us-irs-notices-irb-2019-9-pdf•Internal Revenue Bulletin 2019-9 (PDF rendition): IRS Notices
Internal Revenue Bulletin 2019-9 (PDF rendition): IRS Notices
us-irs-notices-irb-2019-9-pdfInternal Revenue Bulletin 2019-9 (PDF rendition): IRS NoticesGuidance
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# INTERNAL REVENUE BULLETIN
IRS
Bulletin No. 2019-09
February 25, 2019
## HIGHLIGHTS OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
## INCOME TAX
### Notice 2019-07, page 740.
This notice contains a proposed revenue procedure that pro-
vides for a safe harbor under which a rental real estate enter-
prise will be treated as a trade or business solely for purposes
of section 199A of the Internal Revenue Code (Code) and
§§ 1.199A-1 through 1.199A-6 of the Income Tax Regula-
tions (Regulations) (26 CFR Part 1). To qualify for treatment as
a trade or business under this safe harbor, the rental real
estate enterprise must satisfy the requirements of the pro-
posed revenue procedure. If an enterprise fails to satisfy these
requirements, the rental real estate enterprise may still be
treated as a trade or business for purposes of section 199A if
the enterprise otherwise meets the definition of trade or busi-
ness in § 1.199A-1(b)(14).
### REG-134652-18, page 747.
This document contains proposed regulations concerning the
deduction for qualified business income under section 199A of
the Internal Revenue Code (Code). The proposed regulations
will affect certain individuals, partnerships, S corporations,
trusts, and estates. The proposed regulations provide guid-
ance on the treatment of previously suspended losses that
constitute qualified business income. The proposed regula-
tions also provide guidance on the determination of the section
199A deduction for taxpayers that hold interests in regulated
investment companies, charitable remainder trusts, and split-
interest trusts.
### REG-141739-08, page 757.
These proposed regulations address when tax-exempt bonds
are treated as retired for purposes of § 103. To be tax-exempt
under § 103, a bond issued by a State or local government
must satisfy various eligibility requirements under §§ 141
through 150 at the time the bond is issued. Notice 88-130
and Notice 2008-41 describe circumstances in which a tax-
exempt bond is treated as having been retired for purposes of
§§ 103 and 141 through 150 and a new bond issued in its
place. These notices also provide special rules for certain
financial products, such as qualified tender bonds. The pro-
posed regulations propose rules similar to those in Notice
2008-41 and include a related conforming amendment to
§ 1.1001-3.
### REV. PROC. 2019-11, page 742.
This revenue procedure provides methods for calculating W-2
wages, as defined in section 199A(b)(4) and § 1.199A-2 of the
Income Tax Regulations, (1) for purposes of section 199A(b)(2)
of the Internal Revenue Code (Code) which, for certain taxpay-
ers, provides a limitation based on W-2 wages to the amount
of the deduction for qualified business income (QBI); and (2) for
purposes of section 199A(b)(7), which, for certain specified
agricultural and horticultural cooperative patrons, provides a
reduction to the section 199A deduction based on W-2 wages.
### REV. PROC. 2019-13, page 744.
This revenue procedure provides a safe harbor method of
accounting for determining depreciation deductions for pas-
senger automobiles that qualify for the 100-percent additional
first year depreciation deduction under section 168(k), as
amended by the Tax Cuts and Jobs Act, PL 115-97 (TCJA),
and that are subject to the depreciation limitations under sec-
tion 280F, as amended by the TCJA.
### T.D. 9846, page 583.
These final regulations implement section 965 of the Internal
Revenue Code as amended by the Tax Cuts and Jobs Act,
which was enacted on December 22, 2017. The final regula-
tions affect United States persons with direct or indirect own-
ership interests in certain foreign corporations.
### T.D. 9847, page 670.
Section 199A provides that, for taxable years beginning after
December 31, 2017 and before January 1, 2026, taxpayers
other than C corporations may deduct 20 percent of the
qualified business income from the taxpayer's qualified trades
Finding Lists begin on page ii.
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or businesses, which can be operated through a partnership, S
corporation, trust, estate, or sole proprietorship. The deduc-
tion is subject to multiple limitations based on the type of trade
or business, the taxpayer's taxable income, the amount of W-2
wages paid with respect to the qualified trade or business, and
the unadjusted basis of qualified property held by the trade or
business. Taxpayers other than C corporations generally may
also deduct 20 percent of aggregate qualified REIT dividends
and qualified publicly traded partnership income. Special rules
apply to specified agricultural or horticultural cooperatives.
The final regulations provide computational, definitional, and
anti-abuse guidance necessary to apply these rules.
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## The IRS Mission
Provide America's taxpayers top-quality service by helping
them understand and meet their tax responsibilities and en-
force the law with integrity and fairness to all.
## Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly.
It is the policy of the Service to publish in the Bulletin all
substantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless other-
wise indicated. Procedures relating solely to matters of internal
management are not published; however, statements of inter-
nal practices and procedures that affect the rights and duties
of taxpayers are published.
Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the
revenue ruling. In those based on positions taken in rulings to
taxpayers or technical advice to Service field offices, identify-
ing details and information of a confidential nature are deleted
to prevent unwarranted invasions of privacy and to comply with
statutory requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
### Part I .- 1986 Code.
This part includes rulings and decisions based on provisions of
the Internal Revenue Code of 1986.
### Part II .- Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A, Tax
Conventions and Other Related Items, and Subpart B, Legisla-
tion and Related Committee Reports.
Part III .- Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury's Office of the Assistant Sec-
retary (Enforcement).
### Part IV .- Items of General Interest.
This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index for
the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
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## Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
26 CFR 1.962-1 and 1.962-2; 26 CFR 1.965-1,
1.965-2, 1.965-3, 1.965-4, 1.965-5, 1.965-6,
1.965-7, 1.965-8, and 1.965-9; 26 CFR 1.986(c)-1
T.D. 9846
### DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1
Regulations Regarding the Transition
Tax Under Section 965 and Related Pro-
visions.
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final
regulations implementing section 965 of the
Internal Revenue Code (the "Code"). Sec-
tion 965 was amended by the Tax Cuts and
Jobs Act, which was enacted on December
22, 2017. This document finalizes the pro-
posed regulations published on August 9,
2018. The final regulations affect United
States persons with direct or indirect
ownership interests in certain foreign
corporations.
DATES: Effective date: These regulations
are effective on February 5, 2019. Appli-
cability dates: For dates of applicability,
see §§1.962-(d), 1.965-9(a), 1.965-9(b),
and 1.986(c)-1(d).
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations
§§1.962-1 and 1.962-2, 1.965-1 through
1.965-4, 1.965-7 through 1.965-9, and
1.986(c)-1, Natalie Punchak at (202) 317-
6934; concerning the regulations
§§1.965-5 and 1.965-6, Karen J. Cate at
(202) 317-6926 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
#### Background
On August 9, 2018, the Department of
the Treasury ("Treasury Department")
and the IRS published proposed regula-
tions (REG-104226-18) under sections
962, 965, and 986 in the Federal Register
(83 FR 39514) (the "proposed regula-
tions"). The proposed regulations were is-
sued following guidance announcing and
describing regulations intended to be is-
sued under section 965, which was
amended by section 14103 of the Tax
Cuts and Jobs Act, Pub. L. 115-97
(2017) (the "Act"). See Notice 2018-
07, 2018-4 I.R.B. 317; Notice 2018-
13, 2018-6 I.R.B. 341; and Notice
2018-26, 2018-16 I.R.B. 480. Addi-
tional guidance describing certain pro-
visions included in these regulations
(the "final regulations") was published
on October 15, 2018. See Notice 2018-
78, 2018-42 I.R.B. 604. Terms used but
not defined in this preamble have the
meaning provided in the final regula-
tions.
A public hearing was held on October
22, 2018. The Treasury Department and
the IRS also received written comments
with respect to the proposed regulations.
Comments received before the final regu-
lations were substantially developed, in-
cluding all comments received on or be-
fore the deadline for comments on
October 9, 2018, were carefully consid-
ered in developing the final regulations.
Several comments were received that do
not pertain to the rules in the proposed
regulations or that are otherwise outside
the scope of this rulemaking. For exam-
ple, certain comments regarding the pay-
ment and reporting of net tax liability un-
der section 965 as addressed in the
document containing Questions and An-
swers about Reporting Related to Section
965 on 2017 Tax Returns (available at
https://www.irs.gov/newsroom/questions-
and-answers-about-reporting-related-to-
section-965-on-2017-tax-returns) are be-
yond the scope of the final regulations.
Comments that are outside the scope of this
rulemaking are generally not addressed in
this preamble. The Treasury Department
and the IRS will consider these comments in
connection with any future guidance proj-
ects addressing the issues discussed in the
comments. All written comments received
in response to the proposed regulations are
available at www.regulations.gov or upon
request.
### Summary of Comments and Explanation of Revisions
#### I. Overview
The final regulations retain the basic
approach and structure of the proposed
regulations, with certain revisions. This
Summary of Comments and Explanation
of Revisions section discusses those revi-
sions as well as comments received in
response to the solicitation of comments
in the notice of proposed rulemaking ac-
companying the proposed regulations.
II. Comments and Changes to Proposed
§1.965-1 - Overview, General Rules,
and Definitions
Proposed §1.965-1 provides general
rules and definitions under section 965,
including general rules concerning section
965(a) inclusion amounts, general rules
concerning section 965(c) deduction
amounts, and rules concerning the treat-
ment of certain specified foreign corpora-
tions as controlled foreign corporations
(as defined in section 957) ("CFCs") and
certain controlled domestic partnerships
as foreign partnerships. The comments
and modifications with respect to these
rules are discussed in this Part II.
##### A. Application of exchange rate for determining section 965(a) inclusion amount
The proposed regulations provide that a
section 965(a) inclusion amount is deter-
mined by translating a section 958(a) U.S.
shareholder's pro rata share of the section
965(a) earnings amount of a deferred for-
eign income corporation ("DFIC") into U.S.
dollars using the spot rate on December 31,
2017. Proposed §1.965-1(b)(1). A comment
suggested that the average exchange rate for
the section 958(a) U.S. shareholder's 2017
fiscal year should be used under section
989(b)(3) and stated that the approach of the
proposed regulations created unnecessary
complexity but did not elaborate on how
complexity was created. The Treasury De-
partment and the IRS have determined that
while section 989(b)(3) would generally ap-
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ply the average exchange rate for the inclu-
sion year of the DFIC (not the section
958(a) U.S. shareholder, as the comment
suggested) for purposes of translating an
amount included in income under section
951(a)(1)(A), like a section 965(a) inclusion
amount, it is appropriate to use the grant of
regulatory authority in section 989 to in-
stead provide for translation at the spot rate
on December 31, 2017. As explained in
Notice 2018-13, a single spot rate on De-
cember 31, 2017, is more administrable for
the IRS and less burdensome for taxpayers
than the yearly average approach of section
989(b)(3) because under the yearly average
approach, certain amounts required for the
determination of the section 965(a) inclu-
sion amount (for example, a DFIC's alloca-
ble share of an aggregate foreign E&P def-
icit) would not be determinable until the
closing of the last year of a specified foreign
corporation beginning before January 1,
2018. Accordingly, the final regulations do
not adopt the comment.
### B. Application of controlled domestic partnership rule
Proposed §1.965-1(e) contains a rule
treating certain controlled domestic part-
nerships as foreign partnerships for pur-
poses of determining the section 958(a)
U.S. shareholders of a specified foreign
corporation owned by the controlled do-
mestic partnership and the section 958(a)
stock owned by such shareholders. A
comment suggested that because con-
trolled domestic partnership is defined by
reference to a specific United States share-
holder, the rule could be read to apply
only with respect to such shareholder but
not with respect to other partners of the
controlled domestic partnership, for
which it would therefore still be treated as
domestic. The definition of controlled do-
mestic partnership is accordingly revised
to not be defined only with respect to a
United States shareholder, so that a con-
trolled domestic partnership is clearly
treated as a foreign partnership for all
partners if the rule applies. See §1.965-
1(e)(2).
The comment also recommended that a
controlled domestic partnership treated as
a foreign partnership be treated as such for
purposes of the specified basis adjustment
rules discussed in Part III.D of this Sum-
mary of Comments and Explanation of Re-
visions. The final regulations adopt this rec-
ommendation and provide that a controlled
domestic partnership treated as a foreign
partnership is treated as a foreign pass-
through entity. Section 1.965-2(i)(2).
### C. Determination of accumulated post- 1986 deferred foreign income
1\. Application of Previously Taxed E&P
Exception to Non-CFCs
Proposed §1.965-1(f)(7)(i)(B) and (C)
exclude from accumulated post-1986 de-
ferred foreign income certain earnings and
profits ("E&P") described in section
959(c)(1) or 959(c)(2) ("previously taxed
E&P") and amounts that would be treated
as previously taxed E&P in the case of
shareholders that are not United States
shareholders on an E&P measurement
date. These exclusions (consistent with
section 965(d)(2)(B)) apply only to E&P
of a CFC. A comment requested that the
exclusion be expanded to previously taxed
E&P and amounts that would be treated as
previously taxed E&P of specified foreign
corporations that are no longer CFCs as of
the relevant E&P measurement date,
given that section 959 can apply to distri-
butions by foreign corporations that are no
longer CFCs. The Treasury Department and
the IRS have determined that the recom-
mendation is inconsistent with the clear stat-
utory language of section 965(d)(2)(B),
which applies solely to CFCs. Accordingly,
the final regulations do not reflect this rec-
ommendation. See Part II.J of this Summary
of Comments and Explanation of Revisions
for a discussion of the consequences of an
actual distribution of previously taxed E&P
for purposes of section 965.
### 2. Expansion of Previously Taxed E&P Exception to Address Distributions
Another comment suggested that the
final regulations expand on the rationale
of section 965(d)(2)(B) and proposed
§1.965-1(f)(7)(i)(B) and (C) to provide
that accumulated post-1986 deferred for-
eign income is reduced by post-1986
earnings and profits described in section
959(c)(3) that have been distributed to an
unrelated foreign corporation pursuant to
a dividend pro rata to such corporation
and a specified foreign corporation, given
that the "no diminution rule" discussed in
Part II.G.1 of this Summary of Comments
and Explanation of Revisions would de-
crease the post-1986 earnings and profits
by the amount distributed to the specified
foreign corporation but not the unrelated
foreign corporation. As discussed in more
detail in Part II.G.1 of this Summary of
Comments and Explanation of Revisions,
the Treasury Department and the IRS have
determined that the application of the statu-
tory "no diminution rule" is clear, and the
special rules in section 965(d)(2)(B) for pre-
viously taxed E&P have no bearing on the
fact pattern highlighted by the comment.
Accordingly, the final regulations do not
adopt this comment, nor a similar comment
suggesting that step 2 of the ordering rule in
proposed §1.965-2(b), discussed in Part
III.A of this Summary of Comments and
Explanation of Revisions, permit such div-
idends to persons other than specified for-
eign corporations to be taken into account
before the application of section 965 is de-
termined.
### 3. Expansion of Previously Taxed E&P Exception to Address Section 951(a)(1)(B) Inclusions
A comment suggested that a pre-
inclusion year inclusion under sections
951(a)(1)(B) and 956 with respect to a
DFIC whose inclusion year ends No-
vember 30, 2018, may not be properly
accounted for in determining accumu-
lated post-1986 deferred foreign income
as of the measurement date on Novem-
ber 2, 2017. The comment notes that a
distribution of an amount of E&P that
would be described in section 959(c)(1)
as a result of an inclusion under sections
951(a)(1)(B) and 956 during a pre-
inclusion year taxable year would pre-
vent sections 951(a)(1)(B) and 956 from
applying. Accordingly, such E&P would
not qualify for the exception from accu-
mulated post-1986 deferred foreign in-
come for previously taxed E&P in
§1.965-1(f)(7)(i)(B). The comment sug-
gested that the final regulations provide
an additional exception from the defini-
tion of accumulated post-1986 deferred
foreign income for E&P that would be
included in the income of a United
States shareholder under sections
951(a)(1)(B) and 956.
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The Treasury Department and the IRS
have determined that the statutory defini-
tion of accumulated post-1986 deferred
foreign income is clear in not excluding
such E&P. Moreover, modifications to re-
duce a section 965(a) inclusion amount to
the extent of an inclusion under sections
951(a)(1)(B) and 956 in such circum-
stances are not warranted for the same
reasons that modifications to address div-
idends with comparable results are not
warranted, as discussed in Part II.G.1 of
this Summary of Comments and Explana-
tion of Revisions. A new example illus-
trates the treatment of E&P of a specified
foreign corporation as of the E&P mea-
surement date on November 2, 2017,
which is described in section 959(c)(1) as
a result of an inclusion under section
951(a)(1)(B) with respect to the specified
foreign corporation's taxable year ending
on November 30, 2017. See §1.965-
2(j)(5).
### 4. Application of Previously Taxed E&P Exception in the Case of Section 962 Elections
Under section 962(d), E&P giving rise
to inclusions under section 951(a)(1) with
respect to which an election under section
962 applies are, notwithstanding section
959(a)(1), includible in the gross income
of a United States shareholder when dis-
tributed except to the extent of tax paid on
the inclusions. Therefore, those E&P (that
is, the non-excludable amount) are in-
cluded in accumulated post-1986 deferred
foreign income in an inclusion year. See
section 965(d)(2)(B) (excluding from ac-
cumulated post-1986 deferred foreign in-
come earnings that, if distributed, would
be excluded from gross income under sec-
tion 959). A comment suggested that ac-
cumulated post-1986 deferred foreign in-
come should exclude all previously taxed
E&P attributable to a prior year inclusion
under section 951(a)(1) by a United States
shareholder when a section 962 election
applied with respect to the prior year in-
clusion. In the alternative, the comment
suggested that the final regulations allow
foreign income taxes deemed paid with
respect to the original inclusion under sec-
tion 951(a)(1) to be treated as deemed
paid again with respect to a section 965(a)
inclusion with respect to such previously
taxed E&P. The Treasury Department and
the IRS have determined that the statute is
clear that a reduction to accumulated
post-1986 deferred income is allowed
only for E&P that would be excluded
from income under section 959 upon dis-
tribution. In addition, there is no authority
under the Code to allow the same foreign
income taxes to be credited twice. There-
fore, because there is no statutory author-
ity for such modifications, the suggested
modifications to the statutory definition of
accumulated post-1986 deferred foreign
income and operation of the foreign tax
credit rules are not warranted and are not
adopted in the final regulations.
### D. Determination of aggregate foreign cash position and cash position
The proposed regulations define "ag-
gregate foreign cash position" to mean the
greater of the aggregate of a section
958(a) U.S. shareholder's pro rata share of
the cash position of each specified foreign
corporation determined on the final cash
measurement date or the average of the
aggregate of a section 958(a) U.S. share-
holder's pro rata share of the cash position
of each specified foreign corporation de-
termined as of each specified foreign cor-
poration's first and second cash measure-
ment dates. Proposed §1.965-1(f)(8). For
purposes of this calculation, a specified
foreign corporation's cash position con-
sists of cash held by the corporation, the
net accounts receivable of the corporation,
and the fair market value of the cash-
equivalent assets held by the corporation.
Proposed §1.965-1(f)(16)(i). Cash-equiv-
alent assets include (i) personal property
which is of a type that is actively traded
and for which there is an established fi-
nancial market; (ii) commercial paper,
certificates of deposit, the securities of the
Federal government and of any State or
foreign government; (iii) any foreign cur-
rency; (iv) any obligation with a term of
less than one year ("short-term obliga-
tion"); and (v) derivative financial instru-
ments, other than bona fide hedging trans-
actions. Proposed §1.965-1(f)(13).
#### 1. Exclusions from Cash Position
Guidance was requested about the ex-
clusion of certain assets from the cash po-
sition of a specified foreign corporation.
Specifically, comments recommended that
cash subject to local regulatory restrictions,
held in a fiduciary or trust capacity, derived
from domestic E&P, earmarked to fund a
foreign acquisition pursuant to a legal con-
tract entered into before November 2, 2017,
obligated to be paid to a third party, or
corresponding to previously taxed E&P not
be taken into account in determining a spec-
ified foreign corporation's cash position.
Comments also requested that obligations
with respect to which there was an inclusion
under sections 951(a)(1)(B) and 956 be ex-
cluded from a specified foreign corpora-
tion's cash position. In addition, comments
requested guidance exempting certain assets
that would otherwise be considered personal
property which is of a type that is actively
traded and for which there is an established
financial market. For example, comments
suggested that the stock of a publicly traded
company be excluded from a specified for-
eign corporation's cash position if the stock
represents a controlling interest in a corpo-
ration, meets an annual trading volume
threshold, is the stock of a specified foreign
corporation, is held in the ordinary course of
a section 958(a) U.S. shareholder's trade or
business, or was not reported as a current
asset on the audited financial statements of a
section 958(a) U.S. shareholder or its spec-
ified foreign corporation. Similarly, com-
ments requested that certain products or raw
materials held as inventory that are a type of
property that may be actively traded on, for
example, commodities markets, and for-
ward contracts with respect to those items
be excluded from a specified foreign corpo-
ration's cash position if the items are part of
the corporation's ongoing operations or are
disposed of in the normal course of busi-
ness. One comment requested guidance that
actively traded personal property be pre-
sumptively treated as cash, subject to the
ability of the taxpayer to rebut the presump-
tion by submitting a statement with its tax
return that establishes, based on all of the
relevant facts and circumstances, that the
property is illiquid. Another comment stated
that the proposed regulations struck an ap-
propriate balance and requested that the ex-
ceptions from the definition of cash position
be limited to those in the proposed regula-
tions and that no additional exceptions be
given.
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The Treasury Department and the IRS
have determined that a narrow exemption
from the definition of "cash position" is
appropriate for certain assets held by a
specified foreign corporation in the ordi-
nary course of its trade or business as well
as for certain privately negotiated contracts
to buy or sell such assets. Therefore, in
response to comments, the final regulations
provide that a commodity that is described
in section 1221(a)(1) or 1221(a)(8) in the
hands of the specified foreign corporation is
excluded from the category of personal
property which is of a type that is actively
traded and for which there is an established
market, except with respect to dealers or
traders in commodities. Section 1.965-
1(f)(13)(i)(A) and (ii). Additionally, the fi-
nal regulations exclude forward contracts
and short positions with respect to such
commodities from the definition of deriva-
tive financial instrument to the extent that
they could have been identified as a hedging
transaction with respect to such commodi-
ties. See §1.965-1(f)(18)(iii) and (v). This
exemption does not raise the administrabil-
ity concerns that are inherent in a liquidity-
based test of widespread applicability.
However, the Treasury Department
and the IRS decline to adopt the recom-
mendations for additional cash position
exceptions. Congress developed a statu-
tory definition of "cash position" that in-
cludes all cash and certain assets held by a
specified foreign corporation regardless of
whether the cash or assets are illiquid or
were transferred from the United States.
See section 965(c)(3)(B). The legislative
history is consistent with the unambigu-
ous language in the statute. See, e.g., H.R.
Rep. No. 115-446, at 609-10 (2017)
("The cash position of an entity consists
of all cash, net accounts receivable, and
the fair market value of similarly liquid
assets, specifically including personal
property that is actively traded on an es-
tablished financial market, government
securities, certificates of deposit, commer-
cial paper, foreign currency, and short-
term obligations."). Therefore, the final
regulations continue to provide that, for
example, the fair market value of publicly
traded stock held by a specified foreign
corporation is included in a specified for-
eign corporation's cash position, regard-
less of the specified foreign corporation's
ownership percentage in the publicly
traded corporation, because such stock is
"of a type" that is actively traded on an
established securities market.
Additionally, creating broad regulatory
exceptions to the statutory definition would
require administratively complex tracing
and facts-and-circumstances rules. For ex-
ample, an exclusion for cash that originated
in the United States and was earmarked to
fund a foreign acquisition pursuant to a legal
contract entered into before November 2,
2017, would necessarily require difficult-to-
administer rules to identify such cash, which
may currently be or may have previously
been comingled with foreign-derived cash
in a single account. Similarly, it would be
challenging to administer a presumption or a
test that assesses the liquidity of every asset
based on the facts and circumstances.
Accordingly, the final regulations gen-
erally retain the definitions of "aggregate
foreign cash position" and "cash position"
set forth in the proposed regulations. See
§1.965-1(f)(8) and (16).
### 2. Accounts Receivable and Accounts Payable
The proposed regulations provide that
for purposes of determining net accounts
receivable taken into account in determin-
ing the cash position of a specified foreign
corporation, the term "accounts receiv-
able" means receivables described in sec-
tion 1221(a)(4), and the term "accounts
payable" means payables arising from the
purchase of property described in section
1221(a)(1) or 1221(a)(8) or the receipt of
services from vendors or suppliers, and
only receivables or payables with a term
upon issuance that is less than one year
are taken into account. Proposed §1.965-
1(f)(5) and (6).
Comments requested that the definition
of accounts payable for purposes of deter-
mining a specified foreign corporation's
cash position be expanded. Specifically,
comments recommended that accounts
payable be defined to include payables to
employees in the ordinary course of busi-
ness, payables arising from the purchase of
depreciable property, payables related to the
licensing of intellectual property, payables
for taxes other than income taxes, payables
for debt with a term of less than one year,
and payables established under Revenue
Procedure 99-32, 1999-2 C.B. 296. Al-
though the statute does not define the term
"accounts payable," generally accepted ac-
counting principles define the term to mean
amounts owed to vendors and suppliers for
the purchase of goods and services on
credit, to the exclusion of obligations such
as accrued taxes, interest expense, commis-
sion or royalty expense, and compensation
payable, which are treated as accrued liabil-
ities. The definition of accounts payable set
forth in the proposed regulations therefore
reflects the ordinary meaning of the term,
and the final regulations do not adopt these
recommendations.
### 3. Short-Term Obligations
The proposed regulations provide that
for purposes of determining a specified
foreign corporation's cash position, the
term "short-term obligation" means any
obligation with a term at issuance that is
less than one year and any loan that must
be repaid at the demand of the lender (or
that must be repaid within one year of
such demand) but does not include any
accounts receivable. Proposed §1.965-
1(f)(43). Comments requested that the
definition of short-term obligation be
modified to allow netting of short-term
notes payable against short-term notes re-
ceivable for purposes of computing a
specified foreign corporation's cash posi-
tion.
The Treasury Department and the IRS
decline to adopt these comments. The stat-
ute explicitly allows accounts payable to
be netted against accounts receivable for
purposes of determining the cash position
of a specified foreign corporation but does
not provide the same treatment with re-
spect to short-term obligations. See sec-
tion 965(c)(3)(B)(ii), (c)(3)(B)(iii)(IV),
and (c)(3)(C). The legislative history is
consistent with the statute's plain mean-
ing. See H.R. Rep. No. 115-446, at 615
(2017). Accordingly, the final regulations
retain the definition of "short-term obliga-
tion" set forth in the proposed regulations.
See §1.965-1(f)(43).
### 4. Cash-Equivalent Asset Hedging Transactions
For purposes of determining the cash
position of a specified foreign corporation,
the proposed regulations include special
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rules regarding the treatment of cash-
equivalent asset hedging transactions. The
term "cash-equivalent asset hedging trans-
action" is defined as a bona fide hedging
transaction identified on a specified for-
eign corporation's books and records as
hedging a cash-equivalent asset. Proposed
§1.965-1(f)(14). A bona fide hedging
transaction is defined to mean a hedging
transaction that meets (or that would meet
if the specified foreign corporation were a
CFC) the requirements of a bona fide
hedging transaction described in §1.954-
2(a)(4)(ii) (without regard to the identifi-
cation requirements, in the case of a spec-
ified foreign corporation that is not a
CFC). Proposed §1.965-1(f)(12).
The proposed regulations do not ad-
dress whether, and the extent to which, a
bona fide hedging transaction that hedges
an aggregate risk (an "aggregate hedging
transaction"), including risks with respect
to one or more cash-equivalent assets, may
be treated as a cash-equivalent asset hedging
transaction. For example, a bona fide hedg-
ing transaction may hedge the risk with re-
spect to multiple assets, some of which are
cash-equivalent assets and some of which
are not cash-equivalent assets. See generally
§1.954-2(a)(4)(ii)(A) (defining a bona fide
hedging transaction, in part, by reference to
the requirements of §1.1221-2(a) through
(d)); §1.1221-2(c)(3) (providing that a
hedging transaction may manage aggregate
risk).
The Treasury Department and the IRS
have determined that it is appropriate to
permit bona fide hedging transactions that
are aggregate hedging transactions to be
treated as cash-equivalent asset hedging
transactions to the extent that the risks
managed by the aggregate hedging trans-
action relate to cash-equivalent hedging
transactions. Accordingly, the final regu-
lations provide that an aggregate hedging
transaction may be treated as a cash-
equivalent asset hedging transaction and al-
locate the value of an aggregate hedging
transaction between cash-equivalent hedg-
ing transactions and other assets, if any,
being hedged. See §1.965-1(f)(14)(ii).
One comment requested guidance clari-
fying that hedging transactions that use
cash-equivalent assets that are not derivative
financial instruments as hedging instru-
ments, in addition to hedging transactions
that use derivative financial instruments as
hedging instruments, are eligible to be
treated as bona fide hedging transactions.
The Treasury Department and the IRS have
determined that it is clear that a hedging
transaction that uses a cash-equivalent asset
as a hedging instrument will qualify as a
bona fide hedging transaction if the require-
ments in proposed §1.965-1(f)(12) are met,
and no clarification is necessary.
#### E. Cash measurement dates
The proposed regulations provide that
a specified foreign corporation's final cash
measurement date is the close of the last
taxable year of the specified foreign corpo-
ration that begins before January 1, 2018,
and ends on or after November 2, 2017, if
any. Proposed §1.965-1(f)(24). The second
cash measurement date of a specified for-
eign corporation is the close of the last tax-
able year of the specified foreign corpora-
tion that ends after November 1, 2016, and
before November 2, 2017, if any. Proposed
§1.965-1(f)(31). The first cash measure-
ment date of a foreign corporation is the
close of the last taxable year of the specified
foreign corporation that ends after Novem-
ber 1, 2015, and before November 2, 2016,
if any. Proposed §1.965-1(f)(25). Under the
proposed regulations, a section 958(a) U.S.
shareholder takes into account its pro rata
share of the cash position of a specified
foreign corporation as of the close of
any cash measurement date of the spec-
ified foreign corporation on which the
section 958(a) U.S. shareholder is a sec-
tion 958(a) U.S. shareholder of the spec-
ified foreign corporation, without regard
to whether the section 958(a) U.S.
shareholder is a section 958(a) U.S.
shareholder as of any other cash mea-
surement date, including the final cash
measurement date of the specified for-
eign corporation. See proposed §1.965-
1(f)(30)(iii).
A comment recommended that the pro-
posed regulations be modified such that a
section 958(a) U.S. shareholder would not
take into account the pro rata share of the
cash position of any specified foreign cor-
poration liquidated before November 2,
2017. The comment is premised on the
view that the references to "each such
specified foreign corporation" in section
965(c)(3)(A)(ii) expressly link the speci-
fied foreign corporations whose cash po-
sitions are measured on the first and sec-
ond cash measurement dates to those
whose cash positions are measured on the
final cash measurement date. Accord-
ingly, the comment reads the statute to
provide that if a specified foreign corpo-
ration did not exist or was not held by a
section 958(a) U.S. shareholder on the
final cash measurement date, its cash po-
sition may not be taken into account under
section 965(c)(3)(A)(ii).
The Treasury Department and the IRS
have determined that the comment's read-
ing of section 965(c)(3)(A)(ii) is an infe-
rior reading and have determined that the
cash measurement date rules in the pro-
posed regulations are consistent with the
text and underlying purposes of the rele-
vant statutory provision and that the legisla-
tive history supports this conclusion. The
phrase "each such specified foreign corpo-
ration" in section 965(c)(3)(A)(ii)(I) and (II)
refers only to the phrase "each specified
foreign corporation of such United States
shareholder" in section 965(c)(3)(A)(i), and
not the additional language in section
965(c)(3)(A)(i) referring to the final cash
measurement date. Additionally, given that
the purpose of the multiple cash measure-
ment dates was to mitigate any incentive for
taxpayers to manipulate their cash position
as of the final cash measurement date, it is
appropriate to ensure that the cash position
of a specified foreign corporation in exis-
tence on a cash measurement date is taken
into account by a United States shareholder
on such date. For example, a rule that ig-
nored the cash position of specified foreign
corporations that did not exist or were not
held by a section 958(a) U.S. shareholder on
the final cash measurement date could allow
a section 958(a) U.S. shareholder with an
aggregate foreign cash position that was de-
termined as of the earlier cash measurement
dates described in section 965(c)(3)(A) to
retroactively reduce its aggregate foreign
cash position by liquidating or otherwise
disposing of specified foreign corporations
with significant cash positions, even when
cash and cash-equivalent assets of the spec-
ified foreign corporation continued to be
held by one or more other specified foreign
corporations of the section 958(a) U.S.
shareholder.
Finally, the Joint Committee on Taxa-
tion explanation of the Act also indicates
that, for purposes of section 965, the cash
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position of a specified foreign corporation
that no longer exists must still be taken
into account by a section 958(a) U.S.
shareholder in determining its aggregate
foreign cash position. See Staff, Joint
Committee on Taxation, General Expla-
nation of Public Law 115-97, JCS-1-18,
at 359-360 (2018) ("If a specified foreign
corporation does not exist on any partic-
ular cash measurement date, its cash po-
sition would be zero with respect to that
date."). Accordingly, the Treasury Depart-
ment and the IRS do not adopt this rec-
ommendation.
Another comment requested confirma-
tion that United States shareholder status,
the United States shareholder's pro rata
share, and specified foreign corporation
status are determined based on the facts
and applicable law at the time of each
cash measurement date. The Treasury De-
partment and the IRS have determined
that that is clear under proposed §1.965-
1(f)(8) and (f)(30)(iii), as illustrated by the
example in §1.965-1(g)(7). Accordingly,
no changes are made in the final regula-
tions in this regard.
#### F. Domestic pass-through entities
A comment made a number of sugges-
tions premised on the assumption that ag-
gregate foreign E&P deficits, section
965(a) inclusion amounts, and section
965(c) deductions are not determined at
the section 958(a) U.S. shareholder level
when the section 958(a) U.S. shareholder
is a domestic pass-through entity, and in-
stead that shares of the components of
those amounts (such as specified E&P
deficits, section 965(a) earnings amounts,
and aggregate foreign cash positions) are
taken into account separately by the do-
mestic pass-through owners. As discussed
in more detail in this Part II.F with respect
to the specific suggestions made by the
comment, the Treasury Department and
the IRS have determined that the statute
clearly provides otherwise, and the pro-
posed regulations and final regulations are
consistent with the statute.
The comment requested that the final
regulations clarify that if a domestic pass-
through entity is a United States share-
holder of an E&P deficit foreign corpora-
tion, a domestic pass-through owner of the
domestic pass-through entity can take into
account its shares of the domestic pass-
through entity's pro rata share of the spec-
ified E&P deficit of the E&P deficit for-
eign corporation to reduce the domestic
pass-through owner's pro rata share of a
section 965(a) earnings amount of a
DFIC. In support of its recommendation,
the comment cited the rule provided in
proposed §1.965-1(e) treating a con-
trolled domestic partnership as a foreign
partnership, such that its partners could be
treated as having a pro rata share of spec-
ified E&P deficits of E&P deficit foreign
corporations owned by the partnership.
However, that rule is intended to ensure
that the accumulated post-1986 deferred
foreign income of DFICs of such a part-
nership is subject to U.S. tax. The Trea-
sury Department and the IRS have deter-
mined that it should not be extended to
structures that do not present the same
tax-avoidance concerns, such as the one
raised by the comment involving a United
States person that is a partner in a domes-
tic partnership. The Treasury Department
and the IRS have determined that it is
clear under the statute that a domestic
pass-through entity's pro rata share of a
specified E&P deficit can only be used to
reduce the domestic pass-through entity's
pro rata share of section 965(a) earnings
amounts, and the proposed and final reg-
ulations are consistent with the statute.
Similarly, under the statute, a domestic
pass-through owner's distributive share of
a domestic pass-through entity's section
965(a) inclusion amount cannot be re-
duced by the domestic pass-through own-
er's pro rata share of a specified E&P
deficit of an E&P deficit foreign corpora-
tion of which it is a section 958(a) U.S.
shareholder. The proposed and final regu-
lations are consistent with the statute. Ac-
cordingly, the comment's suggestion is
not adopted.
The comment also suggested clarifying
that if a domestic pass-through entity's
aggregate foreign cash position exceeds
its aggregate section 965(a) inclusion
amounts, the domestic pass-through own-
ers of the domestic pass-through entity
need only take into account their share of
the excess aggregate foreign cash posi-
tion, and not their share of the aggregate
foreign cash position taken into account in
determining the section 965(c) deduction
amount of the domestic pass-through en-
tity. The Treasury Department and the
IRS have determined that because only a
section 958(a) U.S. shareholder can have
an aggregate foreign cash position, and
there is no mechanism for treating a do-
mestic pass-through owner of a domestic
pass-through entity that is a section 958(a)
U.S. shareholder as having a share of an
aggregate foreign cash position, it is clear
under the statute, the proposed regula-
tions, and the final regulations, that do-
mestic pass-through owners do not take
into account any amount of a domestic
pass-through entity's aggregate foreign
cash position. Accordingly, no clarifica-
tion is needed, and the comment is not
adopted.
### G. Post-1986 earnings and profits
#### 1. Treatment of Distributions
Under the proposed regulations, a
specified foreign corporation's post-1986
earnings and profits are determined with-
out diminution by reason of dividends dis-
tributed during the last taxable year of the
foreign corporation that begins before
January 1, 2018, other than dividends dis-
tributed to another specified foreign cor-
poration ("no diminution rule"). Proposed
§1.965-1(f)(29)(i)(B). Comments noted
that the no diminution rule may result in
overinclusion of a specified foreign cor-
poration's post-1986 earnings and profits
and suggested that the final regulations
limit the rule's application (that is, to al-
low diminution of a specified foreign cor-
poration's post-1986 earnings and profits)
in the case of dividends to a seller before
a sale during the inclusion year. The stat-
ute explicitly provides that dividend dis-
tributions, other than distributions to an-
other specified foreign corporation, must
not be taken into account for purposes of
computing a specified foreign corpora-
tion's post-1986 earnings and profits.
Section 965(d)(3)(B). The legislative his-
tory supports the plain language of the
statute. See H.R. Rep. No. 115-446, at
619 (2017). See Part II.H of this Summary
of Comments and Explanation of Revi-
sions for additional discussion of rules
affecting the treatment of pre-sale distri-
butions by a DFIC. Therefore, the com-
ments are not adopted.
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Similarly, comments have suggested
reducing post-1986 earnings and profits
by dividends to a United States shareholder
between November 2, 2017, and December
1, 2017, by a DFIC with an inclusion year
ending November 30, 2018, in order to mit-
igate double counting of E&P in connection
with such dividends. However, the legisla-
tive history to section 965(o) makes clear
that the Treasury Department and the IRS
were expected to provide regulations to ad-
dress double counting resulting from trans-
actions between specified foreign corpora-
tions but is silent with respect to transactions
between specified foreign corporations and
United States shareholders. Id. Accordingly,
the Treasury Department and the IRS have
determined that the grant of regulatory au-
thority in section 965 was not intended to
address such fact patterns. Further, and as
the preamble to the proposed regulations
notes, payments by a specified foreign cor-
poration to a United States shareholder can
have attendant U.S. tax effects that do not
occur with respect to payments between
specified foreign corporations. For example,
a distribution to a United States shareholder
may permit that shareholder to take into
account foreign tax credits under section
902 and avoid the limitation under section
965(g)(1) that would apply if the underlying
foreign taxes had been deemed paid with
respect to the shareholder's section 965(a)
inclusion amount. Accordingly, the Trea-
sury Department and the IRS decline to
adopt this recommendation. The alternative
recommendations in some of the comments,
to treat the dividend as out of previously
taxed E&P arising in the subsequent taxable
year or to allow the same foreign income
taxes to be deemed paid with respect to both
the dividend and the section 965(a) inclu-
sion, are inconsistent with the statute and the
Code at large, and, accordingly, these rec-
ommendations are not adopted.
#### 2. Foreign Income Tax Rule
The proposed regulations provide that
for purposes of determining a specified
foreign corporation's post-1986 earnings
and profits as of the E&P measurement
date on November 2, 2017, in the case in
which foreign income taxes (as defined in
section 901(m)(5)) of the specified foreign
corporation accrue after November 2,
2017, but on or before December 31,
2017, and during the specified foreign cor-
poration's U.S. taxable year that includes
November 2, 2017, the specified foreign
corporation's post-1986 earnings and
profits as of November 2, 2017, are re-
duced by the applicable portion of such
foreign income taxes. Proposed §1.965-
1(f)(29)(ii). Comments requested that the
rule be expanded to permit reduction for
foreign income taxes accrued after De-
cember 31, 2017, for purposes of deter-
mining post-1986 earnings and profits on
the measurement dates on both November
2, 2017, and December 31, 2017, and re-
gardless of whether the foreign corpora-
tion's U.S. taxable year includes Novem-
ber 2, 2017. The Treasury Department and
the IRS have determined that it would be
inappropriate to allow taxes accrued in a
U.S. tax year after the one that includes
November 2, 2017, to be taken into ac-
count in determining post-1986 earnings
and profits on November 2, 2017, because
such taxes could not have accrued for the
first year under the general foreign tax
credit rules. Moreover, expanding the rule
to take into account taxes accrued after
December 31, 2017, would prevent sec-
tion 965-related amounts from being de-
termined with certainty as of December
31, 2017. As discussed in Part II.A of this
Summary of Comments and Explanation
of Revisions, the Treasury Department
and the IRS have determined that it con-
tinues to be important to have certainty
about section 965-related amounts as of
December 31, 2017, and accordingly de-
cline to adopt the comments.
Another comment recommended mod-
ifying how the applicable portion of for-
eign income taxes taken into account on
November 2, 2017, is determined. For
ease of implementation, instead of basing
the determination on the portion of the
income for the foreign taxable period that
includes November 2, 2017, as computed
under foreign tax law, that had accrued as of
such date, this comment recommended bas-
ing the determination on the ratio of the
E&P for the U.S. taxable year, as computed
under U.S. tax principles, as of November 2,
2017, to that as of December 31, 2017. The
Treasury Department and the IRS have de-
termined that taxpayers are generally re-
quired under §1.904-6 to associate foreign
income taxes with taxable income computed
under foreign law, such that the rule in
§1.965-1(f)(29)(ii) does not create a signif-
icant additional burden. Moreover, the sug-
gested approach could result in significant
distortions if the foreign corporation's U.S.
and foreign taxable years differed. Accord-
ingly, the recommendation is not adopted.
#### 3. Other Exclusions from Post-1986 Earnings and Profits
A comment also requested that the def-
inition of post-1986 earnings and profits
exclude cashless earnings generated by
foreign corporations while they were not
controlled by United States shareholders.
In the same vein, it requested that divi-
dends paid out of earnings earned before a
foreign corporation became a specified
foreign corporation be excluded from the
post-1986 earnings and profits of the re-
cipient specified foreign corporation. Be-
cause the term "post-1986 earnings and
profits" clearly includes E&P (which is
not tied to cash and is often attributable to
cashless income) earned while a corpora-
tion was a specified foreign corporation,
without regard to whether it was con-
trolled by United States shareholders, and
because section 965(d)(3)(B) clearly evi-
dences consideration for the impact of
dividends between foreign corporations
on post-1986 earnings and profits, the
Treasury Department and the IRS decline
to adopt this comment.
#### 4. Alternative Measurement Methods
A comment requested guidance per-
mitting taxpayers to determine their spec-
ified foreign corporations' post-1986
earnings and profits and cash positions
using an alternative measurement method.
The comment noted that before the enact-
ment of section 965, foreign corporations
other than CFCs or section 902 corpora-
tions (as defined under former section
909(d)(5)) had no reason to track E&P
under U.S. tax principles; therefore, re-
quiring a United States shareholder to ob-
tain information from a foreign corpora-
tion that the corporation would not have
known to maintain is unduly burdensome.
Section 965(d)(3) provides, without
exception, that for purposes of determin-
ing post-1986 earnings and profits, the
E&P of a specified foreign corporation
must be "computed in accordance with
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sections 964(a) and 986." Likewise, sec-
tion 965(c)(3)(B), which contains rules for
determining a specified foreign corpora-
tion's cash position, applies to "any spec-
ified foreign corporation." Moreover,
there is no indication in the legislative
history that Congress intended to ease the
requirements for computing the post-
1986 earnings and profits and the cash
position for those specified foreign corpo-
rations that may not have previously cal-
culated E&P under U.S. tax principles.
Accordingly, the Treasury Department
and the IRS do not adopt this comment.
##### H. Determination of pro rata share of section 965(a) earnings amount
The proposed regulations provide that
a section 958(a) U.S. shareholder's pro
rata share of the section 965(a) earnings
amount of a DFIC is the portion of the
section 965(a) earnings amount that would
be treated as distributed to the section 958(a)
U.S. shareholder under section 951(a)(2)(A)
and §1.951-1(e), determined as of the last
day of the inclusion year of the DFIC. Pro-
posed §1.965-1(f)(30)(i). The Treasury De-
partment and the IRS have determined that
this definition is inconsistent with the statu-
tory language of sections 951 and 965 in the
case in which a specified foreign corpora-
tion, whether it is or is not a CFC, ceases to
be a specified foreign corporation during its
inclusion year. Under section 951, a section
958(a) U.S. shareholder of such a specified
foreign corporation would generally have an
inclusion under section 951 with respect to
the corporation if it were a DFIC because it
would own stock of the specified foreign
corporation on the last day of the inclusion
year on which the corporation was a speci-
fied foreign corporation.
Because a specified foreign corpora-
tion is treated as a CFC for purposes of
section 951, the Treasury Department and
the IRS have determined that the final
regulations should be consistent with sec-
tion 951 in requiring a section 965(a) in-
clusion by such a section 958(a) U.S. share-
holder. Moreover, the Treasury Department
and the IRS have concluded that it would
not be appropriate to prorate a section
965(a) earnings amount based on the por-
tion of the inclusion year that the DFIC is a
specified foreign corporation, as the refer-
ence in proposed §1.965-1(f)(30)(i) to sec-
tion 965(a)(2)(A) might suggest, given that
the limitation of post-1986 earnings and
profits to E&P accumulated in periods in
which the DFIC was a specified foreign
corporation would already prevent E&P
accrued after the DFIC ceased to be a
specified foreign corporation from being
taken into account. The definitions of
"pro rata share" and "section 958(a)
U.S. shareholder inclusion year" are re-
vised accordingly in the final regula-
tions. See §1.965-1(f)(30) and (f)(34).
The definition of pro rata share contin-
ues to preclude reduction by distribu-
tions to other owners under section
951(a)(2)(B) in order to be consistent
with section 965(d)(3)(B) and prevent
double non-taxation in the case of cer-
tain 2018 dispositions of specified for-
eign corporations. Id .; see §1.965-
2(j)(6).
##### I. Determination of pro rata share of specified E&P deficit
The proposed regulations provide that,
for purposes of determining a section
958(a) U.S. shareholder's pro rata share of
a specified E&P deficit of an E&P deficit
foreign corporation, the specified E&P
deficit is allocated among the shareholders
of the corporation's common stock in pro-
portion to the value of the common stock
held by such shareholders. Proposed
§1.965-1(f)(30)(ii). The Treasury Depart-
ment and the IRS have determined that a
specified E&P deficit should be allocated
to shareholders of an E&P deficit corpo-
ration's preferred stock in cases involving
common stock with no liquidation value.
The final regulations therefore provide
that any amount of a specified E&P deficit
that would otherwise be allocated in a
hypothetical distribution to a class of
common stock that has no liquidation
value is instead allocated to the most ju-
nior class of equity with a positive liqui-
dation value to the extent of the liquida-
tion value. Section 1.965-1(f)(30)(ii)(A).
The final regulations also provide that, in
cases in which a corporation's common
stock has a liquidation value of zero and
there is no class of equity with a liquida-
tion preference relative to the common
stock, the specified E&P deficit is allo-
cated among the common stock using any
reasonable method consistently applied.
Section 1.965-1(f)(30)(ii)(B).
##### J. Determination of specified E&P deficit
The proposed regulations provide that
previously taxed E&P are not excluded in
determining the existence and amount of
an E&P deficit foreign corporation's spec-
ified E&P deficit. See proposed §1.965-
1(f)(22)(ii). Comments requested that the
final regulations provide to the contrary.
The Treasury Department and the IRS
have determined that it is clear that previ-
ously taxed E&P are not excluded in de-
termining a specified E&P deficit. Section
965(b)(3)(B) and (C) provide that a spec-
ified E&P deficit is, with respect to an
E&P deficit foreign corporation, a deficit
in post-1986 earnings and profits as of
November 2, 2017. For purposes of sec-
tion 965, the term post-1986 earnings and
profits is defined in section 965(d)(3) and
is computed in accordance with sections
964(a) and 986. Under section 964(a),
E&P are determined according to rules
substantially similar to those applicable to
domestic corporations. Previously taxed
E&P are a type of E&P. See section
959(c). No express exclusion of previ-
ously taxed E&P is provided in section
965(d)(3) for purposes of determining
post-1986 earnings and profits. In con-
trast, the term accumulated post-1986 de-
ferred foreign income, as defined in sec-
tion 965(d)(2), starts with post-1986
earnings and profits and then explicitly
excludes previously taxed E&P. See sec-
tion 965(d)(2)(B). Accordingly, the com-
ments are not adopted. While previously
taxed E&P is not excluded in the statutory
definition of post-1986 earnings and prof-
its, there is no double taxation of previ-
ously taxed E&P related to the E&P def-
icit foreign corporations because section
959 continues to apply when the previ-
ously taxed E&P are distributed.
A comment also requested that the fi-
nal regulations confirm that E&P or defi-
cits in E&P attributable to income that is
effectively connected with the conduct of
a trade or business within the United
States and subject to tax under chapter 1
("effectively connected E&P") are taken
into account in determining the specified
E&P deficit of an E&P deficit foreign cor-
poration. The Treasury Department and the
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IRS have determined that section 965
clearly allows deficits in effectively con-
nected E&P to be included in an E&P deficit
foreign corporation's specified E&P deficit.
No express exclusion for effectively con-
nected E&P is provided in section 965(d)(3)
for purposes of determining post-1986
earnings and profits. Moreover, the term
accumulated post-1986 deferred foreign in-
come, as defined in section 965(d)(2), ex-
pressly excludes effectively connected
E&P. Accordingly, no clarification is made
to the proposed regulations with respect to
effectively connected E&P.
A comment also requested confirma-
tion that a distribution of previously taxed
E&P in the last taxable year of a CFC
beginning before January 1, 2018, can af-
fect an E&P deficit foreign corporation's
specified E&P deficit. Because previously
taxed E&P can only be distributed pursuant
to a dividend, which, pursuant to section
316, requires positive E&P, the Treasury
Department and IRS have determined that a
distribution of previously taxed E&P could
not affect a specified E&P deficit. Accord-
ingly, the comment is not adopted.
K. Application of attribution rules for
purposes of determining status of foreign
corporation as a specified foreign
corporation
To limit the administrative and compli-
ance difficulties associated with determin-
ing whether a foreign corporation is a
specified foreign corporation solely by
reason of downward attribution of its
stock under section 318(a)(3)(A) from a
partner to a partnership when the partner has
only a de minimis interest in the partnership,
proposed §1.965-1(f)(45)(ii) provides a spe-
cial attribution rule for purposes of determin-
ing whether a foreign corporation is a speci-
fied foreign corporation within the meaning of
section 965(e)(1)(B) and proposed §1.965-
1(f)(45)(i)(B). Specifically, the definition of
specified foreign corporation provides that,
solely for purposes of determining whether a
foreign corporation is a specified foreign cor-
poration within the meaning of section
965(e)(1)(B), stock owned, directly or indi-
rectly, by or for a partner ("tested partner")
will not be considered as being owned by a
partnership under sections 958(b) and
318(a)(3)(A) if the tested partner owns less
than five percent of the interests in the partner-
ship's capital and profits. Proposed §1.965-
1(f)(45)(ii). Similar rules apply with respect to
S corporations. See sections 318(a)(5)(E) and
1373(a).
## 1. Downward Attribution to Trusts
A comment requested that the final
regulations adopt a similar rule for trusts,
noting that downward attribution of stock
to trusts is also possible when a benefi-
ciary has a de minimis interest in the trust,
unless that interest is a remote contingent
interest. See section 318(a)(3)(B). The
Treasury Department and the IRS agree
that downward attribution of stock to a
trust from de minimis beneficiaries of the
trust presents similar administrative and
compliance difficulties to those addressed
in the proposed regulations. Accordingly,
the final regulations extend the special
rules concerning downward attribution (as
modified per the discussion in Part II.K.2
of this Summary of Comments and Expla-
nation of Revisions) to trusts. See §1.965-
1(f)(45)(ii)(A)(2).
## 2. Other Relief from Attribution
A comment indicated that, in determin-
ing specified foreign corporation status
under section 965(e)(1)(B), the final reg-
ulations should take into account domestic
corporations that are United States share-
holders only if they own (within the
meaning of section 958(a)) stock of the
specified foreign corporation. Another
comment indicated that the Treasury De-
partment and the IRS should generally
consider additional de minimis construc-
tive ownership exceptions in determining
specified foreign corporation status with-
out specifically identifying the nature of
such relief. A comment also recom-
mended that the five percent threshold in
proposed §1.965-1(f)(45)(ii) be increased
to a more significant percentage, such
as ten percent. A similar comment sug-
gested that the five percent threshold ap-
ply only to managing and controlling part-
ners, and that a threshold of fifteen percent
apply to partners who have no ability to
manage or control the partnership. In re-
sponse to these comments, the Treasury
Department and the IRS have determined
that a ten-percent threshold for application
of the special attribution rules relating to
partnerships and trusts would strike the
appropriate balance between mitigating
administrative and compliance burdens
and accurately identifying which foreign
corporations are, in fact, specified foreign
corporations. Accordingly, the final regu-
lations increase the threshold for applica-
tion of this special attribution rule for
partnerships from five percent to ten per-
cent, and similarly use a ten-percent
threshold for the newly-added special at-
tribution rule for trusts.
Another comment suggested that a for-
eign corporation that is a CFC solely by
reason of downward attribution not be
treated as a CFC for purposes of determin-
ing whether it is a specified foreign cor-
poration with respect to a United States
shareholder that is not a related person
(within the meaning of section 954(d)(3))
with respect to the domestic corporation
to which ownership was attributed. Noth-
ing in the plain statutory language of sec-
tion 965 or 958(b), as amended by the
Act, prevents the application of section
318(a)(3) so as to treat a foreign corpora-
tion as a CFC with respect to a United
States shareholder as a result of down-
ward attribution of stock from a foreign
person to a United States person if the
United States person and the United States
shareholder are not related persons as de-
fined by section 954(d)(3). Furthermore, it
may benefit taxpayers for a specified for-
eign corporation with respect to which
section 965 would otherwise apply to be
respected as a CFC for purposes of section
965, as that could permit deemed paid
credits to be claimed with respect to a
section 965(a) inclusion with respect to
the specified foreign corporation that
would not otherwise be permitted. Con-
sistent with the statutory text, the final
regulations therefore do not adopt the ex-
clusion from the definition of specified
foreign corporation recommended by the
comment.
## 3. Application of Section 318(a)(5)(A) and (C)
A comment stated that Example 1 and
Example 2 in proposed §1.965-1(g), which
illustrate the special attribution rule, apply
section 318(a)(5)(A) and (a)(5)(C) inconsis-
tently with informal advice issued by the
IRS. Because the interpretation of those pro-
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visions reflected in the examples is irrele-
vant to the application of the special attribu-
tion rule, the final regulations modify the
examples to avoid the issue raised by the
comment. See §1.965-1(g)(1) and (2).
No inference, however, is intended re-
garding the proper interpretation of sec-
tion 318(a)(5)(A) and (a)(5)(C).
### III. Comments and Changes to Proposed §1.965-2 - Adjustments to E&P and Basis
Proposed §1.965-2 contains rules re-
lating to adjustments to E&P and basis to
determine and account for the application
of section 965(a) and (b) and proposed
§1.965-1(b), and a rule that limits the
amount of gain recognized in connection
with the application of section 961(b)(2).
The comments and modifications with re-
spect to these rules are discussed in this
Part III.
### A. Ordering rule
The proposed regulations set forth an
ordering rule relating to adjustments to
E&P for purposes of determining a sec-
tion 958(a) U.S. shareholder's inclusions
under section 951(a)(1) and the treatment
of distributions under section 959. See
proposed §1.965-2(b).
### 1. Application in the Case of E&P Measurement Dates in Two Taxable Years
The Treasury Department and the IRS
have determined that the ordering rule's
limited application to E&P for a specified
foreign corporation's last taxable year be-
ginning before January 1, 2018, is too
narrow, given that it is intended to apply
for purposes of determining post-1986
earnings and profits and accumulated
post-1986 deferred foreign income on the
E&P measurement date on November 2,
2017; that measurement date may not fall
within a specified foreign corporation's
last taxable year beginning before January
1, 2018. The final regulations address this
issue by providing that the ordering rule
applies for the taxable year of a specified
foreign corporation in which an E&P
measurement date occurs, as well as for
the last taxable year of a specified foreign
corporation that begins before January 1,
2018.
### 2. Section 1248
Comments have also raised questions
about the proper point in the sequence at
which to determine and take into account
inclusions under section 1248. Although
one comment suggested that section 965
should be taken into account before sec-
tion 1248 amounts are determined, the
Treasury Department and the IRS have
determined that such an approach would
not mitigate double taxation in the case of
a sale in which the buyer (as opposed to
the seller, as in the example provided by
the comment) was subject to tax under
section 965. However, such double taxa-
tion is mitigated by the approach sug-
gested by another comment and taken by
the final regulations, which provide that,
for purposes of the ordering rules, section
1248 amounts are determined at the same
time as the determination of amounts in-
cluded under section 951(a)(1)(A) other
than amounts included by reason of sec-
tion 965. As a result, section 1248
amounts are determined before, and may
reduce, a buyer's section 965(a) inclusion
amount with respect to a DFIC. The ap-
plication of the ordering rule in connec-
tion with a sale to which section 1248
applies is illustrated in a new example in
§1.965-2(j)(6).
The comment also suggested that the
final regulations include an example ad-
dressing the interaction of the section 367
gain recognition agreement rules and the
determination of section 965(a) inclu-
sions. The Treasury Department and the
IRS have determined that those rules are
outside of the scope of these regulations
and do not adopt the comment.
### 3. Interaction of Ordering Rule, Foreign Tax Credit Rules, and Disregard Rules
Comments have raised questions con-
cerning the interaction of the ordering rule
with the rule disregarding payments in
proposed §1.965-4(f) and the determina-
tion of the foreign tax credit consequences
of inclusions with respect to, and distribu-
tions by, a specified foreign corporation.
The final regulations address these is-
sues by providing rules concerning the
ordering of the determination of foreign
income taxes deemed paid with respect to
an inclusion or distribution, after the E&P
adjustments are determined in accordance
with §1.965-2(b). The final regulations
provide that for purposes of determining
the consequences under sections 902 and
960 of a dividend or an inclusion under
section 951(a)(1), respectively, the order-
ing rule in §1.960-1(i)(2) applies except
that section 902 is applied with respect to
any distributions from the specified for-
eign corporation described in §1.965-
2(b)(2) that are not disregarded under
§1.965-4 before section 960 is applied
with respect to an inclusion or a distribu-
tion described in §1.965-2(b)(3), (b)(4),
or (b)(5). Section 1.965-2(b). As dis-
cussed in more detail in Parts VI.C.3 and
4 of this Summary of Comments and Ex-
planation of Revisions, the final regula-
tions confirm that the other rules of sec-
tions 902 and 960 apply. See §1.965-
6(b). The final regulations also provide
that the E&P consequences of a distribu-
tion between specified foreign corporations
that is disregarded for purposes of section
965 pursuant to §1.965-4 are redetermined
after adjustments for section 965(a) inclu-
sions, at the same time that the conse-
quences of other distributions are deter-
mined. See §1.965-2(b)(1) and (4).
Modified and new examples illustrate
the determination of the section 902 con-
sequences of a distribution between spec-
ified foreign corporations before Novem-
ber 2, 2017, before the determination of
the section 960 consequences of a section
965(a) inclusion and the foreign tax credit
consequences of a distribution disre-
garded pursuant to §1.965-4. See §1.965-
2(j)(1) and (4).
A comment recommended that the or-
dering rule be further modified to allow
the foreign tax credit consequences of a
distribution to a United States shareholder
to be determined before applying section
965. The Treasury Department and the
IRS decline to adopt the recommendation
because ordering section 965(a) inclu-
sions before distributions to United States
shareholders is required to be consistent
with section 965(d)(3)(B), which pre-
cludes diminution of post-1986 earnings
and profits by distributions during the rel-
evant year other than by dividends distrib-
uted to another specified foreign corpora-
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tion, as well as to be consistent with the
general treatment of inclusions under sec-
tion 951 as being taken into account be-
fore distributions, as discussed in this Part
III.A.3.
### B. Adjustments to the E&P of DFICs
Under proposed §1.965-2(c), the E&P
of a DFIC that are described in section
959(c)(3) (or that would be described in
section 959(c)(3) but for the application of
section 965(a) and the section 965 regu-
lations) are reduced (or, in the case of a
deficit, increased) by an amount equal to the
DFIC's section 965(a) previously taxed
earnings and profits. A comment requested
that the final regulations clarify that earnings
described in section 959(c)(3) cannot be re-
duced below zero by reason of the rule in
proposed §1.965-2(c), in order to ensure
that the DFIC would be able to make a
distribution of the section 965(a) previously
taxed earnings and profits. The comment
was also concerned that a deficit in E&P
described in section 959(c)(3) could prevent
foreign income taxes accrued on future sub-
part F income from being deemed paid with
respect to inclusions under section 951(a)
(1)(A) with respect to such income and re-
quested that, in the alternative, guidance be
provided allowing foreign income taxes to
be deemed paid under those circumstances.
The sum of a foreign corporation's E&P
described in each of the categories in section
959(c) must equal the foreign corporation's
total E&P. See Rev. Rul. 86-131, 1986-2
C.B. 135 ("[T]he section 959(c) compo-
nents are intended to reflect the composition
of the CFC's total earnings and profits. . .. ").
In order to ensure that a specified foreign
corporation's E&P are not distorted by the
adjustment to section 959(c)(2) E&P re-
quired by the proposed regulations, the
Treasury Department and the IRS have de-
termined that it is appropriate for the reduc-
tion provided for in proposed §1.965-
2(c) to create a deficit in E&P described
in section 959(c)(3) if there are insuffi-
cient E&P to be reclassified and accord-
ingly do not adopt the comment. The
suggestion concerning deemed paid
taxes is outside of the scope of this
rulemaking.
Under proposed §1.965-2(d)(1), the
E&P described in section 959(c)(2) of a
DFIC are increased by an amount equal to
the reduction to a section 958(a) U.S.
shareholder's pro rata share of the section
965(a) earnings amount of the DFIC un-
der section 959(b), "provided the section
958(a) U.S. shareholder includes the sec-
tion 965(a) inclusion amount with respect
to the deferred foreign income corporation
in income." A comment noted that the rule
would seem to preclude the creation of
section 965(b) previously taxed earnings
and profits in a DFIC if its section 965(a)
earnings amount was completely offset by
section 958(a) U.S. shareholders' aggre-
gate foreign E&P deficits. Because the
rule was intended to limit the availability
of section 965(b) previously taxed earn-
ings and profits to situations in which a
section 965(a) inclusion amount was in-
cluded only if there was a section 965(a)
inclusion amount, the rule is revised to so
clarify. See §1.965-2(d)(1).
Comments also requested that the final
regulations clarify that section 965(b) pre-
viously taxed earnings and profits are
treated as E&P attributable to an amount
previously included in the income of a
person under section 951 for purposes of
section 1248(d)(1). The Treasury Depart-
ment and the IRS have determined that
this treatment is appropriate, notwith-
standing the fact that, as discussed in Part
III.D.2 of this Summary of Comments and
Explanation of Revisions, these amounts
have not been included in income under
section 951, because it is necessary to
ensure the ability to take into account sec-
tion 965(b) previously taxed earnings and
profits upon a disposition of specified for-
eign corporation stock. Accordingly, the
final regulations reflect this clarification.
See §1.965-2(d)(1).
### C. Adjustments to the E&P described in section 959(c)(3) of E&P deficit foreign corporations
Under the proposed regulations, the
E&P described in section 959(c)(3) of an
E&P deficit foreign corporation are in-
creased by an amount equal to the portion
of a section 958(a) U.S. shareholder's pro
rata share of the specified E&P deficit of
the E&P deficit foreign corporation taken
into account under section 965(b), trans-
lated (if necessary) into the functional cur-
rency of the E&P deficit foreign corpora-
tion using the spot rate on December 31,
2017\. Proposed §1.965-2(d)(2)(i)(A). A
comment recommended that the proposed
regulations be modified such that any in-
crease to the earnings and profits de-
scribed in section 959(c)(3) of an E&P
deficit foreign corporation is allocated
only to a section 958(a) U.S. shareholder
that takes into account its E&P deficit
foreign corporation's specified E&P defi-
cit under section 965(b) and not to any
other shareholders of the E&P deficit for-
eign corporation. E&P described in sec-
tion 959(c)(3) are not generally allocated
to specific shareholders, and creating a
rule that tracks section 959(c)(3) E&P re-
sulting from a section 958(a) U.S. share-
holder's use of each E&P deficit foreign
corporation's specified E&P deficit in a
shareholder-level account would entail con-
siderable complexity. Accordingly, the final
regulations do not adopt the recommended
change. See §1.965-2(d)(2)(i)(A).
### D. Basis election
#### 1. Requirements for Making and Revoking Basis Election
The proposed regulations clarify that,
in general, no adjustments to basis of
stock or property are made under section
961 (or any other provision of the Code) to
account for the reduction to a section 958(a)
U.S. shareholder's pro rata share of the sec-
tion 965(a) earnings amount of a DFIC by a
portion of its aggregate foreign E&P deficit.
See proposed §1.965-2(f)(1). However,
consistent with the legislative history, the
proposed regulations allow a section 958(a)
U.S. shareholder to elect to make certain
basis adjustments ("specified basis adjust-
ments") with respect to each DFIC and each
E&P deficit foreign corporation. Proposed
§1.965-2(f)(2). Specifically, an election un-
der the proposed regulations allows a sec-
tion 958(a) U.S. shareholder's basis in the
section 958(a) stock of a DFIC or applicable
property with respect to the DFIC to be
increased by an amount equal to the section
965(b) previously taxed earnings and profits
of the DFIC with respect to the section
958(a) U.S. shareholder. See proposed
§1.965-2(f)(2)(ii)(A). The basis election
also requires that the section 958(a) U.S.
shareholder's basis in the section 958(a)
stock of an E&P deficit foreign corporation
or applicable property with respect to an
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E&P deficit foreign corporation be reduced
by an amount equal to the portion of the
section 958(a) U.S. shareholder's pro rata
share of the specified E&P deficit of the
E&P deficit foreign corporation taken into
account under the reduction rules. See pro-
posed §1.965-2(f)(2)(ii)(B).
The proposed regulations provide the
general rule that the basis election must be
made no later than the due date (taking into
account extensions, if any) for the section
958(a) U.S. shareholder's return for the first
taxable year that includes the last day of the
last taxable year of a DFIC or E&P deficit
foreign corporation of the section 958(a)
U.S. shareholder that begins before January
1, 2018. Proposed §1.965-2(f)(2)(iii)(B)
(1)(i). If the relevant return was due before
September 10, 2018, the proposed regula-
tions provide that the basis election
must be made by October 9, 2018 (the
"transition rule"). Proposed §1.965-2(f)(2)
(iii)(B)(1)(ii). The proposed regulations further
require that, in order for the basis election to be
effective, a section 958(a) U.S. shareholder
and each section 958(a) U.S. shareholder that
is related to the section 958(a) U.S. share-
holder under section 267(b) or 707(b) ("related
section 958(a) U.S. shareholder") must make
the election. Proposed §1.965-2(f)(2)(iii)(A).
Section 2 of Notice 2018-78 an-
nounced that the Treasury Department
and the IRS had determined that requiring
taxpayers to make a binding basis election
before the finalization of the proposed
regulations would be too onerous for tax-
payers. Consistent with that announce-
ment, the final regulations provide that the
transition rule will apply with respect to
returns due (determined with regard to
any extension) before May 6, 2019, and
that in such cases the basis election must
be made no later than May 6, 2019. Sec-
tion 1.965-2(f)(2)(iii)(B)(1)(ii). Addition-
ally, as explained in section 2 of Notice
2018-78, the final regulations provide
that if a basis election was made on or
before February 5, 2019, the basis election
may be revoked by attaching a statement
to an amended return filed no later than
May 6, 2019. Id.
Clarification was requested regarding
whether a basis election must be made by
a related section 958(a) U.S. shareholder
if that shareholder owns a DFIC but does
not own an E&P deficit foreign corpora-
tion and does not reduce its pro rata share
of any section 965(a) earnings amount
under section 965(b), proposed §1.965-
1(b)(2), or proposed §1.965-8(b). The
Treasury Department and the IRS have
concluded that the requirement to make a
basis election should not apply to such
persons. Accordingly, the final regulations
provide that the basis election must be
made by a section 958(a) U.S. shareholder
and any related section 958(a) U.S. share-
holder of an E&P deficit foreign corpora-
tion or of a DFIC with respect to which
the section 958(a) U.S. shareholder's pro
rata share of the section 965(a) earnings
amount is reduced under section 965(b),
§1.965-1(b)(2), or §1.965-8(b). Section
1.965-2(f)(2)(iii)(A). However, the final
regulations do not adopt a comment's sug-
gestion that the consistency requirement
be eliminated in its entirety because the
Treasury Department and the IRS have
determined that the requirement is neces-
sary to prevent related taxpayers from ap-
plying the rules only where they are ad-
vantageous.
Another comment requested that the
basis election be considered made by de-
fault unless a taxpayer affirmatively elects
not to make specified basis adjustments.
Given the potentially significant ramifica-
tions of the specified basis adjustments,
the Treasury Department and the IRS
have determined that providing for auto-
matic basis adjustments and putting the
onus on taxpayers to affirmatively elect
out is not appropriate. Accordingly, the
comment is not adopted.
#### 2. Level and Consequences of Basis Adjustments
Comments requested that the final reg-
ulations provide that positive basis adjust-
ments with respect to section 965(b) pre-
viously taxed earnings and profits apply
down a chain of foreign corporations un-
der section 961(c) and thus that they apply
by default, such that the basis election and
its concomitant downward basis adjust-
ments with respect to E&P deficit foreign
corporations need not be made. Com-
ments also suggested that even if down-
ward basis adjustments were required, the
final regulations should not require them
to be made for the entire amount of a
specified E&P deficit taken into account,
but instead allow taxpayers to elect an
amount of basis that "shifted." The com-
ments were particularly concerned that
downward adjustments not offset upward
adjustments. Comments also recommended
that the final regulations not require gain
recognition to the extent that downward ba-
sis adjustments would exceed basis, and
that, if such gain recognition is required, a
special reduced rate of tax be provided for
such gain.
The Treasury Department and the IRS
have determined that it is clear under pro-
posed §1.965-2(f)(1) that no adjustments
are made under section 961 with respect
to section 965(b) previously taxed earn-
ings and profits, given that section 965(b)
previously taxed earnings and profits do
not represent amounts included in income
by a section 958(a) U.S. shareholder, as
required by section 961, and that adjust-
ments apply only with respect to section
958(a) stock or applicable property owned
directly by a section 958(a) U.S. share-
holder (or in certain cases, through foreign
pass-through entities). Id. Accordingly,
the final regulations do not modify the
proposed regulations in this regard.
The Treasury Department and the IRS
have also determined that it would create
economic distortions to provide for up-
ward basis adjustments with respect to
section 965(b) previously taxed earnings
and profits without providing for corre-
sponding downward basis adjustments
with respect to portions of specified E&P
deficits taken into account to reduce sec-
tion 965(a) inclusion amounts and requir-
ing gain recognition to the extent such
adjustments exceed basis. Accordingly, it
would not be appropriate to provide that
section 965(b) previously taxed earnings
and profits are treated as included in in-
come under section 951 for purposes of
section 961, even though the final regula-
tions provide as much for purposes of
section 1248(d), as discussed in Part III.B
of this Summary of Comments and Expla-
nation of Revisions. Moreover, the Trea-
sury Department and the IRS have con-
cluded that rules coordinating upward and
downward tiered-basis adjustments are
not warranted. Additionally, given the
electivity of the specified basis adjust-
ments and the ability of taxpayers to take
into account factors like the tax rate at
which gain is recognized as a result of the
basis election, the Treasury Department
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and the IRS decline to provide rules re-
sulting in the application of a special tax
rate to such gain.
However, the Treasury Department
and the IRS have determined that it is
appropriate to not require downward basis
adjustments in excess of basis (in order
to avoid gain recognition under §1.965-
2(h)(3) to the extent of such excess) if
the corresponding upward basis adjust-
ments are correspondingly limited. Ac-
cordingly, §1.965-2(f)(2)(ii)(B)(2) pro-
vides that downward basis adjustments
to the stock of, or applicable property
with respect to, an E&P deficit foreign
corporation may be limited to the avail-
able basis with the result that gain is not
recognized (the "to-the-extent rule"). If
the to-the-extent rule limits downward
basis adjustments, the corresponding
upward basis adjustments are corre-
spondingly limited. See §1.965-2(f)(2)
(ii)(A)(2)(ii). However, the section 958(a)
U.S. shareholder can (subject to certain lim-
itations) designate the stock of, or applicable
property with respect to, a DFIC with re-
spect to which the upward adjustments are
made. Id. A taxpayer may also choose to
make the full amounts of the adjustments
that would have been required under the
proposed regulations and recognize gain
under §1.965-2(h)(3) as necessary. See
§1.965-2(f)(2)(ii)(A)(1)and (f)(2)(ii)(B)(1).
#### 3. Timing of Basis Adjustments
The proposed regulations provide that
the specified basis adjustments are made
as of the close of the last day of the last
taxable year of the specified foreign cor-
poration that begins before January 1,
2018. Proposed §1.965-2(h)(1). Ques-
tions have been raised about the applica-
tion of the proposed rules in the case of a
specified foreign corporation that ceases
to be a CFC during its last taxable year of
the specified foreign corporation that be-
gins before January 1, 2018, due to a
disposition of its stock. As discussed in
Part II.H of this Summary of Comments
and Explanation of Revisions, under sec-
tion 951, a section 958(a) U.S. share-
holder of such a specified foreign corpo-
ration would generally have an inclusion
under section 951 with respect to the cor-
poration if it were a DFIC because it
would own stock of the specified foreign
corporation on the last day on which the
corporation was a controlled foreign cor-
poration. Accordingly, under §1.961-
1(a), a basis adjustment would generally
be allowed as of the last day in the taxable
year of such corporation on which it is a
controlled foreign corporation.
As discussed in Part II.H of this Sum-
mary of Comments and Explanation of
Revisions, because a specified foreign
corporation is treated as a CFC for pur-
poses of §1.965-1(b) and sections 951 and
961, the Treasury Department and the IRS
have determined that income inclusion
provisions in the final regulations should be
consistent with these rules, and thus the ba-
sis adjustment provisions should as well,
and the relevant rules in the final regulations
are revised accordingly. See §§1.965-
1(f)(30)(i) and (f)(34) and 1.965-2(h)(1)
(providing that a specified basis adjustment
is made as of the last day of the last taxable
year of the specified foreign corporation that
begins before January 1, 2018, on which it is
a specified foreign corporation).
#### 4. Share-by-Share Requirement for Basis Adjustments
Proposed §1.965-2(h)(3) requires that
the specified basis adjustments be made
on a share-by-share basis. A comment
suggested that the specified basis adjust-
ments be made in the aggregate to miti-
gate taxpayer burden in tracking and pre-
vent what it described as inappropriate
gain recognition. However, adjustments to
basis under section 961 for inclusions un-
der section 951 and distributions of previ-
ously taxed E&P are generally required to
be made on a share-by-share basis, and it
will be necessary to have information con-
cerning basis share-by-share going for-
ward. Furthermore, the to-the-extent rule
included in the final regulations will pro-
vide relief to taxpayers that have low-
basis and high-basis shares. Accordingly,
the comment is not adopted.
## 5. Basis Adjustments with Respect to Foreign Pass-Through Entity
A comment suggested that the final
regulations provide that for purposes of
the specified basis adjustments with re-
spect to foreign pass-through entities, the
principles of section 743(b) apply for as-
sociating a specified basis adjustment with
a section 958(a) U.S. shareholder with
respect to whom it is made. The comment
also recommended clarification of the ba-
sis consequences of a distribution in a
structure with a foreign pass-through en-
tity. The Treasury Department and the
IRS will consider these recommendations
in connection with future guidance con-
cerning the application of sections 959
and 961 generally.
See Part II.B of this Summary of Com-
ments and Explanation of Revisions for a
discussion of the treatment of a controlled
domestic partnership treated as a foreign
partnership under §1.965-1(e) for pur-
poses of the specified basis adjustment
rules relating to foreign pass-through en-
tities.
## 6. Section 962 Elections
The proposed regulations reserve on
the issue of basis adjustments with respect
to a section 958(a) U.S. shareholder that
made a section 962 election. A comment
noted that section 961(a)'s limitation on a
basis increase to the amount of tax paid
under chapter 1 of the Code with respect
to amounts required to be included in in-
come under section 951(a) (in the case of
a United States shareholder who has made
a section 962 election for the taxable year)
means that a section 958(a) U.S. shareholder
that makes a section 965(h) election may
only increase its basis as it pays its section
965(h) net tax liability over time. As sug-
gested by the comment, the final regulations
include this rule. See §1.965-2(e)(2) and
(h)(1). Consistent with this rule, no adjust-
ments apply for section 965(b) previously
taxed earnings and profits and the use of
specified E&P deficits. See §1.965-
2(f)(2)(ii)(C).
A comment requested that the final
regulations provide guidance concerning
the consequences if an individual section
958(a) U.S. shareholder that made both a
section 962 election and a section 965(h)
election that applied to a section 965(a)
inclusion with respect to a DFIC disposed
of the DFIC stock before all of its section
965(h) net tax liability had been paid, and
thus before all corresponding basis adjust-
ments had been made. The comment rec-
ommended that the basis adjustments be
treated as made immediately before the
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disposition. The Treasury Department and
the IRS have determined that this treat-
ment would not be appropriate, because it
would allow the shareholder to obtain the
benefits of the basis increase without hav-
ing paid the corresponding tax, and do not
adopt the comment.
The comment also requested that the
final regulations clarify the basis adjust-
ments to be made in the case of a domestic
pass-through owner that has made a sec-
tion 962 election applicable to its distrib-
utive share of a domestic pass-through
entity's section 965(a) inclusion amount.
The issue raised by the comment is a
longstanding issue of general applicability
within subpart F that is outside of the
scope of regulations concerning section
965. Accordingly, the Treasury Depart-
ment and the IRS decline to adopt the
comment, and the final regulations, like
the proposed regulations, address only ba-
sis adjustments applicable to section
958(a) U.S. shareholders of DFICs.
### E. Gain reduction rule and translation rates
The proposed regulations provide that,
for purposes of section 986(c), foreign
currency gain or loss with respect to dis-
tributions of section 965(a) previously
taxed earnings and profits is determined
based on movements in the exchange rate
between December 31, 2017, and the date
on which such E&P are actually distrib-
uted. See proposed §1.986(c)-1(a). The
proposed regulations also provide that any
gain or loss recognized under section
986(c) with respect to distributions of sec-
tion 965(a) previously taxed earnings and
profits is reduced in the same proportion
as the reduction by a section 965(c) de-
duction amount of the section 965(a) inclu-
sion amount that gave rise to such section
965(a) previously taxed earnings and prof-
its. See proposed §1.986(c)-1(b). Moreover,
proposed §1.986(c)-1(c) provides that sec-
tion 986(c) does not apply with respect to
distributions of section 965(b) previously
taxed earnings and profits.
The proposed regulations also provide
that if a section 958(a) U.S. shareholder
receives a distribution from a DFIC (in-
cluding through a chain of ownership de-
scribed under section 958(a)) during the
inclusion year of the DFIC that is attrib-
utable to section 965 previously taxed
earnings and profits of the DFIC, then the
amount of gain that otherwise would be
recognized under section 961(b)(2) by the
section 958(a) U.S. shareholder with re-
spect to the section 958(a) U.S. sharehold-
er's section 958(a) stock of the DFIC or
interest in applicable property with re-
spect to the DFIC by reason of the distri-
bution is reduced (but not below zero) by
an amount equal to the section 965 previ-
ously taxed earnings and profits of the DFIC
with respect to the section 958(a) U.S.
shareholder. Proposed §1.965-2(g)(1)(i).
The proposed regulations do not spec-
ify the translation rate to be used for pur-
poses of reducing the amount of gain that
otherwise would be recognized under sec-
tion 961(b)(2) when a DFIC that has a
functional currency other than the U.S.
dollar distributes section 965(b) previ-
ously taxed earnings and profits. In the
absence of a rule providing that section
965(b) previously taxed earnings and
profits should be translated into U.S. dol-
lars at the spot rate on December 31,
2017, fluctuations in exchange rates
would cause distortions in the application
of the gain reduction rule to distributions
of section 965(b) previously taxed earn-
ings and profits. For example, distribu-
tions of section 965(b) previously taxed
earnings and profits denominated in a cur-
rency other than the U.S. dollar during an
inclusion year could result in gain recog-
nition attributable to fluctuations in ex-
change rates, notwithstanding the fact that
proposed §1.986(c)-1 specifically pro-
vides that a taxpayer is not required to
recognize foreign currency gain or loss on
such distributions. To prevent recognition
of gain under these circumstances, the fi-
nal regulations provide that the translation
rate to be used with respect to section
965(b) previously taxed earnings and
profits for purposes of the gain reduction
rule is the spot rate on December 31,
2017.
The Treasury Department and the IRS
are considering proposing regulations un-
der section 961 to similarly ensure that a
taxpayer is not required to recognize gain
by reason of fluctuations in exchange rates
on distributions of section 965(b) previ-
ously taxed earnings and profits in taxable
years after the inclusion year. In addition,
the Treasury Department and the IRS in-
tend to study the proper amount of gain or
loss, including foreign currency gain or
loss, to be recognized on distributions of
previously taxed E&P, including previ-
ously taxed E&P other than section 965(a)
previously taxed earnings and profits and
section 965(b) previously taxed earnings
and profits.
### IV. Comments and Changes to Proposed §1.965-3 - Section 965(c) Deductions
Proposed §1.965-3 provides rules re-
garding the determination of section
965(c) deductions and section 965(c) de-
duction amounts. The comments and
modifications with respect to these rules
are discussed in this Part IV.
### A. Disregard of certain assets to prevent double counting
The proposed regulations contain rules
for disregarding certain assets for pur-
poses of determining the aggregate for-
eign cash position of a section 958(a) U.S.
shareholder. See proposed §1.965-3(b).
### 1. Disregard of Certain Obligations Between Related Specified Foreign Corporations
One such rule in the proposed regula-
tions provides that, for purposes of deter-
mining the aggregate foreign cash posi-
tion of a section 958(a) U.S. shareholder,
accounts receivable, accounts payable,
short-term obligations, and derivative fi-
nancial instruments between related spec-
ified foreign corporations are disregarded,
if applicable, on a cash measurement date
of the specified foreign corporations to the
extent of the smallest of the section 958(a)
U.S. shareholder's ownership percentages
of section 958(a) stock of the specified
foreign corporations owned by the section
958(a) U.S. shareholder on the cash mea-
surement date. Proposed §1.965-3(b)(1).
A comment suggested that the rule in
proposed §1.965-3(b)(1) be extended to
permit the same treatment for third-party
accounts payable and third-party accounts
receivable held by related specified for-
eign corporations of a section 958(a) U.S.
shareholder. The comment also suggested
that all members of a consolidated group
that are section 958(a) U.S. shareholders
be treated as a single section 958(a) U.S.
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shareholder for purposes of such a rule.
The Treasury Department and the IRS do
not adopt this comment for several rea-
sons. First, although the statute explicitly
allows third-party accounts payable held
by a specified foreign corporation to be
netted against the same specified foreign
corporation's third-party accounts receiv-
able for purposes of determining its cash
position, it does not provide for netting of
third-party payables and third-party receiv-
ables among a section 958(a) U.S. share-
holder's specified foreign corporations for
purposes of determining that section 958(a)
U.S. shareholder's aggregate foreign cash
position. See section 965(c)(3)(B)(ii) and
(c)(3)(C). Second, the statutory language
and the legislative history direct the Secre-
tary to address the double counting of ac-
counts receivable and accounts payable be-
tween related specified foreign corporations
of a section 958(a) U.S. shareholder but
do not grant authority to issue rules al-
lowing one specified foreign corpora-
tion's third-party accounts payable to
offset another specified foreign corpora-
tion's third-party accounts receivable.
See section 965(c)(3)(D); H.R. Rep. No.
115-446, at 615 (2017). Furthermore,
allowing third-party payables and third-
party receivables of all related specified
foreign corporations of a section 958(a)
U.S. shareholder to be netted would re-
quire administratively onerous alloca-
tion rules. The final regulations there-
fore do not extend the rule in proposed
§1.965-3(b)(1) to cover third-party ac-
counts payable and third-party accounts
receivable held by related specified for-
eign corporations with a common sec-
tion 958(a) U.S. shareholder.
## 2. Disregard of Other Assets upon Demonstration of Double-Counting
Another rule in the proposed regula-
tions intended to prevent double counting
provides that, in determining the aggre-
gate foreign cash position of a section
958(a) U.S. shareholder, amounts of net
accounts receivable, actively traded prop-
erty, and short-term obligations of a spec-
ified foreign corporation are disregarded
to the extent such amounts are attributable
to amounts taken into account in deter-
mining the section 958(a) U.S. sharehold-
er's pro rata share of the cash position of
another specified foreign corporation on
the same cash measurement date. Pro-
posed §1.965-3(b)(2). In order for the rule
in proposed §1.965-3(b)(2) to apply, a
section 958(a) U.S. shareholder must
explain, in a statement attached to its
timely filed return for its inclusion year,
why there would otherwise be double-
counting. Id.
### a. Expansion
Comments recommended that the rule
in proposed §1.965-3(b)(2) be expanded
to cover all assets constituting a specified
foreign corporation's cash position, which
are enumerated in section 965(c)(3)(B).
Under this formulation, a section 958(a)
U.S. shareholder would be able to disre-
gard cash held by its specified foreign
corporation (or any other asset described
in section 965(c)(3)(B)) on a cash mea-
surement date to the extent attributable to
amounts already taken into account in de-
termining the section 958(a) U.S. share-
holder's pro rata share of the cash position
of another specified foreign corporation
on such cash measurement date.
The Treasury Department and the IRS
do not adopt this recommendation for a
number of reasons. First, extending the
rule in proposed §1.965-3(b)(2) to apply
to assets other than net accounts receiv-
able, actively traded property, and short-
term obligations would be inconsistent
with section 965(c)(3)(D), which ex-
pressly identifies net accounts receivable,
actively traded property, and short-term
obligations as assets not to be taken into
account by a section 958(a) U.S. share-
holder for purposes of determining its ag-
gregate foreign cash position to the extent
the shareholder demonstrates to the Sec-
retary's satisfaction that such amount is so
taken into account by the shareholder with
respect to another specified foreign corpo-
ration. The other assets described in sec-
tion 965(c)(3)(C), including cash, are not
mentioned in section 965(c)(3)(D). Sec-
ond, the Treasury Department and the IRS
have determined that expanding the rule
in proposed §1.965-3(b)(2) to cover all
assets taken into account in determining a
specified foreign corporation's cash posi-
tion would require complex tracing rules
to ensure that each asset was already taken
into account by a section 958(a) U.S. share-
holder with respect to another specified for-
eign corporation and have determined that
such rules would entail significant adminis-
trative and compliance challenges. Accord-
ingly, the final regulations do not expand the
rule in proposed §1.965-3(b)(2) to allow a
section 958(a) U.S. shareholder to disregard
assets other than those specifically enumer-
ated in section 965(c)(3)(D).
## b. Clarification of cash measurement dates
Comments also recommended that the
rule in proposed §1.965-3(b)(2) be clari-
fied so that relief from double-counting is
available with respect to a specified for-
eign corporation when an amount is taken
into account in determining the section
958(a) U.S. shareholder's pro rata share of
the cash position of another specified for-
eign corporation on such other specified
foreign corporation's corresponding cash
measurement date even if the cash mea-
surement date is not the same calendar
date for both specified foreign corpora-
tions.
The Treasury Department and the IRS
have concluded that section 965(c)(3)(D)
allows relief from double counting when-
ever a section 958(a) U.S. shareholder can
establish that net accounts receivable, ac-
tively traded property, or short-term obli-
gations are "taken into account ... with
respect to another specified foreign corpo-
ration." The statute does not require that
an amount must have been taken into ac-
count with respect to another specified
foreign corporation on the same day.
Therefore, in response to the comments,
the final regulations amend the rule in
proposed §1.965-3(b)(2) to clarify that
double-counting relief with respect to a
specified foreign corporation is available
when an amount is taken into account in
determining the section 958(a) U.S. share-
holder's pro rata share of the cash position
of another specified foreign corporation
on the other specified foreign corpora-
tion's corresponding cash measurement
date. Section 1.965-3(b)(2). Correspond-
ing clarifications are made for consistency
in §1.965-3(b)(1).
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## 3. Notional Cash Pooling Arrangements
Comments requested guidance provid-
ing that for purposes of computing a sec-
tion 958(a) U.S. shareholder's aggregate
foreign cash position, notional cash pool-
ing arrangements are treated as creating
intercompany receivables. The facts and
circumstances of each notional cash pool,
including the underlying contractual
rights and obligations of the parties to the
arrangement and the role of the unrelated
cash pool provider in the arrangement, are
varied. Whether a notional cash pooling
arrangement is treated as in substance cre-
ating a loan between and among partici-
pants, rather than between the participant
and the unrelated cash pool provider, de-
pends on the application of federal income
tax principles to the particular facts and
circumstances of the arrangement. Ac-
cordingly, the Treasury Department and
the IRS do not adopt these comments.
### B. Disregard of portion of cash position of noncorporate entities treated as specified foreign corporations
Section 965(c)(3)(E) provides that an
entity (other than a corporation) is treated
as a specified foreign corporation of a
United States shareholder for purposes of
determining the United States sharehold-
er's aggregate foreign cash position if any
interest in the entity is held by a specified
foreign corporation of the United States
shareholder (determined after application
of the rule in this sentence) and the entity,
if it were a foreign corporation, would be
a specified foreign corporation of the
United States shareholder. A comment re-
quested confirmation that application of
section 965(c)(3)(E) to treat a noncorpo-
rate entity as a specified foreign corpora-
tion could depend on ownership by other
owners of the noncorporate entity and on
the definition of United States shareholder
applicable for the year in which the status
of a foreign corporation as a specified
foreign corporation is being determined.
The Treasury Department and the IRS
have determined that this point is clear
from the definition of specified foreign
corporation. The comment also suggested
that the Treasury Department and the IRS
consider limitations on attribution for pur-
poses of determining whether a noncorpo-
rate entity would be a specified foreign
corporation if it were a foreign corpora-
tion. The Treasury Department and the
IRS have determined that the special at-
tribution rule described in Part II.K of this
Summary of Comments and Explanation
of Revisions, as modified to a ten-percent
threshold in the final regulations, would
apply for purposes of the noncorporate
entity rule and that no additional limita-
tions are warranted. The Treasury Depart-
ment and the IRS have also determined
that it is clear under the statute that section
951(b) as in effect for years of foreign
corporations beginning before January 1,
2018, applies for purposes of determining
whether a noncorporate entity would be a
specified foreign corporation if it were a
foreign corporation for purposes of sec-
tion 965(c)(3)(E), given that the relevant
year for application of the rule is the last
taxable year of a foreign corporation be-
ginning before January 1, 2018.
A comment also requested guidance
clarifying the application of section
965(c)(3)(E) to noncorporate entities only
partially owned by a specified foreign cor-
poration. The legislative history to section
965(c)(3)(E) indicates that it was intended
that "the cash position of a U.S. share-
holder ... not generally include the cash
attributable to a direct ownership interest
in a partnership," and that the Treasury
Department and the IRS "provide guid-
ance for taking into account only the spec-
ified foreign corporation's share of the
partnership's cash position, and not [an]
interest directly owned by the U.S. share-
holder." H.R. Rep. No. 115-446, at 621
(2017). Accordingly, the final regulations
include a rule in §1.965-3(b)(3) providing
that if section 965(c)(3)(E) applies to an
entity, the section 958(a) U.S. sharehold-
er's pro rata share of the cash position of
the entity is reduced by the amount attrib-
utable to deemed stock of the entity not
owned (within the meaning of section
958(a)) by a specified foreign corporation
of the section 958(a) U.S. shareholder.
This rule is illustrated in the example in
§1.965-3(b)(4)(v).
### C. Increase of income by section 965(c) deduction of expatriated entity
Under proposed §1.965-3(d)(1), if a
person is allowed a section 965(c) deduc-
tion and becomes an expatriated entity, in
certain circumstances, the person must
pay tax equal to 35 percent of the person's
section 965(c) deductions. See also sec-
tion 965(l)(1). A comment recommended
clarifying and limiting the definition of
expatriated entity to exclude United States
individuals on the theory that the refer-
ence to "entity" in section 965(1)(2) was
intended to so provide. Section 965(l)(2)
defines expatriated entity by cross-
reference to the definition provided in
section 7874(a)(2), which includes not
only entities but certain persons (which
could be individuals) related to the en-
tity at issue; therefore, the Treasury De-
partment and the IRS have determined
that section 965(l)(2) does not apply
only to an entity but potentially to any
person that is an expatriated entity, and
the final regulations are clarified accord-
ingly. See §1.965-3(d)(2).
D. Treatment of section 965(c)
deductions
Under the proposed regulations, a
United States person that must pay tax
under section 4940 or 1411 on a section
965(a) inclusion cannot take into account
a section 965(c) deduction for purposes of
determining the amount of such tax. See
proposed §1.965-3(f)(3) and (4). A com-
ment recommended that the section 965(c)
deduction be allowed for purposes of com-
puting the amount of tax due under section
1411. It suggested that the rule in proposed
§1.965-3(f)(3) was inconsistent with the
rule in §1.1411-4(f)(3)(ii), which takes into
account in determining net investment in-
come itemized deductions that are investment
expenses (as defined in section 163(d)(4)(C)).
However, §1.1411-4(f)(3)(ii) is inapplicable
because §1.965-3(f)(1) provides that a section
965(c) deduction is not an itemized deduction.
The Treasury Department and the IRS have
determined that the section 965(c) deduction
was only intended to reduce the rate of tax
attributable to income taxes contained in chap-
ter 1 of the Code. See H.R. Rep. No. 115-466,
at 620 (2017). Accordingly, the final regula-
tions continue to provide that for purposes of
section 1411 and §1.1411-4(f)(6), a section
965(c) deduction is not treated as a deduction
properly allocable to a corresponding section
965(a) inclusion. Section 1.965-3(f)(3).
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Another comment suggested that the
final regulations clarify whether a section
965(c) deduction is taken into account for
purposes of the tax imposed under section
4968. Because section 4968(c) provides
that net investment income subject to the
tax is determined under rules similar to
the rules of section 4940(c), and §1.965-
3(f)(4) provides that for purposes of sec-
tion 4940(c)(3)(A), a section 965(c) de-
duction is not treated as an ordinary and
necessary expense paid or incurred for the
production or collection of gross invest-
ment income, the Treasury Department
and the IRS have determined that it is
clear that a section 965(c) deduction is not
taken into account for purposes of section
4968, and no clarification is necessary.
The comment also requested rules ad-
dressing the basis of the stock of a DFIC
for purposes of section 4968; however,
such rules would be outside of the scope
of this rulemaking, and the request for
such guidance is declined.
The comment also recommended that
the final regulations clarify that a section
965(c) deduction is a deduction taken into
account under section 62(a) in determin-
ing an individual's adjusted gross income.
The Treasury Department and the IRS
have determined that such treatment is
appropriate and the final regulations are
modified to so provide. See §1.965-
3(f)(1).
### V. Comments and Changes to Proposed §1.965-4 - Disregard of Certain Transactions
Proposed §1.965-4 sets forth rules that
disregard certain transactions for purposes
of applying section 965. Specifically, pro-
posed §1.965-4 provides rules that disre-
gard (i) transactions undertaken with a
principal purpose of changing a section
965 element of a United States share-
holder, (ii) certain changes in method of
accounting and entity classification elec-
tions, and (iii) certain transactions occur-
ring between E&P measurement dates.
The comments and modifications with re-
spect to these rules are discussed in this
Part V.
A. Scope and consequences of anti-
abuse rules generally
The rules under proposed §1.965-
4(b) through (e) ("anti-abuse rules") relate
to transactions undertaken with a principal
purpose of changing a section 965 ele-
ment of a United States shareholder and
certain changes in method of accounting
and entity classification elections. They
provide that transactions subject to those
rules are "disregarded for purposes of de-
termining the amounts of all section 965
elements" of a United States shareholder.
Comments questioned the consequences
of disregarding a transaction under these
rules, including with respect to certain
E&P and foreign tax credit calculations.
The final regulations retain the approach
in the proposed regulations, which do not
describe the consequences of disregarding
a transaction other than the consequences
with respect to the section 965 elements of
a United States shareholder. A discussion
of, or rules regarding, the consequences of
these transactions for other purposes is
outside the scope of the final regulations.
However, the Treasury Department and
the IRS have determined that it is appro-
priate to mitigate double taxation that
could result from the application of the
anti-abuse rules to a liquidation. Accord-
ingly, §1.965-4(e)(4) provides that in the
case of a liquidation of a specified foreign
corporation that is disregarded for pur-
poses of determining the section 965 ele-
ments of a United States shareholder pur-
suant to §1.965-4(b) or (c)(2), for
purposes of determining the amounts of
the section 965 elements of the United
States shareholder, the date of the liquida-
tion generally is treated as the last day of
the taxable year of the specified foreign
corporation. Special rules apply with re-
spect to liquidations resulting from entity
classification elections, including a rule
that may defer the date of liquidation for
this purpose to the date on which the
entity classification election is filed. For
example, if a domestic corporation (USP)
wholly owns a foreign subsidiary (FS)
that has a taxable year ending on Novem-
ber 30, and an entity classification election
is filed on November 15, 2017, to treat FS as
an entity that is disregarded as an entity
separate from its owner for U.S. federal
income tax purposes ("disregarded entity")
effective on October 1, 2017, then any trans-
actions undertaken by FS through and in-
cluding November 30, 2017, would be
taken into account for purposes of determin-
ing the post-1986 earnings and profits and
accumulated post-1986 deferred foreign in-
come of FS, and any transactions involving
FS after November 30, 2017, would not be
taken into account for such purposes. Fur-
thermore, any section 965(a) previously
taxed earnings and profits and section
965(b) previously taxed earnings and profits
of FS would be taken into account in deter-
mining the all earnings and profits amount
under §1.367(b)-3(b) with respect to FS.
Comments also requested various ex-
ceptions from the anti-abuse rules for
transactions that do not reduce the overall
U.S. federal income tax liability of United
States persons resulting from the applica-
tion of section 965. In response to these
comments, the final regulations provide an
exception from the anti-abuse rules for
certain incorporation transactions. Under
the exception, the anti-abuse rules do not
apply to disregard a transfer of stock of a
specified foreign corporation by a United
States shareholder to a domestic corpora-
tion (for this purpose, including an S cor-
poration), provided that the section 965(a)
inclusion amount with respect to the trans-
ferred stock of the specified foreign cor-
poration is not reduced and that the aggre-
gate foreign cash position of both the
transferor and the transferee is determined
as if each had held the transferred stock of
the specified foreign corporation owned
by the other on each of the cash measure-
ment dates. See §1.965-4(e)(3).
## B. Transactions with a principal purpose of changing a section 965 element
### 1. General Rules
Comments suggested that the anti-
abuse rules be eliminated and that, if re-
tained, the anti-abuse rules in proposed
§1.965-4(b) not contain rebuttable pre-
sumptions or per se rules. The Treasury
Department and the IRS have determined
that the rebuttable presumptions and per
se rules are appropriate for tax adminis-
tration reasons. They identify situations in
which tax avoidance is highly likely or
unlikely in order to minimize the number
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of circumstances in which more detailed
facts and circumstances analyses are re-
quired.
A comment also suggested that ordi-
nary course exceptions be provided for all
of the anti-abuse rules, so that the rules
can never apply to ordinary course trans-
actions. The Treasury Department and the
IRS have determined that excluding ordi-
nary course transactions from the pre-
sumptions in the anti-abuse rules, rather
than the overall application of the rules,
while still applying those rules to transac-
tions that were actually undertaken with a
principal purpose of changing a section
965 element, strikes the appropriate bal-
ance between administrability and tax-
payer certainty, and therefore do not adopt
the comment.
A comment also suggested that the fi-
nal regulations omit the requirement in
proposed §1.965-4(b)(2) that a taxpayer
file a statement indicating that it takes the
position that a presumption in proposed
§1.965-4(b) is rebutted. The Treasury
Department and the IRS have determined
that it is important for fair and effective
tax administration that the IRS be aware
of transactions for which there is a pre-
sumption of a principal purpose of chang-
ing a section 965 element and do not
adopt the suggestion.
### 2. Cash Reduction Transactions and Specified Distributions
The proposed regulations provide that
a cash reduction transaction is presumed
to be undertaken with a principal pur-
pose of changing a section 965 element
of a United States shareholder unless the
cash reduction transaction occurs in the
ordinary course of business. Proposed
§1.965-4(b)(2)(iii)(A). A cash reduc-
tion transaction includes a transfer of
cash, accounts receivable, or cash-
equivalent assets by a specified foreign
corporation to a United States share-
holder of the specified foreign corpora-
tion or a person related to a United
States shareholder of the specified foreign
corporation if the transfer or assumption re-
duces the aggregate foreign cash position of
the United States shareholder. Id. The pre-
sumption may be rebutted only if the facts
and circumstances clearly establish that the
transaction was not undertaken with a prin-
cipal purpose of changing the amount of a
section 965 element of a United States
shareholder, and a taxpayer taking the posi-
tion that the presumption is rebutted must
attach a statement to its tax return disclosing
that it has rebutted the presumption. Section
1.965-4(b)(2)(i).
The proposed regulations also set forth
a "per se" rule providing that a cash re-
duction transaction will be treated per se
as being undertaken with a principal pur-
pose of changing the amount of a section
965 element of a United States share-
holder if it is a specified distribution. Pro-
posed §1.965-4(b)(2)(iii)(B). The pro-
posed regulations provide, in part, that a
cash reduction transaction that is a distri-
bution by a specified foreign corporation
of a United States shareholder will be
considered a specified distribution if and
to the extent that, at the time of the dis-
tribution, there was a plan or intention for
the distributee to transfer cash, accounts
receivable, or cash-equivalent assets to
any specified foreign corporation of the
United States shareholder. Id. Under the
proposed regulations, a cash reduction
transaction that is a distribution by a spec-
ified foreign corporation to a United
States shareholder of the specified foreign
corporation, other than a specified distri-
bution, is treated per se as not being un-
dertaken with a principal purpose of
changing the amount of a section 965 el-
ement of a United States shareholder. Id.
The Treasury Department and the IRS
received requests that the final regulations
exempt certain transactions from the def-
inition of cash reduction transaction and
specified distribution. A comment re-
quested that a cash reduction transaction
not be treated as a specified distribution if,
and to the extent that, the distributee does
not, within 24 months following the dis-
tribution, transfer cash, accounts receiv-
able, or cash equivalents to a specified
foreign corporation of the United States
shareholder. Although the Treasury De-
partment and the IRS have determined
that the amount of time between a distri-
bution and a transfer of cash may be rel-
evant in determining whether there was a
plan or intent for the distributee to transfer
the cash, the Treasury Department and the
IRS have determined that a per se rule
disregarding transfers outside of a certain
window is not warranted, as long-term
plans for a transfer could exist, and pro-
viding such a rule would facilitate tax
avoidance. A comment also suggested that
it be clarified that any transferred amount
disregarded be limited to the amount of
the subsequent transfer. Because a speci-
fied distribution is defined as a cash re-
duction transaction "to the extent that"
there is a plan or intent to re-transfer cash,
the Treasury Department and the IRS
have determined that it is already clear
that the amount of a specified distribution
is limited to the amount re-transferred,
and accordingly no additional clarification
is required.
Another comment requested that the
per se rule not apply to cash reduction
transactions planned before November 2,
2017. The final regulations do not adopt
this requested change, as the Treasury De-
partment and the IRS have determined
that a rule exempting cash reduction trans-
actions in planning stages before Novem-
ber 2, 2017, from the application of the
per se rule would necessarily have to ac-
count for the possibility of subsequent
plan modification or amendment and
would require an inquiry regarding a tax-
payer's subjective intent, resulting in a
standard that is difficult to administer.
Comments also suggested that a cash
reduction transaction should not be con-
sidered a specified distribution to a United
States shareholder by reason of a transfer
of cash to a specified foreign corporation
of the United States shareholder in the
ordinary course of business. The Treasury
Department and the IRS agree that pay-
ments pursuant to a legal obligation en-
tered into before the Act's introduction in
Congress should not be considered to give
rise to a plan or intention for the distrib-
utee in a cash reduction transaction to
transfer cash, accounts receivable, or
cash-equivalent assets to a specified for-
eign corporation of the distributee. Ac-
cordingly, the final regulations provide
that in the case of a cash reduction trans-
action that is a distribution by a specified
foreign corporation of a United States
shareholder, there is not considered to be
a plan or intention for the distributee to
transfer cash, accounts receivable, or
cash-equivalent assets to any specified
foreign corporation of the United States
shareholder if the transfer is made by the
distributee pursuant to a legal obligation
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entered into before November 2, 2017.
Section 1.965-4(b)(2)(iii)(B). If the tax-
payer relies on this rule in determining
that a cash reduction transaction is not a
specified distribution, it must attach a
statement to its return indicating that po-
sition. Id.
### 3. Pro Rata Share Transactions
The proposed regulations provide that
a pro rata share transaction is presumed to
be undertaken with a principal purpose of
changing the amount of a section 965 el-
ement of a United States shareholder and
treat certain internal group transactions as
per se being undertaken with a principal
purpose of changing the amount of a sec-
tion 965 element of a United States share-
holder. Proposed §1.965-4(b)(2)(v). A
comment requested that internal group
transactions not be treated as per se hav-
ing a principal purpose of changing a sec-
tion 965 element. The Treasury Depart-
ment and the IRS have determined that the
definition of internal group transactions is
sufficiently narrowly tailored to apply the
per se rule to tax-motivated transactions
of the type that Congress intended the
Treasury Department and the IRS to ad-
dress and do not adopt the comment.
### 4. E&P Reduction Transactions
A comment noted that dividends paid
by one specified foreign corporation to
another between E&P measurement dates
could potentially be subject to the rules in
both proposed §1.965-4(f) (disregarding
specified payments in order to mitigate
double-counting) and proposed §1.965-
4(b)(2)(iv) (which can result in disregard-
ing certain transactions that reduce accumu-
lated post-1986 deferred foreign income or
post-1986 earnings and profits) and argued
that the overlapping rules create a burden on
taxpayers that should be ameliorated by ex-
empting dividends between E&P measure-
ment dates from the rules in §1.965-
4(b)(2)(iv). The Treasury Department and
the IRS have determined that if such a div-
idend is disregarded pursuant to §1.965-
4(f), then it is clear that it is irrelevant
whether it would also be disregarded under
§1.965-4(b), applying the presumption in
§1.965-4(b)(2)(iv), such that there would
be no need for a taxpayer to bear the burden
of rebutting the presumption. If, however,
the dividend is not disregarded pursuant to
§1.965-4(f), and the taxpayer takes the po-
sition that it is also not disregarded under
§1.965-4(b), because it can rebut a pre-
sumption that applies under §1.965-4(b)
(2)(iv), then it is appropriate that the tax-
payer be required to document that rebuttal
for the reasons discussed in Part V.B.1 of
this Summary of Comments and Explana-
tion of Revisions. Accordingly, the com-
ment is not adopted.
### C. Changes of accounting method and entity classification elections
A comment noted that a positive sec-
tion 481 adjustment resulting from a change
of accounting method could increase the
section 965(a) inclusion amount and the
amount of foreign income taxes deemed
paid by a United States shareholder and thus
be disregarded for purposes of determining
the United States shareholder's section
965(a) inclusion amount, allowing some or
all of the adjustment to escape taxation un-
der section 965, even though the increase in
foreign income taxes deemed paid was min-
imal. The Treasury Department and the IRS
have determined that this would be inappro-
priate and modify the rule in proposed
§1.965-4(c)(1) to apply only if there is a
reduction in a section 965(a) inclusion
amount or an aggregate foreign cash posi-
tion, or an increase in section 960 deemed
paid taxes other than by reason of an in-
crease in a section 965(a) inclusion amount.
See §1.965-4(c)(1)(i).
Comments suggested that the rule in
proposed §1.965-4(c)(1), which applies
to changes in methods of accounting, not
apply to changes from impermissible
methods of accounting to permissible
methods of accounting, and that the rule
be conditioned on a principal purpose of
changing a section 965 element. However,
a principal purpose-based rule would be
difficult to administer and unwarranted,
given that changes after November 2,
2017, relating to specified foreign corpora-
tions likely would be tax-motivated. More-
over, the Treasury Department and the IRS
have determined that allowing changes from
impermissible methods of accounting to
permissible methods of accounting to be
taken into account will allow similarly situ-
ated taxpayers to take different positions in
a way that is detrimental to the government,
as taxpayers will choose to make currently
those changes that result in reductions of tax
due under section 965 while deferring such
changes that would result in increases of tax
due under section 965 until later years. Ac-
cordingly, the comments are not adopted.
Another comment requested that the
final regulations permit the taxable year of
a specified foreign corporation to be
changed to a calendar year taxable year.
Because neither the proposed regulations
nor the final regulations affect the possi-
bility of changing the accounting period
of a specified foreign corporation, the final
regulations do not adopt this comment.
But see Rev. Proc. 2018-17, 2018-9
I.R.B. 384 (limiting certain changes in
accounting periods of a specified foreign
corporation).
In addition, comments raised questions
regarding the scope of the rule in pro-
posed §1.965-4(c)(2), which applies to
any entity classification election under
§301.7701-3 that is filed on or after No-
vember 2, 2017, and whether it is appro-
priate for that rule to be a per se rule that
applies to all entity classification elections
filed on or after that date. A comment
suggested that the rule would inappropri-
ately apply to a transaction that would
have no impact on section 965 elements.
Another comment suggested that certain
transactions effectuated by entity classifi-
cation elections, such as conversion of a
United States shareholder from a domestic
pass-through entity to a C corporation, or
vice versa, should be excepted from the
application of the rule. However, because
an entity classification election is an elec-
tion made specifically for tax purposes
that could be made retroactively in order
to be effective before November 2, 2017,
and because the rule would only disregard
such an election if it had the effect of
changing a section 965 element, the final
regulations do not change the rule from
the proposed regulations. But see §1.965-
4(e)(3) (discussed in Part V.A of this
Summary of Comments and Explanation
of Revisions).
### D. Application of specified payment rule
The proposed regulations provide that
certain amounts paid or incurred between
related specified foreign corporations of a
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section 958(a) U.S. shareholder between
E&P measurement dates that would oth-
erwise reduce the post-1986 earnings and
profits as of December 31, 2017, of the
specified foreign corporation that paid or
incurred such amounts are disregarded for
purposes of determining the post-1986
earnings and profits of both of the speci-
fied foreign corporations as of the E&P
measurement date on December 31, 2017.
See proposed §1.965-4(f)(1). Comments
indicated that the requirement that the two
specified foreign corporations have differ-
ent tentative measurement dates in order
for specified payments to be disregarded
resulted in complexity and inappropriate
results when there were multiple pay-
ments among specified foreign corpora-
tions during the period, such as in a series
of dividends up a multi-level chain of
specified foreign corporations. They also
indicated that it was unclear how the tenta-
tive measurement date was to be determined
in the case of a specified foreign corporation
that was neither an E&P deficit foreign cor-
poration nor a DFIC. Moreover, comments
indicated that disregarding specified pay-
ments that were deductible payments only
for purposes of section 965, but not other
purposes, could create unintended foreign
tax credit results, which results would not be
remedied by the changes to the ordering rule
in §1.965-2(b) discussed in Part III.A of this
Summary of Comments and Explanation of
Revisions. One comment suggested that the
specified payment rule should be refined to
have an anti-abuse function.
The Treasury Department and the IRS
have determined that detailed rules to ad-
dress the fact patterns raised in the com-
ments, such as rules to determine the
extent of double-counting, to except ordi-
nary course payments, or to add ordering
rules to determine whether a payment is a
specified payment, would introduce more
complexity than warranted and would be
difficult to administer. However, in re-
sponse to the comments, the final regula-
tions eliminate the requirement that the
specified foreign corporations between
which a payment is made have different
tentative measurement dates in order for
the payment to be a specified payment
disregarded under the rule and provide
that a section 958(a) U.S. shareholder may
choose not to apply the rule in §1.965-
4(f)(1), provided that it and all related
section 958(a) U.S. shareholders do so
with respect to all of their specified for-
eign corporations. Section 1.965-4(f)(1),
(2), and (3).
VI. Comments and Changes to Proposed
§1.965-5 and §1.965-6 - Foreign Tax
Credits
Proposed §1.965-5 and §1.965-6 pro-
vide rules with respect to foreign tax
credits. The proposed regulations in-
clude, in addition to the foreign tax
credit-specific rules of section 965, rules
coordinating the provisions of section
965 with the foreign tax credit provi-
sions as in effect before their repeal or
amendment by the Act. The comments
and modifications with respect to these
rules are discussed in this Part VI.
#### A. Application and determination of the disallowance of the applicable percentage of foreign income taxes
1\. Disallowance of the Applicable
Percentage of Foreign Income Taxes
Attributable to Distributions of
Previously Taxed Earnings and Profits
Under the proposed regulations, no de-
duction (including under section 164) or
credit under section 901 is allowed for the
applicable percentage (as defined in pro-
posed §1.965-5(d)) of any foreign income
taxes "paid or accrued" with respect to
any amount for which a section 965(c)
deduction is allowed for a section 958(a)
U.S. shareholder inclusion year. Proposed
§1.965-5(b). This includes foreign in-
come taxes directly paid or accrued by a
taxpayer attributable to a distribution of
section 965(a) previously taxed earnings
and profits or section 965(b) previously
taxed earnings and profits. A similar rule
applies to deny the applicable percentage
of any foreign income taxes "treated as
paid or accrued" with respect to any
amount for which a section 965(c) deduc-
tion is allowed for a section 958(a) U.S.
shareholder inclusion year. Proposed
§1.965-5(c). For these purposes, foreign
income taxes "treated as paid or ac-
crued" include foreign income taxes
deemed paid by the taxpayer under sec-
tion 960 with respect to distributions of
section 965(a) previously taxed earnings
and profits or section 965(b) previously
taxed earnings and profits.
Comments recommended that the pro-
posed regulations be modified to allow a
credit for the applicable percentage of for-
eign income taxes directly paid or accrued
under section 901 or treated as paid or
accrued under section 960 on a distribu-
tion of section 965(a) previously taxed
earnings and profits or section 965(b) previ-
ously taxed earnings and profits. In general,
these comments asserted that the disallow-
ance of taxes attributable to a distribution
of previously taxed E&P discourages
the distribution of the previously taxed
E&P, which the comments assert is in-
consistent with the purpose of section
965. Comments also argued that the rule
created administrative complexity and
asked for guidance on how to track pre-
viously taxed E&P for purposes of ap-
plying this rule. Other comments ac-
knowledged that providing a reduction
for the foreign tax credits attributable to
a distribution of previously taxed E&P
based on the applicable percentage was
appropriate.
The final regulations do not adopt the
recommended changes. As an initial mat-
ter, guidance on tracking previously taxed
E&P is outside the scope of this rulemak-
ing. In addition, the Treasury Department
and the IRS have determined that the rules
under §1.965-5(b) are consistent with the
statutory purpose of sections 960 and 965
and do not discourage the repatriation of
previously taxed E&P. In any event, the
purpose of the foreign tax credit is not to
encourage repatriation of E&P to the
United States but to relieve double taxa-
tion. To the extent the income is subject to
a lower effective rate of U.S. tax, it is
consistent with the purpose of section
965(g) to reduce the credits allowed as
part of relieving double taxation on such
income.
Moreover, the statutory language of
section 965(g) contemplates that the dis-
allowance for the applicable percentage
will apply to distributions of previously
taxed E&P. Section 965(g)(1) provides,
"[n]o credit shall be allowed under section
901 for the applicable percentage of any
foreign income taxes paid or accrued (or
treated as paid or accrued). .. . " In addi-
tion, section 965(g)(3) provides that no
deduction is allowed for any tax for which
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credit is not allowable under section 901
by reason of section 965(g)(1). A deduc-
tion is allowed only for taxes directly paid
or accrued by the taxpayer, not taxes
deemed paid by the taxpayer. Because a
U.S. taxpayer would ordinarily be subject
to foreign tax only on a distribution from
a foreign corporation, not on an income
inclusion under U.S. tax law, "taxes paid
or accrued" can only be understood to
refer to foreign income taxes directly paid
or accrued under section 901 with respect
to a distribution to the taxpayer of previ-
ously taxed E&P. Allowing a full credit for
all such foreign income taxes would render
section 965(g)(3) meaningless. Accord-
ingly, in order to give effect to the language
of section 965(g)(3), foreign taxes paid or
accrued on distributions of section 965(a)
previously taxed earnings and profits and
section 965(b) previously taxed earnings
and profits are subject to the credit disallow-
ance rules of section 965(g)(1).
Furthermore, there is no policy reason
to differentiate between foreign income
taxes attributable to a distribution of pre-
viously taxed E&P that are paid or ac-
crued directly by the United States share-
holder and are creditable under section
901 and those foreign income taxes that
are paid or accrued by other CFCs as part
of the distribution of the earnings to the
United States shareholder and are cred-
itable under section 960(a)(3). Thus, be-
cause section 965(g)(3) contemplates
the disallowance of foreign tax credits
attributable to distributions of previ-
ously taxed E&P when the foreign in-
come taxes are directly paid or accrued
by the United States shareholder, the final
regulations continue to provide that the for-
eign tax credit is disallowed with respect to
the applicable percentage of foreign income
taxes deemed paid under section 960(a)(3)
with respect to a distribution of previously
taxed E&P in the same manner as credits are
disallowed for foreign taxes deemed paid
under section 960(a)(1) with respect to a
section 965(a) inclusion.
Additionally, some comments raised
specific objections about the application
of these rules to foreign income taxes paid
and deemed paid with respect to distribu-
tions of section 965(b) previously taxed
earnings and profits, asserting that the dis-
allowance is inappropriate because these
earnings do not represent an amount for
which a section 965(c) deduction is al-
lowed. One comment also asserted that it
was inappropriate to disallow the applica-
ble percentage of foreign income taxes
paid and deemed paid with respect to dis-
tributions of section 965(b) previously
taxed earnings and profits because a
distribution of section 965(b) previously
taxed earnings and profits results in a
dollar-for-dollar reduction to basis (to the
extent thereof), followed by gain recogni-
tion, because there is no automatic basis
increase in the amount of such earnings
under section 961. Additionally, the com-
ment pointed out that the proposed regu-
lations could create inequities between
taxpayers because the proposed regula-
tions could be read to imply that a tax-
payer that had no section 965(a) inclusion
amount because of the operation of sec-
tion 965(b) had no applicable percentage,
and thus no reduction in creditable foreign
income taxes paid or deemed paid on dis-
tributions of the section 965(b) previously
taxed earnings and profits.
As discussed in Part VI.B.1 of this
Summary of Comments and Explanation
of Revisions, the Treasury Department
and the IRS have determined that section
965(b) previously taxed earnings and
profits are treated as included in income
under section 951(a) for purposes of sec-
tion 960, and thus are treated similarly to
section 965(a) previously taxed earnings
and profits for purposes of applying sec-
tion 965(g). Additionally, with respect to
the reduction in basis associated with a
distribution of section 965(b) previously
taxed earnings and profits, the final regu-
lations provide that a section 958(a) U.S.
shareholder may elect to make certain ba-
sis adjustments to increase the basis of
DFICs with section 965(b) previously
taxed earnings and profits. See §1.965-
2(f)(2). Finally, comments concerning the
applicable percentage for distributions of
section 965(b) previously taxed earnings
and profits are addressed in Part VI.A.4 of
this Summary of Comments and Explana-
tion of Revisions.
2\. Compatibility of Applicable
Percentage Credit Disallowance with
U.S. Bilateral Income Tax Treaties
A comment stated that proposed
§1.965-5 is incompatible with the pro-
visions of U.S. bilateral income tax trea-
ties that provide for relief from double
taxation. However, the credit against
U.S. income tax provided for in these
treaties is generally allowed "[i]n accor-
dance with the provisions and subject to
the limitations of the law of the United
States (as it may be amended from time
to time without changing the general
principle hereof)." See, for example,
paragraph 1 of Article 24 (Elimination
of Double Taxation) of the income tax
convention between the United States
and Canada, as amended by the protocol
signed June 14, 1983. This language
provides that foreign tax credits allowed
under the treaty are subject to the terms
of the U.S. statutory credit, including
"provisions such as Code sections
901(c), 904, 905, 907, 908, and 911,"
but the applicable limitations of U.S.
law are not limited to the illustrative
listed provisions. See, for example, the
U.S. Treasury Department Technical
Explanation to the income tax conven-
tion between the United States and Can-
ada, concerning Article 24, as amended
by the protocol signed June 14, 1983.
The disallowance of the applicable per-
centage of foreign income taxes under
section 965(g)(1) and §1.965-5 is similar
to the application of section 904 and other
provisions in the Code that limit the al-
lowable foreign tax credit. The disallow-
ance takes into account the section 965(c)
deduction and reflects the fact that, be-
cause of the section 965(c) deduction, the
income included under section 965 is sub-
ject to an effective rate of U.S. tax that is
significantly lower than the U.S. tax rates
ordinarily imposed on corporations or in-
dividuals. Absent this disallowance, for-
eign income tax incurred with respect to
the income included under section 965
could inappropriately be used to offset
U.S. tax on unrelated foreign source in-
come, rather than to mitigate double tax-
ation incurred with respect to the taxable
amount of the section 965(a) inclusion.
Accordingly, the application of section
965(g)(1) and §1.965-5 is consistent with
the provisions of U.S. bilateral income tax
treaties that provide for relief from double
taxation.
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### 3. Applicable Percentage with Respect to Foreign Income Taxes that are Not Net Basis Taxes
The proposed regulations provide that
no deduction or credit is allowed for the
applicable percentage of net basis taxes
imposed on a United States citizen by the
citizen's jurisdiction of residence upon re-
ceipt of a distribution of section 965(a)
previously taxed earnings and profits or
section 965(b) previously taxed earnings
and profits. Proposed §1.965-5(b). A
comment recommended that the final reg-
ulations define "net basis taxes" and clar-
ify that proposed §1.965-5(b) does not
apply to creditable gross basis income
taxes.
Section 965(g) and proposed §1.965-
5(b) apply to all creditable foreign income
taxes. The reference to "net basis taxes"
was included in the proposed regulations
for illustrative purposes only, and the
taxes listed in proposed §1.965-5(b) are
not an exhaustive list of the taxes sub-
ject to proposed §1.965-5(b). The final
regulations clarify this accordingly. See
§1.965-5(b).
### 4. Applicable Percentage with Respect to Distributions of Section 965(b) Previously Taxed Earnings and Profits
The definition of applicable percentage
in section 965(g) and proposed §1.965-
5(d) is computed based on a taxpayer's
section 965(a) inclusion for a section
958(a) U.S. shareholder inclusion year.
Comments noted that it was not clear un-
der the proposed regulations how the ap-
plicable percentage with respect to section
965(b) previously taxed earnings and
profits should be determined when a DFIC
has section 965(b) previously taxed earn-
ings and profits but the section 958(a)
U.S. shareholder does not have an aggre-
gate section 965(a) inclusion amount, be-
cause its pro rata shares of accumulated
post-1986 deferred foreign income are
entirely offset by its pro rata shares of
specified E&P deficits. The final regula-
tions provide that if there is no aggregate
section 965(a) inclusion amount, the ap-
plicable percentage is 55.7 percent (that
is, the applicable percentage that would
apply if the section 965(b) previously
taxed earnings and profits had been in-
cluded in income and were an amount to
which section 965(c)(1)(B) applied). See
§1.965-5(d)(2).
The final regulations also clarify how
the applicable percentage applies with re-
spect to domestic pass-through owners and
with respect to distributions of previously
taxed E&P. With respect to domestic pass-
through owners, the final regulations pro-
vide that the applicable percentage deter-
mined under §1.965-5(d)(1) or (2) with
respect to a domestic pass-through entity
applies with respect to taxes deemed paid by
a domestic pass-through owner even if the
domestic pass-through entity does not have
a section 965(a) inclusion amount. Section
1.965-5(d)(3). With respect to foreign in-
come taxes imposed on distributions of pre-
viously taxed E&P, the final regulations
provide that the applicable percentage that is
applied is the applicable percentage with
respect to the section 958(a) U.S. share-
holder and the section 958(a) U.S. inclusion
year in which the section 958(a) U.S. share-
holder had the section 965(a) inclusion as a
result of which the section 965(a) previously
taxed earnings and profits or the section
965(b) previously taxed earnings and profits
first arose. Section 1.965-5(d)(4).
### 5. Applicable Percentage with Respect to Tax on Gain from Sale of Stock
The proposed regulations provide that
the disallowance of foreign tax credits un-
der section 965(g)(1) applies with respect
to the applicable percentage of foreign
income taxes attributable to distributions
of section 965(a) previously taxed earn-
ings and profits and section 965(b) previ-
ously taxed earnings and profits. Proposed
§1.965-5(b). A comment requested guid-
ance on whether the applicable percentage
also applies to foreign income taxes im-
posed on an amount of a shareholder's
gain from the sale of the specified foreign
corporation's stock taken into account for
foreign, but not U.S., income tax pur-
poses, equal to its tax basis increase under
section 961(a) or §1.965-2(f)(2) by reason
of section 965. The Treasury Department
and the IRS have determined that under
§1.904-6, foreign tax imposed on a dis-
position of stock is associated with the
gain (or other income) that is (or would
be) recognized for U.S. tax purposes upon
a taxable disposition, without regard to
whether the taxpayer's basis in the stock
(and, accordingly, the amount of gain rec-
ognized) is a different amount for U.S.
and foreign tax purposes. Because no por-
tion of a foreign tax imposed on the sale
of a specified foreign corporation's stock
is considered imposed with respect to its
previously taxed E&P, the final regula-
tions do not expand the scope of the rule
in the proposed regulations.
B. Operation of section 960(a)(3)
1\. Disallowance of Credits for Foreign
Taxes Treated as Deemed Paid Under
Section 960(a)(1) with respect to Section
965(b) Previously Taxed Earnings and
Profits
The proposed regulations provide that no
credit is allowed under section 960(a)(3) or
any other section for foreign income taxes
that would have been deemed paid under
section 960(a)(1) with respect to the section
965(a) earnings amount that is reduced under
proposed §1.965-1(b)(2) or proposed §1.965-
8(b). Proposed §1.965-5(c)(1)(ii). The Trea-
sury Department and the IRS have received
comments asserting that this rule should not be
included in the final regulations. The final reg-
ulations maintain the rule from the proposed
regulations.
Comments stated that allowing a deemed
paid credit under section 960(a)(3) is neces-
sary to avoid double taxation; however, there
is no double taxation associated with section
965(b) previously taxed earnings and profits.
The section 965(a) earnings amount offset by
an aggregate foreign E&P deficit is excluded
from U.S. taxable income and thereby effec-
tively exempted from U.S. tax under section
965(b)(4)(A) and proposed §1.965-1(b)(2) or
proposed §1.965-8(b). As a policy matter, this
exclusion eliminates the need for a foreign tax
credit. The purpose of the foreign tax credit is
to mitigate double taxation by allowing for-
eign income taxes to reduce the U.S. tax that
would otherwise be imposed on foreign
source income. Allowing foreign income
taxes imposed on income that is not subject to
U.S. tax by reason of section 965(b) to be
credited against U.S. tax on unrelated income
would confer a windfall double benefit for
taxpayers with section 965(b) previously taxed
earnings and profits.
As a technical matter, section 965(b)
(4)(A) treats section 965(a) earnings
amounts offset by an aggregate foreign
E&P deficit as previously included in
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income under section 951(a) "for pur-
poses of applying section 959." Accord-
ingly, section 965(b) previously taxed
earnings and profits are treated as pre-
viously taxed E&P resulting from a sec-
tion 951(a) inclusion, despite never actually
having been included in U.S. taxable in-
come. Under section 960(a)(1), a domestic
corporate shareholder that includes an
amount in income under section 951(a) is
deemed to have paid a ratable portion of the
foreign corporation's foreign income taxes at
the time of the income inclusion. Amounts
treated as previously taxed E&P resulting
from an income inclusion under section 951(a)
should similarly be treated as having resulted
in foreign taxes deemed paid under section
960(a)(1).
Section 960(a)(3) allows a credit for
foreign income taxes paid by CFCs upon a
subsequent distribution of the section
965(b) previously taxed earnings and
profits through a chain of CFCs to the
domestic corporate shareholder, but does
not allow a credit for foreign income taxes
that were previously deemed paid (or
treated as deemed paid) under section
960(a)(1) when the amounts were in-
cluded (or treated as included) in income
under section 951(a). Because foreign in-
come taxes attributable to a section 965(a)
earnings amount that were offset by an
aggregate foreign E&P deficit were
treated as deemed paid under section
960(a)(1) when those earnings were
treated as included in income under sec-
tion 951(a), those taxes are not available
to be deemed paid again under section
960(a)(3) upon a subsequent distribution
of the section 965(b) previously taxed
earnings and profits. Consistent with that
treatment and with section 960(a)(2), the
regulations under section 902 remove
from the foreign corporation's pool of
post-1986 foreign income taxes the for-
eign income taxes that are attributable to
earnings included in income under section
951(a) or otherwise removed from its
post-1986 undistributed earnings. See
§1.902-1(a)(8)(i).
Comments argue that the plain lan-
guage of section 965(b)(4)(A) means that
section 965(a) earnings amounts offset by
an aggregate foreign E&P deficit are
treated as income previously included un-
der section 951(a) solely for purposes of
applying section 959, and not for purposes
of applying section 960(a). However, the
application of section 959 is a precondition
to the application of section 960(a)(3). The
Treasury Department and the IRS have de-
termined that section 960(a)(3) cannot be
applied independently of section 959 and
that the Act did not change the relationship
between these sections. Indeed, the com-
ments recognize the interaction between
sections 959 and 960(a)(3) by recommend-
ing that a credit be allowed under section
960(a)(3) upon a distribution of section
965(b) previously taxed earnings and prof-
its, which requires treating such amounts as
previously taxed E&P for purposes of sec-
tion 960(a)(3) as well as for purposes of
section 959. If the section 965(b) previously
taxed earnings and profits are treated as pre-
viously taxed E&P excluded from gross in-
come on distribution under section 959(a) in
applying section 960(a)(3), it necessarily
follows that in applying that same section
those amounts are treated as having been
included in income under section 951(a) and
resulted in foreign taxes deemed paid under
section 960(a)(1) as well.
