Internal Revenue Bulletin 2018-2 (PDF rendition): IRS Revenue Rulings

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# INTERNAL REVENUE BULLETIN

IRS

Bulletin No. 2018-2
January 8, 2018

## 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.

## EMPLOYEE PLANS

### Notice 2018-02, page 281.

This notice sets forth the updated mortality improvement rates
and static mortality tables that are used for purposes of deter-
mining minimum funding requirements under § 430(h)(3) for
2019 and minimum present value under § 417(e)(3) for distri-
butions with annuity starting dates that occur during stability
periods beginning in the 2019 calendar year.

## INCOME TAX

### Notice 2018-03, page 285.

This notice provides the optional 2018 standard mileage rates
for taxpayers to use in computing the deductible costs of
operating an automobile for business, charitable, medical, or
moving expense purposes. This notice also provides the
amount taxpayers must use in calculating reductions to basis
for depreciation taken under the business standard mileage
rate, and the maximum standard automobile cost that may be
used in computing the allowance under a fixed and variable rate
(FAVR) plan.

### Rev. Proc. 2018-08, page 286.

This revenue procedure provides safe harbor methods that
individual taxpayers may use in determining the amount of their
casualty and theft losses for their personal-use residential real
property and personal belongings. This revenue procedure
provides additional safe harbor methods that may be used in
the case of casualty and theft losses occurring as a result of
any Federally declared disaster.

### Rev. Proc. 2018-09, page 290.

In addition to the safe harbor methods available in Rev. Proc.
2018-08, this revenue procedure provides a cost index safe
harbor method that individual taxpayers may use in determin-

ing the amount of their casualty losses for their personal-use
residential real property occurring as a result of the 2017
hurricanes.

#### Rev. Rul. 2018-01, page 275.

Federal rates; adjusted federal rates; adjusted federal long-
term rate and the long-term exempt rate. For purposes of
sections 382, 642, 1274, 1288, and other sections of the
Code, tables set forth the rates for January 2018. Table 6,
however, contains the deemed rate for transfers to new pooled
income funds during 2018.

#### Rev. Rul. 2018-03, page 278.

This revenue ruling clarifies that a package of films licensed to
customers in the normal course of business may be an item
under Treas. Reg. § 1.199-3(d)(1)(i) for determining the do-
mestic production activities deduction under IRC § 199.

## EXCISE TAX

### Rev. Rul. 2018-02, page 277.

This notice clarifies the Services' position that mixtures of
gasoline and butane are not alternative fuel mixtures and thus
do not qualify for the alternative fuel mixture credit under
§ 6426(e).

Finding Lists begin on page ii.

## 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.

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

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

(Also: Sections 42, 280G, 382, 467, 468, 482, 483,
642, 1288, 7520.)

#### Rev. Rul. 2018-01

This revenue ruling provides various
prescribed rates for federal income tax
purposes for January 2018 (the current
month). Table 1 contains the short-term,

mid-term, and long-term applicable fed-
eral rates (AFR) for the current month
for purposes of section 1274(d) of the
Internal Revenue Code. Table 2 contains
the short-term, mid-term, and long-term
adjusted applicable federal rates (ad-
justed AFR) for the current month for
purposes of section 1288(b). Table 3
sets forth the adjusted federal long-term
rate and the long-term tax-exempt rate
described in section 382(f). Table 4 con-
tains the appropriate percentages for de-
termining the low-income housing
credit described in section 42(b)(1) for
buildings placed in service during the
current month. However, under section

42(b)(2), the applicable percentage for
non-federally subsidized new buildings
placed in service after July 30, 2008,
shall not be less than 9%. Table 5 con-
tains the federal rate for determining the
present value of an annuity, an interest
for life or for a term of years, or a
remainder or a reversionary interest for
purposes of section 7520. Finally, Table
6 contains the deemed rate of return for
transfers made during calendar year
2018 to pooled income funds described
in section 642(c)(5) that have been in
existence for less than 3 taxable years
immediately preceding the taxable year
in which the transfer was made.

REV. RUL. 2018-01 TABLE 1 Applicable Federal Rates (AFR) for January 2018 Period for Compounding

Annual

Semiannual Short-term

Quarterly

Monthly

AFR

1.68%

1.67%

1.66%

110% AFR

1.85%

1.84%

1.83%

120% AFR

2.01%

2.00%

1.99%

130% AFR

2.18%

2.17%

2.16%

Mid-term

AFR

2.18%

2.17%

2.16%

110% AFR

2.40%

2.39%

2.38%

120% AFR

2.62%

2.60%

2.59%

130% AFR

2.84%

2.82%

2.81%

2.80%

150% AFR

3.29%

3.26%

3.25%

3.24%

175% AFR

3.84%

3.80%

3.78%

3.77%

AFR

Long-term

2.59%

2.57%

2.56%

110% AFR

2.85%

2.83%

2.82%

2.81%

120% AFR

3.10%

3.08%

3.07%

3.06%

130% AFR

3.37%

3.34%

3.33%

3.32%

REV. RUL. 2018-01 TABLE 2 Adjusted AFR for January 2018 Period for Compounding

Annual

Semiannual

Quarterly

Monthly

Short-term adjusted AFR

1.24%

Mid-term adjusted AFR

1.62%

1.61%

1.60%

Long-term adjusted AFR

1.92%

1.91%

1.90%

# REV. RUL. 2018-01 TABLE 3 Rates Under Section 382 for January 2018

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

1.92%

1.96%

## REV. RUL. 2018-01 TABLE 4 Appropriate Percentages Under Section 42(b)(1) for January 2018

Note: Under section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in
service after July 30, 2008, shall not be less than 9%.

Appropriate percentage for the 70% present value low-income housing credit
Appropriate percentage for the 30% present value low-income housing credit

7.55%

3.24%

## REV. RUL. 2018-01 TABLE 5 Rate Under Section 7520 for January 2018

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

2.6%

REV. RUL. 2018-01 TABLE 6
Deemed Rate for Transfers to New Pooled Income Funds During 2018

Deemed rate of return for transfers during 2018 to pooled income funds that have been in existence
for less than 3 taxable years

1.4%

# Section 42 .- Low-Income Housing Credit

The appropriate percentages under section
42(b)(1) are set forth for the month of January 2018.
See Rev. Rul. 2018-01, page 275.

## Section 280G .- Golden Parachute Payments

The applicable federal short-term, mid-term, and
long-term rates are set forth for the month of January
2018. See Rev. Rul. 2018-01, page 275.

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

The adjusted applicable federal long-term rate is
set forth for the month of January 2018. See Rev.
Rul. 2018-01, page 275.

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

The applicable federal short-term, mid-term, and
long-term rates are set forth for the month of January
2018. See Rev. Rul. 2018-01, page 275.

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

The applicable federal short-term, mid-term, and
long-term rates are set forth for the month of January
2018. See Rev. Rul. 2018-01, page 275.

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

The applicable federal short-term, mid-term, and
long-term rates are set forth for the month of January
2018. See Rev. Rul. 2018-01, page 275.

## Section 483 .- Interest on Certain Deferred Payments

The applicable federal short-term, mid-term, and
long-term rates are set forth for the month of January
2018. See Rev. Rul. 2018-01, page 275.

# Section 642 .- Special Rules for Credits and Deductions

The deemed rate for transfers to new pooled
income funds during 2018 is set forth. See Rev. Rul.
2018-01, page 275.

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

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of January 2018. See Rev. Rul. 2018-01, page 275.

# Section 7520 .- Valuation Tables

The applicable federal rate under section 7520 is
set forth for the month of January 2018. See Rev.
Rul. 2018-01, page 275.

26 CFR 48.4081-1(c)(3): Gasoline blendstocks. (Al-
so: Sections 4041, 4081, 4083.)

Rev. Rul. 2018-02

## ISSUE

Is a mixture of butane and gasoline an
alternative fuel mixture that qualifies for
the alternative fuel mixture credit under
§ 6426(e) of the Internal Revenue Code
(Code)?

## FACTS

A claimant (Producer) mixes gasoline
and butane and sells it for use as a fuel.
Producer claims the alternative fuel mix-
ture credit under § 6426(e) for an open tax
period ending on or before December 31,
2016, on the premise that the gasoline in
the mixture is a taxable fuel and the bu-
tane in the mixture is a form of liquefied
petroleum gas (LPG), an alternative fuel.
Producer indicates in its claim that the
basis for its position that butane is a form
of LPG is the language in Chapter One of
IRS Publication 510, "Excise Taxes (In-
cluding Fuel Tax Credits and Refunds),"
which provides, in the "Other Fuels (In-
cluding Alternative Fuels)" section, that
"[I]iquefied petroleum gas includes pro-
pane, butane, pentane, or mixtures of
those products."

### LAW

Section 4081(a)(1)(A) imposes a tax
on certain removals, entries, and sales of
taxable fuel.

Section 4083(a)(1) provides that the
term "taxable fuel" means gasoline, diesel
fuel, and kerosene.

Section 4083(a)(2)(B) provides that the
term "gasoline" includes, to the extent
prescribed in the regulations, (i) any gas-
oline blend stock, and (ii) any product
commonly used as an additive in gasoline
(other than alcohol), and that for purposes
of § 4083(a)(2)(B)(i), the term "gasoline
blend stock" means any petroleum prod-
uct component of gasoline.

Section 48.4081-1(b) of the Manufac-
turers and Retailers Excise Tax Regula-
tions provides that "gasoline" means fin-
ished gasoline and gasoline blendstocks.

Section 48.4081-1(b) also provides
that "finished gasoline" means all prod-
ucts that are commonly or commercially

known or sold as gasoline and are suitable
for use as a motor fuel, other than prod-
ucts that have an American Society for
Testing and Materials (ASTM) octane
number of less than 75 as determined by
the motor method.

Section 48.4081-1(c)(3)(i) provides
that, except as provided in § 48.4081-
1(c)(3)(ii), "gasoline blendstocks" means
(A) alkylate; (B) butane; (C) butene; (D)
catalytically cracked gasoline; (E) coker
gasoline; (F) ethyl tertiary butyl ether
(ETBE); (G) hexane; (H) hydrocrackate;
(I) isomerate; (J) methyl tertiary butyl
ether (MTBE); (K) mixed xylene (not in-
cluding any separated isomer of xylene);
(L) natural gasoline; (M) pentane; (N)
pentane mixture; (O) polymer gasoline;
(P) raffinate; (Q) reformate; (R) straight-
run gasoline; (S) straight-run naphtha; (T)
tertiary amyl methyl ether (TAME); (U)
tertiary butyl alcohol (gasoline grade)
(TBA); (V) thermally cracked gasoline;
(W) toluene; and (X) transmix containing
gasoline.

Section 48.4081-1(c)(3)(ii) provides
that the term "gasoline blendstocks" does
not include any product that cannot, with-
out further processing, be used in the pro-
duction of finished gasoline.

Section 6426(a)(1) and (e)(1) allows a
$0.50 credit against a claimant's § 4081
tax liability for each gallon of alternative
fuel used by the taxpayer to produce an
alternative fuel mixture for sale or use in
the taxpayer's trade or business.

Section 6426(e)(2) provides that for
purposes of § 6426, the term "alternative
fuel mixture" means a mixture of alterna-
tive fuel and taxable fuel (as defined in
§ 4083(a)(1)(A), (B), or (C)) that is sold
by the taxpayer producing such mixture to
any person for use as a fuel, or used as a
fuel by the taxpayer producing such mix-
ture.

Section 6426(d)(2)(A) provides that
the term "alternative fuel" includes LPG.

Section 2(b) of Notice 2006-92,
2006-2 C.B. 774, provides that an alter-
native fuel mixture requires a mixture of
alternative fuel and at least 0.1 percent (by
volume) of taxable fuel.

Section 6(a)(1) of Notice 2006-92 pro-
vides that a liquid alternative fuel is a
liquid other than gas oil, fuel oil, or tax-
able fuel and is subject to the tax imposed
by § 4041(a)(2) when it is sold for use or

used as fuel in a motor vehicle or motor-
boat.

Section 4041(a) generally imposes a
tax on the sale or use of certain liquids,
including LPG. The tax does not apply to
any liquid taxed under § 4081.

Section 48.4041-8(f)(1)(i) provides
that the term "special motor fuel" includes
"[a]ny [LPG] (such as propane, butane,
pentane, or mixtures of the same)."

Section 48.4041-8(f)(2) further pro-
vides that the term "special motor fuel"
does not include any product taxable un-
der the provisions of § 4081.

## ANALYSIS

Every gallon of gasoline sold in the
United States contains butane. Gasoline
contains some butane naturally from the
typical refining process. Butane is also
commonly blended with gasoline to achieve
correct vapor pressure properties depending
on where and when the gasoline will be
used.

Under the facts presented, Producer
blended butane with gasoline and con-
tends that the mixture qualifies for the
alternative fuel mixture credit under
§ 6246(e) because the gasoline in the
mixture is a taxable fuel and the butane
in the mixture is LPG, an alternative
fuel.

Section 4083(a)(1) provides that gaso-
line is a taxable fuel. Section 4083(a)
(2)(B) provides that, to the extent pre-
scribed in regulations, gasoline includes
any gasoline blendstock, and that for
purposes of § 4083(a)(2)(B)(i), a gaso-
line blendstock includes any petroleum
product component of gasoline. Section
48.4081-1(c)(3)(i), which was issued in
1996, states that butane is a gasoline
blendstock. See T.D. 8659, 1996-1 C.B.
264. Accordingly, butane is and has
been a taxable fuel since before the en-
actment of § 6426(d) and (e) in 2005 as
part of the Safe, Accountable, Flexible,
Efficient Transportation Equity Act. See
119 Stat. 1144, P.L. 109-59 (2005). A
mixture of butane, a taxable fuel, with
gasoline, a taxable fuel, is a mixture of
two taxable fuels, not a mixture of a
taxable fuel and an alternative fuel, as
required by § 6426(e)(2). Therefore,
Producer may not claim the alternative
fuel mixture credit under § 6426(e) for

the mixture of butane and gasoline. See
Notice 2006-92.

