Internal Revenue Bulletin 2015-41 (PDF rendition): IRS Revenue Procedures

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# INTERNAL REVENUE BULLETIN

IRS

Bulletin No. 2015-41
October 13, 2015

## 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-127895-14, page 556.

This document is a notice of proposed rulemaking by cross-
reference to a temporary regulation (TD 9743). These pro-
posed regulations relating to determining when a complex
contract provides for a dividend equivalent payment and pro-
vides rules for qualified derivatives dealers.

### REG-138344-13, page 557.

These proposed regulations propose standards to implement
the exception to the "contemporaneous written acknowledge-
ment" requirement for substantiating charitable contribution
deductions of $250 or more. These proposed regulations
provide rules concerning the time and manner for donee orga-
nizations to file information returns that report the required
information about contributions (donee reporting).

### REG-155164-09, page 560.

This document contains proposed regulations that provide
rules regarding the treatment as United States property of
property held by a controlled foreign corporation (CFC) in
connection with certain transactions involving partnerships. In
addition, the Department of Treasury (Treasury Department)
and the IRS are issuing temporary regulations under sections
954 and 956, the text of which also serves as the text of
certain provisions of these proposed regulations.

### Notice 2015-66, page 541.

Notice 2015-66 announces that the Department of the Treasury
(Treasury) and the Internal Revenue Service (IRS) intend to amend
regulations under sections 1471-1474 to extend the time that
certain FATCA transitional rules will apply. Specifically, the amend-
ments will extend: (1) the date for when withholding on gross
proceeds and foreign passthru payments will begin; (2) the use of
limited branches and limited foreign financial institutions (limited
FFIs); and (3) the deadline for a sponsoring entity to register its
sponsored entities and redocument such entities with withholding

agents. In addition, in order to reduce compliance burdens on
withholding agents that hold collateral as a secured party, the
notice announces that Treasury and the IRS intend to amend the
regulations under chapter 4 to modify the rules for grandfathered
obligations in relation to collateral. The notice also provides infor-
mation on the exchange of information by Model 1 IGA jurisdic-
tions with respect to 2014.

### Notice 2015-67, page 546.

This notice finalizes and supersedes Notice 2014-17. It pro-
vides a general rule that per capita distributions to Indian tribe
members made from funds held in trust by the Secretary of the
Interior ("Trust Account") are excluded from the gross income
of the members of the tribe receiving the per capita distribu-
tions. This notice also provides an exception to the general
rule. Distributions to tribal members from a Trust Account will
constitute gross income under 26 U.S.C. § 61 to the members
of the tribe receiving the distributions if the Trust Account is
used to mischaracterize taxable income as nontaxable per
capita distributions.

### Notice 2015-68, page 547.

Information Reporting on Minimum Essential Coverage. This
notice provides guidance on issues under section 6055 of the
Code. Comments are requested by November 16, 2015, on
the application of the reasonable good cause rules under
section 6724 of the Code to section 6055 reporting, in par-
ticular relating to TIN solicitation and reporting.

### Notice 2015-69, page 550.

This notice explains the circumstances under which the 4-year
replacement period under section 1033(e)(2) is extended for
livestock sold on account of drought. The Appendix to this
notice contains a list of counties that experienced exceptional,
extreme, or severe drought conditions during the 12-month
period ending August 31, 2015. Taxpayers may use this list to
determine if an extension is available.

(Continued on the next page)

Finding Lists begin on page ii.

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### T.D. 9733, page 494.

This document contains temporary regulations that provide
rules regarding the treatment as United States property of
property held by a controlled foreign corporation (CFC) in
connection with certain transactions involving partnerships.
In addition, the temporary regulations provide rules regard-
ing when a CFC is considered to derive rents and royalties in
the active conduct of a trade or business for purposes of
determining foreign personal holding company income
(FPHCI).

### T.D. 9734, page 500.

These regulations describes payments that are dividend equiv-
alents for purposes of section 871(m) and explains how to
calculation of the amount of a dividend equivalent. These pro-
posed regulations also provide guidance regarding the amount
of a dividend equivalent payment and withholding rules relating
to these payments.

### T.D. 9739, page 528.

Final regulations providing guidance regarding the qualification
of a transaction as a corporate reorganization under section
368(a)(1)(F) by virtue of being a mere change of identity, form,
or place of organization of one corporation (F reorganization).
Also final regulations relating to F reorganizations in which the
transferor corporation is a domestic corporation and the ac-
quiring corporation is a foreign corporation (an outbound F
reorganization). These regulations will affect corporations en-
gaging in transactions that could qualify as F reorganizations
(including outbound F reorganizations) and their shareholders.

## ADMINISTRATIVE

Rev. Proc. 2015-49, page 555.

This procedure publishes the amounts of unused housing
credit carryovers allocated to qualified states under section
42(h)(3)(D) of the Code for calendar year 2015.

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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 conclu-
sions 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 recommenda-
tion of the Action on Decision to similar
cases where the facts are different. More-
over, the recommendation in the Action
on Decision may be superseded by new

legislation, regulations, rulings, cases, or
Actions on Decisions.

Prior to 1991, the Service published
acquiescence or nonacquiescence only in
certain regular Tax Court opinions. The
Service has expanded its acquiescence
program to include other civil tax cases
where guidance is determined to be help-
ful. Accordingly, the Service now may
acquiesce or nonacquiesce in the holdings
of memorandum Tax Court opinions, as
well as those of the United States District
Courts, Claims Court, and Circuit Courts
of Appeal. Regardless of the court decid-
ing the case, the recommendation of any
Action on Decision will be published in
the Internal Revenue Bulletin.

The recommendation in every Action
on Decision will be summarized as acqui-
escence, acquiescence in result only, or
nonacquiescence. Both "acquiescence"
and "acquiescence in result only" mean
that the Service accepts 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, "acqui-
escence" indicates neither approval nor
disapproval of the reasons assigned by the
court for its conclusions; whereas, "acqui-
escence in result only" indicates disagree-

ment or concern with some or all of those
reasons. "Nonacquiescence" signifies that,
although no further review was sought,
the Service does not agree with the hold-
ing 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
"nonacquiescence" indicates that the Ser-
vice will not follow the holding on a na-
tionwide basis. However, the Service will
recognize the precedential impact of the
opinion on cases arising within the venue
of the deciding circuit.

The Actions on Decisions published in
the weekly Internal Revenue Bulletin are
consolidated semiannually and appear in
the first Bulletin for July and the Cumu-
lative Bulletin for the first half of the year.
A semiannual consolidation also appears
in the first Bulletin for the following Jan-
uary and in the Cumulative Bulletin for
the last half of the year.

The Commissioner does NOT ACQUI-
ESCE in the following decision:

Morehouse v. Commissioner1

769 F.3d 616 (8th Cir. 2014) rev'g140
T.C. 350 (2013)

1 Nonacquiescence relating to whether Conservation Reserve Program payments constitute rentals from real estate for purposes of section 1402(a)(1) and thus not subject to self-employment
tax.

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

26 CFR 1.954-2: Foreign personal holding com-
pany income.

26 CFR 1.954-2T: Foreign personal holding com-
pany income (temporary).

26 CFR 1.956-1: Shareholder's pro rata share of a
controlled foreign corporation's increase in earn-
ings invested in United States property.

26 CFR 1.956-1T: Shareholder's pro rata share of
a controlled foreign corporation's increase in earn-
ings invested in United States property (temporary).

### T.D. 9733

DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1

#### United States Property Held by Controlled Foreign Corporations in Transactions Involving Partnerships; Rents and Royalties Derived in the Active Conduct of a Trade or Business

AGENCY: Internal Revenue Service (IRS),
Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains
temporary regulations regarding the treat-
ment as United States property of property
held by a controlled foreign corporation
(CFC) in connection with certain transac-
tions involving partnerships. In addition,
the temporary regulations provide rules
regarding when a CFC is considered to
derive rents and royalties in the active
conduct of a trade or business for pur-
poses of determining foreign personal
holding company income (FPHCI). These
regulations affect United States share-
holders of CFCs. The text of the tempo-
rary regulations also serves as the text of
the proposed regulations set forth in the
notice of proposed rulemaking on this
subject in the Proposed Rules section of
this issue of the Internal Revenue Bulle-
tin. The final regulations revise and add

cross-references to coordinate the applica-
tion of the temporary regulations.

DATES: Effective Date: These regula-
tions are effective on September 2, 2015.

Applicability Dates: For dates of appli-
cability, see §§ 1.954-2T(j) and 1.956-1T(g).

FOR FURTHER INFORMATION
CONTACT: Rose E. Jenkins, (202) 317-
6934 (not a toll-free number).

SUPPLEMENTARY INFORMATION:
Background

This document contains amendments
to 26 CFR part 1 under section 956 of the
Internal Revenue Code (Code). Section
956 determines the amount that a United
States shareholder (as defined in section
951(b)) of a CFC must include in gross
income with respect to the CFC under
section 951(a)(1)(B). This amount is de-
termined, in part, based on the average
amount of United States property held,
directly or indirectly, by the CFC at the
close of each quarter during its taxable
year. Subject to certain exceptions, United
States property generally includes obliga-
tions of United States persons that are
related to the CFC. Sections 956(c)(1)(C),
956(c)(2)(F), and 956(c)(2)(L). In general,
the amount taken into account for section
956 purposes with respect to any United
States property is the adjusted basis of the
property, reduced by any liability to which
the property is subject. See section 956(a)
and § 1.956-1(e).

Section 956(e) grants the Secretary au-
thority to prescribe such regulations as
may be necessary to carry out the pur-
poses of section 956, including regula-
tions to prevent the avoidance of section
956 through reorganizations or otherwise.
In addition, section 956(d) grants the Sec-
retary authority to prescribe regulations
pursuant to which a CFC that is a pledgor
or guarantor of an obligation of a United
States person is considered to hold the
obligation.

Section 1.956-1T(b)(4) provides in
relevant part that, at the District Director's
discretion, a CFC will be considered to
hold indirectly investments in United

States property acquired by any other for-
eign corporation that is controlled by the
CFC if one of the principal purposes for
creating, organizing, or funding (through
capital contributions or debt) such other
foreign corporation is to avoid the appli-
cation of section 956 with respect to the
CFC.

This document also contains amend-
ments to 26 CFR part 1 under section 954.
Section 954 defines foreign base company
income (FBCI), which generally is in-
come earned by a CFC that is taken into
account in computing the amount that a
United States shareholder of the CFC
must include in income under section
951(a)(1)(A). FBCI includes FPHCI, as
defined in section 954(c), which, in turn,
generally includes rents and royalties.
Section 954(c)(1)(A). However, rents and
royalties are excluded from FPHCI if they
are received from a person other than a
related person and derived in the active
conduct of a trade or business within the
meaning of section 954(c)(2)(A) and
§ 1.954-2(c) and (d) (active rents and
royalties exception). Temporary regula-
tions in this document provide guidance on
the active rents and royalties exception, in-
cluding the treatment of cost sharing ar-
rangements for purposes of the exception.

### Explanation of Provisions

#### 1. Modifications of Anti-Avoidance Rule in § 1.956-1T(b)(4)

#### A. Modifications of existing rules

These regulations modify § 1.956-
1T(b)(4) so that the rule can also apply
when a foreign corporation controlled by
a CFC is funded other than through capital
contributions or debt. In addition, these
temporary regulations add an example in-
volving the funding of one CFC by an-
other CFC that controls it to illustrate the
application of the anti-avoidance rule
when a principal purpose for funding the
first CFC is to avoid the application of
section 956 with respect to the funding
CFC, even though there would be a sec-
tion 956 inclusion with respect to the CFC
that received the funding. This example

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illustrates that the CFCs' tax attributes
associated with a section 956 inclusion
(such as total earnings and profits, previ-
ously taxed earnings and profits, and for-
eign tax credit pools) are taken into ac-
count in determining whether a principal
purpose of a funding was to avoid the
application of section 956 with respect to
the funding CFC. In addition, this exam-
ple makes clear that if a CFC is consid-
ered to indirectly hold United States prop-
erty pursuant to § 1.956-1T(b)(4), then
the CFC that actually holds the United
States property will not also be considered
to hold the property for purposes of sec-
tion 956. See Example 3 in § 1.956-
1T(b)(4)(iv).

These regulations also modify Exam-
ple 1 and Example 2 of § 1.956-1T(b)(4)
to more closely reflect the language of
new § 1.956-1T(b)(4)(iv). The Depart-
ment of the Treasury (Treasury Depart-
ment) and the IRS do not view these mod-
ifications as a substantive change.

Moreover, § 1.956-1T(b)(4) applies if
"one of the principal purposes" for the
transaction is to avoid the application of
section 956 with respect to the CFC.
These temporary regulations apply when
"a principal purpose" for the transaction is
to avoid the application of section 956
with respect to the CFC. The Treasury
Department and the IRS do not view this
modification as a substantive change,
since both formulations appropriately re-
flect that there may be more than one
principal purpose for a transaction. Ac-
cordingly, § 1.956-1T(b)(4) may be ap-
plied if a principal purpose of a transac-
tion is to avoid the application of section
956, even if there also were other princi-
pal purposes for the transaction.

Finally, the Treasury Department and
the IRS have concluded that § 1.956-
1T(b)(4) should apply without requiring
the IRS to exercise its discretion, and,
therefore, have modified the rule to be
self-executing. This modification, as well
as the modification to what constitutes a
funding, is consistent with a previous
change to a similar rule in § 1.304-4(b).
See TD 9477, 74 FR 69021 (Dec. 30, 2009).

#### B. New partnership rule

Existing § 1.956-1T(b)(4) applies only
to transactions that involve foreign corpo-

rations that are controlled by a CFC. The
Treasury Department and the IRS under-
stand that taxpayers may be using partner-
ships to structure transactions that are
similar to the types of transactions ad-
dressed by § 1.956-1T(b)(4). For exam-
ple, with a principal purpose of avoiding
the application of section 956, a CFC may
contribute cash to a partnership in ex-
change for an interest in the partnership,
which in turn lends the cash to a United
States shareholder of the CFC. In such a
case, a taxpayer may take the position that
the CFC is not treated as indirectly hold-
ing the entire obligation of the United
States shareholder but instead is treated as
holding the obligation only to the extent
of the CFC's interest in the partnership
under § 1.956-2(a)(3).

These types of partnership transactions
raise concerns similar to those that are
currently addressed by § 1.956-1T(b)(4).
Accordingly, these temporary regulations
expand § 1.956-1T(b)(4) to include trans-
actions involving partnerships that are
controlled by the CFC. These temporary
regulations also contain a coordination
rule in § 1.956-1T(b)(4)(iii), which pro-
vides that the new partnership rule in
§ 1.956-1T(b)(4)(i)(C) applies only to the
extent that the amount of United States
property that a CFC would be treated as
holding under the rule exceeds the amount
that it would be treated as holding under
§ 1.956-2(a)(3).

2\. New Rule Governing Foreign
Partnership Distributions Funded by
CFCs

The Treasury Department and the IRS
also understand that CFCs are engaging in
transactions in which a CFC lends funds
to a foreign partnership, which then dis-
tributes the proceeds from the borrowing
to a U.S. partner who is related to the CFC
and whose obligation would be United
States property if it were held (or treated
as held) by the CFC. Alternatively, the
CFC could guarantee a loan to a foreign
partnership, which then could distribute
the loan proceeds to a related U.S. partner.
Taxpayers take the position that section
956 does not apply to these transactions
even though the CFC's earnings are effec-
tively repatriated to a related U.S. partner.

In response to these transactions, the
temporary regulations add § 1.956-1T(b)(5)
to address certain cases in which a CFC
funds a foreign partnership (or guarantees
a borrowing by a foreign partnership) and
the foreign partnership makes a distribu-
tion to a U.S. partner that is related to the
CFC. For purposes of section 956,
§ 1.956-1T(b)(5) treats the partnership
obligation as an obligation of the distrib-
utee partner to the extent of the lesser of
the amount of the distribution that would
not have been made but for the funding of
the partnership or the amount of the for-
eign partnership obligation. For example,
if a related United States shareholder of a
CFC has an interest in a foreign partner-
ship, the CFC lends $100 to the partner-
ship, and the partnership distributes $100
to the United States shareholder in a dis-
tribution that would not have been made
but for the loan from the CFC, then the
entire $100 partnership obligation held by
the CFC will be treated as an obligation of
the United States shareholder that quali-
fies as United States property. Section
1.956-1T(b)(5) generally has the same
purpose and effect as proposed § 1.956-
4(c)(3) contained in the notice of pro-
posed rulemaking on this subject in the
Proposed Rules section of this issue of the
Internal Revenue Bulletin (REG-
155164-09) and will be removed upon
the finalization of proposed § 1.956-4(c)(3).

#### 3. Active Rents and Royalties Exception to FPHCI

Although rents and royalties generally
are included in FPHCI under section
954(c)(1)(A), rents and royalties derived
in the active conduct of a trade or business
and received from a person that is not a
related person are excluded from FPHCI
under the active rents and royalties excep-
tion in section 954(c)(2)(A) and § 1.954-
2(b)(6). The section 954 regulations pro-
vide the exclusive rules for determining
whether rents and royalties are derived in
the active conduct of a trade or business
for purposes of section 954(c)(2)(A). Spe-
cifically, § 1.954-2(c) provides four alter-
native ways for rents to be derived in the
active conduct of a trade or business, and
§ 1.954-2(d) provides two alternative
ways for royalties to be derived in the
active conduct of a trade or business. One

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way for a CFC to derive rents and royal-
ties in the active conduct of a trade or
business is to satisfy an "active develop-
ment" test, which, among other things,
requires the CFC to be "regularly en-
gaged" either in the "manufacture or pro-
duction of, or in the acquisition and addi-
tion of substantial value to," certain
property (§ 1.954-2(c)(1)(i), applicable to
rents); or in the "development, creation or
production of, or in the acquisition of and
addition of substantial value to," certain
property (§ 1.954-2(d)(1)(i), applicable to
royalties) (collectively, active develop-
ment tests). Although certain of the alter-
native ways (specifically, the active man-
agement and marketing tests) in which a
CFC can satisfy the active rents and roy-
alties exception require that the relevant
activities be performed by the CFC's own
officers or staff of employees (§ 1.954-
2(c)(1)(ii), (iv), and (d)(1)(ii)), the active
development tests do not expressly con-
tain this requirement. But see § 1.954-
2(d)(3) Example 5 (indicating that royal-
ties received by a CFC that financed
independent persons in development ac-
tivities were not considered derived in the
active conduct of a trade or business for
purposes of section 954(c)(2)(A)).

In addition to the active development
tests, another way for a CFC to derive
rents and royalties in the active conduct of
a trade or business is to satisfy an "active
marketing" test, which, among other
things, requires the CFC to operate in a
foreign country an organization that is
regularly engaged in the business of mar-
keting, or marketing and servicing, the
leased or licensed property, and that is
"substantial" in relation to the amount of
rents or royalties derived from the leased
or licensed property. See § 1.954-2(c)(1)(iv)
and (d)(1)(ii). Pursuant to a safe harbor in
the regulations, an organization is "sub-
stantial" if the active leasing or licensing
expenses equal or exceed 25 percent of
the adjusted leasing or licensing profits.
See § 1.954-2(c)(2)(ii) and (d)(2)(ii). The
regulations generally define active leas-
ing expenses and active licensing ex-
penses to mean, subject to certain ex-
ceptions, deductions that are properly
allocable to rental or royalty income and
that would be allowable under section
162 if the CFC were a domestic corpora-
tion. See § 1.954-2(c)(2)(iii) and (d)(2)(iii).

In general, the active rents and royalties
exception is intended to distinguish between
a CFC that passively receives investment
income and a CFC that derives income from
the active conduct of a trade or business. See
S. Rep. No. 87-1881, 87th Cong., 2d Sess.,
at 83 (1962). Accordingly, the policy under-
lying the active rents and royalties exception
requires that the CFC itself actively conduct
the business that generates the rents or roy-
alties. The Treasury Department and the
IRS have determined that, consistent with
this policy, the CFC must perform the rele-
vant activities (that is, activities related to
the manufacturing, production, develop-
ment, or creation of, or, in the case of an
acquisition, the addition of substantial value
to, the property at issue) through its own
officers or staff of employees in order to
satisfy the active development tests. Thus,
§ 1.954-2T(c)(1)(i) and (d)(1)(i) expressly
provide that the CFC lessor or licensor must
perform the required functions through its
own officers or staff of employees.

The Treasury Department and the IRS
also have concluded that the policy of the
active rents and royalties exception allows
the relevant activities undertaken by a
CFC through its officers or staff of em-
ployees to be performed in more than one
foreign country. Thus, § 1.954-2T(c)(1)(iv)
and (d)(1)(ii) provide that (i) a CFC's
officers or staff of employees may be lo-
cated in one or more foreign countries;
and (ii) an organization that meets the
requirements of the active marketing test
can be maintained and operated by the
officers or staff of employees either in a
single foreign country or in multiple for-
eign countries collectively. Similarly,
§ 1.954-2T(c)(2)(ii) and (d)(2)(ii) indi-
cate that an organization can be in a single
foreign country or in multiple foreign
countries collectively for purposes of de-
termining the substantiality of the foreign
organization.

In applying the active development
tests and active marketing tests, questions
have arisen as to the treatment of cost
sharing arrangements under which a per-
son other than the CFC actually conducts
relevant activities. Consistent with the
policy underlying the active rents and roy-
alties exception that requires the CFC it-
self to conduct the relevant activities,
§ 1.954-2T(c)(2)(viii) and (d)(2)(v) clar-
ify that CST Payments and PCT Payments

(as defined in § 1.482-7(b)(1)) made by a
CFC will not cause the CFC's officers and
employees to be treated as undertaking the
activities of the controlled participant to
which the payments are made. This clari-
fication applies for purposes of the active
development tests and the active marketing
tests, including for purposes of determining
whether an organization that engages in
marketing is substantial. Similarly, § 1.954-
2T(c)(2)(iii)(E) and (d)(2)(iii)(E) provide
that deductions for CST Payments and PCT
Payments are excluded from the definition
of active leasing expenses and active licens-
ing expenses, respectively. Thus, CST Pay-
ments and PCT Payments are not active
leasing expenses or active licensing ex-
penses for purposes of determining whether
an organization is "substantial" under the
safe harbor test.

#### 4. Effective/Applicability Dates

The rules in § 1.956-1T(b)(4) de-
scribed in Part 1 of this preamble apply to
taxable years of CFCs ending on or after
September 1, 2015, and to taxable years of
United States shareholders in which or
with which such taxable years end, with
respect to property acquired, including
property treated as acquired as the result
of a deemed exchange of property pursu-
ant to section 1001, on or after September
1, 2015. The rule in § 1.956-1T(b)(5)
described in Part 2 of this preamble ap-
plies to taxable years of CFCs ending on
or after September 1, 2015, and to taxable
years of United States shareholders in
which or with which such taxable years
end, in the case of distributions made on
or after September 1, 2015. The rules re-
garding the active development test in
§ 1.954-2T(c)(1)(i) and (d)(1)(i) described
in Part 3 of this preamble apply to rents or
royalties, as applicable, received or accrued
during taxable years of CFCs ending on or
after September 1, 2015, and to taxable
years of United States shareholders in which
or with which such taxable years end, but
only with respect to property manufactured,
produced, developed, or created, or, in the
case of acquired property, property to which
substantial value has been added, on or after
September 1, 2015. The rules regarding the
active marketing test in § 1.954-2T(c)(1)(iv),
(c)(2)(ii), (d)(1)(ii), and (d)(2)(ii) de-
scribed in Part 3 of this preamble, as well

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as the rules regarding cost-sharing ar-
rangements in § 1.954-2T(c)(2)(iii)(E),
(c)(2)(viii), (d)(2)(iii)(E), and (d)(2)(v)
also described in Part 3 of this preamble,
apply to rents or royalties, as applicable,
received or accrued during taxable years
of CFCs ending on or after September 1,
2015, and to taxable years of United
States shareholders in which or with
which such taxable years end, to the ex-
tent that such rents or royalties are re-
ceived or accrued on or after September 1,
2015. No inference is intended as to the
application of the provisions amended by
these temporary regulations under current
law. The IRS may, where appropriate,
challenge transactions, including those
described in these temporary regulations
and this preamble, under currently appli-
cable Code or regulatory provisions or
judicial doctrines.

### 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 assessment is not
required. It has been determined that sec-
tions 553(b) and (d) of the Administrative
Procedure Act (5 U.S.C. chapter 5) do not
apply to these regulations. For applicabil-
ity of the Regulatory Flexibility Act (5
U.S.C. chapter 6), refer to the cross-
referenced notice of proposed rulemaking
published elsewhere in this issue of the
Internal Revenue Bulletin. Pursuant to
section 7805(f) of the Internal Revenue
Code, these regulations have been submit-
ted to the Chief Counsel for Advocacy of
the Small Business Administration for
comment on its impact on small business.

### Drafting Information

The principal authors of these regula-
tions are Barbara E. Rasch and Rose E.
Jenkins of the Office of Associate Chief
Counsel (International). However, other
personnel from the Treasury Department
and the IRS participated in their develop-
ment.

* * * *

### Amendments to the Regulations

(E) [Reserved]. For further guidance,
Accordingly, 26 CFR part 1 is see § 1.954-2T(d)(2)(iii)(E).
amended as follows:

PART 1-INCOME TAXES

Paragraph 1. The authority citation for
part 1 is amended by adding entries in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *

Section 1.956-1T also issued under 26
U.S.C. 956(d) and 956(e).

* * * * *

Par. 2. Section 1.954-2 is amended by:

a. Revising paragraphs (c)(1)(i),
(c)(1)(iv), and (c)(2)(ii);

b. Adding paragraphs (c)(2)(iii)(E) and
(c)(2)(viii);

c. Revising paragraphs (d)(1)(i) and (ii)
and (d)(2)(ii); and

d. Adding paragraphs (d)(2)(iii)(E),
(d)(2)(v), and (j).

The revisions and additions read as fol-
lows:

#### § 1.954-2 Foreign personal holding company income.

* * * * *

(c) * * *

(1) * * *

(i) [Reserved]. For further guidance,
see § 1.954-2T(c)(1)(i).

* * * * *

(iv) [Reserved]. For further guidance,
see § 1.954-2T(c)(1)(iv).

(2) * * *

(ii) [Reserved]. For further guidance,
see § 1.954-2T(c)(2)(ii).

(iii) * * *

(E) [Reserved]. For further guidance,
see § 1.954-2T(c)(2)(iii)(E).

* * * * *

(viii) [Reserved]. For further guidance,
see § 1.954-2T(c)(2)(viii).

** * * *

(d) * * *

(1) * * *

(i) [Reserved]. For further guidance,
see § 1.954-2T(d)(1)(i).

(ii) [Reserved]. For further guidance,
see § 1.954-2T(d)(1)(ii).

(2) * * *

(ii) [Reserved]. For further guidance,
see § 1.954-2T(d)(2)(ii).

(iii) * * *

* * * * *

(v) [Reserved]. For further guidance,
see § 1.954-2T(d)(2)(v).

* * * * *

(j) [Reserved]. For further guidance,
see § 1.954-2T(j).

Par. 3. Section 1.954-2T is added to
read as follows:

#### § 1.954-2T Foreign personal holding company income (temporary).

(a)(1) through (c)(1) introductory text [Re-
served]. For further guidance, see § 1.954-
2(a)(1) through (c)(1) introductory text.

(i) Property that the lessor, through its
own officers or staff of employees, has
manufactured or produced, or property
that the lessor has acquired and, through
its own officers or staff of employees,
added substantial value to, but only if the
lessor, through its officers or staff of em-
ployees, is regularly engaged in the man-
ufacture or production of, or in the acqui-
sition and addition of substantial value to,
property of such kind;

(c)(1)(ii) and (iii) [Reserved]. For fur-
ther guidance, see § 1.954-2(c)(1)(ii) and
(c)(1)(iii).

(iv) Property that is leased as a result of
the performance of marketing functions
by such lessor through its own officers or
staff of employees located in a foreign
country or countries, if the lessor, through
its officers or staff of employees, main-
tains and operates an organization either
in such country or in such countries (col-
lectively), as applicable, that is regularly
engaged in the business of marketing, or
of marketing and servicing, the leased
property and that is substantial in relation
to the amount of rents derived from the
leasing of such property.

(c)(2)(i) [Reserved]. For further guid-
ance, see § 1.954-2(c)(2)(i).

(ii) Substantiality of foreign organiza-
tion. For purposes of paragraph (c)(1)(iv)
of this section, whether an organization
either in a foreign country or in foreign
countries (collectively) is substantial in
relation to the amount of rents is deter-
mined based on all the facts and circum-
stances. However, such an organization
will be considered substantial in relation
to the amount of rents if active leasing
expenses, as defined in paragraph
(c)(2)(iii) of this section, equal or exceed
25 percent of the adjusted leasing profit,

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as defined in paragraph (c)(2)(iv) of this
section. In addition, for purposes of air-
craft or vessels leased in foreign com-
merce, an organization will be considered
substantial if active leasing expenses, as
defined in paragraph (c)(2)(iii) of this sec-
tion, equal or exceed 10 percent of the
adjusted leasing profit, as defined in para-
graph (c)(2)(iv) of this section. For pur-
poses of paragraphs (c)(1)(iv) and (c)(2)
of this section and § 1.956-2(b)(1)(vi),
the term aircraft or vessels includes com-
ponent parts, such as engines that are
leased separately from an aircraft or vessel.

(c)(2)(iii) introductory text through
(c)(2)(iii)(D) [Reserved]. For further guid-
ance, see § 1.954-2(c)(2)(iii) through
(c)(2)(iii)(D).

(E) Deductions for CST Payments or
PCT Payments (as defined in § 1.482-
7(b)).

(c)(2)(iv) through (c)(2)(vii) [Re-
served]. For further guidance, see
§ 1.954-2(c)(2)(iv) through (c)(2)(vii).

(viii) Cost sharing arrangements
(CSAs). For purposes of paragraphs
(c)(1)(i) and (iv) of this section, CST Pay-
ments or PCT Payments (as defined in
§ 1.482-7(b)(1)) made by the lessor to
another controlled participant (as defined
in § 1.482-7(j)(1)(i)) pursuant to a CSA
(as defined in § 1.482-7(a)) do not cause
the activities undertaken by that other
controlled participant to be considered to
be undertaken by the lessor's own officers
or staff of employees.

(c)(3) and (d)(1) introductory text [Re-
served]. For further guidance, see § 1.954-
2(c)(3) and (d)(1) introductory text.

(i) Property that the licensor, through
its own officers or staff of employees, has
developed, created, or produced, or prop-
erty that the licensor has acquired and,
through its own officers or staff of em-
ployees, added substantial value to, but
only so long as the licensor, through its
officers or staff of employees, is regularly
engaged in the development, creation, or
production of, or in the acquisition and
addition of substantial value to, property
of such kind; or

(ii) Property that is licensed as a result
of the performance of marketing functions
by such licensor through its own officers
or staff of employees located in a foreign
country or countries, if the licensor,
through its officers or staff of employees,

maintains and operates an organization ei-
ther in such foreign country or in such
foreign countries (collectively), as appli-
cable, that is regularly engaged in the
business of marketing, or of marketing
and servicing, the licensed property and
that is substantial in relation to the amount
of royalties derived from the licensing of
such property.

(d)(2)(i) [Reserved]. For further guid-
ance, see § 1.954-2(d)(2)(i).

(ii) Substantiality of foreign organiza-
tion. For purposes of paragraph (d)(1)(ii)
of this section, whether an organization
either in a foreign country or in foreign
countries (collectively) is substantial in
relation to the amount of royalties is de-
termined based on all of the facts and
circumstances. However, such an organi-
zation will be considered substantial in
relation to the amount of royalties if active
licensing expenses, as defined in para-
graph (d)(2)(iii) of this section, equal or
exceed 25 percent of the adjusted licens-
ing profit, as defined in paragraph
(d)(2)(iv) of this section.

(d)(2)(iii) introductory text through
(d)(2)(iii)(D) [Reserved]. For further
guidance, see § 1.954-2(d)(2)(iii) intro-
ductory text through (d)(2)(iii)(D).

(E) Deductions for CST Payments or
PCT Payments (as defined in § 1.482-
7(b)).

(d)(2)(iv) [Reserved]. For further guid-
ance, see § 1.954-2(d)(2)(iv).

(v) Cost sharing arrangements (CSAs).
For purposes of paragraphs (d)(1)(i) and
(ii) of this section, CST Payments or PCT
Payments (as defined in § 1.482-7(b)(1))
made by the licensor to another controlled
participant (as defined in § 1.482-
7(j)(1)(i)) pursuant to a CSA (as defined
in § 1.482-7(a)) do not cause the activities
undertaken by that other controlled partic-
ipant to be considered to be undertaken by
the licensor's own officers or staff of em-
ployees.

(d)(3) through (i) [Reserved]. For fur-
ther guidance, see § 1.954-2(d)(3)
through (i).

(j) Effective/applicability date. Para-
graphs (c)(1)(i) and (d)(1)(i) of this section
apply to rents or royalties, as applicable,
received or accrued during taxable years of
controlled foreign corporations ending on or
after September 1, 2015, and to taxable
years of United States shareholders in which

or with which such taxable years end, but
only with respect to property manufactured,
produced, developed, or created, or in the
case of acquired property, property to which
substantial value has been added, on or after
September 1, 2015. Paragraphs (c)(1)(iv),
(c)(2)(ii), (c)(2)(iii)(E),(c)(2)(viii), (d)(1)(ii),
(d)(2)(ii), (d)(2)(iii)(E), and (d)(2)(v) of
this section apply to rents or royalties, as
applicable, received or accrued during
taxable years of controlled foreign corpo-
rations ending on or after September 1,
2015, and to taxable years of United
States shareholders in which or with
which such taxable years end, to the ex-
tent that such rents or royalties are re-
ceived or accrued on or after September 1,
2015. See § 1.954-2(c)(1)(i), (c)(1)(iv),
(c)(2)(ii), (c)(2)(iii), (d)(1)(i), (d)(1)(ii),
(d)(2)(ii), and (d)(2)(iii), as contained in
26 CFR part 1 revised as of April 1, 2015,
for rules applicable to rents or royalties, as
applicable, received or accrued before
September 1, 2015.

(k) Expiration date. The applicability of
paragraphs (c)(1)(i), (c)(1)(iv), (c)(2)(ii),
(c)(2)(iii)(E),(c)(2)(viii),(d)(1)(i),(d)(1)(ii),
(d)(2)(ii), (d)(2)(iii)(E), and (d)(2)(v) of this
section expires on or before Friday August
31, 2018.

Par. 4. Section 1.956-1 is amended by:

a. Adding paragraphs (b)(4), (b)(5), (f),
and (g)(1) through (3).

b. Redesignating paragraph (e)(6)(vii)
as paragraph (g)(4) and revising it.

The additions and revisions read as fol-
lows:

§ 1.956-1 Shareholder's pro rata share
of a controlled foreign corporation's
increase in earnings invested in United
States property.

* * * * *

(b) * * *

(4) [Reserved]. For further guidance,
see § 1.956-1T(b)(4).

(5) [Reserved]. For further guidance,
see § 1.956-1T(b)(5).

* * * * *

(f) [Reserved]. For further guidance,
see § 1.956-1T(f).

(g) introductory text through (g)(3)
[Reserved]. For further guidance, see
§ 1.956-1T(g) introductory text through
(g)(3).

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(4) Paragraph (e)(6) of this section ap-
plies to property acquired in exchanges
occurring on or after June 24, 2011. For
transactions that occur prior to June 24,
2011, see § 1.956-1T(e)(6) as contained
in 26 CFR Part 1 revised as of April 1,
2011.

Par. 5. Section 1.956-1T is amended
by revising paragraph (b)(4), and adding
paragraphs (b)(5), (e)(6), (g), and (h) to
read as follows:

§ 1.956-1T Shareholder's pro rata
share of a controlled foreign
corporation's increase in earnings
invested in United States property
(temporary).

(b) * * *

(4) Certain indirectly held United
States property-(i) General rule. For
purposes of section 956, United States
property held indirectly by a controlled
foreign corporation includes-

(A) United States property held on be-
half of the controlled foreign corporation
by a trustee or a nominee;

(B) United States property acquired by
any other foreign corporation that is con-
trolled by the controlled foreign corpora-
tion if a principal purpose of creating,
organizing, or funding by any means (in-
cluding through capital contributions or
debt) the other foreign corporation is to
avoid the application of section 956 with
respect to the controlled foreign corpora-
tion; and

(C) Property acquired by a partnership
that is controlled by the controlled foreign
corporation if the property would be
United States property if held directly by
the controlled foreign corporation, and a
principal purpose of creating, organizing,
or funding by any means (including
through capital contributions or debt) the
partnership is to avoid the application of
section 956 with respect to the controlled
foreign corporation.

(ii) Control. For purposes of paragraphs
(b)(4)(i)(B) and (C) of this section, a con-
trolled foreign corporation controls a for-
eign corporation or partnership if the con-
trolled foreign corporation and the other
foreign corporation or partnership are re-
lated within the meaning of section 267(b)
or section 707(b). For this purpose, in deter-

mining whether two corporations are mem-
bers of the same controlled group under, a
person is considered to own stock owned di-
rectly by such person, stock owned for the
purposes of section 1563(e)(1), and stock
owned with the application of section 267(c).

(iii) Coordination rule. Paragraph
(b)(4)(i)(C) of this section applies only to
the extent that the amount of United States
property that is treated as held indirectly
by a controlled foreign corporation under
that paragraph exceeds the amount of
United States property that is treated as
held by the controlled foreign corporation
under § 1.956-2(a)(3).

(iv) Examples. The following examples
illustrate the rules of this paragraph (b)(4).
In each example, unless otherwise pro-
vided, P is a domestic corporation that
wholly owns two controlled foreign cor-
porations, FS1 and FS2.

Example 1. (i) Facts. FS1 sells inventory to FS2
in exchange for trade receivables due in 60 days.
Avoiding the application of section 956 with respect
to FS1 was not a principal purpose of establishing
the trade receivables. FS2 has no earnings and profits
and FS1 has substantial accumulated earnings and
profits. FS2 makes a loan to P equal to the amount it
owes FS1 under the trade receivables. FS2 pays the
trade receivables according to their terms.

(ii) Result. FS1 will not be considered to indi-
rectly hold United States property under this para-
graph (b)(4) because the funding of FS2 through the
sale of inventory in exchange for the establishment
of trade receivables was not undertaken with a prin-
cipal purpose of avoiding the application of section
956 with respect to FS1.

Example 2. (i) Facts. The facts are the same as in
Example 1, except that, with a principal purpose of
avoiding the application of section 956 with respect
to FS1, FS1 and FS2 agree to defer FS2's payment
obligation, and FS2 does not timely pay the receiv-
ables.

(ii) Result. FS1 is considered to hold indirectly
United States property under this paragraph (b)(4),
because there was a funding of FS2, a principal
purpose of which was to avoid the application of
section 956 with respect to FS1.

Example 3. (i) Facts. FS1 has $100x of post-
1986 undistributed earnings and profits and $100
post-1986 foreign income taxes, but does not have
any cash. FS2 has earnings and profits of at least
$100x, no post-1986 foreign income taxes, and sub-
stantial cash. Neither FS1 nor FS2 has earnings and
profits described in section 959(c)(1) or section
959(c)(2). FS2 loans $100x to FS1. FS1 then loans
$100x to P. An income inclusion by P of $100x
under sections 951(a)(1)(B) and 956 with respect to
FS1 would result in foreign income taxes deemed
paid by P under section 960. A principal purpose of
funding FS1 through the loan from FS2 is to avoid
the application of section 956 with respect to FS2.

(ii) Result. Under paragraph (b)(4)(i)(B) of this
section, FS2 is considered to indirectly hold the

$100x obligation of P that is held by FS1. As a
result, P has an income inclusion of $100x under
sections 951(a)(1)(B) and 956 with respect to FS2,
and the foreign income taxes deemed paid by P
under section 960 is $0. P does not have an income
inclusion under sections 951(a)(1)(B) and 956
with respect to FS1 related to the $100x loan from
FS1 to P.

Example 4. (i) Facts. FS1 has substantial earn-
ings and profits. P and FS1 are the only partners in a
foreign partnership, FPRS. FS1 contributes $600x
cash to FPRS in exchange for a 60% interest in the
partnership, and P contributes real estate located
outside the United States ($400x value) to FPRS in
exchange for a 40% interest in the partnership. There
are no special allocations in the FPRS partnership
agreement. FPRS lends $100x to P. Under § 1.956-
2(a)(3), FS1 is treated as holding United States prop-
erty of $60x (60% x $100x) as a result of the FPRS
loan to P. A principal purpose of creating, organiz-
ing, or funding FPRS is to avoid the application of
section 956 with respect to FS1.

(ii) Result. Before taking into account paragraph
(b)(4)(iii) of this section, because FS1 controls FPRS
and a principal purpose of creating, organizing, or
funding FPRS was to avoid the application of section
956 with respect to FS1, FS1 is considered under
paragraph (b)(4)(i)(C) of this section to indirectly
hold the $100x obligation of P that would be United
States property if held directly by FS1. However,
under paragraph (b)(4)(iii) of this section, FS1 is
treated as holding United States property under para-
graph (b)(4)(i)(C) only to the extent the amount held
indirectly under paragraph (b)(4)(i)(C) of this sec-
tion exceeds the amount of United States property
that FS1 is treated as holding under § 1.956-2(a)(3).
The amount of United States property that FS1 is
treated as indirectly holding under paragraph
(b)(4)(i)(C) of this section ($100x) exceeds the
amount determined under § 1.956-2(a)(3) ($60x) by
$40x. Thus, FS1 is considered to hold United States
property within the meaning of section 956(c) in the
amount of $100x ($60x under § 1.956-2(a)(3) and
$40x under paragraphs (b)(4)(i)(C) and (b)(4)(iii) of
this section).

(5) Certain foreign partnership distri-
butions funded by CFCs-(i) General
rule. For purposes of section 956, an ob-
ligation of a foreign partnership that is
held (or that would be treated as held
under § 1.956-2(c) if the obligation were
an obligation of a United States person)
by a controlled foreign corporation is
treated as a separate obligation of a part-
ner in the partnership when-

(A) The foreign partnership distributes
an amount of money or property to the
partner;

(B) The foreign partnership would not
have made the distribution but for a fund-
ing of the partnership through the obliga-
tion; and

(C) The partner is related to the con-
trolled foreign corporation within the
meaning of section 954(d)(3).

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(ii) Amount of obligation. Notwith-
standing § 1.956-1(e), the amount that is
treated as an obligation of the distributee
partner pursuant to paragraph (b)(5)(i) of
this section is equal to the lesser of the
amount of the partnership distribution that
would not have been made but for the
funding of the partnership or the amount
(as determined under § 1.956-1(e)) of the
obligation of the foreign partnership that
is held (or that would be treated as held
under § 1.956-2(c) if the obligation were
an obligation of a United States person)
by the controlled foreign corporation.

(iii) Example. (A) Facts. P, a domestic corpora-
tion, wholly owns FS, a controlled foreign corpora-
tion. P owns a 70% interest in FPRS, a foreign
partnership. A domestic corporation that is unrelated
to P and FS owns the remaining 30% interest in
FPRS. FPRS borrows $100x from FS, and distrib-
utes $80x to P. FPRS would not have made the
distribution to P but for the funding by FS.

(B) Result. Under paragraph (b)(5)(i) of this sec-
tion, a portion of the obligation of FPRS that FS
holds is treated as an obligation of P, which consti-
tutes United States property, because FPRS made a
distribution to P that FPRS would not have made but
for the funding of FPRS through the obligation held
by FS. Under paragraph (b)(5)(ii) of this section,
the amount that is treated as an obligation of P is the
lesser of the amount of the distribution, $80x, or the
amount of the entire obligation of FPRS held by FS,
$100x. For purposes of section 956, therefore, on the
date the loan to FPRS is made, FS is considered to
hold United States property of $80x.

* * * * *

(e)(6) [Reserved]. For further guid-
ance, see § 1.956-1(e)(6).

* * * * *

(g) Effective/applicability date. (1)
Paragraph (b)(4) of this section applies to
taxable years of controlled foreign corpo-
rations ending on or after September 1,
2015, and to taxable years of United
States shareholders in which or with
which such taxable years end, with respect
to property acquired on or after September
1, 2015. See paragraph (b)(4) of § 1.956-
1T, as contained in 26 CFR part 1 revised
as of April 1, 2015, for the rules applica-
ble to taxable years of controlled foreign
corporations ending before September 1,
2015, and property acquired before Sep-
tember 1, 2015. For purposes of this para-
graph (g)(1), a deemed exchange of prop-
erty pursuant to section 1001 on or after
September 1, 2015, constitutes an acqui-
sition of the property on or after that date.

(2) Paragraph (b)(5) of this section ap-
plies to taxable years of controlled foreign
corporations ending on or after September

1, 2015, and to taxable years of United
States shareholders in which or with
which such taxable years end, in the case
of distributions made on or after Septem-
ber 1, 2015.

(3) [Reserved].

(4) [Reserved]. For further guidance,
see § 1.956-1(g)(4).

(h) Expiration date. The applicability of
paragraphs (b)(4) and (b)(5) of this section
expires on or before August 31, 2018.

John Dalrymple,
Deputy Commissioner for
Services and Enforcement.

Approved: July 30, 2015.

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

(Filed by the Office of the Federal Register on September 1,
2015, 8:45 a.m., and published in the issue of the Federal
Register for September 2, 2015, 80 F.R. 52976)

26 CFR 1.871-14: Rules relating to repeal of tax on
interest of nonresident alien individuals and foreign
corporations received from certain portfolio debt
investments.

26 CFR 1.871-15: Treatment of dividend equivalents.
26 CFR 1.871-15T: Treatment of dividend equivalents
(temporary).

26 CFR 1.1441-1: Requirement for the deduction and
withholding of tax on payments to foreign persons.
26 CFR 1.1441-1T: Requirement for the deduction and
withholding of tax on payments to foreign persons
(temporary).

26 CFR 1.1441-2: Amounts subject to withholding.
26 CFR 1.1441-3: Determination of amounts to be
withheld.

26 CFR 1.1441-7: General provisions relating to with-
holding agents.

26 CFR 1.1461-1: Payments and returns of tax with-
held.

26 CFR 1.1473-1: Section 1473 definitions.

#### T.D. 9734

DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
RIN 1545-BJ56

### Dividend Equivalents from Sources within the United States

AGENCY: Internal Revenue Service (IRS),
Treasury.

ACTION: Final regulations and tempo-
rary regulations.

SUMMARY: This document provides
guidance to nonresident alien individuals
and foreign corporations that hold certain
financial products providing for payments
that are contingent upon or determined by
reference to U.S. source dividend pay-
ments. This document also provides guid-
ance to withholding agents that are re-
sponsible for withholding U.S. tax with
respect to a dividend equivalent.

DATES: Effective Date: These regula-
tions are effective on September 18, 2015.

Applicability Dates: For dates of appli-
cability, see §§ 1.871-14(j)(4), 1.871-
15(r), 1.871-15T(r)(4), 1.1441-1(f)(4),
1.1441-1T(f)(3), 1.1441-2(f), 1.1441-
3(h)(3), 1.1441-7(a)(4),
1.1461-
1(c)(2)(iii), and 1.1473-1(f).

FOR FURTHER INFORMATION
CONTACT: D. Peter Merkel or Karen
Walny at (202) 317-6938 (not a toll-free
number).

SUPPLEMENTARY INFORMATION:

### Paperwork Reduction Act

The collection of information con-
tained in these final regulations has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act of
1995 (44 U.S.C. 3507(d)) under control
numbers 1545-0096 and 1545-1597. The
collections of information in this final reg-
ulation are in § 1.871-15(p), and are an
increase in the total annual burden in the
current regulations under §§ 1.1441-1
through 1.1441-9, 1.1461-1, and 1.1474-1.
This information is required to establish
whether a payment is treated as a U.S.
source dividend for purposes of section
871(m) of the Internal Revenue Code
(Code). This information will be used for
audit and examination purposes. The IRS
intends that these information collection
requirements will be satisfied by persons
complying with revised chapter 3 report-
ing requirements and the requirements of
the applicable QI revenue procedure to be
revised by the IRS, or alternative certifi-
cation and documentation requirements
set out in these regulations. An agency
may not conduct or sponsor, and a person

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is not required to respond to, a collection
of information unless it displays a valid
control number.

Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any internal
revenue law. Generally, tax returns and
return information are confidential, as re-
quired by 26 U.S.C. 6103.

#### Background

On January 23, 2012, the Federal Reg-
ister published temporary regulations (TD
9572) at 77 FR 3108 (2012 temporary
regulations), and a notice of proposed
rulemaking by cross-reference to the tem-
porary regulations and notice of public
hearing at 77 FR 3202 (2012 proposed
regulations, and together with the 2012
temporary regulations, 2012 section 871(m)
regulations) under section 871(m). The
2012 section 871(m) regulations relate to
dividend equivalents from sources within
the United States paid to nonresident alien
individuals and foreign corporations. Cor-
rections to the 2012 temporary regulations
were published on February 6, 2012, and
March 8, 2012, in the Federal Register at
77 FR 5700 and 77 FR 13969, respec-
tively. A correcting amendment to the
2012 temporary regulations was also pub-
lished on August 31, 2012, in the Federal
Register at 77 FR 53141. The Treasury
Department and the IRS received written
comments on the 2012 proposed regula-
tions, and a public hearing was held on
April 27, 2012.

On December 5, 2013, the Federal
Register published final regulations and
removal of temporary regulations (TD
9648) at 78 FR 73079 (2013 final regula-
tions), which finalized a portion of the
2012 section 871(m) regulations. Also on
December 5, 2013, the Federal Register
published a withdrawal of notice of pro-
posed rulemaking, a notice of proposed
rulemaking, and a notice of public hearing
at 78 FR 73128 (2013 proposed regula-
tions). In light of comments on the 2012
proposed regulations, the 2013 proposed
regulations described a new approach for
determining whether a payment made pur-
suant to a notional principal contract
(NPC) or an equity-linked instrument
(ELI) is a dividend equivalent based on
the delta of the contract. In response to

written comments on the 2013 proposed
regulations, the Treasury Department and
the IRS released Notice 2014-14, 2014-13
IRB 881, on March 24, 2014 (see
§ 601.601(d)(2)(ii)(b)), stating that the
Treasury Department and the IRS antici-
pated limiting the application of the rules
with respect to specified ELIs described in
the 2013 proposed regulations to ELIs is-
sued on or after 90 days after the date of
publication of final regulations.

The Treasury Department and the IRS
received written comments on the 2013
proposed regulations, which are available
at www.regulations.gov. The public hear-
ing scheduled for April 11, 2013, was
cancelled because no request to speak was
received. This Treasury decision generally
adopts the 2013 proposed regulations with
the changes discussed in this preamble.
This Treasury decision also includes tem-
porary regulations, which provide new
rules for determining whether certain
complex derivatives are subject to section
871(m) and for payments to certain deal-
ers in response to comments on the 2013
proposed regulations.

### Summary of Comments and Explanation of Provisions

#### I. In General

The Treasury Department and the IRS
received numerous comments regarding
the 2013 proposed regulations. Most com-
ments agreed that the approach taken in
the 2013 proposed regulations, in particu-
lar the use of a test based on delta, was a
fair and practical way to apply section
871(m) to financial instruments linked to
one or more U.S. equity securities. Com-
menters, however, identified a number of
issues with the 2013 proposed regulations.
Many of the comments suggested modifi-
cations and clarifications to the 2013 pro-
posed regulations before they are issued
as final regulations. Those comments are
summarized in Part II of this preamble.
Part II also explains the changes made to
the final regulations in response to those
comments.

Several of the issues identified by com-
menters required more significant changes
or additions to the 2013 proposed regula-
tions. To allow taxpayers adequate oppor-
tunity to consider and comment on these
changes, the Treasury Department and the

IRS are issuing portions of the regulations
as temporary and proposed regulations.
Those provisions, and the relevant com-
ments, are summarized in Part III of this
preamble.

#### II. Final Regulations

##### A. Source of a Dividend Equivalent

The 2013 proposed regulations provide
that a dividend equivalent is treated as a
dividend from sources within the United
States for purposes of sections 871(a),
881, 892, 894, and 4948(a), and chapters 3
and 4 of subtitle A of the Code. This rule
follows section 871(m)(1) but adds the
reference to section 894 to clarify (as pro-
vided in § 1.894-1(c)(2)) that a dividend
equivalent is treated as a dividend for pur-
poses of any provision regarding divi-
dends in an income tax treaty. The final
regulations retain the general sourcing
provision. See § 1.871-15(b).

#### B. Definition of a Dividend Equivalent

The 2013 proposed regulations define a
dividend equivalent as (1) any substitute
dividend that references a U.S. source div-
idend made pursuant to a securities lend-
ing or sale-repurchase transaction, (2) any
payment that references a U.S. source div-
idend made pursuant to a specified NPC,
(3) any payment that references a U.S.
source dividend made pursuant to a spec-
ified ELI, or (4) any other substantially
similar payment. A payment references a
U.S. source dividend if the payment is di-
rectly or indirectly contingent upon a U.S.
source dividend or determined by reference
to such a dividend. While the transactions
described in (1) and (2) are transactions de-
scribed in sections 871(m)(2)(A) and (B), re-
spectively, the 2013 proposed regulations
extend section 871(m) to the transactions
described in (3) and (4) under the regulatory
authority granted in section 871(m)(2)(C),
which includes as a dividend equivalent
"any other payment determined by the Sec-
retary to be substantially similar to a pay-
ment described in subparagraph (A) or (B)"
of section 871(m)(2). The final regulations
retain this four-part definition of a dividend
equivalent. See § 1.871-15(c)(1). The final
regulations also provide certain exceptions

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to the term "dividend equivalent," which are
described in section II.D of this preamble.

Section 871(m)(3)(A) provides a tem-
porary definition of the term "specified
notional principal contract." This defini-
tion is effective for payments made on or
after September 14, 2010, and on or before
March 18, 2012. Section 871(m)(3)(B) pro-
vides that, for payments made after March
18, 2012, a specified NPC includes "any
notional principal contract unless the Sec-
retary determines that such contract is of a
type which does not have the potential for
tax avoidance." The 2013 final regulations
extend the applicability of the temporary
statutory definition in section 871(m)(3)(A)
(the four-part definition provided in para-
graphs (3)(A)(i) through (iv)) to payments
made before January 1, 2016. These final
regulations amend the 2013 final regula-
tions to extend the application of the tem-
porary statutory definition adopted in the
2013 final regulations to payments made
before January 1, 2017.

Pursuant to the grant of authority in
section 871(m)(2)(C), the 2013 proposed
regulations provide that certain payments
made pursuant to a specified ELI are sub-
stantially similar to a dividend equivalent
payment. Section 1.871-15(c)(1)(iii) of
the 2013 proposed regulations defines a
dividend equivalent to include any pay-
ment that references the payment of a
dividend from an underlying security on a
specified ELI. Section 1.871-15(a)(3) of
the 2013 proposed regulations defines an
ELI (whether or not specified) as any fi-
nancial transaction (other than a securities
lending or sale-repurchase transaction or
an NPC) that references the value of one
or more underlying securities. Forward
contracts, futures contracts, options, debt
instruments convertible into underlying
securities, and debt instruments that have
payments linked to underlying securities
are common examples of an ELI.

#### C. The Delta Test

The 2012 proposed regulations used a
multi-factor test to determine whether an
NPC or ELI is a specified contract subject
to withholding under section 871(m). The
2013 proposed regulations replace the
multi-factor test with a single-factor test
that employs a "delta" threshold to deter-
mine whether a transaction is a section

871(m) transaction. Delta refers to the ra-
tio of a change in the fair market value of
a contract to a small change in the fair
market value of the property referenced
by the contract. Delta is widely used by
participants in the derivatives markets to
measure and manage risk. Under the test
in the 2013 proposed regulations, any
NPC or ELI that had a delta of 0.70 or
greater when the long party acquired the
transaction would be a section 871(m)
transaction subject to withholding.

The Treasury Department and the IRS
proposed a delta-based standard after con-
cluding that it would provide a compara-
tively simple, administrable, and objective
framework that would also minimize po-
tential avoidance of U.S. withholding tax.
A financial instrument that provides an
economic return that is substantially sim-
ilar to the return on the underlying stock
should be taxed in the same manner as the
underlying stock for the purpose of sec-
tion 871(m). The Treasury Department
and the IRS concluded that the delta test
was the best way to identify these instru-
ments.

The Treasury Department and the IRS
received many comments regarding the
delta test. Commenters generally agreed
that the delta test was both a fair and
comprehensive way to implement section
871(m), but provided comments on sev-
eral aspects of the test. The major con-
cerns noted in the comments relate to: (1)
the use of 0.70 as the delta threshold; (2)
the time for testing delta; (3) the ability of
parties to the transaction to obtain and
track the necessary delta information; and
(4) the difficulty of determining an initial
delta with respect to certain complex eq-
uity derivatives (in contrast with simple
contracts, as defined in Part II.C.4 of this
preamble).

##### 1. Delta Threshold

Comments on the 2013 proposed reg-
ulations recommended raising the delta
threshold, with suggestions ranging from
a delta of 0.80 to 0.95. The majority of
comments preferred a delta threshold of
0.90 or greater. Comments maintained
that a higher delta would more accurately
capture transactions that are economically
equivalent to stock ownership and likely
to be used for tax-avoidance. One com-

ment noted that a 0.80 delta standard, al-
though not prescribed in regulatory guid-
ance, is used by some practitioners as a
yardstick to judge economic equivalence
in other tax contexts.

