Internal Revenue Bulletin 2016-32 (PDF rendition): IRS Revenue Procedures

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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–102516–15, page 231.
This document contains proposed regulations that provide
guidance regarding the income inclusion rules under section
50(d)(5) of the Internal Revenue Code (Code) that are applica-
ble to a lessee of investment credit property when a lessor of
such property elects to treat the lessee as having acquired the
property. These proposed regulations also provide rules to
coordinate the section 50(a) recapture rules with the section
50(d)(5) income inclusion rules. In addition, these proposed
regulations provide rules regarding income inclusion upon a
lease termination, lease disposition by a lessee, or disposition
of a partner’s or S corporation shareholder’s entire interest in
a lessee partnership or S corporation outside of the recapture
period.
Rev. Proc. 2016–40, page 228.
This Revenue Procedure provides two safe harbors in which the
Service will not assert that a corporation lacks the requisite
control for purposes of section 355(a), when a corporation (D)
acquires putative control of another corporation (C) through C’s
issuance of stock, and C subsequently engages in a transaction
that actually or effectively reverses the effect of the issuance.
T.D. 9776, page 222.
This document contains temporary regulations that provideguid-
ance regarding the income inclusion rules under section 50(d)(5)
of the Internal Revenue Code (Code) that are applicable to a
lessee of investment credit property when a lessor of such prop-
erty elects to treat the lessee as having acquired the property.
These temporary regulations also provide rules to coordinate the
section 50(a) recapture rules with the section 50(d)(5) income
inclusion rules. In addition, these temporary regulations
provide rules regarding income inclusion upon a lease ter-
mination, lease disposition by a lessee, or disposition of a
partner’s or S corporation shareholder’s entire interest in a
lessee partnership or S corporation outside of the recapture
period.
Finding Lists begin on page ii.
Bulletin No. 2016–32
August 8, 2016

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.
August 8, 2016Bulletin No. 2016–32

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
226 CFR 1.50–1T: Lessee’s income inclusion fol-
lowing election of lessor of investment credit prop-
erty to treat lessee as acquirer (temporary)
T.D. 9776
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Income Inclusion When
Lessee Treated as Having
Acquired Investment Credit
Property
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Final and temporary regulations.
SUMMARY: This document contains
temporary regulations that provide guid-
ance regarding the income inclusion rules
under section 50(d)(5) of the Internal Rev-
enue Code (Code) that are applicable to a
lessee of investment credit property when
a lessor of such property elects to treat the
lessee as having acquired the property.
These temporary regulations also provide
rules to coordinate the section 50(a) re-
capture rules with the section 50(d)(5) in-
come inclusion rules. In addition, these
temporary regulations provide rules re-
garding income inclusion upon a lease
termination, lease disposition by a lessee,
or disposition of a partner’s or S corpora-
tion shareholder’s entire interest in a les-
see partnership or S corporation outside of
the recapture period. Accordingly, these
regulations will affect lessees of invest-
ment credit property when the lessor of
such property makes an election to treat
the lessee as having acquired the property
and an investment credit is determined
under section 46 with respect to such les-
see. The text of these temporary regula-
tions also serves as the text of the pro-
posed regulations set forth in the Proposed
Rules section in this issue of theInternal
Revenue Bulletin.
DATES:Effective Date: These regula-
tions are effective on July 22, 2016.
Applicability Date: For date of appli-
cability, see § 1.50–1T(f).
FOR FURTHER INFORMATION
CONTACT:Jennifer A. Records, (202)
317-6853 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
These temporary regulations amend
the Income Tax Regulations (26 CFR part
1) under section 50(d)(5) to provide the
income inclusion rules applicable to a les-
see of investment credit property when a
lessor elects to treat the lessee as having
acquired such property. Section 50(d)(5)
provides that, for purposes of the invest-
ment credit, rules similar to former section
48(d) (as in effect prior to the enactment
of Revenue Reconciliation Act of 1990
(Public Law 101–508, 104 Stat. 1388
(November 5, 1990))) apply.
Former section 48(d)(1) permitted a
lessor of new section 38 property to elect
to treat that property as having been ac-
quired by the lessee for an amount equal
to its fair market value (or, if the lessor
and lessee were members of a controlled
group of corporations, equal to the les-
sor’s basis). Former section 48(d)(3) pro-
vided that if the lessor made the election
provided in former section 48(d)(1) with
respect to any such property, the lessee
would be treated for all purposes of sub-
part E, part IV, subchapter A, Chapter 1,
subtitle A, as having acquired such prop-
erty. Section 50(a)(5)(A) replaced the
term “section 38 property” with the term
“investment credit property.”
Under former section 48(q), if a credit
was determined under section 46 with re-
spect to section 38 property, the basis of
the property was reduced by 50 percent of
the amount of the credit determined (or
100 percent of the amount of the credit
determined in the case of a credit for
qualified rehabilitation expenditures).
Former section 48(d)(5) provided specific
rules coordinating the effect of the former
section 48(d) election with the basis ad-
justment rules under former section 48(q).
Because the lessee would have no basis in
the property that the lessee was only
deemed to have acquired pursuant to the
election, former section 48(d)(5)(A) pro-
vided that the basis adjustment rules under
former section 48(q) did not apply. Sec-
tion 50(c) replaced former section 48(q)
and provides the current basis adjustment
rules.
In lieu of a basis adjustment, former
section 48(d)(5)(B) provided that the les-
see was required to include ratably in
gross income, over the shortest recovery
period which could be applicable under
section 168 with respect to the property,
an amount equal to 50 percent of the
amount of the credit allowable under sec-
tion 38 to the lessee with respect to such
property. In the case of the rehabilitation
credit, former section 48(q)(3) provided
that former section 48(d)(5)(B) was to be
applied without the phrase “50 percent
of.”
Former section 48(d)(5)(C) provided
that, in the case of a disposition of prop-
erty to which former section 47 (the for-
mer recapture rules) applied, the income
inclusion rules of former section 48(d)(5)
applied in accordance with regulations
prescribed by the Secretary. Section 50(a)
replaced former section 47 and provides
the current recapture rules.
Explanation of Provisions
A.Scope
These temporary regulations provide
the applicable rules that the Secretary has
determined are similar to the rules of for-
mer section 48(d)(5). Thus, these tempo-
rary regulations are limited in scope to the
income inclusion rules that apply when a
lessor elects under § 1.48–4 of the Trea-
sury Regulations to treat the lessee as hav-
ing acquired investment credit property.
B.In General
Section 1.50–1T(b) provides the gen-
eral rules for coordinating the basis ad-
justment rules under section 50(c) (the
successor to former section 48(q)) with
the rules under § 1.48–4 pursuant to
which a lessor may elect to treat the lessee
of investment credit property as having
August 8, 2016Bulletin No. 2016–32
222

