Internal Revenue Bulletin 2015-21 (PDF rendition): IRS Notices

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

# INTERNAL REVENUE BULLETIN

4
IRS

Bulletin No. 2015-21
May 26, 2015

## HIGHLIGHTS OF THIS ISSUE

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

## INCOME TAX

### REG-102656-15, page 1005.

Proposed regulations under section 446 of the Code provide
that, subject to certain exceptions (including the full margin
exception), a notional principal contract with a nonperiodic
payment must be treated as two separate transactions con-
sisting of one or more loans and an on-market, level payment
swap. The proposed regulations also provide an exception
under section 956 of the Code from the definition of United
States property for certain obligations of United States per-
sons arising from upfront payments made with respect to
notional principal contracts that qualify for the full margin
exception under section 446. These regulations also withdraw
the notice of proposed rulemaking (REG-107548-11; RIN
1545-BK10) published in the Federal Register on May 11,
2012 (77 FR 27669).

### REG-107595-11, page 986.

This document contains proposed regulations that provide
guidance regarding the application of the modified carryover
basis rules of section 1022 of the Internal Revenue Code.
Specifically, the proposed regulations will modify provisions
of the Treasury Regulations involving basis rules by including
a reference to section 1022 where appropriate. The regu-
lations will affect property transferred from certain dece-
dents who died in 2010. The regulations reflect changes to
the law made by the Economic Growth and Tax Relief
Reconciliation Act of 2001 and the Tax Relief, Unemploy-
ment Insurance Reauthorization, and Job Creation Act of
2010.

### REG-132634-14, page 997.

This document contains proposed regulations under section
7704(d)(1)(E) of the Internal Revenue Code relating to qualify-
ing income from exploration, development, mining or produc-
tion, processing, refining, transportation, and marketing of

minerals or natural resources. The proposed regulations affect
publicly traded partnerships and their partners.

### Rev. Rul. 2015-9, page 972.

This ruling holds that the transaction described is properly
treated for federal income tax purposes as a transfer of stock
in an exchange governed by § 351 of the Internal Revenue
Code (Code) followed by reorganizations under § 368(a)(1)(D)
of the Code. Rev. Rul. 78-130, 1978-1 C.B. 114 is revoked.

### Rev. Rul. 2015-10, page 973.

This ruling holds that the transaction described is properly
treated for federal income tax purposes as two transfers of
stock in exchanges governed by § 351 of the Internal Revenue
Code (Code) followed by a reorganization under § 368(a)(1)(D)
of the Code.

### Rev. Rul. 2015-11, page 975.

The revenue ruling holds that the cost of unrecoverable pre-
cious metals used in various manufacturing processes are
depreciable under §§ 167 and 168 of the Internal Revenue
Code. The costs of any recoverable precious metals are not
depreciable.

### T.D. 9719, page 977.

Final, temporary and proposed regulations under section 446
of the Code provide that, subject to certain exceptions (includ-
ing the full margin exception), a notional principal contract with
a nonperiodic payment must be treated as two separate trans-
actions consisting of one or more loans and an on-market, level
payment swap. These regulations also provide an exception
under section 956 of the Code from the definition of United
States property for certain obligations of United States per-
sons arising from upfront payments made with respect to
notional principal contracts that qualify for the full margin
exception under section 446.

(Continued on the next page)

Finding Lists begin on page ii.

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## EMPLOYEE PLANS

REG-107595-11, page 986.

This document contains proposed regulations that provide
guidance regarding the application of the modified carryover
basis rules of section 1022 of the Internal Revenue Code.
Specifically, the proposed regulations will modify provisions of
the Treasury Regulations involving basis rules by including a
reference to section 1022 where appropriate. The regulations
will affect property transferred from certain decedents who
died in 2010. The regulations reflect changes to the law made
by the Economic Growth and Tax Relief Reconciliation Act of
2001 and the Tax Relief, Unemployment Insurance Reauthori-
zation, and Job Creation Act of 2010.

## ESTATE TAX

REG-107595-11, page 986.

This document contains proposed regulations that provide
guidance regarding the application of the modified carryover
basis rules of section 1022 of the Internal Revenue Code.
Specifically, the proposed regulations will modify provisions of
the Treasury Regulations involving basis rules by including a
reference to section 1022 where appropriate. The regulations
will affect property transferred from certain decedents who
died in 2010. The regulations reflect changes to the law made
by the Economic Growth and Tax Relief Reconciliation Act of
2001 and the Tax Relief, Unemployment Insurance Reauthori-
zation, and Job Creation Act of 2010.

## GIFT TAX

REG-107595-11, page 986.

This document contains proposed regulations that provide
guidance regarding the application of the modified carryover
basis rules of section 1022 of the Internal Revenue Code.
Specifically, the proposed regulations will modify provisions of
the Treasury Regulations involving basis rules by including a
reference to section 1022 where appropriate. The regulations
will affect property transferred from certain decedents who
died in 2010. The regulations reflect changes to the law made
by the Economic Growth and Tax Relief Reconciliation Act of
2001 and the Tax Relief, Unemployment Insurance Reauthori-
zation, and Job Creation Act of 2010.

## ADMINISTRATIVE

Notice 2015-38, page 984.

This Notice updates the list of designated private delivery
service ("designated PDSs") set forth in Notice 2004-83,
2004-2 C.B. 1030, for purposes of the timely mailing treated
as timely filing/paying rule of section 7502 of the Internal
Revenue Code, providing rules for determining the postmark
date for these services, and provides a new address for sub-
mitting documents to the Internal Revenue Service ("IRS") with
respect to an application for designation as a designated PDS.

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## The IRS Mission

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

## Introduction

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

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

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

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

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

The Bulletin is divided into four parts as follows:

### Part I .- 1986 Code.

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

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

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

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

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

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

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

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

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

### Section 368 .- Definitions Relating to Corporate Reorganizations

26 CFR 1.368-2: Definition of terms.
(Also §§ 351, 7805; 1.351-1, 301.7805-1.)

### Rev. Rul. 2015-9 ISSUE

Is a transaction in which (1) a domestic
corporation transfers all of the stock of its
foreign operating subsidiary to its foreign
holding company subsidiary in exchange
for additional stock, (2) the foreign oper-
ating subsidiary and three foreign subsid-
iaries of the foreign holding company
transfer substantially all of their assets to a
newly-formed foreign subsidiary of the
foreign holding company in exchange for
stock of the new subsidiary, and (3) the
subsidiaries that transfer their assets are
liquidated, properly treated for federal in-
come tax purposes as a transfer of the
foreign operating subsidiary's stock in an
exchange governed by § 351 of the Inter-
nal Revenue Code (Code) followed by
reorganizations under § 368(a)(1)(D) of
the Code?

### FACTS

P, a domestic corporation, owns all of
the stock of S-1 and S-2, both of which
are incorporated in foreign country R. S-1
is an operating company. S-2 is a holding
company that owns all of the stock of X,
Y, and Z, which are operating companies
incorporated in foreign country R.

All of the operating companies in
country R are to be combined into a new
subsidiary of S-2 to be formed in coun-
try R in accordance with the following
plan:

(a) S-2 will organize N corporation, in
foreign country R, solely for the pur-
pose of participating in the proposed
transaction.

(b) P will then transfer all of the stock
of S-1 to S-2 in exchange for ad-
ditional shares of voting common
stock of S-2 (P's transfer).

(c) Immediately after P's transfer, X,
Y, and Z, as well as S-1, will trans-
fer substantially all of their assets
(subject to liabilities) to N, in ex-
change for additional shares of
common stock of N (X, Y, and Z's
transfers and S-1's transfer).

(d) X, Y, Z, and S-1 will liquidate and
distribute all of their N stock to
S-2 (X, Y, and Z's liquidations
and S-1's liquidation).

Following the transaction, N will continue
to conduct the businesses formerly con-
ducted by S-1, X, Y, and Z.

To avoid recognizing gain under
§ 367(a)(1) and § 1.367(a)-3(a) on the
transfer of the S-1 stock to S-2, P will
properly enter into a gain recognition agree-
ment pursuant to § 1.367(a)-8 with respect
to that transfer and will satisfy the applica-
ble exceptions to triggering events resulting
from the other exchanges that occur in the
transaction. P will also take into account the
application of § 1.367(b)-4, which may re-
quire shareholders that exchange stock of a
foreign corporation in certain nonrecogni-
tion exchanges (including §§ 351 and 354)
to include in income as a deemed dividend
the § 1248 amount attributable to the ex-
changed stock.

### LAW

Section 351(a) provides that no gain or
loss will be recognized if property is
transferred to a corporation by one or
more persons solely in exchange for stock
in such corporation and immediately after
the exchange such person or persons are
in control (as defined in § 368(c)) of the
corporation.

Section 368(c) defines "control" to
mean the ownership of stock possessing at
least 80 percent of the total combined
voting power of all classes of stock enti-
tled to vote and at least 80 percent of the
total number of shares of all other classes
of stock of the corporation.

Section 368(a)(1)(D) provides that the
term "reorganization" includes a transfer
by a corporation of all or a part of its
assets to another corporation if immedi-
ately after the transfer the transferor, or
one or more of its shareholders (including

persons who were shareholders immedi-
ately before the transfer), or any combi-
nation thereof, is in control of the corpo-
ration to which the assets are transferred;
but only if, in pursuance of the plan, stock
or securities of the corporation to which
the assets are transferred are distributed in
a transaction which qualifies under § 354,
355, or 356.

Section 354(a) provides, in general,
that no gain or loss will be recognized if
stock or securities in a corporation a party
to a reorganization are, in pursuance of the
plan of reorganization, exchanged solely
for stock or securities in such corporation
or in another corporation a party to the
reorganization.

Section 368(b)(2) provides that "a
party to a reorganization" includes both
corporations, in the case of a reorganiza-
tion resulting from the acquisition by one
corporation of stock or property of the
other.

Section 354(b)(1) provides, in general,
that § 354(a) will not apply to an ex-
change in pursuance of a plan of reorga-
nization under § 368(a)(1)(D) unless (A)
the corporation to which the assets are
transferred acquires substantially all of the
assets of the transferor of such assets; and
(B) the stock, securities, and other prop-
erties received by such transferor, as well
as the other properties of such transferor,
are distributed in pursuance of the plan of
reorganization.

Section 368(a)(2)(H) provides that
for purposes of determining whether a
nondivisive transaction qualifies under
§ 368(a)(1)(D), the term "control" has the
meaning given such term by § 304(c).

Section 304(c)(1) provides that "con-
trol" means the ownership of stock pos-
sessing at least 50 percent of the total
combined voting power of all classes of
stock entitled to vote, or at least 50 per-
cent of the total value of shares of all
classes of stock. If a person (or persons) is
in control (within the meaning of the pre-
ceding sentence) of a corporation, which
in turn owns at least 50 percent of the total
combined voting power of all stock enti-
tled to vote of another corporation or
owns at least 50 percent of the total value

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of the shares of all classes of stock of
another corporation, then such person (or
persons) will be treated as in control of
such other corporation.

### ANALYSIS

A transfer of property may be re-
spected as a § 351 exchange even if it is
followed by subsequent transfers of the
property as part of a prearranged, inte-
grated plan. See Rev. Rul. 77-449,
1977-2 C.B. 110, amplified by Rev. Rul.
83-34, 1983-1 C.B. 79, and Rev. Rul.
83-156, 1983-2 C.B. 66; see also Rev.
Rul. 2003-51, 2003-1 C.B. 938. How-
ever, a transfer of property in an exchange
otherwise described in § 351 will not
qualify as a § 351 exchange if, for exam-
ple, a different treatment is warranted to
reflect the substance of the transaction as a
whole. See Rev. Rul. 54-96, 1954-1 C.B.
111; Rev. Rul. 70-140, 1970-1 C.B. 73;
see also Rev. Rul. 2015-10, page 973, this
Bulletin (holding that the transfer by a
corporation to its wholly-owned subsid-
iary of all of the interests in an entity
classified as a corporation for federal in-
come tax purposes, followed by the enti-
ty's planned election to be disregarded as
separate from its owner for federal income
tax purposes, is more properly character-
ized as a § 368(a)(1)(D) reorganization
than as a § 351 transfer followed by a
§ 332 liquidation).

Under the facts of this revenue ruling,
P's transfer satisfies the formal require-
ments of § 351, including the requirement
that P control S-2 within the meaning of
§ 368(c) immediately after the exchange.
Moreover, even though P's transfer and
S-1's transfer and liquidation are steps in
a prearranged, integrated plan that has as
its objective the consolidation of S-1 and
the other operating companies in N, an
analysis of the transaction as a whole does
not dictate that P's transfer be treated
other than in accordance with its form in
order to reflect the substance of the trans-
action. Accordingly, P's transfer is re-
spected as a § 351 exchange, and no gain
or loss is recognized by P on the transfer
of all of the stock of S-1 to S-2.

S-1's transfer followed by S-1's liq-
uidation is a reorganization under
§ 368(a)(1)(D). X, Y, and Z's transfers
followed by X, Y, and Z's liquidations are
also reorganizations under § 368(a)(1)(D).

### HOLDING

A transaction in which (1) a domestic
corporation transfers all of the stock of its
foreign operating subsidiary to its foreign
holding company subsidiary in exchange
for additional stock, (2) the foreign oper-
ating subsidiary and three foreign subsid-
iaries of the foreign holding company
transfer substantially all of their assets to a
newly-formed foreign subsidiary of the
foreign holding company in exchange for
stock of the new subsidiary, and (3) the
subsidiaries that transfer their assets are
liquidated, is properly treated for federal
income tax purposes as a transfer of the
foreign operating subsidiary's stock in an
exchange governed by § 351 followed by
reorganizations under § 368(a)(1)(D).

### EFFECT ON OTHER REVENUE RULING

Rev. Rul. 78-130, 1978-1 C.B. 114
is revoked.

### PROSPECTIVE APPLICATION

Under the authority of § 7805(b)(8),
the Internal Revenue Service will not ap-
ply this revenue ruling to challenge a po-
sition taken by a taxpayer that reasonably
relied on the conclusions in Rev. Rul.
78-130 prior to May 5, 2015 with respect
to a transaction that occurs on or before
such date, or a transaction that is effected
pursuant to a written agreement (subject
to customary conditions) that is binding
on May 5, 2015 and at all times thereafter
until the date the transaction is completed,
provided that none of the purported ac-
quiring corporation, issuing corporation,
and transferor corporation (and each of
their shareholders) treated the transaction
inconsistently for federal income tax pur-
poses. See § 601.601(d)(2)(v)(c) of the
Statement of Procedural Rules.

### DRAFTING INFORMATION

The principal author of this revenue
ruling is Stephanie D. Floyd of the Of-
fice of Associate Chief Counsel (Corpo-
rate). For further information regarding
this revenue ruling, contact Stephanie
D. Floyd at (202) 317-6848 (not a toll-
free number).

## Section 368 .- Definitions Relating to Corporate Reorganizations

26 CFR 1.368-2: Definition of terms.
(Also §§ 351; 1.351-1, 301.7701-3.)

## Rev. Rul. 2015-10

### ISSUE

Is a transaction in which (1) a parent
corporation transfers all of the interests
in its limited liability company that is
taxable as a corporation to its subsidiary
(first subsidiary) in exchange for addi-
tional stock, (2) the first subsidiary
transfers all of the interests in the limited
liability company to its subsidiary (second
subsidiary) in exchange for additional stock,
(3) the second subsidiary transfers all of the
interests in the limited liability company to
its subsidiary (third subsidiary) in exchange
for additional stock, and (4) the limited lia-
bility company elects to be disregarded as
an entity separate from its owner for federal
income tax purposes effective after it is
owned by the third subsidiary, properly
treated for federal income tax purposes as
two transfers of stock in exchanges gov-
erned by § 351 of the Internal Revenue
Code (Code) followed by a reorganization
under § 368(a)(1)(D) of the Code?

## FACTS

P, a domestic corporation, owns all of
the interests in LLC, a domestic limited
liability company that elected pursuant
to § 301.7701-3(c) of the Procedure and
Administration Regulations to be an as-
sociation taxable as a corporation for
federal income tax purposes effective on
its date of formation. P also owns all of
the stock of S1. S1 owns all of the stock
of S2, which owns all of the stock of
S3. S3 owns all of the stock of S4. S1,
S2, and S3 are each holding companies
that are domestic corporations. For valid
business purposes, and as part of a
plan:

(a) P will transfer all of the interests in
LLC to S1 in exchange for addi-
tional shares of voting common
stock of S1 (P's transfer).

(b) S1 will transfer all of the interests
in LLC to S2 in exchange for ad-

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ditional shares of voting common
stock of S2 (Sl's transfer).

(c) S2 will transfer all of the interests
in LLC to S3 in exchange for addi-
tional shares of voting common
stock of S3 (S2's transfer).

(d) LLC will elect pursuant to
§ 301.7701-3(c) to be disregarded
as an entity separate from its
owner for federal income tax pur-
poses, effective no sooner than one
day after S2's transfer (LLC's elec-
tion).

Following the transaction, S3 will, through
LLC, continue to conduct the business con-
ducted by LLC prior to the transaction.

## LAW

Section 351(a) provides that no gain or
loss will be recognized if property is
transferred to a corporation by one or
more persons solely in exchange for stock
in such corporation and immediately after
the exchange such person or persons are
in control (as defined in § 368(c)) of the
corporation.

Section 368(c) defines "control" to
mean the ownership of stock possessing at
least 80 percent of the total combined
voting power of all classes of stock enti-
tled to vote and at least 80 percent of the
total number of shares of all other classes
of stock of the corporation.

Section 301.7701-3(a) provides that a
business entity that is not classified as a
corporation under § 301.7701-2(b)(1),
(3), (4), (5), (6), (7), or (8) (eligible entity)
can elect its classification for federal in-
come tax purposes. An eligible entity with
at least two members can elect pursuant to
§ 301.7701-3(c) to be classified as either
an association (and thus a corporation un-
der § 301.7701-2(b)(2)) or a partnership,
and an eligible entity with a single owner
can elect to be classified as an association
or to be disregarded as an entity separate
from its owner.

Section 301.7701-3(g)(1)(iii) provides
that if an eligible entity classified as an
association elects pursuant to § 301.7701-
3(c) to be disregarded as an entity separate
from its owner, the following is deemed to
occur: the association distributes all of its
assets and liabilities to its single owner in
liquidation of the association.

Section 301.7701-3(g)(2)(i) provides
that the tax treatment of a change in the

classification of an entity for federal in-
come tax purposes by an election pursuant
to § 301.7701-3(c) is determined under all
relevant provisions of the Internal Revenue
Code and general principles of tax law, in-
cluding the step transaction doctrine.

Section 368(a)(1)(D) provides that the
term "reorganization" includes a transfer
by a corporation of all or a part of its
assets to another corporation if immedi-
ately after the transfer the transferor, or
one or more of its shareholders (including
persons who were shareholders immedi-
ately before the transfer), or any combi-
nation thereof, is in control of the corpo-
ration to which the assets are transferred;
but only if, in pursuance of the plan, stock
or securities of the corporation to which
the assets are transferred are distributed in
a transaction which qualifies under § 354,
355, or 356.

Section 354(a) provides, in general,
that no gain or loss will be recognized if
stock or securities in a corporation a party
to a reorganization are, in pursuance of the
plan of reorganization, exchanged solely
for stock or securities in such corporation
or in another corporation a party to the
reorganization.

Section 368(b)(2) provides that "a
party to a reorganization" includes both cor-
porations, in the case of a reorganization
resulting from the acquisition by one corpo-
ration of stock or property of the other.

Section 354(b)(1) provides, in general,
that § 354(a) will not apply to an ex-
change in pursuance of a plan of reorga-
nization under § 368(a)(1)(D) unless (A)
the corporation to which the assets are
transferred acquires substantially all of the
assets of the transferor of such assets; and
(B) the stock, securities, and other prop-
erties received by such transferor, as well
as the other properties of such transferor,
are distributed in pursuance of the plan of
reorganization.

Section 368(a)(2)(H) provides that for
purposes of determining whether a nondi-
visive transaction qualifies under
§ 368(a)(1)(D), the term "control" has the
meaning given such term by § 304(c).

Section 304(c)(1) provides that "con-
trol" means the ownership of stock pos-
sessing at least 50 percent of the total
combined voting power of all classes of
stock entitled to vote, or at least 50 per-
cent of the total value of shares of all

classes of stock. If a person (or persons) is
in control (within the meaning of the pre-
ceding sentence) of a corporation, which
in turn owns at least 50 percent of the total
combined voting power of all stock enti-
tled to vote of another corporation or
owns at least 50 percent of the total value
of the shares of all classes of stock of
another corporation, then such person (or
persons) will be treated as in control of
such other corporation.

Section 304(c)(3) provides, in part, that
§ 318(a) relating to constructive owner-
ship of stock will apply for purposes of
determining control under § 304 and that
paragraph (2)(C) of § 318(a) will be ap-
plied by substituting "5 percent" for "50
percent."

As modified by § 304(c)(3),
§ 318(a)(2)(C) provides that if 5 percent
or more in value of the stock in a corpo-
ration is owned, directly or indirectly, by
or for any person, such person will be
considered as owning the stock owned,
directly or indirectly, by or for such cor-
poration, in that proportion which the
value of the stock such person so owns
bears to the value of all the stock in such
corporation.

In Rev. Rul. 67-274, 1967-2 C.B. 141,
pursuant to a plan of reorganization, cor-
poration Y acquired all of the stock of
corporation X in exchange for voting
stock of Y. Thereafter, X completely liq-
uidated into Y. The ruling concludes that
the two steps will not constitute a reorga-
nization under § 368(a)(1)(B) followed by
a liquidation under § 332, but instead will
be considered a single acquisition of X's
assets in a reorganization under
§ 368(a)(1)(C).

## ANALYSIS

A transfer of property may be re-
spected as a § 351 exchange even if it is
followed by subsequent transfers of the
property as part of a prearranged, inte-
grated plan. See Rev. Rul. 77-449,
1977-2 C.B. 110, amplified by Rev. Rul.
83-34, 1983-1 C.B. 79, and Rev. Rul.
83-156, 1983-2 C.B. 66; see also Rev.
Rul. 2003-51, 2003-1 C.B. 938. How-
ever, a transfer of property in an exchange
otherwise described in § 351 will not
qualify as a § 351 exchange if, for exam-
ple, a different treatment is warranted to
reflect the substance of the transaction as a

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whole. See Rev. Rul. 54-96, 1954-1 C.B.
111; Rev. Rul. 70-140, 1970-1 C.B. 73.

Under the facts of this revenue ruling,
even though P's transfer is part of a series
of transactions undertaken as part of a
prearranged, integrated plan involving
successive transfers of the LLC interests,
P's transfer satisfies the formal require-
ments of § 351, including the requirement
that P control S1 within the meaning of
§ 368(c) immediately after the exchange,
and an analysis of the transaction as a
whole does not dictate that P's transfer be
treated other than in accordance with its
form in order to reflect the substance of
the transaction. Accordingly, P's transfer
is respected as a § 351 exchange, and no
gain or loss is recognized by P. Similarly,
§ 351 applies to SI's transfer, and no gain
or loss is recognized by S1.

With regard to S2's transfer and LLC's
election, if an acquiring corporation ac-
quires all of the stock of a target corporation
in an exchange otherwise qualifying as a
§ 351 exchange, and as part of a prear-
ranged, integrated plan, the target corpora-
tion thereafter transfers its assets to the ac-
quiring corporation in liquidation, the
transaction is more properly characterized
as a reorganization under § 368(a)(1)(D), to
the extent it so qualifies. See Rev. Rul. 67-
274; see also Rev. Rul. 2004-83,
2004-2 C.B. 157. Accordingly, under
the circumstances described above, S2's
transfer and LLC's election are more
properly characterized as a reorganiza-
tion under § 368(a)(1)(D) than as a
§ 351 exchange followed by a § 332
liquidation.

### HOLDING

A transaction in which (1) a parent cor-
poration transfers all of the interests in its
limited liability company that is taxable as a
corporation to the first subsidiary in ex-
change for additional stock, (2) the first sub-
sidiary transfers all of the interests in the
limited liability company to the second sub-
sidiary in exchange for additional stock, (3)
the second subsidiary transfers all of the
interests in the limited liability company to
the third subsidiary in exchange for addi-
tional stock, and (4) the limited liability
company elects to be disregarded as an en-
tity separate from its owner for federal in-
come tax purposes effective after it is owned
by the third subsidiary, is properly treated

for federal income tax purposes as two
transfers of stock in exchanges governed by
§ 351 followed by a reorganization under
§ 368(a)(1)(D).

## DRAFTING INFORMATION

The principal author of this revenue
ruling is Stephanie D. Floyd of the Office
of Associate Chief Counsel (Corporate).
For further information regarding this rev-
enue ruling, contact Stephanie D. Floyd at
(202) 317-6848 (not a toll-free number).

## Section 167 .- Depreciation

26 CFR 1.167(a)-2: Tangible property.
(Also § 168; 1.168(a)-1)

## Rev. Rul. 2015-11

### ISSUE

Is the capitalized cost of unrecoverable
precious metal that is used in various
manufacturing processes depreciable un-
der §§ 167 and 168 of the Internal Reve-
nue Code?

