Internal Revenue Bulletin 2019-3 (PDF rendition): IRS Revenue Procedures

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# INTERNAL REVENUE BULLETIN

IRS

## HIGHLIGHTS OF THIS ISSUE

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

## ADMINISTRATIVE

### NOTICE 2019-06, page 353.

This notice informs taxpayers that the Department of the Trea-
sury and the Internal Revenue Service intend to propose reg-
ulations addressing certain special enforcement matters under
section 6241(11). Specifically, this Notice explains that pro-
posed rules will be issued that provide the IRS may determine
that the centralized partnership audit regime will not apply to
adjustments to partnership-related items in certain limited cir-
cumstances and that partnerships with a qualified subchapter
S subsidiary (QSub) are not eligible to elect out of the central-
ized partnership audit regime except by applying a rule similar
to the rules for S corporations under section 6221(b)(2)(A) to
the QSub partner. This notice also requests comments regard-
ing other special enforcement matters that could be the sub-
ject of future proposed regulations.

### REG-104352-18, page 357.

Proposed regulations implementing sections 245A(e) and 267A
of the Internal Revenue Code regarding hybrid dividends and
certain amounts paid or accrued in hybrid transactions or with
hybrid entities. This document also contains proposed regulations
under: (1) sections 1503(d) and 7701 to prevent the same de-
duction from being claimed under the tax laws of both the United
States and a foreign country, and (2) sections 6038, 6038A, and
6038C to facilitate administration of these rules.

## EMPLOYEE PLANS

### NOTICE 2019-03, page 350.

This notice sets forth updates on the corporate bond monthly
yield curve, the corresponding spot segment rates for December
2018 used under § 417(e)(3)(D), the 24-month average segment
rates applicable for December 2018, and the 30-year Treasury
rates, as reflected by the application of § 430(h)(2)(C)(iv).

Finding Lists begin on page ii.

Bulletin No.

2019-03

January 14, 2019

## EMPLOYMENT TAX

### NOTICE 2019-08, page 354.

This Notice provides the maximum fair market value of a
vehicle eligible to use the fleet-average and cents-per-mile
special valuation rules of Treas. Reg. section 1.61-21(d) and
(e), respectively, for 2018. These special valuation rules may
be used to value an employee's personal use of an employer-
provided vehicle for income and employment tax purposes.

## INCOME TAX

### NOTICE 2019-08, page 354.

This Notice provides the maximum fair market value of a
vehicle eligible to use the fleet-average and cents-per-mile
special valuation rules of Treas. Reg. section 1.61-21(d) and
(e), respectively, for 2018. These special valuation rules may
be used to value an employee's personal use of an employer-
provided vehicle for income and employment tax purposes.

### Rev. Proc. 2019-08, page 347.

This revenue procedure describes how taxpayers elect to
expense under section 179(a) the cost of qualified real prop-
erty and how taxpayers change their computation of depreci-
ation for certain assets to the alternative depreciation system
of section 168(g), for taxable years beginning after 2017. This
revenue procedure also defines qualified real property under
section 179. Effective date December 21, 2018, Rev. Proc.
87-57 and Rev. Proc. 2018-31 are modified.

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## The IRS Mission

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

## Introduction

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

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

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

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

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

The Bulletin is divided into four parts as follows:

### Part I .- 1986 Code.

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

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

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

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

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

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

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

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

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## Part III. Administrative, Procedural, and Miscellaneous

26 CFR 1.179-5: Time and manner of making election.
(Also Part 1, §§ 168, 446; 1.168(i)-4, 1.446-1.)

Rev. Proc. 2019-08

### SECTION 1. PURPOSE

This revenue procedure provides guid-
ance under §§ 13101(b), 13204(a)(3), and
13205 of the Tax Cuts and Jobs Act, Pub.
L. No. 115-97, 131 Stat. 2054 (Dec. 22,
2017) (the "TCJA"). Section 13101(b) of
the TCJA amended § 179 of the Internal
Revenue Code by modifying the definition
of qualified real property that may be eligi-
ble as § 179 property under § 179(d)(1).
Section 13204(a)(3) of the TCJA amended
§ 168 by (i) requiring certain property held
by an electing real property trade or busi-
ness, as defined in § 163(j)(7)(B), to be
depreciated under the alternative deprecia-
tion system in § 168(g), and (ii) changing
the recovery period under the alternative
depreciation system from 40 to 30 years for
residential rental property. Section 13205 of
the TCJA amended § 168 by requiring cer-
tain property held by an electing farming
business, as defined in § 163(j)(7)(C), to be
depreciated under the alternative deprecia-
tion system. This revenue procedure also
modifies Rev. Proc. 87-57, 1987-2 C.B.
687, to provide an optional depreciation ta-
ble for residential rental property depreci-
ated under the alternative depreciation sys-
tem with a 30-year recovery period, and
Rev. Proc. 2018-31, 2018-22 I.R.B. 637,
to provide guidance for calculating a
§ 481(a) adjustment for a change in method
of accounting due to a change in the use of
depreciable tangible property.

### SECTION 2. BACKGROUND

.01 Modifications to § 179.

(1) Section 179(a) allows a taxpayer to
elect to treat the cost (or a portion of the
cost) of any § 179 property as an expense
for the taxable year in which the taxpayer
places the property in service. Sections
179(b)(1) and (2) prescribe a dollar limi-
tation on the aggregate cost of § 179 prop-
erty that can be treated as an expense
under § 179(a). The dollar limitation is the
amount under § 179(b)(1) (the § 179(b)(1)
limitation), reduced (but not below zero)
by the amount by which the cost of § 179

property placed in service during the taxable
year exceeds the amount under § 179(b)(2)
(the § 179(b)(2) limitation). For taxable
years beginning after 2017, the § 179(b)(1)
limitation is $1,000,000 and the § 179(b)(2)
limitation is $2,500,000. Pursuant to
§ 179(b)(6), these limitation amounts are
adjusted for inflation for taxable years be-
ginning after 2018. For taxable years begin-
ning in 2019, section 3.26 of Rev. Proc.
2018-57, 2018-49 I.R.B. 827, provides
that the § 179(b)(1) limitation is $1,020,000
and the § 179(b)(2) limitation is $2,550,000.

(2) Section 179(b)(3)(A) provides that
a taxpayer's § 179 deduction for any
taxable year, after application of the
§ 179(b)(1) and (2) limitations, is lim-
ited to the taxpayer's taxable income for
that taxable year that is derived from the
taxpayer's active conduct of any trade or
business during that taxable year (tax-
able income limitation). Section 179(b)
(3)(B) provides that the amount of any
cost of § 179 property elected to be
expensed in a taxable year that is disal-
lowed as a § 179 deduction under the
taxable income limitation may be car-
ried forward for an unlimited number of
years and may be deducted under
§ 179(a) in a future year, subject to the
same limitations.

(3) Section 179(c) provides the rules
for making and revoking elections under
§ 179 ("§ 179 election"). Pursuant to
§ 179(c)(1), a § 179 election is made in
the manner prescribed by regulations.
Section 1.179-5(c)(1) of the Income Tax
Regulations provides the manner for mak-
ing or revoking a § 179 election for any
taxable year beginning after 2002 and be-
fore 2008. Section 1.179-5(c) was promul-
gated in 2005 and has not been amended to
reflect subsequent amendments to § 179(c).
However, in 2017, the Treasury Department
and the IRS issued Rev. Proc. 2017-33,
2017-19 I.R.B. 1236. Section 3.02 of Rev.
Proc. 2017-33 provides that for a taxable
year beginning after 2014, the taxpayer will
be permitted to make a § 179 election for
any § 179 property without the Commis-
sioner's consent on an amended federal tax
return for the taxable year in which the
taxpayer places in service the § 179 prop-
erty. Section 3.02 of Rev. Proc. 2017-33
further provides that until § 1.179-5(c) is

amended to incorporate this guidance, tax-
payers may rely on such guidance.

(4) Section 179(d) defines the term
"§ 179 property." Prior to amendment by
the TCJA, § 179(d)(1) defined § 179 prop-
erty as property that is: (A)(i) tangible prop-
erty to which § 168 applies, or (ii) computer
software, as defined in § 197(e)(3)(B), that
is described in § 197(e)(3)(A)(i) and to
which § 167 applies; (B) § 1245 property as
defined in § 1245(a)(3); and (C) acquired by
purchase for use in the active conduct of a
trade or business. Prior to amendment by the
TCJA, § 179(d)(1) further provided that
§ 179 property does not include any prop-
erty described in § 50(b).

Section 13101(b)(1) of the TCJA
amended § 179(d)(1)(B) to provide that
if the taxpayer elects, § 179 property
may include qualified real property as
defined in § 179(f). Section 13101(c) of
the TCJA also amended the flush lan-
guage in § 179(d)(1) to allow property
used predominantly to furnish lodging
or in connection with the furnishing of
lodging as described in § 50(b)(2) to be
§ 179 property. These amendments ap-
ply to property placed in service in tax-
able years beginning after December 31,
2017.

(5) Prior to amendment by the TCJA,
§ 179(f)(1) provided that § 179 property
included qualified real property if the tax-
payer elected the application of § 179(f)
for the taxable year, and § 179(f)(2) de-
fined "qualified real property" as meaning
qualified leasehold improvement prop-
erty, qualified restaurant property, and
qualified retail improvement property de-
scribed in § 168(e)(6), (7), and (8), respec-
tively, as in effect on the day before the
date of the enactment of the TCJA. Sec-
tion 13101(b)(2) of the TCJA amended
§ 179(f) by defining qualified real prop-
erty as (1) any qualified improvement
property described in § 168(e)(6) and (2)
any of the following improvements to
nonresidential real property placed in ser-
vice after the date such property was first
placed in service: roofs; heating, ventila-
tion, and air-conditioning property; fire
protection and alarm systems; and secu-
rity systems. These amendments apply to
property placed in service in taxable years
beginning after December 31, 2017.

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Some taxpayers have inquired as to
whether the election to treat qualified real
property as § 179 property is made in ac-
cordance with the § 179 election procedures
in § 1.179-5(c) or the procedures in Notice
2013-59, 2013-40 I.R.B. 297, for electing
the application of former § 179(f)(1). Sec-
tion 3 of this revenue procedure addresses
this issue.

(6) Section 401(b)(15)(A) of the Con-
solidated Appropriations Act, 2018, Pub.
L. No. 115-141, Div. U, Title IV, 132
Stat. 348 (Mar. 23, 2018) (the “2018
Act"), removed § 179(e), which provided
special rules for qualified disaster assis-
tance property, and redesignated § 179(f)
as § 179(e).

.02 Modifications to § 168(g).

(1) Prior to amendment by the TCJA,
§ 168(g)(1) provided that the depreciation
deduction provided by § 167(a) is deter-
mined under the alternative depreciation
system for: (A) any tangible property that
during the taxable year is used predomi-
nantly outside the United States; (B) any
tax-exempt use property; (C) any tax-
exempt bond financed property; (D) any im-
ported property covered by an Executive
order under § 168(g)(6); and (E) any prop-
erty to which an election under § 168(g)(7)
applies. Sections 13204(a)(3)(A)(i) and
13205(a) of the TCJA amended § 168(g)(1)
by requiring the depreciation deduction pro-
vided by § 167(a) to be determined under
the alternative depreciation system for the
following additional property: nonresiden-
tial real property, residential rental property,
and qualified improvement property held by
an electing real property trade or business as
defined in § 163(j)(7)(B); and any property
with a recovery period of 10 years or more
that is held by an electing farming business
as defined in § 163(j)(7)(C). These amend-
ments apply to taxable years beginning after
December 31, 2017, without regard to when
the property is or was placed in service.

Some taxpayers that are electing real
property trades or businesses or electing
farming businesses have inquired about how
depreciation is changed from the general de-
preciation system under § 168(a) to the alter-
native depreciation system under § 168(g) for
property placed in service in taxable years
beginning before 2018. Section 4 of this rev-
enue procedure addresses this issue.

(2) Prior to amendment by the TCJA,
the table of recovery periods under

§ 168(g)(2)(C) provided that the recovery
period was 40 years for residential rental
property. Section 13204(a)(3)(C) of the
TCJA amended that table by providing
that the recovery period is 30 years for
residential rental property. This amend-
ment applies to property placed in service
after December 31, 2017.

Some taxpayers have inquired whether
residential rental property placed in ser-
vice before 2018 has a recovery period of
30 or 40 years under the alternative de-
preciation system. Section 4 of this reve-
nue procedure addresses this issue.

.03 Optional depreciation table under
the alternative depreciation system for
residential rental property placed in ser-
vice after 2017. Rev. Proc. 87-57 pro-
vides guidance for computing deprecia-
tion deductions for tangible property
under § 168. Sections 2-7 of Rev. Proc.
87-57 prescribe the manner of computing
such depreciation deductions. Section 8 of
Rev. Proc. 87-57 contains optional depre-
ciation tables that may be used by certain
taxpayers in lieu of computing deprecia-
tion deductions in the manner described in
sections 2-7 of Rev. Proc. 87-57.

Section 8.01 of Rev. Proc. 87-57 pro-
vides that the optional depreciation tables
may be used for any item of property
placed in service in a taxable year. For all
items of property placed in service in a
taxable year for which the optional depre-
ciation tables are not used, depreciation
deductions must be computed in the man-
ner prescribed in sections 2-7 of Rev.
Proc. 87-57.

Section 8.02 of Rev. Proc. 87-57 pro-
vides that the optional depreciation tables
specify schedules of annual depreciation
rates to be applied to the unadjusted basis
of the property in each taxable year. If a
taxpayer uses an optional depreciation ta-
ble to compute the annual depreciation
deduction for any item of property, the
taxpayer must use the table to compute the
annual depreciation deductions for the en-
tire recovery period of such property.
However, a taxpayer may not continue to
use the table if there are any adjustments
to the basis of such item of property for
reasons other than (1) depreciation al-
lowed or allowable, or (2) an addition or
an improvement to such property that is
subject to depreciation as a separate item
of property. Use of the optional deprecia-

tion tables to compute depreciation deduc-
tions does not require the filing of any
notice with the Internal Revenue Service
(IRS).

The IRS has not previously published
an optional table for property depreciated
under the alternative depreciation system
with a recovery period of 30 years and the
mid-month convention. Some taxpayers
have requested the IRS to provide an op-
tional depreciation table for residential
rental property that is placed in service
after December 31, 2017, and depreciated
under the alternative depreciation system
of § 168(g) using the straight-line method,
the new 30-year recovery period required
by the TCJA, and the mid-month conven-
tion. This table is provided in section 4 of
this revenue procedure.

.04 Subsequent References. Unless oth-
erwise specifically stated, all references in
the subsequent sections of this revenue
procedure to § 168(g) are to § 168(g) as in
effect after the enactment of the TCJA and
to § 179 are to § 179 as in effect after the
enactment of the 2018 Act.

### SECTION 3. QUALIFIED REAL PROPERTY UNDER § 179

.01 Definition.

(1) Taxable year beginning after 2017.
For property placed in service by the tax-
payer in any taxable year beginning after
2017, the following types of property are
qualified real property that may be eligible
as § 179 property under § 179(d)(1):

(a) Qualified improvement property, as
described in § 168(e)(6), that is placed in ser-
vice by the taxpayer. The definition of quali-
fied improvement property in § 168(e)(6) is
the same definition of that term in § 168(k)(3)
as in effect on the day before the date of
enactment of the TCJA. Accordingly, see sec-
tion 4.02 of Rev. Proc. 2017-33 for further
guidance on the definition of qualified im-
provement property; and

(b) An improvement to nonresidential
real property, as defined in § 168(e)(2)(B),
if the improvement:

(i) Is placed in service by the taxpayer
after the date such nonresidential real
property was first placed in service by any
person;

(ii) Is § 1250 property; and

(iii) Is:

(A) A roof;

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(B) Heating, ventilation, and air-
conditioning property (HVAC). A central
HVAC system includes all components
that are in, on, or adjacent to the nonres-
idential real property. See § 1.48-1(e)(2);

(C) A fire protection and alarm system;
or

(D) A security system.

(2) Taxable year beginning in 2017
and ending in 2018. For property placed
in service by the taxpayer in a taxable year
beginning in 2017 and ending in 2018,
qualified real property is qualified lease-
hold improvement property, qualified
restaurant property, or qualified retail
improvement property as described in
§ 179(f)(1) and (2) as in effect on the day
before the date of enactment of the TCJA.
Qualified leasehold improvement prop-
erty, qualified restaurant property, and
qualified retail improvement property are
defined in § 168(e)(6), (e)(7), and (e)(8),

respectively, as in effect on the day before
the date of the enactment of the TCJA.

.02 Election to Treat Qualified Real
Property as § 179 Property. A taxpayer
may elect to expense under § 179(a) the
cost, or a portion of the cost, of qualified
real property placed in service by the tax-
payer during any taxable year beginning
after 2017 by filing an original or
amended Federal tax return for that tax-
able year in accordance with procedures
similar to those in § 1.179-5(c)(2) and
section 3.02 of Rev. Proc. 2017-33. If a
taxpayer elects or elected to expense un-
der § 179(a) a portion of the cost of qual-
ified real property placed in service by the
taxpayer during any taxable year begin-
ning after 2017, the taxpayer is permitted
to increase the portion of the cost of such
property expensed under § 179(a) by fil-
ing an amended Federal tax return for that
taxable year. Any such increase in the
amount expensed under § 179 is not

deemed to be a revocation of the prior
election for that taxable year.

SECTION 4. ALTERNATIVE
DEPRECIATION SYSTEM UNDER
§ 168(g)

.01 Recovery period of residential
rental property.

(1) In general. The recovery period
under the table in § 168(g)(2)(C) is 30
years for residential rental property placed
in service by the taxpayer after December
31, 2017, and is 40 years for residential
rental property placed in service by the
taxpayer before January 1, 2018.

(2) Optional depreciation table. Below
is the optional depreciation table for resi-
dential rental property placed in service by
the taxpayer after December 31, 2017, and
depreciated by the taxpayer under the alter-
native depreciation system of § 168(g) using
the straight-line method, a 30-year recovery
period, and the mid-month convention.

Table-Alternative Depreciation System Method: Straight line Convention: Mid-month Recovery period: 30 years Month in the 1st recovery year the property is placed in service

1

2

3

4

5

6

7

8

9

10

11

12

Year

1

3.204%

2.926%

2.649%

2.371%

2.093%

1.815%

1.528%

1.250%

0.972%

0.694%

0.417%

0.139%

2-30

3.333%

3.333%

3.333%

3.333%

3.333%

3.333%

3.333%

3.333%

3.333%

3.333%

3.333%

3.333%

31

0.139%

0.417%

0.694%

0.972%

1.250%

1.528%

1.815%

2.093%

2.371%

2.649%

2.926%

3.204%

.02 Electing real property trade or
business or electing farming business.

(1) In general. Section 168(g)(1)(F)
and (G) provide that the depreciation de-
duction provided by § 167(a) must be
determined in accordance with the alter-
native depreciation system in § 168(g) for
the following types of MACRS property
(as defined in § 1.168(b)-1(a)(2)):

(a) Any nonresidential real property (as
defined in § 168(e)(2)(B)), residential rental
property (as defined in § 168(e)(2)(A)), and
qualified improvement property (as defined
in § 168(e)(6)) held by an electing real prop-
erty trade or business (as defined in
§ 163(j)(7)(B) and the regulations thereun-
der); and

(b) Any property with a recovery pe-
riod of 10 years or more that is held by an
electing farming business (as defined in

§ 163(j)(7)(C) and the regulations there-
under). For determining what MACRS
property has a recovery period of 10 years
or more, the recovery period is determined
in accordance with § 168(c).

(2) Changing depreciation of property
to the alternative depreciation system.

(a) In general. For the first taxable year
for which an electing real property trade or
business or an electing farming business
makes an election under § 163(j)(7)(B) or
(C), respectively, and the regulations there-
under (the "election year"), that trade or
business must begin depreciating the prop-
erties described in section 4.02(1) of this
revenue procedure, as applicable, in accor-
dance with the alternative depreciation sys-
tem in § 168(g). The preceding sentence
applies to such property placed in service by
the trade or business in taxable years begin-

ning before the election year ("existing
property") and such property placed in ser-
vice by the trade or business in the election
year and subsequent taxable years ("newly-
acquired property").

(b) Existing property. For existing
property described in section 4.02(1) of
this revenue procedure, as applicable, a
change in use occurs under § 168(i)(5)
and § 1.168(i)-4(d) for the election year
as a result of the election under
§ 163(j)(7)(B) or (C), as applicable. Ac-
cordingly, depreciation for such property
beginning for the election year is deter-
mined in accordance with § 1.168(i)-4(d).
Pursuant to § 1.168(i)-4(f), a change in
computing depreciation for the election
year for such existing property is not a
change in method of accounting under
§ 446(e). If any such existing property

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was qualified property under § 168(k) in
the taxable year in which the trade or
business placed the property in service,
the additional first year depreciation de-
duction allowable for that property is
not redetermined. See § 1.168(k)-
1(f)(6)(iv)(A).

(c) Newly-acquired property. For
newly-acquired property described in sec-
tion 4.02(1) of this revenue procedure, as
applicable, the taxpayer determines the
depreciation in accordance with the alter-
native depreciation system for such prop-
erty for its placed-in-service year and the
subsequent taxable years. Because such
newly-acquired property is required to be
depreciated under the alternative depreci-
ation system, the property is not qualified
property for purposes of the additional
first year depreciation deduction under
§ 168(k). See § 168(k)(2)(D).

(3) Failure to change to alternative
depreciation system.

(a) Existing property. If an electing real
property trade or business or an electing
farming business does not depreciate any
existing property that is described in sec-
tion 4.02(1) of this revenue procedure, as
applicable, under the alternative deprecia-
tion system for the election year and the
subsequent taxable year then that trade or
business has adopted an impermissible
method of accounting for that item of
MACRS property. As a result, a change
from that impermissible method of account-
ing to the straight-line method, the applica-
ble recovery period, and/or the applicable
convention under the alternative deprecia-
tion system for the item of MACRS prop-
erty is a change in method of accounting
under § 446(e). See § 1.446-1(e)(2)(ii)
(d)(2)(i). The taxpayer requests to make
such a method change by filing Form 3115,
Application for Change in Accounting
Method, in accordance with the automatic
change procedures or non-automatic change
procedures, as applicable, in Rev. Proc.
2015-13, 2015-5 I.R.B. 419 (or any succes-
sor). If the taxpayer is eligible to make this
method change under the automatic change
procedures, the method change is described
in section 6.05 of Rev. Proc. 2018-31 (or
any successor). The § 481(a) adjustment as
of the first day of the year of change is
calculated as though the change in use oc-
curred for the item of MACRS property in
the election year.

(b) Newly-acquired property. If an
electing real property trade or business or
an electing farming business does not de-
termine its depreciation under the alterna-
tive depreciation system for any newly-
acquired property that is described in
section 4.02(1) of this revenue procedure,
as applicable, for its placed-in-service
year and the subsequent taxable year then
that trade or business has adopted an im-
permissible method of accounting for that
item of MACRS property. As a result, a
change from that impermissible method of
accounting to the straight-line method, the
applicable recovery period, and/or the
applicable convention under the alterna-
tive depreciation system for the item of
MACRS property is a change in method
of accounting under § 446(e). See
§ 1.446-1(e)(2)(ii)(d)(2)(i). The tax-
payer requests to make such a method
change by filing Form 3115 in accor-
dance with the automatic change proce-
dures or non-automatic change proce-
dures, as applicable, in Rev. Proc.
2015-13 (or any successor). If the tax-
payer is eligible to make this method
change under the automatic change pro-
cedures, the method change is described
in section 6.01 of Rev. Proc. 2018-31
(or any successor), provided none of the
inapplicability provisions in section
6.01(1)(c) of Rev. Proc. 2018-31 (or
any successor) apply. The § 481(a) ad-
justment as of the first day of the year of
change is calculated as though the tax-
payer determined depreciation under the
alternative depreciation system for the
item of MACRS property beginning for
its placed-in-service year.

### SECTION 5. MODIFICATION TO REV. PROC. 2018-31

Section 6.05 of Rev. Proc. 2018-31
provides the procedures for obtaining au-
tomatic consent to change the method of
accounting for depreciation due to a
change in the use of MACRS property.
Section 6.05 of Rev. Proc. 2018-31 is
modified as follows:

.01 Section 6.05(3), (4), and (5) are
redesignated as section 6.05(4), (5), and
(6), respectively; and

.02 New section 6.05(3) is added to
read as follows:

(3) Section 481(a) adjustment. A tax-
payer changing its method of accounting

under this section 6.05 is required to cal-
culate a § 481(a) adjustment as of the first
day of the year of change as if the pro-
posed method of accounting had always
been used by the taxpayer beginning with
the taxable year in which the change in the
use of the MACRS property occurred by
the taxpayer.

## SECTION 6. EFFECTIVE DATE

This revenue procedure is effective
December 21, 2018.

## SECTION 7. EFFECT ON OTHER DOCUMENTS

Rev. Proc. 87-57 and Rev. Proc.
2018-31 are modified.

## SECTION 8. DRAFTING INFORMATION

The principal author of this revenue
procedure is Charles Magee of the Office
of Associate Chief Counsel (Income Tax
& Accounting). For further information
regarding this revenue procedure, contact
Mr. Magee at (202) 317-7005 (not a toll-
free number).

## Update for Weighted Average Interest Rates, Yield Curves, and Segment Rates

### Notice 2019-03

This notice provides guidance on the
corporate bond monthly yield curve, the
corresponding spot segment rates used un-
der § 417(e)(3), and the 24-month average
segment rates under § 430(h)(2) of the
Internal Revenue Code. In addition, this
notice provides guidance as to the interest
rate on 30-year Treasury securities under
§ 417(e)(3)(A)(ii)(II) as in effect for plan
years beginning before 2008 and the 30-
year Treasury weighted average rate un-
der § 431(c)(6)(E)(ii)(I).

### YIELD CURVE AND SEGMENT RATES

Section 430 specifies the minimum
funding requirements that apply to single-
employer plans (except for CSEC plans
under § 414(y)) pursuant to § 412. Section
430(h)(2) specifies the interest rates that

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must be used to determine a plan's target
normal cost and funding target. Under this
provision, present value is generally de-
termined using three 24-month average
interest rates ("segment rates"), each of
which applies to cash flows during speci-
fied periods. To the extent provided under
§ 430(h)(2)(C)(iv), these segment rates are
adjusted by the applicable percentage of the
25-year average segment rates for the period
ending September 30 of the year preceding
the calendar year in which the plan year
begins.1 However, an election may be made
under § 430(h)(2)(D)(ii) to use the monthly
yield curve in place of the segment rates.

Notice 2007-81, 2007-44 I.R.B. 899,
provides guidelines for determining the
monthly corporate bond yield curve, and

the 24-month average corporate bond seg-
ment rates used to compute the target nor-
mal cost and the funding target. Consis-
tent with the methodology specified in
Notice 2007-81, the monthly corporate
bond yield curve derived from November
2018 data is in Table 2018-11 at the end
of this notice. The spot first, second, and
third segment rates for the month of No-
vember 2018 are, respectively, 3.43, 4.46,
and 4.88.

The 24-month average segment rates de-
termined under § 430(h)(2)(C)(i) through
(iii) must be adjusted pursuant to
§ 430(h)(2)(C)(iv) to be within the applica-
ble minimum and maximum percentages of
the corresponding 25-year average segment
rates. For plan years beginning before 2021,

the applicable minimum percentage is 90%
and the applicable maximum percentage is
110%. The 25-year average segment rates
for plan years beginning in 2017, 2018, and
2019 were published in Notice 2016-54,
2016-40 I.R.B. 429, Notice 2017-50,
2017-41 I.R.B. 280, and Notice 2018-73,
2018-40 I.R.B. 526, respectively.

### 24-MONTH AVERAGE CORPORATE BOND SEGMENT RATES

The three 24-month average corporate
bond segment rates applicable for Decem-
ber 2018 without adjustment for the 25-
year average segment rate limits are as
follows:

24-Month Average Segment Rates Without 25-Year Average Adjustment

Applicable Month

First Segment

Second Segment

Third Segment

December 2018

2.50

3.92

4.50

month averages applicable for December

Based on § 430(h)(2)(C)(iv), the 24-
2018, adjusted to be within the applicable
minimum and maximum percentages of

the corresponding 25-year average seg-
ment rates, are as follows:

Adjusted 24-Month Average Segment Rates

For Plan Years Beginning In

Applicable Month

First Segment

Second Segment

Third Segment

2017

December 2018

4.16

5.72

6.48

2018

December 2018

3.92

5.52

6.29

2019

December 2018

3.74

5.35

6.11

## 30-YEAR TREASURY SECURITIES INTEREST RATES

Section 431 specifies the minimum
funding requirements that apply to mul-
tiemployer plans pursuant to § 412. Sec-
tion 431(c)(6)(B) specifies a minimum
amount for the full-funding limitation de-
scribed in § 431(c)(6)(A), based on the
plan's current liability. Section 431(c)(6)
(E)(ii)(I) provides that the interest rate
used to calculate current liability for this

purpose must be no more than 5 percent
above and no more than 10 percent below
the weighted average of the rates of inter-
est on 30-year Treasury securities during
the four-year period ending on the last day
before the beginning of the plan year.
Notice 88-73, 1988-2 C.B. 383, provides
guidelines for determining the weighted
average interest rate. The rate of interest
on 30-year Treasury securities for No-
vember 2018 is 3.36 percent. The Service
determined this rate as the average of the

daily determinations of yield on the 30-
year Treasury bond maturing in August
2048 determined each day through No-
vember 6, 2018 and the yield on the 30-
year Treasury bond maturing in Novem-
ber 2048 determined each day for the
balance of the month. For plan years be-
ginning in December 2018, the weighted
average of the rates of interest on 30-year
Treasury securities and the permissible
range of rates used to calculate current
liability are as follows:

For Plan Years Beginning In

Treasury Weighted Average Rates 30-Year Treasury Weighted Average

Permissible Range 90% to 105%

December 2018

2.91

2.62 to 3.06

1Pursuant to § 433(h)(3)(A), the 3rd segment rate determined under § 430(h)(2)(C) is used to determine the current liability of a CSEC plan (which is used to calculate the minimum amount
of the full funding limitation under § 433(c)(7)(C)).

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# MINIMUM PRESENT VALUE SEGMENT RATES

In general, the applicable interest rates
under § 417(e)(3)(D) are segment rates

computed without regard to a 24-month
average. Notice 2007-81 provides guide-
lines for determining the minimum pres-
ent value segment rates. Pursuant to that
notice, the minimum present value seg-

ment rates determined for November 2018
are as follows:

Minimum Present Value Segment Rates Month First Segment Second Segment Third Segment

November 2018

3.43

4.46

4.88

## DRAFTING INFORMATION

The principal author of this notice is
Tom Morgan of the Office of the Associ-

ate Chief Counsel (Tax Exempt and Gov-
ernment Entities). However, other person-
nel from the IRS participated in the
development of this guidance. For further

information regarding this notice, contact
Mr. Morgan at 202-317-6700 or Paul
Stern at 202-317-8702 (not toll-free calls).

Maturity

Table 2018-11 Monthly Yield Curve for November 2018 Derived from November 2018 Data

Yield

Maturity

Yield

Maturity

Yield

Maturity

Yield

Maturity

Yield

0.5

2.90

20.5

4.77

40.5

4.89

60.5

4.93

80.5

4.96

1.0

3.08

21.0

4.78

41.0

4.89

61.0

4.93

81.0

4.96

1.5

3.24

21.5

4.78

41.5

4.89

61.5

4.94

81.5

4.96

2.0

3.37

22.0

4.79

42.0

4.90

62.0

4.94

82.0

4.96

2.5

3.46

22.5

4.79

42.5

4.90

62.5

4.94

82.5

4.96

3.0

3.53

23.0

4.80

43.0

4.90

63.0

4.94

83.0

4.96

3.5

3.59

23.5

4.80

43.5

4.90

63.5

4.94

83.5

4.96

4.0

3.64

24.0

4.80

44.0

4.90

64.0

4.94

84.0

4.96

4.5

3.69

24.5

4.81

44.5

4.90

64.5

4.94

84.5

4.96

5.0

3.75

25.0

4.81

45.0

4.90

65.0

4.94

85.0

4.96

5.5

3.81

25.5

4.82

45.5

4.91

65.5

4.94

85.5

4.96

6.0

3.87

26.0

4.82

46.0

4.91

66.0

4.94

86.0

4.96

6.5

3.94

26.5

4.82

46.5

4.91

66.5

4.94

86.5

4.96

7.0

4.00

27.0

4.83

47.0

4.91

67.0

4.94

87.0

4.96

7.5

4.07

27.5

4.83

47.5

4.91

67.5

4.94

87.5

4.96

8.0

4.13

28.0

4.83

48.0

4.91

68.0

4.94

88.0

4.96

8.5

4.19

28.5

4.84

48.5

4.91

68.5

4.94

88.5

4.96

9.0

4.25

29.0

4.84

49.0

4.91

69.0

4.94

89.0

4.96

9.5

4.30

29.5

4.84

49.5

4.91

69.5

4.95

89.5

4.96

10.0

4.36

30.0

4.84

50.0

4.92

70.0

4.95

90.0

4.96

10.5

4.40

30.5

4.85

50.5

4.92

70.5

4.95

90.5

4.96

11.0

4.45

31.0

4.85

51.0

4.92

71.0

4.95

91.0

4.96

11.5

4.49

31.5

4.85

51.5

4.92

71.5

4.95

91.5

4.96

12.0

4.52

32.0

4.86

52.0

4.92

72.0

4.95

92.0

4.96

12.5

4.55

32.5

4.86

52.5

4.92

72.5

4.95

92.5

4.96

13.0

4.58

33.0

4.86

53.0

4.92

73.0

4.95

93.0

4.96

13.5

4.61

33.5

4.86

53.5

4.92

73.5

4.95

93.5

4.97

14.0

4.63

34.0

4.87

54.0

4.92

74.0

4.95

94.0

4.97

14.5

4.65

34.5

4.87

54.5

4.92

74.5

4.95

94.5

4.97

15.0

4.67

35.0

4.87

55.0

4.93

75.0

4.95

95.0

4.97

15.5

4.68

35.5

4.87

55.5

4.93

75.5

4.95

95.5

4.97

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Table 2018-11 Monthly Yield Curve for November 2018 Derived from November 2018 Data

Maturity

Yield

Maturity

Yield

Maturity

Yield

Maturity

Yield

Maturity

Yield

16.0

4.70

36.0

4.87

56.0

4.93

76.0

4.95

96.0

4.97

16.5

4.71

36.5

4.88

56.5

4.93

76.5

4.95

96.5

4.97

17.0

4.72

37.0

4.88

57.0

4.93

77.0

4.95

97.0

4.97

17.5

4.73

37.5

4.88

57.5

4.93

77.5

4.95

97.5

4.97

18.0

4.74

38.0

4.88

58.0

4.93

78.0

4.95

98.0

4.97

18.5

4.75

38.5

4.88

58.5

4.93

78.5

4.95

98.5

4.97

19.0

4.75

39.0

4.89

59.0

4.93

79.0

4.95

99.0

4.97

19.5

4.76

39.5

4.89

59.5

4.93

79.5

4.96

99.5

4.97

20.0

4.77

40.0

4.89

60.0

4.93

80.0

4.96

100.0

4.97

## Guidance on Special Enforcement Matters Under the Centralized Partnership Audit Regime

Notice 2019-06

### SECTION 1. PURPOSE

This notice informs taxpayers that the
Department of the Treasury (Treasury De-
partment) and the Internal Revenue Ser-
vice (IRS) intend to propose regulations
addressing certain special enforcement
matters under section 6241(11). This no-
tice also requests comments regarding
other special enforcement matters that
could be the subject of future proposed
regulations.

### SECTION 2. BACKGROUND

Section 206(l) of the Technical Correc-
tions Act of 2018, contained in Title II of
Division U of the Consolidated Appropri-
ations Act of 2018, Public Law 115-141
(TTCA), added section 6241(11) to the
Internal Revenue Code (Code), regarding
the treatment of special enforcement mat-
ters. Under section 6241(11), in the case
of partnership-related items involving
special enforcement matters, the Secretary
may prescribe regulations providing that
the centralized partnership audit regime
(or any portion thereof) does not apply to
such items and that such items are subject
to special rules as the Secretary deter-
mines to be necessary for the effective and
efficient enforcement of the Code. For
purposes of section 6241(11), the term

"special enforcement matters" means: (1)
failure to comply with the requirements of
section 6226(b)(4)(A)(ii) (regarding the
requirement for a partnership-partner or S
corporation partner to furnish statements
or compute and pay an imputed underpay-
ment); (2) assessments under section 6851
(relating to termination assessments of in-
come tax) or section 6861 (relating to
jeopardy assessments of income, estate,
gift, and certain excise taxes); (3) criminal
investigations; (4) indirect methods of
proof of income; (5) foreign partners or
partnerships; and (6) other matters that the
Secretary determines by regulation pres-
ent special enforcement considerations.

Section 6221(a) requires that any ad-
justment to a partnership-related item
shall be determined at the partnership
level under the centralized partnership au-
dit regime, except to the extent otherwise
provided in subchapter C of chapter 63 of
the Code. A partnership-related item is
defined in section 6241(2) as any item or
amount with respect to the partnership
which is relevant in determining the tax
liability of any person under chapter 1 of
the Code, including any distributive share
of such an item or amount.

Certain partnerships may elect out of
the centralized partnership audit regime
under section 6221(b). A partnership is
eligible to make an election out if it has
100 or fewer partners for the taxable year,
each partner in the partnership is an eligi-
ble partner, the election is timely made in
the manner prescribed by the Secretary,
and the partnership notifies its partners of
the election in the manner prescribed by
the Secretary. The number of partners is

determined by counting the number of
statements required to be furnished by the
partnership under section 6031(b) and the
number of statements required to be fur-
nished by any S corporation partners of
the partnership. Eligible partners are pre-
scribed in section 6221(b)(1)(C) and
Treas. Reg. § 301.6221(b)-1(b)(3)(i), and
include C corporations.

A qualified subchapter S subsidiary
(QSub) is defined in section 1361(b)(3) as
a domestic corporation that has 100 per-
cent of its stock held by an S corporation
and for which an election has been made
to treat it as a QSub. Except as provided
by regulation, a QSub is not treated as a
corporation separate from its S corpora-
tion shareholder and its assets, liabilities,
and items of income, deduction and credit
are treated as the assets, liabilities, and
items of its S corporation shareholder for
the taxable year. Section 1361(b)(3)(A).
For purposes of the Code, a C corporation
is defined under section 1361(a)(2) as a
corporation which is not an S corporation.
Because a QSub is not an S corporation, it
is a C corporation (as defined in section
1361(a)(2)). Because a QSub is a C cor-
poration, it is an eligible partner under
section 6221(b).

### SECTION 3. GUIDANCE TO BE ISSUED

The Treasury Department and the IRS
intend to propose regulations under sec-
tion 6241(11)(B)(vi) regarding two mat-
ters that the Secretary has determined pres-
ent special enforcement considerations. The
first matter concerns certain situations in
which an adjustment during an examination

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of a person other than the partnership re-
quires a change to a partnership-related
item. Specifically, the regulations will allow
the IRS to effectively and efficiently focus
on a single partner or a small group of
partners with respect to a limited set of
partnership-related items without unduly
burdening the partnership and avoiding pro-
cedural concerns about the appropriate level
at which such items must be examined.
Consequently, the regulations will provide
that the IRS may determine that the central-
ized partnership audit regime does not apply
to adjustments to partnership-related items
when the following conditions are met:

(1) The examination being conducted
is of a person other than the partnership;

(2) A partnership-related item must be
adjusted, or a determination regarding a
partnership-related item must be made, as
part of an adjustment to a non-partnership-
related item of the person whose return is
being examined; and

(3) The treatment of the partnership-
related item on the return of the partner-
ship under section 6031(b) or in the part-
nership's books and records was based in
whole or in part on information provided
by, or under the control of, the person
whose return is being examined.