acquired such property for purposes of
calculating the investment credit. Similar
to the rule in former section 48(d)(5)(A),
which provided that the basis adjustment
rules under former section 48(q) did not
apply when a § 1.48–4 election was
made, § 1.50–1T(b)(1) provides that sec-
tion 50(c) does not apply when the elec-
tion is made. Thus, the lessor is not re-
quired to reduce its basis in the property
by the amount of the investment credit
determined under section 46 (or 50 per-
cent of the amount of the credit in the case
of the energy credit under section 48).
Under § 1.50–1T(b)(2), in lieu of a
basis adjustment, and similar to the rule
contained in former section 48(d)(5)(B), a
lessee must include in gross income an
amount equal to the amount of the credit
(or, in the case of the section 48 energy
credit, 50 percent of the amount of the
credit) determined under section 46. Gen-
erally, the lessee includes such amount
ratably over the shortest recovery period
applicable under the accelerated cost re-
covery system provided in section 168,
beginning on the date the investment
credit property is placed in service and
continuing on each one year anniversary
date thereafter until the end of the appli-
cable recovery period. The amount re-
quired to be included by the lessee is not
subject to any limitations under section
38(c) on the amount of the credit allowed
based on the amount of the lessee’s in-
come tax.
Because section 50(c) replaces the old
basis adjustment rules under former sec-
tion 48(q), the amount the lessee is re-
quired to include in gross income under
these temporary regulations in § 1.50–
1T(b)(2) corresponds to the current basis
adjustment amounts required under sec-
tion 50(c), rather than the former basis
adjustment amounts provided in former
section 48(q).
C.Special Rule for Partnerships and
S Corporations
Section 1.50–1T(b)(3) provides that, in
the case of a partnership (other than an
electing large partnership) or an S corpo-
ration for which an election is made under
§ 1.48–4 to treat such entity as having
acquired the investment credit property,
each partner or S corporation shareholder
that is the “ultimate credit claimant” is
treated as the lessee for purposes of the
income inclusion rules under § 1.50–
1T(b)(2). The termultimate credit claim-
antis defined in § 1.50–1T(b)(3)(ii) as
any partner or S corporation shareholder
that files (or that would file) Form 3468,
“Investment Credit” (or its successor
form), with such partner’s or S corpora-
tion shareholder’s income tax return to
claim the investment credit determined
under section 46 that results in the corre-
sponding income inclusion under § 1.50–
1T(b)(2). Each partner or S corporation
shareholder that is the ultimate credit
claimant must include in gross income the
amount required under § 1.50–1T(b)(2) in
proportion to the amount of the credit
determined under section 46 (or 50 per-
cent of the amount of the credit in the case
of the energy credit under section 48) with
respect to the partner or S corporation
shareholder.
The Treasury Department and the IRS
believe that, because the investment credit
and any limitations on the credit itself are
determined at the partner or S corporation
shareholder level, it is appropriate that the
income inclusion occurs at the partner or
shareholder level. In the case of a partner-
ship that actually owns the investment
credit property, a partner in a partnership
is treated as the taxpayer with respect to
the partner’s share of the basis of partner-
ship investment credit property under
§ 1.46–3(f)(1) and separately computes
the investment credit based on its share of
the basis of the investment credit property.
Similarly, in the case of a lessee partner-
ship where the lessor makes an election
under § 1.48–4 to treat the partnership as
having acquired investment credit prop-
erty, each partner in the lessee partnership
is the taxpayer with respect to whom the
investment credit is determined under sec-
tion 46. Each partner in the lessee partner-
ship will separately compute the invest-
ment credit based on each partner’s share
of the investment credit property. The
credit is therefore computed at the partner
level based on partner level limitations.
Section 1.704–1(b)(4)(ii), which requires
allocations with respect to the investment
tax credit provided by section 38 to be
made in accordance with the partners’ in-
terests in the partnership, provides that
allocations of cost or qualified investment
(as opposed to the investment credit itself,
which is not determined at the partnership
level) made in accordance with § 1.46–
3(f) shall be deemed to be made in accor-
dance with the partners’ interests in the
partnership.
Under similar principles, in the case of
a lessor that makes an election under
§ 1.48–4 to treat an S corporation as
having acquired investment credit prop-
erty, each shareholder in the lessee S cor-
poration is the taxpayer with respect to
whom the investment credit is determined
under section 46. The credit is therefore
computed at the S corporation shareholder
level based on shareholder level limitations.
The Treasury Department and the IRS
believe that the burden of income inclu-
sion should match the benefits of the al-
lowable credit. Therefore, because the in-
vestment credit and any limitations on the
credit are determined at the partner or
shareholder level, these temporary regula-
tions in § 1.50–1T(b)(3) provide that the
gross income required to be ratably in-
cluded under § 1.50–1T(b)(2) is not an
item of partnership income for purposes
of subchapter K or an item of S corpora-
tion income for purposes of subchapter S.
Accordingly, the rules that would apply
were such gross income an item of income
under section 702 or section 1366, such as
section 705(a) (providing for an increase
in the partner’s outside basis for items of
income) or section 1367(a) (providing for
an increase in the S corporation share-
holder’s stock basis for items of income)
do not apply.
The Treasury Department and the IRS
are aware that some partnerships and S
corporations have taken the position that
this income is includible by the partner-
ship or S corporation and that their part-
ners or S corporation shareholders are en-
titled to increase their bases in their
partnership interests or S corporation
stock as a result of the income inclusion.
The Treasury Department and the IRS be-
lieve that such basis increases are incon-
sistent with Congressional intent as they
thwart the purpose of the income inclu-
sion requirement in former section
48(d)(5)(B) and confer an unintended
benefit upon partners and S corporation
shareholders of lessee partnerships and S
corporations that is not available to any
other credit claimant.
Bulletin No. 2016–32August 8, 2016
223