Some comments raised the concern
that U.S. companies would face a higher
U.S. tax burden by not being able to claim
foreign tax credits under section 960(a)(3)
for foreign income tax imposed on E&P
that is not subject to tax in the United
States by reason of section 965(b). The
comments argued that this would reduce
the competitive advantage Congress
sought to confer through the enactment
of the foreign tax credit regime and dis-
courage repatriation of previously taxed
E&P. However, the purpose of the for-
eign tax credit regime is to relieve dou-
ble taxation of foreign source income by
reducing U.S. tax on that income, not to
guarantee that U.S. taxpayers will be
able to use all foreign income taxes paid
to reduce their U.S. tax burden. See sec-
tion 904. The foreign tax credit regime
was never intended to subsidize foreign
income taxes that are paid in excess of
the U.S. tax burden on the foreign
source income. Because these earnings
are not subject to U.S. tax, any foreign
tax credits related to these earnings
would only be used to offset other un-
related foreign source income.
One comment explained that allowing a
deemed paid credit under section 960(a)(3)
with respect to section 965(b) previously
taxed earnings and profits is equivalent to
allowing a deemed paid credit for foreign
income tax paid in a year in which losses
recognized for U.S. (but not foreign) tax
purposes reduced post-1986 undistributed
earnings. Pre-Act law, however, associated
foreign income taxes paid by a foreign cor-
poration in post-1986 years with its post-
1986 undistributed earnings, but did not
treat earnings offset by losses as giving rise
to previously taxed E&P. Therefore, the
statutory scheme allowed a credit for those
taxes in connection with dividends or inclu-
sions of those earnings, and not in connec-
tion with distributions of previously taxed
E&P.
Relatedly, comments also suggested
that the premise of section 965(b) is to
treat an E&P deficit foreign corporation
and a DFIC as a single corporation to the
extent that a DFIC's accumulated post-
1986 deferred foreign income is offset by
an aggregate foreign E&P deficit. How-
ever, Congress did not adopt the single
corporation approach, as evidenced by the
allocation of the aggregate foreign E&P
deficit to the DFICs under section 965(b).
Section 965 as enacted requires a foreign
corporation-by-foreign corporation deter-
mination, which method extends to the
computation of the foreign tax credit.
Congress did not change the computation
of the deemed-paid credit to apply other
than on a foreign corporation-by-foreign
corporation basis.
After consideration of the comments,
the Treasury Department and the IRS
maintain the rule in the final regulations
based upon both the technical analysis of
the relevant sections of the Code and the
underlying policy. As a result, no credit is
allowed under section 960(a)(3) or any
other provision of the Code for taxes at-
tributable to section 965(a) earnings
amounts offset by an aggregate foreign
E&P deficit that would have been deemed
paid under section 960(a)(1) had the
amounts actually been included in income
under section 951(a).
#### 2. Definition of Upper-Tier Foreign Corporation
The proposed regulations provide that
the credit allowed under section 960(a)(3)
is only with respect to foreign income taxes
imposed on an upper-tier foreign corpora-
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tion on distributions of section 965(a) pre-
viously taxed earnings and profits or section
965(b) previously taxed earnings and profits
from a lower-tier foreign corporation. Pro-
posed §1.965-5(c)(1)(ii). A comment re-
quested that the final regulations clarify that
references to "upper-tier foreign corpora-
tion" includes a disregarded entity or part-
nership that is legally an owner of the spec-
ified foreign corporation in question, and
that references to distributions similarly re-
fer to legal distributions not to U.S. tax
characterizations.
The final regulations do not broaden
the definition of "upper-tier foreign cor-
poration" as requested by the comment.
To the extent that there is a distribution of
previously taxed E&P from a foreign cor-
poration to a disregarded entity or partner-
ship that is owned by a foreign corpora-
tion, the foreign corporate owner would
be considered an "upper-tier foreign cor-
poration." See, e.g., section 702(a). There-
fore, a credit would be allowed under sec-
tion 960(a)(3), upon ultimate distribution
of the previously taxed E&P to an eligible
United States shareholder, for creditable
foreign income taxes imposed on the dis-
regarded entity or partnership that are
considered paid by the foreign corporate
owner for U.S. tax purposes with respect
to the distribution of previously taxed
E&P from the lower-tier foreign corpora-
tion. To the extent that there is a distribu-
tion of previously taxed E&P from a for-
eign corporation to a disregarded entity or
partnership that is owned by a domestic
corporation, the domestic corporate owner
should be entitled to a credit under section
901 for the creditable foreign income
taxes imposed on the disregarded entity or
partnership that are considered paid by the
domestic corporation for U.S. tax pur-
poses. Therefore, there is no need to
broaden the definition of "upper-tier for-
eign corporation" to include disregarded
entities and partnerships.
Similar comments requested that the
final regulations clarify that a tax imposed
on a disregarded payment from a disre-
garded entity to an upper-tier foreign cor-
poration that owns the disregarded entity
is related to a distribution of previously
taxed E&P. Another comment stated that
the limitation of the credit allowed under
section 960(a)(3) to foreign income taxes
imposed on an upper-tier foreign corpora-
tion impedes the avoidance of double tax-
ation with respect to foreign income taxes
imposed on a lower-tier CFC upon distri-
bution of its previously taxed E&P to an
upper-tier CFC or foreign income taxes
imposed on a first-tier CFC upon distribu-
tion of its previously taxed E&P to its
United States shareholder. The Treasury
Department and the IRS do not address
these comments in the final regulations
because the characterization of taxes in-
curred with respect to disregarded pay-
ments for purposes of section 960(a)(3) is
outside of the scope of this rulemaking.
Finally, clarification was requested on
whether the requirement that the previ-
ously taxed E&P be distributed by a
lower-tier foreign corporation in order for
taxes to be deemed paid with respect to
the previously taxed E&P under section
960(a)(3) applies to both section 965(a)
previously taxed earnings and profits and
section 965(b) previously taxed earnings
and profits, or just to the latter. The Trea-
sury Department and the IRS have deter-
mined that regulations are clear that the
requirement applies to both section 965(a)
previously taxed earnings and profits and
section 965(b) previously taxed earnings
and profits. See §1.965-5(c)(1)(ii).
#### C. Deemed paid credit computation
#### 1. Treatment of Adjustment under Section 965(b)(4)(B)
The proposed regulations provide that,
for purposes of section 902(c)(1), the
post-1986 undistributed earnings of an
E&P deficit foreign corporation are in-
creased under section 965(b)(4)(B) and
§1.965-2(d)(2)(i)(A) as of the first day of
the foreign corporation's first taxable year
following the E&P deficit foreign corpo-
ration's last taxable year that begins be-
fore January 1, 2018. Proposed §1.965-
6(c)(3). Comments recommended that the
final regulations conform to the language
of section 965(b)(4)(B) to provide that
these adjustments happen in the last tax-
able year that begins before January 1,
2018.
Section 965(b)(4)(B) provides that, for
purposes of the Code, a United States
shareholder's pro rata share of the E&P of
any E&P deficit foreign corporation is in-
creased by the amount of the specified
E&P deficit of such corporation taken into
account by the shareholder by reason of
allocation of the deficit to a DFIC. Under
section 902(c)(1), post-1986 undistrib-
uted earnings are based on the E&P of the
foreign corporation, computed in accor-
dance with sections 964(a) and 986, with-
out diminution for dividends distributed
during the taxable year. Pursuant to sec-
tion 902(c)(8), Treasury regulations mod-
ify the computation of E&P included in
post-1986 undistributed earnings as nec-
essary to carry out the provisions of sec-
tion 902. For example, under §1.902-
1(a)(9)(i), previously taxed earnings and
profits arising in prior post-1986 taxable
years are not included in post-1986 un-
distributed earnings. Section 965(o) also
provides that the Treasury Department
and IRS may issue regulations necessary
to prevent the avoidance of the purposes
of section 965.
Given this background, the Treasury
Department and the IRS have determined
that post-1986 undistributed earnings
should not be increased during the last
taxable year of an E&P deficit foreign
corporation beginning before January 1,
2018, as a result of section 965(b)(4)(B).
An immediate increase could allow share-
holders to claim deemed paid credits with
respect to amounts earned after November
2, 2017, by E&P deficit foreign corpora-
tions even though such earnings were not
in excess of accumulated deficits. That
would result in a windfall to section
958(a) U.S. shareholders of DFICs and
E&P deficit foreign corporations because
such shareholders are not taxable on ac-
cumulated post-1986 deferred foreign in-
come of a DFIC to the extent of the DF-
IC's allocable share of an aggregate
foreign E&P deficit and, with respect to
the E&P deficit corporation, they would
be entitled to deemed paid taxes that they
would not otherwise be eligible to claim
because of the accumulated deficit, a re-
sult inconsistent with general operation of
section 902. See, e.g., §1.902-1(b)(4). Ad-
ditionally, the deemed paid taxes would
not be subject to the disallowance for the
applicable percentage provided for in sec-
tion 965(g), even though the foreign in-
come taxes were able to be deemed paid
only as a result of the operation of section
965. Accordingly, the Treasury Depart-
ment and the IRS do not amend this rule
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in the final regulations. See §1.965-
6(b)(3).
#### 2. Deemed Paid Credits for E&P Deficit Foreign Corporations
The proposed regulations clarify that
when the denominator of the section 902
fraction is zero or less than zero, the sec-
tion 902 fraction is zero, and no foreign
taxes are deemed paid. Proposed §1.965-
6(c)(2). A comment requested that the for-
eign taxes of an E&P deficit foreign cor-
poration could be deemed paid with
respect to a section 965(a) inclusion, for
example, by allocation of such taxes pro
rata to DFICs.
The Treasury Department and the IRS
do not adopt the suggestion to treat the
post-1986 foreign income taxes of an
E&P deficit foreign corporation as taxes
paid or accrued by a DFIC because there
is no basis in the statute for modifying the
computation of deemed paid credits in this
manner. In addition, neither section 902
nor 960 nor the regulations issued under
those sections provide for the allocation of
taxes from one foreign corporation to an-
other as suggested by the comment.
#### 3. Application of Section 902 as if Section 965(a) Inclusion Were a Dividend
The proposed regulations provide, in
relevant part, that for purposes of deter-
mining foreign taxes deemed paid under
section 960(a)(1) with respect to a section
965(a) inclusion with respect to a DFIC,
section 902 applies as if the section 965(a)
inclusion were a dividend paid by the
DFIC. Proposed §1.965-6(b). Questions
have arisen as to the effect of treating a
section 965(a) inclusion as a dividend for
this purpose. This language merely incor-
porates the language of section 960(a)(1)
into the regulations, as section 960(a)(1)
also provides in relevant part that "section
902 shall be applied as if the amount so
included were a dividend paid by such
foreign corporation." The language in pro-
posed §1.965-6(b) does not mean that
any of the requirements of sections 902
and 960 should be considered inapplicable
for purposes of determining deemed paid
taxes with respect to section 965(a) inclu-
sions.
Further, the language in proposed
§1.965-6(b) does not mean that section
965(a) inclusions should be treated as div-
idends for purposes of the ordering rule
under §1.960-1(i)(2). The final regula-
tions clarify that the ordering rules of
§1.960-1(i)(2) continue to apply, subject
to the modification described in Part III.A
of this Summary of Comments and Expla-
nation of Revisions. See §1.965-2(b).
### 4. Section 902 Fraction
The proposed regulations provide that
the term "section 902 fraction" means,
with respect to either a DFIC or an E&P
deficit foreign corporation, the fraction
that is (i) the dividend paid by, or the
inclusion under section 951(a)(1) (includ-
ing a section 965(a) inclusion) with respect
to, the foreign corporation, as applicable,
divided by (ii) the foreign corporation's
post-1986 undistributed earnings. Proposed
§1.965-6(c). A question was raised as to
whether dividends and inclusions under sec-
tion 951(a)(1) are combined for purposes of
the section 902 fraction. Another comment
concerned whether the definition of "section
902 fraction" implied that the ordering rule
in §1.960-1(i)(2) was no longer effective.
The final regulations continue to in-
clude a defined term, "section 902 frac-
tion," that is consistent with section
902(a), while tying it to the computation
of deemed paid taxes in section 902(a).
See §1.965-6(b)(2) and (4). As noted in
Part VI.C.3 of this Summary of Com-
ments and Explanation of Revisions, the
final regulations also confirm that the or-
dering rule in §1.960-1(i)(2), as modified
by §1.965-2(b), applies in years in which
a taxpayer may have a section 965(a) in-
clusion; accordingly, the section 902 frac-
tion must be computed separately with
respect to dividends and inclusions under
section 951(a)(1). As noted in Part III.A.3
of this Summary of Comments and Expla-
nation of Revisions, the examples in
§1.965-2(j)(1) and (4) illustrate the deter-
mination of deemed paid taxes (including
the computation of section 902 fractions)
under sections 902 and 960 in fact pat-
terns involving section 965(a) inclusions.
### 5. Ownership Requirements for Deemed Paid Taxes
The proposed regulations provide that
the rule treating members of a consoli-
dated group as a single corporation does
not apply for purposes of computing the
foreign taxes deemed paid with respect to
a section 965(a) inclusion, and that the
foreign taxes deemed paid must be com-
puted on a separate member basis. See
proposed §1.965-8(e)(2). A comment re-
quested that the final regulations treat all
the members of a consolidated group as a
single taxpayer for all purposes of section
965, such that members owning less than
ten percent of a DFIC would be able to
claim deemed paid credits with respect to
the DFIC.
Another comment requested relief in
the case in which a domestic corporation
satisfied the ownership requirements un-
der section 902 with respect to a DFIC
when it received a distribution from the
DFIC, but did not satisfy the ownership
requirements under section 960 on the
date of the section 965(a) inclusion.
The final regulations continue to follow
the statute under section 960 regarding the
ownership requirements for eligibility for a
foreign tax credit and, therefore, do not
adopt either of these comments. See
§1.965-8(e)(2).
### 6. Hovering Deficits
In response to comments, the preamble
to the proposed regulations stated that the
regulations would not provide a rule that,
to the extent that a hovering deficit is
treated as reducing the post-1986 earn-
ings and profits of a DFIC, related taxes
would be added to the DFIC's post-1986
foreign income taxes in the inclusion year
with respect to the DFIC. After the issu-
ance of the proposed regulations, the
Treasury Department and the IRS re-
ceived additional comments requesting re-
consideration of this issue. Comments
highlighted the following language in the
legislative history to section 965:
[T]he conferees expect the Secretary
may issue guidance to provide that,
solely for purposes of calculating the
amount of foreign income taxes
deemed paid by the U.S. shareholder
with respect to an inclusion under
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section 965, a hovering deficit may
be absorbed by current year earnings
and profits and the foreign income
taxes related to the hovering deficit
may be added to the specified foreign
corporation's post-1986 foreign in-
come taxes in that separate category
on a pro rata basis in the year of
inclusion.
H.R. Rep. No. 115-466, at 619 (2017).
To effectuate the legislative history,
the final regulations provide that to the
extent the hovering deficit would have
been absorbed by E&P accrued during the
taxable year but for a section 965(a) in-
clusion, taxes that relate to the hovering
deficit are taken into account for purposes
of determining post-1986 foreign income
taxes. Therefore, §1.965-6(d) provides
that in the last taxable year that begins
before January 1, 2018, of a DFIC that is
also a foreign surviving corporation, for
purposes of determining the related taxes
that are included in post-1986 foreign in-
come taxes, the post-transaction earnings
that can be offset by a hovering deficit
include any current year earnings which
were included under section 965 by a sec-
tion 958(a) U.S. shareholder; and the hov-
ering deficit offset is treated as occurring
as of the last day of the DFIC's inclusion
year.
#### VII. Comments and Changes to Proposed §1.965-7 - Elections and Payment Rules
Proposed §1.965-7 provides rules re-
garding the timing and manner of certain
elections that may be available to taxpay-
ers under section 965, and payments to be
made pursuant to those elections. The
comments and modifications with respect
to these rules are discussed in this Part
VII.
### A. Election statements
The proposed regulations provide that,
in order to make elections with respect to
section 965, the person making the elec-
tion must attach an election statement,
signed under penalties of perjury, to its return
for the relevant taxable year. Proposed
§§1.965-2(f)(2)(iii)(B)(2), 1.965-7(b)(2)(iii),
1.965-7(c)(2)(iii), 1.965-7(d)(3)(iii), 1.965-
7(e)(2)(iii), and 1.965-7(f)(5)(iii). The pro-
posed regulations do not address whether the
election statement attached to or included with
the return must be signed or whether the per-
son making the election can attach an un-
signed statement and retain the signed copy in
its records. The final regulations provide that
the signature requirement is satisfied if the
unsigned copy is attached to a timely-filed
return of the person making the election,
provided that the person retains the signed
original in the manner specified in §1.6001-
1(e). See §§1.965-2(f)(2)(iii)(B)(2), 1.965-
7(b)(2)(iii), 1.965-7(c)(2)(iii), 1.965-7(d)(3)
(iii), 1.965-7(e)(2)(iii), and 1.965-7(f)(5)(iii).
In addition, comments requested clarification
regarding whether the election statement could
be signed by a return preparer and who must
sign the statement in the case of a married
filing jointly income tax return. The final reg-
ulations do not specifically address who must
sign a statement but indicate that general rules
concerning who is authorized to sign tax re-
turns apply. Id.
### B. Acceleration events and triggering events
Section 965(h)(3) provides that an ac-
celeration event occurs when there is an
addition to tax for failure to timely pay an
installment required under section 965(h),
a liquidation or sale of substantially all of
the assets of the person who made the
section 965(h) election (including in a title
11 or similar case), a cessation of business
by the person who made the section 965(h)
election, or any similar circumstance. Pro-
posed §1.965-7(b)(3)(ii) clarifies what
events are acceleration events and what is
considered a similar circumstance. Proposed
§1.965-7(b)(3)(ii)(B) provides that a liqui-
dation, sale, exchange, or other disposition
of substantially all of the assets of the person
making the election (including in a title 11
or similar case or, in the case of an individ-
ual, death) is an acceleration event.
Similarly, section 965(i)(2) lists trig-
gering events that end the payment defer-
ral for purposes of the section 965(i) elec-
tion, including a liquidation or sale of
substantially all of the assets of the S
corporation (including in a title 11 or sim-
ilar case), a cessation of business by the S
corporation, the S corporation ceasing to
exist, or any similar circumstance. Pro-
posed §1.965-7(c)(3)(ii) clarifies the sim-
ilar circumstances treated as triggering
events. Specifically, proposed §1.965-
7(c)(3)(ii)(B) provides that a liquidation,
sale, exchange, or other disposition of
substantially all of the assets of the S
corporation (including in a title 11 or sim-
ilar case) is a triggering event.
In addition, section 965(m)(2)(B)(ii)
provides that, with respect to a real estate
investment trust ("REIT") that made a
section 965(m) election, a liquidation or
sale of substantially all of the assets of the
REIT (including in a title 11 or similar
case), a cessation of business by the REIT,
or any similar circumstance will cause any
amount not yet included in gross income
(due to the section 965(m) election) to be
included in gross income as of the day
before the date of the event. Proposed
§1.965-7(d)(5) clarifies what a similar cir-
cumstance is by providing that a liquida-
tion, sale, exchange, or other disposition
of substantially all of the assets of the
REIT will cause the acceleration of the
remaining inclusion.
### 1. Disposition or Exchange of Substantially All of the Assets
Comments questioned whether a dis-
position of substantially all of the assets
resulting from a downstream tax-free re-
organization or an exchange described in
section 351 or 721 should constitute an
acceleration event or triggering event,
particularly when the assets remain un-
der the control of the taxpayer, and
whether a reorganization described in
section 368(a)(1)(F) should be treated
as an acceleration event or triggering
event. One comment, relating only to
triggering events under section 965(i),
proposed multiple alternatives, includ-
ing removing the "exchange or other
disposition" language from proposed
§1.965-7(c)(3)(ii)(B) and providing that
any nonrecognition transaction is not an
exchange.
The Treasury Department and the IRS
have determined that any disposition of
substantially all of the assets of the person
making the section 965(h) election, the S
corporation, or the REIT, including in a
tax-free reorganization or an exchange de-
scribed in section 351 or 721, poses a risk
to the IRS's ability to collect the full
amount of the section 965(h) net tax lia-
bility, section 965(i) net tax liability, or
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total net tax liability under section 965, as
the case may be. The Treasury Depart-
ment and the IRS have determined that it
is essential for tax administration pur-
poses for the IRS to be apprised of these
dispositions. Providing an exclusion to the
general rule that an exchange or other
disposition of substantially all of the as-
sets of the person making the section
965(h) election, the S corporation with
respect to which a section 965(i) election
is in effect, or the REIT with a section
965(m) election in effect for nonrecogni-
tion transactions could hamper the IRS's
ability to collect the outstanding tax lia-
bilities and could enable certain taxpayers
to inappropriately dilute their interests in
their assets or change their businesses in a
way that is inconsistent with the purposes
behind the elections and related triggering
and acceleration events. The final regula-
tions also do not include a special excep-
tion for reorganizations under section
368(a)(1)(F) because requiring a transfer
agreement, if applicable, in those situa-
tions is necessary for tax administration
purposes.
A comment also requested clarification
of the meaning of "substantially all" for
purposes of the acceleration event and
triggering event rules. The phrase "sub-
stantially all" is used in various Code pro-
visions and in regulations, and often is
determined based on all of the facts and
circumstances. Consistent with this gen-
eral approach, the Treasury Department
and the IRS decline to provide a bright-
line definition of "substantially all" in the
final regulations.
### 2. Death of Transferor
Proposed §1.965-7(b)(3)(ii)(B) pro-
vides that for a person who made a section
965(h) election, the liquidation, sale, ex-
change, or other disposition of substan-
tially all of the assets of the person, in-
cluding, for an individual, by reason of
death, is an acceleration event. Proposed
§1.965-7(b)(3)(iii)(A)(1)(ii) specifically
excludes death of an individual from the
covered acceleration events that allow for
a transfer agreement. A comment re-
quested that, because death is specifically
mentioned as a triggering event in section
965(i)(2)(A)(iii) but not section 965(h)(3),
death not be treated as an acceleration
event for purposes of the section 965(h)
election. In addition, the comment re-
quested that, if death is treated as an accel-
eration event for purposes of the section
965(h) election, it be treated as a covered
acceleration event (as described in proposed
§1.965-7(b)(3)(iii)(A)(1)) and thus be eligi-
ble for a transfer agreement. Under section
965(h)(3), an acceleration event includes a
liquidation or sale of substantially all of the
assets of the taxpayer or any similar circum-
stance, and proposed §1.965-7(b)(3)(ii)
(B) provides that an exchange or other dis-
position of substantially all of the assets of
the taxpayer (outside of the context of the
death of an individual) is an acceleration
event. The death of an individual taxpayer is
similar to any transfer or other disposition of
substantially all of the assets of a taxpayer,
and, accordingly, is a similar circumstance
that should be an acceleration event. The
Treasury Department and the IRS have de-
termined that there are administrative diffi-
culties with transferring liabilities and exe-
cuting transfer agreements in the event of
death. Moreover, in many cases, there
would be multiple beneficiaries in the case
of death, and multiple transferees are not
permitted for purposes of section 965(h).
For those reasons, and because the section
965(i) rules more clearly contemplate allow-
ing transfers on death (and allowing trans-
fers to multiple transferees or beneficiaries),
the Treasury Department and the IRS have
determined that it is appropriate not to treat
the death of an individual shareholder as a
covered acceleration event for purposes of
section 965(h), and the comment is not ad-
opted.
## C. Transfer agreements
### 1. Inclusion of Form 965-A or 965-B
The proposed regulations provide that
transfer agreements for purposes of sec-
tion 965(h) and section 965(i) are required
to include the eligible section 965(h) trans-
feror's or eligible section 965(i) transferor's
most recent Form 965-A or 965-B, as appli-
cable, among other information. Proposed
§1.965-7(b)(3)(iii)(B)(4)(v) and (c)(3)(iv)
(B)(4)(v). In some cases, no Form 965-A or
965-B will have been required to be filed
before the transfer agreement. Accordingly,
the final regulations clarify that the Form
965-A or 965-B is only required to be filed
with a transfer agreement if the eligible sec-
tion 965(h) transferor or eligible section
965(i) transferor was required to file the
form. Section 1.965-7(b)(3)(iii)(B)(4)(v)
and (c)(3)(iv)(B)(4)(v).
### 2. Due Date for Transfer Agreements
Proposed §1.965-7(b)(3)(iii)(B)(2)(ii) and
§1.965-7(c)(3)(iv)(B)(2)(ii) provide that, if an
acceleration event or a triggering event occurs
before September 10, 2018, a transfer agree-
ment must be filed by October 9, 2018, in
order to be considered timely filed. In addition,
proposed §1.965-7(b)(3)(iii)(B)(2)(i) and
§1.965-7(c)(3)(iv)(B)(2)(i) provide that, if an
acceleration event or a triggering event occurs
on or after September 10, 2018, a transfer
agreement must be filed within thirty days of
the acceleration or triggering event in order to
be considered timely filed. Proposed §1.965-
7(b)(3)(iii)(B)(2)(i) and §1.965-7(c)(3)(iv)
(B)(2)(i) provide that transfer agreements must
be filed in accordance with the rules provided
in publications, forms, instructions, or other
guidance. Because additional guidance, in-
cluding where to file the agreements, was not
issued before certain transfer agreements
would have been due, the transition rules in
§1.965-7(b)(3)(iii)(B)(2)(i) and §1.965-7(c)
(3)(iv)(B)(2)(ii) have been updated to provide
that if a triggering event or acceleration event
occurs on or before February 5, 2019, the
transfer agreement must be filed by March 7,
2019, in order to be considered timely filed.
See also §1.965-7(c)(3)(v)(D)(2)(ii) (similarly
extending the deadline for filing agreements to
make a section 965(h) election after a trigger-
ing event).
### 3. Multiple Transferees
With respect to a section 965(h) accel-
eration event, proposed §1.965-7(b)(3)
(iii)(B)(1) defines an eligible section
965(h) transferee as a "single United
States person that is not a domestic pass-
through entity" that meets additional re-
quirements. With respect to a section
965(i) triggering event, proposed §1.965-
7(c)(3)(iv)(B)(1) defines an eligible sec-
tion 965(i) transferee as a "single United
States person that is not a domestic pass-
through entity." A comment requested
that multiple transferees be allowed to be
eligible transferees for purposes of both
section 965(h) and section 965(i). Section
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965(h) and proposed §1.965-7(b) do not
allow for a partial transfer of the section
965(h) net tax liability. Allowing multiple
transferees would be similar to allowing
for partial transfers. Furthermore, the ex-
istence of multiple transferees poses sig-
nificant administrative challenges for the
IRS. Accordingly, the Treasury Depart-
ment and the IRS do not adopt the recom-
mendation. However, section 965(i)(2)(B)
specifically contemplates partial transfers
of the section 965(i) net tax liability. As a
result, the final regulations clarify in
§1.965-7(c)(3)(iv)(B)(1) that if a transfer
(including as a result of the death of an
eligible section 965(i) transferor) consists
of multiple partial transfers (as described
in §1.965-7(c)(3)(iii)), then the eligible
section 965(i) transferor can enter into
multiple transfer agreements, one for each
partial transfer, with different eligible sec-
tion 965(i) transferees.
### 4. Consolidated Groups
Proposed §1.965-7(b)(3)(ii)(F) pro-
vides that an acceleration event includes,
in the case of a consolidated group, the
consolidated group ceasing to exist. Pro-
posed §1.965-7(b)(3)(iii)(A)(1)(iv) pro-
vides that, for purposes of the eligible
section 965(h) transferee exception (as de-
fined in proposed §1.965-7(b)(3)(iii)), a
covered acceleration event includes, with
respect to an acceleration event under pro-
posed §1.965-7(b)(3)(ii)(F), an event re-
sulting from the acquisition of a consoli-
dated group within the meaning of §1.1502-
13(j)(6) if the acquired consolidated group
members join a different consolidated group
as of the day following the acquisition. The
proposed regulations do not provide for cov-
ered acceleration events related to other fact
patterns in which a consolidated group
ceases to exist. Comments requested that
there be an additional covered accelera-
tion event to account for a situation in
which the consolidated group ceases to
exist by reason of one or more members
of the consolidated group transferring
all of their assets to other members, with
only one member remaining (for exam-
ple, a consolidated group consisting
only of a parent and a subsidiary ceasing
to exist by reason of the subsidiary liq-
uidating into the parent). The Treasury
Department and the IRS have deter-
mined that it is appropriate to permit the
remaining member to enter into a trans-
fer agreement in these circumstances.
Accordingly, §1.965-7(b)(3)(iii)(A)(1)
(v) includes this scenario as a covered
acceleration event. In addition, §1.965-
7(b)(3)(iii)(B)(1)(v) provides that, with
respect to the acceleration event in §1.965-
7(b)(3)(iii)(A)(1)(v), the remaining member of
the consolidated group to which all of the
other members' assets are transferred is an
eligible section 965(h) transferee (provided
that it meets the remaining requirements of
§1.965-7(b)(3)(iii)(B)(1)).
Another comment requested that there
be an additional covered acceleration
event to account for a situation in which a
consolidated group is wholly owned by a
corporation that is not an includible cor-
poration (within the meaning of section
1504(b)) when a section 965(h) election
was made but subsequently becomes an
includible corporation even though the sit-
uation does not involve the acquisition of
stock of the common parent. For example,
this situation could arise when the corpo-
ration that owns the consolidated group is
an S corporation and subsequently re-
vokes its S corporation election. The Trea-
sury Department and the IRS have deter-
mined that it is appropriate to permit transfer
agreements in these circumstances. Accord-
ingly, §1.965-7(b)(3)(iii)(A)(1)(vi) provides
that a covered acceleration event occurs
when the group ceases to exist as a result of
the termination of the subchapter S election
pursuant to section 1362(d) of a shareholder
of the common parent of the consolidated
group and, for the shareholder's taxable
year immediately following the termination,
the shareholder joins in the filing a consol-
idated return as of a consolidated group that
includes all of the former members of the
former consolidated group. In addition,
§1.965-7(b)(3)(iii)(B)(1)(vi) provides that,
with respect to the acceleration event in
§1.965-7(b)(3)(iii)(A)(1)(vi), the agent
(within the meaning of §1.1502-77) of
the new consolidated group that in-
cludes the shareholder whose subchap-
ter S election was terminated and all of
the former members of the former con-
solidated group is an eligible section
965(h) transferee (provided that it meets
the remaining requirements of §1.965-
7(b)(3)(iii)(B)(1)).
### 5. Joint and Several Liability
Proposed §1.965-7(b)(3)(iii)(D)(2) pro-
vides that an eligible section 965(h) transferor
remains jointly and severally liable for any
unpaid installments assumed by the eligible
section 965(h) transferee, as well as any
penalties, additions to tax, or other addi-
tional amounts attributable to the section
965(h) net tax liability that was transferred.
A representation to this effect is required in
the transfer agreement if the section 965(h)
transferor remains in existence after the
transfer. Proposed §1.965-7(b)(3)(iii)(B)
(4)(viii). A comment questioned whether the
joint and several liability requirement was
necessary, given that the eligible section
965(h) transferee has agreed to assume the
liability and has the assets from which the
liability would be satisfied, and whether
there should be differing treatment between
eligible section 965(h) transferors that liqui-
date immediately after the transfer and those
that do not. The comment also noted that in
many cases, the section 965(h) net tax lia-
bility would be taken into account in the
purchase price of a sale of substantially all
of the assets of the eligible section 965(h)
transferor. The final regulations do not
adopt this comment. Requiring the eligible
section 965(h) transferor to be jointly and
severally liability for the unpaid section
965(h) net tax liability, as well as any pen-
alties, additions to tax, or other additional
amounts attributable to the section 965(h)
net tax liability, protects the IRS's ability to
collect the full amount of the section 965(h)
net tax liability and helps guard against abu-
sive transactions. In addition, as the com-
ment noted, taxpayers are able to account
for the joint and several liability in their
transactions.
### 6. Death of an S Corporation Shareholder
Under section 965(i)(2)(A)(iii) and
(i)(2)(C) and proposed §1.965-7(c)(3)
(ii)(C) and (c)(3)(iv)(A)(1), the death of an
S corporation shareholder who made a sec-
tion 965(i) election is a triggering event, and
the deferred liability can be transferred if a
transfer agreement is entered into with an
eligible section 965(i) transferee (as de-
fined in proposed §1.965-7(c)(3)(iv)
(B)(1)). Proposed §1.965-7(c)(3)(iv)
(B)(2)(i) requires that any transfer
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agreement with respect to a section
965(i) election be filed within 30 days of
the date that the transfer occurred. The
Treasury Department and the IRS have
determined that when the triggering event is
the death of the eligible section 965(i) trans-
feror, filing a transfer agreement within 30
days may be impractical. Accordingly, the
final regulations provide, in §1.965-
7(c)(3)(iv)(B)(2)(iii), that in the case of the
death of an eligible section 965(i) transferor,
the transfer agreement is required to be filed
by the later of the unextended due date for
the eligible section 965(i) transferor's final
income tax return and March 7, 2019.
In addition, the final regulations clarify
in §1.965-7(c)(3)(iv)(B)(5) what transfer
agreements are required following the
death of an eligible section 965(i) trans-
feror. In order to make the transfer agree-
ments more administrable for both tax-
payers and the IRS, the final regulations
provide that, except in the case of trans-
fers to trusts, in the event of the death of
an eligible section 965(i) transferor, if
the beneficiary or beneficiaries are
known and determined as of the due
date for the transfer agreement (that is,
generally, the unextended due date for
the eligible section 965(i) transferor's
final income tax return), then the trans-
fer will be treated as a transfer directly
between the eligible section 965(i)
transferor and the eligible section 965(i)
transferee beneficiary or beneficiaries,
and only one transfer agreement for
each eligible section 965(i) transferee is
required. If, however, the beneficiary or
beneficiaries are not known and deter-
mined by the due date for the transfer
agreement, then the transfer will be
treated as two transfers: first, the trans-
fer on death between the eligible section
965(i) transferor and his or her estate,
and, second, a transfer (not on death)
between the estate and the eligible sec-
tion 965(i) transferee beneficiary or ben-
eficiaries, and separate transfer agree-
ments are required for each transfer. The
general rule concerning transfers to
trusts will continue to apply as dis-
cussed in Part VII.E.1 of this Summary
of Comments and Explanation of Revi-
sions.
7\. Terms of Transfer Agreements
a. Transfer agreements after acceleration
events
The proposed regulations provide spe-
cific information and representations that
a transfer agreement must contain, includ-
ing a statement that the transferee agrees
to assume the transferor's liability for any
unpaid installment payments. The final
regulations include modifications to certain
requirements for the terms of a transfer
agreement. First, the final regulations clarify
that an eligible section 965(h) transferee
must consent to an assessment with respect
to the liability that it assumes. Specifically,
when an eligible section 965(h) transferor
and an eligible section 965(h) transferee en-
ter into a transfer agreement, the amount of
the section 965(h) net tax liability will al-
ready be assessed against the transferor. For
the transfer agreements to be administrable,
the final regulations add the requirement
that an eligible section 965(h) transferee
waive the right to a notice of liability and
consent to the immediate assessment of the
portion of the eligible section 965(h) transfer-
or's section 965(h) net tax liability remaining
unpaid as a term of the transfer agreement.
Section 1.965-7(b)(3)(iii)(B)(4)(ix).
Second, the final regulations retain the
proposed regulations' requirement that an
eligible section 965(h) transferee repre-
sent that it is able to make the remaining
payments with respect to the section
965(h) net tax liability being assumed.
Because the transfer of substantially all of
the assets of the eligible section 965(h)
transferor presents a risk to the IRS's abil-
ity to collect the outstanding section
965(h) net tax liability, the final regula-
tions require a transfer agreement to in-
clude a statement as to whether the lever-
age ratio of the eligible section 965(h)
transferee exceeds three to one, subject
to modification by future guidance.
See §1.965-7(b)(3)(iii)(B)(4)(ix) and
(b)(3)(iii)(B)(6).
A taxpayer with a leverage ratio in
excess of three to one may be an eligible
section 965(h) transferee and may file a
valid transfer agreement, provided the re-
quirements of §1.965-7(b)(3)(iii)(B) are
met. The IRS may, however, use the in-
formation provided regarding an eligible
section 965(h) transferee's leverage ratio
in connection with a subsequent evalua-
tion of the accuracy of an eligible section
965(h) transferee's representation that it
has the ability to pay the outstanding sec-
tion 965(h) net tax liability. The ability of
an eligible section 965(h) transferee to
pay the outstanding section 965(h) net tax
liability depends on all of the relevant
facts and circumstances, including its le-
verage ratio and also including the eligible
section 965(h) transferee's revenue, the
value of its assets, its access to capital,
the volatility of its business, the size of the
section 965(h) net tax liability assumed,
and other factors. The IRS may request
further information when evaluating a
transfer agreement in order to assess these
aspects of the transferee. Section 1.965-
7(b)(3)(iii)(C)(1)and (c)(3)(iv)(C)(1).
If the Commissioner determines that
this representation (or any of the other
information contained in the transfer
agreement) is incorrect, then the transfer
agreement may be rejected as of the date
of the acceleration event or the Commis-
sioner may determine that an acceleration
event has occurred with respect to the
eligible section 965(h) transferee as of the
date of the determination. See §1.965-
7(b)(3)(iii)(C)(2).
Third, §1.965-7(b)(3)(iii)(B)(4)(xi) clar-
ifies, consistent with the requirement in pro-
posed §1.965-7(b)(3)(iii)(B)(2)(i) that a
transfer agreement be filed consistent with
other guidance, that additional terms for
transfer agreements may be prescribed pur-
suant to publications, forms, instructions, or
other guidance.
## b. Transfer agreements and consent agreements after triggering events
The final regulations also include
changes to the terms of the transfer agree-
ments to be entered into by eligible section
965(i) transferees and the consent agree-
ments to be entered into by certain share-
holders after certain triggering events con-
sistent with the changes to the terms of the
transfer agreements to be entered into in
connection with acceleration events dis-
cussed in Part VI.C.7.a of this Summary of
Comments and Explanation of Revisions.
The final regulations require a transfer
agreement or consent agreement to include
a statement as to whether the leverage ratio
of the eligible section 965(i) transferee or
the taxpayer making the section 965(h)
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election after a triggering events ex-
ceeds three to one. See §1.965-7(c)(3)
(iv)(B)(4)(ix),(c)(3)(iv)(B)(6),(c)(3)(v)(D)
(4)(v), and (c)(3)(v)(D)(6). The final regula-
tions also clarify that additional terms for
transfer agreements and consent agreements in
connection with triggering events may be pre-
scribed pursuant to publications, forms, in-
structions, or other guidance. Section 1.965-
7(c)(3)(iv)(B)(4)(x)and (c)(3)(v)(D)(4)(vi).
### D. Section 965(h) elections
#### 1. Deficiencies or Additional Liabilities
Section 965(h)(4) provides that if a de-
ficiency is assessed with respect to a per-
son's section 965(h) net tax liability, other
than in cases of negligence, intentional
disregard of rules and regulations, or fraud
with intent to evade tax, the amount of the
deficiency will be prorated among the in-
stallments, and for any installment the due
date of which has already passed, the part
of the deficiency prorated to that install-
ment will be due on notice and demand.
Proposed §1.965-7(b)(1)(ii) extends this
rule to apply in the case of a person that
increases the amount of its section 965(h)
net tax liability when it files a return after
payment of the first installment or files an
amended return. Requiring notice and de-
mand before payment of the additional
amount when it is not due to a deficiency
that has been assessed is administratively
difficult and inconsistent with the rule
provided in proposed §1.965-7(b)(1)
(ii)(C), applicable in the case of negli-
gence, intentional disregard of rules and
regulations, or fraud with intent to evade
tax. Therefore, the final regulations have
been modified to provide that in the case
of an additional liability reported on a
return or amended return, any amount that
is prorated to an installment, the due date
of which has already passed, will be due
with the return reporting the additional
amount. Section 1.965-7(b)(1)(ii)(B). The
rule with respect to deficiencies remains
the same, and payment for a deficiency
prorated to an installment, the due date of
which has already passed, is due on notice
and demand. Id.
#### 2. Elections in Multiple Years
A comment requested clarification re-
garding whether a person who has section
965(h) net tax liabilities in multiple tax-
able years due to ownership of DFICs
with different inclusion years can make
the section 965(h) election for each year
individually. Because the section 965(h)
election is made with respect to the sec-
tion 965(h) net tax liability for a taxable
year and is made with the person's tax
return, it must be made separately for each
year that the person has a section 965(h)
net tax liability. The Treasury Department
and the IRS have determined that no ad-
ditional clarification is necessary. Section
1.965-7(b)(2) and (g)(4).
##### E. Section 965(i) elections
###### 1. Trusts and Estates
Comments requested clarification of the
application of the rules regarding elections
in the case of trusts and estates. These com-
ments can largely be divided into two cate-
gories: (a) requests for guidance concerning
which persons are treated as S corporation
shareholders for purposes of the section
965(i) election and entering into transfer
agreements after a triggering event, and (b)
requests for guidance concerning what
events constitute triggering events.
a. Persons eligible to make section
965(i) elections and eligible section
965(i) transferees
The comments requested that the final
regulations clarify the definition of "pass-
through entity" in proposed §1.965-
1(f)(28) to provide more certainty on the
status of grantor trusts and qualified sub-
chapter S trusts ("QSSTs"). Comments
further noted that it may be unclear
whether grantor trust owners and benefi-
ciaries of QSSTs are eligible to make a
section 965(i) election and enter into
transfer agreements as eligible section
965(i) transferees because it is not clear
whether such persons are treated as share-
holders of an S corporation for purposes
of section 965. They also requested that
the final regulations provide that a person
with a section 965(i) net tax liability be
permitted to make a section 965(i) elec-
tion and that a person that would be sub-
ject to tax on a section 965(i) net tax
liability be permitted to enter into a trans-
fer agreement after a triggering event.
Similarly, they requested that when an S
corporation is owned by a domestic pass-
through entity, the domestic pass-through
owners be able to make the section 965(i)
election. The comments also requested
guidance on who is an eligible section
965(i) transferee when there is a death and
a grantor trust becomes a non-grantor
trust, given that an eligible section 965(i)
transferee does not include a pass-through
entity, as defined in proposed §1.965-
1(f)(28).
The Treasury Department and the IRS
have determined that the proposed regu-
lations are clear that both grantor trusts
and QSSTs constitute pass-through enti-
ties for purposes of proposed §1.965-
1(f)(28). The entire portion of the income
attributable to the S corporation stock is
taxed to the beneficiary of a QSST. See
§1.1361-1(j)(1)(i). The same is true for
grantor trusts. See section 671 and
§1.1361-1(h)(1)(i). The Treasury Depart-
ment and the IRS have determined that,
because the beneficiary of a QSST or the
grantor (or beneficiary) of a grantor trust
is treated as an S corporation shareholder
for subchapter S purposes, it is appropri-
ate that the beneficiary or grantor makes
the section 965(i) election and signs a
transfer agreement as the eligible sec-
tion 965(i) transferee. While the beneficia-
ries of an electing small business trust
("ESBT") are treated as S corporation share-
holders for section 1361 purposes, they are not
treated as such for purposes of consenting to
an S corporation election or taking into ac-
count shares of an S corporation's items of
income, loss, or deduction. See §§1.1361-
1(h)(3) and 1.1362-6(b)(2). Thus, the trustee
of the S corporation portion of an ESBT
should make a section 965(i) election and be
the eligible section 965(i) transferee.
In the case of death, in which a grantor
trust becomes a non-grantor trust, who can
enter the transfer agreement should de-
pend on whether, for example, an election
is made to treat the trust as a QSST or an
ESBT, whether the trust is treated as a
testamentary trust, or whether a section
645 election is made to treat the trust as
part of the estate. Generally, the QSST
beneficiary, the trustee of an ESBT, or the
executor of an estate should be permitted to
enter into the transfer agreement. Accord-
ingly, in response to these comments, the
rules in §1.965-7(c)(1) and (c)(3)(iv)(B)(1)
are revised to clarify that persons required to
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consent with respect to a trust or estate for
purposes of section 1362 are eligible to
make a section 965(i) election and be an
eligible section 965(i) transferee.
The comments also requested clarifica-
tion concerning whether an ESBT or
QSST that is treated as bifurcated under
trust rules is also treated as bifurcated for
purposes of section 965, including elec-
tions, acceleration events, and triggering
events. The comments noted that certain
trusts, in particular ESBTs, are divided
into different portions when they hold
stock of an S corporation. See §1.641(c)-
1(a). Accordingly, separate section 965(h)
elections and section 965(i) elections must
be made. The final regulations do not,
however, address the application of the
trust bifurcation rules, which are outside
of the scope of this rulemaking.
## b. Triggering events
Comments requested that certain trans-
actions that occur frequently with respect
to S corporation trusts not be treated as
triggering events and that guidance be
provided concerning how to enter into a
transfer agreement if such a transaction is
a triggering event. For example, family
settlement agreements, disclaimers, and
certain decanting transactions result in a
legal transfer but are not considered a
transfer for either U.S. federal transfer tax
or income tax purposes. The comments
also noted that certain trust transactions
may result in a change in taxpayer for
U.S. federal income tax reporting pur-
poses although no legal transfer occurred.
These transactions may include a conver-
sion of a grantor trust to a non-grantor
trust, a trust making a QSST or ESBT
election, a merger of two or more trusts,
or a severance of trusts into separate
shares. A comment also recommended
that a material modification of a trust,
such as through an amendment, decanting,
or judicial reformation, or a material mod-
ification in a trust's beneficiaries, not con-
stitute a triggering event where there is no
change in ownership for U.S. federal in-
come tax purposes.
In response to the comments, the final
regulations clarify that a transfer of S cor-
poration stock can only be a triggering
event if it is a transfer that results in a
change in ownership for U.S. federal in-
come tax purposes. Thus, for example, a
transfer of S corporation stock between a
person and a grantor trust of which the
person is an owner, which is disregarded
for U.S. federal income tax purposes, is
not a transfer that can constitute a trigger-
ing event because it does not result in an
ownership change for U.S. federal income
tax purposes. Cf. Rev. Rul. 85-13, 1985-1
C.B. 184 (providing that no sale occurred
upon the transfer of trust assets from a
grantor trust to the grantor). Specific guid-
ance concerning what transactions are
treated as transfers that result in a change
in ownership for U.S. federal income tax
purposes is outside the scope of these reg-
ulations.
Comments also requested guidance on
whether a trust's conversion from grantor
status to non-grantor status due to the
death of a grantor, regardless of whether
the trust is treated as part of the decedent's
estate under section 645, is a triggering
event. Section 965(i)(2)(iii) and §1.965-
7(c)(3)(ii)(C) are clear that a transfer in-
cludes a transfer by reason of death, so a
trust's conversion to non-grantor status
due to a death is a triggering event. Ac-
cordingly, no further guidance is war-
ranted.
### 2. Section 962 Elections
A comment requested guidance con-
cerning the interaction of a section 962
election and a section 965(i) election. The
Treasury Department and the IRS have
determined that it is clear that an eligible
taxpayer may make a section 962 election
that applies with respect to a section
965(a) inclusion that results in a section
965(i) net tax liability that the taxpayer
defers payment of pursuant to a section
965(i) election, because there are no lim-
itations in the section 962 regulations or
the section 965 regulations that would
preclude the elections. Accordingly, no
change is made to the final regulations in
this regard.
The comment also requested guidance
concerning whether making both the sec-
tion 962 election and the section 965(i)
election would result in the treatment of
distributions from a DFIC owned by the S
corporation to which the section 965(i)
election relates occurring before a trigger-
ing event as dividends not excluded from
gross income. The Treasury Department
and the IRS have determined that it is
clear that amounts attributable to a section
965(a) inclusion with respect to which a
section 962 election applies that would
otherwise be excluded from gross income
under section 959 are prevented from be-
ing excluded before a triggering event due
to the application of section 962(d), be-
cause no tax will have been paid with
respect to the section 965(a) inclusion.
See Part III.D.6 of this Summary of Com-
ments and Explanation of Revisions for a
discussion of the application of section
962(d) to section 965(h) elections, the
concepts of which apply equally for sec-
tion 965(i) elections. However, as dis-
cussed in Part III.D.6 of this Summary of
Comments and Explanation of Revisions
with regard to the basis adjustments to be
made in the similar case of a domestic
pass-through owner that has made a sec-
tion 962 election applicable to its distrib-
utive share of a domestic pass-through
entity's section 965(a) inclusion amount,
the issue raised by the comment is a long-
standing issue of general applicability
within subpart F that is outside of the
scope of regulations concerning section
965. Accordingly, the Treasury Depart-
ment and the IRS decline to adopt the
comment.
#### F. Section 965(m) elections
Section 965(m) allows a real estate in-
vestment trust (REIT) to make an election
to include its section 965(a) inclusions (and
correspondingly deduct its section 965(c)
deductions) over an eight-year period, rather
than all in one taxable year. The schedule
for inclusions over the eight-year period is
similar to the schedule for payments for the
section 965(h) election. See sections
965(h)(1) and 965(m)(1)(B). A comment
requested that REITs making section
965(m) elections be treated the same as tax-
payers making section 965(h) elections and
be allowed to make adjustments to previ-
ously taxed E&P and basis under sections
959 and 961 as if the REIT had included the
full section 965(a) inclusion (and deducted
the full section 965(c) deduction) in the tax-
able year or years in which its DFICs had
subpart F income as a result of section
965(a). Notwithstanding the similarities in
the eight-year schedules for section 965(h)
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elections and section 965(m) elections, the
statute is clear that the section 965(h) elec-
tion defers payments while the section
965(m) election defers inclusions (and de-
ductions). Thus, allowing REITs making
section 965(m) elections to make adjust-
ments under sections 959 and 961 as if they
had not made the section 965(m) election
would be inconsistent with the statute;
therefore, the final regulations do not adopt
the comment.
Another comment requested that if ad-
justments under sections 959 and 961
were not permitted until the correspond-
ing amounts were included in income, the
final regulations provide guidance con-
cerning the consequences if the REIT dis-
posed of DFIC stock before all section
965(a) inclusions with respect to the stock
had been included in income, and thus
before all corresponding adjustments un-
der sections 959 and 961 had been made.
The comment recommended that the sec-
tion 959 and 961 adjustments be treated as
made immediately before the disposition.
For the reasons discussed in the preceding
paragraph, the Treasury Department and
the IRS have determined that such treat-
ment would not be appropriate and do not
adopt the comment.
#### G. Section 965(n) elections
Proposed §1.965-7(e) provides that if a
taxpayer makes a section 965(n) election
for a taxable year, certain section 965-
related amounts are not taken into account
in determining the taxpayer's net operat-
ing loss under section 172 for the year or
in determining the taxpayer's taxable in-
come for such taxable year (computed
without regard to the deduction allowable
under section 172) that may be reduced by
net operating loss carryovers or carry-
backs to such taxable year under section
172. A comment requested clarification
that the section 965(n) election applies for
purposes of the alternative minimum tax
("AMT") and section 1411. The Treasury
Department and the IRS have determined
that because the section 965(n) election
affects the net operating loss deduction
and taxable income, which are starting
points for determining alternative mini-
mum tax net operating loss deduction and
alternative minimum taxable income under
sections 56(d) and 55(b)(2), respectively, it
is clear that the section 965(n) election ap-
plies for purposes of the AMT. Similarly, it
is clear that the section 965(n) election af-
fects the computations under §1.1411-
4(h) if an election under §1.1411-10(g) has
been made, and no clarification is needed.
A comment also requested clarification
that a section 965(n) election can be made
for every year in which a REIT has a section
965(a) inclusion by reason of a section
965(m) election. Given that §1.965-
7(e), like proposed §1.965-7(e), provides
that a section 965(n) election can be made
for a taxable year in which a person has a
section 965(a) inclusion, the Treasury De-
partment and the IRS have determined that
no additional clarification is necessary.
H. Election to use alternative method of
calculating post-1986 earnings and
profits
Proposed §1.965-7(f)(5)(i) provides
for an election to use an alternative method
for calculating post-1986 earnings and prof-
its and provides that the election is made for
each specified foreign corporation by its
controlling domestic shareholder (as defined
in §1.964-1(c)(5)) pursuant to the rules of
§1.964-1(c)(3). A comment requested
modifications regarding multiple aspects of
this election.
First, the comment requested that ref-
erences to the rules in §1.964-1(c)(3) be
deleted because the requirements, partic-
ularly with respect to the statement re-
quired by §1.964-1(c)(3)(ii) and the no-
tice to minority shareholders required by
§1.964-1(c)(3)(iii), are too onerous for
this purpose. Second, the comment re-
quested that United States shareholders be
allowed to make a blanket election for all
of their specified foreign corporations or
be allowed to make a single election and
specifically provide a schedule of those
specified foreign corporations for which
they do not want to make the election.
Third, the comment requested that the
penalties of perjury statement requirement
be eliminated.
The Treasury Department and the IRS
have determined that requiring a control-
ling domestic shareholder to file the state-
ment required by §1.964-1(c)(ii) in order
to make the election described in pro-
posed §1.965-7(f) is duplicative in light
of the requirement to provide an election
statement described in proposed §1.965-
7(f)(5)(iii). However, the requirement to
give notice to minority shareholders is not a
duplicative requirement, and it helps ensure
that all taxpayers are using the same
amounts for post-1986 earnings and profits
to calculate their section 965(a) inclusions.
Accordingly, §1.965-7(f)(5)(i) retains the
reference to §1.964-1(c)(3) but provides
that the statement described in §1.964-
1(c)(3)(ii) is not required. In addition, pro-
posed §1.965-7(f) provides that the election
is made on a specified foreign corporation
by specified foreign corporation basis, in
part because the ability to use the November
2, 2017, measurement date might differ
among specified foreign corporations.
While it is important for the IRS to know
what method is being used for each speci-
fied foreign corporation in order to properly
determine the amount of post-1986 earn-
ings and profits, it is not necessary for a
separate statement to be filed with respect to
each specified foreign corporation. There-
fore, the final regulations permit a single
election statement to be filed that provides
the necessary information with respect to
each specified foreign corporation. Finally,
the election statement required by proposed
§1.965-7(f)(5)(iii) contains additional infor-
mation beyond the making of the election,
including the name and taxpayer identifica-
tion number (if any) of both the person
making the election and the specified for-
eign corporation, so the request that the pen-
alties of perjury statement be eliminated is
not adopted. See Part VII.A of this Sum-
mary of Comments and Explanation of Re-
visions for more discussion of the election
statements.
##### I. Total net tax liability under section 965
Section 965(h) elections and section
965(i) elections allow the deferral of pay-
ment of amounts based on a taxpayer's
total net tax liability under section 965.
See §1.965-7(b)(1), (c)(1), (g)(4), and
(g)(6). Total net tax liability is calculated
on the basis of a taxpayer's net income tax
"with" and "without" the application of
section 965, which is intended to isolate
the portion of a taxpayer's net income tax
attributable to section 965.
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## 1. "Without" prong
The second prong of the definition of
total net tax liability under section 965
(the "without" prong) in the proposed reg-
ulations calculates the taxpayer's net in-
come tax without regard to section 965
but also disregards dividends received di-
rectly or through a chain of ownership
described in section 958(a). Proposed
§1.965-7(g)(10)(i)(B)(2). Dividends are
disregarded because, absent section 965,
they would generally be taxed in the
hands of the taxpayer, but such dividends
may instead be distributions of previously
taxed E&P if section 965 applies, and thus
not subject to additional tax if section 965
applies. Therefore, absent this rule, the tax
imposed on dividends would be included
in the "without" prong but not in the
"with" prong, distorting the "with" and
"without" calculation so that it no longer
isolates the net income tax attributable to
section 965. However, this rule does not
disregard investments in United States
property that would give rise to inclusions
under sections 951(a)(1)(B) and 956, even
though these inclusions, like dividends,
could result in income inclusions that would
be taxable in the "without" prong absent
section 965, but may instead be sheltered by
previously taxed E&P if section 965 does
apply. Comments recommended that the fi-
nal regulations disregard inclusions under
sections 951(a)(1)(B) and 956 for purposes
of the "without" computation in order to
ensure that the total net tax liability under
section 965 reflects an accurate measure of a
taxpayer's tax due to section 965. The final
regulations adopt this recommendation. See
§1.965-7(g)(10)(i)(B)(2).
A comment also suggested that the fi-
nal regulations clarify whether the "with-
out" prong disregards dividends received
by a United States shareholder from a
DFIC before the DFIC's inclusion year.
The Treasury Department and the IRS
have determined that disregarding such
dividends would distort the measurement
of the taxpayer's tax due to section 965, as
those dividends would not become distri-
butions of previously taxed E&P solely as
a result of disregarding section 965 in a
year for which there was no section 965(a)
inclusion with respect to a DFIC. Accord-
ingly, consistent with the change dis-
cussed in the preceding paragraph and in
response to the comment, the final regu-
lations clarify that the dividends disre-
garded are limited to those paid by a DFIC
during the DFIC's inclusion year. See id.
A comment also noted that the "with-
out" prong of the definition of total net tax
liability under section 965 under the pro-
posed regulations disregards credits, as
well as income or deductions properly at-
tributable to dividends from a DFIC, even
though section 965(h)(6)(A)(ii)(II) only
specifically disregards income or deduc-
tions. The comment suggested that be-
cause credits were specifically included in
the House version of the rule, but not the
Senate version, Congress specifically in-
tended to take into account credits in the
"without" prong. However, there is no
legislative history explaining the change.
A similar comment recommended that the
"without" prong of the definition of total
net tax liability under section 965 take
into account foreign income taxes that the
taxpayer would have been able to use as
credits in subsequent years had section
965 not been enacted.
The term "net income tax" is defined to
mean the regular tax liability reduced by
the credits allowed under subparts A, B,
and D of part IV of subchapter A of the
Code and is not defined as such solely
with respect to the "with" prong in section
965(h)(6)(A)(i), but also the "without"
prong in section 965(h)(6)(A)(ii). See sec-
tion 965(h)(6)(B). Subpart B includes sec-
tion 27, which allows for a foreign tax
credit. The disregard of credits clearly fol-
lows from the statutory definition of the
"without" prong, as there could be no
credits attributable to a dividend if income
attributable to the dividend were disre-
garded. Accordingly, the Treasury De-
partment and the IRS have determined
that the approach of the proposed regula-
tions is appropriate, and do not adopt the
recommendations.
## 2. Effect on Total Tax Liability
A comment suggested that the rules for
determining a total net tax liability under
section 965 can result in the total tax
liability of a United States person who
makes a section 965(i) election being
higher than it would have been had a
section 965(i) election not been made.
However, the Treasury Department and
the IRS have determined that because
such rules apply only for purposes of the
definition of total net tax liability under
section 965, and thus for purposes of de-
termining how much can be deferred pur-
suant to a section 965(h) election or a
section 965(i) election, they have no im-
pact on a person's actual total tax liability.
Accordingly, no changes are made in re-
sponse to the comment.
### VIII. Comments and Changes to Proposed §1.965-8 - Affiliated Groups (Including Consolidated Groups)
Proposed §1.965-8 sets forth rules
governing the application of section 965
and the section 965 regulations to mem-
bers of an affiliated group (as defined in
section 1504(a)), including members of
a consolidated group (as defined in
§1.1502-1(h)). The comments and mod-
ifications with respect to these rules are
discussed in this Part VIII.
#### A. Treatment of consolidated groups
##### 1. Treatment for Purposes of Determining Aggregate Foreign Cash Position
The proposed regulations provide rules
allowing a section 958(a) U.S. shareholder
to disregard certain assets for purposes of
determining its aggregate foreign cash posi-
tion. See proposed §1.965-3(b). The pro-
posed regulations further provide that all
members of a consolidated group that are
section 958(a) U.S. shareholders of a spec-
ified foreign corporation are treated as a
single section 958(a) U.S. shareholder for
certain enumerated purposes that do not in-
clude proposed §1.965-3(b). Proposed
§1.965-8(e). Section 3 of Notice 2018-78
explained that, to prevent the overstatement
of the aggregate foreign cash position, the
final regulations would provide that all
members of a consolidated group that are
section 958(a) U.S. shareholders of a spec-
ified foreign corporation would also be
treated as a single section 958(a) U.S. share-
holder for purposes of §1.965-3(b).
However, comments have noted that
treating all members of a consolidated
group that are section 958(a) U.S. share-
holders of a specified foreign corporation
as a single section 958(a) U.S. shareholder
for purposes of §1.965-3(b) but not for all
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purposes of determining the aggregate for-
eign cash position could still result in over-
statement of the aggregate foreign cash po-
sition, if, for example, stock of a specified
foreign corporation was transferred between
such shareholders between cash measure-
ment dates. Accordingly, the final regula-
tions provide that the consolidated group
aggregate foreign cash position is deter-
mined as if all members of a consolidated
group that are section 958(a) U.S. shareholders
of a specified foreign corporation were a sin-
gle section 958(a) U.S. shareholder. See
§1.965-8(e)(1), (e)(3), and (f)(4).
#### 2. Treatment for Other Purposes
Comments also requested that the final
regulations treat all members of a consol-
idated group as a single United States
shareholder for all purposes of section
965. One comment highlighted a fact pat-
tern in which it argues that the anti-abuse
rule in §1.965-4(b) applies and causes
double taxation if the members are treated
as separate but would not apply if the
members were treated as a single United
States shareholder. However, the Treasury
Department and the IRS have determined
that treatment of members of a consoli-
dated group as a single United States
shareholder would not alter the applica-
tion of the anti-abuse rule in the fact pat-
tern raised. Even if it did, however,
broadly changing the consequences of
well-established principles concerning the
determination of inclusions under section
951 in a consolidated group would not be
justified by the application of an anti-
abuse rule to a transaction that falls
within its parameters. See Part VI.C.5 of
this Summary of Comments and Expla-
nation of Revisions for a discussion of
why the final regulations do not adopt
recommendations to treat all members
of a consolidated group that are section
958(a) U.S. shareholders of a specified
foreign corporation as a single section
958(a) U.S. shareholder for purposes of
determining foreign income taxes
deemed paid with respect to section
965(a) inclusions.
### B. Treatment of affiliated groups other than consolidated groups
A comment also suggested that section
958(a) U.S. shareholders that are mem-
bers of an affiliated group that do not file
a consolidated U.S. federal income tax
return also be treated as a single United
States shareholder for purposes of deter-
mining the aggregate foreign cash posi-
tion of each member. It suggested that the
statute evidences Congressional intent for
such treatment. The Treasury Department
and the IRS have determined that the rules
in section 965(b)(5) concerning the allo-
cation of an affiliated group member's
aggregate unused E&P deficit to certain
members of its affiliated group do not
evidence an intent to treat all members of
an affiliated, but not consolidated, group
as a single United States shareholder and
decline to adopt the recommendation.
## IX. Other Comments
### A. Application to individuals
Numerous comments recommended that
guidance exempt individuals from the appli-
cation of section 965. A comment also rec-
ommended that section 965(c)(3)(E), which
provides that the cash position of certain
noncorporate entities must be taken into ac-
count in determining a United States share-
holder's aggregate foreign cash position, not
apply with respect to individuals but did not
supply any reasoning for the recommenda-
tion. The statute applies to increase the sub-
part F income of all DFICs, with no excep-
tion to the extent that a DFIC has one or
more United States shareholders that are
individuals. See section 965(a). Further, the
legislative history expressly provides that all
United States shareholders, including indi-
viduals, are subject to section 965. See H.R.
Rep. No. 115-446, at 606 (2017) (“In con-
trast to the participation exemption deduc-
tion [in section 245A] available only to
domestic corporations that are U.S. share-
holders under subpart F, the transition rule
applies to all U.S. shareholders."). Accord-
ingly, the final regulations do not adopt
these recommendations. The final regula-
tions also do not adopt a related recommen-
dation to permit retroactive entity classifica-
tion elections to treat DFICs as disregarded
for U.S. federal income tax purposes, which
would be out of scope and contrary to the
legislative history indicating that the Trea-
sury Department and the IRS were expected
to prevent the avoidance of section 965. See
H.R. Rep. No. 115-466, at 619 (2017).
Another comment disputed the de-
scription of the clear application of sec-
tion 965(c) and the proposed regulations
thereunder in Part XI.C.2 of the Expla-
nation of Provisions in the proposed
regulations but did not suggest any
changes to the rules in the proposed
regulations. The Treasury Department
and the IRS have determined that the
proposed regulations are consistent with
the statute and that Part XI.C.2 of the
Explanation of Provisions in the pro-
posed regulations accurately describes
the rules, and thus that no changes are
needed in response to the comment.
### B. Section 962 elections
A comment requested that the Treasury
Department and the IRS consider provid-
ing relief for individuals who make a sec-
tion 962 election and subsequently receive
a distribution of section 965(a) previously
taxed earnings and profits or section
965(b) previously taxed earnings and
profits from a DFIC to provide parity with
corporations. However, as the comment ac-
knowledges, section 962(d) limits the appli-
cation of section 959 in the case of an indi-
vidual that has made a section 962 election,
and, as discussed in Part III.D.6 of this Sum-
mary of Comments and Explanation of Re-
visions, section 961 similarly limits the
availability of basis for a distribution of pre-
viously taxed E&P in the case of a section
962 election. Accordingly, the Treasury De-
partment and the IRS have determined that
no relief is appropriate.
Another comment requested guidance
concerning the interaction of a section 962
election and a §1.1411-10(g) election;
specifically, whether tax is imposed under
section 1411 on a distribution of previ-
ously taxed E&P that are not excluded
from an individual's income as a result of
the application of section 959(d) and what
the effects are on the section 1411 tax
basis in DFIC stock. Because this is an
issue of general applicability with respect
to previously taxed E&P and not specific
to the application of section 965, the final
regulations do not address this issue.
## C. RICs
A comment requested that guidance af-
firm that section 965(a) inclusions do not
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affect regulated investment company
("RIC") qualification. The application of
the RIC qualification rules is outside of
the scope of the final regulations.
## D. Extension of limitation on assessment
A comment suggested that the final
regulations clarify whether the extension
of the limitation on the time period for
assessment under section 965(k) applies
to domestic pass-through owners. The
comment also suggested that the final reg-
ulations clarify that the extension does not
apply for purposes of the alternative min-
imum tax, the tax under section 1411, the
tax under section 4968, or the tax under
section 4940. In addition, the comment
recommended clarifying the interaction of
the extension of the limitation on the time
period for collection in section 965(i)(6)
with the extension in section 965(k) and
the interaction of section 965(k) with part-
nership audit rules enacted by the Bipar-
tisan Budget Act of 2015, P.L. 114-74,
129 Stat. 587 ("BBA"). The Treasury De-
partment and the IRS have determined
that, because section 965(k) applies to the
net tax liability under section 965 (as de-
fined in section 965(h)(6)), and §1.965-
7(g)(10) defines total net tax liability un-
der section 965 consistently with the
definition under section 965(h)(6), it is
clear that section 965(k) applies to any
total net tax liability under section 965,
including that of a domestic pass-through
owner. Moreover, the definitions of net
tax liability under section 965 in section
965(h)(6) and total net tax liability under
section 965 in §1.965-7(g)(10) are clear
that they do not include the taxes men-
tioned by the comment. The Treasury De-
partment and the IRS have also deter-
mined that it is clear that section 965(k)
does not limit section 965(i)(6). Accord-
ingly, the comment is not adopted. The
final regulations do not address the inter-
action of section 965(k) with the BBA
rules, as those are outside of the scope of
this rulemaking.
### E. Late election relief
Section 965 includes statutory due
dates for making section 965(h) elections,
section 965(i) elections, section 965(m)
elections, and section 965(n) elections. In
addition to furnishing guidance with re-
spect to statutory elections, the proposed
regulations provide taxpayers with two
additional elections in proposed §§1.965-
2(f)(2) and 1.965-7(f) and prescribe due
dates for making these regulatory elections.
The proposed regulations indicate that relief
under §301.9100-2 or §301.9100-3 is not
available with respect to any election under
section 965. A comment recommended that
the Treasury Department and the IRS reverse
its position in the proposed regulations and
grant section 9100 relief for the statutory and
regulatory elections with respect to section
965. The IRS does not have the discretion to
provide section 9100 relief with respect to an
election whose due date is prescribed by stat-
ute. Furthermore, in addition to providing ad-
ditional time for the basis election, as dis-
cussed in Part III.D.1 of this Summary of
Comments and Explanation of Revisions, No-
tice 2018-78 provided a postponement for
taxpayers affected by Hurricane Florence to
make and revoke all elections with respect to
section 965. The Treasury Department and the
IRS have determined that providing additional
election relief would create administrative dif-
ficulties and is therefore inappropriate. Ac-
cordingly, the recommendation is not adopted.
## X. Applicability Dates
No comments were received with re-
spect to the applicability dates of the pro-
posed regulations. The final regulations
retain the applicability dates that were in
the proposed regulations and, consistent
with the applicability date of section 965,
generally apply beginning the last taxable
year of a foreign corporation that begins
before January 1, 2018, and with respect
to a United States person, beginning the
taxable year in which or with which such
taxable year of the foreign corporation
ends. See section 7805(b)(2).
## Effect on Other Documents
Notice 2018-07 (2018-4 I.R.B. 317)
is obsolete as of February 5, 2019.
Sections 1 through 4 and 6 of Notice
2018-13 (2018-6 I.R.B. 341) are obso-
lete as of February 5, 2019.
Sections 1 through 5 and 7 of Notice
2018-26 (2018-16 I.R.B. 480) are obso-
lete as of February 5, 2019.
Sections 1 through 3 and 5 of Notice
2018-78 (2018-42 I.R.B. 604) are obso-
lete as of February 5, 2019.
## Statement of Availability of IRS Documents
IRS Revenue Procedures, Revenue
Rulings, notices, and other guidance cited
in this document are published in the In-
ternal Revenue Bulletin or Cumulative
Bulletin and are available from the Super-
intendent of Documents, U.S. Govern-
ment Printing Office, Washington, DC
20402, or by visiting the IRS website at
http://www.irs.gov.
## Special Analyses
### I. Regulatory Planning and Review
Executive Orders 13563 and 12866 di-
rect agencies to assess costs and benefits
of available regulatory alternatives and, if
regulation is necessary, to select regula-
tory approaches that maximize net benefits
(including potential economic, environmen-
tal, public health and safety effects, distrib-
utive impacts, and equity). Executive Order
13563 emphasizes the importance of quan-
tifying both costs and benefits, reducing
costs, harmonizing rules, and promoting
flexibility. OIRA has designated this rule as
an economically significant regulatory ac-
tion under section 3(f) of Executive Order
12866 and the Memorandum of Agreement
(MOA), Review of Tax Regulations under
Executive Order 12866 (April 11, 2018).
Accordingly, the rule has been reviewed by
the Office of Management and Budget.
### A. Need for the final regulations
These final regulations implement sec-
tion 965 of the Code as amended by the Act.
The final regulations provide rules for de-
termining the section 965(a) inclusion
amount of a United States shareholder of a
foreign corporation with accumulated post-
1986 deferred foreign income. The final reg-
ulations directly implement the statutory re-
quirements. The Senate Committee on
Finance stated with respect to section 965:
To ensure that all distributions from
foreign subsidiaries are treated in the
same manner under the participation
exemption system, the Committee
believes that it is appropriate to tax
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such earnings as if they had been
repatriated under present law, but at a
reduced rate. The Committee be-
lieves the tax on accumulated foreign
earnings should apply without re-
quiring an actual distribution of earn-
ings, and further believes that the tax
rate should take into account the li-
quidity of the accumulated earnings.
Senate Committee on Finance, Explanation
of the Bill, at 358 (November 22, 2017).
### B. Background
The international tax system prior to
the Act created strong incentives for U.S.
companies to keep their earnings and
profits overseas, an action known as de-
ferral, in order to avoid paying a sizeable
residual U.S. tax. The Act ended deferral
and the resulting "lockout effect." It intro-
duced a one-time tax on the stock of any
deferred E&P not previously taxed by the
United States, regardless of whether those
earnings are repatriated. Cash or cash-
equivalent assets held by a foreign corpo-
ration result in a higher rate of repatriation
tax than non-cash assets, such as plant,
property, and equipment. The tax applies
to the accumulated stock of deferred E&P
as of the last taxable year of a foreign
corporation beginning before January 1,
2018, and with respect to United States
shareholders, for taxable years in which or
with which the taxable year of the foreign
corporation ends; these details are impor-
tant for understanding the economic im-
pacts of the final regulations.
The final regulations address open
questions regarding the application of sec-
tion 965 and comments received on the
proposed regulations. They provide rules
related to section 965 described in the four
notices issued since December 22, 2017,
with certain modifications, as well as ad-
ditional guidance related to section 965.
Specifically, the guidance provides gen-
eral rules and definitions, as well as rules
related to the determination and treatment
of section 965(c) deductions, rules that
disregard certain transactions in connec-
tion with section 965, rules related to for-
eign tax credits, rules regarding elections
and payments, rules regarding the appli-
cation of the section 965 regulations to
affiliated groups, including consolidated
groups, rules on dates of applicability,
rules relating to section 962 elections, and
rules regarding the application of section
986(c) in connection with section 965.
These final regulations are designed to
provide clarity and reduce unnecessary
burdens on taxpayers, including by pro-
viding guidance on how to apply particu-
lar mechanical rules.
### C. Baseline
The baseline constitutes a world in
which no regulations pertaining to section
965 had been promulgated. The following
qualitative analysis describes the anticipated
impacts of the regulations relative to the
baseline.
### D. Consideration of alternatives
For a discussion of the alternatives
considered in the promulgation of the pro-
posed regulations, see Parts II through IX
of the Summary of Comments and Expla-
nation of Revisions. For example, see Part
II of the Summary of Comments and Ex-
planation of Revisions for a discussion of
the alternatives considered with respect to
the determination of, among other things,
post-1986 earnings and profits, cash mea-
surement dates, and short-term obligations,
and Part III.D of the Summary of Com-
ments and Explanation of Revisions for a
discussion of the alternatives considered to
the rule permitting elective basis adjust-
ments to the stock of certain DFICs and
E&P deficit foreign corporations. For a dis-
cussion of additional alternatives considered
in the promulgation of the final regulations,
see Part G of this Special Analyses.
### E. Economic analysis of provisions substantially unchanged from the proposed regulations
The final regulations enhance the per-
formance of the U.S. economy by reduc-
ing uncertainty and ambiguity over inter-
pretation of the section 965 requirements.
Absent these final regulations, different
parties would likely interpret the statute in
different ways. Such disparate interpreta-
tions could lead similarly situated taxpay-
ers to calculate their tax liability differ-
ently and therefore possibly to make
organizational or investment decisions un-
der different signals of economic value, an
economically inefficient outcome. The fi-
nal regulations, following the proposed
regulations with primarily only technical
modifications, reduce uncertainty and am-
biguity by: (1) providing that all members
of a consolidated group that are United
States shareholders of a specified foreign
corporation are treated as a single United
States shareholder for certain purposes; (2)
introducing definitions of terminology used;
(3) coordinating foreign tax credit rules; (4)
providing explicit mechanical rules for ap-
plying section 965 in a variety of complex
scenarios; (5) making explicit the process
for making elections and paying the tax; and
(6) providing dates of applicability.
In consultation with taxpayers, the
Treasury Department and the IRS also
determined that there are multiple in-
stances throughout the statute where the
transition tax may be artificially inflated
because of double counting of cash and
E&P due to multiple testing dates and
chains of ownership. Double counting, as
well as non-counting, is inequitable be-
cause similarly situated taxpayers may
differ in terms of the amounts of income
that fall into the specific categories that
may be subject to double counting or non-
counting. As a result of this analysis, the
final regulations, following the proposed
regulations with only technical modifica-
tions, reduce double counting and non-
counting and produce more equitable tax
outcomes across otherwise similarly situ-
ated taxpayers by: (1) preventing double
counting in computing the aggregate for-
eign cash position, for example, by disre-
garding receivables and payables between
related specified foreign corporations with a
common U.S. shareholder; and (2) prevent-
ing double-counting and non-counting in
the computation of deferred earnings arising
from amounts paid or incurred between re-
lated parties between measurement dates.
### F. Responses to comments
The Treasury Department and the IRS
received comments from the public in re-
sponse to the proposed regulations. This
section discusses significant issues brought
up in the comments for which economic
reasoning is insightful. For a full discussion
of comments received, see the Summary of
Comments and Explanation of Revisions
section of this preamble.
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## 1. Basis Election Rules
To understand the basis election, it is
useful to understand that when a United
States shareholder includes an amount in
income related to the subpart F income of
its CFC, the CFC's earnings that are as-
sociated with the income inclusion are
considered as previously taxed. Thus,
when those previously taxed E&P are dis-
tributed to the United States shareholder,
the United States shareholder generally
does not include them in income. Addi-
tionally, in general, the subpart F inclu-
sion also causes an upward basis adjust-
ment in the stock of the CFC equal to the
amount of the income inclusion. This also
prevents double taxation through capital
gain recognized in the event that the CFC
is sold. Because this increase in basis is
only needed to avoid double taxation until
the previously taxed E&P are distributed,
once the earnings are distributed, there is
a corresponding downward adjustment in
basis of the CFC. If there is insufficient
basis in the stock to account for the de-
crease, then the United States shareholder
must recognize gain equal to the differ-
ence between the amount of the basis and
the reduction.
When applying the framework laid out
above in the context of section 965, there
are several places where additional rules
were needed. Under section 965(b)(4)(A),
earnings of DFICs are treated as previ-
ously taxed E&P ("section 965(b) previ-
ously taxed earnings and profits") if a
deficit is used to offset those earnings for
purposes of determining the United States
shareholder's inclusion under section
965(a). However, the statute does not pro-
vide for a basis increase to the stock of the
DFIC, even though other provisions of the
Code still require a basis decrease when
the section 965(b) previously taxed earn-
ings and profits are distributed. Thus, un-
der the statute, there could be a disincen-
tive to distribute section 965(b) previously
taxed earnings and profits because the
United States shareholder has to reduce its
basis in its CFC, and in some instances,
recognize gain, because the initial offset-
ting basis increase did not occur.
Under section 965(b)(4)(B), the deficit
in E&P in an E&P deficit foreign corpo-
ration is generally eliminated to the extent
that it is used to offset earnings of a DFIC.
The increase in E&P without a corre-
sponding decrease in the basis of the E&P
deficit foreign corporation introduces a
distortion into the system because it pre-
serves a loss in the stock of the entity even
though the loss in earnings and profits has
been utilized and eliminated.
Consistent with the legislative history,
under the proposed regulations, a taxpayer
could elect to make certain basis adjust-
ments related to the taxpayer's section
965(b) previously taxed earnings and
profits. This election was allowed in order
to eliminate the distortions in the basis of
the stock of the DFIC and E&P deficit
foreign corporations. The proposed regu-
lations allowed the taxpayer to elect to
increase the basis of certain stock of its
DFICs pro rata by the amount of its sec-
tion 965(b) previously taxed earnings and
profits. However, for consistency, the tax-
payer was then also required to reduce the
basis of certain stock of its E&P deficit
foreign corporations by an equivalent
amount, and recognize gain to the extent the
reduction exceeded the amount of basis the
taxpayer had in the stock. The proposed
regulations therefore reduced the disincen-
tive to repatriate section 965(b) previously
taxed earnings and profits. However, the
forced gain recognition could have discour-
aged some taxpayers from making the elec-
tion, which would continue the disincentive
to repatriate section 965(b) previously taxed
earnings and profits, retaining the distortion
in the basis of their E&P deficit foreign
corporations and thereby distorting taxpay-
ers' investment and planning decisions.
The final regulations therefore revise
this rule slightly to provide an even more
flexible election. The final regulations per-
mit a taxpayer to increase its basis in the
stock of its DFICs by the lesser of its
section 965(b) previously taxed earnings
and profits or the amount it can reduce the
stock basis of its E&P deficit foreign cor-
porations without recognizing gain. Addi-
tionally, subject to certain limitations, the
taxpayer is allowed to designate which
stock of a DFIC is increased and by how
much. This new election further incentiv-
izes taxpayers to make an election to re-
duce some of the distortions created by
the statute, by providing some basis in the
DFICs with section 965(b) previously
taxed earnings and profits that can be used
to repatriate those earnings, and by reduc-
ing some of the basis in the E&P deficit
foreign corporations to account for the uti-
lization and elimination of the deficit. Ad-
ditionally, allowing taxpayers the flexibility
to assign basis increases to stock in a way
which benefits them the most, rather than
merely allocating the increases pro rata
among the taxpayers' DFICs, further neu-
tralizes any negative impact of the statute on
the incentive to repatriate section 965(b)
previously taxed earnings and profits.
In developing the final regulations, the
Treasury Department and the IRS consid-
ered a number of options related to the
basis election, including retaining the rule
in the proposed regulations, requiring that
the taxpayer increase the basis in the stock
of its DFICs on a pro rata basis rather than
by designation, and a more complex rule
that would have permitted additional basis
adjustments where an E&P deficit foreign
corporation had basis in excess of its def-
icit. The rules in the final regulation balance
administrative and compliance concerns,
while still allowing the maximum amount of
flexibility for taxpayers in their investment
and repatriation planning. This increased
flexibility and clarity provided by the final
regulations helps to ensure that taxpayers
face more uniform incentives regarding sec-
tion 965(b) previously taxed earnings and
profits, and minimizes distortions to tax-
payer behavior resulting from the adjust-
ments provided for by the statute. See Part
III.D of the Summary of Comments and
Explanation of Revisions for additional dis-
cussion of the considerations taken into ac-
count with respect to this issue.
## 2. Cash Position Calculation
In the case of a domestic corporate
United States shareholder, section 965
generally taxes foreign earnings at a
15.5% rate if held in cash, but only at 8%
otherwise. The cash definition in the stat-
ute and the proposed regulations includes
both cash and cash equivalents. A number
of comments were received requesting
that certain assets be excluded from the
list of assets counted as cash equivalents,
including commodities held as inventories
or supplies and stock of publicly traded
companies. The final regulations provide a
narrow exception from the definition of
"cash position" for certain commodities
held by a specified foreign corporation in
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the ordinary course of its trade or business
as well as for certain privately negotiated
contracts to buy or sell such assets.
The Treasury Department and the IRS
have determined that assets that would
otherwise constitute cash equivalents
should not be treated as such for purposes
of section 965 if they constitute inventory
or supplies under longstanding tax princi-
ples. These types of assets have been de-
fined by statute and decades of case law as
property used in the ordinary course of a
taxpayer's business, typically for sale to
customers or further use via processes
such as manufacturing and refinement. In
general, these types of assets are not held
for investment with the goal of recogniz-
ing appreciation over a substantial period
of time, but are rather turned over (or used
to make property that is turned over) rou-
tinely in the ordinary conduct of business.
These well-settled delineations of what
constitute inventory or supplies are consis-
tent with the statutory definition of and leg-
islative history explaining cash-equivalent
assets in section 965(c)(3)(B)(iii). More-
over, the contours of this category have
been carefully defined through common law
and are generally well-understood by tax-
payers. As a result, an exception from cash-
equivalent assets for this type of property is
well-defined and understood, consistent
with statutory intent, and appropriately nar-
row. By contrast, other potential exceptions
would have required the creation of new
terms and concepts, led to potential over- or
under-inclusiveness, and created uncer-
tainty. For these reasons, the Treasury De-
partment and the IRS determined that the
general approach in the proposed regula-
tions was most consistent with the statute
and legislative history, subject to the narrow
exception added to the final regulations for
the reasons discussed above. Further, pro-
viding broad exceptions could create com-
plexity and increased administrative and
compliance burdens. See Part II.D of the
Summary of Comments and Explanation of
Revisions for a more complete discussion of
the considerations taken into account with
respect to this issue.
## 3. Total Net Tax Liability under Section 965
Section 965(h) elections and section
965(i) elections allow a taxpayer to defer
payment of its total net tax liability under
section 965. (For section 965(h), the elec-
tion provides deferral over 8 years,
whereas for section 965(i) the election
provides indefinite deferral until the oc-
currence of certain triggering events.) To-
tal net tax liability under section 965,
which defines the portion of a taxpayer's
income tax eligible for deferral, is equal to
the difference between a taxpayer's net
income tax "with" and "without" the ap-
plication of section 965; this is intended to
isolate the portion of a taxpayer's net in-
come tax attributable solely to section
965. Under the statute, the "without"
prong calculates a taxpayer's net income
tax without regard to section 965, but also
disregards dividends received from a for-
eign subsidiary. Dividends are disre-
garded because, absent section 965, the
dividends generally would be taxed in the
hands of the taxpayer, but such dividends
would be distributions of previously taxed
E&P if section 965 applies, and thus not
subject to additional tax.
Absent the provision in the statute that
disregards dividends received from a for-
eign subsidiary in the "without" prong, the
tax imposed on dividends would be in-
cluded in the "without" prong but not in
the "with" prong, distorting the "with"
and "without" calculation so that it no
longer isolates the net income tax attrib-
utable to section 965, and under-counting
income eligible for deferral.
In response to comments, the final reg-
ulations also disregard effective repatria-
tions taxed in a manner similar to dividends
under section 951(a)(1)(B) resulting from a
foreign subsidiary's investments in United
States property under section 956 for pur-
poses of calculating the "without" prong. In
the year that section 965 applied, taxpayers
may have chosen to borrow funds from their
CFCs instead of receiving a regular divi-
dend distribution, because such loans would
not be subject to tax as effective repatria-
tions of previously taxed E&P and their
annual cash distribution policies could not
be easily adjusted following passage of the
Act. Without the final regulations, taxpayers
that received these loans from their CFCs
would be required to include the loan
amount in the "without" calculation, leading
to a distortion in the "with" and "without"
calculation so that it no longer isolates the
net income tax attributable to section 965,
resulting in a reduced net income tax attrib-
utable to section 965, and a loss of some of
the deferral benefit of section 965(h) and (i).
While the Treasury Department and
the IRS considered retaining the proposed
rule, the final regulations do not do so
because the amounts of inbound loans,
like dividends, will generally be non-
taxable investments of previously taxed
E&P "with" section 965, but taxable as
effective repatriations "without" section 965,
and thus, as stated previously, including these
amounts in the "without" calculation would
inappropriately decrease the amount of the
taxpayer's net tax liability eligible for the de-
ferral elections and fail to isolate the portion of
the taxpayer's net tax liability attributable
solely to section 965. See Part VII.I.1 of the
Summary of Comments and Explanation of
Revisions for a more complete discussion of
the considerations taken into account with re-
spect to this issue.
### II. Paperwork Reduction Act
#### A. Collection of information imposed by the regulations
The collection of information imposed
directly by these regulations is contained
in §§1.965-2(d)(2)(ii)(B), 1.965-2(f)(2)(iii)
(B), 1.965-3(b)(2), 1.965-3(c)(3), 1.965-
4(b)(2)(i), 1.965-4(b)(2)(iii)(B), 1.965-
7(b)(2), 1.965-7(b)(3)(iii)(B), 1.965-7(c)
(2), 1.965-7(c)(3)(iv)(B), 1.965-7(c)(3)
(v)(D), 1.965-7(c)(6)(i), 1.965-7(d)(3),
1.965-7(e)(2), 1.965-7(f)(5), and 1.965-
8(c). The collection of information provided
by these regulations has been reviewed and
approved by the Office of Management and
Budget under control number 1545-2280.
The information is required in order for the
IRS to be aware if a taxpayer makes an
election, transfers a section 965(h) net tax
liability or section 965(i) net tax liability
pursuant to a transfer agreement, or takes a
position that the anti-abuse rules (described
in Part V of the Summary of Comments and
Explanation of Revisions section of this pre-
amble) do not apply.
The estimates for the collection of in-
formation provided by these final regula-
tions are that 100,000 respondents will
require 5 hours per response for a total
reporting burden of 500,000 hours. A val-
uation of the burden hours at $95/hour
($2017) leads to a PRA-based estimate of
the reporting costs to taxpayers of
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$47,500,000. This is a one-time paper-
work burden. The Treasury Department
and the IRS anticipate substantially all
paperwork burdens related to the final reg-
ulations to be incurred only with respect
to the inclusion year. Any subsequent re-
porting (such as in connection with a
transfer of a section 965(h) net tax liabil-
ity or section 965(i) net tax liability)
would be negligible burdens that imple-
ment elections made and payments calcu-
lated in the inclusion year. These burden
estimates capture only those burdens im-
posed by the final regulations and do not
include burden estimates for forms asso-
ciated with the statute.
Comments suggested that the burden
reported in connection with the collection
of information requirements under the
proposed regulations did not appropriately
take into account the time necessary for
determining net tax liability under section
965 and performing other computations
related to the determination of such net
tax liability. However, the collections of
information under the proposed regula-
tions do not relate to such computations;
they relate solely to the making of elec-
tions, filing of transfer agreements, and
reporting of positions concerning the ap-
plication of anti-abuse rules. Limited in-
formation is required to make such elec-
tions, file such transfer agreements, or do
such reporting, and accordingly, five
hours is an appropriate estimate of the
burden imposed by the collections of in-
formation in the final regulations.
An agency may not conduct or spon-
sor, and a person is not required to re-
spond to, a collection of information un-
less the collection of information displays
a valid OMB control number.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any internal
revenue law. The IRS has posted informa-
tion for taxpayers on their recordkeeping
requirements at https://www.irs.gov/taxtop-
ics/tc305. Generally, tax returns and tax re-
turn information are confidential, as re-
quired by 26 U.S.C. 6103.
B. Forms created or modified to collect
information
In addition to the collection of infor-
mation requirements in the final regula-
tions, the enactment of section 965 neces-
sitated the creation and modification of
certain forms, which are needed to capture
changes solely made by the Act and do
not reflect a burden imposed by the final
regulations. The Treasury Department and
the IRS intend that the collections of in-
formation relating to the reporting and
payment of tax under section 965 will be
conducted by way of the forms and in-
structions identified thus far in the follow-
ing table. As a result, for purposes of the
Paperwork Reduction Act (44 U.S.C.
3507(d)), the reporting burden associated
with the collection of information in those
forms will be reflected in the Form 14029,
Paperwork Reduction Act Submission, as-
sociated with those forms.
Related New or Revised Tax Forms Revision of Number of Respondents New Forms Existing Form (Estimated)
Form 965
X
50,000-100,000
Form 965-A
X
35,000-70,000
Form 965-B
X
15,000-30,000
Form 990-PF
X
<1,000
Form 990-T
X
<1,000
Form 1040
X
27,000-57,000
Form 1041
X
<1,000
Form 1065
X
8,000-10,000
Form 1120
X
12,000-20,000
Form 1120-C
X
<1,000
Form 1120-L
X
<1,000
Form 1120-PC
X
<1,000
Form 1120-REIT
X
<1,000
Form 1120-RIC
X
<1,000
Form 1120-S
X
3,000-5,000
The current status of the Paperwork
Reduction Act submissions related to the
tax forms that will be created or revised as
a result of section 965 is provided in the
following table. The burdens associated
with the information collections in the
forms are included in aggregated burden
estimates for the OMB control numbers
listed in the following table which, in the
case of 1545-0123, represents a total esti-
mated burden time, including all other
related forms and schedules for corpora-
tions, of 3.157 billion hours and total es-
timated monetized costs of $58.148 bil-
lion ($2017) and, in the case of 1545-
0074, a total estimated burden time,
including all other related forms and
schedules for individuals, of 1.784 billion
hours and total estimated monetized costs
of $31.764 billion ($2017). The burden
estimates provided in the OMB control
numbers in the following table are aggre-
gate amounts that relate to the entire pack-
age of forms associated with the OMB
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control number, and will in the future
include but not isolate the estimated bur-
den of only those information collections
associated with section 965. These num-
bers are therefore unrelated to the future
calculations needed to assess the burden
imposed by these regulations. To guard
against over-counting the burden that in-
ternational tax provisions imposed prior to
the Act, the Treasury Department and the
IRS urge readers to recognize that these
burden estimates have also been cited by
regulations (such as the foreign tax credit
regulations, 83 Fed. Reg. 63200) that rely
on the applicable OMB control numbers
in order to collect information from the
applicable types of filers. With respect to
the final regulations, the only relevant bur-
den estimates are those associated with
OMB control number 1545-2280. Future
estimates would capture both changes
made by the Act and those that arise out of
discretionary authority exercised in the
regulations. In addition, when available,
drafts of IRS forms are posted for com-
ment at https://apps.irs.gov/app/picklist/
list/draftTaxForms.htm.
Form
Type of Filer
OMB Number(s)
Status
Form 965 (including Schedules A-H)
Business (NEW Model)
1545-0123
Published in the FRN on 10/11/18. Public Comment period closed on 12/10/18.
Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/ proposed-collection-comment-request-for-forms-1065-1065-b-1066-1120- 1120-c-1120-f-1120-h-1120-nd
Form 965-B
Business (NEW Model)
1545-0123
Published in the FRN on 10/11/18. Public Comment period closed on 12/10/18.
Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/ proposed-collection-comment-request-for-forms-1065-1065-b-1066- 1120-1120-c-1120-f-1120-h-1120-nd
Form 965-A
Individual (NEW Model)
1545-0074
Limited Scope submission (1040 only) approved on 12/7/18. Full ICR submission for all f orms in 3/2019. 60 Day FRN not published yet for full collection.
Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201808-1545-031
Forms 990- PF, 990-T
Tax exempt entities (NEW Model)
1545-0047
Published 60-day FRN on 8/22/18.
Link: https://www.federalregister.gov/documents/2018/08/22/2018-18135/ proposed-collection-comment-request-for-forms-990-990-ez-sch-b- br-br-990-ez-sch-l-lp-990-ez-990-pf
Form 1040
Individual (NEW Model)
1545-0074
Limited Scope submission (1040 only) approved on 12/7/18. Full ICR submission for all forms in 3/2019. 60 Day FRN not published yet for full collection.
Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201808-1545-031
Form 1041
Trusts and estates
1545-0092
Submitted to OIRA for review on 9/27/18.
Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201806-1545-014
Form 1065
Business (NEW Model)
1545-0123
Published in the FRN on 10/11/18. Public Comment period closed on 12/10/18.
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Form
Type of Filer
OMB Number(s)
Status
Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/ proposed-collection-comment-request-for-forms-1065-1065-b-1066- 1120-1120-c-1120-f-1120-h-1120-nd
Forms 1120, 1120-C, 1120-L, 1120-PC, 1120-REIT, 1120-
Business (NEW Model)
1545-0123
Published in the
FRN on
10/11/18. Public
RIC,
Comment period
1120-S
closed on 12/10/18.
Link: https://www.federalregister.gov/documents/2018/10/09/2018-21846/
proposed-collection-comment-request-for-forms-1065-1065-b-1066-1120-
1120-c-1120-f-1120-h-1120-nd
## III. Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility
Act (5 U.S.C. chapter 6), it is hereby
certified that the final regulations will not
have a significant economic impact on a
substantial number of small entities within
the meaning of section 601(6) of the Reg-
ulatory Flexibility Act ("small entities").
Section 965 and the final regulations
generally affect U.S. taxpayers who are at
least 10-percent shareholders of a foreign
corporation. As an initial matter, foreign
corporations are not considered small en-
tities. Nor are U.S. taxpayers considered
small entities to the extent the taxpayers
are natural persons or entities other than
small entities. Although the Treasury De-
partment and the IRS received a number
of comments asserting that a substantial
number of small entities would be af-
fected by the proposed regulations, those
comments were principally concerned
with U.S. citizens living abroad that
owned foreign corporations directly or in-
directly through other foreign entities. No
small entity is affected in this scenario.
Thus, the final regulations generally only
affect small entities if a U.S. taxpayer that
is a 10-percent shareholder of a foreign
corporation is a small entity.
While comprehensive counts of all
types of small businesses affected by sec-
tion 965 and these regulations are not
readily available, in-house estimates of
section 965 suggest that very roughly
20,000 multinational domestic corpora-
tions are potentially subject to section
965, and that about half of these corpora-
tions have less than $25 million in gross
receipts. Therefore, very roughly 10,000
small multinational corporations (defined
as corporations with less than $25 million
in gross receipts) are potentially subject to
section 965. The in-house estimates fur-
ther suggest that about 25% of these small
multinational corporations would not owe
any tax under section 965, because they
do not have any accumulated E&P to
which the tax would be applied.
Regardless of the number of small en-
tities potentially affected by section 965
or the final regulations, the Treasury De-
partment and the IRS have concluded that
there is no significant economic impact on
such entities as a result of the final regu-
lations. Based on published information
from the Conference Report accompany-
ing the Act, H.R. Rep. No. 115-446, at
688 (2017), and Bureau of Economic
Analysis aggregate data, which were ad-
justed to reflect the tax burden and total
sales of small businesses, the projected net
tax proceeds from section 965 are esti-
mated to be only a small fraction of the
total sales of small U.S. parented multina-
tional enterprises projected to 2027.1 See
the table in this Part III. The tax amounts
to less than 3 to 5 percent of receipts (as
defined in 13 CFR 121.04), an economic
impact that is not regarded as significant
under the Regulatory Flexibility Act.
Moreover, while most affected small en-
tities are likely to pay the tax in (unequal)
installments over 8 years, the percentage
in any particular year does not exceed 2.2
percent.
Net Section 965 Tax Revenue as a Fraction of Total Sales for Small Multinational Businesses1
Fiscal Years
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
Net Tax Collected ($ billions)
1.2
0.8
0.2
0.2
0.2
0.4
0.7
1.0
0.5
-0.1
Total Sales ($ billions)
54.0
56.7
59.6
62.6
65.7
69.0
72.4
76.0
79.8
83.8
Percent
2.20%
1.32%
0.42%
0.38%
0.36%
0.60%
0.99%
1.28%
0.63%
-0.17%
1Small Multinational Businesses are not necessarily small entities as defined by the Regulatory Flexibility Act.
Thus, even if the economic impact of
the final regulations is interpreted broadly
to include the tax liability due under sec-
tion 965, which small entities would be
required to pay even if the final regula-
tions were not issued, the economic im-
pact should not be regarded as significant
under the Regulatory Flexibility Act.
Additionally, the economic impact of
the final regulations when considered alone
should be minimal. Any economic impact
of the final regulations stems from the col-
1In-house estimates of section 965 tax liability and total receipts of small businesses are used to scale the published aggregate figures. In this case, a small business is defined as a multinational
corporation with less than $25 million in gross receipts. Data on total sales of all U.S. parented companies are drawn from the Bureau of Economic Analysis Interactive Data accessed at
this web address in December, 2018: https://apps.bea.gov/iTable/iTable.cfm?ReqID=2&step=1.
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lection of information requirements im-
posed by §§1.965-2(d)(2)(ii)(B), 1.965-
2(f)(2)(iii)(B), 1.965-3(b)(2), 1.965-3(c)
(3), 1.965-4(b)(2)(i), 1.965-4(b)(2)(iii)(B),
1.965-7(b)(2), 1.965-7(b)(3)(iii)(B), 1.965-
7(c)(2), 1.965-7(c)(3)(iv)(B), 1.965-7(c)
(3)(v)(D), 1.965-7(c)(6)(i), 1.965-7(d)(3),
1.965-7(e)(2), 1.965-7(f)(5), and 1.965-8(c).
The Treasury Department and the IRS have
determined that the average burden associated
with these collection of information require-
ments is 5 hours, which is minimal, particu-
larly in comparison with other regulatory re-
quirements related to owning stock in a
specified foreign corporation. Furthermore,
these requirements apply only if a taxpayer
chooses to make an election or rely on a fa-
vorable rule. The comments received regard-
ing the economic impact of the proposed reg-
ulations principally focus on burdens imposed
by the statute (i.e., the tax due as a result of
section 965) rather than any additional burdens
resulting from the proposed regulations.
For the reasons explained above, the
Treasury Department and the IRS have
determined that the final regulations will
not have a significant economic impact on
a substantial number of small entities. Ac-
cordingly, a regulatory flexibility analysis
under the Regulatory Flexibility Act is not
required. Pursuant to section 7805(f), the
notice of proposed rulemaking preceding
these final regulations was submitted to
the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business. No
comments were received.
## IV. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates
Reform Act of 1995 (UMRA) requires
that agencies assess anticipated costs and
benefits and take certain other actions be-
fore issuing a final rule that includes any
Federal mandate that may result in expen-
ditures in any one year by a state, local, or
tribal government, in the aggregate, or by
the private sector, of $100 million in 1995
dollars, updated annually for inflation. In
2018, that threshold is approximately
$150 million. This rule does not include
any Federal mandate that may result in
expenditures by state, local, or tribal gov-
ernments, or by the private sector in ex-
cess of that threshold.
V. Executive Order 13132: Federalism
Executive Order 13132 (entitled “Fed-
eralism") prohibits an agency from pub-
lishing any rule that has federalism implica-
tions if the rule either imposes substantial,
direct compliance costs on state and local
governments, and is not required by statute,
or preempts state law, unless the agency
meets the consultation and funding require-
ments of section 6 of the Executive Order.
This final rule does not have federalism im-
plications and does not impose substantial
direct compliance costs on state and local
governments or preempt state law within the
meaning of the Executive Order.
### Drafting Information
The principal authors of the final reg-
ulations are Leni C. Perkins, Natalie
Punchak, and Karen J. Cate of the Office
of Associate Chief Counsel (Interna-
tional). However, other personnel from
the Treasury Department and the IRS par-
ticipated in the development of the final
regulations.
#### List of Subjects in 26 CFR Part 1
Income taxes, Reporting and record-
keeping requirements.
#### Amendments to the Regulations
Accordingly, 26 CFR part 1 is
amended as follows:
##### PART 1-INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding new entries
in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * *
* * * * *
Section 1.962-1 also issued under 26
U.S.C. 965(o).
* * * * *
Section 1.965-1 also issued under 26
U.S.C. 965(c)(3)(B)(iii)(V), 965(d)(2),
965(o), 989(c), and 7701(a).
Section 1.965-2 also issued under 26
U.S.C. 965(b)(3)(A)(ii), 965(o), and
961(a) and (b).
Section 1.965-3 also issued under 26
U.S.C. 965(c)(3)(D) and 965(o).
Section 1.965-4 also issued under 26
U.S.C. 965(c)(3)(F) and 965(o).
Sections 1.965-5 through 1.965-6 also
issued under 26 U.S.C. 965(o) and 26
U.S.C. 902(c)(8) (as in effect on Decem-
ber 21, 2017).
Section 1.965-7 also issued under 26
U.S.C. 965(h)(3), 965(h)(5), 965(i)(2),
965(i)(8)(B), 965(m)(2)(A), 965(n)(3),
and 965(o).
Section 1.965-8 also issued under 26
U.S.C. 965(o).
Section 1.965-9 also issued under 26
U.S.C. 965(o).
* * * * *
Section 1.986(c)-1 also issued under
26 U.S.C. 965(o) and 26 U.S.C. 989(c).
* * * * *
Par. 2. Section 1.962-1 is amended by:
1\. Revising paragraph (b)(1)(i).
2\. Redesignating paragraphs (b)(2)(iv)(a)
and (b) as paragraph (b)(2)(iv)(A) and (B),
respectively.
3\. Adding paragraph (d).
The revision and addition read as fol-
lows:
§1.962-1 Limitation of tax for
individuals on amounts included in gross
income under section 951(a).
* * * * *
(b) * * *
(1) * * *
(i) Determination of taxable income.
The term taxable income means the ex-
cess of-
(A) The sum of-
(1) All amounts required to be included
in his gross income under section 951(a)
for the taxable year with respect to a for-
eign corporation of which he is a United
States shareholder, including-
(i) His section 965(a) inclusion amounts
(as defined in §1.965-1(f)(38)); and
(ii) His domestic pass-through owner
shares (as defined in §1.965-1(f)(21)) of
section 965(a) inclusion amounts with re-
spect to deferred foreign income corpora-
tions (as defined in §1.965-1(f)(17)) of
which he is a United States shareholder;
plus
(2) [Reserved]
(3) All amounts which would be re-
quired to be included in his gross income
under section 78 for the taxable year with
respect to the amounts referred to in para-
graph (b)(1)(i)(A)(1) and (2) of this sec-
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tion if the shareholder were a domestic
corporation; over
(B) The sum of the following deduc-
tions, but no other deductions or
amounts-
(1) His section 965(c) deduction
amount (as defined in §1.965-1(f)(42)) for
the taxable year;
(2) His domestic pass-through owner
shares of section 965(c) deduction amounts
corresponding to the amounts referred to in
paragraph (b)(1)(i)(A)(1)(ii) of this section;
and
(3) [Reserved]
* * * * *
(d) Applicability dates. Paragraph
(b)(1)(i) of this section applies beginning
the last taxable year of a foreign corpora-
tion that begins before January 1, 2018,
and with respect to a United States person,
for the taxable year in which or with
which such taxable year of the foreign
corporation ends.
Par. 3. Section 1.962-2 is amended by
revising paragraph (a) and adding para-
graph (d) to read as follows:
§1.962-2 Election of limitation of tax
for individuals.
(a) Who may elect. The election under
section 962 may be made only by an in-
dividual (including a trust or estate) who
is a United States shareholder (including
an individual who is a United States
shareholder because, by reason of section
958(b), he is considered to own stock of a
foreign corporation owned (within the
meaning of section 958(a)) by a domestic
pass-through entity (as defined in §1.965-
1(f)(19))).
(d) Applicability dates. Paragraph (a)
of this section applies beginning the last
taxable year of a foreign corporation that
begins before January 1, 2018, and with
respect to a United States person, for the
taxable year in which or with which such
taxable year of the foreign corporation
ends.
Par. 4. Sections 1.965-0 through
1.965-9 are added to read as follows:
* * * * *
1.965-0 Outline of section 965 regula-
tions.
1.965-1 Overview, general rules, and def-
initions.
1.965-2 Adjustments to earnings and
profits and basis.
1.965-3 Section 965(c) deductions.
1.965-4 Disregard of certain transac-
tions.
1.965-5 Allowance of credit or deduction
for foreign income taxes.
1.965-6 Computation of foreign income
taxes deemed paid and allocation and ap-
portionment of deductions.
1.965-7 Elections, payment, and other
special rules.
1.965-8 Affiliated groups (including con-
solidated groups).
1.965-9 Applicability dates.
* * * * *
§1.965-0 Outline of section 965
regulations.
This section lists the headings for
§§1.965-1 through 1.965-9.
§1.965-1 Overview, general rules, and
definitions.
(a) Overview.
(1) In general.
(2) Scope.
(b) Section 965(a) inclusion amounts.
(1) Inclusion of the pro rata share of the
section 965(a) earnings amount.
(2) Reduction by the allocable share of
the aggregate foreign E&P deficit.
(c) Section 965(c) deduction amounts.
(d) Treatment of specified foreign cor-
poration as a controlled foreign corpora-
tion.
(e) Special rule for certain controlled
domestic partnerships.
(1) In general.
(2) Definition of a controlled domestic
partnership.
(f) Definitions.
(1) 8 percent rate amount.
(2) 8 percent rate equivalent percent-
age.
(3) 15.5 percent rate amount.
(4) 15.5 percent rate equivalent per-
centage.
(5) Accounts payable.
(6) Accounts receivable.
(7) Accumulated post-1986 deferred
foreign income.
(8) Aggregate foreign cash position.
(9) Aggregate foreign E&P deficit.
(10) Aggregate section 965(a) inclu-
sion amount.
(11) Allocable share.
(12) Bona fide hedging transaction.
(13) Cash-equivalent asset.
(i) In general.
(ii) Specified commodity.
(14) Cash-equivalent asset hedging
transaction.
(i) In general.
(ii) Aggregate hedging transactions.
(15) Cash measurement dates.
(16) Cash position.
(i) General rule.
(ii) Fair market value of cash-
equivalent assets.
(iii) Measurement of derivative finan-
cial instruments.
(iv) Translation of cash position
amounts.
(17) Deferred foreign income corpora-
tion.
(i) In general.
(ii) Priority rule.
(18) Derivative financial instrument.
(19) Domestic pass-through entity.
(20) Domestic pass-through owner.
(21) Domestic pass-through owner
share.
(22) E&P deficit foreign corporation.
(i) In general.
(ii) Determination of deficit in post-
1986 earnings and profits.
(23) E&P measurement dates.
(24) Final cash measurement date.
(25) First cash measurement date.
(26) Inclusion year.
(27) Net accounts receivable.
(28) Pass-through entity.
(29) Post-1986 earnings and profits.
(i) General rule.
(ii) Foreign income taxes.
(iii) Deficits in earnings and profits.
(30) Pro rata share.
(31) Second cash measurement date.
(32) Section 958(a) stock.
(33) Section 958(a) U.S. shareholder.
(34) Section 958(a) U.S. shareholder
inclusion year.
(35) Section 965 regulations.
(36) Section 965(a) earnings amount.
(37) Section 965(a) inclusion.
(38) Section 965(a) inclusion amount.
(39) Section 965(a) previously taxed
earnings and profits.
(40) Section 965(b) previously taxed
earnings and profits.
(41) Section 965(c) deduction.
(42) Section 965(c) deduction amount.
(43) Short-term obligation.
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(44) Specified E&P deficit.
(45) Specified foreign corporation.
(i) General rule.
(ii) Special attribution rule.
(A) In general.
(B) Attribution for purposes of the ten
percent standard.
(iii) Passive foreign investment compa-
nies.
(46) Spot rate.
(47) United States shareholder.
(g) Examples.
(1) Example 1.
(i) Facts.
(ii) Analysis.
(2) Example 2.
(i) Facts.
(ii) Analysis.
(3) Example 3.
(i) Facts.
(ii) Analysis.
(4) Example 4.
(i) Facts.
(ii) Analysis.
(5) Example 5.
(i) Facts.
(ii) Analysis.
(A) Determination of status as a de-
ferred foreign income corporation.
(B) Determination of status as an E&P
deficit foreign corporation.
(6) Example 6.
(i) Facts.
(ii) Analysis.
(7) Example 7.
(i) Facts.
(ii) Analysis.
(8) Example 8.
(i) Facts.
(ii) Analysis.
##### §1.965-2 Adjustments to earnings and profits and basis.
(a) Scope.
(b) Determination of and adjustments
to earnings and profits of a specified for-
eign corporation for purposes of applying
sections 902, 959, 960, and 965.
(c) Adjustments to earnings and profits
by reason of section 965(a).
(d) Adjustments to earnings and profits
by reason of section 965(b).
(1) Adjustments to earnings and profits
described in section 959(c)(2) and (c)(3)
of deferred foreign income corporations.
(2) Adjustments to earnings and profits
described in section 959(c)(3) of E&P
deficit foreign corporations.
(i) Increase in earnings and profits by
an amount equal to the portion of the
section 958(a) U.S. shareholder's pro rata
share of the specified E&P deficit.
(A) In general.
(B) Reduction of a qualified deficit.
(ii) Determination of portion of a sec-
tion 958(a) U.S. shareholder's pro rata
share of a specified E&P deficit taken into
account.
(A) In general.
(B) Designation of portion of a section
958(a) U.S. shareholder's pro rata share of
a specified E&P deficit taken into account.
(e) Adjustments to basis by reason of
section 965(a).
(1) General rule.
(2) Section 962 election.
(f) Adjustments to basis by reason of
section 965(b).
(1) In general.
(2) Election to make adjustments to
basis to account for the application of
section 965(b).
(i) In general.
(ii) Basis adjustments.
(A) Increase in basis with respect to a
deferred foreign income corporation.
(1) In general.
(2) Limited basis adjustment.
(B) Reduction in basis with respect to
an E&P deficit foreign corporation.
(1) In general.
(2) Limited basis adjustment.
(C) Section 962 election.
(iii) Rules regarding the election.
(A) Consistency requirement.
(B) Manner of making election.
(1) Timing.
(i) In general.
(ii) Transition rule.
(2) Election statement.
(g) Gain reduction rule.
(1) Reduction in gain recognized under
section 961(b)(2) by reason of distribu-
tions attributable to section 965 previ-
ously taxed earnings and profits in the
inclusion year.
(i) In general.
(ii) Definition of section 965 previ-
ously taxed earnings and profits.
(2) Reduction in basis by an amount
equal to the gain reduction amount.
(h) Rules of application for specified
basis adjustments.
(1) Timing of basis adjustments.
(2) Netting of basis adjustments.
(3) Gain recognition for reduction in
excess of basis.
(4) Adjustments with respect to each
share.
(i) Section 958(a) stock.
(ii) Applicable property.
(5) Stock or property for which adjust-
ments are made.
(i) In general.
(ii) Special rule for an interest in a
foreign pass-through entity.
(i) Definitions.
(1) Applicable property.
(2) Foreign pass-through entity.
(3) Property.
(j) Examples.
(1) Example 1.
(i) Facts.
(ii) Analysis.
(A) Adjustments to section 959(c) clas-
sification of earnings and profits for inclu-
sion under section 951(a)(1)(A) without
regard to section 965.
(B) Distributions between specified
foreign corporations before January 1,
2018.
(C) Section 965(a) inclusion amount.
(1) CFC1 section 965(a) earnings
amount.
(2) CFC2 section 965(a) earnings
amount.
(3) Effect on earnings and profits de-
scribed in section 959(c)(2) and (3).
(D) Distribution to United States share-
holder.
(E) Section 902 and section 960 con-
sequences.
(1) Distribution by and inclusions with
respect to CFC2.
(2) Inclusions with respect to CFC1.
(2) Example 2.
(i) Facts.
(ii) Analysis.
(A) Adjustments to section 959(c) clas-
sification of earnings and profits for inclu-
sion under section 951(a)(1)(A) without
regard to section 965.
(B) Distributions between specified
foreign corporations before January 1,
2018.
(C) Section 965(a) inclusion amount.
(1) CFC1 section 965(a) earnings
amount.
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(2) CFC2 section 965(a) earnings
(i) Facts.
(A) Facts.
amount.
(ii) Analysis.
(B) Analysis.
(3) Effect on earnings and profits de-
(A) Adjustments to section 959(c) clas-
(1) Treatment of PS1.
scribed in section 959(c)(2) and (3).
sification of earnings and profits for sec-
(2) Treatment of PS2.
(D) Distribution to United States share-
tion 1248 inclusion.
(c) Determination of aggregate foreign
holder.
(B) Section 965(a) inclusion amount.
cash position for a section 958(a) U.S.
(3) Example 3.
(C) Distributions to United States
shareholder inclusion year.
(i) Facts.
shareholders.
(1) Single section 958(a) U.S. share-
(ii) Analysis.
(7) Example 7.
holder inclusion year.
(A) Adjustments to section 959(c) clas-
(i) Facts.
(2) Multiple section 958(a) U.S. share-
sification of earnings and profits for inclu-
(ii) Analysis.
holder inclusion years.
sion under section 951(a)(1)(A) without
(8) Example 8.
(i) Allocation to first section 958(a)
regard to section 965.
(i) Facts.
U.S. shareholder inclusion year.
(B) Distributions between specified
(ii) Analysis.
(ii) Allocation to succeeding section
foreign corporations before January 1,
(A) Application of the gain reduction
958(a) U.S. shareholder inclusion years.
2018.
rule.
(3) Estimation of aggregate foreign
(C) Section 965(a) inclusion amount.
(B) Adjustments to the basis of CFC1.
cash position.
(1) CFC1 section 965(a) earnings
(9) Example 9.
(4) Examples.
amount.
(i) Facts.
(i) Example 1.
(2) CFC2 section 965(a) earnings
(ii) Analysis.
(A) Facts.
amount.
(A) Application of the gain reduction
(B) Analysis.
(3) Effect on earnings and profits de-
rule.
(ii) Example 2.
scribed in section 959(c)(2) and (3).
(B) Adjustments to the basis of CFC1
(A) Facts.
(D) Distribution to United States share-
and CFC2.
(B) Analysis.
holder.
(d) Increase of income by section
(4) Example 4.
965(c) deduction of an expatriated entity.
(i) Facts.
§1.965-3 Section 965(c) deductions.
(1) In general.
(ii) Analysis.
(a) Scope.
(2) Definition of expatriated entity.
(A) Adjustments to section 959(c) clas-
(b) Rules for disregarding certain as-
(3) Definition of surrogate foreign cor-
sification of earnings and profits for inclu-
sets for determining aggregate foreign
poration.
sion under section 951(a)(1)(A) without
cash position.
(e) Section 962 election.
regard to section 965.
(1) Disregard of certain obligations be-
(1) In general.
(B) Distributions between specified
tween related specified foreign corpora-
(2) Example.
foreign corporations before January 1,
tions.
(i) Facts.
2018.
(2) Disregard of other assets upon
(ii) Analysis.
(C) Section 965(a) inclusion amount.
demonstration of double-counting.
(f) Treatment of section 965(c) deduc-
(1) CFC1 section 965(a) earnings
(3) Disregard of portion of cash posi-
tion under certain provisions of the Inter-
amount.
tion of noncorporate entities treated as
nal Revenue Code. (1) Section 63(d).
(2) CFC2 section 965(a) earnings
specified foreign corporations.
(2) Sections 705, 1367, and 1368.
amount.
(4) Examples.
(i) Adjustments to basis
(3) Effect on earnings and profits de-
(i) Example 1.
scribed in section 959(c)(2) and (3).
(A) Facts.
(ii) S corporation accumulated adjust-
(D) Distribution to United States share-
(B) Analysis.
ments account.
holder.
(1) Loan from CFC1 to CFC2.
(iii) Example.
(1) Distribution that is a specified pay-
(2) Account receivable of CFC1 held
(A) Facts.
ment.
by CFC2.
(B) Analysis.
(2) Distribution to United States share-
(3) Loan from CFC1 to CFC3.
(3) Section 1411.
holder.
(ii) Example 2.
(4) Section 4940.
(E) Section 902 and section 960 con-
(A) Facts.
(g) Domestic pass-through entities.
sequences.
(B) Analysis.
(5) Example 5.
(iii) Example 3.
§1.965-4 Disregard of certain
(A) Section 965(a) inclusion amount.
(A) Facts.
transactions.
(1) CFC section 965(a) earnings
(B) Analysis.
amount.
(iv) Example 4.
(a) Scope.
(2) Effect on earnings and profits de-
(A) Facts.
(b) Transactions undertaken with a
scribed in section 959(c)(2) and (3).
(B) Analysis.
principal purpose of changing the amount
(6) Example 6.
(v) Example 5.
of a section 965 element.
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(1) General rule.
(A) Facts.
§1.965-7 Elections, payment, and other
(2) Presumptions and exceptions for
(B) Analysis.
special rules.
the application of the general rule.
(iv) Example 4.
(ii) Definitions.
(A) Facts.
(a) Scope.
(A) Relatedness.
(B) Analysis.
(b) Section 965(h) election.
(B) Transfer.
(v) Example 5.
(1) In general.
(1) In general.
(A) Facts.
(i) Amount of installments.
(2) Indirect transfer.
(B) Analysis.
(ii) Increased installments due to a de-
(iii) Cash reduction transactions.
(vi) Example 6.
ficiency or a timely filed or amended re-
(A) General rule.
(A) Facts.
turn.
(B) Per se rules for certain distribu-
(B) Analysis.
(A) In general.
tions.
(B) Timing.
(iv) E&P reduction transactions.
§1.965-5 Allowance of credit or
(C) Exception for negligence, inten-
(A) General rule.
deduction for foreign income taxes.
tional disregard, or fraud.
(1) Definition of pro rata share reduc-
(iii) Due date of installments.
tion transaction.
(a) Scope.
(A) In general.
(2) Definition of E&P deficit transac-
(b) Rules for foreign income taxes paid
(B) Extension for specified individuals.
tion.
or accrued.
(2) Manner of making election.
(B) Per se rule for internal group trans-
(c) Rules for foreign income taxes
(i) Eligibility.
actions.
treated as paid or accrued.
(ii) Timing.
(C) Example.
(1) Disallowed credit.
(iii) Election statement.
(1) Facts.
(i) In general.
(3) Acceleration of payment.
(2) Analysis.
(ii) Foreign income taxes deemed paid
(i) Acceleration.
(c) Disregard of certain changes in
under section 960(a)(3) (as in effect on
(ii) Acceleration events.
method of accounting and entity classifi-
December 21, 2017).
(iii) Eligible section 965(h) transferee
cation elections.
(iii) [Reserved]
exception.
(1) Changes in method of accounting.
(2) Disallowed deduction.
(A) In general.
(2) Entity classification elections.
(3) Coordination with section 78. (i) In general.
(1) Requirement to have a covered ac-
(d) Definition of a section 965 element.
celeration event.
(e) Rules for applying paragraphs (b)
(ii) Domestic corporation that is a do-
(2) Requirement to enter into a transfer agreement.
and (c) of this section.
mestic pass-through owner.
(1) Determination of whether there is a
(d) Applicable percentage.
(B) Transfer agreement.
change in the amount of a section 965
(1) In general.
(1) Eligibility.
element.
(2) No section 965(a) inclusion amount.
(2) Filing requirements.
(2) Treatment of domestic pass-
(3) Applicable percentage for domestic
(i) In general.
through owners as United States share-
pass-through owners.
(ii) Transition rule.
holders.
(4) Applicable percentage with respect
(3) Signature requirement.
(3) Exception for certain incorporation
to certain distributions of previously taxed
(4) Terms of agreement.
transactions.
earnings and profits.
(5) Consolidated groups.
(i) In general.
(6) Leverage ratio.
(ii) Aggregate foreign cash position.
§1.965-6 Computation of
(C) Consent of Commissioner.
(4) Consequences of liquidation.
foreign income taxes deemed paid and
(1) In general.
(i) In general.
allocation and apportionment of
(2) Material misrepresentations and
(ii) Specified liquidation date.
deductions.
omissions.
(f) Disregard of certain transactions oc-
(D) Effect of assumption.
curring between E&P measurement dates.
(a) Scope.
(1) In general.
(1) Disregard of specified payments.
(b) Computation of foreign income
(2) Eligible section 965(h) transferor
(2) Definition of specified payment.
taxes deemed paid.
liability.
(3) Non-application of disregard rule.
(1) In general.
(E) Qualifying consolidated group
(4) Examples.
(2) Dividend or inclusion in excess of
member transaction.
(i) Example 1.
post-1986 undistributed earnings.
(1) Definition of qualifying consoli-
(A) Facts.
(3) Treatment of adjustment under sec-
dated group member transaction.
(B) Analysis.
tion 965(b)(4)(B).
(2) Definition of qualified successor.
(ii) Example 2.
(4) Section 902 fraction.
(3) Departure of multiple members of a
(A) Facts.
(c) Allocation and apportionment of
consolidated group.
(B) Analysis.
deductions.
(c) Section 965(i) election.
(iii) Example 3.
(d) Hovering deficits.
(1) In general.
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(2) Manner of making election.
(ii) Failure to report.
(4) Section 965(h) net tax liability.
(i) Eligibility.
(d) Section 965(m) election and special
(5) Section 965(i) election.
(ii) Timing.
rule for real estate investment trusts.
(6) Section 965(i) net tax liability.
(iii) Election statement.
(1) In general.
(7) Section 965(m) election.
(3) Triggering events.
(2) Inclusion schedule for section
(8) Section 965(n) election.
(i) In general.
965(m) election.
(9) Specified individual.
(ii) Triggering events.
(3) Manner of making election.
(10) Total net tax liability under sec-
(iii) Partial transfers.
(i) Eligibility.
tion 965.
(iv) Eligible section 965(i) transferee
(ii) Timing.
(i) General rule.
exception.
(iii) Election statement.
(ii) Net income tax.
(A) In general.
(4) Coordination with section 965(h).
(iii) Foreign tax credits.
(1) Requirement to have a covered trig-
(5) Acceleration of inclusion.
gering event.
(6) Treatment of section 965(a) inclu-
(2) Requirement to enter into a transfer
sions of a real estate investment trust.
§1.965-8 Affiliated groups (including
agreement.
(e) Section 965(n) election.
consolidated groups).
(B) Transfer agreement.
(1) In general.
(a) Scope.
(1) Eligibility.
(i) General rule.
(b) Reduction of E&P net surplus
(2) Filing requirements.
(ii) Applicable amount for section
shareholder's pro rata share of the section
(i) In general.
965(n) election.
965(a) earnings amount of a deferred for-
(ii) Transition rule.
(iii) Scope of section 965(n) election.
eign income corporation by the allocable
(iii) Death of eligible section 965(i)
(iv) [Reserved]
share of the applicable share of the aggre-
transferor.
(2) Manner of making election.
gate unused E&P deficit.
(3) Signature requirement.
(i) Eligibility.
(1) In general.
(4) Terms of agreement.
(ii) Timing.
(2) Consolidated group as part of an
(5) Special rule in the case of death of
(iii) Election statement.
affiliated group.
eligible section 965(i) transferor.
(f) Election to use alternative method
(c) Designation of portion of excess
(6) Leverage ratio.
for calculating post-1986 earnings and
aggregate foreign E&P deficit taken into
(C) Consent of Commissioner.
profits.
account.
(1) In general.
(1) Effect of election for specified for-
(1) In general.
(2) Material misrepresentations and
eign corporations that do not have a 52-
(2) Consolidated group as part of an
omissions.
53-week taxable year.
affiliated group.
(D) Effect of assumption.
(2) Effect of election for specified for-
(d) [Reserved]
(1) In general.
eign corporations that have a 52-53-week
(1) [Reserved]
(2) Eligible section 965(i) transferor
taxable year.
(2) Consolidated groups.
liability.
(3) Computation of post-1986 earnings
(e) Treatment of a consolidated group
(v) Coordination with section 965(h)
and profits using alternative method.
as a single section 958(a) U.S. shareholder
election.
(4) Definitions.
or a single person.
(A) In general.
(i) 52-53-week taxable year.
(1) In general.
(B) Timing for election.
(ii) Annualized earnings and profits
(2) Limitation.
(C) Due date for installment.
amount.
(3) Determination of section 965(c) de-
(D) Limitation.
(iii) Daily earnings amount.
duction amount.
(1) In general.
(iv) Notional measurement date.
(f) Definitions.
(2) Manner of obtaining consent.
(5) Manner of making election.
(1) Aggregate unused E&P deficit.
(i) In general.
(i) Eligibility.
(i) In general.
(ii) Transition rule.
(ii) Timing.
(ii) Reduction with respect to E&P net
(3) Signature requirement.
(iii) Election statement.
deficit shareholders that are not wholly
(4) Terms of agreement.
(6) Examples.
owned by the affiliated group.
(5) Consent of Commissioner.
(i) Example 1.
(2) Allocable share.
(i) In general.
(A) Facts.
(3) Applicable share.
(ii) Material misrepresentations and
(B) Analysis.
(4) Consolidated group aggregate for-
omissions.
(ii) Example 2.
eign cash position.
(6) Leverage ratio.
(A) Facts.
(5) E&P net deficit shareholder.
(4) Joint and several liability.
(B) Analysis.
(6) E&P net surplus shareholder.
(5) Extension of limitation on collec-
(g) Definitions.
(7) Excess aggregate foreign E&P def-
tion.
(1) Deferred net tax liability.
icit.
(6) Annual reporting requirement.
(2) REIT section 965 amounts.
(8) Group cash ratio.
(i) In general.
(3) Section 965(h) election.
(9) Group ownership percentage.
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(g) Examples.
(1) Example 1.
(i) Facts.
(A) In general.
(B) Facts relating to section 965.
(ii) Analysis.
(A) Section 965(a) inclusion amounts
before application of section 965(b)(5).
(B) Application of section 965(b)(5).
(1) Determination of E&P net surplus
shareholders and E&P net deficit share-
holders.
(2) Determining section 965(a) inclu-
sion amounts under section 965(b)(5).
(C) Aggregate foreign cash position.
(D) Section 965(c) deduction amount.
(2) Example 2.
(i) Facts.
(ii) Analysis.
(A) Section 965(a) inclusion amount.
(1) Single section 958(a) U.S. share-
holder treatment.
(2) Determination of inclusion amount.
(B) Consolidated group aggregate for-
eign cash position.
(C) Section 965(a) deduction amount.
§1.965-9 Applicability dates.
(a) In general.
(b) Applicability dates for rules disre-
garding certain transactions.
§1.965-1 Overview, general rules, and
definitions.
(a) Overview-(1) In general. This
section provides general rules and defini-
tions under section 965. Section 1.965-2
provides rules relating to adjustments to
earnings and profits and basis to deter-
mine and account for the application of
section 965 and a rule that limits the
amount of gain recognized under section
961(b)(2) by reason of distributions attrib-
utable to section 965 previously taxed
earnings and profits (as defined in §1.965-
2(g)(1)(ii)) in the inclusion year. Section
1.965-3 provides rules regarding the de-
termination of section 965(c) deductions.
Section 1.965-4 sets forth rules that dis-
regard certain transactions for purposes of
section 965. Sections 1.965-5 and
1.965-6 provide rules with respect to for-
eign tax credits. Section 1.965-7 provides
rules regarding elections and payments.
Section 1.965-8 provides rules regarding
affiliated groups, including consolidated
groups. Section 1.965-9 provides dates of
applicability. See also §§1.962-1 and
1.962-2 (providing rules regarding the ap-
plication of section 962) and 1.986(c)-1
(providing rules regarding the application
of section 986(c)).
(2) Scope. Paragraph (b) of this section
provides the general rules concerning sec-
tion 965(a) inclusion amounts. Paragraph
(c) of this section provides the general
rule concerning section 965(c) deduction
amounts. Paragraph (d) of this section
provides a rule for specified foreign cor-
porations that are not controlled foreign
corporations. Paragraph (e) of this section
treats certain controlled domestic partner-
ships as foreign partnerships for purposes
of section 965. Paragraph (f) of this sec-
tion provides definitions applicable for the
section 965 regulations and §§1.962-
1, 1.962-2, and 1.986(c)-1. Paragraph (g)
of this section contains examples illustrat-
ing the general rules and definitions set
forth in this section.
(b) Section 965(a) inclusion amounts-
(1) Inclusion of the pro rata share of the
section 965(a) earnings amount. For an in-
clusion year of a deferred foreign income
corporation, the subpart F income of the
deferred foreign income corporation (as oth-
erwise determined for the inclusion year un-
der section 952 and §1.952-1) is increased
by the section 965(a) earnings amount of the
deferred foreign income corporation. See
section 965(a). Accordingly, a section
958(a) U.S. shareholder with respect to a
deferred foreign income corporation gener-
ally includes in gross income under section
951(a)(1) for the section 958(a) U.S. share-
holder inclusion year its pro rata share of the
section 965(a) earnings amount of the de-
ferred foreign income corporation, trans-
lated (if necessary) into U.S. dollars using
the spot rate on December 31, 2017, and
subject to reduction under section 965(b),
paragraph (b)(2) of this section, and §1.965-
8(b). The amount of the section 958(a) U.S.
shareholder's inclusion with respect to a de-
ferred foreign income corporation as a result
of section 965(a) and this paragraph (b)(1),
as reduced under section 965(b), paragraph
(b)(2) of this section, and §1.965-8(b), as
applicable, is referred to as the section
965(a) inclusion amount. Neither the sec-
tion 965(a) earnings amount nor the section
965(a) inclusion amount is subject to the
rules or limitations in section 952 or limited
by the accumulated earnings and profits of
the deferred foreign income corporation on
the date of the inclusion.
(2) Reduction by the allocable share of
the aggregate foreign E&P deficit. For
purposes of determining a section 958(a)
U.S. shareholder's section 965(a) inclu-
sion amount with respect to a deferred
foreign income corporation, the U.S. dol-
lar amount of the section 958(a) U.S.
shareholder's pro rata share of the section
965(a) earnings amount of the deferred
foreign income corporation, translated (if
necessary) into U.S. dollars using the spot
rate on December 31, 2017, is reduced by
the deferred foreign income corporation's
allocable share of the section 958(a) U.S.
shareholder's aggregate foreign E&P defi-
cit. See section 965(b). If the section 958(a)
U.S. shareholder is a member of a consoli-
dated group, under §1.965-8(e), all section
958(a) U.S. shareholders that are members
of the consolidated group are treated as a
single section 958(a) U.S. shareholder for
purposes of this paragraph (b)(2).
