Internal Revenue Bulletin 2016-31 (PDF rendition): IRS Announcements

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.

# INTERNAL REVENUE BULLETIN

IRS

Bulletin No. 2016-31
August 1, 2016

## HIGHLIGHTS OF THIS ISSUE

These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.

## INCOME TAX

### REG-134016-15, page 205.

Proposed regulations under section 355 of the Internal Reve-
nue Code would clarify the application of the device prohibition
and the active business requirement of section 355. The pro-
posed regulations would affect corporations that distribute the
stock of controlled corporations, their shareholders, and their
security holders.

### Rev. Rul. 2016-18, page 194.

Federal rates; adjusted federal rates; adjusted federal long-
term rate and the long-term exempt rate. For purposes of
sections 382, 642, 1274, 1288, 7872, and other sections of
the Code, tables set forth the rates for August 2016.

## EMPLOYEE PLANS

### Notice 2016-46, page 202.

This notice sets forth updates on the corporate bond monthly
yield curve, the corresponding spot segment rates for July
2016 used under § 417(e)(3)(D), the 24-month average seg-
ment rates applicable for May 2016, and the 30-year Treasury
rates. These rates reflect the application of § 430(h)(2)(C)(iv),
which was added by the Moving Ahead for Progress in the 21st
Century Act, Public Law 112-141 (MAP-21) and amended by
section 2003 of the Highway and Transportation Funding Act of
2014 (HATFA).

## ADMINISTRATIVE

### Announcement 2016-25, page 205.

This Announcement informs area residents affected by the
Southern California Gas Company's natural gas leak at Aliso

Finding Lists begin on page ii.

Canyon that the IRS will not assert that amounts paid either on
behalf of or to the residents pursuant to the relocation plan are
includible in gross income.

### T.D. 9778, page 196.

Final regulations under section 7602 that clarify that persons
with whom the IRS contracts for services described in section
6103(n) may be included as persons to receive summoned
records and, in the presence and under the guidance of an IRS
employee, participate fully in the interview of a summoned
witness.

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## The IRS Mission

Provide America's taxpayers top-quality service by helping
them understand and meet their tax responsibilities and en-
force the law with integrity and fairness to all.

## Introduction

The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly.

It is the policy of the Service to publish in the Bulletin all
substantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless other-
wise indicated. Procedures relating solely to matters of internal
management are not published; however, statements of inter-
nal practices and procedures that affect the rights and duties
of taxpayers are published.

Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the
revenue ruling. In those based on positions taken in rulings to
taxpayers or technical advice to Service field offices, identify-
ing details and information of a confidential nature are deleted
to prevent unwarranted invasions of privacy and to comply with
statutory requirements.

Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

### Part I .- 1986 Code.

This part includes rulings and decisions based on provisions of
the Internal Revenue Code of 1986.

### Part II .- Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A, Tax
Conventions and Other Related Items, and Subpart B, Legisla-
tion and Related Committee Reports.

Part III .- Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury's Office of the Assistant Sec-
retary (Enforcement).

### Part IV .- Items of General Interest.

This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative index for
the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

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# Actions Relating to Decisions of the Tax Court

It is the policy of the Internal Revenue
Service to announce at an early date
whether it will follow the holdings in cer-
tain cases. An Action on Decision is the
document making such an announcement.
An Action on Decision will be issued at
the discretion of the Service only on un-
appealed issues decided adverse to the
government. Generally, an Action on De-
cision is issued where its guidance would
be helpful to Service personnel working
with the same or similar issues. Unlike a
Treasury Regulation or a Revenue Ruling,
an Action on Decision is not an affirma-
tive statement of Service position. It is not
intended to serve as public guidance and
may not be cited as precedent. Actions on
Decisions shall be relied upon within the
Service only as conclusions applying the
law to the facts in the particular case at the
time the Action on Decision was issued.
Caution should be exercised in extending
the recommendation of the Action on De-

cision to similar cases where the facts are
different. Moreover, the recommendation
in the Action on Decision may be super-
seded by new legislation, regulations, rul-
ings, cases, or Actions on Decisions. Prior
to 1991, the Service published acquies-
cence or nonacquiescence only in certain
regular Tax Court opinions. The Service
has expanded its acquiescence program to
include other civil tax cases where guid-
ance is determined to be helpful. Accord-
ingly, the Service now may acquiesce or
nonacquiesce in the holdings of memoran-
dum Tax Court opinions, as well as those
of the United States District Courts,
Claims Court, and Circuit Courts of Ap-
peal. Regardless of the court deciding the
case, the recommendation of any Action
on Decision will be published in the In-
ternal Revenue Bulletin. The recommen-
dation in every Action on Decision will be
summarized as acquiescence, acquies-
cence in result only, or nonacquiescence.
Both "acquiescence" and "acquiescence
in result only" mean that the Service ac-
cepts the holding of the court in a case and
that the Service will follow it in disposing

of cases with the same controlling facts.
However, "acquiescence" indicates nei-
ther approval nor disapproval of the rea-
sons assigned by the court for its conclu-
sions; whereas, "acquiescence in result
only" indicates disagreement or concern
with some or all of those reasons. "Non-
acquiescence" signifies that, although no
further review was sought, the Service
does not agree with the holding of the
court and, generally, will not follow the
decision in disposing of cases involving
other taxpayers. In reference to an opinion
of a circuit court of appeals, a "nonacqui-
escence" indicates that the Service will
not follow the holding on a nationwide
basis. However, the Service will recog-
nize the precedential impact of the opin-
ion on cases arising within the venue of
the deciding circuit.

The Commissioner DOES ACQUIESCE
in the following decision:

Voss v. Commissioner2

796 F.3d 1051 (9th Cir. 2015), rev'g
Sophy v. Commissioner, 138 T.C. 204
(2012).

2 Acquiescence relating to the holding that the section 163(h)(3) limitations apply on a per taxpayer basis, allowing each taxpayer to deduct interest on mortgage indebtedness of up to $1.1
million.

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## Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

Section 1274-
Determination of Issue
Price in the Case of
Certain Debt Instruments
Issued for Property

(Also Sections 42, 280G, 382, 412, 467, 468, 482,
483, 642, 807, 846, 1288, 7520, 7872.)

### Rev. Rul. 2016-18

This revenue ruling provides various
prescribed rates for federal income tax

purposes for August 2016 (the current
month). Table 1 contains the short-term,
mid-term, and long-term applicable fed-
eral 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 sec-
tion 1288(b). Table 3 sets forth the ad-
justed 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 sec-
tion 42(b)(1) for buildings placed in ser-
vice during the current month. However,
under section 42(b)(2), the applicable per-
centage 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 de-
termining 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.

REV. RUL. 2016-18 TABLE 1 Applicable Federal Rates (AFR) for August 2016 Period for Compounding

Annual

Semiannual Short-term

Quarterly

Monthly

AFR

.56%

.56%

.56%

.56%

110% AFR

.62%

.62%

.62%

.62%

120% AFR

.67%

.67%

.67%

.67%

130% AFR

.73%

.73%

.73%

.73%

Mid-term

AFR

1.18%

1.18%

1.18%

1.18%

110% AFR

1.30%

1.30%

1.30%

1.30%

120% AFR

1.43%

1.42%

1.42%

1.42%

130% AFR

1.54%

1.53%

1.53%

1.53%

150% AFR

1.78%

1.77%

1.77%

1.76%

175% AFR

2.08%

2.07%

2.06%

2.06%

Long-term

AFR

1.90%

1.89%

1.89%

1.88%

110% AFR

2.09%

2.08%

2.07%

2.07%

120% AFR

2.28%

2.27%

2.26%

2.26%

130% AFR

2.48%

2.46%

2.45%

2.45%

REV. RUL. 2016-18 TABLE 2 Adjusted AFR for August 2016 Period for Compounding

Annual

Semiannual

Quarterly

Monthly

Short-term adjusted AFR

.56%

.56%

.56%

.56%

Mid-term adjusted AFR

1.03%

1.03%

1.03%

1.03%

Long-term adjusted AFR

1.82%

1.81%

1.81%

1.80%

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# REV. RUL. 2016-18 TABLE 3 Rates Under Section 382 for August 2016

## Adjusted federal long-term rate for the current month

1.82%

Long-term tax-exempt rate for ownership changes during the current month (the highest of the
adjusted federal long-term rates for the current month and the prior two months.)

2.15%

# REV. RUL. 2016-18 TABLE 4 Appropriate Percentages Under Section 42(b)(1) for August 2016

Note: 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%.

Appropriate percentage for the 70% present value low-income housing credit
7.35%

Appropriate percentage for the 30% present value low-income housing credit

3.15%

# REV. RUL. 2016-18 TABLE 5 Rate Under Section 7520 for August 2016

Applicable federal rate for determining the present value of an annuity, an interest for life or a
term of years, or a remainder or reversionary interest

1.4%

## Section 42 .- Low-Income Housing Credit

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of August 2016. See Rev. Rul. 2016-18, page 194.

## Section 280G .- Golden Parachute Payments

Federal short-term, mid-term, and long-term
rates are set forth for the month of August 2016. See
Rev. Rul. 2016-18, page 194.

## Section 382 .- Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change

The adjusted applicable federal long-term rate is
set forth for the month of August 2016. See Rev.
Rul. 2016-18, page 194.

# Section 412 .- Minimum Funding Standards

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of August 2016. See Rev. Rul. 2016-18, page 194.

# Section 467 .- Certain Payments for the Use of Property or Services

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of August 2016. See Rev. Rul. 2016-18, page 194.

## Section 468 .- Special Rules for Mining and Solid Waste Reclamation and Closing Costs

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of August 2016. See Rev. Rul. 2016-18, page 194.

# Section 482 .- Allocation of Income and Deductions Among Taxpayers

Federal short-term, mid-term, and long-term
rates are set forth for the month of August 2016. See
Rev. Rul. 2016-18, page 194.

# Section 483 .- Interest on Certain Deferred Payments

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of August 2016. See Rev. Rul. 2016-18, page 194.

# Section 642 .- Special Rules for Credits and Deductions

Federal short-term, mid-term, and long-term
rates are set forth for the month of August 2016. See
Rev. Rul. 2016-18, page 194.

# Section 807 .- Rules for Certain Reserves

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of August 2016. See Rev. Rul. 2016-18, page 194.

# Section 846 .- Discounted Unpaid Losses Defined

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of August 2016. See Rev. Rul. 2016-18, page 194.

# Section 1288 .- Treatment of Original Issue Discount on Tax-Exempt Obligations

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of August 2016. See Rev. Rul. 2016-18, page 194.

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# Section 7520 .- Valuation Tables

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of August 2016. See Rev. Rul. 2016-18, page 194.

# Section 7872 .- Treatment of Loans With Below- Market Interest Rates

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of August 2016. See Rev. Rul. 2016-18, page 194.

26 CFR 301.7602-1 is amended to add new para-
graph (b)(3) pertaining to summons interviews

## T.D. 9778 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 301

## Participation of a Person Described in Section 6103(n) in a Summons Interview Under Section 7602(a)(2) of the Internal Revenue Code

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Final regulations and removal
of temporary regulations.

SUMMARY: This document contains final
regulations modifying regulations under
section 7602(a) of the Internal Revenue
Code relating to administrative summonses.
Specifically, these final regulations clarify
that persons with whom the IRS or the Of-
fice of Chief Counsel (Chief Counsel) con-
tracts for services described in section
6103(n) and its implementing regulations
may be included as persons designated to
receive summoned books, papers, records,
or other data and, in the presence and under
the guidance of an IRS officer or employee,
participate fully in the interview of a witness
summoned by the IRS to provide testimony
under oath. These regulations may affect
taxpayers, a taxpayer's officers or employ-
ees, and any third party who is served with
a summons, as well as any other person
entitled to notice of a summons.

DATES: Effective Date: These regula-
tions are effective on July 14, 2016.

Applicability Date: For date of appli-
cability, see § 301.7602-1(d).

FOR FURTHER INFORMATION
CONTACT: William V. Spatz at (202)
317-5461 (not a toll-free number).

SUPPLEMENTARY INFORMATION:
Background

These final regulations amend Proce-
dure and Administration Regulations (26
CFR part 301) under section 7602 of the
Internal Revenue Code. These final regu-
lations clarify that persons described in
section 6103(n) and Treas. Reg.
§ 301.6103(n)-1(a) with whom the IRS or
Chief Counsel contracts for services -
such as outside economists, engineers,
consultants, or attorneys - may receive
books, papers, records, or other data sum-
moned by the IRS and, in the presence and
under the guidance of an IRS officer or
employee, participate fully in the inter-
view of a person who the IRS has sum-
moned as a witness to provide testimony
under oath. On June 18, 2014, temporary
regulations (TD 9669) regarding partici-
pation in a summons interview of a person
described in section 6103(n) were pub-
lished in the Federal Register (79 FR
34625). A notice of proposed rulemaking
(REG-121542-14) cross-referencing the
temporary regulations was published in
the Federal Register (79 FR 34668) the
same day.

No public hearing was requested or
held. The Internal Revenue Service re-
ceived two comments to the proposed reg-
ulations. One comment recommends that
the regulations be revised to remove the
provision permitting a contractor to ques-
tion a witness under oath or to ask a
witness's representative to clarify an ob-
jection or assertion of privilege. The other
comment recommends that the proposed
and temporary regulations be withdrawn.
After consideration of both comments, the
sole amendment to the proposed regula-
tions is to replace the word "examine"
with "review" in the phrase describing
what contractors may do with books, pa-
pers, records, or other data received by the
IRS under a summons. This revision clar-
ifies that the regulations do not permit
contractors to direct examinations (that is,

audits) of a taxpayer's return. Accord-
ingly, the proposed regulations are ad-
opted as amended by this Treasury deci-
sion, and the corresponding temporary
regulations are removed.

### Explanation and Summary of Comments

#### l. Potential for IRS Loss of Control Over Interview

One comment raises concerns about
how the regulations would operate in
practice. This comment states that turning
the questioning of a witness over to a
third-party contractor may cause the IRS
officer or employee in charge of the inter-
view to lose control of the interview. The
comment further states that having multi-
ple persons "on the record" - an IRS
officer or employee, a contractor, a wit-
ness, and a representative of the witness -
may lead to a cluttered, incomprehensible
transcript of the interview. To address
these concerns, the comment suggests that
instead of having the contractor question
the witness directly, the IRS officer or
employee should announce to the court
reporter that he or she needs a moment to
confer with the contractor, and after con-
sultation ask to go back on the record to
resume questioning.

These concerns are unfounded. When
the IRS hires a contractor to assist the IRS
in reviewing books and records, analyzing
data, or receiving sworn testimony from a
summoned witness, the IRS determines
what information will be requested via a
summons and who the summons will re-
quest to testify. An IRS officer or em-
ployee is present during the interview and
remains in charge of the interview. A con-
tractor asking questions does not present
any additional difficulties for the IRS of-
ficer or employee in retaining control of
that interview. Rather, the IRS officer or
employee in charge of the interview may
be in a better position to maintain control
of the overall interview if someone else is
asking the questions. The IRS officer or
employee always has the ability to ask the
court reporter to go off the record to con-
fer with the contractor, if necessary.

Further, since 2002, § 301.7602-
1(b)(1) has provided that a summoned
witness may be required to appear before
"one or more" IRS officers or employees

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to give testimony, including Chief Coun-
sel attorneys. During this time, the IRS
experience with multiple persons asking
questions of summoned persons has not
resulted in cluttered interview transcripts
as compared to those transcripts in which
only one person from the IRS asks a wit-
ness questions. Instead, the IRS has gen-
erally found that allowing multiple IRS
persons to question a summoned witness
results in more thorough and complete
coverage of the appropriate interview top-
ics. This is particularly true when a person
asking questions for the IRS has the
chance to focus questions on particular
subject areas with which the questioner is
most familiar. Furthermore, the IRS has
found that significant value is also added
when multiple persons have the opportu-
nity to ask questions to address gaps in
prior questioning or clarify answers by a
witness.

Accordingly, for the reasons discussed
above, the proposed regulations have not
been amended as suggested by this com-
ment.

#### 2. Statutory Authority for an Outside Contractor to Question a Summoned Witness

Both comments state section 7602 does
not authorize a contractor to question a
witness during an IRS summons inter-
view. Specifically, the comments state
that the regulations improperly delegate to
the contractor the Secretary's authority
under section 7602(a)(3) to take testimony
under oath. According to one of the com-
ments, because section 7701(a)(11)(B) de-
fines the term "Secretary" to include a
delegate, and section 7701(a)(12)(A) de-
fines a "delegate" of the Secretary, in part,
as a duly authorized "officer, employee or
agency of the Treasury Department," the
regulations improperly attempt to treat a
"third party agent" (a contractor under
section 6103(n)) as an "agency of the
Treasury Department." The other com-
ment adds that this type of treatment of a
contractor would be unprecedented under
various IRS Delegation Orders and Inter-
nal Revenue Manual provisions and that a
statutory authorization is required for
"such delegation." Both comments state
that section 6306, regarding the IRS's use
of private collection agencies to perform

certain tax collection functions, was an
example of such authorization by statute.

Further, both comments question
whether under the regulations inherently
governmental functions will continue to
be performed by IRS officers or employ-
ees, and state that reference to this in the
preamble to the temporary regulations
was included to allay potential concerns
about improper delegation. The comment
also asserts that taking testimony by ask-
ing questions, reviewing books or papers,
and analyzing other data, as allowed by
the regulations, is inherently governmen-
tal. In support of this, the comment states
that when contractors ask questions that
taxpayers are compelled to answer under
oath, the contractor is deciding what in-
formation must be produced by the tax-
payer. The comment asserts that it is clear
that questioning a witness under oath and
with compulsion, or directing counsel for
a witness to clarify an objection or asser-
tion of privilege, in an extra-judicial gov-
ernmental investigation such as an IRS
audit is inherently governmental. This
comment states that the fact that a con-
tractor's participation in a summons inter-
view will only be done in the presence and
under the guidance of an IRS officer or
employee suggests that participation in a
summons interview is inherently govern-
mental.

These comments state further that the
reference to § 301.7602-2(c)(1)(i)(B) and
(c)(1)(ii) Example 2 in the preamble to the
temporary regulations means that the reg-
ulations are delegating authority under
section 7602(a) to the contractor.

The IRS has broad information gather-
ing authority under section 7602(a). See
United States v. Arthur Young & Co., 465
U.S. 805, 816 (1984). Section 7602(a)
provides that, for the purpose of ascertain-
ing the correctness of any return, making
a return where none has been made, or
determining the liability of any person for
any internal revenue tax, the Secretary
(and the IRS as the Secretary's delegate)
is authorized to examine books and re-
cords, issue summonses seeking docu-
ments and testimony, and take testimony
from witnesses under oath. When a con-
tractor assists the IRS in gathering facts
by reviewing books and records or asking
questions of a witness during a summons
interview, the contractor is merely assist-

ing in carrying out the powers granted to
the Secretary. Nothing in section 7602(a)
prohibits participation by a contractor in a
summons interview, nor does it prescribe
procedures that the IRS must follow dur-
ing the summons interview.