Producer nevertheless cites to IRS
Publication 510 to support its contention
that the gasoline in its mixture is a taxable
fuel and the butane is LPG, which is an
alternative fuel. The term "liquefied petro-
leum gas" as used in § 6426(d)(2)(A) is
not defined in the Code or the regulations.
Section 48.4041-8(f)(1)(i) provides that
the term "special motor fuel" includes any
LPG, "such as propane, butane, pentane,
or mixtures of the same." However, the
following subsection, § 48.4041-8(f)(2),
provides that the term "special motor
fuel" does not include any product taxable
under the provisions of § 4081. Thus, the
language in § 48.4041-8(f) that suggests
that butane is a type of LPG also contains
an express exception for products taxable
under § 4081. IRS Publication 510, al-
though not authoritative guidance, is con-
sistent with this conclusion because it lists
butane as a type of LPG in the section
called "Other Fuels (Including Alternative
Fuels)" but also provides that the term
"other fuels," which include alternative
fuels, "means any liquid except gas oil,
fuel oil, or any product taxable under
§ 4081" (emphasis added).

Since Producer used butane in the pro-
duction of finished gasoline, the butane is a
gasoline blendstock. See § 48.4081-1(c)
(3)(i) and (ii). Because gasoline blendstocks
are taxable under § 4081, Producer's butane
is a taxable fuel and not an alternative fuel.
See Notice 2006-92; see also § 4041(a)(2).
Producer's mixture is not an alternative fuel
mixture for purposes of § 6426(e) because
Producer blended two taxable fuels, not a
taxable fuel and an alternative fuel. This
conclusion is supported by §§ 6426(e),
4081(a), 4083(a), 48.4081-1(b), and
48.4081-1(c)(3), as well as the language
in § 48.4041-8(f). Moreover, to view
butane as an alternative fuel within
the meaning of section 6426(d)(2)(A)
would mean that Congress intended to
allow a mixture of gasoline (a taxable
fuel) and a gasoline blendstock, i.e., bu-
tane (a taxable fuel) to qualify for the
alternative fuel mixture credit.

### HOLDING

A mixture of butane (or other gasoline
blendstock as defined in § 48.4081-
1(c)(3)(i)) and gasoline is a mixture of

two taxable fuels. Therefore, it is not an
alternative fuel mixture and does not qual-
ify for the alternative fuel mixture credit
under § 6426(e) of the Code.

## DRAFTING INFORMATION

The principal author of this revenue
ruling is Amanda F. Dunlap of the Office
of the Associate Chief Counsel (Pass-
throughs & Special Industries). For fur-
ther information about this revenue ruling,
please contact Branch 7 of Passthroughs
& Special Industries at (202) 317-6855
(not a toll-free number).

26 CFR 1.199-3: Domestic production gross re-
ceipts.

### Rev. Rul. 2018-03

#### ISSUE

May a package of films licensed to
customers in the normal course of busi-
ness be an item under § 1.199-3(d)(1)(i)
of the Income Tax Regulations for deter-
mining the domestic production activities
deduction under § 199 of the Internal Rev-
enue Code (Code)?

#### FACTS

X Corporation (X) licenses a package
of films (for example, a television chan-
nel) to customers for a fee in the normal
course of its business. X's package con-
tains films licensed to X by unrelated third
parties and films produced by X. X pays
license fees for distribution rights of the
licensed films.

#### LAW AND ANALYSIS

Under § 199(c)(4)(A)(i)(II) and § 1.199-
3(a)(1)(ii), domestic production gross re-
ceipts (DPGR) are the gross receipts of the
taxpayer that are derived from any lease,
rental, license, sale, exchange, or other dis-
position (collectively, "disposition") of any
qualified film produced by the taxpayer.

Under § 1.199-3(d)(1), for purposes of
§§ 1.199-1 through 1.199-9, a taxpayer
may use any reasonable method satisfactory
to the Secretary based on all facts and cir-
cumstances to determine whether gross re-
ceipts qualify as DPGR on an item-by-item
basis (and not, for example, on a division-

by-division, product line-by-product line, or
transaction-by-transaction basis).

Section 1.199-3(d)(1)(i) provides that
the term "item" means the property of-
fered by the taxpayer in the normal course
of the taxpayer's business for disposition
to customers, if the gross receipts from the
disposition of such property qualify as
DPGR.

Section 1.199-3(d)(1)(ii) provides that,
if § 1.199-3(d)(1)(i) does not apply to the
property, then any component of the
property described in § 1.199-3(d)(1)(i) is
treated as the item, provided that the gross
receipts from the disposition of the property
described in § 1.199-3(d)(1)(i) that are at-
tributable to such component qualify as
DPGR. Each component that meets the re-
quirements of § 1.199-3(d)(1)(ii) must be
treated as a separate item and may not be
combined with a component that does not
meet these requirements.

Section 1.199-3(d)(2)(i) provides that,
for purposes of § 1.199-3(d)(1)(i), in no
event may a single item consist of two or
more properties unless those properties
are offered for disposition, in the normal
course of the taxpayer's business, as a
single item (regardless of how the proper-
ties are packaged).

Together, § 199(c)(6) and § 1.199-
3(k)(1) and (9) provide that the term
"qualified film" means any motion picture
film or video tape under § 168(f)(3), or
live or delayed television programming
(film), if not less than 50 percent of the
total compensation relating to the produc-
tion of such film is compensation for ser-
vices performed in the United States by
actors, production personnel, directors,
and producers. A qualified film does not
include property with respect to which
records are required to be maintained un-
der 18 U.S.C. § 2257.

Section 1.199-3 provides guidance on
the determination of DPGR with specific
rules for qualified film provided in
§ 1.199-3(k).

Section 1.199-3(k)(4) provides, for
purposes of § 1.199-3(k), the term "com-
pensation for services" means all pay-
ments for services performed by actors,
production personnel, directors, and pro-
ducers relating to the production of the
film, including participations and residu-
als. Payments for services include all ele-
ments of compensation as provided in

§ 1.263A-1(e)(2)(i)(B) and (3)(ii)(D).
Compensation for services is not limited
to W-2 wages and includes compensation
paid to independent contractors.

Section 1.199-3(k)(6) provides the
general rule for determining whether a qual-
ified film will be treated as produced by
the taxpayer for purposes of § 199(c)(4)
(A)(i)(II). A taxpayer meets this require-
ment if the film production activity per-
formed by the taxpayer is substantial in na-
ture within the meaning of § 1.199-3(g)(2).
For purposes of § 1.199-3(g)(2), the rela-
tive value added by affixing trademarks or
trade names as defined in § 1.197-
2(b)(10)(i) will be treated as zero and is not
a factor for determining whether a taxpay-
er's film production activity is substantial in
nature.

Section 1.199-3(k)(7) provides a safe
harbor under which film is treated as qual-
ified film under § 1.199-3(k)(1) and as
produced by the taxpayer under § 1.199-
3(k)(6) if the taxpayer meets the require-
ments of § 1.199-3(k)(7)(i) and (ii). A
taxpayer that chooses to use this safe har-
bor must apply all the provisions of
§ 1.199-3(k)(7).

Generally, § 1.199-3(k)(7)(i) provides
that a film will be treated as a qualified film
produced by the taxpayer if not less than 50
percent of the total compensation for ser-
vices paid by the taxpayer is compensation
for services performed in the United States
and the taxpayer satisfies the safe harbor in
§ 1.199-3(g)(3). Section 1.199-3(k)(7)(ii)
provides that the not-less-than-50-percent-
of-the-total-compensation requirement un-
der § 1.199-3(k)(7)(i) is calculated using a
fraction, the numerator of which is the com-
pensation for services paid by the taxpayer
for services performed in the United States
and the denominator is the total compensa-
tion for services paid by the taxpayer re-
gardless of where the production activities
are performed.

In the situation described above, the
package of films is property offered in the
normal course of X's business for dispo-
sition to customers. Thus, the package of
films can be an item under § 1.199-
3(d)(1)(i) if the gross receipts that X de-
rives from licensing the package of films
qualify as DPGR.

The gross receipts that X derives from
licensing the package of films may qualify
as DPGR under § 199(c)(4)(A)(i)(II) and

§ 1.199-3(a)(1)(ii) if X establishes that
the package of films meets the criteria
established under the general rules in
§ 1.199-3(k)(1) and § 1.199-3(k)(6) or,
alternatively, under the safe harbor in
§ 1.199-3(k)(7) (including the safe harbor
in § 1.199-3(g)(3)).

If X relies on the safe harbor in
§ 1.199-3(k)(7), the "not-less-than-50-
percent-of-the-total-compensation" re-
quirement in § 1.199-3(k)(7)(i) is a
fraction where the numerator is the com-
pensation X paid to actors, production
personnel, directors, and producers for
services performed in the United States
that are directly related to the films in
X's package and the denominator is such
compensation regardless of where the
film production activities were per-
formed. Furthermore, to satisfy the safe
harbor in § 1.199-3(g)(3), X's direct
labor and overhead for the package of
films must be 20 percent or more of X's
unadjusted depreciable basis in the
package of films, or 20 percent or more
of X's cost of goods sold (CGS) of
the package of films if X has CGS for
the package of films. Direct labor and
overhead include the costs for any films
that are treated as self-produced by X,
and do not include license fees of the
licensed films. Under § 1.199-3(g)(3)
(ii), "unadjusted depreciable basis" in-
cludes the costs that create basis under
§ 1012 and adjusted basis under § 1011
without regard to any adjustments de-
scribed in § 1016(a)(2) or (3). This
means that all costs that X paid or in-
curred for the package of films, includ-
ing any fees X paid to unrelated third
parties to license films included in the
package, are included in unadjusted de-
preciable basis. Thus, X's unadjusted
depreciable basis includes costs of self-
produced films plus license fees X paid
to acquire distribution rights in the li-
censed films (CGS would also include
these costs, in a transaction with CGS).
Costs reasonably attributable to transmis-
sion and distribution activities should not be
included in X's direct labor, overhead, or
unadjusted depreciable basis (or CGS, in a
transaction with CGS).

X's films are treated as self-produced if
X engaged in the film production activi-
ties, or if the films were produced pursu-
ant to a contract with an unrelated party

and X had the benefits and burdens of
ownership as required under § 1.199-
3(k)(8) and § 1.199-3(g)(4). X's film pro-
duction activities include the following
activities carried out by actors, production
personnel, directors, and producers en-
gaged in film: (1) pre-production (ide-
ation, planning, and scripting); (2) pro-
duction (shooting and recording images
and sounds); and (3) post-production (film
editing, scene sequencing, and the addi-
tion of audio/visual effects for self-
produced films). X's transmission and dis-
tribution activities are not film production
activities. Transmission and distribution
activities include, for example: format-
ting the channel feed; assembly and
transmission of the channel signal by
collecting films by satellite, fiber optic
cable, tape, and other means; decoding;
reviewing; assessing; performing qual-
ity control for incoming and outgoing
signals; converting to/from high defini-
tion and for viewing on mobile and
other platforms; compressing and en-
coding signals for distribution; transmit-
ting signals to customers; creating a
seamless viewing format; adding over-
lay of special features and digital tech-
nologies; and inserting transition mate-
rial.

If the gross receipts do not qualify as
DPGR, then § 1.199-3(d)(1)(ii) applies,
and X can treat any individual film in-
cluded in the package of films as an
item, provided the gross receipts attrib-
utable to the individual film qualify as
DPGR. X cannot combine films that
meet the requirements under § 1.199-
3(d)(1)(ii) with films that do not meet
the requirements.

#### HOLDING

A package of films licensed to custom-
ers in the normal course of business may
be an item under § 1.199-3(d)(1)(i) for
determining the domestic production ac-
tivities deduction under § 199.

This holding does not affect the charac-
terization of the property at issue for any
other purpose of the Code. For example, this
holding does not mean that the package of
films is described in § 168(f)(3) or consti-
tutes one motion picture film or video tape
for purposes of § 168(f)(3).

# DRAFTING INFORMATION

The principal authors of this revenue
ruling are James A. Holmes and James W.

Rider of the Office of Associate Chief
Counsel (Passthroughs & Special Indus-
tries). For further information regarding

this revenue ruling, contact Mr. Rider at
(202) 317-4137 (not a toll-free number).

# Part III. Administrative, Procedural, and Miscellaneous

## Updated Mortality Improvement Rates and Static Mortality Tables for Defined Benefit Pension Plans for 2019 Notice 2018-02

### PURPOSE

This notice specifies updated mortality
improvement rates and static mortality ta-
bles to be used for defined benefit pension
plans under § 430(h)(3)(A) of the Internal
Revenue Code (Code) and section 303(h)
(3)(A) of the Employee Retirement Income
Security Act of 1974, Pub. L. No. 93-406,
as amended (ERISA). These updated mor-
tality improvement rates and static tables,
which are being issued pursuant to the reg-
ulations under § 430(h)(3)(A), apply for
purposes of calculating the funding target
and other items for valuation dates occur-
ring during calendar year 2019.

This notice also includes a modified
unisex version of the mortality tables for
use in determining minimum present
value under § 417(e)(3) of the Code and
section 205(g)(3) of ERISA for distribu-
tions with annuity starting dates that occur
during stability periods beginning in the
2019 calendar year.