The Treasury Department and the IRS
agree that the 0.70 delta in the 2013 pro-
posed regulations could apply to contracts
with economic characteristics that do not
sufficiently resemble the underlying secu-
rity to be within the scope of section
871(m). On the other hand, a delta thresh-
old that is 0.90 (or higher) would exclude
many instruments that are surrogates for
the underlying security, such as deep-in-
the-money options. The final regulations
adopt a delta threshold of 0.80, which
strikes a balance between the potential
over-inclusiveness of the 0.70 delta
threshold and the likelihood that a 0.90 (or
higher) threshold would exclude transac-
tions with economic returns that closely
resemble an underlying security.

Several comments noted that a delta
ratio is intended to measure the sensitivity
of the value of a contract to comparatively
small changes in the market value of the
referenced property and suggested that the
regulations incorporate this qualification
in the definition of delta. The final regu-
lations accept this suggestion and clarify
the definition of delta by specifying that
delta is calculated with respect to a small
change in the fair market value of the
property referenced by the contract. Typ-
ically, a small change is a change of less
than 1 percent.

##### 2. Time for Testing Delta

Many comments stated that the re-
quirement to test delta each time a con-
tract is acquired would be extremely dif-
ficult to administer, especially for ELIs
that trade frequently. Multiple testing
events create the possibility that identical
instruments acquired at different times
would have different tax characteristics,
which withholding systems are generally
not designed to handle. To ease compli-
ance, comments suggested that delta be
tested only when a contract is issued. For
derivatives that are listed and cleared
through central clearinghouses, another
comment suggested that the delta test
would be more administrable if taxpayers
were permitted to simplify their calcula-

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tions. For example, delta could be calcu-
lated using the fair market value of an ELI
determined as of the market close on the
trading day prior to the date the ELI is
acquired, even though this approach
would result in a less accurate calculation.
Other comments suggested that, in deter-
mining the delta of an option, only the
stock price at the time the option is en-
tered into should be considered.

The Treasury Department and the IRS
are persuaded that the difficulties of test-
ing delta each time an NPC or ELI is
acquired outweigh the benefit of the in-
creased accuracy of that approach. Ac-
cordingly, the final regulations provide
that the delta of an ELI or NPC is deter-
mined only when the instrument is issued;
it is not re-tested when the instrument is
purchased or otherwise acquired in the
secondary market. Consequently, only an
NPC or ELI that has a delta of 0.80 or
greater at the time it is issued is a specified
NPC or specified ELI.

For purposes of § 1.871-15, an instru-
ment is treated as "issued" when it is
entered into, purchased, or otherwise ac-
quired at its inception or original issuance,
which includes an issuance that results
from a deemed exchange pursuant to sec-
tion 1001. The requirement to test delta
only at the time an instrument is issued
also extends to the rules for determining
the amount of each dividend equivalent
(as discussed in section F.1 of this pream-
ble).

#### 3. Access to Delta Information

Comments noted practical issues with
obtaining delta information, particularly
for exchange-traded positions where the
dealer is not involved in determining pric-
ing and the short party may not have the
expertise to calculate delta. Comments
suggested adopting an alternative test for
identifying high-delta options based on
their relative intrinsic value (amount by
which the option is in-the-money) and rel-
ative extrinsic value (time value). This test
would require the simpler calculation of
determining the applicable strike price as
a percentage of the current fair market
value of the ELI and deeming ELIs at a
certain percentage as passing or failing the
delta threshold. Alternatively, comments
suggested permitting the long party to rely

on commonly available online tools to cal-
culate delta for exchange-traded ELIs, pro-
vided that the taxpayer uses inputs that are
within the range of commercially acceptable
variation, uses a consistent methodology,
and records its calculations contemporane-
ously. Comments also recommended relying
on an anti-abuse rule for particularly com-
plex derivatives for which delta informa-
tion would be unavailable to any party
other than the issuer, speculating that the
increased cost and risk of complex trans-
actions generally would outweigh any tax
savings.

The Treasury Department and the IRS
are concerned that these alternative tests or
shorthand methods for determining delta
may result in uncertainty for withholding
agents and the IRS that could make it diffi-
cult to determine the status of potential sec-
tion 871(m) transactions. Moreover, the
changes to the final regulations to require
that delta be tested only when a contract is
first issued, accompanied by enhanced re-
porting rules (described in more detail later
in this preamble), make these alternative
tests unnecessary. Accordingly, the final
regulations do not adopt these recommen-
dations.

However, in order to simplify the delta
calculation for contracts that reference
multiple underlying securities, the final
regulations provide that a short party may
calculate delta using a single exchange-
traded security in certain circumstances.
More specifically, if a short party issues a
contract that references a basket of 10 or
more underlying securities and uses an
exchange-traded security, such as an
exchange-traded fund, that references sub-
stantially the same underlying securities
to hedge the contract at the time it is
issued, the short party may use the hedge
security to determine the delta of the se-
curity it is issuing rather than determining
the delta of each security referenced in the
basket.

#### 4. Contracts with Indeterminate Deltas

Although commenters generally
agreed that the delta test was fair and
practical for the majority of equity-linked
derivatives, numerous comments ex-
plained that the delta test would be diffi-
cult or impossible to apply to certain more
exotic equity derivatives. For example,

contracts that have asymmetrical or binary
payouts may reference a different number
of shares of an underlying security at dif-
ferent payout points. Similarly, contracts
that have path-dependent payouts may
reference multiple underlying securities,
with payouts that are interdependent on
the performance of each underlying secu-
rity. In each of these cases, comments
noted that the delta is indeterminate be-
cause the number of shares of the under-
lying security that determine the payout of
the derivative cannot be known at the time
the contract is entered into.

The Treasury Department and the IRS
agree that an alternative to the delta test is
needed for contracts with indeterminate
deltas. To address these contracts, the fi-
nal regulations distinguish between sim-
ple contracts and complex contracts. Gen-
erally, a simple contract is a contract that
references a single, fixed number of shares
of one or more issuers to determine the
payout. The number of shares must be
known when the contract is issued. In
addition, the contract must have a single
maturity or exercise date on which all
amounts (other than any upfront payment
or any periodic payments) are required to
be calculated with respect to the underly-
ing security. The fact that a contract has
more than one expiry, or a continuous
expiry, does not preclude the contract
from being a simple contract. Thus, an
American-style option is a simple contract
even though the option may be exercised
by the holder at any time on or before the
expiration of the option if amounts due
under the contract are determined by ref-
erence to a single, fixed number of shares
on the exercise date. Most NPCs and ELIs
are expected to be simple contracts and
remain subject to the delta test described
above.

A complex contract is any contract that
is not a simple contract. Contracts with
indeterminate deltas are classified as com-
plex contracts, which are subject to a new
substantial equivalence test. That test is
included in the temporary regulations, de-
scribed in more detail in Part III of this
preamble. The delta test in the final regu-
lations therefore applies only to simple
contracts.

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D. Exceptions for Certain Payments and
Transactions

Several comments requested that the
final regulations exclude certain payments
from the definition of "dividend equiva-
lent" or exclude certain transactions from
the definition of "section 871(m) transac-
tion." These comments generally noted
that the payment or transaction at issue
either is already taxed under another pro-
vision of the Code or does not provide the
long party with an opportunity to avoid
gross basis taxation on U.S. source divi-
dends.

##### 1. Payment Referencing Distributions That Are Not Dividends

The 2013 proposed regulations provide
that a payment referencing a distribution
on an underlying security is not a dividend
equivalent to the extent that the distribu-
tion would not be subject to tax pursuant
to section 871 or section 881 if the long
party owned the underlying security di-
rectly. The final regulations retain this
provision. See § 1.871-15(c)(2)(i).

##### 2. Section 305 Coordination

Under sections 305(b) and (c) and reg-
ulations authorized by section 305(c), a
change to the conversion ratio or conver-
sion price of a convertible debt instrument
that is a convertible security for purposes
of section 305 (a convertible security)
may be treated as a distribution of prop-
erty to which section 301 applies made to
the holder of the convertible security. See
§ 1.305-7. To the extent such a distribu-
tion is treated under section 301(c)(1) as a
dividend as defined in section 316 (a sec-
tion 305 dividend), § 1.1441-2(d)(1)
would require withholding on the section
305 dividend without regard to the fact
that there is no payment at that time. Ab-
sent special rules, a section 305 dividend
resulting from a change in conversion ra-
tio or price of a convertible security that is
a section 871(m) transaction could also be
subject to withholding as a dividend
equivalent.

The 2013 proposed regulations provide
that a payment pursuant to a section
871(m) transaction is not a dividend
equivalent to the extent that it is treated as

a distribution taxable as a dividend pursu-
ant to section 305. Comments noted that
section 305 dividends and dividend equiv-
alents under section 871(m) arise in dif-
ferent contexts and are determined differ-
ently. Moreover, section 305 dividends
will reduce earnings and profits pursuant
to section 312. Comments suggested that
the regulations provide more detail to co-
ordinate these two provisions, including
guidance on how to reconcile withholding
on the delta-based dividend equivalent in
these regulations with withholding other-
wise required on section 305 dividends.

After consideration of the comments,
these final regulations clarify that a divi-
dend equivalent with respect to a section
871(m) transaction is reduced by any
amount treated in accordance with section
305(b) and (c) as a dividend with respect
to the underlying security referenced by
the section 871(m) transaction. For exam-
ple, if a change in the conversion ratio of
a convertible security that is a section
871(m) transaction is treated as a section
305 dividend made to the holder of the
convertible security, a dividend equiva-
lent is reduced by the amount of the sec-
tion 305 dividend arising from such
change.

Although a transaction (for example, a
change in conversion ratio of a convert-
ible security) may give rise to both a div-
idend equivalent and a section 305 divi-
dend, dividend equivalents and section
305 dividends have different characteris-
tics. These final regulations do not alter
any of the rules applicable to section 305
dividends. As noted in Part II.M. of this
preamble, however, the changes made
elsewhere in these final regulations should
make section 871(m) inapplicable to most
convertible debt instruments, including
those that are convertible securities sub-
ject to section 305(c).

#### 3. Due Bills

The 2013 proposed regulations reserve
on the question of whether a due bill gives
rise to a dividend equivalent and request
comments regarding whether a payment
made by a seller of stock to the purchaser
pursuant to an agreement to deliver a
pending U.S. source dividend after the
record date (for example, a due bill)

should be treated as a substantially similar
payment.

One comment noted that a due bill may
give rise to payments that appear to satisfy
the criteria for a dividend equivalent. That
comment expressed concern regarding the
impact this treatment might have on the
capital markets because of the relative fre-
quency of due bills, as well as the admin-
istrative complexity of treating these pay-
ments as dividend equivalents. Another
comment asserted that a due bill is not the
economic equivalent of a dividend. Both
comments requested that the regulations
either address due bills under the anti-
abuse rule or exclude them from the term
dividend equivalent.

The final regulations provide that a
dividend equivalent does not include a
payment made pursuant to a due bill that
arises from the actions of a securities ex-
change that apply to all transactions in the
stock and when the relevant exchange has
set an ex-dividend date that occurs after
the record date. This rule is expected to
apply in situations in which a securities
exchange sets an ex-dividend date after
the record date to accommodate a special
dividend.

#### 4. Employee Compensation

The 2013 proposed regulations do not
specifically exclude payments of compen-
sation for personal services of a nonresi-
dent alien individual from being treated as
a dividend equivalent. Comments sug-
gested that compensation arrangements
should be excluded from dividend equiv-
alent treatment because compensation is
already subject to an existing tax with-
holding framework, compensatory trans-
actions arise in a different context from
other derivatives and do not have the po-
tential to avoid U.S. withholding tax, and
compensation should be subject to tax
where the services are performed.

The Treasury Department and the IRS
have determined that section 871(m)
should not apply to compensation that is
generally subject to withholding or has a
specific exception therefrom. Accord-
ingly, the final regulations provide that a
dividend equivalent does not include the
portion of equity-based compensation for
personal services of a nonresident alien
individual that is wages subject to with-

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holding under section 3402, excluded
from the definition of wages under
§ 31.3401(a)(6)-1, or exempt from with-
holding under § 1.1441-4(b). For exam-
ple, when a restricted stock unit is paid as
compensation and tax is collected by the
employer at the time of payment through
withholding, the payment will not also be
a dividend equivalent subject to withhold-
ing. If the restricted stock unit results in
the receipt of stock, however, dividends
subsequently paid on that stock would be
subject to withholding under section 871.

#### 5. Certain Corporate Acquisitions

In response to comments, § 1.871-
15(j) of the 2013 proposed regulations
provides an exception to the definition of
a section 871(m) transaction when a tax-
payer enters into a transaction as part of a
plan pursuant to which one or more per-
sons (including the taxpayer) are obli-
gated to acquire more than 50 percent of
the entity issuing the underlying securi-
ties.

Comments requested that the acquisi-
tion threshold in this exception be lowered
from 50 percent to 10 or 20 percent. Com-
ments noted that corporate acquisitions
generally would not provide an opportu-
nity for avoiding dividend withholding.
Further, comments noted that the anti-
abuse rule should be sufficient to address
any abuse that could occur through such
transactions. Comments acknowledged
that when a target company pays a pre-
closing dividend and the purchase price is
reduced for the dividend, this may allow
the purchaser to avoid a subsequent divi-
dend. However, comments observed that
this event should be viewed as a purchase
price adjustment rather than a dividend
equivalent.

The final regulations do not change the
50 percent threshold. Requiring that an
acquisition (as part of a plan by one or
more person) total more than 50 percent
of a corporation is appropriate because it
indicates that the primary intent of the
acquirer is to obtain a controlling interest
rather than just a substantial investment in
the target company. In circumstances
where a taxpayer enters into a transaction
pursuant to which the taxpayer is obli-
gated to acquire 50 percent or less of the
entity issuing the underlying securities,

and the transaction is a section 871(m)
transaction, any party to the transaction
that is a broker, dealer, or intermediary, a
short party, or a withholding agent, must
comply with any requirements in the final
regulation to make appropriate determina-
tions, and satisfy reporting and withhold-
ing obligations, as applicable.

#### E. Payment of a Dividend Equivalent

Section 871(m)(5) provides that a
"payment" includes any gross amount that
references a U.S. source dividend and that
is used to compute any net amount trans-
ferred to or from the taxpayer. The 2013
proposed regulations provide that a divi-
dend equivalent includes any amount that
references an actual or estimated payment
of a U.S. source dividend, whether the
reference is explicit or implicit. Thus, in
addition to amounts equal to actual pay-
ments of dividends and estimated divi-
dends, a dividend equivalent includes any
other contractual term of a section 871(m)
transaction that is calculated based on an
actual or estimated dividend. For exam-
ple, when a long party enters into an NPC
that provides for payments based on the
appreciation in the value of an underlying
security but that does not explicitly entitle
the long party to receive payments based
on regular dividends (a price return swap),
the 2013 proposed regulations treat the
price return swap as a transaction that
provides for the payment of a dividend
equivalent because the anticipated divi-
dend payments are presumed to be taken
into account in determining other terms of
the NPC, such as in the payments that the
long party is required to make to the short
party or in setting the price of the under-
lying securities referenced in the price re-
turn swap.

Comments objected to the provisions
in the 2013 proposed regulations that in-
clude estimated and implicit dividends in
the definition of a dividend equivalent.
These comments noted that an estimated
dividend is reflected as a price reduction
or as an amount that the foreign investor
does not have to pay rather than an
amount the foreign investor affirmatively
receives for holding the derivative, which
suggests that there is no "payment" of a
dividend equivalent to the foreign inves-
tor. Comments also noted that, while es-

timated dividends may be implicitly in-
corporated into the pricing of a derivative,
the price is ultimately determined by sup-
ply and demand in the market and the
expected dividend is not always explicitly
used in computing the amount paid.

The Treasury Department and the IRS
have concluded that the economic benefit
of a dividend is present in transactions
that implicitly incorporate estimated divi-
dends to virtually the same extent as trans-
actions that pay or adjust for actual divi-
dends. Thus, the final regulations retain
the rules in the 2013 proposed regulations
that include estimated and implicit divi-
dends as dividend equivalents. See
§ 1.871-15(i)(2). More specifically, the
final regulations provide that any gross
amount that references the payment of a
dividend, whether actual or estimated, ex-
plicit or implicit, is treated as a dividend
equivalent to the extent of the amount
determined under the regulations. The fi-
nal regulations change the time that with-
holding is required on a payment of a
dividend equivalent, as discussed in Part
II.N. of this preamble.

#### F. Amount of a Dividend Equivalent

##### 1. Calculation of Dividend Equivalent Amount

Under the 2013 proposed regulations,
the amount of a dividend equivalent for a
specified NPC or specified ELI equals the
per-share dividend amount with respect to
the underlying security multiplied by the
number of shares of the underlying secu-
rity referenced in the contract (subject to
adjustment), multiplied by the delta of the
transaction with respect to the underlying
security at the time when the amount of
the dividend equivalent is determined. If a
transaction provides for a payment based
on an estimated or implicit estimated div-
idend, the actual dividend is used to cal-
culate the amount of the dividend equiv-
alent unless the short party identifies a
reasonable estimated dividend amount in
writing at the inception of the transaction.
When a payment based on estimated div-
idends is supported by the required docu-
mentation, the per-share dividend amount
used to compute the amount of a dividend
equivalent is the lesser of the estimated
dividend and the actual dividend.

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Comments on the 2013 proposed reg-
ulations noted that recalculating the delta
of a section 871(m) transaction each time
the amount of a dividend equivalent is
determined would add administrative
complexity without necessarily improving
accuracy. In the interest of simplicity, sev-
eral comments recommended using the
actual dividend amount rather than an
amount adjusted for delta as the dividend
equivalent amount. Other comments sug-
gested using the delta at the time the trans-
action is issued or entered into for deter-
mining the dividend equivalent amount.
For complex transactions for which the
delta is indeterminate, comments sug-
gested that withholding be based on the
number of shares required by the short
party to the transaction to hedge its initial
position in the transaction.

The final regulations simplify the
rules for determining the amount of a
dividend equivalent in response to these
comments. For a simple contract, the
final regulations provide that the amount
of the dividend equivalent for each un-
derlying security equals the amount of
the per-share dividend, multiplied by the
number of shares referenced in the con-
tract, multiplied by the applicable delta.
In a change from the 2013 proposed
regulations, the final regulations provide
that this formula references the delta of
the transaction at the time the simple
contract is issued, rather than when the
dividend is paid. For a complex con-
tract, the amount of the dividend equiv-
alent equals the amount of the per-share
dividend multiplied by the number of
shares that constitute the initial hedge of
the complex contract (as that term is
defined in § 1.871-15(a)(5) and dis-
cussed in Part III.A of this preamble).

Another simplifying rule applies to
dividend equivalents paid with respect to
baskets of more than 25 securities. If a
section 871(m) transaction references a
basket of more than 25 underlying secu-
rities, the short party is allowed to treat all
of the dividends on the basket as paid on
the last day of the calendar quarter.

#### 2. Specified NPCs and Specified ELIs with a Term of One Year or Less

For a specified NPC or specified ELI
with a term of one year or less when

acquired, the 2013 proposed regulations
provide that the amount of a dividend
equivalent is determined when the long
party disposes of the section 871(m) trans-
action. Therefore, a long party that ac-
quires an option with a term of one year or
less that is a specified ELI would not incur
a withholding tax if the option lapses.

One comment noted that the rule pro-
viding that there is no dividend equivalent
for options that have a term of one year or
less and lapse unexercised is inappropriate
in the case of written put options because
put writers realize their maximum profit
when puts lapse. Comments further noted
that the one-year rule could have uneco-
nomic consequences for options close to
expiration and for options that are slightly
in-the-money or slightly out-of-the-
money because the delta could fluctuate
materially in response to small changes in
the price of the underlying stock.

Based on the comments received, the
final regulations eliminate the special rule
for contracts with terms of one year or
less. Any benefit from the rule is out-
weighed by the complexity of creating
systems to track contracts that differ only
in term. Eliminating the special rule for
contracts of one year or less means that a
dividend equivalent amount must be de-
termined for any option, including a short-
term option, that is a specified ELI.

#### G. Qualified Indices

The 2013 proposed regulations revise
rules provided in the 2012 proposed reg-
ulations pertaining to an exception for
transactions that reference certain equity
indices. Under the 2013 proposed regula-
tions, a qualified index is any index that
(1) references 25 or more underlying se-
curities, (2) references only long positions
in underlying securities, (3) contains no
underlying security that represents more
than 10 percent of the index's weighting,
(4) rebalances based on objective rules at
set intervals, (5) does not provide a divi-
dend yield that is greater than 1.5 times
the dividend yield of the S&P 500 Index,
and (6) is referenced by futures or option
contracts that trade on a national securities
exchange or a domestic board of trade. In
addition, the 2013 proposed regulations
provide that a qualified index would be-
come disqualified if a transaction refer-

ences a qualified index and also references
a short position in any component under-
lying security of the qualified index other
than a short position with respect to the
entire qualified index (such as a cap or a
floor).

One comment recommended eliminat-
ing the exception for a qualified index.
This comment noted that when a long
party holds a total return swap referencing
a basket of underlying securities, that
swap is economically equivalent to multi-
ple total return swaps that each reference a
single underlying security. Similarly,
when a long party holds a delta-one de-
rivative that references an index, that de-
rivative is economically equivalent to
multiple delta-one derivatives each refer-
encing a single component of the index;
therefore, that long party is receiving the
economic equivalent of all dividends paid
with respect to each stock in the index.
Thus, transactions that reference U.S.
stock indices have no less potential for
avoidance of gross basis withholding tax
on dividends than transactions that refer-
ence single equities or that reference cus-
tomized baskets of equities.

Another comment noted that the crite-
ria in the 2013 proposed regulations pro-
vide a reasonable method for identifying
legitimate indices that have not been de-
signed to avoid withholding taxes. That
comment noted that the rules would ex-
clude most securities that are linked to an
index and traded on U.S. stock exchanges
from dividend taxation, while preventing
customized indices from becoming a ve-
hicle designed to evade U.S. dividend
taxes.

The majority of comments, however,
recommended that the scope of the index
exception be expanded to include most of
the indices that are represented by ex-
change traded funds. Several comments
requested that the definition allow an in-
dex with fewer than 25 stocks to be a
qualified index, noting that many sector
indices have fewer than 25 names. An-
other comment suggested providing an
exception to the requirement that an index
be referenced by exchange-traded futures
or options that would apply to indices that
are sufficiently broad-based (for example,
indices containing one hundred or more
component securities). Comments also
suggested eliminating the requirement

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that the stock of a single company cannot
represent more than 10 percent of the in-
dex's weighting because some indices in-
clude component securities that grow rap-
idly. Several comments also noted that
many indices would fail to satisfy the re-
quirement that a qualified index rebalance
based on objective rules at set intervals
because many popular indices, including
the S&P 500 Index, rebalance using a
combination of objective and subjective
factors.

Comments further requested that the
permitted dividend yield be increased to
2.5 times the current dividend yield of the
S&P 500 Index. The comments noted that
an index may not satisfy the requirement
based on 1.5 times the current dividend
yield of the S&P 500 Index if the stocks in
the index depreciated significantly relative
to the general U.S. stock market. In addi-
tion, other indices would not qualify be-
cause some market sectors routinely pay
dividends at a rate that is more than 1.5
times the average rate in the U.S. market.

Other comments suggested additional
categories of indices that should be treated
as qualified indices. Specifically, one
comment recommended that any index
that was published by a recognized inde-
pendent index publisher should be a qual-
ified index if the index is offered for li-
cense to third parties on similar terms and
multiple third party industry participants
actually license the index. The comments
proposed defining a recognized indepen-
dent index publisher as an organization
that publishes indices that are created, cal-
culated, and compiled by a group of em-
ployees that have no duties other than
those related to the publication of the in-
dices.

The rule in the 2013 proposed regula-
tions that prevents taxpayers from using
short positions to decrease their long po-
sition with respect to one or more compo-
nents of an index was also noted by com-
ments as too restrictive. Comments
suggested permitting taxpayers to de-
crease risk with respect to a small percent-
age of the value of the stocks in the index
without disqualifying the index. One com-
ment suggested that an index should re-
main a qualified index unless the short
position is used to establish a net long
position in a narrow set of underlying

securities for purposes of evading with-
holding.

The 2013 proposed regulations also in-
cluded a safe harbor for global indices
with 10 percent or less U.S. stocks. Com-
ments recommended expanding this safe
harbor because U.S. equities in a global
index can comprise more than half of the
index's weighting. The comments pro-
posed increasing the threshold to allow
U.S. stocks to represent 50 percent or
more of the index. These comments also
noted that global indices do not typically
trade on U.S. securities or commodities
exchanges and will not be qualified indi-
ces under the current provisions. Other
comments suggested that the regulations
except from withholding all global indices
that are not created to avoid withholding
tax, with a presumption that widely-used
benchmark indices are not designed to
avoid tax.

The Treasury Department and the IRS
believe that the approach taken in the
2013 proposed regulations for identifying
qualified indices appropriately balances
the competing concerns. Accordingly, the
final regulations generally retain the crite-
ria of the 2013 proposed regulations with
modifications to clarify the intent and im-
prove the functionality of the qualified
index rule. See § 1.871-15(1).

The final regulations add a paragraph
stating that the purpose of the qualified
index rule is to provide a safe harbor for
transactions on passive indices that refer-
ence a diverse basket of securities and that
are widely used by numerous market par-
ticipants. The index exception is not in-
tended to apply to any index that is cus-
tomized or reflects a trading strategy, is
unavailable to other investors, or targets
special dividends. The final regulations
further provide that an index will not be
treated as a qualified index if treating the
index as a qualified index would be con-
trary to this purpose.

To make the rules easier to administer,
the final regulations modify the time for
determining whether an index satisfies the
qualified index criteria. Specifically, the
final regulations provide that the determi-
nation of whether an index is a qualified
index is made on the first business day of
each calendar year, and that determination
applies for all potential section 871(m)

transactions issued during that calendar
year.

In response to comments, a number of
changes also were made to specific as-
pects of the qualified index definition.
First, the final regulations delete the mod-
ifier "underlying" with respect to "securi-
ties," thereby allowing an index to qualify
with fewer than 25 component underlying
securities provided that the index contains
a total of at least 25 component securities
(in other words, a component security
may include a security that does not give
rise to U.S. source dividends). The index,
however, will not qualify if it references
five or fewer component underlying secu-
rities that together represent more than 40
percent of the weighting of the component
securities in the index. Second, the final
regulations increase the 10 percent limit
for the maximum weighting of a single
underlying security to 15 percent. Third,
in response to concerns regarding the re-
quirement that a qualified index rebalance
based on objective rules, the final regula-
tions do not require that an index be mod-
ified or rebalanced at set dates or intervals,
and provide flexibility for how the rules
governing the constitution of an index are
applied. Instead, under the final regula-
tions, an index that is periodically rebal-
anced by a board or committee that is
allowed to exercise judgment in interpret-
ing the rules governing the composition of
the index will not be disqualified if the
index is otherwise a qualified index.

The final regulations continue to re-
quire that an index be referenced by fu-
tures or options listed on a national secu-
rities exchange or board of trade to be a
qualified index, which is consistent with
the intent to provide a safe harbor only for
non-customized and widely-available in-
dices. The final regulations do, however,
permit an index that trades on certain for-
eign exchanges to be a qualified index,
provided that the referenced component
underlying securities, in aggregate, com-
prise less than 50 percent of the weighting
of the component securities in the index
and the index otherwise meets the defini-
tion of a qualified index.

Similarly, the Treasury Department
and the IRS have concluded that the pro-
posed rule permitting no more than 1.5
times the current dividend yield of the
S&P 500 Index is appropriate and have

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retained it in the final regulations. To re-
duce the number of required calculations,
however, the final regulations provide that
the annual yields of the tested index and
of the S&P 500 Index are determined
based on their annual yields for the imme-
diately preceding calendar year, rather
than requiring comparison of the annual
yields for the month immediately preced-
ing the date that the potential section
871(m) transaction is issued.

The Treasury Department and the IRS
agree that de minimis short positions,
whether as part of the index or entered
into separately, should not disqualify an
index. Accordingly, the final regulations
permit a qualified index to reference one
or more short positions (in addition to any
short positions with respect to the entire
qualified index, such as caps or floors,
which were already permitted by the 2013
proposed regulations) that represent five
percent or less, in the aggregate, of the
value of the long positions in underlying
securities in the qualified index.

#### H. Combined Transactions

The 2013 proposed regulations treat
multiple transactions as a single transac-
tion for purposes of determining if the
transactions are a section 871(m) transac-
tion when a long party (or a related per-
son) enters into two or more transactions
that reference the same underlying secu-
rity and the transactions were entered into
in connection with each other. The 2013
proposed regulations apply only to com-
bine transactions in which the taxpayer is
the long party, and typically would not
combine transactions when a taxpayer is
the long party with respect to an underly-
ing security in one transaction and the
short party with respect to the same un-
derlying security in another transaction.
The 2013 proposed regulations provide
that a broker-dealer must use "reasonable
diligence" to determine whether a trans-
action is a section 871(m) transaction. Un-
der the 2013 proposed regulations, a with-
holding agent was not required to
withhold on a dividend equivalent paid
pursuant to a transaction that is combined
with one or more other transactions unless
the withholding agent knew that the long
party (or a related person) entered into the

potential section 871(m) transactions in
connection with each other.

The Treasury Department and the IRS
requested comments regarding whether
and how the rules for combining separate
transactions should apply in other situa-
tions, such as when a taxpayer holds both
long and short positions with respect to
the same underlying security (for exam-
ple, a call spread). Comments also were
requested regarding whether and how the
remaining transaction (or transactions)
should be retested when a long party
terminates one or more, but not all, of
the transactions that make up a combined
position.

Several comments recommended that
the regulations not provide a specific com-
bination rule and instead rely on an anti-
abuse rule. One comment endorsed the
proposed regulations as they applied to
combinations of long calls and written
puts (two options that can be used to
closely approximate the economics of
stock ownership) but recommended that
transactions not be combined if the trans-
actions replicate the same or similar risks
with respect to additional shares (for ex-
ample, two purchased calls on the same
underlying securities).

Many comments observed that deter-
mining whether transactions were entered
into "in connection with" each other
would be difficult for a withholding agent
and that the regulations should adopt a
different standard or clarify the meaning
of the phrase. Comments asked that the
final regulations conform the standard for
combined transactions to the narrower
withholding standard that requires "actual
knowledge." Comments noted that the re-
quirement in the 2013 proposed regula-
tions for broker-dealers to use "reasonable
diligence" to determine whether a trans-
action is a section 871(m) transaction
could be interpreted to require broker-
dealers to inquire whether transactions are
entered into in connection with each other
in order to determine whether they must
be combined. These comments observed
that this standard for combined transac-
tions is impractical because broker-
dealers are generally not in a position to
discern the intent of their counterparties,
even using "reasonable diligence."

Several comments recommended that a
combination rule permit netting of long

and short positions. Commenters ob-
served that many standard option strate-
gies involve multiple options positions,
often combining positive and negative
delta options. As a result, an approach that
does not combine these positions would
fail to reflect the economics of the trans-
actions. Commenters suggested that when
a taxpayer modifies an existing combined
position that includes both long and short
positions, the combined position should
continue to be tested based on the net
deltas of the component positions rather
than test the delta for each position sepa-
rately. None of the comments, however,
proposed an administrable test that could
be used to reliably combine long and short
positions and net the resulting deltas.

The final regulations retain the general
rules from the 2013 proposed regulations
that define when transactions are com-
bined. In response to questions about
whether the rules were intended to com-
bine transactions that had similar eco-
nomic exposure, the final regulations add
a requirement that the potential section
871(m) transactions, when combined, rep-
licate the economics of a transaction that
would be a section 871(m) transaction if
the transactions had been entered into as a
single transaction. Thus, the purchase of
two out-of-the-money call options would
typically not be combined because each
call option provides the taxpayer with ex-
posure to appreciation, but not deprecia-
tion, on the referenced stock.

The Treasury Department and the IRS
recognize the challenges that short parties
could face in identifying transactions to be
combined. The final regulations therefore
provide brokers acting as short parties
with two presumptions they can apply to
determine their liability to withhold. First,
a broker may presume that transactions
are not entered into in connection with
each other if the long party holds the
transactions in separate accounts. Second,
a broker may presume that transactions
entered into two or more business days
apart are not entered into in connection
with each other. These presumptions are
independent of each other. Thus, a broker
acting as a short party is relieved of the
obligation to withhold if either of the two
presumptions is met. A broker cannot rely
on the first presumption if it has actual
knowledge that the long party created or

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used separate accounts to avoid section
871(m), however, and neither presump-
tion applies if the broker has actual
knowledge that transactions were entered
into in connection with each other.

In addition, the final regulations pro-
vide that the Commissioner will presume
that transactions that are properly re-
flected on separate trading books of the
taxpayer are not entered into in connec-
tion with each other. The Commissioner
will also presume that a long party did not
enter into two or more transactions in con-
nection with each other if the long party
entered into the transactions two or more
business days apart. These presumptions
are rebuttable. The Commissioner may re-
but the first presumption with facts and
circumstances showing that separate trad-
ing books were created or used to avoid
section 871(m), and may rebut either pre-
sumption with facts and circumstances
showing that the transactions in question
were entered into in connection with each
other.

The Commissioner will also apply an
affirmative presumption. The Commis-
sioner will presume that transactions that
are entered into fewer than two business
days apart and reflected on the same trad-
ing book are entered into in connection
with each other. In this case, the long
party can rebut the presumption by pre-
senting facts and circumstances showing
that the transactions were not entered into
in connection with each other. In applying
the presumptions that are based on trades
being separated by at least two business
days, the regulations include a rule of
convenience that generally allows parties
to treat all of their transactions as entered
into at 4:00 pm.

The presumptions are not available to
the long party. A long party therefore
must treat two or more transactions as
combined transactions if the transactions
satisfy the requirements to be a combined
transaction. The long parties affected by
this rule consist primarily of securities
traders, who are in a position to know
their securities positions and trading strat-
egies and to monitor their compliance
with section 871(m).

The Treasury Department and the IRS
will continue to evaluate the possibility of
expanding the combination rules to ac-
commodate netting of long and short po-

sitions in light of future developments in
transactional reporting and recordkeeping.
Additional comments regarding combined
transactions are welcome.

##### I. Derivatives Referenced to Partnership Interests

The 2013 proposed regulations treat a
transaction that references an interest in
an entity that is not a C corporation for
Federal tax purposes as referencing the
allocable portion of any underlying secu-
rities and potential section 871(m) con-
tracts held directly or indirectly by that
entity. The 2013 proposed regulations
provide an exception for a transaction that
references an interest in an entity that is
not a C corporation if the underlying se-
curities and potential section 871(m)
transactions allocable to that interest rep-
resent, in the aggregate, 10 percent or less
of the value of the interest in the refer-
enced entity at the time the transaction is
entered into. Comments recommended
changing the threshold for applying the
look-through rule from 10 percent to 50
percent unless the taxpayer controls the
entity. Comments also noted that taxpay-
ers would have difficulty determining the
assets owned by referenced entities.

The final regulations revise the rules to
provide that section 871(m) applies to de-
rivatives that reference a partnership in-
terest only when the partnership is either a
dealer or trader in securities, has signifi-
cant investments in securities, or holds an
interest in a lower-tier partnership that
engages in those activities. The final reg-
ulations define a security by cross-
reference to section 475(c). When the rule
in the final regulations applies, a potential
section 871(m) transaction that references
a partnership interest is treated as refer-
encing the allocable share of underlying
securities and the potential section 871(m)
transactions in the partnership directly or
indirectly allocable to that partnership in-
terest. Even when a partnership is not
covered by this rule, the anti-abuse rule in
§ 1.871-15(o) may still apply, or the
transaction may be recharacterized under
the substance-over-form doctrine or other
common law doctrine.

#### J. Anti-Abuse Rule

The 2013 proposed regulations provide
that the Commissioner may treat any pay-
ment made with respect to a transaction as
a dividend equivalent if the taxpayer ac-
quires the transaction with a principal pur-
pose of avoiding the application of section
871(m). Comments generally agreed with
the need for such a rule, and the final
regulations retain this provision. See
§ 1.871-15(0).

In addition, the IRS may challenge the
U.S. tax results claimed in connection
with transactions that are designed to
avoid the application of section 871(m)
using all available statutory provisions
and judicial doctrines (including the
substance-over-form doctrine, the eco-
nomic substance doctrine under section
7701(o), the step transaction doctrine, and
tax ownership principles) as appropriate.
For example, nothing in section 871(m)
precludes the IRS from asserting that a
contract labeled as an NPC or other equity
derivative is in fact an ownership interest
in an underlying security referenced in the
contract.

### K. Reporting Obligations

The 2013 proposed regulations provide
rules for reporting and withholding. The
preamble to the 2013 proposed regula-
tions explains that most equity-linked
transactions involve a financial institution
acting as a broker, dealer, or intermediary
and that the financial institution would be
in the best position to report the tax con-
sequences of a potential section 871(m)
transaction. Accordingly, § 1.871-15(0)
of the 2013 proposed regulations provides
that when a broker or dealer is a party to
a potential section 871(m) transaction, the
broker or dealer is required to determine
whether the transaction is a section
871(m) transaction, and if so, the amounts
of the dividend equivalents. If no broker
or dealer is a party to a transaction or both
parties are brokers or dealers, the short
party is required to determine whether the
transaction is a section 871(m) transaction
and the amounts of the dividend equiva-
lents. Determinations made by the broker,
dealer, or short party are binding on the
parties to the section 871(m) transaction
unless a party to the transaction knows or

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has reason to know that the information is
incorrect. Those determinations, however,
are not binding on the IRS.

Comments expressed concern that the
delta information necessary for an in-
vestor to determine whether a transac-
tion is subject to section 871(m) may not
be available on a timely basis, and re-
quested that the regulations expand the
categories of persons permitted to re-
quest information about the status and
calculations associated with potential
section 871(m) transactions. Comments
recommended requiring the information
to be provided on an issuer's website at
or prior to the time that the transaction is
issued and updated regularly. Investors
could then rely on such information be-
tween update intervals.

In response to these comments, the fi-
nal regulations make several changes to
the reporting obligations in the 2013 pro-
posed regulations. The final regulations
revise the period for providing requested
information from 14 calendar days to 10
business days from the date of the request.
In addition, the final regulations replace
the list of persons entitled to request in-
formation in the 2013 proposed regula-
tions with a simpler provision that entitles
"any party to the transaction" to request
information. The final regulations define
"a party to the transaction" to include any
agent acting on behalf of a long party or
short party to a potential section 871(m)
transaction, or any person acting as an
intermediary with respect to a potential
section 871(m) transaction. This simplifi-
cation responds to the requests to expand
the scope of persons entitled to request
information. Several other changes that
were requested, however, such as posting
information electronically, were already
permitted by the 2013 proposed regula-
tions. Like the 2013 proposed regulations,
the final regulations permit parties to a
transaction to obtain information on po-
tential section 871(m) transactions in a
variety of ways, including through elec-
tronic publication (such as a website).

Comments also noted that a short party
to a listed option will not be able to provide
the long party with a written estimate of
dividends at inception because the short
party does not have a contractual relation-
ship with the long party. These comments
requested that the broker be required to pro-

vide the written estimates. As in the 2013
proposed regulations, the final regulations
do not require any party to a transaction to
provide written estimates of dividends. The
final regulations have taken these comments
into account, however, by increasing a tax-
payer's ability to obtain information from
other parties to the transaction. The final
regulations accomplish this by expanding
the definition of a "party to the transaction"
to include a broker and by clarifying that
either a dealer or a middleman is a "broker."
Therefore, if written estimates of dividends
are prepared when a transaction is issued,
the long party should be able to obtain the
information from another party to the
transaction, whether the short party or a
broker.

#### L. Recordkeeping Rules

The 2013 proposed regulations gener-
ally cross-reference the recordkeeping
rules in § 1.6001-1 for how a taxpayer
establishes whether a transaction is a sec-
tion 871(m) transaction and whether a
payment is a dividend equivalent. For
clarity and to ensure that the IRS will have
access to sufficient information to audit
taxpayers and withholding agents that are
parties to section 871(m) transactions, the
final regulations provide more detailed re-
cordkeeping rules. The final regulations
provide that any person required to retain
records must keep sufficient information
to establish whether a transaction is a sec-
tion 871(m) transaction and the amount of
a dividend equivalent. To satisfy this re-
quirement, a taxpayer must retain docu-
mentation and work papers supporting a
delta calculation or substantial equiva-
lence calculation (including the number of
shares of the initial hedge) and written
estimated dividends (if any). The records
and documentation must be created sub-
stantially contemporaneously with the
time the potential section 871(m) transac-
tion is issued.

### M. Contingent and Convertible Debt Instruments

#### 1. Contingent Debt Instruments

Section 871(h)(1) generally provides
that U.S. source portfolio interest received
by a nonresident alien individual is not

subject to the 30-percent U.S. tax imposed
under section 871(a)(1). Section
871(h)(4)(A)(i), however, excludes cer-
tain contingent interest payments from the
definition of portfolio interest. Section
871(h)(4)(A)(ii) grants the Secretary au-
thority to impose tax on contingent inter-
est other than the payments described in
section 871(h)(4)(A)(i) when necessary or
appropriate to prevent the avoidance of
federal income tax.

Comments on the 2012 proposed reg-
ulations recommended narrowing the
definition of a specified notional princi-
pal contract to clarify that the term does
not include contingent or convertible
debt. These comments suggested that
section 871(m) should not override the
portfolio interest exception. Section
871(h)(4)(A)(ii) expressly provides au-
thority to the Secretary to treat interest as
contingent interest if necessary or appro-
priate to prevent the avoidance of federal
income tax. Consistent with this grant of
authority, the 2013 proposed regulations
provide that contingent interest will not
qualify for the portfolio interest exemp-
tion to the extent that the contingent in-
terest payment is a dividend equivalent.
The final regulations retain this exception
to the portfolio interest exemption. There
is no reason that an equity derivative that
otherwise would be a specified NPC or a
specified ELI should receive different
treatment because it is embedded in a debt
instrument. A debt instrument that pro-
vides for a contingent interest payment
determined by reference to a U.S. source
dividend payment that would otherwise be
a section 871(m) transaction is a transac-
tion that has the potential for tax avoid-
ance, and it is appropriate for section
871(m) to apply. The effect of this rule,
however, is expected to be minimal be-
cause the delta of the embedded derivative
in a contingent debt or convertible debt
instrument is tested only at the time it is
issued.

#### 2. Convertible Debt Instruments

Numerous comments requested that
convertible debt instruments be excluded
from the definition of an ELI. Comments
suggested that certain characteristics typ-
ical of convertible debt would discourage
foreign investors from using these instru-

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ments to avoid U.S. withholding tax.
Comments pointed, for example, to high
transaction costs and certain discontinui-
ties between the economic performance of
the convertible debt and that of the under-
lying stock, such as the downside protec-
tion and creditors' rights afforded by con-
vertible debt. Comments noted that
convertible bonds are important capital
markets instruments used by U.S. corpo-
rations to raise capital at lower rates.
Comments also speculated that treating
such bonds as specified ELIs could ad-
versely impact capital markets by decreas-
ing demand, reducing liquidity, and in-
creasing costs.

The final regulations do not provide an
exception from section 871(m) for con-
vertible debt. When the stock price signif-
icantly exceeds the conversion price, con-
vertible debt becomes a surrogate for the
stock into which the debt can be con-
verted. Accordingly, a convertible debt
obligation is a specified ELI if the delta of
the embedded option at the time the con-
vertible debt is originally issued is 0.80 or
higher. Moreover, the fact that convertible
debt ordinarily has been issued with a
delta on the embedded option of less than
0.80 is expected to significantly reduce the
effect of these regulations on the convert-
ible debt market. In response to uncer-
tainty expressed by some market partici-
pants, the final regulations clarify that the
delta of the convertible feature is tested
separately from the delta of the debt in-
strument in making section 871(m) calcu-
lations.

### N. Amounts Subject to Withholding

Section 1.1441-2(d)(5) of the 2013
proposed regulations provides that a with-
holding agent is not obligated to withhold
on a dividend equivalent until the later of:
(1) when the amount of the dividend
equivalent is determined and (2) when any
of the following occurs: (a) money or
other property is paid pursuant to a section
871(m) transaction, (b) the withholding
agent has custody or control of money or
other property, or (c) there is an upfront
payment or a prepayment of the purchase
price.

Comments emphasized the burden of
withholding on dividend equivalents ab-
sent actual payments, and noted that, in

the absence of actual payment, continuous
monitoring and withholding on each spec-
ified ELI over time is impractical. Certain
comments suggested that a foreign broker
only be required to withhold on dividend
equivalents from ELIs when there is a
final payment or a sale.

Comments also maintained that up-
front payments should not be viewed as
payments subject to withholding because
such proceeds are received in exchange
for issuing the instrument, are used by the
issuer to purchase related hedging posi-
tions, and are not intended to be reserves
for satisfying tax owed by the counter-
party.

Some comments expressed concern re-
garding the practical difficulties in with-
holding from funds that the broker-dealer
holds as collateral. Comments noted that
the broker-dealer may not be legally enti-
tled to use cash or property in one account
to satisfy a withholding obligation in an-
other account. In addition, foreign coun-
terparties may hold different accounts
through different affiliates of a broker-
dealer. Comments indicated that it would
be impractical to determine the existence
of affiliate accounts and apply set-off
rules on that basis.

After consideration of these comments,
the Treasury Department and the IRS
have concluded that the withholding
agent's obligations should not arise until
an actual payment is made or there is a
final settlement of a transaction. Accord-
ingly, the final regulations provide that a
withholding agent is not obligated to with-
hold on a dividend equivalent until the
later of when a payment is made with
respect to a section 871(m) transaction or
when the amount of a dividend equivalent
is determined. A payment with respect to
a section 871(m) transaction will gener-
ally occur when the long party receives or
makes a payment, when there is a final
settlement of the section 871(m) transac-
tion, or when the long party sells or oth-
erwise disposes of the section 871(m)
transaction. For options and other con-
tracts that typically require an upfront
payment, the final regulations do not treat
the premium or other upfront payment as
a payment for withholding purposes.
Thus, withholding on these section
871(m) transactions is not required until
there is a final settlement (including, in the

case of an option, a lapse) or the long
party sells or otherwise disposes of the
transaction. Consequently, if an option
that is a section 871(m) transaction lapses,
the short party is nonetheless required to
withhold on any dividend equivalent as-
sociated with the option. Parties may need
to modify contractual arrangements to en-
sure that there are sufficient funds avail-
able to satisfy withholding obligations.

### III. Temporary and Proposed Regulations

A. Test for Contracts with Indeterminate
Deltas

As noted in Part II of this preamble,
many commenters stated that the delta test
was workable for most equity derivatives
but would be difficult or impossible to
apply to more exotic equity derivatives. In
particular, a contract that provides for
payments based on a number of shares of
stock that varies at different points, or that
provides for a payment that does not vary
with the price of the shares (often called
"digital" options), have an indeterminate
delta because the number of shares of the
underlying security that determine the
payout of the derivative cannot be known
at the time the contract is entered into.
Path-dependent contracts were also men-
tioned as problematic for the delta com-
putation.

Indeterminate delta may, for example,
occur in contracts commonly known as
structured notes. Structured notes are fi-
nancial instruments that combine aspects
of debt with aspects of derivatives, such as
equity options. As an example, in return
for an upfront payment of a set amount, a
structured note might provide the long
party with leveraged upside return, mean-
ing that the long party is entitled to re-
ceive a fixed percentage (for example, 200
percent) of any appreciation in the value
of a referenced stock up to a capped
amount (for example, 125 percent of the
issue price) in addition to return of the
upfront payment, while being exposed to
100 percent of any depreciation in the
value of the referenced stock, with any
such depreciation reducing the amount of
the upfront payment that is returned to the
long party. In such a structured note, the
holder would have two times the "upside"

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up to the cap but only one times exposure
to the "downside." The issuer of this kind
of structured note cannot readily deter-
mine a delta for the note because it refer-
ences a different number of shares at dif-
ferent payoff amounts. In other words,
because delta is the ratio of the change in
the fair market value of a contract to a
small change in the fair market value of
the property referenced by the contract,
the value of the referenced property must
be known to calculate delta. In the case of
the structured note described in this para-
graph, the number of shares of stock (and
hence the value of the property) refer-
enced by the contract will be different
depending on whether the stock appreci-
ates, and in such case whether the cap is
reached, or whether the stock depreciates.

As explained in Part II.C.4 of this pre-
amble, a contract with an indeterminate
delta is not a simple contract, and there-
fore falls into the residual category as a
complex contract. Because the delta test
cannot accurately be applied to a complex
contract, commenters had various sugges-
tions for how to determine whether such a
contract should be a section 871(m) trans-
action. One comment suggested that the
delta should be calculated using the high-
est possible number of shares that could
be referenced by the derivative at matu-
rity. This comment further suggested that
the regulations include a delta-specific
anti-abuse rule to prevent issuers from
manipulating the number of referenced
shares to artificially reduce delta. Other
comments suggested that the regulations
should disaggregate a transaction into a
series of components and then separately
apply the delta test to each component.
When multiple derivatives are embedded
in a single instrument, a comment recom-
mended that multiple pieces be aggre-
gated into separate components (for ex-
ample, aggregating all embedded calls and
separately aggregating all embedded puts)
using an ordering rule that would maxi-
mize the likelihood that the delta thresh-
old would be met.

A majority of comments requested that
some version of a "proportionality" test be
applied to complex contracts or to con-
tracts where the basic delta test is suscep-
tible of manipulation. A proportionality
test measures the likelihood that a con-
tract's performance will track the perfor-

mance of the referenced equity. That is, a
proportionality test measures the same
variability or economic equivalence that
the delta test seeks to measure without
needing to know the number of shares that
the contract references at the outset. Like
the delta test, a proportionality test is
based on the principle that when the value
of an NPC or ELI closely tracks the value
of an underlying security, it is appropriate
to treat the NPC or ELI as a surrogate for
the underlying security.

To test whether a complex contract is a
section 871(m) transaction, the temporary
regulations adopt the "substantial equiva-
lence" test. The substantial equivalence
test is a version of a proportionality test
that was advocated by many commenters,
and it uses information easily accessible
to most issuers of complex contracts. Gen-
erally, the substantial equivalence test
measures the change in value of a com-
plex contract when the price of the under-
lying security referenced by that contract
is hypothetically increased by one stan-
dard deviation or decreased by one stan-
dard deviation (each, a "testing price")
and compares that change to the change in
value of the shares of the underlying se-
curity that would be held to hedge the
complex contract at the time the contract
is issued (the "initial hedge") at each test-
ing price. The smaller the proportionate
difference between the change in value of
the complex contract and the change in
value of its initial hedge at multiple test-
ing prices, the more equivalence there is
between the contract and the referenced
underlying security. When this difference
is equal to or less than the difference for a
simple contract benchmark with a delta of
0.80 and its initial hedge, the complex
contract is treated as substantially equiv-
alent to the underlying security.

The Treasury Department and the
IRS are aware that there may be NPCs
or ELIs that even the substantial equiv-
alence test may not adequately address.
The temporary regulations provide that
when the steps of the substantial equiv-
alence test cannot be applied to a par-
ticular complex contract, a taxpayer
must use the principles of the substantial
equivalence test to reasonably determine
whether the complex contract is a sec-
tion 871(m) transaction with respect to
each underlying security.

The Treasury Department and the IRS
request comments regarding the substan-
tial equivalence test described in the tem-
porary regulations. In particular, com-
ments are requested on whether the two
testing points required for most transac-
tions in the temporary regulations are ad-
equate to ensure that the substantial equiv-
alence test captures the appropriate types
of transactions, and the administrability of
the test and its application to complex
contracts that reference multiple securi-
ties, including path-dependent instru-
ments.

### B. Withholding Requirements and QDDs

#### 1. Background

Section 871(m)(1) generally treats a
dividend equivalent as a dividend from
sources within the United States without
regard to the residence of the person pay-
ing the dividend equivalent. As a result,
section 871(m) may apply to payments
made by a foreign payor to a foreign
payee. See Staff of J. Comm. on Taxation,
Technical Explanation of the Revenue
Provisions Contained in Senate Amend-
ment 3310, the "Hiring Incentives to Re-
store Employment Act," JCX-4-10, at 79
(Feb. 23, 2010) (explaining that section
871(m) may apply to a chain of dividend
equivalents, including payments made by
a foreign person pursuant to transactions
described in Notice 97-66); see also No-
tice 97-66, 1997-2 C.B. 328, at § 5, Ex-
amples 3 and 4 (illustrating that a foreign
person making a substitute dividend pay-
ment to another foreign person must with-
hold U.S. tax). Because Congress was
concerned that this rule may result in
over-withholding in some instances, Con-
gress granted the Secretary authority in
section 871(m)(6) to reduce tax on a chain
of dividend equivalents, but only to the
extent that the taxpayer can establish that
tax has been paid with respect to another
dividend equivalent in the chain, or is not
otherwise due, or as the Secretary deter-
mines is appropriate to address the role of
financial intermediaries in such chain. For
purposes of section 871(m)(6), a dividend
is treated as a dividend equivalent.

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#### 2. Comments on the 2013 Proposed Regulations

The 2013 proposed regulations address
the role of financial intermediaries in a
chain of dividend equivalents with a rule
that provides that payments made to a
"qualified dealer" are not treated as divi-
dend equivalents if made pursuant to a
transaction that is entered into by the qual-
ified dealer in its capacity as a dealer in
securities and the dealer is the long party.
For purposes of this rule, a qualified
dealer is any dealer that is subject to reg-
ulatory supervision by a governmental
authority in the jurisdiction in which it
was created or organized and that certifies
to the short party that it is receiving
the payment in its capacity as a dealer.
The 2013 proposed regulations require the
qualified dealer to certify as to its dealer
status to a short party on a transaction-by-
transaction basis, and do not apply to div-
idends paid to a qualified dealer.

Comments requested that the qualified
dealer exception in the 2013 proposed
regulations be expanded, noting that it
would be impractical for dealers to certify
that each transaction was entered into in a
dealer capacity (and not as a proprietary
trade) and that the rule did not accommo-
date transactions entered into as a hedge
of another transaction. Some comments
suggested that the regulations exclude
transactions entered into in the ordinary
course of the dealer's business for hedg-
ing purposes. Other comments recom-
mended expanding the exception to in-
clude affiliates of qualified dealers that
issue certain potential section 871(m)
transactions. Comments further recom-
mended that an affiliate in these circum-
stances should not be required to certify
that it is acting in its capacity as a dealer.
Several comments requested that, in addi-
tion to expanding the definition of quali-
fied dealer, the final regulations provide
rules similar to the proposed regulatory
framework described in Notice 2010-46
(discussed in more detail in section III.B.4
of this preamble).

#### 3. Qualified Intermediaries Acting as Qualified Derivatives Dealers

The comments received on both the
2012 proposed regulations and the 2013

proposed regulations consistently ex-
pressed the desire for a comprehensive
withholding and documentation regime
tailored to derivatives dealers. Rather than
create a new regime for section 871(m)
transactions, the Treasury Department and
the IRS determined that the most compre-
hensive and efficient way to respond to
the requests in the comments is to expand
the existing qualified intermediary (QI)
regime to accommodate taxpayers acting
as financial intermediaries on section
871(m) transactions. Generally, a QI is an
eligible person that enters into a QI agree-
ment with the IRS and that acts as a QI
under such agreement. See Rev. Proc.
2014-39, 2014-29 I.R.B. 150. A QI
agreement typically requires the QI to as-
sume certain documentation and with-
holding responsibilities in exchange for
simplified information reporting for its
foreign account holders and the ability to
not disclose proprietary account holder in-
formation to a withholding agent that may
be a competitor. A QI may either assume
primary withholding responsibilities or
may provide withholding information to a
withholding agent from which it receives
a payment.

QIs that hold stocks and bonds for cus-
tomers often receive payments subject to
withholding on behalf of their foreign ac-
count holders as custodians rather than as
beneficial owners. In contrast, a broker
that enters into derivative contracts as a
principal typically receives dividends and
dividend equivalents as part of a chain of
transactions in which the broker is a coun-
terparty to both long and short positions.

The Treasury Department and the IRS
intend to implement the particular require-
ments of withholding and reporting on
dividend equivalents received and paid by
brokers by amending the QI agreement to
include new provisions that will permit an
eligible QI to act as a qualified derivatives
dealer (QDD). A QI that acts as a QDD
will not be subject to withholding on div-
idends or payments that may be dividend
equivalents made with respect to potential
section 871(m) transactions that the QDD
receives while acting in its capacity as a
dealer.

In order to act as a QDD, a QI must
meet four requirements. First, the QDD
must furnish to withholding agents a QI
withholding certificate affirming that the

recipient is acting as a QDD for dividends
and dividend equivalent payments associ-
ated with the withholding certificate. Sec-
ond, the QDD must agree to assume pri-
mary withholding and reporting
responsibilities on all payments associated
with the withholding certificate that the
QDD receives and makes as a dealer, and
to determine whether payments it makes
are dividend equivalents. Third, a QDD
must agree to remain liable for tax on any
dividends and dividend equivalents it re-
ceives unless the QDD is obligated to
make an offsetting dividend equivalent
payment as the short party on the same
underlying security. Finally, a QDD must
comply with any compliance review pro-
cedures that are applicable to a QI acting
as a QDD, as specified in the QI agree-
ment.

The class of persons eligible to act as a
QDD is narrower than the class of persons
that are eligible to enter into a QI agree-
ment. A QI will be allowed to act as a
QDD if it is either (1) a securities dealer
that is regulated as a dealer in the juris-
diction in which it was organized or op-
erates, or (2) a bank that is regulated as a
bank in the jurisdiction in which it was
organized or operates (or a wholly-owned
foreign affiliate of such a bank). To act as
a QDD, a QI that is not a securities dealer
also must issue potential section 871(m)
transactions to customers and receive div-
idends or dividend equivalent payments
incident to hedges of potential section
871(m) transactions that it issues. The lat-
ter category of QDDs is intended to allow
banks and bank affiliates that issue equity-
linked instruments on an occasional basis
to still act as QDDs.

