Internal Revenue Bulletin 2018-52 (PDF rendition): IRS Notices

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

# INTERNAL REVENUE BULLETIN

IRS

## 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.

## Administrative

### NOTICE 2018-96, page 1061.

Section 30D provides a credit of up to $7,500 for new qualified
plug-in electric drive motor vehicles sold after December 31,
2009. This notice announces the credit phase-out schedule for
new qualified plug-in electric drive motor vehicles sold by Tesla,
Inc. Section 30D of the Internal Revenue Code provides for a
credit determined under § 30D(b) for certain new qualified
plug-in electric drive motor vehicles. The new qualified plug-in
electric drive motor vehicle credit begins to phase out for a
manufacturer's qualified plug-in electric drive motor vehicles in
the second calendar quarter after the calendar quarter in which
at least 200,000 of the manufacturer's vehicles that qualify for
the credit have been sold for use or lease in the United States
(determined on a cumulative basis for sales after December
31, 2009). Tesla, Inc. has submitted quarterly reports that
indicate that its cumulative sales of qualified plug-in electric
drive motor vehicles reached the 200,000-vehicle limit during
the calendar quarter ending September 30, 2018. Accord-
ingly, the credit for all new qualified plug-in electric drive motor
vehicles sold by Tesla, Inc. will begin to phase out on January
1, 2019.

### NOTICE 2018-100, page 1074.

This notice provides certain tax-exempt organizations a waiver
of the addition to tax under section 6655 of the Internal
Revenue Code (Code) for underpayment of estimated income
tax payments required to be made on or before December 17,
2018, to the extent the underpayment of estimated income tax
results from the changes to the tax treatment of qualified
transportation fringes under sections 13304(c) and 13703 of
"An Act to provide for reconciliation pursuant to titles Il and V of
the concurrent resolution on the budget for fiscal year 2018"
(the Act). Pub. L. No. 115-97, 131 Stat. 2054.

Bulletin No. 2018-52
December 24, 2018

## Employee Plans

### NOTICE 2018-95, page 1058.

This notice provides transition relief from the "once-in-always-
in" (OIAI) exclusion condition for excluding part-time employees
under § 1.403(b)-5(b)(4)(iii)(B) of the Treasury Regulations.
Under the OIAI exclusion condition, for a § 403(b) plan that
excludes part-time employees from making elective deferrals,
once an employee is eligible to make elective deferrals, the
employee may not be excluded from making elective deferrals
in any later exclusion year on the basis that the employee is a
part-time employee. In addition, in applying the OIAI exclusion
condition for exclusion years after the transition relief ends,
this notice provides a fresh-start opportunity for plans.

## Employment Taxes

### NOTICE 2018-97, page 1062.

Section 83 generally provides for the federal tax treatment of
property transferred in connection with the performance of
services. Section 83(i) allows certain employees to elect to
defer income that would otherwise be included under § 83(a)
upon the exercise of a stock option or settlement of a stock-
settled restricted stock unit. Income subject to such an elec-
tion may be deferred for up to 5 years, subject to certain
limitations. The notice provides guidance to taxpayers on (1)
application of the requirement in § 83(i)(2)(C)(i)(II) that grants be
made to 80% of the employer's employees, (2) application of
income tax withholding to the deferred income related to qual-
ified stock, and (3) the manner in which an employer may opt
out of permitting employees to elect the deferred tax treatment
even if the requirements under § 83(i) are otherwise met.

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## Income Tax

### NOTICE 2018-97, page 1062.

Section 83 generally provides for the federal tax treatment of
property transferred in connection with the performance of
services. Section 83(i) allows certain employees to elect to
defer income that would otherwise be included under § 83(a)
upon the exercise of a stock option or settlement of a stock-
settled restricted stock unit. Income subject to such an elec-
tion may be deferred for up to 5 years, subject to certain
limitations. The notice provides guidance to taxpayers on (1)
application of the requirement in § 83(i)(2)(C)(i)(II) that grants be
made to 80% of the employer's employees, (2) application of
income tax withholding to the deferred income related to qual-
ified stock, and (3) the manner in which an employer may opt
out of permitting employees to elect the deferred tax treatment
even if the requirements under § 83(i) are otherwise met.

### NOTICE 2018-99, page 1067.

This notice provides interim guidance for taxpayers to deter-
mine the amount of parking expenses for qualified transporta-
tion fringes (QTFs) that is nondeductible under § 274(a)(4) of
the Internal Revenue Code (Code) and for tax-exempt organi-
zations to determine the corresponding increase in the amount
of unrelated business taxable income (UBTI) under § 512(a)(7)
attributable to the nondeductible parking expenses. Sections
274 and 512 were amended by the Tax Cuts and Jobs Act,
Pub. L. No. 115-97, §§ 13304 and 13703, 131 Stat. 2054,
2123, 2169 (2017) (the Act), effective for amounts paid or
incurred after December 31, 2017. As amended by the Act,
§ 274(a)(4) generally disallows a deduction for expenses with
respect to QTFs provided by taxpayers to their employees, and
§ 512(a)(7) generally provides that a tax-exempt organization's
UBTI is increased by the amount of the QTF expense that is
nondeductible under § 274. However, the Act does not ad-
dress how to determine the amount of the QTF expense that is
nondeductible or treated as an increase in UBTI.

### NOTICE 2018-100, page 1074.

This notice provides certain tax-exempt organizations a waiver
of the addition to tax under section 6655 of the Internal
Revenue Code (Code) for underpayment of estimated income
tax payments required to be made on or before December 17,
2018, to the extent the underpayment of estimated income tax
results from the changes to the tax treatment of qualified
transportation fringes under sections 13304(c) and 13703 of
"An Act to provide for reconciliation pursuant to titles Il and V of
the concurrent resolution on the budget for fiscal year 2018"
(the Act). Pub. L. No. 115-97, 131 Stat. 2054.

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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 III. Administrative, Procedural, and Miscellaneous

Relief from the Once-In-
Always-In Condition for
Excluding Part-Time
Employees from Making
Elective Deferrals under a
§ 403(b) Plan
Notice 2018-95

### SECTION 1. PURPOSE

This notice provides transition relief
from the "once-in-always-in" (OIAI) con-
dition for excluding part-time employees
under § 1.403(b)-5(b)(4)(iii)(B) of the
Treasury Regulations. Under the OIAI ex-
clusion condition, for a § 403(b) plan that
excludes part-time employees from making
elective deferrals, once an employee is eli-
gible to make elective deferrals, the em-
ployee may not be excluded from making
elective deferrals in any later exclusion year
(as defined in section 2.02(2) of this notice)
on the basis that the employee is a part-time
employee. In addition, in applying the OIAI
exclusion condition for exclusion years after
the transition relief ends, this notice pro-
vides a fresh-start opportunity for plans.

## SECTION 2. BACKGROUND

.01 Universal availability requirement
for elective deferrals

Section 403(b)(12)(A) of the Internal
Revenue Code ("Code") provides a "uni-
versal availability" nondiscrimination re-
quirement that must be satisfied by a
§ 403(b) plan that permits employees to
make elective deferrals. Under the univer-
sal availability requirement, all employees
of an employer maintaining a § 403(b)
plan generally must be permitted to make
elective deferrals if any employee of the
employer is permitted to make elective
deferrals. However, the flush language of
§ 403(b)(12)(A) provides that certain cat-
egories of employees may be excluded
from making elective deferrals despite the
universal availability requirement, includ-
ing part-time employees who normally
work less than 20 hours per week ("part-
time exclusion").

.02 Part-time exclusion

On July 23, 2007, the Department of
the Treasury (Treasury Department) and
the Internal Revenue Service (IRS) issued
final regulations under § 403(b) (T.D.
9340, 72 FR 41128) (the Ҥ 403(b) regu-
lations"), which provide rules regarding
the part-time exclusion. The § 403(b) reg-
ulations also provide, under § 1.403(b)-
3(b)(3)(i), that a § 403(b) plan must be a
written plan that satisfies the requirements
of the § 403(b) regulations in both form
and operation, and must include all the
material terms and conditions for eligibil-
ity. The § 403(b) regulations generally are
effective for taxable years beginning after
December 31, 2008.

(1) First-year, preceding-year, and OIAI
exclusion conditions. Section 1.403(b)-
5(b)(4)(iii)(B) provides the following rules
regarding the part-time exclusion:

[A]n employee normally works
fewer than 20 hours per week if and
only if-

(1) For the 12-month period beginning
on the date the employee's em-
ployment commenced, the em-
ployer reasonably expects the em-
ployee to work fewer than 1,000
hours of service (as defined in
section 410(a)(3)(C)) in such pe-
riod; and

(2) For each plan year ending after the
close of the 12-month period be-
ginning on the date the employee's
employment commenced (or, if the
plan so provides, each subsequent
12-month period), the employee
worked fewer than 1,000 hours of
service in the preceding 12-month
period. [Emphasis added.]

Thus, the provision imposes three sepa-
rate conditions for an employee to be ex-
cluded from making elective deferrals under
the part-time exclusion: (1) a "first-year"
exclusion condition, (2) a "preceding-year"
exclusion condition, and (3) the OIAI exclu-
sion condition. Under the first-year exclu-
sion condition, in order to exclude the em-
ployee from making elective deferrals, the
employer must reasonably expect the em-
ployee to work fewer than 1,000 hours dur-

ing the employee's first year of employ-
ment. Under the preceding-year exclusion
condition, in order to exclude the employee
from making elective deferrals in an exclu-
sion year ending after the first year of em-
ployment, the employee must have actually
worked fewer than 1,000 hours in the pre-
ceding 12-month period. Under the OIAI
exclusion condition, the employee may be
excluded under the part-time exclusion if
and only if, in the employee's first year of
employment, the employee meets the first-
year exclusion condition, and, in each ex-
clusion year ending after the first year of
employment, the employee has met the
preceding-year exclusion condition. The ef-
fect of the OIAI exclusion condition is that
once an employee does not meet the part-
time exclusion conditions, whether in the
initial year of employment or for any exclu-
sion year, the employee may no longer be
excluded from making elective deferrals un-
der the part-time exclusion.

(2) Definition of exclusion year. For
purposes of this notice, an exclusion year
is either (1) any plan year that ends after
an employee's first year of employment
(so that the exclusion year for each em-
ployee would be the plan year), or (2) if a
plan so provides, each subsequent 12-
month period ("employee anniversary
year") after an employee's first year of
employment (so that employees may have
different exclusion years depending on
their start dates).

(3) Consistency requirement. Section
1.403(b)-5(b)(4)(i) also imposes a "con-
sistency" requirement, under which the
part-time exclusion applies only if the
rules applicable under § 410(b)(4) of the
Code are satisfied. Under this consistency
requirement, if any employee who meets
the conditions of the part-time exclusion
may make elective deferrals, then no em-
ployee who meets those conditions may
be excluded under the part-time exclusion.

.03 Pre-approved plans

A § 403(b) plan may be either (1) a
§ 403(b) prototype plan or a § 403(b)
volume submitter plan that has been ap-
proved in form by the IRS (collectively, a
"§ 403(b) pre-approved plan")1, or (2) a

1See Rev. Proc. 2013-22, 2013-18 I.R.B. 985, as modified by Rev. Proc. 2014-28, 2014-16 I.R.B. 944, and clarified by Rev. Proc. 2015-22, 2015-11 I.R.B. 754, and Rev. Proc. 2017-18,
2017-5 I.R.B. 743.

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plan that is not a § 403(b) pre-approved
plan (an "individually designed plan").
Rev. Proc. 2013-22 establishes a program
for issuing opinion and advisory letters
approving the form of § 403(b) pre-
approved plans. Under section 9.02(1) of
Rev. Proc. 2013-22, an employer that
adopts a § 403(b) prototype plan may
amend the plan only under certain circum-
stances (including by adopting sample or
model amendments published by the
IRS), and any other amendments will
cause the employer's plan to be consid-
ered individually designed and to lose re-
liance on the opinion letter. Although a
§ 403(b) volume submitter plan may be
amended by an adopting employer, sec-
tion 15.01 of Rev. Proc. 2013-22 provides
that the employer will not be able to rely
on the advisory letter received for the
§ 403(b) volume submitter plan to the
extent that the employer modifies the
terms of the plan.

### .04 Remedial Amendment Period

Section 21.02 of Rev. Proc. 2013-22
provides for a remedial amendment period
during which an employer may retroac-
tively correct defects in the form of its
written § 403(b) plan either by timely
adopting a § 403(b) pre-approved plan or
by otherwise timely amending its written
§ 403(b) plan. Rev. Proc. 2017-18 sets
March 31, 2020, as the last day of this
remedial amendment period. Rev. Proc.
2017-18 also provides that the form of a
plan will be considered to have satisfied the
requirements of § 403(b) if, on or before
March 31, 2020, all provisions of the plan
that are necessary to satisfy § 403(b) have
been adopted and made effective in form
and operation from the beginning of the
remedial amendment period (which is, gen-
erally, the later of January 1, 2010, or the
effective date of the plan).

.05 Listing of Required Modifications
In 2013, the IRS released sample plan
provisions (also referred to as “listings of
required modifications" or "LRMs") in con-
nection with the § 403(b) pre-approved plan
program (the "2013 LRMs"). LRM 17 of
the 2013 LRMs provided sample adoption
agreement language for excluding an em-

ployee who normally works fewer than 20
hours per week, which tracked the language
of § 1.403(b)-5(b)(4)(iii)(B).

In 2015, in response to requests from
commenters to clarify certain provisions,
the IRS issued revised LRMs in connec-
tion with the § 403(b) pre-approved plan
program (the "2015 LRMs").2 Revised
LRM 17 of the 2015 LRMs included the
following additional sentence that specif-
ically highlights the OIAI exclusion con-
dition in the regulations:

Once an Employee becomes eligible
to have Elective Deferrals made on
his or her behalf under the Plan un-
der this [part-time exclusion] stan-
dard, the Employee cannot be ex-
cluded from eligibility to have
Elective Deferrals made on his or
her behalf in any later year under
this standard.

