions) for the taxable year in which the offset is treated as distributed from a qualified employer plan. Thus, a taxpayer with an eligible rollover distribution that is a QPLO amount may roll over any portion of the distribution to an eligible retirement plan, including another qualified retirement plan (if that plan permits) or an IRA, by the taxpayer's deadline for filing income taxes for the year of the distribution, including extensions. If a taxpayer to whom a QPLO amount is distributed satisfies the conditions in §301.9100-2(b), the taxpayer will have an extended period past his or her tax filing due date in which to complete a rollover of the QPLO amount, even if the taxpayer does not request an extension to file his or her income tax return but instead files the return by the unextended tax filing due date. For example, if, on June 1, 2020, Taxpayer A has an eligible rollover distribution of $10,000 that is a QPLO amount, she may be able to roll over the $10,000 amount as late as October 15, 2021. Pursuant to §301.9100-2(b), this automatic six-month extension applies if Taxpayer A timely files her tax return by April 15, 2021 (the due date of her return), rolls over the QPLO amount within the six-month period ending on October 15, 2021, and amends her return by October 15, 2021, as necessary to reflect the rollover. See the further discussion of §301.9100-2(b) in the Background section of this preamble. 3. Definitions of Plan Loan Offset Amount, QPLO Amount, and Qualified Employer Plan Consistent with §1.402(c)-2, Q&A-9(b), the proposed regulations provide that a plan loan offset amount is the amount by which, under plan terms governing a plan loan, an employee's accrued benefit is reduced (offset) in order to repay the loan (including the enforcement of the plan's security interest in the employee's accrued benefit). A distribution of a plan loan offset amount is an actual distribution, not a deemed distribution under section 72(p). Section 1.402(c)-3(a)(2)(iii)(B) of the proposed regulations defines a QPLO amount as a plan loan offset amount that satisfies two requirements. First, the plan loan offset amount must be treated as distributed from a qualified employer plan to an employee or beneficiary solely by reason of the termination of the qualified employer plan, or the failure to meet the repayment terms of the loan from such plan because of the severance from employment of the employee. Second, the plan loan offset amount must relate to a plan loan that met the requirements of section 72(p)(2) immediately prior to the termination of the qualified employer plan or the severance from employment of the employee, as applicable. The proposed regulations define a qualified employer plan, for purposes of the QPLO amount definition, as a qualified employer plan as defined in section 72(p)(4). For a discussion of the definition of a qualified employer plan, see the Background section of this preamble. 4. Special Rules for QPLO Determinations The proposed regulations provide several special rules for purposes of determining whether a plan loan offset amount is a QPLO amount. First, the proposed regulations provide that whether an employee has a severance from employment with the employer that maintains the qualified employer plan is determined in the same manner as under §1.401(k)-1(d)(2). Thus, an employee has a severance from employment when the employee ceases to be an employee of the employer maintaining the plan. Second, the proposed regulations provide that a plan loan offset amount is treated as distributed from a qualified employer plan to an employee or beneficiary solely by reason of the failure to meet the plan loan repayment terms because of severance from employment if the plan loan offset: (1) Relates to a failure to meet the repayment terms of the plan loan, and (2) Occurs within the period beginning on the date of the employee's severance from employment and ending on the first anniversary of that date. Whether a plan loan offset amount is a QPLO amount is relevant to plan administrators because those administrators are responsible for reporting whether a distribution is a plan loan offset amount or a QPLO amount on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., and furnishing that form to the taxpayer. The Instructions to the 2020 Form 1099-R provide that if an employee's accrued benefit is offset to repay a loan (a plan loan offset amount), the administrator should report the distribution as an actual distribution and not use Code L (for deemed distributions) in box 7. For a QPLO amount, the instructions to the 2020 Form 1099-R provide that the administrator should enter Code M (for QPLO amounts) in box 7. The Treasury Department and the IRS anticipate that the proposed 12-month rule will assist plan administrators in identifying QPLO amounts by providing a bright-line rule for determining whether a plan loan offset amount following a severance from employment is a QPLO amount. Proposed Applicability Date These regulations are proposed to apply to plan loan offset amounts, including qualified plan loan offset amounts, treated as distributed on or after the date of publication of a Treasury decision adopting these rules as final regulations in the Federal Register. Taxpayers, however, may rely on these proposed regulations with respect to plan loan offset amounts, including qualified plan loan offset amounts, treated as distributed on or after August 20, 2020 and before the date these regulations are published as final regulations in the Federal Register. Statement of Availability for IRS Documents For copies of recently issued Revenue Procedures, Revenue Rulings, Notices, and other guidance published in the Internal Revenue Bulletin, please visit the IRS website at https://www.irs.gov. Special Analyses These proposed regulations are not subject to review under section 6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) between the Treasury Department and the Office of Management and Budget regarding review of tax regulations. In addition, it is hereby certified that these proposed regulations will not have a significant economic impact on a substantial number of small entities pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6). This certification is based on the fact that the proposed regulations would reflect the statutory changes to section 402(c) made by section 13613 of TCJA. The proposed regulations would reflect the extended rollover period for QPLO amounts, as amended by TCJA. Specifically, the proposed regulations would reflect the statute in a manner that (i) is consistent with the statutory language, (ii) provides certain clarifications, and (iii) eases and facilitates plan administration. Although the proposed regulations might affect a substantial number of individuals, the economic impact of the proposed regulations is not expected to be significant. The regulations do not impose any new compliance burdens on taxpayers and are not expected to result in any economically meaningful changes in behavior. Notwithstanding this certification that the proposed regulations would not have a significant economic impact on a substantial number of small entities, the Treasury Department and the IRS invite comments on the impacts these proposed regulations may have on small entities. Pursuant to section 7805(f), these proposed regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business. Comments and Requests for Public Hearing Before these proposed amendments to the regulations are adopted as final regulations, consideration will be given to comments that are submitted timely to the IRS as prescribed in this preamble under the "ADDRESSES" section. The Treasury Department and the IRS request comments on all aspects of the proposed rules. Any electronic comments submitted, and to the extent practicable any paper comments submitted, will be available at www.regulations.gov or upon request. A public hearing will be scheduled if requested in writing by any person who timely submits electronic or written comments. Requests for a public hearing are also encouraged to be made electronically. If a public hearing is scheduled, notice of the date, time, and place for the public hearing will be published in the Federal Register. Announcement 2020-4, 2020-17 I.R.B. 1, provides that, until further notice, public hearings conducted by the IRS will be held telephonically. Any telephonic hearing will be made accessible to people with disabilities. Drafting Information The principal authors of these regulations are Naomi Lehr and Pamela R Kinard of the Office of Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes), although other persons in the IRS and the Treasury Department participated in their development. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Proposed Amendments to the Regulations Accordingly, 26 CFR part 1 is proposed to be amended as follows: PART 1--INCOME TAXES Paragraph 1. The authority citation for part 1 continues to read in part as follows: Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.402(c)-3 is added to read as follows: §1.402(c)-3 Eligible rollover distributions; Qualified plan loan offsets (a)(1) Q-1 What special rollover rules apply to a plan loan offset amount (including a qualified plan loan offset amount)? (2) A-1 --(i) In general --(A) Eligible rollover distribution. A distribution of a plan loan offset amount, as defined in paragraph (a)(2)(ii)(A) of this section (including a qualified plan loan offset amount, a type of plan loan offset amount defined in paragraph (a)(2)(ii)(B) of this section), is an eligible rollover distribution if it satisfies §1.402(c)-2, Q&A-3 and 4. (B) Other rules relating to plan loan offset amounts. See §1.401(a)(31)-1, Q&A-16, for guidance concerning the offering of a direct rollover of a plan loan offset amount. See also §31.3405(c)-1, Q&A-11, of this chapter for guidance concerning special withholding rules with respect to plan loan offset amounts. (ii) Rollover period for a plan loan offset amount --(A) Plan loan offset amount that is not a qualified plan loan offset amount. A distribution of a plan loan offset amount that is an eligible rollover distribution and not a qualified plan loan offset amount may be rolled over by the employee (or spousal distributee) to an eligible retirement plan (as defined in §1.402(c)-2, Q&A-2) within the 60-day period set forth in section 402(c)(3)(A). (B) Plan loan offset amount that is a qualified plan loan offset amount. A distribution of a plan loan offset amount that is an eligible rollover distribution and that is a qualified plan loan offset amount may be rolled over by the employee (or spousal distributee) to an eligible retirement plan within the period set forth in section 402(c)(3)(C), which is the individual's tax filing due date (including extensions) for the taxable year in which the offset is treated as distributed from a qualified employer plan. (iii) Definitions --(A) Plan loan offset amount. For purposes of section 402(c), a plan loan offset amount is the amount by which, under the plan terms governing a plan loan, an employee's accrued benefit is reduced (offset) in order to repay the loan (including the enforcement of the plan's security interest in an employee's accrued benefit). A distribution of a plan loan offset amount can occur in a variety of circumstances, for example, when the terms governing a plan loan require that, in the event of the employee's termination of employment or request for a distribution, the loan be repaid immediately or treated as in default. A distribution of a plan loan offset amount also occurs when, under the terms governing the plan loan, the loan is cancelled, accelerated, or treated as if it were in default (for example, when the plan treats a loan as in default upon an employee's termination of employment or within a specified period thereafter). A distribution of a plan loan offset amount is an actual distribution, not a deemed distribution under section 72(p). (B) Qualified plan loan offset amount. For purposes of section 402(c), a qualified plan loan offset amount is a plan loan offset amount that satisfies the following requirements: ( 1 ) The plan loan offset amount is treated as distributed from a qualified employer plan to an employee or beneficiary solely by reason of the termination of the qualified employer plan, or the failure to meet the repayment terms of the loan because of the severance from employment of the employee; and ( 2 ) The plan loan offset amount relates to a plan loan that met the requirements of section 72(p)(2) immediately prior to the termination of the qualified employer plan or the severance from employment of the employee, as applicable. (C) Qualified employer plan. For purposes of section 402(c) and this section, a qualified employer plan is a qualified employer plan as defined in section 72(p)(4). (iv) Special rules for qualified plan loan offset amounts --(A) Definition of severance from employment. For purposes of paragraph (a)(2)(iii)(B)( 1 ) of this section, whether an employee has a severance from employment with the employer that maintains the qualified employer plan is determined in the same manner as under §1.401(k)-1(d)(2). Thus, an employee has a severance from employment when the employee ceases to be an employee of the employer maintaining the plan. (B) Offset because of severance from employment. A plan loan offset amount is treated as distributed from a qualified employer plan to an employee or beneficiary solely by reason of the failure to meet the repayment terms of a plan loan because of severance from employment of the employee if the plan loan offset: ( 1 ) Relates to a failure to meet the repayment terms of the plan loan, and ( 2 ) Occurs within the period beginning on the date of the employee's severance from employment and ending on the first anniversary of that date. (v) Examples. The following examples illustrate the rules with respect to plan loan offset amounts, including qualified plan loan offset amounts, in this paragraph (a) and in §§1.401(a)(31)-1, Q&A-16, and 31.3405(c)-1, Q&A-11, of this chapter. For purposes of these examples, each reference to a plan refers to a qualified employer plan as described in section 72(p)(4). (A) Example 1 --( 1 ) In 2020, Employee A has an account balance of $10,000 in Plan Y, of which $3,000 is invested in a plan loan to Employee A that is secured by Employee A's account balance in Plan Y. Employee A has made no after-tax employee contributions to Plan Y. The plan loan meets the requirements of section 72(p)(2). Plan Y does not provide any direct rollover option with respect to plan loans. Employee A severs from employment on June 15, 2020. After severance from employment, Plan Y accelerates the plan loan and provides Employee A 90 days to repay the remaining balance of the plan loan. Employee A, who is under the age set forth in section 401(a)(9)(C)(i)(II), does not repay the loan within the 90 days and instead elects a direct rollover of Employee A's entire account balance in Plan Y. On September 18, 2020 (within the 12-month period beginning on the date that Employee A severed from employment), Employee A's outstanding loan is offset against the account balance. ( 2 ) In order to satisfy section 401(a)(31), Plan Y must make a direct rollover by paying $7,000 directly to the eligible retirement plan chosen by Employee A. When Employee A's account balance was offset by the amount of the $3,000 unpaid loan balance, Employee A received a plan loan offset amount (equivalent to $3,000) that is an eligible rollover distribution. However, under §1.401(a)(31)-1, Q&A-16, Plan Y satisfies section 401(a)(31), even though a direct rollover option was not provided with respect to the $3,000 plan loan offset amount. ( 3 ) No withholding is required under section 3405(c) on account of the distribution of the $3,000 plan loan offset amount because no cash or other property (other than the plan loan offset amount) is received by Employee A from which to satisfy the withholding. ( 4 ) The $3,000 plan loan offset amount is a qualified plan loan offset amount within the meaning of paragraph (a)(2)(iii)(B) of this section. Accordingly, Employee A may roll over up to the $3,000 qualified plan loan offset amount to an eligible retirement plan within the period that ends on the employee's tax filing due date (including extensions) for the taxable year in which the offset occurs. (B) Example 2 --( 1 ) The facts are the same as in paragraph (a)(2)(v)(A) of this section ( Example 1 ), except that, rather than accelerating the plan loan, Plan Y permits Employee A to continue making loan installment payments after severance from employment. Employee A continues making loan installment payments until January 1, 2021, at which time Employee A does not make the loan installment payment due on January 1, 2021. In accordance with §1.72(p)-1, Q&A-10, Plan Y allows a cure period that continues until the last day of the calendar quarter following the quarter in which the required installment payment was due. Employee A does not make a plan loan installment payment during the cure period. Plan Y offsets the unpaid $3,000 loan balance against Employee A's account balance on July 1, 2021 (which is after the 12-month period beginning on the date that Employee A severed from employment). ( 2 ) The conclusion is the same as in paragraph (a)(2)(v)(A) of this section ( Example 1 ), except that the $3,000 plan loan offset amount is not a qualified plan loan offset amount (because the offset did not occur within the 12-month period beginning on the date that Employee A severed from employment). Accordingly, Employee A may roll over up to the $3,000 plan loan offset amount to an eligible retirement plan within the 60-day period provided in section 402(c)(3)(A) (rather than within the period that ends on Employee A's tax filing due date (including extensions) for the taxable year in which the offset occurs). (C) Example 3 --( 1 ) The facts are the same as in paragraph (a)(2)(v)(A) of this section ( Example 1 ), except that the terms governing the plan loan to Employee A provide that, upon severance from employment, Employee A's account balance is automatically offset by the amount of any unpaid loan balance to repay the loan. Employee A severs from employment but does not request a distribution from Plan Y. Nevertheless, pursuant to the terms governing the plan loan, Employee A's account balance is automatically offset on June 15, 2020, by the amount of the $3,000 unpaid loan balance. ( 2 ) The $3,000 plan loan offset amount is a qualified plan loan offset amount within the meaning of paragraph (a)(2)(iii)(B) of this section. Accordingly, Employee A may roll over up to the $3,000 qualified plan loan offset amount to an eligible retirement plan within the period that ends on Employee A's tax filing due date (including extensions) for the taxable year in which the offset occurs. (D) Example 4 --( 1 ) The facts are the same as in paragraph (a)(2)(v)(A) of this section ( Example 1 ), except that Employee A elects to receive a cash distribution of the account balance that remains after the $3,000 plan loan offset amount, instead of electing a direct rollover of the remaining account balance. ( 2 ) The amount of the distribution received by Employee A is $10,000 (not $3,000). Because the amount of the $3,000 plan loan offset amount attributable to the loan is included in determining the amount of the eligible rollover distribution to which withholding applies, withholding in the amount of $2,000 (20 percent of $10,000) is required under section 3405(c). The $2,000 is required to be withheld from the $7,000 to be distributed to Employee A in cash, so that Employee A actually receives a cash amount of $5,000. ( 3 ) The $3,000 plan loan offset amount is a qualified plan loan offset amount within the meaning of paragraph (a)(2)(iii)(B) of this section. Accordingly, Employee A may roll over up to the $3,000 qualified plan loan offset to an eligible retirement plan within the period that ends on the Employee A's tax filing due date (including extensions) for the taxable year in which the offset occurs. In addition, Employee A may roll over up to $7,000 (the portion of the distribution that is not related to the offset) within the 60-day period provided in section 402(c)(3). (E) Example 5 --( 1 ) The facts are the same as in paragraph (a)(2)(v)(D) of this section ( Example 4 ), except that the $7,000 distribution to Employee A after the offset consists solely of employer securities within the meaning of section 402(e)(4)(E). ( 2 ) No withholding is required under section 3405(c) because the distribution consists solely of the $3,000 plan loan offset amount and the $7,000 distribution of employer securities. This is the result because the total amount required to be withheld does not exceed the sum of the cash and the fair market value of other property distributed, excluding plan loan offset amounts and employer securities. ( 3 ) Employee A may roll over up to the $7,000 of employer securities to an eligible retirement plan within the 60-day period provided in section 402(c)(3). The $3,000 plan loan offset amount is a qualified plan loan offset amount within the meaning of paragraph (a)(2)(iii)(B) of this section. Accordingly, Employee A may roll over up to the $3,000 qualified plan loan offset amount to an eligible retirement plan within the period that ends on Employee A's tax filing due date (including extensions) for the taxable year in which the offset occurs. (F) Example 6 --( 1 ) Employee B, who is age 40, has an account balance in Plan Z. Plan Z provides for no after-tax employee contributions. In 2022, Employee B receives a loan from Plan Z, the terms of which satisfy section 72(p)(2), and which is secured by elective contributions subject to the distribution restrictions in section 401(k)(2)(B). ( 2 ) Employee B fails to make an installment payment due on April 1, 2023, or any other monthly payments thereafter. In accordance with §1.72(p)-1, Q&A-10, Plan Z allows a cure period that continues until the last day of the calendar quarter following the quarter in which the required installment payment was due (September 30, 2023). Employee B does not make a plan loan installment payment during the cure period. On September 30, 2023, pursuant to section 72(p)(1), Employee B is taxed on a deemed distribution equal to the amount of the unpaid loan balance. Pursuant to §1.402(c)-2, Q&A4(d), the deemed distribution is not an eligible rollover distribution. ( 3 ) Because Employee B has not severed from employment or experienced any other event that permits the distribution under section 401(k)(2)(B) of the elective contributions that secure the loan, Plan Z is prohibited from executing on the loan. Accordingly, Employee B's account balance is not offset by the amount of the unpaid loan balance at the time of the deemed distribution. Thus, there is no distribution of an offset amount that is an eligible rollover distribution on September 30, 2023. (G) Example 7 --( 1 ) The facts are the same as in in paragraph (a)(2)(v)(F) of this section ( Example 6 ), except that Employee B has a severance from employment on November 1, 2023. On that date, Employee B's unpaid loan balance is offset against the account balance on distribution. ( 2 ) The plan loan offset amount is not a qualified plan loan offset amount. Although the offset occurred within 12 months after Employee B severed from employment, the plan loan does not meet the requirement in paragraph (a)(2)(iii)(B) of this section (that the plan loan meet the requirements of section 72(p)(2) immediately prior to Employee B's severance from employment). Instead, the loan was taxable on September 30, 2023 (prior to Employee B's severance from employment on November 1, 2023), because of the failure to meet the level amortization requirement in section 72(p)(2)(C). Accordingly, Employee B may roll over the plan loan offset amount to an eligible retirement plan within the 60-day period provided in section 402(c)(3)(A) (rather than within the period that ends on Employee B's tax filing due date (including extensions) for the taxable year in which the offset occurs). (b)(1) Q-2 When are the rules in this § 1.402(c)-3 applicable to plan loan offset amounts, including qualified plan loan offset amounts? (2) A-2 Applicability date. The rules provided in paragraph (a) of this section are applicable to plan loan offset amounts, including qualified plan loan offset amounts, treated as distributed on or after the adoption of these rules as final regulations in the Federal Register. * * * * * * * * Sunita Lough, Deputy Commissioner for Services and Enforcement. (Filed by the Office of the Federal Register on August 17, 2020, 4:15 p.m., and published in the issue of the Federal Register for August 20, 2020, 85 F.R. 51369)
Private Letter Ruling Number: 202247014 Internal Revenue Service May 5, 2022 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Release Number: 202247014 Release Date: 11/25/2022 UIL Code: 501.03-00 Date: May 5, 2022 Taxpayer ID number: Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: CERTIFIED MAIL - RETURN RECEIPT REQUESTED Dear ****: Why we are sending you this letter This is a final determination that you don't qualify for exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3). effective **. Your determination letter dated **, is revoked. Our adverse determination as to your exempt status was made for the following reasons: You have failed to produce documents to establish that you are operated exclusively for exempt purposes within the meaning of IRC Section 501(c)(3), and that no part of your net earnings inures to the benefit of private shareholders or individuals. You failed to respond to repeated reasonable requests to allow the Internal Revenue Service to examine your records regarding your receipts, expenditures or activities as required by IRC Sections 6001 and 6033(a)(1) and Rev.Rul. 59-95, 1959-1 C.B. 627. Organizations that are not exempt under IRC Section 501 generally are required to file federal income tax returns and pay tax, where applicable. For further instructions, forms and information please visit www.irs.gov. Because you were a private foundation as of the effective date of the adverse determination, you are considered to be a taxable private foundation until you terminate your private foundation status under IRC Section 507. In addition to your income tax return, you must also continue to file Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as Private Foundation, by the 15th day of the fifth month after the end of your annual accounting period. Contributions to your organization are no longer deductible under IRC Section 170. What you must do if you disagree with this determination If you want to contest our final determination, you have 90 days from the date this determination letter was mailed to you to file a petition or complaint in one of the three federal courts listed below. How to file your action for declaratory judgment If you decide to contest this determination, you may file an action for declaratory judgment under the provisions of IRC Section 7428 in one of the following three venues: 1) United States Tax Court, 2) the United States Court of Federal Claims or 3) the United States District Court for the District of Columbia. Please contact the clerk of the appropriate court for rules and the appropriate forms for filing an action for declaratory judgment by referring to the enclosed Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. You may write to the courts at the following addresses: United States Tax Court 400 Second Street, NW Washington, DC 20217 U.S. Court of Federal Claims 717 Madison Place, NW Washington, DC 20439 U.S. District Court for the District of Columbia 333 Constitution Ave., N.W. Washington, DC 20001 Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory judgment under IRC Section 7428. We'll notify the appropriate state officials (as permitted by law) of our determination that you aren't an organization described in IRC Section 501(c)(3). Information about the IRS Taxpayer Advocate Service The IRS office whose phone number appears at the top of the notice can best address and access your tax information and help get you answers. However, you may be eligible for free help from the Taxpayer Advocate Service (TAS) if you can't resolve your tax problem with the IRS, or you believe an IRS procedure just isn't working as it should. TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Contact your local Taxpayer Advocate Office at: Internal Revenue Service Taxpayer Advocate Office Or call TAS at 877-777-4778. For more information about TAS and your rights under the Taxpayer Bill of Rights, go to taxpayeradvocate.irs.gov. Do not send your federal court pleading to the TAS address listed above. Use the applicable federal court address provided earlier in the letter. Contacting TAS does not extend the time to file an action for declaratory judgment. Where you can find more information Enclosed are Publication 1, Your Rights as a Taxpayer, and Publication 594, The IRS Collection Process, for more comprehensive information. Find tax forms or publications by visiting www.irs.gov/forms or calling 800-TAX-FORM (800-829-3676). If you have questions, you can call the person shown at the top of this letter. If you prefer to write, use the address shown at the top of this letter. Include your telephone number, the best time to call, and a copy of this letter. Keep the original letter for your records. Sincerely, Lynn A. Brinkley Acting Director, Exempt Organizations Examinations Enclosures: Publication 1 Publication 594 Publication 892 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Date: 06/09/2021 Taxpayer ID number: Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: Address: Manager's contact information: Name: ID number: Telephone: Response due date: 07/09/2021 CERTIFIED MAIL -- Return Receipt Requested Dear **: Why you're receiving this letter We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we propose to revoke your tax-exempt status as an organization described in Internal Revenue Code (IRC) Section 501(c)(3). If you agree If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an organization described in IRC Section 501(c)(3) for the periods above. After we issue the final adverse determination letter, we'll announce that your organization is no longer eligible to receive tax deductible contributions under IRC Section 170. If you disagree 1. Request a meeting or telephone conference with the manager shown at the top of this letter. 2. Send any information you want us to consider. 3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after the meeting or after we consider the information. The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case. For your protest to be valid, it must contain certain specific information, including a statement of the facts, applicable law, and arguments in support of your position. For specific information needed for a valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn't apply now that we've issued this letter. 4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities) if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the IRS. If you're considering requesting technical advice, contact the person shown at the top of this letter. If you disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as explained above. A decision made in a technical advice memorandum, however, generally is final and binding on Appeals. If we don't hear from you If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final adverse determination letter. Contacting the Taxpayer Advocate Office is a taxpayer right The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778. Additional information You can get any of the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person shown at the top of this letter. Sincerely, Sean O'Reilly Director, Exempt Organizations Examinations Enclosures: Form 6018 Form 4621-A Form 886-A Pub 892 Pub 3498 Issue: Whether exemption under the Internal Revenue Code (IRC) Section 501(c)(3) should be revoked for the ** to ** (**) for failure to meet the reporting requirements under IRC Section 6001 and 6033. Facts: The ** was incorporated in the state of ** on ** as a nonprofit corporation. It was formed exclusively for charitable purposes within the meaning of IRC Section 501(c)(3). The ** was given exemption as a private foundation under IRC Section 501(c)(3) within the meaning of Section 509(a) effective on **. The ** mailing address on record is the same as its address on the ** Form ** which is at ** On **, Letter 3611 along with Form 4564 -- Information Document Request both dated ** were mailed to the ** requesting an appointment to examine books and records and activities related to the ** Form **. Letter 3611 asks the ** to respond by **. No response has been received from the ** more than two months since Letter 3611 was first mailed. There has been no Undeliverable notice received from the US Postal Service to indicate that the address is not valid. Phone number listed on the ** Form ** is not valid. Law: IRC Section 6001 provides that every person liable for any tax imposed by the IRC, or for the collection thereof, shall keep adequate records as the Secretary of the Treasury or his delegate may from time to time prescribe. IRC Section 6033(a)(1) provides, except as provided in Section 6033(a)(2), every organization exempt from tax under section 501(a) shall file an annual return, stating specifically the items of gross income, receipts and disbursements, and such other information for the purposes of carrying out the internal revenue laws as the Secretary may by forms or regulations prescribe, and keep such records, render under oath such statements, make such other returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Reg. Section 1.6001-1(a) in conjunction with Section 1.6001-1(c) provides that every organization exempt from tax under IRC § 501(a) and subject to the tax imposed by IRC § 511 on its unrelated business income must keep such permanent books or accounts or records, including inventories, as are sufficient to establish the amount of gross income, deduction, credits, or other matters required to be shown by such person in any return of such tax. Such organization shall also keep such books and records as are required to substantiate the information required by IRC § 6033. Reg. Section 1.6001-1(e) states that the books or records required by this section shall be kept at all times available for inspection by authorized Internal Revenue officers or employees, and shall be retained as long as the contents thereof may be material in the administration of any Internal Revenue law. Reg. Section 1.6033-1(h)(2) provides that every organization which has established its right to exemption from tax, whether or not it is required to file an annual return of information, shall submit such additional information as may be required by the Director, for the purpose of enabling him to inquire further into its exempt status and to administer the provisions of subchapter F (section 501 and the following), chapter 1 of the Code and IRC § 6033. Rev.Rul. 59-95, 1959-1 C.B. 627, concerns an exempt organization that was requested to produce a financial statement and statement of its operations for a certain year. However, its records were so incomplete that the organization was unable to furnish such statements. The Service held that the failure or inability to file the required information return or otherwise to comply with the provisions of IRC § 6033 and the regulations which implement it, may result in the termination of the exempt status of an organization previously held exempt, on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status. Taxpayer's Position: Taxpayer's position is unknown at this time. Government's Position: Under IRC Section 6001 and 6033, an organization recognized as exempt from federal income tax must meet certain reporting requirements. These requirements relate to the filing of a complete and accurate annual information (and other required federal tax forms) and the retention of records sufficient to determine whether such entity is operated in accordance with its tax-exempt purposes. Because the ** fails to respond to the Service's request for information to verify its continuing qualification for exempt status as required under Reg. Section 1.6033-1(h)(2), its exempt status should be revoked, similar to the treatment described in Rev.Rul. 59-95. Conclusion: The **** exemption under IRC Section 501(c)(3) should be revoked due to its failure to meet the reporting requirements under IRC Section 6001 and 6033. Proposed date of revocation
