Internal Revenue Bulletin 2018-36 (PDF rendition): IRS Notices

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# INTERNAL REVENUE BULLETIN

IRS

Bulletin No. 2018-36
September 4, 2018

## HIGHLIGHTS OF THIS ISSUE

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

## Employee Plans

### Notice 2018-68, page 418.

The notice provides initial guidance on the application of
§ 162(m) of the 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" (Act), Public Law
115-97 (2017). Section 162(m)(1) generally limits the allow-
able deduction for a taxable year for remuneration by any
publicly held corporation paid with respect to a covered em-
ployee. The Act made significant amendments to § 162(m),
and also provided a transition rule applicable to certain out-
standing arrangements (commonly referred to as the grandfa-
ther rule). The notice provides guidance on the amended rules
for identifying covered employees and the operation of the
grandfather rule.

### REV. PROC. 2018-42, page 424.

This revenue procedure modifies Rev. Proc. 2017-41,
2017-29 I.R.B. 92, to extend the deadline for submitting
on-cycle applications for opinion letters for pre-approved de-
fined contribution plans for the third six-year remedial amend-
ment cycle from October 1, 2018, to December 31, 2018.

## Exempt Organizations

### Notice 2018-67, page 409.

This notice solicits comments regarding the application of new
§ 512(a)(6) of the Internal Revenue Code ("Code"), which was
added to the Code by section 13702 of "An Act to provide for
reconciliation pursuant to titles II and IV of the concurrent
resolution on the budget for fiscal year 2018," Public Law
115-97 (131 Stat. 2054 (2017)). Section 512(a)(6) requires
an organization subject to the unrelated business income tax
under § 511 with more than one unrelated trade or business to
calculate unrelated business taxable income ("UBTI") sepa-

rately with respect to each trade or business. The notice
requests comments on various topics, including possible meth-
ods for separating trades or businesses and the treatment of
activities in the nature of investments and income from fringe
benefits required to be included in UBTI under § 512(a)(7) for
purposes of § 512(a)(6). The notice also sets forth interim and
transition rules under § 512(a)(6) with respect to aggregating
gross income and directly connected deductions of certain
activities in the nature of investments. Finally, the notice con-
cludes that global intangible low-taxed income ("GILTI") under
new § 951A will be treated in the same manner as subpart F
inclusions under § 951(a)(1)(A) for purposes of the unrelated
business income tax.

## Income Tax

### Notice 2018-68, page 418.

The notice provides initial guidance on the application of
§ 162(m) of the 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" (Act), Public Law
115-97 (2017). Section 162(m)(1) generally limits the allow-
able deduction for a taxable year for remuneration by any
publicly held corporation paid with respect to a covered em-
ployee. The Act made significant amendments to § 162(m),
and also provided a transition rule applicable to certain out-
standing arrangements (commonly referred to as the grandfa-
ther rule). The notice provides guidance on the amended rules
for identifying covered employees and the operation of the
grandfather rule.

### REV. PROC. 2018-43, page 425.

This revenue procedure provides the monthly national average
premium for qualified health plans that have a bronze level of
coverage and are offered through Exchanges for taxpayers to
use in determining their maximum individual shared responsi-

Finding Lists begin on page ii.

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bility payment under § 5000A(c)(1)(B) of the Internal Revenue
Code and § 1.5000A-4 of the Income Tax Regulations.

### REV. RUL. 2018-23, page 405.

Federal rates; adjusted federal rates; adjusted federal long-
term rate, the long-term exempt rate, and the blended annual
rate. For purposes of sections 382, 1274, 1288, 7872 and
other sections of the Code, tables set forth the rates for
September 2018.

### REV. RUL. 2018-24, page 407.

This revenue ruling provides that the exchange of mortgage-
backed securities pursuant to the Single Security Initiative does
not constitute a taxable exchange for purposes of section
1001 of the Internal Revenue Code.

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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 1274 .- Determination of Issue Price in the
Case of Certain Debt Instruments Issued for Property
(Also Sections 42, 280G, 382, 467, 468, 482, 483,
1288, 7520, 7872.)

## Rev. Rul. 2018-23

This revenue ruling provides various
prescribed rates for federal income tax
purposes for September 2018 (the current
month). Table 1 contains the short-term,
mid-term, and long-term applicable fed-

eral rates (AFR) for the current month for
purposes of section 1274(d) of the Internal
Revenue Code. Table 2 contains the short-
term, mid-term, and long-term adjusted
applicable federal rates (adjusted AFR)
for the current month for purposes of sec-
tion 1288(b). Table 3 sets forth the ad-
justed federal long-term rate and the long-
term tax-exempt rate described in section
382(f). Table 4 contains the appropriate
percentages for determining the low-
income housing credit described in sec-

tion 42(b)(1) for buildings placed in ser-
vice during the current month. However,
under section 42(b)(2), the applicable per-
centage for non-federally subsidized new
buildings placed in service after July 30,
2008, shall not be less than 9%. Finally,
Table 5 contains the federal rate for de-
termining the present value of an annuity,
an interest for life or for a term of years, or
a remainder or a reversionary interest for
purposes of section 7520.

REV. RUL. 2018-23 TABLE 1 Applicable Federal Rates (AFR) for September 2018 Period for Compounding

Annual

Semiannual Short-term

Quarterly

Monthly

AFR

2.51%

2.49%

2.48%

2.48%

110% AFR

2.76%

2.74%

2.73%

2.72%

120% AFR

3.01%

2.99%

2.98%

2.97%

130% AFR

3.27%

3.24%

3.23%

3.22%

AFR

Mid-term

2.86%

2.84%

2.83%

2.82%

110% AFR

3.14%

3.12%

3.11%

3.10%

120% AFR

3.44%

3.41%

3.40%

3.39%

130% AFR

3.72%

3.69%

3.67%

3.66%

150% AFR

4.31%

4.26%

4.24%

4.22%

175% AFR

5.03%

4.97%

4.94%

4.92%

AFR

3.02%

Long-term

3.00%

2.99%

2.98%

110% AFR

3.33%

3.30%

3.29%

3.28%

120% AFR

3.63%

3.60%

3.58%

3.57%

130% AFR

3.94%

3.90%

3.88%

3.87%

REV. RUL. 2018-23 TABLE 2 Adjusted AFR for September 2018 Period for Compounding Annual Semiannual Quarterly Monthly

Short-term adjusted AFR

1.90%

1.89%

1.89%

1.88%

Mid-term adjusted AFR

2.17%

2.16%

2.15%

2.15%

Mid-term adjusted AFR

2.29%

2.28%

2.27%

2.27%

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# REV. RUL. 2018-23 TABLE 3 Rates Under Section 382 for September 2018

Adjusted federal long-term rate for the current month
2.29%

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

2.32%

# REV. RUL. 2018-23 TABLE 4 Appropriate Percentages Under Section 42(b)(1) for September 2018

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

Appropriate percentage for the 70% present value low-income housing credit
7.68%

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

3.29%

# REV. RUL. 2018-21 TABLE 5 Rate Under Section 7520 for September 2018

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

3.4%

## Section 42 .- Low-Income Housing Credit

The applicable federal short-term, mid-term, and
long-term rates are set forth for the month of Sep-
tember 2018. See Rev. Rul. 2018-23, page 405.

## Section 280G .- Golden Parachute Payments

The applicable federal short-term, mid-term, and
long-term rates are set forth for the month of Sep-
tember 2018. See Rev. Rul. 2018-23, page 405.

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

The adjusted applicable federal long-term rate is
set forth for the month of September 2018. See Rev.
Rul. 2018-23, page 405.

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

The applicable federal short-term, mid-term, and
long-term rates are set forth for the month of Sep-
tember 2018. See Rev. Rul. 2018-23, page 405.

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

The applicable federal short-term, mid-term, and
long-term rates are set forth for the month of Sep-
tember 2018. See Rev. Rul. 2018-23, page 405.

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

The applicable federal short-term, mid-term, and
long-term rates are set forth for the month of Sep-
tember 2018. See Rev. Rul. 2018-23, page 405.

## Section 483 .- Interest on Certain Deferred Payments

The applicable federal short-term, mid-term, and
long-term rates are set forth for the month of Sep-
tember 2018. See Rev. Rul. 2018-23, page 405.

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

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month of
September 2018. See Rev. Rul. 2018-23, page 405.

## Section 7520 .- Valuation Tables

The applicable federal short-term, mid-term, and
long-term rates are set forth for the month of Sep-
tember 2018. See Rev. Rul. 2018-23, page 405.

## Section 7872 .- Treatment of Loans With Below- Market Interest Rates

The applicable federal short-term, mid-term, and
long-term rates are set forth for the month of Sep-
tember 2018. See Rev. Rul. 2018-23, page 405.

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Section 1001 .- Determination of amount of and rec-
ognition of gain or loss
(Also §§ 1.1001-1; 1.1001-3)

## Rev. Rul. 2018-24

### ISSUE

Does the Conversion (as defined be-
low) constitute a taxable exchange of
property for purposes of section 1001 of
the Internal Revenue Code?

### FACTS

#### Participation Certificates

The Federal Home Loan Mortgage
Corporation (Freddie Mac) acquires mort-
gages and participation interests in resi-
dential mortgage loans (Mortgages) that
were originated by unrelated financial
institutions and deposits the Mortgages
into a trust in exchange for Participation
Certificates (PCs), which are sold to in-
vestors. Each PC is a pass-through certif-
icate that is backed by the pool of Mort-
gages that are held in an arrangement that
is classified as a trust under § 301.7701-
4(c) of the Procedure and Administration
Regulations for the benefit of the person
that holds the PC. Freddie Mac acts as
trustee, depositor, master servicer, admin-
istrator, and guarantor with respect to the
PCs. As trustee for these trusts, Freddie
Mac creates and issues under a trust
agreement PCs representing undivided
beneficial ownership interests in pools of
mortgages and related assets held by those
trust funds (Mortgage Pools).

Freddie Mac fulfills its duties as master
servicer for the Mortgages by contracting
with third parties to perform most servic-
ing functions on Freddie Mac's behalf in
accordance with standards that Freddie
Mac has established. PC holders receive a
coupon with respect to the outstanding
principal amount of the Mortgages. Pay-
ments on the PCs do not include the
amounts of any fees, charges, or interest
in excess of the applicable certificate cou-
pon that may be paid on the Mortgages.

In its capacity as administrator of the
PCs, Freddie Mac generally pays principal
and interest to PC holders on a specified
date (Payment Date) in the month follow-
ing the month in which payments on the
underlying Mortgage are received. The
Payment Date is generally 45 days follow-

ing the first day of such preceding month.
This period from the time Freddie Mac
collects payments from the mortgage ser-
vicers to the time that it remits payments to
holders on the Payment Date is referred to
as the Remittance Cycle. As guarantor of
the PCs, Freddie Mac guarantees that PC
holders receive timely payments of amounts
provided for in the terms of the PC whether
or not Freddie Mac receives payments from
the servicers of the Mortgages.

#### Mortgage-Backed Securities

The Federal National Mortgage Asso-
ciation (Fannie Mae) issues Mortgage-
Backed Securities (MBSs) to the market.
The terms and conditions of MBSs are
substantially identical to PCs. In particu-
lar, the key features and terms of the
MBSs largely align with the key features
and terms of the PCs. A difference be-
tween PCs and MBSs is their respective
Remittance Cycle. While the Remittance
Cycle for PCs is 45 days, the Remittance
Cycle for MBSs is 55 days, meaning that
an MBS holder receives monthly pay-
ments 10 days later than a PC holder.

#### Uniform Mortgage-Backed Securities

Freddie Mac and Fannie Mae are both
regulated by the Federal Housing Finance
Agency (FHFA). The FHFA proposes to
standardize pass-through certificates is-
sued by Freddie Mac and Fannie Mae.
Accordingly, the FHFA will require Fred-
die Mac to cease issuing PCs and Fannie
Mae to cease issuing MBSs, and will re-
quire both entities to issue Uniform
Mortgage-Backed Securities (UMBSs) in-
stead. UMBSs issued by Freddie Mac and
Fannie Mae will have the same features
and terms, including identical 55-day Re-
mittance Cycles.

Freddie Mac will also permit holders
of existing PCs the opportunity to ex-
change their PC for a UMBS that repre-
sents the same proportionate undivided
beneficial interest in the pool of Mort-
gages as their existing PC on a voluntary
basis (Conversion). Thus, a PC holder that
agrees to the exchange will receive a
UMBS that provides for the same coupon
rate as the PC coupon rate and is guaran-
teed to the same extent as the PC they
surrender, except that the UMBS will pro-
vide for Payment Dates that are deter-

mined under a 55-day Remittance Cycle
instead of the 45-day Remittance Cycle
associated with a PC and a UMBS that is
issued in exchange for a PC will be given a
new CUSIP number. Freddie Mac will not
charge holders of PCs a fee for an exchange
made pursuant to the Conversion.

The Make Whole Payment

Because a UMBS provides for a 55-
day Remittance Cycle instead of the 45-
day Remittance Cycle associated with the
corresponding PC, the holder of a UMBS
will receive scheduled payments of prin-
cipal and interest 10 days later than the
holder would receive those payments
under the PC. Freddie Mac will make a
one-time payment to PC holders that
choose to participate in the Conversion
(Make Whole Payment). The Make
Whole Payment will be calculated based
on the present value of 10 additional days
of payment delay over the expected term
of the relevant PC. At present market
rates, the amount of the Make Whole Pay-
ment is expected to be between 5 and 15
basis points multiplied by the outstanding
principal balance of the PC, though a
compensation schedule has not been pub-
lished and the exact amount of compen-
sation is unknown at this time.

#### The Inducement Fee

For a limited time when Freddie Mac
first makes the Conversion available,
Freddie Mac may also offer a holder of a
PC a payment intended to induce the
holder to participate in the Conversion
(Inducement Fee). Any Inducement Fee,
should it be offered, would be paid to any
PC holder that agrees to participate in the
Conversion within a timeframe prescribed
by Freddie Mac.

The combined amount of the Make
Whole Payment and any Inducement Fee
will not be more than 25 basis points
multiplied by the outstanding principal
balance of the PC.

LAW

Section 1001 provides rules for the
computation and recognition of gain or
loss from a sale or other disposition of
property.

Section 1.1001-1(a) of the Income Tax
Regulations generally provides that gain

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or loss is realized upon an exchange of
property for other property differing ma-
terially either in kind or in extent. See
Cottage Savings Association v. Commis-
sioner, 499 U.S. 554, 566 (1991), 1991-2
CB 34, 38 ("Under [the Court's] interpre-
tation of section 1001(a), an exchange of
property gives rise to a realization event
so long as the exchanged properties are
'materially different'-that is, so long as
they embody legally distinct entitle-
ments.")

Section 1.1002-1(d) provides that, or-
dinarily, to constitute an exchange, a
transaction must be a reciprocal transfer
of property, as distinguished from a trans-
fer of property for a money consideration
only.

Section 1.1001-3(a)(1) provides rules
for determining whether a modification of
the terms of a debt instrument results in an
exchange for purposes of § 1.1001-1(a).
This section applies to any modification of a
debt instrument, regardless of the form of
the modification. For example, § 1.1001-3
applies to an exchange of a new instrument

for an existing debt instrument, or to an
amendment of an existing debt instrument.
This section also applies to a modification of
a debt instrument that the issuer and holder
accomplish indirectly through one or more
transactions with third parties.

Section 1.1001-3(b) provides that for
purposes of § 1.1001-1(a), a significant
modification of a debt instrument results
in an exchange of the original debt instru-
ment for a modified instrument that differs
materially either in kind or in extent; and
a modification that is not a significant
modification is not an exchange for pur-
poses of § 1.1001-1(a).

Section 1.1001-3(e) describes when a
modification is significant.