### BACKGROUND

Section 412 of the Code provides min-
imum funding requirements that generally
apply for defined benefit plans. Section
412(a)(2) provides that § 430 specifies the
minimum funding requirements that gen-
erally apply to defined benefit plans that
are not multiemployer plans. Section
430(a) defines the minimum required contri-
bution for such a plan by reference to the
plan's funding target for the plan year. Under
§ 430(d)(1), a plan's funding target for a plan
year generally is the present value of all ben-
efits accrued or earned under the plan as of the
first day of that plan year.

Section 430(h)(3) provides rules re-
garding the mortality tables that are gen-
erally used under § 430. Under § 430(h)
(3)(A), except as provided in § 430(h)(3)

(C) or (D), the Secretary is to prescribe by
regulation mortality tables to be used in
determining any present value or making
any computation under § 430. Those ta-
bles are to be based on the actual experi-
ence of pension plans and projected trends
in that experience. Section 430(h)(3)(B)
requires the Secretary to revise any table
in effect under § 430(h)(3)(A) at least
every 10 years to reflect the actual expe-
rience of pension plans and projected
trends in that experience.

Section 430(h)(3)(C) provides that,
upon request by a plan sponsor and ap-
proval by the Secretary, substitute mortal-
ity tables that meet the applicable require-
ments may be used in lieu of the standard
mortality tables provided under § 430(h)
(3)(A). Section 430(h)(3)(D) provides for
the use of separate mortality tables with
respect to certain individuals who are en-
titled to benefits on account of disability.

#### Mortality Tables for Purposes of § 430

On October 5, 2017, the Treasury De-
partment and the Internal Revenue Ser-
vice amended § 1.430(h)(3)-1 to revise
the mortality tables used under § 430(h)
(3)(A) for plan years beginning on or after
January 1, 2018. T.D. 9826, 82 F.R.
46388. The mortality tables used under
§ 430(h)(3)(A) are based on the tables in
the RP-2014 Mortality Tables Report,1
adjusted for mortality improvement. Sec-
tion 1.430(h)(3)-1 sets forth base mortal-
ity tables with a base year of 2006.

Section 1.430(h)(3)-1(a) permits plan
sponsors to apply the projection of mortality
improvement in either of two ways: through
use of static tables that are updated annually
to reflect expected improvements in mortal-
ity, or through use of generational tables.
Section 1.430(h)(3)-1(a)(2)(i)(C) provides
that, for valuation dates occurring in years
after 2018, updated mortality improvement
rates that take into account new data for mor-
tality improvement trends of the general pop-
ulation, along with static mortality tables that
reflect those updated mortality improvement
rates, will be provided through guidance pub-
lished in the Internal Revenue Bulletin.

Application of These Tables for Other
Funding Rules

Section 1.431(c)(6)-1 provides that the
same mortality assumptions that apply for
purposes of § 430(h)(3)(A) and § 1.430(h)
(3)-1(a)(2) are used to determine a mul-
tiemployer plan's current liability for pur-
poses of applying the full-funding rules of
§ 431(c)(6). For this purpose, a multiem-
ployer plan may apply either the static
mortality tables or the generational mor-
tality tables (as updated pursuant to
§ 1.430(h)(3)-1(a)(2)(i)(C) and (a)(3)).

Section 433 provides the minimum
funding standards for CSEC plans, which
are described in section 414(y). Section
433(h)(3)(B)(i) provides that the Secre-
tary may by regulation prescribe mortality
tables to be used in determining current
liability for purposes of § 433(c)(7)(C).
Section 1.433(h)(3)-1(a) provides that the
mortality tables described in § 430(h)(3)
(A) are to be used to determine current
liability under § 433(c)(7)(C).

Application of Mortality Tables for
Minimum Present Value Requirements
under § 417(e)(3)

Section 417(e)(3) generally provides
that the present value of certain acceler-
ated forms of benefit under a qualified
pension plan (including single-sum distri-
butions) must not be less than the present
value of the accrued benefit using appli-
cable interest rates and the applicable
mortality table. Section 417(e)(3)(B) de-
fines the term "applicable mortality table"
as the mortality table specified for the plan
year under § 430(h)(3)(A) (without regard
to § 430(h)(3)(C) or (D)), modified as
appropriate by the Secretary.

Rev. Rul. 2007-67, 2007-2 CB 1047,
provides that, except as otherwise stated
in future guidance, the applicable mortal-
ity table under § 417(e)(3) is a static mor-
tality table set forth in published guidance
that is developed based on a fixed blend of
50 percent of the static male combined
mortality rates and 50 percent of the static
female combined mortality rates used un-
der § 1.430(h)(3)-1. Rev. Rul. 2007-67

1The RP-2014 Mortality Tables Report, as revised November 2014, is available at www.soa.org/Research/Experience-Study/pension/research-2014-rp.aspx.

also provides that the applicable mortality
table for a calendar year applies to distri-
butions with annuity starting dates that
occur during stability periods that begin
during that calendar year.

### MORTALITY IMPROVEMENT RATES FOR 2019

The mortality improvement rates for
valuation dates occurring during 2019 are
the mortality improvement rates in the
Mortality Improvement Scale MP-2017
Report (issued by the Retirement Plans
Experience Committee (RPEC) of the So-
ciety of Actuaries and available at http://
www.soa.org/Files/Research/Exp-Study/
mortality-improvement-scale-mp-2017.pdf).

STATIC MORTALITY TABLES FOR
2019

The static mortality tables that apply
under § 430(h)(3)(A) for valuation dates
occurring during 2019 are set forth in the
appendix to this notice. The mortality
rates in these tables have been developed
from the base mortality rates and method-
ology set forth in § 1.430(h)(3)-1(c) and
(d) using the mortality improvement rates
specified in this notice.

The static mortality table that applies
under § 417(e)(3) for distributions with
annuity starting dates occurring during
stability periods beginning in 2019 is set
forth in the appendix to this notice in the
column labeled "Unisex." The mortality

rates in this table are derived from the
mortality tables specified under § 430(h)
(3)(A) for 2019 in accordance with the
procedures set forth in Rev. Rul. 2007-
67.

#### Drafting Information

The principal authors of this notice are
Arslan Malik and Linda S. F. Marshall of
the Office of the Associate Chief Counsel
(Tax Exempt and Government Entities).
For further information regarding this no-
tice, contact Arslan Malik or Linda Mar-
shall at (202) 317-6700 (not a toll-free
number).

##### APPENDIX Mortality Tables for 2019

Valuation Dates Occurring During 2019 and Distributions Subject to § 417(e)(3) with Annuity Starting Dates During Stability Periods Beginning in 2019

Age

MALE 2019 Non-Annuitant Table

MALE 2019

MALE 2019 Optional Combined Table for Small Plans

FEMALE 2019 Non-Annuitant Table

FEMALE 2019 Annuitant Table

FEMALE 2019 Optional Combined Table for Small Plans

UNISEX 2019 Table for Distributions Subject to § 417(e)(3)

Annuitant Table

0.002709

0.002489

0.002599

0.000159

0.000156

0.000158

0.000108

0.000103

0.000106

0.000091

0.000078

0.000085

0.000071

0.000059

0.000065

0.000063

0.000054

0.000059

0.000057

0.000050

0.000054

0.000051

0.000047

0.000049

0.000044

0.000043

0.000044

0.000036

0.000041

0.000039

0.000030

0.000039

0.000035

0.000032

0.000040

0.000036

0.000049

0.000047

0.000048

0.000065

0.000053

0.000059

0.000081

0.000059

0.000070

0.000097

0.000066

0.000082

0.000114

0.000071

0.000093

0.000132

0.000076

0.000104

0.000151

0.000080

0.000116

0.000171

0.000084

0.000128

0.000190

0.000084

0.000137

0.000215

0.000087

0.000151

Age

MALE 2019 Non-Annuitant Table

MALE 2019 Annuitant Table

MALE 2019 Optional Combined Table for Small Plans

FEMALE 2019 Non-Annuitant Table

FEMALE 2019 Annuitant Table

FEMALE 2019 Optional Combined Table for Small Plans

UNISEX 2019 Table for Distributions Subject to § 417(e)(3)

0.000240

0.000089

0.000165

0.000257

0.000093

0.000175

0.000269

0.000096

0.000183

0.000260

0.000100

0.000180

0.000256

0.000104

0.000180

0.000256

0.000109

0.000183

0.000261

0.000115

0.000188

0.000271

0.000122

0.000197

0.000284

0.000132

0.000208

0.000300

0.000144

0.000222

0.000317

0.000156

0.000237

0.000336

0.000170

0.000253

0.000352

0.000185

0.000269

0.000368

0.000200

0.000284

0.000382

0.000214

0.000298

0.000396

0.000232

0.000314

0.000413

0.000250

0.000332

0.000433

0.000271

0.000352

0.000457

0.000294

0.000376

0.000485

0.000491

0.000485

0.000318

0.000316

0.000318

0.000402

0.000520

0.000566

0.000520

0.000346

0.000366

0.000346

0.000433

0.000565

0.000683

0.000567

0.000378

0.000443

0.000378

0.000473

0.000618

0.000841

0.000622

0.000415

0.000547

0.000415

0.000519

0.000682

0.001043

0.000690

0.000456

0.000680

0.000458

0.000574

0.000757

0.001289

0.000771

0.000504

0.000846

0.000510

0.000641

0.000843

0.001585

0.000867

0.000558

0.001047

0.000570

0.000719

0.000940

0.001936

0.000976

0.000617

0.001287

0.000639

0.000808

0.001050

0.002348

0.001103

0.000682

0.001569

0.000719

0.000911

0.001173

0.002827

0.001248

0.000756

0.001898

0.000813

0.001031

0.001310

0.003069

0.001398

0.000837

0.002016

0.000906

0.001152

0.001465

0.003330

0.001593

0.000929

0.002160

0.001021

0.001307

0.001629

0.003587

0.001816

0.001032

0.002330

0.001155

0.001486

0.001812

0.003859

0.002076

0.001148

0.002529

0.001312

0.001694

0.002018

0.004151

0.002459

0.001274

0.002758

0.001556

0.002008

0.002258

0.004472

0.002961

0.001412

0.003018

0.001871

0.002416

0.002539

0.004828

0.003404

0.001560

0.003310

0.002156

0.002780

0.002871

0.005224

0.003907

0.001718

0.003633

0.002461

0.003184

0.003260

0.005665

0.004459

0.001885

0.003992

0.002804

0.003632

0.003715

0.006157

0.005091

0.002061

0.004382

0.003211

0.004151

0.004238

0.006700

0.005798

0.002250

0.004807

0.003734

0.004766

0.004836

0.007298

0.006585

0.002452

0.005270

0.004311

0.005448

0.005513

0.007956

0.007443

0.002671

0.005769

0.005001

0.006222

0.006267

0.008673

0.008277

0.002909

0.006310

0.005644

0.006961

Age

MALE

MALE 2019 Optional

FEMALE

FEMALE 2019 Annuitant Table

FEMALE 2019 Optional Combined Table for Small Plans

UNISEX 2019 Table for Distributions Subject to § 417(e)(3)

2019 Non-Annuitant Table

2019 Annuitant Table

Combined Table for Small Plans

2019 Non-Annuitant Table

0.007108

0.009458

0.009184

0.003171

0.006904

0.006363

0.007774

0.007948

0.010323

0.010162

0.003526

0.007562

0.007206

0.008684

0.008870

0.011277

0.011159

0.003924

0.008298

0.008021

0.009590

0.009892

0.012341

0.012253

0.004370

0.009123

0.008896

0.010575

0.011025

0.013534

0.013462

0.004874

0.010052

0.009859

0.011661

0.012289

0.014875

0.014808

0.005441

0.011098

0.010906

0.012857

0.013703

0.016385

0.016322

0.006083

0.012277

0.012088

0.014205

0.015289

0.018089

0.018031

0.006810

0.013609

0.013425

0.015728

0.017063

0.020008

0.019954

0.007637

0.015116

0.014939

0.017447

0.019059

0.022182

0.022133

0.008570

0.016809

0.016642

0.019388

0.021299

0.024640

0.024597

0.009636

0.018736

0.018581

0.021589

0.023809

0.027425

0.027387

0.010850

0.020932

0.020795

0.024091

0.026632

0.030598

0.030567

0.012238

0.023449

0.023335

0.026951

0.029797

0.034205

0.034182

0.013816

0.026334

0.026249

0.030216

0.033337

0.038308

0.038295

0.015613

0.029650

0.029602

0.033949

0.037328

0.043013

0.017661

0.033482

0.038248

0.039221

0.048107

0.019407

0.037671

0.042889

0.042793

0.053899

0.022779

0.042472

0.048186

0.048109

0.060505

0.027801

0.047965

0.054235

0.055203

0.068037

0.034499

0.054212

0.061125

0.064088

0.076506

0.042936

0.061316

0.068911

0.074920

0.086158

0.053154

0.069382

0.077770

0.087644

0.097001

0.065156

0.078446

0.087724

0.102308

0.109110

0.078988

0.088548

0.098829

0.118962

0.122618

0.094649

0.099731

0.111175

0.137544

0.112167

0.124856

0.153292

0.125600

0.139446

0.169507

0.139864

0.154686

0.185842

0.154780

0.170311

0.202075

0.170211

0.186143

0.218007

0.186103

0.202055

0.236576

0.203654

0.220115

0.255535

0.221920

0.238728

0.275230

0.241013

0.258122

0.295476

0.260772

0.278124

100

0.316169

0.281029

0.298599

101

0.337103

0.301563

0.319333

102

0.357825

0.322285

0.340055

103

0.378197

0.342997

0.360597

104

0.398127

0.363294

0.380711

105

0.416745

0.383279

0.400012

106

0.434629

0.402808

0.418719

107

0.451641

0.421196

0.436419

Age

MALE 2019 Non-Annuitant Table

MALE 2019 Annuitant Table

MALE 2019 Optional Combined Table for Small Plans

FEMALE 2019 Non-Annuitant Table

FEMALE 2019 Annuitant Table

FEMALE 2019 Optional Combined Table for Small Plans

UNISEX 2019 Table for Distributions Subject to § 417(e)(3)

108

0.467699

0.438540

0.453120

109

0.482755

0.454881

0.468818

110

0.496722

0.470279

0.483501

111

0.501914

0.484597

0.493256

112

0.501408

0.497856

0.499632

113

0.501004

0.503015

0.502010

114

0.500451

0.501403

0.500927

115

0.500000

116

0.500000

117

0.500000

118

0.500000

119

0.500000

120

1.000000

# 2018 Standard Mileage Rates

## Notice 2018-03

### SECTION 1. PURPOSE

This notice provides the optional 2018
standard mileage rates for taxpayers to use
in computing the deductible costs of op-
erating an automobile for business, chari-
table, medical, or moving expense pur-
poses. This notice also provides the
amount taxpayers must use in calculat-
ing reductions to basis for depreciation
taken under the business standard mile-
age rate, and the maximum standard au-
tomobile cost that may be used in com-
puting the allowance under a fixed and
variable rate (FAVR) plan.

