Source: https://www.irs.gov/irb/2016-23_IRB
Timestamp: 2019-04-25 22:02:10+00:00

Document:
Federal rates; adjusted federal rates; adjusted federal long-term rate and the long-term exempt rate. For purposes of sections 382, 642, 1274, 1288, and other sections of the Code, tables set forth the rates for June 2016.
Beginning of Construction for Sections 45 and 48. Notice 2016–31 updates prior IRS guidance to reflect the PATH Act extension and modification of the date by which facilities must begin construction. Notice 2016–31 also extends the date by which taxpayers must place a facility in service to satisfy the Continuity Safe Harbor.
These final regulations provide guidance on distributions from designated Roth accounts. The guidance removes a rule that had required a direct rollover to an eligible retirement account and a payment to the employee to each receive a proportionate share of the pretax and after-tax amounts in the account.
This document contains final regulations eliminating the requirement that each disbursement from a designated Roth account that is directly rolled over to an eligible retirement plan be treated as a separate distribution from any amount paid directly to the employee and therefore separately subject to the rule in section 72(e)(2) of the Internal Revenue Code (the Code) allocating pretax and after-tax amounts to each distribution. As a result of this change, if disbursements are made from a taxpayer’s designated Roth account to the taxpayer and also to the taxpayer’s Roth IRA or designated Roth account in a direct rollover, then pretax amounts will be allocated first to the direct rollover, rather than being allocated pro rata to each destination. Also, a taxpayer will be able to direct the allocation of pretax and after-tax amounts that are included in disbursements from a designated Roth account that are directly rolled over to multiple destinations, applying the same allocation rules to distributions from designated Roth accounts that apply to distributions from other types of accounts. These regulations affect participants in, beneficiaries of, employers maintaining, and administrators of designated Roth accounts under tax-favored retirement plans.
Effective Date: These regulations are effective on May 18, 2016.
Applicability Date: These regulations generally apply to distributions on or after January 1, 2016 (or an earlier date chosen by the taxpayer that is on or after September 18, 2014). For more information see the “Effective/Applicability Dates” section of this preamble.
Michael Brewer at (202) 317-6700 (not a toll-free number).
Section 402(a) provides generally that any amount distributed from a trust described in section 401(a) that is exempt from tax under section 501(a) is taxable to the distributee under section 72 in the taxable year of the distributee in which distributed. Under section 403(b)(1), any amount distributed from a section 403(b) plan is also taxable to the distributee under section 72.
Section 402(c) prescribes rules for amounts that are rolled over from qualified trusts to eligible retirement plans, including individual retirement accounts or annuities (“IRAs”). Subject to certain exceptions, section 402(c)(1) provides that if any portion of an eligible rollover distribution paid to an employee from a qualified trust is transferred to an eligible retirement plan, the portion of the distribution so transferred is not includible in gross income in the taxable year in which paid.
Under section 402(c)(2), the maximum portion of an eligible rollover distribution that may be rolled over in a transfer to which section 402(c)(1) applies generally cannot exceed the portion of the distribution that is otherwise includible in gross income. However, under section 402(c)(2)(A) and (B), the general rule does not apply to such a distribution to the extent that such portion is transferred in a direct trustee-to-trustee transfer to a qualified trust or to an annuity contract described in section 403(b) and such trust or contract provides for separate accounting for amounts so transferred (and earnings thereon), including separately accounting for the portion of such distribution which is includible in gross income and the portion of such distribution which is not so includible, or such portion is transferred to an IRA.
In addition, section 402(c)(2) provides that, in the case of a transfer described in subparagraph (A) or (B), the amount transferred shall be treated as consisting first of the portion of such distribution that is includible in gross income (determined without regard to section 402(c)(1)).
Under section 402A, an applicable retirement plan may include a designated Roth account. An applicable retirement plan is defined in section 402A(e)(1) to mean a plan qualified under section 401(a), a section 403(b) plan, and a governmental section 457(b) plan. Section 402A(d) provides that a qualified distribution (as defined in section 402A(d)(2)) from a designated Roth account is not includible in gross income.
Under section 402A(d)(4), section 72 is applied separately with respect to distributions and payments from a designated Roth account and other distributions and payments from the plan.
Section 1.402A–1, Q&A–5(a), of the Income Tax Regulations prescribes taxability rules for a distribution from a designated Roth account that is rolled over. Q&A–5(a) provides, in part, that “any amount paid in a direct rollover is treated as a separate distribution from any amount paid directly to the employee” (the “separate distribution rule”).