Moreover, nothing in these regulations
delegates authority under section 7602(a).
The IRS's authority to engage contractors
to assist with fact gathering has always
existed under section 7602, and the com-
ments acknowledge this authority. For in-
stance, the comment addressing the im-
pact of multiple questioners on the clarity
of the transcribed record of the summons
interview suggests as an alternative that
the contractor provide the IRS with the
questions to ask. Given that the commen-
tators acknowledge that the IRS is autho-
rized to have a contractor communicate
the question off the record to the IRS, it
seems implausible that having the con-
tractor actually ask the question on the
record, in the presence of and under the
supervision of the IRS, is substantively
different.

Section 6306, dealing with qualified
tax collection contracts, does not support
the contention in the comments that con-
gressional action is required to engage a
contractor to perform services for the IRS.
Long before section 6306 was added to
the Code in 2004, the IRS collection func-
tion had contracted with private persons
(for example, locksmiths, tow truck driv-
ers, storage facilities, property appraisers
and auctioneers) for tax administration
purposes to facilitate IRS seizures of
property by levy and IRS sales of such
property, pursuant to the statutory powers
conferred on the Secretary by sections
6301, 6331, and 6335. In fiscal years 1996
and 1997, without making any modifica-
tions to the Code, Congress earmarked $13
million for the IRS to test the use of private
debt collection companies. In 2004, rather
than say it was authorizing the IRS to enter
into collection agreements with outside con-
tractors to assist the IRS in collecting tax
debts, Congress instead said in section
6306(a) that "[n]othing in any provision of
law shall be construed to prevent the Secre-
tary from entering into a qualified tax col-
lection contract." Therefore, section 6306
was a congressional clarification of the
IRS's existing authority to engage outside
contractors to assist with collection. Accord-

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ingly, contrary to the comments' assertions,
no explicit congressional authorization was
needed to permit the IRS to hire outside
contractors to assist in the collection of
taxes, a role outside contractors had been
playing for years prior to enactment of sec-
tion 6306. As a result, enactment of section
6306 does not support the contention in the
comments that having a contractor ask ques-
tions during a summons interview is incon-
sistent with authority under section 7602.

The comments are also incorrect that
the regulations include an improper dele-
gation to perform certain examination
functions. One comment assumes that the
role of questioner must be accompanied
by the power to compel the witness to
answer under oath. That is not accurate.
While the contractor will ask questions
during a summons interview, an IRS offi-
cer or employee will determine whether
the questions must be answered by pursu-
ing judicial enforcement. Only if an IRS
officer or employee pursues the matter by
seeking judicial enforcement can a wit-
ness be compelled to answer the question
asked by the contractor. Similarly, a con-
tractor can ask counsel for a witness to
clarify an objection or assertion of privi-
lege, but only an IRS officer or employee
can pursue resolution of the claim of priv-
ilege by seeking judicial enforcement.
Accordingly, the comment incorrectly
equates the act of compelling a witness to
answer a question asked with the mere act
of asking the question. Further, the Fed-
eral Activities Inventory Reform Act of
1998, Public Law 105-270 (31 U.S.C.
501 Note (FAIR Act)), defines "inherently
governmental function" as "a function
that is so intimately related to the public
interest as to require performance by Fed-
eral Government employees." FAIR Act
section 5(2)(A). Inherently governmental
functions include activities that require
"the exercise of discretion in applying
Federal Government authority," including
"the interpretation and execution of the
laws of the United States so as . . . to bind
the United States to take or not to take
some action." Id. at section 5(2)(B)(i).
However, Congress further specified in
FAIR Act section 5(2)(C)(i) that an inher-
ently governmental function does not nor-
mally include "gathering information for
or providing advice, opinions, recommen-

dations, or ideas to Federal Government
officials."

In 2009, Congress further directed the
Office of Management and Budget
(OMB) to refine the definition of "inher-
ently governmental function" applicable
to all agencies and provide guidance to
improve internal agency management of
functions that are inherently governmen-
tal. Public Law. 110-417, section 321.
Toward these ends, and after notice and
comment, OMB's Office of Federal Pro-
curement Policy (OFPP) issued its Policy
Letter 11-01 on September 12, 2011. 76
FR 56227. The Policy Letter clarified the
"discretion" that a contractor may appro-
priately exercise as the circumstances
"where the contractor does not have the
authority to decide on the overall course
of action, but is tasked to develop options
or implement a course of action, and the
agency official has the ability to override
the contractor's action." Id., at section
5-1(a)(1)(ii)(B), 76 FR at 56237. The Pol-
icy Letter further explains that "contrac-
tors routinely, and properly, exercise dis-
cretion in performing functions for the
Federal Government when, providing ad-
vice, opinions, or recommended actions,
emphasizing certain conclusions, and . . .
deciding what techniques and procedures
to employ, whether and whom to consult,
[and] what research alternatives to explore
given the scope of the contract." Id., 76
FR at 56237-38. The Policy Letter recog-
nizes that in addition to functions that are
inherently governmental, there are also
many functions closely associated with
inherently governmental functions. The
Policy Letter cautions that when a contrac-
tor function is closely associated with an
inherently governmental one, the agency
should "limit or guide the contractor's exer-
cise of discretion," by "establishing in ad-
vance a process for subjecting the contrac-
tor's discretionary decisions and conduct to
meaningful oversight and, whenever neces-
sary, final approval by an agency official."
Id., at section 5-2(a)(4)(ii) and Appendix C,
section(1)(ii), 76 FR at 56238-39 and
56241-42.

Accordingly, the preamble to the tem-
porary regulations described the inher-
ently governmental functions associated
with section 7602(a) as including the ul-
timate decisions to issue a summons,
whom to summon, what information must

be produced or who will be required to
provide testimony, as well as issuing the
summons. The final decision to issue an
IRS summons may "bind the United
States to take or not take some action,"
within the meaning of the FAIR Act sec-
tion 5(2)(B)(i). For example, serving an
IRS summons pursuant to sections
7609(f) and (g) requires prior court ap-
proval, and IRS summonses issued for an
examination purpose to third parties gen-
erally expose the United States to a court
action the taxpayer may commence to
quash a summons under section
7609(b)(2) or obligate the IRS to pay cer-
tain search and reproduction costs in-
curred by the summoned witness under
section 7610. The final decision to include
or not include certain document or testi-
mony requests in an IRS summons also
limits going forward what information or
documents the IRS may ask a court to
require a witness to produce in any future
summons enforcement proceeding regard-
ing that summons. The final decision to
seek judicial enforcement of an IRS sum-
mons pursuant to sections 7402(b) and
7604 is also an inherently governmental
function. These inherently governmental
actions associated with issuing or seeking
to enforce an IRS summons will continue
to be performed by IRS officers and em-
ployees under these regulations.

As discussed above, pursuant to these
regulations, contractors may assist IRS of-
ficers and employees when the IRS has
summoned a witness, by receiving and
reviewing books, papers, records, or other
data produced in compliance with a sum-
mons and, in the presence and under the
guidance of an IRS officer or employee,
ask questions in the interview of the sum-
moned witness. The contractor's assis-
tance to the IRS officer or employee pre-
siding over a summons interview is
closely associated with the inherently
governmental summons functions per-
formed by an IRS employee, within the
meaning of OFPP Policy Letter 11-01,
without crossing the line into the perfor-
mance of inherently governmental func-
tions. A contractor participating fully in a
summons interview will not, for example,
be permitted to bind or otherwise disad-
vantage the IRS by making any unauthor-
ized, premature statements that the sum-
moned party has produced all of the

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summoned information or has fully an-
swered all of the questions asked by the
IRS in the interview. Similarly, the con-
tractor has no authority to commit the IRS
to pursue judicial enforcement of a sum-
mons for any documents or answers to
questions that a witness failed to provide.

The contractor's "discretion" in pursu-
ing any potentially relevant line of ques-
tioning in a summons interview is permis-
sible under Policy Letter 11-01 standards
because the contractor will not have the
authority to decide on the overall course
of action adopted by the IRS with respect
to the summons interview. The IRS officer
or employee presiding over IRS receipt of
documents and evidence from the sum-
moned witness will also be present for any
questioning pursued by the contractor and
will have the ability to override the con-
tractor's actions, if necessary and appro-
priate. Rather than proving that a contrac-
tor would be performing an inherently
governmental function under these regu-
lations, the additional safeguards the com-
ment points to - that a contractor's partic-
ipation in a summons interview will only
be done in the presence and under the
guidance of an IRS officer or employee -
show the IRS heeded the instructions of
Policy Letter 11-01 to establish a process
for subjecting the contractor's discretion-
ary decisions and conduct under these reg-
ulations to meaningful IRS oversight.

The comments incorrectly interpret
the purpose of the reference in the pre-
amble of the temporary regulations to
§ 301.7602-2(c)(1)(i)(B) and (c)(1)(ii)
Example 2. The purpose of referencing
that regulation, which implements the
provisions of section 7602(c) (requiring
notice of third party contacts) in the case
of a section 6103(n) contractor, was in-
stead intended to highlight the fact that
the IRS had been allowing contractors,
under the guidance of an IRS officer or
employee, to hold discussions and ask
questions of witnesses for many years
and that the proposed regulations were
in the nature of a clarification. The pur-
pose was not to demonstrate that the IRS
is delegating authority to contractors as
the comments incorrectly state.

Therefore, for the reasons above, Trea-
sury and the IRS disagree with the com-
ments' assertion that the regulations im-
properly delegate authority under section

7602\. The statute permits section 6103(n)
contractors to receive books, papers, re-
cords, or other data summoned by the IRS
and, in the presence and under the guid-
ance of an IRS officer or employee, par-
ticipate fully in the interview of a person
who the IRS has summoned as a witness
to provide testimony under oath.

##### 3. Confidential Taxpayer Information Provided to a Contractor

One of the comments suggests that the
proposed regulations raise issues relating
to confidentiality of taxpayer information.
First, the comment states that the regula-
tions place confidential taxpayer informa-
tion unnecessarily at risk of unauthorized
disclosure under section 6103. According
to the comment, this is because placing
taxpayer information in the hands of out-
side contractors under section 6103(n) in-
creases the risk of misuse and unlawful
disclosure because outside contractors are
not subject to the same rules of conduct as
IRS employees and may have loyalties to
other clients besides the IRS and the pub-
lic fisc.

Next, the comment questions whether
the disclosure of confidential information
to outside counsel is permitted under sec-
tion 6103(n). The comment explains that
in 1990 the phrase "other services" was
added to section 6103(n) to cover outside
experts, in part, because these experts are
objective and the IRS is not. The comment
continues that outside counsel, as an ad-
vocate, is not objective and, therefore, is
not covered by the phrase "other services"
in section 6103(n).

Finally, the comment states that the
IRS has failed to demonstrate that govern-
ment employees cannot effectively and
more appropriately perform the function
contemplated by the temporary regula-
tions.

These comments do not address the
clarification made by the proposed and
temporary regulations (that is, that section
6103(n) contractors may be present at
summons interviews, ask questions at a
summons interview, and review sum-
moned books, papers, records, or other
data). Further, the comments do not ex-
plain why the proposed regulations place
confidential taxpayer information at risk
of unauthorized disclosure at all. Rather,

these comments address disclosure to ex-
perts under section 6103(n), which is not
the subject of these regulations. There-
fore, the comments do not address issues
under the regulations.

Regardless of the relevance of the com-
ments to these regulations, the IRS takes
protection of the confidentiality of tax-
payer information seriously and will not
disclose taxpayer information unless au-
thorized under the law. "Return informa-
tion" and "taxpayer return information"
are in general broadly defined in sections
6103(b)(2) and (b)(3), as including infor-
mation concerning a taxpayer's identity,
the nature, source or amount of his in-
come, payments, receipts, deductions, ex-
emptions, credits, assets, liabilities, net
worth, tax liabilities, tax withheld, owed,
or paid, whether the taxpayer is being or
will be examined or investigated, to the
extent such information is filed with or
furnished to the IRS by or on behalf of the
taxpayer to whom such information re-
lates.

Section 6103(n) authorizes the IRS to
disclose confidential taxpayer information
to persons who provide services to the
IRS, including outside experts. The legis-
lative history of section 6103(n) indicates
that Congress added the words "other ser-
vices" in 1990 to ensure that persons who
provide services to the IRS, such as expert
witnesses, and to whom the IRS discloses
returns and return information pursuant to
section 6103, would clearly be subject to
the same confidentiality standards and
penalties for unauthorized disclosure as
are IRS employees.

In sections 7431, 7213, and 7213A,
Congress created parallel civil and crimi-
nal deterrents for outside contractors (to
those applicable to IRS employees) to
punish any misuse of taxpayer return in-
formation through unlawful inspection or
unlawful disclosure of such information.
Specifically, section 7431(a)(2) authorizes
taxpayers to file the same type of civil
action for damages against an IRS con-
tractor for knowingly, or by reason of
negligence, making any unauthorized in-
spection or unauthorized disclosure of
taxpayer return information, as may be
filed against the United States for the
same type of conduct committed by any
officer or employee of the United States.
Similarly, in sections 7213(a)(1) and

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7213A(a)(1)(B) (by references to persons
described in section 6103(n)), Congress
made it a crime punishable by up to five
years or up to one year of imprisonment,
plus a fine, for an IRS contractor to will-
fully make an unauthorized disclosure or
an unauthorized inspection of taxpayer re-
turn information, respectively. If an IRS
officer or employee is convicted under sec-
tions 7213 or 7213A, such person will also
be dismissed or discharged from Federal
employment. Before any conviction, if the
IRS determines that a contractor has vio-
lated its taxpayer return information disclo-
sure obligations under its contract, the IRS
may also suspend or terminate the contract,
pursuant to § 301.6103(n)-1(e)(4)(iii).
Moreover, § 301.6103(n)-1(e)(4) provides
further safeguards against unlawful disclo-
sures or inspections of taxpayer return infor-
mation by contractors.

Finally, it is unclear what connection
the comment is making between protect-
ing confidentiality of taxpayer informa-
tion and objectivity of the section 6103(n)
contractor. First, there is no obligation
under section 6103(n) or the regulations
thereunder for a contractor under section
6103(n) to be objective. Second, whether
a contractor is objective has no relation to
whether the contractor has an obligation
to protect confidential taxpayer informa-
tion from disclosure or the contractor's
ability to do so.

For these reasons, the Treasury and the
IRS disagree that the regulations place
confidential taxpayer information unnec-
essarily at risk of unauthorized disclosure.

##### 4. Potential Litigation Costs to Enforce the Regulation

One comment states that including a
provision to allow an IRS contractor in a
summons interview to question a witness
under oath in the final regulations would
result in time-consuming and costly liti-
gation for the IRS, taxpayers, third party
witnesses, and the courts, and that these
costs would outweigh the potential bene-
fits to the IRS from a contractor directly
questioning a summoned witness under
oath. The comment does not indicate how
it came to this conclusion, nor does it
provide any support for its concern.

The IRS makes the decision of whether
to issue a summons or to pursue summons

enforcement actions on a case-by-case ba-
sis, analyzing each situation in the light of
its particular facts and weighing the de-
sired information against the tax liability
involved, the time and expense of obtain-
ing the records, and the adverse effect on
voluntary compliance by others if the en-
forcement actions are not successful. A
contractor's participation in a summons
interview does not factor into the IRS's
decision to request the Department of Jus-
tice to institute enforcement action or lead
the taxpayer ultimately to file a deficiency
action in the United States Tax Court or a
refund claim in a United States District
Court or the Court of Federal Claims. As
a practical matter, the IRS will likely hire
contractors to assist in the factual devel-
opment of an examination only in signif-
icant cases. These are cases in which liti-
gation over summons enforcement is
already likely to occur if the IRS exami-
nation team faces resistance from taxpay-
ers to providing requested information.
Accordingly, there should not be consid-
erably more litigation as a result of these
final regulations. Moreover, when there is
summons enforcement litigation, it will be
because the IRS has determined that such
litigation is in the best interest of tax ad-
ministration.

##### 5. Procedural Concerns with the Issuance of the Temporary Regulations

One of the comments states that the
temporary regulations were not issued in
accordance with the Administrative Pro-
cedure Act (APA). The temporary regula-
tions were promulgated in full compliance
with the APA. In addition, this document
finalizes proposed regulations contained
in a notice of proposed rulemaking that
cross-referenced the temporary regula-
tions. The proposed regulations were also
promulgated in full compliance with the
APA. Because these final regulations
adopt the proposed regulations, it is not
necessary to address concerns regarding
procedural issues relating to promulgation
of the temporary regulations.

### Special Analyses

It has been determined that this Trea-
sury Decision is not a significant regula-
tory action as defined in Executive Order
12866, as supplemented by Executive Or-

der 13563. Therefore, a regulatory assess-
ment is not required. The IRS has deter-
mined that sections 553(b) and (d) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) do not apply to these regula-
tions and because the regulations do not
impose a collection of information on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Internal
Revenue Code, the notice of proposed
rulemaking preceding these regulations
was submitted to the Chief Counsel for
Advocacy of the Small Business Admin-
istration for comments on its impact on
small business, and no comments were
received.

### Drafting Information

The principal author of these final reg-
ulations is William V. Spatz of the Office
of Associate Chief Counsel (Procedure
and Administration). However, other per-
sonnel from the Treasury Department and
the IRS participated in their development.
* * * * *

### Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 301 is
amended as follows:

#### PART 301-PROCEDURE AND ADMINISTRATION

Paragraph 1. The authority citation for
part 301 continues to read in part as fol-
lows:

Authority: 26 U.S.C. 7805 * * *

##### § 301.7602-1T [Removed]

Par. 2. Section 301.7602-1T is re-
moved.

Par. 3. Section 301.7602-1 is amended
by adding paragraph (b)(3) and revising
paragraph (d) to read as follows:

§ 301.7602-1 Examination of books and
witnesses.

** * * *

(b)(3) Participation of a person de-
scribed in section 6103(n). For purposes
of this paragraph (b), a person autho-
rized to receive returns or return infor-
mation under section 6103(n) and

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§ 301.6103(n)-1(a) of the regulations
may receive and review books, papers,
records, or other data produced in com-
pliance with a summons and, in the pres-
ence and under the guidance of an IRS
officer or employee, participate fully in
the interview of a witness summoned by
the IRS to provide testimony under oath.
Fully participating in an interview in-
cludes, but is not limited to, receipt,
review, and use of summoned books,
papers, records, or other data; being
present during summons interviews;
questioning the person providing testi-
mony under oath; and asking a sum-
moned person's representative to clarify
an objection or assertion of privilege.
* * * * *

(d) Applicability date. This section is
applicable after September 3, 1982, ex-
cept for paragraphs (b)(1) and (2) of this
section which are applicable on and af-
ter April 1, 2005 and paragraph (b)(3) of
this section which applies to summons
interviews conducted on or after July
14, 2016. For rules under paragraphs
(b)(1) and (2) that are applicable to sum-
monses issued on or after September 10,
2002 or under paragraph (b)(3) that are
applicable to summons interviews con-
ducted on or after June 18, 2014, see 26
CFR 301.7602-1T (revised as of April
1, 2016).