## FACTS

Situation 1. A is a contract jeweler who
fabricates jewelry to customers' specifica-
tions using gold supplied by the customers.
A does not maintain an inventory of gold or
completed jewelry, but to assist customers A
fabricates and maintains gold sample jew-
elry showing currently available styles. A's
samples are not held for sale. Every 3 years
A melts down the sample jewelry, recover-
ing 100 percent of the gold content of the
jewelry. For A's purposes, the recovered
gold is indistinguishable from gold that has
not previously been used in sample jewelry
and A reuses it in fabricating new sample
jewelry. A capitalizes the cost of the gold
into the basis of its sample jewelry.

Situation 2. B is a petroleum refiner. As
part of its refining process, B uses a catalyst
called prills, fabricated from platinum and
other chemicals. Based upon engineering
studies performed by B, B determines that
approximately 10 percent of the platinum
initially utilized to fabricate prills is lost
over the course of the platinum's reasonably
expected useful life in the refining process.
The remaining 90 percent of the platinum is
recoverable and becomes available to B for

other uses. B capitalizes the cost of the plat-
inum.

Situation 3. C manufactures flat glass
using the float manufacturing process.
This process involves the use of molten
tin, which provides the ideal surface to
manufacture high-quality, flat glass.
During the manufacturing process, the
tin declines in purity and volume due to
chemical reactions and vaporization.
Additional tin is added as needed to
maintain the level required for the pro-
duction of the glass. After approxi-
mately 7 years, all of the original tin is
lost due to chemical reactions and va-
porization. C capitalizes the cost of the
initial tin installed in the tin bath.

## LAW

Section 167(a) provides as a deprecia-
tion deduction a reasonable allowance for
the exhaustion and wear and tear (includ-
ing a reasonable allowance for obsoles-
cence) of property used in a taxpayer's
trade or business.

Section 1.167(a)-1(a) of the Income
Tax Regulations provides that the depre-
ciation allowance is that amount that
should be set aside for the taxable year in
accordance with a reasonably consistent
plan (not necessarily at a uniform rate), so
that the aggregate of the amounts set
aside, plus the salvage value, will, at the
end of the estimated useful life of the
depreciable property, equal the cost or
other basis of the property.

Section 1.167(a)-1(b) provides that for
the purpose of § 167, the estimated useful
life of an asset is not necessarily the useful
life inherent in the asset but is the period
over which the asset may reasonably be
expected to be useful to the taxpayer in its
trade or business or in the production of
his income. This period is determined by
reference to the taxpayer's experience
with similar property taking into account
present conditions and probable future de-
velopments.

Section 1.167(a)-2 provides that the
depreciation allowance in the case of tan-
gible property applies only to that part of
the property which is subject to wear and
tear, to decay or decline from natural
causes, to exhaustion, and to obsoles-
cence.

Section 1.168(a)-1(a) provides that
§ 168 determines the depreciation allow-

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ance for tangible property that is of a
character subject to the allowance for
depreciation provided in § 167(a) and
that is placed in service generally after
December 31, 1986. See § 1.168(a)-
1(b). Accordingly, tangible property to
which § 1.168(a)-1(a) applies is prop-
erty that is of a character subject to the
allowance for depreciation provided in
§ 167(a) if the taxpayer shows that the
property is subject to exhaustion, wear
and tear, or obsolescence, and that the
property has a determinable estimated
useful life.

## ANALYSIS

An asset is depreciable for federal in-
come tax purposes to the extent that the
taxpayer can show that the asset is sub-
ject to exhaustion, wear and tear, or
obsolescence, and that the asset has a
determinable estimated useful life. See
O'Shaughnessy v. Commissioner, 332
F.3d 1125 (8th Cir. 2003), aff'g in part,
rev'g in part, 2002-1 U.S.T.C. ][ 50,235,
89 A.F.T.R. 2d 658 (D. Minn. 2001) (al-
lowing depreciation for tin that declined
in volume and purity as a result of glass
manufacturing process); Arkla, Inc. v.
United States, 765 F.2d 487 (5th Cir.
1985), cert. denied, 475 U.S. 1064
(1986) (allowing investment credit and
depreciation for unrecoverable cushion
gas but not for recoverable cushion gas);
Rev. Rul. 97-54, 1997-2 C.B. 23
(adopting the reasoning of Arkla, su-
pra). In O'Shaughnessy, the Eighth Cir-
cuit allowed the taxpayer to depreciate
the initial installation of molten tin used in
the float manufacturing process of flat
glass. The Eighth Circuit concluded that
whether an asset is depreciable for federal
income tax purposes depends on the tax-
payer's showing that the asset is subject to
exhaustion and wear and tear. The Eighth
Circuit reasoned that the tin's decline in
volume and purity as a result of its use in
the glass manufacturing process consti-
tuted "exhaustion, wear and tear" within
the meaning of § 167, and therefore, the
taxpayer appropriately depreciated the tin
under § 168. In reaching its decision, the
court concluded that Rev. Rul. 75-491,
1975-2 C.B. 19 (holding that the initial
installation of molten tin used in the float
manufacturing process of flat glass is not
depreciable), was no longer persuasive in-

sofar as the ruling predated a substantial
restructuring of the depreciation rules
upon which its holding was based.

O'Shaughnessy, Arkla, Inc., and Rev.
Rul. 97-54 require a fact-specific analysis
of the extent to which precious metals
used in various manufacturing processes
are subject to exhaustion, wear and tear,
or obsolescence (in other words, the ex-
tent to which precious metals are recover-
able or unrecoverable) for determining
whether such precious metals are depre-
ciable under §§ 167 and 168. Accord-
ingly, determining whether and the extent
to which an asset is depreciable is based
on an examination of the specific facts
relating to the asset's use in a taxpayer's
trade or business and whether the asset
has a determinable estimated useful life.
This analysis departs from the analysis
previously used in Rev. Rul. 90-65,
1990-2 C.B. 41, as corrected by An-
nouncement 91-15, 1991-5 I.R.B. 49, and
Rev. Rul. 75-491.

Rev. Rul. 90-65 and Rev. Rul. 75-491
distinguished the treatment of a precious
metal that remains available to the
owner but is consumed in production
from a material such as "line pack gas"
or "cushion gas," which is lost for any
other potential use upon its initial instal-
lation into a facility (with the facility
itself being a depreciable asset). Rev.
Rul. 75-491 held that the initial instal-
lation of molten tin used in the float
manufacturing process of flat glass is
not depreciable property. The ruling rec-
ognized that, although a portion of the
initial tin is consumed in the manufac-
turing operation, the remaining portion
is undiminished in value and once re-
stored to its original level (by adding
additional quantities during the year) is
property that is "essentially the same
that existed at the beginning of the
year." Accordingly, the ruling con-
cluded that the initial installation of
molten tin was not depreciable and that
the cost of tin consumed during the year
in the production of the glass was de-
ductible under section 162, subject to
being included in inventory as a produc-
tion cost.

Rev. Rul. 90-65 amplified the holding
of Rev. Ruling 75-491 by clarifying that
the principles of Rev. Rul. 75-491 apply
not only when a recoverable element is

used in its natural state, but also when an
economically recoverable precious metal
is fabricated into items of property used in
the taxpayer's trade or business. Specifi-
cally, Rev. Rul. 90-65 held that if an
economically recoverable precious metal
is fabricated into items of property used in
the taxpayer's trade or business and the
cost of that metal is more than half the
cost of the property, the cost of the metal
is nondepreciable and is accounted for
separately from the item into which it is
fabricated.

The analyses in Rev. Rul. 75-491 and
Rev. Rul. 90-65 are inconsistent with
Arkla, Inc. and Rev. Rul. 97-54, which
require an analysis of the specific facts
surrounding an asset's use in a taxpayer's
trade or business when determining
whether and the extent to which an asset is
depreciable. In addition, Rev. Rul. 75-
491 and Rev. Rul. 90-65 have been sup-
planted by more recent authorities such as
O'Shaughnessy. Accordingly, this reve-
nue ruling adopts the factual analysis
approach as applied by those later au-
thorities. Further, because the factual
analysis approach permits depreciation
of initial installations of certain precious
metals, it is no longer relevant whether
the cost of those initial installations is
more than half the cost of the overall
fabricated property.

In Situation 1, the gold used to manu-
facture sample jewelry can be recovered
and reused by A in A's trade or business in
a manner that is indistinguishable from
other gold that has never been fabricated,
used, and recovered. The utility of the
gold does not diminish as a result of its
having previously been fabricated into
sample jewelry. Accordingly, the gold is
not subject to exhaustion, wear and tear,
or obsolescence and as a result, is not
depreciable.

In Situation 2, approximately 10 per-
cent of the platinum is lost over the course
of its expected useful life and is not re-
coverable for reuse. Accordingly, approx-
imately 10 percent of the platinum will
undergo exhaustion, wear and tear, or ob-
solescence over a determinable useful life.
To the extent that the platinum will be lost
and is not recoverable for reuse (i.e., ap-
proximately 10 percent of the total amount),
B may depreciate the capitalized cost of
such platinum under §§ 167 and 168. To the

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extent that any of the platinum is recover-
able for reuse (i.e., approximately 90 per-
cent of the total amount), B may not depre-
ciate the capitalized cost of such platinum.

In Situation 3, all of the original tin
used in the glass manufacturing process is
lost due to chemical reactions and evapo-
ration after about 7 years. Thus, all of the
original tin will undergo exhaustion, wear
and tear, or obsolescence over a determin-
able useful life. Therefore, C may depre-
ciate the capitalized cost of all the entire
original tin under §§ 167 and 168.

## HOLDING

The capitalized cost of unrecoverable
precious metals that are used in various
manufacturing processes is depreciable
under §§ 167 and 168 of the Code. The
capitalized cost of any recoverable pre-
cious metal is not depreciable under
§§ 167 and 168.

## APPLICATION

Any change in a taxpayer's treatment
of the cost of precious metals to conform
with this revenue ruling is a change in
method of accounting that must be made
in accordance with §§ 446 and 481, the
regulations thereunder, and the applicable
administrative procedures. See section
6.01 of Rev. Proc. 2015-14, 2015-5
I.R.B. 450 (or successor guidance). The
amount of the § 481(a) adjustment must
account for the proper amount of the de-
preciation allowable that is required to be
capitalized under any provision of the
Code (for example, § 263A) as of the
beginning of the year of change.

### EFFECT ON OTHER DOCUMENTS

Rev. Rul. 75-491 is revoked.
Rev. Rul. 90-65 is revoked.

## DRAFTING INFORMATION

The principal author of this revenue
ruling is Douglas H. Kim of the Office of
Associate Chief Counsel (Income Tax and
Accounting). For further information re-
garding this revenue ruling, contact Mr.
Kim at (202) 317-7005 (not a toll-free
number).

26 CFR 1.446-3T: Notional Principal Contracts;
Swaps with Nonperiodic Payments.

26 CFR 1.956-2T: Definition of United States prop-
erty (temporary).

TD 9719
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1

### Notional Principal Contracts; Swaps with Nonperiodic Payments

AGENCY: Internal Revenue Service (IRS),
Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains fi-
nal and temporary regulations amending
the treatment of nonperiodic payments
made or received pursuant to certain no-
tional principal contracts. These regula-
tions provide that, subject to certain ex-
ceptions, a notional principal contract
with a nonperiodic payment, regardless of
whether it is significant, must be treated as
two separate transactions consisting of
one or more loans and an on-market, level
payment swap. This document also con-
tains temporary regulations regarding an
exception from the definition of United
States property. These regulations affect
parties making and receiving payments
under notional principal contracts, includ-
ing United States shareholders of con-
trolled foreign corporations and tax-
exempt organizations. The text of the
temporary regulations also serves as the
text of the proposed regulations set forth
in the notice of proposed rulemaking
(REG-102656-15) on this subject in the
Proposed Rules section in this issue of the
Federal Register.

DATES: Effective Date. These regula-
tions are effective on May 8, 2015.

Applicability Date. For the dates of
applicability, see §§ 1.446-3T(j)(2) and
1.956-2T(f).

FOR FURTHER INFORMATION
CONTACT: Regarding the regulations
under section 446, Alexa T. Dubert or
Anna H. Kim at (202) 317-6895; regard-
ing the regulations under section 956,
Kristine A. Crabtree at (202) 317-6934
(not toll-free numbers).

<!-- PageHeader="SUPPLEMENTARY INFORMATION:" -->

#### Background

##### I. Embedded Loan Rule

On October 14, 1993, the Treasury De-
partment and the IRS published final reg-
ulations (TD 8491) under section 446(b)
of the Internal Revenue Code (Code) in
the Federal Register (58 FR 53125) re-
lating to the timing of income, deduction,
gain, or loss with respect to payments,
including nonperiodic payments, made or
received pursuant to a notional principal
contract (NPC) (the 1993 Regulations).
See § 1.446-3. Under the 1993 Regula-
tions, when an NPC includes a "signif-
icant" nonperiodic payment, the con-
tract is generally treated as two separate
transactions consisting of an on-market,
level payment swap and a loan (the em-
bedded loan rule). The loan must be
accounted for by the parties to the con-
tract separately from the swap. The
time-value component associated with
the loan is recognized as interest for all
purposes of the Code.

A nonperiodic payment commonly
arises when a party to an NPC makes
below-market periodic payments or re-
ceives above-market periodic payments
under the terms of the contract. A party
making below-market periodic payments
or receiving above-market periodic pay-
ments would also typically be required to
make an upfront payment to the counter-
party to compensate for the off-market
coupon payments specified in the contract.
For example, if A and B enter into an
off-market interest rate swap the terms of
which require A to make periodic below-
market, fixed rate payments to B in ex-
change for A receiving periodic on-
market, floating-rate payments from B,
then A typically will compensate B for
receiving the below-market fixed rate pay-
ments by making an upfront payment at
the outset of the interest rate swap so that
the present value of the fixed rate leg of
the swap will equal the present value of
the floating rate leg of the swap.

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##### II. Nonperiodic (Upfront) Payments Arising from the Standardization of Contract Terms

The Dodd-Frank Wall Street Reform
and Consumer Protection Act of 2010,
Public Law No. 111-203, 124 Stat. 1376,
Title VII (the Dodd-Frank Act), among
other things: (1) provides for the registra-
tion and comprehensive regulation of
swap dealers and major swap participants;
(2) imposes clearing and trade execution
requirements on many standardized swap
contracts; (3) creates rigorous recordkeep-
ing and real-time reporting regimes; and
(4) enhances rulemaking and enforcement
authority of various federal regulators
with respect to entities and intermediaries
within their jurisdiction. As part of imple-
menting the Dodd-Frank Act, the Com-
modity Futures Trading Commission
(CFTC) has mandated that certain swap
contracts (cleared contracts), including
swaps that are NPCs under § 1.446-3, be
cleared through U.S .- registered deriva-
tives clearing organizations. The Securi-
ties and Exchange Commission (SEC) has
not yet mandated clearing of any security-
based swaps through clearing agencies
(which, together with derivatives clearing
organizations, are referred to herein as
U.S .- registered clearinghouses).

To facilitate clearing and exchange
trading, cleared contracts generally have
standardized terms, which often give rise
to upfront payments. For example, a Mar-
ket Agreed Coupon interest rate swap
(MAC) has standardized terms, including
a standardized coupon rate (or fixed rate).
Because the fixed rate is set in advance, it
is unlikely that the fixed rate will equal the
market rate on the start date of the MAC.
Consequently, except for the rare instance
when the market rate for a particular
MAC equals the fixed rate, a MAC with a
standardized coupon rate will be off-
market and will require an upfront pay-
ment to equalize the present value of the
payment obligations under the contract.

Certain over-the-counter markets in
swap contracts not subject to clearing with

U.S .- registered clearinghouses (uncleared
contracts) also have voluntarily begun to
adopt terms similar to the MAC, including
pre-defined, market-agreed start and end
dates, payment dates, and fixed coupons
to achieve greater standardization of con-
tract terms. Similar to cleared contracts,
these uncleared contracts are resulting in
an increasing number of upfront pay-
ments.

##### III. Margin Requirements

As part of establishing a risk-
management framework, the SEC, CFTC,
and certain other federal regulators (col-
lectively, the Regulators) are required by
the Dodd-Frank Act to propose and adopt
collateral requirements for cleared con-
tracts and certain uncleared contracts.
These requirements are typically referred
to as "margin" requirements in the context
of contracts between entities that are reg-
ulated by the Regulators (regulated enti-
ties) and, in these temporary regulations,
the term "margin" is used in the context of
cleared and uncleared contracts between
regulated entities and the term "collateral"
is used in the context of uncleared con-
tracts between unregulated entities.

##### A. Margin requirements on cleared contracts

U.S .- registered clearinghouses manage
credit risk (the risk of counterparty de-
fault) in part by requiring that each party
to a cleared contract provide various types
of margin in an amount that fully collat-
eralizes the credit risk on the contract.
Because credit risk starts at the inception
of the contract and continues throughout
the term of the contract, the requirement
to exchange margin sufficient to fully col-
lateralize credit risk begins when the par-
ties enter into the contract. To ensure that
credit risk on the contract is fully collat-
eralized, the contract is marked to market
on a daily basis (beginning on the day the
contract is entered into) and margin is

exchanged by the parties based on the
mark-to-market value.

For example, if A and B enter into a
cleared off-market interest rate swap con-
tract the terms of which require A to make
periodic below-market, fixed rate pay-
ments to B in exchange for A receiving
periodic on-market, floating-rate pay-
ments from B, then A will make an up-
front payment to the clearinghouse (to be
passed on to B) so that the present value
of the fixed rate leg of the swap will equal
the present value of the floating rate leg of
the swap. A has credit risk with respect to
that payment because, if the clearinghouse
(or A's clearing member) were to default,
A may not receive the full benefit of re-
ceiving on-market, floating rate payments
in exchange for making below-market
fixed rate payments for the term of the
contract. When the U.S .- registered clear-
inghouse makes the upfront payment to B,
the U.S .- registered clearinghouse simi-
larly has credit risk with respect to B (or
B's clearing member). To eliminate the
credit risk to A and B, the parties are
required to post margin. More specifi-
cally, B (the ultimate recipient of the up-
front payment) is required to make a pay-
ment of initial variation margin to the
U.S .- registered clearinghouse, generally
no later than the end of the business day
on which the upfront payment is made, in
an amount that is equal (or substantially
equal) to the amount of the upfront pay-
ment.1 After receiving B's initial variation
margin payment, the U.S .- registered
clearinghouse will pay the same amount
to A.2 Consequently, A is fully collateral-
ized on the exposure on the swap contract
at the end of the day the upfront payment
is made.

In addition to initial variation margin,
U.S .- registered clearinghouses manage
credit risk by requiring that each party to
a cleared contract provide daily variation
margin. Daily variation margin is a cash
payment made on a daily or intra-day ba-
sis between the counterparties to a con-
tract to protect against the risk of counter-

"The total amount of initial variation margin posted by B may not equal the amount of A's upfront payment due to either: (1) the netting of B's notional exposure to A, or to the U.S .- registered
clearinghouse, as a result of other transactions; or (2) changes in the value of the contract between the time the contract is entered into and the time when the required margin is paid, requiring
daily variation margin to be added to or subtracted from B's initial variation margin payment, as the case may be. However, on a transaction-by-transaction basis, the payment of initial
variation margin by B should equal (or closely approximate) A's upfront payment when any daily variation margin is treated as separate from the initial variation margin posted on that
day.

2In each case, unless A and B are clearing members of the U.S .- registered clearinghouse, the payment is made to or through each party's clearing member (that is, a futures commission
merchant, broker, or dealer who is a member of the clearinghouse), which may be an affiliate of that party.

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party default. The rules of U.S .- registered
clearinghouses generally require that daily
variation margin be paid in an amount
equal to the change in the fair market
value of the contract (the mark-to-market
value). Thus, A and B will continue to
mark to market the cleared contract and
exchange daily variation margin based on
those values on a daily basis for the entire
term of the contract.

##### B. Margin requirements on uncleared contracts between regulated entities and the exchange of collateral on uncleared contracts between unregulated entities

The margin requirements proposed by
the Regulators for uncleared contracts are
expected to appropriately address the
credit risk posed by a counterparty that is
a regulated entity and the risks associated
with an uncleared contract and are ex-
pected to be as stringent as those required
for cleared contracts.3 In addition, unreg-
ulated entities that enter into uncleared
contracts may exchange collateral suffi-
cient to fully collateralize the mark-to-
market exposure on the contract on a daily
basis for the entire term of the contract
(beginning on the day the contract is en-
tered into).

##### IV. Other Recent Guidance and Comments Regarding the Embedded Loan Rule as Applied to Upfront Payments on Cleared and Uncleared Contracts

The Dodd-Frank Act has led to signif-
icant changes in market practices for
cleared and uncleared contracts, including
the increased volume of cleared and un-
cleared contracts with upfront payments.
Under the 1993 Regulations, the parties to
an NPC with an upfront payment are re-
quired to determine whether the upfront
payment is a significant nonperiodic pay-
ment. If the payment is significant, the
embedded loan rule will apply. In addi-
tion, under the 1993 Regulations, for pur-
poses of section 956 (regarding United
States property), the Commissioner may
treat any nonperiodic payment, whether or
not significant, as one or more loans.

On May 11, 2012, the Treasury De-
partment and the IRS published temporary
regulations under section 956 (TD 9589)
in the Federal Register (77 FR 27612).
On the same date, a notice of proposed
rulemaking (REG-107548-11) by cross-
reference to the temporary regulations
was published in the Federal Register
(77 FR 27669). These regulations ex-
cepted from the definition of United States
property under section 956 certain obliga-
tions arising from upfront payments on
cleared contracts with respect to which
full initial variation margin is posted (the
Section 956 Regulations). In response to
the request for comments and, more gen-
erally, because of the growing number of
upfront payments on cleared and un-
cleared contracts, the Treasury Depart-
ment and the IRS have received several
comment letters noting the potentially
burdensome tax consequences associated
with treating an upfront payment as one or
more loans. For example, the 1993 Regu-
lations do not define what constitutes a
"significant" nonperiodic payment. In-
stead, examples in the 1993 Regulations
illustrate contracts with and without sig-
nificant nonperiodic payments and explain
how to determine significance by compar-
ing the nonperiodic payment to the pres-
ent value of the total amount of payments
due under the contract. Commenters have
noted that the lack of a definition in the
embedded loan rule for when such a pay-
ment is significant creates uncertainty and
that taxpayers have developed different
ways to determine "significance" for this
purpose.

In addition, commenters have argued
that receiving an upfront payment and
posting cash margin back to the payor of
the upfront payment lacks the most impor-
tant attribute of indebtedness because the
recipient lacks discretion as to the pay-
ment's use. Commenters also have raised
concerns of increased compliance burdens
arising from withholding and information
reporting resulting from the increasing
number of upfront payments treated as
loans. Commenters specifically cite the
difficulty of satisfying information report-
ing on upfront payments arising from
cleared contracts because a U.S-regis-

tered clearinghouse is interposed between
the first party and second party once a
contract is submitted and accepted for
clearing.

Commenters also have raised concerns
that receipt by a tax-exempt organization
of an upfront payment arising from enter-
ing into a standardized cleared or un-
cleared contract (the loan separated from
the on-market swap under the embedded
loan rule) may cause income earned on
the tax-exempt organization's deployment
of the upfront payment to constitute unre-
lated business taxable income under the
debt-financed property rules of section
514. Finally, commenters have requested
that the exception in the Section 956 Reg-
ulations be extended to uncleared con-
tracts with upfront payments with respect
to which full initial variation margin is
posted.

#### Explanation of Provisions

The text of these temporary regulations
also serves as the text of the proposed
regulations set forth in the notice of pro-
posed rulemaking on this subject in the
Proposed Rules section of this issue of the
Federal Register. The temporary regula-
tions under section 446 simplify the em-
bedded loan rule and provide two excep-
tions to that rule. The temporary
regulations under section 956 provide an
exception to the definition of United
States property with respect to certain no-
tional principal contracts subject to mar-
gin or collateral requirements as de-
scribed in the temporary regulations
under section 446.

##### I. Simplification of the Embedded Loan Rule

Because excepting non-significant
nonperiodic payments from the embedded
loan rule is not functioning as a rule of
administrative convenience as intended,
these temporary regulations eliminate that
exception. Instead, other than contracts
for which there is an explicit exception,
the temporary regulations treat all no-
tional principal contracts that have nonpe-
riodic payments as including one or more
loans. The Treasury Department and the

3See Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 79 FR 59898 (October 3, 2014); Basel Committee on Banking Supervision (BCBS) and
the Board of the International Organization of Securities Commissions (IOSCO), Margin Requirements for Non-centrally Cleared Derivatives (September 2013).

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IRS have determined that, unless an ex-
ception applies, the economic loan that is
inherent in a nonperiodic payment should
be taxed as one or more loans, and that it
is reasonable to require taxpayers to sep-
arate the loan or loans from an NPC in the
case of any nonperiodic payment, regard-
less of the relative size of such payment.
Taxpayers may implement this change
upon publication in the Federal Register,
but for those taxpayers that need addi-
tional time, the temporary regulations de-
lay the applicability date of this rule until
November 4, 2015.