The investment credit rules operate to
allow a taxpayer to claim the immediate
benefit of the full amount of the allowable
credit in exchange for the recoupment of
that amount (or 50 percent of that amount
in the case of the section 48 energy credit)
over time. Where the taxpayer claiming
the credit owns the investment credit
property, the basis reduction provided in
section 50(c) results in reduced cost re-
covery deductions over the life of the
property or the realization of gain (or a
reduction in the amount of loss realized)
upon the disposition of the property. In the
case of a lessor that elects under § 1.48–4
to treat the lessee of investment credit
property as having acquired such prop-
erty, § 1.50–1T(b)(2) instead requires the
lessee to ratably include this amount in
gross income over the life of the property.
If that lessee is a partnership or an S
corporation, however, some partnerships
and S corporations contend that this in-
come inclusion is treated as an item of
partnership or S corporation income that
entitles their partners or S corporation
shareholders to a corresponding basis in-
crease under section 705(a) or section
1367(a). As a result of the basis increase,
these partners or S corporation sharehold-
ers claim a loss (or reduce the amount of
gain realized) upon the disposition of their
partnership interests or S corporation
shares.
As noted, the Treasury Department and
the IRS have concluded that the income
inclusion is not properly treated as an item
of partnership income or of S corporation
income. Nonetheless, had the Treasury
Department and the IRS determined oth-
erwise, the Treasury Department and the
IRS believe that in addition to being in-
consistent with the purpose of section
48(d)(5)(B), allowing a basis increase for
the income inclusion would also be incon-
sistent with the purpose of sections 705
and 1367. The income to be included is a
notional amount, which has no current or
future economic effect on the basis of
assets held by a partnership or S corpora-
tion. In general, Congress intended for
sections 705 and 1367 to preserve inside
and outside basis parity for partnerships
and S corporations so as to prevent any
unintended tax benefit or detriment to the
partners or shareholders. See H.R. Rep.
No. 1337, 83d Cong., 2d Sess. A225
(1954); S. Rep. No. 1622, 83d Cong., 2d
Sess. 384 (1954); H.R. Rep. No. 97–826,
97th Cong. 2d Sess. p. 17 (1982); S. Rep.
No. 97–640, 97th Cong. 2d Sess. 16, 18
(1982); and Rev. Rul. 96–11 (1996–1 CB
140). Ultimately, the Treasury Depart-
ment and the IRS have concluded that,
under any approach, allowing partners and
S corporation shareholders a basis in-
crease to offset the income inclusion re-
quired by § 1.50–1T(b)(2) upon disposi-
tion of their partnership interests or S
corporation shares is inappropriate, and
that Congress did not intend to allow part-
ners and S corporation shareholders the
full benefit of the credit without any of the
corresponding burden.
D.Coordination with the Recapture
Rules
Section 1.50–1T(c) provides that if the
investment credit recapture rules under
section 50(a) are triggered (including if
there is a lease termination), causing a
recapture of the credit or a portion of the
credit, an adjustment will be made to the
lessee’s (or, as applicable, the ultimate
credit claimant’s) gross income for any
discrepancies between the total amount
included in gross income under these tem-
porary regulations in § 1.50–1T(b)(2) and
the total credit allowable after recapture.
The adjustment amount is taken into ac-
count in the taxable year in which the
property is disposed of or otherwise
ceases to be investment credit property.
If the amount of the unrecaptured
credit (that is, the allowable credit after
taking into account the recapture amount),
or 50 percent of the unrecaptured credit in
the case of the energy credit, exceeds the
amount previously included in gross in-
come under § 1.50–1T(b)(2), the lessee’s
(or the ultimate credit claimant’s) gross
income is increased. The lessee (or the
ultimate credit claimant) is required to
include in gross income an amount equal
to the excess of the amount of the credit
that is not recaptured (or 50 percent of the
amount of the credit that is not recaptured
in the case of the energy credit) over the
amount of the total increases in gross in-
come previously made under § 1.50–
1T(b)(2). This amount is in addition to the
amounts previously included in gross in-
come under § 1.50–1T(b)(2).
If the income inclusion prior to recap-
ture under § 1.50–1T(b)(2) exceeds the
unrecaptured credit (that is, the allowable
credit after taking into account the recap-
ture amount), or 50 percent of the unre-
captured credit in the case of the energy
credit, the lessee’s (or the ultimate credit
claimant’s) gross income is reduced. The
lessee’s or ultimate credit claimant’s gross
income is reduced by an amount equal to
the excess of the total increases in gross
income previously made under § 1.50–
1T(b)(2) over the amount of the credit that
is not recaptured (50 percent of the
amount of the credit that is not recaptured
in the case of the energy credit).
E.Election to Accelerate Income
Inclusion Outside of the Recapture
Period
Section 1.50–1T(d)(1) provides that a
lessee or an ultimate credit claimant may
make an irrevocable election to include in
gross income any remaining income re-
quired to be taken into account under
§ 1.50–1T(b)(2) in the taxable year in
which the lease terminates or is otherwise
disposed of. Similarly, § 1.50–1T(d)(1)
provides that if an ultimate credit claimant
disposes of its entire interest, either direct
or indirect, in a partnership (other than an
electing large partnership) or an S corpo-
ration, the ultimate credit claimant may
make an irrevocable election to include in
gross income any remaining income re-
quired to be taken into account under
§ 1.50–1T(b)(2) in the taxable year in
which the ultimate credit claimant no lon-
ger owns a direct or indirect interest in the
lessee of the investment credit property.
The availability of this election allows a
lessee or an ultimate credit claimant to
account for any remaining required gross
income inclusion in the taxable year in
which it is exiting its investment.
This election is available only outside
of the section 50(a) recapture period, and
only if the lessee or the ultimate credit
claimant was not already required to ac-
celerate the gross income required to be
included under § 1.50–1T(b)(2) because
of a recapture event during the recapture
period. Additionally, a former partner or S
corporation shareholder that owns no di-
rect or indirect interest in the lessee part-
nership or S corporation may not elect to
August 8, 2016Bulletin No. 2016–32
224

accelerate the gross income required to be
included under § 1.50–1T(b)(2) at the
time of a termination or disposition of the
lease by the lessee partnership or S cor-
poration. The appropriate time for a for-
mer partner or S corporation shareholder
that is an ultimate credit claimant to elect
income acceleration is the taxable year
that it disposes of its entire interest in a
lessee partnership or S corporation.
Section 1.50–1T(d)(2) provides that
the election to accelerate the income in-
clusion must be made by the due date
(including any extension of time) of the
lessee’s return, or, in the case of a part-
nership or S corporation, by the due date
(including any extension of time) of the
ultimate credit claimant’s return for the
taxable year in which the relevant event
occurs (for example, the lease termina-
tion, lease disposition, or disposition of
the entire interest in the lessee partnership
or S corporation). The election is made by
including the remaining gross income re-
quired by these temporary regulations in
the taxable year of the relevant event (for
example, the lease termination, lease dis-
position, or disposition of the entire inter-
est in the lessee partnership or S corpora-
tion).
F.Applicability Date
These temporary regulations apply
with respect to investment credit property
placed in service on or after the date that
is 60 days after the date of filing of these
regulations in theFederal Register.The
temporary regulations should not be con-
strued to create any inference concerning
the proper interpretation of section
50(d)(5) prior to the effective date of the
regulations.
G.Rev. Proc. 2014–12
Rev. Proc. 2014–12 (2014–3 IRB 415)
establishes the requirements under which
the IRS will not challenge partnership al-
locations of section 47 rehabilitation cred-
its by a partnership to its partners. Section
3 states that Rev. Proc. 2014–12 does not
address how a partnership is required to
allocate the income inclusion required by
section 50(d)(5). Furthermore, section
4.07 provides that, solely for purposes of
determining whether a partnership meets
the requirements of that section, the part-
nership’s allocation to its partners of the
income inclusion required by section
50(d)(5) shall not be taken into account.
Because § 1.704–1(b)(4)(ii) provides
that allocations of cost or qualified invest-
ment, and not the investment credit itself
(which is not determined at the partner-
ship level), made in accordance with
§ 1.46–3(f) shall be deemed to be made in
accordance with the partners’ interests in
a partnership, this Treasury decision mod-
ifies Rev. Proc. 2014–12 by changing all
references to allocations of section 47 re-
habilitation credits to refer instead to al-
locations of qualified rehabilitation expendi-
tures under section 47(c)(2). Additionally,
because § 1.50–1T(b)(3) provides that the
gross income required to be included under
section 50(d)(5) is not an item of partnership
income to which the rules of subchapter K
apply, this Treasury decision modifies Rev.
Proc. 2014–12 by deleting the sentences in
section 3 and section 4.07 that refer to allo-
cation by a partnership of the income inclu-
sion required under section 50(d)(5).
Effect on Other Documents
Rev. Proc. 2014–12 (2014–3 IRB 415)
is modified by: (1) changing all references
to allocations of section 47 rehabilitation
credits to refer instead to allocations of
qualified rehabilitation expenditures under
section 47(c)(2); and (2) deleting the sen-
tences in section 3 and section 4.07 that
refer to allocation by a partnership of the
income inclusion required under section
50(d)(5).
Statement of Availability of IRS
Documents
Rev. Proc. 2014–12 (2014–3 IRB 415)
is published in the Internal Revenue Bul-
letin (or Cumulative Bulletin) and is avail-
able from the Superintendent of Docu-
ments, U.S. Government Printing Office,
Washington, DC 20402, or by visiting the
IRS website athttp://www.irs.gov.
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. For
applicability of the Regulatory Flexibility
Act, please refer to the Special Analyses
section of the preamble to the cross-
referenced notice of proposed rulemaking
published in the Proposed Rules section in
this issue of theInternal Revenue Bulle-
tin.Pursuant to section 7805(f) of the
Code, these regulations have been submitted
to the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on their impact on small business.
Drafting Information
The principal author of these tempo-
rary regulations is Jennifer A. Records,
Office of the Associate Chief Counsel
(Passthroughs and Special Industries),
IRS. However, other personnel from the
Treasury Department and the IRS partic-
ipated in their development.
* * * * *
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 * * *
Par. 2. Section 1.50–1 is revised to
read as follows:
§ 1.50–1 Lessee’s income inclusion
following election of lessor of investment
credit property to treat lessee as
acquirer.
(a) through (f) [Reserved]. For further
guidance, see § 1.50–1T(a) through (f).
Par. 3. Section 1.50–1T is added to
read as follows:
§ 1.50–1T Lessee’s income inclusion
following election of lessor of investment
credit property to treat lessee as
acquirer (temporary).
(a)In general. Section 50(d)(5) pro-
vides that, for purposes of computing the
investment credit, rules similar to the rules
of former section 48(d) (relating to certain
Bulletin No. 2016–32August 8, 2016
225

