Internal Revenue Bulletin 2013-39 (PDF rendition): IRS Revenue Rulings

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Bulletin No. 201
3-39
September 23, 20
13
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
T.D. 9632, page 241.
Final regulations on the requirement to maintain minimum
essential coverage under §5000A, which was enacted by the
Patient Protection and Affordable Care Act and the Health Care
and Education Reconciliation Act of 2010, as amended by
the TRICARE Affirmation Act and Public Law 111–173. These
final regulations provide guidance to individual taxpayers
on the liability under §5000A for the shared responsibility
payment for not maintaining minimum essential coverage and
largely finalize the rules in the notice of proposed rulemaking
(REG–148500–12) published in the Federal Register (78 FR
7314) on February 1, 2013.
T.D. 9633, page 227.
These final regulations prevent the duplication of a net loss
when loss assets are contributed to a corporation in a sec-
tion 351 nonrecognition exchange. Under the regulations, the
duplication of a net loss is prevented by reducing the trans-
feree-corporation’s basis in the assets transferred, unless the
transferor-shareholder elects to reduce its basis in the stock
received in the exchange by the amount that would otherwise
have been applied to reduce the corporation’s basis in its as-
sets. Notice 2005–70 is obsolete.
EMPLOYEE PLANS
REG–111837–13, page 266.
These proposed regulations relate to the requirements for filing
certain employee retirement benefit plan statements, returns,
and reports on magnetic media. These proposed regulations
provide that a plan administrator (or, in certain situations, an
employer maintaining a plan) required by the Code or regula-
tions to file at least 250 returns during the calendar year that
includes the first day of the plan year must use magnetic media
to file certain statements, returns, and reports under sections
6057, 6058, and 6059. Comments requested by October 29,
2013.
ESTATE TAX
Rev. Rul. 2013–19, page 240.
Special Use Value; Farms; Interest Rates. The 2013 interest
rates to be used in computing the special use value of farm real
property for which an election is made under section 2032A of
the Code are listed for estates of decedents.
ADMINISTRATIVE
REG–144990–12, page 264.
These proposed regulations amend user fees for installment
agreements and offers in compromise. They affect taxpay-
ers who wish to pay their liabilities through installment agree-
ments and offers in compromise. Comments are requested by
September 30, 2013, and a public hearing is scheduled for
October 1, 2013.
Notice 2013–56, page 262.
This notice under sections 6050W and 3406 provides guid-
ance on the issuance of CP2100/CP2100As based on Forms
1099–K filed for calendar year 2012 payments. Additionally,
the notice provides relief from penalties under sections 6721
and 6722 for incorrect name and taxpayer identification num-
ber (TIN) combinations and missing TINs for Forms 1099–K
filed for calendar year 2012 payments; and for incorrect name
and TIN combinations for Forms 1099–K required to be filed
for calendar year 2013 payments.
Finding Lists begin on page ii.

The IRS Mission
Provide Americ
a’s taxpayers top-quality service by helping
them understa
nd and meet their tax responsibilities and en-
force the law wi
th 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 poli
cy of the Service to publish in the Bulletin all sub-
stantive ru
lings necessary to promote a uniform application of
the tax laws
, including all rulings that supersede, revoke, mod-
ify, or amen
d any of those previously published in the Bulletin.
All publish
ed rulings apply retroactively unless otherwise indi-
cated. Pro
cedures relating solely to matters of internal man-
agement ar
e not published; however, statements of internal
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, identifying 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, Leg-
islation 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 Secre-
tary (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 cont
ents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
September 23, 20132013–39 I.R.B.

Part I. Rulings
and Decisions Under the Internal Revenue Code
of 1986
Section 362.—
Basis to
Corporations
T.D. 9633
DEPARTMENT O
FTHE
TREASURY
Internal Re
venue Service
26 CFR Parts
1and602
Limitation
s on Duplication of
Net Built-
in Losses
AGENCY: In
ternal Revenue Service
(IRS), Tre
asury.
ACTION: Fi
nal regulations.
SUMMARY: T
his document contains fi-
nal regula
tions under section 362(e)(2) of
the Intern
al Revenue Code of 1986 (Code).
The regul
ations apply to certain nonrecog-
nition tr
ansfers of loss property to corpora-
tions. Th
e regulations affect all parties to
the trans
action.
DATES:Ef
fective Date:These final regu-
lations a
re effective on September 3, 2013.
Applicab
ility Date:For dates of appli-
cability
see §1.358–2(d), §1.362–4(j).
FOR FURTH
ER INFORMATION
CONTACT
: Theresa A. Abell (202)
622–770
0 (not a toll-free number).
SUPPLEM
ENTARY INFORMATION:
Paperwo
rk Reduction Act
The coll
ection of information con-
tained i
n these final regulations has been
reviewe
d and approved by the Office of
Managem
ent and Budget in accordance
with th
e Paperwork Reduction Act of 1995
(44 U.S
.C. 3507(d)) under OMB control
number
1545–2247. The collection of
inform
ation in these final regulations is in
§1.362
–4(d). This information is required
by the
IRS to verify basis of property
trans
ferred in certain tax-free transactions
when t
axpayers make the election pro-
vided
for under section 362(e)(2)(C).
An age
ncy may not conduct or sponsor,
and a p
erson is not required to respond
to, a collecti
on of information unless the
collection of
information displays a valid
control numbe
r.
Books or recor
ds relating to a collection
of informatio
n must be retained as long
as their cont
ents may become material in
the administ
ration of any internal revenue
law. General
ly, tax returns and tax return
information
are confidential, as required
by section 6
103.
Background
Section 362(e)
(2) was enacted in the
American Jobs C
reation Act of 2004 (Pub-
lic Law 108–357
, 188 Stat. 1418 (2004))
in order to prev
ent the duplication of
loss in certai
n corporate nonrecognition
transfers. Se
ction 362(e)(2) applies to
corporate acq
uisitions of property with a
net built-in l
oss in transactions described
in section 36
2(a) (transactions to which
section 351 a
pplies and acquisitions of
property as p
aid-in surplus or contribu-
tions to capi
tal), but only if the transaction
is not descr
ibed in section 362(e)(1) (trans-
actions in w
hich there is an importation
of built-in
loss). When a transaction is
subject to s
ection 362(e)(2), the acquiring
corporatio
n’s basis in loss property is re-
duced by th
e property’s allocable portion
of the tran
sferor’s net built-in loss. See
section 36
2(e)(2)(B). However, under sec-
tion 362(e
)(2)(C), the parties to the trans-
action can
make an irrevocable election
to apply t
he reduction to the transferor’s
basis in t
he stock received in the exchange
instead o
f to the transferee’s basis in the
property
received in the exchange.
Notice 20
05–70, 2005–2 C.B. 694,
was publi
shed on October 11, 2005, to
provide i
nterim guidance for making an
electio
ntoapplysection362(e)(2)(C).
See §601
.601(d)(2) of this chapter. Under
Notice 2
005–70, an election would be
conside
red effective once a certification
was incl
uded by the transferor or, if the
transf
eror is a controlled foreign corpora-
tion (C
FC), by all of its controlling U.S.
shareh
olders as defined in §1.964–1(c)(5),
on a tim
ely filed original Federal income
tax ret
urn (designated a “U.S. return” un-
der th
e final regulations) for the year of
the transacti
on. Notice 2005–70 expressly
permitted tax
payers to make a protective
election that
would have no effect on a
transaction
that is ultimately not subject
to section 36
2(e)(2). The Notice also al-
lowed other s
tatements to be treated as
effective el
ections if sufficient informa-
tion was pro
videdtotheIRSwithrespect
to the trans
fer and parties.
Proposed re
gulations under section
362(e)(2) w
ere published in theFederal
Register(7
1 FR 62067) on October 23,
2006. Follo
wing the publication of the
proposed r
egulations, the IRS received
questions
concerning the application
of section
362(e)(2) to transactions in-
volving S c
orporations and partnerships
and concer
ning the filing of the section
362(e)(2
)(C) election, particularly with
respect t
o transactions between persons
outside t
he United States. The IRS also
has becom
e aware of certain ambiguities
(describ
ed later in this preamble) relat-
ingtoth
e proper operation of the statute.
Two writ
ten comments were submitted;
no publi
c hearing was requested or held.
Summary of Proposed Regulations
1.General Application of Section,
Interaction with Other Law
The propos
ed regulations included a
number of s
pecific provisions regard-
ing the gen
eral operation of the statutory
framework
, such as provisions stating
that secti
on 362(e)(2) is to be applied
on a trans
feror-by-transferor basis; that
a transac
tion is treated as subject to sec-
tion 362(
e)(2) to the extent it is not a
transfer
of net built-in loss property under
section 3
62(e)(1); that gain recognized
by the tr
ansferor is taken into account in
determi
ning the transferee’s basis imme-
diately
after the transfer; and that section
362(e)(
2) applies to any transaction de-
scribed
in section 362(a) without regard to
whethe
r the transaction is also described in
sectio
n 362(b) or any other section. These
provis
ions responded to inquiries from
practi
tioners concerning section 362(e)(2)
and its
interaction with generally applica-
ble pr
ovisions of the Code.
2013–39 I.R.B.227September 23, 2013

2.Exceptions From the Application of
Section 362(e)(2)
The proposed regulations included
two exceptions under which a transaction
would be treated as not subject to section
362(e)(2) notwithstanding that the transac-
tion is generally described in that section.
Under the first exception, if a transfer
is not relevant for Federal income tax pur-
poses at the time it occurs and it does not
become relevant for Federal income tax
purposes at any time within two years of
the transfer, then, solely for purposes of
determining whether section 362(e)(2) ap-
plies to the transaction, the property ex-
changed would be deemed to have a basis
equal to its fair market value (designated
value under the final regulations) imme-
diately after the transaction. As a result,
the transfer would not be subject to section
362(e)(2). This exception reflected a con-
cern that transferors not anticipating that a
transfer would be relevant for Federal in-
come tax purposes would not be likely to
undertake the valuation and record-keep-
ing necessary to comply with the statute.
However, if a transfer that was not rele-
vant for Federal income tax purposes when
it occurred became relevant for Federal
income tax purposes at any time within
two years of the transfer, the administra-
tive burden of compliance would not be
unreasonable, and, if a transaction was un-
dertaken with a view to reducing or avoid-
ing Federal income tax, the transferor must
expect the transfer to be relevant for Fed-
eral income tax purposes. Because relief
would be either unnecessary or inappropri-
ate in either case, relief was not extended
to those cases.
Under the second exception, a trans-
action would not be subject to section
362(e)(2) to the extent that the transferor
distributes the stock received in the trans-
action and, in the distribution, no gain or
loss was recognized and no person takes
the stock or other property with a basis
determined by reference to the transferor’s
basis in the distributed stock. This relief
reflected a determination that, to the ex-
tent there is no duplicated loss that could
be recognized by any taxpayer, section
362(e)(2) should not apply to the transac-
tion.
3.Securities received without the
recognition of gain or loss
Section 362(e)(2) is silent with re-
spect to securities received without the
recognition of gain or loss in a transaction
otherwise subject to section 362(e)(2).
However, the IRS and Treasury Depart-
ment determined that the statutory purpose
of preventing loss duplication would be
circumvented if section 362(e)(2) did not
apply to securities issued in such cases.
For example, if loss property is transferred
in exchange for stock and securities and
any part of the securities are retained fol-
lowing the distribution of the stock under
section 355, loss would be duplicated and
preserved in the retained securities. To
prevent this circumvention of the statu-
tory purpose, the proposed regulations
defined the term “stock” to include both
stock and securities for purposes of section
362(e)(2).
4.Liabilities
In general, as illustrated inExample 5
in paragraph (d) of §1.362–4 of the pro-
posed regulations, liabilities assumed in
the transaction do not affect the applica-
tion of section 362(e)(2). However, the
proposed regulations provided that, if a
section 362(e)(2)(C) election is made, the
reduction to stock basis is limited to the
amount that the transferee would other-
wise reduce its basis in the transferred as-
sets. This was intended to prevent the re-
duction of stock basis attributable to con-
tingent liabilities associated with a trade
or business, for whichbasis is specifically
preserved under section 358(h)(2)(A).
5.The Section 362(e)(2)(C) Election
The proposed regulations adopted the
general approach of Notice 2005–70, treat-
ing an election as effective if the trans-
feror files a certification (designated the
“election statement” inthe proposed reg-
ulations) on its U.S. return for the year
of the transfer or, if the transferor is a
CFC, if the controlling U.S. shareholders
all file the election statement on or with
their U.S. returns. The proposed regula-
tions also adopted the rule allowing a pro-
tective election.
In addition, the proposed regulations
substantially expanded the guidance pro-
vided in Notice 2005–70. The proposed
regulations added an express requirement
that the transferor and the transferee ex-
ecute a written, binding agreement. The
proposed regulations also included guid-
ance on the filing of an election statement
in circumstances not addressed in the No-
tice (for example, if the transferor was not
requiredtofileaU.S.returnandwasnota
CFC) and provided that the statement must
be filed in accordance with the regulations
in order for the section 362(e)(2)(C) elec-
tion to be effective.
In addition, the proposed regulations
provided that the basis tracing provisions
in §1.358–2 would not apply to transac-
tions in which a section 362(e)(2)(C) elec-
tion is made. Thus, if A transferred mul-
tiplesharesofXstocktoYinatrans-
action subject to section 362(e)(2), the Y
shares received in the transaction would
each be allocated an equal portion of A’s
aggregate basis in the X shares transferred,
without regard to A’s bases in the individ-
ual shares of X stock surrendered. As a
result, there would be no disparity among
A’s bases in its Y shares following a sec-
tion 362(e)(2)(C) election. This rule was
intended to prevent apreservation of loss
that would be contrary to the objective of
section 362(e)(2).
6.Partnerships and S Corporations
The proposed regulations con-
firmed that any reduction under section
362(e)(2)(C) to the basis in stock received
by a partnership or S corporation in a
transaction subject to section 362(e)(2) is
an expenditure or expense of the transferor
partnership or S corporation. As a result,
the section 362(e)(2)(C) stock basis reduc-
tion would cause a reduction to the basis of
the partner in its interest in the partnership
or the S corporation shareholder’s basis in
its stock of the S corporation.
Summary of Comments and Guidance
In general, the commenters concurred
with the positions taken in the proposed
regulations, but requested that the overall
operation of the statutebeclarified. For
example, since the issuance of the pro-
posed regulations, the IRS has become
aware of certain questions relating to the
allocation of net built-in loss where gain
is recognized and multiple properties are
transferred in the transaction. In addition,
practitioners requested further guidance
September 23, 20132282013–39 I.R.B.

on the application of section 362(e)(2) to
transactions that are also subject to sec-
tion 362(e)(1), to transactions involving
partnerships and S corporations, and to
transactions between persons not con-
nected with the United States, particularly
with regard to the making of the section
362(e)(2)(C) election.
Accordingly, these final regulations
generally adopt the substantive rules of
the proposed regulations. In addition, the
final regulations revise the structure of the
proposed rules to clarify the application of
section 362(e)(2) and to provide a frame-
work that will better coordinate with the
provisions of section 362(e)(1) and the
regulations that are to be promulgated un-
der that section. These are not substantive
changes from the proposed regulations but
aresolelyintendedtosimplifytheappli-
cation of section 362(e)(2). The material
changes and additions to the proposed
regulations are as follows:
1.Clarification of Overall Application of
Section 362(e)(2)
The final regulations adopt a general
operative rule and related definitions to
facilitate the identification of transactions
that are subject to section 362(e)(2) and to
then determine the tax treatment required
by this section. This approach responds to
comments requesting more clarity on the
general operation of the provision.
The general operative rule set forth in
the final regulations is that whenever a
person (Transferor) transfers property to a
corporation (Acquiring) in a loss duplica-
tion transaction, Acquiring’s basis in each
loss duplication property (as determined
without regard to section 362(e)(2)) is re-
duced by the property’s allocable portion
of Transferor’s net built-in loss.
The final regulations define the term
“loss duplication transaction” as any sec-
tion 362(a) transfer in which Acquiring’s
aggregate basis in the property transferred
by Transferor would exceed the aggregate
value of such property immediately after
the transaction. The term “loss duplica-
tion property” refers to individual property
transferred in the loss duplication transac-
tion that Acquiring would take with a basis
that would exceed value immediately after
the transfer. Finally, the term “Transferor’s
net built-in loss” is defined as the excess
of Acquiring’s aggregate basis in property
received from Transferor over the aggre-
gate value of such property immediately
after the transaction. For purposes of ap-
plying each of these definitions, Acquir-
ing’s basis in property is determined im-
mediately after the transfer, disregarding
section 362(e)(2) but taking into account
all other applicable rules, including section
362(e)(1).
The final regulations thus incorpo-
rate in the operative rules and definitions
the transferor-by-transferor approach and
other general provisions that reflect the
statutory constructas implemented by
the proposed regulations, including that
a transfer can be subject to both section
362(e)(1) and section 362(e)(2) and the
priority given to section 362(e)(1) in such
cases. These principles are further illus-
trated in the examples.
2.Additional Definitions
Several questions were raised concern-
ing whether certain persons were required
to file a U.S. return within the meaning
of the regulations. To address these con-
cerns, the final regulations define the term
“U.S. return” as a return of income that
must be filed under section 6012 or an in-
formation return that must be filed under
Subtitle F, Chapter 61, Subchapter A, Part
III of the Code (sections 6031 and follow-
ing). The final regulations further provide
that the requirement to file the return must
be unconditional. Thus, the term does not
include forms that are merely elective to
receive a particular tax treatment, such as
statements filed to make an election or to
reduce or avoid withholding by a person
not otherwise required to file a U.S. re-
turn. These changes are intended to elimi-
nate uncertainty as to whether a person has
a filing requirement for purposes of deter-
mining whether a transaction qualifies for
relief as a transaction outside the United
States. The final regulations also clarify
the time for filing and the person that must
file a statement that the Transferor and Ac-
quiring are making an election under sec-
tion 362(e)(2)(C) (designated as a “Sec-
tion 362(e)(2)(C) Statement” under the fi-
nal regulations). The Section 362(e)(2)(C)
Statement is described more fully later in
this preamble.
The final regulations modify the defi-
nition of the term “controlling U.S. share-
holder.” Under the final regulations, only
persons owning a direct interest in the CFC
or an interest treated as owned by reason of
an interest in a partnership, estate, trust, or
corporation are treated as controlling U.S.
shareholders. This change reflects a con-
cern that, for this purpose, a rule treating
persons as controlling U.S. shareholders
solely by reason of the family attribution
rules presents undue administrability con-
cerns and can cause inappropriate results
in certain cases.
3.Exception for Transactions Outside the
U.S. Tax System
The IRS and Treasury Department con-
tinue to believe that administrative relief is
appropriate when the parties to the trans-
fer do not expect the transfer to be rele-
vant for Federal tax purposes, and in fact
the transfer does not become relevant for
Federal tax purposes within two years of
the transfer. Accordingly, the final regula-
tions retain the rule in the proposed regu-
lations excepting transactions wholly out-
side the U.S. tax system. However, the fi-
nal regulations conform the formulation of
the rule to the formulation of the exception
for transactions in which duplicated loss
is eliminated. That is, the rule in the fi-
nal regulations does not presume that basis
and value are equal (with the result that no
loss is transferred and so section 362(e)(2)
does not apply), as in the proposed regula-
tions, but instead provides simply that sec-
tion 362(e)(2) will not apply to a qualify-
ing transaction. Like the proposed regu-
lations, the final regulations provide that
a transaction will qualify for this excep-
tion only if the transaction is between per-
sons not connected to the United States,
the transaction does not become relevant
for Federal tax purposes within two years
of the transfer, and the transaction is not
undertaken pursuant to a plan to reduce or
avoid Federal taxes.
4.Controlled Foreign Partnerships
(CFPs)
The IRS and Treasury Department have
determined that, for purposes of the ad-
ministrative relief granted for transactions
outside the United States, as well as for
purposes of determining the person that
must file a Section 362(e)(2)(C) State-
ment, CFPs should be treated in the same
manner as CFCs. First, the reason that
2013–39 I.R.B.229September 23, 2013

CFCs are ineligible for relief is that a CFC
could not reasonably expect a transfer to
have no relevance for Federal income tax
purposes, and so the administrative relief
is not warranted. The same is true with re-
spect to CFPs. Second, with respect to the
filing of a Section 362(e)(2)(C) Statement,
although a CFP may not be required to file
a U.S. return, the reporting U.S. partners of
a CFP have a relationship to the CFP, and a
filing obligation with respect to the CFP’s
activities, that is materially the same as
that of the controlling U.S. shareholders of
a CFC. Thus, the reporting U.S. partners
of a CFP have the same reporting require-
ments under these final regulations as the
controlling U.S. shareholders of a CFC.
For purposes of these final regulations,
a partnership is a CFP if it is treated as
such for purposes of section 6038; a CFP’s
reporting U.S. partners are generally those
persons that would be required to file an
information return with respect to the CFP
under section 6038.
5.Liabilities
The final regulations retain the ap-
proach in the proposed regulations that
generally disregardsliability assumptions.
Example 5in paragraph (d) of the pro-
posed regulations §1.362–4 is expanded,
however, to illustrate more fully the appli-
cation of section 362(e)(2) to transactions
in which fixed and contingent liabilities
are assumed. SeeExample 5in paragraph
(h) of the final regulations §1.362–4.
However, in both written comments
and informal inquiries, practitioners have
raised concerns about the effect of this
rule when the property transferred is an
interest in a partnership with liabilities. In
particular, practitioners are concerned be-
cause partnership liabilities increase each
partner’s basis in its partnership interest
but do not give rise to a corresponding in-
crease in the value of those interests. The
result can be the appearance of a built-in
loss.
To address this problem, the final reg-
ulations generally adopt the approach
proposed by commentators, specifically,
by modifying the definition of the term
“value” (generally, fair market value) to
take liabilities into account when deter-
mining whether a partnership interest is
a loss asset. However, because there can
be differences betweenTransferor’s share
of partnership liabilities and Acquiring’s
share of partnership liabilities, the final
regulations provide that the value of a
partnership interest is the sum of cash that
Acquiring would receivefor such interest,
increased by any §1.752–1 liabilities (as
defined in §1.752–1(a)(4)) of the partner-
ship that are allocated to Acquiring with
regard to such transferred interest under
section 752. The final regulations include
an example that illustrates the application
and effect of this rule. SeeExample 8(ii)
in paragraph (h) of the final regulations
§1.362–4. The final regulations also clar-
ify that any section 743(b) adjustment to
be made as a result of the transaction is
made after any section 362(e) basis adjust-
ment.
6.Elections under Section 362(e)(2)(C)
Since the enactment of section
362(e)(2), the questions most frequently
asked of the IRS concern the making
of the section 362(e)(2)(C) election,
notwithstanding the publication of Notice
2005–70 and the proposed regulations.
Accordingly, the final regulations not only
generally adopt the rules set forth in Notice
2005–70 and in the proposed regulations,
but they also expand those rules signifi-
cantly to address the questions raised.
a. Section 362(e)(2)(C) Statement
To begin, the final regulations retain the
fundamental structure of the proposed reg-
ulations. Thus, under the final regulations,
a written, binding agreement to make a
section 362(e)(2)(C)election must be ex-
ecuted by Transferor and Acquiring, and
a Section 362(e)(2)(C) Statement must be
filed in accordance with the regulations. A
section 362(e)(2)(C) election is effective
only if both conditions are met. The final
regulations do not prescribe a particular
form for the agreement to make the section
362(e)(2)(C) election; however, the final
regulations do require the written, binding
agreement to be in effect prior to the time
a Section 362(e)(2)(C)Statement is filed.
The final regulations generally adopt
the structure of the proposed regulations
regarding the time and manner of filing of
the Section 362(e)(2)(C) Statement. Thus,
under the final regulations, the statement
is filed by Transferor (if Transferor is oth-
erwise required to file a U.S. return for
the year of the transaction) or by all of
Transferor’s controlling U.S. shareholders
or reporting U.S. partners (if Transferor is
a CFC or CFP at the time of the transac-
tion and is not otherwise required to file a
U.S. return). Further, if Transferor is not
otherwise required to file a U.S. return and
is not a CFC or CFP, then the statement is
filed by Acquiring (if Acquiring is other-
wise required to file a U.S. return in the
year of the transaction) or by all of Acquir-
ing’s controlling U.S. shareholders (if Ac-
quiring is a CFC at the time of the transac-
tion and is not otherwise required to file a
U.S. return).
Unlike the proposed regulations, the fi-
nal regulations do not require or permit the
filing of the Section 362(e)(2)(C) State-
ment by a U.S. person (as defined in sec-
tion 7701(a)(30)) that is not otherwise re-
quired to file a U.S. return. This change
was made because these regulations do not
create an independent filing requirement,
and not all U.S. persons would otherwise
be required to file a U.S. return.
b. Neither party able to file a Section
362(e)(2)(C) Statement
Like the proposed regulations, the final
regulations provide rules regarding the fil-
ingofaSection362(e)(2)(C) Statement if
neither Transferor, Acquiring, nor any of
their shareholders would be required to file
the statement at the time of the transaction
but at some later time either Transferor or
Acquiring becomes a person required to
file a U.S. return or a CFC, or the stock
or loss duplication property is acquired by
such a person or a CFC in a transferred
basis transaction. For this purpose, the fi-
nal regulations expand the proposed rule to
treat CFPs in the same manner as CFCs.
The final regulations expand the pro-
posed rules in two respects. First, the fi-
nal regulations provide that, if a person
holds property received in a transaction
with a basis determined directly or indi-
rectly by reference to the basis of loss du-
plication property or stock received in a
loss duplication transaction, the filing re-
quirements will treat such person as Trans-
ferororAcquiring(asapplicable)forpur-
poses of determining who must file a Sec-
tion 362(e)(2)(C) Statement and when.
Second, the final regulations provide
that a Section 362(e)(2)(C) Statement must
be filed with a U.S. return (or U.S. returns)
September 23, 20132302013–39 I.R.B.