.06 Request for relief with respect to
the OIAI exclusion condition

Commenters have requested transition
relief with respect to the OIAI exclusion
condition, stating that many employers
were not aware that the part-time exclu-
sion included the OIAI exclusion condi-
tion. In particular, commenters noted that
the OIAI exclusion condition was not spe-
cifically highlighted in writing until the
2015 LRMs were issued, and that, even
then, the LRMs were directed at drafters of
pre-approved plans and not adopting em-
ployers or sponsors of individually designed
plans. As a result, commenters argued,
many employers applied the first-year ex-
clusion condition for an employee's first
year and applied the preceding-year exclu-
sion condition separately for each succeed-
ing exclusion year, but did not apply the
OIAI exclusion condition to prevent an em-
ployee who failed to meet either the first-
year exclusion condition or the preceding-
year exclusion condition from being
excluded in all subsequent exclusion years.

## SECTION 3. RELIEF FOR § 403(b) PLANS

In response to these comments, the
Treasury Department and the IRS are pro-
viding transition relief from the OIAI ex-

clusion condition, including relief regard-
ing plan operations for a transition period
referred to as the "Relief Period," relief
regarding plan language, and a fresh-start
opportunity after the Relief Period ends.
The Relief Period begins with taxable
years beginning after December 31, 2008
(the general effective date for the § 403(b)
regulations). For plans with exclusion
years based on plan years, the Relief Pe-
riod ends for all employees on the last day
of the last exclusion year that ends before
December 31, 2019. For plans with exclu-
sion years based on employee anniversary
years, the Relief Period ends, with respect
to any employee, on the last day of that
employee's last exclusion year that ends
before December 31, 2019. For example,
under this second type of plan design, if
Employee A began employment on April
1, 2015, and Employee B began employ-
ment on July 20, 2015, the Relief Period
for Employee A would end on March 31,
2019, while the Relief Period for Em-
ployee B would end on July 19, 2019.

.01 Relief regarding plan operations
for the Relief Period

(1) In general. During the Relief Pe-
riod3, a plan will not be treated as failing to
satisfy the conditions of the part-time exclu-
sion merely because the plan was not oper-
ated in compliance with the OIAI exclusion
condition. However, this notice does not
provide relief from the other conditions of
the part-time exclusion: (1) the first-year
exclusion condition (that is, for the first year
of employment, an employee may not be
excluded if the employee was expected to
work at least 1,000 hours in the first year),
and (2) the preceding-year exclusion condi-
tion (that is, for exclusion years ending after
the first year, an employee may not be ex-
cluded if the employee worked at least
1,000 hours in the preceding 12-month pe-
riod). It also does not provide relief from the
consistency requirement.

The following example illustrates the
relief provided by this section 3.01(1).

Facts. An employer establishes a § 403(b) plan on
January 1, 2009, with a calendar-year plan year. The
plan allows elective deferrals, provides for the part-
time exclusion, and uses plan years as exclusion years
for purposes of applying the preceding-year exclusion

2 See https://www.irs.gov/pub/irs-tege/403b_lrm0315_redlined.pdf for the 2015 LRMs. This redlined version of the 2015 LRMs highlights changes made to the 2013 LRMs.

3 A plan with exclusion years based on employee anniversary years that excludes two or more employees with different employee anniversary years (and, therefore, different exclusion years)
will have different Relief Periods applicable to these different employees. Nonetheless, for ease of reference, this notice refers to these multiple Relief Periods under such a plan as the Relief
Period.

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condition under the part-time exclusion. During the
period from plan establishment through 2018, the first-
year and preceding-year exclusion conditions were ap-
plied in operation. However, the OIAI exclusion con-
dition was not applied in operation.

An employee started work January 1, 2012, and
the employer reasonably expected the employee to
work only 500 hours in the employee's first 12
months of employment. The employee actually
worked the following hours for calendar years
2012 through 2017:

Year

Hours Worked

2012

1,000

2013

500

2014

500

2015

500

2016

500

2017

1,000

Because the employee was not expected to work
1,000 hours during the employee's first 12 months of
employment, the first-year exclusion condition was
met; accordingly, the employee was excluded from
making elective deferrals during the employee's first
12 months of employment. Because the employee
worked 1,000 hours during 2012 and 2017, the
preceding-year exclusion condition was not met for the
employee's 2013 and 2018 exclusion years; accord-
ingly, the employee was allowed to make elective
deferrals during those years. Because the employee did
not work at least 1,000 hours in each of the twelve-
month periods that preceded the 2014 through 2017
exclusion years, the preceding-year exclusion condition
was met for each of those exclusion years. Further,
because, for the 2014 through 2017 exclusion years, the
preceding-year exclusion condition was met and the
OIAI exclusion condition was not applied in operation,
the employee was excluded from making elective de-
ferrals under the part-time exclusion in each of the
2014 through 2017 exclusion years (even though the
employee had been eligible to make elective deferrals
during 2013).

Conclusion. Disregarding the relief provided in
this section 3.01, under the part-time exclusion, the
employee was properly excluded from making elec-
tive deferrals in 2012 (because the employee was not
expected to work 1,000 hours in 2012) and properly
allowed to make elective deferrals for the 2013 ex-
clusion year (because the employee actually worked
1,000 hours in 2012), but was improperly excluded
from making elective deferrals for the 2014 through
2017 exclusion years (because, under the OIAI ex-
clusion condition, the employee's eligibility to make
elective deferrals in the 2013 exclusion year would
make the employee not excludible under the part-
time exclusion for any period after that exclusion
year). However, pursuant to the relief provided in
this section 3.01, the plan is not treated as violating
the universal availability requirement even though
the OIAI exclusion condition, if properly applied,
would have precluded excluding the employee from

making elective deferrals in the 2014 through 2017
exclusion years.4

(2) Interaction of first-year exclusion
condition and preceding-year exclusion
condition during the Relief Period. For
plans that use the plan year as the exclu-
sion year, a failure to operate in compli-
ance with the OIAI exclusion condition
during the Relief Period may raise issues
regarding the application of the first-year
and preceding-year exclusion conditions
during the period that includes both a por-
tion of a new employee's initial 12
months of employment and a portion of
the first plan year ending after the close
of the new employee's initial 12 months
of employment (the "overlap period"). For
example, for such a plan with a calendar-
year plan year, if an employee started work
on October 1, 2015, then the employee's
overlap period would be from January 1,
2016, through September 30, 2016. If the
employer reasonably expected the employee
to work 1,000 hours from October 1, 2015,
through September 30, 2016, the employee
only worked 500 hours from October 1,
2015, through December 31, 2015, and the
plan did not apply the OIAI exclusion con-
dition during the Relief Period, then issues
would arise as to whether the employee
would be permitted to make elective
deferrals during the overlap period (due
to application of the first-year exclusion
condition) or would be prevented from
making elective deferrals during the
overlap period (due to application of the
preceding-year exclusion condition).
During the Relief Period, despite these
issues, a plan will not be treated as
failing to satisfy the conditions of the
part-time exclusion during an employ-
ee's overlap period, if the plan has ap-
plied the first-year and preceding-year
exclusion conditions with respect to
overlap periods in a reasonable and uni-
form manner for all employees. After
the Relief Period ends, and all plans
operate in compliance with the OIAI
exclusion condition, these issues involv-
ing new employees and the overlap pe-
riod will no longer arise because, under
the OIAI exclusion condition, once an
employee does not meet the part-time
exclusion conditions, whether in the ini-

tial year of employment or for any ex-
clusion year, the employee may no lon-
ger be excluded from making elective
deferrals under the part-time exclusion.

.02 Relief regarding plan language

(1) Pre-approved plans. Section 403(b)
pre-approved plans include language that
applies the OIAI exclusion condition ret-
roactive to 2009 (when the § 403(b) reg-
ulations became effective). If an employer
that did not apply the OIAI exclusion con-
dition adopts a § 403(b) pre-approved
plan, the plan will, in the absence of relief,
have an operational failure because the
plan's past operation with respect to the
OIAI exclusion condition will not match
the plan's terms. However, under the tran-
sition relief provided in this section
3.02(1), a § 403(b) pre-approved plan ad-
opted by an employer will not be treated
as failing to satisfy the conditions of the
part-time exclusion, and the plan will not be
treated as having a failure to follow plan
terms, merely because the form of the pre-
approved plan for the Relief Period does not
match the plan's operation with regard to
the OIAI exclusion condition during the Re-
lief Period. Accordingly, if the operational
relief granted in section 3.01 applies, a
§ 403(b) pre-approved plan is not required
to be amended to reflect that the plan failed
to apply the OIAI exclusion condition dur-
ing the Relief Period.

(2) Individually designed plans. An
employer with an individually designed
plan has until March 31, 2020 (the end of
the remedial amendment period provided
in Rev. Proc. 2013-22), to correct form
defects in the plan. Under the transition
relief provided in this section 3.02(2), if
the operational relief granted in section
3.01 applies, an employer may amend
plan language, through March 31, 2020, to
reflect that the OIAI exclusion condition
was not applied for all exclusion years,
and that amendment will be treated as a
correction of a form defect during the
remedial amendment period. Solely for
purposes of the relief in this section
3.02(2), plan language that tracks the reg-
ulatory language of the part-time exclu-
sion without explicitly highlighting the
OIAI exclusion condition (such as, for
example, LRM 17 of the 2013 LRMs,

4The OIAI exclusion condition, if properly applied, would also have provided an independent reason, in addition to the preceding-year exclusion condition, to prevent the exclusion of the
employee from making elective deferrals in the 2018 exclusion year.

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which did not explicitly highlight the OIAI
exclusion condition) is treated as language
that reflects that the OIAI exclusion condi-
tion was not applied. An employer's eligi-
bility for the § 403(b) remedial amendment
period will not be adversely affected merely
because an employer uses the relief pro-
vided under this notice (even though, under
Rev. Proc. 2017-18, the remedial amend-
ment period generally is available to correct
a form defect only if all provisions of the
plan that are necessary to satisfy § 403(b)
have been adopted and made effective in
form and operation from the beginning of
the remedial amendment period).

(3) Requirements after the Relief Pe-
riod ends. For periods after the Relief
Period ends, both § 403(b) pre-approved
plans and individually designed plans that
provide for the part-time exclusion must,
pursuant to § 1.403(b)-3(b)(3)(i), include
the OIAI exclusion condition in plan lan-
guage.5 This OIAI exclusion condition
language must be included in the plan, for
periods after the Relief Period ends, by the
end of the remedial amendment period.
.03 Fresh-start opportunity after the
Relief Period ends

In general, for exclusion years begin-
ning on or after January 1, 2019, a plan that
provides for the part-time exclusion must
apply the OIAI exclusion condition in both
form and operation. However, this section
3.03 provides a fresh-start opportunity un-
der which a plan will not be treated as fail-
ing to satisfy the conditions of the part-time
exclusion for periods after the Relief Period,
if the OIAI exclusion condition is applied as
if the OIAI exclusion condition first became
effective January 1, 2018. Thus, a plan may
apply the OIAI exclusion condition by dis-
regarding the fact that the first-year exclu-
sion condition was not met for an employee
if the employee began employment before
January 1, 2018, or the fact that the
preceding-year exclusion condition was not
met for an employee in any exclusion year
before the first exclusion year beginning on
or after January 1, 2018. Notwithstanding
the foregoing, even if a plan applies this
fresh-start opportunity with respect to the
OIAI exclusion condition, the plan must
have been operated during the Relief Period
in compliance with the OIAI exclusion or

pursuant to the relief provided under section
3.01 of this notice. Additionally, a plan
(whether a § 403(b) pre-approved plan or an
individually designed plan) is not required
to be amended to reflect the use of this
fresh-start opportunity in applying the OIAI
exclusion condition.

The following examples illustrate the
fresh-start opportunity provided in this
section 3.03:

Example 1 (disregarding a prior failure to meet
first-year exclusion condition). Facts. An employer
established a § 403(b) plan on January 1, 2009, with
a calendar-year plan year. The plan allows elective
deferrals, provides for the part-time exclusion, and
uses plan years as exclusion years for purposes of
applying the preceding-year exclusion condition un-
der the part-time exclusion. An employee started
work on January 1, 2017, and the employer reason-
ably expected the employee to work 1,000 hours
during the employee's first 12 months of employ-
ment. The employee actually worked 500 hours dur-
ing the 2017 calendar year and 500 hours during the
2018 calendar year. The employee was allowed to
make elective deferrals during the employee's first
year of employment (the 2017 calendar year), and
the employee is excluded from making elective de-
ferrals during the 2018 exclusion year under the
part-time exclusion. The employee is also excluded
from making elective deferrals during the 2019 ex-
clusion year under the part-time exclusion.

Conclusion. Without using the fresh-start oppor-
tunity provided in this section 3.03, the employee
could not be excluded from making elective defer-
rals for the 2019 exclusion year because, under the
OIAI exclusion condition, the employee could not be
excluded for any subsequent exclusion year after the
first-year exclusion condition was not met. That is,
because the employer reasonably expected the em-
ployee to work at least 1,000 hours in the first year
of employment, the employee could not be excluded
from making elective deferrals in the first year of
employment or in any subsequent exclusion year.
However, pursuant to the fresh-start opportunity in
this section 3.03, because the employee began em-
ployment before January 1, 2018, the employer may,
in applying the OIAI exclusion condition, disregard
the fact that the first-year exclusion condition was
not met. Accordingly, excluding the employee from
making elective deferrals during the 2019 exclusion
year will not be treated as a failure to satisfy the
conditions of the part-time exclusion.

Example 2 (disregarding a prior failure to meet
preceding-year exclusion condition). Facts. An em-
ployer established a § 403(b) plan on January 1,
2009, with a calendar-year plan year. The plan al-
lows elective deferrals, provides for the part-time
exclusion, and uses plan years as exclusion years for
purposes of applying the preceding-year exclusion
condition under the part-time exclusion. An em-
ployee started work on January 1, 2016, and the
employer reasonably expected the employee to work
only 500 hours in the employee's first 12 months of

employment. The employee actually worked 1,000
hours in the 2016 calendar year, but worked only 500
hours in the 2017 calendar year and 500 hours in the
2018 calendar year. The employee was excluded
from making elective deferrals during the employ-
ee's first year of employment (the 2016 calendar
year) under the part-time exclusion, but was allowed
to make elective deferrals during the 2017 exclusion
year. The employee is excluded from making elec-
tive deferrals during the 2018 exclusion year and the
2019 exclusion year under the part-time exclusion.