leased property) (as in effect on the day
before the date of the enactment of the
Revenue Reconciliation Act of 1990
(Public Law 101–508, 104 Stat. 1388
(November 5, 1990))) apply. This section
provides rules similar to the rules of for-
mer section 48(d)(5) that the Secretary has
determined shall apply for purposes of
determining the inclusion in gross income
required when a lessor elects to treat a
lessee as having acquired investment
credit property.
(b)Coordination with basis adjustment
rules. In the case of any property with
respect to which an election is made under
§ 1.48–4 by a lessor of investment credit
property to treat the lessee as having ac-
quired the property—
(1)Basis adjustment. Section 50(c)
does not apply with respect to such
property.
(2)Amount of credit included ratably
in gross income—(i)In general. A lessee
of the property must include ratably in
gross income, over the shortest recovery
period which could be applicable under
section 168 with respect to that property,
an amount equal to the amount of the
credit determined under section 46 with
respect to that property. The ratable in-
come inclusion under this paragraph be-
gins on the date the investment credit
property is placed in service and continues
on each one year anniversary date there-
after until the end of the applicable recov-
ery period. The lessee will include in
gross income the amount of its credit de-
termined under section 46 regardless of
limitations on the amount of the credit
allowed under section 38(c) based on the
amount of the lessee’s income tax.
(ii)Special rule for the energy credit.
In the case of any energy credit deter-
mined under section 48(a), paragraph
(b)(2)(i) of this section applies only to the
extent of 50 percent of the amount of the
credit determined under section 46.
(3)Special rule for partnerships and S
corporations—(i)In general. For pur-
poses of paragraph (b)(2) of this section, if
the lessee of the property is a partnership
(other than an electing large partnership)
or an S corporation, the gross income in-
cludible under such paragraph is not an
item of partnership income to which the
rules of subchapter K of Chapter 1, sub-
title A of the Code apply or an item of S
corporation income to which the rules of
subchapter S of Chapter 1, subtitle A of
the Code apply. Any partner or S corpo-
ration shareholder that is an ultimate
credit claimant (as defined in paragraph
(b)(3)(ii) of this section) is treated as a
lessee that must include in gross income
the amounts required under paragraph
(b)(2) of this section in proportion to the
credit determined under section 46 with
respect to such partner or S corporation
shareholder.
(ii)Definition of ultimate credit claim-
ant. For purposes of this section, the term
ultimate credit claimantmeans any part-
ner or S corporation shareholder that files
(or that would file) Form 3468, “Invest-
ment Credit,” with such partner’s or S
corporation shareholder’s income tax re-
turn to claim an investment credit deter-
mined under section 46 with respect to
such partner or S corporation shareholder.
(c)Coordination with the recapture
rules—(1)In general. If section 50(a) re-
quires an increase in the lessee’s or the
ultimate credit claimant’s tax or a reduction
in the carryback or carryover of an unused
credit (or both) as a result of an early dis-
position (including a lease termination), etc.,
of leased property for which an election had
been made under § 1.48–4, the lessee or the
ultimate credit claimant is required to in-
clude in gross income an amount equal to
the excess, if any, of the amount of the
credit that is not recaptured over the total
increases in gross income previously made
under paragraph (b)(2) of this section with
respect to the property. Such amount is in
addition to the amounts the lessee or the
ultimate credit claimant previously included
in gross income under paragraph (b)(2) of
this section.
(2)Income inclusion exceeds unrecap-
tured credit. If section 50(a) requires an
increase in the lessee’s or ultimate credit
claimant’s tax or a reduction in the carry-
back or carryover of an unused credit (or
both) as a result of an early disposition
(including a lease termination), etc., of
leased property for which an election had
been made under § 1.48–4, the lessee’s or
the ultimate credit claimant’s gross in-
come shall be reduced by an amount equal
to the excess, if any, of the total increases
in gross income previously included under
paragraph (b)(2) of this section over the
amount of the credit that is not recaptured.
(3)Special rule for the energy credit.
In the case of any energy credit deter-
mined under section 48(a), paragraphs
(c)(1) and (2) of this section apply by
substituting the phrase “50 percent of the
amount of the credit that is not recap-
tured” for the phrase “the amount of the
credit that is not recaptured.”
(4)Timing of income inclusion or re-
duction following recapture. Any adjust-
ment required by paragraphs (c)(1) and
(2) of this section is taken into account in
the taxable year in which the property is
disposed of or otherwise ceases to be in-
vestment credit property.
(d)Election to accelerate income inclu-
sion outside of the recapture period—(1)In
general. If after the recapture period de-
scribed in section 50(a), but prior to the
expiration of the recovery period described
in paragraph (b)(2) of this section, there is a
lease termination, the lessee otherwise dis-
poses of the lease, or a partner or S corpo-
ration shareholder that is an ultimate credit
claimant disposes of its entire interest, either
direct or indirect, in a lessee partnership
(other than an electing large partnership) or
S corporation, the lessee, or, in the case of a
partnership or S corporation, the ultimate
credit claimant may irrevocably elect to take
into account the remaining amount required
to be included in gross income under this
section in the taxable year of the disposition
or termination.
(2)Exceptions. The election provided
under paragraph (d)(1) of this section is
not available to—
(i) Lessees or ultimate credit claimants
required by paragraph (c) of this section to
account for the remaining amount required
to be included in gross income after ac-
counting for recapture in the taxable year in
which the property was disposed of or oth-
erwise ceased to be investment credit prop-
erty under section 50(a); or
(ii) Former partners or S corporation
shareholders that own no interest, either
direct or indirect, in a lessee partnership or
S corporation at the time of a lease termi-
nation or disposition.
(3)Manner and time for making elec-
tion. The election under paragraph (d)(1)
of this section is made by including the
remaining amount required to be included
under this section in gross income in the
taxable year of the lease termination or
disposition or the disposition of the ulti-
August 8, 2016Bulletin No. 2016–32
226