Section 1.1001-3(e)(1) provides that
(unless an exception applies) a modifica-
tion is a significant modification only if,
based on all facts and circumstances, the
legal rights or obligations that are altered
and the degree to which they are altered
are economically significant.

Under § 1.1001-3(e)(2)(ii), a modifi-
cation is treated as significant if it changes

the yield of a debt instrument by more
than the greater of 1/4 of 1 percent (25 basis
points) or 5 percent of the annual yield of
the unmodified instrument.

Under § 1.1001-3(e)(3), a modification
that changes the timing of payments is a
significant modification if it results in a
material deferral of scheduled payments.
See also § 1.1001-3(g), Example 2 (de-
ferral of payments tested under § 1.1001-
3(e)(2) and (e)(3)).

## HOLDING

The Conversion will not constitute a
taxable exchange of property for purposes
of section 1001.

## DRAFTING INFORMATION

The principal author of this revenue
ruling is Caitlin Holzem of the Office of
the Associate Chief Counsel (Financial
Institutions and Products). For further in-
formation regarding this revenue ruling,
please contact Ms. Holzem at (202) 317-
6842 (not a toll-free number).

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### Part III. Administrative, Procedural, and Miscellaneous

Request for Comments
Regarding the Calculation of
Unrelated Business Taxable
Income under § 512(a)(6)
for Exempt Organizations
with More than One
Unrelated Trade or
Business; Interim and
Transition Rules for
Aggregating Certain Income
in the Nature of
Investments; and the
Treatment of Global
Intangible Low-Taxed
Income Inclusions for
Purposes of the Unrelated
Business Income Tax
Notice 2018-67

#### SECTION 1. PURPOSE

Section 13702 of "An Act to provide
for reconciliation pursuant to titles II and
IV of the concurrent resolution on the
budget for fiscal year 2018," Public Law
115-97 (131 Stat. 2054 (2017)) (the Act),
enacted December 22, 2017, added new
§ 512(a)(6) to the Internal Revenue Code
(Code). Section 512(a)(6) requires an or-
ganization subject to the unrelated busi-
ness income tax under § 511, with more
than one unrelated trade or business, to
calculate unrelated business taxable in-
come (UBTI) separately with respect to
each trade or business. This notice dis-
cusses, and solicits comments regarding,
various issues arising under § 512(a)(6)
and sets forth interim guidance and tran-
sition rules relating to that section. This
notice also provides guidance on the treat-
ment of global intangible low-taxed in-
come (GILTI) under § 951A for purposes
of the unrelated business income tax un-
der § 511.

The contents of this notice are as
follows. Section 2 provides a general
background of the law on UBTI and
§ 512(a)(6). Section 3 outlines general

concepts for identifying separate trades or
businesses for purposes of § 512(a)(6) and
provides interim reliance on a reasonable,
good-faith standard for making such a de-
termination. Section 4 discusses the pos-
sible treatment of income described in
§ 512(b)(4), (13), and (17). Section 5 dis-
cusses general principles surrounding in-
come from partnerships. Section 6 sets
forth interim and transition rules under
§ 512(a)(6) for aggregating income from
partnerships and debt-financed income
from partnerships. Section 7 discusses the
application of § 512(a)(6) to certain orga-
nizations subject to the UBTI rules of
§ 512(a)(3). Section 8 discusses the effect
of § 512(a)(6) on income described in
§ 512(a)(7) (fringe benefits). Section 9
provides information on how to calculate
net operating losses (NOLs) within the
framework of § 512(a)(6). Section 10 con-
cludes that, for purposes of calculating
UBTI, an inclusion of GILTI is treated as a
dividend and follows the treatment of divi-
dends under § 512(b)(1) and (4). Section 11
summarizes reliance on rules provided in
this notice. Section 12 requests comments
and provides information for submitting
comments.

## SECTION 2. BACKGROUND

Under § 501(a), organizations de-
scribed in §§ 401(a) and 501(c) generally
are exempt from federal income taxation.
However, § 511(a)(1) imposes a tax (com-
puted as provided in § 11) on the UBTI of
organizations described in § 511(a)(2),
which includes organizations described in
§§ 401(a) and 501(c) (other than a trust
described in § 511(b) or an instrumental-
ity of the United States described in
§ 501(c)(1)) as well as state colleges and
universities. Additionally, § 511(b)(1) im-
poses a tax (computed as provided in
§ 1(e)) on the UBTI of certain trusts de-
scribed in § 511(b)(2).1 Organizations de-
scribed in § 511(a)(2) and trusts described
in § 511(b)(2) are collectively called "ex-
empt organizations" throughout this no-
tice, unless otherwise stated.

Section 512(a)(1) defines UBTI as the
gross income derived by any exempt or-
ganization from an unrelated trade or
business regularly carried on by it, less the
deductions allowed by Chapter 1 that are
directly connected with the carrying on of
such trade or business, both computed with
the modifications described in § 512(b). An
exempt organization determines whether it
has income from an unrelated trade or busi-
ness under the general principles of §§ 511
through 514 and the Treasury regulations
thereunder.

Section 513(a) defines "unrelated trade
or business" as any trade or business the
conduct of which is not substantially re-
lated (aside from the need of such organi-
zation for income or funds or the use it
makes of the profits derived) to the exer-
cise or performance by such exempt orga-
nization, other than trusts described in
§ 513(b)(2), of its charitable, educational,
or other purpose or function constituting
the basis for its exemption under § 501
(or, in the case of a state college or uni-
versity, to the exercise or performance of
any purpose or function described in
§ 501(c)(3)). In the case of a trust that is
exempt from tax under § 501(a) and de-
scribed in § 401(a) (qualified retirement
plans) or § 501(c)(17) (supplemental un-
employment compensation benefits trusts
(SUBs)), however, § 513(b) defines "unre-
lated trade or business," as any trade or
business regularly carried on by such trust
or by a partnership of which it is a member.

An exempt organization may conduct
an unrelated trade or business directly or
indirectly through another entity, such as a
partnership (including any entity treated
as a partnership for federal tax purposes).
Section 512(c) provides that, if a trade or
business regularly carried on by a partner-
ship of which an exempt organization is a
partner is an unrelated trade or business
with respect to such organization, the ex-
empt organization includes in UBTI - sub-
ject to the exceptions, additions, and limita-
tions of § 512(b) - its distributive share of
partnership gross income (whether or not
distributed) and partnership deductions di-
rectly connected with such gross income.

1Section 408(e) states that an individual retirement account (IRA) is subject to the taxes imposed by § 511. Accordingly, any reference to an exempt organization in this notice includes
an IRA, without regard to whether it is a traditional IRA, Roth IRA, simplified employee pension (SEP-IRA), or savings incentive match plan for employees (SIMPLE IRA).

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See § 1.512(c)-1 (describing how UBTI is
calculated in a situation in which an exempt
organization's distributive share of partner-
ship income consists of both UBTI and in-
come that is excluded from the calcula-
tion of UBTI). In determining whether a
partnership conducts one or more trades
or businesses that are unrelated trades or
businesses with respect to an exempt
organization partner, the exempt organi-
zation would use the applicable defini-
tion of "unrelated trade or business" in
§ 513(a) or (b).2 Section 512(c) applies
regardless of whether an exempt orga-
nization is a general or limited partner.
Rev. Rul. 79-222, 1979-2 C.B. 236.

Except as described in § 512(a)(3) (dis-
cussed in section 7 of this notice), exempt
organizations exclude from the calcula-
tion of UBTI gross income from divi-
dends, interest, annuities, etc .; royalties;
rents; and gains and losses from the sale,
exchange, or other disposition of property.
See § 512(b)(1), (2), (3), & (5). The rea-
son that these and "similar items" are ex-
cluded from UBTI is because Congress
indicated that such items "are not likely to
result in serious competition for taxable
businesses having similar income." S. Rep.
No. 81-2375, at 30-31 (1950). Addition-
ally, Congress stated that "investment-
producing incomes of these types have long
been recognized as a proper source of rev-
enue for [exempt] organizations and trusts."
Id. However, gross income from other
sources in the nature of investments are not
specifically excluded by § 512(b) and are
generally included in the calculation of
UBTI. Such gross income could include an
exempt organization's share (whether or not
distributed) of the gross income of a part-
nership when the exempt organization is a
partner and the partnership is engaged in
one or more trades or businesses that are
unrelated trades or businesses with respect
to the exempt organization partner.3

An exempt organization may engage in
more than one unrelated trade or business.
Prior to the enactment of § 512(a)(6),
§ 1.512(a)-1(a) provided that, with re-
spect to an exempt organization that de-
rives gross income from the regular con-

duct of two or more unrelated trades or
businesses, UBTI was the aggregate gross
income from all such unrelated trades or
businesses less the aggregate deductions al-
lowed with respect to all such unrelated
trades or businesses. However, § 512(a)(6)
changes this calculation for exempt organi-
zations with more than one unrelated trade
or business. Congress intended "that a de-
duction from one trade or business for a
taxable year may not be used to offset in-
come from a different unrelated trade or
business for the same taxable year." H.R.
Rep. No. 115-466, at 548 (2017). Specifi-
cally, § 512(a)(6) provides that, in the case
of any exempt organization with more than
one unrelated trade or business:

(A) UBTI, including for purposes of
determining any NOL deduction, shall be
computed separately with respect to each
trade or business and without regard to
§ 512(b)(12) (allowing a specific deduc-
tion of $1,000),

(B) The UBTI of such organization
shall be the sum of the UBTI so computed
with respect to each trade or business, less
a specific deduction under § 512(b)(12),
and

(C) For purposes of § 512(a)(6)(B),
UBTI with respect to any such trade or
business shall not be less than zero.

Thus, § 512(a)(6) no longer allows ag-
gregation of income and deductions from
all unrelated trades or businesses. Section
512(a)(6) applies to taxable years begin-
ning after December 31, 2017, but, as
discussed in more detail in section 9 of
this notice, not to NOLs arising before
January 1, 2018, that are carried over to
taxable years beginning on or after such
date.

Separately, section 14201 of the Act
added new § 951A of the Code. Section
951A(a) provides that "each person who
is a United States shareholder of any con-
trolled foreign corporation for any taxable
year of such United States shareholder
shall include in gross income such share-
holder's global intangible low-taxed in-
come for such taxable year."

## SECTION 3. SEPARATE TRADE OR BUSINESS

### .01 In General

In the case of any exempt organization
with more than one unrelated trade or
business, § 512(a)(6)(A) requires the or-
ganization to calculate UBTI, including
for purposes of determining any NOL de-
duction (discussed in section 9 of this
notice), separately with respect to each
such trade or business. In enacting
§ 512(a)(6), Congress did not provide cri-
teria for determining whether an exempt
organization has more than one unrelated
trade or business or how to identify sepa-
rate unrelated trades or businesses for pur-
poses of calculating UBTI. The Treasury
Department and the IRS intend to propose
regulations for determining whether an
exempt organization has more than one
unrelated trade or business for purposes of
§ 512(a)(6) and how to identify separate
trades or businesses for purposes of cal-
culating UBTI under § 512(a)(6)(A).

#### .02 Reasonable, Good-Faith Interpretation of §§ 511 through 514

Pending issuance of proposed regula-
tions, and pursuant to additional interim
guidance provided in section 6 of this
notice, exempt organizations may rely on
a reasonable, good-faith interpretation of
§§ 511 through 514, considering all the
facts and circumstances, when determin-
ing whether an exempt organization has
more than one unrelated trade or business
for purposes of § 512(a)(6). A reasonable,
good-faith interpretation includes using
the North American Industry Classifica-
tion System 6-digit codes described in
section 3.03.

The Treasury Department and the IRS
note that the fragmentation principle in
§ 513(c) and § 1.513-1(b), and related
guidance, may also provide helpful guid-
ance. Prior to the passage of § 512(a)(6),
the fragmentation principle was primarily
used to separate unrelated trades or busi-
nesses from exempt activities, but it might
also have utility in identifying separate

2Because IRAs described in § 408 are subject to the tax imposed by § 511, under § 408(e), and IRAs are most similar to § 401(a) trusts, it is reasonable to apply the definition of "unrelated
trade or business" described in § 513(b) to IRAs. The Treasury Department and the IRS intend to provide that the § 513(b) definition of unrelated trades or businesses should be used in
application of § 511 for accounts subject to the tax in § 511 pursuant to § 408(e).

3In the case of a trust that is exempt from tax under § 501(a) that is described in § 401(a) or § 501(c)(17), § 513(b) defines "unrelated trade or business" as any trade or business regularly
carried on a partnership of which it is a member.

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trades or businesses for purposes of
§ 512(a)(6)(A). The fragmentation princi-
ple provides that an activity does not lose
its identity as a trade or business merely
because it is carried on within a larger
aggregate of similar activities or within a
larger complex of other endeavors which
may, or may not, be related to the exempt
purposes of an organization. For example,
the regular sale of pharmaceutical sup-
plies to the general public by a hospital
pharmacy does not lose its status as a
trade or business merely because the phar-
macy also furnishes supplies to the hospi-
tal and patients of the hospital in accor-
dance with its exempt purposes or in
compliance with the terms of § 513(a)(2)
(stating, in part, that the term "trade or
business" does not include any trade or
business that is carried on by an organi-
zation described in § 501(c)(3) or a state
college or university primarily for the
convenience of its members, students,
patients, officers, or employees). See
§ 1.513-1(b). Similarly, activities of so-
liciting, selling, and publishing commer-
cial advertising do not lose their statuses
as trades or businesses even though the
advertising is published in an exempt or-
ganization periodical that contains edito-
rial matter related to the exempt purposes
of the organization. Id. Additionally, sev-
eral revenue rulings provide examples of
how the fragmentation principle has been
applied. See, e.g., Rev. Rul. 78-145,
1978-1 C.B. 169 (regarding the sale of
blood products by a blood bank).

.03 Possible Methods for Identifying
Separate Trades or Businesses

There is no general statutory or regu-
latory definition defining what constitutes
a "trade or business" for purposes of the
Internal Revenue Code. Whether an activ-
ity constitutes a trade or business may
vary depending on which Code section is
involved. See generally Commissioner v.
Groetzinger, 480 U.S. 23, 27 (1987). The
Treasury Department and the IRS request
comments regarding rules to identify sep-
arate trades or businesses that achieve the
intent of Congress in enacting § 512(a)(6)
and are administrable for exempt organi-
zations and the IRS.

Several Code sections describe factors
for determining whether an organization
is engaged in a trade or business or a line

of business, including §§ 132, 162, 183,
414, and 469 (see also section 5.02 of this
notice), and the regulations thereunder.
The Treasury Department and the IRS
have considered these Code sections and
are concerned that they do not provide
useful models for identifying separate
trades or businesses for purposes of
§ 512(a)(6). Nonetheless, the Treasury
Department and the IRS request com-
ments describing whether and how these
and other Code sections (and the regula-
tions thereunder) may aid in determining
how to identify an exempt organization's
separate trades or businesses for purposes
of § 512(a)(6)(A).

Although some commenters have sug-
gested the creation of a facts and circum-
stances test to identify separate trades or
businesses for purposes of § 512(a)(6), the
Treasury Department and the IRS would
like to set forth a more administrable
method than a facts and circumstances test
alone for identifying separate trades or
businesses for purposes of § 512(a)(6). A
facts and circumstances test would in-
crease the administrative burden on ex-
empt organizations in complying with
§ 512(a)(6) because such organizations
would have to perform a fact-intensive
analysis with respect to each of their
trades or businesses, document the analy-
sis, and then track and keep records con-
sistent with such analysis. Additionally,
such a test would likely result in inconsis-
tency across the exempt organization sec-
tor in light of differing approaches in bud-
geting and staffing and thus create
unequal burdens and cause exempt orga-
nizations to make business decisions such
as budgeting and staffing solely to avoid
the requirements of § 512(a)(6). Finally,
such a test would also increase the admin-
istrative burden on the IRS in implement-
ing and enforcing § 512(a)(6) because
verifying whether an exempt organization
calculated its UBTI correctly would re-
quire a fact-intensive analysis of the orga-
nization's trades or businesses and the
determinations made with respect to iden-
tifying separate trades or businesses for
purposes of calculating UBTI under
§ 512(a)(6)(A).