John Dalrymple,
Deputy Commissioner for
Services and Enforcement.
Approved: May 27, 2016.

Mark J. Mazur,
Assistant Secretary of
the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on July 12, 2016,
4:15 p.m., and published in the issue of the Federal Register
for July 14, 2016, 81 F.R. 45409)

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# Part III. Administrative, Procedural, and Miscellaneous

## Update for Weighted Average Interest Rates, Yield Curves, and Segment Rates Notice 2016-46

This notice provides guidance on the
corporate bond monthly yield curve, the
corresponding spot segment rates used un-
der § 417(e)(3), and the 24-month average
segment rates under § 430(h)(2) of the
Internal Revenue Code. In addition, this
notice provides guidance as to the interest
rate on 30-year Treasury securities under
§ 417(e)(3)(A)(ii)(II) as in effect for plan
years beginning before 2008 and the 30-
year Treasury weighted average rate un-
der § 431(c)(6)(E)(ii)(I).

## YIELD CURVE AND SEGMENT RATES

Generally, except for certain plans un-
der sections 104 and 105 of the Pension
Protection Act of 2006 and CSEC plans
under § 414(y), § 430 of the Code speci-
fies the minimum funding requirements

that apply to single-employer plans pursu-
ant to § 412. Section 430(h)(2) specifies the
interest rates that must be used to determine
a plan's target normal cost and funding tar-
get. Under this provision, present value is
generally determined using three 24-month
average interest rates ("segment rates"),
each of which applies to cash flows during
specified periods. To the extent provided
under § 430(h)(2)(C)(iv), these segment
rates are adjusted by the applicable percent-
age of the 25-year average segment rates for
the period ending September 30 of the year
preceding the calendar year in which the
plan year begins.1 However, an election
may be made under § 430(h)(2)(D)(ii) to
use the monthly yield curve in place of the
segment rates.

Notice 2007-81, 2007-44 I.R.B. 899,
provides guidelines for determining the
monthly corporate bond yield curve, and
the 24-month average corporate bond seg-
ment rates used to compute the target nor-
mal cost and the funding target. Consis-
tent with the methodology specified in
Notice 2007-81, the monthly corporate
bond yield curve derived from June 2016
data is in Table I at the end of this notice.

The spot first, second, and third segment
rates for the month of June 2016 are,
respectively, 1.44, 3.46, and 4.48.

The 24-month average segment rates
determined under § 430(h)(2)(C)(i)
through (iii) must be adjusted pursuant
to § 430(h)(2)(C)(iv) to be within the
applicable minimum and maximum per-
centages of the corresponding 25-year
average segment rates. For plan years
beginning before 2018, the applicable
minimum percentage is 90% and the
applicable maximum percentage is
110%. The 25-year average segment
rates for plan years beginning in 2014,
2015, and 2016 were published in No-
tice 2013-58, 2013-40 I.R.B. 294, No-
tice 2014-50, 2014-40 I.R.B. 590, and
Notice 2015-61, 2015-39 I.R.B. 408,
respectively.

## 24-MONTH AVERAGE CORPORATE BOND SEGMENT RATES

The three 24-month average corporate
bond segment rates applicable for July
2016 without adjustment for the 25-year
average segment rate limits are as follows:

Applicable Month

First Segment

Second Segment

Third Segment

July 2016

1.51

3.86

4.86

Based on § 430(h)(2)(C)(iv), the 24-month averages applicable for July 2016 adjusted to be within the applicable minimum and
maximum percentages of the corresponding 25-year average segment rates, are as follows:

For Plan Years Beginning In

Adjusted 24-Month Average Segment Rates

Applicable Month

First Segment

Second Segment

Third Segment

2015

July

2016

4.72

6.11

6.81

2016

July

2016

4.43

5.91

6.65

1Pursuant to § 433(h)(3)(A), the 3rd segment rate determined under § 430(h)(2)(C) is used to determine the current liability of a CSEC plan (which is used to calculate the minimum amount
of the full funding limitation under § 433(c)(7)(C)).

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# 30-YEAR TREASURY SECURITIES INTEREST RATES

Generally for plan years beginning af-
ter 2007, § 431 specifies the minimum
funding requirements that apply to mul-
tiemployer plans pursuant to § 412. Sec-
tion 431(c)(6)(B) specifies a minimum
amount for the full-funding limitation
described in § 431(c)(6)(A), based on
the plan's current liability. Section

431(c)(6)(E)(ii)(I) provides that the inter-
est rate used to calculate current liability
for this purpose must be no more than 5
percent above and no more than 10 per-
cent below the weighted average of the
rates of interest on 30-year Treasury se-
curities during the four-year period ending
on the last day before the beginning of the
plan year. Notice 88-73, 1988-2 C.B.
383, provides guidelines for determining
the weighted average interest rate. The

rate of interest on 30-year Treasury secu-
rities for June 2016 is 2.45 percent. The
Service determined this rate as the aver-
age of the daily determinations of yield on
the 30-year Treasury bond maturing in
May 2046. For plan years beginning in the
month shown below, the weighted aver-
age of the rates of interest on 30-year
Treasury securities and the permissible
range of rate used to calculate current
liability are as follows:

For Plan Years Beginning in

30-Year Treasury Weighted Average

Permissible Range

Month

Year

90%

to

105%

July

2016

3.03

2.72

3.18

# MINIMUM PRESENT VALUE SEGMENT RATES

In general, the applicable interest rates
under § 417(e)(3)(D) are segment rates

computed without regard to a 24-month
average. Notice 2007-81 provides guide-
lines for determining the minimum pres-
ent value segment rates. Pursuant to that
notice, the minimum present value seg-

ment rates determined for June 2016 are
as follows:

First Segment

Second Segment

Third Segment

1.44

3.46

4.48

## DRAFTING INFORMATION

The principal author of this notice is
Tom Morgan of the Office of the Associ-

ate Chief Counsel (Tax Exempt and Gov-
ernment Entities). However, other person-
nel from the IRS participated in the
development of this guidance. For further

information regarding this notice, contact
Mr. Morgan at 202-317-6700 or Tony
Montanaro at 202-317-8698 (not toll-free
numbers).

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# Table I Monthly Yield Curve for June 2016 Derived from June 2016 Data

Maturity

Yield

Maturity

Yield

Maturity

Yield

Maturity

Yield

Maturity

Yield

0.5

0.76

20.5

4.19

40.5

4.51

60.5

4.63

80.5

4.68

1.0

0.98

21.0

4.20

41.0

4.51

61.0

4.63

81.0

4.69

1.5

1.18

21.5

4.22

41.5

4.52

61.5

4.63

81.5

4.69

2.0

1.34

22.0

4.23

42.0

4.52

62.0

4.63

82.0

4.69

2.5

1.46

22.5

4.24

42.5

4.53

62.5

4.63

82.5

4.69

3.0

1.56

23.0

4.25

43.0

4.53

63.0

4.64

83.0

4.69

3.5

1.64

23.5

4.27

43.5

4.53

63.5

4.64

83.5

4.69

4.0

1.73

24.0

4.28

44.0

4.54

64.0

4.64

84.0

4.69

4.5

1.83

24.5

4.29

44.5

4.54

64.5

4.64

84.5

4.69

5.0

1.93

25.0

4.30

45.0

4.55

65.0

4.64

85.0

4.69

5.5

2.05

25.5

4.31

45.5

4.55

65.5

4.64

85.5

4.69

6.0

2.18

26.0

4.32

46.0

4.55

66.0

4.65

86.0

4.70

6.5

2.31

26.5

4.33

46.5

4.56

66.5

4.65

86.5

4.70

7.0

2.45

27.0

4.34

47.0

4.56

67.0

4.65

87.0

4.70

7.5

2.59

27.5

4.35

47.5

4.56

67.5

4.65

87.5

4.70

8.0

2.73

28.0

4.35

48.0

4.56

68.0

4.65

88.0

4.70

8.5

2.86

28.5

4.36

48.5

4.57

68.5

4.65

88.5

4.70

9.0

2.98

29.0

4.37

49.0

4.57

69.0

4.65

89.0

4.70

9.5

3.10

29.5

4.38

49.5

4.57

69.5

4.66

89.5

4.70

10.0

3.21

30.0

4.39

50.0

4.58

70.0

4.66

90.0

4.70

10.5

3.31

30.5

4.40

50.5

4.58

70.5

4.66

90.5

4.70

11.0

3.41

31.0

4.40

51.0

4.58

71.0

4.66

91.0

4.70

11.5

3.50

31.5

4.41

51.5

4.58

71.5

4.66

91.5

4.71

12.0

3.58

32.0

4.42

52.0

4.59

72.0

4.66

92.0

4.71

12.5

3.65

32.5

4.42

52.5

4.59

72.5

4.66

92.5

4.71

13.0

3.71

33.0

4.43

53.0

4.59

73.0

4.67

93.0

4.71

13.5

3.77

33.5

4.44

53.5

4.60

73.5

4.67

93.5

4.71

14.0

3.83

34.0

4.44

54.0

4.60

74.0

4.67

94.0

4.71

14.5

3.87

34.5

4.45

54.5

4.60

74.5

4.67

94.5

4.71

15.0

3.92

35.0

4.46

55.0

4.60

75.0

4.67

95.0

4.71

15.5

3.95

35.5

4.46

55.5

4.60

75.5

4.67

95.5

4.71

16.0

3.99

36.0

4.47

56.0

4.61

76.0

4.67

96.0

4.71

16.5

4.02

36.5

4.47

56.5

4.61

76.5

4.67

96.5

4.71

17.0

4.05

37.0

4.48

57.0

4.61

77.0

4.68

97.0

4.71

17.5

4.07

37.5

4.48

57.5

4.61

77.5

4.68

97.5

4.71

18.0

4.10

38.0

4.49

58.0

4.62

78.0

4.68

98.0

4.72

18.5

4.12

38.5

4.49

58.5

4.62

78.5

4.68

98.5

4.72

19.0

4.14

39.0

4.50

59.0

4.62

79.0

4.68

99.0

4.72

19.5

4.15

39.5

4.50

59.5

4.62

79.5

4.68

99.5

4.72

20.0

4.17

40.0

4.51

60.0

4.62

80.0

4.68

100.0

4.72

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## Part IV. Items of General Interest

Tax Treatment of Payments
Made on Behalf of or
Reimbursements Received
by Residents Affected by
the Southern California Gas
Company Natural Gas Leak
Announcement 2016-25

On October 23, 2015, Southern Califor-
nia Gas Company (SoCal Gas) discovered a
natural gas leak at the Aliso Canyon storage
field, which was sealed on February 18,
2016. Residents of nearby areas complained
of numerous adverse health effects as a re-
sult of the gas leak, including nausea, dizzi-
ness, vomiting, shortness of breath, and
headaches. Because the gas leak caused sig-
nificant symptoms for area residents, the
Los Angeles County Department of Public
Health directed SoCal Gas to offer free,
temporary relocation to affected residents.
Pursuant to the directive and subsequent
court orders, SoCal Gas is required to either
pay on behalf of or reimburse affected res-
idents for certain relocation and cleaning
expenses incurred generally for the period
beginning November 19, 2015 through May
31, 2016. These expenses include:

· Hotel expenses, including meal reim-
bursement ($45 per day for an individ-
ual age 18 and older; $35 per day or
$25 per day for a child based on age),
mileage reimbursement, parking ex-
penses, pet boarding fees, internet
fees, electric vehicle charging fees,
and laundry fees;

· Expenses of staying with friends or
family at the rate of $150 per day, and
mileage reimbursement;

· Expenses of renting another home for
a lease term (including a lease term
extending beyond May 31, 2016) as
approved by SoCal Gas, including ex-
penses of housewares, appliances, pet
fees, furniture rental, utility fees, and
moving expenses;

· Mileage allowances or alternative
transportation for a resident whose
child or children attended the relocated
area schools until the date the resident
exited the relocation program. If, how-
ever, a resident enrolled a child in a

school outside of the affected area, So-
Cal Gas must pay the mileage allow-
ance until the child no longer attends
the reenrolled school or the school
year ends, whichever occurs first;

· Expenses of cleaning the interior of an
affected individual's home prior to re-
turning home according to protocols
established by the Los Angeles
County Department of Public Health;
· Air filtration and purification expenses;

· Expenses of cleaning residue from the
exterior of an affected individual's
home, outdoor fixtures, and exterior
furniture and appliances;

· Expenses of a vehicle detailing treat-
ment; and

· Other expenses not specifically de-
scribed in the relocation plan based on
SoCal Gas's evaluation of the expenses.
Questions have been raised concerning
the taxability of these expenses paid on
behalf of or as reimbursements to affected
area residents. Existing guidance does not
specifically address these questions.

The IRS will not assert that an affected
area resident must include these payments
or reimbursements in gross income. How-
ever, family and friends who received
payments under the relocation plan for
housing affected area residents must in-
clude these payments in gross income un-
der § 61 of the Internal Revenue Code,
unless these amounts are properly exclud-
able from gross income under § 280A
(relating to the exclusion for rental in-
come from a taxpayer's residence for less
than 15 days during the taxable year).

For further information regarding this
announcement, contact Sheldon Iskow of
the Office of Associate Chief Counsel (In-
come Tax & Accounting) at (202) 317-
4718 (not a toll-free number).

Notice of Proposed
Rulemaking
Guidance Under Section 355
Concerning Device and
Active Trade or Business
REG-134016-15

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Notice of proposed
rulemaking.

SUMMARY: This document contains
proposed regulations under section 355 of
the Internal Revenue Code (Code). The
proposed regulations would clarify the ap-
plication of the device prohibition and the
active business requirement of section
355. The proposed regulations would af-
fect corporations that distribute the stock
of controlled corporations, their share-
holders, and their security holders.

DATES: Written or electronic comments
and requests for a public hearing must be
received by October 13, 2016.

ADDRESSES: Send submissions to: CC:
PA:LPD:PR (REG-134016-15), Room
5203, Internal Revenue Service, P.O. Box
7604, Ben Franklin Station, Washington,
DC 20224. Submissions may be hand-
delivered Monday through Friday between
the hours of 8 a.m. and 4 p.m. to: CC:PA:
LPD:PR (REG-134016-15), Courier's
Desk, Internal Revenue Service, 1111 Con-
stitution Avenue, NW. Washington, DC
20224. Submissions may also be sent elec-
tronically via the Federal eRulemaking Por-
tal at http://www.regulations.gov (IRS
REG-134016-15).

### FOR FURTHER INFORMATION

CONTACT: Concerning the proposed
regulations, Stephanie D. Floyd or Russell
P. Subin at (202) 317-6848; concerning
submissions of comments and/or requests
for a public hearing, Regina Johnson at
(202) 317-6901 (not toll-free numbers).

### SUPPLEMENTARY INFORMATION: Background

#### A. Introduction

This document contains proposed reg-
ulations that would amend 26 CFR part 1
under section 355 of the Code. The pro-
posed regulations would provide addi-
tional guidance regarding the device pro-
hibition of section 355(a)(1)(B) and
provide a minimum threshold for the as-
sets of one or more active trades or busi-
nesses, within the meaning of section
355(a)(1)(C) and (b), of the distributing

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corporation and each controlled corpora-
tion (in each case, within the meaning of
section 355(a)(1)(A)).

This Background section of the pream-
ble (1) summarizes the requirements of
section 355, (2) discusses the develop-
ment of current law and IRS practice un-
der section 355 and the regulations there-
under, and (3) explains the reasons for the
proposed regulations.

#### B. Section 355 Requirements

Generally, if a corporation distributes
property with respect to its stock to a
shareholder, section 301(b) provides that
the amount of the distribution is equal to
the amount of money and the fair market
value of other property received. Under
section 301(c), this amount is treated as
(1) the receipt by the shareholder of a
dividend to the extent of the corporation's
earnings and profits, (2) the recovery of
the shareholder's basis in the stock, and/or
(3) gain from the sale or exchange of
property. The corporation recognizes gain
under section 311(b) to the extent the fair
market value of the property distributed
exceeds the corporation's adjusted basis
in the property. However, section 355 pro-
vides that, under certain circumstances, a
corporation (Distributing) may distribute
stock and securities in a corporation it
controls within the meaning of section
368(c) (Controlled) to its shareholders and
security holders without causing either
Distributing or its shareholders or security
holders to recognize income, gain, or loss
on the distribution.

Section 355 has numerous require-
ments for a distribution to be tax-free to
Distributing and its shareholders. Some of
these requirements are intended to prevent
a distribution from being used inappropri-
ately to avoid shareholder-level tax on
dividend income. As examples, section
355(a)(1)(B) provides that the transaction
must not be used principally as a device
for the distribution of the earnings and
profits of Distributing or Controlled or
both (a device), and section 355(a)(1)(C)
and (b) require Distributing and Con-
trolled each to be engaged, immediately
after the distribution, in the active conduct
of a trade or business (an active business).
To qualify for this purpose, an active busi-
ness must have been actively conducted

throughout the five-year period ending on
the date of the distribution and must not
have been acquired, directly or indirectly,
within this period in a transaction in
which gain or loss was recognized. Sec-
tion 355(b)(2)(B), (C), and (D).

Distributions of the stock of Controlled
generally take three different forms: (1) A
pro rata distribution to Distributing's
shareholders of the stock of Controlled (a
spin-off), (2) a distribution of the stock of
Controlled in redemption of Distributing
stock (a split-off), or (3) a liquidating dis-
tribution in which Distributing distributes
the stock of more than one Controlled,
either pro rata or non-pro rata (in either
case, a split-up).

#### C. Development of Current Law and IRS Practice

##### 1. Early Legislation

The earliest predecessor of section 355
was section 202(b) of the Revenue Act of
1918, ch. 18 (40 Stat. 1057, 1060), which
permitted a tax-free exchange by a share-
holder of stock in a corporation for stock
in another corporation in connection with
a reorganization. This section did not al-
low tax-free spin-offs. In section 203(c) of
the Revenue Act of 1924, ch. 234 (43 Stat.
253, 256), Congress amended this provi-
sion to allow tax-free spin-offs pursuant to
plans of reorganization.

Taxpayers tried to use this provision to
avoid the dividend provisions of the Code
by having Distributing contribute surplus
cash or liquid assets to a newly formed
Controlled and distribute the Controlled
stock to its shareholders. See, e.g., Greg-
ory v. Helvering, 293 U.S. 465 (1935).
Congress reacted to this abuse by elimi-
nating the spin-off provision in the Reve-
nue Act of 1934, ch. 277 (48 Stat. 680).
The legislative history states that the pro-
vision had provided a method for corpo-
rations "to pay what would otherwise be
taxable dividends, without any taxes upon
their shareholders" and that "this means of
avoidance should be ended." H.R. Rep.
No. 73-704, at 14 (1934).

In section 317(a) of the Revenue Act of
1951, ch. 521 (65 Stat. 452, 493), Con-
gress re-authorized spin-offs pursuant to
plans of reorganization:

. . unless it appears that (A) any
corporation which is a party to such
reorganization was not intended to
continue the active conduct of a
trade or business after such reorga-
nization, or (B) the corporation
whose stock is distributed was used
principally as a device for the dis-
tribution of earnings and profits to
the shareholders of any corporation
a party to the reorganization.
.