mate credit claimant’s entire interest, ei-
ther direct or indirect, in a partnership or S
corporation. The election must be made
on or before the due date (including any
extension of time) of the lessee’s income
tax return, or, in the case of a partnership
or S corporation, the ultimate credit claim-
ant’s income tax return for the taxable
year in which the lease termination or
disposition or the disposition of the ulti-
mate credit claimant’s entire interest, ei-
ther direct or indirect, in a partnership or S
corporation occurs.
(e)Examples. The provisions of this
section may be illustrated by the follow-
ing examples:
Example 1. X, a calendar year C corporation, leases
nonresidential real property from Y. The property is
placed in service on October 1, 2016. Y elects under
§ 1.48–4 to treat X as having acquired the property.
X’s investment credit determined under section 46 for
2016 with respect to such property is $9,750. The
shortest recovery period that could be available to the
property under section 168 is 39 years. Because Y has
elected to treat X as having acquired the property, Y
does not reduce its basis in the property under section
50(c). Instead, X, the lessee of the property, must
include ratably in gross income over 39 years an
amount equal to the credit determined under section 46
with respect to such property. Under paragraph (b)(2)
of this section, X’s increase in gross income for each of
the 39 years beginning with 2016 is $250 ($9,750/39
year recovery period).
Example 2. The facts are the same as inExample 1
of this paragraph (e), except that instead of nonresiden-
tial real property, X leases from Y solar energy equip-
ment for which an energy credit under section 48 is
determined under section 46. X’s investment credit
determined under section 46 for 2016 with respect to
the property is $9,750. The shortest recovery period
that could be available to the property under section
168 is 5 years. X, the lessee of the property, must
include ratably in gross income over 5 years an amount
equal to 50% of the credit determined under section 46
with respect to such property. Under paragraph (b)(2)
of this section, X’s increase in gross income for each of
the 5 years beginning with 2016 is $975 ($4,875/5 year
recovery period).
Example 3. A and B, calendar year taxpayers, form
a partnership, the AB partnership, that leases nonresi-
dential real property from Y. The property is placed in
service on October 1, 2016. Y elects under § 1.48–4 to
treat the AB partnership as having acquired the prop-
erty. A’s investment credit determined under section 46
for 2016 is $3,900 and B’s investment credit deter-
mined under section 46 for 2016 is $7,800 with respect
to the property. The shortest recovery period that could
be available to the property under section 168 is 39
years. Because Y has elected to treat the AB partner-
ship as having acquired the property, Y does not reduce
its basis in the building under section 50(c). Instead, A
and B, the ultimate credit claimants, must include the
amount of the credit determined with respect to A and
B under section 46 ratably in gross income over 39
years, the shortest recovery period available with re-
spect to such property. Therefore, A and B must in-
clude ratably in gross income over 39 years under
paragraph (b)(2) of this section an amount equal to
$3,900 and $7,800, respectively. Under paragraph
(b)(2) of this section, A’s increase in gross income for
each of the 39 years beginning with 2016 is $100
($3,900/39 year recovery period) and B’s is $200
($7,800/39 year recovery period). Because the gross
income A and B are required to include under para-
graph (b)(2) of this section is not an item of partnership
income, the rules under subchapter K applicable to
items of partnership income do not apply with respect
to such income. In particular, A and B are not entitled
to an increase in the outside basis of their partnership
interests under section 705(a) and are not entitled to an
increase in their capital accounts under section 704(b).
Example 4. The facts are the same as inExample
3of this paragraph (e), except that on January 1,
2019, the lease between AB partnership and Y ter-
minates (Y retains ownership of the property), which
is a recapture event under section 50(a). A’s and B’s
income tax for 2019 is increased under section 50(a)
by $2,340 and $4,680, respectively (60% of $3,900
and $7,800, respectively, assuming that the aggre-
gate decrease in the credits allowed under section 38
was the full amount of the investment credits deter-
mined as to A and B under section 46). Therefore,
the amount of the unrecaptured credit as to A and B
is $1,560 and $3,120, respectively (40% of $3,900
and $7,800, respectively). The amounts that A and B
previously included in gross income under paragraph
(b)(2) of this section are $300 ($100 for each of
2016, 2017, and 2018) and $600 ($200 for each of
2016, 2017, and 2018), respectively. A and B are
required under paragraph (c)(1) of this section to
include in gross income an amount equal to the
excess of the credit that is not recaptured ($1,560 and
$3,120, respectively) over the total increases in gross
income previously made under paragraph (b)(2) of
this section with respect to the property ($300 and
$600, respectively). Therefore, A and B must include
in gross income $1,260 and $2,520, respectively, in
the taxable year of the lease termination (2019) in
addition to the recapture amounts described above.
Example 5. (i) The facts are the same as in
Example 4of this paragraph (e), except that instead
of nonresidential real property, the AB partnership
leases from Y solar energy equipment for which an
energy credit under section 48 is determined under
section 46. Because the shortest recovery period that
could be available to the property under section 168
is 5 years, A and B are required under paragraph
(b)(2)(ii) of this section to include ratably in gross
income over 5 years an amount equal to 50% of the
credit determined under section 46 with respect to
such property (50% of $3,900/5, or $390, per year
for A, and 50% of $7,800/5, or $780, per year for B).
(ii) The January 1, 2019 lease termination re-
quires A’s and B’s income tax for 2019 to be in-
creased under section 50(a) by $2,340 and $4,680,
respectively (60% of $3,900 and $7,800, respec-
tively). Therefore, the amount of the unrecaptured
credit as to A and B is $1,560 and $3,120, respec-
tively (40% of $3,900 and $7,800, respectively).
Under paragraph (b)(2)(ii) of this section, the
amounts A and B previously included in gross in-
come are $1,170 ($390 for each of 2016, 2017, and
2018) and $2,340 ($780 for each of 2016, 2017, and
2018), respectively. A and B are entitled to a reduc-
tion in gross income under paragraph (c)(2) of this
section equal to the excess of the total increases in
gross income made under paragraph (b)(2)(ii) of this
section ($1,170 and $2,340, respectively) over 50%
of the amount of the credit that is not recaptured
($780 and $1,560, respectively). Therefore, A and B
are entitled to a reduction in gross income in the
amount of $390 and $780, respectively, in the tax-
able year of the lease termination (2019).
Example 6. (i) The facts are the same as inExample
3of this paragraph (e), except that on December 1,
2021, A sells its entire interest to C, and on January 1,
2022, the lease between AB partnership and Y termi-
nates. At the time of the lease termination, B is still a
partner in the AB partnership. There is no recapture
event under section 50(a) because both the lease termi-
nation and the disposition of A’s interest in the part-
nership occurred outside of the recapture period.
(ii) At the time that A sold its interest in the AB
partnership to C, A had previously included $500
($100 for each of 2016–2020) in gross income under
paragraph (b)(2) of this section. Under paragraph (b)(2)
of this section, A must continue to include the remain-
ing $3,400 (including $100 in 2021) in gross income
ratably over the remaining portion of the applicable
recovery period of 39 years. Alternatively, under para-
graph (d)(1) of this section, A may irrevocably elect to
include the remaining $3,400 in gross income in the
taxable year that A sold its entire interest in the AB
partnership to C (2021). Pursuant to paragraph (d)(2) of
this section, A cannot make this election in the taxable
year of the lease termination (2022).
(iii) At the time of the lease termination, B had
previously included $1,200 ($200 for each of 2016–
2021) in gross income under paragraph (b)(2) of this
section. Under paragraph (b)(2) of this section, B
must continue to include the remaining $6,600 re-
quired in gross income ratably over the remaining
portion of the applicable recovery period of 39 years.
Alternatively, under paragraph (d)(1) of this section,
B may irrevocably elect to include the remaining
$6,600 in gross income in the taxable year of the
lease termination (2022).
(f)Applicability date. This section ap-
plies to property placed in service on or
after September 19, 2016.
(g)Expiration date. The applicability
of this section will expire on or before
July 19, 2019.
John Dalrymple,
Deputy Commissioner for
Services and Enforcement.
Approved: June 1, 2016.
Mark J. Mazur,
Assistant Secretary of
the Treasury (Tax Policy).
(Filed by the Office of the Federal Register on July 21, 2016,
8:45 a.m., and published in the issue of the Federal Register
for July 22, 2016, 81 F.R. 47701)
Bulletin No. 2016–32August 8, 2016
227