To provide additional guidance in pro-
posed regulations for determining whether
an exempt organization has more than one
unrelated trade or business for purposes of

§ 512(a)(6) and how to identify separate
trades or businesses for purposes of cal-
culating UBTI under § 512(a)(6)(A), the
Treasury Department and the IRS are con-
sidering the use of North American Indus-
try Classification System (NAICS) codes.
Prior to proposed regulations, the Trea-
sury Department and the IRS will con-
sider the use of NAICS 6-digit codes to be
a reasonable, good-faith interpretation un-
der section 3.02 of this notice.

The NAICS is an industry classifica-
tion system for purposes of collecting,
analyzing, and publishing statistical data
related to the United States business econ-
omy. See EXECUTIVE OFFICE of the PRESI-
DENT, OFFICE of MANAGEMENTand BUDGET,
NORTH AMERICAN INDUSTRY CLASSIFICATION
SYSTEM (2017), available at https://www.
census.gov/eos/www/naics/2017NAICS/
2017_NAICS_Manual.pdf. For example,
under a NAICS 6-digit code, all of an
exempt organization's advertising activi-
ties and related services (NAICS code
541800) might be considered one unre-
lated trade or business activity, regardless
of the source of the advertising income.
Use of all 6 digits of the NAICS codes
would result in more specific categories of
trades or businesses whereas use of fewer
than 6 digits of the NAICS codes would
result in broader categories of trades or
businesses. Exempt organizations filing
Form 990-T, "Exempt Organization
Business Income Tax Return," already are
required to use the 6-digit NAICS codes
when describing the organization's unre-
lated trades or businesses in Block E. The
Treasury Department and the IRS request
comments regarding whether using less
than 6 digits of the NAICS codes, or
combining NAICS codes with other criteria,
would appropriately identify separate trades
or businesses for purposes of achieving the
objective of § 512(a)(6). The Treasury De-
partment and the IRS also request com-
ments on the utility of this method, other
methods, or a combination of methods that
could be used for making this determina-
tion.

.04 Allocation of Directly Connected
Deductions

Section 512(a)(1) permits an exempt
organization with an unrelated trade or
business to reduce the income from that
trade or business by the deductions al-

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lowed by Chapter 1 of the Code that are
directly connected with the carrying on of
such trade or business. To be "directly
connected" with a trade or business, an
item of deduction must have a proximate
and primary relationship to the carrying
on of the unrelated trade or business gen-
erating the gross income. See § 1.512(a)-
1(a). Expenses, depreciation, and similar
items attributable solely to the conduct of
an unrelated trade or business are prox-
imately and primarily related to that
trade or business and qualify to reduce
income from such trade or business un-
der § 512(a)(1) to the extent such items
meet the requirements of §§ 162 (trade
or business expenses), 167 (deprecia-
tion), and other relevant provisions.

To the extent that an exempt organiza-
tion may have items of deduction that are
shared between an exempt activity and an
unrelated trade or business, the Treasury
regulations at § 1.512(a)-1(c) and (d) pro-
vide special rules for allocating such ex-
penses. For example, if facilities are used
both to carry on exempt activities and to
conduct unrelated trade or business activ-
ities, then expenses, depreciation, and
similar items attributable to such facilities
must be allocated between the two uses on
a reasonable basis. See § 1.512(a)-1(c).

The Treasury Department and the IRS
currently have an item on the Priority Guid-
ance Plan regarding methods of allocating
expenses relating to dual use facilities. The
allocation issues under § 512(a)(1) also are
relevant under § 512(a)(6) because an ex-
empt organization with more than one un-
related trade or business must not only allo-
cate indirect expenses among exempt and
taxable activities as described in § 1.512(a)-
1(c) and (d) but also among separate unre-
lated trades or businesses. The Treasury
Department and the IRS therefore are con-
sidering modifying the underlying reason-
able allocation method in § 1.512(a)-1(c)
and providing specific standards for allocat-
ing expenses relating to dual use facilities
and the rules under § 512(a)(6). The Trea-
sury Department and the IRS are requesting
comments regarding possible rules or de-
fined standards for the allocation of indirect
expenses between separate unrelated trades
or businesses for purposes of calculating

UBTI under § 512(a)(6)(A), and, in partic-
ular, regarding what allocation methods
should be considered "reasonable."

## SECTION 4. INCOME TREATED AS AN ITEM OF GROSS INCOME FROM AN UNRELATED TRADE OR BUSINESS

Sections 512(b)(4), (13), and (17) treat
unrelated debt-financed income, specified
payments received from controlled enti-
ties, and certain insurance income (as de-
fined in § 953) as items of gross income
derived from an unrelated trade or busi-
ness and therefore includable in the cal-
culation of UBTI under § 512(a) even
though such amounts ordinarily would be
excluded from the calculation of UBTI
under § 512(b)(1), (2), (3), or (5). At least
one commenter has questioned how in-
come that is included in UBTI under
§ 512(b)(4), (13), and (17) is treated for
purposes of § 512(a)(6) because that com-
menter states that amounts included in
UBTI under these provisions do not have
a nexus to an unrelated trade or business.

The Treasury Department and the IRS
note that, in the absence of § 512(b)(1),
(2), (3), and (5), interest, royalties, rents,
and gains (or losses) from the sale, ex-
change, or other disposition of property
would be included in the calculation of
UBTI to the extent that such amounts are
"gross income derived by any organiza-
tion from any unrelated trade or business
. . . regularly carried on by it" under
§ 512(a)(1). Accordingly, the Treasury
Department and the IRS see no distinction
between "gross income derived by any
organization from any unrelated trade or
business ... regularly carried on by it"
within the meaning of § 512(a)(1) and
amounts included in UBTI "as an item of
gross income derived from an unrelated
trade or business" under § 512(b)(4), (13),
and (17).

However, the Treasury Department and
the IRS recognize that one interpretation of
§ 512(a)(6) might impose a significant bur-
den on organizations required to include
amounts in UBTI under § 512(b)(4), (13), or
(17). For example, one interpretation of
§ 512(a)(6) might require treating each debt-
financed property owned by an exempt or-

ganization as a separate trade or business for
purposes of § 512(a)(6)(A), because the
debt/basis percentage used to calculate the
portion of income that is unrelated debt-
financed income included in the calculation
of UBTI under § 512(b)(4) is specific to
each property. Similarly, an exempt organi-
zation might be required to report income
from each controlled entity as income from
a separate trade or business for purposes of
§ 512(a)(6)(A). The exempt organization
would have to track and report each debt-
financed property owned directly by an ex-
empt organization or income from each con-
trolled entity separately, which imposes a
burden both on the exempt organization and
on the IRS. Accordingly, aggregating in-
come included in UBTI under § 512(b)(4),
(13), or (17) may be appropriate in certain
circumstances. The Treasury Department
and the IRS therefore request comments re-
garding the treatment under § 512(a)(6) of
income that is not from a partnership but is
included in UBTI under § 512(b)(4), (13),
and (17).

## SECTION 5. ACTIVITIES IN THE NATURE OF INVESTMENTS

### .01 Partnership Interests

In general, for exempt organizations,
the activities of a partnership are consid-
ered the activities of the partners.4 Section
512(c) requires an exempt organization
that is a partner in a partnership that con-
ducts a trade or business that is an unre-
lated trade or business with respect to the
exempt organization to include in UBTI
its distributive share of gross partnership
income (and directly connected partner-
ship deductions) from such unrelated
trade or business. Whether a trade or busi-
ness engaged in by the partnership is an
unrelated trade or business with respect to
the exempt organization is determined un-
der §§ 511 through 514, and the regula-
tions thereunder. Based on § 512(c) and
the fragmentation principle, as discussed
in section 3.02 of this notice, one inter-
pretation of § 512(a)(6) might require an
exempt organization to calculate UBTI
separately with respect to each unrelated
trade or business regularly carried on by
the partnership in which the exempt orga-

4See IRC §§ 512(c), 513(a); Treas. Reg. § 1.513-1(d)(1) and (2); Plumstead Theatre Society, Inc. v. Commissioner, 74 T.C. 1324 (1980), aff'd, 675 F.2d 244 (9th Cir. 1982); Service Bolt
& Nut Co. Profit Sharing Trust v. Commissioner, 724 F.2d 519 (6th Cir.1983), aff'g, 78 T.C. 812 (1982); Rev. Rul. 98-15, 1998-1 C.B. 718.

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nization is a direct or indirect partner. For
example, if an exempt organization is a
partner in a holding partnership that is a
partner in multiple partnerships, many of
which engage in one or more unrelated
trades or businesses with respect to the
exempt organization partner, the exempt
organization may be engaged in multiple
separate unrelated trades or businesses
through its interest in the partnership.

.02 Permitting the Aggregation of
Gross Income and Directly Connected
Deductions from Certain "Investment
Activities"

The Treasury Department and the IRS
have received comments regarding the po-
tential significant reporting and adminis-
trative burden imposed by § 512(a)(6) on
exempt organizations with various activi-
ties in the nature of an investment includ-
ing ownership interests in multi-tier part-
nership structures that generate UBTI if
the Treasury Department and the IRS
adopt the interpretation of § 512(a)(6) dis-
cussed in section 5.01 of this notice. The
administrative burden related to owning
partnership interests would be heightened
by the difficulty of obtaining sufficient
information regarding the trade or busi-
ness activities of lower-tier partnerships.
Accordingly, as a matter of administrative
convenience, the Treasury Department
and the IRS intend to propose regulations
treating certain activities in the nature of
an investment ("investment activities") of
an exempt organization as one trade or
business for purposes of § 512(a)(6)(A) in
order to permit exempt organizations to
aggregate gross income and directly con-
nected deductions from such "investment
activities." The Treasury Department and
the IRS expect that treating these "invest-
ment activities" as one trade or business
for this purpose will reduce the reporting
and administrative burden on organiza-
tions required to comply with § 512(a)(6)
and will also reduce the burden the IRS
may experience in implementing and en-
forcing § 512(a)(6).

The Treasury Department and the IRS
request comments regarding the scope of
the activities, both investment partnership
interests or other activities in the nature of
an investment that may generate unrelated
business income, that should be included
in the category of "investment activities"

for purposes of § 512(a)(6). The Treasury
Department and the IRS have received
some comments suggesting the definition
of material participation in § 469 could
serve as a basis for separating investment
activities from more active involvement in
an unrelated trade or business. The Trea-
sury Department and the IRS are con-
cerned that the criteria for finding material
participation under § 469 are more exten-
sive than appropriate. With respect to
partnership interests that could be in-
cluded in the category of "investment ac-
tivities" for purposes of § 512(a)(6), the
Treasury Department and the IRS note
that "investment activities" as discussed
in section 6 of this notice should capture
only partnership interests in which the ex-
empt organization does not significantly
participate in any partnership trade or
business.

## SECTION 6. INTERIM AND TRANSITION RULES FOR PARTNERSHIP INVESTMENTS

### .01 Aggregation of Income and Directly Connected Deductions

(1) In General. Except as provided in
section 6.01(2) through (4) of this notice,
exempt organizations with partnership in-
vestments should use a reasonable, good-
faith interpretation of §§ 511 and 514,
considering all the facts and circum-
stances, when identifying separate trades
or businesses for purposes of § 512(a)
(6)(A) until the issuance of proposed reg-
ulations (see section 3.02 of this notice).

(2) Interim Rule for Aggregation of
Qualifying Partnership Interests under
the De Minimis and Control Tests. Pend-
ing publication of proposed regulations,
an exempt organization may aggregate its
UBTI from its interest in a single partner-
ship with multiple trades or businesses,
including trades or businesses conducted
by lower-tier partnerships, as long as the
directly-held interest in the partnership
meets the requirements of either the de
minimis test (described in section 6.02 of
this notice) or the control test (described
in section 6.03 of this notice) ("qualifying
partnership interest"). Additionally, under
this interim rule, an exempt organization
may aggregate all qualifying partnership
interests and treat the aggregate group of
qualifying partnership interests as com-

prising a single trade or business for pur-
poses of § 512(a)(6)(A).

(3) Transition Rule. Pending publica-
tion of proposed regulations, an exempt
organization may follow the transition
rule (described in section 6.04 of this no-
tice) for partnership interests with respect
to which it is not applying the interim rule
described in section 6.01(2) of this notice.

(4) Limitations. The interim rule and
the transition rule do not apply to exempt
organizations described in § 501(c)(7) that
are subject to § 512(a)(3). See section 7 of
this notice. Furthermore, these rules do
not otherwise impact the application of
§ 512(c) and the fragmentation principle
under § 513(c).

### .02 De minimis test

(1) In general. A partnership interest is
a qualifying partnership interest that
meets the requirements of the de minimis
test if the exempt organization holds di-
rectly no more than 2 percent of the profits
interest and no more than 2 percent of the
capital interest. But see section 6.02(2)(b)
of this notice for rules requiring the com-
bining of related interests in certain cir-
cumstances.

(2) Percentage Interest. (a) Reliance
on Schedule K-1. In determining the ex-
empt organization's percentage interest in
a partnership, the exempt organization
may rely on the Schedule K-1 it receives
from the partnership. In Part II, line J, a
partnership enters the partner's share of
profit, loss, and capital interests at the
beginning and the ending of the partner-
ship's taxable year. An organization will
be considered to have no more than 2
percent of the profits or capital interests in
the case of a partnership, if the average
of the organization's percentage interest at
the beginning and the end of the partner-
ship's taxable year, or, in the case of a
partnership interest held for less than a
year, the percentage interest held at the
beginning and end of the period of own-
ership within the partnership's taxable
year, entered in Part II, line J, of Schedule
K-1 is no more than 2 percent (without
regard to the number of days each such
percentage is held during the taxable
year). For example, if an exempt organi-
zation acquires an interest in a partnership
that files on a calendar year basis in May
and the partnership reports in Part II, Line

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J, of Schedule K-1 that the partner held a
3 percent profits interest at the date of
acquisition but held a 1 percent profits
interest at the end of the calendar year,
the exempt organization will be consid-
ered to have held 2 percent of the profits
interest in that partnership for that year
((3 percent + 1 percent)/2 = 2 percent).
To the extent that a specific profits in-
terest is not identified in Part II, Line J,
of Schedule K-1, an organization does
not meet the de minimis test.

(b) Combining Related Interests. (i) In
General. When determining an exempt or-
ganization's percentage partnership inter-
est, the interest of a disqualified person, a
supporting organization, or a controlled
entity in the same partnership will be
taken into account. For example, if an
exempt organization owns 1.5 percent of
the profits interests in a partnership and a
disqualified person with respect to the ex-
empt organization owns an additional 1
percent profits interest in that partnership,
the exempt organization would not meet
the requirements of the de minimis test
because its aggregate percentage interest
exceeds 2 percent. However, the exempt
organization may still be able to aggregate
the income (and directly connected deduc-
tions) from that partnership interest with
other qualifying partnership interests if
the partnership interest meets the require-
ments of the control test (described in
section 6.03 of this notice).

(ii) Disqualified Person. For purposes
of section 6.02(2)(b)(i) of this notice, the
term "disqualified person" has the same
meaning as in § 4958(f).

(iii) Supporting Organization. For pur-
poses of section 6.02(2)(b)(i) of this no-
tice, the term "supporting organization"
has the same meaning as in § 509(a)(3).