for the first taxable year in which property
with a basis determined by reference to the
basis of loss duplication property or stock
received in a loss duplication transaction
is acquired by a person required to file a
U.S. return, a CFC, or a CFP. If, in the same
taxable year, more than one person has an
event that causes such basis to become rel-
evant for U.S. tax purposes, the Section
362(e)(2)(C) Statement must be filed by all
such persons with their U.S. return for that
first year.
These two changes were determined
necessary to prevent transactions from
qualifying for the two-year exception for
transactions outside the U.S. tax system
if the basis of property exchanged in a
transaction becomes relevant for U.S. tax
purposes within two years of the transac-
tion, as it would not be unduly burdensome
to require the valuation necessary to com-
ply with section 362(e)(2) in such a case.
These rules are expected to have limited
application, inasmuch as they will gener-
ally only apply if, within two years of the
transaction, a party to the transaction be-
comes a person required to file a U.S. re-
turn, a CFC, or a CFP, or such a person
acquires the loss duplication property or
stock received in a lossduplication trans-
action in a transferred basis transaction.
These rules will also apply in the limited
situations in which Transferor is a U.S.
person not otherwise required to file a U.S.
return and Acquiring is neither required to
file a U.S. return, a CFC, nor a CFP (such
a case would not qualify for the two-year
exception for transactions outside the U.S.
tax system because a U.S. person is a party
to the transaction).
7.Transactions Involving Partnerships
and S Corporations
Like the proposed regulations, the fi-
nal regulations expressly confirm that
any reduction to a transferor’s basis in
Acquiring stock by reason of a section
362(e)(2)(C) election is an expenditure
or expense under section 705(a)(2)(B)
(if Transferor is a partnership) and under
section 1367(a)(2)(D) (if Transferor is an
S corporation). However, in response to
questions raised with regard to the pro-
posed regulations, the final regulations
provide further guidance on the interac-
tion between section 362(e)(2) and both
subchapter K and subchapter S. Specif-
ically, the final regulations clarify that
no stock basis reduction is required un-
der section 1367(a)(2)(D) by reason of a
reduction to the S corporation’s basis in
acquired assets if a section 362(e)(2)(C)
election is not made. Inaddition, the final
regulations include examples illustrating
the consequences of transfers to and by S
corporations, as well as transfers by part-
nerships. For example, practitioners raised
concerns that S corporation shareholders
electing to reduce the basis of their S cor-
poration stock under section 362(e)(2)(C)
may inadvertently eliminate their loss
completely when the transferred asset is
sold. The IRS and Treasury Department
recognize that the elimination of any tax
benefit from the economic loss can result
in such cases and, to alert taxpayers to
the potential elimination of loss, the final
regulations include an example to illus-
trate the application of section 362(e)(2) to
transfers made both with and without the
election under section 362(e)(2)(C). See
Example 9in paragraph (h) of the final
regulations §1.362–4.
8.Examples
The final regulations include revised
and expanded examples based on those in
the proposed regulations. For example, in
response to questions about the scope of
the application of section 362(e)(2) to re-
organizations, the final regulations include
not only examples from the proposed reg-
ulations illustratingthe application of sec-
tion 362(e)(2) to transactions qualifying as
both section 351 transactions and reorga-
nizations, they also include an example il-
lustrating the nonapplicability of section
362(e)(2) to triangular reorganizations that
do not include a transfer to which section
362(a) applies.
9.Other Requests for Comments in the
Proposed Regulations
Although the preamble to the proposed
regulations invited comments concern-
ing whether special rules were needed
to address the interaction of section
362(e)(2) and section 336(d) when a sec-
tion 362(e)(2)(C) election is made, and
whether the regulations should deem a
section 362(e)(2)(C)election in the case
of a section 304 transaction, no comments
were received regarding these issues. Ac-
cordingly, no special rules addressing
these issues are included in the final reg-
ulations.
10.Effective/applicability date
These final regulations generally adopt
the proposed effective date and thus are
applicable to transactions occurring after
September 3, 2013. However, the final
regulations modify the proposed effective
date to provide that the final regulations
do not apply to transactions after Septem-
ber 3, 2013, that were effected pursuant
to a binding agreement that was in ef-
fect prior to September 3, 2013, and at all
times thereafter. In addition, the final reg-
ulations provide that taxpayers may apply
these rules to any transaction occurring af-
ter October 22, 2004.
11.Revision of §602.101, Table of OMB
Control Numbers
This Treasury Decision revises
§602.101 of this chapter (OMB Control
Numbers under Paperwork Reduction
Act) to include the OMB control num-
ber 1545–2247 issued with respect to the
collection of information in this Treasury
Decision, as well as OMB control number
1545–2125 issued with respect to the col-
lections of information in §§1.336–2 and
1.336–4 (TD 9619, 78 FR 28467) May 15,
2013.
Effect on Other Documents
The following publication is obsolete as
of September 3, 2013:
Notice 2005–70 (2005–2 C.B. 694).
Special Analyses
It has been determined that this Trea-
sury decision is not asignificant regula-
tory action as defined in Executive Order
12866, as supplemented by Executive Or-
der 13563. Therefore, a regulatory as-
sessment is not required. Further, it is
hereby certified that these final regulations
will not have a significant economic im-
pact on a substantial number of small enti-
ties. This certification is based on the fact
that the collection of information in these
regulations merely provides a mechanism
whereby, once a transferor and transferee
have agreed that it would be advantageous
to elect the special basis treatment afforded
under section 362(e)(2)(C), the transferor
2013–39 I.R.B.231September 23, 2013

(or in limited cases the transferee) can re-
port the existence of the agreement, and
minimal identifying information regarding
the transaction and the parties, on its return
in order to make the election effective. The
minimal identifying information should be
readily available to the parties and the pro-
fessional skills that would be necessary to
make the election would be the same as
those required to prepare a return for the
small business. Accordingly, a Regulatory
Flexibility Analysis under the Regulatory
Flexibility Act (5 U.S.C. chapter 6) is not
required. Pursuant to section 7805(f) of
the Code, these final regulations, as well as
the proposed regulations preceding these
final regulations, were submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business, and no com-
ments were received.
Drafting Information
The principal author of these regula-
tions is Jean R. Broderick of the Office
of Associate Chief Counsel (Corporate),
IRS. However, other personnel from the
IRS and Treasury Department participated
in their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry for
§1.362–4 to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.362–4 also issued under 26
U.S.C. 362(e)(2)(C)(ii). * * *
Par. 2. Section 1.358–2 is amended by
revising paragraph (a)(2)(viii) and adding
a new sentence at the end of paragraph (d)
to read as follows:
§1.358–2 Allocation of basis among
nonrecognition property.
(a) * * *
(2) * * *
(viii) This paragraph (a)(2) shall not
apply to determine the basis of a share
of stock or security received by a share-
holder or security holder in an exchange
describedinbothsection351andeither
section 354 or 356, if, in connection with
the exchange—
(A) The shareholder or security holder
exchanges property for stock or securities
in an exchange to which neither section
354 nor section 356 applies;
(B) The shareholder or security holder
exchanges property for stock or securities
in a transaction for which an election to
apply section 362(e)(2)(C) is in effect; or
(C) Liabilities of the shareholder or se-
curity holder are assumed.
*****
(d)Effective/applicability date.***
However, paragraph (a)(2)(viii) of this
section applies only to exchanges and dis-
tributions of stock occurring on or after
September 3, 2013; taxpayers may also
apply paragraph (a)(2)(viii) of this section
to transactions occurring after October 22,
2004.
Par. 3. Section 1.362–4 is amended by
revising the section heading and paragraph
(a)(1), and adding paragraphs (b) through
(j) to read as follows:
§1.362–4 Basis of loss duplication
property.
(a)Purpose and scope—(1)In general.
The purpose of section 362(e)(2) and this
section is to prevent the duplication of
net loss in transfers to which section 351
applies, capital contributions, and paid-in
surplus (each, a section 362(a) transac-
tion). See paragraph (g) of this section for
definitions of terms used in this section.
(2) * * *
(b)Basis determinations under section
362(e)(2) and this section. Notwithstand-
ing section 362(a), if a corporation (Ac-
quiring) receives loss duplication property
(as defined in paragraph (g)(1) of this sec-
tion) from a person (Transferor) in a loss
duplication transaction (as defined in para-
graph (g)(2) of thissection), Acquiring’s
basisinsuchpropertyisequaltotheba-
sis of the property determined without re-
gard to section 362(e)(2) and this section
(as described in paragraph (g)(1)(ii) of this
section), reduced by the property’s alloca-
ble portion of Transferor’s net built-in loss
(as defined in paragraph (g)(3) of this sec-
tion). If more than one Transferor trans-
fers property to a corporation in a sec-
tion 362(a) transaction, whether and the
extent to which section 362(e)(2) and this
section apply is determined separately for
each Transferor.
(c)Exceptions—(1)Transactions in
which net built-in loss is eliminated with-
out recognition. Section 362(e)(2) does
not apply to a transaction to the extent
that—
(i) Without recognizing gain or loss,
Transferor distributesthe Acquiring stock
received in the transaction; and
(ii) Upon completion of the transac-
tion, no person holds Acquiring stock or
any other asset with a basis determined, in
whole or in part, by reference to Trans-
feror’s basis in the distributed Acquiring
stock.
(2)Certain transactions outside of the
United States. Section 362(e)(2) does not
apply to a transaction if—
(i) Neither Transferor nor Acquiring
is a U.S. person (as defined in section
7701(a)(30)), a person otherwise required
tofileaU.S.returnfortheyearofthe
transaction, a controlled foreign corpora-
tion (CFC, as defined in paragraph (g)(7)
of this section), or a controlled foreign
partnership (CFP, as defined in paragraph
(g)(9) of this section) on the date of the
transaction;
(ii) The transfer occurs more than two
years prior to the date of any event de-
scribed in paragraph (d)(3)(ii)(E), (F), or
(G) of this section; and
(iii) The original transaction and the
event or events described in paragraph
(d)(3)(ii)(E), (F), or (G) of this section
werenotenteredintowithaviewtore-
ducing or avoiding the Federal income
tax liability of any person by avoiding the
application of section 362(e)(2) and this
section to the original transaction.
(d)Election to reduce Transferor’s
stock basis instead of Acquiring’s asset
basis—(1)In general.Inlieuofmaking
the basis reductions otherwise required
under paragraph (b) of this section, Trans-
feror and Acquiring may elect to reduce
Transferor’s basis in Acquiring stock that
is received in the transaction without
the recognition of gain or loss (the sec-
tion 362(e)(2)(C) election). The section
362(e)(2)(C) election may be made protec-
tively and will have no effect to the extent
that property transferred in the transaction
is determined not to be subject to section
362(e)(2) and this section. However, the
election is irrevocable once it is made. A
September 23, 20132322013–39 I.R.B.

section 362(e)(2)(C) election is made and
effective if—
(i) Prior to the filing of a Section
362(e)(2)(C) Statement (described in para-
graph (d)(3)(i) of this section), Transferor
and Acquiring enter into a written, bind-
ing agreement to elect to apply section
362(e)(2)(C); and
(ii) The Section 362(e)(2)(C) Statement
is filed in accordance with the provisions
of paragraph (d)(3) of this section.
(2)Effect of section 362(e)(2)(C) elec-
tion. If a section 362(e)(2)(C) election is
made and in effect—
(i) An amount equal to the portion of
Transferor’s net built-in loss (as defined in
paragraph (g)(3) of this section) that would
otherwise be applied to reduce asset basis
under paragraph (b) of this section is allo-
cated among the Acquiring shares received
or deemed received in the exchange (in
proportion to the value of such shares) and
applied to reduce Transferor’s basis (deter-
mined without regard to section 362(e)(2)
and this section) in each such share; and
(ii) Acquiring’s basis in loss duplication
property received from Transferor in the
transaction is not determined under section
362(e)(2) and this section.
(3)Section 362(e)(2)(C) Statement—(i)
Form and contents of statement. The Sec-
tion 362(e)(2)(C) Statement is to be titled
“Section 362(e)(2)(C) Statement.” The
Section 362(e)(2)(C) Statement must—
(A) Identify (by name and tax identifi-
cation number, if any) Transferor and Ac-
quiring;
(B) State that Transferor and Acquiring
have entered into a written, binding agree-
ment to elect to apply section 362(e)(2)(C)
as required in paragraph (d)(1)(i) of this
section; and
(C) State the date of the transaction
(or, if the transaction includes transfers on
more than one date, then the dates of all
transfers) to which the election applies.
(ii)Filing the Section 362(e)(2)(C)
Statement. In general, the Section
362(e)(2)(C) Statement is filed by the
person or entity described in the applica-
ble paragraph of this paragraph (d)(3)(ii).
Thus, if Transferor is a partnership, S
corporation, trust (including a subpart E
trust), or other pass-through entity, or Ac-
quiring is an S corporation, the entity (and
not the partners, shareholders, or other
persons having an interest in the entity or
its property) is the person that must file the
Section 362(e)(2)(C) Statement, without
regard to whether such entity is foreign or
domestic. However, in the case of a CFC
or CFP, the controlling U.S. shareholders
of the CFC or the reporting U.S. partners
of the CFP, respectively, file the Section
362(e)(2)(C) Statement.
(A)Transferor is a person required to
file a U.S. return. If Transferor is a per-
sonrequiredtofileaU.S.returnforthe
year of the transfer, Transferor must in-
clude the Section 362(e)(2)(C) Statement
on or with its timely filed (including ex-
tensions) original U.S. return for the tax-
able year in which thetransfer occurred.
(B)Transferor is a CFC or CFP and
not required to file a U.S. return. If para-
graph (d)(3)(ii)(A)of this section does
not apply and Transferor is either a CFC
or a CFP on the date of the transfer, all
of Transferor’s controlling U.S. share-
holders (in the case of a CFC) or all of
Transferor’s reporting U.S. partners (in the
case of a CFP) must include the Section
362(e)(2)(C) Statement on or with their
timely filed (including extensions) origi-
nal U.S. returns for their taxable years in
which the transfer occurred.
(C)Transferor is not a person required
to file a U.S. return, a CFC, or a CFP,
but Acquiring is required to file U.S. re-
turn. If paragraphs (d)(3)(ii)(A) and (B) of
this section do not apply and Acquiring is
a person required to file a U.S. return for
the year of the transfer, Acquiring must in-
clude the Section 362(e)(2)(C) Statement
on or with its timely filed (including ex-
tensions) original U.S. return for the tax-
able year in which thetransfer occurred.
(D)Transferor is not a person required
to file a U.S. return, a CFC, or a CFP, Ac-
quiring is not required to file a U.S. re-
turn, but Acquiring is a CFC.If paragraphs
(d)(3)(ii)(A) through (C) of this section
do not apply and Acquiring is a CFC on
the date of the transfer, all of Acquiring’s
controlling U.S. shareholders must include
the Section 362(e)(2)(C) Statement on or
with their timely filed (including exten-
sions) original U.S. returns for their tax-
able years in which the transfer occurred.
(E)Neither Transferor nor Acquiring
isapersonrequiredtofileaU.S.return,
aCFC,oraCFP,butTransferorlater
becomes a person required to file a U.S.
return, a CFC, or a CFP. If paragraphs
(d)(3)(ii)(A) through (D) of this section do
not apply and Transferor becomes a per-
son required to file a U.S. return, a CFC,
or a CFP, Transferor (if required to file a
U.S. return), all of Transferor’s control-
ling U.S. shareholders (if Transferor be-
comes a CFC not otherwise required to
file a U.S. return), or all of Transferor’s
reporting U.S. partners (if Transferor be-
comes a CFP not otherwise required to file
a U.S. return) must include the Section
362(e)(2)(C) Statement on or with their
timely filed (including extensions) orig-
inal U.S. returns fortheir taxable years
in which an event described in this para-
graph (d)(3)(ii)(E) first occurs. For pur-
poses of this paragraph (d)(3)(ii)(E), the
term Transferor includes any person hold-
ing property with a basis determined di-
rectly or indirectly by reference to Trans-
feror’s basis in the Acquiring stock re-
ceived in the transaction.
(F)Transferor is not and does not
become a person required to file a U.S.
return, a CFC, or a CFP, Acquiring is not,
but later becomes either a person required
to file a U.S. return, a CFC, or a CFP.
If paragraphs (d)(3)(ii)(A) through (E)
of this section do not apply and Acquir-
ing becomes a person required to file a
U.S. return, a CFC, or a CFP, Acquiring
(if required to file a U.S. return), all of
Acquiring’s controlling U.S. shareholders
(if Acquiring becomes a CFC not oth-
erwise required to file a U.S. return), or
all of Acquiring’s reporting U.S. part-
ners (if Acquiring becomes a CFP not
otherwise required to file a U.S. return)
must include the Section 362(e)(2)(C)
Statement on or with their timely filed (in-
cluding extensions) original U.S. returns
for their taxable years in which an event
described in this paragraph (d)(3)(ii)(F)
first occurs. For purposes of this para-
graph (d)(3)(ii)(F), the term Acquiring
includes any person holding property with
a basis determined directly or indirectly
by reference to Acquiring’s basis in loss
duplication property received in the trans-
action.
(G)Transferor and Acquiring are not
anddonotbecomeapersonrequiredto
fileaU.S.return,aCFC,oraCFP,but
the basis of the loss duplication property
or Acquiring stock later becomes relevant
for Federal tax purposes. If paragraphs
(d)(3)(ii)(A) through (F) of this section
do not apply and, in a transferred basis
transaction, a person required to file a U.S.
return, a CFC, or a CFP acquires either
2013–39 I.R.B.233September 23, 2013

loss duplication property or Acquiring
stock that was received in the loss duplica-
tion transaction, or any property the basis
ofwhichisdeterminedinwholeorinpart
by reference to any such property or stock,
all such persons (or, in the case of a CFC
or CFP not required to file a U.S. return,
all the controlling U.S. shareholders or all
the reporting U.S. partners, as applicable)
must include the Section 362(e)(2)(C)
Statement on or with their timely filed (in-
cluding extensions) original U.S. returns
for their first taxable year(s) in which there
occurs an event or events described in this
paragraph (d)(3)(ii)(G).
(e)Transfers by partnerships and S
corporations—(1)Transfers by partner-
ships. If a partnership transfers property in
a loss duplication transaction with respect
to which a section 362(e)(2)(C) election
is made, the resulting reduction to the
partnership’s basis in the Acquiring stock
received in exchange for the loss duplica-
tion property is treated as an expenditure
of the partnership described in section
705(a)(2)(B).
(2)Transfers by S corporations.IfanS
corporation transfers property in a loss du-
plication transaction with respect to which
a section 362(e)(2)(C) election is made, the
resulting reduction to the S corporation’s
basis in the Acquiring stock received in ex-
change for the loss duplication property is
treated as an expense of the S corporation
described in section 1367(a)(2)(D).
(f)Transfers to S corporations.Ifaper-
son transfers property to an S corporation
in a loss duplication transaction, any re-
sulting reduction under section 362(e)(2)
and this section to the S corporation’s ba-
sis in the property received is not treated as
an expense of the S corporation described
in section 1367(a)(2)(D).
(g)Definitions. For purposes of section
362(e)(2) and this section—
(1)Loss duplication propertyis any
property—
(i) That is transferred by Transferor to
Acquiring in a loss duplication transaction
(as defined in paragraph (g)(2) of this sec-
tion); and
(ii) That Acquiring would take with a
basis in excess of value immediately af-
ter the transaction; for this purpose, the
basis Acquiring would take in the prop-
erty is determined immediately after the
transaction and without regard to section
362(e)(2) and this section, but otherwise
taking into account all applicable provi-
sions of law, including, without limitation,
section 362(e)(1).
(2) Aloss duplication transactionis a
section 362(a) transaction in which Ac-
quiring’s aggregate basis in the property
received from Transferor would, but for
section 362(e)(2) and this section, exceed
the aggregate value of such property im-
mediately after the transaction. For this
purpose—
(i) A transaction is a section 362(a)
transaction if it is described in section
362(a) without regard to whether it is also
described in any other provision of the
Internal Revenue Code (Code), including,
without limitation, section 362(b); and
(ii) Acquiring’s aggregate basis in the
property received from Transferor is de-
termined immediately after the transaction
and without regard tosection 362(e)(2)
and this section, but otherwise taking
into account all applicable provisions of
law, including, without limitation, section
362(e)(1).
(3)Transferor’s net built-in lossis the
excess of—
(i) Acquiring’s aggregate basis (de-
termined under paragraph (g)(2)(ii) of
this section) in all property received from
Transferor in a loss duplication transac-
tion, over
(ii) The aggregate value of such prop-
erty immediately after the transaction.
(4) A property’sbuilt-in lossis the ex-
cess of Acquiring’s basis in the property
(determined as described in paragraph
(g)(1)(ii) of this section) over the prop-
erty’s value (determined immediately after
the transaction).
(5) A property’sallocable portion of
Transferor’s net built-in lossis the portion
of Transferor’s net built-in loss that bears
the same ratio to Transferor’s net built-in
loss that the property’s built-in loss bears
to the aggregate built-in losses reflected
in the bases of loss duplication property
transferred by Transferor in the transac-
tion.
(6) AU.S. returnis a return of income
under section 6012 or an information
return under Subtitle F, Chapter 61, Sub-
chapter A, Part III of the Code (sections
6031 and following) or the regulations
thereunder, that the taxpayer is uncondi-
tionally required to file. Thus, the term
does not include elective forms or state-
ments that are required to be filed only to
obtain a particular tax treatment, includ-
ingformsfiledtomakeanelectionorto
reduce or avoid withholding by a person
not otherwise required to file a U.S. return
(as described in this paragraph (g)(6)) (for
example, a notice of nonrecognition under
§1.1445–2(d)).
(7) Acontrolled foreign corporation
(CFC) is any corporation described in sec-
tion 957 or section 953(c).
(8) Acontrolling U.S. shareholderis
any person that is treated as a controlling
U.S. shareholder under §1.964–1(c)(5) be-
cause such person either owns a direct in-
terest in the CFC or is treated as own-
ing an interest in the CFC by reason of
section 318(a)(2) (attribution from partner-
ships, estates, trusts, and corporations).
(9) Acontrolled foreign partnership
(CFP) is any partnership treated as a con-
trolled foreign partnership for purposes of
section 6038.
(10) Areporting U.S. partneris any
partner of a CFP that is required to file
an information return with respect to the
CFP pursuant to section 6038 or the reg-
ulations thereunder, without regard to
§1.6038–3(c) or (j). In addition, in ap-
plying the constructive ownership rules
of §1.6038–3(b)(4), the term “nonresident
alien” is replaced by the term “individual.”
(11) The termstockmeans both Ac-
quiring stock and Acquiring securities re-
ceived by Transferor in the transaction if
gain or loss on the receipt of the stock or
securities is not recognized in whole or in
part.
(12)Value.(i)General rule.Theterm
valuemeans fair market value.
(ii)
Special rule for transfers of part-
nership interests. Notwithstanding the
general rule in paragraph (g)(12)(i) of this
section, when referring to a partnership
interest, for purposes of section 362(e)(2)
and this section, the termvaluemeans
the sum of the cash that Acquiring would
receive for the interest, assuming an ex-
change between a willing buyer and a
willing seller (neither being under any
compulsion to buy or sell and both having
reasonable knowledge of relevant facts),
increased by any §1.752–1 liabilities (as
defined in §1.752–1(a)(4)) of the partner-
ship allocated to Acquiring with regard
to such transferred interest under sec-
tion 752 immediately after the transfer to
Acquiring. See §1.743–1 regarding the
September 23, 20132342013–39 I.R.B.