Conclusion. Without using the fresh-start oppor-
tunity provided in this section 3.03, the employee
could not be excluded from making elective defer-
rals for the 2019 exclusion year, because, under the
OIAI exclusion condition, the employee could not be
excluded for any subsequent exclusion year after the
preceding-year exclusion condition was not met for
the 2017 exclusion year. That is, once the employee
works at least 1,000 hours in the applicable 12-
month period preceding an exclusion year, the em-
ployee could not be excluded from making elective
deferrals in that exclusion year or in any subsequent
exclusion year. However, pursuant to the fresh-start
opportunity in this section 3.03, because the exclu-
sion year for which the preceding-year exclusion
condition was not met was an exclusion year before
the first exclusion year beginning on or after January
1, 2018, the employer may disregard the fact that the
preceding-year exclusion condition was not met for
that exclusion year. Accordingly, excluding the em-
ployee from making elective deferrals during the
2019 exclusion year will not be treated as a failure to
satisfy the conditions of the part-time exclusion.

## SECTION 4. DRAFTING INFORMATION

The principal author of this notice is
Patrick T. Gutierrez of the Office of Associate
Chief Counsel (Tax Exempt and Government
Entities). For further information regarding
this notice, contact Patrick T. Gutierrez at
(202) 317-4148 (not a toll-free number).

## Phase-out of Credit for New Qualified Plug-in Electric Drive Motor Vehicles

Notice 2018-96

### SECTION 1. PURPOSE

This notice announces the credit phase-out
schedule for new qualified plug-in electric
drive motor vehicles sold by Tesla, Inc.

### SECTION 2. BACKGROUND

Section 30D(a) of the Internal Revenue
Code provides for a credit for certain new

5For example, LRM 17 of the 2015 LRMs provides sample language highlighting the OIAI exclusion condition. LRM 17 of the 2013 LRMs also includes the OIAI exclusion condition (even
though it does not explicitly highlight the condition).

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qualified plug-in electric drive motor ve-
hicles. The new qualified plug-in electric
drive motor vehicle credit begins to phase
out for a manufacturer's vehicles in the
second calendar quarter after the calendar
quarter in which at least 200,000 of the
manufacturer's vehicles that qualify for
the credit have been sold for use or lease
in the United States (determined on a cu-
mulative basis for sales after December
31, 2009). Taxpayers purchasing the man-
ufacturer's vehicles during the first two
calendar quarters of the phase-out period
may claim 50 percent of the otherwise
allowable credit. Taxpayers purchasing
the manufacturer's vehicles during the
third and fourth calendar quarters of the
phase-out period may claim 25 percent of
the otherwise allowable credit. No credit
is available for vehicles purchased after
the last day of the fourth calendar quarter
of the phase-out period.

Notice 2009-89, 2009-48 I.R.B. 714,
provides procedures for a vehicle manu-
facturer (or in the case of a foreign vehicle
manufacturer, its domestic distributor) to
certify to the Internal Revenue Service
(Service) both (1) that a particular make,
model and model year of vehicle qualifies

as a plug-in electric drive motor vehicle
and (2) the amount of the credit allowable
with respect to that vehicle.

Section 5.05 of Notice 2009-89 re-
quires a manufacturer (or, in the case of a
foreign vehicle manufacturer, its domestic
distributor) that has received from the Ser-
vice an acknowledgement of its certifica-
tion for a particular make, model, and
model year of vehicle to submit to the
Service a report of the number of qualified
vehicles sold by the manufacturer (or, in
the case of a foreign vehicle manufacturer,
its domestic distributor) to consumers or
retail dealers during the calendar quarter.
A qualified vehicle is defined for this pur-
pose as any vehicle that is a new qualified
plug-in electric drive motor vehicle.

In accordance with section 5.05 of No-
tice 2009-89, Tesla, Inc. has submitted
reports that indicate that its cumulative
sales of qualified vehicles reached the
200,000-vehicle limit during the calendar
quarter ending September 30, 2018. Ac-
cordingly, the credit for all new qualified
plug-in electric drive motor vehicles sold
by Tesla, Inc. will begin to phase out
January 1, 2019.

### SECTION 3. SCOPE OF NOTICE

This notice applies to any make, model,
or model year of new qualified plug-in elec-
tric drive motor vehicle that is -

(1) sold by Tesla, Inc .; and

(2) purchased for use or lease in the
United States on or after January 1, 2019.

### SECTION 4. CREDIT AMOUNT

If a new qualified plug-in electric drive
motor vehicle sold by Tesla, Inc. is pur-
chased for use or lease on or after January
1, 2019, the allowable credit is as follows:

(1) For vehicles purchased for use or
lease on or after January 1, 2019, and on
or before June 30, 2019, the credit is 50
percent of the otherwise allowable amount
determined under § 30D(b);

(2) For vehicles purchased for use or
lease on or after July 1, 2019, and on or
before December 31, 2019, the credit is 25
percent of the otherwise allowable amount
determined under § 30D(b);

(3) For vehicles purchased for use or
lease on or after January 1, 2020, no credit
is allowable.

Qualifying Vehicle

Full Credit When Purchased through 12/31/2018; (first quarter = 100% credit allowed)

Reduced Credit When Purchased from 1/1/2019 through 6/30/2019 (2nd &amp; 3rd quarters = 50% credit allowed)

Reduced Credit When Purchased from 7/1/2019 through 12/31/2019 (4th &amp; 5th quarters = 25% credit allowed)

Credit available starting 1/1/2020

All Tesla Vehicles

$7,500

$3,750

$1,875

$0

### SECTION 5: DRAFTING INFORMATION

The principal author of this notice is
Maggie Stehn of the Office of Associate
Chief Counsel (Passthroughs & Special
Industries). For further information re-
garding this notice contact Ms. Stehn at
(202) 317-4547 (not a toll-free number).

### Guidance on the Application of Section 83(i) Notice 2018-97

#### I. PURPOSE

This notice provides initial guidance
on the application of section 83(i) of the
Internal Revenue Code (Code), as enacted

by section 13603 of the Tax Cuts and Jobs
Act, Pub. Law 115-97, 131 Stat. 2054,
2155 (2017) (Act). Section 83 generally
provides for the federal income tax treat-
ment of property transferred in connection
with the performance of services. Section
13603 of the Act amended section 83 by
adding section 83(i) to allow certain em-
ployees to defer recognition of income
attributable to the receipt or vesting of
qualified stock.

Stakeholders have indicated that they
would benefit from initial guidance on
certain aspects of section 83(i), in partic-
ular on (1) the application of the require-
ment in section 83(i)(2)(C)(i)(II) that
grants be made to not less than 80% of all
employees who provide services to the
corporation in the United States, (2) the
application of federal income tax with-

holding to the deferred income related to
the qualified stock, and (3) the ability of
an employer to opt out of permitting em-
ployees to elect the deferred tax treatment
even if the requirements under section
83(i) are otherwise met. In response, this
notice addresses these three issues. The
Department of the Treasury (Treasury De-
partment) and the Internal Revenue Ser-
vice (IRS) anticipate that further guidance
on section 83(i) will be issued in the form
of proposed regulations, which are ex-
pected to incorporate the guidance pro-
vided in this notice.

## II. BACKGROUND

Section 83(i) allows certain employees
to elect to defer inclusion in income of the
amount that would otherwise be included

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under section 83(a) upon the transfer of
stock pursuant to the exercise of a stock
option or the settlement of a restricted
stock unit (RSU). Inclusion of that income
may be deferred for up to 5 years as the
result of a section 83(i) election, subject to
certain limitations described in this Back-
ground section.

### A. Effect of a Section 83(i) Election

Section 83(i)(1)(A) provides that if
qualified stock is transferred to a qualified
employee who makes an election under
section 83(i) with respect to such stock,
the amount determined under section
83(a) with respect to such stock will be
included in income in the taxable year
determined under section 83(i)(1)(B). Ac-
cordingly, such income shall be included
in the taxable year of the employee which
includes the earliest of:

(i) the first date such qualified stock be-
comes transferable (including, solely
for purposes of this clause, transfer-
able to the employer);

(ii) the date the employee first becomes
an excluded employee;

(iii) the first date on which any stock of
the issuing corporation becomes
readily tradable on an established
securities market;

(iv) the date that is 5 years after the first
date the rights of the employee in
such stock are transferable or not
subject to a substantial risk of for-
feiture, whichever occurs earlier; or

(v) the date on which the employee re-
vokes the election (at such time and
in such manner as the Secretary of
the Treasury (Secretary) provides).

### B. Definition of "Qualified Employee"

Section 83(i)(3)(A) defines a "qualified
employee" as any individual who is not an
"excluded employee" and who agrees to
meet such requirements as are determined
by the Secretary to be necessary to ensure
that the withholding requirements of the
corporation under chapter 24 (Collection
of Income Tax at Source on Wages) with
respect to the qualified stock are met.

An "excluded employee" is defined un-
der section 83(i)(3)(B) as, with respect to
any corporation, any individual:

(i) who is a 1 percent owner at any time
during the calendar year or who was
a 1 percent owner at any time during
the 10 preceding calendar years;

(ii) who is or has been at any prior time
(I) the chief executive officer (or an
individual acting in such capacity) or
(II) the chief financial officer (or an
individual acting in such capacity);

(iii) who bears a relationship described
in section 318(a)(1) to any individ-
ual described in subclause (I) or (II)
of clause (ii); or

(iv) who is one of the 4 highest com-
pensated officers of the corporation
for the taxable year, or was one of
the 4 highest compensated officers
of such corporation for any of the 10
preceding taxable years, determined
on the basis of the shareholder dis-
closure rules for compensation under
the Securities Exchange Act of 1934
(as if such rules applied to such cor-
poration).

### C. Definition of "Qualified Stock"

Section 83(i)(2)(A) defines "qualified
stock" as any stock in a corporation that is
the employer of a qualified employee, if
such stock is received (i) in connection
with the exercise of a stock option or in
settlement of an RSU, and (ii) such stock
option or RSU was granted in connection
with the performance of services as an
employee and during a calendar year that
the employer corporation was an eligible
corporation. Section 83(i)(5) provides
that, for purposes of this subsection, all
persons treated as a single employer under
section 414(b) shall be treated as one cor-
poration. Section 83(i)(2)(B) provides that
qualified stock does not include any stock
if the employee may sell the stock to, or
otherwise receive cash in lieu of stock
from, the corporation at the time that the
employee's rights to the stock first be-
come transferable or not subject to a sub-
stantial risk of forfeiture.

### D. Definition of "Eligible Corporation"

Section 83(i)(2)(C)(i) defines an "eligi-
ble corporation" as any corporation that,
with respect to any calendar year, (i) has
none of its (or any predecessor's) stock
readily tradable on an established securi-

ties market during any preceding calendar
year, and (ii) has a written plan under
which, in such calendar year, not less than
80% of all employees who provide ser-
vices to the corporation in the United
States (or any possession of the United
States) are granted stock options, or are
granted RSUs, with the same rights and
privileges to receive qualified stock. As
provided in section 83(i)(2)(C)(iii), for
purposes of section 83(i)(2)(C)(i)(II), the
term "employee" does not include any
excluded employee or any employee de-
scribed in section 4980E(d)(4) (certain
part-time employees).

Section 83(i)(2)(C)(ii)(I) provides that
the determination of rights and privileges
shall be made in a manner similar to the
determination under section 423(b)(5).
However, in accordance with section
83(i)(2)(C)(ii)(II), employees shall not
fail to be treated as having the same rights
and privileges to receive qualified stock
solely because the number of shares avail-
able to all employees is not equal in amount,
so long as the number of shares available to
each employee is more than a de minimis
amount. In addition, section 83(i)(2)(C)
(ii)(III) provides that rights and privileges
with respect to the exercise of an option
shall not be treated as the same as rights and
privileges with respect to the settlement of
an RSU. Finally, in the case of any calendar
year beginning before January 1, 2018, sec-
tion 83(i)(2)(C)(iv) provides that neither
stock options nor RSUs are required to have
been granted with the same rights and priv-
ileges for the stock received to be treated as
qualified stock.

### E. Manner of Making Election

Section 83(i)(4)(A) provides that an
election with respect to qualified stock
shall be made no later than 30 days after
the first date the rights of the employee in
such stock are transferable or are not sub-
ject to a substantial risk of forfeiture,
whichever occurs earlier, and shall be
made in a manner similar to the manner in
which an election is made under section
83(b). Section 83(i)(4)(C) provides that
the term "deferral stock" is used to refer to
stock with respect to which a section 83(i)
election has been made.

Section 83(i)(4)(B) provides that no
election may be made under section 83(i)
if the qualified employee has made an

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election under section 83(b) with respect
to such qualified stock, or if any stock of
the corporation which issued the qualified
stock is readily tradable on an established
securities market at any time before the
election is made. In addition, no election
may be made under section 83(i) with
respect to any qualified stock if the cor-
poration that issued the stock purchased
any of its outstanding stock in the calen-
dar year preceding the calendar year
which includes the first date the rights of
the employee are transferable or are not
subject to a substantial risk of forfeiture,
unless (i) not less than 25% of the total
dollar amount of the stock so purchased is
deferral stock, and (ii) the determination
of which individuals from whom deferral
stock is purchased is made on a reason-
able basis.

### F. Notice Requirement

Section 83(i)(6) provides that any cor-
poration which transfers qualified stock to
a qualified employee shall, at the time an
amount attributable to such stock would
first be includible in the gross income of
such employee (or a reasonable time be-
fore), certify to the employee that such
stock is qualified stock, and notify the
employee that the employee may be eligi-
ble under section 83(i) to defer income on
such stock. Section 83(i)(6) provides that
the corporation must also notify the em-
ployee that if the employee makes such an
election:

(i) the amount of income recognized
at the end of the deferral period
will be based on the value of the
stock at the time at which the
rights of the employee first be-
come transferable or not subject to
a risk of forfeiture, notwithstand-
ing whether the value of the stock
has declined during the deferral
period;

(ii) the amount of such income recog-
nized at the end of the deferral
period will be subject to withhold-
ing under section 3401(i) at the
rate determined under section
3402(t); and

(iii) the responsibilities of the employee,
as determined by the Secretary un-

der section 83(i)(3)(A)(ii), with re-
spect to such withholding.

Section 6652 was amended by the Act
to include a new subsection (p) which
imposes a $100 penalty for each failure to
provide a notice as required by section
83(i)(6) (up to a maximum of $50,000 per
calendar year), unless it is shown that such
failure is due to reasonable cause and not
to willful neglect. The penalty applies to
failures after December 31, 2017.