Part III. Administrative, Procedural, and Miscellaneous
26 CFR 601.105: Examination of returns and claims
for refund, credit or abatement; determination of tax
liability
(Also: Part I §§ 355, 1.355–1)
Rev. Proc. 2016–40
SECTION 1. PURPOSE
This revenue procedure provides fact
patterns (safe harbors) in which the Inter-
nal Revenue Service (IRS) will not assert
that a distributing corporation, D, lacks
control of another corporation, C, within
the meaning of § 355(a)(1)(A) of the In-
ternal Revenue Code (Code), even though
D and C engage in a transaction described
in sections 3 and 4 of this revenue proce-
dure.
SECTION 2. BACKGROUND
.01 Section 355(a)(1) provides that, if
certain requirements are met, a corpora-
tion may distribute stock and securities of
a controlled corporation to its sharehold-
ers and security holders without recogni-
tion of gain or loss by the shareholders or
security holders.
.02 Section 355(a)(1)(A) provides that,
for a distribution to qualify for nonrecog-
nition treatment, the distributing corpora-
tion must distribute stock or securities of a
corporation (the controlled corporation) it
controls immediately before the distribu-
tion. For this purpose, “control” is defined
by cross-reference to § 368(c) as owner-
ship of stock possessing at least 80 per-
cent of the total combined voting power of
all classes of stock entitled to vote and at
least 80 percent of the total number of
shares of each other class of stock of the
corporation.
.03 In Rev. Rul. 56–117, 1956–1 C.B.
180, corporation M owned all of the vot-
ing common stock and 12 percent of the
non-voting preferred stock of corporation
N. Disputes arose among the M share-
holders, and it was decided that M would
distribute its N stock to one group of M
shareholders (the departing shareholders)
in exchange for all their M stock. To qual-
ify N as a controlled corporation for pur-
poses of § 355(a)(1)(A), N issued shares
of voting common stock to the preferred
shareholders other than M, in exchange
for all their non-voting preferred shares in
a recapitalization within the meaning of
§ 368(a)(1)(E). After the recapitalization,
M owned 93 percent of the outstanding N
voting common stock and all of the out-
standing N non-voting preferred stock. M
then distributed all of its common and
preferred N stock to the departing share-
holders in exchange for all their M stock.
After the distribution, the departing share-
holders controlled N, and N’s business
was carried on under their management.
The ruling holds that, under § 355(a)(1),
no gain or loss was recognized to the
departing shareholders upon their receipt
of N stock.
.04 In Rev. Rul. 63–260, 1963–2 C.B.
147, A owned all the stock of corporation
X, which owned 70 shares of the stock of
corporation Y. A also owned the remain-
ing 30 shares of Y stock. A contributed 10
shares of his Y stock to X, and, immedi-
ately thereafter, X distributed all of its 80
shares of Y stock to A. The ruling holds
that the distribution did not qualify under
§ 355, because X, the distributing corpo-
ration, did not have control of Y immedi-
ately before the distribution except in a
transitory and illusory sense.
.05 In Rev. Rul. 69–407, 1969–2 C.B.
50, corporation X owned 70 percent, and
A and B owned the remaining 30 percent,
of the single outstanding class of stock of
corporation Y. In exchange for the surren-
der of all the Y stock, Y issued Class A
voting stock to A and B and Class B
voting stock to X. The Class A stock
issued to A and B represented 20 percent,
and the Class B stock issued to X repre-
sented 80 percent, of the total combined
voting power of all classes of Y voting
stock. The exchange qualified as a recap-
italization under § 368(a)(1)(E). Follow-
ing the recapitalization, X distributed all
of the Class B stock to its shareholders.
The ruling holds that, immediately prior to
the distribution, X had control of Y, and
that, under § 355, no gain or loss was
recognized to X’s shareholders on the dis-
tribution to them of the Y stock. The
transaction was distinguished from the
transaction described in Rev. Rul. 63–260,
because the recapitalization resulted in a
permanent realignment of voting control.
.06 Rev. Rul. 98–27, 1998–1 C.B.
1159, states that the IRS will not apply
Commissioner v. Court Holding Co., 324
U.S. 331 (1945) (or any formulation of the
step transaction doctrine) to determine
whether the distributed corporation was a
controlled corporation immediately before
a distribution under § 355(a) solely be-
cause of any post-distribution acquisition
or restructuring of the distributed corpo-
ration, whether prearranged or not. The
ruling also states that, otherwise, in apply-
ing the step transaction doctrine, all facts
and circumstances will be considered (cit-
ing Rev. Rul. 63–260, 1963–2 C.B. 147),
and an independent shareholder vote is
only one relevant factor.
.07 Rev. Rul. 98–27 is based, in part,
on § 1012(c) of the Taxpayer Relief Act
of 1997, Pub. L. No. 105–34, 111 Stat.
788, 916–17, which added § 355(e) to the
Code. Under § 355(e), gain is recognized
to the distributing corporation on a distri-
bution of stock or securities of a con-
trolled corporation in connection with a
planned acquisition of stock representing
a 50-percent or greater interest, by vote or
value, in the distributing corporation or
the controlled corporation. The Confer-
ence Report accompanying the legislation
states in part:
The . . . bill does not change the
present-law requirement under sec-
tion 355 that the distributing corpo-
ration must distribute 80 percent of
the voting power and 80 percent of
each other class of stock of the con-
trolled corporation . . . . [T]he 80-
percent control requirement is ex-
pected to be administered in a
manner that would prevent the tax-
free spin-off of a less-than-80-
percent controlled subsidiary, but
would not generally impose
additional restrictions on post-
distribution restructurings of the
controlled corporation if such re-
strictions would not apply to the dis-
tributing corporation. H.R. Rep. No.
105–220, at 529-30 (1997); 1997–4
C.B. 1457, at 1999–2000.
.08 As illustrated in Rev. Rul. 56–117
and Rev. Rul. 69–407, the control re-
quirement of § 355(a)(1)(A) may be sat-
isfied by an acquisition of control that
occurs immediately before a distribution
for the purpose of qualifying the distribu-
tion under § 355. However, as illustrated
August 8, 2016Bulletin No. 2016–32
228