(c) Section 965(c) deduction amounts.
For a section 958(a) U.S. shareholder in-
clusion year, a section 958(a) U.S. share-
holder is generally allowed a deduction in
an amount equal to the section 965(c)
deduction amount.
(d) Treatment of specified foreign corpo-
ration as a controlled foreign corporation. A
specified foreign corporation described in sec-
tion 965(e)(1)(B) and paragraph (f)(45)(i)(B)
of this section that is not otherwise a controlled
foreign corporation is treated as a controlled
foreign corporation solely for purposes of
paragraph (b) of this section and sections 951,
961, and §1.1411-10. See 965(e)(2).
(e) Special rule for certain controlled
domestic partnerships-(1) In general.
For purposes of the section 965 regula-
tions, a controlled domestic partnership is
treated as a foreign partnership for pur-
poses of determining the section 958(a)
U.S. shareholder of a specified foreign
corporation and the section 958(a) stock
of the specified foreign corporation owned
by the section 958(a) U.S. shareholder if
the following conditions are satisfied-
(i) Without regard to this paragraph (e),
the controlled domestic partnership is a
section 958(a) U.S. shareholder of the
specified foreign corporation and thus
owns section 958(a) stock of the specified
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foreign corporation (tested section 958(a)
stock);
(ii) If the controlled domestic partner-
ship (and all other controlled domestic
partnerships in the chain of ownership of
the specified foreign corporation) were
treated as foreign-
(A) The specified foreign corporation
would continue to be a specified foreign
corporation; and
(B) At least one United States share-
holder of the specified foreign corpora-
tion-
(1) Would be treated as a section
958(a) U.S. shareholder of the specified
foreign corporation; and
(2) Would be treated as owning (within
the meaning of section 958(a)) tested sec-
tion 958(a) stock of the specified foreign
corporation through another foreign cor-
poration that is a direct or indirect partner
in the controlled domestic partnership.
(2) Definition of a controlled domestic
partnership. For purposes of paragraph
(e)(1) of this section, the term controlled
domestic partnership means a domestic
partnership that is controlled by a United
States shareholder described in paragraph
(e)(1)(ii)(B) of this section and persons
related to the United States shareholder.
For purposes of this paragraph (e)(2), con-
trol is determined based on all the facts
and circumstances, except that a partner-
ship will be deemed to be controlled by a
United States shareholder and related per-
sons if those persons, in the aggregate,
own (directly or indirectly through one or
more partnerships) more than 50 percent
of the interests in the partnership capital
or profits. For purposes of this paragraph
(e)(2), a related person is, with respect to
a United States shareholder, a person that
is related (within the meaning of section
267(b) or 707(b)(1)) to the United States
shareholder.
(f) Definitions. This paragraph (f) pro-
vides definitions that apply for purposes of
the section 965 regulations and §§1.962-
1, 1.962-2, and 1.986(c)-1. Unless other-
wise indicated, all amounts are expressed as
positive numbers.
(1) 8 percent rate amount. The term 8
percent rate amount means, with respect
to a section 958(a) U.S. shareholder and a
section 958(a) U.S. shareholder inclusion
year, the excess, if any, of the section
958(a) U.S. shareholder's aggregate sec-
tion 965(a) inclusion amount for the sec-
tion 958(a) U.S. shareholder inclusion
year over the amount of the section 958(a)
U.S. shareholder's aggregate foreign cash
position for the section 958(a) U.S. share-
holder inclusion year as determined under
§1.965-3(c).
(2) 8 percent rate equivalent percent-
age. The term 8 percent rate equivalent
percentage means, with respect to a sec-
tion 958(a) U.S. shareholder and a section
958(a) U.S. shareholder inclusion year,
the percentage that would result in the 8
percent rate amount being subject to an 8
percent rate of tax determined by only
taking into account a deduction equal to
such percentage of such amount and the
highest rate of tax specified in section 11
for the section 958(a) U.S. shareholder
inclusion year. In the case of a section
958(a) U.S. shareholder inclusion year of
a section 958(a) U.S. shareholder to which
section 15 applies, the highest rate of tax
under section 11 before the effective date
of the change in rates and the highest rate
of tax under section 11 after the effective
date of such change will each be taken
into account under the preceding sentence
in the same proportions as the portion of
the section 958(a) U.S. shareholder inclu-
sion year that is before and after such
effective date, respectively.
(3) 15.5 percent rate amount. The term
15.5 percent rate amount means, with re-
spect to a section 958(a) U.S. shareholder
and a section 958(a) U.S. shareholder in-
clusion year, the amount of the section
958(a) U.S. shareholder's aggregate for-
eign cash position for the section 958(a)
U.S. shareholder inclusion year as deter-
mined under §1.965-3(c) to the extent it
does not exceed the section 958(a) U.S.
shareholder's aggregate section 965(a) in-
clusion amount for the section 958(a) U.S.
shareholder inclusion year.
(4) 15.5 percent rate equivalent per-
centage. The term 15.5 percent rate
equivalent percentage, with respect to a
section 958(a) U.S. shareholder and a sec-
tion 958(a) U.S. shareholder inclusion
year, has the meaning provided for the
term "8 percent rate equivalent percent-
age" applied by substituting "15.5 percent
rate amount" for "8 percent rate amount"
and "15.5 percent rate of tax" for "8 per-
cent rate of tax."
(5) Accounts payable. The term ac-
counts payable means payables arising
from the purchase of property described in
section 1221(a)(1) or section 1221(a)(8)
or the receipt of services from vendors or
suppliers, provided the payables have a
term upon issuance of less than one year.
(6) Accounts receivable. The term ac-
counts receivable means receivables de-
scribed in section 1221(a)(4) that have a
term upon issuance of less than one year.
(7) Accumulated post-1986 deferred
foreign income-(i) In general. The term
accumulated post-1986 deferred foreign
income means, with respect to a specified
foreign corporation, the post-1986 earn-
ings and profits of the specified foreign
corporation except to the extent such earn-
ings and profits-
(A) Are attributable to income of the
specified foreign corporation that is effec-
tively connected with the conduct of a
trade or business within the United States
and subject to tax under chapter 1;
(B) If distributed, would, in the case of
a controlled foreign corporation, be ex-
cluded from the gross income of a United
States shareholder under section 959; or
(C) If distributed, would, in the case of
a controlled foreign corporation that has
shareholders that are not United States
shareholders on an E&P measurement
date, be excluded from the gross income
of such shareholders under section 959 if
such shareholders were United States
shareholders, determined by applying the
principles of Revenue Ruling 82-16,
1982-1 C.B. 106.
(ii) Earnings and profits attributable to
subpart F income in the same taxable year
as an E&P measurement date. For pur-
poses of determining the accumulated post-
1986 deferred foreign income of a specified
foreign corporation as of an E&P measure-
ment date, earnings and profits of the spec-
ified foreign corporation that are or would
be, applying the principles of Revenue Rul-
ing 82-16, 1982-1 C.B. 106, described in
section 959(c)(2) by reason of subpart F
income (as defined in section 952 without
regard to section 965(a)) are described in
section 965(d)(2)(B) and paragraph (f)(7)
(i)(B) or (f)(7)(i)(C) of this section only to
the extent that such income has been ac-
crued by the specified foreign corporation as
of the E&P measurement date. For rules
regarding the interaction of sections 951,
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956, 959, and 965 generally, see §1.965-
2(b).
(8) Aggregate foreign cash position-
(i) In general. The term aggregate foreign
cash position means, with respect to a
section 958(a) U.S. shareholder that is not
a member of a consolidated group, the
greater of-
(A) The aggregate of the section 958(a)
U.S. shareholder's pro rata share of the
cash position of each specified foreign
corporation determined as of the final cash
measurement date of the specified foreign
corporation; or
(B) One half of the sum of-
(1) The aggregate described in para-
graph (f)(8)(i)(A) of this section deter-
mined as of the second cash measurement
date of each specified foreign corporation,
plus
(2) The aggregate described in para-
graph (f)(8)(i)(A) of this section deter-
mined as of the first cash measurement
date of each specified foreign corporation.
(ii) Other rules. For rules for determin-
ing the aggregate foreign cash position for
a section 958(a) U.S. shareholder inclu-
sion year of the section 958(a) U.S. share-
holder, see §1.965-3(c). For the rule for
determining the aggregate foreign cash
position of a section 958(a) U.S. share-
holder that is a member of a consolidated
group, see §1.965-8(e)(3). For rules dis-
regarding certain assets for purposes of
determining the aggregate foreign cash
position of a section 958(a) U.S. share-
holder, see §1.965-3(b).
(9) Aggregate foreign E&P deficit. The
term aggregate foreign E&P deficit
means, with respect to a section 958(a)
U.S. shareholder, the lesser of-
(i) The aggregate of the section 958(a)
U.S. shareholder's pro rata share of the
specified E&P deficit of each E&P deficit
foreign corporation, translated (if neces-
sary) into U.S. dollars using the spot rate
on December 31, 2017, or
(ii) The aggregate of the section 958(a)
U.S. shareholder's pro rata share of the
section 965(a) earnings amount of each
deferred foreign income corporation,
translated (if necessary) into U.S. dollars
using the spot rate on December 31, 2017.
(10) Aggregate section 965(a) inclu-
sion amount. The term aggregate section
965(a) inclusion amount means, with re-
spect to a section 958(a) U.S. shareholder,
the sum of all of the section 958(a) U.S.
shareholder's section 965(a) inclusion
amounts.
(11) Allocable share. The term alloca-
ble share means, with respect to a de-
ferred foreign income corporation and an
aggregate foreign E&P deficit of a section
958(a) U.S. shareholder, the product of
the aggregate foreign E&P deficit and the
ratio determined by dividing-
(i) The section 958(a) U.S. sharehold-
er's pro rata share of the section 965(a)
earnings amount of the deferred foreign
income corporation, translated (if neces-
sary) into U.S. dollars using the spot rate
on December 31, 2017, by
(ii) The amount described in paragraph
(f)(9)(ii) of this section with respect to the
section 958(a) U.S. shareholder.
(12) Bona fide hedging transaction.
The term bona fide hedging transaction
means a hedging transaction that meets
(or that would meet if the specified for-
eign corporation were a controlled foreign
corporation) the requirements of a bona
fide hedging transaction described in
§1.954-2(a)(4)(ii), except that in the case
of a specified foreign corporation that is
not a controlled foreign corporation, the
identification requirements of §1.954-
2(a)(4)(ii)(B) do not apply.
(13) Cash-equivalent asset-(i) In gen-
eral. The term cash-equivalent asset
means any of the following assets-
(A) Personal property which is of a
type that is actively traded and for which
there is an established financial market,
other than a specified commodity;
(B) Commercial paper, certificates of
deposit, the securities of the Federal gov-
ernment and of any State or foreign gov-
ernment;
(C) Any foreign currency;
(D) A short-term obligation; or
(E) Derivative financial instruments,
other than bona fide hedging transactions.
(ii) Specified commodity. The term spec-
ified commodity means a commodity held
by a specified foreign corporation that, in
the hands of the specified foreign corpora-
tion, is property described in section
1221(a)(1) or 1221(a)(8). This paragraph
(f)(13)(ii) does not apply with respect to a
specified foreign corporation that is a dealer
or trader in commodities.
(14) Cash-equivalent asset hedging
transaction-(i) In general. The term
cash-equivalent asset hedging transaction
means a bona fide hedging transaction
identified on a specified foreign corpora-
tion's books and records as hedging a
cash-equivalent asset.
(ii) Aggregate hedging transactions.
For purposes of paragraph (f)(14)(i) of
this section, the amount of a bona fide
hedging transaction described in §1.1221-
2(c)(3) (an aggregate hedging transac-
tion) that is treated as a cash-equivalent
asset hedging transaction is the amount
that bears the same proportion to the fair
market value of the aggregate hedging
transaction as the value of the cash-
equivalent assets being hedged by the ag-
gregate hedging transaction bears to the
value of all assets being hedged by the
aggregate hedging transaction.
(15) Cash measurement dates. The
term cash measurement dates means, with
respect to a specified foreign corporation,
the first cash measurement date, the sec-
ond cash measurement date, and the final
cash measurement date, collectively, and
each a cash measurement date.
(16) Cash position-(i) General rule.
The term cash position means, with re-
spect to a specified foreign corporation,
the sum of-
(A) Cash held by the corporation;
(B) The net accounts receivable of the
corporation; and
(C) The fair market value of the cash-
equivalent assets held by the corporation.
(ii) Fair market value of cash-equivalent
assets. For purposes of determining the fair
market value of a cash-equivalent asset of a
specified foreign corporation, the value of
the cash-equivalent asset must be adjusted
by the fair market value of any cash- equiv-
alent asset hedging transaction with respect
to the cash-equivalent asset, but only to the
extent that the cash-equivalent asset hedging
transaction does not reduce the fair market
value of the cash-equivalent asset below
zero.
(iii) Measurement of derivative finan-
cial instruments. The amount of derivative
financial instruments taken into account in
determining the cash position of a specified
foreign corporation is the aggregate fair
market value of its derivative financial in-
struments that constitute cash-equivalent as-
sets, provided such amount is not less than
zero.
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(iv) Translation of cash position amounts.
The cash position of a specified foreign cor-
poration with respect to a cash measurement
date must be expressed in U.S. dollars. For this
purpose, the amounts described in paragraph
(f)(16)(i) of this section must be translated (if
necessary) into U.S. dollars using the spot rate
on the relevant cash measurement date.
(17) Deferred foreign income corpora-
tion-(i) In general. The term deferred
foreign income corporation means a spec-
ified foreign corporation that has accumu-
lated post-1986 deferred foreign income
greater than zero as of an E&P measure-
ment date.
(ii) Priority rule. If a specified foreign
corporation satisfies the definition of a de-
ferred foreign income corporation under
section 965(d)(1) and paragraph (f)(17)(i) of
this section, it is classified solely as a de-
ferred foreign income corporation and not
also as an E&P deficit foreign corporation
even if it otherwise satisfies the require-
ments of section 965(b)(3)(B) and para-
graph (f)(22) of this section.
(18) Derivative financial instrument.
The term derivative financial instrument
includes a financial instrument that is one
of the following-
(i) A notional principal contract,
(ii) An option contract,
(iii) A forward contract, other than a
forward contract with respect to a speci-
fied commodity (as defined in paragraph
(f)(13)(ii) of this section), but solely to the
extent that the specified foreign corpora-
tion identified, or could have identified,
the forward contract as a hedging transac-
tion (within the meaning of §1.1221-
2(b)) with respect to one or more specified
commodities held by the specified foreign
corporation,
(iv) A futures contract,
(v) A short position in securities or
commodities, other than a forward con-
tract with respect to a specified commod-
ity, but solely to the extent that the spec-
ified foreign corporation identified, or
could have identified, the forward contract
as a hedging transaction (within the mean-
ing of §1.1221-2(b)) with respect to one
or more specified commodities held by the
specified foreign corporation, or
(vi) Any financial instrument similar to
one described in paragraphs (f)(18)(i)
through (v) of this section.
(19) Domestic pass-through entity. The
term domestic pass-through entity means a
pass-through entity that is a United States
person (as defined in section 7701(a)(30)).
(20) Domestic pass-through owner.
The term domestic pass-through owner
means, with respect to a domestic pass-
through entity, a United States person (as
defined in section 7701(a)(30)) that is a
partner, shareholder, beneficiary, grantor,
or owner, as the case may be, in the do-
mestic pass-through entity. Notwithstand-
ing the preceding sentence, the term does
not include a partner, shareholder, benefi-
ciary, grantor, or owner of the domestic
pass-through entity that is itself a domes-
tic pass-through entity but does include
any other United States person that is an
indirect partner, shareholder, beneficiary,
grantor, or owner of the domestic pass-
through entity through one or more other
pass-through entities.
(21) Domestic pass-through owner
share. The term domestic pass-through
owner share means, with respect to a do-
mestic pass-through owner and a domestic
pass-through entity, the domestic pass-
through owner's share of the aggregate
section 965(a) inclusion amount and the
section 965(c) deduction amount, as ap-
plicable, of the domestic pass-through en-
tity, including the domestic pass-through
owner's share of the aggregate section
965(a) inclusion amount and section
965(c) deduction amount, as applicable,
of a domestic pass-through entity owned
indirectly by the domestic pass-through
owner through one or more other pass-
through entities.
(22) E&P deficit foreign corporation-
(i) In general. The term E&P deficit for-
eign corporation means, with respect to a
section 958(a) U.S. shareholder, a speci-
fied foreign corporation, other than a de-
ferred foreign income corporation, if, as
of November 2, 2017-
(A) The specified foreign corporation
had a deficit in post-1986 earnings and
profits,
(B) The corporation was a specified
foreign corporation, and
(C) The shareholder was a United
States shareholder of the corporation.
(ii) Determination of deficit in post-
1986 earnings and profits. In the case of a
specified foreign corporation that has
post-1986 earnings and profits that in-
clude earnings and profits described in
section 959(c)(1) or 959(c)(2) (or both)
and a deficit in earnings and profits (in-
cluding hovering deficits, as defined in
§1.367(b)-7(d)(2)(i)), the specified for-
eign corporation has a deficit in post-1986
earnings and profits described in para-
graph (f)(22)(i)(A) of this section only to
the extent the deficit in post-1986 earn-
ings and profits exceeds the aggregate of
its post-1986 earnings and profits de-
scribed in section 959(c)(1) and 959(c)(2).
(23) E&P measurement dates. The
term E&P measurement dates means No-
vember 2, 2017, and December 31, 2017,
collectively, and each an E&P measure-
ment date.
(24) Final cash measurement date. The
term final cash measurement date means,
with respect to a specified foreign corpo-
ration, the close of the last taxable year of
the specified foreign corporation that be-
gins before January 1, 2018, and ends on
or after November 2, 2017, if any.
(25) First cash measurement date. The
term first cash measurement date means,
with respect to a specified foreign corpo-
ration, the close of the last taxable year of
the specified foreign corporation that ends
after November 1, 2015, and before No-
vember 2, 2016, if any.
(26) Inclusion year. The term inclusion
year means, with respect to a deferred
foreign income corporation, the last tax-
able year of the deferred foreign income
corporation that begins before January 1,
2018.
(27) Net accounts receivable. The term
net accounts receivable means, with re-
spect to a specified foreign corporation,
the excess (if any) of-
(i) The corporation's accounts receiv-
able, over
(ii) The corporation's accounts payable
(determined consistent with the rules of
section 461).
(28) Pass-through entity. The term
pass-through entity means a partnership, S
corporation, or any other person (whether
domestic or foreign) other than a corpora-
tion to the extent that the income or de-
ductions of the person are included in the
income of one or more direct or indirect
owners or beneficiaries of the person. For
example, if a domestic trust is subject to
federal income tax on a portion of its
section 965(a) inclusion amount and its
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domestic pass-through owners are subject
to tax on the remaining portion, the do-
mestic trust is treated as a domestic pass-
through entity with respect to such re-
maining portion.
(29) Post-1986 earnings and profits-
(i) General rule. The term post-1986
earnings and profits means, with respect to
a specified foreign corporation and an E&P
measurement date, the earnings and profits
(including earnings and profits described in
section 959(c)(1) and 959(c)(2)) of the spec-
ified foreign corporation (computed in ac-
cordance with sections 964(a) and 986, sub-
ject to §1.965-4(f), and by taking into
account only periods when the foreign cor-
poration was a specified foreign corpora-
tion) accumulated in taxable years be-
ginning after December 31, 1986, and
determined-
(A) As of the E&P measurement date,
except as provided in paragraph (f)(29)(ii)
of this section, and
(B) Without diminution by reason of
dividends distributed during the last tax-
able year of the foreign corporation that
begins before January 1, 2018, other than
dividends distributed to another specified
foreign corporation to the extent the div-
idends increase the post-1986 earnings
and profits of the distributee specified for-
eign corporation.
(ii) Foreign income taxes. For purposes
of determining a specified foreign corpo-
ration's post-1986 earnings and profits as
of the E&P measurement date on Novem-
ber 2, 2017, in the case in which foreign
income taxes (as defined in section
901(m)(5)) of the specified foreign corpo-
ration accrue after November 2, 2017, but
on or before December 31, 2017, and dur-
ing the specified foreign corporation's
U.S. taxable year that includes November
2, 2017, the specified foreign corpora-
tion's post-1986 earnings and profits as of
November 2, 2017, are reduced by the
applicable portion of such foreign income
taxes. For purposes of the preceding sen-
tence, the applicable portion of the foreign
income taxes is the amount of the taxes
that are attributable to the portion of the
taxable income (as determined under for-
eign law) that accrues on or before No-
vember 2, 2017.
(iii) Deficits in earnings and profits.
Any deficit related to post-1986 earnings
and profits, including a hovering deficit
(as defined in §1.367(b)-7(d)(2)(i)), of a
specified foreign corporation is taken into
account for purposes of determining the
post-1986 earnings and profits (including
a deficit) of the specified foreign corpora-
tion.
(30) Pro rata share. The term pro rata
share means, with respect to a section
958(a) U.S. shareholder of a specified for-
eign corporation, a deferred foreign in-
come corporation, or an E&P deficit for-
eign corporation, as applicable-
(i) With respect to the section 965(a)
earnings amount of a deferred foreign in-
come corporation, the portion of the sec-
tion 965(a) earnings amount that would be
treated as distributed to the section 958(a)
U.S. shareholder under §1.951-1(e), de-
termined as of the last day of the inclusion
year of the deferred foreign income cor-
poration on which it is a specified foreign
corporation;
(ii) With respect to the specified E&P
deficit of an E&P deficit foreign corpora-
tion, the portion of the specified E&P def-
icit allocated to the section 958(a) U.S.
shareholder, determined by allocating the
specified E&P deficit among the share-
holders of the corporation's common
stock in proportion to the liquidation
value of the common stock held by the
shareholders, determined as of the last day
of the last taxable year of the E&P deficit
foreign corporation that begins before
January 1, 2018, provided that-
(A) If the corporation's common stock
has a liquidation value of zero and there is
at least one other class of equity with a
liquidation preference relative to the com-
mon stock, then the specified E&P deficit
is allocated as if it were distributed in a
hypothetical distribution described in
§1.951-1(e)(1)(i) with respect to the most
junior class of equity with a positive liq-
uidation value to the extent of such liqui-
dation value, and then to the next most
junior class of equity to the extent of its
liquidation value, and so on, applying
§1.951-1(e) by substituting "specified
E&P deficit" for "subpart F income" each
place it appears and treating the amount of
current earnings and profits of the corpo-
ration for the year as being equal to the
specified E&P deficit of the corporation
for the year; and
(B) If the corporation's common stock
has a liquidation value of zero and there is
no other class of equity with a liquidation
preference relative to the common stock,
the specified E&P deficit is allocated
among the common stock using any rea-
sonable method consistently applied; and
(iii) With respect to the cash position of
a specified foreign corporation on a cash
measurement date, the portion of the cash
position that would be treated as distrib-
uted to the section 958(a) U.S. share-
holder under §1.951-1(e) if the cash po-
sition were subpart F income, determined
as of the close of the cash measurement
date and without regard to whether the
section 958(a) U.S. shareholder is a sec-
tion 958(a) U.S. shareholder of the spec-
ified foreign corporation as of any other
cash measurement date of the specified
foreign corporation, including the final
cash measurement date of the specified
foreign corporation.
(31) Second cash measurement date.
The term second cash measurement date
means, with respect to a specified foreign
corporation, the close of the last taxable
year of the specified foreign corporation
that ends after November 1, 2016, and
before November 2, 2017, if any.
(32) Section 958(a) stock. The term
section 958(a) stock means, with respect
to a specified foreign corporation, a de-
ferred foreign income corporation, or an
E&P deficit foreign corporation, as appli-
cable, stock of the corporation owned (di-
rectly or indirectly) by a United States
shareholder within the meaning of section
958(a).
(33) Section 958(a) U.S. shareholder.
The term section 958(a) U.S. shareholder
means, with respect to a specified foreign
corporation, a deferred foreign income
corporation, or an E&P deficit foreign cor-
poration, as applicable, a United States
shareholder of such corporation that owns
section 958(a) stock of the corporation.
(34) Section 958(a) U.S. shareholder
inclusion year. The term section 958(a)
U.S. shareholder inclusion year means the
taxable year of a section 958(a) U.S.
shareholder in which or with which the
last day of the inclusion year of a deferred
foreign income corporation on which it is
a specified foreign corporation occurs.
(35) Section 965 regulations. The term
section 965 regulations means the regula-
tions under §§1.965-1 through 1.965-9,
collectively.
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(36) Section 965(a) earnings amount.
The term section 965(a) earnings amount
means, with respect to a deferred foreign
income corporation, the greater of the ac-
cumulated post-1986 deferred foreign in-
come of the deferred foreign income cor-
poration as of the E&P measurement date
on November 2, 2017, or the accumulated
post-1986 deferred foreign income of the
deferred foreign income corporation as of
the E&P measurement date on December
31, 2017, determined in each case in the
functional currency of the specified for-
eign corporation. If the functional cur-
rency of a specified foreign corporation
changes between the two E&P measure-
ment dates, the comparison must be made
in the functional currency of the specified
foreign corporation as of December 31,
2017, by translating the specified foreign
corporation's accumulated post-1986 de-
ferred foreign income as of November 2,
2017, into the new functional currency
using the spot rate on November 2, 2017.
(37) Section 965(a) inclusion. The term
section 965(a) inclusion means, with re-
spect to a person and a deferred foreign
income corporation, an amount included
in income by the person by reason of
section 965 with respect to the deferred
foreign income corporation, whether be-
cause the person is a section 958(a) U.S.
shareholder of the deferred foreign in-
come corporation with a section 965(a)
inclusion amount with respect to the de-
ferred foreign income corporation or be-
cause the person is a domestic pass-
through owner with respect to a domestic
pass-through entity that is a section 958(a)
U.S. shareholder of the deferred foreign
income corporation and the person in-
cludes in income its domestic pass-
through owner share of the section 965(a)
inclusion amount of the domestic pass-
through entity with respect to the deferred
foreign income corporation.
(38) Section 965(a) inclusion amount.
The term section 965(a) inclusion amount
has the meaning provided in paragraph
(b)(1) of this section.
(39) Section 965(a) previously taxed
earnings and profits. The term section
965(a) previously taxed earnings and
profits has the meaning provided in
§1.965-2(c).
(40) Section 965(b) previously taxed
earnings and profits. The term section
965(b) previously taxed earnings and
profits has the meaning provided in
§1.965-2(d).
(41) Section 965(c) deduction. The
term section 965(c) deduction means, with
respect to a person, an amount allowed as
a deduction to the person by reason of
section 965(c), whether because the per-
son is a section 958(a) U.S. shareholder
with a section 965(c) deduction amount or
because the person is a domestic pass-
through owner with respect to a domestic
pass-through entity that is a section 958(a)
U.S. shareholder and the person takes into
account its domestic pass-through owner
share of the section 965(c) deduction
amount of the domestic pass-through en-
tity.
(42) Section 965(c) deduction amount.
The term section 965(c) deduction amount
means an amount equal to the sum of-
(i) A section 958(a) U.S. shareholder's
8 percent rate equivalent percentage of the
section 958(a) U.S. shareholder's 8 per-
cent rate amount for the section 958(a)
U.S. shareholder inclusion year, plus
(ii) The section 958(a) U.S. sharehold-
er's 15.5 percent rate equivalent percent-
age of the section 958(a) U.S. sharehold-
er's 15.5 percent rate amount for the
section 958(a) U.S. shareholder inclusion
year.
(43) Short-term obligation. The term
short-term obligation means any obliga-
tion with a term upon issuance that is less
than one year and any loan that must be
repaid at the demand of the lender (or that
must be repaid within one year of such
demand), but does not include any ac-
counts receivable.
(44) Specified E&P deficit. The term
specified E&P deficit means, with respect
to an E&P deficit foreign corporation, the
amount of the deficit described in para-
graph (f)(22)(i)(A) of this section.
(45) Specified foreign corporation-(i)
General rule. Except as provided in para-
graph (f)(45)(iii) of this section, the term
specified foreign corporation means-
(A) A controlled foreign corporation,
or
(B) A foreign corporation of which one
or more domestic corporations is a United
States shareholder.
(ii) Special attribution rule-(A) In
general. Solely for purposes of determin-
ing whether a foreign corporation is a
specified foreign corporation within the
meaning of section 965(e)(1)(B) and para-
graph (f)(45)(i)(B) of this section, stock
owned, directly or indirectly, by or for-
(1) A partner (tested partner) will not
be considered as being owned by a part-
nership under sections 958(b) and 318(a)
(3)(A) and §1.958-2(d)(1)(i) if the tested
partner owns less than ten percent of the
interests in the partnership's capital and
profits; and
(2) A beneficiary (tested beneficiary)
will not be considered as being owned by
a trust under sections 958(b) and
318(a)(3)(B) and §1.958-2(d)(1)(ii) if the
value of the interest of the tested benefi-
ciary, computed actuarially, whether vested
or contingent, current or remainder, is less
than ten percent of the value of the trust
property, assuming the maximum exercise
of discretion in favor of the beneficiary.
(B) Attribution for purposes of the ten
percent standard. For purposes of para-
graph (f)(45)(ii)(A) of this section, an in-
terest in a partnership or trust owned by a
partner or beneficiary other than the tested
partner or tested beneficiary will be con-
sidered as being owned by the tested part-
ner or tested beneficiary under the princi-
ples of sections 958(b) and 318, as
modified by this paragraph (f)(45)(ii), as if
interests in a partnership or trust were
stock.
(iii) Passive foreign investment compa-
nies. A foreign corporation that is a passive
foreign investment company (as defined in
section 1297) with respect to a United States
shareholder and that is not a controlled for-
eign corporation is not a specified foreign
corporation of the United States share-
holder.
(46) Spot rate. The term spot rate has
the meaning provided in §1.988-1(d).
(47) United States shareholder. The
term United States shareholder has the
meaning provided in section 951(b).
(g) Examples. The following examples
illustrate the definitions and general rules
set forth in this section.
(1) Example 1. Definition of specified foreign
corporation. (i) Facts. A, an individual, owns 1% of
the interests in a partnership, PS, and 10% by vote
and value of the stock of a foreign corporation, FC.
PS owns 100% of the stock of a domestic corpora-
tion, DC. A United States citizen, USI, owns an
additional 10% by vote and value of the stock of FC.
The remaining 80% by vote and value of the stock of
FC is owned by non-United States persons that are
unrelated to A, USI, DC, and PS.
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(ii) Analysis. (A) Absent the application of sec-
tions 958(b), 318(a)(3)(A), and 318(a)(3)(C), and
§1.958-2(d)(1)(i) and (iii), FC would not be a spec-
ified foreign corporation because FC is not a con-
trolled foreign corporation and there would be no
domestic corporation that is a United States share-
holder of FC. However, under sections 958(b) and
318(a)(3)(A) and §1.958-2(d)(1)(i), absent the spe-
cial attribution rule in paragraph (f)(45)(ii) of this
section, PS would be treated as owning 10% of the
stock of FC. As a result, under sections 958(b),
318(a)(5)(A), and 318(a)(3)(C), and §1.958-
2(f)(1)(i) and (d)(1)(iii), DC would be treated as
owning the stock of FC treated as owned by PS, and
thus DC would be a United States shareholder with
respect to FC, causing FC to be a specified foreign
corporation within the meaning of section
965(e)(1)(B) and paragraph (f)(45)(i)(B) of this sec-
tion. The results would be the same whether A or PS
or both are domestic or foreign persons.
(B) Under the special attribution rule in para-
graph (f)(45)(ii) of this section, solely for purposes
of determining whether a foreign corporation is a
specified foreign corporation within the meaning of
section 965(e)(1)(B) and paragraph (f)(45)(i)(B) of
this section, the stock of FC owned by A is not
considered as being owned by PS under sections
958(b) and 318(a)(3)(A) and §1.958-2(d)(1)(i) be-
cause A owns less than 10% of the interests in PS's
capital and profits. Accordingly, FC is not a specified
foreign corporation within the meaning of section
965(e)(1)(B) and paragraph (f)(45)(i)(B) of this sec-
tion.
(2) Example 2. Definition of specified foreign
corporation. (i) Facts. The facts are the same as in
paragraph(g)(1)(i) of this section (the facts in Exam-
ple 1), except that A is a foreign corporation wholly
owned by B, a foreign corporation, and B directly
owns 9% of the interests in PS.
(ii) Analysis. Applying the principles of sections
958(b) and 318, as modified by paragraph (f)(45)(ii)
of this section, as if the interest in PS were stock, A
is treated as owning the interests in PS owned by B
(in addition to the 1% interest in PS that A owns
directly), and thus A is not treated as owning less
than 10% of the interests in PS's capital and profits.
Accordingly, the special attribution rule in paragraph
(f)(45)(ii) of this section does not apply, and PS is
treated as owning A's stock of FC for purposes of
determining whether FC is a specified foreign cor-
poration within the meaning of section 965(e)(1)(B)
and paragraph (f)(45)(i)(B) of this section. Accord-
ingly, under the analysis described in paragraph
(ii)(A) of Example 1 of paragraph (g)(1) of this
section, FC is a specified foreign corporation within
the meaning of section 965(e)(1)(B) and paragraph
(f)(45)(i)(B) of this section.
(3) Example 3. Determination of accumulated
post-1986 deferred foreign income. (i) Facts. USP, a
domestic corporation, and FP, a foreign corporation
unrelated to USP, have owned 70% and 30% respec-
tively, by vote and value, of the only class of stock
of FS, a foreign corporation, from January 1, 2016,
until December 31, 2017. USP and FS both have a
calendar year taxable year. FS had no income until
its taxable year ending December 31, 2016, in which
it had 100u of income, all of which constituted
subpart F income, and USP included 70u in income
with respect to FS under section 951(a)(1) for such
year. FS earned no income in 2017. Therefore, FS's
post-1986 earnings and profits are 100u as of both
E&P measurement dates.
(ii) Analysis. Because USP included 70u in in-
come with respect to FS under section 951(a)(1), 70u
of such post-1986 earnings and profits would, if
distributed, be excluded from the gross income of
USP under section 959. Thus, FS's accumulated
post-1986 deferred foreign income would be re-
duced by 70u pursuant to section 965(d)(2)(B) and
paragraph (f)(7)(i)(B) of this section. Furthermore,
under paragraph (f)(7)(i)(C) of this section, the ac-
cumulated post-1986 deferred foreign income of FS
is reduced by amounts that would be excluded from
the gross income of FP if FP were a United States
shareholder, consistent with the principles of Reve-
nue Ruling 82-16. Accordingly, FS's accumulated
post-1986 deferred foreign income is reduced by the
remaining 30u of the 100u of post-1986 earnings
and profits to which USP's 70u of section 951(a)(1)
income inclusions were attributable. As a result,
FS's accumulated post-1986 deferred foreign in-
come is 0u (100u minus 70u minus 30u).
(4) Example 4. Determination of status as a
deferred foreign income corporation or an E&P
deficit foreign corporation; specified foreign corpo-
ration is solely a deferred foreign income corpora-
tion. (i) Facts. USP, a domestic corporation, owns all
of the stock of FS, a foreign corporation. As of
November 2, 2017, FS has a deficit in post-1986
earnings and profits of 150u. As of December 31,
2017, FS has 200u of post-1986 earnings and profits.
FS does not have earnings and profits that are attrib-
utable to income of the specified foreign corporation
that is effectively connected with the conduct of a
trade or business within the United States and sub-
ject to tax under chapter 1, or that, if distributed,
would be excluded from the gross income of a
United States shareholder under section 959 or from
the gross income of another shareholder if such
shareholder were a United States shareholder.
(ii) Analysis. FS's accumulated post-1986 de-
ferred foreign income is equal to its post-1986 earn-
ings and profits because no adjustment to post-1986
earnings and profits is made under section 965(d)(2)
or §1.965-1(f)(7). Under paragraph (f)(17)(i) of this
section, FS is a deferred foreign income corporation
because FS has accumulated post-1986 deferred for-
eign income greater than zero as of the E&P mea-
surement date on December 31, 2017. In addition,
under paragraph (f)(17)(ii) of this section, because
FS is a deferred foreign income corporation, FS is
not also an E&P deficit foreign corporation, notwith-
standing that FS has a deficit in post-1986 earnings
and profits as of the E&P measurement date on
November 2, 2017.
(5) Example 5. Determination of status as a
deferred foreign income corporation or an E&P
deficit foreign corporation; specified foreign corpo-
ration is neither a deferred foreign income corpora-
tion nor an E&P deficit foreign corporation. (i)
Facts. USP, a domestic corporation, owns all of the
stock of FS, a foreign corporation. As of both No-
vember 2, 2017, and December 31, 2017, FS has
100u of earnings and profits described in section
959(c)(2) and a deficit of 90u in earnings and profits
described in section 959(c)(3), all of which were
accumulated in taxable years beginning after De-
cember 31, 1986, while FS was a specified foreign
corporation. Accordingly, as of both November 2,
2017, and December 31, 2017, FS has 10u of post-
1986 earnings and profits.
(ii) Analysis. (A) Determination of status as a
deferred foreign income corporation. Under para-
graph (f)(17) of this section, for purposes of deter-
mining whether FS is a deferred foreign income
corporation, a determination must be made whether
FS has accumulated post-1986 deferred foreign in-
come greater than zero as of either the E&P mea-
surement date on November 2, 2017, or the E&P
measurement date on December 31, 2017. Under
section 965(d)(2) and paragraph (f)(7) of this sec-
tion, FS's accumulated post-1986 deferred foreign
income is its post-1986 earnings and profits, except
to the extent such earnings and profits are attribut-
able to income of the specified foreign corporation
that is effectively connected with the conduct of a
trade or business within the United States and sub-
ject to tax under chapter 1, or that, if distributed,
would be excluded from the gross income of a
United States shareholder under section 959 or from
the gross income of another shareholder if such
shareholder were a United States shareholder. Dis-
regarding FS's 100u of post-1986 earnings and prof-
its described in paragraph (f)(7)(i)(B) of this section,
FS has a 90u deficit in accumulated post-1986 de-
ferred foreign income as of both E&P measurement
dates. Accordingly, FS does not have accumulated
post-1986 deferred foreign income greater than zero
as of either E&P measurement date, and, therefore,
FS is not a deferred foreign income corporation.
(B) Determination of status as an E&P deficit
foreign corporation. Under paragraph (f)(22)(i) of
this section, for purposes of determining whether FS
is an E&P deficit foreign corporation, a determina-
tion must be made whether FS has a deficit in post-
1986 earnings and profits as of the E&P measure-
ment date on November 2, 2017. Under paragraph
(f)(22)(ii) of this section, because the deficit in the
earnings and profits of FS described in section
959(c)(3) of 90u does not exceed the earnings and
profits of FS described in section 959(c)(2) of 100u,
FS does not have a deficit in post-1986 earnings and
profits as of the E&P measurement date on Novem-
ber 2, 2017, and, therefore, FS is not an E&P deficit
foreign corporation. Accordingly, FS is neither a
deferred foreign income corporation nor an E&P
deficit foreign corporation.
(6) Example 6. Application of currency transla-
tion rules. (i) Facts. As of November 2, 2017, and
December 31, 2017, USP, a domestic corporation,
owns all of the stock of CFC1, an E&P deficit
foreign corporation with the "u" as its functional
currency; CFC2, an E&P deficit foreign corporation
with the "v" as its functional currency; CFC3, a
deferred foreign income corporation with the "y" as
its functional currency; and CFC4, a deferred foreign
income corporation with the "z" as its functional
currency. USP, CFC1, CFC2, CFC3, and CFC4 each
have a calendar year taxable year. As of December
31, 2017, lu=$1, .75v=$1, .50y=$1, and .25z=$1.
CFC1 has a specified E&P deficit of 100u, CFC2 has
a specified E&P deficit of 120v, CFC3 has a section
965(a) earnings amount of 50y, and CFC4 has a
section 965(a) earnings amount of 75z.
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(ii) Analysis. (A) Under paragraph (f)(38) of this
section, for purposes of determining USP's section
965(a) inclusion amounts with respect to CFC3 and
CFC4, the section 965(a) earnings amount of each of
CFC3 and CFC4 is translated into U.S. dollars at the
spot rate on December 31, 2017, which equals $100
(50y at .50y=$1) and $300 (75z at .25z=$1), re-
spectively. Furthermore, USP's pro rata share of the
section 965(a) earnings amounts, as translated, is
$100 and $300, respectively, or 100% of each sec-
tion 965(a) earnings amount.
(B) Under paragraph (f)(9) of this section, for
purposes of determining USP's aggregate foreign
E&P deficit, the specified E&P deficit of each of
CFC1 and CFC2 is translated into U.S. dollars at the
spot rate on December 31, 2017, which equals $100
(100u at lu=$1) and $160 (120v at .75v=$1), re-
spectively. Furthermore USP's pro rata share of each
specified E&P deficit, as translated, is $100 and
$160, respectively, or 100% of each specified E&P
deficit. Therefore, USP's aggregate foreign E&P
deficit is $260.
(C) Under section 965(b)(1) and paragraph (b)(2)
of this section, for purposes of determining USP's
section 965(a) inclusion amount with respect to each
of CFC3 and CFC4, the U.S. dollar amount of USP's
pro rata share of the section 965(a) earnings amount
of each of CFC3 and CFC4 is reduced by each of
CFC3 and CFC4's allocable share of USP's aggre-
gate foreign E&P deficit. Under section 965(b)(2)
and paragraph (f)(11) of this section, CFC3's allo-
cable share of USP's aggregate foreign E&P deficit
of $260 is $65 ($260 x ($100/$400)) and CFC4's
deficit is $195 ($260 x ($300/400)). After reduction
under section 965(b)(1) and paragraph (b)(2) of this
section, the section 965(a) inclusion amount of USP
with respect to CFC3 is $35 ($100-$65) and the
section 965(a) inclusion amount of USP with respect
to CFC4 is $105 ($300-$195). Under §1.965-
2(c), the section 965(a) previously taxed earnings
and profits of each of CFC3 and CFC4, translated
into the respective functional currencies of CFC3
and CFC4 at the spot rate on December 31, 2017, are
17.5y ($35 at .50y=$1) and 26.25z ($105 at
.25z=$1), respectively. Under §1.965-6(b)(1), for
purposes of applying section 960(a)(1), the amounts
treated as a dividend paid by each of CFC3 and
CFC4, translated into the respective functional cur-
rencies of CFC3 and CFC4 at the spot rate on De-
cember 31, 2017, are 17.5y ($35 at .50y=$1) and
26.25z ($105 at .25z=$1).
(D) For purposes of determining the section
965(b) previously taxed earnings and profits of each
of CFC3 and CFC4 under section 965(b)(4)(A) and
§1.965-2(d)(1) as a result of the reduction to USP's
section 965(a) inclusion amounts with respect to
CFC3 and CFC4, the amount of the aggregate for-
eign E&P deficit of USP allocated to each of CFC3
and CFC4 under section 965(b)(2) and paragraph
(f)(11) of this section, translated into the respective
functional currencies of CFC3 and CFC4 at the spot
rate on December 31, 2017, is 32.5y ($65 at
.50y=$1) and 48.75z ($195 at .25z=$1), respec-
tively.
(7) Example 7. Determination of cash measure-
ment dates and pro rata shares of cash positions. (i)
Facts. Except as otherwise provided, for all relevant
periods, USP, a domestic corporation, has owned
directly at least 10% of the stock of CFC1, CFC2,
CFC3, and CFC4, each a foreign corporation. CFC1
and CFC2 have calendar year taxable years. CFC3
and CFC4 have taxable years that end on November
30. No entity has a short taxable year, except as a
result of the transactions described below.
(A) USP transferred all of its stock of CFC2 to an
unrelated person on June 30, 2016, at which point
USP ceased to be a United States shareholder with
respect to CFC2.
(B) CFC4 dissolved on December 30, 2010, and,
as a result, its final taxable year ended on December
30, 2010.
(ii) Analysis. Each of CFC1, CFC2, CFC3, and
CFC4 is a specified foreign corporation of USP,
subject to the sale of CFC2 on June 30, 2016, and the
dissolution of CFC4 on December 30, 2010. Under
the definition of aggregate foreign cash position in
paragraph (f)(8)(i) of this section, the definition of
pro rata share of a cash position in paragraph
(f)(30)(iii) of this section, and the definitions of the
final cash measurement date, second cash measure-
ment date, and first cash measurement date in para-
graphs (f)(24), (25), and (31) of this section, the cash
measurement dates of the specified foreign corpora-
tions to be taken into account by USP in determining
its aggregate foreign cash position are summarized
in the following table:
Cash Measurement Dates Final Second First
CFC1
December 31, 2017
December 31, 2016
December 31, 2015
CFC2
N/A
N/A
December 31, 2015
CFC3
November 30, 2018
November 30, 2016
November 30, 2015
CFC4
N/A
N/A
N/A
(8) Example 8. Determination of section 958(a)
U.S. shareholder in case of a controlled domestic
partnership. (i) Facts. USP, a domestic corporation,
owns all of the stock of CFC1 and CFC2. CFC1 and
CFC2 own 60% and 40%, respectively, of the inter-
ests in the capital and profits of DPS, a domestic
partnership. DPS owns all of the stock of CFC3 and
CFC4. This ownership structure has existed since the
date of formation of CFC1, CFC2, CFC3, and CFC4.
CFC1, CFC2, CFC3, and CFC4 are each a foreign
corporation. USP, DPS, CFC1, CFC2, CFC3, and
CFC4 have calendar year taxable years. On both
E&P measurement dates, CFC3 has 50u of accumu-
lated post-1986 deferred foreign income. On both
E&P measurement dates, CFC4 has a deficit in post-
1986 earnings and profits of 30u. On all cash mea-
surement dates, CFC1, CFC2, and CFC3 each have
a cash position of 0u, and CFC4 has a cash position
of 200u.
(ii) Analysis. DPS is a controlled domestic part-
nership with respect to USP within the meaning of
paragraph (e)(2) of this section because more than
50% of the interests in its capital and profits are
owned by persons related to USP within the meaning
of section 267(b), CFC1 and CFC2, and thus DPS is
controlled by USP and related persons. Without re-
gard to paragraph (e) of this section, DPS is a section
958(a) U.S. shareholder of CFC3 and CFC4, each of
which is a controlled foreign corporation. If DPS
were treated as foreign, CFC3 and CFC4 would each
continue to be a controlled foreign corporation, and
USP would be treated as a section 958(a) U.S. share-
holder of each of CFC3 and CFC4, and would be
treated as owning (within the meaning of section
958(a)) tested section 958(a) stock of each of CFC3
and CFC4 through CFC1 and CFC2, which are both
partners in DPS. Thus, under paragraph (e)(1) of this
section, DPS is treated as a foreign partnership for
purposes of determining the section 958(a) U.S.
shareholder of both CFC3 and CFC4 and the section
958(a) stock of both CFC3 and CFC4 owned by the
section 958(a) U.S. shareholder. Thus, USP's pro
rata share of CFC3's section 965(a) earnings amount
is 50u, and its pro rata share of CFC4's specified
E&P deficit is 30u. USP's aggregate foreign cash
position is 200u. DPS is not a section 958(a) U.S.
shareholder with respect to either CFC3 or CFC4.
§1.965-2 Adjustments to earnings and
profits and basis.
(a) Scope. This section provides rules
relating to adjustments to earnings and
profits and basis to determine and account
for the application of section 965(a) and
(b) and §1.965-1(b) and a rule that limits
the amount of gain recognized under sec-
tion 961(b)(2) by reason of distributions
attributable to section 965 previously
taxed earnings and profits (as defined in
paragraph (g)(1)(ii) of this section) in the
inclusion year. Paragraph (b) of this sec-
tion provides rules relating to adjustments
to earnings and profits of a specified for-
eign corporation for purposes of applying
sections 902, 959, 960, and 965. Para-
graph (c) of this section provides rules
regarding adjustments to earnings and
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profits by reason of section 965(a). Para-
graph (d) of this section provides rules
regarding adjustments to earnings and
profits by reason of section 965(b). Para-
graph (e) provides rules regarding adjust-
ments to basis by reason of section 965(a).
Paragraph (f) of this section provides an
election to make certain adjustments to
basis corresponding to adjustments to
earnings and profits by reason of section
965(b). Paragraph (g) of this section pro-
vides rules that limit the amount of gain
recognized in connection with the appli-
cation of section 961(b)(2) and that re-
quire related reductions in basis. Para-
graph (h) of this section provides rules
regarding basis adjustments. Paragraph (i)
of this section provides definitions that
apply for purposes of this section. Para-
graph (j) of this section provides examples
illustrating the application of this section.
(b) Determination of and adjustments
to earnings and profits of a specified for-
eign corporation for purposes of applying
sections 902, 959, 960, and 965. For the
taxable year of a specified foreign corpo-
ration in which an E&P measurement date
occurs, and the last taxable year of a spec-
ified foreign corporation that begins be-
fore January 1, 2018, and the taxable year
of a section 958(a) U.S. shareholder in
which or with which any such year ends,
the adjustments to earnings and profits
described in paragraphs (b)(1) through
(b)(5) of this section apply in sequence.
For purposes of determining the conse-
quences under sections 902 and 960 of a
distribution or an inclusion under section
951(a)(1), after the application of those
paragraphs, the ordering rule in §1.960-
1(i)(2) applies except that section 902 is
applied with respect to any distributions
from the specified foreign corporation de-
scribed in paragraph (b)(2) of this section
that are not disregarded under §1.965-
4 before section 960 is applied with re-
spect to an inclusion or distribution de-
scribed in paragraph (b)(3), (b)(4), or
(b)(5) of this section.
(1) Each of the subpart F income of the
specified foreign corporation and the
amount required to be included in income
under section 1248, if any, are determined
without regard to section 965(a), but taking
into account any relevant distributions, and
earnings and profits of the specified foreign
corporation that are described in section
959(c)(2) with respect to the section 958(a)
U.S. shareholder are increased to the extent
of the section 958(a) U.S. shareholder's in-
clusion under section 951(a)(1)(A) without
regard to section 965(a) (including to the
extent provided in section 959(e)).
(2) The treatment of a distribution by
the specified foreign corporation to an-
other specified foreign corporation that is
made before January 1, 2018, is deter-
mined under section 959.
(3) Each of the post-1986 earnings and
profits (including a deficit) of the specified
foreign corporation, the accumulated post-
1986 deferred foreign income of the speci-
fied foreign corporation, the section 965(a)
earnings amount of the specified foreign
corporation, and the section 965(a) inclu-
sion amount with respect to the specified
foreign corporation, if any, is determined,
taking into account the rules of §1.965-
4, and the earnings and profits (including a
deficit) of the specified foreign corporation
are adjusted as provided in paragraphs (c)
and (d) of this section. For a rule disregard-
ing subpart F income earned after an E&P
measurement date for purposes of calculat-
ing accumulated post-1986 deferred foreign
income as of the E&P measurement date,
see §1.965-1(f)(7)(ii).
(4) The treatment of distributions de-
scribed in paragraph (b)(2) of this section
that are disregarded under §1.965-4 is
redetermined and the treatment of all dis-
tributions from the specified foreign cor-
poration other than those described in
paragraph (b)(2) of this section is deter-
mined under section 959.
(5) An amount is determined under
section 956 with respect to the specified
foreign corporation and the section 958(a)
U.S. shareholder; earnings and profits of
the specified foreign corporation de-
scribed in section 959(c)(2) with respect
to the section 958(a) U.S. shareholder are
reclassified as earnings and profits described
in section 959(c)(1) with respect to the sec-
tion 958(a) U.S. shareholder to the extent
the amount determined under section 956
would, but for section 959(a)(2), be in-
cluded by the section 958(a) U.S. share-
holder under section 951(a)(1)(B); and
earnings and profits described in section
959(c)(1) with respect to the section 958(a)
U.S. shareholder are further increased to the
extent of the section 958(a) U.S. sharehold-
er's inclusion under section 951(a)(1)(B).
(c) Adjustments to earnings and profits
by reason of section 965(a). The earnings
and profits of a deferred foreign income
corporation described in section 959(c)(2)
with respect to a section 958(a) U.S.
shareholder are increased by an amount
equal to the section 965(a) inclusion
amount of the section 958(a) U.S. share-
holder with respect to the deferred foreign
income corporation, if any, translated (if
necessary) into the functional currency of
the deferred foreign income corporation
using the spot rate on December 31, 2017,
provided the section 965(a) inclusion
amount is included in income by the sec-
tion 958(a) U.S. shareholder. For purposes
of the section 965 regulations, the earn-
ings and profits described in section
959(c)(2) by reason of this paragraph (c)
and the earnings and profits initially de-
scribed in section 959(c)(2) by reason of
this paragraph (c) but subsequently reclas-
sified as earnings and profits described in
section 959(c)(1), if any, are referred to as
section 965(a) previously taxed earnings
and profits. Furthermore, the earnings and
profits (including a deficit) of the deferred
foreign income corporation that are de-
scribed in section 959(c)(3) (or that would
be described in section 959(c)(3) but for
the application of section 965(a) and the
section 965 regulations) are reduced (or,
in the case of a deficit, increased) by an
amount equal to the section 965(a) previ-
ously taxed earnings and profits.
(d) Adjustments to earnings and profits
by reason of section 965(b)-(1) Adjust-
ments to earnings and profits described in
section 959(c)(2) and (c)(3) of deferred
foreign income corporations. The earn-
ings and profits of a deferred foreign in-
come corporation described in section
959(c)(2) with respect to a section 958(a)
U.S. shareholder are increased by an
amount equal to the reduction to the sec-
tion 958(a) U.S. shareholder's pro rata
share of the section 965(a) earnings
amount of the deferred foreign income
corporation under section 965(b), §1.965-
1(b)(2), and §1.965-8(b), as applicable,
translated (if necessary) into the func-
tional currency of the deferred foreign in-
come corporation using the spot rate on
December 31, 2017, provided the section
958(a) U.S. shareholder includes the sec-
tion 965(a) inclusion amount (if any) with
respect to the deferred foreign income
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corporation in income. For purposes of the
section 965 regulations, the earnings and
profits described in section 959(c)(2) by
reason of this paragraph (d) and the earn-
ings and profits initially described in sec-
tion 959(c)(2) by reason of this paragraph
(d) but subsequently reclassified as earnings
and profits described in section 959(c)(1)
are referred to as section 965(b) previously
taxed earnings and profits, and are treated
as having been previously included in the
gross income of the section 958(a) U.S.
shareholder under section 951 for purposes
of section 1248(d)(1). Furthermore, the
earnings and profits (including a deficit) de-
scribed in section 959(c)(3) of the deferred
foreign income corporation (or that would
be described in section 959(c)(3) but for the
application of section 965(b) and the section
965 regulations) are reduced (or, in the case
of a deficit, increased) by an amount equal
to the section 965(b) previously taxed earn-
ings and profits.
(2) Adjustments to earnings and profits
described in section 959(c)(3) of E&P
deficit foreign corporations-(i) Increase
in earnings and profits by an amount
equal to the portion of the section 958(a)
U.S. shareholder's pro rata share of the
specified E&P deficit taken into ac-
count-(A) In general. For an E&P deficit
foreign corporation's last taxable year that
begins before January 1, 2018, the earn-
ings and profits of the E&P deficit foreign
corporation described in section 959(c)(3)
are increased by an amount equal to the
portion of a section 958(a) U.S. sharehold-
er's pro rata share of the specified E&P
deficit of the E&P deficit foreign corpora-
tion taken into account under section
965(b), §1.965-1(b)(2), and §1.965-8(b), as
determined under paragraph (d)(2)(ii) of this
section, translated (if necessary) into the
functional currency of the E&P deficit for-
eign corporation using the spot rate on De-
cember 31, 2017. For purposes of section
316, the earnings and profits of the E&P
deficit foreign corporation attributable to the
increase described in the preceding sentence
are not treated as earnings and profits of the
taxable year described in section 316(a)(2).
See also §1.965-6(b)(3) for the timing of
this adjustment for purposes of determining
foreign taxes deemed paid under sections
902 and 960.
(B) Reduction of a qualified deficit. For
purposes of section 952, a section 958(a)
U.S. shareholder's pro rata share of the
earnings and profits of an E&P deficit
foreign corporation is increased by an
amount equal to the portion of the section
958(a) U.S. shareholder's pro rata share of
the specified E&P deficit of the E&P def-
icit foreign corporation taken into account
under section 965(b), §1.965-1(b)(2), or
§1.965-8(b), as applicable, as determined
under paragraph (d)(2)(ii) of this section,
translated (if necessary) into the func-
tional currency of the E&P deficit foreign
corporation using the spot rate on Decem-
ber 31, 2017, and such increase is attrib-
utable to the same activity to which the
deficit so taken into account was attribut-
able.
(ii) Determination of portion of a sec-
tion 958(a) U.S. shareholder's pro rata
share of a specified E&P deficit taken into
account-(A) In general. The portion of a
section 958(a) U.S. shareholder's pro rata
share of a specified E&P deficit of an E&P
deficit foreign corporation taken into
account under section 965(b), §1.965-
1(b)(2), or §1.965-8(b), as applicable, is
100 percent of the section 958(a) U.S. share-
holder's pro rata share of the specified E&P
deficit if either of the following conditions is
satisfied:
(1) The section 958(a) U.S. share-
holder (including a consolidated group of
which the section 958(a) U.S. shareholder
is a member) does not have an excess
aggregate foreign E&P deficit (as defined
in §1.965-8(f)(7)(i)), or
(2) If the section 958(a) U.S. share-
holder is a member of an affiliated group
in which not all members are members of
the same consolidated group, the amount
described in §1.965-8(f)(1)(i)(B) with re-
spect to the affiliated group is equal to or
greater than the amount described §1.965-
8(f)(1)(i)(A).
(B) Designation of portion of a section
958(a) U.S. shareholder's pro rata share
of a specified E&P deficit taken into ac-
count. If neither the condition in para-
graph (d)(2)(ii)(A)(1) nor the condition in
paragraph (d)(2)(ii)(A)(2) is satisfied with
respect to a section 958(a) U.S. share-
holder, then the section 958(a) U.S. share-
holder must designate the portion taken
into account by reporting to each E&P
deficit foreign corporation of the section
958(a) U.S. shareholder, and maintaining,
in its books and records, a statement set-
ting forth the following information-
(1) The portion of the section 958(a)
U.S. shareholder's pro rata share of the
specified E&P deficit of the E&P deficit
foreign corporation taken into account un-
der section 965(b), §1.965-1(b)(2), or
§1.965-8(b), as designated under §1.965-
8(c), as applicable, and
(2) In the case of an E&P deficit for-
eign corporation that has a qualified defi-
cit (as determined under section 952 and
§1.952-1), the portion (if any) of the sec-
tion 958(a) shareholder's pro rata share of
the specified E&P deficit of the E&P def-
icit foreign corporation taken into account
under paragraph (d)(2)(ii)(B)(1) of this
section that is attributable to a qualified
deficit, including the qualified activities to
which such portion is attributable.
(e) Adjustments to basis by reason of
section 965(a)-(1) General rule. Except
as provided in paragraph (e)(2) of this
section, a section 958(a) U.S. sharehold-
er's basis in section 958(a) stock of a
deferred foreign income corporation, or a
section 958(a) U.S. shareholder's basis in
applicable property with respect to a de-
ferred foreign income corporation, is in-
creased by the section 958(a) U.S. share-
holder's section 965(a) inclusion amount
with respect to the deferred foreign in-
come corporation included in income by
the section 958(a) U.S. shareholder. See
section 961(a).
(2) Section 962 election. In the case of
a section 958(a) U.S. shareholder who has
made an election under section 962 for a
section 958(a) U.S. shareholder's inclu-
sion year, the increase in basis in the sec-
tion 958(a) U.S. shareholder's section
958(a) stock of, or applicable property
with respect to, a deferred foreign income
corporation cannot exceed an amount
equal to the amount of tax paid under
chapter 1 of the Code with respect to the
section 958(a) U.S. shareholder's section
965(a) inclusion amount with respect to
the deferred foreign income corporation,
taking into account any section 965(h)
election made by the section 958(a) U.S.
shareholder.
(f) Adjustments to basis by reason of
section 965(b)-(1) In general. Except as
provided in paragraph (f)(2) of this sec-
tion, no adjustments to basis of stock or
property are made under section 961 (or
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any other provision of the Code) to take
into account the reduction to a section
958(a) U.S. shareholder's pro rata share of
the section 965(a) earnings amount of a
deferred foreign income corporation un-
der section 965(b), §1.965-1(b)(2), or
§1.965-8(b), as applicable.
(2) Election to make adjustments to
basis to account for the application of
section 965(b)-(i) In general. If a section
958(a) U.S. shareholder makes the elec-
tion as provided in this paragraph (f)(2),
the adjustments to basis described in para-
graph (f)(2)(ii) of this section are made
with respect to each deferred foreign in-
come corporation and each E&P deficit
foreign corporation in which the section
958(a) U.S. shareholder owns section
958(a) stock.
(ii) Basis adjustments-(A) Increase in
basis with respect to a deferred foreign
income corporation-(1) In general. Except
as provided in paragraphs (f)(2)(ii)(A)(2)
and (C) of this section, a section 958(a) U.S.
shareholder's basis in section 958(a) stock
of a deferred foreign income corporation, or
a section 958(a) U.S. shareholder's basis in
applicable property with respect to a de-
ferred foreign income corporation, is in-
creased by an amount equal to the section
965(b) previously taxed earnings and profits
of the deferred foreign income corporation
with respect to the section 958(a) U.S.
shareholder, translated (if necessary) into
U.S. dollars using the spot rate on Decem-
ber 31, 2017.
(2) Limited basis adjustment. A section
958(a) U.S. shareholder may, in lieu of
applying paragraph (f)(2)(ii)(A)(1) of this
section, designate the amount by which it
increases its basis in section 958(a) stock
of, or applicable property with respect to,
a deferred foreign income corporation,
provided that-
(i) The increase does not exceed the
section 965(b) previously taxed earnings
and profits of the deferred foreign income
corporation with respect to the section
958(a) U.S. shareholder, translated (if
necessary) into U.S. dollars using the spot
rate on December 31, 2017; and
(ii) The aggregate amount of a section
958(a) U.S. shareholder's increases in basis
with respect to stock or applicable property
pursuant to paragraph (f)(2)(ii)(A)(2) of this
section does not exceed the aggregate
amount of the section 958(a) U.S. share-
holder's reductions in basis pursuant to
paragraph (f)(2)(ii)(B) of this section subject
to the limitation under paragraph (f)(2)(ii)
(B)(2) of this section.
(B) Reduction in basis with respect to
an E&P deficit foreign corporation-(1)
In general. Except as provided in para-
graphs (f)(2)(ii)(B)(2) and (f)(2)(ii)(C) of
this section, a section 958(a) U.S. share-
holder's basis in section 958(a) stock of
an E&P deficit foreign corporation, or a
section 958(a) U.S. shareholder's basis in
applicable property with respect to an
E&P deficit foreign corporation, is re-
duced by an amount equal to the portion
of the section 958(a) U.S. shareholder's
pro rata share of the specified E&P deficit
of the E&P deficit foreign corporation
taken into account under section 965(b),
§1.965-1(b)(2), and §1.965-8(b), as ap-
plicable, as determined under paragraph
(d)(2)(ii) of this section, translated (if nec-
essary) into U.S. dollars using the spot
rate on December 31, 2017. For rules re-
quiring gain recognition, see paragraph
(h)(3) of this section.
(2) Limited basis adjustment. If a sec-
tion 958(a) U.S. shareholder adjusts its
basis in section 958(a) stock of, or appli-
cable property with respect to, one or
more deferred foreign income corpora-
tions under paragraph (f)(2)(ii)(A)(2) of
this section, the section 958(a) U.S. share-
holder's aggregate reductions in basis in
section 958(a) stock of, or applicable
property with respect to, an E&P deficit
foreign corporation pursuant to paragraph
(f)(2)(ii)(B)(1) of this section on a day
may not exceed the amount of the section
958(a) U.S. shareholder's basis in the sec-
tion 958(a) stock of, or applicable prop-
erty with respect to, such E&P deficit
foreign corporation, determined without
taking into account specified basis adjust-
ments to the section 958(a) stock of, or
applicable property with respect to, such
E&P deficit foreign corporation.
(C) Section 962 election. In the case of
a section 958(a) U.S. shareholder who has
made an election under section 962 for a
section 958(a) U.S. shareholder's inclu-
sion year, the adjustments provided in
paragraphs (f)(2)(ii)(A) and (B) of this
section do not apply.
(iii) Rules regarding the election-(A)
Consistency requirement. In order for the
election described in this paragraph (f)(2)
to be effective, a section 958(a) U.S.
shareholder and each section 958(a) U.S.
shareholder of an E&P deficit foreign cor-
poration or of a deferred foreign income
corporation with respect to which the sec-
ond section 958(a) U.S. shareholder's pro
rata share of the section 965(a) earnings
amount is reduced under section 965(b),
§1.965-1(b)(2), or §1.965-8(b) that is re-
lated to the first section 958(a) U.S. share-
holder must make the election described
in this paragraph (f)(2). For purposes of
this paragraph (f)(2)(iii)(A), a person is
treated as related to a section 958(a) U.S.
shareholder if the person bears a relation-
ship to the section 958(a) U.S. shareholder
described in section 267(b) or 707(b).
(B) Manner of making election-(1)
Timing-(i) In general. Except as pro-
vided in paragraph (f)(2)(iii)(B)(1)(ii) of
this section, the election provided in this
paragraph (f)(2) must be made no later
than the due date (taking into account
extensions, if any) for the section 958(a)
U.S. shareholder's return for the first tax-
able year that includes the last day of the
last taxable year of a deferred foreign in-
come corporation or E&P deficit foreign
corporation of the shareholder that begins
before January 1, 2018. Relief is not avail-
able under §301.9100-2 or 301.9100-3 to
file a late election. Except as provided in
paragraph (f)(2)(iii)(B)(1)(ii) of this sec-
tion, the election provided in this para-
graph (f)(2) is irrevocable.
(ii) Transition rule. If the due date re-
ferred to in paragraph (f)(2)(iii)(B)(1)(i)
of this section occurs before May 6, 2019,
the election must be made by May 6,
2019. In the case of an election made
before February 5, 2019, the election may
be revoked by attaching a statement,
signed under penalties of perjury, to an
amended return filed by May 6, 2019. The
statement must contain the section 958(a)
U.S. shareholder's name and taxpayer
identification number and a statement that
the section 958(a) U.S. shareholder and all
related persons, as defined in paragraph
(f)(2)(iii)(A) of this section, that are sec-
tion 958(a) U.S. shareholders of E&P def-
icit foreign corporations or of deferred for-
eign income corporations with respect to
which the section 958(a) U.S. shareholder's
pro rata share of the section 965(a) earnings
amount is reduced under section 965(b),
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§1.965-1(b)(2), or §1.965-8(b) revoke the
election provided in this paragraph (f)(2).
(2) Election statement. Except as oth-
erwise provided in publications, forms,
instructions, or other guidance, to make
the election provided in this paragraph
(f)(2), a section 958(a) U.S. shareholder
must attach a statement, signed under pen-
alties of perjury consistent with the rules
for signatures applicable to the section
958(a) U.S. shareholders return, to its re-
turn for the first taxable year that includes
the last day of the last taxable year of a
deferred foreign income corporation or E&P
deficit foreign corporation of the share-
holder that begins before January 1, 2018.
The statement must include the section
958(a) U.S. shareholder's name, taxpayer
identification number, and a statement that
the section 958(a) U.S. shareholder and all
related persons, as defined in paragraph
(f)(2)(iii)(A) of this section, that are section
958(a) U.S. shareholders of E&P deficit for-
eign corporations or of deferred foreign in-
come corporations with respect to which the
section 958(a) U.S. shareholder's pro rata
share of the section 965(a) earnings amount
is reduced under section 965(b), §1.965-
1(b)(2), or §1.965-8(b) make the election
provided in this paragraph (f)(2). If the sec-
tion 958(a) U.S. shareholder increases its
basis in stock or applicable property under
paragraph (f)(2)(ii)(A)(2) of this section and
decreases its basis in stock or applicable
property pursuant to paragraph (f)(2)(ii)(B)
of this section subject to the limitation under
paragraph (f)(2)(ii)(B)(2) of this section, the
election statement must so indicate. The at-
tachment of an unsigned copy of the elec-
tion statement to the timely-filed return for
the relevant taxable year satisfies the signa-
ture requirement of this paragraph
(f)(2)(iii)(B)(2) if the section 958(a) U.S.
shareholder retains the original signed elec-
tion statement in the manner specified by
§1.6001-1(e).
(g) Gain reduction rule-(1) Reduc-
tion in gain recognized under section
961(b)(2) by reason of distributions at-
tributable to section 965 previously taxed
earnings and profits in the inclusion
year-(i) In general. If a section 958(a)
U.S. shareholder receives a distribution
from a deferred foreign income corpora-
tion (including through a chain of owner-
ship described under section 958(a)) dur-
ing the inclusion year of the deferred
foreign income corporation that is attrib-
utable to section 965 previously taxed
earnings and profits of the deferred for-
eign income corporation, then the amount
of gain that otherwise would be recog-
nized under section 961(b)(2) by the sec-
tion 958(a) U.S. shareholder with respect
to the section 958(a) U.S. shareholder's
section 958(a) stock of the deferred for-
eign income corporation or interest in ap-
plicable property with respect to the de-
ferred foreign income corporation is
reduced (but not below zero) by an
amount equal to the section 965 previ-
ously taxed earnings and profits of the
deferred foreign income corporation with
respect to the section 958(a) U.S. share-
holder, translated (if necessary) into U.S.
dollars at the spot rate on December 31,
2017.
(ii) Definition of section 965 previously
taxed earnings and profits. For purposes
of paragraph (g)(1)(i) of this section, the
term section 965 previously taxed earn-
ings and profits means, with respect to a
deferred foreign income corporation and a
section 958(a) U.S. shareholder, the sum
of the section 965(a) previously taxed
earnings and profits of the deferred for-
eign income corporation with respect to
the section 958(a) U.S. shareholder, and,
if the section 958(a) U.S. shareholder has
made the election described in paragraph
(f)(2) of this section, the section 965(b)
previously taxed earnings and profits of
the deferred foreign income corporation
with respect to the section 958(a) U.S.
shareholder.
(2) Reduction in basis by an amount
equal to the gain reduction amount. If a
section 958(a) U.S. shareholder does not
recognize gain under section 961(b)(2) by
reason of paragraph (g)(1) of this section
with respect to a distribution from a de-
ferred foreign income corporation (includ-
ing through a chain of ownership de-
scribed under section 958(a)), the section
958(a) U.S. shareholder's basis in the sec-
tion 958(a) stock of the deferred foreign
income corporation, or the section 958(a)
U.S. shareholder's basis in the applicable
property with respect to the deferred for-
eign income corporation, is reduced by the
amount of gain that would otherwise be
recognized by the section 958(a) U.S.
shareholder without regard to paragraph
(g)(1) of this section.
(h) Rules of application for specified
basis adjustments. This paragraph (h) ap-
plies for purposes of making any adjust-
ment to the basis of section 958(a) stock
or applicable property with respect to a
specified foreign corporation described in
paragraph (e), (f)(2), or (g)(2) of this sec-
tion (collectively, specified basis adjust-
ments, and each a specified basis adjust-
ment).
(1) Timing of basis adjustments. Ex-
cept as provided in paragraph (e)(2) of
this section, a specified basis adjustment
to section 958(a) stock or applicable prop-
erty with respect to a specified foreign
corporation is made as of the last day of
the last taxable year of the specified for-
eign corporation that begins before Janu-
ary 1, 2018, on which it is a specified
foreign corporation.
(2) Netting of basis adjustments. If one
or more specified basis adjustments occur
on the same day with respect to the same
section 958(a) stock or applicable prop-
erty, a single basis adjustment is made as
of the close of such day with respect to
such stock or applicable property in an
amount equal to the net amount, if any, of
the increase or reduction, as applicable.
(3) Gain recognition for reduction in
excess of basis. The excess (if any) of a
net reduction in basis with respect to sec-
tion 958(a) stock or applicable property of
a section 958(a) U.S. shareholder by rea-
son of one or more specified basis adjust-
ments over the section 958(a) U.S. share-
holder's basis in such stock or applicable
property without regard to the specified
basis adjustments is treated as gain from
the sale or exchange of property.
(4) Adjustments with respect to each
share-(i) Section 958(a) stock. If a spec-
ified basis adjustment is made with re-
spect to section 958(a) stock, the specified
basis adjustment is made with respect to
each share of the section 958(a) stock in a
manner consistent with the section 958(a)
U.S. shareholder's pro rata share of the
section 965(a) earnings amount or speci-
fied E&P deficit, as applicable, by reason
of such share.
(ii) Applicable property. If a specified
basis adjustment is made with respect to
applicable property, the adjustment is
made with respect to the applicable prop-
erty in a manner consistent with the ap-
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plication of paragraph (h)(4)(i) of this sec-
tion.
(5) Stock or property for which adjust-
ments are made-(i) In general. Except as
provided in paragraph (h)(5)(ii) of this
section, a specified basis adjustment is
made solely with respect to section 958(a)
stock owned by the section 958(a) U.S.
shareholder within the meaning of section
958(a)(1)(A) or applicable property owned
directly by the section 958(a) U.S. share-
holder.
(ii) Special rule for an interest in a
foreign pass-through entity. If the appli-
cable property of the section 958(a) U.S.
shareholder described in paragraph
(h)(5)(i) of this section is an interest in a
foreign pass-through entity, then, for pur-
poses of determining the foreign pass-
through entity's basis in section 958(a)
stock or applicable property, as applica-
ble, with respect to the section 958(a) U.S.
shareholder, a specified basis adjustment
is made with respect to section 958(a)
stock or applicable property of the section
958(a) U.S. shareholder owned through
the foreign pass-through entity in the
same manner as if the section 958(a) stock
or applicable property were owned di-
rectly by the section 958(a) U.S. share-
holder. In the case of tiered foreign pass-
through entities, this paragraph (h)(5)(ii)
applies with respect to each foreign pass-
through entity.
(i) Definitions. This paragraph (i) pro-
vides definitions that apply for purposes
of this section.
(1) Applicable property. The term ap-
plicable property means, with respect to a
section 958(a) U.S. shareholder and a
specified foreign corporation, property
owned by the section 958(a) U.S. share-
holder (including through one or more
foreign pass-through entities) by reason of
which the section 958(a) U.S. shareholder
is considered under section 958(a)(2) as
owning section 958(a) stock of the speci-
fied foreign corporation.
(2) Foreign pass-through entity. The
term foreign pass-through entity means a
foreign partnership or a foreign estate or
trust (as defined in section 7701(a)(31))
(including a controlled domestic partner-
ship treated as a foreign partnership pur-
suant to §1.965-1(e)).
(3) Property. The term property has the
meaning provided in §1.961-1(b)(1).
(j) Examples. The following examples
illustrate the application of this section.
(1) Example 1. Determination of accumulated
post-1986 deferred foreign income with subpart F
income earned before E&P measurement date on
November 2, 2017. (i) Facts. USP, a domestic cor-
poration, owns all of the stock of CFC1, a foreign
corporation, which owns all of the stock of CFC2,
also a foreign corporation. USP, CFC1, and CFC2 all
have taxable years ending December 31, 2017. As of
January 1, 2017, CFC1 has no earnings and profits,
and CFC2 has 100u of earnings and profits described
in section 959(c)(3) that were accumulated in taxable
years beginning after December 31, 1986, while
CFC2 was a specified foreign corporation, and $21x
of post-1986 foreign income taxes. None of CFC2's
earnings and profits are attributable to income
treated as effectively connected with the conduct of
a trade or business within the United States. On
March 1, 2017, CFC1 earns 30u of subpart F income
(as defined in section 952), and CFC2 earns 20u of
subpart F income. No foreign income tax is imposed
on CFC1's or CFC2's subpart F income. For pur-
poses of section 904, the post-1986 undistributed
earnings, subpart F income, and post-1986 foreign
income taxes are in the general category. On July 1,
2017, CFC2 distributes 40u to CFC1. On November
1, 2017, CFC1 distributes 60u to USP. USP does not
have an aggregate foreign E&P deficit. USP includes
in gross income all amounts that it is required to
include under section 951. No foreign income tax is
imposed or withheld on the distribution by CFC2 to
CFC1 or the distribution by CFC1 to USP.
(ii) Analysis. (A) Adjustments to section 959(c)
classification of earnings and profits for inclusion
under section 951(a)(1)(A) without regard to section
965. The distribution from CFC2 to CFC1 does not
give rise to subpart F income to CFC1 due to the
application of section 954(c)(6). Accordingly, USP's
inclusion under section 951(a)(1)(A) without regard
to section 965(a) is 30u with respect to CFC1 and
20u with respect to CFC2 for their taxable years
ending December 31, 2017. As a result of the inclu-
sions under section 951(a)(1)(A), CFC1 and CFC2
increase their earnings and profits described in sec-
tion 959(c)(2) by 30u and 20u, respectively.
(B) Distributions between specified foreign cor-
porations before January 1, 2018. The distribution
of 40u from CFC2 to CFC1 is treated as a distribu-
tion of 20u out of earnings and profits described in
section 959(c)(2) (attributable to inclusions under
section 951(a)(1)(A) without regard to section
965(a)) and 20u out of earnings and profits described
in section 959(c)(3).
(C) Section 965(a) inclusion amount. USP deter-
mines whether CFC1 and CFC2 are deferred foreign
income corporations and, if so, determines its section
965(a) inclusion amounts with respect to CFC1 and
CFC2. CFC1 and CFC2 are specified foreign corpo-
rations, and CFC1 and CFC2 each have accumulated
post-1986 deferred foreign income greater than zero
as of an E&P measurement date. Accordingly, CFC1
and CFC2 are deferred foreign income corporations.
USP's section 965(a) inclusion amount with respect
to each of CFC1 and CFC2, respectively, equals the
section 965(a) earnings amount of CFC1 and CFC2,
respectively.
(1) CFC1 section 965(a) earnings amount. The
section 965(a) earnings amount with respect to
CFC1 is 20u, the amount of its accumulated post-
1986 deferred foreign income as of both November
2, 2017, and December 31, 2017, which is equal to
70u of post-1986 earnings and profits (30u earned
and 40u attributable to the CFC2 distribution) re-
duced by 50u of such post-1986 earnings and profits
described in section 959(c)(2) (30u earned and 20u
attributable to the CFC2 distribution) under section
965(d)(2)(B) and §1.965-1(f)(7)(i)(B). Under sec-
tion 965(d)(3)(B) and §1.965-1(f)(29)(i)(B), the
post-1986 earnings and profits of CFC1 are not
reduced by the 60u distribution to USP.
(2) CFC2 section 965(a) earnings amount. The
section 965(a) earnings amount with respect to
CFC2 is 80u, the amount of its accumulated post-
1986 deferred foreign income as of both November
2, 2017, and December 31, 2017, which is equal to
the amount of CFC2's post-1986 earnings and prof-
its of 80u. CFC2's accumulated post-1986 deferred
foreign income is equal to its post-1986 earnings
and profits because CFC2 does not have earnings
and profits that are attributable to income of the
specified foreign corporation that is effectively con-
nected with the conduct of a trade or business within
the United States and subject to tax under chapter 1,
or that, if distributed, would be excluded from the
gross income of a United States shareholder under
section 959 or from the gross income of another
shareholder if such shareholder were a United States
shareholder, and, therefore, no adjustment is made
under section 965(d)(2) or §1.965-1(f)(7). CFC2's
80u of post-1986 earnings and profits consists of
120u of earnings and profits that it earned, reduced
by the 40u distribution to CFC1 under section
965(d)(3)(B) and §1.965-1(f)(29)(i)(B). The amount
of the reduction to the post-1986 earnings and prof-
its of CFC2 for the 40u distribution is not limited by
§1.965-1(f)(29)(i)(B) because CFC1's post-1986
earnings and profits are increased by 40u as a result
of the distribution. Furthermore, because the 40u
distribution was made on July 1, 2017, which is
before the E&P measurement date on November 2,
2017, §1.965-4(f) is not relevant.
(3) Effect on earnings and profits described in
section 959(c)(2) and (3). CFC1 and CFC2 increase
their earnings and profits described in section
959(c)(2) by USP's section 965(a) inclusion
amounts with respect to CFC1 and CFC2, 20u and
80u, respectively, and reduce their earnings and
profits described in section 959(c)(3) by an equiva-
lent amount.
(D) Distribution to United States shareholder.
The distribution from CFC1 to USP is treated as a
distribution of 60u out of the earnings and profits of
CFC1 described in section 959(c)(2), which include
earnings and profits attributable to the section 965(a)
inclusion amount taken into account by USP.
(E) Section 902 and section 960 consequences.
(1) Distribution by and inclusions with respect to
CFC2. Under section 960, USP is deemed to pay
$3.50x ($21x x (20u/120u)) of CFC2's post-1986
foreign income taxes as a result of its inclusion under
section 951(a)(1)(A) without regard to section
965(a) with respect to CFC2. As a result of the
distribution from CFC2 to CFC1, CFC2's post-1986
foreign income taxes are reduced, and CFC1's post-
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1986 foreign income taxes are increased, by the
foreign income taxes deemed paid by CFC1 under
section 902 of $3.50x (($21x-$3.50x) x (20u/120u-
20u). Under section 960, USP is deemed to pay
$14x (($21x-$3.50x-$3.50x) x 80u/(120u-40u)) of
CFC2's post-1986 foreign income taxes as a result
of its section 965(a) inclusion with respect to CFC2.
The taxes deemed paid by USP as a result of its
section 965(a) inclusion with respect to CFC2 are
subject to the applicable percentage disallowance
under section 965(g).
(2) Inclusions with respect to CFC1. As deter-
mined in paragraph (j)(1)(ii)(E)(1) of this section
(paragraph (E)(1) in the analysis in this Example 1),
as a result of the distribution from CFC2 to CFC1,
CFC1 is deemed under section 902 to pay $3.50x of
CFC2's post-1986 foreign income taxes. Under sec-
tion 960, USP is deemed to pay $2.10x ($3.50x x
(30u/(30u+20u))) of CFC1's post-1986 foreign in-
come taxes as a result of its inclusion under section
951(a)(1)(A) without regard to section 965(a) with
respect to CFC1. Under section 960, USP is deemed
to pay $1.40x (($3.50x-$2.10x) x 20u/(30u+20u-
30u)) of CFC1's post-1986 foreign income taxes as
a result of its section 965(a) inclusion with respect to
CFC1. The taxes deemed paid by USP as a result of
its section 965(a) inclusion with respect to CFC1 are
subject to the applicable percentage disallowance
under section 965(g).
(2) Example 2. Determination of accumulated
post-1986 deferred foreign income with subpart F
income earned after E&P measurement date on No-
vember 2, 2017. (i) Facts. The facts are the same as
in paragraph (j)(1)(i) of this section (the facts in
Example 1), except that on December 1, 2017, CFC1
earns an additional 50u of subpart F income (as
defined in section 952), and neither CFC1 nor CFC2
has any post-1986 foreign income taxes.
(ii) Analysis. (A) Adjustments to section 959(c)
classification of earnings and profits for inclusion
under section 951(a)(1)(A) without regard to section
965. USP determines its inclusion under section
951(a)(1)(A) without regard to section 965(a), which
is 80u with respect to CFC1 and 20u with respect to
CFC2 for their taxable years ending December 31,
2017. As a result of the inclusions under section
951(a)(1)(A), CFC1 and CFC2 increase their earn-
ings and profits described in section 959(c)(2) by
80u and 20u, respectively.
(B) Distributions between specified foreign cor-
porations before January 1, 2018. The analysis is the
same as in paragraph (j)(1)(ii)(B) of this section
(paragraph (B) in the analysis in Example 1).
(C) Section 965(a) inclusion amount. USP deter-
mines whether CFC1 and CFC2 are deferred foreign
income corporations and, if so, determines its section
965(a) inclusion amounts with respect to CFC1 and
CFC2. CFC1 and CFC2 are specified foreign corpo-
rations, and CFC1 and CFC2 each have accumulated
post-1986 deferred foreign income greater than zero
as of an E&P measurement date. Accordingly, CFC1
and CFC2 are deferred foreign income corporations.
USP's section 965(a) inclusion amount with respect
to each of CFC1 and CFC2, respectively, equals the
section 965(a) earnings amount of CFC1 and CFC2,
respectively.
(1) CFC1 section 965(a) earnings amount. The
section 965(a) earnings amount with respect to
CFC1 is 20u, the greater of-
(i) The amount of its accumulated post-1986
deferred foreign income as of November 2, 2017,
20u, which is equal to 70u of post-1986 earnings and
profits (30u earned and 40u attributable to the CFC2
distribution) reduced by 50u of such post-1986 earn-
ings and profits described in section 959(c)(2) with-
out regard to the subpart F income earned after
November 2, 2017 (30u earned and 20u attributable
to the CFC2 distribution) under section 965(d)(2)(B)
and §1.965-1(f)(7)(i)(B) and (ii), and
(ii) The amount of its accumulated post-1986
deferred foreign income as of December 31, 2017,
20u, which is equal to 120u of post-1986 earnings
and profits (80u earned and 40u attributable to the
CFC2 distribution) reduced by 100u of such post-
1986 earnings and profits described in section
959(c)(2) with regard to the subpart F income earned
on or before December 31, 2017 (80u earned and
20u attributable to the CFC2 distribution) under sec-
tion 965(d)(2)(B) and §1.965-1(f)(7)(i)(B) and (ii).
(2) CFC2 section 965(a) earnings amount. The
analysis is the same as in paragraph (j)(1)(ii)(C)(2)
of this section (paragraph (C)(2) in the analysis in
Example 1)).
(3) Effect on earnings and profits described in
section 959(c)(2) and (3). The analysis is the same as
in paragraph (j)(1)(ii)(C)(3) of this section (para-
graph (C)(3) in the analysis in Example 1).
(D) Distribution to United States shareholder.
The analysis is the same as in paragraph (j)(1)(ii)(D)
of this section (paragraph (D) in the analysis in
Example 1).
(3) Example 3. Determination of accumulated
post-1986 deferred foreign income with subpart F
income earned after E&P measurement date on No-
vember 2, 2017, but previously taxed earnings and
profits attributable to the subpart F income distrib-
uted before E&P measurement date on November 2,
2017. (i) Facts. The facts are the same as in para-
graph (j)(1)(i) of this section (the facts in Example
1), except that on December 1, 2017, CFC2 earns an
additional 50u of subpart F income (as defined in
section 952), and neither CFC1 nor CFC2 has any
post-1986 foreign income taxes.
(ii) Analysis. (A) Adjustments to section 959(c)
classification of earnings and profits for inclusion
under section 951(a)(1)(A) without regard to section
965. USP determines its inclusion under section
951(a)(1)(A) without regard to section 965(a), which
is 30u with respect to CFC1 and 70u with respect to
CFC2 for their taxable years ending December 31,
2017. As a result of the inclusions under section
951(a)(1)(A), CFC1 and CFC2 increase their earn-
ings and profits described in section 959(c)(2) by
30u and 70u, respectively.
(B) Distributions between specified foreign cor-
porations before January 1, 2018. The distribution
of 40u from CFC2 to CFC1 is treated as a distribu-
tion of 40u out of earnings and profits described in
section 959(c)(2) (attributable to inclusions under
section 951(a)(1)(A) without regard to section
965(a)).
(C) Section 965(a) inclusion amount. USP deter-
mines whether CFC1 and CFC2 are deferred foreign
income corporations, and, if so, determines its sec-
tion 965(a) inclusion amounts with respect to CFC1
and CFC2. Because USP wholly owns CFC1 and
CFC2 under section 958(a) and USP does not have
an aggregate foreign E&P deficit, USP's section
965(a) inclusion amount with respect to each of
CFC1 and CFC2, respectively, equals the section
965(a) earnings amount, if any, of CFC1 and CFC2,
respectively.
(1) CFC1 section 965(a) earnings amount. CFC1
is not a deferred foreign income corporation and
does not have a section 965(a) earnings amount
because the amount of its accumulated post-1986
deferred foreign income as of both November 2,
2017, and December 31, 2017, is 0u, which is equal
to 70u of post-1986 earnings and profits (30u earned
and 40u attributable to the CFC2 distribution) re-
duced by 70u of such post-1986 earnings and profits
described in section 959(c)(2) (30u earned and 40u
attributable to the CFC2 distribution) under section
965(d)(2)(B) and §1.965-1(f)(7)(i)(B).
(2) CFC2 section 965(a) earnings amount. The
section 965(a) earnings amount with respect to
CFC2 is 100u, the greater of the amounts in para-
graph (j)(3)(ii)(C)(2)(i) and (ii) of this section (para-
graph (C)(2)(i) and (ii) in the analysis in this Exam-
ple 3)-
(i) The amount of its accumulated post-1986
deferred foreign income as of November 2, 2017,
80u. CFC2's 80u of accumulated post-1986 deferred
foreign income as of November 2, 2017, is equal to
its 80u of post-1986 earnings and profits because no
adjustment is made under section 965(d)(2) or
§1.965-1(f)(7), as CFC2 does not have earnings and
profits that are attributable to income of the specified
foreign corporation that is effectively connected with
the conduct of a trade or business within the United
States and subject to tax under chapter 1, or that, if
distributed, would be excluded from the gross in-
come of a United States shareholder under section
959 or from the gross income of another shareholder
if such shareholder were a United States shareholder,
without regard to the subpart F income earned after
November 2, 2017. CFC2's 80u of post-1986 earn-
ings and profits consists of 120u of earnings and profits
that it earned, reduced by the 40u distribution to CFC1
under section 965(d)(3)(B) and §1.965-1(f)(29)
(i)(B). The amount of the reduction to the post-1986
earnings and profits of CFC2 for the 40u distribution is
not limited by §1.965-1(f)(29)(i)(B) because CFC1's
post-1986 earnings and profits are increased by 40u as
a result of the distribution. Furthermore, because the
40u distribution was made on July 1, 2017, which is
before any E&P measurement date, §1.965-4(f) is not
relevant.
(ii) The amount of its accumulated post-1986
deferred foreign income as of December 31, 2017,
100u, which is equal to 130u of post-1986 earnings
and profits reduced by 30u of such post-1986 earn-
ings and profits described in section 959(c)(2) with
regard to the subpart F income earned before De-
cember 31, 2017, under section 965(d)(2)(B) and
§1.965-1(f)(7)(i)(B) and (ii). CFC2's 130u of post-
1986 earnings and profits consists of 170u of earn-
ings and profits that it earned, reduced by the 40u
distribution to CFC1 under section 965(d)(3)(B) and
§1.965-1(f)(29)(i)(B).
(3) Effect on earnings and profits described in
section 959(c)(2) and (3). CFC2 increases its earn-
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ings and profits described in section 959(c)(2) by
USP's section 965(a) inclusion amount with respect
to CFC2, 100u, and reduces its earnings and profits
described in section 959(c)(3) by an equivalent
amount.
(D) Distribution to United States shareholder.
The analysis is the same as in paragraph (j)(1)(ii)(D)
of this section (paragraph (D) in the analysis in
Example 1).
(4) Example 4. Determination of accumulated
post-1986 deferred foreign income with distribution
made after E&P measurement date on November 2,
2017. (i) Facts. USP, a domestic corporation, owns
all of the stock of CFC1, a foreign corporation,
which owns all of the stock of CFC2, also a foreign
corporation. USP, CFC1, and CFC2 all have taxable
years ending December 31, 2017. As of January 1,
2017, CFC1 has 10u of earnings and profits de-
scribed in section 959(c)(3) that were accumulated in
taxable years beginning after December 31, 1986,
while CFC1 was a specified foreign corporation, and
$2x of post-1986 foreign income taxes; and CFC2
has 100u of earnings and profits described in section
959(c)(3) that were accumulated in taxable years
beginning after December 31, 1986, while CFC2
was a specified foreign corporation and $10x of
post-1986 foreign income taxes. For purposes of
section 904, the post-1986 undistributed earnings
and post-1986 foreign income taxes are in the gen-
eral category. None of CFC1's or CFC2's earnings
and profits are attributable to income treated as ef-
fectively connected with the conduct of a trade or
business within the United States. On December 1,
2017, CFC2 distributes 100u to CFC1, and CFC1
distributes 10u to USP. USP does not have an ag-
gregate foreign E&P deficit. USP includes in gross
income all amounts that it is required to include
under section 951. No foreign income tax is imposed
or withheld on the distribution by CFC2 to CFC1 or
the distribution by CFC1 to USP. USP does not
apply §1.965-4(f)(3) to determine the post-1986
earnings and profits of CFC1 and CFC2.
(ii) Analysis. (A) Adjustments to section 959(c)
classification of earnings and profits for inclusion
under section 951(a)(1)(A) without regard to section
965. The distribution from CFC2 to CFC1 does not
give rise to subpart F income to CFC1 due to
the application of section 954(c)(6). Accordingly,
USP does not have an inclusion under section
951(a)(1)(A) without regard to section 965(a) with
respect to CFC1 or CFC2 for their taxable years
ending December 31, 2017. As a result, neither
CFC1 nor CFC2 has earnings and profits described
in section 959(c)(2).
(B) Distributions between specified foreign cor-
porations before January 1, 2018. The distribution
of 100u from CFC2 to CFC1 is initially treated as a
distribution out of earnings and profits described in
section 959(c)(3).
(C) Section 965(a) inclusion amount. USP deter-
mines whether CFC1 and CFC2 are deferred foreign
income corporations, and, if so, determines its sec-
tion 965(a) inclusion amounts with respect to CFC1
and CFC2. CFC1 and CFC2 are specified foreign
corporations, and CFC1 and CFC2 each have accu-
mulated post-1986 deferred foreign income greater
than zero as of an E&P measurement date. Accord-
ingly, CFC1 and CFC2 are deferred foreign income
corporations. USP's section 965(a) inclusion amount
with respect to each of CFC1 and CFC2, respec-
tively, equals the section 965(a) earnings amount of
CFC1 and CFC2, respectively.
(1) CFC1 section 965(a) earnings amount. The
section 965(a) earnings amount with respect to
CFC1 is 10u, the amount of its accumulated post-
1986 deferred foreign income as of both November
2, 2017, and December 31, 2017, which is equal to
the amount of CFC1's post-1986 earnings and prof-
its of 10u. CFC1's accumulated post-1986 deferred
foreign income is equal to its post-1986 earnings
and profits because CFC1 does not have earnings
and profits that are attributable to income of the
specified foreign corporation that is effectively con-
nected with the conduct of a trade or business within
the United States and subject to tax under chapter 1,
or that, if distributed, would be excluded from the
gross income of a United States shareholder under
section 959 or from the gross income of another
shareholder if such shareholder were a United States
shareholder, and therefore no adjustment is made
under section 965(d)(2) or §1.965-1(f)(7). But for
§1.965-4(f), CFC1's post-1986 earnings and profits
as of December 31, 2017, would be 110u, but be-
cause the distribution from CFC2 is a specified pay-
ment, it is disregarded in determining CFC1's post-
1986 earnings and profits as of December 31, 2017,
under §1.965-4(f). Under section 965(d)(3)(B) and
§1.965-1(f)(29)(i)(B), the post-1986 earnings and
profits of CFC1 are not reduced by the 10u distribu-
tion to USP.
(2) CFC2 section 965(a) earnings amount. The
section 965(a) earnings amount with respect to
CFC2 is 100u, the amount of its accumulated post-
1986 deferred foreign income as of both November
2, 2017, and December 31, 2017, which is equal to
the amount of CFC2's post-1986 earnings and prof-
its of 100u. CFC2's accumulated post-1986 deferred
foreign income is equal to its post-1986 earnings
and profits because CFC2 does not have earnings
and profits that are attributable to income of the
specified foreign corporation that is effectively con-
nected with the conduct of a trade or business within
the United States and subject to tax under chapter 1,
or that, if distributed, would be excluded from the
gross income of a United States shareholder under
section 959 or from the gross income of another
shareholder if such shareholder were a United States
shareholder, and therefore no adjustment is made
under section 965(d)(2) or §1.965-1(f)(7). But for
§1.965-4(f), CFC2's post-1986 earnings and profits
as of December 31, 2017, would be 0u, but because
the distribution to CFC1 is a specified payment, it is
disregarded in determining CFC2's post-1986 earn-
ings and profits as of December 31, 2017, under
§1.965-4(f).
(3) Effect on earnings and profits described in
section 959(c)(2) and (3). CFC1 and CFC2 increase
their earnings and profits described in section
959(c)(2) by USP's section 965(a) inclusion
amounts with respect to CFC1 and CFC2, 10u and
100u, respectively, and reduce their earnings and
profits described in section 959(c)(3) by an equiva-
lent amount.
(D) Distributions-(1) Distribution that is a
specified payment. The distribution from CFC2 to
CFC1 is recharacterized as a distribution of 100u out
of the earnings and profits of CFC2 described in
section 959(c)(2), which include earnings and profits
attributable to the section 965(a) inclusion amount
taken into account by USP.
(2) Distribution to United States shareholder.
The distribution from CFC1 to USP is treated as a
distribution of 10u out of the earnings and profits of
CFC1 described in section 959(c)(2), which include
earnings and profits attributable to the section 965(a)
inclusion amount taken into account by USP.
(E) Section 902 and section 960 consequences.
Under section 960, USP is deemed to pay $10x
($10x x (100u/100u)) of CFC2's post-1986 foreign
income taxes as a result of its section 965(a) inclu-
sion with respect to CFC2 and $2x ($2x x (10u/10u)
of CFC1's post-1986 foreign income taxes as a
result of its section 965(a) inclusion with respect to
CFC1. Such taxes are subject to the applicable per-
centage disallowance under section 965(g).
(5) Example 5. Determination of accumulated
post-1986 deferred foreign income with section
951(a)(1)(B) inclusion after E&P measurement date
on November 2, 2017. (i) Facts. USP, a domestic
corporation, owns all of the stock of CFC, a foreign
corporation. USP has a taxable year ending Decem-
ber 31, 2017, and CFC has a taxable year ending
November 30, 2017. As of December 1, 2016, CFC
has 110u of earnings and profits described in section
959(c)(3) that were accumulated in taxable years
beginning after December 31, 1986, while CFC was
a specified foreign corporation. CFC holds 150u of
United States property throughout its taxable year
ending November 30, 2017, but disposes of it on
December 1, 2017, recognizing no gain or loss on
the property. Between December 1, 2017, and De-
cember 31, 2017, CFC earns an additional 10u of
income that does not constitute subpart F income or
income treated as effectively connected with the
conduct of a trade or business within the United
States that gives rise to 10u of earnings and profits.
USP includes in income all amounts that it is re-
quired to include under section 951.
(ii) Analysis. (A) Section 965(a) inclusion
amount. USP determines whether CFC is a deferred
foreign income corporation, and, if so, determines its
section 965(a) inclusion amount with respect to
CFC. CFC is a specified foreign corporation, and
CFC has accumulated post-1986 deferred foreign
income greater than zero as of an E&P measurement
date. Accordingly, CFC is a deferred foreign income
corporation. USP's section 965(a) inclusion amount
with respect to CFC equals the section 965(a) earn-
ings amount of CFC.
(1) CFC section 965(a) earnings amount. The
section 965(a) earnings amount with respect to CFC
is 110u, the greater of the amount of its accumulated
post-1986 deferred foreign income as of November
2, 2017, which is 110u, and the amount of its accu-
mulated post-1986 deferred foreign income as of
December 31, 2017, which is 10u. CFC's accumu-
lated post-1986 deferred foreign income as of No-
vember 2, 2017, is equal to its 110u of post-1986
earnings and profits, which are not reduced by the
110u of earnings and profits described in section
959(c)(1) as a result of USP's section 951(a)(1)(B)
inclusion with respect to CFC as of December 31,
2017, because such amounts would not be excluded
from the gross income of a United States shareholder
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under section 959 under section 965(d)(2) or
§1.965-1(f)(7) if distributed on November 2, 2017.
CFC's accumulated post-1986 deferred foreign in-
come as of December 31, 2017, is equal to its 120u
of post-1986 earnings and profits reduced by the
110u of earnings and profits described in section
959(c)(1) as a result of USP's section 951(a)(1)(B)
inclusion with respect to CFC as of December 31,
2017, which would be excluded from the gross in-
come of a United States shareholder under section
959 under section 965(d)(2) or §1.965-1(f)(7) if
distributed on December 31, 2017.
(2) Effect on earnings and profits described in
section 959(c)(2) and (3). In USP's taxable year
ending December 31, 2018, CFC increases its earn-
ings and profits described in section 959(c)(2) by
USP's section 965(a) inclusion amount with respect
to CFC, 110u, and reduces its earnings and profits
described in section 959(c)(3) by an equivalent
amount.
(B) Section 956 inclusion. In USP's taxable year
ending December 31, 2017, USP increases its earn-
ings and profits described in section 959(c)(1) by
USP's amount included under sections 951(a)(1)(B)
and 956 with respect to CFC, 110u, and reduces its
earnings and profits described in section 959(c)(3)
by an equivalent amount.
(6) Example 6. Section 1248 inclusion. (i) Facts.
USP1, a domestic corporation, owns all of the stock
of CFC, a foreign corporation, until it sells all of
such stock to USP2, a domestic corporation, on
December 1, 2017, in a sale on which USP1 recog-
nizes $100x of gain. Throughout 2017, lu=$1x.
USP1, USP2, and CFC all have taxable years ending
December 31, 2017. As of January 1, 2017, CFC has
100u of earnings and profits described in section
959(c)(3) that were accumulated in taxable years
beginning after December 31, 1986, while CFC was
wholly owned by USP1. On March 1, 2017, CFC
distributes 20u to USP1. None of CFC's earnings
and profits are attributable to income treated as ef-
fectively connected with the conduct of a trade or
business within the United States. USP2 does not
have an aggregate foreign E&P deficit. USP1 and
USP2 include in income all amounts that they are
required to include under sections 951 and 1248.
(ii) Analysis. (A) Adjustments to section 959(c)
classification of earnings and profits for section
1248 inclusion. USP1's inclusion under section 1248
with respect to CFC is $80x ($100x-$20x). As a
result of the inclusion under section 1248, under
section 959(e), CFC increases its earnings and profits
described in section 959(c)(2) by 80u.
(B) Section 965(a) inclusion amount. USP2 de-
termines whether CFC is a deferred foreign income
corporation and, if so, determines its section 965(a)
inclusion amount with respect to CFC. CFC is a
specified foreign corporation, and CFC has accumu-
lated post-1986 deferred foreign income greater than
zero as of an E&P measurement date. Accordingly,
CFC is a deferred foreign income corporation.
USP2's section 965(a) inclusion amount with respect
to CFC equals the section 965(a) earnings amount of
CFC. The section 965(a) earnings amount with re-
spect to CFC is 20u, the amount of its accumulated
post-1986 deferred foreign income as of both No-
vember 2, 2017, and December 31, 2017, which is
equal to 100u of post-1986 earnings and profits
reduced by 80u of such post-1986 earnings and
profits described in section 959(c)(2) under section
965(d)(2)(B) and §1.965-1(f)(7)(i)(B). CFC in-
creases its earnings and profits described in section
959(c)(2) by USP2's section 965(a) inclusion
amount with respect to CFC, 20u, and reduces its
earnings and profits that would be described in sec-
tion 959(c)(3) but for the application of section
965(a) by an equivalent amount.
(C) Distributions to United States shareholders.
The distributions from CFC to USP1 (including the
deemed dividend under section 1248) are treated as
distributions out of the earnings and profits of CFC
described in section 959(c)(3).
(7) Example 7. Distribution attributable to sec-
tion 965(a) previously taxed earnings and profits. (i)
Facts. USP, a domestic corporation, owns all of the
stock of CFC1, a specified foreign corporation that
has no post-1986 earnings and profits (or deficit in
post-1986 earnings and profits), and CFC1 owns all
the stock of CFC2, a deferred foreign income cor-
poration. USP is a calendar year taxpayer. CFC1's
last taxable year beginning before January 1, 2018,
ends on November 30, 2018; CFC2 has an inclusion
year that ends on November 30, 2018. The func-
tional currency of CFC1 and CFC2 is the U.S. dollar.
USP's adjusted basis in the stock of CFC1 is zero.
On January 1, 2018, CFC2 distributes $100x to
CFC1, and CFC1 distributes $100x to USP. USP has
a section 965(a) inclusion amount of $100x with
respect to CFC2 that is taken into account for USP's
taxable year ending December 31, 2018. CFC2 has
no earnings and profits described in section
959(c)(1) or (2) other than section 965(a) previously
taxed earnings and profits.
(ii) Analysis. Under paragraph (c) of this section,
CFC2 has $100x of section 965(a) previously taxed
earnings and profits with respect to USP. USP re-
ceives a distribution from CFC2 through a chain of
ownership described in section 958(a) during the
inclusion year of CFC2 that is attributable to the
$100x of section 965(a) previously taxed earnings
and profits of CFC2. Under paragraph (g)(1) of this
section, the amount of gain that USP otherwise
would recognize with respect to the stock of CFC1
under section 961(b)(2) is reduced (but not below
zero) by $100x, the amount of CFC2's section
965(a) previously taxed earnings and profits with
respect to USP. As of the close of November 30,
2018, USP's basis in CFC1 is increased under para-
graph (e) of this section by USP's section 965(a)
inclusion amount with respect to CFC2 ($100x), and
is reduced under paragraph (g)(2) of this section by
the amount of gain that would have been recognized
by USP under section 961(b)(2) but for the applica-
tion of paragraph (g)(1) of this section ($100x).
(8) Example 8. Distribution attributable to sec-
tion 965(b) previously taxed earnings and profits;
parent-subsidiary. (i) Facts. The facts are the same
as in paragraph (j)(7)(i) of this section (the facts in
Example 7), except that CFC1 has a specified E&P
deficit of $100x. Because of the specified E&P def-
icit of CFC1, USP's section 965(a) inclusion amount
with respect to CFC2 is reduced to zero pursuant to
section 965(b)(1) and §1.965-1(b)(2). USP makes
the election described in paragraph (f)(2) of this
section.
(ii) Analysis. (A) Application of the gain reduc-
tion rule. Under paragraph (d)(1) of this section,
CFC2 has $100x of section 965(b) previously taxed
earnings and profits with respect to USP, and, under
paragraph (d)(2) of this section, CFC1's earnings
and profits described in section 959(c)(3) are in-
creased by $100x to $0. USP receives a distribution
from CFC2 through a chain of ownership described
in section 958(a) during the inclusion year of CFC2
that is attributable to the $100x of section 965(b)
previously taxed earnings and profits of CFC2. Un-
der paragraph (g)(1) of this section, the amount of
gain that USP otherwise would recognize with re-
spect to the stock of CFC1 under section 961(b)(2) is
reduced (but not below zero) by $100x, the amount
of CFC2's section 965(b) previously taxed earnings
and profits with respect to USP under paragraph
(d)(1) of this section.
(B) Adjustments to the basis of CFC1. Because
USP makes the election described in paragraph (f)(2)
of this section, as of the close of November 30, 2018,
USP's basis in CFC1 is increased under paragraph
(f)(2)(ii)(A) of this section by an amount equal to
CFC2's section 965(b) previously taxed earnings
and profits with respect to USP under paragraph
(d)(1) of this section ($100x), reduced under para-
graph (f)(2)(ii)(B) of this section by an amount equal
to the portion of the specified E&P deficit of CFC1
taken into account in determining USP's section
965(a) inclusion amount with respect to CFC2
($100x), and reduced under paragraph (g)(2) of this
section by the amount of gain that would have been
recognized by USP with respect to the stock of
CFC1 under section 961(b)(2) but for the application
of paragraph (g)(1) of this section ($100x). Under
paragraph (h)(2) and (3) of this section, the excess of
the net reduction from the adjustments under para-
graphs (f) and (g) of this section over USP's basis in
the stock of CFC1 (in this case, $100x) is treated as
gain recognized by USP from the sale or exchange of
property.
(9) Example 9. Distribution attributable to sec-
tion 965(b) previously taxed earnings and profits;
brother-sister. (i) Facts. The facts are the same as in
paragraph (j)(8)(i) of this section (the facts in Exam-
ple 8), except that USP owns all the stock of CFC2,
USP's adjusted basis in the stock of CFC2 is zero,
CFC1 made no distributions, and on January 1, 2018,
CFC2 distributes $100x to USP.
(ii) Analysis. (A) Application of the gain reduc-
tion rule. Under paragraph (d)(1) of this section,
CFC2 has $100x of section 965(b) previously taxed
earnings and profits with respect to USP, and, under
paragraph (d)(2) of this section, CFC1's earnings
and profits described in section 959(c)(3) (deficit of
$100x) are increased by $100x to $0. USP receives
a distribution from CFC2 during the inclusion year
of CFC2 that is attributable to the $100x of section
965(b) previously taxed earnings and profits of
CFC2. Under paragraph (g)(1) of this section, the
amount of gain that USP otherwise would recognize
with respect to the stock of CFC2 under section
961(b)(2) is reduced (but not below zero) by $100x,
the amount of CFC2's section 965(b) previously
taxed earnings and profits with respect to USP under
paragraph (d)(1) of this section.
(B) Adjustments to the basis of CFC1 and CFC2.
Because USP makes the election described in para-
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graph (f)(2) of this section, as of the close of No-
vember 30, 2018, USP's basis in the stock of CFC2
is increased under paragraph (f)(2)(ii)(A) of this
section by the amount of CFC2's section 965(b)
previously taxed earnings and profits with respect to
USP under paragraph (d)(1) of this section ($100x)
and reduced under paragraph (g)(2) of this section by
the amount of gain that would have been recognized
by USP with respect to the stock of CFC2 under
section 961(b)(2) but for the application of para-
graph (g)(1) of this section ($100x). As of the close
of November 30, 2018, USP's basis in CFC1 is
reduced under paragraph (f)(2)(ii)(B) of this section
by an amount equal to the portion of USP's pro rata
share of the specified E&P deficit of CFC1 taken into
account in determining USP's section 965(a) inclu-
sion amount with respect to CFC2 ($100x). Under
paragraph (h)(3) of this section, the excess of the
reduction under paragraph (f) of this section over
USP's basis in the stock of CFC1 (in this case,
$100x) is treated as gain recognized by USP from
the sale or exchange of property.
§1.965-3 Section 965(c) deductions.
(a) Scope. This section provides rules
regarding section 965(c) deductions and
section 965(c) deduction amounts. Para-
graph (b) of this section provides rules for
disregarding certain assets for purposes of
determining the aggregate foreign cash
position of a section 958(a) U.S. share-
holder. Paragraph (c) of this section pro-
vides rules for determining the aggregate
foreign cash position for a section 958(a)
U.S. shareholder inclusion year. Para-
graph (d) of this section provides a rule
regarding certain expatriated entities.
Paragraph (e) of this section provides a
rule for the treatment of section 965(c)
deductions in connection with an election
under section 962. Paragraph (f) of this
section provides rules regarding the treat-
ment of a section 965(c) deduction under
certain provisions of the Internal Revenue
Code. Paragraph (g) of this section pro-
vides a rule for domestic pass-through en-
tities.
(b) Rules for disregarding certain as-
sets for determining aggregate foreign
cash position-(1) Disregard of certain
obligations between related specified for-
eign corporations. In determining the ag-
gregate foreign cash position of a section
958(a) U.S. shareholder, any account re-
ceivable, account payable, short-term ob-
ligation, or derivative financial instrument
between a specified foreign corporation
with respect to which the section 958(a)
U.S. shareholder owns section 958(a)
stock and a related specified foreign cor-
poration on corresponding cash measure-
ment dates is disregarded to the extent of
the smallest of the product of the amount
of the item on such corresponding cash
measurement dates of each specified for-
eign corporation and the section 958(a)
U.S. shareholder's ownership percentage
of section 958(a) stock of the specified
foreign corporation owned by the section
958(a) U.S. shareholder on such dates. For
purposes of this paragraph (b)(1)(i), a
specified foreign corporation is treated as
a related specified foreign corporation
with respect to another specified foreign
corporation if, as of the cash measurement
date referred to in the preceding sentence
of each specified foreign corporation, the
specified foreign corporations are related
persons within the meaning of section
954(d)(3), substituting the term "specified
foreign corporation" for "controlled for-
eign corporation" in each place that it
appears.
(2) Disregard of other assets upon
demonstration of double-counting. For
purposes of determining the aggregate
foreign cash position of a section 958(a)
U.S. shareholder, the section 958(a) U.S.
shareholder's pro rata share of the cash
position of a specified foreign corporation
on a cash measurement date is reduced by
amounts of net accounts receivable, ac-
tively traded property, and short-term ob-
ligations to the extent such amounts are
attributable to amounts taken into account
in determining the section 958(a) U.S.
shareholder's pro rata share of the cash
position of another specified foreign cor-
poration on the corresponding cash mea-
surement date of such other specified cor-
poration and to the extent not disregarded
pursuant to paragraph (b)(1) of this section.
However, the preceding sentence applies
only if the section 958(a) U.S. shareholder
attaches a statement containing the informa-
tion outlined in paragraphs (b)(2)(i) through
(v) of this section to its timely filed return
(taking into account extensions, if any) for the
section 958(a) U.S. shareholder inclusion year,
or, if the section 958(a) U.S. shareholder has
multiple section 958(a) U.S. shareholder inclu-
sion years, the later of such years. Relief is not
available under §301.9100-2 or 301.9100-3
to allow late filing of the statement. The state-
ment must contain the following information
with respect to each specified foreign corpo-
ration for which the cash position is reduced
under this paragraph (b)(2)-
(i) A description of the asset that would
be taken into account with respect to both
specified foreign corporations,
(ii) A statement of the amount by
which its pro rata share of the cash posi-
tion of one specified foreign corporation is
reduced,
(iii) A detailed explanation of why there
would otherwise be double-counting, in-
cluding the computation of the amount
taken into account with respect to the other
specified foreign corporation, and
(iv) An explanation of why paragraph
(b)(1) of this section does not apply to
disregard such amount.
(3) Disregard of portion of cash posi-
tion of noncorporate entities treated as
specified foreign corporations. If an entity
is treated as a specified foreign corpora-
tion of a section 958(a) U.S. shareholder
pursuant to section 965(c)(3)(E), for pur-
poses of determining the aggregate for-
eign cash position of the section 958(a)
U.S. shareholder, the section 958(a) U.S.
shareholder's pro rata share of the cash
position of the entity (determined taking
into account paragraphs (b)(1) and (b)(2)
of this section) is reduced by the amount
of the pro rata share attributable to
deemed stock of the entity not owned
(within the meaning of section 958(a),
applied by treating domestic pass-through
entities as foreign) by a specified foreign
corporation of the section 958(a) U.S.
shareholder (determined without taking
into account section 965(c)(3)(E)).
(4) Examples. The following examples
illustrate the application of this paragraph
(b).
(i) Example 1. (A) Facts. USP, a domestic cor-
poration, owns all of the stock of CFC1, a foreign
corporation. CFC1 owns 95% of the only class of
stock of CFC2, also a foreign corporation, and 40%
of the only class of stock of CFC3, also a foreign
corporation. The remaining 5% of the only class of
stock of CFC2 is owned by a person unrelated to
USP, CFC1, and CFC2; and the remaining 60% of
the only class of stock of CFC3 is owned by a person
unrelated to USP and CFC1. USP, CFC1, and CFC3
have calendar year taxable years. CFC2 has a taxable
year ending on November 30. On November 15,
2015, CFC1 makes a loan of $100x to CFC2, which
is required to be and is, in fact, repaid on January 1,
2016. On November 15, 2016, CFC2 sells inventory
to CFC1 in exchange for an account receivable of
$200x, which is required to be and is, in fact, repaid
on December 15, 2016. On August 1, 2017, CFC1
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makes a loan of $300x to CFC3, which is required to
be and is, in fact, repaid on January 31, 2018.
(B) Analysis-(1) Loan from CFC1 to CFC2.
For purposes of determining the aggregate foreign
cash position of USP, a section 958(a) U.S. share-
holder of CFC1, under paragraph (b)(1) of this sec-
tion, because CFC1 and CFC2 are related within the
meaning of paragraph (b)(1) of this section, the
short-term obligation of CFC2 held by CFC1 out-
standing on the first cash measurement date of each
specified foreign corporation, November 30, 2015,
and December 31, 2015, respectively, is disregarded
to the extent of 95%, the smallest ownership per-
centage of section 958(a) stock of CFC1 and CFC2
owned by USP on such first cash measurement dates.
Accordingly, USP only takes into account $5 ($100
\- 95% of $100) of the short-term obligation in de-
termining CFC1's cash position for purposes of de-
termining its aggregate foreign cash position.
(2) Account receivable of CFC1 held by CFC2.
Because the account receivable of CFC1 held by
CFC2 on its second cash measurement date, Novem-
ber 30, 2016, is not outstanding on CFC1's second
cash measurement date, December 31, 2016, para-
graph (b)(1) of this section does not apply to disre-
gard any portion of such account receivable.
(3) Loan from CFC1 to CFC3. Because CFC3 is
not related to CFC1 within the meaning of paragraph
(b)(1) of this section, paragraph (b)(1) of this section
does not apply to disregard any portion of such
short-term obligation.
(ii) Example 2. (A) Facts. The facts are the same
as in paragraph (b)(4)(i)(A) of this section (the facts
in Example 1), except that on December 1, 2015,
CFC1 sells 5% of the stock of CFC2 to an unrelated
person.
(B) Analysis. The analysis is the same as in
paragraph (b)(4)(i)(B) of this section (the analysis in
Example 1), except that the short-term obligation of
CFC2 held by CFC1 outstanding on both of their
first cash measurement dates, November 30, 2015,
and December 31, 2015, respectively, is disregarded
under paragraph (b)(1) of this section to the extent of
90%, the smallest ownership percentage of section
958(a) stock of CFC1 and CFC2 by USP on such
first cash measurement dates. Accordingly, USP
takes into account $10 ($100- 90% of $100) of the
short-term obligation in determining CFC1's cash
position for purposes of determining its aggregate
foreign cash position.
(iii) Example 3. (A) Facts. USP, a domestic
corporation, owns all of the stock of CFC1, a foreign
corporation, which owns 45% of the only class of
stock of CFC2, also a foreign corporation. The re-
mainder of the CFC2 stock is actively traded on an
established financial market but is not owned by any
person related to USP or CFC1. USP, CFC1, and
CFC2 have calendar year taxable years. The value of
the CFC2 stock owned by CFC1 is $500x on each of
the cash measurement dates. Also on each of the
cash measurement dates, CFC2 has $300x of assets
described in section 965(c)(3)(B) and §1.965-
1(f)(16) that are taken into account in determining its
cash position.
(B) Analysis. For purposes of determining USP's
aggregate foreign cash position, USP's pro rata share
of the cash position of CFC1 on each cash measure-
ment date may be reduced by the amount of the stock
of CFC2 to the extent attributable to amounts taken
into account in determining USP's pro rata share of
the cash position of CFC2 on such cash measure-
ment date (that is, to the extent of the $135x taken
into account with respect to CFC2), provided USP
attaches a statement to its timely filed return (taking
into account extensions, if any) containing the fol-
lowing: a description of the CFC2 stock and the
assets of CFC2 taken into account in determining its
cash position; a statement that USP's pro rata share
of the cash position of CFC1 is being reduced by
$135x; the computation of the $135x taken into
account with respect to CFC2; and an explanation of
why paragraph (b)(1) of this section does not apply
to disregard such amount.
(iv) Example 4. (A) Facts. USP, a domestic
corporation, owns all of the stock of CFC1 and
CFC2, each a foreign corporation. USP, CFC1, and
CFC2 have calendar year taxable years. CFC1 buys
goods on credit from a third party for $100x and thus
has an account payable of $100x. CFC1 modifies the
goods and sells to CFC2 for $105x in exchange for
an account receivable of $105x. CFC2 modifies the
goods and sells to another third party for $110x in
exchange for an account receivable of $110x. All of
the accounts payable and accounts receivable are
outstanding on the final cash measurement date.
(B) Analysis. For purposes of determining USP's
aggregate foreign cash position, on the final cash
measurement date, CFC1 has net accounts receivable
of $0 because, pursuant to paragraph (b)(1) of this
section, CFC1's account receivable from CFC2 is
disregarded, and CFC2 has net accounts receivable
of $110x because, pursuant to paragraph (b)(1) of
this section, CFC2's account payable to CFC1 is
disregarded. USP cannot rely on the rule in para-
graph (b)(2) of this section because no amounts
attributable to CFC2's net accounts receivable are
taken into account with respect to another specified
foreign corporation.
(v) Example 5. (A) Facts. USP, a domestic cor-
poration, owns all of the stock of CFC1 and CFC2,
each a foreign corporation. USP and CFC1 own 60%
and 40%, respectively, of the interests in the capital
and profits of PS1, a partnership. PS1 and CFC2 own
70% and 30%, respectively, of the interests in the
capital and profits of PS2, a partnership. On each
cash measurement date, PSI's cash position of
$100x consists entirely of cash, and PS2's cash po-
sition of $200x includes a $50x short-term obligation
of CFC2.
(B) Analysis. (1) Treatment of PS1. Because an
interest in PS1 is held by CFC1, a specified foreign
corporation of USP, and PS1 would be a specified
foreign corporation of USP if it were a foreign
corporation, PS1 is treated as a specified foreign
corporation of USP for purposes of determining
USP's aggregate foreign cash position. Without re-
gard to paragraph (b)(3) of this section, USP must
take into account $100x, its pro rata share of PS1's
cash position, for purposes of determining its aggre-
gate foreign cash position. However, 60% of that
amount is attributable to deemed stock of PS1 that is
not owned (within the meaning of section 958(a)) by
a specified foreign corporation of USP. Accordingly,
pursuant to paragraph (b)(3) of this section, the
amount of PS1's cash position that USP must take
into account for purposes of determining its aggre-
gate foreign cash position is reduced by $60x (60%
of $100x) to $40x ($100x - $60x).
(2) Treatment of PS2. Because an interest in PS2
is held by CFC2, a specified foreign corporation of
USP, and PS2 would be a specified foreign corpo-
ration of USP if it were a foreign corporation, PS2 is
treated as a specified foreign corporation of USP for
purposes of determining USP's aggregate foreign
cash position. USP, CFC1, CFC2, PS1, and PS2 all
have calendar year taxable years. For purposes of
determining the aggregate foreign cash position of
USP, a section 958(a) U.S. shareholder of PS2, un-
der paragraph (b)(1) of this section, the short-term
obligation of CFC2 held by PS2 outstanding on each
cash measurement date of each specified foreign
corporation is disregarded on such cash measure-
ment dates. Accordingly, without regard to para-
graph (b)(3) of this section, USP must take into
account $150x ($200x - $50x) of PS2's cash posi-
tion for purposes of determining its aggregate for-
eign cash position. However, 42% (60% x 70%) of
that amount is attributable to deemed stock of PS2
that is not owned (within the meaning of section
958(a), applied by treating PS1 as foreign if it is a
domestic pass-through entity) by a specified foreign
corporation of USP (determined without taking into
account section 965(c)(3)(E)). Accordingly, pursu-
ant to paragraph (b)(3) of this section, the amount of
PS2's cash position that USP must take into account
for purposes of determining its aggregate foreign
cash position is reduced by $63x (42% of $150x) to
$87x ($150x - $63x).
(c) Determination of aggregate foreign
cash position for a section 958(a) U.S.
shareholder inclusion year-(1) Single
section 958(a) U.S. shareholder inclusion
year. If a section 958(a) U.S. shareholder
has a single section 958(a) U.S. share-
holder inclusion year, then the section
958(a) U.S. shareholder's aggregate for-
eign cash position for the section 958(a)
U.S. shareholder inclusion year is equal to
the aggregate foreign cash position of the
section 958(a) U.S. shareholder.
(2) Multiple section 958(a) U.S. share-
holder inclusion years. If a section 958(a)
U.S. shareholder has multiple section
958(a) U.S. shareholder inclusion years,
then the section 958(a) U.S. shareholder's
aggregate foreign cash position for each
section 958(a) U.S. shareholder inclusion
year is determined by allocating the ag-
gregate foreign cash position to a section
958(a) U.S. shareholder inclusion year un-
der paragraphs (c)(2)(i) and (c)(2)(ii) of
this section.
(i) Allocation to first section 958(a)
U.S. shareholder inclusion year. A por-
tion of the aggregate foreign cash position
of the section 958(a) U.S. shareholder is
allocated to the first section 958(a) U.S.
shareholder inclusion year in an amount
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equal to the lesser of the section 958(a)
U.S. shareholder's aggregate foreign cash
position or the section 958(a) U.S. share-
holder's aggregate section 965(a) inclu-
sion amount for the section 958(a) U.S.
shareholder inclusion year.
(ii) Allocation to succeeding section
958(a) U.S. shareholder inclusion years.
The amount of the section 958(a) U.S.
shareholder's aggregate foreign cash po-
sition allocated to any succeeding section
958(a) U.S. shareholder inclusion year
equals the lesser of the excess, if any, of
the section 958(a) U.S. shareholder's ag-
gregate foreign cash position over the ag-
gregate amount of its aggregate foreign
cash position allocated to preceding sec-
tion 958(a) U.S. shareholder inclusion
years under paragraph (c)(2)(i) of this sec-
tion and this paragraph (c)(2)(ii) or the
section 958(a) U.S. shareholder's aggre-
gate section 965(a) inclusion amount for
such succeeding section 958(a) U.S.
shareholder inclusion year.
(3) Estimation of aggregate foreign
cash position. For purposes of determin-
ing the aggregate foreign cash position of
a section 958(a) U.S. shareholder, the sec-
tion 958(a) U.S. shareholder may assume
that its pro rata share of the cash position
of any specified foreign corporation
whose last taxable year beginning before
January 1, 2018, ends after the date the
return for such section 958(a) U.S. share-
holder inclusion year (the estimated sec-
tion 958(a) U.S. shareholder inclusion
year) is timely filed (taking into account
extensions, if any) is zero as of the cash
measurement date with which the taxable
year of such specified foreign corporation
ends. If a section 958(a) U.S. sharehold-
er's pro rata share of the cash position of
a specified foreign corporation is treated
as zero pursuant to the preceding sen-
tence, the amount described in §1.965-
1(f)(8)(i)(A) with respect to such section
958(a) U.S. shareholder in fact exceeds
the amount described in §1.965-1(f)(8)
(i)(B) with respect to such section 958(a)
U.S. shareholder, and the aggregate sec-
tion 965(a) inclusion amount for the esti-
mated section 958(a) U.S. shareholder
inclusion year exceeds the amount de-
scribed in §1.965-1(f)(8)(i)(B) with re-
spect to such section 958(a) U.S. share-
holder, interest and penalties will not be
imposed if such section 958(a) U.S. share-
holder amends the return for the estimated
section 958(a) U.S. shareholder inclusion
year to account for the correct aggregate
foreign cash position for the year. The
amended return must be filed by the due
date (taking into account extensions, if
any) for the return for the year after the
estimated section 958(a) U.S. shareholder
inclusion year.
(4) Examples. The following examples
illustrate the application of this paragraph
(c).
(i) Example 1. Estimation of aggregate foreign
cash position for a section 958(a) U.S. shareholder
inclusion year-(A) Facts. USP, a domestic corpo-
ration, owns all of the stock of CFC1, a foreign
corporation, which owns all of the stock of CFC2,
also a foreign corporation. USP is a calendar year
taxpayer. CFC1 has a taxable year ending on De-
cember 31, and CFC2 has a taxable year ending on
November 30. The cash position of CFC1 on each of
December 31, 2015, December 31, 2016, and De-
cember 31, 2017, is $100x. The cash position of
CFC2 on each of November 30, 2015, and Novem-
ber 30, 2016, is $200x. USP has a section 965(a)
inclusion amount of $300x with respect to CFC1.
(B) Analysis. In determining its aggregate for-
eign cash position for its 2017 taxable year, USP
may assume that its pro rata share of the cash posi-
tion of CFC2 will be zero as of November 30, 2018,
for purposes of filing its return due on April 18, 2018
(or due on October 15, 2018, with extension). There-
fore, USP's aggregate foreign cash position is treated
as $300x, which is the greater of (a) $300x, 50% of
the sum of USP's pro rata shares of the cash position
of CFC1 as of December 31, 2015, and December
31, 2016, and of the cash position of CFC2 as of
November 30, 2015, and November 30, 2016, and
(b) $100x, USP's pro rata share of the cash position
of CFC1 as of December 31, 2017. If USP's pro rata
share of the cash position of CFC2 as of November
30, 2018, in fact exceeds $200x, USP must amend its
return for its 2017 taxable year to reflect the correct
aggregate foreign cash position by the due date for
its return for its 2018 taxable year, April 15, 2019 (or
October 15, 2019, with extension).
(ii) Example 2. Allocation of aggregate foreign
cash position among section 958(a) U.S. share-
holder inclusion years-(A) Facts. The facts are the
same as in paragraph (c)(4)(i)(A) of this section (the
facts in Example 1), except that the cash position of
each of CFC1 and CFC2 on all relevant cash mea-
surement dates is $200x, with the result that USP has
an aggregate foreign cash position determined under
§1.965-1(f)(8)(i) of $400x. For its 2017 taxable
year, USP has a section 965(a) inclusion amount
with respect to CFC1 of $300x, and for its 2018
taxable year, USP has a section 965(a) inclusion
amount with respect to CFC2 of $300x.
(B) Analysis. Under paragraph (c)(2)(i) of this
section, USP's aggregate foreign cash position for
2017 is $300x, which is the lesser of USP's aggre-
gate foreign cash position determined under §1.965-
1(f)(8)(i) ($400x) or the section 965(a) inclusion
amount ($300x) that USP takes into account in 2017.
Under paragraph (c)(2)(ii) of this section, the amount
of USP's aggregate foreign cash position for 2018 is
$100x, USP's aggregate foreign cash position deter-
mined under §1.965-1(f)(8)(i) ($400x) reduced by
the amount of its aggregate foreign cash position for
2017 ($300x) under paragraph (c)(2)(i) of this sec-
tion.
(d) Increase of income by section
965(c) deduction of an expatriated enti-
ty-(1) In general. If a person is allowed
a section 965(c) deduction and the person
(or a successor) first becomes an expatri-
ated entity, with respect to a surrogate
foreign corporation, at any time during the
10-year period beginning on December
22, 2017, then the tax imposed by chapter
1 of the Internal Revenue Code is in-
creased for the first taxable year in which
such person becomes an expatriated entity
by an amount equal to 35 percent of the
person's section 965(c) deductions, and
no credits are allowed against such in-
crease in tax. The preceding sentence ap-
plies only if the surrogate foreign corpo-
ration first becomes a surrogate foreign
corporation on or after December 22,
2017.
(2) Definition of expatriated entity. For
purposes of paragraph (d)(1) of this sec-
tion, the term expatriated entity has the
same meaning given such term under sec-
tion 7874(a)(2), except that such term
does not include an expatriated entity if
the surrogate foreign corporation with re-
spect to the expatriated entity is treated as
a domestic corporation under section
7874(b).
(3) Definition of surrogate foreign cor-
poration. For purposes of paragraph (d)(1)
of this section, the term surrogate foreign
corporation has the meaning given such
term in section 7874(a)(2)(B).
(e) Section 962 election-(1) In gen-
eral. In the case of an individual (includ-
ing a trust or estate) that makes an election
under section 962, any section 965(c) de-
duction taken into account under §1.962-
1(b)(1)(i)(B) in determining taxable in-
come as used in section 11 is not taken
into account for purposes of determining
the individual's taxable income under sec-
tion 1.
(2) Example. The following example
illustrates the application of the rule in
this paragraph (e).
