Internal Revenue Bulletin 2018-16 (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

Bulletin No. 2018-16
April 16, 2018

## HIGHLIGHTS OF THIS ISSUE

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

## ADMNISTRATIVE

### Notice 2018-29, page 495.

This notice announces that the Treasury Department and the
IRS intend to issue regulations under new section 1446(f)
regarding the disposition of a partnership interest that is not
publicly traded. This notice also provides interim guidance that
taxpayers may rely on pending the issuance of regulations.

### Notice 2018-31, page 501.

This notice impacts U.S. multinational enterprise groups that
are required to file a Form 8975 and Schedule A (Form 8975)
(Country-by-Country Report) (i.e., those that have more than
$850M in revenue in the prior reporting period) and that have
more than 50 percent of their revenues attributable to con-
tracts with the Department of Defense or other U.S. govern-
mental intelligence or security agencies. Such specified na-
tional security contractors may file their Country-by-Country
Report in the modified manner described in the notice.

### REG-132434-17, page 503.

These proposed regulations will narrow the scope of the cur-
rent summons interview regulations by excluding certain non-
government attorneys from receiving summoned books, pa-
pers, records, or other data, or from participating in the
interview of a witness summoned by the IRS to provide testi-
mony under oath. An attorney who is not an officer or employee
of the United States may not be hired by the IRS to perform
these activities unless the attorney is hired by the IRS as a
specialist in foreign, state, or local law, including tax law, or in
non-tax substantive law that is relevant to an issue in the
examination, such as patent law, property law, or environmen-
tal law, or is hired for knowledge, skills, or abilities other than
providing legal services as an attorney.

## EXEMPT ORGANIZATIONS

### Announcement 2018-07, page 503.

Revocation of IRC 501(c)(3) Organizations for failure to meet
the code section requirements. Contributions made to the
organizations by individual donors are no longer deductible
under IRC 170(b)(1)(A).

## INCOME TAX

### Notice 2018-26, page 480.

This notice provides additional guidance regarding the imple-
mentation of section 965 of the Internal Revenue Code as
amended by "An Act to provide for reconciliation pursuant to
titles II and V of the concurrent resolution on the budget for
fiscal year 2018", P.L. 115-97, which was enacted on Decem-
ber 22, 2017.

### Notice 2018-28, page 492.

This notice announces that the Department of the Treasury and
the Internal Revenue Service (IRS) intend to issue proposed
regulations providing guidance to assist taxpayers in comply-
ing with section 163(j) of the Internal Revenue Code (Code), as
amended on December 22, 2017, by "An Act to provide for
reconciliation pursuant to titles II and V of the concurrent
resolution on the budget for fiscal year 2018," P.L. 115-97
(the Act). This notice further describes certain of the rules that
those proposed regulations will include to provide taxpayers
with interim guidance as more comprehensive guidance is
developed. The rules described in this notice apply only for
purposes of determining the limitation on deductions for inter-
est expense under section 163(j), as amended by the Act.

### Notice 2018-29, page 495.

This notice announces that the Treasury Department and the
IRS intend to issue regulations under new section 1446(f)

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regarding the disposition of a partnership interest that is not
publicly traded. This notice also provides interim guidance that
taxpayers may rely on pending the issuance of regulations.

### Rev. Rul. 2018-10, page 477.

Fringe benefits aircraft valuation formula. For purposes of
section 1.61-21(g) of the Income Tax Regulations, relating to
the rule for valuing non-commercial flights on employer-
provided aircraft, the Standard Industry Fare Level (SIFL) cents-
per-mile rates and terminal charge in effect for the first half of
2018 are set forth.

### T.D. 9832, page 477.

These final regulations provide rules addressing the allocation
of the credit for increasing research activities to corporations
and trades or businesses under common control. These final
regulations also contain rules relating to the allocation of the
railroad track maintenance credit and the election for a re-
duced research credit.

## Special Announcement

### Notice 2018-29, page 495.

This notice announces that the Treasury Department and the
IRS intend to issue regulations under new section 1446(f)
regarding the disposition of a partnership interest that is not
publicly traded. This notice also provides interim guidance that
taxpayers may rely on pending the issuance of regulations.

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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 61 .- Gross Income Defined

26 CFR 1.61-21: Taxation of fringe benefits.

## Rev. Rul. 2018-10

For purposes of the taxation of fringe
benefits under section 61 of the Internal
Revenue Code, section 1.61-21(g) of the

Income Tax Regulations provides a rule
for valuing noncommercial flights on
employer-provided aircraft. Section 1.61-
21(g)(5) provides an aircraft valuation
formula to determine the value of such
flights. The value of a flight is determined
under the base aircraft valuation formula
(also known as the Standard Industry Fare
Level formula or SIFL) by multiplying the
SIFL cents-per-mile rates applicable for the

period during which the flight was taken by
the appropriate aircraft multiple provided in
section 1.61-21(g)(7) and then adding the
applicable terminal charge. The SIFL cents-
per-mile rates in the formula and the termi-
nal charge are calculated by the Department
of Transportation and are reviewed semi-
annually.

The following chart sets forth the ter-
minal charge and SIFL mileage rates:

Period During Which the Flight Is Taken

Terminal Charge

SIFL Mileage Rates

1/1/18 - 6/30/18

$41.71

Up to 500 miles = $.2282 per mile 501-1500 miles = $.1740 per mile Over 1500 miles = $.1673 per mile

### DRAFTING INFORMATION

The principal author of this revenue
ruling is Kathleen Edmondson of the Of-
fice of Associate Chief Counsel (Tax Ex-
empt/Government Entities). For further
information regarding this revenue ruling,
contact Ms. Edmondson at (202) 317-
6798 (not a toll-free number).

### T.D. 9832

#### DEPARTMENT OF THE TREASURY

#### Internal Revenue Service 26 CFR Part 1 Allocation of Controlled Group Research Credit

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Final regulations and removal
of temporary regulations.

SUMMARY: This document contains fi-
nal regulations relating to the allocation
of the credit for increasing research ac-
tivities (research credit) to corporations
and trades or businesses under common
control (controlled groups). This docu-
ment also contains final regulations re-
lating to the allocation of the railroad

track maintenance credit and the elec-
tion for a reduced research credit.

DATES: Effective date: These regulations
are effective on April 2, 2018.

Applicability date: For dates of applicabil-
ity, see §§ 1.41-6(j), 1.45G-1(g), and
1.280C-4(c).

FOR FURTHER INFORMATION CON-
TACT: James Holmes, at (202) 317-4137;
(not a toll-free number).

## SUPPLEMENTARY INFORMATION: Background

This document amends 26 CFR part 1
to provide rules relating to sections 41,
45G, and 280C of the Internal Revenue
Code (Code). On April 3, 2015, the De-
partment of the Treasury (Treasury De-
partment) and the IRS published final and
temporary regulations (TD 9717) (tempo-
rary regulations) in the Federal Register
(80 FR 18096) and a notice of proposed
rulemaking by cross-reference to the tem-
porary regulations (REG-133489-13) in
the Federal Register (80 FR 18171) (pro-
posed regulations). On April 27, 2015, the
Treasury Department and the IRS pub-
lished corrections to TD 9717 in the Fed-
eral Register (80 FR 23237 and 80 FR
23238). The temporary regulations expire
on April 2, 2018.

The preamble to the temporary regula-
tions fully describes the updates to the

regulations under sections 41, 45G, and
280C. See 80 FR 18097, April 3, 2015.
The temporary regulations updated the
section 41 rules in a manner that is con-
sistent with the amendments made to
section 41(f)(1)(A)(ii) and section 41(f)
(1)(B)(ii) contained in Section 301(c) of
the American Taxpayer Relief Act of
2012, Public Law 112-240, H.R. 8
(ATRA). The temporary regulations also
updated the regulations under § 1.45G-
1(f) and an example under § 1.280C-
4(b)(2) because they are based on the
rules of section 41(f) in effect before the
ATRA amendments.

One written comment responding to the
proposed regulations was received. No re-
quests for a public hearing were made and
no public hearing was held. After consider-
ation of the comment, the proposed regula-
tions are adopted without change by this
Treasury decision.

## Summary of Comment and Explanation of Provisions

No comments were received related to
the proposed regulations under section 41
or section 280C. One commenter re-
quested the regulations under § 1.45G-
1(f)(8) be amended to explicitly provide
that qualified railroad track maintenance
expenditures (QRTMEs) associated with a
track assignment reside with the assignee
(and not with the track owner) when there
has been an intra-group track assignment.

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Revising those rules is beyond the scope
of these regulations. Therefore, the Trea-
sury Department and IRS decline to adopt
the comment.

## Effect on Other Documents

The temporary regulations are obsolete
for taxable years beginning on or after
April 2, 2018.

## Special Analyses

Certain IRS regulations, including
these, are exempt from the requirements
of Executive Order 12866, as supple-
mented and reaffirmed by Executive Or-
der 13563. Therefore, a regulatory im-
pact assessment is not required. Because
the final regulations do not impose a
collection of information on small enti-
ties, the Regulatory Flexibility Act (5
U.S.C. chapter 6) does not apply. Pur-
suant to section 7805(f) of the Code, the
notice of proposed rulemaking that pre-
ceded the final regulations was submit-
ted to the Chief Counsel for Advocacy
of the Small Business Administration
for comment on their impact on small
business. No comments were received
on the proposed regulations.

These final regulations provide neces-
sary guidance for corporations that file a
consolidated return regarding the alloca-
tion of the group credit to members of
certain controlled groups of corporations
and trades or businesses under common
control. It is necessary to provide this
administrative relief for these controlled
groups as of April 2, 2018, the expiration
date of the temporary regulations, to re-
move impediments to claiming the re-
search and railroad track maintenance
credits and making the election for a re-
duced research credit. Accordingly, good
cause is found for dispensing with a de-
layed effective date pursuant to 5 U.S.C.
553(d).

## Drafting Information

The principal author of these regula-
tions is James Holmes, Office of the As-
sociate Chief Counsel (Passthroughs and
Special Industries). However, other per-
sonnel from the Treasury Department and
the IRS participated 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 is amended by revising the sectional
authority entries for §§ 1.41-6 and
1.280C-4 and adding a sectional author-
ity for § 1.45G-1 in numerical order to
read in part as follows:

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

Section 1.41-6 also issued under 26
U.S.C. 41(f)(1) and 1502.

* * * * *

Section 1.45G-1 also issued under 26
U.S.C. 45G(e)(2).

** * * *

Section 1.280C-4 also issued under 26
U.S.C. 280C(c)(4)

* * * * *

Par. 2. Section 1.41-6 is amended by
revising paragraphs (c), (d)(1) and (3), (e),
and (j)(4) and (5) to read as follows:

§ 1.41-6 Aggregation of expenditures.

* * * * *

(c) Allocation of the group credit. The
group credit is allocated to each member
of the controlled group on a proportionate
basis to its share of the aggregate of the
qualified research expenses, basic re-
search payments, and amounts paid or in-
curred to energy research consortiums
taken into account for the taxable year by
such controlled group for purposes of the
credit. For purposes of paragraphs (c), (d),
and (e) of this section, qualified research
expenses, basic research payments, and
amounts paid or incurred to energy re-
search consortiums are collectively re-
ferred to as QREs.

(d) Special rules for consolidated
groups-(1) In general. For purposes of
applying paragraph (c) of this section,
members of a consolidated group who are
members of a controlled group are treated
as a single member of the controlled
group.

* * * * *

(3) Special rule for allocation of group
credit among consolidated group mem-
bers. The portion of the group credit that
is allocated to a consolidated group is

allocated to each member of the consoli-
dated group on a proportionate basis to its
share of the aggregate of the QREs taken
into account for the taxable year by such
consolidated group for purposes of the
credit.

(e) Examples. The following examples
illustrate the provisions of paragraphs (c)
and (d) of this section.

Example 1. Controlled group. A, B, and C are a
controlled group. A had $100x, B $300x, and C
$500x of qualified research expenses for the year,
totaling $900x for the group. A, in the course of its
trade or business, also made a payment of $100x to
an energy research consortium for energy research.
The group's QREs total 1000x and the group calcu-
lated its total research credit to be $60x for the year.
Based on each member's proportionate share of the
controlled group's aggregate QREs, A is allocated
$12x, B $18x, and C $30x of the credit.

Example 2. Consolidated group is a member of
controlled group. The controlled group's members
are D, E, F, G, and H. F, G, and H file a consolidated
return and are treated as a single member (FGH) of
the controlled group. D had $240x, E $360x, and
FGH $600x of qualified research expenses for the
year ($1,200x aggregate). The group calculated its
research credit to be $100x for the year. Based on the
proportion of each member's share of QREs to the
controlled group's aggregate QREs for the taxable
year D is allocated $20x, E $30x, and FGH $50x of
the credit. The $50x of credit allocated to FGH is
then allocated to the consolidated group members
based on the proportion of each consolidated
group member's share of QREs to the consoli-
dated group's aggregate QREs. F had $120x, G
$240x, and H $240x of QREs for the year. There-
fore, F is allocated $10x, G is allocated $20x, and
H is allocated $20x.

* * * * *

(j) ** *

(4) Taxable years beginning after De-
cember 31, 2011. Paragraphs (c), (d)(1)
and (3), (e), and (j)(4) and (5) of this
section apply to taxable years beginning
on or after April 2, 2018. For taxable
years ending before April 2, 2018, see
§ 1.41-6T as contained in 26 CFR part 1,
as revised April 1, 2017.

(5) Taxable years beginning before
January 1, 2012. See § 1.41-6 as con-
tained in 26 CFR part 1, revised April 1,
2014.

### § 1.41-6T [Removed]

Par. 3. Section 1.41-6T is removed.

Par. 4. Section 1.45G-1 is amended by
revising paragraphs (f)(4) and (5) and
(g)(4) and (5) to read as follows:

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§ 1.45G-1 Railroad track maintenance
credit.

(f)

(4) Allocation of the group credit. The
group credit is allocated to each member
of the controlled group on a proportionate
basis to its share of the aggregate of the
QRTMEs taken into account for the tax-
able year by such controlled group for
purposes of the credit.

(5) Special rules for consolidated
groups-(i) In general. For purposes of
applying paragraph (f)(4) of this section,
members of a consolidated group who are
members of a controlled group are treated
as a single member of the controlled
group.

(ii) Special rule for allocation of group
credit among consolidated group mem-
bers. The portion of the group credit that
is allocated to a consolidated group is
allocated to each member of the consoli-
dated group on a proportionate basis to its
share of the aggregate of the QRTMEs
taken into account for the taxable year by
such consolidated group for purposes of
the credit.

(g)

(4) Taxable years beginning after De-
cember 31, 2011. Paragraphs (f)(4) and
(5) and (g)(4) and (5) of this section apply
to taxable years beginning on or after
April 2, 2018. For taxable years ending
before April 2, 2018, see § 1.45G-1T as

contained in 26 CFR part 1, as revised
April 1, 2017.

(5) Taxable years beginning before
January 1, 2012. See § 1.45-1 as con-
tained in 26 CFR part 1, revised April 1,
2014.

### § 1.45G-1T [Removed]

Par. 5. Section 1.45G-1T is removed.

Par. 6. Section 1.280C-4 is amended
by revising paragraphs (b)(2) and (c)(2)
and (3) to read as follows:

§ 1.280C-4 Credit for increasing
research activities.

* * * * *

(b)

(2) Example. The following example illustrates
an application of paragraph (b) of this section: A, B,
and C, all of which are calendar year taxpayers, are
members of a controlled group of corporations
(within the meaning of section 41(f)(5)). A, B, and C
each attach a statement to the 2012 Form 6765,
"Credit for Increasing Research Activities," showing
A and C were the only members of the controlled
group to have qualified research expenses when cal-
culating the group credit. A and C report their allo-
cated portions of the group credit on the 2012 Form
6765 and B reports no research credit on Form 6765.
Pursuant to paragraph (a) of this section, A and B,
but not C, each make an election for the reduced
credit under section 280C(c)(3)(B) on the 2012 Form
6765. In December 2013, B determines it had qual-
ified research expenses in 2012 resulting in an in-
creased group credit. On an amended 2012 Form
6765, A, B, and C each report their allocated por-
tions of the group credit. B reports its credit as a
regular credit under section 41(a) and reduces the

credit under section 280C(c)(3)(B). C may not re-
duce its credit under section 280C(c)(3)(B) because
C did not make an election for the reduced credit
with its original return.

(c) * * *

(2) Taxable years beginning after De-
cember 31, 2011. Paragraphs (b)(2) and
(c)(2) and (3) of this section apply to
taxable years beginning on or after April
2, 2018. For taxable years ending before
April 2, 2018, see § 1.280C-4T as con-
tained in 26 CFR part 1, as revised April
1, 2017.

(3) For taxable years ending before
January 1, 2012. See § 1.280C-4 as con-
tained in 26 CFR part 1, revised April 1,
2014.

#### § 1.280C-4T [Removed]

Par. 7. Section 1.280C-4T is removed.

Kirsten Wielobob,
Deputy Commissioner for Services and
Enforcement.

Approved: March 7, 2018.

David J. Kautter,
Assistant Secretary of the Treasury (Tax
Policy).

(Filed by the Office of the Federal Register on March 27,
2018, 8:45 a.m., and published in the issue of the Federal
Register for March 28, 2018, 83 F.R. 13183)

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## Part III. Administrative, Procedural, and Miscellaneous

Additional Guidance Under
Section 965; Guidance
Under Sections 62, 962,
and 6081 in Connection
With Section 965; and
Penalty Relief Under
Sections 6654 and 6655 in
Connection with Section
965 and Repeal of Section
958(b)(4)

Notice 2018-26

### SECTION 1. OVERVIEW

This notice announces that the Depart-
ment of the Treasury ("Treasury Depart-
ment") and the Internal Revenue Service
("IRS") intend to issue regulations in con-
nection with section 965 of the Internal
Revenue Code ("Code") as amended by
"An Act to provide for reconciliation pur-
suant to titles II and V of the concurrent
resolution on the budget for fiscal year
2018," P.L. 115-97 (the "Act"), which
was enacted on December 22, 2017. For
prior guidance issued under section 965,
see Notice 2018-07, 2018-4 I.R.B. 317;
Notice 2018-13, 2018-6 I.R.B. 341; and
Rev. Proc. 2018-17, 2018-9 I.R.B. 384.
In addition, this notice announces relief
from estimated tax penalties in connection
with the amendment of section 965 and
the repeal of section 958(b)(4) by the Act.

Section 2 of this notice provides back-
ground on section 965 and other relevant
provisions of the Code. Section 3 of this
notice describes regulations that the Trea-
sury Department and the IRS intend to
issue in connection with section 965 and
announces the IRS's intent to modify cer-
tain form instructions as a result of section
965. Section 4 of this notice describes a
modification that the Treasury Depart-
ment and the IRS intend to make with
respect to regulations under section 965
that were described in section 3.04(a) of
Notice 2018-13. Section 5 of this notice
provides guidance under section 962 in
connection with section 965. Section 6 of
this notice provides guidance concerning
the application of the estimated tax rules
in sections 6654 and 6655 and a waiver

from the penalty imposed under those sec-
tions with respect to estimated taxes in
connection with section 965 and the re-
peal of section 958(b)(4). Section 7 of this
notice describes the effective dates of the
regulations and other guidance described
in this notice, as well as a clarification to
the effective date provided in section 6 of
Notice 2018-13 for the rule described in
section 5.01 of Notice 2018-13. Section 8
of this notice requests comments and pro-
vides contact information.

## SECTION 2. BACKGROUND

### .01 Treatment of Accumulated Post-1986 Deferred Foreign Income as Subpart F Income

Section 965(a) provides that for the last
taxable year of a deferred foreign income
corporation ("DFIC") that begins before
January 1, 2018 (such year of the DFIC,
the "inclusion year"), the subpart F in-
come of the corporation (as otherwise de-
termined for such taxable year under sec-
tion 952) shall be increased by the greater
of (1) the accumulated post-1986 deferred
foreign income of such corporation deter-
mined as of November 2, 2017, or (2) the
accumulated post-1986 deferred foreign
income of such corporation determined as
of December 31, 2017 (each such date, a
"measurement date," and the greater of
the accumulated post-1986 deferred for-
eign income of the corporation as of the
measurement dates, the "section 965(a)
earnings amount"). The section 965(a)
earnings amount is not subject to the rules
or limitations in section 952 and is not
limited by the accumulated earnings and
profits of the DFIC as of the close of the
inclusion year.