application of section 743(b) following a
section 362(e) basis reduction.
(h)Examples. The examples in this
paragraph (h) illustrate the application of
section 362(e)(2) and this section. For pur-
poses of these examples, X, Y, P, S, S1,
S2, and DC are domestic corporations; A
and B are U.S. individuals; FC1 and FC2
are foreign corporations and, unless oth-
erwise indicated, are not required to file
a U.S. return and are not CFCs; and PRS
is a domestic partnership. Unless the facts
indicate otherwise, all persons and trans-
actions are unrelated; Acquiring’s basis
in the transferred property is not deter-
mined under section 362(e)(1); the prop-
erty transferred is not described in section
362(e)(1)(B); no election is made under
section 362(e)(2)(C), and the transactions
are not subject to recharacterization.
Example 1.Transfer described in section 351.(i)
Basic application of section.(A)Facts. A owns As-
set 1 (basis $90, value $60) and Asset 2 (basis $110,
value $120). In a transaction to which section 351 ap-
plies, A transfers Asset 1 and Asset 2 to X in exchange
for a single outstanding share of X stock represent-
ing all the outstanding X stock immediately after the
transaction.
(B)
Analysis.(1)Loss duplication transaction.
A’s transfer of Asset 1 and Asset 2 is a section 362(a)
transaction. But for section 362(e)(2) and this sec-
tion, X’s aggregate basis in those assets would be
$200 ($90 + $110), which would exceed the aggre-
gate value of the assets $180 ($60 + $120) immedi-
ately after the transaction. Accordingly, the transfer is
a loss duplication transaction and A has a net built-in
loss of $20 ($200 - $180).
(
2)Identifying loss duplication property.Butfor
section 362(e)(2) and this section, X’s basis in As-
set 1 would be $90, which would exceed Asset 1’s
$60 value immediately after the transaction. Accord-
ingly, Asset 1 is loss duplication property. But for
section 362(e)(2) and this section, X’s basis in As-
set 2 would be $110, which would not exceed Asset
2’s $120 value immediately after the transaction. Ac-
cordingly, Asset 2 is not loss duplication property.
(C)
Basis in loss duplication property.X’sbasis
in Asset 1 is $70, computed as its $90 basis under
section 362(a) reduced by A’s $20 net built-in loss.
(D)
Basis in other property. Under section 362(a),
X has a transferred basis of $110 in Asset 2. Under
section 358(a), A has an exchanged basis of $200 in
the X stock it receives in the transaction.
(ii)
Section 362(e)(2)(C) election. The facts are
the same as in paragraph (i)(A) of this
Example 1,
except that A and X make an election under section
362(e)(2)(C). Under paragraph (d)(2)(i) of this sec-
tion, A reduces its basis in the X stock, as determined
without regard to section 362(e)(2) and this section,
by the amount of A’s net built-in loss that would have
beenappliedtoreduceX’sbasisinAsset1hadthe
section 362(e)(2)(C) election not been made. In ad-
dition, no reduction is made to X’s basis in Asset 1,
as determined without regardtosection362(e)(2)and
this section. As a result, A’s basis in the X stock is
$180 ($200 - $20), X’s basis in Asset 1 is $90, and
X’s basis in Asset 2 is $110.
Example 2.Transfer described in both section
351 and section 368(a)(1)(B)
.(i)Basic application
of section
.(A)Facts. P owns the sole outstanding
share of S1 stock and the ten outstanding shares of
S2 stock. In a transaction to which section 351 ap-
plies and that is described in section 368(a)(1)(B), P
transfers its ten S2 shares to S1 in exchange for an
additional ten shares of S1 voting stock. At the time
of the transfer, P has a basis of $10 each in five of its
S2 shares (Shares 1 - 5) and a basis of $5 each in its
other five S2 shares (Shares 6 - 10), and the value of
each share is $7.
(B)
Analysis.(1)Loss duplication transaction.
P’s transfer of the S2 shares is a section 362(a) trans-
action notwithstanding that it is also a transaction de-
scribed in section 368(a)(1)(B) and therefore section
362(b). But for section 362(e)(2) and this section,
S1’s aggregate basis in the S2 shares would be $75
($10x5,or$50,forShares1–5+$5x5,or$25,
for Shares 6–10). Thus, S1’s $75 aggregate basis in
the shares would exceed the aggregate value of the
shares, $70 ($7 x 10 shares), immediately after the
transaction. Accordingly, the transfer is a loss dupli-
cation transaction and P has a net built-in loss of $5
($75 - $70).
(
2)Identifying loss duplication property. But for
section 362(e)(2) and this section, S1’s basis in each
of Shares 1–5 would be $10, which would exceed
each share’s $7 value immediately after the transac-
tion. Accordingly, Shares 1–5 are each loss duplica-
tion property. But for section 362(e)(2) and this sec-
tion, S1’s basis in each of Shares 6–10 would be $5,
which would not exceed each share’s $7 value im-
mediately after the transaction. Accordingly, Shares
6–10 are not loss duplication property.
(C)
Basis in loss duplication property.S1’sbasis
in each of Shares 1 - 5 is $9, computed as its $10
basis (determined without regard to section 362(e)(2)
and this section) reduced by $1, the share’s allocable
portion (1/5) of P’s net built-in loss ($5).
(D)
Basis in other property. Under section 362(a),
S1 has a transferred basis of $5 in each of Shares 6 -
10. Under section 358(a), P has an exchanged basis
in the ten S1 shares it receives in the exchange ($10
in each of the five S1 shares received in exchange
for Shares 1–5 and $5 in each of the five S1 shares
received in exchange for Shares 5 - 10).
(ii)
Section 362(e)(2)(C) election. The facts are
the same as in paragraph (i)(A) of this
Example 2,
except that an election undersection 362(e)(2)(C) is
made to reduce P’s basis in the shares of S1 stock
received in the exchange. Under paragraph (d)(2)(i)
of this section, P reduces its basis in the S1 stock
by $5, the amount of P’s net built-in loss that S1’s
basis in the S2 shares would have been reduced
under section 362(e)(2) and this section had the
section 362(e)(2)(C) election not been made, and
no reduction is made to S1’s basis in the S2 stock
(as determined without regardtosection362(e)(2)
and this section). Because an election is being made
under section 362(e)(2)(C), P’s basis in the new S1
shares is not determined under the general rule of
§1.358–2(a)(2)(i) (under which P’s basis in each new
S1 share would be equal to the basis of the S2 share
transferred in exchange for the S1 share). Section
1.358–2(a)(2)(viii)(B). Accordingly, P’s basis in
each new S1 share will be $7, the share’s allocable
portion of P’s $75 aggregate basis in the S2 shares
transferred in the transaction (or, $7.50 per share),
reduced under paragraph (d)(2)(i) of this section by
the$5thatwouldhavebeenappliedtoreduceS1’s
basis in the S2 shares had the section 362(e)(2)(C)
election not been made (or $.50 per share). Un-
der paragraph (d)(2)(ii) of this section and section
362(a), S1 receives five shares of the S2 stock with
a basis of $10 each and five shares of the S2 stock
with a basis of $5 each.
Example 3.Transfer described in both section
351 and section 368(a)(1)(A), multiple transferors,
elimination of duplicated loss
.(i)Facts.AownsAs-
set 1 (basis $120, value $130) and all the outstand-
ing shares of X stock. B owns all the outstanding
shares of Y stock (basis$150). Y owns Asset 2 (ba-
sis $250, value $210). Pursuant to a single plan, A
transfers Asset 1 to X in exchange for additional X
shares and, in a transaction qualifying as a reorgani-
zation described in section 368(a)(1)(A), Y merges
with and into X. In the merger, B receives X stock
with a basis equal to B’s basis in its Y stock immedi-
ately before the merger. A’s transfer of Asset 1 to X
in exchange for X stock and Y’s transfer of Asset 2
to X in the merger are both transactions to which sec-
tion 351 applies. Notwithstanding that the transfers
by A and Y are pursuant to a single plan forming one
transaction, section 362(e)(2) and this section apply
to each transferor separately.
(ii)
Application of section to A’s transfer of Asset
1
. A’s transfer of Asset 1 is a section 362(a) transac-
tion. But for section 362(e)(2) and this section, X’s
basis in Asset 1 would be $120, which would not ex-
ceed Asset 1’s $130 value immediately after the trans-
action. Accordingly, A’s transfer of Asset 1 is not a
loss duplication transaction notwithstanding that, tak-
ing both A’s transfer and Y’s transfer into account,
X has an aggregate net loss in Asset 1 and Asset 2.
Because Asset 1 is not received in a loss duplication
transaction, it is not loss duplication property and sec-
tion362(e)(2)andthissectiondonotapplytoA’s
transfer of Asset 1.
(iii)
Application of section to Y’s transfer of As-
set 2
.(A)Analysis.(1)Loss duplication transaction.
Y’stransferofAsset2toXisasection362(a)trans-
action, notwithstanding that it is also a transaction de-
scribed in section 368(a)(1)(A) and therefore section
362(b). But for section 362(e)(2) and this section, X’s
basis in Asset 2 would be $250, which would exceed
Asset 2’s $210 value immediately after the transac-
tion. Accordingly, Y’s transfer is a loss duplication
transaction and Y has a net built-in loss of $40.
(
2)Identifying loss duplication property. But for
section 362(e)(2) and this section, X’s basis in Asset
2 would be $250, which would exceed Asset 2’s $210
value immediately after the transaction. Accordingly,
Asset 2 is loss duplication property.
(B)
Basis in loss duplication property. Although
Asset 2 is loss duplication property, section 362(e)(2)
does not apply to Y’s transfer of Asset 2 to X because
Y distributes all of the X stock received in the ex-
change without recognizing gain or loss, and, upon
completion of the transaction, no person will hold the
X stock or any other asset with a basis determined
in whole or in part by reference to Y’s basis in such
stock. Accordingly, under paragraph (c)(1) of this
section, X’s basis in Asset 2 is not determined under
section 362(e)(2) and this section. Thus, under sec-
tion 362(a), X’s basis in Asset 2 is $250.
2013–39 I.R.B.235September 23, 2013

(iv)Basis in other property. Under section 358,
A’s basis in the X stock received in exchange for As-
set 1 is $120 and B’s basis in the X stock received in
the merger is $150. Under section 362(a), X’s basis
in Asset 1 is $120.
Example 4.Transfer described in both section
351 and section 368(a)(1)(D), followed by a distri-
bution qualifying under section 355
.(i)Basic trans-
action
.(A)Facts. A and B each own one of the two
outstanding shares of X common stock. X’s assets
include Asset 1 (basis $120, value $70), Asset 2 (ba-
sis $160, value $110), and Asset 3 (basis $220, value
$240). In a transaction to which section 351 applies
and that is described in section 368(a)(1)(D), X trans-
fers Asset 1, Asset 2, and Asset 3 to Y in exchange
for all the Y stock; then, in a distribution that quali-
fies under section 355, X distributes all the Y stock
received in the exchange to A in exchange for all of
A’s X stock. Under section 361(c)(1), X does not rec-
ognize gain or loss as a result of the distribution of all
the Y stock.
(B)
Analysis.(1)Loss duplication transaction.
X’s transfer of Asset 1, Asset 2, and Asset 3 is a sec-
tion 362(a) transaction. But for section 362(e)(2) and
this section, Y’s aggregate basis in those assets would
be $500 ($120 + $160 + $220). The aggregate value
of the assets immediately after the transaction is $420
($70 + $110 + $240). Thus, Y’s aggregate basis in the
assets would exceed the aggregate value of the assets
immediately after the transaction. Accordingly, the
transfer is a loss duplication transaction and X has a
net built-in loss of $80 ($500 - $420).
(
2)Identifying loss duplication property.Butfor
section 362(e)(2) and this section, Y’s basis in Asset
1 would be $120, which would exceed Asset 1’s $70
value immediately after the transaction. Accordingly,
Asset 1 is loss duplication property. But for section
362(e)(2) and this section, Y’s basis in Asset 2 would
be $160, which would exceed Asset 2’s $110 value
immediately after the transaction. Accordingly, As-
set 2 is also loss duplication property. But for sec-
tion 362(e)(2) and this section, Y’s basis in Asset 3
would be $220 and would therefore not exceed Asset
3’s $240 value immediately after the transaction. Ac-
cordingly, Asset 3 is not loss duplication property.
(C)
Basis in loss duplication property. Although
Asset 1 and Asset 2 are each loss duplication property,
X will distribute the Y stock received in exchange
for Asset 1 and Asset 2 without recognition of gain
or loss, and, upon completion of the transaction, no
person will hold the Y stock received by X or any
other asset with a basis determined in whole or in
part by reference to X’s basis in the Y stock received
in the exchange. (A’s basis in the Y stock will be
determined by reference to his basis in his X stock.)
Accordingly, under paragraph (c)(1) of this section,
Y’s bases in Asset 1 and Asset 2 are determined under
section 362(a) and not under section 362(e)(2) and
this section. Thus, Y’s basis in Asset 1 is $120 and
Y’s basis in Asset 2 is $160.
(D)
Basis in other property. Under section 358,
A’sbasisintheYstockreceivedinexchangeforhis
X stock is determined by reference to his basis in his
X stock surrendered. Under section 362(a), Y’s basis
in Asset 3 is $220.
(ii)
Section 355(e).(A)Facts.Thefactsarethe
same as in paragraph (i)(A) of this
Example 4,except
that, after the section 355 distribution, Y is acquired
pursuant to a plan (within the meaning of §1.355–7),
resulting in the application of section 355(e) to the
transactions.
(B)
Analysis. Because section 361(c)(2), and not
section 361(c)(1), will apply to X’s distribution of
Y stock, X will not qualify for nonrecognition treat-
ment on the distribution of the Y stock. As a result,
paragraph (c)(1) of this section does not apply to the
transaction, and Y’s bases in Asset 1 and Asset 2, the
loss duplication property, are determined under sec-
tion 362(e)(2) and this section. Asset 1 has a built-in
loss of $50 ($120 - $70), and Asset 2 has a built-in
loss of $50 ($160 - $110). Thus, Asset 1’s alloca-
ble portion of X’s net built-in loss is $40 ($50/$100
x $80), and Asset 2’s allocable portion of X’s net
built-in loss is $40 ($50/$100 x $80). Accordingly,
Y receives Asset 1 with a basis of $80 ($120 - $40)
and Asset 2 with a basis of $120 ($160 - $40).
(iii)
Retained stock and securities.(A)Facts.The
facts are the same as in paragraph (i)(A) of this
Ex-
ample 4
, except that X transfers Asset 1, Asset 2, and
Asset 3 to Y in exchange for Y stock and Y securities,
each constituting half of the consideration. In addi-
tion, for a valid business purpose, X retains Y stock
and Y securities each worth 1 percent of the total con-
sideration.
(B)
Analysis. Paragraph (c)(1) of this section ap-
plies only to the extent that stock received in a trans-
action is distributed without recognition of gain or
loss. Thus, section 362(e)(2) and this section apply
to the extent that property was exchanged for the re-
tained Y stock and Y securities (2 percent of the to-
tal). Accordingly, Y reduces its basis in Asset 1 and
in Asset 2, the loss duplication property, by $1.60
(two percent of X’s $80 net built-in loss). Asset 1
has a built-in loss of $50 ($120 - $70), and Asset 2
has a built-in loss of $50 ($160 - $110). Thus, Asset
1’s allocable portion of X’s net built-in loss is $.80
($50/$100 x $1.60), and Asset 2’s allocable portion of
X’s net built-in loss is $.80 ($50/$100 x $1.60). As
a result, Y receives Asset 1 with a basis of $119.20
($120 - $.80) and Asset 2 with a basis of $159.20
($160 - $.80).
(iv)
Retained stock and securities with a section
362(e)(2)(C) election
.(A)Facts. The facts are the
same as in paragraph (iii)(A) of this
Example 4,ex-
cept that an election undersection 362(e)(2)(C) is
made to reduce X’s bases in its retained Y stock and
retained Y securities.
(B)
Analysis. Under paragraph (d)(2)(i) of this
section, X reduces its basis in the retained Y stock and
the retained Y securities (determined without regard
to section 362(e)(2) and this section) by $1.60, the
portion of X’s $80 net built-in loss that would have
been applied to reduce Y’s basis in the transferred
assets had the election to apply section 362(e)(2)(C)
not been made. (Because the value of the Y stock
and the value of the Y securities are equal, X’s $500
basis in the transferred property would be allocated
equally between the Y stock and the Y securities,
$250 to each, under §1.358–2(b)(2), and the retained
Y stock and Y securities have a basis of $2.50 each
(one percent of $250).) For the reasons set forth in
paragraph (iii)(B) of this
Example 4,Ywouldhave
been required to reduce its basis in the transferred as-
sets by $1.60. Accordingly, X must reduce its ag-
gregate basis in the retained Y stock and Y securities
by $1.60. Under paragraph (d)(2)(i) of this section,
the $1.60 basis reduction is allocated and applied to
reduce X’s bases in the retained Y stock and Y secu-
rities in proportion to the value of each. Because X
retained Y stock and Y securities with equal values,
X holds each of the retained Y stock and securities
with an adjusted basis of $1.70 ($2.50 - $.80). Under
paragraph (d)(2)(ii) of this section, Y receives Asset
1 with a basis of $120, Asset 2 with a basis of $160,
and Asset 3 with a basis of $220.
Example 5.Transfer of liabilities.(i)Liabilities
described in section 358(d)(1)
.(A)Basic applica-
tion of section, no section 362(e)(2)(C) election
.(1)
Facts. A owns Asset 1 (basis $800, value $700). A
also has a $200 liability that has been taken into ac-
count for tax purposes and is thus described in section
358(d)(1), and not in sections 357(c)(3), 358(d)(2),
and 358(h)(1). A transfers Asset 1 to X in exchange
for a single outstanding share of X stock represent-
ing all the outstanding X stock immediately after the
transaction and X’s assumption of the liability. The
transfer is a transaction to which section 351 applies.
(
2)Analysis.(i)Loss duplication transaction.A’s
transfer of Asset 1 is a section 362(a) transaction. But
for section 362(e)(2) and this section, X’s basis in
Asset 1 would be $800, which would exceed Asset
1’s $700 value immediately after the transaction. Ac-
cordingly, the transfer is a loss duplication transaction
and A has a net built-in loss of $100 ($800 - $700).
(
ii)Identifying loss duplication property. But for
section 362(e)(2) and this section, X’s basis in Asset
1 would be $800, which would exceed the $700 value
of Asset 1 immediately after the transaction. Accord-
ingly, Asset 1 is loss duplication property.
(
3)Basis in loss duplication property.X’sbasis
in Asset 1 is $700, computed as its $800 basis deter-
mined under section 362(a) reduced by A’s $100 net
built-in loss.
(
4)Basis in other property. Under sections 358(a)
and (d)(1), A’s basis in the X stock is $600 ($800 basis
in property transferred - $200 liability assumed).
(B)
Section 362(e)(2)(C) election. The facts are
the same as in paragraph (i)(A)(
1)ofthisExample 5,
except that A and X make an election under section
362(e)(2)(C). In this case, A’s $100 net built-in loss
that would have been applied to reduce X’s basis in
Asset 1 is applied to reduce A’s basis in the X stock
received. As a result, A’s basis in the X stock is $500
($600, as determined in paragraph (i)(A)(
4)ofthis
Example 5, reduced by $100) and X’s basis in Asset
1 is $800.
(ii)
Contingent liabilities described in section
358(h)(1), section 358(h)(2)(A) exception applies
.
(A)
Facts. The facts are the same as in paragraph
(i)(A)(
1)ofthisExample 5, except that A’s liability
(valued at $200) has not been taken into account for
tax purposes and is described in sections 358(d)(2)
and 358(h)(1). However, Asset 1 is a trade or busi-
ness and the liability is associated with the trade or
business; as a result, the liability is described in sec-
tion 358(h)(2)(A) and is excepted from the general
rule of section 358(h)(1).
(B)
Analysis. For the reasons set forth in para-
graph (i)(A)(
2)ofthisExample 5, A’s transfer of As-
set 1 is a loss duplication transaction, A has a net
built-in loss of $100, and Asset 1 is loss duplication
property.
(C)
Basis in loss duplication property.Forthe
reasons set forth in paragraph (i)(A)(
3)ofthisExam-
ple 5
,X’sbasisinAsset1is$700.
September 23, 20132362013–39 I.R.B.