### SECTION 2. BACKGROUND

Rev. Proc. 2010-51, 2010-51 I.R.B.
883, provides rules for computing the de-
ductible costs of operating an automobile
for business, charitable, medical, or mov-
ing expense purposes, and for substantiat-
ing, under § 274(d) of the Internal Reve-
nue Code and § 1.274-5 of the Income
Tax Regulations, the amount of ordinary
and necessary business expenses of local
transportation or travel away from home.
Taxpayers using the standard mileage

rates must comply with Rev. Proc. 2010-
51. However, a taxpayer is not required to
use the substantiation methods described
in Rev. Proc. 2010-51, but instead may
substantiate using actual allowable ex-
pense amounts if the taxpayer maintains
adequate records or other sufficient evi-
dence.

An independent contractor conducts an
annual study for the Internal Revenue Ser-
vice of the fixed and variable costs of
operating an automobile to determine the
standard mileage rates for business, med-
ical, and moving use reflected in this no-
tice. The standard mileage rate for chari-
table use is set by § 170(i).

## SECTION 3. STANDARD MILEAGE RATES

The standard mileage rate for transpor-
tation or travel expenses is 54.5 cents per
mile for all miles of business use (busi-
ness standard mileage rate). See section 4
of Rev. Proc. 2010-51.

The standard mileage rate is 14 cents
per mile for use of an automobile in ren-
dering gratuitous services to a charitable
organization under § 170. See section 5 of
Rev. Proc. 2010-51.

The standard mileage rate is 18 cents
per mile for use of an automobile (1) for
medical care described in § 213, or (2) as
part of a move for which the expenses are

deductible under § 217. See section 5 of
Rev. Proc. 2010-51.

# SECTION 4. BASIS REDUCTION AMOUNT

For automobiles a taxpayer uses for
business purposes, the portion of the busi-
ness standard mileage rate treated as de-
preciation is 22 cents per mile for 2014,
24 cents per mile for 2015, 24 cents per
mile for 2016, 25 cents per mile for 2017,
and 25 cents per mile for 2018. See sec-
tion 4.04 of Rev. Proc. 2010-51.

# SECTION 5. MAXIMUM STANDARD AUTOMOBILE COST

For purposes of computing the allow-
ance under a FAVR plan, the standard
automobile cost may not exceed $27,300
for automobiles (excluding trucks and
vans) or $31,000 for trucks and vans. See
section 6.02(6) of Rev. Proc. 2010-51.

# SECTION 6. EFFECTIVE DATE

This notice is effective for (1) deduct-
ible transportation expenses paid or in-
curred on or after January 1, 2018, and (2)
mileage allowances or reimbursements
paid to an employee or to a charitable
volunteer (a) on or after January 1, 2018,
and (b) for transportation expenses the

employee or charitable volunteer pays or

DRAFTING INFORMATION

counting). For further information on this notice contact Bernard P. Harvey on (202)

incurs on or after January 1, 2018.

SECTION 7. EFFECT ON OTHER DOCUMENTS

The principal author of this notice is Bernard P. Harvey of the Office of Asso- ciate Chief Counsel (Income Tax and Ac-

317-7005 (not a toll-free number).

Notice 2016-79 is superseded.

26 CFR 601.105. Examination of returns and claims for refund, credit or abatement; determination of correct tax liablity.
(Also: Part I, §§ 165; 1.165-1(c)(4), 1.165-1(d)(2)(iii), 1.165-7(a)(2), 1.165-7(b), 1.165-8(c).)

# Rev. Proc. 2018-08

CONTENTS

SECTION 1. PURPOSE

286

SECTION 2. BACKGROUND

287

SECTION 3. SCOPE

288

.01 In general

288

.02 Definition of personal-use residential real property and personal residence

288

.03 Definition of personal belongings

288

.04 Taking into account no-cost repairs

288

.05 Limited use of safe harbor methods.

288

SECTION 4. PERSONAL-USE RESIDENTIAL REAL PROPERTY SAFE HARBOR METHODS

288

.01 In general

288

.02 Estimated Repair Cost Safe Harbor Method.

288

.03 De Minimis Safe Harbor Method.

288

.04 Insurance Safe Harbor Method.

288

.05 Safe harbor methods for Federally declared disasters

289

(1) Contractor Safe Harbor Method

289

(2) Disaster Loan Appraisal Safe Harbor Method

289

SECTION 5. PERSONAL BELONGINGS SAFE HARBOR METHODS

289

.01 De Minimis Safe Harbor Method.

289

.02 Safe harbor method for Federally declared disasters.

289

(1) Replacement Cost Safe Harbor Method.

289

(2) Exclusions

290

(3) Example

290

SECTION 6. REDUCTION FOR NO-COST REPAIRS

290

SECTION 7. EFFECTIVE DATE

290

SECTION 8. PAPERWORK REDUCTION ACT

290

SECTION 9. DRAFTING INFORMATION

290

# SECTION 1. PURPOSE

.01 This revenue procedure provides
safe harbor methods that individual tax-
payers may use in determining the amount
of their casualty and theft losses pursuant
to § 165 of the Internal Revenue Code for
their personal-use residential real property
(as defined in section 3.02 of this revenue
procedure) and personal belongings (as
defined in section 3.03 of this revenue
procedure). This revenue procedure pro-
vides additional safe harbor methods that
may be used in the case of casualty and
theft losses occurring as a result of any
Federally declared disaster (as defined in
section 2.06 of this revenue procedure).

.02 The Internal Revenue Service
(IRS) will not challenge an individual's
determination of the decrease in fair
market value of personal-use residential
real property if the individual qualifies
for and uses one of the safe harbor meth-
ods described in section 4 of this reve-
nue procedure. The IRS will not chal-
lenge an individual's determination of
the decrease in fair market value of per-
sonal belongings if the individual qual-
ifies for and uses one of the safe harbor
methods described in section 5 of this
revenue procedure.

.03 If an individual uses a safe harbor
method described in this revenue proce-
dure, the individual also must take into
account the value of any no-cost repairs as

described in section 6 of this revenue pro-
cedure.

.04 Use of a safe harbor method de-
scribed in this revenue procedure is not
mandatory. An individual may, instead,
use the actual reduction in the fair market
value of personal-use residential real
property or personal belongings, pursuant
to § 1.165-7(a)(2) of the Income Tax Reg-
ulations, if the individual has proper sub-
stantiation.

.05 The safe harbor methods provided
in this revenue procedure apply only to
the circumstances within the scope of this
revenue procedure and may not be used in
any other circumstances.

# SECTION 2. BACKGROUND

.01 Section 165(a) generally provides
that a taxpayer may deduct any loss sus-
tained during the taxable year and not
compensated for by insurance or other-
wise. With respect to property not con-
nected with a trade or business or a trans-
action entered into for profit, § 165(c)(3)
limits an individual taxpayer's deduction
to losses arising from fire, storm, ship-
wreck, or other casualty, or from theft.

.02 Section 165(h) imposes two limita-
tions on casualty and theft loss deductions
for property not connected with a trade or
business or transaction entered into for
profit. Section 165(h)(1) provides that
any loss to an individual described in
§ 165(c)(3) shall be allowed only to the
extent that the amount of the loss arising
from each casualty, or from each theft,
exceeds $100. Section 165(h)(2) provides
that if personal casualty and theft losses
for any taxable year exceed personal ca-
sualty and theft gains for the taxable year,
the losses are allowed only to the extent of
the sum of the amount of the gains, plus so
much of the excess as exceeds ten percent
of the adjusted gross income of the indi-
vidual.

.03 Section 165(h)(4)(E) provides that
to the extent an individual's casualty or
theft loss is covered by insurance, such
loss shall be taken into account only if the
individual files a timely insurance claim
with respect to such loss.

.04 Section 165(i)(1) allows an individ-
ual who suffered a loss occurring in a
disaster area and attributable to a Feder-
ally declared disaster to take the loss into
account for the taxable year immediately
preceding the taxable year in which the
disaster occurred.

.05 Section 165(i)(4) authorizes the
Treasury Department and the IRS to pre-
scribe guidance under which an appraisal
for the purpose of obtaining a loan of
Federal funds or a loan guarantee from the
Federal Government as a result of a Fed-
erally declared disaster may be used to
establish the amount of any loss described
in § 165(i)(1) or (2).

.06 Section 165(i)(5)(A) defines "Fed-
erally declared disaster" as any disaster
subsequently determined by the President
of the United States to warrant assistance
by the Federal Government under the

Robert T. Stafford Disaster Relief and
Emergency Assistance Act. Section 165(i)
(5)(B) defines "disaster area" as the area
so determined to warrant such assistance.
For areas with respect to which Federally
declared disasters have been determined,
see www.fema.gov/disasters.

.07 Section 1.165-1(c)(4) provides that
in determining the amount of loss sus-
tained, adjustments must be made for any
insurance or other compensation received.

.08 Section 1.165-1(d)(2)(iii) provides
that if a taxpayer deducted a loss and in a
subsequent taxable year receives reim-
bursement for such loss, the taxpayer does
not recompute the tax for the taxable year
in which the deduction was taken but in-
cludes the amount of such reimbursement
in gross income for the taxable year in
which received, subject to the provisions
of section 111, relating to recovery of
amounts previously deducted.

.09 Section 1.165-7(b) provides that
the amount of a casualty loss is the lesser
of (1) the difference between the fair mar-
ket value of the property immediately be-
fore the casualty and the fair market value
immediately after the casualty, or (2) the
adjusted basis of the property. Section
1012 and § 1.1012-1(a) provide that the
basis of property generally is its cost. Sec-
tion 1016(a)(1) and § 1.1016-2(a) pro-
vide that the basis of property is adjusted
for any expenditure, receipt, loss, or other
item, properly chargeable to capital ac-
count, including the cost of improvements
and betterments made to the property.

.10 Section 1.165-7(a)(2)(i) provides
that to determine the amount of the de-
ductible loss under section 165(a), the fair
market value of the property immediately
before and immediately after the casualty
generally shall be ascertained by compe-
tent appraisal. Section 1.165-7(a)(2)(ii)
provides that the cost of repairs to the
property damaged is acceptable as evi-
dence of the decrease in value of the prop-
erty if the taxpayer shows that: (1) the
repairs are necessary to restore the prop-
erty to its condition immediately before
the casualty; (2) the amount spent for such
repairs is not excessive; (3) the repairs do
not care for more than the damage suf-
fered; and (4) the value of the property
after the repairs does not, as a result of the
repairs, exceed the value of the property
immediately before the casualty. In order

to use the cost-of-repairs method to deter-
mine the decrease in fair market value, the
taxpayer must actually make the repairs
rather than rely on estimates of repairs
that will be performed in the future or not
at all. See Lamphere v. Commissioner, 70
T.C. 391, 396 (1978), acq., 1978-2 C.B.
2; Farber v. Commissioner, 57 T.C. 714,
719 (1972), acq., 1972-2 C.B. 2.

.11 Section 1.165-8(c) provides that
the amount deductible in the case of a
theft loss is determined consistently with
the manner described in § 1.165-7 for
determining the amount of a casualty loss.
The fair market value of the property im-
mediately after the theft is considered to
be zero.

.12 Section 1.165-7(b)(2)(ii) provides
that in determining a casualty loss involv-
ing real property and improvements
thereon not used in a trade or business or
in any transaction entered into for profit,
the improvements (such as buildings and
ornamental trees and shrubbery) to the
property damaged or destroyed are con-
sidered an integral part of the property,
and no separate basis need be apportioned
to the improvements.

.13 Following certain disasters, Con-
gress may modify the rules of § 165 as
applied to casualty and theft losses occur-
ring in a specified disaster area. For ex-
ample, § 504(b) of the Disaster Tax Relief
and Airport and Airway Extension Act of
2017, Pub. L. No. 115-63, 131 Stat. 1168,
1182-1183 (Sept. 29, 2017), modifies the
§ 165(h) loss limitations and other provisions
of § 165 as applied to casualty and theft losses
occurring in certain areas affected by Hurri-
canes Harvey, Irma, and Maria.