### .02 Determination of United States Shareholder's Section 951(a)(1) Inclusion by Reason of Section 965

Section 965(b)(1) provides that, if a
taxpayer is a United States shareholder
with respect to at least one DFIC and at
least one E&P deficit foreign corporation,
then the portion of the section 965(a)
earnings amount which would otherwise
be taken into account under section 951(a)
(1) by a United States shareholder with
respect to each DFIC is reduced by the

amount of such United States sharehold-
er's aggregate foreign E&P deficit that is
allocated to such DFIC. The portion of the
section 965(a) earnings amount that is
taken into account under section 951(a)(1)
by a United States shareholder, taking into
account the reduction described in the pre-
ceding sentence, is referred to in this no-
tice as the "section 965(a) inclusion
amount."

.03 Allocation of Aggregate Foreign
E&P Deficit and Definition of E&P
Deficit Foreign Corporation

The aggregate foreign E&P deficit of
any United States shareholder is allocated
to each DFIC of the United States share-
holder in an amount that bears the same
proportion to such aggregate as (A) such
United States shareholder's pro rata share
of the section 965(a) earnings amount of
each such DFIC bears to (B) the aggregate
of such United States shareholder's pro
rata shares of the section 965(a) earnings
amounts of all DFICs of such United
States shareholder. Section 965(b)(2). The
term "aggregate foreign E&P deficit"
means, with respect to any United States
shareholder, the lesser of (I) the aggregate
of such shareholder's pro rata shares of
the specified E&P deficits of the E&P
deficit foreign corporations of such share-
holder or (II) the aggregate of such share-
holder's pro rata shares of the section
965(a) earnings amounts of all DFICs of
such shareholder. Section 965(b)(3)(A)(i).

The term "E&P deficit foreign corpo-
ration" means, with respect to any tax-
payer, any specified foreign corporation
with respect to which such taxpayer is a
United States shareholder, if, as of No-
vember 2, 2017, (i) such specified foreign
corporation has a deficit in post-1986
earnings and profits, (ii) such corporation
was a specified foreign corporation, and
(iii) such taxpayer was a United States
shareholder of such corporation. Section
965(b)(3)(B). The term "specified E&P
deficit" means, with respect to an E&P
deficit foreign corporation, the amount of
such corporation's deficit in post-1986
earnings and profits as of November 2,
2017. See section 965(b)(3)(C).

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### .04 Application of the Participation Exemption

Section 965(c)(1) provides that there
shall be allowed as a deduction for the
taxable year of a United States share-
holder in which a section 965(a) inclu-
sion amount is included in the gross
income of such United States share-
holder an amount equal to the sum of
(A) the United States shareholder's 8
percent rate equivalent percentage (as
defined in section 965(c)(2)(A)) of the
excess (if any) of (i) the section 965(a)
inclusion amount, over (ii) the amount
of such United States shareholder's ag-
gregate foreign cash position, plus (B)
the United States shareholder's 15.5
percent rate equivalent percentage (as
defined in section 965(c)(2)(B)) of so
much of such United States sharehold-
er's aggregate foreign cash position as
does not exceed the section 965(a) in-
clusion amount. The deduction allowed
to a United States shareholder under
section 965(c) with respect to a section
965(a) inclusion amount of the United
States shareholder is referred to in this
notice as a "section 965(c) deduction."

Section 965(c)(3)(A) provides that the
term "aggregate foreign cash position"
means, with respect to any United States
shareholder, the greater of (i) the aggre-
gate of such United States shareholder's
pro rata share of the cash position of
each specified foreign corporation of
such United States shareholder deter-
mined as of the close of the last taxable
year of such specified foreign corpora-
tion that begins before January 1, 2018
("final cash measurement date"),1 or (ii)
one half of the sum of (I) the aggregate
described in clause (i) determined as of
the close of the last taxable year of each
such specified foreign corporation that
ends before November 2, 2017 (the
"second cash measurement date"), plus
(II) the aggregate described in clause (i)
determined as of the close of the taxable
year of each such specified foreign cor-
poration that precedes the taxable year
referred to in subclause (I) ("first cash

measurement date"). Each date referred
to in the preceding sentence is referred
to in this notice as a "cash measurement
date."

The cash position of any specified for-
eign corporation is the sum of (i) cash
held by such corporation, (ii) the net ac-
counts receivable of such corporation, and
(iii) the fair market value of the following
assets held by such corporation (each as-
set, a "cash equivalent asset"): (I) personal
property which is of a type that is actively
traded and for which there is an estab-
lished financial market; (II) commercial
paper, certificates of deposit, the securities
of the Federal government and of any
State or foreign government; (III) any for-
eign currency; (IV) any obligation with a
term of less than one year ("short-term
obligation"); and (V) any asset which the
Secretary identifies as being economically
equivalent to any asset described in sec-
tion 965(c)(3)(B). Section 965(c)(3)(B).
For purposes of determining the aggregate
foreign cash position of a United States
shareholder, the term "net accounts re-
ceivable" means, with respect to any
specified foreign corporation, the excess
(if any) of (i) such corporation's ac-
counts receivable, over (ii) such corpo-
ration's accounts payable (determined
consistent with the rules of section 461).
Section 965(c)(3)(C).

Section 965(c)(3)(D) provides that net
accounts receivable, actively traded prop-
erty, and short-term obligations shall not
be taken into account by a United States
shareholder in determining its aggregate
foreign cash position to the extent that
such United States shareholder demon-
strates to the satisfaction of the Secretary
that such amount is so taken into account
by such United States shareholder with
respect to another specified foreign corpo-
ration.

Section 965(c)(3)(F) provides that if
the Secretary determines that a principal
purpose of any transaction was to reduce
the aggregate foreign cash position taken
into account under section 965(c), such
transaction shall be disregarded for pur-
poses of section 965(c).

.05 Definition of DFIC and Accumulated
Post-1986 Deferred Foreign Income

For purposes of section 965, a DFIC is,
with respect to any United States share-
holder, any specified foreign corporation
of such United States shareholder that has
accumulated post-1986 deferred foreign
income (as of a measurement date) greater
than zero. Section 965(d)(1). The term
"accumulated post-1986 deferred foreign
income" means the post-1986 earnings
and profits of the specified foreign corpo-
ration except to the extent such earnings
and profits (A) are attributable to income
of the specified foreign corporation that is
effectively connected with the conduct of
a trade or business within the United
States and subject to tax under chapter 1
("effectively connected income"), or (B)
in the case of a controlled foreign corpo-
ration ("CFC"), if distributed, would be
excluded from the gross income of a
United States shareholder under section
959 ("previously taxed income"). Section
965(d)(2).

Section 965(d)(3) provides that the
term "post-1986 earnings and profits"
means the earnings and profits of the for-
eign corporation (computed in accordance
with sections 964(a) and 986, and by tak-
ing into account only periods when the
foreign corporation was a specified for-
eign corporation) accumulated in taxable
years beginning after December 31, 1986,
and determined (A) as of the measurement
date that is applicable with respect to such
foreign corporation, and (B) without dim-
inution by reason of dividends distributed
during the inclusion year other than divi-
dends distributed to another specified for-
eign corporation.

### .06 Specified Foreign Corporation

Section 965(e)(1) provides that the term
"specified foreign corporation" means (A)
any CFC and (B) any foreign corporation
with respect to which one or more domestic
corporations is a United States shareholder.
For purposes of sections 951 and 961, a
specified foreign corporation described in
section 965(e)(1)(B) is treated as a CFC

1Notice 2018-07 and Notice 2018-13 referred to the year that includes the final cash measurement date as the "inclusion year" of such specified foreign corporation. However, only a DFIC
can have an inclusion year, and therefore the final cash measurement date of a specified foreign corporation, which can be a DFIC, an E&P deficit foreign corporation, or neither, will not
necessarily be the close of an inclusion year. The regulations described in Notice 2018-07 and Notice 2018-13 will describe the final cash measurement date consistently with section
965(c)(3)(A) and this notice. Any reference to an "inclusion year" for a specified foreign corporation that is not a DFIC will describe the last year of the specified foreign corporation that
begins before January 1, 2018.

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solely for purposes of taking into account
the subpart F income of such corporation
under section 965(a) (and for purposes of
determining a United States shareholder's
pro rata share of any amount with respect to
a specified foreign corporation under section
965(f). Section 965(e)(2). However, if a
passive foreign investment company (as de-
fined in section 1297) with respect to the
shareholder is not a CFC, then such corpo-
ration is not a specified foreign corporation.
Section 965(e)(3).

### .07 Determination of Pro Rata Share

Section 965(f)(1) provides that the de-
termination of any United States share-
holder's pro rata share of any amount with
respect to any specified foreign corpora-
tion shall be determined under rules sim-
ilar to the rules of section 951(a)(2) by
treating such amount in the same manner
as subpart F income (and by treating such
specified foreign corporation as a CFC).

.08 Election Under Section 965(h)
Concerning Payment of Net Tax
Liability Under Section 965

Section 965(h)(1) provides that in the
case of a United States shareholder of a
DFIC, such United States shareholder
may elect to pay the net tax liability under
section 965 in eight installments. Section
965(h)(5) provides that any election under
section 965(h)(1) must be made not later
than the due date for the return of tax for
the year of the United States shareholder
in which or with which the inclusion year
of the DFIC ends and must be made in
such manner as the Secretary provides.

If an election is made under section
965(h)(1), the first installment must be
paid on the due date (determined without
regard to any extension of time for filing
the return) for the return of tax for the year
of the United States shareholder in which
or with which the inclusion year of the
DFIC ends, and each succeeding install-
ment must be paid on the due date (deter-
mined without regard to any extension of
time for filing the return) for the return of
tax for the taxable year following the tax-
able year with respect to which the pre-
ceding installment was made. Section
965(h)(2).

Section 965(h)(6) defines the net tax
liability under section 965 with respect to

any United States shareholder as the ex-
cess (if any) of (i) such taxpayer's net
income tax for the taxable year in which
an amount is included in the gross income
of such United States shareholder under
section 951(a)(1) by reason of section
965, over (ii) such taxpayer's net income
tax for such taxable year determined (I)
without regard to section 965, and (II)
without regard to any income or deduction
properly attributable to a dividend re-
ceived by such United States shareholder
from any DFIC. For this purpose, the term
"net income tax" means the regular tax
liability reduced by the credits allowed
under subparts A, B, and D of part IV of
subchapter A.

.09 Election Under Section 965(i)
Concerning Payment of Net Tax
Liability Under Section 965 by S
Corporation Shareholder and Related
Reporting Requirements

Section 965(i)(1) provides that in the
case of any S corporation that is a United
States shareholder of a DFIC, each share-
holder of such S corporation may elect to
defer payment of such shareholder's net
tax liability under section 965 with respect
to such S corporation until the sharehold-
er's taxable year which includes the trig-
gering event with respect to such liability.

Under section 965(i)(1), any net tax
liability, payment of which is deferred
under section 965(i)(1), will be assessed
on the return of tax as an addition to tax
in the shareholder's taxable year which
includes the triggering event with re-
spect to such liability. As defined in
section 965(i)(2), in the case of any
shareholder's net tax liability under sec-
tion 965 with respect to any S corpora-
tion, the triggering event with respect to
such liability is whichever of the follow-
ing occurs first: (i) such corporation
ceases to be an S corporation (deter-
mined as of the first day of the first
taxable year that such corporation is not
an S corporation); (ii) a liquidation or
sale of substantially all the assets of
such S corporation (including in a title
11 or similar case), a cessation of busi-
ness by such S corporation, such S cor-
poration ceases to exist, or any similar
circumstance; or (iii) a transfer of any
share of stock in such S corporation by
the taxpayer (including by reason of

death, or otherwise). In the case of a
transfer of less than all of the taxpayer's
shares of stock in the S corporation,
such transfer shall only be a triggering
event with respect to so much of the
taxpayer's net tax liability under section
965 with respect to such S corporation
as is properly allocable to such stock.
Section 965(i)(2)(B).

Section 965(i)(3) defines a sharehold-
er's net tax liability under section 965
with respect to any S corporation as the
net tax liability under section 965 which
would be determined under section
965(h)(6) if the only amounts taken into
account under section 951(a)(1) by rea-
son of section 965 by such shareholder
were allocations from such S corpora-
tion.

.10 Election Under Section 965(m)
Concerning Inclusions of Amounts
Under Section 965

Under section 965(m)(1)(B), a real es-
tate investment trust (REIT) may elect, in
lieu of including any amount required
to be taken into account under section
951(a)(1) by reason of section 965 in the
taxable year in which it would otherwise
be included in gross income (for purposes
of the computation of REIT taxable in-
come under section 857(b)), to include
such amount in gross income in eight in-
stallments.

.11 Election Under Section 965(n) Not
to Apply Net Operating Loss Deduction

Under section 965(n)(1), a United
States shareholder of a DFIC may make
an election pursuant to which the amount
described in section 965(n)(2) shall not be
taken into account (A) in determining the
amount of the net operating loss deduction
under section 172 of such shareholder for
such taxable year, or (B) in determining
the amount of taxable income for such
taxable year which may be reduced by net
operating loss carryovers or carrybacks to
such taxable year under section 172. The
amount described in section 965(n)(2) is
the sum of (A) the amount required to be
taken into account under section 951(a)(1)
by reason of section 965 (determined after
the application of section 965(c)), plus (B)
in the case of a domestic corporation
which chooses to have the benefits of sub-

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part A of part III of subchapter N for the
taxable year, the taxes deemed to be paid
by such corporation under subsections (a)
and (b) of section 960 for such taxable
year with respect to the amount described
in section 965(n)(2)(A) which are treated
as a dividends under section 78.

### .12 Regulations or Other Guidance Under Section 965

Section 965(o) provides that the Sec-
retary shall prescribe such regulations or
other guidance as may be necessary or
appropriate to carry out the provisions
of section 965, including regulations or
other guidance to provide appropriate
basis adjustments, and regulations or
other guidance to prevent the avoidance
of the purposes of section 965, including
through a reduction in earnings and
profits, through changes in entity classi-
fication or accounting methods, or oth-
erwise.

### .13 Definition of United States Shareholder

For taxable years of foreign corpora-
tions beginning before January 1, 2018,
under section 951(b), a United States
shareholder is a United States person
(within the meaning of section 957(c))
that owns within the meaning of section
958(a), or is considered as owning by
applying the rules of ownership of sec-
tion 958(b), 10 percent or more of the
total combined voting power of all
classes of stock entitled to vote of the
stock of a foreign corporation. Under
section 957(c), a United States person
generally has the meaning assigned to it
by section 7701(a)(30), which includes
a domestic partnership or domestic trust.
But see Notice 2010-41, 2010-22
I.R.B. 715 (announcing that the Trea-
sury Department and the IRS intend
to issue regulations treating certain do-
mestic partnerships as foreign partner-
ships for purposes of identifying which
United States shareholders are required
to include amounts in gross income un-
der section 951(a)). Moreover, an S cor-
poration is treated as a partnership for
purposes of sections 951 through 965.
See section 1373(a).

.14 Attribution Rules in Section 958(b)
and Section 318(a)

Section 958 provides rules for deter-
mining direct, indirect, and constructive
stock ownership. Under section 958(a)(1),
stock is considered owned by a person if it
is owned directly or is owned indirectly
through certain foreign entities under
section 958(a)(2). Under section 958(b),
section 318 applies, with certain modifi-
cations, to the extent that the effect is to
treat any United States person as a United
States shareholder within the meaning of
section 951(b), to treat a person as a re-
lated person within the meaning of section
954(d)(3), to treat the stock of a domestic
corporation as owned by a United States
shareholder of a CFC for purposes of sec-
tion 956(c)(2), or to treat a foreign corpo-
ration as a CFC under section 957.

Section 318 provides rules that attribute
the ownership of stock to certain family
members, between certain entities and their
owners, and to holders of options to acquire
stock. Section 318(a)(1) provides rules at-
tributing stock ownership among members
of a family. Section 318(a)(2) provides rules
attributing stock ownership "upward" from
partnerships, estates, trusts, and corpora-
tions to partners, beneficiaries, owners, and
shareholders. In addition, section 318(a)(3)
provides specific rules that attribute the
ownership of stock "downward" from part-
ners, beneficiaries, owners, and sharehold-
ers to partnerships, estates, trusts, and
corporations. In particular, section 318(a)
(3)(A) provides that stock owned, directly
or indirectly, by or for a partner in a part-
nership or a beneficiary of an estate is con-
sidered as owned by the partnership or es-
tate. This provision applies to all partners
and beneficiaries without regard to the size
of their interest in the partnership or estate.
Section 318(a)(3)(B) similarly provides,
subject to certain exceptions, that stock
owned, directly or indirectly, by or for a
beneficiary of a trust (or a person who is
considered an owner of a trust) is considered
owned by the trust. In comparison, section
318(a)(3)(C) provides that stock owned, di-
rectly or indirectly, by or for a shareholder
in a corporation is considered owned by the
corporation only if 50 percent or more in
value of the stock in the corporation is
owned, directly or indirectly, by such per-
son.

Effective for the last taxable year of
foreign corporations beginning before
January 1, 2018, and each subsequent year
of such foreign corporations, and for the
taxable years of United States sharehold-
ers in which or with which such taxable
years of foreign corporations end, the Act
repeals section 958(b)(4). As in effect
prior to repeal, section 958(b)(4) provided
that subparagraphs (A), (B), and (C) of
section 318(a)(3) (providing for “down-
ward" attribution) were not to be applied
so as to consider a United States person as
owning stock that is owned by a person
who is not a United States person.

### .15 Estimated Taxes Under Sections 6654 and 6655

Taxpayers who fail to make sufficient
and timely payments of estimated taxes
are liable for additions to tax under sec-
tions 6654(a), for individuals, and
6655(a), for corporations. Generally, the
addition to tax is calculated by applying
the underpayment interest rate under sec-
tion 6621 to the unpaid portion of any
required installment for the period that
portion goes unpaid.

### .16 Miscellaneous Itemized Deductions

Under section 67(a), miscellaneous
itemized deductions are allowed only to
the extent that the aggregate of such de-
ductions exceeds 2 percent of adjusted
gross income (the "2-percent floor"). As
amended by the Act, section 67(g) pro-
vides that for taxable years beginning af-
ter December 31, 2017, and before Janu-
ary 1, 2026, no miscellaneous itemized
deductions are allowable under section
67(a). In addition, under section 56(b)(1)
(A)(i), an individual subject to the alter-
native minimum tax ("AMT") in 2017 is
not allowed a deduction for any miscella-
neous itemized deduction. Under section
63(d), itemized deductions generally
mean all allowable deductions except for
the deductions allowable in arriving at
adjusted gross income pursuant to section
62(a), the deduction provided by section
151, and the deduction provided in section
199A (added by the Act). Miscellaneous
itemized deductions include all itemized
deductions other than those listed in sec-
tion 67(b), which does not reference the
deduction under section 965(c).

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### .17 Election Under Section 962 for Individual to be Subject to Tax at Corporate Rates

As amended by the Act, section 962
provides that an individual who is a
United States shareholder may elect to
have the tax imposed under chapter 1 on
amounts that are included in the individ-
ual's gross income under section 951(a)
be an amount equal to the tax that would
be imposed under section 11 if the
amounts were received by a domestic cor-
poration. In addition, if such election is
made, the amounts included in the indi-
vidual's gross income under section
951(a) are treated as if they were received
by a domestic corporation for purposes of
applying section 960 (relating to foreign
tax credits). See § 1.962-1(a). However,
the taxable income determined for pur-
poses of applying section 11 is not re-
duced by any deduction of the United
States shareholder. See § 1.962-1(b)(1)(i).
An election under section 962 does not
affect tax imposed under other chapters,
including under chapter 2A.

### .18 Extensions of Time for Filing Income Tax Returns and Paying Tax for Certain Citizens and Residents Abroad

In relevant part, regulations under sec-
tion 6081 provide an extension of time to
the fifteenth day of the sixth month fol-
lowing the close of the taxable year for
filing returns of income and for paying
any tax shown on the return in the case of
United States citizens or residents whose
tax homes and abodes, in a real and sub-
stantial sense, are outside the United
States and Puerto Rico, and United States
citizens and residents in military or naval
service on duty, including non-permanent
or short term duty, outside the United
States and Puerto Rico ("specified indi-
viduals"). See § 1.6081-5(a)(5) and (6).