During debate on this legislation, Sen-
ator Hubert Humphrey expressed con-
cerns about spin-offs and argued that
these restrictions were necessary. See,
e.g., 97 Cong. Rec. 11812 (1951) (“Unless
strictly safeguarded, [a spin-off provision]
can result in a loophole that will enable a
corporation to distribute earnings and
profits to stockholders without payment of
the usual income taxes."); Id. ("Clauses
(A) and (B) of section 317 provide very
important safeguards against the tax
avoidance which would be possible if sec-
tion 317 were adopted without clauses (A)
and (B)."). See also 96 Cong. Rec. 13686
(1950) ("It was the viewpoint of the com-
mittee that [a spin-off] must be strictly a
bona fide transaction, not colorable, not
for the purpose of evading the tax.").

Until 1954, a spin-off, split-off, or
split-up was eligible for tax-free treatment
only if Distributing transferred property to
Controlled as part of a reorganization. In
1954, Congress adopted section 355 as
part of the 1954 Code. As a significant
innovation, section 355 allowed spin-offs,
split-offs, and split-ups to be tax-free
without a reorganization, and this innova-
tion remains in effect.

##### 2. Case Law

Courts applying section 355 (or a pre-
decessor provision) have generally placed
greater emphasis on the substance of the
transaction than on compliance with the
technical requirements of the statute.
Thus, some courts have determined that a
transaction does not qualify under section
355 (or a predecessor provision), notwith-
standing strict statutory compliance, on
the basis that the substance of the trans-
action was inconsistent with congressio-
nal intent. For example, in Gregory, the
Supreme Court held that compliance with
the letter of the spin-off statute was insuf-
ficient if the transaction was otherwise

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indistinguishable from a dividend. The
Supreme Court observed that the transac-
tion in Gregory was "an operation having
no business or corporate purpose-a mere
device which put on the form of a corpo-
rate reorganization as a disguise for con-
cealing its real character." Gregory, 293
U.S. at 469.

Other courts have found that a transac-
tion does qualify under section 355 de-
spite its failure to comply with all of the
statutory requirements. For example, in
Commissioner v. Gordon, 382 F.2d 499
(2d Cir.1967), rev'd on other grounds,
391 U.S. 83 (1968), the court addressed
section 355(b)(2)(C). Pursuant to that sec-
tion, a corporation is treated as engaged in
the active conduct of a trade or business
only if the trade or business was not ac-
quired in a transaction in which gain or
loss was recognized in whole or in part
within the five-year period ending on the
date of the distribution. The court con-
cluded that, despite the fact that gain was
recognized when Distributing transferred
a trade or business to Controlled, section
355(b)(2)(C) was not violated because
new assets were not brought within the
combined corporate shells of Distributing
and Controlled. The court stated:

We think that the draftsmen of
Section 355 intended these subsec-
tions to apply only to the bringing of
new assets within the combined cor-
porate shells of the distributing and
the controlled corporations. There-
fore, it is irrelevant in this case
whether gain was recognized on the
intercorporate transfer.

Id. at 507.

##### 3. Device Regulations

###### a. 1955 Regulations

Regulations under section 355 of the
1954 Code were issued in 1955 (the 1955
regulations). TD 6152 (20 FR 8875).
These regulations included § 1.355-
2(b)(3), which provided the following:

In determining whether a transac-
tion was used principally as a device
for the distribution of the earnings
and profits of the distributing corpo-
ration or of the controlled corpora-
tion or both, consideration will be
given to all of the facts and circum-
stances of the transaction. In partic-

ular, consideration will be given to
the nature, kind and amount of the
assets of both corporations (and cor-
porations controlled by them) im-
mediately after the transaction. The
fact that at the time of the transac-
tion substantially all of the assets of
each of the corporations involved
are and have been used in the active
conduct of trades or businesses
which meet the requirements of sec-
tion 355(b) will be considered evi-
dence that the transaction was not
used principally as such a device.

#### b. 1989 Regulations

Additional regulations under section
355 were issued in 1989 (the 1989 regu-
lations). TD 8238 (54 FR 283). These
regulations provide substantially more
guidance than the 1955 regulations to de-
termine whether a distribution was a de-
vice. Section 1.355-2(d)(1) provides that
"a tax-free distribution of the stock of a
controlled corporation presents a potential
for tax avoidance by facilitating the avoid-
ance of the dividend provisions of the
Code through the subsequent sale or ex-
change of stock of one corporation and the
retention of the stock of another corpora-
tion. A device can include a transaction
that effects a recovery of basis."

This provision clarifies that, although the
device prohibition primarily targets the con-
version of dividend income to capital gain, a
device can still exist if there would be a
recovery of stock basis in lieu of receipt of
dividend income and even if the sharehold-
er's federal income tax rates on dividend
income and capital gain are the same.

The 1989 regulations also expand on
the statement in the 1955 regulations that
the device analysis takes into account all
of the facts and circumstances by specify-
ing three factors that are evidence of de-
vice and three factors that are evidence of
nondevice. One of the device factors, de-
scribed in § 1.355-2(d)(2)(iv)(B), ex-
pands the statement in the 1955 regula-
tions that consideration will be given to
the nature, kind, and amount of the assets
of Distributing and Controlled immedi-
ately after the transaction (the nature and
use of assets device factor). First, this
provision provides that "[t]he existence of
assets that are not used in a trade or busi-
ness that satisfies the requirements of sec-

tion 355(b) is evidence of device. For this
purpose, assets that are not used in a trade
or business that satisfies the requirements
of section 355(b) include, but are not lim-
ited to, cash and other liquid assets that
are not related to the reasonable needs of
a business satisfying such section." This
provision continues to provide that "[t]he
strength of the evidence of device depends
on all the facts and circumstances, includ-
ing, but not limited to, the ratio for each
corporation of the value of assets not used
in a trade or business that satisfies the
requirements of section 355(b) to the
value of its business that satisfies such
requirements." Finally, the provision pro-
vides that "[a] difference in the ratio de-
scribed in the preceding sentence for the
distributing and controlled corporation is
ordinarily not evidence of device if the
distribution is not pro rata among the
shareholders of the distributing corpora-
tion and such difference is attributable to a
need to equalize the value of the stock
distributed and the value of the stock or
securities exchanged by the distributees."

Although this provision describes the
factor, it provides little guidance relating
to the quality or quantity of the relevant
assets and no guidance on how the factor
relates to other device factors or nonde-
vice factors.

The nondevice factors in § 1.355-2(d)(3)
are the presence of a corporate business
purpose, the fact that the stock of Distribut-
ing is publicly traded and widely held, and
the fact that the distribution is made to cer-
tain domestic corporate shareholders.

Section 1.355-2(d)(5) specifies certain
distributions that ordinarily are not con-
sidered a device, notwithstanding the
presence of device factors, because they
ordinarily do not present the potential for
federal income tax avoidance in convert-
ing dividend income to capital gain or
using stock basis to reduce shareholder-
level tax. These transactions include a dis-
tribution that, in the absence of section
355, with respect to each distributee,
would be a redemption to which sale-or-
exchange treatment applies.

#### 4. Active Business Requirement Regulations

Section 1.355-3 provides rules for de-
termining whether Distributing and Con-

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trolled satisfy the active business require-
ment. Proposed regulations issued in
2007 would amend § 1.355-3. REG-
123365-03 (72 FR 26012). The Treasury
Department and the IRS continue to study
the active business requirement issues
considered in those proposed regulations.

#### 5. Administration of the Active Business Requirement

The fact that Distributing's or Con-
trolled's qualifying active business is
small in relation to all the assets of Dis-
tributing or Controlled is generally recog-
nized as a device factor. A separate issue
is whether a relatively small active busi-
ness satisfies the active business require-
ment. In Rev. Rul. 73-44 (1973-1 CB
182), Controlled's active business repre-
sented a "substantial portion" but less than
half of the value of its total assets. The
revenue ruling states:

There is no requirement in section
355(b) that a specific percentage of
the corporation's assets be devoted
to the active conduct of a trade or
business. In the instant case, there-
fore, it is not controlling for pur-
poses of the active business require-
ment that the active business assets
of the controlled corporation, Y,
represent less than half of the value
of the controlled corporation imme-
diately after the distribution.

The IRS has taken the position, in letter
rulings and internal memoranda, that an
active business can satisfy the active busi-
ness requirement regardless of its absolute
or relative size. However, no published
guidance issued by the Treasury Depart-
ment or the IRS takes this position.

In 1996, the Treasury Department and
the IRS issued Rev. Proc. 96-43 (1996-2
CB 330), which provided that (1) the IRS
ordinarily would not issue a letter ruling
or determination letter on whether a dis-
tribution was described in section
355(a)(1) if the gross assets of the active
business would have a fair market value
that was less than five percent of the total
fair market value of the gross assets of the
corporation directly conducting the active
business, but (2) a ruling might be issued
"if it can be established that, based upon
all relevant facts and circumstances, the
trades or businesses are not de minimis
compared with the other assets or activi-

ties of the corporation and its subsidiar-
ies." This no-rule provision was elimi-
nated in Rev. Proc. 2003-48 (2003-2 CB
86). Since that time, until the publication
of Rev. Proc. 2015-43 (2015-40 IRB
467) and Notice 2015-59 (2015-40 IRB
459), discussed in Part D.1 of this Back-
ground section of the preamble, the IRS
maintained its position that the relative
size of an active business is a device fac-
tor rather than a section 355(b) require-
ment. The IRS issued numerous letter rul-
ings on section 355 distributions
involving active businesses that were de
minimis in value compared to the other
assets of Distributing or Controlled.

The IRS interpreted section 355(b) in
this manner in part as a result of the me-
chanical difficulties of satisfying the ac-
tive business requirement. These mechan-
ical difficulties are discussed further in
Part D.3.c of this Background section of
the preamble.

As an example, until section 355(b)
was amended by section 202 of the Tax
Increase Prevention and Reconciliation
Act of 2005, Public Law 109-222 (120
Stat. 345, 348); Division A, section 410 of
the Tax Relief and Health Care Act of
2006, Public Law 109-432 (120 Stat.
2922, 2963); and section 4(b) of the Tax
Technical Corrections Act of 2007, Public
Law 110-172 (121 Stat. 2473, 2476) (the
Separate Affiliated Group, or SAG,
Amendments), if, immediately after the
distribution, a corporation did not directly
engage in an active business, it could sat-
isfy the active business requirement only
if substantially all of its assets consisted of
stock and securities of corporations it con-
trolled that were engaged in an active
business (the holding company rule). See
section 355(b) prior to the SAG Amend-
ments. Because of the limited application
of the holding company rule, corporations
often had to undergo burdensome restruc-
turings prior to section 355 distributions
merely to satisfy the active business re-
quirement. See, e.g., H.R. Rep. No. 109-
304, at 54 (2005).

As another example, until 1992, no
guidance provided that Distributing or
Controlled could rely on activities con-
ducted by a partnership to satisfy the ac-
tive business requirement, even if Distrib-
uting or Controlled held a substantial
interest in the partnership and participated

in its management. This situation changed
after the Treasury Department and the IRS
published revenue rulings permitting this
reliance. See Rev. Rul. 92-17 (1992-1 CB
142) amplified by Rev. Rul. 2002-49
(2002-2 CB 288) and modified by Rev.
Rul. 2007-42 (2007-2 CB 44).

#### 6. Administration of the Device Prohibition

The device prohibition continues to be
important even though the federal income
tax rates for dividend income and capital
gain may be identical for many taxpayers.
In Rev. Proc. 2003-48, the Treasury De-
partment and the IRS announced that the
IRS would no longer rule on whether a
transaction is a device or has a business
purpose. As a result, since the publication
of Rev. Proc. 2003-48, the IRS has made
only limited inquiries as to device and
business purpose issues raised in requests
for private letter rulings under section
355.

#### D. Reasons for Proposed Regulations

##### 1. Rev. Proc. 2015-43 and Notice 2015-59

As explained in Part C of this Back-
ground section of the preamble, section
355 and its predecessors have had a long
and contentious history. Despite the safe-
guards in the Code and regulations, and
the courts' interpretations in accordance
with congressionally-articulated statutory
purposes, taxpayers have attempted to use
section 355 distributions in ways that the
Treasury Department and the IRS have
determined to be inconsistent with the
purpose of section 355.

On September 14, 2015, the Treasury
Department and the IRS issued Rev. Proc.
2015-43 and Notice 2015-59 in response
to concerns relating to distributions in-
volving relatively small active businesses,
substantial amounts of investment assets,
and regulated investment companies
(RICs) or real estate investment trusts
(REITs). The notice states that the Trea-
sury Department and the IRS are studying
issues under sections 337(d) and 355 re-
lating to these transactions and that these
transactions may present evidence of de-
vice, lack an adequate business purpose or
a qualifying active business, or circum-

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vent the purposes of Code provisions in-
tended to implement repeal of the General
Utilities doctrine, a doctrine under which
a corporation generally could distribute
appreciated property to its shareholders
without recognizing gain (General Utili-
ties repeal). The notice invited comments
with respect to these issues and one com-
menter (the commenter) submitted a com-
ment letter.

The proposed regulations in this notice
of proposed rulemaking would address the
device prohibition (including the business
purpose requirement as it pertains to de-
vice) and the active business requirement.
Congress has addressed certain other is-
sues discussed in Notice 2015-59. See
section 311 of the Protecting Americans
from Tax Hikes Act of 2015, Public Law
114-113 (129 Stat. 3040, 3090), in which
Congress added section 355(h), which
generally denies section 355 treatment if
either Distributing or Controlled is a REIT
unless both are REITs immediately after
the distribution, and section 856(c)(8),
which generally provides that Distributing
or Controlled will not be eligible to make
a REIT election within the ten-year period
after a section 355 distribution. Separate
temporary and proposed regulations ad-
dress transactions that avoid the applica-
tion of sections 355(h) and 856(c)(8). See
REG-126452-15 (Certain Transfers of
Property to RICs and REITs) (81 FR
36816), cross-referencing TD 9770 (81
FR 36793). The Treasury Department and
the IRS continue to study issues relating
to General Utilities repeal presented by
other transactions involving the separation
of nonbusiness assets from business as-
sets, and are considering issuing guidance
under section 337(d) to address these is-
sues. See Part D.4 of this Background
section of the preamble.

#### 2. Comments Regarding Device

The commenter believes that new rules
are not needed for transactions that raise
the purely shareholder-level concerns that
are the subject of the device prohibition.
According to the commenter, those trans-
actions likely do not qualify under section
355 under current law and are infrequent.
Although largely agreeing with this state-
ment, the Treasury Department and the
IRS have determined that certain clarify-

ing changes should be made to the device
rules. As discussed in Part C.3.b of this
Background section of the preamble, the
current regulations relating to device are
not specific as to the quality or quantity of
assets relevant in the nature and use of
assets device factor or the appropriate
weighing of the device and nondevice fac-
tors. The Treasury Department and the
IRS have determined that, in some situa-
tions, insufficient weight has been given
to the nature and use of assets device
factor and that device factors have not
been balanced correctly against nondevice
factors.

For example, if, after a distribution,
Distributing or Controlled holds mostly
liquid nonbusiness assets, the sharehold-
ers of that corporation can sell their stock
at a price that reflects the value of the
nonbusiness assets, and such a sale is ec-
onomically similar to a distribution of the
liquid nonbusiness assets to the sharehold-
ers that would have been treated as a
dividend to the extent of earnings and
profits of the corporation. See, e.g., Greg-
ory. If Distributing's ratio of nonbusiness
assets to total assets differs substantially
from Controlled's ratio, the distribution
could facilitate a separation of the non-
business assets from the business assets
by means of the sale of the stock in the
corporation with a large percentage of
nonbusiness assets. No corporate-level
gain, and possibly little or no shareholder-
level gain, would be recognized.

Taxpayers have taken the position that
nondevice factors in the regulations can
outweigh the substantial evidence of de-
vice presented in such distributions. For
example, certain taxpayers have viewed
even a weak business purpose, combined
with the fact that the stock of Distributing
is publicly traded, as offsetting evidence
of device presented by distributions ef-
fecting a separation of nonbusiness assets
from business assets, even if pressure
from public shareholders was a significant
motivation for the distribution. The Trea-
sury Department and the IRS do not agree
that these types of nondevice factors
should outweigh the substantial evidence
of device presented by a distribution that
separates nonbusiness assets from busi-
ness assets.

Accordingly, the Treasury Department
and the IRS have determined that the reg-

ulations should provide clearer, more ob-
jective guidance regarding the nature and
use of assets device factor and the appro-
priate weighing of device factors and non-
device factors. The Treasury Department
and the IRS also have determined that if a
high enough proportion of assets of Dis-
tributing or Controlled consists of non-
business assets, and if the assets of the
other corporation include a much lower
proportion of nonbusiness assets, the evi-
dence of device is so strong that nonde-
vice factors generally should not be al-
lowed to overcome the evidence of
device.

The commenter also noted that the im-
portance of device, traditionally under-
stood as reflecting shareholder-level poli-
cies, has diminished in the context of a
unified rate regime for long-term capital
gains and qualified dividend income for
some taxpayers. However, because of
continuing differences in the federal in-
come tax treatment of capital gains and
dividends, including the potential for ba-
sis recovery (see § 1.355-2(d)(1)) and the
availability of capital gains to absorb cap-
ital losses, the device prohibition contin-
ues to be important.

#### 3. Comments Regarding Active Business

#### a. Section 355(b) Requires Minimum Size Active Business

The commenter stated that section 355
is meant to apply to genuine separations
of businesses, and that section 355(b)
should not function as a formality. Nev-
ertheless, the commenter does not believe
that the active business requirement needs
to be strengthened through the adoption of
a requirement of a minimum amount of
active business assets.

After studying this issue, the Treasury
Department and the IRS have determined
that Distributing or Controlled should not
satisfy the active business requirement by
holding a relatively de minimis active
business. As described in the remainder of
this Part D.3, the Treasury Department
and the IRS have determined that inter-
preting section 355(b) as having meaning
and substance and therefore requiring an
active business that is economically sig-
nificant is consistent with congressional
intent, case law, and the reorganization

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provisions. In addition, given the develop-
ments in the tax law described in Part
D.3.c of this Background section of the
preamble, the Treasury Department and
the IRS have determined that allowing a
de minimis active business to satisfy the
active business requirement is not neces-
sary to reduce the burden of compliance
with the active business requirement. Fur-
thermore, requiring a minimum relative
size for an active business is not inconsis-
tent with the facts of Rev. Rul. 73-44 or
with its conclusion. See Part D.3.d of this
Background section of the preamble.