Proposed regulations limiting the applicability of the separate distribution rule of § 1.402A–1, Q&A–5(a), were published on September 19, 2014 (REG–105739–11, 79 FR 56310). The proposed regulations achieved this result by adding, after the separate distribution rule in paragraph A–5(a), the following sentence: “The preceding sentence does not apply to distributions made on or after January 1, 2015; in addition, a taxpayer may elect not to apply the preceding sentence to distributions made on or after an earlier date that is no earlier than September 18, 2014.” Thus, under the proposed regulations, an amount paid in a direct rollover is not required to be treated as a separate distribution from any amount paid directly to the employee.
The proposed regulations were issued in conjunction with Notice 2014–54 (2014–41 IRB 670 (October 6, 2014)), which specified that a taxpayer may direct after-tax and pretax amounts that are simultaneously disbursed to multiple destinations so as to allocate them to specific destinations. Under Notice 2014–54, a taxpayer may direct the allocation of after-tax and pretax amounts in connection with disbursements that are directly rolled over, as well as in connection with disbursements that are rolled over in 60-day rollovers.
No comments were received regarding the proposed regulations.
These regulations finalize the proposed regulations, with a 1-year delay of the applicability date (from January 1, 2015, to January 1, 2016). They are substantively the same as the proposed regulations, but express the rule differently to better reflect the ongoing rule and the transition rule. For distributions made on or after January 1, 2016, the final regulations remove the sentence in the existing regulations that provided the separate distribution rule. For earlier distributions, the final regulations add a sentence at the end of the paragraph which provides that a separate distribution rule applies to distributions made prior to January 1, 2016, unless a taxpayer elects not to apply that rule with respect to a distribution made on or after September 18, 2014.
These regulations apply to distributions from designated Roth accounts made on or after January 1, 2016, and for such distributions taxpayers are required to follow the allocation rules described in Notice 2014–54.
These regulations also preserve the separate distribution rule for distributions made prior to the January 1, 2016, applicability date, except that a taxpayer is permitted to choose not to apply the separate distribution rule to distributions that are made on or after September 18, 2014, and before January 1, 2016. Taxpayers choosing not to apply the separate distribution rule to distributions made during that transition period, must apply a reasonable interpretation of the last sentence of section 402(c)(2) (generally requiring that pretax amounts be treated as rolled over first) to allocate pretax and after-tax amounts among disbursements made to multiple destinations. For this purpose, a reasonable interpretation of the last sentence of section 402(c)(2) includes the rules described in Notice 2014–54.
Notice 2014–54 is published in the Internal Revenue Bulletin and is available from the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402, or by visiting the IRS website at http://www.irs.gov.
Certain IRS regulations, including this one, are exempt from the requirements of Executive Order 12866, as supplemented and reaffirmed by Executive Order 13563. Therefore, a regulatory impact assessment is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because the regulation does not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply.
The principal author of these regulations is Michael Brewer, Office of the IRS Associate Chief Counsel (Tax Exempt and Government Entities). However, other personnel from the IRS and the Department of Treasury participated in the development of the regulations.
§ 1.402A–1 Designated Roth Accounts.
A–5. (a) * * * For distributions made prior to January 1, 2016, any amount paid in a direct rollover is treated as a separate distribution from any amount paid directly to the employee, except that taxpayers may choose not to apply this sentence to distributions made on or after September 18, 2014, and before January 1, 2016.
John M. Dalrymple Deputy Commissioner for Services and Enforcement.
This revenue ruling provides various prescribed rates for federal income tax purposes for June 2016 (the current month). Table 1 contains the short-term, mid-term, and long-term applicable federal rates (AFR) for the current month for purposes of section 1274(d) of the Internal Revenue Code. Table 2 contains the short-term, mid-term, and long-term adjusted applicable federal rates (adjusted AFR) for the current month for purposes of section 1288(b). Table 3 sets forth the adjusted federal long-term rate and the long-term tax-exempt rate described in section 382(f). Table 4 contains the appropriate percentages for determining the low-income housing credit described in section 42(b)(1) for buildings placed in service during the current month. However, under section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after July 30, 2008, shall not be less than 9%. Finally, Table 5 contains the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of section 7520.
Section 38 of the Internal Revenue Code (the Code) allows certain business credits against the tax imposed by Chapter 1 of the Code. Among the credits allowed by § 38 is the credit for renewable electricity production described in § 45(a). To qualify for the renewable electricity production tax credit, electricity must, among other things, be produced by the taxpayer at a qualified facility. Section 45(a)(2)(A). Section 45(d) defines qualified facilities for purposes of § 45.