(i) Facts. USI, a United States citizen, owns 10%
of the capital and profits of USPRS, a domestic
partnership that has a calendar year taxable year, the
remainder of which is owned by foreign persons
unrelated to USI or USPRS. USPRS owns all of the
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stock of FS, a foreign corporation that is a controlled
foreign corporation with a calendar year taxable
year. USPRS has a section 965(a) inclusion amount
with respect to FS of $1,000x and has a section
965(c) deduction amount of $700x. FS has no post-
1986 foreign income taxes. USI makes a valid elec-
tion under section 962 for 2017.
(ii) Analysis. USI's "taxable income" described
in §1.962-1(b)(1)(i) equals $100x (USI's domestic
pass-through owner share of USPRS's section
965(a) inclusion amount) minus $70x (USI's domes-
tic pass-through owner share of USPRS's section
965(c) deduction amount), or $30x. No other deduc-
tions are allowed in determining this amount. USI's
tax on the $30x section 965(a) inclusion will be
equal to the tax that would be imposed on such
amount under section 11 if USI were a domestic
corporation. Under paragraph (e)(1) of this section,
USI cannot deduct $70x for purposes of determining
USI's taxable income that is subject to tax under
section 1.
(f) Treatment of section 965(c) deduc-
tion under certain provisions of the Inter-
nal Revenue Code-(1) Sections 62(a)
and 63(d). A section 965(c) deduction is
treated as a deduction described in section
62(a) and is not treated as an itemized
deduction for any purpose of the Internal
Revenue Code.
(2) Sections 705, 1367, and 1368-(i)
Adjustments to basis. In the case of a
domestic partnership or S corporation-
(A) The aggregate amount of its sec-
tion 965(a) inclusions net of the aggregate
amount of its section 965(c) deductions is
treated as a separately stated item of net
income solely for purposes of calculating
basis under section 705(a) and §1.705-
1(a) and section 1367(a)(1) and §1.1367-
1(f), and
(B) The aggregate amount of its section
965(a) inclusions equal to the aggregate
amount of its section 965(c) deductions is
treated as income exempt from tax solely
for purposes of calculating basis under sec-
tions 705(a)(1)(B), 1367(a)(1)(A), and
§1.1367-1(f).
(ii) S corporation accumulated adjust-
ments account. In the case of an S corpo-
ration, the aggregate amount of its section
965(a) inclusions equal to the aggregate
amount of its section 965(c) deductions is
treated as income not exempt from tax
solely for purposes of determining
whether an adjustment is made to an ac-
cumulated adjustments account under sec-
tion 1368(e)(1)(A) and §1.1368-2(a)(2).
(iii) Example. The following example
illustrates the application of this para-
graph (f)(2).
(A) Facts. USI, a United States citizen, owns all
of the stock of S Corp, an S corporation, which owns
all of the stock of FS, a foreign corporation. S Corp
has a section 965(a) inclusion of $1,000x with re-
spect to FS and has a $700x section 965(c) deduc-
tion.
(B) Analysis. As a result of the application of
paragraph (f)(2)(i)(A) of this section, solely for pur-
poses of calculating basis under section 1367(a)(1)
and §1.1367-1(f), USI treats as a separately stated
item of net income $300x (its pro rata share of the
net of S Corp's $1,000x aggregate section 965(a)
inclusion and S Corp's $700x aggregate section
965(c) deduction). Accordingly, USI's basis in S
Corp is increased under section 1367(a)(1) by $300x.
As a result of the application of paragraph
(f)(2)(i)(B) of this section, an amount of S Corp's
aggregate section 965(a) inclusion equal to its ag-
gregate section 965(c) deduction, $700x, is treated as
tax exempt income solely for purposes of calculating
basis under section 1367(a)(1)(A) and §1.1367-
1(f), and accordingly, USI's basis in S Corp is fur-
ther increased by its pro rata share of such amount,
$700x. S Corp's accumulated adjustments account
("AAA") is increased under section 1368(e)(1)(A)
by the $1,000x section 965(a) inclusion taken into
account and reduced by the $700x section 965(c)
deduction taken into account. In addition, as a result
of the application of paragraph (f)(2)(ii) of this sec-
tion, S Corp's AAA is further increased by an
amount of S Corp's aggregate section 965(a) inclu-
sion equal to its aggregate section 965(c) deduction,
$700x, which is not treated as tax-exempt income for
purposes of §1.1368-2(a)(2).
(3) Section 1411. For purposes of sec-
tion 1411 and §1.1411-4(f)(6), a section
965(c) deduction is not treated as being
properly allocable to any section 965(a)
inclusion.
(4) Section 4940. For purposes of sec-
tion 4940(c)(3)(A), a section 965(c) de-
duction is not treated as an ordinary and
necessary expense paid or incurred for the
production or collection of gross invest-
ment income.
(g) Domestic pass-through entities. For
purposes of determining a domestic pass-
through owner share, a section 965(c) de-
duction amount of a domestic pass-through
entity must be allocated to a domestic pass-
through owner in the same proportion as an
aggregate section 965(a) inclusion amount
of the domestic pass-through entity for a
section 958(a) U.S. shareholder inclusion
year is allocated to the domestic pass-
through owner.
###### §1.965-4 Disregard of certain transactions.
(a) Scope. This section provides rules
that disregard certain transactions for pur-
poses of applying section 965 to a United
States shareholder. Paragraph (b) of this
section provides rules that disregard trans-
actions undertaken with a principal pur-
pose of changing the amount of a section
965 element of a United States share-
holder. Paragraph (c) of this section pro-
vides rules that disregard certain changes
in method of accounting and entity clas-
sification elections that would otherwise
change the amount of a section 965 ele-
ment. Paragraph (d) of this section defines
the term section 965 element. Paragraph
(e) of this section provides rules of appli-
cation concerning paragraphs (b) and (c)
of this section. Paragraph (f) of this sec-
tion provides rules that disregard certain
transactions occurring between E&P mea-
surement dates. Paragraph (g) of this sec-
tion provides examples illustrating the ap-
plication of this section.
(b) Transactions undertaken with a
principal purpose of changing the amount
of a section 965 element -- (1) General
rule. Except as otherwise provided in
paragraph (e)(3) of this section, a transac-
tion is disregarded for purposes of deter-
mining the amounts of all section 965
elements of a United States shareholder if
each of the following conditions is satis-
fied with respect to any section 965 ele-
ment of the United States shareholder-
(i) The transaction occurs, in whole or
in part, on or after November 2, 2017 (the
specified date);
(ii) The transaction is undertaken with
a principal purpose of changing the
amount of a section 965 element of the
United States shareholder; and
(iii) The transaction would, without re-
gard to this paragraph (b)(1), change the
amount of the section 965 element of the
United States shareholder.
(2) Presumptions and exceptions for
the application of the general rule-(i)
Overview. Under paragraphs (b)(2)(iii)
through (v) of this section, certain trans-
actions are presumed to be undertaken
with a principal purpose of changing the
amount of a section 965 element of a
United States shareholder for purposes of
paragraph (b)(1) of this section. The
presumptions described in paragraphs
(b)(2)(iii) through (v) of this section may
be rebutted only if facts and circum-
stances clearly establish that the transac-
tion was not undertaken with a principal
purpose of changing the amount of a sec-
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tion 965 element of a United States share-
holder. A taxpayer that takes the position
that the presumption is rebutted must at-
tach a statement to its return for its taxable
year in which or with which the relevant
taxable year of the relevant specified for-
eign corporation ends disclosing that it
has rebutted the presumption. In the case
of a transaction described in paragraph
(b)(2)(iii) or (iv) of this section, if the
presumption does not apply because the
transaction occurs in the ordinary course
of business, whether the transaction was
undertaken with a principal purpose of
changing the amount of a section 965 el-
ement of a United States shareholder must
be determined under all the facts and cir-
cumstances. Under paragraphs (b)(2)(iii)
through (v) of this section, certain trans-
actions are treated per se as being under-
taken with a principal purpose of chang-
ing the amount of a section 965 element of
a United States shareholder, and, there-
fore, such transactions are disregarded un-
der paragraph (b)(1) of this section if the
conditions of paragraphs (b)(1)(i) and (iii)
of this section are satisfied. Further, under
paragraph (b)(2)(iii) of this section, cer-
tain distributions are treated per se as not
being undertaken with a principal purpose
of changing the amount of a section 965
element of a United States shareholder
and therefore are not disregarded under
paragraph (b)(1) of this section.
(ii) Definitions-(A) Relatedness. For
purposes of paragraphs (b)(2)(iii) through
(v) of this section, a person is treated as
related to a United States shareholder if,
either immediately before or immediately
after the transaction (or series of related
transactions), the person bears a relation-
ship to the United States shareholder de-
scribed in section 267(b) or section
707(b).
(B) Transfer-(1) In general. For pur-
poses of paragraphs (b)(2)(iii) and (v) of
this section, the term transfer includes any
disposition of stock or property, including
a sale or exchange, contribution, distribu-
tion, issuance, redemption, recapitaliza-
tion, or loan of stock or property, and
includes an indirect transfer of stock or
property.
(2) Indirect transfer. For purposes of
paragraph (b)(2)(ii)(B)(1) of this section,
the term indirect transfer includes a trans-
fer of property or stock owned by an en-
tity through a transfer of an interest in
such entity (or an interest in an entity that
has a direct or indirect interest in such
entity), and a transfer of property or stock
to a person through a transfer of property
or stock to a pass-through entity of which
such person is a direct or indirect owner.
(iii) Cash reduction transactions-(A)
General rule. For purposes of paragraph
(b)(1) of this section, a cash reduction
transaction is presumed to be undertaken
with a principal purpose of changing the
amount of a section 965 element of a
United States shareholder. For this pur-
pose, the term cash reduction transaction
means a transfer of cash, accounts receiv-
able, or cash-equivalent assets by a spec-
ified foreign corporation to a United
States shareholder of the specified foreign
corporation or a person related to a United
States shareholder of the specified foreign
corporation, or an assumption by a speci-
fied foreign corporation of an account
payable of a United States shareholder of
the specified foreign corporation or a per-
son related to a United States shareholder
of the specified foreign corporation, if
such transfer or assumption would, with-
out regard to paragraph (b)(1) of this sec-
tion, reduce the aggregate foreign cash
position of the United States shareholder.
The presumption described in this para-
graph (b)(2)(iii) does not apply to a cash
reduction transaction that occurs in the
ordinary course of business.
(B) Per se rules for certain distribu-
tions. Notwithstanding the presumption
described in paragraph (b)(2)(iii)(A) of
this section, except in the case of a spec-
ified distribution, a cash reduction trans-
action that is a distribution by a specified
foreign corporation to a United States
shareholder of the specified foreign cor-
poration is treated per se as not being
undertaken with a principal purpose of
changing the amount of a section 965 el-
ement of the United States shareholder for
purposes of paragraph (b)(1) of this sec-
tion. A specified distribution is treated per
se as being undertaken with a principal
purpose of changing the amount of a sec-
tion 965 element of a United States share-
holder for purposes of paragraph (b)(1) of
this section. For purposes of this para-
graph (b)(2)(iii)(B), the term specified dis-
tribution means a cash reduction transac-
tion that is a distribution by a specified
foreign corporation of a United States
shareholder if and to the extent that, at the
time of the distribution, there was a plan
or intention for the distributee to trans-
fer cash, accounts receivable, or cash-
equivalent assets to any specified for-
eign corporation of the United States
shareholder or a distribution that is a
non pro rata distribution to a foreign
person that is related to the United
States shareholder. For purposes of the
preceding sentence, there is no plan or
intention for the distributee to transfer
cash, accounts receivable, or cash-
equivalent assets to any specified for-
eign corporation of the United States
shareholder if the transfer is pursuant to
a legal obligation entered into before
November 2, 2017. A taxpayer that
takes the position that a cash reduction
transaction is not a specified distribution
because a transfer of cash, accounts re-
ceivable, or cash-equivalent asset is pur-
suant to a legal obligation entered into
before November 2, 2017, must attach a
statement to its return for its taxable
year in which or with which the relevant
taxable year of the relevant specified
foreign corporation ends disclosing the
position.
(iv) E&P reduction transactions-(A)
General rule. For purposes of paragraph
(b)(1) of this section, an E&P reduction
transaction is presumed to be undertaken
with a principal purpose of changing the
amount of a section 965 element of a
United States shareholder. For purposes of
this paragraph (b)(2)(iv), the term E&P
reduction transaction means a transaction
between a specified foreign corporation
and any of a United States shareholder of
the specified foreign corporation, another
specified foreign corporation of a United
States shareholder of the specified foreign
corporation, or any person related to a
United States shareholder of the specified
foreign corporation, if the transaction
would, without regard to paragraph (b)(1)
of this section, reduce either the accumu-
lated post-1986 deferred foreign income
or the post-1986 undistributed earnings
(as defined in section 902(c)(1)) of the
specified foreign corporation or another
specified foreign corporation of any
United States shareholder of such speci-
fied foreign corporation. The presumption
described in this paragraph (b)(2)(iv)(A)
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does not apply to an E&P reduction trans-
action that occurs in the ordinary course
of business.
(B) Per se rule for specified transac-
tions. A specified transaction is treated per
se as being undertaken with a principal
purpose of changing the amount of a sec-
tion 965 element of a United States share-
holder for purposes of paragraph (b)(1) of
this section. For purposes of the preceding
sentence, the term specified transaction
means an E&P reduction transaction that
involves one or more of the following: a
complete liquidation of a specified foreign
corporation to which section 331 applies;
a sale or other disposition of stock by a
specified foreign corporation; or a distri-
bution by a specified foreign corporation
that reduces the earnings and profits of the
specified foreign corporation pursuant to
section 312(a)(3).
(v) Pro rata share transactions-(A)
General rule. For purposes of paragraph
(b)(1) of this section, a pro rata share
transaction is presumed to be undertaken
with a principal purpose of changing the
amount of a section 965 element of a
United States shareholder. For this pur-
pose, the term pro rata share transaction
means either a pro rata share reduction
transaction or an E&P deficit transaction.
(1) Definition of pro rata share reduc-
tion transaction. For purposes of this
paragraph (b)(2)(v)(A), the term pro rata
share reduction transaction means a
transfer of the stock of a specified foreign
corporation by either a United States
shareholder of the specified foreign cor-
poration or a person related to a United
States shareholder of the specified foreign
corporation (including by the specified
foreign corporation itself) to a person re-
lated to the United States shareholder if
the transfer would, without regard to para-
graph (b)(1) of this section, reduce the
United States shareholder's pro rata share
of the section 965(a) earnings amount of
the specified foreign corporation, reduce
the United States shareholder's pro rata
share of the cash position of the specified
foreign corporation, or both.
(2) Definition of E&P deficit transac-
tion. For purposes of this paragraph
(b)(2)(v)(A), the term E&P deficit trans-
action means a transfer to either a United
States shareholder or a person related to
the United States shareholder of the stock
of an E&P deficit foreign corporation by a
person related to the United States share-
holder (including by the E&P deficit for-
eign corporation itself) if the transfer
would, without regard to paragraph (b)(1)
of this section, increase the United States
shareholder's pro rata share of the speci-
fied E&P deficit of the E&P deficit foreign
corporation.
(B) Per se rule for internal group
transactions. An internal group transac-
tion is treated per se as being undertaken
with a principal purpose of changing the
amount of a section 965 element of a
United States shareholder for purposes of
paragraph (b)(1) of this section. For pur-
poses of the preceding sentence, the term
internal group transaction means a pro
rata share transaction if, immediately be-
fore or after the transfer, the transferor of
the stock of the specified foreign corpora-
tion and the transferee of such stock are
members of an affiliated group in which
the United States shareholder is a mem-
ber. For this purpose, the term affiliated
group has the meaning set forth in section
1504(a), determined without regard to
paragraphs (1) through (8) of section
1504(b), and the term members of an af-
filiated group means entities included in
the same affiliated group. For purposes of
identifying an affiliated group and the
members of such group, each partner in a
partnership, as determined without regard
to this sentence, is treated as holding its
proportionate share of the stock held by
the partnership, as determined under the
rules and principles of sections 701
through 777, and if one or more members
of an affiliated group own, in the aggre-
gate, at least 80 percent of the interests in
a partnership's capital or profits, the part-
nership will be treated as a corporation
that is a member of the affiliated group.
(C) Example. The following example
illustrates the application of the rules in
this paragraph (b)(2)(v).
(1) Facts. FP, a foreign corporation, owns all of
the stock of USP, a domestic corporation. USP owns
all of the stock of FS, a foreign corporation. USP has
a calendar year taxable year; FS's taxable year ends
November 30. On January 2, 2018, USP transfers all
of the stock of FS to FP in exchange for cash. On
January 3, 2018, FS makes a distribution with re-
spect to the stock transferred to FP. USP treats the
transaction as a taxable sale of the FS stock and
claims a dividends received deduction under section
245A with respect to its deemed dividend under
section 1248(j) as a result of the sale. FS has post-
1986 earnings and profits as of December 31, 2017,
and no post-1986 earnings and profits that are at-
tributable to income effectively connected with the
conduct of a trade or business within the United
States and subject to tax under chapter 1 or that, if
distributed, would be excluded from the gross in-
come of a United States shareholder under section
959.
(2) Analysis. The transfer of the stock of FS is a
pro rata share reduction transaction and thus a pro
rata share transaction because such transfer is by
USP, a United States shareholder, to FP, a person
related to USP, and the transfer would, without re-
gard to the rule in paragraph (b)(1) of this section,
reduce USP's pro rata share of the section 965(a)
earnings amount of FS. Because USP and FP are also
members of an affiliated group within the meaning
of paragraph (b)(2)(v)(B) of this section, the transfer
of the stock of FS is also an internal group transac-
tion and is treated per se as being undertaken with a
principal purpose of changing the amount of a sec-
tion 965 element of USP. Accordingly, because the
transfer occurs after the specified date and reduces
USP's section 965(a) inclusion amount with respect
to FS, the transfer is disregarded for purposes of
determining any section 965 element of USP with
the result that, among other things, USP's pro rata
share of FS's section 965(a) earnings amount is
determined as if USP owned (within the meaning of
section 958(a)) 100% of the stock of FS on the last
day of FS's inclusion year and no other person
received a distribution with respect to such stock
during such year. See section 951(a)(2)(A) and (B).
(c) Disregard of certain changes in
method of accounting and entity classifi-
cation elections-(1) Changes in method
of accounting. Any change in method of
accounting made for a taxable year of a
specified foreign corporation that ends in
2017 or 2018 is disregarded for purposes
of determining the amounts of all section
965 elements with respect to a United
States shareholder if the change in method
of accounting would, without regard to
this paragraph (c)(1), change the amount
of any section 965 element described in
paragraph (d)(1) or (2) of this section with
respect to the United States shareholder,
or change the amount of the section 965
element described in paragraph (d)(3) of
this section other than by reason of an
increase in a section 965(a) inclusion
amount with respect to the specified for-
eign corporation, regardless of whether
the change in method of accounting is
made with a principal purpose of chang-
ing the amount of a section 965 element
with respect to the United States share-
holder. The rule described in the preced-
ing sentence applies regardless of whether
the change in method of accounting was
made in accordance with the procedures
described in Rev. Proc. 2015-13, 2015-5
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I.R.B. 419 (or successor), and regardless
of whether the change in method of ac-
counting was properly made, but it does
not apply to a change in method of ac-
counting for which the original and/or du-
plicate copy of any Form 3115, "Applica-
tion for Change in Accounting Method,"
requesting the change was filed before the
specified date (as defined in paragraph
(b)(1) of this section).
(2) Entity classification elections. Ex-
cept as otherwise provided in paragraph
(e)(3) of this section, an election under
§301.7701-3 to change the classification
of an entity that is filed on or after the
specified date (as defined in paragraph
(b)(1) of this section) is disregarded for
purposes of determining the amounts of
all section 965 elements of a United States
shareholder if the election would, without
regard to this paragraph (c)(2), change the
amount of any section 965 element of the
United States shareholder, regardless of
whether the election is made with a prin-
cipal purpose of changing the amount of a
section 965 element of the United States
shareholder. An election filed on or after
the specified date is subject to the preced-
ing sentence even if the election was filed
with an effective date that is before the
specified date.
(d) Definition of a section 965 element.
For purposes of paragraphs (b) and (c) of
this section, the term section 965 element
means, with respect to a United States
shareholder, any of the following amounts
(collectively, section 965 elements)-
(1) The United States shareholder's
section 965(a) inclusion amount with re-
spect to a specified foreign corporation;
(2) The aggregate foreign cash position
of the United States shareholder; or
(3) The amount of foreign income
taxes of a specified foreign corporation
deemed paid by the United States share-
holder under section 960 as a result of a
section 965(a) inclusion.
(e) Rules for applying paragraphs (b)
and (c) of this section-(1) Determination
of whether there is a change in the amount
of a section 965 element. For purposes of
paragraphs (b) and (c) of this section,
there is a change in the amount of a sec-
tion 965 element of a United States share-
holder as a result of a transaction, change
in accounting method, or election to
change an entity's classification, if, with-
out regard to paragraph (b)(1), (c)(1), or
(c)(2) of this section, the transaction,
change in accounting method, or change
in entity classification would-
(i) Reduce the amount described in
paragraph (d)(1) of this section,
(ii) Reduce the amount described in
paragraph (d)(2) of this section, but only if
such amount is less than the United States
shareholder's aggregate section 965(a) in-
clusion amount, or
(iii) Increase the amount described in
paragraph (d)(3) of this section.
(2) Treatment of domestic pass-
through owners as United States share-
holders. For purposes of paragraphs (b)
and (c) of this section, if a domestic pass-
through entity is a United States share-
holder, then a domestic pass-through
owner with respect to the domestic pass-
through entity that is not otherwise a
United States shareholder is treated as a
United States shareholder.
(3) Exception for certain incorporation
transactions-(i) In general. Paragraphs
(b) and (c)(2) of this section do not apply
to disregard a transfer of stock of a spec-
ified foreign corporation by a United
States shareholder to a domestic corpora-
tion (for this purpose, including an S cor-
poration), provided that-
(A) The transferee's section 965(a) in-
clusion amount with respect to the trans-
ferred stock of the specified foreign cor-
poration is no lower than the transferor's
section 965(a) inclusion amount with re-
spect to the transferred stock of the spec-
ified foreign corporation, determined
without regard to the transfer; and
(B) The transferee and the transferor
determine their aggregate foreign cash po-
sition under paragraph (e)(3)(ii) of this
section.
(ii) Aggregate foreign cash position. In
the case of a transfer described in para-
graph (e)(3)(i) of this section, in order to
rely on the exception in paragraph
(e)(3)(i) of this section-
(A) The transferee must treat its pro
rata share of the cash position of a speci-
fied foreign corporation as of a cash mea-
surement date as of which it did not own
the transferred stock of the specified for-
eign corporation as including the transfer-
or's pro rata share of the cash position of
the specified foreign corporation with re-
spect to the transferred stock of the spec-
ified foreign corporation as of such cash
measurement date for purposes of deter-
mining its aggregate foreign cash posi-
tion; and
(B) The transferor must treat its pro
rata share of the cash position of a speci-
fied foreign corporation as of a cash mea-
surement date as of which it did not own
the transferred stock of the specified for-
eign corporation as including the transfer-
ee's pro rata share of the cash position of
the specified foreign corporation with re-
spect to the transferred stock of the spec-
ified foreign corporation as of such cash
measurement date for purposes of deter-
mining its aggregate foreign cash position.
(4) Consequences of liquidation-(i)
In general. In the case of a liquidation of
a specified foreign corporation that is dis-
regarded for purposes of determining the
section 965 elements of a United States
shareholder pursuant to paragraph (b) or
(c)(2) of this section, for purposes of de-
termining the amounts of the section 965
elements of the United States shareholder,
the date that is treated as the last day of
the taxable year of the specified foreign
corporation is the later of-
(A) The date of the liquidation; and
(B) The specified liquidation date, if
any.
(ii) Specified liquidation date. The term
specified liquidation date means, in the
case of a liquidation of a specified foreign
corporation pursuant to an entity classifi-
cation election that is disregarded for pur-
poses of determining the section 965 ele-
ments of a United States shareholder-
(A) November 30, 2017, with respect
to a United States shareholder that must
include in income under §1.367(b)-3 as a
deemed dividend the all earnings and
profits amount with respect to the United
States shareholder's stock of the liquidat-
ing specified foreign corporation; or
(B) The date of filing of the entity
classification election, with respect to all
other United States shareholders.
(f) Disregard of certain transactions
occurring between E&P measurement
dates-(1) Disregard of specified pay-
ments. Except as provided in paragraph
(f)(3) of this section, a specified payment
made by a specified foreign corporation
(payor specified foreign corporation)
to another specified foreign corporation
(payee specified foreign corporation) is
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disregarded for purposes of determining
the post-1986 earnings and profits of each
of the payor specified foreign corporation
and the payee specified foreign corpora-
tion as of the E&P measurement date on
December 31, 2017.
(2) Definition of specified payment. For
purposes of paragraph (f)(1) of this sec-
tion, the term specified payment means
any amount paid or accrued by the payor
specified foreign corporation, including a
distribution by the payor specified foreign
corporation with respect to its stock, if
each of the following conditions are sat-
isfied:
(i) Immediately before or immediately
after the payment or accrual of the
amount, the payor specified foreign cor-
poration and the payee specified foreign
corporation are related within the meaning
of section 954(d)(3), substituting the term
"specified foreign corporation" for "con-
trolled foreign corporation" in each place
that it appears;
(ii) The payment or accrual of the
amount occurs after November 2, 2017,
and on or before December 31, 2017; and
(iii) The payment or accrual of the
amount would, without regard to the ap-
plication of paragraph (f)(1) of this sec-
tion, reduce the post-1986 earnings and
profits of the payor specified foreign cor-
poration as of the E&P measurement date
on December 31, 2017.
(3) Non-application of disregard rule.
A section 958(a) U.S. shareholder may
determine the post-1986 earnings and
profits of a specified foreign corporation
without regard to paragraph (f)(1) of this
section, provided that it and every section
958(a) U.S. shareholder related to the first
section 958(a) U.S. shareholder deter-
mines the post-1986 earnings and profits
of each of its specified foreign corpora-
tions without regard to paragraph (f)(1) of
this section. For purposes of this para-
graph (f)(3), a person is treated as related
to a section 958(a) U.S. shareholder if the
person bears a relationship to the section
958(a) U.S. shareholder described in sec-
tion 267(b) or 707(b).
(4) Examples. The following examples
illustrate the application of the rules in
this paragraph (f).
(i) Example 1. Deductible payment between
wholly owned specified foreign corporations is a
specified payment. (A) Facts. USP, a domestic cor-
poration, owns all of the stock of CFC1, a foreign
corporation, which owns all of the stock of CFC2,
also a foreign corporation. USP, CFC1, and CFC2
have calendar year taxable years. On November 2,
2017, each of CFC1 and CFC2 has post-1986 earn-
ings and profits of 100u. Neither CFC1 nor CFC2
has post-1986 earnings and profits that are attribut-
able to income of the specified foreign corporation
that is effectively connected with the conduct of a
trade or business within the United States and sub-
ject to tax under chapter 1 or that, if distributed,
would be excluded from the gross income of a
United States shareholder under section 959 or from
the gross income of another shareholder if such
shareholder were a United States shareholder; there-
fore, no adjustment is made under section 965(d)(2)
or §1.965-1(f)(7), and each of CFC1's and CFC2's
accumulated post-1986 deferred foreign income is
equal to such corporation's post-1986 earnings and
profits. On November 3, 2017, CFC2 makes a de-
ductible payment of 10u to CFC1. The payment does
not constitute subpart F income. CFC1 and CFC2
have no other items of income or deduction.
(B) Analysis. The payment from CFC2 to CFC1
is a specified payment because (1) CFC1 and CFC2
are related specified foreign corporations; (2) the
payment occurs after November 2, 2017, and on or
before December 31, 2017; and (3) the payment
would, without regard to the application of the rule
in paragraph (f)(1) of this section, reduce the post-
1986 earnings and profits of CFC2 as of the E&P
measurement date on December 31, 2017. Under
paragraph (f)(1) of this section, the payment is dis-
regarded, and CFC1 and CFC2 each have post-1986
earnings and profits of 100u as of December 31,
2017. Accordingly, the section 965(a) earnings
amount of each of CFC1 and CFC2 is 100u.
(ii) Example 2. Distribution is a specified pay-
ment. (A) Facts. The facts are the same as in para-
graph (f)(4)(i)(A) of this section (the facts in Exam-
ple 1), except instead of a deductible payment to
CFC1, CFC2 makes a 10u distribution on November
3, 2017, that, without regard to paragraph (f)(1) of
this section would reduce the post-1986 earnings
and profits of CFC2 as of the E&P measurement date
on December 31, 2017, and increase the post-1986
earnings and profits of CFC1 as of the E&P mea-
surement date on December 31, 2017, by 10u.
(B) Analysis. The distribution is a specified pay-
ment because (1) CFC1 and CFC2 are related spec-
ified foreign corporations; (2) the distribution occurs
after November 2, 2017, and on or before December
31, 2017; and (3) the distribution would, without
regard to the application of the rule in paragraph
(f)(1) of this section, reduce the post-1986 earnings
and profits of CFC2 as of the E&P measurement date
on December 31, 2017. Under paragraph (f)(1) of
this section, the distribution is disregarded with the
result that CFC1 and CFC2 each have post-1986
earnings and profits of 100u as of the E&P measure-
ment date on December 31, 2017, and a section
965(a) earnings amount of 100u.
(iii) Example 3. Deductible payment between
related (but not wholly owned) specified foreign cor-
porations is a specified payment. (A) Facts. The
facts are the same as in paragraph (f)(4)(i)(A) of this
section (the facts in Example 1), except that CFC1
owns only 51% of the only class of stock of CFC2,
the remainder of which is owned by USI, a United
States citizen unrelated to USP, CFC1, and CFC2.
(B) Analysis. The analysis is the same as in
paragraph (f)(4)(i)(B) of this section (the analysis in
Example 1); thus, the payment is disregarded with
the result that CFC1 and CFC2 each have post-1986
earnings and profits of 100u as of the E&P measure-
ment date on December 31, 2017, and a section
965(a) earnings amount of 100u.
(iv) Example 4. Deductible payment between un-
related specified foreign corporations is not a spec-
ified payment. (A) Facts. The facts are the same as in
paragraph (f)(4)(i)(A) of this section (the facts in
Example 1), except that CFC1 owns only 50% of the
only class of stock of CFC2, the remainder of which
is owned by USI, a United States citizen unrelated to
USP, CFC1, and CFC2.
(B) Analysis. Paragraph (f)(1) of this section
does not apply because CFC1 and CFC2 are not
related. Thus, the payment is taken into account with
the result that CFC1 has post-1986 earnings and
profits of 110u as of the E&P measurement date on
December 31, 2017, and a section 965(a) earnings
amount of 110u.
(v) Example 5. Deductible payment and income
accrued from unrelated persons are not specified
payments. (A) Facts. The facts are the same as in
paragraph (f)(4)(i)(A) of this section (the facts in
Example 1), except that CFC2 does not make a
deductible payment to CFC1, and, between E&P
measurement dates, CFC2 accrues gross income of
20u from a person that is not related to CFC2, and
CFC1 incurs a deductible expense of 20u to a person
that is not related to CFC1.
(B) Analysis. Paragraph (f)(1) of this section
does not apply because neither the deductible ex-
pense of CFC1 nor the income accrual by CFC2 are
attributable to a specified payment.
(vi) Example 6. Deductible payment and income
accrued with respect to unrelated persons are not
specified payments; deductible payment between
wholly specified foreign corporations is a specified
payment. (A) Facts. The facts are the same as in
paragraph (f)(4)(v)(A) of this section (the facts in
Example 5), except that CFC2 also makes a deduct-
ible payment of 10u to CFC1 on November 3, 2017.
(B) Analysis. The deductible payment is a spec-
ified payment because (1) CFC1 and CFC2 are re-
lated specified foreign corporations; (2) the payment
occurs after November 2, 2017, and on or before
December 31, 2017; and (3) the deductible payment
would, without regard to the application of the rule
in paragraph (f)(1) of this section, reduce the post-
1986 earnings and profits of CFC2 as of the E&P
measurement date on December 31, 2017. Accord-
ingly, under paragraph (f)(1) of this section, the
deductible payment is disregarded with the result
that CFC1 and CFC2 have 80u and 120u of post-
1986 earnings and profits as of the E&P measure-
ment date on December 31, 2017, respectively. Ac-
cordingly, CFC1 and CFC2 have section 965(a)
earnings amounts of 100u and 120u, respectively.
§1.965-5 Allowance of a credit or
deduction for foreign income taxes.
(a) Scope. This section provides rules
for the allowance of a credit or deduction
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for foreign income taxes in connection
with the application of section 965. Para-
graph (b) of this section provides rules
under section 965(g) for the allowance of
a credit or deduction for foreign income
taxes paid or accrued. Paragraph (c) of
this section provides rules for the allow-
ance of a credit or deduction for foreign
income taxes treated as paid or accrued in
connection with the application of section
965. Paragraph (d) of this section defines
the term applicable percentage.
(b) Rules for foreign income taxes paid
or accrued. Neither a deduction (includ-
ing under section 164) nor a credit under
section 901 is allowed for the applicable
percentage of any foreign income taxes paid
or accrued with respect to any amount for
which a section 965(c) deduction is allowed
for a section 958(a) U.S. shareholder inclu-
sion year. Neither a deduction (including
under section 164) nor a credit under section
901 is allowed for the applicable percentage
of any foreign income taxes attributable to a
distribution of section 965(a) previously
taxed earnings and profits or section 965(b)
previously taxed earnings and profits. Ac-
cordingly, for example, no deduction or
credit is allowed for the applicable percent-
age of any withholding taxes imposed on a
United States shareholder by the jurisdiction
of residence of the distributing foreign cor-
poration with respect to a distribution of
section 965(a) previously taxed earnings
and profits or section 965(b) previously
taxed earnings and profits. Similarly, for
example, no deduction or credit is allowed
for the applicable percentage of foreign in-
come taxes imposed on a United States cit-
izen by the citizen's jurisdiction of residence
upon receipt of a distribution of section
965(a) previously taxed earnings and profits
or section 965(b) previously taxed earnings
and profits.
(c) Rules for foreign income taxes
treated as paid or accrued-(1) Disal-
lowed credit-(i) In general. A credit un-
der section 901 is not allowed for the
applicable percentage of any foreign in-
come taxes treated as paid or accrued with
respect to any amount for which a section
965(c) deduction is allowed for a section
958(a) U.S. shareholder inclusion year.
For purposes of the preceding sentence,
taxes treated as paid or accrued include
foreign income taxes deemed paid under
section 960(a)(1) with respect to a section
965(a) inclusion, foreign income taxes
deemed paid under section 960(a)(3) (as
in effect on December 21, 2017) or sec-
tion 960(b) (as applicable to taxable years
of controlled foreign corporations begin-
ning after December 31, 2017) with re-
spect to distributions of section 965(a)
previously taxed earnings and profits or
section 965(b) previously taxed earnings
and profits, foreign income taxes allocated
to an entity under §1.901-2(f)(4), and a
distributive share of foreign income taxes
paid or accrued by a partnership.
(ii) Foreign income taxes deemed paid
under section 960(a)(3) (as in effect on
December 21, 2017). Foreign income
taxes deemed paid by a domestic corpo-
ration under section 960(a)(3) with re-
spect to a distribution of section 965(a)
previously taxed earnings and profits or
section 965(b) previously taxed earnings
and profits include only the foreign in-
come taxes paid or accrued by an upper-
tier foreign corporation with respect to a
distribution of section 965(a) previously
taxed earnings and profits or section
965(b) previously taxed earnings and
profits from a lower-tier foreign corpora-
tion. No credit is allowed under section
960(a)(3) or any other section for foreign
income taxes that would have been
deemed paid under section 960(a)(1) with
respect to the portion of a section 965(a)
earnings amount that is reduced under
§1.965-1(b)(2) or §1.965-8(b).
(iii) [Reserved]
(2) Disallowed deduction. No deduc-
tion (including under section 164) is al-
lowed for the applicable percentage of any
foreign income taxes treated as paid or
accrued with respect to any amount for
which a section 965(c) deduction is al-
lowed. Such taxes include foreign income
taxes allocated to an entity under §1.901-
2(f)(4) and a distributive share of foreign
income taxes paid or accrued by a part-
nership.
(3) Coordination with section 78-(i)
In general. With respect to foreign income
taxes deemed paid by a domestic corpo-
ration with respect to its section 965(a)
inclusion amount for a section 958(a) U.S.
shareholder inclusion year, section 78 ap-
plies only to so much of such taxes as
bears the same proportion to the amount
of such taxes as-
(A) The excess of-
(1) The section 965(a) inclusion
amount for a section 958(a) U.S. share-
holder inclusion year, over
(2) The section 965(c) deduction amount
allowable with respect to such section
965(a) inclusion amount, bears to
(B) Such section 965(a) inclusion
amount.
(ii) Domestic corporation that is a do-
mestic pass-through owner. With respect to
foreign income taxes deemed paid by a do-
mestic corporation attributable to such cor-
poration's domestic pass-through owner
share of a section 965(a) inclusion amount
of a domestic pass-through entity, section
78 applies only to so much of such taxes as
bears the same proportion to the amount of
such taxes as the proportion determined un-
der paragraph (c)(3)(i) of this section as
applied to the domestic pass-through enti-
ty's section 965(a) inclusion amount for a
section 958(a) U.S. shareholder inclusion
year.
(d) Applicable percentage-(1) In gen-
eral. For purposes of this section, except
as provided in paragraph (d)(2) and (d)(3)
of this section, the term applicable per-
centage means, with respect to a section
958(a) U.S. shareholder and a section
958(a) U.S. shareholder inclusion year,
the amount (expressed as a percentage)
equal to the sum of-
(i) 0.771 multiplied by the ratio of-
(A) The section 958(a) U.S. sharehold-
er's 8 percent rate amount for the section
958(a) U.S. shareholder inclusion year,
divided by
(B) The sum of the section 958(a) U.S.
shareholder's 8 percent rate amount for
the section 958(a) U.S. shareholder inclu-
sion year plus the section 958(a) U.S.
shareholder's 15.5 percent rate amount for
the section 958(a) U.S. shareholder inclu-
sion year; plus
(ii) 0.557 multiplied by the ratio of-
(A) The section 958(a) U.S. sharehold-
er's 15.5 percent rate amount for the sec-
tion 958(a) U.S. shareholder inclusion
year, divided by
(B) The amount described in paragraph
(d)(1)(i)(B) of this section.
(2) No section 965(a) inclusion amount.
If a section 958(a) U.S. shareholder does not
have an aggregate section 965(a) inclusion
amount, the section 958(a) U.S. sharehold-
er's applicable percentage is 55.7 percent.
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(3) Applicable percentage for domestic
pass-through owners. In the case of a do-
mestic pass-through owner with respect to
a domestic pass-through entity, the do-
mestic pass-through owner's applicable
percentage that is applied to foreign in-
come taxes attributable to the domestic
pass-through owner share of the section
965(a) inclusion amount or of distribu-
tions of section 965(a) previously taxed
earnings and profits or section 965(b) pre-
viously taxed earnings and profits is equal
to the applicable percentage determined
under paragraph (d)(1) or (2) of this sec-
tion, as applicable, with respect to the
domestic pass-through entity.
(4) Applicable percentage with respect
to certain distributions of previously taxed
earnings and profits. In the case of a distri-
bution of section 965(a) previously taxed
earnings and profits or section 965(b) previ-
ously taxed earnings and profits (other than
with respect to a section 958(a) U.S. share-
holder described in paragraph (d)(2) of this
section), the applicable percentage that is
applied to foreign income taxes attributable
to the distribution is the applicable percent-
age that applied with respect to the section
958(a) U.S. shareholder and the section
958(a) U.S. inclusion year in which, or with
which, the inclusion year of the relevant
deferred foreign income corporation ends.
For this purpose, the relevant deferred for-
eign income corporation is the deferred for-
eign income corporation with respect to
which the section 958(a) U.S. shareholder
had the section 965(a) inclusion as a result
of which the section 965(a) previously taxed
earnings and profits first arose (as described
in §1.965-2(c)) or the section 965(b) previ-
ously taxed earnings and profits first arose
(as described in §1.965-2(d)).
§1.965-6 Computation of foreign income
taxes deemed paid and allocation and ap-
portionment of deductions.
(a) Scope. This section provides rules
for the computation of foreign income
taxes deemed paid and the allocation and
apportionment of deductions. Paragraph
(b) of this section provides the general
rules for the computation of foreign in-
come taxes deemed paid under sections
902 and 960. Paragraph (c) of this section
provides rules for allocation and appor-
tionment of expenses. Paragraph (d) of
this section provides rules for foreign in-
come taxes associated with hovering def-
icits.
(b) Computation of foreign incomes
taxes deemed paid-(1) In general. For
purposes of determining foreign income
taxes deemed paid under section 960(a)(1)
with respect to a section 965(a) inclusion
attributable to a deferred foreign income
corporation that is a member of a qualified
group (as defined in section 902(b)(2)),
section 902 applies as if the section 965(a)
inclusion, translated (if necessary) into the
functional currency of the deferred for-
eign income corporation using the spot
rate on December 31, 2017, were a divi-
dend paid by the deferred foreign income
corporation. For purposes of computing
the amount of foreign income taxes
deemed paid under section 960(a)(1),
§§1.965-2(b), 1.965-5, sections 902 and
960, the regulations under those sections,
and this section apply.
(2) Dividend or inclusion in excess of
post-1986 undistributed earnings. When
the denominator of the section 902 frac-
tion is positive but less than the numerator
of such fraction, the section 902 fraction is
one. When the denominator of the section
902 fraction is zero or less than zero, the
section 902 fraction is zero, and no for-
eign taxes are deemed paid.
(3) Treatment of adjustment under sec-
tion 965(b)(4)(B). For purposes of section
902(c)(1), the post-1986 undistributed
earnings of an E&P deficit foreign corpora-
tion are increased under section 965(b)
(4)(B) and §1.965-2(d)(2)(i)(A) as of the
first day of the foreign corporation's first
taxable year following the E&P deficit for-
eign corporation's last taxable year that be-
gins before January 1, 2018.
(4) Section 902 fraction. The term sec-
tion 902 fraction means, with respect to
either a deferred foreign income corpora-
tion or an E&P deficit foreign corporation,
the fraction that is-
(i) The dividends paid by, or the inclu-
sion under section 951(a)(1) (including a
section 965(a) inclusion) with respect to,
the foreign corporation, as applicable (the
numerator), divided by
(ii) The foreign corporation's post-
1986 undistributed earnings or pre-1987
accumulated profits, as applicable (the de-
nominator).
(c) Allocation and apportionment of
deductions. For purposes of allocating and
apportioning expenses, a section 965(c)
deduction does not result in any gross
income, including a section 965(a) inclu-
sion, being treated as exempt, excluded, or
eliminated income within the meaning of
section 864(e)(3) or §1.861-8T(d). Simi-
larly, a section 965(c) deduction does not
result in the treatment of stock as an ex-
empt asset within the meaning of section
864(e)(3) or §1.861-8T(d). In addition,
consistent with the general inapplicability
of §1.861-8T(d)(2) to earnings and prof-
its described in section 959(c)(1) or
959(c)(2), neither section 965(a) previ-
ously taxed earnings and profits nor sec-
tion 965(b) previously taxed earnings and
profits are treated as giving rise to gross
income that is exempt, excluded, or elim-
inated income. Similarly, the asset that
gives rise to a section 965(a) inclusion,
section 965(a) previously taxed earnings
and profits, or section 965(b) previously
taxed earnings and profits is not treated as
a tax-exempt asset.
(d) Hovering deficits. In the last taxable
year that begins before January 1, 2018, of
a deferred foreign income corporation that
is also a foreign surviving corporation, as
defined in §1.367(b)-7(a), solely for pur-
poses of determining the amount of re-
lated taxes that are included in post-1986
foreign income taxes under §1.367(b)-
7(d)(2)(iii)-
(1) The post-transaction earnings de-
scribed in §1.367(b)-7(d)(2)(ii) that can
be offset by a hovering deficit include any
post-transaction earnings earned in that
year that were not considered accumulated
because they were included in income under
section 965 and §1.965-1(b)(1) by a section
958(a) U.S. shareholder; and
(2) Any offset for purposes of
§1.367(b)-7(d)(2)(ii) is treated as oc-
curring on the last day of the foreign
surviving corporation's inclusion year.
§1.965-7 Elections, payment, and other
special rules.
(a) Scope. This section provides rules
regarding certain elections and payments.
Paragraph (b) of this section provides
rules regarding the section 965(h) elec-
tion. Paragraph (c) of this section provides
rules regarding the section 965(i) election.
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Paragraph (d) of this section provides
rules regarding the section 965(m) elec-
tion and a special rule for real estate in-
vestment trusts. Paragraph (e) of this sec-
tion provides rules regarding the section
965(n) election. Paragraph (f) of this sec-
tion provides rules regarding the election
to use the alternative method for calculat-
ing post-1986 earnings and profits. Para-
graph (g) of this section provides defini-
tions that apply for purposes of this
section.
(b) Section 965(h) election-(1) In
general. Any person with a section 965(h)
net tax liability (that is, a section 958(a) U.S.
shareholder or a domestic pass-through
owner with respect to a domestic pass-
through entity that is a section 958(a) U.S.
shareholder, but not a domestic pass-
through entity itself) may elect under sec-
tion 965(h) and this paragraph (b) to pay its
section 965(h) net tax liability in eight in-
stallments. This election may be revoked
only by paying the full amount of the re-
maining unpaid section 965(h) net tax lia-
bility.
(i) Amount of installments. Except as
provided in paragraph (b)(3) of this sec-
tion, if a person makes a section 965(h)
election, the amounts of the installments
are-
(A) Eight percent of the section 965(h)
net tax liability in the case of each of the
first five installments;
(B) Fifteen percent of the section
965(h) net tax liability in the case of the
sixth installment;
(C) Twenty percent of the section
965(h) net tax liability in the case of the
seventh installment; and
(D) Twenty-five percent of the section
965(h) net tax liability in the case of the
eighth installment.
(ii) Increased installments due to a de-
ficiency or a timely filed or amended re-
turn-(A) In general. If a person makes a
section 965(h) election, except as pro-
vided in paragraph (b)(1)(ii)(C) of this
section, any deficiency or additional lia-
bility will be prorated to the installments
described under paragraph (b)(1)(i) of this
section if any of the following occur:
(1) A deficiency is assessed with re-
spect to the person's section 965(h) net
tax liability;
(2) The person files a return by the due
date of the return (taking into account
extensions, if any) increasing the amount
of its section 965(h) net tax liability be-
yond that taken into account in paying the
first installment described under para-
graph (b)(1)(i) of this section; or
(3) The person files an amended return
that reflects an increase in the amount of
its section 965(h) net tax liability.
(B) Timing. If the due date for the
payment of an installment to which
the deficiency is prorated has passed, the
amount prorated to such installment must
be paid on notice and demand by the
Secretary, or, in the case of an additional
liability reported on a return increasing
the amount of the section 965(h) net tax
liability after payment of the first install-
ment or on an amended return, with the
filing of the return. If the due date for
the payment of an installment to which the
deficiency or additional liability is pro-
rated has not passed, then such amount
will be due at the same time as, and as part
of, the relevant installment.
(C) Exception for negligence, inten-
tional disregard, or fraud. If a deficiency
or additional liability is due to negligence,
intentional disregard of rules and regula-
tions, or fraud with intent to evade tax, the
proration rule of this paragraph (b)(1)(ii)
will not apply, and the deficiency or ad-
ditional liability (as well as any applicable
interest and penalties) must be paid on
notice and demand by the Secretary or, in
the case of an additional liability reported
on a return increasing the amount of the
section 965(h) net tax liability after pay-
ment of the first installment or on an
amended return, with the filing of the re-
turn.
(iii) Due date of installments-(A) In
general. If a person makes a section
965(h) election, the first installment pay-
ment is due on the due date (without re-
gard to extensions) for the return for the
relevant taxable year. For purposes of this
paragraph (b), the term relevant taxable
year means, in the case in which the per-
son is a section 958(a) U.S. shareholder,
the section 958(a) U.S. shareholder inclu-
sion year, or, in the case in which the
person is a domestic pass-through owner,
the taxable year in which the person has
the section 965(a) inclusion to which the
section 965(h) net tax liability is attribut-
able. Each succeeding installment pay-
ment is due on the due date (without re-
gard to extensions) for the return for the
taxable year following the taxable year
with respect to which the previous install-
ment payment was made.
(B) Extension for specified individuals.
If a person is a specified individual with
respect to a taxable year within which an
installment payment is due pursuant to
paragraph (b)(1)(iii)(A) of this section,
then, for purposes of determining the due
date of an installment payment under
paragraph (b)(1)(iii)(A) of this section, the
due date of the return (without regard to
extensions) due within the taxable year will
be treated as the fifteenth day of the sixth
month following the close of the prior tax-
able year. This paragraph (b)(1)(iii)(B) is
applicable regardless of whether the person
is a specified individual with respect to the
relevant taxable year.
(2) Manner of making election-(i) El-
igibility. Any person with a section 965(h)
net tax liability may make the section 965(h)
election, provided that, with respect to the
person, none of the acceleration events de-
scribed in paragraph (b)(3)(ii) of this section
has occurred before the election is made.
Notwithstanding the preceding sentence, a
person that would be eligible to make the
section 965(h) election but for the occur-
rence of an event described in paragraph
(b)(3)(ii) of this section may make the sec-
tion 965(h) election if the exception de-
scribed in paragraph (b)(3)(iii)(A) of this
section applies.
(ii) Timing. A section 965(h) election
must be made no later than the due date
(taking into account extensions, if any, or
any additional time that would have been
granted if the person had made an exten-
sion request) for the return for the relevant
taxable year. Relief is not available under
§301.9100-2 or §301.9100-3 to file a late
election.
(iii) Election statement. Except as oth-
erwise provided in publications, forms,
instructions, or other guidance, to make a
section 965(h) election, a person must at-
tach a statement, signed under penalties of
perjury consistent with the rules for sig-
natures applicable to the person's return,
to its return for the relevant taxable year.
The statement must include the person's
name, taxpayer identification number, to-
tal net tax liability under section 965,
section 965(h) net tax liability, section
965(i) net tax liability with respect to
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which a section 965(i) election is effective
(if applicable), and the anticipated amounts
of each installment described under para-
graph (b)(1)(i) of this section. The statement
must be filed in the manner prescribed in
publications, forms, instructions, or other
guidance. The attachment of an unsigned
copy of the election statement to the timely-
filed return for the relevant taxable year
satisfies the signature requirement of this
paragraph (b)(2)(iii) if the person making
the election retains the original signed elec-
tion statement in the manner specified by
§1.6001-1(e).
(3) Acceleration of payment-(i) Ac-
celeration. Notwithstanding paragraph
(b)(1)(i) of this section, if a person
makes a section 965(h) election and an
acceleration event described in para-
graph (b)(3)(ii) of this section subse-
quently occurs, then, except as provided
in paragraph (b)(3)(iii) of this section,
the unpaid portion of the remaining in-
stallments will be due on the date of the
acceleration event (or in the case of a
title 11 or similar case, the day before
the petition is filed).
(ii) Acceleration events. The following
events are acceleration events for pur-
poses of paragraph (b)(3)(i) of this section
with respect to a person that has made a
section 965(h) election-
(A) An addition to tax is assessed for
the failure to timely pay an installment
described in paragraph (b)(1)(i) of this
section;
(B) A liquidation, sale, exchange, or
other disposition of substantially all of the
assets of the person (including in a title 11
or similar case, or, in the case of an indi-
vidual, by reason of death);
(C) In the case of a person that is not an
individual, a cessation of business by the
person;
(D) Any event that results in the person
no longer being a United States person,
including a resident alien (as defined in
section 7701(b)(1)(A)) becoming a non-
resident alien (as defined in section
7701(b)(1)(B));
(E) In the case of a person that was not
a member of any consolidated group, the
person becoming a member of a consoli-
dated group;
(F) In the case of a consolidated group,
the group ceasing to exist (including by
reason of the acquisition of a consolidated
group within the meaning of §1.1502-
13(j)(5)) or the group otherwise discontin-
uing in the filing of a consolidated return;
or
(G) A determination by the Commis-
sioner described in the second sentence of
paragraph (b)(3)(iii)(C)(2) of this section.
(iii) Eligible section 965(h) transferee
exception-(A) In general. Paragraph
(b)(3)(i) of this section does not apply
(such that the unpaid portion of all re-
maining installments will not be due as of
the date of the acceleration event) to a per-
son with respect to which an acceleration
event occurs if the requirements described
in paragraphs (b)(3)(iii)(A)(1)and (2) of this
section are satisfied. A person with respect
to which an acceleration event described in
this paragraph (b)(3)(iii)(A) occurs is re-
ferred to as an eligible section 965(h) trans-
feror.
(1) Requirement to have a covered ac-
celeration event. The acceleration event
satisfies the requirements of this para-
graph (b)(3)(iii)(A)(1) if it is described
in-
(i) Paragraph (b)(3)(ii)(B) of this sec-
tion, and the acceleration event is a qual-
ifying consolidated group member trans-
action within the meaning of paragraph
(b)(3)(iii)(E) of this section;
(ii) Paragraph (b)(3)(ii)(B) of this sec-
tion (other than, in the case of an individ-
ual, an acceleration event caused by rea-
son of death) in a transaction that is not a
qualifying consolidated group member
transaction;
(iii) Paragraph (b)(3)(ii)(E) of this sec-
tion;
(iv) Paragraph (b)(3)(ii)(F) of this sec-
tion, and the acceleration event results
from the acquisition of a consolidated
group within the meaning of §1.1502-
13(j)(5), and the acquired consolidated
group members join a different consoli-
dated group as of the day following the
acquisition;
(v) Paragraph (b)(3)(ii)(F) of this sec-
tion, and the group ceases to exist as a
result of the transfer of all of the assets of
one or more members of the consolidated
group to other members with only one
entity remaining (the successor entity); or
(vi) Paragraph (b)(3)(ii)(F) of this sec-
tion, and the group ceases to exist as a
result of the termination of the subchapter
S election pursuant to section 1362(d) of a
shareholder of the common parent of the
consolidated group and, for the sharehold-
er's taxable year immediately following
the termination, the shareholder joins in
the filing of a consolidated return as a
consolidated group that includes all of the
former members of the former consoli-
dated group.
(2) Requirement to enter into a transfer
agreement. An eligible section 965(h) trans-
feror and an eligible section 965(h) transferee
(as defined in paragraph (b)(3)(iii)(B)(1) of
this section) must enter into an agreement with
the Commissioner that satisfies the require-
ments of paragraph (b)(3)(iii)(B) of this sec-
tion.
(B) Transfer agreement-(1) Eligibility.
A transfer agreement that satisfies the re-
quirements of this paragraph (b)(3)(iii)(B)
must be entered into by an eligible section
965(h) transferor and an eligible section
965(h) transferee. For this purpose, the term
eligible section 965(h) transferee refers to a
single United States person that is not a
domestic pass-through entity and that-
(i) With respect to an acceleration event
described in paragraph (b)(3)(iii)(A)(1)(i) of
this section, is a departing member (as de-
fined in paragraph (b)(3)(iii)(E)(1)(i) of this
section) or its qualified successor (as defined
in paragraph (b)(3)(iii)(E)(2) of this sec-
tion);
(ii) With respect to an acceleration event
described in paragraph (b)(3)(iii)(A)(1)(ii)
of this section, acquires substantially all of
the assets of an eligible section 965(h) trans-
feror;
(iii) With respect to an acceleration event
described in paragraph (b)(3)(iii)(A)(1)(iii)
of this section, is the agent (within the
meaning of §1.1502-77) of the consolidated
group that the eligible section 965(h) trans-
feror joins;
(iv) With respect to an acceleration event
described in paragraph (b)(3)(iii)(A)(1)(iv)
of this section, is the agent (within the
meaning of §1.1502-77) of the surviving
consolidated group;
(v) With respect to an acceleration event
described in paragraph (b)(3)(iii)(A)(1)(v)
of this section, is the successor entity
(within the meaning of paragraph (b)(3)
(iii)(A)(1)(v) of this section); or
(vi) With respect an acceleration event
described in paragraph (b)(3)(iii)(A)
(1)(vi) of this section, is the agent (within
the meaning of §1.1502-77) of the con-
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solidated group that includes the share-
holder whose subchapter S election was
terminated and all of the former members
of the former consolidated group.
(2) Filing requirements-(i) In gen-
eral. A transfer agreement must be timely
filed. Except as provided in paragraph
(b)(3)(iii)(B)(2)(ii) of this section, a trans-
fer agreement is considered timely filed
only if the transfer agreement is filed
within 30 days of the date that the accel-
eration event occurs. The transfer agree-
ment must be filed in accordance with the
rules provided in publications forms, in-
structions, or other guidance. In addition, a
duplicate copy of the transfer agreement
must be attached to the returns of both the
eligible section 965(h) transferee and the
eligible section 965(h) transferor for the tax-
able year during which the acceleration
event occurs filed by the due date for such
returns (taking into account extensions,
if any). Relief is not available under
§301.9100-2 or 301.9100-3 to file a trans-
fer agreement late.
(ii) Transition rule. If an acceleration
event occurs on or before February 5,
2019, the transfer agreement must be filed
by March 7, 2019, to be considered timely
filed.
(3) Signature requirement. The transfer
agreement that is filed within 30 days of
the acceleration event or by the due date
specified in paragraph (b)(3)(iii)(B)(2)(ii)
of this section must be signed under pen-
alties of perjury by a person who is au-
thorized to sign a return on behalf of the
eligible section 965(h) transferor and a
person who is authorized to sign a return
on behalf of the eligible section 965(h)
transferee.
(4) Terms of agreement. A transfer agree-
ment under this paragraph (b)(3)(iii)(B) must
be entitled "Transfer Agreement Under Sec-
tion 965(h)(3)" and must contain the following
information and representations-
(i) A statement that the document con-
stitutes an agreement by the eligible sec-
tion 965(h) transferee to assume the lia-
bility of the eligible section 965(h)
transferor for any unpaid installment pay-
ments of the eligible section 965(h) trans-
feror under section 965(h);
(ii) A statement that the eligible section
965(h) transferee (and, if the eligible sec-
tion 965(h) transferor continues in exis-
tence immediately after the acceleration
event, the eligible section 965(h) trans-
feror) agrees to comply with all of the
conditions and requirements of section
965(h) and paragraph (b) of this section,
as well as any other applicable require-
ments in the section 965 regulations;
(iii) The name, address, and taxpayer
identification number of the eligible sec-
tion 965(h) transferor and the eligible sec-
tion 965(h) transferee;
(iv) The amount of the eligible section
965(h) transferor's section 965(h) net tax
liability remaining unpaid, as determined
by the eligible section 965(h) transferor,
which amount is subject to adjustment by
the Commissioner;
(v) A copy of the eligible section
965(h) transferor's most recent Form
965-A or Form 965-B, as applicable, if the
eligible section 965(h) transferor has been
required to file a Form 965-A or Form
965-B;
(vi) A detailed description of the accel-
eration event that led to the transfer agree-
ment;
(vii) A representation that the eligible
section 965(h) transferee is able to make
the remaining payments required under
section 965(h) and paragraph (b) of this
section with respect to the section 965(h)
net tax liability being assumed;
(viii) If the eligible section 965(h)
transferor continues to exist immediately
after the acceleration event, an acknowl-
edgement that the eligible section 965(h)
transferor and any successor to the eligible
section 965(h) transferor will remain jointly
and severally liable for any unpaid install-
ment payments of the eligible section 965(h)
transferor under section 965(h), including, if
applicable, under §1.1502-6;
(ix) A statement as to whether the le-
verage ratio of the eligible section 965(h)
transferee and all subsidiary members of
its affiliated group immediately after the
acceleration event exceeds three to one,
which ratio may be modified as provided
in publications, forms, instructions, or
other guidance;
(x) A certification by the eligible sec-
tion 965(h) transferee stating that the eli-
gible section 965(h) transferee waives the
right to a notice of liability and consents
to the immediate assessment of the por-
tion of the section 965(h) net tax liability
remaining unpaid; and
(xi) Any additional information, repre-
sentation, or certification required by the
Commissioner in publications, forms, in-
structions, or other guidance.
(5) Consolidated groups. For purposes
of this paragraph (b)(3)(iii)(B), in the case
of a consolidated group, the terms "eligi-
ble section 965(h) transferor" and "eligi-
ble section 965(h) transferee" each refer
to a consolidated group that is a party to a
covered acceleration event described in
paragraph (b)(3)(iii)(A)(1) of this section.
In such a case, any transfer agreement
under this paragraph (b)(3)(iii)(B) must be
entered into by the agent (as defined in
§1.1502-77) of the relevant consolidated
group.
(6) Leverage ratio. For purposes of
paragraph (b)(3)(iii)(B)(4)(ix) of this sec-
tion, and except as otherwise provided in
publications, forms, instructions, or other
guidance, the term leverage ratio means
the ratio that the total indebtedness of the
eligible section 965(h) transferee bears to
the sum of its money and all other assets
reduced (but not below zero) by such total
indebtedness. For this purpose, the amount
taken into account with respect to any asset
is the adjusted basis thereof for purposes of
determining gain, and the amount taken into
account with respect to any indebtedness
with original issue discount is its issue price
plus the portion of the original issue dis-
count previously accrued as determined un-
der the rules of section 1272 (determined
without regard to subsection (a)(7) or (b)(4)
thereof).
(C) Consent of Commissioner-(1) In
general. Except as otherwise provided in
publications, forms, instructions, or other
guidance, if an eligible section 965(h)
transferor and an eligible section 965(h)
transferee file a transfer agreement in ac-
cordance with the provisions of paragraph
(b)(3)(iii)(B) of this section, the eligible
section 965(h) transferor and the eligible
section 965(h) transferee will be consid-
ered to have entered into an agreement
described in paragraph (b)(3)(iii)(A)(2) of
this section with the Commissioner for
purposes of section 965(h)(3) and para-
graph (b)(3)(iii) of this section. If the
Commissioner determines that additional
information is necessary (for example, ad-
ditional information regarding the ability
of the eligible section 965(h) transferee to
fully pay the remaining section 965(h) net
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tax liability), the eligible section 965(h)
transferee must provide such information
upon request.
(2) Material misrepresentations and
omissions. If the Commissioner deter-
mines that an agreement filed by an eligi-
ble section 965(h) transferor and an eligi-
ble section 965(h) transferee contains a
material misrepresentation or material
omission, or if the eligible section 965(h)
transferee does not provide the additional
information requested under paragraph
(b)(3)(iii)(C)(1) of this section within a
reasonable timeframe communicated by
the Commissioner to the eligible section
965(h) transferee, then the Commissioner
may reject the transfer agreement (effec-
tive as of the date of the related accelera-
tion event). In the alternative, on the date
that the Commissioner determines that the
transfer agreement includes a material
misrepresentation or material omission,
the Commissioner may determine that an
acceleration event has occurred with re-
spect to the eligible section 965(h) trans-
feree as of the date of the determination,
such that any unpaid installment payments
of the eligible section 965(h) transferor
that were assumed by the eligible section
965(h) transferee become due on the date
of the determination.
(D) Effect of assumption-(1) In gen-
eral. If the exception in this paragraph
(b)(3)(iii) applies with respect to an eligi-
ble section 965(h) transferor and an eligi-
ble section 965(h) transferee, the eligible
section 965(h) transferee assumes all of
the outstanding obligations and responsi-
bilities of the eligible section 965(h) trans-
feror with respect to the section 965(h) net
tax liability as though the eligible section
965(h) transferee had included the section
965(a) inclusion in income. Accordingly,
the eligible section 965(h) transferee is
responsible for making payments and re-
porting with respect to any unpaid install-
ment payments. In addition, for example,
if an acceleration event described in para-
graph (b)(3)(ii) of this section occurs with
respect to an eligible section 965(h) trans-
feree, any unpaid installment payments of
the eligible section 965(h) transferor that
were assumed by the eligible section
965(h) transferee will become due on the
date of such event, subject to any appli-
cable exception in paragraph (b)(3)(iii) of
this section.
(2) Eligible section 965(h) transferor
liability. An eligible section 965(h) trans-
feror (or a successor) remains jointly and
severally liable for any unpaid installment
payments of the eligible section 965(h)
transferor that were assumed by the eligi-
ble section 965(h) transferee, as well as
any penalties, additions to tax, or other
additional amounts attributable to such net
tax liability.
(E) Qualifying consolidated group mem-
ber transaction-(1) Definition of qualify-
ing consolidated group member transac-
tion. For purposes of this paragraph (b)(3),
the term qualifying consolidated group
member transaction means a transaction in
which-
(i) A member of a consolidated group
(the departing member) ceases to be a
member of the consolidated group (in-
cluding by reason of the distribution, sale,
or exchange of the departing member's
stock);
(ii) The transaction results in the con-
solidated group (which is treated as a sin-
gle person for this purpose under §1.965-
8(e)(1)) being treated as transferring
substantially all of its assets for purposes
of paragraph (b)(3)(ii)(B) of this section;
and
(iii) The departing member either con-
tinues to exist immediately after the trans-
action or has a qualified successor.
(2) Definition of qualified successor.
For purposes of this paragraph (b)(3), the
term qualified successor means, with re-
spect to a departing member described in
this paragraph (b)(3)(iii)(E), another do-
mestic corporation (or consolidated
group) that acquires substantially all of
the assets of the departing member (in-
cluding in a transaction described in sec-
tion 381(a)(2)).
(3) Departure of multiple members of a
consolidated group. Multiple members
that deconsolidate from the same consol-
idated group as a result of a single trans-
action are treated as a single departing
member to the extent that, immediately
after the transaction, they become mem-
bers of the same (second) consolidated
group, which would be treated as a single
person under §1.965-8(e)(1).
(c) Section 965(i) election-(1) In gen-
eral. Each shareholder of an S corporation
(including a person listed in §1.1362-
6(b)(2) with respect to a trust or estate, but
not a domestic pass-through entity itself)
that is a United States shareholder of a
deferred foreign income corporation may
elect under section 965(i) and this para-
graph (c) to defer the payment of the
shareholder's section 965(i) net tax liabil-
ity with respect to the S corporation until
the shareholder's taxable year that in-
cludes a triggering event described in
paragraph (c)(3) of this section. This elec-
tion may be revoked only by paying the
full amount of the unpaid section 965(i)
net tax liability.
(2) Manner of making election-(i) El-
igibility. Each shareholder with a section
965(i) net tax liability with respect to an S
corporation may make the section 965(i)
election with respect to such S corpora-
tion, provided that, with respect to the
shareholder, none of the triggering events
described in paragraph (c)(3)(ii) of this
section have occurred before the election
is made. Notwithstanding the preceding
sentence, a shareholder that would be el-
igible to make the section 965(i) election
but for the occurrence of an event de-
scribed in paragraph (c)(3)(ii) of this sec-
tion may make the section 965(i) election
if an exception described in paragraph
(c)(3)(iv) of this section applies.
(ii) Timing. A section 965(i) election
must be made no later than the due date
(taking into account extensions, if any) for
the shareholder's return for each taxable
year that includes the last day of the tax-
able year of the S corporation in which the
S corporation has a section 965(a) inclu-
sion to which the shareholder's section
965(i) net tax liability is attributable. Re-
lief is not available under §301.9100-2 or
301.9100-3 to make a late election.
(iii) Election statement. Except as oth-
erwise provided in publications, forms,
instructions, or other guidance, to make a
section 965(i) election, a shareholder must
attach a statement, signed under penalties
of perjury consistent with the rules for
signatures applicable to the person's re-
turn, to its return for the taxable year that
includes the last day of a taxable year of
the S corporation in which the S corpora-
tion has a section 965(a) inclusion to
which the shareholder's section 965(i) net
tax liability is attributable. The statement
must include the shareholder's name, tax-
payer identification number, the name and
taxpayer identification number of the S
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corporation with respect to which the
election is made, the amount described in
paragraph (g)(10)(i)(A) of this section as
modified by paragraph (g)(6) of this sec-
tion for purposes of determining the sec-
tion 965(i) net tax liability with respect to
the S corporation, the amount described in
paragraph (g)(10)(i)(B) of this section,
and the section 965(i) net tax liability with
respect to the S corporation. The state-
ment must be filed in the manner pre-
scribed in publications, forms, instruc-
tions, or other guidance. The attachment
of an unsigned copy of the election state-
ment to the timely-filed return for the rel-
evant taxable year satisfies the signature
requirement of this paragraph (c)(2)(iii) if
the shareholder retains the original signed
election statement in the manner specified
by §1.6001-1(e).
(3) Triggering events-(i) In general.
If a shareholder makes a section 965(i)
election with respect to an S corporation,
the shareholder defers payment of its
section 965(i) net tax liability with respect
to the S corporation until the sharehold-
er's taxable year that includes the occur-
rence of a triggering event described in
paragraph (c)(3)(ii) of this section with
respect to the section 965(i) net tax liabil-
ity with respect to the S corporation. If a
triggering event described in paragraph
(c)(3)(ii) of this section with respect to an
S corporation occurs, except as provided
in paragraph (c)(3)(iv) of this section, the
shareholder's section 965(i) net tax liabil-
ity with respect to the S corporation will
be assessed as an addition to tax for the
shareholder's taxable year that includes
the triggering event.
(ii) Triggering events. The following
events are considered triggering events for
purposes of paragraph (c)(3)(i) of this sec-
tion with respect to a shareholder's sec-
tion 965(i) net tax liability with respect to
an S corporation-
(A) The corporation ceases to be an S
corporation (determined as of the first day
of the first taxable year that the corpora-
tion is not an S corporation);
(B) A liquidation, sale, exchange, or
other disposition of substantially all of the
assets of the S corporation (including in a
title 11 or similar case), a cessation of
business by the S corporation, or the S
corporation ceasing to exist;
(C) The transfer of any share of stock
of the S corporation by the shareholder
(including by reason of death or other-
wise) that results in a change of ownership
for federal income tax purposes; or
(D) A determination by the Commis-
sioner described in the second sentence of
paragraph (c)(3)(iv)(C)(2) of this section.
(iii) Partial transfers. If an S corpora-
tion shareholder transfers less than all of
its shares of stock of the S corporation, the
transfer will be a triggering event only with
respect to the portion of a shareholder's
section 965(i) net tax liability that is prop-
erly allocable to the transferred shares.
(iv) Eligible section 965(i) transferee
exception-(A) In general. Paragraph
(c)(3)(i) of this section will not apply
(such that a shareholder's section 965(i)
net tax liability with respect to an S cor-
poration will not be assessed as an addi-
tion to tax for the shareholder's taxable
year that includes the triggering event) if
the requirements described in paragraphs
(c)(3)(iv)(A)(1) and (2) of this section are
satisfied. A shareholder with respect to
which a triggering event described in this
paragraph (c)(3)(iv)(A) occurs is referred
to as an eligible section 965(i) transferor.
(1) Requirement to have a covered
triggering event. The triggering event sat-
isfies the requirements of this paragraph
(c)(3)(iv)(A)(1) if it is described in para-
graph (c)(3)(ii)(C) of this section.
(2) Requirement to enter into a transfer
agreement. The shareholder with respect
to which a triggering event occurs and an
eligible section 965(i) transferee (as de-
fined in paragraph (c)(3)(v)(B)(1) of this
section) must enter into an agreement with
the Commissioner that satisfies the re-
quirements of paragraph (c)(3)(iv)(B) of
this section.
(B) Transfer agreement-(1) Eligibility.
A transfer agreement that satisfies the re-
quirements of this paragraph (c)(3)(iv)(B)
may be entered into by an eligible section
965(i) transferor and an eligible section
965(i) transferee. For this purpose, the term
eligible section 965(i) transferee refers to a
single United States person that becomes a
shareholder of the S corporation (including
a person listed in §1.1362-6(b)(2) with re-
spect to a trust or estate, but not a do-
mestic pass-through entity itself). In the
case of a transfer that consists of multi-
ple partial transfers (as described in
paragraph (c)(3)(iii) of this section), a
transfer agreement that satisfies the re-
quirements of this paragraph (c)(3)
(iv)(B) may be entered into by an eligi-
ble section 965(i) transferor and an eli-
gible section 965(i) transferee for each
partial transfer.
(2) Filing requirements-(i) In gen-
eral. A transfer agreement must be timely
filed. Except as provided in paragraphs
(c)(3)(iv)(B)(2)(ii) and (iii) of this section,
a transfer agreement is considered timely
filed only if the transfer agreement is filed
within 30 days of the date that the trigger-
ing event occurs. The transfer agreement
must be filed in accordance with the rules
provided in publications, forms, instruc-
tions, or other guidance. In addition, a
duplicate copy of the transfer agreement
must be attached to the returns of both the
eligible section 965(i) transferee and the
eligible section 965(i) transferor for the tax-
able year during which the triggering event
occurs filed by the due date (taking into
account extensions, if any) for such returns.
Relief is not available under §301.9100-
2 or 301.9100-3 to file a transfer agreement
late.
(ii) Transition rule. If a triggering
event occurs on or before February 5,
2019, the transfer agreement must be filed
by March 7, 2019, to be considered timely
filed.
(iii) Death of eligible section 965(i)
transferor. If the triggering event is the
death of the eligible section 965(i) trans-
feror, the transfer agreement must be filed
by the later of the unextended due date for
the eligible section 965(i) transferor's fi-
nal income tax return or March 7, 2019.
(3) Signature requirement. The transfer
agreement that is filed within 30 days of the
triggering event or by the due date specified
in paragraph (c)(3)(iv)(B)(2)(ii) or (iii) of
this section must be signed under penalties
of perjury by a person who is authorized to
sign a return on behalf of the eligible section
965(i) transferor and a person who is autho-
rized to sign a return on behalf of the eligi-
ble section 965(i) transferee.
(4) Terms of agreement. A transfer agree-
ment under this paragraph (c)(3)(iv)(B) must
be entitled "Transfer Agreement Under Sec-
tion 965(i)(2)" and must contain the following
information and representations:
(i) A statement that the document con-
stitutes an agreement by the eligible sec-
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tion 965(i) transferee to assume the liabil-
ity of the eligible section 965(i) transferor
for the unpaid portion of the section 965(i)
net tax liability, or, in the case of a partial
transfer, for the unpaid portion of the sec-
tion 965(i) net tax liability attributable to
the transferred stock;
(ii) A statement that the eligible section
965(i) transferee agrees to comply with all
of the conditions and requirements of sec-
tion 965(i) and paragraph (c) of this sec-
tion, including the annual reporting re-
quirement, as well as any other applicable
requirements in the section 965 regula-
tions;
(iii) The name, address, and taxpayer
identification number of the eligible sec-
tion 965(i) transferor and the eligible sec-
tion 965(i) transferee;
(iv) The amount of the eligible section
965(i) transferor's unpaid section 965(i)
net tax liability or, in the case of a partial
transfer, the unpaid portion of the section
965(i) net tax liability attributable to the
transferred stock, each as determined by
the eligible section 965(i) transferor,
which amount is subject to adjustment by
the Commissioner;
(v) A copy of the eligible section 965(i)
transferor's most recent Form 965-A, if
the eligible section 965(i) transferor has
been required to file a Form 965-A;
(vi) A detailed description of the trig-
gering event that led to the transfer agree-
ment, including the name and taxpayer
identification number of the S corporation
with respect to which the section 965(i)
election was effective;
(vii) A representation that the eligible
section 965(i) transferee is able to pay the
section 965(i) net tax liability being as-
sumed;
(viii) An acknowledgement that the el-
igible section 965(i) transferor and any
successor to the eligible section 965(i)
transferor will remain jointly and sever-
ally liable for the section 965(i) net tax
liability being assumed by the eligible
section 965(i) transferee;
(ix) A statement as to whether the le-
verage ratio of the eligible section 965(i)
transferee immediately after the triggering
event exceeds three to one, which ratio
may be modified as provided in publica-
tions, forms, instructions, or other guid-
ance;
(x) Any additional information, repre-
sentation, or certification required by the
Commissioner in publications, forms, in-
structions, or other guidance.
(5) Special rule in the case of death of
eligible section 965(i) transferor. Except
in the case of transfers to trusts, if the
triggering event is the death of the eligible
section 965(i) transferor, and the identity of
the beneficiary or beneficiaries (in the case
of multiple partial transfers) is determined
as of the due date for the transfer agreement
described in paragraph (c)(3)(iv)(B)(2)(iii)
of this section, then the transfer may be
treated as a transfer directly between the
eligible 965(i) transferor and the beneficiary
or beneficiaries. If, however, the identity of
the beneficiary or beneficiaries is not deter-
mined as of the due date for the transfer
agreement described in paragraph (c)(3)(iv)
(B)(2)(iii) of this section, then the transfer
must be treated first as a transfer between
the eligible section 965(i) transferor and his
or her estate at the time of death and second
as a transfer between the estate and the
beneficiary or beneficiaries when the shares
are actually transferred to the beneficiary or
beneficiaries. Separate transfer agreements
must be filed for each transfer. The transfer
from the eligible section 965(i) transferor to
his or her estate is a transfer resulting from
a triggering event that is the death of the
eligible section 965(i) transferor, and the
transfer agreement is subject to the timing
rules in paragraph (c)(3)(iv)(B)(2)(iii) of
this section. The transfer from the estate to
the beneficiary or beneficiaries is not
a transfer resulting from a triggering event
that is the death of the eligible section 965(i)
transferor, and the transfer agreement is sub-
ject to the timing rules in paragraph
(c)(3)(iv)(B)(2)(i) and (ii) of this section.
(6) Leverage ratio. For purposes of
paragraph (c)(3)(iv)(B)(4)(ix) of this sec-
tion, and except as otherwise provided in
publications, forms, instructions, or other
guidance, the term leverage ratio means
the ratio that the total indebtedness of the
eligible section 965(i) transferee bears to the
sum of its money and all other assets re-
duced (but not below zero) by such total
indebtedness. For this purpose, the amount
taken into account with respect to any asset
is the adjusted basis thereof for purposes of
determining gain, and the amount taken into
account with respect to any indebtedness
with original issue discount is its issue price
plus the portion of the original issue dis-
count previously accrued as determined un-
der the rules of section 1272 (determined
without regard to subsection (a)(7) or (b)(4)
thereof).
(C) Consent of Commissioner-(1) In
general. Except as otherwise provided in
publications, forms, instructions, or other
guidance, if an eligible section 965(i)
transferor and an eligible section 965(i)
transferee file a transfer agreement in ac-
cordance with the provisions of paragraph
(c)(3)(iv)(B) of this section, the eligible
section 965(i) transferor and the eligible
section 965(i) transferee will be consid-
ered to have entered into an agreement
with the Commissioner for purposes of
section 965(i)(2) and paragraph (c)(3)(iv)
of this section. If the Commissioner deter-
mines that additional information is nec-
essary (for example, additional informa-
tion regarding the ability of the eligible
section 965(i) transferee to pay the eligi-
ble section 965(i) transferor's unpaid sec-
tion 965(i) net tax liability), the eligible
section 965(i) transferee must provide
such information upon request.
(2) Material misrepresentations and
omissions. If the Commissioner deter-
mines that an agreement filed by an eligi-
ble section 965(i) transferor and an eligi-
ble section 965(i) transferee contains a
material misrepresentation or material
omission, or if the eligible section 965(i)
transferee does not provide the additional
information requested under paragraph
(c)(3)(iv)(C)(1) of this section within a
reasonable timeframe communicated by
the Commissioner to the eligible section
965(i) transferee, then the Commissioner
may reject the transfer agreement (effec-
tive as of the date of the related triggering
event). In the alternative, on the date that
the Commissioner determines that the
transfer agreement includes a material
misrepresentation or material omission,
the Commissioner may determine that a
triggering event has occurred with respect
to the eligible section 965(i) transferee as
of the date of the determination, such that
the unpaid section 965(i) net tax liability
of the eligible section 965(i) transferor
that was assumed by the eligible section
965(i) transferee becomes due on the date
of the determination.
(D) Effect of assumption-(1) In gen-
eral. When the exception in this paragraph
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(c)(3)(iv) applies with respect to an eligi-
ble section 965(i) transferor and an eligi-
ble section 965(i) transferee, the eligible
section 965(i) transferee assumes all of
the outstanding obligations and responsi-
bilities of the eligible section 965(i) trans-
feror with respect to the section 965(i) net
tax liability with respect to the S corpora-
tion as though the eligible section 965(i)
transferee had included the section 965(a)
inclusion in income. Accordingly, the el-
igible section 965(i) transferee is respon-
sible for making payments and reporting
with respect to any unpaid section 965(i)
net tax liability with respect to the S cor-
poration. In addition, for example, if a
triggering event described in paragraph
(c)(3)(ii) of this section occurs with re-
spect to an eligible section 965(i) trans-
feree, any unpaid portion of the section
965(i) net tax liability of the eligible sec-
tion 965(i) transferor that was assumed by
the eligible section 965(i) transferee be-
comes due on the date of such event,
subject to any applicable exception in
paragraph (c)(3)(iv) or (v) of this section.
(2) Eligible section 965(i) transferor
liability. An eligible section 965(i) trans-
feror remains jointly and severally liable
for any unpaid installment payments of
the eligible section 965(i) transferor that
were assumed by the eligible section
965(i) transferee, as well as any penalties,
additions to tax, or other additional
amounts attributable to such net tax liabil-
ity.
(v) Coordination with section 965(h)
election-(A) In general. Subject to the
limitation described in paragraph (c)(3)
(v)(D) of this section, a shareholder that
has made a section 965(i) election with
respect to an S corporation, upon the
occurrence of a triggering event with
respect to such S corporation, may make
a section 965(h) election with respect to
the portion of the shareholder's section
965(i) net tax liability with respect to
such S corporation that is assessed as an
addition to tax for the shareholder's tax-
able year that includes the triggering
event pursuant to paragraph (c)(3)(i) of
this section as if such portion were a
section 965(h) net tax liability.
(B) Timing for election. A section
965(h) election made pursuant to section
965(i)(4) and paragraph (c)(3)(v)(A) of
this section must be made no later than the
due date (taking into account extensions,
if any) for the shareholder's return for the
taxable year in which the triggering event
with respect to the S corporation occurs.
Relief is not available under §301.9100-
2 or §301.9100-3 to make a late election.
(C) Due date for installment. If a share-
holder makes a section 965(h) election
pursuant to section 965(i)(4) and para-
graph (c)(3)(v)(A) of this section, the pay-
ment of the first installment (as described
in paragraph (b)(1)(i) of this section) must
be made no later than the due date (with-
out regard to extensions) for the share-
holder's return of tax for the taxable year
in which the triggering event with respect
to the S corporation occurs.
(D) Limitation-(1) In general. Not-
withstanding paragraph (c)(3)(v)(A) of
this section, if the triggering event with
respect to an S corporation is a triggering
event described in paragraph (c)(3)(ii)(B)
of this section, then the section 965(h)
election may only be made with the con-
sent of the Commissioner.
(2) Manner of obtaining consent-(i)
In general. In order to obtain the consent
of the Commissioner as required by para-
graph (c)(3)(v)(D)(1) of this section, the
shareholder intending to make the section
965(h) election must file the agreement
described in paragraph (c)(3)(v)(D)(4) of
this section within 30 days of the occur-
rence of the triggering event, except as
described in paragraph (c)(3)(v)(D)(2)(ii)
of this section. The agreement must be
filed in accordance with the rules provided
in publications, forms, instructions, or other
guidance. In addition, a duplicate copy of
the agreement must be filed, with the share-
holder's timely-filed return for the taxable
year during which the triggering event oc-
curs (taking into account extensions, if any),
along with the election statement described
in paragraph (b)(2)(iii) of this section. Relief
is not available under §301.9100-2 or
§301.9100-3 to file an agreement late.
(ii) Transition rule. If a triggering
event occurs on or before February 5,
2019, the agreement must be filed by
March 7, 2019, in order to be considered
timely filed.
(3) Signature requirement. The agree-
ment that is filed within 30 days of the
triggering event or by the due date speci-
fied in paragraph (c)(3)(v)(D)(2)(ii) of this
section must be signed under penalties of
perjury by the shareholder.
(4) Terms of agreement. The agree-
ment under this paragraph (c)(3)(v)(D)
must be entitled "Consent Agreement Un-
der Section 965(i)(4)(D)" and must con-
tain the following information and repre-
sentations-
(i) A statement that the shareholder
agrees to comply with all of the conditions
and requirements of section 965(h) and
paragraph (b) of this section, as well as
any other applicable requirements in the
section 965 regulations;
(ii) The name, address, and taxpayer
identification number of the shareholder;
(iii) The amount of the section 965(i) net
tax liability under section 965 remaining
unpaid with respect to which the section
965(h) election is made pursuant to section
965(i)(4)(D) and paragraph (c)(3)(v)(A) of
this section, as determined by the share-
holder, which amount is subject to adjust-
ment by the Commissioner; and
(iv) A representation that the share-
holder is able to make the payments re-
quired under section 965(h) and paragraph
(b) of this section with respect to the por-
tion of the total net tax liability under
section 965 remaining unpaid described in
paragraph (c)(3)(v)(D)(4)(iii) of this sec-
tion.
(v) A statement as to whether the lever-
age ratio of the shareholder and all subsid-
iary members of its affiliated group imme-
diately following the triggering event
exceeds three to one; and
(vi) Any additional information, repre-
sentation, or certification required by the
Commissioner in publications, forms, in-
structions, or other guidance.
(5) Consent of Commissioner-(i) In
general. If a shareholder files an agree-
ment in accordance with the provisions of
paragraph (c)(3)(v)(D) of this section, the
shareholder will be considered to have
obtained the consent of the Commissioner
for purposes of section 965(i)(4)(D) and
paragraph (c)(3)(v)(D)(1) of this section.
However, if the Commissioner reviews
the agreement and determines that addi-
tional information is necessary, the share-
holder must provide such information
upon request.
(ii) Material misrepresentations and
omissions. If the Commissioner determines
that an agreement filed by a shareholder in
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accordance with the provisions of this para-
graph (c)(3)(v)(D) contains a material mis-
representation or material omission, or if the
shareholder does not provide the additional
information requested under paragraph
(c)(3)(v)(D)(5)(i) of this section within a
reasonable timeframe communicated by the
Commissioner to the shareholder, then the
Commissioner may reject the agreement
(effective as of the date of the related trig-
gering event).
(6) Leverage ratio. For purposes of
paragraph (c)(3)(v)(D)(4)(v) of this sec-
tion, and except as otherwise provided in
publications, forms, instructions, or other
guidance, the term leverage ratio means
the ratio that the total indebtedness of the
shareholder bears to the sum of its money
and all other assets reduced (but not below
zero) by such total indebtedness. For this
purpose, the amount taken into account
with respect to any asset is the adjusted
basis thereof for purposes of determining
gain, and the amount taken into account
with respect to any indebtedness with
original issue discount is its issue price
plus the portion of the original issue dis-
count previously accrued as determined
under the rules of section 1272 (deter-
mined without regard to subsection (a)(7)
or (b)(4) thereof).
(4) Joint and several liability. If any
shareholder of an S corporation makes a
section 965(i) election, the S corporation
is jointly and severally liable for the pay-
ment of the shareholder's section 965(i)
net tax liability with respect to the S cor-
poration, as well as any penalties, addi-
tions to tax, or other additional amounts
attributable to such net tax liability.
(5) Extension of limitation on collection.
If an S corporation shareholder makes a
section 965(i) election with respect to its
section 965(i) net tax liability with respect to
an S corporation, any limitation on the time
period for the collection of the net tax lia-
bility shall not begin before the date of the
triggering event with respect to the section
965(i) net tax liability.
(6) Annual reporting requirement-(i)
In general. A shareholder that makes a
section 965(i) election with respect to its
section 965(i) net tax liability with respect
to an S corporation is required to report
the amount of its deferred net tax liability
on its return of tax for the taxable year in
which the election is made and on the
return of tax for each subsequent taxable
year until such net tax liability has been
fully assessed.
(ii) Failure to report. If a shareholder
fails to report the amount of its deferred
net tax liability as required with respect to
any taxable year by the due date (taking
into account extensions, if any) for the
return of tax for that taxable year, five
percent of such deferred net tax liability
will be assessed as an addition to tax for
such taxable year.
(d) Section 965(m) election and special
rule for real estate investment trusts-(1)
In general. A real estate investment trust
may elect under section 965(m) and this
paragraph (d) to defer the inclusion in
gross income (for purposes of the compu-
tation of real estate investment trust tax-
able income under section 857(b)) of its
REIT section 965 amounts and include
them in income according to the schedule
described in paragraph (d)(2) of this sec-
tion. This election is revocable only by
including in gross income (for purposes of
the computation of real estate investment
trust taxable income under section 857(b))
the full amount of the REIT section 965
amounts.
(2) Inclusion schedule for section
965(m) election. If a real estate investment
trust makes the section 965(m) election,
the REIT section 965 amounts will be
included in the real estate investment
trust's gross income as follows-
(i) Eight percent of the REIT section
965 amounts in each taxable year in the
five-taxable year period beginning with
the taxable year the amount would other-
wise be included;
(ii) Fifteen percent of the REIT section
965 amounts in the first year following the
five year period described in paragraph
(d)(2)(i) of this section;
(iii) Twenty percent of the REIT sec-
tion 965 amounts in the second year fol-
lowing the five year period described in
paragraph (d)(2)(i) of this section; and
(iv) Twenty-five percent of the REIT
section 965 amounts in the third year fol-
lowing the five year period described in
paragraph (d)(2)(i) of this section.
(3) Manner of making election-(i) El-
igibility. A real estate investment trust
with section 965(a) inclusions may make
the section 965(m) election.
(ii) Timing. A section 965(m) election
must be made no later than the due date
(taking into account extensions, if any) for
the return for the first year of the five year
period described in paragraph (d)(2)(i) of
this section. Relief is not available under
§301.9100-2 or §301.9100-3 to make a
late election.
(iii) Election statement. Except as oth-
erwise provided in publications, forms,
instructions, or other guidance, to make a
section 965(m) election, a real estate in-
vestment trust must attach a statement,
signed under penalties of perjury consis-
tent with the rules for signatures applica-
ble to the person's return, to its return for
the taxable year in which it would otherwise
be required to include the REIT section 965
amounts in gross income. The statement
must include the real estate investment
trust's name, taxpayer identification num-
ber, REIT section 965 amounts, and the
anticipated amounts of each portion of the
REIT section 965 amounts described under
paragraph (d)(2) of this section, and the
statement must be filed in the manner pre-
scribed in publications, forms, instructions,
or other guidance. The attachment of an
unsigned copy of the election statement to
the timely-filed return for the relevant tax-
able year satisfies the signature requirement
of this paragraph (d)(3)(iii) if the real estate
investment trust retains the original signed
election statement in the manner specified
by §1.6001-1(e).
(4) Coordination with section 965(h).
A real estate investment trust that makes
the section 965(m) election may not also
make a section 965(h) election for any
year with respect to which a section
965(m) election is in effect.
(5) Acceleration of inclusion. If a real
estate investment trust makes a section
965(m) election and subsequently there is
a liquidation, sale, exchange, or other dis-
position of substantially all of the assets of
the real estate investment trust (including
in a title 11 or similar case), or a cessation
of business by the real estate investment
trust, any amount not yet included in gross
income (for purposes of the computation
of real estate investment trust taxable in-
come under section 857(b)) as a result of
the section 965(m) election will be so
included as of the day before the date of
the event. The unpaid portion of any tax
liability with respect to such inclusion will
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be due on the date of the event (or in the
case of a title 11 or similar case, the day
before the petition is filed).
(6) Treatment of section 965(a) inclu-
sions of a real estate investment trust.
Regardless of whether a real estate invest-
ment trust has made a section 965(m)
election, and regardless of whether it is a
United States shareholder of a deferred
foreign income corporation, any section
965(a) inclusions of the real estate invest-
ment trust are not taken into account as
gross income of the real estate investment
trust for purposes of applying paragraphs
(2) and (3) of section 856(c) for any tax-
able year for which the real estate invest-
ment trust takes into account a section
965(a) inclusion, including pursuant to
paragraph (d)(2) of this section.
(e) Section 965(n) election-(1) In
general-(i) General rule. A person may
elect to not take into account the amount
described in paragraph (e)(1)(ii) of this
section in determining its net operating
loss under section 172 for the taxable year
or in determining the amount of taxable
income for such taxable year (computed
without regard to the deduction allowable
under section 172) that may be reduced by
net operating loss carryovers or carry-
backs to such taxable year under section
172. The election for each taxable year is
irrevocable.
(ii) Applicable amount for section
965(n) election. If a person makes a sec-
tion 965(n) election, the amount referred
to in paragraph (e)(1)(i) of this section is
the sum of-
(A) The person's section 965(a) inclu-
sions for the taxable year reduced by the
person's section 965(c) deductions for the
taxable year, and
(B) In the case of a domestic corpora-
tion, the taxes deemed paid under section
960(a)(1) for the taxable year with respect
to the person's section 965(a) inclusions
that are treated as dividends under section
78.
(iii) Scope of section 965(n) election. If
a person makes a section 965(n) election,
the election applies to both net operating
losses for the taxable year for which the
election is made and the net operating loss
carryovers or carrybacks to such taxable
year, each in their entirety. Any section
965(n) election made by the agent (within
the meaning of §1.1502-77) of a consol-
idated group applies to all net operating
losses available to the consolidated group,
including all components of the consoli-
dated net operating loss deduction (as de-
fined in §1.1502-21(a)).
###### (iv) [Reserved]
(2) Manner of making election-(i) El-
igibility. A person with a section 965(a)
inclusion may make the section 965(n)
election.
(ii) Timing. A section 965(n) election
must be made no later than the due date
(taking into account extensions, if any) for the
person's return for the taxable year to which
the election applies. Relief is not available
under §301.9100-2 or §301.9100-3 to make
a late election.
(iii) Election statement. Except as oth-
erwise provided in publications, forms,
instructions, or other guidance, to make a
section 965(n) election, a person must at-
tach a statement, signed under penalties of
perjury consistent with the rules for sig-
natures applicable to the person's return,
to its return for the taxable year to which
the election applies. The statement must
include the person's name, taxpayer iden-
tification number, the amounts described
in section 965(n)(2)(A) and paragraph
(e)(1)(ii)(A) of this section and section
965(n)(2)(B) and paragraph (e)(1)(ii)(B)
of this section, and the sum thereof, and
the statement must be filed in the manner
prescribed in publications, forms, instruc-
tions, or other guidance. The attachment
of an unsigned copy of the election state-
ment to the timely-filed return for the rel-
evant taxable year satisfies the signature
requirement of this paragraph (e)(2)(iii) if
the person making the election retains the
original signed election statement in the
manner specified by §1.6001-1(e).
(f) Election to use alternative method
for calculating post-1986 earnings and
profits-(1) Effect of election for specified
foreign corporations that do not have a
52-53-week taxable year. If an election is
made under this paragraph (f) with respect
to a specified foreign corporation that
does not have a 52-53-week taxable year,
the amount of the post-1986 earnings and
profits (including a deficit) as of the E&P
measurement date on November 2, 2017,
is determined under paragraph (f)(3) of
this section. The election described in this
paragraph (f) is irrevocable. A specified
foreign corporation that does not have a
52-53-week taxable year may not use the
alternative method of determination in
paragraph (f)(3) of this section for pur-
poses of determining its post-1986 earn-
ings and profits on the E&P measurement
date on December 31, 2017.
(2) Effect of election for specified for-
eign corporations that have a 52-53-week
taxable year. If an election is made under
this paragraph (f) with respect to a speci-
fied foreign corporation that has a 52-53-
week taxable year, the amount of the
post-1986 earnings and profits (including
a deficit) as of both E&P measurement
dates is determined under paragraph (f)(3)
of this section. The election described in
this paragraph (f) is irrevocable.
(3) Computation of post-1986 earn-
ings and profits using alternative method.
With respect to an E&P measurement
date, the post-1986 earnings and profits of
a specified foreign corporation for which
an election is properly made equals the
sum of-
(i) The specified foreign corporation's
post-1986 earnings and profits (including
a deficit) determined as of the notional
measurement date, as if it were an E&P
measurement date, plus
(ii) The specified foreign corporation's
annualized earnings and profits amount
with respect to the notional measurement
date.
(4) Definitions-(i) 52-53-week tax-
able year. The term 52-53-week taxable
year means a taxable year described in
§1.441-2(a)(1).
(ii) Annualized earnings and profits
amount. The term annualized earnings
and profits amount means, with respect to
a specified foreign corporation, an E&P
measurement date, and a notional mea-
surement date, the amount equal to the
product of the number of days between
the notional measurement date and the
E&P measurement date (not including the
former, but including the latter) multiplied
by the daily earnings amount of the spec-
ified foreign corporation. The annualized
earnings and profits amount is expressed
as a negative number if the E&P measure-
ment date precedes the notional measure-
ment date.
(iii) Daily earnings amount. The term
daily earnings amount means, with re-
spect to a specified foreign corporation
and a notional measurement date, the
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post-1986 earnings and profits (including
a deficit) of the specified foreign corpora-
tion determined as of the close of the
notional measurement date that were
earned (or incurred) during the specified
foreign corporation's taxable year that in-
cludes the notional measurement date, di-
vided by the number of days that have
elapsed in such taxable year as of the
close of the notional measurement date.
(iv) Notional measurement date. The
term notional measurement date means-
(A) With respect to an E&P measure-
ment date of a specified foreign corpora-
tion with a 52-53-week taxable year, the
closest end of a fiscal month to such E&P
measurement date, and
(B) With respect to the E&P measure-
ment date on November 2, 2017, of all
specified foreign corporations not de-
scribed in paragraph (f)(4)(iv)(A) of this
section, October 31, 2017.
(5) Manner of making election-(i) El-
igibility. An election with respect to a
specified foreign corporation to use the
alternative method of calculating post-
1986 earnings and profits as of an E&P
measurement date pursuant to this para-
graph (f) must be made on behalf of the
specified foreign corporation by a control-
ling domestic shareholder (as defined in
§1.964-1(c)(5)) pursuant to the rules of
§1.964-1(c)(3), except that the control-
ling domestic shareholder is not required
to file the statement described in §1.964-
1(c)(3)(ii).
(ii) Timing. An election under this
paragraph (f) must be made no later than
the due date (taking into account exten-
sions, if any) for the person's return for
the first taxable year in which the person
has a section 965(a) inclusion amount
with respect to the specified foreign corpo-
ration or in which the person takes into
account a specified E&P deficit with respect
to the specified corporation for purposes of
computing a section 965(a) inclusion
amount with respect to another specified
foreign corporation. Relief is not available
under §301.9100-2 or §301.9100-3 to
make a late election.
(iii) Election statement. Except as oth-
erwise provided in publications, forms,
instructions, or other guidance, to make an
election under this paragraph (f), a person
must attach a statement, signed under pen-
alties of perjury consistent with the rules
for signatures applicable to the person's
return, to the person's return for the tax-
able year described in paragraph (f)(5)(ii)
of this section. The statement must in-
clude the person's name, taxpayer identi-
fication number, and the name and tax-
payer identification number, if any, of
each of the specified foreign corporations
with respect to which the election is made,
and the statement must be filed in the
manner prescribed in instructions or other
guidance. The attachment of an unsigned
copy of the election statement to the
timely-filed return for the relevant taxable
year satisfies the signature requirement of
this paragraph (f)(5)(iii) if the person
making the election retains the original
signed election statement in the manner
specified by §1.6001-1(e).
(6) Examples. The following examples
illustrate the application of this paragraph
(f).
(i) Example 1. (A) Facts. FS, a foreign corpora-
tion, has a calendar year taxable year, and as of
October 31, 2017, FS has post-1986 earnings and
profits of 10,000u, 3,040u of which were earned
during the taxable year that includes October 31,
2017. An election is properly made under paragraph
(f)(5) of this section with respect to FS, allowing FS
to determine its post-1986 earnings and profits under
the alternative method with respect to its E&P mea-
surement date on November 2, 2017.
(B) Analysis. As of the close of October 31,
2017, the notional measurement date with respect to
the E&P measurement date on November 2, 2017,
304 days have elapsed in the taxable year of FS that
includes October 31, 2017. Therefore, FS's daily
earnings amount is 10u (3,040u divided by 304), and
FS's annualized earnings and profits amount is 20u
(10u multiplied by 2 (the number of days between
the notional measurement date on October 31, 2017,
and the E&P measurement date on November 2,
2017)). Accordingly, FS's post-1986 earnings and
profits as of November 2, 2017, are 10,020u (its
post-1986 earnings and profits as of October 31,
2017 (10,000u), plus its annualized earnings and
profits amount (20u)).
(ii) Example 2. (A) Facts. The facts are the same
as in paragraph (f)(6)(i)(A) of this section (the facts
in Example 1), except that a deficit of 3,040u was
incurred during the taxable year that includes Octo-
ber 31, 2017.
(B) Analysis. The analysis is the same as in
paragraph (f)(6)(i)(B) of this section (the analysis in
Example 1), except that FS's daily earnings amount
is (10u) ((3,040u) divided by 304), and FS's annu-
alized earnings and profits amount is (20u) ((10u)
multiplied by 2 (the number of days between the
notional measurement date on October 31, 2017, and
the E&P measurement date on November 2, 2017)).
Accordingly, FS's post-1986 earnings and profits as
of November 2, 2017, are 9,980u (its post-1986
earnings and profits as of October 31, 2017
(10,000u), plus its annualized earnings and profits
amount ((20u))).
(g) Definitions. This paragraph (g) pro-
vides definitions that apply for purposes
of this section.
(1) Deferred net tax liability. The term
deferred net tax liability means, with re-
spect to any taxable year of a person, the
amount of the section 965(i) net tax lia-
bility the payment of which has been de-
ferred under section 965(i) and paragraph
(c) of this section.
(2) REIT section 965 amounts. The
term REIT section 965 amounts means,
with respect to a real estate investment
trust and a taxable year of the real estate
investment trust, the aggregate amount of
section 965(a) inclusions and section
965(c) deductions that would (but for sec-
tion 965(m)(1)(B) and paragraph (d) of
this section) be taken into account in de-
termining the real estate investment trust's
income for the taxable year.
(3) Section 965(h) election. The term
section 965(h) election means the election
described in section 965(h)(1) and para-
graph (b)(1) of this section.
(4) Section 965(h) net tax liability. The
term section 965(h) net tax liability
means, with respect to a person that has
made a section 965(h) election, the total
net tax liability under section 965 reduced
by the aggregate amount of the person's
section 965(i) net tax liabilities, if any,
with respect to which section 965(i) elec-
tions are effective.
(5) Section 965(i) election. The term
section 965(i) election means the election
described in section 965(i)(1) and para-
graph (c)(1) of this section.
(6) Section 965(i) net tax liability. The
term section 965(i) net tax liability means,
with respect to an S corporation and a
shareholder of the S corporation, in the
case in which a section 965(i) election is
made, the amount determined pursuant to
paragraph (g)(10)(i) of this section
by adding before the word "over" in
(g)(10)(i)(A) of this section "determined
as if the only section 965(a) inclusions
included in income by the person are do-
mestic pass-through entity shares of sec-
tion 965(a) inclusions by the S corpora-
tion with respect to deferred foreign
income corporations of which the S cor-
poration is a United States shareholder."
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(7) Section 965(m) election. The term
section 965(m) election means the elec-
tion described in section 965(m)(1)(B)
and paragraph (d)(1) of this section.
(8) Section 965(n) election. The term
section 965(n) election means the election
described in section 965(n)(1) and para-
graph (e)(1)(i) of this section.
(9) Specified individual. The term spec-
ified individual means, with respect to a
taxable year, a person described in
§1.6081-5(a)(5) or (6) who receives an
extension of time to file and pay under
§1.6081-5(a) for the taxable year.
(10) Total net tax liability under sec-
tion 965-(i) General rule. The term total
net tax liability under section 965 means,
with respect to a person, the excess (if
any) of-
(A) The person's net income tax for the
taxable year in which the person includes
a section 965(a) inclusion in income,
over-
(B) The person's net income tax for the
taxable year determined-
(1) Without regard to section 965, and
(2) Without regard to any income, de-
duction, or credit properly attributable to a
dividend received (directly or through a
chain of ownership described in section
958(a)) by the person (or, in the case of a
domestic pass-through owner, by the per-
son's domestic pass-through entity) from, or
an inclusion under sections 951(a)(1)(B)
and 956 with respect to, a deferred foreign
income corporation and paid during, or in-
cluded with respect to, the deferred foreign
income corporation's inclusion year.
(ii) Net income tax. For purposes of this
paragraph (g)(10), the term net income tax
means the regular tax liability (as defined in
section 26(b)) reduced by the credits al-
lowed under subparts A, B, and D of part IV
of subchapter A of chapter 1 of subtitle A of
the Internal Revenue Code.
(iii) Foreign tax credits. The foreign
tax credit disregarded in determining net
income tax determined under paragraph
(g)(10)(i)(B) of this section includes the
credit for foreign income taxes deemed
paid with respect to section 965(a) inclu-
sions or foreign income taxes deemed
paid with respect to a dividend, including
a distribution that would have been treated
as a dividend in the absence of section
965. The foreign tax credit disregarded
under paragraph (g)(10)(i)(B) of this sec-
tion also includes the credit for foreign
income taxes imposed on distributions of
section 965(a) previously taxed earnings
and profits or 965(b) previously taxed
earnings and profits made in the taxable
year in which the person includes a sec-
tion 965(a) inclusion in income.
§1.965-8 Affiliated groups (including
consolidated groups).
(a) Scope. This section provides rules
for applying section 965 and the section
965 regulations to members of an affili-
ated group (as defined in section 1504(a)),
including members of a consolidated
group (as defined in §1.1502-1(h)). Para-
graph (b) of this section provides guid-
ance regarding the application of section
965(b)(5) to determine the section 965(a)
inclusion amounts of a member of an af-
filiated group. Paragraph (c) of this sec-
tion provides guidance for designating the
source of aggregate unused E&P deficits.
Paragraph (d) provides rules regarding
earning and profits and stock basis adjust-
ments. Paragraph (e) of this section pro-
vides rules that treat members of a con-
solidated group as a single person for
certain purposes. Paragraph (f) of this sec-
tion provides definitions that apply for
purposes of this section. Paragraph (g) of
this section provides examples illustrating
the application of this section.
(b) Reduction of E&P net surplus
shareholder's pro rata share of the sec-
tion 965(a) earnings amount of a deferred
foreign income corporation by the alloca-
ble share of the applicable share of the
aggregate unused E&P deficit-(1) In
general. This paragraph (b) applies after
the application of §1.965-1(b)(2) for pur-
poses of determining the section 965(a)
inclusion amount with respect to a de-
ferred foreign income corporation of a
section 958(a) U.S. shareholder that is
both an E&P net surplus shareholder and a
member of an affiliated group in which
not all members are members of the same
consolidated group. If this paragraph (b)
applies, the U.S. dollar amount of the sec-
tion 958(a) U.S. shareholder's pro rata
share of the section 965(a) earnings
amount of the deferred foreign income
corporation is further reduced (but not be-
low zero) by the deferred foreign income
corporation's allocable share of the sec-
tion 958(a) U.S. shareholder's applicable
share of the affiliated group's aggregate
unused E&P deficit.
(2) Consolidated group as part of an
affiliated group. If some, but not all, mem-
bers of an affiliated group are members of
a consolidated group, then the consoli-
dated group is treated as a single member
of the affiliated group for purposes of
§1.965-1(b)(2) and paragraph (b)(1) of
this section.
(c) Designation of portion of excess
aggregate foreign E&P deficit taken into
account-(1) In general. This paragraph
(c) provides rules for designating the
source of an aggregate unused E&P deficit
of an affiliated group that is not also a
consolidated group taken into account un-
der section 965(b)(5) and paragraph (b) of
this section if the amount described in para-
graph (f)(1)(i)(A) of this section with re-
spect to the affiliated group exceeds the
amount described in paragraph (f)(1)(i)(B)
of this section with respect to the affiliated
group. If this paragraph (c)(1) applies, each
member of the affiliated group that is an
E&P net deficit shareholder must designate
by maintaining in its books and records a
statement (identical to the statement main-
tained by all other such members) setting
forth the portion of the excess aggregate
foreign E&P deficit of the E&P net deficit
shareholder taken into account under section
965(b)(5) and paragraph (b) of this section.
See §1.965-2(d)(2)(ii)(B) for a rule for des-
ignating the portion of a section 958(a) U.S.
shareholder's pro rata share of a specified
E&P deficit of an E&P deficit foreign cor-
poration taken into account under section
965(b), §1.965-1(b)(2), and paragraph (b)
of this section, as applicable.
(2) Consolidated group as part of an
affiliated group. If some, but not all, mem-
bers of an affiliated group are properly
treated as members of a consolidated
group, then the consolidated group is
treated as a single member of the affiliated
group for purposes of applying paragraph
(c)(1) of this section.
(d) Adjustments to earning and profits
and stock basis.
(1) [Reserved]
(2) Consolidated groups. See §1.1502-
33(d)(1) for adjustments to members' earn-
ings and profits and §1.1502-32(b)(3) for
adjustments to members' basis.
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(e) Treatment of a consolidated group
as a single section 958(a) U.S. share-
holder or a single person-(1) In general.
All members of a consolidated group that
are section 958(a) U.S. shareholders of a
specified foreign corporation are treated
as a single section 958(a) U.S. shareholder
for purposes of section 965(b), §1.965-
1(b)(2), and §1.965-3. Furthermore, all
members of a consolidated group are
treated as a single person for purposes of
paragraphs (h), (k), and (n) of section 965
and §1.965-7. Thus, for example, any
election governed by section 965(h) and
§1.965-7(b) must be made by the agent
(within the meaning of §1.1502-77) of the
group as a single election on behalf of all
members of the consolidated group. Sim-
ilarly, the determination of whether the
transfer of assets by one member to a
non-member of the consolidated group
would constitute an acceleration event un-
der section §1.965-7(b)(3)(ii)(B) takes
into account all of the assets of the con-
solidated group, which for purposes of
this determination, includes all of the as-
sets of each consolidated group member.
In analyzing issues relating to the transfer
of assets of a consolidated group, appro-
priate adjustments are made to prevent the
duplication of assets or asset value.
(2) Limitation. Paragraph (e)(1) of this
section does not apply to treat all mem-
bers of a consolidated group as a single
section 958(a) U.S. shareholder or a single
person, as applicable, for purposes of de-
termining the amount of any member's
inclusion under section 951 (including a
section 965(a) inclusion), the foreign in-
come taxes deemed paid with respect to a
section 965(a) inclusion (see sections 960
and 902), or any purpose other than those
specifically listed in paragraph (e)(1) of
this section or another provision of the
section 965 regulations.
(3) Determination of section 965(c) de-
duction amount. For purposes of determin-
ing the section 965(c) deduction amount of
any section 958(a) U.S. shareholder that is a
member of a consolidated group, the aggre-
gate foreign cash position of the section
958(a) U.S. shareholder is equal to the ag-
gregate section 965(a) inclusion amount of
the section 958(a) U.S. shareholder multi-
plied by the group cash ratio of the consol-
idated group.
(f) Definitions. This paragraph (f) pro-
vides definitions that apply for purposes
of applying the section 965 regulations to
members of an affiliated group, including
members of a consolidated group.
(1) Aggregate unused E&P deficit-(i)
General rule. The term aggregate unused
E&P deficit means, with respect to an
affiliated group, the lesser of-
(A) The sum of the excess aggregate
foreign E&P deficit with respect to each
E&P net deficit shareholder that is a mem-
ber of the affiliated group, or
(B) The amount determined under
paragraph (f)(3)(ii) of this section.
(ii) Reduction with respect to E&P net
deficit shareholders that are not wholly
owned by the affiliated group. If the group
ownership percentage of an E&P net def-
icit shareholder is less than 100 percent,
the amount of the excess aggregate for-
eign E&P deficit with respect to the E&P
net deficit shareholder that is taken into
account under paragraph (f)(1)(i) of this
section is the product of the group own-
ership percentage multiplied by the excess
aggregate foreign E&P deficit.
(2) Allocable share. The term allocable
share means, with respect to a deferred
foreign income corporation and an E&P
net surplus shareholder's applicable share
of an aggregate unused E&P deficit of an
affiliated group, the product of the E&P
net surplus shareholder's applicable share
of the affiliated group's aggregate unused
E&P deficit and the ratio described in
§1.965-1(f)(11) with respect to the de-
ferred foreign income corporation.
(3) Applicable share. The term appli-
cable share means, with respect to an
E&P net surplus shareholder and an ag-
gregate unused E&P deficit of an affiliated
group, the amount that bears the same
proportion to the affiliated group's aggre-
gate unused E&P deficit as-
(i) The product of-
(A) The E&P net surplus shareholder's
group ownership percentage, multiplied by
(B) The amount that would (but for
section 965(b)(5) and paragraph (b) of this
section) constitute the E&P net surplus
shareholder's aggregate section 965(a) in-
clusion amount, bears to
(ii) The aggregate amount determined
under paragraph (f)(3)(i) of this section
with respect to all E&P net surplus share-
holders that are members of the group.
(4) Consolidated group aggregate for-
eign cash position. The term consolidated
group aggregate foreign cash position
means, with respect to a consolidated
group, the aggregate foreign cash position
(as defined in §1.965-1(f)(8)(i)) deter-
mined by treating each member of the
consolidated group that is a section 958(a)
U.S. shareholder as a single section 958(a)
U.S. shareholder pursuant to paragraph
(e)(1) of this section.
(5) E&P net deficit shareholder. The
term E&P net deficit shareholder means a
section 958(a) U.S. shareholder that has
an excess aggregate foreign E&P deficit.
(6) E&P net surplus shareholder. The
term E&P net surplus shareholder means
a section 958(a) U.S. shareholder that
would (but for section 965(b)(5) and para-
graph (b) of this section) have an aggre-
gate section 965(a) inclusion amount
greater than zero.
(7) Excess aggregate foreign E&P def-
icit. The term excess aggregate foreign
E&P deficit means, with respect to a sec-
tion 958(a) U.S. shareholder, the amount, if
any, by which the amount described in
§1.965-1(f)(9)(i) with respect to the section
958(a) U.S. shareholder exceeds the amount
described in §1.965-1(f)(9)(ii) with respect
to the section 958(a) U.S. shareholder.
(8) Group cash ratio. The term group
cash ratio means, with respect to a con-
solidated group, the ratio of-
(i) The consolidated group aggregate
foreign cash position, to
(ii) The sum of the aggregate section
965(a) inclusion amounts of all members
of the consolidated group.
(9) Group ownership percentage. The
term group ownership percentage means,
with respect to a section 958(a) U.S.
shareholder that is a member of an affili-
ated group, the percentage of the value of
the stock of the United States shareholder
which is held by other includible corpora-
tions in the affiliated group. Notwithstand-
ing the preceding sentence, the group
ownership percentage of the common par-
ent of the affiliated group is 100 percent.
Any term used in this paragraph (f)(9) that
is also used in section 1504 has the same
meaning as when used in such section.
Additionally, if the term is used in the
context of a rule for which all members of
a consolidated group are treated as a sin-
gle section 958(a) U.S. shareholder under
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paragraph (e)(1) of this section, then the
group ownership percentage is determined
solely with respect to the value of the
stock of the common parent of the con-
solidated group held by other includible
corporations that are not members of the
consolidated group.
(g) Examples. The following examples
illustrate the application of this section.
(1) Example 1. Application of affiliated group
rule. (i) Facts. (A) In general. USP owns all of the
stock of USS1, USS2, and USS3. Each of USP,
USS1, USS2, and USS3 is a domestic corporation
and is a member of an affiliated group of which USP
is the common parent (the "USP Group"). The USP
Group has not elected to file a consolidated federal
income tax return. USS1 owns all of the stock of
CFC1 and CFC2, USS2 owns all of the stock of
CFC3, and USS3 owns all of the stock of CFC4.
Each of CFC1, CFC2, CFC3, and CFC4 is a con-
trolled foreign corporation within the meaning of
section 957(a), and, therefore, each is a specified
foreign corporation under section 965(e) and
§1.965-1(f)(45). Each of USP, USS1, USS2, USS3,
CFC1, CFC2, CFC3, and CFC4 has the calendar
year as its taxable year.
(B) Facts relating to section 965. CFC1 and
CFC3 are deferred foreign income corporations with
section 965(a) earnings amounts of $600x and
$300x, respectively. CFC1 and CFC3 have cash po-
sitions of $0x and $50x, respectively, on each of
their cash measurement dates. CFC2 and CFC4 are
E&P deficit foreign corporations with specified E&P
deficits of $400x and $100x, respectively. CFC2 and
CFC4 have cash positions of $100x and $50x, re-
spectively, on each of their cash measurement dates.
The cash positions all consist solely of cash. CFC1,
CFC2, CFC3, and CFC4 all use the U.S. dollar as
their functional currency.
(ii) Analysis. (A) Section 965(a) inclusion
amounts before application of section 965(b)(5).
USS1 is a section 958(a) U.S. shareholder with re-
spect to CFC1 and CFC2; USS2 is a section 958(a)
U.S. shareholder with respect to CFC3; and USS3 is
a section 958(a) U.S. shareholder with respect to
CFC4. USS1's pro rata share of CFC1's section
965(a) earnings amount is $600x. Under section
965(b)(3)(A) and §1.965-1(f)(9), USS1's aggregate
foreign E&P deficit is $400x, the lesser of the ag-
gregate of USS1's pro rata share of the specified
E&P deficit of each E&P deficit foreign corporation
($400x) and the amount described in §1.965-
1(f)(9)(ii) with respect to USS1 ($600x). Under sec-
tion 965(b) and §1.965-1(b)(2), in determining its
section 965(a) inclusion amount with respect to
CFC1, USS1 reduces its pro rata share of the U.S.
dollar amount of section 965(a) earnings amount of
CFC1 by CFC1's allocable share of USS1's aggre-
gate foreign E&P deficit. CFC1's allocable share of
USS1's aggregate foreign E&P deficit is $400x,
which is the product of USSI's aggregate foreign
E&P deficit ($400x) and 1, which is the ratio deter-
mined by dividing USS1's pro rata share of the
section 965(a) earnings amount of CFC1 ($600x), by
the amount described in §1.965-1(f)(9)(ii) with re-
spect to USS1 ($600x). Accordingly, under section
965(b) and §1.965-1(b)(2) (before applying section
965(b)(5) and paragraph (b) of this section), USS1's
section 965(a) inclusion amount with respect to
CFC1 would be $200x (USS1's pro rata share of the
section 965(a) earnings amount of CFC1 of $600x
reduced by CFC1's allocable share of USS1's ag-
gregate foreign E&P deficit of $400x). Under section
965(b) and §1.965-1(b)(2) (before applying section
965(b)(5) and paragraph (b) of this section), USS2's
section 965(a) inclusion amount with respect to
CFC3 would be $300x (USS2's pro rata share of the
section 965(a) earnings amount of CFC3).
(B) Application of section 965(b)(5)-(1) Deter-
mination of E&P net surplus shareholders and E&P
net deficit shareholders. USS1 is an E&P net surplus
shareholder because it would have an aggregate sec-
tion 965(a) inclusion amount of $200x but for the
application of section 965(b)(5) and paragraph (b) of
this section. USS2 is also an E&P net surplus share-
holder because it would have an aggregate section
965(a) inclusion amount of $300x but for the appli-
cation of section 965(b)(5) and paragraph (b) of this
section. USS3 is an E&P net deficit shareholder
because it has an excess aggregate foreign E&P
deficit of $100x.
(2) Determining section 965(a) inclusion
amounts under section 965(b)(5). Under section
965(b) and paragraph (b) of this section, for purposes
of determining the section 965(a) inclusion amount
of a section 958(a) U.S. shareholder with respect to
a deferred foreign income corporation, if, after ap-
plying §1.965-1(b)(2), the section 958(a) U.S. share-
holder is an E&P net surplus shareholder, then the
U.S. dollar amount of the section 958(a) U.S. share-
holder's pro rata share of the section 965(a) earnings
amount of the deferred foreign income corporation is
further reduced (but not below zero) by the deferred
foreign income corporation's allocable share of the
section 958(a) U.S. shareholder's applicable share of
the affiliated group's aggregate unused E&P deficit.
USS3 is the only E&P net deficit shareholder in the
USP Group, and, therefore, the aggregate unused
E&P deficit of the USP Group is equal to USS3's
excess aggregate foreign E&P deficit ($100x). The
applicable share of the USP Group's aggregate un-
used E&P deficit of each of USS1 and USS2, re-
spectively, is an amount that bears the same propor-
tion to the USP Group's aggregate unused E&P
deficit as the product of the group ownership per-
centage of USS1 and USS2, respectively, multiplied
by the amount that would (but for section 965(b)(5)
and paragraph (b) of this section) constitute the ag-
gregate section 965(a) inclusion amount of USS1
and USS2, respectively, bears to the aggregate of
such amounts with respect to both USS1 and USS2.
Therefore, USS1's applicable share of the USP
Group's aggregate unused E&P deficit is $40 ($100x
x ($200x/($200x + $300x))) and USS2's applicable
share of the USP Group's aggregate unused E&P
deficit is $60x ($100x x ($300x/($200x + $300x))).
Because USS1 is a section 958(a) U.S. shareholder
with respect to only one deferred foreign income
corporation, the entire $60x of USS1's applicable
share of the USP Group's aggregate unused E&P
deficit is treated as CFC1's allocable share of
USS1's applicable share of the USP Group's aggre-
gate unused E&P deficit, and thus USS1's section
965(a) inclusion amount with respect to CFC1 is
reduced to $160x ($200x - $40x). Because USS2 is
a section 958(a) U.S. shareholder with respect to only
one deferred foreign income corporation, the entire $60x
of USS2's applicable share of the USP Group's aggregate
unused E&P deficit is treated as CFC3's allocable share of
USS2's applicable share of the USP Group's aggregate
unused E&P deficit, and thus USS2's section 965(a) in-
clusion amount with respect to CFC3 is reduced to $240x
($300x - $60x).
(C) Aggregate foreign cash position. Under sec-
tion 965(c) and §1.965-1(c), a section 958(a) U.S.
shareholder that includes a section 965(a) inclusion
amount in income is allowed a deduction equal to the
section 965(c) deduction amount. The section 965(c)
deduction amount is computed by taking into ac-
count the aggregate foreign cash position of the
section 958(a) U.S. shareholder. Under §1.965-
1(f)(8)(i), the aggregate foreign cash position of
USS1 is $100x, and the aggregate foreign cash po-
sition of USS2 is $50x.
(D) Section 965(c) deduction amount. The sec-
tion 965(c) deduction amount of USS1 is $102x,
which is equal to (i) USS1's 8 percent rate equiva-
lent percentage (77.1428571%) of its 8 percent rate
amount for USS1's 2017 year ($60x ($160x -
$100x)), plus USS1's 15.5 percent rate equivalent
percentage (55.7142857%) of its 15.5 percent rate
amount for USS1's 2017 year ($100x). The section
965(c) deduction amount of USS2 is $174.43x,
which is equal to (i) USS2's 8 percent rate equiva-
lent percentage (77.1428571%) of its 8 percent rate
amount for USS2's 2017 year ($190x ($240x -
$50x)), plus USS2's 15.5 percent rate equivalent
percentage (55.7142857%) of its 15.5 percent rate
amount for USS2's 2017 year ($50x). Because USS3
has no section 965(a) inclusion amount, it has no
section 965(c) deduction amount and therefore is not
allowed a section 965(c) deduction.
(2) Example 2. Application to members of a
consolidated group. (i) Facts. The facts are the same
as in paragraph (g)(1)(i) of this section (the facts in
Example 1), except that the USP Group has elected
to file a consolidated return.
(ii) Analysis-(A) Section 965(a) inclusion
amount-(1) Single section 958(a) U.S. shareholder
treatment. Because each of USS1, USS2, and USS3 is
a section 958(a) U.S. shareholder of a specified foreign
corporation and is a member of a consolidated group,
paragraph (e)(1) of this section applies to treat USS1,
USS2, and USS3 as a single section 958(a) U.S. share-
holder for purposes of section 965(b) and §1.965-
1(b)(2).
(2) Determination of inclusion amount. The sin-
gle section 958(a) U.S. shareholder composed of
USS1, USS2, and USS3 is a section 958(a) U.S.
shareholder with respect to CFC1, CFC2, CFC3, and
CFC4. Under §1.965-1(b)(2), in determining
USS1's section 965(a) inclusion amount, the single
section 958(a) U.S. shareholder decreases its pro rata
share of the U.S. dollar amount of the section 965(a)
earnings amount of CFC1 by CFC1's allocable share
of the aggregate foreign E&P deficit of the single
section 958(a) U.S. shareholder. CFC1's allocable
share of the aggregate foreign E&P deficit is
$333.33x, which is the product of the aggregate
foreign E&P deficit of the single section 958(a) U.S.
shareholder ($500x ($400x + $100x)) and .67,
which is the ratio determined by dividing its pro rata
share of the section 965(a) earnings amount of CFC1
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($600x) by the amount described in §1.965-
1(f)(9)(ii) with respect to the single section 958(a)
U.S. shareholder ($900x ($600x + $300x)). There-
fore, USS1's section 965(a) inclusion amount with
respect to CFC1 is $266.67 (its pro rata share of the
section 965(a) earnings amount of CFC1 ($600) less
CFC1's allocable share of the aggregate foreign
E&P deficit of the single section 958(a) U.S. share-
holder ($333.33x)). Similarly, under §1.965-
1(b)(2), in determining the section 965(a) inclusion
amount of USS2, the single section 958(a) U.S.
shareholder decreases its pro rata share of the U.S.
dollar amount of the section 965(a) earnings amount
of CFC3 by CFC3's allocable share of the aggregate
foreign E&P deficit of the single section 958(a) U.S.
shareholder. CFC3's allocable share of the aggregate
foreign E&P deficit is $166.67x, which is the prod-
uct of the aggregate foreign E&P deficit of the single
section 958(a) U.S. shareholder ($500x) and .33,
which is the ratio determined by dividing its pro rata
share of the section 965(a) earnings amount of CFC3
($300x) by the amount described in §1.965-
1(f)(9)(ii) with respect to the single section 958(a)
U.S. shareholder ($900x ($600x + $300x)). There-
fore, USS2's section 965(a) inclusion amount with
respect to CFC3 is $133.33x (its pro rata share of the
section 965(a) earnings amount of CFC3 ($300x)
less CFC3's allocable share of the aggregate foreign
E&P deficit of the single section 958(a) U.S. share-
holder ($166.67x)).
(B) Consolidated group aggregate foreign cash
position. Because USS1 and USS2 are members of a
consolidated group, the aggregate foreign cash posi-
tion of each of USS1 and USS2 is determined under
paragraph (e)(3) of this section. Under paragraph
(e)(3) of this section, the aggregate foreign cash
position of each of USS1 and USS2 is equal to the
aggregate section 965(a) inclusion amount of USS1
and USS2, respectively, multiplied by the group cash
ratio of the USP Group, as determined pursuant to
paragraph (f)(8) of this section. The group cash ratio
of the USP Group is .50, which is the ratio of the
USP Group's consolidated group aggregate foreign
cash position ($200x ($50x + $100x + $50x)) and
the sum of the aggregate section 965(a) inclusion
amounts of all members of the USP Group ($400x
($266.67x + $133.33x)). Therefore, under para-
graph (e)(3) of this section, the aggregate foreign
cash positions of USS1 and USS2 are, respectively,
$133.34x ($266.67x x ($200x/$400x)) and $66.67
($133.33x x ($200x/400x)).
(C) Section 965(c) deduction amount. The sec-
tion 965(c) deduction amount of USS1 is $177.14x,
which is equal to (i) USS1's 8 percent rate equiva-
lent percentage (77.1428571%) of its 8 percent rate
amount for USS1's 2017 year ($133.33x ($266.67x -
$133.34x)), plus USS1's 15.5 percent rate equivalent
percentage (55.7142857%) of its 15.5 percent rate
amount for USS1's 2017 year ($133.34x). The sec-
tion 965(c) deduction amount of USS2 is $88.56x,
which is equal to (i) USS2's 8 percent rate equiva-
lent percentage (77.1428571%) of its 8 percent rate
amount for USS2's 2017 year ($66.66x ($133.33x -
$66.67x)), plus USS2's 15.5 percent rate equivalent
percentage (55.7142857%) of its 15.5 percent rate
amount for USS2's 2017 year ($66.67x). Because
USS3 has no section 965(a) inclusion amount, it has
no section 965(c) deduction amount and therefore is
not allowed a section 965(c) deduction.
§1.965-9 Applicability dates.
(a) In general. Sections 1.965-1
through 1.965-8 apply beginning the last
taxable year of a foreign corporation that
begins before January 1, 2018, and with
respect to a United States person, begin-
ning the taxable year in which or with
which such taxable year of the foreign
corporation ends.
(b) Applicability dates for rules disre-
garding certain transactions. Section
1.965-4 applies regardless of whether, with
respect to a foreign corporation, the transac-
tion, effective date of a change in method of
accounting, effective date of an entity clas-
sification election, or specified payment de-
scribed in §1.965-4 occurred before the first
day of the foreign corporation's last taxable
year that begins before January 1, 2018, or,
with respect to a United States person, the
transaction, effective date of a change in
method of accounting, effective date of an
entity classification election, or specified
payment described in §1.965-4 occurred be-
fore the first day of the taxable year of the
United States person in which or with which
the taxable year of the foreign corporation
ends.
Par. 5. Section 1.986(c)-1 is added to
read as follows:
§1.986(c)-1 Coordination with section 965.
(a) Amount of foreign currency gain or
loss. Foreign currency gain or loss with
respect to distributions of section 965(a)
previously taxed earnings and profits (as
defined in §1.965-1(f)(39)) is determined
based on movements in the exchange rate
between December 31, 2017, and the time
such distributions are made.
(b) Section 965(a) previously taxed
earnings and profits. Any gain or loss
recognized under section 986(c) with re-
spect to distributions of section 965(a)
previously taxed earnings and profits is
reduced in the same proportion as the re-
duction by a section 965(c) deduction
amount (as defined in §1.965-1(f)(42)) of
the section 965(a) inclusion amount (as
defined in §1.965-1(f)(38)) that gave rise
to such section 965(a) previously taxed
earnings and profits.
(c) Section 965(b) previously taxed
earnings and profits. Section 986(c) does
not apply with respect to distributions of
section 965(b) previously taxed earnings
and profits (as defined in §1.965-1(f)(40)).
(d) Applicability dates. The section ap-
plies beginning the last taxable year of a
foreign corporation that begins before
January 1, 2018, and with respect to a
United States person, for the taxable year
in which or with which such taxable year
of the foreign corporation ends.
Kirsten Wielobob
Deputy Commissioner for Services and
Enforcement.
Approved: December 19, 2018.
David J Kautter
Assistant Secretary of the Treasury (Tax
Policy).
(Filed by the Office of the Federal Register on February 4,
2019, 8:45 a.m., and published in the issue of the Federal
Register for February 5, 2019, 84 F.R. 1838)
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<!-- PageHeader="26 CFR 1.199A-1, et seq." -->
##### T.D. 9847
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
##### Qualified Business Income Deduction
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Final Regulations.
SUMMARY: This document contains fi-
nal regulations concerning the deduction
for qualified business income under sec-
tion 199A of the Internal Revenue Code
(Code). The regulations will affect indi-
viduals, partnerships, S corporations,
trusts, and estates engaged in domestic
trades or businesses. The regulations also
contain an anti-avoidance rule under sec-
tion 643 of the Code to treat multiple
trusts as a single trust in certain cases,
which will affect trusts, their grantors, and
beneficiaries. This document also requests
additional comments on certain aspects of
the deduction.
DATES: Effective date: These regulations
are effective on February 8, 2019. Sec-
tions 1.199A-1 through 1.199A-6 are
generally applicable to taxable years end-
ing after February 8, 2019. However, tax-
payers may rely on the rules set forth in
§§ 1.199A-1 through 1.199A-6, in their
entirety, or on the proposed regulations
under §§ 1.199A-1 through 1.199A-6 is-
sued on August 16, 2018, in their entirety,
for taxable years ending in calendar year
2018.