(D)Basis in other property.A’sbasisintheX
stock is $800 under sections 358(a), 358(d)(2), and
358(h)(2)(A).
(E)
Section 362(e)(2)(C) election. The facts are
the same as in paragraph (ii)(A) of this
Example 5,
except that A and X make an election under section
362(e)(2)(C). In this case, A’s $100 net built-in loss
that would have applied to reduce X’s basis in Asset 1
is applied to reduce A’s basis in the X stock received.
As a result, A’s basis in the X stock is $700 ($800,
as determined in paragraph (ii)(D) of this
Example 5,
reduced by $100). X’s basis in Asset 1 is $800.
Example 6.Section 351 transfer with boot.(i)
Basic transaction.(A)Facts. A owns Asset 1 (ba-
sis $80, value $100) and Asset 2 (basis $30, value
$25). In a transaction to which section 351 applies,
A transfers Asset 1 and Asset 2 to X in exchange for
10 shares of X stock and $25.
(B)
Analysis.(1)Loss duplication transaction.
A’s transfer of Asset 1 and Asset 2 is a section 362(a)
transaction. But for section 362(e)(2) and this sec-
tion, X’s aggregate basis in those assets would be
$130, computed as follows. Under section 362(a), a
corporation’s basis in property acquired in a trans-
action to which section 351 applies is the same as
the property’s basis in the hands of the transferor,
increased by any gain recognized to the transferor
on such transfer. Under section 351(b), gain (but
not loss) is recognized to the extent a transferor in
a section 351 exchange receives other property or
money in addition to the stock permitted to be re-
ceived without the recognition of gain. To determine
the amount of gain recognized under section 351(b),
the consideration is allocated proportionately (by
value) among the transferred properties. A’s gain
on the transfer is therefore computed as follows:
Asset 1 reflects 80 percent of the value transferred
($100/$125) and Asset 2 reflects 20 percent of the
value transferred ($25/$125). Thus, 80 percent of
the stock (eight shares) and the cash ($20) are treated
as being received in exchange for Asset 1 and 20
percentofthestock(twoshares)andthecash($5)
are treated as being received in exchange for Asset
2. Thus, under section 351(b), A recognizes $20 of
gain for the cash received in exchange for Asset 1,
but A recognizes no loss for the amount received for
Asset 2. As a result, under section 362(a), X would
have a basis of $100 in Asset 1 and $30 in Asset
2. Thus, X’s aggregate basis in the assets would
be $130, which exceeds the $125 aggregate value
of the assets ($100 + $25)). The transfer is a loss
duplication transaction and A has a net built-in loss
of $5 ($130 - $125).
(
2)Identifying loss duplication property.Butfor
section 362(e)(2) and this section, X’s basis in As-
set 1 would be $100 (A’s $80 basis increased by A’s
$20 gain recognized), which would not exceed As-
set 1’s $100 value immediately after the transaction.
Accordingly, Asset 1 is not loss duplication property.
But for section 362(e)(2) and this section, X’s basis
in Asset 2 would be $30, which would exceed Asset
2’s $25 value immediately after the transaction. Ac-
cordingly, Asset 2 is loss duplication property.
(C)
Basis in loss duplication property.X’sbasis
in Asset 2 is $25, computed as its $30 basis under
section 362(a) reduced by A’s $5 net built-in loss.
(D)
Basis in other property. Under section 362(a),
X’s basis in Asset 1 is $100 (A’s $80 basis increased
by the $20 gain recognized). Under section 358, A’s
basis in the X stock is $105 (the sum of its $80 basis
in Asset 1, its $30 basis in Asset 2, and its $20 gain
recognized, reduced by the $25 cash received in the
exchange).
(ii)
Section 362(e)(2)(C) election. The facts are
the same as in paragraph (i)(A) of this
Example 6,
except that A and X elect to reduce A’s stock basis
under section 362(e)(2)(C). Under paragraph (d)(2)(i)
of this section, A reduces its $105 basis in the X stock
by $5, the amount of A’s net built-in loss of that would
have been applied to reduce X’s basis in Asset 2 had
the section 362(e)(2)(C) election not been made. As
a result, A’s basis in the X stock is $100, and X’s basis
in Asset 2 is $30.
Example 7.Section 304 sale of built-in loss stock.
(i)
Basic transaction.(A)Facts. A owns all the stock
of X (basis $90, value $60) and all the stock of Y. A
sells all his X stock to Y for $60. Under section 304,
A is treated as though he transferred the X stock to
Y in exchange for Y stock in a transaction to which
section 351 applies. Then, Y is treated as redeeming
the Y stock it was treated as having issued to A in the
deemed section 351 transaction.
(B)
Analysis.(1)Loss duplication transaction.
A’s deemed transfer of X stock to Y is a section 362(a)
transaction. But for section 362(e)(2) and this sec-
tion, Y’s aggregate basis in the X stock would be $90,
whichwouldexceedtheXstock’svalueof$60imme-
diately after the transaction. Accordingly, the trans-
fer is a loss duplication transaction and A has a net
built-in loss of $30.
(
2)Identifying loss duplication property. But for
section 362(e)(2) and this section, Y’s basis in the
X stock would be $90, which would exceed the X
stock’s $60 value immediately after the transaction.
Accordingly, the X stock is loss duplication property.
(C)
Basis in loss duplication property.Y’sbasis
in the X stock is $60, its $90 basis determined without
regard to section 362(e)(2) and this section, reduced
by A’s $30 net built-in loss.
(D)
Basis in other property. Under section 358(a),
A has an exchanged basis of $90 in the Y stock he is
deemed to receive in the exchange; the effect of the
deemed redemption of that stock is then determined
under section 302.
(ii)
Section 362(e)(2)(C) election. The facts are
the same as in paragraph (i)(A) of this
Example 7,ex-
cept that the parties elect to reduce A’s stock basis un-
der section 362(e)(2)(C). For the reasons set forth in
paragraphs (i)(B) and (C) of this
Example 7,Y’sbasis
in the X stock would be reduced by $30. Accordingly,
A’s basis in the deemed-issued Y stock is $60, his $90
basis otherwise determined under section 358(a) re-
duced by the $30 that would have been applied to re-
duce Y’s basis in the X stock under section 362(e)(2)
and this section; the effect of the deemed redemption
of that stock is then determined under section 302.
Y’s basis in the X stock is $90.
Example 8.Transactions involving partnerships.
(i)
Transfer by a partnership.(A)Basic application
of section
.(1)Facts. PRS owns Asset 1 (basis $100,
value $70). PRS contributes Asset 1 to X in a trans-
action to which section 351 applies.
(
2)Analysis.(i)Loss duplication transaction.
PRS’stransferofAsset1isasection362(a)trans-
action. But for section 362(e)(2) and this section, X’s
basis in Asset 1 would be $100, which would exceed
Asset 1’s $70 value immediately after the transaction.
Accordingly, the transfer is a loss duplication trans-
action and PRS has a net built-in loss of $30 ($100 -
$70).
(
ii)Identifying loss duplication property. But for
section 362(e)(2) and this section, X’s basis in Asset
1 would be $100, which would exceed Asset 1’s $70
value immediately after the transaction. Accordingly,
Asset 1 is loss duplication property.
(
3)Basis in loss duplication property.X’sbasis
in Asset 1 is $70, computed as its $100 basis under
section 362(a) reduced by PRS’s $30 net built-in loss.
(
4)Basis in other property. Under section 358(a),
PRS has an exchanged basis of $100 in the X stock it
receives in the exchange.
(B)
Section 362(e)(2)(C) election.Thefactsare
the same as in paragraph (i)(A)(
1)ofthisExample 8,
except that PRS and X elect to reduce PRS’s stock
basis under section 362(e)(2)(C). In this case, PRS’s
$30 net built-in loss (as determined in paragraph
(i)(A)(
2)(i)ofthisExample 8) that would have been
applied to reduce X’s basis in Asset 1 is applied
to reduce PRS’s basis in the X stock received. As
a result, PRS’s basis in the X stock is $70 ($100
- $30) and X’s basis in Asset 1 is $100. The $30
reduction to PRS’s basis in the X stock is treated as
an expenditure of PRS under section 705(a)(2)(B)
and paragraph (e)(1) of this section. As a result, the
partners of PRS must reduce their bases in their PRS
interests.
(ii)
Transfer of interest in partnership with lia-
bility
.(A)Basic application of section.(1)Facts.
A and two other individuals are equal partners in
PRS. A’s basis in its partnership interest is $247. A’s
share of PRS’s §1.752–1 liabilities (as defined in
§1.752–1(a)(4)) is $145. A transfers his partnership
interest to X in a transaction to which section 351
applies. PRS has no election in effect under section
754. If X were to sell the PRS interest immediately
after the transfer, X would receive $100 in cash or
other property. In addition, assume that, taking into
account the rules under §1.752–4, X’s share of PRS’s
§1.752–1 liabilities (as defined in §1.752–1(a)(4)) is
$150 immediately after the transfer.
(
2)Analysis.(i)Loss duplication transaction.A’s
transfer of its PRS interest is a section 362(a) trans-
action. But for section 362(e)(2) and this section, X’s
basis in the PRS interest, would be $252 (A’s basis of
$247, reduced by A’s $145 share of PRS liabilities,
increased by X’s $150 share of PRS liabilities) and,
under paragraph (g)(12)(ii) of this section, the value
of the PRS interest would be $250 (the sum of $100,
the cash X would receive if X immediately sold the
interest, and $150, X’s share of the §1.752–1 liabili-
ties (as defined in §1.752–1(a)(4)) under section 752
immediately after the transfer to X). Therefore, the
transfer is a loss duplication transaction and A has a
net built-in loss of $2 ($252 - $250).
(
ii)Identifying loss duplication property. But for
section 362(e)(2) and this section, X’s basis in the
PRS interest would be $252, which would exceed the
PRS interest’s $250 value immediately after the trans-
action. Accordingly, the PRS interest is loss duplica-
tion property.
(
3)Basis in loss duplication property.X’sbasisin
the PRS interest is $250, computed as its $252 basis
under section 362(a), taking into account the rules
under section 752, reduced by A’s $2 net built-in loss.
(
4)Basis in other property. Under section 358,
taking into account the rules under section 752, A
has a basis of $102 ($247 reduced by A’s $145 share
2013–39 I.R.B.237September 23, 2013

of PRS liabilities) in the X stock he receives in the
transaction.
(B)
Section 362(e)(2)(C) election. The facts are
the same as in paragraph (i)(A) of this
Example 8,
except that A and X make an election under section
362(e)(2)(C). Under paragraph (d)(2)(i) of this sec-
tion, A reduces his basis in the X stock, as determined
without regard to section 362(e)(2) and this section,
by the amount of A’s net built-in loss that would have
been applied to reduce X’s basis in the PRS interest
had the section 362(e)(2)(C) election not been made.
In addition, no reduction is made to X’s basis in the
PRS interest, as determined without regard to section
362(e)(2) and this section. As a result, A’s basis in
the X stock is $100 ($102 - $2) and X’s basis in the
PRS interest is $252.
(C)
Transfer of partnership interest with liabil-
ity, not loss duplication transaction
. The facts are
the same as in paragraph (ii)(A)(1) of this
Example
8
, except that A’s share of PRS’s §1.752–1 liabilities
(as defined in §1.752–1(a)(4)) is $155. But for sec-
tion 362(e)(2) and this section, X’s basis in the PRS
interest would be $242 (A’s basis of $247, reduced
by A’s $155 share of PRS liabilities, increased by X’s
$150 share of PRS liabilities), which would not ex-
ceed the PRS interest’s $250 value immediately after
the transaction. Accordingly, A’s transfer of the PRS
interest is not a loss duplication transaction and sec-
tion 362(e)(2) and this section have no application to
the transaction. Under section 362(a), X’s basis in
the PRS interest is $242 and, under section 358, tak-
ing into account the rules under section 752, A has a
basis of $92 ($247 reduced by A’s $155 share of PRS
liabilities) in the X stock he receives in the transac-
tion.
Example 9.Transactions involving S Corpora-
tions
.(i)Transfer by S Corporation.(A)No section
362(e)(2)(C) election
.(1)Facts. S, an S corpora-
tion as defined in section 1361(a)(1), owns Asset 1
(basis $100, value $70). S transfers Asset 1 to X in
exchange for a single outstanding share of X stock
representing all the outstanding X stock immediately
after the transaction. S does not elect to treat X as a
qualified subchapter S subsidiary. The transaction is
one to which section 351 applies.
(
2)Analysis.(i)Loss duplication transaction.S’s
transfer of Asset 1 is a section 362(a) transaction. But
for section 362(e)(2) and this section, X’s basis in As-
set 1 would be $100, which would exceed Asset 1’s
$70 value immediately after the transaction. Accord-
ingly, the transfer is a loss duplication transaction and
S has a net built-in loss of $30 ($100 - $70).
(
ii)Identifying loss duplication property. But for
section 362(e)(2) and this section, X’s basis in Asset
1 would be $100, which would exceed Asset 1’s $70
value immediately after the transaction. Accordingly,
Asset 1 is loss duplication property.
(
iii)Basis in loss duplication property.X’sbasis
in Asset 1 is $70, computed as its $100 basis under
section 362(a) reduced by S’s $30 net built-in loss.
(
iv)Basis in other property. Under section 358(a),
S has an exchanged basis of $100 in the X stock it
receives in the exchange.
(B)
Section 362(e)(2)(C) election. The facts are
the same as in paragraph (i)(A)(
1)ofthisExample 9,
except that S and X elect to reduce S’s stock basis
under section 362(e)(2). In this case, S’s $30 built-in
loss (as determined in paragraph (i)(A)(
2)(i)ofthis
Example 9) that would have been applied to reduce
X’s basis in Asset 1 is applied to reduce S’s basis in
the X stock received. As a result, S’s basis in the
X stock is $70 ($100 - $30) and X’s basis in As-
set 1 is $100. The $30 reduction to S’s basis in the
X stock is treated as an expense of S under section
1367(a)(2)(D) and paragraph (e)(2) of this section.
As a result, the shareholders of S must reduce their
bases in their S stock.
(ii)
Transfer to S Corporation.(A)Basic applica-
tion of section
.(1)Facts. A owns Asset 1 (basis $90,
value $60) and Asset 2 (basis $110, value $120). In a
transaction to which section 351 applies, A transfers
Asset1andAsset2toS,anScorporationasdefined
in section 1361(a)(1), in exchange for a single share
of S stock representing all the outstanding S stock im-
mediately after the transaction.
(
2)Analysis.(i)Loss duplication transaction.A’s
transfer of Asset 1 and Asset 2 is a section 362(a)
transaction. But for section 362(e)(2) and this sec-
tion, S’s aggregate basis in those assets would be
$200 ($90 + $110), which would exceed the aggre-
gate value of the assets $180 ($60 + $120) immedi-
ately after the transaction. Accordingly, the transfer is
a loss duplication transaction and A has a net built-in
loss of $20 ($200 - $180).
(
ii)Identifying loss duplication property. But for
section 362(e)(2) and this section, S’s basis in As-
set 1 would be $90, which would exceed Asset 1’s
$60 value immediately after the transaction. As a re-
sult, Asset 1 is loss duplication property. But for sec-
tion 362(e)(2) and this section, S’s basis in Asset 2
would be $110, which would not exceed Asset 2’s
$120 value immediately after the transaction. As a
result, Asset 2 is not loss duplication property.
(
3)Basis in loss duplication property.S’sbasisin
Asset 1 is $70, computed as its $90 basis under sec-
tion 362(a) reduced by S’s $20 net built-in loss. The
$20 reduction to S’s basis in Asset 1 does not require
a reduction to A’s basis in its S stock under section
1367(a)(2)(D). See paragraph (f) of this section.
(
4)Basis in other property. Under section 362(a),
S has a transferred basis of $110 in Asset 2. Under
section 358(a), A has a basis of $200 in the S stock it
receives in the exchange.
(B)
Section 362(e)(2)(C) election.(1)Applica-
tion of section to transaction
. The facts are the same
as in paragraph (ii)(A)(
1)ofthisExample 9, except
that A and S elect to reduce A’s stock basis under sec-
tion 362(e)(2)(C). In this case, A’s $20 built-in loss
(as determined in paragraph (ii)(A)(
2)ofthisExam-
ple 9
) that would have been applied to reduce S’s ba-
sis in Asset 1 is applied to reduce A’s basis in the S
stock received. As a result, A’s basis in the S stock is
$180 ($200 - $20), S’s basis in Asset 1 is $90, and S’s
basisinAsset2is$110.
(
2)Tax consequences of subsequent disposition
of transferred assets
. The facts are the same as in
paragraph (ii)(B)(
1)ofthisExample 9except that,
in addition, the year after the transaction, S sells As-
set 1 (basis $90, value $60) and Asset 2 (basis $110,
value $120) for $180, recognizing the $20 net built-in
loss. The loss is allocated to A and reduces A’s ba-
sis in the S stock from $180 to $160 under section
1367(a)(2)(B). If A then sells its S stock for its $180
value, A will recognize a gain of $20.
Example 10.Triangular reorganizations.(i)
Facts. P owns all the stock of S1 and X owns all
the stock of S2. In a merger described in section
368(a)(2)(D), S2 merges with and into S1, and X
receives stock of P in exchange for its S2 stock. S2
has a net built-in loss in its assets acquired by S1 in
the transaction.
(ii)
Analysis. The reorganization is not a sec-
tion 362(a) transaction, notwithstanding that, under
§1.358–6(c), P is treated as acquiring and then trans-
ferring S2’s assets to S1 for purposes of determining
P’s adjustment to its basis in its S1 stock. Accord-
ingly, S1’s basis in the property acquired in the trans-
action is not determined under section 362(e)(2) and
this section; it is determined under section 362(b).
Example 11.Transfer that includes property de-
scribed in section 362(e)(1)(B) and property not de-
scribed in section 362(e)(1)(B)
.(i)Facts.FC1trans-
fers Asset 1 (basis $80, value $50) and Asset 2 (basis
$120, value $110) to DC in a transaction to which sec-
tion 351 applies. Asset 1 is not property described in
section 362(e)(1)(B); Asset 2 is property described in
section 362(e)(1)(B).
(ii)
Basis in property described in section
362(e)(1)(B)
. Immediately after the transfer and with-
out regard to section 362(e)(1) or section 362(e)(2)
and this section, DC’s aggregate basis in property
described in section 362(e)(1)(B) (Asset 2) would be
$120 under section 362(a). However, the aggregate
value of such property immediately after the transfer
is $110. Accordingly, the transfer of Asset 2 is an
importation of net built-in loss within the meaning
of section 362(e)(1)(C) and, under section 362(e)(1),
X’s basis in Asset 2 would be Asset 2’s value, $110.
(iii)
Application of section.(A)Analysis.(1)Loss
duplication transaction
. FC1’s transfer of Asset 1
and Asset 2 is a section 362(a) transaction. But for
section 362(e)(2) and this section, DC’s aggregate ba-
sis in those assets would be $190 (Asset 1’s $80 ba-
sis under section 362(a) + Asset 2’s $110 basis under
section 362(e)(1)), which would exceed the aggregate
value of the assets $160 ($50 + $110) immediately af-
ter the transaction. Accordingly, the transfer is a loss
duplication transaction and FC1 has a net built-in loss
of $30 ($190 - $160).
(
2)Identifying loss duplication property. But for
section 362(e)(2) and this section, DC’s basis in As-
set 1 would be $80, which would exceed Asset 1’s
$50 value immediately after the transaction. Accord-
ingly, Asset 1 is loss duplication property. But for
section 362(e)(2) and this section, DC’s basis in As-
set 2 would be $110, which would not exceed Asset
2’s $110 value immediately after the transaction. Ac-
cordingly, Asset 2 is not loss duplication property.
(B)
Basis in loss duplication property.DC’sbasis
in Asset 1 is $50, computed as its $80 basis under
section 362(a) reduced by FC1’s $30 net built-in loss.
(C)
Basis in other property. Under section
362(e)(1), DC’s basis in Asset 2 is $110. Under
section 358(a), FC1 has anexchanged basis of $200
in the DC stock it receives in the transaction.
Example 12.Section 362(e)(2)(C) elections with
respect to transfers between persons that are not re-
quired to file a U.S. return and that are not CFCs or
CFPs
.(i)Basic application of section. On June 30,
Year 1, FC1 transfers Asset 1 to FC2 in a transac-
tion to which section 351 applies (the original trans-
fer) and that is therefore a section 362(a) transac-
tion. But for section 362(e)(2) and this section, FC2’s
basis in Asset 1 (determined immediately after the
transfer, taking into account all applicable law, in-
cluding section 362(e)(1)) exceeds the value of As-
set 1 immediately after the transaction. Accordingly,
September 23, 20132382013–39 I.R.B.

the transaction is a loss duplication transaction and
Asset 1 is loss duplication property. FC1 and FC2
executed a written, binding agreement to apply sec-
tion 362(e)(2)(C) at some point before any Section
362(e)(2)(C) Statement is filed. However, the trans-
fer was not entered into with a view to reducing or
avoiding the Federal income tax liability of any per-
son by avoiding the application of section 362(e)(2)
and this section; further, no event described in para-
graph (d)(3)(ii)(E), (F), or (G) of this section occurs
prior to June 30, Year 3. As a result, under paragraph
(c)(2) of this section, section 362(e)(2) and this sec-
tion do not apply to the transfer. Accordingly, FC2’s
basis in Asset 1 is determined under section 362(a),
no section 362(e)(2)(C) election can be made, and any
protective filing of a Section 362(e)(2)(C) Statement
will have no effect.
(ii)
Loss duplication property later acquired by a
person required to file U.S. return
.Thefactsarethe
same as in paragraph (i) of this
Example 12,except
that, in addition, on January 1, Year 2, FC2 trans-
fers Asset 1 to DC in an exchange to which section
351 applies. FC2’s transfer is an event described in
paragraph (d)(3)(ii)(G) of this section. As a result,
paragraph (c)(2) does not except the original trans-
fer from the application of section 362(e)(2) and this
section. Under paragraph (d)(3)(ii)(G) of this section,
DC must include the Section 362(e)(2)(C) Statement
for the original transfer on or with its Year 2 U.S. re-
turn in order for that election to be effective. The re-
sult would be the same if, instead of FC2 transferring
Asset 1 to DC, FC1 transferred its FC2 stock to DC in
an exchange to which section 351 applies. (Further,
if an asset transferred by FC1 or FC2 to DC is a loss
asset immediately after its transfer to DC, DC’s basis
in that asset may be subject to section 362(e)(1).)
(iii)
Party to exchange later becomes a person re-
quired to file U.S. return
. The facts are the same
as in paragraph (i) of this
Example 12,exceptthat,
in addition, on January 1, Year 2, FC2 becomes en-
gaged in a U.S. business. FC2’s becoming engaged
in a U.S. business is an event described in paragraph
(d)(3)(ii)(F) of this section because it will cause FC2
to become a person required to file a U.S. return. As a
result, paragraph (c)(2) of this section does not except
the transfer from the application of section 362(e)(2)
and this section. Under paragraph (d)(3)(ii)(F) of this
section, FC2 must include the Section 362(e)(2)(C)
Statement for the original transfer on or with its Year
2 U.S. return in order for the section 362(e)(2)(C)
election for the original transfer to be effective.
(iv)
Statement not filed with respect to designated
event
. The facts are the same as in paragraph (iii)
of this
Example 12, except that, in addition, FC1 be-
came engaged in a U.S. trade or business on Octo-
ber 31, Year 1 and as a result became a person re-
quired to file a U.S. return, an event described in para-
graph (d)(3)(ii)(E) of this section. As a result, para-
graph (c)(2) of this section does not except the trans-
fer from the application of section 362(e)(2) and this
section. Further, in order for the election to be ef-
fective, FC1 must file the Section 362(e)(2)(C) State-
ment on or with its Year 1 U.S. return. See paragraph
(d)(3)(ii)(E) of this section. A statement filed by FC2
on or with its Year 2 U.S. return has no effect. Thus,
if FC1 does not file the statement, the election does
not become effective and basis is determined under
the general rule of section 362(e)(2).
(v)
Nonrecognition transfer of loss duplication
property outside United States, transferee later be-
comes engaged in U.S. trade or business
. The facts
are the same as in paragraph (i) of this
Example 12,
except that, in addition, on December 31, Year 1, FC2
transfers Asset 1 to FC3 in a transferred basis transac-
tion. In Year 2, FC3 becomes engaged in a U.S. trade
or business and as a result becomes a person required
to file a U.S. return; Asset 1 is not used in or con-
nected with the U.S. trade or business or otherwise
subject to Federal income tax. FC3’s becoming en-
gaged in a U.S. trade or business is an event described
in paragraph (d)(3)(ii)(F) of this section because FC3,
a person who holds loss duplication property with a
basis determined by FC2’s basis in the property, will
be required to file a U.S. return as a result of its be-
coming engaged in a U.S. business. As a result, para-
graph (c)(2) of this section does not except the trans-
fer from the application of section 362(e)(2) and this
section. Under paragraph (d)(3)(ii)(F) of this section,
FC3 must include the Section 362(e)(2)(C) Statement
for the original transfer on or with its Year 2 U.S. re-
turn in order for the section 362(e)(2)(C) election for
the original transfer to be effective.
(i) [Reserved].
(j)Effective/applicability date.This
section applies to transactions occurring
after September 3, 2013, unless effected
pursuant to a binding agreement that was
in effect prior to September 3, 2013, and at
all times thereafter. In addition, taxpayers
may apply these regulations to transac-
tions occurring after October 22, 2004.
Par. 4. In §1.705–1, paragraph (a)(9) is
added to read as follows:
§1.705–1 Determination of basis of
partner’s interest.
(a) * * *
(9) For basis adjustments necessary to
coordinate sections 705 and 362(e)(2), see
§1.362–4(f)(i).
*****
Par. 5. In §1.1367–1, a new sentence
is added at the end of paragraph (c)(2) to
read as follows:
§1.1367–1 Adjustments to basis of
shareholder’s stock in an S corporation.
*****
(c) * * *
(2) * * * For basis adjustments nec-
essary to coordinate sections 1367 and
362(e)(2), see §1.362–4(f)(ii).
*****
PART 602—OMB CONTROL
NUMBERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 6. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805
Par. 7. In §602.101, paragraph (b) is
amended by adding the following entries
to the table in numerical order to read as
follows:
§602.101 OMB Control numbers.
*****
(b) * * *
CFR part or section where
identified and described
Current OMB
control No.
*****
1.336–2...........................................................
1545–2125
1.336–4...........................................................
1545–2125
*****
1.362
–4
...........................................................
1545–2247
*****
Beth Tucker,
Deputy Commissioner for
Operations Support.
Approved August 23, 2013Mark J. Mazur,
Assistant Secretary
oftheTreasury(TaxPolicy).
2013–39 I.R.B.239September 23, 2013