##### II. Exceptions to the Embedded Loan Rule

The temporary regulations provide two
independent exceptions from the embed-
ded loan rule. First, except for purposes of
sections 514 and 956, the temporary reg-
ulations provide an exception for a non-
periodic payment made under an NPC
with a term of one year or less (short-term
exception).

Second, the temporary regulations pro-
vide an exception for certain NPCs with
nonperiodic payments that are subject to
prescribed margin or collateral require-
ments. The embedded loan rule is in-
tended to address situations when one
party to a contract provides cash to the
counterparty and is compensated for that
cash with a direct or indirect interest pay-
ment. The Treasury Department and the
IRS have concluded, however, that the
same concerns do not exist when a party
pays or receives an upfront payment and
must immediately collect or post an
equivalent amount of cash margin or col-
lateral. Accordingly, in those circum-
stances, the Treasury Department and the
IRS have determined that the embedded
loan rule should not apply to the upfront
payment.

In order to qualify for the exception,
the regulations require both that the mar-
gin or collateral posted and collected be
paid in cash and that the parties to the
contract be required to post and collect
margin or collateral in an amount that
fully collateralizes the mark-to-market ex-
posure on the contract (including the ex-
posure on the nonperiodic payment) on a
daily basis for the entire term of the con-
tract. The mark-to-market exposure on a

cleared contract will be fully collateral-
ized only if the contract is subject to both
initial variation margin in an amount
equal to the nonperiodic payment (except
for variances permitted by intraday price
changes) and daily variation margin in an
amount equal to the daily change in the
fair market value of the contract, and on
an uncleared contract if it is subject to
equivalent margin or collateral require-
ments (full margin exception). A taxpayer
may use the full margin exception without
regard to whether the contract qualifies for
the short-term exception.

The Treasury Department and the IRS
request comments on whether there are
other circumstances in which the embed-
ded loan rule should not apply. For exam-
ple, there may be circumstances in which
time value is appropriately accounted for
under the contract because applying the
embedded loan rule would not alter the
tax consequences of the contract. In par-
ticular, the Treasury Department and the
IRS request comments on whether it is
necessary to require taxpayers to apply the
embedded loan rule to NPCs with nonpe-
riodic payments that are subject to mark-
to-market accounting.

Finally, the Treasury Department and
the IRS request comments on all other
aspects of the temporary and proposed
rules, including but not limited to any
anticipated effects on market participants'
behavior, the applicability of the full mar-
gin exception only in cases in which cash
margin is posted, or possible effects on the
goal of the Dodd-Frank Act to encourage
centralized clearing of swaps.

##### III. Exception to the Definition of United States Property

The temporary regulations under sec-
tion 956 provide an exception to the def-
inition of United States property for cer-
tain obligations of United States persons
arising from upfront payments made with
respect to notional principal contracts that
qualify for the full margin exception to the
embedded loan rule in the temporary reg-
ulations under section 446. To qualify for
the United States property exception, the
upfront payment must be made by a con-
trolled foreign corporation (as defined in
section 957(a)) that is either a dealer in

securities under section 475(c)(1) or a
dealer in commodities.

## Special Analyses

It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866, as supplemented by Executive Or-
der 13653. Therefore, a regulatory assess-
ment is not required. It also has been
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions, and because these regulations do not
impose a collection of information on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Internal
Revenue Code, these regulations have
been submitted to the Chief Counsel for
Advocacy of the Small Business Admin-
istration for comment on their impact on
small entities.

### Drafting Information

The principal authors of these regula-
tions are Alexa T. Dubert and Anna H.
Kim of the Office of Associate Chief
Counsel (Financial Institutions and Prod-
ucts). However, other personnel from the
Treasury Department and the IRS partic-
ipated in their development.

** * * *

## Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended
as follows:

## PART 1 - INCOME TAXES

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

Par. 2. Section 1.446-3 is amended by:

1\. Revising paragraph (g)(4).

2\. Revising paragraph (g)(6), Examples
2, 3 and 4.

3\. Redesignating paragraph (j) as (j)(1)
and revising the paragraph heading of
paragraph (j)(1).

4\. Adding paragraph (j)(2).

The revisions and addition to read as
follows:

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§ 1.446-3 Notional principal contracts.

* * * * *

(g) * * *

(4) [Reserved]. For further guidance,
see § 1.446-3T(g)(4).

* * * * *

(6) * * *

Example 2. [Reserved]. For further guidance, see

§ 1.446-3T(g)(6), Example 2.

Example 3. [Reserved]. For further guidance, see

§ 1.446-3T(g)(6), Example 3.
Example 4. [Reserved]. For further guidance, see

§ 1.446-3T(g)(6), Example 4.

* * * * *

(j) Effective/applicability date-(1) ***

(2) [Reserved]. For further guidance,
see § 1.446-3T(j)(2).

Par. 3. Section 1.446-3T is added to
read as follows:

§ 1.446-3T Notional principal contracts
(temporary).

(a) through (g)(3) [Reserved]. For fur-
ther guidance, see § 1.446-3(a) through
(g)(3).

(4) Notional principal contracts with
nonperiodic payments-(i) General
rule. Except as provided in paragraph
(g)(4)(ii) of this section, a notional prin-
cipal contract with one or more nonpe-
riodic payments is treated as two sepa-
rate transactions consisting of an on-
market, level payment swap and one or
more loans. The loan(s) must be ac-
counted for by the parties to the contract
independently of the swap. The time
value component associated with the
loan(s) is not included in the net income
or net deduction from the swap under
§ 1.446-3(d), but it is recognized as
interest for all purposes of the Internal
Revenue Code. See paragraph (g)(6) Ex-
ample 2 of this section.

(ii) Exceptions-(A) Notional princi-
pal contract with a term of one year or
less-(1) General rule. Except for pur-
poses of sections 514 and 956, paragraph
(g)(4)(i) of this section does not apply to a
notional principal contract if the term of
the contract is one year or less. For pur-
poses of this paragraph (g)(4)(ii)(A), the
term of a notional principal contract is the
stated term of the contract, inclusive of
any extensions (optional or otherwise)
provided for in the terms of the contract,
without regard to whether any extension is

unilateral, is subject to approval by one or
both parties to the contract, or is based on
the occurrence or non-occurrence of a
specified event.

(2) Anti-abuse rule. For purposes of
determining the term of a contract under
paragraph (g)(4)(ii)(A)(1) of this section,
the Commissioner may treat two or more
contracts as a single contract if a principal
purpose of entering into separate contracts
is to qualify for the exception set forth in
paragraph (g)(4)(ii)(A)(1) of this section.
A purpose may be a principal purpose
even though it is outweighed by other
purposes (taken together or separately).

(B) Notional principal contract subject
to margin or collateral requirements.
Subject to the requirements in paragraph
(g)(4)(ii)(C) of this section, paragraph
(g)(4)(i) of this section does not apply to a
notional principal contract if the contract
is described in paragraph (g)(4)(ii)(B)(1)
or (2) of this section. See § 1.956-
2T(b)(1)(xi) for a related exception under
section 956.

(1) The contract is cleared by a deriv-
atives clearing organization (as such term
is defined in section 1a of the Commodity
Exchange Act (7 U.S.C. 1a)) or by a clear-
ing agency (as such term in defined in
section 3 of the Securities Exchange Act
of 1934 (15 U.S.C. 78c)) that is registered
as a derivatives clearing organization un-
der the Commodity Exchange Act or as a
clearing agency under the Securities Ex-
change Act of 1934, respectively, and the
derivatives clearing organization or
clearing agency requires the parties to
the contract to post and collect margin
or collateral to fully collateralize the
mark-to-market exposure on the con-
tract (including the exposure on the non-
periodic payment) on a daily basis for the
entire term of the contract. The mark-to-
market exposure on a contract will be
fully collateralized only if the contract is
subject to both initial variation margin in
an amount equal to the nonperiodic pay-
ment (except for variances permitted by
intraday price changes) and daily varia-
tion margin in an amount equal to the
daily change in the fair market value of
the contract. See paragraph (g)(6) Exam-
ple 3 of this section.

(2) The parties to the contract are re-
quired, pursuant to the terms of the con-
tract or the requirements of a federal reg-

ulator, to post and collect margin or
collateral to fully collateralize the mark-
to-market exposure on the contract (in-
cluding the exposure on the nonperiodic
payment) on a daily basis for the entire
term of the contract. The mark-to-market
exposure on a contract will be fully col-
lateralized only if the contract is subject to
both initial variation margin or collateral
in an amount equal to the nonperiodic
payment (except for variances permitted
by intraday price changes) and daily vari-
ation margin or collateral in an amount
equal to the daily change in the fair mar-
ket value of the contract. For purposes of
this paragraph (g)(4)(ii)(B)(2), the term
"federal regulator" means the Securities
and Exchange Commission (SEC), Com-
modity Futures Trading Commission
(CFTC), or a prudential regulator, as de-
fined in section 1a(39) of the Commodity
Exchange Act (7 U.S.C. 1a), as amended
by section 721 of the Dodd-Frank Act.
See paragraph (g)(6) Example 4 of this
section.

(C) Limitations and special rules-(1)
Cash requirement. A notional principal
contract is described in paragraph
(g)(4)(ii)(B) of this section only to the
extent the parties post and collect margin
or collateral to fully collateralize the
mark-to-market exposure on the contract
(including the exposure on the nonperi-
odic payment) by paying and receiving
the required margin or collateral in cash.
The term "cash" includes U.S. dollars or
cash in any currency in which payment
obligations under the notional principal
contract are denominated.

(2) Excess margin or collateral. For
purposes of paragraph (g)(4)(ii)(B)(2) of
this section, if the amount of cash margin
or collateral posted and collected is in
excess of the amount necessary to fully
collateralize the mark-to-market exposure
on the contract (including the exposure on
the nonperiodic payment) on a daily basis
for the entire term of the contract, any
excess is subject to the rule in paragraph
(g)(4)(i) of this section.

(3) Margin or collateral paid and re-
ceived in cash and other property. If the
parties to the contract post and collect
both cash and other property to satisfy
margin or collateral requirements to col-
lateralize the mark-to-market exposure on
the contract (including the exposure on

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the nonperiodic payment), any excess of
the nonperiodic payment over the cash
margin or collateral posted and collected
is subject to the rule in paragraph (g)(4)(i)
of this section.

(5) [Reserved]. For further guidance,
see § 1.446-3(g)(5).

(6) Examples through Example 1. [Re-
served]. For further guidance, see § 1.446-
3(g)(6), Examples through Example 1.

Example 2. Nonperiodic payment. (i) On January
1, 2016, unrelated parties M and N enter into an interest
rate swap contract. Under the terms of the contract, N

agrees to make five annual payments to M equal to
LIBOR times a notional principal amount of $100
million. In return, M agrees to pay N 6% of $100
million annually, plus an upfront payment of
$15,163,147 on January 1, 2016. At the time M and N
enter into the contract, the rate for similar on-market
swaps is LIBOR to 10%, and N provides M with
information that the amount of the upfront payment
was determined as the present value, at 10% com-
pounded annually, of five annual payments from M to
N of $4,000,000 (4% of $100,000,000). The contract
does not require the parties to post and collect margin
or collateral to collateralize the mark-to-market expo-
sure on the contract on a daily basis for the entire term
of the contract.

(ii) The exceptions in paragraphs (g)(4)(ii)(A) and
(B) of this section do not apply. Under paragraph
(g)(4)(i) of this section, the transaction is recharacter-
ized as consisting of both a $15,163,147 loan from M
to N that N repays in installments over the term of the
contract and an interest rate swap between M and N in
which M immediately pays the installment payments
on the loan back to N as part of its fixed payments on
the swap in exchange for the LIBOR payments by N.

(iii) The upfront payment is recognized over the
life of the contract by treating the $15,163,147 as a
loan that will be repaid with level payments over five
years. Assuming a constant yield to maturity and
annual compounding at 10%, M and N account for
the principal and interest on the loan as follows:

Level Payment

Interest Component

Principal Component

2016

$ 4,000,000

$1,516,315

$ 2,483,685

2017

4,000,000

1,267,946

2,732,054

2018

4,000,000

994,741

3,005,259

2019

4,000,000

694,215

3,305,785

2020

4,000,000

363,636

3,636,364

$20,000,000

$4,836,853

$15,163,147

(iv) M recognizes interest income, and N claims
an interest deduction, each taxable year equal to the
interest component of the deemed installment pay-
ments on the loan. These interest amounts are not
included in the parties' net income or net deduction
from the swap contract under § 1.446-3(d). The prin-
cipal components are needed only to compute the in-
terest component of the level payment for the following
period and do not otherwise affect the parties' net
income or net deduction from this contract.

(v) N also makes swap payments to M based on
LIBOR and receives swap payments from M at a
fixed rate that is equal to the sum of the stated fixed
rate and the rate calculated by dividing the deemed
level annual payments on the loan by the notional
principal amount. Thus, the fixed rate on this swap is
10%, which is the sum of the stated rate of 6% and
the rate calculated by dividing the annual loan pay-
ment of $4,000,000 by the notional principal amount
of $100,000,000, or 4%. Using the methods provided
in § 1.446-3(e)(2), the fixed swap payments from M
to N of $10,000,000 (10% of $100,000,000) and the
LIBOR swap payments from N to M are included in
the parties' net income or net deduction from the
contract for each taxable year.

Example 3. Full margin - cleared contract. (i) A,
a domestic corporation enters into an interest rate
swap contract with unrelated counterparty B. The
contract is required to be cleared and is accepted
for clearing by a U.S .- registered derivatives clear-
ing organization (DCO). The standardized terms
of the contract provide that A, for a term of X
years, will pay B a fixed coupon of 1% per year
and receive a floating coupon on a notional prin-
cipal amount of $Y. When A and B enter into the
interest rate swap, the market coupon for similar
interest rate swaps is 2% per year. The DCO
requires A to make an upfront payment to com-
pensate B for the below-market annual coupon
payments that B will receive, and A makes the

upfront payment in cash. The DCO also requires B
to post initial variation margin in an amount equal
to the upfront payment and requires each party to
post and collect daily variation margin in an
amount equal to the change in the fair market
value of the contract on a daily basis for the entire
term of the contract. B posts the initial variation
margin in U.S. dollars, and the parties post and
collect daily variation margin in U.S. dollars.

(ii) Because the contract is subject to initial vari-
ation margin in an amount equal to the upfront payment
and daily variation margin in an amount equal to the
change in the fair market value of the contract on a
daily basis for the entire term of the contract, the
contract is described in paragraph (g)(4)(ii)(B)(1) of
this section and paragraph (g)(4)(i) of this section does
not apply to the contract.

Example 4. Full margin - uncleared contract. (i)
On June 1, 2016, P, a domestic corporation, enters
into an interest rate swap contract with an unrelated
domestic counterparty, CP. Under the terms of the
contract, CP agrees to make five annual payments to
P equal to a specified contract rate of 3% times the
notional amount of $10,000,000 plus an upfront pay-
ment of $1,878,030. In exchange, P agrees to make five
annual payments to CP equal to the same notional
amount times LIBOR. At the time the parties enter into
the contract, the fixed rate for an on-market swap is
7.52%. The contract is not required to be cleared and is
not accepted for clearing by a U.S .- registered deriva-
tives clearing organization. However, pursuant to the
terms of the contract, P is obligated to post $1,878,030
as collateral with CP, and P and CP are obligated to
post and collect collateral each business day in an
amount equal to the daily change in the fair market
value of the contract for the entire term of the contract.
All collateral on the contract is required to be in U.S.
dollars.

(ii) Because the contract is required to be collat-
eralized in an amount equal to the upfront payment

and changes in the fair market value of the contract
on a daily basis for the entire term of the contract, the
contract is described in paragraph (g)(4)(ii)(B)(2) of
this section and paragraph (g)(4)(i) of this section
does not apply to the contract.

(h) through (j)(1) [Reserved]. For fur-
ther guidance, see § 1.446-3(h) through
(j)(1).

(2) Application of § 1.446-3T(g)(4).
The rules provided in paragraph (g)(4)(i)
of this section apply to notional principal
contracts entered into on or after Novem-
ber 4, 2015. Taxpayers may apply the
rules provided in paragraph (g)(4)(i) of
this section to notional principal contracts
entered into before November 4, 2015.
The rules provided in paragraph (g)(4)(ii)
of this section apply to notional princi-
pal contracts entered into on or after
May 8, 2015. Taxpayers may apply the
rules provided in paragraph (g)(4)(ii) of
this section to notional principal con-
tracts entered into before May 8, 2015.
For the rules that apply to notional prin-
cipal contracts with nonperiodic pay-
ments entered into before the dates set
forth in this paragraph (j)(2), see
§ 1.446-3(g)(4) as contained in 26 CFR
part 1, revised April 1, 2015.

(k) Expiration date. The applicability
of paragraph (g)(4) of this section and
paragraph (g)(6) Examples 2, 3 and 4 of
this section expires on May 7, 2018.

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Par. 4. Section 1.956-2T is amended
by revising paragraphs (b)(1)(xi), (f) and
(g) to read as follows:

§ 1.956-2T Definition of United States
property (temporary).

* * * * *

(b) * * *

(1) * * *

(xi) An obligation of a United States
person arising from a nonperiodic payment
by a controlled foreign corporation (within
the meaning of section 957(a)) with respect
to a notional principal contract described in
§ 1.446-3T(g)(4)(ii)(B)(1) or (2) if the fol-
lowing conditions are satisfied-

(A) The controlled foreign corporation
that makes the nonperiodic payment is
either a dealer in securities (within the
meaning of section 475(c)(1)) or a dealer
in commodities; and

(B) The conditions set forth in
§ 1.446-3T(g)(4)(ii)(C)(1) (relating to
full margin or collateral in cash) are sat-
isfied.

(C) Examples. The following examples
illustrate the application of this paragraph
(b)(1)(xi):

Example 1. Full margin - cleared contract. (i) A
domestic corporation (USC) wholly owns a con-
trolled foreign corporation (CFC) that is a dealer in
securities under section 475(c)(1). CFC enters into
an interest rate swap contract with unrelated coun-
terparty B. The contract is required to be cleared and
is accepted for clearing by a U.S .- registered deriva-
tives clearing organization (DCO). CFC is not a
member of the DCO. CFC uses a U.S. affiliate (CM),
which is a member of the DCO, as its clearing
member to submit the contract to be cleared. CM is
a domestic corporation that is wholly owned by
USC. The standardized terms of the contract provide

that, for a term of X years, CFC will pay B a fixed
coupon of 1% per year and receive a floating coupon
on a notional principal amount of $Y. When CFC
and B enter into the contract, the market coupon for
similar interest rate swaps is 2% per year. The DCO
requires CFC to make an upfront payment to com-
pensate B for the below-market annual coupon pay-
ments that B will receive, and CFC makes the up-
front payment in cash. CFC makes the upfront
payment through CM to the DCO, which then makes
the payment to B. The DCO also requires B to post
initial variation margin in an amount equal to the
upfront payment and requires each party to post and
collect daily variation margin in an amount equal to
the change in the fair market value of the contract on
a daily basis for the entire term of the contract. B
posts the initial variation margin in U.S. dollars,
which is received by CFC (through DCO and CM),
and the parties post and collect daily variation mar-
gin in U.S. dollars.

(ii) Because the contract is subject to initial vari-
ation margin in an amount equal to the upfront
payment and daily variation margin in an amount
equal to the change in the fair market value of the
contract on a daily basis for the entire term of the
contract, the contract is described in § 1.446-
3T(g)(4)(ii)(B)(1). Furthermore, because the addi-
tional conditions set forth in this paragraph (b)(1)(xi)
are satisfied, the obligation of CM arising from the
upfront payment by CFC does not constitute United
States property for purposes of section 956.

Example 2. Full margin - uncleared contract. (i)
Assume the same facts as in Example 1, except for
the following. CFC's counterparty to the contract is
USC, CM is not involved, and the contract is not
required to be cleared and is not accepted for clear-
ing by a U.S .- registered derivatives clearing organi-
zation. The contract requires CFC to make an up-
front payment to compensate USC for the below-
market annual coupon payments that USC will
receive, and CFC makes the upfront payment in U.S.
dollars. Pursuant to the requirements of a federal
regulator, USC is obligated to post initial variation
margin with CFC in an amount equal to CFC's
upfront payment, and USC and CFC are obligated to
post and collect daily variation margin in an amount
equal to the change in the fair market value of the
contract on a daily basis for the entire term of the

contract. USC posts the initial variation margin in
U.S. dollars, which is received by CFC, and the
parties post and collect daily variation margin in
U.S. dollars.

(ii) Because the contract is subject to initial vari-
ation margin in an amount equal to the upfront
payment and daily variation margin in an amount
equal to the change in the fair market value of the
contract on a daily basis for the entire term of the
contract, the contract is described in § 1.446-
3T(g)(4)(ii)(B)(2). Furthermore, because the addi-
tional conditions set forth in this paragraph (b)(1)(xi)
are satisfied, the obligation of USC arising from the
upfront payment by CFC does not constitute United
States property for purposes of section 956.

* * * * *

(f) Effective/applicability date. Para-
graph (b)(1)(xi) of this section applies to
payments described in § 1.956-
2T(b)(1)(xi) made on or after May 8,
2015. Taxpayers may apply the rules of
paragraph (b)(1)(xi) to payments made
before May 8, 2015.

(g) Expiration date. The applicability
of paragraph (b)(1)(xi) of this section ex-
pires on May 7, 2018.

John M. Dalrymple
Deputy Commissioner for
Services and Enforcement.

Approved: April 29, 2015

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

(Filed by the Office of the Federal Register on May 7, 2015,
8:45 a.m., and published in the issue of the Federal Register
for May 8, 2015, 80 F.R. 26437)

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## Part III. Administrative, Procedural, and Miscellaneous

### Designation of Private Delivery Services

Notice 2015-38

This notice updates the list of desig-
nated private delivery services ("desig-
nated PDSs") set forth in Notice 2004-
83, 2004-2 C.B. 1030, for purposes of the
timely mailing treated as timely filing/
paying rule of section 7502 of the Internal
Revenue Code, provides rules for deter-
mining the postmark date for these ser-
vices, and provides a new address for sub-
mitting documents to the Internal
Revenue Service ("IRS") with respect to
an application for designation as a desig-
nated PDS. These changes are effective
May 6, 2015.

#### BACKGROUND

Section 7502(f) authorizes the Secre-
tary to designate certain private delivery
services ("PDSs") for the timely mailing
treated as timely filing/paying rule of sec-
tion 7502. Revenue Procedure 97-19,
1997-1 C.B. 644, provided rules to apply
to be a designated PDS, as well as setting
forth the criteria for eligibility for desig-
nation as a PDS. Originally, under Rev.
Proc. 97-19, there was a semi-annual ap-
plication period for designation as a PDS
with set dates for announcing the list of
designated PDSs to the public. The cur-
rent rules provide that there is one annual
application period to apply for designa-
tion, ending on June 30th, and the list of
designated PDSs is updated as PDSs are
added or removed from the list. See No-
tice 97-50, 1997-2 C.B. 305, and Notice
99-41, 1999-2 C.B. 325. In addition, the
address for submitting applications listed
in Rev. Proc. 97-19 was updated in No-
tice 2001-62, 2001-2 C.B. 307.

Notice 97-26, 1997-1 C.B. 413, pro-
vided the first list of designated PDSs as
well as special rules to determine the date
that will be treated as the postmark date
for purposes of section 7502, including
certain presumption rules and rules for
overcoming the presumption. The list of
designated PDS services was updated by
Notice 97-50, Notice 99-41, Notice

2001-62, Notice 2002-62, 2002-2 C.B.
574, and Notice 2004-83.

NATURE OF CHANGES

The IRS is adding four new delivery
services to the list of designated delivery
services. Federal Express Corporation
("FedEx"): FedEx First Overnight, FedEx
International First Next Flight Out, and
FedEx International Economy; and United
Parcel Service ("UPS"): UPS Next Day
Air Early AM are added to the list pub-
lished in Notice 2004-83.

In addition, the IRS is removing five
delivery services previously designated
that are no longer provided. Notice
2004-83 contained five services provided
by DHL Express (DHL Same Day Ser-
vice; DHL Next Day 10:30 am; DHL
Next Day 12:00 pm; DHL Next Day 3:00
pm; and DHL 2nd Day Service) that had
been designated for purposes of section
7502. Since the publication of Notice
2004-83, DHL Express substantially al-
tered or discontinued its delivery services
within the domestic United States, and the
DHL Express services listed in Notice
2004-83 are no longer provided. Accord-
ingly, the DHL Express services listed in
Notice 2004-83 are no longer designated.

This notice also updates, and consoli-
dates in one place, the rules for determin-
ing the postmark date for documents de-
livered by a designated delivery service.

Finally, this notice modifies Rev. Proc.
97-19, as modified by Notice 2001-62, to
provide a new address to submit an appli-
cation for PDS designation. This new ad-
dress may also be used to request admin-
istrative review of a letter of denial of
designation, appeal a letter confirming the
denial of designation, provide written no-
tification of any change in application in-
formation, and appeal a proposed revoca-
tion letter.