(iv) Controlled Entity. For purposes of
section 6.02(2)(b)(i) of this notice, the
term "controlled entity" has the same
meaning as in § 512(b)(13)(D).

### .03 Control Test

(1) In General. A partnership interest is
a qualifying partnership interest that
meets the requirements of the control test
if the exempt organization (i) directly
holds no more than 20 percent of the
capital interest; and (ii) does not have
control or influence over the partnership.
The rules in section 6.02(2)(b) of this no-

tice requiring the combination of related
interests also apply for purposes of the
control test.

(2) Reliance on Schedule K-1. When
determining the exempt organization's
percentage interest in a partnership the
exempt organization may rely on the
Schedule K-1 it receives from the partner-
ship. An organization will be considered
to have no more than 20 percent of the
capital interest, if the average of the orga-
nization's percentage interest at the begin-
ning and the end of the partnership's tax-
able year, or, in the case of a partnership
interest held for less than a year, the per-
centage interest held at the beginning and
end of the period of ownership within the
partnership's taxable year, entered in Part
II, line J, of Schedule K-1 is no more than
20 percent (without regard to the number
of days each such percentage is held dur-
ing the taxable year).

(3) Control or Influence. All facts and
circumstances are relevant for determin-
ing whether an exempt organization has
control or influence over a partnership. An
exempt organization has control or influ-
ence if the exempt organization may re-
quire the partnership to perform, or may
prevent the partnership from performing,
any act that significantly affects the oper-
ations of the partnership. An exempt or-
ganization also has control or influence
over a partnership if any of the exempt
organization's officers, directors, trustees,
or employees have rights to participate in
the management of the partnership or con-
duct the partnership's business at any
time, or if the exempt organization has the
power to appoint or remove any of the
partnership's officers, directors, trustees,
or employees.

#### .04 Transition rule

A previously acquired partnership in-
terest may be difficult to modify to meet
the de minimis test (as described in section
6.02 of this notice) or control test (as
described in section 6.03 of this notice)
under the interim rule and the exempt
organization may have to incur significant
transactions costs to do so. Thus, an orga-
nization may choose to apply the follow-
ing transition rule, if applicable, for a part-
nership interest acquired prior to August
21, 2018: an exempt organization may
treat each such partnership interest as

comprising a single trade or business for
purposes of § 512(a)(6) whether or not
there is more than one trade or business
directly or indirectly conducted by the
partnership or lower-tier partnerships. For
example, if an organization has a thirty-
five percent interest in a partnership prior
to August 21, 2018, it can treat the part-
nership as being in a single unrelated trade
or business even if the partnership's in-
vestments generated UBTI from various
lower-tier partnerships that were engaged
in multiple types of trades or businesses.

.05 Unrelated Debt-Financed Income.
The income from qualifying partnership
interests permitted to be aggregated under
the interim rule includes any unrelated
debt-financed income (within the meaning
of § 514) that arises in connection with the
qualifying partnership interest that meets
the requirements of either the de minimis
test or the control test. See §§ 512(b)(4)
and 514. For example, assume an exempt
organization has an interest in a hedge
fund that is treated as a partnership for
federal income tax purposes, the interest
is a qualifying partnership interest that
meets the requirements of the de minimis
test, and the hedge fund regularly trades
stock on margin. Ordinarily, the divi-
dends from such stock and any income
(or loss) from the sale, exchange, or
other disposition of such stock would be
excluded from UBTI under § 512(b)(1)
and (5). However, because all or a por-
tion of the stock's purchase is debt-
financed, § 512(b)(4) requires that all of
or a portion (depending on the debt-
basis percentage applied) of the divi-
dend income (if any) and any income (or
loss) from the sale of the stock be in-
cluded in UBTI. For the purpose of the
interim rule, the exempt organization
may aggregate unrelated debt-financed
income generated by the hedge fund
with any other UBTI generated by any
of the hedge fund's trades or businesses
that are unrelated trades or businesses
with respect to the exempt organization.

Similarly, any unrelated debt-financed
income that arises in connection with a
partnership interest that meets the require-
ments of the transition rule may be aggre-
gated with the other UBTI that arises in
connection with that partnership interest.

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# SECTION 7. SOCIAL CLUBS, VOLUNTARY EMPLOYEES' BENEFICIARY ASSOCIATIONS, AND SUPPLEMENTAL UNEMPLOYMENT COMPENSATION BENEFITS TRUSTS

Section 512(a)(3) provides special
rules applicable to exempt organizations
described in § 501(c)(7) (social clubs), (9)
(voluntary employees' beneficiary associ-
ations (VEBAs)), and (17) (supplemental
unemployment compensation benefits
trusts (SUBs)). For these exempt orga-
nizations, § 512(a)(3)(A) provides that
UBTI means the gross income (exclud-
ing any exempt function income), less
the deductions allowed by Chapter 1 of
the Code that are directly connected
with the production of the gross income
(excluding exempt function income),
both computed with the modifications
provided in § 512(b)(6) (the NOL de-
duction), (10) (charitable contribution
deduction by exempt organizations),
(11) (charitable contribution deduction
by certain trusts), and (12) (specific de-
duction). Thus, social clubs, VEBAs,
and SUBs are taxed under § 511 on their
non-exempt function income, which
generally includes investment income
and income derived from an unrelated
trade or business.

In particular, § 512(a)(3)(B) defines
"exempt function income" as the gross
income from dues, fees, charges, or simi-
lar amounts paid by members of the orga-
nization as consideration for providing
such members or their dependents or
guests goods, facilities, or services in fur-
therance of the purposes constituting the
basis for the organization's tax-exempt
status. However, § 512(a)(3)(B) specifi-
cally excludes from the definition of "ex-
empt function income" gross income de-
rived from any unrelated trade or business
regularly carried on by such organization
(computed as if the organization were
subject to § 512(a)(1)).5 For example,
a social club's nonmember income is
treated as gross income from an unrelated
trade or business under § 512(a)(3). See
Rev. Rul. 2003-64, 2003-1 C.B. 1036. Ac-

cordingly, even though § 512(a)(3) uses
terminology different from § 512(a)(1),
§ 512(a)(6) applies to an organization sub-
ject to § 512(a)(3) if such organization has
more than one unrelated trade or business.
For example, a social club that receives non-
member income from multiple sources,
such as from a dining facility and from a
retail store, would have more than one un-
related trade or business and therefore be
subject to the requirements of § 512(a)(6).

The Treasury Department and the IRS
anticipate that any rules issued regarding
how an exempt organization identifies
separate trades or businesses for purposes
of § 512(a)(6)(A) will apply equally under
§ 512(a)(1) and (3).6 Nonetheless, be-
cause social clubs, VEBAs, and SUBs are
taxed differently than other exempt orga-
nizations under § 511, the Treasury De-
partment and the IRS request comments
regarding any additional considerations
that should be given to how § 512(a)(6)
applies within the context of § 512(a)(3).
In particular, the Treasury Department
and the IRS request comments regarding
how these exempt organizations' invest-
ment income should be treated for pur-
poses of § 512(a)(6).

## SECTION 8. TOTAL UBTI

### .01 In General

To determine total UBTI under § 512(a)
(6)(B), an exempt organization takes the
sum of the UBTI computed with respect to
each separate trade or business under
§ 512(a)(6)(A), less a specific deduction un-
der § 512(b)(12). However, in calculating
total UBTI under § 512(a)(6)(B), § 512(a)
(6)(C) provides that UBTI with respect to
any trade or business cannot be less than
zero.

### .02 Fringe Benefits

Section 512(a)(7) increases UBTI by
any amount for which a deduction is not
allowable under this chapter by reason of
§ 274 and which is paid or incurred by
such exempt organization for any quali-
fied transportation fringe (as defined in
§ 132(f)), any parking facility used in
connection with qualified parking (as

defined in § 132(f)(5)(C)), or any on-
premises athletic facility (as defined in
§ 132(j)(4)(B)). However, § 512(a)(7)
does not apply to the extent the amount
paid or incurred is directly connected
with an unrelated trade or business that
is regularly carried on by the organiza-
tion. Unlike other paragraphs of § 512,
§ 512(a)(7) does not treat amounts in-
cluded in UBTI as a result of that sec-
tion as an item of gross income derived
from an unrelated trade or business (see
section 4 of this notice). Furthermore,
the Treasury Department and the IRS do
not believe that the provision of the
fringe benefits described in § 512(a)(7)
is an unrelated trade or business. Ac-
cordingly, any amount included in UBTI
under § 512(a)(7) is not subject to
§ 512(a)(6).

## SECTION 9. NOLS AND UBTI

Prior to the Act, § 172 allowed an NOL
deduction equal to the sum of NOLs per-
mitted to be carried back to the taxable
year from succeeding taxable years and
the NOLs permitted to be carried forward
from preceding taxable years. An NOL
generally could be carried back two
years and carried forward twenty years.
See § 172(b) (prior to the Act). Section
512(b)(6), which was not changed by
the Act, generally permits exempt orga-
nizations subject to the unrelated busi-
ness income tax under § 511, including
exempt organizations with more than
one unrelated trade or business, to take
the NOL deduction provided in § 172. In
particular, § 512(b)(6)(A) states that the
NOL for any taxable year, the amount of
the NOL carryback or carryover to any
taxable year, and the NOL deduction for
any taxable year shall be determined
under § 172 without taking into account
any amount of income or deduction that is
excluded under § 512(b) in computing
UBTI. For example, a loss attributable to
an unrelated trade or business is not to
be reduced by reason of the receipt
of dividend income. See § 1.512(b)-1(e)(1).
An NOL carryover is allowed only from a
taxable year for which the taxpayer is sub-
ject to the provisions of § 511, or a corre-

5However, VEBAs and SUBs are taxed on income to the extent that the amount of assets in the VEBA or SUB at the close of the taxable year exceed the account limit described in
§ 512(a)(3)(E) and § 1.512(a)-5T. See also Prop. Reg. § 1.512(a)-5.

6However, the rules in section 6 of this notice for aggregating UBTI from partnership interests do not apply to social clubs described in § 501(c)(7).

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sponding provision of prior law. See
§ 512(b)(6)(B); § 1.512(b)-1(e)(3).

However, § 512(a)(6) changes how an
exempt organization with more than one
unrelated trade or business calculates and
takes NOLs into account with respect to a
particular trade or business. In particular,
§ 512(a)(6)(A) requires such an organiza-
tion to calculate UBTI, including for pur-
poses of determining any NOL deduction,
separately with respect to each trade or
business for taxable years beginning after
December 31, 2017 (post-2017 NOLs).
The Congressional intent behind this
change is to allow an NOL deduction
"only with respect to a trade or business
from which the loss arose." H.R. Rep. No.
115-466, at 547-48. In the first taxable
year beginning after December 31, 2017,
no exempt organization with more than
one unrelated trade or business will have
an NOL deduction to take against the
UBTI of a particular trade or business
calculated under § 512(a)(6)(A).

Additionally, in order to preserve
NOLs from tax years prior to the effective
date of the Act, Congress created a special
transition rule to permit the carryover of
any NOL arising in a taxable year begin-
ning before January 1, 2018 (pre-2018
NOLs). In particular, section 13702(b)(2)
of the Act provides that § 512(a)(6)(A)
does not apply to pre-2018 NOLs; rather,
pre-2018 NOLs are taken against total
UBTI calculated under § 512(a)(6)(B).
Accordingly, even though an exempt or-
ganization with more than one unrelated
trade or business will not have any NOL
deductions when calculating UBTI with
respect to a separate trade or business
under § 512(a)(6)(A) for the first taxable
year beginning after December 31, 2017,
such an organization may be able to take
an NOL deduction against total UBTI cal-
culated for such year under § 512(a)(6)(B)
if the organization has pre-2018 NOLs.

In the second taxable year beginning
after December 31, 2017, an exempt or-
ganization with more than one unrelated
trade or business may have both pre-2018
NOLs and post-2017 NOLs. Section
512(a)(6) may have changed the order in
which an organization would ordinarily
take losses because § 512(a)(6)(A) re-
quires an organization with more than one
unrelated trade or business to calculate
UBTI separately (including for purposes of

determining any NOL deduction) with re-
spect to each such trade or business before
calculating total UBTI under § 512(a)
(6)(B). If § 512(a)(6) is read as an ordering
rule for purposes of calculating and taking
the NOL deduction, post-2017 NOLs will
be calculated and taken before pre-2018
NOLs because the UBTI with respect to
each separate trade or business is calculated
under § 512(a)(6)(A) before calculating to-
tal UBTI under § 512(a)(6)(B).

Furthermore, section 13302 of the Act
made extensive changes to § 172, includ-
ing limiting post-2017 NOLs to the lesser
of (1) the aggregate NOL carryovers to
such year, plus the NOL carrybacks to
such year, or (2) 80 percent of taxable
income computed without regard to the
deduction generally allowable under
§ 172. The limitation in § 172(a) applies
only to post-2017 NOLs, but a question
exists regarding how the § 172(a) 80 per-
cent income limitation applies when both
pre-2018 and post-2017 NOLs exist. The
Treasury Department and the IRS intend
to issue guidance regarding how § 172
generally applies. However, because
§ 512(a)(6) provides a more specific rule
than the one found in § 172 regarding how
the NOL deduction is calculated and taken
in the context of calculating UBTI, the
Treasury Department and the IRS are re-
questing comments regarding how the
NOL deduction should be taken under
§ 512(a)(6) by exempt organizations with
more than one unrelated trade or business
and, in particular, by such organizations
with both pre-2018 and post-2017 NOLs.
The Treasury Department and the IRS
also request comments on the ordering of
pre-2018 and post-2017 NOLs and the
potential treatment of pre-2018 NOLs that
may expire in a given tax year if not taken
before post-2017 NOLs.

## SECTION 10. TREATMENT OF GLOBAL INTANGIBLE LOW- TAXED INCOME

Commenters have asked whether an
exempt organization must include GILTI
(included in gross income under § 951A)
in the calculation of UBTI. In particular,
these commenters have questioned
whether GILTI is treated in the same
manner as an inclusion of subpart F
income under § 951(a)(1)(A) for pur-

poses of the unrelated business income
tax under § 511.

The IRS treats an inclusion of subpart
F income as a dividend for purposes of
§ 512(b)(1). Accordingly, subpart F in-
come generally is excluded from the cal-
culation of UBTI. Congress approved of
the IRS's long-standing position when it
enacted § 512(b)(17) as part of the Small
Business Job Protection Act of 1996, Pub-
lic Law 104-188 (110 Stat. 1755 (1996)).
See H.R. Rep. No. 105-586, at 136 (1996)
(stating that "income inclusions under
subpart F have been characterized as divi-
dends for unrelated business income tax
purposes" and citing several private letter
rulings issued by the IRS taking this posi-
tion). Although an inclusion of subpart F
income under § 951(a)(1)(A) is generally
excluded from the calculation of UBTI as a
dividend under § 512(b)(1), § 512(b)(17)
requires any amount included in gross in-
come under § 951(a)(1)(A) that is attribut-
able to insurance income (as defined in
§ 953) which, if derived directly by the
organization, would be treated as gross in-
come from an unrelated trade or business to
be included in the calculation of UBTI.

GILTI is not an inclusion of subpart F
income under § 951(a)(1)(A), but instead
is a separate inclusion under § 951A(a).
Nonetheless, an inclusion of GILTI is
generally treated in a manner similar to an
inclusion of subpart F income for other
purposes of the Code. See H.R. Rep. No.
115-446, at 641 (stating that, "[u]nder the
provision, a U.S. shareholder of any [con-
trolled foreign corporation] must include
in gross income for a taxable year its
[GILTI] in a manner generally similar to
inclusions of subpart F income"). The
Treasury Department and the IRS have
determined that an inclusion of GILTI un-
der § 951A(a) should be treated in the
same manner as an inclusion of subpart F
income under § 951(a)(1)(A) for purposes
of § 512(b)(1) and (4). Accordingly, an
inclusion of GILTI will be treated as a
dividend which is generally excluded
from UBTI under § 512(b)(1).