## SECTION 3. REGULATIONS TO BE ISSUED ADDRESSING THE APPLICATION OF SECTION 965

.01 Application of Section 318(a)(3)(A)
to Treat a Foreign Corporation as a
Specified Foreign Corporation

As a result of the application of the
constructive ownership rule in section
318(a)(3)(A) (providing for downward at-

tribution of stock from a partner to a part-
nership), it may be difficult to determine if
a foreign corporation is a specified foreign
corporation under certain circumstances.
Assume, for example, that a person, A,
owns 100 percent of the stock of a domes-
tic corporation, DC, and 1 percent of the
interests in a partnership, PS. Assume fur-
ther that a United States citizen, USI,
owns 10 percent of the interests in PS and
10 percent by vote and value of the stock
of a foreign corporation, FC. The remain-
ing 90 percent by vote and value of the
stock of FC is owned by non-U.S. persons
that are unrelated to A, USI, DC, and PS.
Absent the application of sections 958(b),
318(a)(3)(A), and 318(a)(3)(C), FC would
not be a specified foreign corporation, be-
cause FC is not a CFC and there would be
no domestic corporation that is a United
States shareholder of FC.

Under sections 958(b) and 318(a)
(3)(A), PS would be treated as owning
100 percent of the stock of DC and 10
percent of the stock of FC. As a result,
under sections 958(b), 318(a)(5)(A), and
318(a)(3)(C), DC would be treated as
owning the stock of FC treated as owned
by PS, and thus DC would be a United
States shareholder with respect to FC,
causing FC to be a specified foreign cor-
poration within the meaning of section
965(e)(1)(B). USI is a United States
shareholder with respect to FC and thus,
absent an exception, would be required to
include amounts in gross income under
section 951(a)(1) by reason of section 965
with respect to FC. The results are the
same whether A or PS or both are domes-
tic or foreign persons.

The Treasury Department and the IRS
have determined that it would pose com-
pliance difficulties for taxpayers and ad-
ministrative difficulties for the IRS to re-
quire a United States person to determine
whether a foreign corporation with respect
to which it is a United States shareholder
is a specified foreign corporation if such
foreign corporation may be a specified for-
eign corporation solely by reason of down-
ward attribution under section 318(a)(3)(A)
of stock from a partner to a partnership
when such partner has only a de minimis
interest in such partnership. Accordingly,
the Treasury Department and the IRS intend
to issue regulations, pursuant to the grant of
authority under section 965(o), providing

that, solely for purposes of determining
whether a foreign corporation is a specified
foreign corporation within the meaning of
section 965(e)(1)(B), stock owned, directly
or indirectly, by or for a partner (tested
partner) will not be considered as being
owned by a partnership under sections
958(b) and 318(a)(3)(A) if such partner
owns less than five percent of the interests in
the partnership's capital and profits. For pur-
poses of the preceding sentence, an interest
in the partnership owned by another partner
will be considered as being owned by the
tested partner under the principles of sec-
tions 958(b) and 318, as modified by this
notice, as if the interest in the partnership
were stock.

Thus, for example, assume the same
facts as in the example above, except that
A is a corporation wholly owned by B,
and B directly owns 4 percent of the in-
terests in PS. For purposes of the rule in
this section 3.01, applying the principles
of sections 958(b) and 318, as modified by
this notice, as if the interest in PS were
stock, A is treated as owning the interests
in PS owned by B (in addition to the 1
percent interest in PS that A owns directly),
and thus A is not treated as owning less than
five percent of the interests in PS's capital
and profits. Accordingly, the rule in this
section 3.01 does not apply, and PS is
treated as owning A's stock in DC for pur-
poses of determining whether FC is a spec-
ified foreign corporation within the meaning
of section 965(e)(1)(B).

.02 Determination of Cash Measurement
Dates of a Specified Foreign
Corporation with Respect to a United
States Shareholder

In certain cases, a specified foreign
corporation may not be owned by a par-
ticular United States shareholder on all of
the cash measurement dates, whether be-
cause the specified foreign corporation
goes out of existence before the final cash
measurement date or because its stock is
acquired or disposed of between cash
measurement dates. The Treasury Depart-
ment and the IRS understand that section
965(c)(3)(A)(i) could be interpreted to
treat the close of the final taxable year of
a specified foreign corporation that ceased
to exist before November 2, 2017, as the
final cash measurement date of such spec-
ified foreign corporation. Additionally, if

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a United States shareholder acquires or
disposes of stock of a specified foreign
corporation between cash measurement
dates of the specified foreign corporation,
questions have been raised as to whether
the United States shareholder's pro rata
share of the cash position of such speci-
fied foreign corporation as of an earlier or
subsequent cash measurement date should
be taken into account for purposes of de-
termining the United States shareholder's
aggregate foreign cash position.

The Treasury Department and the IRS
intend to issue regulations providing that
(i) the final cash measurement date of a
specified foreign corporation is the close
of the last taxable year of the specified
foreign corporation that begins before
January 1, 2018, and ends on or after
November 2, 2017, if any; (ii) the second
cash measurement date of a specified for-
eign corporation is the close of the last
taxable year of the specified foreign cor-
poration that ends after November 1,

2016, and before November 2, 2017, if
any; (iii) the first cash measurement date
of a specified foreign corporation is the
close of the last taxable year of the spec-
ified foreign corporation that ends after
November 1, 2015, and before November
2, 2016, if any; and (iv) a United States
shareholder takes into account its pro rata
share of the cash position of a specified
foreign corporation as of any cash mea-
surement date of the specified foreign cor-
poration on which such United States
shareholder is a United States shareholder
of such specified foreign corporation, re-
gardless of whether such United States
shareholder is a United States shareholder
of such specified foreign corporation as of
any other cash measurement date, includ-
ing the final cash measurement date of
such specified foreign corporation. For
purposes of applying this paragraph, a 52-
53-week taxable year is deemed to begin
on the first day of the calendar month
nearest to the first day of the 52-53-week

taxable year, and is deemed to end or
close on the last day of the calendar month
nearest to the last day of the 52-53-week
taxable year, as the case may be. See
§ 1.441-2(c).

Example. (i) Facts. Except as otherwise pro-
vided, for all relevant periods, USP, a domestic
corporation, has owned directly at least 10 percent of
the stock of CFC1, CFC2, CFC3, and CFC4, each a
foreign corporation. CFC1 and CFC2 have calendar
year U.S. taxable years. CFC3 and CFC4 have U.S.
taxable years that end on November 30. No entity
has a short taxable year, except as a result of the
transactions described below.

(a) USP transferred all of its stock of CFC2 to an
unrelated person on June 30, 2016, at which point
USP ceased to be a United States shareholder with
respect to CFC2.

(b) CFC4 dissolved on December 30, 2010, and,
as a result, its final taxable year ended on December
30, 2010.

(ii) Analysis. Each of CFC1, CFC2, CFC3, and
CFC4 is a specified foreign corporation. Taking into
account the regulations described in this section
3.02, the cash measurement dates of the specified
foreign corporations to be taken into account by USP
in determining its aggregate foreign cash position are
summarized in the following table:

Cash Measurement Dates Final Second First

CFC1

December 31, 2017

December 31, 2016

December 31, 2015

CFC2

N/A

N/A

December 31, 2015

CFC3

November 30, 2018

November 30, 2016

November 30, 2015

CFC4

N/A

N/A

N/A

### .03 Treatment of Certain Accrued Foreign Income Taxes for Purposes of Determining Post-1986 Earnings and Profits

Post-1986 earnings and profits are de-
fined, in relevant part, as the earnings and
profits of a specified foreign corporation
determined as of each of the two measure-
ment dates described in section 965(a) and
"computed in accordance with sections
964(a) and 986." Section 965(d)(3). In
general, section 964(a) provides that, un-
der regulations prescribed by the Secre-
tary, the earnings and profits of any for-
eign corporation, and the deficit in
earnings and profits of any foreign cor-
poration, for any taxable year shall be
determined according to rules substan-
tially similar to those applicable to do-
mestic corporations. As described in
section 3.02 of Notice 2018-13, for pur-
poses of measuring the post-1986 earn-
ings and profits of a specified foreign

corporation as of a measurement date,
the extent to which an item of income,
deduction, gain, or loss is taken into
account as of such measurement date
must be determined under principles
generally applicable to the calculation
of the earnings and profits of a domestic
corporation. Section 3.02(a) of Notice
2018-13 provided a limited exception
to this general rule in order to reduce
taxpayer compliance burdens. Section
3.02(a) of Notice 2018-07 also an-
nounced the intention to issue regula-
tions that may provide exceptions to this
general rule in limited cases that are
contemplated by section 965 or the leg-
islative history to the Act, such as to
address double counting or double non-
counting.

The Treasury Department and the IRS
have determined that an additional limited
exception to the general rule is appropri-
ate for certain foreign income taxes that

accrue between measurement dates. Ac-
cordingly, the Treasury Department and
the IRS intend to issue regulations provid-
ing that, for purposes of determining a
specified foreign corporation's post-1986
earnings and profits as of the measure-
ment date on November 2, 2017, any for-
eign income tax (as defined in section
901(m)(5)) that accrues (i) within the
specified foreign corporation's U.S. tax-
able year that includes November 2, 2017,
and (ii) after November 2, 2017, but on or
before December 31, 2017, will be allo-
cated between the respective portions of
the foreign tax base on which the accrued
foreign taxes are determined that are at-
tributable to the part of the U.S. taxable
year ending on November 2, 2017, and the
part of the U.S. taxable year beginning
after November 2, 2017.

The Treasury Department and the IRS
have determined that it is appropriate to
limit the scope of the regulations to for-

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eign income taxes that accrue on or before
December 31, 2017, in order to allow for
the section 965(a) earnings amounts of
each specified foreign corporation to be
determined as of the final measurement
date, December 31, 2017.

The regulations announced in this sec-
tion 3.03 are relevant solely for purposes
of determining a specified foreign corpo-
ration's post-1986 earnings and profits
(including a deficit) within the meaning of
section 965(d)(3). Therefore, the regula-
tions to be issued will not affect, for ex-
ample, the computation of credits for
taxes deemed paid under sections 902 and
960.

.04 Prevention of the Reduction of the
Section 965 Tax Liability of a United
States Shareholder

(a) Anti-Avoidance Rule

(i) Transactions Undertaken with a
Principal Purpose of Reducing Section
965 Tax Liability

The Treasury Department and the IRS
intend to issue regulations under sections
965(c)(3)(F) and 965(o) providing that a
transaction will be disregarded for pur-
poses of determining a United States
shareholder's section 965 tax liability if
each of the following conditions is satis-
fied: (i) such transaction occurs, in whole
or in part, on or after November 2, 2017
(the "specified date"); (ii) such transaction
is undertaken with a principal purpose of
reducing the section 965 tax liability of
such United States shareholder; and (iii)
such transaction would, without regard to
this sentence, reduce the section 965 tax
liability of such United States shareholder
(the "anti-avoidance rule").

For purposes of this section 3.04(a) and
section 3.04(b) of this notice, a transaction
(or change in method of accounting or
election described in section 3.04(b) of
this notice) reduces the section 965 tax
liability of a United States shareholder if
such transaction (i) reduces a section
965(a) inclusion amount of such United
States shareholder with respect to any
specified foreign corporation, (ii) reduces
the aggregate foreign cash position of
such United States shareholder, or (iii)
increases the amount of foreign income
taxes of any specified foreign corporation

deemed paid by such United States share-
holder under section 960 as a result of an
inclusion under section 951(a) by reason
of section 965. Also for purposes of this
section 3.04(a) and section 3.04(b) of this
notice, in the case of a United States
shareholder that is a domestic pass-
through entity, a domestic pass-through
owner of such domestic pass-through en-
tity is also treated as a United States
shareholder. For the definition of domestic
pass-through entity and domestic pass-
through owner, see section 3.05(b) of this
notice.

Under section 3.04(a)(ii) through (iv)
of this notice, certain transactions are pre-
sumed to be undertaken with a principal
purpose of reducing the section 965 tax
liability of a United States shareholder for
purposes of the anti-avoidance rule. The
presumption described in the preceding
sentence may be rebutted only if facts and
circumstances clearly establish that the
transaction was not undertaken with a
principal purpose of reducing the section
965 tax liability of a United States share-
holder. The regulations will provide that a
taxpayer that takes the position that the
presumption is rebutted must attach a
statement to its income tax return for its
taxable year in which or with which the
relevant taxable year of the relevant spec-
ified foreign corporation ends disclosing
that it has rebutted the presumption. In the
case of a transaction described in section
3.04(a)(ii) and (iii), if the presumption
does not apply because such transaction
occurs in the ordinary course of business,
whether such transaction was undertaken
with a principal purpose of reducing the
section 965 tax liability of a United States
shareholder must be determined under all
the facts and circumstances. Under section
3.04(a)(ii) through (iv) of this notice, cer-
tain transactions are also treated per se as
being undertaken with a principal purpose
of reducing the section 965 tax liability of
a United States shareholder. Further, un-
der section 3.04(a)(ii), certain distribu-
tions are treated per se as not being un-
dertaken with a principal purpose of
reducing the section 965 tax liability of
such United States shareholder and there-
fore are not subject to the anti-avoidance
rule.

For purposes of the rules described in
section 3.04(a)(ii) through (iv) of this no-

tice, a person is treated as related to a
United States shareholder if (i) the person
bears a relationship to the United States
shareholder described in section 267(b) or
section 707(b) and (ii) the relationship
described in clause (i) of this sentence is
satisfied either immediately before or im-
mediately after the transaction. Further-
more, for purposes of the rules described in
section 3.04(a)(ii) and (iv) of this notice, the
term "transfer" includes any disposition, ex-
change, contribution, distribution, issuance,
redemption, recapitalization, or loan, and in-
cludes an indirect transfer (for example, a
transfer of an interest in a partnership is a
transfer of the assets of such partnership).

No inference is intended as to the treat-
ment, under general tax law, of transac-
tions that occurred before the specified
date. The IRS may, where appropriate,
challenge such transactions under the
Code, regulations, or judicial doctrines
such as the step transaction doctrine or the
economic substance doctrine.

#### (ii) Application of the Anti-Avoidance Rule to Cash Reduction Transactions

For purposes of applying the anti-
avoidance rule, a cash reduction transac-
tion is presumed to be undertaken with a
principal purpose of reducing the section
965 tax liability of a United States share-
holder. For this purpose, the term "cash
reduction transaction" means (i) a transfer
of cash, accounts receivable, or cash
equivalent assets by a specified foreign
corporation to a United States shareholder
of such specified foreign corporation or a
person related to a United States share-
holder of such specified foreign corpora-
tion, or (ii) an assumption by a specified
foreign corporation of an accounts pay-
able of a United States shareholder of
such specified foreign corporation or a
person related to a United States share-
holder of such specified foreign corpora-
tion, if such transfer or assumption would,
without regard to the anti-avoidance rule,
reduce the aggregate foreign cash position
of such United States shareholder. The
presumption described in this paragraph
does not apply to a cash reduction trans-
action that occurs in the ordinary course
of business.

Notwithstanding the presumption de-
scribed in the preceding paragraph, except

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in the case of a specified distribution, a
cash reduction transaction that is a distri-
bution by a specified foreign corporation
to a United States shareholder of such
specified foreign corporation will be
treated per se as not being undertaken
with a principal purpose of reducing the
section 965 tax liability of such United
States shareholder for purposes of the
anti-avoidance rule. A specified distribu-
tion will be treated per se as being under-
taken with a principal purpose of reducing
the section 965 tax liability of a United
States shareholder for purposes of the
anti-avoidance rule. For purposes of this
section 3.04(a)(ii), the term "specified dis-
tribution" means a cash reduction transac-
tion that is a distribution by a specified
foreign corporation of a United States
shareholder if (i) at the time of the distri-
bution, there was a plan or intention for
the distributee to transfer, directly or in-
directly, cash, accounts receivable, or cash
equivalent assets to any specified foreign
corporation of such United States share-
holder, or (ii) the distribution is a non pro
rata distribution to a foreign person that is
related to such United States shareholder.
For purpose of clause (i) of the preceding
sentence, an indirect transfer includes, for
example, a transfer of cash to a partner-
ship if a specified foreign corporation of
such United States shareholder is a part-
ner.

##### (iii) Application of the Anti-Avoidance Rule to E&P Reduction Transactions

For purposes of applying the anti-
avoidance rule, an E&P reduction trans-
action is presumed to be undertaken with
a principal purpose of reducing the section
965 tax liability of a United States share-
holder. For this purpose, the term "E&P
reduction transaction" means a transaction
between a specified foreign corporation
and any of (i) a United States shareholder
of such specified foreign corporation, (ii)
another specified foreign corporation of a
United States shareholder of such speci-
fied foreign corporation, or (iii) any per-
son related to a United States shareholder
of such specified foreign corporation, if
such transaction would, without regard to
the anti-avoidance rule, reduce the accu-
mulated post-1986 deferred foreign in-
come or the post-1986 undistributed earn-

ings (as defined in section 902(c)(1) as in
effect before the date of the enactment of
the Act) of such specified foreign corpo-
ration or another specified foreign corpo-
ration of any United States shareholder of
such specified foreign corporation. The
presumption described in this paragraph
does not apply to an E&P reduction trans-
action that occurs in the ordinary course
of business.

Notwithstanding the presumption de-
scribed in the preceding paragraph, a
specified transaction will be treated per se
as being undertaken with a principal pur-
pose of reducing the section 965 tax lia-
bility of a United States shareholder for
purposes of the anti-avoidance rule. For
purposes of the preceding sentence, the
term "specified transaction" means an
E&P reduction transaction that involves
one or more of the following: (i) a com-
plete liquidation of a specified foreign
corporation to which section 331 applies;
(ii) a sale or other disposition of stock by
a specified foreign corporation, or (iii) a
distribution by a specified foreign corpo-
ration that reduces the earnings and profits
of such specified foreign corporation pur-
suant to section 312(a)(3).

##### (iv) Application of the Anti-Avoidance Rule to Pro Rata Share Transactions

For purposes of applying the anti-
avoidance rule, a pro rata share transac-
tion is presumed to be undertaken with a
principal purpose of reducing the section
965 tax liability of a United States share-
holder. For this purpose, the term "pro
rata share transaction" means a transfer of
the stock of a specified foreign corpora-
tion to a United States shareholder of the
specified foreign corporation or a person
related to a United States shareholder of
such specified foreign corporation if such
transfer would, without regard to the anti-
avoidance rule, (i) reduce such United
States shareholder's pro rata share of the
section 965(a) earnings amount of such

specified foreign corporation if it is a
DFIC; (ii) increase such United States
shareholder's pro rata share of the speci-
fied E&P deficit of such specified foreign
corporation if it is an E&P deficit foreign
corporation; or (iii) reduce such United
States shareholder's pro rata share of the

cash position of such specified foreign
corporation.

Notwithstanding the presumption de-
scribed in the preceding paragraph, an in-
ternal group transaction will be treated per
se as being undertaken with a principal
purpose of reducing the section 965 tax
liability of a United States shareholder for
purposes of the anti-avoidance rule. For
purposes of the preceding sentence, the
term "internal group transaction" means a
pro rata share transaction if, immediately
before or after the transfer, the transferor
of the stock of the specified foreign cor-
poration and the transferee of such stock
are members of an affiliated group in
which the United States shareholder is a
member. For this purpose, the term "affil-
iated group" has the meaning set forth in
section 1504(a), determined without re-
gard to paragraphs (1) through (8) of sec-
tion 1504(b), and the term "members of an
affiliated group" means entities included
in the same affiliated group. For purposes
of identifying an affiliated group and the
members of such group, (i) each partner in
a partnership, as determined without re-
gard to clause (ii) of this sentence, is
treated as holding its proportionate share
of the stock held by the partnership, as
determined under the rules and principles
of sections 701 through 777, and (ii) if
one or more members of an affiliated
group own, in the aggregate, at least 80
percent of the interests in a partnership's
capital or profits, the partnership will be
treated as a corporation that is a member
of the affiliated group.

Example. (i) Facts. FP, a foreign corporation,
owns all of the stock of USP, a domestic corporation.
USP owns all of the stock of FS, a foreign corpora-
tion. USP has held the stock of FS for more than one
year. USP has a calendar year taxable year; FS's
taxable year ends November 30. On January 2, 2018,
USP transfers all of the stock of FS to FP in ex-
change for cash. On January 3, 2018, FS makes a
distribution with respect to the stock transferred to
FP. USP treats the transaction as a taxable sale of the
FS stock and claims a dividends received deduction
under section 245A with respect to its deemed div-
idend under section 1248(j) as a result of the sale. FS
has post-1986 earnings and profits as of December
31, 2017, and no previously taxed income or effec-
tively connected income for any previous taxable
year.