#### 4. Notice 2010-46

Shortly after section 871(m) was en-
acted, the Treasury Department and the
IRS published Notice 2010-46, 2010-24
I.R.B. 757. Notice 2010-46 addresses po-
tential overwithholding in the context of
securities lending and sale repurchase
agreements. Notice 2010-46 provides a
two-part solution to the problem of over-
withholding on a chain of dividends and
dividend equivalents. First, it provides an
exception from withholding for payments
to a qualified securities lender (QSL). Sec-
ond, it provides a proposed framework to

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credit forward prior withholding on a
chain of substitute dividends paid pursu-
ant to a chain of securities loans or stock
repurchase agreements. The QSL regime
requires a person that agrees to act as a
QSL to comply with certain withholding
and documentation requirements. Notice
2010-46 and any QI agreement imposing
QSL requirements will remain effective
until final regulations implementing the
QDD rules are published.

As stated above, Notice 2010-46 pro-
vided a proposed framework to credit for-
ward prior withholding on a chain of sub-
stitute dividends paid pursuant to a chain
of securities loans or stock repurchase
agreements. The Treasury Department
and the IRS will continue to consider
whether a credit forward system for prior
withholding would be appropriate in the
context of a chain of dividend equivalents
on NPCs or ELIs. While administrating
the credit forward system described in
Notice 2010-46, however, the IRS has
had difficulty verifying that prior with-
holding in a chain of securities loans had
in fact occurred in order to justify the
crediting of prior withholding to a subse-
quent payment. The temporary regula-
tions, therefore, reserve on the issue of a
general credit forward system, and the
Treasury Department and the IRS request
comments on the need for such a system
and how it could be implemented.

#### 5. Implementation of the QDD Regime and Phase-out of the QSL Regime

All existing QI agreements expire on
December 31, 2016. Prior to January 1,
2017, the Treasury Department and the
IRS intend to publish an updated QI
agreement and rules addressing the re-
quirements for QDD status. Procedures
for entering into a QI agreement that per-
mits a QI to act as a QDD are expected to
be set out in this agreement. QDD status
will be effective no sooner than January 1,
2017. Until these temporary regulations
are finalized and appropriate provisions
are incorporated into a new QI agreement,
the provisions for QSLs and the credit-
forward rules under Notice 2010-46 will
continue to apply for dividend equivalents
that are substitute dividend payments
made pursuant to a securities lending or a
sale-repurchase transaction.

Once fully implemented, the new QDD
status under the QI regime will replace
and expand the QSL regime described in
Notice 2010-46. To continue to be eligi-
ble for the exception from withholding,
entities that have been treated as QSLs
will be required to enter into a QI agree-
ment to satisfy and comply with the re-
quirements for QDD treatment provided
in the temporary regulations and in the
updated QI Agreement. When these tem-
porary regulations are finalized, the Trea-
sury Department and the IRS expect the
final regulations to supplant the proposed
regulatory framework described in Notice
2010-46.

#### C. Certain Insurance Contracts

The 2013 proposed regulations do not
specifically address whether payments
made on life insurance or annuity con-
tracts are dividend equivalents when the
payments are directly or indirectly contin-
gent upon or determined by reference to
the payment of a dividend from sources
within the United States. Comments noted
that treating annuity contract payments as
dividend equivalents could conflict with
section 72, which provides that the holder
of an annuity contract is taxed only when
an amount is received from the annuity.
Comments further noted that when a for-
eign person receives payments or with-
drawals from an annuity contract issued
by a domestic insurance company, the
payment is FDAP subject to 30% with-
holding to the extent such payment or
withdrawal constitutes gross income as
determined in accordance with section 72.
Similarly, withdrawals of income from a
life insurance contract issued by a domes-
tic insurance company are generally U.S.
source FDAP subject to withholding.
Commenters argued that the existing rules
that apply to life insurance and annuity
contracts obviate the need for withholding
under section 871(m).

The Treasury Department and the IRS
agree that the taxation of life insurance
and annuity contracts issued by domestic
insurance companies is adequately ad-
dressed under current law. Therefore, the
temporary regulations provide that there is
no dividend equivalent associated with a
payment that a foreign person receives
pursuant to the terms of an annuity, en-

dowment, or life insurance contract issued
by a domestic insurance company (includ-
ing the foreign or U.S. possession branch
of the domestic insurance company).

The Treasury Department and the IRS
are considering how section 871(m)
should apply to annuity, endowment, and
life insurance contracts that reference U.S.
equities and that are issued by foreign life
insurance companies. Until further guid-
ance is issued, the temporary regulations
provide that these contracts do not include
a dividend equivalent when issued by a
foreign corporation that is predominately
engaged in an insurance business and that
would be subject to tax under subchapter
L if it were a domestic corporation. Sim-
ilarly, the temporary regulations do not
treat any portion of a payment received by
a foreign life insurance company as a div-
idend equivalent when the payment is
made according to the terms of an insur-
ance contract, such as reinsurance, by a
foreign corporation meeting the same re-
quirements. The Treasury Department and
the IRS are also evaluating how section
871(m) should apply to reinsurance con-
tracts. Taxpayers are encouraged to send
comments on how section 871(m) should
apply to foreign life insurance companies
and the contracts they issue.

#### IV. Effective/Applicability Date

The final and temporary regulations are
generally effective on September 18,
2015. To ensure that brokers have ade-
quate time to develop the systems needed
to implement the regulations, however,
the final and temporary regulations gener-
ally apply to transactions issued on or
after January 1, 2017. In addition, with
respect to transactions issued on or after
January 1, 2016, and before January 1,
2017, that are section 871(m) transactions,
the regulations also apply to any payment
of a dividend equivalent made on or after
January 1, 2018. The regulations do not
change the applicability date of § 1.871-
15(d)(1)(i) for specified NPCs described
in that section.

The chapter 4 regulations provide a
coordinating effective date for the treat-
ment of dividend equivalents as withhold-
able payments for purposes of chapter 4
withholding. Section 1.1471-2(b)(2)(i)(A)(2)
provides that grandfathered obligations

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under chapter 4 include any obligation
that gives rise to a withholdable pay-
ment solely because the obligation gives
rise to a dividend equivalent pursuant to
section 871(m) and the regulations
thereunder. This grandfather rule ap-
plies only to obligations that are exe-
cuted on or before the date that is six
months after the date on which obliga-
tions of its type are first treated as giving
rise to dividend equivalents.

### 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 also has been deter-
mined that section 553(b) of the Admin-
istrative Procedure Act (5 U.S.C. chapter
5) does not apply to these regulations. It is
hereby certified that these regulations will
not have a significant economic impact on
a substantial number of small entities.
This certification is based on the fact that
few, if any, small entities will be affected
by these regulations. The regulations will
primarily affect multinational financial in-
stitutions, which tend to be larger busi-
nesses, and foreign entities. Therefore, a
Regulatory Flexibility Analysis is not re-
quired. Pursuant to section 7805(f) of the
Code, these regulations have been submit-
ted to the Chief Counsel for Advocacy of
the Small Business Administration for
comment on its impact on small business.

### Drafting Information

The principal authors of these regula-
tions are D. Peter Merkel and Karen
Walny of the Office of Associate Chief
Counsel (International). Other personnel
from the Treasury Department and the
IRS also participated in the development
of these regulations.

### List of Subjects in 26 CFR Part 1

Income taxes, Reporting and record-
keeping requirements

### Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is
amended as follows:

## PART 1- INCOME TAXES

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

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

§ 1.871-14(h) also issued under 26
U.S.C. 871(h) and 871(m). * * *

§§ 1.871-15 and 1.871-15T also is-
sued under 26 U.S.C. 871(m). * * *

Par. 2. Section 1.871-14 is amended
by:

1\. Redesignating paragraphs (h) and (i)
as paragraphs (i) and (j), respectively.

2\. Adding new paragraphs (h) and
(j)(4).

The additions read as follows:

§ 1.871-14 Rules relating to repeal of
tax on interest of nonresident alien
individuals and foreign corporations
received from certain portfolio debt
investments.

* * * * *

(h) Portfolio interest not to include
certain contingent interest-(1) Dividend
equivalents. Contingent interest does not
qualify as portfolio interest to the extent
that the interest is a dividend equivalent
within the meaning of section 871(m).

(2) Amount of dividend equivalent that
is not portfolio interest. The amount that
does not qualify as portfolio interest be-
cause it is a dividend equivalent equals the
amount of the dividend equivalent deter-
mined pursuant to § 1.871-15(j). Unless
otherwise excluded pursuant to section
871(h), any other interest paid on an ob-
ligation that is not a dividend equivalent
may qualify as portfolio interest.

* * * * *

(j) ***

(4) Effective/applicability date. The
rules of paragraph (h) of this section apply
beginning September 18, 2015.

Par. 3. Section 1.871-15 is amended
by:

1\. Redesignating paragraphs (d)(1)(i)
as (d)(1)(i)(A), (d)(1) introductory text as
(d)(1)(i), (d)(1)(ii) as (d)(1)(i)(B),
(d)(1)(iii) as (d)(1)(i)(C), and (d)(1)(iv) as
(d)(1)(i)(D).

2\. Removing "2016" from newly re-
designated paragraph (d)(1)(i) and adding
"2017" in its place.

3\. Removing "Specified NPCs before
January 1, 2016" from newly redesignated

paragraph (d)(1)(i) and adding "In gen-
eral" in its place.

4\. Adding new paragraphs (d)(1) intro-
ductory text, (d)(1)(ii) and (d)(2).

5\. Redesignating paragraph (o) as para-
graph (r)(2) and:

a. Revising the heading for newly re-
designated paragraph (r)(2),

b. Removing the language "This" in
paragraph (r)(2) and adding "Paragraph
(d)(1)(i) of this" in its place, and

c. Adding new paragraphs (r)(1), (r)(3),
(r)(4) and (q).

7\. Adding new paragraphs (a) through
(c), and (e) through (p).

The additions and revisions read as fol-
lows:

### § 1.871-15 Treatment of dividend equivalents.

(a) Definitions. For purposes of this
section, the following terms have the
meanings described in this paragraph (a).

(1) Broker. A broker is a broker within
the meaning provided in section 6045(c).

(2) Dealer. A dealer is a dealer in
securities within the meaning of section
475(c)(1).

(3) Dividend. A dividend is a dividend
as described in section 316.

(4) Equity-linked instrument. An
equity-linked instrument (ELI) is a finan-
cial transaction, other than a securities
lending or sale-repurchase transaction or
an NPC, that references the value of one
or more underlying securities. For exam-
ple, a futures contract, forward contract,
option, debt instrument, or other contrac-
tual arrangement that references the value
of one or more underlying securities is an
ELI.

(5) Initial hedge. An initial hedge is the
number of underlying security shares that
a short party would need to fully hedge an
NPC or ELI (whether the NPC or ELI is a
complex contract or a simple contract
benchmark (within the meaning of para-
graph (h)(2) of this section), as appropri-
ate) with respect to an underlying security
at the time the NPC or ELI is issued, even
if the short party does not in fact fully
hedge the NPC or ELI.

(6) Issue. An NPC or ELI is treated as
issued at inception, original issuance, or at
the time of an issuance as a result of a

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deemed exchange pursuant to section
1001.

(7) Notional principal contract. A no-
tional principal contract (NPC) is a no-
tional principal contract as defined in
§ 1.446-3(c).

(8) Option. An option includes an op-
tion embedded in any debt instrument,
forward contract, NPC, or other potential
section 871(m) transaction.

(9) Parties to the transaction-(i)
Long party. A long party is the party to a
potential section 871(m) transaction with
respect to an underlying security that
would be entitled to receive a payment of
a dividend equivalent (within the meaning
of paragraph (i) of this section) described
in paragraph (c) of this section.

(ii) Short party. A short party is the
party to a potential section 871(m) trans-
action with respect to an underlying secu-
rity that would be obligated to make a
payment of a dividend equivalent (within
the meaning of paragraph (i) of this sec-
tion) described in paragraph (c) of this
section.

(iii) Party to the transaction. A party to
the transaction is any person that is a long
party or a short party to a potential section
871(m) transaction, any agent acting on
behalf of the long party or short party, or
any person acting as an intermediary with
respect to the potential section 871(m)
transaction.

(iv) Party to the transaction that is
both a long party and a short party-(A)
In general. If a potential section 871(m)
transaction references more than one un-
derlying security, the long party and short
party are determined separately with re-
spect to each underlying security. A party
to a potential section 871(m) transaction is
both a long party and a short party when
the party is entitled to a payment that
references a dividend payment on an un-
derlying security and the same party is
obligated to make a payment that refer-
ences a dividend payment on another un-
derlying security pursuant to the potential
section 871(m) transaction.

(B) Example. The following example
illustrates the definitions in paragraph
(a)(9) of this section:

Example. (i) Stock X and Stock Y are underlying
securities. A and B enter into an NPC that entitles A
to receive payments from B based on any apprecia-
tion in the value of Stock X and dividends paid on
Stock X during the term of the contract and obligates

A to make payments to B based on any depreciation
in the value of Stock X during the term of the
contract. In return, the NPC entitles B to receive
payments from A based on any appreciation in the
value of Stock Y and dividends paid on Stock Y
during the term of the contract and obligates B to
make payments to A based on any depreciation in
the value of Stock Y during the term of the contract.

(ii) A is the long party with respect to Stock X,
and the short party with respect to Stock Y. B is the
long party with respect to Stock Y, and the short
party with respect to Stock X.

(10) Payment. A payment has the
meaning provided in paragraph (i) of this
section.

(11) Reference. To reference means to
be contingent upon or determined by ref-
erence to, directly or indirectly, whether
in whole or in part.

(12) Section 871(m) transaction and
potential section 871(m) transaction. A
section 871(m) transaction is any securi-
ties lending or sale-repurchase transac-
tion, specified NPC, or specified ELI. A
potential section 871(m) transaction is
any securities lending or sale-repurchase
transaction, NPC, or ELI that references
one or more underlying securities.

(13) Securities lending or sale-
repurchase transaction. A securities lend-
ing or sale-repurchase transaction is any
securities lending transaction, sale-
repurchase transaction, or substantially
similar transaction that references an un-
derlying security. Securities lending
transaction and sale-repurchase transac-
tion have the same meaning as provided in
§ 1.861-3(a)(6).

(14) Simple contracts and complex
contracts-(i) Simple contract. A simple
contract is an NPC or ELI for which, with
respect to each underlying security,

(A) All amounts to be paid or received
on maturity, exercise, or any other pay-
ment determination date are calculated by
reference to a single, fixed number of
shares (as determined in paragraph (j)(3)
of this section) of the underlying security,
provided that the number of shares can be
ascertained when the contract is issued,
and

(B) The contract has a single maturity
or exercise date with respect to which all
amounts (other than any upfront payment
or any periodic payments) are required to
be calculated with respect to the underly-
ing security. A contract has a single exer-
cise date even though it may be exercised
by the holder at any time on or before the

stated expiration of the contract. An NPC
or ELI that includes a term that discontin-
uously increases or decreases the amount
paid or received (such as a digital option),
or that accelerates or extends the maturity
is not a simple contract. A simple contract
that is an NPC is a simple NPC. A simple
contract that is an ELI is a simple ELI.

(ii) Complex contract-(A) In general.
A complex contract is any NPC or ELI
that is not a simple contract. A complex
contract that is an NPC is a complex NPC.
A complex contract that is an ELI is a
complex ELI.

(B) Example. An ELI entitles the long party to a
return equal to 200 percent of the appreciation on
100 shares of Stock X, and obligates the long party
to pay an amount equal to the actual depreciation on
100 shares of Stock X. Because the ELI does not
provide the long party with an amount that is calcu-
lated by reference to a single, fixed number of shares
of Stock X on the maturity date that can be ascer-
tained at issuance, it is not a simple ELI. More
specifically, upon maturity the ELI will either entitle
the long party to receive a payment that is, in sub-
stance, measured by reference to 200 shares of stock
or obligate the long party to make a payment mea-
sured by reference to 100 shares of stock. The ELI is
a complex ELI because it is not a simple ELI.

(15) Underlying security. An underly-
ing security is any interest in an entity if a
payment with respect to that interest could
give rise to a U.S. source dividend pursu-
ant to § 1.861-3, where applicable taking
into account paragraph (m) of this section.
Except as provided in paragraph (l) of this
section, if a potential section 871(m)
transaction references an interest in more
than one entity described in the preceding
sentence or different interests in the same
entity, each referenced interest is a sepa-
rate underlying security for purposes of
applying the rules of this section.

(b) Source of a dividend equivalent. A
dividend equivalent is treated as a divi-
dend from sources within the United
States for purposes of sections 871(a),
881, 892, 894, and 4948(a), and chapters 3
and 4 of subtitle A of the Internal Revenue
Code.

(c) Dividend equivalent-(1) In gen-
eral. Except as provided in paragraph (2),
dividend equivalent means-

(i) Any payment that references the
payment of a dividend from an underlying
security pursuant to a securities lending or
sale-repurchase transaction;

(ii) Any payment that references the
payment of a dividend from an underlying

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security pursuant to a specified NPC de-
scribed in paragraph (d) of this section;

(iii) Any payment that references the
payment of a dividend from an underlying
security pursuant to a specified ELI de-
scribed in paragraph (e) of this section;
and

(iv) Any other substantially similar
payment as described in paragraph (f) of
this section.

(2) Exceptions-(i) Not a dividend. A
payment that references a distribution
with respect to an underlying security is
not a dividend equivalent to the extent that
the distribution would not be subject to
tax pursuant to section 871 or section 881
if the long party owned the underlying
security. For example, if an NPC refer-
ences stock in a regulated investment
company that pays a dividend that in-
cludes a capital gains dividend described
in section 852(b)(3)(C) that would not be
subject to tax under section 871 or section
881 if paid directly to the long party, then
an NPC payment is not a dividend equiv-
alent to the extent that it is determined by
reference to the capital gains dividend.

(ii) Section 305 coordination. A divi-
dend equivalent with respect to a section
871(m) transaction is reduced by any
amount treated in accordance with section
305(b) and (c) as a dividend with respect
to the underlying security referenced by
the section 871(m) transaction.

(iii) Due bills. A dividend equivalent
does not include a payment made pursuant
to a due bill arising from the actions of a
securities exchange that apply to all trans-
actions in the stock with respect to the
dividend. For purposes of this section, a
stock will be considered to trade with a
due bill only when the relevant securities
exchange has set an ex-dividend date with
respect to a dividend that occurs after the
record date.

(iv) Certain payments pursuant to an-
nuity, endowment, and life insurance con-
tracts. [Reserved]. For further guidance,
see § 1.871-15T(c)(2)(iv).

(v) Certain payments pursuant to em-
ployee compensation arrangements. A
dividend equivalent does not include the
portion of equity-based compensation for
personal services of a nonresident alien
individual that is-

(A) Wages subject to withholding un-
der section 3402 and the regulations under
that section;

(B) Excluded from the definition of
wages under § 31.3401(a)(6)-1; or

(C) Exempt from withholding under
§ 1.1441-4(b).

(d) Specified NPCs-(1) Specified
NPCs entered into before January 1,
2017-(i) * * *

(ii) Specified NPC status as of January
1, 2017. An NPC that is treated as a spec-
ified NPC pursuant to paragraph (d)(1)(i)
of this section will remain a specified
NPC on or after January 1, 2017.

(2) Specified NPCs on or after January
1, 2017-(i) Simple NPCs. A simple NPC
that has a delta of 0.8 or greater with
respect to an underlying security when the
NPC is issued is a specified NPC.

(ii) Complex NPCs. A complex NPC
that meets the substantial equivalence test
described in paragraph (h) of this section
with respect to an underlying security
when the NPC is issued is a specified
NPC.

(e) Specified ELIs-(1) Simple ELIs. A
simple ELI that has a delta of 0.8 or
greater with respect to an underlying se-
curity when the ELI is issued is a specified
ELI.

(2) Complex ELIs. A complex ELI that
meets the substantial equivalence test de-
scribed in paragraph (h) of this section
with respect to an underlying security
when the ELI is issued is a specified ELI.

(f) Other substantially similar pay-
ments. For purposes of this section, any
payment made in satisfaction of a tax lia-
bility of the long party with respect to a
dividend equivalent by a withholding
agent is a dividend equivalent received by
the long party. The amount of that divi-
dend equivalent constitutes additional in-
come to the payee to the extent provided
in § 1.1441-3(f)(1).

(g) Delta-(1) In general. Delta is the
ratio of the change in the fair market value
of an NPC or ELI to a small change in the
fair market value of the number of shares
of the underlying security (as determined
under paragraph (j)(3) of this section) ref-
erenced by the NPC or ELI. If an NPC or
ELI contains more than one reference to a
single underlying security, all references
to that underlying security are taken into
account in determining the delta with re-

spect to that underlying security. If an
NPC or ELI references more than one
underlying security or other property, the
delta with respect to each underlying se-
curity must be determined without taking
into account any other underlying security
or property. The delta of an equity deriv-
ative that is embedded in a debt instru-
ment or other derivative is determined
without taking into account changes in the
market value of the debt instrument or
other derivative that are not directly re-
lated to the equity element of the instru-
ment. Thus, for example, the delta of an
option embedded in a convertible note is
determined without regard to the debt
component of the convertible note. For
purposes of this section, delta must be
determined in a commercially reasonable
manner. If a taxpayer calculates delta for
non-tax business purposes, that delta or-
dinarily is the delta used for purposes of
this section.

(2) Time for determining delta. For
purposes of applying the rules of this sec-
tion, the delta of a potential section
871(m) transaction is determined only
when the potential section 871(m) trans-
action is issued (as defined in paragraph
(a)(6) of this section).

(3) Simplified delta calculation for cer-
tain simple contracts that reference mul-
tiple underlying securities. If an NPC or
ELI references 10 or more underlying se-
curities and the short party uses an
exchange-traded security (for example, an
exchange-traded fund) that references
substantially all of the underlying securi-
ties (the hedge security) to hedge the NPC
or ELI at the time it is issued, the delta of
the NPC or ELI may be calculated by
determining the ratio of the change in the
fair market value of the simple contract to
a small change in the fair market value of
the hedge security. A delta determined
under this paragraph (g)(3) must be used
as the delta for each underlying security
for purposes of calculating the amount of
a dividend equivalent as provided in para-
graph (j)(1)(ii) of this section.

(4) Examples. The following examples
illustrate the rules of this paragraph (g).
For purposes of these examples, Stock X
and Stock Y are common stock of domes-
tic corporations X and Y. LP is the long
party to the transaction.

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Example 1. Delta calculation for an NPC. The
terms of an NPC require LP to pay the short party an
amount equal to all of the depreciation in the value
of 100 shares of Stock X and an interest-rate based
return. In return, the NPC requires the short party to
pay LP an amount equal to all of the appreciation in
the value of 100 shares of Stock X and any dividends
paid by X on those shares. The value of the NPC will
change by $1 for each $0.01 change in the price of a
share of Stock X. When LP entered into the NPC,
Stock X had a fair market value of $50 per share.
The NPC therefore has a delta of 1.0 ($1.00 / ($0.01
x 100)).

Example 2. Delta calculation for an option. LP
purchases a call option that references 100 shares of
Stock Y. At the time LP purchases the call option,
the value of the option is expected to change by
$0.30 for a $0.01 change in the price of a share of
Stock Y. When LP purchases the option, Stock Y has
a fair market value of $100 per share. The call option
has a delta of 0.3 ($0.30 / ($0.01 x 100)).

(h) Substantial Equivalence. [Re-
served]. For further guidance, see
§ 1.871-15T(h).

(i) Payment of a dividend equivalent-
(1) Payments determined on gross basis.
For purposes of this section, a payment
includes any gross amount that references
the payment of a dividend and that is used
in computing any net amount transferred
to or from the long party even if the long
party makes a net payment to the short
party or no amount is paid because the net
amount is zero.

(2) Actual and estimated dividends-
(i) In general. A payment includes any
amount that references an actual or esti-
mated payment of dividends, whether the
reference is explicit or implicit. If a po-
tential section 871(m) transaction pro-
vides for a payment based on an estimated
dividend that adjusts to account for the
amount of an actual dividend paid, the
payment is treated as referencing the ac-
tual dividend amount and not an estimated
dividend amount.

(ii) Implicit dividends. A payment in-
cludes an actual or estimated dividend
payment that is implicitly taken into ac-
count in computing one or more of the
terms of a potential section 871(m) trans-
action, including interest rate, notional
amount, purchase price, premium, upfront
payment, strike price, or any other amount
paid or received pursuant to the potential
section 871(m) transaction.

(iii) Actual dividend presumption. A
short party to a section 871(m) transaction
is treated as paying a per-share dividend
amount equal to the actual dividend
amount unless the short party to the sec-

tion 871(m) transaction identifies a rea-
sonable estimated dividend amount in
writing at the time the transaction is is-
sued. For this purpose, a reasonable esti-
mated dividend amount stated in an offer-
ing document or the documents governing
the terms at the time the transaction is
issued will establish the estimated divi-
dend amount. To qualify as an estimated
dividend amount, the written estimated
dividend amount must separately state the
amount estimated for each anticipated
dividend or state a formula that allows
each dividend to be determined. If an un-
derlying security is not expected to pay a
dividend, a reasonable estimate of the div-
idend amount may be zero.

(iv) Additions to estimated payments. If
a section 871(m) transaction provides for
any payment in addition to an estimated
dividend and that additional payment is
determined by reference to a dividend (for
example, a special dividend), both the es-
timated dividend and the additional pay-
ment are used to determine the per-share
dividend amount.

(3) Dividends for certain baskets-(i)
In general. If a section 871(m) transaction
references long positions in more than 25
underlying securities, the short party may
treat the dividends with respect to the ref-
erenced underlying securities as paid at
the end of the applicable calendar quarter
to compute the per-share dividend
amount.

(ii) Publicly available dividend yield.
For purposes of paragraph (i)(3)(i) of this
section, if a section 871(m) transaction
references the same underlying securities
as a security (for example, stock in an
exchange-traded fund) or index for which
there is a publicly available quarterly div-
idend yield, the publicly available divi-
dend yield may be used to determine the
per-share dividend amount for the section
871(m) transaction with any adjustment
for special dividends.

(iii) Dividend yield for a section
871(m) transaction using the simplified
delta calculation. When the delta of a
section 871(m) transaction is determined
under paragraph (g)(3) of this section, the
per-share dividend amount for that section
871(m) transaction must be determined
using the dividend yield for the exchange-
traded security that fully hedges the sec-
tion 871(m) transaction.

(4) Examples. The following examples
illustrate the rules of this paragraph (i).
For purposes of these examples, Stock X
is common stock of Corporation X, a do-
mestic corporation, that historically pays
quarterly dividends on Stock X. The par-
ties anticipate that Corporation X will
continue to pay quarterly dividends.

Example 1. Forward contract to purchase do-
mestic stock. (i) When Stock X is trading at $50 per
share, Foreign Investor enters into a forward contract
to purchase 100 shares of Stock X in one year.
Reasonable estimates of the quarterly dividend are
specified in the transaction documents. The price in
the forward contract is determined by multiplying
the number of shares referenced in the contract by
the current price of the shares and an interest rate,
and subtracting the value of any dividends expected
to be paid during the term of the contract. Assuming
that the forward contract is priced using an interest
rate of 4 percent and total estimated dividends with
a future value of $1 per share during the term of the
forward contract, the purchase price set in the for-
ward contract is $5,100 (100 shares x $50 per share
x 1.04-($1x100)).

(ii) Subject to paragraph (i)(2)(iv) of this section,
the estimate dividend amounts are the per share
dividend amounts because the estimate is reasonable
and specified in accordance with paragraph (i)(2)(iii)
of this section. The estimate dividend amounts are
dividend equivalents for purposes of this section

Example 2. Price return only swap contract. (i)
Foreign Investor enters into a price return swap
contract that entitles Foreign Investor to receive pay-
ments based on the appreciation in the value of 100
shares of Stock X and requires Foreign Investor to
pay an amount based on LIBOR plus any deprecia-
tion in the value of Stock X. The swap contract
neither explicitly entitles Foreign Investor to pay-
ments based on dividends paid on Stock X during the
term of the contract nor references an estimated
dividend amount. The LIBOR rate in the swap con-
tract, however, is reduced to reflect expected annual
dividends on Stock X.

(ii) Because the LIBOR leg of the swap contract
is reduced to reflect estimated dividends and the
estimated dividend amounts are not specified, For-
eign Investor is treated as receiving the actual divi-
dend amounts in accordance with paragraph (i)(2) of
this section. The actual per-share dividend amounts
are dividend equivalents for purposes of this section.

(j) Amount of dividend equivalent-(1)
Calculation of the amount of a dividend
equivalent-(i) Securities lending or sale-
repurchase transactions. For a securities
lending or sale-repurchase transaction, the
amount of the dividend equivalent for
each underlying security equals the
amount of the actual per-share dividend
paid on the underlying security multiplied
by the number of shares of the underlying
security.

(ii) Simple contracts. For a simple con-
tract that is a section 871(m) transaction,

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the amount of the dividend equivalent for
each underlying security equals:

(A) The per-share dividend amount (as
determined under either paragraph (i)(2)
or (i)(3) of this section) with respect to the
underlying security multiplied by;

(B) The number of shares of the under-
lying security multiplied by;

(C) The delta of the section 871(m)
transaction with respect to the underlying
security.

(iii) Complex contracts. For a complex
contract that is a section 871(m) transac-
tion, the amount of the dividend equiva-
lent for each underlying security equals:

(A) The per-share dividend amount (as
determined under paragraph (i)(2) or
(i)(3) of this section) with respect to the
underlying security multiplied by;

(B) The initial hedge for the underlying
security.

(iv) Other substantially similar pay-
ments. In addition to any amount deter-
mined pursuant to paragraph (j)(1)(i), (ii),
or (iii), the amount of a dividend equiva-
lent includes the amount of any payment
described in paragraph (f) of this section.

(2) Time for determining the amount of
a dividend equivalent. The amount of a
dividend equivalent is determined on the
earlier of the date that is the record date of
the dividend and the day prior to the ex-
dividend date with respect to the dividend.
For example, if a specified NPC provides
for a payment at settlement that takes into
account an earlier dividend payment, the
amount of the dividend equivalent is de-
termined on the earlier of the record date
or the day prior to the ex-dividend date for
that dividend.

(3) Number of shares. The number of
shares of an underlying security generally
is the number of shares of the underlying
security stated in the contract. If the trans-
action modifies that number by a factor or
fraction or otherwise alters the amount of
any payment, the number of shares is ad-
justed to take into account the factor, frac-
tion, or other modification. For example,
in a transaction in which the long party
receives or makes payments based on 200
percent of the appreciation or depreciation
(as applicable) of 100 shares of stock, the
number of shares of the underlying secu-
rity is 200 shares of the stock.

(k) Limitation on the treatment of cer-
tain corporate acquisitions as section

871(m) transactions. A potential section
871(m) transaction is not a section 871(m)
transaction with respect to an underlying
security if the transaction obligates the
long party to acquire ownership of the
underlying security as part of a plan pur-
suant to which one or more persons (in-
cluding the long party) are obligated to
acquire underlying securities representing
more than 50 percent of the value of the
entity issuing the underlying securities.

(1) Rules relating to indices-(1) Pur-
pose. The purpose of this section is to
provide a safe harbor for potential section
871(m) transactions that reference certain
passive indices that are based on a diverse
basket of publicly-traded securities and
that are widely used by numerous market
participants. Notwithstanding any other
provision in this paragraph (l), an index is
not a qualified index if treating the index
as a qualified index would be contrary to
the purpose described in this paragraph.

(2) Qualified index not treated as an
underlying security. For purposes of this
section, a qualified index is treated as a
single security that is not an underlying
security. The determination of whether an
index referenced in a potential section
871(m) transaction is a qualified index is
made at the time the transaction is issued
based on whether the index is a qualified
index on the first business day of the cal-
endar year in which the transaction is is-
sued.

(3) Qualified index. A qualified index
means an index that-

(i) References 25 or more component
securities (whether or not the security is
an underlying security);

(ii) Except as provided in paragraph
(l)(6)(ii) of this section, references only
long positions in component securities;

(iii) References no component under-
lying security that represents more than 15
percent of the weighting of the component
securities in the index;

(iv) References no five or fewer com-
ponent underlying securities that together
represent more than 40 percent of the
weighting of the component securities in
the index;

(v) Is modified or rebalanced only ac-
cording to publicly stated, predefined cri-
teria, which may require interpretation by
the index provider or a board or commit-
tee responsible for maintaining the index;

(vi) Did not provide an annual divi-
dend yield in the immediately preceding
calendar year from component underlying
securities that is greater than 1.5 times the
annual dividend yield of the S&P 500
Index as reported for the immediately pre-
ceding calendar year; and

(vii) Is traded through futures contracts
or option contracts (regardless of whether
the contracts provide price only or total
return exposure to the index or provide for
dividend reinvestment in the index) on-

(A) A national securities exchange that
is registered with the Securities and Ex-
change Commission or a domestic board
of trade designated as a contract market
by the Commodity Futures Trading Com-
mission; or

(B) A foreign exchange or board of
trade that is a qualified board or exchange
as determined by the Secretary pursuant to
section 1256(g)(7)(C) or that has a staff
no action letter from the CFTC permitting
direct access from the United States that is
effective on the applicable testing date,
provided that the referenced component
underlying securities, in the aggregate,
comprise less than 50 percent of the
weighting of the component securities in
the index.

(4) Safe harbor for certain indices that
reference assets other than underlying se-
curities. Notwithstanding paragraph (l)(3)
of this section, an index is a qualified
index if the referenced component under-
lying securities in the aggregate comprise
10 percent or less of the weighting of the
component securities in the index.

(5) Weighting of component securities.
For purposes of this paragraph (l), the
weighting of a component security of an
index is the percentage of the index's
value represented, or accounted for, by the
component security.

(6) Transactions that reference a qual-
ified index and one or more component
securities or indices-(i) In general.
When a potential section 871(m) transac-
tion references a qualified index and one
or more component securities or other in-
dices, the qualified index remains a qual-
ified index only if the potential section
871(m) transaction does not reference a
short position in any referenced compo-
nent security of the qualified index, other
than a short position with respect to the
entire qualified index (for example, a cap

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or floor) or a de minimis short position
described in paragraph (l)(6)(ii) of this
section. If, in connection with a potential
section 871(m) transaction that references
a qualified index, a taxpayer (or a related
person within the meaning of section
267(b) or section 707(b)) enters into one
or more transactions that reduce exposure
to any referenced component security of
the index, other than transactions that re-
duce exposure to the entire index, then the
potential section 871(m) transaction is not
treated as referencing a qualified index.

(ii) Safe harbor for de minimis short
positions. Notwithstanding paragraphs
(l)(3)(ii) and (l)(6)(i) of this section, an
index may be a qualified index if the short
position (whether part of the index or en-
tered into separately by the taxpayer or
related person within the meaning of sec-
tion 267(b) or section 707(b)) reduces ex-
posure to referenced component securities
of a qualified index (excluding any short
positions with respect to the entire quali-
fied index) by five percent or less of the
value of the long positions in component
securities in the qualified index.

(7) Transactions that indirectly refer-
ence a qualified index. If a potential sec-
tion 871(m) transaction references a secu-
rity (for example, stock in an exchange-
traded fund) that tracks a qualified index,
the potential section 871(m) transaction
will be treated as referencing a qualified
index.

(m) Rules relating to derivatives that
reference partnerships-(1) In general.
When a potential section 871(m) transac-
tion references a partnership interest, the
assets of the partnership will be treated as
referenced by the potential section 871(m)
transaction only if the partnership carries
on a trade or business of dealing or trading
in securities, holds significant investments
in securities (either of which is a covered
partnership), or directly or indirectly holds
an interest in a lower-tier partnership that
is a covered partnership. For purposes of
this section, if a covered partnership di-
rectly or indirectly holds assets that are
underlying securities or potential section
871(m) transactions, any potential section
871(m) transaction that references an in-
terest in the covered partnership is treated
as referencing the shares of the underlying
securities, including underlying securities
of potential section 871(m) transactions,

directly or indirectly allocable to that part-
nership interest. For purposes of this para-
graph (m), a security is defined in section
475(c).

(2) Significant investments in securi-
ties-(i) In general. For purposes of this
paragraph (m), a partnership holds signif-
icant investments in securities if either-

(A) 25 percent or more of the value of
the partnership's assets consist of under-
lying securities or potential section
871(m) transactions; or

(B) The value of the underlying secu-
rities or potential section 871(m) transac-
tions equals or exceeds $25 million.

(ii) Determining the value of the part-
nership's assets. For purposes of this
paragraph (m)(2), the value of a partner-
ship's assets is determined at the time the
potential 871(m) transaction referencing
that partnership interest is issued based on
the value of the assets held by the part-
nership on the last day of the partnership's
prior taxable year unless the long party or
the short party has actual knowledge that a
subsequent transaction has caused the
partnership to cross either of the thresh-
olds described in paragraph (m)(2)(i). The
value of a partnership's assets is equal to
their fair market value, except that the
value of any NPC, futures contract, for-
ward contract, option, and any similar fi-
nancial instrument held by the partnership
is deemed to be the value of the notional
securities referenced by the transaction.

(n) Combined transactions-(1) In
general. For purposes of determining
whether a potential section 871(m) trans-
action is a section 871(m) transaction, two
or more potential section 871(m) transac-
tions are treated as a single transaction
with respect to an underlying security
when-

(i) A person (or a related person within
the meaning of section 267(b) or section
707(b)) is the long party with respect to
the underlying security for each potential
section 871(m) transaction;

(ii) The potential section 871(m) trans-
actions reference the same underlying se-
curity;

(iii) The potential section 871(m)
transactions, when combined, replicate
the economics of a transaction that would
be a section 871(m) transaction if the
transactions had been entered into as a
single transaction; and

(iv) The potential section 871(m) trans-
actions are entered into in connection with
each other (regardless of whether the
transactions are entered into simultane-
ously or with the same counterparty).

(2) Section 871(m) transactions. If a
potential section 871(m) transaction is a
section 871(m) transaction, either by itself
or as a result of a combination with one or
more other potential section 871(m) trans-
actions, it does not cease to be a section
871(m) transaction as a result of applying
paragraph (n) of this section or disposing
of one or more of the potential section
871(m) transaction with which it is com-
bined.

(3) Short party presumptions regard-
ing combined transactions-(i) Transac-
tions in separate accounts. A short party
that is a broker may presume that transac-
tions are not entered into in connection
with each other for purposes of paragraph
(n)(1) of this section if a long party holds
or reflects the transactions in separate ac-
counts maintained by the short party, un-
less the short party has actual knowledge
that the transactions held or reflected in
separate accounts by the long party were
entered into in connection with each other
or that separate accounts were created or
used to avoid section 871(m).

(ii) Transactions separated by at least
two business days. A short party that is a
broker may presume that transactions en-
tered into two or more business days apart
are not entered into in connection with
each other for purposes of paragraph
(n)(1) of this section unless the short party
has actual knowledge that the transactions
were entered into in connection with each
other.

(4) Presumptions Commissioner will
apply to long party-(i) Transactions in
separate trading books. The Commis-
sioner will presume that a long party did
not enter into two or more transactions in
connection with each other for purposes
of paragraph (n)(1) of this section if the
long party properly reflected those trans-
actions on separate trading books. The
Commissioner may rebut this presump-
tion with facts and circumstances showing
that transactions reflected on separate
trading books were entered into in con-
nection with each other or that separate
trading books were created or used to
avoid section 871(m).

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(ii) Transactions separated by at least
two days. The Commissioner will pre-
sume that a long party did not enter into
two or more transactions in connection
with each other for purposes of paragraph
(n)(1) of this section if the long party
entered into the transactions two or more
business days apart. The Commissioner
may rebut this presumption with facts and
circumstances showing that the transac-
tions entered into two or more business
days apart were entered into in connection
with each other.

(iii) Transactions separated by less
than two days and reflected in the same
trading book. The Commissioner will pre-
sume that transactions that are entered
into less than two business days apart and
reflected on the same trading book are
entered into in connection with each other.
A long party can rebut this presumption
with facts and circumstances showing that
the transactions were not entered into in
connection with each other.

(5) Rules of application-(i) Two busi-
ness days rule. For the purpose of deter-
mining the number of business days be-
tween transactions, the short party may,
and the Commissioner will, assume that
all transactions are entered into at 4:00 pm
on the date the transaction becomes effec-
tive in the jurisdiction of the long party.

(ii) No long party presumptions. Not-
withstanding the presumptions described
in paragraphs (n)(3) and (n)(4) of this
section, the long party must treat two or
more transactions as combined transac-
tions if the transactions are described in
paragraph (n)(1) of section.

(6) Ordering rule for transactions en-
tered into in connection with each other.
If a long party enters into more than two
potential section 871(m) transactions that
could be combined under this paragraph
(n), a short party is required to apply para-
graph (n)(1) of this section by combining
transactions in a manner that results in the
most transactions with a delta of 0.8 or
higher with respect to the referenced un-
derlying security. Thus, for example, if a
taxpayer has sold one at-the-money put
and purchased two at-the-money calls,
each with respect to 100 shares of the
same underlying security, the put and one
call are combined. Similarly, a purchased
call on 100 shares and a sold put on 200
shares of the same underlying security can

be combined for 100 shares with 100
shares of the put remaining separate. The
two calls are not combined because they
do not provide the long party with eco-
nomic exposure to depreciation in the un-
derlying security. Similarly, if a long
party enters into more than two potential
section 871(m) transactions that could be
combined under this paragraph (n), but
have not been combined by a short party,
the long party is required to apply para-
graph (n)(1) of this section by combining
transactions in a manner that results in the
most transactions with a delta of 0.8 or
higher with respect to the referenced un-
derlying security.

(7) More than one underlying security
referenced. If potential section 871(m)
transactions reference more than one un-
derlying security, paragraph (n)(1) of this
section applies separately with respect to
each underlying security.

(o) Anti-abuse rule. If a taxpayer (di-
rectly or through the use of a related per-
son within the meaning of section 267(b)
or section 707(b)) acquires (whether by
entering into, purchasing, accepting by
transfer, by exchange, or by conversion,
or otherwise acquiring) or disposes of
(whether by sale, offset, exercise, termi-
nation, expiration, maturity, or other
means) a transaction or transactions with a
principal purpose of avoiding the applica-
tion of this section, the Commissioner
may treat any payment (as described in
paragraph (i) of this section) made with
respect to that transaction or transactions
as a dividend equivalent to the extent nec-
essary to prevent the avoidance of this
section. Therefore, notwithstanding any
other provision of this section, the Com-
missioner may, for example, adjust the
delta of a transaction, change the number
of shares, adjust an estimated dividend
amount, change the maturity, adjust the
timing of payments, treat a transaction
that references a partnership interest as
referencing the assets of the partnership,
combine, separate, or disregard transac-
tions, indices, or components of indices to
reflect the substance of the transaction or
transactions, or otherwise depart from the
rules of this section as necessary to deter-
mine whether the transaction includes a
dividend equivalent or the amount or tim-
ing of a dividend equivalent. A purpose
may be a principal purpose even though it

is outweighed by other purposes (taken
together or separately). When a withhold-
ing agent knows that the taxpayer ac-
quired or disposed of a transaction or
transactions with a principal purpose of
avoiding the application of this section
and the Commissioner treats a payment
made with respect to any transaction as a
dividend equivalent, the withholding
agent may be liable for any tax pursuant to
section 1461.

(p) Information required to be reported
regarding a potential section 871(m)
transaction-(1) In general. If a broker or
dealer is a party to a potential section
871(m) transaction with a counterparty or
customer that is not a broker or dealer, the
broker or dealer is required to determine
whether the potential section 871(m)
transaction is a section 871(m) transac-
tion. If both parties to a potential section
871(m) transaction are brokers or dealers,
or neither party to a potential section
871(m) transaction is a broker or dealer,
the short party must determine whether
the potential section 871(m) transaction is
a section 871(m) transaction. The party to
the transaction that is required to deter-
mine whether a transaction is a section
871(m) transaction must also determine
and report to the counterparty or customer
the timing and amount of any dividend
equivalent (as described in paragraphs (i)
and (j) of this section). Except as other-
wise provided in paragraph (n)(3) of this
section, the party required to make the
determinations described in this paragraph
is required to exercise reasonable dili-
gence to determine whether a transaction
is a section 871(m) transaction, the
amount of any dividend equivalents, and
any other information necessary to apply
the rules of this section. The information
must be provided in the manner pre-
scribed in paragraphs (p)(2) and (p)(3) of
this section. The determinations required
by paragraph (p) of this section are bind-
ing on the parties to the potential section
871(m) transaction and on any person
who is a withholding agent with respect to
the potential section 871(m) transaction
unless the person knows or has reason to
know that the information received is in-
correct. The determinations are not bind-
ing on the Commissioner.

(2) Reporting requirements. For rules
regarding the reporting requirements of

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withholding agents with respect to divi-
dend equivalents described in this section,
see §§ 1.1461-1(b) and (c) and 1.1474-
1(c) and (d).

(3) Additional information available to
a party to a potential section 871(m)
transaction-(i) In general. Upon request
by any person described in paragraph
(p)(3)(ii) of this section, the party required
to report information pursuant to para-
graph (p)(1) of this section must provide
the requester with information regarding
the amount of each dividend equivalent,
the delta of the potential section 871(m)
transaction, the amount of any tax with-
held and deposited, the estimated dividend
amount if specified in accordance with
paragraph (i)(2)(iii) of this section, the
identity of any transactions combined pur-
suant to paragraph (n) of this section, and
any other information necessary to apply
the rules of this section. The information
requested must be provided within a rea-
sonable time, not to exceed 10 business
days, and communicated in one or more of
the following ways:

(A) By telephone, and confirmed in
writing;

(B) By written statement sent by first
class mail to the address provided by the
requesting party;

(C) By electronic publication available
to all persons entitled to request informa-
tion; or

(D) By any other method agreed to by
the parties, and confirmed in writing.

(ii) Persons entitled to request infor-
mation. Any party to the transaction de-
scribed in paragraph (a)(9) of this section
may request the information specified in
paragraph (p) of this section with respect
to a potential section 871(m) transaction
from the party required by paragraph
(p)(3)(i) of this section to provide the in-
formation.

(iii) Reliance on information received.
A person described in paragraph (p)(1) or
(p)(3)(ii) of this section that receives in-
formation described in paragraph (p)(1) or
(p)(3)(i) of this section may rely on that
information to provide information to any
other person unless the recipient knows or
has reason to know that the information
received is incorrect. When the recipient
knows or has reason to know that the
information received is incorrect, the re-
cipient must make a reasonable effort to

determine and provide the information de-
scribed in paragraph (p)(1) or (p)(3)(i) of
this section to any person described in
paragraph (p)(1) or (p)(3)(ii) of this sec-
tion that requests information from the
recipient.

(4) Recordkeeping rules-(i) In gen-
eral. For rules regarding recordkeeping
requirements sufficient to establish
whether a transaction is a section 871(m)
transaction and whether a payment is a
dividend equivalent and the amount of
gross income treated as a dividend equiv-
alent, see § 1.6001-1.

(ii) Records sufficient to establish
whether a transaction is a section 871(m)
transaction and any dividend equivalent
amount. Any person required to retain re-
cords must keep sufficient information to
establish whether a transaction is a section
871(m) transaction and the amount of a
dividend equivalent (if any), including
documentation and work papers support-
ing the delta calculation or the substantial
equivalence test (including the number of
shares of the initial hedge), as applicable,
and written estimated dividends (if any).
The records and documentation must be
created substantially contemporaneously.
A record will be considered to have been
created substantially contemporaneously
if it was created within 10 business days
of the date the potential section 871(m)
transaction is issued.

(q) Dividend and dividend equivalent
payments to a qualified derivatives dealer.
[Reserved]. For further guidance, see
§ 1.871-15T(q).

(r) Effective/applicability date-(1) In
general. This section applies to payments
made on or after September 18, 1015 ex-
cept as provided in paragraphs (r)(2), (3),
and (4) of this section.

(2) Effective/applicability date for
paragraph (d)(1)(i).

(3) Effective/applicability date for
paragraphs (d)(2) and (e). Paragraphs
(d)(2) and (e) apply to any payment made
on or after January 1, 2017, with respect
to any transaction issued on or after Jan-
uary 1, 2017, and to any payment made on
or after January 1, 2018, with respect to
any transaction issued on or after January
1, 2016, and before January 1, 2017.

(4) Effective/applicability date for
paragraphs (c)(2)(iv), (h), and (q).

[Reserved]. For further guidance, see
§ 1.871-15T(r)(4).

Par. 4. Section 1.871-15T is added to
read as follows:

### § 1.871-15T Treatment of dividend equivalents (temporary).

(a) through (b) [Reserved]. For further
guidance, see § 1.871-15(a) through (b).

(c) [Reserved]. For further guidance,
see § 1.871-15(c)(1) through (c)(2)(iii).

(iv) Payments made pursuant to annu-
ity, endowment, and life insurance con-
tracts-(A) Insurance contracts issued by
domestic insurance companies. A pay-
ment made pursuant to a contract that is
an annuity, endowment, or life insurance
contract issued by a domestic corporation
(including its foreign or U.S. possession
branch) that is a life insurance company
described in section 816(a) does not in-
clude a dividend equivalent if the payment
is subject to tax under section 871(a) or
section 881.

(B) Insurance contracts issued by for-
eign insurance companies. A payment
does not include a dividend equivalent if it
is made pursuant to a contract that is an
annuity, endowment, or life insurance
contract issued by a foreign corporation
that is predominantly engaged in an insur-
ance business and that would be subject to
tax under subchapter L if it were a domes-
tic corporation.

(C) Insurance contracts held by for-
eign insurance companies. A payment
made pursuant to a policy of insurance
(including a policy of reinsurance) does
not include a dividend equivalent if it is
made to a foreign corporation that is pre-
dominantly engaged in an insurance busi-
ness and that would be subject to tax
under subchapter L if it were a domestic
corporation.

(v) [Reserved]. For further guidance,
see § 1.871-15(c)(2)(v).

(d) through (g) [Reserved]. For further
guidance, see § 1.871-15(d) through (g).

(h) Substantial equivalence test-(1)
In general. The substantial equivalence
test described in this paragraph (h) applies
to determine whether a complex contract
is a section 871(m) transaction. The sub-
stantial equivalence test assesses whether
a complex contract substantially replicates
the economic performance of the underly-

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ing security by comparing, at various test-
ing prices for the underlying security, the
differences between the expected changes
in value of that complex contract and its
initial hedge with the differences between
the expected changes in value of a simple
contract benchmark (as described in para-
graph (h)(2) of this section) and its initial
hedge. If the complex contract contains
more than one reference to a single under-
lying security, all references to that under-
lying security are taken into account for
purposes of applying the substantial
equivalence test with respect to that un-
derlying security. With respect to an eq-
uity derivative that is embedded in a debt
instrument or other derivative, the sub-
stantial equivalence test is applied to the
complex contract without taking into ac-
count changes in the market value of the
debt instrument or other derivative that
are not directly related to the equity ele-
ment of the instrument. The complex con-
tract is a section 871(m) transaction with
respect to an underlying security if, for
that underlying security, the expected
change in value of the complex contract
and its initial hedge is equal to or less than
the expected change in value of the simple
contract benchmark and its initial hedge
when the substantial equivalence test de-
scribed in this paragraph (h) is calculated
at the time the complex contract is issued.
To the extent that the steps of the substan-
tial equivalence test set out in this para-
graph (h) cannot be applied to a particular
complex contract, a taxpayer must use the
principles of the substantial equivalence
test to reasonably determine whether the
complex contract is a section 871(m)
transaction with respect to each underly-
ing security. For purposes of this section,
the test must be applied and the inputs
must be determined in a commercially
reasonable manner. If a taxpayer calcu-
lates any relevant input for non-tax busi-
ness purposes, that input ordinarily is the
input used for purposes of this section.

(2) Simple contract benchmark. The
simple contract benchmark is a closely
comparable simple contract that, at the
time the complex contract is issued, has a
delta of 0.8, references the applicable un-
derlying security referenced by the com-
plex contract, and has the same maturity
as the complex contract with respect to the
applicable underlying security. Depend-

ing on the complex contract, the simple
contract benchmark might be, for exam-
ple, a call option, a put option, or a collar.

(3) Substantial equivalence. A com-
plex contract is a section 871(m) transac-
tion with respect to an underlying security
if the complex contract calculation de-
scribed in paragraph (h)(4) of this section
results in an amount that is equal to or less
than the amount of the benchmark calcu-
lation described in paragraph (h)(5) of this
section.

(4) Complex contract calculation-(i)
In general. The complex contract calcula-
tion for each underlying security refer-
enced by a potential section 871(m) trans-
action that is a complex contract is
computed by:

(A) Determining the change in value
(as described in paragraph (h)(4)(ii) of
this section) of the complex contract with
respect to the underlying security at each
testing price (as described in paragraph
(h)(4)(iii) of this section);

(B) Determining the change in value of
the initial hedge for the complex contract
at each testing price;

(C) Determining the absolute value of
the difference between the change in
value of the complex contract determined
in paragraph (h)(4)(i)(A) of this section
and the change in value of the initial
hedge determined in paragraph
(h)(4)(i)(B) of this section at each testing
price;

(D) Determining the probability (as de-
scribed in paragraph (h)(4)(iv) of this sec-
tion) associated with each testing price;

(E) Multiplying the absolute value for
each testing price determined in paragraph
(h)(4)(i)(C) of this section by the corre-
sponding probability for that testing price
determined in paragraph (h)(4)(i)(D) of
this section;

(F) Adding the product of each calcu-
lation determined in paragraph
(h)(4)(i)(E) of this section; and

(G) Dividing the sum determined in
paragraph (h)(4)(i)(F) of this section by
the initial hedge for the complex contract.

(ii) Determining the change in value.
The change in value of a complex contract
is the difference between the value of the
complex contract with respect to the un-
derlying security at the time the complex
contract is issued and the value of the
complex contract with respect to the un-

derlying security if the price of the under-
lying security were equal to the testing
price at the time the complex contract is
issued. The change in value of the initial
hedge of a complex contract with respect
to the underlying security is the difference
between the value of the initial hedge at
the time the complex contract is issued
and the value of the initial hedge if the
price of the underlying security were
equal to the testing price at the time the
complex contract is issued.

(iii) Testing price. The testing prices
must include the prices of the underlying
security if the price of the underlying se-
curity at the time the complex contract is
issued were alternatively increased by one
standard deviation and decreased by one
standard deviation, each of which is a
separate testing price. In circumstances
where using only two testing prices is
reasonably likely to provide an inaccurate
measure of substantial equivalence, a tax-
payer must use additional testing prices as
necessary to determine whether a complex
contract satisfies the substantial equiva-
lence test. If additional testing prices are
used for the substantial equivalence test,
the probabilities as described in paragraph
(h)(4)(iv) of this section must be adjusted
accordingly.

(iv) Probability. For purposes of para-
graphs (h)(4)(i)(D) and (E) of this section,
the probability of an increase by one stan-
dard deviation is the measure of the like-
lihood that the price of the underlying
security will increase by any amount from
its price at the time the complex contract
is issued. For purposes of paragraphs
(h)(4)(i)(D) and (E) of this section, the
probability of a decrease by one standard
deviation is the measure of the likelihood
that the price of the underlying security
will decrease by any amount from its price
at the time the complex contract is issued.

(5) Benchmark calculation. The bench-
mark calculation with respect to each un-
derlying security referenced by the poten-
tial section 871(m) transaction is
determined by using the computation
methodology described in paragraph
(h)(4) of this section with respect to a
simple contract benchmark for the under-
lying security.

(6) Substantial equivalence calculation
for certain complex contracts that refer-
ence multiple underlying securities. If a

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complex contract references 10 or more
underlying securities and the short party
uses an exchange-traded security (for ex-
ample, an exchange-traded fund) that ref-
erences substantially all of the underlying
securities (the hedge security) to hedge
the complex contract at the time it is is-
sued, the substantial equivalence calcula-
tions for the complex contract may be
calculated by treating the hedge security
as the underlying security. When the
hedge security is used for the substantial
equivalence calculation pursuant to this
paragraph (h)(6), the initial hedge is the
number of shares of the hedge security for
purposes of calculating the amount of a
dividend equivalent as provided in para-
graph (j)(1)(iii) of this section.

(7) Example. The following example
illustrates the rules of paragraph (h) of this
section. For purposes of this example,
Stock X is common stock of domestic
corporation X. FI is the financial institu-
tion that structures the transaction de-
scribed in the example, and is the short
party to the transaction. Investor is a non-
resident alien individual.

Example. Complex contract that is not substan-
tially equivalent. (i) FI issues an investment contract
(the Contract) that has a stated maturity of one year,
and Investor purchases the Contract from FI at issu-
ance for $10,000. At maturity, the Contract entitles
Investor to a return of $10,000 (i) plus 200 percent of
any appreciation in Stock X above $100 per share,
capped at $110, on 100 shares or (ii) minus 100
percent of any depreciation in Stock X below $90 on
100 shares. At the time FI issues the Contract, the
price of Stock X is $100 per share. Thus, for exam-
ple, Investor will receive $11,000 if the price of
Stock X is $105 per share at maturity of the Contract,
but Investor will receive $9,000 if the price of Stock
X is $80 per share when the Contract matures. At
issuance, FI acquires 64 shares of Stock X to fully
hedge the Contract issued to Investor.

(ii) The Contract references an underlying secu-
rity and is not an NPC, so it is classified as an ELI
under paragraph (a)(4) of this section. At issuance,
the Contract does not provide for an amount paid at
maturity that is calculated by reference to a single,
fixed number of shares of Stock X. When the Con-
tract matures, the amount paid is effectively calcu-
lated based on either 200 shares of Stock X (if the
price of Stock X has appreciated up to $110) or 100
shares of Stock X (if the price of Stock X has
declined below $90). Consequently, the Contract is a
complex contract described in paragraph (a)(14) of
this section.