Prior to the American Taxpayer Relief Act of 2012, Pub. L. No. 112–240, 126 Stat. 2313 (ATRA), § 45(d) required a facility to be placed in service before January 1, 2014, in order to be a qualified facility, except for qualified wind facilities which had to be placed in service before January 1, 2013. ATRA modified the definition of certain qualified facilities under § 45(d) by replacing the placed in service requirement with a beginning of construction requirement. ATRA provided that a taxpayer is eligible to receive the renewable electricity production tax credit (PTC) under § 45, or the energy investment tax credit (ITC) under § 48 in lieu of the PTC, with respect to certain renewable energy facilities if construction of such facility began before January 1, 2014. On December 19, 2014, the Tax Increase Prevention Act of 2014, Pub. L. No. 113–295, 128 Stat. 4021 (TIPA), extended by one year, to January 1, 2015, the date by which construction of a qualified facility must begin.
On December 18, 2015, the Protecting American from Tax Hikes Act of 2015, Pub. L. No. 114–113, Div. Q, 129 Stat. 2242 (the PATH Act), enacted amendments to the PTC and the ITC for certain renewable energy facilities. The PATH Act extended the PTC for two years with respect to certain facilities the construction of which begins before January 1, 2017, and further extended the PTC for wind facilities the construction of which begins before January 1, 2020. The PATH Act also modified the PTC for wind facilities by providing that the credit will phase out over the next four years. The PATH Act also extended the ITC for solar energy facilities the construction of which begins before January 1, 2022. The Treasury Department and the Internal Revenue Service (Service) anticipate issuing separate guidance addressing the extension of the ITC for solar energy facilities.
The Service will not issue private letter rulings to taxpayers regarding the application of this notice or the application of the beginning of construction requirement under §§ 45(d) and 48(a)(5) as provided in Notice 2013–29, 2013–1 C.B. 1085; Notice 2013–60, 2013–2 C.B. 431; Notice 2014–46, 2014–2 C.B. 520; and Notice 2015–25, 2015–13 I.R.B. 814 (collectively “the prior IRS notices”).
On May 13, 2013, the Treasury Department and the Service published Notice 2013–29, which provides two methods that a taxpayer may use to establish that construction of a qualified facility has begun. A taxpayer may establish the beginning of construction by beginning physical work of a significant nature as described in section 4 of Notice 2013–29 (Physical Work Test). Alternatively, a taxpayer may establish the beginning of construction by meeting the safe harbor provided in section 5 of Notice 2013–29 (Five Percent Safe Harbor). Both methods require that a taxpayer make continuous progress towards completion once construction has begun, as set forth in section 4.06 of Notice 2013–29 (Continuous Construction Test) for taxpayers using the Physical Work Test and section 5.02 of Notice 2013–29 (Continuous Efforts Test) for taxpayers using the Five Percent Safe Harbor (collectively, the Continuity Requirement).
On October 28, 2013, the Treasury Department and the Service published Notice 2013–60, which provides a safe harbor for satisfying the Continuity Requirement (the Continuity Safe Harbor). Under the Continuity Safe Harbor in section 3.02 of Notice 2013–60, if a facility was placed in service before January 1, 2016, the facility will be considered to satisfy the Continuity Requirement. Failure to satisfy the Continuity Safe Harbor does not mean that a facility has not satisfied the Continuity Requirement, however. If a facility was not placed in service before January 1, 2016, whether the facility satisfies the Continuity Requirement will be determined by the relevant facts and circumstances, as described in sections 4.06 and 5.02 of Notice 2013–29.
After the publication of Notice 2013–60, the Treasury Department and the Service received requests for further clarification regarding how to satisfy the Physical Work Test, as well as questions regarding the effect of various types of transfers with respect to a facility after construction has begun. On September 2, 2014, the Treasury Department and the Service published Notice 2014–46 to clarify the application of the Physical Work Test and the effect that certain transfers with respect to a facility after construction has begun will have on a taxpayer’s ability to qualify for the PTC or the ITC.
In response to a significant number of questions received after the extension of the PTC and the ITC by TIPA, on March 30, 2015, the Treasury Department and the Service published Notice 2015–25 to extend by one year the Continuity Safe Harbor provided in Notice 2013–60. Under the extended Continuity Safe Harbor in Notice 2015–25, if a taxpayer began construction on a facility prior to January 1, 2015, and places the facility in service before January 1, 2017, the facility will be considered to satisfy the Continuity Requirement, regardless of the amount of physical work performed or the amount of costs paid or incurred with respect to the facility after December 31, 2014, and before January 1, 2017.