Private Letter Ruling Number: 202239017 Internal Revenue Service June 23, 2021 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Release Number: 202239017 Release Date: 9/30/2022 UIL Code: 501.03-00 Date: June 23, 2021 Taxpayer ID number: Form: Tax periods ended: Person to contact: Name: ID number: Telephone: Fax: CERTIFIED MAIL - RETURN RECEIPT REQUESTED: Dear ****: Why we are sending you this letter This is a final determination that you don't qualify for exemption from federal income tax under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section 501(c)(3), effective **. Your determination letter dated **, is revoked. Our adverse determination as to your exempt status was made for the following reasons: Organizations described in IRC Section 501(c)(3) and exempt under IRC Section 501(a) must be both organized and operated exclusively for exempt purposes. You have not demonstrated that you are organized exclusively for charitable, educational, or other exempt purposes within the meaning of IRC Section 501(c)(3). You have also fail to demonstrate that you are operated exclusively for charitable, educational, or other exempt purposes within the meaning of IRC Section 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. You have also failed to produce documents to establish that you operated exclusively for an exempt purpose. Organizations that are not exempt under IRC Section 501 generally are required to file federal income tax returns and pay tax, where applicable. For further instructions, forms and information please visit www.irs.gov. Contributions to your organization are no longer deductible under IRC Section 170. What you must do if you disagree with this determination If you want to contest our final determination, you have 90 days from the date this determination letter was mailed to you to file a petition or complaint in one of the three federal courts listed below. How to file your action for declaratory judgment If you decide to contest this determination, you may file an action for declaratory judgment under the provisions of IRC Section 7428 in one of the following three venues: 1) United States Tax Court, 2) the United States Court of Federal Claims or 3) the United States District Court for the District of Columbia. Please contact the clerk of the appropriate court for rules and the appropriate forms for filing an action for declaratory judgment by referring to the enclosed Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. You may write to the courts at the following addresses: United States Tax Court 400 Second Street, NW Washington, DC 20217 U.S. Court of Federal Claims 717 Madison Place, NW Washington, DC 20439 U.S. District Court for the District of Columbia 333 Constitution Ave., N.W. Washington, DC 20001 Processing of income tax returns and assessments of any taxes due will not be delayed if you file a petition for declaratory judgment under IRC Section 7428. We'll notify the appropriate state officials (as permitted by law) of our determination that you aren't an organization described in IRC Section 501(c)(3). Information about the IRS Taxpayer Advocate Service The IRS office whose phone number appears at the top of the notice can best address and access your tax information and help get you answers. However, you may be eligible for free help from the Taxpayer Advocate Service (TAS) if you can't resolve your tax problem with the IRS, or you believe an IRS procedure just isn't working as it should. TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Contact your local Taxpayer Advocate Office at: Or call TAS at 877-777-4778. For more information about TAS and your rights under the Taxpayer Bill of Rights, go to taxpayeradvocate.irs.gov. Do not send your federal court pleading to the TAS address listed above. Use the applicable federal court address provided earlier in the letter. Contacting TAS does not extend the time to file an action for declaratory judgment. Where you can find more information Enclosed are Publication 1, Your Rights as a Taxpayer, and Publication 594, The IRS Collection Process, for more comprehensive information. Find tax forms or publications by visiting www.irs.gov/forms or calling 800-TAX-FORM (800-829-3676). If you have questions, you can call the person shown at the top of this letter. If you prefer to write, use the address shown at the top of this letter. Include your telephone number, the best time to call, and a copy of this letter. Keep the original letter for your records. Sincerely, Sean E. O'Reilly Director, Exempt Organizations Examinations Enclosures: Publication 1 Publication 594 Publication 892 Department of the Treasury Internal Revenue Service Tax Exempt and Government Entities Exempt Organizations Examinations Date: March 13, 2019 Taxpayer Identification Number: Form: Tax Year(s) Ended: Person to Contact: Employee ID: Telephone: Fax: Manager's Contact Information: Employee ID: Telephone: Response Due Date: April 12, 2019 CERTIFIED MAIL -- Return Receipt Requested Dear **: Why you're receiving this letter You stated that your organization ceased operations in **. You previously agreed to sign the enclosed consent, which will allow us to propose revocation of your tax-exempt status as an organization described in Internal Revenue Code (IRC) § 501(c)(3)(c). If you agree Please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an organization described in IRC Section 501(c)(3) for the periods above. After we issue the final adverse determination letter, we'll announce that your organization is no longer eligible to receive tax deductible contributions under IRC Section 170. If you disagree 1. Request a meeting or telephone conference with the manager shown at the top of this letter. 2. Send any information you want us to consider. 3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after the meeting or after we consider the information. The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case. For your protest to be valid, it must contain certain specific information, including a statement of the facts, applicable law, and arguments in support of your position. For specific information needed for a valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status. Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn't apply now that we've issued this letter. 4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities) if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the IRS. If you're considering requesting technical advice, contact the person shown at the top of this letter. If you disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as explained above. A decision made in a technical advice memorandum, however, generally is final and binding on Appeals. If we don't hear from you If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final adverse determination letter. Contacting the Taxpayer Advocate Office is a taxpayer right The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. Visit www.taxoaveradvocate.irs.gov or call 877-777-4778. For additional information You can get any of the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person shown at the top of this letter. Sincerely, for Maria Hooke Director, Exempt Organizations Examinations Enclosures: Form 6018 REVENUE AGENT'S REPORT FOR PROPOSED REVOCATION I. ISSUE 1. Whether the tax-exempt status of ** should be revoked based on multiple issues revealed during our audit including; activities inconsistent with the operation of an exempt organization (real estate sales), excess benefit transactions, undisclosed related party transactions, charitable activities not commensurate in scope with resources from real estate sales, inadequate records, and 501(c)(3) tax-exempt status acquired by assuming the identity of a previously dissolved exempt organization. II. BACKGROUND The organization was incorporated in the state of ** on **. The incorporation was revoked by the state on ** for failure to file an annual report. ** assumed the identity of an unrelated exempt organization that had previously dissolved its incorporation in the State of **. ** did not apply for 501(c)(3) exempt status with the Internal Revenue Service by filing Form ** Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code and was not granted exemption based on a review of the activities in which the organization planned to engage **, "CEO" of **, contacted TEGE Determinations on ** to request that the previously dissolved organization's name be changed to **, Inc. Since that time, ** has been presumed to be a publicly supported organization described in IRC § 509(a)(1) and 170(b)(1)(A)(vi) because that designation was formerly assigned to the organization whose identity ** assumed. According to the Form **, the organization's exempt purpose was described as: According to the Form ** for the year under review, the Officers consisted of **, CEO, **, Executive Vice President, **, Director, **, Vice President of Marketing, **, Secretary/Treasurer, and **, Vice President of Development. No formal audit was conducted because ** stated that the organization had ceased operations at the start of ** and told the Agent that there were virtually no remaining records to review. If employment contracts existed, no copies were provided. The Form ** for the year under review stated that the organization had a written conflict of interest policy, but no copy was provided. The Taxpayer signed Form 6018 Consent to Proposed Action agreeing to revocation of the organization's exempt status on **. III. FACTS ** President, **, engaged in multiple Excess Benefit Transactions with the organization through related, undisclosed corporations and through an unincorporated entity that ** established and controlled. These entities constituted "Disqualified Persons" under IRC section 4958. A person is considered a disqualified person, with respect to any transaction with an applicable tax-exempt organization, if the "person" is a 35-percent controlled entity. The following are related controlled entities in which ** holds more than a * percent interest; **** (**), **. (**), **, ** (**), and **, **(**). In the year under review, funds flowed between ** (**), and all these entities except **. However, ** is a % shareholder in **** and ** so is joint and severally liable for any taxes and or penalties associated with the transactions of these entities. ** relationships with these entities were not disclosed on the organization's Forms **, and a false answer was provided to a relevant question regarding whether the organization had engaged in transactions with related entities. In Section M of the **, ** & ** Forms **, the organization was asked the following in Question # 32a: - Does the organization hire or use third parties or related organizations to solicit, process, or sell non-cash contributions? - The organization replied "NO", which was a false response because the organization used the related controlled entity, **, to market and sell the properties. The organization's Representative supplied copies of several invoices issued to ** by ** to initiate payment for "marketing fees". The stated basis for the payments was % of the "charitable" contribution amount. The organization has provided no documentary support for any of the multiple real estate transactions in which the organization engaged and provided no copies of contribution acknowledgements issued to the property "donors". In addition, the organization provided no documentation in support of more than $ **** in "investment resale expenses" characterized as "program service expenses" on the ** return. The organization also did not complete Question # 29 on the Form **, for tax year ending **, in its entirety. The organization was asked to provide details regarding the contributed property assets. No such details were provided. According to summary information provided by the organization's representative (Exhibit A-1), at the time the organization ceased operations, ** remained in receipt of "donated" properties with a book value of $ **. The summary did not include the associated charitable contribution amounts on which the donor's IRC 170(c) tax deductions were based. In addition, copies of the associated charitable contribution acknowledgements were not provided. However, copies of invoices issued by ** to **, for "marketing fees", were provided by the Representative (Exhibit A-2). In the sample invoice represented by (Exhibit A-2), the "charitable contribution" amount for the **, ** property was $ **. According to the property summary provided by the Representative (Exhibit A-1) the **, ** property had a book value of $ **. No explanation or documentation has been provided to explain the discrepancy between the "charitable contribution" amount of $ ** and the "book value" of $ **. The organization has provided no supporting documentation or details regarding any of the multiple real estate transactions in which it engaged. The organization claimed to have fulfilled its charitable mission by having made contributions through a 501(c)(3) microlender known as **. The organization provided approximately ** pages of line item transactions titled "Transaction List: ** Account". Most of the transactions consisted of "loan repayment" amounts ranging from $ ** to $ ** per transaction. The documentation did not include totals, summary information, or page numbers and the name ** appeared only on the first page. We issued a summons to ** to verify the organization's participation in the reported activity and to confirm ** association with these transactions. ** representative replied that the microlender had no account information under the name of **. According to **, there were no charitable transactions completed by **. A bargain sale of property to a qualified organization is the sale or exchange of property to a charitable organization for less than the property's fair market value. A bargain sale transaction typically reduces the tax liability of the donating party. The portion of the sale that is considered a gift is equal to the excess of the fair market value of the donated item over the price paid by the charitable organization. The organization has provided no documentation that would allow the Service to determine if the property transactions in which the organization engaged, were conducted in accordance with CFR § 1.1011-2 Bargain Sale to a Charitable Organization. The organization provided no documentation that would allow us to tie property transactions listed on the "** Financial Change Summary from ** to Close of Business (**) (Exhibit A-1) provided by the Representative, to specific property addresses, or to any of the associated donors or buyers. The organization has provided no documentation in support of property valuations, and no copies of charitable contribution acknowledgements. IV. LAW 26 U.S. Code § 170. Charitable, etc., contributions and gifts (a) Allowance of deduction (1) General rule There shall be allowed as a deduction any charitable contribution (as defined in subsection (c)) payment of which is made within the taxable year. A charitable contribution shall be allowable as a deduction only if verified under regulations prescribed by the Secretary. (b) Percentage limitations (1) Individuals. In the case of an individual, the deduction provided in subsection (a) shall be limited as provided in the succeeding subparagraphs. (A) General rule. Any charitable contribution to-- vi) an organization referred to in subsection (c)(2) which normally receives a substantial part of its support (exclusive of income received in the exercise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501(a)) from a governmental unit referred to in subsection (c)(1) or from direct or indirect contributions from the general public 26 CFR § 1.501(c)(3)-1 - Organizations organized and operated for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or for the prevention of cruelty to children or animals. § 1.501(c)(3)-1 Organizations organized and operated for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or for the prevention of cruelty to children or animals. (a) Organizational and operational tests. (1) In order to be exempt as an organization described in section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in such section. If an organization fails to meet either the organizational test or the operational test, it is not exempt. (2) The term exempt purpose or purposes, as used in this section, means any purpose or purposes specified in section 501(c)(3), as defined and elaborated in paragraph (d) of this section. (b) Organizational test - (1) In general. (i) An organization is organized exclusively for one or more exempt purposes only if its articles of organization (referred to in this section as its articles) as defined in subparagraph (2) of this paragraph: (a) Limit the purposes of such organization to one or more exempt purposes; and (b) Do not expressly empower the organization to engage, otherwise than as an insubstantial part of its activities, in activities which in themselves are not in furtherance of one or more exempt purposes. (ii) In meeting the organizational test, the organization's purposes, as stated in its articles, may be as broad as, or more specific than, the purposes stated in section 501(c)(3). Therefore, an organization which, by the terms of its articles, is formed for literary and scientific purposes within the meaning of section 501(c)(3) of the Code shall, if it otherwise meets the requirements in this paragraph, be considered to have met the organizational test. Similarly, articles stating that the organization is created solely to receive contributions and pay them over to organizations which are described in section 501(c)(3) and exempt from taxation under section 501(a)) are sufficient for purposes of the organizational test. Moreover, it is sufficient if the articles set for the purpose of the organization to be the operation of a school for adult education and describe in detail the manner of the operation of such school. In addition, if the articles state that the organization is formed for charitable purposes, such articles ordinarily shall be sufficient for purposes of the organizational test (see subparagraph (5) of this paragraph for rules relating to construction of terms). (iii) An organization is not organized exclusively for one or more exempt purposes if its articles expressly empower it to carry on, otherwise than as an insubstantial part of its activities, activities which are not in furtherance of one or more exempt purposes, even though such organization is, by the terms of such articles, created for a purpose that is no broader than the purposes specified in section 501(c)(3). Thus, an organization that is empowered by its articles to engage in a manufacturing business, or to engage in the operation of a social club does not meet the organizational test regardless of the fact that its articles may state that such organization is created for charitable purposes within the meaning of section 501(c)(3) of the Code. (iv) In no case shall an organization be considered to be organized exclusively for one or more exempt purposes, if, by the terms of its articles, the purposes for which such organization is created are broader than the purposes specified in section 501(c)(3). The fact that the actual operations of such an organization have been exclusively in furtherance of one or more exempt purposes shall not be sufficient to permit the organization to meet the organizational test. Similarly, such an organization will not meet the organizational test as a result of statements or other evidence that the members thereof intend to operate only in furtherance of one or more exempt purposes. (v) Unless otherwise prescribed by applicable regulations or other guidance published in the Internal Revenue Bulletin, an organization must, in order to establish its exemption, submit a detailed statement of its proposed activities with and as a part of its application for exemption (see § 1.501(a)-1(b)). (2) Articles of organization. For purposes of this section, the term articles of organization or articles includes the trust instrument, the corporate charter, the articles of association, or any other written instrument by which an organization is created. (3) Authorization of legislative or political activities. An organization is not organized exclusively for one or more exempt purposes if its articles expressly empower it: (i) To devote more than an insubstantial part of its activities to attempting to influence legislation by propaganda or otherwise; or (ii) Directly or indirectly to participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of or in opposition to any candidate for public office; or (iii) To have objectives and to engage in activities which characterize it as an action organization as defined in paragraph (c)(3) of this section. The terms used in subdivisions (i), (ii), and (iii) of this subparagraph shall have the meanings provided in paragraph (c)(3) of this section. An organization's articles will not violate the provisions of paragraph (b)(3)(i) of this section even though the organization's articles expressly empower it to make the election provided for in section 501(h) with respect to influencing legislation and, only if it so elects, to make lobbying or grass roots expenditures that do not normally exceed the ceiling amounts prescribed by section 501(h)(2)(B) and (D). (4) Distribution of assets on dissolution. An organization is not organized exclusively for one or more exempt purposes unless its assets are dedicated to an exempt purpose. An organization's assets will be considered dedicated to an exempt purpose, for example, if, upon dissolution, such assets would, by reason of a provision in the organization's articles or by operation of law, be distributed for one or more exempt purposes, or to the Federal Government, or to a State or local government, for a public purpose, or would be distributed by a court to another organization to be used in such