(iii) Because it is a complex ELI, FI applies the
substantial equivalence test described in paragraph
(h) of this section to determine whether the Contract
is a specified ELI. FI determines that the price of
Stock X would be $120 if the price of Stock X were
increased by one standard deviation, and $79 if the

price of Stock X were decreased by one standard
deviation. Based on these results, FI next determines
the change in value of the Contract to be $2,000 at
the testing price that represents an increase by one
standard deviation ($12,000 testing price minus
$10,000 issue price) and a negative $1,100 at the
testing price that represents a decrease by one stan-
dard deviation ($10,000 issue price minus $8,900
testing price). FI performs the same calculations for
the 64 shares of Stock X that constitute the initial
hedge, determining that the change in value of the
initial hedge is $1,280 at the testing price that rep-
resents an increase by one standard deviation
($6,400 at issuance compared to $7,680 at the testing
price) and negative $1,344 at the testing price that
represents a decrease by one standard deviation
($6,400 at issuance compared to $5,056 at the testing
price).

(iv) FI then determines the absolute value of the
difference between the change in value of the initial
hedge and the Contract at the testing price that
represents an increase by one standard deviation and
a decrease by one standard deviation. Increased by
one standard deviation, the absolute value of the
difference is $720 ($2,000 - $1,280); decreased by
one standard deviation, the absolute value of the
difference is $244 (negative $1,100 minus negative
$1,344). FI determines that there is a 52% chance
that the price of Stock X will have increased in value
when the Contract matures and a 48% chance that
the price of Stock X will have decreased in value at
that time. FI multiplies the absolute value of the
difference between the change in value of the initial
hedge and the Contract at the testing price that
represents an increase by one standard deviation by
52%, which equals $374.40. FI multiplies the abso-
lute value of the difference between the change in
value of the initial hedge and the Contract at the
testing price that represents a decrease by one stan-
dard deviation by 48%, which equals $117.12. FI
adds these two numbers and divides by the number
of shares that constitute the initial hedge to deter-
mine that the complex contract calculation is 7.68
((374.40 plus 117.12) divided by 64).

(v) FI then performs the same calculation with
respect to the simple contract benchmark, which is a
one-year call option that references one share of
Stock X, settles on the same date as the Contract, and
has a delta of 0.8. The one-year call option has a
strike price of $79 and has a cost (the purchase
premium) of $22. The initial hedge for the one-year
call option is 0.8 shares of Stock X.

(vi) FI first determines that the change in value of
the simple contract benchmark is $19.05 if the test-
ing price is increased by one standard deviation
($22.00 at issuance to $41.05 at the testing price) and
negative $20.95 if the testing price is decreased by
one standard deviation ($22.00 at issuance to $1.05
at the testing price). Second, FI determines that the
change in value of the initial hedge is $16.00 at the
testing price that represents an increase by one stan-
dard deviation ($80 at issuance to $96 at the testing
price) and negative $16.80 at the testing price that
represents a decrease by one standard deviation
($80.00 at issuance to $63.20 at the testing price).

(vii) FI determines the absolute value of the
difference between the change in value of the initial
hedge and the one-year call option at the testing

price that represents an increase by one standard
deviation is $3.05 ($16.00 minus $19.05). FI next
determines the absolute value of the difference be-
tween the change in value of the initial hedge and the
option at the testing price that represents a decrease
by one standard deviation is $4.15 (negative $16.80
minus negative $20.95). FI multiplies the absolute
value of the difference between the change in value
of the initial hedge and the option at the testing price
that represents an increase by one standard deviation
by 52%, which equals $1.586. FI multiplies the
absolute value of the difference between the change
in value of the initial hedge and the option at the
testing price that represents a decrease by one stan-
dard deviation by 48%, which equals $1.992. FI adds
these two numbers and divides by the number of
shares that constitute the initial hedge to determine
that the benchmark calculation is 4.473 ((1.586 plus
1.992) divided by .8).

(viii) FI concludes that the Contract is not a
section 871(m) transaction because the complex con-
tract calculation of 7.68 exceeds the benchmark cal-
culation of 4.473.

(i) through (p) [Reserved]. For further
guidance, see § 1.871-15(i) through (p).

(q) Dividend and dividend equivalent
payments to a qualified derivatives deal-
er-(1) In general. Except as otherwise
provided in this paragraph (q), a qualified
derivatives dealer described in § 1.1441-
1(e)(6) that receives a dividend or the
payment of a dividend equivalent (within
the meaning of paragraph (i) of this sec-
tion) in its dealer capacity will not be
liable for tax under section 871 or section
881 provided that the qualified derivatives
dealer complies with its obligations under
the qualified intermediary agreement de-
scribed in §§ 1.1441-1(e)(5) and 1.1441-
1(e)(6). If a qualified derivatives dealer
receives a dividend or dividend equivalent
payment on or determined by reference to
an underlying security and the offsetting
dividend equivalent payment the qualified
derivatives dealer is contractually obli-
gated to make on the same underlying
security is less than the dividend and div-
idend equivalent amount received (includ-
ing when the qualified derivatives dealer
is not contractually obligated to make an
offsetting dividend equivalent payment),
the qualified derivatives dealer is liable
for tax under section 871 or section 881
for the difference. For purposes of this
paragraph (q), a dividend or dividend
equivalent is not treated as received by a
qualified derivatives dealer acting in its
dealer capacity if the dividend or dividend
equivalent is received by the qualified de-
rivatives dealer acting as a proprietary
trader. Transactions properly reflected in a

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qualified derivatives dealer's dealer book
are presumed to be held by a dealer in its
dealer capacity for purposes of this para-
graph (q).

(2) Examples. The following examples
illustrate the rules of this paragraph (q):

Example 1. Forward contract entered into by a
foreign dealer. (i) Facts. FB is a foreign bank that is
a qualified intermediary that acts as a qualified de-
rivatives dealer. On April 1, Year 1, FB enters into a
cash settled forward contract initiated by a foreign
customer (Customer) that entitles Customer to re-
ceive from FB all of the appreciation and dividends
on 100 shares of Stock X, and obligates Customer to
pay FB any depreciation on 100 shares of Stock X,
at the end of three years. FB hedges the forward
contract by entering into a total return swap contract
with a domestic broker (U.S. Broker) and maintains
the swap contract as a hedge for the duration of the
forward contract. The swap contract entitles FB to
receive an amount equal to all of the dividends on
100 shares of Stock X and obligates FB to pay an
amount referenced to a floating interest rate each
quarter, and also entitles FB to receive from or pay
to U.S. Broker, as the case may be, the difference
between the value of 100 shares of Stock X at the
inception of the swap and the value of 100 shares of
Stock X at the end of 3 years. FB provides valid
documentation to U.S. Broker that FB will receive
payments under the swap contract in its capacity as
a qualified derivatives dealer, and FB contempora-
neously enters both the swap contract with U.S.
Broker and the forward contract with Customer on
its dealer books. Stock X pays a quarterly dividend
of $0.25 per share.

(ii) Application of rules. FB is a long party on a
delta one contract (the total return swap) and a short
party on a delta one contract (the forward contract
with Customer). U.S. Broker is not obligated to
withhold on the dividend equivalent payments to FB
on the swap contract that are referenced to Stock X
dividends, however, because U.S. Broker has re-
ceived valid documentation that it may rely upon to
treat the payment as made to FB acting as a qualified
derivatives dealer. Similarly, FB is not obligated to
pay tax on the payments it receives from U.S. Broker
referenced to Stock X dividends because at the time
it received the payments FB was contractually obli-
gated to make fully offsetting dividend equivalent
payments as the short party with respect to 100
shares of Stock X to Customer. FB is required to
withhold on dividend equivalent payments to Cus-
tomer on the forward contract in accordance with
§ 1.1441-2(e)(8).

Example 2. At-the-money option contract entered
into by a foreign dealer. (i) Facts. The facts are the
same as Example 1, but customer purchases from FB
an at-the-money call option on 100 shares of Stock X
with a term of one year. The call option has a delta
of 0.5 and FB hedges the call option by purchasing
50 shares of Stock X, which are held in an account
with U.S. Broker, who also acts as paying agent.

(ii) Application of rules. FB is a long party on 50
shares of Stock X and a short party on an option.
Because the option has a delta of less than 0.8 on the
date it was issued, it is not a section 871(m) trans-
action. U.S. Broker is not obligated to withhold on

the Stock X dividends paid to FB because U.S.
Broker has received valid documentation that it may
rely upon to treat the dividends as paid to FB acting
as a qualified derivatives dealer. FB is liable for tax
under section 871 or section 881 on the Stock X
dividends it receives from U.S. Broker, however,
because at the time it received the dividends FB was
not contractually obligated to make an offsetting
dividend equivalent payment to Customer. FB is not
required to make an offsetting dividend equivalent
payment to Customer because the option has a delta
of 0.5; therefore, it is not a section 871(m) transaction.

Example 3. In-the-money option contract entered
into by a foreign dealer. (i) Facts. The facts are the
same as Example 2, but Customer purchases from
FB an in-the-money call option on 100 shares of
Stock X with a term of one year. The call option has
a delta of 0.8 and FB hedges the call option by
purchasing 80 shares of Stock X, which are held in
an account with U.S. Broker, who also acts as paying
agent. The price of Stock X declines substantially
and the option lapses unexercised.

(ii) Application of rules. FB is a long party on 80
shares of Stock X and a short party on an option.
Because the option has a delta of 0.8 on the date it
was issued, it is a section 871(m) transaction. U.S.
Broker is not obligated to withhold on the Stock X
dividends paid to FB because U.S. Broker has re-
ceived valid documentation that it may rely upon to
treat the dividends as paid to FB acting as a qualified
derivatives dealer. Similarly, FB is not obligated to
pay tax on the Stock X dividends it receives from
U.S. Broker to the extent that FB is contractually
obligated to make offsetting dividend equivalent
payments as the short party to Customer. FB is
required to withhold on dividend equivalent pay-
ments to Customer on the option contract in accor-
dance with § 1.1441-2(e)(8). FB is also liable for tax
under section 871 or section 881 on Stock X divi-
dends, if any, that exceed the dividend equivalent
payment to Customer.

(r)(1) through (3) [Reserved]. For further
guidance, see § 1.871-15(r)(1) through (3).

(4) Effective/applicability date. This
section applies to payments made on or
after January 1, 2017.

(s) Expiration date. This section ex-
pires September 17, 2018.

Par. 5. Section 1.1441-1 is amended by:

1\. Redesignating paragraph (b)(4)(xxi)
as (b)(4)(xxiv).

2\. Adding paragraphs (b)(4)(xxi)
through (xxiii).

3\. Adding new paragraphs (e)(3)(ii)(F)
and (6).

4\. Adding new paragraph (f)(4).

The additions read as follows:

§ 1.1441-1 Requirement for the
deduction and withholding of tax on
payments to foreign persons.

* * * * *

(b) * * *

(4) * * *

(xxi) Amounts paid with respect to a
notional principal contract described in
§ 1.871-15(a)(7), an equity-linked instru-
ment described in § 1.871-15(a)(4), or a
securities lending or sale-repurchase trans-
action described in § 1.871-15(a)(13) are
exempt from withholding under section
1441(a) as dividend equivalents under sec-
tion 871(m) if the transaction is not a section
871(m) transaction within the meaning of
§ 1.871-15(a)(12), if the transaction is sub-
ject to the exception described in § 1.871-
15(k), or if the payment is not a dividend
equivalent pursuant to § 1.871-15(c)(2).
However, the amounts may be subject to
withholding under section 1441(a) if they
are subject to tax under any section other
than section 871(m). For purposes of this
withholding exemption, it is not necessary
for the payee to provide documentation es-
tablishing that a notional principal contract
or equity-linked instrument has a delta (as
described in § 1.871-15(g)) that is less than
0.80 or does not have substantial equiva-
lence (as defined in § 1.871-15(h)) with the
underlying security. For purposes of the
withholding exemption regarding corporate
acquisitions described in § 1.871-15(k), the
exemption only applies if the long party
furnishes, under penalties of perjury, a writ-
ten statement to the withholding agent cer-
tifying that it satisfies the requirements of
§ 1.871-15(k).

(xxii) Certain payments to qualified de-
rivatives dealers (as described in para-
graph (e)(6) of this section). For purposes
of this withholding exemption, the quali-
fied derivatives dealer must furnish to the
withholding agent the documentation de-
scribed in paragraph (e)(3)(ii) of this sec-
tion. A withholding agent that makes a
payment of a dividend or a divided equiv-
alent to a qualified intermediary that is
acting as a qualified derivatives dealer is
not required to withhold on the payment if
the withholding agent can reliably associ-
ate the payment with a valid qualified
intermediary withholding certificate as de-
scribed in paragraph (e)(3)(ii) of this sec-
tion, including the certification described
in paragraph (e)(3)(ii)(E).

(xxiii) Amounts paid with respect to a
potential section 871(m) transaction that is
only a section 871(m) transaction as a result
of applying § 1.871-15(n) to treat certain
transactions as combined transactions, if the

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withholding agent is able to rely on one or
more of the presumptions provided in
§ 1.871-15(n)(3)(i) or (ii) (applying those
paragraphs whether or not the withholding
agent is a short party by substituting "with-
holding agent" for "short party"), and the
withholding agent does not otherwise have
actual knowledge that the long party (or a
related person within the meaning of section
267(b) or section 707(b)) entered into the
potential section 871(m) transaction in con-
nection with any other potential section
871(m) transactions. The ability of one or
more withholding agents to rely on the pre-
sumptions provided in section 1.871-
15(n)(3) does not affect the withholding tax
obligations or liability of any party to the
transaction that cannot rely on the presump-
tions. Notwithstanding the withholding ex-
emption provided to the withholding agent
in this paragraph (b)(4)(xxii), the long party
may still be liable for tax on dividend equiv-
alent amounts with respect to such com-
bined transactions under section 871(m).

* * * * *

(e)(3)(ii)(E) [Reserved]. For further
guidance, see § 1.1441-1T(e)(3)(ii)(F).

* * * * *

(6) Qualified derivatives dealers. [Re-
served]. For further guidance, see
§ 1.1441-1T(e)(6).

(f) * * *

(4) Effective/applicability date. Para-
graphs (b)(4)(xxi) through (b)(4)(xxiii) of
this section, and paragraphs (e)(3)(ii)(E)
and (e)(6) of this section apply to pay-
ments made on or after September 18,
2015.

Par. 6. Section 1.1441-1T is amended
by:

1\. Redesignating paragraph (e)(3)(ii)(E) as
paragraph (e)(3)(ii)(F).

2\. Adding new paragraphs (e)(3)(ii)(E)
and (e)(6).

3\. Revising paragraph (e)(5)(i).

4\. Amending paragraph (f)(3) by re-
moving "This section" and adding in its
place "Except for paragraphs (e)(3)(ii)(E)
and (e)(6), this section" and adding a third
sentence.

5\. Amending paragraph (g) by remov-
ing "The applicability" and adding in its
place "Except for paragraphs (e)(3)(ii)(E)
and (e)(6), the applicability" and adding a
third sentence.

The additions and revisions read as fol-
lows:

§ 1.1441-1T Requirement for the
deduction and withholding of tax on
payments to foreign persons
(temporary).

* * * * *

(e) * * *

(3) * * *

(ii) * * *

(E) In the case of dividends or dividend
equivalents received by a qualified inter-
mediary acting as a qualified derivatives
dealer, a certification that the qualified
intermediary meets the requirements to
act as a qualified derivatives dealer as
further described in paragraph (e)(6) of
this section and that the qualified deriva-
tives dealer assumes primary withholding
and reporting responsibilities under chap-
ters 3, 4, and 61, and section 3406 with
respect to any dividend equivalent pay-
ments;

* * * * *

(5) Qualified intermediaries-(i) In
general. A qualified intermediary, as de-
fined in paragraph (e)(5)(ii) of this sec-
tion, may furnish a qualified intermediary
withholding certificate to a withholding
agent. The withholding certificate pro-
vides certifications on behalf of other per-
sons for the purpose of claiming and ver-
ifying reduced rates of withholding under
section 1441 or 1442 and for the purpose
of reporting and withholding under other
provisions of the Internal Revenue Code,
such as the provisions under chapter 61
and section 3406 (and the regulations un-
der those provisions). Furnishing such a
certificate is in lieu of transmitting to a
withholding agent withholding certificates
or other appropriate documentation for the
persons for whom the qualified intermedi-
ary receives the payment, including inter-
est holders in a qualified intermediary that
is fiscally transparent under the regula-
tions under section 894. Although the
qualified intermediary is required to ob-
tain withholding certificates or other ap-
propriate documentation from beneficial
owners, payees, or interest holders pursu-
ant to its agreement with the IRS, it is
generally not required to attach such doc-
umentation to the intermediary withhold-
ing certificate. Notwithstanding the pre-
ceding sentence, a qualified intermediary
must provide a withholding agent with the
Forms W-9, or disclose the names, ad-

dresses, and taxpayer identifying num-
bers, if known, of those U.S. non-exempt
recipients for whom the qualified interme-
diary receives reportable amounts (within
the meaning of paragraph (e)(3)(vi) of this
section) to the extent required in the qual-
ified intermediary's agreement with the
IRS. When a qualified intermediary is act-
ing as a qualified derivatives dealer, the
withholding certificate entitles a withhold-
ing agent to make payments of dividend
equivalents and dividends to the qualified
derivatives dealer free of withholding.
Paragraph (e)(6) of this section contains
detailed rules prescribing the circum-
stances in which a qualified intermediary
can act as a qualified derivatives dealer. A
person may claim qualified intermediary
status before an agreement is executed
with the IRS if it has applied for such
status and the IRS authorizes such status
on an interim basis under such procedures
as the IRS may prescribe.

* * * * *

(6) Qualified derivatives dealers-(i)
In general. To act as a qualified deriva-
tives dealer under a qualified intermediary
agreement, a qualified intermediary must
be an eligible entity as described in para-
graph (e)(6)(ii) of this section and, in ac-
cordance with the qualified intermediary
agreement, must-

(A) Furnish to a withholding agent a
qualified intermediary withholding certif-
icate (described in paragraph (e)(3)(ii) of
this section) that indicates that the quali-
fied intermediary is a qualified derivatives
dealer with respect to the applicable div-
idends and dividend equivalent payments;

(B) Agree to assume the primary with-
holding and reporting responsibilities, in-
cluding the documentation provisions un-
der chapters 3, 4, and 61, and section
3406, the regulations under those provi-
sions, and other withholding provisions of
the Internal Revenue Code, on all divi-
dends and dividend equivalents that it re-
ceives and makes in its dealer capacity.
For this purpose, a qualified derivatives
dealer is required to obtain a withholding
certificate or other appropriate documen-
tation from each counterparty to whom
the qualified derivatives dealer pays a div-
idend equivalent. The qualified deriva-
tives dealer is also required to determine
whether a payment it makes to a counter-

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party is, in whole or in part, a dividend
equivalent;

(C) Agree to remain liable for tax un-
der section 871 and section 881 on any
dividend or payment of a dividend equiv-
alent (within the meaning of § 1.871-
15(i)) it receives in its dealer capacity to
the extent that the offsetting dividend
equivalent payment on an underlying se-
curity the qualified derivatives dealer is
contractually obligated to make is less
than the dividend and dividend equivalent
amount the qualified derivatives dealers
received on or with respect to the same
underlying security (including when the
qualified derivatives dealer is not contrac-
tually obligated to make an offsetting div-
idend equivalent payment); and

(D) Comply with the compliance re-
view procedures applicable to a qualified
intermediary that acts as a qualified deriv-
atives dealer under a qualified intermedi-
ary agreement, which will specify the time
and manner in which a qualified deriva-
tives dealer must:

(1) Certify to the IRS that it has com-
plied with the obligations to act as a qual-
ified derivatives dealer (including its per-
formance of a periodic review applicable
to a qualified derivatives dealer);

(2) Report to the IRS the dividend
equivalent payments that it made and the
dividends and dividend equivalent
amounts received in determining offset-
ting payments (as described in § 1.871-
15(q)(1)); and

(3) Respond to inquiries from the IRS
about obligations it has assumed as a qual-
ified derivatives dealer in a timely man-
ner.

(ii) Definition of eligible entity. An el-
igible entity is a qualified intermediary
that is-

(A) A dealer in securities subject to
regulatory supervision as a dealer by a
governmental authority in the jurisdiction
in which it was organized or operates; or

(B) A bank subject to regulatory super-
vision as a bank by a governmental au-
thority in the jurisdiction in which it was
organized or operates or an entity that is
wholly-owned by a bank subject to regu-
latory supervision as a bank by a govern-
mental authority in the jurisdiction in
which it was organized or operates and
that-

(1) Issues potential section 871(m)
transactions to customers; and

(2) Receives dividends with respect to
stock or dividend equivalent payments
pursuant to potential section 871(m) trans-
actions that hedge potential section
871(m) transactions that it issued.

(iii) Crediting prior withholding to a
subsequent dividend equivalent payment.
[Reserved].

* * * * *

(f)(3) *** Paragraphs (e)(3)(ii)(E) and
(e)(6) apply beginning September 18,
2015.

(g) * * * Paragraphs (e)(3)(ii)(E) and
(e)(6) of this section expire September 17,
2018.

Par. 7. Section 1.1441-2 is amended by
adding paragraph (e)(8) and adding a sen-
tence to the end of paragraph (f) to read as
follows:

§ 1.1441-2 Amounts subject to
withholding.

* * * * *

(e) * * *

(8) Payments of dividend equiva-
lents-(i) In general. A payment of a div-
idend equivalent is not considered to be
made until the later of when-

(A) The amount of a dividend equiva-
lent is determined as provided in § 1.871-
15(j)(2), and

(B) A payment occurs with respect to
the section 871(m) transaction.

(ii) Payment. For purposes of para-
graph (e)(8) of this section, a payment
occurs with respect to a section 871(m)
transaction when-

(A) Money or other property is paid to
or by the long party;

(B) In the case of a section 871(m)
transaction described in § 1.871-15(i)(3),
a payment is treated as being made at the
end of the applicable calendar quarter; or

(C) The long party sells, exchanges,
transfers, or otherwise disposes of the sec-
tion 871(m) transaction (including by set-
tlement, offset, termination, expiration,
lapse, or maturity).

(iii) Premiums and other upfront pay-
ments. When a long party pays a premium
or other upfront payment to the short party
at the time a section 871(m) transaction is
issued, the premium or other upfront pay-
ment is not treated as a payment for pur-

poses of paragraph (e)(8)(ii)(A) of this
section.

* * * * *

(f) ** * Paragraph (e)(8) of this section
applies to payments made on or after Sep-
tember 18, 2015.

Par. 8. Section 1.1441-3 is amended
by:

1\. Adding a second sentence to para-
graph (h)(1).

2\. Redesignating paragraph (h)(2) as
(h)(3) and revising newly redesignated
paragraph (h)(3).

3\. Adding new paragraph (h)(2).

The additions and revisions read as fol-
lows:

§ 1.1441-3 Determination of amounts to
be withheld.

* * * * *

(h)* * *

(1) * * * Withholding is required on the
amount of the dividend equivalent calcu-
lated under § 1.871-15(j).

(2) Reliance by withholding agent on
reasonable determinations. For purposes
of determining whether a payment is a
dividend equivalent and the timing and
amount of a dividend equivalent under
section 871(m), a withholding agent may
rely on the information received from the
party to the transaction that is required (as
provided in § 1.871-15(p)) to make those
determinations, unless the withholding
agent knows or has reason to know that
the information is incorrect. When a with-
holding agent fails to withhold the re-
quired amount because the party de-
scribed in § 1.871-15(p) fails to
reasonably determine or timely provide
information regarding whether a transac-
tion is a section 871(m) transaction, the
timing and amount of any dividend equiv-
alent, or any other information required to
be provided pursuant to § 1.871-15(p),
and the withholding agent relied, absent
actual knowledge to the contrary, on that
party's determination or did not timely
receive required information, then the fail-
ure to withhold is imputed to the party
required to make the determinations de-
scribed in § 1.871-15(p). In that case, the
IRS may collect any underwithheld
amount from the party to the transaction
that was required to make the determina-
tions described in § 1.871-15(p) or timely

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provide the information and subject that
party to applicable interest and penalties
as if the party were a withholding agent
with respect to the payment of the divi-
dend equivalent made pursuant to the sec-
tion 871(m) transaction.

(3) Effective/applicability date. Except
for the first sentence of paragraph (h)(1),
this paragraph (h) applies to payments
made on or after September 18, 2015. The
first sentence of paragraph (h)(1) of this
section, applies to payments made on or
after January 23, 2012.

* * * * *

Par. 9. Section 1.1441-7 is amended
by:

1\. Adding Example 7 to paragraph
(a)(3).

2\. Adding a second sentence to para-
graph (a)(4).

The additions read as follows:

§ 1.1441-7 General provisions relating
to withholding agents.

(a) * * *

(3) * * *

Example 7. CO is a domestic clearing organiza-
tion. CO serves as a central counterparty clearing
and settlement service provider for derivatives ex-
changes in the United States. CB is a broker orga-
nized in Country X, a foreign country, and a clearing
member of CO. CB is a nonqualified intermediary,
as defined in § 1.1441-1(c)(14). FC is a foreign
corporation that has an investment account with CB.
FC instructs CB to purchase a call option that is a
specified ELI (as described in § 1.871-15(e)). CB
effects the trade for FC on the exchange. The ex-
change matches FC's order with an order for a
written call option with the same terms. The ex-
change then sends the matched trade to CO, which
clears the trade. CB and the clearing member repre-
senting the call option seller settle the trade with CO.
Upon receiving the matched trade, the option con-
tracts are novated and CO becomes the counterparty
to CB and the counterparty to the clearing member
representing the call option seller. To the extent that
there is a dividend equivalent with respect to the call
option, both CO and CB are withholding agents as
described in paragraph (a)(1) of this section.

(4) * * * Example 7 of paragraph (a)(3)
of this section applies to payments made
on or after September 18, 2015.

* * * * *

Par. 10. Section 1.1461-1 is amended
by:

1\. Redesignating paragraphs (c)(2)(i)(N) as
(c)(2)(i)(O) and (c)(2)(i)(M) as (c)(2)(i)(N).

2\. Adding paragraph (c)(2)(i)(M).

3\. Redesignating paragraph (c)(2)(ii)(K) as
(c)(2)(ii)(L) and redesignating paragraph
(c)(2)(ii)(J) as (c)(2)(ii)(K)

4\. Adding paragraph (c)(2)(ii)(J).

5\. Adding a second sentence to para-
graph (c)(2)(iii).

The additions read as follows:

§ 1.1461-1 Payments and returns of tax
withheld.

* * * * *

(c) * * *

(2) * * *

(i) * * *

(M) Any dividend or any payment that
references the payment of a dividend from
an underlying security pursuant to a secu-
rities lending or sale-repurchase transac-
tion paid to a qualified derivatives dealer
even when the withholding agent is not
required to withhold on the payment pur-
suant to § 1.1441-1(b)(4)(xxi), (xxii), or
(xxiii);

* * * * *

(ii) * * *

(J) Except as provided in § 1.1461-
1(c)(2)(i)(M), any payment to a qualified
derivatives dealer when the withholding
agent is not required to withhold on the
payment pursuant to § 1.1441-
1(b)(4)(xxi), (xxii), or (xxiii);
* * * * *

(iii) ** * Paragraphs (c)(2)(i)(M) and
(c)(2)(ii)(J) of this section apply begin-
ning September 18, 2015.

Par. 11. Section 1.1473-1 is amended by:
1\. Adding new paragraph (a)(4)(viii).

2\. Adding a sentence to the end of
paragraph (f).

The additions read as follows:

§ 1.1473-1 Section 1473 definitions.

(a) * * *

(4) * * *

(viii) Certain dividend equivalents.
Amounts paid with respect to a notional
principal contract described in § 1.871-
15(a)(7), an equity-linked instrument de-
scribed in § 1.871-15(a)(4), or a securities
lending or sale-repurchase transaction de-
scribed in § 1.871-15(a)(13) that are ex-
empt from withholding under section
1441(a) as dividend equivalents under
section 871(m) if the transaction is not a
section 871(m) transaction within the

meaning of § 1.871-15(a)(12), if the
transaction is subject to the exception de-
scribed in § 1.871-15(k), or to the extent
the payment is not a dividend equivalent
pursuant to § 1.871-15(c)(2).

* * * * *

(f) * * * Paragraph (a)(4)(viii) of this
section applies to payments made on or
after September 18, 2015.

John Dalrymple
Deputy Commissioner for
Services and Enforcement.

Approved: July 20, 2015

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

(Filed by the Office of the Federal Register on September
17, 2015, 8:45 a.m., and published in the issue of the Federal
Register for September 18, 2015, 80 F.R. 56866)

26 CFR 1.367(a)-1: Transfers to foreign corpora-
tions subject to 367(a): In general.
26 CFR 1.368-2: Definition of terms.

T.D. 9739

DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1

Reorganizations Under Section
368(a)(1)(F); Section 367(a) and
Certain Reorganizations Under
Section 368(a)(1)(F)

AGENCY: Internal Revenue Service (IRS),
Treasury.

ACTION: Final regulations and removal
of temporary regulations.

SUMMARY: This document contains fi-
nal regulations that provide guidance re-
garding the qualification of a transaction
as a corporate reorganization under sec-
tion 368(a)(1)(F) by virtue of being a
mere change of identity, form, or place of
organization of one corporation (F reorga-
nization). This document also contains fi-
nal regulations relating to F reorganiza-
tions in which the transferor corporation is
a domestic corporation and the acquiring

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corporation is a foreign corporation (an
outbound F reorganization). These regula-
tions will affect corporations engaging in
transactions that could qualify as F reor-
ganizations (including outbound F reorga-
nizations) and their shareholders.

DATES: Effective date: These final regu-
lations are effective on September 21,
2015.

Applicability date: For dates of appli-
cability, see §§ 1.367(a)-1(g)(4) and
1.368-2(m)(5).

FOR FURTHER INFORMATION
CONTACT: Douglas C. Bates, (202) 317-
6065 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

#### Background

##### 1. Introduction

This Treasury decision contains final
regulations (the Final Regulations) that
amend 26 CFR part 1 under sections 367
and 368 of the Internal Revenue Code
(Code). These Final Regulations provide
guidance relating to the qualification of
transactions as F reorganizations and the
treatment of outbound F reorganizations.

In general, upon the exchange of prop-
erty, gain or loss must be recognized if the
new property differs materially, in kind or
extent, from the old property. See
§ 1.1001-1(a); § 1.368-1(b). The purpose
of the reorganization provisions of the
Code is to except from the general rule of
section 1001 certain specifically described
exchanges that are required by business
exigencies and effect only a readjustment
of continuing interests in property under
modified corporate forms. See § 1.368-
1(b). These exchanges, described in sec-
tions 354, 356, and 361, must be made in
pursuance of a plan of reorganization. See
§ 1.368-1(c).

Section 368(a)(1) describes several
types of transactions that constitute reor-
ganizations. One of these, described in
section 368(a)(1)(F), is "a mere change in
identity, form, or place of organization of
one corporation, however effected" (a
Mere Change). One court has described
the F reorganization as follows:

[The F reorganization] encom-
pass[es] only the simplest and least
significant of corporate changes.

The (F)-type reorganization pre-
sumes that the surviving corporation
is the same corporation as the pre-
decessor in every respect, except for
minor or technical differences. For
instance, the (F) reorganization typ-
ically has been understood to com-
prehend only such insignificant
modifications as the reincorporation
of the same corporate business with
the same assets and the same stock-
holders surviving under a new char-
ter either in the same or in a differ-
ent State, the renewal of a corporate
charter having a limited life, or the
conversion of a U.S .- chartered sav-
ings and loan association to a State-
chartered institution.

Berghash v. Commissioner, 43 T.C.
743, 752 (1965) (citation and footnotes
omitted), aff'd, 361 F.2d 257 (2d Cir.
1966).

Although the statutory description of
an F reorganization is short, and courts
have described F reorganizations as sim-
ple, questions have arisen regarding the
requirements of F reorganizations. In par-
ticular, when a corporation changes its
identity, form, or place of incorporation,
questions have arisen as to what other
changes (if any) may occur, either before,
during, or after the Mere Change, without
affecting the status of the Mere Change
(that is, what other changes are compati-
ble with the Mere Change). These ques-
tions can become more pronounced if the
transaction intended to qualify as an F
reorganization is composed of a series of
steps occurring over a period of days or
weeks. Moreover, changes in identity,
form, or place of organization are often
undertaken to facilitate other changes that
are difficult to effect in the corporation's
current form or place of organization.

##### 2. Related Regulations

On January 16, 1990, the Treasury De-
partment and the IRS published temporary
regulations (TD 8280) in the Federal
Register (55 FR 1406) under sections
367(a), (b), and (e). A notice of proposed
rulemaking (INTL-704-87) cross-
referencing these temporary regulations
was published the same day under RIN
1545-AL35 in the Federal Register (55
FR 1472) (1990 Proposed Regulations).
No public hearing was requested or held.

Prior to the publication of the 1990 Pro-
posed Regulations, the Treasury Depart-
ment and the IRS had issued two notices
and a revenue ruling providing that, in an
outbound F reorganization, the transferor
corporation's taxable year closes, and
clarifying that, in such F reorganizations,
there is an actual or constructive transfer
of assets and an exchange of stock. See
Notice 88-50, 1988-1 CB 535; Notice
87-29, 1987-1 CB 474; Rev. Rul. 87-27,
1987-1 CB 134. The 1990 Proposed Reg-
ulations, in relevant part, proposed the
rules described in Notice 88-50, Notice
87-29, and Rev. Rul. 87-27. No com-
ments were received on this aspect of the
1990 Proposed Regulations. While this
aspect of the 1990 Proposed Regulations
has not yet been finalized, final regula-
tions (TD 8834) regarding the primary
subject of the 1990 Proposed Regula-
tions-guidance under sections 367(e)(1)
and 367(e)(2) regarding outbound distri-
butions under sections 355 and 332-
have since been issued. See, for example,
TD 8834, 64 FR 43072 (Aug. 9, 1999). A
new RIN (RIN 1545-BM78, REG-
117141-15) has been issued under which
the portion of the 1990 Proposed Regula-
tions relating to outbound F reorganiza-
tions will be finalized.

On August 12, 2004, the Treasury De-
partment and the IRS published a notice
of proposed rulemaking (REG-106889-
04) (2004 Proposed Regulations) in the
Federal Register (69 FR 49836) regard-
ing the requirements for F reorganiza-
tions. The 2004 Proposed Regulations are
discussed in more detail in section 3. of
this Background section of this preamble.
In the preamble to the 2004 Proposed
Regulations, the Treasury Department and
the IRS requested comments from the
public. One written comment was re-
ceived with respect to the 2004 Proposed
Regulations. No public hearing was re-
quested or held.

On February 25, 2005, the Treasury
Department and the IRS published final
regulations (TD 9182) (2005 Regulations)
in the Federal Register (70 FR 9219)
adopting a portion of the 2004 Proposed
Regulations. The 2005 Regulations pro-
vide that the continuity of interest and
continuity of business enterprise require-
ments applicable to reorganizations in
general do not apply to reorganizations

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under section 368(a)(1)(E) or section
368(a)(1)(F). The preamble to the 2005
Regulations stated that the Treasury De-
partment and the IRS would continue to
study the other issues addressed in the
2004 Proposed Regulations and would
welcome further comments from the pub-
lic. One written comment was received
with regard to the 2005 Regulations.

##### 3. The 2004 Proposed Regulations

A corporation that continues to inhabit
its corporate shell can change in many
respects. Although these changes may
have federal income tax consequences,
they do not result in the corporation being
treated for federal income tax purposes as
a new corporation or as transferring its
assets. Nor do these changes cause the
corporation's taxable year to close. Unlike
a partnership that might terminate for fed-
eral income tax purposes upon the transfer
of a given percentage of the partnership
interests, a corporation that continues to
inhabit a single corporate shell continues
to exist for federal tax purposes, indepen-
dent of the identity of its shareholders or
the composition of its assets.

The underlying premise of the 2004
Proposed Regulations was that, if a cor-
porate enterprise changes its corporate
shell while adhering to four proposed re-
quirements for a Mere Change, the result-
ing corporation should be treated as the
functional equivalent of the transferor cor-
poration.

##### A. Mere Change

As noted in section 1. of this Back-
ground, questions have arisen as to
whether other changes are compatible
with a Mere Change. In addressing these
questions, the 2004 Proposed Regulations
embraced the principles derived from the
language of section 368(a)(1)(F), the his-
toric practice of the IRS and courts in
applying that statutory definition, and
functional differences between F reorga-
nizations and other types of reorganiza-
tions.

Like other types of reorganizations, an
F reorganization generally involves, in
form, two corporations, one (a Transferor
Corporation) that transfers (or is deemed
to transfer) assets to the other (a Resulting

Corporation). However, the statute de-
scribes an F reorganization as being with
respect to "one corporation" and provides
for treatment that differs from that ac-
corded other types of reorganizations in
which assets are transferred from one cor-
poration to another (Asset Reorganiza-
tions). As noted in the preamble to the
2004 Proposed Regulations, “an F reorga-
nization is treated for most purposes of the
Code as if the reorganized corporation
were the same entity as the corporation in
existence before the reorganization."
Thus, the tax treatment accorded an F
reorganization is more consistent with that
of a single continuing corporation in that
(1) the taxable year of the Transferor Cor-
poration does not close and includes the
operations of the Resulting Corporation
for the remainder of the year, and (2) the
Resulting Corporation's losses may be
carried back to taxable years of the Trans-
feror Corporation.

Because an F reorganization must in-
volve "one corporation," and continuation
of the taxable year and loss carrybacks
from the Resulting Corporation to the
Transferor Corporation are allowed, the
statute cannot accommodate transactions
in which the Resulting Corporation has
preexisting activities or tax attributes. See
H. Rep. Conf. Rep't. 97-760, 97th Cong.,
2d Sess., at pp. 540-41 (1982). Accord-
ingly, the 2004 Proposed Regulations did
not allow for more than de minimis activ-
ities or very limited assets or tax attributes
in the Resulting Corporation from sources
other than the Transferor Corporation.
This is one of the principal distinctions
between F reorganizations and Asset Re-
organizations. The proposed rule was con-
sistent with the historical interpretation of
the statute in this regard.

Similarly, the requirement that there be
"one corporation" means that the status of
the Resulting Corporation as the successor
to the Transferor Corporation must be un-
ambiguous. Accordingly, and consistent
with the historical interpretation of the
statute, the 2004 Proposed Regulations re-
quired that, for a transaction to qualify as
a Mere Change, the Transferor Corpora-
tion be liquidated for tax purposes.

In Helvering v. Southwest Consoli-
dated Corp., 315 U.S. 194 (1942), the
Supreme Court noted that "a transaction
which shifts the ownership of the propri-

etary interest in a corporation is hardly a
'mere change in identity, form, or place of
incorporation' within the meaning of [the
F reorganization provision]." The 2004
Proposed Regulations also adopted this
principle by providing that an F reorgani-
zation could not be used as a vehicle to
introduce new owners into the corporate
enterprise.

Based on these principles, the 2004
Proposed Regulations would have im-
posed four requirements for an F reorga-
nization, with limited exceptions. First, all
the stock of the Resulting Corporation,
including stock issued before the transfer,
would have had to be issued in respect of
stock of the Transferor Corporation. Sec-
ond, a change in the ownership of the
corporation in the transaction would not
have been allowed, except a change that
had no effect other than that of a redemp-
tion of less than all the shares of the
corporation. Third, the Transferor Corpo-
ration would have had to completely liq-
uidate in the transaction. Fourth, the Re-
sulting Corporation would not have been
allowed to hold any property or possess
any tax attributes (including those speci-
fied in section 381(c)) immediately before
the transfer.

As discussed in the preamble to the
2004 Proposed Regulations, the first two
requirements reflected the Supreme
Court's holding in Helvering v. Southwest
Consolidated Corp., supra, that a transac-
tion cannot be a Mere Change if it shifts
the ownership of the proprietary interests
in a corporation. These requirements
would have prevented a transaction in-
volving the introduction of a new share-
holder or new equity capital into the cor-
poration from qualifying as an F
reorganization. Notwithstanding these re-
quirements, the first requirement would
have allowed the Resulting Corporation to
issue a nominal amount of stock not in
respect of stock of the Transferor Corpo-
ration to facilitate the organization of the
Resulting Corporation.

Under the second requirement (no
change in ownership), redemptions of less
than all the shares of the corporation
would have been allowed. The law was
not completely clear as to the effect of
redemptions on the qualification of a
transaction as an F reorganization. Some
authorities supported the proposition that

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changes in ownership resulting from re-
demptions were compatible with an F re-
organization. See Reef Corp. v. U.S., 368
F.2d 125 (5th Cir. 1966) (holding that a
redemption of 48 percent of the stock of a
corporation that occurred during a change
in place of incorporation did not cause the
transaction to fail to qualify as an F reor-
ganization, because the redemption was
functionally separate from the F reorgani-
zation even if coincident in time);
§ 1.301-1(1) (relating in part to the treat-
ment of a distribution with respect to
stock that is in substance separate from a
reincorporation); Rev. Rul. 66-284,
1966-2 CB 115 (concluding that a trans-
action could qualify as an F reorganiza-
tion even though there was less than a one
percent change in a corporation's share-
holders as a result of stock held by dis-
senting shareholders being redeemed in
the transaction); cf. Casco Products Corp.
v. Commissioner, 49 T.C. 32 (1967)
(reaching a comparable result without
finding an F reorganization where a nine
percent shareholder was redeemed in the
transaction).

The third requirement and the fourth
requirement implemented the statutory re-
quirement that an F reorganization in-
volve only one corporation. Although the
third requirement was that the Transferor
Corporation completely liquidate in the
transaction, a legal dissolution was not
required. This accommodation allowed
the value of the Transferor Corporation's
charter to be preserved. Further, the Pro-
posed Regulations would have allowed
the Transferor Corporation to retain a
nominal amount of assets to preserve its
legal existence.

The fourth requirement would have
precluded the Resulting Corporation from
holding any property or having any tax
attributes immediately before the transfer.
Nevertheless, the Proposed Regulations
would have allowed the Resulting Corpo-
ration to hold or to have held a nominal
amount of assets to facilitate its organiza-
tion or preserve its existence, and to have
tax attributes related to these assets. In
addition, the Proposed Regulations pro-
vided that the fourth requirement would
not be violated if, before the transfer, the
Resulting Corporation held the proceeds
of borrowings undertaken in connection
with the transaction.

##### B. Related Transactions

###### i. Series of Transactions Constituting a Mere Change

The Treasury Department and the IRS
concluded that the words "however ef-
fected" in the statutory definition of F
reorganization reflect a Congressional in-
tent to treat as an F reorganization a series
of transactions that together result in a
Mere Change. The 2004 Proposed Regu-
lations reflected this view by providing
that a series of related transactions that
together result in a Mere Change may
qualify as an F reorganization. This view
is consistent with the IRS's historical in-
terpretation of the statute.

##### ii. Mere Change Within a Larger Transaction

The Treasury Department and the
IRS also recognized that an F reorgani-
zation may be a step in a larger transac-
tion that effects more than a Mere
Change. For example, in Situation 1 of
Rev. Rul. 96-29, 1996-1 CB 50, the
IRS ruled that a reincorporation quali-
fied as an F reorganization even though
it was a step in a transaction in which
the reincorporated entity issued com-
mon stock in a public offering and re-
deemed preferred stock having a value
of 40 percent of the aggregate value of
its outstanding stock immediately prior
to the offering. In Situation 2 of the
same ruling, the IRS ruled that a rein-
corporation of a corporation in another
state qualified as an F reorganization
even though it was a step in a transac-
tion in which the reincorporated entity
acquired the business of another entity.

Consistent with Rev. Rul. 96-29, the
2004 Proposed Regulations provided that
events occurring before or after a transac-
tion or series of transactions that other-
wise constitutes a Mere Change and re-
lated thereto would not cause the Mere
Change to fail to qualify as an F reorga-
nization (the Related Events Rule). The
2004 Proposed Regulations further pro-
vided that the qualification of the Mere
Change as an F reorganization would not
alter the treatment of the other events.

The Related Events Rule would have
operated in tandem with the proposal,

which was made a final rule in the 2005
Regulations, that the continuity of interest
and continuity of business enterprise re-
quirements of § 1.368-1(d) and (e) that
are generally applicable to reorganizations
under section 368 do not apply to F reor-
ganizations. These rules, together, would
have focused the F reorganization analysis
on the discrete step or series of steps (to
use the words of many observers, those
steps occurring "in a bubble") that may
satisfy the four requirements for a Mere
Change, even if these steps constitute part
of a larger series of steps. In other words,
these rules rejected the application of step
transaction principles to integrate all the
steps of the overall plan or agreement to
accomplish the larger transaction and
thereby potentially prevent the transaction
from qualifying as an F reorganization.
See Rev. Rul. 75-456, 1975-2 CB 128 (F
reorganization of the acquiring corpora-
tion in a stock reorganization under sec-
tion 368(a)(1)(B) did not prevent that pro-
vision's "solely for voting stock"
requirement from being satisfied); see
also Rev. Rul. 79-250, 1979-2 CB 156
(F reorganization of issuing corporation
immediately after forward triangular
merger did not prevent the transaction
from satisfying requirements of section
368(a)(2)(D)).

##### C. Net Effect of the Proposed Regulations

Overall, the 2004 Proposed Regula-
tions would have found certain changes
occurring in connection with a change in
identity, form, or place of organization to
be compatible with the Mere Change re-
quirement. Some changes could have been
effected simultaneously with the transac-
tion or series of transactions otherwise
qualifying as an F reorganization because
these changes would not have violated
any of the four proposed requirements for
a Mere Change. Thus, for example, a cor-
poration could have bought, sold, or ex-
changed property, borrowed money, or re-
paid debt because the 2004 Proposed
Regulations would not have required an
identity of assets between the Transferor
Corporation and the Resulting Corpora-
tion. Other changes could not have been
effected simultaneously with the potential
F reorganization, but could have occurred

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before or after the F reorganization "in a
bubble," for example, the issuance of new
equity capital or the transfer of shares to
new shareholders.

##### D. Distributions

Prior to the issuance of the 2004 Pro-
posed Regulations, much commentary
had focused on whether distributions of
money or other property in F reorganiza-
tions were distributions to which section
356 applied, or whether sections 301 and
302, and related provisions, governed the
treatment of these distributions. The Trea-
sury Department and the IRS believed it
appropriate to treat these distributions as
transactions separate from the F reorgani-
zation, even if they occurred immediately
before or immediately after the F reorga-
nization, after some of the transactions
making up the F reorganization and before
other transactions making up the F reor-
ganization, or as part of the same plan as
the F reorganization. See, for example,
§ 1.301-1(1). Accordingly, the 2004 Pro-
posed Regulations provided that, if a
shareholder received money or other
property (including in exchange for its
shares) from the Transferor Corporation
or the Resulting Corporation in a transac-
tion that constituted an F reorganization,
the money or other property would be
treated as distributed by the Transferor
Corporation immediately before the trans-
action, and that section 356 would not
apply.

###### Explanation of Revisions

####### 1. Overview

After consideration of the comments
received with respect to the 2004 Pro-
posed Regulations and the 2005 Regula-
tions, the Treasury Department and the
IRS are publishing, in this Treasury deci-
sion, additional Final Regulations regard-
ing F reorganizations. The Final Regula-
tions generally adopt the provisions of the
2004 Proposed Regulations not previously
adopted in the 2005 Regulations, with
changes discussed in the remainder of this
preamble, and several clarifying, non-
substantive changes. The Final Regula-
tions also include rules regarding out-
bound F reorganizations by adopting,

without substantive change, the provi-
sions of the 1990 Proposed Regulations
relating to section 367(a) and making con-
forming revisions to other regulations.

Like the 2004 Proposed Regulations,
the Final Regulations are based on the
premise that it is appropriate to treat the
Resulting Corporation in an F reorganiza-
tion as the functional equivalent of the
Transferor Corporation and to give its cor-
porate enterprise roughly the same free-
dom of action as would be accorded a
corporation that remains within its origi-
nal corporate shell. The Final Regulations
provide that a transaction that involves an
actual or deemed transfer of property by a
Transferor Corporation to a Resulting
Corporation is a Mere Change that quali-
fies as an F reorganization if six require-
ments are satisfied (with certain excep-
tions). The Final Regulations provide that
a transaction or a series of related trans-
actions to be tested against the six require-
ments (a Potential F Reorganization) be-
gins when the Transferor Corporation
begins transferring (or is deemed to begin
transferring) its assets to the Resulting
Corporation, and ends when the Trans-
feror Corporation has distributed (or is
deemed to have distributed) the consider-
ation it receives from the Resulting Cor-
poration to its shareholders and has com-
pletely liquidated for federal income tax
purposes. The concept of a Potential F
Reorganization was added to the Final
Regulations to aid in determining which
steps in a multi-step transaction should be
considered when applying the six require-
ments to a potential mere change (that is,
which steps are "in the bubble").

In the context of determining whether a
Potential F Reorganization qualifies as a
Mere Change, deemed asset transfers in-
clude, but are not limited to, those trans-
fers treated as occurring as a result of an
entity classification election under para-
graph § 301.7701-3(c)(1)(i), as well as
transfers resulting from the application of
step transaction principles. One example
of such a transfer would be the deemed
asset transfer by the Transferor Corpora-
tion to the Resulting Corporation resulting
from a so-called "liquidation- reincorpo-
ration" transaction. See, for example, Da-
vant v. Commissioner, 366 F.2d 874 (5th
Cir. 1966); § 1.331-1(c) (liquidation-

reincorporation may be a tax-free reorga-
nization). Another example of such a
deemed asset transfer would include the
deemed transfer of the Transferor Corpo-
ration's assets to the Resulting Corpora-
tion in a so-called "drop-and-check"
transaction in which a newly formed Re-
sulting Corporation acquires the stock of a
Transferor Corporation from its share-
holders and, as part of the plan, the Trans-
feror Corporation liquidates into the Re-
sulting Corporation. See, for example,
steps (d) and (c) of Rev. Rul. 2015-10,
2015-21 IRB 973; Rev. Rul. 2004-83,
2004-2 CB 157; Rev. Rul. 67-274,
1967-2 CB 141.

Four of the six requirements are gen-
erally adopted from the 2004 Proposed
Regulations, and the fifth and sixth re-
quirements address comments received
with respect to the Proposed Regulations
regarding "overlap transactions" (for ex-
ample, transactions involving the Trans-
feror Corporation's transfer of its assets to
a potential successor corporation other
than the Resulting Corporation in a trans-
action that could also qualify for nonrec-
ognition treatment under a different pro-
vision of the Code). Viewed together,
these six requirements ensure that an F
reorganization involves only one continu-
ing corporation and is neither an acquisi-
tive transaction nor a divisive transaction.
Thus, an F reorganization does not include
a transaction that involves a shift in own-
ership of the enterprise, an introduction of
assets in exchange for equity (other than
that raised by the Transferor Corporation
prior to the F reorganization), or a division
of assets or tax attributes of a Transferor
Corporation between or among the Re-
sulting Corporation and other acquiring
corporations. An F reorganization also
does not include a transaction that leads to
multiple potential acquiring corporations
having competing claims to the Transferor
Corporation's tax attributes under section
381.

Certain exceptions, similar to those of
the 2004 Proposed Regulations, apply to
these six requirements. Three of these ex-
ceptions allow de minimis departures
from the six requirements for purposes
unrelated to federal income taxation.

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####### 2. F Reorganization Requirements and Certain Exceptions

######## A. Resulting Corporation Stock Issuances and Identity of Stock Ownership

As in the 2004 Proposed Regulations,
the first and the second requirements of
the Final Regulations reflect the Supreme
Court's holding in Helvering v. Southwest
Consolidated Corp, supra, that a transac-
tion that shifts the ownership of the pro-
prietary interests in a corporation cannot
qualify as a Mere Change. Thus, the Final
Regulations provide that a transaction that
involves the introduction of a new share-
holder or new equity capital into the cor-
poration "in the bubble" does not qualify
as an F reorganization.

Consistent with the 2004 Proposed
Regulations, the first requirement in the
Final Regulations is that immediately
after the Potential F Reorganization, all
the stock of the Resulting Corporation
must have been distributed (or deemed
distributed) in exchange for stock of the
Transferor Corporation in the Potential
F Reorganization. The 2004 Proposed
Regulations focused on the issuance of
the stock of the Resulting Corporation
in respect of stock of the Transferor
Corporation. The Treasury and the IRS
believe, however, that a focus on the
distribution of the stock of the Resulting
Corporation better matches the transac-
tions that occur (or are deemed to occur)
in reorganizations.

Also consistent with the 2004 Pro-
posed Regulations, the second require-
ment is that, subject to certain exceptions,
the same person or persons own all the
stock of the Transferor Corporation at the
beginning of the Potential F Reorganiza-
tion and all of the stock of the Resulting
Corporation at the end of the Potential F
Reorganization, in identical proportions.

Notwithstanding these requirements
and also consistent with the Proposed
Regulations, the Final Regulations allow
the Resulting Corporation to issue a de
minimis amount of stock not in respect of
stock of the Transferor Corporation, to
facilitate the organization or maintenance
of the Resulting Corporation. This rule is
designed to allow, for example, reincor-
poration in a jurisdiction that requires

minimum capitalization, two or more
shareholders, or ownership of shares by
directors. It is also intended to allow a
transfer of assets to certain pre-existing
entities, for reasons explained further in
section 2.B. of this Explanation of Revi-
sions.

In addition, the Final Regulations al-
low changes of ownership that result from
either (i) a holder of stock in the Trans-
feror Corporation exchanging that stock
for stock of equivalent value in the Re-
sulting Corporation having terms different
from those of the stock in the Transferor
Corporation or (ii) receiving a distribution
of money or other property from either the
Transferor Corporation or the Resulting
Corporation, whether or not in redemption
of stock of the Transferor Corporation or
the Resulting Corporation. In other words,
the corporation involved in a Mere
Change may also recapitalize, redeem its
stock, or make distributions to its share-
holders, without causing the Potential F
Reorganization to fail to qualify as an F
reorganization. These exceptions reflect
the determination of the Treasury Depart-
ment and the IRS that allowing certain
transactions to occur contemporaneously
with an F reorganization is appropriate so
long as one corporation could effect the
transaction without undergoing an F reor-
ganization. These exceptions also reflect
the case law, discussed in section 3.A. of
the Background, holding that certain
transactions qualify as F reorganizations
even if some shares are redeemed in the
transaction, and rulings by the IRS that a
recapitalization may happen at the same
time as an F reorganization. See, for ex-
ample, Rev. Rul. 2003-19, 2003-1 CB
468, and Rev. Rul. 2003-48, 2003-1 CB
863 (both providing that certain demutu-
alization transactions may involve both E
Reorganizations and F reorganizations).

##### B. Resulting Corporation's Assets or Attributes and Liquidation of Transferor Corporation

As in the 2004 Proposed Regulations,
the third requirement (limiting the assets
and attributes of the Resulting Corpora-
tion immediately before the transaction)
and the fourth requirement (requiring the
liquidation of the Transferor Corporation)
under the Final Regulations reflect the

statutory mandate that an F reorganization
involve only one corporation. Although
the Final Regulations generally require
the Resulting Corporation not to hold any
property or have any tax attributes imme-
diately before the Potential F Reorganiza-
tion, as in the 2004 Proposed Regulations,
the Resulting Corporation is allowed to
hold a de minimis amount of assets to
facilitate its organization or preserve its
existence (and to have tax attributes re-
lated to these assets), and the Resulting
Corporation is allowed to hold proceeds
of borrowings undertaken in connection
with the Potential F Reorganization.

A commenter responding to the 2004
Proposed Regulations stated that the Final
Regulations should allow the Resulting
Corporation to hold, in addition to the
proceeds of borrowings, cash proceeds of
stock issuances before the Mere Change.
The Treasury Department and the IRS do
not believe that the Resulting Corporation
should be allowed to issue more than a de
minimis amount of stock before a trans-
action constituting a Mere Change be-
cause that would allow a substantial in-
vestment of new capital and/or new
shareholders, or an acquisition of assets
from more than one corporation. This rule
does not, however, preclude the Trans-
feror Corporation from issuing new stock
before a Potential F Reorganization con-
stituting an F reorganization. Nor does it
preclude the Resulting Corporation from
issuing new stock after the Potential F
Reorganization.

Under the fourth requirement in the
Final Regulations, the Transferor Corpo-
ration must completely liquidate in the
Potential F Reorganization for federal in-
come tax purposes. Nevertheless, as in the
2004 Proposed Regulations, the Trans-
feror Corporation is not required to legally
dissolve and is allowed to retain a de
minimis amount of assets for the sole pur-
pose of preserving its legal existence.

C. One Section 381(a) Acquiring
Corporation, One Section 381(a)
Transferor Corporation

The fifth requirement under the Final
Regulations is that immediately after the
Potential F Reorganization, no corpora-
tion other than the Resulting Corporation
may hold property that was held by the

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Transferor Corporation immediately be-
fore the Potential F Reorganization, if
such other corporation would, as a result,
succeed to and take into account the items
of the transferor corporation described in
section 381(c). Thus, a transaction that
divides the property or tax attributes of a
Transferor Corporation between or among
acquiring corporations, or that leads to
potential competing claims to such tax
attributes, will not qualify as a Mere
Change.

The sixth requirement under the Final
Regulations is that immediately after the
Potential F Reorganization, the Resulting
Corporation may not hold property ac-
quired from a corporation other than the
Transferor Corporation if the Resulting
Corporation would, as a result, succeed to
and take into account the items of such
other corporation described in section
381(c). Thus, a transaction that involves
simultaneous acquisitions of property and
tax attributes from multiple transferor cor-
porations (such as the transaction de-
scribed in Rev. Rul. 58-422, 1958-2 CB
145) will not qualify as a Mere Change.