(ii) Analysis. The transfer of the stock of FS is a
pro rata share transaction because such transfer is to
a person related to USP, and the transfer would,
without regard to the anti-avoidance rule, reduce
USP's pro rata share of FS's section 965(a) earnings
amount. Because USP and FP are also members of

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an affiliated group within the meaning of this section
3.04(a)(iv), the transfer of the stock of FS is also an
internal group transaction and is treated per se as
being undertaken with a principal purpose of reduc-
ing the section 965 tax liability of USP. Accordingly,
the transfer will be disregarded for purposes of de-
termining USP's section 965 tax liability with the
result that, among other things, USP's pro rata share
of FS's section 965(a) earnings amount is deter-
mined as if USP owned (within the meaning of
section 958(a)) 100 percent of the stock of FS on the
last day of FS's inclusion year and no other person
received a distribution with respect to such stock
during such year. See section 951(a)(2)(A) and (B).

###### (b) Disregard of Certain Changes in Method of Accounting and Entity Classification Elections

The Treasury Department and the IRS
also intend to issue regulations, pursuant
to the grant of authority under section
965(o), providing that any change in
method of accounting made for a taxable
year of a specified foreign corporation that
ends in 2017 or 2018 will be disregarded
for purposes of determining the section
965 tax liability of a United States share-
holder if such change in method of ac-
counting would otherwise reduce the sec-
tion 965 tax liability of such United States
shareholder. The rule described in this
section 3.04(b) will apply whether or not
such change in method of accounting was
made in accordance with the procedures
described in Rev. Proc. 2015-13, 2015-5
I.R.B. 419 (or successor), and whether or
not such change in method of accounting
was properly made. These regulations will
not apply to a change in method of ac-
counting for which the original and/or du-
plicate copy of any Form 3115, Applica-
tion for Change in Accounting Method,
requesting the change was filed before the
specified date, November 2, 2017.

The regulations will also provide that
any entity classification election under
§ 301.7701-3 that is filed on or after the
specified date will be disregarded for pur-
poses of determining the section 965 tax
liability of such United States shareholder
if such entity classification election would
otherwise reduce the section 965 tax lia-
bility of any United States shareholder.
An entity classification election filed on or
after the specified date will be subject to
these regulations even if such entity clas-
sification election was effective on a date
before the specified date.

The regulations described in this sec-
tion 3.04(b) will apply regardless of
whether such change in method of ac-
counting or change of entity classification
election is made with a principal purpose
of reducing the section 965 tax liability of
a United States shareholder.

### .05 Rules Related to Elections, Reporting, and Payment

#### (a) Documentation of Cash Position

Section 965(c)(3)(D) provides that net
accounts receivable, actively traded prop-
erty, and short-term obligations shall not
be taken into account by a United States
shareholder in determining its aggregate
foreign cash position to the extent that
such United States shareholder demon-
strates to the satisfaction of the Secretary
that such amount is so taken into account
by such United States shareholder with
respect to another specified foreign corpo-
ration. The IRS intends to issue forms,
publications, regulations, or other guid-
ance that will specify the documentation
that a United States shareholder must
maintain or provide, and the time and
manner for providing any such documen-
tation, in order to make the required dem-
onstration to the Secretary.

#### (b) United States Persons Eligible to Make Elections Under Section 965 in the Case of a United States Shareholder that is a Domestic Pass-Through Entity

Section 965 increases the amount in-
cluded in the gross income of a United
States shareholder under section 951(a)(1)
only if such United States shareholder owns
(within the meaning of section 958(a)) stock
in one or more specified foreign corpora-
tions. See section 951(a)(2)(A). For pur-
poses of this notice, the term "section 958(a)
stock" means, with respect to a United
States shareholder of a DFIC, the stock of
the DFIC owned by the United States share-
holder within the meaning of section 958(a).

The Treasury Department and IRS
have determined that if a domestic pass-
through entity is a United States share-
holder of a DFIC and owns section 958(a)
stock in such DFIC, the section 965(a)
inclusion amount with respect to such sec-
tion 958(a) stock and the section 965(c)
deduction with respect to such amount

should be determined at the level of the
domestic pass-through entity. However,
the domestic pass-through owners of the
domestic pass-through entity are subject
to federal income tax on their share of the
section 965(a) inclusion amount with re-
spect to the section 958(a) stock of the
domestic pass-through entity. Accord-
ingly, in the case of a domestic pass-
through entity that is a United States
shareholder, the regulations will provide
that each domestic pass-through owner
takes into account its share of the section
965(a) inclusion amount with respect to
section 958(a) stock of a DFIC of the
domestic pass-through entity and the sec-
tion 965(c) deduction with respect to such
amount, regardless of whether such do-
mestic pass-through owner is also a
United States shareholder with respect to
such DFIC. In this case, the section 965(a)
inclusion amount and the related section
965(c) deduction must be allocated in the
same proportion. For example, if a domes-
tic pass-through owner is allocated 50
percent of the section 965(a) inclusion
amount with respect to section 958(a)
stock of a domestic pass-through entity,
such domestic pass-through owner must
be allocated 50 percent of the related sec-
tion 965(c) deduction. If the domestic
pass-through owner is also a United States
shareholder with respect to such DFIC
that owns section 958(a) stock of such
DFIC, regulations will provide that the
section 965(a) inclusion amount with re-
spect to such section 958(a) stock of such
domestic pass-through owner and the sec-
tion 965(c) deduction with respect to such
amount are determined separately from its
share of the section 965(a) inclusion
amount and section 965(c) deduction of
the domestic pass-through entity.

For purposes of this notice, the term
"domestic pass-through entity" means a
pass-through entity that is a United States
person (as defined in section 7701(a)(30)).
Also for purposes of this notice, a "pass-
through entity" means a partnership, S
corporation, or any other person to the
extent that the income or deductions of
such person are included in the income of
one or more direct or indirect owners or
beneficiaries of the person. Accordingly,
if, for example, a domestic trust is subject
to federal income tax on a portion of its
section 965(a) inclusion amount and its

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domestic pass-through owners are subject
to tax on the remaining portion, the do-
mestic trust is treated as a domestic pass-
through entity with respect to such re-
maining portion. Also for purposes of this
notice, the term "domestic pass-through
owner" means a United States person
that is a partner, shareholder, beneficiary,
grantor, or owner, as the case may be, in a
domestic pass-through entity, except that,
in the case of tiered pass-through entities,
the term does not include a partner, share-
holder, beneficiary, or owner that is itself
a domestic pass-through entity. In the case
of tiered pass-through entities, a reference
in this notice to a domestic pass-through
owner includes a United States person that
is an indirect partner, shareholder, benefi-
ciary, or owner through one or more other
pass-through entities, and a reference to a
domestic pass-through owner's share of
the section 965(a) inclusion amount and
section 965(c) deduction of a domestic
pass-through entity includes such domes-
tic pass-through owner's share of the sec-
tion 965(a) inclusion amount and section
965(c) deduction of a domestic pass-
through entity owned indirectly by such
domestic pass-through owner through one
or more other pass-through entities.

The elections under section 965(h),
(m), and (n) ("specified elections") are
described in section 965 as available to
a United States shareholder of a DFIC.
However, because a domestic pass-
through owner includes in income a
share of the section 965(a) inclusion
amount with respect to section 958(a)
stock of a DFIC of a domestic pass-
through entity, the Treasury Department
and the IRS intend to issue regulations,
pursuant to the grant of regulatory au-
thority under section 965(o), allowing
such domestic pass-through owner to
make a specified election that applies to
its share of the section 965(a) inclusion
amount with respect to section 958(a)
stock of a DFIC of the domestic pass-
through entity. Such a domestic pass-
through owner will be permitted to
make a specified election regardless of
whether the domestic pass-through
owner is itself a United States share-
holder of the DFIC. If a domestic pass-
through owner makes a specified elec-
tion for its taxable year, such election
will be applicable to all section 965(a)

inclusion amounts included in the gross
income of such domestic pass-through
owner for such taxable year (other than
amounts with respect to which elections
under section 965(i) are effective),
whether included directly by reason of
owning section 958(a) stock in a DFIC
or indirectly by reason of being a do-
mestic pass-through owner.

If an S corporation is, directly or indi-
rectly, a partner, beneficiary, or owner of
a domestic pass-through entity and takes
into account a share of the section 965(a)
inclusion amount of a domestic pass-
through entity with respect to a DFIC, and
the S corporation is a United States share-
holder of the DFIC, the regulations will
provide that shareholders of the S corpo-
ration will be permitted to make an elec-
tion under section 965(i) to defer the
shareholder's net tax liability under sec-
tion 965 with respect to the S corporation.
However, in such a case, if the S corpo-
ration is not itself a United States share-
holder of a DFIC, the net tax liability
under section 965 of a shareholder with
respect to the S corporation for purposes
of the election under section 965(i) will
not include the shareholder's share of the
domestic pass-through entity's section
965(a) inclusion amount with respect to
the DFIC or section 965(c) deduction with
respect to such amount.

#### (c) Determination of Amount of Net Tax Liability Under Section 965 for Purposes of Section 965(h)

As discussed in section 3.05(b) of this
notice, if a domestic pass-through entity is
a United States shareholder that has a sec-
tion 965(a) inclusion amount with respect
to section 958(a) stock in a DFIC, a
United States person that is a domestic
pass-through owner, directly or indirectly,
in such domestic pass-through entity is
subject to net income tax on its share of
the section 965(a) inclusion amount. Ac-
cordingly, the Treasury Department and
the IRS intend to issue regulations provid-
ing that for purposes of determining the
net tax liability under section 965 of a
domestic pass-through owner, the domes-
tic pass-through owner will be treated as a
United States shareholder. See, however,
section 5 of this notice, which provides
that a domestic pass-through owner that is

not itself a United States shareholder is
not permitted to make an election under
section 962.

Furthermore, the regulations will pro-
vide that, in the case of a taxpayer that has
made one or more elections under section
965(i) for a taxable year, the taxpayer's
net tax liability under section 965 for pur-
poses of section 965(h) is the taxpayer's
net tax liability under section 965 as de-
termined under section 965(h)(6) (taking
into account the rules in this section
3.05(c)) reduced by the aggregate amount
of the taxpayer's net tax liabilities under
section 965 as determined under section
965(i)(3) (taking into account the rule pro-
vided in section 3.05(b) of this notice)
with respect to which elections under sec-
tion 965(i) are effective.

#### (d) Application of Section 965(n) to Losses Arising in the Year in Which the Inclusion Year of a DFIC Ends

A United States shareholder of a DFIC
may elect the application of section
965(n) for the taxable year of the United
States shareholder in which, or with
which, the inclusion year of the DFIC
ends. If such an election is made, the
United States shareholder does not take
into account the amount described in sec-
tion 965(n)(2) in determining the amount
of the net operating loss deduction under
section 172 of such shareholder for such
taxable year or in determining the amount
of taxable income for such taxable year
which may be reduced by net operating
loss carryovers or carrybacks to such tax-
able year under section 172.

Questions have arisen regarding the
scope of the election under section 965(n)
due to the use of the term "deduction" in
section 965(n)(1)(A). A net operating loss
"deduction" for a taxable year generally re-
fers to the amount of a net operating loss
carried to such taxable year from a prior or
subsequent year rather than the net operat-
ing loss arising from such year. Compare
section 172(a) and (c). However, interpret-
ing "deduction" in section 965(n)(1)(A) to
refer to carryovers or carrybacks (and not to
the net operating loss for the taxable year)
would cause that paragraph to be duplicative
of section 965(n)(1)(B), which already pro-
vides that amounts described in section
965(n)(2) are disregarded for purposes of

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applying net operating loss carryovers or
carrybacks to such taxable year under
section 172. The Treasury Department and
the IRS have determined that section
965(n)(1)(A) was intended to apply to a
different set of losses than those to which
section 965(n)(1)(B) applies. Therefore, the
Treasury Department and the IRS intend to
issue regulations providing that, if an elec-
tion under section 965(n) is made with re-
spect to a taxable year in which or with
which the inclusion year of a DFIC ends, the
amount of a net operating loss for such
taxable year will be determined without tak-
ing into account as gross income the amount
described in section 965(n)(2). The regula-
tions will also clarify that an election made
under section 965(n) will be treated as made
with respect to both the amount of a net
operating loss for such taxable year and the
net operating loss carryovers or carrybacks
for such taxable year.

#### (e) Filing and Payment Due Date for Specified Individuals

A specified individual (as defined in
section 2.18 of this notice) who does not
make the election under section 965(h)(1)
or (i)(1) is considered to have timely filed
such person's return and paid the net tax
liability under section 965 if the filing and
payment are made on or before the fif-
teenth day of the sixth month following
the close of the taxable year, and the spec-
ified individual attaches a statement to the
return showing that the person for whom
the return is made is a person described in
§ 1.6081-5(a). See § 1.6081-5(a)(5)-(6),
and (b). For a specified individual who makes
the election under section 965(h)(1), section
965(h)(2) provides that the installments must
be paid on the due dates for the relevant re-
turns (determined without regard to any exten-
sion of time for filing the return).

The question has arisen whether the
disregarding of extensions of time to
file in section 965(h)(2) applies to negate
the extension of time to pay that is other-
wise available under § 1.6081-5 for a
specified individual that does not make
the election under section 965(h)(1). The
Treasury Department and the IRS intend
to issue regulations providing that, if a
specified individual receives an extension
of time to file and pay under § 1.6081-
5(a)(5) or (6), then the individual's due

date for an installment payment under sec-
tion 965(h) is also the fifteenth day of the
sixth month following the close of a tax-
able year.

.06 Treatment of Section 965(c) De-
duction for Purposes of Sections 62(a)
and 63(d)

Questions have arisen as to whether the
section 965(c) deduction is a miscella-
neous itemized deduction as defined in
section 67(b). The Treasury Department
and the IRS have determined that an indi-
vidual's section 965(c) deduction was not
intended to be subject to the 2-percent
floor under section 67 or the deduction
disallowance under the AMT, or, in the
case of a taxable year beginning after De-
cember 31, 2017, the deduction disallow-
ance under section 67 as modified by the
Act. Therefore, the Treasury Department
and the IRS intend to issue regulations,
pursuant to the grant of authority under
section 965(o), providing that a section
965(c) deduction will not be treated as an
itemized deduction, including for pur-
poses of sections 56 and 67.

## SECTION 4. MODIFICATION OF RULE DESCRIBED IN SECTION 3.04(a) OF NOTICE 2018-13

Section 3.04(a) of Notice 2018-13 an-
nounced that the Treasury Department
and the IRS intend to issue regulations
providing that, for purposes of calculat-
ing the net accounts receivable of a
specified foreign corporation, the term
"accounts receivable" means receiv-
ables described in section 1221(a)(4),
and the term "accounts payable" means
payables arising from the purchase of
property described in section 1221(a)(1)
or 1221(a)(8) or the receipt of services
from vendors or suppliers. The Treasury
Department and the IRS have deter-
mined that it is appropriate to exclude
any receivable or payable with an initial
term of one year or more for purposes of
calculating a specified foreign corpora-
tion's net accounts receivable. Cf.
section 965(c)(3)(B)(iii)(IV) (short-term
obligations). Accordingly, the Treasury
Department and the IRS intend to issue reg-
ulations providing that the terms "accounts
receivable" and "accounts payable" will in-
clude only receivables or payables with a
term of less than one year.

## SECTION 5. REGULATIONS TO BE ISSUED ADDRESSING ELECTIONS UNDER SECTION 962

As discussed in section 3.05(b) of this
notice, if a domestic pass-through entity is
a United States shareholder that has a sec-
tion 965(a) inclusion amount with respect
to section 958(a) stock in a DFIC, a do-
mestic pass-through owner of such entity
is subject to net income tax on its share of
the section 965(a) inclusion amount. The
Treasury Department and the IRS intend to
issue regulations clarifying that a domestic
pass-through owner who is an individual
(including, as provided in § 1.962-2(a), a
trust or estate) and a United States share-
holder with respect to a DFIC may make an
election under section 962 with respect to
the individual's share of the section 965(a)
inclusion amount of a domestic pass-
through entity with respect to such DFIC.
However, an individual who is not a United
States shareholder of a DFIC is not permit-
ted to make an election under section 962
with respect to the individual's share of a
section 965(a) inclusion amount of a domes-
tic pass-through entity with respect to such
DFIC notwithstanding the rules in section
3.05(b) and (c) of this notice. See section
962(b). The regulations will clarify that the
same principles apply to inclusions under
section 951(a) other than by reason of sec-
tion 965.

If an individual elects to have the provi-
sions of section 962 apply for a taxable year,
the tax imposed on amounts included in the
individual's gross income under section
951(a) (directly by reason of owning section
958(a) stock or indirectly by reason of being
a domestic pass-through owner), including
by reason of section 965, is an amount equal
to the tax that would be imposed under
section 11 if the amounts were received
by a domestic corporation. In addition,
§ 1.962-1(b)(1)(i) provides that a deduction
of a United States shareholder does not re-
duce the amount included in gross income
under section 951(a) for purposes of com-
puting the amount of tax that would be
imposed under section 11.

The Treasury Department and the IRS
have determined that in the case of a tax-
payer making an election under section
962, Congress intended for the section
965(c) deduction (which is generally
available to United States shareholders of

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DFICs, including individuals) to be al-
lowed with respect to the tax imposed
under section 11 rather than under section
1\. See H.R. Rep. No. 115-466, at 620
(2017) (Conf. Rep.). Pursuant to the grant
of authority under section 965(o), the
Treasury Department and the IRS intend
to modify § 1.962-1(b)(1)(i) to provide
that, in computing the amount of tax due
as a result of a section 962 election, the
section 965(c) deduction may be taken
into account. Specifically, the regulations
will provide that "taxable income" as used
in section 11 shall be reduced by the sec-
tion 965(c) deduction. These regulations
will not apply to any other deductions, and
therefore existing § 1.962-1(b)(1)(i) will
continue to provide that "taxable income"
as used in section 11 shall not be reduced
by any other deductions. Any section
965(c) deduction allowed in determining
"taxable income" as used in section 11 for
purposes of computing the tax due as a
result of a section 962 election will not
also be allowed for purposes of determin-
ing an individual's actual taxable income.

Example. (i) Facts. USI, a United States citizen,
owns 10% of the capital and profits of USPRS, a
domestic partnership that has a calendar year taxable
year, the remainder of which is owned by foreign
persons unrelated to USI or USPRS. USPRS owns
all of the stock of FS, a foreign corporation that is a
CFC with a calendar year U.S. taxable year. USPRS
has a section 965(a) inclusion amount with respect to
FS of $1,000 and is allowed a section 965(c) deduc-
tion of $700. FS has no post-1986 foreign income
taxes (as defined in section 902(c)(1) as in effect
before the date of the enactment of the Act). USI
makes a valid election under section 962 for 2017.

(ii) Analysis. USI's "taxable income" described
in § 1.962-1(b)(1)(i) equals $100 (USI's distributive
share of USPRS's section 965(a) inclusion amount)
minus $70 (USI's distributive share of USPRS's
allowable section 965(c) deduction), or $30. No
other deductions are allowed in determining this
amount. USI's tax on such amount will be equal to
the tax imposed under section 11 as if $30 were
received by a domestic corporation. USI cannot de-
duct $70 for purposes of determining USI's taxable
income that is subject to tax under section 1.

## SECTION 6. PENALTY RELIEF UNDER SECTIONS 6654 AND 6655 IN CONNECTION WITH THE AMENDMENT OF SECTION 965 AND THE REPEAL OF SECTION 958(b)(4)

.01 Penalty Waiver with Respect to
Section 965

A United States shareholder that has a
net tax liability under section 965 gener-

ally includes the amount of the net tax
liability on its return for the year in which
or with which the inclusion year of the
DFIC ends.

Section 965(h)(1) provides that a
United States shareholder of a DFIC may
elect to pay the net tax liability under
section 965 in eight annual installments,
the first of which is due on the due date
(without regard to any extension of time
to file) of the return for the shareholder's
taxable year in which or with which the
inclusion year of the DFIC ends. Each
successive installment is due on the due
date (without regard to any extension of
time to file) of the return for the taxable
year following the taxable year the prior
installment was made. Section 965(h)(2).
The timely payment of an installment
does not incur underpayment interest. See
H.R. Rep. No. 115-466, at 611 (2017)
(Conf. Rep.). Section 965(h), therefore,
demonstrates Congress's intent to permit
a taxpayer to pay its net tax liability under
section 965 without incurring additional
liability, including additions to tax. Con-
sistent with this intent, and in the interest
of sound tax administration, the IRS will
waive underpayment penalties under sec-
tions 6654 and 6655 with respect to a
taxpayer's net tax liability under section
965 for those taxpayers that make an elec-
tion under section 965(h). In addition, the
IRS will waive underpayment penalties
under sections 6654 and 6655 with respect
to a taxpayer's net tax liability under sec-
tion 965 for those taxpayers who do not
elect to pay their net tax liability under
section 965 in installments. Accordingly,
a taxpayer's required installments of esti-
mated tax need not include amounts at-
tributable to its net tax liability under sec-
tion 965 to prevent the imposition of
penalties under sections 6654(a) and
6655(a). If a taxpayer fails to timely pay
its net tax liability under section 965 when
due, other sections of the Code may apply;
for example, additions to tax could result
under section 6651, and installment pay-
ments could be accelerated under section
965(h)(3).