The second matter concerns situations
where a QSub is a partner in a partnership.
The regulations will provide that this sit-
uation presents special enforcement con-
siderations because partnership structures
with QSubs as partners could have far more
than 100 ultimate partners, including many
thousands, and still potentially elect out of
the centralized partnership audit regime. Al-
lowing such a large partnership to elect out
of the centralized partnership audit regime
would give rise to significant enforcement
concerns for the IRS and frustrate the effi-
ciencies introduced by the centralized part-
nership regime. As a result, the regulations
will provide that section 6221(b) generally
does not apply to a partnership with a QSub
as a partner. The regulations will also pro-
vide, however, that if a partnership meets
certain requirements as set forth in the reg-
ulations, the partnership may make an elec-
tion under section 6221(b). Specifically, the
regulations will apply a rule similar to the
rules for S corporations under section
6221(b)(2)(A). The regulations will also
provide that for purposes of determining
whether a partnership has 100 or fewer part-

ners for the taxable year for purposes of the
election under section 6221(b), the partner-
ship must include (1) the statement the part-
nership is required to furnish to the QSub
partner under section 6031(b) and (2) each
statement the S corporation that holds 100
percent of the stock of the QSub partner is
required to furnish to its shareholders under
section 6037(b).

The Treasury Department and the IRS
intend to issue proposed and final regula-
tions prior to eighteen months after enact-
ment of the TTCA such that the intended
regulations described in this section of the
Notice may be applicable to all partner-
ship taxable years beginning after Decem-
ber 31, 2017. Section 7805(b)(2). If final
regulations are not issued prior to eighteen
months after enactment of the TTCA, the
Treasury Department and the IRS intend
the regulations to be applicable to partner-
ship taxable years beginning after Decem-
ber 31, 2017 and ending after the date this
Notice is issued to the public. Section
7805(b)(1)(C).

# SECTION 4. REQUEST FOR COMMENTS

The Treasury Department and the IRS
request comments on the intended regula-
tions described in section 3 of this notice
and whether any other matters might pres-
ent special enforcement matters under
section 6241(11). Comments must be re-
ceived by February 22, 2019.

# SECTION 5. ADDRESS TO SEND COMMENTS

Taxpayers may submit comments elec-
tronically via the Federal eRulemaking
Portal at www.regulations.gov (type IRS-
2018-0044 in the search field on the
regulations.gov homepage to find this no-
tice and submit comments). All recom-
mendations for guidance submitted by the
public in response to this notice will be
available for public inspection and copy-
ing in their entirety.

Alternatively, taxpayers may mail
comments to:

Internal Revenue Service

Attn: CC:PA:LPD:PR (Notice 2019-
06)

Room 5203
P.O. Box 7604
Ben Franklin Station

Washington, D.C. 20044

or hand deliver comments Monday
through Friday between the hours of 8
a.m. and 4 p.m. to:

Courier's Desk
Internal Revenue Service
Attn: CC:PA:LPD:PR (Notice 2019-

06\)
1111 Constitution Avenue, N.W.
Washington, D.C. 20224

# SECTION 6. DRAFTING INFORMATION

The principal author of this notice is
Jennifer M. Black of the Office of the
Associate Chief Counsel (Procedure and
Administration). For further information
regarding this notice, contact Ms. Black at
(202) 317-6834 (not a toll-free number).

# Maximum Values For 2018 For Use with Vehicle Cents- Per-Mile and Fleet-Average Valuation Rules

## Notice 2019-08

### I. PURPOSE

This notice provides the 2018 maxi-
mum values for use with the vehicle
cents-per-mile valuation rule under Treas.
Reg. § 1.61-21(e) and the fleet-average
valuation rule, which is an optional com-
ponent of the automobile lease valuation
rule under Treas. Reg. § 1.61-21(d).
These values are adjusted annually for
inflation. This notice also provides interim
guidance on new procedures for calculat-
ing the inflation adjustments to the maxi-
mum values for use with the special val-
uation rules under Treas. Reg. § 1.61-
21(d) and (e) using section 280F(d)(7), as
modified by sections 11002 and 13202 of
the Tax Cuts and Jobs Act, Pub. L. No.
115-97 (the "Act"). The Internal Revenue
Service (IRS) and the Department of the
Treasury (Treasury Department) antici-
pate that further guidance on these issues
will be issued in the form of proposed
regulations and expect that the regulations
will be consistent with the rules set forth
in this notice.

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### BACKGROUND

If an employer provides an employee
with a vehicle that is available to the em-
ployee for personal use, the value of the
personal use generally must be included in
the employee's income. Internal Revenue
Code § 61; Treas. Reg. § 1.61-21.

For employer-provided vehicles made
available to employees for personal use
that meet the requirements of Treas. Reg.
§ 1.61-21(e)(1), generally the value of the
personal use may be determined under the
vehicle cents-per-mile valuation rule of
Treas. Reg. § 1.61-21(e). However,
Treas. Reg. § 1.61-21(e)(1)(iii)(A) pro-
vides that for a vehicle first made avail-
able after 1988 to any employee of the
employer for personal use, the value of the
personal use may not be determined under
the vehicle cents-per-mile valuation rule
for a calendar year if the fair market value
of the vehicle (determined pursuant to
Treas. Reg. § 1.61-21(d)(5)(i) through
(iv)) on the first date the vehicle is made
available to the employee exceeds the sum
of the maximum recovery deductions al-
lowable under section 280F(a) for a five-
year period for an automobile first placed
in service during that calendar year, as
adjusted by section 280F(d)(7). The regu-
lation additionally specifies that, with re-
spect to a vehicle placed in service in or
after 1989, the limitation on value consists
of a base value of $12,800 that is adjusted
annually under section 280F(d)(7).

For employer-provided automobiles
available to employees for personal use
for an entire year, generally the value of
the personal use may be determined under
the automobile lease valuation rule of
Treas. Reg. § 1.61-21(d). Under this val-
uation rule, the value of the personal use is
the Annual Lease Value. Provided the re-
quirements of Treas. Reg. § 1.61-
21(d)(5)(v) are met, an employer with a
fleet of 20 or more automobiles may use a
fleet-average value for purposes of calcu-
lating the Annual Lease Values of the
automobiles in the employer's fleet. The
fleet-average value is the average of
the fair market values of all the automo-
biles in the fleet. However, Treas. Reg.
§ 1.61-21(d)(5)(v)(D) provides that for an
automobile first made available after 1988
to an employee of the employer for per-
sonal use, the value of the personal use

may not be determined under the fleet-
average valuation rule for a calendar year
if the fair market value of the automobile
(determined pursuant to Treas. Reg.
§ 1.61-21(d)(5)(i) through (v)) on the first
date the automobile is made available to
the employee exceeds the base value of
$16,500, as adjusted annually for inflation
pursuant to section 280F(d)(7).

Thus, the maximum values for apply-
ing the vehicle cents-per-mile and the
fleet-average valuation rules reflect the
automobile price inflation adjustment of
section 280F(d)(7)(B). Prior to enactment
of the Act, this price inflation amount for
automobiles other than trucks and vans
was calculated using the "new car" com-
ponent of the Consumer Price Index (CPI)
"automobile component." Beginning in
2005, the IRS began to calculate the price
inflation adjustment for trucks and vans
separately using the "new truck" compo-
nent of the CPI and continued using the
"new car" component of the CPI for au-
tomobiles other than trucks and vans. See
Rev. Proc. 2005-48, 2005-32 I.R.B. 271.

Section 11002(d)(8) of the Act
amended section 280F(d)(7)(B) effective
for tax years beginning after December
31, 2017. Pursuant to these amendments,
the price inflation amount for automobiles
(including trucks and vans) is calculated
using both the CPI automobile component
and the Chained Consumer Price Index
for All Urban Consumers (C-CPI-U) au-
tomobile component. The C-CPI-U does
not currently have separate components
for new cars and new trucks.

For owners of passenger automobiles,
section 280F(a), as modified by section
13202(a)(1) of the Act, imposes dollar
limitations on the depreciation deduction
for the year the taxpayer places the pas-
senger automobile in service and for each
succeeding year. The amendments made
by the Act substantially increased the
maximum annual dollar limitations on the
depreciation deductions for passenger au-
tomobiles. The new dollar limitations are
based on the depreciation, over a five-year
recovery period, of a passenger automo-
bile with a cost of $50,000 (formerly
$12,800).

# II. GUIDANCE

Consistent with the substantial increase
in the dollar limitations on depreciation

deductions under section 280F(a), as mod-
ified by section 13202(a)(1) of the Act, the
IRS and the Treasury Department intend
to amend Treas. Reg. § 1.61-21(d) and (e)
to incorporate a higher base value of
$50,000 as the maximum value for use of
the vehicle cents-per-mile and fleet-
average valuation rules effective for the
2018 calendar year. Further, the IRS and
the Treasury Department intend that the
regulations will be modified to provide
that this $50,000 base value will be ad-
justed annually using section 280F(d)(7)
for 2019 and subsequent years. Consistent
with this intention, in the interim:

(1) The maximum value of an employer-
provided vehicle first made available to em-
ployees for personal use in calendar year
2018 for which the vehicle cents-per-mile
valuation rule provided under Treas. Reg.
§ 1.61-21(e) may be applicable is $50,000.

(2) The maximum value of an employer-
provided automobile first made available to
employees for personal use in calendar year
2018 for which the fleet-average valuation
rule provided under Treas. Reg. § 1.61-
21(d) may be applicable is $50,000.

For 2018 and 2019, due to the lack of
data, the IRS and the Treasury Depart-
ment will not publish separate maximum
values for trucks and vans for use with the
vehicle cents-per-mile and fleet-average
valuation rules.

Employer-provided vehicles are non-
cash fringe benefits that fall within section
3501(b). Announcement 85-113, 1985-31
I.R.B. 31, provides guidelines for withhold-
ing, paying, and reporting employment tax
on taxable noncash fringe benefits. An-
nouncement 85-113 provides generally that
taxpayers may rely on the guidelines in the
announcement until the issuance of regula-
tions that supersede the temporary and pro-
posed regulations under section 3501(b). No
regulations have been issued under section
3501(b) that supersede the announcement.
Thus, Announcement 85-113 generally is
applicable to current payments of noncash
fringe benefits, including vehicles.

Section 1 of Announcement 85-113
allows payors of certain noncash fringe
benefits to treat the benefits as paid on any
day(s) during the year so long as they treat
benefits provided in a calendar year as
paid not later than December 31 of the
calendar year. Section 5 of the announce-
ment allows employers to treat certain

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benefits paid during the last two months of
the year (or any shorter period) as paid
during the subsequent calendar year.

Employers that wish to use the vehicle
cents-per-mile rule or the fleet-average
value rule for 2018 based on the maxi-
mum values set forth in this notice may
use the rules in Announcement 85-113 or
the adjustment process under section 6413
or the refund claim process under section
6402 to correct any overpayment of fed-
eral employment taxes on these amounts
(see the regulations under these sections,
Rev. Rul. 2009-39, 2009-52 I.R.B. 951,
section 13 of Publication 15 (Circular E),
Employer's Tax Guide, and the Instruc-
tions for Form 941-X, Adjusted Employ-
er's QUARTERLY Federal Tax Return or

Claim for Refund for information on these
adjustment and refund claim processes).

# III. REQUEST FOR COMMENTS

Interested parties are invited to submit
comments on this notice by February 19,
2019. Comments should include a refer-
ence to Notice 2019-08. Comments may
be submitted electronically via the Federal
eRulemaking Portal at www.regulations.
gov (type IRS-2019-08 in the search
field on the regulations.gov homepage to
find this notice and submit comments). Al-
ternatively, submissions may be sent to CC:
PA:LPD:PR (Notice 2019-08), Room
5203, Internal Revenue Service, P.O. Box
7604, Ben Franklin Station, Washington,
DC 20044. Submissions also may be hand

delivered Monday through Friday between
the hours of 8 a.m. and 4 p.m. to CC:PA:
LPD:PR (Notice 2019-08), Courier's
Desk, Internal Revenue Service, 1111 Con-
stitution Avenue, NW, Washington, DC
20044. All comments submitted by the pub-
lic in response to this notice will be avail-
able for public inspection and copying in
their entirety.

# IV. DRAFTING INFORMATION

The principal author of this notice is
Gabriel Minc of the Office of Associate
Chief Counsel (Tax Exempt and Govern-
ment Entities). For further information re-
garding this notice contact Mr. Minc at
(202) 317-4774 (not a toll-free number).

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## Part IV. Items of General Interest

### Rules Regarding Certain Hybrid Arrangements Notice of Proposed Rulemaking

REG-104352-18

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains
proposed regulations implementing sec-
tions 245A(e) and 267A of the Internal
Revenue Code ("Code") regarding hybrid
dividends and certain amounts paid or ac-
crued in hybrid transactions or with hy-
brid entities. Sections 245A(e) and 267A
were added to the Code by the Tax Cuts
and Jobs Act, Pub. L. No. 115-97 (2017)
(the "Act"), which was enacted on De-
cember 22, 2017. This document also con-
tains proposed regulations under sections
1503(d) and 7701 to prevent the same
deduction from being claimed under the
tax laws of both the United States and a
foreign country. Further, this document
contains proposed regulations under sec-
tions 6038, 6038A, and 6038C to facilitate
administration of certain rules in the pro-
posed regulations. The proposed regula-
tions affect taxpayers that would other-
wise claim a deduction related to such
amounts and certain shareholders of for-
eign corporations that pay or receive hy-
brid dividends.

DATES: Written or electronic comments
and requests for a public hearing must be
received by February 26, 2019.

ADDRESSES: Send submissions to: Inter-
nal Revenue Service, CC:PA:LPD:PR
(REG-104352-18), Room 5203, Post Of-
fice Box 7604, Ben Franklin Station, Wash-
ington, 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 (indicate REG-104352-
18), Courier's Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue, N.W.,
Washington, DC 20224, or sent electroni-
cally, via the Federal eRulemaking Portal at
www.regulations.gov (IRS REG-104352-18).

FOR FURTHER INFORMATION CON-
TACT: Concerning the proposed regula-
tions, contact Tracy Villecco at (202)
317-3800; concerning submissions of
comments or requests for a public hearing,
Regina L. Johnson at (202) 317-6901 (not
toll-free numbers).

#### SUPPLEMENTARY INFORMATION:

##### Background

###### I. In General

This document contains proposed
amendments to 26 CFR parts 1 and 301
under sections 245A(e), 267A, 1503(d),
6038, 6038A, 6038C, and 7701 (the "pro-
posed regulations"). Added to the Code by
sections 14101(a) and 14222(a) of the
Act, section 245A(e) denies the dividends
received deduction under section 245A
with respect to hybrid dividends, and sec-
tion 267A denies certain interest or roy-
alty deductions involving hybrid transac-
tions or hybrid entities. The proposed
regulations only include rules under sec-
tion 245A(e); rules addressing other as-
pects of section 245A, including the
general eligibility requirements for the
dividends received deduction under sec-
tion 245A(a), will be addressed in a sep-
arate notice of proposed rulemaking. Sec-
tion 14101(f) of the Act provides that
section 245A, including section 245A(e),
applies to distributions made after Decem-
ber 31, 2017. Section 14222(c) of the Act
provides that section 267A applies to tax-
able years beginning after December 31,
2017. Other provisions of the Code, such
as sections 894(c) and 1503(d), also ad-
dress certain hybrid arrangements.

###### II. Purpose of Anti-Hybrid Rules

A cross-border transaction may be
treated differently for U.S. and foreign tax
purposes because of differences in the tax
law of each country. In general, the U.S.
tax treatment of a transaction does not
take into account foreign tax law. How-
ever, in specific cases, foreign tax law is
taken into account - for example, in the
context of withholdable payments to hy-
brid entities for which treaty benefits are
claimed under section 894(c) and for dual

consolidated losses subject to section
1503(d) - in order to address policy con-
cerns resulting from the different treat-
ment of the same transaction or arrange-
ment under U.S. and foreign tax law.

In response to international concerns
regarding hybrid arrangements used to
achieve double non-taxation, Action 2 of
the OECD's Base Erosion and Profit
Shifting ("BEPS") project, and two final
reports thereunder, address hybrid and
branch mismatch arrangements. See
OECD/G20, Neutralising the Effects of
Hybrid Mismatch Arrangements, Action
2: 2015 Final Report (October 2015) (the
"Hybrid Mismatch Report"); OECD/G20,
Neutralising the Effects of Branch Mis-
match Arrangements, Action 2: Inclusive
Framework on BEPS (July 2017) (the
"Branch Mismatch Report"). The Hybrid
Mismatch Report sets forth recommenda-
tions to neutralize the tax effects of hybrid
arrangements that exploit differences in
the tax treatment of an entity or instru-
ment under the laws of two or more coun-
tries (such arrangements, “hybrid mis-
matches"). The Branch Mismatch Report
sets forth recommendations to neutralize the
tax effects of certain arrangements involv-
ing branches that result in mismatches sim-
ilar to hybrid mismatches (such arrange-
ments, "branch mismatches"). Given the
similarity between hybrid mismatches and
branch mismatches, the Branch Mismatch
Report recommends that a jurisdiction
adopting rules to address hybrid mismatches
adopt, at the same time, rules to address
branch mismatches. See Branch Mismatch
Report, at p. 11, Executive Summary. Oth-
erwise, taxpayers might "shift[] from hybrid
mismatch to branch mismatch arrangements
in order to secure the same tax advantages."
Id.

The Act's legislative history explains
that section 267A is intended to be "con-
sistent with many of the approaches to the
same or similar problems [regarding hy-
brid arrangements] taken in the Code, the
OECD base erosion and profit shifting
project ("BEPS"), bilateral income tax
treaties, and provisions or rules of other
countries." See Senate Committee on Fi-
nance, Explanation of the Bill, at 384 (No-
vember 22, 2017). The types of hybrid
arrangements of concern are arrangements

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that "exploit differences in the tax treat-
ment of a transaction or entity under the
laws of two or more tax jurisdictions to
achieve double non-taxation, including
long-term deferral." Id. Hybrid arrange-
ments targeted by these provisions are
those that rely on a hybrid element to
produce such outcomes.

These concerns also arise in the con-
text of section 245A as a result of the
enactment of a participation exemption
system for taxing foreign income. Under
this system, section 245A(e) generally
prevents double non-taxation by disallow-
ing the 100 percent dividends received
deduction for dividends received from a
controlled foreign corporation ("CFC"),
or by mandating subpart F inclusions for
dividends received from a CFC by another
CFC, if there is a corresponding deduction
or other tax benefit in the foreign country.

##### Explanation of Provisions

###### I. Section 245A(e) - Hybrid Dividends A. Overview

The proposed regulations under section
245A(e) address certain dividends involv-
ing hybrid arrangements. The proposed
regulations neutralize the double non-
taxation effects of these dividends by ei-
ther denying the section 245A(a) divi-
dends received deduction with respect to
the dividend or requiring an inclusion un-
der section 951(a) with respect to the div-
idend, depending on whether the dividend
is received by a domestic corporation or a
CFC.

The proposed regulations provide that
if a domestic corporation that is a United
States shareholder within the meaning of
section 951(b) ("U.S. shareholder") of a
CFC receives a "hybrid dividend" from
the CFC, then the U.S. shareholder is not
allowed the section 245A(a) deduction for
the hybrid dividend, and the rules of sec-
tion 245A(d) (denial of foreign tax credits
and deductions) apply. See proposed
§ 1.245A(e)-1(b). In general, a dividend
is a hybrid dividend if it satisfies two
conditions: (i) but for section 245A(e), the
section 245A(a) deduction would be al-
lowed, and (ii) the dividend is one for
which the CFC (or a related person) is or
was allowed a deduction or other tax ben-
efit under a "relevant foreign tax law" (such

a deduction or other tax benefit, a "hybrid
deduction"). See proposed § 1.245A(e)-1(b)
and (d). The proposed regulations take into
account certain deductions or other tax ben-
efits allowed to a person related to a CFC
(such as a shareholder) because, for exam-
ple, certain tax benefits allowed to a share-
holder of a CFC are economically equiva-
lent to the CFC having been allowed a
deduction.

###### B. Relevant foreign tax law

The proposed regulations define a rel-
evant foreign tax law as, with respect to a
CFC, any regime of any foreign country
or possession of the United States that
imposes an income, war profits, or excess
profits tax with respect to income of the
CFC, other than a foreign anti-deferral
regime under which an owner of the CFC
is liable to tax. See proposed § 1.245A(e)-
1(f). Thus, for example, a relevant foreign
tax law includes the tax law of a foreign
country of which the CFC is a tax resi-
dent, as well as the tax law applicable to a
foreign branch of the CFC.

###### C. Deduction or other tax benefit

###### 1. In General

Under the proposed regulations, only
deductions or other tax benefits that are
"allowed" under the relevant foreign tax
law may constitute a hybrid deduction.
See proposed § 1.245A(e)-1(d). Thus, for
example, if the relevant foreign tax law
contains hybrid mismatch rules under
which a CFC is denied a deduction for an
amount of interest paid with respect to a
hybrid instrument to prevent a deduction/
no-inclusion ("D/NI") outcome, then the
payment of the interest does not give
rise to a hybrid deduction, because the
deduction is not "allowed." This pre-
vents double-taxation that could arise if
a hybrid dividend were subject to both
section 245A(e) and a hybrid mismatch
rule under a relevant foreign tax law.

For a deduction or other tax benefit to
be a hybrid deduction, it must relate to or
result from an amount paid, accrued, or
distributed with respect to an instrument
of the CFC that is treated as stock for U.S.
tax purposes. That is, there must be a
connection between the deduction or other

tax benefit under the relevant foreign tax
law and the instrument that is stock for
U.S. tax purposes. Thus, a hybrid deduc-
tion includes an interest deduction under a
relevant foreign tax law with respect to a
hybrid instrument (stock for U.S. tax pur-
poses, indebtedness for foreign tax pur-
poses). It also includes dividends paid de-
ductions and other deductions allowed on
equity under a relevant foreign tax law,
such as notional interest deductions
("NIDs"), which raise similar concerns as
traditional hybrid instruments. However,
it does not, for example, include an ex-
emption provided to a CFC under its tax
law for certain types of income (such as
income attributable to a foreign branch),
because there is not a connection between
the tax benefit and the instrument that is
stock for U.S. tax purposes.

The proposed regulations provide that
deductions or other tax benefits allowed
pursuant to certain integration or impu-
tation systems do not constitute hybrid
deductions. See proposed § 1.245A(e)-
1(d)(2)(i)(B). However, a system that
has the effect of exempting earnings that
fund a distribution from foreign tax at
both the CFC and shareholder level
gives rise to a hybrid deduction. See id .;
see also proposed § 1.245A(e)-1(g)(2),
Example 2.

###### 2. Effect of Foreign Currency Gain or Loss

The payment of an amount by a CFC
may, under a provision of foreign tax law
comparable to section 988, give rise to
gain or loss to the CFC that is attributable
to foreign currency. The proposed regula-
tions provide that such foreign currency
gain or loss recognized with respect to
such deduction or other tax benefit is
taken into account for purposes of deter-
mining hybrid deductions. See proposed
§ 1.245A(e)-1(d)(6); see also section
II.K.1 of this Explanation of Provisions
(requesting comments on foreign currency
rules).

###### D. Tiered hybrid dividends

Proposed § 1.245A(e)-1(c) sets forth
rules related to hybrid dividends of tiered
corporations ("tiered hybrid dividends"),
as provided under section 245A(e)(2). A

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tiered hybrid dividend means an amount
received by a CFC from another CFC to the
extent that the amount would be a hybrid
dividend under proposed § 1.245A(e)-1(b)
if the receiving CFC were a domestic cor-
poration. Accordingly, the amount must be
treated as a dividend under U.S. tax law to
be treated as a tiered hybrid dividend; the
treatment of the amount under the tax law in
which the receiving CFC is a tax resident (or
under any other foreign tax law) is irrelevant
for this purpose.

If a CFC receives a tiered hybrid divi-
dend from another CFC, and a domestic
corporation is a U.S. shareholder of both
CFCs, then (i) the tiered hybrid dividend
is treated as subpart F income of the re-
ceiving CFC, (ii) the U.S. shareholder
must include in gross income its pro rata
share of the subpart F income, and (iii) the
rules of section 245A(d) apply to the
amount included in the U.S. shareholder's
gross income. See proposed § 1.245A(e)-
1(c)(1). This treatment applies notwith-
standing any other provision of the Code.
Thus, for example, exceptions to subpart
F income such as those provided under
section 954(c)(3) ("same country" excep-
tion for income received from related per-
sons) and section 954(c)(6) (look-through
rule for related CFCs) do not apply. As
additional examples, the gross amount of
subpart F income cannot be reduced by
deductions taken into account under sec-
tion 954(b)(5) and § 1.954-1(c), and is
not subject to the current earnings and
profits limitation under section 952(c).

###### E. Interaction with section 959

Distributions of previously taxed earn-
ings and profits ("PTEP") attributable to
amounts that have been taken into account
by a U.S. shareholder under section
951(a) are, in general, excluded from the
gross income of the U.S. shareholder
when distributed under section 959(a),
and under section 959(d) are not treated as
a dividend (other than to reduce earnings
and profits). As a result, distributions from
a CFC to its U.S. shareholder out of PTEP
are not eligible for the dividends received
deduction under section 245A(a), and sec-
tion 245A(e) does not apply. Similarly,
distributions of PTEP from a CFC to an
upper-tier CFC are excluded from the
gross income of the upper-tier CFC under

section 959(b), but only for the limited
purpose of applying section 951(a). In ad-
dition, such amounts continue to be
treated as dividends because section
959(d) does not apply to such amounts.
Accordingly, distributions out of PTEP
could qualify as tiered hybrid dividends
that would result in an income inclusion to
a U.S. shareholder. To prevent this result,
the proposed regulations provide that a
tiered hybrid dividend does not include
amounts described in section 959(b). See
proposed § 1.245A(e)-1(c)(2).

###### F. Interaction with section 964(e)

Under section 964(e)(1), gain recog-
nized by a CFC on the sale or exchange of
stock in another foreign corporation may
be treated as a dividend. In certain cases,
section 964(e)(4): (i) treats the dividend as
subpart F income of the selling CFC; (ii)
requires a U.S. shareholder of the CFC to
include in its gross income its pro rata share
of the subpart F income; and (iii) allows the
U.S. shareholder the section 245A(a) deduc-
tion for its inclusion in gross income. As is
the case with the treatment of tiered hybrid
dividends, the treatment of dividends under
section 964(e)(4) applies notwithstanding
any other provision of the Code.

The proposed regulations coordinate
the tiered hybrid dividend rules and the
rules of section 964(e) by providing
that, to the extent a dividend arising
under section 964(e)(1) is a tiered hy-
brid dividend, the tiered hybrid dividend
rules, rather than the rules of section
964(e)(4), apply. Thus, in such a case,
a U.S. shareholder that includes an
amount in its gross income under the
tiered hybrid dividend rule is not al-
lowed the section 245A(a) deduction, or
foreign tax credits or deductions, for the
amount. See proposed § 1.245A(e)-
1(c)(1) and (4).

###### G. Hybrid deduction accounts

## 1. In General

In some cases, the actual payment by a
CFC of an amount that is treated as a
dividend for U.S. tax purposes will result
in a corresponding hybrid deduction. In
many cases, however, the dividend and
the hybrid deduction may not arise pursu-

ant to the same payment and may be rec-
ognized in different taxable years. This
may occur in the case of a hybrid instru-
ment for which under a relevant foreign
tax law the CFC is allowed deductions for
accrued (but not yet paid) interest. In such
a case, to the extent that an actual payment
has not yet been made on the instrument,
there generally would not be a dividend
for U.S. tax purposes for which the sec-
tion 245A(a) deduction could be disal-
lowed under section 245A(e). Neverthe-
less, because the earnings and profits of
the CFC would not be reduced by the
accrued interest deduction, the earnings
and profits may give rise to a dividend
when subsequently distributed to the U.S.
shareholder. This same result could occur
in other cases, such as when a relevant
foreign tax law allows deductions on eq-
uity, such as NIDs.

The disallowance of the section 245A(a)
deduction under section 245A(e) should not
be limited to cases in which the dividend
and the hybrid deduction arise pursuant to
the same payment (or in the same taxable
year for U.S. tax purposes and for purposes
of the relevant foreign tax law). Interpreting
the provision in such a manner would result
in disparate treatment for hybrid arrange-
ments that produce the same D/NI outcome.
Accordingly, the proposed regulations de-
fine a hybrid dividend (or tiered hybrid div-
idend) based, in part, on the extent of the
balance of the "hybrid deduction accounts"
of the domestic corporation (or CFC)
receiving the dividend. See proposed
§ 1.245A(e)-1(b) and (d). This ensures that
dividends are subject to section 245A(e) re-
gardless of whether the same payment gives
rise to the dividend and the hybrid deduc-
tion.

A hybrid deduction account must be
maintained with respect to each share of
stock of a CFC held by a person that,
given its ownership of the CFC and the
share, could be subject to section 245A
upon a dividend paid by the CFC on the
share. See proposed § 1.245A(e)-1(d) and
(f). The account, which is maintained in
the functional currency of the CFC, re-
flects the amount of hybrid deductions of
the CFC (allowed in taxable years begin-
ning after December 31, 2017) that have
been allocated to the share. A dividend
paid by a CFC to a shareholder that has a
hybrid deduction account with respect to

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the CFC is generally treated as a hybrid
dividend or tiered hybrid dividend to the
extent of the shareholder's balance in all
of its hybrid deduction accounts with re-
spect to the CFC, even if the dividend is
paid on a share that has not had any hybrid
deductions allocated to it. Absent such an
approach, the purposes of section 245A(e)
might be avoided by, for example, struc-
turing dividend payments such that they
are generally made on shares of stock to
which a hybrid deduction has not been
allocated (rather than on shares of stock to
which a hybrid deduction has been allo-
cated, such as a share that is a hybrid
instrument).

Once an amount in a hybrid deduction
account gives rise to a hybrid dividend or
a tiered hybrid dividend, the account is
correspondingly reduced. See proposed
§ 1.245A(e)-1(d). The Treasury Depart-
ment and the IRS request comments on
whether hybrid deductions attributable to
amounts included in income under section
951(a) or section 951A should not in-
crease the hybrid deduction account, or,
alternatively, the hybrid deduction ac-
count should be reduced by distributions
of PTEP, and on whether the effect of any
deemed paid foreign tax credits associated
with such inclusions or distributions
should be considered.

## 2. Transfers of Stock

Because hybrid deduction accounts are
with respect to stock of a CFC, the pro-
posed regulations include rules that take into
account transfers of the stock. See proposed
§ 1.245A(e)-1(d)(4)(ii)(A). These rules,
which are similar to the "successor" PTEP
rules under section 959 (see § 1.959-1(d)),
ensure that section 245A(e) properly applies
to dividends that give rise to a D/NI out-
come in cases where the shareholder that
receives the dividend is not the same share-
holder that held the stock when the hybrid
deduction was incurred. These rules only
apply when the stock is transferred among
persons that are required to keep hybrid
deduction accounts. Thus, if the stock is
transferred to a person that is not required to
keep a hybrid deduction account - such as
an individual or a foreign corporation that is
not a CFC - the account terminates (subject
to the anti-avoidance rule, discussed in sec-
tion I.H of this Explanation of Provisions).

Finally, the proposed regulations include
rules that take into account certain non-
recognition exchanges of the stock, such as
exchanges in connection with asset reorga-
nizations, recapitalizations, and liquidations,
as well as transfers and exchanges that occur
mid-way through a CFC's taxable year. See
proposed § 1.245A(e)-1(d)(4)(ii)(B) and
(d)(5). The Treasury Department and the
IRS request comments on these rules.

## 3. Dividends from Lower-Tier CFCs

The proposed regulations provide a
special rule to address earnings and profits
of a lower-tier CFC that are included in a
domestic corporation's income as a divi-
dend by virtue of section 1248(c)(2). In
these cases, the proposed regulations treat
the domestic corporation as having certain
hybrid deduction accounts with respect to
the lower-tier CFC that are held and main-
tained by other CFCs. See proposed
§ 1.245A(e)-1(b)(3). This ensures that, to
the extent the earnings and profits of the
lower-tier CFC give rise to the dividend,
hybrid deduction accounts with respect to
the lower-tier CFC are taken into account
for purposes of the determinations under
section 245A(e), even though the accounts
are held indirectly by the domestic corpo-
ration. A similar rule applies with respect
to gains on stock sales treated as divi-
dends under section 964(e)(1). See pro-
posed § 1.245A(e)-1(c)(3).

## H. Anti-avoidance rule

The proposed regulations include an
anti-avoidance rule. This rule provides
that appropriate adjustments are made, in-
cluding adjustments that would disregard
a transaction or arrangement, if a transac-
tion or arrangement is engaged in with a
principal purpose of avoiding the pur-
poses of proposed § 1.245A(e)-1.

II. Section 267A - Related Party
Amounts Involving Hybrid Transactions
and Hybrid Entities

## A. Overview

As indicated in the Senate Finance
Committee's Explanation of the Bill, hy-
brid arrangements may exploit differences
under U.S. and foreign tax law between

the tax characterization of an entity as
transparent or opaque or differences in the
treatment of financial instruments or other
transactions. The proposed regulations
under section 267A address certain pay-
ments or accruals of interest or royalties
for U.S. tax purposes (the amount of such
interest or royalty, a "specified payment")
that involve hybrid arrangements, or sim-
ilar arrangements involving branches, that
produce D/NI (deduction/no inclusion)
outcomes or indirect D/NI outcomes. See
also section II.J.1 of this Explanation of
Provisions (discussing certain amounts
that are treated as specified payments).
The proposed regulations neutralize the
double non-taxation effects of the ar-
rangements by denying a deduction for
the specified payment to the extent of the
D/NI outcome.

## B. Scope

### 1. Disallowed Deductions

The proposed regulations generally dis-
allow a deduction for a specified payment if
and only if the payment is (i) a "disqualified
hybrid amount," meaning that it produces a
D/NI outcome as a result of a hybrid or
branch arrangement; (ii) a "disqualified im-
ported mismatch amount," meaning that it
produces an indirect D/NI outcome as a
result of the effects of an offshore hybrid or
branch arrangement being imported into the
U.S. tax system; or (iii) made pursuant to a
transaction a principal purpose of which is
to avoid the purposes of the regulations un-
der section 267A and it produces a D/NI
outcome. See proposed § 1.267A-1(b).
Thus, the proposed regulations do not ad-
dress D/NI outcomes that are not the result
of hybridity. See also section II.E of this
Explanation of Provisions (discussing the
link between hybridity and a D/NI out-
come). In addition, the proposed regulations
do not address double-deduction outcomes.
Section 267A is intended to address D/NI
outcomes; transactions that produce double-
deduction outcomes are addressed through
other provisions (or doctrines), such as the
dual consolidated loss rules under section
1503(d). See also section IV.A.1 of this
Explanation of Provisions (discussing the
dual consolidated loss rules).

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### 2. Parties Subject to Section 267A

The application of section 267A by its
terms is not limited to any particular cat-
egory of persons. The proposed regula-
tions, however, narrow the scope of sec-
tion 267A so that it applies only to
deductions of "specified parties." Deduc-
tions of persons other than specified par-
ties are not subject to disallowance under
section 267A because the deductions of
such other persons generally do not have
significant U.S. tax consequences.

A specified party means any of (i) a tax
resident of the United States, (ii) a CFC
for which there is one or more United
States shareholders that own (within the
meaning of section 958(a)) at least ten
percent of the stock of the CFC, and (iii)
a U.S. taxable branch (which includes a
U.S. permanent establishment of a tax
treaty resident). See proposed § 1.267A-
5(a). The term generally includes a CFC
because, for example, a specified payment
made by a CFC to the foreign parent of
the CFC's U.S. shareholder, or a specified
payment by the CFC to an unrelated party
pursuant to a structured arrangement, may
indirectly reduce income subject to U.S.
tax. Specified payments made by a CFC to
other related CFCs or to U.S. shareholders
of the CFC, however, typically will not be
subject to section 267A because of the
rules in proposed § 1.267A-3(b) that ex-
empt certain payments included in income
of a U.S. tax resident or taken into account
under the subpart F or global intangible
low-tax income ("GILTI") rules. See also
section II.F of this Explanation of Provi-
sions (discussing the relatedness or struc-
tured arrangement limitation); section
II.H of this Explanation of Provisions
(discussing exceptions for amounts in-
cluded or includible in income). Similarly,
the term includes a U.S. taxable branch
because a payment made by the home
office may be allocable to and thus reduce
income subject to U.S. tax under sections
871(b) or 882. See also section II.K.2 of
this Explanation of Provisions (discussing
amounts considered paid or accrued by a
U.S. taxable branch for section 267A pur-
poses).

The term specified party does not in-
clude a partnership because a partnership
generally is not liable to tax and therefore
is not the person allowed a deduction.

However, a partner of a partnership may
be a specified party. For example, in the
case of a payment made by a partnership a
partner of which is a domestic corpora-
tion, the domestic corporation is a speci-
fied party and its allocable share of the
deduction for the payment is subject to
disallowance under section 267A.

## C. Amount of a D/NI outcome

### 1. In General

Proposed § 1.267A-3(a) provides rules
for determining the "no-inclusion" aspect
of a D/NI outcome - that is, the amount of
a specified payment that is or is not in-
cluded in income under foreign tax law.
The proposed regulations provide that
only "tax residents" or "taxable branches"
are considered to include an amount in
income. Parties other than tax residents or
taxable branches, for example, an entity
that is fiscally transparent for purposes of
the relevant tax laws, do not include an
amount in income because such parties
are not liable to tax.

In general, a tax resident or taxable
branch includes a specified payment in
income for this purpose to the extent that,
under its tax law, it includes the payment
in its income or tax base at the full mar-
ginal rate imposed on ordinary income,
and the payment is not reduced or offset
by certain items (such as an exemption or
credit) particular to that type of payment.
See proposed § 1.267A-3(a)(1).

Whether a tax resident or taxable
branch includes a specified payment in
income is determined without regard to
any defensive or secondary rule in hybrid
mismatch rules (which generally requires
the payee to include certain amounts in
income, if the payer is not denied a de-
duction for the amount), if any, under the
tax resident's or taxable branch's tax law.
Otherwise, in cases in which such tax law
contains a secondary response, the analy-
sis of whether the specified payment is
included in income could become circu-
lar: for example, whether the United
States denies a deduction under section
267A may depend on whether the payee
includes the specified payment in income,
and whether the payee includes it in in-
come (under a secondary response) may

depend on whether the United States de-
nies the deduction.

A specified payment may be consid-
ered included in income even though off-
set by a generally applicable deduction or
other tax attribute, such as a deduction for
depreciation or a net operating loss. For
this purpose, a deduction may be treated
as being generally applicable even if
closely related to the specified payment
(for example, if the deduction and pay-
ment are in connection with a back-to-
back financing arrangement).

If a specified payment is taxed at a
preferential rate, or if there is a partial
reduction or offset particular to the type of
payment, a portion of the payment is con-
sidered included in income. The portion
included in income is the amount that,
taking into account the preferential rate or
reduction or offset, is subject to tax at the
full marginal rate applicable to ordinary
income. See proposed § 1.267A-3(a)(1);
see also proposed § 1.267A-6(c), Exam-
ple 2 and Example 7.

### 2. Timing Differences

Some specified payments may never be
included in income. For example, a spec-
ified payment treated as a dividend under
a tax resident's tax laws may be perma-
nently excluded from its income under a
participation exemption. Permanent ex-
clusions are always treated as giving rise
to a no-inclusion. See proposed § 1.267A-
3(a)(1).

Other specified payments, however,
may be included in income but on a de-
ferred basis. Some of these timing differ-
ences result from different methods of ac-
counting between U.S. tax law and
foreign tax law. For example, and subject
to certain limitations such as those under
sections 163(e)(3) and 267(a) (generally
applicable to payments involving related
parties, but not to payments involving
structured arrangements), a specified pay-
ment may be deductible for U.S. tax pur-
poses when accrued and later included in
a foreign tax resident's income when ac-
tually paid. See also section II.K.3 of this
Explanation of Provisions (discussing the
coordination of section 267A with rules
such as sections 163(e)(3) and 267(a)).
Timing differences may also occur in
cases in which all or a portion of a spec-

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ified payment that is treated as interest for
U.S. tax purposes is treated as a return of
principal for purposes of the foreign tax
law.