Commenters have also questioned
whether § 512(b)(17) will apply to treat as
UBTI an inclusion of GILTI to the extent
attributable to insurance income (as de-
fined in § 953) that does not constitute
subpart F income. The Treasury Depart-
ment and the IRS note that Congress made

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no changes to § 512(b) when enacting
§ 951A, and has not otherwise specifically
required the inclusion of such insurance
income in UBTI. Accordingly, unless pro-
vided otherwise in proposed regulations,
the Treasury Department and the IRS will
not treat GILTI included in gross income
under § 951A(a) that is attributable to
insurance income as includible in the
UBTI of a tax-exempt organization.

## SECTION 11. RELIANCE

For taxable years beginning after De-
cember 31, 2017, organizations described
in § 511(a)(2) and trusts described in
§ 511(b)(2), collectively called "exempt
organizations" throughout this notice,
may rely on methods of aggregating or
identifying separate trades or businesses
under § 512(a)(6) provided in this notice
until proposed regulations are published.
All such organizations may rely on a rea-
sonable, good-faith interpretation of
§§ 511 through 514 taking into account all
the facts and circumstances when deter-
mining whether an exempt organization
has more than one unrelated trade or busi-
ness for purposes of § 512(a)(6). For an
exempt organization this also includes us-
ing a reasonable, good-faith interpretation
when determining:

· Whether to separate debt-financed in-
come described in §§ 512(b)(4) and
514;

· Whether to separate income from
a controlled entity described in
§ 512(b)(13); and

· Whether to separate insurance income
earned through a controlled foreign cor-
poration as described in § 512(b)(17).

The use of NAICS 6-digit codes will be
considered a reasonable, good-faith inter-
pretation until regulations are proposed.

For taxable years beginning after De-
cember 31, 2017, exempt organizations,
other than organizations described in
§ 501(c)(7) (social clubs), may also rely
on the rules provided for aggregating in-
come from partnerships in section 6 of
this notice until proposed regulations are
published. These aggregation rules in-
clude any unrelated debt-financed income
that is earned through a partnership that
meets the requirements of the rules de-
scribed in section 6 of this notice. The

rules described in section 6 of this notice
include:

· The interim rule that permits the ag-
gregation of qualifying partnership in-
terests that meet either the de minimis
test or control test into a single trade or
business; and

· The transition rule, which allows for
aggregating income within each direct
partnership interest acquired before
August 21, 2018.

Finally, exempt organizations may rely
on sections 8.02 and 10 of this notice.
These sections provide that:

· Income under § 512(a)(7) is not in-
come from a trade or business for pur-
poses of § 512(a)(6); and

· For purposes of calculating UBTI, an
inclusion of GILTI under § 951A(a) is
treated as a dividend and follows the
treatment of dividends under § 512(b)(1)
and (4).

## SECTION 12. REQUEST FOR COMMENTS

The Treasury Department and the IRS
request comments regarding the applica-
tion of § 512(a)(6) to exempt organiza-
tions with more than one unrelated trade
or business. Specifically, the Treasury De-
partment and the IRS seek comments on
the general interim rule for distinguishing
between trades and businesses under
§ 512(a)(6) (section 3 of this notice);
whether other Code sections (and the reg-
ulations thereunder) may provide an ad-
ministrable model for identifying an ex-
empt organization's separate trades or
businesses (section 3.03 of this notice);
whether NAICS 6-digit (or less) codes
might be the basis of a method for iden-
tifying separate trades or businesses (sec-
tion 3.03 of this notice); the general rules
for allocating deductions between trades
or businesses (section 3.04 of this notice);
the treatment of income treated as an item
of gross income from an unrelated trade or
business, including the treatment of debt-
financed income (§ 512(b)(4), (13) and
(17)) (section 4 of this notice); the scope
of the activities that should be included in
the category of "investment activities"
(section 5.02 of this notice); the treatment
of income derived from activities in the
nature of an investment through partner-
ships (sections 5 and 6 of this notice); any

additional considerations that should be
given to how § 512(a)(6) applies within
the context of § 512(a)(3) (section 7 of
this notice); and the calculation and order-
ing of pre-2018 and post-2017 NOLs and
the treatment of pre-2018 NOLs that will
expire in a given tax year if not taken
before post-2017 NOLs (section 9 of this
notice). Comments should be submitted
on or before December 3, 2018. Please
include Notice 2018-67 on the cover
page. Comments should be sent to the
following address:

Internal Revenue Service
CC:PA:LPD:PR (Notice 2018-67),
Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

Submissions may be hand delivered Mon-
day 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 2018-67)

Submissions may also be sent electroni-
cally to the following e-mail address:

Notice.Comments@irscounsel.treas.gov.
Please include "Notice 2018-67" in the
subject line.

All comments will be available for public
inspection and copying.

## SECTION 13. PAPERWORK REDUCTION ACT

The collection of information in this no-
tice is the requirement under § 512(a)(6)
that an exempt organization with more than
one unrelated trade or business calculate
UBTI separately with respect to each such
trade or business. The collection of informa-
tion contained in this notice is reflected in
the collection of information for Form
990-T that has been reviewed and approved
by the Office of Management and Budget in
accordance with the Paperwork Reduction
Act (44 U.S.C. 3507(c)) under control num-
ber 1545-0687.

An agency may not conduct or spon-
sor, and a person is not required to re-
spond to, a collection of information un-

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less the collection of information displays
a valid OMB control number.

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

## SECTION 14. DRAFTING INFORMATION

The principal authors of this notice are
Stephanie N. Robbins and Jonathan A.
Carter of the Office of Associate Chief
Counsel (TEGE). For further information
regarding this notice contact Mr. Carter at
(202) 317-5800 (not a toll-free number).

## Guidance on the Application of Section 162(m)

## Notice 2018-68

### I. PURPOSE

This notice provides initial guidance
on the application of section 162(m) of
the Internal Revenue Code (Code), as
amended by section 13601 of "An Act to
provide for reconciliation pursuant to ti-
tles II and V of the concurrent resolution
on the budget for fiscal year 2018," Public
Law 115-97 (2017) (the Act). Section
162(m)(1) generally limits the allowable
deduction for a taxable year for remuner-
ation paid by any publicly held corpora-
tion with respect to a covered employee.
Section 13601 of the Act made significant
amendments to section 162(m) and pro-
vided a transition rule applicable to cer-
tain outstanding arrangements (commonly
referred to as the grandfather rule).

Stakeholders have submitted com-
ments indicating that they would benefit
from initial guidance on certain aspects of
the amendments made by section 13601
of the Act, in particular on the amended
rules for identifying covered employees
and the operation of the grandfather rule,
including when a contract will be consid-
ered materially modified so that it is no
longer grandfathered. This notice ad-
dresses these limited issues. The Depart-
ment of the Treasury (Treasury Depart-

ment) and the Internal Revenue Service
(IRS) anticipate that further guidance on
the amendments made by section 13601
of the Act will be issued in the form of
proposed regulations, which will incorpo-
rate the guidance provided in this notice.

# II. BACKGROUND

Section 162(m)(1) disallows the de-
duction by any publicly held corporation
for applicable employee remuneration
paid to any covered employee to the ex-
tent that such remuneration for the taxable
year exceeds $1,000,000.

## A. Amendments to the Definition of Publicly Held Corporation

Section 162(m)(2) defines the term
"publicly held corporation" for purposes
of identifying the entities subject to the
deduction limitation of section 162(m)(1).
Before the amendments made by section
13601(c) of the Act, section 162(m)(2)
defined the term "publicly held corpora-
tion" as any corporation issuing any class
of common equity securities required to
be registered under section 12 of the Se-
curities Exchange Act of 1934. Section
13601(c) of the Act amended the defini-
tion of "publicly held corporation" in sec-
tion 162(m)(2) to mean any corporation
which is an issuer (as defined in section 3
of the Securities Exchange Act of 1934)
(A) the securities of which are required to
be registered under section 12 of the Se-
curities Exchange Act of 1934, or (B) that
is required to file reports under section
15(d) of the Securities Exchange Act of
1934.

## B. Amendments to the Definition of Covered Employee

Section 162(m)(3) defines the term
"covered employee" for purposes of iden-
tifying employees whose remuneration
may be subject to the deduction limitation
under section 162(m)(1). Before the
amendments made by section 13601(b) of
the Act, section 162(m)(3) defined the
term "covered employee" as any em-
ployee of the taxpayer if (A) as of the
close of the taxable year, such employee is
the chief executive officer of the taxpayer
or is an individual acting in such capacity,
or (B) the total compensation of such em-
ployee for the taxable year is required to

be reported to shareholders under the Se-
curities Exchange Act of 1934 by reason
of such employee being among the four
highest compensated officers for the tax-
able year (other than the chief executive
officer). Section 13601(b) of the Act
amended the definition of "covered em-
ployee" in section 162(m)(3) to mean any
employee of the taxpayer if (A) such em-
ployee is the principal executive officer
(PEO) or principal financial officer (PFO)
of the taxpayer at any time during the
taxable year, or was an individual acting
in such a capacity, (B) the total compen-
sation of such employee for the taxable
year is required to be reported to share-
holders under the Securities Exchange Act
of 1934 by reason of such employee being
among the three highest compensated of-
ficers for the taxable year (other than
any individual described in subparagraph
(A)), or (C) such employee was a covered
employee of the taxpayer (or any prede-
cessor) for any preceding taxable year be-
ginning after December 31, 2016.

Section 13601(c) of the Act also added
flush language to section 162(m)(3) pro-
viding that the term "covered employee"
includes any employee who would be de-
scribed in section 162(m)(3)(B) if the re-
porting described in such subparagraph
were required as so described. The legis-
lative history to section 13601 of the Act
explains that the term "covered em-
ployee" includes "officers of a corporation
not required to file a proxy statement but
which otherwise falls within the revised
definition of a publicly held corporation."
House Conf. Rpt. 115-466, 489. Further-
more, the legislative history provides that
the term "covered employee" includes
"officers of a publicly traded corporation
that would otherwise have been required
to file a proxy statement for the year (for
example, but for the fact that the corpora-
tion delisted its securities or underwent a
transaction that resulted in the nonappli-
cation of the proxy statement require-
ment)." Id.

## C. Amendments to the Definition of Applicable Employee Remuneration

Section 162(m)(4) defines the term
"applicable employee remuneration" for
purposes of identifying the remuneration
of a covered employee that may be subject
to the deduction limitation under section

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162(m)(1). Section 162(m)(4) generally
provides that the term "applicable em-
ployee remuneration" means, with respect
to any covered employee for any taxable
year, the aggregate amount allowable as a
deduction for such taxable year (deter-
mined without regard to section 162(m))
for remuneration for services performed
by such employee (whether or not during
the taxable year). Before the amendments
made by section 13601(a) of the Act, the
term "applicable employee remuneration"
did not include remuneration payable on a
commission basis (as defined in section
162(m)(4)(B)) or qualified performance-
based compensation (as described in sec-
tion 162(m)(4)(C)). Section 13601(a) of
the Act amended the definition of "appli-
cable employee remuneration" in section
162(m)(4) to remove these two exclu-
sions. Section 13601(d) of the Act also
amended the definition of "applicable em-
ployee remuneration" by adding a special
rule for remuneration paid to beneficia-
ries. As amended, section 162(m)(4)(F)
provides that remuneration shall not fail
to be applicable employee remuneration
merely because it is includible in the in-
come of, or paid to, a person other than
the covered employee, including after the
death of the covered employee.

## D. Grandfather Rule

Section 13601(e) of the Act generally
provides that the amendments made to
section 162(m) shall apply to taxable
years beginning after December 31, 2017.
However, section 13601(e) of the Act fur-
ther provides that the amendments to sec-
tion 162(m) shall not apply to remunera-
tion which is provided pursuant to a
written binding contract which was in ef-
fect on November 2, 2017, and which was
not modified in any material respect on or
after such date. The text of section
13601(e) of the Act is almost identical
to the text of pre-amendment section
162(m)(4)(D), which provides a grandfa-
ther rule addressing the initial addition of

section 162(m) to the Code and grandfa-
thers remuneration payable under a writ-
ten binding contract which was in effect
on February 17, 1993, and which was not
modified thereafter in any material respect
before such remuneration was paid. Sec-
tion 1.162-27(h) of the Income Tax Reg-
ulations (Regulations) provides guidance
under pre-amendment section 162(m)
(4)(D) on the definitions of "written bind-
ing contract" and "material modification"
for purposes of applying that original
grandfather provision.

# III. GUIDANCE

## A. Application of Amended Definition of Covered Employee

Section 162(m)(3)(A)7 provides that
the term "covered employee" includes any
employee who is the PEO or PFO of the
publicly held corporation at any time dur-
ing the taxable year, or was an individual
acting in such a capacity.

Section 162(m)(3)(B) provides that a
"covered employee" also includes any
employee whose total compensation for
the taxable year is required to be reported
to shareholders under the Securities Ex-
change Act of 1934 by reason of such
employee being among the three highest
compensated officers for the taxable year
(other than the PEO or PFO, or an indi-
vidual acting in such capacity). Stakehold-
ers have asked whether an employee must
have served as an executive officer at the
end of the taxable year to be a covered
employee under section 162(m)(3)(B).
The statutory provisions do not impose an
end-of-year requirement, and nothing in
the legislative history indicates that Con-
gress intended such a requirement to ap-
ply. Accordingly, the Treasury Depart-
ment and the IRS have determined that
there is no end-of-year requirement under
section 162(m)(3)(B).

Some commenters have asserted that
an end-of-year requirement should apply
under section 162(m)(3)(B) because the
Securities and Exchange Commission

(SEC) rules relating to executive compen-
sation disclosure under the Securities Ex-
change Act of 1934 require disclosure of
the compensation of the registrant's three
most highly compensated executive offi-
cers other than the PEO and the PFO who
were serving as executive officers at the
end of the last completed fiscal year. See
Item 402 of Regulation S-K, 17 CFR
§ 229.402(a)(3)(iii).8 The SEC rules, how-
ever, do not limit the disclosure of com-
pensation by reason of an executive offi-
cer being among the highest compensated
executive officers solely to executive of-
ficers who serve at the end of the last
completed fiscal year. For example, in ad-
dition to requiring the disclosure of the
three most highly compensated executive
officers (other than the PEO and PFO)
who were serving as executive officers at
the end of the last completed fiscal year,
the SEC rules also require disclosure
of the compensation of up to two addi-
tional individuals for whom disclosure
would have been required pursuant to 17
CFR § 229.402(a)(3)(iii) but for the fact
that the individual was not serving as an
executive officer of the registrant at the
end of the last completed fiscal year. See
Item 402 of Regulation S-K, 17 CFR
§ 229.402(a)(3)(iv). 9 Moreover, as previ-
ously noted, the section 162(m)(3)(B)
statutory language and legislative history
do not impose an end-of-year require-
ment. While certain aspects of section
162(m) are interpreted consistent with the
SEC rules, the SEC rules do not serve as
the sole basis for interpreting section
162(m).

Stakeholders have also questioned
whether an employee whose compensa-
tion is not required to be disclosed under
the SEC rules could nevertheless be a
covered employee under section 162(m)
(3)(B). The flush language at the end of
section 162(m)(3) provides that the term
"covered employee" includes any em-
ployee who would be described in section
162(m)(3)(B) if the reporting described
there were required. Although this flush

7References to section 162(m) in sections III, IV and V of this notice refer to section 162(m) as amended by section 13601 of the Act, except as otherwise explicitly provided herein.
8References to Item 402 in this Notice refer to Item 402 of Regulation S-K, 17 CFR § 229.402, which contains the SEC rules regarding the executive compensation disclosure requirements.