The instructions to estimated tax forms
will be modified, as necessary, to clarify
that no underpayment penalty will be im-
posed under section 6654 or section 6655
with respect to a taxpayer's net tax liabil-
ity under section 965 and that the taxpayer

may exclude such amounts when calculat-
ing the amount of its required installment.

.02 Penalty Waiver for 2017 with
Respect to Amendments to Sections 965
and 958(b) by the Act

In addition, because the amendment to
section 965 and the repeal of section
958(b)(4) could also affect tax liability
(other than by way of the imposition of
the net tax liability under section 965) for
periods that end before or shortly after the
enactment of the Act, the IRS has deter-
mined that additional penalty relief is ap-
propriate. Therefore, the IRS has deter-
mined that if the amendment to section
965 or the amendment to section 958(b)
by the Act causes an underpayment re-
lated to a required installment of esti-
mated tax due on or before January 15,
2018, the estimated tax penalty under sec-
tion 6654 or section 6655 will not apply to
that underpayment.

## SECTION 7. EFFECTIVE DATES

Section 965 is effective for the last
taxable years of foreign corporations that
begin before January 1, 2018, and with
respect to United States shareholders, for
the taxable years in which or with which
such taxable years of the foreign corpora-
tions end. The Treasury Department and
the IRS intend to provide that the regu-
lations and instructions described in sec-
tions 3, 4, 5, and 6 of this notice are
effective beginning for the first taxable
year of a foreign corporation (and with
respect to United States shareholders,
the taxable years in which or with which
such taxable years of the foreign corpo-
rations end) to which section 965 ap-
plies. Before the issuance of the regula-
tions and instructions described in this
notice, taxpayers may rely on the rules
described in sections 3, 4, 5, and 6 of
this notice.

This notice also clarifies one of the
effective dates described in section 6 of
Notice 2018-13, which provided that tax-
payers could rely on the rules described in
section 5.01 of Notice 2018-13 with re-
spect to the last taxable year of foreign
corporations beginning before January 1,
2018, and for the taxable years of United
States shareholders in which or with
which such taxable years of foreign cor-

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porations end, pending the issuance of
further guidance. Taxpayers may rely on
section 5.01 of Notice 2018-13 with re-
spect to the last taxable year of foreign
corporations beginning before January 1,
2018, and each subsequent year of such
foreign corporations, and for the taxable
years of United States shareholders in
which or with which such taxable years of
foreign corporations end, pending the is-
suance of further guidance (the applica-
tion of which will be prospective).

## SECTION 8. REQUEST FOR COMMENTS AND CONTACT INFORMATION

The Treasury Department and the IRS
request comments on the rules described
in this notice. The Treasury Department
and the IRS expect to issue additional
guidance under section 965, and the Trea-
sury Department and the IRS request
comments on what additional guidance
should be issued to assist taxpayers in
applying section 965.

Written comments may be submitted to
the Office of Associate Chief Counsel (In-
ternational), Attention: Leni C. Perkins,
Internal Revenue Service, IR-4579, 1111
Constitution Avenue, NW, Washington,
DC 20224. Alternatively, taxpayers
may submit comments electronically to
Notice.comments@irscounsel.treas.gov.
Comments will be available for public
inspection and copying.

The principal author of this notice is
Ms. Perkins of the Office of Associate
Chief Counsel (International). For further
information regarding this notice, contact
Ms. Perkins at (202) 317-6934 (not a toll-
free number).

# Initial Guidance Under Section 163(j) as Applicable to Taxable Years Beginning After December 31, 2017

Notice 2018-28

## SECTION 1. PURPOSE

This notice announces that the Depart-
ment of the Treasury (Treasury Depart-
ment) and the Internal Revenue Service

(IRS) intend to issue proposed regulations
providing guidance to assist taxpayers in
complying with section 163(j) of the In-
ternal Revenue Code (Code), as amended
on December 22, 2017, by "An Act to
provide for reconciliation pursuant to ti-
tles II and V of the concurrent resolution
on the budget for fiscal year 2018," P.L.
115-97 (the Act). This notice further de-
scribes certain of the rules that those pro-
posed regulations will include to provide
taxpayers with interim guidance as more
comprehensive guidance is developed.
The rules described in this notice apply
only for purposes of determining the lim-
itation on deductions for interest expense
under section 163(j), as amended by the
Act. Before the issuance of the regulations
described in this notice, taxpayers may
rely on the rules described in sections 3
through 7 of this notice.

## SECTION 2. BACKGROUND

Prior to the Act, section 163(j) disal-
lowed a deduction for disqualified interest
paid or accrued by a corporation in a
taxable year if two threshold tests were
satisfied. The first threshold test was sat-
isfied if the payor's debt-to-equity ratio
exceeded 1.5 to 1.0 (safe harbor ratio).
The second threshold test was satisfied if
the payor's net interest expense exceeded
50 percent of its adjusted taxable income
(generally, taxable income computed
without regard to deductions for net inter-
est expense, net operating losses, domes-
tic production activities under section 199,
depreciation, amortization, and deple-
tion). Disqualified interest for this purpose
included interest paid or accrued to: (1)
related parties when no Federal income
tax was imposed with respect to such inter-
est; (2) unrelated parties in certain instances
in which a related party guaranteed the
debt; or (3) a real estate investment trust
(REIT) by a taxable REIT subsidiary of
that REIT. Interest amounts disallowed
for any taxable year under section 163(j)
prior to the Act were treated as interest
paid or accrued in the succeeding tax-
able year and could be carried forward
indefinitely. In addition, any excess lim-
itation (i.e., the excess, if any, of 50
percent of the adjusted taxable income
of the payor over the payor's net interest
expense) could be carried forward three
years.

Prior to the Act, section 163(j)(6)(C)
provided that "[a]ll members of the same
affiliated group (within the meaning of
section 1504(a)) shall be treated as 1 tax-
payer." In addition, section 163(j)(9)(B)
provided the Secretary with the authority
to issue regulations providing for adjust-
ments in the case of corporations that are
members of an affiliated group as may be
appropriate for carrying out the purposes
of section 163(j). The Report of the Com-
mittee on the Budget, House of Represen-
tatives, House Report 101-247 at 1248
(Sept. 20, 1989) noted that "[i]n cases
where a group of commonly controlled
U.S. corporations would constitute an af-
filiated group but for the inclusion within
the group of one or more entities other
than includible corporations (as defined in
section 1504(b)), the committee intends
for the regulations to treat all U.S. corpo-
rations that are members of such a group
as a single taxpayer where such treatment
is appropriate in order to carry out the
purposes of the bill or to prevent avoid-
ance of the purposes of the bill."

Proposed regulations under section
163(j) were issued on June 18, 1991 (Pro-
posed Regulations). 56 FR 27907 (June
18, 1991). The Proposed Regulations con-
tained affiliation rules for section 163(j)
purposes (the super-affiliation rules). In
particular, proposed § 1.163(j)-5(a)(2)
contained a rule that would treat all mem-
bers of an affiliated group (as defined in
section 1504(a)) as one taxpayer for pur-
poses of section 163(j), without regard to
whether such affiliated group files a con-
solidated return pursuant to section 1501.
The Proposed Regulations also contained
rules in proposed § 1.163(j)-5(a)(3) under
which, for purposes of section 163(j), if at
least 80 percent of the total voting power
and total value of the stock of an includ-
ible corporation (as defined in section
1504(b)) is owned, directly or indirectly,
by another includible corporation, the first
corporation would be treated as a member
of an affiliated group that includes the
other corporation and its affiliates.

Section 163(j) was amended by the Act
to provide new rules limiting the deduc-
tion of business interest expense for tax-
able years beginning after December 31,
2017. See Section 13301(a) of the Act.
For any taxpayer to which section 163(j)
applies, section 163(j)(1) now limits the

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taxpayer's annual deduction for business
interest expense to the sum of: (1) the
taxpayer's business interest income (as
defined in section 163(j)(6)) for the tax-
able year; (2) 30 percent of the taxpayer's
adjusted taxable income (as defined in
section 163(j)(8)) for the taxable year; and
(3) the taxpayer's floor plan financing in-
terest (as defined in section 163(j)(9)) for
the taxable year. The limitation in section
163(j) applies to all taxpayers, except for
certain taxpayers that meet the gross re-
ceipts test in section 448(c), and to all
trades or businesses, except certain trades
or businesses listed in section 163(j)(7).
Section 163(j)(2), as amended by the Act,
provides that the amount of any business
interest not allowed as a deduction for any
taxable year as a result of the limitation in
section 163(j)(1) is treated as business in-
terest paid or accrued in the next taxable
year and may be carried forward. Section
163(j), as amended by the Act, does not
provide for the carryforward of any excess
limitation. Section 163(j)(6)(C), which
treated an affiliated group as one taxpayer,
and section 163(j)(9)(B), which autho-
rized the super-affiliation rules, were re-
moved by the Act and no equivalent pro-
visions are included in section 163(j), as
amended by the Act.

The Conference Report to Accompany
H.R. 1, Report 115-466 (Dec. 15, 2017)
(the Conference Report) states in a foot-
note describing the House Bill that ". .. a
corporation has neither investment inter-
est nor investment income within the
meaning of section 163(d). Thus, interest
income and interest expense of a corpora-
tion is properly allocable to a trade or
business, unless such trade or business is
otherwise explicitly excluded from the ap-
plication of the provision." See Confer-
ence Report footnote 688, at 386. Nothing
in the Conference Report's description
of the Senate Amendment or the Con-
ference Agreement is inconsistent with
this approach. The Conference Report
also notes, in the description of the
House Bill, that "[i]n the case of a group
of affiliated corporations that file a con-
solidated return, the limitation applies at
the consolidated tax return filing level."
See Conference Report at 386. Nothing
in the Conference Report's description of
the Senate Amendment or the Conference
Agreement is inconsistent with this ap-

proach. However, there is no mention in the
Conference Report of applying section
163(j) to affiliated groups (within the mean-
ing of section 1504(a)) that do not file a
consolidated return.

## SECTION 3. TREATMENT OF DISALLOWED DISQUALIFIED INTEREST FROM LAST TAXABLE YEAR BEGINNING BEFORE JANUARY 1, 2018

Prior to the Act, C corporation taxpay-
ers that could not deduct all of their inter-
est expense under section 163(j)(1)(A)
could carry their disallowed disqualified
interest forward to the succeeding taxable
year under section 163(j)(1)(B). Such in-
terest was treated as paid or accrued in the
succeeding taxable year. Similarly, under
section 163(j)(2), as amended by the Act,
taxpayers that cannot deduct all of their
business interest because of the limitation
in section 163(j)(1) may carry their disal-
lowed business interest forward to the
succeeding taxable year, and such interest
is treated as business interest paid or ac-
crued in the succeeding taxable year.

Consistent with the approach of section
163(j)(1)(B) prior to the Act and section
163(j)(2), as amended by the Act, the
Treasury Department and the IRS intend
to issue regulations clarifying that taxpay-
ers with disqualified interest disallowed
under prior section 163(j)(1)(A) for the
last taxable year beginning before January
1, 2018, may carry such interest forward
as business interest to the taxpayer's first
taxable year beginning after December 31,
2017. The regulations will also clarify that
business interest carried forward will be
subject to potential disallowance under sec-
tion 163(j), as amended by the Act, in the
same manner as any other business interest
otherwise paid or accrued in a taxable year
beginning after December 31, 2017.

The regulations will also address the
interaction of section 163(j) with section
59A, relating to the tax on base erosion
payments of taxpayers with substantial
gross receipts, which was added by sec-
tion 14401 of the Act. The regulations will
provide that business interest carried for-
ward from a taxable year beginning before
January 1, 2018, will be subject to section
59A in the same manner as interest paid or
accrued in a taxable year beginning after
December 31, 2017, and will clarify how

section 59A applies to that interest. Thus,
for example, if interest paid or accrued by
a taxpayer to a foreign person that is a
related party as defined in section 59A(g)
is carried forward to a taxable year begin-
ning after December 31, 2017, and a de-
duction is otherwise allowable under
Chapter 1 of the Code for such interest,
then the interest is treated as a base
erosion payment described in section
59A(d)(1) and is subject to the rules under
section 59A(c)(3).

In addition, the regulations will pro-
vide rules for the allocation of business
interest from a group treated as affiliated
under the super-affiliation rules applicable
to section 163(j) prior to the Act to tax-
payers under section 163(j), as amended.

Prior to the Act, section 163(j)(2)
(B)(ii) also allowed a corporation that
was subject to the limitation in section
163(j)(1) to add to its annual limitation
any "excess limitation carryforward"
from the prior year, as defined in section
163(j)(2)(B)(ii). Section 163(j), as amended
by the Act, does not have a provision that
would allow an excess limitation carryfor-
ward. Thus, the Treasury Department and the
IRS intend to issue regulations clarifying that
no amount previously treated as an excess
limitation carryforward may be carried to tax-
able years beginning after December 31, 2017.

For further information regarding car-
ryforwards generally, contact Zachary
King or Charles Gorham at (202) 317-
7003 (not a toll-free number). For further
information regarding the interaction of
sections 59A and 163(j), contact Sheila
Ramaswamy or Steve Jensen at (202)
317-6938 (not a toll-free number).

## SECTION 4. C CORPORATION BUSINESS INTEREST EXPENSE AND INCOME

Consistent with congressional intent as
reflected in the Conference Report, the
Treasury Department and the IRS intend
to issue regulations clarifying that, solely
for purposes of section 163(j), as amended
by the Act, in the case of a taxpayer that is
a C corporation, all interest paid or ac-
crued by the C corporation on indebted-
ness of such C corporation will be busi-
ness interest within the meaning of section
163(j)(5), and all interest on indebtedness
held by the C corporation that is includ-
ible in gross income of such C corporation

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will be business interest income within the
meaning of section 163(j)(6). The regula-
tions described in the foregoing sen-
tence will not apply to a corporation that
is an S corporation as defined in section
1361(a)(1). Regulations also will ad-
dress whether and to what extent interest
paid, accrued, or includible in gross in-
come by a non-corporate entity such as a
partnership in which a C corporation
holds an interest is properly character-
ized, to such C corporation, as business
interest within the meaning of section
163(j)(5) or business interest income
within the meaning of section 163(j)(6).

For further information regarding this
issue, contact John B. Lovelace at (202)
317-4723 (not a toll-free number).

## SECTION 5. APPLICATION OF SECTION 163(j) TO CONSOLIDATED GROUPS

Consistent with congressional intent as
reflected in the Conference Report, the
Treasury Department and the IRS intend
to issue regulations clarifying that the lim-
itation in section 163(j)(1) on the amount
allowed as a deduction for business inter-
est applies at the level of the consolidated
group (as defined in § 1.1502-1(h)). Thus,
for example, a consolidated group's tax-
able income for purposes of calculating
adjusted taxable income (as defined in
section 163(j)(8)) will be its consolidated
taxable income (as determined under
§ 1.1502-11), and intercompany obliga-
tions (as defined in § 1.1502-13(g)(2)(ii))
will be disregarded for purposes of deter-
mining the limitation in section 163(j)(1).

Regulations also will address other is-
sues concerning the application of section
163(j) to consolidated groups, including:
the allocation of the section 163(j)(1) lim-
itation among group members; the treat-
ment of disallowed interest deduction car-
ryforwards when a member leaves the
group; the treatment of disallowed interest
deduction carryforwards of a member that
joins the group, including whether such car-
ryforwards are subject to a separate return
limitation year (SRLY) limitation (see
§§ 1.1502-15, 1.1502-21(c), and 1.1502-
22(c)); the application of § 1.1502-32 (pro-
viding rules for adjusting the basis of the
stock of a subsidiary owned by another
member) to disallowed interest deductions;
and the application of section 163(j) to a

consolidated group with one or more mem-
bers that conduct a trade or business de-
scribed in section 163(j)(7)(A)(ii), (iii), or
(iv), as amended by the Act, or whose mem-
bers hold an interest in a non-corporate en-
tity such as a partnership that conducts such
a trade or business. The Treasury Depart-
ment and the IRS anticipate that such regu-
lations will not include a general rule treat-
ing an affiliated group that does not file a
consolidated return as a single taxpayer for
purposes of section 163(j), as amended by
the Act.

For further information regarding this
issue, contact John B. Lovelace at (202)
317-4723 (not a toll-free number).

## SECTION 6. IMPACT OF SECTION 163(j) ON EARNINGS AND PROFITS

The Treasury Department and the IRS
intend to issue regulations clarifying that
the disallowance and carryforward of a
deduction for a C corporation's business
interest expense under section 163(j), as
amended by the Act, will not affect
whether or when such business interest
expense reduces earnings and profits of
the payor C corporation.

For further information regarding this
issue, contact John B. Lovelace at (202)
317-4723 (not a toll-free number).

## SECTION 7. BUSINESS INTEREST INCOME AND FLOOR PLAN FINANCING OF PARTNERSHIPS, PARTNERS, S CORPORATIONS, AND S CORPORATION SHAREHOLDERS

Section 163(j)(4) requires that the an-
nual limitation on the deduction for busi-
ness interest expense be applied at the
partnership level and that any deduction
for business interest be taken into account
in determining the non-separately stated
taxable income or loss of the partnership.
Although section 163(j)(4) is applied at
the partnership level with respect to the
partnership's indebtedness, section 163(j)
may also be applied at the partner level in
certain circumstances. The Treasury Depart-
ment and the IRS intend to issue regulations
providing that, for purposes of calculating a
partner's annual deduction for business in-
terest under section 163(j)(1), a partner can-
not include the partner's share of the part-
nership's business interest income for the

taxable year except to the extent of the part-
ner's share of the excess of (i) the partner-
ship's business interest income over (ii) the
partnership's business interest expense (not
including floor plan financing). Addition-
ally, the Treasury Department and the IRS
intend to issue regulations providing that a
partner cannot include such partner's share
of the partnership's floor plan financing in-
terest in determining the partner's annual
business interest expense deduction limita-
tion under section 163(j). Such regulations
are intended to prevent the double counting
of business interest income and floor plan
financing interest for purposes of the deduc-
tion afforded by section 163(j) and are con-
sistent with general principles of Chapter 1
of the Code. Similar rules will apply to any
S corporation and its shareholders.

For further information regarding this
issue, contact Meghan Howard at (202)
317-5279, Adrienne Mikolashek at (202)
317-6850, or Anthony McQuillen at (202)
317-6850 (not a toll-free number).

## SECTION 8. WITHDRAWAL OF PROPOSED REGULATIONS

The Treasury Department and the IRS
intend to withdraw the Proposed Regula-
tions in connection with the issuance of
proposed regulations under section 163(j),
as amended by the Act.

## SECTION 9. REQUEST FOR COMMENTS

The Treasury Department and the IRS
request comments on the rules described
in this notice. In addition, the Treasury
Department and the IRS expect to issue
regulations under section 163(j) providing
guidance with respect to issues not de-
scribed in this notice and request comments
on what additional issues should be ad-
dressed by those regulations to assist tax-
payers in applying section 163(j). Com-
ments must be submitted by May 31, 2018.
All comments received will be available for
public inspection and copying.

Written comments responding to this
notice should be mailed to:

Internal Revenue Service

CC:PA:LPD:PR (Notice 2018-28)
Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

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Please include "Notice 2018-28" on the
cover page.

Submissions may be hand delivered
Monday through Friday between the
hours of 8 a.m. and 4 p.m. to:

Internal Revenue Service

Courier's Desk
1111 Constitution Ave., N.W.
Washington, DC 20224
Attn: CC:PA:LPD:PR
(Notice 2018-28)

Submissions may also be sent electron-
ically to the following e-mail address:
Notice.Comments@irscounsel.treas.gov.
Please include "Notice 2018-28" in the
subject line.

## SECTION 10. DRAFTING AND GENERAL CONTACT INFORMATION

The principal authors of this notice are
Zachary King and Charles Gorham of the
Office of the Associate Chief Counsel (In-
come Tax and Accounting). Other person-
nel from the Treasury Department and the
IRS participated in its development. For
further information regarding this notice,
contact Mr. King or Mr. Gorham at (202)
317-7003 (not a toll-free number).