These requirements address a comment
received with respect to the second re-
quirement of the 2004 Proposed Regula-
tions that there not be a change in the
ownership of the corporation in the trans-
action, except a change that has no effect
other than a redemption of less than all the
shares of the corporation. The comment
stated that allowing a corporation to dis-
tribute property in redemption of less than
all of its shares could result in satisfying
both the requirements for an F reorgani-
zation with respect to one transferee cor-
poration and the requirements of another
nonrecognition provision with respect to a
different transferee corporation. The result
would be uncertainty as to which corpo-
ration should succeed to the Transferor
Corporation's tax attributes.

For example, assume that corporation
P owns all of the stock of corporation T,
and T operates two separate businesses,
Business 1 (worth $297) and Business 2
(worth $3). Further assume that T merges
into newly formed corporation R, and
that, pursuant to the merger agreement, P
receives Business 1 and all of R's stock in
exchange for surrendering all of the T
stock, and R receives Business 2. Under
the 2004 Proposed Regulations, the trans-

action could have qualified as an F reor-
ganization, with T as the Transferor Cor-
poration and R as the Resulting
Corporation, because the only change in
ownership is a redemption of less than all
of the T shares. However, because T
transfers 99 percent of its historic business
assets (Business 1) to P in exchange for all
of T's stock, the transaction might also
qualify as a complete liquidation under
sections 332 and 337 or an upstream re-
organization under section 368(a)(1)(C)
of T into P. This overlap - with two po-
tential acquiring corporations - would
present unintended complexities. For ex-
ample, as discussed above, there would be
uncertainty as to which corporation
should succeed to T's tax attributes.

Accordingly, notwithstanding the over-
all flexibility provided with respect to
transactions occurring contemporaneously
with a Mere Change, the Final Regula-
tions provide that a Mere Change cannot
accommodate transactions that occur at
the same time as the Potential F Reorga-
nization if those other transactions could
result in a corporation other than the Re-
sulting Corporation acquiring the tax at-
tributes of the Transferor Corporation.

The same commenter requested clari-
fication of the treatment of combinations
of several corporations into a single,
newly-created corporation. Consistent
with the statutory language of section
368(a)(1)(F), the Treasury Department
and the IRS believe that a Mere Change
involves only one Transferor Corporation
and one Resulting Corporation. Thus, the
Final Regulations provide that only one
Transferor Corporation can transfer prop-
erty to the Resulting Corporation in the
Potential F Reorganization. If more than
one corporation transfers assets to the Re-
sulting Corporation in a Potential F Reor-
ganization, none of the transfers would
constitute an F reorganization.

##### 3. Series of Transactions

In some cases, business or legal con-
siderations may require extra steps to
complete a transaction that is intended to
qualify as a Mere Change. As discussed in
section 3.B.i. of the Background, the
Treasury Department and the IRS con-
cluded that the words "however effected"
in the statutory definition of F reorganiza-

tion reflect a Congressional intent to treat
a series of transactions that together result
in a Mere Change as an F reorganization,
even if the transfer (or deemed transfer) of
property from the Transferor Corporation
to the Resulting Corporation occurs indi-
rectly. The Final Regulations confirm this
conclusion by providing that a Potential F
Reorganization consisting of a series of
related transactions that together result in
a Mere Change may qualify as an F reor-
ganization, whether or not certain steps in
the series, viewed in isolation, might, for
example, be treated as a redemption under
section 304(a), as a complete liquidation
under section 331 or section 332, or as a
transfer of property under section 351. For
example, the first step in an F reorganiza-
tion of a corporation owned by individual
shareholders could be a dissolution of the
Transferor Corporation, so long as this
step is followed by a transfer of all the
assets of the Transferor Corporation to a
Resulting Corporation. However, see
§ 1.368-2(k) for completed reorganiza-
tions that will not be recharacterized as a
Mere Change as a result of one or more
subsequent transfers of assets or stock,
such as where a Transferor Corporation
transfers all of its assets to its parent cor-
poration in liquidation, followed by the
parent corporation's retransfer of those as-
sets to a new corporation. See also Rev.
Rul. 69-617, 1969-2 CB 57 (an upstream
merger followed by a contribution of all
the target assets to a new subsidiary cor-
poration is a reorganization under sections
368(a)(1)(A) and 368(a)(2)(C)).

##### 4. Mere Change within Larger Transaction

As discussed in section 3.B.ii. of the
Background, the Treasury Department
and the IRS recognized that an F reorga-
nization may be a step, or a series of steps,
before, within, or after other transactions
that effect more than a Mere Change, even
if the Resulting Corporation has only a
transitory existence following the Mere
Change. In some cases an F reorganiza-
tion sets the stage for later transactions by
alleviating non-tax impediments to a
transfer of assets. In other cases, prior
transactions may tailor the assets and
shareholders of the Transferor Corpora-
tion before the commencement of the F

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reorganization. Although an F reorganiza-
tion may facilitate another transaction that
is part of the same plan, the Treasury
Department and the IRS have concluded
that step transaction principles generally
should not recharacterize F reorganiza-
tions because F reorganizations involve
only one corporation and do not resemble
sales of assets. From a federal income tax
perspective, F reorganizations are gener-
ally neutral, involving no change in own-
ership or assets, no end to the taxable
year, and inheritance of the tax attributes
described in section 381(c) without a lim-
itation on the carryback of losses. See, for
example, Rev. Rul. 96-29 (discussed in
section 3.B.ii. of the Background);
§ 1.381(b)-1(a)(2).

The Final Regulations adopt the Re-
lated Events Rule of the 2004 Proposed
Regulations, which provided that related
events preceding or following the Poten-
tial F Reorganization that constitutes a
Mere Change generally would not cause
that Potential F Reorganization to fail to
qualify as an F reorganization. Notwith-
standing the Related Events Rule, in the
cross-border context, related events pre-
ceding or following an F reorganization
may be relevant to the tax consequences
under certain international provisions that
apply to F reorganizations. For example,
such events may be relevant for purposes
of applying certain rules under section
7874 and for purposes of determining
whether stock of the Resulting Corpora-
tion should be treated as stock of a con-
trolled foreign corporation for purposes of
section 367(b). See, for example, section
2.03(b)(iv), Example 2 in Notice 2014-
52, 2014-52 IRB 712; Rev. Rul. 83-23,
1983-1 CB 82.

The Final Regulations also adopt the
provision of the 2004 Proposed Regula-
tions that the qualification of a Potential F
Reorganization as an F reorganization
would not alter the treatment of other re-
lated transactions. For example, if an F
reorganization is part of a plan that in-
cludes a subsequent merger involving the
Resulting Corporation, the qualification of
a Potential F Reorganization as an F reor-
ganization will not alter the tax conse-
quences of the subsequent merger.

5\. Transactions Qualifying under Other
Provisions of Section 368(a)(1)

A comment to the Proposed Regula-
tions stated that, in some cases, an asset
transfer that would constitute a step in an
F reorganization is also a necessary step
for characterizing a larger transaction as a
nonrecognition transaction that would not
constitute an F reorganization. For exam-
ple, assume that corporation P acquires all
of the stock of unrelated corporation T in
exchange for consideration consisting of
$50 cash and P voting stock with $50
value (without making an election under
section 338), and, immediately thereafter
and as part of the same plan, T is merged
into corporation S, a newly-formed corpo-
ration wholly owned by P. Viewed in iso-
lation, the merger of T into S appears to
constitute a Mere Change. Provided the
requirements for Asset Reorganization
treatment are otherwise satisfied, how-
ever, the step transaction doctrine is ap-
plied to integrate the steps and treat the
transaction as a statutory merger of T into
S in which S acquires T's assets in ex-
change for $50 cash, $50 of P voting stock
and assumption of T's liabilities, and T
distributes the cash and P stock to its
shareholders. This merger qualifies as a
reorganization under section 368(a)(1)(A)
by reason of section 368(a)(2)(D), and P's
momentary ownership of T stock is disre-
garded. See Situation 2 of Rev. Rul. 2001-
46, 2001-2 CB 321 (same). The stock of S
is not treated as issued for the assets of T;
the historic shareholders of T are replaced
by P as the shareholder of the resulting
corporation (S); and the transaction is not
a Mere Change.

To clarify this and similar situations,
the Treasury Department and the IRS
have determined that, if the Potential F
Reorganization or a step thereof involving
a transfer of property from the Transferor
Corporation to the Resulting Corporation
is also a reorganization or part of a reor-
ganization in which a corporation in con-
trol (within the meaning of section 368(c))
of the Resulting Corporation is a party to
the reorganization (within the meaning of
section 368(b)), the Potential F Reorgani-
zation is not a Mere Change and does not
qualify as an F reorganization. This
rule will apply to transactions qualifying
as reorganizations (i) under section

368(a)(1)(C) by reason of the parentheti-
cal language therein, (ii) under section
368(a)(1)(A) by reason of section
368(a)(2)(D), and (iii) under sections
368(a)(1)(A) or (C) by reason of section
368(a)(2)(C).

The IRS has long taken the position
that, if a Transferor Corporation's transfer
of property qualifies as a step in both an F
reorganization and another type of reorga-
nization in which the Resulting Corpora-
tion is the acquiring corporation, the trans-
action qualifies for the benefits accorded
to an F reorganization. See, for example,
Rev. Rul. 57-276, 1957-1 CB 126 (sec-
tion 381(b) applies such that the parts of
the Transferor Corporation's taxable year
before and after an F reorganization con-
stitute a single taxable year of the Acquir-
ing Corporation, notwithstanding that the
transaction also qualifies as another type
of reorganization under section
368(a)(1)); Rev. Rul. 79-289, 1979-2 CB
145 (section 357(c) does not apply to an F
reorganization even if the transaction also
qualifies as another type of reorganization
to which section 357(c) applies);
§ 1.381(b)-1(a)(2) (providing for rules ap-
plicable to F reorganizations, regardless of
whether such reorganizations also qualify
as another type of reorganization).

To avoid confusion in the application
of the reorganization provisions, the Trea-
sury Department and the IRS have de-
cided that, except as provided earlier in
this section 5. of the Explanation of Re-
visions, if a Potential F Reorganization
qualifies as a reorganization under section
368(a)(1)(F) and would also qualify as
a reorganization under section
368(a)(1)(A), 368(a)(1)(C), or
368(a)(1)(D), then for all federal income
tax purposes the Potential F Reorganiza-
tion qualifies only as a reorganization un-
der section 368(a)(1)(F). This rule does
not apply to a reorganization within the
meaning of sections 368(a)(1)(E) (see
Rev. Rul. 2003-19, 2003-1 CB 468, and
Rev. Rul. 2003-48, 2003-1 CB 863 (pro-
viding that certain demutualization trans-
actions may involve both E Reorganiza-
tions and F reorganizations)) or
368(a)(1)(G) (see section 368(a)(3)(C)).

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##### 6. Distributions

As described in section 3.D. of the
Background, the 2004 Proposed Regula-
tions provided that, if a shareholder re-
ceived money or other property (including
in exchange for its shares) from the Trans-
feror Corporation or the Resulting Corpo-
ration in a transaction that constituted an F
reorganization, the money or other prop-
erty would be treated as distributed by the
Transferor Corporation immediately be-
fore the transaction, not as additional con-
sideration under section 356(a). The pre-
amble to the 2004 Proposed Regulations
indicated that this treatment would also be
appropriate for distributions of money or
other property in E reorganizations.

Although the Treasury Department and
the IRS considered whether a distribution
occurring during a Potential F Reorgani-
zation should prevent it from qualifying as
an F reorganization, the Treasury Depart-
ment and the IRS determined to allow
flexibility for such distributions. Never-
theless, unlike other types of reorganiza-
tions, which generally involve substantial
changes in economic position, F reorgani-
zations are mere changes in form. Accord-
ingly, the Treasury Department and the
IRS have concluded that any concurrent
distribution should be treated as a trans-
action separate from the F reorganization.
See § 1.301-1(1); see also Bazley v. Com-
missioner, 331 U.S. 737 (1947) (distribu-
tion in the context of a purported E reor-
ganization treated as a dividend).

An F reorganization is a Mere Change
involving only one continuing corporation
and is neither an acquisitive transaction nor
a divisive transaction. From a federal in-
come tax perspective, F reorganizations
generally are neutral, involving no change
in ownership or assets, no end to the taxable
year, and inheritance of the tax attributes
described in section 381(c). A distribution
that occurs at the same time as a Mere
Change is, in substance, a distribution from
one continuing corporation and is function-
ally separate from the Mere Change. The
Treasury Department and the IRS believe
that a distribution from one continuing cor-
poration should not be treated the same as
an exchange of money or other property for
stock of a target corporation in an acquisi-
tive reorganization. Instead, the distribution
should be treated as a separate transaction

occurring at the same time. Although the
2004 Proposed Regulations would have
treated a distribution as occurring immedi-
ately before the transaction qualifying as an
F reorganization, the Treasury Department
and the IRS believe it is sufficient to treat the
distribution as a separate transaction that oc-
curs at the same time as the F reorganization.

###### 7. Entities Treated as Corporations for Federal Tax Purposes

As explained in this preamble, the first
requirement of the Final Regulations is
that all of the stock of the Resulting Cor-
poration be distributed in exchange for
stock of the Transferor Corporation. Cer-
tain entities may be treated as corpora-
tions for federal tax purposes even though
they do not have owners that could be
treated as shareholders for federal tax pur-
poses to whom the profits of the corpora-
tion would inure (for example, some char-
itable organizations described in section
501(c)(3)). Nevertheless, these entities
may be able to engage in corporate reor-
ganizations. Thus, no inference should be
drawn from the use of the terms "stock" or
"shareholders" in these Final Regulations
with respect to the ability of such entities
to engage in reorganizations under section
368(a)(1)(F).

##### 8. Employer Identification Numbers

The Treasury Department and the IRS
are studying how to assign (or reassign)
employer identification numbers (EINs) to
taxpayers following an F reorganization,
including in cases in which the Transferor
Corporation remains in existence as a dis-
regarded entity, and comments on this is-
sue are welcome.

#### Effective Date

These final regulations are effective for
transactions occurring on or after Septem-
ber 21, 2015.

#### Effect on Other Documents

The following publications are obso-
lete as of September 21, 2015:

Rev. Rul. 57-276, 1957-1 CB 126;
Rev. Rul. 58-422, 1958-2 CB 145; Rev.
Rul. 66-284, 1966-2 CB 115; Rev. Rul.
79-250, 1979-2 CB 156; Rev. Rul. 79-

289, 1979-2 CB 145; and Rev. Rul. 96-
29, 1996-1 CB 50; are obsoleted. Rev.
Rul. 87-27, 1987-1 CB 134; and Rev.
Rul. 88-25, 1988-1 CB 116; are obsoleted
in part (with respect to the determination of
whether a transaction qualifies as a reorgani-
zation under section 368(a)(1)(F)).

##### 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 determined
that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does not
apply to these regulations, and because
these regulations do not impose a collection
of information on small entities, the Regu-
latory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Pursuant to section 7805(f)
of the Code, the proposed regulations pre-
ceding these final regulations were submit-
ted to the Chief Counsel for Advocacy of
the Small Business Administration for com-
ment on their impact on small businesses,
and no comments were received.

##### Drafting Information

The principal author of these final reg-
ulations is Douglas C. Bates of the Office
of Associate Chief Counsel (Corporate).
However, other personnel from the Trea-
sury Department and the IRS participated
in their development.

##### Availability of IRS Documents

IRS revenue rulings, revenue procedures,
and notices cited in this Treasury decision
are made available by the Superintendent of
Documents, U.S. Government Printing Of-
fice, Washington, DC 20402.
* * * * *

##### Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is
amended as follows:

##### PART 1 - INCOME TAXES

Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *

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## § 1.269B-1 [Amended]

Par. 2. Section 1.269B-1 is amended
by removing the language in paragraph (c)
"1.367(a)-1T(e), (f)" and adding
"1.367(a)-1(e), (f)" in its place.

Par. 3. Section 1.367(a)-1 is amended by:
1\. Revising paragraph (d)(4) through
(d)(5).

2\. Adding paragraphs (e) and (f).

3\. Revising paragraphs (g)(1) through
(g)(3).

4\. Adding two sentences at the end of
paragraph (g)(4).

The additions and revisions read as fol-
lows:

§ 1.367(a)-1 Transfers to foreign

corporations subject to section 367(a):
In general.

* * * * *

(d) * * *

(4) through (5) [Reserved]. For further
guidance, see § 1.367(a)-1T(d)(4) through (5).

(e) Close of taxable year in certain
section 368(a)(1)(F) reorganizations. If a
domestic corporation is the transferor cor-
poration in a reorganization described in
section 368(a)(1)(F) after March 30, 1987,
in which the acquiring corporation is a for-
eign corporation, then the taxable year of the
transferor corporation shall end with the
close of the date of the transfer and the
taxable year of the acquiring corporation
shall end with the close of the date on which
the transferor's taxable year would have
ended but for the occurrence of the transfer.
With regard to the consequences of the clos-
ing of the taxable year, see section 381 and
the regulations thereunder.

(f) Exchanges under sections 354(a)
and 361(a) in certain section 368(a)(1)(F)
reorganizations-(1) Rule. In every reor-
ganization under section 368(a)(1)(F),
where the transferor corporation is a do-
mestic corporation, and the acquiring cor-
poration is a foreign corporation, there is
considered to exist-

(i) A transfer of assets by the transferor
corporation to the acquiring corporation
under section 361(a) in exchange for stock
(or stock and securities) of the acquiring
corporation and the assumption by the ac-
quiring corporation of the transferor cor-
poration's liabilities;

(ii) A distribution of the stock (or stock
and securities) of the acquiring corpora-
tion by the transferor corporation to the
shareholders (or shareholders and security
holders) of the transferor corporation; and

(iii) An exchange by the transferor cor-
poration's shareholders (or shareholders and
security holders) of their stock (or stock and
securities) of the transferor corporation for
stock (or stock and securities) of the acquir-
ing corporation under section 354(a).

(2) Rule applies regardless of whether
a continuance under applicable law. For
purposes of paragraph (f)(1) of this sec-
tion, it shall be immaterial that the appli-
cable foreign or domestic law treats the
acquiring corporation as a continuance of
the transferor corporation.

(g)(1) through (3) [Reserved]. For fur-
ther guidance, see § 1.367(a)-1T(g)(1)
through (3).

(4) * * * The rules in paragraph (e) of this
section apply to transactions occurring on or
after March 31, 1987. The rules in paragraph
(f) of this section apply to transactions occur-
ring on or after January 1, 1985.

Par. 4. Section 1.367(a)-1T is amended
by revising paragraphs (e) and (f) to read
as follows:

§ 1.367(a)-IT Transfers to foreign
corporations subject to section 367(a):
In general (temporary).

* * * * *

(e) [Reserved]. For further guidance,
see § 1.367(a)-1(e).

(f) [Reserved]. For further guidance,
see § 1.367(a)-1(f).

* * * * *

Par. 5. Section 1.368-2 is amended by
adding paragraph (m) to read as follows:

§ 1.368-2 Definition of terms.

* * * * *

(m) Qualification as a reorganization
under section 368(a)(1)(F)-(1) Mere
change. To qualify as a reorganization
under section 368(a)(1)(F), a transaction
must result in a mere change in identity,
form, or place of organization of one cor-
poration, however effected (a mere
change). A mere change can consist of a
transaction that involves an actual or
deemed transfer of property from one cor-
poration (a transferor corporation) to one

other corporation (a resulting corpora-
tion). Such a transaction is a mere change
and qualifies as a reorganization under
section 368(a)(1)(F) only if all the re-
quirements set forth in paragraphs
(m)(1)(i) through (vi) of this section are
satisfied. For purposes of this paragraph
(m), a transaction or a series of related
transactions that can be tested against the
requirements set forth in paragraphs
(m)(1)(i) through (vi) of this section (a
potential F reorganization) begins when
the transferor corporation begins transfer-
ring (or is deemed to begin transferring)
its assets, directly or indirectly, to the re-
sulting corporation, and it ends when the
transferor corporation has distributed (or
is deemed to have distributed) to its share-
holders the consideration it receives (or is
deemed to receive) from the resulting cor-
poration and has completely liquidated for
federal income tax purposes. For purposes
of this paragraph (m), deemed transfers
include, for example, those provided in
§ 301.7701-3(g)(1)(iv) of this chapter
(when an entity disregarded as separate
from its owner elects under paragraph
§ 301.7701-3(c)(1)(i) of this chapter to be
classified as an association, the owner of
the entity is deemed to transfer all of the
assets and liabilities of the entity to the
association in exchange for stock of the
association). Deemed transfers also in-
clude those resulting from the application
of step transaction principles. For exam-
ple, step transaction principles may disre-
gard a transitory holding of property by an
individual after a liquidation of the trans-
feror corporation and before a subsequent
transfer of the transferor corporation's
property to the resulting corporation. Step
transaction principles may also treat a
contribution of all the stock of the trans-
feror corporation to the resulting corpora-
tion, followed by a liquidation (or deemed
liquidation) of the transferor corporation,
as a deemed transfer of the transferor cor-
poration's property to the resulting corpo-
ration, followed by a distribution of stock
of the resulting corporation in complete
liquidation of the transferor corporation.

(i) Resulting corporation stock distrib-
uted in exchange for transferor corpora-
tion stock. Immediately after the potential
F reorganization, all the stock of the re-
sulting corporation, including any stock of
the resulting corporation issued before the

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potential F reorganization, must have been
distributed (or deemed distributed) in ex-
change for stock of the transferor corpo-
ration in the potential F reorganization.
However, for purposes of this paragraph
(m)(1)(i) and paragraph (m)(1)(ii) of this
section, a de minimis amount of stock
issued by the resulting corporation other
than in respect of stock of the transferor
corporation to facilitate the organization
of the resulting corporation or maintain its
legal existence is disregarded.

(ii) Identity of stock ownership. The
same person or persons must own all of
the stock of the transferor corporation,
determined immediately before the poten-
tial F reorganization, and of the resulting
corporation, determined immediately after
the potential F reorganization, in identical
proportions. However, this requirement is
not violated if one or more holders of
stock in the transferor corporation ex-
change stock in the transferor corporation
for stock of equivalent value in the result-
ing corporation, but having different terms
from those of the stock in the transferor
corporation, or receive a distribution of
money or other property from either the
transferor corporation or the resulting cor-
poration, whether or not in exchange for
stock in the transferor corporation or the
resulting corporation.

(iii) Prior assets or attributes of result-
ing corporation. The resulting corporation
may not hold any property or have any tax
attributes (including those specified in
section 381(c)) immediately before the
potential F reorganization. However, this
requirement is not violated if the resulting
corporation holds or has held a de minimis
amount of assets to facilitate its organiza-
tion or maintain its legal existence, and
has tax attributes related to holding those
assets, or holds the proceeds of borrow-
ings undertaken in connection with the
potential F reorganization.

(iv) Liquidation of transferor corpora-
tion. The transferor corporation must
completely liquidate, for federal income
tax purposes, in the potential F reorgani-
zation. However, the transferor corpora-
tion is not required to dissolve under ap-
plicable law and may retain a de minimis
amount of assets for the sole purpose of
preserving its legal existence.

(v) Resulting corporation is the only
acquiring corporation. Immediately after

the potential F reorganization, no corpora-
tion other than the resulting corporation may
hold property that was held by the transferor
corporation immediately before the poten-
tial F reorganization, if such other corpora-
tion would, as a result, succeed to and take
into account the items of the transferor cor-
poration described in section 381(c).

(vi) Transferor corporation is the only
acquired corporation. Immediately after
the potential F reorganization, the result-
ing corporation may not hold property ac-
quired from a corporation other than the
transferor corporation if the resulting cor-
poration would, as a result, succeed to and
take into account the items of such other
corporation described in section 381(c).

(2) Non-application of continuity of in-
terest and continuity of business enter-
prise requirements. A continuity of the
business enterprise and a continuity of
interest are not required for a potential F
reorganization to qualify as a reorganiza-
tion under section 368(a)(1)(F). See
§ 1.368-1(b).

(3) Related transactions-(i) Series of
transactions. A potential F reorganization
consisting of a series of related transactions
that together result in a mere change of one
corporation may qualify as a reorganization
under section 368(a)(1)(F), whether or not
certain steps in the series, viewed in isola-
tion, could be subject to other Code provi-
sions, such as sections 304(a), 331, 332, or
351. However, see paragraph (k) of this
section for transactions that qualify as reor-
ganizations under section 368(a) and will
not be recharacterized as a mere change as a
result of one or more subsequent transfers of
assets or stock.

(ii) Mere change within a larger trans-
action. A potential F reorganization that
qualifies as a reorganization under section
368(a)(1)(F) may occur before, within, or
after other transactions that effect more than
a mere change, even if the resulting corpo-
ration has only transitory existence. Related
events that precede or follow the potential F
reorganization generally will not cause that
potential F reorganization to fail to qualify
as a reorganization under section 368(a)(1)(F).
Qualification of a potential F reorganization as
a reorganization under section 368(a)(1)(F)
will not alter the character of other transac-
tions for federal income tax purposes, and
step transaction principles may be applied to
other transactions without regard to whether

certain steps qualify as a reorganization or
part of a reorganization under section
368(a)(1)(F).

(iii) Distributions treated as separate
transactions. As provided in paragraph
(m)(1)(ii) of this section, a potential F
reorganization may qualify as a mere
change even though a holder of stock in
the transferor corporation receives a dis-
tribution of money or other property from
either the transferor corporation or the re-
sulting corporation. If a shareholder re-
ceives money or other property (including
in exchange for its shares) from the trans-
feror corporation or the resulting corpora-
tion in a potential F reorganization that
qualifies as a reorganization under section
368(a)(1)(F), then the receipt of money or
other property (including any exchanged
for shares) is treated as an unrelated, sep-
arate transaction from the reorganization,
whether or not connected in a formal
sense. See § 1.301-1(1).

(iv) Transactions also qualifying under
other provisions of section 368(a)(1). In
certain cases, a potential F reorganization
would (but for this paragraph (m)(3)(iv))
qualify both as a reorganization under sec-
tion 368(a)(1)(F) and as a reorganization
or part of a reorganization under another
provision of section 368(a)(1). The fol-
lowing rules determine which of these
overlapping qualifications applies.

(A) If the potential F reorganization or
a step thereof qualifies as a reorganization
or part of a reorganization under another
provision of section 368(a)(1), and if a
corporation in control (within the meaning
of section 368(c)) of the resulting corpo-
ration is a party to such other reorganiza-
tion (within the meaning of section
368(b)), the potential F reorganization
will not qualify as a reorganization under
section 368(a)(1)(F).

(B) Except as provided in paragraph
(m)(3)(iv)(A) of this section, if, but for
this paragraph (m)(3)(iv)(B), the potential
F reorganization would qualify as a reor-
ganization under both section 368(a)(1)(F)
and one or more of sections 368(a)(1)(A),
368(a)(1)(C), or 368(a)(1)(D), then for all
federal income tax purposes the potential F
reorganization will qualify as a reorganiza-
tion only under section 368(a)(1)(F).

(4) Examples. The following examples
illustrate the application of this paragraph
(m). Unless the facts otherwise indicate,

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A, B, and C are domestic individuals; P,
S, T, X, Y, and Z (and similar designa-
tions) are domestic corporations; each
transaction is entered into for a valid busi-
ness purpose; all persons and transactions
are unrelated; and all other relevant facts
are set forth in the examples.

Example 1. Cash contribution and redemption -
no mere change. C owns all of the stock of X, a State
A corporation. The net value of X's assets and liabili-
ties is $1,000,000. Y, a State B corporation, seeks to
acquire the assets of X for cash. To effect the acquisi-
tion, Y and X enter into an agreement under which Y
will contribute $1,000,000 to Z, a newly formed cor-
poration of which Y is the sole shareholder, in ex-
change for Z stock and X will merge into Z. In the
merger, C surrenders all of the X stock and receives the
$1,000,000 Y contributed to Z. C receives no Z stock in
the transaction. After the merger, Y holds all of the Z
stock, and Z holds all of the assets and liabilities pre-
viously held by X. Z stock is not distributed to the
shareholders of X in exchange for their stock in X as
required by paragraph (m)(1)(i) of this section, and the
transaction results in a change in the ownership of X
that does not result from an exchange or distribution
described in paragraph (m)(1)(ii) of this section. There-
fore, the merger of X into Z is not a mere change of X
and does not qualify as a reorganization under section
368(a)(1)(F).

Example 2. Cash redemption - mere change. A
owns 75%, and B owns 25%, of the stock of X, a
State A corporation. The management of X deter-
mines that it would be in the best interest of X to
reorganize under the laws of State B. Accordingly, X
forms Y, a State B corporation, and X and Y enter
into an agreement under which X will merge into Y.
A does not wish to own stock in Y. In the merger, A
surrenders A's X stock and receives cash, and B
surrenders all of B's X stock and receives all the
stock of Y. The change in ownership caused by A's
surrender of X stock results from a distribution and
exchange described in paragraph (m)(1)(ii) of this
section. Therefore, the merger of X into Y is a mere
change of X and qualifies as a reorganization under
section 368(a)(1)(F). Under paragraph (m)(3)(iii) of
this section, A's surrender of X stock for cash is
treated as a transaction, separate from the reorgani-
zation, to which section 302(a) applies.

Example 3. Pre-transaction de minimis stock is-
suance - mere change - other provisions of section
368(a)(1). P owns all of the stock of S, a Country A
corporation. The management of P determines that it
would be in the best interest of S to change its place
of incorporation to Country B. Under Country B law,
a corporation must have at least two shareholders to
enjoy limited liability. P is advised by its Country B
advisors that the new corporation should issue 1% of
its stock to a shareholder that is not P's nominee to
assure satisfaction of the two-shareholder require-
ment. As part of an integrated plan, C, an officer of
S, organizes Y, a Country B corporation with 1,000
shares of common stock authorized, and contributes
cash to Y in exchange for ten of the common shares.
S then merges into Y under the laws of Country A
and Country B. Pursuant to the plan of merger, P
surrenders its shares of S stock and receives 990
shares of Y common stock. The ten shares of Y stock

issued to C not in respect of the S stock are de
minimis and are used to facilitate the organization of
Y within the meaning of paragraph (m)(1)(i) of this
section. Therefore, the issuance of this stock to a
new shareholder does not prevent the merger of S
into Y from qualifying as a mere change of S.
Accordingly, the merger is a reorganization under
section 368(a)(1)(F). Without regard to the merger's
qualification under section 368(a)(1)(F), the merger
would also qualify as a reorganization under both
section 368(a)(1)(A) and section 368(a)(1)(D). Un-
der paragraph (m)(3)(iv)(B) of this section, if a po-
tential F reorganization qualifies as a reorganization
under section 368(a)(1)(F), and would also qualify
under one or more of sections 368(a)(1)(A) or
368(a)(1)(D), the potential F reorganization qualifies
only as a reorganization under 368(a)(1)(F), and neither
section 368(a)(1)(A) nor section 368(a)(1)(D) will apply.

Example 4. Pre-transaction assets, attributes -
no mere change. A owns all of the stock of P, and P
owns all of the stock of S, which is engaged in a
manufacturing business. P has owned the stock of S
for many years. P owns no assets other than the stock
of S. A decides to eliminate the holding company
structure by merging P into S. Because it operates a
manufacturing business, the potential resulting cor-
poration, S, holds property and has tax attributes
immediately before the potential F reorganization.
Therefore, under paragraph (m)(1)(iii) of this sec-
tion, the merger of P into S is not a mere change of
P and does not qualify as a reorganization under
section 368(a)(1)(F). The same result would occur
under paragraph (m)(1)(iii) of this section if, instead
of P merging into S, S merged into P, because P, the
potential resulting corporation, holds property (the
stock of S) and has tax attributes immediately before
the potential F reorganization.

Example 5. Series of related transactions - mere
change. P owns all of the stock of S1, a State A
corporation. The management of P determines that it
would be in the best interest of S1 to change its place
of incorporation to State B. Accordingly, under an
integrated plan, P forms S2, a new State B corpora-
tion; P contributes the S1 stock to S2; and S1 merges
into S2 under the laws of State A and State B. Under
paragraph (m)(3)(i) of this section, a series of trans-
actions that together result in a mere change of one
corporation may qualify as a reorganization under
section 368(a)(1)(F). The contribution of S1 stock to
S2 and the merger of S1 into S2 together constitute
a mere change of S1. Therefore, the potential F
reorganization qualifies as a reorganization under
section 368(a)(1)(F). Without regard to its qualifica-
tion under section 368(a)(1)(F), the potential F reor-
ganization would also qualify as a reorganization
under both section 368(a)(1)(A) and section
368(a)(1)(D). Under paragraph (m)(3)(iv)(B) of this
section, if a potential F reorganization qualifies as a
reorganization under section 368(a)(1)(F) and would
also qualify under one or more of sections
368(a)(1)(A) or 368(a)(1)(D), it qualifies only as a
reorganization under 368(a)(1)(F), and neither sec-
tion 368(a)(1)(A) nor section 368(a)(1)(D) will ap-
ply. The result would be the same with respect to
qualification under section 368(a)(1)(F) if, instead of
merging into S2, S1 completely liquidates or is
deemed to liquidate by reason of a conversion into

an entity disregarded as separate from its owner
under § 301.7701-3(g)(1)(iii) of this chapter.

Example 6. Post-transaction stock sale - mere
change. P owns all of the stock of S1, a State A
corporation. The management of P determines that it
would be in the best interest of S1 to change its place
of incorporation to State B. Accordingly, P forms S2,
a new State B corporation. S1 then merges into S2
under the laws of State A and State B. Immediately
thereafter, and as part of the same plan, P sells all of
its stock in S2 to an unrelated party. Without regard
to P's sale of S2 stock, the merger of S1 into S2 is a
potential F reorganization that qualifies as a mere
change of S1 within the meaning of paragraph
(m)(1) of this section. Under paragraph (m)(3)(ii) of
this section, related events that occur before or after
a potential F reorganization that qualifies as a mere
change generally do not cause that potential F reor-
ganization to fail to qualify as a reorganization under
section 368(a)(1)(F). Therefore, P's sale of the S2
stock is disregarded in determining whether the
merger of S1 into S2 is a mere change of S1. Ac-
cordingly, the merger of S1 into S2 qualifies as a
reorganization under section 368(a)(1)(F). The result
would be the same if, instead of the S2 stock being
sold by P, S2 merges into a previously unrelated
corporation and terminates its separate existence.

Example 7. Post-transaction redemption - mere
change. A owns all of the stock of T. Each of T, P,
and S is a State A corporation engaged in a manu-
facturing business. The following transactions occur
pursuant to a single plan. First, T merges into S with
A receiving solely stock in P. Second, P changes its
state of incorporation to State B by merging into
newly incorporated New P under the laws of State A
and State B. Third, New P redeems all the New P
stock issued to A in respect of A's P stock (initially
issued to A in respect of A's T stock) for cash.
Without regard to the other steps, the merger of P
into New P is a potential F reorganization that qual-
ifies as a reorganization under section 368(a)(1)(F).
Under paragraph (m)(3)(ii) of this section, related
events that occur before or after a potential F reor-
ganization that qualifies as a mere change generally
do not prevent that potential F reorganization from
qualifying as a reorganization under section
368(a)(1)(F). Therefore, the merger of P into New P
qualifies as a reorganization under section
368(a)(1)(F). Under paragraph (m)(3)(ii) of this sec-
tion, the qualification of the merger of P into New P
as a reorganization under section 368(a)(1)(F) does
not alter the tax treatment of the merger of T into S.
Because the P shares received by A in respect of the
T shares (exchanged for New P shares in the mere
change of P into New P) are redeemed for cash
pursuant to the plan, the merger of T into S does not
satisfy the continuity of interest requirement of
§ 1.368-1(e) and therefore does not qualify as a
reorganization under section 368(a).

Example 8. Series of related transactions - mere
change. P owns all of the stock of S, a State A
corporation. The management of P determines that it
would be in the best interest of S to change its form
from a State A corporation to a State A limited
partnership but to continue to be treated as a corpo-
ration for federal tax purposes. Accordingly, P con-
tributes 1% of the S stock to newly formed LLC, a
limited liability company, in exchange for all of the

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membership interests in LLC. P is the sole member
of LLC. Under § 301.7701-3 of this chapter, LLC is
disregarded as an entity separate from its owner, P.
Then, under a State A statute, S converts to a State A
limited partnership. In the conversion, P's interest as
a 99% shareholder of S is converted into a 99%
limited partner interest, and LLC's interest as a 1%
shareholder of S is converted into a 1% general
partner interest. S also elects, under § 301.7701-3(c)
of this chapter, to be classified as a corporation for
federal income tax purposes, effective on the same day
as the conversion. Under paragraph (m)(3)(i) of this
section, the conversion of S from a State A corporation
to a State A limited partnership, together with the
election to treat S as a corporation for federal tax
purposes, results in a mere change of S and qualifies as
a reorganization under section 368(a)(1)(F).

Example 9. Other acquiring corporation - no
mere change. P owns 80%, and A owns 20%, of the
stock of S. A and the management of P determine
that it would be in the best interest of S to completely
liquidate while A continues to operate part of the
business of S in corporate form. Accordingly, S
distributes 80% of its assets to P and 20% of its
assets to A; S dissolves; and A contributes the assets
it receives from S to newly incorporated New S in
exchange for all of the stock of New S. S's distri-
bution of 80% of its property to P as part of the
complete liquidation of S meets the requirements of
section 332. Thus, section 381(a)(1) applies to P's
acquisition of 80% of the property held by S imme-
diately before the transaction. Under paragraph
(m)(1)(v) of this section, the potential F reorganiza-
tion in which 20% of the property held by S imme-
diately before the transaction is transferred to New S
cannot be a mere change of S, because section 381(a)
applies to P's acquisition of property held by S
immediately before the potential F reorganization.
Accordingly, sections 331 and 336 apply to A's
acquisition of property from S and S's distribution of
property to A, and section 351 applies to A's con-
tribution of that property to New S.

Example 10. Other acquiring corporation - no
mere change. P owns all of the stock of S1. The
management of P determines that it would be in the
best interest of S1 to merge S1 into P. Accordingly,
pursuant to a state merger statute, S1 merges into P.
Immediately afterward and as part of the same plan,
P contributes 50% of the former assets of S1 to
newly incorporated S2 in exchange for all of the
stock of S2. The transaction does not qualify as a
complete liquidation of S1 under section 332 (be-
cause of the reincorporation of some of S1's assets)
but does qualify as a reorganization under section
368(a)(1)(A) by reason of section 368(a)(2)(C) and
paragraph (k) of this section. Under paragraph
(m)(1)(v) of this section, the potential F reorganiza-
tion in which some of the former assets of S1 are
transferred (in form) first to P, and then to S2, is not
a mere change of S1, because section 381(a) applies
to P's acquisition of property held by S1 immedi-
ately before the potential F reorganization. Further-
more, under paragraph (m)(3)(iv)(A) of this section,
P, the corporation in control of S2 within the mean-
ing of section 368(c), is a party to the reorganization
within the meaning of section 368(b). Thus, the
indirect transfer of property from S1 to S2 does not
qualify under section 368(a)(1)(F).

Example 11. Other acquiring corporation - mere
change. P owns all of the stock of S1. SI's only asset
is all of the equity interest in LLC2, a domestic
limited liability company. Under § 301.7701-3 of
this chapter, LLC2 is disregarded as an entity sepa-
rate from its owner, S1. Pursuant to an integrated
plan to undergo a reorganization under 368(a)(1)(F),
S1 and LLC2 undergo the following two state law
conversions. First, under state law LLC2 converts
into S2, a corporation. Second, under state law S1
converts into LLC1, a domestic limited liability
company. Under § 301.7701-3 of this chapter, LLC1
is disregarded as an entity separate from its owner, P.
As a result of the two conversions, S1 is deemed to
transfer its assets to S2 in exchange for all of the
stock in S2 and then distribute the S2 stock to P in
complete liquidation of S1. The two conversions,
viewed as a potential F reorganization, constitute a
mere change of S1, and that potential F reorganiza-
tion qualifies as a reorganization under section
368(a)(1)(F). The result would be the same if, instead
of converting into S2 pursuant to state law, LLC2
elected under § 301.7701-3(c) to change its classifica-
tion for federal tax purposes and be treated as an
association taxable as a corporation, provided the ef-
fective date of the election (and its resulting deemed
transactions) occurs before the conversion of S1.

Example 12. Other acquiring corporation - no
mere change. The facts are the same facts as in
Example 11, except that S1 converts into LLC1 prior
to the conversion of LLC2 into S2. As a result of
these conversions, S1 is deemed to distribute all of
its assets to P in exchange for all of P's S1 stock, and
P is deemed to transfer all of those assets to S2 in
exchange for all of the stock in S2. The transaction
does not qualify as a complete liquidation of S1
under section 332 (because of the reincorporation of
S1's assets), but does qualify as a reorganization
under section 368(a)(1)(C) by reason of section
368(a)(2)(C) and paragraph (k) of this section. Under
paragraph (m)(1)(v) of this section, the potential F
reorganization in which the former assets of S1 are
deemed transferred, first by S1 to P, and then by P to
S2, is not a mere change of S1 because section
381(a) applies to P's acquisition of property held by
S1 immediately before the potential F reorganiza-
tion. Furthermore, the corporation in control of S2,
within the meaning of section 368(c), is a party to the
reorganization within the meaning of section 368(b).
Thus, the indirect transfer of property from S1 to S2
does not qualify under section 368(a)(1)(F).

Example 13. Series of related transactions - no
mere change. X owns all of the stock of T. P ac-
quires all of the stock of T in exchange for consid-
eration consisting of $50 cash and P voting stock
with $50 value. No election is made under section
338. Immediately thereafter and as part of the same
plan, P forms S as a wholly-owned subsidiary, and T
is merged into S. Viewed in isolation as a potential
F reorganization, the merger of T into S appears to
constitute a mere change of T. However, the acqui-
sition of the T stock by P and the merger of T into S,
viewed together, qualify as a reorganization under
section 368(a)(1)(A) by reason of section
368(a)(2)(D). The step transaction doctrine is ap-
plied treat the transaction as a statutory merger of T
into S in exchange for $50 cash and $50 of P's
voting stock (and S's assumption of T's liabilities),

P's momentary ownership of T stock is disregarded.
Under paragraph (m)(3)(iv)(A) of this section, P, the
corporation in control of S, is a party to the reorga-
nization within the meaning of section 368(b). Thus,
the transfer of property from T to S does not qualify
under section 368(a)(1)(F).

Example 14. Multiple transferor corporations -
no mere change. P owns all the stock of S1 and S2.
The management of P determines it would be in the
best interest of S1 and S2 to operate as a single
corporation. P forms S3 and, under applicable cor-
porate law,S1 and S2 simultaneously merge into S3.
Immediately after the merger, P owns all the stock of
S3. Each of the mergers can be tested as a potential
F reorganization. However, immediately after the
simultaneous mergers. the resulting corporation, S3,
holds property acquired from a corporation other
than the transferor corporation, and section 381(a)
would apply to the acquisition of such property.
Therefore, under paragraph (m)(1)(vi) of this sec-
tion, neither potential F reorganization is a mere
change, and neither merger into S3 qualifies as a
reorganization under section 386(a)(1)(F). The result
would be different if the mergers were not simulta-
neous. If S1 completed its merger into S3 before S2
began its merger into S3, the merger of S1 into S3
would qualify as a reorganization under section
368(a)(1)(F), but the merger of S2 into S3 would not
so qualify (although it would qualify as a reorgani-
zation under sections 368(a)(1)(A) and 368(a)(1)(D)).

(5) Effective/Applicability Date. This
paragraph (m) applies to transactions oc-
curring on or after September 21, 2015.

## § 1.381(b)-1 [Amended]

Par. 6. Section 1.381(b)-1 is amended
by removing the language in paragraph
(a)(1) "1.367(a)-1T(e)" and adding
"1.367(a)-1(e)" in its place.

John M. Dalrymple
Deputy Commissioner for
Services and Enforcement.

Approved: September 9, 2015

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

(Filed by the Office of the Federal Register on September
18, 2015, 8:45 a.m., and published in the issue of the Federal
Register for September 21, 2015, 80 F.R. 56904)

# Section 42 .- Low-Income Housing Credit

Guidance is provided to state housing credit
agencies of qualified states that request an allocation
of unused housing credit carryover under section
42(h)(3)(D) of the Internal Revenue Code. See Rev.
Proc. 2015-49.

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# Part III. Administrative, Procedural, and Miscellaneous

Extension of FATCA
Transitional Rules for Gross
Proceeds, Foreign Passthru
Payments, Limited
Branches and Limited FFIs,
and Sponsored Entities;
Modification to
Grandfathered Obligation
Rule with Respect to
Collateral; and Reporting of
2014 Information under a
Model 1 IGA

Notice 2015-66

## I. PURPOSE

This notice announces that the Depart-
ment of the Treasury (Treasury) and the
Internal Revenue Service (IRS) intend to
amend the regulations under chapter 4
(sections 1471-1474) to extend the period
of time that certain transitional rules will
apply. Specifically, the amendments will
extend: (1) the date for when withholding
on gross proceeds and foreign passthru
payments will begin; (2) the use of limited
branches and limited foreign financial in-
stitutions (limited FFIs); and (3) the dead-
line for a sponsoring entity to register its
sponsored entities and redocument such
entities with withholding agents. In addi-
tion, in order to reduce compliance bur-
dens on withholding agents that hold col-
lateral as a secured party, this notice
announces that Treasury and the IRS in-
tend to amend the regulations under chap-
ter 4 to modify the rules for grandfathered
obligations with respect to collateral.

The transitional rules provided in this
notice are intended to facilitate an orderly
transition for withholding agents and FFIs
regarding Foreign Account Tax Compli-
ance Act (FATCA) compliance and re-
spond to comments regarding how the
phase-out of transitional rules may affect
information reporting and withholding
systems. In light of these comments and
the successful engagement of Treasury
and partner jurisdictions to conclude in-
tergovernmental agreements to implement
FATCA (IGAs), this notice provides ad-
ditional time for withholding agents and

FFIs to modify their systems in stages as
necessary to address the phase-out of the
above-mentioned transitional rules consis-
tent with the information reporting and
compliance objectives of FATCA.

Finally, this notice also provides informa-
tion on the exchange of information by Model
1 IGA jurisdictions with respect to 2014.

# II. BACKGROUND

A. The Final and Temporary Chapter 4
Regulations

## 1. Withholdable Payments

On March 18, 2010, the Hiring Incen-
tives to Restore Employment Act of 2010,
Pub. L. 111-147 (H.R. 2847), added chap-
ter 4 to Subtitle A of the Internal Revenue
Code (sections 1471-1474 (commonly
known as "FATCA")). Chapter 4 gener-
ally requires withholding agents to with-
hold 30 percent on certain payments to a
foreign financial institution (FFI) unless
the FFI has entered into an agreement
(FFI agreement) to obtain status as a par-
ticipating FFI and to, among other things,
report certain information with respect to
U.S. accounts. On January 17, 2013, Trea-
sury and the IRS published final regula-
tions under chapter 4 (T.D. 9610, 78 Fed.
Reg. 5873). On February 20, 2014, Trea-
sury and the IRS published temporary reg-
ulations under chapter 4 (T.D. 9657, 79
Fed. Reg. 12,812) that clarify and modify
certain provisions of the final regulations
(the temporary and final regulations, to-
gether, the chapter 4 regulations).

The amounts subject to withholding un-
der chapter 4 are "withholdable payments."
Under § 1.1473-1(a), the term "withhold-
able payment" generally means any pay-
ment of U.S. source fixed or determinable
annual or periodical (FDAP) income, and
for sales or other dispositions occurring after
December 31, 2016, any gross proceeds
from the sale or other disposition of any
property of a type that can produce interest
or dividends that are U.S. source FDAP
income. Withholding on withholdable pay-
ments of U.S. source FDAP income gener-
ally began on July 1, 2014. The transitional
rule that provides for gross proceeds with-
holding after December 31, 2016, allows
FFIs and withholding agents to implement

FATCA in stages to minimize burdens con-
sistent with ensuring that the information
reporting objectives of FATCA are met and
maintained.

Several transitional rules exist with re-
spect to withholding under chapter 4 on
withholdable payments of U.S. source
FDAP income.

Under a transitional rule in § 1.1473-
1(a)(4)(vi), a payment made on or before
December 31, 2016, with respect to an "off-
shore obligation" is not treated as a with-
holdable payment if the payment is made by
a person that is not acting as an intermediary
(including a qualified securities lender and
excluding any insurance broker with respect
to premiums), withholding foreign partner-
ship, or withholding foreign trust with re-
spect to the payment.

Under § 1.1471-2(b), a withholdable
payment does not include a payment made
under a "grandfathered obligation." A
grandfathered obligation includes any obli-
gation, as defined in § 1.1471-2(b)(2)(ii),
outstanding on July 1, 2014. Under
§ 1.1471-2(b)(2)(i)(A)(3), a grandfa-
thered obligation also includes an agree-
ment requiring a secured party to make a
payment with respect to collateral posted
to secure a grandfathered obligation. If
collateral secures both grandfathered and
non-grandfathered obligations, the collat-
eral posted to secure the grandfathered
obligations must be determined by allo-
cating, pro rata by value, the collateral to
all outstanding obligations secured by the
collateral (the pro rata rule).

Furthermore, under a transitional rule
in § 1.1473-1(a)(4)(vii), a payment made
on or before December 31, 2016, by a
secured party, or to a secured party other
than a nonparticipating FFI, with respect
to collateral securing one or more trans-
actions under a collateral arrangement is
not treated as a withholdable payment,
provided that only a commercially
reasonable amount of collateral is held by
the secured party (or by a third party for
the benefit of the secured party) as part
of the collateral arrangement.

## 2. Foreign Passthru Payments

Chapter 4 provides that, in order for an
FFI to obtain the status of a participating

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FFI, it must agree to all the requirements of
being a participating FFI, including with-
holding on passthru payments made to re-
calcitrant account holders and nonparticipat-
ing FFIs. See section 1471(b)(1)(D)(i). A
passthru payment is defined in the regula-
tions to mean a withholdable payment and
any foreign passthru payment. The chapter 4
regulations reserve on the definition of the
term "foreign passthru payment." See
§ 1.1471-5(h)(2). A transitional rule in
§ 1.1471-4(b)(4) provides that a participat-
ing FFI is not required to withhold tax on a
foreign passthru payment made to a recalci-
trant account holder or a nonparticipating
FFI before the later of January 1, 2017, or
the date of publication in the Federal Reg-
ister of final regulations defining foreign
passthru payment.

## 3. Limited Branches and Limited FFIs

In order for an FFI that is a member of
an expanded affiliated group (EAG) to
obtain the status of a participating FFI or
registered deemed-compliant FFI, § 1.1471-
4(a)(4) requires that each FFI that is a
member of the EAG have the chapter 4
status of a participating FFI, deemed-
compliant FFI, or exempt beneficial
owner. The final regulations include two
transitional rules to provide limited relief
to FFIs with branches or affiliates that are
located in jurisdictions whose laws pro-
hibit such branches or affiliates from com-
plying with an FFI agreement. These tran-
sitional rules are intended to provide
jurisdictions additional time to enter into
an IGA with the United States or to mod-
ify their domestic laws to allow FFIs not
covered by an IGA to be able to comply
with the terms of the FFI agreement.

Under the transitional rule for a "lim-
ited branch," an FFI that otherwise satis-
fies the requirements for participating FFI
status can become a participating FFI, not-
withstanding that one or more branches
cannot satisfy the requirements of a par-
ticipating FFI, provided that all noncom-
pliant branches satisfy the conditions for
limited branch status and the FFI meets
the other requirements described in
§ 1.1471-4(e)(2)(i). Under the transi-
tional rule for a "limited FFI," an FFI can
become either a participating FFI or a
registered deemed-compliant FFI, not-
withstanding that one or more other FFIs

in its EAG cannot comply with all of the
requirements of a participating FFI, pro-
vided that any such noncompliant FFIs
meet the definition of a "limited FFI" un-
der § 1.1471-4(e)(3). Under §§ 1.1471-
4(e)(2)(v) and (3)(iv), limited branch and
limited FFI statuses will be unavailable
after December 31, 2015.

## 4. Sponsored Entity GIINs

Under section 1471, a withholding
agent is not generally required to withhold
on payments to an FFI that is deemed to
comply with the requirements of section
1471(b) (a deemed-compliant FFI). The
chapter 4 regulations provide that a regis-
tered deemed-compliant FFI includes an
FFI that satisfies the requirements of
§ 1.1471-5(f)(1)(i)(F)(1) or (2) to qualify
as either a sponsored investment entity or
a sponsored controlled foreign corpora-
tion (a sponsored registered deemed-
compliant FFI). A sponsoring entity of a
sponsored registered deemed-compliant
FFI must agree to perform, on behalf of
the FFI, all due diligence, withholding,
reporting, and other requirements that the
FFI would have been required to perform
if it were a participating FFI. A sponsor-
ing entity must register with the IRS as a
sponsoring entity and must also register
the sponsored registered deemed-
compliant FFI by the later of January 1,
2016, or the date that the FFI identifies
itself as qualifying as a registered
deemed-compliant FFI under § 1.1471-
5(f)(1)(i)(F)(1) or (2). The chapter 4 reg-
ulations include a transitional due dili-
gence rule providing that for payments
prior to January 1, 2016, a withholding
agent may rely on a withholding certifi-
cate provided by a sponsored registered
deemed-compliant FFI that includes only
the global intermediary identification
number (GIIN) of the FFI's sponsoring
entity. See § 1.1471-3(e)(3)(iv)(B) (cross-
referenced in § 1.1471-3(d)(4)(i)) for ad-
ditional due diligence requirements that
apply in such cases.

Under section IV(B)(3)(c) of Annex II
of the Model 1 IGA, if the sponsoring
entity of a sponsored investment entity or
sponsored controlled foreign corporation
identifies any U.S. reportable accounts,
the sponsoring entity must register the
sponsored entity with the IRS on or before

the later of December 31, 2015, and the
date that is 90 days after such account is
first identified. Under section IV(B)(3)(c)
of Annex II of the Model 2 IGA, the
sponsoring entity must register the spon-
sored entity prior to December 31, 2015.

Under section 1472, a withholding
agent generally is required to withhold on
payments to a nonfinancial foreign entity
(NFFE) unless the NFFE provides the
withholding agent with certain informa-
tion identifying the NFFE's substantial
U.S. owners (or a certification that the
NFFE does not have any such owners),
and the withholding agent reports such
information to the IRS. The final regula-
tions except withholding agents from
withholding or reporting under section
1472 with respect to payments benefi-
cially owned by entities qualifying as ex-
cepted NFFEs. The temporary regulations
issued under chapter 4 add direct report-
ing NFFEs as a class of excepted NFFEs.
A direct reporting NFFE is an NFFE that
elects to report information about its sub-
stantial U.S. owners directly to the IRS
(rather than to its withholding agent) and
that meets the requirements of § 1.1472-
1(c)(3). A direct reporting NFFE must
register with the IRS and obtain a GIIN.

A direct reporting NFFE may elect to be
treated as a sponsored direct reporting
NFFE if another entity, other than a nonpar-
ticipating FFI, agrees to act as its sponsoring
entity for performing all of the due dili-
gence, reporting, and other requirements
that the NFFE would have been required to
perform as a direct reporting NFFE. A spon-
soring entity of a sponsored direct reporting
NFFE must register with the IRS as a spon-
soring entity and must register the NFFE.
The temporary regulations include a transi-
tional due diligence rule for payments prior
to January 1, 2016, that allows a withhold-
ing agent to rely on a withholding certificate
provided by a sponsored direct reporting
NFFE that includes only the GIIN of the
NFFE's sponsoring entity. See § 1.1471-
3(e)(3)(iv)(B) for additional due diligence
requirements that apply in such cases.

## B. IGAS

During 2012, Treasury released the
Model 1 IGA and the Model 2 IGA to
facilitate the implementation of FATCA
and to address foreign legal impediments
that otherwise would limit an FFI's ability

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to comply with FATCA. On April 2,
2014, Treasury and the IRS published An-
nouncement 2014-17 (2014-18 I.R.B.
1001), providing that jurisdictions treated
as having an IGA in effect would include
jurisdictions that, before July 1, 2014,
reached agreements in substance with the
United States on the terms of an IGA and
consented to be included on the list of
such jurisdictions, in addition to jurisdic-
tions that had already signed IGAs. An
FFI that is resident in, or organized under
the laws of, a jurisdiction that is treated as
having an IGA in effect is permitted to
register on the FATCA registration web-
site and to certify to a withholding agent
its status as an FFI covered by an IGA. On
December 1, 2014, Treasury and the IRS
published Announcement 2014-38
(2014-51 I.R.B. 951), providing that cer-
tain jurisdictions that reached an agree-
ment in substance after June 30, 2014, and
before November 30, 2014, also would be
treated as having an IGA in effect. Fur-
thermore, Announcement 2014-38 pro-
vided that jurisdictions that are treated as
if they have an IGA in effect would retain
such status, provided that the jurisdiction
continues to demonstrate firm resolve to
sign the IGA as soon as possible.

As of the publication of this notice, 112
jurisdictions are treated as having an IGA
in effect. A complete list can be found on
Treasury's website, available at http://
www.treasury.gov/resource-center/tax-
policy/treaties/Pages/FATCA.aspx.

### 1. Treatment of Limited Branches and Limited FFIs under IGAs

Article 4(5) of the Model 1 IGA and
Article 3(5) of the Model 2 IGA generally
provide that, in order for an FFI resident
in or organized under the laws of the
partner jurisdiction to be compliant with
the IGA and be treated as a participating
FFI, deemed-compliant FFI, or exempt
beneficial owner, as appropriate, all of the
FFI's related entities or branches must be
FATCA-compliant. However, the Model
1 and Model 2 IGAs also provide that if a
resident FFI has a related entity or branch
that operates in a jurisdiction that prevents
such entity or branch from complying
with FATCA, or the FFI has a related
entity or branch that is treated as a non-
participating FFI solely due to the expira-

tion of the transitional rule for limited
FFIs and limited branches under the chap-
ter 4 regulations, such FFI shall continue
to be in compliance with the IGA and be
treated as a participating FFI, deemed-
compliant FFI, or exempt beneficial owner,
as appropriate, if the conditions described in
subparagraphs (a) through (c) of Article 4(5)
of the Model 1 IGA or Article 3(5) of the
Model 2 IGA are satisfied.