.14 Taxpayers report gains and losses
from casualties and theft on Form 4684 ac-
cording to the Form 4684 instructions, as
updated at www.irs.gov/form4684. See spe-
cial instructions at www.irs.gov/form4684
for taxpayers electing under § 165(i) to re-
port their casualty and theft losses calculated
under this revenue procedure on an original
or amended 2016 tax return.

.15 The Treasury Department and the
IRS are aware that taxpayers often have
difficulty determining the amount of their
losses under the methods provided in
§ 1.165-7(a)(2), which has resulted in
time-consuming and expensive litigation.
In order to provide certainty to both tax-
payers and the IRS, this revenue proce-

dure provides safe harbor methods that
individuals may use under § 1.165-7(a)(2)
to measure the decrease in the fair market
value of their personal-use residential real
property following a casualty and to de-
termine the pre-casualty or theft fair mar-
ket value of personal belongings.

The Treasury Department and the IRS
also are aware of the unique circum-
stances surrounding a Federally declared
disaster area and the difficulties individu-
als encounter in determining the amount
of their losses in those areas. Accordingly,
this revenue procedure provides those
individuals with additional safe harbor
methods to use in determining the amount
of their casualty and theft losses for prop-
erty damaged, destroyed, or stolen as a
result of any Federally declared disaster.

# SECTION 3. SCOPE

.01 In general. An individual who suf-
fered a casualty loss to the individual's
personal-use residential real property may
use the safe harbor methods provided in
sections 4.02, 4.03, or 4.04 of this revenue
procedure in determining the amount of
the individual's casualty loss under § 165.
An individual who suffered a casualty loss
to the individual's personal-use residential
real property due to a Federally declared
disaster may use any of the safe harbor
methods provided in section 4 of this rev-
enue procedure in determining the amount
of the individual's casualty loss under
§ 165. An individual who suffered a ca-
sualty or theft loss to the individual's per-
sonal belongings may use the safe harbor
method provided in section 5.01 of this
revenue procedure in determining the
amount of the individual's casualty and
theft loss under § 165. An individual who
suffered a casualty or theft loss to the
individual's personal belongings due to a
Federally declared disaster may use either
of the safe harbor methods provided in
section 5 of this revenue procedure in
determining the amount of the individu-
al's casualty and theft loss under § 165.

that contains at least one personal resi-
dence. Personal-use residential real prop-
erty does not include a personal residence
if any part of the personal residence is
used as rental property or contains a home
office used in a trade or business or trans-
action entered into for profit. For purposes
of this revenue procedure, a personal res-
idence is a single family residence, or a
single unit within a contiguous group of
attached residential units (for example, a
townhouse or duplex), owned by the indi-
vidual who suffered a casualty loss, and
includes any structures attached to the res-
idence or single unit. For purposes of this
revenue procedure, a personal residence
does not include a condominium or coop-
erative unit, or any other property for
which the individual who suffered the ca-
sualty loss does not own the structural
components of the building (such as the
foundation, walls, and roof), or owns only
a fractional interest in all of the structural
components of the building, or a mobile
home or trailer.

.03 Definition of personal belongings.
For purposes of this revenue procedure, a
personal belonging is an item of tangible
personal property that is owned by the
individual who suffered a casualty or theft
loss and that is not used in a trade or
business or in a transaction entered into
for profit. For purposes of this revenue
procedure, personal belongings do not in-
clude a boat, aircraft, mobile home,
trailer, or vehicle (as defined in section
5.02(2) of this revenue procedure), or an
antique or other asset that maintains or
increases its value over time.

.04 Taking into account no-cost re-
pairs. An individual using a safe harbor
method described in this revenue proce-
dure must take into account the value of
any no-cost repairs as described in section
6 of this revenue procedure.

.05 Limited use of safe harbor meth-
ods. The safe harbor methods described in
sections 4 and 5 are available only in the
circumstances described in this revenue
procedure.

# SECTION 4. PERSONAL-USE RESIDENTIAL REAL PROPERTY SAFE HARBOR METHODS

.01 In general. An individual within
the scope of this revenue procedure may
use one of the safe harbor methods de-

scribed in this section 4. If an individual
owns two or more parcels of personal-use
residential real property, the use of a safe
harbor method for one parcel does not
require the individual to use the same
safe harbor method, or any safe harbor
method, for any other parcel.

.02 Estimated Repair Cost Safe Harbor
Method. Under the Estimated Repair Cost
Safe Harbor Method, to determine the de-
crease in the fair market value of the in-
dividual's personal-use residential real
property, an individual may use the lesser
of two repair estimates prepared by two
separate and independent contractors, li-
censed or registered in accordance with
State or local regulations. The two repair
estimates must set forth the itemized costs to
restore the individual's personal-use resi-
dential real property to the condition exist-
ing immediately prior to the casualty. How-
ever, the costs of any improvements or
additions that increase the value of the
personal-use residential real property above
its pre-casualty value, such as the cost to
elevate the personal residence to meet new
construction requirements, must be ex-
cluded from the estimate for purposes of this
safe harbor. The Estimated Repair Cost Safe
Harbor Method is available for casualty
losses of $20,000 or less, prior to application
of the limitations under § 165(h).

.03 De Minimis Safe Harbor Method.
Under the De Minimis Safe Harbor Method,
to determine the decrease in the fair market
value of the individual's personal-use resi-
dential real property, an individual may es-
timate the cost of repairs required to restore
the individual's personal-use residential real
property to the condition existing immedi-
ately prior to the casualty. However, the
costs of any improvements or additions that
increase the value of the personal-use resi-
dential real property above its pre-casualty
value, such as the cost to elevate the per-
sonal residence to meet new construction
requirements, must be excluded from the
estimate for purposes of this safe harbor. An
individual's estimate must be a good-faith
estimate, and the individual must maintain
records detailing the methodology used for
estimating the loss. The De Minimis Safe
Harbor Method is available for casualty
losses of $5,000 or less, prior to application
of the limitations under § 165(h).

.04 Insurance Safe Harbor Method.
Under the Insurance Safe Harbor Method,

to determine the decrease in the fair mar-
ket value of the individual's personal-use
residential real property, an individual
may use the estimated loss determined in
reports prepared by the individual's hom-
eowners' or flood insurance company set-
ting forth the estimated loss the individual
sustained as a result of the damage to or
destruction of the individual's personal-
use residential real property.

.05 Safe harbor methods for Federally
declared disasters. An individual who
suffered a casualty loss to personal-use
residential real property in a disaster area
and due to a Federally declared disaster
may use one of the following safe harbor
methods in determining the amount of the
individual's casualty loss under § 165.

(1) Contractor Safe Harbor Method. Un-
der the Contractor Safe Harbor Method, to
determine the decrease in the fair market
value of the individual's personal-use resi-
dential real property, an individual may use
the contract price for the repairs specified in
a contract prepared by an independent con-
tractor, licensed or registered in accordance
with State or local regulations, setting forth
the itemized costs to restore the individual's
personal-use residential real property to the
condition existing immediately prior to the
Federally declared disaster. However, the
costs of any improvements or additions that
increase the value of the personal-use resi-
dential real property above its pre-disaster
value, such as the cost to elevate the per-
sonal residence to meet new construction

requirements, must be excluded from the
contract price for purposes of this safe har-
bor. To use the Contractor Safe Harbor
Method, the contract must be a binding con-
tract signed by the individual and the con-
tractor.

(2) Disaster Loan Appraisal Safe Har-
bor Method. Under the Disaster Loan Ap-
praisal Safe Harbor Method, to determine
the decrease in fair market value of the
individual's personal-use residential real
property, an individual may use an ap-
praisal prepared for the purpose of obtain-
ing a loan of Federal funds or a loan
guarantee from the Federal Government
setting forth the estimated loss the indi-
vidual sustained as a result of the damage
to or destruction of the individual's
personal-use residential real property
from a Federally declared disaster.

## SECTION 5. PERSONAL BELONGINGS SAFE HARBOR METHODS

.01 De Minimis Safe Harbor Method.
Under the De Minimis Safe Harbor
Method, an individual may make a good
faith estimate of the decrease in the fair
market value of the individual's personal
belongings. An individual using the De
Minimis Safe Harbor Method must main-
tain records describing the personal be-
longings affected and detailing the meth-
odology used for estimating the loss. The
De Minimis Safe Harbor Method is avail-

able for casualty or theft losses of $5,000
or less, prior to application of the limita-
tions under § 165(h).

.02 Safe harbor method for Federally
declared disasters.

(1) Replacement Cost Safe Harbor
Method. Except as provided in section
5.02(2) of this revenue procedure, an in-
dividual may use the safe harbor method
in this section 5.02(1) to determine the fair
market value of the individual's personal
belongings located in a disaster area im-
mediately before a Federally declared di-
saster in order to compute the amount of a
casualty or theft loss. If an individual
chooses to use the Replacement Cost Safe
Harbor Method for a Federally declared
disaster, the individual must apply that
method to all personal belongings for
which a loss is claimed under § 165 for
that Federally declared disaster, except
those specifically excluded in section
5.02(2) of this revenue procedure.

To use this safe harbor method, an in-
dividual must first determine the current
cost to replace the personal belonging
with a new one and reduce that amount by
10% for each year the individual owned
the personal belonging using the percent-
ages in the Personal Belongings Valuation
Table below. If the personal belonging
was owned by the individual for nine or
more years, the pre-disaster fair market
value is 10% of the current replacement
cost under this safe harbor method.

Personal Belongings Valuation Table

Year

Percentage of Replacement Cost to Use

90%

80%

70%

60%

50%

40%

30%

20%

10%

To determine the amount of a casualty
or theft loss for personal belongings that
were damaged, destroyed, or stolen:

(a) Determine the decrease in the fair mar-
ket value of each personal belonging by
subtracting the fair market value of the per-

sonal belonging immediately after the Fed-
erally declared disaster from the fair market
value of the personal belonging immedi-
ately before the Federally declared disaster,
determined as described above. If a personal
belonging was destroyed or stolen as a result

of a Federally declared disaster, its fair mar-
ket value after the disaster is zero.

(b) Determine the basis of each personal
belonging (generally its cost).

personal belonging (from step (b)). From
the lesser of the basis or decrease in fair
market value, subtract any insurance or
other reimbursements the individual re-
ceives or expects to receive for the per-
sonal belonging.

(2) Exclusions. An individual may not
use the Replacement Cost Safe Harbor
Method for Federally declared disasters
for a boat, aircraft, mobile home, trailer,
vehicle, or an antique or other asset that
maintains or increases its value over time.
For purposes of this revenue procedure, a
vehicle is an automobile, motorcycle, mo-
tor home, recreational vehicle, sport util-
ity vehicle, off-road vehicle, van, or truck.

An individual may determine the pre-
disaster value of a boat, aircraft, mobile
home, trailer, or vehicle by consulting es-
tablished pricing sources. See Rev. Rul.
2002-67, 2002-2 C.B. 873; Publication
561, Determining the Value of Donated
Property.

(3) Example. An individual's personal
belongings included a couch destroyed by
a hurricane in a Federally declared disas-
ter area. The individual purchased the
couch for $700 four years prior to the
hurricane. The cost to replace the couch
with a new couch is $1,000. The couch is
not insured.

Using the Replacement Cost Safe Har-
bor Method for Federally declared disas-
ter areas, the individual computes the fair
market value of the couch immediately
before the hurricane by multiplying the
current replacement cost of the couch,

$1,000, by the applicable percentage of
replacement cost from the Personal Be-
longings Valuation table, 60%:

$1,000 × 60% = $600

The individual determines the decrease
in the fair market value of the couch by
subtracting $0, the fair market value of the
couch immediately after the hurricane,
from $600, the fair market value of the
couch immediately before the hurricane.

$600 - 0 = $600

The individual compares the basis of
$700 with the decrease in fair market
value of $600. Since the decrease in fair
market value is less than the basis, the
amount of the individual's casualty loss is
$600.

## SECTION 6. REDUCTION FOR NO-COST REPAIRS

Under § 165(a), a casualty loss must be
reduced by insurance or other amounts
received, such as amounts given to an
individual to repair the damage to the in-
dividual's property due to the casualty.
This includes the value of repairs to, or
rebuilding of, the individual's personal-
use residential real property provided by
another party at no cost to the individual
("no-cost repairs"), such as the repair or
rebuilding of an individual's personal res-
idence by volunteers. No-cost repairs in-
clude repairs made for a de minimis or
token cost, donation, or gratuity.

An individual who uses any safe har-
bor method provided in this revenue pro-

cedure to determine the decrease in the
fair market value of or the amount of loss
to the individual's personal-use residential
real property or personal belongings must
reduce the loss by the value of any no-cost
repairs.

# SECTION 7. EFFECTIVE DATE

This revenue procedure is effective
December 13, 2017.

# SECTION 8. PAPERWORK REDUCTION ACT

The collection of information con-
tained in this revenue procedure has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act (44
U.S.C. 3507) under control number 1545-
0074. Please refer to the Paperwork Re-
duction Act statement accompanying
Form 1040, U.S. Individual Income Tax
Return, for further information.

# SECTION 9. DRAFTING INFORMATION

The principal author of this revenue
procedure is Joanna L. Trebat of the Of-
fice of Associate Chief Counsel (Income
Tax & Accounting). For further informa-
tion regarding this revenue procedure,
contact Ms. Trebat at 202-317-7003 (not a
toll-free number).

26 CFR 601.105. Examination of returns and claims for refund, credit or abatement; determination of correct tax liability.
(Also: Part I, §§ 165; 1.165-1(c)(4), 1.165-1(d)(2)(iii), 1.165-7(a)(2), 1.165-7(b).)