manner as in the judgment of the court will best accomplish the general purposes for which the dissolved organization was organized. However, an organization does not meet the organizational test if its articles or the law of the State in which it was created provide that its assets would, upon dissolution, be distributed to its members or shareholders. (5) Construction of terms. The law of the State in which an organization is created shall be controlling in construing the terms of its articles. However, any organization which contends that such terms have under State law a different meaning from their generally accepted meaning must establish such special meaning by clear and convincing reference to relevant court decisions, opinions of the State attorney-general, or other evidence of applicable State law. (6) Applicability of the organizational test. A determination by the Commissioner that an organization is described in section 501(c)(3) and exempt under section 501(a) will not be granted after July 26, 1959, regardless of when the application is filed, unless such organization meets the organizational test prescribed by this paragraph (b). If, before July 27, 1959, an organization has been determined by the Commissioner or district director to be exempt as an organization described in section 501(c)(3) or in a corresponding provision of prior law and such determination has not been revoked before such date, the fact that such organization does not meet the organizational test prescribed by this paragraph (b) shall not be a basis for revoking such determination. Accordingly, an organization that has been determined to be exempt before July 27, 1959, and which does not seek a new determination of exemption is not required to amend its articles of organization to conform to the rules of this paragraph (b), but any organization that seeks a determination of exemption after July 26, 1959, must have articles of organization that meet the rules of this paragraph (b). For the rules relating to whether an organization determined to be exempt before July 27, 1959, is organized exclusively for one or more exempt purposes, see 26 CFR (1939) 39.101(6)-1 (Regulations 118) as made applicable to the Code by Treasury Decision 6091, approved August 16, 1954 (19 FR 5167; 1954-2 CB 47). (c) Operational test - (1) Primary activities. An organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in section 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. (2) Distribution of earnings. An organization is not operated exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals. For the definition of the words private shareholder or individual, see paragraph (c) of § 1.501(a)-1. (3) Action organizations. (i) An organization is not operated exclusively for one or more exempt purposes if it is an action organization as defined in subdivisions (ii), (iii), or (iv) of this subparagraph. (ii) An organization is an action organization if a substantial part of its activities is attempting to influence legislation by propaganda or otherwise. For this purpose, an organization will be regarded as attempting to influence legislation if the organization: (a) Contacts, or urges the public to contact, members of a legislative body for the purpose of proposing, supporting, or opposing legislation; or (b) Advocates the adoption or rejection of legislation. The term legislation, as used in this subdivision, includes action by the Congress, by any State legislature, by any local council or similar governing body, or by the public in a referendum, initiative, constitutional amendment, or similar procedure. An organization will not fail to meet the operational test merely because it advocates, as an insubstantial part of its activities, the adoption or rejection of legislation. An organization for which the expenditure test election of section 501(h) is in effect for a taxable year will not be considered an action organization by reason of this paragraph (c)(3)(ii) for that year if it is not denied exemption from taxation under section 501(a) by reason of section 501(h). (iii) An organization is an action organization if it participates or intervenes, directly or indirectly, in any political campaign on behalf of or in opposition to any candidate for public office. The term candidate for public office means an individual who offers himself, or is proposed by others, as a contestant for an elective public office, whether such office be national, State, or local. Activities which constitute participation or intervention in a political campaign on behalf of or in opposition to a candidate include, but are not limited to, the publication or distribution of written or printed statements or the making of oral statements on behalf of or in opposition to such a candidate. (iv) An organization is an action organization if it has the following two characteristics: (a) Its main or primary objective or objectives (as distinguished from its incidental or secondary objectives) may be attained only by legislation or a defeat of proposed legislation; and (b) it advocates, or campaigns for, the attainment of such main or primary objective or objectives as distinguished from engaging in nonpartisan analysis, study, or research and making the results thereof available to the public. In determining whether an organization has such characteristics, all the surrounding facts and circumstances, including the articles and all activities of the organization, are to be considered. (v) An action organization, described in subdivisions (ii) or (iv) of this subparagraph, though it cannot qualify under section 501(c)(3), may nevertheless qualify as a social welfare organization under section 501(c)(4) if it meets the requirements set out in paragraph (a) of § 1.501(c)(4)-1. (d) Exempt purposes - (1) In general. (i) An organization may be exempt as an organization described in section 501(c)(3) if it is organized and operated exclusively for one or more of the following purposes: (a) Religious, (b) Charitable, (c) Scientific, (d) Testing for public safety, (e) Literary, (f) Educational, or (g) Prevention of cruelty to children or animals. (ii) An organization is not organized or operated exclusively for one or more of the purposes specified in subdivision (i) of this subparagraph unless it serves a public rather than a private interest. Thus, to meet the requirement of this subdivision, it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals, the creator or his family, shareholders of the organization, or persons controlled, directly or indirectly, by such private interests. (iii) Examples. The following examples illustrate the requirement of paragraph (d)(1)(ii) of this section that an organization serve a public rather than a private interest: Example 1. (i) O is an educational organization the purpose of which is to study history and immigration. O's educational activities include sponsoring lectures and publishing a journal. The focus of O's historical studies is the genealogy of one family, tracing the descent of its present members. O actively solicits for membership only individuals who are members of that one family. O's research is directed toward publishing a history of that family that will document the pedigrees of family members. A major objective of O's research is to identify and locate living descendants of that family to enable those descendants to become acquainted with each other. (ii) O's educational activities primarily serve the private interests of members of a single family rather than a public interest. Therefore, O is operated for the benefit of private interests in violation of the restriction on private benefit in paragraph (d)(1)(ii) of this section. Based on these facts and circumstances, O is not operated exclusively for exempt purposes and, therefore, is not described in section 501(c)(3). Example 2. (i) O is an art museum. O's principal activity is exhibiting art created by a group of unknown but promising local artists. O's activity, including organized tours of its art collection, promotes the arts. O is governed by a board of trustees unrelated to the artists whose work O exhibits. All of the art exhibited is offered for sale at prices set by the artist. Each artist whose work is exhibited has a consignment arrangement with O. Under this arrangement, when art is sold, the museum retains 10 percent of the selling price to cover the costs of operating the museum and gives the artist 90 percent. (ii) The artists in this situation directly benefit from the exhibition and sale of their art. As a result, the principal activity of O serves the private interests of these artists. Because O gives 90 percent of the proceeds from its sole activity to the individual artists, the direct benefits to the artists are substantial and O's provision of these benefits to the artists is more than incidental to its other purposes and activities. This arrangement causes O to be operated for the benefit of private interests in violation of the restriction on private benefit in paragraph (d)(1)(ii) of this section. Based on these facts and circumstances, O is not operated exclusively for exempt purposes and, therefore, is not described in section 501(c)(3). Example 3. (i) O is an educational organization the purpose of which is to train individuals in a program developed by P, O's president. The program is of interest to academics and professionals, representatives of whom serve on an advisory panel to O. All of the rights to the program are owned by Company K, a for-profit corporation owned by P. Prior to the existence of O, the teaching of the program was conducted by Company K. O licenses, from Company K, the right to conduct seminars and lectures on the program and to use the name of the program as part of O's name, in exchange for specified royalty payments. Under the license agreement, Company K provides O with the services of trainers and with course materials on the program. O may develop and copyright new course materials on the program, but all such materials must be assigned to Company K without consideration if and when the license agreement is terminated. Company K sets the tuition for the seminars and lectures on the program conducted by O. O has agreed not to become involved in any activity resembling the program or its implementation for 2 years after the termination of O's license agreement. (ii) O's sole activity is conducting seminars and lectures on the program. This arrangement causes O to be operated for the benefit of P and Company K in violation of the restriction on private benefit in paragraph (d)(1)(ii) of this section, regardless of whether the royalty payments from O to Company K for the right to teach the program are reasonable. Based on these facts and circumstances, O is not operated exclusively for exempt purposes and, therefore, is not described in section 501(c)(3). (iv) Since each of the purposes specified in subdivision (i) of this subparagraph is an exempt purpose in itself, an organization may be exempt if it is organized and operated exclusively for any one or more of such purposes. If, in fact, an organization is organized and operated exclusively for an exempt purpose or purposes, exemption will be granted to such an organization regardless of the purpose or purposes specified in its application for exemption. For example, if an organization claims exemption on the ground that it is educational, exemption will not be denied if, in fact, it is charitable. (2) Charitable defined. The term charitable is used in section 501(c)(3) in its generally accepted legal sense and is, therefore, not to be construed as limited by the separate enumeration in section 501(c)(3) of other tax-exempt purposes which may fall within the broad outlines of charity as developed by judicial decisions. Such term includes: Relief of the poor and distressed or of the underprivileged; advancement of religion; advancement of education or science; erection or maintenance of public buildings, monuments, or works; lessening of the burdens of Government; and promotion of social welfare by organizations designed to accomplish any of the above purposes, or (i) to lessen neighborhood tensions; (ii) to eliminate prejudice and discrimination; (iii) to defend human and civil rights secured by law; or (iv) to combat community deterioration and juvenile delinquency. The fact that an organization which is organized and operated for the relief of indigent persons may receive voluntary contributions from the persons intended to be relieved will not necessarily prevent such organization from being exempt as an organization organized and operated exclusively for charitable purposes. The fact that an organization, in carrying out its primary purpose, advocates social or civic changes or presents opinion on controversial issues with the intention of molding public opinion or creating public sentiment to an acceptance of its views does not preclude such organization from qualifying under section 501(c)(3) so long as it is not an action organization of any one of the types described in paragraph (c)(3) of this section. (3) Educational defined - (i) In general. The term educational, as used in section 501(c)(3), relates to: (a) The instruction or training of the individual for the purpose of improving or developing his capabilities; or (b) The instruction of the public on subjects useful to the individual and beneficial to the community. An organization may be educational even though it advocates a particular position or viewpoint so long as it presents a sufficiently full and fair exposition of the pertinent facts as to permit an individual or the public to form an independent opinion or conclusion. On the other hand, an organization is not educational if its principal function is the mere presentation of unsupported opinion. (ii) Examples of educational organizations. The following are examples of organizations which, if they otherwise meet the requirements of this section, are educational: Example 1. An organization, such as a primary or secondary school, a college, or a professional or trade school, which has a regularly scheduled curriculum, a regular faculty, and a regularly enrolled body of students in attendance at a place where the educational activities are regularly carried on. Example 2. An organization whose activities consist of presenting public discussion groups, forums, panels, lectures, or other similar programs. Such programs may be on radio or television. Example 3. An organization which presents a course of instruction by means of correspondence or through the utilization of television or radio. Example 4. Museums, zoos, planetariums, symphony orchestras, and other similar organizations. (4) Testing for public safety defined. The term testing for public safety, as used in section 501(c)(3), includes the testing of consumer products, such as electrical products, to determine whether they are safe for use by the general public. (5) Scientific defined. (i) Since an organization may meet the requirements of section 501(c)(3) only if it serves a public rather than a private interest, a scientific organization must be organized and operated in the public interest (see subparagraph (1)(ii) of this paragraph). Therefore, the term scientific, as used in section 501(c)(3), includes the carrying on of scientific research in the public interest. Research when taken alone is a word with various meanings; it is not synonymous with scientific; and the nature of particular research depends upon the purpose which it serves. For research to be scientific, within the meaning of section 501(c)(3), it must be carried on in furtherance of a scientific purpose. The determination as to whether research is scientific does not depend on whether such research is classified as fundamental or basic as contrasted with applied or practical. On the other hand, for purposes of the exclusion from unrelated business taxable income provided by section 512(b)(9), it is necessary to determine whether the organization is operated primarily for purposes of carrying on fundamental, as contrasted with applied, research. (ii) Scientific research does not include activities of a type ordinarily carried on as an incident to commercial or industrial operations, as, for example, the ordinary testing or inspection of materials or products or the designing or construction of equipment, buildings, etc. (iii) Scientific research will be regarded as carried on in the public interest: (a) If the results of such research (including any patents, copyrights, processes, or formulae resulting from such research) are made available to the public on a nondiscriminatory basis; (b) If such research is performed for the United States, or any of its agencies or instrumentalities, or for a State or political subdivision thereof; or (c) If such research is directed toward benefiting the public. The following are examples of scientific research which will be considered as directed toward benefiting the public, and, therefore, which will be regarded as carried on in the public interest: (1) Scientific research carried on for the purpose of aiding in the scientific education of college or university students; (2) scientific research carried on for the purpose of obtaining scientific information, which is published in a treatise, thesis, trade publication, or in any other form that is available to the interested public; (3) scientific research carried on for the purpose of discovering a cure for a disease; or (4) scientific research carried on for the purpose of aiding a community or geographical area by attracting new industry to the community or area or by encouraging the development of, or retention of, an industry in the community or area. Scientific research described in this subdivision will be regarded as carried on in the public interest even though such research is performed pursuant to a contract or agreement under which the sponsor or sponsors of the research have the right to obtain ownership or control of any patents, copyrights, processes, or formulae resulting from such research. (iv) An organization will not be regarded as organized and operated for the purpose of carrying on scientific research in the public interest and, consequently, will not qualify under section 501(c)(3) as a scientific organization, if: (a) Such organization will perform research only for persons which are (directly or indirectly) its creators and which are not described in section 501(c)(3), or (b) Such organization retains (directly or indirectly) the ownership or control of more than an insubstantial portion of the patents, copyrights, processes, or formulae resulting from its research and does not make such patents, copyrights, processes, or formulae available to the public. For purposes of this subdivision, a patent, copyright, process, or formula shall be considered as made available to the public if such patent, copyright, process, or formula is made available to the public on a nondiscriminatory basis. In addition, although one person is granted the exclusive right to the use of a patent, copyright, process, or formula, such patent, copyright, process, or formula shall be considered as made available to the public if the granting of such exclusive right is the only practicable manner in which the patent, copyright, process, or formula can be utilized to benefit the public. In such a case, however, the research from which the patent, copyright, process, or formula resulted will be regarded as carried on in the public interest (within the meaning of subdivision (iii) of this subparagraph) only if it