Applicability date: For dates of applicabil-
ity, see §§ 1.199A-1(f), 1.199A-2(d),
1.199A-3(d), 1.199A-4(e), 1.199A-5(e),
1.199A-6(e), and 1.643(f)-1(b).
FOR FURTHER INFORMATION CON-
TACT: Vishal R. Amin or Frank J. Fisher
at (202) 317-6850 or Robert D. Alinsky,
Margaret Burow, or Wendy L. Kribell at
(202) 317-5279.
ADDRESSES: Submit electronic submis-
sions to the Federal eRulemaking Portal at
www.regulations.gov (indicate IRS and
REG-107892-18) by following the online
instructions for submitting comments.
Once submitted to the Federal eRulemak-
ing Portal, comments cannot be edited or
withdrawn. The Department of the Trea-
sury (Treasury Department) and the IRS
will publish for public availability any com-
ment received to its public docket, whether
submitted electronically or in hard copy.
Send hard copy submissions to CC:PA:
LPD:PR (REG-107892-18), Room 5203,
Internal Revenue Service, P.O. Box 7604,
Ben Franklin Station, Washington, D.C.,
20044. Submissions may be hand-delivered
Monday through Friday between the hours
of 8 a.m. and 4 p.m. to CC:PA:LPD:PR
(REG-107892-18), Courier's Desk, Inter-
nal Revenue Service, 1111 Constitution Av-
enue, N.W., Washington, D.C., 20224.
## SUPPLEMENTARY INFORMATION: Paperwork Reduction Act
The collection of information con-
tained in these regulations has been re-
vised and approved by the Office of Man-
agement and Budget for review in
accordance with the Paperwork Reduction
Act of 1995 (44 U.S.C. 3507) under con-
trol numbers 1545-0123, 1545-0074, and
1545-0092.
Regulations in §§ 1.199A-4 and
1.199A-6 require the collection of infor-
mation. Section 1.199A-4 requires taxpay-
ers and passthrough entities that choose to
aggregate two or more trades or businesses
to collect information. Section 1.199A-6
requires passthrough entities to report sec-
tion 199A information to their owners or
beneficiaries. Taxpayers need to report the
information to the IRS by attaching the ap-
plicable statement to Form 1040 or to the
Schedules K-1 for the Form 1041, Form
1065, or Form 1120S, as appropriate, to
ensure the correct amount of deduction is
reported under section 199A. The collection
of information is necessary to ensure tax
compliance.
The likely respondents are individuals
with qualified business income from more
than one trade or business as well as most
partnerships, S corporations, trusts, and
estates that have qualified business in-
come. More of the paperwork burden
analysis details are explained in the Spe-
cial Analysis Section J, Anticipated im-
pacts on administrative and compliance
costs.
Estimated total annual reporting bur-
den: 25 million hours. This estimate pri-
marily reflects two effects of the regula-
tions: a 0.7 million hour increase in
reporting burden from compliance with
§ 1.199A-4 and a 24.2 million hour in-
crease in reporting burden from compli-
ance with § 1.199A-6.
Estimated average annual burden hours
per respondent will vary from 30 minutes
to 20 hours, depending on individual cir-
cumstances, with an estimated average of
2.5 hours.
Estimated number of respondents: 10
million.
Estimated annual frequency of re-
sponses: annually.
Estimated monetized burden: Using
the IRS's taxpayer compliance cost esti-
mates, taxpayers who are self-employed
with multiple businesses are estimated to
have a monetization rate of $39 per hour.
Passthroughs that issue K-1s have a mon-
etization rate of $53 per hour. (See "Tax-
payer Compliance Costs for Corporations
and Partnerships: A New Look," Contos,
et. al. IRS Research Bulletin (2012) p. 5
for a description of the model.)
An agency may not conduct or spon-
sor, and a person is not required to re-
spond to, a collection of information un-
less it displays a valid control number
assigned by the Office of Management
and Budget.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by section 6103.
### Background
This document contains amendments
to the Income Tax Regulations (26 CFR
part 1) under sections 199A and 643(f) of
the Code. On August 16, 2018, the De-
partment of the Treasury (Treasury De-
partment) and the IRS published a notice
of proposed rulemaking (REG-107892-
18) in the Federal Register (83 FR
40884) containing proposed regulations
under sections 199A and 643(f) of the
Code (proposed regulations). The Sum-
mary of Comments and Explanation of
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Revisions summarizes the provisions of
sections 199A and 643(f) and the provi-
sions of the proposed regulations, which
are explained in greater detail in the pre-
amble to the proposed regulations.
The Treasury Department and the IRS
received written and electronic comments
responding to the proposed regulations
and held a public hearing on the proposed
regulations on October 16, 2018. After
full consideration of the comments re-
ceived on the proposed regulations and
the testimony heard at the public hearing,
this Treasury decision adopts the pro-
posed regulations with modifications in
response to such comments and testimony
as described in the Summary of Com-
ments and Explanation of Revisions. Con-
currently with the publication of these fi-
nal regulations, the Treasury Department
and the IRS are publishing in the Pro-
posed Rule section of this edition of the
Federal Register (RIN 1545-BP12) a no-
tice of proposed rulemaking providing ad-
ditional proposed regulations under sec-
tion 199A (REG-134652-18).
## Summary of Comments and Explanation of Revisions
The Treasury Department and the IRS
received approximately 335 comments in
response to the notice of proposed rule-
making. All comments were considered
and are available at www.regulations.gov
or upon request. Most of the comments
addressing the proposed regulations are
summarized in this Summary of Com-
ments and Explanation of Revisions.
However, comments merely summarizing
or interpreting the proposed regulations,
recommending statutory revisions, or ad-
dressing provisions outside the scope of
these final regulations are not discussed in
this preamble. The Treasury Department
and the IRS continue to study comments
on issues related to section 199A that are
beyond the scope of these final regulations
(or the notice of proposed rulemaking on
this subject in the Proposed Rules section
of this issue of the Federal Register) and
may discuss those comments that are be-
yond the scope of the regulations if future
guidance on those issues is published.
As discussed in the preamble to the
proposed regulations, the purpose and
scope of the proposed regulations and
these final regulations are primarily lim-
ited to determining the amount of the de-
duction of up to 20 percent of income
from a domestic business operated as a
sole proprietorship or through a partner-
ship, S corporation (as defined in section
1361(a)(1)), trust, or estate (section 199A
deduction). The purpose and scope of the
proposed regulations and these final reg-
ulations are also to determine when to
treat two or more trusts as a single trust
for purposes of subchapter J of chapter 1
of subtitle A of the Code (subchapter J).
These final regulations are not intended to
address section 643 in general.
Commenters and others requested that
the proposed regulations be finalized as
quickly as possible to provide guidance to
practitioners and taxpayers as they pre-
pare returns and determine the section
199A deduction for the first taxable year
in which the deduction is allowed. Com-
menters also requested that the rules for
section 199A be simplified and clarified.
Accordingly, these final regulations adopt
many of the rules described in the pro-
posed regulations, with revisions in re-
sponse to the comments received and tes-
timony provided at the public hearing, as
described in the remainder of this Sum-
mary of Comments and Explanation of
Revisions. Additionally, clarifying lan-
guage and additional examples have been
added throughout the final regulations.
Part I of this section provides an over-
view of the sections of the Code addressed
by these final regulations. Part II of this
section addresses the operational rules, in-
cluding definitions, computational rules,
special rules, and reporting requirements.
Part III of this section addresses the deter-
mination of W-2 wages and unadjusted ba-
sis immediately after acquisition (UBIA) of
qualified property. Part IV of this section
addresses the determination of qualified
business income (QBI), qualified real estate
investment trust (REIT) dividends, and
qualified publicly traded partnership (PTP)
income. Part V of this section addresses the
optional aggregation of trades or businesses.
Part VI of this section addresses specified
services trades or businesses (SSTBs) and
the trade or business of being an employee.
Part VII of this section addresses the rules
for relevant passthrough entities (RPEs),
PTPs, beneficiaries, trusts, and estates. Part
VIII of this section addresses the treatment
of multiple trusts.
I. Overview
### A. Section 199A
As noted in the preamble to the pro-
posed regulations, section 199A was en-
acted on December 22, 2017, by section
11011 of "An Act to provide for reconcil-
iation pursuant to titles II and V of the
concurrent resolution on the budget for
fiscal year 2018," Pub. L. 115-97 (TCJA),
and was amended on March 23, 2018,
retroactively to January 1, 2018, by sec-
tion 101 of Division T of the Consolidated
Appropriations Act, 2018, Pub. L. 115-
141, (2018 Act). Section 199A applies to
taxable years beginning after 2017 and
before 2026.
Section 199A provides a deduction of
up to 20 percent of income from a domes-
tic business operated as a sole proprietor-
ship or through a partnership, S corpora-
tion, trust, or estate. The section 199A
deduction may be taken by individuals
and by some estates and trusts. A section
199A deduction is not available for wage
income or for business income earned
through a C corporation (as defined in
section 1361(a)(2)). For taxpayers whose
taxable income exceeds a statutorily-
defined amount (threshold amount), sec-
tion 199A may limit the taxpayer's sec-
tion 199A deduction based on (i) the type
of trade or business engaged in by the
taxpayer, (ii) the amount of W-2 wages
paid with respect to the trade or business
(W-2 wages), and/or (iii) the UBIA of
qualified property held for use in the trade
or business (UBIA of qualified property).
These statutory limitations are subject to
phase-in rules based upon taxable income
above the threshold amount.
Section 199A also allows individuals
and some trusts and estates (but not cor-
porations) a deduction of up to 20 percent
of their combined qualified REIT dividends
and qualified PTP income, including quali-
fied REIT dividends and qualified PTP in-
come earned through passthrough entities.
This component of the section 199A deduc-
tion is not limited by W-2 wages or UBIA
of qualified property.
The section 199A deduction is the
lesser of (1) the sum of the combined
amounts described in the prior two para-
graphs or (2) an amount equal to 20 per-
cent of the excess (if any) of taxable in-
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come of the taxpayer for the taxable year
over the net capital gain of the taxpayer
for the taxable year.
Additionally, section 199A(g), as
amended by the 2018 Act effective as of
January 1, 2018, provides that specified
agricultural or horticultural cooperatives
may claim a special entity-level deduction
that is substantially similar to the domes-
tic production activities deduction under
former section 199. The Treasury Depart-
ment and the IRS intend to issue a future
notice of proposed rulemaking describing
proposed rules for applying section 199A
to specified agricultural and horticultural
cooperatives and their patrons.
Finally, the statute expressly grants the
Secretary authority to prescribe such reg-
ulations as are necessary to carry out the
purposes of section 199A (section
199A(f)(4)), and provides specific grants
of authority with respect to: the treatment
of acquisitions, dispositions, and short
taxable years (section 199A(b)(5)); cer-
tain payments to partners for services ren-
dered in a non-partner capacity (section
199A(c)(4)(C)); the allocation of W-2
wages and UBIA of qualified property
(section 199A(f)(1)(A)(iii)); restricting
the allocation of items and wages under
section 199A and such reporting require-
ments as the Secretary determines appro-
priate (section 199A(f)(4)(A)); the appli-
cation of section 199A in the case of
tiered entities (section 199A(f)(4)(B); pre-
venting the manipulation of the deprecia-
ble period of qualified property using
transactions between related parties (sec-
tion 199A(h)(1)); and determining the
UBIA of qualified property acquired in
like-kind exchanges or involuntary con-
versions (section 199A(h)(2)).
### B. Section 643(f)
Part I of subchapter J provides rules
related to the taxation of estates, trusts,
and beneficiaries. For various subparts of
part I of subchapter J, sections 643(a),
643(b), and 643(c) define the terms dis-
tributable net income (DNI), income, and
beneficiary, respectively. Sections 643(d)
through 643(i) (other than section 643(f))
provide additional rules. Section 643(f)
grants the Secretary authority to treat two
or more trusts as a single trust for pur-
poses of subchapter J if (1) the trusts have
substantially the same grantors and sub-
stantially the same primary beneficiaries
and (2) a principal purpose of such trusts
is the avoidance of the tax imposed by
chapter 1 of the Code. Section 643(f) fur-
ther provides that, for these purposes,
spouses are treated as a single person.
### II. Operational Rules
#### A. Definitions
##### 1. Net Capital Gain
Section 199A(a) provides, in relevant
part, that the section 199A deduction is
limited to the lesser of the taxpayer's
combined QBI or 20 percent of the excess
of a taxpayer's taxable income over the
taxpayer's net capital gain (as defined in
section 1(h)) for the taxable year. The
proposed regulations do not contain a spe-
cific definition of net capital gain. The
Treasury Department and the IRS are
aware that taxpayers and practitioners
have questioned how net capital gain is
determined for purposes of section 199A.
One commenter suggested that net capital
gain, as used to calculate the section 199A
deduction, should be defined as excluding
qualified dividend income, which is taxed
as capital gain.
The final regulations provide a defini-
tion of net capital gain for purposes of
section 199A. Section 1(h) establishes the
maximum capital gains rates imposed on
individuals, trusts, and estates that have a
net capital gain for the taxable year. Sec-
tion 1222(11) defines net capital gain as
the excess of net long-term capital gain
for the taxable year over the net short-
term capital loss for such year. Section
1(h)(11) provides that for purposes of sec-
tion 1(h), net capital gain means net cap-
ital gain (determined without regard to
section 1(h)(11)) increased by qualified
dividend income. Accordingly, § 1.199A-
1(b)(3) defines net capital gain for pur-
poses of section 199A as net capital gain
within the meaning of section 1222(11)
plus any qualified dividend income (as
defined in section 1(h)(11)(B)) for the tax-
able year.
The Treasury Department and the IRS
note that under section 1(h)(2), net capital
gain is reduced by the amount that the
taxpayer takes into account as investment
income under section 163(d)(4)(B)(iii).
This reduction does not change the defi-
nition of net capital gain for purposes of
section 1(h). Instead, it reduces the
amount of gains that can be taxed at the
maximum capital gains rates as a tradeoff
for allowing a taxpayer to elect to deduct
more investment interest under section
163(d). Consequently, capital gains and
qualified dividends treated as investment
income are net capital gain for purposes of
determining the section 199A deduction.
##### 2. Relevant Passthrough Entity
The proposed regulations define an
RPE as a partnership (other than a PTP) or
an S corporation that is owned, directly or
indirectly, by at least one individual, es-
tate, or trust. A trust or estate is treated as
an RPE to the extent it passes through
QBI, W-2 wages, UBIA of qualified
property, qualified REIT dividends, or
qualified PTP income. In response to a
comment, the final regulations provide
that other passthrough entities, including
common trust funds as described in
§ 1.6032-T and religious or apostolic or-
ganizations described in section 501(d),
are also treated as RPEs if the entity files
a Form 1065, U.S. Return of Partnership
Income, and is owned, directly or indi-
rectly, by at least one individual, estate, or
trust. The Treasury Department and the
IRS decline to adopt the recommendation
of another commenter to treat regulated
investment companies (RICs) as RPEs be-
cause RICs are C corporations, not pass-
through entities.
##### 3. Trade or Business
###### a. In General
The calculation of QBI and therefore,
the benefits of section 199A, are limited to
taxpayers with income from a trade or
business. Section 199A and its legislative
history, however, do not define the phrase
"trade or business." The proposed regula-
tions define trade or business by reference
to section 162. Section 162(a) permits a
deduction for all the ordinary and neces-
sary expenses paid or incurred in carrying
on a trade or business. Multiple comment-
ers agreed that section 162 is the most
appropriate standard for what constitutes a
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trade or business for purposes of section
199A, but noted that there are significant
uncertainties in the meaning of trade or
business under section 162. However, be-
cause many taxpayers who will now ben-
efit from the section 199A deduction are
already familiar with the trade or business
standard under section 162, using the sec-
tion 162 standard appears to be the most
practical for taxpayers and the IRS. There-
fore, after considering all relevant com-
ments, the final regulations retain and
slightly reword the proposed regulation's
definition of trade or business. Specifi-
cally, for purposes of section 199A and
the regulations thereunder, § 1.199A-
1(b)(14) defines trade or business as a
trade or business under section 162 (sec-
tion 162 trade or business) other than the
trade or business of performing services
as an employee.
The Treasury Department and the IRS
received a number of comments request-
ing additional guidance with respect to
determining whether an activity rises to
the level of a section 162 trade or busi-
ness, and therefore, will be considered to
be a trade or business for purposes of
determining the section 199A deduction.
Commenters suggested guidance in the
form of a regulatory definition, a bright-
line test, a factor-based test, or a safe
harbor. Whether an activity rises to the
level of a section 162 trade or business,
however, is inherently a factual question
and specific guidance under section 162 is
beyond the scope of these regulations. Ac-
cordingly, the Treasury Department and
the IRS have concluded that the factual
setting of various trades or businesses var-
ies so widely that a single rule or list of
factors would be difficult to provide in a
timely and manageable manner and would
be difficult for taxpayers to apply.
In Higgins v. Commissioner, 312 U.S.
212 (1941), the Supreme Court noted that
determining whether a trade or business
exists is a factual determination. Specifi-
cally, the Court stated that the determina-
tion of "whether the activities of a tax-
payer are 'carrying on a business' requires
an examination of the facts in each case."
312 U.S. at 217. Because there is no stat-
utory or regulatory definition of a section
162 trade or business, courts have estab-
lished elements to determine the existence
of a trade or business. The courts have
developed two definitional requirements.
One, in relation to profit motive, is said to
require the taxpayer to enter into and carry
on the activity with a good faith intention
to make a profit or with the belief that a
profit can be made from the activity. The
second is in relation to the scope of the
activities and is said to require consider-
able, regular, and continuous activity. See
generally Commissioner v. Groetzinger,
480 U.S. 23 (1987). In the seminal case of
Groetzinger, the Supreme Court stated,
"[w]e do not overrule or cut back on the
Court's holding in Higgins when we con-
clude that if one's gambling activity is
pursued full time, in good faith, and with
regularity, to the production of income for
a livelihood, and is not a mere hobby, it is
a trade or business within the statutes with
which we are here concerned." Id. at 35.
A few commenters suggested adopting
the definitions or rules regarding a trade or
business found in other provisions of the
Code, including sections 469 and 1411.
Section 469(c)(6) and § 1.469-4(b)(1)
broadly define trade or business activities
other than rental activities to include any
activity performed: (i) in connection with
a trade or business within the meaning of
section 162, (ii) with respect to which
expenses are allowable as a deduction un-
der section 212, (iii) conducted in antici-
pation of the commencement of a trade or
business, or (iv) that involves research and
experimentation expenditures (within the
meaning of section 174). Section 1.469-
4(b)(2) defines a rental activity as an ac-
tivity that constitutes a rental activity
within the meaning of § 1.469-1T(e)(3).
Passive activities for purposes of section
469 are defined as any activity that in-
volves the conduct of a trade or business
in which the taxpayer does not materially
participate and includes all rental activity.
The definition of trade or business for
section 469 purposes is significantly
broader than the definition for purposes of
section 162 as it is intended to capture a
larger universe of activities, including
passive activities. Section 469 was en-
acted to limit the deduction of certain pas-
sive losses and therefore, serves a very
different purpose than the allowance of a
deduction under section 199A. Further,
section 199A does not require that a tax-
payer materially participate in a trade or
business in order to qualify for the section
199A deduction. Consequently, the Trea-
sury Department and the IRS decline to
adopt the recommendation to define trade
or business for purposes of section 199A
by reference to section 469. The Treasury
Department and the IRS also decline to
define trade or business by reference to
section 1411 as § 1.1411-1(d)(12) defines
trade or business by reference to section
162 in a manner similar to § 1.199A-
1(b)(14).
Commenters also suggested that the
section 199A regulations incorporate the
real estate professional provisions in sec-
tion 469(c)(7) in a manner similar to the
cross references in section 163(j) and
§ 1.1411-4(g)(7). Under section 469, a
real estate professional may treat rental
real estate activities described in section
469(c)(7)(C) as nonpassive if the taxpayer
materially participates in such activities.
Section 1.469-5T(a) provides seven tests
to establish material participation, but as
noted above, these tests only determine
whether an individual materially partici-
pates in a rental real estate activity. They
cannot be used to determine whether the
activity itself is a trade or business. Unlike
section 469, whether a taxpayer is entitled
to a section 199A deduction is not deter-
mined based on the taxpayer's level of
participation in a trade or business, nor
does it require that an individual materially
participate in the trade or business. Instead,
section 199A is dependent on whether the
individual has QBI from a trade or business.
Consequently, the Treasury Department and
the IRS decline to adopt these comments
because the § 1.469-5T material participa-
tion tests are not a proxy to establish regular,
continuous, and considerable activity that
rises to the level of a trade or business for
purposes of section 199A.
###### b. Rental Real Estate Activities as a Trade or Business.
A majority of the comments received
on the meaning of a trade or business
focus on the treatment of rental real estate
activities. Commenters noted inconsis-
tency in the case law in determining
whether a taxpayer renting real estate is
engaged in a trade or business. Some com-
menters suggested including safe harbors,
tests, or a variety of factors, which if
satisfied, would qualify a rental real estate
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activity as a trade or business. A number
of commenters suggested that all rental
real estate activity should qualify as a
trade or business. Further, one commenter
suggested that rental income from real
property held for the production of rents
within the meaning of section 62(a)(4)
should be considered a trade or business
for purposes of section 199A. Another
commenter suggested that final regula-
tions provide that an individual whose
taxable income does not exceed the
threshold amount will be considered to be
conducting a trade or business with re-
spect to any real estate rental of which the
individual owns at least ten percent and in
which the individual actively participates
within the meaning of section 469(i).
In determining whether a rental real
estate activity is a section 162 trade or
business, relevant factors might include,
but are not limited to (i) the type of rented
property (commercial real property versus
residential property), (ii) the number of
properties rented, (iii) the owner's or the
owner's agents day-to-day involvement,
(iv) the types and significance of any an-
cillary services provided under the lease,
and (v) the terms of the lease (for exam-
ple, a net lease versus a traditional lease
and a short-term lease versus a long-term
lease).
Providing bright line rules on whether
a rental real estate activity is a section 162
trade or business for purposes of section
199A is beyond the scope of these regu-
lations. Additionally, the Treasury Depart-
ment and the IRS decline to adopt a position
deeming all rental real estate activity to be a
trade or business for purposes of section
199A. However, the Treasury Department
and IRS recognize the difficulties taxpayers
and practitioners may have in determining
whether a taxpayer's rental real estate activ-
ity is sufficiently regular, continuous, and
considerable for the activity to constitute a
section 162 trade or business. Accordingly,
Notice 2019-07, 2019-9 IRB 740, re-
leased concurrently with these final regula-
tions, provides notice of a proposed revenue
procedure detailing a proposed safe harbor
under which a rental real estate enterprise
may be treated as a trade or business solely
for purposes of section 199A.
Under the proposed safe harbor, a
rental real estate enterprise may be treated
as a trade or business for purposes of
section 199A if at least 250 hours of ser-
vices are performed each taxable year
with respect to the enterprise. This in-
cludes services performed by owners, em-
ployees, and independent contractors and
time spent on maintenance, repairs, col-
lection of rent, payment of expenses, pro-
vision of services to tenants, and efforts to
rent the property. Hours spent by any per-
son with respect to the owner's capacity
as an investor, such as arranging financ-
ing, procuring property, reviewing finan-
cial statements or reports on operations,
planning, managing, or constructing long-
term capital improvements, and traveling
to and from the real estate are not consid-
ered to be hours of service with respect to
the enterprise. The proposed safe harbor
also would require that separate books and
records and separate bank accounts be
maintained for the rental real estate enter-
prise. Property leased under a triple net
lease or used by the taxpayer (including
an owner or beneficiary of an RPE) as a
residence for any part of the year under
section 280A would not be eligible under
the proposed safe harbor. A rental real
estate enterprise that satisfies the proposed
safe harbor may be treated as a trade or
business solely for purposes of section
199A and such satisfaction does not nec-
essarily determine whether the rental real
estate activity is a section 162 trade or
business. Likewise, failure to meet the
proposed safe harbor would not necessar-
ily preclude rental real estate activities
from being a section 162 trade or busi-
ness.
Examples 1 and 2 of proposed
§ 1.199A-1(d)(4) describe a taxpayer who
owns several parcels of land that the tax-
payer manages and leases to airports for
parking lots. The Treasury Department
and the IRS are aware that some practi-
tioners and taxpayers questioned whether
the use of the lease of unimproved land
in these examples was intended to imply
that the lease of unimproved land is a
trade or business for purposes of section
199A. Proposed § 1.199A-1(d)(4) pro-
vides that for purposes of the examples all
businesses described in the examples are
trades or business for purposes of section
199A. Example 1 was intended to provide
a simple illustration of how the calcula-
tion would work if a taxpayer lacked suf-
ficient W-2 wages or UBIA of qualified
property to claim the deduction. Example
2 built on the fact pattern by adding UBIA
of qualified property to the facts. The ex-
amples in the proposed regulations were
not intended to imply that the lease of the
land is, or is not, a trade or business for
purposes of section 199A beyond the as-
sumption in the examples. In order to
avoid any confusion, the final regulations
remove the references to land in both ex-
amples.
##### c. Special Rule for Renting Property to a Related Person.
In one instance, the proposed regula-
tions and the final regulations extend the
definition of trade or business for pur-
poses of section 199A beyond section
162. Solely for purposes of section 199A,
the rental or licensing of tangible or intan-
gible property to a related trade or busi-
ness is treated as a trade or business if the
rental or licensing activity and the other
trade or business are commonly controlled
under proposed § 1.199A-4(b)(1)(i). This
rule also allows taxpayers to aggregate
their trades or businesses with the leasing
or licensing of the associated rental or
intangible property if all of the require-
ments of proposed § 1.199A-4 are met.
One commenter asked for clarification
regarding whether this rule applies to sit-
uations in which the rental or licensing is
to a commonly controlled C corporation.
Another commenter suggested that the
rule in the proposed regulations could al-
low passive leasing and licensing-type ac-
tivities to benefit from section 199A even
if the counterparty is not an individual or
an RPE. The commenter recommended
that the exception be limited to scenarios
in which the related party is an individual
or an RPE and that the term related party
be defined with reference to existing attri-
bution rules under sections 267, 707, or
414. The final regulations clarify these
rules by adopting these recommendations
and limiting this special rule to situations
in which the related party is an individual
or an RPE. Further, as discussed in part
V.B. of this Summary of Comments and
Explanation of Revisions, the final regu-
lations provide that the related party rules
under sections 267(b) or 707(b) will be
used to determine relatedness for purposes
of § 1.199A-4 and this special rule.
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d. Multiple Trades or Businesses Within
an Entity
Several commenters suggested that
there should be safe harbors or factors to
determine how to delineate separate sec-
tion 162 trades or businesses within an
entity and when an entity's combined ac-
tivities should be considered a single sec-
tion 162 trade or business. Some of the
factors suggested include whether the ac-
tivities: have separate books and records,
facilities, locations, employees, and bank
accounts; operate separate types of busi-
nesses or activities; are held out as sepa-
rate to the public; and are housed in sep-
arate legal entities. One commenter
suggested adopting the separate trade or
business rules provided in regulations un-
der sections 446 and 469.
The Treasury Department and the IRS
decline to adopt these recommendations be-
cause specific guidance under section 162 is
beyond the scope of these final regulations
and, as described in part II.A.3.a. of this
Summary of Comments and Explanation of
Revisions, guidance under section 469 is
inapplicable. Further, § 1.446-1(d) does not
provide guidance on when trades or busi-
nesses will be considered separate and dis-
tinct. Instead, it provides that a taxpayer can
use different methods of accounting for sep-
arate and distinct trades or businesses and
specifies two circumstances in which trades
or businesses will not be considered sepa-
rate and distinct. Section 1.446-1(d)(2) pro-
vides that no trade or business will be con-
sidered separate and distinct unless a
complete and separable set of books and
records is kept for such trade or business.
The Treasury Department and the IRS
acknowledge that an entity can conduct
more than one section 162 trade or business.
This position is inherent in the reporting
requirements detailed in § 1.199A-6, which
require an entity to separately report QBI,
W-2 wages, UBIA of qualified property,
and SSTB information for each trade or
business engaged in by the entity. Whether a
single entity has multiple trades or busi-
nesses is a factual determination. However,
court decisions that help define the meaning
of "trade or business" provide taxpayers
guidance in determining whether more than
one trades or businesses exist. As discussed
in part II.A.3.a. of this Summary of Com-
ments and Explanation of Revisions, gener-
ally under section 162, to be engaged in a
trade or business, the taxpayer must be in-
volved in the activity with continuity and
regularity and the taxpayer's primary pur-
pose for engaging in the activity must be for
income or profit. Groetzinger, at 35.
The Treasury Department and the IRS
also believe that multiple trades or busi-
nesses will generally not exist within an
entity unless different methods of ac-
counting could be used for each trade or
business under § 1.446-1(d). Section
1.446-1(d) explains that no trade or busi-
ness is considered separate and distinct
unless a complete and separable set of
books and records is kept for that trade or
business. Further, trades or businesses
will not be considered separate and dis-
tinct if, by reason of maintaining different
methods of accounting, there is a creation
or shifting of profits and losses between
the businesses of the taxpayer so that in-
come of the taxpayer is not clearly re-
flected.
### e. Taxpayer Consistency.
In cases in which other Code provi-
sions use a trade or business standard that
is the same or substantially similar to the
section 162 standard adopted in these final
regulations, taxpayers should report such
items consistently. For example, if tax-
payers who own tenancy in common in-
terests in rental property treat such joint
interests as a trade or business for pur-
poses of section 199A but do not treat the
joint interests as a separate entity for pur-
poses of § 301.7701-1(a)(2), the IRS will
consider the facts and circumstances sur-
rounding the differing treatment. Simi-
larly, taxpayers should consider the appro-
priateness of treating a rental activity as a
trade or business for purposes of section
199A where the taxpayer does not comply
with the information return filing require-
ments under section 6041.
### B. Computational Rules
Section 1.199A-1(d)(2)(iii)(A) of the
proposed regulations provides that if an
individual's QBI from at least one trade or
business is less than zero, the individual
must offset the QBI attributable to each
trade or business that produced net posi-
tive QBI with the QBI from each trade or
business that produced net negative QBI
in proportion to the relative amounts of
net QBI in the trades or businesses with
positive QBI. This rule is applied prior to
the application of the W-2 wage and
UBIA of qualified property limitations.
One commenter supported this rule, not-
ing that it leads to fair and administrable
results for both the government and tax-
payers. Another commenter argued that
the rule requiring losses to be allocated to
a trade or business with positive QBI
should be eliminated. The commenter
noted that aggregation is optional and net-
ting provisions force a mathematical ag-
gregation where one is not desired or nec-
essary. The commenter also stated that
taxpayers are prevented from claiming an
excessive deduction by the taxable in-
come, W-2 wage, and UBIA of qualified
property limitations. A third commenter
suggested that if the netting rule is re-
tained, a taxpayer should be able to elect
to include an unprofitable business with
any group of businesses when determin-
ing the amount of their W-2 wages and
UBIA of qualified property regardless of
whether the aggregation factors are met.
The Treasury Department and the IRS
decline to adopt these recommenda-
tions. The aggregation rules provided in
§ 1.199A-4 are optional and are in-
tended to assist taxpayers in applying
the W-2 wage and UBIA of qualified
property limitations in situations in
which a unified business is conducted
across multiple entities. In contrast, the
netting rule is derived from section
199A(b) of the Code, which provides in
relevant part that the term "combined
qualified business income amount" in-
cludes the sum of 20 percent of the
taxpayer's QBI with respect to each
qualified trade or business of the tax-
payer. Further, the conference report ac-
companying the TCJA describes the
Senate amendment as providing that
"[i]f the net amount of qualified busi-
ness income from all qualified trades or
businesses during the taxable year is a
loss, it is carried forward as a loss from
a qualified trade or business in the next
taxable year." H.R. Rep. No. 115-466,
at 214 (2017) (Conference Report). The
Conference Report also includes an ex-
ample, "For example, an individual has
two business activities that give rise to a
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net business loss of 3 and 4, respec-
tively, in year one, giving rise to a car-
ryover business loss of 7 in year two. If
in year two the two business activities
each give rise to net business income of 2, a
carryover business loss of 3 is carried to
year three (that is, <7>-(2 + 2) = < 3>)."
Id. at 211. This example indicates that QBI
is netted in determining combined QBI.
Another commenter asked, in the case
of a taxpayer with taxable income within
the phase-in range, whether QBI from an
SSTB is reduced by the applicable per-
centage before or after QBI from all of the
taxpayer's trades or businesses is netted.
The commenter recommended that nega-
tive QBI be netted with positive QBI be-
fore the reduction amount is applied to the
QBI from the SSTB.
The Treasury Department and the IRS
agree that clarification is needed regarding
the reduction of QBI from an SSTB when
a taxpayer has multiple trades or busi-
nesses. Section 199A(d)(3)(A)(ii) pro-
vides that only the applicable percentage
of qualified items of income, gain, deduc-
tion, or loss, and the W-2 wages and the
unadjusted basis immediately after acqui-
sition of qualified property, of the tax-
payer allocable to such specified service
trade or business shall be taken into ac-
count in computing the qualified business
income, W-2 wages, and the unadjusted
basis immediately after acquisition of
qualified property of the taxpayer for the
taxable year for purposes of applying this
section. The Treasury Department and the
IRS believe this language applies for all
purposes in computing the section 199A
deduction. Accordingly, the final regula-
tions provide that for taxpayers with tax-
able income within the phase-in range,
QBI from an SSTB must be reduced by
the applicable percentage before the ap-
plication of the netting and carryover rules
described in § 1.199A-1(d)(2)(iii)(A).
The final regulations clarify that the SSTB
limitations also apply to qualified income
received by an individual from a PTP.
### C. Other Comments
#### 1. Disregarded Entities
The proposed regulations do not ad-
dress the treatment of disregarded entities
for purposes of section 199A. A few com-
menters questioned whether trades or
businesses conducted by disregarded enti-
ties would be treated as if conducted di-
rectly by the owner of the entity. Section
1.199A-1(e)(2) of the final regulations
provides that an entity with a single owner
that is treated as disregarded as an entity
separate from its owner under any provi-
sion of the Code is disregarded for pur-
poses of section 199A and §§ 1.199A-1
through 1.199A-6. Accordingly, trades or
businesses conducted by a disregarded en-
tity will be treated as conducted directly
by the owner of the entity for purposes of
section 199A.
### 2. Deductions Limited by Taxable Income
One commenter requested clarification
that other deductions limited by taxable in-
come, such as the 65-percent-of-taxable-
income limit imposed on the deduction for
oil and gas percentage depletion under sec-
tion 613A, are to be computed without re-
gard to any section 199A deduction. The
Treasury Department and the IRS decline to
adopt this comment as the specific question
is answered by section 613A(d)(1)(B), as
amended by the TCJA, which provides that
taxable income for purposes of the limita-
tion under section 613A(d)(1) is computed
without regard to any deduction allowable
under 199A. The Treasury Department and
the IRS believe that limitations on other
deductions provided for under the Code are
more properly addressed by guidance under
those Code sections.
### 3. Treatment of Section 199A Deduction for Purposes of Section 162(a)
Another commenter suggested that the
final regulations provide that the section
199A deduction is treated as a deduction
for purposes of section 199A only and not
as a deduction that is paid or incurred for
purposes of section 162(a) or for any other
purposes of the Code. The Treasury De-
partment and the IRS decline to adopt this
recommendation. In making this sugges-
tion, the Treasury Department and the IRS
assume the commenter is concerned with
how section 199A interacts with the many
Code sections that reference a "trade or
business." How section 199A interacts
with other Code sections must be deter-
mined with respect to the particular Code
section at issue. Accordingly, the Trea-
sury Department and the IRS decline to
adopt this general suggestion.
### 4. Section 6662(a) Penalty for Underpayment of Tax
Section 6662(a) provides a penalty for
an underpayment of tax required to be
shown on a return. Under section 6662(b),
the penalty applies to the portion of any
underpayment that is attributable to a sub-
stantial underpayment of income tax. Sec-
tion 6662(d)(1) defines substantial under-
statement of tax, which is generally an
understatement that exceeds the greater of
10 percent of the tax required to be shown
on the return or $5,000. Section 6662(d)
(1)(C) provides a special rule in the case of
any taxpayer who claims the section 199A
deduction for the taxable year, which re-
quires that section 6662(d)(1)(A) is applied
by substituting "5 percent" for "10 percent."
Section 1.199A-1(e)(6) cross-references
this rule. One commenter asked for guid-
ance on how the section 6662 accuracy pen-
alty would be applied if an activity was
determined by the IRS not to be a trade or
business for purposes of section 199A. The
Treasury Department and the IRS decline to
adopt this suggestion as guidance regarding
the application of section 6662 is beyond the
scope of these regulations.
III. Determination of W-2 Wages and
Unadjusted Basis Immediately After
Acquisition of Qualified Property.
#### A. W-2 Wages
One commenter asked for clarification
regarding whether W-2 wages include elec-
tive deferrals to self-employed Simplified
Employee Pensions (SEP), simple retire-
ment accounts (SIMPLE), and other quali-
fied plans. Revenue Procedure 2019-11,
2019-9 IRB 742, issued concurrently with
these final regulations, provides additional
guidance on the definition of W-2 wages,
including amounts treated as elective defer-
rals. A few commenters asked for confirma-
tion that W-2 wages include S corporation
owner/employee W-2 wages for purposes
of the W-2 wage limitation (assuming the
wages are included on the Form W-2 filed
within 60 days of the due date). The defini-
tion of W-2 wages includes amounts paid to
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officers of an S corporation and common-
law employees of an individual or RPE.
Amounts paid as W-2 wages to an S cor-
poration shareholder cannot be included in
the recipient's QBI. However, these
amounts are included as W-2 wages for
purposes of the W-2 wage limitation to the
extent that the requirements of § 1.199A-2
are otherwise satisfied.
Another commenter suggested that, for
purposes of the W-2 wage limitation, tax-
payers should be able to include wages
paid during the 12 months prior to the sale,
disposition, or other transactions involving a
business segment that generates LIFO and
depreciation recapture. The Treasury De-
partment and the IRS decline to adopt this
comment. Section 199A(b)(4) provides that
the term W-2 wages means, with respect to
any person for any taxable year of such
person, the amounts described in paragraphs
(3) and (8) of section 6051(a) paid by such
person with respect to employment of em-
ployees by such person during the calendar
year ending during such taxable year.
Therefore, regardless of recapture, wages
paid prior to a calendar year cannot be in-
cluded in determining W-2 wages for such
calendar year under the language of the stat-
ute.
## B. UBIA
### 1. Qualified Property Held by an RPE
The proposed regulations provide that
in the case of qualified property held by an
RPE, each partner's or shareholder's share
of the UBIA of qualified property is an
amount that bears the same proportion to
the total UBIA of qualified property as the
partner's or shareholder's share of tax de-
preciation bears to the RPE's total tax
depreciation with respect to the property
for the year. In the case of a partnership
with qualified property that does not pro-
duce tax depreciation during the year,
each partner's share of the UBIA of qual-
ified property would be based on how gain
would be allocated to the partners pursu-
ant to sections 704(b) and 704(c) if the
qualified property were sold in a hypothet-
ical transaction for cash equal to the fair
market value of the qualified property.
Several commenters suggested that only
section 704(b) should be used for this
purpose, arguing that the use of section
704(c) allocation methods would be un-
duly burdensome and could lead to unin-
tended results. One commenter recom-
mended that partners should share UBIA
of qualified property in the same manner
that they share the economic depreciation
of the property. Another commenter sug-
gested allocating UBIA based on a ratio of
each partner's allocation of depreciation
and the partnership's total depreciation of
qualified property for the year. One com-
menter requested clarification regarding
how UBIA is allocated when a partner or
shareholder has depreciation expense as
an ordinary deduction and as a rental real
estate deduction and they are allocated
differently.
The Treasury Department and the IRS
agree with the commenters that relying on
section 704(c) to allocate UBIA could lead
to unintended shifts in the allocation of
UBIA. Therefore, the final regulations pro-
vide that each partner's share of the UBIA
of qualified property is determined in accor-
dance with how depreciation would be allo-
cated for section 704(b) book purposes un-
der § 1.704-1(b)(2)(iv)(g) on the last day of
the taxable year. To the extent a partner has
depreciation expense as an ordinary deduc-
tion and as a rental real estate deduction, the
allocation of the UBIA should match the
allocation of the expenses. The Treasury
Department and the IRS request comments
on whether a new regime is necessary in the
case of a partnership with qualified property
that does not produce tax depreciation dur-
ing the taxable year. In the case of qualified
property held by an S corporation, each
shareholder's share of UBIA of qualified
property is a share of the unadjusted basis
proportionate to the ratio of shares in the S
corporation held by the shareholder on the
last day of the taxable year over the total
issued and outstanding shares of the S cor-
poration.
### 2. Property Contributed to a Partnership or S Corporation in a Nonrecognition Transfer
The proposed regulations provide that
the UBIA of qualified property means the
basis on the placed in service date of the
property. Therefore, the UBIA of quali-
fied property contributed to a partnership
in a section 721 transaction generally
equals the partnership's tax basis under
section 723 rather than the contributing
partner's original UBIA of the property.
Similarly, the UBIA of qualified property
contributed to an S corporation in a sec-
tion 351 transaction is determined by ref-
erence to section 362. Multiple comment-
ers expressed concern that this treatment
could result in a step-down in the UBIA of
qualified property used in a trade or busi-
ness at the time of the contribution due
only to the change in entity structure.
These commenters suggested that the
UBIA of qualified property contributed to
a partnership under section 721 or to an S
corporation under section 351 should be
determined as of the date it was first
placed in service by the contributing part-
ner or shareholder. Another commenter
suggested that final regulations should
generally provide for carryover of UBIA
of qualified property in non-recognition
transactions, but provide an anti-abuse
rule for cases in which a transaction was
engaged in with a principal purpose of
increasing the section 199A deduction.
The Treasury Department and the IRS
agree that qualified property contributed to
a partnership or S corporation in a nonrec-
ognition transaction should generally retain
its UBIA on the date it was first placed in
service by the contributing partner or share-
holder. Accordingly, § 1.199A-2(c)(3)(iv)
provides that, solely for the purposes of sec-
tion 199A, if qualified property is acquired
in a transaction described in section
168(i)(7)(B), the transferee's UBIA in the
qualified property is the same as the trans-
feror's UBIA in the property, decreased by
the amount of money received by the trans-
feror in the transaction or increased by the
amount of money paid by the transferee to
acquire the property in the transaction.
The rules set forth in these regulations
are limited solely to the determination of
UBIA of qualified property for purposes
of section 199A and are not applicable to
the determination of gain, loss, basis, or
depreciation with respect to transactions
described in section 168(i)(7).
3\. Property Received in a Section 1031
Like-Kind Exchange or Section 1033
Involuntary Conversion
Section 1.199A-2(c)(3) of the pro-
posed regulations explains that UBIA of
qualified property means the basis of qual-
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ified property on the placed in service date
of the property as determined under appli-
cable sections of chapter 1 of subtitle A of
the Code, which includes sections 1012
(Basis of property-cost), 1031 (Ex-
change of real property held for produc-
tive use or investment), and 1033 (Invol-
untary conversions). Section 1.199A-
2(c)(3) of the proposed regulations also
explains that UBIA of qualified property
is determined without regard to any ad-
justments for depreciation described in
section 1016(a)(2) or (3). Example 2 to
proposed § 1.199A-2(c)(4) illustrates that
the UBIA of qualified property received in
a section 1031 like-kind exchange is the
adjusted basis of the relinquished property
transferred in the exchange as determined
under section 1031(d), which reflects the
adjustment in basis for depreciation de-
ductions previously taken under section
168.
Several commenters argued that the
proposed regulations discourage like-kind
exchanges by providing an incentive to
retain property in order to maintain
greater UBIA of qualified property. These
commenters argue that the UBIA of re-
placement qualified property should be
the taxpayer's UBIA of the relinquished
property on the placed in service date by
the taxpayer, increased by any additional
capital invested by the taxpayer to acquire
the replacement property, rather than the
adjusted basis of the replacement property
at the time of the exchange as determined
under section 1031(d). This would be con-
sistent with the step-in-the-shoes rule for
determining the depreciable period. An-
other commenter suggested that if the rule
is retained, the provision should be re-
vised to treat the placed in service date as
the date of the exchange.
Section 1.1002-1(c) of the Income Tax
Regulations generally describes nonrec-
ognition sections, including section 1031,
as "exchanges of property in which at the
time of the exchange particular differ-
ences exist between the property parted
with and the property acquired, but such
differences are more formal that substan-
tial," so that recognition and income in-
clusion at that time of the exchange are
not appropriate. The underlying assump-
tion of these exceptions to the recognition
requirement is that the new property is
substantially a continuation of the old in-
vestment still unliquidated; and in the case
of reorganization, that the new enterprise,
the new corporate structure, and the new
property are substantially a continuation
of the old still unliquidated investment. Id.
Application of section 1031(d) in de-
termining UBIA for the replacement prop-
erty would require, among other possible
adjustments, a downward adjustment for
depreciation deductions. This approach is
contrary to the rule in § 1.199A-2(c)(3) of
the proposed regulations that UBIA of
qualified property is determined without
regard to any adjustments for depreciation
described in section 1016(a)(2) or (3).
Accordingly, the final regulations pro-
vide that the UBIA of qualified like-kind
property that a taxpayer receives in a sec-
tion 1031 like-kind exchange is the UBIA
of the relinquished property. However, if
a taxpayer either receives money or prop-
erty not of a like kind to the relinquished
property (other property) or provides
money or other property as part of the
exchange, the taxpayer's UBIA in the re-
placement property is adjusted. The tax-
payer's UBIA in the replacement property
is adjusted downward by the excess of any
money or the fair market value of other
property received by the taxpayer in the
exchange over the taxpayer's appreciation
in the relinquished property (excess boot).
Appreciation for this purpose is the excess
of the relinquished property's fair market
value on the date of the exchange over the
fair market value of the relinquished prop-
erty on the date of acquisition by the tax-
payer. This reduction for excess boot in
the taxpayer's UBIA in the replacement
property reflects a partial liquidation of
the taxpayer's investment in qualified
property.
If the taxpayer adds money or other
property to acquire replacement property,
the taxpayer's UBIA in the replacement
property is adjusted upward by the
amount of money paid or the fair market
value of the other property transferred to
reflect additional taxpayer investment.
If the taxpayer receives other property
in the exchange that is qualified property,
the taxpayer's UBIA in the qualified other
property will equal the fair market value
of the other property. Consequently, a tax-
payer who receives qualified other prop-
erty in the exchange is treated, for UBIA
purposes, as if the taxpayer receives cash
in the exchange and uses that cash to
purchase the qualified property.
The rules are similar for qualified prop-
erty acquired pursuant to an involuntary
conversion under section 1033, except
that appreciation for this purpose is the
difference between the fair market value
of the converted property on the date of
the conversion over the fair market value
of the converted property on the date of
acquisition by the taxpayer. In addition,
other property is property not similar or
related in service or use to the converted
property.
The rules set forth in these final regu-
lations are limited solely to the determi-
nation of UBIA of qualified property for
purposes of section 199A and are not ap-
plicable to the determination of gain, loss,
basis, or depreciation with respect to
transactions governed by sections 1031 or
1033.
In determining the depreciable period
of replacement property acquired in a
like-kind exchange or in an involuntary
conversion, the proposed regulations ap-
ply § 1.168(i)-6 which, in turn, follows
the rules in section 1031(d) or 1033(b), as
applicable. Because the final regulations
do not determine the UBIA of replace-
ment property under section 1031(d) or
1033(b), the final regulations correspond-
ingly remove the indirect references to
those rules for determining the deprecia-
ble period of replacement property. To be
consistent with the rules regarding the
UBIA of replacement property that is of
like kind to the relinquished property or
that is similar or related in service or use
to the involuntarily converted property,
the final regulations provide that (i) for the
portion of the individual's or RPE's UBIA
in the replacement property that does not
exceed the individual's or RPE's UBIA in
the relinquished property or involuntarily
converted property, the date such portion
in the replacement property was first placed
in service by the individual or RPE is the
date on which the relinquished property or
involuntarily converted property was first
placed in service by the individual or RPE,
and (ii) for the portion of the individual's or
RPE's UBIA in the replacement property
that exceeds the individual's or RPE's
UBIA in the relinquished property or invol-
untarily converted property, such portion in
the replacement property is treated as sepa-
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rate qualified property that the individual or
RPE first placed in service on the date on
which the replacement property was first
placed in service by the individual or
RPE. This rule is not a change from the
proposed regulations, but is consistent
with the step-in-the-shoes rationale for
determining the depreciable period for
certain non-recognition transactions de-
scribed in section 168(i)(7)(B).
In addition, the final regulations pro-
vide that when qualified property that is
not of like kind to the relinquished prop-
erty or qualified property that is not sim-
ilar or related in service or use to invol-
untarily converted property is received in
a section 1031 or 1033 transaction, such
qualified property is treated as separate
qualified property that the individual or
RPE first placed in service on the date on
which such qualified property was first
placed in service by the individual or
RPE. This rule is consistent with the rules
regarding the UBIA of such qualified
property.
The rules set forth in these final regu-
lations are limited solely to the determi-
nation of the depreciable period for pur-
poses of section 199A and are not
applicable to the determination of the
placed in service date for depreciation or
tax credit purposes.
### 4. Sections 734(b) and 743(b) Special Basis Adjustments
The proposed regulations provide that
basis adjustments under sections 734(b)
and 743(b) are not treated as qualified
property. The preamble to the proposed
regulations describes concerns about inap-
propriate duplication of the UBIA of qual-
ified property in circumstances such as
when the fair market value of property has
not increased and its depreciable period
has not ended. Several commenters agreed
that special basis adjustments could result
in the duplication of UBIA of qualified
property to the extent that the fair market
value of the qualified property does not
exceed UBIA. However, many of these
commenters suggested that basis adjust-
ments under section 734(b) and 743(b)
should be treated as qualified property to
the extent that the fair market value of the
qualified property to which the adjust-
ments relate exceeds the UBIA of such
property immediately before the special
basis adjustment. Other commenters rec-
ommended that both section 734(b) and
section 743(b) adjustments should gener-
ate new UBIA. Commenters suggested a
variety of methods for adjusting UBIA to
account for the special basis adjustments.
These included incorporating existing
principles of sections 734(b), 743(b), 754,
and 755 by determining the UBIA of sep-
arate qualified property by reference to the
difference between the transferee part-
ner's outside basis and its share of UBIA;
treating the entire amount of the section
743(b) adjustment as separate qualified
property with a new depreciation period,
with adjustments to the partner's share of
the partnership's UBIA to avoid duplicat-
ing UBIA; and creating an entirely new
regime mirroring the principles of sec-
tions 734(b), 743(b), 754, and 755.
The Treasury Department and the IRS
agree that section 743(b) basis adjust-
ments should be treated as qualified prop-
erty to extent the section 743(b) basis ad-
justment reflects an increase in the fair
market value of the underlying qualified
property. Accordingly, the final regula-
tions define an "excess section 743(b) ba-
sis adjustment" as an amount that is de-
termined with respect to each item of
qualified property and is equal to an
amount that would represent the partner's
section 743(b) basis adjustment with re-
spect to the property, as determined under
§ 1.743-1(b) and § 1.755-1, but calcu-
lated as if the adjusted basis of all of the
partnership's property was equal to the
UBIA of such property. The absolute
value of the excess section 743(b) basis
adjustment cannot exceed the absolute
value of the total section 743(b) basis ad-
justment with respect to qualified prop-
erty. The excess section 743(b) basis ad-
justment is treated as a separate item of
qualified property placed in service when
the transfer of the partnership interest oc-
curs. This rule is limited solely to the
determination of the depreciable period
for purposes of section 199A and is not
applicable to the determination of the
placed in service date for depreciation or
tax credit purposes. The recovery period
for such property is determined under
§ 1.743-1(j)(4)(i)(B) with respect to pos-
itive basis adjustments and § 1.743-
1(j)(4)(ii)(B) with respect to negative ba-
sis adjustments.
The Treasury Department and the IRS
do not believe that a section 734(b) ad-
justment is an acquisition of qualified
property for purposes of determining
UBIA. Section 734(b)(1) provides that, in
the case of a distribution of property to a
partner with respect to which a section
754 election is in effect (or when there is
a substantial basis reduction under section
734(d)), the partnership will increase the
adjusted basis of partnership property by
the sum of (A) the amount of any gain
recognized to the distributee partner under
section 731(a)(1), and (B) in the case of
distributed property to which section
732(a)(2) or (b) applies, the excess of the
adjusted basis of the distributed property
to the partnership immediately before the
distribution (as adjusted by section
732(d)) over the basis of the distributed
property to the distributee, as determined
under section 732. The Treasury Depart-
ment and the IRS do not believe that the
adjustment to basis is an acquisition for
purposes of section 199A.
Commenters also noted that the failure
to adjust UBIA for reduction of basis un-
der section 734 could result in a duplica-
tion of UBIA if property is distributed in
liquidation of a partner's interest in a part-
nership and the partner takes that property
with the partner's outside basis under sec-
tion 732(b) without the partnership adjust-
ing the UBIA in the partnership's remain-
ing assets. The Treasury Department and
the IRS agree that such a duplication is
inappropriate, but do not agree with com-
menters that such a distribution results in
an increase in UBIA. These regulations
provide that the partnership's UBIA in the
qualified property carries over to a partner
that receives a distribution of the qualified
property.
The Treasury Department and the IRS
continue to study this issue and request
additional comments on the interaction of
the special basis adjustments under sec-
tions 734(b) and 743(b) with section 199A
and whether a new regime for calculating
adjustments with respect to UBIA is nec-
essary.
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### 5. Qualified Property Held by a Trade or Business at the Close of the Taxable Year
Section 199A(b)(6)(A)(i) and proposed
§ 1.199A-2(c) provide that qualified prop-
erty must be held by, and available for use
in, the qualified trade or business at the
close of the taxable year. One commenter
suggested the final regulations contain a
rule for determining the UBIA of qualified
property in a short year on acquisition or
disposition of a trade or business, similar
to the guidance provided in § 1.199A-
2(b)(2)(v) for purposes of calculating
W-2 wages. The commenter suggested
that one approach for UBIA could be a
pro rata calculation based on the number
of days the qualified property is held dur-
ing the year. The Treasury Department
and the IRS decline to adopt this sugges-
tion because the statute looks to qualified
property held at the close of the taxable
year.
Another commenter asked for addi-
tional guidance on this rule with respect to
qualified property held by an RPE. The
commenter questioned whether the appli-
cable taxable year is that of the taxpayer
or the RPE. The commenter also asked
how the rule would be applied if a tax-
payer transferred his or her interest in an
RPE. The Treasury Department and the
IRS believe that the UBIA of qualified
property is measured at the trade or busi-
ness level. Accordingly, in the case of
qualified property held by an RPE, the
applicable taxable year is that of the RPE.
A taxpayer who transfers an interest in an
RPE prior to the close of the RPE's tax-
able year is not entitled to a share of
UBIA from the RPE.
In the context of S corporations, one
commenter noted that section 1377(a)
provides that income for the taxable year
is allocated among shareholders on a pro
rata basis by assigning a pro rata share of
each corporate item to each day of the
taxable year. The commenter suggested
that all shareholders who were owners
during the taxable year should be given
access to the UBIA of qualified property
held by an S corporation at the close of the
S corporation's taxable year. The Trea-
sury Department and the IRS decline to
adopt this comment because section 199A
does not have a rule comparable to the
rule in section 1377(a).
The proposed regulations provide that
property is not qualified property if the
property is acquired within 60 days of the
end of the taxable year and disposed of
within 120 days without having been used
in a trade or business for at least 45 days
prior to disposition, unless the taxpayer
demonstrates that the principal purpose of
the acquisition and disposition was a pur-
pose other than increasing the section
199A deduction. The Treasury Depart-
ment and the IRS received no comments
with respect to this rule. The final regula-
tions retain the rule but clarify that the 120
day period begins with the acquisition of
the property.
### 6. Qualified Property Acquired from a Decedent
The preamble to the proposed regula-
tions provides that for property acquired
from a decedent and immediately placed
in service, the UBIA generally will be its
fair market value at the time of the dece-
dent's death under section 1014. One
commenter recommended that the regula-
tions should clearly state this rule in the
regulatory text. The commenter recom-
mended that the regulations should further
clarify that the date of the decedent's
death should commence a new deprecia-
ble period for the property. The Treasury
Department and the IRS adopt these com-
ments. The final regulations provide that
for qualified property acquired from a de-
cedent and immediately placed in service,
the UBIA of the property will generally be
the fair market value at the date of the
decedent's death under section 1014. Fur-
ther, the regulations provide that a new
depreciable period for the property com-
mences as of the date of the decedent's
death.
IV. Qualified Business Income, Qualified
REIT Dividends, and Qualified PTP
Income
### A. Qualified Business Income
#### 1. Items Spanning Multiple Tax Years
Section 1.199A-3(b)(1)(iii) provides
that section 481 adjustments (whether
positive or negative) are taken into ac-
count for purposes of computing QBI to
the extent that the requirements of this
section and section 199A are otherwise
satisfied, but only if the adjustment arises
in taxable years ending after December
31, 2017. One commenter suggested that
income from installment sales and de-
ferred cancellation of indebtedness in-
come under section 108(i) arising in tax-
able years ending before January 1, 2018,
should not be taken into account for pur-
poses of computing QBI. The commenter
also recommended that items deferred un-
der Revenue Procedure 2004-34, 2004-1
C.B. 911 (advanced payments not in-
cluded in revenue) prior to January 1,
2018, should be included in QBI. The
Treasury Department and the IRS con-
tinue to study this issue and request addi-
tional comments on when items arising in
taxable years prior to January 1, 2018,
should be taken into account for purposes
of computing QBI.
### 2. Previously Disallowed Losses
The proposed regulations provide that
previously disallowed losses or deduc-
tions (including under sections 465, 469,
704(d), and 1366(d)) allowed in the tax-
able year are taken into account for pur-
poses of computing QBI so long as the
losses were incurred in a taxable year be-
ginning after January 1, 2018. Because pre-
viously disallowed losses incurred for tax-
able years beginning before January 1,
2018, cannot be taken into account for pur-
poses of computing QBI, several comment-
ers recommended that final regulations pro-
vide an ordering rule for the use of such
losses. Commenters recommended both
"last-in, first-out" (LIFO) and "first-in, first-
out" (FIFO) approaches, with a slight pref-
erence for the FIFO approach as consistent
with former section 199. The Treasury De-
partment and the IRS agree that taxpayers
with previously disallowed losses for tax-
able years beginning both before and after
January 1, 2018, require an ordering rule to
determine which portion of a previously dis-
allowed loss can be taken into account for
purposes of section 199A. Consistent with
regulations under former section 199, these
regulations provide that any losses disal-
lowed, suspended, or limited under the pro-
visions of sections 465, 469, 704(d), and
1366(d), or any other similar provisions,
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shall be used, for purposes of section 199A
and these regulations, in order from the old-
est to the most recent on a FIFO basis.
One commenter suggested that a spe-
cial rule should be provided to identify the
section 469 trade or business losses that
are used to offset income if the taxpayer's
section 469 groupings differ from the tax-
payer's section 199A aggregations. The
commenter recommended that any section
469 loss carryforward that is later used
should be allocated across the taxpayer's
section 199A aggregations based on in-
come with respect to such aggregations in
the year the loss was generated. The Trea-
sury Department and the IRS decline to
adopt this comment. Concurrently with
the publication of these proposed regula-
tions, the Treasury Department and the
IRS are publishing proposed regulations
under section 199A (REG-134652-18)
that treat previously suspended losses as
losses from a separate trade or business
for purposes of section 199A.
3\. Net Operating Losses and the
Interaction of Section 199A with Section
461(l)
The preamble to the proposed regula-
tions requested comments on the interac-
tion of sections 199A and 461(l). Com-
menters requested guidance in many areas
including: ordering rules for the use of
suspended active business losses; methods
for tracing losses to a taxpayer's various
trades or businesses; whether a loss retains
its character; whether a deduction under sec-
tion 199A is a loss for calculating the loss
limitation; and how the section 199A loss
carryover rules interact with a loss limited
under section 461(l). The Treasury Depart-
ment and the IRS understand that taxpayers
will need guidance as to the interaction of
section 199A and section 461(l). However,
these issues are beyond the scope of these
regulations and will be considered in future
guidance under section 461(l). Section
1.199A-3(b)(1)(v) retains and clarifies the
rule that while a deduction under section
172 for a net operating loss is generally not
considered to be with respect to a trade or
business (and thus not taken into account in
determining QBI), an excess business loss
under section 461(l) is treated as a net op-
erating loss carryover to the following tax-
able year and is taken into account for pur-
poses of computing QBI in the subsequent
taxable year in which it is deducted.
### 4. Recapture of Overall Foreign Losses
One commentator requested that Trea-
sury and the IRS provide that U.S .- source
taxable income arising upon recapture of
an overall foreign loss described in sec-
tion 904(f) be treated as QBI in the recap-
ture year to the extent the overall foreign
loss limited the section 199A deduction in
a prior tax year. This comment was not
adopted. Section 199A(c)(3)(A)(i) limits
QBI to items that are effectively con-
nected to a U.S. trade or business in the
tax year concerned and the recapture rules
in section 904(f) apply only for purposes
of subchapter N, Part III, Subpart A of the
Code. In addition, it would not be appro-
priate to expand the scope of QBI for
recaptured foreign losses when no similar
relief is available if non-qualifying do-
mestic losses are subsequently offset by
non-qualifying domestic income.
### 5. Treatment of Other Deductions
Section 199A(c)(1) provides that QBI
includes the net amount of qualified items
of income, gain, deduction, and loss with
respect to any qualified trade or business
of the taxpayer. Commenters requested
additional guidance on whether certain
items constitute qualified items under this
provision. Several commenters suggested
that deductions for self-employment tax,
self-employed health insurance, and cer-
tain other retirement plan contribution de-
ductions should not reduce QBI. One
commenter reasoned that qualified retire-
ment plan contributions should not reduce
QBI because they should not be treated as
being associated with a trade or business,
consistent with the treatment when calcu-
lating net operating losses under section
172(d)(4)(D). The commenter also sug-
gested that while self-employed health in-
surance is treated as associated with a
trade or business, such expense should
likewise not reduce QBI for purposes of
simplification in administering the rule.
Another commenter suggested that QBI
should not be reduced by these expenses
because they are personal adjustments.
One commenter also requested guidance
on whether unreimbursed partnership ex-
penses, the interest expense to acquire
partnership and S corporation interests,
and state and local taxes reduce QBI.
The Treasury Department and the IRS
have not adopted these recommendations
because they are inconsistent with the
statutory language of section 199A(c).
Whether a deduction is attributable to a
trade or business must be determined un-
der the section of the Code governing the
deduction. All deductions attributable to a
trade or business should be taken into
account for purposes of computing QBI
except to the extent provided by section
199A and these regulations. Accordingly,
§ 1.199A-3(b)(1)(vi) provides that, in
general, deductions attributable to a trade
or business are taken into account for pur-
poses of computing QBI to the extent that
the requirements of section 199A and
§ 1.199A-3 are otherwise satisfied. Thus,
for purposes of section 199A, deductions
such as the deductible portion of the tax
on self-employment income under section
164(f), the self-employed health insurance
deduction under section 162(l), and the
deduction for contributions to qualified
retirement plans under section 404 are
considered attributable to a trade or busi-
ness to the extent that the individual's
gross income from the trade or business is
taken into account in calculating the al-
lowable deduction, on a proportionate ba-
sis. The Treasury Department and the IRS
decline to address whether deductions for
unreimbursed partnership expenses, the
interest expense to acquire partnership
and S corporation interests, and state and
local taxes are attributable to a trade or
business as such guidance is beyond the
scope of these regulations.
### 6. Guaranteed Payments for the Use of Capital
A few commenters suggested that the
rule in the proposed regulations which
excludes guaranteed payments for the use
of capital under section 707(c) should be
removed. Commenters argued that while
section 199A(c)(4) excludes guaranteed
payments paid to a partner for services
rendered with respect to a trade or busi-
ness under section 707(a), the statutory
language does not likewise exclude guar-
anteed payments for the use of capital
under section 707(c). The commenters ar-
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gued that Congress drew a line between
payments for services and payments for
the use of capital when it drafted section
199A(c) and that even though payments
for the use of capital are determined with-
out regard to the partnership's income,
that does not mean that they are not at-
tributable to a trade or business. Several
commenters stated that contrary to the
reasoning in the preamble to the proposed
regulations, there is risk involved when
making guaranteed payments for the use
of capital because the payments do rely to
some degree on the partnership's success.
Commenters noted that guaranteed pay-
ments for the use of capital are generally
accepted as part of the partner's distribu-
tive share from the partnership and taxed
as such, and should be included in calcu-
lating QBI. Similarly, another commenter
generally requested additional guidance
for how to determine when a payment to a
partner is considered for the use of capital
and excluded from the calculation of QBI.
Another commenter suggested that if
guaranteed payments for the use of capital
under section 707(c) are excluded from
the calculation of QBI, a partnership's
expense related to guaranteed payments
for the use of capital also should be ex-
cluded from the calculation of QBI. One
commenter suggested that to the extent a
guaranteed payment for the use of capital
is considered akin to interest income on
indebtedness, it is generally appropriate to
exclude the payment from QBI but noted
the significant uncertainty in determining
whether an arrangement is a guaranteed
payment for the use of capital, a gross
income allocation, or something else. The
commenter also noted that guaranteed
payments for the use of capital are not
necessarily akin to interest income.
The Treasury Department and the IRS
decline to adopt the comments suggesting
that guaranteed payments for the use of
capital are generally attributable to a trade
or business. Although section 199A is si-
lent with respect to guaranteed payments
for the use of capital, section 199A does
limit the deduction under section 199A to
income from qualified trades or busi-
nesses. The Treasury Department and the
IRS believe that guaranteed payments for
the use of capital are not attributable to the
trade or business of the partnership be-
cause they are determined without regard
to the partnership's income. Conse-
quently, such payments should not gener-
ally be considered part of the recipient's
QBI. Rather, for purposes of section
199A, guaranteed payments for the use of
capital should be treated in a manner sim-
ilar to interest income. Interest income
other than interest income which is prop-
erly allocated to trade or business is spe-
cifically excluded from qualified items of
income, gain, deduction or loss under sec-
tion 199A(c)(3)(B)(iii). One commenter
noted that if guaranteed payments are
treated like interest income for purposes
of section 199A, and if such payments are
properly allocated to a qualified trade or
business of the recipient, they should con-
stitute QBI to that recipient in respect of
such qualified trade or business. Al-
though, this is an unlikely fact pattern to
occur, the Treasury Department and the
IRS agree with this comment and the final
regulations adopt this comment. Further,
guidance under sections 707(a) and 707(c)
is beyond the scope of these regulations.
### 7. Section 707(a) Payments for Services
The proposed regulations provide that
any payment described in section 707(a)
received by a partner for services rendered
with respect to a trade or business, regard-
less of whether the partner is an individual
or an RPE, is excluded from QBI. A num-
ber of commenters suggested that pay-
ments to partners in exchange for services
provided to the partnership under section
707(a) should not be excluded from QBI
and others suggested a narrowing of the
rule for certain circumstances. Some com-
menters suggested that the payments
should be QBI when the arrangement is
structured as it would be with a third-
party. Many commenters argued that sec-
tion 707(a) payments should be QBI when
the partner who is providing services has
its own business separate from that of the
partnership. On a related note, one com-
menter suggested payments for services
should be QBI when the services provided
are a different business from that of the
partnership. Other commenters further
suggested that payments should be QBI
when the partner is not primarily provid-
ing services solely to one partnership. One
commenter suggested that the rule exclud-
ing section 707(a) payments from QBI
should be narrowed to apply only in the
context of SSTBs or if the payments
would be considered wages by the partner,
but that generally payments from the part-
ner's qualified trade or business should be
QBI. One commenter suggested that the
regulations excluding section 707(a) pay-
ments from QBI be applied only to indi-
viduals and RPEs that are either (i) not
otherwise engaged in a trade or business
of providing similar services to other con-
sumers or (ii) whose ownership interests
in the partnership exceed a de minimis
amount. Another commenter suggested
that the exclusion of section 707(a) pay-
ments be replaced with a narrowly tai-
lored anti-abuse rule that would exclude
from QBI section 707(a) payments (i)
paid to a partner owning more than 50
percent of the capital or profits interests in
the partnership and (ii) designed with a
primary purpose of causing income that
would not otherwise have qualified as
QBI to be treated as QBI.
The Treasury Department and the IRS
decline to adopt these recommendations.
As stated in the preamble to the proposed
regulations, payments under section
707(a) for services are similar to guaran-
teed payments, reasonable compensation,
and wages, none of which are includable
in QBI. Thus, treating section 707(a) pay-
ments received by a partner for services
rendered to a partnership as QBI would be
inconsistent with the statute. Further, as
noted by one commenter, it is difficult to
distinguish between payments under sec-
tion 707(c) and payments under section
707(a). Therefore, creating such a distinc-
tion would be difficult for both taxpayers
and the IRS to administer.
Section 1.199A-3(b)(2) of the pro-
posed regulations addresses items that are
not taken into account as qualified items
of income, gain, deduction, or loss, and
includes all of the items listed in both
section 199A(c)(3) (exceptions from qual-
ified items of income, gain, deduction, and
loss) and section 199A(c)(4) (treatment of
reasonable compensation and guaranteed
payments). As suggested by one com-
menter, the final regulations clarify that
amounts received by an S corporation
shareholder as reasonable compensation
or by a partner as a payment for services
under sections 707(a) or 707(c) are not
taken into account as qualified items of
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income, gain, deduction, or loss, and thus
are excluded from QBI.
### 8. Interaction of Sections 875(l) and 199A
Section 199A(c)(3)(A)(i) provides that
for purposes of determining QBI, the term
qualified items of income, gain, deduc-
tion, and loss means items of income,
gain, deduction and loss to the extent such
items are effectively connected with the
conduct of a trade or business within the
United States (within the meaning of sec-
tion 864(c), determined by substituting
"qualified trade or business (within the
meaning of section 199A" for "nonresi-
dent alien individual or a foreign corpora-
tion" or for "a foreign corporation" each
place it appears). The preamble to the
proposed regulations provides that certain
items of income, gain, deduction, and loss
are treated as effectively connected in-
come but are not with respect to a domes-
tic trade or business (such as items attrib-
utable to the election to treat certain U.S.
real property sales as effectively con-
nected pursuant to section 871(d)), and are
thus not QBI because they are not items
attributable to a qualified trade or business
for purposes of section 199A. One com-
menter agreed with this interpretation but
requested additional guidance on the in-
teraction between sections 875(l) and
199A, specifically whether the determina-
tion of whether an activity is a trade or
business is made at the entity level for
purposes of section 199A. The commenter
also recommended that regulations distin-
guish between (1) items of income, gain,
loss, or deduction that are incurred in a
trade or business applying the principles
of section 162 and (2) items of income,
gain, deduction, or loss that are not in-
curred in such a trade or business.
For purposes of section 199A, the de-
termination of whether an activity is a
trade or business is made at the entity
level. If an RPE is engaged in a trade or
business, items of income, gain, loss, or
deduction from such trade or business re-
tain their character as they pass from the
entity to the taxpayer - even if the tax-
payer is not personally engaged in the
trade or business of the entity. Con-
versely, if an RPE is not engaged in a
trade or business, income, gain, loss, or
deduction allocated to a taxpayer from
such entity will not qualify for the section
199A deduction even if the taxpayer or an
intervening entity is otherwise engaged in
a trade or business. As described in part
II.A.3 of this Summary of Comments and
Explanation of Revisions, a trade or busi-
ness for purposes of section 199A is gen-
erally defined by reference to the stan-
dards for a section 162 trade or business.
A rental real estate enterprise that meets
the safe harbor described in Notice 2017-
07, released concurrently with these final
regulations, may also treated as trades or
businesses for purposes of section 199A.
Additionally, the rental or licensing of prop-
erty if the property is rented or licensed to a
trade or business conducted by the individ-
ual or an RPE which is commonly con-
trolled under § 1.199A-4(b)(1)(i) is also
treated as a trade or business for purposes of
section 199A. In addition to these require-
ments, the items must be effectively con-
nected to a trade or business within the
United States as described in section 864(c).
One commenter requested guidance
coordinating section 199A with section
751(a) and the rules for dispositions of
certain interests by foreign persons in sec-
tion 864(c)(8). The proposed regulations
provide that, with respect to a partnership,
if section 751(a) or (b) applies, then gain
or loss attributable to assets of the part-
nership giving rise to ordinary income un-
der section 751(a) or (b) is considered
attributable to the trades or businesses
conducted by the partnership, and is taken
into account for purposes of computing
QBI. The commenter questioned whether
income treated as ordinary income under
section 751 for purposes of section
864(c)(8) should be QBI. The treatment of
ordinary income under section 751 under
subchapter N of chapter 1 of subtitle A of
the Code is generally a function of section
864(c)(8). On December 27, 2018, the
Federal Register published a notice of
proposed rulemaking (REG-113604-18)
at 83 FR 66647 under section 864(c)(8)
(proposed section 864(c)(8) regulations).
The proposed section 864(c)(8) regula-
tions provide rules for determining the
amount of gain or loss treated as effec-
tively connected with the conduct of a
trade or business within the United States
("effectively connected gain" or "effec-
tively connected loss") described in sec-
tion 864(c)(8), including rules coordinat-
ing section 864(c)(8) with sections 741
and 751 (relating to the character of gain
or loss realized in connection with the sale
or exchange of an interest in a partner-
ship). Because the proposed section
864(c)(8) regulations apply the deemed
sale construct of section 751(a) to deter-
mine whether gain or loss on the sale of a
partnership interest is subject to tax under
section 864(c)(8), the issue raised in this
comment does not arise, and thus this
comment is not adopted. The Treasury
Department and the IRS request further
comments on the interaction of section
199A and the proposed regulations under
section 864(c)(8) after the publication of
those proposed regulations.
### 9. Reasonable Compensation
Several commenters were concerned
that an overlap of the QBI, W-2 wage
limitation, and reasonable compensation
rules for S corporations would cause dis-
parities between taxpayers operating busi-
nesses in different entity structures. These
commenters stated that the rules might
have the unintended consequence of en-
couraging taxpayers to select or avoid cer-
tain business entities. For example, one
commenter noted that the reasonable com-
pensation requirement for S corporations
favors S corporations for purposes of the
W-2 wage limitation when calculating the
section 199A deduction, compared to sole
proprietorships and partnerships which
may not pay any wages. That commenter
suggested the final regulations include an
election for partners or sole proprietors to
treat an amount of reasonable compensa-
tion paid as wages for purposes of the
W-2 wage limitation. Other commenters
similarly noted the entity choice issue, but
from the perspective that S corporations
can be less advantageous. The comment-
ers argued that QBI is reduced for S cor-
poration shareholders because reasonable
compensation is not included in QBI and
noted there could be further impacts de-
pending on whether the taxpayer is above
or below the income thresholds. These
commenters suggested that the final regu-
lations should strive for equity between
taxpayers operating businesses in differ-
ent entity structures. Finally, one com-
menter suggested the need for additional
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guidance regarding whether and how rea-
sonable compensation paid to an S corpo-
ration shareholder is considered wages for
purposes of the W-2 wage limitation.
One commenter maintained that to avoid
incentivizing minimization of compensation
and Federal Insurance Contributions Act
tax, the final regulations should provide that
deductions with respect to reasonable com-
pensation should not reduce QBI. The com-
menter stated that reasonable compensation
must be added back in calculating QBI.
The Treasury Department and the IRS
decline to adopt these suggestions. Sec-
tion 199A(c)(4) clearly excludes reason-
able compensation paid to a taxpayer by
any qualified trade or business of the tax-
payer for services rendered with respect to
the trade or business from QBI. These
amounts are attributable to a trade or busi-
ness and are thus qualified items of deduc-
tion as described in section 199A(c)(3) to
the extent they are effectively connected
with the conduct of a trade or business
within the United States and included or
allowed in determining taxable income for
the taxable year. In addition, reasonable
compensation paid to a shareholder-
employee is included as W-2 wages for
purposes of the W-2 wage limitation to the
extent that the requirements of § 1.199A-2
are otherwise satisfied. Further, guaranteed
payments and payments to independent con-
tractors are not W-2 wages and therefore,
cannot be counted for purposes of the W-2
wage limitation.
A few commenters were concerned
about whether tax return preparers would
have the responsibility to closely examine
whether compensation paid to a shareholder
of an S corporation is reasonable before
calculating the section 199A deduction, and
whether tax return preparers could be sub-
ject to penalties. One commenter suggested
a small business safe harbor approach where
certain cash method S corporations that treat
at least 70 percent of dividend distributions
to shareholder-employees as wages are
deemed to satisfy the reasonable compensa-
tion requirement of Rev. Rul. 74-44,
1974-1 C.B. 287. Providing additional
guidance with respect to what constitutes
reasonable compensation for a shareholder-
employee of an S corporation or the appli-
cation or non-application of assessable pen-
alties applicable to tax return preparers is
beyond the scope of these final regulations.
10\. Items Treated as Capital Gain or
Loss
The proposed regulations provide that
any item of short-term capital gain, short-
term capital loss, long-term capital gain,
or long-term capital loss, including any
item treated as one of such items, such as
gains or losses under section 1231, that
are treated as capital gains or losses, are
not taken into account as a qualified item
of income, gain, deduction, or loss in
computing QBI.
Several commenters suggested that
many technical complications arise from
the exclusion of section 1231 gain from
QBI. Specifically, commenters noted that
whether a taxpayer has long-term capital
gain or loss under section 1231 is deter-
mined at the taxpayer level and not at the
level of the various trades or businesses
for which QBI is being determined. For
example, if a taxpayer has two businesses,
the taxpayer may have section 1231 gains
in one trade or business and section 1231
losses in the other trade or business. One
commenter suggested that both section
1231 gains and losses be included in the
calculation of QBI regardless of whether
they result in a capital or ordinary amount
when combined at the taxpayer level. The
commenter asserts that this approach
would not affect the overall limitation that
restricts a taxpayer's deduction to 20 per-
cent of the excess of taxable income over
net capital gain.
The Treasury Department and the IRS
acknowledge the added challenges in ap-
plying section 1231 in the context of cal-
culating QBI under section 199A. Gener-
ally, under section 1231, a taxpayer nets
all of its section 1231 gains and losses
from multiple trades or businesses before
determining their ultimate character. In
other words, the section 1231 determina-
tion is not made until the taxpayer com-
bines its section 1231 gain or loss from all
sources. This does not change in the con-
text of section 199A. Thus, the section
1231 rules remain the same in the context
of section 199A. For purposes of calculat-
ing QBI, taxpayers should continue to net
their section 1231 gains and losses from
their multiple trades or businesses to de-
termine whether they have excess gain
(which characterizes all of the gain or loss
as capital and so all are excluded from
QBI) or excess loss (which characterizes
all of the gain or loss as ordinary and so
all are included in QBI). As would be the
case outside the section 199A context, the
character tracks back to the trade or busi-
ness that disposed of the asset.
Another potential complication noted
by commenters is the section 1231(c) re-
capture rule. Under the rule, a taxpayer
that has a section 1231 capital gain in the
current year must look back to any section
1231 ordinary loss taken in the previous
five years and convert a portion of the cur-
rent year section 1231 capital gain to ordi-
nary gain, based on the previous losses
taken. One commenter asked for further
guidance on how to allocate ordinary gains
and losses that may result from the section
1231 calculation to multiple trades or busi-
nesses. While the Treasury Department and
the IRS recognize the complexity in apply-
ing the section 1231(c) recapture rules and
allocating gain to multiple trades or busi-
nesses, providing additional guidance with
respect to section 1231(c) is beyond the
scope of these regulations. For purposes of
determining whether ordinary income is in-
cluded in QBI, taxpayers should apply the
section 1231(c) recapture rules in the same
manner as they would otherwise. Notice
97-59, 1997-2 C.B. 309, provides guidance
on netting capital gains and losses and how
that netting incorporates the section 1231(c)
recapture rule.
Given the specific reference to section
1231 gain in the proposed regulations,
other commenters requested guidance
with respect to whether gain or loss under
other provisions of the Code would be
included in QBI. One commenter asked
for clarification about whether real estate
gain, which is taxed at a preferential rate,
is included in QBI. Additionally, other
commenters requested clarification re-
garding whether items treated as ordinary
income, such as gain under sections 475,
1245, and 1250, are included in QBI.
To avoid any unintended inferences,
the final regulations remove the specific
reference to section 1231 and provide that
any item of short-term capital gain, short-
term capital loss, long-term capital gain,
or long-term capital loss, including any
item treated as one of such items under
any other provision of the Code, is not
taken into account as a qualified item of
income, gain, deduction, or loss. To the
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extent an item is not treated as an item of
capital gain or capital loss under any other
provision of the Code, it is taken into
account as a qualified item of income,
gain, deduction, or loss unless otherwise
excluded by section 199A or these regu-
lations.
Similarly, another commenter requested
clarification regarding whether income from
foreign currencies and notional principal
contracts are excluded from QBI if they are
ordinary income. Section 199A(c)(3)(B)(iv)
and § 1.199A-3(b)(2)(ii)(D) provide that
any item of gain or loss described in section
954(c)(1)(C) (transactions in commodities)
or section 954(c)(1)(D) (excess foreign cur-
rency gains) is not included as a qualified
item of income, gain, deduction, or loss.
Section 199A(c)(3)(B)(v) and § 1.199A-
3(b)(2)(ii)(E) provide any item of income,
gain, deduction, or loss described in section
954(c)(1)(F) (income from notional princi-
pal contracts) determined without regard to
section 954(c)(1)(F)(ii) and other than items
attributable to notional principal contracts
entered into in transactions qualifying under
section 1221(a)(7) is not included as a qual-
ified item of income, gain, deduction, or
loss. The statutory language does not pro-
vide for the ability to permit an exception to
these rules based on the character of the
income. Accordingly, income from foreign
currencies and notional principal contracts
described in the listed sections is excluded
from QBI, regardless of whether it is ordi-
nary income.
#### 11. Reasonable Methods for Allocation of Items Among Multiple Trades or Businesses
The proposed regulations provide that
if an individual or an RPE directly con-
ducts multiple trades or businesses, and
has items of QBI which are properly at-
tributable to more than one trade or busi-
ness, the individual or RPE must allocate
those items among the several trades or
businesses to which they are attributable
using a reasonable method based on all
the facts and circumstances. The chosen
reasonable method for each item must be
consistently applied from one taxable year
to another and must clearly reflect the
income and expenses of each trade or
business. One commenter suggested that a
reasonable approach to allocating items that
are not clearly attributable to a single trade
or business could be the cost allocation
methods used in § 1.199-4(b)(2). The com-
menter suggested that the reasonableness
standard could be applied to determine the
allocation of items of QBI among multiple
trades or businesses. The commenter also
suggested a safe harbor allocation method
allowing a taxpayer to bypass direct tracing
if the amount of other items of QBI that
must be allocated is below a pre-determined
threshold, such as a percentage of total QBI
or a specified dollar amount.
The Treasury Department and the IRS
decline to adopt this comment as the rules
under § 1.199-4 were intended solely for
the allocation of expenses. By contrast, the
rule described in § 1.199A-3(b)(5) requires
the allocation of all qualified items of in-
come, gain, loss, and deduction across mul-
tiple trades or businesses. Whether direct
tracing or allocations based on gross income
are reasonable methods depends on the facts
and circumstances of each trade or business.
Different reasonable methods may be ap-
propriate for different items. Accordingly,
the final regulations retain the rule in the
proposed regulations. However, once a
method is chosen for an item, it must be
applied consistently with respect to that
item. The Treasury Department and the IRS
continue to study this issue and request ad-
ditional comments, including comments
with respect to potential safe harbors.
Another commenter requested guid-
ance on when or how a method can be
changed from year to year if, for example,
it is no longer reasonable or no longer
clearly reflects income. The Treasury De-
partment and the IRS decline to adopt this
comment as it is beyond the scope of these
regulations. If a method is no longer rea-
sonable or no longer clearly reflects in-
come, the method cannot continue to be
used. The individual or RPE must choose
a new method that is reasonable under the
facts and circumstances and apply it con-
sistently going forward.
### B. Qualified REIT Dividends
#### 1. Regulated Investment Companies
A number of commenters requested
guidance that would allow a shareholder
in a RIC to take a section 199A deduction
with respect to certain distributions or
deemed distributions from the RIC attrib-
utable to qualified REIT dividends re-
ceived by the RIC. One of these comment-
ers also suggested that RICs should be
able to pass through qualified PTP in-
come. As noted in part II.A.2. of this
Summary of Comments and Explanation
of Revisions, the final regulations do not
treat a RIC as an RPE, because a RIC is a
C corporation, not a passthrough entity.
However, concurrently with the publica-
tion of these final regulations, the Trea-
sury Department and the IRS are publish-
ing elsewhere in this issue of the Federal
Register proposed regulations under sec-
tion 199A (REG-134652-18, RIN 1545-
BP12) that address the payment by RICs
of dividends that certain shareholders may
include as qualified REIT dividends under
section 199A(b)(1)(B). The pass through
by RICs of qualified PTP income would
raise several novel issues and the com-
menter suggesting that RICs be allowed to
pass through such income did not address
how these issues should be resolved. Ac-
cordingly, the proposed regulations do not
provide for the pass through of qualified
PTP income by RICs, but request com-
ments on the issues that would be pre-
sented if RICs were allowed to pass
through qualified PTP income.
#### 2. Meaning of Qualified REIT Dividend
The proposed regulations provide that
a REIT dividend is not a qualified REIT
dividend if the stock with respect to which
it is received is held for fewer than 45
days, taking into account the principles of
sections 246(c)(3) and (4). One com-
menter interpreted the rule as requiring
the REIT stock to have been held at least
45 days prior to the dividend, and asked
that the definition of qualified REIT divi-
dend not be conditioned on a 45-day hold-
ing period. The commenter suggested that
the reporting entity might not have suffi-
cient information to determine whether
the holding period was met and thus
whether a particular dividend was in fact a
qualified REIT dividend. The commenter
also argued that the proposed rule was not
part of the statutory text and could create
significant administrative burdens, includ-
ing in situations where there is no abuse
and potentially subject a REIT or broker
to information reporting penalties. The
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commenter suggested two alternatives.
First, the section 199A deduction could be
disallowed to the extent it offsets short-
term capital gains. Second, the holding
period could be eliminated as part of the
definition of qualified REIT dividend and
the Treasury Department and the IRS
could be given authority to disallow the
deduction in the event that the taxpayer
held the stock for the period specified in
section 246(c)(1)(A).
The Treasury Department and the IRS
have determined that a holding period for
REIT stock with respect to which a qual-
ified REIT dividend is received is appro-
priate in order to prevent abuse. The hold-
ing period in the proposed regulations
requires holding the stock no fewer than
any 45 days, not necessarily the 45 days
prior to the REIT dividend. To provide
additional certainty regarding the holding
period requirements, these final regula-
tions define the requisite holding period
for the REIT stock as the period described
in section 246(c)(1)(A). Generally, use of
a holding period to prevent abuse is con-
sistent with established principles under
the Code, and the application of these
principles and the duration of the holding
period should be familiar to affected enti-
ties. Furthermore, the Treasury Depart-
ment and the IRS intend to provide guid-
ance to REITs and brokers on how to
report qualified REIT dividends in in-
stances in which it is impractical to deter-
mine whether the shareholder has met the
requisite holding period. This guidance is
expected to be similar to guidance in-
structing a person required to make a re-
turn under section 6042 to report a divi-
dend as a qualified dividend on a Form
1099-DIV if such person determines that
the recipient of the dividend has satisfied
the holding period test in section
1(h)(11)(B)(iii) or it is impractical for
such person to make such determination.
See Notice 2003-79, 2003-2 C.B. 1206;
Notice 2004-71, 2004-2 C.B. 793 and
Notice 2006-3, 2006-1 C.B. 306. The
Treasury Department and the IRS also
intend to inform REIT shareholders that
they may receive Forms 1099-DIV report-
ing qualified REIT dividends that are not
actually qualified REIT dividends because
the shareholders have not met the holding
period requirement.
V. Aggregation
### A. Overview
As described in part II of this Summary
of Comments and Explanation of Revi-
sions, the final regulations incorporate the
principles of section 162 for determining
whether a trade or business exists for pur-
poses of section 199A. A taxpayer can
have more than one section 162 trade or
business. See § 1.446-1(d)(1). Multiple
trades or businesses can also be conducted
within one entity. A trade or business,
however, cannot generally be conducted
across multiple entities for tax purposes.
The preamble to the proposed regulations
acknowledges that it is not uncommon for
what may be thought of as single trades or
businesses to be operated across multiple
entities, for various legal, economic, or
other non-tax reasons. It is because trades
or businesses may be structured this way
that the proposed regulations permit ag-
gregation.
The proposed regulations provide a set
of rules under which an individual can
aggregate multiple trades or businesses
for purposes of applying the W-2 wage
and UBIA of qualified property limita-
tions described in § 1.199A-1(d)(2)(iv).
Based on comments received, the final
regulations retain these rules with modifi-
cations as described in the remainder of
this part V. The Treasury Department and
the IRS received comments in support of
the aggregation rules generally, though
some commenters suggested that the
grouping rules described in the regula-
tions under section 469 be used to deter-
mine when a taxpayer may aggregate. The
Treasury Department and the IRS decline
to adopt this suggestion. For reasons
stated in the proposed regulations (that is,
the differences in the definition of trade or
business, section 469's reliance on a tax-
payer's level of involvement in the trade
or business, and the use of separate rules
for specified service trades or businesses),
the Treasury Department and the IRS do
not consider the grouping rules under sec-
tion 469 an appropriate method for deter-
mining whether a taxpayer can aggregate
trades or businesses for purposes of ap-
plying section 199A. Another commenter
suggested looking to the controlled group
rules under section 414 rather than creat-
ing a new framework for aggregation. The
Treasury Department and the IRS decline
to adopt the controlled group rules under
section 414 as those rules are too specific
to be applied as a general aggregation rule
under section 199A.
The preamble to the proposed regulations
requested comments on whether the aggrega-
tion method described in § 1.199A-4 would
be an appropriate grouping method for pur-
poses of sections 469 and 1411, in addition to
section 199A. One commenter suggested that
the section 199A aggregation method would
not be an appropriate method for sections 469
and 1411 because the primary focus of group-
ing under those sections is based on the
taxpayer's level of participation. Another
commenter, noting that the standard for aggre-
gation under the proposed regulations is nar-
rower than the section 469 grouping require-
ments, recommended that taxpayers be
permitted to adopt their section 199A aggre-
gation for purposes of section 469. The
commenter stated that this would provide
taxpayers with an option to mitigate the
administrative burden of multiple grouping
rules. The Treasury Department and the IRS
continue to study this issue and request ad-
ditional comments.
### B. General Rules
The proposed regulations provide rules
that allow a taxpayer to aggregate trades
or businesses based on a 50-percent own-
ership test, which must be maintained for
a majority of the taxable year. The final
regulations clarify that majority of the tax-
able year must include the last day of the
taxable year. One commenter requested
guidance on whether each individual in-
cluded in making the ownership determi-
nation must own an interest in each trade
or business to be aggregated. Another
commenter suggested that to avoid abuse
in situations where actual overlapping
ownership is low, anyone who owns less
than 10 percent of the value of an enter-
prise could be excluded from the group of
owners whose ownership is considered in
testing. The commenter suggested clarifi-
cation or modification of the overlapping
ownership requirement including by re-
quiring a minimum ownership threshold
of the trades or businesses, or that the 50
percent test use each owner's lowest in-
terest in the RPE. The ownership rule in
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the proposed regulations does not require
that every person involved in the owner-
ship determination own an interest in ev-
ery trade or business. The rule is satisfied
so long as one person or group of persons
holds a 50 percent or more ownership
interest in each trade or business. The
Treasury Department and the IRS decline
to require a minimum ownership thresh-
old for purposes of the ownership test as
the abuse potential is outweighed by the
administrative complexity such a rule
would create. The Treasury Department
and the IRS note that trades or businesses
to be aggregated must meet all of the
requirements of § 1.199A-4, not just the
ownership requirement.
Other commenters suggested that ag-
gregation should be allowed for trades or
businesses that do not meet the common
ownership test if the general partner or
managing member is the same for each
entity. The Treasury Department and the
IRS decline to adopt this recommenda-
tion. The aggregation rules are intended to
allow aggregation of what is commonly
thought of as a single trade or business
where the business is spread across mul-
tiple entities. Common ownership is an
essential element of a single trade or busi-
ness.
Several commenters noted that the fam-
ily attribution rules under section 199A do
not include grandparents, siblings, or ad-
opted children. One commenter requested
clarification that the family attribution rules
would not cause an aggregated trade or
business to cease to qualify for aggregation
when children and grandchildren reached
adulthood. A few commenters requested
guidance on the manner in which beneficial
interests in trusts are considered for pur-
poses of the common ownership rule. Other
commenters suggested that the attribution
rules in sections 267 and 707 should be used
in place of the family attribution rule. An-
other commenter suggested that final regu-
lations provide a specific attribution rule that
treats owners of entities as owning a pro rata
share of any business owned by the entity
for purposes of the 50 percent ownership
test. Another commenter recommended de-
fining "directly or indirectly" as used in the
proposed regulations by reference to a spe-
cific ownership rule. The final regulations
address these recommendations by requir-
ing that the same person or group of per-
sons, directly or by attribution through sec-
tions 267(b) or 707(b), own 50 percent or
more of each trade or business. A C corpo-
ration may constitute part of this group.
In addition, the proposed regulations
require that all items attributable to aggre-
gated trades or businesses be reported on
returns for the same taxable year. Several
commenters recommended that this re-
quirement be removed, arguing that trades
or businesses that meet the ownership and
factor tests could have different taxable
years. The Treasury Department and the
IRS decline to adopt this recommendation
because the aggregation rules are intended
for use in applying the W-2 wage and
UBIA of qualified property limitations. As
described in § 1.199A-2(b), W-2 wages
are determined based on a calendar year.
Allowing trades or businesses with differ-
ent taxable years to aggregate would re-
quire special rules for apportioning W-2
wages for purposes of applying the W-2
wage limitation. Accordingly, the final
regulations retain the requirement that all
of the items attributable to each trade or
business to be aggregated are reported on
returns at the trade or business level with
the same taxable year, not taking into ac-
count short taxable years. One commenter
asked for clarification regarding whether
the majority of the taxable year require-
ment refers to the taxable year of the
taxpayer claiming the deduction or of the
RPE reporting the items. The aggregation
rules are applied at the trade or business
level. Accordingly, the majority of the
taxable year requirement refers to the in-
dividual or RPE that conducts the trade or
business to be aggregated.
The proposed regulations also provide
that an SSTB cannot be aggregated. One
commenter requested guidance on whether
SSTBs with de minimis gross receipts are
permitted to aggregate. A trade or business
with gross receipts from a specified service
activity below the de minimis thresholds
described in § 1.199A-5(c)(1) is not
treated as an SSTB and therefore may be
aggregated under the rules described in
§ 1.199A-4. Another commenter sug-
gested that the prohibition on aggrega-
tion for SSTBs is unnecessary because a
taxpayer must combine W-2 wages and
UBIA of qualified property for the ag-
gregated trade or business prior to ap-
plying the W-2 wages and UBIA limi-
tations. The commenter recommended
that at a minimum, the prohibition
be removed for taxpayers within the
phase-in range and that taxpayers should
be permitted to aggregate SSTBs with
other SSTBs for reporting purposes. The
Treasury Department and the IRS de-
cline to adopt the recommendation to
allow SSTBs to aggregate as doing so
would increase administrative burden
and complexity without providing sig-
nificant benefit. Aggregation is intended
to assist taxpayers in applying the W-2
wage and UBIA of qualified property
limitations. A taxpayer with taxable in-
come below the threshold amount does
not need to apply the W-2 wage and
UBIA of qualified property limitations
and therefore will not benefit from ag-
gregation. Further, the Treasury Depart-
ment and the IRS decline to adopt the
recommendation that the prohibition on
aggregation of SSTBs be removed for
taxpayers with taxable income within
the phase-in range as taxpayers may
have taxable income within the phase-in
range for some taxable years and taxable
income that exceeds the phase-in range
in other taxable years.
To determine whether trades or busi-
nesses may be aggregated, the proposed
regulations provide that multiple trades or
businesses must, among other require-
ments, satisfy two of three listed factors,
which demonstrate that the businesses are
part of a larger, integrated trade or busi-
ness. These factors include: (1) the busi-
nesses provide products and services that
are the same (for example, a restaurant
and a food truck) or customarily provided
together (for example, a gas station and a
car wash); (2) the businesses share facili-
ties or share significant centralized busi-
ness elements (for example, common per-
sonnel, accounting, legal, manufacturing,
purchasing, human resources, or informa-
tion technology resources); or (3) the
businesses are operated in coordination
with, or reliance on, other businesses in
the aggregated group (for example, supply
chain interdependencies). Some com-
menters expressed support for the factors
in the proposed regulations while others
suggested modifications to the test. One
commenter questioned whether, to meet
the first factor, trades or businesses must
provide both products and services that
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are the same. Another commenter noted
that it is unclear how to apply the first
factor with respect to real estate as real
estate is neither a product nor a service. In
response to these comments, the final reg-
ulations describe the first factor as prod-
ucts, property, or services that are the
same or customarily offered together. Ad-
ditionally, the final regulations add exam-
ples clarifying when a real estate trade or
business satisfies the aggregation rules.
Other commenters requested additional
guidance on whether certain fact patterns
regarding specific trades or businesses
would satisfy a particular factor. The
Treasury Department and the IRS decline
to address specific fact patterns or trades
or businesses because this test is based on
all the facts and circumstances. Therefore,
specific rules would be impractical and
imprecise. Similarly, the Treasury Depart-
ment and the IRS decline to define "sig-
nificant" in terms of centralized business
elements in the second factor because the
answer is dependent on the facts and cir-
cumstances of each combination of trades
and businesses.
Another commenter suggested that op-
erational interdependence could be deter-
mined more precisely by using tests such
as the twelve factor test outlined in
§ 1.469-4T(g)(3). The commenter noted
that such a test would be less likely to
inappropriately preclude a section 199A
deduction. Other commenters suggested
that taxpayers be permitted to aggregate
when two of the four factors are met. The
Treasury Department and the IRS have
carefully considered alternatives, includ-
ing the factors outlined in § 1.469-
4T(g)(3). Aggregation of multiple trades
or businesses is not provided for in the
statutory text, but was added to the regu-
lations to enhance administrability for tax-
payers and the IRS in situations when
what is thought of as a single trade or
business is operated across multiple enti-
ties for various legal, economic, or other
non-tax reasons. Aggregation is optional
and the inability to aggregate does not
preclude a taxpayer with QBI from mul-
tiple trades or businesses from claiming a
section 199A deduction on the separate
trades or businesses to the extent other-
wise allowed by section 199A and these
regulations. The Treasury Department and
the IRS believe that reducing the required
number of factors would allow the aggre-
gation of trades or businesses that are not
owned and operated as integrated busi-
nesses. Conversely, adding new factors
would increase complexity and burden for
both taxpayers and the IRS. Accordingly,
the final regulations retain the factors pro-
vided in the proposed regulations, modi-
fied to take real estate into account.
### C. Aggregation by RPEs
Multiple commenters recommended that
RPEs be permitted to aggregate at the entity
level. One commenter suggested that allow-
ing aggregation at the entity level would
reduce reporting requirements if the owners
or beneficiaries of the entity were required
to follow the entity's aggregation. The com-
menter also suggested that entity aggrega-
tion would help non-majority owners by
allowing them to benefit from aggregation
without requiring the entity to provide own-
ership information. Another commenter
suggested that reporting would be simplified
if aggregation was allowed at the entity
level when it is known that the owners want
to aggregate. A third commenter suggested
that aggregation should be allowed where
each owner provides consent, including
through provisions in the operating agree-
ments. Another commenter suggested that if
entity level aggregation is not allowed gen-
erally, an exception should be made for dis-
regarded and wholly-owned entities.
The Treasury Department and the IRS
agree that aggregation should be allowed
at the entity level. Accordingly, the final
regulations permit an RPE to aggregate
trades or businesses it operates directly or
through lower-tier RPEs. The resulting
aggregation must be reported by the RPE
and by all owners of the RPE. An individ-
ual or upper-tier RPE may not separate the
aggregated trade or business of a lower-
tier RPE, but instead must maintain the
lower-tier RPE's aggregation. An individ-
ual or upper-tier RPE may aggregate ad-
ditional trades or businesses with the
lower-tier RPE's aggregation if the rules
of § 1.199A-4 are otherwise satisfied.
Each RPE in a tiered structure is subject to
the disclosure and reporting requirements
in § 1.199A-4(c)(1). Further, as discussed
in part II.C.1 of this Summary of Com-
ments and Explanation of Revisions,
§ 1.199A-1(e)(2) of the final regulations
provides that an entity with a single owner
that is treated as disregarded as an entity
separate from its owner under any other
provision of the Code is disregarded for
purposes of section 199A and §§ 1.199A-1
through 1.199A-6.
### D. Reporting and Disclosure
The proposed regulations require con-
sistent reporting of aggregated trades or
businesses. Each individual who chooses
to aggregate must attach a statement to
their return annually identifying each
trade or business to be aggregated. A few
commenters requested clarification of
these rules in situations in which a tax-
payer did not aggregate or failed to report
an aggregation. Several commenters sug-
gested that taxpayers be required to file
only one disclosure in the first year the
taxpayer chooses to aggregate and that
any subsequent aggregation information
be reported on the same form used to
report a taxpayer's section 199A deduc-
tion. Further, these commenters suggested
that taxpayers be allowed to remedy a
failure to provide the required information
by filing an amended return or upon ex-
amination, provided that the taxpayer can
establish reasonable cause for the failure.
One commenter recommended that any re-
quired aggregation information be reported
on a form for the section 199A deduction
instead of as a separate statement. Addition-
ally, commenters requested guidance as to
whether a taxpayer is required to aggregate
in its first year and if the failure to aggregate
precludes aggregation in a later year. Fi-
nally, one commenter requested guidance
regarding when a taxpayer could re-
aggregate. The commenter suggested that
options could include during an open sea-
son; after a change in circumstances; under
a formal process similar to a change in ac-
counting method; or based on a list of cir-
cumstances that would allow for automatic
permission to re-aggregate.
Based on these comments, the final
regulations provide that a taxpayer's fail-
ure to aggregate trades or businesses will
not be considered to be an aggregation
under this rule; that is, later aggregation is
not precluded. The final regulations do not
generally allow for an initial aggregation
to be made on an amended return as this
would allow aggregation decisions to be
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made with the benefit of hindsight. A tax-
payer who fails or chooses not to aggre-
gate in Year 1 can still choose to aggre-
gate in Year 2 or other future year (but
cannot amend returns to choose to aggre-
gate for Year 1). A taxpayer who chooses
to aggregate must continue to aggregate
each taxable year unless there is a material
change in circumstances that would cause
a change to the aggregation. However, the
Treasury Department and the IRS acknowl-
edge that many individuals and RPEs may
be unaware of the aggregation rules when
filing returns for the 2018 taxable year.
Therefore, the IRS will allow initial aggre-
gations to be made on amended returns for
the 2018 taxable year. The final regulations
retain the annual disclosure requirement
and, in order to provide flexibility as forms
and instructions change, allow the Commis-
sioner to require disclosure of information
on aggregated trades or businesses as pro-
vided in a variety of formats including
forms, instructions, or published guidance.
The final regulations contain similar report-
ing and disclosure rules for RPEs.
The preamble to the proposed regula-
tions requested comments on whether re-
porting requirements should be imposed
on RPEs requiring majority owners to
provide information about all of the other
RPEs in which they hold a majority inter-
est. One commenter stated that the extra
time and cost of imposing additional re-
porting requirements on aggregated trades
or businesses would not be worth the po-
tential benefit a non-majority owner may
gain by having such information. Another
commenter suggested that the need for
such a rule would be reduced if the final
regulations allowed aggregation by RPEs.
The Treasury Department and the IRS
agree with these comments. Accordingly,
the final regulations do not adopt a rule
requiring the disclosure of such informa-
tion to non-majority owners.
The proposed regulations permit the
Commissioner to disaggregate trades or
businesses if a taxpayer fails to attach the
required annual disclosure. The preamble to
the proposed regulations requested com-
ments on an administrable standard under
which trades or businesses will be disaggre-
gated. One commenter suggested that a dis-
aggregation rule is unnecessary because the
Commissioner can always assert that an ag-
gregation that was inappropriate should be
disregarded. The commenter suggested that
the Treasury Department and the IRS con-
sider a rule allowing the Commissioner to
aggregate trades or businesses in which the
taxpayer engages in a transaction or series
of transactions to divide trades or businesses
in a manner that allows the taxpayer to use
the aggregation rules to artificially increase
the taxpayer's section 199A deduction.
The Treasury Department and the IRS
decline to adopt both of these suggestions.
Although the Treasury Department and
the IRS agree with the commenter that the
Commissioner can always assert that an
inappropriate aggregation should be disre-
garded, the reporting requirements, in-
cluding the disaggregation rule, are nec-
essary for the Commissioner to administer
section 199A in accordance with the stat-
utory intent. The final regulations clarify
that the disaggregation is not permanent
by providing that trades or businesses that
are disaggregated by the Commissioner
may not be re-aggregated for the three
subsequent taxable years, similar to the
typical period during which a tax return
may be audited. The Treasury Department
and the IRS also decline to adopt the
commenter's suggestion that the final reg-
ulations include an additional anti-abuse
rule that would allow the Commissioner
to aggregate trades or business in cases in
which a division of the taxpayer's trades
or businesses is used in conjunction with
the aggregation rules with a principal pur-
pose of increasing the taxpayer's section
199A deduction. As explained in part
II.D. of this Summary of Comments and
Explanation of Revisions, taxpayers and
entities can have more than one trade or
business. The suggested anti-abuse rule is
overly broad and would create unneces-
sary complexity for both taxpayers and
the IRS.
### E. Examples
The proposed regulations provide sev-
eral examples of the aggregation rules.
One commenter noted that proposed
§ 1.199A-4(b)(1)(i) refers to the capital
or profits of a partnership while the exam-
ples refer to the capital and profits of a
partnership. The language in the examples
was intended to demonstrate that the tax-
payers were sharing proportionately in all
items. For clarification, the final regula-
tions retain the reference to capital or
profits in § 1.199A-4(b)(1)(i) and update
the examples to remove the references to
capital and profits.
VI. Specified Service Trades or
Businesses and the Trade or Business of
Being an Employee.
#### A. Definition of Specified Service Trade or Business
##### 1. In General
The proposed regulations provide def-
initional guidance on the meaning of a
trade or business involving the perfor-
mance of services in each of the fields
listed in section 199A(d)(2). Multiple
commenters requested guidance on
whether specific trades or businesses
would constitute SSTBs. In many cases,
the determination of whether a specific
trade or business is an SSTB depends on
whether the facts and circumstances dem-
onstrate that the trade or business is in one
of the listed fields. Although the Treasury
Department and the IRS understand the
desire for certainty, because the determi-
nation of whether a particular trade or
business is an SSTB is factually depen-
dent, this analysis is beyond the scope of
these regulations.
Several commenters argued that the
meaning of performance of services in
the various fields should be limited to the
definitions provided in § 1.448-1T(e)(4).
A few commenters noted that any expan-
sion beyond these definitions is contrary
to legislative intent as expressed in "Tax
Cuts and Jobs Act," Statement of Manag-
ers to the Conference Report to Accom-
pany H.R. 1, H.R. Rept. 115-466 (Dec.
15, 2017), p. 216-222. These commenters
argue that the Statement of Managers
notes that the committee adopted the Sen-
ate Amendment and described the section
448 regulations as an indicator of the
meaning of services in the health, per-
forming arts, and consulting fields refer-
enced in section 1202(e)(3)(A) as incor-
porated by section 199A. The Treasury
Department and the IRS decline to adopt
these comments. While the Statement of
Managers does reference § 1.448-
1T(e)(4), nothing in the language of the
report limits the definitions for purposes
of section 199A to those provided in
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§ 1.448-1T(e)(4). Section 199A does not
reference section 448; instead, section
199A incorporates section 1202(e)(3)(A)
with modifications. The Treasury Depart-
ment and the IRS believe it is appropriate
to look to the definitions provided for in
the regulations under section 448 because
guidance under section 1202 is limited.
However, as stated in the preamble to the
proposed regulations, the existing guid-
ance under section 448 is not a substitute
for guidance under section 199A.
The intent of section 448 and the intent
of section 199A are different. Section 448
prohibits certain taxpayers from comput-
ing taxable income under the cash receipts
and disbursements method of accounting.
Qualified personal services corporations
are excluded from this prohibition. Sec-
tion 448(d)(2) defines the term qualified
personal service corporation to include
certain employee-owned corporations,
substantially all of the activities of which
involve the performance of services in the
fields of health, law, engineering architec-
ture, accounting, actuarial sciences, per-
forming arts, or consulting. By contrast,
section 199A provides a deduction based
on QBI from a qualified trade or business.
For taxpayers with taxable income above
the phase-in range, an SSTB is not a qual-
ified trade or business. Section 199A,
through reference to section 1202, defines
an SSTB as a trade or business involving
the performance of services in the fields of
health, law, accounting, actuarial science,
performing arts, consulting, athletics, fi-
nancial services, brokerage services, or
any trade or business where the principal
asset of such trade or business is the rep-
utation or skill of one or more of its em-
ployees or owners. The trade or business
of the performance of services that consist
of investing and investment management,
trading, or dealing in securities (as defined
in section 475(c)(2)), partnership inter-
ests, or commodities (as defined in section
475(e)(2)) is also defined as an SSTB for
purposes of section 199A. Further, section
199A looks to the trade or business of
performing services involving one or
more of the listed fields, and not the per-
formance of services themselves in deter-
mining whether a trade or business is an
SSTB. The designation of a trade or busi-
ness as an SSTB applies to owners of the
trade or business, regardless of whether
the owner is passive or participated in any
specified service activity. Accordingly, it
is both necessary and consistent with the
statute and the legislative history to ex-
pand the definitions of the fields of ser-
vices listed in section 199A(d)(1) and (2)
and § 1.199A-5 beyond those provided in
§ 1.448-1T(e)(4).
One commenter suggested that in order
to provide certainty and further economic
growth, the final regulations should in-
clude a franchising example to clarify that
a franchisor will not be considered to be
an SSTB based solely on the selling of a
franchise in a listed field of service. The
Treasury Department and the IRS adopt
this comment and have included a fran-
chising example in the final regulations.
Finally, the final regulations add two
rules of general application. First, the final
regulations specify that the rules for de-
termining whether a business is an SSTB
within the meaning of section 199A(d)(2)
apply solely for purposes of section 199A
and therefore, may not be taken into ac-
count for purposes of applying any other
provision of law, except to the extent that
another provision expressly refers to sec-
tion 199A(d). Second, the final regula-
tions include a hedging rule that is appli-
cable to any trade or business conducted
by an individual or an RPE. The hedging
rule provides that income, deduction,
gain, or loss from a hedging transaction
entered into in the normal course of a
trade or business is included as income,
deduction, gain, or loss from that trade or
business. A hedging transaction for these
purposes is defined in § 1.1221-2(b) and
the timing rules of § 1.446-4 are also
applicable.
The remainder of this part VI.A. re-
sponds to those comments advocating that
a specific category of trade or business
should be excluded from one of the listed
fields in section 199(d)(2) or from the
SSTB provisions entirely.
2\. Health
Multiple commenters submitted com-
ments requesting additional guidance on
the meaning of performance of services in
the field of health. Several commenters
recommended that the definition of the
performance of services in the field of
health should differentiate between insti-
tutional health care providers (such as
skilled nursing homes), which bill on a
fee-for-service or per diem-basis, versus
health care providers who provide and bill
for professional services (such as a physi-
cian's practice). Another commenter sug-
gested a distinction between these types of
providers based on whether the trade or
business had made the capital investment
necessary to function as a custodial institu-
tion. One commenter recommended the def-
inition be restricted to health care providers
who derive a majority of their revenue from
billing patients and third party payers for
professional services, thereby excluding
health care providers who derive a majority
of their revenue from billing for institutional
services (skilled nursing facilities, hospitals,
ambulatory surgery centers, home health
care agencies, outpatient radiology centers,
and hospice agencies).
Commenters noted the many services
that skilled nursing facilities and assisted
living facilities provide are unrelated to
health care, including housing, meals,
laundry facilities, security, and socializa-
tion activities. In some cases, skilled nurs-
ing and similar facilities may make avail-
able independent contractors who provide
services related to health care available to
patients, without the facility receiving any
payment or revenue with respect to such
services. Another commenter suggested
that skilled nursing facilities, assisted liv-
ing, and similar facilities should be ex-
cluded from the definition of services in
the field of health unless 95 percent or
more of the time spent by employees of
the facility are directly related to provid-
ing medical care.
The Treasury Department and the IRS
agree that skilled nursing, assisted living,
and similar facilities provide multi-faceted
services to their residents. Whether such a
facility and its owners are in the trade or
business of performing services in the field
of health requires a facts and circumstances
inquiry that is beyond the scope of these
final regulations. The final regulations pro-
vide an additional example of one such fa-
cility offering services that the Treasury De-
partment and the IRS do not believe rises to
the level of the performance of services in
the field of health.
Several commenters asked for clarifi-
cation regarding when two separate activ-
ities would generally be viewed sepa-
rately, particularly in the context of health
care facilities such as emergency centers,
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urgent care centers, and surgical centers
that provide improved real estate and
equipment but do not directly provide
treatment or diagnostic care to service re-
cipients. One commenter noted that there
is precedent under section 469 for distin-
guishing between the provision of direct
treatment and diagnostic care versus the
business of providing services or facilities
ancillary to direct care, even if the physi-
cians own an interest in the entity owning
the facilities. The commenter suggested
that the final regulations provide examples
or other clarification regarding when these
and similar facilities will be treated as
performing services in the field of health,
particularly if one of the owners of a fa-
cility also performs medical services in
the facility. The final regulations provide
an additional example of an outpatient
surgical center demonstrating a fact pat-
tern that the Treasury Department and the
IRS do not believe is a trade or business
providing services in the field of health.
Several commenters requested clarifi-
cation regarding whether a retail phar-
macy selling pharmaceuticals or medical
devices is engaged in a health service
trade or business. One commenter sug-
gested that final regulations include an
example of when a pharmacist would be
considered in the health profession. The
commenter agreed that a pharmacist
working as an independent contractor at
various pharmacies, a pharmacist provid-
ing inoculations directly to the patient,
and a consulting pharmacist working as an
independent contractor would all be ex-
amples of a pharmacist engaged in an
SSTB. Another commenter stated that the
inclusion of pharmacists in the definition
might be overbroad, suggesting that a
pharmacist who was also a pharmacy
owner generating revenue from selling
pharmaceuticals or medical devices would
not be engaged in an SSTB while a phar-
macist operating as a consultant and paid
as an independent contractor would be
engaged in an SSTB. A third commenter
suggested that a pharmacist working as an
independent contractor for several phar-
macies would not be performing services
in the field of health unless the pharma-
cists provides medical services, such as
inoculations, directly to a patient.
The Treasury Department and the IRS
agree that the sale of pharmaceuticals and
medical devices by a retail pharmacy is
not by itself a trade or business perform-
ing services in the field of health. As the
commenters note, however, some services
provided by a retail pharmacy through a
pharmacist are the performance of ser-
vices in the field of health. The final reg-
ulations provide an additional example of
a pharmacist performing services in the
field of health.
Another commenter argued that gene
therapy and similar injectable products
such as stem cell therapy and RNA-based
therapies manufactured or produced from
the patient's body itself should be treated
in the same manner as pharmaceuticals.
The commenter argued that their manu-
facture and production should not be
treated as an SSTB, regardless of whether
they take place in a hospital or in a sepa-
rate production facility. The Treasury De-
partment and the IRS decline to adopt this
recommendation as this is a question of
facts and circumstances.
Another commenter argued that veter-
inary medicine should not be considered
an SSTB. The commenter stated that de-
livery of veterinary care is different than
delivery of human health care because
veterinary patients are property and the
nature of the animal may dictate the level
of veterinary care provided by the owner.
Most veterinary practices have other
streams of income such as retail, labora-
tory and diagnostic services, boarding and
grooming services, and pharmacies, and
the commenter expressed concern that it
would be difficult for veterinarians to seg-
regate those other streams of income. The
commenter noted that animal boarding and
grooming would ordinarily generate income
eligible for the deduction and that should
not change when services are provided by a
veterinarian. The commenter also stated that
Federal health legislation does not apply to
veterinarians unless the legislation specifi-
cally refers to veterinarians, veterinary med-
icine, or animal health. Finally, the com-
menter noted that § 1.448-1T(e)(4)(ii) does
not reference veterinarians, suggesting that
this is an indication that Congress did not
intend for veterinary medicine to be treated
as a business in the field of health.
Issued nearly three decades ago, Rev.
Rul. 91-30, 1991-1 C.B. 61, described a
corporation in which employees spend all
of their time in the performance of veter-
inary services, including diagnostic and
recuperative services as well as activities,
such as the boarding and grooming of
animals, that are incident to the perfor-
mance of these services. The ruling also
describes the definition of the perfor-
mance of services in the field of health
contained in § 1.448-1T(e)(4)(ii) and
holds that a corporation whose employees
perform veterinary services is a qualified
personal service corporation within the
meaning of sections 448(d)(2) and
11(b)(2) and a personal service corpora-
tion within the meaning of section 441(i).
Accordingly, the Treasury Department
and the IRS believe that it is appropriate
to continue the long-standing treatment of
veterinary services as the performance of
services in the field of health for purposes
of section 199A and these final regula-
tions.
Another commenter noted that there is
a dividing line between physical therapists
and other health-related occupations. For
example, reimbursement rates from third-
party payers are higher for doctors, nurses,
and dentists. The commenter also noted that
Congress initially attempted to exclude
physical therapists from participating in
Medicare and Medicaid incentive programs
and health service student loan forgiveness
programs. The Treasury Department and the
IRS decline to adopt this comment as mul-
tiple health services are reimbursed differ-
ently, but are still within the field of health.
One commenter suggested that ser-
vices are not performed in the field of
health unless services are performed di-
rectly to a patient. As an example, the
commenter argued that a physician who
reads x-rays for another physician but
does not work directly with the patient
would not be performing a service in the
field of health. Another commenter stated
that defining services in the field of health
by proximity to patients could lead to ar-
bitrary results, pointing out that a radiol-
ogist who acts as an expert consultant to a
physician engages in the same exercise of
medical skills and judgment as a physi-
cian who sees patients. The commenter
suggested that technicians who operate
medical equipment or test samples, but are
not required to exercise medical judgment
should not be considered as performing
services in the field of health. The Trea-
sury Department and the IRS agree with
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the second commenter that proximity to
patients is not a necessary component of
providing services in the field of health.
Accordingly, the final regulations remove
the requirement that medical services be
provided directly to the patient. The final
regulations do not adopt the suggestion
that technicians who operate medical
equipment or test samples are not consid-
ered to be performing services in the field
of health as this is a question of fact.
However, the final regulations do include
an additional example related to labora-
tory services.
### 3. Accounting
One commenter suggested that real es-
tate settlement agents should be excluded
from the definition of those who perform
services in the field of accounting. The com-
menter recommended that final regulations
define the performance of services in the
field of accounting as the performance of
core accounting services such as bookkeep-
ing (including data entry), write-up work,
review services, and attest functions, as well
as tax preparation and similar functions. As
an alternative, the commenter recommends
that settlement agents be added as not con-
stituting the practice of accounting. A sec-
ond commenter stated that the definition of
accounting should be narrowed to the ordi-
nary meaning of accounting. This comment
noted that the field of accounting should
include bookkeeping and financial state-
ment preparation, but not tax return advice
and preparation. A third commenter noted
that the proposed regulations treat book-
keeping services, which do not require pro-
fessional training or license, as an account-
ing service. The commenter argued that if
the intent of section 199A is to create parity
between C corporations and passthrough en-
tities, the regulations should narrowly define
SSTBs, as was done for reputation and skill,
and not expand the definitions beyond what
was expressly contemplated by Congress.
The Treasury Department and the IRS
decline to adopt these comments. As
noted in the preamble to the proposed
regulations, the provision of services in
the field of accounting is not limited to
services requiring state licensure. It is
based on a common understanding of ac-
counting, which includes tax return and
bookkeeping services. Whether a real es-
tate settlement agent is engaged in the
performance of services in the field of
accounting depends on the facts and cir-
cumstances including the specific services
offered and performed by the trade or
business.
### 4. Actuarial Science
The proposed regulations provide that
the performance of services in the field of
actuarial science means the provision of
services by individuals such as actuaries
and similar professionals performing ser-
vices in their capacity as such. One com-
menter stated that the definition creates
uncertainty for businesses that employ ac-
tuaries but do not separately bill for the
services (such as insurance businesses).
The commenter recommended providing
a rule similar to the rule for consulting
services related to the manufacture and
sale of goods for actuarial science. The
Treasury Department and the IRS decline
to adopt this comment as section 199A
looks to the trade or business of perform-
ing services rather than the performance
of services themselves. As stated in the
preamble to the proposed regulations,
the field of actuarial science does not in-
clude the provision of services by ana-
lysts, economists, mathematicians, and
statisticians not engaged in analyzing or
assessing the financial cost of risk or un-
certainty of events. The mere employment
of an actuary does not itself cause a trade
or business to be treated as performing
services in the field of actuarial science.
Whether a trade or business is providing
actuarial services is a question of fact and
circumstance.
### 5. Performing Arts
Multiple commenters stated that the
definition of performance of services in
the field of performing arts should be
limited to the definition in § 1.448-
1T(e)(4)(iii). One commenter argued that
the position in the proposed regulations
that includes individuals who participate
in the creation of the performing arts is
not supported by the legislative history,
namely the Statement of Managers that
references the section 448 regulations. As
described in part VII.A.1. of this Summary
of Comments and Explanation of Revisions,
the Treasury Department and the IRS de-
cline to limit the definition of the perfor-
mance of services in the field of performing
arts to the definition in § 1.448-1T(e)
(4)(iii). Another commenter suggested that
writers should fall outside the definition of
the performance of services in the field of
performing arts because writing does not
require a skill unique to the creation of per-
forming arts. Further, writers create a wide
variety of works not intended to be per-
formed before an audience. The Treasury
Department and the IRS also decline to
adopt this comment. To the extent that a
writer is paid for written material, such as a
song or screenplay, that is integral to the
creation of the performing arts, the writer is
performing services in the field of perform-
ing arts.
### 6. Consulting
One commenter suggested that pro-
posed § 1.199A-5(b)(3), Example 3,
should be modified to clarify that C, a
taxpayer in the business of providing ser-
vices that assist unrelated entities in mak-
ing their personnel structures more effi-
cient, does not provide any temporary
workers, and C's compensation and fees
are not affected by whether C's clients use
temporary workers. The commenter ar-
gued that such a change would prevent the
example from being interpreted as treating
any recommendation for a business to use
temporary workers as consulting services.
The commenter also suggested that the
final regulations include an additional ex-
ample similar to Example 7 of § 1.448-
1T(e)(4)(iv)(B) related to staffing firms.
The commenter recommended that the ex-
ample provide that a business that assists
other businesses in meeting their person-
nel needs by referring job applicants to
them does not engage in the performance
of services in the field of consulting when
the compensation for the business refer-
ring job applicants is based on whether the
applicants accept employment positions
with the businesses searching for employ-
ees. The final regulations adopt these sug-
gestions.
Another commenter suggested that fi-
nal regulations clarify whether services
provided by engineers and architects
could be considered to be an SSTB if their
services meet the definition of consulting
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services. The Treasury Department and
the IRS adopt this comment. Section
1.199A-5(b)(2)(vii) of the final regula-
tions provides that services within the
fields of architecture and engineering are
not treated as consulting services for pur-
poses of section 199A.
One commenter suggested that the def-
inition of consulting should be narrowed
to stand-alone advice and counsel with no
link to production, manufacturing, sales,
or licensing of products. The Treasury
Department and the IRS decline to adopt
this suggestion as it would be difficult to
administer and subject to manipulation.
Another commenter suggested that the
phrase "provision of professional advice
and counsel to clients to assist the client in
achieving goals and solving problems" is
overly broad as it could apply to almost
any service-based business that assists cli-
ents in achieving goals and solving prob-
lems. The commenter stated that applying
the ancillary rule would be difficult where
a taxpayer is required to separately bill for
embedded consulting services under state
or local sales tax laws. The commenter
suggested that the consulting field should
be limited to taxpayers that fall under a
consulting-related business activity code
under the North American Industry Clas-
sification Systems (NAICS). The Trea-
sury Department and the IRS agree with
the commenter that many service-based
businesses could be construed as provid-
ing professional advice and counsel to cli-
ents to assist the client in achieving goals
and solving problems; however, the Trea-
sury Department and the IRS decline to
adopt the recommendation to limit the
consulting field based on NAICS codes.
Section 1.199A-5(b)(2)(vii) excludes the
performance of services other than pro-
viding advice and counsel from the field
of consulting. At issue is whether advice
and counsel is provided in the context of
the provision of goods or services (that are
not otherwise SSTBs). This is a question
of facts and circumstances. Consulting
services that are separately billed are gen-
erally not considered to be provided in the
context of the provisions of goods or ser-
vices.
### 7. Athletics
A few commenters suggested that the
definition of a trade or business involving
the performance of services in the field of
athletics should not include the trade or
business of owning a professional sports
team. One commenter stated that the def-
inition should be limited to entities that
are either owned or controlled by, or
whose primary beneficiaries are, profes-
sional athletes or that involve the perfor-
mance of services by those athletes; in
other words, the definition should apply
solely to athletes' personal services com-
panies.
Another commenter recommended that
§ 1.199A-5(b)(3) Example 2 be revised to
reflect that neither sports clubs nor club
owners perform services described in sec-
tion 1202(e)(3)(A). The commenter stated
that a professional sports club and its
owners do not perform services in the
field of athletics. Instead, a sports club
sells tickets, licenses, sponsorships, and
other intellectual property, creates digital
content, engages in community activities,
manages a stadium, and produces an en-
tertainment product. The commenter ar-
gued that Congress intended through the
SSTB rules to prevent W-2 wage income
from being converted to QBI and that only
the trade or business of an athlete involves
W-2 wage income from athletic perfor-
mance. The commenter continued, stating
that professional sports clubs are not de-
scribed in section 1202(e)(3)(A) or pro-
vided in section 448(d)(2)(A).
The Treasury Department and the IRS
decline to adopt this comment. As de-
scribed in part VII.A.1. of this Summary
of Comments and Explanation of Revi-
sions, the Treasury Department and the
IRS do not believe that definitional guid-
ance should be limited to that provided in
§ 1.448-1T(e)(4)(i) (by analogy to per-
forming arts for athletics). While sports
club and team owners are not performing
athletic services directly, that is not a re-
quirement of section 199A, which looks to
whether there is income attributable to a
trade or business involving the perfor-
mance of services in a specified activity,
not who performed the services. A profes-
sional sports club may operate more than
one trade or business. For example, a team
may operate its concession services as a
separate trade or business. The Treasury
Department and the IRS agree that such
concession services generally would not
be a trade or business of performing ser-
vices in the field of athletics. Nonetheless,
a professional sports club's operation of
an athletic team is a trade or business of
performing services in the field of athlet-
ics. Income from that trade or business,
including income from ticket sales and
broadcast rights, is income from a trade or
business of performing services in the
field of athletics. The performance of ser-
vices in the field of athletics does not
include the provision of services by per-
sons who broadcast or otherwise dissem-
inate video or audio of athletic events to
the public.
### 8. Financial Services
Several commenters suggested that fi-
nal regulations clarify that financing, in-
cluding taking deposits, making loans,
and entering into financing contracts, is
not a financial service. One commenter
requested an explicit rule clarifying that
non-bank mortgage bankers are not
SSTBs and that customary activities of
mortgage bankers including mortgage
loan origination, sales of mortgage loans,
mortgage loan servicing, and sale of mort-
gage servicing rights are not financial ser-
vices. The preamble to the proposed reg-
ulations provides that the provision of
financial services does not include taking
deposits or making loans. The final regu-
lations clarify that the provision of finan-
cial services does not include taking de-
posits or making loans.
One commenter stated that the deter-
mination that banking is not a financial
service appears to be wrong and inconsis-
tent with statutory construction since any
common definition of financial services
includes banking services. As stated in the
preamble to the proposed regulations,
banking is listed in section 1202(e)(3)(B)
but not section 1202(e)(3)(A). As a matter
of statutory construction, the Treasury De-
partment and the IRS believe that banking
must therefore be excluded from the defi-
nition of financial services for purposes of
section 199A. Another commenter sug-
gested that insurance should be categori-
cally excluded from the meaning of finan-
cial services because insurance is described
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in section 1202(e)(3)(B). The Treasury De-
partment and the IRS agree that by opera-
tion of section 1202(e)(3)(B), insurance
cannot be considered a financial service for
purposes of section 199A. The commenter
also suggested that a rule similar to the
ancillary services rule for consulting should
be extended to cover financial services. An-
other commenter argued that insurance
agents and others who provide investment
advice are not in the field of financial ser-
vices, unless the agent receives a fee for the
advice, rather than a commission on the
sale. The Treasury Department and the IRS
decline to categorically exclude services
provided by insurance agents from the def-
inition of financial services as financial ser-
vices such as managing wealth, advising
clients with respect to finances, and the pro-
vision of advisory and other similar services
that can be provided by insurance agents.
However, the Treasury Department and the
IRS note that the provision of these services
to the extent that they are ancillary to the
commission-based sale of an insurance pol-
icy will generally not be considered the pro-
vision of financial services for purposes of
section 199A.
### 9. Brokerage Services
One commenter stated that the ordi-
nary definition of a broker is any person
who buys and sells goods or services for
others, including agents, and argued that
nothing in the statute limits this to stock
brokers. The commenter said that the def-
inition in the proposed regulations artifi-
cially narrows the standard to appease
special interests without any justification.
The definition provided for in the pro-
posed regulations applies more broadly
than stock brokers and includes all ser-
vices in which a person arranges transac-
tions between a buyer and a seller with
respect to securities (as defined in section
475(c)(2)) for a commission or fee. While
the term "broker" is sometimes used in a
broad sense to include anyone who facil-
itates the purchase and sale of goods for a
fee or commission, the term "brokerage
services" is most commonly associated
with services, such as those provided by
brokerage firms, involving the facilitation
of purchases and sales of stock and other
securities.
Another commenter suggested that fi-
nal regulations clarify that life insurance
products are not securities for purposes of
section 199A or that life insurance brokers
engaged in their capacity as such are not
brokers in securities for purposes of sec-
tion 199A. Other commenters requested
the final regulations clarify that the busi-
ness of financing or making loans, includ-
ing the services provided by mortgage
banking companies, does not fall within
the definition of brokerage services. The
Treasury Department and the IRS address
this comment in the final regulations by
explicitly stating that although the perfor-
mance of services in the field of financial
services does not include taking deposits
or making loans, it does include arranging
lending transactions between a lender and
borrower. The final regulations define se-
curities by reference to section 475(c)(2).