Rev. Proc. 2018-09

CONTENTS

SECTION 1. PURPOSE

291

SECTION 2. BACKGROUND

291

SECTION 3. SCOPE

292

.01 In general

292

.02 Definition of personal-use residential real property and personal residence

292

.03 Use of Cost Indexes Safe Harbor Method.

293

(1) Total loss

293

(2) Near total loss

293

(3) Interior flooding over 1 foot

293

(4) Structural damage from wind, rain, or debris

293

(5) Roof covering damage from wind, rain, or debris

293

(6) Damage to a detached structure

293

(7) Damage to decking

293

.04 Taking into account no-cost repairs

293

.05 Limited use of safe harbor method

293

SECTION 4. COST INDEXES SAFE HARBOR METHOD

293

.01 In general

293

.02 Special rules

294

.03 Tables

294

Table 1 - Total Loss

294

Table 2 - Near Total Loss

294

Table 3 - Interior Flooding Over 1 Foot

295

Table 4 - Structural Damage From Wind, Rain, or Debris

295

Table 5 - Roof Covering Damage From Wind, Rain, or Debris

296

Table 6 - Damage to a Detached Structure

296

Table 7 - Damage to Decking

296

SECTION 5. EXAMPLES

296

SECTION 6. REDUCTION FOR NO-COST REPAIRS

298

SECTION 7. EFFECTIVE DATE

298

SECTION 8. PAPERWORK REDUCTION ACT

298

SECTION 9. DRAFTING INFORMATION

298

# SECTION 1. PURPOSE

.01 This revenue procedure provides the
Cost Indexes Safe Harbor Method that indi-
vidual taxpayers may use in determining the
amount of their casualty losses pursuant to
§ 165 of the Internal Revenue Code for their
personal-use residential real property (as de-
fined in section 3.02 of this revenue proce-
dure) damaged or destroyed as a result of
Hurricane and Tropical Storm Harvey, Hur-
ricane Irma, and Hurricane Maria (the
"2017 Hurricanes"). Specifically, this reve-
nue procedure provides a safe harbor
method that individuals may use to deter-
mine the decrease in fair market value of
their personal-use residential real property
on their U.S. income tax returns filed with
the Internal Revenue Service (IRS).

.02 The IRS will not challenge an indi-
vidual's determination of the decrease in
fair market value of personal-use residential
real property attributable to one of the 2017
Hurricanes if the individual qualifies for and
uses the safe harbor method described in
section 4 of this revenue procedure.

.03 If an individual uses the safe harbor
method described in section 4 of this rev-
enue procedure, the individual also must
take into account the value of any no-cost
repairs as described in section 6 of this
revenue procedure.

.04 Use of the safe harbor method de-
scribed in this revenue procedure is not
mandatory. An individual may, instead,
use a safe harbor method described in
Rev. Proc. 2018-08, 2018-02 I.R.B.

286, or the actual reduction in the fair
market value of the personal-use residen-
tial real property, pursuant to § 1.165-
7(a)(2) of the Income Tax Regulations, if
the individual has proper substantiation.

.05 The safe harbor method provided in
this revenue procedure applies only to the
circumstances within the scope of this
revenue procedure and may not be used in
any other circumstances.

# SECTION 2. BACKGROUND

.01 Section 165(a) generally provides
that a taxpayer may deduct any loss sus-
tained during the taxable year and not
compensated for by insurance or other-
wise. With respect to property not con-
nected with a trade or business or a trans-
action entered into for profit, § 165(c)(3)
limits an individual's deductions to losses
arising from fire, storm, shipwreck, or
other casualty, or from theft.

.02 Section 165(h) imposes two limita-
tions on casualty and theft loss deductions
for property not connected with a trade or
business or transaction entered into for
profit. Section 165(h)(1) provides that any
loss to an individual described in § 165(c)
(3) shall be allowed only to the extent that
the amount of the loss arising from each
casualty, or from each theft, exceeds
$100. Section 165(h)(2) provides that if
personal casualty and theft losses for any
taxable year exceed personal casualty and
theft gains for the taxable year, the losses
are allowed only to the extent of the sum

of the amount of the gains, plus so much
of the excess as exceeds ten percent of the
adjusted gross income of the individual.

.03 Section 165(h)(4)(E) provides that to
the extent an individual's casualty loss is
covered by insurance, such loss shall be
taken into account only if the individual files
a timely insurance claim with respect to
such loss.

.05 Section 165(i)(5)(A) defines "Fed-
erally declared disaster" as any disaster
subsequently determined by the President
of the United States to warrant assistance
by the Federal Government under the
Robert T. Stafford Disaster Relief and
Emergency Assistance Act (“Stafford
Act"). Section 165(i)(5)(B) defines "disas-
ter area" as the area so determined to
warrant such assistance.

.06 The Disaster Tax Relief and Air-
port and Airway Extension Act of 2017
("Disaster Tax Relief Act"), Pub. L. No.
115-63, 131 Stat. 1168, 1182-1183 (Sept.
29, 2017), modifies some of the general
rules under § 165 for losses in certain
geographic areas. Section 504(b) of the
Disaster Tax Relief Act increases the
§ 165(h)(1) dollar limitation from $100 to
$500, waives the § 165(h)(2) ten percent

of adjusted gross income limitation, in-
creases the § 63 standard deduction, and
provides that such increase in the standard
deduction is allowed in computing the al-
ternative minimum tax. Section 504(b) of
the Disaster Tax Relief Act applies only to
net disaster losses, which are the excess of
losses attributable to Hurricanes Harvey,
Irma, and Maria and that arose in the
Hurricane Harvey disaster area, Hurricane
Irma disaster area, or Hurricane Maria
disaster area after particular dates, over
personal casualty gains.

.07 Under § 501(a)(2) of the Disaster
Tax Relief Act, "Hurricane Harvey disaster
area," "Hurricane Irma disaster area," and
"Hurricane Maria disaster area" are areas
with respect to which a major disaster has
been declared by the President under § 401
of the Stafford Act by reason of Hurricane
Harvey, Hurricane Irma, and Hurricane Ma-
ria, respectively. For areas with respect to
which a major disaster has been declared by
the President under § 401 of the Stafford
Act, see www.fema.gov/disasters.

.08 Section 1.165-1(c)(4) provides that
in determining the amount of loss sus-
tained, adjustments must be made for any
insurance or other compensation received.

.09 Section 1.165-1(d)(2)(iii) provides
that if a taxpayer deducted a loss and in a
subsequent taxable year receives reim-
bursement for such loss, the taxpayer does
not recompute the tax for the taxable year
in which the deduction was taken but in-
cludes the amount of such reimbursement
in gross income for the taxable year in
which received, subject to the provisions
of section 111, relating to recovery of
amounts previously deducted.

.10 Section 1.165-7(b) provides that
the amount of a casualty loss is the lesser
of (1) the difference between the fair mar-
ket value of the property immediately be-
fore the casualty and the fair market value
immediately after the casualty, or (2) the
adjusted basis of the property. Section
1012 and § 1.1012-1(a) provide that the
basis of property generally is its cost. Sec-
tion 1016(a)(1) and § 1.1016-2(a) pro-
vide that the basis of property is adjusted
for any expenditure, receipt, loss, or other
item, properly chargeable to capital ac-
count, including the cost of improvements
and betterments made to the property.

.11 Section 1.165-7(a)(2)(i) provides
that to determine the amount of the de-

ductible loss under section 165(a), the fair
market value of the property immediately
before and immediately after the casualty
generally shall be ascertained by compe-
tent appraisal. Section 1.165-7(a)(2)(ii)
provides that the cost of repairs to the
property damaged is acceptable as evi-
dence of the decrease in value of the prop-
erty if the taxpayer shows that: (1) the
repairs are necessary to restore the prop-
erty to its condition immediately before
the casualty; (2) the amount spent for such
repairs is not excessive; (3) the repairs do
not care for more than the damage suf-
fered; and (4) the value of the property
after the repairs does not, as a result of the
repairs, exceed the value of the property
immediately before the casualty. In order
to use the cost-of-repairs method to deter-
mine the decrease in fair market value, the
taxpayer must actually make the repairs
rather than rely on estimates of repairs that
will be performed in the future or not at all.
See Lamphere v. Commissioner, 70 T.C.
391, 396 (1978), acq., 1978-2 C.B. 2; Far-
ber v. Commissioner, 57 T.C. 714, 719
(1972), acq., 1972-2 C.B. 2. But see § 4.02
of Rev. Proc. 2018-08 (providing an esti-
mated repair cost safe harbor method).

.13 Taxpayers report gains and losses
from casualties on Form 4684 according
to the Form 4684 instructions, as updated
at www.irs.gov/form4684. See special in-
structions at www.irs.gov/form4684 for
taxpayers electing under § 165(i) to report
their casualty losses calculated under this
revenue procedure on an original or
amended 2016 tax return.

.14 Rev. Proc. 2018-08, provides safe
harbor methods that individuals may use
in determining the amount of their casu-
alty and theft losses under § 165 for
personal-use residential real property and
personal belongings. Due to the wide-
spread devastation from the 2017 Hurri-
canes, the Treasury Department and the

IRS are providing an additional safe har-
bor method that individuals may use un-
der § 1.165-7(a)(2) to measure the de-
crease in the fair market value of their
personal-use residential real property that
was damaged or destroyed as a result of
the 2017 Hurricanes.

# SECTION 3. SCOPE

.01 In general. An individual with a
U.S. income tax filing requirement who
suffered a casualty loss to the individual's
personal-use residential real property lo-
cated in the 2017 Disaster Area as a result
of the 2017 Hurricanes may use the safe
harbor method provided in this revenue pro-
cedure in determining the amount of the
individual's casualty loss under § 165. The
term "2017 Disaster Area" means the entire
states of Texas, Louisiana, Florida, Georgia,
and South Carolina, the Commonwealth of
Puerto Rico, and the territory of the U.S.
Virgin Islands. This revenue procedure ap-
plies to bona fide residents of Puerto Rico
and the U.S. Virgin Islands only where
these individuals otherwise have a U.S. in-
come tax filing requirement.

.02 Definition of personal-use residen-
tial real property and personal residence.
For purposes of this revenue procedure,
personal-use residential real property is
real property, including improvements
(such as buildings and ornamental trees
and shrubbery), that is owned by the in-
dividual who suffered a casualty loss and
that contains at least one personal resi-
dence. Personal-use residential real prop-
erty does not include a personal residence
if any part of the personal residence is
used as rental property or contains a home
office used in a trade or business or trans-
action entered into for profit. For purposes
of this revenue procedure, a personal res-
idence is a single family residence, or a
single unit within a contiguous group of
attached residential units (for example, a
townhouse or duplex), owned by the indi-
vidual who suffered a casualty loss, and
consists of the total enclosed square foot-
age of the residence or single unit, includ-
ing any enclosed structures attached to the
residence or single unit. For example, a
personal residence includes a basement
and an attached garage, but does not in-
clude a deck or screened-in porch. For
purposes of this revenue procedure, a per-
sonal residence does not include a condo-

minium or cooperative unit, or any other
property for which the individual who suf-
fered the casualty loss does not own the
structural components of the building
(such as the foundation, walls, and roof),
or owns only a fractional interest in all of
the structural components of the building,
or a mobile home or trailer.

.03 Use of Cost Indexes Safe Harbor
Method. An individual described in sec-
tion 3.01 of this revenue procedure may
use the Cost Indexes Safe Harbor Method
if the individual's personal-use residential
real property has suffered, in the circum-
stances described below, (1) a total loss of
a personal residence, (2) a near total loss
of a personal residence, (3) interior flood-
ing over 1 foot of a personal residence, (4)
structural damage from wind, rain, or de-
bris to a personal residence, (5) roof cov-
ering damage from wind, rain, or debris to a
personal residence, (6) damage to a de-
tached structure, or (7) damage to decking:

(1) Total loss. A total loss of a personal
residence occurs if, as a result of one of
the 2017 Hurricanes, any one of the fol-
lowing occurred:

(a) The personal residence either col-
lapsed or is structurally unsound (for ex-
ample, the structural connections in the
personal residence, such as nails and an-
chor bolts, have corroded as a result of
prolonged exposure to water over an ex-
tended period of time to the extent that
they compromise the structural integrity
of the personal residence);

(b) The state or local government or
any political subdivision thereof has or-
dered that the personal residence be de-
molished or relocated;

(c) The individual has sold the personal
residence to an unrelated party for a price
that reflects the fair market value solely of
the land on which the personal residence
is situated; or

(d) The personal residence sustained
damage that satisfies the definition of
near total loss, as described in section
3.03(2) of this revenue procedure, and
the individual has demolished the per-
sonal residence.

(2) Near total loss. The near total loss of
a personal residence occurs if, as a result of
one or more of the 2017 Hurricanes, the
personal residence sustained severe damage
necessitating the removal and disposal of
substantially all interior wall frame cover-

ings (including drywall and other wall frame
coverings), floorings, electrical lines, ducts,
plumbing, and other fixtures. For a personal
residence sustaining near total loss, only the
wood frame, rafters, and outside façade of
the personal residence remain structurally
sound and reusable.

(3) Interior flooding over 1 foot. Inte-
rior flooding over 1 foot occurs if a per-
sonal residence was flooded with water to
a height of more than 1 foot as a result of
one or more of the 2017 Hurricanes, but
did not sustain damage that falls within
the definition of total loss or near total
loss, as described in sections 3.03(1) and
(2) of this revenue procedure.

(4) Structural damage from wind, rain,
or debris. Structural damage from wind,
rain, or debris occurs if a personal residence
sustained major structural damage to the
roof and/or outside wall(s) as a result of
wind or windblown debris from one or more
of the 2017 Hurricanes that exposed part or
all of the interior of the personal residence to
rain or debris, requiring substantial renova-
tion of the damaged areas. Substantial ren-
ovation requires the removal and replace-
ment of drywall or other wall frame
coverings, replacement of trim, and repair
and painting of the damaged interior areas
of the personal residence.