## Guidance Regarding the Implementation of New Section 1446(f) for Partnership Interests That Are Not Publicly Traded

### Notice 2018-29

#### SECTION 1. OVERVIEW

This notice announces that the Depart-
ment of the Treasury ("Treasury Depart-
ment") and the Internal Revenue Service
("IRS") intend to issue regulations under
new section 1446(f) of the Internal Reve-
nue Code ("Code") regarding the disposi-
tion of a partnership interest that is not
publicly traded. This notice also provides
interim guidance that taxpayers may rely
on pending the issuance of regulations.
New section 1446(f) was added by section
13501 of "An Act to provide for reconcil-
iation pursuant to titles II and V of the
concurrent resolution on the budget for
fiscal year 2018," P.L. 115-97 (the

"Act"), which was enacted on December
22, 2017. Section 13501 of the Act also
added new section 864(c)(8).

### SECTION 2. BACKGROUND AND SUMMARY OF COMMENTS

In general, section 864(c)(8) provides
that gain or loss from the sale, exchange,
or other disposition of a partnership inter-
est by a nonresident alien or foreign cor-
poration is effectively connected with the
conduct of a trade or business in the
United States to the extent that the person
would have had effectively connected
gain or loss had the partnership sold all of
its assets at fair market value. Section
864(c)(8) applies to sales, exchanges, or
other dispositions occurring on or after
November 27, 2017. See Rev. Rul. 91-32,
1991-1 C.B. 107, for the IRS's position
with respect to sales, exchanges, or other
dispositions of an interest in a partnership
by a nonresident alien individual or for-
eign corporation occurring before Novem-
ber 27, 2017.

In general, section 1446(f)(1) provides
that if any portion of the gain on any
disposition of an interest in a partnership
would be treated under section 864(c)(8)
as effectively connected with the conduct
of a trade or business within the United
States, then the transferee must deduct and
withhold a tax equal to 10 percent of the
amount realized on the disposition. Under
an exception in section 1446(f)(2), how-
ever, withholding is generally not required
if the transferor furnishes an affidavit to
the transferee stating, among other things,
that the transferor is not a foreign person.

Section 1446(f)(4) provides that if a
transferee fails to withhold any amount
required to be withheld under section
1446(f)(1), the partnership shall be re-
quired to deduct and withhold from distri-
butions to the transferee a tax in an
amount equal to the amount the transferee
failed to withhold (plus interest under the
Code on such amount).

Section 1446(f)(6) authorizes the Sec-
retary to prescribe such regulations or
other guidance as may be necessary to
carry out the purposes of section 1446(f),
including regulations providing for excep-
tions from the provisions of section
1446(f). Furthermore, section 1446(g) au-
thorizes the Secretary to prescribe such
regulations as may be necessary to carry

out the purposes of section 1446 gener-
ally. Section 1446(f) applies to sales, ex-
changes, or other dispositions occurring
after December 31, 2017.

On December 29, 2017, the Treasury
Department and IRS advance released
Notice 2018-08, 2018-7 I.R.B. 352
("PTP Notice"). The PTP Notice sus-
pended the requirement to withhold on
dispositions of certain interests in publicly
traded partnerships ("PTPs") in response
to stakeholder concerns that applying sec-
tion 1446(f) to PTPs without guidance
presented significant practical problems.
The PTP Notice also requested comments
on the implementation of section 1446(f),
including whether a temporary suspension
of section 1446(f) for partnership interests
that are not publicly traded (“non-PTP
interests") was needed. Several comments
were received.

Comments in response to the PTP No-
tice requested guidance minimizing the
application of section 1446(f) until further
guidance was issued, including suspen-
sion of section 1446(f) for non-PTP inter-
ests. This notice does not suspend the
application of section 1446(f) for non-
PTP interests in all cases, but does include
guidance under section 1446(f) designed to
allow for an effective and orderly imple-
mentation, including minimizing occasions
of overwithholding. The rules in this notice
(including section 6) that modify or suspend
withholding under section 1446(f) do not
affect the transferor's tax liability under sec-
tion 864(c)(8). See section 4.06 of this no-
tice.

Comments stated that applying section
1446(f) to dispositions of non-PTP inter-
ests presents significant practical prob-
lems. Comments stated that a transferee is
obligated to withhold with respect to dis-
positions occurring after December 31,
2017, but without forms, instructions or
other guidance, it is unclear when or how
to deposit the withheld amounts. To ad-
dress this concern, section 5 of this notice
provides interim guidance on reporting
and paying over the amount required to be
withheld under section 1446(f)(1). This
guidance generally adopts the forms and
procedures relating to withholding on dis-
positions of U.S. real property interests
under section 1445 and the regulations
thereunder.

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Comments requested guidance on the
procedures for the transferor to furnish an
affidavit of non-foreign status to the trans-
feree as described in section 1446(f)(2) to
be relieved from withholding. Section
6.01 of this notice provides this guidance
by generally adopting the rules in the sec-
tion 1445 regulations for similar situa-
tions.

Section 1446(f) applies only when
there is gain on a disposition of an interest
in a partnership. To prevent withholding
when no gain occurs on a disposition,
section 6.02 of this notice provides that if
a transferee receives a certification from a
transferor that the disposition will not re-
sult in gain, then the transferee generally
is not required to withhold under section
1446(f).

Comments requested relief from with-
holding obligations when the amount of
effectively connected gain under section
864(c)(8) is zero or a small amount. One
comment recommended a rule providing
relief based on the value of the assets
producing effectively connected in-
come, modeled on § 1.1445-11T. Sec-
tion 1.1445-11T provides an exception
from the requirement that a transferee
withhold on the transfer of an interest in
a partnership that holds U.S. real prop-
erty interests. The transferee is relieved
from withholding under this exception if
the partnership provides the transferee a
statement certifying that fifty percent or
more of the value of the gross assets
does not consist of U.S. real property
interests, or that ninety percent or more
of the value of the gross assets of the
partnership does not consist of U.S. real
property interests plus cash or cash
equivalents. Instead of adopting a rule
based on the test in § 1.1445-11T, sec-
tions 6.03 and 6.04 of this notice pro-
vide two rules that relieve the transferee
from withholding in circumstances sim-
ilar to those described by the comments.

Section 6.03 of this notice provides
generally that, if a transferor certifies to a
transferee that for each of the past three
years the transferor's effectively con-
nected taxable income from the partner-
ship was less than 25 percent of the trans-
feror's total income from the partnership,
the transferee is not required to withhold.
This rule is designed to provide a simple
approach, obviating the need for the part-

nership to make the computation required
by section 864(c)(8) or to otherwise pro-
vide information to the transferor or trans-
feree at the time of the transaction. How-
ever, in certain cases transferees may not
be able to obtain this certification, so sec-
tion 6.04 of this notice provides a separate
rule relieving a transferee of its withhold-
ing obligation under section 1446(f)(1)
when the transferee receives a certifica-
tion from the partnership that the partner-
ship's effectively connected gain under
section 864(c)(8) would be less than 25
percent of the total gain on the deemed
sale of all its assets. The Treasury Depart-
ment and the IRS intend to provide future
guidance that will reduce the threshold for
withholding below 25 percent for both of
these rules. Other limitations are also un-
der consideration. The Treasury Depart-
ment and the IRS expect that any such
reduction in the threshold for withholding
would be effective at the same time as
guidance providing for withholding certif-
icates or otherwise providing for with-
holding determined by reference to gain
recognized under section 1446(f)(3).

A comment recommended guidance pro-
viding that no gain or loss be recognized
under section 864(c)(8) in certain disposi-
tions that would otherwise be considered
nonrecognition transactions, provided
that gain or loss is preserved. Specifi-
cally, the comment suggested alterna-
tive rules, one considering whether the
gain or loss is preserved in the U.S. tax
base, and the other considering whether
the gain or loss is preserved in the hands
of the transferee. The Treasury Depart-
ment and the IRS are studying the ap-
propriate treatment of nonrecognition
transactions under section 864(c)(8),
and comments are requested on this is-
sue, including the relationship between
nonrecognition transactions under sec-
tions 864(c)(8) and 897. See § 1.897-
6T. Until this guidance is provided, sec-
tion 6.05 of this notice provides that no
withholding is required under section
1446(f) in a transaction in which no gain
is recognized.

Section 1446(f)(1) applies to the
amount realized on the disposition of a
partnership interest. The amount realized
includes a reduction in the transferor's share
of partnership liabilities and other liabilities
to which the partnership interest is subject.

See §§ 1.752-1(h) and 1.1001-2. Section 7
of this notice provides two rules for deter-
mining the amount of partnership liabilities
that are included in the amount realized.
Section 7.02 of this notice provides that a
transferee may generally rely on a transfer-
or's most recently issued Schedule K-1
(Form 1065), Partner's Share of Income,
Deductions, Credits, etc., for purposes of
determining the transferor's share of part-
nership liabilities included in the amount
realized for purposes of section 1446(f). Al-
ternatively, section 7.03 provides that a
transferee may generally rely on a certifica-
tion from the partnership providing the
amount of the transferor's share of partner-
ship liabilities.

Comments stated that when the amount
realized includes a reduction in liabilities,
the amount the transferee may be required
to withhold could exceed the cash or other
property the transferee pays to the trans-
feror. Further, in some situations, a trans-
feror may not provide any information to
the transferee about its share of partner-
ship liabilities, making a determination of
the total amount realized difficult. To ad-
dress these issues, section 8 of this notice
provides that in certain cases, the total
amount of withholding is generally lim-
ited to the total amount of cash and prop-
erty to be transferred. The Treasury De-
partment and the IRS expect that the
exception in section 8 will not apply after
guidance is issued providing for withhold-
ing certificates or otherwise providing for
withholding determined by reference to
gain recognized under section 1446(f)(3).

The comments also raised an issue re-
lating to the determination of a transfer-
or's basis in its partnership interest. Sec-
tion 731(a) provides that in the case of a
distribution by a partnership to a partner,
gain shall not be recognized to such part-
ner, except to the extent that any money
distributed exceeds the adjusted basis of
such partner's interest in the partnership
immediately before the distribution. Any
gain recognized under section 731(a) is
considered gain from the sale or exchange
of the partnership interest of the distribu-
tee partner. Thus, section 1446(f) applies
in certain cases when a distribution of
money (including marketable securities)
results in gain under section 731. Accord-
ing to a comment, when a partnership
distributes money, it may not know the

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distributee partner's basis in its interest
and, thus, may not know whether the dis-
tribution will cause the distributee partner
to recognize gain. In response to this com-
ment, section 9 of this notice provides that
the partnership may generally rely on its
books and records, or on a certification
received from the distributee partner, to
determine whether the distribution ex-
ceeds the partner's basis.

Section 10 of this notice responds to
requests for guidance on the interaction of
section 1445 with section 1446(f).

The Treasury Department and the IRS
are considering rules that would relieve a
partnership of its obligation under section
1446(f)(4) if it provides the information
required by a transferor and transferee to
comply with the requirements under sec-
tions 864(c)(8) and 1446(f), including the
certification described in section 6.04 of
this notice, information on the calculation
of the tax liability under section 864(c)(8)
to the transferor, and information neces-
sary to calculate the amount realized (in-
cluding calculations relating to section 752)
by the transferor. Section 11 of this notice
provides that the withholding requirements
described in section 1446(f)(4) will not ap-
ply until regulations or other guidance have
been issued under that section.

### SECTION 3. DEFINITIONS

.01 Effectively connected gain. The term
"effectively connected gain" means the
amount of net gain (if any) that would
have been effectively connected with the
conduct of a trade or business within the
United States if the partnership had sold
all of its assets at their fair market value as
of the date of the transfer described in
section 864(c)(8)(A).

.02 Transfer. The term "transfer" means
any sale, exchange or other disposition.
.03 Transferor. The term "transferor"
means any person that transfers a partner-
ship interest, and includes a person that
receives a distribution from a partnership.
.04 Transferee. The term "transferee"
means any person that acquires a partner-
ship interest by transfer, and includes a
partnership that makes a distribution.

.05 Related person. The term "related per-
son" is a person that is related within the
meaning of section 267(b) or section
707(b)(1).

### SECTION 4. RULES OF GENERAL APPLICABILITY

.01 U.S. taxpayer identification numbers
("U.S. TINs"). A certificate described in
sections 6.02, 6.03, and 7.02 of this notice
must include the transferor's U.S. TIN to
the extent that the transferor is required to
have, or does have, a U.S. TIN. A trans-
feree may rely on an otherwise valid cer-
tificate that does not include a U.S. TIN
for the transferor unless the transferee
knows that the transferor is required to
have a U.S. TIN or that the transferor does
in fact have a U.S. TIN. An affidavit of
non-foreign status or Form W-9, Request
for Taxpayer Identification Number and
Certification, provided for purposes of
section 6.01 of this notice must include a
U.S. TIN in all cases.

.02 Penalties of perjury. For purposes of
this notice, a certification signed under
"penalties of perjury" must provide the
following: "Under penalties of perjury I
declare that I have examined the informa-
tion on this document, and to the best of
my knowledge and belief, it is true, cor-
rect, and complete." Such a certification
by an entity must further provide the fol-
lowing: "I further declare that I have au-
thority to sign this document on behalf of
[name of entity]."

.03 Authority to sign certifications. For
purposes of this notice, a certification de-
scribed in section 6, 7, or 9 of this notice
from an entity must be signed by an indi-
vidual who is an officer, director, general
partner, or managing member of the en-
tity, or, if the general partner or managing
member of the entity is itself an entity, an
individual who is an officer, director, gen-
eral partner, or managing member of the
entity that is the general partner or man-
aging member.

.04 Retention period. A transferee that
obtains and relies upon an affidavit or
certification provided for in this notice
must retain that document with its books
and records for a period of five calendar
years following the close of the last cal-
endar year in which the entity relied upon
the certification or as long as it may be
relevant to the determination of the trans-
feree's withholding obligation under sec-
tion 1446(f), whichever period is longer.
.05 Publicly traded partnerships. The
rules in this notice do not apply to the

transfer of a publicly traded interest in a
publicly traded partnership (within the
meaning of section 7704(b)).

.06 Applicability of Section 864(c)(8). The
rules in this notice that modify or suspend
withholding under section 1446(f) do not
affect the transferor's tax liability under sec-
tion 864(c)(8).

## SECTION 5. USE OF SECTION 1445 PRINCIPLES FOR REPORTING AND PAYING OVER SECTION 1446(f) WITHHOLDING FOR DISPOSITIONS OF NON-PUBLICLY TRADED PARTNERSHIP INTERESTS

The Treasury Department and the IRS
have determined that, until regulations,
other guidance, or forms and instructions
have been issued under section 1446(f),
transferees required to withhold under
section 1446(f)(1) must use the rules in
section 1445 and the regulations thereun-
der for purposes of reporting and paying
over the tax, except as otherwise provided
in this notice. See, e.g., § 1.1445-1(c).
The forms specified in those rules include
Form 8288, U.S. Withholding Tax Return
for Dispositions by Foreign Persons of
U.S. Real Property Interests, and Form
8288-A, Statement of Withholding on
Dispositions by Foreign Persons of U.S.
Real Property Interests. The transferee
must include the statement "Section
1446(f)(1) withholding" at the top of both
the relevant Form 8288 and the relevant
Form 8288-A. Except as provided in sec-
tion 8 of this notice, the transferee must
also enter the amount subject to withhold-
ing under section 1446(f)(1) on line 5b of
Part I of the Form 8288 and on line 3 of
Form 8288-A and enter the amount with-
held on line 6 of Part I of Form 8288 and
on line 2 of Form 8288-A. At this time,
the IRS will not issue withholding certif-
icates under section 1446(f)(3), such as
those provided on Form 8288-B, Appli-
cation for Withholding Certificate for Dis-
positions by Foreign Persons of U.S. Real
Property Interests.

The rules for reporting and paying over
amounts withheld and the rules regarding
the contents of Form 8288 and Form
8288-A contained in § 1.1445-1(c) and
(d) (such as the requirement to report and
pay over withholding within 20 days of a
transfer) apply to the submission of sec-

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tion 1446(f)(1) withholding. A transferee
that is required to pay over a withholding
tax under section 1446(f) is made liable
for that tax under section 1461 (including
any applicable penalties and interest). A
person that is required, but fails, to pay
over the withholding tax required by sec-
tion 1446(f) may also be subject to civil
and criminal penalties. Officers or other
responsible persons of either an entity that
is required to pay over the withholding tax
or any other withholding agent may be
subject to a civil penalty under section
6672. The Treasury Department and the
IRS intend to issue regulations providing
that with respect to any forms that were
required to be filed, or amounts that were
due, under section 1446(f) on or before
May 31, 2018, no penalties or interest will
be asserted if these forms are filed with,
and such amounts are paid over to, the
IRS on or before May 31, 2018.

## SECTION 6. EXCEPTIONS TO SECTION 1446(f) WITHHOLDING ON DISPOSITIONS OF NON- PUBLICLY TRADED PARTNERSHIP INTERESTS

### .01 Certifying Non-Foreign Status

Section 1446(f)(2) provides that no
person shall be required to deduct and
withhold any amount under section
1446(f)(1) with respect to any disposi-
tion of an interest in a partnership if the
transferor furnishes to the transferee an
affidavit by the transferor stating, under
penalty of perjury, the transferor's U.S. TIN
and that the transferor is not a foreign per-
son. Thus, unless the transferee receives the
required affidavit, it must presume that the
transferor is foreign for purposes of with-
holding under section 1446(f)(1).

The Treasury Department and the IRS
intend to issue regulations applying rules
substantially similar to § 1.1445-2(b), ex-
cept § 1.1445-2(b)(2)(ii), for making a
certification of non-foreign status for pur-
poses of applying section 1446(f)(2). Sec-
tion 1.1445-2(b) provides rules pursuant
to which a transferor of a U.S. real prop-
erty interest can provide a certification of
non-foreign status to inform the transferee
that withholding is not required. Until reg-
ulations on certifications of non-foreign
status under section 1446(f) are issued, a
transferor may furnish the certification de-

scribed in § 1.1445-2(b), as modified to
take into account section 1446(f) to satisfy
the requirements of section 1446(f)(2).
Further, a transferor may submit a Form
W-9 for this purpose if: (i) it includes the
name and U.S. TIN of the transferor; (ii) it
is signed and dated by the transferor; and
(iii) the jurat has not been deleted. A
transferee may generally rely on a Form
W-9 that it has previously received from
the transferor if it meets these require-
ments. Until further notice, the certifica-
tion of non-foreign status or Form W-9
the transferor provides to the transferee
should not be furnished to the IRS. See
section 1446(f)(2)(B)(ii). If the transferee
has actual knowledge that the certification
or Form W-9 is false, or the transferee re-
ceives a notice (as described in section
1445(d)) from a transferor's agent or trans-
feree's agent that it is false, it may not be
relied upon. See section 1446(f)(2)(B)(i).

### .02 Transferee Receives a Certification of No Realized Gain

The Treasury Department and the IRS
intend to issue regulations providing that,
if the transferee receives a certification,
issued by the transferor (signed under
penalties of perjury and including a U.S.
TIN, to the extent required under section
4.01 of this notice), stating that the trans-
fer of its partnership interest will not re-
sult in realized gain, a transferee may gen-
erally rely on the certification and be
relieved from liability for withholding un-
der section 1446(f). The transferee may
not rely on the certification and is not
relieved from withholding if it has knowl-
edge that the certification is false under
the principles of § 1.1445-2(b)(4). Pend-
ing the issuance of other guidance, the
transferor should not submit to the IRS
Form 8288-B for this purpose. If gain is
realized in a transfer but not recognized as
a result of a nonrecognition provision, the
transferee cannot apply this section 6.02.
In this circumstance, see section 6.05 of
this notice.