#### LIST OF DESIGNATED PDSs

Effective May 6, 2015, the list of des-
ignated PDSs is as follows:
FedEx:

1\. FedEx First Overnight

2\. FedEx Priority Overnight

3\. FedEx Standard Overnight

4\. FedEx 2 Day

5\. FedEx International Next Flight Out

6\. FedEx International Priority

7\. FedEx International First

8\. FedEx International Economy

UPS:

1\. UPS Next Day Air Early AM

2\. UPS Next Day Air

3\. UPS Next Day Air Saver

4\. UPS 2nd Day Air

5\. UPS 2nd Day Air A.M.

6\. UPS Worldwide Express Plus

7\. UPS Worldwide Express.

Only the specific delivery services enu-
merated in this list are designated delivery
services for purposes of section 7502(f).
FedEx and UPS are not designated with
respect to any type of delivery service not
enumerated in this list. Taxpayers are cau-
tioned that merely because a delivery ser-
vice is provided by FedEx or UPS, it does
not mean that the service is designated for
purposes of the timely mailing treated as
timely filing/paying rule of section 7502.

This list of designated PDSs and des-
ignated services will remain in effect until
further notice. The IRS will publish a sub-
sequent notice setting forth a new list only
if a designated PDS (or service) is added
to, or removed from, the current list, or if
there is a change to the application and/or
appeal procedures. Delivery services re-
questing to be designated in time for an
upcoming filing season must submit ap-
plications by June 30th of the year pre-
ceding that filing season, as required by
Rev. Proc. 97-19, as modified by Notice
97-50.

#### SPECIAL RULES FOR DETERMINING POSTMARK DATE IN THE CASE OF A PDS

Section 7502(f)(2)(C) requires a PDS
to either (1) record electronically to its
data base (kept in the regular course of its
business) the date on which an item was
given to the PDS for delivery or (2) mark
on the cover of the item the date on which
an item was given to the PDS for delivery.
Under section 7502(f)(1), the date recorded
or the date marked by the PDS under section
7502(f)(2)(C) is treated as the postmark date
for purposes of section 7502.

For each PDS designated in this notice,
the delivery service records electronically

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the date on which an item was given to it
for delivery, which is treated as the post-
mark date for purposes of section 7502.
Under this notice, the postmark date for an
item delivered after the due date is pre-
sumed to be the day that precedes the
delivery date by an amount of time that
equals the amount of time it would nor-
mally take for an item to be delivered
under the terms of the specific type of
delivery service used (e.g., two days be-
fore the actual delivery date for a two-day
delivery service). Taxpayers who wish to
overcome this presumption must provide
information that shows that the date re-
corded in the delivery service's electronic
data base is on or before the due date, such
as a written confirmation produced and
issued by the delivery service. Each deliv-
ery service stores the date recorded in its
database only for a finite period, but for no
less than six months. Senders or recipients
using a designated delivery service can
obtain information concerning the date re-
corded by contacting the designated deliv-
ery service. Contact information for each

delivery service is available on the com-
pany's website.

NEW ADDRESS FOR SUBMITTING
APPLICATIONS

The application address first provided
in Rev. Proc. 97-19 and modified by No-
tice 2001-62 is no longer correct. Effec-
tive May 6, 2015, applications must be
submitted to:

Internal Revenue Service
Postal and Transport Policy Section,
PDS
MC 7015 NDAL
4050 Alpha Road
Dallas, TX 75244

The above address is also where a PDS
may write to: (1) obtain administrative
review of a letter of denial of designa-
tion under section 9.03 of Rev. Proc.
97-19; (2) appeal a letter confirming the
denial of designation under section 9.06
of Rev. Proc. 97-19; (3) provide prompt
written notification to the IRS of any
change in application information under

section 10.01 of Rev. Proc. 97-19; and
(4) appeal the issuance of a proposed
revocation letter under section 12.03 of
Rev. Proc. 97-19.

### EFFECT ON OTHER DOCUMENTS

Revenue Procedure 97-19 is modified.
Notice 97-26, Notice 2001-62, Notice
2002-62 and Notice 2004-83 are super-
seded.

EFFECTIVE DATE

This notice is effective on May 6,
2015.

### FOR FURTHER INFORMATION

The principal author of this notice is
Steven L. Karon of the Office of Associate
Chief Counsel (Procedure & Administra-
tion). For further information regarding
this notice contact Steven L. Karon at
(202) 317-6834 (not a toll-free number).

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## Part IV. Items of General Interest

### Notice of Proposed Rulemaking

### Application of Modified Carryover Basis to General Basis Rules

REG-107595-11

AGENCY: Internal Revenue Service (IRS),
Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains
proposed regulations that provide guid-
ance regarding the application of the mod-
ified carryover basis rules of section 1022
of the Internal Revenue Code (Code).
Specifically, the proposed regulations will
modify provisions of the Treasury Regu-
lations involving basis rules by including
a reference to section 1022 where appro-
priate. The regulations will affect property
transferred from certain decedents who
died in 2010. The regulations reflect
changes to the law made by the Economic
Growth and Tax Relief Reconciliation Act
of 2001 and the Tax Relief, Unemploy-
ment Insurance Reauthorization, and Job
Creation Act of 2010.

DATES: Written or electronic comments
and requests for a public hearing must be
received by August 10, 2015.

ADDRESSES: Send submissions to CC:
PA:LPD:PR (REG-107595-11), room
5205, Internal Revenue Service, PO Box
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand-
delivered Monday through Friday be-
tween the hours of 8 a.m. and 4 p.m. to:
CC:PA:LPD:PR (REG-107595-11), Cou-
rier's Desk, Internal Revenue Service, 1111
Constitution Avenue, NW, Washington,
DC, or sent electronically via the Federal
eRulemaking Portal at www.regulations.gov
(REG-107595-11).

FOR FURTHER INFORMATION

CONTACT: Concerning the proposed
regulations, Mayer R. Samuels, (202)
317-6859; concerning submissions of
comments or a request for a public hear-

ing, Oluwafunmilayo Taylor, (202) 317-
6901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:
Background

Subtitle A of title V of the Economic
Growth and Tax Relief Reconciliation Act
of 2001, Public Law 107-16 (EGTRRA)
enacted section 2210 of the Code, which
made chapter 11 (the estate tax) inappli-
cable to the estate of any decedent who
died in 2010. Subtitle E of title V of
EGTRRA enacted section 1022 regarding
a modified carryover basis system appli-
cable during 2010. On December 17,
2010, the Tax Relief, Unemployment In-
surance Reauthorization, and Job Creation
Act of 2010, Public Law 111-312 (TRU-
IRJCA) became law, and section 301(a) of
TRUIRJCA retroactively reinstated the
estate and generation-skipping transfer
taxes. However, section 301(c) of TRU-
IRJCA allows the executor of the estate of
a decedent who died in 2010 to elect to
apply the Code as though section 301(a)
of TRUIRJCA did not apply with respect
to chapter 11 and with respect to property
acquired or passing from the decedent
(within the meaning of section 1014(b) of
the Code). Thus, section 301(c) of TRU-
IRJCA allows the executor of the estate of
a decedent who died in 2010 to elect not
to have the provisions of chapter 11 apply
to the decedent's estate, but rather to have
the provisions of section 1022 apply (Sec-
tion 1022 Election).

Generally, under section 1014(a), the
basis of property in the hands of a person
acquiring the property from a decedent or
to whom the property passed from a de-
cedent is the fair market value of the prop-
erty at the date of the decedent's death.
However, if the decedent died in 2010 and
the decedent's executor, as defined in sec-
tion 2203, makes the Section 1022 Elec-
tion, then the basis of property in the
hands of a person acquiring the property
from that decedent is governed by section
1022 and not by section 1014.

Section 1022(a)(1) generally provides
that property acquired from a decedent
(within the meaning of section 1022(e)) is
treated as having been transferred by gift.
If the decedent's adjusted basis is less

than or equal to the property's fair market
value (FMV) determined as of the dece-
dent's date of death, the recipient's basis
is the adjusted basis of the decedent. If the
decedent's adjusted basis is greater than
that FMV, the recipient's basis is limited
to that FMV. See section 1022(a)(2).

If the decedent's adjusted basis in the
property is less than the property's FMV
on the decedent's date of death, sections
1022(b) and 1022(c) allow the executor of
a decedent's estate to allocate additional
basis (Basis Increase) to certain assets that
both are owned by the decedent (within
the meaning of section 1022(d)) at death
and are acquired from the decedent
(within the meaning of section 1022(e)).
However, the property's total basis may
not exceed the property's FMV on the
date of death.

Although section 1022 was applicable
only to decedents dying in calendar year
2010, basis determined pursuant to that
section will continue to be relevant until
all of the property whose basis is deter-
mined under that section has been sold or
otherwise disposed of. Accordingly, the
existing regulations need to be updated to
incorporate appropriate references to basis
determined under section 1022.

#### Explanation of Provisions

These proposed regulations incorpo-
rate into the existing regulations, as ap-
propriate, references to section 1022 to
ensure that references to basis also include
basis as determined under that section.
Some changes involve simply inserting
the words "or section 1022", "and 1022",
or similar references. Others (such as
§ 1.742-1) require the insertion of a new
sentence or an example to expressly ad-
dress the applicability of section 1022. A
few changes (such as proposed
§ 1.684-3) require the inclusion of a new
section to provide a detailed explanation
of the application of section 1022 in the
particular context of the existing regula-
tion. The proposed regulations also pro-
vide cross references for section 1022
when appropriate and make other minor,
non-substantive changes. Language revi-
sions serve solely to conform the existing
regulations to the provisions of section

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1022 and no additional changes are in-
tended. The more significant changes are
briefly described below.

Section 1.48-12(b)(2)(vii)(B) of the
proposed regulations provides that, if a
transferee's basis is determined under sec-
tion 1022, any qualified rehabilitation ex-
penditures incurred by the decedent under
section 48 within the measuring period
that are treated as having been incurred by
the transferee decrease the transferee's ba-
sis for purposes of the substantial rehabil-
itation test.

Section 1.83-4(b)(1) of the proposed
regulations provides that, if property to
which section 83 applies is acquired by
any person while such property is substan-
tially nonvested, such person's basis in the
property reflects any adjustments to basis
provided under section 1022, as well as
under sections 1015 and 1016.

Sections 1.179-4(c)(1)(iv), 1.267(d)-
1(a)(3), 1.336-1(b)(5)(i)(A) and 1.355-
6(d)(1)(i)(A)(2) of the proposed regula-
tions provide that property acquired from
a decedent in a transaction in which the
recipient's basis is determined under sec-
tion 1022 is not acquired by purchase or
exchange for purposes of sections 179,
267, 336, and 355(d).

Section 1.197-2(h)(5)(i) of the pro-
posed regulations provides that the anti-
churning rules of § 1.197-2(h) do not
apply to the acquisition of a section
197(f)(9) intangible if the acquiring tax-
payer's basis in the intangible is deter-
mined under section 1022.

Section 1.306-3(e) of the proposed
regulations provides that section 306
stock continues to be classified as section
306 stock if the basis of such stock is
determined by reference to the decedent-
stockholder's basis under section 1022. In
addition, the revision of the last sentence
of the existing regulation clarifies the ref-
erence to "the optional valuation date un-
der section 1014" by changing the lan-
guage to refer expressly to the election to
use the alternate valuation date under sec-
tion 2032.

Section 1.382-9 of the proposed regu-
lations provides that for purposes of
§ 1.382-9(d)(5)(i), the definition of qual-
ified transfer is expanded to include situ-
ations where the transferee's basis in the
indebtedness is determined under section
1022.

Section 1.421-2(c)(4) of the proposed
regulations provides that an option
granted under an employee stock purchase
plan acquires a basis, determined under
section 1014 (or section 1022, if applica-
ble), only if the transfer of the share pur-
suant to the exercise of such option qual-
ifies for the special tax treatment provided
by section 421(a).

Section 1.423-2(k)(2) of the proposed
regulations provides that if the special
rules provided under § 1.423-2(k) are ap-
plicable to a share of stock upon the death
of an employee, then the basis of the share
in the hands of the estate or the person
receiving the stock by bequest or inheri-
tance shall be determined under section
1014 (or section 1022, if applicable).

Section 1.467-7(c)(2) of the proposed
regulations provides that section 467 re-
capture does not apply to a disposition on
death of the transferor if the basis of the
property in the hands of the transferee is
determined under section 1022. However,
section 467 recapture does apply to prop-
erty that constitutes a right to receive an
item of income in respect of a decedent.
Section 1.467-7(c)(4) of the proposed
regulations provides that, if the transferee
subsequently disposes of the property in a
transaction to which § 1.467-7(a) applies,
the prior understated inclusion is com-
puted by taking into account the amounts
attributable to the period of the transfer-
or's ownership of the property prior to the
first disposition.

Section 1.617-3(d)(5)(ii)(b) of the pro-
posed regulations provides that the
amount of the adjusted exploration expen-
ditures for mining property in the hands of
the transferee immediately after a dispo-
sition of property that is subject to section
1022 is equal to the amount of the ad-
justed exploration expenditures for min-
ing property in the hands of the transferor
immediately before the disposition, minus
the amount of any gain taken into account
under section 617(d). In addition, under
§ 1.617-4(c)(1)(i), no gain is recognized
on the gift of mining property. For pur-
poses of determining gain from the dispo-
sition of certain mining property, the term
"gift" is expanded to include disposition
of property with a basis that is determined
under section 1022.

Section 684 generally requires gain to
be recognized on any transfer of appreci-

ated property by a U.S. person to a foreign
non-grantor trust or foreign estate. For
decedents dying in 2010, section 684 also
applies to certain transfers of property by
reason of death to nonresident aliens. Gain
is determined by reference to the fair mar-
ket value of the property over the adjusted
basis of such property in the hands of the
transferor. Section 1.684-3(c) currently
provides that, in the case of a transfer of
property by reason of death of a U.S.
transferor to a foreign non-grantor trust,
no gain recognition is required if the basis
of the property in the hands of the trust is
determined under section 1014(a).

Section 1.684-3(c) of the proposed
regulations provides that this rule is mod-
ified to clarify the application of section
684 to transfers of property by reason of
death of U.S. transferor decedents dying
in 2010. If the executor of a U.S. decedent
does not make a Section 1022 Election,
the proposed regulations confirm that the
general exception to gain recognition will
apply. If the executor of a U.S. decedent
does make a Section 1022 Election, the
proposed regulations provide, consistent
with Rev. Proc. 2011-41 (2011-35 IRB
188 (August 29, 2011)) (see
§ 601.601(d)(2)(ii)(b) of this chapter) and
Notice 2011-66 (2011-35 IRB 184 (Au-
gust 29, 2011)) (see § 601.601(d)(2)(ii)(b)
of this chapter), that there is gain recog-
nition. Any basis increase that the execu-
tor allocates under section 1022 will re-
duce the amount of gain in that property
for purposes of section 684.

Section 1.742-1(a) of the proposed
regulations provides that the basis of a
partnership interest acquired from a dece-
dent who died in 2010, and whose exec-
utor made a Section 1022 Election, is the
lower of the adjusted basis of the decedent
or fair market value of the interest at the
date of decedent's death. The basis of
property acquired from a decedent may be
further increased under section 1022(b)
and/or 1022(c), but not above the fair mar-
ket value of the interest on the date of the
decedent's death.

Section 1.995-4(d)(2) of the proposed
regulations provides that the period during
which a shareholder of stock in a DISC
has held stock includes the period he is
considered to have held it by reason of the
application of section 1223 and, if his
basis is determined in whole or in part

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under the provisions of section 1022, the
holding period of the decedent.

Section 1.1014-4(a) of the proposed
regulations provides that the basis of
property acquired from a decedent, in-
cluding basis determined under section
1022, is uniform in the hands of every
person having possession or enjoyment of
the property at any time, whether obtained
under the will or other instrument or under
the laws of descent and distribution.

Section 1.1014-5(b) of the proposed
regulations provides that, in determining
gain or loss from the sale or other dispo-
sition of a term interest in property the
adjusted basis of which is determined pur-
suant to section 1022, that part of the
adjusted uniform basis assignable under
the rules of § 1.1014-5(a) to the interest
sold or otherwise disposed of is disre-
garded to the extent and in the manner
provided by section 1001(e).

Section 1.1223-1(b) of the proposed
regulations provides that the holding pe-
riod under section 1223 of the recipient of
property acquired from a decedent who
died in 2010, and whose executor made a
Section 1022 Election, includes the period
that the property was held by the dece-
dent.

Sections 1.1245-2(c)(2)(ii)(d) and
1.1245-3(a)(3) of the proposed regula-
tions provide that, if section 1245 property
is acquired from a decedent who died in
2010 and whose executor made a Section
1022 Election, the amount of the adjust-
ments reflected in the adjusted basis of the
property in the hands of the transferee
immediately after the transfer is equal to
the amount of the adjustments reflected in
the adjusted basis of the property in the
hands of the transferor immediately be-
fore the transfer, minus the amount of any
gain taken into account under section
1245(a)(1) by the transferor upon the
transfer. Further, even though property is
not of a character subject to the allowance
for depreciation in the hands of the tax-
payer, the property is section 1245 prop-
erty if the taxpayer's basis in the property
is determined under section 1022 and the
property was of a character subject to the
allowance for depreciation in the hands of
the decedent.

Section 1.1245-4(a)(1) of the pro-
posed regulations provides that no gain is
recognized under section 1245(a)(1) upon

a transfer of section 1245 property from a
decedent whose executor made the Sec-
tion 1022 Election.

Section 1.1250-4(c)(5) of the pro-
posed regulations provides that the hold-
ing period under section 1250(e) for the
recipient of property acquired from a de-
cedent who died in 2010, and whose ex-
ecutor made a Section 1022 Election, in-
cludes the period that the property was
held by the decedent.

Section 1.1254-2(a)(1) of the pro-
posed regulations provides that no gain is
recognized under section 1254(a)(1) upon
a transfer of natural resource recapture
property from a decedent who died in
2010 and whose executor made a Section
1022 Election.

Sections 1.1254-3(b), 1.1254-4(e)(4),
and 1.1254-5(c)(2)(iv) of the proposed
regulations provide that, for purposes of
determining the amount of section 1254
costs from the disposition of natural re-
source recapture property, the term "gift"
is expanded to include the transfer of
property with a basis that is determined
under section 1022.

Section 1.1296-1(d)(4) of the pro-
posed regulations provides that the basis
of stock of a passive foreign investment
company for which a section 1296 elec-
tion was in effect as of the date of the
decedent's death that is acquired from a
decedent is the lower of the adjusted basis
of the stock in the hands of the decedent
immediately before his death or the basis
that would have been determined under
section 1014 or section 1022, as applica-
ble, without regard to this paragraph.

Section 1.1312-7(b) of the proposed
regulations provides that the taxpayer
with respect to whom the erroneous treat-
ment occurred must be a taxpayer who
had title to the property at the time of the
erroneously treated transaction and from
whom, mediately or immediately, the tax-
payer with respect to whom the determi-
nation is made derived title, if the basis of
the property in the hands of the taxpayer
with respect to whom the determination is
made is determined under section 1022.

### Proposed Effective/Applicability Date

These regulations are proposed to ap-
ply on and after the date the regulations
are published as final regulations in the
Federal Register.

### Special Analyses

It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866, as supplemented by
Executive Order 13563. Therefore, a reg-
ulatory assessment is not required. It also
has been determined that section 553(b) of
the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these
regulations, and, because these regula-
tions do not impose a collection of infor-
mation requirement on small entities, the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to
section 7805(f) of the Code, this notice of
proposed rulemaking has been submitted
to the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business.

### Comments and Requests for a Public Hearing

Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written (a signed
original and eight (8) copies) or electronic
comments that are submitted timely to the
IRS. All comments will be available at
www.regulations.gov or upon request for
public inspection and copying. A public
hearing will be scheduled if requested in
writing by any person that timely submits
comments. If a public hearing is sched-
uled, notice of the date, time, and place for
the public hearing will be published in the
Federal Register.

### Drafting Information

The principal author of these regula-
tions is Mayer R. Samuels, Office of the
Associate Chief Counsel (Passthroughs
and Special Industries). However, other
personnel from the IRS and the Treasury
Department participated in their develop-
ment.

* * * * *

### Proposed Amendments to the Regulations

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

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## PART 1-INCOME TAXES

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

Par. 2. Section 1.48-12 is amended by
revising the last sentence of paragraph
(b)(2)(vii)(B) and adding paragraph (g) to
read as follows:

§ 1.48-12 Qualified rehabilitated
building; expenditures incurred after
December 31, 1981.

* * * * *

(b) * * *

(2) * * *

(vii) * * *

(B) * * * If a transferee's basis is
determined under section 1014 or section
1022, any expenditures incurred by the
decedent within the measuring period that
are treated as having been incurred by the
transferee under paragraph (c)(3)(ii) of
this section shall decrease the transferee's
basis for purposes of the substantial reha-
bilitation test.

* * * * *

(g) Effective/applicability date. This
section applies on and after the date these
regulations are published as final regula-
tions in the Federal Register. For rules
before the date these regulations are pub-
lished as final regulations in the Federal
Register, see § 1.48-12 as contained in
26 CFR (revised as of the April 1 preced-
ing the date these regulations are pub-
lished as final regulations in the Federal
Register).

Par. 3. Section 1.83-4 is amended by
revising the last sentence of paragraph
(b)(1) and adding paragraph (d) to read as
follows:

§ 1.83-4 Special rules.

* * * * *

(b) * * *

(1) * * * Such basis shall also reflect
any adjustments to basis provided under
sections 1015, 1016, and 1022.

* * * * *

(d) Effective/applicability date. The
provisions in this section are applicable
for taxable years beginning on or after
July 21, 1978. The provisions of para-
graph (b)(1) of this section relating to

section 1022 are effective on and after the
date these regulations are published as
final regulations in the Federal Register.

Par. 4. Section 1.179-4 is amended by
revising the first sentence of paragraph
(c)(1)(iv) to read as follows:

§ 1.179-4 Definitions.

* * * * *

(c) * * *

(1) * * *

(iv) The property is not acquired by
purchase if the basis of the property in the
hands of the person acquiring it is deter-
mined in whole or in part by reference to the
adjusted basis of such property in the hands
of the person from whom acquired, is deter-
mined under section 1014(a), relating to
property acquired from a decedent, or is
determined under section 1022, relating to
the basis of property acquired from certain
decedents who died in 2010. * * *

* * * * *

Par. 5. Section 1.179-6 is amended by:
a. Revising the section heading and the
first sentence of paragraph (a).

b. Adding paragraph (d).

The revision and addition read as fol-
lows:

§ 1.179-6 Effective/applicability dates.

(a) * * * Except as provided in para-
graphs (b), (c), and (d) of this section, the
provisions of §§ 1.179-1 through
1.179-5 apply for property placed in ser-
vice by the taxpayer in taxable years end-
ing after January 25, 1993. * * *

* * * * *

(d) Application of § 1.179-4(c)(1)(iv).
The provisions of § 1.179-4(c)(1)(iv) re-
lating to section 1022 are effective on and
after the date these regulations are pub-
lished as final regulations in the Federal
Register.

Par. 6. Section 1.197-2 is amended by
revising paragraphs (h)(5)(i) and (h)(12)(viii)
and adding paragraph (l)(5) to read as follows:

§ 1.197-2 Amortization of goodwill and
certain other intangibles.

* * * * *

(h) * * *

(5) * * *

(i) The acquisition of a section
197(f)(9) intangible if the acquiring tax-
payer's basis in the intangible is deter-
mined under section 1014(a) or 1022; or
* * * * *

(12) * * *

(viii) Operating rule for transfers upon
death. For purposes of this paragraph
(h)(12), if the basis of a partner's interest
in a partnership is determined under sec-
tion 1014(a) or 1022, such partner is
treated as acquiring such interest from a
person who is not related to such partner,
and such interest is treated as having pre-
viously been held by a person who is not
related to such partner.

* * * * *

(l) * * *

(5) Application of section 1022. The
provisions of § 1.197-2 relating to section
1022 are effective on and after the date
these regulations are published as final
regulations in the Federal Register.

Par. 7. Section 1.267(d)-1 is amended
by revising paragraph (a)(3) to read as
follows:

§ 1.267(d)-1 Amount of gain where loss
previously disallowed.

(a) * * *

(3) The benefit of the general rule is
available only to the original transferee
but does not apply to any original trans-
feree (for example, a donee or a person
acquiring property from a decedent where
the basis of property is determined under
section 1014 or 1022) who acquired the
property in any manner other than by pur-
chase or exchange.

* * * * *

Par. 8. Section 1.267(d)-2 is amended
by revising the section heading and add-
ing a sentence to the end of the paragraph
to read as follows:

§ 1.267(d)-2 Effective/applicability
dates.

\* \* \* The provisions of § 1.267(d)-
1(a)(3) relating to section 1022 are effec-
tive on and after the date these regulations
are published as final regulations in the
Federal Register.

Par. 9. Section 1.273-1 is revised to
read as follows:

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§ 1.273-1 Life or terminable interests.

(a) In general. Amounts paid as in-
come to the holder of a life or a terminable
interest acquired by gift, bequest, or in-
heritance shall not be subject to any de-
duction for shrinkage (whether called by
depreciation or any other name) in the
value of such interest due to the lapse of
time. In other words, the holder of such an
interest so acquired may not set up the
value of the expected future payments as
corpus or principal and claim deduction
for shrinkage or exhaustion thereof due to
the passage of time. For the treatment
generally of distributions to beneficiaries
of an estate or trust, see Subparts A, B, C,
and D (section 641 and following), Sub-
chapter J, Chapter 1 of the Code, and
corresponding regulations. For basis of
property acquired from a decedent and by
gifts and transfers in trust, see sections
1014, 1015, and 1022, and corresponding
regulations.