### 2. Exchange of 2014 Information under a Model 1 IGA

There are two versions of the Model 1
IGA. A Model 1A IGA provides for re-
ciprocal information exchange between
the United States and the partner jurisdic-
tion. The obligation to exchange informa-
tion generally begins after the IGA enters
into force under Article 10(1) of the IGA
and the competent authorities provide no-
tification that each is satisfied that the
other jurisdiction has in place the neces-
sary safeguards to ensure that the infor-
mation received will remain confidential
and be used solely for tax purposes and
the infrastructure necessary for an effec-
tive exchange relationship. See Articles
3(8) and 3(9) of the Model 1A IGA.

A Model 1B IGA provides for infor-
mation to be exchanged only by the part-
ner jurisdiction. Under a Model 1B IGA,
the obligation for a partner jurisdiction to
exchange information with the United
States begins when the IGA enters into
force under Article 10(1) or Article 12(1)
(as applicable) of the IGA.

Once an IGA has entered into force and
any relevant notifications described above
for the Model 1A IGA have been pro-
vided, Article 2 of both versions of the
Model 1 IGA requires the partner jurisdic-
tion to obtain and exchange specified in-
formation with respect to each U.S. re-
portable account. Under Article 3(5) of
the Model 1 IGA, the partner jurisdiction
is obligated to obtain and exchange infor-
mation within nine months after the end of
the calendar year to which the information
relates. In the case of information required
to be obtained and exchanged with respect
to 2014 pursuant to a Model 1 IGA that is
in force, the 2014 information should be
exchanged by the partner jurisdiction by
September 30, 2015.

### III. EXTENSION OF DATES FOR WHEN WITHHOLDING BEGINS FOR PAYMENTS OF GROSS PROCEEDS AND PASSTHRU PAYMENTS

Many U.S. and foreign financial insti-
tutions, foreign governments, Treasury,
the IRS, and other stakeholders have de-
voted resources to implementing FATCA
withholding on withholdable payments,
which (subject to certain exceptions) be-
gan on July 1, 2014, as well as for the first
U.S. account reporting under FATCA,
which was due for certain FFIs starting in
March 2015. At the same time, 112 juris-
dictions are now treated as if they have an
IGA in effect, which allows for the infor-
mation reporting goals of FATCA to be
satisfied for FFIs covered by such IGAs.
In order to continue to facilitate an orderly
phase-in of FATCA withholding, Trea-
sury and the IRS intend to amend the
chapter 4 regulations under section 1473
to extend the start date of gross proceeds
withholding by providing that the defini-
tion of the term withholdable payment
means any payment of U.S. source FDAP
income, and for sales or other dispositions
occurring after December 31, 2018, any
gross proceeds from the sale or other dis-
position of any property of a type that can
produce interest or dividends that are U.S.
source FDAP income. Additionally, Trea-
sury and the IRS intend to amend the
regulations under section 1471 to extend
the start date of withholding on foreign
passthru payments to provide that a par-
ticipating FFI is not required to withhold
tax on a foreign passthru payment made to
a recalcitrant account holder or a nonpar-
ticipating FFI before the later of January
1, 2019, or the date of publication in the
Federal Register of final regulations defin-
ing the term foreign passthru payment.

#### IV. EXTENSION OF LIMITED BRANCH AND LIMITED FFI STATUSES

Currently, 112 jurisdictions are treated
as if they have an IGA in effect, which
highlights the overwhelming support of
FATCA partner jurisdictions in imple-
menting the information reporting goals
of FATCA. FFIs and other stakeholders
continue to express strong support for
IGAs as a way to facilitate effective and

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efficient FATCA implementation while
avoiding conflicts with local law.

While Treasury remains open to enter-
ing into IGA discussions based on the
published models, there may be jurisdic-
tions that have not been able or willing to
agree to an IGA and that continue to im-
pose legal restrictions that prevent FFIs
resident or organized there, or branches
located there, from complying with the
terms of an FFI agreement. If an FFI that
is not covered by an IGA has a branch
located in, or an FFI affiliate subject to the
laws of, a jurisdiction that prohibits com-
pliance with the terms of an FFI agree-
ment, that FFI will no longer be able to
obtain or maintain status as a participating
or deemed-compliant FFI once limited
branch and limited FFI status expire.

To provide FFIs and other stakeholders
additional time to determine whether to
continue operating in jurisdictions where
limited branches or limited FFIs exist,
Treasury and the IRS intend to amend the
regulations under section 1471 to provide
that the availability of limited branch and
limited FFI statuses will terminate on Jan-
uary 1, 2017. A limited FFI or limited
branch that becomes able to comply with
the terms of the FFI agreement or be-
comes a participating FFI or deemed-
compliant FFI pursuant to an applicable
IGA should amend its registration to re-
flect its modified status. FFIs that continue
to operate after December 31, 2016, in
jurisdictions where they cannot comply
with the terms of an FFI agreement due to
local law will jeopardize the chapter 4
status of participating FFIs and registered
deemed-compliant FFIs (other than FFIs
covered by an IGA) in the group.
Branches that continue to operate after
December 31, 2016, in jurisdictions where
they cannot comply with the terms of an
FFI agreement due to local law will jeop-
ardize the participating FFI status of the
FFI of which the branch is part (as well as
jeopardize any branches of the FFI that
have participating FFI status under the
FFI agreement), subject to the terms of an
applicable IGA.

After December 31, 2015, all limited
FFI and limited branch registrations will
be placed in "registration incomplete" sta-
tus on their online FATCA account. Lim-
ited FFIs and limited branches that seek to
continue such status during the 2016 cal-

endar year will be required to edit and
resubmit their registrations after Decem-
ber 31, 2015, on the FATCA registration
website.

### V. EXTENSION OF TIME TO REGISTER SPONSORED ENTITIES AND EXTENSION OF RELIANCE ON SPONSORING ENTITY GIINS

As previewed in Notice 2013-69
(2013-46 I.R.B. 503), the IRS is devel-
oping a streamlined process for sponsor-
ing entities to register their sponsored en-
tities on the FATCA registration website.
The IRS anticipates that this registration
process will be available in the coming
months and intends to update the FATCA
registration user guide to include this pro-
cess. In order to provide sufficient time for
sponsored entity registration, Treasury
and the IRS intend to amend the regula-
tions under sections 1471 and 1472 to
provide that sponsoring entities must reg-
ister their sponsored registered deemed-
compliant FFIs and sponsored direct re-
porting NFFEs by January 1, 2017.
Beginning on such date, sponsoring enti-
ties must use the GIIN of the sponsored
entity when reporting with respect to the
sponsored entity on Form 8966 (FATCA
Report) and must provide the GIIN to
withholding agents making payments to
the sponsored entity.

Sponsored investment entities and
sponsored controlled foreign corporations
covered by Annex II of a Model 1 IGA
will maintain their deemed-compliant sta-
tus as long as they are registered by the
sponsoring entity on or before the later of
December 31, 2016, and the date that is 90
days after a U.S. reportable account is first
identified. Sponsored investment entities
and sponsored controlled foreign corpora-
tions covered by Annex II of a Model 2
IGA will maintain their deemed-
compliant status as long as they are reg-
istered by the sponsoring entity on or be-
fore December 31, 2016.

In addition, Treasury and the IRS in-
tend to amend the regulations under sec-
tion 1471 to provide that withholding
agents can continue to rely on withholding
certificates from sponsored registered
deemed-compliant FFIs and sponsored di-
rect reporting NFFEs that have only the
sponsoring entity's GIIN for payments
made prior to January 1, 2017. For a pay-

ment made on or after January 1, 2017, a
withholding agent will be required to ob-
tain the GIIN of a payee that is a spon-
sored registered deemed-compliant FFI or
a sponsored direct reporting NFFE by ob-
taining either: (1) a withholding certificate
from the payee that includes its GIIN, or
(2) if the withholding agent already has on
file a withholding certificate for the payee
that includes the GIIN of the sponsoring
entity, oral or written confirmation of the
payee's GIIN (such as by e-mail). If a
withholding agent obtains oral or written
confirmation of the payee's GIIN, it will
be required to retain a record of such
information, which will become part of
the withholding certificate. Whether the
withholding agent receives the GIIN
through a new withholding certificate, or
by oral or written confirmation, the with-
holding agent will have 90 days from the
date it obtains the GIIN to verify its ac-
curacy against the published IRS FFI list.
Because withholding agents will be re-
quired to obtain the GIIN of each spon-
sored entity for payments made after De-
cember 31, 2016, sponsoring entities
should consider registering to obtain GI-
INs well in advance of January 1, 2017, in
order to give withholding agents sufficient
time to complete this requirement (and
thereby avoid being withheld upon).

### VI. TREATMENT OF COLLATERAL UNDER THE GRANDFATHERED OBLIGATION RULE

#### A. Modifications to Pro Rata Rule for Pooled Collateral

Treasury and the IRS have received
comments stating that it would be burden-
some for financial institutions to comply
with the pro rata rule described in
§ 1.1471-2(b)(2)(i)(A)(3) for collateral
that secures both grandfathered obliga-
tions and obligations that are not grandfa-
thered. Commenters have stated that they
would prefer to treat any collateral that
secures both grandfathered obligations
and obligations that are not grandfathered
as posted to secure only obligations that
are not grandfathered, rather than apply-
ing the pro rata rule, and accordingly to
withhold on all payments made with re-
spect to the collateral.

Treasury and the IRS agree that, in
order to ease administrative burdens when

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collateral secures both grandfathered ob-
ligations and obligations that are not
grandfathered, the secured party should be
permitted either to withhold on all collat-
eral or to apply the pro rata approach with
respect to such collateral. Therefore, Trea-
sury and the IRS intend to amend
§ 1.1471-2(b)(2)(i)(A)(3) to provide that
the pro rata rule is not mandatory.

# B. Substitute Payments Made with Respect to a Grandfathered Obligation

The chapter 4 regulations treat obliga-
tions that are outstanding on July 1, 2014,
as grandfathered obligations. If, after July
1, 2014, a payee pledges a grandfathered
obligation as collateral, and the secured
party acts as an intermediary for payments
made under the grandfathered obligation
that is posted as collateral, then payments
made by the secured party to the payee
with respect to such collateral remain cov-
ered by the grandfathered obligation rule
and are not treated as withholdable pay-
ments. Commenters have noted, however,
that the definition of a grandfathered ob-
ligation does not include an obligation
that is created as a result of the posting of
collateral that is itself a grandfathered ob-
ligation. As a result, to the extent that a
secured party is treated as the beneficial
owner of collateral that is a grandfathered
obligation, payments made by the secured
party would not be payments made under
a grandfathered obligation, but would in-
stead be substitute payments made under a
newly created obligation that is not cov-
ered by the grandfathered obligation rule.
Commenters have noted that without a
rule to cover these substitute payments, it
would be difficult to determine the proper
treatment of collateral that is itself a
grandfathered obligation, as collateral is
frequently rehypothecated and the secured
party cannot readily determine which col-
lateral was rehypothecated (giving rise to
substitute payments to the payee) and
which collateral has been retained.

In balancing the benefits and burdens
of the information reporting and withhold-
ing rules under FATCA, Treasury and the
IRS agree that a substitute payment made
with respect to a grandfathered obligation
that has been posted as collateral should
also be treated as a payment made under a
grandfathered obligation, and therefore
not subject to withholding under section

1471 or section 1472. Therefore, Treasury
and the IRS intend to amend the definition
of grandfathered obligation in § 1.1471-
2(b)(2)(i)(A) to include any obligation
that gives rise to substitute payments and
that is created as a result of the payee
posting collateral that is otherwise treated
as a grandfathered obligation under
§ 1.1471-2(b)(2)(i)(A)(1).

# VII. TIMING OF EXCHANGE OF 2014 INFORMATION UNDER A MODEL 1 IGA

## A. Model 1 IGAs for which the Obligation to Exchange Has Not Taken Effect

Many partner jurisdictions that have
signed IGAs or reached an agreement in
substance on the text of an IGA continue
to work through their internal procedures
to bring the IGA into force. Pursuant to its
authority under section 1471(b)(2)(B),
and consistent with Announcement 2014-
38, for Model 1 IGAs that have not yet
entered into force on September 30, 2015,
Treasury intends to continue to treat FFIs
covered by the IGA as complying with,
and not subject to withholding under,
FATCA so long as the partner jurisdiction
continues to demonstrate firm resolve to
bring the IGA into force and any informa-
tion that would have been reportable un-
der the IGA on September 30, 2015, is
exchanged by September 30, 2016, to-
gether with any information that is report-
able under the IGA on September 30,
2016.

This policy is consistent with memo-
randa of understanding (MOUs) that the
United States has entered into with certain
partner jurisdictions and letters that Trea-
sury has sent to certain other partner ju-
risdictions. This notice clarifies that this
policy applies to all partner jurisdictions
that have signed or agreed in substance to
a Model 1 IGA, even if such a jurisdiction
has not entered into the MOU or received
the letter described above. This notice
does not affect the timing of when FFIs
should report information to a partner ju-
risdiction, which remains governed by lo-
cal law.

B. Model 1 IGAs for which the
Obligation to Exchange Is in Effect

For Model 1B IGA jurisdictions that
have an IGA in force pursuant to Article
10(1) or Article 12(1) (as applicable) of
the IGA, and for Model 1A IGA jurisdic-
tions for which the obligation to exchange
information has taken effect pursuant to
Articles 3(9) and 10(1) of the IGA, Article
3(5) of the IGA requires the partner juris-
diction to exchange information on U.S.
reportable accounts with respect to 2014
by September 30, 2015.

Treasury and the IRS understand that
partner jurisdictions are continuing to de-
velop and implement the systems needed
for automatic information exchange and
may not have those systems in place by
September 30, 2015. In addition, several
partner jurisdictions are in the process of
enacting legislation to implement their
IGAs, without which they are not able to
exchange information with the United
States.

Notice 2014-33 (2014-21 I.R.B.
1033) states that calendar years 2014 and
2015 are regarded as a transition period
for purposes of IRS enforcement and ad-
ministration of the due diligence, report-
ing, and withholding provisions under
chapter 4. Consistent with treating 2014
and 2015 as a transition period, Treasury
and the IRS will treat FFIs covered by an
IGA as complying with, and not subject to
withholding under, FATCA even if the
relevant partner jurisdiction has not ex-
changed 2014 information by September
30, 2015, as long as the partner jurisdic-
tion notifies the U.S. competent authority
before September 30, 2015, of the delay
and provides assurance that the jurisdic-
tion is making good faith efforts to ex-
change the information as soon as possi-
ble. This notice does not affect the timing
of when FFIs should report information to
a partner jurisdiction, which remains gov-
erned by local law.

# VIII. TAXPAYER RELIANCE

Prior to the issuance of the amend-
ments described in sections III, IV, V, and
VI of this notice, taxpayers may rely on
the provisions of this notice.

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# IX. DRAFTING INFORMATION

The principal author of this notice is
Kamela Nelan of the Office of Associate
Chief Counsel (International). For further
information regarding this notice, contact
Ms. Nelan at (202) 317-6942 (not a toll-
free number).

# Per Capita Distributions of Funds Held in Trust by the Secretary of the Interior Notice 2015-67 PURPOSE

In Notice 2014-17, 2014-13 I.R.B.
881, the Internal Revenue Service and the
Treasury Department issued interim guid-
ance concerning the federal income tax
treatment of per capita distributions made
to members of Indian tribes from funds
held in trust by the Secretary of the Inte-
rior. This notice supersedes Notice
2014-17 and provides final guidance.

## BACKGROUND

The Department of the Interior (DOI),
primarily through the Office of the Special
Trustee for American Indians (OST), is re-
sponsible for holding in trust certain funds
received on behalf of individual Indians and
federally recognized Indian tribes.

Current DOI regulations under 25
C.F.R. §§ 115.700-703 provide that cer-
tain funds may be accepted by the Secre-
tary of the Interior on behalf of federally
recognized Indian tribes and certain indi-
vidual Indians who have an interest in
trust lands, trust resources, or trust assets.
Funds accepted on behalf of Indian tribes
are deposited into tribal "Trust Accounts"
as defined at 25 C.F.R. § 115.002 (Trust
Accounts). The OST has the responsibility
to manage the funds and make them avail-
able to the tribe upon request.

Funds held in tribal Trust Accounts by
the DOI may be distributed per capita to
members of the tribes. Prior to the enact-
ment of the Per Capita Act, Pub. L. No.
98-64, 97 Stat. 365, 25 U.S.C. §§ 117a-
117c, in 1983, the DOI had the sole au-
thority for making per capita distributions
out of tribal Trust Accounts. However, the
Per Capita Act provided Indian tribes au-

thority to make per capita distributions
directly to members of the tribe out of the
tribe's tribal Trust Account. 25 U.S.C.
§ 117a.

# APPLICABLE PROVISIONS OF LAW

Section 61(a) of the Internal Revenue
Code, 26 U.S.C. § 61, states that, except
as otherwise provided by law, gross in-
come means all income from whatever
source derived, including but not limited
to compensation, gross income derived
from business, and dividends. Under 26
U.S.C. § 61, Congress intends to tax all
gains and undeniable accessions to
wealth, clearly realized, over which tax-
payers have complete dominion. Commis-
sioner v. Glenshaw Glass Co., 348 U.S.
426 (1955), 1955-1 C.B. 207.

Indians are U.S. citizens subject to the
requirement to pay income taxes. Squire
v. Capoeman, 351 U.S. 1 (1956), 1956-1
C.B. 605. There is no provision in the
Internal Revenue Code that exempts an
individual from the payment of federal
income tax solely because he or she is an
Indian. Therefore, exemption of individ-
ual Indians from the payment of tax must
derive plainly from treaties or agreements
with the Indian tribes concerned or an act
of Congress. See Rev. Rul. 67-284,
1967-2 C.B. 55.

The Per Capita Act (25 U.S.C. §§ 117a-
117c) provides authority to Indian tribes to
make per capita distributions to members of
the tribe out of funds held in a tribal Trust
Account. Under 25 U.S.C. § 117a, funds
subject to that section may be distributed by
either the Secretary of the Interior or the
tribe at the request of the governing body of
the tribe and subject to the approval of the
Secretary of the Interior. In practice, pro-
ceeds from trust assets or trust resources
(both defined at 25 C.F.R. § 115.002) are
deposited into a tribal Trust Account for a
tribe and that tribe can subsequently make a
per capita distribution using funds from that
tribal Trust Account.

The Indian Tribal Judgment Funds Use
or Distribution Act, Pub. L. No. 93-134, 87
Stat. 466, 25 U.S.C. §§ 1401-1408, con-
cerns the distribution of certain judgment
funds to Indian tribes. Under 25 U.S.C.
§ 117b(a), per capita distributions made pur-
suant to 25 U.S.C. § 117a are subject to the
provisions of 25 U.S.C. § 1407. Pursuant to

25 U.S.C. § 1407, none of the funds that are
distributed per capita or held in trust pursu-
ant to a plan approved under 25 U.S.C.
§ 1401 et. seq, including all interest and
investment income accrued on the funds
while held in trust, are subject to federal
income taxes. See also H.R. Rep. No. 98-
230 at 3 (1983), which provides that per
capita distributions of tribal trust revenue
"shall be subject to the provisions of [25
U.S.C. § 1407] with respect to tax exemp-
tions." However, per capita distributions to
tribal members of "net revenues" from In-
dian gaming activity that are subject to the
Indian Gaming Regulatory Act (net gaming
revenues) are subject to federal income tax-
ation and are subject to the information re-
porting and withholding requirements of 26
U.S.C. §§ 6041 and 3402(r). See 25 U.S.C.
§§ 2701-2721 and 25 C.F.R. Part 290. Un-
der the Indian Gaming Regulatory Act, net
gaming revenues means "gross revenues of
an Indian gaming activity less amounts paid
out as, or paid for, prizes and total operating
expenses, excluding management fees." 25
U.S.C. § 2703(9).

Under 25 C.F.R. § 115.703, the Secre-
tary of the Interior accepts and deposits
into tribal Trust Accounts only funds from
sources listed in the table in 25 C.F.R.
§ 115.702. The 25 C.F.R. § 115.702 table
provides that the Secretary of the Interior
will accept, among other payments, pay-
ments resulting from money directly de-
rived from title conveyance or use of trust
lands, payments resulting from penalties
for trespass on trust lands, and payments
resulting from a final order from a court of
competent jurisdiction for a cause of ac-
tion related to trust assets. The Secretary
of the Interior also accepts deposits of
funds derived directly from trust lands,
restricted fee lands, or trust resources. See
25 C.F.R. § 115.702 for a full list of funds
that the Secretary of the Interior accepts
and deposits into tribal Trust Accounts.

# FEDERAL INCOME TAX TREATMENT OF PER CAPITA DISTRIBUTIONS OF TRIBAL TRUST ACCOUNT FUNDS

a. General Rule

Under 25 U.S.C. § 117b(a) and 25
U.S.C. § 1407, per capita distributions
made from funds the Secretary of the In-
terior holds in a tribal Trust Account are

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generally excluded from the gross income
of the members of the tribe receiving the
per capita distributions. For example, if
proceeds from timber sales, an agricul-
tural lease, or a grazing permit are depos-
ited into a tribe's tribal Trust Account and
that tribe subsequently makes a per capita
distribution using funds from the tribal
Trust Account, the per capita distributions
are excluded from the tribal members'
gross income.

## b. Exception

Distributions to tribal members from a
tribal Trust Account constitute gross in-
come under 26 U.S.C. § 61 to the mem-
bers of the tribe receiving the distributions
if a tribal Trust Account is used to mis-
characterize what would otherwise be tax-
able income as nontaxable per capita dis-
tributions. For example, distributions
from a tribal Trust Account constitute
gross income under 26 U.S.C. § 61 if,
based on the facts and circumstances, the
distributions are mischaracterized com-
pensation to tribal members for their ser-
vices, mischaracterized distributions of
business profits, or mischaracterized gam-
ing revenues.

The following examples illustrate situ-
ations in which distributions from a tribal
Trust Account are not treated as nontax-
able per capita distributions and are in-
cluded in gross income under 26 U.S.C.
§ 61.

### Example 1 - Mischaracterized Compensation

B is a housing authority established by Tribe C,
a federally recognized Indian tribe. The Director and
the Assistant Director of B are both members of
Tribe C. During each of the 2011, 2012, and 2013
taxable years, the Director and the Assistant Director
are each paid bonuses in the amount of $15x. In the
2014 taxable year, members of Tribe C's Tribal
Council authorize per capita distributions out of the
tribe's tribal Trust Account in the amount of $1x to
every member of the tribe and an additional $2x in
per capita distributions to every elder in the tribe. In
addition, the members of Tribe C's Tribal Council
authorize distributions out of the tribal Trust Ac-
count to the Director and Assistant Director in the
amount of $15x each, instead of paying bonuses to
the Director and the Assistant Director. The distri-
butions of $15x to the Director and the Assistant
Director are mischaracterized compensation and,
therefore, are included in their gross income under
26 U.S.C. § 61.

### Example 2 - Mischaracterized Distributions of Business Profits

Tribe D is a federally recognized Indian tribe. A
group of Tribe D members own Corporation E, an
information technology company that provides call
center services. Corporation E's headquarters is lo-
cated on land held in trust by the Secretary of the
Interior for the benefit of Tribe D. Tribe D charges
Corporation E rent at fair market value for its head-
quarters. However, the lease agreement with Tribe D
includes a provision whereby Corporation E also
deposits an amount approximating its net revenues
into Tribe D's tribal Trust Account, characterizing
the revenue as additional rent. Subsequently, mem-
bers of Tribe D's Tribal Council authorize per capita
distributions out of the tribal Trust Account in an
aggregate amount equal to the purported "additional
rent" to the group of Tribe D members who own
Corporation E. The distributions of the mischarac-
terized business profits from the tribal Trust Account
constitute gross income under 26 U.S.C. § 61 to the
members receiving the distributions.

#### Example 3 - Mischaracterized Gaming Revenues

Tribe F is a federally recognized Indian tribe.
Tribe F owns all of Corporation G, which owns and
operates a casino located on land held in trust by the
Secretary of the Interior for the benefit of Tribe F.
All of Corporation G's gaming revenues are subject
to the Indian Gaming Regulatory Act. After paying
out all prizes and all administrative expenses (ex-
cluding management fees), Corporation G distributes
50% of its net gaming revenues to Tribe F. Also,
under a lease agreement with Tribe F, Corporation G
deposits the remaining 50% of its net gaming reve-
nues into Tribe F's tribal Trust Account, character-
izing the deposits as rent for use of the land for the
casino. Subsequently, members of Tribe F's Tribal
Council authorize per capita distributions to every
member of the tribe out of the net gaming revenues
that are held in the tribal Trust Account. The distri-
butions out of the tribal Trust Account are mischar-
acterized gaming revenues. Because per capita dis-
tributions of net gaming revenues are subject to
federal income taxation, the distributions constitute
gross income under 26 U.S.C. § 61 to the members
of the tribe receiving the distributions.

## LIMITATION

This notice applies only to per capita
distributions made by the Secretary of the
Interior or an Indian tribe out of a tribal
Trust Account. This notice does not affect
the federal income taxation of distribu-
tions made from individual Indian trust
accounts, from which per capita distribu-
tions cannot be made. This notice also
does not affect the federal income taxation
of and withholding from distributions
made pursuant to a Revenue Allocation
Plan under the Indian Gaming Regulatory
Act, Pub. L. No. 100-497, 102 Stat.
2475, 25 U.S.C. §§ 2701-2721.

# EFFECT ON OTHER DOCUMENTS

Notice 2014-17 is superseded.
DRAFTING INFORMATION

The principal author of this notice is
Dave Rifkin of the Office of Associate
Chief Counsel (Tax Exempt and Govern-
ment Entities). For further information,
please contact Mr. Rifkin at (202) 317-
5800 (not a toll-free number).

# Information Reporting on Minimum Essential Coverage Notice 2015-68

PURPOSE

This notice advises taxpayers that the
Treasury Department and the Internal
Revenue Service intend to propose regu-
lations under § 6055 of the Internal Rev-
enue Code (1) providing that health insur-
ance issuers must report coverage in
catastrophic health insurance plans de-
scribed in § 1302(e) of the Affordable
Care Act enrolled in through an Afford-
able Insurance Exchange (Exchange, also
known as a Health Insurance Market-
place), (2) allowing electronic delivery of
statements reporting coverage under expa-
triate health plans unless the recipient ex-
plicitly refuses consent or requests a paper
statement, (3) allowing filers reporting on
insured group health plans to use a trun-
cated taxpayer identification number
(TTIN) to identify the employer on the
statement furnished to a taxpayer, and (4)
specifying when a provider of minimum
essential coverage is not required to report
coverage of an individual who has other
minimum essential coverage. This notice
also invites comments on issues relating
to solicitation of taxpayer identification
numbers (TINs) of covered individuals;
advises that the governments of United
States possessions or territories, namely
American Samoa, Guam, the Common-
wealth of the Northern Mariana Islands,
Puerto Rico, and the U.S. Virgin Islands,
are not required to report coverage under
Medicaid and the Children's Health Insur-
ance Program (CHIP); and provides that
the state government agency sponsoring

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coverage under the Basic Health Program
is required to report Basic Health Program
coverage.

## BACKGROUND

Requirement to have minimum essential
coverage

Under § 5000A, nonexempt individu-
als have the choice of maintaining mini-
mum essential coverage or making an in-
dividual shared responsibility payment
with their income tax returns. Minimum
essential coverage is defined in
§ 5000A(f) and includes health insurance
coverage offered in the individual market
(such as a qualified health plan offered
through an Exchange), an employer-
sponsored plan, and government-
sponsored programs such as Medicare,
Medicaid, CHIP, and TRICARE. The
Secretary of Health and Human Services,
in coordination with the Secretary of the
Treasury, may designate health benefits
coverage not specified in § 5000A as min-
imum essential coverage. Under
§ 5000A(f)(4), bona fide residents (within
the meaning of § 937(a) and accompany-
ing regulations) of U.S. possessions or
territories are treated as having minimum
essential coverage.

### Information reporting of minimum essential coverage

Section 6055 requires all persons pro-
viding minimum essential coverage to file
annual information returns with the IRS
reporting information about the coverage
and about each covered individual, includ-
ing each covered individual's TIN and
months of coverage, and to furnish a state-
ment to the taxpayer. This reporting al-
lows taxpayers to establish and the IRS to
verify that individuals have minimum es-
sential coverage.

Under § 1.6055-1(c)(1)(i), (c)(3)(ii),
and (d)(1) of the Income Tax Regulations,
health insurance issuers or carriers must
report on most insured minimum essential
coverage. However, under § 36B(f)(3)
and § 1.36B-5, Exchanges must report
information on coverage in individual
market qualified health plans enrolled in
through an Exchange, including each cov-
ered individual's SSN and months of cov-
erage, and must furnish a statement to a
taxpayer. Because Exchange reporting un-

der § 36B(f)(3) includes the information
reported and furnished under § 6055, reg-
ulations provide that health insurance is-
suers are not required to report on cover-
age in individual market qualified health
plans enrolled in through an Exchange.
See § 1.6055-1(d).

If a group health plan is self-insured,
the plan sponsor (generally the employer)
must report the coverage for all covered
individuals. See § 1.6055-1(c)(1)(ii) and
(c)(2).

Section 1.6055-1(c)(1)(iii) requires
that the executive department or agency of
a government unit that provides coverage
under a government-sponsored program
must file the information return under
§ 6055. Section 1.6055-1(c)(3)(i) pro-
vides that the state agency that adminis-
ters the Medicaid program under Title
XIX of the Social Security Act or the
CHIP program under Title XXI of the
Social Security Act, must report the cov-
erage under § 6055.

### Employer's EIN

Section 6055(b) and § 1.6055-1(e) re-
quire that health insurance issuers and car-
riers reporting coverage under insured
group health plans report information
about the employer sponsoring the plan,
including the employer's EIN, to the IRS.
Section 6055(c) and § 1.6055-1(g) require
that health insurance issuers and carriers
reporting information to the IRS furnish a
statement to a taxpayer providing infor-
mation about the filer and the covered
individuals. Section 301.6109-4(a)(1) of
the Procedure and Administration Regu-
lations provides that the TIN of a person
other than the filer, including an EIN, may
be truncated on statements furnished to
taxpayers, unless otherwise prohibited by
statute or regulations. Section 1.6055-
1(g)(3) allows filers to truncate the TINs
of individuals identified on the statement,
but does not address the use of a TTIN for
the employer.

### Expatriate health plans

Section 1.6055-2 allows filers of infor-
mation returns under § 6055 to furnish a
statement to an individual in electronic
format only if the individual affirmatively
consents. However, under § 3(b)(2) of the
Expatriate Health Coverage Clarification

Act of 2014, Division M of the Consoli-
dated and Further Continuing Appropria-
tions Act, 2015, Public Law 113-235
(EHCCA), a recipient of the Form
1095-B reporting minimum essential cov-
erage under an expatriate health plan (de-
fined in EHCCA § 3(d)(2)) is deemed to
consent to delivery in electronic format
unless the recipient explicitly refuses con-
sent.

### Supplemental coverage

To ensure that the IRS receives a report
for every individual with minimum essen-
tial coverage, every provider of minimum
essential coverage generally must report
information for every covered individual.
However, § 1.6055-1(d)(2) provides that
reporting is not required for minimum es-
sential coverage that supplements or pro-
vides benefits in addition to other mini-
mum essential coverage if (1) the primary
and supplemental coverage have the same
plan sponsor, or (2) the coverage supple-
ments government-sponsored coverage
such as Medicare.

### TIN solicitation and penalties

Information reporting under § 6055 is
subject to the penalty provisions of
§§ 6721 and 6722 for failure to file a
correct information return or to furnish a
correct statement. See § 1.6055-1(h). Pen-
alties may be waived under § 6724(a) if
the failure is due to reasonable cause and
not willful neglect; that is, if a reporting
entity demonstrates that it acted in a re-
sponsible manner and that the failure is
due to significant mitigating factors or
events beyond the reporting entity's con-
trol. See § 301.6724-1(a)(1). Under
§ 301.6724-1(e), a reporting entity acts in
a responsible manner in soliciting a TIN if
the reporting entity makes (1) an initial
solicitation when an account is opened or
a relationship is established, (2) a first
annual solicitation by December 31 of the
year the account is opened (or January 31
if the account is opened in December),
and (3) a second annual solicitation by
December 31 of the following year.

### Basic Health Program

Section 1331 of the Affordable Care
Act allows states to establish a Basic
Health Program, which provides an addi-

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tional option to provide health coverage to
certain individuals not eligible for Medic-
aid. See 42 CFR Part 600. The Basic
Health Program is designated as minimum
essential coverage under 42 CFR 600.5.

## GUIDANCE

### 1. Anticipated regulations

### a. Coverage in catastrophic health plans

Section 1302(e) of the Affordable Care
Act provides for catastrophic health plans.
These plans are minimum essential cover-
age and qualified health plans, may be
offered only in the individual market, and
may be enrolled in through an Exchange,
but taxpayers may not claim the premium
tax credit for this coverage. See
§ 36B(c)(3)(A).

For purposes of reporting by Ex-
changes under § 36B(f)(3) on coverage in
a qualified health plan, the term qualified
health plan has the same meaning as in
§ 1301(a) of the Affordable Care Act ex-
cept that it does not include a catastrophic
plan described in § 1302(e) of the Afford-
able Care Act. Section 1.36B-1(c). Ac-
cordingly, Exchanges do not report on
catastrophic coverage. Section 1.36B-
1(c), -5(a). The § 6055 regulations, how-
ever, provide that health insurance issuers
need not report on coverage in a qualified
health plan in the individual market en-
rolled in through an Exchange, because
that information is generally reported by
Exchanges under § 36B(f)(3). As a result,
at present neither the Exchanges nor
health insurance issuers have the respon-
sibility for reporting minimum essential
coverage under a catastrophic plan.

To ensure that there is reporting of
catastrophic health plans enrolled in
through an Exchange, the Treasury De-
partment and the IRS intend to propose
regulations under § 6055 requiring issuers
of these plans to report the coverage on
Form 1095-B. The Treasury Department
and the IRS anticipate that the regulations
will apply to coverage in 2016 and to
returns and statements filed and furnished
in 2017. Health insurance issuers may re-
port on 2015 catastrophic coverage (on
returns and statements filed and furnished
in 2016) and are encouraged to do so. An
issuer that reports on 2015 catastrophic

coverage will not be subject to penalties
for these returns.

### b. Employer's EIN

The Treasury Department and the IRS
anticipate publishing regulations under
§ 6055 to clarify that health insurance
issuers and carriers reporting on insured
group health plans may use the TTIN of
the employer sponsoring the plan on the
statement furnished to the taxpayer.

### c. Statements to individuals covered by expatriate healthplans

Proposed § 6055 regulations also will
provide that statements reporting cover-
age under an expatriate healthplan may be
furnished in electronic format unless the
recipient affirmatively refuses consent or
requests a paper statement. Reporting en-
tities may apply these rules for coverage
under expatriate health plans that are is-
sued or renewed on or after July 1, 2015,
and may rely on Notice 2015-43,
2015-29 I.R.B. 73, which addresses the
definition of "expatriate health plans" and
provides transition relief.

### d. Supplemental coverage

The supplemental coverage rule in
§ 1.6055-1(d)(2) is intended to eliminate
duplicate reporting of an individual's min-
imum essential coverage under circum-
stances when there is reasonable certainty
that the provider of the "primary" cover-
age will report. This rule has proven to be
confusing. Accordingly, the Treasury De-
partment and the IRS anticipate proposing
regulations that would replace this rule
with rules providing that (1) if an individ-
ual is covered by multiple minimum es-
sential coverage plans or programs pro-
vided by the same provider, reporting is
required for only one of them; and (2)
reporting generally is not required for an
individual's minimum essential coverage
for which an individual is eligible only if
the individual is covered by other mini-
mum essential coverage for which § 6055
reporting is required.

These rules would apply month by
month and individual by individual. Thus,
under the first rule (that is, the rule for
reporting multiple minimum essential

coverage plans or programs of the same
provider), if for a month an individual is
enrolled in a self-insured group health
plan and also has a self-insured health
reimbursement arrangement (HRA) from
the same employer, the provider (the em-
ployer) is required to report only one type
of coverage for that individual. If an em-
ployee is covered under both arrange-
ments for some months of the year but
retires or otherwise drops coverage under
the non-HRA group health plan and is
covered only under the HRA, the em-
ployer must report coverage under the
HRA for the months after the employee
retires or drops the non-HRA coverage.
The employer must report the coverage in
an arrangement of any individual who is
covered by only one arrangement.

Under the second rule (that is, the rule
for reporting minimum essential coverage
for which an individual is eligible only if
the individual is covered by other mini-
mum essential coverage), reporting would
not be required for Medicare or TRI-
CARE supplements and Medicaid cover-
age providing benefits only to an individ-
ual enrolled in other coverage for which
reporting is required, such as employer
coverage or a qualified health plan. Re-
porting also would not be required under
the second rule for an HRA that is avail-
able only to employees and other individ-
uals who enroll in an employer's insured
group health plan for months that the in-
dividual is enrolled in the insured group
health plan. It is anticipated that, for em-
ployer coverage, this rule will apply only
if the two types of coverage are eligible
employer-sponsored coverage of the same
employer. For example, if an employee is
enrolled in both his employer's HRA and
insured group health plan, the employer is
not required to report the employee's cov-
erage under the HRA. However, if an em-
ployee is enrolled in an employer's HRA
and in a spouse's non-HRA group health
plan, the employee's employer would be
required to report for the HRA, and the
employee's spouse's employer (or the
health insurance issuer or carrier, if the
plan is insured) would be required to re-
port for the non-HRA group health plan
coverage.

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### 2. Other guidance

### a. Relief from penalties for reasonable cause

A reporting entity that fails to comply
with the filing and statement furnishing
requirements of § 6055 may be subject to
penalties for failure to file a correct infor-
mation return (§ 6721) or to furnish a
correct payee statement (§ 6722). The pre-
amble to the § 6055 regulations (T.D.
9660, 79 FR 13220) provides short-term
relief from reporting penalties for 2015
coverage. Specifically, the IRS will not
impose penalties under §§ 6721 and 6722
on reporting entities that can show that
they have made good faith efforts to com-
ply with the information reporting re-
quirements. This relief applies to incorrect
or incomplete information, including
TINs or dates of birth, reported on a return
or statement.

The preamble to the § 6055 regulations
also notes the general rule that, under
§ 6724 and the related regulations, the
§§ 6721 and 6722 penalties may be
waived if a failure is due to reasonable
cause, that is, the reporting entity demon-
strates that it acted in a responsible man-
ner and the failure is due to significant
mitigating factors or events beyond the
reporting entity's control. Section
301.6724-1(e) provides specific proce-
dures for soliciting TINs which, if fol-
lowed, establish that a reporting entity that
does not report a TIN has acted in a re-
sponsible manner.

Nonetheless, reporting entities have ex-
pressed concerns that § 6055 reporting has
significant differences from other informa-
tion reporting provisions that are not ade-
quately addressed by the regulations under
§ 6724 for establishing reasonable cause.
For example, reporting entities asserted that
the requirements for TIN solicitation under
§ 301.6724-1(e) are not practical in the
context of § 6055 reporting.

The Treasury Department and the IRS
request comments on the application of
the reasonable good cause rules under
§ 6724 to § 6055 reporting, and in partic-
ular the rules under § 301.6724-1(e) re-
lating to TIN solicitation and reporting.
Pending the issuance of additional guid-
ance, reporting entities will not be subject
to penalties for failure to report a TIN if

they comply with the requirements of
§ 301.6724-1(e) with the following mod-
ifications: (1) the initial solicitation is
made at an individual's first enrollment or,
if already enrolled on September 17,
2015, the next open season, (2) the second
solicitation is made at a reasonable time
thereafter, and (3) the third solicitation is
made by December 31 of the year follow-
ing the initial solicitation. Additionally, a
reporting entity is not required to solicit a
TIN from an individual whose coverage is
terminated.

### b. Bona fide residents of U.S. possessions or territories

The governments of American Samoa,
the Commonwealth of the Northern Mari-
ana Islands, Guam, Puerto Rico, and the
U.S. Virgin Islands provide Medicaid and
CHIP coverage to their eligible residents.
Because bona fide residents of U.S. pos-
sessions or territories are treated as having
minimum essential coverage under
§ 5000A(f)(4), reporting of Medicaid and
CHIP coverage for these taxpayers is not
needed for administration of the individ-
ual shared responsibility requirement.
Therefore, Medicaid and CHIP agencies
in U.S. possessions or territories are not
required to report that coverage under
§ 6055.

### c. Basic Health Program

Section 5000A(f) does not identify the
Basic Health Program as a government-
sponsored program, but it closely resem-
bles government-sponsored coverage such
as Medicaid and CHIP. Accordingly, like
Medicaid and CHIP, the state agency that
administers the Basic Health Program is
the entity that must report that coverage
under § 6055.

## REQUEST FOR COMMENTS

Comments may be submitted in writ-
ing on or before November 16, 2015.
Comments should be submitted to Internal
Revenue Service, CC:PA:LPD:PR (No-
tice 2015-68), Room 5203, P.O. Box
7604, Ben Franklin Station, Washington,
DC 20044, or electronically to
Notice.Comments@irscounsel.treas.gov.
Please include "Notice 2015-68" in the
subject line of any electronic communica-

tions. Alternatively, comments may be
hand delivered between the hours of 8:00
a.m. and 4:00 p.m. Monday to Friday to
CC:PA:LPD:PR (Notice 2015-68), Cou-
rier's Desk, Internal Revenue Service,
1111 Constitution Avenue NW, Washing-
ton, D.C. All comments will be available
for public inspection and copying.

## FURTHER INFORMATION

For further information on this notice,
contact Andrew Braden at (202) 317-7006
(not a toll-free number).

## Extension of Replacement Period for Livestock Sold on Account of Drought Notice 2015-69

SECTION 1. PURPOSE

This notice provides guidance regard-
ing an extension of the replacement period
under § 1033(e) of the Internal Revenue
Code for livestock sold on account of
drought in specified counties.

### SECTION 2. BACKGROUND

.01 Nonrecognition of Gain on Invol-
untary Conversion of Livestock. Section
1033(a) generally provides for nonrecog-
nition of gain when property is involun-
tarily converted and replaced with prop-
erty that is similar or related in service or
use. Section 1033(e)(1) provides that a
sale or exchange of livestock (other than
poultry) held by a taxpayer for draft,
breeding, or dairy purposes in excess of
the number that would be sold following
the taxpayer's usual business practices is
treated as an involuntary conversion if the
livestock is sold or exchanged solely on
account of drought, flood, or other
weather-related conditions.

.02 Replacement Period. Section
1033(a)(2)(A) generally provides that
gain from an involuntary conversion is
recognized only to the extent the amount
realized on the conversion exceeds the
cost of replacement property purchased
during the replacement period. If a sale or
exchange of livestock is treated as an in-
voluntary conversion under § 1033(e)(1)
and is solely on account of drought, flood,

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or other weather-related conditions that
result in the area being designated as eli-
gible for assistance by the federal govern-
ment, § 1033(e)(2)(A) provides that the
replacement period ends four years after
the close of the first taxable year in which
any part of the gain from the conversion is
realized. Section 1033(e)(2)(B) provides
that the Secretary may extend this replace-
ment period on a regional basis for such
additional time as the Secretary deter-
mines appropriate if the weather-related
conditions that resulted in the area being
designated as eligible for assistance by the
federal government continue for more
than three years. Section 1033(e)(2) is ef-
fective for any taxable year with respect to
which the due date (without regard to ex-
tensions) for a taxpayer's return is after
December 31, 2002.

SECTION 3. EXTENSION OF
REPLACEMENT PERIOD UNDER
§ 1033(e)(2)(B)

Notice 2006-82, 2006-2 C.B. 529,
provides for extensions of the replace-
ment period under § 1033(e)(2)(B). If a
sale or exchange of livestock is treated
as an involuntary conversion on account
of drought and the taxpayer's replace-
ment period is determined under
§ 1033(e)(2)(A), the replacement period
will be extended under § 1033(e)(2)(B)
and Notice 2006-82 until the end of the
taxpayer's first taxable year ending after
the first drought-free year for the applica-
ble region. For this purpose, the first
drought-free year for the applicable region
is the first 12-month period that (1) ends
August 31; (2) ends in or after the last
year of the taxpayer's 4-year replacement
period determined under § 1033(e)(2)(A);
and (3) does not include any weekly pe-
riod for which exceptional, extreme, or
severe drought is reported for any location
in the applicable region. The applicable
region is the county that experienced the
drought conditions on account of which
the livestock was sold or exchanged and
all counties that are contiguous to that
county.

A taxpayer may determine whether ex-
ceptional, extreme, or severe drought is
reported for any location in the applicable
region by reference to U.S. Drought Mon-
itor maps that are produced on a weekly
basis by the National Drought Mitigation

Center. U.S. Drought Monitor maps are
archived at http://droughtmonitor.unl.edu/
MapsAndData/MapArchive.aspx.

In addition, Notice 2006-82 provides
that the Internal Revenue Service will
publish in September of each year a list of
counties, boroughs, cities, parishes, or
municipalities (hereinafter "counties") for
which exceptional, extreme, or severe
drought was reported during the preceding
12 months. Taxpayers may use this list
instead of U.S. Drought Monitor maps to
determine whether exceptional, extreme,
or severe drought has been reported for
any location in the applicable region.

The Appendix to this notice contains
the list of counties for which exceptional,
extreme, or severe drought was reported
during the 12-month period ending Au-
gust 31, 2015. Under Notice 2006-82, the
12-month period ending on August 31,
2015, is not a drought-free year for an
applicable region that includes any county
on this list. Accordingly, for a taxpayer
who qualified for a four-year replacement
period for livestock sold or exchanged on
account of drought and whose replace-
ment period is scheduled to expire at the
end of 2015 (or, in the case of a fiscal year
taxpayer, at the end of the taxable year
that includes August 31, 2015), the re-
placement period will be extended under
§ 1033(e)(2) and Notice 2006-82 if the
applicable region includes any county on
this list. This extension will continue until
the end of the taxpayer's first taxable year
ending after a drought-free year for the
applicable region.

### SECTION 4. DRAFTING INFORMATION

The principal author of this notice is
Andrew Braden of the Office of Associate
Chief Counsel (Income Tax & Account-
ing). For further information regarding
this notice contact Mr. Braden at (202)
317-4725 (not a toll-free number).

#### APPENDIX

Alabama

Counties of Autauga, Baldwin, Bar-
bour, Bibb, Blount, Bullock, Butler, Cal-
houn, Chambers, Cherokee, Chilton,
Choctaw, Clarke, Clay, Cleburne, Coffee,
Colbert, Conecuh, Coosa, Covington,
Crenshaw, Cullman, Dale, Dallas,

DeKalb, Elmore, Escambia, Etowah, Fay-
ette, Franklin, Geneva, Greene, Hale,
Henry, Houston, Jefferson, Lamar, Law-
rence, Lee, Lowndes, Macon, Marengo,
Marion, Marshall, Mobile, Monroe,
Montgomery, Morgan, Perry, Pickens,
Pike, Randolph, Russell, Saint Clair,
Shelby, Sumter, Talladega, Tallapoosa,
Tuscaloosa, Walker, Washington, Wilcox,
Winston.

Alaska

Boroughs of Denali, Fairbanks North
Star, Juneau, Kenai Peninsula, Ketchikan
Gateway, Matanuska-Susitna, Sitka. Cit-
ies of Juneau and Sitka. Census Areas of
Bethel, Prince of Wales-Outer Ketchikan,
Skagway-Hoonah-Angoon, Southeast
Fairbanks, Valdez-Cordova, Wrangell-
Petersburg, Yukon-Koyukuk. Municipal-
ity of Anchorage.

Arizona

Counties of Apache, Cochise, Co-
conino, Gila, Graham, Greenlee, La Paz,
Maricopa, Mohave, Navajo, Pima, Pinal,
Santa Cruz, Yavapai, Yuma.

Arkansas

Counties of Arkansas, Ashley, Benton,
Boone, Bradley, Calhoun, Chicot, Clay,
Cleburne, Cleveland, Columbia, Craig-
head, Crawford, Crittenden, Cross, Desha,
Drew, Faulkner, Garland, Grant, Greene,
Hempstead, Hot Spring, Independence,
Izard, Jackson, Jefferson, Lafayette, Law-
rence, Lee, Lincoln, Little River, Lonoke,
Madison, Marion, Miller, Mississippi,
Monroe, Nevada, Ouachita, Perry, Phil-
lips, Poinsett, Polk, Prairie, Pulaski, Ran-
dolph, Saint Francis, Saline, Sevier,
Sharp, Stone, Union, Washington, White,
Woodruff.

California

Counties of Alameda, Alpine, Amador,
Butte, Calaveras, Colusa, Contra Costa,
Del Norte, El Dorado, Fresno, Glenn,
Humboldt, Imperial, Inyo, Kern, Kings,
Lake, Lassen, Los Angeles, Madera,
Marin, Mariposa, Mendocino, Merced,
Modoc, Mono, Monterey, Napa, Nevada,
Orange, Placer, Plumas, Riverside, Sacra-
mento, San Benito, San Bernardino, San
Diego, San Francisco, San Joaquin, San

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Luis Obispo, San Mateo, Santa Barbara,
Santa Clara, Santa Cruz, Shasta, Sierra,
Siskiyou, Solano, Sonoma, Stanislaus,
Sutter, Tehama, Trinity, Tulare, Tuol-
umne, Ventura, Yolo, Yuba.

Colorado

Counties of Alamosa, Archuleta, Baca,
Bent, Cheyenne, Conejos, Costilla, Crow-
ley, Delta, Dolores, Eagle, El Paso, Gar-
field, Grand, Gunnison, Hinsdale, Huer-
fano, Jackson, Kiowa, Kit Carson, La
Plata, Las Animas, Lincoln, Mesa, Min-
eral, Moffat, Montezuma, Montrose,
Otero, Ouray, Pitkin, Prowers, Pueblo,
Rio Blanco, Rio Grande, Routt, Saguache,
San Juan, San Miguel.

##### Connecticut

Counties of Fairfield, Hartford, Litch-
field, Middlesex, New Haven, New Lon-
don, Tolland, Windham.

Florida

Counties of Baker, Bradford, Brevard,
Broward, Clay, Collier, Columbia, Duval,
Escambia, Franklin, Gadsden, Glades,
Hamilton, Hendry, Holmes, Indian River,
Jackson, Jefferson, Leon, Liberty, Madi-
son, Martin, Miami-Dade, Monroe, Nas-
sau, Okaloosa, Okeechobee, Palm Beach,
Saint Johns, Saint Lucie, Santa Rosa, Su-
wannee, Taylor, Union, Wakulla, Walton,
Washington.

##### Georgia

Counties of Appling, Atkinson, Bacon,
Baker, Baldwin, Bartow, Ben Hill, Ber-
rien, Bibb, Bleckley, Brantley, Brooks,
Bryan, Bulloch, Burke, Butts, Calhoun,
Camden, Candler, Carroll, Charlton,
Chattahoochee, Chattooga, Cherokee,
Clay, Clinch, Cobb, Coffee, Colquitt, Co-
lumbia, Cook, Coweta, Crawford, Crisp,
Dade, Decatur, Dodge, Dooly, Dougherty,
Early, Echols, Effingham, Emanuel, Ev-
ans, Fayette, Floyd, Glascock, Glynn,
Grady, Greene, Hancock, Haralson, Har-
ris, Heard, Henry, Houston, Irwin, Jasper,
Jeff Davis, Jefferson, Jenkins, Johnson,
Jones, Lamar, Lanier, Laurens, Lee, Lib-
erty, Lowndes, Macon, Marion,
McDuffie, McIntosh, Meriwether, Miller,
Mitchell, Monroe, Montgomery, Morgan,
Muscogee, Newton, Paulding, Peach,

Pickens, Pierce, Pike, Polk, Pulaski, Put-
nam, Quitman, Randolph, Richmond,
Screven, Seminole, Spalding, Stewart,
Sumter, Talbot, Taliaferro, Taylor, Tel-
fair, Terrell, Thomas, Tift, Toombs,
Treutlen, Troup, Turner, Twiggs, Upson,
Walker, Ware, Warren, Washington,
Wayne, Webster, Wheeler, Wilcox,
Wilkinson, Worth.

Hawaii

Counties of Hawaii, Honolulu, Kala-
wao, Kauai, Maui.

Idaho

Counties of Ada, Adams, Bannock,
Bear Lake, Benewah, Bingham, Blaine,
Boise, Bonner, Bonneville, Boundary,
Butte, Camas, Canyon, Caribou, Cassia,
Clark, Clearwater, Custer, Elmore, Frank-
lin, Fremont, Gem, Gooding, Idaho, Jef-
ferson, Jerome, Kootenai, Latah, Lemhi,
Lewis, Lincoln, Madison, Minidoka, Nez
Perce, Oneida, Owyhee, Payette, Power,
Shoshone, Teton, Twin Falls, Valley,
Washington.

Illinois

Counties of Alexander, Jo Daviess,
Massac, Pope.

Indiana

Counties of Bartholomew, Clark,
Crawford, Dearborn, Decatur, Dubois,
Floyd, Harrison, Jackson, Jefferson, Jen-
nings, Lawrence, Ohio, Orange, Perry, Ri-
pley, Scott, Spencer, Switzerland, War-
rick, Washington.

Iowa

Counties of Allamakee, Dickinson,
Dubuque, Emmet, Lyon, Osceola, Plym-
outh, Sioux, Woodbury.

Kansas

Counties of Allen, Anderson, Barber,
Barton, Bourbon, Brown, Butler, Chase,
Chautauqua, Cherokee, Cheyenne, Clark,
Clay, Cloud, Coffey, Comanche, Cowley,
Crawford, Decatur, Dickinson, Douglas,
Edwards, Elk, Ellis, Ellsworth, Finney,
Ford, Franklin, Geary, Gove, Graham,
Grant, Gray, Greeley, Greenwood, Ham-
ilton, Harper, Harvey, Haskell, Hodge-

man, Jackson, Jewell, Kearny, Kingman,
Kiowa, Labette, Lane, Lincoln, Linn, Lo-
gan, Lyon, Marion, Marshall, McPherson,
Meade, Mitchell, Montgomery, Morris,
Morton, Nemaha, Neosho, Ness, Norton,
Osage, Osborne, Ottawa, Pawnee, Phil-
lips, Pottawatomie, Pratt, Rawlins, Reno,
Republic, Rice, Riley, Rooks, Rush, Rus-
sell, Saline, Scott, Sedgwick, Seward,
Shawnee, Sheridan, Sherman, Smith,
Stafford, Stanton, Stevens, Sumner,
Thomas, Trego, Wabaunsee, Wallace,
Washington, Wichita, Wilson, Woodson.

Kentucky

Counties of Allen, Anderson, Ballard,
Barren, Bath, Bell, Boone, Bourbon,
Boyd, Boyle, Bracken, Breathitt, Breckin-
ridge, Bullitt, Butler, Caldwell, Calloway,
Campbell, Carlisle, Carroll, Carter,
Casey, Christian, Clark, Clay, Crittenden,
Daviess, Edmonson, Elliott, Estill, Fay-
ette, Fleming, Floyd, Franklin, Fulton,
Gallatin, Garrard, Grant, Graves, Gray-
son, Green, Hancock, Hardin, Harlan,
Harrison, Hart, Henry, Hickman, Hop-
kins, Jackson, Jefferson, Jessamine, John-
son, Kenton, Knott, Knox, Larue, Law-
rence, Lee, Leslie, Letcher, Lincoln,
Livingston, Logan, Lyon, Madison, Ma-
goffin, Marion, Marshall, Martin, Mason,
McCracken, McLean, Meade, Menifee,
Mercer, Metcalfe, Montgomery, Morgan,
Muhlenberg, Nelson, Nicholas, Ohio,
Oldham, Owen, Owsley, Pendleton,
Perry, Pike, Powell, Robertson, Rock-
castle, Rowan, Scott, Shelby, Simpson,
Spencer, Taylor, Todd, Trigg, Trimble,
Warren, Washington, Webster, Wolfe,
Woodford.

##### Louisiana

Parishes of Acadia, Allen, Ascension,
Assumption, Avoyelles, Beauregard, Bi-
enville, Bossier, Caddo, Calcasieu,
Caldwell, Cameron, Catahoula, Clai-
borne, Concordia, De Soto, East Baton
Rouge, East Feliciana, Evangeline, Frank-
lin, Grant, Iberia, Iberville, Jackson, Jef-
ferson Davis, Jefferson, La Salle, Lafay-
ette, Lafourche, Lincoln, Livingston,
Madison, Morehouse, Natchitoches, Or-
leans, Ouachita, Plaquemines, Pointe
Coupee, Rapides, Red River, Richland,
Sabine, Saint Bernard, Saint Charles,
Saint Helena, Saint James, Saint John the

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Baptist, Saint Landry, Saint Martin, Saint
Mary, Saint Tammany, Tangipahoa, Ter-
rebonne, Union, Vermilion, Vernon,
Washington, Webster, West Baton Rouge,
West Carroll, West Feliciana, Winn.

Maine

Counties of Androscoggin, Cumber-
land, Lincoln, Oxford, Sagadahoc, York.
Massachusetts

Counties of Barnstable, Berkshire,
Bristol, Dukes, Essex, Franklin, Hamp-
den, Hampshire, Middlesex, Nantucket,
Norfolk, Plymouth, Suffolk, Worcester.
Michigan

Counties of Gogebic, Keweenaw.