(Filed by the Office of the Federal Register on August 30,
2013, 8:45 a.m., and published in the issue of the Federal
Register for September 3, 2013, 78 F.R. 54156)
Section 2032A.—Valuation
of Certain Farm, etc.,
Real Property
26 CFR 20.2032A–4: Method of valuing farm real
property.
Special Use Value; Farms; Interest
Rates. The 2013 interest rates to be used
in computing the special use value of farm
real property for which an election is made
under section 2032A of the Code are listed
for estates of decedents.
Rev. Rul. 2013–19
This revenue ruling contains a list of the
average annual effective interest rates on
new loans under the Farm Credit System.
This revenue ruling also contains a list of
the states within each Farm Credit System
Bank Territory.
Under § 2032A(e)(7)(A)(ii) of the In-
ternal Revenue Code, rates on new Farm
Credit System Bank loans are used in com-
puting the special use value of real prop-
erty used as a farm for which an election is
made under § 2032A. The rates in Table 1
of this revenue ruling may be used by es-
tates that value farmland under § 2032A as
ofadatein2013.
Average annual effective interest
rates, calculated in accordance with
§ 2032A(e)(7)(A) and § 20.2032A–4(e)
of the Estate Tax Regulations, to be used
under § 2032A(e)(7)(A)(ii), are set forth in
the accompanying Table of Interest Rates
(Table 1). The states within each Farm
Credit System Bank Territory are set forth
in the accompanying Table of Farm Credit
System Bank Territories (Table 2).
Rev. Rul. 81–170, 1981–1 C.B. 454,
contains an illustrative computation of an
average annual effective interest rate. The
rates applicable for valuation in 2012 are
in Rev. Rul. 2012–26, 2012–39 I.R.B.
358. For rate information for years prior
to 2012, see Rev. Rul. 2011–17, 2011–33
I.R.B. 160, and other revenue rulings that
are referenced therein.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Lane Damazo of the Office of the
Associate Chief Counsel (Passthroughs
and Special Industries). For further
information regarding this revenue ruling,
contact Lane Damazo at (202) 622–3090
(not a toll-free call).
REV. RUL. 2013–19 TABLE 1
TABLE OF INTEREST RATES
(Year of Valuation 2013)
Farm Credit System Bank Servicing State in
Which Property is LocatedRate
AgFirst,FCB .......................................................................
5.49
AgriBank,FCB .....................................................................
5.03
CoBank,ACB ......................................................................
4.56
Texas,FCB ........................................................................ 4.99
REV. RUL. 2013–19 TABLE 2
TABLE OF FARM CREDIT SYSTEM BANK TERRITORIES
Farm Credit System BankLocation of Property
AgFirst,FCB ............................................ Delaware,DistrictofColumbia,Florida,Georgia,Maryland,
North Carolina, Pennsylvania, South Carolina, Virginia, West
Virginia.
AgriBank,FCB .......................................... Arkansas, Illinois, Indiana, Iowa, Kentucky, Michigan,
Minnesota, Missouri, Nebraska, North Dakota, Ohio, South
Dakota, Tennessee, Wisconsin, Wyoming.
CoBank,ACB ........................................... Alaska,Arizona,California,Colorado,Connecticut,Hawaii,
Idaho, Kansas, Maine, Massachusetts, Montana, New
Hampshire, New Jersey, New Mexico, New York, Nevada,
Oklahoma, Oregon, Rhode Island, Utah, Vermont, Washington.
Texas,FCB.............................................. Alabama,Louisiana,Mississippi,Texas.
September 23, 20132402013–39 I.R.B.

Section 5000A.—Require-
ment to Maintain Minimum
Essential Coverage
T.D. 9632
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Shared Responsibility
PaymentforNotMaintaining
Minimum Essential Coverage
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final
regulations on the requirement to maintain
minimum essential coverage enacted by
the Patient Protection and Affordable Care
Act and the Health Care and Education
Reconciliation Act of 2010, as amended by
the TRICARE Affirmation Act and Pub-
lic Law 111–173. These final regulations
provide guidance to individual taxpayers
on the liability under section 5000A of the
Internal Revenue Code for the shared re-
sponsibility payment for not maintaining
minimum essential coverage and largely
finalize the rules in the notice of proposed
rulemaking (REG–148500–12) published
in theFederal Register(78 FR 7314) on
February 1, 2013.
DATES:Effective Date:These regulations
are effective on August 30, 2013.
Applicability Date:For date of applica-
bility, see §1.5000A–5(c).
FOR FURTHER INFORMATION
CONTACT: Sue-Jean Kim or
John B. Lovelace at (202) 622–4960 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained
in these regulations has been reviewed
and approved by the Office of Manage-
ment and Budget in accordance with the
Paperwork and Reduction Act of 1995
(44 U.S.C. 3507(d)) under control number
1545–0074. The collection of information
in these final regulations is in §1.5000A–3
and §1.5000A–4. The information is nec-
essary to determine whether the shared
responsibility payment provision applies
to a taxpayer, and, if it applies, the amount
of the penalty. The likely respondents are
individuals required to file Federal income
tax returns undersection 6012(a)(1).
Estimated total annual reporting bur-
den: 7,500,000 hours.
Estimated annual burden hours per re-
spondent varies from .1 to .5 hours, de-
pending on individual circumstances, with
an estimated average of .21 hours.
Estimated number of respondents:
36,000,000.
Estimated frequency of responses: An-
nually.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless the
collection of information displays a valid
control number assigned by the Office of
Management and Budget.
Book or records relating to a collection
of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required
by section 6103.
Background
This document amends the Income Tax
Regulations (26 CFR part 1) by adding fi-
nal regulations under section 5000A on the
individual shared responsibility provision.
Section 5000A was enacted by the Patient
Protection and Affordable Care Act, Pub-
lic Law 111–148 (124 Stat. 119 (2010)),
and the Health Care and Education Recon-
ciliation Act of 2010, Public Law 111–152
(124 Stat. 1029 (2010)) (collectively, the
Affordable Care Act). On February 1,
2013, a notice of proposed rulemaking
(REG–148500–12) was published in the
Federal Register(78 FR 7314).
Written comments responding to the
notice of proposed rulemaking of February
1, 2013, were received. The comments are
available for public inspection atwww.reg-
ulations.govor on request. A public
hearing was held on May 29, 2013. After
considering all the comments, the pro-
posed regulations are adopted as revised
by this Treasury decision. The comments
and revisions are discussed in the pream-
ble.
In related rulemaking, on July 1, 2013,
the Department of Health and Human
Services (HHS) promulgated final reg-
ulations implementing certain functions
of the Affordable Insurance Exchanges
(Exchanges) to determine eligibility for
and grant certain exemptions from the
shared responsibility payment under sec-
tion 5000A, and implementing the re-
sponsibilities of the Secretary of HHS,
in coordination with the Secretary of
the Treasury, to designate other health
benefits coverage as minimum essential
coverage under section 5000A(f)(1)(E).
Patient Protection and Affordable Care
Act: Exchange Functions: Eligibility for
Exemptions; Miscellaneous Minimum Es-
sential Coverage Provisions, 78 FR 39494
(codified at 45 CFR pts. 155 and 156) (the
HHS MEC regulations). The HHS MEC
regulations provide, among other things,
eligibility standards for the hardship ex-
emption, setting forth both general and
specific descriptions of the circumstances
in which an Exchange will grant a hard-
ship exemption certification as well as
those in which a hardship exemption may
be claimed on a Federal income tax return.
The HHS MEC regulations also designate
certain coverage as minimum essential
coverage and outline substantive and pro-
cedural requirements for other types of
coverage to be recognized as minimum
essential coverage.
Summary of Comments and
Explanation of Revisions
I.Maintenance of Minimum Essential
Coverage
A.Coverage for a month
The proposed regulations provide that,
for any calendar month, an individual has
minimum essential coverage if the individ-
ual is enrolled in and entitled to receive
benefits under a program or plan that is
minimum essential coverage for at least
one day during the month.
A commentator recommended that an
individual be covered for a month if the
individual is enrolled in and entitled to
receive benefits under a plan or program
identified as minimum essential coverage
for a majority of the days in the month.
2013–39 I.R.B.241September 23, 2013

The commentator asserted that allowing
one day of enrollment in a month to sat-
isfy the coverage requirement would per-
mit individuals to obtain minimum essen-
tial coverage for only one day and then
forgo it for the rest of the month with-
out any adverse consequence under section
5000A.
The Treasury Department and the IRS
considered a rule requiring coverage for
a majority of days in a month but chose
the one-day rule because it provides ad-
ministrative convenience for both taxpay-
ers and the IRS. Without the one-day rule,
taxpayers and the IRS would need to de-
termine the number of days each person in
a shared responsibility family is covered in
each month of a taxable year. Accordingly,
the final regulations do not adopt this rec-
ommendation. The Treasury Department
and the IRS will reconsider this rule if fu-
ture developments indicate that the rule is
being abused, for example, if individuals
obtain coverage for a single day in a month
over the course of several months in a year.
A commentator requested that the fi-
nal regulations provide that an individ-
ual who has submitted an application for
Medicaid but is awaiting approval for en-
rollment have minimum essential cover-
age while the application is pending ap-
proval. In general, Medicaid coverage is
granted retroactively to the date the appli-
cation is filed. Section 5000A(a) requires
that an individual have minimum essential
coverage for a month. If retroactive cover-
age is granted, an applicant has minimum
essential coverage. If the application is de-
nied, the applicant does not have minimum
essential coverage. Accordingly, the final
regulations do not adopt this recommenda-
tion. However, an individual without cov-
erage may be eligible for an exemption,
such as a short coverage gap exemption.
See §1.5000A–3 and 45 CFR 155.605.
B.Liability for shared responsibility
payment
1. Liability for Dependents
In general, section 151 allows individ-
ual taxpayers a deduction for personal ex-
emptions for the taxpayer, the taxpayer’s
spouse, and any dependents (as defined in
section 152) of the taxpayer for the taxable
year. Section 152 defines dependent to in-
clude a taxpayer’s qualifying children and
qualifying relatives. Although a section
151 deduction is allowable to a taxpayer
for the taxpayer’s dependents (as defined
in section 152), a deduction is allowed to
a taxpayer under section 151 only if the
taxpayer properly claims the dependent.
Consistent with section 5000A(b)(3), the
proposed regulations provide that a tax-
payer is liable for the shared responsibility
payment imposed for any individual for a
month in a taxable year for which the indi-
vidual is the taxpayer’s dependent (as de-
fined in section 152) for that taxable year.
Whether the taxpayer actually claims the
individual as a dependent for the taxable
year does not affect the taxpayer’s liability
for the shared responsibility payment for
the individual.
Several commentators recommended
modifications to the section 5000A rule
addressing liability for dependents. Some
commentators recommended that a tax-
payer’s liability for the shared responsi-
bility payment be limited to individuals
eligible for the same minimum essential
coverage for which the taxpayer is eligi-
ble. The commentators stated that many
taxpayers are unable to enroll their quali-
fying children in their employer-provided
plans. Other commentators recommended
that a taxpayer’s liability under section
5000A extend solely to those dependents
who meet the requirements to be a qual-
ifying child under section 152, so that a
taxpayer’s qualifying relatives would be
disregarded. In addition, commentators
requested that section 5000A liability ex-
tend only to those dependents who are
actually claimed bythe taxpayer. They
stated that the complexity in identifying
a potential dependentbefore the taxable
year begins, particularly a qualifying rel-
ative, would prevent them from making
informed coverage decisions. The com-
mentators claimed that, unless the rule is
revised, those taxpayers may unexpect-
edly be liable for shared responsibility
payments for dependents for whom a de-
duction under section 151 is not claimed.
Section 5000A(b)(3) provides that a
taxpayer is liable for the shared responsi-
bility payment for an individual without
minimum essential coverage if the individ-
ual is the taxpayer’s dependent as defined
in section 152. While the definition of
family size in section 5000A(c)(4)(A)
refers to dependents for whom a taxpayer
claims a deduction under section 151, sec-
tion 5000A(b)(3) refers to section 152, and
section 152 defines dependent based on
status as a qualifying child or qualifying
relative. Accordingly, the final regulations
retain the rule imposing liability on the
taxpayer who may claim an individual as
a dependent.
Other commentators recommended that
a non-custodial parent who must provide
the health care of a childunder a separation
agreement, divorce decree, court order, or
other similar legal obligation and who fails
to provide that health care be liable for the
shared responsibilitypayment attributable
to that child even if the child is the custo-
dial parent’s dependent under section 152.
Section 5000A placesliability for a de-
pendent’s lack of minimum essential cov-
erage on the taxpayer who may claim the
individual as a dependent. Section 5000A
does not provide that this liability may be
assigned to another taxpayer, even if the
other taxpayer has a legal obligation to
provide the child’s health care. Accord-
ingly, the final regulations do not adopt this
recommendation. However, HHS has ad-
dressed the situation described in the com-
ments in recently issued guidance, permit-
ting Exchanges to grant a hardship exemp-
tion under 45 CFR 155.605(g)(1) to the
custodial parent for a child in this situation
if the child is ineligible for coverage un-
der Medicaid or the Children’s Health In-
surance Program (CHIP). See HHS Cen-
ter for Consumer Information & Insurance
Oversight, Guidance on Hardship Exemp-
tion Criteria and Special Enrollment Peri-
ods (June 26, 2013).
2. Special Rule for Adopted Children
The proposed regulations provide spe-
cial rules for determining liability for the
shared responsibilitypayment attributable
to children adopted or placed in foster care
during a taxable year. If a taxpayer legally
adopts a child and is entitled to claim the
child as a dependent for the taxable year
when the adoption occurs, the taxpayer is
not liable for a shared responsibility pay-
ment attributable to the child for the month
of the adoption and any preceding month.
Conversely, if a taxpayer who is entitled
to claim a child as a dependent for the tax-
able year places the child for adoption dur-
ing the year, the taxpayer is not liable for a
shared responsibilitypayment attributable
September 23, 20132422013–39 I.R.B.

to the child for the month of the adoption
and any following month.
Similar to the comment on a cus-
todial parent’s liability, commentators
recommended that a taxpayer’s liability
for shared responsibility payment for an
adopted child be basedon the state law
assigning responsibility for the child’s
health care, not when a child is adopted or
placed for foster care.
As explained previously in sec-
tion I.B.1. of this preamble, section
5000A(b)(3) provides that a taxpayer is
liable for the sharedresponsibility pay-
ment for an individual without minimum
essential coverage if the individual is the
taxpayer’s dependent as defined in sec-
tion 152. Determining when a taxpayer
is liable for an adopted child’s health care
under numerous and varying state laws
would introduce considerable administra-
tive difficulty and uncertainty into the im-
plementation and administration of section
5000A. Accordingly, the final regulations
do not modify the rule for determining
liability for the shared responsibility pay-
ment attributable to children adopted or
placed in foster care during a taxable year.
C.Definitions of terms
1. Insurance-related Terms
Section 5000A(f)(5) provides that any
term used in section 5000A that is also
used in Title I of the Affordable Care Act
has the same meaning as when used in that
Title. To provide additional guidance and
clarity, the final regulations specifically
identify the terms used in section 5000A
that also are used in Title I of the Afford-
able Care Act. The additional terms de-
fined include health insurance coverage,
individual health insurance coverage, indi-
vidual market, and state.
2. Household Income
Section 5000A(c)(4)(B) provides that
the termhousehold incomemeans the
modified adjusted gross income of the
taxpayer plus the modified adjusted gross
income of all members of the taxpayer’s
family required to file a tax return un-
der section 1 for the taxable year. The
proposed regulations provide that the de-
termination of whether a family member
is required to file a return is made without
regard to section 1(g)(7). Under section
1(g)(7), a parent may, if certain require-
ments are met, elect to include in the
parent’s gross income, the gross income
of his or her child. If the parent makes
the election, the child is treated as having
no gross income for the taxable year. The
final regulations remove “without regard
to section 1(g)(7).” The proposed regula-
tions’ use of the phrase “without regard
to section 1(g)(7)” implies that the child’s
gross income is included in both the par-
ent’s adjusted gross income and the child’s
adjusted gross income in determining
household income. The final regulations
remove the phrase to clarify that if a parent
makes an election under section 1(g)(7),
household income includes the child’s
gross income included on the parent’s re-
turn and the child is treated as having no
gross income.
II.Minimum Essential Coverage
A.Government-sponsored programs
1. Medicaid Coverage for Pregnant
Women
The proposed regulations exclude
Medicaid coverage for pregnant women
under section 1902(a)(10)(A)(i)(IV) and
(a)(10)(A)(ii)(IX) of the Social Security
Act (42 U.S.C. 1396a(a)(10)(A)(i)(IV),
(a)(10)(A)(ii)(IX)) (“pregnancy-related
Medicaid”) from government-sponsored
programs constituting minimum essential
coverage. Some commentators com-
mended this treatment of pregnancy-re-
lated Medicaid. Other commentators
expressed concern that women who have
pregnancy-related Medicaid and who do
not have any form of minimum essen-
tial coverage would, under the proposed
regulations, be subject to a shared re-
sponsibility payment. The commenta-
tors recommended that pregnancy-related
Medicaid be considered minimum essen-
tial coverage solely for section 5000A
(and not section 36B).In the alternative,
they recommended that women enrolled
in pregnancy-related Medicaid who are
not also enrolled in services providing
minimum essential coverage be granted
a hardship exemption from the shared re-
sponsibility payment.
The final regulations do not adopt the
recommendation to treat pregnancy-re-
lated Medicaid as minimum essential
coverage solely for section 5000A. As
explained in the preamble to the proposed
regulations, states have the option to pro-
vide pregnant women with full Medicaid
coverage as pregnancy-related Medicaid.
Some states adopt this option. Other states
do not provide full Medicaid coverage as
pregnancy-related Medicaid. The final
regulations continue to provide that preg-
nancy-related Medicaid is not minimum
essential coverage.
In addition, the final regulations do not
adopt the recommendation that women
with pregnancy-related Medicaid be
granted a hardship exemption because
rules regarding eligibility for the hardship
exemption fall under the jurisdiction of
HHS. See section 5000A(e)(5).
However, individuals who are eligible
for pregnancy-related Medicaid may not
know at open enrollment for the 2014
coverage year that such coverage is not
minimum essential coverage. Accord-
ingly, the Treasury Department and the
IRS anticipate issuing guidance providing
that women covered with pregnancy-re-
latedMedicaidforamonthin2014will
not be liable for the shared responsibility
payment for that month.
2. Section 1115 Demonstration Projects
Section 1115 of the Social Security
Act (42 U.S.C. 1315) authorizes the Sec-
retary of HHS to approve experimen-
tal, pilot, or demonstration projects that
promote the objectives of the Medicaid
program (Section1115 demonstration
projects). These projects give states flex-
ibility to test new or existing approaches
to financing and delivering Medicaid.
Some Section 1115 demonstration projects
provide full Medicaid benefits, while
others provide a specific and narrow
set of benefits similar to the optional
coverage of family planning services
under section 1902(a)(10)(A)(ii)(XXI)
of the Social Security Act (42 U.S.C.
1396a(a)(10)(A)(ii)(XXI)) or the optional
coverage of tuberculosis-related services
under section 1902(a)(10)(A)(ii)(XII)
of the Social Security Act (42 U.S.C.
1396a(a)(10)(A)(ii)(XII)).
The proposed regulations do not specif-
ically address whether Section 1115
demonstration projects constitute Med-
icaid coverage under Title XIX of the
Social Security Act for purposes of sec-
tion 5000A. A number of commentators
2013–39 I.R.B.243September 23, 2013