(5) Roof covering damage from wind,
rain, or debris. Roof covering damage from
wind, rain, or debris occurs if a personal
residence sustains damage from wind, rain,
or windblown debris to roofing felt, shin-
gles, flashings, fascia, or soffit as a result of
one or more of the 2017 Hurricanes.

(6) Damage to a detached structure.
Damage to a detached structure occurs if, as
a result of one or more of the 2017 Hurri-
canes, the detached structure requires either
complete or major rebuilding. A detached
structure is an enclosed structure of wood-
frame construction that has some electrical
capabilities, but little or no interior finishing.
A detached structure is located on personal-
use residential real property and includes a
shed, shop, or detached garage that is not
used in connection with a trade or business
and that is not equipped with heating or air
conditioning.

(7) Damage to decking. Damage to
decking occurs if, as a result of one or
more of the 2017 Hurricanes, the decking
attached to a personal residence was dam-
aged or destroyed.

.04 Taking into account no-cost re-
pairs. An individual using the Cost In-
dexes Safe Harbor Method described in
section 4 of this revenue procedure must
take into account the value of any no-cost
repairs as described in section 6 of this
revenue procedure.

.05 Limited use of safe harbor method.
The safe harbor method described in section
4 is available only in the circumstances de-
scribed in this revenue procedure.

## SECTION 4. COST INDEXES SAFE HARBOR METHOD

.01 In general. An individual within
the scope of this revenue procedure may
use the safe harbor method described in
this section 4. If an individual owns two or
more parcels of personal-use residential
real property, the use of the Cost Indexes
Safe Harbor Method for one parcel does
not require the individual to use the Cost
Indexes Safe Harbor Method, or any safe
harbor method, for any other parcel.

Under the Cost Indexes Safe Harbor
Method, an individual may use one or more
of the cost indexes, as applicable, provided
in this section 4 to determine the decrease in
the fair market value of personal-use resi-
dential real property, including the personal
residence, detached structures, and decking.
Cost indexes are provided for three size
categories of personal residences based on
the square footage of the personal residence
and for seven geographic areas.

In computing the decrease in fair mar-
ket value under the Cost Indexes Safe
Harbor Method, an individual must take
into account the value of any no-cost re-
pairs as described in section 6 of this
revenue procedure.

If the Cost Indexes Safe Harbor
Method described in this section 4 is used,
the amount determined is the full amount
of the decrease in fair market value of that
personal-use residential real property and
may not be increased by amounts related
to items such as landscaping, debris re-
moval, demolition, etc.

The Cost Indexes Safe Harbor
Method applies only to the following
three types of improvements on an indi-
vidual's personal-use residential real
property: a personal residence (as de-
scribed in section 3.02 of this revenue
procedure), a detached structure (as de-
scribed in section 3.03(6) of this reve-

nue procedure), and a deck (as described
in section 3.03(7) of this revenue proce-
dure). If there is any other type of im-
provement on an individual's personal-
use residential real property that is not
described in sections 3.02, 3.03(6), and
3.03(7) of this revenue procedure, the
individual may use the Cost Indexes
Safe Harbor Method to determine the
decrease in fair market value of the
personal-use residential real property,
but may not add any amount for the
other type of improvements. The de-
crease in fair market value of the other
type of improvement may be determined
by another applicable method. For ex-
ample, under the Cost Indexes Safe Har-
bor Method, no amount may be added to
the decrease in fair market value of the
personal-use residential real property
for a residence that contains a home
office, a residence in a structure that
contains five or more residential units,

or a detached structure equipped with
heating or air conditioning.

.02 Special Rules.

(1) A personal residence may not be
subject to more than one of the following
tables: Table 1 (Total Loss); Table 2
(Near Total Loss); or Table 3 (Interior
Flooding Over 1 Foot).

(2) A personal residence subject to Ta-
ble 3 (Interior Flooding Over 1 Foot) also
may be subject to Table 4 (Structural
Damage From Wind, Rain, or Debris), but
the square footage flooded may not be
included in the square footage used for
Table 4 (Structural Damage From Wind,
Rain, or Debris).

(3) A personal residence subject to Ta-
ble 3 (Interior Flooding Over 1 Foot) or
Table 4 (Structural Damage From Wind,
Rain, or Debris) also may be subject to
Table 5 (Roof Covering Damage from
Wind, Rain, or Debris).

(4) Table 6 (Damage to a Detached
Structure) and Table 7 (Damage to Deck-
ing) may apply to any personal-use resi-
dential real property without regard to
whether Table 1 (Total Loss), Table 2
(Near Total Loss), Table 3 (Interior
Flooding Over 1 Foot), Table 4 (Structural
Damage From Wind, Rain, or Debris), or
Table 5 (Roof Covering Damage From
Wind, Rain, or Debris) apply to a personal
residence located on such property.

(5) If an individual's personal-use
residential real property contains more
than one personal residence and the in-
dividual uses the Cost Indexes Safe Har-
bor Method, the individual must apply
the applicable table, or combination of
tables, to each personal residence.

.03 Tables. The following tables set
forth the cost indexes for each corre-
sponding category described in section
3.03 of this revenue procedure:

Table 1 - Total Loss

Total Loss - Cost Index Per Square Foot

Personal Residence Size and Location

Texas

Louisiana

Florida

Georgia

South Carolina

Puerto Rico

U.S. Virgin Islands

Small Personal Residence (Personal residence is less than 1,500 square feet)

$231

$235

$231

$293

Medium Personal Residence (Personal residence is between 1,500 and 3,000 square feet)

$195

$208

$195

$248

Large Personal Residence (Personal residence is greater than 3,000 square feet)

$174

$175

$193

$174

$175

$222

For a personal residence that falls
within the description of a total loss in
section 3.03(1) of this revenue procedure,
use Table 1 as follows:

(1) Determine the total square footage
of the personal residence.

(2) Determine the size of the personal
residence based on the total square foot-
age described in Table 1.

(3) Determine which column applies
based on the geographic location of the
personal residence.

(4) Multiply the total square footage of
the personal residence (from step 1) by the
applicable cost index based on the appro-
priate column of Table 1.

Table 2 - Near Total Loss Near Total Loss - Cost Index Per Square Foot

Personal Residence Size and Location

Texas

Louisiana

Florida

Georgia

South Carolina

Puerto Rico

U.S. Virgin Islands

Small Personal Residence (Personal residence is less than 1,500 square feet)

$185

$187

$190

$185

$187

$237

Medium Personal Residence (Personal residence is between 1,500 and 3,000 square feet)

$156

$158

$166

$156

$158

$201

Large Personal Residence (Personal residence is greater than 3,000 square feet)

$139

$141

$154

$139

$141

$179

For a personal residence that falls
within the description of a near total loss
in section 3.03(2) of this revenue proce-
dure, use Table 2 as follows:

(1) Determine the total square footage
of the personal residence.

(2) Determine the size of the personal
residence based on the total square foot-
age described in Table 2.

(3) Determine which column applies
based on the geographic location of the
personal residence.

(4) Multiply the total square footage of
the personal residence (from step 1) by the
applicable cost index based on the appro-
priate column of Table 2.

Table 3 - Interior Flooding Over 1 Foot Interior Flooding Over 1 Foot - Cost Index Per Square Foot

Personal Residence Size and Location

Texas

Louisiana

Florida

Georgia

South Carolina

Puerto Rico

U.S. Virgin Islands

Small Personal Residence (Personal residence is less than 1,500 square feet)

$139

$143

$146

$139

$143

$182

Medium Personal Residence (Personal residence is between 1,500 and 3,000 square feet)

$117

$121

$125

$117

$121

$154

Large Personal Residence (Personal residence is greater than 3,000 square feet)

$104

$108

$116

$104

$108

$137

The cost indexes in Table 3 are applied
only to the square footage of the personal
residence that was flooded, rather than the
total square footage.

For a personal residence that was
flooded to a height of greater than 1 foot,
as described in section 3.03(3) of this rev-
enue procedure, and does not fall within
the description of a total loss or near total
loss in sections 3.03(1) and (2) of this

revenue procedure, use Table 3 as fol-
lows:

(1) Determine the total square footage
of the personal residence.

(2) Determine the size of the personal
residence based on the total square foot-
age described in Table 3.

(3) Determine the square footage of the
flooded area of the personal residence.

(4) Determine which column applies
based on the geographic location of the
personal residence.

(5) Multiply the flooded square foot-
age (from step 3) by the applicable cost
index based on the appropriate column
of Table 3.

Table 4 - Structural Damage From Wind, Rain, or Debris Structural Damage From Wind, Rain, or Debris - Cost Index Per Square Foot Percent of Damage Category Percent Damaged = Square Footage of Damaged Area/Total Square Footage of Personal Residence

Percent Damaged and Location

Texas

Louisiana

Florida

Georgia

South Carolina

Puerto Rico

U.S. Virgin Islands

15% to 25%

$189

$202

$189

$240

26% to 50%

$174

$186

$174

$221

51% to 100%

$157

$168

$157

$199

The cost indexes in Table 4 apply only
to the square footage of the damaged area
of the personal residence, rather than the
total square footage. Personal residences
that sustained 100% wind, rain, or debris
damage are those that sustained major
structural damage throughout the entire
personal residence necessitating substan-
tial renovation (as defined in section
3.03(4) of this revenue procedure) of all of
the rooms in the personal residence.

For a personal residence that sustained
structural damage from wind, rain, or de-
bris, use Table 4 as follows:

(1) Determine the total square footage
of the personal residence.

(2) Determine the square footage of the
damaged portion of the personal residence
by adding the square footage of each room
needing substantial renovation.

(3) Determine the percent of square
footage of the personal residence that was

damaged by dividing the square footage
that was damaged (from step 2) by the
total square footage (from step 1).

(4) Determine which column applies
based on the geographic location of the
personal residence.

(5) Multiply the square footage of the
damaged area (from step 2) by the appli-
cable cost index based on the appropriate
column of Table 4 (based on the percent
of damage range in column 1 of Table 4).

# Table 5 - Roof Covering Damage From Wind, Rain, or Debris Roof Covering Damage From Wind, Rain, or Debris - Cost Index Per Square Foot

Personal Residence Size and Location

Texas

Louisiana

Florida

Georgia

South Carolina

Puerto Rico

U.S. Virgin Islands

Small Personal Residence (Personal residence is less than 1,500 square feet)

$10

Medium Personal Residence (Personal residence is between 1,500 and 3,000 square feet)

$10

Large Personal Residence (Personal residence is greater than 3,000 square feet)

If the personal residence sustained roof
covering damage from wind, rain, or de-
bris as described in section 3.03(5) of this
revenue procedure, apply the applicable
cost index in Table 5 to the total square
footage under the roof (including the
porch, patios, and overhangs).

For a personal residence that sustained
roof covering damage from wind, rain, or
debris, as described in section 3.03(5) of

this revenue procedure, use Table 5 as
follows:

(1) Determine the total square footage
of the ground floor of the personal resi-
dence.

(2) Add to the total square footage of
the ground floor (from step 1) the square
footage of any area of the roof that ex-
tends beyond the ground floor, such as
porches and attached carports, to deter-

mine the total square footage under the
roof.

(3) Determine the applicable cost index
in Table 5 based on the total square foot-
age and the geographic location of the
personal residence.

(4) Multiply the total square footage
under the roof (from step 2) by the appli-
cable cost index based on the appropriate
column of Table 5.

Table 6 - Damage to a Detached Structure Damage to a Detached Structure - Cost Index Per Square Foot

Detached Structure Size and Location

Texas

Louisiana

Florida

Georgia

South Carolina

Puerto Rico

U.S. Virgin Islands

Up to 200 square feet

$63

$65

$71

$63

$65

$81

Over 200 and up to 400 square feet

$50

$51

$56

$50

$51

$64

Over 400 square feet

$44

$46

$50

$44

$46

$58

For a detached structure on personal-
use residential real property, as described
in section 3.03(6) of this revenue proce-
dure, apply the applicable cost index in
Table 6 as follows:

(1) Determine the total square footage
of the detached structure.

(2) Determine the size of the detached
structure based on the total square footage
described in column 1 of Table 6.

(3) Determine which column applies
based on the geographic location of the
personal residence.

(4) Multiply the total square footage of
the detached structure (from step 1) by the
applicable cost index based on the appro-
priate column of Table 6.

Location

Table 7 - Damage to Decking Damage to Decking - Cost Index Per Square Foot

Texas

Louisiana

Florida

Georgia

South Carolina

Puerto Rico

U.S. Virgin Islands

Use for all types of decking

$27

$29

$27

$33

For decking attached to a personal res-
idence, as described in section 3.03(7) of
this revenue procedure, apply the cost in-
dex in Table 7 as follows:

(1) Determine the square footage of the
damaged area of the deck.

(2) Multiply the square footage of the
damaged area of the deck (from step 1) by

the applicable cost index based on the
appropriate column of Table 7.

## SECTION 5. EXAMPLES

The following examples illustrate the
application of the Cost Indexes Safe Har-
bor Method described in section 4 of this
revenue procedure.