Minnesota

Counties of Aitkin, Anoka, Becker,
Beltrami, Benton, Big Stone, Blue Earth,
Brown, Carlton, Carver, Cass, Chippewa,
Chisago, Clay, Clearwater, Cook, Cotton-
wood, Crow Wing, Dakota, Dodge, Doug-
las, Faribault, Freeborn, Goodhue, Grant,
Hennepin, Hubbard, Isanti, Itasca, Jack-
son, Kanabec, Kandiyohi, Kittson,
Koochiching, Lac qui Parle, Lake, Lake of
the Woods, Le Sueur, Lincoln, Lyon,
Mahnomen, Marshall, Martin, McLeod,
Meeker, Mille Lacs, Morrison, Murray,
Nicollet, Nobles, Norman, Olmsted, Otter
Tail, Pennington, Pine, Pipestone, Polk,
Pope, Ramsey, Red Lake, Redwood, Ren-
ville, Rice, Rock, Roseau, Saint Louis,
Scott, Sherburne, Sibley, Stearns, Steele,
Stevens, Swift, Todd, Traverse, Wabasha,
Wadena, Waseca, Washington, Waton-
wan, Wilkin, Wright, Yellow Medicine.

Mississippi

Counties of Adams, Amite, Attala,
Benton, Bolivar, Carroll, Claiborne,
Clarke, Clay, Coahoma, Copiah, Coving-
ton, DeSoto, Forrest, Franklin, George,
Greene, Hancock, Harrison, Hinds, Hol-
mes, Humphreys, Issaquena, Jackson, Jas-
per, Jefferson, Jefferson Davis, Jones,
Kemper, Lamar, Lauderdale, Lawrence,
Leake, Leflore, Lincoln, Lowndes, Madi-
son, Marion, Marshall, Neshoba, Newton,
Noxubee, Pearl River, Perry, Pike,
Rankin, Scott, Sharkey, Simpson, Smith,
Stone, Sunflower, Tallahatchie, Tate, Tu-

nica, Walthall, Warren, Washington,
Wayne, Wilkinson, Yazoo.

Missouri

Counties of Barton, Camden, Cedar, Chris-
tian, Dade, Dallas, Douglas, Dunklin, Greene,
Hickory, Jasper, Laclede, Lawrence, McDon-
ald, Mississippi, New Madrid, Newton,
Ozark, Pemiscot, Polk, Pulaski, Stone, Taney,
Vernon, Webster, Wright.

Montana

Counties of Beaverhead, Blaine,
Broadwater, Cascade, Chouteau, Deer
Lodge, Flathead, Gallatin, Glacier, Gran-
ite, Hill, Jefferson, Lake, Lewis and Clark,
Liberty, Lincoln, Madison, Meagher,
Mineral, Missoula, Park, Phillips, Pon-
dera, Powell, Ravalli, Sanders, Silver
Bow, Teton, Toole, Valley.

Nebraska

Counties of Adams, Antelope, Boone,
Boyd, Brown, Buffalo, Cedar, Chase,
Cherry, Custer, Dakota, Dawson, Dixon,
Dundy, Franklin, Frontier, Furnas, Gage,
Gosper, Greeley, Hall, Hamilton, Harlan,
Hayes, Hitchcock, Holt, Howard, Jeffer-
son, Johnson, Kearney, Keya Paha, Knox,
Lancaster, Lincoln, Madison, Merrick,
Nance, Nemaha, Nuckolls, Otoe, Pawnee,
Perkins, Phelps, Pierce, Platte, Red Wil-
low, Richardson, Rock, Sherman, Valley,
Wayne, Webster, Wheeler.

Nevada

Carson City. Counties of Churchill,
Clark, Douglas, Elko, Esmeralda, Eureka,
Humboldt, Lander, Lincoln, Lyon, Min-
eral, Nye, Pershing, Storey, Washoe,
White Pine.

New Hampshire

Counties of Belknap, Carroll,
Cheshire, Grafton, Hillsborough, Merri-
mack, Rockingham, Strafford, Sullivan.

New Jersey

Counties of Bergen, Essex, Hudson,
Hunterdon, Mercer, Middlesex, Mon-
mouth, Morris, Passaic, Somerset, Sussex,
Union, Warren.

New Mexico

Counties of Bernalillo, Catron, Chaves,
Cibola, Colfax, Curry, DeBaca, Dona
Ana, Eddy, Grant, Guadalupe, Harding,
Hidalgo, Lea, Los Alamos, Luna, McKin-
ley, Mora, Otero, Quay, Rio Arriba, Roos-
evelt, San Juan, San Miguel, Sandoval,
Santa Fe, Sierra, Socorro, Taos, Torrance,
Union, Valencia.

New York

Counties of Albany, Bronx, Clinton,
Columbia, Delaware, Dutchess, Franklin,
Fulton, Greene, Hamilton, Herkimer, Jef-
ferson, Kings, Lewis, Montgomery, Nas-
sau, New York, Orange, Oswego, Putnam,
Queens, Rensselaer, Richmond, Rock-
land, Saint Lawrence, Saratoga, Sche-
nectady, Schoharie, Suffolk, Sullivan, Ul-
ster, Warren, Washington, Westchester.

North Carolina

Counties of Alamance, Alexander, An-
son, Avery, Bertie, Buncombe, Burke,
Cabarrus, Caldwell, Caswell, Catawba,
Chatham, Cleveland, Cumberland, David-
son, Davie, Duplin, Durham, Edgecombe,
Forsyth, Franklin, Gaston, Granville,
Greene, Guilford, Halifax, Harnett, Hay-
wood, Henderson, Iredell, Jackson, John-
ston, Lincoln, Macon, Madison, Martin,
McDowell, Mecklenburg, Mitchell, Nash,
Northampton, Orange, Person, Pitt, Polk,
Rockingham, Rowan, Rutherford, Samp-
son, Stanly, Stokes, Surry, Swain, Tran-
sylvania, Union, Vance, Wake, Warren,
Watauga, Wayne, Wilkes, Wilson, Yad-
kin, Yancey.

North Dakota

Counties of Barnes, Benson, Cass,
Cavalier, Dickey, Eddy, Emmons, Foster,
Grand Forks, Griggs, LaMoure, Logan,
McIntosh, Nelson, Pembina, Ramsey,
Ransom, Richland, Sargent, Steele, Stut-
sman, Traill, Walsh.

Ohio

Counties of Adams, Brown, Clermont,
Hamilton, Highland.

Oklahoma

Counties of Adair, Alfalfa, Atoka, Bea-
ver, Beckham, Blaine, Bryan, Caddo, Ca-

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nadian, Carter, Cherokee, Choctaw, Ci-
marron, Cleveland, Coal, Comanche,
Cotton, Craig, Creek, Custer, Delaware,
Dewey, Ellis, Garfield, Garvin, Grady,
Grant, Greer, Harmon, Harper, Hughes,
Jackson, Jefferson, Johnston, Kay, King-
fisher, Kiowa, Latimer, Le Flore, Lincoln,
Logan, Love, Major, Marshall, Mayes,
McClain, McCurtain, Murray, Muskogee,
Noble, Nowata, Okfuskee, Oklahoma,
Okmulgee, Osage, Ottawa, Pawnee,
Payne, Pittsburg, Pontotoc, Pottawatomie,
Pushmataha, Roger Mills, Rogers, Semi-
nole, Sequoyah, Stephens, Texas,
Tillman, Tulsa, Wagoner, Washington,
Washita, Woods, Woodward.

Oregon

Counties of Baker, Benton, Clackamas,
Clatsop, Columbia, Coos, Crook, Curry,
Deschutes, Douglas, Gilliam, Grant, Har-
ney, Hood River, Jackson, Jefferson, Jo-
sephine, Klamath, Lake, Lane, Lincoln,
Linn, Malheur, Marion, Morrow, Mult-
nomah, Polk, Sherman, Tillamook, Uma-
tilla, Union, Wallowa, Wasco, Washing-
ton, Wheeler, Yamhill.

##### Pennsylvania

Counties of Berks, Bucks, Carbon,
Chester, Lancaster, Lehigh, Luzerne,
Monroe, Montgomery, Northampton,
Pike, Schuylkill, Wayne.

##### Puerto Rico

Municipalities (Municipios) of Aguas
Buenas, Aibonito, Arecibo, Arroyo, Bar-
celoneta, Barranquitas, Bayamon, Cabo
Rojo, Caguas, Canovanas, Carolina, Ca-
tano, Cayey, Ceiba, Ciales, Cidra, Coamo,
Comerio, Corozal, Culebra, Dorado, Fa-
jardo, Florida, Guayama, Guayanilla,
Guaynabo, Gurabo, Hatillo, Hormigueros,
Humacao, Jayuya, Juana Diaz, Juncos,
Las Piedras, Loiza, Luquillo, Manati,
Maunabo, Mayaguez, Morovis, Naguabo,
Naranjito, Orocovis, Patillas, Penuelas,
Ponce, Rio Grande, Salinas, San German,
San Juan, San Lorenzo, Santa Isabel, Toa
Alta, Toa Baja, Trujillo Alto, Utuado,
Vega Alta, Vega Baja, Vieques, Villalba,
Yabucoa, Yauco.

Rhode Island

Counties of Bristol, Kent, Newport,
Providence, Washington.

South Carolina

Counties of Aiken, Allendale, Bam-
berg, Barnwell, Beaufort, Berkeley, Cal-
houn, Cherokee, Chester, Chesterfield,
Clarendon, Colleton, Darlington, Dillon,
Dorchester, Edgefield, Fairfield, Florence,
Georgetown, Greenville, Hampton,
Horry, Jasper, Kershaw, Lancaster, Lau-
rens, Lee, Lexington, Marion, McCor-
mick, Newberry, Oconee, Orangeburg,
Pickens, Richland, Saluda, Spartanburg,
Sumter, Union, Williamsburg, York.

South Dakota

Counties of Aurora, Beadle, Bon
Homme, Brookings, Brown, Brule, Buf-
falo, Butte, Campbell, Charles Mix, Clark,
Clay, Codington, Corson, Custer, Davi-
son, Day, Deuel, Dewey, Douglas, Ed-
munds, Faulk, Grant, Gregory, Haakon,
Hamlin, Hand, Hanson, Harding, Hughes,
Hutchinson, Hyde, Jackson, Jerauld,
Jones, Kingsbury, Lake, Lincoln, Lyman,
Marshall, McCook, McPherson, Meade,
Mellette, Miner, Minnehaha, Moody, Pen-
nington, Perkins, Potter, Roberts, San-
born, Shannon, Spink, Stanley, Sully,
Todd, Tripp, Turner, Union, Walworth,
Yankton, Ziebach.

Tennessee

Counties of Anderson, Benton, Blount,
Campbell, Carroll, Cheatham, Chester,
Claiborne, Cocke, Crockett, Davidson,
Decatur, Dickson, Dyer, Fayette, Gibson,
Grainger, Greene, Hamblen, Hancock,
Hardeman, Hardin, Hawkins, Haywood,
Henderson, Henry, Houston, Humphreys,
Jefferson, Knox, Lake, Lauderdale,
Loudon, Madison, McNairy, Monroe,
Montgomery, Morgan, Obion, Perry,
Roane, Robertson, Sevier, Shelby, Stew-
art, Sullivan, Sumner, Tipton, Union,
Washington, Weakley.

Texas

Counties of Anderson, Andrews, Ange-
lina, Aransas, Archer, Armstrong, Atascosa,
Austin, Bailey, Bandera, Bastrop, Baylor,
Bee, Bell, Bexar, Blanco, Borden, Bosque,

Bowie, Brazoria, Brazos, Brewster, Briscoe,
Brooks, Brown, Burleson, Burnet,
Caldwell, Calhoun, Callahan, Cameron,
Camp, Carson, Cass, Castro, Chambers,
Cherokee, Childress, Clay, Cochran, Coke,
Coleman, Collin, Collingsworth, Colorado,
Comal, Comanche, Concho, Cooke, Cory-
ell, Cottle, Crane, Crockett, Crosby, Dallam,
Dallas, Dawson, Deaf Smith, Delta, Denton,
DeWitt, Dickens, Dimmit, Donley, East-
land, Ector, Edwards, El Paso, Ellis, Erath,
Falls, Fannin, Fayette, Fisher, Floyd, Foard,
Fort Bend, Franklin, Freestone, Frio,
Gaines, Galveston, Garza, Gillespie, Glass-
cock, Goliad, Gonzales, Gray, Grayson,
Gregg, Grimes, Guadalupe, Hale, Hall,
Hamilton, Hansford, Hardeman, Hardin,
Harris, Harrison, Hartley, Haskell, Hays,
Hemphill, Henderson, Hidalgo, Hill, Hock-
ley, Hood, Hopkins, Houston, Howard,
Hudspeth, Hunt, Hutchinson, Jack, Jackson,
Jasper, Jeff Davis, Jefferson, Jim Hogg, Jim
Wells, Johnson, Jones, Karnes, Kaufman,
Kendall, Kenedy, Kent, Kerr, Kimble, King,
Kinney, Kleberg, Knox, La Salle, Lamar,
Lamb, Lampasas, Lavaca, Lee, Leon, Lib-
erty, Limestone, Lipscomb, Live Oak,
Llano, Loving, Lubbock, Lynn, Madison,
Marion, Martin, Mason, Matagorda, Maver-
ick, McCulloch, McLennan, McMullen,
Medina, Menard, Midland, Milam, Mills,
Mitchell, Montague, Montgomery, Moore,
Morris, Motley, Nacogdoches, Navarro,
Newton, Nolan, Nueces, Ochiltree, Oldham,
Orange, Palo Pinto, Panola, Parker, Parmer,
Pecos, Polk, Potter, Presidio, Rains, Ran-
dall, Reagan, Real, Red River, Reeves,
Refugio, Roberts, Robertson, Rockwall,
Runnels, Rusk, Sabine, San Augustine, San
Jacinto, San Patricio, San Saba, Schleicher,
Scurry, Shackelford, Shelby, Sherman,
Smith, Somervell, Starr, Stephens, Sterling,
Stonewall, Sutton, Swisher, Tarrant, Taylor,
Terrell, Terry, Throckmorton, Titus, Tom
Green, Travis, Trinity, Tyler, Upshur, Up-
ton, Uvalde, Val Verde, Van Zandt, Victo-
ria, Walker, Waller, Ward, Washington,
Webb, Wharton, Wheeler, Wichita, Wil-
barger, Willacy, Williamson, Wilson, Win-
kler, Wise, Wood, Yoakum, Young, Zapata,
Zavala.

Utah

Counties of Beaver, Box Elder, Cache,
Carbon, Daggett, Davis, Duchesne, Em-
ery, Garfield, Grand, Iron, Juab, Kane,
Millard, Morgan, Piute, Rich, Salt Lake,

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San Juan, Sanpete, Sevier, Summit,
Tooele, Uintah, Utah, Wasatch, Washing-
ton, Wayne, Weber.

Virginia

Norton City. Counties of Buchanan,
Dickenson, Lee, Scott, Wise.

Vermont

Counties of Bennington, Orange, Rut-
land, Windham, Windsor.

Washington

Counties of Adams, Asotin, Benton,
Chelan, Clallam, Clark, Columbia, Cowlitz,
Douglas, Ferry, Franklin, Garfield, Grant,
Grays Harbor, Island, Jefferson, King, Kit-
sap, Kittitas, Klickitat, Lewis, Lincoln, Ma-
son, Okanogan, Pacific, Pend Oreille,
Pierce, San Juan, Skagit, Skamania, Sno-
homish, Spokane, Stevens, Thurston, Wah-
kiakum, Walla Walla, Whatcom, Whitman,
Yakima.

Wisconsin

Counties of Ashland, Barron, Bayfield,
Brown, Buffalo, Burnett, Calumet, Chip-
pewa, Clark, Crawford, Douglas, Dunn,
Eau Claire, Fond du Lac, Forest, Grant,
Green Lake, Iowa, Iron, Jackson, Juneau,
Kewaunee, Lafayette, Langlade, Lincoln,
Manitowoc, Marathon, Marquette,
Menominee, Oconto, Oneida, Outagamie,
Pepin, Pierce, Polk, Portage, Price, Rich-
land, Rusk, Saint Croix, Sauk, Sawyer,
Shawano, Sheboygan, Taylor, Trempea-
leau, Vernon, Vilas, Washburn, Waupaca,
Waushara, Winnebago, Wood.

West Virginia

Counties of Boone, Cabell, Kanawha,
Lincoln, Logan, McDowell, Mingo, Ra-
leigh, Wayne, Wyoming.

Wyoming

Counties of Carbon, Lincoln, Park,
Sublette, Sweetwater, Teton, Uinta.

26 CFR 601.105: Examination of returns and claims
for refund, credit, or abatement; determination of
correct tax liability.
(Also Part I, § 42; 1.42-14.)

Rev. Proc. 2015-49

### SECTION 1. PURPOSE

This revenue procedure publishes the
amounts of unused housing credit carry-
overs allocated to qualified states under
§ 42(h)(3)(D) of the Internal Revenue
Code for calendar year 2015.

### SECTION 2. BACKGROUND

Rev. Proc. 92-31, 1992-1 C.B. 775,
provides guidance to state housing credit
agencies of qualified states on the proce-
dure for requesting an allocation of un-
used housing credit carryovers under
§ 42(h)(3)(D). Section 4.06 of Rev. Proc.
92-31 provides that the Internal Revenue
Service will publish in the Internal Reve-
nue Bulletin the amount of unused hous-
ing credit carryovers allocated to qualified
states for a calendar year from a national
pool of unused credit authority (the Na-
tional Pool). This revenue procedure pub-
lishes these amounts for calendar year
2015.

### SECTION 3. PROCEDURE

The unused housing credit carryover
amount allocated from the National Pool
by the Secretary to each qualified state for
calendar year 2015 is as follows:

Qualified State

Amount Allocated

California

388,272

Connecticut

35,990

Delaware

9,362

Florida

199,060

Georgia

101,038

Idaho

16,355

Illinois

128,888

Kansas

29,059

Maine

13,309

Maryland

59,802

Massachusetts

67,497

Michigan

99,162

Qualified State

Amount Allocated

Minnesota

54,607

Nebraska

18,827

New Jersey

89,439

New Mexico

20,869

New York

197,588

North Carolina

99,503

Ohio

116,016

Oklahoma

38,805

Oregon

39,728

Pennsylvania

127,954

Puerto Rico

35,507

South Dakota

8,537

Tennessee

65,535

Texas

269,741

Utah

29,448

Virginia

83,316

Washington

70,660

West Virginia

18,515

Wisconsin

57,612

### EFFECTIVE DATE

This revenue procedure is effective for
allocations of housing credit dollar
amounts attributable to the National Pool
component of a qualified state's housing
credit ceiling for calendar year 2015.

### DRAFTING INFORMATION

The principal author of this revenue
procedure is James A. Holmes of the Of-
fice of Associate Chief Counsel (Pass-
throughs and Special Industries). For fur-
ther information regarding this revenue
procedure, contact Mr. Holmes at (202)
317-4137 (not a toll-free number).

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## Part IV. Items of General Interest

Notice of proposed
rulemaking by cross-
reference to temporary
regulations and notice of
public hearing.

Dividend Equivalents from
Sources within the United
States

## 26 CFR Part 1 REG-127895-14 RIN 1545-BM33

AGENCY: Internal Revenue Service (IRS),
Treasury.

ACTION: Notice of proposed rulemaking
by cross-reference to temporary regula-
tions and notice of public hearing.

SUMMARY:

DATES: Written or electronic comments
must be received by December 17, 2015.
Outlines of topics to be discussed at the
public hearing scheduled for January 15,
2016, at 10 a.m. must be received by
December 17, 2015.

ADDRESSES: Send submissions to CC:
PA:LPD:PR (REG-127895-14), room
5203, Internal Revenue Service, PO Box
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand de-
livered Monday through Friday between
the hours of 8 a.m. and 4 p.m. to CC:PA:
LPD:PR (REG-127895-14), Courier's
desk, Internal Revenue Service, 1111
Constitution Avenue, NW., Washington,
DC 20044, or sent electronically, via the
Federal eRulemaking Portal at www.
regulations.gov (IRS REG-127895-14).
The public hearing will be held in the IRS
Auditorium, Internal Revenue Building,
1111 Constitution Avenue, NW., Wash-
ington, DC.

## FOR FURTHER INFORMATION

CONTACT: Concerning the regulations,
D. Peter Merkel or Karen Walny at (202)
317-6938; concerning submissions of
comments, the hearing, and/or to be
placed on the building access list to attend

the hearing Oluwfunmilayo Taylor at
(202) 317-6901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

### Background and Explanation of Provisions

Final and temporary regulations in the
Rules and Regulations section of this is-
sue of the Internal Revenue Bulletin
contain amendments to the Income Tax
Regulations (26 CFR Part 1) which pro-
vide rules for determining when a pay-
ment made pursuant to certain financial
products will be treated as a dividend
equivalent for purposes of section 871(m).
These proposed regulations provide guid-
ance relating to the substantial equiva-
lence test, which is used to determine
whether a complex contract is a section
871(m) transaction. These proposed regu-
lations also provide guidance to qualified
derivatives dealers. The text of those tem-
porary regulations also serves as the text
of these proposed regulations. The pream-
ble to the final and temporary regulations
explains the temporary regulations and
these proposed regulations. The regula-
tions affect nonresident alien individuals,
foreign corporations, and withholding
agents.

## 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 regulations, 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), these regulations have
been submitted to the Chief Counsel for
Advocacy of the Small Business Admin-
istration for comment on its impact on
small business.

## Comments and Public Hearing

Before these proposed regulations are
adopted as final regulations, consideration
will be given to any comments that are
submitted timely to the IRS as prescribed
in this preamble under the "Addresses"
heading. The Treasury Department and
the IRS request comments on all aspects
of the proposed rules. All comments will
be available at www.regulations.gov or
upon request.

A public hearing has been scheduled
for January 14, 2016, beginning at 10 a.m.
in the Auditorium of the Internal Revenue
Building, 1111 Constitution Avenue,
NW., Washington, DC. Due to building
security procedures, visitors must enter at
the Constitution Avenue entrance. In ad-
dition, all visitors must present photo
identification to enter the building. Be-
cause of access restrictions, visitors will
not be admitted beyond the immediate
entrance more than 30 minutes before the
hearing starts. For information about hav-
ing your name placed on the building ac-
cess list to attend the hearing, see the
"FOR FURTHER INFORMATION
CONTACT" section of this preamble.

The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing. Persons who wish to
present oral comments at the hearing must
submit an outline of the topics to be dis-
cussed and the time to be devoted to each
topic by December 17, 2015. Submit a
signed paper or electronic copy of the
outline as prescribed in this preamble un-
der the "Addresses" heading. A period of
10 minutes will be allotted to each person
for making comments. An agenda show-
ing the scheduling of the speakers will be
prepared after the deadline for receiving
outlines has passed. Copies of the agenda
will be available free of charge at the
hearing.

## Drafting Information

The principal authors of these regula-
tions are D. Peter Merkel and Karen
Walny of the Office of Chief Counsel
(International). However, other personnel
from the Treasury Department and the
IRS participated in their development.
* * * * *

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<!-- PageBreak -->

## 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 * * *

§ 1.871-15 also issued under 26 U.S.C.
871(m). * * *

Par. 2. Section 1.871-15 is amended by
revising paragraph (c)(2)(vi), paragraph
(h), and paragraph (q) to read as follows:

§ 1.871-15 Treatment of dividend
equivalents.

** * * *

(c) * * *

(2) * * *

(iv) [The text of the proposed amend-
ments to § 1.871-15(c)(2)(iv) is the same
as the text of § 1.871-15T(c)(2)(iv) pub-
lished elsewhere in this issue of the Inter-
nal Revenue Bulletin.]

* * * * *

(h) [The text of the proposed amend-
ments to § 1.871-15(h) is the same as the
text of § 1.871-15T(h) published else-
where in this issue of the Internal Reve-
nue Bulletin.]

* * * * *

(q) [The text of the proposed amend-
ments to § 1.871-15(q) is the same as the
text of § 1.871-15T(q) published else-
where in this issue of the Internal Reve-
nue Bulletin.]

Par. 3. Section 1.1441-1 is amended by
revising paragraph (e)(3)(ii)(E) and para-
graph (e)(6) to read as follows:

§ 1.1441-1 Requirement for the
deduction and withholding of tax on
payments to foreign persons.

* * * * *

(e) * * *

(3) * * *

(ii) * * *

(E) [The text of the proposed amend-
ments to § 1.1441-1(e)(3)(ii)(E) is the
same as the text of § 1.1441-
1T(e)(3)(ii)(E) published elsewhere in this
issue of the Internal Revenue Bulletin.]
* * * * *

(5) [The text of the proposed amend-
ments to § 1.1441-1(e)(5) is the same as
the text of § 1.1441-1T(e)(5) published
elsewhere in this issue of the Internal
Revenue Bulletin.]

(6) [The text of the proposed amend-
ments to § 1.1441-1(e)(6) is the same as
the text of § 1.1441-1T(e)(6) published
elsewhere in this issue of the Internal
Revenue Bulletin.]

John Dalrymple
Deputy Commissioner for
Services and Enforcement.

(Filed by the Office of the Federal Register on September
17, 2015, 8:45 a.m., and published in the issue of the Federal
Register for September 18, 2015, 80 F.R. 56415)

### Notice of proposed rulemaking Substantiation Requirement for Certain Contributions

#### REG-138344-13

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains
proposed regulations to implement the ex-
ception to the "contemporaneous written
acknowledgement" requirement for sub-
stantiating charitable contribution deduc-
tions of $250 or more. These proposed
regulations provide rules concerning the
time and manner for donee organizations
to file information returns that report the
required information about contributions
(donee reporting).

DATES: Written or electronic comments
must be received by December 16, 2015.

ADDRESSES: Send submissions to CC:
PA:LPD:PR (REG-138344-13), room
5203, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand-
delivered Monday through Friday be-
tween the hours of 8 a.m. and 4 p.m. to:
CC:PA:LPD:PR (REG-138344-13),
Courier's Desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Wash-
ington, DC, or sent electronically via the

Federal eRulemaking Portal at www.
regulations.gov (IRS REG-138344-13).

#### FOR FURTHER INFORMATION

CONTACT: Concerning the proposed
regulations, Robert Basso at (202) 317-
7011 (not a toll-free number); concerning
comments or a request for a public hear-
ing, Oluwafunmilayo Taylor at (202) 317-
6901 (not a toll-free number).

## SUPPLEMENTARY INFORMATION: Paperwork Reduction Act

The collection of information con-
tained in this notice of proposed rulemak-
ing will be submitted to the Office of
Management and Budget in accordance
with the Paperwork Reduction Act of
1995 (44 U.S.C. 3507(d)). Comments on
the collection of information should be
sent to the Office of Management and
Budget, Attn: Desk Officer for the De-
partment of the Treasury, Office of Infor-
mation and Regulatory Affairs, Washing-
ton, DC 20503, with copies to the
Internal Revenue Service, Attn: IRS Re-
ports Clearance Officer, SE:W:CAR:MP:
T:T:SP, Washington, DC 20224. Com-
ments on the collection of information
should be received by November 16,
2015. Comments are specifically re-
quested concerning:

Whether the proposed collection of in-
formation is necessary for the proper per-
formance of the functions of the IRS, in-
cluding whether the information will have
practical utility;

How the quality, utility, and clarity of
the information to be collected may be
enhanced;

How the burden of complying with the
proposed collection of information may
be minimized, including the application of
automated collection techniques or other
forms of information technology; and

Estimates of capital or start-up costs
and costs of operation, maintenance, and
purchase of services to provide informa-
tion.

The collection of information in these
proposed regulations is in § 1.170A-
13(f)(18) of the Income Tax Regula-
tions. The collection of information is
necessary to properly substantiate char-
itable contribution deductions under the
exception to the general requirements
for substantiating charitable contribu-

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tion deductions of $250 or more. The
collection of information is required to
comply with the provisions of section
170(f)(8)(D) of the Internal Revenue
Code (Code). The respondents are enti-
ties that receive charitable contributions
and donors to such entities. The burden
for the collection of information contained
in proposed regulation § 1.170A-
13(f)(18) will be reflected in the burden
estimate for a form that the IRS intends to
create to request the information specified
in the proposed regulation. Once a draft
form is available, comments will be in-
vited via a notice in the Federal Register
and on the IRS website.

An agency may not conduct or spon-
sor, and a person is not required to re-
spond to, a collection of information un-
less it displays a valid control number
assigned by the Office of Management
and Budget.

### Background

This document contains amendments
to the Income Tax Regulations (26 CFR
part 1) under Code section 170(f)(8) gov-
erning the substantiation of charitable
contributions of $250 or more. Section
170(f)(8) was enacted by Section
13172(a) of the Omnibus Budget Recon-
ciliation Act of 1993, Public Law 103-66
(107 Stat. 312, 455 (1993)), effective for
contributions made on or after January 1,
1994. Section 1.170A-13(f) provides
rules on substantiation of charitable con-
tributions of $250 or more. See TD 8690
(1997-1 CB 68).

Section 170(f)(8)(A) requires a tax-
payer who claims a charitable contribu-
tion deduction for any contribution of
$250 or more to obtain substantiation in
the form of a contemporaneous written
acknowledgment (CWA) from the donee
organization. Under section 170(f)(8)(B),
while the CWA need not be in any partic-
ular form, it must contain the following
information: (1) the amount of cash and a
description of any property other than
cash contributed; (2) whether any goods
and services were provided by the donee
organization in consideration for the con-
tribution; and (3) a description and good
faith estimate of the value of any goods
and services provided by the donee orga-
nization or a statement that such goods

and services consist solely of intangible
religious benefits.

The CWA must also be contemporane-
ous. Under sections 170(f)(8)(C) and
1.170A-13(f)(3), a CWA is contempora-
neous if it is obtained by the taxpayer on
or before the earlier of the date the tax-
payer files an original return for the tax-
able year in which the contribution was
made or the due date (including exten-
sions) for filing the taxpayer's original
return for that year. In the preamble to TD
8690, the Treasury Department and the
IRS further emphasized this requirement,
noting that "[a] written acknowledgment
obtained after a taxpayer files the original
return for the year of the contribution is
not contemporaneous within the meaning
of the statute." TD 8690 (1997-1 CB 68).

Section 170(f)(8)(D) provides an ex-
ception to the CWA requirement. Under
the exception, a CWA is not required if
the donee organization files a return, on
such form and in accordance with such
regulations as the Secretary may pre-
scribe, that includes the information de-
scribed in section 170(f)(8)(B). When is-
suing TD 8690 in 1997, the Treasury
Department and the IRS specifically de-
clined to issue regulations under section
170(f)(8)(D) to effectuate donee report-
ing. The present CWA system works ef-
fectively, with minimal burden on donors
and donees, and the Treasury Department
and the IRS have received few requests
since the issuance of TD 8690 to imple-
ment a donee reporting system.

In recent years, some taxpayers under
examination for their claimed charitable
contribution deductions have argued that a
failure to comply with the CWA require-
ments of section 170(f)(8)(A) may be
cured if the donee organization files an
amended Form 990, "Return of Organiza-
tion Exempt From Income Tax," that in-
cludes the information described in sec-
tion 170(f)(8)(B) for the contribution at
issue. These taxpayers argue that an
amended Form 990 constitutes permissi-
ble donee reporting within the meaning of
section 170(f)(8)(D), even if the amended
Form 990 is submitted to the IRS many
years after the purported charitable contri-
bution was made. The IRS has consis-
tently maintained that the section
170(f)(8)(D) exception is not available
unless and until the Treasury Department

and the IRS issue final regulations pre-
scribing the method by which donee re-
porting may be accomplished. Moreover,
the Treasury Department and the IRS
have concluded that the Form 990 is un-
suitable for donee reporting.

### Explanation of Provisions

The framework established by these
proposed regulations for donee reporting
under the section 170(f)(8)(D) exception
is intended to provide for timely reporting,
while also minimizing reporting burdens
on donees and protecting donor privacy.

#### Manner of Donee Reporting

The present CWA process requires that
the acknowledgement provided to the do-
nor contain information useful in prepar-
ing the donor's tax return for the year of
the contribution. To effectively substitute
for the CWA, any donee reporting process
would require not only that an information
return be filed with the IRS, but also that
a copy be provided to the donor for use in
preparing the donor's federal income tax
return for the year of the contribution.

In order to better protect donor privacy,
the Treasury Department and the IRS
have concluded that the Form 990 series
should not be used for donee reporting.
Instead, before finalization of these pro-
posed regulations, the IRS intends to de-
velop a specific-use information return for
donee reporting. Donees are not required
to adopt donee reporting. Donees who opt
to use donee reporting will be required to
provide a copy of the information return
to the donor at the address the donor pro-
vides for this purpose, and the information
return will contain only the information
related to that donor. The proposed regu-
lations are reserved on the particular form
that will be prescribed for this purpose.

Section 170(f)(8)(D) provides that a
donee organization must include the infor-
mation described in section 170(f)(8)(B)
on its return for the donor to qualify for
the donee reporting exception. Accord-
ingly, the proposed regulations require
that donees who opt to use donee report-
ing must report that information as well as
the donor's name, address, and taxpayer
identification number. The donor's tax-
payer identification number is necessary
in order to properly associate the donation

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information with the correct donor. Unlike
a CWA, which is not sent to the IRS, the
donee reporting information return will be
sent to the IRS, which must have a means
to store, maintain, and readily retrieve the
return information for a specific taxpayer
if and when substantiation is required in
the course of an examination. The Trea-
sury Department and the IRS request
comments on the scope of the information
necessary to verify substantiation of char-
itable contribution deductions under do-
nee reporting.

The Treasury Department and the IRS
are concerned about the potential risk for
identity theft involved with donee report-
ing given that donees will be collecting
donors' taxpayer identification numbers
and maintaining those numbers for some
period of time. The Treasury Department
and the IRS request comments on whether
additional guidance is necessary regarding
the procedures a donee should use in so-
liciting and maintaining a donor's tax-
payer identification number and address to
mitigate the risk.

In order to minimize the burden on
donees, the proposed regulations provide
that donee reporting is not required, but
may be done at the option of a donee
organization. If a contribution is not re-
ported using donee reporting, then the do-
nor must obtain a CWA. The Treasury
Department and the IRS request com-
ments on these provisions and whether
additional guidance is necessary to clarify
the requirements for donors and donees if
the donee chooses to use donee reporting
for some or all of the contributions it
receives. Also, because of the potential
burden on donee organizations, the Trea-
sury Department and the IRS request
comments on how the donee reporting
process might be better designed to min-
imize donee burden, and how it may in-
teract with the requirement under section
6115 to provide donors information re-
garding quid pro quo contributions.

#### Time of Donee Reporting

Section 170(f)(8) is premised on do-
nors receiving timely substantiation of
their donations of $250 or more. The
CWA assists a donor preparing a return
(as well as the IRS examining the return)
in determining whether, and in what

amount, a donor may claim a charitable
contribution deduction. H.R. Rept. No.
103-111, at 783, 785 (1993), 1993-3 CB
167, 359, 361; Viralam v. Commissioner,
136 T.C. 151, 171 (2011); Addis v. Com-
missioner, 118 T.C. 528, 536 (2002),
aff'd, 374 F.3d 881 (9th Cir. 2004); Di-
Donato v. Commissioner, T.C. Memo.
2011-153. It would be inconsistent with
the purpose of section 170(f)(8) to allow
an exception to the CWA requirement of
section 170(f)(8)(A) based on information
that might be reported by a donee on a
return that is filed many years after the
purported charitable contribution was
made. Rather, any alternative method to
using a CWA for substantiating charitable
contributions through donee reporting
must provide timely information to both
the IRS and the donor in order to satisfy
the purpose of section 170(f)(8).

Accordingly, the proposed regulations
provide that any information return under
section 170(f)(8)(D) must be filed by the
donee no later than February 28th of the
year following the year in which the con-
tribution is made, and the donee organi-
zation must provide a copy of the infor-
mation return to the donor by the same
date. An information return that is not
filed timely with the IRS, with a copy
provided to the donor, will not qualify
under section 170(f)(8)(D).

February 28th is the date when numer-
ous other information returns concerning
transactions with other persons must be
filed. See, for example, § 1.6041-6 (in-
formation at source), § 1.6045-1(j) (re-
turns of brokers), and § 1.6049-4(g) (re-
turns regarding payment of interest). The
requirement that a donee organization
provide a copy of the information return
to the donor no later than February 28th of
the year following the year in which the
contribution is made is intended to pro-
vide donors with timely information
needed to claim appropriate charitable
contribution deductions on their returns,
as well as to ensure sound tax administra-
tion - objectives that will not be met if
donee reporting is allowed to occur long
after the contribution was made. In addi-
tion, for donors to be relieved of the ob-
ligation to obtain a CWA, the donee must
file the donee reporting information re-
turn, and communicate that it has done so
to the donor, before the due date for the

donor's return. The Treasury Department
and the IRS request comments on the use
of February 28th as the due date for filing
a return and furnishing a copy to a donor.

## Proposed Effective Date

The regulations are proposed to apply
to contributions made on or after the date
of publication of a Treasury decision
adopting these rules as final regulations in
the Federal Register.

## 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 regulations.

It is hereby certified that these regula-
tions will not have a significant economic
impact on a substantial number of small
entities. This certification is based on the
fact that, to the extent a donee reporting
system is implemented under section
170(f)(8)(D), the statute itself specifies the
bulk of the information that needs to be
collected for purposes of these regula-
tions. The proposed regulations require
that, in order for a donor to be relieved of
the current CWA requirement, a donee
organization that uses donee reporting
must file a return with the IRS reporting
certain information and must furnish a
copy of the return to the donor whose
contribution is reported on such return.
These regulations provide the content of
the return under section 170(f)(8)(D), the
time for filing the return, and the require-
ment to furnish a copy to the donor. More-
over, any burden associated with the col-
lection of information under the proposed
regulations is minimized by the fact that
donee reporting under the proposed regu-
lations is optional on the part of any do-
nee, including small entities. Donees need
not use this donee reporting process and
donors can continue to use the current
CWA process. Given the effectiveness
and minimal burden of the CWA process,
it is expected that donee reporting will be
used in an extremely low percentage of
cases.

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Based on these facts, a Regulatory
Flexibility Analysis under the Regulatory
Flexibility Act (5 U.S.C. chapter 6) is not
required.

Pursuant to section 7805(f) of the
Code, this notice of proposed rulemaking
will be submitted to the Chief Counsel for
Advocacy of the Small Business Admin-
istration for comment on its impact on
small business.

## Comments and Requests for a Public Hearing

Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments
that are submitted timely to the IRS as
prescribed in this preamble under the
"Addresses" heading. The Treasury De-
partment and the IRS request comments
on all aspects of the proposed rules. All
comments will be available at http://www.
regulations. gov or upon request.

A public hearing will be scheduled if
requested in writing by any person who
timely submits comments. 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 regula-
tions are Martin L. Osborne and Robert
Basso of the Office of the Associate Chief
Counsel (Income Tax and Accounting).
However, other personnel from the Trea-
sury Department and the IRS participated
in their development.

* * * * *

## Proposed Amendment 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 170A-13 is amended by
revising paragraph (f)(18) and adding
paragraph (f)(19) to read as follows:

§ 1.170A-13. Recordkeeping and return
requirements for deductions for
charitable contributions.

** * * *

(f) * * *

(18) Donee organization reporting-

(i) Prescribed form. [Reserved]

(ii) Content of return. A document will
not qualify as a return for purposes of
section 170(f)(8)(D) unless it contains all
of the following information:

(A) The name and address of the do-
nee;

(B) The name and address of the donor;

(C) The taxpayer identification number
of the donor;

(D) The amount of cash and a descrip-
tion (but not necessarily the value) of any
property other than cash contributed by
the donor to the donee;

(E) Whether any goods and services
were provided by the donee organization
in consideration, in whole or in part, for
the contribution by the donor; and

(F) A description and good faith esti-
mate of the value of any goods and ser-
vices provided by the donee organization
or a statement that such goods and ser-
vices consist solely of intangible religious
benefits.

(iii) Time for filing return. Every donee
organization filing a return described in
section 170(f)(8)(D) shall file such return
on or before February 28 of the year fol-
lowing the calendar year in which the
contribution was made. If the return is not
filed timely, the return does not qualify
under section 170(f)(8)(D), and section
170(f)(8)(A) through (C) applies to the
contribution.

(iv) Furnishing a copy to donor. Every
donee organization filing a return de-
scribed in section 170(f)(8)(D) shall fur-
nish a copy of the return to the donor
whose contribution is reported on such
return on or before February 28 of the
year following the calendar year in which
the contribution was made. The copy of
the return shall be provided to the donor at
the address the donor provides for this
purpose.

(v) Donee organization reporting at
option of donee. Donee organization re-
porting is not required. Donee reporting is
available solely at the option of a donee
organization, and the requirements of sec-

tion 170(f)(8)(A) through (C) apply to all
contributions that are not reported using
donee reporting.

(19) Effective/applicability date. Para-
graphs (f)(1) through (17) of this section
apply to contributions made on or after
December 16, 1996. However, taxpayers
may rely on the rules of paragraphs (f)(1)
through (17) for contributions made on or
after January 1, 1994. Paragraph (f)(18) of
this section applies to contributions made
on or after the date of publication of a
Treasury decision adopting these rules as
final regulations in the Federal Register.

John Dalrymple,
Deputy Commissioner for
Services and Enforcement.

(Filed by the Office of the Federal Register on September
16, 2015, 8:45 a.m., and published in the issue of the Federal
Register for September 17, 2015, 80 F.R. 55802)

Notice of proposed
rulemaking; notice of
proposed rulemaking by
cross-reference to
temporary regulation

United States Property Held
by Controlled Foreign
Corporations in
Transactions Involving
Partnerships; Rents and
Royalties Derived in the
Active Conduct of a Trade
or Business

REG-155164-09

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Notice of proposed rulemak-
ing; notice of proposed rulemaking by
cross-reference to temporary regulation.

SUMMARY: This document contains
proposed regulations that provide rules re-
garding the treatment as United States
property of property held by a controlled
foreign corporation (CFC) in connection
with certain transactions involving part-
nerships. In addition, in the Rules and
Regulations section of this issue of the
Internal revenue Internal Revenue Bul-

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letin, the Department of Treasury (Trea-
sury Department) and the IRS are issuing
temporary regulations under sections 954
and 956, the text of which also serves as
the text of certain provisions of these pro-
posed regulations. The proposed regula-
tions affect United States shareholders of
CFCs.

DATES: Written or electronic comments
and requests for a public hearing must be
received by December 1, 2015.

ADDRESSES: Send submissions to: CC:
PA:LPD:PR (REG-155164-09), room
5203, Internal Revenue Service, P.O. Box
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand-
delivered Monday through Friday be-
tween the hours of 8 a.m. and 4 p.m. to
CC:PA:LPD:PR (REG-155164-09),
Courier's Desk, Internal Revenue Service,
1111 Constitution Avenue NW, Washing-
ton, DC, or sent electronically via the Fed-
eral eRulemaking Portal at http://www.
regulations.gov (IRS REG-155164-09).

### FOR FURTHER INFORMATION

CONTACT: Concerning the proposed
regulations, Rose E. Jenkins, (202) 317-
6934; concerning submissions of com-
ments or requests for a public hearing,
Regina Johnson, (202) 317-6901 (not a
toll-free number).

# SUPPLEMENTARY INFORMATION:

## Background

This document contains proposed
amendments to 26 CFR part 1 under sec-
tion 956. Section 956 determines the
amount that a United States shareholder
(as defined in section 951(b)) of a CFC
must include in gross income with respect
to the CFC under section 951(a)(1)(B).
This amount is determined, in part, based
on the average amount of United States
property held, directly or indirectly, by the
CFC at the close of each quarter during its
taxable year. For this purpose, in general,
the amount taken into account with re-
spect to any United States property is the
adjusted basis of the property, reduced by
any liability to which the property is sub-
ject. See section 956(a) and § 1.956-1(e).

Section 956(e) grants the Secretary au-
thority to prescribe such regulations as
may be necessary to carry out the pur-

poses of section 956, including regula-
tions to prevent the avoidance of section
956 through reorganizations or otherwise.
In addition, section 956(d) grants the Sec-
retary authority to prescribe regulations
pursuant to which a CFC that is a pledgor
or guarantor of an obligation of a United
States person is considered to hold the
obligation.

The current regulations under section
956 do not specifically address when the
obligations of a foreign partnership will
be treated as United States property. The
preamble to proposed regulations under
section 954(i) (REG-106418-05), pub-
lished in the Federal Register on January
17, 2006 (71 FR 2496), requested com-
ments regarding the application of section
956 to loans made by a CFC to a foreign
partnership in which one or more partners
are United States shareholders of the CFC.
After considering the comments received,
the Treasury Department and the IRS
have determined to issue these regulations
that propose new rules concerning the
treatment of obligations of, and United
States property held by, a foreign partner-
ship for purposes of section 956.

The temporary regulations in the Rules
and Regulations section of this issue of
the Internal Revenue Bulletin amend the
Income Tax Regulations (26 CFR part 1)
relating to sections 954 and 956. The text
of the temporary regulations also serves as
the text of certain provisions of the pro-
posed regulations herein. The preamble to
the temporary regulations explains the
temporary regulations and the correspond-
ing proposed regulations.

## Explanation of Provisions

### 1. Obligations of Foreign Partnerships

### A. General rule

Comments received in response to the
request for comments in the preamble to
the proposed regulations under section
954(i) recommended that the general rule
under section 956 should treat an obliga-
tion of a foreign partnership held by a
CFC as an obligation of a foreign person,
rather than as an obligation of its partners,
including any partners that are United
States persons. Those comments noted
that the inclusion of a domestic partner-
ship in the definition of a United States

person in section 7701 causes an obliga-
tion of a domestic partnership to be
treated as an obligation of a United States
person for purposes of section 956. Based
on that observation, the comments as-
serted that section 956 implicitly treats
both domestic and foreign partnerships as
entities, rather than as aggregates of their
partners, for purposes of determining
whether an obligation of a partnership is
United States property, such that an obli-
gation of a foreign partnership with one or
more partners that are United States per-
sons should not be treated as an obligation
of a United States person for purposes of
section 956. The comments further stated
that a general rule that treated an obliga-
tion of a foreign partnership as an obliga-
tion of a foreign person, rather than a
United States person, would be consistent
with the purposes of section 956.

The definition of United States person
in section 7701(a)(30) includes a domestic
partnership, such that an obligation of a
domestic partnership generally is an obli-
gation of a United States person for pur-
poses of section 956. In contrast, section
7701 contains no corresponding definition
of foreign person that includes a foreign
partnership, nor any residual definition
treating a person that is not a United
States person as a foreign person. More-
over, section 956 does not address the
status of an obligation of a foreign part-
nership as an obligation of a United States
person or as United States property. Sec-
tion 956(e), however, provides that the
Secretary shall prescribe such regulations
as may be necessary to carry out the pur-
poses of section 956, including regula-
tions to prevent the avoidance of section
956. Additionally, the Code and Regula-
tions alternately treat partnerships either
as aggregates of their partners or as enti-
ties, depending on the context and rele-
vant policy considerations. For example,
current law under section 956 employs
both approaches with regard to domestic
partnerships, applying an aggregate ap-
proach with respect to United States prop-
erty held through a domestic partnership
and an entity approach with respect to the
obligations of a domestic partnership.

Section 956 is intended to prevent a
United States shareholder of a CFC from
inappropriately deferring U.S. taxation of
CFC earnings and profits by "prevent[ing]

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the repatriation of income to the United
States in a manner which does not subject
it to U.S. taxation." H.R. Rep. No. 87-
1447, 87th Cong., 2d Sess., at 58 (1962).
In the absence of section 956, a United
States shareholder of a CFC could access
the CFC's funds (untaxed earnings and
profits) in a variety of ways other than by
the payment of an actual taxable dividend,
such that there would be no reason for the
United States shareholder to incur the div-
idend tax. Section 956 ensures that, to the
extent CFC earnings are made available
for use in the United States or for use by
the United States shareholder, the United
States shareholder of the CFC is subject to
current U.S. taxation with respect to such
amounts. Accordingly, under section 956,
the investment by a CFC of its earnings
and profits in United States property is
"taxed to the [CFC's] shareholders on the
grounds that this is substantially the
equivalent of a dividend." S. Rep. No.
87-1881, 87th Cong., 2d Sess., at 88
(1962).

The Treasury Department and the IRS
have determined that failing to treat an
obligation of a foreign partnership as an
obligation of its partners could allow de-
ferral of U.S. taxation of CFC earnings
and profits in a manner inconsistent with
the purposes of section 956. When a
United States shareholder can conduct op-
erations through a foreign partnership us-
ing deferred CFC earnings, those earnings
effectively have been made available to
the United States shareholder. Addition-
ally, because assets of a partnership gen-
erally are available to the partners without
additional U.S. tax, a United States share-
holder potentially could directly access
deferred CFC earnings lent to a foreign
partnership in which the United States
shareholder is a partner without those
earnings becoming subject to current U.S.
tax by causing the partnership to make a
distribution.

In light of these considerations, these
proposed regulations treat an obligation of
a foreign partnership as an obligation of
its partners for purposes of section 956,
subject to the exception described in Part
1.B of this preamble for obligations of
foreign partnerships in which neither the
lending CFC nor any person related to the
lending CFC is a partner. More specifi-
cally, proposed § 1.956-4(c)(1) generally

treats an obligation of a foreign partner-
ship as an obligation of the partners to the
extent of each partner's share of the obli-
gation as determined in accordance with
the partner's interest in partnership profits.
The Treasury Department and the IRS
have considered various methods for de-
termining a partner's share of a partner-
ship obligation, including the regulations
under section 752 for determining a part-
ner's share of partnership liabilities, the
partner's liquidation value percentage
(discussed in Part 3 of this preamble), and
the partner's interest in partnership profits.
Using the partner's interest in partnership
profits to determine a partner's share of a
partnership obligation is consistent with
the observation that, to the extent the pro-
ceeds of a partnership borrowing are used
by the partnership to invest in profit-
generating activities, partners in the part-
nership (including service partners with
limited or no partnership capital) will ben-
efit from the partnership obligation to the
extent of their interests in the partnership
profits. Taking this into account along
with considerations of administrability,
the Treasury Department and the IRS be-
lieve that it is appropriate to determine a
partner's share of a foreign partnership's
obligation in accordance with the part-
ner's interest in partnership profits. How-
ever, the Treasury Department and the
IRS solicit comments on whether the liq-
uidation value percentage method or an-
other method would be a more appropriate
basis for determining a partner's share of
a foreign partnership's obligation.

The determination of a partner's share
of the obligation will be made as of the
close of each quarter of the CFC's taxable
year in connection with the calculation of
the amount of United States property held
by the CFC for purposes of section
956(a)(1)(B). Thus, for example, if a part-
ner in a foreign partnership is a United
States shareholder of a CFC, an obligation
of the partnership that is held by the CFC
will be treated as United States property
(subject to the exception described in Part
1.B of this preamble for obligations of
foreign partnerships in which neither the
lending CFC nor any person related to the
lending CFC is a partner) to the extent of
the United States shareholder partner's
share of the obligation as determined in
accordance with the partner's interest in

partnership profits as of the close of each
quarter of the CFC's taxable year.

The general rule in proposed § 1.956-
4(c)(1) also applies to determine the ex-
tent to which a CFC guarantees or other-
wise supports an obligation of a related
United States person when the related
United States person is a partner in a
foreign partnership that incurred the obli-
gation that is the subject of the CFC's
credit enhancement. Likewise, if a CFC is
a partner in a foreign partnership that
owns property that would be United States
property if held by the CFC, and the prop-
erty is subject to a liability that would
constitute a specific charge within the
meaning of § 1.956-1(e)(1), the CFC's
share of the liability, as determined under
proposed § 1.956-4(c)(1), would be
treated as a specific charge that, under
§ 1.956-1(e)(1), could reduce the amount
taken into account by the CFC in deter-
mining the amount of its share of the
United States property, as determined un-
der proposed § 1.956-4(b).

One commenter asserted that if a
United States shareholder of a CFC is a
partner in a foreign partnership and is
treated as having an inclusion under sec-
tion 956 when the CFC makes a loan to
the partnership, as can occur under these
proposed regulations, and that partner
later receives an actual distribution from
the partnership, the partner could have an
inappropriate second inclusion when it is
deemed to receive a distribution from the
partnership upon the partnership's repay-
ment of the loan. The second inclusion in
this fact pattern could arise under sub-
chapter K to the extent the partner is re-
quired to reduce its basis in its partnership
interest under section 733 on the actual
distribution and again reduce its basis as a
result of a deemed distribution under sec-
tion 752(b) when its share of the loan is
repaid. If the distributions exceed the part-
ner's basis in its partnership, including the
increase to basis under section 752(a)
when the partnership originally undertook
the obligation, the partner could recognize
gain under section 731. The commenter
suggested that having inclusions under
both section 956 and subchapter K in this
fact pattern is inappropriate and that
changes should be made to the subchapter
K rules to prevent this result.

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The Treasury Department and the IRS
have determined that these proposed reg-
ulations and the existing rules under sub-
chapter K and section 959 provide the
appropriate result in the fact pattern de-
scribed in the comment. The potential for
gain under subchapter K in the fact pattern
exists regardless of the application of sec-
tion 956. The required inclusion under
these proposed regulations to the extent a
CFC is treated as holding an obligation of
a United States person reflects policy con-
siderations distinct from the policy con-
siderations underlying the potential results
under subchapter K. Moreover, in the fact
pattern, the United States property held by
the CFC in connection with its loan to the
partnership generates previously taxed
earnings and profits described in section
959(c)(1)(A) that, in general, are available
for distribution by the CFC to its United
States shareholder without further U.S.
tax on the distributed amount. Accord-
ingly, these proposed regulations do not
include rules under subchapter K to ad-
dress this comment.

B. Exception for obligations of
partnerships in which neither the
lending CFC nor any person related to
the lending CFC is a partner

The Treasury Department and the IRS
have determined that certain obligations
of foreign partnerships should not be
treated as United States property. Under
section 956(c)(2)(L), obligations of a do-
mestic partnership are excluded from the
definition of United States property if nei-
ther the CFC nor any related person (as
defined in section 954(d)(3)) is a partner
in the domestic partnership immediately
after the acquisition by the CFC of any
obligation of the partnership. The Trea-
sury Department and the IRS have deter-
mined that the policy considerations un-
derlying this rule are also relevant for
comparable foreign partnerships. See
H.R. Conf. Rep. No. 108-755, 108th
Cong., 2d Sess., at 391 (2004); H.R. Rep.
No. 108-548, 108th Cong., 2d Sess., at
198 (2004); S. Rep. No. 108-192, 108th
Cong., 1st Sess., at 46 (2003). Accord-
ingly, proposed § 1.956-4(c)(2) provides
that an obligation of a foreign partnership
is treated as an obligation of the foreign
partnership (and not as an obligation of its

partners) for purposes of determining
whether a CFC holds United States prop-
erty if neither the CFC nor any person
related to the CFC (within the meaning of
section 954(d)(3)) is a partner in the part-
neship.

### C. Special obligor rule in the case of certain distributions

The proposed regulations include a
special rule that increases the amount of a
foreign partnership obligation that is
treated as United States property under the
general rule when the following require-
ments are satisfied: (i) a CFC lends funds
(or guarantees a loan) to a foreign part-
nership whose obligation is, in whole or in
part, United States property with respect
to the CFC pursuant to proposed § 1.956-
4(c)(1); (ii) the partnership distributes the
proceeds to a partner that is related to the
CFC (within the meaning of section
954(d)(3)) and whose obligation would be
United States property if held by the CFC;
(iii) the foreign partnership would not
have made the distribution but for a fund-
ing of the partnership through an obliga-
tion held (or treated as held) by the CFC;
and (iv) the distribution exceeds the part-
ner's share of the partnership obligation as
determined in accordance with the part-
ner's interest in partnership profits. When
these requirements are satisfied, proposed
§ 1.956-4(c)(3) provides that the amount
of the partnership obligation that is treated
as an obligation of the distributee partner
(and thus as United States property held
by the CFC) is the lesser of the amount of
the distribution that would not have been
made but for the funding of the partner-
ship and the amount of the partnership
obligation. For example, assume a United
States shareholder of a CFC that is related
to the CFC within the meaning of section
954(d)(3) has a 60 percent interest in the
profits of a foreign partnership and the
CFC lends $100 to the partnership. If the
partnership, in turn, distributes $100 to the
United States shareholder in a distribution
that would not have been made but for the
funding by the CFC, the CFC will be
treated as holding United States property
in the amount of $100.

Section 1.956-1T(b)(5) of the tempo-
rary regulations published elsewhere in
the Rules and Regulations section of this

issue of the Internal Revenue Bulletin
under section 956 also addresses the
funded distribution fact pattern discussed
above. That temporary rule also provides
that the obligation of the foreign partner-
ship is treated as an obligation of the
distributee partner when similar condi-
tions are satisfied. The Treasury Depart-
ment and the IRS expect to withdraw
§ 1.956-1T(b)(5) as unnecessary when
proposed § 1.956-4(c), including
§ 1.956-4(c)(3), is adopted as a final reg-
ulation.

### 2. Pledges and Guarantees

Existing § 1.956-2(c)(1) provides that,
subject to an exception, any obligation of
a United States person with respect to
which a CFC is a pledgor or guarantor is
considered for purposes of section 956 to
be United States property held by the
CFC. In order to better align the regula-
tions with the statutory text of section
956(d), these regulations propose to revise
§ 1.956-2(c)(1) to clarify that a CFC that
is a pledgor or guarantor of an obligation
of a United States person is treated as
holding the obligation. Accordingly, un-
der the proposed rule, the general excep-
tions to the definition of United States
property would apply to the obligation
treated as held by the CFC.