recommended against considering as min-
imum essential coverage Section 1115
demonstration projects that provide a spe-
cific and narrow set of benefits.
The final regulations reserve on ad-
dressing the status of Section 1115 demon-
stration projects as minimum essential
coverage and, accordingly, do not address
the commentators’ recommendation that
a specific and narrow set of benefits pro-
vided under a Section 1115 demonstration
project be excludedfrom the definition
of minimum essential coverage. It is an-
ticipated that future regulations that will
be effective starting January 1, 2014 will
provide that coverage authorized under a
Section 1115 demonstration project is not
government-sponsored minimum essen-
tial coverage. However, certain coverage
may be recognized as minimum essen-
tial coverage by the Secretary of HHS,
in consultation with the Secretary of the
Treasury, under section 5000A(f)(1)(E).
Finally, it is anticipated that to the ex-
tent future guidance excludes benefits pro-
vided under certain Section 1115 demon-
stration projects from minimum essential
coverage, the guidance also will provide
that individuals who are enrolled in a Sec-
tion 1115 demonstration project that is not
minimum essential coverage for a month
in 2014 will not be liable for the shared re-
sponsibility payment for that month.
3. Medicaid Premium Assistance
Programs
The proposed regulations do not specif-
ically address whether and to what extent
Medicaid premium assistance programs
are minimum essential coverage. Com-
mentators recommended that, to preserve
affected Medicaid beneficiaries’ ability
to receive the premium tax credit under
section 36B, Medicaid premium assis-
tance programs, which are intended to
supplement comprehensive coverage, be
excluded from the definition of minimum
essential coverage. Commentators re-
ferred to, in particular, the Tax Equity
and Fiscal Responsibility Act of 1982
(TEFRA) state plan option (commonly
referred to as the “Katie Beckett option”),
coverage under an optional Medicaid cov-
erage group authorized by the Family
Opportunity Act of 2006 (FOA), home
and community based services waivers,
and “Katie Beckett” waivers.
Medicaid premium assistance programs
function as a service delivery mechanism
for benefits covered under the Medicaid
program and do not solely supplement a
private health insurance plan. In general,
Medicaid premium assistance programs
are provided under the authority of sec-
tions 1905, 1906, and 1906A of the Social
Security Act (42 U.S.C. 1396d, 1396e,
and 1396e–1) to individuals described in
section 1902 of the Social Security Act
(42 U.S.C. 1396a) who are eligible for full
Medicaid benefits.
Under section 1906 or 1906A of the So-
cial Security Act, states may use Medicaid
funds to pay premiums and cost sharing
incurred by Medicaid-eligible individuals
to enroll in employer-sponsored coverage
if it is cost-effective for the state to do so
(as compared to the cost of providing cov-
ered services through a standard service
delivery mechanism, such as fee-for-ser-
vice or per-patient payments to a managed
care organization). States exercising this
option must provide “wrap around” cover-
age to ensure individuals can access ben-
efits covered under the state’s Medicaid
program that are not covered under the em-
ployer-sponsored insurance. Authority for
states to create similar premium assistance
programs for individuals to enroll in pri-
vate coverage in the individual market is
provided in regulations under the author-
ity of section 1905(a)(29) of the Social Se-
curity Act published by HHS on July 15,
2013, at 42 CFR 435.1015. Individuals
enrolled in the premium assistance pro-
grams are eligible for full Medicaid ben-
efits. Accordingly, the final regulations do
not adopt the commentators’ recommen-
dation. Instead, coverage under a Medic-
aid premium assistance program under the
authority of section 1905, 1906, or 1906A
of the Social Security Act to individuals
described in section 1902 is minimum es-
sential coverage.
Section 134(a) of TEFRA (Public
Law 97–248) added section 1902(e)(3)
of the Social Security Act (42 U.S.C.
1396a(e)(3)), under which states may pro-
vide Medicaid to a disabled child who
requires an institutional level of care (such
as that provided in a nursing facility) with-
out regard to the income of the child’s
parent(s). A child eligible under this op-
tion is eligible for full Medicaid benefits.
Enrollment of the child in private health
insurance is not required as a condition
of eligibility under the TEFRA option.
Whenever a Medicaid beneficiary is en-
rolled in other coverage, Medicaid serves
as the secondary payer. Thus, if a child
enrolled in Medicaid under this option
also has other coverage, Medicaid will
serve as the secondary payer, and in that
sense will wrap around the child’s private
insurance coverage. Because an eligible
child receives full Medicaid benefits, the
coverage provided is minimum essential
coverage.
Sections6062(a)(1)(A)(iii)
and 6062(a)(1)(B) of FOA (Pub-
lic Law 109–171) added sections
1902(a)(10)(A)(ii)(XIX) and 1902(cc)
of the Social Security Act, under which
states may provide Medicaid to disabled
children who are not otherwise eligible
for Medicaid because their income is
too high. Children eligible for Medicaid
under this option are entitled to the full
Medicaid benefits provided to all other
children enrolled in Medicaid. However,
under section 1902(cc)(2)(A) of the Social
Security Act, if the child’s parents have
access to employer-sponsored coverage
in which the child can enroll and the
employer pays at least 50 percent of
the annual premium for coverage of
the child under the employer plan, the
family is required to enroll the child in
the employer-sponsored coverage, and
Medicaid will wrap around that coverage,
providing services not covered under the
employer plan. If the parents do not have
access to employer-sponsored coverage
for the child or if the employer does not
contribute at least the minimum amount
required, the family is not required to
enroll the child in the coverage, and the
Medicaid program willcover all Medicaid
benefits. In either situation, the child
is eligible for all Medicaid benefits.
Therefore, coverage under this option is
minimum essential coverage.
In addition, under Section 1915(c)
of the Social Security Act (42. U.S.C.
1396n(c)) states have the authority to pro-
vide home and community based services
to certain individuals covered under the
Medicaid state plan in addition to the full
Medicaid benefit package. Because these
individuals receive comprehensive Med-
icaid benefits, coverage under a home and
community based services waiver autho-
rized under section 1915(c) of the Social
September 23, 20132442013–39 I.R.B.

Security Act is minimum essential cover-
age.
The treatment of Medicaid coverage
provided through a “Katie Beckett” waiver
referred to by the commentators is ad-
dressed in section II.A.2. of this preamble,
discussing Section 1115 demonstration
projects.
4. Medicaid for the Medically Needy
The Social Security Act provides states
with flexibility to extend Medicaid eligi-
bility to individuals with high medical ex-
penses who would otherwise be eligible
for Medicaid but for their income level
(medically needy individuals). See sec-
tion 1902(a)(10)(C) of the Social Security
Act (42 U.S.C. 1396a(a)(10)(C)) and 42
CFR §435.300 and following (Subpart D).
Over half of the states have opted to pro-
vide coverage to medically needy individ-
uals. In general, individuals whose income
is in excess of the maximum allowed for
Medicaid eligibility but who are otherwise
eligible for Medicaid may “spend down”
their income, based on incurred medical
expenses, and therebybecome eligible for
the benefits provided for medically needy
individuals in the state. States provid-
ing coverage to medically needy individ-
uals must establish a “budget period” of
between one and six months. Eligibility
for coverage as a medically needy individ-
ual, which must be determined each bud-
get period, is provided only after an indi-
vidual incurs sufficient medical expenses
to “spend down” to the qualifying income
level. Thus, depending on an individ-
ual’s medical needs and the options exer-
cised by the state program, eligibility may
be assessed as frequently as every month,
and an individual may move in and out
of Medicaid coverage multiple times in a
year. States are permitted, and some have
adopted the option, to offer benefits to the
medically needy that are more limited than
the benefits generally provided to Medic-
aid beneficiaries.
Commentators requested excluding
Medicaid coverage provided to medically
needy individuals from the definition of
minimum essential coverage because the
benefits available may be limited. In ad-
dition, treating Medicaid coverage for the
medically needy as minimum essential
coverage can lead those individuals to
experience multiple changes in premium
tax credit eligibility throughout a year,
creating administrative complexity.
The final regulations reserve on
whether Medicaid coverage provided to a
medically needy individual is minimum
essential coverage. It is anticipated that
future regulations that will be effective
starting in 2014 will provide that Medicaid
coverage provided to a medically needy
individual is not government-sponsored
minimum essential coverage. However,
certain coverage of this type may be rec-
ognized as minimum essential coverage
by the HHS Secretary, in consultation
with the Treasury Secretary, under section
5000A(f)(1)(E).
To the extent that future guidance
excludes certain Medicaid coverage pro-
vided to medically needy individuals from
the definition of minimum essential cov-
erage, it is anticipated that the guidance
also will provide that individuals receiving
Medicaid coverage provided to medically
needy individuals for a month in 2014 will
not be liable for the shared responsibility
payment for that month.
5. TRICARE
In accordance with section
5000A(f)(1)(A)(v), the proposed regu-
lations provide that minimum essential
coverage under government-sponsored
programs includes medical coverage
under chapter 55 of Title 10, U.S.C.,
including coverage under the TRICARE
program. However, after publishing
the proposed regulations, the Treasury
Department and the IRS identified two
programs under chapter 55 of Title 10,
U.S.C., as providing benefits and services
that are limited either in availability or
in scope: (1) the program providing care
limited to the space available in a facility
for the uniformed services for individuals
excluded from TRICARE coverage under
section 1079(a), 1086(c)(1), or 1086(d)(1)
of Title 10, U.S.C.; and (2) the program
for individuals not on active duty for an
injury, illness, or disease, incurred or ag-
gravated in the line of duty under sections
1074a and 1074b of Title 10, U.S.C.
The proposed regulations exclude cer-
tain government-provided health care
programs from the definition of minimum
essential coverage because they do not
provide a comprehensive level of ben-
efits. Similarly, certain limited benefit
TRICARE programs do not provide a
comprehensive level of benefits. It is an-
ticipated that future regulations that will
be effective starting in 2014 will provide
that coverage under a limited benefit TRI-
CARE program is not minimum essential
coverage. However, the final regulations
reserve on the status of these programs as
minimum essential coverage.
It is anticipated that if future guidance
excludes the limited-availability TRI-
CARE program under section 1079(a),
1086(c)(1), or 1086(d)(1) of Title 10,
U.S.C., and the limited-scope line-of-duty
TRICARE program under sections 1074a
and 1074b of Title 10, U.S.C., from the
definition of minimum essential cover-
age, the guidance also will provide that
individuals enrolled in either TRICARE
program for any month in 2014 will not be
liable for a shared responsibility payment
for that month.
B.Eligible employer-sponsored coverage
1. Self-Insured Group Health Plans
The preamble to the proposed regula-
tions explains that a self-insured group
health plan is an eligible employer-spon-
sored plan. Several commentators re-
quested additional clarification concern-
ing the treatment of a self-insured group
health plan because these plans are not
offered in a large or small group market
within a state. The rule in the proposed
regulations is revised to clarify that a
self-insured group health plan is an eligi-
ble employer-sponsored plan, regardless
of whether the plan could be offered in the
large or small group market in a state.
2. Arrangements to Provide
Employer-Subsidized Coverage under
Plans in the Individual Market
The proposed regulations do not specif-
ically address arrangements in which an
employer provides subsidies or funds a
pre-tax arrangement for employees to use
to obtain coverage under plans offered
in the individual market (as defined in
section 5000A(f)(1)(C)). The Treasury
Department and the IRS received several
comments on arrangements of this type.
One commentator suggested that certain
arrangements ofthis type be treated as el-
igible employer-sponsored plans, arguing
that treating these arrangements as eligible
2013–39 I.R.B.245September 23, 2013

employer-sponsored plans would increase
flexibility for employers and employees in
satisfying their respective shared respon-
sibility requirements.
The final regulations do not specifically
address these arrangements. It is antic-
ipated that future guidance will address
the application of section 5000A and the
ACA’s insurance market reforms to these
types of arrangements.
3. Former Employees
The proposed regulations provide that
the termemployeeincludes former em-
ployees and, as a result, treat coverage
provided by an employer to former em-
ployees as coverage under an eligible
employer-sponsored plan. Commentators
noted that retiree coverage may be unlike
coverage offered to current employees
in terms of cost, scope of benefits, and
enrollment opportunities and, therefore,
should be treated differently from other
employer-provided coverage.
Employer-sponsored group health
plans offered to former employees are
treated similarly for purposes of the Public
Health Service Act, the Employee Re-
tirement Income Security Act, and other
provisions of the Code. Therefore, the
final regulations do not adopt this sugges-
tion, and retiree coverage under a group
health plan is minimum essential cov-
erage. However, the final regulations
provide that, for the lack of affordable
coverage exemption, an individual will not
be eligible for retiree coverage unless the
individual enrolls. Therefore, an individ-
ual who is eligible for retiree coverage but
does not enroll disregards that eligibility
in determining qualification for the lack of
affordable coverage exemption.
4. Plans Offered on Behalf of Employers
The Treasury Department and the IRS
received comments asking whether med-
ical coverage offered to employees by
an organization acting on behalf of an
employer qualifies as an eligible em-
ployer-sponsored plan. For example, com-
mentators asked whether a multiemployer
plan or a single employer collectively-bar-
gained plan is an eligible employer-spon-
sored plan for the employees covered by
the collective bargaining arrangement and
eligible to participate in the plan. In addi-
tion, commentators asked whether a plan
offered to an employer’s employees by
a third party, such as a professional em-
ployer organization or leasing company,
is an eligible employer-sponsored plan for
the employees eligible to participate in the
plan. The final regulations are revised to
provide that a plan offered by an employer
to an employee includes a plan offered to
an employee on behalf of an employer. No
inference is intended from this treatment
that the third party is the employer for
this or any other provision of the Code or
related laws.
5. Government-sponsored programs that
are eligible employer-sponsored plans
The proposed regulations provide that
a government-sponsored program (as de-
scribed in §1.5000A–2(b)(2) of the pro-
posed regulations) is not an eligible em-
ployer-sponsored plan. However, some in-
dividuals are eligible for minimum essen-
tial coverage under government-sponsored
plans by reason of employment with the
United States government. For example,
the Nonappropriated Fund Health Bene-
fits Program of the Department of Defense,
established under section 349 of the Na-
tional Defense Authorization Act for Fis-
cal Year 1995 (Public Law 103–337; 10
U.S.C. 1587 note), is offered by an instru-
mentality of the Department of Defense to
its employees. Accordingly, the final reg-
ulations provide that the Nonappropriated
Fund Health Benefits Program is a gov-
ernment-sponsored program and an eligi-
ble employer-sponsored plan. The Trea-
sury Department and the IRS are consider-
ing whether other government-sponsored
programs are eligible employer-sponsored
plans.
C.Plan in the individual market
The proposed regulations provide that a
plan in the individual marketmeans health
insurance coverage offered to individuals
not in connection with a group health plan,
including a qualified health plan offered
by an Exchange. Commentators stated
that this definition is ambiguous about
whether qualified health plans are plans
in the individual market. The final regu-
lations clarify that qualified health plans
offered through Exchanges are plans in
the individual market.
Another commentator asked whether a
plan offered to one specific individual is a
plan in the individual market. A plan of-
fered to one specific individual is a plan
in the individual market only if the plan
is health insurance coverage under section
2791(b)(1) of the Public Health Service
Act, is not short-term limited duration cov-
erage, and is offered in the individual mar-
ket within a state. The final regulations
clarify the meaning of the term plan in the
individual market by restating definitions
of other essential terms.
D.Foreign issuer coverage
1. In General
Under section 5000A(f)(4) and
§1.5000A–1(b)(2) of the final regulations,
an individual is treated as having mini-
mum essential coverage for a month if
the individual is a bona fide resident of a
United States possession for the month, or
if the month occurs during any period de-
scribed in section 911(d)(1)(A) or section
911(d)(1)(B) that is applicable to the indi-
vidual. Section 911(d)(1)(A) is applicable
to a citizen of the United States who has a
tax home outside the United States and is
a bona fide resident of a foreign country
or countries during an uninterrupted pe-
riod that includes an entire taxable year.
Section 911(d)(1)(B) is applicable to a
U.S. citizen or U.S. resident (as defined
in section 7701(b)) who has a tax home
outside the United States and is present
in a foreign country or countries for at
least 330 full days during a period of 12
consecutive months.
A commentator expressed a concern
that a United States citizen or national
who resides outside the United States may
be subject to the shared responsibility
penalty even if the individual has health
care coverage provided by a foreign health
insurance issuer (sometimes referred to
as a form of expatriate coverage) or the
government of the foreign country where
the individual resides. The commentator
requested that individuals in this situation
be exempt from section 5000A.
Under section 5000A(f)(4), a United
States citizen or national satisfying the re-
quirements of section 911(d)(1) is deemed
to have minimum essential coverage. If
the individual does not satisfy those re-
quirements, the remaining provisions of
September 23, 20132462013–39 I.R.B.

section 5000A apply. Accordingly, the fi-
nal regulations do not adopt the recom-
mendation.
The same commentator and another
commentator asked whether expatriate
coverage or coverage provided by a for-
eign insurance issuer to foreign nationals
lawfully present in the United States for
an extended period of time is minimum
essential coverage. The commentators
acknowledged that some coverage pro-
videdbyaforeignhealthinsuranceissuer
is not offered in the small or large group
market, or the individual market, within a
state. However, the commentators noted
that the foreign health care coverage may
be substantially similar to other types of
plans recognized as minimum essential
coverage.
Under section 1304(d) of the Afford-
able Care Act (42 U.S.C. 18024(d)) and
the final regulations, the termstatemeans
each of the 50 states and the District of Co-
lumbia. Coverage or a plan provided by
an issuer that is not offered within a state
is neither an eligible employer-sponsored
plan nor a plan in the individual market.
Accordingly, the final regulations do not
adopt this recommendation.
However, to provide relief in the situa-
tions that the two commentators described,
the HHS MEC regulations provide a
process by which a sponsor of a health
plan, whether domestic or foreign, may ap-
ply for recognition as minimum essential
coverage under section 5000A(f)(1)(E).
See 45 CFR 156.604.
2. Territory of the United States
A commentator questioned whether
coverage offered by issuers located in ter-
ritories of the United States is minimum
essential coverage. Insured plans must
be offered within a state to be treated as
an eligible employer-sponsored plan or as
a plan in the individual market. Section
1304(d) of the Affordable Care Act (42
U.S.C. 18024(d)) and the final regulations
provide that the termstatemeans each of
the 50 states and the District of Columbia.
Consequently, in general, health insurance
coverage and insured group health plans
that are not offered within one of the 50
states or the District of Columbia are nei-
ther eligible employer-sponsored plans
nor plans in the individual market.
However, section 1323(a)(1) of the Af-
fordable Care Act (42 U.S.C. 18043(a)(1))
provides that a territory electing to estab-
lish an Exchange in accordance with part
II of subtitle D of the Affordable Care Act
is treated as a state for applying basic rules
governing qualified health plans offered
through Exchanges. As discussed earlier
in this preamble, a qualified health plan
offered through an Exchange is a plan in
the individual market within a state. Ac-
cordingly, the final regulations clarify that
a qualified health plan offered through an
Exchange established by and within a ter-
ritory of the United States under section
1323(a)(1) of the Affordable Care Act is a
plan in the individual market within a state.
III.Exempt Individuals
A.Members of recognized religious sects
or divisions
Consistentwithsection
5000A(d)(2)(A), the proposed regulations
provide that individuals who are members
of a recognized religious sect or division
of the sect described in section 1402(g)(1)
and who are adherents of the established
tenets or teachings of the sect or division
are eligible to receive a religious con-
science exemption certification from an
Exchange. Commentators recommended
that section 5000A(d)(2)(A) be narrowly
construed to limit the ability of parents
who qualify for this religious conscience
exemption to apply for a religious con-
science exemption on behalf of any minor
children who, owing to their youth, should
not be considered full members of a
recognized religious sect or division of
the sect.
Section 5000A(d)(2)(A) does not make
a distinction between full and less than
full membership in a sect or division.
Accordingly, the final regulations do not
adopt this recommendation. However, as
explained in the preamble to the proposed
regulations, the section 5000A religious
conscience exemption is administered by
HHS through Exchanges. The HHS MEC
regulations permit adult members of a sect
or division to apply for the exemption on
behalf of their minor children.See45
CFR 155.600 (definitions of applicant and
application filer); 45 CFR 155.605(c)(1)
(eligibility standards for religious con-
science exemption). Those regulations
further provide, however, that once a child
turns 21 years of age, to maintain the re-
ligious conscience exemption the child
must reapply for the exemption and attest
to membership individually. See 45 CFR
155.605(c)(2).
B.Members of health care sharing
ministries
The proposed regulations provide an
exemption for members of health care
sharing ministries as defined in section
5000A(d)(2)(B)(ii). Commentators rec-
ommended that individuals seeking the
exemption based on their membership
in health care sharing ministries be re-
quired to demonstrate membership for
every month of the taxable year for which
they seek the exemption. The proposed
regulations provide that eligibility for the
exemption for members of a health care
sharing ministry is determined monthly,
and the final regulations retain this rule.
C.Exempt noncitizens
Section 5000A(d)(3) and the proposed
regulations provide that an individual who
is not a citizen or national of the United
States is exempt for a month if the indi-
vidual is not lawfully present in the United
States in that month. The proposed reg-
ulations provide that, for this exemption,
an individual who is not a citizen or na-
tional of the United States is treated as not
lawfully present in the United States for a
month in a taxable year if the individual
is either (1) a nonresident alien as defined
in section 7701(b)(1)(B) for that taxable
year or (2) does not have lawful immigra-
tion status in the United States (within the
meaning of 45 CFR 155.20) for any day in
the month.
Many commentators requested guid-
ance on how individuals claim the exemp-
tion for being not lawfully present in the
United States and recommended several
reporting methods for this exemption. The
final regulations do not adopt any of the
recommended reporting methods. How-
ever, guidance on claiming exemptions
will be provided in forms, instructions,
publications, or other guidance published
by the IRS, and these comments will be
considered in developing that guidance.
Commentators also requested that the
exemption for individuals not lawfully
present in the United States apply to all
2013–39 I.R.B.247September 23, 2013

members of a taxpayer’s family if the tax-
payer qualifies for the exemption. Section
5000A applies its coverage requirement
and exemptions on an individual basis,
which is inconsistent with the commenta-
tors’ recommendation. Accordingly, the
final regulations do not adopt this sugges-
tion.
D.Incarcerated individuals
Section 5000A(d)(4) provides that an
individual is exempt for a month for which
the individual is incarcerated (other than
incarceration pendingthe disposition of
charges). The proposedregulations clarify
that an individual confined for at least one
day in a jail, prison, or similar penal insti-
tution or correctional facility after the dis-
position of charges is exempt for the month
that includes the day of confinement.
A commentator urged that those incar-
cerated while awaiting the final disposition
of charges also be given an exemption on
account of their incarceration. This rec-
ommendation is inconsistent with section
5000A(d)(4), which distinguishes between
individuals incarcerated while awaiting
final disposition of charges and those in-
carcerated after the final disposition of
charges. Accordingly,the final regulations
do not adopt this suggestion.
In the alternative, the commentator re-
quested treating incarcerated individuals
whose Medicaid benefits have been sus-
pended as having minimum essential cov-
erage. An individual incarcerated pend-
ing disposition of charges whose Medic-
aid benefits have been suspended remains
enrolled in Medicaid,is entitled to receive
benefits for healthcare provided outside
the state prison system, and is not required
to re-enroll in Medicaid at the end of incar-
ceration. Thus, treating the individual as
covered under Medicaid is consistent with
§1.5000A–1(b)(1), which provides that an
individual has minimum essential cover-
age for the month when the individual is
enrolled in and entitled to receive benefits
under a program or plan identified as mini-
mum essential coverage in §1.5000A–2 for
at least one day in the month. Accordingly,
an individual incarcerated pending dispo-
sition of charges whose Medicaid bene-
fits have been suspended is covered under
minimum essential coverage, and no revi-
sion to the regulations is necessary to ad-
dress the commentator’s concern.
E.Individuals who cannot afford coverage
1. Household Income
To determine affordability of coverage,
section 5000A(e)(1)(A) and the proposed
regulations require taxpayers to increase
household income by the portion of the re-
quired contribution made through a salary
reduction arrangement and excluded from
gross income. The preamble to the pro-
posed regulations notes that the informa-
tion necessary to make the required adjust-
ment may not be readily available to the
employee or the IRS and requests com-
ments on practicable ways, if any, for mak-
ing the adjustment.
A commentator stated that the informa-
tion required is not readily available. The
commentator recommended that, consid-
ering the limited effect of the required ad-
justment, the IRS postpone enforcement of
the adjustment until a later year when the
necessary information may become more
readily available and when the effect of the
adjustment may be accurately assessed.
The portion of the required contribution
made through a salary reduction arrange-
ment that is excluded from gross income
includes amounts that an employee pays
out of the employee’s salary on a pre-tax
basis for minimum essential coverage un-
der a cafeteria plan that is an eligible em-
ployer-sponsored plan. Although the in-
formation may not be readily available,
generally it is possible for an employee
to identify amounts paid through a salary
reduction arrangement that are excluded
from the individual’s gross income. In ad-
dition, under the HHS MEC regulations,
a hardship exemption is available for an
individual who lacks access to affordable
minimum essential coverage based on pro-
jected household income. An individual
seeking this exemption must adjust pro-
jected household income by the amount
paid through a salary reduction arrange-
ment for minimum essential coverage that
is excluded in the prior year. Accordingly,
the final regulations do not adopt this rec-
ommendation.
Several commentators suggested allow-
ing an exemption or safe harbor for indi-
viduals whose income early in the taxable
year appears to entitle them to the lack of
affordable coverage exemption and who,
as a result, do not obtain minimum essen-
tial coverage. If these individuals have
large increases in income later in the year,
they may be liable for the shared respon-
sibility payment if no other exemption ap-
plies. The final regulations do not adopt
this recommendationbecause it is not ad-
ministrable. The IRS does not have the
monthly income data necessary to verify
eligibility for the proposed safe harbor or
exemption. However, as explained in this
preamble, the HHS MEC regulations pro-
vide for a prospective hardship exemption
based on a lack of affordable coverage de-
termined on the basis of projected house-
hold income. Individuals may mitigate po-
tential adverse consequences of mid-year
increases in household income by applying
for this hardship exemption prospectively.
2. Required Contribution Percentage
One commentator requested a spe-
cial rule for determining the inflation
adjustment of the required contribution
percentage for low- income taxpayers
to provide relief if health care expenses
grow more rapidly than incomes. Section
5000A(e)(1)(D) provides specific rules for
annually calculating a uniform required
contribution inflationadjustment. Accord-
ingly, the final regulations do not adopt
this suggestion.
The commentator also requested a spe-
cial rule to avoid requiring individuals to
visit Exchanges to apply for a hardship ex-
emption. Under section 5000A(e)(5), the
authority to prescribe the procedures for
applying for exemptions resides with the
Secretary of HHS. Based on this autho-
rization, the HHS MEC regulations pro-
vide guidance addressing which hardship
exemptions must be acquired through an
Exchange and which may be claimed di-
rectly on a Federal income tax return.
3. Required Contribution
a. In general
A commentator recommended that in-
dividuals who are eligible for unaffordable
coverage under an eligible employer-spon-
sored plan qualify for the lack of affordable
coverage exemption only if coverage pur-
chased through an Exchange would also
be unaffordable. The commentator noted
that those individuals might find afford-
able coverage under plans in the individ-
ual market and that, if so, they should
be encouraged to enroll in them. Section
September 23, 20132482013–39 I.R.B.