is carried on for a person described in subdivision (iii)(b) of this subparagraph or if it is scientific research described in subdivision (iii)(c) of this subparagraph. (v) The fact that any organization (including a college, university, or hospital) carries on research which is not in furtherance of an exempt purpose described in section 501(c)(3) will not preclude such organization from meeting the requirements of section 501(c)(3) so long as the organization meets the organizational test and is not operated for the primary purpose of carrying on such research (see paragraph (e) of this section, relating to organizations carrying on a trade or business). See paragraph (a)(5) of § 1.513-2, with respect to research which constitutes an unrelated trade or business, and section 512(b) (7), (8), and (9), with respect to income derived from research which is excludable from the tax on unrelated business income. (vi) The regulations in this subparagraph are applicable with respect to taxable years beginning after December 31, 1960. (e) Organizations carrying on trade or business - (1) In general. An organization may meet the requirements of section 501(c)(3) although it operates a trade or business as a substantial part of its activities, if the operation of such trade or business is in furtherance of the organization's exempt purpose or purposes and if the organization is not organized or operated for the primary purpose of carrying on an unrelated trade or business, as defined in section 513. In determining the existence or nonexistence of such primary purpose, all the circumstances must be considered, including the size and extent of the trade or business and the size and extent of the activities which are in furtherance of one or more exempt purposes. An organization which is organized and operated for the primary purpose of carrying on an unrelated trade or business is not exempt under section 501(c)(3) even though it has certain religious purposes, its property is held in common, and its profits do not inure to the benefit of individual members of the organization. See, however, section 501(d) and § 1.501(d)-1, relating to religious and apostolic organizations. (2) Taxation of unrelated business income. For provisions relating to the taxation of unrelated business income of certain organizations described in section 501(c)(3), see sections 511 to 515, inclusive, and the regulations thereunder. (f) Interaction with section 4958 - (1) Application process. An organization that applies for recognition of exemption under section 501(a) as an organization described in section 501(c)(3) must establish its eligibility under this section. The Commissioner may deny an application for exemption for failure to establish any of section 501(c)(3)'s requirements for exemption. Section 4958 does not apply to transactions with an organization that has failed to establish that it satisfies all of the requirements for exemption under section 501(c)(3). See § 53.4958-2. (2) Substantive requirements for exemption still apply to applicable tax-exempt organizations described in section 501(c)(3) - (i) In general. Regardless of whether a particular transaction is subject to excise taxes under section 4958, the substantive requirements for tax exemption under section 501(c)(3) still apply to an applicable tax-exempt organization (as defined in section 4958(e) and § 53.4958-2) described in section 501(c)(3) whose disqualified persons or organization managers are subject to excise taxes under section 4958. Accordingly, an organization will no longer meet the requirements for tax-exempt status under section 501(c)(3) if the organization fails to satisfy the requirements of paragraph (b), (c) or (d) of this section. See § 53.4958-8(a). (ii) Determination of whether revocation of tax-exempt status is appropriate when section 4958 excise taxes also apply. In determining whether to continue to recognize the tax-exempt status of an applicable tax-exempt organization (as defined in section 4958(e) and § 53.4958-2) described in section 501(c)(3) that engages in one or more excess benefit transactions (as defined in section 4958(c) and § 53.4958-4) that violate the prohibition on inurement under section 501(c)(3), the Commissioner will consider all relevant facts and circumstances, including, but not limited to, the following - (A) The size and scope of the organization's regular and ongoing activities that further exempt purposes before and after the excess benefit transaction or transactions occurred; (B) The size and scope of the excess benefit transaction or transactions (collectively, if more than one) in relation to the size and scope of the organization's regular and ongoing activities that further exempt purposes; (C) Whether the organization has been involved in multiple excess benefit transactions with one or more persons; (D) Whether the organization has implemented safeguards that are reasonably calculated to prevent excess benefit transactions; and (E) Whether the excess benefit transaction has been corrected (within the meaning of section 4958(f)(6) and § 53.4958-7), or the organization has made good faith efforts to seek correction from the disqualified person(s) who benefited from the excess benefit transaction. (iii) All factors will be considered in combination with each other. Depending on the particular situation, the Commissioner may assign greater or lesser weight to some factors than to others. The factors listed in paragraphs (f)(2)(ii)(D) and (E) of this section will weigh more heavily in favor of continuing to recognize exemption where the organization discovers the excess benefit transaction or transactions and takes action before the Commissioner discovers the excess benefit transaction or transactions. Further, with respect to the factor listed in paragraph (f)(2)(ii)(E) of this section, correction after the excess benefit transaction or transactions are discovered by the Commissioner, by itself, is never a sufficient basis for continuing to recognize exemption. (iv) Examples. The following examples illustrate the principles of paragraph (f)(2)(ii) of this section. For purposes of each example, assume that O is an applicable tax-exempt organization (as defined in section 4958(e) and § 53.4958-2) described in section 501(c)(3). The examples read as follows: Example 1. (i) O was created as a museum for the purpose of exhibiting art to the general public. In Years 1 and 2, O engages in fundraising and in selecting, leasing, and preparing an appropriate facility for a museum. In Year 3, a new board of trustees is elected. All of the new trustees are local art dealers. Beginning in Year 3 and continuing to the present, O uses a substantial portion of its revenues to purchase art solely from its trustees at prices that exceed fair market value. O exhibits and offers for sale all of the art it purchases. O's Form 1023, "Application for Recognition of Exemption," did not disclose the possibility that O would purchase art from its trustees. (ii) O's purchases of art from its trustees at more than fair market value constitute excess benefit transactions between an applicable tax-exempt organization and disqualified persons under section 4958. Therefore, these transactions are subject to the applicable excise taxes provided in that section. In addition, O's purchases of art from its trustees at more than fair market value violate the proscription against inurement under section 501(c)(3) and paragraph (c)(2) of this section. (iii) The application of the factors in paragraph (f)(2)(ii) of this section to these facts is as follows. Beginning in Year 3, O does not engage primarily in regular and ongoing activities that further exempt purposes because a substantial portion of O's activities consists of purchasing art from its trustees and dealing in such art in a manner similar to a commercial art gallery. The size and scope of the excess benefit transactions collectively are significant in relation to the size and scope of any of O's ongoing activities that further exempt purposes. O has been involved in multiple excess benefit transactions, namely, purchases of art from its trustees at more than fair market value. O has not implemented safeguards that are reasonably calculated to prevent such improper purchases in the future. The excess benefit transactions have not been corrected, nor has O made good faith efforts to seek correction from the disqualified persons who benefited from the excess benefit transactions (the trustees). The trustees continue to control O's Board. Based on the application of the factors to these facts, O is no longer described in section 501(c)(3) effective in Year 3. Example 2. (i) The facts are the same as in Example 1, except that in Year 4, O's entire board of trustees resigns, and O no longer offers all exhibited art for sale. The former board is replaced with members of the community who are not in the business of buying or selling art and who have skills and experience running charitable and educational programs and institutions. O promptly discontinues the practice of purchasing art from current or former trustees, adopts a written conflicts of interest policy, adopts written art valuation guidelines, hires legal counsel to recover the excess amounts O had paid its former trustees, and implements a new program of activities to further the public's appreciation of the arts. (ii) O's purchases of art from its former trustees at more than fair market value constitute excess benefit transactions between an applicable tax-exempt organization and disqualified persons under section 4958. Therefore, these transactions are subject to the applicable excise taxes provided in that section. In addition, O's purchases of art from its trustees at more than fair market value violate the proscription against inurement under section 501(c)(3) and paragraph (c)(2) of this section. (iii) The application of the factors in paragraph (f)(2)(ii) of this section to these facts is as follows. In Year 3, O does not engage primarily in regular and ongoing activities that further exempt purposes. However, in Year 4, O elects a new board of trustees comprised of individuals who have skills and experience running charitable and educational programs and implements a new program of activities to further the public's appreciation of the arts. As a result of these actions, beginning in Year 4, O engages in regular and ongoing activities that further exempt purposes. The size and scope of the excess benefit transactions that occurred in Year 3, taken collectively, are significant in relation to the size and scope of O's regular and ongoing exempt function activities that were conducted in Year 3. Beginning in Year 4, however, as O's exempt function activities grow, the size and scope of the excess benefit transactions that occurred in Year 3 become less and less significant as compared to the size and scope of O's regular and ongoing exempt function activities. O was involved in multiple excess benefit transactions in Year 3. However, by discontinuing its practice of purchasing art from its current and former trustees, by replacing its former board with independent members of the community, and by adopting a conflicts of interest policy and art valuation guidelines, O has implemented safeguards that are reasonably calculated to prevent future violations. In addition, O has made a good faith effort to seek correction from the disqualified persons who benefited from the excess benefit transactions (its former trustees). Based on the application of the factors to these facts, O continues to meet the requirements for tax exemption under section 501(c)(3). Example 3. (i) O conducts educational programs for the benefit of the general public. Since its formation, O has employed its founder, C, as its Chief Executive Officer. Beginning in Year 5 of O's operations and continuing to the present, C caused O to divert significant portions of O's funds to pay C's personal expenses. The diversions by C significantly reduced the funds available to conduct O's ongoing educational programs. The board of trustees never authorized C to cause O to pay C's personal expenses from O's funds. Certain members of the board were aware that O was paying C's personal expenses. However, the board did not terminate C's employment and did not take any action to seek repayment from C or to prevent C from continuing to divert O's funds to pay C's personal expenses. C claimed that O's payments of C's personal expenses represented loans from O to C. However, no contemporaneous loan documentation exists, and C never made any payments of principal or interest. (ii) The diversions of O's funds to pay C's personal expenses constitute excess benefit transactions between an applicable tax-exempt organization and a disqualified person under section 4958. Therefore, these transactions are subject to the applicable excise taxes provided in that section. In addition, these transactions violate the proscription against inurement under section 501(c)(3) and paragraph (c)(2) of this section. (iii) The application of the factors in paragraph (f)(2)(ii) of this section to these facts is as follows. O has engaged in regular and ongoing activities that further exempt purposes both before and after the excess benefit transactions occurred. However, the size and scope of the excess benefit transactions engaged in by O beginning in Year 5, collectively, are significant in relation to the size and scope of O's activities that further exempt purposes. Moreover, O has been involved in multiple excess benefit transactions. O has not implemented any safeguards that are reasonably calculated to prevent future diversions. The excess benefit transactions have not been corrected, nor has O made good faith efforts to seek correction from C, the disqualified person who benefited from the excess benefit transactions. Based on the application of the factors to these facts, O is no longer described in section 501(c)(3) effective in Year 5. Example 4. (i) O conducts activities that further exempt purposes. O uses several buildings in the conduct of its exempt activities. In Year 1, O sold one of the buildings to Company K for an amount that was substantially below fair market value. The sale was a significant event in relation to O's other activities. C, O's Chief Executive Officer, owns all of the voting stock of Company K. When O's board of trustees approved the transaction with Company K, the board did not perform due diligence that could have made it aware that the price paid by Company K to acquire the building was below fair market value. Subsequently, but before the IRS commences an examination of O, O's board of trustees determines that Company K paid less than the fair market value for the building. Thus, O concludes that an excess benefit transaction occurred. After the board makes this determination, it promptly removes C as Chief Executive Officer, terminates C's employment with O, and hires legal counsel to recover the excess benefit from Company K. In addition, O promptly adopts a conflicts of interest policy and new contract review procedures designed to prevent future recurrences of this problem. (ii) The sale of the building by O to Company K at less than fair market value constitutes an excess benefit transaction between an applicable tax-exempt organization and a disqualified person under section 4958 in Year 1. Therefore, this transaction is subject to the applicable excise taxes provided in that section. In addition, this transaction violates the proscription against inurement under section 501(c)(3) and paragraph (c)(2) of this section. (iii) The application of the factors in paragraph (f)(2)(ii) of this section to these facts is as follows. O has engaged in regular and ongoing activities that further exempt purposes both before and after the excess benefit transaction occurred. Although the size and scope of the excess benefit transaction were significant in relation to the size and scope of O's activities that further exempt purposes, the transaction with Company K was a one-time occurrence. By adopting a conflicts of interest policy and new contract review procedures and by terminating C, O has implemented safeguards that are reasonably calculated to prevent future violations. Moreover, O took corrective actions before the IRS commenced an examination of O. In addition, O has made a good faith effort to seek correction from Company K, the disqualified person who benefited from the excess benefit transaction. Based on the application of the factors to these facts, O continues to be described in section 501(c)(3). Example 5. (i) O is a large organization with substantial assets and revenues. O conducts activities that further its exempt purposes. O employs C as its Chief Financial Officer. During Year 1, O pays $2,500 of C's personal expenses. O does not make these payments pursuant to an accountable plan, as described in § 53.4958-4(a)(4)(ii). In addition, O does not report any of these payments on C's Form W-2, "Wage and Tax Statement," or on a Form 1099-MISC, "Miscellaneous Income," for C for Year 1, and O does not report these payments as compensation on its Form 990, "Return of Organization Exempt From Income Tax," for Year 1. Moreover, none of these payments can be disregarded as nontaxable fringe benefits under § 53.4958-4(c)(2) and none consisted of fixed payments under an initial contract under § 53.4958-4(a)(3). C does not report the $2,500 of payments as income on his individual Federal income tax return for Year 1. O does not repeat this reporting omission in subsequent years and, instead, reports all payments of C's personal expenses not made under an accountable plan as income to C. (ii) O's payment in Year 1 of $2,500 of C's personal expenses constitutes an excess benefit transaction between an applicable tax-exempt organization and a disqualified person under section 4958. Therefore, this transaction is subject to the applicable excise taxes provided in that section. In addition, this transaction violates the proscription against inurement in section 501(c)(3) and paragraph (c)(2) of this section. (iii) The application of the factors in paragraph (f)(2)(ii) of this section to these facts is as follows. O engages in regular and ongoing activities that further exempt purposes. The payment of $2,500 of C's personal expenses represented only a de minimis portion of O's assets and revenues; thus, the size and scope of the excess benefit transaction were not significant in relation to the size and scope of O's activities that further exempt purposes. The reporting omission that resulted in the excess benefit transaction in Year 1 occurred only once and is not repeated in subsequent years. Based on the application of the factors to these facts, O continues to be described in section 501(c)(3). Example 6. (i) O is a large organization with substantial assets and revenues. O furthers its exempt purposes by providing social services to the population of a specific geographic area. O has a sizeable workforce of employees and volunteers to conduct its work. In Year 1, O's board of directors adopted written procedures for setting executive compensation at O. O's executive compensation procedures were modeled on the procedures for establishing a rebuttable presumption of reasonableness under § 53.4958-6. In accordance with these procedures, the board appointed a compensation committee to gather data on compensation levels paid by similarly situated organizations for functionally comparable positions. The members of the compensation committee were