### G. Transition Rule

Section 13603(g) of the Act provides
that until the Secretary (or the Secretary's
delegate) issues regulations or other guid-
ance for purposes of implementing the
80% requirement of section 83(i)(2)(C)
(i)(II) or the notice requirements of sec-
tion 83(i)(6), a corporation shall be treated
as in compliance with those requirements
if the corporation complies with a reason-
able good faith interpretation of such re-
quirements.

## III. GUIDANCE

### A. Application of the 80% Requirement

As described above, section 83(i)(2)(C)
defines an "eligible corporation," in relevant
part, as, with respect to any calendar year,
any corporation that has a written plan under
which, in such calendar year, not less than
80% of all employees who provide services
to the corporation in the United States (or
any possession of the United States) are
granted stock options, or are granted RSUs,
with the same rights and privileges to re-
ceive qualified stock. Stakeholders have
asked whether the 80% requirement of sec-
tion 83(i)(2)(C)(i)(II) with respect to a cal-
endar year is applied on a cumulative basis
that takes into account stock options or
RSUs granted in prior calendar years.

The determination of whether a corpo-
ration qualifies as an eligible corporation
is made "with respect to any calendar
year." Furthermore, to meet the 80% re-
quirement, the corporation must have
granted "in such calendar year" stock
options to 80% of its employees or
RSUs to 80% of its employees. There-
fore, the determination that the corporation

is an eligible corporation must be made on a
calendar year basis, and whether the corpo-
ration has satisfied the 80% requirement is
based solely on the stock options or the
RSUs granted in that calendar year to em-
ployees who provide services to the corpo-
ration in the United States (or any posses-
sion of the United States). In calculating
whether the 80% requirement is satisfied,
the corporation must take into account the
total number of individuals employed at any
time during the year in question as well as
the total number of employees receiving
grants during the year (in each case,
without regard to excluded employees
or part-time employees described in sec-
tion 4980E(d)(4)), regardless of whether
the employees were employed by the
corporation at the beginning of the cal-
endar year or the end of the calendar
year.

The Treasury Department and the IRS
have determined that interpreting the 80%
requirement of section 83(i)(2)(C)(i)(II)
with respect to a calendar year on a cu-
mulative basis that takes into account
stock options or RSUs granted in prior
calendar years is contrary to the language
of the statute and is not a reasonable good
faith interpretation of the 80% require-
ment. Accordingly, the transition rule in
section 13603(g) of the Act does not apply
to such an interpretation.

### B. Employment Taxes (including Income Tax Withholding)

#### 1. General

Employment taxes under Subtitle C of
the Code include Federal Insurance Con-
tributions Act (FICA) taxes, Federal Un-
employment Tax Act (FUTA) tax, and
federal income tax withholding. The Act
made no amendments to FICA and FUTA
taxation with respect to deferral stock.
Thus, the FICA and FUTA taxation of
deferral stock is unaffected by the Act.
See H.R. Rep. No. 115-466, at 501
(2017).6

The Act did amend the income tax
withholding provisions in the Code with
respect to deferral stock. Specifically, sec-
tion 13603(b) of the Act amended the
income tax withholding provisions, as de-
scribed below, to conform the income tax

6See H.R. Rep. No. 115-466, pages 496-497 for a discussion of FICA and FUTA taxation.

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withholding provisions in section 3401
and section 3402 to the income taxation of
deferral stock. The remainder of the dis-
cussion of employment taxes concerns
only federal income tax withholding.

Section 3402(a) provides that, except
as otherwise provided in section 3402,
every employer making payment of wages
shall deduct and withhold upon such
wages a tax determined in accordance
with tables or computational procedures
prescribed by the Secretary. The term
"wages" is defined in section 3401(a) for
income tax withholding purposes as in-
cluding all remuneration for services per-
formed by an employee for his or her
employer including the cash value of all
remuneration (including benefits) paid in
any medium other than cash, with certain
specific exceptions. Section 3401(i), as
added by section 13603(b)(1) of the Act,
provides that for purposes of section
3401(a), qualified stock (as defined in sec-
tion 83(i)) with respect to which an elec-
tion is made under section 83(i) is treated
as wages (1) received on the earliest date
described in section 83(i)(1)(B), and (2) in
an amount equal to the amount included in
income under section 83 for the taxable
year which includes such date. Thus, un-
der section 3401(i), the amount of the
deferral stock included in gross income is
treated as wages subject to federal income
tax withholding on the earliest date de-
scribed in section 83(i)(1)(B), which sets
forth the end date of the applicable defer-
ral period.

Section 3402(t), which was added by
section 13603(b)(2) of the Act, provides
that, in the case of any qualified stock with
respect to which an election is made under
section 83(i), (1) the rate of tax under
section 3402(a) must not be less than the
maximum rate in effect under section 1
(37% in 2018), and (2) such stock is
treated for purposes of section 3501(b) in
the same manner as a noncash fringe ben-
efit. Section 3501(b) provides that the
taxes imposed by Subtitle C with respect
to noncash fringe benefits must be col-
lected (or paid) by the employer at the
time and in the manner prescribed by the
Secretary by regulations. Questions and

Answers 5 and 6 of § 31.3501(a)-1T pro-
vide that the employer is liable for the
payment of the tax with respect to a non-
cash fringe benefit regardless of whether
the benefit is paid by another entity.

Noncash fringe benefits that fall within
section 3501(b) generally are subject to
the provisions of Announcement 85-113,
1985-31 I.R.B. 31, which provides guide-
lines for withholding, paying, and report-
ing employment tax on taxable noncash
fringe benefits. Announcement 85-113
provides generally that taxpayers may rely
on the guidelines in the announcement
until the issuance of regulations that su-
persede the temporary and proposed reg-
ulations under section 3501(b). No regu-
lations have been issued under section
3501(b) that supersede the announcement.
Thus, Announcement 85-113 generally is
applicable to current payments of noncash
fringe benefits, and until further regula-
tory guidance is issued, it applies to de-
ferral stock, except as limited by the spe-
cific rules of section 3401(i) and the terms
of the announcement itself, as discussed
further below.

Section 2 of Announcement 85-113
sets out the general income tax and ac-
counting rule, which provides, in relevant
part, that employers must withhold the
applicable income tax on the date the ben-
efits are paid and must deposit the with-
held taxes under the regular rules for tax
deposits. The employer may make a rea-
sonable estimate of the value of the fringe
benefit on the date the fringe benefit is
paid for purposes of meeting the timely
deposit requirements. The actual value of
the fringe benefit must be determined by
January 31 of the following year and re-
ported on Form W-2, Wage and Tax
Statement, and Form 941, Employer's
Quarterly Federal Tax Return (or Form
944, Employer's Annual Federal Tax Re-
turn, if applicable instead of Form 941).

Announcement 85-113 states that if
the employer underestimates the value of
the fringe benefit and as a result deposits
less than the amount required to be depos-
ited (that is, the amount the employer
would be required to deposit if the em-
ployer had correctly withheld the applica-

ble taxes), the employer may be subject to
the failure to deposit penalty under section
6656. Under Announcement 85-113, if
the employer overestimates the value and
deposits more than the amount required,
the employer may claim a refund or elect
to have the overpayment applied to the
employer's next Form 941 (or other em-
ployment tax return).

Generally, under § 31.6205-1(d)(2), if
an employer collects less than the correct
amount of income tax required to be with-
held from wages during a calendar year,
the employer must collect the amount of
the undercollection on or before the last
day of the year by deducting the amount
from remuneration of the employee. Un-
der § 31.6205-1(d)(2),7 if such a deduc-
tion is not made, the obligation of the
employee to the employer with respect to
the undercollection is a matter for settle-
ment between the employee and the em-
ployer within the calendar year. However,
in the case of noncash fringe benefits,
Announcement 85-113 permits the em-
ployer to recover the undercollection of
income tax withholding from the em-
ployee after the end of the calendar year
during which the wage payment is made,
as long as the recovery occurs prior to
April 1 of the year following the year in
which the benefits are paid. This rule in
Announcement 85-113 applies to the
amount included in wages under section
3401(i). Thus, with regard to any income
tax withholding that the employer depos-
its for deferral stock included in wages
under section 3401(i) that has not been
collected from the employee, the em-
ployer may recover the income tax from
the employee prior to April 1 of the year
following the year in which the inclusion
in wages under section 3401(i) occurs.

Section 3401(i) provides the specific
date on which deferral stock must be
treated as wages for income tax with-
holding purposes and the special rules
for timing of inclusion in income under
Announcement 85-113 available with
respect to certain noncash fringe bene-
fits do not apply.8 The withholding rates
described in section 2 of Announcement
85-113 also do not apply to deferral

7The reference in Announcement 85-113 is to the section of the regulations (§ 31.6205-1(c)(4)) setting forth the same principle in the section 6205 regulations before amendments to the
regulations after 1985. See T.D. 9405, 72 FR 37376 (July 1, 2008).

8 Announcement 85-113 provides two rules applicable to the date of payment of some noncash fringe benefits that do not apply to deferral stock. The first rule allows payors of certain noncash

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stock because, under section 3402(t)(1),
the income tax withholding rate under
section 3402(a) "shall not be less than
the maximum rate of tax in effect under
section 1." The Treasury Department
and the IRS expect that proposed regu-
lations providing further guidance on
section 83(i) will provide that the rate of
withholding under section 3402(t)(1) on
deferral stock is the maximum rate of
tax in effect under section 1 and will
provide that withholding is applied (1)
without reference to any payment of
regular wages, (2) without allowance for
the number of allowances or other dollar
amounts claimed by the employee on
Form W-4, Employee's Withholding Al-
lowance Certificate, (3) without regard to
whether the employee has requested addi-
tional withholding, and (4) without regard to
the withholding method used by the em-
ployer. Thus, under the anticipated proposed
regulations, only one rate, the maximum
rate of tax under section 1, would be used in
withholding on deferral stock under section
3402(t), and employers would not be able to
increase or decrease the rate at the request of
the employee. Under Code section 3402(t)
and this notice and unless and until super-
seding guidance is issued, with respect to
wages resulting from deferral stock under
section 3402(t), employers must withhold
taxes at the maximum rate of income tax
under section 1 without regard to whether
the employee has requested additional with-
holding and without regard to any withhold-
ing allowances or dollar amounts entered on
the employee's Form W-4.

In summary, deferral stock constitutes
wages under section 3401(i) and is treated
as received on the earliest date described
in section 83(i)(1)(B) in an amount equal
to the amount included in income under
section 83 for the taxable year that in-
cludes such date. When the wages are
treated as paid under section 3401(i), the
employer must make a reasonable esti-
mate of the value of the stock and make
deposits of the amount of income tax
withholding liability based on that esti-
mate. The wages included under section

3401(i) are subject to withholding at the
maximum rate of tax in effect under sec-
tion 1, and withholding is determined
without regard to the employee's Form
W-4. By January 31 of the following
year, the employer must determine the
actual value of the deferral stock on the
date it is includible in the employee's in-
come and report that amount and the with-
holding on Form W-2 and Form 941.
With respect to income tax withholding
for the deferral stock that the employer
pays from its own funds, the employer
may recover that income tax withholding
from the employee until April 1 of the
year following the calendar year in which
the wages were paid.

An employer that fails to deduct and
withhold federal income tax under section
3402 is liable for the payment of the tax
whether or not the employer collects it
from the employee, unless section 3402(d)
applies.9 Section 3402(d) provides that if
the employer fails to deduct and withhold
the correct amount of income tax with-
holding, and thereafter the income tax
against which the tax under section 3402
may be credited is paid, the tax imposed
under section 3402(a) shall not be col-
lected from the employer. Section 3402(d)
does not relieve the employer from liabil-
ity for any penalties in respect of the fail-
ure to deduct and withhold.

#### 2. Escrow Arrangement

Section 83(i)(3)(A)(ii) provides the
Secretary with authority to impose any
requirements as the Secretary determines
to be necessary to ensure that the with-
holding requirements of the corporation
under chapter 24 with respect to the qual-
ified stock are met. In order to be a qual-
ified employee, an employee making an
election under section 83(i) must agree in
the election to these requirements.

Pursuant to the authority provided to the
Secretary under section 83(i)(3)(A)(ii), in or-
der to be a qualified employee an employee
making a section 83(i) election with respect to
qualified stock must agree in the election that

all deferral stock will be held in an escrow
arrangement, the terms of which are consistent
with the following requirements:

(i) The deferral stock must be depos-
ited into escrow before the end of
the calendar year during which
the section 83(i) election is made
and must remain in escrow until
removed in accordance with clause
(ii) or the corporation has otherwise
recovered from the employee an
amount equal to the corresponding
income tax withholding obligation
under section 3401(i) for the tax-
able year determined in accordance
with section 83(i)(1)(B).

(ii) At any time between the date of
income inclusion under section
83(i)(1)(B) and March 31 of the
following calendar year, the cor-
poration may remove from es-
crow and retain the number of
shares of deferral stock with a
fair market value equal to the
income tax withholding obligation
that has not been recovered from the
employee by other means. The fair
market value of the shares must be
determined pursuant to the rules in
§ 1.409A-1(b)(5)(iv). The fair mar-
ket value used for purposes of this
calculation is the fair market value
of the shares at the time the corpo-
ration retains shares held in escrow
to satisfy the income tax withhold-
ing obligation.

(iii) Any remaining shares held in es-
crow after the corporation's income
tax withholding obligation has been
met, whether by retention of shares
in accordance with clause (ii) or
otherwise, must be delivered to the
employee as soon as reasonably
practicable thereafter.

The Treasury Department and the IRS
have concluded that the escrow arrange-
ment described above adequately ensures
the statutory income tax withholding re-
quirements of the corporation will be met
and that this approach is less burdensome

fringe benefits to treat the benefits as paid on any day(s) during the year so long as they treat benefits provided in a calendar year as paid not later than December 31 of the calendar year.
The second rule allows employers to treat certain benefits paid during the last two months of the year (or any shorter period) as paid during the subsequent calendar year. However,
Announcement 85-113 provides that neither of these two rules applies when the fringe benefit is the transfer of personal property (either tangible or intangible) of a kind normally held for
investment or the transfer of real property. Because deferral stock is personal property of a kind normally held for investment, neither of these rules may be used with respect to deferral
stock.

9Section 3403, Section 31.3403-1.