5000A(e)(1)(B) defines the required con-
tribution for two discrete groups based on
whether an individual is eligible for cov-
erage under eligible employer-sponsored
plans. An individual cannot be described
in both groups. Thus, section 5000A does
not require an individual to test the afford-
ability of coverage under both an eligible
employer-sponsored plan and a plan in the
individual market. Accordingly, the final
regulations do not adopt this suggestion.
b. Required contribution for individuals
eligible for coverage under eligible
employer-sponsored plans
The proposed regulations under sec-
tion 36B published on May 3, 2013 (78
FR 25909) (the proposed minimum value
regulations) provide that amounts newly
made available for the current plan year
under a health reimbursement arrangement
(HRA) that is integrated with an eligible
employer-sponsored plan are counted to-
ward the employee’s required contribution
in determining the affordability of the cov-
erage if the employee may use the amounts
only for premiums or may choose to use
the amounts for either premiums or cost
sharing. The preamble to the proposed
minimum value regulations states that reg-
ulations under section 5000A will provide
a similar rule for determining the effect of
amounts newly made available under an
HRA for each plan year on the determina-
tion of affordability of minimum essential
coverage. It is anticipated that future guid-
ance under section 5000A will address
the treatment of employer contributions
to HRAs in determining the required con-
tribution in a manner consistent with the
treatment of these contributions in final
rulemaking under section 36B.
The proposed regulations provide that a
former employee eligible to enroll in con-
tinuation coverage is eligible for coverage
under an eligible employer-sponsored plan
only if the former employee enrolls in it.
In addition to extending this rule to re-
tiree coverage, the final regulations clar-
ify that an individual eligible for continu-
ation or retiree coverage because of a re-
lationship to a former employee is treated
in the same manner as the former em-
ployee. Therefore, individuals eligible for
continuation or retiree coverage who do
not enroll in it, and who are not eligible
for coverage under another eligible em-
ployer-sponsored plan, determine qualifi-
cation for the lack of affordable coverage
exemption under the rules that apply to in-
dividuals ineligible for coverage for eligi-
ble employer-sponsored plans.
c. Required contribution for individuals
ineligible for coverage under eligible
employer-sponsored plans
To determine the required contribution
for individuals who are ineligible for cov-
erage under eligible employer-sponsored
plans, the proposed regulations provide
that the required contribution is the pre-
mium for the applicable plan reduced by
the amount of the credit allowable under
section 36B. The proposed regulations
further provide that, in general, the ap-
plicable plan is the lowest cost bronze
plan available in the Exchange serving the
rating area where the individual resides
that would cover all members of the in-
dividual’s nonexempt family taking into
account the rating factors (for example, an
individual’s age) that an Exchange would
use to determine the cost of coverage. The
proposed regulations allow taxpayers to
make an irrevocable election to use a sim-
plified method to determine the premium
for the applicable plan.
One commentator requested that the
election to use the simplified method to
determine the premium for the applicable
plan, when a plan is not offered that covers
members of the entire tax household, be
revocable. The Treasury Department and
the IRS are considering the comment, as
well as alternative simplified methods of
identifying the premium for the applicable
plan. Accordingly, the final regulations
remove the simplified method rule that
was included in the proposed regulations
and reserve on providing simplified meth-
ods for identifying the premium for the
applicable plan.
A commentator asked that characteris-
tics of individuals in a taxpayer’s nonex-
empt family taken into account in identi-
fying the applicableplan expressly include
tobacco use. The rule is intended to reflect
as accurately as possible a taxpayer’s ac-
tual premium amount.Therefore, the final
regulations clarify that the characteristics
used to identify the applicable plan include
tobacco use.
It is anticipated that future HHS guid-
ance will specify that when determining
eligibility for the hardship exemption for
individuals who lackaffordable coverage
based on projected income described in 45
CFR 155.605(g)(2), the Exchange will cal-
culate advance payments of the premium
tax credit using the rules specified in the
regulations under section 36B, providing
that individuals who have minimum essen-
tial coverage are excluded from the com-
putation of the applicable benchmark plan.
This treatment will ensure that Exchanges
can reuse existing advance payment func-
tionality instead of having to develop ad-
ditional functionality for the sole purpose
of supporting this exemption.
d. Wellness program incentives
The proposed regulations do not ad-
dress wellness program incentives. Com-
mentators recommended determining an
individual’s required contribution without
regard to any wellness program incentives
that, if received, would lower premiums.
A commentator asked that premiums for
the applicable plan for an individual resid-
ing in a rating area in a state participating
in the Individual Market Wellness Pro-
gram Demonstration Project described in
section 2705(l) of the Public Health Ser-
vice Act (42 U.S.C. 300gg–4(l)) disregard
any premium-based wellness incentive re-
quirements, including incentives relating
to tobacco use. The proposed minimum
value regulations disregard wellness pro-
gram incentives, except those related
to tobacco use, in determining an em-
ployee’s required contribution under sec-
tion 36B(c)(2)(C)(i). It is anticipated that
future guidance under section 5000A will
address the treatment of wellness program
incentives in determining the required
contribution in a manner consistent with
the treatment of theseincentives in final
rulemaking under section 36B.
F.Household income below the return
filing threshold
The proposed regulations exempt an in-
dividual for a month in a calendar year
if the individual’s household income for
the taxable year is less than the applica-
ble filing threshold. The proposed regula-
tions provide that this below filing thresh-
old exemption may be claimed on an in-
come tax return. Under the proposed reg-
ulations an individual is not required to
2013–39 I.R.B.249September 23, 2013

file an income tax return to claim this ex-
emption. One commentator requested that
a taxpayer with household income below
the applicable filing threshold who files a
return remain eligible for this exemption.
The final regulations retain the rule that an
individual is not required to file a Federal
income tax return to claim this exemption
and clarify that a taxpayer with household
income below the applicable filing thresh-
old who files a Federal income tax return
may claim the exemption on the filed re-
turn.
The same commentator inquired
whether the filing threshold rule for depen-
dents in §1.5000A–3(f)(2)(ii) of the pro-
posed regulations affects the definition of
household income in §1.5000A–1(d)(7).
Under §1.5000A–3(f)(2)(ii) a dependent’s
applicable filing threshold is the same
as the threshold for the taxpayer claim-
ing the dependent. Section 5000A(e)(2)
allows an exemption for an individual
whose household income is less than
the amount of gross income specified
in section 6012(a)(1)with respect to the
taxpayer. The taxpayer referred to in sec-
tion 5000A(e)(2) is the taxpayer claiming
the dependent. Accordingly, a dependent
claimed for an exemption deduction uses
the family’s household income and the
taxpayer’s applicable filing threshold in
determining eligibility for the below filing
threshold exemption. This treatment has
no effect on the household income defini-
tion.
G.Members of Indian tribes
The proposed regulations provide an
exemption for individuals who are mem-
bers of federally-recognized Indian tribes.
Many commentators were concerned that
this exemption was overly restrictive and
recommended that the final regulations
broaden the exemption to include all indi-
viduals who are eligible to receive services
through the Indian Health Service, a tribe
or tribal organization clinic, or an urban
Indian organization (collectively referred
to as I/T/U services). Alternatively, com-
mentators asked that coverage under I/T/U
services be recognized as minimum es-
sential coverage solely for section 5000A
or that these individuals be eligible for a
hardship exemption from Exchanges.
The final regulations do not define
coverage under I/T/U services as mini-
mum essential coverage because section
5000A does not specifically identify I/T/U
services as minimum essential coverage.
However, following consultation among
HHS, tribal groups, and the Treasury De-
partment and the IRS, the HHS MEC
regulations provide a hardship exemption
for an individual who is not a member of a
federally-recognized Indian tribe, but who
is eligible for services through an Indian
health care provider, as defined in 42 CFR
447.50, or is eligible for services through
Indian Health Service in accordance with
25 U.S.C. 1680c(a), (b), or (d)(3). See 45
CFR 155.605(g)(6).
Several commentators also requested
that individuals be allowed to claim the
hardship exemption for those eligible for
I/T/U services on their income tax returns.
The final regulations do not adopt this
suggestion because section 5000A(e)(5)
provides HHS, through Exchanges, with
the authority to grant hardship exemptions
not delegated to the IRS.
H.Short coverage gap
The proposed regulations provide that
an individual qualifies for the short cov-
erage gap exemption if the continuous pe-
riod without minimum essential coverage
is less than three full calendar months and
is the first short coverage gap in the in-
dividual’s taxable year. Further, in deter-
mining whether a gap in coverage quali-
fies as a short coverage gap, the length of
the period without minimum essential cov-
erage is measured by reference to calen-
dar months (for example, January or Feb-
ruary) in conjunction with the one day rule
in §1.5000A–1(b). Therefore, if an indi-
vidual is enrolled in and entitled to receive
benefits under a plan identified as mini-
mum essential coverage for one day in a
calendar month, the month is not included
in the continuous period when applying the
short coverage gap exemption.
Some commentators recommended
making the short coverage gap exemption
available to cover an aggregate period
of coverage of less than three months,
regardless of whether the period was con-
tinuous. The commentators noted that
those who switched jobs frequently might
have numerous short gaps in coverage
throughout the year. The commenta-
tors’ recommendation is inconsistent with
section 5000A(e)(4)(B)(iii), which lim-
its the short coverage gap exemption to
one continuous period of less than three
months. Accordingly, the final regulations
do not adopt this suggestion. However,
if a taxpayer has multiple short coverage
gaps due to extended waiting periods after
switching employment or because of other
circumstances that prevent the taxpayer
from obtaining coverage, the taxpayer
maybeeligibleforahardshiporother
exemption available through an Exchange.
See 45 CFR 155.605.
Section 5000A(e)(4)(B)(i) provides
that, in general, the length of a continuous
period without coverage is determined
without regard to the calendar years in
which the period occurs. However, section
5000A(e)(4) expressly authorizes the Sec-
retary of the Treasury to prescribe rules for
the collection of the shared responsibility
payment in cases in which a continuous
period includes months in more than one
taxable year. The proposed regulations
provide rules for a coverage gap that strad-
dles two taxable years. For the earlier
taxable year, the coverage gap terminates
at the end of the earlier taxable year. For
the later taxable year, the coverage gap
continues from the earlier taxable year and
terminates when the individual no longer
lacks minimum essential coverage. Thus,
a taxpayer who lacked minimum essential
coverage in November and December of
one year and January and February of the
following year has a coverage gap of two
months in the earlier taxable year and four
months in the later taxable year.
Some commentators stated that the cov-
erage gap in the earlier year should include
months in the later year in which an in-
dividual has no minimum essential cover-
age. Other commentators recommended
that all continuous periods in a year begin
no earlier than January 1, thereby ignoring
any gaps in coverage in the preceding year.
The final regulations adopt neither sugges-
tion. To assist taxpayers in timely filing re-
turns and in the interests of efficient tax ad-
ministration, the final regulations provide
that a continuous period terminates no later
than the last day of a taxable year. In addi-
tion, for the later year when the same ad-
ministrative concerns do not apply, consis-
tent with section 5000A(e)(4)(B)(i), the fi-
nal regulations provide that a continuous
period may include months in an earlier
year.
September 23, 20132502013–39 I.R.B.

Under the proposed regulations an in-
dividual has minimum essential coverage
for a month in which the individual is oth-
erwise exempt fromsection 5000A for the
short coverage gap exemption. One com-
mentator asked whether gaps in coverage
in 2013 affect the measurement of gaps in
coverage beginning in January 2014. Sec-
tion 5000A is effective for months begin-
ning on or after January 1, 2014. Accord-
ingly, the final regulations provide that
gaps in coverage prior to January 1, 2014,
are not taken into account when measuring
the length of a coverage gap in 2014.
A commentator requested that any pro-
bationary period during which an individ-
ual is enrolled in minimum essential cov-
erage but not yet entitled to benefits under
the plan not be taken into account in deter-
mining the length of a continuous period
for the short coverage gap exemption. As
discussed in this preamble with regard to
a similar comment concerning a taxpayer
who submitted an application for Medic-
aid but is awaiting approval for enroll-
ment, section 5000A(a) requires that an in-
dividual have minimum essential coverage
for the month. Unless retroactive cover-
age is provided, an applicant awaiting ap-
proval for enrollment is not covered until
approval of the application. Therefore, the
final regulations do not adopt this recom-
mendation. However, an individual who is
unable to obtain coverage in a timely man-
ner because of a lengthy approval process
may be otherwise eligible for a hardship
or other exemption through an Exchange.
See 45 CFR 155.605.
I.Additional hardship exemptions
A number of commentators proposed
that the IRS adopt additional hardship
exemptions to address specific situations.
Authority to define circumstances giving
rise to a hardship exemption, as well as
authority to grant hardship exemptions in
individual cases, resides with HHS. HHS
has provided guidance on the hardship
exemption in the HHS MEC regulations.
Section 155.605(g)(3) of the HHS MEC
regulations provides that the IRS may al-
low a taxpayer to claim a hardship exemp-
tion for a calendar year if the taxpayer was
notrequiredtofileanincometaxreturnbe-
cause the taxpayer’s gross income was be-
low the applicable return filing threshold
but nevertheless filed a return, claimed a
dependent with a return filing requirement
and, as a result, had household income that
exceeds the applicablefiling threshold.
Section 155.605(g)(5) of the HHS MEC
regulations provides that the IRS may al-
low a taxpayer to claim a hardship exemp-
tion for employed family members who
are eligible for affordable employer-spon-
sored self-only coverage, but for whom
the aggregate cost of employer-sponsored
coverage for all employed members of the
family is unaffordable.
The information required to determine
eligibility for these hardship exemptions
is available only at the time of tax filing.
Accordingly, the final regulations provide
that eligible taxpayers may claim these two
hardship exemptions on a Federal income
tax return.
J.Claiming exemptions from the shared
responsibility payment
Section 1.5000A–3(k) of the proposed
regulations addresses which exemptions
may be certified by an Exchange or
claimed on a return, and how to claim
exemptions. The HHS MEC regulations
address how to request certification for an
exemption from an Exchange. The man-
ner for claiming an exemption on a return
is more appropriately addressed through
IRS forms, instructions, or other publica-
tions. Therefore, the final regulations do
not provide information on how to claim
an exemption on a Federal income tax
return.
IV.Accuracy-Related Penalties
One commentator expressed concern
that taxpayers would have difficulty accu-
rately calculating the shared responsibility
payment. Emphasizing the complex-
ity of the calculation, the commentator
requested that the IRS not impose accu-
racy-related penalties under section 6662
for underpayments caused by erroneous
section 5000A computations.
Section 6662 does not apply to a sec-
tion 5000A shared responsibility payment.
The accuracy-related penalty of section
6662(a) applies only to underpayments
of tax, defined in section 6664. The sec-
tion 5000A shared responsibility payment
is not taken into consideration in deter-
mining whether there is an underpayment
of tax under section 6664. Therefore,
the shared responsibility payment is not
taken into account under section 6662.
Forms, instructions, publications, or other
guidance to be published by the IRS are
anticipated to assist taxpayers in deter-
mining the amount of an applicable shared
responsibility payment.
V.Effective/Applicability Date
These final regulations apply to taxable
years ending after December 31, 2013.
Special Analyses
It has been determined that this Trea-
sury decision is not asignificant regula-
tory action as defined in Executive Order
12866, as supplemented by Executive Or-
der 13563. Therefore, a regulatory assess-
ment is not required. Section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regu-
lations, and, because the regulations do
not impose a collection of information re-
quirement on small entities, the Regula-
tory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Pursuant to section 7805(f)
of the Code, the notice of proposed rule-
making that preceded these final regula-
tions was submitted to the Chief Counsel
for Advocacy of the Small Business Ad-
ministration for comment on its impact on
small business, and no comments were re-
ceived.
Drafting Information
The principal authors of these fi-
nal regulations are Sue-Jean Kim and
John B. Lovelace of the Office of
Associate Chief Counsel (Income Tax
and Accounting). Other personnel from
the IRS and the Treasury Department
participated in their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are amended to read as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805* * *
Section 1.5000A–4 also issued under
26 U.S.C. 5000A(e)(4).
2013–39 I.R.B.251September 23, 2013

Par 2. Sections 1.5000A–0 through
1.5000A–5 are added to read as follows:
§1.5000A–0 Table of Contents.
This section lists the captions contained
in §§1.5000A–1 through 1.5000A–5.
§1.5000A–1 Maintenance of minimum
essential coverage and liability for the
shared responsibility payment.
(a) In general.
(b) Coverage under minimum essential
coverage.
(1) In general.
(2) Special rule for United States cit-
izens or residents residing outside the
United States or residents of territories.
(c) Liability for shared responsibility
payment.
(1) In general.
(2) Liability for dependents.
(i) In general.
(ii) Special rules for dependents
adopted or placed in foster care during the
taxable year.
(A) Taxpayers adopting an individual.
(B) Taxpayers placingan individual for
adoption.
(C) Examples.
(3) Liability of individuals filing a joint
return.
(d) Definitions.
(1) Affordable Care Act.
(2) Employee.
(3) Exchange.
(4) Family.
(5) Family coverage.
(6) Group health insurance coverage.
(7) Group health plan.
(8) Health insurance coverage.
(9) Health insurance issuer.
(10) Household income.
(i) In general.
(ii) Modified adjusted gross income.
(11) Individual market.
(12) Large and small group market.
(13) Month.
(14) Qualified health plan.
(15) Rating area.
(16) Self-only coverage.
(17) Shared responsibility family.
(18) State.
§1.5000A–2 Minimum essential coverage.
(a) In general.
(b) Government-sponsored program.
(1) In general.
(i) Medicare.
(ii) Medicaid.
(iii) Children’s Health Insurance Pro-
gram.
(iv) TRICARE.
(v) Veterans programs.
(vi) Peace Corp program.
(vii) Nonappropriated Fund Health
Benefits Program.
(2) Government-sponsored program
special rules.
(i) Coverage authorized under Section
1115 of the Social Security Act.
(ii) Medicaid for the medically needy
programs.
(iii) Limited benefits TRICARE pro-
grams.
(c) Eligible employer-sponsored plan.
(1) In general.
(2) Government-sponsored program
generally not an eligible employer-spon-
sored plan.
(d) Plan in the individual market.
(1) In general.
(2) Qualified health plan offered by an
Exchange.
(e) Grandfathered health plan.
(f) Other coverage that qualifies as min-
imum essential coverage.
(g) Excepted benefits not minimum es-
sential coverage.
§1.5000A–3 Exempt individuals.
(a) Members of recognized religious
sects.
(1) In general.
(2) Exemption certification.
(b) Member of health care sharing min-
istries.
(1) In general.
(2) Health care sharing ministry.
(c) Exempt noncitizens.
(1) In general.
(2) Exempt noncitizens.
(d) Incarcerated individuals.
(1) In general.
(2) Incarcerated.
(e) Individuals with no affordable cov-
erage.
(1) In general.
(2) Required contribution percentage.
(i) In general.
(ii) Indexing.
(iii) Plan year.
(3) Individuals eligible for coverage un-
der eligible employer-sponsored plans.
(i) Eligibility.
(A) In general.
(B) Multiple eligibility.
(C) Special rule for post-employment
coverage.
(ii) Required contribution for individu-
als eligible for coverage under an eligible
employer-sponsored plan.
(A) Employees.
(B) Individuals related to employees.
(C) Required contribution for part-year
period.
(D) Employer contributions to health
reimbursement arrangements.
(E) Wellness program incentives.
(iii) Examples.
(4) Individuals ineligible for coverage
under eligible employer-sponsored plans.
(i) Eligibility for coverage other than an
eligible employer-sponsored plan.
(ii) Required contribution for individu-
als ineligible for coverage under eligible
employer-sponsored plans.
(A) In general.
(B) Applicable plan.
(1) In general.
(2) Lowest cost bronze plan does not
cover all individuals included in the tax-
payer’s nonexempt family.
(i) In general.
(ii) Optional simplified method for ap-
plicable plan identification.
(C) Credit allowable under section 36B.
(D) Required contribution for part-year
period.
(iii) Examples.
(f) Household income below filing
threshold.
(1) In general.
(2) Applicable filing threshold.
(i) In general.
(ii) Certain dependents.
(3) Manner of claiming the exemption.
(g) Members of Indian tribes.
(h) Individuals with hardship exemp-
tion certification.
(1) In general.
(2) Hardship exemption certification.
(3) Hardship exemptions that may be
claimed on a return.
(i) [Reserved]
(j) Individuals with certain short cover-
age gaps.
(1) In general.
(2) Short coverage gap.
(i) In general.
(ii) Coordinationwith other exemp-
tions.
September 23, 20132522013–39 I.R.B.