(b) Effective/applicability date. The
provisions in this section are applicable
for taxable years beginning on or after
September 16, 1958. The provisions of
this section relating to section 1022 are
effective on and after the date these reg-
ulations are published as final regulations
in the Federal Register.

Par. 10. Section 1.306-3 is amended
by removing the last sentence of para-
graph (e) and adding two sentences in its
place to read as follows:

§ 1.306-3 Section 306 stock defined.

* * * * *

(e) * * * Section 306 stock ceases to be
so classified if the basis of such stock is
determined by reference to its fair market
value on the date of the decedent-
stockholder's death under section 1014 or
the optional valuation date under section
2032. Section 306 stock continues to be so
classified if the basis of such stock is
determined under section 1022.

* * * * *

Par. 11. Section 1.306-4 is added to
read as follows:

§ 1.306-4 Effective/applicability date.

The provisions of §§ 1.306-1 through
1.306-3 are applicable on or after June

22, 1954. The provisions of § 1.306-3
relating to section 1022 are effective on
and after the date these regulations are
published as final regulations in the Fed-
eral Register.

Par. 12. Section 1.336-1 is amended
by revising paragraph (b)(5)(i)(A) to read
as follows:

§ 1.336-1 General principles,
nomenclature, and definitions for a
section 336(e) election.

* * * * *

(b) * * *

(5) * * *

(i) * * *

(A) The basis of the stock in the hands
of the purchaser is not determined in
whole or in part by reference to the ad-
justed basis of such stock in the hands of
the person from whom the stock is ac-
quired, is not determined under section
1014(a) (relating to property acquired
from a decedent), or is not determined
under section 1022 (relating to the basis of
property acquired from certain decedents
who died in 2010);

* * * * *

Par. 13. Section 1.336-5 is amended
by revising the section heading and add-
ing a sentence to the end of the paragraph
to read as follows:

§ 1.336-5 Effective/applicability dates.

\* \* \* The provisions of § 1.336-
1(b)(5)(i)(A) relating to section 1022 are
effective on and after the date these reg-
ulations are published as final regulations
in the Federal Register.

Par. 14. Section 1.355-6 is amended
by revising paragraphs (d)(1)(i)(A)(2) and
(g) to read as follows:

§ 1.355-6 Recognition of gain on
certain distributions of stock or
securities in controlled corporation.

* * * * *

(d) * * *

(1) * * *

(i) * * *

(A) * * *

(2) Under section 1014(a) or 1022; and
* * * * *

(g) Effective/applicability dates. This
section applies to distributions occurring

after December 20, 2000, except that they
do not apply to any distributions occur-
ring pursuant to a written agreement that
is (subject to customary conditions)
binding on December 20, 2000, and at
all later times. The provisions of para-
graph (d)(1)(i)(A)(2) of this section re-
lating to section 1022 are effective on
and after the date these regulations are
published as final regulations in the
Federal Register.

Par. 15. Section 1.382-9 is amended by
revising paragraphs (d)(5)(ii)(D) and
(d)(6)(i) to read as follows:

§ 1.382-9 Special rules under section
382 for corporations under the
jurisdiction of a court in a title 11 or
similar case.

* * * * *

(d) * * *

(5) * * *

(ii) * * *

(D) The transferee's basis in the in-
debtedness is determined under section
1014, 1015, or 1022 or with reference to
the transferor's basis in the indebtedness;
* * * * *

(6) Effective/applicability date-(i) In
general. This paragraph (d) applies to
ownership changes occurring on or after
March 17, 1994. The provisions of para-
graph (d)(5)(ii)(D) of this section relat-
ing to section 1022 are effective on and
after the date these regulations are pub-
lished as final regulations in the Federal
Register.

* * * * *

Par. 16. Section 1.421-2 is amended
by:

a. Revising paragraphs (c)(4)(i)(a) and
(c)(4)(ii).

b. Revising paragraph (f) heading and
adding paragraph (f)(3).

The revisions and addition read as fol-
lows:

§ 1.421-2 General rules.

* * * * *

(c) * * *

(4)(i)(a) In the case of the death of an
optionee, the basis of any share of stock
acquired by the exercise of an option un-
der this paragraph (c), determined under
section 1011, shall be increased by an

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amount equal to the portion of the basis of
the option attributable to such share. For
example, if a statutory option to acquire
10 shares of stock has a basis of $100, the
basis of one share acquired by a partial
exercise of the option, determined under
section 1011, would be increased by
1/10th of $100, or $10. The option ac-
quires a basis, determined under section
1014(a) or under section 1022, if applica-
ble, only if the transfer of the share pur-
suant to the exercise of such option qual-
ifies for the special tax treatment provided
by section 421(a). To the extent the option
is so exercised, in whole or in part, it will
acquire a basis equal to its fair market
value (or the basis as determined under
section 1022, if applicable) at the date of
the employee's death or, if an election is
made under section 2032, its value at its
applicable valuation date. In certain cases,
the basis of the share is subject to the
adjustments provided by paragraphs
(c)(4)(i)(b) and (c) of this section, but
such adjustments are only applicable in
the case of an option that is subject to
section 423(c).

* * * * *

(ii) If a statutory option is not exercised
by the estate of the individual to whom the
option was granted, or by the person who
acquired such option by bequest or inher-
itance or by reason of the death of such
individual, the option shall be considered
to be property that constitutes a right to
receive an item of income in respect of a
decedent to which the rules of sections
691 and 1014(c) (or section 1022(f), if
applicable) apply.

* * * * *

(f) Effective/applicability date. * * *
* * * * *

(3) Application of section 1022. The
provisions of § 1.421-2(c) relating to sec-
tion 1022 are effective on and after the
date these regulations are published as
final regulations in the Federal Register.

Par. 17. Section 1.423-2 is amended
by:

a. Revising the third sentence of para-
graph (k)(2).

b. Adding a sentence to the end of
paragraph (l).

The revision and addition read as fol-
lows:

§ 1.423-2 Employee stock purchase plan
defined.

** * * *

(k) * * *

(2) * * * If the special rules provided in
this paragraph (k) are applicable to a share
of stock upon the death of an employee,
then the basis of the share in the hands of
the estate or the person receiving the stock
by bequest or inheritance shall be deter-
mined under section 1014 or under section
1022, if applicable, and shall not be in-
creased by reason of the inclusion upon
the decedent's death of any amount in the
decedent's gross income under this para-
graph (k). * * *

* * * * *

(1) * * * The provisions of § 1.423-2
relating to section 1022 are effective on
and after the date these regulations are
published as final regulations in the Fed-
eral Register.

Par. 18. Section 1.424-1 is amended
by revising the last sentence of paragraph
(c)(2) and adding paragraph (g)(3) to read
as follows:

§ 1.424-1 Definitions and special rules
applicable to statutory options.

* * * * *

(c) * * *

(2) * * * For determination of basis in
the hands of the survivor where joint own-
ership is terminated by the death of one of
the owners, see section 1014 or section
1022, if applicable.

* * * * *

(g) * * *

(3) Application of section 1022. The
provisions of § 1.424-1(c)(2) relating to
section 1022 are effective on and after the
date these regulations are published as
final regulations in the Federal Register.

Par. 19. Section 1.467-7 is amended by
revising paragraph (c)(2) and revising the
first sentence of paragraph (c)(4) to read
as follows:

§ 1.467-7 Section 467 recapture and
other rules relating to dispositions and
modifications.

* * * * *

(c) * * *

(2) Dispositions at death. Paragraph (a)
of this section does not apply to a dispo-

sition if the basis of the property in the
hands of the transferee is determined un-
der section 1014(a) or section 1022. How-
ever, see paragraph (c)(4) of this section
for dispositions of property subject to sec-
tion 1022 by transferees. This paragraph
(c)(2) does not apply to property that con-
stitutes a right to receive an item of in-
come in respect of a decedent. See sec-
tions 691, 1014(c), and 1022(f).

* * * * *

(4) * * * If the recapture amount with
respect to a disposition of property (the
first disposition) is limited under para-
graph (c)(1), (c)(2) (if the basis of the
property in the hands of the transferee is
determined under section 1022), or (c)(3)
of this section and the transferee subse-
quently disposes of the property in a trans-
action to which paragraph (a) of this sec-
tion applies, the prior understated
inclusion determined under paragraph
(b)(2) of this section is computed by tak-
ing into account the amounts attributable
to the period of the transferor's ownership
of the property prior to the first disposi-
tion. * * *

* * * * *

Par. 20. Section 1.467-9 is amended by
revising the section heading and adding
paragraph (f) to read as follows:

§ 1.467-9 Effective/applicability dates
and automatic method changes for
certain agreements.

* * * * *

(f) Application of section 1022. The
provisions of § 1.467-7(c) relating to sec-
tion 1022 are effective on and after the
date these regulations are published as
final regulations in the Federal Register.

Par. 21. Section 1.617-3 is amended by
revising paragraph (d)(5)(ii)(b) to read as
follows:

### § 1.617-3 Recapture of exploration expenditures.

* * * * *

(d) * * *

(5) * * *

(ii) * * *

(b) The transactions referred to in para-
graph (d)(5)(ii)(a) of this section are:

(1) A disposition that is in part a sale or
exchange and in part a gift;

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(2) A disposition that is described in
section 617(d) through the incorporation
by reference of the provisions of section
1245(b)(3) (relating to certain tax free
transactions); or

(3) A transfer at death where basis of
property in the hands of the transferee is
determined under section 1022.

* * * * *

Par. 22. Section 1.617-4 is amended
by revising the second sentence of para-
graph (c)(1)(i) to read as follows:

§ 1.617-4 Treatment of gain from
disposition of certain mining property.

* * * * *

(c) * * *

(1)(i) * * * For purposes of this para-
graph (c), the term "gift" means, except to
the extent that paragraph (c)(1)(ii) of this
section applies, a transfer of mining prop-
erty that, in the hands of the transferee,
has a basis determined under the provi-
sions of section 1015(a) or 1015(d) (relat-
ing to basis of property acquired by gift)
or section 1022 (relating to the basis of
property acquired from certain decedents
who died in 2010). * * *

* * * * *

Par. 23. Section 1.617-5 is added to
read as follows:

§ 1.617-5 Effective/applicability date.

Sections 1.617-3 and 1.617-4 apply
on and after the date these regulations are
published as final regulations in the Fed-
eral Register. For rules before the date
these regulations are published as final
regulations in the Federal Register, see
§§ 1.617-3 and 1.617-4 as contained in
26 CFR (revised as of the April 1 preced-
ing the date these regulations are pub-
lished as final regulations in the Federal
Register).

Par. 24. Section 1.684-3 is amended
by revising paragraph (c) to read as fol-
lows:

§ 1.684-3 Exceptions to general rule of
gain recognition.

* * * * *

(c) Certain transfers at death-(1) Sec-
tion 1014 basis. The general rule of gain
recognition under § 1.684-1 shall not ap-
ply to any transfer of property to a foreign

trust or foreign estate or, in the case of a
transfer of property by a U.S. transferor
decedent dying in 2010, to a foreign trust,
foreign estate, or a nonresident alien, by
reason of death of the U.S. transferor, if
the basis of the property in the hands of
the transferee is determined under section
1014(a).

(2) Section 1022 basis election. For
U.S. transferor decedents dying in 2010,
the general rule of gain recognition under
§ 1.684-1 shall apply to any transfer of
property by reason of death of the U.S.
transferor if the basis of the property in
the hands of the foreign trust, foreign es-
tate, or the nonresident alien individual is
determined under section 1022. The gain
on the transfer shall be calculated as set
out under § 1.684-1(a), except that ad-
justed basis will reflect any increases al-
located to such property under section
1022.

* * * * *

Par. 25. Section 1.684-5 is revised to
read as follows:

§ 1.684-5 Effective/applicability dates.

(a) Sections 1.684-1 through 1.684-4
apply to transfers of property to foreign
trusts and foreign estates after August 7,
2000, except as provided in paragraph (b)
of this section.

(b) In the case a U.S. transferor dece-
dent dying in 2010, § 1.684-3(c) applies
to transfers of property to foreign trusts,
foreign estates, and nonresident aliens af-
ter December 31, 2009, and before Janu-
ary 1, 2011.

Par. 26. Section 1.691(a)-3 is amended
by revising the last two sentences of para-
graph (a) and adding paragraph (c) to read
as follows:

§ 1.691(a)-3 Character of gross income.

(a) * * * The provisions of section
1014(a), relating to the basis of property
acquired from a decedent, and section
1022, relating to the basis of property
acquired from certain decedents who died
in 2010, do not apply to these amounts in
the hands of the estate and such persons.
See sections 1014(c) and 1022(f).

** * * *

(c) Effective/applicability dates. The
last two sentences of paragraph (a) of this

section apply on and after the date these
regulations are published as final regula-
tions in the Federal Register. For rules
before the date these regulations are pub-
lished as final regulations in the Federal
Register, see § 1.691(a)-3 as contained in
26 CFR (revised as of the April 1 preced-
ing the date these regulations are pub-
lished as final regulations in the Federal
Register).

Par. 27. Section 1.742-1 is revised to
read as follows:

§ 1.742-1 Basis of transferee partner's
interest.

(a) In general. The basis to a transferee
partner of an interest in a partnership shall
be determined under the general basis
rules for property provided by part II (sec-
tion 1011 and following), Subchapter O,
Chapter 1 of the Internal Revenue Code.
Thus, the basis of a purchased interest will
be its cost. Generally, the basis of a part-
nership interest acquired from a decedent
is the fair market value of the interest at
the date of his death or at the alternate
valuation date, increased by his estate's or
other successor's share of partnership lia-
bilities, if any, on that date, and reduced to
the extent that such value is attributable to
items constituting income in respect of a
decedent (see section 753 and §§ 1.706-
1(c)(3)(v) and 1.753-1(b)) under section
691. See section 1014(c). However, the
basis of a partnership interest acquired
from a decedent is determined under sec-
tion 1022 if the decedent died in 2010 and
the decedent's executor elected to have
section 1022 apply to the decedent's es-
tate. For basis of contributing partner's
interest, see section 722. The basis so de-
termined is then subject to the adjustments
provided in section 705.

(b) Effective/applicability date. This
section applies on and after the date these
regulations are published as final regula-
tions in the Federal Register. For rules
before the date these regulations are pub-
lished as final regulations in the Federal
Register, see § 1.742-1 as contained in 26
CFR (revised as of the April 1 preceding
the date these regulations are published as
final regulations in the Federal Register).

Par. 28. Section 1.743-1 is amended by
revising paragraphs (k)(2)(ii) and (l) to
read as follows:

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§ 1.743-1 Optional adjustment to basis
of partnership property.

* * * * *

(k) * * *

(2) * * *

(ii) Special rule. A transferee that ac-
quires, on the death of a partner, an inter-
est in a partnership with an election under
section 754 in effect for the taxable year
of the transfer, must notify the partner-
ship, in writing, within one year of the
death of the deceased partner. The written
notice to the partnership must be signed
under penalties of perjury and must in-
clude the names and addresses of the de-
ceased partner and the transferee, the tax-
payer identification numbers of the
deceased partner and the transferee, the
relationship (if any) between the trans-
feree and the transferor, the deceased part-
ner's date of death, the date on which the
transferee became the owner of the part-
nership interest, the fair market value of
the partnership interest on the applicable
date of valuation set forth in section 1014
or section 1022, the manner in which the
fair market value of the partnership inter-
est was determined, and the carryover ba-
sis as adjusted under section 1022 (if ap-
plicable).

* * * * *

(l) Effective/applicability date. The
provisions in this section apply to trans-
fers of partnership interests that occur on
or after December 15, 1999. The provi-
sions of this section relating to section
1022 are effective on and after the date
these regulations are published as final
regulations in the Federal Register.

Par. 29. Section 1.755-1 is amended
by:

a. Revising paragraphs (a)(4)(i)(C) and
the first sentence of (b)(4)(i).

b. Revising the heading of paragraph
(e) and paragraph (e)(2).

The revisions read as follows:

§ 1.755-1 Rules for allocation of basis.

(a) * * *

(4) * * *

(i) * * *

(C) Income in respect of a decedent.
Solely for the purpose of determining
partnership gross value under this para-
graph (a)(4)(i), where a partnership inter-

est is transferred as a result of the death of
a partner, the transferee's basis in its part-
nership interest is determined without re-
gard to section 1014(c) or section 1022(f),
and is deemed to be adjusted for that
portion of the interest, if any, that is at-
tributable to items representing income in
respect of a decedent under section 691.

* * * * *

(b) * * *

(4) * * *

(i) * * * Where a partnership interest is
transferred as a result of the death of a
partner, under section 1014(c) or section
1022(f), the transferee's basis in its part-
nership interest is not adjusted for that
portion of the interest, if any, that is at-
tributable to items representing income in
respect of a decedent under section 691. *
\* \*

* * * * *

(e) Effective/applicability dates. * * *
(2) Special rules. Paragraphs (a) and
(b)(3)(iii) of this section apply to transfers
of partnership interests and distributions
of property from a partnership that occur
on or after June 9, 2003. The provisions of
paragraphs (a)(4)(i)(C) and (b)(4)(i) of
this section relating to section 1022 are
effective on and after the date these reg-
ulations are published as final regulations
in the Federal Register.

Par. 30. Section 1.995-4 is amended
by revising the first sentence of paragraph
(d)(2) and adding paragraph (f) to read as
follows:

§ 1.995-4 Gain on disposition of stock
in a DISC.

* * * * *

(d) * * *

(2) * * * For purposes of this section,
the period during which a shareholder has
held stock includes the period he is con-
sidered to have held it by reason of the
application of section 1223 and, if his
basis is determined in whole or in part
under the provisions of section 1014(d)
(relating to special rule for DISC stock
acquired from decedent) or section 1022
(relating to property acquired from certain
decedents who died in 2010), the holding
period of the decedent. * * *

* * * * *

(f) Effective/applicability date. This
section applies on and after the date these

regulations are published as final regula-
tions in the Federal Register. For rules
before the date these regulations are pub-
lished as final regulations in the Federal
Register, see § 1.995-4 as contained in
26 CFR (revised as of the April 1 preced-
ing the date these regulations are pub-
lished as final regulations in the Federal
Register).

Par. 31. Section 1.1001-1 is amended
by revising the last sentence of paragraph
(a), revising paragraph (f)(1), and adding
paragraph (f)(5) to read as follows:

§ 1.1001-1 Computation of gain or loss.

(a) * * * Section 1001(e) and paragraph
(f) of this section prescribe the method of
computing gain or loss upon the sale or
other disposition of a term interest in
property the adjusted basis (or a portion)
of which is determined pursuant, or by
reference, to section 1014 (relating to the
basis of property acquired from a dece-
dent), section 1015 (relating to the basis of
property acquired by gift or by a transfer
in trust), or section 1022 (relating to the
basis of property acquired from certain
decedents who died in 2010).

* * * * *

(f) * * *

(1) General rule. Except as otherwise
provided in paragraph (f)(3) of this sec-
tion, for purposes of determining gain or
loss from the sale or other disposition
after October 9, 1969, of a term interest in
property (as defined in paragraph (f)(2) of
this section), a taxpayer shall not take into
account that portion of the adjusted basis
of such interest that is determined pursu-
ant, or by reference, to section 1014 (re-
lating to the basis of property acquired
from a decedent), section 1015 (relating to
the basis of property acquired by gift or by
a transfer in trust), or section 1022 (relat-
ing to the basis of property acquired from
certain decedents who died in 2010) to the
extent that such adjusted basis is a portion
of the adjusted uniform basis of the entire
property (as defined in § 1.1014-5).
Where a term interest in property is trans-
ferred to a corporation in connection with
a transaction to which section 351 applies
and the adjusted basis of the term interest:

(i) Is determined pursuant to sections
1014, 1015, or 1022; and

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(ii) Is also a portion of the adjusted
uniform basis of the entire property, a sub-
sequent sale or other disposition of such
term interest by the corporation will be sub-
ject to the provisions of section 1001(e) and
this paragraph (f) to the extent that the basis
of the term interest so sold or otherwise
disposed of is determined by reference to its
basis in the hands of the transferor as pro-
vided by section 362(a). See paragraph
(f)(2) of this section for rules relating to the
characterization of stock received by the
transferor of a term interest in property in
connection with a transaction to which sec-
tion 351 applies. That portion of the ad-
justed uniform basis of the entire property
that is assignable to such interest at the time
of its sale or other disposition shall be de-
termined under the rules provided in
§ 1.1014-5. Thus, gain or loss realized from
a sale or other disposition of a term interest
in property shall be determined by compar-
ing the amount of the proceeds of such sale
with that part of the adjusted basis of such
interest that is not a portion of the adjusted
uniform basis of the entire property.

* * * * *

(5) Effective/applicability date. This
section applies on and after the date these
regulations are published as final regula-
tions in the Federal Register. For rules
before the date these regulations are pub-
lished as final regulations in the Federal
Register, see § 1.1001-1 as contained in
26 CFR (revised as of the April 1 preced-
ing the date these regulations are pub-
lished as final regulations in the Federal
Register).

* * * * *

Par.32. Section 1.1014-1 is amended
by revising paragraph (a) and adding para-
graph (d) to read as follows:

§ 1.1014-1 Basis of property acquired
from a decedent.

(a) General rule. The purpose of sec-
tion 1014 is, in general, to provide a basis
for property acquired from a decedent that
is equal to the value placed upon such
property for purposes of the Federal estate
tax. Accordingly, the general rule is that
the basis of property acquired from a de-
cedent is the fair market value of such
property at the date of the decedent's
death, or, if the decedent's executor so
elects, at the alternate valuation date pre-

scribed in section 2032, or in section
811(j) of the Internal Revenue Code
(Code) of 1939. However, the basis of prop-
erty acquired from certain decedents who
died in 2010 is determined under section
1022, if the decedent's executor made an
election under section 301(c) of the Tax
Relief, Unemployment Insurance Reautho-
rization, and Job Creation Act of 2010, Pub-
lic Law 111-312 (124 Stat. 3296, 3300
(2010)). See section 1022. Property ac-
quired from a decedent includes, princi-
pally, property acquired by bequest, devise,
or inheritance, and, in the case of decedents
dying after December 31, 1953, property
required to be included in determining the
value of the decedent's gross estate under
any provision of the Code of 1954 or the
Code of 1939. The general rule governing
basis of property acquired from a decedent,
as well as other rules prescribed elsewhere
in this section, shall have no application if
the property is sold, exchanged, or other-
wise disposed of before the decedent's death
by the person who acquired the property
from the decedent. For general rules on the
applicable valuation date where the executor
of a decedent's estate elects under section
2032, or under section 811(j) of the Code of
1939, to value the decedent's gross estate at
the alternate valuation date prescribed in
such sections, see § 1.1014-3(e).

* * * * *

(d) Effective/applicability date. This
section applies on and after the date these
regulations are published as final regula-
tions in the Federal Register. For rules
before the date these regulations are pub-
lished as final regulations in the Federal
Register, see § 1.1014-1 as contained in
26 CFR (revised as of the April 1 preced-
ing the date these regulations are pub-
lished as final regulations in the Federal
Register).

Par. 33. Section 1.1014-4 is amended
by revising the first sentence of paragraph
(a)(1), revising the second sentence of
paragraph (a)(2), and adding paragraph
(d) to read as follows:

§ 1.1014-4 Uniformity of basis;
adjustment to basis.

(a) * * *

(1) The basis of property acquired from
a decedent, as determined under section
1014(a) or section 1022, is uniform in the

hands of every person having possession
or enjoyment of the property at any time
under the will or other instrument or under
the laws of descent and distribution. * * *

(2) * * * Accordingly, there is a com-
mon acquisition date for all titles to prop-
erty acquired from a decedent within the
meaning of section 1014 or section 1022,
and, for this reason, a common or uniform
basis for all such interests. * * *

* * * * *

(d) Effective/applicability date. This
section applies on and after the date these
regulations are published as final regula-
tions in the Federal Register. For rules
before the date these regulations are pub-
lished as final regulations in the Federal
Register, see § 1.1014-4 as contained in
26 CFR (revised as of the April 1 preced-
ing the date these regulations are pub-
lished as final regulations in the Federal
Register).

Par. 34. Section 1.1014-5 is amended
by revising paragraph (b), adding and re-
serving paragraph (d), and adding para-
graph (e) to read as follows:

§ 1.1014-5 Gain or loss.

* * * * *

(b) Sale or other disposition of certain
term interests. In determining gain or loss
from the sale or other disposition after
October 9, 1969, of a term interest in
property (as defined in § 1.1001-1(f)(2))
the adjusted basis of which is determined
pursuant, or by reference, to section 1014
(relating to the basis of property acquired
from a decedent), section 1015 (relating to
the basis of property acquired by gift or by
a transfer in trust), or section 1022 (relat-
ing to the basis of property acquired from
certain decedents who died in 2010), that
part of the adjusted uniform basis assign-
able under the rules of paragraph (a) of
this section to the interest sold or other-
wise disposed of shall be disregarded to
the extent and in the manner provided by
section 1001(e) and § 1.1001-1(f).