##### b. Consistent with Congressional Intent, Case Law, and the Reorganization Provisions

Allowing section 355(b) to be satisfied
with an active business that is economi-
cally insignificant in relation to other as-
sets of Distributing or Controlled is not
consistent with the congressional purpose
for adopting the active business require-
ment. It is generally understood that Con-
gress intended section 355 to be used to
separate businesses, not to separate inac-
tive assets from a business. See S. Rep.
No. 83-1622, at 50-51 (section 355 "con-
templates that a tax-free separation shall
involve only the separation of assets at-
tributable to the carrying on of an active
business" and does not permit "the tax
free separation of an existing corporation
into active and inactive entities"); see also
Coady v. Commissioner, 33 T.C. 771, 777
(1960), aff'd, 289 F.2d 490 (6th Cir. 1961)
(stating that a function of section 355(b) is
"to prevent the tax-free separation of ac-
tive and inactive assets into active and
inactive corporate entities") (emphasis in
original); § 1.355-1(b) ("[s]ection 355
provides for the separation . . . of one or
more existing businesses"). Additionally,
when the active business of Distributing
or Controlled is economically insignifi-
cant in relation to its other assets, it is
unlikely that any non-federal tax purpose
for separating that business from other
businesses is a significant purpose for the
distribution. See § 1.355-2(b)(1) ("Sec-
tion 355 applies to a transaction only if it
is carried out for one or more corporate
business purposes. .. . The potential for
the avoidance of Federal taxes by the dis-
tributing or controlled corporations .. . is

relevant in determining the extent to
which an existing corporate business pur-
pose motivated the distribution.").

Further, as the Supreme Court held in
Gregory, transactions are to be taxed in
accordance with their substance. The re-
organization regulations adopt the same
principle. For example, § 1.368-1(b) pro-
vides that "[b]oth the terms of the speci-
fications [of the reorganization provi-
sions] and their underlying assumptions
and purposes must be satisfied in order to
entitle the taxpayer to the benefit of the
exception from the general rule." Addi-
tionally, § 1.368-1(c) provides that "[a]
scheme, which involves an abrupt depar-
ture from normal reorganization proce-
dure in connection with a transaction on
which the imposition of tax is imminent,
such as a mere device that puts on the
form of a corporate reorganization as a
disguise for concealing its real character,
and the object and accomplishment of
which is the consummation of a precon-
ceived plan having no business or corpo-
rate purpose, is not a plan of reorganiza-
tion."

Accordingly, when a corporation that
owns only nonbusiness assets and a rela-
tively de minimis active business is sepa-
rated from a corporation with another ac-
tive business, the substance of the
transaction is not a separation of busi-
nesses as contemplated by section 355.

c. Developments in the Tax Law Reduce
the Burden of Complying With Section
355

In the past, the active business require-
ment was more difficult to satisfy than it is
today, in part because of the limited ap-
plication of the holding company rule,
discussed in Part C.5 of this Background
section of the preamble. However, several
developments in the tax law have oc-
curred that make the active business re-
quirement easier to satisfy and negate the
historical need to reduce the administra-
tive burden of complying with section
355(b).

In the SAG Amendments, Congress
amended section 355(b) to adopt the sep-
arate affiliated group rules of section
355(b)(3). Section 355(b)(3)(A) provides
that, for purposes of determining whether
a corporation meets the requirements of

section 355(b)(2)(A), all members of the
corporation's separate affiliated group
(SAG) are treated as one corporation. Sec-
tion 355(b)(3)(B) provides that a corpora-
tion's SAG is the affiliated group which
would be determined under section
1504(a) if the corporation were the com-
mon parent and section 1504(b) did not
apply.

Additionally, as discussed in Part C.5
of this Background section of the pream-
ble, section 355(b) now can be satisfied
through the ownership of certain interests
in a partnership that is engaged in an
active business. See Rev. Rul. 2007-42
and Rev. Rul. 92-17. Similarly,
§ 301.7701-3 now allows an eligible en-
tity to elect to be disregarded as an entity
separate from its owner and permits a
corporation to satisfy the active business
requirement through a tax-free acquisition
without having to assume liabilities relat-
ing to an active business. Finally, the ex-
pansion rules of § 1.355-3(b)(3)(ii) have
been developed so that it is easier to ac-
quire the assets of an active business in a
taxable transaction while complying with
section 355(b). See, e.g., Rev. Rul.
2003-18 (2003-1 CB 467) and Rev. Rul.
2003-38 (2003-1 CB 811) (both describ-
ing facts and circumstances to be consid-
ered in determining whether one trade or
business is in the same line of business as
another).

###### d. Rev. Rul. 73-44

Rev. Rul. 73-44 is sometimes cited in
support of the proposition that a de mini-
mis active business satisfies the section
355(b) requirement. However, Rev. Rul.
73-44 states only that there is no require-
ment in section 355(b) that a specific per-
centage of a corporation's assets be de-
voted to the active conduct of a trade or
business, not that any size active business
can satisfy section 355(b). In fact, the size
of the active business in that ruling repre-
sented a substantial portion of Con-
trolled's assets, although less than half of
Controlled's value. Accordingly, Rev.
Rul. 73-44 does not validate a section
355 distribution involving a de minimis
active business, and the proposed regula-
tions in this notice of proposed rulemak-
ing addressing the minimum relative size
of active businesses would not change the

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conclusion set forth in that revenue ruling.
Nevertheless, the Treasury Department
and the IRS intend to modify Rev. Rul.
73-44 with regard to the statement in the
revenue ruling that there is no requirement
that a specific percentage of a corpora-
tion's assets be devoted to the active con-
duct of a trade or business.

#### 4. General Utilities Repeal

The Treasury Department and the IRS
have observed, as noted in Notice 2015-
59, that taxpayers may attempt to use sec-
tion 355 distributions in ways that are
inconsistent with the purpose of General
Utilities repeal. Specifically, the Treasury
Department and the IRS are concerned
that certain taxpayers may be interpreting
the current regulations under sections
337(d) and 355 in a manner allowing tax-
free distributions motivated in whole or
substantial part by a purpose of avoiding
corporate-level taxation of built-in gain in
investment or nonbusiness assets. See
§ 1.355-1(b) ("Section 355 provides for
the separation . . . of one or more existing
businesses formerly operated, directly or
indirectly, by a single corporation . . . . ").
The Treasury Department and the IRS
continue to study whether permitting tax-
free separations of large amounts of non-
business assets from business assets, es-
pecially when the gain in the nonbusiness
assets is expected to be eliminated, is con-
sistent with General Utilities repeal in all
circumstances. Comments are welcome
on potential additional guidance under
section 337(d) addressing such transac-
tions.

#### Explanation of Provisions

##### A. Modification of Device Regulations

The proposed regulations would mod-
ify § 1.355-2(d), which addresses trans-
actions that are or are not a device. The
proposed regulations would modify the
nature and use of assets device factor in
§ 1.355-2(d)(2)(iv), modify the corporate
business purpose nondevice factor in
§ 1.355-2(d)(3)(ii), and add a per se de-
vice test.

##### 1. Nature and Use of Assets

The Treasury Department and the IRS
have determined that device potential gen-
erally exists either if Distributing or Con-
trolled owns a large percentage of assets
not used in business operations compared
to total assets or if Distributing's and Con-
trolled's percentages of these assets dif-
fers substantially. A proposed change to
the nature and use of assets device factor
in § 1.355-2(d)(2)(iv) would focus on as-
sets used in a Business (Business Assets)
(each as defined in proposed § 1.355-
2(d)(2)(iv)(B)) rather than assets used in
an active business meeting the require-
ments of section 355(b) (a Five-Year-
Active Business, as defined in proposed
§ 1.355-9(a)(2)). In general, Business
would have the same meaning as a Five-
Year-Active Business, but without regard
to whether the business has been operated
or owned for at least five years prior to the
date of the distribution or whether the
collection of income requirement in
§ 1.355-3(b)(2)(ii) is satisfied. Business
Assets would be gross assets used in a
Business, including reasonable amounts
of cash and cash equivalents held for
working capital and assets required to be
held to provide for exigencies related to a
Business or for regulatory purposes with
respect to a Business. The Treasury De-
partment and the IRS have determined
that the presence of Business Assets gen-
erally does not raise any more device con-
cerns than the presence of assets used in a
Five-Year-Active Business (Five-Year-
Active-Business Assets). Thus, the pro-
posed regulations would modify § 1.355-
2(d)(2)(iv)(B) to take into account
Business Assets, not just Five-Year-
Active-Business Assets.

Rev. Proc. 2015-43 (now incorporated
into Rev. Proc. 2016-3 (2016-1 IRB
126)) and Notice 2015-59 focus on in-
vestment assets (using a modified section
355(g) definition) of a corporation as as-
sets that may raise device concerns. How-
ever, after further study, the Treasury De-
partment and the IRS have determined
that investment assets as defined therein
may include certain assets that do not
raise device concerns, such as cash needed
by a corporation for working capital, and
may not include other assets that do raise
device concerns, such as real estate not

related to the taxpayer's Business. The
Treasury Department and the IRS have
determined that focusing on Nonbusiness
Assets, as defined in the proposed regula-
tions, is a better method of evaluating
device or nondevice as compared to using
investment assets as described in Rev.
Proc. 2016-3 and Notice 2015-59. Thus,
the proposed regulations would focus on
Nonbusiness Assets rather than invest-
ment assets.

The proposed regulations would pro-
vide thresholds for determining whether
the ownership of Nonbusiness Assets
(gross assets that are not Business Assets)
and/or differences in the Nonbusiness As-
set Percentages (the percentage of a cor-
poration's Total Assets (its Business As-
sets and Nonbusiness Assets) that are
Nonbusiness Assets) for Distributing and
Controlled are evidence of device. If nei-
ther Distributing nor Controlled has Non-
business Assets that comprise 20 percent
or more of its Total Assets, the ownership
of Nonbusiness Assets ordinarily would
not be evidence of device. Additionally, a
difference in the Nonbusiness Asset Per-
centages for Distributing and Controlled
ordinarily would not be evidence of de-
vice if such difference is less than 10
percentage points or, in the case of a non-
pro rata distribution, if the difference is
attributable to a need to equalize the value
of the Controlled stock and securities dis-
tributed and the consideration exchanged
therefor by the distributees. Accordingly,
the Treasury Department and the IRS pro-
pose to treat such circumstances as ordi-
narily not constituting evidence of device.

##### 2. Corporate Business Purpose

The Treasury Department and the IRS
also propose to revise the nondevice fac-
tor in § 1.355-2(d)(3)(ii), which relates to
corporate business purpose for a transac-
tion as evidence of nondevice. Under the
proposed revision, a corporate business
purpose that relates to a separation of
Nonbusiness Assets from one or more
Businesses or from Business Assets
would not be evidence of nondevice, un-
less the business purpose involves an ex-
igency that requires an investment or
other use of the Nonbusiness Assets in a
Business. The Treasury Department and
the IRS have determined that, absent such

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an exigency, such separations are not con-
sistent with the intent of Congress to pre-
vent section 355 from applying to a dis-
tribution that is used principally as a
device.

##### 3. Per se Device Test

The Treasury Department and the IRS
also propose to add a per se device test to
the device determination in proposed
§ 1.355-2(d)(5). Under proposed § 1.355-
2(d)(5), if designated percentages of Dis-
tributing's and/or Controlled's Total As-
sets are Nonbusiness Assets, the
transaction would be considered a device,
notwithstanding the presence of any other
nondevice factors, for example, a corpo-
rate business purpose or stock being pub-
licly traded and widely held. By their na-
ture, these transactions present such clear
evidence of device that the Treasury De-
partment and the IRS have determined
that the nondevice factors can never over-
come the device potential. The only ex-
ceptions to this per se device rule would
apply if the distribution is also described
in § 1.355-2(d)(3)(iv) (distributions in
which the corporate distributee would be
entitled to a dividends received deduction
under section 243(a) or 245(b)) or in re-
designated § 1.355-2(d)(6) (§ 1.355-
2(d)(5) of the current regulations, relating
to transactions ordinarily not considered
as a device).

The per se device test would have two
prongs, both of which must be met for the
distribution to be treated as a per se de-
vice.

The first prong would be if Distributing
or Controlled has a Nonbusiness Asset
Percentage of 662/3 percent or more. If 66
2/3 percent or more of the Total Assets of
either corporation consist of Nonbusiness
Assets, a strong device potential exists.

The second prong of the test would
compare the Nonbusiness Asset Per-
centage of Distributing with that of
Controlled. The comparison would be
similar to the comparison, in § 1.355-
2(d)(2)(iv)(B) of the current regulations,
between Distributing's ratio of assets
not used in a Five-Year-Active Business
to assets used in a Five-Year-Active Busi-
ness and Controlled's ratio of such assets.
However, the Treasury Department and
the IRS recognize that valuation of assets

may be difficult and that determining
whether certain assets are Business Assets
also may be difficult. Accordingly, rather
than requiring Distributing and Controlled
to make exact determinations of their
Nonbusiness Asset Percentages, which
would then be compared to the other cor-
poration's Nonbusiness Asset Percentage,
the second prong of the per se device test
would provide for three bands in making
this comparison. These bands generally
would provide for the comparison of the
Nonbusiness Asset Percentages of Dis-
tributing and Controlled but require less
precision in asset valuation.

In the first band, if one corporation's
Nonbusiness Asset Percentage is 662/3
percent or more, but less than 80 percent,
the distribution would fall within the band
if the other corporation's Nonbusiness As-
set Percentage is less than 30 percent. In
the second band, if one corporation's
Nonbusiness Asset Percentage is 80 per-
cent or more, but less than 90 percent, the
distribution would fall within the band if
the other corporation's Nonbusiness Asset
Percentage is less than 40 percent. In the
third band, if one corporation's Nonbusi-
ness Asset Percentage is 90 percent or
more, the distribution would fall within
the band if the other corporation's Non-
business Asset Percentage is less than 50
percent. All of these bands represent cases
in which the Nonbusiness Asset Percent-
ages of Distributing and Controlled are
significantly different.

If both prongs of the per se device test
are met, that is, if the Nonbusiness Asset
Percentage for either Distributing or Con-
trolled is 662/3 percent or more and the
Nonbusiness Asset Percentages of Dis-
tributing and Controlled fall within one of
the three bands, the distribution would be
a per se device. Otherwise, the general
facts-and-circumstances test of § 1.355-
2(d), as modified by these proposed regu-
lations, would apply to determine if the
transaction was a device.

##### 4. Certain Operating Rules

In making the determination of which
assets of a corporation are Business As-
sets and which are Nonbusiness Assets, if
Distributing or Controlled owns a partner-
ship interest or stock in another corpora-

tion, the proposed regulations would pro-
vide four operating rules.

First, all members of a SAG with re-
spect to which Controlled is the common
parent (CSAG) and all members of a SAG
with respect to which Distributing is the
common parent excluding Controlled and
its SAG (DSAG) would be treated as a
single corporation. Thus, any stock owned
by one member of a SAG in another mem-
ber of the same SAG and any intercom-
pany obligations between the same SAG
members would be disregarded.

Second, a partnership interest would
generally be considered a Nonbusiness
Asset. However, if, by reason of a corpo-
ration's ownership interest or its owner-
ship interest and participation in manage-
ment of the partnership, the corporation is
considered to be engaged in the Business
conducted by such partnership (based on
the criteria that would be used to deter-
mine whether such corporation is consid-
ered to be engaged in the Five-Year-
Active Business of such partnership under
Rev. Ruls. 92-17, 2002-49, and 2007-
42), the fair market value of the partner-
ship interest would be allocated between
Business Assets and Nonbusiness Assets
in the same proportion as the proportion
of the fair market values of the Business
Assets and the Nonbusiness Assets of the
partnership.

Third, a rule similar to the partnership
interest rule would apply for corporate
stock owned by Distributing or Con-
trolled. That is, stock in a corporation,
other than a member of the DSAG or the
CSAG, would generally be a Nonbusiness
Asset. However, there would be an excep-
tion for stock in a Member of a 50-
Percent-Owned Group. For this purpose, a
50-Percent-Owned Group would have the
same meaning as SAG, except substitut-
ing "50-percent" for "80-percent," and a
Member of a 50-Percent-Owned Group
would be a corporation that would be a
member of a DSAG or CSAG, with such
substitution. If a Member of a 50-Percent-
Owned Group with respect to Distributing
or Controlled owns stock in another Mem-
ber of such 50-Percent-Owned Group
(other than a member of the DSAG or the
CSAG, respectively), the fair market
value of such stock would be allocated
between Business Assets and Nonbusi-
ness Assets in the same proportion as the

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proportion of the fair market values of the
Business Assets and the Nonbusiness As-
sets of the issuing corporation.

Fourth, the proposed regulations would
provide for adjustments to prevent distor-
tion if Distributing or Controlled owes
money to or is owed money by a partner-
ship or Member of a 50-Percent-Owned
Group.

The partnership rules and the 50-
Percent-Owned Group rules are designed
to recognize that ownership of a partner-
ship interest or stock in a Member of a
50-Percent-Owned Group may reflect an
investment in Business Assets, Nonbusi-
ness Assets, or both, while minimizing the
significance of changes in the form of
ownership of Business Assets and Non-
business Assets.

##### 5. Multiple Controlleds

If a transaction involves distributions
by Distributing of the stock of more than
one Controlled, proposed §§ 1.355-
2(d)(2)(iv) and 1.355-2(d)(5) would ap-
ply to all such Controlleds. To the extent
any rule would require a comparison be-
tween characteristics of Distributing and
Controlled, there would have to be a com-
parison between Distributing and each
Controlled and between each Controlled
and each other Controlled. If any compar-
ison under proposed § 1.355-2(d)(2)(iv)
or § 1.355-2(d)(5) would result in a de-
termination that a distribution is a device,
then all distributions involved in the trans-
action would be considered a device.

##### B. Minimum Size for Active Business

Section 355(b) does not literally pro-
vide a minimum absolute or relative size
requirement for an active business to qual-
ify under section 355(b). Nevertheless, as
discussed in Part D.3 of the Background
section of the preamble, the Treasury De-
partment and the IRS have determined
that Congress intended that section 355(b)
would require that distributions have sub-
stance and that a distribution involving
only a relatively de minimis active busi-
ness should not qualify under section 355
because such a distribution is not a sepa-
ration of businesses as contemplated by
section 355.

To ensure that congressional intent is
satisfied and to reduce uncertainty, the
Treasury Department and the IRS propose
to add new § 1.355-9. This section would
provide that, for the requirements of sec-
tion 355(a)(1)(C) and (b) to be satisfied
with respect to a distribution, the Five-
Year-Active-Business Asset Percentage
(the percentage determined by dividing
the fair market value of a corporation's
Five-Year-Active-Business Assets by the
fair market value of its Total Assets) of
each of Controlled (or the CSAG) and
Distributing (or the DSAG excluding
Controlled and other CSAG members)
must be at least five percent. Similar to the
proposed definition of Business Assets,
Five-Year-Active-Business Assets would
include reasonable amounts of cash and
cash equivalents held for working capital
and assets required to be held to provide
for exigencies related to a Five-Year-
Active Business or for regulatory pur-
poses with respect to a Five-Year-Active
Business.

In making the determination of the per-
centage of a corporation's assets that are
Five-Year-Active-Business Assets, if a
corporation is considered to be engaged in
a Five-Year-Active Business of a partner-
ship, the fair market value of the partner-
ship interest would be allocated between
Five-Year-Active-Business Assets and
Non-Five-Year-Active-Business Assets
(assets other than Five-Year-Active-
Business Assets) in the same proportion
as the proportion of the fair market values
of Five-Year-Active-Business Assets and
Non-Five-Year-Active-Business Assets of
the partnership.