in Rev. Rul. 63–260, an acquisition of
control by the distributing corporation is not
respected for purposes of § 355(a)(1)(A) if it
is transitory or illusory. The acquisition of
control must have substance under general
federal tax principles.
.09 Although the § 355(e) legislative
history states, and Rev. Rul. 98–27 pro-
vides, that post-distribution events are not
to be taken into account in determining
whether a distributing corporation has
control of the distributed corporation, this
interpretation of § 355 applies only after it
has been determined that, at the time of
the distribution, the distributing corpora-
tion otherwise had control of the distrib-
uted corporation in substance. Thus, the
§ 355(e) legislative history and Rev. Rul.
98–27 do not prevent the step transaction
doctrine from applying to determine if,
taking into account all facts and circum-
stances (including post-distribution
events), a pre-distribution acquisition of
control has substance such that a distribut-
ing corporation has control of a corporation
within the meaning of § 355(a)(1)(A) im-
mediately prior to a distribution of the stock
of that corporation.
.10 The Treasury Department and the
IRS recognize that determining whether
an acquisition of control has substance for
federal tax purposes can be difficult and
fact-intensive. The Treasury Department
and the IRS are concerned that, in some
cases, taxpayers may not be able to deter-
mine whether such an acquisition has sub-
stance with sufficient certainty to proceed
with transactions that otherwise satisfy the
requirements of § 355. To resolve this
uncertainty, the Treasury Department and
the IRS are describing transactions in
which the IRS will not assert that an ac-
quisition of control lacks substance.
SECTION 3. TRANSACTIONS TO
WHICH THIS REVENUE
PROCEDURE APPLIES
This revenue procedure applies to
transactions in which—
(1) D owns C stock not constituting
control of C;
(2) C issues shares of one or more
classes of stock to D and/or to other share-
holders of C (the issuance), as a result of
which D owns C stock possessing at least
80 percent of the total combined voting
power of all classes of C stock entitled to
vote and at least 80 percent of the total
number of shares of all other classes of
stock of C;
(3) D distributes its C stock in a
transaction that otherwise qualifies under
§ 355 (the distribution); and
(4) C subsequently engages in a
transaction that, actually or in effect, sub-
stantially restores (a) C’s shareholders to
the relative interests, direct or indirect,
they would have held in C (or a successor
to C) had the issuance not occurred;
and/or (b) the relative voting rights and
value of the C classes of stock that were
present prior to the issuance (an unwind).
SECTION 4. SAFE HARBORS
The IRS will not assert that a transac-
tion described in section 3 of this revenue
procedure lacks substance, and that there-
fore D lacked control of C immediately
before the distribution, within the mean-
ing of § 355(a)(1)(A) of the Code, if the
transaction is also described in one of the
following safe harbors:
.01No Action Taken Within 24
Months. No action is taken (including the
adoption of any plan or policy), at any
time prior to 24 months after the distribu-
tion, by C’s board of directors, C’s man-
agement, or any of C’s controlling share-
holders (as defined in § 1.355–7(h)(3))
that would (if implemented) actually or
effectively result in an unwind.
.02Unanticipated Third Party Trans-
action. C engages in a transaction with
one or more persons (for example, a
merger of C with another corporation) that
results in an unwind, regardless of
whether the transaction takes place more
or less than 24 months after the distribu-
tion, provided that—
(1) There is no agreement, understand-
ing, arrangement, or substantial negotia-
tions (within the meaning of § 1.355–
7(h)(1)) or discussions (within the
meaning of § 1.355–7(h)(6)) concerning
the transaction or a similar transaction
(applying the principles of § 1.355–
7(h)(12) and (13), relating to similar ac-
quisitions), at any time during the 24-
month period ending on the date of the
distribution; and
(2) No more than 20 percent of the
interest in the other party, in vote or value,
is owned by the same persons that own
more than 20 percent in vote or value of
the stock of C. For purposes of the pre-
ceding sentence, ownership is determined
by application of the constructive owner-
ship rules of § 318(a) as modified by
§ 304(c)(3), except that for purposes of
applying § 318(a)(3)(A) and (B), the prin-
ciples of § 304(c)(3)(B)(ii) (without re-
gard to § 304(c)(3)(B)(ii)(I)) apply. In the
case of a corporation the stock of which is
listed on an established market (within the
meaning of § 1.355–7(h)(7)), the persons
referred to in the first sentence of this
section 4.02(2) are limited to controlling
shareholders (within the meaning of
§ 1.355–7(h)(3)(i), taking into account
§ 1.355–7(h)(8) but without regard to
whether stock of a corporation is trans-
ferred) and ten-percent shareholders
(within the meaning of § 1.355–7(h)(14)
but without regard to the second sentence
thereof or whether stock of a corporation
is transferred).
SECTION 5. SCOPE AND EFFECT
OF REVENUE PROCEDURE
.01Exclusivity. The safe harbors pro-
vided in section 4 of this revenue proce-
dure apply solely to determine whether an
acquisition of control has substance for
purposes of § 355(a)(1)(A). Further, they
apply only to transactions described in
section 3 of this revenue procedure. No
inference should be drawn from this rev-
enue procedure regarding the application
of any federal tax principles outside the
scope of this revenue procedure.
.02Effect of Safe Harbor Not Apply-
ing. If a transaction is not described in one
of the safe harbors in section 4 of this
revenue procedure, this revenue procedure
has no effect on the determination of the
federal tax treatment of the transaction.
Rather, in such cases, the determination of
whether an acquisition of control has sub-
stance and is therefore respected for pur-
poses of § 355(a)(1)(A), and the proper
treatment of all related transactions en-
tered into by or between the parties, will
be made under general federal tax princi-
ples without regard to the provisions of
this revenue procedure.
SECTION 6. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 2016–3, 2016–1 I.R.B. 129,
is modified by deleting section 5.01(4)
Bulletin No. 2016–32August 8, 2016
229

(providing that the acquisition of putative
control of a corporation, in certain circum-
stances, is an area under study in which a
ruling letter will not be issued). However,
the IRS may decline to issue a letter ruling
addressing an acquisition of control when
appropriate in the interest of sound tax
administration or on other grounds when
warranted by the facts or circumstances of
a particular case. See Rev. Proc. 2016–1,
2016–1 I.R.B. 1, § 6.02; Rev. Proc.
2016–3, 2016–1 I.R.B. 129, §§ 2.01 and
3.01(50).
SECTION 7. DRAFTING
INFORMATION
The principal authors of this revenue
ruling are Frances Kelly and Theresa
Abell of the Office of Associate Chief
Counsel (Corporate). For further informa-
tion regarding this revenue ruling, contact
Ms. Kelly at (202) 317-6975 or Ms. Abell
at (202) 317-7700 (neither a toll-free
number).
SECTION 8. EFFECTIVE DATE
This revenue procedure is effective
with respect to distributions that occur on
or after August 8, 2016. However, taxpay-
ers may apply this revenue procedure with
respect to a distribution that occurs before
August 8, 2016.
August 8, 2016Bulletin No. 2016–32
230