### 10. Investing and Investment Management
One commenter recommended that the
performance of services that consist of
investing and investment management be
limited to investment management and in-
vestment advisory businesses whose in-
come is principally attributable to the per-
formance of personal services involving
the provision of investment advice or the
regular and contemporaneous manage-
ment of investors' assets by individual
employees or owners of the business. The
commenter recommended that the defini-
tion exclude large, diversified asset man-
agers that invest significant capital in and
derive significant income from the re-
search, development, and sale of invest-
ment products. The commenter suggested
that rather than making business-by-
business determinations, the final regula-
tions should look to rules such as the
regulations under now repealed section
1348, which did not treat income from a
business in which capital is a material
income producing factor as earned in-
come. As an alternative, the commenter
suggested that the final regulations could
provide a safe harbor for firms that re-
search, develop, and sell investment prod-
ucts, including changes to the de minimis
and incidental rules necessary to effectu-
ate the safe harbor. An example of such a
rule could be similar to the rule provided
for ancillary consulting services.
The Treasury Department and the IRS
decline to adopt this comment as the reg-
ulations under now repealed section 1348
looked to earned income including fees
received by taxpayers engaged in a pro-
fessional occupation. Section 199A is fo-
cused on a trade or business, not a profes-
sion of an individual. Accordingly, the
determination of whether a trade or busi-
ness in an SSTB must be made on a
business-by-business basis.
Another commenter suggested that fi-
nal regulations clarify that investing and
investment management does not include
the sale of life insurance products and that
life insurance products are not invest-
ments for purposes of section 199A. The
Treasury Department and the IRS decline
to define investment for purposes of sec-
tion 199A but note that commission-based
sales of insurance policies generally will
not be considered the performance of ser-
vices in the field of investing and invest-
ing management for purposes of section
199A.
Another commenter recommended that
final regulations clarify that directly man-
aging real property includes management
through agents and affiliates acting as
agents for the property manager. The
SSTB limitations apply to direct and indi-
rect owners of a trade or business that is
an SSTB, regardless of whether the owner
is passive or participated in any specified
service activity. Accordingly, direct and
indirect management of real property in-
cludes management through agents, em-
ployees, and independent contractors.
### 11. Dealing
### a. Mortgage Banking, Credit Sales, and Non-Bank Lending
Several commenters suggested that the
provisions regarding dealing in securities
should exclude mortgage banking and
other lending activities in which lending is
the primary business focus. Several of
these commenters noted that the plain lan-
guage meaning of "purchasing securities"
does not include making loans. One com-
menter suggested that the reference to the
definition of negligible sales should be
clarified to explain that negligible sales as
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defined in § 1.475(c)-1(c)(2) and (4) does
not apply if the loan is in connection with
mortgage servicing contracts as excluded
in section 451(b)(1)(B). Another com-
menter suggested that portfolio lenders
should also be able to use the negligible
sales exemption and all sales of loans
outside the ordinary course of business
should be excluded from consideration in
applying the negligible sales test. A third
commenter suggested that the regulation
clarify that the negligible sales exception
is simply an exception to the general def-
inition of dealing in securities. Another
commenter suggested that application of
dealing in securities should be limited to
taxpayers engaged in broker-dealer activ-
ities for which registration under Federal
law would be required. Another com-
menter suggested that the creation of a
loan should not be construed as a purchase
and a taxpayer should be considered a
dealer in securities only if they both pur-
chase and sell securities. As an alterna-
tive, this commenter suggested that negli-
gible sales could be defined in terms of the
number of customers that the lender sells
loans to each year. For this purpose, the
Government National Mortgage Associa-
tion (GNMA) would be considered to be
the customer for purpose of sales of
GNMA mortgage pools through the issu-
ance of mortgage backed securities. An-
other commenter suggested that sales of
retail installment contracts or loans for
purposes of liquidity, portfolio diversifi-
cation, and similar purposes should be
considered to be outside of recurring busi-
ness activity and thus not dealing in secu-
rities. In response to these comments, the
final regulations provide that for purposes
of section 199A and the definition of per-
forming services that consist of dealing in
securities, the performance of services to
originate a loan is not treated as the pur-
chase of a security from the borrower.
Additionally, the final regulations remove
the reference to the negligible sales excep-
tion under § 1.475(c)-1(c)(2) and (4) from
the definition of dealing in securities.
Another commenter suggested that un-
der section 199A, the term "securities"
should be defined by reference to section
475 but not the terms "dealer" or "dealer
in securities." The commenter suggested
that a lender should be considered to be a
dealer in securities for purposes of section
199A only to the extent that loans, includ-
ing retail sales contracts, acquired by the
lender are held in inventory or held for
sale to customers in the ordinary course of
a trade or business within the meaning of
section 1221. The commenter also sug-
gested that when a loan is acquired with a
view towards holding the loan to maturity
in the lender's portfolio and the loan is
later sold outside the normal course of
business; such a sale should not result in
the lender being viewed as a dealer in
securities. Another commenter suggested
that the meaning of sales to customers
should be clarified in the context of a
mortgage finance business. This com-
menter requested that the regulations clar-
ify that a mortgage loan originator which
transfers mortgages to an agency or bro-
ker/dealer for cash or mortgage-backed
securities does not engage in a sale by the
originator to a customer for purposes of
section 199A.
In response to these comments, the fi-
nal regulations provide that the perfor-
mance of services to originate a loan is not
treated as the purchase of a security from
the borrower in determining whether the
lender is performing services consisting of
dealing in securities. The comment re-
garding the definition of a dealer in secu-
rities, however, is not accepted, as the
definition of a securities dealer has never
depended on whether securities were held
in inventory. The final regulations also do
not address loans that are sold outside the
normal course of business, which is an
inherently factual question. Similarly, the
Treasury Department and the IRS decline
to address the question of whether a per-
son is a customer as this is a subject which
is beyond the scope of these regulations.
### b. Banking
Many commenters recommended that
traditional banking activities be excluded
entirely from the definition of an SSTB,
including the performance of services that
consist of dealing in securities. The com-
menters argued that Congress intended
banks that elect under section 1362(a) to
be S corporations (subchapter S banks) to
have the same relative reduction in taxes
as C corporation banks after enactment of
the TCJA. Many commenters noted that
subchapter S bank activities are already
strictly limited by the Bank Holding Com-
pany Act and this effectively serves as a
guardrail against abuse of the section
199A deduction. As an alternative, com-
menters suggested that the definition of
SSTB should be more narrowly drawn to
exclude bank services such as trust or
fiduciary services, securities brokerage,
and the origination and sale of mortgages
and loans. Commenters also expressed
concern that the de minimis rule is insuf-
ficient to protect banks. These comment-
ers suggested revisions including raising
the de minimis threshold to 25 percent
regardless of the amount of gross receipts
and using net income rather than gross
receipts for the measure.
The Treasury Department and the IRS
decline to accept these comments. Al-
though the final regulations continue to
exclude taking deposits or making loans
from the definition of an SSTB involving
the performance of financial services, and
exclude the origination of loans from the
definition of dealing in securities for pur-
poses of section 199A, the Treasury De-
partment and the IRS do not believe that
there is a broad exemption from the listed
SSTBs with respect to all services that
may be legally permitted to be performed
by banks. Therefore, to the extent a bank
operates a single trade or business that
involves the performance of services
listed as SSTBs outside of the de minimis
exception, such as investing and invest-
ment management, the bank's single trade
or business will be treated as an SSTB.
However, as noted previously, an RPE,
including a subchapter S bank, may oper-
ate more than one trade or business. Thus,
a subchapter S bank could segregate spec-
ified service activities from an existing
trade or business and operate such speci-
fied service activities as an SSTB separate
from its remaining trade or business, ei-
ther within the same legal entity or in a
separate entity.
### c. Commodities
Several commenters suggested that the
final regulations provide that a trade or
business is not engaged in the perfor-
mance of services of investing, trading, or
dealing in commodities if it regularly
takes physical possession of the underly-
ing commodity in the ordinary course of
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its trade or business. These commenters
also argued that a business that takes
physical possession of the commodity
should not be treated as an SSTB if it
hedges its risk with respect to the com-
modity as part of the ordinary course of its
trade or business. The commenters state
that dealing in commodities for purposes
of section 199A should be understood to
mean an activity similar to dealing in se-
curities and should be limited to the deal-
ing in financial instruments referenced to
commodities, such as commodities fu-
tures or options that are traded on regu-
lated exchanges. One commenter argued
that if the regulations were to apply to
physical commodities it would result in
different tax treatment depending on
whether the commodity is actively traded
and that Congress intended the definition
of commodities to apply only to commod-
ities derivatives. Another commenter sug-
gested that manufacturing activities as de-
fined under the now repealed section 199
should be expressly excluded from the
definition of both trading in commodities
and dealing in commodities.
The Treasury Department and the IRS
agree with commenters that the definition
of dealing in commodities for purposes of
section 199A should be limited to a trade
or business that is dealing in financial
instruments or otherwise does not engage
in substantial activities with respect to
physical commodities. To distinguish a
trade or business that performs substantial
activities with physical commodities from
a trade or business that engages in a com-
modities trade or business by dealing or
trading in financial instruments that are
commodities (within the meaning of sec-
tion 475(e)(2)), or a trade or business that
otherwise does not perform substantial ac-
tivities with commodities, the final regu-
lations adopt rules similar to the rules that
apply to qualified active sales of commod-
ities in § 1.954-2(f)(2)(iii). Those rules
generally require a person to be engaged
in the active conduct of a commodities
business as a producer, processor, mer-
chant, or handler of commodities and to
perform certain activities with respect to
those commodities.
Accordingly, for purposes of section
199A, gains and losses from the sale of
commodities in the active conduct of a
commodities business as a producer, pro-
cessor, merchant, or handler of commod-
ities will be qualified active sales and
gains and losses from qualified active
sales are not taken into account in deter-
mining whether a person is engaged in the
trade or business of dealing in commodi-
ties. Similarly, income, deduction, gain,
or loss from a hedging transaction (as
defined in § 1.1221-2(b)) entered into in
the normal course of a commodities busi-
ness conducted by a producer, processor,
merchant, or handler of commodities will
be treated as gains and losses from qual-
ified active sales that are part of that trade
or business. Qualified active sales gener-
ally require a taxpayer to hold commodi-
ties as inventory or similar property and to
satisfy specified conditions regarding sub-
stantial and significant activities described
in the final regulations. A sale by a trade
or business of commodities held for in-
vestment or speculation is not a qualified
active sale.
### 13. Reputation/Skill
Many commenters expressed support
for the position in the proposed regula-
tions that reputation or skill was intended
to describe a narrow set of trades or busi-
nesses not otherwise covered by the other
listed SSTBs, often writing that a more
broad interpretation would be inherently
complex and unworkable. Other com-
menters disagreed with the definition in
the proposed regulations, expressing con-
cern that the narrowness of the definition
is contrary to the language of the statute
and Congressional intent.
The Treasury Department and the IRS
remain concerned that a broad interpreta-
tion of the reputation and skill clause
would result in substantial uncertainty for
both taxpayers and the IRS. As stated in
the preamble to the proposed regulations,
it would be inconsistent with the text,
structure, and purpose of section 199A to
potentially exclude income from all ser-
vice businesses from qualifying for the
section 199A deduction for taxpayers with
taxable income above the threshold
amount. If Congressional intent was to
exclude all service businesses, Congress
clearly could have drafted such a rule.
Accordingly, the final regulations retain
the proposed rule limiting the meaning of
the reputation or skill clause to fact pat-
terns in which an individual or RPE is
engaged in the trade or business of receiv-
ing income from endorsements, the licens-
ing of an individual's likeness or features,
and appearance fees.
One commenter requested additional
clarification regarding whether advertis-
ing income received for on air advertising
spots in which a program host reads a
script describing the positive qualities of a
product or service, and may also choose to
describe his or her own positive experi-
ences with the product, is endorsement
income as described in § 1.199A-
5(b)(2)(xiv)(A). The commenter argued
that such income should not be considered
endorsement income because it is not re-
ceived in connection with a separate trade
or business of making endorsements. The
Treasury Department and the IRS decline
to adopt this suggestion as § 1.199A-
5(b)(2)(xiv)(A) looks to whether the indi-
vidual or RPE is receiving income from
the endorsement of products or services,
not whether the income is received in con-
nection with a separate trade or business
of making endorsements. Whether a tax-
payer endorses a product or services is
dependent on the facts and circumstances.
### B. De Minimis Rule
The proposed regulations provide that
for a trade or business with gross receipts
of $25 million or less for the taxable year,
a trade or business is not an SSTB if less
than 10 percent of the gross receipts of the
trade or business are attributable to a spec-
ified service field. The percentage is re-
duced to 5 percent in the case of trades or
businesses with gross receipts in excess of
$25 million. Several commenters re-
quested clarification regarding whether
the entire trade or business is designated
an SSTB if the threshold is exceeded.
Some of these commenters suggested that
the rule be modified so that the deduction
could be claimed on the portion of the
trade or business activity that was not an
SSTB. A few suggested that an allocation
similar to that in now repealed section 199
could be used. One commenter suggested
using the cost accounting principles of
section 861 with a safe harbor allowing a
simplified method for entities with aver-
age annual gross receipts less than $25
million. Another commenter stated that
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treating the entire trade or business as an
SSTB is a trap for the unwary because
well-advised taxpayers could avoid appli-
cation of the rule by rearranging their ac-
tivities into separate entities. One com-
menter suggested that the de minimis rule
allow for minor year-to-year changes in
gross receipts for businesses that are close
to the de minimis thresholds. The com-
menter also suggested that the thresholds
be increased and recommended an incre-
mental approach in which the deduction is
calculated based on the portion of the
business that is not engaged in an SSTB.
Another commenter suggested that if the
rule is retained, it should be imposed only
at a greater than 50 percent threshold
since only at that point would SSTB gross
receipts predominate over non-SSTB
gross receipts. The commenter also noted
that a higher threshold would be easier to
track. Several commenters also suggested
that the de minimis threshold be raised.
One commenter suggested that the de mi-
nimis threshold be raised to 20 percent
for all qualified businesses, regardless
of gross receipts. The commenter argued
that a 20 percent threshold is supported
by Congress's decision to use section
1202(e) for its definition of an SSTB,
noting that section 1202(e)(1)(A) uses
an at least 80 percent (by value) rule for
determining whether a qualified trade or
business satisfies the section's active
business requirement. Other comment-
ers recommended that the ten percent
threshold should apply for purposes of
the de minimis threshold regardless of
the amount of gross receipts of the trade
or business. Public comments lacked
consensus regarding the 5-percent de
minimis threshold. After considering all
of the comments, the Treasury Depart-
ment and the IRS chose to retain the
5-percent threshold in the final regula-
tions as it is a de minimis threshold that
is generally consistent with prior regu-
lations under the Code in similar cir-
cumstances and therefore, such a stan-
dard should be familiar to affected
entities.
Another commenter suggested that fi-
nal regulations clarify whether revenue
generated from the sale of medical prod-
ucts or devices should be excluded from
the overall QBI for trades or businesses
that provide services in the field of health.
The commenter noted that physicians who
provide their patients with medical de-
vices should be able to use the deduction
with respect to income from such devices
and expressed concern that the de minimis
thresholds could limit the ability of some
practitioners to use the deduction. Another
commenter suggested that a business with
SSTB gross receipts in excess of the de
minimis should not be entirely disquali-
fied, but that the facts and circumstances
should be analyzed to determine the true
nature of the trade or business. The com-
menter also suggested that a safe harbor
should be provided in which a business
can make an election to deem the SSTB
activity as a separate trade or business
solely for the purposes of section 199A.
Finally, one commenter suggested that fi-
nal regulations include an example of
what result occurs if a taxpayer's SSTB
revenue is not de minimis.
The Treasury Department and the IRS
decline to adopt most of the recommen-
dations in these comments. As stated in
the preamble to the proposed regulations,
the statutory language of section 199A
does not provide a certain quantum of
activity before an SSTB is found. Rather,
section 199A looks to whether the trade
or business involves the performance of
services in the list of SSTBs. The use of
the word "involving" suggests that any
amount of specified service activity
causes a trade or business to be an
SSTB. Consequently, the Treasury De-
partment and the IRS believe that it
would be inappropriate to adopt a pro
rata rule. However, requiring all taxpay-
ers to evaluate and quantify any amount
of specified service activity would be
unduly burdensome and complex for
both taxpayers and the IRS. Accord-
ingly, the proposed rule provides a de
minimis threshold under which a trade
or business will not be considered an
SSTB merely because it provides a
small amount of services in a specified
service activity. Trades or business with
gross income from a specified service
activity in excess of the de minimis
threshold are considered to be SSTBs.
The final regulations retain the proposed
rule but add an additional example dem-
onstrating the result in which a trade or
business has income from a specified
service activity in excess of the de mi-
nimis threshold.
As discussed in part II of this Summary
of Comments and Explanation of Revi-
sions, the Treasury Department and the
IRS acknowledge that an RPE can have
more than one trade or business for pur-
poses of section 162 and thus for section
199A. However, each trade or business is
required under section 199A to be sepa-
rately tested to determine whether that
trade or business is an SSTB. Similarly,
the de minimis threshold is applied to
each trade or business of an RPE sepa-
rately, not in the aggregate to all the trades
or businesses of the RPE. Thus, to the
extent that an individual or RPE has more
than one trade or business, the presence of
specified service activity in one of those
trades or business will not cause the indi-
vidual's or RPE's other trades or busi-
nesses to be considered SSTBs except to
the extent that the rules in § 1.199A-
5(c)(2) (services or property provided to
an SSTB) apply.
### C. Services or Property Provided to an SSTB.
The proposed regulations provide spe-
cial rules for service or property provided
to an SSTB by a trade or business with
common ownership. A trade or business
that provides more than 80 percent of its
property or services to an SSTB is treated
as an SSTB if there is 50 percent or more
common ownership of the trades or busi-
nesses. In cases in which a trade or busi-
ness provides less than 80 percent of its
property or services to a commonly
owned SSTB, the portion of the trade or
business providing property to the com-
monly owned SSTB is treated as part of
the SSTB with respect to the related par-
ties.
One commenter suggested that the pro-
vision is warranted because of abuse po-
tential but is overbroad and prevents le-
gitimate transactions. The commenter
recommended that the rule be modified
into a presumption that a taxpayer could
rebut with evidence demonstrating that
the property or services provided to the
SSTB by the related RPE are (1) compa-
rable to those available from competing
organizations and (2) that prices charged
by the RPE and paid by the SSTB are
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comparable to those charged in the mar-
ket. The commenter also suggested that
the IRS could examine the totality of facts
and circumstances, including historic con-
duct between the SSTB and RPE. Another
commenter suggested that the final rule
add an exception to the rule for taxpayers
that can demonstrate they have a substan-
tial purpose (apart from Federal income
tax effects) for structuring their trade or
business in a particular manner. For ex-
ample, title to a skilled nursing facility
could be held by one passthrough entity
that is operated by a related passthrough
entity in order to satisfy Department of
Housing and Urban Development lending
requirements. The Treasury Department
and the IRS decline to adopt these recom-
mendations. Creating a presumption or
substantial purpose test would lead to
greater complexity and administrative
burden for both taxpayers and the IRS.
A few commenters requested clarifica-
tion regarding whether the rule applies
when the property or services are pro-
vided to a commonly-owned C corpora-
tion. One commenter also asked for clar-
ification on the meaning of 50 percent or
more common ownership, examples of
how ownership is determined, and
whether the definition is different than the
50 percent or more common ownership
test used in the aggregation rules. One
commenter suggested that the rule should
apply only to those owners who make up
the 50 percent ownership test. Another
commenter suggested that the rule should
not apply to real estate rentals to a com-
monly owned SSTB. Another commenter
suggested that structures that existed be-
fore December 22, 2017, be grandfathered
so that the rule would not apply. In re-
sponse to comments, the final regulations
clarify that the rule applies only to those
who make up the 50 percent test. As dis-
cussed in section V.B. of this Summary of
Comments and Explanation of Revisions,
the final regulations provide that sections
267(b) and 707(b) apply in determining
common ownership for purposes of the
aggregation rules. The Treasury Depart-
ment and the IRS decline to exempt real
estate rentals or to structures that existed
before December 22, 2017, as the rule is
intended to address goods and services
that are provided to an SSTB regardless of
the type of good or service provided or the
date on which the structure was put into
place.
One commenter stated that the rule is
overbroad and not based on statutory au-
thority and unfairly punishes related party
transactions. Other commenters suggested
that the rule automatically treating a trade
or business that provides more than 80
percent of its goods or services to a com-
monly owned SSTB as an SSTB is unnec-
essary, as there are no abuse concerns
regarding the portions of goods or ser-
vices provided to a third party. The Trea-
sury Department and the IRS agree with
this comment and have removed the 80
percent rule in the final regulations. Ac-
cordingly, the final regulations provide
that if a trade or business provides prop-
erty or services to an SSTB and there is 50
percent or more common ownership of the
trade or business, the portion of the trade
or business providing property or services
to the 50 percent or more commonly-
owned SSTB will be treated as a separate
SSTB with respect to related parties.
### D. Incidental to a Specified Service Trade or Business
The proposed regulations provide that
if a trade or business (that would not oth-
erwise be treated as an SSTB) has both 50
percent or more common ownership with
an SSTB and shared expenses with an
SSTB, then the trade or business is treated
as incidental to and, therefore, part of the
SSTB, if the gross receipts of the trade or
business represent no more than five per-
cent of the total combined gross receipts
of the trade or business and the SSTB in a
taxable year. One commenter recom-
mended that this rule be removed because
it is unnecessary and causes administra-
tive difficulties for taxpayers who must
determine whether a trade or business is
incidental in order to apply the rule. If the
rule is retained, the commenter recom-
mended that final regulations define gross
receipts and shared expenses, make ad-
justments to avoid double counting the
same gross receipts, clarify what busi-
nesses are taken into account for purposes
of the rule, and treat a trade or business to
which the anti-abuse rule applies as a sep-
arate SSTB rather than as part of the
SSTB. Another commenter suggested that
the final regulations add an exception for
start-ups such as a three to five year grace
period and also clarify the ownership stan-
dard, how the rule would apply if the
trades or business have different tax years,
and how shared expenses would be deter-
mined. In accordance with the comments,
the rule is removed from the final regula-
tions.
### E. Trade or Business of Performing Services as an Employee
Multiple commenters expressed sup-
port for the rule in the proposed regula-
tions that provides that an individual who
was previously treated as an employee
and is subsequently treated as other than
an employee while performing substan-
tially the same services to the same per-
son, or a related person, will be presumed
to be in the trade or business of perform-
ing services as an employee for purposes
of section 199A. The commenters noted
that the presumption furthers the public
policy goal of preventing worker misclas-
sification, preserves agency resources, and
prevents a decline in Federal and state tax
revenues. The commenters also state that
regulations should not incentivize workers
to accept misclassification by their em-
ployer in order to obtain a tax benefit.
Other commenters recommended that
the presumption be removed arguing that
the common law test under current law is
sufficient for determining whether a for-
mer employee is properly classified as an
employee and that the presumption would
impede the objective of ensuring similar
treatment of similarly situated taxpayers
because two similarly situated taxpayers
who provide services to the same com-
pany would be treated differently if one
was a former employee of the company
and the other was not. The commenter
also notes that the presumption would cre-
ate uncertainty for taxpayers and would
cause former employees to not claim the
deduction in order to avoid a dispute with
the IRS.
Another commenter expressed concern
that the presumption as written in the pro-
posed regulations could create a dual stan-
dard for worker classification under the
Code, in which a worker could be classi-
fied as an independent contractor for em-
ployment tax purposes, and an employee
for purposes of claiming section 199A
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deduction. This could result in an inde-
pendent contractor being held liable for
self-employment taxes and unable to
claim the section 199A deduction on in-
come that would otherwise qualify as
QBI. The commenter suggested that if the
presumption is retained, it should include
an exemption for certain independent con-
tractors based on factors including in-
come, source of income, industry practice,
and timeframe.
A different commenter suggested that
the presumption should provide that an
independent contractor is operating as
such and that it is up to the relevant Fed-
eral agencies to determine whether the
business misclassified the individual. The
commenter also noted that the IRS is
barred from issuing regulations with re-
spect to the employment status of any
individual for employment tax purposes
under Section 530(b) of the Revenue Act
of 1978 (Pub. L. 95-600), as amended by
section 9(d)(2) of Pub. L. 96-167, section
1(a) of Pub. L. 96-541, and section
269(c) of Pub. L. 97-248, and that the
presumption could result in an individual
otherwise subject to self-employment tax
to not get the benefit of the section 199A
deduction. Another commenter argued
that an employee who changes his status
from employee to independent contractor
so he may deduct business expenses on
Schedule C and claim a section 199A de-
duction is exercising his right to structure
his business transactions to minimize his
tax liability.
Another commenter questioned how
the rule would be applied, asking for clar-
ification on whether the rule is intended to
prohibit employers from firing employees
and rehiring them as independent contrac-
tors; whether it applies to former employ-
ees regardless of current relationship; and
how far the IRS would look back at prior
employees. Another commenter sug-
gested that a new example be added to the
final regulations demonstrating that
the presumption is inapplicable when the
facts demonstrate that a service recipient
and a service provider have materially
modified their relationship such that its
proper classification is that of a service
recipient and a partner.
The Treasury Department and the IRS
believe that the presumption is necessary
to prevent misclassifications but agree that
some clarification of the presumption is
necessary. In accordance with comment-
er's suggestions, the final regulations pro-
vide a three-year look back rule for pur-
poses of the presumption. The final
regulations provide that an individual may
rebut the presumption by showing re-
cords, such as contracts or partnership
agreements, that are sufficient to corrobo-
rate the individual's status as a non-
employee for three years from the date a
person ceases to treat the individual as an
employee for Federal employment taxes.
Finally, the final regulations contain an
additional example demonstrating the ap-
plication of the presumption for the situ-
ation in which an employee has materially
modified his relationship with his em-
ployer such that the employee can suc-
cessfully rebut the presumption.
VII. Relevant Passthrough Entities,
Publicly Traded Partnerships, Trusts,
and Estates
### A. Reporting Rules
The proposed regulations provide that
an RPE must determine and separately
report QBI, W-2 wages, UBIA of quali-
fied property, and whether the trade or
business is an SSTB for each of the RPE's
trades or businesses. To help simplify the
administration and compliance burden,
several commenters suggested that there
be an option to compute, aggregate, and
report activities at the RPE or entity level.
As discussed in part V of this Summary of
Comments and Explanation of Revisions,
the final regulations allow an RPE to ag-
gregate its trades or businesses provided
the rules of § 1.199A-4 are satisfied. An
RPE that chooses to aggregate can report
combined QBI, W-2 wages, and UBIA of
qualified property for the aggregated trade
of business. This aggregation must be
maintained and reported by all direct and
indirect owners of the RPE, including
upper-tier RPEs.
The proposed regulations provide that
if an RPE fails to separately identify or
report any QBI, W-2 wages, UBIA of
qualified property, or SSTB determina-
tions, the owner's share (and the share of
any upper-tier indirect owner) of QBI,
W-2 wages, and UBIA of qualified prop-
erty attributable to trades or businesses
engaged in by that RPE will be presumed
to be zero. A few commenters suggested
that the final regulations clarify that if an
RPE fails to separately identify or report
each owner's allocable share of QBI, W-2
wages, or UBIA of qualified property,
then only the unidentified or unreported
amount is presumed to be zero. Another
commenter suggested that a return be con-
sidered substantially complete even if an
RPE chooses not to report QBI, W-2
wages, and UBIA of qualified property,
while other commenters suggested that
taxpayers could rebut the presumption.
One commenter requested that the final
regulations clarify that if an RPE fails to
report QBI, W-2 wages, UBIA of quali-
fied property, and SSTB information, the
information can still be reported on an
amended or late filed return if filed while
the period of limitations is still open. An-
other commenter suggested that to incen-
tivize accurate and timely reporting, tax-
payers should be given reasonable
opportunities to correct errors and not be
subject to penalties for such errors.
The Treasury Department and the IRS
agree with commenters that all of an
RPE's items related to section 199A
should not be presumed to be zero be-
cause of a failure to report one item. For
example, an RPE may have sufficient
W-2 wages and send out that information,
but decline to provide information for
UBIA of qualified property because it is
not necessary or is an insignificant
amount. Accordingly, the final regulations
retain the reporting requirement but revise
the presumption to provide that if an RPE
fails to separately identify or report an
item of QBI, W-2 wages, or UBIA of
qualified property, the owner's share of
each unreported item of positive QBI,
W-2 wages, or UBIA of qualified prop-
erty attributable to trades or businesses
engaged in by that RPE will be presumed
to be zero. The final regulations also pro-
vide that such information can be reported
on an amended or late filed return for any
open tax year. Guidance on the applica-
tion of penalties is beyond the scope of
these regulations.
The preamble to the proposed regula-
tions requested comments regarding
whether it is administrable to provide a
special rule that if none of the owners of
the RPE have taxable income above the
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threshold amount, the RPE does not need
to determine and report W-2 wages,
UBIA of qualified property, or whether
the trade or business is an SSTB. One
commenter recommended that a special
rule be provided that an RPE need not
determine or report W-2 wages, UBIA of
qualified property or whether the trade or
business is an SSTB if none of the owners
of the RPE have taxable income above the
threshold amount. The commenter sug-
gested that the final regulations provide an
exception to the reporting requirements if
(1) an RPE does not have gross receipts
that constitute QBI; (2) none of the own-
ers of the RPE are non-corporate taxpay-
ers; or (3) none of the RPE owners have
taxable income above the threshold
amount. The commenter suggested that an
RPE could establish the taxable income of
its owners through the review and main-
tenance of its owners' tax returns or writ-
ten statements signed under the penalty of
perjury. Another commenter suggested
that an RPE should not be subject to the
reporting requirements unless the RPE is
aware of a non-corporate owner. Another
commenter suggested that the RPE only
needs to report W-2 wages when it is
clear that the amount will result in an
amount greater than 20 percent of QBI.
Another commenter requested guidance
on how to qualify for the special rule and
what information the RPE would be re-
quired to report to its owners and retain in
connection with the rule. One commenter,
however, cautioned against a special rule
because of the lack of knowledge the RPE
has about the owners. The commenter also
suggested that a certification process by
the owners would create an administrative
burden. The commenter requested guid-
ance on who would be responsible for
corrections and penalties due to failure to
disclose the information on the Schedule
K-1 when the determination affects the
owner's QBI deduction. One commenter
suggested that RPEs should not have to
report QBI, W-2 wages, and UBIA of
qualified property with respect to trades or
businesses not effectively connected with
the United States.
The Treasury Department and the IRS
remain concerned that RPEs do not have
sufficient information to determine an ul-
timate owner's taxable income or whether
the ultimate owner will require W-2 wage
or UBIA of qualified property information
for the RPE's trades or businesses in order
to determine the owner's section 199A
deduction. Conversely, the RPE itself, not
its ultimate owners, is in the best position
to determine the RPE's section 199A
items. Accordingly, the final regulations
do not contain a special reporting rule for
RPEs based on whether the RPE's owners
have taxable income below the threshold
amounts. Similarly, the Treasury Depart-
ment and the IRS decline to create a re-
porting exception based on whether an
RPE has non-corporate owners. Finally, a
trade or businesses that is not effectively
connected with the United States produces
no QBI, W-2 wages, or UBIA of qualified
property and thus has no reporting re-
quirement under § 1.199A-6.
### B. Application to Trusts and Estates.
1\. Charitable Remainder Trust
Beneficiary's Eligibility for the
Deduction
The preamble to the proposed regula-
tions requested comments with respect to
whether taxable recipients of annuity and
unitrust interests in charitable remainder
trusts and taxable beneficiaries of other
split-interest trusts may be eligible for the
section 199A deduction to the extent that
the amounts received by such recipients
include amounts that may give rise to the
deduction. Concurrently with the publica-
tion of these proposed regulations, the
Treasury Department and the IRS are pub-
lishing proposed regulations under section
199A (REG-134652-18) that address the
eligibility of taxable recipients of annuity
and unitrust interests in charitable remain-
der trusts and taxable beneficiaries of
other split-interests trusts to receive the
section 199A deduction.
### 2. Tax Exempt Trusts
One commenter requested guidance on
whether "exempt trust organizations" (that
is, trusts that are exempt from income tax
under section 501(a) or "tax exempt trusts")
are entitled to a section 199A deduction in
computing their unrelated business taxable
income. The commenter also requested con-
firmation regarding whether the method of
determining or separating trades of busi-
nesses is the same for sections 199A and
512(a)(6). The Treasury Department and the
IRS decline to adopt these comments here
because they are beyond the scope of these
final regulations. The Treasury Department
and the IRS continue to study this issue and
request comments on the interaction of sec-
tions 199A and 512. We will consider all
comments and decide whether further guid-
ance on these issues, including as part of a
forthcoming notice of a proposed rulemak-
ing under section 512(a)(6), is warranted.
### 3. ESBTs
One commenter supported the pro-
posed regulation's position on ESBT's el-
igibility for the deduction. Another com-
menter stated that based on § 1.641(c)-
1(a) and its reference to an ESBT being
two separate trusts for purposes of chapter
1 of subtitle A of the Code (except regard-
ing administrative purposes), the S portion
and non-S portion should each have its
own threshold. The Treasury Department
and the IRS disagree with this comment.
Although an ESBT has separate portions,
it is one trust. Therefore, in order to pro-
vide clarity, the final regulations state that
the S and non-S portions of an ESBT are
treated as a single trust for purposes of
determining the threshold amount.
### 4. Inclusion of Trust Distributions in Taxable Income
Multiple commenters suggested that
distributions should not be counted twice
in determining whether the threshold
amount is met or exceeded, saying this is
counter to the statute and beyond the reg-
ulatory authority of the Treasury Depart-
ment and the IRS. Further, sections 651
and 661 are fundamental principles of fi-
duciary income taxation and the possible
duplication of the threshold is better ad-
dressed in anti-abuse provisions. Another
commenter suggested that double counted
income should be ignored, arguing that
double counting is punitive because it
fails to take into account the economic
consequences of distributions and is in-
consistent with the longstanding funda-
mental principles of subchapter J. Another
commenter recommended that the distri-
bution deduction should be given effect in
computing thresholds, consistent with
section 1411 and fiduciary obligations.
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The Treasury Department and IRS agree
with the commenters that distributions
should reduce taxable income because the
trust is not taxed on that income. The final
regulations remove the provision that
would exclude distributions from taxable
income for purposes of determining
whether taxable income for a trust or es-
tate exceeds the threshold amount. The
final regulations specifically provide that
for purposes of determining whether a
trust or estate has taxable income that
exceeds the threshold amount, the taxable
income of the trust or estate is determined
after taking into account any distribution
deduction under sections 651 or 661.
### 5. Allocation between Trust or Estate and Beneficiaries
One commenter argued that proposed
§ 1.199A-6(d)(3)(v)(C) and (D) and the
accompanying example are wrong in allo-
cating the whole depreciation deduction to
the trust. Instead, the commenter said that
the depreciation should be allocated based
on fiduciary accounting income. Another
commenter stated that the QBI net loss
should be allocated entirely to the trust or
estate and not passed through to the benefi-
ciaries. Another commenter stated that the
example in proposed § 1.199A-6(d)(3)(vi)
overlooks section 167(d) and that final reg-
ulations should clarify whether reporting of
depreciation is being changed. An addi-
tional commenter stated that a charitable
lead trust's threshold amount should be the
same as other trusts after the charitable de-
duction. Based on comments received, the
final regulations provide that the treatment
of depreciation applies solely for purposes
of section 199A, and the example has been
revised to clarify the allocation of QBI and
depreciation to the trust and the beneficia-
ries. As an RPE, the final regulations con-
tinue to require that a trust or estate allocates
QBI (which may be a negative amount) to
its beneficiaries based on the relative por-
tions of DNI distributed to its beneficiaries
or retained by the trust or estate.
### 6. Section 199A Anti-Abuse Rule
One commenter requested clarification
on whether a trust with a reasonable estate
or business planning purpose would be
respected. Another commenter argued that
the rule is overbroad and lacks clarity as
to what would be abusive and what the
consequences would be of not respecting
the trust for section 199A purposes. The
commenter also stated that the rule is not
needed because of § 1.643-1 and if both
rules are retained, they should use the
same test (principal versus significant pur-
pose). Finally, the commenter asked for
clarification on whether the rule applies to
a single trust and suggested it should ap-
ply on an annual basis. This last sugges-
tion has not been adopted because the test
goes to the creation of the trust, factors
which would not change in later years.
The final regulations clarify that the anti-
abuse rule is designed to thwart the cre-
ation of even one single trust with a prin-
cipal purpose of avoiding, or using more
than one, threshold amount. If such trust
creation violates the rule, the trust will be
aggregated with the grantor or other trusts
from which it was funded for purposes of
determining the threshold amount for cal-
culating the deduction under section
199A.
### VIII. Treatment of Multiple Trusts
Two commenters requested clarifica-
tion regarding whether multiple trusts will
be aggregated if section 643(f) require-
ments are met. Specifically, the comment-
ers asked for clarification on what it
means to form or fund a trust with a
significant purpose of receiving a section
199A deduction. These commenters state
that trusts should not be combined simply
because the section 199A deduction is in-
creased if a legitimate non-tax reason led
to the creation of the trusts.
Other commenters objected to the pre-
sumption of a tax-avoidance purpose, ar-
guing that it will shift the focus to a re-
quirement that there be a non-tax purpose
for creating multiple trusts. The comment-
ers also asked whether the reference to
income tax includes state income tax, as
the proposed rule refers to the avoidance
of more than Federal income tax.
Another commenter agreed with the
need for the rule but asked for clarification
on the definitions of primary beneficiary,
significant tax benefit, principal purpose,
and arrangement involving multiple
trusts; the application of the substantially
the same beneficiary rule; and whether
trusts for different children, with other
children as default beneficiaries, are the
same. Another commenter noted that the
use of substantial purpose rather than
principal purpose is inconsistent with the
statutory language.
Another commenter asked for clarifi-
cation of the effective date regarding
modifications or contributions to pre-
effective date trusts, and of the identifica-
tion of trusts to which the regulation ap-
plies. Another commenter requested that
final regulations address the applicability
of the rule to the conversion of grantor
trusts to non-grantor trusts post enactment
of the TCJA.
One commenter requested that exam-
ples be given for each of the three require-
ments under section 643(f) and requested
that § 1.643(f)-1, Example 2, be clarified
to describe the trusts as non-grantor trusts.
Based on the comments received, the
Treasury Department and the IRS have
removed the definition of "principal pur-
pose" and the examples illustrating this
rule that had been included in the pro-
posed regulations, and are taking under
advisement whether and how these ques-
tions should be addressed in future guid-
ance. This includes questions of whether
certain terms such as "principal purpose"
and "substantially identical grantors and
beneficiaries" should be defined or their
meaning clarified in regulations or other
guidance, along with providing illustrat-
ing examples for each of these terms.
Nevertheless, the position of the Treasury
Department and the IRS remains that the
determination of whether an arrangement
involving multiple trusts is subject to
treatment under section 643(f) may be
made on the basis of the statute and the
guidance provided regarding that provi-
sion in the legislative history of section
643(f), in the case of any arrangement
involving multiple trusts entered into or
modified before the effective date of these
final regulations.
## Availability of IRS Documents
IRS notices cited in this preamble are
made available by the Superintendent of
Documents, U.S. Government Printing
Office, Washington, DC 20402.
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### Request for Comments
The Treasury Department and the IRS
request comments on various aspects of
section 199A and these regulations, as
described in this preamble. All comments
that are submitted as prescribed in this
preamble under the ADDRESSES head-
ing will be available at www.regulations-
.gov and upon request.
### Effective/Applicability Date
Section 7805(b)(1)(A) and (B) of the
Code generally provide that no temporary,
proposed, or final regulation relating to
the internal revenue laws may apply to
any taxable period ending before the ear-
liest of (A) the date on which such regu-
lation is filed with the Federal Register,
or (B) in the case of a final regulation, the
date on which a proposed or temporary
regulation to which the final regulation
relates was filed with the Federal Regis-
ter.
Consistent with authority provided
by section 7805(b)(1)(A), §§ 1.199A-1
through 1.199A-6 generally apply to tax-
able years ending after February 8, 2019.
However, taxpayers may rely on the rules
set forth in §§ 1.199A-1 through
1.199A-6, in their entirety, or on the pro-
posed regulations under §§ 1.199A-1
through 1.199A-6 issued on August 16,
2018, in their entirety, for taxable years
ending in calendar year 2018. In addition,
to prevent abuse of section 199A and the
regulations thereunder, the anti-abuse
rules in §§ 1.199A-2(c)(1)(iv), 1.199A-
3(c)(2)(ii), 1.199A-5(c)(2), 1.199A-5(d)
(3), and 1.199A-6(d)(3)(vii) apply to tax-
able years ending after December 22,
2017, the date of enactment of the TCJA.
Finally, the provisions of § 1.643-1,
which prevent abuse of the Code gener-
ally through the use of trusts, apply to
taxable years ending after August 16,
2018.
Section 199A(f)(1) provides that sec-
tion 199A applies at the partner or S cor-
poration shareholder level, and that each
partner or shareholder takes into account
such person's allocable share of each
qualified item. Section 199A(c)(3) pro-
vides that the term "qualified item"
means items that are effectively connected
with a U.S. trade or business, and "in-
cluded or allowed in determining taxable
income from the taxable year." Section
199A applies to taxable years beginning
after December 31, 2017. However, there
is no statutory requirement under section
199A that a qualified item arise after De-
cember 31, 2017.
Section 1366(a) generally provides
that, in determining the income tax of a
shareholder for the shareholder's taxable
year in which the taxable year of the S
corporation ends, the shareholder's pro
rata share of the corporation's items is
taken into account. Similarly, section
706(a) generally provides that, in comput-
ing the taxable income of a partner for a
taxable year, the partner includes items of
the partnership for any taxable year of the
partnership ending within or with the part-
ner's taxable year. Therefore, income
flowing to an individual from a partner-
ship or S corporation is subject to the tax
rates and rules in effect in the year of the
individual in which the entity's year
closes, not the year in which the item
actually arose.
Accordingly, for purposes of determin-
ing QBI, W-2 wages, UBIA of qualified
property, and the aggregate amount of
qualified REIT dividends and qualified
PTP income, the effective date provisions
provide that if an individual receives QBI,
W-2 wages, UBIA of qualified property,
and the aggregate amount of qualified
REIT dividends and qualified PTP income
from an RPE with a taxable year that
begins before January 1, 2018, and ends
after December 31, 2017, such items are
treated as having been incurred by the
individual during the individual's tax year
during which such RPE taxable year ends.
### Special Analyses
#### I. Regulatory Planning and Review - Economic Analysis
Executive Orders 13563 and 12866 di-
rect agencies to assess costs and benefits of
available regulatory alternatives and, if reg-
ulation is necessary, to select regulatory ap-
proaches that maximize net benefits (includ-
ing potential economic, environmental,
public health and safety effects, distributive
impacts, and equity). Executive Order
13563 emphasizes the importance of quan-
tifying both costs and benefits, of reducing
costs, of harmonizing rules, and of promot-
ing flexibility.
These final regulations have been des-
ignated as subject to review under Exec-
utive Order 12866 pursuant to the Mem-
orandum of Agreement (April 11, 2018)
between the Treasury Department and the
Office of Management and Budget
(OMB) regarding review of tax regula-
tions. OIRA has designated this final reg-
ulation as economically significant under
section 1(c) of the Memorandum of
Agreement. Accordingly, these final reg-
ulations have been reviewed by the Office
of Management and Budget. For more
detail on the economic analysis, please
refer to the following analysis.
### A. Overview
Congress enacted section 199A to pro-
vide individuals, estates, and trusts a deduc-
tion of up to 20 percent of QBI from do-
mestic businesses, which includes trades or
businesses operated as a sole proprietorship
or through a partnership, S corporation,
trust, or estate. As stated in the Summary of
Comments and Explanation of Revisions,
these regulations are necessary to provide
taxpayers with computational, definitional,
and anti-avoidance guidance regarding the
application of section 199A. The final reg-
ulations provide guidance to taxpayers for
purposes of calculating the section 199A
deduction. They provide clarity for taxpay-
ers in determining their eligibility for the
deduction and the amount of the allowed
deduction. Among other benefits, this clarity
helps ensure that taxpayers all calculate the
deduction in a similar manner, which en-
courages decision-making that is economi-
cally efficient contingent on the provisions
of the overall Code.
The final regulations contain seven sec-
tions, six under section 199A (§§ 1.199A-1
through 1.199A-6) and one under section
643(f) (§ 1.643(f)-1). Each of §§ 1.199A-1
through 1.199A-6 provides rules relevant
to the section 199A deduction and
§ 1.643(f)-1 would establish anti-abuse
rules to prevent taxpayers from estab-
lishing multiple non-grantor trusts or
contributing additional capital to multi-
ple existing non-grantor trusts in order
to avoid Federal income tax, including
abuse of section 199A. This economic
analysis describes the economic benefits
and costs of each of the seven sections
of the final regulations.
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### B. Baseline
The analysis in this section compares
the final regulation to a no-action baseline
reflecting anticipated Federal income tax-
related behavior in the absence of these
regulations.
### C. Economic Analysis of Changes in Final Regulations
The Treasury Department and the IRS
received comments from the public in re-
sponse to the section 199A proposed reg-
ulations. This section discusses significant
issues brought up in the comments for
which economic reasoning would be par-
ticularly insightful. For a full discussion
of comments received see the Summary of
Comments and Explanation of Revisions
section of this preamble.
#### 1. UBIA of Qualified Property
Relative to the proposed 199A regula-
tions, the final regulations make several
changes in the determination of UBIA of
qualified property. In particular, proposed
§ 1.199A-2 adjusted UBIA for (i) quali-
fied property contributed to a partnership
or S corporation in a nonrecognition trans-
action, (ii) like-kind exchanges, or (iii)
involuntary conversions. Upon review of
comments received addressing these rules,
the Treasury Department and the IRS
have amended these rules in the final reg-
ulations such that UBIA of qualified prop-
erty generally remains unadjusted as a re-
sult of these three types of transactions.
As several commenters pointed out, the
proposed regulations would have intro-
duced distortions into the economic incen-
tives for businesses to invest or earn in-
come. In cases where UBIA would have
been reduced following a nonrecognition
transfer under the proposed regulations,
the treatment under the proposed regula-
tions would have discouraged such trans-
actions by introducing a financial cost (in
the form of a reduced 199A deduction)
where no resource cost exists. An analo-
gous distortion exists for the other two
types of transactions. Such distortions are
economically inefficient.
To avoid such distortion, the final reg-
ulations establish that qualified property
contributed to a partnership or S corpora-
tion in a nonrecognition transaction gen-
erally retains its UBIA on the date it was
first placed in service by the contributing
partner or shareholder. Similar rules are
adopted for the other two transaction
forms mentioned above. In particular, the
final regulations provide that the UBIA of
qualified property received in a section
1031 like-kind exchange is generally the
UBIA of the relinquished property. The
rule is the same for qualified property
acquired pursuant to an involuntary con-
version under section 1033.
#### 2. Entity Aggregation
The final regulations allow an RPE to
aggregate trades or businesses it operates
directly or through lower-tier RPEs for the
purposes of calculating the section 199A
deduction in addition to allowing aggre-
gation at the individual owner level. This
change to the proposed rules allows RPEs,
if they meet the ownership and other tests
outlined in the regulations, to aggregate
QBI, wages, and capital amounts and re-
port aggregated figures to owners. This
change was made in response to com-
ments suggesting that allowing aggrega-
tion at the RPE level would simplify re-
porting and compliance efforts for owners
because the RPEs may more easily obtain
the information to determine whether the
trades or businesses meet the tests for
aggregation and whether it is beneficial to
aggregate. Because RPEs that aggregate
must meet all of the aggregation require-
ments, the change is consistent with the
aggregation concept, which allows trades
or businesses that operate across multiple
entities but are commonly considered one
business to benefit from calculating their
section 199A deduction using combined
income and expenses.
#### 3. Anti-abuse Rules
The final regulations removed the "in-
cidental to an SSTB" rule requiring that
businesses with majority ownership and
shared expenses with an SSTB be consid-
ered as part of the same trade or business
for purposes of the section 199A deduc-
tion. This anti-abuse rule was intended to
limit the ability of taxpayers to separate
their SSTB and non-SSTB income into
two trades or businesses in order to re-
ceive the deduction on their non-SSTB
income. In response to comments, the rule
was removed from the final regulations
for a number of reasons. First, defining
when two businesses have shared ex-
penses is difficult to administer and could
be overly inclusive. Second, there was a
concern that start-up businesses could be
excluded from the section 199A deduction
if they shared expenses and ownership
with a larger business that could be con-
sidered an SSTB.
The final regulations modify the anti-
abuse rule concerning services or property
provided to an SSTB. The rule is meant to
disallow SSTBs from splitting their trade
or business into two pieces with one pro-
viding services or leasing property to the
other. For example, imagine a dentist of-
fice that owns a building. The dental prac-
tice would be considered an SSTB. Sup-
pose the dentist split the business into two
trades or businesses, the first of which was
the dental practice and the second of
which owned the building and leased it to
the dental practice. This rule states that the
income from leasing the building to the
dental practice would also be considered
SSTB income and ineligible for the sec-
tion 199A deduction. Under the proposed
regulations, a trade or business that pro-
vides more than 80 percent of its property
or services to an SSTB is treated as an
SSTB if there is 50 percent or more com-
mon ownership of the trades or busi-
nesses. In cases in which a trade or busi-
ness provides less than 80 percent of its
property or services to a commonly
owned SSTB, the portion of the trade or
business providing property to the com-
monly owned SSTB is treated as part of
the SSTB with respect to the related par-
ties. The final regulations remove the 80
percent threshold and allow any portion
that is not provided to an SSTB to be
eligible for the section 199A deduction.
For example, if the dentist's leasing trade
or business leased 90 percent of the build-
ing to the dental office and 10 percent to a
coffee shop, the 10 percent would now be
eligible for the section 199A deduction.
This change removed a threshold in the
anti-abuse rule, which will remove any
incentive to stay below the 80 percent
threshold, while still disallowing the in-
come from providing property or services
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to related SSTBs to be eligible for the
deduction.
### C. Economic Analysis of § 1.199A-1
#### 1. Background
Because the section 199A deduction
has not previously been available, a large
number of the relevant terms and neces-
sary calculations taxpayers are currently
required to apply under the statute can
benefit from greater specificity. For exam-
ple, the statute uses the term trade or
business to refer to the enterprise whose
income would be potentially eligible for
the deduction but does not define what
constitutes a trade or business for pur-
poses of section 199A; the final regula-
tions provide that taxpayers should gener-
ally apply the trade or business standard
used for section 162(a). The definition of
trade or business in § 1.199A-1 is ex-
tended beyond the section 162 standard if
a taxpayer chooses to aggregate busi-
nesses under the rules of § 1.199A-4. In
addition, solely for purposes of section
199A, the rental or licensing of property
to a related trade or business is treated as
a trade or business if the rental or licens-
ing and the other trade or business are
commonly controlled under § 1.199A-
4(b)(1)(i). The regulations also make clear
that the section 199A deduction is allowed
when calculating alternative minimum
taxable income of individuals.
Because the section 199A deduction
has multiple components that may interact
in determining the deduction, it is also
valuable to lay out rules for calculating
the deduction since the statute does not
provide each of those particulars.
Alternative approaches the Treasury
Department and the IRS could have taken
would be to remain silent on additional
definitional specificities and to allow post-
limitation netting in calculating the sec-
tion 199A deduction. The Treasury De-
partment and the IRS concluded these
approaches would likely give rise to less
economically efficient tax-related deci-
sions than would relying on statutory lan-
guage alone and requiring or leaving open
the possibility of post-limitation netting.
#### 2. Anticipated benefits of § 1.199A-1
The Treasury Department and the IRS
expect that the definitions and guidance
provided in § 1.199A-1 will implement
the section 199A deduction in an econom-
ically efficient manner. An economically
efficient tax system generally aims to treat
income derived from similar economic
decisions similarly in order to reduce in-
centives to make choices based on tax
rather than market incentives. In this con-
text, the principal benefit of § 1.199A-1 is
to reduce taxpayer uncertainty regarding
the calculation of the section 199A deduc-
tion relative to an alternative scenario in
which no such regulations were issued.
In the absence of the clarifications in
§ 1.199A-1 regarding, for example, the
definition of an eligible trade or business,
similarly situated taxpayers might inter-
pret the statutory rules of section 199A
differently, given the statute's limited pre-
scription or absence of implementation
details. In addition, without these regula-
tions it is likely that many taxpayers im-
pacted by section 199A would take on
more (or less) than the optimal level of
risk in allocating resources within or
across their businesses. Both of these ac-
tions would give rise to economic ineffi-
ciencies. The final regulations would pro-
vide a uniform signal to businesses and
thus lead taxpayers to make decisions that
are more economically efficient contin-
gent on the overall Code. As an example,
§ 1.199A-1 prescribes the steps taxpayers
must take to calculate the QBI deduction
in a manner that avoids perverse incen-
tives for shifting wages and capital assets
across businesses. The statute does not
address the ordering for how the W-2
wages and UBIA of qualified property
limitations should be applied when tax-
payers have both positive and negative
QBI from different businesses. The final
regulations clarify that in such cases the
negative QBI should offset positive QBI
prior to applying the wage and capital
limitations. For taxpayers who would
have assumed in the alternate that nega-
tive QBI offsets positive QBI after apply-
ing the wage and capital limitations, the
regulations weaken the incentive to shift
W-2 wage labor or capital (in the form of
qualified property) from one business to
another to maximize the section 199A de-
duction.
To illustrate this, consider a taxpayer
who is above the statutory threshold and
owns two non-service sector businesses,
A and B. A has net qualified income of
$10,000, while B has net qualified income
of -$5,000. Suppose that A paid $3,000 in
W-2 wages, B paid $1,000 in W-2 wages,
and neither business has tangible capital.
If negative QBI offsets positive QBI after
applying the wage and capital limitations,
then A generates a tentative deduction of
$1,500, while B generates a tentative de-
duction of -$1,000, for a total deduction of
$500. After moving B's W-2 wages to A,
A's tentative deduction rises to $2,000,
while B's remains -$1,000, increasing the
total deduction to $1,000. If, on the other
hand, negative QBI offsets positive QBI
prior to applying the wage and capital
limitations (as in the final regulations),
then A and B have combined income of
$5,000, and the total deduction is $1,000
because the wage and capital limitations
are non-binding. After moving B's
wages to A, the total deduction remains
$1,000. Thus, an incentive to shift
wages arises if negative QBI offsets
positive QBI after applying the wage
and capital limitations. By taking the
opposite approach, § 1.199A-1 reduces
incentives for such tax-motivated, eco-
nomically inefficient reallocations of la-
bor (or capital) relative to a scenario in
which offsets were taken after wage and
capital limitations were applied.
#### 3. Anticipated costs of § 1.199A-1
The Treasury Department and the IRS
do not anticipate any meaningful eco-
nomic distortions to be induced by
§ 1.199A-1. However, changes to the col-
lective paperwork burden arising from
this and other sections of these regulations
are discussed in section J, Anticipated im-
pacts on administrative and compliance
costs, of this analysis.
### D. Economic Analysis of § 1.199A-2
#### 1. Background
Section 199A provides a deduction of
up to 20 percent of the taxpayer's income
from qualifying trades or businesses. Tax-
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payers with incomes above a threshold
amount cannot enjoy the full 20 percent
deduction unless they determine that their
businesses pay a sufficient amount of
wages and/or maintain a sufficient stock
of tangible capital, among other require-
ments.
Because this deduction has not previ-
ously been available, § 1.199A-2 pro-
vides greater specificity than is available
from the statute regarding the definitions
of W-2 wages and UBIA of qualified
property (that is, depreciable capital
stock) relevant to this aspect of the deduc-
tion. For example, the final regulations
make clear that property that is transferred
or acquired within a specific timeframe
with a principal purpose of increasing
the section 199A deduction is not con-
sidered qualified property for purposes
of the section 199A deduction. In addi-
tion, § 1.199A-2 generally follows prior
guidance for the former section 199 de-
duction in determining which W-2
wages are relevant for section 199A pur-
poses, with additional rules for allocat-
ing wages amongst multiple trades or
businesses. In these and other cases, the
final regulations generally aim, within
the context of the legislative language
and other tax considerations, to ensure
that only genuine business income is
eligible for the section 199A deduction,
and to reduce business compliance costs
and government administrative costs.
Alternative approaches would be to re-
main silent or to choose different defini-
tions of W-2 wages or qualified property
for the purposes of claiming the deduc-
tion. The Treasury Department and the
IRS rejected these alternatives as being
inconsistent with other definitions or re-
quirements under the Code and therefore
unnecessarily costly for taxpayers to com-
ply with and the IRS to administer.
#### 2. Anticipated benefits of § 1.199A-2
The Treasury Department and the IRS
expect that § 1.199A-2 will implement
the section 199A deduction in an econom-
ically efficient manner. For example,
§ 1.199A-2 will discourage some ineffi-
cient transfers of capital given the stat-
ute's silence regarding the circumstances
in which certain property transfers would
or would not be considered under section
199A. Specifically, the final rules make
clear that property transferred or acquired
within a specific timeframe with a princi-
pal purpose of increasing the section
199A deduction is not considered quali-
fied for purposes of the section 199A de-
duction.
The final regulations will also reduce
taxpayer uncertainty regarding the imple-
mentation of the section 199A deduction
relative to a scenario in which no regula-
tions were issued. In the absence of such
clarification, similarly situated taxpayers
would likely interpret the section 199A
deduction differently to the extent that the
statute does not adequately specify the
particular implementation issues ad-
dressed by § 1.199A-2, such as the deter-
mination of UBIA for nonrecognition
transfers and like-kind exchanges. As a
result, taxpayers might take on more (or
less) than the optimal level of risk in their
interpretations. The final regulations
would lead taxpayers to make decisions
that were more economically efficient,
conditional on the overall Code.
#### 3. Anticipated costs of § 1.199A-2
The Treasury Department and the IRS
do not anticipate any meaningful eco-
nomic distortions to be induced by
§ 1.199A-2. However, changes to the col-
lective paperwork burden arising from
this and other sections of these regulations
are discussed in section J, Anticipated im-
pacts on administrative and compliance
costs, of this analysis.
### E. Economic Analysis of § 1.199A-3
#### 1. Background
Section 199A provides a deduction of
up to 20 percent of the taxpayer's income
from qualifying trades or businesses. In
the absence of legislative and regulatory
constraints, taxpayers would have an in-
centive to count as income some income
that, from an economic standpoint, did not
accrue specifically from qualifying eco-
nomic activity. The final regulations clar-
ify what does and does not constitute QBI
for purposes of the section 199A deduc-
tion, providing greater implementation
specificity than provided by the statute.
Because guaranteed payments for capital,
for example, are not at risk in the same
way as other forms of income, it would
generally be economically efficient to ex-
clude them from QBI. Similarly, the Trea-
sury Department and the IRS proposes
that income that is a guaranteed payment,
but which is filtered through a tiered part-
nership in order to avoid being labeled as
such, should be treated similarly to guar-
anteed payments in general and therefore
excluded from QBI. This principle applies
to other forms of income that similarly
represent income that either is not at risk
or does not flow from the specific eco-
nomic value provided by a qualifying
trade or business, such as returns on in-
vestments of working capital.
#### 2. Anticipated benefits of § 1.199A-3
The Treasury Department and the IRS
expect that the § 1.199A-3 regulations
will implement the section 199A deduc-
tion in an economically efficient manner.
For example, § 1.199A-3 will discourage
the creation of tiered partnerships purely
for the purposes of increasing the section
199A deduction. In the absence of regu-
lation, some taxpayers would likely create
tiered partnerships under which a lower-
tier partnership would make a guaranteed
payment to an upper-tier partnership, and
the upper-tier partnership would pay out
this income to its partners without guar-
anteeing it. Such an organizational struc-
ture would likely be economically ineffi-
cient because it was, apparently, created
solely for tax minimization purposes and
not for reasons related to efficient eco-
nomic decision-making.
The Treasury Department and the IRS
further expect that the final regulations
will reduce uncertainty over whether par-
ticular forms of income do or do not con-
stitute QBI relative to a scenario in which
no regulations were issued. In the absence
of regulations, taxpayers would still need
to determine what income is considered
QBI and similarly situated taxpayers
might interpret the statutory rules differ-
ently and pursue income-generating activ-
ities based on different assumptions about
whether that income would qualify for
QBI. Section 1.199A-3 provides clearer
guidance for how to determine QBI, help-
ing to ensure that taxpayers face uniform
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incentives when making economic deci-
sions, a tenet of economic efficiency.
#### 3. Anticipated costs of § 1.199A-3
The Treasury Department and the IRS
do not anticipate any meaningful eco-
nomic distortions to be induced by
§ 1.199A-3. However, changes to the col-
lective paperwork burden arising from
this and other sections of these regulations
are discussed in section J, Anticipated im-
pacts on administrative and compliance
costs, of this analysis.
### F. Economic Analysis of § 1.199A-4
#### 1. Background
Businesses may organize either as C
corporations, which are owned by stock-
holders, or in a form generally called a
passthrough, which may take one of sev-
eral legal forms including sole proprietor-
ships, under which there does not exist a
clear separation between the owners and
the business's decision-makers. Each or-
ganizational structure, in some circum-
stance, may be economically efficient, de-
pending on the risk profile, information
asymmetries, and decision-making chal-
lenges pertaining to the specific business
and on the risk preferences and economic
situations of the individual owners. An
economically efficient tax system would
keep the choice among organizational
structures neutral contingent on the provi-
sions of the corporate income tax.
This principle of neutral tax treatment
further applies to the various organiza-
tional structures that qualify as pass-
throughs. Many passthrough business en-
tities are connected through ownership,
management, or shared decision-making.
The aggregation rule allows individuals or
entities to aggregate their trades or busi-
nesses for the purposes of calculating the
section 199A deduction. It thus helps en-
sure that significant choices over owner-
ship and management relationships within
businesses are not chosen solely to in-
crease the section 199A deduction.
An alternative approach would be not
to allow aggregation for purposes of
claiming the deduction. The Treasury De-
partment and the IRS decided to allow
aggregation in the specified circumstances
to minimize or avoid distortions in orga-
nizational form that could arise if aggre-
gation were not allowed.
#### 2. Anticipated benefits of § 1.199A-4
The Treasury Department and the IRS
expect that the aggregation guidance pro-
vided in § 1.199A-4 will implement the
section 199A deduction in an economi-
cally efficient manner. Economic tax prin-
ciples are called into play here because a
large number of businesses that could
commonly be thought of as a single trade
or business actually may be divided across
multiple entities for legal or economic
reasons. Allowing individual owners and
entities to aggregate trades or businesses
offers taxpayers a means of putting to-
gether what they think of as their trade or
business for the purposes of claiming the
deduction under section 199A without
otherwise changing market-driven owner-
ship and management structure incen-
tives. If such aggregation were not permit-
ted, certain taxpayers would restructure
their businesses solely for tax purposes,
with the resulting structures leading to
less efficient economic decision-making.
#### 3. Anticipated costs of § 1.199A-4
The final regulations require common
majority ownership, in addition to other
requirements, to apply the aggregation
rule. If no aggregation were allowed, tax-
payers would have to combine businesses
to calculate the deduction based on the
combined income, wages, and capital. The
majority ownership threshold may thus
encourage owners to concentrate their
ownership in order to benefit from the
aggregation rule. The additional costs of
the final regulations would be limited to
those owners who would find merging
entities too costly based on other market
conditions, but under these regulations
may find it beneficial to increase their
ownership share in order to aggregate
their businesses and maximize their QBI
deduction.
Changes to the collective paperwork
burden arising from § 1.199A-4 and other
sections of these regulations are discussed
in section J, Anticipated impacts on ad-
ministrative and compliance costs, of this
analysis.
G. Economic Analysis of § 1.199A-5
#### 1. Background
Section 199A provides a deduction of
up to 20 percent of the taxpayer's income
from qualifying trades or businesses. In
the absence of legislative and regulatory
constraints, taxpayers have an incentive to
receive labor income as income earned as
a an independent contractor or through
ownership of an RPE, even though this
income may not derive from the risk-
bearing or decision-making efficiencies
that are unique to being an independent
contractor or to owning an equity interest
in an RPE. The TCJA provided several
provisions that bear on this distinction.
Section 1.199A-5 provides guidance
on what trades or businesses would
be characterized as an SSTB under each
type of services trade or business listed in
the legislative text. In addition,
§ 1.199A-5 provides an exception to the
SSTB exclusion if the trade or business
only earns a small fraction of its gross
income from specified service activities
(de minimis exception). Finally, the final
regulations state that former employees
providing services as independent con-
tractors to their former employer will be
presumed to be acting as employees un-
less they provide evidence that they are
providing services in a capacity other than
an employee.
An alternative approach to the de mi-
nimis exception would be to require busi-
nesses or their owners to trigger the SSTB
exclusion regardless of the share of gross
income from specified service activities.
The Treasury Department and the IRS
concluded that providing a de minimis
exception is necessary to avoid very small
amounts of SSTB activity within a trade
or business making the entire trade or
business ineligible for the deduction, an
outcome that is inefficient in the context
of section 199A.
#### 2. Anticipated benefits of § 1.199A-5
The Treasury Department and the IRS
expect that § 1.199A-5 will implement
the section 199A deduction in an econom-
ically efficient manner. To this end,
§ 1.199A-5 clarifies the definition of an
SSTB. In the absence of such clarification,
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similarly situated taxpayers might inter-
pret the legislative text differently, leading
some taxpayers to invest in particular
businesses under the assumption income
earned from that entity was eligible for the
deduction while other taxpayers might
forgo that investment due to the opposite
assumption. These disparate investment
signals generate economic inefficiencies.
Additionally, similarly situated taxpayers
may interpret the legislative text differ-
ently leading to equity concerns and pos-
sibly disadvantageng taxpayers who take a
less aggressive approach. These distor-
tions are reduced by the specificity pro-
vided in these final regulations relative to
a scenario without regulations.
Furthermore, in the absence of the reg-
ulations, some owners of businesses may
find it advantageous to separate their busi-
ness activity into SSTB and non-SSTB
businesses in order to receive the section
199A deduction on their non-SSTB activ-
ity. The final regulations would disallow
this behavior by stating that a taxpayer
that provides property or services to an
SSTB that is commonly-owned will have
the portion of property or services pro-
vided to the SSTB treated as attributable
to an SSTB. Additionally without these
regulations, some businesses may have
an incentive to change employment re-
lationships in favor of independent con-
tractors. Either of these actions would
entail some loss of economic efficiency
due to changes in businesses' decision-
making structures based on tax incen-
tives. The final regulations help to avoid
these sources of inefficiency.
In addition to the statutory threshold
amount, below which SSTB status is not
relevant, § 1.199A-5 provides a de mini-
mis rule with tiered thresholds of gross
revenues arising from specified service
activity in determining whether a trade or
business is classified as an SSTB. The
threshold for trades or businesses with
less than $25 million of gross receipts is
10 percent, and for trades or businesses
with more than $25 million of gross re-
ceipts it is 5 percent. This de minimis rule
allows trades and businesses that have
very little SSTB activity to benefit from
the deduction. Absent these regulations,
any income from SSTB activity could
make the entire trade or business ineligi-
ble for the deduction.
The de minimis thresholds were set at
these levels to balance the desire of the
Treasury Department and the IRS to allow
the deduction for trades and businesses
with very small amounts of SSTB activity
with the intent of the legislation to disal-
low the deduction for trades or businesses
involving SSTB activity. The $25 million
threshold is used in multiple statutory pro-
visions enacted into law by the TCJA as a
threshold to apply certain rules to smaller
businesses. For example, businesses with
average annual gross receipts under $25
million are exempt from the application of
the interest deduction limitation under
section 163(j), the uniform capitalization
(UNICAP) rules under section 263A, and
the inventory accounting rules of section
471. The Treasury Department and the
IRS chose to adopt this threshold for
§ 1.199A-5 because of its prevalent use in
the TCJA as a threshold applicable to
smaller businesses and to avoid a prolif-
eration of varying thresholds applicable to
such businesses in TCJA-related rule-
making.
The SSTB gross revenue percentages
for businesses above and below the $25
million threshold were selected to repre-
sent small fractions of income. At present,
the Treasury and IRS do not have data to
determine what fraction of activity within
a trade or business arises from SSTB ac-
tivity. Treasury and the IRS also do not
have data to determine whether or to what
extent it would be advantageous for busi-
nesses to restructure in order to avoid the
SSTB classification based on de minimis
standards set at various percentage levels
nor, if businesses were to restructure,
what the economic consequences would
be at those various percentage levels. The
stipulated percentages represent the best
judgment of Treasury and the IRS regard-
ing percentages that efficiently balance
compliance costs for taxpayers, effective
administration of section 199A, and reve-
nue considerations. Treasury and the IRS
received several comments on these per-
centages and discuss these comments in
the preamble.
#### 3. Anticipated costs of § 1.199A-5
By providing a de minimis rule to al-
low a small fraction of gross receipts to be
derived from SSTB activity, the regula-
tion may cause businesses near the thresh-
old to decrease their specified service ac-
tivities or increase their non-specified
service activities to avoid being classified
as an SSTB. Additionally, the de minimis
rule may encourage smaller entities en-
gaged in SSTBs to merge with larger en-
tities not engaged in an SSTB. The eco-
nomic costs of these mergers are difficult
to quantify.
Changes to the collective paperwork
burden arising from § 1.199A-5 and other
sections of these regulations are discussed
in section J, Anticipated impacts on ad-
ministrative and compliance costs, of this
analysis.
### H. Economic Analysis of § 1.199A-6
#### 1. Background
The section 199A deduction is reduced
below 20 percent for some businesses and
taxpayers. The attributes that determine
any such reduction must be determined by
taxpayers claiming the section 199A de-
duction. Section 1.199A-6 provides rules
for RPEs, PTPs, trusts, and estates rele-
vant to making these determinations. In
particular, RPEs are required to calculate
and report their owners' QBI, SSTB sta-
tus, W-2 wages, UBIA of qualified prop-
erty, REIT dividends, and PTP income.
Similarly, PTPs must calculate and report
their owners' QBI, SSTB status, REIT
dividends, and other PTP income.
#### 2. Anticipated benefits of § 1.199A-6
The Treasury Department and the IRS
expect that § 1.199A-6 will implement
the section 199A deduction in an econom-
ically efficient manner. As with other reg-
ulations discussed in these Analyses, a
principal benefit of § 1.199A-6 is to in-
crease the likelihood that all taxpayers
interpret the statutory rules of section
199A similarly. Additionally, we expect
that requiring RPEs to determine and re-
port the information necessary to compute
the section 199A deduction will result in a
more accurate and uniform application of
the regulations and statute relative to an
alternative approach under which individ-
ual owners would most likely determine
these items.
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3\. Anticipated costs of § 1.199A-6
relative to the baseline
The Treasury Department and the IRS
do not anticipate any meaningful eco-
nomic distortions to be induced by
§ 1.199A-6. However, changes to the col-
lective paperwork burden arising from
this and other sections of these regulations
are discussed in section J, Anticipated im-
pacts on administrative and compliance
costs, of this analysis.
##### I. Economic Analysis of § 1.643(f)-1
###### 1. Background
Section 1.643(f)-1 provides that tax-
payers cannot set up multiple trusts in
certain cases with a principal purpose of
tax avoidance, which would include the
avoidance of the statutory threshold
amounts under section 199A.
2\. Anticipated benefits of § 1.643(f)-1
relative to the baseline
The Treasury Department and the IRS
expect that the § 1.643(f)-1 will imple-
ment the section 199A deduction in an
economically efficient manner. Because
§ 1.643(f)-1 defines the manner in which
multiple trusts are subject to the threshold
amount, the Treasury Department and the
IRS anticipate that the final regulations
will lead to fewer resources being devoted
to setting up trusts in attempts to avoid the
threshold amount rules under section
199A. If multiple trusts have substantially
the same grantors and beneficiaries, and a
principal purpose for establishing such
trusts or contributing additional cash or
other property to such trusts is the avoid-
ance of Federal income tax, then the var-
ious trusts would be generally considered
one trust, including for section 199A pur-
poses.
3\. Anticipated costs of § 1.643(f)-1
relative to the baseline
The Treasury Department and the
IRS do not anticipate any meaningful
economic distortions to be induced by
§ 1.643(f)-1. However, changes to the
collective paperwork burden arising
from this and other sections of these
regulations are discussed in section J,
Anticipated impacts on administrative
and compliance costs, of this analysis.
### J. Anticipated impacts on administrative and compliance costs
#### 1. Discussion
The final regulations have a number of
effects on taxpayers' compliance costs.
Section 1.199A-2 provides guidance in
determining a taxpayer's share of W-2
wages and UBIA of qualified property.
The Treasury Department and the IRS ex-
pect that this guidance reduces the tax
compliance costs of making this determi-
nation and reduces uncertainty. In the ab-
sence of the regulations, taxpayers would
still need to determine how to allocate
W-2 wages and UBIA of qualified prop-
erty, among other calculations. These reg-
ulations provide clear instructions for how
to do this, simplifying the process of com-
plying with the law.
Section 1.199A-4 requires that owners
who decide to aggregate their trades or
businesses report the aggregation annu-
ally. This reporting requirement adds to
the tax compliance burden of these own-
ers. For owners who consider aggregating,
these regulations increase compliance
costs because the owners must calculate
their deduction for both disaggregated and
aggregated trades or businesses to make
the aggregation decision. These additional
compliance costs would be voluntary and
accrue only to owners who find it benefi-
cial to aggregate for the purposes of cal-
culating their section 199A deduction.
The final regulations also allow for aggre-
gation at the entity level. This will gener-
ally reduce reporting and compliance
costs for individual owners, relative to
allowing aggregation only at the individ-
ual owner level, because the entity may
have easier access to the facts and circum-
stances required for aggregation.
Section 1.199A-5 includes a require-
ment for former employees working as
independent contractors for their former
employer to show that their employment
relationship has changed in order to be
eligible for the section 199A deduction.
The burden to substantiate employment
status exists without these regulations;
however, the final regulation may in-
crease these individuals' compliance
costs slightly.
Section 1.199A-6 specifies that RPEs
must report relevant section 199A infor-
mation to owners. Due to these entity re-
porting requirements, the final regulations
will increase compliance costs for RPEs.
These entities will need to keep records of
new information relevant to the calcula-
tion of their owners' section 199A deduc-
tion, such as QBI, W-2 wages, SSTB
status, and UBIA of qualified property.
This recordkeeping is costly. Without
these regulations, it is likely that only
some RPEs would engage in this record
keeping.
Section 1.199A-6 reduces the compli-
ance burden on many individuals that own
RPEs relative a scenario in which no reg-
ulations were issued or regulatory alterna-
tives that assigned each owner of an RPE
the responsibility to acquire the required
information were issued without any re-
quirement for the RPE to provide such
information. Under the final regulations,
owners will receive information pertain-
ing to the section 199A deduction from
the RPE, such as whether a given trade or
business is an SSTB, whereas in the alter-
nate they could have been required to
make such determinations themselves.
Overall, it is likely to be more effi-
cient for RPEs, rather than individual
owners, to keep records of section 199A
deduction information. Therefore, the
Treasury Department and the IRS ex-
pect that § 1.199A-6 will reduce com-
pliance costs on net and relative to these
alternative scenarios.
#### 2. Estimated effect on compliance costs
As explained above, key provisions of
§§ 1.199A-1 through 1.199A-6 will re-
duce compliance costs that taxpayers
would likely have incurred in the absence
of the regulations. Most notably, the de
minimis rule of § 1.199A-5 provides that
a trade or business will not be considered
to be an SSTB merely because it provides
a small amount of services in a specified
service activity. This provision is ex-
pected to reduce compliance costs associ-
ated with section 199A for millions of
U.S. businesses. In addition, the aggrega-
tion rules will reduce overall costs for
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taxpayers because some taxpayers would
otherwise restructure their business ar-
rangements in order to receive the benefit
of the deduction. These and other discre-
tionary choices by the Treasury Depart-
ment and the IRS in the final regulations
will substantially reduce taxpayers' com-
pliance costs.
The Treasury Department and the IRS
also assessed the provisions of the final
regulations that could increase compli-
ance burdens. The Treasury Department
and the IRS estimate that these regulations
will lead to a gross (not net) increase in
total reporting burden of 25 million hours
annually. This estimate primarily reflects
two effects of the regulations. First, the
Treasury Department and the IRS project
that approximately 1.2 million individuals
with more than one directly owned or
passthrough business who voluntarily
choose to aggregate will spend 0.66 hours
annually complying with § 1.199A-4, re-
sulting in a 0.7 million hour increase in
reporting burden. Second, the Treasury
Department and the IRS project that - in
complying with the § 1.199A-6 require-
ment to report relevant section 199A in-
formation to their approximately 8.8 mil-
lion owners - RPEs will spend 2.75
hours annually per owner, resulting in a
24.2 million hour increase in reporting
burden. These estimates do not include
the decrease in compliance costs to in-
dividuals who would no longer find it
necessary to compute the quantities de-
tailed in § 1.199A-6 because they
would receive this information from
each RPE. Nor do these estimates reflect
the decrease in compliance costs out-
lined above.
Valuations of the burden hours of $39/
hour in the case of individuals making
aggregation decisions and $53/hour in the
case of RPEs reporting section 199A in-
formation lead to gross reporting annual-
ized costs to taxpayers of $1.36 billion (3
percent rate) to $1.37 billion (7 percent
rate) ($2017). These estimates do not ac-
count for the provisions of the final regu-
lations that will substantially reduce com-
pliance costs. These estimates assume that
the costs are approximately the same pro-
portion of GDP each year. It is possible,
however, that costs will be higher in the
first years that the deduction is allowed
and lower in future years once taxpayers
have more experience with the calcula-
tions and reporting requirements associ-
ated with the deduction. Finally, the esti-
mates reflect data for entities of a size and
form expected to be impacted by section
199A. More specifically, because of the
scope of the section 199A deduction, the
Treasury Department and the IRS expect
the majority of affected entities to be pri-
marily small, and medium in size.
The Treasury Department and the IRS
received a comment that the hours as-
sumptions for the compliance costs were
too small. The hours estimates were not
revised because the commenter's discus-
sion focused mainly on the effort required
to compute the values necessary to calcu-
late the deduction not on the specific ag-
gregation or reporting requirements esti-
mated here.
Annualized Monetized
Effect on Compliance
Years 2018 to 2027
Years 2018 to 2027
Costs from Final Regulations
(3% Discount Rate, millions $2017)
(7% Discount Rate, millions $2017)
Estimated Gross Costs
$1,357
$1,368
Estimated Savings
Not quantified
Not quantified
Estimated net change in compliance costs
Not quantified
Not quantified
OMB control number 1545-0123 repre-
sents a total estimated burden time, includ-
ing all other related forms and schedules, of
3.157 billion hours and total estimated mon-
etized costs of $58.148 billion (available at:
https://www.federalregister.gov/documents/
2018/10/09/2018-21846/proposed-collection-
comment-request-for-forms-1065-1065-b-
1066-1120-1120-c-1120-f-1120-h-1120-nd).
Likewise, OMB control number 1545-
0074 represents a total estimated burden
time, including all other related forms
and schedules, of 1.784 billion hours
and total estimated monetized costs of
$31.764 billion. OMB Control number
1545-0092 represents burden hours of
roughly 917,800 hours. The burden es-
timates provided by the IRS under the
OMB Numbers listed in the above table
are aggregate amounts that relate to the
entire package of forms associated with
the OMB control number, and do not
include the estimated burden changes
related to the additional burdens con-
templated in this final rule such as at-
taching the applicable statement to Form
1040 or Schedule K-1 for the Form
1041, Form 1065, or Form 1120S, as
appropriate, to ensure the correct
amount of deduction is reported under
section 199A. The Treasury department
anticipates incorporating these burdens
in the next annual cycle of the above
aggregated collections, and the public
will have an opportunity to comment on
those estimates at that time.
### K. Executive Order 13771.
These final regulations have been des-
ignated as regulatory under E.O. 13771.
#### II. Regulatory Flexibility Act
It is hereby certified that the collections
of information in §§ 1.199A-4 and
1.199A-6 will not have a significant eco-
nomic impact on a substantial number of
small entities. Based on Joint Committee
on Taxation (JCT) analysis of 2014 tax
returns, there were approximately 4.3 mil-
lion S corporations, 3.6 million partner-
ships, 24.6 million non-farm sole propri-
etorships with receipts below $10 million,
and 1.8 million farm sole proprietorships
with gross income below $10 million. See
Present Law and Background Regarding
the Federal Income Taxation of Small
Businesses JCX-32-17. The Treasury
Department and the IRS have determined
that the regulations may affect a substan-
tial number of small entities (businesses
entities with receipts below $10 million)
but have also concluded that the economic
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impact on small entities as a result of the
collections of information in this regula-
tion is not expected to be significant.
The collection in § 1.199A-4 may ap-
ply to RPEs, individuals, and certain trusts
or estates that have qualified business in-
come (QBI) under section 199A and that
choose to aggregate two or more trades or
businesses for purposes of section 199A.
If a taxpayer chooses to aggregate its
trades or businesses, the taxpayer, must
include an attachment to its tax return
identifying and describing each trade or
business aggregated, describing changes
to the aggregated group, and providing
other information as the Commissioner
may require in forms, instructions, or
other published guidance. Aggregation is
not required by a person claiming the sec-
tion 199A deduction, and therefore, the
collection of information in § 1.199A-4 is
required only if the person or RPE
chooses to aggregate multiple trades or
businesses. Because the Treasury Depart-
ment and the IRS do not yet have data on
how many small entities will choose to
aggregate multiple trades or businesses,
the number of affected entities is not es-
timated at this time. However, the Trea-
sury Department and the IRS have deter-
mined that the majority of businesses and
particularly small businesses (businesses
entities with receipts below $10 million)
will choose not to aggregate or will have
no call to do so. Aggregation is potentially
beneficial to businesses with individual
owners who have taxable income above
$315,000 for married filing joint taxpayers
and $157,500 for others. Approximately
three-quarters of passthrough businesses
are structured as a sole proprietorship and
therefore only have one owner. The Trea-
sury Department and the IRS estimate that
approximately 95 percent of these busi-
nesses have owners below the income
threshold and therefore, would not need to
aggregate to receive the full benefit of the
section 199A deduction.
The small entities subject to the collec-
tion of information in § 1.199A-6 are
business entities formed as estates, trusts,
partnerships, or S corporations that con-
duct, directly or indirectly, one or more
trades or businesses. Section 1.199A-6
requires such an entity to attach a state-
ment describing the QBI, W-2 wages, and
UBIA of qualified property for each sep-
arate trade or business to the Schedule K-1
required under existing law to be issued to
each beneficiary, partner, or shareholder.
Although data is not available to estimate
the number of small entities (business enti-
ties with receipts below $10 million) af-
fected by the § 1.199A-6 requirements, the
Treasury Department and the IRS project
that number would include a substantial
number of small entities.
As discussed elsewhere in this pream-
ble, the reporting burden is estimated at 30
minutes to 20 hours, depending on indi-
vidual circumstances, with an estimated
average of 2.5 hours for all affected enti-
ties, regardless of size. The burden on
entities (those with business receipts be-
low $10 million) is expected to be at the
lower end of the range (30 minutes to 2.5
hours). Using the IRS's taxpayer compli-
ance cost estimates, taxpayers who are
self-employed with multiple businesses
are estimated to have a monetization rate
of $39 per hour. Passthroughs that issue
K-1s have a monetization rate of $53 per
hour. Thus, the annual aggregate burden
on businesses with gross receipts below
$10 million is between $19.50 and
$132.50 per business.
Moreover, the Treasury Department
and the IRS have determined that there
would be no significant economic impact
on affected entities. Based on published
information from the Conference Report
accompanying the Act, H.R. Rep. No.
155-446, at 683 (2017), and Statistics of
Income aggregate data, the projected net
tax revenue losses from section 199A are
estimated to be only a small fraction of the
business receipts of S corporations (in-
cluding subchapter S banks), partnerships,
and non-farm sole proprietorships pro-
jected to 2027. See the following table in
this Part II. These revenue projections,
which represent a reduced tax liability for
these businesses, include both the effects
of the statute as well as the regulations.
The reduction in tax liability varies from
0.02 percent to 0.49 percent of gross re-
ceipts, an economic impact that is not
regarded as substantial under the Regula-
tory Flexibility Act.
Fiscal Years
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
Net Tax Reduction1 ($billions)
27.7
47.1
49.9
51.8
52.8
52.2
53.6
53.2
24.2
1.9
Total Business Receipts2 ($ billions)
10095.1
10306.7
10415.2
10525.7
10638.0
10752.2
10868.4
10986.5
11106.96
11228.7
Percent
0.27
0.46
0.48
0.49
0.50
0.49
0.49
0.48
0.22
0.02
1Tax revenue effects of 199A are from the Conference Report accompanying the Act.
2To the extent that some "not small" passthroughs are reflected in this table, the percentages reported represent an under-
estimate of the tax cut that those small businesses will receive.
3Business receipt figures for 2013 S Corp (https://www.irs.gov/statistics/soi-tax-stats-table-1-returns-of-active-corporations-
form-1120s), 2016 Sole Prop (https://www.irs.gov/statistics/soi-tax-stats-nonfarm-sole-proprietorship-statistics), and 2015
Partnerships (https://www.irs.gov/statistics/soi-tax-stats-partnership-statistics-by-sector-or-industry) come from published
SOI data. Amounts for 2017 through 2029 are projected using historical growth rates.
Finally, no comments regarding the
economic impact of these regulations on
small entities were received. For these
reasons, the Treasury Department and the
IRS have determined that the collection of
information in this final rulemaking will
not have a significant economic impact.
Accordingly, a regulatory flexibility anal-
ysis under the Regulatory Flexibility Act
(5 U.S.C. chapter 6) is not required.
Pursuant to section 7805(f) of the
Code, this final rulemaking has been sub-
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mitted to the Chief Counsel for Advocacy
of the Small Business Administration for
comment on its impact on small business.
## Drafting Information
The principal authors of these regula-
tions are Robert D. Alinsky, Vishal R.
Amin, Margaret Burow, Frank J. Fisher,
and Wendy L. Kribell, Office of the As-
sociate Chief Counsel (Passthroughs and
Special Industries). However, other per-
sonnel from the Treasury Department and
the IRS participated in their development.
### List of Subjects in 26 CFR Part 1
Income taxes, Reporting and record-
keeping requirements.
### Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is
amended as follows:
## PART 1-INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding sectional
authorities for §§ 1.199A-1 through
1.199A-6 and § 1.643(f) to read in part as
follows:
Authority: 26 U.S.C. 7805
Section 1.199A-1 also issued under 26
U.S.C. 199A(f)(4).
Section 1.199A-2 also issued under 26
U.S.C. 199A(b)(5), (f)(1)(A), (f)(4), and
(h).
Section 1.199A-3 also issued under 26
U.S.C. 199A(c)(4)(C) and (f)(4).
Section 1.199A-4 also issued under 26
U.S.C. 199A(f)(4).
Section 1.199A-5 also issued under 26
U.S.C. 199A(f)(4).
Section 1.199A-6 also issued under 26
U.S.C. 199A(f)(1)(B) and (f)(4).
* * * * *
Section 1.643(f)-1 also issued under
26 U.S.C. 643(f).
** * * *
Par. 2. Section 1.199A-0 is added to
read as follows:
§ 1.199A-0 Table of contents.
This section lists the section headings
that appear in §§ 1.199A-1 through
1.199A-6.
§ 1.199A-1 Operational rules.
(a) Overview.
(1) In general.
(2) Usage of term individual.
(b) Definitions.
(1) Aggregated trade or business.
(2) Applicable percentage.
(3) Net capital gain.
(4) Phase-in range.
(5) Qualified business income (QBI).
(6) QBI component.
(7) Qualified PTP income.
(8) Qualified REIT dividends.
(9) Reduction amount.
(10) Relevant passthrough entity
(RPE).
(11) Specified service trade or business
(SSTB).
(12) Threshold amount.
(13) Total QBI amount.
(14) Trade or business.
(15) Unadjusted basis immediately af-
ter the acquisition of qualified property
(UBIA of qualified property).
### (16) W-2 Wages.
(c) Computation of the section 199A
deduction for individuals with taxable in-
come not exceeding threshold amount.
(1) In general.
(2) Carryover rules.
(i) Negative total QBI amount.
(ii) Negative combined qualified REIT
dividends/qualified PTP income.
(3) Examples.
(d) Computation of the section 199A
deduction for individuals with taxable in-
come above the threshold amount.
(1) In general.
(2) QBI component.
(i) SSTB exclusion.
(ii) Aggregated trade or business.
(iii) Netting and carryover.
(A) Netting.
(B) Carryover of negative total QBI
amount.
(iv) QBI component calculation.
(A) General rule.
(B) Taxpayers with taxable income
within phase-in range.
(3) Qualified REIT dividends/qualified
PTP income component.
(i) In general.
(ii) SSTB exclusion.
(iii) Negative combined qualified REIT
dividends/qualified PTP income.
(4) Examples.
(e) Special rules.
(1) Effect of deduction.
(2) Disregarded entities.
(3) Self-employment tax and net in-
vestment income tax.
(4) Commonwealth of Puerto Rico.
(5) Coordination with alternative min-
imum tax.
(6) Imposition of accuracy-related pen-
alty on underpayments.
(7) Reduction for income received
from cooperatives.
(f) Applicability date.
(1) General rule.
(2) Exception for non-calendar year
RPE.
#### § 1.199A-2 Determination of W-2
Wages and unadjusted basis immediately
after acquisition of qualified property.
(a) Scope.
(1) In general.
(2) W-2 wages.
(3) UBIA of qualified property.
(i) In general.
(ii) UBIA of qualified property held by
a partnership.
(iii) UBIA of qualified property held
by an S corporation.
(iv) UBIA and section 743(b) basis ad-
justments.
(A) In general.
(B) Excess section 743(b) basis adjust-
ments.
(C) Computation of partner's share of
UBIA with excess section 734(b) basis
adjustments.
(D) Examples.
(b) W-2 wages.
(1) In general.
(2) Definition of W-2 wages.
(i) In general.
(ii) Wages paid by a person other than
a common law employer.
(iii) Requirement that wages must be
reported on return filed with the Social
Security Administration.
(A) In general.
(B) Corrected return filed to correct a
return that was filed within 60 days of the
due date.
(C) Corrected return filed to correct a
return that was filed later than 60 days
after the due date.
(iv) Methods for calculating W-2
Wages.
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(A) In general. (B) Acquisition or disposition of a
(vi) Property acquired in a nonrecogni- tion transaction with principal purpose of increasing UBIA.
(2) Individual disclosure. (i) Required annual disclosure. (ii) Failure to disclose.
trade or business.
(1) In general.
(4) Examples.
(3) For RPEs.
(2) Acquisition or disposition.
(d) Applicability date.
(i) Required annual disclosure.
(C) Application in the case of a person
(1) General rule.
(ii) Failure to disclose.
with a short taxable year.
(2) Exceptions.
(d) Examples.
(1) In general.
(i) Anti-abuse rules.
(e) Applicability date.
(2) Short taxable year that does not
(ii) Non-calendar year RPE.
(1) General rule.
include December 31.
(2) Exception for non-calendar year
(D) Remuneration paid for services
§ 1.199A-3 Qualified business income,
RPE.
performed in the Commonwealth of
qualified REIT dividends, and qualified
Puerto Rico.
PTP income.
§ 1.199A-5 Specified service trades or
(3) Allocation of wages to trades or
businesses and the trade or business of
businesses.
(a) In general.
performing services as an employee.
(4) Allocation of wages to QBI.
(b) Definition of qualified business in-
come.
(5) Non-duplication rule.
(a) Scope and effect.
(1) In general. (i) Section 751 gain.
(c) UBIA of qualified property.
(1) Scope. (2) Effect of being an SSTB.
(1) Qualified property.
(ii) Guaranteed payments for the use of
(3) Trade or business of performing
(i) In general.
capital.
services as an employee.
(ii) Improvements to qualified prop-
(iii) Section 481 adjustments.
(b) Definition of specified service trade
erty.
(iv) Previously disallowed losses
or business.
(iii) Adjustments under sections 734(b)
(v) Net operating losses.
(1) Listed SSTBs.
and 743(b).
(vi) Other deductions.
(2) Additional rules for applying sec-
(iv) Property acquired at end of year.
(2) Qualified items of income, gain,
tion 199A(d)(2) and paragraph (b) of this section.
(2) Depreciable period.
deduction, and loss.
(i) In general.
(i) In general.
(i) In general.
(ii) Additional first-year depreciation
(ii) Items not taken into account.
(A) No effect on other tax rules.
under section 168.
(3) Commonwealth of Puerto Rico.
(B) Hedging transactions.
(iii) Qualified property acquired in
(4) Wages.
(ii) Meaning of services performed in
transactions subject to section 1031 or
(5) Allocation of items among directly-
the field of health.
section 1033.
conducted trades or businesses.
(iii) Meaning of services performed in
(A) Replacement property received in
(c) Qualified REIT dividends and qual-
the field of law.
a section 1031 or 1033 transaction.
ified PTP income.
(iv) Meaning of services performed in
(B) Other property received in a sec-
(1) In general.
the field of accounting.
tion 1031 or 1033 transaction.
(2) Qualified REIT dividend.
(v) Meaning of services performed in
(iv) Qualified property acquired in trans-
(3) Qualified PTP income.
the field of actuarial science.
actions subject to section 168(i)(7)(B).
(i) In general.
(vi) Meaning of services performed in
(v) Excess section 743(b) basis adjust-
(ii) Special rules.
the field of performing arts.
ment.
(d) [Reserved]
(vii) Meaning of services performed in
(3) Unadjusted basis immediately after acquisition.
(e) Applicability date. (1) General rule.
the field of consulting.
(viii) Meaning of services performed in
(2) Exceptions.
the field of athletics.
(i) In general.
(ii) Qualified property acquired in a
(i) Anti-abuse rules. (ii) Non-calendar year RPE.
(ix) Meaning of services performed in
like-kind exchange.
the field of financial services.
(A) In general.
(x) Meaning of services performed in
(B) Excess boot.
§ 1.199A-4 Aggregation.
the field of brokerage services. (xi) Meaning of the provision of ser-
(iii) Qualified property acquired pursu-
ant to an involuntary conversion. (A) In general.
(a) Scope and purpose.
vices in investing and investment manage- ment.
(b) Aggregation rules.
(1) General rule.
(xii) Meaning of the provision of ser-
(B) Excess boot.
(2) Operating rules.
vices in trading.
(iv) Qualified property acquired in trans-
(i) Individuals.
(xiii) Meaning of the provision of ser-
actions described in section 168(i)(7)(B).
(ii) RPEs.
vices in dealing.
(v) Qualified property acquired from a
(c) Reporting and consistency.
(A) Dealing in securities.
decedent.
(1) For individual.
(B) Dealing in commodities.
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(1) Qualified active sale.
(2) Active conduct of a commodities
business.
(3) Directly holds commodities as in-
ventory or similar property.
(4) Directly incurs substantial expenses
in the ordinary course.
(5) Significant activities for purposes
of paragraph (b)(2)(xiii)(B)(4)(iii) of this
section.
(C) Dealing in partnership interests.
(xiv) Meaning of trade or business
where the principal asset of such trade or
business is the reputation or skill of one or
more of its employees or owners.
(3) Examples.
(c) Special rules.
(1) De minimis rule.
(i) Gross receipts of $25 million or
less.
(ii) Gross receipts of greater than $25
million.
(2) Services or property provided to an
SSTB.
(i) In general.
(ii) 50 percent or more common own-
ership.
(iii) Examples.
(d) Trade or business of performing
services as an employee.
(1) In general.
(2) Employer's Federal employment
tax classification of employee immaterial.
(3) Presumption that former employees
are still employees.
(i) Presumption.
(ii) Rebuttal of presumption.
(iii) Examples.
(e) Applicability date.
(1) General rule.
(2) Exceptions.
(i) Anti-abuse rules.
(ii) Non-calendar year RPE.
§ 1.199A-6 Relevant passthrough
entities (RPEs), publicly traded
partnerships (PTPs), trusts, and estates.
(a) Overview.
(b) Computational and reporting rules
for RPEs.
(1) In general.
(2) Computational rules.
(3) Reporting rules for RPEs.
(i) Trade or business directly engaged
in.
(ii) Other items.
(iii) Failure to report information.
(c) Computational and reporting rules
for PTPs.
(1) Computational rules.
(2) Reporting rules.
(d) Application to trusts, estates, and
beneficiaries.
(1) In general.
(2) Grantor trusts.
(3) Non-grantor trusts and estates.
(i) Calculation at entity level.
(ii) Allocation among trust or estate
and beneficiaries.
(iii) [Reserved]
(iv) Threshold amount.
(v) [Reserved]
(vi) Electing small business trusts.
(vii) Anti-abuse rule for creation of a
trust to avoid exceeding the threshold
amount.
(viii) Example.
(e) Applicability date.
(1) General rule.
(2) Exceptions.
(i) Anti-abuse rules.
(ii) Non-calendar year RPE.
Par. 3. Section 1.199A-1 is added to
read as follows:
§ 1.199A-1 Operational rules.
(a) Overview-(1) In general. This
section provides operational rules for cal-
culating the section 199A(a) qualified
business income deduction (section 199A
deduction) under section 199A of the In-
ternal Revenue Code (Code). This section
refers to the rules in §§ 1.199A-2 through
1.199A-6. This paragraph (a) provides an
overview of this section. Paragraph (b) of
this section provides definitions that apply
for purposes of section 199A and
§§ 1.199A-1 through 1.199A-6. Para-
graph (c) of this section provides compu-
tational rules and examples for individuals
whose taxable income does not exceed the
threshold amount. Paragraph (d) of this
section provides computational rules and
examples for individuals whose taxable
income exceeds the threshold amount.
Paragraph (e) of this section provides spe-
cial rules for purposes of section 199A and
§§ 1.199A-1 through 1.199A-6. This sec-
tion and §§ 1.199A-2 through 1.199A-6 do
not apply for purposes of calculating the
deduction in section 199A(g) for specified
agricultural and horticultural cooperatives.
(2) Usage of term individual. For pur-
poses of applying the rules of §§ 1.199A-1
through 1.199A-6, a reference to an indi-
vidual includes a reference to a trust (other
than a grantor trust) or an estate to the extent
that the section 199A deduction is deter-
mined by the trust or estate under the rules
of § 1.199A-6.
(b) Definitions. For purposes of section
199A and §§ 1.199A-1 through 1.199A-6,
the following definitions apply:
(1) Aggregated trade or business
means two or more trades or businesses
that have been aggregated pursuant to
§ 1.199A-4.
(2) Applicable percentage means, with
respect to any taxable year, 100 percent
reduced (not below zero) by the percent-
age equal to the ratio that the taxable
income of the individual for the taxable
year in excess of the threshold amount,
bears to $50,000 (or $100,000 in the case
of a joint return).
(3) Net capital gain means net capital
gain as defined in section 1222(11) plus
any qualified dividend income (as defined
in section 1(h)(11)(B)) for the taxable
year.
(4) Phase-in range means a range of
taxable income between the threshold
amount and the threshold amount plus
$50,000 (or $100,000 in the case of a joint
return).
(5) Qualified business income (QBI)
means the net amount of qualified items of
income, gain, deduction, and loss with
respect to any trade or business (or aggre-
gated trade or business) as determined un-
der the rules of § 1.199A-3(b).
(6) QBI component means the amount
determined under paragraph (d)(2) of this
section.
(7) Qualified PTP income is defined in
§ 1.199A-3(c)(3).
(8) Qualified REIT dividends are de-
fined in § 1.199A-3(c)(2).
(9) Reduction amount means, with re-
spect to any taxable year, the excess
amount multiplied by the ratio that the
taxable income of the individual for the
taxable year in excess of the threshold
amount, bears to $50,000 (or $100,000 in
the case of a joint return). For purposes of
this paragraph (b)(9), the excess amount is
the amount by which 20 percent of QBI
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exceeds the greater of 50 percent of W-2
wages or the sum of 25 percent of W-2
wages plus 2.5 percent of the UBIA of
qualified property.
(10) Relevant passthrough entity
(RPE) means a partnership (other than a
PTP) or an S corporation that is owned,
directly or indirectly, by at least one indi-
vidual, estate, or trust. Other passthrough
entities including common trust funds as
described in § 1.6032-T and religious or
apostolic organizations described in sec-
tion 501(d) are also treated as RPEs if the
entity files a Form 1065, U.S. Return of
Partnership Income, and is owned, di-
rectly or indirectly, by at least one indi-
vidual, estate, or trust. A trust or estate is
treated as an RPE to the extent it passes
through QBI, W-2 wages, UBIA of qual-
ified property, qualified REIT dividends,
or qualified PTP income.
(11) Specified service trade or business
(SSTB) means a specified service trade or
business as defined in § 1.199A-5(b).
(12) Threshold amount means, for any
taxable year beginning before 2019,
$157,500 (or $315,000 in the case of a
taxpayer filing a joint return). In the case
of any taxable year beginning after 2018,
the threshold amount is the dollar amount
in the preceding sentence increased by an
amount equal to such dollar amount, mul-
tiplied by the cost-of-living adjustment
determined under section 1(f)(3) of the
Code for the calendar year in which the
taxable year begins, determined by substi-
tuting "calendar year 2017" for "calendar
year 2016" in section 1(f)(3)(A)(ii). The
amount of any increase under the preced-
ing sentence is rounded as provided in
section 1(f)(7) of the Code.
(13) Total QBI amount means the net
total QBI from all trades or businesses
(including the individual's share of QBI
from trades or business conducted by
RPEs).
(14) Trade or business means a trade or
business that is a trade or business under
section 162 (a section 162 trade or busi-
ness) other than the trade or business of
performing services as an employee. In
addition, rental or licensing of tangible or
intangible property (rental activity) that
does not rise to the level of a section 162
trade or business is nevertheless treated as
a trade or business for purposes of section
199A, if the property is rented or licensed
to a trade or business conducted by the in-
dividual or an RPE which is commonly
controlled under § 1.199A-4(b)(1)(i) (re-
gardless of whether the rental activity and
the trade or business are otherwise eligible
to be aggregated under § 1.199A-4(b)(1)).
(15) Unadjusted basis immediately af-
ter acquisition of qualified property
(UBIA of qualified property) is defined in
§ 1.199A-2(c).
(16) W-2 wages means W-2 wages of
a trade or business (or aggregated trade or
business) properly allocable to QBI as de-
termined under § 1.199A-2(b).
(c) Computation of the section 199A
deduction for individuals with taxable in-
come not exceeding threshold amount-
(1) In general. The section 199A deduc-
tion is determined for individuals with
taxable income for the taxable year that
does not exceed the threshold amount by
adding 20 percent of the total QBI amount
(including the individual's share of QBI
from an RPE and QBI attributable to an
SSTB) and 20 percent of the combined
amount of qualified REIT dividends and
qualified PTP income (including the indi-
vidual's share of qualified REIT dividends
and qualified PTP income from RPEs and
qualified PTP income attributable to an
SSTB). That sum is then compared to 20
percent of the amount by which the indi-
vidual's taxable income exceeds net cap-
ital gain. The lesser of these two amounts
is the individual's section 199A deduc-
tion.
(2) Carryover rules-(i) Negative total
QBI amount. If the total QBI amount is
less than zero, the portion of the individ-
ual's section 199A deduction related to
QBI is zero for the taxable year. The neg-
ative total QBI amount is treated as neg-
ative QBI from a separate trade or busi-
ness in the succeeding taxable years of the
individual for purposes of section 199A
and this section. This carryover rule does
not affect the deductibility of the loss for
purposes of other provisions of the Code.
(ii) Negative combined qualified REIT
dividends/qualified PTP income. If the
combined amount of REIT dividends and
qualified PTP income is less than zero, the
portion of the individual's section 199A
deduction related to qualified REIT divi-
dends and qualified PTP income is zero
for the taxable year. The negative com-
bined amount must be carried forward and
used to offset the combined amount of
REIT dividends and qualified PTP income
in the succeeding taxable years of the in-
dividual for purposes of section 199A and
this section. This carryover rule does not
affect the deductibility of the loss for pur-
poses of other provisions of the Code.
(3) Examples. The following examples
illustrate the provisions of this paragraph
(c). For purposes of these examples, un-
less indicated otherwise, assume that all of
the trades or businesses are trades or busi-
nesses as defined in paragraph (b)(14) of
this section and all of the tax items are
effectively connected to a trade or busi-
ness within the United States within the
meaning of section 864(c). Total taxable
income does not include the section 199A
deduction.
(i) Example 1. A, an unmarried individual, owns
and operates a computer repair shop as a sole pro-
prietorship. The business generates $100,000 in net
taxable income from operations in 2018. A has no
capital gains or losses. After allowable deductions
not relating to the business, A's total taxable income
for 2018 is $81,000. The business's QBI is
$100,000, the net amount of its qualified items of
income, gain, deduction, and loss. A's section 199A
deduction for 2018 is equal to $16,200, the lesser of
20% of A's QBI from the business ($100,000 x 20%
= $20,000) and 20% of A's total taxable income for
the taxable year ($81,000 x 20% = $16,200).
(ii) Example 2. Assume the same facts as in
Example 1 of paragraph (c)(3)(i) of this section,
except that A also has $7,000 in net capital gain for
2018 and that, after allowable deductions not relating
to the business, A's taxable income for 2018 is
$74,000. A's taxable income minus net capital gain
is $67,000 ($74,000 - $7,000). A's section 199A
deduction is equal to $13,400, the lesser of 20% of
A's QBI from the business ($100,000 x 20% =
$20,000) and 20% of A's total taxable income minus
net capital gain for the taxable year ($67,000 x 20%
= $13,400).
(iii) Example 3. B and C are married and file a
joint individual income tax return. B earns $50,000
in wages as an employee of an unrelated company in
2018. C owns 100% of the shares of X, an S corpo-
ration that provides landscaping services. X gener-
ates $100,000 in net income from operations in
2018. X pays C $150,000 in wages in 2018. B and C
have no capital gains or losses. After allowable de-
ductions not related to X, B and C's total taxable
income for 2018 is $270,000. B's and C's wages are
not considered to be income from a trade or business
for purposes of the section 199A deduction. Because
X is an S corporation, its QBI is determined at the S
corporation level. X's QBI is $100,000, the net
amount of its qualified items of income, gain, deduc-
tion, and loss. The wages paid by X to C are con-
sidered to be a qualified item of deduction for pur-
poses of determining X's QBI. The section 199A
deduction with respect to X's QBI is then deter-
mined by C, X's sole shareholder, and is claimed on
the joint return filed by B and C. B and C's section
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199A deduction is equal to $20,000, the lesser of
20% of C's QBI from the business ($100,000 x 20%
= $20,000) and 20% of B and C's total taxable
income for the taxable year ($270,000 x 20% =
$54,000).
(iv) Example 4. Assume the same facts as in
Example 3 of paragraph (c)(3)(iii) of this section
except that B also earns $1,000 in qualified REIT
dividends and $500 in qualified PTP income in 2018,
increasing taxable income to $271,500. B and C's
section 199A deduction is equal to $20,300, the
lesser of:
(A) 20% of C's QBI from the business ($100,000
x 20% = $20,000) plus 20% of B's combined qual-
ified REIT dividends and qualified PTP income
($1500 x 20% = $300); and
(B) 20% of B and C's total taxable for the
taxable year ($271,500 x 20% = $54,300).
(d) Computation of the section 199A
deduction for individuals with taxable in-
come above threshold amount-(1) In
general. The section 199A deduction is
determined for individuals with taxable
income for the taxable year that exceeds
the threshold amount by adding the QBI
component described in paragraph (d)(2)
of this section and the qualified REIT div-
idends/qualified PTP income component
described in paragraph (d)(3) of this sec-
tion (including the individual's share of
qualified REIT dividends and qualified
PTP income from RPEs). That sum is then
compared to 20 percent of the amount by
which the individual's taxable income ex-
ceeds net capital gain. The lesser of these
two amounts is the individual's section
199A deduction.
(2) QBI component. An individual with
taxable income for the taxable year that
exceeds the threshold amount determines
the QBI component using the following
computational rules, which are to be ap-
plied in the order they appear.
(i) SSTB exclusion. If the individual's
taxable income is within the phase-in
range, then only the applicable percentage
of QBI, W-2 wages, and UBIA of quali-
fied property for each SSTB is taken into
account for all purposes of determining
the individual's section 199A deduction,
including the application of the netting
and carryover rules described in para-
graph (d)(2)(iii) of this section. If the in-
dividual's taxable income exceeds the
phase-in range, then none of the individ-
ual's share of QBI, W-2 wages, or UBIA
of qualified property attributable to an
SSTB may be taken into account for pur-
poses of determining the individual's sec-
tion 199A deduction.
(ii) Aggregated trade or business. If an
individual chooses to aggregate trades or
businesses under the rules of § 1.199A-4,
the individual must combine the QBI,
W-2 wages, and UBIA of qualified prop-
erty of each trade or business within an
aggregated trade or business prior to ap-
plying the netting and carryover rules de-
scribed in paragraph (d)(2)(iii) of this sec-
tion and the W-2 wage and UBIA of
qualified property limitations described in
paragraph (d)(2)(iv) of this section.
(iii) Netting and carryover-(A) Net-
ting. If an individual's QBI from at least
one trade or business (including an aggre-
gated trade or business) is less than zero,
the individual must offset the QBI attrib-
utable to each trade or business (or aggre-
gated trade or business) that produced net
positive QBI with the QBI from each
trade or business (or aggregated trade or
business) that produced net negative QBI
in proportion to the relative amounts of
net QBI in the trades or businesses (or
aggregated trades or businesses) with pos-
itive QBI. The adjusted QBI is then used
in paragraph (d)(2)(iv) of this section. The
W-2 wages and UBIA of qualified prop-
erty from the trades or businesses (includ-
ing aggregated trades or businesses) that
produced net negative QBI are not taken
into account for purposes of this para-
graph (d) and are not carried over to the
subsequent year.
(B) Carryover of negative total QBI
amount. If an individual's QBI from all
trades or businesses (including aggregated
trades or businesses) combined is less than
zero, the QBI component is zero for the
taxable year. This negative amount is
treated as negative QBI from a separate
trade or business in the succeeding taxable
years of the individual for purposes of sec-
tion 199A and this section. This carryover
rule does not affect the deductibility of the
loss for purposes of other provisions of the
Code. The W-2 wages and UBIA of qual-
ified property from the trades or businesses
(including aggregated trades or businesses)
that produced net negative QBI are not
taken into account for purposes of this para-
graph (d) and are not carried over to the
subsequent year.
(iv) QBI component calculation-(A)
General rule. Except as provided in para-
graph (d)(2)(iv)(B) of this section, the QBI
component is the sum of the amounts deter-
mined under this paragraph (d)(2)(iv)(A) for
each trade or business (or aggregated trade
or business). For each trade or business (or
aggregated trade or business) (including
trades or businesses operated through RPEs)
the individual must determine the lesser
of-
(1) 20 percent of the QBI for that trade
or business (or aggregated trade or busi-
ness); or
(2) The greater of-
(i) 50 percent of W-2 wages with re-
spect to that trade or business (or aggre-
gated trade or business); or
(ii) The sum of 25 percent of W-2
wages with respect to that trade or busi-
ness (or aggregated trade or business) plus
2.5 percent of the UBIA of qualified prop-
erty with respect to that trade or business
(or aggregated trade or business).
(B) Taxpayers with taxable income
within phase-in range. If the individual's
taxable income is within the phase-in
range and the amount determined under
paragraph (d)(2)(iv)(A)(2) of this section for
a trade or business (or aggregated trade or
business) is less than the amount determined
under paragraph (d)(2)(iv)(A)(1) of this sec-
tion for that trade or business (or aggregated
trade or business), the amount determined
under paragraph (d)(2)(iv)(A) of this section
for such trade or business (or aggregated
trade or business) is modified. Instead of the
amount determined under paragraph (d)(2)
(iv)(A)(2) of this section, the QBI compo-
nent for the trade or business (or aggregated
trade or business) is the amount determined
under paragraph (d)(2)(iv)(A)(1) of this sec-
tion reduced by the reduction amount as
defined in paragraph (b)(9) of this section.
This reduction amount does not apply if the
amount determined in paragraph (d)(2)(iv)
(A)(2) of this section is greater than the
amount determined under paragraph
(d)(2)(iv)(A)(1) of this section (in which
circumstance the QBI component for the
trade or business (or aggregated trade or
business) will be the unreduced amount de-
termined in paragraph (d)(2)(iv)(A)(1) of
this section).
(3) Qualified REIT dividends/qualified
PTP income component-(i) In general.
The qualified REIT dividend/qualified
PTP income component is 20 percent of
the combined amount of qualified REIT
dividends and qualified PTP income re-
ceived by the individual (including the
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individual's share of qualified REIT divi-
dends and qualified PTP income from
RPEs).
(ii) SSTB exclusion. If the individual's
taxable income is within the phase-in
range, then only the applicable percentage
of qualified PTP income generated by an
SSTB is taken into account for purposes
of determining the individual's section
199A deduction, including the determina-
tion of the combined amount of qualified
REIT dividends and qualified PTP income
described in paragraph (d)(1) of this sec-
tion. If the individual's taxable income
exceeds the phase-in range, then none of
the individual's share of qualified PTP
income generated by an SSTB may be
taken into account for purposes of deter-
mining the individual's section 199A de-
duction.
(iii) Negative combined qualified REIT
dividends/qualified PTP income. If the
combined amount of REIT dividends and
qualified PTP income is less than zero, the
portion of the individual's section 199A
deduction related to qualified REIT divi-
dends and qualified PTP income is zero
for the taxable year. The negative com-
bined amount must be carried forward and
used to offset the combined amount of
REIT dividends/qualified PTP income in
the succeeding taxable years of the indi-
vidual for purposes of section 199A and
this section. This carryover rule does not
affect the deductibility of the loss for pur-
poses of other provisions of the Code.
(4) Examples. The following examples
illustrate the provisions of this paragraph
(d). For purposes of these examples, un-
less indicated otherwise, assume that all of
the trades or businesses are trades or busi-
nesses as defined in paragraph (b)(14) of
this section, none of the trades or busi-
nesses are SSTBs as defined in paragraph
(b)(11) of this section and § 1.199A-5(b);
and all of the tax items associated with the
trades or businesses are effectively con-
nected to a trade or business within the
United States within the meaning of sec-
tion 864(c). Also assume that the taxpay-
ers report no capital gains or losses or
other tax items not specified in the exam-
ples. Total taxable income does not in-
clude the section 199A deduction.
(i) Example 1. D, an unmarried individual, oper-
ates a business as a sole proprietorship. The business
generates $1,000,000 of QBI in 2018. Solely for
purposes of this example, assume that the business
paid no wages and holds no qualified property for
use in the business. After allowable deductions un-
related to the business, D's total taxable income for
2018 is $980,000. Because D's taxable income ex-
ceeds the applicable threshold amount, D's section
199A deduction is subject to the W-2 wage and
UBIA of qualified property limitations. D's section
199A deduction is limited to zero because the busi-
ness paid no wages and held no qualified property.
(ii) Example 2. Assume the same facts as in
Example 1 of paragraph (d)(4)(i) of this section,
except that D holds qualified property with a UBIA
of $10,000,000 for use in the trade or business. D
reports $4,000,000 of QBI for 2020. After allowable
deductions unrelated to the business, D's total tax-
able income for 2020 is $3,980,000. Because D's
taxable income is above the threshold amount, the
QBI component of D's section 199A deduction is
subject to the W-2 wage and UBIA of qualified
property limitations. Because the business has no
W-2 wages, the QBI component of D's section
199A deduction is limited to the lesser of 20% of the
business's QBI or 2.5% of its UBIA of qualified
property. Twenty percent of the $4,000,000 of QBI
is $800,000. Two and one-half percent of the
$10,000,000 UBIA of qualified property is
$250,000. The QBI component of D's section 199A
deduction is thus limited to $250,000. D's section
199A deduction is equal to the lesser of:
(A) 20% of the QBI from the business as limited
($250,000); or
(B) 20% of D's taxable income ($3,980,000 x
20% = $796,000). Therefore, D's section 199A de-
duction for 2020 is $250,000.
(iii) Example 3. E, an unmarried individual, is a
30% owner of LLC, which is classified as a partner-
ship for Federal income tax purposes. In 2018, the
LLC has a single trade or business and reports QBI
of $3,000,000. The LLC pays total W-2 wages of
$1,000,000, and its total UBIA of qualified property
is $100,000. E is allocated 30% of all items of the
partnership. For the 2018 taxable year, E reports
$900,000 of QBI from the LLC. After allowable
deductions unrelated to LLC, E's taxable income is
$880,000. Because E's taxable income is above the
threshold amount, the QBI component of E's section
199A deduction will be limited to the lesser of 20%
of E's share of LLC's QBI or the greater of the W-2
wage or UBIA of qualified property limitations.
Twenty percent of E's share of QBI of $900,000 is
$180,000. The W-2 wage limitation equals 50% of
E's share of the LLC's wages ($300,000) or
$150,000. The UBIA of qualified property limitation
equals $75,750, the sum of 25% of E's share of
LLC's wages ($300,000) or $75,000 plus 2.5% of
E's share of UBIA of qualified property ($30,000) or
$750. The greater of the limitation amounts
($150,000 and $75,750) is $150,000. The QBI com-
ponent of E's section 199A deduction is thus limited
to $150,000, the lesser of 20% of QBI ($180,000)
and the greater of the limitations amounts
($150,000). E's section 199A deduction is equal to
the lesser of 20% of the QBI from the business as
limited ($150,000) or 20% of E's taxable income
($880,000 x 20% = $176,000). Therefore, E's sec-
tion 199A deduction is $150,000 for 2018.
(iv) Example 4. F, an unmarried individual, owns
a 50% interest in Z, an S corporation for Federal
income tax purposes that conducts a single trade or
business. In 2018, Z reports QBI of $6,000,000. Z
pays total W-2 wages of $2,000,000, and its total
UBIA of qualified property is $200,000. For the
2018 taxable year, F reports $3,000,000 of QBI from
Z. F is not an employee of Z and receives no wages
or reasonable compensation from Z. After allowable
deductions unrelated to Z and a deductible qualified
net loss from a PTP of ($10,000), F's taxable income
is $1,880,000. Because F's taxable income is above
the threshold amount, the QBI component of F's
section 199A deduction will be limited to the lesser
of 20% of F's share of Z's QBI or the greater of the
W-2 wage and UBIA of qualified property limita-
tions. Twenty percent of F's share of Z's QBI
($3,000,000) is $600,000. The W-2 wage limitation
equals 50% of F's share of Z's W-2 wages
($1,000,000) or $500,000. The UBIA of qualified
property limitation equals $252,500, the sum of 25%
of F's share of Z's W-2 wages ($1,000,000) or
$250,000 plus 2.5% of E's share of UBIA of quali-
fied property ($100,000) or $2,500. The greater of
the limitation amounts ($500,000 and $252,500) is
$500,000. The QBI component of F's section 199A
deduction is thus limited to $500,000, the lesser of
20% of QBI ($600,000) and the greater of the limi-
tations amounts ($500,000). F reports a qualified loss
from a PTP and has no qualified REIT dividend. F
does not net the ($10,000) loss from the PTP against
QBI. Instead, the portion of F's section 199A deduc-
tion related to qualified REIT dividends and quali-
fied PTP income is zero for 2018. F's section is
199A deduction is equal to the lesser of 20% of the
QBI from the business as limited ($500,000) or 20%
of F's taxable income over net capital gain
($1,880,000 x 20% = $376,000). Therefore, F's
section 199A deduction is $376,000 for 2018. F must
also carry forward the ($10,000) qualified loss from
a PTP to be netted against F's qualified REIT divi-
dends and qualified PTP income in the succeeding
taxable year.
(v) Example 5: Phase-in range. (A) B and C are
married and file a joint individual income tax return.
B is a shareholder in M, an entity taxed as an S
corporation for Federal income tax purposes that
conducts a single trade or business. M holds no
qualified property. B's share of the M's QBI is
$300,000 in 2018. B's share of the W-2 wages from
M in 2018 is $40,000. C earns wage income from
employment by an unrelated company. After allow-
able deductions unrelated to M, B and C's taxable
income for 2018 is $375,000. B and C are within the
phase-in range because their taxable income exceeds
the applicable threshold amount, $315,000, but does
not exceed the threshold amount plus $100,000, or
$415,000. Consequently, the QBI component of B
and C's section 199A deduction may be limited by
the W-2 wage and UBIA of qualified property lim-
itations but the limitations will be phased in.
(B) Because M does not hold qualified property,
only the W-2 wage limitation must be calculated. In
order to apply the W-2 wage limitation, B and C
must first determine 20% of B's share of M's QBI.
Twenty percent of B's share of M's QBI of $300,000
is $60,000. Next, B and C must determine 50% of
B's share of M's W-2 wages. Fifty percent of B's
share of M's W-2 wages of $40,000 is $20,000.
Because 50% of B's share of M's W-2 wages
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($20,000) is less than 20% of B's share of M's QBI
($60,000), B and C must determine the QBI compo-
nent of their section 199A deduction by reducing
20% of B's share of M's QBI by the reduction
amount.
(C) B and C are 60% through the phase-in range
(that is, their taxable income exceeds the threshold
amount by $60,000 and their phase-in range is
$100,000). B and C must determine the excess
amount, which is the excess of 20% of B's share of
M's QBI, or $60,000, over 50% of B's share of M's
W-2 wages, or $20,000. Thus, the excess amount is
$40,000. The reduction amount is equal to 60% of
the excess amount, or $24,000. Thus, the QBI com-
ponent of B and C's section 199A deduction is equal
to $36,000, 20% of B's $300,000 share M's QBI
(that is, $60,000), reduced by $24,000. B and C's
section 199A deduction is equal to the lesser of 20%
of the QBI from the business as limited ($36,000) or
20% of B and C's taxable income ($375,000 x 20%
= $75,000). Therefore, B and C's section 199A
deduction is $36,000 for 2018.
(vi) Example 6. (A) Assume the same facts as in
Example 5 of paragraph (d)(4)(v) of this section,
except that M is engaged in an SSTB. Because B and
C are within the phase-in range, B must reduce the
QBI and W-2 wages allocable to B from M to the
applicable percentage of those items. B and C's
applicable percentage is 100% reduced by the per-
centage equal to the ratio that their taxable income
for the taxable year ($375,000) exceeds their thresh-
old amount ($315,000), or $60,000, bears to
$100,000. Their applicable percentage is 40%. The
applicable percentage of B's QBI is ($300,000 x
40% =) $120,000, and the applicable percentage of
B's share of W-2 wages is ($40,000 x 40% =)
$16,000. These reduced numbers must then be used
to determine how B's section 199A deduction is
limited.
(B) B and C must apply the W-2 wage limitation
by first determining 20% of B's share of M's QBI as
limited by paragraph (d)(4)(vi)(A) of this section.
Twenty percent of B's share of M's QBI of $120,000
is $24,000. Next, B and C must determine 50% of
B's share of M's W-2 wages. Fifty percent of B's
share of M's W-2 wages of $16,000 is $8,000.
Because 50% of B's share of M's W-2 wages
($8,000) is less than 20% of B's share of M's QBI
($24,000), B and C's must determine the QBI com-
ponent of their section 199A deduction by reducing
20% of B's share of M's QBI by the reduction
amount.
(C) B and C are 60% through the phase-in range
(that is, their taxable income exceeds the threshold
amount by $60,000 and their phase-in range is
$100,000). B and C must determine the excess
amount, which is the excess of 20% of B's share of
M's QBI, as adjusted in paragraph (d)(4)(vi)(A)
of this section or $24,000, over 50% of B's share of
M's W-2 wages, as adjusted in paragraph
(d)(4)(vi)(A) of this section, or $8,000. Thus, the
excess amount is $16,000. The reduction amount is
equal to 60% of the excess amount or $9,600. Thus,
the QBI component of B and C's section 199A
deduction is equal to $14,400, 20% of B's share M's
QBI of $24,000, reduced by $9,600. B and C's
section 199A deduction is equal to the lesser of 20%
of the QBI from the business as limited ($14,400) or
20% of B's and C's taxable income ($375,000 x 20%
= $75,000). Therefore, B and C's section 199A
deduction is $14,400 for 2018.
(vii) Example 7. (A) F, an unmarried individual,
owns as a sole proprietor 100 percent of three trades
or businesses, Business X, Business Y, and Business
Z. None of the businesses hold qualified property. F
does not aggregate the trades or businesses under
§ 1.199A-4. For taxable year 2018, Business X
generates $1 million of QBI and pays $500,000 of
W-2 wages with respect to the business. Business Y
also generates $1 million of QBI but pays no wages.
Business Z generates $2,000 of QBI and pays
$500,000 of W-2 wages with respect to the business.
F also has $750,000 of wage income from employ-
ment with an unrelated company. After allowable
deductions unrelated to the businesses, F's taxable
income is $2,722,000.
(B) Because F's taxable income is above the
threshold amount, the QBI component of F's section
199A deduction is subject to the W-2 wage and
UBIA of qualified property limitations. These limi-
tations must be applied on a business-by-business
basis. None of the businesses hold qualified prop-
erty, therefore only the 50% of W-2 wage limitation
must be calculated. Because QBI from each business
is positive, F applies the limitation by determining
the lesser of 20% of QBI and 50% of W-2 wages for
each business. For Business X, the lesser of 20% of
QBI ($1,000,000 × 20 percent =$200,000) and 50%
of Business X's W-2 wages ($500,000 x 50% =
$250,000) is $200,000. Business Y pays no W-2
wages. The lesser of 20% of Business Y's QBI
($1,000,000 x 20% = $200,000) and 50% of its W-2
wages (zero) is zero. For Business Z, the lesser of
20% of QBI ($2,000 x 20% = $400) and 50% of
W-2 wages ($500,000 x 50% = $250,000) is $400.
(C) Next, F must then combine the amounts
determined in paragraph (d)(4)(vii)(B) of this section
and compare that sum to 20% of F's taxable income.
The lesser of these two amounts equals F's section
199A deduction. The total of the combined amounts
in paragraph (d)(4)(vii)(B) of this section is
$200,400 ($200,000 + zero + 400). Twenty percent
of F's taxable income is $544,400 ($2,722,000 x
20%). Thus, F's section 199A deduction for 2018 is
$200,400.
(viii) Example 8. (A) Assume the same facts as in
Example 7 of paragraph (d)(4)(vii) of this section,
except that F aggregates Business X, Business Y,
and Business Z under the rules of § 1.199A-4.
(B) Because F's taxable income is above the
threshold amount, the QBI component of F's section
199A deduction is subject to the W-2 wage and
UBIA of qualified property limitations. Because the
businesses are aggregated, these limitations are ap-
plied on an aggregated basis. None of the businesses
holds qualified property, therefore only the W-2
wage limitation must be calculated. F applies the
limitation by determining the lesser of 20% of the
QBI from the aggregated businesses, which is
$400,400 ($2,002,000 x 20%) and 50% of W-2
wages from the aggregated businesses, which is
$500,000 ($1,000,000 x 50%). F's section 199A
deduction is equal to the lesser of $400,400 and 20%
of F's taxable income ($2,722,000 x 20% =
$544,400). Thus, F's section 199A deduction for
2018 is $400,400.
(ix) Example 9. (A) Assume the same facts as in
Example 7 of paragraph (d)(4)(vii) of this section,
except that for taxable year 2018, Business Z gen-
erates a loss that results in ($600,000) of negative
QBI and pays $500,000 of W-2 wages. After allow-
able deductions unrelated to the businesses, F's tax-
able income is $2,120,000. Because Business Z had
negative QBI, F must offset the positive QBI from
Business X and Business Y with the negative QBI
from Business Z in proportion to the relative
amounts of positive QBI from Business X and Busi-
ness Y. Because Business X and Business Y pro-
duced the same amount of positive QBI, the negative
QBI from Business Z is apportioned equally among
Business X and Business Y. Therefore, the adjusted
QBI for each of Business X and Business Y is
$700,000 ($1 million plus 50% of the negative QBI
of $600,000). The adjusted QBI in Business Z is $0,
because its negative QBI has been fully apportioned
to Business X and Business Y.
(B) Because F's taxable income is above the
threshold amount, the QBI component of F's section
199A deduction is subject to the W-2 wage and
UBIA of qualified property limitations. These limi-
tations must be applied on a business-by-business
basis. None of the businesses hold qualified prop-
erty, therefore only the 50% of W-2 wage limitation
must be calculated. For Business X, the lesser of
20% of QBI ($700,000 × 20%= $140,000) and 50%
of W-2 wages ($500,000 x 50% = $250,000) is
$140,000. Business Y pays no W-2 wages. The
lesser of 20% of Business Y's QBI ($700,000 x 20%
= $140,000) and 50% of its W-2 wages (zero) is
zero.
(C) F must combine the amounts determined in
paragraph (d)(4)(ix)(B) of this section and compare
the sum to 20% of taxable income. F's section 199A
deduction equals the lesser of these two amounts.
The combined amount from paragraph (d)(4)(ix)(B)
of this section is $140,000 ($140,000 + zero) and
20% of F's taxable income is $424,000 ($2,120,000
x 20%). Thus, F's section 199A deduction for 2018
is $140,000. There is no carryover of any loss into
the following taxable year for purposes of section
199A.
(x) Example 10. (A) Assume the same facts as in
Example 9 of paragraph (d)(4)(ix) of this section,
except that F aggregates Business X, Business Y,
and Business Z under the rules of § 1.199A-4.
(B) Because F's taxable income is above the
threshold amount, the QBI component of F's section
199A deduction is subject to the W-2 wage and
UBIA of qualified property limitations. Because the
businesses are aggregated, these limitations are ap-
plied on an aggregated basis. None of the businesses
holds qualified property, therefore only the W-2
wage limitation must be calculated. F applies the
limitation by determining the lesser of 20% of the
QBI from the aggregated businesses ($1,400,000 x
20% = $280,000) and 50% of W-2 wages from the
aggregated businesses ($1,000,000 x 50% =
$500,000), or $280,000. F's section 199A deduction
is equal to the lesser of $280,000 and 20% of F's
taxable income ($2,120,000 x 20% = $424,000).
Thus, F's section 199A deduction for 2018 is
$280,000. There is no carryover of any loss into the
following taxable year for purposes of section 199A.
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(xi) Example 11. (A) Assume the same facts as in
Example 7 of paragraph (d)(4)(vii) of this section,
except that Business Z generates a loss that results in
($2,150,000) of negative QBI and pays $500,000 of
W-2 wages with respect to the business in 2018.
Thus, F has a negative combined QBI of ($150,000)
when the QBI from all of the businesses are added
together ($1 million plus $1 million minus the loss of
($2,150,000)). Because F has a negative combined
QBI for 2018, F has no section 199A deduction with
respect to any trade or business for 2018. Instead, the
negative combined QBI of ($150,000) carries for-
ward and will be treated as negative QBI from a
separate trade or business for purposes of computing
the section 199A deduction in the next taxable year.
None of the W-2 wages carry forward. However, for
income tax purposes, the $150,000 loss may offset
F's $750,000 of wage income (assuming the loss is
otherwise allowable under the Code).
(B) In taxable year 2019, Business X generates
$200,000 of net QBI and pays $100,000 of W-2
wages with respect to the business. Business Y gen-
erates $150,000 of net QBI but pays no wages.
Business Z generates a loss that results in ($120,000)
of negative QBI and pays $500 of W-2 wages with
respect to the business. F also has $750,000 of wage
income from employment with an unrelated com-
pany. After allowable deductions unrelated to the
businesses, F's taxable income is $960,000. Pursuant
to paragraph (d)(2)(iii)(B) of this section, the
($150,000) of negative QBI from 2018 is treated as
arising in 2019 from a separate trade or business.