disinterested within the meaning of § 53.4958-6(c)(1)(iii). Based on its research, the compensation committee recommended a range of reasonable compensation for several of O's existing top executives (the Top Executives). On the basis of the committee's recommendations, the board approved new compensation packages for the Top Executives and timely documented the basis for its decision in board minutes. The board members were all disinterested within the meaning of § 53.4958-6(c)(1)(iii). The Top Executives were not involved in setting their own compensation. In Year 1, even though payroll expenses represented a significant portion of O's total operating expenses, the total compensation paid to O's Top Executives represented only an insubstantial portion of O's total payroll expenses. During a subsequent examination, the IRS found that the compensation committee retied exclusively on compensation data from organizations that perform similar social services to O. The IRS concluded, however, that the organizations were not similarly situated because they served substantially larger geographic regions with more diverse populations and were larger than O in terms of annual revenues, total operating budget, number of employees, and number of beneficiaries served. Accordingly, the IRS concluded that the compensation committee did not rely on "appropriate data as to comparability" within the meaning of § 53.4958-6(c)(2) and, thus, failed to establish the rebuttable presumption of reasonableness under § 53.4958-6. Taking O's size and the nature of the geographic area and population it serves into account, the IRS concluded that the Top Executives' compensation packages for Year 1 were excessive. As a result of the examination, O's board added new members to the compensation committee who have expertise in compensation matters and also amended its written procedures to require the compensation committee to evaluate a number of specific factors, including size, geographic area, and population covered by the organization, in assessing the comparability of compensation data. O's board renegotiated the Top Executives' contracts in accordance with the recommendations of the newly constituted compensation committee on a going forward basis. To avoid potential liability for damages under state contract law, O did not seek to void the Top Executives' employment contracts retroactively to Year 1 and did not seek correction of the excess benefit amounts from the Top Executives. O did not terminate any of the Top Executives. (ii) O's payments of excessive compensation to the Top Executives in Year 1 constituted excess benefit transactions between an applicable tax-exempt organization and disqualified persons under section 4958. Therefore, these payments are subject to the applicable excise taxes provided under that section, including second-tier taxes if there is no correction by the disqualified persons. In addition, these payments violate the proscription against inurement under section 501(c)(3) and paragraph (c)(2) of this section. (iii) The application of the factors in paragraph (f)(2)(ii) of this section to these facts is as follows. O has engaged in regular and ongoing activities that further exempt purposes both before and after the excess benefit transactions occurred. The size and scope of the excess benefit transactions, in the aggregate, were not significant in relation to the size and scope of O's activities that further exempt purposes. O engaged in multiple excess benefit transactions. Nevertheless, prior to entering into these excess benefit transactions, O had implemented written procedures for setting the compensation of its top management that were reasonably calculated to prevent the occurrence of excess benefit transactions. O followed these written procedures in setting the compensation of the Top Executives for Year 1. Despite the board's failure to rely on appropriate comparability data, the fact that O implemented and followed these written procedures in setting the compensation of the Top Executives for Year 1 is a factor favoring continued exemption. The fact that O amended its written procedures to ensure the use of appropriate comparability data and renegotiated the Top Executives' compensation packages on a going-forward basis are also factors favoring continued exemption, even though O did not void the Top Executives' existing contracts and did not seek correction from the Top Executives. Based on the application of the factors to these facts, O continues to be described in section 501(c)(3). (3) Applicability. The rules in paragraph (f) of this section will apply with respect to excess benefit transactions occurring after **. (g) Applicability of regulations in this section. The regulations in this section are, except as otherwise expressly provided, applicable with respect to taxable years beginning after July 26, 1959. For the rules applicable with respect to taxable years beginning before July 27, 1959, see 26 CFR (1939) 39.101(6)-1 (Regulations 118) as made applicable to the Code by Treasury Decision 6091, approved August 16, 1954 (19 FR 5167; C.B. 1954-2, 47). (h) Effective/applicability date. Paragraphs (b)(1)(v) and (b)(6) of this section apply on and after **. [T.D. 6500, 25 FR 11737, Nov. 26, 1960, as amended by T.D. 6525, 26 FR 189, Jan. 11, 1961; T.D. 6939, 32 FR 17661, Dec. 12, 1967; T.D. 7428, 41 FR 34620, Aug. 16, 1976; T.D. 8308, 55 FR 35587, Aug. 31, 1990; T.D. 9390, 73 FR 16521, Mar. 28, 2008; T.D. 9390, 73 FR 23069, Apr. 29, 2008; T.D. 9674, 79 FR 37631, July 2, 2014; T.D. 9819, 82 FR 29732, June 30, 2017] 26 U.S. Code § 509. (a) General rule. For purposes of this title, the term "private foundation" means a domestic or foreign organization described in section 501(c)(3) other than- (1) an organization described in section 170(b)(1)(A) (other than in clauses (vii) and (viii)); (2) an organization which- (A) normally receives more than one-third of its support in each taxable year from any combination of- (i) gifts, grants, contributions, or membership fees, and (ii) gross receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities, in an activity which is not an unrelated trade or business (within the meaning of section 513), not including such receipts from any person, or from any bureau or similar agency of a governmental unit (as described in section 170(c)(1)), in any taxable year to the extent such receipts exceed the greater of $5,000 or 1 percent of the organization's support in such taxable year, from persons other than disqualified persons (as defined in section 4946) with respect to the organization, from governmental units described in section 170(c)(1), or from organizations described in section 170(b)(1)(A) (other than in clauses (vii) and (viii)), and (B) normally receives not more than one-third of its support in each taxable year from the sum of-- (i) gross investment income (as defined in subsection (e)) and (ii) the excess (if any) of the amount of the unrelated business taxable income (as defined in section 512) over the amount of the tax imposed by section 511. 26 CFR § 1.1011-2 - Bargain sale to a charitable organization. § 1.1011-2 Bargain sale to a charitable organization. (a) In general. (1) If for the taxable year a charitable contributions deduction is allowable under section 170 by reason of a sale or exchange of property, the taxpayer's adjusted basis of such property for purposes of determining gain from such sale or exchange must be computed as provided in section 1011(b) and paragraph (b) of this section. If after applying the provisions of section 170 for the taxable year, including the percentage limitations of section 170(b), no deduction is allowable under that section by reason of the sale or exchange of the property, section 1011(b) does not apply and the adjusted basis of the property is not required to be apportioned pursuant to paragraph (b) of this section. In such case the entire adjusted basis of the property is to be taken into account in determining gain from the sale or exchange, as provided in § 1.1011-1(e). In ascertaining whether or not a charitable contributions deduction is allowable under section 170 for the taxable year for such purposes, that section is to be applied without regard to this section and the amount by which the contributed portion of the property must be reduced under section 170(e)(1) is the amount determined by taking into account the amount of gain which would have been ordinary income or long-term capital gain if the contributed portion of the property had been sold by the donor at its fair market value at the time of the sale or exchange. (2) If in the taxable year there is a sale or exchange of property which gives rise to a charitable contribution which is carried over under section 170(b)(1)(D)(ii) or section 170(d) to a subsequent taxable year or is postponed under section 170(a)(3) to a subsequent taxable year, section 1011(b) and paragraph (b) of this section must be applied for purposes of apportioning the adjusted basis of the property for the year of the sale or exchange, whether or not such contribution is allowable as a deduction under section 170 in such subsequent year. (3) If property is transferred subject to an indebtedness, the amount of the indebtedness must be treated as an amount realized for purposes of determining whether there is a sale or exchange to which section 1011(b) and this section apply, even though the transferee does not agree to assume or pay the indebtedness. (4) (i) Section 1011(b) and this section apply where property is sold or exchanged in return for an obligation to pay an annuity and a charitable contributions deduction is allowable under section 170 by reason of such sale or exchange. (ii) If in such case the annuity received in exchange for the property is non-assignable, or is assignable but only to the charitable organization to which the property is sold or exchanged, and if the transferor is the only annuitant or the transferor and a designated survivor annuitant or annuitants are the only annuitants, any gain on such exchange is to be reported as provided in example (8) in paragraph (c) of this section. In determining the period over which gain may be reported as provided in such example, the life expectancy of the survivor annuitant may not be taken into account. The fact that the transferor may retain the right to revoke the survivor's annuity or relinquish his own right to the annuity will not be considered, for purposes of this subdivision, to make the annuity assignable to someone other than the charitable organization. Gain on an exchange of the type described in this subdivision pursuant to an agreement which is entered into after December 19, 1969, and before May 3, 1971, may be reported as provided in example (8) in paragraph (c) of this section, even though the annuity is assignable. (iii) In the case of an annuity to which subdivision (ii) of this subparagraph applies, the gain unreported by the transferor with respect to annuity payments not yet due when the following events occur is not required to be included in gross income of any person where - (a) The transferor dies before the entire amount of gain has been reported and there is no surviving annuitant, or (b) The transferor relinquishes the annuity to the charitable organization. If the transferor dies before the entire amount of gain on a two-life annuity has been reported, the unreported gain is required to be reported by the surviving annuitant or annuitants with respect to the annuity payments received by them. (b) Apportionment of adjusted basis. For purposes of determining gain on a sale or exchange to which this paragraph applies, the adjusted basis of the property which is sold or exchanged shall be that portion of the adjusted basis of the entire property which bears the same ratio to the adjusted basis as the amount realized bears to the fair market value of the entire property. The amount of such gain which shall be treated as ordinary income (or long-term capital gain) shall be that amount which bears the same ratio to the ordinary income (or long-term capital gain) which would have been recognized if the entire property had been sold by the donor at its fair market value at the time of the sale or exchange as the amount realized on the sale or exchange bears to the fair market value of the entire property at such time. The terms ordinary income and long-term capital gain, as used in this section, have the same meaning as they have in paragraph (a) of § 1.170A-4. For determining the portion of the adjusted basis, ordinary income, and long-term capital gain allocated to the contributed portion of the property for purposes of applying section 170(e)(1) and paragraph (a) of § 1.170A-4 to the contributed portion of the property, and for determining the donee's basis in such contributed portion, see paragraph (c)(2) and (4) of § 1.170A-4. For determining the holding period of such contributed portion, see section 1223(2) and the regulations thereunder. (c) Illustrations. The application of this section may be illustrated by the following examples, which are supplemented by other examples in paragraph (d) of § 1.170A-4: Example 1. In 1970, A, a calendar-year individual taxpayer, sells to a church for $4,000 stock held for more than 6 months which has an adjusted basis of $4,000 and a fair market value of $10,000. A's contribution base for 1970, as defined in section 170(b)(1)(F), is $100,000, and during that year he makes no other charitable contributions. Thus, A makes a charitable contribution to the church of $6,000 ($10,000 value -$4,000 amount realized). Without regard to this section, A is allowed a deduction under section 170 of $6,000 for his charitable contribution to the church, since there is no reduction under section 170(e)(1) with respect to the long-term capital gain. Accordingly, under paragraph (b) of this section the adjusted basis for determining gain on the bargain sale is $1,600 ($4,000 adjusted basis x $4,000 amount realized / $10,000 value of property). A has recognized long-term capital gain of $2,400 ($4,000 amount realized - $1,600 adjusted basis) on the bargain sale. Example 2. The facts are the same as in example (1) except that A also makes a charitable contribution in 1970 of $50,000 cash to the church. By reason of section 170(b)(1)(A), the deduction allowed under section 170 for 1970 is $50,000 for the amount of cash contributed to the church; however, the $6,000 contribution of property is carried over to 1971 under section 170(d). Under paragraphs (a)(2) and (b) of this section the adjusted basis for determining gain for 1970 on the bargain sale in that year is $1,600 ($4,000 x $4,000 / $10,000). A has a recognized long-term capital gain for 1970 of $2,400 ($4,000 - $1,600) on the sale. Example 3. In 1970, C, a calendar-year individual taxpayer, makes a charitable contribution of $50,000 cash to a church. In addition, he sells for $4,000 to a private foundation not described in section 170(b)(1)(E) stock held for more than 6 months which has an adjusted basis of $4,000 and a fair market value of $10,000. Thus, C makes a charitable contribution of $6,000 of such property to the private foundation ($10,000 value - $4,000 amount realized). C's contribution base for 1970, as defined in section 170(b)(1)(F), is $100,000, and during that year he makes no other charitable contributions. By reason of section 170(b)(1)(A), the deduction allowed under section 170 for 1970 is $50,000 for the amount of cash contributed to the church. Under section 170(e)(1)(B)(ii) and paragraphs (a)(1) and (c)(2)(i) of § 1.170A-4, the $6,000 contribution of stock is reduced to $4,800 ($6,000 - [50% x ($6,000 value of contributed portion of stock - $3,600 adjusted basis)]). However, by reason of section 170(b)(1)(B)(ii), applied without regard to section 1011(b), no deduction is allowed under section 170 for 1970 or any other year for the reduced contribution of $4,800 to the private foundation. Accordingly, paragraph (b) of this section does not apply for purposes of apportioning the adjusted basis of the stock sold to the private foundation, and under section 1.1011-1(e) the recognized gain on the bargain sale is $0 ($4,000 amount realized - $4,000 adjusted basis). Example 4. In 1970; B, a calendar-year individual taxpayer, sells to a church for $2,000 stock held for not more than 6 months which has an adjusted basis of $4,000 and a fair market value of $10,000. B's contribution base for 1970, as defined in section 170(b)(1)(F), is $20,000 and during such year B makes no other charitable contributions. Thus, he makes a charitable contribution to the church of $8,000 ($10,000 value - $2,000 amount realized). Under paragraph (b) of this section the adjusted basis for determining gain on the bargain sale is $800 ($4,000 adjusted basis x $2,000 amount realized / $10,000 value of stock). Accordingly, B, has a recognized short-term capital gain of $1,200 ($2,000 amount realized - $800 adjusted basis) on the bargain sale. After applying section 1011(b) and paragraphs (a)(1) and (c)(2)(i) of § 1.170A-4, B is allowed a charitable contributions deduction for 1970 of $3,200 ($8,000 value of gift - [$8,000 - ($4,000 adjusted basis of property x $8,000 value of gift / $10,000 value of property)]). Example 5. The facts are the same as in Example 4 except that B sells the property to the church for $4,000. Thus, B makes a charitable contribution to the church of $6,000 ($10,000 value -$4,000 amount realized). Under paragraph (b) of this section the adjusted basis for determining gain on the bargain sale is $1,600 ($4,000 adjusted basis x $4,000 amount realized / $10,000 value of stock). Accordingly, B has a recognized short-term capital gain of $2,400 ($4,000 amount realized - $1,600 adjusted basis) on the bargain sale. After applying section 1011(b) and paragraphs (a)(1) and (c)(2)(i) of § 1.170A-4, B is allowed a charitable contributions deduction for 1970 of $2,400 ($6,000 value of gift - [$6,000 - ($4,000 adjusted basis of property x $6,000 value of gifts / $10,000 value of property)]). Example 6. The facts are the same as in Example 4 except that B sells the property to the church for $6,000. Thus, B makes a charitable contribution to the church of $4,000 ($10,000 value -$6,000 amount realized). Under paragraph (b) of this section the adjusted basis for determining gain on the bargain sale is $2,400 ($4,000 adjusted basis x $6,000 amount realized/$10,000 value of stock). Accordingly, B has a recognized short-term capital gain of $3,600 ($6,000 amount realized -$2,400 adjusted basis) on the bargain sale. After applying section 1011(b) and paragraphs (a)(1) and (c)(2)(i) of § 1.170A-4, B is allowed a charitable contributions deduction for 1970 of $1,600 ($4,000 value of gift -[$4,000 -($4,000 adjusted basis of property x $4,000 value of gift/$10,000 value of property]). Example 7. In 1970, C, a calendar-year individual taxpayer, sells to a church for $4,000 tangible personal property used in his business for more than 6 months which has an adjusted basis of $4,000 and a fair market value of $10,000. Thus, C makes a charitable contribution to the church of $6,000 ($10,000 value -$4,000 adjusted basis). C's contribution base for 1970, as defined in section 170(b)(1)(F) is $100,000 and during such year he makes no other charitable contributions. If C had sold the property at its fair market value at the time of its contribution, it is assumed that under section 1245 $4,000 of the gain of $6,000 ($10,000 value -$4,000 adjusted basis) would have been treated as ordinary