Except in the case of a member of its
SAG, neither Distributing nor Controlled
would be considered to be engaged in the
Five-Year-Active Business of a corpora-
tion in which it owns stock. Accordingly,
such stock in a corporation would be con-
sidered a Non-Five-Year-Active-Business
Asset. Although the proposed regulations
relating to the device prohibition would
provide an allocation rule for assets held
by a Member of a 50-Percent-Owned
Group, discussed in Part A.4 of this Ex-
planation of Provisions section of the pre-
amble, the Treasury Department and the
IRS believe the SAG Amendments, dis-
cussed in Parts C.5 and D.3.c of the Back-
ground section of the preamble, limit the

ability to take into account assets held by
subsidiaries for purposes of the active
business requirement. Accordingly, pro-
posed § 1.355-9 would not provide a sim-
ilar allocation rule for stock owned by
Distributing or Controlled.

The commenter stated that the regula-
tions should not provide a minimum size
requirement for an active business in any
distribution and that such a requirement
could be especially problematic in intra-
group distributions in preparation for a
distribution outside of a group. Internal
distributions often are necessary to align
the proper assets within Distributing and
Controlled prior to a distribution of the
stock of Controlled outside the group. If a
minimum size requirement is imposed on
each of these internal distributions, tax-
payers may have to undertake movements
of active businesses within groups to meet
the minimum size requirement for each
internal distribution.

In enacting the SAG Amendments,
Congress did not provide an exception to
the requirements of section 355(b) for in-
ternal distributions that are preparatory to
external distributions, although Congress
permitted Distributing and Controlled to
rely on active businesses held by members
of their respective SAGs, even if such
assets were distributed or sold within the
SAG in a taxable transaction. Under the
commenter's rationale, the regulations
should not only permit an internal distri-
bution with a de minimis active business,
but could also permit tax-free treatment
for taxable distributions or sales of assets
within the SAG if such assets need to be
moved in preparation of the external dis-
tribution. The Treasury Department and
the IRS have determined that each distri-
bution must meet all the requirements of
section 355, including the requirement
that Distributing and each Controlled con-
duct an active business immediately after
the distribution. Accordingly, the pro-
posed regulations would provide a five-
percent minimum Five-Year-Active-
Business Asset Percentage requirement
for all distributions.

##### C. Timing of Asset Identification, Characterization, and Valuation

For purposes of determining whether a
transaction would be considered a device

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and whether one or more Five-Year-
Active Businesses would meet the five-
percent minimum Five-Year-Active-
Business Asset Percentage requirement of
proposed § 1.355-9, the assets held by
Distributing and by Controlled must be
identified, and their character and fair
market value must be determined. The
assets under consideration would be the
assets held by Distributing and by Con-
trolled immediately after the distribution.
Thus, for example, the stock of Controlled
that is distributed would not be an asset of
Distributing for this purpose. The charac-
ter of the assets held by Distributing and
by Controlled, as Business Assets or Non-
business Assets or as Five-Year-Active-
Business Assets or Non-Five-Year-
Active-Business Assets, also would be the
character as determined immediately after
the distribution.

The proposed regulations would pro-
vide, however, that the fair market value
of assets would be determined, at the elec-
tion of the parties on a consistent basis,
either (a) immediately before the distribu-
tion, (b) on any date within the 60-day
period before the distribution, (c) on the
date of an agreement with respect to the
distribution that was binding on Distribut-
ing on such date and at all times thereaf-
ter, or (d) on the date of a public an-
nouncement or filing with the Securities
and Exchange Commission with respect
to the distribution. The parties would be
required to make consistent determina-
tions between themselves, and use the
same date, for purposes of applying the
device rules of proposed § 1.355-2(d) and
the five-percent minimum Five-Year-
Active-Business Asset Percentage re-
quirement of proposed § 1.355-9. If the
parties do not meet these consistency
requirements, the valuation would be
determined as of immediately before the
distribution unless the Commissioner
determines that the use of such date is
inconsistent with the purposes of section
355 and the regulations thereunder.

##### D. Anti-Abuse Rules

The proposed regulations would also
provide anti-abuse rules. Under the anti-
abuse rules, a transaction or series of
transactions (such as a change in the form
of ownership of an asset; an issuance,

assumption or repayment of indebtedness;
or an issuance or redemption of stock)
would not be given effect if undertaken
with a principal purpose of affecting the
Nonbusiness Asset Percentage of any cor-
poration in order to avoid a determination
that a distribution was a device or affect-
ing the Five-Year-Active-Business Asset
Percentage of any corporation in order to
avoid a determination that a distribution
does not meet the requirements of
§ 1.355-9. The transactions covered by
the anti-abuse rules generally would not
include an acquisition or disposition of
assets, other than an acquisition from
or disposition to a person the ownership of
whose stock would, under section 318(a)
(other than paragraph (4) thereof), be at-
tributed to Distributing or Controlled, or a
transfer of assets between Distributing
and Controlled. However, such transac-
tions would not be given effect if they are
transitory, for example, if Distributing
contributes cash to Controlled and retains
some of the stock of Controlled or Con-
trolled debt instruments, and there is a
plan or intention for Controlled to return
the cash to Distributing in redemption of
the stock or repayment of the debt.

#### Statement of Availability of IRS Documents

IRS revenue procedures, revenue rul-
ings, notices, and other guidance cited in
this document are published in the Inter-
nal Revenue Bulletin (or Cumulative Bul-
letin) and are available from the Superin-
tendent of Documents, U.S. Government
Printing Office, Washington, D.C. 20402,
or by visiting the IRS Web site, http://
www.irs.gov.

#### Effect on Other Documents

Section 3 of Notice 2015-59 is obso-
lete as of July 15, 2016. The IRS will
modify Rev. Rul. 73-44, as of the date the
Treasury decision adopting these regula-
tions as final regulations is published in
the Federal Register, as necessary to con-
form to § 1.355-9 of these proposed reg-
ulations. The IRS solicits comments as to
whether other publications should be
modified, clarified, or obsoleted.

#### Special Analyses

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 deter-
mined that section 553(b) of the Admin-
istrative Procedure Act (5 U.S.C. chapter
5) does not apply to these proposed regu-
lations. Pursuant to the Regulatory Flexi-
bility Act (5 U.S.C. chapter 6), it is hereby
certified that this regulation will not have
a significant economic impact on a sub-
stantial number of small entities. This cer-
tification is based on the fact that these
regulations primarily affect larger corpo-
rations operating more than one business
and with a substantial number of share-
holders. Thus, these regulations are not
expected to affect a substantial number of
small entities. Accordingly, a regulatory
flexibility analysis is not required. Pursu-
ant to section 7805(f) of the Code, these
regulations will be submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on their
impact on small business.

#### Comments and Requests for Public Hearing

Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written or electronic
comments that are submitted timely to the
IRS as prescribed in this preamble under
the ADDRESSES heading. The Treasury
Department and the IRS request com-
ments on all aspects of the proposed reg-
ulations, including-

1\. Whether there should be any excep-
tions to the application of proposed
§ 1.355-9.

2\. Whether additional exceptions
should be incorporated into the per se
device rule in proposed § 1.355-2(d)(5).

3\. The scope of the safe harbors relat-
ing to presence of Nonbusiness Assets as
evidence of device under proposed
§ 1.355-2(d)(2)(iv)(C)(1) and (2) and
whether additional safe harbors should be
added to proposed § 1.355-2(d).

4\. Whether the definition of Business
Assets in proposed § 1.355-
2(d)(2)(iv)(B)(2) should be revised, for
example, to include additional categories

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of assets or to include cash or cash equiv-
alents expected to be used for other cate-
gories of expenditures.

5\. Whether the operating rules applica-
ble to proposed § 1.355-2(d)(2)(iv)(D)(6)
through (8) concerning the allocation of
the value of a partnership interest between
Business Assets and Nonbusiness Assets
to its partners, the allocation of the value
of the stock of a Member of a 50-Percent-
Owned Group between Business Assets
and Nonbusiness Assets to its sharehold-
ers, and certain borrowings should be
modified, including whether the partner-
ship rule should allocate an allocable
share of the partnership's gross assets to
its partners, whether different allocation
rules should be used for partnership inter-
ests with different characteristics(for ex-
ample, limited liability vs. non-limited li-
ability), and whether the rules relating to
borrowing between a partnership and a
partner or between a Member of a 50-
Percent-Owned Group and a shareholder
should be made more specific.

6\. Whether the anti-abuse rules in the
proposed regulations pertaining to device
and the five-percent minimum Five-
Year-Active-Business Assets require-
ment should be revised, for example, to
include or exclude additional transactions
or to include a reference to acquisitions of
assets by Distributing or Controlled on
behalf of shareholders.

7\. Whether the absence of any device
factor, for example, a small difference in
Nonbusiness Asset Percentages for Dis-
tributing and Controlled, should be con-
sidered a nondevice factor.

All comments will be available at
www.regulations.gov or upon request.

A public hearing will be scheduled if
requested in writing by any person that
timely submits written or electronic com-
ments. If a public hearing is scheduled,
notice of the date, time, and place for the
public hearing will be published in the
Federal Register.

#### Drafting Information

The principal authors of these proposed
regulations are Stephanie D. Floyd and Rus-
sell P. Subin of the Office of Associate
Chief Counsel (Corporate). Other personnel
from the Treasury Department and the IRS
participated in their development.

* * * * *

#### Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:

PART 1-INCOME TAXES

Paragraph 1. The authority citation for
part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.355-0 is amended by:

1\. Removing from the introductory text
"1.355-7" and adding "1.355-9" in its
place.

2\. Revising the entry for § 1.355-
2(d)(2)(iv)(B).

3\. Adding entries for § 1.355-
2(d)(2)(iv)(B)(1),(2),(3),(4),(5), (6), and
(7).

4\. Redesignating the entry for § 1.355-
2(d)(2)(iv)(C) as the entry for § 1.355-
2(d)(2)(iv)(F).

5\. Adding a new entry for § 1.355-
2(d)(2)(iv)(C).

6\. Adding entries for § 1.355-
2(d)(2)(iv)(C)(1), (2), and (3).

7\. Adding an entry for § 1.355-
2(d)(2)(iv)(D).

8\. Adding entries for § 1.355-
2(d)(2)(iv)(D)(1),(2), (3), and (4).

9\. Adding entries for § 1.355-
2(d)(2)(iv)(D)(4)(i) and (ii).

10\. Adding entries for § 1.355-
2(d)(2)(iv)(D)(5) and (6).

11\. Adding entries for § 1.355-
2(d)(2)(iv)(D)(6)(i) and (ii).

12\. Adding an entry for § 1.355-
2(d)(2)(iv)(D)(7).

13\. Adding entries for § 1.355-
2(d)(2)(iv)(D)(7)(i) and (ii).

14\. Adding an entry for § 1.355-
2(d)(2)(iv)(D)(8).

15\. Adding an entry for § 1.355-
2(d)(2)(iv)(E).

16\. Redesignating the entry for
§ 1.355-2(d)(5) as the entry for § 1.355-
2(d)(6).

17\. Adding a new entry for § 1.355-
2(d)(5).

18\. Adding entries for § 1.355-
2(d)(5)(i), (ii), (iii), and (iv).

19\. Adding entries for § 1.355-2(i)(1),
(i)(1)(i) and (ii), and (i)(2).

20\. Adding an entry for § 1.355-8.

21\. Adding entries for § 1.355-9.

The revisions and additions read as fol-
lows:

§ 1.355-0 Outline of sections.

* * * * *

§ 1.355-2 Limitations.

* * * * *

(d) * * *

(2) * * *

(iv) * * *

(B) Definitions.

(1) Business.

(2) Business Assets.

(3) Nonbusiness Assets.

(4) Total Assets.

(5) Nonbusiness Asset Percentage.

(6) Separate Affiliated Group, SAG,
CSAG, and DSAG.

(7) 50-Percent-Owned Group, Member

of a 50-Percent-Owned Group.

(C) Presence of Nonbusiness Assets as
evidence of device.

(1) Ownership of Nonbusiness Assets.

(2) Difference between Nonbusiness
Asset Percentages.

(3) Cross-reference.

(D) Operating rules.

(1) Multiple controlled corporations.

(2) Treatment of SAG as a single cor-
poration.

(3) Time to identify assets and deter-
mine character of assets.

(4) Time to determine fair market
value of assets.

(i) In general.

(ii) Consistency.

(5) Fair market value.

(6) Interest in partnership.

(i) In general.

(ii) Exception for certain interests in
partnerships.

(7) Stock in corporation.

(i) In general.

(ii) Exception for stock in Member of a
50-Percent-Owned Group.

(8) Obligation between distributing
corporation or controlled corporation and
certain partnerships or Members of 50-
Percent-Owned Groups.

(E) Anti-abuse rule.

* * * * *

(5) Distributions involving separation
of Business Assets from Nonbusiness As-
sets.

(i) In general.

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(ii) Definitions and operating rules.

(iii) Certain distributions involving
separation of Nonbusiness Assets from
Business Assets.

(iv) Anti-abuse rule.

* * * * *

(i) * * *

(1) Paragraph (d) of this section.

(i) In general.

(ii) Transition rule.

(2) Paragraph (g) of this section.

* * * * *

#### § 1.355-8 Reserved.

§ 1.355-9 Minimum percentage of Five-
Year-Active-Business Assets.

(a) Definitions.

(1) Distributing, Controlled.

(2) Five-Year-Active Business.

(3) Five-Year-Active-Business Assets.

(4) Non-Five-Year-Active-Business
Assets.

(5) Total Assets.

(6) Five-Year-Active-Business Asset
Percentage.

(7) Separate Affiliated Group, CSAG,
and DSAG.

(b) Five percent minimum Five-Year-
Active-Business Asset Percentage.

(c) Operating rules.

(1) Treatment of SAG and fair market
value.

(2) Time to identify assets, determine
character of assets, and determine fair
market value of assets.

(3) Interest in partnership.

(i) In general.

(ii) Exception for certain interests in
partnerships.

(d) Anti-abuse rule.

(e) Effective/applicability date.

(1) In general.

(2) Transition rule.

Par. 3. Section 1.355-2 is amended by:

1\. Adding the language "federal" before
the language "tax avoidance" in the
second sentence of paragraph (d)(1).

2\. Removing the last sentence of para-
graph (d)(1) and adding two sentences
at the end of the paragraph.

3\. Revising paragraphs (d)(2)(iv)(A) and
(B).

4\. Redesignating paragraph (d)(2)(iv)(C) as
(d)(2)(iv)(F).

5\. Adding new paragraphs (d)(2)(iv)(C),
(D), and (E).

6\. Revising paragraph (d)(3)(ii).

7\. Removing from paragraph (d)(3)(ii)(A)
the language "the business" and add-
ing the language "one or more Busi-
nesses (as defined in paragraph
(d)(2)(iv)(B)(1) of this section) of the
distributing corporation, the controlled
corporation, or both" in its place.

8\. Revising paragraph (d)(4).

9\. Redesignating paragraph (d)(5) as
(d)(6).

10\. Adding a new paragraph (d)(5).

11\. Revising newly designated paragraph
(d)(6)(i).

12\. Removing from newly designated
paragraph (d)(6)(v) the language
"subparagraph (5)" and adding the
language "paragraph (d)(6)" in its
place.

13\. Removing from the last sentence of
newly designated paragraph (d)(6)(v)
Example 1 the language "(d)(5)(i)"
and adding the language "(d)(6)(i)" in
its place.

14\. Removing from the sixth sentence of
newly designated paragraph (d)(6)(v)
Example 2 the language "(d)(5)(i)"
and adding the language "(d)(6)(i)" in
its place.

15\. Removing from the last sentence of
newly designated paragraph (d)(6)(v)
Example 2 the language "made from all
the facts" and adding the language
"made from either the presence of a
separation of Business Assets from
Nonbusiness Assets as described in
paragraph (d)(5) of this section or from
all the facts" in its place.

16\. Adding to paragraph (h) the language
"and § 1.355-9 (relating to Minimum
Percentage of Five-Year-Active-
Business Assets)" immediately before
the language "are satisfied".

17\. Revising paragraph (i).

The revisions and additions read as fol-
lows:

§ 1.355-2 Limitations.

* * * * *

(d) * * *

(1) * * * However, if a transaction is
specified in paragraph (d)(5)(iii) of this
section, then it is considered to have been
used principally as a device unless it is
also specified in paragraph (d)(3)(iv) of
this section or paragraph (d)(6) of this

section. If a transaction is specified in
paragraph (d)(6) of this section, then it is
ordinarily considered not to have been
used principally as a device.

(2) * * *

(iv) * * * (A) In general. The determi-
nation of whether a transaction was used
principally as a device will take into ac-
count the nature, kind, amount, and use of
the assets of the distributing corporation
and the controlled corporation.

(B) Definitions. The following defini-
tions apply for purposes of this paragraph
(d)(2)(iv):

(1) Business. Business means the active
conduct of a trade or business, within the
meaning of section 355(b) and § 1.355-3,
without regard to-

(i) The requirements of section
355(b)(2)(B), (C), and (D), and § 1.355-
3(b)(3) and (4) (relating to active conduct
throughout the five-year period preceding
a distribution and acquisitions during such
period);

(ii) The collection of income require-
ment in § 1.355-3(b)(2)(ii); and

(iii) The requirement of § 1.355-9 (re-
lating to Minimum Percentage of Five-
Year-Active-Business Assets (as defined
in § 1.355-9(a)(3))).

(2) Business Assets. Business Assets of
a corporation means its gross assets used
in one or more Businesses. Such assets
include cash and cash equivalents held as
a reasonable amount of working capital
for one or more Businesses. Such assets
also include assets required (by binding
commitment or legal requirement) to be
held to provide for exigencies related to a
Business or for regulatory purposes with
respect to a Business. For this purpose,
such assets include assets the holder is
required (by binding commitment or legal
requirement) to hold to secure or other-
wise provide for a financial obligation rea-
sonably expected to arise from a Business
and assets held to implement a binding
commitment to expend funds to expand or
improve a Business.

(3) Nonbusiness Assets. Nonbusiness
Assets of a corporation means its gross
assets other than its Business Assets.

(4) Total Assets. Total Assets of a cor-
poration means its Business Assets and its
Nonbusiness Assets.

(5) Nonbusiness Asset Percentage. The
Nonbusiness Asset Percentage of a corpo-

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ration is the percentage determined by di-
viding the fair market value of its Non-
business Assets by the fair market value
of its Total Assets.

(6) Separate Affiliated Group, SAG,
CSAG, and DSAG. Separate Affiliated
Group (or SAG) means a separate affili-
ated group as defined in section
355(b)(3)(B), CSAG means a SAG with
respect to which a controlled corporation
is the common parent, and DSAG means a
SAG with respect to which a distributing
corporation is the common parent, exclud-
ing the controlled corporation and any
other members of the CSAG.