Thus, F has overall net QBI of $80,000 when all
trades or businesses are taken together ($200,000)
plus $150,000 minus $120,000 minus the carryover
loss of $150,000). Because Business Z had negative
QBI and F also has a negative QBI carryover
amount, F must offset the positive QBI from Busi-
ness X and Business Y with the negative QBI from
Business Z and the carryover amount in proportion
to the relative amounts of positive QBI from Busi-
ness X and Business Y. Because Business X pro-
duced 57.14% of the total QBI from Business X and
Business Y, 57.14% of the negative QBI from Busi-
ness Z and the negative QBI carryforward must be
apportioned to Business X, and the remaining
42.86% allocated to Business Y. Therefore, the ad-
justed QBI in Business X is $45,722 ($200,000 mi-
nus 57.14% of the loss from Business Z ($68,568),
minus 57.14% of the carryover loss ($85,710). The
adjusted QBI in Business Y is $34,278 ($150,000,
minus 42.86% of the loss from Business Z ($51,432)
minus 42.86% of the carryover loss ($64,290)). The
adjusted QBI in Business Z is $0, because its nega-
tive QBI has been apportioned to Business X and
Business Y.
(C) Because F's taxable income is above the
threshold amount, the QBI component of F's section
199A deduction is subject to the W-2 wage and
UBIA of qualified property limitations. These limi-
tations must be applied on a business-by-business
basis. None of the businesses hold qualified prop-
erty, therefore only the 50% of W-2 wage limitation
must be calculated. For Business X, 20% of QBI is
$9,144 ($45,722 x 20%) and 50% of W-2 wages is
$50,000 ($100,000 x 50%), so the lesser amount is
$9,144. Business Y pays no W-2 wages. Twenty
percent of Business Y's QBI is $6,856 ($34,278 x
20%) and 50% of its W-2 wages (zero) is zero, so
the lesser amount is zero.
(D) F must then compare the combined amounts
determined in paragraph (d)(4)(xi)(C) of this section
to 20% of F's taxable income. The section 199A
deduction equals the lesser of these amounts. F's
combined amount from paragraph (d)(4)(xi)(C) of
this section is $9,144 ($9,144 plus zero) and 20% of
F's taxable income is $192,000 ($960,000 x 20%)
Thus, F's section 199A deduction for 2019 is $9,144.
There is no carryover of any negative QBI into the
following taxable year for purposes of section 199A.
(xii) Example 12. (A) Assume the same facts as
in Example 11 of paragraph (d)(4)(xi) of this section,
except that F aggregates Business X, Business Y,
and Business Z under the rules of § 1.199A-4. For
2018, F's QBI from the aggregated trade or business
is ($150,000). Because F has a combined negative
QBI for 2018, F has no section 199A deduction with
respect to any trade or business for 2018. Instead, the
negative combined QBI of ($150,000) carries for-
ward and will be treated as negative QBI from a
separate trade or business for purposes of computing
the section 199A deduction in the next taxable year.
However, for income tax purposes, the $150,000 loss
may offset taxpayer's $750,000 of wage income
(assuming the loss is otherwise allowable under the
Code).
(B) In taxable year 2019, F will have QBI of
$230,000 and W-2 wages of $100,500 from the
aggregated trade or business. F also has $750,000 of
wage income from employment with an unrelated
company. After allowable deductions unrelated to
the businesses, F's taxable income is $960,000. F
must treat the negative QBI carryover loss
($150,000) from 2018 as a loss from a separate trade
or business for purposes of section 199A. This loss
will offset the positive QBI from the aggregated
trade or business, resulting in an adjusted QBI of
$80,000 ($230,000 - $150,000).
(C) Because F's taxable income is above the
threshold amount, the QBI component of F's section
199A deduction is subject to the W-2 wage and
UBIA of qualified property limitations. These limi-
tations must be applied on a business-by-business
basis. None of the businesses hold qualified prop-
erty, therefore only the 50% of W-2 wage limitation
must be calculated. For the aggregated trade or busi-
ness, the lesser of 20% of QBI ($80,000 x 20% =
$16,000) and 50% of W-2 wages ($100,500 x 50%
= $50,250) is $16,000. F's section 199A deduction
equals the lesser of that amount ($16,000) and 20%
of F's taxable income ($960,000 x 20% =
$192,000). Thus, F's section 199A deduction for
2019 is $16,000. There is no carryover of any neg-
ative QBI into the following taxable year for pur-
poses of section 199A.
(e) Special rules-(1) Effect of deduc-
tion. In the case of a partnership or S
corporation, section 199A is applied at the
partner or shareholder level. The rules of
subchapter K and subchapter S of the
Code apply in their entirety for purposes
of determining each partner's or share-
holder's share of QBI, W-2 wages, UBIA
of qualified property, qualified REIT div-
idends, and qualified PTP income or loss.
The section 199A deduction has no effect
on the adjusted basis of a partner's interest
in the partnership, the adjusted basis of a
shareholder's stock in an S corporation, or
an S corporation's accumulated adjust-
ments account.
(2) Disregarded entities. An entity
with a single owner that is treated as dis-
regarded as an entity separate from its
owner under any provision of the Code is
disregarded for purposes of section 199A
and §§ 1.199A-1 through 1.199A-6.
(3) Self-employment tax and net invest-
ment income tax. The deduction allowed
under section 199A does not reduce net
earnings from self-employment under sec-
tion 1402 or net investment income under
section 1411.
(4) Commonwealth of Puerto Rico. If
all of an individual's QBI from sources
within the Commonwealth of Puerto Rico
is taxable under section 1 of the Code for
a taxable year, then for purposes of deter-
mining the QBI of such individual for
such taxable year, the term "United
States" includes the Commonwealth of
Puerto Rico.
(5) Coordination with alternative min-
imum tax. For purposes of determining
alternative minimum taxable income un-
der section 55, the deduction allowed un-
der section 199A(a) for a taxable year is
equal in amount to the deduction allowed
under section 199A(a) in determining tax-
able income for that taxable year (that is,
without regard to any adjustments under
sections 56 through 59).
(6) Imposition of accuracy-related
penalty on underpayments. For rules re-
lated to the imposition of the accuracy-
related penalty on underpayments for
taxpayers who claim the deduction al-
lowed under section 199A, see section
6662(d)(1)(C).
(7) Reduction for income received from
cooperatives. In the case of any trade or
business of a patron of a specified agri-
cultural or horticultural cooperative, as
defined in section 199A(g)(4), the amount
of section 199A deduction determined un-
der paragraph (c) or (d) of this section
with respect to such trade or business
must be reduced by the lesser of:
(i) Nine percent of the QBI with re-
spect to such trade or business as is prop-
erly allocable to qualified payments re-
ceived from such cooperative; or
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(ii) 50 percent of the W-2 wages with
respect to such trade or business as are so
allocable as determined under § 1.199A-2.
(f) Applicability date-(1) General
rule. Except as provided in paragraph
(f)(2) of this section, the provisions of this
section apply to taxable years ending after
February 8, 2019.
(2) Exception for non-calendar year
RPE. For purposes of determining QBI,
W-2 wages, UBIA of qualified property,
and the aggregate amount of qualified
REIT dividends and qualified PTP in-
come, if an individual receives any of
these items from an RPE with a taxable
year that begins before January 1, 2018,
and ends after December 31, 2017, such
items are treated as having been incurred
by the individual during the individual's
taxable year in which or with which such
RPE taxable year ends.
Par. 4. Section 1.199A-2 is added to
read as follows:
§ 1.199A-2 Determination of W-2
wages and unadjusted basis immediately
after acquisition of qualified property.
(a) Scope-(1) In general. This section
provides guidance on calculating a trade
or business's W-2 wages properly alloca-
ble to QBI (W-2 wages) and the trade or
business's unadjusted basis immediately
after acquisition of all qualified property
(UBIA of qualified property). The provi-
sions of this section apply solely for pur-
poses of section 199A of the Internal Rev-
enue Code (Code).
(2) W-2 wages. Paragraph (b) of this
section provides guidance on the determi-
nation of W-2 wages. The determination
of W-2 wages must be made for each
trade or business by the individual or RPE
that directly conducts the trade or business
(or aggregated trade or business). In the
case of W-2 wages paid by an RPE, the
RPE must determine and report W-2
wages for each trade or business (or ag-
gregated trade or business) conducted by
the RPE. W-2 wages are presumed to be
zero if not determined and reported for
each trade or business (or aggregated
trade or business).
(3) UBIA of qualified property-(i) In
general. Paragraph (c) of this section pro-
vides guidance on the determination of the
UBIA of qualified property. The determi-
nation of the UBIA of qualified property
must be made for each trade or business
(or aggregated trade or business) by the
individual or RPE that directly conducts
the trade or business (or aggregated trade
or business). The UBIA of qualified prop-
erty is presumed to be zero if not deter-
mined and reported for each trade or busi-
ness (or aggregated trade or business).
(ii) UBIA of qualified property held by
a partnership. In the case of qualified
property held by a partnership, each part-
ner's share of the UBIA of qualified prop-
erty is determined in accordance with how
the partnership would allocate deprecia-
tion under § 1.704-1(b)(2)(iv)(g) on the
last day of the taxable year.
(iii) UBIA of qualified property held by
an S corporation. In the case of qualified
property held by an S corporation, each
shareholder's share of the UBIA of qual-
ified property is the share of the unad-
justed basis proportionate to the ratio of
shares in the S corporation held by the
shareholder on the last day of the taxable
year over the total issued and outstanding
shares of the S corporation.
(iv) UBIA and section 743(b) basis ad-
justments-(A) In general. A partner will
be allowed to take into account UBIA
with respect to an item of qualified prop-
erty in addition to the amount of UBIA
with respect to such qualified property
determined under paragraphs (a)(3)(i) and
(c) of this section and allocated to such
partner under paragraph (a)(3)(ii) of this
section to the extent of the partner's ex-
cess section 743(b) basis adjustment with
respect to such item of qualified property.
(B) Excess section 743(b) basis adjust-
ments. A partner's excess section 743(b)
basis adjustment is an amount that is de-
termined with respect to each item of
qualified property and is equal to an
amount that would represent the partner's
section 743(b) basis adjustment with re-
spect to the same item of qualified prop-
erty, as determined under §§ 1.743-1(b)
and 1.755-1, but calculated as if the ad-
justed basis of all of the partnership's
property was equal to the UBIA of such
property. The absolute value of the excess
section 743(b) basis adjustment cannot
exceed the absolute value of the total sec-
tion 743(b) basis adjustment with respect
to qualified property.
(C) Computation of partner's share of
UBIA with excess section 743(b) basis
adjustments. The partnership first com-
putes its UBIA with respect to qualified
property under paragraphs (a)(3)(i) and
(c) of this section and allocates such
UBIA under paragraph (a)(3)(ii) of this
section. If the sum of the excess section
743(b) basis adjustment for all of the
items of qualified property is a negative
number, that amount will be subtracted
from the partner's UBIA of qualified
property determined under paragraphs
(a)(3)(i) and (c) of this section and allo-
cated under paragraph (a)(3)(ii) of this
section. A partner's UBIA of qualified
property may not be below $0. Excess
section 743(b) basis adjustments are com-
puted with respect to all section 743(b)
adjustments, including adjustments made
as a result of a substantial built-in loss
under section 743(d).
(D) Examples. The provisions of this
paragraph (a)(3)(iv) are illustrated by the
following examples:
(1) Example 1-(i) Facts. A, B, and C are equal
partners in partnership, PRS. PRS has a single trade
or business that generates QBI. PRS has no liabilities
and only one asset, a single item of qualified prop-
erty with a UBIA equal to $900,000. Each partner's
share of the UBIA is $300,000. A sells its one-third
interest in PRS to T for $350,000 when a section 754
election is in effect. At the time of the sale, the tax
basis of the qualified property held by PRS is
$750,000. The amount of gain that would be allo-
cated to T from a hypothetical transaction under
§ 1.743-1(d)(2) is $100,000. Thus, T's interest in
PRS's previously taxed capital is equal to $250,000
($350,000, the amount of cash T would receive if
PRS liquidated immediately after the hypothetical
transaction, decreased by $100,000, T's share of gain
from the hypothetical transaction). The amount of
T's section 743(b) basis adjustment to PRS's quali-
fied property is $100,000 (the excess of $350,000,
T's cost basis for its interest, over $250,000, T's
share of the adjusted basis to PRS of the partner-
ship's property).
(iii) Analysis. In order for T to determine its
UBIA, T must calculate its excess section 743(b)
basis adjustment. T's excess section 743(b) basis
adjustment is equal to an amount that would repre-
sent T's section 743(b) basis adjustment with respect
to the same item of qualified property, as determined
under §§ 1.743-1(b) and 1.755-1, but calculated as
if the adjusted basis of all of PRS's property was
equal to the UBIA of such property. T's section
743(b) basis adjustment calculated as if adjusted
basis of the qualified property were equal to its
UBIA is $50,000 (the excess of $350,000, T's cost
basis for its interest, over $300,000, T's share of the
adjusted basis to PRS of the partnership's property).
Thus, T's excess section 743(b) basis adjustment is
equal to $50,000. For purposes of applying the
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UBIA limitation to T's share of QBI from PRS's
trade or business, T's UBIA is equal to $350,000
($300,000, T's one-third share of the qualified prop-
erty's UBIA, plus $50,000, T's excess section 743(b)
basis adjustment).
(2) Example 2-(i) Facts. Assume the same facts
as in Example 1 of paragraph (a)(3)(iv)(D)(1) of this
section, except that A sells its one-third interest in
PRS to T for $200,000 when a section 754 election
is in effect. At the time of the sale, the tax basis of
the qualified property held by PRS is $750,000, and
the amount of loss that would be allocated to T from
a hypothetical transaction under § 1.743-1(d)(2) is
$50,000. Thus, T's interest in PRS's previously
taxed capital is equal to $250,000 ($200,000, the
amount of cash T would receive if PRS liquidated
immediately after the hypothetical transaction, in-
creased by $50,000, T's share of loss from the hy-
pothetical transaction). The amount of T's section
743(b) basis adjustment to PRS's qualified property
is negative $50,000 (the excess of $250,000, T's
share of the adjusted basis to PRS of the partner-
ship's property, over $200,000, T's cost basis for its
interest).
(ii) Analysis. In order for T to determine its
UBIA, T must calculate its excess section 743(b)
basis adjustment. T's excess section 743(b) basis
adjustment is equal to an amount that would repre-
sent T's section 743(b) basis adjustment with respect
to the same item of qualified property, as determined
under §§ 1.743-1(b) and 1.755-1, but calculated as
if the adjusted basis of all of PRS's property was
equal to the UBIA of such property T's section
743(b) basis adjustment calculated as if adjusted
basis of the qualified property were equal to its
UBIA is negative $100,000 (the excess of $300,000,
T's share of the adjusted basis to PRS of the part-
nership's property, over $200,000, T's cost basis for
its interest). T's excess section 743(b) basis adjust-
ment to the qualified property is limited to the
amount of T's section 743(b) basis adjustment of
negative $50,000. Thus, T's excess section 743(b)
basis adjustment is equal to negative $50,000. For
purposes of applying the UBIA limitation to T's
share of QBI from PRS's trade or business, T's
UBIA is equal to $250,000 ($300,000, T's one-third
share of the qualified property's UBIA, reduced by
T's negative $50,000 excess section 743(b) basis
adjustment).
(b) W-2 wages-(1) In general. Sec-
tion 199A(b)(2)(B) provides limitations
on the section 199A deduction based on
the W-2 wages paid with respect to each
trade or business (or aggregated trade or
business). Section 199A(b)(4)(B) pro-
vides that W-2 wages do not include any
amount which is not properly allocable to
QBI for purposes of section 199A(c)(1).
This section provides a three step process
for determining the W-2 wages paid with
respect to a trade or business that are
properly allocable to QBI. First, each in-
dividual or RPE must determine its total
W-2 wages paid for the taxable year un-
der the rules in paragraph (b)(2) of this
section. Second, each individual or RPE
must allocate its W-2 wages between or
among one or more trades or businesses
under the rules in paragraph (b)(3) of this
section. Third, each individual or RPE
must determine the amount of such wages
with respect to each trade or business,
which are allocable to the QBI of the trade
or business (or aggregated trade or busi-
ness) under the rules in paragraph (b)(4)
of this section.
(2) Definition of W-2 wages-(i) In
general. Section 199A(b)(4)(A) provides
that the term W-2 wages means with re-
spect to any person for any taxable year of
such person, the amounts described in sec-
tion 6051(a)(3) and (8) paid by such person
with respect to employment of employees
by such person during the calendar year
ending during such taxable year. Thus, the
term W-2 wages includes the total amount
of wages as defined in section 3401(a) plus
the total amount of elective deferrals (within
the meaning of section 402(g)(3)), the com-
pensation deferred under section 457, and
the amount of designated Roth contributions
(as defined in section 402A). For this pur-
pose, except as provided in paragraphs
(b)(2)(iv)(C)(2) and (b)(2)(iv)(D) of this
section, the Forms W-2, "Wage and Tax
Statement," or any subsequent form or doc-
ument used in determining the amount of
W-2 wages, are those issued for the calen-
dar year ending during the individual's or
RPE's taxable year for wages paid to em-
ployees (or former employees) of the indi-
vidual or RPE for employment by the indi-
vidual or RPE. For purposes of this section,
employees of the individual or RPE are lim-
ited to employees of the individual or RPE
as defined in section 3121(d)(1) and (2).
(For purposes of section 199A, this includes
officers of an S corporation and employees
of an individual or RPE under common
law.)
(ii) Wages paid by a person other than
a common law employer. In determining
W-2 wages, an individual or RPE may
take into account any W-2 wages paid by
another person and reported by the other
person on Forms W-2 with the other per-
son as the employer listed in Box c of the
Forms W-2, provided that the W-2 wages
were paid to common law employees or
officers of the individual or RPE for em-
ployment by the individual or RPE. In
such cases, the person paying the W-2
wages and reporting the W-2 wages on
Forms W-2 is precluded from taking into
account such wages for purposes of deter-
mining W-2 wages with respect to that
person. For purposes of this paragraph
(b)(2)(ii), persons that pay and report W-2
wages on behalf of or with respect to
others can include, but are not limited to,
certified professional employer organiza-
tions under section 7705, statutory em-
ployers under section 3401(d)(1), and
agents under section 3504.
(iii) Requirement that wages must be
reported on return filed with the Social Se-
curity Administration (SSA)-(A) In gen-
eral. Pursuant to section 199A(b)(4)(C), the
term W-2 wages does not include any
amount that is not properly included in a
return filed with SSA on or before the 60th
day after the due date (including extensions)
for such return. Under § 31.6051-2 of this
chapter, each Form W-2 and the transmittal
Form W-3, "Transmittal of Wage and Tax
Statements," together constitute an informa-
tion return to be filed with SSA. Similarly,
each Form W-2c, "Corrected Wage and
Tax Statement," and the transmittal Form
W-3 or W-3c, "Transmittal of Corrected
Wage and Tax Statements," together consti-
tute an information return to be filed with
SSA. In determining whether any amount
has been properly included in a return filed
with SSA on or before the 60th day after the
due date (including extensions) for such re-
turn, each Form W-2 together with its ac-
companying Form W-3 will be considered
a separate information return and each Form
W-2c together with its accompanying Form
W-3 or Form W-3c will be considered a
separate information return. Section 6071(c)
provides that Forms W-2 and W-3 must be
filed on or before January 31 of the year
following the calendar year to which such
returns relate (but see the special rule in
§ 31.6071(a)-1T(a)(3)(1) of this chapter for
monthly returns filed under § 31.6011(a)-
5(a) of this chapter). Corrected Forms W-2
are required to be filed with SSA on or
before January 31 of the year following the
year in which the correction is made.
(B) Corrected return filed to correct a
return that was filed within 60 days of the
due date. If a corrected information return
(Return B) is filed with SSA on or before
the 60th day after the due date (including
extensions) of Return B to correct an in-
formation return (Return A) that was filed
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with SSA on or before the 60th day after
the due date (including extensions) of the
information return (Return A) and para-
graph (b)(2)(iii)(C) of this section does
not apply, then the wage information on
Return B must be included in determining
W-2 wages. If a corrected information
return (Return D) is filed with SSA later
than the 60th day after the due date (in-
cluding extensions) of Return D to correct
an information return (Return C) that was
filed with SSA on or before the 60th day
after the due date (including extensions)
of the information return (Return C), and
if Return D reports an increase (or in-
creases) in wages included in determining
W-2 wages from the wage amounts re-
ported on Return C, then such increase (or
increases) on Return D will be disre-
garded in determining W-2 wages (and
only the wage amounts on Return C may
be included in determining W-2 wages).
If Return D reports a decrease (or de-
creases) in wages included in determining
W-2 wages from the amounts reported on
Return C, then, in determining W-2
wages, the wages reported on Return C
must be reduced by the decrease (or de-
creases) reflected on Return D.
(C) Corrected return filed to correct a
return that was filed later than 60 days
after the due date. If an information return
(Return F) is filed to correct an informa-
tion return (Return E) that was not filed
with SSA on or before the 60th day after
the due date (including extensions) of Re-
turn E, then Return F (and any subsequent
information returns filed with respect to
Return E) will not be considered filed on
or before the 60th day after the due date
(including extensions) of Return F (or the
subsequent corrected information return).
Thus, if a Form W-2c is filed to correct a
Form W-2 that was not filed with SSA on
or before the 60th day after the due date
(including extensions) of the Form W-2
(or to correct a Form W-2c relating to
Form W-2 that had not been filed with
SSA on or before the 60th day after the
due date (including extensions) of the
Form W-2), then this Form W-2c will not
be considered to have been filed with SSA
on or before the 60th day after the due
date (including extensions) for this Form
W-2c (or corrected Form W-2), regard-
less of when the Form W-2c is filed.
(iv) Methods for calculating W-2 wag-
es-(A) In general. The Secretary may
provide for methods to be used in calcu-
lating W-2 wages, including W-2 wages
for short taxable years by publication in
the Internal Revenue Bulletin (see
§ 601.601(d)(2)(ii)(b) of this chapter).
(B) Acquisition or disposition of a
trade or business-(1) In general. In the
case of an acquisition or disposition of a
trade or business, the major portion of a
trade or business, or the major portion of
a separate unit of a trade or business that
causes more than one individual or entity
to be an employer of the employees of the
acquired or disposed of trade or business
during the calendar year, the W-2 wages
of the individual or entity for the calendar
year of the acquisition or disposition are
allocated between each individual or en-
tity based on the period during which the
employees of the acquired or disposed of
trade or business were employed by the
individual or entity, regardless of which
permissible method is used for reporting
predecessor and successor wages on Form
W-2, "Wage and Tax Statement." For this
purpose, the period of employment is de-
termined consistently with the principles
for determining whether an individual is
an employee described in paragraph (b) of
this section.
(2) Acquisition or disposition. For pur-
poses of this paragraph (b)(2)(iv)(B), the
term acquisition or disposition includes
an incorporation, a formation, a liquida-
tion, a reorganization, or a purchase or
sale of assets.
(C) Application in the case of a person
with a short taxable year-(1) In general.
In the case of an individual or RPE with a
short taxable year, subject to the rules of
paragraph (b)(2) of this section, the W-2
wages of the individual or RPE for the
short taxable year include only those
wages paid during the short taxable year
to employees of the individuals or RPE,
only those elective deferrals (within the
meaning of section 402(g)(3)) made dur-
ing the short taxable year by employees of
the individual or RPE and only compen-
sation actually deferred under section 457
during the short taxable year with respect
to employees of the individual or RPE.
(2) Short taxable year that does not
include December 31. If an individual or
RPE has a short taxable year that does not
contain a calendar year ending during
such short taxable year, wages paid to
employees for employment by such indi-
vidual or RPE during the short taxable
year are treated as W-2 wages for such
short taxable year for purposes of para-
graph (b) of this section (if the wages
would otherwise meet the requirements to
be W-2 wages under this section but for
the requirement that a calendar year must
end during the short taxable year).
(D) Remuneration paid for services
performed in the Commonwealth of
Puerto Rico. In the case of an individual
or RPE that conducts a trade or business
in the Commonwealth of Puerto Rico, the
determination of W-2 wages of such in-
dividual or RPE will be made without
regard to any exclusion under section
3401(a)(8) for remuneration paid for ser-
vices performed in the Commonwealth of
Puerto Rico. The individual or RPE must
maintain sufficient documentation (for ex-
ample, Forms 499R-2/W-2PR) to sub-
stantiate the amount of remuneration paid
for services performed in the Common-
wealth of Puerto Rico that is used in de-
termining the W-2 wages of such individ-
ual or RPE with respect to any trade or
business conducted in the Commonwealth
of Puerto Rico.
(3) Allocation of wages to trades or
businesses. After calculating total W-2
wages for a taxable year, each individual
or RPE that directly conducts more than
one trade or business must allocate those
wages among its various trades or busi-
nesses. W-2 wages must be allocated to
the trade or business that generated those
wages. In the case of W-2 wages that are
allocable to more than one trade or busi-
ness, the portion of the W-2 wages allo-
cable to each trade or business is deter-
mined in the same manner as the expenses
associated with those wages are allocated
among the trades or businesses under
§ 1.199A-3(b)(5).
(4) Allocation of wages to QBI. Once
W-2 wages for each trade or business
have been determined, each individual or
RPE must identify the amount of W-2
wages properly allocable to QBI for each
trade or business (or aggregated trade or
business). W-2 wages are properly allo-
cable to QBI if the associated wage ex-
pense is taken into account in computing
QBI under § 1.199A-3. In the case of an
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RPE, the wage expense must be allocated
and reported to the partners or sharehold-
ers of the RPE as required by the Code,
including subchapters K and S of chapter
1 of subtitle A of the Code. The RPE must
also identify and report the associated
W-2 wages to its partners or shareholders.
(5) Non-duplication rule. Amounts that
are treated as W-2 wages for a taxable
year under any method cannot be treated
as W-2 wages of any other taxable year.
Also, an amount cannot be treated as W-2
wages by more than one trade or business
(or aggregated trade or business).
(c) UBIA of qualified property-(1)
Qualified property-(i) In general. The
term qualified property means, with re-
spect to any trade or business (or aggregated
trade or business) of an individual or RPE
for a taxable year, tangible property of a
character subject to the allowance for depre-
ciation under section 167(a)-
(A) Which is held by, and available for
use in, the trade or business (or aggregated
trade or business) at the close of the tax-
able year;
(B) Which is used at any point during
the taxable year in the trade or business's
(or aggregated trade or business's) pro-
duction of QBI; and
(C) The depreciable period for which
has not ended before the close of the in-
dividual's or RPE's taxable year.
(ii) Improvements to qualified prop-
erty. In the case of any addition to, or
improvement of, qualified property that
has already been placed in service by the
individual or RPE, such addition or im-
provement is treated as separate qualified
property first placed in service on the date
such addition or improvement is placed in
service for purposes of paragraph (c)(2) of
this section.
(iii) Adjustments under sections 734(b)
and 743(b). Excess section 743(b) basis
adjustments as defined in paragraph
(a)(3)(iv)(B) of this section are treated as
qualified property. Otherwise, basis ad-
justments under sections 734(b) and
743(b) are not treated as qualified prop-
erty.
(iv) Property acquired at end of year.
Property is not qualified property if the
property is acquired within 60 days of the
end of the taxable year and disposed of
within 120 days of acquisition without
having been used in a trade or business for
at least 45 days prior to disposition, unless
the taxpayer demonstrates that the princi-
pal purpose of the acquisition and dispo-
sition was a purpose other than increasing
the section 199A deduction.
(2) Depreciable period-(i) In general.
The term depreciable period means, with
respect to qualified property of a trade or
business, the period beginning on the date
the property was first placed in service by
the individual or RPE and ending on the
later of-
(A) The date that is 10 years after such
date; or
(B) The last day of the last full year in
the applicable recovery period that would
apply to the property under section 168(c),
regardless of any application of section
168(g).
(ii) Additional first-year depreciation
under section 168. The additional first-
year depreciation deduction allowable un-
der section 168 (for example, under sec-
tion 168(k) or (m)) does not affect the
applicable recovery period under this
paragraph for the qualified property.
(iii) Qualified property acquired in
transactions subject to section 1031 or
section 1033. Solely for purposes of para-
graph (c)(2)(i) of this section, the following
rules apply to qualified property acquired in
a like-kind exchange or in an involuntary
conversion (replacement property).
(A) Replacement property received in
a section 1031 or 1033 transaction. The
date on which replacement property that is
of like-kind to relinquished property or is
similar or related in service or use to in-
voluntarily converted property was first
placed in service by the individual or RPE
is determined as follows-
(1) For the portion of the individual's
or RPE's UBIA, as defined in paragraph
(c)(3) of this section, in such replacement
property that does not exceed the individ-
ual's or RPE's UBIA in the relinquished
property or involuntarily converted prop-
erty, the date such portion in the replace-
ment property was first placed in service
by the individual or RPE is the date on
which the relinquished property or invol-
untarily converted property was first
placed in service by the individual or
RPE; and
(2) For the portion of the individual's
or RPE's UBIA, as defined in paragraph
(c)(3) of this section, in such replacement
property that exceeds the individual's or
RPE's UBIA in the relinquished property
or involuntarily converted property, such
portion in the replacement property is
treated as separate qualified property that
the individual or RPE first placed in ser-
vice on the date on which the replacement
property was first placed in service by the
individual or RPE.
(B) Other property received in a sec-
tion 1031 or 1033 transaction. Other
property, as defined in paragraph (c)(3)(ii)
or (iii) of this section, that is qualified
property is treated as separate qualified
property that the individual or RPE first
placed in service on the date on which
such other property was first placed in
service by the individual or RPE.
(iv) Qualified property acquired in trans-
actions described in section 168(i)(7)(B). If an
individual or RPE acquires qualified property
in a transaction described in section
168(i)(7)(B) (pertaining to treatment of trans-
ferees in certain nonrecognition transactions),
the individual or RPE must determine the date
on which the qualified property was first
placed in service solely for purposes of para-
graph (c)(2)(i) of this section as follows-
(A) For the portion of the transferee's
UBIA in the qualified property that does
not exceed the transferor's UBIA in such
property, the date such portion was first
placed in service by the transferee is the
date on which the transferor first placed
the qualified property in service; and
(B) For the portion of the transferee's
UBIA in the qualified property that ex-
ceeds the transferor's UBIA in such prop-
erty, such portion is treated as separate
qualified property that the transferee first
placed in service on the date of the trans-
fer.
(v) Excess section 743(b) basis adjust-
ment. Solely for purposes of paragraph
(c)(2)(i) of this section, an excess section
743(b) basis adjustment with respect to an
item of partnership property that is quali-
fied property is treated as being placed in
service when the transfer of the partner-
ship interest occurs, and the recovery pe-
riod for such property is determined under
§ 1.743-1(j)(4)(i)(B) with respect to pos-
itive basis adjustments and § 1.743-
1(j)(4)(ii)(B) with respect to negative ba-
sis adjustments.
(3) Unadjusted basis immediately after
acquisition-(i) In general. Except as pro-
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vided in paragraphs (c)(3)(ii) through (v)
of this section, the term unadjusted basis
immediately after acquisition (UBIA)
means the basis on the placed in service
date of the property as determined under
section 1012 or other applicable sections
of chapter 1 of the Code, including the
provisions of subchapters O (relating to
gain or loss on dispositions of property), C
(relating to corporate distributions and ad-
justments), K (relating to partners and
partnerships), and P (relating to capital
gains and losses). UBIA is determined
without regard to any adjustments de-
scribed in section 1016(a)(2) or (3), to any
adjustments for tax credits claimed by the
individual or RPE (for example, under
section 50(c)), or to any adjustments for
any portion of the basis which the indi-
vidual or RPE has elected to treat as an
expense (for example, under sections 179,
179B, or 179C). However, UBIA does
reflect the reduction in basis for the per-
centage of the individual's or RPE's use
of property for the taxable year other than
in the trade or business.
(ii) Qualified property acquired in a
like-kind exchange-(A) In general.
Solely for purposes of this section, if
property that is qualified property (re-
placement property) is acquired in a like-
kind exchange that qualifies for deferral of
gain or loss under section 1031, then the
UBIA of such property is the same as the
UBIA of the qualified property exchanged
(relinquished property), decreased by ex-
cess boot or increased by the amount of
money paid or the fair market value of
property not of a like kind to the relin-
quished property (other property) trans-
ferred by the taxpayer to acquire the re-
placement property. If the taxpayer acquires
more than one piece of qualified property as
replacement property that is of a like kind to
the relinquished property in an exchange
described in section 1031, UBIA is appor-
tioned between or among the qualified re-
placement properties in proportion to their
relative fair market values. Other property
received by the taxpayer in a section 1031
transaction that is qualified property has a
UBIA equal to the fair market value of such
other property.
(B) Excess boot. For purposes of para-
graph (c)(3)(ii)(A) of this section, excess
boot is the amount of any money or the
fair market value of other property re-
ceived by the taxpayer in the exchange
over the amount of appreciation in the
relinquished property. Appreciation for
this purpose is the excess of the fair mar-
ket value of the relinquished property on
the date of the exchange over the fair
market value of the relinquished property
on the date of the acquisition by the tax-
payer.
(iii) Qualified property acquired pur-
suant to an involuntary conversion-(A)
In general. Solely for purposes of this
section, if qualified property is compulso-
rily or involuntarily converted (converted
property) within the meaning of section
1033 and qualified replacement property
is acquired in a transaction that qualifies
for deferral of gain under section 1033,
then the UBIA of the replacement prop-
erty is the same as the UBIA of the con-
verted property, decreased by excess boot
or increased by the amount of money paid
or the fair market value of property not
similar or related in service or use to the
converted property (other property) trans-
ferred by the taxpayer to acquire the re-
placement property. If the taxpayer ac-
quires more than one piece of qualified
replacement property that meets the sim-
ilar or related in service or use require-
ments in section 1033, UBIA is appor-
tioned between the qualified replacement
properties in proportion to their relative
fair market values. Other property ac-
quired by the taxpayer with the proceeds
of an involuntary conversion that is qual-
ified property has a UBIA equal to the fair
market value of such other property.
(B) Excess boot. For purposes of para-
graph (c)(3)(iii)(A) of this section, excess
boot is the amount of any money or the
fair market value of other property re-
ceived by the taxpayer in the conversion
over the amount of appreciation in the
converted property. Appreciation for this
purpose is the excess of the fair market
value of the converted property on the
date of the conversion over the fair market
value of the converted property on the
date of the acquisition by the taxpayer.
(iv) Qualified property acquired in trans-
actions described in section 168(i)(7)(B).
Solely for purposes of this section, if qualified
property is acquired in a transaction described
in section 168(i)(7)(B) (pertaining to treatment
of transferees in certain nonrecognition trans-
actions), the transferee's UBIA in the qualified
property shall be the same as the transferor's
UBIA in the property, decreased by the
amount of money received by the transferor in
the transaction or increased by the amount of
money paid by the transferee to acquire the
property in the transaction.
(v) Qualified property acquired from a
decedent. In the case of qualified property
acquired from a decedent and immedi-
ately placed in service, the UBIA of the
property will generally be the fair market
value at the date of the decedent's death
under section 1014. See section 1014 and
the regulations thereunder. Solely for pur-
poses of paragraph (c)(2)(i) of this sec-
tion, a new depreciable period for the
property commences as of the date of the
decedent's death.
(vi) Property acquired in a nonrecog-
nition transaction with principal purpose
of increasing UBIA. If qualified property
is acquired in a transaction described in
section 1031, 1033, or 168(i)(7) with the
principal purpose of increasing the UBIA
of the qualified property, the UBIA of the
acquired qualified property is its basis as
determined under relevant Code sections
and not under the rules described in para-
graphs (c)(3)(i) through (iv) of this sec-
tion. For example, in a section 1031 trans-
action undertaken with the principal
purpose of increasing the UBIA of the
replacement property, the UBIA of the
replacement property is its basis as deter-
mined under section 1031(d).
(4) Examples. The provisions of this
paragraph (c) are illustrated by the follow-
ing examples:
(i) Example 1. (A) On January 5, 2012, A pur-
chases Real Property X for $1 million and places it
in service in A's trade or business. A's trade or
business is not an SSTB. A's basis in Real Property
X under section 1012 is $1 million. Real Property X
is qualified property within the meaning of section
199A(b)(6). As of December 31, 2018, A's basis in
Real Property X, as adjusted under section
1016(a)(2) for depreciation deductions under section
168(a), is $821,550.
(B) For purposes of section 199A(b)(2)(B)(ii)
and this section, A's UBIA of Real Property X is its
$1 million cost basis under section 1012, regardless
of any later depreciation deductions under section
168(a) and resulting basis adjustments under section
1016(a)(2).
(ii) Example 2. (A) The facts are the same as in
Example 1 of paragraph (c)(4)(i) of this section,
except that on January 15, 2019, A enters into a
like-kind exchange under section 1031 in which A
exchanges Real Property X for Real Property Y.
Real Property Y has a value of $1 million. No cash
or other property is involved in the exchange. As of
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January 15, 2019, A's basis in Real Property X, as
adjusted under section 1016(a)(2) for depreciation
deductions under section 168(a), is $820,482.
(B) A's UBIA in Real Property Y is $1 million as
determined under paragraph (c)(3)(ii) of this section.
Pursuant to paragraph (c)(2)(iii)(A) of this section,
Real Property Y is first placed in service by A on
January 5, 2012, which is the date on which Real
Property X was first placed in service by A.
(iii) Example 3. (A) The facts are the same as in
Example 1 of paragraph (c)(4)(i) of this section,
except that on January 15, 2019, A enters into a
like-kind exchange under section 1031, in which A
exchanges Real Property X for Real Property Y.
Real Property X has appreciated in value to $1.3
million, and Real Property Y also has a value of $1.3
million. No cash or other property is involved in the
exchange. As of January 15, 2019, A's basis in Real
Property X, as adjusted under section 1016(a)(2), is
$820,482.
(B) A's UBIA in Real Property Y is $1 million as
determined under paragraph (c)(3)(ii) of this section.
Pursuant to paragraph (c)(2)(iii)(A) of this section,
Real Property Y is first placed in service by A on
January 5, 2012, which is the date on which Real
Property X was first placed in service by A.
(iv) Example 4. (A) The facts are the same as in
Example 1 of paragraph (c)(4)(i) of this section,
except that on January 15, 2019, A enters into a
like-kind exchange under section 1031, in which A
exchanges Real Property X for Real Property Y.
Real Property X has appreciated in value to $1.3
million, but Real Property Y has a value of $1.5
million. A therefore adds $200,000 in cash to the
exchange of Real Property X for Real Property Y.
On January 15, 2019, A places Real Property Y in
service. As of January 15, 2019, A's basis in Real
Property X, as adjusted under section 1016(a)(2), is
$820,482.
(B) A's UBIA in Real Property Y is $1.2 million
as determined under paragraph (c)(3)(ii) of this sec-
tion ($1 million in UBIA from Real Property X plus
$200,000 cash paid by A to acquire Real Property
Y). Because the UBIA of Real Property Y exceeds
the UBIA of Real Property X, Real Property Y is
treated as being two separate qualified properties for
purposes of applying paragraph (c)(2)(iii)(A) of this
section. One property has a UBIA of $1 million (the
portion of A's UBIA of $1.2 million in Real Property
Y that does not exceed A's UBIA of $1 million in
Real Property X) and it is first placed in service by A
on January 5, 2012, which is the date on which Real
Property X was first placed in service by A. The
other property has a UBIA of $200,000 (the portion
of A's UBIA of $1.2 million in Real Property Y that
exceeds A's UBIA of $1 million in Real Property X)
and it is first placed in service by A on January 15,
2019, which is the date on which Real Property Y
was first placed in service by A.
(v) Example 5. (A) The facts are the same as in
Example 1 of paragraph (c)(4)(i) of this section,
except that on January 15, 2019, A enters into a
like-kind exchange under section 1031, in which A
exchanges Real Property X for Real Property Y.
Real Property X has appreciated in value to $1.3
million. Real Property Y has a fair market value of
$1 million. As of January 15, 2019, A's basis in Real
Property X, as adjusted under section 1016(a)(2), is
$820,482. Pursuant to the exchange, A receives Real
Property Y and $300,000 in cash.
(B) A's UBIA in Real Property Y is $1 million as
determined under paragraph (c)(3)(ii) of this section
($1 million in UBIA from Real Property X, less $0
excess boot ($300,000 cash received in the exchange
over $300,000 in appreciation in Property X, which
is equal to the excess of the $1.3 million fair market
value of Property X on the date of the exchange over
$1 million fair market value of Property X on the
date of acquisition by the taxpayer)). Pursuant to
paragraph (c)(2)(iii)(A) of this section, Real Property
Y is first placed in service by A on January 5, 2012,
which is the date on which Real Property X was first
placed in service by A.
(vi) Example 6. (A) The facts are the same as in
Example 1 of paragraph (c)(4)(i) of this section,
except that on January 15, 2019, A enters into a
like-kind exchange under section 1031, in which A
exchanges Real Property X for Real Property Y.
Real Property X has appreciated in value to $1.3
million. Real Property Y has a fair market value of
$900,000. Pursuant to the exchange, A receives Real
Property Y and $400,000 in cash. As of January 15,
2019, A's basis in Real Property X, as adjusted
under section 1016(a)(2), is $820,482.
(B) A's UBIA in Real Property Y is $900,000 as
determined under paragraph (c)(3)(ii) of this section
($1 million in UBIA from Real Property X less
$100,000 excess boot ($400,000 in cash received in
the exchange over $300,000 in appreciation in Prop-
erty X, which is equal to the excess of the $1.3
million fair market value of Property X on the date
of the exchange over the $1 million fair market value
of Property X on the date of acquisition by the
taxpayer)). Pursuant to paragraph (c)(2)(iii)(A) of
this section, Real Property Y is first placed in service
by A on January 5, 2012, which is the date on which
Real Property X was first placed in service by A.
(vii) Example 7. (A) The facts are the same as in
Example 1 of paragraph (c)(4)(i) of this section,
except that on January 15, 2019, A enters into a
like-kind exchange under section 1031, in which A
exchanges Real Property X for Real Property Y.
Real Property X has declined in value to $900,000,
and Real Property Y also has a value of $900,000.
No cash or other property is involved in the ex-
change. As of January 15, 2019, A's basis in Real
Property X, as adjusted under section 1016(a)(2), is
$820,482.
(B) Even though Real Property Y is worth only
$900,000, A's UBIA in Real Property Y is $1 mil-
lion as determined under paragraph (c)(3)(ii) of this
section because no cash or other property was in-
volved in the exchange. Pursuant to paragraph
(c)(2)(iii)(A) of this section, Real Property Y is first
placed in service by A on January 5, 2012, which is
the date on which Real Property X was first placed in
service by A.
(viii) Example 8. (A) C operates a trade or busi-
ness that is not an SSTB as a sole proprietorship. On
January 5, 2011, C purchases Machinery Y for
$10,000 and places it in service in C's trade or
business. C's basis in Machinery Y under section
1012 is $10,000. Machinery Y is qualified property
within the meaning of section 199A(b)(6). Assume
that Machinery Y's recovery period under section
168(c) is 10 years, and C depreciates Machinery Y
under the general depreciation system by using the
straight-line depreciation method, a 10-year recovery
period, and the half-year convention. As of Decem-
ber 31, 2018, C's basis in Machinery Y, as adjusted
under section 1016(a)(2) for depreciation deductions
under section 168(a), is $2,500. On January 1, 2019,
C incorporates the sole proprietorship and elects to
treat the newly formed entity as an S corporation for
Federal income tax purposes. C contributes Machin-
ery Y and all other assets of the trade or business to
the S corporation in a non-recognition transaction
under section 351. The S corporation immediately
places all the assets in service.
(B) For purposes of section 199A(b)(2)(B)(ii)
and this section, C's UBIA of Machinery Y from
2011 through 2018 is its $10,000 cost basis under
section 1012, regardless of any later depreciation
deductions under section 168(a) and resulting basis
adjustments under section 1016(a)(2). The S corpo-
ration's basis of Machinery Y is $2,500, the basis of
the property under section 362 at the time the S
corporation places the property in service. Pursuant
to paragraph (c)(3)(iv) of this section, S corpora-
tion's UBIA of Machinery Y is $10,000, which is
C's UBIA of Machinery Y. Pursuant to paragraph
(c)(2)(iv)(A) of this section, for purposes of deter-
mining the depreciable period of Machinery Y, the S
corporation's placed in service date of Machinery Y
will be January 5, 2011, which is the date C origi-
nally placed the property in service in 2011. There-
fore, Machinery Y may be qualified property of the
S corporation (assuming it continues to be used in
the business) for 2019 and 2020 and will not be
qualified property of the S corporation after 2020,
because its depreciable period will have expired.
(ix) Example 9. (A) LLC, a partnership, operates
a trade or business that is not an SSTB. On January
5, 2011, LLC purchases Machinery Z for $30,000
and places it in service in LLC's trade or business.
LLC's basis in Machinery Z under section 1012 is
$30,000. Machinery Z is qualified property within
the meaning of section 199A(b)(6). Assume that
Machinery Z's recovery period under section 168(c)
is 10 years, and LLC depreciates Machinery Z under
the general depreciation system by using the
straight-line depreciation method, a 10-year recovery
period, and the half-year convention. As of Decem-
ber 31, 2018, LLC's basis in Machinery Z, as ad-
justed under section 1016(a)(2) for depreciation de-
ductions under section 168(a), is $7,500. On January
1, 2019, LLC distributes Machinery Z to Partner A
in full liquidation of Partner A's interest in LLC.
Partner A's outside basis in LLC is $35,000.
(B) For purposes of section 199A(b)(2)(B)(ii)
and this section, LLC's UBIA of Machinery Z from
2011 through 2018 is its $30,000 cost basis under
section 1012, regardless of any later depreciation
deductions under section 168(a) and resulting basis
adjustments under section 1016(a)(2). Prior to the
distribution to Partner A, LLC's basis of Machinery
Z is $7,500. Under section 732(b), Partner A's basis
in Machinery Z is $35,000. Pursuant to paragraph
(c)(3)(iv) of this section, upon distribution of Ma-
chinery Z, Partner A's UBIA of Machinery Z is
$30,000, which was LLC's UBIA of Machinery Z.
(d) Applicability date-(1) General
rule. Except as provided in paragraph
(d)(2) of this section, the provisions of this
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section apply to taxable years ending after
February 8, 2019.
(2) Exceptions-(i) Anti-abuse rules.
The provisions of paragraph (c)(1)(iv) of
this section apply to taxable years ending
after December 22, 2017.
(ii) Non-calendar year RPE. For pur-
poses of determining QBI, W-2 wages,
UBIA of qualified property, and the ag-
gregate amount of qualified REIT divi-
dends and qualified PTP income if an in-
dividual receives any of these items from
an RPE with a taxable year that begins
before January 1, 2018, and ends after
December 31, 2017, such items are treated
as having been incurred by the individual
during the individual's taxable year in
which or with which such RPE taxable
year ends.
Par. 5. Section 1.199A-3 is added to
read as follows:
§ 1.199A-3 Qualified business income,
qualified REIT dividends, and qualified
PTP income.
(a) In general. This section provides
rules on the determination of a trade or
business's qualified business income
(QBI), as well as the determination of
qualified real estate investment trust
(REIT) dividends and qualified publicly
traded partnership (PTP) income. The pro-
visions of this section apply solely for
purposes of section 199A of the Internal
Revenue Code (Code). Paragraph (b) of
this section provides rules for the deter-
mination of QBI. Paragraph (c) of this
section provides rules for the determina-
tion of qualified REIT dividends and qual-
ified PTP income. QBI must be determined
and reported for each trade or business by
the individual or relevant passthrough entity
(RPE) that directly conducts the trade or
business before applying the aggregation
rules of § 1.199A-4.
(b) Definition of qualified business in-
come-(1) In general. For purposes of
this section, the term qualified business
income or QBI means, for any taxable
year, the net amount of qualified items of
income, gain, deduction, and loss with
respect to any trade or business of the
taxpayer as described in paragraph (b)(2)
of this section, provided the other require-
ments of this section and section 199A are
satisfied (including, for example, the ex-
clusion of income not effectively con-
nected with a United States trade or busi-
ness).
(i) Section 751 gain. With respect to a
partnership, if section 751(a) or (b) ap-
plies, then gain or loss attributable to as-
sets of the partnership giving rise to ordi-
nary income under section 751(a) or (b) is
considered attributable to the trades or
businesses conducted by the partnership,
and is taken into account for purposes of
computing QBI.
(ii) Guaranteed payments for the use of
capital. Income attributable to a guaran-
teed payment for the use of capital is not
considered to be attributable to a trade or
business, and thus is not taken into ac-
count for purposes of computing QBI ex-
cept to the extent properly allocable to a
trade or business of the recipient. The
partnership's deduction associated with
the guaranteed payment will be taken into
account for purposes of computing QBI if
such deduction is properly allocable to the
trade or business and is otherwise deduct-
ible for Federal income tax purposes.
(iii) Section 481 adjustments. Section
481 adjustments (whether positive or neg-
ative) are taken into account for purposes
of computing QBI to the extent that the
requirements of this section and section
199A are otherwise satisfied, but only if
the adjustment arises in taxable years end-
ing after December 31, 2017.
(iv) Previously disallowed losses. Gen-
erally, previously disallowed losses or de-
ductions (including under sections 465,
469, 704(d), and 1366(d)) allowed in the
taxable year are taken into account for
purposes of computing QBI. These losses
shall be used, for purposes of section 199A
and these regulations, in order from the old-
est to the most recent on a first-in, first-out
(FIFO) basis. However, losses or deductions
that were disallowed, suspended, limited, or
carried over from taxable years ending be-
fore January 1, 2018 (including under sec-
tions 465, 469, 704(d), and 1366(d)), are not
taken into account in a later taxable year for
purposes of computing QBI.
(v) Net operating losses. Generally, a
net operating loss deduction under section
172 is not considered with respect to a
trade or business and therefore, is not
taken into account in computing QBI.
However, an excess business loss under
section 461(l) is treated as a net operating
loss carryover to the following taxable
year and is taken into account for pur-
poses of computing QBI in the subsequent
taxable year in which it is deducted.
(vi) Other deductions. Generally, de-
ductions attributable to a trade or business
are taken into account for purposes of
computing QBI to the extent that the re-
quirements of section 199A and this sec-
tion are otherwise satisfied. For purposes
of section 199A only, deductions such as
the deductible portion of the tax on self-
employment income under section 164(f),
the self-employed health insurance deduc-
tion under section 162(l), and the deduction
for contributions to qualified retirement
plans under section 404 are considered at-
tributable to a trade or business to the extent
that the individual's gross income from the
trade or business is taken into account in
calculating the allowable deduction, on a
proportionate basis to the gross income re-
ceived from the trade or business.
(2) Qualified items of income, gain,
deduction, and loss-(i) In general. The
term qualified items of income, gain, de-
duction, and loss means items of gross
income, gain, deduction, and loss to the
extent such items are-
(A) Effectively connected with the
conduct of a trade or business within the
United States (within the meaning of sec-
tion 864(c), determined by substituting
"trade or business (within the meaning of
section 199A)" for "nonresident alien in-
dividual or a foreign corporation" or for
"a foreign corporation" each place it ap-
pears); and
(B) Included or allowed in determining
taxable income for the taxable year.
(ii) Items not taken into account. Not-
withstanding paragraph (b)(2)(i) of this
section and in accordance with section
199A(c)(3)(B) and (c)(4), the following
items are not taken into account as quali-
fied items of income, gain, deduction, or
loss and thus are not included in determin-
ing QBI:
(A) Any item of short-term capital
gain, short-term capital loss, long-term
capital gain, or long-term capital loss, in-
cluding any item treated as one of such
items under any other provision of the
Code. This provision does not apply to the
extent an item is treated as anything other
than short-term capital gain, short-term
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capital loss, long-term capital gain, or
long-term capital loss.
(B) Any dividend, income equivalent
to a dividend, or payment in lieu of divi-
dends described in section 954(c)(1)(G).
Any amount described in section 1385(a)(1)
is not treated as described in this clause.
(C) Any interest income other than in-
terest income which is properly allocable
to a trade or business. For purposes of
section 199A and this section, interest in-
come attributable to an investment of
working capital, reserves, or similar ac-
counts is not properly allocable to a trade
or business.
(D) Any item of gain or loss described
in section 954(c)(1)(C) (transactions in
commodities) or section 954(c)(1)(D) (ex-
cess foreign currency gains) applied in each
case by substituting "trade or business
(within the meaning of section 199A)" for
"controlled foreign corporation."
(E) Any item of income, gain, deduc-
tion, or loss described in section 954(c)
(1)(F) (income from notional principal con-
tracts) determined without regard to section
954(c)(1)(F)(ii) and other than items attrib-
utable to notional principal contracts entered
into in transactions qualifying under section
1221(a)(7).
(F) Any amount received from an an-
nuity which is not received in connection
with the trade or business.
(G) Any qualified REIT dividends as
defined in paragraph (c)(2) of this section
or qualified PTP income as defined in
paragraph (c)(3) of this section.
(H) Reasonable compensation received
by a shareholder from an S corporation.
However, the S corporation's deduction
for such reasonable compensation will re-
duce QBI if such deduction is properly
allocable to the trade or business and is
otherwise deductible for Federal income
tax purposes.
(I) Any guaranteed payment described
in section 707(c) received by a partner for
services rendered with respect to the trade
or business, regardless of whether the
partner is an individual or an RPE. How-
ever, the partnership's deduction for such
guaranteed payment will reduce QBI if
such deduction is properly allocable to the
trade or business and is otherwise deduct-
ible for Federal income tax purposes.
(J) Any payment described in section
707(a) received by a partner for services
rendered with respect to the trade or busi-
ness, regardless of whether the partner is
an individual or an RPE. However, the
partnership's deduction for such payment
will reduce QBI if such deduction is prop-
erly allocable to the trade or business and
is otherwise deductible for Federal in-
come tax purposes.
(3) Commonwealth of Puerto Rico. For
the purposes of determining QBI, the term
United States includes the Common-
wealth of Puerto Rico in the case of any
taxpayer with QBI for any taxable year
from sources within the Commonwealth
of Puerto Rico, if all of such receipts are
taxable under section 1 for such taxable
year. This paragraph (b)(3) only applies as
provided in section 199A(f)(1)(C).
(4) Wages. Expenses for all wages paid
(or incurred in the case of an accrual
method taxpayer) must be taken into ac-
count in computing QBI (if the require-
ments of this section and section 199A are
satisfied) regardless of the application of
the W-2 wage limitation described in
§ 1.199A-1(d)(2)(iv).
(5) Allocation of items among directly-
conducted trades or businesses. If an in-
dividual or an RPE directly conducts mul-
tiple trades or businesses, and has items of
QBI that are properly attributable to more
than one trade or business, the individual
or RPE must allocate those items among
the several trades or businesses to which
they are attributable using a reasonable
method based on all the facts and circum-
stances. The individual or RPE may use a
different reasonable method with respect
to different items of income, gain, deduc-
tion, and loss. The chosen reasonable
method for each item must be consistently
applied from one taxable year to another
and must clearly reflect the income and
expenses of each trade or business. The
overall combination of methods must also
be reasonable based on all facts and cir-
cumstances. The books and records main-
tained for a trade or business must be
consistent with any allocations under this
paragraph (b)(5).
(c) Qualified REIT Dividends and
Qualified PTP Income-(1) In general.
Qualified REIT dividends and qualified
PTP income are the sum of qualified REIT
dividends as defined in paragraph (c)(2) of
this section earned directly or through an
RPE and the net amount of qualified PTP
income as defined in paragraph (c)(3) of
this section earned directly or through an
RPE.
(2) Qualified REIT dividend-(i) The
term qualified REIT dividend means any
dividend from a REIT received during the
taxable year which-
(A) Is not a capital gain dividend, as
defined in section 857(b)(3); and
(B) Is not qualified dividend income, as
defined in section 1(h)(11).
(ii) The term qualified REIT dividend
does not include any REIT dividend re-
ceived with respect to any share of REIT
stock-
(A) That is held by the shareholder for
45 days or less (taking into account the
principles of section 246(c)(3) and (4))
during the 91-day period beginning on the
date which is 45 days before the date on
which such share becomes ex-dividend
with respect to such dividend; or
(B) To the extent that the shareholder is
under an obligation (whether pursuant to a
short sale or otherwise) to make related
payments with respect to positions in sub-
stantially similar or related property.
(3) Qualified PTP income-(i) In gen-
eral. The term qualified PTP income
means the sum of-
(A) The net amount of such taxpayer's
allocable share of income, gain, deduc-
tion, and loss from a PTP as defined in
section 7704(b) that is not taxed as a cor-
poration under section 7704(a); plus
(B) Any gain or loss attributable to
assets of the PTP giving rise to ordinary
income under section 751(a) or (b) that is
considered attributable to the trades or
businesses conducted by the partnership.
(ii) Special rules. The rules applicable
to the determination of QBI described in
paragraph (b) of this section also apply to
the determination of a taxpayer's alloca-
ble share of income, gain, deduction, and
loss from a PTP. An individual's allocable
share of income from a PTP, and any
section 751 gain or loss is qualified PTP
income only to the extent the items meet
the qualifications of section 199A and this
section, including the requirement that the
item is included or allowed in determining
taxable income for the taxable year, and
the requirement that the item be effec-
tively connected with the conduct of a
trade or business within the United States.
For example, if an individual owns an
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interest in a PTP, and for the taxable year
is allocated a distributive share of net loss
which is disallowed under the passive ac-
tivity rules of section 469, such loss is not
taken into account for purposes of section
199A. The specified service trade or busi-
ness limitations described in §§ 1.199A-
1(d)(3) and 1.199A-5 also apply to in-
come earned from a PTP. Furthermore,
each PTP is required to determine its qual-
ified PTP income for each trade or busi-
ness and report that information to its
owners as described in § 1.199A-6(b)(3).
(d) [Reserved]
(e) Applicability date-(1) General
rule. Except as provided in paragraph
(e)(2) of this section, the provisions of this
section apply to taxable years ending after
February 8, 2019.
(2) Exceptions-(i) Anti-abuse rules.
The provisions of paragraph (c)(2)(ii) of
this section apply to taxable years ending
after December 22, 2017.
(ii) Non-calendar year RPE. For pur-
poses of determining QBI, W-2 wages,
UBIA of qualified property, and the ag-
gregate amount of qualified REIT divi-
dends and qualified PTP income if an in-
dividual receives any of these items from
an RPE with a taxable year that begins
before January 1, 2018, and ends after
December 31, 2017, such items are treated
as having been incurred by the individual
during the individual's taxable year in
which or with which such RPE taxable
year ends.
Par. 6. Section 1.199A-4 is added to
read as follows:
### § 1.199A-4 Aggregation.
(a) Scope and purpose. An individual
or RPE may be engaged in more than one
trade or business. Except as provided in
this section, each trade or business is a
separate trade or business for purposes of
applying the limitations described in
§ 1.199A-1(d)(2)(iv). This section sets
forth rules to allow individuals and RPEs
to aggregate trades or businesses, treating
the aggregate as a single trade or business
for purposes of applying the limitations
described in § 1.199A-1(d)(2)(iv). Trades
or businesses may be aggregated only to
the extent provided in this section, but
aggregation by taxpayers is not required.
(b) Aggregation rules-(1) General
rule. Trades or businesses may be aggre-
gated only if an individual or RPE can
demonstrate that-
(i) The same person or group of per-
sons, directly or by attribution under sec-
tions 267(b) or 707(b), owns 50 percent or
more of each trade or business to be ag-
gregated, meaning in the case of such
trades or businesses owned by an S cor-
poration, 50 percent or more of the issued
and outstanding shares of the corporation,
or, in the case of such trades or businesses
owned by a partnership, 50 percent or
more of the capital or profits in the part-
nership;
(ii) The ownership described in para-
graph (b)(1)(i) of this section exists for a
majority of the taxable year, including the
last day of the taxable year, in which the
items attributable to each trade or business
to be aggregated are included in income;
(iii) All of the items attributable to each
trade or business to be aggregated are
reported on returns with the same taxable
year, not taking into account short taxable
years;
(iv) None of the trades or businesses to
be aggregated is a specified service trade
or business (SSTB) as defined in
§ 1.199A-5; and
(v) The trades or businesses to be ag-
gregated satisfy at least two of the follow-
ing factors (based on all of the facts and
circumstances):
(A) The trades or businesses provide
products, property, or services that are the
same or customarily offered together.
(B) The trades or businesses share fa-
cilities or share significant centralized
business elements, such as personnel, ac-
counting, legal, manufacturing, purchas-
ing, human resources, or information
technology resources.
(C) The trades or businesses are oper-
ated in coordination with, or reliance
upon, one or more of the businesses in the
aggregated group (for example, supply
chain interdependencies).
(2) Operating rules-(i) Individuals.
An individual may aggregate trades or
businesses operated directly or through an
RPE to the extent an aggregation is not
inconsistent with the aggregation of an
RPE. If an individual aggregates multiple
trades or businesses under paragraph
(b)(1) of this section, QBI, W-2 wages,
and UBIA of qualified property must be
combined for the aggregated trades or
businesses for purposes of applying the
W-2 wage and UBIA of qualified prop-
erty limitations described in § 1.199A-
1(d)(2)(iv). An individual may not sub-
tract from the trades or businesses
aggregated by an RPE but may aggregate
additional trades or businesses with the
RPE's aggregation if the rules of this sec-
tion are otherwise satisfied.
(ii) RPEs. An RPE may aggregate
trades or businesses operated directly or
through a lower-tier RPE to the extent an
aggregation is not inconsistent with the
aggregation of a lower-tier RPE. If an
RPE itself does not aggregate, multiple
owners of an RPE need not aggregate in
the same manner. If an RPE aggregates
multiple trades or businesses under para-
graph (b)(1) of this section, the RPE must
compute and report QBI, W-2 wages, and
UBIA of qualified property for the aggre-
gated trade or business under the rules
described in § 1.199A-6(b). An RPE may
not subtract from the trades or businesses
aggregated by a lower-tier RPE but may
aggregate additional trades or businesses
with a lower-tier RPE's aggregation if the
rules of this section are otherwise satis-
fied.
(c) Reporting and consistency require-
ments-(1) Individuals. Once an individ-
ual chooses to aggregate two or more
trades or businesses, the individual must
consistently report the aggregated trades
or businesses in all subsequent taxable
years. A failure to aggregate will not be
considered to be an aggregation for pur-
poses of this rule. An individual that fails
to aggregate may not aggregate trades or
businesses on an amended return (other
than an amended return for the 2018 tax-
able year). However, an individual may
add a newly created or newly acquired
(including through non-recognition trans-
fers) trade or business to an existing ag-
gregated trade or business (including the
aggregated trade or business of an RPE) if
the requirements of paragraph (b)(1) of
this section are satisfied. In a subsequent
year, if there is a significant change in
facts and circumstances such that an indi-
vidual's prior aggregation of trades or
businesses no longer qualifies for aggre-
gation under the rules of this section, then
the trades or businesses will no longer be
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aggregated within the meaning of this sec-
tion, and the individual must reapply the
rules in paragraph (b)(1) of this section to
determine a new permissible aggregation
(if any). An individual also must report
aggregated trades or businesses of an RPE
in which the individual holds a direct or
indirect interest.
(2) Individual disclosure-(i) Required
annual disclosure. For each taxable year,
individuals must attach a statement to
their returns identifying each trade or
business aggregated under paragraph
(b)(1) of this section. The statement must
contain -
(A) A description of each trade or busi-
ness;
(B) The name and EIN of each entity in
which a trade or business is operated;
(C) Information identifying any trade
or business that was formed, ceased oper-
ations, was acquired, or was disposed of
during the taxable year;
(D) Information identifying any aggre-
gated trade or business of an RPE in
which the individual holds an ownership
interest; and
(E) Such other information as the
Commissioner may require in forms, in-
structions, or other published guidance.
(ii) Failure to disclose. If an individual
fails to attach the statement required in
paragraph (c)(2)(i) of this section, the
Commissioner may disaggregate the indi-
vidual's trades or businesses. The individ-
ual may not aggregate trades or businesses
that are disaggregated by the Commis-
sioner for the subsequent three taxable
years.
(3) RPEs. Once an RPE chooses to
aggregate two or more trades or busi-
nesses, the RPE must consistently report
the aggregated trades or businesses in all
subsequent taxable years. A failure to ag-
gregate will not be considered to be an
aggregation for purposes of this rule. An
RPE that fails to aggregate may not ag-
gregate trades or businesses on an
amended return (other than an amended
return for the 2018 taxable year). How-
ever, an RPE may add a newly created or
newly acquired (including through non-
recognition transfers) trade or business to
an existing aggregated trade or business
(other than the aggregated trade or busi-
ness of a lower-tier RPE) if the require-
ments of paragraph (b)(1) of this section
are satisfied. In a subsequent year, if there
is a significant change in facts and circum-
stances such that an RPE's prior aggrega-
tion of trades or businesses no longer
qualifies for aggregation under the rules of
this section, then the trades or businesses
will no longer be aggregated within the
meaning of this section, and the RPE must
reapply the rules in paragraph (b)(1) of
this section to determine a new permissi-
ble aggregation (if any). An RPE also
must report aggregated trades or busi-
nesses of a lower-tier RPE in which the
RPE holds a direct or indirect interest.
(4) RPE disclosure-(i) Required an-
nual disclosure. For each taxable year,
RPEs (including each RPE in a tiered
structure) must attach a statement to each
owner's Schedule K-1 identifying each
trade or business aggregated under para-
graph (b)(1) of this section. The statement
must contain -
(A) A description of each trade or busi-
ness;
(B) The name and EIN of each entity in
which a trade or business is operated;
(C) Information identifying any trade
or business that was formed, ceased oper-
ations, was acquired, or was disposed of
during the taxable year;
(D) Information identifying any aggre-
gated trade or business of an RPE in
which the RPE holds an ownership inter-
est; and
(E) Such other information as the
Commissioner may require in forms, in-
structions, or other published guidance.
(ii) Failure to disclose. If an RPE fails
to attach the statement required in para-
graph (c)(2)(i) of this section, the Com-
missioner may disaggregate the RPE's
trades or businesses. The RPE may not
aggregate trades or businesses that are dis-
aggregated by the Commissioner for the
subsequent three taxable years.
(d) Examples. The following examples
illustrate the principles of this section. For
purposes of these examples, assume the
taxpayer is a United States citizen, all
individuals and RPEs use a calendar tax-
able year, there are no ownership changes
during the taxable year, all trades or busi-
nesses satisfy the requirements under sec-
tion 162, all tax items are effectively con-
nected to a trade or business within the
United States within the meaning of sec-
tion 864(c), and none of the trades or
businesses is an SSTB within the meaning
of § 1.199A-5. Except as otherwise spec-
ified, a single capital letter denotes an
individual taxpayer.
(1) Example 1-(i) Facts. A wholly owns and
operates a catering business and a restaurant through
separate disregarded entities. The catering business
and the restaurant share centralized purchasing to
obtain volume discounts and a centralized account-
ing office that performs all of the bookkeeping,
tracks and issues statements on all of the receivables,
and prepares the payroll for each business. A main-
tains a website and print advertising materials that
reference both the catering business and the restau-
rant. A uses the restaurant kitchen to prepare food for
the catering business. The catering business employs
its own staff and owns equipment and trucks that are
not used or associated with the restaurant.
(ii) Analysis. Because the restaurant and catering
business are held in disregarded entities, A will be
treated as operating each of these businesses directly
and thereby satisfies paragraph (b)(1)(i) of this sec-
tion. Under paragraph (b)(1)(v) of this section, A
satisfies the following factors: paragraph
(b)(1)(v)(A) of this section is met as both businesses
offer prepared food to customers; and paragraph
(b)(1)(v)(B) of this section is met because the two
businesses share the same kitchen facilities in addi-
tion to centralized purchasing, marketing, and ac-
counting. Having satisfied paragraphs (b)(1)(i)
through (v) of this section, A may treat the catering
business and the restaurant as a single trade or busi-
ness for purposes of applying § 1.199A-1(d).
(2) Example 2-(i) Facts. Assume the same facts
as in Example 1 of paragraph (d)(1) of this section,
but the catering and restaurant businesses are owned
in separate partnerships and A, B, C, and D each own
a 25% interest in each of the two partnerships. A, B,
C, and D are unrelated.
(ii) Analysis. Because under paragraph (b)(1)(i)
of this section A, B, C, and D together own more
than 50% of each of the two partnerships, they may
each treat the catering business and the restaurant as
a single trade or business for purposes of applying
§ 1.199A-1(d).
(3) Example 3-(i) Facts. W owns a 75% interest
in S1, an S corporation, and a 75% interest in PRS,
a partnership. S1 manufactures clothing and PRS is
a retail pet food store. W manages S1 and PRS.
(ii) Analysis. W owns more than 50% of the
stock of S1 and more than 50% of PRS thereby
satisfying paragraph (b)(1)(i) of this section. Al-
though W manages both S1 and PRS, W is not able
to satisfy the requirements of paragraph (b)(1)(v) of
this section as the two businesses do not provide
goods or services that are the same or customarily
offered together; there are no significant centralized
business elements; and no facts indicate that the
businesses are operated in coordination with, or re-
liance upon, one another. W must treat S1 and PRS
as separate trades or businesses for purposes of ap-
plying § 1.199A-1(d).
(4) Example 4-(i) Facts. E owns a 60% interest
in each of four partnerships (PRS1, PRS2, PRS3, and
PRS4). Each partnership operates a hardware store.
A team of executives oversees the operations of all
four of the businesses and controls the policy deci-
sions involving the business as a whole. Human
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resources and accounting are centralized for the four
businesses. E reports PRS1, PRS3, and PRS4 as an
aggregated trade or business under paragraph (b)(1)
of this section and reports PRS2 as a separate trade
or business. Only PRS2 generates a net taxable loss.
(ii) Analysis. E owns more than 50% of each
partnership thereby satisfying paragraph (b)(1)(i) of
this section. Under paragraph (b)(1)(v) of this section,
the following factors are satisfied: paragraph (b)(1)
(v)(A) of this section because each partnership operates
a hardware store; and paragraph (b)(1)(v)(B) of this
section because the businesses share accounting and
human resource functions. E's decision to aggregate
only PRS1, PRS3, and PRS4 into a single trade or
business for purposes of applying § 1.199A-1(d) is
permissible. The loss from PRS2 will be netted against
the aggregate profits of PRS1, PRS3, and PRS4 pursu-
ant to § 1.199A-1(d)(2)(iii).
(5) Example 5-(i) Facts. Assume the same facts
as Example 4 of paragraph (d)(4) of this section, and
that F owns a 10% interest in PRS1, PRS2, PRS3,
and PRS4.
(ii) Analysis. Because under paragraph (b)(1)(i)
of this section E owns more than 50% of the four
partnerships, F may aggregate PRS 1, PRS2, PRS3,
and PRS4 as a single trade or business for purposes
of applying § 1.199A-1(d), provided that F can
demonstrate that the ownership test is met by E.
(6) Example 6-(i) Facts. D owns 75% of the
stock of S1, S2, and S3, each of which is an S
corporation. Each S corporation operates a grocery
store in a separate state. S1 and S2 share centralized
purchasing functions to obtain volume discounts and
a centralized accounting office that performs all of
the bookkeeping, tracks and issues statements on all
of the receivables, and prepares the payroll for each
business. S3 is operated independently from the
other businesses.
(ii) Analysis. D owns more than 50% of the stock
of each S corporation thereby satisfying paragraph
(b)(1)(i) of this section. Under paragraph (b)(1)(v) of
this section, the grocery stores satisfy paragraph
(b)(1)(v)(A) of this section because they are in the
same trade or business. Only S1 and S2 satisfy
paragraph (b)(1)(v)(B) of this section because of
their centralized purchasing and accounting offices.
D is only able to show that the requirements of
paragraph (b)(1)(v)(B) of this section are satisfied
for S1 and S2; therefore, D only may aggregate S1
and S2 into a single trade or business for purposes of
§ 1.199A-1(d). D must report S3 as a separate trade
or business for purposes of applying § 1.199A-1(d).
(7) Example 7-(i) Facts. Assume the same facts
as Example 6 of paragraph (d)(6) of this section
except each store is independently operated and S1
and S2 do not have centralized purchasing or ac-
counting functions.
(ii) Analysis. Although the stores provide the
same products and services within the meaning of
paragraph (b)(1)(v)(A) of this section, D cannot
show that another factor under paragraph (b)(1)(v) of
this section is present. Therefore, D must report S1,
S2, and S3 as separate trades or businesses for pur-
poses of applying § 1.199A-1(d).
(8) Example 8-(i) Facts. G owns 80% of the
stock in S1, an S corporation and 80% of LLC1 and
LLC2, each of which is a partnership for Federal tax
purposes. LLC1 manufactures and supplies all of the
widgets sold by LLC2. LLC2 operates a retail store
that sells LLC1's widgets. S1 owns the real property
leased to LLC1 and LLC2 for use by the factory and
retail store. The entities share common advertising
and management.
(ii) Analysis. G owns more than 50% of the stock
of S1 and more than 50% of LLC1 and LLC2 thus
satisfying paragraph (b)(1)(i) of this section. LLC1,
LLC2, and S1 share significant centralized business
elements and are operated in coordination with, or in
reliance upon, one or more of the businesses in the
aggregated group. G can treat the business opera-
tions of LLC1 and LLC2 as a single trade or business
for purposes of applying § 1.199A-1(d). S1 is eligi-
ble to be included in the aggregated group because it
leases property to a trade or business within the
aggregated trade or business as described in
§ 1.199A-1(b)(14) and meets the requirements of
paragraph (b)(1) of this section.
(9) Example 9-(i) Facts. Same facts as Example
8 of paragraph (d)(8) of this section, except G owns
80% of the stock in S1 and 20% of each of LLC1 and
LLC2. B, G's son, owns a majority interest in LLC2,
and M, G's mother, owns a majority interest in
LLC1. B does not own an interest in S1 or LLC1,
and M does not own an interest in S1 or LLC2.
(ii) Analysis. Under the rules in paragraph (b)(1)
of this section, B and M's interest in LLC2 and
LLC1, respectively, are attributable to G and G is
treated as owning a majority interest in LLC2 and
LLC1; G thus satisfies paragraph (b)(1)(i) of this
section. G may aggregate his interests in LLC1,
LLC2, and S1 as a single trade or business for
purposes of applying § 1.199A-1(d). Under para-
graph (b)(1) of this section, S1 is eligible to be
included in the aggregated group because it leases
property to a trade or business within the aggregated
trade or business as described in § 1.199A-1(b)(14)
and meets the requirements of paragraph (b)(1) of
this section.
(10) Example 10-(i) Facts. F owns a 75% in-
terest and G owns a 5% interest in five partnerships
(PRS1-PRS5). H owns a 10% interest in PRS1 and
PRS2. Each partnership operates a restaurant and
each restaurant separately constitutes a trade or busi-
ness for purposes of section 162. G is the executive
chef of all of the restaurants and as such he creates
the menus and orders the food supplies.
(ii) Analysis. F owns more than 50% of the
partnerships thereby satisfying paragraph (b)(1)(i) of
this section. Under paragraph (b)(1)(v) of this sec-
tion, the restaurants satisfy paragraph (b)(1)(v)(A) of
this section because they are in the same trade or
business, and paragraph (b)(1)(v)(B) of this section
is satisfied as G is the executive chef of all of the
restaurants and the businesses share a centralized
function for ordering food and supplies. F can show
the requirements under paragraph (b)(1) of this sec-
tion are satisfied as to all of the restaurants. Because
F owns a majority interest in each of the partner-
ships, G can demonstrate that paragraph (b)(1)(i) of
this section is satisfied. G can also aggregate all five
restaurants into a single trade or business for pur-
poses of applying § 1.199A-1(d). H, however, only
owns an interest in PRS1 and PRS2. Like G, H
satisfies paragraph (b)(1)(i) of this section because F
owns a majority interest. H can, therefore, aggregate
PRS1 and PRS2 into a single trade or business for
purposes of applying § 1.199A-1(d).
(11) Example 11-(i) Facts. H, J, K, and L own
interests in PRS1 and PRS2, each a partnership, and
S1 and S2, each an S corporation. H, J, K, and L also
own interests in C, an entity taxable as a C corpo-
ration. H owns 30%, J owns 20%, K owns 5%, and
L owns 45% of each of the five entities. All of the
entities satisfy 2 of the 3 factors under paragraph
(b)(1)(v) of this section. For purposes of section
199A the taxpayers report the following aggregated
trades or businesses: H aggregates PRS1 and S1
together and aggregates PRS2 and S2 together; J
aggregates PRS1, S1 and S2 together and reports
PRS2 separately; K aggregates PRS1 and PRS2 to-
gether and aggregates S1 and S2 together; and L
aggregates S1, S2, and PRS2 together and reports
PRS1 separately. C cannot be aggregated.
(ii) Analysis. Under paragraph (b)(1)(i) of this
section, because H, J, and K together own a majority
interest in PRS1, PRS2, S1, and S2, H, J, K, and L
are permitted to aggregate under paragraph (b)(1) of
this section. Further, the aggregations reported by
the taxpayers are permitted, but not required for each
of H, J, K, and L. C's income is not eligible for the
section 199A deduction and it cannot be aggregated
for purposes of applying § 1.199A-1(d).
(12) Example 12-(i) Facts. L owns 60% of
PRS1, a partnership, a business that sells non-food
items to grocery stores. L also owns 55% of PRS2, a
partnership, which owns and operates a distribution
trucking business. The predominant portion of
PRS2's business is transporting goods for PRS1.
(ii) Analysis. L is able to meet paragraph (b)(1)(i)
of this section as the majority owner of PRS1 and
PRS2. Under paragraph (b)(1)(v) of this section, L is
only able to show the operations of PRS1 and PRS2
are operated in reliance of one another under para-
graph (b)(1)(v)(C) of this section. For purposes of
applying § 1.199A-1(d), L must treat PRS1 and
PRS2 as separate trades or businesses.
(13) Example 13-(i) Facts. C owns a majority
interest in a sailboat racing team and also owns an
interest in PRS1 which operates a marina. PRS1 is a
trade or business under section 162, but the sailboat
racing team is not a trade or business within the
meaning of section 162.
(ii) Analysis. C has only one trade or business for
purposes of section 199A and, therefore, cannot ag-
gregate the interest in the racing team with PRS1
under paragraph (b)(1) of this section.
(14) Example 14-(i) Facts. Trust wholly owns
LLC1, LLC2, and LLC3. LLC1 operates a trucking
company that delivers lumber and other supplies
sold by LLC2. LLC2 operates a lumber yard and
supplies LLC3 with building materials. LLC3 oper-
ates a construction business. LLC1, LLC2, and
LLC3 have a centralized human resources depart-
ment, payroll, and accounting department.
(ii) Analysis. Because Trust owns 100% of the
interests in LLC1, LLC2, and LLC3, Trust satisfies
paragraph (b)(1)(i) of this section. Trust can also
show that it satisfies paragraph (b)(1)(v)(B) of this
section as the trades or businesses have a centralized
human resources department, payroll, and account-
ing department. Trust also can show is meets para-
graph (b)(1)(v)(C) of this section as the trades or
businesses are operated in coordination, or reliance
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upon, one or more in the aggregated group. Trust can
aggregate LLC1, LLC2, and LLC3 for purposes of
applying § 1.199A-1(d).
(15) Example 15-(i) Facts. PRS1, a partnership,
directly operates a food service trade or business and
owns 60% of PRS2, which directly operates a movie
theater trade or business and a food service trade or
business. PRS2's movie theater and food service
businesses operate in coordination with, or reliance
upon, one another and share a centralized human
resources department, payroll, and accounting de-
partment. PRS1's and PRS2's food service busi-
nesses provide products and services that are the
same and share centralized purchasing and shipping
to obtain volume discounts.
(ii) Analysis. PRS2 may aggregate its movie the-
ater and food service businesses. Paragraph (b)(1)(v)
of this section is satisfied because the businesses
operate in coordination with one another and share
centralized business elements. If PRS does aggregate
the two businesses, PRS1 may not aggregate its food
service business with PRS2's aggregated trades or
businesses. Because PRS1 owns more than 50% of
PRS2, thereby satisfying paragraph (b)(1)(i) of this
section, PRS1 may aggregate its food service busi-
nesses with PRS2's food service business if PRS2
has not aggregated its movie theater and food service
businesses. Paragraph (b)(1)(v) of this section is
satisfied because the businesses provide the same
products and services and share centralized business
elements. Under either alternative, PRS1's food ser-
vice business and PRS2's movie theater cannot be
aggregated because there are no factors in paragraph
(b)(1)(v) of this section present between the busi-
nesses.
(16) Example 16-(i) Facts. PRS1, a partnership,
owns 60% of a commercial rental office building in
state A, and 80% of a commercial rental office
building in state B. Both commercial rental office
building operations share centralized accounting, le-
gal, and human resource functions. PRS1 treats the
two commercial rental office buildings as an aggre-
gated trade or business under paragraph (b)(1) of this
section.
(ii) Analysis. PRS1 owns more than 50% of each
trade or business thereby satisfying paragraph
(b)(1)(i) of this section. Under paragraph (b)(1)(v) of
this section, PRS1 may aggregate its commercial
rental office buildings because the businesses pro-
vide the same type of property and share accounting,
legal, and human resource functions.
(17) Example 17-(i) Facts. S, an S corporation
owns 100% of the interests in a residential condo-
minium building and 100% of the interests in a
commercial rental office building. Both building op-
erations share centralized accounting, legal, and hu-
man resource functions.
(ii) Analysis. S owns more than 50% of each
trade or business thereby satisfying paragraph
(b)(1)(i) of this section. Although both businesses
share significant centralized business elements, S
cannot show that another factor under paragraph
(b)(1)(v) of this section is present because the two
building operations are not of the same type of
property. S must treat the residential condominium
building and the commercial rental office building as
separate trades or businesses for purposes of apply-
ing § 1.199A-1(d).
(18) Example 18-(i) Facts. M owns 75% of a
residential apartment building. M also owns 80% of
PRS2. PRS2 owns 80% of the interests in a residen-
tial condominium building and 80% of the interests
in a residential apartment building. PRS2's residen-
tial condominium building and residential apartment
building operations share centralized back office
functions and management. M's residential apart-
ment building and PRS2's residential condominium
and apartment building operate in coordination with
each other in renting apartments to tenants.
(ii) Analysis. PRS2 may aggregate its residential
condominium and residential apartment building op-
erations. PRS2 owns more than 50% of each trade or
business thereby satisfying paragraph (b)(1)(i) of
this section. Paragraph (b)(1)(v) of this section is
satisfied because the businesses are of the same type
of property and share centralized back office func-
tions and management. M may also add its residen-
tial apartment building operations to PRS2's aggre-
gated residential condominium and apartment
building operations. M owns more than 50% of each
trade or business thereby satisfying paragraph
(b)(1)(i) of this section. Paragraph (b)(1)(v) of this
section is also satisfied because the businesses oper-
ate in coordination with each other.
(e) Applicability date-(1) General
rule. Except as provided in paragraph
(e)(2) of this section, the provisions of this
section apply to taxable years ending after
February 8, 2019.
(2) Exception for non-calendar year
RPE. For purposes of determining QBI,
W-2 wages, and UBIA of qualified prop-
erty, and the aggregate amount of quali-
fied REIT dividends and qualified PTP
income, if an individual receives any of
these items from an RPE with a taxable
year that begins before January 1, 2018,
and ends after December 31, 2017, such
items are treated as having been incurred
by the individual during the individual's
taxable year in which or with which such
RPE taxable year ends.
Par. 7. Section 1.199A-5 is added to
read as follows:
§ 1.199A-5 Specified service trades or
businesses and the trade or business of
performing services as an employee.
(a) Scope and effect-(1) Scope. This
section provides guidance on specified
service trades or businesses (SSTBs) and
the trade or business of performing ser-
vices as an employee. This paragraph (a)
describes the effect of a trade or business
being an SSTB and the trade or business
of performing services as an employee.
Paragraph (b) of this section provides def-
initional guidance on SSTBs. Paragraph
(c) of this section provides special rules
related to SSTBs. Paragraph (d) of this
section provides guidance on the trade or
business of performing services as an em-
ployee. The provisions of this section ap-
ply solely for purposes of section 199A of
the Internal Revenue Code (Code).
(2) Effect of being an SSTB. If a trade
or business is an SSTB, no qualified busi-
ness income (QBI), W-2 wages, or unad-
justed basis immediately after acquisition
(UBIA) of qualified property from the
SSTB may be taken into account by any
individual whose taxable income exceeds
the phase-in range as defined in § 1.199A-
1(b)(4), even if the item is derived from an
activity that is not itself a specified service
activity. The SSTB limitation also applies
to income earned from a publicly traded
partnership (PTP). If a trade or business
conducted by a relevant passthrough en-
tity (RPE) or PTP is an SSTB, this limita-
tion applies to any direct or indirect individ-
ual owners of the business, regardless of
whether the owner is passive or participated
in any specified service activity. However,
the SSTB limitation does not apply to indi-
viduals with taxable income below the
threshold amount as defined in § 1.199A-
1(b)(12). A phase-in rule, provided in
§ 1.199A-1(d)(2), applies to individuals
with taxable income within the phase-in
range, allowing them to take into account a
certain "applicable percentage" of QBI,
W-2 wages, and UBIA of qualified property
from an SSTB. The phase-in rule also ap-
plies to income earned from a PTP. A direct
or indirect owner of a trade or business
engaged in the performance of a specified
service is engaged in the performance of the
specified service for purposes of section
199A and this section, regardless of whether
the owner is passive or participated in the
specified service activity.
(3) Trade or business of performing
services as an employee. The trade or
business of performing services as an em-
ployee is not a trade or business for pur-
poses of section 199A and the regulations
thereunder. Therefore, no items of in-
come, gain, deduction, or loss from the
trade or business of performing services
as an employee constitute QBI within the
meaning of section 199A and § 1.199A-3.
No taxpayer may claim a section 199A
deduction for wage income, regardless of
the amount of taxable income.
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(b) Definition of specified service trade
or business. Except as provided in para-
graph (c)(1) of this section, the term spec-
ified service trade or business (SSTB)
means any of the following:
(1) Listed SSTBs. Any trade or business
involving the performance of services in
one or more of the following fields:
(i) Health as described in paragraph
(b)(2)(ii) of this section;
(ii) Law as described in paragraph
(b)(2)(iii) of this section;
(iii) Accounting as described in para-
graph (b)(2)(iv) of this section;
(iv) Actuarial science as described in
paragraph (b)(2)(v) of this section;
(v) Performing arts as described in
paragraph (b)(2)(vi) of this section;
(vi) Consulting as described in para-
graph (b)(2)(vii) of this section;
(vii) Athletics as described in para-
graph (b)(2)(viii) of this section;
(viii) Financial services as described in
paragraph (b)(2)(ix) of this section;
(ix) Brokerage services as described in
paragraph (b)(2)(x) of this section;
(x) Investing and investment manage-
ment as described in paragraph (b)(2)(xi)
of this section;
(xi) Trading as described in paragraph
(b)(2)(xii) of this section;
(xii) Dealing in securities (as defined
in section 475(c)(2)), partnership inter-
ests, or commodities (as defined in section
475(e)(2)) as described in paragraph
(b)(2)(xiii) of this section; or
(xiii) Any trade or business where the
principal asset of such trade or business is
the reputation or skill of one or more of its
employees or owners as defined in para-
graph (b)(2)(xiv) of this section.
(2) Additional rules for applying sec-
tion 199A(d)(2) and paragraph (b) of this
section-(i) In general-(A) No effect on
other tax rules. This paragraph (b)(2) pro-
vides additional rules for determining
whether a business is an SSTB within the
meaning of section 199A(d)(2) and para-
graph (b) of this section only. The rules of
this paragraph (b)(2) apply solely for pur-
poses of section 199A and therefore may
not be taken into account for purposes of
applying any provision of law or regula-
tion other than section 199A and the reg-
ulations thereunder, except to the extent
such provision expressly refers to section
199A(d) or this section.
(B) Hedging transactions. Income, de-
duction, gain or loss from a hedging trans-
action (as defined in § 1.1221-2(b)) en-
tered into by an individual or RPE in the
normal course of the individual's or
RPE's trade or business is treated as in-
come, deduction, gain, or loss from that
trade or business for purposes of this para-
graph (b)(2). See also § 1.446-4.
(ii) Meaning of services performed in
the field of health. For purposes of section
199A(d)(2) and paragraph (b)(1)(i) of this
section only, the performance of services
in the field of health means the provision
of medical services by individuals such as
physicians, pharmacists, nurses, dentists,
veterinarians, physical therapists, psy-
chologists, and other similar healthcare
professionals performing services in their
capacity as such. The performance of ser-
vices in the field of health does not in-
clude the provision of services not directly
related to a medical services field, even
though the services provided may purport-
edly relate to the health of the service
recipient. For example, the performance
of services in the field of health does not
include the operation of health clubs or
health spas that provide physical exercise
or conditioning to their customers, pay-
ment processing, or the research, testing,
and manufacture and/or sales of pharma-
ceuticals or medical devices.
(iii) Meaning of services performed in
the field of law. For purposes of section
199A(d)(2) and paragraph (b)(1)(ii) of
this section only, the performance of ser-
vices in the field of law means the perfor-
mance of legal services by individuals
such as lawyers, paralegals, legal arbitra-
tors, mediators, and similar professionals
performing services in their capacity as
such. The performance of services in the
field of law does not include the provision
of services that do not require skills
unique to the field of law; for example, the
provision of services in the field of law
does not include the provision of services
by printers, delivery services, or stenogra-
phy services.
(iv) Meaning of services performed in
the field of accounting. For purposes of sec-
tion 199A(d)(2) and paragraph (b)(1)(iii) of
this section only, the performance of ser-
vices in the field of accounting means the
provision of services by individuals such as
accountants, enrolled agents, return prepar-
ers, financial auditors, and similar profes-
sionals performing services in their capacity
as such.
(v) Meaning of services performed in
the field of actuarial science. For purposes
of section 199A(d)(2) and paragraph
(b)(1)(iv) of this section only, the perfor-
mance of services in the field of actuarial
science means the provision of services by
individuals such as actuaries and similar
professionals performing services in their
capacity as such.
(vi) Meaning of services performed in
the field of performing arts. For purposes
of section 199A(d)(2) and paragraph
(b)(1)(v) of this section only, the perfor-
mance of services in the field of the per-
forming arts means the performance of
services by individuals who participate in
the creation of performing arts, such as
actors, singers, musicians, entertainers, di-
rectors, and similar professionals perform-
ing services in their capacity as such. The
performance of services in the field of
performing arts does not include the pro-
vision of services that do not require skills
unique to the creation of performing arts,
such as the maintenance and operation of
equipment or facilities for use in the per-
forming arts. Similarly, the performance
of services in the field of the performing
arts does not include the provision of ser-
vices by persons who broadcast or other-
wise disseminate video or audio of per-
forming arts to the public.
(vii) Meaning of services performed in
the field of consulting. For purposes of sec-
tion 199A(d)(2) and paragraph (b)(1)(vi) of
this section only, the performance of ser-
vices in the field of consulting means the
provision of professional advice and counsel
to clients to assist the client in achieving
goals and solving problems. Consulting in-
cludes providing advice and counsel regard-
ing advocacy with the intention of influenc-
ing decisions made by a government or
governmental agency and all attempts to
influence legislators and other government
officials on behalf of a client by lobbyists
and other similar professionals performing
services in their capacity as such. The per-
formance of services in the field of consult-
ing does not include the performance of
services other than advice and counsel, such
as sales (or economically similar services)
or the provision of training and educational
courses. For purposes of the preceding sen-
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tence, the determination of whether a per-
son's services are sales or economically
similar services will be based on all the facts
and circumstances of that person's business.
Such facts and circumstances include, for
example, the manner in which the taxpayer
is compensated for the services provided.
Performance of services in the field of con-
sulting does not include the performance of
consulting services embedded in, or ancil-
lary to, the sale of goods or performance of
services on behalf of a trade or business that
is otherwise not an SSTB (such as typical
services provided by a building contractor)
if there is no separate payment for the con-
sulting services. Services within the fields of
architecture and engineering are not treated
as consulting services.
(viii) Meaning of services performed in
the field of athletics. For purposes of sec-
tion 199A(d)(2) and paragraph (b)(1)(vii)
of this section only, the performance of
services in the field of athletics means the
performance of services by individuals
who participate in athletic competition
such as athletes, coaches, and team man-
agers in sports such as baseball, basket-
ball, football, soccer, hockey, martial arts,
boxing, bowling, tennis, golf, skiing,
snowboarding, track and field, billiards,
and racing. The performance of services
in the field of athletics does not include
the provision of services that do not re-
quire skills unique to athletic competition,
such as the maintenance and operation of
equipment or facilities for use in athletic
events. Similarly, the performance of ser-
vices in the field of athletics does not
include the provision of services by per-
sons who broadcast or otherwise dissem-
inate video or audio of athletic events to
the public.
(ix) Meaning of services performed in
the field of financial services. For pur-
poses of section 199A(d)(2) and para-
graph (b)(1)(viii) of this section only, the
performance of services in the field of
financial services means the provision of
financial services to clients including
managing wealth, advising clients with re-
spect to finances, developing retirement
plans, developing wealth transition plans,
the provision of advisory and other similar
services regarding valuations, mergers,
acquisitions, dispositions, restructurings
(including in title 11 of the Code or sim-
ilar cases), and raising financial capital by
underwriting, or acting as a client's agent
in the issuance of securities and similar
services. This includes services provided
by financial advisors, investment bankers,
wealth planners, retirement advisors, and
other similar professionals performing
services in their capacity as such. Solely
for purposes of section 199A, the perfor-
mance of services in the field of financial
services does not include taking deposits
or making loans, but does include arrang-
ing lending transactions between a lender
and borrower.
(x) Meaning of services performed in
the field of brokerage services. For pur-
poses of section 199A(d)(2) and para-
graph (b)(1)(ix) of this section only, the
performance of services in the field of
brokerage services includes services in
which a person arranges transactions be-
tween a buyer and a seller with respect to
securities (as defined in section 475(c)(2))
for a commission or fee. This includes
services provided by stock brokers and
other similar professionals, but does not
include services provided by real estate
agents and brokers, or insurance agents
and brokers.
(xi) Meaning of the provision of ser-
vices in investing and investment manage-
ment. For purposes of section 199A(d)(2)
and paragraph (b)(1)(x) of this section
only, the performance of services that
consist of investing and investment man-
agement refers to a trade or business in-
volving the receipt of fees for providing
investing, asset management, or invest-
ment management services, including
providing advice with respect to buying
and selling investments. The performance
of services of investing and investment
management does not include directly
managing real property.
(xii) Meaning of the provision of ser-
vices in trading. For purposes of section
199A(d)(2) and paragraph (b)(1)(xi) of
this section only, the performance of ser-
vices that consist of trading means a trade
or business of trading in securities (as
defined in section 475(c)(2)), commodi-
ties (as defined in section 475(e)(2)), or
partnership interests. Whether a person is
a trader in securities, commodities, or
partnership interests is determined by tak-
ing into account all relevant facts and cir-
cumstances, including the source and type
of profit that is associated with engaging
in the activity regardless of whether that
person trades for the person's own ac-
count, for the account of others, or any
combination thereof.
(xiii) Meaning of the provision of ser-
vices in dealing-(A) Dealing in securi-
ties. For purposes of section 199A(d)(2)
and paragraph (b)(1)(xii) of this section
only, the performance of services that
consist of dealing in securities (as defined
in section 475(c)(2)) means regularly pur-
chasing securities from and selling secu-
rities to customers in the ordinary course
of a trade or business or regularly offering
to enter into, assume, offset, assign, or
otherwise terminate positions in securities
with customers in the ordinary course of a
trade or business. Solely for purposes of
the preceding sentence, the performance
of services to originate a loan is not
treated as the purchase of a security from
the borrower in determining whether the
lender is dealing in securities.
(B) Dealing in commodities. For pur-
poses of section 199A(d)(2) and para-
graph (b)(1)(xii) of this section only, the
performance of services that consist of
dealing in commodities (as defined in sec-
tion 475(e)(2)) means regularly purchas-
ing commodities from and selling com-
modities to customers in the ordinary course
of a trade or business or regularly offering to
enter into, assume, offset, assign, or other-
wise terminate positions in commodities
with customers in the ordinary course of a
trade or business. Solely for purposes of the
preceding sentence, gains and losses from
qualified active sales as defined in paragraph
(b)(2)(xiii)(B)(1) of this section are not
taken into account in determining whether a
person is engaged in the trade or business of
dealing in commodities.
(1) Qualified active sale. The term
qualified active sale means the sale of
commodities in the active conduct of a
commodities business as a producer, pro-
cessor, merchant, or handler of commod-
ities if the trade or business is as an active
producer, processor, merchant or handler
of commodities. A hedging transaction
described in paragraph (b)(2)(i)(B) of this
section is treated as a qualified active sale.
The sale of commodities held by a trade or
business other than in its capacity as an
active producer, processor, merchant, or
handler of commodities is not a qualified
active sale. For example, the sale by a
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trade or business of commodities that
were held for investment or speculation
would not be a qualified active sale.
(2) Active conduct of a commodities
business. For purposes of paragraph
(b)(2)(xiii)(B)(1) of this section, a trade or
business is engaged in the active conduct
of a commodities business as a producer,
processor, merchant, or handler of com-
modities only with respect to commodities
for which each of the conditions described
in paragraphs (b)(2)(xiii)(B)(3) through
(5) of this section are satisfied.
(3) Directly holds commodities as in-
ventory or similar property. The commod-
ities trade or business holds the commod-
ities directly, and not through an agent or
independent contractor, as inventory
or similar property. The term inventory or
similar property means property that is
stock in trade of the trade or business or
other property of a kind that would prop-
erly be included in the inventory of the
trade or business if on hand at the close of
the taxable year, or property held by the
trade or business primarily for sale to cus-
tomers in the ordinary course of its trade
or business.
(4) Directly incurs substantial ex-
penses in the ordinary course. The com-
modities trade or business incurs substan-
tial expenses in the ordinary course of the
commodities trade or business from en-
gaging in one or more of the following
activities directly, and not through an
agent or independent contractor-
(i) Substantial activities in the produc-
tion of the commodities, including plant-
ing, tending or harvesting crops, raising or
slaughtering livestock, or extracting min-
erals;
(ii) Substantial processing activities
prior to the sale of the commodities, in-
cluding the blending and drying of agri-
cultural commodities, or the concentrat-
ing, refining, mixing, crushing, aerating or
milling of commodities; or
(iii) Significant activities as described
in paragraph (b)(2)(xiii)(B)(5) of this sec-
tion.
(5) Significant activities for purposes
of paragraph (b)(2)(xiii)(B)(4)(iii) of this
section. The commodities trade or busi-
ness performs significant activities with
respect to the commodities that consists
of-
(i) The physical movement, handling
and storage of the commodities, including
preparation of contracts and invoices, ar-
ranging transportation, insurance and
credit, arranging for receipt, transfer or
negotiation of shipping documents, ar-
ranging storage or warehousing, and deal-
ing with quality claims;
(ii) Owning and operating facilities for
storage or warehousing; or
(iii) Owning, chartering, or leasing
vessels or vehicles for the transportation
of the commodities.
(C) Dealing in partnership interests.
For purposes of section 199A(d)(2) and
paragraph (b)(1)(xii) of this section only,
the performance of services that consist of
dealing in partnership interests means
regularly purchasing partnership interests
from and selling partnership interests to
customers in the ordinary course of a trade
or business or regularly offering to enter
into, assume, offset, assign, or otherwise
terminate positions in partnership interests
with customers in the ordinary course of a
trade or business.
(xiv) Meaning of trade or business
where the principal asset of such trade or
business is the reputation or skill of one or
more employees or owners. For purposes
of section 199A(d)(2) and paragraph
(b)(1)(xiii) of this section only, the term
any trade or business where the principal
asset of such trade or business is the rep-
utation or skill of one or more of its em-
ployees or owners means any trade or
business that consists of any of the fol-
lowing (or any combination thereof):
(A) A trade or business in which a
person receives fees, compensation, or
other income for endorsing products or
services;
(B) A trade or business in which a
person licenses or receives fees, compen-
sation, or other income for the use of an
individual's image, likeness, name, signa-
ture, voice, trademark, or any other sym-
bols associated with the individual's iden-
tity; or
(C) Receiving fees, compensation, or
other income for appearing at an event or
on radio, television, or another media for-
mat.
(D) For purposes of paragraphs
(b)(2)(xiv)(A) through (C) of this section,
the term fees, compensation, or other in-
come includes the receipt of a partnership
interest and the corresponding distributive
share of income, deduction, gain, or loss
from the partnership, or the receipt of
stock of an S corporation and the corre-
sponding income, deduction, gain, or loss
from the S corporation stock.
(3) Examples. The following examples
illustrate the rules in paragraphs (a) and
(b) of this section. The examples do not
address all types of services that may or
may not qualify as specified services. Un-
less otherwise provided, the individual in
each example has taxable income in ex-
cess of the threshold amount.
(i) Example 1. B is a board-certified pharmacist
who contracts as an independent contractor with X,
a small medical facility in a rural area. X employs
one full time pharmacist, but contracts with B when
X's needs exceed the capacity of its full-time staff.
When engaged by X, B is responsible for receiving
and reviewing orders from physicians providing
medical care at the facility; making recommenda-
tions on dosing and alternatives to the ordering phy-
sician; performing inoculations, checking for drug
interactions, and filling pharmaceutical orders for
patients receiving care at X. B is engaged in the
performance of services in the field of health within
the meaning of section 199A(d)(2) and paragraphs
(b)(1)(i) and (b)(2)(ii) of this section.
(ii) Example 2. X is the operator of a residential
facility that provides a variety of services to senior
citizens who reside on campus. For residents, X
offers standard domestic services including housing
management and maintenance, meals, laundry, en-
tertainment, and other similar services. In addition,
X contracts with local professional healthcare orga-
nizations to offer residents a range of medical and
health services provided at the facility, including
skilled nursing care, physical and occupational ther-
apy, speech-language pathology services, medical
social services, medications, medical supplies and
equipment used in the facility, ambulance transpor-
tation to the nearest supplier of needed services, and
dietary counseling. X receives all of its income from
residents for the costs associated with residing at the
facility. Any health and medical services are billed
directly by the healthcare providers to the senior
citizens for those professional healthcare services
even though those services are provided at the facil-
ity. X does not perform services in the field of health
within the meaning of section 199A(d)(2) and para-
graphs (b)(1)(i) and (b)(2)(ii) of this section.
(iii) Example 3. Y operates specialty surgical
centers that provide outpatient medical procedures
that do not require the patient to remain overnight for
recovery or observation following the procedure. Y
is a private organization that owns a number of
facilities throughout the country. For each facility, Y
ensures compliance with state and Federal laws for
medical facilities and manages the facility's opera-
tions and performs all administrative functions. Y
does not employ physicians, nurses, and medical
assistants, but enters into agreements with other pro-
fessional medical organizations or directly with the
medical professionals to perform the procedures and
provide all medical care. Patients are billed by Y for
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the facility costs relating to their procedure and by
the healthcare professional or their affiliated organi-
zation for the actual costs of the procedure con-
ducted by the physician and medical support team. Y
does not perform services in the field of health
within the meaning of section 199A(d)(2) and para-
graphs (b)(1)(i) and (b)(2)(ii) of this section.
(iv) Example 4. Z is the developer and the only
provider of a patented test used to detect a particular
medical condition. Z accepts test orders only from
health care professionals (Z's clients), does not have
contact with patients, and Z's employees do not
diagnose, treat, or manage any aspect of patient care.
A, who manages Z's testing operations, is the only
employee with an advanced medical degree. All
other employees are technical support staff and not
healthcare professionals. Z's workers are highly ed-
ucated, but the skills the workers bring to the job are
not often useful for Z's testing methods. In order to
perform the duties required by Z, employees receive
more than a year of specialized training for working
with Z's test, which is of no use to other employers.
Upon completion of an ordered test, Z analyses the
results and provides its clients a report summarizing
the findings. Z does not discuss the report's results,
or the patient's diagnosis or treatment with any
health care provider or the patient. Z is not informed
by the healthcare provider as to the healthcare pro-
vider's diagnosis or treatment. Z is not providing
services in the field of health within the meaning of
section 199A(d)(2) and paragraphs (b)(1)(i) and
(b)(2)(ii) of this section or where the principal asset
of the trade or business is the reputation or skill of
one or more of its employees within the meaning of
paragraphs (b)(1)(xiii) and (b)(2)(xiv) of this section.
(v) Example 5. A, a singer and songwriter, writes
and records a song. A is paid a mechanical royalty
when the song is licensed or streamed. A is also paid
a performance royalty when the recorded song is
played publicly. A is engaged in the performance of
services in an SSTB in the field of performing arts
within the meaning of section 199A(d)(2) or para-
graphs (b)(1)(v) and (b)(2)(vi) of this section. The
royalties that A receives for the song are not eligible
for a deduction under section 199A.
(vi) Example 6. B is a partner in Movie LLC, a
partnership. Movie LLC is a film production com-
pany. Movie LLC plans and coordinates film pro-
duction. Movie LLC shares in the profits of the films
that it produces. Therefore, Movie LLC is engaged
in the performance of services in an SSTB in the
field of performing arts within the meaning of sec-
tion 199A(d)(2) or paragraphs (b)(1)(v) and
(b)(2)(vi) of this section. B is a passive owner in
Movie LLC and does not provide any services with
respect to Movie LLC. However, because Movie
LLC is engaged in an SSTB in the field of perform-
ing arts, B's distributive share of the income, gain,
deduction, and loss with respect to Movie LLC is not
eligible for a deduction under section 199A.
(vii) Example 7. C is a partner in Partnership,
which solely owns and operates a professional sports
team. Partnership employs athletes and sells tickets
and broadcast rights for games in which the
sports team competes. Partnership sells the broadcast
rights to Broadcast LLC, a separate trade or busi-
ness. Broadcast LLC solely broadcasts the games.
Partnership is engaged in the performance of ser-
vices in an SSTB in the field of athletics within the
meaning of section 199A(d)(2) or paragraphs
(b)(1)(vii) and (b)(2)(viii) of this section. The tickets
sales and the sale of the broadcast rights are both the
performance of services in the field of athletics. C is
a passive owner in Partnership and C does not pro-
vide any services with respect to Partnership or the
sports team. However, because Partnership is en-
gaged in an SSTB in the field of athletics, C's
distributive share of the income, gain, deduction, and
loss with respect to Partnership is not eligible for a
deduction under section 199A. Broadcast LLC is not
engaged in the performance of services in an SSTB
in the field of athletics.
(viii) Example 8. D is in the business of provid-
ing services that assist unrelated entities in making
their personnel structures more efficient. D studies
its client's organization and structure and compares
it to peers in its industry. D then makes recommen-
dations and provides advice to its client regarding
possible changes in the client's personnel structure,
including the use of temporary workers. D does not
provide any temporary workers to its clients and D's
compensation and fees are not affected by whether
D's clients used temporary workers. D is engaged in
the performance of services in an SSTB in the field
of consulting within the meaning of section
199A(d)(2) or paragraphs (b)(1)(vi) and (b)(2)(vii)
of this section.
(ix) Example 9. E is an individual who owns and
operates a temporary worker staffing firm primarily
focused on the software consulting industry. Busi-
ness clients hire E to provide temporary workers that
have the necessary technical skills and experience
with a variety of business software to provide con-
sulting and advice regarding the proper selection and
operation of software most appropriate for the busi-
ness they are advising. E does not have a technical
software engineering background and does not pro-
vide software consulting advice herself. E reviews
resumes and refers candidates to the client when the
client indicates a need for temporary workers. E does
not evaluate her clients' needs about whether the
client needs workers and does not evaluate the cli-
ents' consulting contracts to determine the type of
expertise needed. Rather, the client provides E with
a job description indicating the required skills for the
upcoming consulting project. E is paid a fixed fee for
each temporary worker actually hired by the client
and receives a bonus if that worker is hired perma-
nently within a year of referral. E's fee is not con-
tingent on the profits of its clients. E is not consid-
ered to be engaged in the performance of services in
the field of consulting within the meaning of section
199A(d)(2) or (b)(1)(vi) and (b)(2)(vii) of this sec-
tion.
(x) Example 10. F is in the business of licensing
software to customers. F discusses and evaluates the
customer's software needs with the customer. The
taxpayer advises the customer on the particular soft-
ware products it licenses. F is paid a flat price for the
software license. After the customer licenses the
software, F helps to implement the software. F is
engaged in the trade or business of licensing soft-
ware and not engaged in an SSTB in the field of
consulting within the meaning of section 199A(d)(2)
or paragraphs (b)(1)(vi) and (b)(2)(vii) of this sec-
tion.
(xi) Example 11. G is in the business of provid-
ing services to assist clients with their finances. G
will study a particular client's financial situation,
including, the client's present income, savings, and
investments, and anticipated future economic and
financial needs. Based on this study, G will then
assist the client in making decisions and plans re-
garding the client's financial activities. Such finan-
cial planning includes the design of a personal bud-
get to assist the client in monitoring the client's
financial situation, the adoption of investment strat-
egies tailored to the client's needs, and other similar
services. G is engaged in the performance of services
in an SSTB in the field of financial services within
the meaning of section 199A(d)(2) or paragraphs
(b)(1)(viii) and (b)(2)(ix) of this section.
(xii) Example 12. H is in the business of fran-
chising a brand of personal financial planning of-
fices, which generally provide personal wealth man-
agement, retirement planning, and other financial
advice services to customers for a fee. H does not
provide financial planning services itself. H licenses
the right to use the business tradename, other brand-
ing intellectual property, and a marketing plan to
third-party financial planner franchisees that operate
the franchised locations and provide all services to
customers. In exchange, the franchisees compensate
H based on a fee structure, which includes a one-
time fee to acquire the franchise. H is not engaged in
the performance of services in the field of financial
services within the meaning of section 199A(d)(2) or
paragraphs (b)(1)(viii) and (b)(2)(ix) of this section.
(xiii) Example 13. J is in the business of execut-
ing transactions for customers involving various
types of securities or commodities generally traded
through organized exchanges or other similar net-
works. Customers place orders with J to trade secu-
rities or commodities based on the taxpayer's recom-
mendations. J's compensation for its services typically
is based on completion of the trade orders. J is engaged
in an SSTB in the field of brokerage services within the
meaning of section 199A(d)(2) or paragraphs (b)(1)(ix)
and (b)(2)(x) of this section.
(xiv) Example 14. K owns 100% of Corp, an S
corporation, which operates a bicycle sales and re-
pair business. Corp has 8 employees, including K.
Half of Corp's net income is generated from sales of
new and used bicycles and related goods, such as
helmets, and bicycle-related equipment. The other
half of Corp's net income is generated from bicycle
repair services performed by K and Corp's other
employees. Corp's assets consist of inventory, fix-
tures, bicycle repair equipment, and a leasehold on
its retail location. Several of the employees and G
have worked in the bicycle business for many years,
and have acquired substantial skill and reputation in
the field. Customers often consult with the employ-
ees on the best bicycle for purchase. K is in the
business of sales and repairs of bicycles and is not
engaged in an SSTB within the meaning of section
199A(d)(2) or paragraphs (b)(1)(xiii) and (b)(2)(xiv)
of this section.
(xv) Example 15. L is a well-known chef and the
sole owner of multiple restaurants each of which is
owned in a disregarded entity. Due to L's skill and
reputation as a chef, L receives an endorsement fee
of $500,000 for the use of L's name on a line of
cooking utensils and cookware. L is in the trade or
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business of being a chef and owning restaurants and
such trade or business is not an SSTB. However, L is
also in the trade or business of receiving endorse-
ment income. L's trade or business consisting of the
receipt of the endorsement fee for L's skill and/or
reputation is an SSTB within the meaning of section
199A(d)(2) or paragraphs (b)(1)(xiii) and (b)(2)(xiv)
of this section.
(xvi) Example 16. M is a well-known actor. M
entered into a partnership with Shoe Company, in
which M contributed her likeness and the use of her
name to the partnership in exchange for a 50%
interest in the partnership and a guaranteed payment.
M's trade or business consisting of the receipt of the
partnership interest and the corresponding distribu-
tive share with respect to the partnership interest for
M's likeness and the use of her name is an SSTB
within the meaning of section 199A(d)(2) or para-
graphs (b)(1)(xiii) and (b)(2)(xiv) of this section.
(c) Special rules-(1) De minimis
rule-(i) Gross receipts of $25 million or
less. For a trade or business with gross
receipts of $25 million or less for the
taxable year, a trade or business is not an
SSTB if less than 10 percent of the gross
receipts of the trade or business are attrib-
utable to the performance of services in a
field described in paragraph (b) of this
section. For purposes of determining
whether this 10 percent test is satisfied,
the performance of any activity incident to
the actual performance of services in the
field is considered the performance of ser-
vices in that field.
(ii) Gross receipts of greater than $25
million. For a trade or business with gross
receipts of greater than $25 million for the
taxable year, the rules of paragraph
(c)(1)(i) of this section are applied by sub-
stituting "5 percent" for "10 percent" each
place it appears.
(iii) Examples. The following exam-
ples illustrate the provisions of paragraph
(c)(1) of this section.
(A) Example 1. Landscape LLC sells lawn care
and landscaping equipment and also provides advice
and counsel on landscape design for large office
parks and residential buildings. The landscape de-
sign services include advice on the selection and
placement of trees, shrubs, and flowers and are con-
sidered to be the performance of services in the field
of consulting under paragraphs (b)(1)(vi) and
(b)(2)(vii) of this section. Landscape LLC separately
invoices for its landscape design services and does
not sell the trees, shrubs, or flowers it recommends
for use in the landscape design. Landscape LLC
maintains one set of books and records and treats the
equipment sales and design services as a single trade
or business for purposes of sections 162 and 199A.
Landscape LLC has gross receipts of $2 million.
$250,000 of the gross receipts is attributable to the
landscape design services, an SSTB. Because the
gross receipts from the consulting services exceed 10
percent of Landscape LLC's total gross receipts, the
entirety of Landscape LLC's trade or business is
considered an SSTB.
(B) Example 2. Animal Care LLC provides vet-
erinarian services performed by licensed staff and
also develops and sells its own line of organic dog
food at its veterinarian clinic and online. The veter-
inarian services are considered to be the performance
of services in the field of health under paragraphs
(b)(1)(i) and (b)(2)(ii) of this section. Animal Care
LLC separately invoices for its veterinarian services
and the sale of its organic dog food. Animal Care
LLC maintains separate books and records for its
veterinarian clinic and its development and sale of its
dog food. Animal Care LLC also has separate em-
ployees who are unaffiliated with the veterinary
clinic and who only work on the formulation, mar-
keting, sales, and distribution of the organic dog
food products. Animal Care LLC treats its veterinary
practice and the dog food development and sales as
separate trades or businesses for purposes of section
162 and 199A. Animal Care LLC has gross receipts
of $3,000,000. $1,000,000 of the gross receipts is
attributable to the veterinary services, an SSTB. Al-
though the gross receipts from the services in the
field of health exceed 10 percent of Animal Care
LLC's total gross receipts, the dog food development
and sales business is not considered an SSTB due to
the fact that the veterinary practice and the dog food
development and sales are separate trades or busi-
nesses under section 162.
(2) Services or property provided to an
SSTB-(i) In general. If a trade or busi-
ness provides property or services to an
SSTB within the meaning of this section
and there is 50 percent or more common
ownership of the trades or businesses, that
portion of the trade or business of provid-
ing property or services to the 50 percent
or more commonly-owned SSTB will be
treated as a separate SSTB with respect to
the related parties.
(ii) 50 percent or more common own-
ership. For purposes of paragraph (c)(2)(i)
and (ii) of this section, 50 percent or more
common ownership includes direct or in-
direct ownership by related parties within
the meaning of sections 267(b) or 707(b).
(iii) Examples. The following exam-
ples illustrate the provisions of paragraph
(c)(2) of this section.
(A) Example 1. Law Firm is a partnership that
provides legal services to clients, owns its own office
building and employs its own administrative staff.
Law Firm divides into three partnerships. Partner-
ship 1 performs legal services to clients. Partnership
2 owns the office building and rents the entire build-
ing to Partnership 1. Partnership 3 employs the ad-
ministrative staff and through a contract with Part-
nership 1 provides administrative services to
Partnership 1 in exchange for fees. All three of the
partnerships are owned by the same people (the
original owners of Law Firm). Because Partnership 2
provides all of its property to Partnership 1, and
Partnership 3 provides all of its services to Partner-
ship 1, Partnerships 2 and 3 will each be treated as an
SSTB under paragraph (c)(2) of this section.
(B) Example 2. Assume the same facts as in
Example 1 of this paragraph (c)(2), except that Part-
nership 2, which owns the office building, rents 50
percent of the building to Partnership 1, which pro-
vides legal services, and the other 50 percent to
various unrelated third party tenants. Because Part-
nership 2 is owned by the same people as Partnership
1, the portion of Partnership 2's leasing activity
related to the lease of the building to Partnership 1
will be treated as a separate SSTB. The remaining 50
percent of Partnership 2's leasing activity will not be
treated as an SSTB.
(d) Trade or business of performing
services as an employee-(1) In general.
The trade or business of performing ser-
vices as an employee is not a trade or
business for purposes of section 199A and
the regulations thereunder. Therefore, no
items of income, gain, deduction, and loss
from the trade or business of performing
services as an employee constitute QBI
within the meaning of section 199A and
§ 1.199A-3. Except as provided in para-
graph (d)(3) of this section, income from
the trade or business of performing ser-
vices as an employee refers to all wages
(within the meaning of section 3401(a))
and other income earned in a capacity as
an employee, including payments de-
scribed in § 1.6041-2(a)(1) (other than
payments to individuals described in sec-
tion 3121(d)(3)) and § 1.6041-2(b)(1).
(2) Employer's Federal employment
tax classification of employee immaterial.
For purposes of determining whether
wages are earned in a capacity as an em-
ployee as provided in paragraph (d)(1) of
this section, the treatment of an employee
by an employer as anything other than an
employee for Federal employment tax
purposes is immaterial. Thus, if a worker
should be properly classified as an em-
ployee, it is of no consequence that the
employee is treated as a non-employee by
the employer for Federal employment tax
purposes.
(3) Presumption that former employees
are still employees-(i) Presumption. Solely
for purposes of section 199A(d)(1)(B) and
paragraph (d)(1) of this section, an individual
that was properly treated as an employee for
Federal employment tax purposes by the per-
son to which he or she provided services and
who is subsequently treated as other than an
employee by such person with regard to the
provision of substantially the same services
directly or indirectly to the person (or a related
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person), is presumed, for three years after
ceasing to be treated as an employee for Fed-
eral employment tax purposes, to be in the
trade or business of performing services as an
employee with regard to such services. As
provided in paragraph (d)(3)(ii) of this section,
this presumption may be rebutted upon a
showing by the individual that, under Federal
tax law, regulations, and principles (including
common-law employee classification rules),
the individual is performing services in a ca-
pacity other than as an employee. This pre-
sumption applies regardless of whether the
individual provides services directly or indi-
rectly through an entity or entities.
(ii) Rebuttal of presumption. Upon no-
tice from the IRS, an individual rebuts the
presumption in paragraph (d)(3)(i) of this
section by providing records, such as con-
tracts or partnership agreements, that pro-
vide sufficient evidence to corroborate the
individual's status as a non-employee.
(iii) Examples. The following exam-
ples illustrate the provision of paragraph
(d)(3) of this section. Unless otherwise
provided, the individual in each example
has taxable income in excess of the
threshold amount.
(A) Example 1. A is employed by PRS, a part-
nership for Federal tax purposes, as a fulltime em-
ployee and is treated as such for Federal employment
tax purposes. A quits his job for PRS and enters into
a contract with PRS under which A provides sub-
stantially the same services that A previously pro-
vided to PRS in A's capacity as an employee. Be-
cause A was treated as an employee for services he
provided to PRS, and now is no longer treated as an
employee with regard to such services, A is pre-
sumed (solely for purposes of section 199A(d)(1)(B)
and paragraphs (a)(3) and (d) of this section) to be in
the trade or business of performing services as an
employee with regard to his services performed for
PRS. Unless the presumption is rebutted with a
showing that, under Federal tax law, regulations, and
principles (including the common-law employee
classification rules), A is not an employee, any
amounts paid by PRS to A with respect to such
services will not be QBI for purposes of section
199A. The presumption would apply even if, instead
of contracting directly with PRS, A formed a disre-
garded entity, or a passthrough entity, and the entity
entered into the contract with PRS.
(B) Example 2. C is an attorney employed as an
associate in a law firm (Law Firm 1) and was treated
as such for Federal employment tax purposes. C and
the other associates in Law Firm 1 have taxable
income below the threshold amount. Law Firm 1
terminates its employment relationship with C and
its other associates. C and the other former associates
form a new partnership, Law Firm 2, which contracts
to perform legal services for Law Firm 1. Therefore,
in form, C is now a partner in Law Firm 2 which
earns income from providing legal services to Law
Firm 1. C continues to provide substantially the same
legal services to Law Firm 1 and its clients. Because
C was previously treated as an employee for services
she provided to Law Firm 1, and now is no longer
treated as an employee with regard to such services,
C is presumed (solely for purposes of section
199A(d)(1)(B) and paragraphs (a)(3) and (d) of this
section) to be in the trade or business of performing
services as an employee with respect to the services
C provides to Law Firm 1 indirectly through Law
Firm 2. Unless the presumption is rebutted with a
showing that, under Federal tax law, regulations, and
principles (including common-law employee classi-
fication rules), C's distributive share of Law Firm 2
income (including any guaranteed payments) will
not be QBI for purposes of section 199A. The results
in this example would not change if, instead of
contracting with Law Firm 1, Law Firm 2 was in-
stead admitted as a partner in Law Firm 1.
(C) Example 3. E is an engineer employed as a
senior project engineer in an engineering firm, En-
gineering Firm. Engineering Firm is a partnership for
Federal tax purposes and structured such that after
10 years, senior project engineers are considered for
partner if certain career milestones are met. After 10
years, E meets those career milestones and is admit-
ted as a partner in Engineering Firm. As a partner in
Engineering Firm, E shares in the net profits of
Engineering Firm, and also otherwise satisfies the
requirements under Federal tax law, regulations, and
principles (including common-law employee classi-
fication rules) to be respected as a partner. E is
presumed (solely for purposes of section 199A(d)
(1)(B) and paragraphs (a)(3) and (d) of this section)
to be in the trade or business of performing services
as an employee with respect to the services E pro-
vides to Engineering Firm. However, E is able to
rebut the presumption by showing that E became a
partner in Engineering Firm as a career milestone,
shares in the overall net profits in Engineering Firm,
and otherwise satisfies the requirements under Fed-
eral tax law, regulations, and principles (including
common-law employee classification rules) to be
respected as a partner.
(D) Example 4. F is a financial advisor employed
by a financial advisory firm, Advisory Firm, a part-
nership for Federal tax purposes, as a fulltime em-
ployee and is treated as such for Federal employment
tax purposes. F has taxable income below the thresh-
old amount. Advisory Firm is a partnership and
offers F the opportunity to be admitted as a partner.
F elects to be admitted as a partner to Advisory Firm
and is admitted as a partner to Advisory Firm. As a
partner in Advisory Firm, F shares in the net profits
of Advisory Firm, is obligated to Advisory Firm in
ways that F was not previously obligated as an
employee, is no longer entitled to certain benefits
available only to employees of Advisory Firm, and
has materially modified his relationship with Advi-
sory Firm. F's share of net profits is not subject to a
floor or capped at a dollar amount. F is presumed
(solely for purposes of section 199A(d)(1)(B) and
paragraphs (a)(3) and (d) of this section) to be in the
trade or business of performing services as an em-
ployee with respect to the services F provides to
Advisory Firm. However, F is able to rebut the
presumption by showing that F became a partner in
Advisory Firm by sharing in the profits of Advisory
Firm, materially modifying F's relationship with Ad-
visory Firm, and otherwise satisfying the require-
ments under Federal tax law, regulations, and
principles (including common-law employee classi-
fication rules) to be respected as a partner.
(e) Applicability date-(1) General
rule. Except as provided in paragraph
(e)(2) of this section, the provisions of this
section apply to taxable years ending after
February 8, 2019.
(2) Exceptions-(i) Anti-abuse rules.
The provisions of paragraphs (c)(2) and
(d)(3) of this section apply to taxable
years ending after December 22, 2017.
(ii) Non-calendar year RPE. For pur-
poses of determining QBI, W-2 wages,
UBIA of qualified property, and the ag-
gregate amount of qualified REIT divi-
dends and qualified PTP income, if an
individual receives any of these items
from an RPE with a taxable year that
begins before January 1, 2018, and ends
after December 31, 2017, such items are
treated as having been incurred by the
individual during the individual's taxable
year in which or with which such RPE
taxable year ends.
Par. 8. Section 1.199A-6 is added to
read as follows:
§ 1.199A-6 Relevant passthrough
entities (RPEs), publicly traded
partnerships (PTPs), trusts, and estates.
(a) Overview. This section provides
special rules for RPEs, PTPs, trusts, and
estates necessary for the computation of
the section 199A deduction of their own-
ers or beneficiaries. Paragraph (b) of this
section provides computational and re-
porting rules for RPEs necessary for indi-
viduals who own interests in RPEs to cal-
culate their section 199A deduction.
Paragraph (c) of this section provides
computational and reporting rules for
PTPs necessary for individuals who own
interests in PTPs to calculate their section
199A deduction. Paragraph (d) of this sec-
tion provides computational and reporting
rules for trusts (other than grantor trusts)
and estates necessary for their beneficia-
ries to calculate their section 199A deduc-
tion.
(b) Computational and reporting rules
for RPEs-(1) In general. An RPE must
determine and report information attribut-
able to any trades or businesses it is en-
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gaged in necessary for its owners to de-
termine their section 199A deduction.
(2) Computational rules. Using the fol-
lowing four rules, an RPE must determine
the items necessary for individuals who
own interests in the RPE to calculate their
section 199A deduction under § 1.199A-
1(c) or (d). An RPE that chooses to ag-
gregate trades or businesses under the
rules of § 1.199A-4 may determine these
items for the aggregated trade or business.
(i) First, the RPE must determine if it is
engaged in one or more trades or busi-
nesses. The RPE must also determine
whether any of its trades or businesses is
an SSTB under the rules of § 1.199A-5.
(ii) Second, the RPE must apply the
rules in § 1.199A-3 to determine the QBI
for each trade or business engaged in di-
rectly.
(iii) Third, the RPE must apply the
rules in § 1.199A-2 to determine the W-2
wages and UBIA of qualified property for
each trade or business engaged in directly.
(iv) Fourth, the RPE must determine
whether it has any qualified REIT divi-
dends as defined in § 1.199A-3(c)(1)
earned directly or through another RPE.
The RPE must also determine the amount
of qualified PTP income as defined in
§ 1.199A-3(c)(2) earned directly or indi-
rectly through investments in PTPs.
(3) Reporting rules for RPEs-(i)
Trade or business directly engaged in. An
RPE must separately identify and report
on the Schedule K-1 issued to its owners
for any trade or business (including an
aggregated trade or business) engaged in
directly by the RPE-
(A) Each owner's allocable share of
QBI, W-2 wages, and UBIA of qualified
property attributable to each such trade or
business; and
(B) Whether any of the trades or busi-
nesses described in paragraph (b)(3)(i) of
this section is an SSTB.
(ii) Other items. An RPE must also
report on an attachment to the Schedule
K-1, any QBI, W-2 wages, UBIA of
qualified property, or SSTB determina-
tions, reported to it by any RPE in which
the RPE owns a direct or indirect interest.
The RPE must also report each owner's
allocated share of any qualified REIT div-
idends received by the RPE (including
through another RPE) as well as any qual-
ified PTP income or loss received by the
RPE for each PTP in which the RPE holds
an interest (including through another
RPE). Such information can be reported
on an amended or late filed return to the
extent that the period of limitations re-
mains open.
(iii) Failure to report information. If an
RPE fails to separately identify or report
on the Schedule K-1 (or any attachments
thereto) issued to an owner an item de-
scribed in paragraph (b)(3)(i) of this sec-
tion, the owner's share (and the share of
any upper-tier indirect owner) of each un-
reported item of positive QBI, W-2
wages, or UBIA of qualified property at-
tributable to trades or businesses engaged
in by that RPE will be presumed to be
zero.
(c) Computational and reporting rules
for PTPs-(1) Computational rules. Each
PTP must determine its QBI under the
rules of § 1.199A-3 for each trade or
business in which the PTP is engaged in
directly. The PTP must also determine
whether any of the trades or businesses it
is engaged in directly is an SSTB.
(2) Reporting rules. Each PTP is re-
quired to separately identify and report the
information described in paragraph (c)(1)
of this section on Schedules K-1 issued to
its partners. Each PTP must also deter-
mine and report any qualified REIT divi-
dends or qualified PTP income or loss
received by the PTP including through an
RPE, a REIT, or another PTP. A PTP is
not required to determine or report W-2
wages or the UBIA of qualified property
attributable to trades or businesses it is
engaged in directly.
(d) Application to trusts, estates, and
beneficiaries-(1) In general. A trust or
estate computes its section 199A deduc-
tion based on the QBI, W-2 wages, UBIA
of qualified property, qualified REIT div-
idends, and qualified PTP income that are
allocated to the trust or estate. An individ-
ual beneficiary of a trust or estate takes
into account any QBI, W-2 wages, UBIA
of qualified property, qualified REIT div-
idends, and qualified PTP income allo-
cated from a trust or estate in calculating
the beneficiary's section 199A deduction,
in the same manner as though the items
had been allocated from an RPE. For pur-
poses of this section and §§ 1.199A-1
through 1.199A-5, a trust or estate is
treated as an RPE to the extent it allocates
QBI and other items to its beneficiaries,
and is treated as an individual to the extent
it retains the QBI and other items.
(2) Grantor trusts. To the extent that
the grantor or another person is treated as
owning all or part of a trust under sections
671 through 679, such person computes
its section 199A deduction as if that per-
son directly conducted the activities of the
trust with respect to the portion of the trust
treated as owned by the grantor or other
person.
(3) Non-grantor trusts and estates-(i)
Calculation at entity level. A trust or es-
tate must calculate its QBI, W-2 wages,
UBIA of qualified property, qualified
REIT dividends, and qualified PTP in-
come. The QBI of a trust or estate must be
computed by allocating qualified items of
deduction described in section 199A(c)(3)
in accordance with the classification of
those deductions under § 1.652(b)-3(a),
and deductions not directly attributable
within the meaning of § 1.652(b)-3(b)
(other deductions) are allocated in a
manner consistent with the rules in
§ 1.652(b)-3(b). Any depletion and de-
preciation deductions described in sec-
tion 642(e) and any amortization deduc-
tions described in section 642(f) that
otherwise are properly included in the
computation of QBI are included in the
computation of QBI of the trust or es-
tate, regardless of how those deductions
may otherwise be allocated between the
trust or estate and its beneficiaries for
other purposes of the Code.
(ii) Allocation among trust or estate
and beneficiaries. The QBI (including any
amounts that may be less than zero as
calculated at the trust or estate level), W-2
wages, UBIA of qualified property, qual-
ified REIT dividends, and qualified PTP
income of a trust or estate are allocated to
each beneficiary and to the trust or estate
based on the relative proportion of the
trust's or estate's distributable net income
(DNI), as defined by section 643(a), for
the taxable year that is distributed or re-
quired to be distributed to the beneficiary
or is retained by the trust or estate. For this
purpose, the trust's or estate's DNI is de-
termined with regard to the separate share
rule of section 663(c), but without regard
to section 199A. If the trust or estate has
no DNI for the taxable year, any QBI,
W-2 wages, UBIA of qualified property,
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qualified REIT dividends, and qualified
PTP income are allocated entirely to the
trust or estate.