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than alternatives that would require a cash
outlay by the corporation or the employee
before the due date for the relevant with-
holding, and thus allow less flexibility
with respect to resource allocation. If the
corporation and the employee do not
agree to deposit the deferral stock into an
escrow arrangement consistent with the
terms outlined above, the employee is not
a "qualified employee" within the mean-
ing of section 83(i)(3). The Treasury De-
partment and the IRS are aware that this
has the effect of allowing a corporation to
preclude its employees from making sec-
tion 83(i) elections by declining to estab-
lish an escrow arrangement consistent
with the terms outlined above.

Future guidance on section 83(i)(3)
(A)(ii) may establish alternative or sub-
stitute mechanisms to ensure a corpora-
tion's income tax withholding require-
ments are satisfied. Such mechanisms
may be more restrictive than the above
described escrow arrangement.

### C. Designation of Stock as Not Eligible for Section 83(i) Election

As described above, section 83(i) im-
poses a number of requirements and lim-
itations that must be met for a section
83(i) election to be allowed. Although the
election, if allowed, may be made by an
employee, the corporation is responsible
for creating the conditions that would al-
low an employee to make the election.
Stakeholders have indicated that a corpo-
ration may wish to compensate its em-
ployees with equity-based compensation
for which no section 83(i) election may be
made. As noted above, a corporation can
preclude its employees from making sec-
tion 83(i) elections by declining to estab-
lish an escrow arrangement as described
in Section III.B.2 of this notice. As a
result, a corporation need not be con-
cerned that it would inadvertently create
the requisite conditions for its employees
to make section 83(i) elections or be re-
quired to comply with the notice require-
ment of section 83(i)(6). If a corporation
does not intend to deposit qualified stock
into an escrow arrangement (as described
in Section III.B.2 of this notice) or other-
wise create the conditions that would al-
low an employee to make the section 83(i)
election, the terms of a stock option or
RSU may provide that no election under

section 83(i) will be available with respect
to stock received upon the exercise of the
stock option or settlement of the RSU.
This designation would inform employees
that no section 83(i) election may be made
with respect to stock received upon exer-
cise of the option or settlement of the RSU
even if the stock is qualified stock.

## IV. EFFECTIVE DATE

Section 83(i) applies to stock attribut-
able to stock options exercised, or RSUs
settled, after December 31, 2017. The
Treasury Department and the IRS antici-
pate that the guidance in this notice will
be incorporated into future regulations
that, with respect to issues addressed in
this notice, will apply to any taxable year
ending on or after December 7, 2018. Any
future guidance, including regulations, ad-
dressing the issues covered by this notice,
such as the establishment of more restric-
tive mechanisms to ensure a corporation's
income tax withholding requirements are
satisfied, will apply prospectively only.

## V. REQUEST FOR COMMENTS

The Treasury Department and the IRS
anticipate issuing further guidance on sec-
tion 83(i). Accordingly, comments are re-
quested on additional issues under section
83(i) that future guidance should address,
as well as any clarifications or further
guidance that may be helpful on the issues
addressed in this notice. Comments spe-
cifically are requested on additional or
alternative mechanisms that could be es-
tablished to ensure the collection of the
required income tax withholding in accor-
dance with section 83(i)(3)(A)(ii).

Written comments may be submitted
through February 5, 2019. Comments
should include a reference to Notice
2018-97. Comments may be submitted
electronically via the Federal eRulemak-
ing Portal at www.regulations.gov (type
IRS-2018-0039 in the search field on the
regulations.gov homepage to find this no-
tice and submit comments). Alternatively,
submissions may be sent to CC:PA:LP-
D:PR (Notice 2018-97), Room 5203, In-
ternal Revenue Service, P.O. Box 7604,
Ben Franklin Station, Washington, DC
20044. Submissions also may be hand de-
livered Monday through Friday between
the hours of 8 a.m. and 4 p.m. to CC:PA:

LPD:PR (Notice 2018-97), Courier's
Desk, Internal Revenue Service, 1111
Constitution Avenue, NW, Washington,
DC 20044. All recommendations for guid-
ance submitted by the public in response
to this notice will be available for public
inspection and copying in their entirety.

## VI. DRAFTING INFORMATION

The principal author of this notice is
Michael Hughes of the Office of Associ-
ate Chief Counsel (Tax Exempt and Gov-
ernment Entities), although other Trea-
sury and IRS officials participated in its
development. For further information on
the provisions of this notice, contact Mi-
chael Hughes at (202) 317-5600 (not a
toll-free number). For further information
regarding issues with respect to income
tax withholding, contact A.G. Kelley at
(202) 317-4774 (not a toll-free number).

## Section 83 .- Property transferred in connection with performance of services

The notice contains guidance on the application
of § 83(i) of the Internal Revenue Code, including
the application of the 80% requirement described in
§83(i)(2)(C)(i)(II). Additionally, the notice describes
how stock may be designated as not eligible for a
§83(i) election. See Notice 2018-97.

## Section 3402 .- Income tax collected at source

The notice contains guidance on income tax
withholding with respect to qualified stock, as de-
fined in § 83(i). See Notice 2018-97.

Parking Expenses for
Qualified Transportation
Fringes Under § 274(a)(4)
and § 512(a)(7) of the
Internal Revenue Code

Notice 2018-99
PURPOSE

This notice provides interim guidance
for taxpayers to determine the amount of

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parking expenses for qualified transporta-
tion fringes (QTFs) that is nondeductible
under § 274(a)(4) of the Internal Revenue
Code (Code) and for tax-exempt organi-
zations to determine the corresponding in-
crease in the amount of unrelated business
taxable income (UBTI) under § 512(a)(7)
attributable to the nondeductible parking
expenses. Sections 274 and 512 were
amended by the Tax Cuts and Jobs Act,
Pub. L. No. 115-97, §§ 13304 and 13703,
131 Stat. 2054, 2123, 2169 (2017) (the
Act), effective for amounts paid or in-
curred after December 31, 2017. As
amended by the Act, § 274(a)(4) generally
disallows a deduction for expenses with
respect to QTFs provided by taxpayers to
their employees, and § 512(a)(7) generally
provides that a tax-exempt organization's
UBTI is increased by the amount of the
QTF expense that is nondeductible under
§ 274. However, the Act does not address
how to determine the amount of the QTF
expense that is nondeductible or treated as
an increase in UBTI.

This notice also announces that the De-
partment of the Treasury (Treasury De-
partment) and the Internal Revenue Ser-
vice (IRS) intend to publish proposed
regulations under §§ 274 and 512 (and
under § 6012 with regard to the exempt
organization's related filing requirement).
The proposed regulations will include
guidance on the determination of nonde-
ductible parking expenses and other ex-
penses for QTFs and the calculation of
increased UBTI attributable to QTFs. Un-
til such guidance is issued, taxpayers and
tax-exempt organizations that own or
lease parking facilities where their em-
ployees park may use any reasonable
method, as provided in section B of the
Interim Guidance on QTF Parking section
of this notice, to determine the amount of
nondeductible expenses under § 274(a)(4)
or the amount of the increase in UBTI
under § 512(a)(7). Furthermore, until fur-
ther guidance is issued, taxpayers may
rely on the guidance in this notice to de-
termine the amount of nondeductible
parking expenses for QTFs under
§ 274(a)(4), and tax-exempt organizations
may rely on the guidance in this notice to

determine the amount of the increase in
UBTI under § 512(a)(7).

## BACKGROUND AND ANALYSIS

Section 274(a)(4), as added by the Act,
provides that no deduction is allowed un-
der Chapter 1 of the Code for the expense
of any QTF (as defined in section 132(f))
provided by taxpayers to their employees.
Section 132 generally excludes from em-
ployees' gross income the value of certain
fringe benefits, including QTFs under
§ 132(f). Although the value of a QTF is
relevant in determining the exclusion un-
der § 132(f) and whether the § 274(e)(2)
exception (discussed below) applies, the
deduction disallowed under § 274(a)(4)
relates to the expense of providing a QTF,
not its value.

QTFs are defined in § 132(f)(1) to in-
clude: (1) transportation in a commuter
highway vehicle between the employee's
residence and place of employment, (2)
any transit pass, and (3) qualified park-
ing.10 Qualified parking is defined in
§ 132(f)(5)(C) as parking provided to an
employee on or near the business prem-
ises of the employer or on or near a loca-
tion from which the employee commutes
to work. The term does not include any
parking on or near property used by the
employee for residential purposes. The
term "employee" for these purposes is de-
fined in §§ 1.132-1(b)(2)(i) and 1.132-
9(b) of the Income Tax Regulations,
Q/A-5, as any individual who is currently
employed by the employer; the term in-
cludes common law employees and other
statutory employees, such as officers of
corporations. Section 1.132-9(b), Q/A-
24, explains that partners, 2-percent share-
holders of S Corporations, sole propri-
etors, and independent contractors are not
employees for purposes of § 132(f).

Section 132(a)(5) generally provides
that gross income does not include any
fringe benefit that qualifies as a QTF. Sec-
tion 132(f)(2) provides that the amount of
QTFs provided by an employer to any
employee that can be excluded from gross
income under § 132(a)(5) cannot exceed a
maximum monthly dollar amount, ad-
justed for inflation. The adjusted maxi-

mum monthly excludable amount for
2018 is $260.

An employer may provide QTFs as a
supplement to an employee's compensa-
tion, either in kind or through a bona fide
cash reimbursement arrangement. In ad-
dition, § 132(f)(4) provides that QTFs
may be provided via compensation reduc-
tion agreements. See also § 1.132-9(b),
Q/A-11 through 15. Section 274(a)(4) dis-
allows a deduction for expenses incurred for
QTFs regardless of whether the benefit is
provided by the employer in-kind, through a
bona fide cash reimbursement arrangement,
or through a compensation reduction agree-
ment. Additional guidance regarding quali-
fied parking and other QTFs is provided in
§ 1.132-9.

Section 274(e) enumerates nine spe-
cific exceptions to § 274(a), two of which
are discussed in more detail below as ap-
plied to parking expenses. Deductions for
expenses that are within one of the excep-
tions in § 274(e) are not disallowed under
§ 274(a).

Section 274(e)(2) provides an excep-
tion for expenses for goods, services, and
facilities, to the extent that the expenses
are treated by the taxpayer, with respect to
the recipient of the entertainment, amuse-
ment, or recreation, as compensation to its
employees under Chapter 1 and as wages
to its employees under chapter 24. Al-
though the language in § 274(e)(2) refers
to a recipient of entertainment, amuse-
ment, or recreation, it applies as a specific
exception to the application of § 274(a),
which, as amended by the Act includes the
QTF expense disallowance in § 274(a)(4).
Thus, the Treasury Department and the
IRS have determined that QTF expenses
are included in this exception to the extent
that the fair market value of the QTF
exceeds the § 132(f)(2) limitation on ex-
clusion and such excess amount is in-
cluded in an employee's compensation
under Chapter 1 and wages under chapter
24. See § 1.132-9(b), Q/A-8. This inter-
pretation is consistent with Congressional
intent. See H.R. Rep. No.115-409, at 266
(2017) ("As part of its broader tax reform
effort, the Committee believes that certain
nontaxable fringe benefits should not be

1º Although § 132(f)(1)(D) lists qualified bicycle commuting reimbursements as a QTF, § 132(f)(8) suspends the reference in § 132(f)(1)(D) for taxable years beginning after December 31,
2017, and before January 1, 2026. Thus, for 2018-2025, QTFs do not include bicycle commuting reimbursements.

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deductible by employers if not includible
in income of employees.").

Section 274(e)(7) provides an excep-
tion for expenses for goods, services, and
facilities made available by the taxpayer
to the general public. When enacting
§ 274(n) in 1986 (limiting the deduction
for meal and entertainment expenses),
Congress acknowledged that a taxpayer's
customers and potential customers are
members of the general public for pur-
poses of § 274(e)(7):

The reduction rule [in § 274(n)] does
not apply in the case of items, such as
samples and promotional activities,
that are made available to the general
public. For example, if the owner of
a hardware store advertises that tick-
ets to a baseball game will be pro-
vided to the first 50 people who visit
the store on a particular date, or who
purchase an item from the store dur-
ing a sale, then the full amount of the
face value of the tickets is deductible
by the owner.

H.R. Rep. No. 99-426 (1986), reprinted
in 1986-3 (Vol. 2) C.B. 1, 124, and S.
Rep. No. 99-313(1986), reprinted in
1986-3 (Vol. 3) C.B. 1, 72. Thus, the
Treasury Department and the IRS have
determined that expenses for parking
made available to the general public are
within this exception. The regulations un-
der § 274(e)(7) further explain the general
public exception:

Expenditures for entertainment of the
general public by means of televi-
sion, radio, newspapers and the like,
will come within this exception, as
will expenditures for distributing
samples to the general public. Simi-
larly, expenditures for maintaining
private parks, golf courses and simi-
lar facilities, to the extent that they
are available for public use, will
come within this exception. For ex-
ample, if a corporation maintains a
swimming pool which it makes
available for a period of time each
week to children participating in a
local public recreational program,
the portion of the expense relating to
such public use of the pool will come
within this exception.

Section 1.274-2(f)(2)(viii). However,
goods, services, and facilities are not
made available to the general public if

they are made available only to an exclu-
sive list of guests. See Churchill Downs,
Inc. v. Commissioner, 307 F.3d 423 (6th
Cir. 2002).

Generally, § 274 is not applicable to
tax-exempt organizations except with re-
gard to determining their deductions con-
nected with unrelated trades or businesses.
However, under § 512(a)(7), as added by
the Act, the UBTI of organizations de-
scribed in § 511(a)(2) ("tax-exempt orga-
nizations") is increased by any amount for
which a deduction is not allowable by
reason of § 274 and which is paid or
incurred by such organization for (1) any
QTF as defined in § 132(f), (2) any park-
ing facility used in connection with qual-
ified parking as defined in § 132(f)(5)(C),
or (3) any on-premises athletic facility as
defined in § 132(j)(4)(B).

## INTERIM GUIDANCE ON QTF PARKING ISSUES

The Treasury Department and the IRS
have received questions about how to de-
termine the amount of parking expenses
that is nondeductible or treated as an in-
crease in UBTI. This notice provides
guidance to determine the nondeductible
amount of parking expenses, as well as
the amount treated as increasing UBTI.
The method of determining the nonde-
ductible amount depends on whether the
taxpayer pays a third party to provide
parking for its employees or the taxpayer
owns or leases a parking facility where its
employees park.