In some cases, timing differences re-
verse after a short period of time and
therefore do not provide a meaningful de-
ferral benefit. The Treasury Department
and the IRS have determined that routine,
short-term deferral does not give rise to
the policy concerns that section 267A is
intended to address. In addition, subject-
ing such short-term deferral to section
267A could give rise to administrability
issues for both taxpayers and the IRS,
because it may be challenging to deter-
mine whether the taxable period in which
a specified payment is included in income
matches the taxable period in which the
payment is deductible.

Other timing differences, though, may
provide a significant and long-term defer-
ral benefit. Moreover, taxpayers may
structure transactions that exploit these
differences to achieve long-term deferral
benefits. Timing differences that result in
long-term deferral have an economic ef-
fect similar to a permanent exclusion and
therefore give rise to policy concerns that
section 267A is intended to address. See
Senate Explanation, at 384 (expressing
concern with hybrid arrangements that
"achieve double non-taxation, including
long-term deferral."). Accordingly, pro-
posed § 1.267A-3(a)(1) provides that
short-term deferral, meaning inclusion
during a taxable year that ends no more
than 36 months after the end of the spec-
ified party's taxable year, does not give
rise to a D/NI outcome; inclusions outside
of the 36-month timeframe, however, are
treated as giving rise to a D/NI outcome.

D. Hybrid and branch arrangements
giving rise to disqualified hybrid
amounts

#### 1. Hybrid Transactions

Proposed § 1.267A-2(a) addresses hy-
brid financial instruments and similar ar-
rangements (collectively, "hybrid transac-
tions") that result in a D/NI outcome. For
example, in the case of an instrument that
is treated as indebtedness for purposes of
the payer's tax law and stock for purposes
of the payee's tax law, a payment on the

instrument may constitute deductible in-
terest expense of the payer and excludible
dividend income of the payee (for in-
stance, under a participation exemption).

In general, the proposed regulations
provide that a specified payment is made
pursuant to a hybrid transaction if there is
a mismatch in the character of the instru-
ment or arrangement such that the pay-
ment is not treated as interest or a royalty,
as applicable, under the tax law of a
"specified recipient." Examples of such a
specified payment include a payment that
is treated as interest for U.S. tax purposes
but, for purposes of a specified recipient's
tax law, is treated as a distribution on
equity or a return of principal. When a
specified payment is made pursuant to a
hybrid transaction, it generally is a dis-
qualified hybrid amount to the extent that
the specified recipient does not include the
payment in income.

The proposed regulations broadly de-
fine specified recipient as (i) any tax res-
ident that under its tax law derives the
specified payment, and (ii) any taxable
branch to which under its tax law the
specified payment is attributable. See pro-
posed § 1.267A-5(a)(19). In other words,
a specified recipient is any party that may
be subject to tax on the specified payment
under its tax law. There may be more than
one specified recipient of a specified pay-
ment. For example, in the case of a spec-
ified payment to an entity that is fiscally
transparent for purposes of the tax law of
its tax resident owners, each of the owners
is a specified recipient of a share of the
payment. In addition, if the entity is a tax
resident of the country in which it is es-
tablished or managed and controlled, then
the entity is also a specified recipient.
Moreover, in the case of a specified pay-
ment attributable to a taxable branch, both
the taxable branch and the home office are
specified recipients.

The proposed regulations deem a spec-
ified payment as made pursuant to a hy-
brid transaction if there is a long-term
mismatch between when the specified
party is allowed a deduction for the pay-
ment under U.S. tax law and when a spec-
ified recipient includes the payment in in-
come under its tax law. This rule applies,
for example, when a specified payment is
made pursuant to an instrument viewed as
indebtedness under both U.S. and foreign

tax law and, due to a mismatch in tax
accounting treatment between the U.S.
and foreign tax law, results in long-term
deferral. In these cases, this rule treats the
long-term deferral as giving rise to a hy-
brid transaction; the rules in proposed
§ 1.267A-3(a)(1) (discussed in section
II.C.2 of this Explanation of Provisions)
treat the long-term deferral as creating a
D/NI outcome.

Lastly, proposed § 1.267A-2(a)(3)
provides special rules to address securities
lending transactions, sale-repurchase trans-
actions, and similar transactions. In these
cases, a specified payment (that is, interest
consistent with the substance of the transac-
tion) might not be regarded under a foreign
tax law. As a result, there might not be a
specified recipient of the specified payment
under such foreign tax law, absent a special
rule. To address this scenario, the proposed
regulations provide that the determination of
the identity of a specified recipient under the
foreign tax law is made with respect to an
amount connected to the specified payment
and regarded under the foreign tax law - for
example, a dividend consistent with the
form of the transaction. The Treasury De-
partment and the IRS request comments on
whether similar rules should be extended to
other specific transactions.

### 2. Disregarded Payments

Proposed § 1.267A-2(b) addresses dis-
regarded payments. Disregarded pay-
ments generally give rise to a D/NI out-
come because they are regarded under the
payer's tax law and are therefore available
to offset income not taxable to the payee,
but are disregarded under the payee's tax
law and therefore are not included in in-
come.

In general, the proposed regulations
define a disregarded payment as a speci-
fied payment that, under a foreign tax law,
is not regarded because, for example, it is
a disregarded transaction involving a sin-
gle taxpayer or between consolidated
group members. For example, a disre-
garded payment includes a specified pay-
ment made by a domestic corporation to
its foreign owner if, under the foreign tax
law, the domestic corporation is a disre-
garded entity and therefore the payment is
not regarded. It also includes a specified
payment between related foreign corpora-

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tions that are members of the same foreign
consolidated group (or can otherwise
share income or loss) if, under the foreign
tax law, payments between group mem-
bers are not regarded, or give rise to a
deduction or similar offset to the payer
member that is available to offset the cor-
responding income of the recipient mem-
ber.

In general, a disregarded payment is a
disqualified hybrid amount only to the ex-
tent it exceeds dual inclusion income. For
example, if a domestic corporation that for
foreign tax purposes is a disregarded en-
tity of its foreign owner makes a disre-
garded payment to its foreign owner, the
payment is a disqualified hybrid amount
only to the extent it exceeds the net of the
items of gross income and deductible ex-
pense taken into account in determining
the domestic corporation's income for
U.S. tax purposes and the foreign owner's
income for foreign tax purposes. This pre-
vents the excess of the disregarded pay-
ment over dual inclusion income from off-
setting non-dual inclusion income. Such
an offset could otherwise occur, for exam-
ple, through the U.S. consolidation re-
gime, or a sale, merger, or similar trans-
action.

A disregarded payment could also be
viewed as being made pursuant to a hy-
brid transaction because the payment of
interest or royalty would not be viewed as
interest or royalty under the foreign tax
law (since the payment is disregarded).
The proposed regulations address disre-
garded payments separately from hybrid
transactions, however, because disre-
garded payments are more likely to offset
dual inclusion income and therefore are
treated as disqualified hybrid amounts
only to the extent they offset non-dual
inclusion income.

### 3. Deemed Branch Payments

Proposed § 1.267A-2(c) addresses
deemed branch payments. These pay-
ments result in a D/NI outcome when,
under an income tax treaty, a deductible
payment is deemed to be made by a per-
manent establishment to its home office
and offsets income not taxable to the
home office, but the payment is not taken
into account under the home office's tax
law.

In general, the proposed regulations
define a deemed branch payment as inter-
est or royalty considered paid by a U.S.
permanent establishment to its home of-
fice under an income tax treaty between
the United States and the home office
country. See proposed § 1.267A-2(c)(2).
Thus, for example, a deemed branch pay-
ment includes an amount allowed as a
deduction in computing the business prof-
its of a U.S. permanent establishment with
respect to the use of intellectual property
developed by the home office. See, for
example, the U.S. Treasury Department
Technical Explanation to the income tax
convention between the United States and
Belgium, signed November 27, 2006
("[T]he OECD Transfer Pricing Guide-
lines apply, by analogy, in determining
the profits attributable to a permanent es-
tablishment.").

When a specified payment is a deemed
branch payment, it is a disqualified hybrid
amount if the home office's tax law pro-
vides an exclusion or exemption for in-
come attributable to the branch. In these
cases, a deduction for the deemed branch
payment would offset non-dual inclusion
income and therefore give rise to a D/NI
outcome. If the home office's tax law does
not have an exclusion or exemption for
income attributable to the branch, then,
because U.S. permanent establishments
cannot consolidate or otherwise share
losses with U.S. taxpayers, there would
generally not be an opportunity for a de-
duction for the deemed branch payment to
offset non-dual inclusion income.

### 4. Reverse Hybrids

Proposed § 1.267A-2(d) addresses
payments to reverse hybrids. In general,
and as discussed below, a reverse hybrid
is an entity that is fiscally transparent for
purposes of the tax law of the country in
which it is established but not for pur-
poses of the tax law of its owner. Thus,
payments to a reverse hybrid may result in
a D/NI outcome because the reverse hy-
brid is not a tax resident of the country in
which it is established, and the owner does
not derive the payment under its tax law.
Because this D/NI outcome may occur
regardless of whether the establishment
country is a foreign country or the United
States, the proposed regulations provide

that both foreign and domestic entities
may be reverse hybrids. A domestic entity
that is a reverse hybrid for this purpose
therefore differs from a "domestic reverse
hybrid entity" under § 1.894-1(d)(2)(i),
which is defined as "a domestic entity that
is treated as not fiscally transparent for
U.S. tax purposes and as fiscally transpar-
ent under the laws of an interest holder's
jurisdiction[.]”

For an entity to be a reverse hybrid
under the proposed regulations, two re-
quirements must be satisfied. These re-
quirements generally implement the
definition of hybrid entity in section
267A(d)(2), with certain modifications.
First, the entity must be fiscally transpar-
ent under the tax law of the country in
which it is established, whether or not it is
a tax resident of another country. For this
purpose, the determination of whether an
entity is fiscally transparent with respect
to an item of income is made using the
principles of § 1.894-1(d)(3)(ii) (but
without regard to whether there is an in-
come tax treaty in effect between the en-
tity's jurisdiction and the United States).

Second, the entity must not be fiscally
transparent under the tax law of an "in-
vestor." An investor means a tax resident
or taxable branch that directly or indi-
rectly owns an interest in the entity. For
this purpose, the determination of whether
an investor's tax law treats the entity as
fiscally transparent with respect to an item
of income is made under the principles of
§ 1.894-1(d)(3)(iii) (but without regard to
whether there is an income tax treaty in
effect between the investor's jurisdiction
and the United States). If an investor
views the entity as not fiscally transparent,
the investor generally will not be currently
taxed under its tax law on payments to the
entity. Thus, the non-fiscally-transparent
status of the entity is determined on an
investor-by-investor basis, based on the
tax law of each investor. In addition, a tax
resident or a taxable branch may be an
investor of a reverse hybrid even if the tax
resident or taxable branch indirectly owns
the reverse hybrid through one or more
intermediary entities that, under the tax
law of the tax resident or taxable branch,
are not fiscally transparent. In such a case,
however, the investor's no-inclusion
would not be a result of the payment being
made to the reverse hybrid and therefore

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would not be a disqualified hybrid
amount. See also section II.E of this Ex-
planation of Provisions (explaining that
the D/NI outcome must be a result of
hybridity); proposed § 1.267A-6(c), Ex-
ample 5 (analyzing whether a D/NI out-
come with respect to an upper-tier inves-
tor is a result of the specified payment
being made to the reverse hybrid).

When a specified payment is made to a
reverse hybrid, it is generally a disquali-
fied hybrid amount to the extent that an
investor does not include the payment in
income. For this purpose, whether an in-
vestor includes the specified payment in
income is determined without regard to a
subsequent distribution by the reverse hy-
brid. Although a subsequent distribution
may be included in the investor's income,
the distribution may not occur for an ex-
tended period and, when it does occur, it
may be difficult to determine whether the
distribution is funded from an amount
comprising the specified payment.

In addition, if an investor takes a spec-
ified payment into account under an anti-
deferral regime, then the investor is con-
sidered to include the payment in income
to the extent provided under the general
rules of proposed § 1.267A-3(a). See pro-
posed § 1.267A-6(c), Example 5. Thus,
for example, if the investor's inclusion
under the anti-deferral regime is subject to
tax at a preferential rate, the investor is
considered to include only a portion of the
specified payment in income.

## 5. Branch Mismatch Payments

Proposed § 1.267A-2(e) addresses
branch mismatch payments. These pay-
ments give rise to a D/NI outcome due to
differences between the home office's tax
law and the branch's tax law regarding the
allocation of items of income or the treat-
ment of the branch. This could occur, for
example, if the home office's tax law
views a payment as attributable to the
branch and exempts the branch's income,
but the branch's tax law does not tax the
payment.

Under the proposed regulations, a
specified payment is a branch mismatch
payment when two requirements are sat-
isfied. First, under a home office's tax law,
the specified payment is treated as attrib-
utable to a branch of the home office.

Second, under the tax law of the branch
country, either (i) the home office does not
have a taxable presence in the country, or
(ii) the specified payment is treated as
attributable to the home office and not the
branch. When a specified payment is a
branch mismatch payment, it is generally
a disqualified hybrid amount to the extent
that the home office does not include the
payment in income.

### E. Link between hybridity and D/NI outcome

Under section 267A(a), a deduction for
a payment is generally disallowed if (i)
the payment involves a hybrid arrange-
ment, and (ii) a D/NI outcome occurs. In
certain cases, although both of these con-
ditions are satisfied, the D/NI outcome is
not a result of the hybridity. For example,
in the hybrid transaction context, the D/NI
outcome may be a result of the specified
recipient's tax law containing a pure ter-
ritorial system (and thus exempting from
taxation all foreign source income) or not
having a corporate income tax, or a result
of the specified recipient's status as a tax-
exempt entity under its tax law.

The proposed regulations provide that
a D/NI outcome gives rise to a disquali-
fied hybrid amount only to the extent that
the D/NI outcome is a result of hybridity.
See, for example, proposed § 1.267A-
2(a)(1)(ii); see also Senate Explanation, at
384 ("[T]he Committee believes that hy-
brid arrangements exploit differences in
the tax treatment of a transaction or entity
under the laws of two or more jurisdic-
tions to achieve double non-taxation . .. ")
(emphasis added).

To determine whether a D/NI outcome
is a result of hybridity, the proposed reg-
ulations generally apply a test based on
facts that are counter to the hybridity at
issue. For example, in the hybrid transac-
tion context, a specified recipient's no-
inclusion is a result of the specified pay-
ment being made pursuant to the hybrid
transaction to the extent that the no-
inclusion would not occur were the pay-
ment to be treated as interest or a royalty
for purposes of the specified recipient's
tax law.

This test also addresses cases in which,
for example, a specified payment is made
to a fiscally transparent entity (such as a

partnership) and owners of the entity that
are specified recipients of the payment
each derive only a portion of the payment
under its tax law. The test ensures that,
with respect to each specified recipient,
only the no-inclusion that occurs for the
portion of the specified payment that it
derives may give rise to a disqualified hy-
brid amount. In addition, as a result of the
relatedness or structured arrangement limi-
tation discussed in section II.F of this Ex-
planation of Provisions, the no-inclusion
with respect to the specified recipient is
taken into account under the proposed reg-
ulations only if the specified recipient is
related to the specified party or is a party to
a structured arrangement pursuant to which
the specified payment is made.

### F. Relatedness or structured arrangement limitation

In determining whether a specified
payment is made pursuant to a hybrid or
branch mismatch arrangement, the pro-
posed regulations generally only consider
the tax laws of tax residents or taxable
branches that are related to the specified
party. See proposed § 1.267A-2(f). For
example, in general, only the tax law of a
specified recipient that is related to the
specified party is taken into account for
purposes of determining whether the spec-
ified payment is made pursuant to a hybrid
transaction. Because a deemed branch
payment by its terms involves a related
home office, the relatedness limitation in
proposed § 1.267A-2(f) does not apply to
proposed § 1.267A-2(c).

The proposed regulations provide that
related status is determined under the rules
of section 954(d)(3) (involving ownership
of more than 50 percent of interests) but
without regard to downward attribution. See
proposed § 1.267A-5(a)(14). In addition, to
ensure that a tax resident may be considered
related to a specified party even though the
tax resident is a disregarded entity for U.S.
tax purposes, the proposed regulations pro-
vide that such a tax resident is treated as a
corporation for purposes of the relatedness
test. A similar rule applies with respect to a
taxable branch.

However, the Treasury Department
and the IRS are aware that some hybrid
arrangements involving unrelated parties
are designed to give rise to a D/NI out-

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come and therefore present the policy
concerns underlying section 267A. Fur-
thermore, it is likely that in such cases the
specified party will have, or can reason-
ably obtain, the information necessary to
comply with section 267A. Accordingly,
the proposed regulations generally pro-
vide that the tax law of an unrelated tax
resident or taxable branch is taken into
account for purposes of section 267A if
the tax resident or taxable branch is a
party to a structured arrangement. See pro-
posed § 1.267A-2(f). The proposed regu-
lations set forth a test for when a transac-
tion is a structured arrangement. See
proposed § 1.267A-5(a)(20). In addition,
the proposed regulations impute an enti-
ty's participation in a structured arrange-
ment to its investors. See id. Thus, for
example, in the case of a specified pay-
ment to a partnership that is a party to a
structured arrangement pursuant to which
the payment is made, a tax resident that is
a partner of the partnership is also a party
to the structured arrangement, even
though the tax resident may not have ac-
tual knowledge of the structured arrange-
ment.

## G. Effect of inclusion in another jurisdiction

The proposed regulations provide that
a specified payment is a disqualified hy-
brid amount if a D/NI outcome occurs as
a result of hybridity in any foreign juris-
diction, even if the payment is included in
income in another foreign jurisdiction. See
proposed § 1.267A-6(c), Example 1. Ab-
sent such a rule, an inclusion of a specified
payment in income in a jurisdiction with a
(generally applicable) low rate might dis-
charge the application of section 267A
even though a D/NI outcome occurs in
another jurisdiction as a result of hybrid-
ity.

For example, assume FX, a tax resident
of Country X, owns US1, a domestic cor-
poration, and FZ, a tax resident of Coun-
try Z that is fiscally transparent for Coun-
try X tax purposes. Also, assume that
Country Z has a single, low-tax rate ap-
plicable to all income. Further, assume
that FX holds an instrument issued by
US1, a $100x payment with respect to
which is treated as interest for U.S. tax
purposes and an excludible dividend for

Country X tax purposes. In an attempt to
avoid US1's deduction for the $100x pay-
ment being denied under the hybrid trans-
action rule, FX contributes the instrument
to FZ, and, upon US1's $100x payment,
US1 asserts that, although a $100x no-
inclusion occurs with respect to FX as a
result of the payment being made pursuant
to the hybrid transaction, the payment is
not a disqualified hybrid amount because
FZ fully includes the payment in income
(albeit at a low-tax rate). The proposed
regulations treat the payment as a disqual-
ified hybrid amount.

This rule only applies for inclusions
under the laws of foreign jurisdictions.
See proposed § 1.267A-3(b), and section
II.H of this Explanation of Provisions, for
exceptions that apply when the payment is
included or includible in a U.S. tax resi-
dent's or U.S. taxable branch's income.

The Treasury Department and IRS re-
quest comments on whether an exception
should apply if the specified payment is
included in income in any foreign jurisdic-
tion, taking into account accommodation
transactions involving low-tax entities.

H. Exceptions for certain amounts
included or includible in a U.S. tax
resident's or U.S. taxable branch's
income

Proposed § 1.267A-3(b) provides rules
that reduce disqualified hybrid amounts to
the extent the amounts are included or
includible in a U.S. tax resident's or U.S.
taxable branch's income. In general, these
rules ensure that a specified payment is
not a disqualified hybrid amount to the
extent included in the income of a tax
resident of the United States or a U.S.
taxable branch, or taken into account by a
U.S. shareholder under the subpart F or
GILTI rules.

Source-based withholding tax imposed
by the United States (or any other coun-
try) on disqualified hybrid amounts does
not neutralize the D/NI outcome and
therefore does not reduce or otherwise
affect disqualified hybrid amounts. With-
holding tax policies are unrelated to the
policies underlying hybrid arrangements -
for example, withholding tax can be im-
posed on non-hybrid payments - and, ac-
cordingly, withholding tax is not a substi-
tute for a specified payment being

included in income by a tax resident or
taxable branch. See also section II.L of
this Explanation of Provisions (interaction
with withholding taxes and income tax
treaties). Furthermore, other jurisdictions
applying the defensive or secondary rule
to a payment (which generally requires
the payee to include the payment in in-
come, if the payer is not denied a deduc-
tion for the payment under the primary
rule) may not treat withholding taxes as
satisfying the primary rule and may there-
fore require the payee to include the pay-
ment in income if a deduction for the
payment is not disallowed (regardless of
whether withholding tax has been im-
posed).

Thus, the proposed regulations do not
treat amounts subject to U.S. withholding
taxes as reducing disqualified hybrid
amounts. Nevertheless, the Treasury De-
partment and the IRS request comments
on the interaction of the proposed regula-
tions with withholding taxes and whether,
and the extent to which, there should be
special rules under section 267A when
withholding taxes are imposed in connec-
tion with a specified payment, taking into
account how such a rule could be coordi-
nated with the hybrid mismatch rules of
other jurisdictions.

### I. Disqualified imported mismatch amounts

Proposed § 1.267A-4 sets forth a rule
to address "imported" hybrid and branch
arrangements. This rule is generally in-
tended to prevent the effects of an "off-
shore" hybrid arrangement (for example, a
hybrid arrangement between two foreign
corporations completely outside the U.S.
taxing jurisdiction) from being shifted, or
"imported," into the U.S. taxing jurisdic-
tion through the use of a non-hybrid ar-
rangement.

Accordingly, the proposed regulations
disallow deductions for specified pay-
ments that are "disqualified imported mis-
match amounts." In general, a disqualified
imported mismatch amount is a specified
payment: (i) that is non-hybrid in nature,
such as interest paid on an instrument that
is treated as indebtedness for both U.S.
and foreign tax purposes, and (ii) for
which the income attributable to the pay-
ment is directly or indirectly offset by a

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hybrid deduction of a foreign tax resident
or taxable branch. The rule addresses "in-
direct" offsets in order to take into ac-
count, for example, structures involving
intermediaries where the foreign tax resi-
dent that receives the specified payment is
different from the foreign tax resident that
incurs the hybrid deduction. See proposed
§ 1.267A-6(c), Example 8, Example 9,
and Example 10.

In general, a hybrid deduction for pur-
poses of the imported mismatch rule is an
amount for which a foreign tax resident or
taxable branch is allowed an interest or
royalty deduction under its tax law, to the
extent the deduction would be disallowed
if such tax law were to contain rules sub-
stantially similar to the section 267A pro-
posed regulations. For this purpose, it is
not relevant whether the amount is recog-
nized as interest or a royalty under U.S.
law, or whether the amount would be al-
lowed as a deduction under U.S. law.
Thus, for example, a deduction with re-
spect to equity (such as a notional interest
deduction) constitutes a hybrid deduction
even though such a deduction would not
be recognized (or allowed) under U.S. tax
law. As another example, a royalty deduc-
tion under foreign tax law may constitute
a hybrid deduction even though for U.S.
tax purposes the royalty is viewed as
made from a disregarded entity to its
owner and therefore is not regarded.

The requirement that the deduction
would be disallowed if the foreign tax law
were to contain rules substantially similar
to those under section 267A is intended to
limit the application of the imported mis-
match rule to cases in which, had the
foreign-to-foreign hybrid arrangement in-
stead involved a specified party, section
267A would have applied to disallow the
deduction. In other words, this require-
ment prevents the imported mismatch rule
from applying to arrangements outside the
general scope of section 267A, even if the
arrangements are hybrid in nature and
result in a D/NI (or similar) outcome.
For example, in the case of a deductible
payment of a foreign tax resident to a
tax resident of a foreign country that
does not impose an income tax, the de-
duction would generally not be a hybrid
deduction - even though it may be made
pursuant to a hybrid instrument - be-
cause the D/NI outcome would not be a

result of hybridity. See section II.E of
this Explanation of Provisions (requir-
ing a link between hybridity and the
D/NI outcome, for a specified payment
to be a disqualified hybrid amount).

Further, the proposed regulations in-
clude "ordering" and "funding" rules to
determine the extent that a hybrid deduc-
tion directly or indirectly offsets income
attributable to a specified payment. In ad-
dition, the proposed regulations provide
that certain payments made by non-
specified parties the tax laws of which
contain hybrid mismatch rules are taken
into account when applying the ordering
and funding rules. Together, these provi-
sions are intended to coordinate proposed
§ 1.267A-4 with foreign imported mis-
match rules, in order to prevent the same
hybrid deduction from resulting in deduc-
tions for non-hybrid payments being dis-
allowed under imported mismatch rules in
more than one jurisdiction.

## J. Definitions of interest and royalty

### 1. Interest

There are no generally applicable reg-
ulations or statutory provisions addressing
when financial instruments are treated as
debt for U.S. tax purposes or when a pay-
ment is interest. As a general matter, how-
ever, the factors that distinguish debt from
equity are described in Notice 94-47,
1994-1 C.B. 357, and interest is defined
as compensation for the use or forbear-
ance of money. Deputy v. Dupont, 308
U.S. 488 (1940).

Using these principles, the proposed
regulations define interest broadly to in-
clude interest associated with conven-
tional debt instruments, other amounts
treated as interest under the Code, as well
as transactions that are indebtedness in
substance although not in form. See pro-
posed § 1.267A-5(a)(12).

In addition, in order to address certain
structured transactions, the proposed reg-
ulations apply equally to "structured pay-
ments." Proposed § 1.267A-5(b)(5) de-
fines structured payments to include a
number of items such as an expense or
loss predominately incurred in consider-
ation of the time value of money in a
transaction or series of integrated or re-
lated transactions in which a taxpayer se-

cures the use of funds for a period of time.
This approach is consistent with the rules
treating such payments similarly to inter-
est under §§ 1.861-9T and 1.954-2.

The definitions of interest and struc-
tured payments also provide for adjust-
ments to the amount of interest expense or
structured payments, as applicable, to re-
flect the impact of derivatives that affect
the economic yield or cost of funds of a
transaction involving interest or structured
payments. The definitions of interest and
structured payments contained in the pro-
posed regulations apply only for purposes
of section 267A. However, solely for pur-
poses of certain other provisions, similar
definitions apply. For example, the defini-
tion of interest and structured payments
under the proposed regulations is similar
in scope to the definition of items treated
similarly to interest under § 1.861-9T for
purposes of allocating and apportioning
deductions under section 861 and similar
to the items treated as interest expense for
purposes of section 163(j) in proposed
regulations under section 163(j).

The Treasury Department and the IRS
considered three options with respect to
the definition of interest for purposes of
section 267A. The first option considered
was to not provide a definition of interest,
and thus rely on general tax principles and
case law to define interest for purposes of
section 267A. While adopting this option
might reduce complexity for some taxpay-
ers, not providing an explicit definition of
interest would create its own uncertainty
as neither taxpayers nor the IRS might
have a clear sense of what types of pay-
ments are treated as interest expense sub-
ject to disallowance under section 267A.
Such uncertainty could increase burdens
to the IRS and taxpayers by increasing the
number of disputes about whether partic-
ular payments are interest for section
267A purposes. Moreover, this option
could be distortive as it would provide an
incentive to taxpayers to engage in trans-
actions generating deductions economi-
cally similar to interest while asserting
that such deductions are not described by
existing principles defining interest ex-
pense. If successful, such strategies could
allow taxpayers to avoid the application of
section 267A through transactions that are
similar to transactions involving interest.

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The second option considered would
have been to adopt a definition of interest
but limit the scope of the definition to
cover only amounts associated with con-
ventional debt instruments and amounts
that are generally treated as interest for all
purposes under the Code or regulations
prior to the passage of the Act. This would
be equivalent to only adopting the rule
that is proposed in § 1.267A-5(a)(12)(i)
without also addressing structured pay-
ments, which are described in proposed
§ 1.267A-5(b)(5). While this would clar-
ify what would be deemed interest for
purposes of section 267A, the Treasury
Department and the IRS have determined
that this approach would potentially dis-
tort future financing transactions. Some
taxpayers would choose to use financial
instruments and transactions that provide
a similar economic result of using a con-
ventional debt instrument, but would
avoid the label of interest expense under
such a definition, potentially enabling
these taxpayers to avoid the application of
section 267A. As a result, under this sec-
ond approach, there would still be an in-
centive for taxpayers to engage in the type
of avoidance transactions discussed in the
first alternative.

The final option considered and the one
ultimately adopted in the proposed regu-
lations is to provide a complete definition
of interest that addresses all transactions
that are commonly understood to produce
interest expense, as well as structured pay-
ments that may have been entered into to
avoid the application of section 267A. The
proposed regulations also reduce taxpayer
burden by adopting definitions of interest
that have already been developed and ad-
ministered in §§ 1.861-9T and 1.954-2
and that have been proposed for purposes
of section 163(j). The definition of interest
provided in the proposed regulations ap-
plies only for purposes of section 267A
and not for other purposes of the Code,
such as section 904(d)(3).

The Treasury Department and the IRS
welcome comments on the definition of
interest for purposes of section 267A con-
tained in the proposed regulations.

## 2. Royalty

Section 267A does not define the term
royalty and there is no universal definition

of royalty under the Code. The Treasury
Department and the IRS considered pro-
viding no definition for royalties. How-
ever, similar to the discussion in Section
II.J.1 of this Explanation of Provisions
with respect to the definition of interest,
not providing a definition for royalties and
relying instead on general tax principles
could create uncertainty as neither taxpay-
ers nor the IRS might have a clear sense of
what types of payments are treated as roy-
alties subject to disallowance under sec-
tion 267A. Such uncertainty could in-
crease burdens to the IRS and taxpayers
with respect to disputes about whether
particular payments are royalties for sec-
tion 267A purposes.

Instead, the Treasury Department and
the IRS have determined that providing a
definition of royalties would increase cer-
tainty, and therefore the proposed regula-
tions define the term royalty for purposes
of section 267A to include amounts paid
or accrued as consideration for the use of,
or the right to use, certain intellectual prop-
erty and certain information concerning in-
dustrial, commercial or scientific experi-
ence. See proposed § 1.267A-5(a)(16). The
term does not include amounts paid or ac-
crued for after-sales services, for services
rendered by a seller to the purchaser under a
warranty, for pure technical assistance, or
for an opinion given by an engineer, lawyer
or accountant. The definition of royalty pro-
vided in the proposed regulations applies
only for purposes of section 267A and not
for other purposes of the Code, such as
section 904(d)(3).

The definition of royalty is generally
based on the definition used in tax treaties
and, in particular, the definition incorpo-
rated into Article 12 of the 2006 U.S.
Model Income Tax Treaty. This definition
is also generally consistent with the lan-
guage of section 861(a)(4). In addition,
similar to the approach in the technical
explanation to Article 12 of the 2006 U.S.
Model Income Tax Treaty, the proposed
regulations provide certain circumstances
where payments are not treated as paid or
accrued in consideration for the use of
information concerning industrial, com-
mercial or scientific experience. By using
definitions that have already been devel-
oped and administered in other contexts,
the proposed regulations provide an ap-
proach that reduces taxpayer burdens and

uncertainty. The Treasury Department
and the IRS welcome comments on the
definition of royalty for purposes of sec-
tion 267A contained in the proposed reg-
ulations.

## K. Miscellaneous issues

### 1. Effect of Foreign Currency Gain or Loss

The proposed regulations provide that
foreign currency gain or loss recognized
under section 988 is not separately taken
into account under section 267A. See pro-
posed § 1.267A-5(b)(2). Rather, foreign
currency gain or loss recognized with re-
spect to a specified payment is taken into
account under section 267A only to the
extent that the specified payment is in
respect of accrued interest or an accrued
royalty for which a deduction is disal-
lowed under section 267A. Thus, for ex-
ample, a section 988 loss recognized with
respect to a specified payment of interest
is not separately taken into account under
section 267A (even though under the tax
law of the tax resident to which the spec-
ified payment is made the tax resident
does not include in income an amount
corresponding to the section 988 loss, as
the specified payment is made in the tax
resident's functional currency).

The Treasury Department and the IRS
recognize that additional rules addressing
the effect of different foreign currencies
may be necessary. For example, a hybrid
deduction for purposes of the imported
mismatch rule may be denominated in a
different currency than a specified pay-
ment, in which case a translation rule may
be necessary to determine the amount of
the specified payment that is subject to the
imported mismatch rule. The Treasury
Department and the IRS request com-
ments on foreign currency rules, including
any rules regarding the translation of
amounts between currencies, for purposes
of the proposed regulations under sections
245A and 267A.

### 2. Payments by U.S. Taxable Branches

Certain expenses incurred by a nonres-
ident alien or foreign corporation are al-
lowed as deductions under sections 873(a)
and 882(c) in determining that person's

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effectively connected income. To the ex-
tent the deductions arise from transactions
involving certain hybrid or branch ar-
rangements, the deductions should be dis-
allowed under section 267A, as discussed
in section II.B of this Explanation of Pro-
visions. The proposed regulations do so
by (i) treating a U.S. taxable branch
(which includes a permanent establish-
ment of a foreign person) as a specified
party, and (ii) providing rules regarding
interest or royalties considered paid or
accrued by a U.S. taxable branch, solely
for purposes of section 267A (and thus not
for other purposes, such as chapter 3 of
the Code). See proposed § 1.267A-
5(b)(3). The effect of this approach is that
interest or royalties considered paid or
accrued by a U.S. taxable branch are spec-
ified payments that are subject to the rules
of proposed §§ 1.267A-1 through
1.267A-4. See also proposed § 1.267A-
6(c), Example 4.

In general, a U.S. taxable branch is
considered to pay or accrue any interest or
royalties allocated or apportioned to effec-
tively connected income of the U.S. tax-
able branch. See proposed § 1.267A-
5(b)(3)(i). However, if a U.S. taxable
branch constitutes a U.S. permanent es-
tablishment of a treaty resident, then the
U.S. permanent establishment is consid-
ered to pay or accrue the interest or roy-
alties deductible in computing its business
profits. Although interest paid by a U.S.
taxable branch may be subject to with-
holding tax as determined under section
884(f)(1)(A) and § 1.884-4, those rules
are not relevant for purposes of section
267A.

The proposed regulations also provide
rules to identify the manner in which a
specified payment of a U.S. taxable
branch is considered made. See proposed
§ 1.267A-5(b)(3)(ii). Absent such rules, it
might be difficult to determine whether
the specified payment is made pursuant to
a hybrid or branch arrangement (for ex-
ample, made pursuant to a hybrid transac-
tion or to a reverse hybrid). However,
these rules regarding the manner in which
a specified payment is made do not apply
to interest or royalties deemed paid by a
U.S. permanent establishment in connec-
tion with inter-branch transactions that are
permitted to be taken into account under
certain U.S. tax treaties - such payments,

by definition, constitute deemed branch
payments (subject to disallowance under
proposed § 1.267A-2(c)) and are there-
fore made pursuant to a branch arrange-
ment.

## 3. Coordination with Other Provisions

Proposed § 1.267A-5(b)(1) coordi-
nates the application of section 267A with
other provisions of the Code and regula-
tions that affect the deductibility of inter-
est and royalties. This rule provides that,
in general, section 267A applies after the
application of other provisions of the
Code and regulations. For example, a
specified payment is subject to section
267A for the taxable year for which a
deduction for the payment would other-
wise be allowed. Thus, if a deduction for
an accrued amount is deferred under sec-
tion 267(a) (in certain cases, deferring a
deduction for an amount accrued to a re-
lated foreign person until paid), then the
deduction is tested for disallowance under
section 267A for the taxable year in which
the amount is paid. Absent such a rule, an
accrued amount for which a deduction is
deferred under section 267(a) could con-
stitute a disqualified hybrid amount even
though the amount will be included in the
specified recipient's income when actu-
ally paid. This coordination rule also pro-
vides that section 267A applies to interest
or royalties after taking into account pro-
visions that could otherwise recharacter-
ize such amounts, such as § 1.894-
1(d)(2).

## 4. E&P Reduction

Proposed § 1.267A-5(b)(4) provides
that the disallowance of a deduction under
section 267A does not affect whether or
when the amount paid or accrued that
gave rise to the deduction reduces earn-
ings and profits of a corporation. Thus, a
corporation's earnings and profits may
be reduced as a result of a specified
payment for which a deduction is disal-
lowed under section 267A. This is con-
sistent with the approach in the con-
text of other disallowance rules. See
§ 1.312-7(b)(1) ("A loss ... may be
recognized though not allowed as a de-
duction (by reason, for example, of the
operation of sections 267 and 1211 . . . )

but the mere fact that it is not allowed
does not prevent a decrease in earnings
and profits by the amount of such disal-
lowed loss."); Luckman v. Comm'r, 418
F.2d 381, 383-84 (7th Cir. 1969)
("[T]rue expenses incurred by the cor-
poration reduce earnings and profits de-
spite their nondeductibility from current
income for tax purposes.").

## 5. De Minimis Exception

The proposed regulations provide a de
minimis exception to make the rules more
administrable. See proposed § 1.267A-
1(c). As a result of this exception, a spec-
ified party is excepted from the applica-
tion of section 267A for any taxable year
for which the sum of its interest and roy-
alty deductions (plus interest and royalty
deductions of any related specified par-
ties) is below $50,000. This rule applies
based on any interest or royalty deduc-
tions, regardless of whether the deduc-
tions would be disallowed under section
267A. In addition, for purposes of this
rule, specified parties that are related are
treated as a single specified party.

The Treasury Department and the IRS
welcome comments on the de minimis
exception and whether another threshold
would be more appropriate to implement
the purposes of section 267A.

### L. Interaction with withholding taxes and income tax treaties

The determination of whether a deduc-
tion for a specified payment is disallowed
under section 267A is made without re-
gard to whether the payment is subject to
withholding under section 1441 or 1442
or is eligible for a reduced rate of tax
under an income tax treaty. Since the U.S.
tax characterization of the payment pre-
vails in determining the treaty rate for
interest or royalties, regardless of whether
the payment is made pursuant to a hybrid
transaction, the proposed regulations will
generally result in the disallowance of a
deduction but treaty benefits may still be
claimed, as long as the recipient is the
beneficial owner of the payment and oth-
erwise eligible for treaty benefits. On the
other hand, if interest or royalties are paid
to a fiscally transparent entity that is a
reverse hybrid, as defined in proposed

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§ 1.267A-2(d), the payment generally
will not be deductible under the proposed
regulations if the investor does not derive
the payment, and will not be eligible for
treaty benefits if the interest holder under
§ 1.894-1(d) does not derive the payment.
The proposed regulations will only apply,
however, if the investor is related to the
specified party, whereas the reduced rate
under the treaty may be denied without
regard to whether the interest holder is
related to the payer of the interest or roy-
alties.

Certain U.S. income tax treaties also
address indirectly the branch mismatch
rules under proposed § 1.267A-2(e). Spe-
cial rules, generally in the limitation on
benefits articles of income tax treaties,
increase the tax treaty rate for interest and
royalties to 15 percent (even if otherwise
not taxable under the relevant treaty arti-
cle) if the amount paid to a permanent
establishment of the treaty resident is sub-
ject to minimal tax, and the foreign cor-
poration that derives and beneficially
owns the payment is a resident of a treaty
country that excludes or otherwise ex-
empts from gross income the profits at-
tributable to the permanent establishment
to which the payment was made.

## III. Information Reporting under Sections 6038, 6038A, and 6038C

Under section 6038(a)(1), U.S. persons
that control foreign business entities must
file certain information returns with re-
spect to those entities, which includes in-
formation listed in section 6038(a)(1)(A)
through (a)(1)(E), as well as information
that "the Secretary determines to be ap-
propriate to carry out the provisions of
this title." Section 6038A similarly re-
quires 25-percent foreign-owned domestic
corporations (reporting corporations) to
file certain information returns with re-
spect to those corporations, including in-
formation related to transactions between
the reporting corporation and each foreign
person which is a related party to the
reporting corporation. Section 6038C im-
poses the same reporting requirements on
certain foreign corporations engaged in a
U.S. trade or business (also, a reporting
corporation).