Part IV. Items of General Interest
Withdrawal of notice of
proposed rulemaking; and
notice of proposed
rulemaking by cross-
reference to temporary
regulations.
Income Inclusion When
Lessee Treated as Having
Acquired Investment Credit
Property
REG–102516–15
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Withdrawal of notice of pro-
posed rulemaking; and notice of proposed
rulemaking by cross-reference to tempo-
rary regulations.
SUMMARY: This document withdraws
the notice of proposed rulemaking pub-
lished in theFederal Registeron Decem-
ber 20, 1985, and the notice of proposed
rulemaking published in theFederal Reg-
isteron September 21, 1987. In the Rules
and Regulations section of this issue of
theInternal Revenue Bulletin, the Trea-
sury Department and the IRS are issuing
temporary regulations relating to the in-
come inclusion rules under section
50(d)(5) of the Internal Revenue Code
(Code) that are applicable to a lessee of
investment credit property when a lessor
of such property elects to treat the lessee
as having acquired the property. The text
of those regulations also serves as the text
of these proposed regulations.
DATES: Written or electronic comments
and requests for a public hearing must be
received by October 20, 2016.
ADDRESSES: Send submissions to: CC:
PA:LPD:PR (REG–102516–15), 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–102516–15),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW., Wash-
ington, DC, or sent electronically via the
Federal eRulemaking Portal at www.regu-
lations.gov (IRS REG–102516–15).
FOR FURTHER INFORMATION
CONTACT: Concerning the regulations,
Jennifer A. Records at (202) 317-6853;
concerning submissions of comments and
requests for a public hearing, Regina
Johnson of the Publications and Regula-
tions Branch at (202) 317-6901 (not toll-
free numbers).
SUPPLEMENTARY INFORMATION:
Background and Explanation of
Provisions
On December 20, 1985, the Treasury
Department and the IRS published in the
Federal Register(50 FR 51874–01) a
notice of proposed rulemaking (LR–92–
73) under sections 46, 47, 48, and 167
providing proposed rules related to the
determination of the amount of taxpayer’s
qualified investment and recapture of the
investment credit with respect to mass as-
sets. On September 21, 1987, the Treasury
Department and the IRS published in the
Federal Register(52 FR 35438–01) a
notice of proposed rulemaking (LR–183–
82) under sections 48, 196, 312, and 705
providing proposed rules related to the
adjustment in the basis of property with
respect to which a taxpayer claimed the
investment credit. On April 27, 1993, the
Treasury Department and the IRS with-
drew (58 FR 25587–01) the proposed
amendments to § 1.48–7 of the Income
Tax Regulations that were published as
part of the notice of proposed rulemaking
(LR–183–82) published in theFederal
Register(52 FR 35438–01) on Septem-
ber 21, 1987. Because of numerous statu-
tory changes since the publication of those
proposed regulations, the remainder of the
proposed regulations (50 FR 51874–01
and 52 FR 35438–01) are withdrawn.
Temporary regulations in the Rules
and Regulations section of this issue of
theInternal Revenue Bulletinamend the
Income Tax Regulations (26 CFR part 1)
relating to section 50(d)(5). The tempo-
rary regulations provide rules regarding
the income inclusion required under sec-
tion 50(d)(5) of the Code by a lessee of
investment credit property when a lessor
of such property elects to treat the lessee
as having acquired the property. The tem-
porary regulations also provide rules to
coordinate the section 50(a) recapture
rules with the section 50(d)(5) income in-
clusion rules and rules regarding income
inclusion upon a disposition or lease ter-
mination outside of the recapture period.
The text of those regulations also serves
as the text of these proposed regulations.
The preamble to the temporary regula-
tions explains the amendments.
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,
and, because these regulations do not im-
pose a collection of information on small
entities, the Regulatory Flexibility Act (5
U.S.C. chapter 6) does not apply. There-
fore, a regulatory flexibility analysis is not
required. Pursuant to section 7805(f) of
the Code, these proposed regulations have
been submitted to the Chief Counsel for
Advocacy of the Small Business Admin-
istration for comment on their 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 (a signed
original and eight (8) copies) or electronic
comments that are submitted timely to the
IRS. The Treasury Department and the
IRS request comments on all aspects of
these proposed regulations. Specifically,
the Treasury Department and the IRS re-
quest comments regarding whether guid-
ance is needed to address the applicability
of the income inclusion rules under sec-
tion 50(d)(5) to trusts, estates, and/or
electing large partnerships. All comments
will be available for public inspection and
copying. A public hearing will be sched-
Bulletin No. 2016–32August 8, 2016
231

uled if requested in writing by any person
that timely submits written comments. If a
public hearing is scheduled, notice of the
date, time, and place for the public hear-
ing will be published in theFederal Reg-
ister.
Drafting Information
The principal author of these regula-
tions is Jennifer A. Records, Office of the
Associate Chief Counsel (Passthroughs
and Special Industries), IRS. However,
other personnel from the Treasury Depart-
ment and the IRS participated in their
development.
* * * * *
Withdrawal of Notice of Proposed
Rulemaking
Accordingly, under authority of 26
U.S.C. 7805, the notice of proposed rule-
making (LR–92–73) that was published in
theFederal Registeron December 20,
1985 (50 FR 51874–01), and the notice of
proposed rulemaking (LR–183–82) that
was published in theFederal Registeron
September 21, 1987 (52 FR 35438–01),
are withdrawn.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.50–1 is revised to
read as follows:
§ 1.50–1 Lessee’s income inclusion
following election of lessor of investment
credit property to treat lessee as
acquirer.
[The text of proposed amendment to
§ 1.50–1 is the same as the text of § 1.50–
1T(a) through (f) published elsewhere in
this issue of theInternal Revenue Bulletin.
John Dalrymple,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on July 21, 2016,
8:45 a.m., and published in the issue of the Federal Register
for July 22, 2016, 81 F.R. 47739)
August 8, 2016Bulletin No. 2016–32
232

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:
Amplifieddescribes 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).
Clarifiedis 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.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis 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 andclarified, above).
Obsoleteddescribes 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.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
being stated in a new ruling.
Supersededdescribes 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
supersededdescribes 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.
Supplementedis 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.
Suspendedis 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.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
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.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
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.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
Bulletin No. 2016–32August 8, 2016
i

Numerical Finding List
1
Bulletin 2016–27 through 2016–32
Action on Decision:
2016-01, 2016-16 I.R.B.580
2016-02, 2016-31 I.R.B.193
Announcements:
2016-21, 2016-27 I.R.B.8
2016-23, 2016-27 I.R.B.10
2016-24, 2016-30 I.R.B.170
2016-25, 2016-31 I.R.B.205
Notices:
2016-40, 2016-27 I.R.B.4
2016-41, 2016-27 I.R.B.5
2016-42, 2016-29 I.R.B.67
2016-43, 2016-29 I.R.B.132
2016-44, 2016-29 I.R.B.132
2016-45, 2016-29 I.R.B.135
2016-46, 2016-31 I.R.B.202
Proposed Regulations:
REG-102516-15, 2016-32 I.R.B.231
REG-109086-15, 2016-30 I.R.B.171
REG-101689-16, 2016-30 I.R.B.170
REG-123854-12, 2016-28 I.R.B.15
REG-147196-07, 2016-29 I.R.B.32
REG-134016-15, 2016-31 I.R.B.205
Revenue Procedures:
2016-37, 2016-29 I.R.B.136
2016-39, 2016-30 I.R.B.164
2016-40, 2016-32 I.R.B.228
2016-41, 2016-30 I.R.B.165
Revenue Rulings:
2016-17, 2016-27 I.R.B.1
2016-18, 2016-31 I.R.B.194
Treasury Decisions:
9773, 2016-29 I.R.B.56
9774, 2016-30 I.R.B.151
9775, 2016-30 I.R.B.159
9776, 2016-32 I.R.B.222
9778, 2016-31 I.R.B.196
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2016–01 through 2016–26 is in Internal Revenue Bulletin
2016–26, dated June 27, 2016.
August 8, 2016Bulletin No. 2016–32
ii

Finding List of Current Actions on
Previously Published Items
1
Bulletin 2016–27 through 2016–32
Notices:
2013-1
Modified by
Notice 2016-41, 2016-27 I.R.B.5
2013-1
Superseded by
Notice 2016-41, 2016-27 I.R.B.5
Revenue Procedures:
2007-44
Clarified by
Rev. Proc. 2016-37, 2016-29 I.R.B.136
2007-44
Modified by
Rev. Proc. 2016-37, 2016-29 I.R.B.136
2007-44
Superseded by
Rev. Proc. 2016-37, 2016-29 I.R.B.136
2015-36
Modified by
Rev. Proc. 2016-37, 2016-29 I.R.B.136
2016-3
Modified by
Rev. Proc. 2016-40, 2016-32 I.R.B.228
2016-29
Modified by
Rev. Proc. 2016-39, 2016-30 I.R.B.164
Treasury Decisions:
2014-12
Modified by
T.D. 9776 2016-32 I.R.B.222
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2016–01 through 2016–26 is in Internal Revenue Bulletin
2016–26, dated June 27, 2016.
Bulletin No. 2016–32August 8, 2016
iii

INTERNAL REVENUE BULLETIN
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