### A. Taxpayer Pays a Third Party for Employee Parking Spots

If a taxpayer pays a third party an
amount so that its employees may park at
the third party's parking lot or garage, the
§ 274(a)(4) disallowance generally is cal-
culated as the taxpayer's total annual cost
of employee parking paid to the third
party. However, if the amount the tax-
payer pays to a third party for an employ-
ee's parking exceeds the § 132(f)(2)
monthly limitation on exclusion, which
for 2018 is $260 per employee, that excess
amount must be treated by the taxpayer as
compensation and wages to the employee.
As a result, the total of the monthly
amount in excess of $260 that is treated as
compensation and wages is excepted from

the taxpayer's § 274(a) disallowance
amount by § 274(e)(2).

B. Taxpayer Owns or Leases All or a
Portion of a Parking Facility

Until further guidance is issued, if a
taxpayer owns or leases all or a portion of
one or more parking facilities where its
employees park, the § 274(a)(4) disallow-
ance may be calculated using any reason-
able method. The methodology described
in Steps 1-4 of this section B is deemed to
be a reasonable method. Using the value
of employee parking to determine ex-
penses allocable to employee parking in a
parking facility owned or leased by the
taxpayer is not a reasonable method be-
cause § 274(a)(4) disallows a deduction
for the expense of providing a QTF, re-
gardless of its value. Furthermore, for tax-
able years beginning on or after January 1,
2019, a method that fails to allocate ex-
penses to reserved employee spots (within
the meaning of step 1 in this section B)
cannot be a reasonable method; however,
see the rule later in this notice providing
that changes in employee reserved spot
designations made by March 31, 2019,
may be treated as applying retroactively
for purposes of this notice.

For purposes of this notice, a "parking
facility" includes indoor and outdoor ga-
rages and other structures, as well as park-
ing lots and other areas, where employees
may park on or near the business premises
of the employer or on or near a location
from which the employee commutes to
work. The term does not include any park-
ing on or near property used by the em-
ployee for residential purposes. If a tax-
payer owns or leases more than one
parking facility in a single geographic lo-
cation, the taxpayer may aggregate the
number of spots in those parking facilities
when using the methodology in this sec-
tion B. However, if a taxpayer owns or
leases parking facilities in more than one
geographic location, the taxpayer may not
aggregate the spots in parking facilities
that are in different geographic locations.
See example 8 below.

For purposes of this notice, "total park-
ing expenses" include, but are not limited
to, repairs, maintenance, utility costs, in-
surance, property taxes, interest, snow and
ice removal, leaf removal, trash removal,
cleaning, landscape costs, parking lot at-

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tendant expenses, security, and rent or
lease payments or a portion of a rent or
lease payment (if not broken out sepa-
rately). A deduction for an allowance for
depreciation on a parking structure owned
by a taxpayer and used for parking by the
taxpayer's employees is an allowance for
the exhaustion, wear and tear, and obso-
lescence of property, and not a parking
expense for purposes of this notice. Com-
pare § 274(a)(1) (disallowing deductions
for any "item" with respect to entertain-
ment activities or facilities) to § 274(a)(4)
(disallowing deductions for the "expense"
of any QTF). See also W.L. Schautz v.
United States, 567 F.2d 373, 376 (Ct. Cl.
1977) (noting that § 274(a)(1) applies to
deductions broadly, not to expenses), and
Gordon v. Commissioner, 37 T.C. 986,
987 (1962) ("Any allowance for depreci-
ation is not an 'expense paid' or 'amount
paid."). Expenses paid for items not lo-
cated on or in the parking facility, includ-
ing items related to property next to the
parking facility, such as landscaping or
lighting, also are not included.

Step 1. Calculate the disallowance for
reserved employee spots

A taxpayer that owns or leases all or a
portion of one or more parking facilities
must identify the number of spots in the
parking facility, or the taxpayer's portion
thereof, exclusively reserved for the tax-
payer's employees ("reserved employee
spots"). Employee spots in the parking
facility, or portion thereof, may be exclu-
sively reserved for employees by a variety
of methods, including, but not limited to,
specific signage (for example, "Employee
Parking Only") or a separate facility or
portion of a facility segregated by a bar-
rier to entry or limited by terms of access.

The taxpayer must then determine the
percentage of reserved employee spots in
relation to total parking spots and multiply
that percentage by the taxpayer's total
parking expenses for the parking facility.
The product is the amount of the deduc-
tion for total parking expenses that is dis-
allowed under § 274(a)(4) for reserved
employee spots. Until March 31, 2019,
taxpayers that have reserved employee
spots as defined in this notice may change
their parking arrangements (changing sig-
nage, access, etc.) to decrease or eliminate

their reserved employee spots and treat
those parking spots as not reserved em-
ployee spots for purposes of this notice
retroactively to January 1, 2018.

Step 2. Determine the primary use of
remaining spots (the "primary use test")

The taxpayer may identify the remain-
ing parking spots in the parking facility
and determine whether their primary use
is to provide parking to the general public.
If the primary use of the remaining park-
ing spots in the parking facility is to pro-
vide parking to the general public, then
the remaining total parking expenses for
the parking facility are excepted from the
§ 274(a) disallowance by the general pub-
lic exception under § 274(e)(7). For pur-
poses of § 274(a)(4) and this notice, "pri-
mary use" means greater than 50 percent
of actual or estimated usage of the parking
spots in the parking facility. Primary use
of the parking spots is tested during nor-
mal business hours on a typical business
day, or in the case of an exempt organi-
zation during the normal hours of the ex-
empt organization's activities on a typical
day. Non-reserved parking spots that are
available to the general public but empty
during normal business hours on a typical
business day, or in the case of an exempt
organization, during the normal hours of
the exempt organization's activities on a
typical day, are treated as provided to the
general public. In addition, if the actual or
estimated usage of the parking spots var-
ies significantly between days of the week
or times of the year, the taxpayer may use
any reasonable method to determine the
average actual or estimated usage.

For purposes of § 274(a)(4) and this
notice, the "general public" includes, but
is not limited to, customers, clients, visi-
tors, individuals delivering goods or ser-
vices to the taxpayer, patients of a health
care facility, students of an educational
institution, and congregants of a religious
organization. The general public does not
include employees, partners or indepen-
dent contractors of the taxpayer.

### Step 3. Calculate the allowance for reserved nonemployee spots

If the primary use of a taxpayer's re-
maining parking spots is not to provide

parking to the general public, the taxpayer
may identify the number of spots in the
parking facility, or the taxpayer's portion
thereof, exclusively reserved for nonem-
ployees ("reserved nonemployee spots").
For example, reserved nonemployee spots
include spots reserved for visitors and
customers, as well as spots reserved for
partners, sole proprietors, and 2-percent
shareholders of S Corporations.

The number of reserved nonemployee
spots in the parking facility, or portion
thereof, may be exclusively reserved for
nonemployees by a variety of methods,
including, but not limited to, specific sig-
nage (for example, "Customer Parking
Only") or a separate facility or portion of
a facility segregated by a barrier to entry
or limited by terms of access. A taxpayer
that has no reserved nonemployee spots
may go to Step 4.

If the taxpayer has reserved nonem-
ployee spots, it may determine the percent-
age of reserved nonemployee spots in rela-
tion to the remaining total parking spots and
multiply that percentage by the taxpayer's
remaining total parking expenses. The prod-
uct is the amount of the deduction for re-
maining total parking expenses that is not
disallowed under § 274(a)(4).

Step 4. Determine remaining use and
allocable expenses

If the taxpayer completes Steps 1-3 in
the methodology above and has any re-
maining parking expenses not specifically
categorized as deductible or nondeduct-
ible, the taxpayer must reasonably deter-
mine the employee use of the remaining
parking spots during normal business
hours on a typical business day (or, in the
case of an exempt organization, during the
normal hours of the exempt organization's
activities on a typical day) and the related
expenses allocable to employee parking
spots. Methods to determine employee use
of the remaining parking spots may include
specifically identifying the number of em-
ployee spots based on actual or estimated
usage. Actual or estimated usage may be
based on the number of spots, the number of
employees, the hours of use, or other mea-
sures. See examples 7 and 8 below.

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## EXAMPLES

For each example, assume that the
parking expenses are otherwise deductible
expenses; that all or some portion of the
expenses relate to a QTF under § 132(f);
and that the § 132(f)(2) limitation on an
employee's exclusion is $260 per month.
For examples 3-10, also assume that the
taxpayer or tax-exempt organization uses
the methodology described in Steps 1-4
in Section B of this notice, as applicable.

Example 1. Taxpayer A pays B, a third party who
owns a parking garage across the street from A, $100
per month for each of A's 10 employees to park in
B's garage, or $12,000 per year (($100 × 10) × 12
= $12,000). The $100 per month paid for each em-
ployee for parking is excludible under § 132(a)(5), and
none of the § 274(e) exceptions apply. Thus, the entire
$12,000 is subject to the § 274(a)(4) disallowance.

Example 2. Assume the same facts as Example 1,
except A pays B $300 per month for each employee,
or $36,000 per year (($300 × 10) × 12= $36,000).
Of the $300 per month paid for parking for each
employee, $260 is excludible under § 132(a)(5) and
none of the § 274(e) exceptions apply to this amount.
Thus, $31,200 (($260 × 10) × 12 = $31,200) is
subject to the § 274(a)(4) disallowance.

The excess amount of $40 per employee per
month is not excludible under § 132(a)(5) and is
treated as compensation and wages. As a result, the
§ 274(e)(2) exception applies to this amount. Thus,
$4,800 ($36,000 - $31,200 = $4,800) is not subject to
the § 274(a)(4) disallowance and remains deductible.

Example 3. Taxpayer C, a big box retailer, owns
a surface parking lot adjacent to its store. C incurs
$10,000 of total parking expenses. C's parking lot
has 500 spots that are used by its customers and
employees. C usually has approximately 50 employ-
ees parking in the lot in non-reserved spots during
normal business hours on a typical business day. C
usually has approximately 300 non-reserved parking
spots that are empty during normal business hours on
a typical business day.

Step 1. Because none of C's parking
spots are exclusively reserved for employ-
ees, there is no amount to be specifically
allocated to reserved employee spots.

Step 2. The primary use of C's parking
lot is to provide parking to the general
public because 90% (450/500 = 90%) of
the lot is used by the public. The 300
empty non-reserved parking spots are
treated as provided to the general public.
Thus, expenses allocable to these spots are
excepted from the § 274(a) disallowance
by § 274(e)(7). Because the primary use
of the parking lot is to provide parking to
the general public, none of the $10,000 is
subject to the § 274(a)(4) disallowance.

Example 4. Taxpayer D, a manufacturer, owns a
surface parking lot adjacent to its plant. D incurs
$10,000 of total parking expenses. D's parking lot has

500 spots that are used by its visitors and employees. D
usually has approximately 400 employees parking in
the lot in non-reserved spots during normal business
hours on a typical business day. Additionally, D has 25
spots reserved for nonemployee visitors.

Step 1. Because none of D's parking
spots are exclusively reserved for employ-
ees, there is no amount to be specifically
allocated to reserved employee spots.

Step 2. The primary use of D's parking
lot is not to provide parking to the general
public because 80% (400/500 = 80%) of
the lot is used by its employees. Thus,
expenses allocable to those spots are not
excepted from the § 274(a) disallowance
by § 274(e)(7) under the primary use test.

Step 3. Because 5% (25/500 = 5%) of
D's parking lot spots are reserved nonem-
ployee spots, up to $9,500 ($10,000 ×
95% = $9,500) of D's total parking ex-
penses are subject to the § 274(a)(4) dis-
allowance under this step.

Step 4. D must reasonably determine
the employee use of the remaining park-
ing spots during normal business hours on
a typical business day and the expenses
allocable to employee parking spots.

Example 5. Taxpayer E, a manufacturer, owns a
surface parking lot adjacent to its plant. E incurs
$10,000 of total parking expenses. E's parking lot
has 500 spots that are used by its visitors and em-
ployees. E has 50 spots reserved for management
and has approximately 400 employees parking in the
lot in non-reserved spots during normal business
hours on a typical business day. Additionally, E has
10 reserved nonemployee spots for visitors.

Step 1. Because E has 50 reserved
spots for management, $1,000 ((50/500) ×
$10,000 = $1,000) is the amount of total
parking expenses that is nondeductible for
reserved employee spots under § 274(a)(4).

Step 2. The primary use of the remain-
der of E's parking lot is not to provide
parking to the general public because 89%
(400/450 = 89%) of the remaining park-
ing spots in the lot are used by its employ-
ees. Thus, expenses allocable to these
spots are not excepted from the § 274(a)
disallowance by § 274(e)(7) under the pri-
mary use test.

Step 3. Because 2% (10/450 = 2.22%)
of E's remaining parking lot spots are re-
served nonemployee spots, the $180 alloca-
ble to those spots (($10,000-$1,000) ×2%))
is not subject to the § 274(a)(4) disallow-
ance and continues to be deductible.

Step 4. E must reasonably determine
the employee use of the remaining park-
ing spots during normal business hours on

a typical business day and the expenses
allocable to employee parking spots.

Example 6. Taxpayer F, a financial services in-
stitution, owns a multi-level parking garage adjacent
to its office building. F incurs $10,000 of total park-
ing expenses. F's parking garage has 1,000 spots that
are used by its visitors and employees. However, one
floor of the parking garage is segregated by an elec-
tronic barrier and can be entered only with an access
card provided by F to its employees. The segregated
floor of the parking garage contains 100 spots. The
other floors of the parking garage are not used by
employees for parking during normal business hours
on a typical business day.

Step 1. Because F has 100 reserved
spots for employees, $1,000 ((100/1,000)
× $10,000 = $1,000) is the amount of
total parking expenses that is nondeduct-
ible for reserved employee spots under
§ 274(a)(4).

Step 2. The primary use of the remain-
der of F's parking lot is to provide parking
to the general public because 100% (900/
900 = 100%) of the remaining parking
spots are used by the public. Thus, ex-
penses allocable to those spots are ex-
cepted from the § 274(a) disallowance by
§ 274(e)(7) under the primary use test, and
only $1,000 is subject to the § 274(a)(4)
disallowance.