(7) 50-Percent-Owned Group, Member
of a 50-Percent-Owned Group. 50-
Percent-Owned Group has the same
meaning as SAG, except that "50-percent"
is substituted for "80-percent" each place
it appears in section 1504(a)(2), for pur-
poses of section 355(b)(3)(B). A Member
of a 50-Percent-Owned Group is a corpo-
ration that would be a member of a DSAG
or a CSAG, with the substitution provided
in this paragraph (d)(2)(iv)(B)(7).

(C) Presence of Nonbusiness Assets as
evidence of device-(1) Ownership of
Nonbusiness Assets. Ownership of Non-
business Assets by the distributing corpo-
ration or the controlled corporation is ev-
idence of device. The strength of the
evidence will be based on all the facts and
circumstances, including the Nonbusiness
Asset Percentage for each corporation.
The larger the Nonbusiness Asset Percent-
age of either corporation, the stronger is
the evidence of device. Ownership of
Nonbusiness Assets ordinarily is not evi-
dence of device if the Nonbusiness Asset
Percentage of each of the distributing cor-
poration and the controlled corporation is
less than 20 percent.

(2) Difference between Nonbusiness
Asset Percentages. A difference between
the Nonbusiness Asset Percentage of the
distributing corporation and the Nonbusi-
ness Asset Percentage of the controlled
corporation is evidence of device, and the
larger the difference, the stronger is the
evidence of device. Such a difference or-
dinarily is not itself evidence of device
(but may be considered in determining the
presence or the strength of other device
factors) if-

(i) The difference is less than 10 per-
centage points; or

(ii) The distribution is not pro rata
among the shareholders of the distributing
corporation, and the difference is attribut-
able to a need to equalize the value of the
controlled stock and securities (if any)
distributed and the value of the distribut-
ing stock and securities (if any) ex-
changed therefor by the distributees.

(3) Cross-reference. See paragraph
(d)(5) of this section for a rule under
which a distribution is considered to have
been used principally as a device when the
distributing corporation or the controlled
corporation has a large Nonbusiness Asset
Percentage and there is a large difference
between Nonbusiness Asset Percentages
of the two corporations.

(D) Operating rules. The following op-
erating rules apply for purposes of this
paragraph (d)(2)(iv):

(1) Multiple controlled corporations. If
a transaction involves distributions by a
distributing corporation of the stock of
more than one controlled corporation, this
paragraph (d)(2)(iv) applies to all such
controlled corporations. If any provision
in this paragraph (d)(2)(iv) requires a
comparison between characteristics of the
distributing corporation and the controlled
corporation, the provision also requires
such a comparison between the distribut-
ing corporation and each of the controlled
corporations and between each controlled
corporation and each other controlled cor-
poration. If any distribution involved in
the transaction is determined to have been
used principally as a device by reason of
this paragraph (d)(2)(iv), all distributions
involved in the transaction are considered
to have been used principally as a device.

(2) Treatment of SAG as a single cor-
poration. The members of a DSAG are
treated as a single corporation, the mem-
bers of a CSAG are treated as a single
corporation, references to the distributing
corporation include all members of the
DSAG, and references to the controlled
corporation include all members of the
CSAG.

(3) Time to identify assets and deter-
mine character of assets. The assets of the
distributing corporation and the controlled
corporation that are relevant in connection
with this paragraph (d)(2)(iv), and the
character of these assets as Business As-
sets or Nonbusiness Assets, must be de-
termined by the distributing corporation

and the controlled corporation immedi-
ately after the distribution. Accordingly,
for purposes of this paragraph (d)(2)(iv),
the assets of the distributing corporation
do not include any asset, including stock
of the controlled corporation, that is dis-
tributed in the transaction.

(4) Time to determine fair market value
of assets-(i) In general. The distributing
corporation and the controlled corporation
each must determine the fair market value
of its assets at the time of the distribution
as of one of the following dates: Immedi-
ately before the distribution; on any date
within the 60-day period before the distri-
bution; on the date of an agreement with
respect to the distribution that was binding
on the distributing corporation on such
date and at all times thereafter; or on the
date of a public announcement or filing
with the Securities and Exchange Com-
mission with respect to the distribution.

(ii) Consistency. The distributing cor-
poration and the controlled corporation
must make the determinations described
in paragraph (d)(2)(iv)(D)(4)(i) of this
section in a manner consistent with each
other and as of the same date for purposes
of this paragraph (d)(2)(iv), paragraph
(d)(5) of this section, and § 1.355-9. If
these consistency requirements are not
met, the fair market value of assets will be
determined immediately before the distri-
bution for purposes of all such provisions,
unless the Commissioner determines that
the use of such date is inconsistent with
the purposes of section 355 and the regu-
lations thereunder.

(5) Fair market value. The fair market
value of an asset is determined under gen-
eral federal tax principles but reduced (but
not below the adjusted basis of the asset)
by the amount of any liability that is de-
scribed in section 357(c)(3) (relating to
exclusion of certain liabilities, including
liabilities the payment of which would
give rise to a deduction, from the amount
of liabilities assumed in certain ex-
changes) and relates to the asset (or to a
Business with which the asset is associ-
ated). Any other liability is disregarded
for purposes of determining the fair mar-
ket value of an asset.

(6) Interest in partnership-(i) In gen-
eral. Except as provided in paragraph
(d)(2)(iv)(D)(6)(ii) of this section, an in-

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terest in a partnership is a Nonbusiness
Asset.

(ii) Exception for certain interests in
partnerships. A distributing corporation
or controlled corporation may be consid-
ered to be engaged in one or more Busi-
nesses conducted by a partnership. This
determination will be made using the
same criteria that would be used to deter-
mine for purposes of section 355(b) and
§ 1.355-3 whether the corporation is con-
sidered to be engaged in the active con-
duct of a trade or business conducted by
the partnership (relating to the corpora-
tion's ownership interest or to its owner-
ship interest and participation in manage-
ment of the partnership). If a distributing
corporation or controlled corporation is
considered to be engaged in one or more
Businesses conducted by a partnership,
the fair market value of the corporation's
interest in the partnership will be allocated
between Business Assets and Nonbusi-
ness Assets in the same proportion as the
proportion of the fair market values of the
Business Assets and Nonbusiness Assets
of the partnership.

(7) Stock in corporation-(i) In gen-
eral. Except as provided in paragraph
(d)(2)(iv)(D)(7)(ii) of this section, stock in
a corporation other than a member of the
DSAG or the CSAG is a Nonbusiness
Asset.

(ii) Exception for stock in Member of a
50-Percent-Owned Group. If a Member of
a 50-Percent-Owned Group with respect
to the distributing corporation or the con-
trolled corporation owns stock in another
Member of the 50-Percent-Owned Group
(other than a member of the DSAG or the
CSAG, respectively), the fair market
value of such stock will be allocated be-
tween Business Assets and Nonbusiness
Assets in the same proportion as the pro-
portion of the fair market values of the
Business Assets and Nonbusiness Assets
of the issuing corporation. This computa-
tion will be made with respect to lower-
tier Members of the 50-Percent-Owned
Group before the computations with re-
spect to higher-tier members.

(8) Obligation between distributing
corporation or controlled corporation
and certain partnerships or Members of
50-Percent-Owned Groups. If an obliga-
tion of the distributing corporation or the
controlled corporation is held by a part-

nership
described
in
paragraph
(d)(2)(iv)(D)(6)(ii) of this section or by a
Member of its 50-Percent-Owned Group,
or if an obligation of a partnership de-
scribed in paragraph (d)(2)(iv)(D)(6)(ii)
of this section or of a Member of its
50-Percent-Owned Group, with respect to
the distributing corporation or the con-
trolled corporation, is held by the distrib-
uting corporation or the controlled corpo-
ration, proper adjustments will be made to
prevent double inclusion of assets or in-
appropriate allocation between Business
Assets and Nonbusiness Assets of the dis-
tributing corporation or the controlled cor-
poration on account of such obligation.
See Examples 6 and 7 of paragraph (d)(4)
of this section.

(E) Anti-abuse rule. A transaction or
series of transactions undertaken with a
principal purpose of affecting the Non-
business Asset Percentage of any corpo-
ration will not be given effect for purposes
of applying this paragraph (d)(2)(iv). For
this purpose, a transaction or series of
transactions includes a change in the form
of ownership of an asset; an issuance,
assumption, or repayment of indebtedness
or other obligations; or an issuance or
redemption of stock. However, this para-
graph (d)(2)(iv)(E) generally does not ap-
ply to a non-transitory acquisition or dis-
position of assets, other than an
acquisition from or disposition to a person
the ownership of whose stock would, un-
der section 318(a) (other than paragraph
(4) thereof), be attributed to the distribut-
ing corporation or the controlled corpora-
tion, or to a non-transitory transfer of as-
sets between the distributing corporation
and the controlled corporation.

* * * * *

(3) * * *

(ii) Corporate business purpose. A cor-
porate business purpose for the transac-
tion is evidence of nondevice. The stron-
ger the evidence of device (such as the
presence of the device factors specified in
paragraph (d)(2) of this section), the stron-
ger the corporate business purpose must
be to prevent the determination that the
transaction is being used principally as a
device. Evidence of device presented by
ownership of Nonbusiness Assets (as de-
fined in paragraph (d)(2)(iv)(B)(3) of this
section) can be outweighed by the exis-
tence of a corporate business purpose for

the ownership. Evidence of device pre-
sented by a difference between the Non-
business Asset Percentages (as defined in
paragraph (d)(2)(iv)(B)(5) of this section)
of the distributing corporation and the
controlled corporation can be outweighed
by the existence of a corporate business
purpose for the difference. A corporate
business purpose that relates to a separa-
tion of Nonbusiness Assets from one or
more Businesses or Business Assets (as
defined in paragraph (d)(2)(iv)(B) of this
section) is not evidence of nondevice un-
less the business purpose involves an ex-
igency that requires an investment or
other use of the Nonbusiness Assets in
one or more Businesses of the distributing
corporation, the controlled corporation, or
both. The assessment of the strength of a
corporate business purpose will be based
on all of the facts and circumstances, in-
cluding, but not limited to, the following
factors:

* * * * *

(4) Examples. The provisions of para-
graphs (d)(1) through (3) of this section
may be illustrated by the following exam-
ples. For purposes of these examples, A
and B are individuals; P is a partnership;
D and C are the distributing corporation
and the controlled corporation, respective-
ly; D and C each has no assets other than
those described; there is no other evidence
of device or nondevice other than as de-
scribed; D has accumulated earnings and
profits; and D distributes the stock of C in
a distribution which, but for the issue of
whether the transaction has been used
principally as a device, satisfies the re-
quirements of section 355(a).

Example 1. Sale after distribution (device). A
owns all of the stock of D, which is engaged in the
warehousing business. D owns all of the stock of C,
which is engaged in the transportation business. All
of D's and C's assets are Business Assets. D em-
ploys B, who is extremely knowledgeable of the
warehousing business in general and the operations
of D in particular. B has informed A that he will
seriously consider leaving D if he is not given the
opportunity to purchase a significant amount of stock
of D. Because of his knowledge and experience, the
loss of B would seriously damage the business of D.
B cannot afford to purchase any significant amount
of stock of D as long as D owns C. Accordingly, D
distributes the stock of C to A and A subsequently
sells a portion of his D stock to B. However, instead
of A selling a portion of the D stock, D could have
issued additional shares to B after the distribution. In
light of the fact that D could have issued additional
shares to B, the sale of D stock by A is substantial

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evidence of device. The transaction is considered to
have been used principally as a device. See para-
graph (d)(1), (2)(i), (ii), and (iii)(A), (B), and (D),
and (3)(i) and (ii) of this section.

Example 2. Disproportionate division of Non-
business Assets (device)-(i) Facts. D owns and
operates a fast food restaurant in State M and owns
all of the stock of C, which owns and operates a fast
food restaurant in State N. The value of the Business
Assets of D's and C's fast food restaurants are $100
and $105, respectively. D also has $195 cash which
D holds as a Nonbusiness Asset. D and C operate
their businesses under franchises granted by compet-
ing businesses F and G, respectively. G has recently
changed its franchise policy and will no longer grant
or renew franchises to subsidiaries or other members
of the same affiliated group of corporations operat-
ing businesses under franchises granted by its com-
petitors. Thus, C will lose its franchise if it remains
a subsidiary of D. The franchise is about to expire.
The lease for the State M location will expire in 24
months, and D will be forced to relocate at that time.
While D has not made any plans, it is weighing its
option to purchase a building for the relocation. D
contributes $45 to C, which C will retain, and dis-
tributes the stock of C pro rata among D's share-
holders.

(ii) Analysis. After the distribution, D's Nonbusi-
ness Asset Percentage is 60 percent ($150/$250), and
C's Nonbusiness Asset Percentage is 30 percent
($45/$150). D's and C's ownership of Nonbusiness
Assets of at least 20 percent of their respective Total
Assets is evidence of device with respect to each.
The difference between D's Nonbusiness Asset Per-
centage and C's Nonbusiness Asset Percentage is 30
percentage points, which is also evidence of device.
The corporate business purpose for the distribution
does not relate to a separation of Nonbusiness Assets
from one or more Businesses or Business Assets and
is evidence of nondevice. However, D has no cor-
porate business purpose for the difference of Non-
business Asset Percentages. While D is considering
purchasing a building for use in the State M location,
this purchase is not required by any exigency. The
fact that the distribution is pro rata is also evidence
of device. Based on all the facts and circumstances,
the transaction is considered to have been used prin-
cipally as a device. See paragraph (d)(1), (2)(i), (ii),
(iv)(A) and (C), and (3)(i) and (ii)(A), (B), and (C) of
this section.

Example 3. Proportionate division of Nonbusi-
ness Assets (nondevice). The facts are the same as in
Example 2, except that D contributes $95 of the cash
to C instead of $45. After the distribution, D's Non-
business Asset Percentage is 50 percent ($100/$200)
and C's Nonbusiness Asset Percentage is 47.5 per-
cent ($95/$200), each of which is evidence of de-
vice. The difference between D's Nonbusiness Asset
Percentage and C's Nonbusiness Asset Percentage
(2.5 percentage points) is less than 10 percentage
points and thus is not evidence of device. The cor-
porate business purpose for the distribution is evi-
dence of nondevice. Based on all the facts and cir-
cumstances, the transaction is considered not to have
been used principally as a device. See paragraph
(d)(1), (2)(i), (ii), (iv)(A) and (C), and (3)(i) and
(ii)(A), (B), and (C) of this section.

Example 4. Disproportionate division of Non-
business Assets (nondevice).

The facts are the same as in Example 2, except
that the lease for the State M location will expire in
6 months instead of 24 months, and D will use $80
of the $150 cash it retains to purchase a nearby
building for the relocation. After the distribution,
D's Nonbusiness Asset Percentage is 60 percent, and
C's Nonbusiness Asset Percentage is 30 percent. D's
and C's ownership of Nonbusiness Assets of at least
20 percent of their respective Total Assets is evi-
dence of device with respect to each. The difference
between D's Nonbusiness Asset Percentage and C's
Nonbusiness Asset Percentage is 30 percentage
points, which is also evidence of device. However, D
has a corporate business purpose for a significant
part of the difference of Nonbusiness Asset Percent-
ages because D's use of $80 is required by business
exigencies. The fact that the distribution is pro rata is
also evidence of device. The corporate business pur-
pose for the distribution is evidence of nondevice.
Based on all the facts and circumstances, the trans-
action is not considered to have been used princi-
pally as a device. See paragraph (d)(1), (2)(i), (ii),
(iv)(A) and (C), and (3)(i) and (ii)(A), (B), and (C) of
this section.

Example 5. Nonbusiness Asset Percentage (50-
Percent-Owned Group)-(i) Facts. C's assets con-
sist of 50% of the stock of S1 and other assets
consisting of $10,000 of Business Assets and $5,000
of Nonbusiness Assets. S1's assets consist of 40% of
the stock of S2, 60% of the stock of S3 and other
assets consisting of $1,000 of Business Assets and
$500 of Nonbusiness Assets. S1 has $500 of liabil-
ities, owed to unrelated persons. S2's assets consist
of $500 Business Assets and $100 Nonbusiness As-
sets. S2 has $200 of liabilities. S3's assets consist of
$3,000 Business Assets and $1,500 Nonbusiness As-
sets. S3 has $3,500 of liabilities, owed to unrelated
persons.

(ii) Determination of SI's Business Assets and
Nonbusiness Assets. Because C owns at least 50% of
the stock of S1, S1 is a member of C's 50-Percent-
Owned Group. See paragraph (d)(2)(iv)(B)(7) of this
section. In determining the amount of C's Business
Assets and Nonbusiness Assets, whether S1's stock
in S2 and S3 are Nonbusiness Assets or partially
Nonbusiness Assets and partially Business Assets
must first be determined. See paragraph
(d)(2)(iv)(D)(7)(ii) of this section (computations are
made with respect to lower-tier Members of a 50-
Percent-Owned Group before the computations with
respect to higher-tier members). The fair market
value of S1's stock in S2 is $160 (40% of $400
($500 + $100 - $200)). Because S1 owns less than
50% of the stock of S2, S2 is not a member of C's
50-Percent-Owned Group, and thus the S2 stock is a
$160 Nonbusiness Asset in the hands of S1. See
paragraph (d)(2)(iv)(B)(7) and (D)(7)(i) of this sec-
tion. The fair market value of S1's stock in S3 is
$600 (60% of $1,000 ($3,000 + $1,500 - $3,500)).
Because C owns at least 50% of the stock of S1 and
S1 owns at least 50% of the stock of S3, S3 is a
member of C's 50-Percent-Owned Group. See para-
graph (d)(2)(iv)(B)(7) of this section. Thus, the fair
market value of the S3 stock is allocated between
Business Assets and Nonbusiness Assets in the same
proportion as S3's proportion of Business Assets and

Nonbusiness Assets. See paragraph (d)(2)(iv)(D)(7)(ii)
of this section. Because S3 has Business Assets of
$3,000 and Nonbusiness Assets of $1,500, this propor-
tion is 662/3 % Business Assets ($3,000/$4,500) and
331/3 % Nonbusiness Assets ($1,500/$4,500). The
$600 fair market value of S1's stock in S3 is allocated
$400 to Business Assets ($600 x 662/3%) and $200 to
Nonbusiness Assets ($600 x 331/3 %). Thus, S1's assets
consist of $1,400 of Business Assets ($1,000 held di-
rectly + $400 allocated from S3) and $860 of Non-
business Assets ($500 held directly + $160 fair market
value of its S2 stock + $200 allocated from S3).