9 See also Item 402(m)(2) of Regulation S-K, 17 CFR § 229.402(m)(2) (SEC rules for executive compensation disclosure requirements for smaller reporting companies and emerging growth
companies). These rules require disclosure of compensation with respect to (i) all individuals serving as the PEO or acting in a similar capacity during the last completed fiscal year, regardless
of compensation level; (ii) the two most highly compensated executive officers other than the PEO who were serving as executive officers at the end of the last completed fiscal year; and
(iii) up to two additional individuals for whom disclosure would have been provided based on compensation level but for the fact that the individual was not serving as an executive officer
at the end of the last completed fiscal year.

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language was added by a conforming
amendment under section 13601(c) of the
Act, which expanded the definition of
publicly held corporation to include issu-
ers required to file reports under section
15(d) of the Securities Exchange Act of
1934, the legislative history clarifies that
the flush language was intended to apply
more broadly, explaining that this lan-
guage applies, for example, to a corpora-
tion that does not file a proxy statement
for the year because it delists its securities.
See House Conf. Rpt. 115-466, 489.
Thus, executive officers of publicly held
corporations can be covered employees
under section 162(m)(3)(B) even when
disclosure of their compensation is not
required under the SEC rules.

Accordingly, the term "covered em-
ployee" for any taxable year means any
employee who is among the three highest
compensated executive officers for the
taxable year (other than the PEO or PFO,
or an individual acting in such capacity),
regardless of whether the executive officer
is serving at the end of the publicly held
corporation's taxable year, and regardless
of whether the executive officer's com-
pensation is subject to disclosure for the
last completed fiscal year under the appli-
cable SEC rules. The determination of the
amount of compensation used to identify
the three most highly compensated exec-
utive officers for purposes of section
162(m)(3)(B) is made consistent with the
Instructions to Item 402(a)(3) and the In-
structions to Item 402(m)(2), 17 CFR
§ 229.402(a)(3), § 229.402(m)(2). In
cases in which a publicly held corpora-
tion's last completed fiscal year and the
taxable year do not end on the same date
(for example, due to a short taxable year
as a result of a corporate transaction), the
publicly held corporation will have three
most highly compensated executive offi-
cers under section 162(m)(3)(B) for the
taxable year. The Treasury Department
and IRS request comments on the appli-
cation of the SEC executive compensation
disclosure rules to determine the three
most highly compensated executive offi-
cers for a taxable year that does not end on
the same date as the last completed fiscal
year. Until additional guidance is issued,
to determine the three most highly com-
pensated employees for purposes of sec-
tion 162(m)(3)(B), taxpayers should base

their determination upon a reasonable
good faith interpretation of the statute,
taking into account the guidance provided
under this notice.

Pursuant to section 162(m)(3)(C), the
term "covered employee" also includes
any individual who was a covered em-
ployee of the publicly held corporation (or
any predecessor) for any taxable year be-
ginning after December 31, 2016. For tax-
able years beginning prior to January 1,
2018, "covered employees" are identified
pursuant to section 162(m)(3) as in effect
before the amendments made by section
13601(b) of the Act. Accordingly, cov-
ered employees identified for the taxable
year beginning during 2017 (in accor-
dance with the pre-amendment rules for
identifying covered employees) will con-
tinue to be covered employees for taxable
years beginning in 2018 and beyond.

The following examples illustrate how
these rules apply under certain circum-
stances, including how their application
may differ from the application of the
SEC's executive compensation disclosure
requirements. For each example, assume
that none of the employees were covered
employees for the 2017 taxable year
(since being a covered employee for the
2017 taxable year would provide a sepa-
rate and independent basis for classifying
that employee as a covered employee for
the 2018 taxable year). For each example,
assume that the corporation has a fiscal
year ending December 31 for SEC report-
ing purposes.

Example 1. (i) Facts. Corporation Z is a calendar
year taxpayer and a publicly held corporation within
the meaning of section 162(m)(2). Corporation Z is
not a smaller reporting company or emerging growth
company under the SEC rules. For 2018, Employee
A served as the sole PEO of Corporation Z and
Employees B and C both served as the PFO of
Corporation Z at different times during the year.
Employees D, E, and F were, respectively, the first,
second, and third most highly compensated execu-
tive officers of Corporation Z for 2018 other than the
PEO and PFO, and all three retired before the end of
2018. Employees G, H, and I were, respectively,
Corporation Z's fourth, fifth, and sixth highest com-
pensated executive officers other than the PEO and
PFO for 2018, and all three were serving at the end
of 2018. On March 1, 2019, Corporation Z filed its
Form 10-K, Annual Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934 with
the SEC. With respect to Item 11, Executive Compen-
sation (as required by Part III of Form 10-K), Corpo-
ration Z disclosed the compensation of Employee A for
serving as the PEO, Employees B and C for serving as
the PFO, and Employees G, H, and I pursuant to Item

402 of Regulation S-K, 17 CFR § 229.402(a)(3)(iii).
Corporation Z also disclosed the compensation of Em-
ployees D and E pursuant to Item 402 of Regulation
S-K, 17 CFR § 229.402(a)(3)(iv).

(ii) Conclusion: PEO. Because Employee A
served as the PEO during 2018, Employee A is a
covered employee under section 162(m)(3)(A) for
2018.

(iii) Conclusion: PFO. Because Employees B
and C served as the PFO during 2018, Employees B
and C are covered employees under section
162(m)(3)(A) for 2018.

(iv) Conclusion: Three Highest Compensated
Executive Officers. Even though the SEC rules re-
quire Corporation Z to disclose the compensation of
Employees D, E, G, H, and I for 2018, Corporation
Z's covered employees for 2018 under section
162(m)(3)(B) are Employees D, E, and F, because
these are the three highest compensated executive
officers other than the PEO and PFO for 2018.

Example 2. (i) Facts. Assume the same facts as
in Example 1, except that Corporation Z is a smaller
reporting company or emerging growth company
under the SEC rules. Accordingly, with respect to
Item 11, Executive Compensation (as required by
Part III of Form 10-K), Corporation Z disclosed the
compensation of Employee A for serving as the
PEO, Employees G and H pursuant to Item 402(m)
of Regulation S-K, 17 CFR § 229.402(m)(2)(ii), and
Employees D and E pursuant to Item 402(m) of
Regulation S-K, 17 CFR § 229.402(m)(2)(iii).

(ii) Conclusion. The results are the same as in
Example 1. For purposes of identifying a corpora-
tion's covered employees under section 162(m)(3), it
is not relevant whether the SEC rules for smaller
reporting companies and emerging growth compa-
nies apply to the corporation, nor is it relevant
whether the specific executive officers' compensa-
tion must be disclosed under the SEC rules applica-
ble to the corporation.

Example 3. (i) Facts. Corporation Y is a domes-
tic publicly held corporation within the meaning of
section 162(m)(2) for its 2018 taxable year and a
calendar year taxpayer. Corporation X is a domestic
corporation and a calendar year taxpayer; however,
Corporation X is not a publicly held corporation
within the meaning of section 162(m)(2) for its 2018
and 2019 taxable years. On July 31, 2019, Corpora-
tion X acquires for cash 80% of the only class of
outstanding stock of Corporation Y. The group
(comprised of Corporations X and Y) elects to file a
consolidated income tax return. As a result of this
election, Corporation Y has a short taxable year
ending on July 31, 2019. Corporation Y does not
change its fiscal year for SEC reporting purposes to
correspond to the short taxable year. Corporation Y
remains a domestic publicly held corporation within
the meaning of section 162(m)(2) for its short tax-
able year ending on July 31, 2019 and its subsequent
taxable year ending on December 31, 2019, for
which it files a consolidated income tax return with
Corporation X.

For Corporation Y's taxable year ending July 31,
2019, Employee N serves as the only PEO, and
Employee O serves as the only PFO. Employees J,
K, and L are the three most highly compensated
executive officers of Corporation Y for the taxable
year ending July 31, 2019, other than the PEO and

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PFO. As a result of the acquisition, effective July 31,
2019, Employee N ceases to serve as the PEO of
Corporation Y. Instead, Employee M begins serving
as the PEO of Corporation Y on August 1, 2019.
Employee N continues to provide services for Cor-
poration Y and never serves as PEO again (or as an
individual acting in such capacity). For Corporation
Y's taxable year ending December 31, 2019, Em-
ployee M serves as the only PEO, and Employee O
serves as the only PFO. Employees J, K, and L
continued to be the three most highly compensated
executive officers of Corporation Y, other than the
PEO and PFO, for the taxable year ending December
31, 2019.

(ii) Conclusion: Employee N. Because Employee
N served as the PEO during Corporation Y's taxable
year ending July 31, 2019, Employee N is a covered
employee for Corporation Y's taxable year ending
July 31, 2019. Furthermore, Employee N is a cov-
ered employee for Corporation Y's taxable year end-
ing July 31, 2019, even though Employee N's com-
pensation is required to be disclosed pursuant to the
SEC executive compensation disclosure rules only
for the fiscal year ending December 31, 2019. Be-
cause Employee N was a covered employee for
Corporation Y's taxable year ending July 31, 2019,
Employee N is also a covered employee for Corpo-
ration Y's taxable year ending December 31, 2019.

(iii) Conclusion: Employee O. Because Em-
ployee O served as the PFO during Corporation Y's
taxable years ending July 31, 2019, and December
31, 2019, Employee O is a covered employee for
these taxable years. Furthermore, Employee O is a
covered employee for Corporation Y's taxable year
ending July 31, 2019, even though Employee O's
compensation is required to be disclosed pursuant to
the SEC executive compensation disclosure rules
only for the fiscal year ending December 31, 2019.
Employee O would be a covered employee for Cor-
poration Y's taxable year ending December 31, 2019
even if Employee O did not serve as the PFO during
this taxable year because Employee O was a covered
employee for Corporation Y's taxable year ending
July 31, 2019.

(iv) Conclusion: Employees J, K, and L. Employ-
ees J, K, and L are covered employees for Corpora-
tion Y's taxable years ending July 31, 2019, and
December 31, 2019, because these employees are the
three highest compensated executive officers for
these taxable years. Employees J, K, and L would be
covered employees for Corporation Y's taxable year
ending December 31, 2019, even if Employees J, K,
and L were not the three highest compensated exec-
utive officers during this taxable year because Em-
ployees J, K, and L were covered employees for
Corporation Y's taxable year ending July 31, 2019.
Accordingly, Employees J, K, and L would be cov-
ered employees for Corporation Y's taxable years
ending July 31, 2019 and December 31, 2019, even
if their compensation would not be required to be
disclosed pursuant to the SEC executive compensa-
tion disclosure rules.

(v) Conclusion: Employee M. Because Employee
M served as the PEO during Corporation Y's taxable
year ending December 31, 2019, Employee M is a
covered employee for Corporation Y's taxable year
ending December 31, 2019.

## B. Remuneration Provided pursuant to a Written Binding Contract

### 1. Written Binding Contract

The amendments to section 162(m)
made by the Act do not apply to remuner-
ation payable under a written binding con-
tract which was in effect on November 2,
2017, and which is not modified in any
material respect on or after such date.
Remuneration is payable under a written
binding contract that was in effect on No-
vember 2, 2017, only to the extent that the
corporation is obligated under applicable
law (for example, state contract law) to
pay the remuneration under such contract
if the employee performs services or sat-
isfies the applicable vesting conditions.
Accordingly, the amendments to section
162(m) made by the Act apply to any
amount of remuneration that exceeds the
amount of remuneration that applicable
law obligates the corporation to pay under
a written binding contract that was in ef-
fect on November 2, 2017, if the em-
ployee performs services or satisfies the
applicable vesting conditions.

The Act's amendments to section
162(m) also apply to a written binding
contract that is renewed after November 2,
2017. A written binding contract that is
terminable or cancelable by the corpora-
tion without the employee's consent after
November 2, 2017, is treated as renewed
as of the date that any such termination or
cancellation, if made, would be effective.
Thus, for example, if the terms of a con-
tract provide that it will be automatically
renewed or extended as of a certain date
unless either the corporation or the em-
ployee provides notice of termination of
the contract at least 30 days before that
date, the contract is treated as renewed as
of the date that termination would be ef-
fective if that notice were given. Simi-
larly, for example, if the terms of a con-
tract provide that the contract will be
terminated or canceled as of a certain date
unless either the corporation or the em-
ployee elects to renew within 30 days of
that date, the contract is treated as re-
newed by the corporation as of that date
(unless the contract is renewed before that
date, in which case, it is treated as re-
newed on that earlier date). Alternatively,
if the corporation will remain legally ob-

ligated by the terms of a contract beyond
a certain date at the sole discretion of the
employee, the contract will not be treated
as renewed as of that date if the employee
exercises the discretion to keep the corpo-
ration bound to the contract. A contract is
not treated as terminable or cancelable if it
can be terminated or canceled only by
terminating the employment relationship
of the employee. A contract is not treated
as renewed if upon termination or cancel-
ation of the contract the employment re-
lationship continues but would no longer
be covered by the contract. However, if
the employment continues after such ter-
mination or cancellation, payments with
respect to such employment are not made
pursuant to the contract (and, therefore,
are not grandfathered).

If a compensation plan or arrangement
is binding, the amount that is required to
be paid as of November 2, 2017, to an
employee pursuant to the plan or ar-
rangement will not be subject to the
Act's amendments to section 162(m)
even though the employee was not eli-
gible to participate in the plan or ar-
rangement as of November 2, 2017.
However, the Act's amendments to sec-
tion 162(m) will apply to such compen-
sation plan or arrangement unless the
employee was employed on November
2, 2017, by the corporation that main-
tained the plan or arrangement, or the
employee had the right to participate in
the plan or arrangement under a written
binding contract as of that date.

### 2. Material Modification

The Act's amendments to section
162(m) will apply to any written binding
contract that is materially modified after
November 2, 2017. A material modifica-
tion occurs when the contract is amended
to increase the amount of compensation
payable to the employee. If a written bind-
ing contract is materially modified, it is
treated as a new contract entered into as of
the date of the material modification.
Thus, amounts received by an employee
under the contract before a material mod-
ification are not affected, but amounts re-
ceived subsequent to the material modifi-
cation are treated as paid pursuant to a
new contract, rather than as paid pursuant
to a written binding contract in effect on

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November 2, 2017. A modification of the
contract that accelerates the payment of
compensation is a material modification
unless the amount of compensation paid is
discounted to reasonably reflect the time
value of money. If the contract is modified
to defer the payment of compensation, any
compensation paid or to be paid that is in
excess of the amount that was originally
payable to the employee under the con-
tract will not be treated as resulting in a
material modification if the additional
amount is based on either a reasonable
rate of interest or a predetermined actual
investment (whether or not assets associ-
ated with the amount originally owed
are actually invested therein) such that
the amount payable by the employer at the
later date will be based on the actual rate
of return on the predetermined actual in-
vestment (including any decrease, as well
as any increase, in the value of the invest-
ment).

The adoption of a supplemental con-
tract or agreement that provides for in-
creased compensation, or the payment of
additional compensation, is a material
modification of a written binding contract
if the facts and circumstances demonstrate
that the additional compensation is paid
on the basis of substantially the same el-
ements or conditions as the compensation
that is otherwise paid pursuant to the writ-
ten binding contract. However, a material
modification of a written binding contract
does not include a supplemental payment
that is equal to or less than a reasonable
cost-of-living increase over the payment
made in the preceding year under that
written binding contract. In addition, the
failure, in whole or in part, to exercise
negative discretion under a contract does
not result in the material modification of
that contract.

The following examples illustrate the
rules in this section III.B of this notice.
For each example, assume for all relevant
years that the corporation is a publicly
held corporation within the meaning of
section 162(m)(2) and is a calendar year
taxpayer.