The proposed regulations provide that
a specified payment for which a deduction

is disallowed under section 267A, as well
as hybrid dividends and tiered hybrid divi-
dends under section 245A, must be reported
on the appropriate information reporting
form in accordance with sections 6038 and
6038A. See proposed §§ 1.6038-2(f)(13)
and (14), 1.6038-3(g)(3), and 1.6038A-
2(b)(5)(iii).

IV. Sections 1503(d) and 7701 -
Application to Domestic Reverse
Hybrids

## A. Overview

### 1. Dual Consolidated Loss Rules

Congress enacted section 1503(d) to
prevent the "double dipping" of losses.
See S. Rep. 313, 99th Cong., 2d Sess., at
419-20 (1986). The Senate Report ex-
plains that "losses that a corporation uses
to offset foreign tax on income that the
United States does not subject to tax
should not also be used to reduce any
other corporation's U.S. tax." Id. Section
1503(d) and the regulations thereunder
generally provide that, subject to certain
exceptions, a dual consolidated loss of a
corporation cannot reduce the taxable in-
come of a domestic affiliate (a "domestic
use"). See §§ 1.1503(d)-2 and 1.1503-
4(b). Section 1.1503(d)-1(b)(5) defines a
dual consolidated loss as a net operating
loss of a dual resident corporation or the
net loss attributable to a separate unit
(generally defined as either a foreign
branch or an interest in a hybrid entity).
See § 1.1503(d)-1(b)(4).

The general prohibition against the do-
mestic use of a dual consolidated loss does
not apply if, pursuant to a "domestic use
election," the taxpayer certifies that there
has not been and will not be a "foreign use"
of the dual consolidated loss during a certi-
fication period. See § 1.1503(d)-6(d). If a
foreign use or other triggering event occurs
during the certification period, the dual con-
solidated loss is recaptured. A foreign use
occurs when any portion of the dual consol-
idated loss is made available to offset the
income of a foreign corporation or the direct
or indirect owner of a hybrid entity (gener-
ally non-dual inclusion income). See
§ 1.1503(d)-3(a)(1). Other triggering events
include certain transfers of the stock or as-
sets of a dual resident corporation, or the

interests in or assets of a separate unit. See
§ 1.1503(d)-6(e).

The regulations include a "mirror leg-
islation" rule that, in general, prevents a
domestic use election when a foreign ju-
risdiction has enacted legislation similar
to section 1503(d) that denies any oppor-
tunity for a foreign use of the dual con-
solidated loss. See § 1.1503(d)-3(e). As a
result, the existence of mirror legislation
may prevent the dual consolidated loss from
being put to a domestic use (due to the
domestic use limitation) or to a foreign use
(due to the foreign "mirror legislation")
such that the loss becomes "stranded." In
such a case, the regulations contemplate that
the taxpayer may enter into an agreement
with the United States and the foreign coun-
try (for example, through the competent au-
thorities) pursuant to which the losses are
used in only one country. See § 1.1503(d)-
6(b).

## 2. Entity Classification Rules

Sections 301.7701-1 through 301.7701-3
classify a business entity with two or more
members as either a corporation or a part-
nership, and a business entity with a single
owner as either a corporation or a disre-
garded entity. Certain domestic business
entities, such as limited liability compa-
nies, are classified by default as partner-
ships (if they have more than one mem-
ber) or as disregarded entities (if they
have only one owner) but are eligible to
elect for federal tax purposes to be classi-
fied as corporations. See § 301.7701-
3(b)(1).

## B. Domestic reverse hybrids

The Treasury Department and the IRS
are aware that structures involving domes-
tic reverse hybrids have been used to ob-
tain double-deduction outcomes because
they were not subject to limitation under
current section 1503(d) regulations. A do-
mestic reverse hybrid generally refers to a
domestic business entity that elects under
§ 301.7701-3(c) to be treated as a corpo-
ration for U.S. tax purposes, but is treated
as fiscally transparent under the tax law of
its investors. In these structures, a foreign
parent corporation typically owns the ma-
jority of the interests in the domestic re-
verse hybrid. Domestic reverse hybrid

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structures can lead to double-deduction
outcomes because, for example, deduc-
tions incurred by the domestic reverse hy-
brid can be used (i) under U.S. tax law to
offset income that is not subject to tax in
the foreign parent's country, such as in-
come of domestic corporations with
which the domestic reverse hybrid files a
U.S. consolidated return, and (ii) under
the foreign parent's tax law to offset in-
come not subject to U.S. tax, such as
income of the foreign parent other than
the income (if any) of the domestic re-
verse hybrid. Taxpayers take the position
that these structures are not subject to the
current section 1503(d) regulations be-
cause the domestic reverse hybrid is nei-
ther a dual resident corporation (because it
is not subject to tax on a residence basis or
on its worldwide income in the foreign
parent country) nor a separate unit of a
domestic corporation.

A comment on regulations under sec-
tion 1503(d) that were proposed in 2005
asserted that this result is inconsistent
with the policies underlying section
1503(d), which was adopted, in part, to
ensure that domestic corporations were
not put at a competitive disadvantage as
compared to foreign corporations through
the use of certain inbound acquisition
structures. See TD 9315. The comment
suggested that the scope of the final reg-
ulations be broadened to treat such entities
as separate units, the losses of which are
subject to the restrictions of section
1503(d). Id.

In response to this comment, the pre-
amble to the 2007 final dual consolidated
loss regulations stated that the Treasury
Department and the IRS acknowledged
that this type of structure results in a dou-
ble dip similar to that which Congress
intended to prevent through the adoption
of section 1503(d). The final regulations
did not address these structures, however,
because the Treasury Department and the
IRS determined at that time that a domes-
tic reverse hybrid was neither a dual res-
ident corporation nor a separate unit and,
therefore, was not subject to section
1503(d). See TD 9315. The preamble
noted, however, that the Treasury Depart-
ment and the IRS would continue to study
these and similar structures.

The Treasury Department and the IRS
have determined that these structures are

inconsistent with the principles of section
1503(d) and, as a result, raise significant
policy concerns. Accordingly, the pro-
posed regulations include rules under sec-
tions 1503(d) and 7701 to prevent the use
of these structures to obtain a double-
deduction outcome. The proposed regula-
tions require, as a condition to a domestic
entity electing to be treated as a corpora-
tion under § 301.7701-3(c), that the do-
mestic entity consent to be treated as a
dual resident corporation for purposes of
section 1503(d) (such an entity, a “domes-
tic consenting corporation") for taxable
years in which two requirements are sat-
isfied. See proposed § 301.7701-3(c)(3).
The requirements are intended to restrict
the application of section 1503(d) to cases
in which it is likely that losses of the
domestic consenting corporation could re-
sult in a double-deduction outcome.

The requirements are satisfied if (i) a
"specified foreign tax resident" (generally,
a body corporate that is a tax resident of a
foreign country) under its tax law derives
or incurs items of income, gain, deduc-
tion, or loss of the domestic consenting
corporation, and (ii) the specified foreign
tax resident is related to the domestic con-
senting corporation (as determined under
section 267(b) or 707(b)). See proposed
§ 1.1503(d)-1(c). For example, the re-
quirements are satisfied if a specified
foreign tax resident directly owns all the
interests in the domestic consenting cor-
poration and the domestic consenting
corporation is fiscally transparent under
the specified foreign tax resident's tax
law. In addition, an item of the domestic
consenting corporation for a particular
taxable year is considered derived or
incurred by the specified tax resident
during that year even if, under the spec-
ified foreign tax resident's tax law, the
item is recognized in, and derived or
incurred by the specified foreign tax res-
ident in, a different taxable year.

Further, if a domestic entity filed an
election to be treated as a corporation be-
fore December 20, 2018 such that the
entity was not required to consent to be
treated as a dual resident corporation, then
the entity is deemed to consent to being
treated as a dual resident corporation as of
its first taxable year beginning on or after
the end of a 12-month transition period.
This deemed consent can be avoided if the

entity elects, effective before its first tax-
able year beginning on or after the end of
the transition period, to be treated as a
partnership or disregarded entity such that
it ceases to be a corporation for U.S. tax
purposes. For purposes of such an elec-
tion, the 60 month limitation under
§ 301.7701-3(c)(1)(iv) is waived.

Finally, the proposed regulations pro-
vide that the mirror legislation rule does
not apply to dual consolidated losses of a
domestic consenting corporation. See pro-
posed § 1.1503(d)-3(e)(3). This exception is
intended to minimize cases in which dual
consolidated losses could be "stranded"
when, for example, the foreign parent juris-
diction has adopted rules similar to the rec-
ommendations in Chapter 6 of the Hybrid
Mismatch Report. The exception does not
apply to dual consolidated losses attribut-
able to separate units because, in such cases,
the United States is the parent jurisdiction
and the dual consolidated loss rules should
neutralize the double-deduction outcome.

## V. Triggering Event Exception for Compulsory Transfers

As noted in section IV.A.1 of this Ex-
planation of Provisions, certain triggering
events require a dual consolidated loss
that is subject to a domestic use election to
be recaptured and included in income. The
dual consolidated loss regulations also in-
clude various exceptions to these trigger-
ing events, including an exception for
compulsory transfers involving foreign
governments. See § 1.1503(d)-6(f)(5).

A comment on the 2007 final dual con-
solidated loss regulations stated that the pol-
icies underlying the triggering event excep-
tion for compulsory transfers involving
foreign governments apply equally to com-
pulsory transfers involving the United States
government. Accordingly, the comment re-
quested guidance under § 1.1503(d)-3(c)(9)
to provide that the exception is not limited
to foreign governments. The comment sug-
gested, as an example, that the exception
should apply to a divestiture of a hybrid
entity engaged in proprietary trading pursu-
ant to the "Volcker Rule" contained in the
Dodd-Frank Wall Street Reform and Con-
sumer Protection Act, Pub. L. No. 111-203
(2010).

The Treasury Department and the IRS
agree with this comment and, accordingly,

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the proposed regulations modify the com-
pulsory transfer triggering event excep-
tion such that it will also apply with re-
spect to the United States government.

## VI. Disregarded Payments Made to Domestic Corporations

As discussed in sections II.D.2 and 3 of
this Explanation of Provisions, the pro-
posed regulations under section 267A ad-
dress D/NI outcomes resulting from actual
and deemed payments of interest and roy-
alties that are regarded for U.S. tax pur-
poses but disregarded for foreign tax pur-
poses. The proposed regulations under
section 267A do not, however, address
similar structures involving payments to
domestic corporations that are regarded
for foreign tax purposes but disregarded
for U.S. tax purposes.

For example, USP, a domestic corpo-
ration that is the parent of a consolidated
group, borrows from a bank to fund the
acquisition of the stock of FT, a foreign
corporation that is tax resident of Country
X. USP contributes the loan proceeds to
USS, a newly formed domestic corpora-
tion that is a member of the USP consol-
idated group, in exchange for all the stock
of USS. USS then forms FDE, a disre-
garded entity that is tax resident of Coun-
try X, USS lends the loan proceeds to
FDE, and FDE uses the proceeds to ac-
quire the stock of FT. For U.S. tax pur-
poses, USP claims a deduction for interest
paid on the bank loan, and USS does not
recognize interest income on interest pay-
ments made to it from FDE because the
payments are disregarded. For Country X
tax purposes, the interest paid from FDE
to USS is regarded and gives rise to a loss
that can be surrendered (or otherwise
used, such as through a consolidation re-
gime) to offset the operating income of
FT.

Under the current section 1503(d) reg-
ulations, the loan from USS to FDE does
not result in a dual consolidated loss at-
tributable to USS's interest in FDE be-
cause interest paid on the loan is not re-
garded for U.S. tax purposes; only items
that are regarded for U.S. tax purposes are
taken into account for purposes of deter-
mining a dual consolidated loss. See
§ 1.1503(d)-5(c)(1)(ii). In addition, the
regarded interest expense of USP is not

attributed to USS's interest in FDE because
only regarded items of USS, the domestic
owner of FDE, are taken into account for
purposes of determining a dual consolidated
loss. Id. The result would generally be the
same, however, even if USS, rather than
USP, were the borrower on the bank loan.
See § 1.1503(d)-7(c), Example 23.

The Treasury Department and the IRS
have determined that these transactions
raise significant policy concerns that are
similar to those relating to the D/NI out-
comes addressed by sections 245A(e) and
267A, and the double-deduction outcomes
addressed by section 1503(d). The Trea-
sury Department and the IRS are studying
these transactions and request comments.

## VII. Applicability Dates

Under section 7805(b)(2), and consis-
tent with the applicability date of section
245A, proposed § 1.245A(e)-1 applies to
distributions made after December 31,
2017. Under section 7805(b)(2), proposed
§§ 1.267A-1 through 1.267A-6 generally
apply to specified payments made in tax-
able years beginning after December 31,
2017. This applicability date is consistent
with the applicability date of section
267A. The Treasury Department and the
IRS therefore expect to finalize such pro-
visions by June 22, 2019. See section
7805(b)(2). However if such provisions
are finalized after June 22, 2019, then the
Treasury Department and the IRS expect
that such provisions will apply only to
taxable years ending on or after December
20, 2018. See section 7805(b)(1)(B).

As provided in proposed § 1.267A-
7(b), certain rules, such as the disregarded
payment and deemed branch payment rules
as well as the imported mismatch rule, apply
to specified payments made in taxable years
beginning on or after December 20, 2018.
See section 7805(b)(1)(B).

Proposed §§ 1.6038-2, 1.6038-3, and
1.6038A-2, which require certain report-
ing regarding deductions disallowed un-
der section 267A, as well as hybrid divi-
dends and tiered hybrid dividends under
section 245A, apply with respect to infor-
mation for annual accounting periods or
tax years, as applicable, beginning on or
after December 20, 2018. See section
7805(b)(1)(B).

Proposed §§ 1.1503(d)-1 and -3, treat-
ing domestic consenting corporations as
dual resident corporations, apply to tax-
able years ending on or after December
20, 2018. See section 7805(b)(1)(B).

Proposed § 1.1503(d)-6, amending the
compulsory transfer triggering event ex-
ception, applies to transfers that occur on
or after December 20, 2018, but taxpayers
may apply the rules to earlier transfers.
See section 7805(b)(1)(B).

Proposed § 301.7701-3(a) and (c)(3)
apply to a domestic eligible entity that on
or after December 20, 2018 files an elec-
tion to be classified as an association (re-
gardless of whether the election is effec-
tive before December 20, 2018). These
provisions also apply to certain domestic
eligible entities the interests in which are
transferred or issued on or after December
20, 2018. See section 7805(b)(1)(B).

## Special Analyses

### I. Regulatory Planning and Review

Executive Orders 13771, 13563, and
12866 direct agencies to assess costs and
benefits of available regulatory alterna-
tives and, if regulation is necessary, to
select regulatory approaches that maxi-
mize net benefits, including potential eco-
nomic, environmental, public health and
safety effects, distributive impacts, and
equity. Executive Order 13563 empha-
sizes the importance of quantifying both
costs and benefits, reducing costs, harmo-
nizing rules, and promoting flexibility.
The preliminary EO 13771 designation
for this proposed rulemaking is regula-
tory.

The proposed regulations have been
designated by the Office of Management
and Budget's Office of Information and
Regulatory Affairs (OIRA) as subject to
review under Executive Order 12866 pur-
suant to the Memorandum of Agreement
(April 11, 2018) between the Treasury
Department and the Office of Manage-
ment and Budget regarding review of tax
regulations ("MOA"). OIRA has deter-
mined that the proposed rulemaking is
economically significant and subject to re-
view under EO 12866 and section 1(c) of
the Memorandum of Agreement. Accord-
ingly, the proposed regulations have been
reviewed by the Office of Management
and Budget.

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## A. Background

Hybrid arrangements include both "hy-
brid entities" and "hybrid instruments." A
hybrid entity is generally an entity which
is treated as a flow-through or disregarded
entity for U.S. tax purposes but as a cor-
poration for foreign tax purposes or vice
versa. Hybrid instruments are financial in-
struments that share characteristics of
both debt and equity and are treated as
debt for U.S. tax purposes and equity in
the foreign jurisdiction or vice versa.

Before the Act, U.S. subsidiaries of
foreign-based multinational enterprises
could employ cross-border hybrid ar-
rangements as legal tax-avoidance tech-
niques by exploiting differences in tax
treatment across jurisdictions. These ar-
rangements allowed taxpayers to claim
tax deductions in the United States with-
out a corresponding inclusion in another
jurisdiction.

The United States has a check-the-box
regulatory provision, under which some
taxpayers can choose whether they are
treated as corporations, where they may
face a separate entity level tax, or as part-
nerships, where there is no such separate
entity tax (but rather only owner-level
tax), under the U.S. tax code. This choice
allows taxpayers the ability to become
hybrid entities that are viewed as corpo-
rations in one jurisdiction, but not in an-
other. For example, a foreign parent could
own a domestic subsidiary limited liabil-
ity partnership (LLP) that, under the
check-the-box rules, elects to be treated as
a corporation under U.S. tax law. How-
ever, this subsidiary could be viewed as a
partnership under foreign tax law. The
result is that the domestic subsidiary could
be entitled to a deduction for U.S. tax
purposes for making interest payments to
the foreign parent, but the foreign country
would see a payment between a partner-
ship and a partner, and therefore would
not tax the interest income. That is, the
corporate structure would enable the busi-
ness entity to avoid paying U.S. tax on the
interest by allowing a deduction attribut-
able to an intra-group loan, despite the
interest income never being included un-
der foreign tax law.

In addition, there are hybrid instru-
ments, which share characteristics of both
debt and equity. Because of these shared

characteristics, countries may be inconsis-
tent in their treatment of such instruments.
One example is perpetual debt, which
many countries treat as debt, but the
United States treats as equity. If a foreign
affiliate of a U.S .- based multinational is-
sued perpetual debt to a U.S. holder, the
interest payments would be tax deductible
in a foreign jurisdiction that treats the
instrument as debt, while the payments
are treated as dividends in the United
States and potentially eligible for a divi-
dends received deduction (DRD).

The Act adds section 245A(e) to the
Code to address issues of hybridity by
introducing a hybrid dividends provision,
which disallows the DRD for any divi-
dend received by a U.S. shareholder from
a controlled foreign corporation if the div-
idend is a hybrid dividend. The statute
defines a hybrid dividend as an amount
received from a controlled foreign corpo-
ration for which a deduction would be
allowed under section 245A(a) and for
which the controlled foreign corporation
received a deduction or other tax benefit
in a foreign country. Hybrid dividends
between controlled foreign corporations
with a common U.S. shareholder are
treated as subpart F income.

The Act also adds section 267A of the
Code to deny a deduction for any disqual-
ified related party amount paid or accrued
as a result of a hybrid transaction or by, or
to, a hybrid entity. The statute defines a
disqualified related party amount as any
interest or royalty paid or accrued to a
related party where there is no corre-
sponding inclusion to the related party in
the other tax jurisdiction or the related
party is allowed a deduction with respect
to such amount in the other tax jurisdic-
tion. The statute's definition of a hybrid
transaction is any transaction where there
is a mismatch in tax treatment between the
U.S. and the other foreign jurisdiction.
Similarly, a hybrid entity is any entity
which is treated as fiscally transparent for
U.S. tax purposes but not for purposes of
the foreign tax jurisdiction, or vice versa.

## B. Overview

The hybrids provisions in the Act and
the proposed regulations are anti-abuse
measures. Taxpayers have been taking ag-
gressive tax positions to take advantage of

tax treatment mismatches between juris-
dictions in order to achieve favorable tax
outcomes at the detriment of tax revenues
(see OECD/G20 Hybrid Mismatch Re-
port, October 2015 and OECD/G20
Branch Mismatch Report, July 2017). The
statute and the proposed regulations serve
to conform the U.S. tax system to recently
agreed-upon international tax principles
(see OECD/G20 Hybrids Mismatch Re-
port, October 2015 and OECD/G20
Branch Mismatch Report, July 2017),
consistent with statutory intent, while pro-
tecting U.S. interests and the U.S. tax
base. International tax coordination is par-
ticularly advantageous in the context of
hybrids as it has the potential to greatly
curb opportunities for hybrid arrange-
ments, while avoiding double taxation.
The anticipated effect of the statute and
proposed regulations is a reduction in tax
revenue loss due to hybrid arrangements,
at the cost of an increase in compliance
burden for a limited number of sophisti-
cated taxpayers, as explained below.

## C. Need for the proposed regulations

Because the Act introduced new sec-
tions to the Code to address hybrid entities
and hybrid instruments, a large number of
the relevant terms and necessary calcula-
tions that taxpayers are currently required
to apply under the statute can benefit from
greater specificity. Taxpayers will lack
clarity on which types of arrangements are
subject to the statute without the addi-
tional interpretive guidance and clarifica-
tions contained in the proposed regula-
tions. This lack of clarity could lead to a
shifting of corporate income overseas
through hybrid arrangements, further
eroding U.S. tax revenues. Without ac-
companying rules to cover branches,
structured arrangements, imported mis-
matches, and similar structures, the statute
would be extremely easy to avoid, a path-
way that is contrary to Congressional in-
tent. It could also lead to otherwise similar
taxpayers interpreting the statute differ-
ently, distorting the equity of tax treat-
ment for otherwise similarly situated tax-
payers. Finally, the lack of clarity could
cause some taxpayers unnecessary com-
pliance burden if they misinterpret the
statute.

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## D. Economic analysis

### 1. Baseline

The Treasury Department and the IRS
have assessed the benefits and costs of the
proposed regulations relative to a no-
action baseline reflecting anticipated tax-
related behavior and other economic be-
havior in the absence of the proposed
regulations.

The baseline includes the Act, which
effectively cut the top statutory corporate
income tax rate from 35 to 21 percent.
This change lowered the value of using
hybrid arrangements for multinational
corporations, because the value of such
arrangements is proportional to the tax
they allow the corporation to avoid. As
such, some firms with an incentive to set
up hybrid arrangements prior to the Act
would no longer find it profitable to
maintain these arrangements. The Act
also modified section 163(j), and regu-
lations interpreting this provision are
expected to be finalized soon, which to-
gether further limit the deductibility of
interest payments. These statutory and
regulatory changes further curb the in-
centive to set up and maintain hybrid
arrangements for multinational corpora-
tions, since interest payments are a pri-
mary vehicle through which hybrid ar-
rangements generated deductions prior
to the Act. Further, prior to the Act, the
Treasury Department and the IRS issued
a series of regulations that reduced or
eliminated the incentive for multina-
tional corporations to invert, or change
their tax residence to avoid U.S. taxes
(including setting up some hybrid ar-
rangements). As a result, under the base-
line, the value of hybrid arrangements
reflects the existing regulatory frame-
work and the Act and its associated
soon-to-be-finalized regulations, all of
which strongly affect the value of hy-
brid arrangements as a tax avoidance
technique.

### 2. Anticipated Costs and Benefits

#### i. Economic Effects

The Treasury Department has deter-
mined that the discretionary non-revenue
impacts of the proposed hybrid regula-

tions will reduce U.S. Gross Domestic
Product (GDP) by less than $100 million
per year ($2018).

To evaluate this effect, the Treasury
Department considered the share of inter-
est deductions that would be disallowed
by the proposed regulations. Using Trea-
sury Department models applied to confi-
dential 2016 tax data, the Treasury De-
partment calculated the average effective
tax rate for potentially affected taxpayers
under a range of levels of interest payment
deductibility, including the level of de-
ductibility under the Act without the pro-
posed regulations. The difference between
the estimated effective tax rate under the
Act and without the discretionary ele-
ments of the proposed regulations and the
range of estimated effective tax rates that
include the proposed regulations provides
a range of estimates of the net increase in
the effective tax rate due to the discretion
exercised in the proposed regulations. The
Treasury Department next applied an elas-
ticity of taxable income to the range of
estimated increases in the effective tax
rate to estimate the reduction in taxable
income for each of the affected taxpayers
in the sample. The Treasury Department
then examined a range of estimates of the
relationship between the change in taxable
income and the real change in economic
activity. Finally, the Treasury Department
extrapolated the results through 2027.

The Treasury Department concludes
from this evaluation that the discretionary
aspects of the proposed rules will reduce
GDP annually by less than $100 million
($2018). The projected effects reflect the
proposed regulations alone and do not in-
clude non-revenue economic effects stem-
ming from the Act in the absence of the
proposed regulations. More specifically,
the analysis did not estimate the impacts
of the statutory requirement that hybrid
dividends shall be treated as subpart F
income of the receiving controlled foreign
corporations for purposes of section
951(a)(1)(A) for the taxable year and shall
not be permitted a foreign tax credit. See
section 245A(e).

The Treasury Department solicits com-
ments on the methodology used to evalu-
ate the non-revenue economic effects of
the proposed regulations and anticipates
that further analysis will be provided at
the final rule stage.

### ii. Anticipated Costs and Benefits of Specific Provisions

### a. Section 245A(e)

Section 245A(e) applies in certain
cases in which a CFC pays a hybrid div-
idend, which is a dividend paid by the
CFC for which the CFC received a deduc-
tion or other tax benefit under foreign tax
law (a hybrid deduction). The proposed
regulations provide rules for identifying
and tracking such hybrid deductions.
These rules set forth common standards
for identifying hybrid deductions and
therefore clarify what is deemed a hybrid
dividend by the statute and ensure equita-
ble tax treatment of otherwise similar tax-
payers.

The proposed regulations also address
timing differences to ensure that there is
parity between economically similar
transactions. Absent such rules, similar
transactions may be treated differently
due to timing differences. For example, if
a CFC paid out a dividend in a given
taxable year for which it received a de-
duction or other tax benefit in a prior
taxable year, the taxpayer might claim the
dividend is not a hybrid dividend, since
the taxable year in which the dividend is
paid for U.S. tax purposes and the year in
which the tax benefit is received do not
overlap. Absent rules, such as the pro-
posed regulations, the purpose of section
245A(e) might be avoided and economi-
cally similar transactions might be treated
differently.

Finally, these rules excuse certain tax-
payers from having to track hybrid deduc-
tions (namely taxpayers without a suffi-
cient connection to a section 245A(a)
dividends received deduction). The utility
of requiring these taxpayers to track hy-
brid deductions would be outweighed by
the burdens of doing so. The proposed
regulations reduce the compliance burden
on taxpayers that are not directly dealing
with hybrid dividends.

b. Section 267A

Section 267A disallows a deduction for
interest or royalties paid or accrued in
certain transactions involving a hybrid ar-
rangement. Congress intended this provi-
sion to address cases in which the tax-

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payer is provided a deduction under U.S.
tax law, but the payee does not have a
corresponding income inclusion under
foreign tax law, dubbed a "deduction/no-
inclusion outcome" (D/NI outcome). See
Senate Explanation, at 384. This affects
taxpayers that attempt to use hybrid ar-
rangements to strip income out of the
United States taxing jurisdiction.

The proposed regulations disallow a
deduction under section 267A only to the
extent that the D/NI outcome is a result of
a hybrid arrangement. Note that under the
statute but without the proposed regula-
tions, a deduction would be disallowed
simply if a D/NI outcome occurs and a
hybrid arrangement exists (see section
II.E of the Explanation of Provisions). For
example, a royalty payment made to a
hybrid entity in the U.K. qualifying for a
low tax rate under the U.K. patent box
regime could be denied a deduction in the
U.S. under the statute. However, the low
U.K. rate is a result of the lower tax rate
on patent box income and not a result of
any hybrid arrangement. In this example,
there is no link between hybridity and the
D/NI outcome, since it is the U.K. patent
box regime that yields the D/NI outcome
and the low U.K. patent box rate is avail-
able to taxpayers regardless of whether
they are organized as hybrid entities or
not. The proposed regulations limit the
application of section 267A to cases
where the D/NI outcome occurs as a result
of hybrid arrangements and not due to a
generally applicable feature of the juris-
diction's tax system.

The proposed regulations also provide
several exceptions to section 267A in or-
der to refine the scope of the provision and
minimize burdens on taxpayers. First, the
proposed regulations generally exclude
from section 267A payments that are in-
cluded in a U.S. tax resident's or U.S.
taxable branch's income or are taken into
account for purposes of the subpart F or
global intangible low-taxed income
(GILTI) provisions. While the exception
for income taken into account for pur-
poses of subpart F is in the statute, the
proposed regulations expand the excep-
tion to cover GILTI. This avoids potential
double taxation on that income. In addi-
tion, as a refinement compared with the
statute, the extent to which a payment is
taken into account under subpart F is de-

termined without regard to allocable de-
ductions or qualified deficits. The pro-
posed regulations also provide a de
minimis rule that excepts small taxpayers
from section 267A, minimizing the bur-
den on small taxpayers.

Finally, the proposed regulations ad-
dress a comprehensive set of transactions
that give rise to D/NI outcomes. The stat-
ute, as written, does not apply to certain
hybrid arrangements, including branch ar-
rangements and certain reverse hybrids, as
described above (see section II.D of the
Explanation of Provisions). The exclusion
of these arrangements could have large
economic and fiscal consequences due to
taxpayers shifting tax planning towards
these arrangements to avoid the new anti-
abuse statute. The proposed regulations
close off this potential avenue for addi-
tional tax avoidance by applying the rules
of section 267A to branch mismatches,
reverse hybrids, certain transactions with
unrelated parties that are structured to
achieve D/NI outcomes, certain structured
transactions involving amounts similar to
interest, and imported mismatches.

### 3. Alternatives Considered

i. Addressing conduit

arrangements/imported mismatches

Section 267A(e)(1) provides regula-
tory authority to apply the rules of section
267A to conduit arrangements and thus to
disallow a deduction in cases in which
income attributable to a payment is di-
rectly or indirectly offset by an offshore
hybrid deduction. The Treasury Depart-
ment and the IRS considered four options
with regards to conduit arrangement rules.

The first option was to not implement
any conduit rules, and thus rely on exist-
ing and established judicial doctrines
(such as conduit principles and substance-
over-form principles) to police these
transactions. A second option considered
was to address conduit arrangement con-
cerns through a broad anti-abuse rule. On
the one hand, both of these approaches
might reduce complexity by eliminating
the need for detailed regulatory rules ad-
dressing conduit arrangements. On the
other hand, such approaches could create
uncertainty (as neither taxpayers nor the
IRS might have a clear sense of what

types of transactions might be challenged
under the judicial doctrines or anti-abuse
rule) and could increase burdens to the
IRS (as challenging under judicial doc-
trines or anti-abuse rules are generally dif-
ficult and resource intensive). Signifi-
cantly, such approaches could result in
double non-taxation (if judicial doctrines
or anti-abuse rules were to not be success-
fully asserted) or double-taxation (if judi-
cial doctrines or anti-abuse rules were to
not take into account the application of
foreign tax law, such as a foreign im-
ported mismatch rule).

A third option considered was to im-
plement rules modeled off existing U.S.
anti-conduit rules under § 1.881-3. On the
positive side, such an approach would rely
on an established and existing framework
that taxpayers are already familiar with
and thus there would be a lesser need to
create and apply a new framework or set
of rules. On the negative side, existing
anti-conduit rules are limited in certain
respects as they apply only to certain fi-
nancing arrangements, which exclude cer-
tain stock, and they address only with-
holding tax policies, which pose separate
concerns from section 267A policies
(D/NI policies). Furthermore, taxpayers
have implemented structures that attempt
to avoid the application of the existing
anti-conduit rules. Detrimental to tax eq-
uity, such an approach could also lead to
double-taxation, as the existing anti-
conduit rules do not take into account the
application of foreign tax law, such as a
foreign imported mismatch rule.

The final option considered was to im-
plement rules that are generally consistent
with the BEPS imported mismatch rule.
The first advantage of such an approach is
that it provides certainty about when a
deduction will or will not be disallowed
under the rule. The second advantage of
this approach is that it neutralizes the risk
of double non-taxation, while also neutral-
izing the risk of double taxation. This is
because this option is modeled off the
BEPS approach, which is being imple-
mented by other countries, and also con-
tains explicit rules to coordinate with for-
eign tax law. Coordinating with the global
tax community reduces opportunities for
economic distortions. Although such an
approach involves greater complexity than
the alternatives, the Treasury Department

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and IRS expect the benefits of this ap-
proach's comprehensiveness, administrabil-
ity, and conduciveness to taxpayer certainty,
to be substantially greater than the complex-
ity burden in comparison with the available
alternative approaches. Thus, this is the ap-
proach adopted in the proposed regulations.

#### ii. De minimis rules

The proposed regulations provide a de
minimis exception that exempts taxpayers
from the application of section 267A for
any taxable year for which the sum of the
taxpayer's interest and royalty deductions
(plus interest and royalty deductions of
any related specified parties) is below
$50,000. The exception's $50,000 thresh-
old looks to a taxpayer's amount of inter-
est or royalty deductions without regard to
whether the deductions involve hybrid ar-
rangements and therefore, absent the de
minimis exception, would be disallowed
under section 267A.

The Treasury Department and the IRS
considered not providing a de minimis
exception because hybrid arrangements
are highly likely to be tax-motivated
structures undertaken only by mostly so-
phisticated investors. However, it is pos-
sible that, in limited cases, small taxpay-
ers could be subject to these rules, for
example, as a result of timing differences
or a lack of familiarity with foreign law.
Furthermore, section 267A is intended to
stop base erosion and tax avoidance, and
in the case of small taxpayers, it is ex-
pected that the revenue gains from apply-
ing these rules would be minimal since
few small taxpayers are expected to en-
gage in hybrid arrangements.

The Treasury Department and IRS also
considered a de minimis exception based
on a dollar threshold with respect to the
amount of interest or royalties involving
hybrid arrangements. However, such an
approach would require a taxpayer to first
apply the rules of section 267A to identify
its interest or royalty deductions involving
hybrid arrangements in order to determine
whether the de minimis threshold is satis-
fied and thus whether it is subject to sec-
tion 267A for the taxable year. This would
therefore not significantly reduce burdens
on taxpayers with respect to applying the
rules of section 267A.

Therefore, the proposed regulations
adopt a rule that looks to the overall
amount of interest and royalty payments,

whether or not such payments involve hy-
brid arrangements. This has the effect of
exempting, in an efficient manner, small
taxpayers that are unlikely to engage in
hybrid arrangements, and therefore such
taxpayers do not need to consider the ap-
plication of these rules.

## iii. Deemed branch payments and branch mismatch payments

The proposed regulations expand the
application of section 267A to certain
transactions involving branches. This was
necessary in order to ensure that taxpayers
could not avoid section 267A by engaging
in transactions that were economically
similar to the hybrid arrangements that are
covered by the statute. For example, as-
sume that a related party payment is made
to a foreign entity in Country X that is
owned by a parent company in Country Y.
Further assume that there is a mismatch
between how Country X views the entity
(fiscally transparent) versus how Country
Y views it (not fiscally transparent). In
general, section 267A's hybrid entity rules
prevent a D/NI outcome in this case.
However, assume instead that the parent
company forms a branch in Country X
instead of a foreign entity, and Country Y
(the parent company's jurisdiction) ex-
empts all branch income under its territo-
rial system. On the other hand, due to a
mismatch in laws governing whether a
branch exists, Country X does not view
the branch as existing and therefore does
not tax payments made to the branch. Ab-
sent regulations, taxpayers could easily
avoid section 267A through use of branch
structures, which are economically similar
to the foreign entity structure in the first
example.

In the absence of the proposed regula-
tions, taxpayers may have found it valu-
able to engage in transactions that are
economically similar to hybrid arrange-
ments but that avoided the application of
267A. Such transactions would have re-
sulted in a loss in U.S. tax revenue with-
out any accompanying efficiency gain.
Furthermore, to the extent that these trans-
actions were structured specifically to
avoid the application of section 267A and
were not available to all taxpayers, they
would generally have led to an efficiency

loss in addition to the loss in U.S. tax
revenue.

iv. Exceptions for income included in
U.S. tax and GILTI inclusions

Section 267A(b)(1) provides that de-
ductions for interest and royalties that are
paid to a CFC and included under section
951(a) in income (as subpart F income) by
a United States shareholder of such CFC
are not subject to disallowance under sec-
tion 267A. The statute does not state
whether section 267A applies to a pay-
ment that is included directly in the U.S.
tax base (for example, because the pay-
ment is made directly to a U.S. taxpayer
or a U.S. taxable branch), or a payment
made to a CFC that is taken into account
under GILTI (as opposed to being in-
cluded as subpart F income) by such
CFC's United States shareholders. How-
ever, the grant of regulatory authority in
section 267A(e) includes a specific men-
tion of exceptions in "cases which the
Secretary determines do not present a risk
of eroding the Federal tax base." See sec-
tion 267A(e)(7)(B).

The Treasury Department and the IRS
considered providing no additional excep-
tion for payments included in the U.S. tax
base (either directly or under GILTI),
therefore the only exception available
would be the exception provided in the
statute for payments included in the U.S
tax base by subpart F inclusions. This
approach was rejected in the case of a
payment to a U.S. taxpayer since it would
result in double taxation by the United
States, as the United States would both
deny a deduction for a payment as well as
fully include such payment in income for
U.S. tax purposes. Similarly, in the case of
hybrid payments made by one CFC to
another CFC with the same United States
shareholders, a payment would be in-
cluded in tested income of the recipient
CFC and therefore taken into account un-
der GILTI. If section 267A were to apply
to also disallow the deduction by the
payor CFC, this could also lead to the
same amount being subject to section
951A twice because the payor CFC's
tested income would increase as a result
of the denial of deduction, and the payee
would have additional tested income for
the same payment.

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Payments that are included directly in
the U.S. tax base or that are included in
GILTI do not give rise to a D/NI outcome
and, therefore, it is consistent with the
policy of section 267A and the grant of
authority in section 267A(e) to exempt
them from disallowance under section
267A. Therefore, the proposed regulations
provide that such payments are not subject
to disallowance under section 267A.

## v. Link between hybridity and D/NI

As discussed in section II.E of the Ex-
planation of Provisions and section
I.D.2.ii of this Special Analyses, the pro-
posed regulations limit disallowance to
cases in which the no-inclusion portion of
the D/NI outcome is a result of hybridity
as opposed to a different feature of foreign
tax law, such as a general preference for
royalty income.

Under the language of the statute, no
link between hybridity and the no-
inclusion outcome appears to be re-
quired. The Treasury Department and
the IRS considered following this ap-
proach, which would have resulted in a
deduction being disallowed even though
if the transaction had been a non-hybrid
transaction, the same no-inclusion out-
come would have resulted. However,
the Treasury Department and the IRS
rejected this option because it would
lead to inconsistent and arbitrary results.
In particular, such an approach would
incentivize taxpayers to restructure to
eliminate hybridity in order to avoid the
application of section 267A in cases
where hybridity does not cause a D/NI
outcome. Such restructuring would
eliminate the hybridity without actually
eliminating the D/NI outcome since the
hybridity did not cause the D/NI out-
come. Interpreting section 267A in a
manner that incentivizes taxpayers to
engage in restructurings of this type
would generally impose costs on tax-
payers to retain deductions where hy-
bridity is irrelevant to a D/NI outcome,
without furthering the statutory purpose
of section 267A to neutralize hybrid ar-
rangements.

Furthermore, the policy of section
267A is not to address all situations that
give rise to no-inclusion outcomes, but to
only address a subset of such situations

where they arise due to hybrid arrange-
ments. When base erosion or double non-
taxation arises due to other features of the
international tax system (such as the exis-
tence of low-tax jurisdictions or preferen-
tial regimes for certain types of income),
there are other types of rules that are
better suited to address these concerns (for
example, through statutory impositions of
withholding taxes, revisions to tax trea-
ties, or new statutory provisions such as
the base erosion and anti-abuse tax under
section 59A). Moreover, the legislative
history to section 267A makes clear that
the policy of the provision is to eliminate
the tax-motivated hybrid structures that
lead to D/NI outcomes, and was not a
general provision for eliminating all cases
of D/NI outcomes. See Senate Explana-
tion, at 384 ("[T]he Committee believes
that hybrid arrangements exploit differ-
ences in the tax treatment of a transaction
or entity under the laws of two or more
jurisdictions to achieve double non-
taxation .. . ") (emphasis added). In addi-
tion, to the extent that regulations limit
disallowance to those cases in which the
no-inclusion portion of the D/NI outcome
is a result of hybridity, the scope of
section 267A is limited and the burden
on taxpayers is reduced without impact-
ing the core policy underlying section
267A. Therefore, the proposed regula-
tions provide that a deduction is disal-
lowed under section 267A only to the
extent that the no-inclusion portion of
the D/NI outcome is a result of hybrid-
ity.