(iii) Determination of C's Business Assets and
Nonbusiness Assets. The fair market value of C's
stock in S1 is $880 (50% of $1,760 ($160 + $600 +
$1,000 + $500 - $500)). Because C owns at least 50%
of the stock of S1, S1 is a member of C's 50-Percent-
Owned Group. See paragraph (d)(2)(iv)(B)(7) of this
section. Thus, the fair market value of the S1 stock is
allocated between Business Assets and Nonbusiness
Assets in the same proportion as the proportion of S1's
Business Assets and Nonbusiness Assets. See para-
graph (d)(2)(iv)(D)(7)(ii) of this section. Because S1
has Business Assets of $1,400 and Nonbusiness Assets
of $860, this proportion is 61.95% Business Assets
($1,400/$2,260) and 38.05% Nonbusiness Assets
($860/$2,260). The $880 fair market value of C's S1
stock is allocated $545 to Business Assets ($880 x
61.95%) and $335 to Nonbusiness Assets ($880 x
38.05%). Thus, C's assets consist of $10,545 of Busi-
ness Assets ($10,000 + $545) and $5,335 of Nonbusi-
ness Assets ($5,000 + $335), for Total Assets of
$15,880. C's Nonbusiness Asset Percentage is 33.6%
($5,335/$15,880).

Example 6. Partnership interest held by Distrib-
uting. (i) Facts. D has directly-held Business Assets
of $1,000, directly held Nonbusiness Assets of
$2,000, and a 40% partnership interest in P. P has
$450 of Business Assets and $1,350 of cash, which
P holds as a Nonbusiness Asset, and owes a liability
of $800.

(ii) Analysis. Pursuant to paragraph
(d)(2)(iv)(D)(6)(ii) of this section, D is allocated
$100 of Business Assets from P ($400 (value of D's
40% interest in P) x 25% ($450/$1,800)) and $300 of
Nonbusiness Assets from P ($400 (value of D's 40%
interest in P) x 75% ($1,350/$1,800)), which are
added to D's directly held Business Assets and Non-
business Assets, respectively. D's Nonbusiness As-
set Percentage is 67.6% ($2,300 Nonbusiness As-
sets/$3,400 Total Assets).

Example 7. Borrowing by Distributing from part-
nership. (i) Facts. The facts are the same as in
Example 6, except that D borrows $500 from P and
invests the proceeds in a Nonbusiness Asset. P's
directly-held Nonbusiness Assets increase by $500.
The D obligation is a Nonbusiness Asset in P's
hands.

(ii) Analysis. D's directly-held Nonbusiness As-
sets increase by $500, to $2,500. There is no corre-
sponding decrease in the amount of Business Assets
or Nonbusiness Assets allocated to D from P, be-
cause a Nonbusiness Asset of P ($500 cash) has been
replaced by another $500 Nonbusiness Asset, the
obligation from D. Effectively, because D has a 40%
interest in P, D has borrowed $200 (40% of $500)
from itself. Accordingly, D's Nonbusiness Assets
must be decreased by $200. D's Business Assets will

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continue to be $1,100 ($1,000 directly held plus
$100 allocated from P), and D's Nonbusiness Assets
will be $2,600 ($2,500 directly held, plus $300 al-
located from P less the $200 decrease to prevent
double inclusion of the obligation and the obligation
proceeds).

* * * * *

(5) Distributions involving separation
of Business Assets from Nonbusiness As-
sets-(i) In general. A distribution speci-
fied in paragraph (d)(5)(iii) of this section
is considered to have been used princi-
pally as a device, notwithstanding the
presence of nondevice factors described in
paragraph (d)(3) of this section or other
facts and circumstances. However, this
paragraph (d)(5)(i) does not apply to a
distribution that is described in paragraph
(d)(3)(iv) of this section (distributions to
domestic corporations entitled to certain
dividends received deductions absent ap-
plication of section 355(a)) or paragraph
(d)(6) of this section (transactions ordinar-
ily not considered to be a device).

(ii) Definitions and operating rules.
The definitions in paragraph (d)(2)(iv)(B)
of this section and the operating rules in
paragraph (d)(2)(iv)(D) of this section ap-
ply for purposes of this paragraph
(d)(5). For purposes of paragraph
(d)(2)(iv)(D)(1),(2), and (3), references
to paragraph (d)(2)(iv) of this section
are treated as references to this para-
graph (d)(5).

(iii) Certain distributions involving
separation of Nonbusiness Assets from
Business Assets. A distribution is specified
in this paragraph (d)(5)(iii) if both-

(A) The Nonbusiness Asset Percentage
of the distributing corporation or the con-
trolled corporation is 662/3 percent or
more, and

(B) If the Nonbusiness Asset Percent-
age of the distributing corporation or the
controlled corporation is-

(1) 662/3 percent or more but less than
80 percent, and the Nonbusiness Asset
Percentage of the other corporation (the
controlled corporation or the distributing
corporation, as the case may be) is less
than 30 percent;

(2) 80 percent or more but less than 90
percent, and the Nonbusiness Asset Per-
centage of the other corporation (the con-
trolled corporation or the distributing cor-
poration, as the case may be) is less than
40 percent; or

(3) 90 percent or more, and the Non-
business Asset Percentage of the other
corporation (the controlled corporation or
the distributing corporation, as the case
may be) is less than 50 percent.

(iv) Anti-abuse rule. The anti-abuse
rule in paragraph (d)(2)(iv)(E) of this sec-
tion applies for purposes of this paragraph
(d)(5), with references to paragraph
(d)(2)(iv) of this section treated as refer-
ences to this paragraph (d)(5) and refer-
ences to paragraph (d)(2)(iv)(E) of this
section treated as references to this para-
graph (d)(5)(iv).

(6) Transactions ordinarily not consid-
ered as a device-(i) In general. This
paragraph (d)(6) specifies three distribu-
tions that ordinarily do not present the
potential for federal tax avoidance de-
scribed in paragraph (d)(1) of this section.
Accordingly, such distributions are ordi-
narily considered not to have been used
principally as a device, notwithstanding
the presence of any of the device factors
described in paragraph (d)(2) of this sec-
tion or a separation of Business Assets
from Nonbusiness Assets as described in
paragraph (d)(5) of this section. A trans-
action described in paragraph (d)(6)(iii) or
(iv) of this section is not protected by this
paragraph (d)(6) from a determination that
it was used principally as a device if it
involves the distribution of the stock of
more than one controlled corporation and
facilitates the avoidance of the dividend
provisions of the Code through the subse-
quent sale or exchange of stock of one
corporation and the retention of the stock
of another corporation .* * *

* * * * *

(i) Effective/applicability date-(1)
Paragraph (d) of this section-(i) In gen-
eral. Except as provided in paragraph
(i)(1)(ii) of this section, paragraph (d) of
this section applies to transactions occur-
ring on or after the date the Treasury
decision adopting these regulations as fi-
nal regulations is published in the Federal
Register.

(ii) Transition rule. Paragraph (d) of
this section does not apply to a distribu-
tion that is-

(A) Made pursuant to an agreement,
resolution, or other corporate action that is
binding on or before the date the Treasury
decision adopting these regulations as fi-

nal regulations is published in the Federal
Register and at all times thereafter;

(B) Described in a ruling request sub-
mitted to the Internal Revenue Service on
or before July 15, 2016; or

(C) Described in a public announce-
ment or filing with the Securities and Ex-
change Commission on or before the date
the Treasury decision adopting these reg-
ulations as final regulations is published in
the Federal Register.

(2) Paragraph (g) of this section. Para-
graph (g) of this section applies to distri-
butions occurring after October 20, 2011.
For rules regarding distributions occurring
on or before October 20, 2011, see
§ 1.355-2T(i), as contained in 26 CFR
part 1, revised as of April 1, 2011.

Par. 5. Reserved § 1.355-8 is added to
read as follows:

### § 1.355-8 [Reserved]

Par. 6. Section 1.355-9 is added to read
as follows:

§ 1.355-9 Minimum percentage of Five-
Year-Active-Business Assets.

(a) Definitions. The following defini-
tions apply for purposes of this section:

(1) Distributing, Controlled. Distribut-
ing means the distributing corporation
within the meaning of § 1.355-1(b). Con-
trolled means the controlled corporation
within the meaning of § 1.355-1(b).

(2) Five-Year-Active Business. Five-
Year-Active Business means the active
conduct of a trade or business that satisfies
the requirements and limitations of sec-
tion 355(b)(2) and § 1.355-3(b).

(3) Five-Year-Active-Business Assets.
Five-Year-Active-Business Assets of a
corporation means its gross assets used in
one or more Five-Year-Active Businesses.
Such assets include cash and cash equiv-
alents held as a reasonable amount of
working capital for one or more Five-
Year-Active Businesses. Such assets also
include assets required (by binding com-
mitment or legal requirement) to be held
to provide for exigencies related to a Five-
Year-Active Business or for regulatory
purposes with respect to a Five-Year-
Active Business. For this purpose, such
assets include assets the holder is required
(by binding commitment or legal require-
ment) to hold to secure or otherwise pro-

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vide for a financial obligation reasonably
expected to arise from a Five-Year-Active
Business and assets held to implement a
binding commitment to expend funds to
expand or improve a Five-Year-Active
Business.

(4) Non-Five-Year-Active-Business As-
sets. Non-Five-Year-Active-Business As-
sets of a corporation means its gross assets
other than its Five-Year-Active-Business
Assets.

(5) Total Assets. Total Assets of a cor-
poration means its Five-Year-Active-
Business Assets and its Non-Five-Year-
Active-Business Assets.

(6) Five-Year-Active-Business Asset
Percentage. The Five-Year-Active-
Business Asset Percentage of a corpora-
tion is the percentage determined by di-
viding the fair market value of its Five-
Year-Active-Business Assets by the fair
market value of its Total Assets.

(7) Separate Affiliated Group, SAG,
CSAG, and DSAG. Separate Affiliated
Group (or SAG), CSAG, and DSAG have
the same meanings as in § 1.355-
2(d)(2)(iv)(B)(6).

(b) Five percent minimum Five-Year-
Active-Business Asset Percentage. For the
requirements of section 355(a)(1)(C) and
section 355(b) to be satisfied with respect
to a distribution, the Five-Year-Active-
Business Asset Percentage of each of Dis-
tributing and Controlled must be at least
five percent.

(c) Operating rules. The following op-
erating rules apply for purposes of this
section:

(1) Treatment of SAG and fair market
value. The operating rules in § 1.355-
2(d)(2)(iv)(D)(2) (treatment of SAG as a
single corporation) and (5) (fair market
value) apply.

(2) Time to identify assets, determine
character of assets, and determine fair
market value of assets. The provisions of
§ 1.355-2(d)(2)(iv)(D)(3) (time to iden-
tify assets and determine character of as-
sets) apply, except that references to para-
graph (d)(2)(iv) are treated as references
to this section and "Business Assets or
Nonbusiness Assets" is replaced with
"Five-Year-Active-Business Assets or
Non-Five-Year-Active-Business Assets,"
and the provisions of § 1.355-
2(d)(2)(iv)(D)(4) (time to determine fair
market value of assets) apply.

(3) Interest in partnership-(i) In gen-
eral. Except as provided in paragraph
(c)(3)(ii) of this section, an interest in a
partnership is a Non-Five-Year-Active-
Business Asset.

(ii) Exception for certain interests in
partnerships. If Distributing or Controlled
is considered to be engaged in one or
more Five-Year-Active Businesses con-
ducted by a partnership, the fair market
value of the corporation's interest in the
partnership will be allocated between
Five-Year-Active-Business Assets and
Non-Five-Year-Active-Business Assets in
the same proportion as the proportion of
the fair market values of the Five-Year-
Active-Business Assets and Non-Five-
Year-Active-Business Assets of the part-
nership.

(d) Anti-abuse rule. A transaction or
series of transactions undertaken with a
principal purpose of affecting the Five-
Year-Active-Business Asset Percentage
of any corporation will not be given effect
for purposes of applying this § 1.355-9.
For this purpose, a transaction or series of
transactions includes a change in the form
of ownership of an asset; an issuance,
assumption, or repayment of indebtedness
or other obligations; or an issuance or

redemption of stock. However, this para-
graph (d) generally does not apply to a
non-transitory acquisition or disposition
of assets, other than an acquisition from or
disposition to a person the ownership of
whose stock would, under section 318(a)
(other than paragraph (4) thereof), be at-
tributed to Distributing or Controlled, or
to a non-transitory transfer of assets be-
tween Distributing and Controlled.

(e) Effective/applicability date-(1) In
general. Except as provided in paragraph
(e)(2) of this section, this section applies
to transactions occurring on or after the
date the Treasury decision adopting these
regulations as final regulations is pub-
lished in the Federal Register.

(2) Transition rule-This section does
not apply to a distribution that is-

(i) Made pursuant to an agreement, res-
olution, or other corporate action that is
binding on or before the date the Treasury
decision adopting these regulations as fi-
nal regulations is published in the Federal
Register and at all times thereafter;

(ii) Described in a ruling request sub-
mitted to the Internal Revenue Service on
or before July 15, 2016; or

(iii) Described in a public announce-
ment or filing with the Securities and Ex-
change Commission on or before the date
the Treasury decision adopting these reg-
ulations as final regulations is published in
the Federal Register.

John Dalrymple,
Deputy Commissioner for Services and
Enforcement.

(Filed by the Office of the Federal Register on July 14, 2016,
8:45 a.m., and published in the issue of the Federal Register
for July 15, 2016, 81 F.R. 46004)

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# Definition of Terms

Revenue rulings and revenue procedures
(hereinafter referred to as "rulings") that
have an effect on previous rulings use the
following defined terms to describe the
effect:

Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that
the same principle also applies to B, the
earlier ruling is amplified. (Compare with
modified, below).

Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.

Distinguished describes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.

Modified is used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A

and B, the prior ruling is modified because
it corrects a published position. (Compare
with amplified and clarified, above).

Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.

Revoked describes situations where the
position in the previously published ruling
is not correct and the correct position is
being stated in a new ruling.

Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a pe-
riod of time in separate rulings. If the new
ruling does more than restate the sub-

stance of a prior ruling, a combination of
terms is used. For example, modified and
superseded describes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is
self contained. In this case, the previously
published ruling is first modified and then,
as modified, is superseded.

Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names
in subsequent rulings. After the original
ruling has been supplemented several
times, a new ruling may be published that
includes the list in the original ruling and
the additions, and supersedes all prior rul-
ings in the series.

Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.

# Abbreviations

The following abbreviations in current
use and formerly used will appear in ma-
terial published in the Bulletin.

A-Individual.

Acq .- Acquiescence.

B-Individual.

BE-Beneficiary.

F.R .- Federal Register.

FUTA-Federal Unemployment Tax Act.

FX-Foreign corporation.

G.C.M .- Chief Counsel's Memorandum.

GE-Grantee.

GP-General Partner.

TFR-Transferor.

CI-City.

GR-Grantor.

T.I.R .- Technical Information Release.

TP-Taxpayer.

Ct.D .- Court Decision.

I.R.B .- Internal Revenue Bulletin.

TR-Trust.

CY-County.

LE-Lessee.

TT-Trustee.

D-Decedent.

LP-Limited Partner.

U.S.C .- United States Code.

DC-Dummy Corporation.

LR-Lessor.

X-Corporation.

DE-Donee.

Del. Order-Delegation Order.

Nonacq .- Nonacquiescence.

O Organization.

DR-Donor.

P-Parent Corporation.

PHC-Personal Holding Company.

PO-Possession of the U.S.

PR-Partner.

PRS-Partnership.

PTE-Prohibited Transaction Exemption.
Pub. L .- Public Law.

REIT-Real Estate Investment Trust.

Rev. Proc .- Revenue Procedure.

Rev. Rul .- Revenue Ruling.

S-Subsidiary.

S.P.R .- Statement of Procedural Rules.

Stat .- Statutes at Large.

BK-Bank.

B.T.A .- Board of Tax Appeals.

T.C .- Tax Court.

C-Individual.

T.D .- Treasury Decision.

C.B .- Cumulative Bulletin.

TFE-Transferee.

CFR-Code of Federal Regulations.

COOP-Cooperative.

IC-Insurance Company.

M-Minor.

Y-Corporation.

Z-Corporation.

DISC-Domestic International Sales Corporation.

E-Estate.

EE-Employee.

E.O .- Executive Order.

ER-Employer.

ERISA-Employee Retirement Income Security Act.
EX-Executor.

F-Fiduciary.

FC-Foreign Country.

FICA-Federal Insurance Contributions Act.

FISC-Foreign International Sales Company.

FPH-Foreign Personal Holding Company.

T-Target Corporation.

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## Numerical Finding List1

Bulletins 2016-27 through 2016-31

### Action on Decision:

2016-01, 2016-16 I.R.B. 580
2016-02, 2016-31 I.R.B. 193

### Announcements:

2016-21, 2016-27 I.R.B. 8
2016-23, 2016-27 I.R.B. 10

2016-24, 2016-30 I.R.B. 170

2016-25, 2016-31 I.R.B. 205

### Notices:

2016-40, 2016-27 I.R.B. 4

2016-41, 2016-27 I.R.B. 5

2016-42, 2016-29 I.R.B. 67

2016-43, 2016-29 I.R.B. 132

2016-44, 2016-29 I.R.B. 132

2016-45, 2016-29 I.R.B. 135

2016-46, 2016-31 I.R.B. 202

### Proposed Regulations:

REG-109086-15, 2016-30

I.R.B. 171

REG-101689-16, 2016-30 I.R.B. 170

REG-123854-12, 2016-28

I.R.B. 15

REG-147196-07, 2016-29 I.R.B. 32

REG-134016-15, 2016-31 I.R.B. 205

### Revenue Procedures:

2016-37, 2016-29 I.R.B. 136

2016-39, 2016-30 I.R.B. 164

2016-40, 2016-30 I.R.B. 165

### Revenue Rulings:

2016-17, 2016-27 I.R.B. 1
2016-18, 2016-31 I.R.B. 194

### Treasury Decisions:

9773, 2016-29 I.R.B. 56

9774, 2016-30 I.R.B. 151
9775, 2016-30 I.R.B. 159
9778, 2016-31 I.R.B. 196

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2016-01 through 2016-26 is in Internal Revenue Bulletin
2016-26, dated June 27, 2016.

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### Finding List of Current Actions on Previously Published Items1

Bulletins 2016-27 through 2016-31

Notices:

2013-1
Modified by
Notice 2016-41, 2016-27 I.R.B. 5

2013-1
Superseded by
Notice 2016-41, 2016-27 I.R.B. 5

#### Revenue Procedures:

2007-44
Clarified by
Rev. Proc. 2016-37, 2016-29 I.R.B. 136

2007-44
Modified by
Rev. Proc. 2016-37, 2016-29 I.R.B. 136

2007-44
Superseded by
Rev. Proc. 2016-37, 2016-29 I.R.B. 136

2015-36
Modified by
Rev. Proc. 2016-37, 2016-29 I.R.B. 136

2016-29
Modified by
Rev. Proc. 2016-39, 2016-30 I.R.B. 164

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# Internal Revenue Service Washington, DC 20224

Official Business
Penalty for Private Use, $300

# INTERNAL REVENUE BULLETIN

The Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue
Bulletins are available at www.irs.gov/irb/.

## We Welcome Comments About the Internal Revenue Bulletin

If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we
would be pleased to hear from you. You can email us your suggestions or comments through the IRS Internet Home Page
(www.irs.gov) or write to the Internal Revenue Service, Publishing Division, IRB Publishing Program Desk, 1111 Constitution Ave.
NW, IR-6230 Washington, DC 20224.