Similarly, in response to a significant number of questions received after the extension of the PTC and the ITC by the PATH Act, this notice further extends and modifies the Continuity Safe Harbor and provides additional guidance regarding the application of the Continuity Safe Harbor and the Physical Work Test. This notice also clarifies the application of the Five Percent Safe Harbor to retrofitted renewable energy facilities. Except as otherwise specified in this notice, the guidance provided in the prior IRS notices continues to apply.
On December 18, 2015, the PATH Act extended the PTC for two years with respect to certain facilities the construction of which begins before January 1, 2017, and further extended the PTC for wind facilities the construction of which begins before January 1, 2020, with the PTC phasing out over the next four years. This notice modifies the Continuity Safe Harbor originally provided in section 3.02 of Notice 2013–60 and extended by section 3 of Notice 2015–25. Accordingly, if a taxpayer places a facility in service by the later of (1) a calendar year that is no more than four calendar years after the calendar year during which construction of the facility began or (2) December 31, 2016, the facility will be considered to satisfy the Continuity Safe Harbor. For example, if construction begins on a facility on January 15, 2016, and the facility is placed in service by December 31, 2020, the facility will be considered to satisfy the Continuity Safe Harbor.
.01 Combination of methods. A taxpayer may not rely upon the Physical Work Test and the Five Percent Safe Harbor in alternating calendar years to satisfy the beginning of construction requirement or the Continuity Requirement. For example, if a taxpayer performs physical work of a significant nature on a facility in 2015, and then pays or incurs five percent or more of the total cost of the facility in 2016, the Continuity Safe Harbor will be applied beginning in 2015, not in 2016.
.02 Disruptions to Continuous Construction or Continuous Efforts Tests.
(1) In general. Section 4.06(1) of Notice 2013–29 provides that whether a taxpayer satisfies the Continuity Requirement will be determined by the relevant facts and circumstances.
.01 In general. The Physical Work Test requires that a taxpayer begin physical work of a significant nature. As provided in section 3 of Notice 2014–46, this test focuses on the nature of the work performed, not the amount or the cost. Assuming the work performed is of a significant nature, there is no fixed minimum amount of work or monetary or percentage threshold required to satisfy the Physical Work Test.
.02 Examples. The following list of examples is intended to illustrate physical work of a significant nature for different types of renewable energy facilities and is non-exclusive.
(1) Wind facilities. On-site physical work of a significant nature may include the excavation for the foundation, the setting of anchor bolts into the ground, or the pouring of the concrete pads of the foundation.
(2) Hydropower facilities. On-site physical work of a significant nature may include the excavation for or construction of a penstock, power house, or retaining wall structure.
(3) Biomass and trash facilities. On-site physical work of a significant nature may include the performance of site improvements (as opposed to site clearing), such as filling or compacting soil, or installing stack piling.
(4) Geothermal facilities. On-site physical work of a significant nature may include physical activities that are undertaken at a project site after a valid discovery.
(13) removing existing turbines and towers, solar panels, or any components that will no longer be part of the facility.
(1) In general. As provided in section 4.04 of Notice 2013–29, a facility (within the meaning of § 45(d)) generally includes all components of property that are functionally interdependent. Components of property are functionally interdependent if the placing in service of each of the components is dependent upon the placing in service of each of the other components in order to generate electricity.
(2) Single project. Solely for purposes of determining whether construction of a facility has begun for purposes of §§ 45 and 48, multiple facilities that are operated as part of a single project (along with any property, such as a computer control system, that serves some or all such facilities) will be treated as a single facility. Whether multiple facilities are operated as part of a single project will depend on the relevant facts and circumstances. The single project rule may be applied to facilities that rely upon either the Physical Work Test or the Five Percent Safe Harbor to satisfy the Continuity Requirement.
(3) Timing of single project determination. The determination of whether multiple facilities are operated as part of a single project and are therefore treated as a single facility for beginning of construction purposes under section 5.04(2) must be determined in the calendar year during which the last of the multiple facilities is placed in service.