(iii) [Reserved]
(iv) Threshold amount. The threshold
amount applicable to a trust or estate is
$157,500 for any taxable year beginning
before 2019. For taxable years beginning
after 2018, the threshold amount shall be
$157,500 increased by the cost-of-living
adjustment as outlined in § 1.199A-
1(b)(12). For purposes of determining
whether a trust or estate has taxable in-
come in excess of the threshold amount,
the taxable income of the trust or estate is
determined after taking into account any
distribution deduction under sections 651
or 661.
(v) [Reserved]
(vi) Electing small business trusts. An
electing small business trust (ESBT) is
entitled to the deduction under section
199A. Any section 199A deduction attrib-
utable to the assets in the S portion of the
ESBT is to be taken into account by the S
portion. The S portion of the ESBT must
take into account the QBI and other items
from any S corporation owned by the
ESBT, the grantor portion of the ESBT
must take into account the QBI and other
items from any assets treated as owned by
a grantor or another person (owned por-
tion) of a trust under sections 671 through
679, and the non-S portion of the ESBT
must take into account any QBI and other
items from any other entities or assets
owned by the ESBT. For purposes of de-
termining whether the taxable income of
an ESBT exceeds the threshold amount,
the S portion and the non-S portion of an
ESBT are treated as a single trust. See
§ 1.641(c)-1.
(vii) Anti-abuse rule for creation of a
trust to avoid exceeding the threshold
amount. A trust formed or funded with a
principal purpose of avoiding, or of using
more than one, threshold amount for pur-
poses of calculating the deduction under
section 199A will not be respected as a
separate trust entity for purposes of deter-
mining the threshold amount for purposes
of section 199A. See also § 1.643(f)-1 of
the regulations.
(viii) Example. The following example
illustrates the application of paragraph (d)
of this section.
(A) Example-(1) Computation of DNI and in-
clusion and deduction amounts-(i) Trust's distrib-
utive share of partnership items. Trust, an irrevoca-
ble testamentary complex trust, is a 25% partner in
PRS, a family partnership that operates a restaurant
that generates QBI and W-2 wages. A and B, Trust's
beneficiaries, own the remaining 75% of PRS di-
rectly. In 2018, PRS properly allocates gross income
from the restaurant of $55,000, and expenses directly
allocable to the restaurant of $45,000 (including
W-2 wages of $25,000, and miscellaneous expenses
of $20,000) to Trust. These items are properly in-
cluded in Trust's DNI. PRS distributes $10,000 of
cash to Trust in 2018.
(ii) Trust's activities. In addition to its interest in
PRS, Trust also operates a family bakery conducted
through an LLC wholly-owned by the Trust that is
treated as a disregarded entity. In 2018, the bakery
produces $100,000 of gross income and $155,000 of
expenses directly allocable to operation of the bak-
ery (including W-2 wages of $50,000, rental ex-
pense of $75,000, miscellaneous expenses of
$25,000, and depreciation deductions of $5,000).
(The net loss from the bakery operations is not
subject to any loss disallowance provisions outside
of section 199A.) Trust maintains a reserve of
$5,000 for depreciation. Trust also has $125,000 of
UBIA of qualified property in the bakery. For pur-
poses of computing its section 199A deduction,
Trust and its beneficiaries have properly chosen to
aggregate the family restaurant conducted through
PRS with the bakery conducted directly by Trust
under § 1.199A-4. Trust also owns various invest-
ment assets that produce portfolio-type income con-
sisting of dividends ($25,000), interest ($15,000),
and tax-exempt interest ($15,000). Accordingly,
Trust has the following items which are properly
included in Trust's DNI:
Table 1 to Paragraph (d)(3)(viii)(A)(1)(ii)
Interest Income
15,000
Dividends
25,000
Tax-exempt interest
15,000
Net business loss from PRS and bakery
(45,000)
Trustee commissions
3,000
State and local taxes
5,000
(iii) Allocation of deductions under § 1.652(b)-3
(Directly attributable expenses). In computing
Trust's DNI for the taxable year, the distributive
share of expenses of PRS are directly attributable
under § 1.652(b)-3(a) to the distributive share of
income of PRS. Accordingly, Trust has gross busi-
ness income of $155,000 ($55,000 from PRS and
$100,000 from the bakery) and direct business ex-
penses of $200,000 ($45,000 from PRS and
$155,000 from the bakery). In addition, $1,000 of
the trustee commissions and $1,000 of state and local
taxes are directly attributable under § 1.652(b)-3(a)
to Trust's business income. Accordingly, Trust has
excess business deductions of $47,000. Pursuant to
its authority recognized under § 1.652(b)-3(d), Trust
allocates the $47,000 excess business deductions as
follows: $15,000 to the interest income, resulting in
$0 interest income, $25,000 to the dividends, result-
ing in $0 dividend income, and $7,000 to the tax
exempt interest.
(iv) Allocation of deductions under § 1.652(b)-3
(Non-directly attributable expenses). The trustee
must allocate the sum of the balance of the trustee
commissions ($2,000) and state and local taxes
($4,000) to Trust's remaining tax-exempt interest
income, resulting in $2,000 of tax exempt interest.
(v) Amounts included in taxable income. For
2018, Trust has DNI of $2,000. Pursuant to Trust's
governing instrument, Trustee distributes 50%, or
$1,000, of that DNI to A, an individual who is a
discretionary beneficiary of Trust. In addition,
Trustee is required to distribute 25%, or $500, of that
DNI to B, a current income beneficiary of Trust.
Trust retains the remaining 25% of DNI. Conse-
quently, with respect to the $1,000 distribution A
receives from Trust, A properly excludes $1,000 of
tax-exempt interest income under section 662(b).
With respect to the $500 distribution B receives from
Trust, B properly excludes $500 of tax exempt in-
terest income under section 662(b). Because the DNI
consists entirely of tax-exempt income, Trust de-
ducts $0 under section 661 with respect to the dis-
tributions to A and B.
(2) Section 199A deduction-(i) Trust's W-2
wages and QBI. For the 2018 taxable year, prior to
allocating the beneficiaries' shares of the section
199A items, Trust has $75,000 ($25,000 from PRS
\+ $50,000 of Trust) of W-2 wages. Trust also has
$125,000 of UBIA of qualified property. Trust has
negative QBI of ($47,000) ($155,000 gross income
from aggregated businesses less the sum of $200,000
direct expenses from aggregated businesses and
$2,000 directly attributable business expenses from
Trust under the rules of § 1.652(b)-3(a)).
(ii) A's Section 199A deduction computation.
Because the $1,000 Trust distribution to A equals
one-half of Trust's DNI, A has W-2 wages from
Trust of $37,500. A also has W-2 wages of $2,500
from a trade or business outside of Trust (computed
without regard to A's interest in Trust), which A has
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properly aggregated under § 1.199A-4 with the
Trust's trade or businesses (the family's restaurant
and bakery), for a total of $40,000 of W-2 wages
from the aggregate trade or businesses. A also has
$62,500 of UBIA from Trust and $25,000 of UBIA
of qualified property from the trade or business out-
side of Trust for $87,500 of total UBIA of qualified
property. A has $100,000 of QBI from the non-Trust
trade or businesses in which A owns an interest.
Because the $1,000 Trust distribution to A equals
one-half of Trust's DNI, A has (negative) QBI from
Trust of ($23,500). A's total QBI is determined by
combining the $100,000 QBI from non-Trust
sources with the ($23,500) QBI from Trust for a total
of $76,500 of QBI. Assume that A's taxable income
is $357,500, which exceeds A's applicable threshold
amount for 2018 by $200,000. A's tentative deduct-
ible amount is $15,300 (20% x $76,500 of QBI),
limited to the greater of (i) $20,000 (50% x $40,000
of W-2 wages), or (ii) $12,187.50 ($10,000, 25% x
$40,000 of W-2 wages, plus $2,187.50, 2.5% x
$87,500 of UBIA of qualified property). A's section
199A deduction is equal to the lesser of $15,300, or
$71,500 (20% x $357,500 of taxable income). Ac-
cordingly, A's section 199A deduction for 2018 is
$15,300.
(iii) B's Section 199A deduction computation.
For 2018, B's taxable income is below the threshold
amount so B is not subject to the W-2 wage limita-
tion. Because the $500 Trust distribution to B equals
one-quarter of Trust's DNI, B has a total of
($11,750) of QBI. B also has no QBI from non-Trust
trades or businesses, so B has a total of ($11,750) of
QBI. Accordingly, B's section 199A deduction for
2018 is zero. The ($11,750) of QBI is carried over to
2019 as a loss from a qualified business in the hands
of B pursuant to section 199A(c)(2).
(iv) Trust's Section 199A deduction computation.
For 2018, Trust's taxable income is below the
threshold amount so it is not subject to the W-2
wage limitation. Because Trust retained 25% of
Trust's DNI, Trust is allocated 25% of its QBI,
which is ($11,750). Trust's section 199A deduction
for 2018 is zero. The ($11,750) of QBI is carried
over to 2019 as a loss from a qualified business in the
hands of Trust pursuant to section 199A(c)(2).
(B) [Reserved]
(e) Applicability date-(1) General
rule. Except as provided in paragraph
(e)(2) of this section, the provisions of this
section apply to taxable years ending after
February 8, 2019.
(2) Exceptions-(i) Anti-abuse rules.
The provisions of paragraph (d)(3)(vii) of
this section apply to taxable years ending
after December 22, 2017.
(ii) Non-calendar year RPE. For pur-
poses of determining QBI, W-2 wages,
UBIA of qualified property, and the ag-
gregate amount of qualified REIT divi-
dends and qualified PTP income, if an
individual receives any of these items
from an RPE with a taxable year that
begins before January 1, 2018, and ends
after December 31, 2017, such items are
treated as having been incurred by the
individual during the individual's taxable
year in which or with which such RPE
taxable year ends.
Par. 9. Section 1.643(f)-1 is added to
read as follows:
§ 1.643(f)-1 Treatment of multiple
trusts.
(a) General rule. For purposes of sub-
chapter J of chapter 1 of subtitle A of Title
26 of the United States Code, two or more
trusts will be aggregated and treated as a
single trust if such trusts have substan-
tially the same grantor or grantors and
substantially the same primary beneficiary
or beneficiaries, and if a principal purpose
for establishing one or more of such trusts
or for contributing additional cash or other
property to such trusts is the avoidance of
Federal income tax. For purposes of ap-
plying this rule, spouses will be treated as
one person.
(b) Applicability date. The provisions
of this section apply to taxable years end-
ing after August 16, 2018.
Kirsten Wielobob,
Deputy Commissioner for Services and
Enforcement.
Approved: December 20, 2018.
David J. Kautter,
Assistant Secretary of the Treasury (Tax
Policy).
(Filed by the Office of the Federal Register on February 4,
2019, 4:15 p.m., and published in the issue of the Federal
Register for February 8, 2019, 84 F.R. 2952)
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## Part III. Administrative, Procedural, and Miscellaneous
### Section 199A Trade or Business Safe Harbor: Rental Real Estate
Notice 2019-07
#### SECTION 1. PURPOSE
This notice contains a proposed revenue
procedure that provides for a safe harbor
under which a rental real estate enterprise
will be treated as a trade or business solely
for purposes of section 199A of the Internal
Revenue Code (Code) and §§ 1.199A-1
through 1.199A-6 of the Income Tax Reg-
ulations (Regulations) (26 CFR Part 1),
which are being published contemporane-
ously with this notice. To qualify for treat-
ment as a trade or business under this safe
harbor, the rental real estate enterprise must
satisfy the requirements of the proposed rev-
enue procedure. If an enterprise fails to sat-
isfy these requirements, the rental real estate
enterprise may still be treated as a trade or
business for purposes of section 199A if the
enterprise otherwise meets the definition of
trade or business in § 1.199A-1(b)(14).
## SECTION 2. BACKGROUND
Section 199A was enacted on Decem-
ber 22, 2017, as part of the act titled "An
Act to provide for reconciliation pursuant
to titles II and V of the concurrent reso-
lution on the budget for fiscal year 2018,"
Pub. L. 115-97, and was amended on
March 23, 2018, retroactively to January
1, 2018, by the Consolidated Appropria-
tions Act, 2018, Pub. L. No. 115-141.
Congress enacted section 199A to provide
a deduction to non-corporate taxpayers of
up to 20 percent of the taxpayer's quali-
fied business income from each of the
taxpayer's qualified trades or businesses,
including those operated through a partner-
ship, S corporation, or sole proprietorship,
as well as a deduction of up to 20 percent of
aggregate qualified real estate investment
trust (REIT) dividends and qualified pub-
licly traded partnership income.
Section 199A(d) defines a qualified
trade or business as any trade or business
other than a specified service trade or
business (SSTB) or the trade or business
of performing services as an employee.
Section 1.199A-1(b)(14) defines trade or
business, in relevant part, as a trade or
business under section 162 other than the
trade or business of performing services
as an employee.
The Treasury Department and the IRS
are aware that whether a rental real estate
enterprise is a trade or business is the
subject of uncertainty for some taxpayers.
To help mitigate this uncertainty, the pro-
posed revenue procedure set forth in sec-
tion 6 of this notice provides for a safe
harbor under which a rental real estate
enterprise will be treated as a trade or
business solely for purposes of the section
199A deduction.
## SECTION 3. REQUEST FOR COMMENTS
The Treasury Department and the IRS
request comments on the proposed reve-
nue procedure set forth in section 6 of this
notice. Interested parties are invited to
submit comments on this notice by April
9, 2019. Taxpayers may submit comments
electronically via the Federal eRulemak-
ing Portal at www.regulations.gov (indi-
cate IRS and NOT-133582-18). Alterna-
tively, taxpayers may submit comments
to: CC:PA:LPD:PR (Notice 2019-07),
Room 5203, Internal Revenue Service,
P.O. Box 7604, Ben Franklin Station,
Washington, D.C., 20044. Submissions
may be hand-delivered Monday through
Friday between the hours of 8 a.m. and 4
p.m. to CC:PA:LPD:PR (Notice 2019-
07), Courier's Desk, Internal Revenue
Service, 1111 Constitution Avenue, N.W.,
Washington, D.C. 20224.
## SECTION 4. EFFECTIVE DATE AND IMMEDIATE RELIANCE
The proposed revenue procedure is
proposed to apply generally to taxpayers
with taxable years ending after December
31, 2017.
Until such time that the proposed rev-
enue procedure is published in final form,
taxpayers may use the safe harbor de-
scribed in the proposed revenue procedure
for purposes of determining when a rental
real estate enterprise may be treated as a
trade or business solely for purposes of
section 199A.
## SECTION 5. DRAFTING INFORMATION
The principal authors of this notice are
Robert D. Alinsky, Vishal R. Amin, Marga-
ret Burow, and Frank J. Fisher of the Office of
the Associate Chief Counsel (Passthroughs &
Special Industries). However, other personnel
from the Treasury Department and the IRS
participated in its development. For further
information regarding this notice, contact
Robert D. Alinsky or Margaret Burow at (202)
317-5279 or Vishal R. Amin or Frank J.
Fisher at (202) 317-6850 (not a toll-free num-
ber).
## SECTION 6. FORM OF PROPOSED REVENUE PROCEDURE
Set forth below is the form of the pro-
posed revenue procedure that is proposed
in this Notice:
## FORM OF PROPOSED REVENUE PROCEDURE
26 CFR 1.199A-1: Trade or Business
(Also: § 199A)
## Rev. Proc. 2019-XX
## SECTION 1. PURPOSE
Section 3 of this revenue procedure
provides a safe harbor under which a
rental real estate enterprise will be treated
as a trade or business for purposes of
section 199A of the Internal Revenue
Code (Code) and §§ 1.199A-1 through
1.199A-6 of the Income Tax Regulations
(26 CFR Part I). The safe harbor provided
by this revenue procedure applies solely
for purposes of section 199A. If an enter-
prise fails to satisfy the requirements of
this safe harbor, the rental real estate en-
terprise may still be treated as a trade or
business for purposes of section 199A if
the enterprise otherwise meets the defini-
tion of trade or business in § 1.199A-
1(b)(14).
## SECTION 2. BACKGROUND
Section 199A was enacted on Decem-
ber 22, 2017, as part of the act entitled
"An Act to provide for reconciliation pur-
suant to titles II and V of the concurrent
resolution on the budget for fiscal year
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2018," Pub. L. 115-97, and was amended
on March 23, 2018, retroactively to Janu-
ary 1, 2018, by the Consolidated Appro-
priations Act, 2018, Pub. L. No. 115-141.
Congress enacted section 199A to provide
a deduction to non-corporate taxpayers of
up to 20 percent of the taxpayer's quali-
fied business income from the taxpayer's
qualified trades or businesses, including
those operated through a partnership, S
corporation, or sole proprietorship, as well
as a deduction of up to 20 percent of
aggregate real estate investment trust
(REIT) dividends and qualified publicly
traded partnership income.
Section 199A(d) defines a qualified
trade or business as any trade or business
other than a specified service trade or
business (SSTB) or a trade or business of
performing services as an employee. Sec-
tion 1.199A-1(b)(14) defines trade or
business, in relevant part, as a trade or
business under section 162 other than the
trade or business of performing services
as an employee. Sections 1.199A-5(b)
and 1.199A-5(d) define an SSTB and the
trade or business of performing services
as an employee, respectively.
The Treasury Department and the IRS
are aware that whether a rental real estate
enterprise is a trade or business for pur-
poses of section 199A is the subject of
uncertainty for some taxpayers. To help
mitigate this uncertainty, this proposed
revenue procedure provides a safe harbor
for treating a rental real estate enterprise
as a trade or business solely for purposes
of the section 199A deduction.
## SECTION 3. RULES OF APPLICATION
.01 In general. This safe harbor is
available to taxpayers who seek to claim
the deduction under section 199A with
respect to a rental real estate enterprise. If
the safe harbor requirements are met, the
real estate enterprise will be treated as a
trade or business as defined in section
199A(d) for purposes of applying the reg-
ulations under section 199A. Relevant
passthrough entities (RPEs), as defined in
§ 1.199A-1(b)(10), may also use this safe
harbor in order to determine whether a
rental real estate enterprise is a trade or
business as defined in section 199A(d).
Failure to satisfy the requirements of this
safe harbor does not preclude a taxpayer
from otherwise establishing that a rental
real estate enterprise is a trade or business
for purposes of section 199A.
.02 Rental real estate enterprise.
Solely for purposes of this safe harbor, a
rental real estate enterprise is defined as
an interest in real property held for the
production of rents and may consist of an
interest in multiple properties. The indi-
vidual or RPE relying on this revenue
procedure must hold the interest directly
or through an entity disregarded as an
entity separate from its owner under
§ 301.7701-3. Taxpayers must either
treat each property held for the production
of rents as a separate enterprise or treat all
similar properties held for the production
of rents (with the exception of those de-
scribed in paragraph .05 of this section) as
a single enterprise. Commercial and resi-
dential real estate may not be part of the
same enterprise. Taxpayers may not vary
this treatment from year-to-year unless
there has been a significant change in facts
and circumstances.
.03 Safe harbor. Solely for the pur-
poses of section 199A, a rental real estate
enterprise will be treated as a trade or
business if the following requirements are
satisfied during the taxable year with re-
spect to the rental real estate enterprise:
(A) Separate books and records are
maintained to reflect income and
expenses for each rental real estate
enterprise;
(B) For taxable years beginning prior
to January 1, 2023, 250 or more
hours of rental services are per-
formed (as described in this reve-
nue procedure) per year with re-
spect to the rental enterprise. For
taxable years beginning after De-
cember 31, 2022, in any three of
the five consecutive taxable years
that end with the taxable year (or in
each year for an enterprise held for
less than five years), 250 or more
hours of rental services are per-
formed (as described in this reve-
nue procedure) per year with re-
spect to the rental real estate
enterprise; and
(C) The taxpayer maintains contempora-
neous records, including time re-
ports, logs, or similar documents, re-
garding the following: (i) hours of
all services performed; (ii) descrip-
tion of all services performed; (iii)
dates on which such services were
performed; and (iv) who performed
the services. Such records are to be
made available for inspection at the
request of the IRS. The contempora-
neous records requirement will not
apply to taxable years beginning
prior to January 1, 2019.
.04 Rental services. Rental services for
purposes of this revenue procedure in-
clude: (i) advertising to rent or lease the
real estate; (ii) negotiating and executing
leases; (iii) verifying information con-
tained in prospective tenant applications;
(iv) collection of rent; (v) daily operation,
maintenance, and repair of the property;
(vi) management of the real estate; (vii)
purchase of materials; and (viii) supervi-
sion of employees and independent con-
tractors. Rental services may be per-
formed by owners or by employees,
agents, and/or independent contractors of
the owners. The term rental services does
not include financial or investment man-
agement activities, such as arranging fi-
nancing; procuring property; studying and
reviewing financial statements or reports
on operations; planning, managing, or
constructing long-term capital improve-
ments; or hours spent traveling to and
from the real estate.
.05 Certain rental real estate arrange-
ments excluded. Real estate used by the
taxpayer (including an owner or benefi-
ciary of an RPE relying on this safe har-
bor) as a residence for any part of the year
under section 280A is not eligible for this
safe harbor. Real estate rented or leased
under a triple net lease is also not eligible
for this safe harbor. For purposes of this
revenue procedure, a triple net lease in-
cludes a lease agreement that requires the
tenant or lessee to pay taxes, fees, and
insurance, and to be responsible for main-
tenance activities for a property in addi-
tion to rent and utilities. This includes a
lease agreement that requires the tenant or
lessee to pay a portion of the taxes, fees,
and insurance, and to be responsible for
maintenance activities allocable to the
portion of the property rented by the ten-
ant.
.06 Procedural requirements for appli-
cation of safe harbor. A taxpayer or RPE
must include a statement attached to the
return on which it claims the section 199A
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deduction or passes through section 199A
information that the requirements in Sec-
tion 3.03 of this revenue procedure have
been satisfied. The statement must be
signed by the taxpayer, or an authorized
representative of an eligible taxpayer or
RPE, which states: "Under penalties of
perjury, I (we) declare that I (we) have
examined the statement, and, to the best of
my (our) knowledge and belief, the state-
ment contains all the relevant facts relat-
ing to the revenue procedure, and such
facts are true, correct, and complete." The
individual or individuals who sign must
have personal knowledge of the facts and
circumstances related to the statement.
## SECTION 4. EFFECTIVE DATE
This revenue procedure applies to tax-
able years ending after December 31,
2017. Until such time that the proposed
revenue procedure is published in final
form, taxpayers may use the safe harbor
described in this proposed revenue proce-
dure for determining when a rental real
estate enterprise may be treated as a trade
or business solely for purposes of section
199A.
## SECTION 5. DRAFTING INFORMATION
The principal authors of this revenue
procedure are Robert D. Alinsky, Vishal
R. Amin, Margaret Burow, and Frank J.
Fisher of the Office of the Associate Chief
Counsel (Passthroughs & Special Indus-
tries). However, other personnel from the
Treasury Department and the IRS partic-
ipated in its development. For further in-
formation regarding this revenue proce-
dure contact Robert D. Alinsky or
Margaret Burow at (202) 317-5279 or
Vishal R. Amin or Frank J. Fisher at (202)
317-6850 (not a toll-free number).
26 CFR 1.199A-2: Determination of W-2 Wages
(Also: § 199A)
## Rev. Proc. 2019-11 SECTION 1. PURPOSE
This revenue procedure provides meth-
ods for calculating W-2 wages, as defined
in section 199A(b)(4) and § 1.199A-2 of
the Income Tax Regulations, (1) for pur-
poses of section 199A(b)(2) of the Inter-
nal Revenue Code (Code) which, for cer-
tain taxpayers, provides a limitation based
on W-2 wages to the amount of the de-
duction for qualified business income
(QBI); and (2) for purposes of section
199A(b)(7), which, for certain specified
agricultural and horticultural cooperative
patrons, provides a reduction to the sec-
tion 199A deduction based on W-2
wages.
## SECTION 2. BACKGROUND
For taxpayers above a certain amount
of taxable income, section 199A(b)(2)
limits the amount of a taxpayer's section
199A deduction for each qualified trade or
business to the lesser of (1) 20 percent of
the taxpayer's QBI with respect to the
qualified trade or business, or (2) the
greater of (A) 50 percent of the W-2
wages with respect to the qualified trade
or business, or (B) the sum of 25 percent
of the W-2 wages with respect to the
qualified trade or business plus 2.5 percent
of the unadjusted basis immediately after
acquisition of all qualified property. Sec-
tion 199A(b)(7) provides that in the case
of any qualified trade or business of a
patron of a specified agricultural or horti-
cultural cooperative, the amount deter-
mined under section 199A(b)(2) with re-
spect to such trade or business shall be
reduced by the lesser of (A) 9 percent of
so much of the qualified business income
with respect to such trade or business as is
properly allocable to qualified payments
received from such cooperative, or (B) 50
percent of so much of the W-2 wages
with respect to such trade or business as
are so allocable.
Section 199A(b)(4)(A) defines the
term "W-2 wages" to mean, with respect
to any person for any taxable year of such
person, the amounts described in section
6051(a)(3) and (8) paid by such person with
respect to employment of employees by
such person during the calendar year ending
during such taxable year. Section 199A(b)
(4)(B) provides that W-2 wages does not
include any amount which is not properly
allocable to qualified business income for
purposes of section 199A(c)(1). Section
199A(b)(4)(C) provides that W-2 wages
shall not include any amount that is not
properly included in a return filed with the
Social Security Administration (SSA) on or
before the 60th day after the due date (in-
cluding extensions) for such return.
Section 1.199A-2(b)(2)(iv)(A) of the
regulations provides the Internal Revenue
Service with authority to issue guidance
providing the methods that may be used to
calculate W-2 wages.
This revenue procedure provides three
methods for calculating W-2 wages, as
defined in section 199A(b)(4) and
§ 1.199A-2, for purposes of section
199A(b) and the regulations thereunder.
The first method (the unmodified Box
method) allows for a simplified calcula-
tion while the second and third methods
(the modified Box 1 method and the track-
ing wages method) provide greater accu-
racy.
W-2 wages calculated under this rev-
enue procedure are not necessarily the
W-2 wages that are properly allocable to
QBI and eligible for use in computing the
section 199A limitations. As mentioned
above, only W-2 wages that are properly
allocable to QBI may be taken into account
in computing the section 199A(b)(2) W-2
wage limitations. Thus, after computing
W-2 wages under this revenue procedure,
under § 1.199A-2(b)(3), the taxpayer must
determine the extent to which the W-2
wages are properly allocable to QBI. Then,
the properly allocable W-2 wages amount is
used in determining the W-2 wage limita-
tions under section 199A(b)(2) for that trade
or business as well as any reduction for
income received from cooperatives under
section 199A(b)(7).
## SECTION 3. RULES FOR APPLICATION
.01 In general. In calculating W-2
wages for a taxable year under the meth-
ods described in this revenue procedure,
include only wages properly reported on
Forms W-2 that meet the applicable rules
of § 1.199A-2(b). Specifically, § 1.199A-
2(b)(2)(i) provides that, except as pro-
vided in § 1.199A-2(b)(2)(iv)(C)(2) (con-
cerning short taxable years that do not
include December 31) and § 1.199A-
2(b)(2)(iv)(D) (concerning remuneration
for services performed in the Common-
wealth of Puerto Rico), the Forms W-2,
"Wage and Tax Statement," or any subse-
quent form or document used in determin-
ing the amount of W-2 wages are those
that are issued for the calendar year end-
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ing during the person's taxable year for
wages paid to employees (or former em-
ployees) of the person for employment by
the person. Section 1.199A-2(b)(2)(i) also
provides that, for purposes of § 1.199A-2,
employees of the person are limited to
employees of the person as defined in
section 3121(d)(1) and (2) (that is, officers
of a corporation and employees of the
person under the common law rules).
Therefore, Forms W-2 provided to statu-
tory employees described in section
3121(d)(3) (that is, Forms W-2 in which
the "Statutory Employee" box in Box 13
is checked) should not be included in cal-
culating W-2 wages under any of the
methods described in this revenue proce-
dure.
.02 No application in determining
whether amounts are wages for employ-
ment tax purposes. The discussions of
"wages" in this revenue procedure and in
the regulations under section 199A are for
purposes of section 199A only and have
no application in determining whether
amounts are wages under section 3121(a)
for purposes of the Federal Insurance
Contributions Act, under section 3306(b)
for purposes of the Federal Unemploy-
ment Tax Act, or under section 3401(a)
for purposes of the Collection of Income
Tax at Source on Wages (federal income
tax withholding), or any other wage-
related determination. See § 1.199A-2 of
the regulations.
## SECTION 4. DEFINITION OF W-2 WAGES AND CORRELATION WITH BOXES ON FORM W-2
.01 Definition of W-2 wages. Section
199A(b)(4)(A) provides that W-2 wages
means, with respect to any person for any
taxable year of such person, the sum of the
amounts described in section 6051(a)(3)
and (8) paid by such person with respect
to employment of employees by such per-
son during the calendar year ending dur-
ing such taxable year. Thus, W-2 wages
include: (i) the total amount of wages as
defined in section 3401(a); (ii) the total
amount of elective deferrals (within the
meaning of section 402(g)(3)); (iii) the
compensation deferred under section 457;
and (iv) the amount of designated Roth
contributions (as defined in section 402A).
.02 Correlation with Form W-2. Under
the 2018 Forms W-2, the elective defer-
rals under section 402(g)(3) and the
amounts deferred under section 457 di-
rectly correlate to coded items reported in
Box 12 on Form W-2. Box 12, Code D is
for elective deferrals to a section 401(k)
cash or deferred arrangement plan (in-
cluding a SIMPLE 401(k) arrangement);
Box 12, Code E is for elective deferrals
under a section 403(b) salary reduction
agreement; Box 12, Code F is for elective
deferrals under a section 408(k)(6) salary
reduction Simplified Employee Pension
(SEP); Box 12, Code G is for elective
deferrals and employer contributions (in-
cluding nonelective deferrals) to any gov-
ernmental or nongovernmental section
457(b) deferred compensation plan; Box
12, Code S is for employee salary reduc-
tion contributions under a section 408(p)
SIMPLE (simple retirement account);
Box 12, Code AA is for designated Roth
contributions (as defined in section 402A)
under a section 401(k) plan; and Box 12,
Code BB is for designated Roth contribu-
tions (as defined in section 402A) under a
section 403(b) salary reduction agree-
ment. However, designated Roth contri-
butions are also reported in Box 1, Wages,
tips, other compensation, and are subject
to income tax withholding.
## SECTION 5. METHODS FOR CALCULATING W-2 WAGES
For any taxable year, a taxpayer must
calculate W-2 wages for purposes of sec-
tion 199A(b)(2) using one of the three
methods described in sections 5.01, 5.02,
and 5.03 of this revenue procedure. For a
taxpayer with a short taxable year, see
section 6 of this revenue procedure. In
calculating W-2 wages for a taxable year
under the methods below, the taxpayer
includes only those Forms W-2 that are
for the calendar year ending with or
within the taxable year of the taxpayer and
that meet the rules of application de-
scribed in section 3 of this revenue proce-
dure.
.01 Unmodified box method. Under the
unmodified box method, W-2 wages are
calculated by taking, without modifica-
tion, the lesser of-
(A) The total entries in Box 1 of all
Forms W-2 filed with SSA by the tax-
payer with respect to employees of the
taxpayer for employment by the taxpayer;
or
(B) The total entries in Box 5 of all
Forms W-2 filed with SSA by the tax-
payer with respect to employees of the
taxpayer for employment by the taxpayer.
.02 Modified Box 1 method. Under the
Modified Box 1 method, the taxpayer
makes modifications to the total entries in
Box 1 of Forms W-2 filed with respect to
employees of the taxpayer. W-2 wages
under this method are calculated as fol-
lows-
(A) Total the amounts in Box 1 of all
Forms W-2 filed with SSA by the tax-
payer with respect to employees of the
taxpayer for employment by the tax-
payer;
(B) Subtract from the total in paragraph
.02(A) of this section amounts included
in Box 1 of Forms W-2 that are not
wages for Federal income tax withhold-
ing purposes, including amounts that are
treated as wages for purposes of income
tax withholding under section 3402(o)
(for example, supplemental unemploy-
ment compensation benefits within the
meaning of Rev. Rul. 90-72); and
(C) Add to the amount obtained after
paragraph .02(B) of this section the
total of the amounts that are reported in
Box 12 of Forms W-2 with respect to
employees of the taxpayer for employ-
ment by the taxpayer and that are prop-
erly coded D, E, F, G, and S.
.03 Tracking wages method. Under the
tracking wages method, the taxpayer ac-
tually tracks total wages subject to federal
income tax withholding and makes appro-
priate modifications. W-2 wages under
this method are calculated as follows-
(A) Total the amounts of wages subject
to federal income tax withholding that
are paid to employees of the taxpayer
for employment by the taxpayer and
that are reported on Forms W-2 filed
with SSA by the taxpayer for the cal-
endar year; plus
(B) The total of the amounts that are
reported in Box 12 of Forms W-2 with
respect to employees of the taxpayer
for employment by the taxpayer and
that are properly coded D, E, F, G, and
S.
## SECTION 6. APPLICATION IN CASE OF SHORT TAXABLE YEAR
.01 Special rule for taxpayers with a
short taxable year. In the case of a tax-
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payer with a short taxable year, subject to
the rules of application described in sec-
tion 3 of this revenue procedure, the W-2
wages of the taxpayer for the short taxable
year shall include only those wages paid
during the short taxable year to employees
of the taxpayer, only those elective defer-
rals (within the meaning of section
402(g)(3)) made during the short taxable
year by employees of the taxpayer, and
only compensation actually deferred un-
der section 457 during the short taxable
year with respect to employees of the tax-
payer. See § 1.199A-2(b)(2)(iv)(C) of the
regulations.
.02 Method required for a short tax-
able year and modifications required in
application of method. The W-2 wages of
a taxpayer with a short taxable year shall
be determined under the tracking wages
method described in section 5.03 of this
revenue procedure. In applying the track-
ing wages method in the case of a short
taxable year, the taxpayer must apply the
method as follows-
(A) For purposes of section 5.03(A),
the total amount of wages subject to
federal income tax withholding and re-
ported on Form W-2 must include only
those wages subject to federal income
tax withholding that are actually or
constructively paid to employees dur-
ing the short taxable year and reported
on Form W-2 for the calendar year
ending with or within that short taxable
year (or, for a short taxable year that
does not contain a calendar year ending
with or within such short taxable year,
wages subject to federal income tax
withholding that are actually or con-
structively paid to employees during
the short taxable year and reported on
Form W-2 for the calendar year con-
taining such short taxable year); and
(B) For purposes of section 5.03(B),
only the portion of the total amounts
reported in Box 12, Codes D, E, F, G,
and S on Forms W-2, that are actually
deferred or contributed during the short
taxable year are included in W-2
wages.
## SECTION 7. EFFECTIVE DATE
This revenue procedure applies to tax-
able years ending after December 31,
2017.
## SECTION 8. DRAFTING INFORMATION
The principal authors of this revenue
procedure are Andrew Holubeck and
Mikhail Zhidkov of the Office of Associ-
ate Chief Counsel (Employee Benefits,
Exempt Organizations, and Employment
Taxes) and Margaret Burow and Frank J.
Fisher of the Office of Associate Chief
Counsel (Passthroughs & Special Indus-
tries). However, other personnel from the
Treasury Department and the IRS partic-
ipated in its development. For further in-
formation regarding this revenue proce-
dure contact Andrew Holubeck or Mikhail
Zhidkov at (202) 317-4774, or Margaret
Burow or Frank J. Fisher at (202) 317-
6850 (not toll free numbers).
CASE MIS No .: RP-117661-18
26 CFR 601.105: Examination of returns and claims
for refund, credit, or abatement; determination of
correct tax liability
(Also: Part I, §§ 168, 280F; § 1.168(k)-1)
## Rev. Proc. 2019-13 SECTION 1. PURPOSE
This revenue procedure provides a safe
harbor method of accounting for deter-
mining depreciation deductions for pas-
senger automobiles that qualify for the
100-percent additional first year deprecia-
tion deduction under § 168(k) of the In-
ternal Revenue Code, as amended by
§ 13201 of the Tax Cuts and Jobs Act,
Public Law 115-97, 131 Stat. 2054 (De-
cember 22, 2017) (the "Act"), and that are
subject to the depreciation limitations under
§ 280F(a), as amended by § 13202(a)(1) of
the Act.
## SECTION 2. BACKGROUND
.01 Section 13201 of the Act amended
§ 168(k) to extend and modify the addi-
tional first year depreciation deduction for
qualified property acquired and placed in
service by the taxpayer after September
27, 2017, and generally placed in service
by the taxpayer before January 1, 2027.
Section 168(k)(1) provides that, in the
case of qualified property, the deprecia-
tion deduction allowed under § 167(a) for
the taxable year in which the property is
placed in service includes an allowance
equal to the applicable percentage of the
property's adjusted basis. Pursuant to
§ 168(k)(6)(A), the applicable percentage
is 100-percent for qualified property ac-
quired and placed in service after Septem-
ber 27, 2017, and placed in service before
January 1, 2023 (hereinafter, referred to as
"100-percent additional first year depreci-
ation deduction"). The applicable percent-
age is phased down by 20 percentage
points each year for qualified property
placed in service after December 31,
2022, through December 31, 2026.
.02 Section 168(k)(7) provides that a
taxpayer may elect out of the additional
first year depreciation deduction with re-
spect to any class of property that is qual-
ified property placed in service during the
taxable year.
.03 Section 168(k)(10) allows a tax-
payer to elect to deduct 50-percent, in-
stead of 100-percent, additional first year
depreciation for all qualified property ac-
quired after September 27, 2017, by the
taxpayer and placed in service by the tax-
payer during its first taxable year that in-
cludes September 28, 2017.
.04 For owners of passenger automo-
biles, § 280F(a), as modified by § 13202(a)
of the Act, imposes dollar limitations on the
depreciation deduction for the year the tax-
payer places the passenger automobile in
service and for each succeeding year. For a
passenger automobile that is qualified prop-
erty under § 168(k) and for which the 100-
percent additional first year depreciation de-
duction is allowable, § 168(k)(2)(F)(i)
increases the first year limitation amount
under § 280F(a)(1)(A)(i) by $8,000. On
April 30, 2018, the Treasury Department
and the Internal Revenue Service (IRS) pub-
lished Rev. Proc. 2018-25, 2018-18 I.R.B.
543, which provides the dollar limitation
amounts provided in § 280F(a)(1)(A)(i) that
apply to passenger automobiles first placed
in service by the taxpayer during calendar
year 2018.
.05 Under § 280F(a)(1)(B), the unre-
covered basis of any passenger automo-
bile is treated as an expense for the first
taxable year after the recovery period,
subject to the limitation under § 280F(a)
(1)(B)(ii). Under that section, the unre-
covered basis that may be treated as an
expense in any succeeding taxable year
may not exceed $5,760.
.06 Section 280F(d)(1) provides that
any deduction allowable under § 179 for a
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passenger automobile is subject to the
limitations of § 280F(a) in the same man-
ner as if it were a depreciation deduction
allowable under § 168.
.07 Section 280F(d)(7) provides that
the limitations of § 280F(a) will be ad-
justed for inflation for any passenger au-
tomobile placed in service by the taxpayer
after 2018.
## SECTION 3. SCOPE AND DEFINITIONS
.01 Scope. This revenue procedure ap-
plies to a passenger automobile (other
than a leased passenger automobile):
(1) That is acquired and placed in ser-
vice by the taxpayer after September 27,
2017;
(2) That is qualified property under
§ 168(k) for which the 100-percent addi-
tional first year depreciation deduction is
allowable;
(3) That has an unadjusted depreciable
basis, as defined in section 3.02(5) of this
revenue procedure, exceeding the first
year limitation amount under § 280F(a)(1)
(A)(i); and
(4) For which the taxpayer did not elect
to treat the cost or a portion of the cost as
an expense under § 179.
.02 Definitions. Solely for purposes of
this revenue procedure, the following def-
initions apply:
(1) Adjusted depreciable basis is the
unadjusted depreciable basis, as defined in
section 3.02(5) of this revenue procedure,
of the passenger automobile reduced by
the depreciation deductions allowable un-
der the safe harbor method of accounting
provided in section 4.03 of this revenue
procedure.
(2) Applicable optional depreciation
table is based on the depreciation system,
depreciation method, recovery period, and
convention applicable to the passenger au-
tomobile for its placed-in-service year, as
provided in section 8 of Rev. Proc. 87-57,
1987-2 C.B. 687, 693. See Appendix A in
IRS Publication 946 for the applicable
optional depreciation tables.
(3) Passenger automobile is defined in
§ 280F(d)(5).
(4) Remaining adjusted depreciable
basis is the unadjusted depreciable basis,
as defined in section 3.02(5) of this reve-
nue procedure, of the passenger automo-
bile reduced by the first year limitation
amount allowable under section 4.03(2) of
this revenue procedure.
(5) Unadjusted depreciable basis is de-
fined in § 1.168(b)-1(a)(3) of the Income
Tax Regulations, except that there is no
reduction by reason of an election to ex-
pense any portion of the basis under
§ 179.
(6) Unrecovered basis is defined in
§ 280F(d)(8).
## SECTION 4. SAFE HARBOR FOR SECTION 280F(a) LIMITATIONS ON PASSENGER AUTOMOBILES
.01 In general. If the unadjusted depre-
ciable basis of a passenger automobile for
which the 100-percent additional first year
depreciation deduction is allowable ex-
ceeds the first year limitation amount un-
der § 280F(a)(1)(A)(i), the excess amount
is the unrecovered basis of the passenger
automobile for purposes of § 280F(a)(1)
(B)(i) and, therefore, is treated as a de-
ductible expense in the first taxable year
succeeding the end of the recovery period
subject to the limitation under § 280F(a)
(1)(B)(ii). For example, if a calendar-year
taxpayer places in service in December
2018 a passenger automobile that costs
$50,000 and is qualified property for
which the 100-percent additional first year
depreciation deduction is allowable, the
100-percent additional first year deprecia-
tion deduction and any § 179 deduction
for this property is limited to $18,000
under § 280F(a)(1)(A)(i) (see Table 2 of
Rev. Proc. 2018-25) and the excess
amount of $32,000 is recovered by the
taxpayer beginning in 2024, subject to
the annual limitation of $5,760 under
§ 280F(a)(1)(B)(ii).
.02 Safe harbor method of accounting.
To mitigate the anomalous result that oc-
curs in the taxable years subsequent to the
placed-in-service year and before the first
taxable year succeeding the end of the
recovery period for a passenger automo-
bile within the scope of this revenue pro-
cedure, the Treasury Department and the
IRS provide a safe harbor method of ac-
counting under section 4.03 of this reve-
nue procedure. A taxpayer adopts this safe
harbor method of accounting by applying
it to deduct depreciation of its passenger
automobile on its federal tax return for the
first taxable year succeeding the placed-
in-service year of the passenger automo-
bile. To use the safe harbor method of
accounting, the taxpayer must comply
with section 4.03 of this revenue proce-
dure. If a taxpayer's taxable year is less
than 12 months, the depreciation deduc-
tions determined under section 4.03 of this
revenue procedure must be adjusted for a
short taxable year (for further guidance,
see Rev. Proc. 89-15, 1989-1 C.B. 816).
.03 Operation of the safe harbor. For a
taxpayer with a passenger automobile
within the scope of this revenue proce-
dure, the safe harbor method of account-
ing operates as follows:
(1) The taxpayer must use the applica-
ble optional depreciation table for com-
puting the depreciation deductions for the
passenger automobile;
(2) For the placed-in-service year of
the passenger automobile, the taxpayer
deducts the first year limitation amount
under § 280F(a)(1)(A)(i). See Table 2 of
Rev. Proc. 2018-25 for the first year lim-
itation amount under § 280F(a)(1)(A)(i)
for a passenger automobile placed in ser-
vice in calendar year 2018 for which the
100-percent additional first year deprecia-
tion deduction is allowable. For a passen-
ger automobile placed in service after
2018, further guidance will be issued to
provide the limitation amounts under
§ 280F(a)(1) for the applicable placed-in-
service year;
(3) For the 12-month taxable year sub-
sequent to the placed-in-service year and
for each succeeding 12-month taxable
year in the recovery period, the taxpayer
determines the depreciation deduction for
the passenger automobile by multiplying
the remaining adjusted depreciable basis
of the passenger automobile by the annual
depreciation rate for each taxable year
subsequent to the placed-in-service year
specified in the applicable optional depre-
ciation table, subject to the limitation
amounts under § 280F(a)(1)(A);
(4) The adjusted depreciable basis of
the passenger automobile as of the begin-
ning of the first taxable year succeeding
the end of the recovery period is treated as
a deductible depreciation expense for the
first taxable year succeeding the end of the
recovery period, subject to the limitation
under § 280F(a)(1)(B)(ii). Any excess is
treated as a deductible depreciation expense
for the succeeding taxable years, subject to
the limitation under § 280F(a)(1)(B)(ii); and
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(5) If § 280F(b) applies to the passen-
ger automobile in a taxable year subse-
quent to the placed-in-service year, the
safe harbor method of accounting ceases
to apply beginning for the first year in
which § 280F(b) applies. Any passenger
automobile that is not predominantly used
in a qualified business use, as defined in
§ 280F(d)(6)(B) and (C), for any taxable
year is subject to § 280F(b) for such tax-
able year and any subsequent taxable year.
.04 Examples. The following examples
illustrate the application of the safe harbor
method of accounting.
(1) Example 1 - Application of § 280F(a) safe
harbor method of accounting. In 2018, X, a
calendar-year taxpayer, purchased and placed in ser-
vice for use in its business a new passenger automo-
bile that costs $60,000. The passenger automobile is
5-year property under § 168(e), is qualified property
under § 168(k) for which the 100-percent additional
first year depreciation deduction is allowable, and is
used 100 percent in X's trade or business. X does not
claim a § 179 deduction for the passenger automo-
bile and does not make an election under § 168(b),
(g)(7), or (k). X depreciates the passenger automo-
bile under the general depreciation system by using
the 200-percent declining balance method, a 5-year
recovery period, and the half-year convention. X
adopts the safe harbor method of accounting pro-
vided in section 4.03 of this revenue procedure. As a
result:
(a) X must use the applicable optional deprecia-
tion table that corresponds with the 200-percent de-
clining balance method of depreciation, a 5-year
recovery period, and the half-year convention, for
determining the depreciation deductions for the pas-
senger automobile (see Table A-1 in Appendix A of
IRS Publication 946);
(b) For 2018, X deducts depreciation of $18,000
for the passenger automobile, which is the depreci-
ation limitation for 2018 under § 280F(a)(1)(A)(i)
(see Table 2 in Rev. Proc. 2018-25). As a result, the
remaining adjusted depreciable basis of the passen-
ger automobile as of January 1, 2019, is $42,000
($60,000 unadjusted depreciable basis less $18,000
depreciation deduction claimed for 2018);
(c) For 2019 through 2023, the total depreciation
allowable for the passenger automobile for each tax-
able year is determined by multiplying the annual
depreciation rate in the applicable optional depreci-
ation table by the remaining adjusted depreciable
basis of $42,000, subject to the limitation under
§ 280F(a)(1)(A) for that year. Accordingly, for 2019,
the total depreciation allowable for the passenger
automobile is $13,440 (32 percent multiplied by the
remaining adjusted depreciable basis of $42,000).
Because this amount is less than the depreciation
limitation of $16,000 for 2019 (see Table 2 in Rev.
Proc. 2018-25), X deducts $13,440 as depreciation
on its federal income tax return for the 2019 taxable
year. For 2020, the total depreciation allowable for
the passenger automobile is $8,064 (19.20 percent
multiplied by $42,000). Because this amount is less
than the depreciation limitation of $9,600 for 2020
(see Table 2 in Rev. Proc. 2018-25), X deducts
$8,064 as depreciation on its federal income tax
return for the 2020 taxable year. Below is a table
showing the depreciation allowable for the passenger
automobile under the safe harbor method of account-
ing for the 2018 through 2023 taxable years. X
deducts these amounts.
Taxable year
Depreciation limitations under Table 2 of Rev. Proc. 2018-25
Depreciation deduction under the safe harbor
2018
$18,000
$18,000
2019
$16,000
$13,440 ($42,000 x .32)
2020
$ 9,600
$ 8,064 ($42,000 x .1920)
2021
$ 5,760
$ 4,838 ($42,000 x .1152)
2022
$ 5,760
$ 4,838 ($42,000 x .1152)
2023
$ 5,760
$ 2,419 ($42,000 x .0576)
TOTAL
$51,599
(d) As of January 1, 2024 (the beginning of the
first taxable year succeeding the end of the recovery
period), the adjusted depreciable basis of the passen-
ger automobile is $8,401 ($60,000 unadjusted depre-
ciable basis less the total depreciation allowable of
$51,599 for 2018-2023 (see above table)). Accord-
ingly, for the 2024 taxable year, X deducts depreci-
ation of $5,760 for the passenger automobile (the
lesser of the adjusted depreciable basis of $8,401 as
of January 1, 2024, or the § 280F(a)(1)(B)(ii) limi-
tation of $5,760).
(e) As of January 1, 2025, the adjusted deprecia-
ble basis of the passenger automobile is $2,641
($8,401 adjusted depreciable basis as of January 1,
2024, less the depreciation claimed of $5,760 for
2024). Accordingly, for the 2025 taxable year, X
deducts depreciation of $2,641 for the passenger
automobile (the lesser of the adjusted depreciable
basis of $2,641 as of January 1, 2025, or the
§ 280F(a)(1)(B)(ii) limitation of $5,760).
(2) Example 2 - Section 179 deduction claimed.
The facts are the same as in Example 1, except X
elects to treat $18,000 of the cost of the passenger
automobile as an expense under § 179. As a result,
this passenger automobile is not within the scope of
this revenue procedure pursuant to section 3.01(4)
of this revenue procedure. Accordingly, the safe
harbor method of accounting in section 4.03 of this
revenue procedure does not apply to the passenger
automobile. For 2018, the 100-percent additional
first year depreciation deduction and the § 179 de-
duction for this passenger automobile is limited to
$18,000 under § 280F(a)(1)(A)(i) (see Table 2 of
Rev. Proc. 2018-25). Therefore, for 2018, X deducts
$18,000 for the passenger automobile under § 179,
and X deducts the excess amount of $42,000 begin-
ning in 2024, subject to the annual limitation of
$5,760 under § 280F(a)(1)(B)(ii).
(3) Example 3 - Section 168(k)(7) election made.
The facts are the same as in Example 1, except X
makes an election under § 168(k)(7) to not claim the
100-percent additional first year depreciation deduc-
tion for 5-year property placed in service during
2018. As a result, the 100-percent additional first
year depreciation deduction is not allowable for the
passenger automobile. Accordingly, the passenger
automobile is not within the scope of this revenue
procedure pursuant to section 3.01(2) of this revenue
procedure, and the safe harbor method of accounting
in section 4.03 of this revenue procedure does not
apply to the passenger automobile. For 2018 and
subsequent taxable years, X determines the depreci-
ation deductions for the passenger automobile in
accordance with the general depreciation system of
§ 168(a), subject to the § 280F(a) limitations.
## SECTION 5. EFFECT ON OTHER DOCUMENTS
Rev. Proc. 2018-25 is amplified as
provided in section 4.03 of this revenue
procedure.
## SECTION 6. EFFECTIVE DATE
This revenue procedure is effective on
February 13, 2019.
## SECTION 7. DRAFTING INFORMATION
The principal author of this revenue
procedure is Jaime C. Park of the Office of
Associate Chief Counsel (Income Tax &
Accounting). For further information re-
garding this revenue procedure contact
Ms. Park on (202) 317-7005 (not a toll
free number).
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## Part IV. Items of General Interest
### Qualified Business Income Deduction
#### REG-134652-18
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document contains
proposed regulations concerning the de-
duction for qualified business income un-
der section 199A of the Internal Revenue
Code (Code). The proposed regulations
will affect certain individuals, partner-
ships, S corporations, trusts, and estates.
The proposed regulations provide guid-
ance on the treatment of previously sus-
pended losses that constitute qualified
business income. The proposed regula-
tions also provide guidance on the deter-
mination of the section 199A deduction
for taxpayers that hold interests in regu-
lated investment companies, charitable re-
mainder trusts, and split-interest trusts.
DATES: Written or electronic comments
and requests for a public hearing must be
received by April 9, 2019.
ADDRESSES: Submit electronic submis-
sions to the Federal eRulemaking Portal at
www.regulations.gov (indicate IRS and
REG-134652-18) by following the online
instructions for submitting comments.
Once submitted to the Federal eRulemak-
ing Portal, comments cannot be edited or
withdrawn. The Department of the Trea-
sury (Treasury Department) and the IRS
will publish for public availability any
comment received to its public docket,
whether submitted electronically or in
hard copy. Send hard copy submissions
to CC:PA:LPD:PR (REG-134652-18),
Room 5203, Internal Revenue Service,
P.O. Box 7604, Ben Franklin Station,
Washington, D.C., 20044. Submissions
may be hand-delivered Monday through
Friday between the hours of 8 a.m. and
4 p.m. to CC:PA:LPD:PR (REG-
134652-18), Courier's Desk, Internal
Revenue Service, 1111 Constitution Av-
enue, N.W., Washington, D.C., 20224.
FOR FURTHER INFORMATION CON-
TACT: Concerning § 1.199A-3(d), Mi-
chael Y. Chin or Steven Harrison at (202)
317-6842; concerning §§ 1.199A-3(b)
and 1.199A-6, Vishal R. Amin or Frank
J. Fisher at (202) 317-6850 or Robert D.
Alinsky or Margaret Burow at 202-317-
5279; concerning submissions of com-
ments or requests for a public hearing,
Regina Johnson at (202) 317-6901 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
### Background
This document contains proposed
amendments to the Income Tax Regula-
tions (26 CFR part 1) under section 199A
of the Code.
Section 199A was enacted on Decem-
ber 22, 2017, by section 11011 of “An Act
to provide for reconciliation pursuant to
titles II and V of the concurrent resolution
on the budget for fiscal year 2018," Pub.L.
115-97 (TCJA), and was amended on
March 23, 2018, retroactively to January
1, 2018, by section 101 of Division T of
the Consolidated Appropriations Act,
2018, Pub.L. 115-141, (2018 Act). Sec-
tion 199A applies to taxable years begin-
ning after 2017 and before 2026.
Section 199A provides a deduction of
up to 20 percent of qualified business in-
come from a U.S. trade or business oper-
ated as a sole proprietorship or through a
partnership, S corporation, trust, or estate
(section 199A deduction). The section
199A deduction may be taken by individ-
uals and by some estates and trusts. A
section 199A deduction is not available
for wage income or for income earned by
a C corporation. For taxpayers whose tax-
able income exceeds a statutorily-defined
amount (threshold amount), section 199A
may limit the taxpayer's section 199A de-
duction based on (i) the type of trade or
business engaged in by the taxpayer, (ii)
the amount of W-2 wages paid with re-
spect to the trade or business (W-2
wages), and/or (iii) the unadjusted basis
immediately after acquisition (UBIA) of
qualified property held for use in the trade
or business (UBIA of qualified property).
These statutory limitations are subject to
phase-in rules based upon taxable income
above the threshold amount.
Section 199A also allows individuals
and some trusts and estates (but not cor-
porations) a deduction of up to 20 percent
of their combined qualified real estate in-
vestment trust (REIT) dividends and qual-
ified publicly traded partnership (PTP) in-
come, including qualified REIT dividends
and qualified PTP income earned through
passthrough entities. This component of
the section 199A deduction is not limited
by W-2 wages or UBIA of qualified prop-
erty.
The section 199A deduction is the
lesser of (1) the sum of the combined
amounts described in the prior two para-
graphs or (2) an amount equal to 20 per-
cent of the excess (if any) of taxable in-
come of the taxpayer for the taxable year
over the net capital gain of the taxpayer
for the taxable year.
Additionally, section 199A(g) provides
that specified agricultural or horticultural
cooperatives may claim a special entity-
level deduction that is substantially simi-
lar to the domestic production activities
deduction under former section 199.
The statute expressly grants the Secre-
tary authority to prescribe such regula-
tions as are necessary to carry out the
purposes of section 199A (section
199A(f)(4)), and also provides specific
grants of authority with respect to certain
issues: the treatment of acquisitions, dis-
positions, and short-tax years (section
199A(b)(5)); certain payments to partners
for services rendered in a non-partner ca-
pacity (section 199A(c)(4)(C)); the alloca-
tion of W-2 wages and UBIA of qualified
property (section 199A(f)(1)(A)(iii)); re-
stricting the allocation of items and wages
under section 199A and such reporting
requirements as the Secretary determines
appropriate (section 199A(f)(4)(A)); the
application of section 199A in the case of
tiered entities (section 199A(f)(4)(B); pre-
venting the manipulation of the deprecia-
ble period of qualified property using
transactions between related parties (sec-
tion 199A(h)(1)); and determining the
UBIA of qualified property acquired in
like-kind exchanges or involuntary con-
versions (section 199A(h)(2)).
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The Treasury Department and the In-
ternal Revenue Service published pro-
posed regulations interpreting section
199A on August 16, 2018 (the August
Proposed Regulations) (83 FR 40884).
The August Proposed Regulations contain
six substantive sections, §§ 1.199A-1
through 1.199A-6, each of which pro-
vides rules relevant to the calculation of
the section 199A deduction. The August
Proposed Regulations, with modifications
in response to comments and testimony
received, were adopted as final regulations
in TD 9847, issued concurrently with this
notice of proposed rulemaking and pub-
lished elsewhere in this issue of the Fed-
eral Register.
### Explanation of Provisions
These proposed regulations propose
rules addressing issues not addressed in
the August Proposed Regulations that are
necessary to provide taxpayers with compu-
tational, definitional, and anti-avoidance
guidance regarding the application of sec-
tion 199A. Specifically, these proposed reg-
ulations contain amendments to two sub-
stantive sections of the August Proposed
Regulations, §§ 1.199A-3 and 1.199A-6,
each of which provides rules relevant to the
calculation of the section 199A deduction.
These additional proposed rules respond to
comments received on the August Proposed
Regulations as well as address certain issues
identified after additional study. This Expla-
nation of Provisions describes each of the
proposed rules contained in this document
in turn. The Treasury Department and the
IRS request comments on all aspects of
these proposed regulations.
#### I. Treatment of Previously Suspended Losses That Constitute QBI.
Section 1.199A-3(b)(1)(iv) of the final
regulations provides that previously disal-
lowed losses or deductions (including un-
der sections 465, 469, 704(d), and
1366(d)) allowed in the taxable year are
generally taken into account for purposes
of computing QBI except to the extent the
losses or deductions were disallowed, sus-
pended, limited, or carried over from tax-
able years ending before January 1, 2018.
The final regulations also provide a first-
in-first-out ordering rule. One commenter
on the August Proposed Regulations sug-
gested that a special rule should be pro-
vided to identify the section 469 trade or
business losses that are used to offset in-
come if the taxpayer's section 469 group-
ings differ from the taxpayer's section
199A aggregations. The commenter rec-
ommended that any section 469 loss car-
ryforward that is later used should be al-
located across the taxpayer's section
199A aggregations based on income with
respect to such aggregations in the year
the loss was generated.
The Treasury Department and the IRS
believe that previously disallowed losses
should be treated as losses from a separate
trade or business for both the reasons
stated by the commenter and because the
losses may relate to a trade or business
that is no longer in existence. Accord-
ingly, these proposed regulations amend
§ 1.199A-3(b)(1)(iv) to provide that such
losses are treated as loss from a separate
trade or business. To the extent that losses
relate to a PTP, they must be treated as
losses from a separate PTP. Section
1.199A-3(b)(1)(iv)(B) provides that attri-
butes of the disallowed loss are deter-
mined in the year the loss is incurred.
#### II. Regulated Investment Companies with Interests in REITs and PTPs
#### A. REITs
Section 1.199A-3 restates the defini-
tions in section 199A(c) and provides ad-
ditional guidance on the determination of
QBI, qualified REIT dividends, and qual-
ified PTP income. For simplicity, the reg-
ulations use the term individual when re-
ferring to an individual, trust, estate, or
other person eligible to claim the section
199A deduction. See § 1.199A-1(a)(2).
The term relevant passthrough entity
(RPE) is used to describe passthrough en-
tities that directly operate the trade or
business or pass through the trade or busi-
ness' items of income, gain, loss, or de-
duction from lower-tier RPEs to the indi-
vidual. See § 1.199A-1(b)(10).
A number of commenters on the Au-
gust Proposed Regulations requested
guidance that would allow a shareholder
in a regulated investment company within
the meaning of section 851(a) (RIC) to
take a section 199A deduction with re-
spect to certain income of, or distributions
from, the RIC. Because a RIC is a sub-
chapter C corporation, a shareholder in a
RIC generally does not take into account a
share of the RIC's items of income, de-
duction, gain, or loss. Part 1 of subchapter
M, however, has features that allow the tax
consequences of investing in a RIC to ap-
proximate those of a direct investment in the
assets of the RIC. The principal feature is
the allowance of the deduction for dividends
paid under section 852(b)(2)(D). If a corpo-
ration qualifies as a RIC under section 851
and meets the distribution requirements and
other requirements in section 852(a), the
RIC's income tax is computed on its invest-
ment company taxable income (ICTI),
which is its taxable income with certain
adjustments, including the allowance of the
deduction for dividends paid. See section
852(b)(2). ICTI also excludes the amount of
the RIC's net capital gain, but tax is sepa-
rately imposed on that amount to the extent
it exceeds the deduction for dividends paid,
taking into account only capital gain divi-
dends. See section 852(b)(3)(A). The deduc-
tion for dividends paid allows RICs to elim-
inate all or most of their corporate income
tax liability.
If a RIC has certain items of income or
gain, subchapter M also provides rules
under which a RIC may pay dividends
that a shareholder in the RIC may treat in
the same manner (or a similar manner) as
the shareholder would treat the underlying
item of income or gain if the shareholder
realized it directly. Although this treat-
ment differs fundamentally from the pass-
through treatment of partners or trust ben-
eficiaries, this preamble refers to is as
"conduit treatment." For example, under
section 852(b)(3), a RIC that has net cap-
ital gain for a taxable year generally may
pay capital gain dividends, and sharehold-
ers receiving the capital gain dividends
treat them as gain from the sale or exchange
of a capital asset held for more than one year.
Section 852(b)(3) provides necessary limits
and procedures that apply to capital gain div-
idends. There are similar statutory provisions
for exempt-interest dividends under section
852(b)(5), interest-related dividends under
section 871(k)(1), short-term capital gain div-
idends under section 871(k)(2), dividends eli-
gible for the dividends received deduction un-
der section 854(b)(1)(A), and qualified
dividend income under section 854(b)(1)(B).
Rules for paying dividends corresponding to
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different types of long-term capital gain have
been provided in guidance under regulatory
authority granted in section 1(h). See Notice
2015-41, 2015-24 I.R.B. 1058, modifying
Notice 2004-39, 2004-1 C.B. 982 and Notice
97-64, 1997-2 C.B. 323.
Investing in RICs enables small inves-
tors to gain benefits, such as professional
management and broad diversification,
that otherwise would be available only to
investors with more resources. The House
Report for the enactment of the Internal
Revenue Code of 1954 explained that the
RIC regime "permits investors to pool
their funds through the use of a corpora-
tion in order to obtain skilled, diversified
investment in corporate securities without
having to pay an additional layer of cor-
porate tax." H.R. Rep. No. 83-1337, p. 73
(1954). The ability to elect to be taxed as
a RIC is available typically only to do-
mestic corporations that, at all times dur-
ing the taxable year, are registered under
the Investment Company Act of 1940, as
amended (15 U.S.C. 80a-1 to 80b-2). See
section 851(a)(1)(A).
Section 199A(f)(4) directs the Secre-
tary to prescribe such regulations as are
necessary to carry out the purposes of
section 199A, including regulations for its
application in the case of tiered entities.
The Treasury Department and the IRS
have determined that it is consistent with
the grant of authority under section 199A
and the purposes of part 1 of subchapter
M of chapter 1 of the Code to provide for
conduit treatment of qualified REIT divi-
dends. The Treasury Department and the
IRS continue to consider whether it is
appropriate to provide for conduit treat-
ment of qualified PTP income.
These proposed regulations provide
rules under which a RIC that receives
qualified REIT dividends may pay section
199A dividends. Non-corporate share-
holders receiving section 199A dividends
would treat them as qualified REIT divi-
dends under section 199A(e)(3), provided
the shareholder meets the holding period
requirements for its shares in the RIC.
The rules under which a RIC would
compute and report section 199A divi-
dends are based on the rules for capital
gain dividends in section 852(b)(3) and
exempt-interest dividends in section
852(b)(5). The amount of a RIC's section
199A dividends for a taxable year would
be limited to the excess of the RIC's qual-
ified REIT dividends for the taxable year
over allocable expenses. Section 199A
dividends generally are also subject to the
principles that apply to other RIC divi-
dends. See, e.g., Rev. Rul. 2005-31,
2005-1 C.B. 1084; Rev. Rul. 89-81,
1989-1 C.B. 226.
#### B. PTPs
One of the commenters recommending
that the regulations permit conduit treat-
ment for qualified REIT dividends re-
ceived by a RIC also recommended that
the regulations permit conduit treatment
for qualified PTP income received by a
RIC. In response to this comment, the
Treasury Department and the IRS have
given significant consideration to includ-
ing in this notice of proposed rulemaking
regulations that would provide conduit
treatment for qualified PTP income. How-
ever, unlike conduit treatment for quali-
fied REIT dividends received by a RIC,
conduit treatment of qualified PTP income
received by a RIC presents several novel
issues. The commenter recommending
this conduit treatment did not address
these issues or make any suggestions as to
how they should be resolved. The need to
resolve these issues in a way that would
afford RIC shareholders treatment that is
similar to the treatment they would re-
ceive if they held the PTP interests di-
rectly while preserving the relative sim-
plicity of the tax treatment of RIC
investors has prevented the Treasury De-
partment and the IRS from crafting and
including appropriate rules in these pro-
posed regulations. As noted later in this
part of the Explanation of Provisions, the
Treasury Department and the IRS con-
tinue to consider permitting conduit treat-
ment for qualified PTP income received
by a RIC to further the purposes of section
199A(b)(1)(B) and seek public comment
to assist in resolving these novel issues
with a view to developing regulations per-
mitting conduit treatment for qualified
PTP income.
These issues arise in part from the fact
that income attributable to a specified ser-
vice trade or business within the meaning
of section 199A(d)(2) (SSTB) of a PTP
may be qualified PTP income for taxpay-
ers with taxable income below the thresh-
old amount, but not for taxpayers with
taxable income above the top of the
phase-out range. For taxpayers with tax-
able income in the phase-out range, a por-
tion of PTP income attributable to an
SSTB is qualified PTP income. There is
no precedent for providing conduit treat-
ment for a RIC (or any other C corpora-
tion) with respect to income of a PTP or
other partnership taxed in this manner,
and the complexity and potential confu-
sion such treatment might create for RIC
investors is arguably inconsistent with the
relative simplicity that the tax system has
historically provided for RIC investors.
This is particularly true given the limita-
tion on the portion of a RIC's assets that
can be invested in qualified PTPs as de-
fined in section 851(h) (the type of PTP
likely to be engaged in a trade or business)
and the limited portion of the RIC's div-
idends that would likely be attributable to
income from such PTPs.
Another novel issue is presented by the
rules relating to the treatment of losses for
purposes of section 199A. First, a PTP
may not net losses from an SSTB against
income from a non-SSTB, and vice versa,
in determining the amounts that it reports
to its partners. Thus, PTPs are required to
separately calculate income and deduc-
tions from SSTBs and non-SSTBs and
report that information to their partners.
Second, if a taxpayer has a net loss from
an SSTB or a non-SSTB that is allowed in
determining taxable income for a taxable
year, that loss may be required to be car-
ried over to the subsequent year for sec-
tion 199A attribute purposes. In the case
of a RIC, it is not clear to what extent
these requirements can be implemented
by permitting RIC dividends to reflect at-
tributes of the RIC's investment experi-
ences in PTPs. For example, it is difficult
to conceive how losses of a RIC can be
passed through to shareholders upon the
payment of a dividend, which would be
inconsistent with the status of a RIC as a
C corporation. See section 311(a). In ad-
dition, RICs and RIC shareholders would
experience complexity inconsistent with
the longstanding tax policy of providing
simplified reporting for RIC investors.
Consistent with RICs' status as C cor-
porations, RICs could instead offset losses
from PTPs against qualified REIT divi-
dends received, with any excess PTP
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losses carried forward as negative quali-
fied PTP income for section 199A attri-
bute purposes at the RIC level. To the
extent RICs would be required to carry
forward PTP losses, it would appear that
RICs would need to track separate loss
carryforwards for SSTB PTP losses and
non-SSTB PTP losses. While netting
qualified non-SSTB losses from PTPs
against larger amounts of qualified REIT
dividends would support RIC dividends
that could be treated as eligible for the
section 199A deduction by the RICs'
shareholders regardless of income level,
SSTB losses from PTPs would complicate
the offset of qualified PTP losses against
qualified REIT dividends by RICs be-
cause SSTB losses from a PTP do not
offset qualified REIT dividends for tax-
payers with taxable income above the
phase-out range. Such losses do, however,
offset qualified REIT dividends for tax-
payers with income below the threshold
amount. For taxpayers with income in the
phase-out range, these losses partially off-
set qualified REIT dividends to a greater
or lesser extent depending on where the
taxpayer's income falls in the phase-out
range. It is not clear how a conduit regime
for qualified PTP income could work in
terms of treating RIC shareholders in the
phase-out range in a manner that is consis-
tent with the treatment they would receive if
they received the qualified REIT dividend
and the qualified PTP loss from an SSTB
directly rather than through a RIC.
Providing conduit treatment for quali-
fied PTP income would also raise poten-
tially significant issues with respect to the
treatment of RIC shareholders that are
non-U.S. persons, tax-exempt organiza-
tions, and trusts underlying individual re-
tirement accounts (IRAs) and qualified re-
tirement plans. In order to be qualified
PTP income, section 199A(c)(3)(A)(i) re-
quires that the income must be effectively
connected with a U.S. trade or business. If
conduit treatment is afforded to RIC div-
idends attributable to such PTP income
for section 199A purposes, it is not clear
that a RIC dividend attributable to such
income could be disregarded for purposes
of calculating effectively connected in-
come of a non-U.S. shareholder or unre-
lated business taxable income of a tax-
exempt organization or trust underlying
an IRA or qualified retirement plan. Given
that such investors typically do not hold
directly interests in PTPs intentionally,
but do so through corporate "blockers,"
allowing conduit treatment for qualified
PTP income through RICs could cause
unwelcome results for non-U.S. share-
holders, tax-exempt organizations, and
trusts underlying IRAs and qualified re-
tirement plans holding RIC stock.
The Treasury Department and the IRS
continue to evaluate whether it is appro-
priate to provide conduit treatment for
qualified PTP income through RICs, and
request detailed comments on these novel
issues. In particular, comments are re-
quested concerning: (1) Whether RICs
have sufficient qualified items of PTP in-
come, gain, deduction, or loss to warrant a
conduit regime that would permit RICs to
pay qualified PTP dividends to sharehold-
ers; (2) How to provide conduit treatment
for qualified PTP income for taxpayers
with income below the threshold amount
or within the phase-out range, particularly
where a RIC has qualified REIT dividends
and a qualified PTP loss from an SSTB;
(3) How to treat losses of PTPs arising
from SSTBs and non-SSTBs; (4) Whether
conduit treatment for qualified PTP in-
come can be disregarded for purposes of
determining the effectively connected in-
come or unrelated business taxable in-
come of certain RIC shareholders; (5)
Whether SSTB items are sufficiently rare
or incidental for PTPs that a conduit re-
gime for PTP dividends should exclude all
SSTB items; and (6) How to implement
conduit treatment for qualified PTP in-
come in a way that is consistent with the
policy goal of preserving the overall rela-
tive simplicity of the tax treatment of in-
vestors in RICs while still achieving the
policy goals of section 199A and section
199A(b)(1)(B) in particular.
#### III. Special Rules for Trusts and Estates
Section 1.199A-6 provides guidance
that certain specified entities (for example,
trusts and estates) may need to follow to
enable the computation of the section
199A deduction of the entity and each of
its owners. Section 1.199A-6(d) contains
special rules for applying section 199A to
trusts and decedents' estates. The August
Proposed Regulations expressly requested
comments, and comments were submit-
ted, on whether and how certain trusts and
other entities would be able to take a
deduction under section 199A. These pro-
posed regulations take those suggestions
into consideration in proposing rules ap-
plicable to those particular situations iden-
tified by commenters.
In the case of a section 199A deduction
claimed by a non-grantor trust or estate,
section 199A(f)(1)(B) applies rules simi-
lar to the rules under former section
199(d)(1)(B)(i) for the apportionment
of W-2 wages and the apportionment of
UBIA of qualified property. In the case of
a non-grantor trust or estate, the QBI and
expenses properly allocable to the busi-
ness, including the W-2 wages relevant to
the computation of the wage limitation,
and relevant UBIA of depreciable prop-
erty must be allocated among the trust or
estate and its various beneficiaries. Spe-
cifically, § 1.199A-6(d)(3)(ii) provides
that each beneficiary's share of the trust's
or estate's QBI and W-2 wages is deter-
mined based on the proportion of the
trust's or estate's DNI that is deemed to be
distributed to that beneficiary for that tax-
able year. Similarly, the proportion of the
entity's DNI that is not deemed distributed
by the trust or estate will determine the
entity's share of the QBI and W-2 wages. In
addition, if the trust or estate has no DNI in
a particular taxable year, any QBI and W-2
wages are allocated to the trust or estate, and
not to any beneficiary.
In addition, § 1.199A-6(d)(3)(ii) pro-
vides that, to the extent the trust's or es-
tate's UBIA of qualified property is rele-
vant to a trust or estate and any
beneficiary, the trust's or estate's UBIA of
qualified property will be allocated among
the trust or estate and its beneficiaries in
the same proportions as is the DNI of the
trust or estate. This is the case regardless of
how any depreciation or depletion deduc-
tions resulting from the same property may
be allocated under section 643(c) among the
trust or estate and its beneficiaries for pur-
poses other than section 199A.
Under § 1.199A-6(d)(3)(iv), the
threshold amount is determined at the
trust level after taking into account any
distribution deductions. Commenters have
noted that taxpayers could circumvent the
threshold amount by dividing assets
among multiple trusts, each of which
would claim its own threshold amount.
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This result is inappropriate and inconsis-
tent with the purpose of section 199A.
Therefore, § 1.199A-6(d)(3)(vii) pro-
vides that a trust formed or funded with a
principal purpose of receiving a deduction
under section 199A will not be respected
for purposes of determining the threshold
amount under section 199A.
In the August Proposed Regulations,
the Treasury Department and the IRS re-
quested comments with respect to whether
taxable recipients of annuity and unitrust
interests in charitable remainder trusts and
taxable beneficiaries of other split-interest
trusts may be eligible for the section 199A
deduction to the extent that the amounts
received by such recipients include
amounts that may give rise to the deduc-
tion. The request for such comments indi-
cated that such comments should include
explanations of how amounts that may
give rise to the section 199A deduction
would be identified and reported in the
various classes of income of the trusts
received by such recipients and how the
excise tax rules in section 664(c) would
apply to such amounts.
#### A. Charitable Remainder Trust Beneficiary's Eligibility for the Deduction
A few commenters suggested that a
charitable remainder trust under section
664 should be allowed to calculate the
deduction at the trust level and that the
charitable remainder trust should be
treated as a single taxpayer for purposes
of the thresholds for taxable income, W-2
wages, and UBIA of qualified property.
Several commenters recommended
that, if unrelated business taxable income
(UBTI) is qualified business income, the
section 199A deduction should be allowed
before the UBTI excise tax is imposed.
However, other commenters disagreed.
Another commenter stated that the section
199A deduction should not be allowed
when calculating UBTI because it is not a
deduction directly connected with carry-
ing on the trade or business and is allow-
able only for purposes of chapter 1, while
the excise tax on UBTI is imposed under
chapter 42 (that is, it is not an income tax).
Another commenter said the UBTI excise
tax under section 664(c) should not affect
QBI because that tax is charged to principal.
One commenter recommended that
QBI should be allocated to the ordinary
income tier. Another recommended that
QBI should be the bottom of the first tier
(last to be distributed) and section 199A
items should be reported on the Schedule
K-1 when QBI is deemed distributed. An-
other commenter stated that a charitable
remainder trust has no taxable income and
no DNI, so the allocation of QBI, W-2
wages, and UBIA of qualified property
should be allocated to beneficiaries based
on the percentage of distributions from the
ordinary income tier, with QBI allocated
to the charitable remainder trust remain-
ing a tier one item. Another commenter
stated that QBI cannot be a separate tier
because it is a deduction, rather than a rate
difference.
The Treasury Department and the IRS
believe that, because a charitable remain-
der trust described in section 664 is not
subject to income tax, and because the
excise tax imposed by section 664(c) is
treated as imposed under chapter 42, the
trust does not either have or calculate a
section 199A deduction and the threshold
amount described in section 199A(e)(2)
does not apply to the trust. Furthermore,
application of section 199A to effectively
reduce the 100 percent rate of tax imposed
by section 664(c) on any UBTI would be
inconsistent with the intent of section
664(c) to deter trusts from making invest-
ments that generate significant UBTI.
However, any taxable recipient of a uni-
trust or annuity amount from the trust
must determine and apply the recipient's
own threshold amount for purposes of
section 199A, taking into account any an-
nuity or unitrust amounts received from
the trust. Therefore, a taxable recipient of
a unitrust or annuity amount from a char-
itable remainder trust may take into ac-
count QBI, qualified REIT dividends, and
qualified PTP income for purposes of de-
termining the recipient's section 199A de-
duction for the taxable year to the extent
that the unitrust or annuity amount distrib-
uted to such recipient consists of such
section 199A items under § 1.664-1(d).
In order to determine the order of dis-
tribution of the various classes of income
of the trust for purposes of applying
§ 1.664-1(d), QBI, qualified REIT divi-
dends, and qualified PTP income of a
charitable remainder trust will be allo-
cated to the classes of income within the
category of income described in § 1.664-
1(d)(1)(i)(a)(1) based on the rate of tax
that normally would apply to that type of
income, not taking into account the char-
acterization of that income as QBI, qual-
ified REIT dividends, or qualified PTP
income for purposes of section 199A. Ac-
cordingly, any QBI, qualified REIT divi-
dends, and qualified PTP income will be
treated as distributed from the trust to a
unitrust or annuity recipient only when all
other classes of income within the ordi-
nary income category subject to a higher
rate of tax (not taking into account section
199A) have been exhausted. The unitrust
or annuity recipient will be treated as re-
ceiving a proportionate amount of any
QBI, qualified REIT dividends, and qual-
ified PTP income that is distributed along
with other income in the same class within
the ordinary income category. To the ex-
tent that a trust is treated as distributing
QBI, qualified REIT dividends, or quali-
fied PTP income to more than one unitrust
or annuity recipient in the taxable year,
the distribution of such income will be
treated as made to the recipients propor-
tionately, based on their respective shares
of the total of QBI, qualified REIT divi-
dends, and qualified PTP income distrib-
uted for that year. The amount of any W-2
wages or UBIA of qualified property of
the charitable remainder trust in a taxable
year will be allocable to unitrust or annu-
ity recipients based on each recipient's
share of the trust's total QBI (whether or
not distributed) for that taxable year.
Any QBI, qualified REIT dividends, or
qualified PTP income of the trust that is
unrelated business taxable income is sub-
ject to excise tax and § 1.664-1(c) re-
quires that tax to be allocated to the cor-
pus of the trust. Certain other rules
relating to charitable remainder trusts are
provided.
#### B. Split-interest Trusts
The August Proposed Regulations re-
quested comments on whether any special
rules were necessary with respect to split-
interest trusts. One commenter suggested
that additional rules may be necessary for
split-interest trusts other than charitable
reminder trusts. After considering the
comment and studying other split-interest
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trusts in more depth after the publication
of the August Proposed Regulations, the
Treasury Department and the IRS have
determined that special rules for other
split-interest trusts, such as non-grantor
charitable lead trusts or pooled income
funds, are not necessary because such
trusts are taxable under part I, subchapter
J, chapter 1 of the Code, except subpart E.
Such split-interest trusts would apply the
rules for non-grantor trusts and estates set
forth in § 1.199A-6(d)(3) to determine
any applicable section 199A deduction for
the trust or its taxable beneficiaries.
#### C. Separate Shares
Although no comments were received
with respect the application of the thresh-
old amount to separate shares, the Trea-
sury Department and the IRS believe that
clarification with respect to this issue may
be necessary. These proposed regulations
provide that, in the case of a trust de-
scribed in section 663(c) with substan-
tially separate and independent shares for
multiple beneficiaries, such separate
shares will not be treated as separate trusts
for purposes of applying the threshold
amount. Instead, the trust will be treated
as a single trust for purposes of determin-
ing whether the taxable income of the
trust exceeds the threshold amount. The
purpose of the separate share rule in sec-
tion 663(c) is to treat distributions of trust
DNI to trust beneficiaries as independent
taxable events solely for purposes of ap-
plying sections 661 and 662 with respect
to each beneficiary's separate share. The
rule determines each beneficiary's share
of DNI based on the amount of DNI from
that beneficiary's separate share, rather
than as a percentage of the trust's DNI.
Nevertheless, under the separate share
rule, if a trust retains any portion of DNI,
the trust will be subject to tax as a single
trust with respect to the retained DNI.
Only trusts with retained DNI will be el-
igible for the section 199A deduction, be-
cause a trust will be allocated QBI, qual-
ified REIT dividends, and qualified PTP
income only in proportion to the amount
of DNI retained by the trust for the taxable
year. For this reason, a trust, regardless of
the number of separate shares it has for its
beneficiaries under the separate share rule
of section 663(c), will be treated as a
single trust for purposes of applying the
threshold amount under section 199A. To
the extent that a taxable beneficiary of
a trust receives a distribution of DNI from
the beneficiary's separate share of the
trust which includes section 199A items,
the beneficiary would apply its own
threshold amount to those section 199A
items in computing its section 199A de-
duction in accordance with the rules of
§ 1.199A-6(d).
### Availability of IRS Documents
IRS notices cited in this preamble are
made available by the Superintendent of
Documents, U.S. Government Printing
Office, Washington, DC 20402.
### Proposed Effective/Applicability Date
Section 7805(b)(1)(A) and (B) of the
Code generally provide that no temporary,
proposed, or final regulation relating to
the internal revenue laws may apply to
any taxable period ending before the ear-
liest of (A) the date on which such regula-
tion is filed with the Federal Register, or
(B) in the case of a final regulation, the date
on which a proposed or temporary regula-
tion to which the final regulation relates was
filed with the Federal Register.
The amendments to §§ 1.199A-3 and
1.199A-6 set forth in this notice of pro-
posed rulemaking generally are proposed
to apply to taxable years ending after the
date of publication of a Treasury decision
adopting these rules as final regulations in
the Federal Register. However, taxpay-
ers may rely on the rules in the amend-
ments to §§ 1.199A-3 and 1.199A-6 set
forth in this notice of proposed rulemak-
ing, in their entirety, until the date a Trea-
sury decision adopting these regulations
as final regulations is published in the
Federal Register.
### Special Analyses
I. Regulatory Planning and Review -
Economic Analysis
Executive Orders 13563 and 12866 di-
rect agencies to assess costs and benefits
of available regulatory alternatives and, if
regulation is necessary, to select regula-
tory approaches that maximize net bene-
fits (including potential economic, envi-
ronmental, public health and safety
effects, distributive impacts, and equity).
Executive Order 13563 emphasizes the
importance of quantifying both costs and
benefits, of reducing costs, of harmoniz-
ing rules, and of promoting flexibility.
The proposed regulations have been
designated by the Office of Management
and Budget's ("OMB") Office of Informa-
tion and Regulatory Affairs ("OIRA") as
subject to review under Executive Order
12866 pursuant to the Memorandum of
Agreement (April 11, 2018) between the
Treasury Department and OMB regarding
review of tax regulations. It has been de-
termined that the proposed rulemaking is
economically significant under section
1(c) of the Memorandum of Agreement
and thereby subject to review. Accord-
ingly, the proposed regulations have been
reviewed by OMB.
#### A. Overview
Congress enacted section 199A to pro-
vide taxpayers other than corporations a
deduction of up to 20 percent of QBI from
domestic businesses plus up to 20 percent of
their combined qualified REIT dividends and
qualified PTP income. As stated in the Ex-
planation of Provisions, these regula-
tions are necessary to provide taxpayers
with computational, definitional, and
anti-avoidance guidance regarding the
application of section 199A. These pro-
posed regulations contain amendments
to § 1.199A-3, providing further guid-
ance to taxpayers for purposes of calcu-
lating the section 199A deduction. They
provide clarity for taxpayers in deter-
mining their eligibility for the deduction
and the amount of the allowed deduc-
tion. Among other benefits, this clarity
helps ensure that taxpayers all calculate
the deduction in a similar manner,
which encourages decision-making that
is economically efficient contingent on
the provisions of the overall Code.
#### B. Baseline
The analysis in this section compares
the proposed regulation to a no-action
baseline reflecting anticipated Federal in-
come tax-related behavior in the absence
of these regulations.
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C. Economic Analysis of the Proposed
Amendments to § 1.199A-3
##### 1. Background
Because the section 199A deduction
has not previously been available,
§§ 1.199A-1 through 1.199A-6 provide
greater specificity for a large number of
the relevant terms and necessary calcula-
tions taxpayers are currently required to
apply under the statute. However, one
subject not covered by the August 2018
Proposed Regulations is the treatment of
REIT dividends received by RICs. Be-
cause RICs are taxed as C corporations,
they are ineligible for the section 199A
deduction under the statute, which gener-
ally does not apply to C corporations.
However, the statute also directs the Sec-
retary to prescribe such regulations as are
necessary to carry out the purposes of
section 199A, including regulations for its
application in the case of tiered entities.
Thus these proposed regulations establish
rules under which a RIC that earns qual-
ified REIT dividends may pay section
199A dividends to its shareholders.
An alternative approach the Treasury
Department and the IRS could have taken
would be to remain silent on this issue. For
reasons given below, the Treasury Depart-
ment and the IRS concluded such an ap-
proach would likely give rise to less eco-
nomically efficient decisions than the
approach taken in these proposed regula-
tions.
##### 2. Anticipated benefits of the Proposed Amendments to § 1.199A-3
The Treasury Department and the IRS
expect that the definitions and guidance
provided in the proposed amendments to
§ 1.199A-3 will implement the section
199A deduction in an economically effi-
cient manner. An economically efficient
tax system generally aims to treat income
derived from similar economic decisions
similarly in order to reduce incentives to
make choices based on tax rather than
market incentives. In absence of these
proposed regulations, the section 199A
statute would not accomplish this in the
case of REIT dividends. Under the statute
and the section 199A final regulations,
individuals who directly hold ownership
interests in a REIT would generally qual-
ify for the section 199A deduction on their
qualified REIT dividends. However, indi-
viduals who are shareholders of a RIC that
has an ownership interest in a REIT would
not receive any benefit from section 199A
on REIT dividends received by the RIC,
even if the RIC pays dividends to the
individual. Thus, in the absence of these
supplemental proposed regulations, a
market distortion is introduced by section
199A whereby direct ownership of REITs
is tax-advantaged relative to indirect own-
ership of REITs through RICs.
These proposed regulations remove
this distortion. The proposed amendments
to § 1.199A-3 establish rules under which
a RIC that earns qualified REIT dividends
may pay section 199A dividends to its
shareholders, such that the effective tax
treatment of qualified REIT dividends is
similar under the proposed regulations re-
gardless of whether a taxpayer invests in a
REIT directly or through a RIC.
##### 3. Anticipated costs of the Proposed Amendments to § 1.199A-3
The Treasury Department and the IRS
do not anticipate any meaningful eco-
nomic distortions to be induced by the
proposed amendments to § 1.199A-3 be-
cause the proposed amendments seek to
continue to provide similar tax treatment
to REIT income regardless of whether it is
held directly or through a RIC. Prior to
TCJA, the tax treatment was similar, but
TCJA made REIT dividends eligible for
the section 199A deduction, and the
section 199A final regulations did not ad-
dress this uncertainty. This proposed
amendment ensures that REIT income
earned through a RIC is also eligible for
the same deduction. RICs are financial
intermediaries, and, as a general rule, eco-
nomic distortion is minimized to the ex-
tent that the tax consequences of invest-
ment through an intermediary correspond
to the tax consequences of direct invest-
ment. The Treasury Department and the
IRS request comments regarding any an-
ticipated economic costs. Changes to the
collective paperwork burden arising from
this and other sections of these regulations
are discussed in section D, Anticipated
impacts on administrative and compliance
costs, of this analysis.
#### D. Anticipated impacts on administrative and compliance costs
The proposed regulations add to the
compliance costs of RICs and intermedi-
aries such as brokerage firms that hold
RIC shares. In order for a RIC's share-
holders to benefit from the section 199A
deduction on qualified REIT dividends
earned by the RIC, the proposed regula-
tions require the RIC to compute and re-
port section 199A dividends to its share-
holders. Though many RICs keep detailed
records of their investment portfolios, this
action nonetheless creates non-trivial ad-
ministrative costs for any RICs and inter-
mediaries that wish to provide section
199A dividends to their shareholders.
These costs and the associated impacted
tax forms are described in the Paperwork
Reduction Act section of this proposed
amendment.
#### E. Executive Order 13771.
These regulations have been desig-
nated as regulatory under E.O. 13771.
## II. Paperwork Reduction Act
The collection of information required
by this proposed regulation is in proposed
§ 1.199A-3. The collection of information
in proposed § 1.199A-3 is required for
RICs that choose to report information
regarding qualified REIT dividends to
their shareholders. It is necessary to report
the information to the IRS and relevant
taxpayers in order to ensure that taxpayers
properly report in accordance with the
rules of the proposed regulations the cor-
rect amount of deduction under section
199A. The collection of information in
proposed § 1.199A-3 is satisfied by pro-
viding information about section 199A
dividends as Form 1099-DIV and its in-
structions may prescribe.
For purpose of the PRA, the reporting
burden associated with § 1.199A-3 will
be reflected in the IRS Form 14029, Pa-
perwork Reduction Act Submission, asso-
ciated with Form 1099-DIV (OMB con-
trol number 1545-0110). The burden
associated with the information collection
in the proposed regulations represents
1.567 million hours and $149 million
($2018) annually to comply with the in-
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formation collection requirement in the
proposed regulations. The burden hours
estimate was derived from IRS's legacy
burden model and is discussed in further
detail on 1545-0110. The hourly rate is
derived from RAAS's Business Taxpayer
Burden model that relates time and out-
of-pocket costs of business tax prepara-
tion, derived from survey data, to assets
and receipts of affected taxpayers along
with other relevant variables, and con-
verted by the Treasury Department to
$2017. The Treasury Department and the
IRS request comments on all aspects of in-
formation collection burdens related to the
proposed regulations. In addition, when
available, drafts of the applicable IRS forms
are posted for comment at https://www.irs-
.gov/pub/irs-pdf/f1099div.pdf.
### III. Regulatory Flexibility Act
It is hereby certified that the collections
of information in proposed § 1.199A-3
will not have a significant economic im-
pact on a substantial number of small en-
tities.
The collection in proposed § 1.199A-3
applies only to RICs that pay section
199A dividends. As described above,
Congress created RICs to give small in-
vestors access to the professional manage-
ment and asset diversification that are
available only with very large investment
portfolios. To insure appropriate non-tax
regulation of these substantial investment
portfolios, subchapter M of chapter 1 of
subtitle A the Code requires that such
RICs must be eligible for registration, and
must actually be registered, with the Se-
curities and Exchange Commission under
the Investment Company Act of 1940.
There are some small businesses that are
publicly traded, but most publicly traded
businesses are not small entities as defined
by the Regulatory Flexibility Act. Thus,
the Treasury Department and IRS expect
that most RICs are not small entities for
purposes of the Regulatory Flexibility
Act. Accordingly, the Treasury Depart-
ment and the IRS have determined that the
collection of information in this notice of
proposed rulemaking will not have a sig-
nificant economic impact. Accordingly, a
regulatory flexibility analysis under the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required. Notwithstand-
ing this certification, the Treasury Depart-
ment and the IRS invite comments from
interested members of the public on both
the number of entities affected and the
economic impact on small entities.
Pursuant to section 7805(f) of the
Code, this notice of proposed rulemaking
has been submitted to the Chief Counsel
for Advocacy of the Small Business Ad-
ministration for comment on its impact on
small business.
## Comments and Requests for Public Hearing
The Treasury Department and the IRS
request comments on all aspects of the
proposed rules.
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any comments that are
submitted timely to the IRS as prescribed
in this preamble under the "Addresses"
heading. All comments will be available
at www.regulations.gov or upon request.
A public hearing will be scheduled if re-
quested in writing by any person that
timely submits written comments. If a
public hearing is scheduled, then notice of
the date, time, and place for the public
hearing will be published in the Federal
Register.
## Drafting Information
The principal authors of these regula-
tions are Michael Y. Chin and Steven
Harrison, Office of the Associate Chief
Counsel (Financial Institutions and Prod-
ucts) and Robert Alinsky, Vishal R. Amin,
Margaret Burow, and Frank J. Fisher, Of-
fice of the Associate Chief Counsel (Pass-
throughs and Special Industries). How-
ever, other personnel from the Treasury
Department and the IRS participated in
their development.
* * * * *
## Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
## PART 1-INCOME TAXES
Paragraph 1. The authority citations for
part 1 are revised by amending sectional
authorities for §§ 1.199A-3 and
1.199A-6 to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.199A-3 also issued under 26
U.S.C. 199A(c)(4)(C) and (f)(4).
* * * * *
Section 1.199A-6 also issued under 26
U.S.C. 199A(f)(1)(B) and (f)(4).
* * * * *
Par. 2. Section 1.199A-0 is amended
by:
1\. Adding entries for § 1.199A-
3(b)(1)(iv)(A) and (B).
2\. Adding entries for § 1.199A-3(d),
(d)(1) and (2), (d)(2)(i) through (iii),
(d)(2)(iii)(A) and (B),(d)(3), (d)(3)(i)
through (v), (d)(4), (d)(4)(i) and (ii), and
(d)(5) and (6).
3\. Adding entries for § 1.199A-
6(d)(3)(iii) and (v).
The additions read as follows:
§ 1.199A-0 Table of contents.
* * * * *
§ 1.199A-3 Qualified business income,
qualified REIT dividends, and qualified
PTP income.
* * * * *
(b) * * *
(1) * * *
(iv) * * *
(A) In general.
(B) Attributes of disallowed loss deter-
mined in year loss is incurred.
* * * * *
(d) Section 199A dividends paid by a
regulated investment company.
(1) In general.
(2) Definition of section 199A divi-
dend.
(i) In general.
(ii) Reduction in the case of excess
reported amounts.
(iii) Allocation of excess reported
amount.
(A) In general.
(B) Special rule for noncalendar-year
RICs.
(3) Definitions.
(i) Reported section 199A dividend
amount.
(ii) Excess reported amount.
(iii) Aggregate reported amount.
(iv) Post-December reported amount.
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(v) Qualified REIT dividend income.
(4) Treatment of section 199A divi-
dends by shareholders.
(i) In general.
(ii) Holding period.
(5) Example.
(6) Applicability date.
* * * * *
§ 1.199A-6 Relevant passthrough
entities (RPEs), publicly traded
partnerships (PTPs), trusts, and estates.
* * * * *
(d) * * *
(3) * * *
(iii) Separate shares.
* * * * *
(v) Charitable remainder trusts.
* * * * *
Par. 3. Section 1.199A-3 is amended
by revising paragraph (b)(1)(iv) and add-
ing paragraph (d) to read as follows:
§ 1.199A-3 Qualified business income,
qualified REIT dividends, and qualified
PTP income.
* * * * *
(b) * * *
(1) * * *
(iv) Previously disallowed losses-(A)
In general. Previously disallowed losses
or deductions (including losses disallowed
under sections 465, 469, 704(d), and
1366(d)) allowed in the taxable year gen-
erally are taken into account for purposes
of computing QBI to the extent the disal-
lowed loss or deduction is otherwise al-
lowed by section 199A and this section.
These losses shall be used, for purposes of
section 199A and these regulations, in or-
der from the oldest to the most recent on a
first-in, first-out (FIFO) basis and shall be
treated as losses from a separate trade or
business. To the extent such losses relate
to a PTP, they must be treated as a loss
from a separate PTP in the taxable year
the losses are taken into account. How-
ever, losses or deductions that were disal-
lowed, suspended, limited, or carried over
from taxable years ending before January
1, 2018 (including under sections 465,
469, 704(d), and 1366(d)), are not taken
into account in a later taxable year for
purposes of computing QBI.
(B) Attributes of disallowed loss deter-
mined in year loss is incurred. Whether a
disallowed loss or deduction is attribut-
able to a trade or business, and otherwise
meets the requirements of this section is
determined in the year the loss is incurred.
Whether a disallowed loss or deduction is
attributable to a specified service trade or
business (including whether an individual
has taxable income under the threshold
amount, within the phase-in range, or in
excess of the phase-in range) also is de-
termined in the year the loss is incurred.
To the extent a loss is partially disallowed,
QBI in the year of disallowance must be
reduced proportionately.
* * * * *
(d) Section 199A dividends paid by a
regulated investment company-(1) In
general. If section 852(b) applies to a
regulated investment company (RIC) for a
taxable year, the RIC may pay section
199A dividends, as defined in this para-
graph (d).
(2) Definition of section 199A divi-
dend-(i) In general. Except as provided
in paragraph (d)(2)(ii) of this section, a
section 199A dividend is any dividend or
part of such a dividend that a RIC pays to
its shareholders and reports as a section
199A dividend in written statements fur-
nished to its shareholders.
(ii) Reduction in the case of excess
reported amounts. If the aggregate re-
ported amount with respect to the RIC for
any taxable year exceeds the RIC's qual-
ified REIT dividend income for the tax-
able year, then a section 199A dividend is
equal to-
(A) The reported section 199A divi-
dend amount, reduced by;
(B) The excess reported amount that is
allocable to that reported section 199A
dividend amount.
(iii) Allocation of excess reported
amount-(A) In general. Except as pro-
vided in paragraph (d)(2)(iii)(B) of this
section, the excess reported amount (if
any) that is allocable to the reported sec-
tion 199A dividend amount is that portion
of the excess reported amount that bears
the same ratio to the excess reported
amount as the reported section 199A div-
idend amount bears to the aggregate re-
ported amount.
(B) Special rule for noncalendar-year
RICs. In the case of any taxable year that
does not begin and end in the same cal-
endar year, if the post-December reported
amount equals or exceeds the excess re-
ported amount for that taxable year, para-
graph (d)(2)(iii)(A) of this section is ap-
plied by substituting "post-December
reported amount" for "aggregate reported
amount," and no excess reported amount
is allocated to any dividend paid on or
before December 31 of that taxable year.
(3) Definitions. For purposes of para-
graph (d) of this section-
(i) Reported section 199A dividend
amount. The term reported section 199A
dividend amount means the amount of a
dividend distribution reported to the RIC's
shareholders under paragraph (d)(2)(i) of
this section as a section 199A dividend.
(ii) Excess reported amount. The term
excess reported amount means the excess
of the aggregate reported amount over the
RIC's qualified REIT dividend income for
the taxable year.
(iii) Aggregate reported amount. The
term aggregate reported amount means
the aggregate amount of dividends re-
ported by the RIC under paragraph
(d)(2)(i) of this section as section 199A
dividends for the taxable year (including
section 199A dividends paid after the
close of the taxable year and described in
section 855).
(iv) Post-December reported amount.
The term post-December reported amount
means the aggregate reported amount de-
termined by taking into account only div-
idends paid after December 31 of the tax-
able year.
(v) Qualified REIT dividend income.
The term qualified REIT dividend income
means, with respect to a taxable year of a
RIC, the excess of the amount of qualified
REIT dividends, as defined in § 1.199A-
3(c)(2), includible in the RIC's taxable
income for the taxable year over the
amount of the RIC's deductions that are
properly allocable to such income.
(4) Treatment of section 199A divi-
dends by shareholders-(i) In general.
For purposes of section 199A and the reg-
ulations under section 199A, a section
199A dividend is treated by a taxpayer
that receives the section 199A dividend as
a qualified REIT dividend.
(ii) Holding period. Paragraph (d)(4)(i)
does not apply to any dividend received
with respect to a share of RIC stock-
(A) That is held by the shareholder for
45 days or less (taking into account the
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principles of section 246(c)(3) and (4))
during the 91-day period beginning on the
date which is 45 days before the date on
which the share becomes ex-dividend
with respect to such dividend; or
(B) To the extent that the shareholder is
under an obligation (whether pursuant to a
short sale or otherwise) to make related
payments with respect to positions in sub-
stantially similar or related property.
(5) Example. The following example il-
lustrates the provisions of this paragraph (d).
(i) Example. (A) X is a corporation that has
elected to be a RIC. For its taxable year ending
March 31, 2019, X has $25,000x of net long-term
capital gain, $60,000x of qualified dividend income,
$25,000x of taxable interest income, $15,000x of net
short-term capital gain, and $25,000x of qualified
REIT dividends. X has $15,000x of deductible ex-
penses, of which $3,000x is allocable to the qualified
REIT dividends. On December 31, 2018, X pays a
single dividend of $100,000x on December 31, and
reports $20,000x of the dividend as a section 199A
dividend in written statements to its shareholders. On
March 31, 2019, X pays a dividend of $35,000x, and
reports $5,000x of the dividend as a section 199A
dividend in written statements to its shareholders.
(B) X's qualified REIT dividend income under
paragraph (d)(3)(v) of this section is $22,000x,
which is the excess of X's $25,000x of qualified
REIT dividends over $3,000x in allocable expenses.
The reported section 199A dividend amounts for the
December 31, 2018, and March 31, 2019, distribu-
tions are $20,000x and $5,000x, respectively. For the
taxable year ending March 31, 2019, the aggregate
reported amount of section 199A dividends is
$25,000x, and the excess reported amount under
paragraph (d)(3)(ii) of this section is $3,000x. Be-
cause X is a non calendar-year RIC and the post-
December reported amount of $5,000x exceeds the
excess reported amount of $3,000x, the entire excess
reported amount is allocated under paragraphs
(d)(2)(iii)(A) and (B) of this section to the reported
section 199A dividend amount for the March 31,
2019, distribution. No portion of the excess reported
amount is allocated to the reported section 199A
dividend amount for the December 31, 2018, distri-
bution. Thus, the section 199A dividend on March
31, 2019, is $2,000x, which is the reported section
199A dividend amount of $5,000x reduced by the
$3,000x of allocable excess reported amount. The
section 199A dividend on December 31, 2018, is
the $20,000x that X reports as a section 199A divi-
dend.
(C) Shareholder A, a United States person, re-
ceives a dividend from X of $100x on December 31,
2018, of which $20x is reported as a section 199A
dividend. If A meets the holding period requirements
in paragraph (d)(4)(ii) of this section with respect to
the stock of X, A treats $20x of the dividend from X
as a qualified REIT dividend for purposes of section
199A for A's 2018 taxable year.
(D) A receives a dividend from X of $35x on
March 31, 2019, of which $5x is reported as a
section 199A dividend. If A meets the holding period
requirements in paragraph (d)(4)(ii) of this section
with respect to the stock of X, A may only treat $2x
of the dividend from X as a section 199A dividend
for A's 2019 taxable year.
(6) Applicability date. The provisions
of paragraph (d) of this section apply to
taxable years ending after the date the
Treasury decision adopting these regu-
lations as final regulations is published
in the Federal Register. However, tax-
payers may rely on the rules of this
section until the date the Treasury deci-
sion adopting these regulations as final
regulations is published in the Federal
Register.
* * * * *
Par. 4. Section 1.199A-6 is amended
by adding paragraphs (d)(3)(iii) and (v) to
read as follows:
§ 1.199A-6 Relevant passthrough
entities (RPEs), publicly traded
partnerships (PTPs), trusts, and estates.
* * * * *
(d) * * *
(3) * * *
(iii) Separate shares. In the case of a
trust described in section 663(c) with sub-
stantially separate and independent shares
for multiple beneficiaries, such trust will
be treated as a single trust for purposes of
determining whether the taxable income
of the trust exceeds the threshold amount.
* * * * *
(v) Charitable remainder trusts. A
charitable remainder trust described in
section 664 is not entitled to and does not
calculate a section 199A deduction and
the threshold amount described in section
199A(e)(2) does not apply to the trust.
However, any taxable recipient of a uni-
trust or annuity amount from the trust
must determine and apply the recipient's
own threshold amount for purposes of
section 199A taking into account any an-
nuity or unitrust amounts received from
the trust. A recipient of a unitrust or an-
nuity amount from a trust may take into
account QBI, qualified REIT dividends, or
qualified PTP income for purposes of de-
termining the recipient's section 199A de-
duction for the taxable year to the extent
that the unitrust or annuity amount distrib-
uted to such recipient consists of such
section 199A items under § 1.664-1(d).
For example, if a charitable remainder
trust has investment income of $500, qual-
ified dividend income of $200, and qual-
ified REIT dividends of $1,000, and dis-
tributes $1,000 to the recipient, the trust
would be treated as having income in two
classes within the category of income de-
scribed in § 1.664-1(d)(1)(i)(a)(1), for
purposes of § 1.664-1(d)(1)(ii)(b). Be-
cause the annuity amount first carries out
income in the class subject to the highest
income tax rate, the entire annuity pay-
ment comes from the class with the in-
vestment income and qualified REIT div-
idends. Thus, the charitable remainder
trust would be treated as distributing a
proportionate amount of the investment
income ($500/(1,000+500)*1,000 =
$333) and qualified REIT dividends
($1000/(1,000+500)*1000 = $667) be-
cause the investment income and qualified
REIT dividends are taxed at the same rate
and within the same class, which is higher
than the rate of tax for the qualified divi-
dend income which is in a separate class.
The charitable remainder trust in this ex-
ample would not be treated as distributing
any of the qualified dividend income until
it distributed all of the investment income
and qualified REIT dividends (more than
$1,500 in total) to the recipient. To the
extent that a trust is treated as distributing
QBI, qualified REIT dividends, or quali-
fied PTP income to more than one unitrust
or annuity recipient in the taxable year,
the distribution of such income will be
treated as made to the recipients propor-
tionately, based on their respective shares
of the total of QBI, qualified REIT divi-
dends, or qualified PTP income distrib-
uted for that year. The trust allocates and
reports any W-2 wages or UBIA of qual-
ified property to the taxable recipient of
the annuity or unitrust interest based on
each recipient's share of the trust's total
QBI (whether or not distributed) for that
taxable year. Accordingly, if 10 percent of
the QBI of a charitable remainder trust is
distributed to the recipient and 90 percent
of the QBI is retained by the trust, 10
percent of the W-2 wages and UBIA of
qualified property is allocated and re-
ported to the recipient and 90 percent of
the W-2 wages and UBIA of qualified
property is treated as retained by the trust.
However, any W-2 wages retained by the
trust do not carry over to subsequent taxable
years for section 199A purposes. Any QBI,
qualified REIT dividends, or qualified PTP
income of the trust that is unrelated business
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taxable income is subject to excise tax and
that tax must be allocated to the corpus of
the trust under § 1.664-1(c).
Kirsten Wielobob,
Deputy Commissioner for Services and
Enforcement.
(Filed by the Office of the Federal Register on February 4,
2019, 4:15 p.m., and published in the issue of the Federal
Register for February 8, 2019, 84 F.R. 3015)
## Reissuance of State or Local Bonds
### REG-141739-08
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document contains
proposed regulations that address when
tax-exempt bonds are treated as retired for
purposes of section 103 and sections 141
through 150 of the Internal Revenue Code
(Code). The proposed regulations are nec-
essary to unify and to clarify existing
guidance on this subject. The proposed
regulations affect State and local govern-
ments that issue tax-exempt bonds.
DATES: Comments and requests for a
public hearing must be received by
March 1, 2019.
ADDRESSES: Send submissions to: CC:
PA:LPD:PR (REG-141739-08), Room
5203, Internal Revenue Service, P.O. Box
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand-
delivered Monday through Friday be-
tween the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (REG-141739-08),
Courier's Desk, Internal Revenue Service,
1111 Constitution Avenue NW, Washing-
ton, DC 20224, or sent electronically via
the Federal eRulemaking Portal at www-
.regulations.gov (REG-141739-08).
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations, Spence Hanemann, (202)
317-6980; concerning submissions of
comments and requesting a hearing, Re-
gina Johnson, (202) 317-6901 (not toll-
free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to 26 CFR part 1 under sec-
tions 150 and 1001 of the Code (Proposed
Regulations).
#### 1. In General
In general, under section 103, interest
received by the holders of certain bonds
issued by State and local governments is
exempt from Federal income tax. To qual-
ify for the tax exemption, a bond issued by
a State or local government must satisfy
various eligibility requirements under sec-
tions 141 through 150 at the time of issu-
ance of the bond. If the issuer and holder
agree after issuance to modify the terms of
a tax-exempt bond significantly, the orig-
inal bond may be treated as having been
retired and exchanged for a newly issued,
modified bond. Similarly, if the issuer or
its agent acquires and resells the bond, the
bond may be treated as having been re-
tired upon acquisition and replaced upon
resale with a newly issued bond.
The term "reissuance" commonly re-
fers to the effect of a transaction in which
a new debt instrument replaces an old debt
instrument as a result of retirement of the
old debt instrument pursuant to such an ex-
change or extinguishment. In the case of a
reissuance, the reissued bond must be re-
tested for qualification under sections 103
and 141 through 150. The reissuance of an
issue of tax-exempt bonds may result in
various negative consequences to the issuer,
such as changes in yield for purposes of the
arbitrage investment yield restrictions under
section 148(a), acceleration of arbitrage re-
bate payment obligations under section
148(f), and change-in-law risk.
#### 2. Tender Option Bonds
Tender option bonds and variable rate
demand bonds (collectively, tender option
bonds) have special features that present
reissuance questions. Specifically, tender
option bonds have original terms that pro-
vide for a tender option interest rate mode,
as described in this paragraph. Issuers of
tax-exempt bonds often preauthorize sev-
eral different interest rate modes in the
bond documents and retain an option to
switch interest rate modes under parame-
ters set forth in the bond documents. Dur-
ing a tender option mode, tender option
bonds have short-term interest rates that
are reset periodically at various short-term
intervals (typically, every seven days)
based on the current market rate necessary
to remarket the bonds at par. In connec-
tion with each resetting of the interest rate,
the holder of a tender option bond has a
right or requirement to tender the bond
back to the issuer or its agent for purchase
at par. Tender option bonds also may have
interest rate mode conversion options that
permit the issuer or conduit borrower to
change the interest rate mode on the bonds
from a tender option mode to another
short-term interest rate mode or to a fixed
interest rate to maturity. At the time of a
conversion to another interest rate mode,
the holder of a tender option bond typi-
cally has the right or requirement to tender
the bond for purchase at par.
Tender option bonds generally have
third-party liquidity facilities from banks or
other liquidity providers to ensure that there
is sufficient cash to repurchase the bonds
upon a holder's tender, and they also com-
monly have credit enhancement from bond
insurers or other third-party guarantors.
Upon a holder's exercise of its tender rights
in connection with either a resetting of the
interest rate during a tender option mode or
a conversion to another interest rate mode, a
remarketing agent or a liquidity provider
typically will acquire the bonds subject to
the tender and resell the bonds either to the
same bondholders or to others willing to
purchase such bonds.
#### 3. Existing Guidance
To address reissuance questions related
to tax-exempt bonds, on December 27,
1988, the IRS published Notice 88-130,
1988-2 CB 543, which provides rules for
determining when a tax-exempt bond is
retired for purposes of sections 103 and
141 through 150. Notice 88-130 provides
in part that a tax-exempt bond is retired
when there is a change to the terms of the
bond that results in a disposition of the
bond for purposes of section 1001. In ad-
dition, Notice 88-130 provides special
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rules for retirement of certain tender op-
tion bonds that meet a definition of the
term "qualified tender bond."
On June 26, 1996, the Department of
the Treasury (Treasury Department) and
the IRS published final regulations under
§ 1.1001-3 (1996 Final Regulations) in
the Federal Register (61 FR 32926).
These regulations provide rules for deter-
mining whether a modification of the
terms of a debt instrument, including a
tax-exempt bond, results in an exchange
for purposes of section 1001. In recogni-
tion of a need to coordinate the interaction
of the prior guidance in Notice 88-130
with the subsequent final regulations un-
der § 1.1001-3 for particular tax-exempt
bond purposes, the Treasury Department
and the IRS stated their intention to issue
regulations under section 150 on this sub-
ject in the Federal Register (61 FR
32930).
On April 14, 2008, the IRS published
Notice 2008-41, 2008-1 CB 742. Like
Notice 88-130, Notice 2008-41 provides
rules for determining when a tax-exempt
bond is retired for purposes of sections
103 and 141 through 150 and includes
special rules for qualified tender bonds.
While the retirement standards provided
in these two notices are similar, Notice
2008-41 was intended to coordinate the
retirement standards for tax-exempt bond
purposes with the 1996 Final Regulations
on modifications of debt instruments un-
der § 1.1001-3 and to be more adminis-
trable than Notice 88-130. In order to
preserve flexibility and to limit potential
unintended consequences during the 2008
financial crisis, Notice 2008-41 permit-
ted issuers to apply either notice. Gener-
ally, under Notice 2008-41, a tax-exempt
bond is retired when a significant modifi-
cation to the terms of the bond occurs
under § 1.1001-3, the bond is acquired by
or on behalf of its issuer, or the bond is
otherwise redeemed or retired. The notice
clarifies that, for purposes of these retire-
ment standards, the purchase of a tax-
exempt bond by a third-party guarantor or
third-party liquidity facility provider pur-
suant to the terms of the guarantee or
liquidity facility is not treated as a pur-
chase or other acquisition by or on behalf
of a governmental issuer. Although these
general rules apply to a qualified tender
bond, Notice 2008-41 also provides that
certain features of qualified tender bonds
will not result in a retirement. In Notice
2008-41, the Treasury Department and
the IRS reiterated their intention to pro-
vide guidance on the retirement of tax-
exempt bonds in regulations under section
150.
The Proposed Regulations provide rules
for determining when tax-exempt bonds are
treated as retired for purposes of sections
103 and 141 through 150. The Proposed
Regulations also amend § 1.1001-3(a)(2) to
conform that section to the special rules in
the Proposed Regulations for retirement of
qualified tender bonds.
## Explanation of Provisions
1\. Section 1.150-3: Retirement of Tax-
Exempt Bonds
### A. General Rules for Retirement of a Tax-Exempt Bond
The Proposed Regulations generally
provide retirement standards that apply to
tax-exempt bonds for purposes of sections
103 and 141 through 150. These retire-
ment standards follow the guidance in No-
tice 2008-41 with technical refinements.
The Proposed Regulations provide that a
tax-exempt bond is retired if a significant
modification to the terms of the bond oc-
curs under § 1.1001-3, if the issuer or an
agent acting on its behalf acquires the
bond in a manner that liquidates or extin-
guishes the bondholder's investment in
the bond, or if the bond is otherwise re-
deemed (for example, redeemed at matu-
rity).
For this purpose, the Proposed Regula-
tions define the term "issuer" to mean the
State or local governmental unit that ac-
tually issues the bonds and any related
party (as defined in § 1.150-1(b)) to that
actual issuer. In the case of a governmen-
tal unit, the applicable related party defi-
nition under § 1.150-1(b) applies a con-
trolled group test under § 1.150-1(e) to
determine related party status, based gen-
erally on all of the facts and circum-
stances. This controlled group test in-
cludes special rules which specifically
treat control over the governing board of a
governmental unit and control over use of
funds or assets of a governmental unit as
giving rise to controlled group status.
By focusing on the actual issuer rather
than on a conduit borrower, this definition
of issuer maintains and respects the essen-
tial legal construct necessary for issuance
of many tax-exempt bonds, such as qual-
ified private activity bonds under section
141(e), that the actual issuer be treated as
the obligor in conduit financings. Thus,
under the Proposed Regulations, the ac-
quisition of a tax-exempt bond by a con-
duit borrower that is not a related party to
the actual issuer does not result in the
retirement of that bond.
The Proposed Regulations also pre-
scribe certain consequences for a bond
that is retired pursuant to a deemed ex-
change under § 1.1001-3 or following the
acquisition of the bond by the issuer or the
issuer's agent. In the former case,
the bond is treated as a new bond issued at
the time of the modification as determined
under § 1.1001-3. In the latter case, if the
issuer resells the bond, the bond is treated
as a new bond issued at the time of resale.
If the issuer does not resell the acquired
bond, the acquired bond is simply retired.
In either case in which a retired bond is
treated as a newly issued bond, the issuer
must consider whether the new bond re-
funds the retired bond. For this purpose,
the rules regarding the definition of a re-
funding issue under § 1.150-1(d) apply.
For example, if the issuer of the bond
retired pursuant to § 1.1001-3 is the same
as the issuer (or a related party to the
issuer) of the newly issued bond, the
newly issued bond will be part of a current
refunding issue that refunds the retired
bond.
### B. Exceptions to Retirement of a Tax- Exempt Bond
The Proposed Regulations provide
three exceptions that limit retirements re-
sulting from the operation of the general
rules. Two of these exceptions are in-
tended to prevent the special features of
tender option bonds from resulting in a
retirement. A third exception applies to all
tax-exempt bonds.
The first two exceptions in the Pro-
posed Regulations apply to qualified ten-
der bonds, a defined term that is essen-
tially a tender option bond meeting certain
requirements. Specifically, a qualified ten-
der bond is a tax-exempt bond that, pur-
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suant to the terms of its governing con-
tract, bears interest during each interest
rate mode at a fixed rate, a qualified float-
ing rate under § 1.1275-5, or an objective
rate that is permitted for a tax-exempt
bond under § 1.1275-5(c)(5). Further-
more, interest on a qualified tender bond
must be unconditionally payable at peri-
odic intervals of no more than a year.
Finally, a qualified tender bond may not
have a stated maturity date later than 40
years after its issue date and must include
a qualified tender right. This definition is
similar to the definition of qualified tender
bond provided in Notice 2008-41.
The Proposed Regulations define a
qualified tender right required for a qual-
ified tender bond in terms of the mechan-
ics by which the tender right operates. The
Proposed Regulations define a qualified
tender right to include either a tender right
that arises periodically during a tender
option mode or a tender right that arises
upon the exercise of the issuer's option
under the original terms of the bond to
change the interest rate mode.
A qualified tender bond has two fea-
tures that otherwise could result in retire-
ment of the bond under the general rules
for retirement in the Proposed Regula-
tions. First, when accompanied by a qual-
ified tender right, an exercise of the issu-
er's option to change the interest rate
mode might, in some circumstances, qual-
ify as a modification under the rule in
§ 1.1001-3(c)(2)(iii) for alterations that
result from the exercise of an option.
Thus, absent the exception in the Pro-
posed Regulations, a qualified tender right
might result in a modification that, if sig-
nificant, would cause the qualified tender
bond to be retired. To address this circum-
stance, the Proposed Regulations provide
an exception that avoids retirement by dis-
regarding a qualified tender right for pur-
poses of determining whether a significant
modification of a qualified tender bond
under § 1.1001-3 results in retirement of
the bond. Consequently, the issuer's op-
tion to change the interest rate mode typ-
ically would qualify as a unilateral option
and the change of interest rate mode re-
sulting from exercise of that option would
not be a modification of the qualified ten-
der bond.
The second feature of a qualified ten-
der bond that could result in retirement of
the bond under the general rules for retire-
ment in the Proposed Regulations is the
financing structure feature that may re-
quire the issuer or its agent to acquire the
bond upon exercise of the qualified tender
right. To address this circumstance, the
Proposed Regulations provide another ex-
ception under which an acquisition of a
qualified tender bond pursuant to the ex-
ercise of a qualified tender right will not
result in retirement, provided that neither
the issuer nor its agent holds the bond for
longer than 90 days. This 90-day period is
intended to provide the issuer or its remar-
keting agent with sufficient time to resell a
tendered bond to a new holder.
The Proposed Regulations also provide
an exception to the general rules of retire-
ment for all tax-exempt bonds. This ex-
ception, carried forward from Notice
2008-41, provides that acquisition of a
tax-exempt bond by a guarantor or liquid-
ity facility provider acting as the issuer's
agent does not result in retirement of the
bond if the acquisition is pursuant to the
terms of the guarantee or liquidity facility
and the guarantor or liquidity facility pro-
vider is not a related party (as defined in
§ 1.150-1(b)) to the issuer.
#### 2. Applicability Dates
The rules in § 1.150-3 of the Proposed
Regulations are proposed to apply to
events and actions taken with respect to
bonds that occur on or after the date that is
90 days after the date of publication of the
Treasury decision adopting these rules as
final regulations in the Federal Register.
Issuers may apply these regulations to
events and actions taken with respect to
bonds that occur before that date. The
Treasury Department and the IRS expect
that the final regulations will obsolete No-
tice 88-130 and Notice 2008-41.
## Special Analyses
This regulation is not subject to review
under section 6(b) of Executive Order
12866 pursuant to the Memorandum of
Agreement (April 11, 2018) between the
Department of the Treasury and the Office
of Management and Budget regarding re-
view of tax regulations. Because these
regulations do not impose a collection of
information on small entities, the Regula-
tory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Pursuant to section
7805(f) of the Code, this notice of pro-
posed rulemaking will be submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small entities.
## Comments and Requests for Public Hearing
Before the Proposed Regulations are
adopted as final regulations, consideration
will be given to any comments that are
submitted timely to the IRS as prescribed
in this preamble under the ADDRESSES
heading. The Treasury Department and
the IRS request comments on all aspects
of the proposed rules. All comments will
be available at www.regulations.gov or
upon request. A public hearing will be
scheduled if requested in writing by any
person that timely submits written com-
ments. If a public hearing is scheduled,
notice of the date, time, and place for the
hearing will be published in the Federal
Register.
## Drafting Information
The principal authors of these regula-
tions are Spence Hanemann of the Office
of Associate Chief Counsel (Financial In-
stitutions and Products) and Vicky Tsilas,
formerly of the Office of Associate Chief
Counsel (Financial Institutions and Prod-
ucts). However, other personnel from the
Treasury Department and the IRS partic-
ipated in their development.
## Availability of IRS Documents
The IRS notices cited in this preamble
are published in the Internal Revenue Bul-
letin (or Cumulative Bulletin) and are
available from the Superintendent of Doc-
uments, U.S. Government Publishing Of-
fice, Washington, DC 20402, or by visit-
ing the IRS website at www.irs.gov.
* * * *
## Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PART 1-INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
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Authority: 26 U.S.C. 7805
Par. 2. Section 1.150-3 is added to
read as follows:
### § 1.150-3 Retirement standards for state and local bonds.
(a) General purpose and scope. This
section provides rules to determine when
a tax-exempt bond is retired for purposes
of sections 103 and 141 through 150.
(b) General rules for retirement of a
tax-exempt bond. Except as otherwise pro-
vided in paragraph (c) of this section, a
tax-exempt bond is retired when:
(1) A significant modification of the
bond occurs under § 1.1001-3;
(2) The issuer or its agent acquires the
bond in a manner that liquidates or extin-
guishes the bondholder's investment in
the bond; or
(3) The bond is otherwise redeemed
(for example, redeemed at maturity).
(c) Exceptions to retirement of a tax-
exempt bond-(1) Qualified tender right
does not result in a modification. In ap-
plying § 1.1001-3 to a qualified tender
bond for purposes of paragraph (b)(1) of this
section, both the existence and exercise of a
qualified tender right are disregarded. Thus, a
change in the interest rate mode made in con-
nection with the exercise of a qualified tender
right generally is not a modification because
the change occurs by operation of the terms of
the bond and the holder's resulting right to put
the bond to the issuer or its agent does not
prevent the issuer's option from being a uni-
lateral option.
(2) Acquisition pursuant to a qualified
tender right. Acquisition of a qualified
tender bond by the issuer or its agent does
not result in retirement of the bond under
paragraph (b)(2) of this section if the ac-
quisition is pursuant to the operation of a
qualified tender right and neither the is-
suer nor its agent continues to hold the
bond after the close of the 90-day period
beginning on the date of the tender.
(3) Acquisition of a tax-exempt bond by
a guarantor or liquidity facility provider.
Acquisition of a tax-exempt bond by a guar-
antor or liquidity facility provider acting on the
issuer's behalf does not result in retirement of
the bond under paragraph (b)(2) of this section
if the acquisition is pursuant to the terms of the
guarantee or liquidity facility and the guaran-
tor or liquidity facility provider is not a related
party (as defined in § 1.150-1(b) to the issuer.
(d) Effect of retirement. If a bond is
retired pursuant to paragraph (b)(1) of this
section (that is, in a transaction treated as
an exchange of the bond for a bond with
modified terms), the bond is treated as a
new bond issued at the time of the modi-
fication as determined under § 1.1001-3.
If the issuer or its agent resells a bond retired
pursuant to paragraph (b)(2) of this section, the
bond is treated as a new bond issued on the
date of resale. In both cases, the rules of
§ 1.150-1(d) apply to determine if the new
bond is part of a refunding issue.
(e) Definitions. For purposes of this
section, the following definitions apply:
(1) Issuer means the State or local gov-
ernmental unit (as defined in § 1.103-1)
that actually issues the tax-exempt bond
and any related party (as defined in
§ 1.150-1(b)) to the actual issuer (as dis-
tinguished, for example, from a conduit
borrower that is not a related party to the
actual issuer).
(2) Qualified tender bond means a tax-
exempt bond that, pursuant to the terms of
its governing contract, has all of the fea-
tures described in this paragraph (e)(2).
During each authorized interest rate mode,
the bond bears interest at a fixed interest
rate, a qualified floating rate under
§ 1.1275-5(b), or an objective rate for a
tax-exempt bond under § 1.1275-5(c)(5).
Interest on the bond is unconditionally
payable at periodic intervals of no more
than one year. The bond has a stated ma-
turity date that is not later than 40 years
after the issue date of the bond. The bond
includes a qualified tender right.
(3) Qualified tender right means a right
or obligation of a holder of the bond to
tender the bond for purchase as described
in this paragraph (e)(3). The purchaser
under the tender may be the issuer, its
agent, or another party. The tender right is
available on at least one date before the
stated maturity date. For each such tender,
the purchase price of the bond is equal to
par (plus any accrued interest). Following
each such tender, the issuer or its remar-
keting agent either redeems the bond or
uses reasonable best efforts to resell the
bond within the 90-day period beginning
on the date of the tender. Upon any such
resale, the purchase price of the bond is
equal to par (plus any accrued interest).
(f) Applicability date. This section ap-
plies to events and actions taken with re-
spect to bonds that occur on or after the
date that is 90 days after the date of pub-
lication of the Treasury decision adopting
these rules as final regulations in the Fed-
eral Register.
Par. 3. Section 1.1001-3 is amended by:
1\. Revising paragraph (a)(2).
2\. Revising the paragraph (h) subject
heading.
3\. Revising the first sentence of para-
graph (h)(1).
4\. Revising the paragraph (h)(2) sub-
ject heading.
5\. Adding paragraph (h)(3).
The revisions and addition read as fol-
lows:
§ 1.1001-3 Modifications of debt
instruments.
(a) * * *
(2) Qualified tender bonds. For special
rules governing whether tax-exempt
bonds that are qualified tender bonds are
retired for purposes of sections 103 and
141 through 150, see § 1.150-3.
* * * * *
(h) Applicability date. * * *
(1) * * * Except as otherwise provided
in paragraphs (h)(2) and (3) of this sec-
tion, this section applies to alterations of
the terms of a debt instrument on or after
September 24, 1996. * * *
(2) Alteration or modification results in
an instrument or property right that is not
debt. * * *
(3) Qualified tender bonds. Paragraph
(a)(2) of this section applies to events and
actions taken with respect to qualified tender
bonds that occur on or after the date that is 90
days after the date of publication of the Trea-
sury decision adopting these rules as final reg-
ulations in the Federal Register.
Kirsten Wielobob
Deputy Commissioner for Services and
Enforcement.
(Filed by the Office of the Federal Register on December 28,
2018, 8:45 a.m., and published in the issue of the Federal
Register for December 31, 2018, 83 F.R. 67701)
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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.
TFE-Transferee.
TFR-Transferor.
CI-City.
GR-Grantor.
IC-Insurance Company.
TP-Taxpayer.
Ct.D .- Court Decision.
I.R.B .- Internal Revenue Bulletin.
TR-Trust.
CY-County.
LE-Lessee.
TT-Trustee.
D-Decedent.
LP-Limited Partner.
U.S.C .- United States Code.
DC-Dummy Corporation.
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.
C-Individual.
T.D .- Treasury Decision.
C.B .- Cumulative Bulletin.
CFR-Code of Federal Regulations.
GP-General Partner.
T.I.R .- Technical Information Release.
COOP-Cooperative.
LR-Lessor.
M-Minor.
Y-Corporation.
Z-Corporation.
DISC-Domestic International Sales Corporation.
E-Estate.
EE-Employee.
E.O .- Executive Order.
ER-Employer.
ERISA-Employee Retirement Income Security Act.
EX-Executor.
F-Fiduciary.
FC-Foreign Country.
FICA-Federal Insurance Contributions Act.
FISC-Foreign International Sales Company.
FPH-Foreign Personal Holding Company.
BK-Bank.
B.T.A .- Board of Tax Appeals.
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## Numerical Finding List1
Bulletin 2019-9
### Action on Decision:
2019-1, 2019-08 I.R.B. 569
### Announcements:
2019-1, 2019-06 I.R.B. 566
### Notices:
2019-01, 2019-02 I.R.B. 275
2019-02, 2019-02 I.R.B. 281
2019-03, 2019-03 I.R.B. 350
2019-04, 2019-02 I.R.B. 282
2019-05, 2019-02 I.R.B. 283
2019-06, 2019-03 I.R.B. 353
2019-07, 2019-09 I.R.B. 740
2019-08, 2019-03 I.R.B. 354
2019-09, 2019-04 I.R.B. 403
2019-11, 2019-05 I.R.B. 430
2019-13, 2019-08 I.R.B. 580
### Proposed Regulations:
REG-104259-18, 2019-02
I.R.B. 300
REG-104352-18, 2019-03
I.R.B. 357
REG-106089-18, 2019-05
I.R.B. 431
REG-134652-18, 2019-09
I.R.B. 747
REG-141739-08, 2019-09
I.R.B. 757
## Revenue Procedures:
2019-1, 2019-01 I.R.B. 1
2019-2, 2019-01 I.R.B. 106
2019-3, 2019-01 I.R.B. 130
2019-4, 2019-01 I.R.B. 146
2019-5, 2019-01 I.R.B. 230
2019-6, 2019-02 I.R.B. 284
2019-7, 2019-01 I.R.B. 268
2019-8, 2019-03 I.R.B. 347
2019-9, 2019-02 I.R.B. 293
2019-10, 2019-02 I.R.B. 296
2019-11, 2019-09 I.R.B. 742
2019-12, 2019-04 I.R.B. 401
2019-13, 2019-09 I.R.B. 744
## Revenue Rulings:
2019-03, 2019-02 I.R.B. 272
2019-04, 2019-07 I.R.B. 567
## Treasury Decisions:
9845, 2019-08 I.R.B. 570
9846, 2019-09 I.R.B. 583
9847, 2019-09 I.R.B. 670
1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2018-27 through 2018-52 is in Internal Revenue Bulletin
2018-52, dated December 27, 2018.
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# Finding List of Current Actions on Previously Published Items1
Bulletin 2019-9
<!-- PageFooter="1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2018-27 through 2018-52 is in Internal Revenue Bulletin 2018-52, dated December 27, 2018." -->
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# Internal Revenue Service Washington, DC 20224
Official Business
Penalty for Private Use, $300
# INTERNAL REVENUE BULLETIN
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