* * * * *

(d) [Reserved]

(e) Effective/applicability date. This
section applies on and after the date these
regulations are published as final regula-
tions in the Federal Register. For rules
before the date these regulations are pub-
lished as final regulations in the Federal

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Register, see § 1.1014-5 as contained in
26 CFR (revised as of the April 1 preced-
ing the date these regulations are pub-
lished as final regulations in the Federal
Register).

Par. 35. Section 1.1223-1 is amended
by adding a sentence to the end of para-
graph (b) and adding paragraph (l) to read
as follows:

§ 1.1223-1 Determination of period for
which capital assets are held.

* * * * *

(b) * * * Similarly, the period for
which property acquired from a decedent
who died in 2010 was held by the dece-
dent must be included in determining the
period during which the property was held
by the recipient, if the recipient's basis in
the property is determined under section
1022.

* * * * *

(l) Effective/applicability date. This
section applies on and after the date these
regulations are published as final regula-
tions in the Federal Register. For rules
before the date these regulations are pub-
lished as final regulations in the Federal
Register, see § 1.1223-1 as contained in
26 CFR (revised as of the April 1 preced-
ing the date these regulations are pub-
lished as final regulations in the Federal
Register).

Par. 36. Section 1.1245-2 is amended
by revising paragraph (c)(2)(ii) and add-
ing paragraph (d) to read as follows:

§ 1.1245-2 Definition of recomputed
basis.

* * * * *

(c) * * *

(2) * * *

(ii) The transactions referred to in para-
graph (c)(2)(i) of this section are:

(a) A disposition that is in part a sale or
exchange and in part a gift (see § 1.1245-
4(a)(3));

(b) A disposition (other than a disposi-
tion to which section 1245(b)(6)(A) ap-
plies) that is described in section
1245(b)(3) (relating to certain tax-free
transactions);

(c) An exchange described in
§ 1.1245-4(e)(2) (relating to transfers de-
scribed in section 1081(d)(1)(A)); or

(d) A transfer at death where the basis
of property in the hands of the transferee
is determined under section 1022.

* * * * *

(d) Effective/applicability date. This
section applies on and after the date these
regulations are published as final regula-
tions in the Federal Register. For rules
before the date these regulations are pub-
lished as final regulations in the Federal
Register, see § 1.1245-2 as contained in
26 CFR (revised as of the April 1 preced-
ing the date these regulations are pub-
lished as final regulations in the Federal
Register).

Par. 37. Section 1.1245-3 is amended
by revising paragraph (a)(3) and adding
paragraph (d) to read as follows:

§ 1.1245-3 Definition of section 1245
property.

(a) * * *

(3) Even though property may not be
of a character subject to the allowance for
depreciation in the hands of the taxpayer,
such property may nevertheless be section
1245 property if the taxpayer's basis for
the property is determined by reference to
its basis in the hands of a prior owner of
the property and such property was of a
character subject to the allowance for de-
preciation in the hands of such prior
owner, or if the taxpayer's basis for the
property is determined by reference to the
basis of other property that in the hands of
the taxpayer was property of a character
subject to the allowance for depreciation,
or if the taxpayer's basis for the property
is determined under section 1022 and such
property was of a character subject to the
allowance for depreciation in the hands of
the decedent. Thus, for example, if a fa-
ther uses an automobile in his trade or
business during a period after December
31, 1961, and then gives the automobile to
his son as a gift for the son's personal use,
the automobile is section 1245 property in
the hands of the son.

* * * * *

(d) Effective/applicability date. This
section applies on and after the date these
regulations are published as final regula-
tions in the Federal Register. For rules
before the date these regulations are pub-
lished as final regulations in the Federal
Register, see § 1.1245-3 as contained in

26 CFR (revised as of the April 1 preced-
ing the date these regulations are pub-
lished as final regulations in the Federal
Register).

Par. 38. Section 1.1245-4 is amended
by revising the second sentence of para-
graph (a)(1) and adding paragraph (i) to
read as follows:

§ 1.1245-4 Exceptions and Limitations.

(a) * * *

(1) * * * For purposes of this paragraph
(a), the term "gift" means, except to the
extent that paragraph (a)(3) of this section
applies, a transfer of property that, in the
hands of the transferee, has a basis deter-
mined under the provisions of section
1015(a) or 1015(d) (relating to basis of
property acquired by gifts) or section
1022 (relating to basis of property ac-
quired from certain decedents who died in
2010). * * *

* * * * *

(i) Effective/applicability date. This
section applies on and after the date these
regulations are published as final regula-
tions in the Federal Register. For rules
before the date these regulations are pub-
lished as final regulations in the Federal
Register, see § 1.1245-4 as contained in
26 CFR (revised as of the April 1 preced-
ing the date these regulations are pub-
lished as final regulations in the Federal
Register).

Par. 39. Section 1.1250-4 is amended
by adding paragraphs (c)(5) and (h) to
read as follows:

§ 1.1250-4 Holding period.

* * * * *

(c) * * *

(5) A transfer at death where the basis
of the property in the hands of the trans-
feree is determined under section 1022.

* * * * *

(h) Effective/applicability date. This
section applies on and after the date these
regulations are published as final regula-
tions in the Federal Register. For rules
before the date these regulations are pub-
lished as final regulations in the Federal
Register, see § 1.1250-4 as contained in
26 CFR (revised as of the April 1 preced-
ing the date these regulations are pub-

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lished as final regulations in the Federal
Register).

Par. 40. Section 1.1254-2 is amended
by revising the second sentence of para-
graph (a)(1) to read as follows:

§ 1.1254-2 Exceptions and limitations.

(a) * * *

(1) * * * For purposes of this paragraph
(a), the term "gift" means, except to the
extent that paragraph (a)(2) of this section
applies, a transfer of natural resource re-
capture property that, in the hands of the
transferee, has a basis determined under
the provisions of section 1015(a) or
1015(d) (relating to basis of property ac-
quired by gift) or section 1022 (relating to
the basis of property acquired from certain
decedents who died in 2010). * * *

* * * * *

Par. 41. Section 1.1254-3 is amended
by revising paragraphs (b)(2)(ii) and (iii)
and adding paragraph (b)(2)(iv) to read as
follows:

§ 1.1254-3 Section 1254 costs
immediately after certain acquisitions.

* * * * *

(b) * * *

(2) * * *

(ii) A transaction described in section
1041(a);

(iii) A disposition described in
§ 1.1254-2(c)(3) (relating to certain tax-
free transactions); or

(iv) A transfer at death where basis of
property in the hands of the transferee is
determined under section 1022.

* * * * *

Par. 42. Section 1.1254-4 is amended
by revising paragraph (e)(4) introductory
text to read as follows:

§ 1.1254-4 Special rules for S
corporations and their shareholders.

* * * * *

(e) * * *

(4) * * * If stock is acquired in a
transfer that is a gift, in a transfer that is a
part sale or exchange and part gift, in a
transfer that is described in section
1041(a), or in a transfer at death where the
basis of property in the hands of the trans-
feree is determined under section 1022,
the amount of section 1254 costs with

respect to the property held by the corpo-
ration in the acquiring shareholder's
hands immediately after the transfer is an
amount equal to-

* * * * *

Par. 43. Section 1.1254-5 is amended
by revising paragraph (c)(2)(iv) introduc-
tory text to read as follows:

§ 1.1254-5 Special rules for
partnerships and their partners.

* * * * *

(c) * * *

(2) * * *

(iv) * * * If an interest in a partnership
is transferred in a transfer that is a gift, in
a transfer that is a part sale or exchange
and part gift, in a transfer that is described
in section 1041(a), or in a transfer at death
where the basis of property in the hands
of the transferee is determined under
section 1022, the amount of the trans-
feree partner's section 1254 costs with
respect to property held by the partner-
ship immediately after the transfer is an
amount equal to-

* * * * *

Par. 44. Section 1.1254-6 is revised to
read as follows:

§ 1.1254-6 Effective/applicability date.

(a) Sections 1.1254-1 through
1.1254-3 and 1.1254-5 are effective with
respect to any disposition of natural re-
source recapture property occurring after
March 13, 1995. The rule in § 1.1254-
1(b)(2)(iv)(A)(2), relating to a nonoperat-
ing mineral interest carved out of an
operating mineral interest with respect
to which an expenditure has been de-
ducted, is effective with respect to any
disposition occurring after March 13,
1995, of property (within the meaning
of section 614) that is placed in service
by the taxpayer after December 31,
1986. Section 1.1254-4 applies to dis-
positions of natural resource recapture
property by an S corporation (and a cor-
poration that was formerly an S corpo-
ration) and dispositions of S corporation
stock occurring on or after October 10,
1996. Sections 1.1254-2(d)(1)(ii),
1.1254-3(b)(1)(i), (b)(1)(ii), (d)(1)(i),
and (d)(1)(ii) are effective for dispositions

of property occurring on or after October
10, 1996.

(b) The provisions of §§ 1.1254-
2(a)(1), 1.1254-3(b)(2), 1.1254-4(e)(4),
and 1.1254-5(c)(2)(iv) that relate to
section 1022 are effective on and after
the date these regulations are published
as final regulations in the Federal Reg-
ister.

Par. 45. Section 1.1296-1 is amended
by revising paragraphs (d)(4) and (j) to
read as follows:

§ 1.1296-1 Mark to market election for
marketable stock.

* * * * *

(d) * * *

(4) Stock acquired from a decedent. In
the case of stock of a PFIC that is ac-
quired by bequest, devise, or inheritance
(or by the decedent's estate) and with
respect to which a section 1296 election
was in effect as of the date of the dece-
dent's death, notwithstanding section
1014 or section 1022, the basis of such
stock in the hands of the person so ac-
quiring it shall be the adjusted basis of
such stock in the hands of the decedent
immediately before his death (or, if
lesser, the basis that would have been
determined under section 1014 or sec-
tion 1022 without regard to this para-
graph (d)).

* * * * *

(j) Effective/applicability date. The
provisions in this section are applicable
for taxable years beginning on or after
May 3, 2004. The provisions of paragraph
(d)(4) of this section relating to section
1022 are effective on and after the date
these regulations are published as final
regulations in the Federal Register.

Par. 46. Section 1.1312-7 is amended
by revising paragraph (b) and adding
paragraph (d) to read as follows:

§ 1.1312-7 Basis of property after
erroneous treatment of a prior
transaction.

* * * * *

(b)(1) For this section to apply, the
taxpayer with respect to whom the erro-
neous treatment occurred must be:

(i) The taxpayer with respect to whom
the determination is made; or

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(ii) A taxpayer who acquired title to
the property in the erroneously treated
transaction and from whom, mediately
or immediately, the taxpayer with re-
spect to whom the determination is
made derived title in such a manner that
he will have a basis ascertained by ref-
erence to the basis in the hands of the
taxpayer who acquired title to the prop-
erty in the erroneously treated transac-
tion; or

(iii) A taxpayer who had title to the
property at the time of the erroneously
treated transaction and from whom, me-
diately or immediately, the taxpayer
with respect to whom the determination
is made derived title, if the basis of the
property in the hands of the taxpayer
with respect to whom the determination
is made is determined under section
1015(a) (relating to the basis of property
acquired by gift) or section 1022 (relat-
ing to the basis of property acquired
from certain decedents who died in
2010).

(2) No adjustment is authorized with
respect to the transferor of the property in
a transaction upon which the basis of the
property depends, when the determination
is with respect to the original transferee or
a subsequent transferee of the original
transferee.

* * * * *

(d) Effective/applicability date. This
section applies on and after the date these
regulations are published as final regula-
tions in the Federal Register. For rules
before the date these regulations are pub-
lished as final regulations in the Federal
Register, see § 1.1312-7 as contained in
26 CFR (revised as of the April 1 preced-
ing the date these regulations are pub-
lished as final regulations in the Federal
Register).

John Dalrymple,
Deputy Commissioner for
Services and Enforcement.

(Filed by the Office of the Federal Register on May 8, 2015,
8:45 a.m., and published in the issue of the Federal Register
for May 11, 2015, 80 F.R. 26873)

### Notice of Proposed Rulemaking

Qualifying Income from
Activities of Publicly
Traded Partnerships With
Respect to Minerals or
Natural Resources
REG-132634-14

AGENCY: Internal Revenue Service (IRS),
Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains
proposed regulations under section
7704(d)(1)(E) of the Internal Revenue
Code (Code) relating to qualifying income
from exploration, development, mining or
production, processing, refining, transpor-
tation, and marketing of minerals or nat-
ural resources. The proposed regulations
affect publicly traded partnerships and
their partners.

DATES: Comments and requests for a
public hearing must be received by Au-
gust 4, 2015.

ADDRESSES: Send submissions to: CC:
PA:LPD:PR (REG-132634-14), room
5203, Internal Revenue Service, P.O. Box
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand-
delivered Monday through Friday be-
tween the hours of 8 a.m. and 4 p.m. to
CC:PA:LPD:PR (REG-132634-14), Cou-
rier's Desk, Internal Revenue Service, 1111
Constitution Avenue, NW, Washington,
DC, or sent electronically, via the Federal
eRulemaking Portal at www.regulations.gov
(IRS REG-132634-14).

## FOR FURTHER INFORMATION

CONTACT: Concerning the proposed
regulations, Caroline E. Hay at (202) 317-
5279; concerning the submissions of com-
ments and requests for a public hearing,
Regina Johnson at (202) 317-6901 (not
toll-free numbers).

SUPPLEMENTARY INFORMATION:
Background

This document contains proposed
amendments to the Income Tax Regula-

tions (26 CFR part 1) under section
7704(d)(1)(E) regarding qualifying in-
come from certain activities with respect
to minerals or natural resources.

Congress enacted section 7704 in the
Omnibus Budget Reconciliation Act of
1987, Public Law 100-203 (101 Stat.
1330 (1987)), due to concerns that the
rapid growth of certain publicly traded
partnerships was eroding the corporate tax
base. See H.R. Rep. No. 100-391, at 1065
(1987). Section 7704(a) provides that, as a
general rule, publicly traded partnerships
will be treated as corporations. In section
7704(c), Congress provided an exception
from this rule if 90 percent or more of the
partnership's gross income is "qualifying
income." Qualifying income is generally
passive-type income, such as interest, div-
idends, and rent. Section 7704(d)(1)(E)
provides, however, that qualifying income
also includes income and gains derived
from the exploration, development, min-
ing or production, processing, refining,
transportation, or marketing of minerals or
natural resources. Section 7704(d)(1) de-
fines the term "mineral or natural re-
source" as any product for which a deduc-
tion for depletion is allowed under section
611, except soil, sod, dirt, turf, water,
mosses, or minerals from sea water, the
air, or other similar inexhaustible sources.

Regulations have been published pro-
viding guidance on (1) when a partnership
is publicly traded (§ 1.7704-1), (2) tran-
sition rules for partnerships in existence
prior to the effective date of section 7704
(§ 1.7704-2), and (3) qualifying income
from certain financial products (§ 1.7704-
3). No regulations have been issued under
section 7704(d)(1)(E). Instead, questions
about the specific application of section
7704(d)(1)(E) generally have been re-
solved by private letter ruling. However,
the number of private letter ruling re-
quests received has increased steadily
from five or fewer requests per year for
most years before 2008 to more than 30
requests received in 2013. Many of these
requests seek rulings that income from
support services provided to businesses
engaged in the section 7704(d)(1)(E) ac-
tivities is qualifying income for purposes
of section 7704. The Treasury Department
and the IRS are issuing these proposed
regulations in response to this increased

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interest in the application of section
7704(d)(1)(E).

These proposed regulations provide
guidance on whether income from activi-
ties with respect to minerals or natural
resources as defined in section 7704(d)(1)
is qualifying income. These regulations do
not address the transportation or storage
of any fuel described in section 6426(b),
(c), (d) or (e), or activities with respect to
industrial source carbon dioxide, any alco-
hol fuel defined in section 6426(b)(4)(A), or
any biodiesel fuel as defined in section
40A(d)(1). The Treasury Department and
the IRS request comments concerning
whether guidance is also needed with re-
spect to those activities and, if so, the spe-
cific issues such guidance should address.

### Explanation of Provisions

These proposed regulations use the
term "qualifying activities" to describe ac-
tivities relating to minerals or natural re-
sources that generate qualifying income.
Qualifying activities include: (1) the ex-
ploration, development, mining or pro-
duction, processing, refining, transporta-
tion, or marketing of minerals or natural
resources (section 7704(d)(1)(E) activities),
and (2) certain limited support activities that
are intrinsic to section 7704(d)(1)(E) activ-
ities (an "intrinsic activity"). These pro-
posed regulations set forth the require-
ments under which an activity is a
qualifying activity.

#### 1. Section 7704(d)(1)(E) activities

Section 7704(d)(1)(E) activities repre-
sent different stages in the extraction of
minerals or natural resources and the
eventual offering of products for sale.
These stages include exploration, devel-
opment, mining or production, process-
ing, refining, transportation (including
pipelines transporting gas, oil, or products
thereof), and marketing of any mineral or
natural resource (including fertilizer, geo-
thermal energy, and timber). Each of these
stages involves various types of opera-
tions. Based in part on discussions with
IRS engineers specializing in the various
oil and natural resource fields, the pro-
posed regulations provide an exclusive list
of operations that comprise the section
7704(d)(1)(E) activities for purposes of
section 7704. This list may be expanded

by published guidance. The Treasury De-
partment and the IRS intend that this list
represents only those activities that would
be undertaken by an exploration and devel-
opment company, a mining or production
company, a refiner or processor, or a trans-
porter or marketer of a mineral or natural
resource. Services provided to those busi-
nesses are not section 7704(d)(1)(E) activi-
ties, although they may qualify as intrinsic
activities. The Treasury Department and the
IRS request comments concerning whether
additional activities should be included in
the list of section 7704(d)(1)(E) activities.

##### A. Exploration

These proposed regulations define ex-
ploration as an activity performed to as-
certain the existence, location, extent, or
quality of any deposit of mineral or natu-
ral resource before the beginning of the
development stage of the natural deposit.
A partnership is engaged in exploration if
the partnership: (i) drills an exploratory or
stratigraphic type test well; (ii) conducts
drill stem and production flow tests to
verify commerciality of the deposit; (iii)
conducts geological or geophysical sur-
veys; or (iv) interprets data obtained from
geological or geophysical surveys. For
minerals, exploration also includes testpit-
ting, trenching, drilling, driving of explo-
ration tunnels and adits, and similar types
of activities described in Rev. Rul. 70-
287 (1970-1 CB 146) if conducted prior
to development activities with respect to
the minerals.

##### B. Development

These proposed regulations define de-
velopment as an activity performed to
make minerals or natural resources acces-
sible. A partnership is engaged in devel-
opment if the partnership: (i) drills wells
to access deposits of mineral or natural
resources; (ii) constructs and installs dril-
ling, production, or dual purpose plat-
forms in marine locations (or constructs
and installs any similar supporting struc-
tures necessary for extraordinary non-
marine terrain such as swamps or tundra);
(iii) completes wells including by install-
ing lease and well equipment (such as
pumps, flow lines, separators, and storage
tanks) so that wells are capable of produc-

ing oil and gas, and the production can be
removed from the premises; (iv) performs
a development technique (for example,
fracturing for oil and natural gas, or, with
respect to minerals, stripping, benching
and terracing, dredging by dragline,
stoping, and caving or room-and-pillar
excavation); or (v) constructs and in-
stalls gathering systems and custody
transfer stations.

##### C. Mining or production

These proposed regulations define
mining or production as an activity per-
formed to extract minerals or other natural
resources from the ground. A partnership
is engaged in mining or production if the
partnership: (i) operates equipment to ex-
tract natural resources from mines or
wells, or (ii) operates equipment to con-
vert raw mined products or raw well ef-
fluent to substances that can be readily
transported or stored (including by pass-
ing crude oil through mechanical separa-
tors to remove gas, placing crude oil in
settling tanks to recover basic sediment
and water, dehydrating crude oil, and op-
erating heater-treaters that separate raw
oil well effluent into crude oil, natural gas,
and salt water).

###### D. Processing or refining

Because processing and refining activ-
ities vary with respect to different miner-
als or natural resources, these proposed
regulations provide industry-specific rules
(described herein) for when an activity
qualifies as processing or refining. In gen-
eral, however, these proposed regulations
provide that an activity is processing or
refining if it is done to purify, separate, or
eliminate impurities. These proposed reg-
ulations further require that, for an activity
to be treated as processing or refining, the
partnership's position that an activity is
processing or refining for purposes of sec-
tion 7704 must be consistent with the part-
nership's designation of an appropriate
Modified Accelerated Cost Recovery Sys-
tem (MACRS) class life for assets used in
the activity in accordance with Rev. Proc.
87-56 (1987-2 CB 674) (for example,
MACRS asset class 13.3 for petroleum
refining facilities). In addition, except as
specifically provided otherwise, process-

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ing or refining does not include activities
that cause a substantial physical or chem-
ical change in a mineral or natural re-
source, or that transform the extracted
mineral or natural resource into new or
different mineral products, including
manufactured products. The Treasury De-
partment and the IRS believe that this rule
is consistent with definitions found else-
where in the Code and regulations. See,
for example, § 1.613-4(g)(5).

With respect to natural gas, an activity
is processing or refining only if the activ-
ity purifies natural gas, including by re-
moval of oil or condensate, water, and
non-hydrocarbon gases (including carbon
dioxide, hydrogen sulfide, nitrogen, and
helium), or separates natural gas into its
constituents which are normally recovered
in a gaseous phase (for example, methane
and ethane) and those which are normally
recovered in a liquid phase (for example,
propane and butane, pentane and gas con-
densate). It is generally anticipated that
activities that create the products listed in
the 2012 version (the most recent version
as of the date of publication of these pro-
posed regulations) of North American In-
dustry Classification System (NAICS)
code 211112 concerning natural gas liquid
extraction will be qualifying activities.
Processing will also include converting
methane in one integrated conversion into
liquid fuels that are otherwise produced
from the processing of crude oil, as de-
scribed in the following paragraph.

With respect to crude oil, an activity is
processing or refining if the activity is
performed to physically separate crude oil
into its component parts, including, but
not limited to, naphtha, gasoline, kero-
sene, fuel oil, lubricating base oils, waxes,
and similar products. An activity that
chemically converts the physically sepa-
rated components is processing or refining
of crude oil only if one or more of the
products of the conversion are recom-
bined with other physically separated
components of crude oil in a manner that
is necessary to the cost-effective produc-
tion of gasoline or other fuels (for exam-
ple, gas oil converted to naphtha through a
cracking process that is hydrotreated and
combined into gasoline). It is generally
anticipated that activities within a refinery
that create the products that are listed in
the 2012 version (the most recent version

as of the date of publication of these pro-
posed regulations) of NAICS code
324110 concerning petroleum refineries
will be qualifying activities, if those prod-
ucts are refinery grade products that are
obtained in the steps required to make
fuels, lubricating base oils, waxes, and
similar products. Additionally, physically
separating any product that is itself gen-
erated by the processing or refining of
crude oil is a qualifying activity for pur-
poses of section 7704(d)(1)(E).

The production of plastics and similar
petroleum derivatives does not give rise to
qualifying income derived from process-
ing or refining. See H.R. Rep. No. 100-
495, at 947 (1987) (Conf. Rep.). The fol-
lowing products are also not qualifying
products under this standard: (1) heat,
steam, or electricity produced by the re-
fining processes; (2) products that are ob-
tained from third parties or produced on-
site for use in the refinery, such as
hydrogen, if excess amounts are sold; and
(3) any product that results from further
chemical change of the product produced
from the separation of the crude oil if it is
not combined with other products sepa-
rated from the crude oil (for example,
production of petroleum coke from heavy
(refinery) residuum qualifies, but any up-
grading of petroleum coke (such as to
anode-grade coke) does not qualify be-
cause it is further chemically changed).

With respect to ores and minerals, an
activity is processing or refining if the
activity is listed in Treas. Reg. § 1.613-
4(f)(1)(ii) or (g)(6)(iii). Generally, refin-
ing of ores and minerals is any activity
that eliminates impurities or foreign mat-
ter from smelted or partially processed
metallic and nonmetallic ores and miner-
als, as for example, the refining of blister
copper.

With respect to timber, an activity is
processing if it merely modifies the phys-
ical form of timber. Processing includes
the application of heat or pressure to tim-
ber without adding any foreign sub-
stances. Processing of timber does not in-
clude activities that use chemicals or other
foreign substances to manipulate timber's
physical or chemical properties, such as
using a digester to produce pulp. Products
that result from timber processing include
wood chips, sawdust, untreated lumber,
veneers (unless a foreign substance is

added), wood pellets, wood bark, and
rough poles. Products that are not the re-
sult of timber processing include pulp,
paper, paper products, treated lumber, ori-
ented strand board, plywood, and treated
poles.

These proposed regulations reserve the
provisions relating to fertilizer. The Trea-
sury Department and the IRS request
comments on what activities should be
included.

