5496 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[TD 9943] 

RIN 1545–BP73 

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 


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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 crossreferences 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 firstyear 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 lookthrough 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 


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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 


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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 


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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 


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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 


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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 wholegroup 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 antiduplication 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 antiduplication 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 antiduplication 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. 


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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 nonpassive investor would be 

recharacterized as BIE by such nonpassive 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 nonpassive 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. 


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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 


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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 selfcharged 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 selfcharged 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 selfcharged 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 uppertier 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 multitiered 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 selfcharged 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 


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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 nonegative 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 antiabuse 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 


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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 (pregroup 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 


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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), 


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(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 


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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 hightax 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 safeharbor 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 


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Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations 5511 

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 nonconsolidated C corporation or CFC is 

allocable to an excepted or nonexcepted 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, nonconsolidated subsidiary (Corporation Y), 

and each of X and Y borrows funds from 

external lenders. Assuming for purposes 

of this example that neither the antiavoidance 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 lookthrough 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 lookthrough rule for non-consolidated C 


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5512 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations 

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 LookThrough Rule). 

For example, P wholly and directly 

owns S1, which wholly and directly 

owns S2. Each of these entities is a nonconsolidated 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 nonexcepted 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 nonconsolidated 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 lowertier 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 lookthrough 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 nonconsolidated 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 flowthrough 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 


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1Under 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). 

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. 

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 


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5514 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations 

2 Interest deductions in tax year 2013 for 

corporations, partnerships, and sole proprietorships 

were approximately $800 billion. 

3See E. Zwick and J. Mahon, ‘‘Tax Policy and 

Heterogeneous Investment Behavior,’’ at American 

Economic Review 2017, 107(1): 217–48 and articles 

cited therein. 

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. 

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 noaction 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 noaction 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 noaction 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 noaction 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 


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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 nonmaterially 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-thanfully-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 


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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 debtfinanced 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 standalone basis, regardless of whether CFCs 

have shared ownership. However, if 

section 163(j) were applied on a standalone 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 ‘‘selfhelp’’ 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 


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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 CFClevel, rather than on a shareholder-byshareholder 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 decisionmaking. 

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 


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5518 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations 

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 safeharbor 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: 

Form OMB No. IRS website link Status 

Form 1040 ....... 1545–0074 .............................. https://www.irs.gov/pub/irs-pdf/f1040.pdf (Instructions: https://www.irs.gov/pub/irs-pdf/ 

i1040gi.pdf).

Published in the Federal Register on 10/30/ 

2020. Public comment period ends 12/29/ 

2020. 

Link: https://www.federalregister.gov/documents/2020/10/30/2020-24139/proposed-extension-of-information-collection-requestsubmitted-for-public-comment-comment-request. 

Form 1120 ....... 1545–0123 .............................. https://www.irs.gov/pub/irs-pdf/f1120.pdf (Instructions: https://www.irs.gov/pub/irs-pdf/ 

i1120.pdf.).

Published in the Federal Register on 11/3/ 

2020. Public comment period ends January 

4, 2021. 

Form 1120S ..... ................................................. https://www.irs.gov/pub/irs-pdf/f1120s.pdf (Instructions: https://www.irs.gov/pub/irs-pdf/ 

i1120s.pdf.).

Form 1065 ....... ................................................. https://www.irs.gov/pub/irs-pdf/f1065.pdf (Instructions: https://www.irs.gov/pub/irs-pdf/ 

i1065.pdf.).

Form 1120– 

REIT.

................................................. https://www.irs.gov/pub/irs-pdf/f1120rei— 

2018.pdf (Instructions: https://www.irs.gov/ 

pub/irs-pdf/i1120rei.pdf.).

Form 8990 ....... ................................................. https://www.irs.gov/pub/irs-pdf/f8990_accessible.pdf (Instructions: https://www.irs.gov/ 

pub/irs-pdf/i8990.pdf.).


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Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations 5519 

Form OMB No. IRS website link Status 

Link: https://www.federalregister.org/documents/2020/11/03/2020-24251/proposed-collection-comment-request-for-forms-1065- 

1066-1120-1120-c-1120-f-1120-h-1120-nd-1120-s. 

In addition, when available, drafts of 

IRS forms are posted for comment at 

https://apps.irs.gov/app/picklist/list/ 

draftTaxForms.htm. IRS forms are 

available at https://www.irs.gov/formsinstructions. 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 safeharbor 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 


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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 nonexcepted 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). 

FORM 1065 AND 1065–B FILERS + NAICS CODES + GROSS RECEIPTS RANGE + SCHEDULE B, QUESTION 1 BOX b, c, 

OR d MARKED

NAICS code 

(description) Gross receipts range 

Schedule B, 

question 1 box 

b, c or d 

5231 (securities and commodity contracts intermediation and brokerage) ................. >$26M but not more than $41.5M ............ 22 

5232 (securities and commodity exchanges) .............................................................. >$26M but not more than $41.5M ............ 0 

6239 (other financial investment activities) .................................................................. >$26M but not more than $41.5M ............ 242 

5259 (other investment pools and funds) .................................................................... >$26M but not more than $35M ............... 12 

Total ...................................................................................................................... ................................................................... 276 

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 safeharbor 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 


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Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations 5521 

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 antiabuse 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 


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5522 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations 

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. 


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(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 lookthrough 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 lookthrough 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 


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5524 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations 

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 


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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 × 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 × 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. 


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(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 antiduplication 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 nondeconsolidating 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 


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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 


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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 exdividend 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 ‘‘postDecember 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, 


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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 interestrelated 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: 


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5530 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations 

§ 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 nonpassive 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 nonpassive 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 


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Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations 5531 

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 (selfcharged 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 × 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, 


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5532 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations 

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% × $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 × 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 


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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 separatecompany 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 pregroup 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 pregroup 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. 


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(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). Pregroup 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 


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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); 


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(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 31⁄3 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 ‘‘31⁄3.’’ 

(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 standalone 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 safeVerDate Sep<11>2014 19:59 Jan 17, 2021 Jkt 253001 PO 00000 Frm 00042 Fmt 4701 Sfmt 4700 E:\FR\FM\19JAR4.SGM 19JAR4

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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 standalone 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 standalone 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 safeharbor 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) pregroup 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 


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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 antiabuse 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 


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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 lookthrough rules. * * * 

(2) Limitation on application of lookthrough 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 nonconsolidated 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 nonexcepted 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 


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5540 Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations 

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. 


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Federal Register / Vol. 86, No. 11 / Tuesday, January 19, 2021 / Rules and Regulations 5541 

(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). 

[FR Doc. 2021–00150 Filed 1–13–21; 4:15 pm] 

BILLING CODE 4830–01–P 


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