## vi. Timing differences under section 245A

In some cases, there may be a timing
difference between when a CFC pays an
amount constituting a dividend for U.S.
tax purposes and when the CFC receives a
deduction for the amount in a foreign ju-
risdiction. Timing differences may raise
issues about whether a deduction is a hy-
brid deduction and thus whether a divi-
dend is considered a hybrid dividend. The
Treasury Department and the IRS consid-
ered three options with respect to this tim-
ing issue.

The first option considered was to not
address timing differences, and thus not
treat such transactions as giving rise to

hybrid dividends. Not addressing the tim-
ing differences would raise policy con-
cerns, since failure to treat the deduction
as giving rise to a hybrid dividend would
result in the section 245A(a) DRD apply-
ing to the dividend, allowing the amount
to permanently escape both foreign tax
(through the deduction) and U.S. tax
(through the DRD).

The second option considered was to
not address the timing difference directly
under section 245A(e), but instead address
it under another Code section or regime.
For example, one method that would be
consistent with the BEPS Report would be
to mandate an income inclusion to
the U.S. parent corporation at the time the
deduction is permitted under foreign law.
This would rely on a novel approach that
deems an inclusion at a particular point in
time despite the fact that the income has
otherwise not been recognized for U.S.
tax purposes.

The final option was to address the
timing difference by providing rules re-
quiring the establishment of hybrid deduc-
tion accounts. These hybrid deduction ac-
counts will be maintained across years so
that deductions that accrue in one year
will be matched up with income arising in
a different year, thus addressing the tim-
ing differences issue. This approach ap-
propriately addresses the timing differ-
ences under section 245A of the Code.
The Treasury Department and IRS expect
the benefits of this option's comprehen-
siveness and clarity to be substantially
greater than the tax administration and
compliance costs it imposes, relative to
the alternative options. This is the ap-
proach adopted by the proposed regula-
tions.

## vii. Timing differences under section 267A

A similar timing issue arises under sec-
tion 267A. Here, there is a timing differ-
ence between when the deduction is oth-
erwise permitted under U.S. tax law and
when the payment is included in the pay-
ee's income under foreign tax law. The
legislative history to section 267A indi-
cates that in certain cases such timing
differences can lead to "long term defer-
ral" and that such long-term deferral
should be treated as giving rise to a D/NI

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outcome. In the context of section 267A,
the Treasury Department and the IRS con-
sidered three options with respect to this
timing issue.

The first option considered was to not
address timing differences, because they
will eventually reverse over time. Al-
though such an approach would result in a
relatively simple rule, it would raise sig-
nificant policy concerns because, as indi-
cated in the legislative history, long-term
deferral can be equivalent to a permanent
exclusion.

The second option considered was to
address all timing differences, because
even a timing difference that reverses
within a short period of time provides a
tax benefit during the short term. Al-
though such an approach might be con-
ceptually pure, it would raise significant
practical and administrative difficulties. It
could also lead to some double-tax, absent
complicated rules to calibrate the disal-
lowed amount to the amount of tax benefit
arising from the timing mismatch.

The final option considered was to ad-
dress only certain timing differences -
namely, long-term timing differences,
such as timing differences that do not re-
verse within a 3 taxable year period. The
Treasury Department and IRS expect that
the net benefits of this option's compre-
hensiveness, clarity, and tax administra-
bility and compliance burden are substan-
tially higher than those of the available
alternatives. Thus, this option is adopted
in the proposed regulations.

4\. Anticipated impacts on administrative
and compliance costs

The Treasury Department and the IRS
estimate that there are approximately
10,000 taxpayers in the current population
of taxpayers affected by the proposed reg-
ulations or about 0.5% of all corporate
filers. This is the best estimate of the num-
ber of sophisticated taxpayers with capa-
bilities to structure a hybrid arrangement.
However, the Treasury Department and
the IRS anticipate that fewer taxpayers
would engage in hybrid arrangements go-
ing forward as the statute and the pro-
posed regulations would make such ar-
rangements less beneficial to taxpayers.
As such, the taxpayer counts provided in
section II of this Special Analyses are an

upper bound of the number of affected
taxpayers by the proposed regulations.

It is important to note that the popula-
tion of taxpayers affected by section 267A
and the proposed regulations under sec-
tion 267A will seldom include U.S .- based
companies as these companies are taxed
under the new GILTI regime as well as
subpart F. Instead, section 267A and the
proposed regulations apply predominantly
to foreign-headquartered companies that
employ hybrid arrangements to strip in-
come out of the U.S., undermining the
collection of U.S. tax revenue. In addition,
although section 245A(e) applies primar-
ily to U.S .- based companies, the amounts
of dividends affected are limited because
a large portion of distributions will be
treated as previously taxed earnings and
profits due to the operation of both the
GILTI regime and the transition tax under
section 965, and such distributions are not
subject to section 245A(e).

## II. Paperwork Reduction Act

The collections of information in the
proposed regulations are in proposed
§§ 1.6038-2(f)(13) and (14), 1.6038-
3(g)(3), and 1.6038A-2(b)(5)(iii).

The collection of information in pro-
posed § 1.6038-2(f)(13) and (14) is man-
datory for every U.S. person that controls
a foreign corporation that has a deduction
disallowed under section 267A, or that
pays or receives a hybrid dividend or
tiered hybrid dividend under section
245A, respectively, during an annual ac-
counting period and files Form 5471 for
that period (OMB control number 1545-
0123, formerly, OMB control number
1545-0704). The collection of information
in proposed § 1.6038-2(f)(13) is satisfied
by providing information about the disal-
lowance of the deduction for any interest
or royalty under section 267A for the cor-
poration's accounting period as Form
5471 and its instructions may prescribe,
and the collection of information in pro-
posed § 1.6038-2(f)(14) is satisfied by
providing information about hybrid divi-
dends or tiered hybrid dividends under
section 245A(e) for the corporation's ac-
counting period as Form 5471 and its in-
structions may prescribe. For purposes of
the PRA, the reporting burden associated
with proposed § 1.6038-2(f)(13) and (14)

will be reflected in the IRS Form 14029,
Paperwork Reduction Act Submission, as-
sociated with Form 5471. As provided
below, the estimated number of respon-
dents for the reporting burden associated
with proposed § 1.6038-2(f)(13) and (14)
is 1,000 and 2,000, respectively.

The collection of information in pro-
posed § 1.6038-3(g)(3) is mandatory for
every U.S. person that controls a foreign
partnership that paid or accrued any inter-
est or royalty for which a deduction is
disallowed under section 267A during the
partnership tax year and files Form 8865
for that period (OMB control number
1545-1668). The collection of information
in proposed § 1.6038-3(g)(3) is satisfied
by providing information about the disal-
lowance of the deduction for any interest
or royalty under section 267A for the part-
nership's tax year as Form 8865 and its
instructions may prescribe. For purposes
of the PRA, the reporting burden associ-
ated with proposed § 1.6038-3(g)(3) will
be reflected in the IRS Form 14029, Pa-
perwork Reduction Act submission, asso-
ciated with Form 8865. As provided be-
low, the estimated number of respondents
for the reporting burden associated with
proposed § 1.6038-3(g)(3) is less than
1,000.

The collection of information in pro-
posed § 1.6038A-2(b)(5)(iii) is manda-
tory for every reporting corporation that
has a deduction disallowed under section
267A and files Form 5472 (OMB control
number 1545-0123, formerly, OMB con-
trol number 1545-0805) for the tax year.
The collection of information in proposed
§ 1.6038A-2(b)(5)(iii) is satisfied by pro-
viding information about the disallowance
of the reporting corporation's deduction
for any interest or royalty under section
267A for the tax year as Form 5472 and
its instructions may prescribe. For pur-
poses of the PRA, the reporting burden
associated with proposed § 1.6038A-
2(b)(5)(iii) will be reflected in the IRS
Form 14029, Paperwork Reduction Act
submission, associated with Form 5472.
As provided below, the estimated number
of respondents for the reporting burden
associated with proposed § 1.6038A-
2(b)(5)(iii) is 7,000.

The revised tax forms are as follows:

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New

Revision of existing form

Number of respondents (estimated, rounded to nearest 1,000)

Schedule G (Form 5471)

☒ ✓

1,000

Schedule I (Form 5471)

☒ ✓

2,000

Form 5472

☒ ✓

7,000

Form 8865

☒ ✓

&lt;1,000

The current status of the Paperwork
Reduction Act submissions related to the
tax forms that will be revised as a result of
the information collections in the pro-
posed regulations is provided in the ac-
companying table. As described above,
the reporting burdens associated with
the information collections in proposed
§§ 1.6038-2(f)(13) and (14) and
1.6038A-2(b)(5)(iii) are included in the
aggregated burden estimates for OMB
control number 1545-0123, which rep-
resents a total estimated burden time for
all forms and schedules for corporations
of 3.157 billion hours and total esti-
mated monetized costs of $58.148 bil-
lion ($2017). The overall burden esti-
mates provided in 1545-0123 are

aggregate amounts that relate to the en-
tire package of forms associated with
the OMB control number and will in the
future include but not isolate the esti-
mated burden of the tax forms that will
be revised as a result of the information
collections in the proposed regulations.
These numbers are therefore unrelated
to the future calculations needed to as-
sess the burden imposed by the pro-
posed regulations. They are further
identical to numbers provided for the
proposed regulations relating to foreign
tax credits (83 FR 63200). The Treasury
Department and IRS urge readers to rec-
ognize that these numbers are duplicates
and to guard against overcounting the
burden that international tax provisions

imposed prior to the Act. No burden esti-
mates specific to the proposed regulations
are currently available. The Treasury De-
partment has not identified any burden esti-
mates, including those for new information
collections, related to the requirements un-
der the proposed regulations. Those esti-
mates would capture both changes made by
the Act and those that arise out of discre-
tionary authority exercised in the proposed
regulations. The Treasury Department and
the IRS request comments on all aspects of
information collection burdens related to the
proposed regulations. In addition, when
available, drafts of IRS forms are posted for
comment at https://apps.irs.gov/app/picklist/
list/draftTaxForms.htm.

Form

Type of Filer

OMB Number(s)

Status

Form 5471

All other Filers (mainly trusts and estates) (Legacy system)

1545-0121

Approved by OMB through 10/30/2020.

Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201704-1545-023

Business (NEW Model)

1545-0123

Published in the Federal Register Notice (FRN) on 10/8/18. 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

Individual (NEW Model)

1545-0074

Limited Scope submission (1040 only) on 10/11/18 at OIRA for review. Full ICR submission (all forms) scheduled 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 5472

Business (NEW Model)

1545-0123

Published in the FRN on 10/8/18. 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

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Form

Type of Filer

OMB Number(s)

Status

Individual (NEW Model)

1545-0074

Limited Scope submission (1040 only) on 10/11/18 at OIRA for review. 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 8865

All other Filers (mainly trusts and estates) (Legacy system)

1545-1668

Published in the FRN on 10/1/18. Public Com- ment period closed on 11/30/18. ICR in process by Treasury as of 10/17/18.

Link: https://www.federalregister.gov/documents/2018/10/01/2018-21288/proposed-collection-comment- request-for-regulation-project

Business (NEW Model)

1545-0123

Published in the FRN on 10/8/18. 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

Individual (NEW Model)

1545-0074

Limited Scope submission (1040 only) on 10/11/18 at OIRA for review. 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

## III. Regulatory Flexibility Act

It is hereby certified that this notice of
proposed rulemaking will not have a sig-
nificant economic impact on a substantial
number of small entities within the mean-
ing of section 601(6) of the Regulatory
Flexibility Act (5 U.S.C. chapter 6).

The small entities that are subject to
proposed §§ 1.6038-2(f)(13), 1.6038-
3(g)(3), and 1.6038A-2(b)(5)(iii) are
small entities that are controlling U.S.
shareholders of a CFC that is disallowed a
deduction under section 267A, small en-
tities that are controlling fifty-percent
partners of a foreign partnership that
makes a payment for which a deduction is
disallowed under section 267A, and small
entities that are 25 percent foreign-owned
domestic corporations and disallowed a
deduction under section 267A, respec-
tively. In addition, the small entities that
are subject to proposed § 1.6038-2(f)(14)
are controlling U.S. shareholders of a

CFC that pays or received a hybrid divi-
dend or a tiered hybrid dividend.

A controlling U.S. shareholder of a
CFC is a U.S. person that owns more than
50 percent of the CFC's stock. A control-
ling fifty-percent partner is a U.S. person
that owns more than a fifty-percent inter-
est in the foreign partnership. A 25 per-
cent foreign-owned domestic corporation
is a domestic corporation at least 25 per-
cent of the stock of which is owned by a
foreign person.

The Treasury Department and the IRS
do not have data readily available to as-
sess the number of small entities poten-
tially affected by proposed §§ 1.6038-
2(f)(13) or (14), 1.6038-3(g)(3), or
1.6038A-2(b)(5)(iii). However, entities
potentially affected by these sections are
generally not small businesses, because
the resources and investment necessary
for an entity to be a controlling U.S.
shareholder, a controlling fifty-percent
partner, or a 25 percent foreign-owned

domestic corporation are generally sig-
nificant. Moreover, the de minimis ex-
ception under section 267A excepts
many small entities from the application
of section 267A for any taxable year for
which the sum of its interest and royalty
deductions (plus interest and royalty de-
ductions of certain related persons) is be-
low $50,000. Therefore, the Treasury De-
partment and the IRS do not believe that a
substantial number of domestic small busi-
ness entities will be subject to proposed
§§ 1.6038-2(f)(13) or (14), 1.6038-3(g)(3),
or 1.6038A-2(b)(5)(iii). Accordingly, the
Treasury Department and the IRS do not
believe that proposed §§ 1.6038-2(f)(13)
or (14), 1.6038-3(g)(3), or 1.6038A-
2(b)(5)(iii) will have a significant economic
impact on a substantial number of small
entities. Therefore, a Regulatory Flexibility
Analysis under the Regulatory Flexibility
Act is not required.

The Treasury Department and the IRS
do not believe that the proposed regulations

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have a significant economic impact on do-
mestic small business entities. Based on
published information from 2012 from form
5472, interest and royalty amounts paid to
related foreign entities by foreign-owned
U.S. corporations over total receipts is
1.6 percent. (https://www.irs.gov/statistics/
soi-tax-stats-transactions-of-foreign-owned-
domestic-corporations#_2, Classified by In-
dustry 2012) This is substantially less than
the 3 to 5 percent threshold for significant
economic impact. The calculated percentage
is likely to be an upper bound of the related
party payments affected by the proposed
hybrid regulations. In particular, this is the
ratio of the potential income affected and
not the tax revenues, which would be less
than half this amount. While 1.6 percent is
only for foreign-owned domestic corpora-
tions with total receipts of $500 million or
more, these are entities that are more likely
to have related party payments and so the
percentage would be higher. Moreover, hy-
brid arrangements are only a subset of these
related party payments; therefore this per-
centage is higher than what it would be if
only considering hybrid arrangements.

Notwithstanding this certification, Trea-
sury and IRS invite comments about the
impact this proposal may have 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 a Public Hearing

Before the proposed regulations are ad-
opted 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 avail-
able at www.regulations.gov or upon re-
quest. A public hearing will be scheduled if
requested in writing by any person that
timely submits written comments. If a pub-
lic hearing is scheduled, notice of the date,
time, and place for the public hearing will be
published in the Federal Register.

## Drafting Information

The principal authors of the proposed
regulations are Shane M. McCarrick and
Tracy M. Villecco of the Office of Asso-
ciate Chief Counsel (International). How-
ever, other personnel from the Treasury
Department and the IRS participated in
the development of the proposed regula-
tions.

Income taxes, Reporting and record-
keeping requirements.

## 26 CFR Part 301

Employment taxes, Estate taxes, Ex-
cise taxes, Gift taxes, Income taxes, Pen-
alties, Reporting and recordkeeping re-
quirements.

## Proposed Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 301
are proposed to be amended as follows:

PART 1-INCOME TAXES

Paragraph 1. The authority citation for
part 1 is amended by adding sectional
authorities for §§ 1.245A(e)-1 and
1.267A-1 through 1.267A-7 in numerical
order and revising the entry for
§ 1.6038A-2 to read in part as follows:
Authority: 26 U.S.C. 7805 * * *

Section 1.245A(e)-1 also issued under
26 U.S.C. 245A(g).

* * * * *

Sections 1.267A-1 through 1.267A-7
also issued under 26 U.S.C. 267A(e).
* * * * *

Section 1.6038A-2 also issued under
26 U.S.C. 6038A and 6038C.

* * * * *

Par. 2. Section 1.245A(e)-1 is added to
read as follows:

§ 1.245A(e)-1 Special rules for hybrid
dividends.

(a) Overview. This section provides
rules for hybrid dividends. Paragraph (b)
of this section disallows the deduction un-
der section 245A(a) for a hybrid dividend
received by a United States shareholder
from a CFC. Paragraph (c) of this section
provides a rule for hybrid dividends of
tiered corporations. Paragraph (d) of this
section sets forth rules regarding a hybrid

deduction account. Paragraph (e) of this
section provides an anti-avoidance rule.
Paragraph (f) of this section provides def-
initions. Paragraph (g) of this section il-
lustrates the application of the rules of this
section through examples. Paragraph (h)
of this section provides the applicability
date.

(b) Hybrid dividends received by
United States shareholders-(1) In gen-
eral. If a United States shareholder re-
ceives a hybrid dividend, then-

(i) The United States shareholder is not
allowed a deduction under section 245A(a)
for the hybrid dividend; and

(ii) The rules of section 245A(d) (dis-
allowance of foreign tax credits and de-
ductions) apply to the hybrid dividend.

(2) Definition of hybrid dividend. The
term hybrid dividend means an amount
received by a United States shareholder
from a CFC for which but for section
245A(e) and this section the United States
shareholder would be allowed a deduction
under section 245A(a), to the extent of the
sum of the United States shareholder's
hybrid deduction accounts (as described
in paragraph (d) of this section) with re-
spect to each share of stock of the CFC,
determined at the close of the CFC's tax-
able year (or in accordance with para-
graph (d)(5) of this section, as applicable).
No other amount received by a United
States shareholder from a CFC is a hybrid
dividend for purposes of section 245A.

(3) Special rule for certain dividends
attributable to earnings of lower-tier for-
eign corporations. This paragraph (b)(3)
applies if a domestic corporation sells or
exchanges stock of a foreign corporation
and, pursuant to section 1248, the gain
recognized on the sale or exchange is in-
cluded in gross income as a dividend. In
such a case, for purposes of this section-

(i) To the extent that earnings and prof-
its of a lower-tier CFC gave rise to the
dividend under section 1248(c)(2), those
earnings and profits are treated as distrib-
uted as a dividend by the lower-tier CFC
directly to the domestic corporation under
the principles of § 1.1248-1(d); and

(ii) To the extent the domestic corpo-
ration indirectly owns (within the mean-
ing of section 958(a)(2)) shares of stock of
the lower-tier CFC, the hybrid deduction
accounts with respect to those shares are
treated as hybrid deduction accounts of

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the domestic corporation. Thus, for exam-
ple, if a domestic corporation sells or ex-
changes all the stock of an upper-tier CFC
and under this paragraph (b)(3) there is
considered to be a dividend paid directly
by the lower-tier CFC to the domestic
corporation, then the dividend is generally
a hybrid dividend to the extent of the sum
of the upper-tier CFC's hybrid deduction
accounts with respect to stock of the
lower-tier CFC.

(4) Ordering rule. Amounts received
by a United States shareholder from a
CFC are subject to the rules of section
245A(e) and this section based on the
order in which they are received. Thus, for
example, if on different days during a
CFC's taxable year a United States share-
holder receives dividends from the CFC,
then the rules of section 245A(e) and this
section apply first to the dividend received
on the earliest date (based on the sum of
the United States shareholder's hybrid de-
duction accounts with respect to each
share of stock of the CFC), and then to the
dividend received on the next earliest date
(based on the remaining sum).

(c) Hybrid dividends of tiered corpora-
tions-(1) In general. If a CFC (the receiv-
ing CFC) receives a tiered hybrid divi-
dend from another CFC, and a domestic
corporation is a United States shareholder
with respect to both CFCs, then, notwith-
standing any other provision of the Code-

(i) The tiered hybrid dividend is treated
for purposes of section 951(a)(1)(A) as
subpart F income of the receiving CFC for
the taxable year of the CFC in which the
tiered hybrid dividend is received;

(ii) The United States shareholder must
include in gross income an amount equal
to its pro rata share (determined in the
same manner as under section 951(a)(2))
of the subpart F income described in para-
graph (c)(1)(i) of this section; and

(iii) The rules of section 245A(d) (dis-
allowance of foreign tax credit, including
for taxes that would have been deemed
paid under section 960(a) or (b), and de-
ductions) apply to the amount included
under paragraph (c)(1)(ii) of this section
in the United States shareholder's gross
income.

(2) Definition of tiered hybrid dividend.
The term tiered hybrid dividend means an
amount received by a receiving CFC from
another CFC to the extent that the amount

would be a hybrid dividend under para-
graph (b)(2) of this section if, for purposes
of section 245A and the regulations under
section 245A as contained in 26 CFR part
1 (except for section 245A(e)(2) and this
paragraph (c)), the receiving CFC were a
domestic corporation. A tiered hybrid div-
idend does not include an amount de-
scribed in section 959(b). No other
amount received by a receiving CFC from
another CFC is a tiered hybrid dividend
for purposes of section 245A.

(3) Special rule for certain dividends
attributable to earnings of lower-tier for-
eign corporations. This paragraph (c)(3)
applies if a CFC sells or exchanges stock
of a foreign corporation and pursuant to
section 964(e)(1) the gain recognized on
the sale or exchange is included in gross
income as a dividend. In such a case, rules
similar to the rules of paragraph (b)(3) of
this section apply.

(4) Interaction with rules under section
964(e). To the extent a dividend described
in section 964(e)(1) (gain on certain stock
sales by CFCs treated as dividends) is a
tiered hybrid dividend, the rules of section
964(e)(4) do not apply and, therefore, the
United States shareholder is not allowed a
deduction under section 245A(a) for the
amount included in gross income under
paragraph (c)(1)(ii) of this section.

(d) Hybrid deduction accounts-(1) In
general. A specified owner of a share of
CFC stock must maintain a hybrid deduc-
tion account with respect to the share. The
hybrid deduction account with respect to
the share must reflect the amount of hy-
brid deductions of the CFC allocated to
the share (as determined under paragraphs
(d)(2) and (3) of this section), and must be
maintained in accordance with the rules of
paragraphs (d)(4) through (6) of this sec-
tion.

(2) Hybrid deductions-(i) In general.
The term hybrid deduction of a CFC
means a deduction or other tax benefit
(such as an exemption, exclusion, or
credit, to the extent equivalent to a deduc-
tion) for which the requirements of para-
graphs (d)(2)(i)(A) and (B) of this section
are both satisfied.

(A) The deduction or other tax benefit
is allowed to the CFC (or a person related
to the CFC) under a relevant foreign tax
law.

(B) The deduction or other tax benefit
relates to or results from an amount paid,
accrued, or distributed with respect to an
instrument issued by the CFC and treated
as stock for U.S. tax purposes. Examples
of such a deduction or other tax benefit
include an interest deduction, a dividends
paid deduction, and a deduction with re-
spect to equity (such as a notional interest
deduction). See paragraph (g)(1) of this
section. However, a deduction or other tax
benefit relating to or resulting from a dis-
tribution by the CFC with respect to an
instrument treated as stock for purposes of
the relevant foreign tax law is considered
a hybrid deduction only to the extent it has
the effect of causing the earnings that
funded the distribution to not be included
in income (determined under the princi-
ples of § 1.267A-3(a)) or otherwise sub-
ject to tax under the CFC's tax law. Thus,
for example, a refund to a shareholder of
a CFC (including through a credit), upon a
distribution by the CFC to the share-
holder, of taxes paid by the CFC on the
earnings that funded the distribution re-
sults in a hybrid deduction of the CFC, but
only to the extent that the shareholder, if a
tax resident of the CFC's country, does
not include the distribution in income un-
der the CFC's tax law or, if not a tax
resident of the CFC's country, is not sub-
ject to withholding tax (as defined in sec-
tion 901(k)(1)(B)) on the distribution un-
der the CFC's tax law. See paragraph
(g)(2) of this section.

(ii) Application limited to items al-
lowed in taxable years beginning after
December 31, 2017. A deduction or other
tax benefit allowed to a CFC (or a person
related to the CFC) under a relevant for-
eign tax law is taken into account for
purposes of this section only if it was
allowed with respect to a taxable year
under the relevant foreign tax law begin-
ning after December 31, 2017.

(3) Allocating hybrid deductions to
shares. A hybrid deduction is allocated to
a share of stock of a CFC to the extent that
the hybrid deduction (or amount equiva-
lent to a deduction) relates to an amount
paid, accrued, or distributed by the CFC
with respect to the share. However, in the
case of a hybrid deduction that is a deduc-
tion with respect to equity (such as a no-
tional interest deduction), the deduction is

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allocated to a share of stock of a CFC
based on the product of-

(i) The amount of the deduction al-
lowed for all of the equity of the CFC; and

(ii) A fraction, the numerator of which
is the value of the share and the denomi-
nator of which is the value of all of the
stock of the CFC.

(4) Maintenance of hybrid deduction
accounts-(i) In general. A specified own-
er's hybrid deduction account with respect
to a share of stock of a CFC is, as of the
close of the taxable year of the CFC, ad-
justed pursuant to the following rules.

(A) First, the account is increased by
the amount of hybrid deductions of the
CFC allocable to the share for the taxable
year.

(B) Second, the account is decreased
by the amount of hybrid deductions in the
account that gave rise to a hybrid dividend
or tiered hybrid dividend during the tax-
able year. If a specified owner has more
than one hybrid deduction account with
respect to its stock of the CFC, then a pro
rata amount in each hybrid deduction ac-
count is considered to have given rise to
the hybrid dividend or tiered hybrid divi-
dend, based on the amounts in the ac-
counts before applying this paragraph
(d)(4)(i)(B).

(ii) Acquisition of account-(A) In gen-
eral. The following rules apply when a
person (the acquirer) acquires a share of
stock of a CFC from another person (the
transferor).

(1) In the case of an acquirer that is a
specified owner of the share immediately
after the acquisition, the transferor's hy-
brid deduction account, if any, with re-
spect to the share becomes the hybrid de-
duction account of the acquirer.

(2) In the case of an acquirer that is not
a specified owner of the share immedi-
ately after the acquisition, the transferor's
hybrid deduction account, if any, is elim-
inated and accordingly is not thereafter
taken into account by any person.

(B) Additional rules. The following
rules apply in addition to the rules of
paragraph (d)(4)(ii)(A) of this section.

(1) Certain section 354 or 356 ex-
changes. The following rules apply when
a shareholder of a CFC (the CFC, the
target CFC; the shareholder, the exchang-
ing shareholder) exchanges stock of the
target CFC for stock of another CFC (the

acquiring CFC) pursuant to an exchange
described in section 354 or 356 that oc-
curs in connection with a transaction de-
scribed in section 381(a)(2) in which the
target CFC is the transferor corporation.

(i) In the case of an exchanging share-
holder that is a specified owner of one or
more shares of stock of the acquiring CFC
immediately after the exchange, the ex-
changing shareholder's hybrid deduction
accounts with respect to the shares of
stock of the target CFC that it exchanges
are attributed to the shares of stock of the
acquiring CFC that it receives in the ex-
change.

(ii) In the case of an exchanging share-
holder that is not a specified owner of one
or more shares of stock of the acquiring
CFC immediately after the exchange, the
exchanging shareholder's hybrid deduc-
tion accounts with respect to its shares of
stock of the target CFC are eliminated and
accordingly are not thereafter taken into
account by any person.

(2) Section 332 liquidations. If a CFC
is a distributor corporation in a transaction
described in section 381(a)(1) (the distrib-
uting CFC) in which a controlled foreign
corporation is the acquiring corporation
(the distributee CFC), then each hybrid
account with respect to a share of stock of
the distributee CFC is increased pro rata
by the sum of the hybrid accounts with
respect to shares of stock of the distribut-
ing CFC.

(3) Recapitalizations. If a shareholder
of a CFC exchanges stock of the CFC
pursuant to a reorganization described in
section 368(a)(1)(E) or a transaction to
which section 1036 applies, then the
shareholder's hybrid deduction accounts
with respect to the stock of the CFC that it
exchanges are attributed to the shares of
stock of the CFC that it receives in the
exchange.

(5) Determinations and adjustments
made on transfer date in certain cases.
This paragraph (d)(5) applies if on a date
other than the date that is the last day of
the CFC's taxable year a United States
shareholder of the CFC or an upper-tier
CFC with respect to the CFC directly or
indirectly transfers a share of stock of the
CFC, and, during the taxable year, but on
or before the transfer date, the United
States shareholder or upper-tier CFC re-
ceives an amount from the CFC that is

subject to the rules of section 245A(e) and
this section. In such a case, as to the
United States shareholder or upper-tier
CFC and the United States shareholder's
or upper-tier CFC's hybrid deduction ac-
counts with respect to each share of stock
of the CFC (regardless of whether such
share is transferred), the determinations
and adjustments under this section that
would otherwise be made at the close of
the CFC's taxable year are made at the
close of the date of the transfer. Thus, for
example, if a United States shareholder of
a CFC exchanges stock of the CFC in an
exchange described in § 1.367(b)-
4(b)(1)(i) and is required to include in
income as a deemed dividend the section
1248 amount attributable to the stock ex-
changed, the sum of the United States
shareholder's hybrid deduction accounts
with respect to each share of stock of the
CFC is determined, and the accounts are
adjusted, as of the close of the date of the
exchange. For this purpose, the principles
of § 1.1502-76(b)(2)(ii) apply to deter-
mine amounts in hybrid deduction ac-
counts at the close of the date of the
transfer.

(6) Effects of CFC functional curren-
cy-(i) Maintenance of the hybrid deduc-
tion account. A hybrid deduction account
with respect to a share of CFC stock must
be maintained in the functional currency
(within the meaning of section 985) of the
CFC. Thus, for example, the amount of a
hybrid deduction and the adjustments de-
scribed in paragraphs (d)(4)(i)(A) and (B)
of this section are determined based on the
functional currency of the CFC. In addi-
tion, for purposes of this section, the
amount of a deduction or other tax benefit
allowed to a CFC (or a person related to
the CFC) is determined taking into ac-
count foreign currency gain or loss recog-
nized with respect to such deduction or
other tax benefit under a provision of for-
eign tax law comparable to section 988
(treatment of certain foreign currency
transactions).

(ii) Determination of amount of hybrid
dividend. This paragraph (d)(6)(ii) applies
if a CFC's functional currency is other
than the functional currency of a United
States shareholder or upper-tier CFC that
receives an amount from the CFC that is
subject to the rules of section 245A(e) and
this section. In such a case, the sum of the

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United States shareholder's or upper-tier
CFC's hybrid deduction accounts with re-
spect to each share of stock of the CFC is,
for purposes of determining the extent that
a dividend is a hybrid dividend or tiered
hybrid dividend, translated into the func-
tional currency of the United States share-
holder or upper-tier CFC based on the
spot rate (within the meaning of § 1.988-
1(d)) as of the date of the dividend.

(e) Anti-avoidance rule. Appropriate
adjustments are made pursuant to this sec-
tion, including adjustments that would
disregard the transaction or arrangement,
if a transaction or arrangement is under-
taken with a principal purpose of avoiding
the purposes of this section. For example,
if a specified owner of a share of CFC
stock transfers the share to another person,
and a principal purpose of the transfer is
to shift the hybrid deduction account with
respect to the share to the other person or
to cause the hybrid deduction account to
be eliminated, then for purposes of this
section the shifting or elimination of the
hybrid deduction account is disregarded as
to the transferor. As another example, if a
transaction or arrangement is undertaken to
affirmatively fail to satisfy the holding pe-
riod requirement under section 246(c)(5)
with a principal purpose of avoiding the
tiered hybrid dividend rules described in
paragraph (c) of this section, the transaction
or arrangement is disregarded for purposes
of this section.

(f) Definitions. The following defini-
tions apply for purposes of this section.

(1) The term controlled foreign corpo-
ration (or CFC) has the meaning provided
in section 957.

(2) The term person has the meaning
provided in section 7701(a)(1).

(3) The term related has the meaning
provided in this paragraph (f)(3). A person
is related to a CFC if the person is a
related person within the meaning of sec-
tion 954(d)(3).

(4) The term relevant foreign tax law
means, with respect to a CFC, any regime
of any foreign country or possession of
the United States that imposes an income,
war profits, or excess profits tax with re-
spect to income of the CFC, other than a
foreign anti-deferral regime under which a
person that owns an interest in the CFC is
liable to tax. Thus, the term includes any
regime of a foreign country or possession

of the United States that imposes income,
war profits, or excess profits tax under
which-

(i) The CFC is liable to tax as a resi-
dent;

(ii) The CFC has a branch that gives
rise to a taxable presence in the foreign
country or possession of the United
States; or

(iii) A person related to the CFC is
liable to tax as a resident, provided that
under such person's tax law the person is
allowed a deduction for amounts paid or
accrued by the CFC (because, for exam-
ple, the CFC is fiscally transparent under
the person's tax law).

(5) The term specified owner means,
with respect to a share of stock of a CFC,
a person for which the requirements of
paragraphs (f)(5)(i) and (ii) of this section
are satisfied.

(i) The person is a domestic corpora-
tion that is a United States shareholder of
the CFC, or is an upper-tier CFC that
would be a United States shareholder of
the CFC were the upper-tier CFC a do-
mestic corporation.

(ii) The person owns the share directly
or indirectly through a partnership, trust,
or estate. Thus, for example, if a domestic
corporation directly owns all the shares of
stock of an upper-tier CFC and the upper-
tier CFC directly owns all the shares of
stock of another CFC, the domestic cor-
poration is the specified owner with re-
spect to each share of stock of the upper-
tier CFC and the upper-tier CFC is the
specified owner with respect to each share
of stock of the other CFC.

(6) The term United States shareholder
has the meaning provided in section
951(b).

(g) Examples. This paragraph (g) pro-
vides examples that illustrate the applica-
tion of this section. For purposes of the
examples in this paragraph (g), unless oth-
erwise indicated, the following facts are
presumed. US1 is a domestic corporation.
FX and FZ are CFCs formed at the begin-
ning of year 1. FX is a tax resident of
Country X and FZ is a tax resident of
Country Z. US1 is a United States share-
holder with respect to FX and FZ. No
distributed amounts are attributable to
amounts which are, or have been, in-
cluded in the gross income of a United
States shareholder under section 951(a).

All instruments are treated as stock for
U.S. tax purposes.

(1) Example 1. Hybrid dividend resulting from
hybrid instrument-(i) Facts. US1 holds both shares
of stock of FX, which have an equal value. One
share is treated as indebtedness for Country X tax
purposes ("Share A"), and the other is treated as
equity for Country X tax purposes ("Share B").
During year 1, under Country X tax law, FX accrues
$80x of interest to US1 with respect to Share A and
is allowed a deduction for the amount (the "Hybrid
Instrument Deduction"). During year 2, FX distrib-
utes $30x to US1 with respect to each of Share A and
Share B. For U.S. tax purposes, each of the $30x
distributions is treated as a dividend for which, but
for section 245A(e) and this section, US1 would be
allowed a deduction under section 245A(a). For
Country X tax purposes, the $30x distribution with
respect to Share A represents a payment of interest
for which a deduction was already allowed (and thus
FX is not allowed an additional deduction for the
amount), and the $30x distribution with respect to
Share B is treated as a dividend (for which no
deduction is allowed).

(ii) Analysis. The entire $30x of each dividend
received by US1 from FX during year 2 is a hybrid
dividend, because the sum of US1's hybrid deduc-
tion accounts with respect to each of its shares of FX
stock at the end of year 2 ($80x) is at least equal to
the amount of the dividends ($60x). See paragraph
(b)(2) of this section. This is the case for the $30x
dividend with respect to Share B even though there
are no hybrid deductions allocated to Share B. See
id. As a result, US1 is not allowed a deduction under
section 245A(a) for the entire $60x of hybrid divi-
dends and the rules of section 245A(d) (disallowance
of foreign tax credits and deductions) apply. See
paragraph (b)(1) of this section. Paragraphs
(g)(1)(ii)(A) through (D) of this section describe the
determinations under this section.

(A) At the end of year 1, US1's hybrid deduction
accounts with respect to Share A and Share B are
$80x and $0, respectively, calculated as follows.

(1) The $80x Hybrid Instrument Deduction al-
lowed to FX under Country X tax law (a relevant
foreign tax law) is a hybrid deduction of FX, because
the deduction is allowed to FX and relates to or
results from an amount accrued with respect to an
instrument issued by FX and treated as stock for U.S.
tax purposes. See paragraph (d)(2)(i) of this section.
Thus, FX's hybrid deductions for year 1 are $80x.

(2) The entire $80x Hybrid Instrument Deduc-
tion is allocated to Share A, because the deduction
was accrued with respect to Share A. See paragraph
(d)(3) of this section. As there are no additional
hybrid deductions of FX for year 1, there are no
additional hybrid deductions to allocate to either
Share A or Share B. Thus, there are no hybrid
deductions allocated to Share B.

(3) At the end of year 1, US1's hybrid deduction
account with respect to Share A is increased by $80x
(the amount of hybrid deductions allocated to Share
A). See paragraph (d)(4)(i)(A) of this section. Be-
cause FX did not pay any dividends with respect to
either Share A or Share B during year 1 (and there-
fore did not pay any hybrid dividends or tiered
hybrid dividends), no further adjustments are made.
See paragraph (d)(4)(i)(B) of this section. Therefore,

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at the end of year 1, US1's hybrid deduction ac-
counts with respect to Share A and Share B are $80x
and $0, respectively.

(B) At the end of year 2, and before the adjust-
ments described in paragraph (d)(4)(i)(B) of this
section, US1's hybrid deduction accounts with re-
spect to Share A and Share B remain $80x and $0,
respectively. This is because there are no hybrid
deductions of FX for year 2. See paragraph
(d)(4)(i)(A) of this section.

(C) Because at the end of year 2 (and before the
adjustments described in paragraph (d)(4)(i)(B) of
this section) the sum of US1's hybrid deduction
accounts with respect to Share A and Share B ($80x,
calculated as $80x plus $0) is at least equal to the
aggregate $60x of year 2 dividends, the entire $60x
dividend is a hybrid dividend. See paragraph (b)(2)
of this section.

(D) At the end of year 2, US1's hybrid deduction
account with respect to Share A is decreased by
$60x, the amount of the hybrid deductions in the
account that gave rise to a hybrid dividend or tiered
hybrid dividend during year 2. See paragraph
(d)(4)(i)(B) of this section. Because there are no
hybrid deductions in the hybrid deduction account
with respect to Share B, no adjustments with respect
to that account are made under paragraph
(d)(4)(i)(B) of this section. Therefore, at the end of
year 2 and taking into account the adjustments under
paragraph (d)(4)(i)(B) of this section, US1's hybrid
deduction account with respect to Share A is $20x
($80x less $60x) and with respect to Share B is $0.