Example 1. (i) Facts. On October 2, 2017, Cor-
poration W executed a 3-year employment agree-
ment with Employee V for an annual salary of
$2,000,000 beginning on January 1, 2018. Employee
V serves as the PFO of Corporation W for the 2017,
2018, 2019, and 2020 taxable years. The terms of the
agreement provide for automatic extensions after the

3-year term for additional 1-year periods, unless the
corporation exercises its option to terminate the
agreement within 30 days before the end of
the 3-year term or, thereafter, within 30 days before
each anniversary date. Termination of the employ-
ment agreement does not require the termination of
Employee V's employment relationship with Corpo-
ration W. Under applicable law, the agreement con-
stitutes a written binding contract in effect on No-
vember 2, 2017, to pay $2,000,000 of annual salary
to Employee V for three years through December 31,
2020.

(ii) Conclusion. Employee V is a covered em-
ployee for Corporation W's 2018, 2019, and 2020
taxable years. Before the Act's amendments to sec-
tion 162(m)(3), an individual serving as a PFO was
not considered a covered employee. Thus, Employee
V is a covered employee solely as a result of the
Act's amendment to section 162(m)(3). Because the
employment agreement executed on October 2,
2017, is a written binding contract under applicable
law to pay Employee V an annual salary of
$2,000,000, the Act's amendments to section 162(m)
do not apply to Employee V's annual salary.
Accordingly, Employee V's annual salary of
$2,000,000 for the 2018, 2019, and 2020 taxable
years is not subject to the deduction limitation under
section 162(m). However, the employment agree-
ment is treated as renewed on January 1, 2021,
unless it is previously terminated, and the Act's
amendments to section 162(m) apply to any pay-
ments made under the employment agreement on or
after that date.

Example 2. (i) Facts. On December 31, 2015,
Employee U, an employee of Corporation V, makes
an election to defer the entire amount that would
otherwise be paid to Employee U under Corporation
V's 2016 annual bonus plan. Pursuant to the deferral
election, the bonus, plus earnings based on a prede-
termined actual investment, is to be paid in a lump
sum at Employee U's separation from service. Em-
ployee U earns a $200,000 bonus for the 2016 tax-
able year. Under applicable law, the deferred com-
pensation agreement into which Corporation V and
Employee U entered on December 31, 2015 consti-
tutes a written binding contract. On January 1, 2018,
Employee U is promoted to serve as PEO of Corpo-
ration V. Prior to January 1, 2018, Employee U was
never a covered employee as defined in section
162(m)(3). On December 15, 2020, Employee U
separates from service and, on that date, Corporation
V pays $225,000 (the deferred $200,000 bonus plus
$25,000 in earnings) to Employee U.

(ii) Conclusion. Employee U is a covered em-
ployee for Corporation V's 2020 taxable year be-
cause Employee U served as the PEO of Corporation
V during the taxable year. Moreover, Employee U is
a covered employee for Corporation V's 2020 tax-
able because Employee U was a covered employee
of Corporation V for a prior taxable year beginning
after December 31, 2016. Before the Act's amend-
ment to section 162(m)(3), a PEO qualified as a
covered employee under section 162(m)(3)(A) only
if that employee served as the PEO as of the close of
the taxable year, and the rule in section 162(m)(3)(C)
did not apply. Thus, Employee U is a covered em-
ployee for the 2020 taxable year solely as a result of
the Act's amendment to section 162(m)(3). Because,

under applicable law, the deferred compensation
agreement into which Corporation V and Employee
U entered on December 31, 2015, constitutes a writ-
ten binding contract to pay the bonus plus earnings
based on a predetermined actual investment, the
Act's amendments to section 162(m) do not apply to
the $225,000 payment Corporation V is obligated to
pay Employee U at Employee U's separation from
service. Accordingly, the $225,000 payment is not
subject to the deduction limitation under section
162(m).

Example 3. (i) Facts. Employee P serves as the
PEO of Corporation U for the 2017 and 2018 taxable
years. On February 1, 2017, Corporation U estab-
lishes a bonus plan, under which Employee P will
receive a cash bonus of $1,500,000 if a specified
performance goal is satisfied; the outcome of the
performance goal is uncertain on February 1, 2017.
The compensation committee retains the right, if the
performance goal is met, to reduce the bonus pay-
ment to no less than $400,000 if, in its judgment,
other subjective factors warrant a reduction. On No-
vember 2, 2017, under applicable law, which takes
into account the employer's ability to exercise neg-
ative discretion, the bonus plan established on Feb-
ruary 1, 2017 constitutes a written binding contract
to pay $400,000. On March 1, 2018, the compensa-
tion committee certifies that the performance goal
was satisfied. However, the compensation committee
reduces the award to $500,000 due to the sale of
certain corporate assets that resulted in the lowering
of the fair market value of Corporation U's goodwill.
On April 1, 2018, Corporation U pays $500,000 to
Employee P. The payment satisfies the requirements
of § 1.162-27(e) as qualified performance-based
compensation.

(ii) Conclusion. Employee P is a covered em-
ployee for Corporation U's 2018 taxable year. Prior
to the Act's amendment to section 162(m)(4), sec-
tion 162(m) did not apply to qualified performance-
based compensation because such compensation was
excluded from the definition of applicable employee
remuneration. Thus, the $500,000 payment consti-
tutes applicable employee remuneration solely as a
result of the amendment to section 162(m)(4). Be-
cause, under applicable law, as of November 2,
2017, the bonus plan established on February 1,
2017, constitutes a written binding contract to pay
$400,000, the Act's amendments to section 162(m)
do not apply to $400,000 of the $500,000 payment to
Employee P. Furthermore, the failure of the compen-
sation committee to exercise negative discretion to
reduce the award to $400,000, instead of $500,000,
does not result in a material modification of the
contract. Accordingly, the $400,000 is not subject to
the deduction limitation under section 162(m). The
remaining $100,000 of the $500,000 payment is
subject to the deduction limitation under section
162(m) regardless of whether the payment satisfies
the requirements of § 1.162-27(e) as qualified
performance-based compensation.

Example 4. (i) Facts. Employee Q serves as the
PFO of Corporation T for the 2016, 2017, and 2018
taxable years. On January 4, 2016, Corporation T
and Employee Q enter into a nonqualified deferred
compensation arrangement that is an account bal-
ance plan. Under the terms of the plan, Corporation
T will pay Employee Q's account balance on April 1,

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2019, but only if Employee Q continues to serve as
the PFO through December 31, 2018. Pursuant to the
terms of the plan, Corporation T credits $100,000 to
Employee Q's account annually for three years on
December 31 of each year beginning on December
31, 2016, and credits earnings on each principal
amount on each subsequent December 31. The plan
also provides that Corporation T may, at any time,
amend the plan to either stop or reduce the amount of
future credits to the account balance in its discretion;
however, Corporation T may not deprive Employee
Q of any benefit accrued before the date of any such
amendment. Under applicable law, the plan consti-
tutes a written binding contract in effect on Novem-
ber 2, 2017, to pay $100,000 of remuneration that
Corporation T credited to the account balance on
December 31, 2016. On April 1, 2019, Corporation
T pays Employee Q $350,000 (including earnings).

(ii) Conclusion. Employee Q is a covered em-
ployee for Corporation T's 2019 taxable year. Prior
to the Act's amendment to section 162(m)(3), an
individual serving as a PFO was not considered a
covered employee. Thus, Employee Q is a covered
employee solely as a result of the amendment to
section 162(m)(3). Because, as of November 2,
2017, the nonqualified deferred compensation ar-
rangement between Corporation T and Employee Q
is a written binding contract under applicable law
only with respect to the $100,000 credited as of that
date, the Act's amendments to section 162(m) do not
apply to $100,000 of the payment. Accordingly,
$250,000 of the $350,000 payment (the difference
between the $350,000 payment on April 1, 2019 and
the $100,000 credited to the account balance on
December 31, 2016) is subject to the deduction lim-
itation under section 162(m).

Example 5. (i) Facts. Assume the same facts as
in Example 4, except that under the plan earnings are
credited quarterly; thus, under applicable law, the
plan constitutes a written binding contract in effect
on November 2, 2017, to pay the account balance as
of November 2, 2017, to Employee Q on April 1,
2019. On November 2, 2017, the account balance
under the plan is $110,000 (the $100,000 credited on
December 31, 2016, plus earnings).

(ii) Conclusion. Employee Q is a covered em-
ployee for Corporation T's 2019 taxable year. Prior
to the Act's amendment to section 162(m)(3), an
individual serving as a PFO was not considered a
covered employee. Thus, Employee Q is a covered
employee solely as a result of the Act's amendment
to section 162(m)(3). Because the nonqualified de-
ferred compensation arrangement between Corpora-
tion T and Employee Q is a written binding contract
under applicable law to pay only the $110,000 ac-
count balance as of November 2, 2017, to Employee
Q on April 1, 2019, the Act's amendments to section
162(m) do not apply to $110,000 of the $350,000
payment. Accordingly, $240,000 of the $350,000
payment (the difference between the $350,000 pay-
ment on April 1, 2019 and the $110,000 account
balance on November 2, 2017) is subject to the
deduction limitation under section 162(m).

Example 6. (i) Facts. Assume the same facts as
in Example 4, except that, Employee Q serves as
PEO (rather than PFO) of Corporation T for the
2016, 2017, and 2018 taxable years, and continues to
serve as the PEO through December 31, 2019.

(ii) Conclusion. Employee Q is a covered em-
ployee for Corporation T's 2019 taxable year be-
cause Employee Q served as the PEO of Corporation
T during the taxable year. Moreover, Employee Q is
a covered employee for Corporation T's 2019 tax-
able year because Employee Q was a covered em-
ployee of Corporation T for a prior taxable year
beginning after December 31, 2016. Prior to the
Act's amendments to section 162(m)(3)(A), a PEO
was a covered employee if such employee served as
the PEO as of the close of the taxable year. Because
Employee Q continues to serve as the PEO through
December 31, 2019, Employee Q is a covered em-
ployee not solely as a result of the amendments to
section 162(m)(3). Accordingly, the entire $350,000
payment is subject to the deduction limitation under
section 162(m).

Example 7. (i) Facts. On January 2, 2017, Cor-
poration S executed a 4-year employment agreement
with Employee R to serve as its PEO. Employee R
serves as the PEO of Corporation S for four years
and receives an annual salary of $1,000,000. Pursu-
ant to the employment agreement, on January 2,
2017, Corporation S granted to Employee R nonstat-
utory stock options to purchase 1,000 shares of Cor-
poration S stock, stock appreciation rights (SARs) on
1,000 shares, and 1,000 shares of Corporation S
restricted stock. On the date of grant, the stock
options had no readily ascertainable fair market
value as defined in § 1.83-7(b) and neither the stock
options nor the SARs provided for a deferral of
compensation under section 409A and § 1.409A-
1(b)(5)(i)(A). The stock options and SARs vest and
become exercisable on January 2, 2019. Employee R
can exercise the stock options and the SARs at any
time from January 2, 2019, through January 2, 2022.
On January 2, 2019, Employee R exercises the stock
options and the SARs, and the 1,000 shares of re-
stricted stock become substantially vested (as de-
fined in § 1.83-3(b)). The grants of the stock options,
SARs, and shares of restricted stock constitute a
written binding contract under applicable law. The
compensation attributable to the stock options and
the SARs satisfy the requirements of § 1.162-27(e)
as qualified performance-based compensation.

(ii) Conclusion. Employee R is a covered em-
ployee for Corporation S's 2019 taxable year. Be-
cause the January 2, 2017, grants of the stock op-
tions, SARs, and shares of restricted stock constitute
a written binding contract in effect on November 2,
2017, under applicable law, the Act's amendments to
section 162(m) do not apply to compensation re-
ceived pursuant to the exercise of the stock options
and the SARs, or the restricted stock becoming sub-
stantially vested (as defined in § 1.83-3(b)). Section
162(m) does not disallow Corporation S's deduction
for compensation attributable to the stock options or
the SARs, because the compensation satisfies the re-
quirements of § 1.162-27(e) as qualified performance-
based compensation, and the Act's elimination of the
exception for qualified performance-based compensa-
tion does not apply. However, Corporation S's deduc-
tion for the compensation attributable to the restricted
stock is disallowed by section 162(m) even though the
Act's amendments do not apply to this compensation.

Example 8. (i) Facts. Assume the same facts as
in Example 7, except that the employment agreement
provides that the stock options, SARs, and restricted

stock will be granted on January 2, 2018, subject to
the approval of the board of directors of Corporation
S. As of November 2, 2017, under applicable law,
the potential grants of stock options, SARs, and
restricted stock do not constitute a written binding
contract.

(ii) Conclusion. Because, under applicable law,
as of November 2, 2017, the potential grants of the
stock options, SARs, and shares of restricted stock
do not constitute a written binding contract, the Act's
amendments to section 162(m) apply to compensa-
tion paid pursuant to the exercise of the stock options
and SARs, and the restricted stock becoming sub-
stantially vested (as defined in § 1.83-3(b)). Accord-
ingly, section 162(m) disallows Corporation S's de-
duction with respect to compensation attributable to
the stock options, SARs, and restricted stock.

Example 9. (i) Facts. On January 2, 2015, Cor-
poration R executes a deferred compensation agree-
ment with Employee T providing for a payment of
$3,000,000 if Employee T continues to provide ser-
vices through December 31, 2017. On October 2,
2017, Employee T terminates employment with Cor-
poration R, executes an employment agreement with
Corporation Q to serve as its PFO, and commences
employment with Corporation Q. The employment
agreement, which is a written binding contract under
applicable law, provides that, on April 1, 2018, Em-
ployee T will participate in the nonqualified deferred
compensation plan available to all executive officers
of Corporation Q and that Employee T's benefit
accrued on that date will be $3,000,000. On April
1, 2021, Employee T receives a payment of
$4,500,000, which is the entire benefit accrued
under the plan.

(ii) Conclusion. Employee T is a covered em-
ployee for Corporation Q's 2021 taxable year. Be-
fore the Act's amendment to section 162(m)(3), an
individual serving as a PFO was not considered a
covered employee. Thus, Employee T is a covered
employee solely as a result of the Act's amendment
to section 162(m)(3). Even though Employee T was
not eligible to participate in the nonqualified de-
ferred compensation plan on November 2, 2017,
Employee T was employed on November 2, 2017
and had the right to participate in the plan under a
written binding contract as of that date. Because, as
of November 2, 2017, the amount that is required to
be paid pursuant to the written binding contract is
$3,000,000, the Act's amendments to section 162(m)
do not apply to $3,000,000 of the $4,500,000
payment made on April 1, 2021. Accordingly,
$1,500,000 of the $4,500,000 payment (the differ-
ence between the $4,500,000 payment and the
$3,000,000 grandfathered amount) is subject to the
deduction limitation under section 162(m).

Example 10. (i) Facts. Corporation P executed a
5-year employment agreement with Employee S on
January 1, 2017, providing for a salary of $1,800,000
per year to serve as Corporation P's PFO. The agree-
ment constitutes a written binding contract under
applicable law. In 2017 and 2018, Employee S re-
ceives the salary of $1,800,000 per year. In 2019,
Corporation P increases Employee S's compensation
with a supplemental payment of $40,000. On Janu-
ary 1, 2020, Corporation P increases Employee S's
salary to $2,400,000.