###### E. Transportation

These proposed regulations define
transportation as the movement of miner-
als or natural resources and products pro-
duced from processing and refining, in-
cluding by pipeline, barge, rail, or truck.
Transportation also includes terminalling,
providing storage services, and operating
custody transfer stations and gathering
systems. Transportation includes the con-
struction of a pipeline only to the extent
that a pipe is run to connect a client to a
preexisting interstate or intrastate line
owned by the publicly traded partnership
(interconnect agreement). Transportation
(except for pipeline transportation) does
not include transportation of oil or gas (or
oil or gas products) to a place that sells or
dispenses to retail customers. See H.R.
Rep. No. 100-795, at 401 (1988). The
legislative history accompanying section
7704 clarifies that "a retail customer does
not include a person who acquires the oil
or gas for refining or processing, or par-
tially refined or processed products
thereof for further refining or processing,
. . . [or a] utility providing power to cus-
tomers." See H.R. Rep. No. 100-1104,
vol. 2, at 18 (1988) (Conf. Rep.). By con-
trast, "transporting refined petroleum
products by truck to retail customers is not
a qualifying activity." Id. However, trans-
portation includes bulk transportation, so
long as the transportation is not to a place
that sells or dispenses oil and gas (or oil
and gas products) to retail customers. See
S. Rep. No. 100-445, at 424 (1988).

###### F. Marketing

These proposed regulations define
marketing as the activities undertaken to
facilitate sale of minerals or natural re-
sources, or products produced from pro-

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cessing and refining. Marketing may also
include some additive blending into fuels
provided to a customer's specification.
The legislative history of section 7704
provides that marketing does not include
activities and assets involved primarily in
sales "to end users at the retail level." S.
Rep. No. 100-445, at 424 (1988). There-
fore, marketing does not include retail
sales (sales made in small quantities di-
rectly to end users). For example, gas
station operations are not included in
marketing for purposes of section
7704(d)(1)(E). Id. However, marketing
includes bulk and wholesale sales made
to end users. See, for example, H.R.
Rep. 100-1104, at 18 (1988) (Conf.
Rep.) (with respect to fertilizer) and in-
corporating in footnote 1, 133 Cong.
Rec. 37957 (December 22, 1987) (state-
ment of Sen. Bentsen with respect to
propane).

#### 2. Intrinsic Activities

The Treasury Department and the IRS
believe that certain limited support activ-
ities intrinsic to section 7704(d)(1)(E) ac-
tivities also give rise to qualifying income
because the income is "derived from" the
section 7704(d)(1)(E) activities. The pro-
posed regulations set forth three require-
ments for a support activity to be intrinsic
to section 7704(d)(1)(E) activities. An ac-
tivity will qualify as an intrinsic activity
only if the activity is specialized to sup-
port the section 7704(d)(1)(E) activity, is
essential to the completion of the section
7704(d)(1)(E) activity, and requires the
provision of significant services to support
the section 7704(d)(1)(E) activity. If each
of these requirements is met, the activity
is an intrinsic activity, and any income
received from the activity is qualifying
income. The Treasury Department and
IRS intend that intrinsic activities consti-
tute active support of section
7704(d)(1)(E) activities, and not merely
the supply of goods.

### A. Specialized

An activity meets the first requirement
of the intrinsic test if both the personnel
performing the activity and any property
used in the activity or sold to the customer
performing the section 7704(d)(1)(E) ac-

tivity are specialized. Personnel are spe-
cialized if they have received training
unique to the mineral or natural resource
industries that is of limited utility other
than to perform or support a section
7704(d)(1)(E) activity. An activity cannot
be an intrinsic activity without specialized
service personnel because all intrinsic ac-
tivities require the provision of significant
services (as described in part 3.C of the
Explanation of Provisions section of this
Preamble). For example, catering ser-
vices provided to employees at a drilling
site would not give rise to qualifying
income because catering services do not
require skills (or equipment as ex-
plained below) limited to supporting a
section 7704(d)(1)(E) activity. As such,
catering services are not intrinsic activ-
ities and any income from those services
is not qualifying income for purposes of
section 7704(c).

If an activity also involves the sale,
provision, or use of property, then the
property must qualify as specialized for
the activity to be an intrinsic activity. The
proposed regulations provide two alterna-
tive tests under which that property can
qualify as specialized. Under the first test,
property is specialized if it is used only in
connection with section 7704(d)(1)(E)
activities and has limited use outside of
those activities. That property must also
not be easily converted to a use other
than performing or supporting a section
7704(d)(1)(E) activity. Whether prop-
erty is easily converted is determined
based on all facts and circumstances, includ-
ing the cost to convert the property.

Under the second test, property that can
be used for purposes other than to perform
or support a section 7704(d)(1)(E) activity
will qualify as specialized to the extent
that the property is used as an injectant to
perform a section 7704(d)(1)(E) activity,
and, as part of the activity, the partnership
also collects and cleans, recycles, or oth-
erwise disposes of the injectant after use
in accordance with federal, state, or local
regulations concerning waste products
from mining or production activities. In-
jectants under this definition include, for
example, water, lubricants, and sand used
in connection with section 7704(d)(1)(E)
activities.

### B. Essential

An activity meets the second require-
ment of the intrinsic test if the activity is
essential to a section 7704(d)(1)(E) activ-
ity. An activity is essential if it is neces-
sary to (a) physically complete the section
7704(d)(1)(E) activity (including in a cost
effective manner in order to make the
activity economically viable), or (b) com-
ply with federal, state or local law regu-
lating the section 7704(d)(1)(E) activity.
For example, water delivery and disposal
services are essential when provided for
use in fracturing because the water must
be used to complete the drilling operations
(a development activity under section
7704(d)(1)(E)) and because the water dis-
posal services must be performed to com-
ply with federal, state, or local law regu-
lating drilling and fracturing. Legal,
financial, consulting, accounting, insur-
ance, and other similar services are not
essential to a section 7704(d)(1)(E) activ-
ity because the connection to completion
of the section 7704(d)(1)(E) activity is too
attenuated.

### C. Significant Services

An activity meets the third requirement
of the intrinsic test if the activity includes
the provision of significant services. A
partnership provides significant services if
its personnel have an ongoing or frequent
presence at the site of the section
7704(d)(1)(E) activity and the activities of
those personnel are necessary for the part-
nership to provide its services or to sup-
port the section 7704(d)(1)(E) activity. A
partnership that provides the same ser-
vices to multiple clients may satisfy this
test by performing the activity through a
rotating presence at multiple sites. For this
purpose, determining whether services are
ongoing or frequent is determined under
all facts and circumstances, including rec-
ognized best practices in the relevant in-
dustry. The Treasury Department and the
IRS request comments on whether and
how this requirement could be set forth as
an objective standard.

In addition, the proposed regulations
acknowledge that a qualifying activity in
which the partnership engages could re-
quire extensive offsite services. There-
fore, these proposed regulations provide

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that the services may be conducted offsite
if the services are performed on an ongo-
ing or frequent basis and offered exclu-
sively for those engaged in one or more
section 7704(d)(1)(E) activities. For exam-
ple, monitoring services will satisfy the sig-
nificant services requirement if the monitor-
ing is done on an ongoing or frequent basis
only to support persons engaged in one or
more section 7704(d)(1)(E) activities.

The proposed regulations also identify
certain activities that do not qualify as
significant services because they involve
the manufacture and sale or temporary
provision of a good. Thus, the design,
construction, manufacturing, repair, main-
tenance, lease, rent, or temporary provi-
sion of assets is not taken into account
when determining whether a partnership
has provided significant services.

#### Proposed Effective/Applicability Date and Transition Rules

Except for rules concerning the Tran-
sition Period, these regulations are pro-
posed to apply to income earned by a
partnership in a taxable year beginning on
or after the date these regulations are pub-
lished as final regulations in the Federal
Register. These regulations also provide
for a Transition Period, which ends on the
last day of the partnership's taxable year
that includes the date that is ten years after
the date that these regulations are pub-
lished as final regulations in the Federal
Register.

The proposed regulations provide that
a partnership may treat income from an
activity as qualifying income during the
Transition Period if the partnership re-
ceived a private letter ruling from the IRS
holding that income from the activity is
qualifying income. In addition, a partner-
ship may treat income from an activity as
qualifying income during the Transition
Period if, prior to May 6, 2015, the part-
nership was publicly traded, engaged in
the activity, and treated the activity as
giving rise to qualifying income under
section 7704(d)(1)(E), and that income
was qualifying income under the statute as
reasonably interpreted prior to the issu-
ance of these proposed regulations. In de-
termining whether an interpretation was
reasonable, the legislative history and in-
terpretations applied by the IRS prior to
the issuance of these proposed regulations

are taken into account. An interpretation
was not reasonable merely because a part-
nership had a reasonable basis for that
position. With respect to an activity un-
dertaken prior to May 6, 2015, no infer-
ence is intended that an activity that is not
described in these proposed regulations as
a qualifying activity did or did not pro-
duce qualifying income under the statute
and legislative history.

A partnership that is publicly traded
and engages in an activity after May 6,
2015, but before the date these regulations
are published as final regulations in the
Federal Register may treat income from
that activity as qualifying income during
the Transition Period if the income from
that activity is qualifying income under
these proposed regulations.

### Special Analyses

It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866, as supplemented by
Executive Order 13563. Therefore, a reg-
ulatory assessment is not required. It also
has been determined that section 553(b) of
the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these
proposed regulations. Because these pro-
posed regulations do not impose a collec-
tion of information on small entities, the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to
section 7805(f) of the Code, this notice of
proposed rulemaking has been submitted
to the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business.

#### Comments and Requests for a Public Hearing

Before these proposed regulations are
adopted as final regulations, consideration
will be given to any comments that are
submitted timely to the IRS as prescribed
in this preamble under the "Addresses"
heading. The IRS and the Treasury De-
partment request comments on all aspects
of the proposed rules. All comments will
be available at www.regulations.gov or
upon request. A public hearing will be
scheduled if requested in writing by any
person that timely submits written com-
ments. If a public hearing is scheduled,

notice of the date, time, and place for the
public hearing will be published in the
Federal Register.

### Drafting Information

The principal author of these proposed
regulations is Caroline E. Hay, Office of
the Associate Chief Counsel (Pass-
throughs and Special Industries). How-
ever, other personnel from the IRS and
Treasury Department participated in their
development.

* * * * *

### Proposed Amendments to the Regulations

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

PART 1-INCOME TAXES

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

Par. 2. Section 1.7704-4 is added to
read as follows:

§ 1.7704-4 Qualifying income -
mineral and natural resources.

(a) In general. For purposes of section
7704(d)(1)(E), qualifying income in-
cludes only income and gains from qual-
ifying activities with respect to minerals
or natural resources as defined in para-
graph (b) of this section. For purposes of
section 7704(d)(1)(E), qualifying activi-
ties include section 7704(d)(1)(E) activi-
ties (as described in paragraph (c) of this
section) and intrinsic activities (as de-
scribed in paragraph (d) of this section).

(b) Mineral or natural resource. The
term mineral or natural resource (includ-
ing fertilizer, geothermal energy, and tim-
ber) means any product of a character
with respect to which a deduction for de-
pletion is allowable under section 611,
except that such term does not include any
product described in section 613(b)(7)(A)
or (B) (soil, sod, dirt, turf, water,
mosses, minerals from sea water, the air,
or other similar inexhaustible sources).
For purposes of this section, the term
mineral or natural resource does not in-
clude industrial source carbon dioxide,
fuels described in section 6426(b)
through (e), any alcohol fuel defined in

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section 6426(b)(4)(A), or any biodiesel
fuel as defined in section 40A(d)(1).

(c) Section 7704(d)(1)(E) activities-
(1) Definition. Section 7704(d)(1)(E) ac-
tivities include the exploration, develop-
ment, mining or production, processing,
refining, transportation, or marketing of
any mineral or natural resource as limited
to those activities described in this para-
graph (c) or as provided by the Commis-
sioner by notice or in other forms of pub-
lished guidance. No other activities
qualify as section 7704(d)(1)(E) activities.

(2) Exploration. An activity constitutes
exploration if it is performed to ascertain
the existence, location, extent, or quality
of any deposit of mineral or natural re-
source before the beginning of the devel-
opment stage of the natural deposit by:

(i) Drilling an exploratory or strati-
graphic type test well;

(ii) Conducting drill stem and produc-
tion flow tests to verify commerciality of
the deposit;

(iii) Conducting geological or geo-
physical surveys;

(iv) Interpreting data obtained from
geological or geophysical surveys; or

(v) For minerals, testpitting, trenching,
drilling, driving of exploration tunnels
and adits, and similar types of activities
described in Rev. Rul. 70-287 (1970-1
CB 146), (see § 601.601(d)(2)(ii)(b) of
this chapter) if conducted prior to devel-
opment activities with respect to the min-
erals.

(3) Development. An activity consti-
tutes development if it is performed to
make accessible minerals or natural re-
sources by:

(i) Drilling wells to access deposits of
mineral or natural resources;

(ii) Constructing and installing drilling,
production, or dual purpose platforms in
marine locations, or any similar support-
ing structures necessary for extraordinary
non-marine terrain (such as swamps or
tundra);

(iii) Completing wells, including by in-
stalling lease and well equipment, such as
pumps, flow lines, separators, and storage
tanks, so that wells are capable of produc-
ing oil and gas, and the production can be
removed from the premises;

(iv) Performing a development tech-
nique such as, for minerals, stripping,
benching and terracing, dredging by dra-

gline, stoping, and caving or room-and-
pillar excavation, and for oil and natural
gas, fracturing; or

(vi) Constructing and installing gather-
ing systems and custody transfer stations.

(4) Mining or production. An activity
constitutes mining or production if it is
performed to extract minerals or other nat-
ural resources from the ground by:

(i) Operating equipment to extract nat-
ural resources from mines and wells; or

(ii) Operating equipment to convert
raw mined products or raw well effluent to
substances that can be readily transported
or stored (for example, passing crude oil
through mechanical separators to remove
gas, placing crude oil in settling tanks to
recover basic sediment and water, dehy-
drating crude oil, and operating heater-
treaters that separate raw oil well effluent
into crude oil, natural gas, and salt water).

(5) Processing or refining-(i) In gen-
eral. Except as otherwise provided in
paragraph (c)(5) of this section, an activity
is processing or refining if it is done to
purify, separate, or eliminate impurities.
For an activity to be treated as processing
or refining for purposes of this section, the
partnership's position that an activity is
processing or refining for purposes of
this section must be consistent with the
partnership's designation of an appro-
priate Modified Accelerated Cost Re-
covery System (MACRS) class life for
assets used in the activity in accordance
with Rev. Proc. 87-56, 1987-2 CB 674
(see § 601.601(d)(2)(ii)(b) of this chap-
ter). For example, for an activity to be
processing or refining of crude oil under
paragraph (c)(5)(iii) of this section, the
assets used in that process must also
have a MACRS class life of 13.3, Petro-
leum Refining. Unless otherwise pro-
vided in this paragraph (c)(5), an activ-
ity will not qualify as processing or
refining if the activity causes a substan-
tial physical or chemical change in a
mineral or natural resource, or trans-
forms the extracted mineral or natural
resource into new or different mineral
products or into manufactured products.

(ii) Natural Gas. An activity consti-
tutes processing of natural gas if it is
performed to:

(A) Purify natural gas, including by
removal of oil or condensate, water, or
non-hydrocarbon gases (including carbon

dioxide, hydrogen sulfide, nitrogen, and
helium);

(B) Separate natural gas into its con-
stituents which are normally recovered in
a gaseous phase (methane and ethane) and
those which are normally recovered in a
liquid phase (propane, butane, pentane,
and gas condensate); or

(C) Convert methane in one integrated
conversion into liquid fuels that are oth-
erwise produced from petroleum.

(iii) Petroleum-(A) Qualifying activ-
ities. An activity constitutes processing or
refining of petroleum if the end products
of these processes are not plastics or sim-
ilar petroleum derivatives and the activity
is performed to:

(1) Physically separate crude oil into
its component parts, including, but not
limited to, naphtha, gasoline, kerosene,
fuel oil, lubricating base oils, waxes and
similar products;

(2) Chemically convert the physically
separated components if one or more of
the products of the conversion are recom-
bined with other physically separated
components of crude oil in a manner that
is necessary to the cost effective produc-
tion of gasoline or other fuels (for exam-
ple, gas oil converted to naphtha through a
cracking process that is hydrotreated and
combined into gasoline); or

(3) Physically separate products cre-
ated through activities described in para-
graph (c)(5)(iii)(A)(1) or (2) of this sec-
tion.

(B) Non-qualifying activities. For pur-
poses of this section, the following prod-
ucts are not obtained through processing
of petroleum:

(1) Heat, steam, or electricity produced
by the refining processes;

(2) Products that are obtained from
third parties or produced onsite for use in
the refinery, such as hydrogen, if excess
amounts are sold; and

(3) Any product that results from fur-
ther chemical change of the product pro-
duced from the separation of the crude oil
if it is not combined with other products
separated from the crude oil (for example,
production of petroleum coke from heavy
(refinery) residuum qualifies, but any up-
grading of petroleum coke (such as to
anode-grade coke) does not qualify be-
cause it is further chemically changed).

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(iv) Ores and minerals. An activity
constitutes processing or refining of ores
and minerals if it meets the definition of
mining processes under § 1.613-
4(f)(1)(ii) or refining under § 1.613-
4(g)(6)(iii). Generally, refining of ores
and minerals is any activity that elimi-
nates impurities or foreign matter from
smelted or partially processed metallic
and nonmetallic ores and minerals, as for
example the refining of blister copper.

(v) Timber. An activity constitutes pro-
cessing of timber if it is performed to
modify the physical form of timber, in-
cluding by the application of heat or pres-
sure to timber, without adding any foreign
substances. Processing of timber does not
include activities that add chemicals or
other foreign substances to timber to ma-
nipulate its physical or chemical proper-
ties, such as using a digester to produce
pulp. Products that result from timber pro-
cessing include wood chips, sawdust,
rough lumber, kiln-dried lumber, veneers,
wood pellets, wood bark, and rough poles.
Products that are not the result of timber
processing include pulp, paper, paper
products, treated lumber, oriented strand
board/plywood, and treated poles.

(vi) Fertilizer. [Reserved]

(6) Transportation. Transportation is
the movement of minerals or natural re-
sources and products produced under
paragraph (c)(4) or (5) of this section,
including by pipeline, barge, rail, or truck,
except for transportation (not including
pipeline transportation) to a place that
sells or dispenses to retail customers. Re-
tail customers do not include a person
who acquires oil or gas for refining or
processing, or a utility. The following ac-
tivities qualify as transportation-

(i) Providing storage services;

(ii) Terminalling;

(iii) Operating gathering systems and
custody transfer stations;

(iv) Operating pipelines, barges, rail, or
trucks; and

(v) Construction of a pipeline only to
the extent that a pipe is run to connect a
producer or refiner to a preexisting inter-
state or intrastate line owned by the pub-
licly traded partnership (interconnect
agreements).

(7) Marketing. An activity constitutes
marketing if it is performed to facilitate
sale of minerals or natural resources and

products produced under paragraph (c)(4)
or (5) of this section, including blending
additives into fuels. Marketing does not
include activities and assets involved pri-
marily in retail sales (sales made in small
quantities directly to end users), which
includes, but is not limited to, operation of
gasoline service stations, home heating oil
delivery services, and local gas delivery
services.

(d) Intrinsic activities-(1) General re-
quirements. An activity is an intrinsic ac-
tivity only if the activity is specialized to
support a section 7704(d)(1)(E) activity, is
essential to the completion of the section
7704(d)(1)(E) activity, and requires the
provision of significant services to support
the section 7704(d)(1)(E) activity. Whether
an activity is an intrinsic activity is deter-
mined on an activity-by-activity basis.

(2) Specialization. An activity is a spe-
cialized activity if:

(i) The partnership provides personnel to
perform or support a section 7704(d)(1)(E)
activity and those personnel have received
training unique to the mineral or natural
resource industry that is of limited utility
other than to perform or support a section
7704(d)(1)(E) activity; and

(ii) To the extent that the activity in-
cludes the sale, provision, or use of prop-
erty, either:

(A) The property is primarily tangible
property that is dedicated to, and has limited
utility outside of, section 7704(d)(1)(E) ac-
tivities and is not easily converted (based on
all the facts and circumstances, including
the cost to convert the property) to another
use other than supporting or performing the
section 7704(d)(1)(E) activities; or

(B) The property is used as an injectant
to perform a section 7704(d)(1)(E) activ-
ity that is also commonly used outside of
section 7704(d)(1)(E) activities (such as
water, lubricants, and sand) and, as part of
the activity, the partnership also collects
and cleans, recycles, or otherwise dis-
poses of the injectant after use in accor-
dance with federal, state, or local regula-
tions concerning waste products from
mining or production activities.

(3) Essential-(i) An activity is essen-
tial to the section 7704(d)(1)(E) activity if
it is required to-

(A) Physically complete a section
7704(d)(1)(E) activity (including in a cost

effective manner, such as by making the
activity economically viable), or

(B) Comply with federal, state, or local
law regulating the section 7704(d)(1)(E)
activity.

(ii) Legal, financial, consulting, ac-
counting, insurance, and other similar ser-
vices do not qualify as essential to a sec-
tion 7704(d)(1)(E) activity.

(4) Significant services-(i) An activ-
ity requires significant services to support
the section 7704(d)(1)(E) activity if it
must be conducted on an ongoing or fre-
quent basis by the partnership's personnel
at the site or sites of the section
7704(d)(1)(E) activities. Alternatively,
those services may be conducted offsite if
the services are performed on an ongoing
or frequent basis and are offered exclu-
sively to those engaged in one or more
section 7704(d)(1)(E) activities. Whether
services are conducted on an ongoing or
frequent basis is determined based on all
the facts and circumstances, including rec-
ognized best practices in the relevant in-
dustry.

(ii) Partnership personnel perform sig-
nificant services only if those services are
necessary for the partnership to perform
an activity that is essential to the section
7704(d)(1)(E) activity, or to support the
section 7704(d)(1)(E) activity.

(iii) An activity does not constitute sig-
nificant services with respect to a section
7704(d)(1)(E) activity if the activity prin-
cipally involves the design, construction,
manufacturing, repair, maintenance, lease,
rent, or temporary provision of property.

(e) Examples. The following examples
illustrate the provisions of this section:

Example 1. Petrochemical products sourced
from an oil and gas well. (i) Z, a publicly traded
partnership, chemically converts a mixture of ethane
and propane (obtained from physical separation of
natural gas) into ethylene, propylene, and other gases
through use of a steam cracker.

(ii) Z's activities chemically convert physically
separated components of natural gas. The chemical
conversion of physically separated components of
natural gas (ethane and propane) is not an activity
that gives rise to qualifying income under paragraph
(c)(5)(ii) of this section. Therefore, the income Z
receives from the sale of ethylene and propylene is
not qualifying income for purposes of section
7704(d)(1)(E).

Example 2. Petroleum streams chemically con-
verted into refinery grade olefins byproducts. (i) Y, a
publicly traded partnership, owns a petroleum refin-
ery. Y classifies Y's assets used in the activity de-
scribed in this paragraph under MACRS class 13.3

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(Petroleum Refining). The refinery physically sepa-
rates crude oil, obtaining heavy gas oil. The refinery
then uses a catalytic cracking unit to chemically
convert the heavy gas oil into a liquid stream suitable
for gasoline blending and a gas stream containing
ethane, ethylene, and other gases. The refinery also
further physically separates the gas steam without
additional chemical change, resulting in refinery
grade ethylene. Y sells the ethylene to a third party.

(ii) Y's activities are performed to physically
separate crude oil into its component parts and to
chemically convert the separated heavy gas oil into a
liquid stream for recombining with other physically
separated components of crude oil. Y has classified
its assets used in that activity under an appropriate
MACRS code pursuant to paragraph (c)(5)(i) of this
section. Income Y receives from the liquid stream is
qualifying income pursuant to paragraph
(c)(5)(iii)(A)(2) of this section. Y's further physical
separation of the gas stream produces ethane, ethyl-
ene, and other gases. Pursuant to paragraph
(c)(5)(iii)(A)(3), income Y receives from the physi-
cally separated gases is qualifying income because
the heavy gas oil was chemically converted as part of
a processing activity pursuant to paragraph
(c)(5)(iii)(A)(2) of this section.

Example 3. Processing methane gas into syn-
thetic fuels through chemical change. (i) Y, a pub-
licly traded partnership, chemically converts meth-
ane into methanol and synthesis gas, and further
chemically converts those products into gasoline and
diesel fuel. Y receives income from sales of gasoline
and diesel created during the conversion processes,
as well as from sales of methanol.

(ii) With respect to the production of gasoline or
diesel, Y is engaged in the processing of natural gas
as provided in paragraph (c)(5)(ii)(C) of this section.
The production and sale of methanol, an intermedi-
ate product in the conversion process, is not a section
7704(d)(1)(E) activity because methanol is not a
liquid fuel otherwise produced from the processing
of crude oil.

Example 4. Delivery of refined products. (i) X, a
publicly traded partnership, sells diesel and lubricat-
ing oils to a government entity at wholesale prices
and delivers those goods in bulk.

(ii) X's sale of refined products to the govern-
ment entity is a section 7704(d)(1)(E) activity be-
cause it is a bulk transportation and sale as described
in paragraphs (c)(6) and (7) of this section and is not
a retail sale.