.03 Transferee Receives a Certification
that Transferor Had Less than 25
Percent Effectively Connected Taxable
Income in Three Prior Taxable Years

The Treasury Department and the IRS
intend to issue regulations providing that

no withholding is required under section
1446(f)(1) upon the transfer of a partner-
ship interest if no earlier than 30 days
before the transfer the transferee receives
from the transferor a certification (signed
under penalties of perjury and including a
U.S. TIN, to the extent required under
section 4.01 of this notice) that for the
transferor's immediately prior taxable
year and the two taxable years that pre-
cede it the transferor was a partner in the
partnership for the entirety of each of
those years, and that the transferor's allo-
cable share of effectively connected tax-
able income (ECTI) (as determined under
§ 1.1446-2) for each of those taxable
years was less than 25 percent of the
transferor's total distributive share of in-
come for that year. For this purpose, the
transferor's immediately prior taxable
year is the most recent taxable year of the
transferor that includes the partnership
taxable year that ends with or within the
transferor's taxable year and for which
both a Form 8805, Foreign Partner's In-
formation Statement of Section 1446
Withholding Tax, and a Schedule K-1
(Form 1065) were due (including exten-
sions) or filed (if earlier) by the time of the
transfer. In no event may a transferee rely
on a certification provided prior to the
transferor's receipt of the relevant Forms
8805 and Schedules K-1 (Form 1065). For
purposes of this rule, a transferor that had
a distributive share of deductions and ex-
penses attributable to the partnership's
U.S. trade or business but no ECTI allo-
cated to it in a year must treat its allocable
share of ECTI for that year as zero. A
transferor that did not have a distributive
share of income in any of its three imme-
diately prior taxable years during which
the partnership had effectively connected
income cannot provide this certification.
A transferee may not rely on the certifi-
cation and is not relieved from withhold-
ing if it has actual knowledge that the
certification is false. When a partnership is
a transferee by reason of making a distri-
bution, this section 6.03 does not apply.

.04 Transferee Receives a Certification
from Partnership of Less than 25
Percent Effectively Connected Gain
Under Section 864(c)(8)

The Treasury Department and the IRS
intend to issue regulations providing that

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no withholding is required under section
1446(f)(1) upon the transfer of a partner-
ship interest if the transferee is provided a
certification, issued by the partnership and
signed under penalties of perjury no ear-
lier than 30 days before the transfer, cer-
tifying that if the partnership had sold all
of its assets at their fair market value, the
amount of gain that would have been ef-
fectively connected with the conduct of a
trade or business within the United States
would be less than 25 percent of the total
gain. For purposes of this section 6.04,
effectively connected gain includes gain
treated as effectively connected with a
trade or business in the United States un-
der section 897. Principles similar to the
rules of § 1.1445-11T(d)(2)(ii) and (iii)
apply to certifications furnished pursuant
to this section 6.04. When a partnership is
a transferee by reason of making a distri-
bution, the transferee partnership must re-
tain a record of the documentation relied
upon to determine the amount of gain (if
any), and the portion of the gain that
would have been effectively connected
with the conduct of a trade or business in
the United States (if any). This documen-
tation must be retained for the period de-
scribed in section 4.04 of this notice.

### .05 Nonrecognition Transactions

The Treasury Department and the IRS
intend to issue regulations providing that
no withholding is required under section
1446(f)(1) upon the transfer of a partner-
ship interest if the transferee receives
from the transferor a notice that satisfies
the requirements of § 1.1445-2(d)(2),
treating references to section 1445(a) as
references to section 1446(f), and refer-
ences to "U.S. real property interest" as
"partnership interest", except as provided
in this section 6.05. A transferee should
not mail a copy of the transferor's notice
to the IRS as described in § 1.1445-
2(d)(2)(i)(B). The Treasury Department
and the IRS are studying the appropriate
treatment of nonrecognition transactions
under section 864(c)(8). Until guidance
providing for the treatment of nonrecogni-
tion transactions under section 864(c)(8) is
issued, a transfer in which the transferor is
not required to recognize any gain or loss by
reason of a nonrecognition provision of the
Code (without regard to section 864(c)(8))
will be eligible for the exception from with-

holding provided in this section 6.05. When
a partnership is a transferee by reason of
making a distribution in which no gain is
recognized, the transferee partnership is not
required to withhold and the transferor is not
required to provide a notice to the transferee
partnership.

### .06 Rules for Agents

Section 1446(f)(2)(C) provides that the
rules of section 1445(d) shall apply to a
transferor's agent or transferee's agent
with respect to any affidavit of nonforeign
status in the same manner as such rules
apply with respect to the disposition of a
United States real property interest under
such section. The Treasury Department and
the IRS intend to issue regulations providing
that the principles of § 1.1445-4 apply for
agents to fulfill their responsibilities with
respect to any certification provided for pur-
poses of section 1446(f).

## SECTION 7. DETERMINING THE AMOUNT OF PARTNERSHIP LIABILITIES INCLUDED IN AMOUNT REALIZED

### .01 In General

The Treasury Department and the IRS
intend to issue regulations providing that a
transferee may rely upon a certification
described in section 7.02 or section 7.03
of this notice to determine the amount of
liabilities of the partnership that are in-
cluded in the amount realized on a transfer
for purposes of section 1446(f), unless the
transferee has actual knowledge that the
certification is incorrect or unreliable.

### .02 Transferor Certification

A transferor that is not a controlling
partner (as defined below) may provide to
the transferee a certification (signed under
penalties of perjury and including a U.S.
TIN, to the extent required under section
4.01 of this notice) that provides (i) the
amount of the transferor's share of part-
nership liabilities reported on the most
recently received Schedule K-1 (Form
1065) from the partnership, for a partner-
ship taxable year that closed no more than
10 months before the date of transfer, and
(ii) that the transferor does not have actual
knowledge of events occurring after the
Schedule K-1 (Form 1065) was issued

that would cause the amount of the trans-
feror's share of partnership liabilities at
the time of the transfer to be significantly
different than the amount shown on the
Schedule K-1 (Form 1065). A difference
in the amount of the transferor's share of
partnership liabilities of 25 percent or less
is not a significant difference. A transferor
is a controlling partner for purposes of this
section 7.02 if the transferor (and related
persons) owned a 50 percent or greater in-
terest in capital, profits, deductions or losses
in the 12 months before the transfer.

### .03 Partnership Certification

The partnership may issue a certifica-
tion, signed under penalties of perjury, no
earlier than 30 days before the transfer,
that provides (i) the amount of the trans-
feror's share of partnership liabilities,
which may be the amount reported on the
most recently prepared Schedule K-1
(Form 1065), and (ii) that the partnership
does not have actual knowledge of events
occurring after its determination of the
amount of the transferor's share of part-
nership liabilities that would cause the
amount of the transferor's share of part-
nership liabilities at the time of the trans-
fer to be significantly different than the
amount shown on the certification pro-
vided to the transferee. A difference in the
amount of the transferor's share of part-
nership liabilities of 25 percent or less is
not a significant difference.

## SECTION 8. WITHHOLDING LIMITATION IN CERTAIN CASES RELATING TO THE TRANFEROR'S SHARE OF PARTNERSHIP LIABILITIES

The Treasury Department and the IRS
intend to issue regulations providing that
if the amount otherwise required to be
withheld under section 1446(f) exceeds
the amount realized less the decrease in
the transferor partner's share of partner-
ship liabilities, then the amount of with-
holding required by section 1446(f)(1) is
the amount realized less the decrease in
the transferor partner's share of partner-
ship liabilities. In addition, if a transferee
is unable to determine the amount realized
because it does not have knowledge of the
transferor partner's share of partnership
liabilities (and does not receive a certifi-

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cation described in section 7.02 or section
7.03 of this notice on which it can rely),
then the amount of withholding required
is the entire amount realized, determined
without regard to the decrease in the trans-
feror partner's share of partnership liabil-
ities. In both cases, the amount of with-
holding under section 1446(f) is generally
the amount that the transferor would, but
for the transferee remitting it as withhold-
ing under section 1446(f), receive from
the transferee. A transferee may rely on
this rule only if the transferee (1) is not the
partnership in which the transferor is a
partner, and (2) is not a related person to
the transferor. A transferee applying this
section 8 must check the box on line 5c of
Part I of Form 8288 and include the
amount withheld in the total reported on
line 6, Part I of Form 8288 and line 2 of
Form 8288-A.

## SECTION 9. DETERMINATION OF APPLICABILITY OF SECTION 1446(f)(1) TO DISTRIBUTIONS BY PARTNERSHIPS

The Treasury Department and the IRS
intend to issue regulations providing that
for purposes of section 1446(f)(1), if a
partnership makes a distribution to a part-
ner, the partnership may rely on its books
and records, or on a certification received
from the distributee partner, to determine
whether the distribution exceeds the part-
ner's basis in its partnership interest, pro-
vided that the partnership does not know
or have reason to know that its books and
records, or the distributee partner's certi-
fication, is incorrect and the partnership
retains a record of the documentation re-
lied upon to establish the partner's basis
for the period described in section 4.04 of
this notice.

## SECTION 10. COORDINATION WITH SECTION 1445 WITHHOLDING

The Treasury Department and the IRS
intend to issue regulations providing that a
transferee that is otherwise required to
withhold under section 1445(e)(5) or
§ 1.1445-11T(d)(1) with respect to the
amount realized, as well as under section
1446(f)(1), will be subject to the payment
and reporting requirements of section
1445 only, and not section 1446(f)(1),

with respect to such amount. However,
this rule applies only if the transferor has
not obtained a withholding certificate that
is provided for in the last sentence of
§ 1.1445-11T(d)(1). If the transferor has
obtained such a withholding certificate,
the transferee must withhold the greater of
the amounts required under section
1445(e)(5) or section 1446(f)(1). Under
these circumstances, a transferee that has
complied with the withholding require-
ments under either section 1445(e)(5) or
section 1446(f)(1), as applicable, will be
deemed to satisfy the other withholding
requirement.

## SECTION 11. TIMING OF THE WITHHOLDING REQUIREMENT OF SECTION 1446(f)(4)

The Treasury Department and the IRS
intend to issue regulations providing that
the withholding requirements in section
1446(f)(4) will not apply until regulations
or other guidance have been issued under
that section.

## SECTION 12. TIERED PARTNERSHIPS

The Treasury Department and the IRS
intend to issue regulations clarifying that
if a transferor transfers an interest in a
partnership (upper-tier partnership) that
owns an interest (directly or indirectly)
in another partnership (lower-tier part-
nership), and the lower-tier partnership
would have effectively connected gain
upon the deemed transaction described
in section 864(c)(8)(B)(i)(I) that would
be taken into account by the transferor
at the time of the transfer of the interest
in the upper-tier partnership, a portion
of the gain recognized by the transferor
is characterized as effectively connected
gain. These regulations will require
lower-tier partnerships to furnish infor-
mation to their partners in order for their
indirect partners to be able to comply
with sections 864(c)(8) and 1446(f). See
section 6031(b); § 1.6031(b)-1T.

## SECTION 13. REQUEST FOR COMMENTS AND CONTACT INFORMATION

The Treasury Department and the IRS
request comments on the rules to be is-
sued under section 1446(f). In addition to

requests for comments identified in the
PTP Notice (which may also be applicable
to non-PTP interests) and in section 2 of
this notice, comments are requested con-
cerning the following:

(i) rules for determining the amount
realized, including when the amount of
required withholding may exceed the pro-
ceeds of a sale of a partnership interest;

(ii) procedures for reducing the amount
required to be withheld, such as (a) limit-
ing the withholding to the tax on the gain
recognized (if determinable) and (b) re-
lieving identifiable historically compliant
taxpayers from withholding;

(iii) credit and refund forms and pro-
cesses, such as (a) forms of standardized
documentation that could be used by
transferors when claiming refunds or
credits for the withholding to facilitate
IRS's evaluation of such claims, or (b)
providing for an expedited refund proce-
dure if a taxpayer can demonstrate sub-
stantial overwithholding;

(iv) rules implementing the require-
ment for a partnership to withhold under
section 1446(f)(4) on distributions to a
transferee that fails to withhold under sec-
tion 1446(f)(1);

(v) rules that should apply under sec-
tions 864(c)(8), 897, 1445, and 1446(f)
when a partner disposes of an interest in a
partnership that holds both U.S. real prop-
erty interests and other property used in
the conduct of a trade or business in the
United States; and

(vi) the calculation of the amount of
gain or loss from the sale, exchange, or
other disposition of a partnership interest
that is effectively connected with the con-
duct of a trade or business in the United
States by operation of section 864(c)(8).

Comments must be submitted by June
2, 2018. All comments received will be
available for public inspection and copy-
ing.

Written comments responding to this
notice should be mailed to:

Internal Revenue Service

CC:PA:LPD:PR (Notice 2018-29)

Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

Please include "Notice 2018-29" on the
cover page.

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Submissions may be hand delivered
Monday through Friday between the
hours of 8 a.m. and 4 p.m. to:

Internal Revenue Service
Courier's Desk
1111 Constitution Ave., N.W.
Washington, DC 20224
Attn: CC:PA:LPD:PR
(Notice 2018-29)

Alternatively, taxpayers may submit
comments electronically to the follow-
ing email address: Notice.comments@
irscounsel.treas.gov. Please include
"Notice 2018-29" in the subject line of
any electronic submission.

The principal authors of this notice are
Ronald M. Gootzeit of the Office of As-
sociate Chief Counsel (International) and
Kevin I. Babitz of the Office of Associate
Chief Counsel (Passthroughs and Special
Industries). However, other personnel
from the Treasury Department and the
IRS also participated in its development.
For further information regarding this no-
tice contact Mr. Gootzeit at 202.317.4953
(not a toll-free number).

### National Security Considerations with Respect to Country-by- Country Reporting

Notice 2018-31

## SECTION 1. OVERVIEW

This notice provides additional guidance
concerning country-by-country (CbC) re-
porting requirements under section 6038
and § 1.6038-4. In consideration of the
national security interests of the United
States, this notice addresses modifications to
the reporting requirement under § 1.6038-4
with respect to certain U.S. multinational
enterprise (MNE) groups. The Department
of the Treasury (Treasury Department) and
the Internal Revenue Service (IRS) intend to
amend § 1.6038-4 to incorporate the guid-
ance described in this notice. Prior to the
issuance of these amendments, U.S. MNE
groups may rely on the provisions of section
3 of this notice.

## SECTION 2. BACKGROUND

On December 23, 2015, a notice of
proposed rulemaking (REG-109822-15)
relating to the furnishing of CbC reports
by certain United States persons under
section 6038 was published in the Federal
Register (80 FR 79795). The preamble
to the proposed regulations requested
comments concerning the need for a na-
tional security exception to the CbC in-
formation reporting requirement. On
June 30, 2016, the Treasury Department
and the IRS published final regulations
(TD 9773) requiring annual CbC report-
ing on Form 8975, Country-by-Country
Report (CbC report), by certain United
States persons that are ultimate parent
entities of U.S. MNE groups that have
annual revenue for the preceding report-
ing period of $850,000,000 or more. The
final regulations do not provide a gen-
eral exception for information that may
relate to national security, but the pre-
amble to the final regulations stated that
the Department of Defense would con-
tinue to consider the national security
implications of CbC reports in particular
fact patterns. Based on subsequent con-
sultations with the Department of De-
fense, the Treasury Department and the
IRS have determined that national secu-
rity interests require modifications to the
reporting requirements for U.S. MNE
groups that are specified national secu-
rity contractors as defined in section
3.01 of this notice and that have a re-
porting requirement under § 1.6038-4.

## SECTION 3. MODIFICATIONS TO CBC REPORTING FOR SPECIFIED NATIONAL SECURITY CONTRACTORS

### .01 Specified National Security Contractor

For purposes of this notice, a U.S.
MNE group is a "specified national secu-
rity contractor" if more than 50 percent of
the U.S. MNE group's annual revenue, as
determined in accordance with U.S. gen-
erally accepted accounting principles, in
the preceding reporting period is attribut-
able to contracts with the Department of
Defense or other U.S. government intelli-
gence or security agencies.

### .02 Modifications to Manner of Reporting on Form 8975

The Treasury Department and the IRS
intend to amend § 1.6038-4 to provide
the definition of specified national secu-
rity contractor and modifications to the
manner of reporting on Form 8975 for
such U.S. MNE groups. The amended reg-
ulations will provide that U.S. MNE
groups that have a Form 8975 filing obli-
gation under § 1.6038-4 and are specified
national security contractors may provide
Form 8975 and Schedules A (Form 8975)
in the following manner:

· Complete Form 8975 with a statement
at the beginning of Part II, Additional
Information, that the U.S. MNE group
is a specified national security contrac-
tor as defined in this notice;

· Complete one Schedule A (Form
8975) for the Tax Jurisdiction of the
United States with aggregated financial
and employee information for the entire
U.S. MNE group in Part I, Tax Jurisdic-
tion Information, and only the ultimate
parent entity's information in Part II,
Constituent Entity Information; and

· Complete one Schedule A (Form
8975) for the Tax Jurisdiction "State-
less" with zeroes in Part I, Tax Juris-
diction Information, and only the ulti-
mate parent entity's information in
Part II, Constituent Entity Information.

No other Schedule A (Form 8975) or ad-
ditional information is required.

### .03 Amended Form 8975 and Schedules A (Form 8975)

A specified national security contractor
that has already filed Form 8975 and
Schedules A (Form 8975) for prior report-
ing periods may file an amended Federal
income tax return (following the instruc-
tions for filing of amended Federal in-
come tax returns) and attach an amended
Form 8975 and Schedules A (Form 8975)
in the manner provided in section 3.02
with the amended report checkbox on
Form 8975 marked. Specified national se-
curity contractors that do not electroni-
cally file their amended Federal income
tax returns should, in addition to filing an
amended Federal income tax return with
an amended Form 8975 and Schedules A
(Form 8975), mail a copy of page 1 of

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their amended Form 8975 to Ogden as
provided in the Instructions for Form
8975 and Schedule A (Form 8975) under
the heading "Where to File." In order to
ensure originally-filed CbC reports are not
automatically exchanged, specified na-
tional security contractors that are filing
amended Form 8975 and Schedules A
(Form 8975) to supersede an already-filed
Form 8975 and Schedules A (Form 8975)

should do so by April 20, 2018, if filing an
amended Federal income tax return on
paper, or by May 25, 2018, if filing elec-
tronically.

## SECTION 4. EFFECTIVE DATE

The amendments to the regulations de-
scribed in this notice shall apply to CbC
reports and amended CbC reports filed
after March 30, 2018.

## SECTION 5. DRAFTING INFORMATION

The principal author of this notice is
Melinda E. Harvey of the Office of Asso-
ciate Chief Counsel (International). For
further information regarding this notice
contact Melinda E. Harvey (202) 317-
6934 (not a toll-free number).

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### Part IV. Items of General Interest

#### Deletions From Cumulative List of Organizations, Contributions to Which are Deductible Under Section 170 of the Code

##### Announcement 2018-07

##### Table of Contents

The Internal Revenue Service has revoked its determination that the organizations listed below qualify as organizations described
in sections 501(c)(3) and 170(c)(2) of the Internal Revenue Code of 1986.

Generally, the IRS will not disallow deductions for contributions made to a listed organization on or before the date of
announcement in the Internal Revenue Bulletin that an organization no longer qualifies. However, the IRS is not precluded from
disallowing a deduction for any contributions made after an organization ceases to qualify under section 170(c)(2) if the organization
has not timely filed a suit for declaratory judgment under section 7428 and if the contributor (1) had knowledge of the revocation
of the ruling or determination letter, (2) was aware that such revocation was imminent, or (3) was in part responsible for or was aware
of the activities or omissions of the organization that brought about this revocation.

If on the other hand a suit for declaratory judgment has been timely filed, contributions from individuals and organizations
described in section 170(c)(2) that are otherwise allowable will continue to be deductible. Protection under section 7428(c) would
begin on April 16, 2018 and would end on the date the court first determines the organization is not described in section 170(c)(2)
as more particularly set for in section 7428(c)(1). For individual contributors, the maximum deduction protected is $1,000, with a
husband and wife treated as one contributor. This benefit is not extended to any individual, in whole or in part, for the acts or
omissions of the organization that were the basis for revocation.

NAME OF ORGANIZATION

Effective Date of Revocation

LOCATION

Louisiana Elite Athletics Academy

3/21/2014

New Iberia, LA

Lifeback Foundation

1/1/2013

Liberty Lake, WA

Federation of Chians Cultural Educational Fund, Inc.

1/1/2012

Astoria, NY

Port Susan Food &amp; Farming Center

1/1/2014

Stanwood, WA

Lon Morris College

8/1/2013

Dallas, TX

Nightingale Adult Day Center

1/1/2014

Houston, TX

Partners in Charity, Inc.

9/2/2011

Crystal Lake, IL

Educate Today, Inc.