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(ii) Conclusion: $40,000 Payment in 2019. Em-
ployee S is a covered employee for Corporation P's
2018, 2019, and 2020 taxable years. Before the Act's
amendment to section 162(m)(3), an individual serv-
ing as a PFO was not considered a covered em-
ployee. Thus, Employee S is a covered employee
solely as a result of the Act's amendment to section
162(m)(3). Accordingly, the salary of $1,800,000
per year payable to Employee S under the employ-
ment agreement, which is a written binding contract
under applicable law, is grandfathered unless the
change in Employee S's compensation in either 2019
or 2020 is a material modification. The $40,000
supplemental payment does not constitute a material
modification of the written binding contract because
the $40,000 payment is less than or equal to a rea-
sonable cost-of-living increase from 2017. However,
the $40,000 supplemental payment is subject to the
Act's amendments to section 162(m). Therefore,
section 162(m) disallows Corporation P's deduction
for the $40,000 supplemental payment, but does not
disallow any portion of Corporation P's deduction
for the $1,800,000 salary.

(iii) Conclusion: Salary Increase to $2,400,000
in 2020. The $560,000 increase in salary in 2020 is
a material modification of the written binding con-
tract because the additional compensation is paid on
the basis of substantially the same elements or con-
ditions as the compensation that is otherwise paid
pursuant to the written binding contract and it is
greater than a reasonable, annual cost-of-living in-
crease. Because the written binding contract is ma-
terially modified as of January 1, 2020, all compen-
sation paid to Employee S in 2020 and thereafter is
subject to the Act's amendments to section 162(m).
Therefore, section 162(m) disallows Corporation P's
deduction for Employee S's compensation in excess
of $1,000,000.

Example 11. (i) Facts. Assume the same facts as
in Example 10, except that instead of an increase in
salary, Employee S receives a restricted stock grant
subject to Employee S's continued employment for
the balance of the contract.

(ii) Conclusion. The restricted stock grant is not
a material modification of the written binding con-
tract because any additional compensation paid to
Employee S under the grant is not paid on the basis
of substantially the same elements and conditions as
Employee S's salary because it is based both on the
stock price and Employee S's continued service.
However, compensation attributable to the restricted
stock grant is subject to the Act's amendments to
section 162(m). Therefore, section 162(m) disallows
Corporation P's deduction for the restricted stock,
but does not disallow any portion of Corporation P's
deduction for the $1,800,000 salary.

# IV. EFFECTIVE DATE

The Act's amendments to section
162(m) apply to taxable years beginning
on or after January 1, 2018. The Treasury
Department and the IRS anticipate that the
guidance in this notice will be incorpo-
rated in future regulations that, with re-
spect to the issues addressed in this notice,
will apply to any taxable year ending on

or after September 10, 2018. Any future
guidance, including regulations, address-
ing the issues covered by this notice in a
manner that would broaden the definition
of "covered employee" as described under
section III.A, or restrict the application of
the definition of "written binding con-
tract" as described in section III.B, will
apply prospectively only.

# V. REQUEST FOR COMMENTS

The Treasury Department and the IRS
anticipate issuing further guidance on
other aspects of section 162(m), including
the Act's amendments to section 162(m).
Accordingly, comments are requested on
additional issues under section 162(m)
that future guidance, including regula-
tions, should address. Specifically, com-
ments are requested on (1) the application
of the definition of "publicly held corpo-
ration" to foreign private issuers, includ-
ing the reference to issuers that are re-
quired to file reports under section 15(d)
of the Securities Exchange Act of 1934,
(2) the application of the definition of
"covered employee" to an employee who
was a covered employee of a predecessor
of the publicly held corporation, (3) the
application of section 162(m) to corpora-
tions immediately after they become pub-
licly held either through an initial public
offering or a similar business transaction,
and (4) the application of the SEC exec-
utive compensation disclosure rules for
determining the three most highly com-
pensated executive officers for a taxable
year that does not end on the same date as
the last completed fiscal year.

Written comments may be submitted
through November 9, 2018. Comments
should include a reference to Notice
2018-68. Send submissions to CC:PA:
LPD:PR (Notice 2018-68), Room 5203,
Internal Revenue Service, P.O. Box 7604,
Ben Franklin Station, Washington, DC
20044. Submissions may be hand deliv-
ered Monday through Friday between
the hours of 8 a.m. and 4 p.m. to CC:
PA:LPD:PR (Notice 2018-68), Couri-
er's Desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Wash-
ington, DC 20224, or sent electroni-
cally, via the following e-mail address:
Notice.comments@irscounsel.treas.gov.
Please include "Notice 2018-68" in the
subject line of any electronic communi-

cation. All material submitted will be
available for public inspection and
copying.

# VI. DRAFTING INFORMATION

The principal author of this notice is
Ilya Enkishev of the Associate Chief
Counsel (Tax Exempt and Government
Entities), although other Treasury and IRS
officials participated in its development.
For further information on the provisions
of this notice, contact Ilya Enkishev at
(202) 317-5600 (not a toll-free number).

## Rev. Proc. 2018-42

### SECTION 1. PURPOSE

This revenue procedure modifies Rev.
Proc. 2017-41, 2017-29 I.R.B. 92, to ex-
tend the deadline for submitting on-cycle
applications for opinion letters for pre-
approved defined contribution plans for
the third six-year remedial amendment cy-
cle to December 31, 2018. Under Rev.
Proc. 2017-41, this submission period is
scheduled to expire on October 1, 2018.

### SECTION 2. BACKGROUND

.01 Rev. Proc. 2016-37, 2016-29
I.R.B. 136, provides that every pre-
approved plan has a regular, six-year re-
medial amendment cycle. Under Rev.
Proc. 2016-37, the third six-year remedial
amendment cycle for pre-approved de-
fined contribution plans began on Febru-
ary 1, 2017, and ends on January 31,
2023. Rev. Proc. 2016-37 also provides
that the 12-month on-cycle submission
period for pre-approved defined contribu-
tion plans was scheduled to begin on Au-
gust 1, 2017, and end on July 31, 2018.

.02 Rev. Proc. 2017-41 modified the
pre-approved letter program by combin-
ing the master & prototype and volume
submitter programs into a new Opinion
Letter program. Under this program, pro-
viders of pre-approved plans may apply
for new opinion letters once every six
years. Rev. Proc. 2017-41 sets forth the
procedures for obtaining opinion letters
for qualified pre-approved plans submit-
ted with respect to the third (and subse-
quent) six-year remedial amendment
cycles. Rev. Proc. 2017-41 modified the
on-cycle submission period for pre-

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approved defined contribution plan pro-
viders to submit applications for opinion
letters for the third six-year remedial
amendment cycle to begin on October 2,
2017, and end on October 1, 2018.

### SECTION 3. MODIFICATION OF REV. PROC. 2017-41

This revenue procedure extends the
October 1, 2018 submission deadline in
Rev. Proc. 2017-41 to December 31,
2018. Accordingly, sections 1.02, 3.10,
and 9.02 of Rev. Proc. 2017-41 are re-
vised to replace October 1, 2018, with
December 31, 2018.

### SECTION 4. EFFECT ON OTHER DOCUMENTS

Rev. Proc. 2017-41 is modified.

### SECTION 5. EFFECTIVE DATE

This revenue procedure is effective as
of August 15, 2018.

### SECTION 6. PAPERWORK REDUCTION ACT

The collection of information con-
tained in Rev. Proc. 2017-41 has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act (44
U.S.C. 3507) under control number 1545-
1674.

#### SECTION 7. DRAFTING INFORMATION

The principal author of this revenue
procedure is Kathleen Herrmann of the
Office of Associate Chief Counsel (Tax
Exempt and Government Entities). For
further information regarding this revenue
procedure or submissions under Rev.
Proc. 2017-41, contact Employee Plans at
(513) 975-6319 (not a toll-free number).

26 CFR 601.105: Examination of returns and claims
for refund, credit, or abatement; determination of
correct tax liability.

## Rev. Proc. 2018-43 SECTION 1. PURPOSE

This revenue procedure provides the
monthly national average premium for

qualified health plans that have a bronze
level of coverage and are offered
through Exchanges for taxpayers to use
in determining their maximum individ-
ual shared responsibility payment under
§ 5000A(c)(1)(B) of the Internal Reve-
nue Code and § 1.5000A-4 of the In-
come Tax Regulations.

# SECTION 2. BACKGROUND

.01 Section 5000A provides that if a
taxpayer, or an individual for whom the
taxpayer is liable, is without minimum
essential coverage for one or more months
in a taxable year, then the taxpayer is
liable for the individual shared responsi-
bility payment when filing his or her fed-
eral income tax return, unless an exemp-
tion applies. See § 5000A(a), (b)(1). In
general, under § 5000A a taxpayer is lia-
ble for any individual who is a dependent,
as defined in § 152, of the taxpayer. See
§§ 5000A(b)(3)(A) and 1.5000A-1(c).
Married individuals who file a joint return
for a taxable year are jointly liable for any
individual shared responsibility payment
for a month included in the taxable year.
See §§ 5000A(b)(3)(B) and 1.5000A-
1(c)(3).

.02 For each taxable year, the individ-
ual shared responsibility payment is the
lesser of (1) the sum of the monthly pen-
alty amounts, or (2) the sum of the
monthly national average bronze plan pre-
miums for the shared responsibility fam-
ily. See § 1.5000A-4(a). The monthly na-
tional average bronze plan premium
means, for a month for which a shared
responsibility payment is imposed, 1/12
of the annual national average premium
for qualified health plans that (1) have a
bronze level of coverage, (2) would pro-
vide coverage for the taxpayer's shared
responsibility family members, and (3) are
offered through Exchanges for plan years
beginning in a calendar year with or
within which the taxable year ends. See
§§ 5000A(c)(1)(B) and 1.5000A-4(c).
Shared responsibility family means, for a
month in a taxable year, all nonexempt
individuals for whom the taxpayer and the
taxpayer's spouse, if the taxpayer is mar-
ried and files a joint return with the
spouse, are liable for the shared responsi-
bility payment under § 5000A for that
taxable year. See § 1.5000A-1(d)(17).

.03 Revenue Procedure 2014-46,
2014-12 C.B. 367, describes the method-
ology used to determine the monthly na-
tional average bronze plan premium and
provides the premium amount for 2014.
Revenue Procedure 2015-15, 2015-5
I.R.B. 564, provides the premium amount
for 2015. Revenue Procedure 2016-43,
2016-36 I.R.B. 316, provides the pre-
mium amount for 2016. Revenue Proce-
dure 2017-48, 2017-36 I.R.B. 229, pro-
vides the premium amount for 2017.

# SECTION 3. MONTHLY NATIONAL AVERAGE BRONZE PLAN PREMIUM

.01 Monthly National Average Bronze
Plan Premium. For purposes of
§ 5000A(c)(1)(B) and § 1.5000A-4, the
monthly national average premium for
qualified health plans that have a bronze
level of coverage and are offered
through Exchanges is $283 per individ-
ual.

.02 Maximum Monthly National Aver-
age Bronze Plan Premium. For purposes
of § 5000A(c)(1)(B) and § 1.5000A-4,
the maximum monthly national average
premium for qualified health plans that
have a bronze level of coverage and are
offered through Exchanges is $1,415 for a
shared responsibility family with five or
more members.

# SECTION 4. EFFECTIVE DATE

This revenue procedure is effective for
taxable years ending after December 31,
2017.

# SECTION 5. EFFECT ON OTHER DOCUMENTS

Revenue Procedure 2017-48 is super-
seded.

# SECTION 6. DRAFTING INFORMATION

The principal author of this revenue
procedure is James Beatty of the Office of
Associate Chief Counsel (Income Tax and
Accounting). For further information re-
garding this revenue procedure, contact
Mr. Beatty at (202) 317-7006 (not a toll-
free number).

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# Definition of Terms

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

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

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

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

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

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

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

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

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

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

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

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

# Abbreviations

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

A-Individual.

Acq .- Acquiescence.

B-Individual.

BE-Beneficiary.

F.R .- Federal Register.

FUTA-Federal Unemployment Tax Act.

FX-Foreign corporation.

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

GE-Grantee.

GP-General Partner.

GR-Grantor.

COOP-Cooperative.

IC-Insurance Company.

Ct.D .- Court Decision.

I.R.B .- Internal Revenue Bulletin.

CY-County.

LE-Lessee.

D-Decedent.

LP-Limited Partner.

LR-Lessor.

M-Minor.

Nonacq .- Nonacquiescence.

O Organization.

P-Parent Corporation.

PHC-Personal Holding Company.

PO-Possession of the U.S.

PR-Partner.

PRS-Partnership.

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

REIT-Real Estate Investment Trust.

Rev. Proc .- Revenue Procedure.

Rev. Rul .- Revenue Ruling.

S-Subsidiary.

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

Stat .- Statutes at Large.

T-Target Corporation.

T.C .- Tax Court.

T.D .- Treasury Decision.

TFE-Transferee.

TFR-Transferor.

T.I.R .- Technical Information Release.

TP-Taxpayer.
TR-Trust.

TT-Trustee.

U.S.C .- United States Code.

DE-Donee.

Del. Order-Delegation Order.

DISC-Domestic International Sales Corporation.
DR-Donor.

E-Estate.

EE-Employee.

E.O .- Executive Order.

ER-Employer.

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

F-Fiduciary.

FC-Foreign Country.

FICA-Federal Insurance Contributions Act.

FISC-Foreign International Sales Company.

FPH-Foreign Personal Holding Company.

BK-Bank.

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

C-Individual.

C.B .- Cumulative Bulletin.

CFR-Code of Federal Regulations.

CI-City.

DC-Dummy Corporation.

X-Corporation.

Y-Corporation.

Z-Corporation.

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## Numerical Finding List1

Bulletin 2018-27 through 2018-36

### Announcements:

2018-09, 2018-28 I.R.B. 206
2018-12, 2018-30 I.R.B. 232

### Notices:

2018-48, 2018-28 I.R.B. 9
2018-56, 2018-27 I.R.B. 3
2018-58, 2018-33 I.R.B. 305
2018-59, 2018-28 I.R.B. 196
2018-60, 2018-31 I.R.B. 275
2018-61, 2018-31 I.R.B. 278
2018-62, 2018-34 I.R.B. 316
2018-63, 2018-34 I.R.B. 318
2018-64, 2018-35 I.R.B. 347
2018-65, 2018-35 I.R.B. 350
2018-67, 2018-36 I.R.B. 409
2018-68, 2018-36 I.R.B. 418

### Proposed Regulations:

REG-103474-18, 2018-32 I.R.B. 284
REG-106977-18, 2018-27 I.R.B. 6
REG-107892-18, 2018-35 I.R.B. 353

## Revenue Procedures:

2018-35, 2018-28 I.R.B. 204
2018-37, 2018-29 I.R.B. 210
2018-38, 2018-31 I.R.B. 280
2018-39, 2018-34 I.R.B. 319
2018-40, 2018-34 I.R.B. 320
2018-42, 2018-36 I.R.B. 424
2018-43, 2018-36 I.R.B. 425

## Revenue Rulings:

2018-19, 2018-27 I.R.B. 1
2018-20, 2018-28 I.R.B. 8

2018-21, 2018-32 I.R.B. 282
2018-22, 2018-34 I.R.B. 308

2018-23, 2018-36 I.R.B. 405
2018-24, 2018-36 I.R.B. 407

## Treasury Decisions:

9834, 2018-31 I.R.B. 233
9835, 2018-33 I.R.B. 288
9836, 2018-33 I.R.B. 291
9838, 2018-34 I.R.B. 309
9839, 2018-35 I.R.B. 325

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2018-01 through 2018-26 is in Internal Revenue Bulletin
2018-26, dated June 27, 2018.

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## Finding List of Current Actions on Previously Published Items1

Bulletin 2018-27 through 2018-36

### Revenue Procedures:

2015-27
Amplified by
Rev. Proc. 2018-39, 2018-34 I.R.B. 319

2017-24
Amplified by
Rev. Proc. 2018-39, 2018-34 I.R.B. 319

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2018-01 through 2018-26 is in Internal Revenue Bulletin
2018-26, dated June 27, 2018.

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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.