#### A. Pledges and guarantees of foreign partnership obligations by CFCs

These proposed regulations provide
that the pledge and guarantee rules under
§ 1.956-2(c) apply to a CFC that directly
or indirectly guarantees an obligation of a
foreign partnership that is treated as an
obligation of a United States person under
proposed § 1.956-4(c). Accordingly, if
an obligation of a foreign partnership is
treated as an obligation of a United States
person pursuant to proposed § 1.956-4(c)
and a CFC directly or indirectly guaran-
tees the partnership obligation, the CFC
will be treated as holding an obligation of
the United States person.

B. Pledges and guarantees of United
States persons' obligations by domestic
or foreign partnerships

These proposed regulations extend the
pledge and guarantee rule in § 1.956-

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2(c)(1) to pledges and guarantees made by
partnerships. Thus, proposed § 1.956-
2(c)(1) provides that a partnership that
guarantees an obligation of a United
States person will be treated as holding
the obligation for purposes of section 956.
As a result, as discussed in Parts 2.D and
3 of this preamble, proposed § 1.956-4(b)
will then treat the partners of the partner-
ship that is the pledgor or guarantor as
holding shares of that obligation. For ex-
ample, if a partnership with one CFC part-
ner guarantees an obligation of the CFC's
United States shareholder, the CFC will
be treated as holding a share of the obli-
gation under proposed §§ 1.956-1(e)(2),
1.956-2(c)(1), and 1.956-4(b).

Under current § 1.956-2(c)(2), a CFC
is treated as a pledgor or guarantor of an
obligation of a United States person if its
assets serve at any time, even though in-
directly, as security for the performance of
the obligation. Consistent with this rule, a
partnership should be considered a pled-
gor or guarantor of an obligation of a
United States person if the partnership's
assets serve indirectly as security for the
performance of the obligation, for exam-
ple, because the partnership agrees to pur-
chase the obligation at maturity if the
United States person does not repay it.
Thus, proposed § 1.956-2(c)(2) applies
the indirect pledge or guarantee rule to
domestic and foreign partnerships.

In the case of a partnership that is con-
sidered a pledgor or guarantor of an obli-
gation under proposed § 1.956-2(c)(2),
however, it would not be appropriate to
separately apply § 1.956-2(c)(2) directly
to a CFC partner in the partnership to treat
the partner as a pledgor or guarantor (in
addition to treating the partnership as a
pledgor or guarantor) solely as a result of
the partnership's indirect pledge or guar-
antee. Therefore, proposed § 1.956-
2(c)(2) provides that when a partnership is
considered a pledgor or guarantor of an
obligation, a CFC that is a partner in the
partnership will not be treated as a pledgor
or guarantor of the obligation solely as a
result of its ownership of an interest in the
partnership. Accordingly, the CFC will be
treated under proposed § 1.956-4(b) as
holding its share of the obligation to
which the pledge or guarantee relates as
described in Part 2.D of this preamble but
will not also be treated as a separate indi-

rect pledgor or guarantor of the obligation.
As a result, the CFC will not be treated as
holding more than its share of the obliga-
tion, as determined under proposed
§ 1.956-4(b).

### C. Pledges and guarantees of United States persons' obligations by CFC partners

As discussed in Part 1.A of this pream-
ble, under proposed § 1.956-4(c) an ob-
ligation of a foreign partnership generally
is treated as an obligation of the partners
in the partnership. In addition, as dis-
cussed in Part 3 of this preamble, a partner
in a partnership is treated as holding its
attributable share of property held by the
partnership. The application of these two
rules and the proposed indirect pledge or
guarantee rule could create uncertainty.
For example, if a CFC and a related
United States person were the only part-
ners in a foreign partnership that bor-
rowed from a person unrelated to the part-
ners, an issue could arise as to whether the
partnership assets attributed to the CFC
under proposed § 1.956-4(b) are consid-
ered under proposed § 1.956-2(c)(2) to
indirectly serve as security for the perfor-
mance of the portion of the partnership
obligation that is treated as an obligation
of the United States person under pro-
posed § 1.956-4(c).

A CFC that is a partner in a partnership
should not be treated as a pledgor or guar-
antor of an obligation of the partnership
merely because the CFC partner is treated
under proposed § 1.956-4(b) as owning a
portion of the partnership assets that sup-
port an obligation that is allocated under
proposed § 1.956-4(c) to a partner that is
a United States person. Accordingly, pro-
posed § 1.956-4(d) provides that, for pur-
poses of section 956 and proposed
§ 1.956-2(c)(2), if a CFC is a partner in a
partnership, the attribution of the assets of
the partnership to the CFC under proposed
§ 1.956-4(b) does not in and of itself give
rise to an indirect pledge or an indirect
guarantee of an obligation of the partner-
ship that is allocated under proposed
§ 1.956-4(c) to a partner that is a United
States person. This rule is consistent with
the new rule under proposed § 1.956-
2(c)(2) providing that a CFC that is a
partner in a partnership will not be treated,

solely as a result of its interest in the
partnership, as a pledgor or guarantor of
an obligation with respect to which the
partnership is considered to be a pledgor
or guarantor. However, as under current
law, the determination of whether a CFC's
assets serve as security for the perfor-
mance of an obligation for purposes of
proposed § 1.956-2(c)(2) is based on all
of the facts and circumstances. In appro-
priate circumstances, the existence of
other factors, such as the use of proceeds
from a partnership borrowing, the use of
partnership assets as security for a part-
nership borrowing, or special allocations
of partnership income or gain, may result
in a CFC partner being considered a pled-
gor or guarantor of an obligation of the
partnership pursuant to proposed § 1.956-
2(c)(2) when taken into account in con-
junction with the attribution of the assets
of the partnership to the CFC.

### D. Amount taken into account with respect to pledges or guarantees

Under existing § 1.956-1(e)(2), the
amount taken into account by a CFC in
determining the amount of its United
States property with respect to a pledge or
guarantee described in § 1.956-2(c)(1) is
the unpaid principal amount of the obli-
gation with respect to which the CFC is a
pledgor or guarantor. In connection with
the proposed revision to § 1.956-2(c)(1),
which treats a partnership as holding an
obligation with respect to which it is a
pledgor or guarantor (as discussed in Part
2.B of this preamble), these regulations
propose to revise § 1.956-1(e)(2) to also
apply in cases in which partnerships are
pledgors or guarantors of an obligation.

Accordingly, under proposed § 1.956-
1(e)(2), as under current law, each pledgor
or guarantor is treated as holding the en-
tire unpaid principal amount of the obli-
gation to which its pledge or guarantee
relates. As a result, in cases in which there
are, with respect to a single obligation,
multiple pledgors or guarantors that are
CFCs or partnerships in which a CFC is a
partner, the aggregate amount of United
States property treated as held by CFCs
may exceed the unpaid principal amount
of the obligation. To the extent that the
CFCs have sufficient earnings and profits,
there could be multiple section 951 inclu-

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sions with respect to the same obligation
that exceed, in the aggregate, the unpaid
principal amount of the obligation.

The Treasury Department and the IRS
are considering whether to exercise the
authority granted under section 956(e) to
prescribe regulations as may be necessary
to carry out the purposes of section 956 to
allocate the amount of the obligation
among the relevant CFCs so as to elimi-
nate the potential for multiple inclusions
and, instead, limit the aggregate inclu-
sions to the unpaid principal amount of
the obligation. Comments are requested
on whether the Treasury Department and
the IRS should adopt such a limitation,
and if such a limitation were adopted, on
methods to implement the limitation. One
approach to implementing such a limita-
tion would be to allow a taxpayer to allo-
cate the unpaid principal amount of the
obligation among the guarantor CFCs and
partnerships based on any consistently ap-
plied, reasonable method selected by the
taxpayer that results in aggregate section
951 inclusions equal to the unpaid princi-
pal amount.

Alternatively, the Treasury Department
and the IRS could seek to establish a
generally applicable method for allocating
the unpaid principal amount of the obli-
gation among the various guarantors. Al-
locating the unpaid principal amount of
the obligation among multiple CFCs and
partnerships in accordance with their
available credit capacities measured, for
example, by the relative net values of their
assets might be broadly consistent with a
creditor's analysis of the support for the
obligation, but such an approach would
give rise to administrability concerns. A
more administrable option would be to
require taxpayers to allocate the unpaid
principal amount of the obligation based
on the earnings and profits of the CFCs
that are treated as holding the obligation
(or portion thereof). Several allocation
methods based on earnings and profits are
possible, including methods that allocate
the unpaid principal amount of the obli-
gation: (i) to all of the CFCs in accordance
with their applicable earnings; (ii) to all of
the CFCs in accordance with their earn-
ings and profits described in section
959(c)(3); or (iii) first to the CFCs with
only earnings and profits described in sec-
tion 959(c)(3) (in accordance with their

section 959(c)(3) earnings and profits),
and then to the remainder of the CFCs,
based on applicable earnings. All of these
approaches could result in aggregate sec-
tion 951 inclusions (for the year) totaling
less than the unpaid principal amount of
the obligation (for example, where one or
more CFCs has previously taxed earnings
and profits that reduce its section 951 in-
clusion).

In considering the options, the Trea-
sury Department and the IRS will con-
sider whether it is appropriate to select a
method that could result in aggregate sec-
tion 951 inclusions for a year totaling less
than the unpaid principal amount of the
obligation, the extent to which a particular
method creates planning opportunities in-
consistent with the policies underlying
sections 956 and 959, and how adminis-
trable and effective the method is over
multiple years. In particular, the Treasury
Department and the IRS are concerned
that certain proration methods could cre-
ate an incentive for taxpayers to include as
additional pledgors or guarantors of an
obligation CFCs with substantial amounts
of previously taxed earnings and profits,
solely to allocate substantial portions of
the obligation to these CFCs and thereby
minimize the current section 951 inclu-
sions. There are also a number of com-
plexities that could affect the application
of a rule that limits multiple inclusions,
including differences in taxable years
among the relevant CFCs and fluctuations
in the unpaid principal amount of the ob-
ligation as well as the earnings and profits
of the CFCs. The Treasury Department
and the IRS request that comments on
potential allocation methods address the
issues described in this paragraph.

### 3. Partnership Property Indirectly Held by a CFC Partner

Under current § 1.956-2(a)(3), if a
CFC is a partner in a partnership that
holds property that would be United
States property if held directly by the CFC
partner, the CFC partner is treated as hold-
ing an interest in the property based on its
interest in the partnership. These proposed
regulations provide rules on the determi-
nation of the amount that the CFC partner
is treated as holding under this rule, which

is redesignated in these proposed regula-
tions as proposed § 1.956-4(b).

Under proposed § 1.956-4(b), a CFC
partner will be treated as holding its share
of partnership property determined in ac-
cordance with the CFC partner's liquida-
tion value percentage, taking into account
any special allocation of income, or,
where appropriate, gain from that property
that is not disregarded or reallocated un-
der section 704(b) or any other Code sec-
tion, regulation, or judicial doctrine and
that does not have a principal purpose of
avoiding the purposes of section 956. See
§ 1.704-1(b)(1)(iii). This rule serves, in
general, as a reasonable measure of a part-
ner's interest in property held by a part-
nership because it generally results in an
allocation of specific items of property
that corresponds with each partner's eco-
nomic interest in that property, including
any income, or gain, that may be subject
to special allocations.

These proposed regulations include ex-
amples illustrating the application of this
proposed rule, including an example that
illustrates a case in which it is appropriate
to take into account a special allocation of
gain because the property is anticipated to
appreciate in value but generate relatively
little income. Although proposed
§ 1.956-4(b) would apply only to prop-
erty acquired on or after publication in the
Federal Register of the Treasury decision
adopting the rule as a final regulation, it
generally would be reasonable to use the
method set forth in proposed § 1.956-
4(b) to determine a partner's interest in
property acquired prior to finalization.

Although the method provided by
proposed § 1.956-4(b) generally should
reflect a partner's economic interest in
partnership property, the Treasury De-
partment and the IRS solicit comments on
whether there may be situations in which
the method would not reflect the partners'
economic interest in the partnership or its
property, and, if so, whether there are
alternative measures or rules to better ad-
dress such circumstances. Furthermore,
the Treasury Department and the IRS so-
licit comments on whether a single
method should be used as the general rule
for determining both a partner's share of a
partnership obligation (as determined un-
der proposed § 1.956-4(c), discussed in
Part 1.A of this preamble) and a partner's

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share of partnership assets, and, if so,
whether the appropriate measure would be
a partner's interest in partnership profits, a
partner's liquidation value percentage, or
an alternative measure.

### 4. Trade or Service Receivables Acquired from Related United States Persons

Section 956(c)(3) provides that United
States property generally includes trade or
service receivables acquired from a re-
lated United States person in a factoring
transaction when the obligor with respect
to the receivables is a United States per-
son. Section 1.956-3T(b)(2) provides
rules for determining whether a trade or
service receivable has been indirectly ac-
quired from a related United States person
for purposes of section 956(c)(3). These
provisions include a rule that applies to
receivables held on a CFC's behalf by a
partnership in which the CFC owns (di-
rectly or indirectly) a beneficial interest.
See § 1.956-3T(b)(2)(ii)(A). This rule is
similar to the rule in both current § 1.956-
2(a)(3) and proposed § 1.956-4(b). Sec-
tion 1.956-3T(b)(2) also includes a rule
that applies to receivables held on a
CFC's behalf by another foreign corpora-
tion controlled by the CFC if one of the
principal purposes for creating, organiz-
ing, or funding such other foreign corpo-
ration (through capital contributions or
debt) is to avoid the application of section
956. See § 1.956-3T(b)(2)(ii)(B). This
rule is similar to a rule in § 1.956-
1T(b)(4).

The Treasury Department and the IRS
have determined that the rules in § 1.956-
3T(b)(2)(ii) applicable to factoring trans-
actions involving partnerships should be
consistent with the rules provided in
§ 1.956-1T(b)(4) and proposed § 1.956-
4(b), which generally apply when partner-
ships own property that would be United
States property in the hands of a CFC
partner. Accordingly, these proposed reg-
ulations propose to revise the rules gov-
erning factoring transactions so that rules
similar to the rules in current § 1.956-
1T(b)(4) and proposed § 1.956-4(b) ap-
ply to factoring transactions involving
partnerships. These proposed regulations
also propose to revise the rules governing
factoring transactions to remove the refer-

ence to S corporations, which are treated
as partnerships for purposes of subpart F,
including section 956. See section
1373(a).

### 5. Obligations of Disregarded Entities and Domestic Partnerships

The Treasury Department and the IRS
understand that issues have arisen as to
the proper treatment under section 956 of
obligations of entities that are disregarded
as entities separate from their owner for
federal tax purposes. Accordingly, these
proposed regulations state explicitly in
proposed § 1.956-2(a)(3) that, for pur-
poses of section 956, an obligation of a
disregarded entity is treated as an obliga-
tion of the owner of the disregarded entity.
Thus, for example, an obligation of a dis-
regarded entity that is owned by a domes-
tic corporation is treated as an obligation
of the domestic corporation for purposes
of section 956. The rule in proposed
§ 1.956-2(a)(3) follows from the applica-
tion of the entity classification rules of
§ 301.7701-3 and is therefore not a
change from current law.

In addition, proposed § 1.956-4(e)
confirms that, for purposes of section 956,
an obligation of a domestic partnership is
an obligation of a United States person,
regardless of whether the partners in the
partnership are United States persons. Un-
der section 956(c)(1)(C), an obligation of
a United States person generally is United
States property for purposes of section
956 unless an exception in section
956(c)(2) applies to the obligation. For
example, as noted in Part 1.B of this pre-
amble, section 956(c)(2)(L) would apply
to exclude an obligation of a domestic
partnership held by a CFC from the defi-
nition of United States property if neither
the CFC nor a person related to the CFC
(within the meaning of section 954(d)(3))
were a partner in the partnership.

### 6. Proposed Effective/Applicability Dates

These proposed regulations are pro-
posed to be effective for taxable years of
CFCs ending on or after the date of pub-
lication in the Federal Register of the
Treasury decision adopting these rules as
final regulations, and taxable years of
United States shareholders in which or

with which such taxable years end. Most
of these rules are proposed to apply to
property acquired, or pledges or guaran-
tees entered into, on or after September 1,
2015, including property considered ac-
quired, or pledges or guarantees consid-
ered entered into, on or after September 1,
2015, as a result of a deemed exchange
pursuant to section 1001. See proposed
§ 1.956-4(c) (dealing with obligations of
foreign partnerships, described in Part 1 of
this preamble); proposed §§ 1.956-2(c),
1.956-4(d), and 1.956-1(e)(2) (dealing
with pledges or guarantees, including
pledges or guarantees either by a partner-
ship or with respect to obligations of a
foreign partnership, described in Part 2 of
this preamble); and proposed § 1.956-3
(dealing with trade or service receivables
acquired from related United States per-
sons, described in Part 4 of this preamble).
Two rules, however, are proposed to ap-
ply to obligations held on or after the date
of publication in the Federal Register of
the Treasury decision adopting these rules
as final regulations. See proposed
§§ 1.956-2(a)(3) and 1.956-4(e) (dealing
with obligations of disregarded entities
and domestic partnerships, respectively,
described in Part 5 of this preamble). Fi-
nally, proposed § 1.956-4(b) (dealing
with partnership property indirectly held
by a CFC, described in Part 3 of this
preamble) is proposed to apply to property
acquired on or after the date of publication
in the Federal Register of the Treasury
decision adopting these rules as final reg-
ulations. No inference is intended as to the
application of the provisions proposed to
be amended by these proposed regulations
under current law, including in transac-
tions involving obligations of foreign
partnerships. The IRS may, where appro-
priate, challenge transactions under cur-
rently applicable Code or regulatory pro-
visions or judicial doctrines.

## 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 assessment is not
required. It has also been determined that
section 553(b) of the Administrative Pro-
cedure Act (5 U.S.C. chapter 5) does not
apply to these regulations, and because the

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regulations do not impose a collection of
information on small entities, the Regula-
tory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Pursuant to section
7805(f), this notice of proposed rulemak-
ing has been submitted to the Chief Coun-
sel of Advocacy of the Small Business
Administration for comment on its 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 comments that are
submitted timely to the IRS as prescribed
in this preamble under the "Addresses"
heading. Treasury and the IRS request
comments on all aspects of the proposed
rules. All comments will be available at
www.regulations.gov or upon request. A
public hearing will be scheduled if re-
quested in writing by any person that
timely submits electronic or written 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 pro-
posed regulations are Barbara E. Rasch
and Rose E. Jenkins of the Office of As-
sociate Chief Counsel (International).
However, other personnel from the Trea-
sury 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 is amended by adding entries in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805.

* * * * *

Section 1.956-1 also issued under 26
U.S.C. 956(d) and 956(e).

Section 1.956-2 also issued under 26
U.S.C. 956(d) and 956(e).

Section 1.956-3 also issued under 26
U.S.C. 864(d)(8) and 956(e).

Section 1.956-4 also issued under 26
U.S.C. 956(d) and 956(e).

* * * * *

Par. 2. Section 1.954-2 is amended by
revising paragraphs (c)(1)(i), (c)(1)(iv),
(c)(2)(ii), (c)(2)(iii)(E), (c)(2)(viii),
(d)(1)(i) and (ii), (d)(2)(ii), (d)(2)(iii)(E),
(d)(2)(v), and (j) to read as follows:

### § 1.954-2 Foreign personal holding company income.

* * * * *

(c) * * *

(1) * * *

(i) [The text of proposed amendments
to § 1.954-2(c)(1)(i) is the same as the
text of § 1.954-2T(c)(1)(i) published
elsewhere in this issue of the Internal
Revenue Bulletin].

* * * * *

(iv) [The text of proposed amendments
to § 1.954-2(c)(1)(iv) is the same as the
text of § 1.954-2T(c)(1)(iv) published
elsewhere in this issue of the Internal
Revenue Bulletin].

(2) * * *

(ii) [The text of proposed amendments
to § 1.954-2(c)(2)(ii) is the same as the
text of § 1.954-2T(c)(2)(ii) published
elsewhere in this issue of the Internal
Revenue Bulletin].

(iii) * * *

(E) [The text of proposed amendments
to § 1.954-2(c)(2)(iii)(E) is the same as
the text of § 1.954-2T(c)(2)(iii)(E) pub-
lished elsewhere in this issue of the Inter-
nal Revenue Bulletin].

* * * * *

(viii) [The text of proposed amend-
ments to § 1.954-2(c)(2)(viii) is the same
as the text of § 1.954-2T(c)(2)(viii) pub-
lished elsewhere in this issue of the Inter-
nal Revenue Bulletin].

* * * * *

(d) * * *

(1) * * *

(i) [The text of proposed amendments
to § 1.954-2(d)(1)(i) is the same as the
text of § 1.954-2T(d)(1)(i) published
elsewhere in this issue of the Internal
Revenue Bulletin].

(ii) [The text of proposed amendments
to § 1.954-2(d)(1)(ii) is the same as the
text of § 1.954-2T(d)(1)(ii) published

elsewhere in this issue of the Internal
Revenue Bulletin].

(2) * * *

(ii) [The text of proposed amendments
to § 1.954-2(d)(2)(ii) is the same as the
text of § 1.954-2T(d)(2)(ii) published
elsewhere in this issue of the Internal
Revenue Bulletin].

(iii) * * *

(E) [The text of proposed amendments
to § 1.954-2(d)(2)(iii)(E) is the same as
the text of § 1.954-2T(d)(2)(iii)(E) pub-
lished elsewhere in this issue of the Inter-
nal Revenue Bulletin].

* * * * *

(v) [The text of proposed amendments
to § 1.954-2(d)(2)(v) is the same as the
text of § 1.954-2T(d)(2)(v) published
elsewhere in this issue of the Internal
Revenue Bulletin].

* * * * *

(j) [The text of proposed amendments
to § 1.954-2(j) is the same as the text of
§ 1.954-2T(j) published elsewhere in this
issue of the Internal Revenue Bulletin].

Par. 3. Section 1.956-1 is amended by
revising paragraphs (b)(4) and (5), (e)(2),
and (g), to read as follows:

§ 1.956-1 Shareholder's pro rata share
of a controlled foreign corporation's
increase in earnings invested in United
States property.

* * * * *

(b) * * *

(4) [The text of proposed amendments
to § 1.956-1(b)(4) is the same as the text
of § 1.956-1T(b)(4) published elsewhere
in this issue of the Internal Revenue Bul-
letin].

(5) [The text of proposed amendments
to § 1.956-1(b)(5) is the same as the text
of § 1.956-1T(b)(5) published elsewhere
in this issue of the Internal Revenue Bul-
letin].

* * * * *

(e) * * *

(2) Rule for pledges and guarantees.
For purposes of this section, the amount of
an obligation treated as held (before ap-
plication of § 1.956-4(b)) as a result of a
pledge or guarantee described in § 1.956-
2(c) is the unpaid principal amount of the
obligation on the applicable determination
date.

* * * * *

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(g) through (g)(2) [The text of pro-
posed amendments to § 1.956-1(g)
through (g)(2) is the same as the text of
§ 1.956-1T(g) through (g)(2) published
elsewhere in this issue of the Internal
Revenue Bulletin].

(3) Paragraph (e)(2) of this section ap-
plies to taxable years of controlled foreign
corporations ending on or after the date of
publication in the Federal Register of the
Treasury decision adopting this rule as a
final regulation, and taxable years of
United States shareholders in which or
with which such taxable years end, with
respect to pledges or guarantees entered
into on or after September 1, 2015. For
purposes of this paragraph (g)(3), a pled-
gor or guarantor is treated as entering into
a pledge or guarantee when there is a
significant modification, within the mean-
ing of § 1.1001-3(e), of an obligation with
respect to which it is a pledgor or guaran-
tor on or after September 1, 2015.

* * * * *

Par. 4. Section 1.956-2 is amended by:

a. Revising paragraphs (a)(3) and
(c)(1) and (2);

b. Adding Example 4 to paragraph
(c)(3);

c. Adding reserved paragraph (g); and
d. Adding paragraph (h).

The revisions and additions read as fol-
lows:

§ 1.956-2 Definition of United States
property.

(a) * * *

(3) Treatment of disregarded entities.
For purposes of section 956, an obligation
of a business entity (as defined in
§ 301.7701-2(a) of this chapter) that is
disregarded as an entity separate from its
owner for federal tax purposes under
§§ 301.7701-1 through 301.7701-3 of
this chapter is treated as an obligation of
its owner.

* * * * *

(c) * * * (1) General rule. Except as
provided in paragraph (c)(4) of this sec-
tion, for purposes of section 956, any ob-
ligation of a United States person with
respect to which a controlled foreign cor-
poration or a partnership is a pledgor or
guarantor will be considered to be held by
the controlled foreign corporation or the
partnership, as the case may be. See

§ 1.956-1(e)(2) for rules that determine
the amount of the obligation treated as
held by a pledgor or guarantor under this
paragraph (c). For rules that treat an obli-
gation of a foreign partnership as an obli-
gation of the partners in the foreign part-
nership for purposes of section 956, see
§ 1.956-4(c).

(2) Indirect pledge or guarantee. If the
assets of a controlled foreign corporation
or a partnership serve at any time, even
though indirectly, as security for the per-
formance of an obligation of a United
States person, then, for purposes of para-
graph (c)(1) of this section, the controlled
foreign corporation or partnership will be
considered a pledgor or guarantor of that
obligation. If a partnership is considered a
pledgor or guarantor of an obligation, a
controlled foreign corporation that is a
partner in the partnership will not also be
treated as a pledgor or guarantor of the
obligation solely as a result of its owner-
ship of an interest in the partnership. For
purposes of this paragraph, a pledge of
stock of a controlled foreign corporation
representing at least 66 2/3 percent of the
total combined voting power of all classes
of voting stock of such corporation will be
considered an indirect pledge of the assets
of the controlled foreign corporation if the
pledge is accompanied by one or more
negative covenants or similar restrictions
on the shareholder effectively limiting the
corporation's discretion to dispose of as-
sets and/or incur liabilities other than in
the ordinary course of business. See
§ 1.956-4(d) for guidance on the treat-
ment of indirect pledges or guarantees of
an obligation of a partnership attributed to
its partners under § 1.956-4(c).

(3) * * *

* * * * *

Example 4. (i) Facts. USP, a domestic corpora-
tion, owns 70% of the stock of FS, a controlled
foreign corporation, and a 90% interest in FPRS, a
foreign partnership. X, an unrelated foreign person,
owns 30% of the stock of FS. Y, an unrelated foreign
person, owns a 10% interest in FPRS. There are no
special allocations in the FPRS partnership agree-
ment. FPRS borrows $100x from Z, an unrelated
person. FS pledges its assets as security for FPRS's
performance of its obligation to repay the $100x
loan. USP's share of the $100x FPRS obligation,
determined in accordance with its interest in partner-
ship profits, is $90x. Under § 1.956-4(c), $90x of
the FPRS obligation is treated as an obligation of
USP for purposes of section 956.

(ii) Result. For purposes of section 956, under
paragraph (c)(1) of this section, FS is considered to

hold an obligation of USP in the amount of $90x,
and thus is treated as holding United States property
in the amount of $90x.

* * * * *

(h) Effective/applicability date. (1)
Paragraph (a)(3) of this section applies to
taxable years of controlled foreign corpo-
rations ending on or after the date of pub-
lication in the Federal Register of the
Treasury decision adopting this rule as a
final regulation, and taxable years of
United States shareholders in which or
with which such taxable years end, with
respect to obligations held on or after the
date of publication in the Federal Regis-
ter of the Treasury decision adopting this
rule as a final regulation.

(2) Paragraphs (c)(1), (c)(2), and Ex-
ample 4 of paragraph (c)(3) of this section
apply to taxable years of controlled for-
eign corporations ending on or after the
date of publication in the Federal Regis-
ter of the Treasury decision adopting
these rules as final regulations, and tax-
able years of United States shareholders in
which or with which such taxable years
end, with respect to pledges and guaran-
tees entered into on or after September 1,
2015. For purposes of this paragraph
(h)(2), a pledgor or guarantor is treated as
entering into a pledge or guarantee when
there is a significant modification, within
the meaning of § 1.1001-3(e), of an obli-
gation with respect to which it is a pledgor
or guarantor on or after September 1,
2015.

Par. 5. Section 1.956-3 is added to
read as follows:

§ 1.956-3 Certain trade or service
receivables acquired from United States
persons.

(a) through (b)(2)(i) [Reserved]. For
further guidance, see § 1.956-3T(a)
through (b)(2)(i).

(ii) Acquisition by nominee, pass-
through entity, or related foreign corpo-
ration. A controlled foreign corporation is
treated as holding a trade or service re-
ceivable that is held by a nominee on its
behalf, or by a simple trust or other pass-
through entity (other than a partnership) to
the extent of its direct or indirect owner-
ship or beneficial interest in such simple
trust or other pass-through entity. See
§§ 1.956-1T(b)(4) and 1.956-4(b) for
rules that may treat a controlled foreign

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corporation as indirectly holding a trade
or service receivable held by a foreign
corporation or partnership. A controlled
foreign corporation that is treated as hold-
ing a trade or service receivable held by
another person (the direct holder) (or that
would be treated as holding the receivable
if the receivable were United States prop-
erty or would be United States property if
held directly by the controlled foreign cor-
poration) is considered to have acquired
the receivable from the person from
whom the direct holder acquired the re-
ceivable. This paragraph (b)(2)(ii) does
not limit the application of paragraph
(b)(2)(iii) of this section. The following
examples illustrate the application of this
paragraph (b)(2)(ii):

Example 1. (i) Facts. A domestic corporation,
P, wholly owns a controlled foreign corporation,
FS, with substantial earnings and profits. FS con-
tributes $200x of cash to a partnership, PRS, in
exchange for an 80% partnership interest. An un-
related foreign person contributes real estate lo-
cated in a foreign country with a fair market value
of $50x to PRS for the remaining 20% partnership
interest. There are no special allocations in the
PRS partnership agreement. PRS uses the $200x
of cash received from FS to purchase trade receiv-
ables from P. The obligors with respect to the
trade receivables are United States persons that are
not related to any partner in PRS. The liquidation
value percentage, as determined under § 1.956-
4(b), for FS with respect to PRS is 80%. A prin-
cipal purpose of funding PRS (through FS's cash
contribution) is to avoid the application of section
956 with respect to FS.

(ii) Result. Under § 1.956-4(b)(1), FS is
treated as holding 80% of the trade receivables
acquired by PRS from P, with a basis equal to
$160x (80% x $200x, PRS's basis in the trade
receivables). However, because FS controls PRS
and a principal purpose of FS funding PRS was to
avoid the application of section 956 with respect
to FS, under § 1.956-1T(b)(4), if the trade receiv-
ables would be United States property if held
directly by FS, FS additionally would be treated as
holding the trade receivables to the extent that
they exceed the amount of the receivables it holds
under § 1.956-4(b), which is $40x ($200x -
$160x). Accordingly, under this paragraph
(b)(2)(ii), FS is treated as having acquired from P,
a related United States person, the trade receiv-
ables that it is treated as holding with a basis equal
to $200x ($160x + $40x). Thus, FS is treated as
holding United States property with a basis of
$200x under paragraph (a) of this section.

Example 2. (i) Facts. A domestic corporation, P,
wholly owns a controlled foreign corporation, FS1,
that has earnings and profits of at least $300x. FS1
organizes a foreign corporation, FS2, with a $200x
cash contribution. FS2 uses the cash contribution to
purchase trade receivables from P. The obligors with
respect to the trade receivables are unrelated United
States persons. A principal purpose of funding FS2

(through FS1's cash contribution) is to avoid the
application of section 956 with respect to FS1.

(ii) Result. Under § 1.956-1T(b)(4), if the
trade receivables held by FS2 were United States
property, FS1 would be treated as holding the
trade receivables held by FS2 because FS1 con-
trols FS2 and a principal purpose of FS1 funding
FS2 was to avoid the application of section 956
with respect to FS1. Accordingly, under this para-
graph (b)(2)(ii), FS1 is treated as having acquired
from P, a related United States person, the trade
receivables that it would be treated as holding with
a basis equal to $200x. Thus, FS1 is treated as
holding United States property with a basis of
$200x under paragraph (a) of this section.

(b)(2)(iii) through (c) [Reserved]. For further
guidance, see § 1.956-3T(b)(2)(iii) through (c).

(d) Effective/applicability date. Para-
graph (b)(2)(ii) of this section applies to
taxable years of controlled foreign cor-
porations ending on or after the date of
publication in the Federal Register of
the Treasury decision adopting this rule
as a final regulation, and taxable years
of United States shareholders in which
or with which such taxable years end,
with respect to trade or service receiv-
ables acquired on or after September 1,
2015. For purposes of this paragraph
(d), a significant modification, within
the meaning of § 1.1001-3(e), of a trade
or service receivable on or after Septem-
ber 1, 2015, constitutes an acquisition of
the trade or service receivable on or
after that date.

Par. 6. Section 1.956-4 is added to
read as follows:

§ 1.956-4 Certain rules applicable to
partnerships.

(a) Overview. This section provides
rules concerning the application of section
956 to certain obligations of and property
held by a partnership. Paragraph (b) of
this section provides rules concerning
United States property held indirectly by a
controlled foreign corporation through a
partnership. Paragraph (c) of this section
provides rules that generally treat obliga-
tions of a foreign partnership as obliga-
tions of the partners in the foreign part-
nership, as well as a special rule that treats
a partner that is a United States person as
owing additional amounts of a partnership
obligation in certain circumstances. Para-
graph (d) of this section sets forth a rule
concerning the application of the indirect
pledge or guarantee rule to obligations of
partnerships. Paragraph (e) of this section

provides that obligations of a domestic
partnership are obligations of a United
States person. Paragraph (f) of this section
provides effective and applicability dates.
See §§ 1.956-1T(b)(4) and 1.956-2(c)
for additional rules applicable to partner-
ships.

(b) Property held indirectly through a
partnership-(1) General rule. For pur-
poses of section 956, a partner in a part-
nership is treated as holding its attribut-
able share of any property held by the
partnership (including an obligation that
the partnership is treated as holding as a
result of the application of § 1.956-2(c)).
A partner's attributable share of partner-
ship property is determined under the
rules set forth in paragraph (b)(2) of this
section. An upper-tier partnership's attrib-
utable share of the property of a lower-tier
partnership is treated as property of the
upper-tier partnership for purposes of ap-
plying this paragraph (b)(1) to the partners
of the upper-tier partnership. For purposes
of section 956, a partner's adjusted basis
in the property of the partnership equals
the partner's attributable share of the part-
nership's adjusted basis in the property
(taking into account any adjustments to
basis under section 743(b) (with respect to
the partner) or section 734(b) or any sim-
ilar adjustments to basis), as determined
under the rules set forth in paragraph
(b)(2) of this section. The rules in
§ 1.956-1(e)(2) apply to determine the
amount of an obligation treated as held by
a partnership as a result of the application
of § 1.956-2(c). See § 1.956-1T(b)(4) for
special rules that may treat a controlled
foreign corporation as holding a greater
amount of United States property held by
a partnership than the amount determined
under this section.

(2) Methodology-(i) Liquidation
value percentage. Except as otherwise
provided in paragraph (b)(2)(ii) of this
section, for purposes of paragraph (b)(1)
of this section, a partner's attributable
share of partnership property is deter-
mined in accordance with the partner's
liquidation value percentage. For pur-
poses of this paragraph (b)(2)(i), the liq-
uidation value of a partner's interest in a
partnership is the amount of cash the part-
ner would receive with respect to the in-
terest if, immediately after the occurrence
of the most recent event described in

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§ 1.704-1(b)(2)(iv)(f)(5) or § 1.704-
1(b)(2)(iv)(s)(1) (a revaluation event), or,
if there has been no revaluation event,
immediately after the formation of the
partnership, as the case may be, the part-
nership sold all of its assets for cash equal
to the fair market value of such assets
(taking into account section 7701(g)), sat-
isfied all of its liabilities (other than those
described in § 1.752-7), paid an unrelated
third party to assume all of its § 1.752-7
liabilities in a fully taxable transaction,
and then liquidated. A partner's liquida-
tion value percentage, which is deter-
mined upon the formation of a partnership
and redetermined upon any revaluation
event, irrespective of whether the capital
accounts of the partners are adjusted un-
der § 1.704-1(b)(2)(iv)(f), is the ratio (ex-
pressed as a percentage) of the liquidation
value of the partner's interest in the part-
nership divided by the aggregate liquida-
tion value of all of the partners' interests
in the partnership.

(ii) Special allocations. For purposes of
paragraph (b)(1) of this section, if a partner-
ship agreement provides for the allocation
of income (or, where appropriate, gain)
from partnership property to a partner that
differs from the partner's liquidation value
percentage in a particular taxable year (a
special allocation), then the partner's attrib-
utable share of that property is determined
solely by reference to the partner's special
allocation with respect to the property, pro-
vided the special allocation does not have a
principal purpose of avoiding the purposes
of section 956.

(3) Examples. The following examples
illustrate the rule of this paragraph (b):

Example 1. (i) Facts. USP, a domestic corpo-
ration, wholly owns FS, a controlled foreign cor-
poration, which, in turn, owns an interest in FPRS,
a foreign partnership. The remaining interest in
FPRS is owned by an unrelated foreign person.
FPRS holds non-depreciable property, with an ad-
justed basis of $100x, that would be United States
property ("US property") if held by FS directly. At
the close of quarter 1 of year 1, the liquidation
value percentage, as determined under paragraph
(b)(2) of this section, for FS with respect to FPRS
is 25%. There are no special allocations in the FPRS
partnership agreement.

(ii) Result. Under paragraph (b)(1) of this sec-
tion, for purposes of section 956, FS is treated as
holding its attributable share of the property held by
FPRS with an adjusted basis equal to its attributable
share of FPRS's adjusted basis in the property. Un-
der paragraph (b)(2) of this section, FS's attributable
share of FPRS's property is determined in accor-

dance with FS's liquidation value percentage, which
is 25%. Thus, FS's attributable share of property
held by FPRS is 25%, and its attributable share of
FPRS's basis in the property is $25x. Accordingly,
for purposes of determining the amount of US prop-
erty held by FS as of the close of quarter 1 of year 1,
FS is treated as holding US property with an adjusted
basis of $25x.

Example 2. (i) Facts. The facts are the same as in
Example 1, except that the FPRS partnership agree-
ment, which satisfies the requirements of section
704(b), specially allocates 80% of the income with
respect to US property to FS. The special allocation
does not have a principal purpose of avoiding the
purposes of section 956.

(ii) Result. Under paragraph (b)(1) of this sec-
tion, for purposes of section 956, FS is treated as
holding its attributable share of the property held by
FPRS with an adjusted basis equal to its attributable
share of FPRS's adjusted basis in the property. In
general, FS's attributable share of FPRS property is
determined in accordance with FS's liquidation
value percentage. However, under paragraph
(b)(2)(ii) of this section, FS's attributable share of
US property is determined in accordance with its
special allocation. FS's special allocation percentage
for US property is 80%, and thus FS's attributable
share of US property held by FPRS is 80% and its
attributable share of FPRS's basis in US property is
$80x. Accordingly, for purposes of determining the
amount of US property held by FS as of the close of
quarter 1 of year 1, FS is treated as holding US
property with an adjusted basis of $80x.

Example 3. (i) Facts. USP, a domestic corpora-
tion, wholly owns FS, a controlled foreign corpora-
tion, which, in turn, owns an interest in FPRS, a
foreign partnership. USP owns the remaining interest
in FPRS. FPRS holds property (the "FPRS prop-
erty") that would be United States property ("US
property") if held by FS directly. The FPRS property
is anticipated to appreciate in value but generate
relatively little income. The US property has an
adjusted basis of $100x. The FPRS partnership
agreement, which satisfies the requirements of sec-
tion 704(b), specially allocates 80% of the income
with respect to the FPRS property to USP and 80%
of the gain with respect to the disposition of FPRS
property to FS. The special allocation does not have
a principal purpose of avoiding the purposes of sec-
tion 956.

(ii) Result. Under paragraph (b)(2)(ii) of this
section, the partners' attributable shares of the FPRS
property are determined in accordance with the spe-
cial allocation of gain. Accordingly, for purposes of
determining the amount of US property held by FS
in each year that FPRS holds FPRS property, FS's
attributable share of the FPRS property is 80% and
its attributable share of FPRS's basis in US property
is $80x. Thus, FS is treated as holding US property
with an adjusted basis of $80x.

(c) Obligations of a foreign partner-
ship-(1) In general. Except as provided
in paragraphs (c)(2) and (3) of this sec-
tion, for purposes of section 956, an obli-
gation of a foreign partnership is treated
as a separate obligation of each of the
partners in the partnership to the extent of

each partner's share of the obligation. A
partner's share of the partnership's obli-
gation is determined in accordance with
the partner's interest in partnership profits.
The partner's interest in partnership prof-
its is determined by taking into account all
facts and circumstances relating to the
economic arrangement of the partners. An
upper-tier partnership's share of an obli-
gation of a lower-tier partnership is
treated as an obligation of the upper-tier
partnership for purposes of applying this
paragraph (c)(1) to the partners of the
upper-tier partnership.

(2) Exception for obligations of part-
nerships in which neither the lending con-
trolled foreign corporation nor any per-
son related to the lending controlled
foreign corporation is a partner. For pur-
poses of applying section 956 with respect
to a controlled foreign corporation, an ob-
ligation of a foreign partnership is treated
as an obligation of a foreign partnership,
and not as an obligation of its partners, if
neither the controlled foreign corporation
nor any person related to the controlled
foreign corporation within the meaning of
section 954(d)(3) is a partner in the part-
nership. For purposes of section 956, an
obligation treated as an obligation of a
foreign partnership pursuant to this para-
graph (c)(2) is not an obligation of a
United States person.

(3) Special obligor rule in the case of
certain partnership distributions. For pur-
poses of determining a partner's share of a
foreign partnership's obligation under
section 956, if the foreign partnership dis-
tributes an amount of money or property
to a partner that is related to a controlled
foreign corporation within the meaning of
section 954(d)(3) and whose obligation
would be United States property if held
(or if treated as held) by the controlled
foreign corporation, and the foreign part-
nership would not have made the distribu-
tion but for a funding of the partnership
through an obligation held (or treated as
held) by a controlled foreign corporation,
notwithstanding § 1.956-1(e), the part-
ner's share of the partnership obligation is
the greater of-

(i) The partner's share of the partner-
ship obligation as determined under para-
graph (c)(1) of this section; and

(ii) The lesser of the amount of the
distribution that would not have been

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made but for the funding of the partner-
ship and the amount of the obligation (as
determined under § 1.956-1(e)).

(4) Examples. The following examples
illustrate the rules of this paragraph (c):

Example 1. (i) Facts. USP, a domestic corpora-
tion, wholly owns FS, a controlled foreign corpora-
tion, and owns a 90% interest in the partnership
profits of FPRS, a foreign partnership. X, a foreign
person that is unrelated to USP or FS, owns a 10%
interest in the partnership profits of FPRS. FPRS
borrows $100x from FS. FS's basis in the FPRS
obligation is $100x.

(ii) Result. Under paragraph (c)(1) of this sec-
tion, for purposes of section 956, the obligation of
FPRS is treated as obligations of its partners (USP
and X) to the extent of each partner's interest in
the partnership profits of FPRS. Because USP, a
partner in FPRS, is related to FS within the mean-
ing of section 954(d)(3), the exception in para-
graph (c)(2) of this section does not apply. Based
on its interest in FPRS's profits, USP's attribut-
able share of the FPRS obligation is $90x. Ac-
cordingly, for purposes of section 956, $90x of the
FPRS obligation held by FS is treated as an obli-
gation of USP and is United States property within
the meaning of section 956(c). Therefore, on the
date the loan is made, FS is treated as holding
United States property of $90x.

Example 2. (i) Facts. The facts are the same as in
Example 1, except that USP owns 40% of the stock
of FS and is not a related person (as defined in
section 954(d)(3)) with respect to FS. Y, a United
States person that is unrelated to USP or X, owns the
remaining 60% of the stock of FS.

(ii) Result. Because neither FS nor any person
related to FS within the meaning of section 954(d)(3) is
a partner in FPRS, the exception in paragraph (c)(2) of
this section applies to treat the FPRS obligation as an
obligation of a foreign partnership and not an obliga-
tion of a United States person. Therefore, paragraph
(c)(1) of this section does not apply, and FS is not
treated as holding United States property.

Example 3. (i) Facts. USP, a domestic corpora-
tion, wholly owns FS, a controlled foreign corpora-
tion. USP has a 60% interest in the partnership
profits of FPRS, a foreign partnership. FS has a 30%
interest in the partnership profits of FPRS. USC, a
domestic corporation that is unrelated to USP and
FS, has a 10% interest in the partnership profits of
FPRS. FPRS borrows $100x from an unrelated per-
son. FS guarantees the FPRS obligation.

(ii) Result. Under paragraph (c)(1) of this sec-
tion, for purposes of section 956, the obligation of
FPRS is treated as obligations of its partners (USP,
FS, and USC) to the extent of each partner's interest
in the partnership profits of FPRS. Because USP, a
partner in FPRS, is related to FS within the meaning
of section 954(d)(3), and because FS is a partner in
FPRS, the exception in paragraph (c)(2) of this sec-
tion does not apply. Based on their interests in part-
nership profits, USP's attributable share of the FPRS
obligation is $60x, and USC's attributable share of
the FPRS obligation is $10x. For purposes of section
956, $60x of the FPRS obligation is treated as an
obligation of USP, and $10x of the FPRS obligation
is treated as an obligation of USC. Under § 1.956-

2(c)(1), FS is treated as holding the obligations of
USP and USC that FS guaranteed. All of the excep-
tions to the definition of United States property con-
tained in section 956 and § 1.956-2 apply to deter-
mine whether the obligations of USP and USC
treated as held by FS constitute United States prop-
erty. Accordingly, the obligation of USC is not
United States property under section 956(c)(2)(F)
and § 1.956-2(b)(1)(viii). The obligation of USP,
however, is United States property within the mean-
ing of section 956(c). Therefore, on the date the
guarantee is made, FS is treated as holding United
States property of $60x.

Example 4. (i) Facts. USP, a domestic corporation,
wholly owns FS, a controlled foreign corporation. USP
has a 70% interest in the partnership profits of FPRS, a
foreign partnership. A domestic corporation that is un-
related to USP and FS has a 30% interest in the part-
nership profits of FPRS. FPRS borrows $100x from FS
and makes a distribution of $80x to USP. FPRS would
not have made the distribution to USP but for the
funding of FPRS by FS.

(ii) Result. Because USP, a partner in FPRS, is
related to FS within the meaning of section
954(d)(3), the exception in paragraph (c)(2) of this
section does not apply. Moreover, an obligation of
USP held by FS would be United States property.
USP's attributable share of the FPRS obligation as
determined under paragraph (c)(1) of this section
in accordance with USP's interest in partnership
profits is $70x. Under paragraph (c)(3) of this
section, USP's share of the FPRS obligation is the
greater of (i) USP's attributable share of the obli-
gation, $70x, or (ii) the lesser of the amount of the
distribution, $80x, or the amount of the obligation,
$100x. For purposes of section 956, therefore,
$80x of the FPRS obligation is treated as an ob-
ligation of USP and is United States property
within the meaning of section 956(c). Thus, on the
date the loan is made, FS is treated as holding
United States property of $80x.

(d) Limitation on a partner's indirect
pledge or guarantee. For purposes of sec-
tion 956 and § 1.956-2(c), a controlled for-
eign corporation that is a partner in a part-
nership is not considered a pledgor or
guarantor of the portion of an obligation of
the partnership attributed to its partners that
are United States persons under paragraph
(c) of this section solely as a result of the
attribution of a portion of the partnership's
assets to the controlled foreign corporation
under paragraph (b) of this section.

(e) Obligations of a domestic partner-
ship. For purposes of section 956, an ob-
ligation of a domestic partnership is an
obligation of a United States person. See
section 956(c)(2)(L) for an exception
from the treatment of such an obligation
as United States property.

(f) Effective/applicability dates. (1)
Paragraph (b) of this section applies to
taxable years of controlled foreign corpo-
rations ending on or after the date of pub-

lication in the Federal Register of the
Treasury decision adopting this rule as a
final regulation, and taxable years of
United States shareholders in which or
with which such taxable years end, with
respect to property acquired on or after the
date of publication in the Federal Regis-
ter of the Treasury decision adopting this
rule as a final regulation. For purposes of
this paragraph (f)(1), a deemed exchange
of property pursuant to section 1001 on or
after the date of publication in the Federal
Register of the Treasury decision adopt-
ing this rule as a final regulation consti-
tutes an acquisition of the property on or
after that date.

(2) Paragraph (c) of this section applies
to taxable years of controlled foreign cor-
porations ending on or after the date of
publication in the Federal Register of the
Treasury decision adopting this rule as a
final regulation, and taxable years of
United States shareholders in which or
with which such taxable years end, with
respect to obligations acquired, or pledges
or guarantees entered into, on or after
September 1, 2015. For purposes of this
paragraph (f)(2), a significant modifica-
tion, within the meaning of § 1.1001-3(e),
of an obligation on or after September 1,
2015, constitutes an acquisition of the ob-
ligation on or after that date. Furthermore,
for purposes of this paragraph (f)(2), a
pledgor or guarantor is treated as entering
into a pledge or guarantee when there is a
significant modification, within the mean-
ing of § 1.1001-3(e), of an obligation with
respect to which it is a pledgor or guaran-
tor on or after September 1, 2015.

(3) Paragraph (d) of this section applies
to taxable years of controlled foreign corpo-
rations ending on or after the date of publi-
cation in the Federal Register of the Trea-
sury decision adopting this rule as a final
regulation, and taxable years of United
States shareholders in which or with which
such taxable years end, with respect to
pledges or guarantees entered into on or
after September 1, 2015. For purposes of
this paragraph (f)(3), a pledgor or guarantor
is treated as entering into a pledge or guar-
antee when there is a significant modifica-
tion, within the meaning of § 1.1001-3(e),
of an obligation with respect to which it is a
pledgor or guarantor on or after September
1, 2015.

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(4) Paragraph (e) of this section applies
to taxable years of controlled foreign cor-
porations ending on or after the date of
publication in the Federal Register of the
Treasury decision adopting this rule as a
final regulation, and to taxable years of

United States shareholders in which or
with which such taxable years end, with
respect to obligations held on or after the
date of publication in the Federal Regis-
ter of the Treasury decision adopting this
rule as a final regulation.

John Dalrymple,
Deputy Commissioner for
Services and Enforcement.

(Filed by the Office of the Federal Register on September 1,
2015, 8:45 a.m., and published in the issue of the Federal
Register for September 2, 2015, 80 F.R. 53058)

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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.

IC-Insurance Company.

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.

T-Target Corporation.

T.C .- Tax Court.

C-Individual.

T.D .- Treasury Decision.

TFE-Transferee.

T.I.R .- Technical Information Release.

COOP-Cooperative.

TP-Taxpayer.

Ct.D .- Court Decision.

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.

BK-Bank.

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

C.B .- Cumulative Bulletin.

CFR-Code of Federal Regulations.

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Numerical Finding List1

Revenue Procedures:

Bulletins 2015-27 through 2015-41

2015-34, 2015-27 I.R.B. 4 2015-36, 2015-27 I.R.B. 20

Announcements:

2015-38, 2015-36 I.R.B. 295 2015-39, 2015-33 I.R.B. 195

2015-17, 2015-28 I.R.B. 67

2015-40, 2015-35 I.R.B. 236

2015-18, 2015-33 I.R.B. 198

2015-41, 2015-35 I.R.B. 263

2015-19, 2015-32 I.R.B. 157

2015-42, 2015-36 I.R.B. 310

2015-20, 2015-38 I.R.B. 375

2015-43, 2015-40 I.R.B. 467

2015-21, 2015-34 I.R.B. 220

2015-44, 2015-38 I.R.B. 374

2015-22, 2015-35 I.R.B. 288

2015-45, 2015-39 I.R.B. 412

2015-23, 2015-36 I.R.B. 311

2015-46, 2015-39 I.R.B. 414

2015-24, 2015-36 I.R.B. 313

2015-47, 2015-39 I.R.B. 419

2015-25, 2015-39 I.R.B. 422

2015-48, 2015-40 I.R.B. 469

2015-49, 2015-41 I.R.B. 555

Notices:

2015-43, 2015-29 I.R.B. 73

Revenue Rulings:

2015-46, 2015-28 I.R.B. 64

2015-15, 2015-27 I.R.B. 1

2015-47, 2015-30 I.R.B. 76

2015-16, 2015-31 I.R.B. 130

2015-48, 2015-30 I.R.B. 77

2015-17, 2015-39 I.R.B. 358

2015-49, 2015-30 I.R.B. 79

2015-18, 2015-34 I.R.B. 209

2015-50, 2015-30 I.R.B. 81

2015-19, 2015-36 I.R.B. 291

2015-51, 2015-31 I.R.B. 133

2015-20, 2015-38 I.R.B. 373

2015-52, 2015-35 I.R.B. 227

2015-21, 2015-40 I.R.B. 447

2015-53, 2015-33 I.R.B. 190

2015-54, 2015-34 I.R.B. 210

Treasury Decisions:

2015-55, 2015-34 I.R.B. 217

2015-56, 2015-35 I.R.B. 235

9723, 2015-31 I.R.B. 84

2015-57, 2015-36 I.R.B. 294

9726, 2015-31 I.R.B. 98

2015-58, 2015-37 I.R.B. 322

9727, 2015-32 I.R.B. 154

2015-59, 2015-40 I.R.B. 459

9728, 2015-33 I.R.B. 169

2015-61, 2015-39 I.R.B. 408

9729, 2015-35 I.R.B. 221

2015-62, 2015-39 I.R.B. 411

9730, 2015-35 I.R.B. 223

2015-63, 2015-40 I.R.B. 461

9731, 2015-37 I.R.B. 314

2015-64, 2015-40 I.R.B. 464

9732, 2015-39 I.R.B. 371

2015-65, 2015-40 I.R.B. 466

9733, 2015-41 I.R.B. 494

2015-66, 2015-41 I.R.B. 541

9734, 2015-41 I.R.B. 500

2015-67, 2015-41 I.R.B. 546

9735, 2015-37 I.R.B. 316

2015-68, 2015-41 I.R.B. 547

9736, 2015-39 I.R.B. 402

2015-69, 2015-41 I.R.B. 550

9737, 2015-40 I.R.B. 449

9738, 2015-40 I.R.B. 453

Proposed Regulations:

9739, 2015-41 I.R.B. 528

REG-136459-09, 2015-37 I.R.B. 332
REG-155164-09, 2015-41 I.R.B. 560
REG-109370-10, 2015-33 I.R.B. 198
REG-112997-10, 2015-39 I.R.B. 422
REG-103033-11, 2015-37 I.R.B. 325
REG-109813-11, 2015-37 I.R.B. 330
REG-138344-13, 2015-41 I.R.B. 557
REG-139483-13, 2015-40 I.R.B. 475
REG-115452-14, 2015-32 I.R.B. 158
REG-127895-14, 2015-41 I.R.B. 556
REG-132075-14, 2015-35 I.R.B. 288
REG-138526-14, 2015-28 I.R.B. 67
REG-143800-14, 2015-37 I.R.B. 347
REG-102648-15, 2015-31 I.R.B. 134
REG-102837-15, 2015-27 I.R.B. 43
REG-123640-15, 2015-37 I.R.B. 350

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2015-01 through 2015-26 is in Internal Revenue Bulletin
2015-26, dated June 29, 2015.

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## Finding List of Current Actions on Previously Published Items1

Bulletins 2015-27 through 2015-41

Notices:

2014-4
Modified by
Notice 2015-51, 2015-31 I.R.B. 133

2014-17
Superseded by
Notice 2015-67, 2015-41 I.R.B. 546

### Proposed Regulations:

2009-57
Obsoleted by
REG-112997-10 2015-39 I.R.B. 422

### Revenue Procedures:

1992-75
Clarified by
Rev. Proc. 2015-40, 2015-35 I.R.B. 236

2003-40
Modified by
Rev. Proc. 2015-40, 2015-35 I.R.B. 236

2003-78
Modified by
Rev. Proc. 2015-46, 2015-39 I.R.B. 414

2006-9
Modified by
Rev. Proc. 2015-41, 2015-35 I.R.B. 263

2006-9
Superseded by
Rev. Proc. 2015-41, 2015-35 I.R.B. 263

2006-54
Modified by
Rev. Proc. 2015-40, 2015-35 I.R.B. 236

2006-54
Superseded by
Rev. Proc. 2015-40, 2015-35 I.R.B. 236

2008-31
Modified by
Rev. Proc. 2015-41, 2015-35 I.R.B. 263

2008-31
Superseded by
Rev. Proc. 2015-41, 2015-35 I.R.B. 263

2011-49
Modified by
Rev. Proc. 2015-36, 2015-27 I.R.B. 20

Revenue Procedures :- Continued

2011-49
Superseded by
Rev. Proc. 2015-36, 2015-27 I.R.B. 20

2015-14
Modified by
Rev. Proc. 2015-39, 2015-33 I.R.B. 195

2015-40
Amplified by
Rev. Proc. 2015-41, 2015-35 I.R.B. 263

2015-41
Amplified by
Rev. Proc. 2015-40, 2015-35 I.R.B. 236

Treasury Decisions:

58-422
Obsoleted by
T.D. 9739 2015-41 I.R.B. 528

66-284
Obsoleted by
T.D. 9739 2015-41 I.R.B. 528

79-250
Obsoleted by
T.D. 9739 2015-41 I.R.B. 528

79-289
Obsoleted by
T.D. 9739 2015-41 I.R.B. 528

96-29
Obsoleted by
T.D. 9739 2015-41 I.R.B. 528

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2015-01 through 2015-26 is in Internal Revenue Bulletin
2015-26, dated June 29, 2015.

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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
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