12/31/2014

Jacksonville, FL

Provided by Chivon

1/1/2014

New York, NY

Free Truth Enterprises

1/1/2014

Cincinnati, OH

Sichuan Commercial Club of North America

1/1/2015

Monrovia, CA

New Beginnings of Philadelphia Corporation

1/1/2014

Philadelphia, PA

Certain Non-Government
Attorneys Not Authorized to
Participate in Examinations
of Books and Witnesses as
a Section 6103(n)
Contractor

REG-132434-17

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains pro-
posed regulations to amend regulations under
section 7602(a) of the Internal Revenue Code
relating to administrative proceedings. Current
regulations permit any person authorized to
receive returns and return information under
section 6103(n) and the regulations thereun-
der to receive and review summoned books,
papers, and other data, and, in the presence
and under the guidance of an IRS officer or
employee, participate fully in the interview
of a witness in a summons interview. These
proposed regulations significantly narrow
the scope of the current regulations by ex-

cluding non-government attorneys from re-
ceiving summoned books, papers, records,
or other data or from participating in the
interview of a witness summoned by the
IRS to provide testimony under oath, with a
limited exception. These proposed regula-
tions affect taxpayers involved in a federal tax
examination and other persons whose books
and records or testimony are sought to be
examined by the IRS under section 7602(a).

DATES: Written or electronic comments
and requests for a public hearing must be
received by June 26, 2018.

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ADDRESSES: Send submissions to: CC:
PA:LPD:PR (REG-132434-17), room
5203, Internal Revenue Service, P.O. Box
7604, Ben Franklin Station, Washington,
D.C. 20044. Submissions may be hand-
delivered Monday through Friday between
the hours of 8 a.m. and 4 p.m. to CC:
PA:LPD:PR (REG-132434-17), Courier's
Desk, Internal Revenue Service, 1111 Con-
stitution Avenue, NW, Washington D.C., or
sent electronically via the Federal eRule-
making Portal at www.regulations.gov
(IRS-REG-132434-17).

FOR FURTHER INFORMATION CON-
TACT: Concerning submission of com-
ments, Regina Johnson, (202) 317-6901;
concerning the proposed regulations, Wil-
liam V. Spatz at (202) 317-5461 (not toll-
free numbers).

SUPPLEMENTARY INFORMATION:

##### Background

These proposed regulations amend
Procedure and Administration Regula-
tions (26 CFR part 301) under section
7602(a) of the Internal Revenue Code re-
lating to participation by persons de-
scribed in section 6103(n) and Treas. Reg.
§ 301.6103(n)-1(a) in receiving and re-
viewing summoned books, papers, re-
cords, or other data and in interviewing a
summoned witness under oath. These pro-
posed regulations narrow the scope of the
current regulations by providing that cer-
tain non-government attorneys hired by
the IRS are not authorized to participate in
an examination.

On June 18, 2014, temporary regula-
tions (TD 9669) regarding participation in
a summons interview of a person de-
scribed in section 6103(n) were published
in the Federal Register (79 FR 34625). A
notice of proposed rulemaking (REG-
121542-14) cross-referencing the tempo-
rary regulations was published in the Fed-
eral Register (79 FR 34668) the same
day. No public hearing was requested or
held. The Internal Revenue Service re-
ceived two comments on the proposed
regulations. One comment recommended
that the regulations be revised to remove
the provision permitting a contractor to
question a witness under oath or to ask a
witness's representative to clarify an ob-
jection or assertion of privilege. The other
comment recommended that the proposed

and temporary regulations be withdrawn.
After consideration of these comments,
the proposed regulations were adopted in
final regulations (TD 9778) published in
the Federal Register (81 FR 45409) on
July 14, 2016 (“Summons Interview Reg-
ulations"). The only change from the tem-
porary regulations in the final regulations
was to replace the word "examine" with
"review" in the phrase describing what
contractors may do with books, papers,
records, or other data received by the IRS
under a summons. The preamble to the
final regulations explains that this was in-
tended to clarify that the regulations do
not authorize contractors to direct audits
of a taxpayer's return. See 81 FR 45410.

Description of Summons Interview
Regulations

The United States tax system relies
upon taxpayers' self-assessment and re-
porting of their tax liability. The expan-
sive information-gathering authority that
Congress granted to the IRS under the
Code includes the IRS's broad examina-
tion and summons authority, which allows
the IRS to determine the accuracy of that
self-assessment. See United States v. Ar-
thur Young & Co., 65 U.S. 805, 816
(1984). Section 7602(a) provides that, for
the purpose of ascertaining the correctness
of any return, making a return where none
has been made, or determining the liabil-
ity of any person for any internal revenue
tax, the IRS is authorized to examine
books and records, issue summonses seek-
ing documents and testimony, and take
testimony from witnesses under oath.
These provisions have been part of the
revenue laws since 1864.

Use of outside specialists is appropri-
ate to assist the IRS in determining the
correctness of the taxpayer's self-assessed
tax liability. The assistance of persons
from outside the IRS, such as economists,
engineers, appraisers, industry specialists,
and actuaries, promotes fair and efficient
administration and enforcement of the
laws administered by the IRS by provid-
ing specialized knowledge, skills, or abil-
ities that the IRS officers or employees
assigned to the examination may not pos-
sess. Section 6103(n) and Treas. Reg.
§ 301.6103(n)-1(a) authorize the IRS to
disclose returns and return information to
these contractors. The regulations under

§ 301.7602-1(b)(3) were issued to clarify
that persons described in section 6103(n)
and Treas. Reg. § 301.6103(n)-1(a) may
receive and review books, papers, records,
or other data summoned by the IRS and,
in the presence and under the guidance of
an IRS officer or employee, participate
fully in the interview of a person who the
IRS has summoned as a witness to pro-
vide testimony under oath. See 81 FR
45410.

Executive Order 13789, Notice 2017-38,
and the Reports to the President

Executive Order 13789, issued on
April 21, 2017 (E.O. 13789, 82 FR
19317), instructs the Secretary of the
Treasury (the Secretary) to review all sig-
nificant tax regulations issued on or after
January 1, 2016, and to take appropriate
action to alleviate the burdens of regula-
tions that (i) impose an undue financial
burden on U.S. taxpayers; (ii) add undue
complexity to the Federal tax laws; or (iii)
exceed the statutory authority of the IRS.

E.O. 13789 further instructs the Secre-
tary to submit to the President within 60
days a report (First Report) that identifies
regulations that meet these criteria. Notice
2017-38 (2017-30 I.R.B. 147 (July 24,
2017)) included the Summons Interview
Regulations in a list of eight regulations
identified by the Secretary in the First
Report as meeting at least one of the first
two criteria specified in E.O. 13789. E.O.
13789 further instructs the Secretary to
submit to the President a second report
(Second Report) that recommends specific
actions to mitigate the burden imposed by
regulations identified in the First Report.

In response to Notice 2017-38, the
Treasury Department and the IRS re-
ceived seven comments from professional
and business associations addressing the
Summons Interview Regulations. All but
one of these comments recommended re-
moval of the regulations based primarily
on the commentators' perception that the
regulations create longer and less efficient
examinations by improperly delegating
authority to outside law firms to conduct
examinations. The one commenter that
did not recommend removal of the regu-
lations in their entirety requested removal
of the provisions permitting a contractor
to directly question a witness during a
summons interview.

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As explained in the preamble to the
final Summons Interview Regulations, the
regulations do not delegate authority to
conduct examinations or summons inter-
views. Rather, the regulations permit con-
tractors authorized under section 6103(n)
to review books and records and be pres-
ent and ask questions during summons
interviews, all under the supervision of
IRS officers and employees. See 81 FR
45410-45412.

Comments in response to Notice
2017-38 also raised concerns that the reg-
ulations permit the IRS to hire law firms
to receive and review summoned informa-
tion and fully participate in a summons
interview on behalf of the government.

On October 16, 2017, the Secretary
published the Second Report in the Fed-
eral Register (82 FR 48013) stating that
the Treasury Department and the IRS are
considering proposing a prospectively ef-
fective amendment to the Summons Inter-
view Regulations to narrow their scope to
prohibit non-government attorneys from
questioning witnesses on behalf of the
IRS, reviewing summoned records, or
playing a behind-the-scenes role in an ex-
amination, such as consulting on IRS legal
strategy, with a limited exception.

The Code provides IRS officers and
employees with significant and broad
powers under its summons authority to
question witnesses under oath and to
require the production of books and re-
cords. The Summons Interview Regula-
tions require the IRS to retain authority
over important decisions when section
6103(n) contractors question witnesses,
but there is a perceived risk that the IRS
may not be able to maintain full control
over the actions of a non-government
attorney hired by the IRS when such an
attorney, with the limited exception de-
scribed below, questions witnesses. The
actions of the non-governmental attor-
ney while questioning witnesses could
foreclose IRS officials from indepen-
dently exercising their judgment. Man-
aging an examination or summons inter-
view is therefore best exercised solely
by government employees, including
government attorneys, whose only duty
is to serve the public interest. These
concerns outweigh the countervailing
need for the IRS to use non-government
attorneys, except in the limited circum-

stances set forth in proposed paragraph
(b)(3)(ii). Treasury and the IRS remain
confident that the core functions of
questioning witnesses and conducting
examinations are well within the exper-
tise and ability of government attorneys
and examination agents.

##### Explanation of Provisions

Proposed § 301.7602-1(b)(3)(i) retains
the rule from the Summons Interview
Regulations authorizing section 6103(n)
contractors to receive and review sum-
moned information and fully participate in
the summons interview, including ques-
tioning witnesses. However, proposed
§ 301.7602-1(b)(3)(ii) is added to pro-
hibit contractors who are attorneys, with
the limited exception described below,
from participating in the administrative
process contemplated by section 7602(a).
Under this prohibition, a non-government
attorney, with the limited exception de-
scribed below, may not review summoned
books, papers, records or other data or
question summoned witnesses on behalf
of the IRS unless the attorney is hired by
the IRS for a permitted purpose.

As a limited exception to that prohibi-
tion, proposed § 301.7602-1(b)(3)(ii) per-
mits the IRS to hire a non-government
attorney if the attorney is being hired for
specialized substantive subject matter ex-
pertise in an area other than federal tax
law. Specifically, proposed § 301.7602-
1(b)(3)(ii) permits the IRS to hire an at-
torney who has specialized knowledge of
foreign, state, or local law, including tax
law, or who is a specialist in non-tax sub-
stantive law such as patent law, property
law, or environmental law. It would not
permit IRS to hire an attorney for non-
substantive specialized knowledge, such
as civil litigation skills. Proposed
§ 301.7602-1(b)(3)(ii) also permits the
IRS to hire a contractor who may happen
to be an attorney, but who is hired for
knowledge, skills, or abilities other than
providing legal services as an attorney.
Further, proposed § 301.7602-1(b)(3)(ii)
permits the IRS to hire an entity that em-
ploys or is owned by attorneys so long as
the expertise they are providing is not
prohibited by proposed § 301.7602-
1(b)(3)(ii).

These changes are proposed to be ef-
fective for examinations begun and sum-

monses served by the IRS on or after the
date that these proposed regulations are
published in the Federal Register.

### Special Analyses

Certain IRS regulations, including
these, are exempt from the requirements
of Executive Order 12866, as supple-
mented and affirmed by Executive Order
13563. Therefore, a regulatory assess-
ment is not required. Because the pro-
posed regulations would not impose a
collection of information on small enti-
ties, the Regulatory Flexibility Act (5
U.S.C. chapter 6) does not apply. There-
fore, a regulatory flexibility analysis is
not required. Pursuant to section 7805(f)
of the Internal Revenue Code, the IRS
will submit the proposed regulations to
the Chief Counsel for Advocacy of the
Small Business Administration for com-
ments about the regulations' impact on
small businesses.

### Comments and Request for a Public Hearing

Before these proposed regulations are
adopted as final, the IRS will consider any
written (signed original and 8 copies) or
electronic comments timely submitted.
The IRS requests comments on all aspects
of these proposed regulations. All com-
ments will be available for public inspec-
tion and copying. The IRS will schedule a
public meeting if one is requested, in writ-
ing, by a person who submits written com-
ments. If the IRS does schedule a public
hearing, the IRS will publish notice of the
date, time, and place for the public hear-
ing in the Federal Register.

### Drafting Information

The principal author of these regula-
tions is William V. Spatz of the Office of
Associate Chief Counsel (Procedure and
Administration).

* * * * *

### Proposed Amendments to the Regulations

Accordingly, 26 CFR part 301 is pro-
posed to be amended as follows:

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## PART 301-PROCEDURE AND ADMINISTRATION

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

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

Par. 2. Section 301.7602-1 is amended
by revising paragraphs(b)(3) and (d) to
read as follows:

§ 301.7602-1 Examination of books and
witnesses.

(b)* * *

(3) Participation of a person described
in section 6103(n). (i) In general. Except
as provided in paragraph (b)(3)(ii) of this
section, for purposes of this paragraph (b),
a person authorized to receive returns or
return information under section 6103(n)
and § 301.6103(n)-1(a) of the regulations
may receive and review books, papers,
records, or other data produced in compli-
ance with a summons, and, in the presence
and under the guidance of an IRS officer

or employee, participate fully in the inter-
view of a witness summoned by the IRS
to provide testimony under oath. Fully
participating in an interview includes, but
is not limited to, receipt, review, and use
of summoned books, papers, records, or
other data; being present during summons
interviews; and questioning the person
providing testimony under oath.

(ii) Exception for certain non-govern-
mental attorneys. An attorney who is not
an officer or employee of the United
States may not be hired by the IRS to
perform the activities described in para-
graph (b)(3)(i) of this section unless the
attorney is hired by the IRS as a specialist
in foreign, state, or local law, including
tax law, or in non-tax substantive law that
is relevant to an issue in the examination,
such as patent law, property law, or envi-
ronmental law, or is hired for knowledge,
skills, or abilities other than providing le-
gal services as an attorney.

* * * * *

(d) Applicability date. This section is
applicable after September 3, 1982, ex-
cept for paragraphs (b)(1) and (2) of this

section which are applicable on and after
April 1, 2005 and paragraph (b)(3) of this
section which applies to examinations be-
gun or administrative summonses served
by the IRS on or after March 27, 2018.
For rules under paragraphs (b)(1) and (2)
of this section that are applicable to sum-
monses issued on or after September 10,
2002 or under paragraph (b)(3) of this
section that are applicable to summons
interviews conducted on or after June 18,
2014 and before July 14, 2016, see 26
CFR 301.7602-1T (revised as of April 1,
2016). For rules under paragraph (b)(3) of
this section that are applicable to admin-
istrative summonses served by the IRS
before March 27, 2018, see 26 CFR
301.7602-1 (revised as of April 1, 2017).

Kirsten Wielobob,
Deputy Commissioner for Services and
Enforcement.

(Filed by the Office of the Federal Register on March 27,
2018, 8:45 a.m., and published in the issue of the Federal
Register for March 28, 2018, 83 F.R. 13206)

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# Definition of Terms

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

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

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

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

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

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

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

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

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

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

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

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

# Abbreviations

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

A-Individual.

Acq .- Acquiescence.

B-Individual.

BE-Beneficiary.

F.R .- Federal Register.

FUTA-Federal Unemployment Tax Act.

FX-Foreign corporation.

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

GE-Grantee.

GP-General Partner.

TFR-Transferor.

CI-City.

GR-Grantor.

T.I.R .- Technical Information Release.

TP-Taxpayer.

Ct.D .- Court Decision.

I.R.B .- Internal Revenue Bulletin.

TR-Trust.

CY-County.

LE-Lessee.

TT-Trustee.

D-Decedent.

LP-Limited Partner.

U.S.C .- United States Code.

DC-Dummy Corporation.

LR-Lessor.

X-Corporation.

DE-Donee.

Del. Order-Delegation Order.

Nonacq .- Nonacquiescence.

O Organization.

DR-Donor.

P-Parent Corporation.

PHC-Personal Holding Company.

PO-Possession of the U.S.

PR-Partner.

PRS-Partnership.

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

REIT-Real Estate Investment Trust.

Rev. Proc .- Revenue Procedure.

Rev. Rul .- Revenue Ruling.

S-Subsidiary.

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

Stat .- Statutes at Large.

BK-Bank.

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

T.C .- Tax Court.

C-Individual.

T.D .- Treasury Decision.

C.B .- Cumulative Bulletin.

TFE-Transferee.

CFR-Code of Federal Regulations.

COOP-Cooperative.

IC-Insurance Company.

M-Minor.

Y-Corporation.

Z-Corporation.

DISC-Domestic International Sales Corporation.

E-Estate.

EE-Employee.

E.O .- Executive Order.

ER-Employer.

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

F-Fiduciary.

FC-Foreign Country.

FICA-Federal Insurance Contributions Act.

FISC-Foreign International Sales Company.

FPH-Foreign Personal Holding Company.

T-Target Corporation.

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## Numerical Finding List1

Bulletin 2018-1 through 2018-16

### Announcements:

2018-01, 2018-9 I.R.B. 387
2018-02, 2018-9 I.R.B. 387
2018-03, 2018-9 I.R.B. 387
2018-04, 2018-10 I.R.B. 401
2018-05, 2018-13 I.R.B. 461
2018-07, 2018-16 I.R.B. 503

### Notices:

2018-01, 2018-3 I.R.B. 285
2018-02, 2018-2 I.R.B. 281
2018-03, 2018-2 I.R.B. 285
2018-05, 2018-6 I.R.B. 341
2018-06, 2018-3 I.R.B. 300
2018-07, 2018-4 I.R.B. 317
2018-08, 2018-7 I.R.B. 352
2018-10, 2018-8 I.R.B. 359
2018-11, 2018-11 I.R.B. 425
2018-12, 2018-12 I.R.B. 441
2018-13, 2018-6 I.R.B. 341
2018-14, 2018-7 I.R.B. 353
2018-15, 2018-9 I.R.B. 376
2018-16, 2018-10 I.R.B. 390
2018-17, 2018-9 I.R.B. 376
2018-18, 2018-12 I.R.B. 443
2018-19, 2018-12 I.R.B. 443
2018-20, 2018-12 I.R.B. 444
2018-21, 2018-15 I.R.B. 472
2018-22, 2018-14 I.R.B. 464
2018-23, 2018-15 I.R.B. 474
2018-25, 2018-15 I.R.B. 476
2018-26, 2018-16 I.R.B. 480
2018-28, 2018-16 I.R.B. 492
2018-29, 2018-16 I.R.B. 495
2018-31, 2018-16 I.R.B. 501

### Proposed Regulations:

REG-119514-15, 2018-04 I.R.B. 325
REG-129260-16, 2018-14 I.R.B. 470

REG-118067-17, 2018-08 I.R.B. 360
REG-132197-17, 2018-10 I.R.B. 404
REG-132197-17, 2018-10 I.R.B. 404
REG-132434-17, 2018-16 I.R.B. 503

### Revenue Procedures:

2018-1, 2018-1 I.R.B. 1
2018-2, 2018-1 I.R.B. 106
2018-3, 2018-1 I.R.B. 130
2018-4, 2018-1 I.R.B. 146
2018-5, 2018-1 I.R.B. 244
2018-7, 2018-1 I.R.B. 282
2018-8, 2018-2 I.R.B. 286
2018-9, 2018-2 I.R.B. 290

### Revenue Procedures :- Continued

2018-10, 2018-7 I.R.B. 355
2018-11, 2018-5 I.R.B. 334
2018-12, 2018-6 I.R.B. 349
2018-13, 2018-7 I.R.B. 356
2018-14, 2018-9 I.R.B. 378
2018-15, 2018-9 I.R.B. 379
2018-16, 2018-9 I.R.B. 383
2018-17, 2018-9 I.R.B. 384
2018-18, 2018-10 I.R.B. 392
2018-19, 2018-14 I.R.B. 466
2018-20, 2018-11 I.R.B. 427
2018-21, 2018-14 I.R.B. 467

### Revenue Rulings:

2018-01, 2018-2 I.R.B. 275
2018-02, 2018-2 I.R.B. 277
2018-03, 2018-2 I.R.B. 278
2018-04, 2018-4 I.R.B. 304
2018-05, 2018-6 I.R.B. 339
2018-06, 2018-10 I.R.B. 388
2018-07, 2018-13 I.R.B. 445
2018-09, 2018-14 I.R.B. 462
2018-10, 2018-16 I.R.B. 477

### Treasury Decisions:

9829, 2018-04 I.R.B. 308
9830, 2018-11 I.R.B. 423
9831, 2018-13 I.R.B. 459
9832, 2018-16 I.R.B. 477

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

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# Finding List of Current Actions on Previously Published Items1

Bulletin 2018-1 through 2018-16

<!-- PageFooter="1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2017-27 through 2017-52 is in Internal Revenue Bulletin 2017-52, dated December 27, 2017." -->
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# Internal Revenue Service Washington, DC 20224

Official Business
Penalty for Private Use, $300

# INTERNAL REVENUE BULLETIN

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

# We Welcome Comments About the Internal Revenue Bulletin

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