(iii) Alternative facts - notional interest deduc-
tions. The facts are the same as in paragraph (g)(1)(i)
of this section, except that for each of year 1 and year
2 FX is allowed $10x of notional interest deductions
with respect to its equity, Share B, under Country X
tax law (the "NIDs"). In addition, during year 2, FX
distributes $47.5x (rather than $30x) to US1 with
respect to each of Share A and Share B. For U.S. tax
purposes, each of the $47.5x distributions is treated
as a dividend for which, but for section 245A(e) and
this section, US1 would be allowed a deduction
under section 245A(a). For Country X tax purposes,
the $47.5x distribution with respect to Share A rep-
resents a payment of interest for which a deduction
was already allowed (and thus FX is not allowed an
additional deduction for the amount), and the $47.5x
distribution with respect to Share B is treated as a
dividend (for which no deduction is allowed). The
entire $47.5x of each dividend received by US1 from
FX during year 2 is a hybrid dividend, because the
sum of US1's hybrid deduction accounts with re-
spect to each of its shares of FX stock at the end of
year 2 ($80x plus $20x, or $100x) is at least equal to
the amount of the dividends ($95x). See paragraph
(b)(2) of this section. As a result, US1 is not allowed
a deduction under section 245A(a) for the $95x
hybrid dividend and the rules of section 245A(d)
(disallowance of foreign tax credits and deductions)
apply. See paragraph (b)(1) of this section. Para-
graphs (g)(1)(iii)(A) through (D) of this section de-
scribe the determinations under this section.

(A) The $10x of NIDs allowed to FX under
Country X tax law in year 1 are hybrid deductions of
FX for year 1. See paragraph (d)(2)(i) of this section.
The $10x of NIDs is allocated equally to each of
Share A and Share B, because the hybrid deduction

is with respect to equity and the shares have an equal
value. See paragraph (d)(3) of this section. Thus, $5x
of the NIDs is allocated to each of Share A and Share
B for year 1. For the reasons described in paragraph
(g)(1)(ii)(A) of this section, the entire $80x Hybrid
Instrument Deduction is allocated to Share A. There-
fore, at the end of year 1, US1's hybrid deduction
accounts with respect to Share A and Share B are
$85x and $5x, respectively.

(B) Similarly, the $10x of NIDs allowed to FX
under Country X tax law in year 2 are hybrid deduc-
tions of FX for year 2, and $5x of the NIDs is
allocated to each of Share A and Share B for year 2.
See paragraphs (d)(2)(i) and (d)(3) of this section.
Thus, at the end of year 2 (and before the adjust-
ments described in paragraph (d)(4)(i)(B) of this
section), US1's hybrid deduction account with re-
spect to Share A is $90x ($85x plus $5x) and with
respect to Share B is $10x ($5x plus $5x). See
paragraph (d)(4)(i) of this section.

(C) Because at the end of year 2 (and before the
adjustments described in paragraph (d)(4)(i)(B) of
this section) the sum of US1's hybrid deduction
accounts with respect to Share A and Share B
($100x, calculated as $90x plus $10x) is at least
equal to the aggregate $95x of year 2 dividends, the
entire $95x of dividends are hybrid dividends. See
paragraph (b)(2) of this section.

(D) At the end of year 2, US1's hybrid deduction
accounts with respect to Share A and Share B are
decreased by the amount of hybrid deductions in the
accounts that gave rise to a hybrid dividend or tiered
hybrid dividend during year 2. See paragraph
(d)(4)(i)(B) of this section. A total of $95x of hybrid
deductions in the accounts gave rise to a hybrid
dividend during year 2. For the hybrid deduction
account with respect to Share A, $85.5x in the ac-
count is considered to have given rise to a hybrid
deduction (calculated as $95x multiplied by $90x/
$100x). See id. For the hybrid deduction account
with respect to Share B, $9.5x in the account is
considered to have given rise to a hybrid deduction
(calculated as $95x multiplied by $10x/$100x). See
id. Thus, following these adjustments, at the end of
year 2, US1's hybrid deduction account with respect
to Share A is $4.5x ($90x less $85.5x) and with
respect to Share B is $0.5x ($10x less $9.5x).

(iv) Alternative facts - deduction in branch
country-(A) Facts. The facts are the same as in
paragraph (g)(1)(i) of this section, except that for
Country X tax purposes Share A is treated as equity
(and thus the Hybrid Instrument Deduction does not
exist and under Country X tax law FX is not allowed
a deduction for the $30x distributed in year 2 with
respect to Share A). However, FX has a branch in
Country Z that gives rise to a taxable presence under
Country Z tax law, and for Country Z tax purposes
Share A is treated as indebtedness and Share B is
treated as equity. Also, during year 1, for Country Z
tax purposes, FX accrues $80x of interest to US1
with respect to Share A and is allowed an $80x
interest deduction with respect to its Country Z
branch income. Moreover, for Country Z tax pur-
poses, the $30x distribution with respect to Share A
in year 2 represents a payment of interest for which
a deduction was already allowed (and thus FX is not
allowed an additional deduction for the amount), and
the $30x distribution with respect to Share B in year

2 is treated as a dividend (for which no deduction is
allowed).

(B) Analysis. The $80x interest deduction al-
lowed to FX under Country Z tax law (a relevant
foreign tax law) with respect to its Country Z branch
income is a hybrid deduction of FX for year 1. See
paragraphs (d)(2)(i) and (f)(4) of this section. For
reasons similar to those discussed in paragraph
(g)(1)(ii) of this section, at the end of year 2 (and
before the adjustments described in paragraph
(d)(4)(i)(B) of this section), US1's hybrid deduction
accounts with respect to Share A and Share B are
$80x and $0, respectively, and the sum of the ac-
counts is $80x. Accordingly, the entire $60x of the
year 2 dividend is a hybrid dividend. See paragraph
(b)(2) of this section. Further, for the reasons de-
scribed in paragraph (g)(1)(ii)(D) of this section, at
the end of year 2 and taking into account the adjust-
ments under paragraph (d)(4)(i)(B) of this section,
US1's hybrid deduction account with respect to
Share A is $20x ($80x less $60x) and with respect to
Share B is $0.

(2) Example 2. Tiered hybrid dividend rule; tax
benefit equivalent to a deduction-(i) Facts. US1
holds all the stock of FX, and FX holds all 100
shares of stock of FZ (the "FZ shares"), which have
an equal value. The FZ shares are treated as equity
for Country Z tax purposes. During year 2, FZ dis-
tributes $10x to FX with respect to each of the FZ
shares, for a total of $1,000x. The $1,000x is treated
as a dividend for U.S. and Country Z tax purposes,
and is not deductible for Country Z tax purposes. If
FX were a domestic corporation, then, but for sec-
tion 245A(e) and this section, FX would be allowed
a deduction under section 245A(a) for the $1,000x.
Under Country Z tax law, 75% of the corporate
income tax paid by a Country Z corporation with
respect to a dividend distribution is refunded to the
corporation's shareholders (regardless of where such
shareholders are tax residents) upon a dividend dis-
tribution by the corporation. The corporate tax rate in
Country Z is 20%. With respect to FZ's distribu-
tions, FX is allowed a refundable tax credit of
$187.5x. The $187.5x refundable tax credit is calcu-
lated as $1,250x (the amount of pre-tax earnings that
funded the distribution, determined as $1,000x (the
amount of the distribution) divided by 0.8 (the per-
centage of pre-tax earnings that a Country Z corpo-
ration retains after paying Country Z corporate tax))
multiplied by 0.2 (the Country Z corporate tax rate)
multiplied by 0.75 (the percentage of the Country Z
tax credit). Under Country Z tax law, FX is not
subject to Country Z withholding tax (or any other
tax) with respect to the $1,000x dividend distribu-
tion.

(ii) Analysis. $937.5x of the $1,000x of divi-
dends received by FX from FZ during year 2 is a
tiered hybrid dividend, because the sum of FX's
hybrid deduction accounts with respect to each of its
shares of FZ stock at the end of year 2 is $937.5x.
See paragraphs (b)(2) and (c)(2) of this section. As a
result, the $937.5x tiered hybrid dividend is treated
for purposes of section 951(a)(1)(A) as subpart F
income of FX and US1 must include in gross income
its pro rata share of such subpart F income, which is
$937.5x. See paragraph (c)(1) of this section. In
addition, the rules of section 245A(d) (disallowance
of foreign tax credits and deductions) apply with

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respect to US1's inclusion. Id. Paragraphs
(g)(2)(ii)(A) through (C) of this section describe the
determinations under this section. The characteriza-
tion of the FZ stock for Country X tax purposes (or
for purposes of any other foreign tax law) does not
affect this analysis.

(A) The $187.5x refundable tax credit allowed to
FX under Country Z tax law (a relevant foreign tax
law) is equivalent to a $937.5x deduction, calculated
as $187.5x (the amount of the credit) divided by 0.2
(the Country Z corporate tax rate). The $937.5x is a
hybrid deduction of FZ because it is allowed to FX
(a person related to FZ), it relates to or results from
amounts distributed with respect to instruments is-
sued by FZ and treated as stock for U.S. tax pur-
poses, and it has the effect of causing the earnings
that funded the distributions to not be included in
income under Country Z tax law. See paragraph
(d)(2)(i) of this section. $9.375x of the hybrid de-
duction is allocated to each of the FZ shares, calcu-
lated as $937.5x (the amount of the hybrid deduc-
tion) multiplied by 1/100 (the value of each FZ share
relative to the value of all the FZ shares). See para-
graph (d)(3) of this section. The result would be the
same if FX were instead a tax resident of Country Z
(and not Country X) and under Country Z tax law
FX were to not include the $1,000x in income (be-
cause, for example, Country Z tax law provides
Country Z resident corporations a 100% exclusion or
dividends received deduction with respect to divi-
dends received from a resident corporation). See
paragraph (d)(2)(i) of this section.

(B) Thus, at the end of year 2, and before the
adjustments described in paragraph (d)(4)(i)(B) of
this section, the sum of FX's hybrid deduction ac-
counts with respect to each of its shares of FZ stock
is $937.5x, calculated as $9.375x (the amount in
each account) multiplied by 100 (the number of
accounts). See paragraph (d)(4)(i) of this section.
Accordingly, $937.5x of the $1,000x dividend re-
ceived by FX from FZ during year 2 is a tiered
hybrid dividend. See paragraphs (b)(2) and (c)(2) of
this section.

(C) Lastly, at the end of year 2, each of FX's
hybrid deduction accounts with respect to its shares
of FZ is decreased by the $9.375x in the account that
gave rise to a hybrid dividend or tiered hybrid div-
idend during year 2. See paragraph (d)(4)(i)(B) of
this section. Thus, following these adjustments, at
the end of year 2, each of FX's hybrid deduction
accounts with respect to its shares of FZ stock is $0,
calculated as $9.375x (the amount in the account
before the adjustments described in paragraph
(d)(4)(i)(B) of this section) less $9.375x (the adjust-
ment described in paragraph (d)(4)(i)(B) of this sec-
tion with respect to the account).

(iii) Alternative facts - imputation system that
taxes shareholders. The facts are the same as in
paragraph (g)(2)(i) of this section, except that under
Country Z tax law the $1,000 dividend to FX is
subject to a 30% gross basis withholding tax, or
$300x, and the $187.5x refundable tax credit is ap-
plied against and reduces the withholding tax to
$112.5x. The $187.5x refundable tax credit provided
to FX is not a hybrid deduction because FX was
subject to Country Z withholding tax of $300x on the
$1,000x dividend (such withholding tax being

greater than the $187.5x credit). See paragraph
(d)(2)(i) of this section.

(h) Applicability date. This section ap-
plies to distributions made after December
31, 2017.

Par. 3. Sections 1.267A-1 through
1.267A-7 are added to read as follows:

§ 1.267A-1 Disallowance of certain
interest and royalty deductions.

(a) Scope. This section and §§ 1.267A-2
through 1.267A-5 provide rules regarding
when a deduction for any interest or royalty
paid or accrued is disallowed under section
267A. Section 1.267A-2 describes hybrid
and branch arrangements. Section 1.267A-3
provides rules for determining income in-
clusions and provides that certain amounts
are not amounts for which a deduction is
disallowed. Section 1.267A-4 provides an
imported mismatch rule. Section 1.267A-5
sets forth definitions and special rules that
apply for purposes of section 267A. Section
1.267A-6 illustrates the application of sec-
tion 267A through examples. Section
1.267A-7 provides applicability dates.

(b) Disallowance of deduction. This
paragraph (b) sets forth the exclusive cir-
cumstances in which a deduction is disal-
lowed under section 267A. Except as pro-
vided in paragraph (c) of this section, a
specified party's deduction for any inter-
est or royalty paid or accrued (the amount
paid or accrued with respect to the speci-
fied party, a specified payment) is disal-
lowed under section 267A to the extent
that the specified payment is described in
this paragraph (b). See also § 1.267A-
5(b)(5) (treating structured payments as
specified payments). A specified payment
is described in this paragraph (b) to the
extent that it is-

(1) A disqualified hybrid amount, as
described in § 1.267A-2 (hybrid and
branch arrangements);

(2) A disqualified imported mismatch
amount, as described in § 1.267A-4 (pay-
ments offset by a hybrid deduction); or

(3) A specified payment for which the
requirements of the anti-avoidance rule of
§ 1.267A-5(b)(6) are satisfied.

(c) De minimis exception. Paragraph
(b) of this section does not apply to a
specified party for a taxable year in which
the sum of the specified party's interest
and royalty deductions (determined with-
out regard to this section) is less than

$50,000. For purposes of this paragraph
(c), specified parties that are related
(within the meaning of § 1.267A-
5(a)(14)) are treated as a single specified
party.

§ 1.267A-2 Hybrid and branch
arrangements.

(a) Payments pursuant to hybrid trans-
actions-(1) In general. If a specified pay-
ment is made pursuant to a hybrid trans-
action, then, subject to § 1.267A-3(b)
(amounts included or includible in in-
come), the payment is a disqualified hy-
brid amount to the extent that-

(i) A specified recipient of the payment
does not include the payment in income,
as determined under § 1.267A-3(a) (to
such extent, a no-inclusion); and

(ii) The specified recipient's no-
inclusion is a result of the payment being
made pursuant to the hybrid transaction. For
this purpose, the specified recipient's no-
inclusion is a result of the specified payment
being made pursuant to the hybrid transac-
tion to the extent that the no-inclusion
would not occur were the specified recipi-
ent's tax law to treat the payment as interest
or a royalty, as applicable. See § 1.267A-
6(c)(1) and (2).

(2) Definition of hybrid transaction.
The term hybrid transaction means any
transaction, series of transactions, agree-
ment, or instrument one or more payments
with respect to which are treated as inter-
est or royalties for U.S. tax purposes but
are not so treated for purposes of the tax
law of a specified recipient of the pay-
ment. Examples of a hybrid transaction
include an instrument a payment with re-
spect to which is treated as interest for
U.S. tax purposes but, for purposes of a
specified recipient's tax law, is treated as
a distribution with respect to equity or a
return of principal. In addition, a specified
payment is deemed to be made pursuant to
a hybrid transaction if the taxable year in
which a specified recipient recognizes the
payment under its tax law ends more than
36 months after the end of the taxable year
in which the specified party would be al-
lowed a deduction for the payment under
U.S. tax law. See also § 1.267A-6(c)(8).
Further, a specified payment is not con-
sidered made pursuant to a hybrid trans-
action if the payment is a disregarded pay-

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ment, as described in paragraph (b)(2) of
this section.

(3) Payments pursuant to securities
lending transactions, sale-repurchase
transactions, or similar transactions. This
paragraph (a)(3) applies if a specified pay-
ment is made pursuant to a repo transac-
tion and is not regarded under a foreign
tax law but another amount connected to
the payment (the connected amount) is
regarded under such foreign tax law. For
this purpose, a repo transaction means a
transaction one or more payments with
respect to which are treated as interest (as
defined in § 1.267A-5(a)(12)) or a struc-
tured payment (as defined in § 1.267A-
5(b)(5)(ii)) for U.S. tax purposes and that
is a securities lending transaction or sale-
repurchase transaction (including as de-
scribed in § 1.861-2(a)(7)), or other sim-
ilar transaction or series of related
transactions in which legal title to prop-
erty is transferred and the property (or
similar property, such as securities of the
same class and issue) is reacquired or ex-
pected to be reacquired. For example, this
paragraph (a)(3) applies if a specified pay-
ment arising from characterizing a repo
transaction of stock in accordance with its
substance (that is, characterizing the spec-
ified payment as interest) is not regarded
as such under a foreign tax law but an
amount consistent with the form of the
transaction (such as a dividend) is re-
garded under such foreign tax law. When
this paragraph (a)(3) applies, the determi-
nation of the identity of a specified recip-
ient of the specified payment under the
foreign tax law is made with respect to
the connected amount. In addition, if the
specified recipient includes the connected
amount in income (as determined under
§ 1.267A-3(a), by treating the connected
amount as the specified payment), then the
amount of the specified recipient's no-
inclusion with respect to the specified
payment is correspondingly reduced. See
§ 1.267A-6(c)(2). Further, the principles
of this paragraph (a)(3) apply to cases
similar to repo transactions in which a
foreign tax law does not characterize the
transaction in accordance with its sub-
stance.

(b) Disregarded payments-(1) In gen-
eral. Subject to § 1.267A-3(b) (amounts
included or includible in income), the ex-
cess (if any) of the sum of a specified

party's disregarded payments for a taxable
year over its dual inclusion income for the
taxable year is a disqualified hybrid
amount. See § 1.267A-6(c)(3) and (4).

(2) Definition of disregarded payment.
The term disregarded payment means a
specified payment to the extent that, under
the tax law of a tax resident or taxable
branch to which the payment is made, the
payment is not regarded (for example, be-
cause under such tax law it is a disre-
garded transaction involving a single tax-
payer or between group members) and,
were the payment to be regarded (and
treated as interest or a royalty, as applica-
ble) under such tax law, the tax resident or
taxable branch would include the payment
in income, as determined under § 1.267A-
3(a). In addition, a disregarded payment
includes a specified payment that, under
the tax law of a tax resident or taxable
branch to which the payment is made, is a
payment that gives rise to a deduction or
similar offset allowed to the tax resident
or taxable branch (or group of entities that
include the tax resident or taxable branch)
under a foreign consolidation, fiscal unity,
group relief, loss sharing, or any similar
regime. Moreover, a disregarded payment
does not include a deemed branch pay-
ment, or a specified payment pursuant to a
repo transaction or similar transaction de-
scribed in paragraph (a)(3) of this section.

(3) Definition of dual inclusion income.
With respect to a specified party, the term
dual inclusion income means the excess, if
any, of-

(i) The sum of the specified party's
items of income or gain for U.S. tax pur-
poses, to the extent the items of income or
gain are included in the income of the tax
resident or taxable branch to which the
disregarded payments are made, as deter-
mined under § 1.267A-3(a) (by treating
the items of income or gain as the speci-
fied payment); over

(ii) The sum of the specified party's
items of deduction or loss for U.S. tax
purposes (other than deductions for disre-
garded payments), to the extent the items
of deduction or loss are allowable (or have
been or will be allowable during a taxable
year that ends no more than 36 months
after the end of the specified party's tax-
able year) under the tax law of the tax
resident or taxable branch to which the
disregarded payments are made.

(4) Payments made indirectly to a tax
resident or taxable branch. A specified
payment made to an entity an interest of
which is directly or indirectly (determined
under the rules of section 958(a) without
regard to whether an intermediate entity is
foreign or domestic) owned by a tax res-
ident or taxable branch is considered
made to the tax resident or taxable branch
to the extent that, under the tax law of the
tax resident or taxable branch, the entity to
which the payment is made is fiscally
transparent (and all intermediate entities,
if any, are also fiscally transparent).

(c) Deemed branch payments-(1) In
general. If a specified payment is a
deemed branch payment, then the pay-
ment is a disqualified hybrid amount if the
tax law of the home office provides an
exclusion or exemption for income attrib-
utable to the branch. See § 1.267A-
6(c)(4).

(2) Definition of deemed branch pay-
ment. The term deemed branch payment
means, with respect to a U.S. taxable
branch that is a U.S. permanent establish-
ment of a treaty resident eligible for ben-
efits under an income tax treaty between
the United States and the treaty country,
any amount of interest or royalties allow-
able as a deduction in computing the busi-
ness profits of the U.S. permanent estab-
lishment, to the extent the amount is
deemed paid to the home office (or other
branch of the home office) and is not
regarded (or otherwise taken into account)
under the home office's tax law (or the
other branch's tax law). A deemed branch
payment may be otherwise taken into ac-
count for this purpose if, for example,
under the home office's tax law a corre-
sponding amount of interest or royalties is
allocated and attributable to the U.S. per-
manent establishment and is therefore not
deductible.

(d) Payments to reverse hybrids-(1) In
general. If a specified payment is made to
a reverse hybrid, then, subject to
§ 1.267A-3(b) (amounts included or in-
cludible in income), the payment is a dis-
qualified hybrid amount to the extent that-

(i) An investor of the reverse hybrid
does not include the payment in income,
as determined under § 1.267A-3(a) (to
such extent, a no-inclusion); and

(ii) The investor's no-inclusion is a re-
sult of the payment being made to the

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reverse hybrid. For this purpose, the in-
vestor's no-inclusion is a result of the
specified payment being made to the re-
verse hybrid to the extent that the no-
inclusion would not occur were the inves-
tor's tax law to treat the reverse hybrid as
fiscally transparent (and treat the payment
as interest or a royalty, as applicable). See
§ 1.267A-6(c)(5).

(2) Definition of reverse hybrid. The
term reverse hybrid means an entity (re-
gardless of whether domestic or foreign)
that is fiscally transparent under the tax
law of the country in which it is created,
organized, or otherwise established but
not fiscally transparent under the tax law
of an investor of the entity.

(3) Payments made indirectly to a re-
verse hybrid. A specified payment made
to an entity an interest of which is directly
or indirectly (determined under the rules
of section 958(a) without regard to
whether an intermediate entity is foreign
or domestic) owned by a reverse hybrid is
considered made to the reverse hybrid to
the extent that, under the tax law of an
investor of the reverse hybrid, the entity to
which the payment is made is fiscally
transparent (and all intermediate entities,
if any, are also fiscally transparent).

(e) Branch mismatch payments-(1) In
general. If a specified payment is a branch
mismatch payment, then, subject to
§ 1.267A-3(b) (amounts included or in-
cludible in income), the payment is a dis-
qualified hybrid amount to the extent that-

(i) A home office, the tax law of which
treats the payment as income attributable
to a branch of the home office, does not
include the payment in income, as deter-
mined under § 1.267A-3(a) (to such ex-
tent, a no-inclusion); and

(ii) The home office's no-inclusion is a
result of the payment being a branch mis-
match payment. For this purpose, the
home office's no-inclusion is a result of
the specified payment being a branch mis-
match payment to the extent that the no-
inclusion would not occur were the home
office's tax law to treat the payment as
income that is not attributable a branch of
the home office (and treat the payment as
interest or a royalty, as applicable). See
§ 1.267A-6(c)(6).

(2) Definition of branch mismatch pay-
ment. The term branch mismatch payment

means a specified payment for which the
following requirements are satisfied:

(i) Under a home office's tax law, the
payment is treated as income attributable
to a branch of the home office; and

(ii) Either-

(A) The branch is not a taxable branch;
or

(B) Under the branch's tax law, the
payment is not treated as income attribut-
able to the branch.

(f) Relatedness or structured arrange-
ment limitation. A specified recipient, a
tax resident or taxable branch to which a
specified payment is made, an investor, or
a home office is taken into account for
purposes of paragraphs (a), (b), (d), and
(e) of this section, respectively, only if the
specified recipient, the tax resident or tax-
able branch, the investor, or the home
office, as applicable, is related (as defined
in § 1.267A-5(a)(14)) to the specified
party or is a party to a structured arrange-
ment (as defined in § 1.267A-5(a)(20))
pursuant to which the specified payment is
made.

§ 1.267A-3 Income inclusions and
amounts not treated as disqualified
hybrid amounts.

(a) Income inclusions-(1) General
rule. For purposes of section 267A, a tax
resident or taxable branch includes in in-
come a specified payment to the extent
that, under the tax law of the tax resident
or taxable branch-

(i) It includes (or it will include during
a taxable year that ends no more than 36
months after the end of the specified par-
ty's taxable year) the payment in its in-
come or tax base at the full marginal rate
imposed on ordinary income; and

(ii) The payment is not reduced or off-
set by an exemption, exclusion, deduc-
tion, credit (other than for withholding tax
imposed on the payment), or other similar
relief particular to such type of payment.
Examples of such reductions or offsets
include a participation exemption, a divi-
dends received deduction, a deduction or
exclusion with respect to a particular cat-
egory of income (such as income attribut-
able to a branch, or royalties under a pat-
ent box regime), and a credit for
underlying taxes paid by a corporation
from which a dividend is received. A

specified payment is not considered re-
duced or offset by a deduction or other
similar relief particular to the type of pay-
ment if it is offset by a generally applica-
ble deduction or other tax attribute, such
as a deduction for depreciation or a net
operating loss. For this purpose, a deduc-
tion may be treated as being generally
applicable even if it is arises from a trans-
action related to the specified payment
(for example, if the deduction and pay-
ment are in connection with a back-to-
back financing arrangement).

(2) Coordination with foreign hybrid
mismatch rules. Whether a tax resident or
taxable branch includes in income a spec-
ified payment is determined without re-
gard to any defensive or secondary rule
contained in hybrid mismatch rules, if
any, under the tax law of the tax resident
or taxable branch. For this purpose, a de-
fensive or secondary rule means a provi-
sion of hybrid mismatch rules that re-
quires a tax resident or taxable branch to
include an amount in income if a deduc-
tion for the amount is not disallowed un-
der applicable tax law.

(3) Inclusions with respect to reverse
hybrids. With respect to a tax resident or
taxable branch that is an investor of a
reverse hybrid, whether the investor in-
cludes in income a specified payment
made to the reverse hybrid is determined
without regard to a distribution from the
reverse hybrid (or right to a distribution
from the reverse hybrid triggered by the
payment).

(4) De minimis inclusions and deemed
full inclusions. A preferential rate, exemp-
tion, exclusion, deduction, credit, or sim-
ilar relief particular to a type of payment
that reduces or offsets 90 percent or more
of the payment is considered to reduce or
offset 100 percent of the payment. In ad-
dition, a preferential rate, exemption, ex-
clusion, deduction, credit, or similar relief
particular to a type of payment that re-
duces or offsets 10 percent or less of the
payment is considered to reduce or offset
none of the payment.

(b) Certain amounts not treated as dis-
qualified hybrid amounts to extent in-
cluded or includible in income-(1) In gen-
eral. A specified payment, to the extent
that but for this paragraph (b) it would be
a disqualified hybrid amount (such
amount, a tentative disqualified hybrid

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amount), is reduced under the rules of
paragraphs (b)(2) through (4) of this sec-
tion, as applicable. The tentative disqual-
ified hybrid amount, as reduced under
such rules, is the disqualified hybrid
amount. See § 1.267A-6(c)(3) and (7).

(2) Included in income of United States
tax resident or U.S. taxable branch. A
tentative disqualified hybrid amount is re-
duced to the extent that a specified recip-
ient that is a tax resident of the United
States or a U.S. taxable branch takes the
tentative disqualified hybrid amount into
account in its gross income.

(3) Includible in income under section
951(a)(1). A tentative disqualified hybrid
amount is reduced to the extent that the
tentative disqualified hybrid amount is re-
ceived by a CFC and includible under
section 951(a)(1) (determined without re-
gard to properly allocable deductions of
the CFC and qualified deficits under sec-
tion 952(c)(1)(B)) in the gross income of a
United States shareholder of the CFC.
However, the tentative disqualified hybrid
amount is reduced only if the United
States shareholder is a tax resident of the
United States or, if the United States
shareholder is not a tax resident of the
United States, then only to the extent that
a tax resident of the United States would
take into account the amount includible
under section 951(a)(1) in the gross in-
come of the United States shareholder.

(4) Includible in income under section
951A(a). A tentative disqualified hybrid
amount is reduced to the extent that the
tentative disqualified hybrid amount in-
creases a United States shareholder's pro
rata share of tested income (within the
meaning of section 951A(c)(2)(A)) with
respect to a CFC, reduces the sharehold-
er's pro rata share of tested loss (within
the meaning of section 951A(c)(2)(B)) of
the CFC, or both. However, the tentative
disqualified hybrid amount is reduced
only if the United States shareholder is a
tax resident of the United States or, if the
United States shareholder is not a tax res-
ident of the United States, then only to the
extent that a tax resident of the United
States would take into account the amount
that increases the United States sharehold-
er's pro rata share of tested income with
respect to the CFC, reduces the sharehold-
er's pro rata share of tested loss of the
CFC, or both.

§ 1.267A-4 Disqualified imported
mismatch amounts.

(a) Disqualified imported mismatch
amounts. A specified payment (to the ex-
tent not a disqualified hybrid amount, as
described in § 1.267A-2) is a disqualified
imported mismatch amount to the extent
that, under the set-off rules of paragraph
(c) of this section, the income attributable
to the payment is directly or indirectly
offset by a hybrid deduction incurred by a
tax resident or taxable branch that is re-
lated to the specified party (or that is a
party to a structured arrangement pursuant
to which the payment is made). For pur-
poses of this section, any specified pay-
ment (to the extent not a disqualified hy-
brid amount) is referred to as an imported
mismatch payment; the specified party is
referred to as an imported mismatch pay-
er; and a tax resident or taxable branch
that includes the imported mismatch pay-
ment in income (or a tax resident or tax-
able branch the tax law of which other-
wise prevents the imported mismatch
payment from being a disqualified hybrid
amount, for example, because under such
tax law the tax resident's no-inclusion is
not a result of hybridity) is referred to as
the imported mismatch payee. See
§ 1.267A-6(c)(8), (9), and (10).

(b) Hybrid deduction. A hybrid deduc-
tion means, with respect to a tax resident
or taxable branch that is not a specified
party, a deduction allowed to the tax res-
ident or taxable branch under its tax law
for an amount paid or accrued that is
interest (including an amount that would
be a structured payment under the princi-
ples of § 1.267A-5(b)(5)(ii)) or royalty
under such tax law (regardless of whether
or how such amounts would be recognized
under U.S. law), to the extent that a deduc-
tion for the amount would be disallowed if
such tax law contained rules substantially
similar to those under §§ 1.267A-1 through
1.267A-3 and 1.267A-5. In addition, with
respect to a tax resident that is not a speci-
fied party, a hybrid deduction includes a
deduction allowed to the tax resident with
respect to equity, such as a notional interest
deduction. Further, a hybrid deduction for a
particular accounting period includes a loss
carryover from another accounting period,
to the extent that a hybrid deduction in-
curred in an accounting period beginning on

or after December 20, 2018 comprises the
loss carryover.

(c) Set-off rules-(1) In general. In the
order described in paragraph (c)(2) of this
section, a hybrid deduction directly or in-
directly offsets the income attributable to
an imported mismatch payment to the ex-
tent that, under paragraph (c)(3) of this
section, the payment directly or indirectly
funds the hybrid deduction.

(2) Ordering rules. The following or-
dering rules apply for purposes of deter-
mining the extent that a hybrid deduction
directly or indirectly offsets income attrib-
utable to imported mismatch payments.

(i) First, the hybrid deduction offsets
income attributable to a factually-related
imported mismatch payment that directly
or indirectly funds the hybrid deduction.
For this purpose, a factually-related im-
ported mismatch payment means an im-
ported mismatch payment that is made
pursuant to a transaction, agreement, or
instrument entered into pursuant to the
same plan or series of related transactions
that includes the transaction, agreement,
or instrument pursuant to which the hy-
brid deduction is incurred.

(ii) Second, to the extent remaining,
the hybrid deduction offsets income at-
tributable to an imported mismatch pay-
ment (other than a factually-related im-
ported mismatch payment) that directly
funds the hybrid deduction.

(iii) Third, to the extent remaining, the
hybrid deduction offsets income attribut-
able to an imported mismatch payment
(other than a factually-related imported
mismatch payment) that indirectly funds
the hybrid deduction.

(3) Funding rules. The following fund-
ing rules apply for purposes of determin-
ing the extent that an imported mismatch
payment directly or indirectly funds a hy-
brid deduction.

(i) The imported mismatch payment
directly funds a hybrid deduction to the
extent that the imported mismatch payee
incurs the deduction.

(ii) The imported mismatch payment
indirectly funds a hybrid deduction to the
extent that the imported mismatch payee
is allocated the deduction.

(iii) The imported mismatch payee is
allocated a hybrid deduction to the extent
that the imported mismatch payee directly
or indirectly makes a funded taxable pay-

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ment to the tax resident or taxable branch
that incurs the hybrid deduction.

(iv) An imported mismatch payee indi-
rectly makes a funded taxable payment to
the tax resident or taxable branch that
incurs a hybrid deduction to the extent
that a chain of funded taxable payments
exists connecting the imported mismatch
payee, each intermediary tax resident or
taxable branch, and the tax resident or
taxable branch that incurs the hybrid de-
duction.

(v) The term funded taxable payment
means, with respect to a tax resident or
taxable branch that is not a specified party,
a deductible amount paid or accrued by
the tax resident or taxable branch under its
tax law, other than an amount that gives
rise to a hybrid deduction. However, a
funded taxable payment does not include
an amount deemed to be an imported mis-
match payment pursuant to paragraph (f)
of this section.

(vi) If, with respect to a tax resident or
taxable branch that is not a specified party,
a deduction or loss that is not incurred by
the tax resident or taxable branch is di-
rectly or indirectly made available to off-
set income of the tax resident or taxable
branch under its tax law, then, for pur-
poses of this paragraph (c), the tax resi-
dent or taxable branch to which the de-
duction or loss is made available and the
tax resident or branch that incurs the de-
duction or loss are treated as a single tax
resident or taxable branch. For example, if
a deduction or loss of one tax resident is
made available to offset income of an-
other tax resident under a tax consolida-
tion, fiscal unity, group relief, loss shar-
ing, or any similar regime, then the tax
residents are treated as a single tax resi-
dent for purposes of paragraph (c) of this
section.

(d) Calculations based on aggregate
amounts during accounting period. For
purposes of this section, amounts are de-
termined on an accounting period basis.
Thus, for example, the amount of im-
ported mismatch payments made by an
imported mismatch payer to a particular
imported mismatch payee is equal to the
aggregate amount of all such payments
made by the payer during the accounting
period.

(e) Pro rata adjustments. Amounts are
allocated on a pro rata basis if there would

otherwise be more than one permissible
manner in which to allocate the amounts.
Thus, for example, if multiple imported
mismatch payers make an imported mis-
match payment to a particular imported
mismatch payee, the amount of such pay-
ments exceeds the hybrid deduction in-
curred by the payee, and the payments are
not factually-related imported mismatch
payments, then a pro rata portion of each
payer's payment is considered to directly
fund the hybrid deduction. See § 1.267A-
6(c)(9).

(f) Certain amounts deemed to be im-
ported mismatch payments for certain
purposes. For purposes of determining the
extent that income attributable to an im-
ported mismatch payment is directly or
indirectly offset by a hybrid deduction, an
amount paid or accrued by a tax resident
or taxable branch that is not a specified
party is deemed to be an imported mis-
match payment (and such tax resident or
taxable branch and a specified recipient of
the amount, determined under § 1.267A-
5(a)(19), by treating the amount as the
specified payment, are deemed to be an
imported mismatch payer and an imported
mismatch payee, respectively) to the ex-
tent that-

(1) The tax law of such tax resident or
taxable branch contains hybrid mismatch
rules; and

(2) Under a provision of the hybrid
mismatch rules substantially similar to
this section, the tax resident or taxable
branch is denied a deduction for all or a
portion of the amount. See § 1.267A-
6(c)(10).

§ 1.267A-5 Definitions and special
rules.

(a) Definitions. For purposes of
§§ 1.267A-1 through 1.267A-7 the fol-
lowing definitions apply.

(1) The term accounting period means
a taxable year, or a period of similar
length over which, under a provision of
hybrid mismatch rules substantially simi-
lar to § 1.267A-4, computations similar
to those under that section are made under
a foreign tax law.

(2) The term branch means a taxable
presence of a tax resident in a country
other than its country of residence under

either the tax resident's tax law or such
other country's tax law.

(3) The term branch mismatch pay-
ment has the meaning provided in
§ 1.267A-2(e)(2).

(4) The term controlled foreign corpo-
ration (or CFC) has the meaning provided
in section 957.

(5) The term deemed branch payment
has the meaning provided in § 1.267A-
2(c)(2).

(6) The term disregarded payment has
the meaning provided in § 1.267A-
2(b)(2).

(7) The term entity means any person (as
described in section 7701(a)(1), including
an entity that under §§ 301.7701-1 through
301.7701-3 of this chapter is disregarded as
an entity separate from its owner) other than
an individual.

(8) The term fiscally transparent
means, with respect to an entity, fiscally
transparent with respect to an item of in-
come as determined under the principles
of § 1.894-1(d)(3)(ii) and (iii), without
regard to whether a tax resident (either the
entity or interest holder in the entity) that
derives the item of income is a resident of
a country that has an income tax treaty
with the United States.

(9) The term home office means a tax
resident that has a branch.

(10) The term hybrid mismatch rules
means rules, regulations, or other tax
guidance substantially similar to section
267A, and includes rules the purpose of
which is to neutralize the deduction/no-
inclusion outcome of hybrid and branch
mismatch arrangements. Examples of
such rules would include rules based on,
or substantially similar to, the recommen-
dations contained in OECD/G-20, Neu-
tralising the Effects of Hybrid Mismatch
Arrangements, Action 2: 2015 Final Re-
port (October 2015), and OECD/G-20,
Neutralising the Effects of Branch Mis-
match Arrangements, Action 2: Inclusive
Framework on BEPS (July 2017).

(11) The term hybrid transaction has
the meaning provided in § 1.267A-
2(a)(2).

(12) The term interest means any
amount described in paragraph (a)(12)(i) or
(ii) of this section (as adjusted by amounts
described in paragraph (a)(12)(iii) of this
section) that is paid or accrued, or treated as
paid or accrued, for the taxable year or that

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is otherwise designated as interest expense
in paragraph (a)(12)(i) or (ii) of this section
(as adjusted by amounts described in para-
graph (a)(12)(iii) of this section).

(i) In general. Interest is an amount
paid, received, or accrued as compensa-
tion for the use or forbearance of money
under the terms of an instrument or con-
tractual arrangement, including a series of
transactions, that is treated as a debt in-
strument for purposes of section 1275(a)
and § 1.1275-1(d), and not treated as
stock under § 1.385-3, or an amount that
is treated as interest under other provi-
sions of the Internal Revenue Code
(Code) or the regulations under 26 CFR
part 1. Thus, for example, interest in-
cludes-

(A) Original issue discount (OID);

(B) Qualified stated interest, as ad-
justed by the issuer for any bond issuance
premium;

(C) OID on a synthetic debt instrument
arising from an integrated transaction un-
der § 1.1275-6;

(D) Repurchase premium to the extent
deductible by the issuer under § 1.163-
7(c);

(E) Deferred payments treated as inter-
est under section 483;

(F) Amounts treated as interest under a
section 467 rental agreement;

(G) Forgone interest under section
7872;

(H) De minimis OID taken into ac-
count by the issuer;

(I) Amounts paid or received in con-
nection with a sale-repurchase agreement
treated as indebtedness under Federal tax
principles; in the case of a sale-repurchase
agreement relating to tax-exempt bonds,
however, the amount is not tax-exempt
interest;

(J) Redeemable ground rent treated as
interest under section 163(c); and

(K) Amounts treated as interest under
section 636.

(ii) Swaps with significant nonperiodic
payments-(A) Non-cleared swaps. A
swap that is not a cleared swap and that
has significant nonperiodic payments is
treated as two separate transactions con-
sisting of an on-market, level payment
swap and a loan. The loan must be ac-
counted for by the parties to the contract
independently of the swap. The time value
component associated with the loan, de-

termined in accordance with § 1.446-
3(f)(2)(iii)(A), is recognized as interest
expense to the payor.

### (B) [Reserved]

(C) Definition of cleared swap. The
term cleared swap means a swap that is
cleared by a derivatives clearing organi-
zation, as such term is defined in section
1a of the Commodity Exchange Act (7
U.S.C. 1a), or by a clearing agency, as
such term is defined in section 3 of the
Securities Exchange Act of 1934 (15
U.S.C. 78c), that is registered as a deriv-
atives clearing organization under the
Commodity Exchange Act or as a clearing
agency under the Securities Exchange Act
of 1934, respectively, if the derivatives
clearing organization or clearing agency
requires the parties to the swap to post and
collect margin or collateral.