icome. Thus, there would have been long-term capital gain of $2,000. It is also assumed that the church does not put the property to an unrelated use, as defined in paragraph (b)(3) of § 1.170A-4. Under paragraph (b) of this section the adjusted basis for determining gain on the bargain sale is $1,600 ($4,000 adjusted basis x $4,000 amount realized/$10,000 value of property). Accordingly, C has a recognized gain of $2,400 ($4,000 amount realized -$1,600 adjusted basis) on the bargain sale, consisting of ordinary income of $1,600 ($4,000 ordinary income x $4,000 amount realized/$10,000 value of property) and of long-term capital gain of $800 ($2,000 long-term gain x $4,000 amount realized/$10,000 value of property). After applying section 1011(b) and paragraphs (a) and (c)(2)(i) of § 1.170A-4, C is allowed a charitable contributions deduction for 1970 of $3,600 ($6,000 gift -[$4,000 ordinary income x $6,000 value of gift/$10,000 value of property]). Example 8. (a) On January 1, 1970, A, a male of age 65, transfers capital assets consisting of securities held for more than 6 months to a church in exchange for a promise by the church to pay A a non-assignable annuity of $5,000 per year for life. The annuity is payable monthly with the first payment to be made on February 1, 1970. A's contribution base for 1970, as defined in section 170(b)(1)(F), is $200,000, and during that year he makes no other charitable contributions. On the date of transfer the securities have a fair market value of $100,000 and an adjusted basis to A of $20,000. (b) The present value of the right of a male age 65 to receive a life annuity of $5,000 per annum, payable in equal installments at the end of each monthly period, is $59,755 ($5,000 x [11.469 + 0.482]), determined in accordance with section 101(b) of the Code, paragraph (e)(1)(iii)(b)(2) of § 1.101-2, and section 3 of Rev.Rul. 62-216, C.B. 1962-2, 30. Thus, A makes a charitable contribution to the church of $40,245 ($100,000 -$59,755). See Rev.Rul. 84-162, 1984-2 C.B. 200, for transfers for which the valuation date falls after November 23, 1984. (See § 601.601(d)(2)(ii)(b) of this chapter). For the applicable valuation tables in connection therewith, see § 20.2031-7(d)(6) of this chapter. See, however, § 1.7520-3(b) (relating to exceptions to the use of standard actuarial factors in certain circumstances). (c) Under paragraph (b) of this section, the adjusted basis for determining gain on the bargain sale is $11,951 ($20,000 x $59,755 / $100,000). Accordingly, A has a recognized long-term capital gain of $47,804 ($59,755 - $11,951) on the bargain sale. Such gain is to be reported by A ratably over the period of years measured by the expected return multiple under the contract, but only from that portion of the annual payments which is a return of his investment in the contract under section 72 of the Code. For such purposes, the investment in the contract is $59,755, that is, the present value of the annuity. (d) The computation and application of the exclusion ratio, the gain, and the ordinary annuity income are as follows, determined by using the expected return multiple of 15.0 applicable under table I of § 1.72-9: A's expected return (annual payments of $5,000 x 15) $75,000.00 Exclusion ratio ($59,755 investment in contract divided by expected return of $75,000) Annual exclusion (annual payments of $5,000 x 79.7%) $3,985.00 Ordinary annuity income ($5,000-$3,985) $1,015.00 Long-term capital gain per year ($47,804/15) with respect to the annual exclusion $3,186.93 (e) The exclusion ratio of 79.7 percent applies throughout the life of the contract. During the first 15 years of the annuity, A is required to report ordinary income of $1,015 and long-term capital gain of $3,186.93 with respect to the annuity payments he receives. After the total long-term capital gain of $47,804 has been reported by A, he is required to report only ordinary income of $1,015.00 per annum with respect to the annuity payments he receives. (d) Effective date. This section applies only to sales and exchanges made after December 19, 1969. (e) Cross reference. For rules relating to the treatment of liabilities on the sale or other disposition or encumbered property, see § 1.1001-2. [T.D. 7207, 37 FR 20798, Oct. 5, 1972, as amended by T.D. 7741, 45 FR 81745, Dec. 12, 1980; T.D. 8176, 53 FR 5570, Feb. 25, 1988; 53 FR 11002, Apr. 4, 1988; T.D. 8540, 59 FR 30148, June 10, 1994] 26 U.S. Code § 4958. Taxes on excess benefit transactions (a) Initial taxes (1) On the disqualified person There is hereby imposed on each excess benefit transaction a tax equal to 25 percent of the excess benefit. The tax imposed by this paragraph shall be paid by any disqualified person referred to in subsection (f)(1) with respect to such transaction. (2) On the management In any case in which a tax is imposed by paragraph (1), there is hereby imposed on the participation of any organization manager in the excess benefit transaction, knowing that it is such a transaction, a tax equal to 10 percent of the excess benefit, unless such participation is not willful and is due to reasonable cause. The tax imposed by this paragraph shall be paid by any organization manager who participated in the excess benefit transaction. (b) Additional tax on the disqualified person In any case in which an initial tax is imposed by subsection (a)(1) on an excess benefit transaction and the excess benefit involved in such transaction is not corrected within the taxable period, there is hereby imposed a tax equal to 200 percent of the excess benefit involved. The tax imposed by this subsection shall be paid by any disqualified person referred to in subsection (f)(1) with respect to such transaction. (c) Excess benefit transaction; excess benefit. For purposes of this section-- (1) Excess benefit transaction (A) In general The term "excess benefit transaction" means any transaction in which an economic benefit is provided by an applicable tax-exempt organization directly or indirectly to or for the use of any disqualified person if the value of the economic benefit provided exceeds the value of the consideration (including the performance of services) received for providing such benefit. For purposes of the preceding sentence, an economic benefit shall not be treated as consideration for the performance of services unless such organization clearly indicated its intent to so treat such benefit. (B) Excess benefit The term "excess benefit" means the excess referred to in subparagraph (A). (2) Special rules for donor advised funds. In the case of any donor advised fund (as defined in section 4966(d)(2))-- (A) the term "excess benefit transaction" includes any grant, loan, compensation, or other similar payment from such fund to a person described in subsection (f)(7) with respect to such fund, and (B) the term "excess benefit" includes, with respect to any transaction described in subparagraph (A), the amount of any such grant, loan, compensation, or other similar payment. (3) Special rules for supporting organizations (A) In general. In the case of any organization described in section 509(a)(3)-- (i) the term "excess benefit transaction" includes-- (I) any grant, loan, compensation, or other similar payment provided by such organization to a person described in subparagraph (B), and (II) any loan provided by such organization to a disqualified person (other than an organization described in subparagraph (C)(ii)), and (ii) the term "excess benefit" includes, with respect to any transaction described in clause (i), the amount of any such grant, loan, compensation, or other similar payment. (B) Person described. A person is described in this subparagraph if such person is-- (i) a substantial contributor to such organization, (ii) a member of the family (determined under section 4958(f)(4)) of an individual described in clause (i), or (iii) a 35-percent controlled entity (as defined in section 4958(f)(3) by substituting "persons described in clause (i) or (ii) of section 4958(c)(3)(B)" for "persons described in subparagraph (A) or (B) of paragraph (1)" in subparagraph (A)(i) thereof). (C) Substantial contributor. For purposes of this paragraph-- (i) In general The term "substantial contributor" means any person who contributed or bequeathed an aggregate amount of more than $5,000 to the organization, if such amount is more than 2 percent of the total contributions and bequests received by the organization before the close of the taxable year of the organization in which the contribution or bequest is received by the organization from such person. In the case of a trust, such term also means the creator of the trust. Rules similar to the rules of subparagraphs (B) and (C) of section 507(d)(2) shall apply for purposes of this subparagraph. (ii) Exception. Such term shall not include-- (I) any organization described in paragraph (1), (2), or (4) of section 509(a), and (II) any organization which is treated as described in such paragraph (2) by reason of the last sentence of section 509(a) and which is a supported organization (as defined in section 509(f)(3)) of the organization to which subparagraph (A) applies. (4) Authority to include certain other private inurement To the extent provided in regulations prescribed by the Secretary, the term "excess benefit transaction" includes any transaction in which the amount of any economic benefit provided to or for the use of a disqualified person is determined in whole or in part by the revenues of 1 or more activities of the organization but only if such transaction results in inurement not permitted under paragraph (3) or (4) of section 501(c), as the case may be. In the case of any such transaction, the excess benefit shall be the amount of the inurement not so permitted. (d) Special rules. For purposes of this section-- (1) Joint and several liability If more than 1 person is liable for any tax imposed by subsection (a) or subsection (b), all such persons shall be jointly and severally liable for such tax. (2) Limit for management With respect to any 1 excess benefit transaction, the maximum amount of the tax imposed by subsection (a)(2) shall not exceed $20,000. (e) Applicable tax-exempt organization. For purposes of this subchapter, the term "applicable tax-exempt organization" means-- (1) any organization which (without regard to any excess benefit) would be described in paragraph (3), (4), or (29) of section 501(c) and exempt from tax under section 501(a), and (2) any organization which was described in paragraph (1) at any time during the 5-year period ending on the date of the transaction. Such term shall not include a private foundation (as defined in section 509(a)). (f) Other definitions. For purposes of this section-- (1) Disqualified person. The term "disqualified person" means, with respect to any transaction-- (A) any person who was, at any time during the 5-year period ending on the date of such transaction, in a position to exercise substantial influence over the affairs of the organization, (B) a member of the family of an individual described in subparagraph (A), (C) a 35-percent controlled entity, (D) any person who is described in subparagraph (A), (B), or (C) with respect to an organization described in section 509(a)(3) and organized and operated exclusively for the benefit of, to perform the functions of, or to carry out the purposes of the applicable tax-exempt organization, (E) which involves a donor advised fund (as defined in section 4966(d)(2)), any person who is described in paragraph (7) with respect to such donor advised fund (as so defined), and (F) which involves a sponsoring organization (as defined in section 4966(d)(1)), any person who is described in paragraph (8) with respect to such sponsoring organization (as so defined). (2) Organization manager The term "organization manager" means, with respect to any applicable tax-exempt organization, any officer, director, or trustee of such organization (or any individual having powers or responsibilities similar to those of officers, directors, or trustees of the organization). (3) 35-percent controlled entity (A) In general, The term "35-percent controlled entity" means-- (i) a corporation in which persons described in subparagraph (A) or (B) of paragraph (1) own more than 35 percent of the total combined voting power, (ii) a partnership in which such persons own more than 35 percent of the profits interest, and (iii) a trust or estate in which such persons own more than 35 percent of the beneficial interest. (B) Constructive ownership rules Rules similar to the rules of paragraphs (3) and (4) of section 4946(a) shall apply for purposes of this paragraph. (4) Family members The members of an individual's family shall be determined under section 4946(d); except that such members also shall include the brothers and sisters (whether by the whole or half-blood) of the individual and their spouses. (5) Taxable period. The term "taxable period" means, with respect to any excess benefit transaction, the period beginning with the date on which the transaction occurs and ending on the earliest of-- (A) the date of mailing a notice of deficiency under section 6212 with respect to the tax imposed by subsection (a)(1), or **. (B) the date on which the tax imposed by subsection (a)(1) is assessed. (6) Correction The terms "correction" and "correct" mean, with respect to any excess benefit transaction, undoing the excess benefit to the extent possible, and taking any additional measures necessary to place the organization in a financial position not worse than that in which it would be if the disqualified person were dealing under the highest fiduciary standards, except that in the case of any correction of an excess benefit transaction described in subsection (c)(2), no amount repaid in a manner prescribed by the Secretary may be held in any donor advised fund. (7) Donors and donor advisors. For purposes of paragraph (1)(E), a person is described in this paragraph if such person-- (A) is described in section 4966(d)(2)(A)(iii), (B) is a member of the family of an individual described in subparagraph (A), or (C) is a 35-percent controlled entity (as defined in paragraph (3) by substituting "persons described in subparagraph (A) or (B) of paragraph (7)" for "persons described in subparagraph (A) or (B) of paragraph (1)" in subparagraph (A)(i) thereof). (8) Investment advisors. For purposes of paragraph (1)(F)-- (A) In general. A person is described in this paragraph if such person-- (i) is an investment advisor, (ii) is a member of the family of an individual described in clause (i), or (iii) is a 35-percent controlled entity (as defined in paragraph (3) by substituting "persons described in clause (i) or (ii) of paragraph (8)(A)" for "persons described in subparagraph (A) or (B) of paragraph (1)" in subparagraph (A)(i) thereof). (B) Investment advisor defined For purposes of subparagraph (A), the term Investment advisor" means, with respect to any sponsoring organization (as defined in section 4966(d)(1)), any person (other than an employee of such organization) compensated by such organization for managing the investment of, or providing investment advice with respect to, assets maintained in donor advised funds (as defined in section 4966(d)(2)) owned by such organization. (Added Pub. L. 104-168, title XIII, § 1311(a), July 30, 1996, 110 Stat. 1475; amended Pub. L. 109-280, title XII, §§1212(a)(3), 1232(a), (b), 1242(a), (b), Aug. 17, 2006, 120 Stat. 1074, 1098, 1099, 1104; Pub. L. 110-172, § 3(i), Dec. 29, 2007, 121 Stat. 2475; Pub. L. 111-148, title I, §1322(h)(3), Mar. 23, 2010, 124 Stat. 192; Pub. L. 115-141, div. U, title IV, §401(a)(224), Mar. 23, 2018, 132 Stat. 1194.) § 53.4958-3 Definition of disqualified person. (a) In general - (1) Scope of definition. Section 4958(f)(1) defines disqualified person, with respect to any transaction, as any person who was in a position to exercise substantial influence over the affairs of an applicable tax-exempt organization at any time during the five-year period ending on the date of the transaction (the lookback period). Paragraph (b) of this section describes persons who are defined to be disqualified persons under the statute, including certain family members of an individual in a position to exercise substantial influence, and certain 35-percent controlled entities. Paragraph (c) of this section describes persons in a position to exercise substantial influence over the affairs of an applicable tax-exempt organization by virtue of their powers and responsibilities or certain interests they hold. Paragraph (d) of this section describes persons deemed not to be in a position to exercise substantial influence. Whether any person who is not described in paragraph (b), (c) or (d) of this section is a disqualified person with respect to a transaction for purposes of section 4958 is based on all relevant facts and circumstances, as described in paragraph (e) of this section. Paragraph (f) of this section describes special rules for affiliated organizations. Examples in paragraph (g) of this section illustrate these categories of persons. (2) Transition rule for lookback period. In the case of any excess benefit transaction occurring before September 14, 2000, the lookback period described in paragraph (a)(1) of this section begins on September 14, 1995, and ends on the date of the transaction. (b) Statutory categories of disqualified persons - (1) Family members. A person is a disqualified person with respect to any transaction with an applicable tax-exempt organization if the person is a member of the family of a person who is a disqualified person described in paragraph (a) of this section (other than as a result of this paragraph) with respect to any transaction with the same organization. For purposes of the following sentence, a legally adopted child of an individual is treated as a child of such individual by blood. A person's family is limited to - (i) Spouse; (ii) Brothers or sisters (by whole or half blood); (iii) Spouses of brothers or sisters (by whole or half blood); (iv) Ancestors; (v) Children; (vi) Grandchildren; (vii) Great grandchildren; and (viii) Spouses of children, grandchildren, and great grandchildren. (2) Thirty-five percent controlled entities - (i) In general. A person is a disqualified person with respect to any transaction with an applicable tax-exempt organization if the person is a 35-percent controlled entity. A 35-percent controlled entity is - (A) A corporation in which persons described in this section (except in paragraphs (b)(2) and (d) of this section) own more than 35 percent of the combined voting power; (B) A partnership in which persons described in this section (except in paragraphs (b)(2) and (d) of this section) own more than 35 percent of the profits interest; or (C) A trust or estate in which persons described in this section (except in paragraphs (b)(2) and (d) of this section) own more than 35 percent of the beneficial interest. (ii) Combined voting power. For purposes of this paragraph (b)(2), combined voting power includes voting power represented by holdings of voting stock, direct or indirect, but does not include voting rights held only as a director, trustee, or other fiduciary. (iii) Constructive ownership rules - (A) Stockholdings. For purposes of section 4958(f)(3) and this paragraph (b)(2), indirect stockholdings are taken into account as under section 267(c), except that in applying section 267(c)(4), the family of an individual shall include the members of the family specified in section 4958(f)(4) and paragraph (b)(1) of this