Example 5. Delivery of water. (i) X, a publicly
traded partnership, owns interstate and intrastate nat-
ural gas pipelines. X built a water delivery pipeline
along the existing right of way for its natural gas
pipeline to deliver water to A for use in A's fractur-
ing activity. A uses the delivered water in fracturing
to develop A's natural gas reserve in a cost-efficient
manner. X earns income for transporting natural gas
in the pipelines and for delivery of water.

(ii) X's income from transporting natural gas in
its interstate and intrastate pipelines is qualifying
income for purposes of section 7704(c) because
transportation of natural gas is a section
7704(d)(1)(E) activity as provided in paragraph
(c)(6) of this section.

(iii) The income X obtains from its water deliv-
ery services is not a section 7704(d)(1)(E) activity as

provided in paragraph (c) of this section. However,
because X's water delivery supports A's develop-
ment of natural gas, a section 7704(d)(1)(E) activity,
X's income from water delivery services may be
qualifying income for purposes of section 7704(c) if
the water delivery service is an intrinsic activity as
provided in paragraph (d) of this section. An activity
is an intrinsic activity if the activity is specialized to
narrowly support the section 7704(d)(1)(E) activity,
is essential to the completion of the section
7704(d)(1)(E) activity, and requires the provision of
significant services to support the section
7704(d)(1)(E) activity. Under paragraph (d)(2)(ii)(B)
of this section, the provision of water used in a
section 7704(d)(1)(E) activity is specialized to that
activity only if the partnership also collects and
cleans, recycles, or otherwise disposes of the water
after use in accordance with federal, state, or local
regulations concerning waste products from mining
or production activities. Because X does not collect
and clean, recycle, or otherwise dispose of the de-
livered water after use, X's water delivery activities
are not specialized to narrowly support the section
7704(d)(1)(E) activity. Thus, X's water delivery is
not an intrinsic activity. Accordingly, X's income
from the delivery of water is not qualifying income
for purposes of section 7704(c).

Example 6. Delivery of water and recovery and
recycling of flowback. (i) Assume the same facts as
in Example 5, except that X also collects and treats
flowback at the drilling site in accordance with state
regulations as part of its water delivery services and
transports the treated flowback away from the site. In
connection with these services, X provides personnel
to perform these services on an ongoing or frequent
basis that is consistent with best industry practices. X
has provided these personnel with specialized train-
ing regarding the recovery and recycling of flowback
produced during the development of natural gas, and
this training is of limited utility other than to perform
or support the development of natural gas.

(ii) The income X obtains from its water delivery
services is not a section 7704(d)(1)(E) activity as
provided in paragraph (d) of this section. However,
because X's water delivery supports A's develop-
ment of natural gas, a section 7704(d)(1)(E) activity,
X's income from water delivery services may be
qualifying income for purposes of section 7704(c) if
the water delivery service is an intrinsic activity as
provided in paragraph (d) of this section.

(iii) An activity is an intrinsic activity if the
activity is specialized to narrowly support the section
7704(d)(1)(E) activity, is essential to the completion
of the section 7704(d)(1)(E) activity, and requires
the provision of significant services to support the
section 7704(d)(1)(E) activity. Under paragraph
(d)(2)(ii)(B) of this section, the provision of water
used in a section 7704(d)(1)(E) activity is special-
ized to that activity only if the partnership also
collects and cleans, recycles, or otherwise disposes
of the water after use in accordance with federal,
state, or local regulations concerning waste products
from mining or production activities. X's provision
of personnel is specialized because those personnel
received training regarding the recovery and recy-
cling of flowback produced during the development
of natural gas, and this training is of limited utility
other than to perform or support the development of

natural gas. The provision of water is also special-
ized because water is an injectant used to perform a
section 7704(d)(1)(E) activity, and X also collects
and treats flowback in accordance with state regula-
tions as part of its water delivery services. Therefore,
X meets the specialized requirement. The delivery of
water is essential to support A's development activ-
ity because the water is needed for use in fracturing
to develop A's natural gas reserve in a cost-efficient
manner. Finally, the water delivery and recovery and
recycling activities require significant services to
support the development activity because X's per-
sonnel provide services necessary for the partnership
to perform the support activity at the development
site on an ongoing or frequent basis that is consistent
with best industry practices. Because X's delivery of
water and X's collection, transport, and treatment of
flowback is a specialized activity, is essential to the
completion of a section 7704(d)(1)(E) activity, and
requires significant services, the delivery of water
and the transport and treatment of flowback is an
intrinsic activity. X's income from the delivery of
water and the collection, treatment, and transport of
flowback is qualifying income for purposes of sec-
tion 7704(c).

(f) Proposed Effective/Applicability
Date and Transition Rule-(i) Except as
provided in paragraph (f)(ii) of this sec-
tion, this section is proposed to apply to
income earned by a partnership in a tax-
able year beginning on or after the date
these regulations are published as final
regulations in the Federal Register. Para-
graph (f)(ii) of this section applies during
the Transition Period, which ends on the
last day of the partnership's taxable year
that includes the date that is ten years after
the date that these regulations are pub-
lished as final regulations in the Federal
Register.

(ii) A partnership may treat income
from an activity as qualifying income dur-
ing the Transition Period if:

(A) The partnership received a private
letter ruling from the IRS holding that the
income from that activity is qualifying
income;

(B) Prior to May 6, 2015, the partner-
ship was publicly traded, engaged in the
activity, and treated the activity as giving
rise to qualifying income under section
7704(d)(1)(E), and that income was qual-
ifying income under the statute as reason-
ably interpreted prior to the issuance of
these proposed regulations; or

(C) The partnership is publicly traded
and engages in the activity after May 6,
2015 but before the date these regulations
are published as final regulations in the
Federal Register, and the income from

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that activity is qualifying income under
these proposed regulations.

John Dalrymple,
Deputy Commissioner for Services and
Enforcement.

(Filed by the Office of the Federal Register on May 5, 2015,
8:45 a.m., and published in the issue of the Federal Register
for May 6, 2015, 80 F.R. 25970)

### Notice of Proposed Rulemaking

### Notional Principal Contracts; Swaps with Nonperiodic Payments REG-102656-15

AGENCY: Internal Revenue Service (IRS),
Treasury.

ACTION: Withdrawal of notice of pro-
posed rulemaking; notice of proposed
rulemaking by cross-reference to tempo-
rary regulations.

SUMMARY: In the Rules and Regula-
tions section of this issue of the Federal
Register, the IRS is issuing final and tem-
porary regulations that amend the treat-
ment of nonperiodic payments made or
received pursuant to certain notional prin-
cipal contracts. These regulations provide
that, subject to certain exceptions, a no-
tional principal contract with a nonperi-
odic payment, regardless of whether it is
significant, must be treated as two sepa-
rate transactions consisting of one or more
loans and an on-market, level payment
swap. The regulations provide an excep-
tion from the definition of United States
property. These regulations affect parties
making and receiving payments under no-
tional principal contracts, including
United States shareholders of controlled
foreign corporations and tax-exempt orga-
nizations. The text of the temporary reg-
ulations also serves as the text of these
proposed regulations. This document
withdraws the notice of proposed rule-
making (REG-107548-11; RIN 1545-
BK10) published in the Federal Register
on May 11, 2012 (77 FR 27669).

DATES: Comments and requests for a
public hearing must be received by Au-
gust 6, 2015.

ADDRESSES: Send submissions to CC:
PA:LPD:PR (REG-102656-15), room
5203, Internal Revenue Service, P.O. Box
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand-
delivered Monday through Friday be-
tween the hours of 8 a.m. and 4 p.m. to
CC:PA:LPD:PR (REG-102656-15), Cou-
rier's Desk, Internal Revenue Service, 1111
Constitution Avenue NW., Washington, DC
20224, or sent electronically via the Federal
eRulemaking Portal at www.regulations.gov
(IRS REG-102656-15).

#### FOR FURTHER INFORMATION

CONTACT: Concerning the proposed
regulations under section 446, Alexa T.
Dubert or Anna H. Kim at (202) 317-
6895; concerning the proposed regula-
tions under section 956, Kristine A.
Crabtree at (202) 317-6934; concerning
submissions of comments or to request a
public hearing, Oluwafunmilayo Taylor,
(202) 317-6901 (not toll-free numbers).

##### SUPPLEMENTARY INFORMATION: Background and Explanation of Provisions

On May 11, 2012, the Treasury De-
partment and the IRS published temporary
regulations under section 956 (TD 9589)
in the Federal Register (77 FR 27612).
On the same date, a notice of proposed
rulemaking (REG-107548-11) by cross-
reference to the temporary regulations
was published in the Federal Register
(77 FR 27669). This document withdraws
those proposed regulations (REG-
107548-11; RIN 1545-BK10) and pro-
vides new proposed regulations (REG-
102656-15).

Final and temporary regulations in the
Rules and Regulations section of this is-
sue of the Federal Register amend the
Income Tax Regulations (26 CFR Part 1).
The final and temporary regulations amend
the regulations under section 446 of the In-
ternal Revenue Code (Code) relating to the
treatment of nonperiodic payments made or
received pursuant to certain notional princi-
pal contracts for U.S. federal income tax
purposes. The final and temporary regula-
tions also amend the regulations under sec-

tion 956 of the Code regarding an excep-
tion from the definition of United States
property. The text of the final and tempo-
rary regulations also serves as the text of
these proposed regulations. The preamble
to the final and temporary regulations ex-
plains those regulations and these pro-
posed regulations.

### Special Analyses

It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866, as supplemented by
Executive Order 13653. Therefore, a reg-
ulatory assessment is not required. It also
has been determined that section 553(b) of
the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these
regulations, and because these regulations
do not impose a collection of information
on small entities, the Regulatory Flexibil-
ity Act (5 U.S.C. chapter 6) does not ap-
ply. Pursuant to section 7805(f) of the
Code, this notice of proposed rulemaking
has been submitted to the Chief Counsel
for Advocacy of the Small Business Ad-
ministration for comment on its impact on
small entities.

#### Comments and Requests for Public Hearing

Before these proposed regulations are
adopted as final regulations, consideration
will be given to any comments that are
submitted timely to the IRS as prescribed
in this preamble under the "Addresses"
heading. The Treasury Department and
the IRS request comments on all aspects
of the proposed rules. All comments will
be available at www.regulations.gov or
upon request. A public hearing will be
scheduled if requested in writing by any
person that timely submits written com-
ments. If a public hearing is scheduled,
notice of the date, time, and place for the
hearing will be published in the Federal
Register.

### Drafting information

The principal authors of these regula-
tions are Alexa T. Dubert and Anna H.
Kim of the Office of Associate Chief
Counsel (Financial Institutions and Prod-
ucts). However, other personnel from the

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Treasury Department and the IRS partic- ipated in their development.

The revisions read as follows:

where in this issue of the Federal Regis- ter].

* * * * * Withdrawal of Notice of Proposed

§ 1.446-3 Notional principal contracts.

Par. 3. Section 1.956-2 is amended by revising paragraphs (b)(1)(xi) and (f) to

Rulemaking

* * * * * (g) * * *

read as follows:

Accordingly, under the authority of 26

(4) [The text of the proposed amend- ment to § 1.446-3(g)(4) is the same as the text of § 1.446-3T(g)(4) published else-

§ 1.956-2 Definition of United States property.

U.S.C. 7805, the notice of proposed rule- making (REG-107548-11 and RIN

1545-BK10) that was published in the

where in this issue of the Federal Regis-

* * * * *

Federal Register on May 11, 2012 (77

ter].

(b)(1)(xi) [The text of this proposed

FR 27669) is withdrawn.

* * * * * (6) * * *

amendment is the same as the text of § 1.956-2T(b)(1)(xi) published elsewhere

Proposed Amendments to the Regulations

Example 2. [The text of proposed amendment to § 1.446-3(g)(6) Example 2 is the same as the text of § 1.446-3T(g)(6) Example 2 published elsewhere in

in this issue of the Federal Register]. * * * * * (f) [The text of this proposed amend-

Accordingly, 26 CFR part 1 is pro-

this issue of the Federal Register].

posed to be amended as follows:

Example 3. [The text of proposed amendment to § 1.446-3(g)(6) Example 3 is the same as the text of

ment is the same as the text of § 1.956- 2T(f) published elsewhere in this issue of

PART 1-INCOME TAXES

§ 1.446-3T(g)(6) Example 3 published elsewhere in this issue of the Federal Register].

the Federal Register].

Paragraph 1. The authority citation for

Example 4. [The text of proposed amendment to § 1.446-3(g)(6) Example 4 is the same as the text of

part 1 continues to read in part as follows:

§ 1.446-3T(g)(6) Example 4 published elsewhere in

John M. Dalrymple

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

this issue of the Federal Register].

Par. 2. Section 1.446-3 is amended by:

* * * * *

Deputy Commissioner for

1. Revising paragraph (g)(4).

(j) ***

Services and Enforcement.

2. Revising paragraph (g)(6), Examples

(2) [The text of the proposed amend-

(Filed by the Office of the Federal Register on May 7, 2015,

2, 3 and 4.

ment to § 1.446-3(j)(2) is the same as the

8:45 a.m., and published in the issue of the Federal Register for May 8, 2015, 89 F.R. 26500)

3. Revising paragraph (j)(2).

text of § 1.446-3T(j)(2) published else-

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# Definition of Terms

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

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

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

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

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

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

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

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

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

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

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

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

# Abbreviations

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

A-Individual.

Acq .- Acquiescence.

B-Individual.

BE-Beneficiary.

F.R .- Federal Register.

FUTA-Federal Unemployment Tax Act.

FX-Foreign corporation.

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

GE-Grantee.

GP-General Partner.

GR-Grantor.

COOP-Cooperative.

IC-Insurance Company.

Ct.D .- Court Decision.

I.R.B .- Internal Revenue Bulletin.

CY-County.

LE-Lessee.

D-Decedent.

LP-Limited Partner.

LR-Lessor.

M-Minor.

Nonacq .- Nonacquiescence.

O Organization.

P-Parent Corporation.

PHC-Personal Holding Company.

PO-Possession of the U.S.

PR-Partner.

PRS-Partnership.

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

REIT-Real Estate Investment Trust.

Rev. Proc .- Revenue Procedure.

Rev. Rul .- Revenue Ruling.

S-Subsidiary.

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

Stat .- Statutes at Large.

T-Target Corporation.

T.C .- Tax Court.

T.D .- Treasury Decision.

TFE-Transferee.

TFR-Transferor.

CI-City.

T.I.R .- Technical Information Release.

TP-Taxpayer.
TR-Trust.

TT-Trustee.

U.S.C .- United States Code.

DE-Donee.

Del. Order-Delegation Order.

DISC-Domestic International Sales Corporation.
DR-Donor.

E-Estate.

EE-Employee.

E.O .- Executive Order.

ER-Employer.

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

F-Fiduciary.

FC-Foreign Country.

FICA-Federal Insurance Contributions Act.

FISC-Foreign International Sales Company.

FPH-Foreign Personal Holding Company.

BK-Bank.

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

C-Individual.

C.B .- Cumulative Bulletin.

CFR-Code of Federal Regulations.

DC-Dummy Corporation.

X-Corporation.

Y-Corporation.

Z-Corporation.

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## Numerical Finding List1

Bulletin 2015-1 through 2015-21

### Announcements:

2015-1, 2015-11 I.R.B. 758
2015-2, 2015-3 I.R.B. 324
2015-3, 2015-3 I.R.B. 328
2015-4, 2015-5 I.R.B. 565
2015-5, 2015-7 I.R.B. 602
2015-6, 2015-8 I.R.B. 685
2015-7, 2015-13 I.R.B. 823
2015-8, 2015-9 I.R.B. 698
2015-10, 2015-11 I.R.B. 758
2015-11, 2015-15 I.R.B. 883
2015-12, 2015-12 I.R.B. 770
2015-13, 2015-15 I.R.B. 908
2015-14, 2015-20 I.R.B. 971

## Proposed Regulations:

REG-109187-11, 2015-2 I.R.B. 277
REG-132751-14, 2015-2 I.R.B. 279
REG-145878-14, 2015-2 I.R.B. 290
REG-153656-3, 2015-5 I.R.B. 566
REG-102648-15, 2015-10 I.R.B. 745
REG-136018-13, 2015-11 I.R.B. 759
REG-143416-14, 2015-11 I.R.B. 757
REG-100400-14, 2015-12 I.R.B. 779
REG-132253-11, 2015-12 I.R.B. 771
REG-143040-11, 2015-13 I.R.B. 827
REG-133489-13, 2015-16 I.R.B. 926
REG-103281-11, 2015-19 I.R.B. 948
REG-107595-11, 2015-21 I.R.B. 986
REG-132634-14, 2015-21 I.R.B. 997
REG-102656-15, 2015-21 I.R.B. 1005

## Notices:

2015-1, 2015-2 I.R.B. 249
2015-2, 2015-4 I.R.B. 334
2015-3, 2015-6 I.R.B. 583
2015-4, 2015-5 I.R.B. 407
2015-5, 2015-5 I.R.B. 408
2015-6, 2015-5 I.R.B. 412
2015-7, 2015-6 I.R.B. 585
2015-8, 2015-6 I.R.B. 589
2015-9, 2015-6 I.R.B. 590
2015-10, 2015-20 I.R.B. 965
2015-11, 2015-8 I.R.B. 618
2015-15, 2015-9 I.R.B. 687
2015-12, 2015-8 I.R.B. 700
2015-13, 2015-10 I.R.B. 722
2015-14, 2015-10 I.R.B. 722
2015-16, 2015-10 I.R.B. 732
2015-17, 2015-14 I.R.B. 845
2015-19, 2015-9 I.R.B. 690
2015-20, 2015-11 I.R.B. 754
2015-18, 2015-12 I.R.B. 765
2015-21, 2015-12 I.R.B. 765

Notices :- Continued

2015-22, 2015-12 I.R.B. 768
2015-23, 2015-12 I.R.B. 769
2015-24, 2015-13 I.R.B. 811
2015-25, 2015-13 I.R.B. 814
2015-26, 2015-13 I.R.B. 814
2015-27, 2015-13 I.R.B. 816
2015-28, 2015-14 I.R.B. 848
2015-29, 2015-15 I.R.B. 873
2015-30, 2015-17 I.R.B. 928
2015-31, 2015-17 I.R.B. 929
2015-32, 2015-20 I.R.B. 967
2015-33, 2015-18 I.R.B. 934
2015-34, 2015-18 I.R.B. 942
2015-35, 2015-18 I.R.B. 943
2015-37, 2015-19 I.R.B. 947
2015-38, 2015-21 I.R.B. 984

## Revenue Procedures:

2015-1, 2015-1 I.R.B. 1
2015-2, 2015-1 I.R.B. 105

2015-3, 2015-1 I.R.B. 129
2015-4, 2015-1 I.R.B. 144
2015-5, 2015-1 I.R.B. 186
2015-6, 2015-1 I.R.B. 194
2015-7, 2015-1 I.R.B. 231
2015-8, 2015-1 I.R.B. 235
2015-9, 2015-2 I.R.B. 249
2015-10, 2015-2 I.R.B. 261
2015-12, 2015-2 I.R.B. 265
2015-13, 2015-5 I.R.B. 419
2015-14, 2015-5 I.R.B. 450
2015-15, 2015-5 I.R.B. 564
2015-16, 2015-7 I.R.B. 596
2015-17, 2015-7 I.R.B. 599
2015-18, 2015-8 I.R.B. 642
2015-19, 2015-8 I.R.B. 678
2015-20, 2015-9 I.R.B. 694
2015-21, 2015-13 I.R.B. 817
2015-22, 2015-11 I.R.B. 754
2015-23, 2015-13 I.R.B. 820
2015-24, 2015-13 I.R.B. 822
2015-25, 2015-14 I.R.B. 848
2015-26, 2015-15 I.R.B. 875
2015-27, 2015-16 I.R.B. 914
2015-28, 2015-16 I.R.B. 920
2015-29, 2015-15 I.R.B. 882
2015-30, 2015-20 I.R.B. 970

## Revenue Rulings:

2015-1, 2015-4 I.R.B. 331
2015-2, 2015-3 I.R.B. 321
2015-3, 2015-6 I.R.B. 580
2015-4, 2015-10 I.R.B. 743
2015-5, 2015-13 I.R.B. 788
2015-6, 2015-13 I.R.B. 801
2015-7, 2015-14 I.R.B. 849
2015-8, 2015-18 I.R.B. 945

Revenue Rulings :- Continued

2015-9, 2015-21 I.R.B. 972
2015-10, 2015-21 I.R.B. 973
2015-11, 2015-21 I.R.B. 975

## Treasury Decisions:

9707, 2015-2 I.R.B. 247
9708, 2015-5 I.R.B. 337
9709, 2015-7 I.R.B. 593
9710, 2015-8 I.R.B. 603
9711, 2015-11 I.R.B. 748
9712, 2015-11 I.R.B. 750
9713, 2015-13 I.R.B. 802
9714, 2015-14 I.R.B. 831
9715, 2015-15 I.R.B. 851
9716, 2015-15 I.R.B. 863
9717, 2015-16 I.R.B. 910
9718, 2015-15 I.R.B. 866
9719, 2015-21 I.R.B. 977

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2014-27 through 2014-52 is in Internal Revenue Bulletin
2014-52, dated December 28, 2014.

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Finding List of Current Actions on Previously Published Items1

Revenue Procedures :- Continued 2011-14

Revenue Rulings :- Continued

1975-491

Bulletin 2015-1 through 2015-21

Amplified by

Revoked by

Rev. Proc. 2015-13, 2015-5 I.R.B. 419

Rev. Rul. 2015-11, 2015-21 I.R.B. 975

Announcements:

2011-14

1990-65

2010-3

Clarified by

Revoked by

Amplified by

Rev. Proc. 2015-13, 2015-5 I.R.B. 419

Rev. Rul. 2015-11, 2015-21 I.R.B. 975

Ann. 2015-3, 2015-3 I.R.B. 328

1997-27

Notices:

Revenue Procedures:

Clarified by

2013-01

Rev. Proc. 2015-13, 2015-5 I.R.B. 419

Modified by

2014-01

Notice 2015-20, 2015-11 I.R.B. 754

Superseded by

1997-27

Rev. Proc. 2015-01, 2015-01 I.R.B. 1

Modified by

2013-01

Rev. Proc. 2015-13, 2015-5 I.R.B. 419

Superseded by

2014-02

Notice 2015-20, 2015-11 I.R.B. 754

Superseded by

2012-11

Rev. Proc. 2015-02, 2015-01 I.R.B. 105

Superseded by

2014-24

Rev. Proc. 2015-17, 2015-7 I.R.B. 599

Obsoleted by

2014-03

Notice 2015-29, 2015-15 I.R.B. 882

Superseded by

2015-9

Rev. Proc. 2015-03, 2015-01 I.R.B. 129

Modified by

1997-19

Rev. Proc. 2015-17, 2015-7 I.R.B. 599

Modified by

2014-04

Notice 2015-38, 2015-21 I.R.B. 984

Superseded by

2015-14

Rev. Proc. 2015-04, 2015-01 I.R.B. 144

Modified by

1997-26

Rev. Proc. 2015-20, 2015-9 I.R.B. 694

Superseded by

2014-05

Notice 2015-38, 2015-21 I.R.B. 984

Superseded by

2013-22

Rev. Proc. 2015-05, 2015-01 I.R.B. 186

Modified by

2001-62

Rev. Proc. 2015-22, 2015-11 I.R.B. 754

Superseded by

2014-06

Notice 2015-38, 2015-21 I.R.B. 984

Superseded by

2015-8

Rev. Proc. 2015-06, 2015-01 I.R.B. 194

Modified by

2002-62

Rev. Proc. 2015-22, 2015-11 I.R.B. 754

Superseded by

2014-07

Notice 2015-38, 2015-21 I.R.B. 984

Superseded by

2014-59

Rev. Proc. 2015-07, 2015-01 I.R.B. 231

Modified by

2004-83 Superseded by

Rev. Proc. 2015-24, 2015-13 I.R.B. 822

Notice 2015-38, 2015-21 I.R.B. 984

2014-08

Superseded by

2002-43

Rev. Proc. 2015-08, 2015-01 I.R.B. 235

Modified by

Rev. Proc. 2015-26, 2015-15 I.R.B. 875

2014-10

Superseded by

2002-43

Rev. Proc. 2015-10, 2015-2 I.R.B. 261

Obsoleted by

Rev. Proc. 2015-26, 2015-15 I.R.B. 875

2003-63

Superseded by

Revenue Rulings:

Rev. Proc. 2015-12, 2015-2 I.R.B. 265

92-19

2011-14

Supplemented by

Modified by

Rev. Rul. 2015-02, 2015-3 I.R.B. 321

Rev. Proc. 2015-12, 2015-2 I.R.B. 265

78-130

2011-14

Revoked by

Modified by

Rev. Rul. 2015-9, 2015-21 I.R.B. 972

Rev. Proc. 2015-13, 2015-5 I.R.B. 419

"A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2014-27 through 2014-52 is in Internal Revenue Bulletin 2014-52, dated December 28,
2014.

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# Internal Revenue Service Washington, DC 20224

Official Business
Penalty for Private Use, $300

# INTERNAL REVENUE BULLETIN

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

# We Welcome Comments About the Internal Revenue Bulletin

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