(iii) Amounts affecting the effective
cost of borrowing that adjust the amount
of interest expense. Income, deduction,
gain, or loss from a derivative, as defined
in section 59A(h)(4)(A), that alters a per-
son's effective cost of borrowing with re-
spect to a liability of the person is treated
as an adjustment to interest expense of the
person. For example, a person that is ob-
ligated to pay interest at a floating rate on
a note and enters into an interest rate swap
that entitles the person to receive an
amount that is equal to or that closely
approximates the interest rate on the note
in exchange for a fixed amount is, in ef-
fect, paying interest expense at a fixed rate
by entering into the interest rate swap.
Income, deduction, gain, or loss from the
swap is treated as an adjustment to interest
expense. Similarly, any gain or loss result-
ing from a termination or other disposition
of the swap is an adjustment to interest
expense, with the timing of gain or loss
subject to the rules of § 1.446-4.

(13) The term investor means, with re-
spect to an entity, any tax resident or
taxable branch that directly or indirectly
(determined under the rules of section
958(a) without regard to whether an inter-
mediate entity is foreign or domestic)
owns an interest in the entity.

(14) The term related has the meaning
provided in this paragraph (a)(14). A tax
resident or taxable branch is related to a
specified party if the tax resident or tax-
able branch is a related person within the
meaning of section 954(d)(3), determined

by treating the specified party as the "con-
trolled foreign corporation" referred to in
that section and the tax resident or taxable
branch as the "person" referred to in that
section. In addition, for these purposes, a
tax resident that under §§ 301.7701-1
through 301.7701-3 of this chapter is dis-
regarded as an entity separate from its
owner for U.S. tax purposes, as well as a
taxable branch, is treated as a corporation.
Further, for these purposes neither section
318(a)(3), nor § 1.958-2(d) or the princi-
ples thereof, applies to attribute stock or
other interests to a tax resident, taxable
branch, or specified party.

(15) The term reverse hybrid has the
meaning provided in § 1.267A-2(d)(2).

(16) The term royalty includes
amounts paid or accrued as consideration
for the use of, or the right to use-

(i) Any copyright, including any copy-
right of any literary, artistic, scientific or
other work (including cinematographic
films and software);

(ii) Any patent, trademark, design or
model, plan, secret formula or process, or
other similar property (including good-
will); or

(iii) Any information concerning in-
dustrial, commercial or scientific experi-
ence, but does not include-

(A) Amounts paid or accrued for after-
sales services;

(B) Amounts paid or accrued for ser-
vices rendered by a seller to the purchaser
under a warranty;

(C) Amounts paid or accrued for pure
technical assistance; or

(D) Amounts paid or accrued for an
opinion given by an engineer, lawyer or
accountant.

(17) The term specified party means a
tax resident of the United States, a CFC
(other than a CFC with respect to which
there is not a United States shareholder
that owns (within the meaning of section
958(a)) at least ten percent (by vote or
value) of the stock of the CFC), and a U.S.
taxable branch. Thus, an entity that is fis-
cally transparent for U.S. tax purposes is
not a specified party, though an owner of
the entity may be a specified party. For
example, in the case of a payment by a
partnership, a domestic corporation or a
CFC that is a partner of the partnership is
a specified party whose deduction for its

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allocable share of the payment is subject
to disallowance under section 267A.

(18) The term specified payment has
the meaning provided in § 1.267A-1(b).

(19) The term specified recipient
means, with respect to a specified pay-
ment, any tax resident that derives the
payment under its tax law or any taxable
branch to which the payment is attribut-
able under its tax law. The principles of
§ 1.894-1(d)(1) apply for purposes of de-
termining whether a tax resident derives a
specified payment under its tax law, with-
out regard to whether the tax resident is a
resident of a country that has an income
tax treaty with the United States. There
may be more than one specified recipient
with respect to a specified payment.

(20) The term structured arrangement
means an arrangement with respect to
which one or more specified payments
would be a disqualified hybrid amount (or
a disqualified imported mismatch amount)
if the specified payment were analyzed
without regard to the relatedness limita-
tion in § 1.267A-2(f) (or without regard to
the language "that is related to the speci-
fied party" in § 1.267A-4(a)) (either such
outcome, a hybrid mismatch), provided
that either paragraph (a)(20)(i) or (ii) of
this section is satisfied. A party to a struc-
tured arrangement means a tax resident or
taxable branch that participates in the
structured arrangement. For this purpose,
an entity's participation in a structured
arrangement is imputed to its investors.

(i) The hybrid mismatch is priced into
the terms of the arrangement.

(ii) Based on all the facts and circum-
stances, the hybrid mismatch is a principal
purpose of the arrangement. Facts and cir-
cumstances that indicate the hybrid mis-
match is a principal purpose of the ar-
rangement include-

(A) Marketing the arrangement as tax-
advantaged where some or all of the tax
advantage derives from the hybrid mis-
match;

(B) Primarily marketing the arrange-
ment to tax residents of a country the tax
law of which enables the hybrid mis-
match;

(C) Features that alter the terms of the
arrangement, including the return, in the
event the hybrid mismatch is no longer
available; or

(D) A below-market return absent the
tax effects or benefits resulting from the
hybrid mismatch.

(21) The term tax law of a country
includes statutes, regulations, administra-
tive or judicial rulings, and treaties of the
country. When used with respect to a tax
resident or branch, tax law refers to-

(i) In the case of a tax resident, the tax
law of the country or countries where the
tax resident is resident; and

(ii) In the case of a branch, the tax law
of the country where the branch is located.

(22) The term taxable branch means a
branch that has a taxable presence under
its tax law.

(23) The term tax resident means either
of the following:

(i) A body corporate or other entity or
body of persons liable to tax under the tax
law of a country as a resident. For this
purpose, a body corporate or other entity
or body of persons may be considered
liable to tax under the tax law of a country
as a resident even though such tax law
does not impose a corporate income tax. A
body corporate or other entity or body of
persons may be a tax resident of more
than one country.

(ii) An individual liable to tax under
the tax law of a country as a resident. An
individual may be a tax resident of more
than one country.

(24) The term United States share-
holder has the meaning provided in sec-
tion 951(b).

(25) The term U.S. taxable branch
means a trade or business carried on in the
United States by a tax resident of another
country, except that if an income tax
treaty applies, the term means a perma-
nent establishment of a tax treaty resident
eligible for benefits under an income tax
treaty between the United States and the
treaty country. Thus, for example, a U.S.
taxable branch includes a U.S. trade or
business of a foreign corporation taxable
under section 882(a) or a U.S. permanent
establishment of a tax treaty resident.

(b) Special rules. For purposes of
§§ 1.267A-1 through 1.267A-7, the fol-
lowing special rules apply.

(1) Coordination with other provisions.
Except as otherwise provided in the Code
or in regulations under 26 CFR part 1,
section 267A applies to a specified pay-
ment after the application of any other

applicable provisions of the Code and reg-
ulations under 26 CFR part 1. Thus, the
determination of whether a deduction for
a specified payment is disallowed under
section 267A is made with respect to the
taxable year for which a deduction for the
payment would otherwise be allowed for
U.S. tax purposes. See, for example, sec-
tions 163(e)(3) and 267(a)(3) for rules that
may defer the taxable year for which a
deduction is allowed. See also § 1.882-
5(a)(5) (providing that provisions that dis-
allow interest expense apply after the ap-
plication of § 1.882-5). In addition,
provisions that characterize amounts paid
or accrued as something other than inter-
est or royalty, such as § 1.894-1(d)(2),
govern the treatment of such amounts and
therefore such amounts would not be
treated as specified payments.

(2) Foreign currency gain or loss. Ex-
cept as set forth in this paragraph (b)(2),
section 988 gain or loss is not taken into
account under section 267A. Foreign cur-
rency gain or loss recognized with respect
to a specified payment is taken into ac-
count under section 267A to the extent
that a deduction for the specified payment
is disallowed under section 267A, pro-
vided that the foreign currency gain or
loss is described in § 1.988-2(b)(4) (re-
lating to exchange gain or loss recognized
by the issuer of a debt instrument with
respect to accrued interest) or § 1.988-
2(c) (relating to items of expense or gross
income or receipts which are to be paid
after the date accrued). If a deduction for a
specified payment is disallowed under sec-
tion 267A, then a proportionate amount of
foreign currency loss under section 988 with
respect to the specified payment is also dis-
allowed, and a proportionate amount of for-
eign currency gain under section 988 with
respect to the specified payment reduces the
amount of the disallowance. For this pur-
pose, the proportionate amount is the
amount of the foreign currency gain or loss
under section 988 with respect to the spec-
ified payment multiplied by the amount of
the specified payment for which a deduction
is disallowed under section 267A.

(3) U.S. taxable branch payments-(i)
Amounts considered paid or accrued by a
U.S. taxable branch. For purposes of sec-
tion 267A, a U.S. taxable branch is con-
sidered to pay or accrue an amount of
interest or royalty equal to-

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(A) The amount of interest or royalty
allocable to effectively connected income
of the U.S. taxable branch under section
873(a) or 882(c)(1), as applicable; or

(B) In the case of a U.S. taxable branch
that is a U.S. permanent establishment of
a treaty resident eligible for benefits under
an income tax treaty between the United
States and the treaty country, the amount
of interest or royalty deductible in com-
puting the business profits attributable to
the U.S. permanent establishment, if such
amounts differ from the amounts allocable
under paragraph (b)(3)(i)(A) of this sec-
tion.

(ii) Treatment of U.S. taxable branch
payments-(A) Interest. Interest consid-
ered paid or accrued by a U.S. taxable
branch of a foreign corporation under para-
graph (b)(3)(i) of this section is treated as a
payment directly to the person to which the
interest is payable, to the extent it is paid or
accrued with respect to a liability described
in § 1.882-5(a)(1)(ii)(A) (resulting in di-
rectly allocable interest) or with respect to a
U.S. booked liability, as defined in § 1.882-
5(d)(2). If the amount of interest allocable to
the U.S. taxable branch exceeds the interest
paid or accrued on its U.S. booked liabili-
ties, the excess amount is treated as paid or
accrued by the U.S. taxable branch on a pro-
rata basis to the same persons and pursuant
to the same terms that the home office paid
or accrued interest for purposes of the cal-
culations described in paragraph (b)(3)(i) of
this section, excluding any interest treated as
already paid directly by the branch.

(B) Royalties. Royalties considered
paid or accrued by a U.S. taxable branch
under paragraph (b)(3)(i) of this section
are treated solely for purposes of section
267A as paid or accrued on a pro-rata
basis by the U.S. taxable branch to the
same persons and pursuant to the same
terms that the home office paid or accrued
such royalties.

(C) Permanent establishments and in-
terbranch payments. If a U.S. taxable
branch is a permanent establishment in the
United States, rules analogous to the rules
in paragraphs (b)(3)(ii)(A) and (B) of this
section apply with respect to interest and
royalties allowed in computing the business
profits of a treaty resident eligible for treaty
benefits. This paragraph (b)(3)(ii)(C) does
not apply to interbranch interest or royalty
payments allowed as deduction under cer-

tain U.S. income tax treaties (as described in
§ 1.267A-2(c)(2)).

(4) Effect on earnings and profits. The
disallowance of a deduction under section
267A does not affect whether or when the
amount paid or accrued that gave rise to
the deduction reduces earnings and profits
of a corporation.

(5) Application to structured paymen-
ts-(i) In general. For purposes of section
267A and the regulations under section
267A as contained in 26 CFR part 1, a
structured payment (as defined in para-
graph (b)(5)(ii) of this section) is treated
as a specified payment.

(ii) Structured payment. A structured
payment means any amount described in
paragraphs (b)(5)(ii)(A) or (B) of this sec-
tion (as adjusted by amounts described in
paragraph (b)(5)(ii)(C) of this section).

(A) Certain payments related to the
time value of money (structured interest
amounts)-(1) Substitute interest pay-
ments. A substitute interest payment de-
scribed in § 1.861-2(a)(7).

(2) Certain amounts labeled as fees-(i)
Commitment fees. Any fees in respect of a
lender commitment to provide financing if
any portion of such financing is actually
provided.

(ii) [Reserved]

(3) Debt issuance costs. Any debt issu-
ance costs subject to § 1.446-5.

(4) Guaranteed payments. Any guaran-
teed payments for the use of capital under
section 707(c).

(B) Amounts predominately associated
with the time value of money. Any ex-
pense or loss, to the extent deductible,
incurred by a person in a transaction or
series of integrated or related transactions
in which the person secures the use of
funds for a period of time, if such expense
or loss is predominately incurred in con-
sideration of the time value of money.

(C) Adjustment for amounts affecting
the effective cost of funds. Income, deduc-
tion, gain, or loss from a derivative, as
defined in section 59A(h)(4)(A), that al-
ters a person's effective cost of funds with
respect to a structured payment described
in paragraph (b)(5)(ii)(A) or (B) of this
section is treated as an adjustment to the
structured payment of the person.

(6) Anti-avoidance rule. A specified
party's deduction for a specified payment

is disallowed to the extent that both of the
following requirements are satisfied:

(i) The payment (or income attribut-
able to the payment) is not included in the
income of a tax resident or taxable branch,
as determined under § 1.267A-3(a) (but
without regard to the de minimis and full
inclusion rules in § 1.267A-3(a)(3)).

(ii) A principal purpose of the plan or
arrangement is to avoid the purposes of
the regulations under section 267A.

§ 1.267A-6 Examples.

(a) Scope. This section provides exam-
ples that illustrate the application of
§§ 1.267A-1 through 1.267A-5.

(b) Presumed facts. For purposes of the
examples in this section, unless otherwise
indicated, the following facts are pre-
sumed:

(1) US1, US2, and US3 are domestic
corporations that are tax residents solely
of the United States.

(2) FW, FX, and FZ are bodies corpo-
rate established in, and tax residents of,
Country W, Country X, and Country Z,
respectively. They are not fiscally trans-
parent under the tax law of any country.

(3) Under the tax law of each country,
interest and royalty payments are deduct-
ible.

(4) The tax law of each country pro-
vides a 100 percent participation exemp-
tion for dividends received from non-
resident corporations.

(5) The tax law of each country, other
than the United States, provides an ex-
emption for income attributable to a
branch.

(6) Except as provided in paragraphs
(b)(4) and (5) of this section, all amounts
derived (determined under the principles
of § 1.894-1(d)(1)) by a tax resident, or
attributable to a taxable branch, are in-
cluded in income, as determined under
§ 1.267A-3(a).

(7) Only the tax law of the United
States contains hybrid mismatch rules.

(c) Examples-(1) Example 1. Payment pursuant
to a hybrid financial instrument-(i) Facts. FX holds
all the interests of US1. FX holds an instrument
issued by US1 that is treated as equity for Country X
tax purposes and indebtedness for U.S. tax purposes
(the FX-US1 instrument). On date 1, US1 pays $50x
to FX pursuant to the instrument. The amount is
treated as an excludible dividend for Country X tax
purposes (by reason of the Country X participation
exemption) and as interest for U.S. tax purposes.

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(ii) Analysis. US1 is a specified party and thus a
deduction for its $50x specified payment is subject to
disallowance under section 267A. As described in
paragraphs (c)(1)(ii)(A) through (C) of this section,
the entire $50x payment is a disqualified hybrid
amount under the hybrid transaction rule of
§ 1.267A-2(a) and, as a result, a deduction for the
payment is disallowed under § 1.267A-1(b)(1).

(A) US1's payment is made pursuant to a hybrid
transaction because a payment with respect to the
FX-US1 instrument is treated as interest for U.S. tax
purposes but not for purposes of Country X tax law
(the tax law of FX, a specified recipient that is
related to US1). See § 1.267A-2(a)(2) and (f). There-
fore, § 1.267A-2(a) applies to the payment.

(B) For US1's payment to be a disqualified hy-
brid amount under § 1.267A-2(a), a no-inclusion
must occur with respect to FX. See § 1.267A-
2(a)(1)(i). As a consequence of the Country X par-
ticipation exemption, FX includes $0 of the payment
in income and therefore a $50x no-inclusion occurs
with respect to FX. See § 1.267A-3(a)(1). The result
is the same regardless of whether, under the Country
X participation exemption, the $50x payment is sim-
ply excluded from FX's taxable income or, instead,
is reduced or offset by other means, such as a $50x
dividends received deduction. See id.

(C) Pursuant to § 1.267A-2(a)(1)(ii), FX's $50x
no-inclusion gives rise to a disqualified hybrid
amount to the extent that it is a result of US1's
payment being made pursuant to the hybrid transac-
tion. FX's $50x no-inclusion is a result of the pay-
ment being made pursuant to the hybrid transaction
because, were the payment to be treated as interest
for Country X tax purposes, FX would include $50x
in income and, consequently, the no-inclusion would
not occur.

(iii) Alternative facts - multiple specified recip-
ients. The facts are the same as in paragraph (c)(1)(i)
of this section, except that FX holds all the interests
of FZ, which is fiscally transparent for Country X tax
purposes, and FZ holds all of the interests of US1.
Moreover, the FX-US1 instrument is held by FZ
(rather than by FX) and US1 makes its $50x pay-
ment to FZ (rather than to FX); the payment is
derived by FZ under its tax law and by FX under its
tax law and, accordingly, both FZ and FX are spec-
ified recipients of the payment. Further, the payment
is treated as interest for Country Z tax purposes and
FZ includes it in income. For the reasons described
in paragraph (c)(1)(ii) of this section, FX's no-
inclusion causes the payment to be a disqualified
hybrid amount. FZ's inclusion in income (regardless
of whether Country Z has a low or high tax rate)
does not affect the result, because the hybrid trans-
action rule of § 1.267A-2(a) applies if any no-
inclusion occurs with respect to a specified recipient
of the payment as a result of the payment being made
pursuant to the hybrid transaction.

(iv) Alternative facts - preferential rate. The
facts are the same as in paragraph (c)(1)(i) of this
section, except that for Country X tax purposes
US1's payment is treated as a dividend subject to a
4% tax rate, whereas the marginal rate imposed on
ordinary income is 20%. FX includes $10x of the
payment in income, calculated as $50x multiplied by
0.2 (.04, the rate at which the particular type of
payment (a dividend for Country X tax purposes) is

subject to tax in Country X, divided by 0.2, the
marginal tax rate imposed on ordinary income). See
§ 1.267A-3(a)(1). Thus, a $40x no-inclusion occurs
with respect to FX ($50x less $10x). The $40x
no-inclusion is a result of the payment being made
pursuant to the hybrid transaction because, were the
payment to be treated as interest for Country X tax
purposes, FX would include the entire $50x in in-
come at the full marginal rate imposed on ordinary
income (20%) and, consequently, the no-inclusion
would not occur. Accordingly, $40x of US1's pay-
ment is a disqualified hybrid amount.

(v) Alternative facts - no-inclusion not the result
of hybridity. The facts are the same as in paragraph
(c)(1)(i) of this section, except that Country X has a
pure territorial regime (that is, Country X only taxes
income with a domestic source). Although US1's
payment is pursuant to a hybrid transaction and a
$50x no-inclusion occurs with respect to FX, FX's
no-inclusion is not a result of the payment being
made pursuant to the hybrid transaction. This is
because if Country X tax law were to treat the
payment as interest, FX would include $0 in income
and, consequently, the $50x no-inclusion would still
occur. Accordingly, US1's payment is not a disqual-
ified hybrid amount. See § 1.267A-2(a)(1)(ii). The
result would be the same if Country X instead did
not impose a corporate income tax.

(2) Example 2. Payment pursuant to a repo
transaction-(i) Facts. FX holds all the interests of
US1, and US1 holds all the interests of US2. On date
1, US1 and FX enter into a sale and repurchase
transaction. Pursuant to the transaction, US1 trans-
fers shares of preferred stock of US2 to FX in return
for $1,000x paid from FX to US1, subject to a
binding commitment of US1 to reacquire those
shares on date 3 for an agreed price, which repre-
sents a repayment of the $1,000x plus a financing or
time value of money return reduced by the amount of
any distributions paid with respect to the preferred
stock between dates 1 and 3 that are retained by FX.
On date 2, US2 pays a $100x dividend on its pre-
ferred stock to FX. For Country X tax purposes, FX
is treated as owning the US2 preferred stock and
therefore is the beneficial owner of the dividend. For
U.S. tax purposes, the transaction is treated as a loan
from FX to US1 that is secured by the US2 preferred
stock. Thus, for U.S. tax purposes, US1 is treated as
owning the US2 preferred stock and is the beneficial
owner of the dividend. In addition, for U.S. tax
purposes, US1 is treated as paying $100x of interest
to FX (an amount corresponding to the $100x divi-
dend paid by US2 to FX). Further, the marginal tax
rate imposed on ordinary income under Country X
tax law is 25%. Moreover, instead of a participation
exemption, Country X tax law provides its tax resi-
dents a credit for underlying foreign taxes paid by a
non-resident corporation from which a dividend is
received; with respect to the $100x dividend re-
ceived by FX from US2, the credit is $10x.

(ii) Analysis. US1 is a specified party and thus a
deduction for its $100x specified payment is subject
to disallowance under section 267A. As described in
paragraphs (c)(2)(ii)(A) through (D) of this section,
$40x of the payment is a disqualified hybrid amount
under the hybrid transaction rule of § 1.267A-2(a)
and, as a result, $40x of the deduction is disallowed
under § 1.267A-1(b)(1).

(A) Although US1's $100x interest payment is
not regarded under Country X tax law, a connected
amount (US2's dividend payment) is regarded and
derived by FX under such tax law. Thus, FX is
considered a specified recipient with respect to
US1's interest payment. See § 1.267A-2(a)(3).

(B) US1's payment is made pursuant to a hybrid
transaction because a payment with respect to the
sale and repurchase transaction is treated as interest
for U.S. tax purposes but not for purposes of Country
X tax law (the tax law of FX, a specified recipient
that is related to US1), which does not regard the
payment. See § 1.267A-2(a)(2) and (f). Therefore,
§ 1.267A-2(a) applies to the payment.

(C) For US1's payment to be a disqualified hy-
brid amount under § 1.267A-2(a), a no-inclusion
must occur with respect to FX. See § 1.267A-
2(a)(1)(i). As a consequence of Country X tax law
not regarding US1's payment, FX includes $0 of the
payment in income and therefore a $100x no-
inclusion occurs with respect to FX. See § 1.267A-
3(a). However, FX includes $60x of a connected
amount (US2's dividend payment) in income, calcu-
lated as $100x (the amount of the dividend) less
$40x (the portion of the connected amount that is not
included in Country X due to the foreign tax credit,
determined by dividing the amount of the credit,
$10x, by 0.25, the tax rate in Country X). See id.
Pursuant to § 1.267A-2(a)(3), FX's inclusion in in-
come with respect to the connected amount corre-
spondingly reduces the amount of its no-inclusion
with respect to US1's payment. Therefore, for pur-
poses of § 1.267A-2(a), FX's no-inclusion with re-
spect to US1's payment is considered to be $40x
($100x less $60x). See § 1.267A-2(a)(3).

(D) Pursuant to § 1.267A-2(a)(1)(ii), FX's $40x
no-inclusion gives rise to a disqualified hybrid
amount to the extent that FX's no-inclusion is a
result of US1's payment being made pursuant to the
hybrid transaction. FX's $40x no-inclusion is a result
of US1's payment being made pursuant to the hybrid
transaction because, were the sale and repurchase
transaction to be treated as a loan from FX to US1
for Country X tax purposes, FX would include
US1's $100x interest payment in income (because it
would not be entitled to a foreign tax credit) and,
consequently, the no-inclusion would not occur.

(iii) Alternative facts - structured arrangement.
The facts are the same as in paragraph (c)(2)(i)
of this section, except that FX is a bank that is
unrelated to US1. In addition, the sale and repur-
chase transaction is a structured arrangement and FX
is a party to the structured arrangement. The result is
the same as in paragraph (c)(2)(ii) of this section.
That is, even though FX is not related to US1, it is
taken into account with respect to the determinations
under § 1.267A-2(a) because it is a party to a struc-
tured arrangement pursuant to which the payment is
made. See § 1.267A-2(f).

(3) Example 3. Disregarded payment-(i) Facts.
FX holds all the interests of US1. For Country X tax
purposes, US1 is a disregarded entity of FX. During
taxable year 1, US1 pays $100x to FX pursuant to a
debt instrument. The amount is treated as interest for
U.S. tax purposes but is disregarded for Country X
tax purposes as a transaction involving a single tax-
payer. During taxable year 1, US1's only other items
of income, gain, deduction, or loss are $125x of

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gross income and a $60x item of deductible expense.
The $125x item of gross income is included in FX's
income, and the $60x item of deductible expense is
allowable for Country X tax purposes.

(ii) Analysis. US1 is a specified party and thus a
deduction for its $100x specified payment is subject
to disallowance under section 267A. As described in
paragraphs (c)(3)(ii)(A) and (B) of this section, $35x
of the payment is a disqualified hybrid amount under
the disregarded payment rule of § 1.267A-2(b) and,
as a result, $35x of the deduction is disallowed under
§ 1.267A-1(b)(1).

(A) US1's $100x payment is not regarded under
the tax law of Country X (the tax law of FX, a related
tax resident to which the payment is made) because
under such tax law the payment is a disregarded
transaction involving a single taxpayer. See
§ 1.267A-2(b)(2) and (f). In addition, were the tax
law of Country X to regard the payment (and treat it
as interest), FX would include it in income. There-
fore, the payment is a disregarded payment to which
§ 1.267A-2(b) applies. See § 1.267A-2(b)(2).

(B) Under § 1.267A-2(b)(1), the excess (if any)
of US1's disregarded payments for taxable year 1
($100x) over its dual inclusion income for the tax-
able year is a disqualified hybrid amount. US1's dual
inclusion income for taxable year 1 is $65x, calcu-
lated as $125x (the amount of US1's gross income
that is included in FX's income) less $60x (the
amount of US1's deductible expenses, other than
deductions for disregarded payments, that are allow-
able for Country X tax purposes). See § 1.267A-
2(b)(3). Therefore, $35x is a disqualified hybrid
amount ($100x less $65x). See §1.267A-2(b)(1).

(iii) Alternative facts - non-dual inclusion in-
come arising from hybrid transaction. The facts are
the same as in paragraph (c)(3)(i) of this section,
except that US1 holds all the interests of FZ (a CFC)
and US1's only item of income, gain, deduction, or
loss during taxable year 1 (other than the $100x
payment to FX) is $80x paid to US1 by FZ pursuant
to an instrument treated as indebtedness for U.S. tax
purposes and equity for Country X tax purposes (the
US1-FZ instrument). In addition, the $80x is treated
as interest for U.S. tax purposes and an excludible
dividend for Country X tax purposes (by reason of
the Country X participation exemption). Paragraphs
(c)(3)(iii)(A) and (B) of this section describe the
extent to which the specified payments by FZ and
US1, each of which is a specified party, are disqual-
ified hybrid amounts.

(A) The hybrid transaction rule of § 1.267A-2(a)
applies to FZ's payment because such payment is
made pursuant to a hybrid transaction, as a payment
with respect to the US1-FZ instrument is treated as
interest for U.S. tax purposes but not for purposes of
Country X's tax law (the tax law of FX, a specified
recipient that is related to FZ). As a consequence of
the Country X participation exemption, an $80x no-
inclusion occurs with respect to FX, and such no-
inclusion is a result of the payment being made
pursuant to the hybrid transaction. Thus, but for
§ 1.267A-3(b), the entire $80x of FZ's payment
would be a disqualified hybrid amount. However,
because US1 (a tax resident of the United States that
is also a specified recipient of the payment) takes the
entire $80x payment into account in its gross in-

come, no portion of the payment is a disqualified
hybrid amount. See § 1.267A-3(b)(2).

(B) The disregarded payment rule of § 1.267A-
2(b) applies to US1's $100x payment to FX, for the
reasons described in paragraph (c)(3)(ii)(A) of this
section. In addition, US1's dual inclusion income for
taxable year 1 is $0 because, as a result of the
Country X participation exemption, no portion of
FZ's $80x payment to US1 (which is derived by FX
under its tax law) is included in FX's income. See
§§ 1.267A-2(b)(3) and 1.267A-3(a). Therefore, the
entire $100x payment from US1 to FX is a disqual-
ified hybrid amount, calculated as $100x (the amount
of the payment) less $0 (the amount of dual inclusion
income). See § 1.267A-2(b)(1).

(4) Example 4. Payment allocable to a U.S. tax-
able branch-(i) Facts. FX1 and FX2 are foreign
corporations that are bodies corporate established in
and tax residents of Country X. FX1 holds all the
interests of FX2, and FX1 and FX2 file a consoli-
dated return under Country X tax law. FX2 has a
U.S. taxable branch ("USB"). During taxable year 1,
FX2 pays $50x to FX1 pursuant to an instrument
(the "FX1-FX2 instrument"). The amount paid pur-
suant to the instrument is treated as interest for U.S.
tax purposes but, as a consequence of the Country X
consolidation regime, is treated as a disregarded
transaction between group members for Country X
tax purposes. Also during taxable year 1, FX2 pays
$100x of interest to an unrelated bank that is not a
party to a structured arrangement (the instrument
pursuant to which the payment is made, the "bank-
FX2 instrument"). FX2's only other item of income,
gain, deduction, or loss for taxable year 1 is $200x of
gross income. Under Country X tax law, the $200x
of gross income is attributable to USB, but is not
included in FX's income because Country X tax law
exempts income attributable to a branch. Under U.S.
tax law, the $200x of gross income is effectively
connected income of USB. Further, under section
882, $75x of interest is, for taxable year 1, allocable
to USB's effectively connected income. USB has
neither liabilities that are directly allocable to it, as
described in § 1.882-5(a)(1)(ii)(A), nor booked lia-
bilities, as defined in § 1.882-5(d)(2).

(ii) Analysis. USB is a specified party and thus
any interest or royalty allowable as a deduction in
determining its effectively connected income is sub-
ject to disallowance under section 267A. Pursuant to
§ 1.267A-5(b)(3)(i)(A), USB is treated as paying
$75x of interest, and such interest is thus a specified
payment. Of that $75x, $25x is treated as paid to
FX1, calculated as $75x (the interest allocable to
USB under section 882) multiplied by 1/3 ($50x,
FX2's payment to FX1, divided by $150x, the total
interest paid by FX2). See § 1.267A-5(b)(3)(ii)(A).
As described in paragraphs (c)(4)(ii)(A) and (B) of
this section, the $25x of the specified payment
treated as paid by USB to FX1 is a disqualified
hybrid amount under the disregarded payment rule
of § 1.267A-2(b) and, as a result, a deduction for
that amount is disallowed under § 1.267A-1(b)(1).

(A) USB's $25x payment to FX1 is not regarded
under the tax law of Country X (the tax law of FX1,
a related tax resident to which the payment is made)
because under such tax law the payment is a disre-
garded transaction between group members. See
§ 1.267A-2(b)(2) and (f). In addition, were the tax

law of Country X to regard the payment (and treat it
as interest), FX1 would include it in income. There-
fore, the payment is a disregarded payment to which
§ 1.267A-2(b) applies. See § 1.267A-2(b)(2).

(B) Under § 1.267A-2(b)(1), the excess (if any)
of USB's disregarded payments for taxable year 1
($25x) over its dual inclusion income for the taxable
year is a disqualified hybrid amount. USB's dual
inclusion income for taxable year 1 is $0. This is
because, as a result of the Country X exemption for
income attributable to a branch, no portion of USB's
$200x item of gross income is included in FX2's
income. See § 1.267A-2(b)(3). Therefore, the entire
$25x of the specified payment treated as paid by
USB to FX1 is a disqualified hybrid amount, calcu-
lated as $25x (the amount of the payment) less $0
(the amount of dual inclusion income). See
§ 1.267A-2(b)(1).

(iii) Alternative facts - deemed branch payment.
The facts are the same as in paragraph (c)(4)(i) of
this section, except that FX2 does not pay any
amounts during taxable year 1 (thus, it does not pay
the $50x to FX1 or the $100x to the bank). However,
under an income tax treaty between the United States
and Country X, USB is a U.S. permanent establish-
ment and, for taxable year 1, $25x of royalties is
allowable as a deduction in computing the business
profits of USB and is deemed paid to FX2. Under
Country X tax law, the $25x is not regarded. Ac-
cordingly, the $25x is a specified payment that is a
deemed branch payment. See §§ 1.267A-2(c)(2) and
1.267A-5(b)(3)(i)(B). The entire $25x is a disqual-
ified hybrid amount for which a deduction is disal-
lowed because the tax law of Country X provides an
exclusion or exemption for income attributable to a
branch. See § 1.267A-2(c)(1).

(5) Example 5. Payment to a reverse hybrid-(i)
Facts. FX holds all the interests of US1 and FY, and
FY holds all the interests of FV. FY is an entity
established in Country Y, and FV is an entity estab-
lished in Country V. FY is fiscally transparent for
Country Y tax purposes but is not fiscally transparent
for Country X tax purposes. FV is fiscally transpar-
ent for Country X tax purposes. On date 1, US1 pays
$100x to FY. The amount is treated as interest for
U.S. tax purposes and Country X tax purposes.

(ii) Analysis. US1 is a specified party and thus a
deduction for its $100x specified payment is subject
to disallowance under section 267A. As described in
paragraphs (c)(5)(ii)(A) through (C) of this section,
the entire $100x payment is a disqualified hybrid
amount under the reverse hybrid rule of § 1.267A-
2(d) and, as a result, a deduction for the payment is
disallowed under § 1.267A-1(b)(1).

(A) US1's payment is made to a reverse hybrid
because FY is fiscally transparent under the tax law
of Country Y (the tax law of the country in which it
is established) but is not fiscally transparent under
the tax law of Country X (the tax law of FX, an
investor that is related to US1). See § 1.267A-
2(d)(2) and (f). Therefore, § 1.267A-2(d) applies to
the payment. The result would be the same if the
payment were instead made to FV. See § 1.267A-
2(d)(3).

(B) For US1's payment to be a disqualified hy-
brid amount under § 1.267A-2(d), a no-inclusion
must occur with respect to FX. See § 1.267A-
2(d)(1)(i). Because FX does not derive the $100x

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payment under Country X tax law (as FY is not
fiscally transparent under such tax law), FX includes
$0 of the payment in income and therefore a $100x
no-inclusion occurs with respect to FX. See
§ 1.267A-3(a).

(C) Pursuant to § 1.267A-2(d)(1)(ii), FX's
$100x no-inclusion gives rise to a disqualified hybrid
amount to the extent that it is a result of US1's
payment being made to the reverse hybrid. FX's
$100x no-inclusion is a result of the payment being
made to the reverse hybrid because, were FY to be
treated as fiscally transparent for Country X tax
purposes, FX would include $100x in income and,
consequently, the no-inclusion would not occur. The
result would be the same if Country X tax law
instead viewed US1's payment as a dividend, rather
than interest. See § 1.267A-2(d)(1)(ii).

(iii) Alternative facts - inclusion under anti-
deferral regime. The facts are the same as in para-
graph (c)(5)(i) of this section, except that, under a
Country X anti-deferral regime, FX includes in its
income $100x attributable to the $100x payment
received by FY. If under the rules of § 1.267A-3(a)
FX includes the entire attributed amount in income
(that is, if FX includes the amount in its income at
the full marginal rate imposed on ordinary income
and the amount is not reduced or offset by certain
relief particular to the amount), then a no-inclusion
does not occur with respect to FX. As a result, in
such a case, no portion of US1's payment would be
a disqualified hybrid amount under § 1.267A-2(d).

(iv) Alternative facts - multiple investors. The
facts are the same as in paragraph (c)(5)(i) of this
section, except that FX holds all the interests of FZ,
which is fiscally transparent for Country X tax pur-
poses; FZ holds all the interests of FY, which is
fiscally transparent for Country Z tax purposes; and
FZ includes the $100x payment in income. Thus,
each of FZ and FX is an investor of FY, as each
directly or indirectly holds an interest of FY. See
§ 1.267A-5(a)(13). A no-inclusion does not occur
with respect to FZ, but a $100x no-inclusion occurs
with respect to FX. FX's no-inclusion is a result of
the payment being made to the reverse hybrid be-
cause, were FY to be treated as fiscally transparent
for Country X tax purposes, then FX would include
$100x in income (as FZ is fiscally transparent for
Country X tax purposes). Accordingly, FX's no-
inclusion is a result of US1's payment being made to
the reverse hybrid and, consequently, the entire
$100x payment is a disqualified hybrid amount.

(v) Alternative facts - portion of no-inclusion not
the result of hybridity. The facts are the same as in
paragraph (c)(5)(i) of this section, except that the
$100x is viewed as a royalty for U.S. tax purposes
and Country X tax purposes, and Country X tax law
contains a patent box regime that provides an 80%
deduction with respect to certain royalty income. If
the payment would qualify for the Country X patent
box deduction were FY to be treated as fiscally
transparent for Country X tax purposes, then only
$20x of FX's $100x no-inclusion would be the result
of the payment being paid to a reverse hybrid, cal-
culated as $100x (the no-inclusion with respect to
FX that actually occurs) less $80x (the no-inclusion
with respect to FX that would occur if FY were to be
treated as fiscally transparent for Country X tax
purposes). See § 1.267A-3(a). Accordingly, in such

a case, only $20x of US1's payment would be a
disqualified hybrid amount.

(6) Example 6. Branch mismatch payment-(i)
Facts. FX holds all the interests of US1 and FZ. FZ
owns BB, a Country B branch that gives rise to a
taxable presence in Country B under Country Z tax
law but not under Country B tax law. On date 1, US1
pays $50x to FZ. The amount is treated as a royalty
for U.S. tax purposes and Country Z tax purposes.
Under Country Z tax law, the amount is treated as
income attributable to BB and, as a consequence of
County Z tax law exempting income attributable to a
branch, is excluded from FZ's income.

(ii) Analysis. US1 is a specified party and thus a
deduction for its $50x specified payment is subject to
disallowance under section 267A. As described in
paragraphs (c)(6)(ii)(A) through (C) of this section,
the entire $50x payment is a disqualified hybrid
amount under the branch mismatch rule of
§ 1.267A-2(e) and, as a result, a deduction for the
payment is disallowed under § 1.267A-1(b)(1).

(A) US1's payment is a branch mismatch pay-
ment because under Country Z tax law (the tax law
of FZ, a home office that is related to US1) the
payment is treated as income attributable to BB, and
BB is not a taxable branch (that is, under Country B
tax law, BB does not give rise to a taxable presence).
See § 1.267A-2(e)(2) and (f). Therefore, § 1.267A-
2(e) applies to the payment. The result would be the
same if instead BB were a taxable branch and, under
Country B tax law, US1's payment were treated as
income attributable to FZ and not BB. See § 1.267A-
2(e)(2).

(B) For US1's payment to be a disqualified hy-
brid amount under § 1.267A-2(e), a no-inclusion
must occur with respect to FZ. See § 1.267A-
2(e)(1)(i). As a consequence of the Country Z branch
exemption, FZ includes $0 of the payment in income
and therefore a $50x no-inclusion occurs with re-
spect to FZ. See § 1.267A-3(a).

(C) Pursuant to § 1.267A-2(e)(1)(ii), FZ's $50x
no-inclusion gives rise to a disqualified hybrid
amount to the extent that it is a result of US1's
payment being a branch mismatch payment. FZ's
$50x no-inclusion is a result of the payment being a
branch mismatch payment because, were the pay-
ment to not be treated as income attributable to BB
for Country Z tax purposes, FZ would include $50x
in income and, consequently, the no-inclusion would
not occur.

(7) Example 7. Reduction of disqualified hybrid
amount for certain amounts includible in income-(i)
Facts. US1 and FW hold 60% and 40%, respec-
tively, of the interests of FX, and FX holds all the
interests of FZ. Each of FX and FZ is a CFC. FX
holds an instrument issued by FZ that it is treated as
equity for Country X tax purposes and as indebted-
ness for U.S. tax purposes (the FX-FZ instrument).
On date 1, FZ pays $100x to FX pursuant to the
FX-FZ instrument. The amount is treated as a divi-
dend for Country X tax purposes and as interest for
U.S. tax purposes. In addition, pursuant to section
954(c)(6), the amount is not foreign personal holding
company income of FX. Further, under section
951A, the payment is included in FX's tested in-
come. Lastly, Country X tax law provides an 80%
participation exemption for dividends received from
nonresident corporations and, as a result of such

participation exemption, FX includes $20x of FZ's
payment in income.