Example 7. Taxpayer G, an accounting firm,
leases a parking lot adjacent to its office building. G
incurs $10,000 of total parking expenses related to
the lease payments. G's leased parking lot has 100
spots that are used by its clients and employees. G
usually has approximately 60 employees parking in
the leased parking lot in non-reserved spots during
normal business hours on a typical business day.

Step 1. Because none of G's leased
parking spots are exclusively reserved for
employees, there is no amount to be spe-
cifically allocated to reserved employee
spots.

Step 2. The primary use of G's leased
parking lot is not to provide parking to the
general public because 60% (60/100 =
60%) of the lot is used by its employees.
Thus, G may not utilize the general public
exception from the § 274(a) disallowance
provided by § 274(e)(7).

Step 3. Because none of G's parking
spots are exclusively reserved for nonem-
ployees, there is no amount to be specifi-
cally allocated to reserved nonemployee
spots.

Step 4. G must reasonably determine
the use of the parking spots and the related
expenses allocable to employee parking.
Because 60% (60/100 = 60%) of G's
parking spots are used by G's employees

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during normal business hours on a typical
business day, G reasonably determines
that $6,000 ($10,000 × 60%=$6,000) of
G's total parking expenses is subject to
the § 274(a)(4) disallowance.

Example 8. Taxpayer H, a large manufacturer,
owns multiple parking lots and garages adjacent to
its manufacturing plant, warehouse, and office build-
ing at its complex in the city of X. H owns parking
lots and garages in other cities as well. For purposes
of applying the methodology in this notice, H
chooses to aggregate the parking spots in the lots and
garages at its complex in city X. However, H may
not aggregate the spots in parking lots and garages in
other cities with its parking spots in city X. H incurs
$50,000 of total parking expenses related to the
parking lots and garages at its complex in city X. H's
parking lots and garages at its complex in city X
have 10,000 spots in total that are used by its visitors
and employees. H has 500 spots reserved for man-
agement and has approximately 8,000 employees
parking in the garages and lots in non-reserved spots
during normal business hours on a typical business
day at H's complex in city X.

Step 1. Because H has 500 reserved
spots for management, $2,500 ((500/
10,000) × $50,000 = $2,500) is the
amount of total parking expenses that is
nondeductible for reserved employee
spots under § 274(a)(4).

Step 2. The primary use of the remain-
der of H's parking facility is not to pro-
vide parking to general public because
84% (8,000/9,500 = 84%) of the remain-
ing parking spots in the facility are used
by its employees. Thus, expenses alloca-
ble to these spots are not excepted from
the § 274(a) disallowance by § 274(e)(7)
under the primary use test.

Step 3. Because none of H's parking
spots are exclusively reserved for nonem-
ployees, there is no amount to be specifi-
cally allocated to reserved nonemployee
spots.

Step 4. H must reasonably determine
the employee use of the remaining park-
ing spots during normal business hours on
a typical business day and the expenses
allocable to employee parking spots at its
complex in city X. Because 84% (8,000/
9,500 = 84%) of the remaining parking
spots in the lot are used by its employees
during normal business hours on a typical
business day, H reasonably determines
that $39,900 (($50,000-$2,500) × 84%
= $39,900) of H's total parking expenses
is subject to the § 274(a)(4) disallowance.

## INTERIM GUIDANCE ON SECTION 512(a)(7) ISSUES

As noted above, under the Act, tax-
exempt organizations that have employees
are required by § 512(a)(7) to increase
their UBTI by any amount for which a
deduction is not allowable by reason of
§ 274 for any QTF (as defined by
§ 132(f)), any parking facility used in
connection with qualified parking (as de-
fined in § 132(f)(5)(C)), or any on-
premises athletic facility (as defined in
§ 132(j)(4)(B)). Because § 512(a)(7) in-
creases UBTI for any QTF amount for
which a deduction is disallowed by reason
of § 274, the rules governing tax-exempt
organizations necessarily mirror the rules
for taxpayers under § 274. See H.R. Rep.
No. 115-409, at 266 (2017) ("The Com-
mittee believes that aligning the tax treat-
ment between for-profit and tax-exempt
employers with respect to nontaxable
transportation and gym benefits provided
to employees will make the tax system
simpler and fairer for all businesses.").
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 organization. In such case, the amount
of the QTF expenses directly connected
with the unrelated trade or business is sub-
ject to the disallowance under § 274(a)(4)
and, thus, is disallowed as a deduction in
calculating the UBTI attributable to such
unrelated trade or business under the general
rule of § 512(a)(1).

Section 512(a)(7) specifically requires
UBTI to be increased by any amount for
which a deduction is not allowable under
§ 274 for any parking facility used in con-
nection with qualified parking (as defined in
§ 132(f)(5)(C)). Although parking facilities
are not separately listed in § 274(a)(4),
§ 274(a)(4) disallows a deduction for QTFs
(as defined in § 132(f)), and § 132(f)(1)(C)
provides that QTFs include qualified park-
ing. Under § 132(f)(5)(C) and § 1.132-9(b),
Q/A-4, qualified parking means parking
provided to an employee by an employer on
or near the employer's business premises or
at a location from which the employee com-
mutes to work (other than property used by
the employee for residential purposes) and
may be provided on property that the em-
ployer owns or leases. Thus, the expenses

for a parking facility referenced in
§ 512(a)(7) are those expenses related to the
property an employer owns or leases, at or
near the employer's business or at a location
from which the employee commutes to
work. Expenses for these parking facilities
used in connection with qualified parking
and as part of the provision of qualified
parking are nondeductible under § 274(a)(4)
as expenses for QTFs and result in an in-
crease in UBTI under § 512(a)(7). Section
512(a)(7) mentions on-premises athletic fa-
cilities. However, the Act did not include a
corresponding change to § 274 disallowing
deductions generally for on-premises ath-
letic facilities. Accordingly, a deduction for
expenses paid or incurred for on-premises
athletic facilities is not disallowed under
§ 274 if the athletic facility is primarily for
the benefit of the tax-exempt organization's
employees and does not discriminate in fa-
vor of highly compensated employees. See
§ 274(e)(4); § 1.274-2(f)(2)(v).

The provision of QTFs that results in
an increase in UBTI under § 512(a)(7) is
not an unrelated trade or business. See
Notice 2018-67, 2018-36 I.R.B. 409,
which discusses and solicits comments re-
garding the calculation of UBTI under
§ 512(a)(6) for exempt organizations with
more than one unrelated trade or business.
Therefore, any increase in UBTI under
§ 512(a)(7) is not subject to § 512(a)(6),
meaning that an exempt organization with
only one unrelated trade or business and
an increase in UBTI under § 512(a)(7)
does not become an exempt organization
with more than one unrelated trade or
business subject to § 512(a)(6). Accord-
ingly, for taxable years beginning after
December 31, 2017, until further guidance
is issued, a tax-exempt organization with
only one unrelated trade or business can
reduce the increase to UBTI under
§ 512(a)(7) to the extent that the deduc-
tions directly connected with the carrying
on of that unrelated trade or business ex-
ceed the gross income derived from such
unrelated trade or business.

Section 512(b)(12) generally provides
a specific deduction of $1,000 as a modi-
fication to the UBTI otherwise determined
under § 512(a), which, after the Act, in-
cludes the increase in UBTI determined
under § 512(a)(7). Furthermore, tax-
exempt organizations are required to file a
return on Form 990-T, Exempt Organiza-

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tion Business Income Tax Return, if they
have gross income, included in computing
UBTI, of $1,000 or more. See § 1.6012-
2(e). This threshold amount for filing
Form 990-T also applies to UBTI calcu-
lated with respect to § 512(a)(7). There-
fore, organizations for which the sum of
(1) gross income from unrelated trades or
businesses and (2) the increase of UBTI
under § 512(a)(7) is less than $1,000 need
not file a Form 990-T. Organizations for
which this amount is $1,000 or more must
file a Form 990-T. The Treasury Depart-
ment and the IRS intend to revise the
regulations under § 6012 to clarify that
amounts which increase UBTI under
§ 512(a)(7) are included in applying the
§ 1,000 threshold for filing the Form
990-T.

## EXAMPLES FOR TAX-EXEMPT ORGANIZATIONS

The principles illustrated in examples 1
through 8 above apply to tax-exempt orga-
nizations. Accordingly, the amount of the
deduction disallowed under § 274(a)(4) for
each entity would, in the case of a tax-
exempt organization with the same relevant
facts, be the increase in UBTI under
§ 512(a)(7). These principles are further il-
lustrated by the following examples:

Example 9. Tax-Exempt Organization J, a reli-
gious organization that operates a church and a
school, owns a surface parking lot adjacent to its
buildings. J incurs $10,000 of total parking expenses.
J's parking lot has 500 spots that are used by its
congregants, students, visitors, and employees, and 10
spots that are reserved for certain employees. During
the normal hours of J's activities on weekdays, J usu-
ally has approximately 50 employees parking in the lot
in non-reserved spots and approximately 440 non-
reserved parking spots that are empty. During the nor-
mal hours of J's activities on weekends, J usually has
approximately 400 congregants parking in the lot in
non-reserved spots and 20 employees parking in the lot
in non-reserved spots.

Step 1. Because J has 10 reserved spots
for certain employees, $200 ((10/500) ×
$10,000 = $200) is the amount of total
parking expenses that is nondeductible for
reserved employee spots under § 274(a)(4).
Thus, under § 512(a)(7), J must increase its
UBTI by $200, the amount of the deduction
disallowed under § 274(a)(4).

Step 2. Because usage of the parking
spots varies significantly between days of
the week, J uses a reasonable method to
determine that the primary use of the re-
mainder of J's parking lot is to provide

parking to the general public because 90%
(440/490 = 90%) of the spots are used by
the public during the weekdays and 95%
(470/490) of the spots are used by the
public on the weekends. The empty, non-
reserved parking spots are treated as pro-
vided to the general public. Thus, ex-
penses allocable to these spots are
excepted from the § 274(a) disallowance
by § 274(e)(7) under the primary use test,
and only $200 of the $10,000 is subject to
the § 274(a)(4) disallowance. Therefore,
only $200 of the expenses for the provi-
sion of the QTF will result in an increase
to UBTI under § 512(a)(7).

If J does not have gross income from
any unrelated trades or businesses of $800
or more included in computing its UBTI (to
reach the $1,000 filing threshold), J is not
required to file a Form 990-T for that year.

Example 10. Tax-Exempt Organization K is a
hospital and owns a surface parking lot adjacent to
its building. K incurs $10,000 of total parking ex-
penses. K's parking lot has 500 spots that are used by
its patients, visitors, and employees. K has 50 spots
reserved for management and has approximately 100
employees parking in the lot in non-reserved spots
during the normal operating hours of the hospital.

Step 1. Because K has 50 reserved spots
for employees, $1,000 ((50/500) × $10,000
= $1,000) is the amount of total parking
expenses that is nondeductible for reserved
employee spots under § 274(a)(4). Thus,
under § 512(a)(7), K must increase its UBTI
by $1,000, the amount of the deduction dis-
allowed under § 274(a)(4).

Step 2. The primary use of the remain-
der of K's parking lot is to provide park-
ing to the general public because 78%
(350/450 = 78%) of the remaining spots
in the lot are open to the public. Thus,
expenses allocable to these spots are ex-
cepted from the § 274(a) disallowance by
§ 274(e)(7) under the primary use test, and
only $1,000 is subject to the § 274(a)(4)
disallowance. Therefore, only $1,000 of
the expenses for the provision of the QTF
will result in an increase in UBTI under
§ 512(a)(7).

K will need to add the $1,000 increase
of UBTI under § 512(a)(7) to its gross
income from unrelated trades or busi-
nesses. K is required to file a Form 990-T
because the $1,000 increase to UBTI un-
der § 512(a)(7) meets the filing threshold.

## RELIANCE

Until further guidance is issued, tax-
payers may rely on the guidance provided
in this notice to determine the amount of
expenses for QTFs that is nondeductible
under § 274(a)(4) or treated as an increase
in UBTI under § 512(a)(7).

## REQUEST FOR COMMENTS

The Treasury Department and the IRS
request comments for future guidance to
further clarify the treatment of QTFs un-
der §§ 274 and 512. In particular, the
Treasury Department and the IRS request
comments about the definitions of "primary
use" and "general public" and whether pri-
mary use should be used to determine the
extent to which parking is made available to
the general public under § 274(e)(7). The
Treasury Department and the IRS request
comments on other methods for determining
the use of the parking spots and the related
expenses allocable to employee parking.
The Treasury Department and the IRS also
request comments on the applicability of
§ 274(e)(8) to expenses for any goods or
services that constitute a QTF sold by the
taxpayer to an employee in a bona fide
transaction for an adequate and full consid-
eration in money or money's worth and the
circumstances under which such a transac-
tion should be excluded from the term QTF
for purposes of § 274(a)(4).

## WHERE TO SEND COMMENTS

Public comments should be submitted
by February 22, 2019 and should include
a reference to Notice 2018-99. Com-
ments may be submitted electronically via
the Federal eRulemaking Portal at www.
regulations.gov (type IRS-2018-0038 in
the search field on the regulations.gov
homepage to find this notice and submit
comments). Alternatively, submissions may
be sent by one of the following methods:

· By Mail:
Internal Revenue Service

Attn: CC:PA:LPD:PR (Notice 2018-
99)
Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

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· By Hand or Courier Delivery: Sub-
missions may be hand-delivered
Monday through Friday between the
hours of 8 a.m. and 4 p.m. to:

Courier's Desk
Internal Revenue Service
Attn: CC:PA:LPD:PR
(Notice 2018-99)
1111 Constitution Avenue, NW
Washington, DC 20224

All recommendations for guidance
submitted by the public in response to this
notice will be available for public inspec-
tion and copying in their entirety.

## DRAFTING INFORMATION

The principal author of this notice is
Patrick M. Clinton of the Office of Asso-
ciate Chief Counsel (Income Tax & Ac-
counting). However, other personnel from
the Treasury Department and the IRS par-
ticipated in its development. For further
information about income tax issues ad-
dressed in this notice, please contact Pat-
rick M. Clinton at (202) 317-7005; for
further information about qualification as
a QTF, please contact Mikhail Zhidkov at
(202) 317-4774; and for further informa-
tion about exempt organization issues ad-
dressed in this notice, please contact La
Vonne Fischer at (202) 317-5800. These
are not toll-free numbers.