Example 1. Prior to Hurricane Irma, an individ-
ual purchased a personal residence in Florida for
$500,000. The personal residence is 2,000 square
feet and the personal-use residential real property
does not contain any decking or detached structures.
The personal residence was flooded for over three
weeks, causing the structural connections in the per-
sonal residence to corrode to the extent they must be
replaced. The personal residence is located in the
2017 Disaster Area. Insurance and other reimburse-

ments total $100,000. The individual chooses to use
the Cost Indexes Safe Harbor Method. Because the
corrosion damage to the personal residence falls
within the definition of total loss, as defined in sec-
tion 3.03(1) of this revenue procedure, the individual
uses Table 1 of the Cost Indexes Safe Harbor
Method to determine the decrease in fair market
value of the personal-use residential real property.
The individual multiplies the square footage of the
personal residence by the cost index for a Medium
Personal Residence in Florida in Table 1, as follows:

2,000 sq. ft. X $208/sq. ft. = $416,000

The individual compares the decrease in fair
market value, $416,000, with the basis in the
personal-use residential real property, $500,000, and
from the smaller of these two amounts, $416,000,
subtracts the insurance and other reimbursements of
$100,000. The amount of the individual's casualty
loss is $316,000 ($416,000 - $100,000).

Example 2. Assume the same facts in Example 1,
except that the individual purchased the personal-use
residential real property twenty years ago for
$120,000 and paid no additional amounts for im-
provements or remodeling. The individual compares
the decrease in fair market value, calculated using
the Cost Indexes Safe Harbor Method in Example 1,
with the basis of the personal-use residential real
property. Since the basis of $120,000 is less than the
decrease in fair market value, $416,000, the individ-
ual's casualty loss is limited to the basis of $120,000.
After subtracting insurance and other reimburse-
ments of $100,000 from the basis of $120,000, the
amount of the individual's casualty loss is $20,000
($120,000 - $100,000 = $20,000).

Example 3. An individual's personal residence in
Puerto Rico is substantially damaged by a storm
surge from Hurricane Maria. The individual is not a
bona fide resident of Puerto Rico. The individual's
personal-use residential real property is located in
the 2017 Disaster Area. The damage falls within the
definition of near total loss, as defined in section
3.03(2) of this revenue procedure, since all of the
drywall, floorings, electrical lines, ducts, plumbing,
and other fixtures need to be replaced. Prior to Hur-
ricane Maria, the individual purchased the personal-
use residential real property for $190,000 and spent
$10,000 for improvements to remodel the residence.
Immediately prior to Hurricane Maria, the adjusted
basis of the property was $200,000 ($190,000 cost +
$10,000 improvements). The personal residence is
2,000 square feet and the personal-use residential
real property does not contain any decking or de-
tached structures. The individual paid $5,000 to have
debris cleared from the personal-use residential real
property. Insurance and other reimbursements total
$100,000.

Because the damage to the personal residence
falls within the definition of near total loss, the
individual uses Table 2 of the Cost Indexes Safe
Harbor Method to determine the decrease in fair
market value of the personal-use residential real
property. Using Table 2 of the Cost Indexes Safe
Harbor Method, the decrease in fair market value of
the personal-use residential real property is deter-
mined by multiplying the square footage of the per-
sonal residence by the cost index for a Medium
Personal Residence in Puerto Rico as follows:

2,000 sq. ft. X $158/sq. ft. = $316,000

Because the individual chooses to use the Cost
Indexes Safe Harbor Method for determining the
decrease in fair market value, the $5,000 debris
removal costs are not added to the safe harbor
amount of $316,000. The individual compares the
adjusted basis of the personal-use residential real
property to the decrease in fair market value deter-
mined by using the Cost Indexes Safe Harbor
Method. Since the adjusted basis of $200,000 is less
than the decrease in fair market value, $316,000, the
individual's casualty loss is limited to the adjusted
basis of $200,000. After subtracting $100,000, the
amount of insurance and other reimbursements re-
ceived, from the adjusted basis of $200,000, the
amount of the individual's casualty loss is $100,000
($200,000 - $100,000 = $100,000).

Example 4. The first floor of an individual's
personal residence in Texas was flooded with 3 feet
of water during Hurricane Harvey. As a result of the
flooding, all of the flooring and drywall on the first
floor needs to be replaced. The second floor of the
personal residence is not damaged. While the per-
sonal residence sustained flooding of more than 1
foot, it did not sustain damage that falls within the
definition of total loss or near total loss in sections
3.03(1) and (2) of this revenue procedure. Therefore,
the personal residence sustained interior flooding
over 1 foot as described in section 3.03(3) of this
revenue procedure. In addition, the deck attached to
the personal residence was completely destroyed by
Hurricane Harvey. The personal-use residential real
property is located in the 2017 Disaster Area. The
personal residence is 2,000 square feet and the
personal-use residential real property does not con-
tain any detached structures. The total square footage
of the flooded rooms on the first floor is 1,000 square
feet. Prior to Hurricane Harvey, the individual pur-
chased the personal-use residential real property for
$200,000. Insurance and other reimbursements total
$90,000. The individual chooses to use the Cost
Indexes Safe Harbor Method.

To calculate the decrease in fair market value of
the personal-use residential real property, the indi-
vidual uses the first column of Table 3 to determine
the size of the personal residence based on the total
square footage of the personal residence. The indi-
vidual multiplies the flooded square footage of the
personal residence, 1,000 square feet, by $117, the
cost index for a Medium Personal Residence in
Texas, in Table 3.

1,000 sq. ft. X $117/sq. ft. = $117,000

The deck is 200 square feet.

Using Table 7, the individual multiplies the
square footage of the damaged area of the deck, 200
square feet, by the cost index of $27 for Texas in
Table 7.

200 sq. ft. X $27/sq. ft. = $5,400

To determine the total decrease in fair market
value of the personal-use residential real property the
individual adds $5,400 to $117,000.

$5,400 + $117,000 = $122,400

The individual then compares the basis of the
personal-use residential real property, $200,000, to
the decrease in fair market value determined by
using the Cost Indexes Safe Harbor Method,
$122,400. Since the decrease in fair market value

of $122,400 is less than the basis of $200,000, the
individual's casualty loss is limited to $122,400.
After subtracting $90,000, the amount of insurance
and other reimbursements, from $122,400, the
amount of the individual's casualty loss is $32,400
($122,400 - $90,000 = $32,400).

Example 5. Prior to Hurricane Irma, an individ-
ual purchased personal-use residential real property
for $200,000 in Georgia and spent $5,000 for im-
provements to the personal-use residential real prop-
erty. Two trees fell onto the individual's personal
residence during Hurricane Irma, destroying a por-
tion of the roof. Rain from the hurricane soaked the
walls and flooring of two bedrooms and the living
room, necessitating removal and replacement of dry-
wall and wood paneling, roof panels, trusses, and
flooring. The rest of the personal residence remains
undamaged. The personal residence was not flooded.
Therefore, the damage constitutes structural damage
from wind, rain, or debris, as described in section
3.03(4) of this revenue procedure. The individual's
personal-use residential real property is located in
the 2017 Disaster Area. The personal residence is
2,000 square feet and the personal-use residential
real property does not contain any decking or de-
tached structures. The damaged two bedrooms and
living room total 1,000 square feet. Insurance and
other reimbursements total $100,000.

The individual chooses to use the Cost Indexes
Safe Harbor Method. Using Table 4, the percentage
of square footage of the personal residence that was
damaged by the hurricane is determined by dividing
the total square footage of the personal residence by
the square footage of the personal residence that was
damaged as follows:

1,000 sq. ft./2,000 sq. ft. = 0.50 or 50% of the
total square footage was damaged. The individual
uses the cost index in the column for Georgia of
Table 4 for 26% to 50% damage and multiplies it by
the number of square feet that were damaged.

$174/sq. ft. × 1,000 sq. ft. = $174,000

The roof covering also sustained damage that
necessitated replacement of all roof shingles, felt
lining, and flashings. The total square footage of the
ground floor of the personal residence is 2,000
square feet. The total square footage under the roof,
including porches, patios, and overhangs, is 2,200
square feet. The individual multiplies the cost index
for a Medium Personal Residence in Georgia in
Table 5 by 2,200 square feet, the total square footage
under the roof.

2,200 sq. ft.X $8/sq. ft. = $17,600

The individual adds $17,600 to $174,000 to de-
termine the total decrease in fair market value of the
personal-use residential real property.

$17,600 + $174,000 = $191,600

The individual compares the decrease in fair
market value, $191,600, with the adjusted basis,
$205,000, and from the smaller of these two
amounts, $191,600, subtracts insurance and other
reimbursements of $100,000. The amount of the
individual's casualty loss is $91,600 ($191,600 -
$100,000 = $91,600).

Example 6. Winds from Hurricane Maria caused
a tree to fall across a detached garage located on an
individual's personal-use residential real property in
the U.S. Virgin Islands. The individual is not a bona

fide resident of the U.S. Virgin Islands. Prior to
Hurricane Maria, the individual purchased the
personal-use residential real property for $200,000.
The personal residence is located in the 2017 Disas-
ter Area. The personal residence is not damaged by
Hurricane Maria. The personal-use residential real
property does not contain any decking or other de-
tached structures. The garage suffered significant
damage and requires major rebuilding. The total
square footage of the garage is 400 square feet. The
garage was not insured.

The individual chooses to use the Cost Indexes
Safe Harbor Method. Because the garage is a de-
tached structure, as described in section 3.03(6) of
this revenue procedure, the individual uses Table 6
to determine the decrease in fair market value of the
personal-use residential real property. Using Table 6,
the individual multiplies the total square footage of
the garage, 400 square feet, by the cost index of $64
in the column for the U.S. Virgin Islands of Table 6.

400 sq. ft. X $64/sq. ft. = $25,600

The individual's basis in the personal-use resi-
dential real property is $200,000. The individual
compares the decrease in fair market value, $25,600,
with the basis, $200,000. Since the decrease in fair
market value is less than the basis, the amount of the
individual's casualty loss is $25,600.

Example 7. Winds from Tropical Storm Harvey
blew down a pine tree that destroyed part of a deck
attached to the back of an individual's personal res-
idence in Louisiana. The personal-use residential
real property is located in the 2017 Disaster Area.
The individual's basis in the personal-use residential
real property is $200,000. Neither the personal res-
idence nor any detached structure was damaged by
the fallen tree. The deck is 450 square feet. It is
necessary to rebuild one-half of the deck. The re-
maining half of the deck is not damaged and remains
structurally sound.

The individual chooses to use the Cost Indexes
Safe Harbor Method for the damage described in
section 3.03(7) of this revenue procedure and uses
Table 7 to determine the decrease in fair market
value of the personal-use residential real property.

The square footage of the damaged area of the
deck is one-half of 450 square feet, which is 225

square feet. Using Table 7, the individual multiplies
the square footage of the damaged area of the deck,
225 square feet, by the cost index of $27 in the
column for Louisiana in Table 7.

225 sq. ft. X $27/sq. ft. = $6,075

The individual compares the decrease in fair
market value, $6,075, with the basis, $200,000.
Since the decrease in fair market value is less than
the basis, the amount of the individual's casualty loss
is $6,075.

## SECTION 6. REDUCTION FOR NO-COST REPAIRS

An individual who uses the Cost In-
dexes Safe Harbor Method provided in
section 4 of this revenue procedure to
determine the decrease in the fair market
value of the individual's personal-use res-
idential real property must reduce the loss,
determined using the Cost Indexes Safe
Harbor Method, by the value of any no-
cost repairs. For this purpose, the value of
a no-cost repair is based upon the total
square footage completely repaired at no
cost to the individual. The total square

footage completely repaired at no cost to
the individual is multiplied by the same
cost index the individual used to deter-
mine the decrease in the fair market value
of the individual's personal-use residen-
tial real property. This amount is then
subtracted from the loss determined under
the Cost Indexes Safe Harbor Method.

## SECTION 7. EFFECTIVE DATE

This revenue procedure is effective for
losses that are attributable to the 2017
Hurricanes and that arose in the 2017 Di-
saster Area after August 22, 2017.

## SECTION 8. PAPERWORK REDUCTION ACT

## SECTION 9. DRAFTING INFORMATION

# 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.

GR-Grantor.

IC-Insurance Company.

Ct.D .- Court Decision.

I.R.B .- Internal Revenue Bulletin.

CY-County.

LE-Lessee.

D-Decedent.

LP-Limited Partner.

LR-Lessor.

DE-Donee.

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.

DC-Dummy Corporation.

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.

BK-Bank.

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

C-Individual.

C.B .- Cumulative Bulletin.

CFR-Code of Federal Regulations.

CI-City.

COOP-Cooperative.

X-Corporation.

Y-Corporation.

Z-Corporation.

## Numerical Finding List1

Bulletin 2018-2

Notices:

2018-02, 2018-2 I.R.B. 281
2018-03, 2018-2 I.R.B. 285

Revenue Procedures:

2018-1, 2018-1 I.R.B. 1

2018-2, 2018-1 I.R.B. 106

2018-3, 2018-1 I.R.B. 130

2018-4, 2018-1 I.R.B. 146

2018-5, 2018-1 I.R.B. 244
2018-7, 2018-1 I.R.B. 282

2018-8, 2018-2 I.R.B. 286

2018-9, 2018-2 I.R.B. 290

## Revenue Rulings:

2018-01, 2018-2 I.R.B. 275
2018-02, 2018-2 I.R.B. 277
2018-03, 2018-2 I.R.B. 278

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2017-27 through 2017-52 is in Internal Revenue Bulletin
2017-52, dated December 27, 2017.

# Finding List of Current Actions on Previously Published Items1

Bulletin 2018-2

# Internal Revenue Service Washington, DC 20224

Official Business
Penalty for Private Use, $300

# INTERNAL REVENUE BULLETIN

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

# We Welcome Comments About the Internal Revenue Bulletin

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

Internal Revenue Bulletin 2018-2 (PDF rendition): IRS Revenue Rulings

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