(ii) Analysis. FZ, a CFC, is a specified party and
thus a deduction for its $100x specified payment is
subject to disallowance under section 267A. But for
§ 1.267A-3(b), $80x of FZ's payment would be a
disqualified hybrid amount (such amount, a “tenta-
tive disqualified hybrid amount"). See §§ 1.267A-
2(a) and 1.267A-3(b)(1). Pursuant to § 1.267A-3(b),
the tentative disqualified hybrid amount is reduced
by $48x. See § 1.267A-3(b)(4). The $48x is the
tentative disqualified hybrid amount to the extent
that it increases US1's pro rata share of tested in-
come with respect to FX under section 951A (cal-
culated as $80x multiplied by 60%). See id. Accord-
ingly, $32x of FZ's payment ($80x less $48x) is a
disqualified hybrid amount under § 1.267A-2(a)
and, as a result, $32x of the deduction is disallowed
under § 1.267A-1(b)(1).

(iii) Alternative facts - United States shareholder
not a tax resident of the United States. The facts are
the same as in paragraph (c)(7)(i) of this section,
except that US1 is a domestic partnership, 90% of
the interests of which are held by US2 and the
remaining 10% of which are held by a foreign indi-
vidual that is a nonresident alien (as defined in
section 7701(b)(1)(B)). As is the case in paragraph
(c)(7)(ii) of this section, $48x of the $80x tentative
disqualified hybrid amount increases US1's pro rata
share of the tested income of FX. However, US1 is
not a tax resident of the United States. Thus, the
$48x reduces the tentative disqualified hybrid
amount only to the extent that the $48x would be
taken into account by a tax resident of the United
States. See § 1.267A-3(b)(4). US2 (a tax resident of
the United States) would take into account $43.2x of
such amount (calculated as $48x multiplied by 90%).
Thus, $36.8x of FZ's payment ($80x less $43.2x) is
a disqualified hybrid amount under § 1.267A-2(a).
See id.

(8) Example 8. Imported mismatch rule - direct
offset-(i) Facts. FX holds all the interests of FW, and
FW holds all the interests of US1. FX holds an
instrument issued by FW that is treated as equity for
Country X tax purposes and indebtedness for Coun-
try W tax purposes (the FX-FW instrument). FW
holds an instrument issued by US1 that is treated as
indebtedness for Country W and U.S. tax purposes
(the FW-US1 instrument). In accounting period 1,
FW pays $100x to FX pursuant to the FX-FW in-
strument. The amount is treated as an excludible
dividend for Country X tax purposes (by reason of
the Country X participation exemption) and as inter-
est for Country W tax purposes. Also in accounting
period 1, US1 pays $100x to FW pursuant to the
FW-US1 instrument. The amount is treated as inter-
est for Country W and U.S. tax purposes and is
included in FW's income. The FX-FW instrument
was not entered into pursuant to the same plan or
series of related transactions pursuant to which the
FW-US1 instrument was entered into.

(ii) Analysis. US1 is a specified party and thus a
deduction for its $100x specified payment is subject
to disallowance under section 267A. The $100x pay-
ment is not a disqualified hybrid amount. In addition,
FW's $100x deduction is a hybrid deduction because
it is a deduction allowed to FW that results from an
amount paid that is interest under Country W tax

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law, and were Country X law to have rules substan-
tially similar to those under §§ 1.267A-1 through
1.267A-3 and 1.267A-5, a deduction for the pay-
ment would be disallowed (because under such rules
the payment would be pursuant to a hybrid transac-
tion and FX's no-inclusion would be a result of the
hybrid transaction). See §§ 1.267A-2(a) and
1.267A-4(b). Under § 1.267A-4(a), US1's payment
is an imported mismatch payment, US1 is an im-
ported mismatch payer, and FW (the tax resident that
includes the imported mismatch payment in income)
is an imported mismatch payee. The imported mis-
match payment is a disqualified imported mismatch
amount to the extent that the income attributable to
the payment is directly or indirectly offset by the
hybrid deduction incurred by FX (a tax resident that
is related to US1). See § 1.267A-4(a). Under
§ 1.267A-4(c)(1), the $100x hybrid deduction di-
rectly or indirectly offsets the income attributable to
US1's imported mismatch payment to the extent that
the payment directly or indirectly funds the hybrid
deduction. The entire $100x of US1's payment di-
rectly funds the hybrid deduction because FW (the
imported mismatch payee) incurs at least that
amount of the hybrid deduction. See § 1.267A-
4(c)(3)(i). Accordingly, the entire $100x payment is
a disqualified imported mismatch amount under
§ 1.267A-4(a) and, as a result, a deduction for the
payment is disallowed under § 1.267A-1(b)(2).

(iii) Alternative facts - long-term deferral. The
facts are the same as in paragraph (c)(8)(i) of this
section, except that the FX-FW instrument is treated
as indebtedness for Country X and Country W tax
purposes, and FW does not pay any amounts pursu-
ant to the instrument during accounting period 1. In
addition, under Country W tax law, FW is allowed to
deduct interest under the FX-FW instrument as it
accrues, whereas under Country X tax law FX does
not recognize income under the FX-FW instrument
until interest is paid. Further, FW accrues $100x of
interest during accounting period 1, and FW will not
pay such amount to FX for more than 36 months
after the end of the accounting period. The results are
the same as in paragraph (c)(8)(ii) of this section.
That is, FW's $100x deduction is a hybrid deduction,
see §§ 1.267A-2(a), 1.267A-3(a), and 1.267A-4(b),
and the income attributable to US1's $100x imported
mismatch payment is offset by the hybrid deduction
for the reasons described in paragraph (c)(8)(ii) of
this section. As a result, a deduction for the payment
is disallowed under § 1.267A-1(b)(2).

(iv) Alternative facts - notional interest deduc-
tion. The facts are the same as in paragraph (c)(8)(i)
of this section, except that the FX-FW instrument
does not exist and thus FW does not pay any
amounts to FX during accounting period 1. How-
ever, during accounting period 1, FW is allowed a
$100x notional interest deduction with respect to its
equity under Country W tax law. Pursuant to
§ 1.267A-4(b), FW's notional interest deduction is a
hybrid deduction. The results are the same as in
paragraph (c)(8)(ii) of this section. That is, the in-
come attributable to US1's $100x imported mis-
match payment is offset by FW's hybrid deduction
for the reasons described in paragraph (c)(8)(ii) of
this section. As a result, a deduction for the payment
is disallowed under § 1.267A-1(b)(2).

(v) Alternative facts - foreign hybrid mismatch
rules prevent hybrid deduction. The facts are the
same as in paragraph (c)(8)(i) of this section, except
that the tax law of Country W contains hybrid mis-
match rules and under such rules FW is not allowed
a deduction for the $100x that it pays to FX on the
FX-FW instrument. The $100x paid by FW therefore
does not give rise to a hybrid deduction. See
§ 1.267A-4(b). Accordingly, because the income
attributable to US1's payment is not directly or in-
directly offset by a hybrid deduction, the payment is
not a disqualified imported mismatch amount. There-
fore, a deduction for the payment is not disallowed
under § 1.267A-2(b)(2).

(9) Example 9. Imported mismatch rule - indi-
rect offsets and pro rata allocations-(i) Facts. FX
holds all the interests of FZ, and FZ holds all the
interests of US1 and US2. FX has a Country B
branch that, for Country X and Country B tax pur-
poses, gives rise to a taxable presence in Country B
and is therefore a taxable branch ("BB"). Under the
Country B-Country X income tax treaty, BB is a
permanent establishment entitled to deduct expenses
properly attributable to BB for purposes of comput-
ing its business profits under the treaty. BB is
deemed to pay a royalty to FX for the right to use
intangibles developed by FX equal to cost plus y%.
The deemed royalty is a deductible expense properly
attributable to BB under the Country B-Country X
income tax treaty. For Country X tax purposes, any
transactions between BB and X are disregarded. The
deemed royalty amount is equal to $80x during ac-
counting period 1. In addition, an instrument issued
by FZ to FX is properly reflected as an asset on the
books and records of BB (the FX-FZ instrument).
The FX-FZ instrument is treated as indebtedness for
Country X, Country Z, and Country B tax purposes.
In accounting period 1, FZ pays $80x pursuant to the
FX-FZ instrument; the amount is treated as interest
for Country X, Country Z, and Country B tax pur-
poses, and is treated as income attributable to BB for
Country X and Country B tax purposes (but, for
Country X tax purposes, is excluded from FX's
income as a consequence of the Country X exemp-
tion for income attributable to a branch). Further, in
accounting period 1, US1 and US2 pay $60x and
$40x, respectively, to FZ pursuant to instruments
that are treated as indebtedness for Country Z and
U.S. tax purposes; the amounts are treated as interest
for Country Z and U.S. tax purposes and are in-
cluded in FZ's income for Country Z tax purposes.
Lastly, neither the instrument pursuant to which US1
pays the $60x nor the instrument pursuant to which
US2 pays the $40x was entered into pursuant to a
plan or series of related transactions that includes the
transaction or agreement giving rise to BB's deduc-
tion for the deemed royalty.

(ii) Analysis. US1 and US2 are specified parties
and thus deductions for their specified payments are
subject to disallowance under section 267A. Neither
of the payments is a disqualified hybrid amount. In
addition, BB's $80x deduction for the deemed roy-
alty is a hybrid deduction because it is a deduction
allowed to BB that results from an amount paid that
is treated as a royalty under Country B tax law
(regardless of whether a royalty deduction would be
allowed under U.S. law), and were Country B tax
law to have rules substantially similar to those under

§§ 1.267A-1 through 1.267A-3 and 1.267A-5, a
deduction for the payment would be disallowed be-
cause under such rules the payment would be a
deemed branch payment and Country X has an ex-
clusion for income attributable to a branch. See
§§ 1.267A-2(c) and 1.267A-4(b). Under § 1.267A-
4(a), each of US1's and US2's payments is an im-
ported mismatch payment, US1 and US2 are im-
ported mismatch payers, and FZ (the tax resident that
includes the imported mismatch payments in in-
come) is an imported mismatch payee. The imported
mismatch payments are disqualified imported mis-
match amounts to the extent that the income attrib-
utable to the payments is directly or indirectly offset
by the hybrid deduction incurred by BB (a taxable
branch that is related to US1 and US2). See
§ 1.267A-4(a). Under § 1.267A-4(c)(1), the $80x
hybrid deduction directly or indirectly offsets the
income attributable to the imported mismatch pay-
ments to the extent that the payments directly or
indirectly fund the hybrid deduction. Paragraphs
(c)(9)(ii)(A) and (B) of this section describe the
extent to which the imported mismatch payments
directly or indirectly fund the hybrid deduction.

(A) Neither US1's nor US2's payment directly
funds the hybrid deduction because FZ (the imported
mismatch payee) did not incur the hybrid deduction.
See § 1.267A-4(c)(3)(i). To determine the extent to
which the payments indirectly fund the hybrid de-
duction, the amount of the hybrid deduction that is
allocated to FZ must be determined. See § 1.267A-
4(c)(3)(ii). FZ is allocated the hybrid deduction to
the extent that it directly or indirectly makes a
funded taxable payment to BB (the taxable branch
that incurs the hybrid deduction). See § 1.267A-
4(c)(3)(iii). The $80x that FZ pays pursuant to the
FX-FZ instrument is a funded taxable payment of FZ
to BB. See § 1.267A-4(c)(3)(v). Therefore, because
FZ makes a funded taxable payment to BB that is at
least equal to the amount of the hybrid deduction, FZ
is allocated the entire amount of the hybrid deduc-
tion. See § 1.267A-4(c)(3)(iii).

(B) But for US2's imported mismatch payment,
the entire $60x of US1's imported mismatch pay-
ment would indirectly fund the hybrid deduction
because FZ is allocated at least that amount of the
hybrid deduction. See § 1.267A-4(c)(3)(ii). Simi-
larly, but for US1's imported mismatch payment, the
entire $40x of US2's imported mismatch payment
would indirectly fund the hybrid deduction because
FZ is allocated at least that amount of the hybrid
deduction. See id. However, because the sum of
US1's and US2's imported mismatch payments to
FZ ($100x) exceeds the hybrid deduction allocated
to FZ ($80x), pro rata adjustments must be made.
See § 1.267A-4(e). Thus, $48x of US1's imported
mismatch payment is considered to indirectly fund
the hybrid deduction, calculated as $80x (the amount
of the hybrid deduction) multiplied by 60% ($60x,
the amount of US1's imported mismatch payment to
FZ, divided by $100x, the sum of the imported
mismatch payments that US1 and US2 make to FZ).
Similarly, $32x of US2's imported mismatch pay-
ment is considered to indirectly fund the hybrid
deduction, calculated as $80x (the amount of the
hybrid deduction) multiplied by 40% ($40x, the
amount of US2's imported mismatch payment to FZ,
divided by $100x, the sum of the imported mismatch

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payments that US1 and US2 make to FZ). Accord-
ingly, $48x of US1's imported mismatch payment,
and $32x of US2's imported mismatch payment, is a
disqualified imported mismatch amount under
§ 1.267A-4(a) and, as a result, a deduction for such
amounts is disallowed under § 1.267A-1(b)(2).

(iii) Alternative facts - loss made available
through foreign group relief regime. The facts are
the same as in paragraph (c)(9)(i) of this section,
except that FZ holds all the interests in FZ2, a body
corporate that is a tax resident of Country Z, FZ2
(rather than FZ) holds all the interests of US1 and
US2, and US1 and US2 make their respective $60x
and $40x payments to FZ2 (rather than to FZ).
Further, in accounting period 1, a $10x loss of FZ is
made available to offset income of FZ2 through a
Country Z foreign group relief regime. Pursuant to
§ 1.267A-4(c)(3)(vi), FZ and FZ2 are treated as a
single tax resident for purposes of § 1.267A-4(c)
because a loss that is not incurred by FZ2 (FZ's $10x
loss) is made available to offset income of FZ2 under
the Country Z group relief regime. Accordingly, the
results are the same as in paragraph (c)(9)(ii) of this
section. That is, by treating FZ and FZ2 as a single
tax resident for purposes of § 1.267A-4(c), BB's
hybrid deduction offsets the income attributable to
US1's and US2's imported mismatch payments to
the same extent as described in paragraph (c)(9)(ii)
of this section.

(10) Example 10. Imported mismatch rule - or-
dering rules and rule deeming certain payments to
be imported mismatch payments-(i) Facts. FX holds
all the interests of FW, and FW holds all the interests
of US1, US2, and FZ. FZ holds all the interests of
US3. FX advances money to FW pursuant to an
instrument that is treated as equity for Country X tax
purposes and indebtedness for Country W tax pur-
poses (the FX-FW instrument). In a transaction that
is pursuant to the same plan pursuant to which the
FX-FW instrument is entered into, FW advances
money to US1 pursuant to an instrument that is
treated as indebtedness for Country W and U.S. tax
purposes (the FW-US1 instrument). In accounting
period 1, FW pays $125x to FX pursuant to the
FX-FW instrument; the amount is treated as an ex-
cludible dividend for Country X tax purposes (by
reason of the Country X participation exemption
regime) and as deductible interest for Country W tax
purposes. Also in accounting period 1, US1 pays
$50x to FW pursuant to the FW-US1 instrument;
US2 pays $50x to FW pursuant to an instrument
treated as indebtedness for Country W and U.S. tax
purposes (the FW-US2 instrument); US3 pays $50x
to FZ pursuant to an instrument treated as indebted-
ness for Country Z and U.S. tax purposes (the FZ-
US3 instrument); and FZ pays $50x to FW pursuant
to an instrument treated as indebtedness for Country
W and Country Z tax purposes (FW-FZ instrument).
The amounts paid by US1, US2, US3, and FZ are
treated as interest for purposes of the relevant tax
laws and are included in the respective specified
recipient's income. Lastly, neither the FW-US2 in-
strument, the FW-FZ instrument, nor the FZ-US3
instrument was entered into pursuant to a plan or
series of related transactions that includes the trans-
action pursuant to which the FX-FW instrument was
entered into.

(ii) Analysis. US1, US2, and US3 are specified
parties (but FZ is not a specified party, see
§ 1.267A-5(a)(17)) and thus deductions for US1's,
US2's, and US3's specified payments are subject to
disallowance under section 267A. None of the spec-
ified payments is a disqualified hybrid amount. Un-
der § 1.267A-4(a), each of the payments is thus an
imported mismatch payment, US1, US2, and US3
are imported mismatch payers, and FW and FZ (the
tax residents that include the imported mismatch
payments in income) are imported mismatch payees.
The imported mismatch payments are disqualified
imported mismatch amounts to the extent that the
income attributable to the payments is directly or
indirectly offset by FW's $125x hybrid deduction.
See § 1.267A-4(a) and (b). Under § 1.267A-4(c)(1),
the $125x hybrid deduction directly or indirectly
offsets the income attributable to the imported mis-
match payments to the extent that the payments
directly or indirectly fund the hybrid deduction.
Paragraphs (c)(10)(ii)(A) through (C) of this section
describe the extent to which the imported mismatch
payments directly or indirectly fund the hybrid de-
duction and are therefore disqualified hybrid
amounts for which a deduction is disallowed under
§ 1.267A-1(b)(2).

(A) First, the $125x hybrid deduction offsets the
income attributable to US1's imported mismatch
payment, a factually-related imported mismatch pay-
ment that directly funds the hybrid deduction. See
§ 1.267A-4(c)(2)(i). The entire $50x of US1's pay-
ment directly funds the hybrid deduction because
FW (the imported mismatch payee) incurs at least
that amount of the hybrid deduction. See § 1.267A-
4(c)(3)(i). Accordingly, the entire $50x of the pay-
ment is a disqualified imported mismatch amount
under § 1.267A-4(a).

(B) Second, the remaining $75x hybrid deduc-
tion offsets the income attributable to US2's im-
ported mismatch payment, a factually-unrelated im-
ported mismatch payment that directly funds the
remaining hybrid deduction. § 1.267A-4(c)(2)(ii).
The entire $50x of US2's payment directly funds the
remaining hybrid deduction because FW (the im-
ported mismatch payee) incurs at least that amount
of the remaining hybrid deduction. See § 1.267A-
4(c)(3)(i). Accordingly, the entire $50x of the pay-
ment is a disqualified imported mismatch amount
under § 1.267A-4(a).

(C) Third, the $25x remaining hybrid deduction
offsets the income attributable to US3's imported
mismatch payment, a factually-unrelated imported
mismatch payment that indirectly funds the remain-
ing hybrid deduction. See § 1.267A-4(c)(2)(iii). The
imported mismatch payment indirectly funds the re-
maining hybrid deduction to the extent that FZ (the
imported mismatch payee) is allocated the remaining
hybrid deduction. § 1.267A-4(c)(3)(ii). FZ is allo-
cated the remaining hybrid deduction to the extent
that it directly or indirectly makes a funded taxable
payment to FW (the tax resident that incurs the
hybrid deduction). § 1.267A-4(c)(3)(iii). The $50x
that FZ pays to FW pursuant to the FW-FZ instru-
ment is a funded taxable payment of FZ to FW.
§ 1.267A-4(c)(3)(v). Therefore, because FZ makes a
funded taxable payment to FW that is at least equal
to the amount of the remaining hybrid deduction, FZ
is allocated the remaining hybrid deduction.

§ 1.267A-4(c)(3)(iii). Accordingly, $25x of US3's
payment indirectly funds the $25x remaining hybrid
deduction and, consequently, $25x of US3's pay-
ment is a disqualified imported mismatch amount
under § 1.267A-4(a).

(iii) Alternative facts - amount deemed to be an
imported mismatch payment. The facts are the same
as in paragraph (c)(10)(i) of this section, except that
US1 is not a domestic corporation but instead is a
body corporate that is only a tax resident of Country
E (hereinafter, "FE") (thus, for purposes of this para-
graph (c)(10)(iii), the FW-US1 instrument is instead
issued by FE and is the "FW-FE instrument"). In
addition, the tax law of Country E contains hybrid
mismatch rules and, under a provision of such rules
substantially similar to § 1.267A-4, FE is denied a
deduction for the $50x it pays to FW under the
FW-FE instrument. Pursuant to § 1.267A-4(f), the
$50x that FE pays to FW pursuant to the FW-FE
instrument is deemed to be an imported mismatch
payment for purposes of determining the extent to
which the income attributable to US2's and US3's
imported mismatch payments is offset by FW's hy-
brid deduction. The results are the same as in para-
graphs (c)(10)(ii)(B) and (C) of this section. That is,
by treating the $50x that FE pays to FW as an
imported mismatch payment, FW's hybrid deduction
offsets the income attributable to US2's and US3's
imported mismatch payments to the same extent as
described in paragraphs (c)(10)(ii)(B) and (C) of this
section.

(iv) Alternative facts - amount deemed to be an
imported mismatch payment not treated as a funded
taxable payment. The facts are the same as in para-
graph (c)(10)(i) of this section, except that FZ holds
its interests of US3 indirectly through FE, a body
corporate that is only a tax resident of Country E
(hereinafter, "FE"), and US3 makes its $50x pay-
ment to FE (rather than to FZ); US3's $50x payment
is treated as interest for Country E tax purposes and
FE includes the payment in income. In addition,
during accounting period 1, FE pays $50x of interest
to FZ pursuant to an instrument and such amount is
included in FZ's income. Further, the tax law of
Country E contains hybrid mismatch rules and, un-
der a provision of such rules substantially similar to
§ 1.267A-4, FE is denied a deduction for $25x of
the $50x it pays to FZ, because under such provision
$25x of the income attributable to FE's payment is
considered offset against $25x of FW's hybrid deduc-
tion. With respect to US1 and US2, the results are the
same as described in paragraphs (c)(10)(ii)(A) and (B)
of this section. However, no portion of US3's payment
is a disqualified imported mismatch amount. This is
because the $50x that FE pays to FZ is not considered
to be a funded taxable payment, because under a pro-
vision of Country E's hybrid mismatch rules that is
substantially similar to § 1.267A-4, FE is denied a
deduction for a portion of the $50x. See § 1.267A-
4(c)(3)(v) and (f). Therefore, there is no chain of
funded taxable payments connecting US3 (the im-
ported mismatch payer) and FW (the tax resident that
incurs the hybrid deduction); as a result, US3's pay-
ment does not indirectly fund the hybrid deduction. See
§ 1.267A-4(c)(3)(ii) through (iv).

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§ 1.267A-7 Applicability dates.

(a) General rule. Except as provided in
paragraph (b) of this section, §§ 1.267A-1
through 1.267A-6 apply to taxable years
beginning after December 31, 2017.

(b) Special rules. Sections 1.267A-
2(b), (c), (e), 1.267A-4, and 1.267A-
5(b)(5) apply to taxable years beginning
on or after December 20, 2018. In addi-
tion, § 1.267A-5(a)(20) (defining struc-
tured arrangement), as well as the portions
of §§ 1.267A-1 through 1.267A-3 that
relate to structured arrangements and that
are not otherwise described in this para-
graph (b), apply to taxable years begin-
ning on or after December 20, 2018.

Par. 4 Section 1.1503(d)-1 is amended
by:

1\. In paragraph (b)(2)(i), removing the
word "and".

2\. In paragraph (b)(2)(ii), removing the
second period and adding in its
place "; and".

3\. Adding paragraph (b)(2)(iii).

4\. Redesignating paragraph (c) as para-
graph (d).

5\. Adding new paragraph (c).

6\. In the first sentence of newly-
redesignated paragraph (d)(2)(ii), re-
moving the language "(c)(2)(i)" and
adding the language "(d)(2)(i)" in its
place.

The additions read as follows:

§ 1.1503(d)-1 Definitions and special
rules for filings under section 1503(d).

* * * * *

(b) * * *

(2) * * *

(iii) A domestic consenting corporation
(as defined in § 301.7701-3(c)(3)(i) of
this chapter), as provided in paragraph
(c)(1) of this section. See § 1.1503(d)-
7(c)(41).

* * * * *

(c) Treatment of domestic consenting
corporation as a dual resident corpora-
tion-(1) Rule. A domestic consenting cor-
poration is treated as a dual resident cor-
poration under paragraph (b)(2)(iii) of this
section for a taxable year if, on any day
during the taxable year, the following re-
quirements are satisfied:

(i) Under the tax law of a foreign coun-
try where a specified foreign tax resident

is tax resident, the specified foreign tax
resident derives or incurs (or would derive
or incur) items of income, gain, deduction,
or loss of the domestic consenting corpo-
ration (because, for example, the domestic
consenting corporation is fiscally trans-
parent under such tax law).

(ii) The specified foreign tax resident
bears a relationship to the domestic con-
senting corporation that is described in
section 267(b) or 707(b). See § 1.1503(d)-
7(c)(41).

(2) Definitions. The following defini-
tions apply for purposes of this paragraph
(c).

(i) The term fiscally transparent means,
with respect to a domestic consenting cor-
poration or an intermediate entity, fiscally
transparent as determined under the princi-
ples of § 1.894-1(d)(3)(ii) and (iii), without
regard to whether a specified foreign tax
resident is a resident of a country that has an
income tax treaty with the United States.

(ii) The term specified foreign tax res-
ident means a body corporate or other
entity or body of persons liable to tax
under the tax law of a foreign country as a
resident.

* * * * *

Par. 5. Section 1.1503(d)-3 is amended
by adding the language "or (e)(3)" after
the language "paragraph (e)(2)" in para-
graph (e)(1), and adding paragraph (e)(3)
to read as follows:

§ 1.1503(d)-3 Foreign use.

** * * *

(e) * * *

(3) Exception for domestic consenting
corporations. Paragraph (e)(1) of this sec-
tion will not apply so as to deem a foreign
use of a dual consolidated loss incurred by
a domestic consenting corporation that is
a dual resident corporation under
§ 1.1503(d)-1(b)(2)(iii).

§ 1.1503(d)-6 [Amended]

Par. 6. Section 1.1503(d)-6 is
amended by:

1\. Removing the language "a foreign
government" and "a foreign country" in
paragraph (f)(5)(i), and adding the lan-
guage "a government of a country" and
"the country" in their places, respectively.

2\. Removing the language "a foreign
government" in paragraph (f)(5)(ii), and
adding the language "a government of a
country" in its place.

3\. Removing the language "the foreign
government" in paragraph (f)(5)(iii), and
adding the language "a government of a
country" in its place.

Par. 7. Section 1.1503(d)-7 is amended
by redesignating Examples 1 through 40
as paragraphs (c)(1) through (40), respec-
tively, and adding paragraph (c)(41) to
read as follows:

§ 1.1503(d)-7 Examples.

* * * * *

(c) * * *

(41) Example 41. Domestic consenting corpora-
tion-treated as dual resident corporation-(i) Facts.
FSZ1, a Country Z entity that is subject to Country
Z tax on its worldwide income or on a residence
basis and is classified as a foreign corporation for
U.S. tax purposes, owns all the interests in DCC, a
domestic eligible entity that has filed an election to
be classified as an association. Under Country Z tax
law, DCC is fiscally transparent. For taxable year 1,
DCC's only item of income, gain, deduction, or loss
is a $100x deduction and such deduction comprises
a $100x net operating loss of DCC. For Country Z
tax purposes, FSZ1's only item of income, gain,
deduction, or loss, other than the $100x loss attrib-
utable to DCC, is $60x of operating income.

(ii) Result. DCC is a domestic consenting corpo-
ration because by electing to be classified as an
association, it consents to be treated as a dual resi-
dent corporation for purposes of section 1503(d). See
§ 301.7701-3(c)(3) of this chapter. For taxable year
1, DCC is treated as a dual resident corporation
under § 1.1503(d)-1(b)(2)(iii) because FSZ1 (a spec-
ified foreign tax resident that bears a relationship to
DCC that is described in section 267(b) or 707(b))
derives or incurs items of income, gain, deduction, or
loss of DCC. See § 1.1503(d)-1(c). FSZ1 derives or
incurs items of income, gain, deduction, or loss of
DCC because, under Country Z tax law, DCC is
fiscally transparent. Thus, DCC has a $100x
dual consolidated loss for taxable year 1. See
§ 1.1503(d)-1(b)(5). Because the loss is available to,
and in fact does, offset income of FSZ1 under Coun-
try Z tax law, there is a foreign use of the dual
consolidated loss in year 1. Accordingly, the dual
consolidated loss is subject to the domestic use lim-
itation rule of § 1.1503(d)-4(b). The result would be
the same if FSZ1 were to indirectly own its DCC
stock through an intermediate entity that is fiscally
transparent under Country Z tax law, or if an indi-
vidual were to wholly own FSZ1 and FSZ1 were a
disregarded entity. In addition, the result would be
the same if FSZ1 had no items of income, gain,
deduction, or loss, other than the $100x loss attrib-
utable to DCC.

(iii) Alternative facts - DCC not treated as a
dual resident corporation. The facts are the same as
in paragraph (c)(41)(i) of this section, except that

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DCC is not fiscally transparent under Country Z tax
law and thus under Country Z tax law FSZ1 does not
derive or incur items of income, gain, deduction, or
loss of DCC. Accordingly, DCC is not treated as a
dual resident corporation under § 1.1503(d)-
1(b)(2)(iii) for year 1 and, consequently, its $100x
net operating loss in that year is not a dual consoli-
dated loss.

(iv) Alternative facts - mirror legislation. The
facts are the same as in paragraph (c)(41)(i) of this
section, except that, under provisions of Country Z
tax law that constitute mirror legislation under
§ 1.1503(d)-3(e)(1) and that are substantially similar
to the recommendations in Chapter 6 of OECD/G-
20, Neutralising the Effects of Hybrid Mismatch
Arrangements, Action 2: 2015 Final Report (October
2015), Country Z tax law prohibits the $100x loss
attributable to DCC from offsetting FSZ1's income
that is not also subject to U.S. tax. As is the case in
paragraph (c)(41)(ii) of this section, DCC is treated
as a dual resident corporation under § 1.1503(d)-
1(b)(2)(iii) for year 1 and its $100x net operating
loss is a dual consolidated loss. Pursuant to
§ 1.1503(d)-3(e)(3), however, the dual consolidated
loss is not deemed to be put to a foreign use by virtue
of the Country Z mirror legislation. Therefore, DCC
is eligible to make a domestic use election for the
dual consolidated loss.

Par. 8. Section 1.1503(d)-8 is amended
by removing the language "§ 1.1503(d)-
1(c)" and adding in its place the language
"§ 1.1503(d)-1(d)" wherever it appears in
paragraphs (b)(3)(i) and (iii), and adding
paragraphs (b)(6) and (7) to read as follows:

§ 1.1503(d)-8 Effective dates.

* * * * *

(b) * * *

(6) Rules regarding domestic consent-
ing corporations. Section 1.1503(d)-
1(b)(2)(iii), (c), and (d), as well
§ 1.1503(d)-3(e)(1) and (e)(3), apply to
determinations under §§ 1.1503(d)-1
through 1.1503(d)-7 relating to taxable
years ending on or after December 20, 2018.
For taxable years ending before December
20, 2018, see §§ 1.1503(d)-1(c) (previous
version of § 1.1503(d)-1(d)) and 1.1503(d)-
3(e)(1) (previous version of § 1.1503(d)-
3(e)(1)) as contained in 26 CFR part 1 re-
vised as of April 1, 2018.

(7) Compulsory transfer triggering
event exception. Sections 1.1503(d)-
6(f)(5)(i) through (iii) apply to transfers
that occur on or after December 20, 2018.
For transfers occurring before December
20, 2018, see § 1.1503(d)-6(f)(5)(i) through
(iii) as contained in 26 CFR part 1 revised as
of April 1, 2018. However, taxpayers may
consistently apply § 1.1503(d)-6(f)(5)(i)

through (iii) to transfers occurring before
December 20, 2018.

Par. 9. Section 1.6038-2 is amended
by adding paragraphs (f)(13) and (14) and
adding a sentence at the end of paragraph
(m) to read as follows:

§ 1.6038-2 Information returns required
of United States persons with respect to
annual accounting periods of certain
foreign corporations beginning after
December 31, 1962.

* * * * *

(f) * * *

(13) Amounts involving hybrid trans-
actions or hybrid entities under section
267A. If for the annual accounting period,
the corporation pays or accrues interest or
royalties for which a deduction is disal-
lowed under section 267A and the regu-
lations under section 267A as contained in
26 CFR part 1, then Form 5471 (or suc-
cessor form) must contain such informa-
tion about the disallowance in the form
and manner and to the extent prescribed
by the form, instruction, publication, or
other guidance published in the Internal
Revenue Bulletin.

(14) Hybrid dividends under section
245A. If for the annual accounting period,
the corporation pays or receives a hybrid
dividend or a tiered hybrid dividend under
section 245A and the regulations under
section 245A as contained in 26 CFR part
1, then Form 5471 (or successor form)
must contain such information about the
hybrid dividend or tiered hybrid dividend
in the form and manner and to the extent
prescribed by the form, instruction, publi-
cation, or other guidance published in the
Internal Revenue Bulletin.

* * * * *

(m) Applicability dates. * * * Para-
graphs (f)(13) and (14) of this section
apply with respect to information for an-
nual accounting periods beginning on or
after December 20, 2018.

Par. 10. Section 1.6038-3 is amended
by:

1\. Adding paragraph (g)(3).

2\. Redesignating the final paragraph (1)
of the section as paragraph (l), revising the
paragraph heading for newly-designated
paragraph (l), and adding a sentence to the
end of newly-designated paragraph (l).

The additions and revision read as fol-
lows:

§ 1.6038-3 Information returns required
of certain United States persons with
respect to controlled foreign
partnerships (CFPs).

* * * * *

(g) * * *

(3) Amounts involving hybrid transac-
tions or hybrid entities under section
267A. In addition to the information re-
quired pursuant to paragraphs (g)(1) and
(2) of this section, if, during the partner-
ship's taxable year for which the Form
8865 is being filed, the partnership paid or
accrued interest or royalties for which a
deduction is disallowed under section
267A and the regulations under section
267A as contained in 26 CFR part 1, the
controlling fifty-percent partners must
provide information about the disallow-
ance in the form and manner and to the
extent prescribed by Form 8865 (or suc-
cessor form), instruction, publication, or
other guidance published in the Internal
Revenue Bulletin.

(l) Applicability dates. * * * Paragraph
(g)(3) of this section applies for taxable
years of a foreign partnership beginning
on or after December 20, 2018.

Par. 11. Section 1.6038A-2 is amended
by adding paragraph (b)(5)(iii) and adding
a sentence at the end of paragraph (g) to
read as follows:

§ 1.6038A-2 Requirement of return.

(b) * * *

(5) * * *

(iii) If, for the taxable year, a reporting
corporation pays or accrues interest or
royalties for which a deduction is disal-
lowed under section 267A and the regu-
lations under section 267A as contained in
26 CFR part 1, then the reporting corpo-
ration must provide such information
about the disallowance in the form and
manner and to the extent prescribed by
Form 5472 (or successor form), instruc-
tion, publication, or other guidance pub-
lished in the Internal Revenue Bulletin.

(g) * * * Paragraph (b)(5)(iii) of this
section applies with respect to information
for annual accounting periods beginning
on or after December 20, 2018.

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# PART 301-PROCEDURE AND ADMINISTRATION

Paragraph 12. The authority citation
for part 301 continues to read in part as
follows:

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

Par. 13. Section 301.7701-3 is
amended by revising the sixth sentence of
paragraph (a) and adding paragraph (c)(3)
to read as follows:

§ 301.7701-3 Classification of certain
business entities.

(a) In general. * * * Paragraph (c) of
this section provides rules for making ex-
press elections, including a rule under
which a domestic eligible entity that elects
to be classified as an association consents
to be subject to the dual consolidated loss
rules of section 1503(d).

(c) * * *

(3) Consent to be subject to section
1503(d)-(i) Rule. A domestic eligible en-
tity that elects to be classified as an asso-

ciation consents to be treated as a dual
resident corporation for purposes of sec-
tion 1503(d) (such an entity, a domestic
consenting corporation), for any taxable
year for which it is classified as an asso-
ciation and the condition set forth in
§ 1.1503(d)-1(c)(1) of this chapter is sat-
isfied.

(ii) Transition rule - deemed consent.
If, as a result of the applicability date
relating to paragraph (c)(3)(i) of this
section, a domestic eligible entity that is
classified as an association has not con-
sented to be treated as a domestic con-
senting corporation pursuant to para-
graph (c)(3)(i) of this section, then the
domestic eligible entity is deemed to
consent to be so treated as of its first
taxable year beginning on or after De-
cember 20, 2019. The first sentence of
this paragraph (c)(3)(ii) does not apply
if the domestic eligible entity elects, on
or after December 20, 2018 and effec-
tive before its first taxable year begin-
ning on or after December 20, 2019, to
be classified as a partnership or disre-

garded entity such that it ceases to be a
domestic eligible entity that is classified
as an association. For purposes of the
election described in the second sen-
tence of this paragraph (c)(3)(ii), the
sixty month limitation under paragraph
(c)(1)(iv) of this section is waived.

(iii) Applicability date. The sixth sen-
tence of paragraph (a) of this section and
paragraph (c)(3)(i) of this section apply to
a domestic eligible entity that on or after
December 20, 2018 files an election to be
classified as an association (regardless of
whether the election is effective before
December 20, 2018). Paragraph (c)(3)(ii)
of this section applies as of December 20,
2018.

Kirsten Wielobob,
Deputy Commissioner for Services and
Enforcement.

(Filed by the Office of the Federal Register on December 12,
2018, 4:15 a.m., and published in the issue of the Federal
Register for December 28, 2018 83 F.R. 67612)

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# Definition of Terms

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

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

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

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

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

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

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

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

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

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

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

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

# Abbreviations

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

A-Individual.

Acq .- Acquiescence.

B-Individual.

BE-Beneficiary.

F.R .- Federal Register.

FUTA-Federal Unemployment Tax Act.

FX-Foreign corporation.

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

GE-Grantee.

GP-General Partner.

GR-Grantor.

COOP-Cooperative.

IC-Insurance Company.

Ct.D .- Court Decision.

I.R.B .- Internal Revenue Bulletin.

CY-County.

LE-Lessee.

D-Decedent.

LP-Limited Partner.

LR-Lessor.

M-Minor.

Nonacq .- Nonacquiescence.

O Organization.

P-Parent Corporation.

PHC-Personal Holding Company.

PO-Possession of the U.S.

PR-Partner.

PRS-Partnership.

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

REIT-Real Estate Investment Trust.

Rev. Proc .- Revenue Procedure.

Rev. Rul .- Revenue Ruling.

S-Subsidiary.

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

Stat .- Statutes at Large.

T-Target Corporation.

T.C .- Tax Court.

T.D .- Treasury Decision.

TFE-Transferee.

TFR-Transferor.

T.I.R .- Technical Information Release.

TP-Taxpayer.
TR-Trust.

TT-Trustee.

U.S.C .- United States Code.

DE-Donee.

Del. Order-Delegation Order.

DISC-Domestic International Sales Corporation.
DR-Donor.

E-Estate.

EE-Employee.

E.O .- Executive Order.

ER-Employer.

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

F-Fiduciary.

FC-Foreign Country.

FICA-Federal Insurance Contributions Act.

FISC-Foreign International Sales Company.

FPH-Foreign Personal Holding Company.

BK-Bank.

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

C-Individual.

C.B .- Cumulative Bulletin.

CFR-Code of Federal Regulations.

CI-City.

DC-Dummy Corporation.

X-Corporation.

Y-Corporation.

Z-Corporation.

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## Numerical Finding List1

Bulletin 2019-3

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

2019-08, 2019-03 I.R.B. 354

### Proposed Regulations:

REG-104259-18, 2019-02 I.R.B. 300
REG-104352-18, 2019-03 I.R.B. 357

### 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, 2019-2 I.R.B. 293

2019-10, 2019-2 I.R.B. 296

### Revenue Rulings:

2019-03, 2019-02 I.R.B. 272

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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# Finding List of Current Actions on Previously Published Items1

Bulletin 2019-3

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# Internal Revenue Service Washington, DC 20224

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# INTERNAL REVENUE BULLETIN

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