section. (B) Profits or beneficial interest. For purposes of section 4958(f)(3) and this paragraph (b)(2), the ownership of profits or beneficial interests shall be determined in accordance with the rules for constructive ownership of stock provided in section 267(c) (other than section 267(c)(3)), except that in applying section 267(c)(4), the family of an individual shall include the members of the family specified in section 4958(f)(4) and paragraph (b)(1) of this section. (c) Persons having substantial influence. A person who holds any of the following powers, responsibilities, or interests is in a position to exercise substantial influence over the affairs of an applicable tax-exempt organization: (1) Voting members of the governing body. This category includes any individual serving on the governing body of the organization who is entitled to vote on any matter over which the governing body has authority. (2) Presidents, chief executive officers, or chief operating officers. This category includes any person who, regardless of title, has ultimate responsibility for implementing the decisions of the governing body or for supervising the management, administration, or operation of the organization. A person who serves as president, chief executive officer, or chief operating officer has this ultimate responsibility unless the person demonstrates otherwise. If this ultimate responsibility resides with two or more individuals (e.g., co-presidents), who may exercise such responsibility in concert or individually, then each individual is in a position to exercise substantial influence over the affairs of the organization. (3) Treasurers and chief financial officers. This category includes any person who, regardless of title, has ultimate responsibility for managing the finances of the organization. A person who serves as treasurer or chief financial officer has this ultimate responsibility unless the person demonstrates otherwise. If this ultimate responsibility resides with two or more individuals who may exercise the responsibility in concert or individually, then each individual is in a position to exercise substantial influence over the affairs of the organization. (4) Persons with a material financial interest in a provider-sponsored organization. For purposes of section 4958, if a hospital that participates in a provider-sponsored organization (as defined in section 1855(e) of the Social Security Act, 42 U.S.C. 1395w-25) is an applicable tax-exempt organization, then any person with a material financial interest (within the meaning of section 501(o)) in the provider-sponsored organization has substantial influence with respect to the hospital. (d) Persons deemed not to have substantial influence. A person is deemed not to be in a position to exercise substantial influence over the affairs of an applicable tax-exempt organization if that person is described in one of the following categories: (1) Tax-exempt organizations described in section 501(c)(3). This category includes any organization described in section 501(c)(3) and exempt from tax under section 501(a). (2) Certain section 501(c)(4) organizations. Only with respect to an applicable tax-exempt organization described in section 501(c)(4) and § 53.4958-2(a)(4), this category includes any other organization so described. (3) Employees receiving economic benefits of less than a specified amount in a taxable year. This category includes, for the taxable year in which benefits are provided, any full- or part-time employee of the applicable tax-exempt organization who - (i) Receives economic benefits, directly or indirectly from the organization, of less than the amount referenced for a highly compensated employee in section 414(q)(1)(B)(i); (ii) Is not described in paragraph (b) or (c) of this section with respect to the organization; and (iii) Is not a substantial contributor to the organization within the meaning of section 507(d)(2)(A), taking into account only contributions received by the organization during its current taxable year and the four preceding taxable years. (e) Facts and circumstances govern in all other cases - (1) In general. Whether a person who is not described in paragraph (b), (c) or (d) of this section is a disqualified person depends upon all relevant facts and circumstances. (2) Facts and circumstances tending to show substantial influence. Facts and circumstances tending to show that a person has substantial influence over the affairs of an organization include, but are not limited to, the following - (i) The person founded the organization; (ii) The person is a substantial contributor to the organization (within the meaning of section 507(d)(2)(A)), taking into account only contributions received by the organization during its current taxable year and the four preceding taxable years; (iii) The person's compensation is primarily based on revenues derived from activities of the organization, or of a particular department or function of the organization, that the person controls; (iv) The person has or shares authority to control or determine a substantial portion of the organization's capital expenditures, operating budget, or compensation for employees; (v) The person manages a discrete segment or activity of the organization that represents a substantial portion of the activities, assets, income, or expenses of the organization, as compared to the organization as a whole; (vi) The person owns a controlling interest (measured by either vote or value) in a corporation, partnership, or trust that is a disqualified person; or (vii) The person is a non-stock organization controlled, directly or indirectly, by one or more disqualified persons. (3) Facts and circumstances tending to show no substantial influence. Facts and circumstances tending to show that a person does not have substantial influence over the affairs of an organization include, but are not limited to, the following - (i) The person has taken a bona fide vow of poverty as an employee, agent, or on behalf, of a religious organization; (ii) The person is a contractor (such as an attorney, accountant, or investment manager or advisor) whose sole relationship to the organization is providing professional advice (without having decision-making authority) with respect to transactions from which the contractor will not economically benefit either directly or indirectly (aside from customary fees received for the professional advice rendered); (iii) The direct supervisor of the individual is not a disqualified person; (iv) The person does not participate in any management decisions affecting the organization as a whole or a discrete segment or activity of the organization that represents a substantial portion of the activities, assets, income, or expenses of the organization, as compared to the organization as a whole; or (v) Any preferential treatment a person receives based on the size of that person's contribution is also offered to all other donors making a comparable contribution as part of a solicitation intended to attract a substantial number of contributions. (f) Affiliated organizations. In the case of multiple organizations affiliated by common control or governing documents, the determination of whether a person does or does not have substantial influence shall be made separately for each applicable tax-exempt organization. A person may be a disqualified person with respect to transactions with more than one applicable tax-exempt organization. 26 U.S. Code § 1.6001-1 Records. (a) In general. Except as provided in paragraph (b) of this section, any person subject to tax under subtitle A of the Code (including a qualified State individual income tax which is treated pursuant to section 6361(a) as if it were imposed by chapter 1 of subtitle A), or any person required to file a return of information with respect to income, shall keep such permanent books of account or records, including inventories, as are sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown by such person in any return of such tax or information. (b) Farmers and wage-earners. Individuals deriving gross income from the business of farming, and individuals whose gross income includes salaries, wages, or similar compensation for personal services rendered, are required with respect to such income to keep such records as will enable the district director to determine the correct amount of income subject to the tax. It is not necessary, however, that with respect to such income individuals keep the books of account or records required by paragraph (a) of this section. For rules with respect to the records to be kept in substantiation of traveling and other business expenses of employees, see § 1.162-17. (c) Exempt organizations. In addition to such permanent books and records as are required by paragraph (a) of this section with respect to the tax imposed by section 511 on unrelated business income of certain exempt organizations, every organization exempt from tax under section 501(a) shall keep such permanent books of account or records, including inventories, as are sufficient to show specifically the items of gross income, receipts and disbursements. Such organizations shall also keep such books and records as are required to substantiate the information required by section 6033. See section 6033 and §§ 1.6033-1 through 1.6033-3. (d) Notice by district director requiring returns statements, or the keeping of records. The district director may require any person, by notice served upon him, to make such returns, render such statements, or keep such specific records as will enable the district director to determine whether or not such person is liable for tax under subtitle A of the Code, including qualified State individual income taxes, which are treated pursuant to section 6361(a) as if they were imposed by chapter 1 of subtitle A. (e) Retention of records. The books or records required by this section shall be kept at all times available for inspection by authorized internal revenue officers or employees and shall be retained so long as the contents thereof may become material in the administration of any internal revenue law. Rev.Rul. 64-182, 1964-1, C.B. 186. States that for an organization to be exempt under IRC section 501(c)(3) the organization must distribute funds for charitable purposes in amounts commensurate to its financial resources. Rev.Rul. 67-246, Ex. 5. Amounts paid for chances to participate in raffles, lotteries, or similar drawings of chance or to participate in puzzles or other contests for valuable prizes are not gifts, and therefore, do not qualify as deductible charitable contributions. Goldman V. Commissioner, 46 T.C. 136 (1966), aff'd, 388, Rev.Rul. 83-130 - In substance, a participant has not made a contribution but has rather purchased a chance to win a valuable prize. Executive Network Club v. Commissioner, T.C. Memo. 1995-21. Individual(s) who run the raffles are compensated indirectly from a % controlled i.e.; related for-profit entity. Bus.Bureau v. United States, 326 U.S. 279, 283, 90 L.Ed. 67, 66 S.Ct. 112 (1945); The presence of a single substantial nonexempt purpose can destroy the exemption regardless of the number or importance of exempt purposes. Better Am. Campaign Acad. v. Commissioner, 92 T.C. 1053, 1065 (1989); see also Old Dominion Box Co., Inc. v. United States, 477 F2d. 340 (4thCir. 1973), cert. denied, 413 US 910 (1973) ("operating for the benefit of private parties who are not members of a charitable class constitutes a substantial nonexempt purpose"). When an organization operates for the benefit of private interests, such as designated individuals, the creator or his family, or persons directly or indirectly controlled by such private interests, the organization by definition does not operate exclusively for exempt purposes. Am. Campaign Acad. v. Commissioner, supra at 1065-1066, and John Marshall Law School v. United States, 228 Ct.Cl. 902 (1981). V. GOVERNMENT'S POSITION We intend to propose revocation of your organization's exempt status based on " inurement " issues revealed during our examination. Our examination revealed that the organization's President, ****, engaged in Excess Benefit Transactions with the exempt organization primarily through related, undisclosed corporations as well as through an unincorporated entity that the President established and controlled. These entities constituted "Disqualified Persons" under IRC section 4958. The following summarizes the reported income, functional expenses, and charitable program expenses reported by the organization during the** lookback period from ** through **. Also included, is information reported from tax years **, ** and **. ** filed its final tax return for tax year **. According to the Secretary of State's office, ** corporate status was revoked by the State on ** for failure to file an annual report. Fig. 1 Itemization of Undocumented Expenses No documentation has been provided to show that any charitable activities have occurred. Real estate expenses do not constitute Program Service Expenses. These expenses were mischaracterized on the returns. In tax year **, more than $ ** in cash was withdrawn from the organization's bank account for purposes of paying real estate bonuses. The Representative's response (dated **) to the Agents preliminary 886-A dated **, stated that it is "common in the real estate industry to provide "**" and cash bonuses as a form of incentive compensation to sales agents". The Representative provided a copy of the organization's "** Transaction List" (Exhibit A-3). Selling real estate is not a charitable activity and paying cash bonuses to real estate agents is an inappropriate use of charitable funds. The following functional expenses represent the most significant UNDOCUMENTED expenses EXCLUDING salaries. Office expenses in ** are significant because the organization ceased operations in **. Fig. 2 Itemization of Excess Benefit Transactions The following graphic provides an itemization of the excess benefit transactions in which the organization engaged with Disqualified Persons in tax year **. The detail provided, coupled with the absence of any charitable activities, evidences the size and scope of the excess benefit transactions at issue, and indicates that ** primarily served the interests of ** through entities he controlled rather than the public interest in the year under review, and in the subsequent years. On the previous table, the "Unadjusted EBT' amounts constitute the basis for the calculation of the 1st tier excise tax. The " Adjusted EBT" amounts constitute the basis for the calculation of the 2nd tier excise tax. Incoming payments made to ** by the "Disqualified Persons"/entities were considered corrective in the calculation of the 2nd tier tax. The size and scope of the excess benefit transactions were significant in relation to the size and scope of the organization's regular and ongoing activities that did nothing to further exempt purposes. Neither the organization nor the microlender have provided documentation to evidence that any charitable activities occurred. Conducting "bargain sale" real estate transactions is not in itself a charitable activity. ** signed Form 6018 agreeing to revocation of the organization's exempt status but did not dissolve the organization's incorporation with the State. The incorporation was revoked by the State effective** for failure to file an annual report. Fig. 3 Analysis of Excess Benefit Transactions as a Percentage of the Organization's Total Revenues - The following graphic shows the excess benefit transactions at issue as a percentage of ** total revenues, and as a percentage of the organization's total expenses. The organization used most of its funding for non-charitable expenses. The greater matter may be that the organization has provided no documentation in support of any of these expenses. The Service has been unable to verify whether the reported expenses are legitimate or have even occurred due to inadequate records, and lack of cooperation on the part of the organization. In summary, the relevant facts and circumstances with respect to the proposed revocation are as follows: §1.501(c)(3)-1(f)(2)(ii)(A), " the size and scope of the organization's regular and ongoing activities that further exempt purposes before and after the excess benefit transactions occurred ". Our Examination revealed that ** appears to have been established for purposes of conducting bargain-sale real estate transactions. The organization has not evidenced charitable activities or a charitable purpose. §1.501(c)(3)-1(f)(2)(ii)(B), " the size and scone of the excess benefit transactions in relation to the size and scope of the organization's regular and ongoing activities that further exempt purposes ". Due to a complete lack of legitimate financial oversight, the cost of furthering this organization's exempt purpose, if any, far outweighs the benefits received. The operation of this organization has resulted in significant harm to the Government due to the organization's granting of fraudulent IRC section 170(c) tax deductions based on intentionally inflated property values. The transactions were conducted through undisclosed 35 percent controlled envies. §1.501(c)(3)-1(f)(2)(ii)(C), as to " whether the organization has been involved in multiple excess benefit transactions with one or more persons ". The organization has been involved with significant, multiple excess benefit transactions with undisclosed controlled entities, **, ** and **. ** is a ** +/- % shareholder in ** and **. §1.501(c)(3)-1(f)(2)(ii)(D), as to " whether the organization has implemented safeguards that are reasonably calculated to prevent excess benefit transactions ". ** stated that the organization ceased operations at the start of tax year **, and signed Form 6018 agreeing to the revocation of the organization's exempt status. The organization's corporate status was revoked by the State effective ** for failure to file an annual report. §1.501(c)(3)-1(f)(2)(ii)(E), as to " whether the excess benefit transaction has been corrected (within the meaning of 4958(f)(6) and § 53.4958-7), or the organization has made good faith efforts to seek correction from the disqualified person who benefited from the excess benefit transactions ". During the year under review funds flowed between ** and controlled entities **, ** and **. We considered incoming payments as "correction" for purposes of calculating the second-tier tax, but significant amounts remain outstanding. Given the size and scope of the inurement issues revealed by our examination, ** is not operated exclusively for exempt purposes and does not qualify for exemption under IRC § 501(c)(3). Based on the facts and circumstances described, ** is not operated exclusively for exempt purposes and, therefore, does not qualify for exemption under IRC § 501(c)(3). VI. TAXPAYER'S POSITION The Taxpayer signed Form 6018 Consent to Proposed Action agreeing to revocation of the organization's exempt status on **. VII. CONCLUSION: It is the Government's position that the organization engaged in multiple and repeated private benefit and inurement transactions, for which there has been insufficient correction, with the organization's President, a Disqualified Person, and undisclosed % controlled entities, under IRC § 4958. As a result, the organization is no longer eligible for exemption from federal income tax under IRC § 501(c)(3). Accordingly, the organization's exempt status is revoked effective ****. Form ** returns should be filed for tax periods ending on or after ****.