### Relief from Additions to Tax for Underpayment of Estimated Income Tax for Tax-Exempt Organizations That Provide Certain Qualified Transportation Fringes

#### Notice 2018-100

This notice provides certain tax-
exempt organizations a waiver of the ad-
dition to tax under section 6655 of the
Internal Revenue Code (Code) for under-
payment of estimated income tax pay-
ments required to be made on or before
December 17, 2018, to the extent the un-
derpayment of estimated income tax re-
sults from the changes to the tax treatment
of qualified transportation fringes under

sections 13304(c) and 13703 of "An Act
to provide for reconciliation pursuant to
titles II and V of the concurrent resolution
on the budget for fiscal year 2018" (the
Act). Pub. L. No. 115-97, 131 Stat. 2054.
This relief applies to a tax-exempt orga-
nization that (1) provides qualified trans-
portation fringes (as defined in section
132(f)) to an employee for which esti-
mated income tax payments, affected by
changes to sections 274 and 512 under the
Act, would otherwise be required to be
made on or before December 17, 2018,
and (2) was not required to file a Form
990-T, Exempt Organization Business
Income Tax Return, for the taxable year
preceding the organization's first taxable
year ending after December 31, 2017.
This relief is limited to tax-exempt orga-
nizations that timely file Form 990-T and
timely pay the amount reported for the
taxable year for which relief is granted.

## BACKGROUND

Generally, the Code requires taxpayers
to pay federal income taxes as they earn
income. To the extent these taxes are not
withheld, a taxpayer must pay estimated
income tax on a quarterly basis.

Subsections 6655(c) and (d)(1)(A) of
the Code generally provide that, in the
case of a corporation, private foundation,
private foundation organized as a trust, or
tax-exempt organization, estimated in-
come tax is required to be paid in four
installments and the amount of any re-
quired installment is 25 percent of the
required annual payment. Generally, un-
der section 6655(d)(1)(B), the required
annual payment is the lesser of (i) 100
percent of the tax shown on the return for
the taxable year or (ii) 100 percent of the
tax shown on the taxpayer's return for the
preceding taxable year, so long as the pre-
ceding taxable year was a full twelve
months long. However, section 6655(d)(1)
(B)(ii) shall not apply if the preceding tax-
able year was not a taxable year of 12
months, or the corporation did not file a
return for such preceding taxable year show-
ing a liability for tax. Under section 6655(e),
the amount of the required installment is the
annualized income installment or adjusted
seasonal installment for those taxpayers
who establish that such amount is lower
than 25 percent of the required annual pay-
ment determined under section 6655(d).

Section 6655(a) imposes an addition to tax
for failure to make a sufficient and timely
payment of estimated income tax.

On December 22, 2017, the Act
amended the Code. Among other things,
the Act affected employers who provide
qualified transportation fringes to employ-
ees. Under section 274(a)(4), added by
section 13304(c) of the Act, employers
may no longer deduct expenses for qual-
ified transportation fringes provided to
employees. Section 13304(c) of the Act
also added section 274(l), which disallows
deductions for transportation and com-
muting benefits except as necessary for
ensuring the safety of the employee.
Section 274(l)(2) provides that deduc-
tions for qualified bicycle commuting
reimbursements (as described in section
132(f)(5)(F)) are not disallowed by sec-
tion 274(l)(1) for any amounts paid or
incurred after December 31, 2017, and be-
fore January 1, 2026. Section 274(a)(4) does
not disallow deductions for qualified bicycle
commuting reimbursements during the
same period because section 132(f)(8) sus-
pends their exclusion from gross income for
any taxable year beginning after December
31, 2017 and before January 1, 2026. Thus,
for the suspension period, qualified bicycle
reimbursements are not qualified transporta-
tion fringes.

Under section 512(a)(7), added by sec-
tion 13703 of the Act, tax-exempt organi-
zations must increase unrelated business
taxable income (UBTI) by any amount for
which a deduction is not allowable by
reason of section 274 and which is paid or
incurred for any qualified transportation
fringes (as defined in section 132(f)) and
any parking facility used in connection
with qualified parking (as defined in sec-
tion 132(f)(5)(C)). (While new section
512(a)(7) also mentions on-premises ath-
letic facilities, the Act did not include a
corresponding change to section 274; ac-
cordingly, a deduction for expenses paid
or incurred for on-premises athletic facil-
ities is disallowed due to application of
section 274 only if it discriminates in fa-
vor of highly compensated employees.
See IRC § 274(e)(4). This Notice does not
address the possibility of estimated tax
payments of UBTI related to discrimina-
tory on-premises athletic facilities.) These
provisions are effective for amounts paid
or incurred after December 31, 2017.

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# TRANSITIONAL RELIEF FOR UNDERPAYMENT OF ESTIMATED INCOME TAX

Enactment of section 512(a)(7) may
result in tax-exempt organizations owing
unrelated business income tax and having
to pay estimated income tax for the first
time. These taxpayers would not be eligi-
ble to use the safe harbor in section
6655(d)(1)(B)(ii) to calculate the required
annual payment of estimated income tax
on the basis of the tax shown on the return
for the taxpayer's preceding taxable year
and may need additional time to develop
the knowledge and processes to comply
with estimated income tax payment re-
quirements. Accordingly, in the interest of
sound tax administration, the addition to
tax under section 6655 for failure to make
estimated income tax payments otherwise
required to be made on or before Decem-
ber 17, 2018, is waived for certain tax-
exempt organizations that provide quali-

fied transportation fringes (as defined in
section 132(f)) and any parking facility
used in connection with qualified parking
(as defined in section 132(f)(5)(C)) to an
employee to the extent that the underpay-
ment of estimated income tax results from
enactment of section 13304(c) and section
13703 of the Act. This relief is available
only to any tax-exempt organization that
was not required to file a Form 990-T for
the taxable year immediately preceding
the organization's first taxable year end-
ing after December 31, 2017. This relief is
limited to tax-exempt organizations that
timely file Form 990-T and timely pay
the amount reported for the taxable year
for which relief is granted. Taxpayers who
do not qualify for relief under this notice
may avoid an addition to tax for under-
payment of estimated income tax if they
meet one of the statutory safe harbor or
exception provisions under section 6654
or section 6655 of the Code.

To claim the waiver under this notice,
the tax-exempt organization must write
"Notice 2018-100" on the top of its Form
990-T.

Simultaneous to the publication of this
Notice, Notice 2018-99 is being pub-
lished which provides interim guidance
for taxpayers to determine the amount of
parking expenses for qualified transporta-
tion fringes that is nondeductible under
section 274(a)(4) of the Code and for tax-
exempt organizations to determine the
corresponding increase in the amount of
UBTI under section 512(a)(7) attributable
to the nondeductible parking expenses.

# CONTACT INFORMATION

The principal author of this notice is
Michael A. Franklin of the Office of the
Associate Chief Counsel (Procedure and
Administration). For further information,
please contact Mr. Franklin at (202) 317-
6844 (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.

TFR-Transferor.

T.I.R .- Technical Information Release.

TP-Taxpayer.

Ct.D .- Court Decision.

I.R.B .- Internal Revenue Bulletin.

TR-Trust.

CY-County.

LE-Lessee.

TT-Trustee.

D-Decedent.

LP-Limited Partner.

LR-Lessor.

X-Corporation.

DE-Donee.

Del. Order-Delegation Order.

Nonacq .- Nonacquiescence.

O Organization.

DR-Donor.

P-Parent Corporation.

PHC-Personal Holding Company.

PO-Possession of the U.S.

PR-Partner.

PRS-Partnership.

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

REIT-Real Estate Investment Trust.

Rev. Proc .- Revenue Procedure.

Rev. Rul .- Revenue Ruling.

S-Subsidiary.

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

Stat .- Statutes at Large.

T-Target Corporation.

T.C .- Tax Court.

T.D .- Treasury Decision.

TFE-Transferee.

CFR-Code of Federal Regulations.

CI-City.

GR-Grantor.

COOP-Cooperative.

IC-Insurance Company.

U.S.C .- United States Code.

DC-Dummy Corporation.

M-Minor.

Y-Corporation.

DISC-Domestic International Sales Corporation.

E-Estate.

EE-Employee.

E.O .- Executive Order.

ER-Employer.

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

F-Fiduciary.

FC-Foreign Country.

FICA-Federal Insurance Contributions Act.

FISC-Foreign International Sales Company.

FPH-Foreign Personal Holding Company.

BK-Bank.

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

C-Individual.

C.B .- Cumulative Bulletin.

Z-Corporation.

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Numerical Finding List1

Proposed Regulations :- Continued

Treasury Decisions:

Bulletin 2018-27 through 2018-52

REG-103474-18, 2018-32 I.R.B. 284

9834, 2018-31 I.R.B. 233

REG-104390-18, 2018-43 I.R.B. 671

9835, 2018-33 I.R.B. 288

Announcements:

REG-104397-18, 2018-41 I.R.B. 560

9836, 2018-33 I.R.B. 291

REG-104872-18, 2018-44 I.R.B. 762

9838, 2018-34 I.R.B. 309

2018-09, 2018-28 I.R.B. 206

REG-106977-18, 2018-27 I.R.B. 6

9839, 2018-35 I.R.B. 325

2018-12, 2018-30 I.R.B. 232

REG-107163-18, 2018-49 I.R.B. 839

9840, 2018-50 I.R.B. 817

2018-13, 2018-43 I.R.B. 232

REG-107813-18, 2018-49 I.R.B. 841

9841, 2018-50 I.R.B. 913

2018-14, 2018-46 I.R.B. 773

REG-107892-18, 2018-35 I.R.B. 353

9842, 2018-48 I.R.B. 783

2018-15, 2018-50 I.R.B. 1020

REG-112176-18, 2018-37 I.R.B. 430

9843, 2018-50 I.R.B. 957

Notices:

REG-114540-18, 2018-47 I.R.B. 777

REG-118826-16, 2018-48 I.R.B. 789

2018-48, 2018-28 I.R.B. 9

2018-56, 2018-27 I.R.B. 3

Revenue Procedures:

2018-58, 2018-33 I.R.B. 305

2018-59, 2018-28 I.R.B. 196

2018-35, 2018-28 I.R.B. 204

2018-60, 2018-31 I.R.B. 275

2018-36, 2018-38 I.R.B. 442

2018-61, 2018-31 I.R.B. 278

2018-37, 2018-29 I.R.B. 210

2018-62, 2018-34 I.R.B. 316

2018-38, 2018-31 I.R.B. 280

2018-63, 2018-34 I.R.B. 318

2018-39, 2018-34 I.R.B. 319

2018-64, 2018-35 I.R.B. 347

2018-40, 2018-34 I.R.B. 320

2018-65, 2018-35 I.R.B. 350

2018-42, 2018-36 I.R.B. 424

2018-67, 2018-36 I.R.B. 409

2018-43, 2018-36 I.R.B. 425

2018-68, 2018-36 I.R.B. 418

2018-44, 2018-37 I.R.B. 426

2018-69, 2018-37 I.R.B. 426

2018-45, 2018-37 I.R.B. 428

2018-70, 2018-38 I.R.B. 441

2018-46, 2018-39 I.R.B. 460

2018-71, 2018-41 I.R.B. 548

2018-72, 2018-40 I.R.B. 522

2018-47, 2018-39 I.R.B. 518

2018-73, 2018-40 I.R.B. 526

2018-48, 2018-40 I.R.B. 521

2018-74, 2018-40 I.R.B. 529

2018-49, 2018-41 I.R.B. 548

2018-75, 2018-41 I.R.B. 556

2018-50, 2018-42 I.R.B. 610

2018-76, 2018-42 I.R.B. 599

2018-51, 2018-44 I.R.B. 721

2018-77, 2018-42 I.R.B. 601

2018-52, 2018-42 I.R.B. 611

2018-78, 2018-42 I.R.B. 604

2018-53, 2018-43 I.R.B. 667

2018-79, 2018-42 I.R.B. 606

2018-54, 2018-45 I.R.B. 769

2018-80, 2018-42 I.R.B. 609

2018-55, 2018-47 I.R.B. 775

2018-81, 2018-43 I.R.B. 666

2018-56, 2018-50 I.R.B. 985

2018-82, 2018-44 I.R.B. 718

2018-57, 2018-49 I.R.B. 827

2018-83, 2018-47 I.R.B. 774

2018-58, 2018-50 I.R.B. 990

2018-84, 2018-45 I.R.B. 768

2018-59, 2018-50 I.R.B. 1018

2018-85, 2018-48 I.R.B. 788

2018-60, 2018-51 I.R.B. 1045

2018-86, 2018-50 I.R.B. 982

2018-88, 2018-49 I.R.B. 817

Revenue Rulings:

2018-89, 2018-49 I.R.B. 826

2018-90, 2018-49 I.R.B. 826

2018-19, 2018-27 I.R.B. 1

2018-91, 2018-50 I.R.B. 985

2018-20, 2018-28 I.R.B. 8

2018-92, 2018-51 I.R.B. 1038

2018-21, 2018-32 I.R.B. 282

2018-93, 2018-51 I.R.B. 1041

2018-22, 2018-34 I.R.B. 308

2018-94, 2018-51 I.R.B. 1042

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

2018-95, 2018-52 I.R.B. 1058

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

2018-96, 2018-52 I.R.B. 1061

2018-25, 2018-39 I.R.B. 445

2018-97, 2018-52 I.R.B. 1062

2018-26, 2018-40 I.R.B. 520

2018-99, 2018-52 I.R.B. 1067

2018-27, 2018-41 I.R.B. 546

2018-100, 2018-52 I.R.B. 1074

2018-28, 2018-45 I.R.B. 764

Proposed Regulations:

2018-29, 2018-45 I.R.B. 765

2018-30, 2018-49 I.R.B. 815

REG-130244-17, 2018-41 I.R.B. 593

2018-31, 2018-50 I.R.B. 848

REG-103163-18, 2018-51 I.R.B. 1049

2018-32, 2018-51 I.R.B. 1023

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 2018-52

Notices:

2014-5
Modified by
Notice 2018-69, 2018-37 I.R.B. 426

2015-28
Modified by
Notice 2018-69, 2018-37 I.R.B. 426

2016-57
Modified by
Notice 2018-69, 2018-37 I.R.B. 426

2017-45
Modified by
Notice 2018-69, 2018-37 I.R.B. 426

### 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

2018-31
Modified by
Rev. Proc. 2018-44, 2018-37 I.R.B. 426

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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.