(4) Disaggregation. Multiple facilities that are operated as part of a single project and treated as a single facility under section 5.04(2) for purposes of determining whether construction of a facility has begun may be disaggregated and treated as multiple separate facilities for purposes of determining whether a facility satisfies the Continuity Safe Harbor. Those disaggregated facilities that are placed in service prior to the Continuity Safe Harbor deadline will be eligible for the Continuity Safe Harbor. The remaining disaggregated facilities may satisfy the Continuity Requirement under a facts and circumstances determination. The disaggregation rule may be applied to facilities that rely upon either the Physical Work Test or the Five Percent Safe Harbor to satisfy the Continuity Requirement.
(a) Example. X is developing a wind farm that will consist of 50 turbines, associated towers and supporting pads, a computer system that monitors and controls the turbines, and associated power conditioning equipment. The entire wind farm will be connected to the power grid through a single intertie, and power generated by the wind farm will be sold to a local utility through a single power purchase agreement. Using the single project rule in section 5.04(2), the entire wind farm is a single project that will be treated as a single facility. On June 1, 2018, X excavates the site for the foundations of 10 of the 50 turbines and pours concrete for the supporting pads. Accordingly, X has performed physical work of a significant nature that constitutes the beginning of construction of the single facility for purposes of §§ 45 and 48.
Thereafter, X places in service only 40 of the 50 turbines and related facilities before January 1, 2023. X disaggregates the 50 turbines under section 5.04(4). Forty of the 50 turbines satisfy the Continuity Safe Harbor. For the remaining 10 turbines, X may demonstrate that it satisfies the Continuous Construction Test described in section 4.06 of Notice 2013–29 based on the facts and circumstances.
.01 In general. A facility may qualify as originally placed in service even though it contains some used property, provided the fair market value of the used property is not more than 20 percent of the facility’s total value (the cost of the new property plus the value of the used property) (80/20 Rule). See Rev. Rul. 94–31, 1994–1 C.B. 16; Notice 2008–60, 2008–2 C.B. 178. In the case of a single project comprised of multiple facilities (as described in section 5.04(2)), the 80/20 Rule is applied to each individual facility comprising the single project.
.02 Application of beginning of construction to retrofitted facilities. To satisfy beginning of construction for §§ 45 and 48, the Five Percent Safe Harbor is applied only with respect to the cost of new property used to retrofit an existing facility. Therefore, only expenditures paid or incurred that relate to new construction should be taken into account for purposes of the Five Percent Safe Harbor.
(1) Example. Taxpayer owns an existing wind farm comprised of 13 turbines, pads, and towers for which the eligibility periods for the PTC or the ITC have elapsed. Each facility has a fair market value of $1 million. Taxpayer replaces components worth $900,000 at each of 11 of the facilities at a cost of $1.4 million for each facility. Two of the 13 facilities are not upgraded. The fair market value of the remaining original components at each of the upgraded facilities is $100,000. The total expenditures to retrofit the 11 facilities are $15.4 million ($1.4 million x 11). Taxpayer applies the single project rule provided in section 5.04(2).
The fair market value of the remaining original components of each individual upgraded facility ($100,000) is not more than 20% of each facility’s total value of $1.5 million (the cost of the new components ($1.4 million) + the value of the remaining original components ($100,000)). Thus, each upgraded facility will be considered newly placed in service for purposes of §§ 45 and 48. Accordingly, if the taxpayer pays or incurs at least $770,000 (5% of $15.4 million) of qualified expenditures in 2016, construction of the single facility will be considered to have begun in 2016, and if the taxpayer also satisfies the Continuous Efforts Test, each of the 11 upgraded facilities will be a qualified facility within the meaning of § 45(d). No additional PTC will be allowed with respect to energy produced by the taxpayer at the two facilities that were not upgraded. Nor will those two facilities qualify for additional ITC.
Notice 2013–29, Notice 2013–60, Notice 2014–46, and Notice 2015–25 are clarified and modified. The guidance provided in this notice is applicable to any project for which a taxpayer claims the PTC or the ITC under §§ 45 or 48, as modified by ATRA, that is placed in service after January 2, 2013.
The principal author of this notice is Jennifer C. Bernardini of the Office of Associate Chief Counsel (Passthroughs & Special Industries). For further information regarding this notice contact Ms. Bernardini on (202) 317-6853 (not a toll-free number).
 As a result, facilities the construction of which begins before January 1, 2017, are eligible to receive 100% of the PTC; facilities the construction of which begins after December 31, 2016, and before January 1, 2018, are eligible to receive 80% of the PTC; facilities the construction of which begins after December 31, 2017, and before January 1, 2019, are eligible to receive 60% of the PTC; and facilities the construction of which begins after December 31, 2018, and before January 1, 2020, are eligible to receive 40% of the PTC.

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