(iii) More than one short coverage gap
during calendar year.
(3) Continuous period.
(i) In general.
(ii) Continuous period straddling more
than one taxable year.
(4) Examples.
§1.5000A–4 Computation of shared
responsibility payment.
(a) In general.
(b) Monthly penalty amount.
(1) In general.
(2) Flat dollar amount.
(i) In general.
(ii) Applicable dollar amount.
(iii) Special applicable dollar amount
for individuals under age 18.
(iv) Indexing of applicable dollar
amount.
(3) Excess income amount.
(i) In general.
(ii) Income percentage.
(c) Monthly national average bronze
plan premium.
(d) Examples.
§1.5000A–5 Administration and
procedure.
(a) In general.
(b) Special rules.
(1) Waiver of criminal penalties.
(2) Limitations on liens and levies.
(3) Authority to offset against overpay-
ment.
(c) Effective/applicability date.
§1.5000A–1 Maintenance of minimum
essential coverage and liability for the
shared responsibility payment.
(a)In general. For each month during
the taxable year, a nonexempt individual
must have minimum essential coverage or
pay the shared responsibility payment. For
a month, a nonexempt individual is an in-
dividual in existence for the entire month
who is not an exempt individual described
in §1.5000A–3.
(b)Coverage under minimum essential
coverage—(1)In general. An individ-
ual has minimum essential coverage for a
month in which the individual is enrolled
in and entitled to receive benefits under a
program or plan identified as minimum es-
sential coverage in §1.5000A–2 for at least
onedayinthemonth.
(2)Special rule for United States cit-
izens or residents residing outside the
United States or residents of territories.
An individual is treated as having mini-
mum essential coverage for a month—
(i) If the month occurs during any pe-
riod described in section 911(d)(1)(A) or
section 911(d)(1)(B) that is applicable to
the individual; or
(ii) If, for the month, the individual is
a bona fide resident of a possession of the
United States (as determined under section
937(a)).
(c)Liability for shared responsibility
payment—(1)In general. A taxpayer is li-
able for the shared responsibility payment
for a month for which—
(i) The taxpayer is a nonexempt individ-
ual without minimum essential coverage;
or
(ii) A nonexempt individual for whom
the taxpayer is liable under paragraph
(c)(2) or (c)(3) of this section does not
have minimum essential coverage.
(2)Liability for dependents—(i)In gen-
eral. For a month when a nonexempt in-
dividual does not have minimum essen-
tial coverage, if the nonexempt individual
is a dependent (as defined in section 152)
of another individual for the other individ-
ual’s taxable year including that month, the
other individual is liable for the shared re-
sponsibility payment attributable to the de-
pendent’s lack of coverage. An individual
is a dependent of a taxpayer for a taxable
year if the individual satisfies the defini-
tion of dependent under section 152, re-
gardless of whether the taxpayer claims the
individual as a dependent on a Federal in-
come tax return for the taxable year. If
an individual may be claimed as a depen-
dent by more than one taxpayer in the same
calendar year, the taxpayer who properly
claims the individual as a dependent for the
taxable year is liable for the shared respon-
sibility payment attributable to the individ-
ual. If more than one taxpayer may claim
an individual as a dependent in the same
calendar year but no one claims the indi-
vidual as a dependent, the taxpayer with
priority under the rules of section 152 to
claim the individual as a dependent is li-
able for the shared responsibility payment
for the individual.
(ii)Special rules for dependents
adopted or placed in foster care during the
taxable year—(A)Taxpayers adopting an
individual. If a taxpayer adopts a nonex-
empt dependent (or accepts a nonexempt
dependent who is an eligible foster child
as defined in section 152(f)(1)(C)) during
the taxable year and is otherwise liable
for the nonexempt dependent under para-
graph (c)(2)(i) of this section, the taxpayer
is liable under paragraph (c)(2)(i) of this
section for the nonexempt dependent only
for the full months in the taxable year that
follow the month in which the adoption or
acceptance occurs.
(B)Taxpayers placing an individual for
adoption. If a taxpayer who is otherwise
liable for a nonexempt dependent under
paragraph (c)(2)(i) of this section places
(or, by operation of law, must place) the
nonexempt dependent for adoption or fos-
ter care during the taxable year, the tax-
payer is liable under paragraph (c)(2)(i) of
this section for the nonexempt dependent
only for the full months in the taxable year
that precede the month in which the adop-
tion or foster care placement occurs.
(C)Examples. The following examples
illustrate the provisions of this paragraph
(c)(2)(ii). In each example the taxpayer’s
taxable year is a calendar year.
Example 1.Taxpayers adopting a child.(i)E
and F, married individuals filing a joint return, initi-
ate proceedings for the legal adoption of a 2-year old
child, G, in January 2016. On May 15, 2016, G be-
comes the adopted child (within the meaning of sec-
tion 152(f)(1)(B)) of E and F, and resides with them
for the remainder of 2016. Prior to the adoption, G
resides with H, an unmarried individual, with H pro-
viding all of G’s support. For 2016 G meets all re-
quirements under section 152 to be E and F’s depen-
dent, and not H’s dependent.
(ii) Under paragraph (c)(2) of this section, E and
F are not liable for a shared responsibility payment
attributable to G for January through May of 2016,
but are liable for a shared responsibility payment at-
tributable to G, if any, for June through December of
2016. H is not liable for a shared responsibility pay-
ment attributable to G for any month in 2016, because
G is not H’s dependent for 2016 under section 152.
Example 2.Taxpayers placing a child for adop-
tion
.(i)ThefactsarethesameasExample 1, except
the legal adoption occurs on August 15, 2016, and,
for 2016, G meets all requirements under section 152
to be H’s dependent, and not E and F’s dependent.
(ii) Under paragraph (c)(2) of this section, H is li-
able for a shared responsibility payment attributable
to G, if any, for January through July of 2016, but is
not liable for a shared responsibility payment attrib-
utable to G for August through December of 2016.
E and F are not liable for a shared responsibility pay-
ment attributable to G for any month in 2016, because
G is not E and F’s dependent for 2016 under section
152.
(3)Liability of individuals filing a joint
return. Married individuals (within the
meaning of section 7703) who file a joint
2013–39 I.R.B.253September 23, 2013

return for a taxable year are jointly liable
for any shared responsibility payment for
a month included in the taxable year.
(d)Definitions. The definitions in this
paragraph (d) apply to this section and
§§1.5000A–2 through 1.5000A–5.
(1)Affordable Care Act.Affordable
Care Actrefers to the Patient Protection
and Affordable Care Act, Public Law
111–148 (124 Stat. 119 (2010)), and the
Health Care and Education Reconciliation
Act of 2010, Public Law 111–152 (124
Stat. 1029 (2010)), as amended.
(2)Employee.Employeeincludes for-
mer employees.
(3)Exchange.Exchangehas the same
meaningasin45CFR155.20.
(4)Family. A taxpayer’s family means
the individuals for whom the taxpayer
properly claims a deduction for a personal
exemption under section 151 for the tax-
able year.
(5)Family coverage.Family coverage
means health insurance that covers more
than one individual.
(6)Group health insurance coverage.
Group health insurance coveragehas the
same meaning as in section 2791(b) of
the Public Health Service Act (42 U.S.C.
300gg–91(b)(4)).
(7)Group health plan.Group health
planhas the same meaning as in section
2791(a) of the Public Health Service Act
(42 U.S.C. 300gg–91(a)(1)).
(8)Health insurance coverage.Health
insurance coveragehas the same mean-
ing as in section 2791(b)(1) of the
Public Health Service Act (42 U.S.C.
300gg–91(b)(1)).
(9)Health insurance issuer.Health in-
surance issuerhas the same meaning as
in section 2791(b)(2) of the Public Health
Service Act (42 U.S.C. 300gg–91(b)(2)).
(10)Household income—(i)In general.
Household incomemeans the sum of—
(A) A taxpayer’s modified adjusted
gross income; and
(B) The aggregate modified adjusted
gross income of all other individuals
who—
(1) Are included in the taxpayer’s fam-
ily under paragraph (d)(4) of this section;
and
(2) Are required to file a Federal income
tax return for the taxable year.
(ii)Modified adjusted gross income.
Modified adjusted gross incomemeans ad-
justed gross income (within the meaning
of section 62) increased by—
(A) Amounts excluded from gross in-
come under section 911; and
(B) Tax-exempt interest the taxpayer re-
ceives or accrues during the taxable year.
(11)Individual market.Individual mar-
kethas the same meaning as in section
1304(a)(2) of the Affordable Care Act (42
U.S.C. 18024(a)(2)).
(12)
Large and small group market.
Large group marketandsmall group mar-
kethave the same meanings as in section
1304(a)(3) of the Affordable Care Act (42
U.S.C. 18024(a)(3)).
(13)Month.Monthmeans calendar
month.
(14)Qualified health plan.Qualified
health planhas the same meaning as in
section 1301(a) of the Affordable Care Act
(42 U.S.C. 18021(a)).
(15)Rating area.Rating areahas the
same meaning as in §1.36B–1(n).
(16)Self-only coverage.Self-only cov-
eragemeans health insurance that covers
one individual.
(17)Shared responsibility family.
Shared responsibility familymeans, for
a month, all nonexempt individuals for
whom the taxpayer (and the taxpayer’s
spouse, if the taxpayer is married and files
a joint return with the spouse) is liable for
the shared responsibility payment under
paragraph (c) of this section.
(18)State.Statemeans each of the 50
states and the District of Columbia.
§1.5000A–2 Minimum essential coverage.
(a)In general.Minimum essential
coveragemeans coverage under a gov-
ernment-sponsored program (described in
paragraph (b) of this section), an eligible
employer-sponsored plan (described in
paragraph (c) of this section), a plan in the
individual market (described in paragraph
(d) of this section), agrandfathered health
plan (described in paragraph (e) of this
section), or other health benefits coverage
(described in paragraph (f) of this section).
Minimum essential coverage does not
include coverage described in paragraph
(g) of this section. All terms defined in
this section apply for purposes of this sec-
tion and §1.5000A–1 and §§1.5000A–3
through 1.5000A–5.
(b)Government-sponsored pro-
gram—(1)In general. Except as provided
in paragraph (2),government-sponsored
programmeans any of the following:
(i)Medicare. The Medicare program
under part A of Title XVIII of the Social
Security Act (42 U.S.C.1395c and follow-
ing sections);
(ii)Medicaid. The Medicaid program
under Title XIX of the Social Security Act
(42 U.S.C. 1396 and following sections),
other than—
(A) Optional coverage of fam-
ily planning services under sec-
tion1902(a)(10)(A)(ii)(XXI)of
the Social Security Act (42 U.S.C.
1396a(a)(10)(A)(ii)(XXI));
(B) Optional coverage of tu-
berculosis-relatedservicesunder
section 1902(a)(10)(A)(ii)(XII) of
the Social Security Act (42 U.S.C.
1396a(a)(10)(A)(ii)(XII));
(C)Coverageofpreg-
nancy-related services under sec-
tion1902(a)(10)(A)(i)(IV)and
(a)(10)(A)(ii)(IX) of the Social Security
Act (42 U.S.C. 1396a(a)(10)(A)(i)(IV),
(a)(10)(A)(ii)(IX)); or
(D) Coverage limited to treatment of
emergency medical conditions in accor-
dance with 8 U.S.C. 1611(b)(1)(A), as au-
thorized by section 1903(v) of the Social
Security Act (42 U.S.C. 1396b(v)).
(iii)Children’s Health Insurance Pro-
gram. The Children’s Health Insurance
Program (CHIP) under Title XXI of the
Social Security Act (42 U.S.C 1397aa and
following sections);
(iv)TRICARE. Medical coverage under
chapter 55 of Title 10, U.S.C., including
coverage under the TRICARE program.
(v)Veterans programs. The following
health care programs under chapter 17 or
18 of Title 38, U.S.C.:
(A) The medical benefits package au-
thorized for eligible veterans under 38
U.S.C. 1710 and 38 U.S.C. 1705;
(B) The Civilian Health and Medical
Program of the Department of Veterans
Affairs (CHAMPVA) authorized under 38
U.S.C. 1781; and
(C) The comprehensive health care pro-
gram authorized under 38 U.S.C. 1803 and
38 U.S.C. 1821 for certain children of Viet-
nam Veterans and Veterans of covered ser-
vice in Korea who are suffering from spina
bifida.
(vi)Peace Corp program. A health plan
under section 2504(e) of Title 22, U.S.C.
(relating to Peace Corps volunteers); and
September 23, 20132542013–39 I.R.B.

(vii)Nonappropriated Fund Health
Benefits Program. The Nonappropriated
Fund Health Benefits Program of the
Department of Defense, established un-
der section 349 of the National Defense
Authorization Act for Fiscal Year 1995
(Public Law No. 103–337; 10 U.S.C.
1587 note).
(2)Government-sponsored program
special rules—(i)Coverage authorized
under Section 1115 of the Social Security
Act. [Reserved]
(ii)Medicaid for the medically needy
programs. [Reserved]
(iii)Limited benefits TRICARE pro-
grams. [Reserved]
(c)Eligible employer-sponsored
plan—(1)In general.Eligible em-
ployer-sponsored planmeans, with respect
to any employee:
(i) Group health insurance coverage of-
fered by, or on behalf of, an employer to
the employee that is—
(A) A governmental plan (within
the meaning of section 2791(d)(8) of
the Public Health Service Act (42
U.S.C.300gg–91(d)(8)));
(B) Any other plan or coverage offered
in the small or large group market within a
State;
(C) A grandfathered health plan (within
the meaning of paragraph (e) of this sec-
tion) offered in a group market; or
(ii) A self-insured group health plan un-
der which coverage is offered by, or on be-
half of, an employer to the employee.
(2)Government-sponsored program
generally not an eligible employer-spon-
sored plan. Except for the program iden-
tified in paragraph (b)(7) of this section, a
government-sponsored program described
in paragraph (b) of this section is not an
eligible employer-sponsored plan.
(d)Plan in the individual market—(1)
In general.Plan in the individual market
means health insurance coverage offered
to individuals in the individual market
within a state, other than short-term lim-
ited duration insurance within the meaning
of section 2791(b)(5) of the Public Health
Service Act (42 U.S.C. 300gg–91(b)(5)).
(2)Qualified health plan offered by an
Exchange. A qualified health plan offered
by an Exchange is a plan in the individual
market. If a territory of the United States
elects to establish an Exchange under sec-
tion 1323(a) and (b) of the Affordable Care
Act (42 U.S.C. 18043(a)(1), (b)), a quali-
fied health plan offered by that Exchange
is a plan in the individual market.
(e)Grandfathered health plan.Grand-
fathered health planmeans any group
health plan or group health insurance
coverage to which section 1251 of the
Affordable Care Act (42 U.S.C. 18011)
applies.
(f)Other coverage that qualifies as min-
imum essential coverage. Minimum es-
sential coverage includes any plan or ar-
rangement recognized by the Secretary of
Health and Human Services, in coordina-
tion with the Secretary of the Treasury, as
minimum essential coverage.
(g)Excepted benefits not minimum
essential coverage. Minimum essential
coverage does not include any health in-
surance coverage that consists solely of
excepted benefits described in section
2791(c)(1), (c)(2), (c)(3), or (c)(4) of the
Public Health Service Act (42 U.S.C.
§300gg–91(c)).
§1.5000A–3 Exempt individuals.
(a)Members of recognized religious
sects—(1)In general. An individual is
an exempt individual for a month that in-
cludes a day on which the individual has
in effect a religiousconscienceexemption
certification describedin paragraph (a)(2)
of this section.
(2)Exemption certification. A religious
conscience exemptioncertification is is-
sued by an Exchange in accordance with
the requirements of section 1311(d)(4)(H)
oftheAffordableCareAct(42U.S.C.
18031(d)(4)(H)), 45 CFR 155.605(c), and
45 CFR 155.615(b) and certifies that an
individual is—
(i) A member of a recognized religious
sect or division of the sect that is described
in section 1402(g)(1); and
(ii) An adherent of established tenets
or teachings of the sector division as de-
scribed in that section.
(b)Member of health care sharing min-
istries—(1)In general. An individual is
an exempt individual for a month that in-
cludes a day on which the individual is a
member of a health care sharing ministry.
(2)Health care sharing ministry.For
purposes of this section,health care shar-
ing ministrymeans an organization—
(i) That is described in section 501(c)(3)
and is exempt from tax under section
501(a);
(ii) Members of which share a common
set of ethical or religious beliefs and share
medical expenses among themselves in ac-
cordance with those beliefs and without re-
gard to the state in which a member resides
or is employed;
(iii) Members of which retain member-
ship even after they develop a medical con-
dition;
(iv) That (or a predecessor of which)
has been in existence at all times since De-
cember 31, 1999;
(v) Members of which have shared
medical expenses continuously and with-
out interruption since at least December
31, 1999; and
(vi) That conducts an annual audit per-
formed by an independent certified public
accounting firm in accordance with gen-
erally accepted accounting principles and
makes the annual audit report available to
the public upon request.
(c)Exempt noncitizens—(1)In general.
An individual is an exempt individual for
a month that the individual is an exempt
noncitizen.
(2)Exempt noncitizens. For purposes
of this section, an individual is an exempt
noncitizen for a month if the individual—
(i) Is not a U.S. citizen or U.S. national
for any day during the month; and
(ii) Is either—
(A) A nonresident alien (within the
meaning of section 7701(b)(1)(B)) for the
taxable year that includes the month; or
(B) An individual who is not lawfully
present (within the meaning of 45 CFR
155.20) on any day in the month.
(d)Incarcerated individuals—(1)In
general. An individual is an exempt indi-
vidual for a month that includes a day on
which the individual is incarcerated.
(2)Incarcerated. For purposes of this
section, the termincarceratedmeans con-
fined, after the disposition of charges, in a
jail, prison, or similar penal institution or
correctional facility.
(e)Individuals with no affordable cov-
erage—(1)In general. An individual is an
exempt individual for a month in which the
individual lacks affordable coverage. For
purposes of this paragraph (e), an individ-
ual lacks affordable coverage in a month if
the individual’s required contribution (de-
termined on an annual basis) for mini-
mum essential coverage for the month ex-
ceeds the required contribution percentage
(as defined in paragraph (e)(2) of this sec-
2013–39 I.R.B.255September 23, 2013

tion) of the individual’s household income.
For purposes of this paragraph (e), an in-
dividual’s household income is increased
by any amount of the required contribution
made through a salary reduction arrange-
ment that is excluded from gross income.
(2)Required contribution percent-
age—(i)In general. Except as provided
in paragraph (e)(2)(ii) of this section, the
required contribution percentage is 8 per-
cent.
(ii)Indexing. For plan years beginning
in any calendar year after 2014, the re-
quired contribution percentage is the per-
centage determined bythe Department of
Health and Human Services that reflects
the excess of the rate of premium growth
between the preceding calendar year and
2013 over the rate of income growth for
the period.
(iii)Plan year. For purposes of this
paragraph (e),plan yearmeans the eli-
gible employer-sponsored plan’s regular
12-month coverage period, or for a new
employee or an individual who enrolls dur-
ing a special enrollment period, the re-
mainder of a 12-month coverage period.
(3)Individuals eligible for cover-
age under eligible employer-sponsored
plans—(i)Eligibility—(A)In general.Ex-
cept as provided in paragraph (e)(3)(i)(B)
of this section, an employee or re-
lated individual (as defined in paragraph
(e)(3)(ii)(B) of this section) is treated as
eligible for coverage under an eligible
employer-sponsored plan for a month dur-
ing a plan year if the employee or related
individual could have enrolled in the plan
for any day in that month during an open
or special enrollment period, regardless of
whether the employee or related individual
is eligible for any other type of minimum
essential coverage.
(B)Multiple eligibility. For purposes
of this paragraph (e)(3), an employee el-
igible for coverage under an eligible em-
ployer-sponsored plan offered by the em-
ployee’s employer is not treated as eligible
as a related individual for coverage under
an eligible employer-sponsored plan (for
example, an eligible employer-sponsored
plan offered by the employer of the em-
ployee’s spouse) for any month included
in the plan year of the eligible employer-
sponsored plan offered by the employee’s
employer.
(C)Special rule for post-employment
coverage. A former employee or an indi-
vidual related to a former employee, who
may enroll in continuation coverage re-
quired under Federal law or a state law that
provides comparable continuation cover-
age, or in retiree coverage under an eligible
employer-sponsored plan, is eligible for
coverage under an eligible employer-spon-
sored plan only if the individual enrolls in
the coverage.
(ii)Required contribution for individu-
als eligible for coverage under an eligible
employer-sponsored plan—(A)Employ-
ees. In the case of an employee who is
eligible to purchase coverage under an
eligible employer-sponsored plan spon-
sored by the employee’s employer, the
required contribution is the portion of the
annual premium that the employee would
pay (whether through salary reduction or
otherwise) for the lowest cost self-only
coverage.
(B)Individuals related to employees.In
the case of an individual who is eligible for
coverage under an eligible employer-spon-
sored plan because of a relationship to
an employee and for whom a personal
exemption deduction under section 151
is claimed on the employee’s Federal in-
come tax return (related individual), the
required contribution is the portion of the
annual premium that the employee would
pay (whether through salary reduction or
otherwise) for the lowest cost family cov-
erage that would cover the employee and
all related individuals who are included in
the employee’s family and are not other-
wise exempt under §1.5000A–3.
(C)Required contribution for part-year
period. For each individual described in
paragraph (e)(3)(ii)(A) or (e)(3)(ii)(B) of
this section, affordability under this para-
graph (e)(3) is determined separately for
each employment period that is less than
a full calendar year or for the portions of
an employer’s plan year that fall in differ-
ent taxable years of the individual. Cover-
age under an eligible employer-sponsored
plan is affordable for a part-year period
if the annualized required contribution for
self-only coverage (in the case of the em-
ployee) or family coverage (in the case of
a related individual) under the plan for the
part-year period does not exceed the re-
quired contribution percentage of the in-
dividual’s household income for the tax-
able year. The annualized required con-
tribution is the required contribution de-
termined under paragraph (e)(3)(ii)(A) or
(e)(3)(ii)(B) of this section for the part-
year period times a fraction, the numer-
ator of which is 12 and the denomina-
tor of which is the number of months in
the part-year period during the individual’s
taxable year. Only full calendar months
are included in the computation under this
paragraph (e)(3)(ii)(C).
(D)Employer contributions to health
reimbursement arrangements. [Reserved]
(E)Wellness program incentives.[Re-
served]
(iii)Examples. The following examples
illustrate the application of this paragraph
(e)(3). Unless stated otherwise, in each
example, each individual’s taxable year is
a calendar year, the individual is ineligi-
ble for any other exemptions described in
this section for a month, the rate of pre-
mium growth has not exceeded the rate of
income growth since 2013, and the indi-
vidual’s employer offers a single plan that
uses a calendar plan year and is an eligi-
ble employer-sponsored plan as described
in §1.5000A–2(c).
Example 1.Unmarried employee with no depen-
dents
. Taxpayer A is an unmarried individual with
no dependents. In November 2015, A is eligible to
enroll in self-only coverage under a plan offered by
A’s employer for calendar year 2016. If A enrolls in
the coverage, A is required to pay $5,000 of the to-
tal annual premium. In 2016, A’s household income
is $60,000. Under paragraph (e)(3)(ii)(A) of this sec-
tion, A’s required contribution is $5,000, the portion
of the annual premium A pays for self-only coverage.
Under paragraph (e)(1) of this section, A lacks afford-
able coverage for 2016 because A’s required contri-
bution ($5,000) is greater than 8% of A’s household
income ($4,800).
Example 2.Married employee with dependents.
Taxpayers B and C are married and file a joint return
for 2016. B and C have two children, D and E. In
November 2015, B is eligible to enroll in self-only
coverage under a plan offered by B’s employer for
calendar year 2016 at a cost of $5,000 to B. C, D, and
E are eligible to enroll in family coverage under the
same plan for 2016 at a cost of $20,000 to B. B, C, D,
and E’s household income for 2016 is $90,000. Under
paragraph (e)(3)(ii)(A) of this section, B’s required
contribution is B’s share of the cost for self-only cov-
erage, $5,000. Under paragraph (e)(1) of this sec-
tion, B has affordable coverage for 2016 because B’s
required contribution ($5,000) does not exceed 8%
of B’s household income ($7,200). Under paragraph
(e)(3)(ii)(B) of this section, the required contribution
for C, D, and E is B’s share of the cost for family
coverage, $20,000. Under paragraph (e)(1) of this
section, C, D, and E lack affordable coverage for
2016 because their required contribution ($20,000)
exceeds 8% of their household income ($7,200).
Example 3.
Plan year is a fiscal year.(i)Tax-
payer F is an unmarried individual with no depen-
dents. In June 2015, F is eligible to enroll in self-only
coverage under a plan offered by F’s employer for
September 23, 20132562013–39 I.R.B.

the period July 2015 through June 2016 at a cost to
F of $4,750. In June 2016, F is eligible to enroll in
self-only coverage under a plan offered by F’s em-
ployer for the period July 2016 through June 2017 at
a cost to F of $5,000. In 2016, F’s household income
is $60,000.
(ii) Under paragraph (e)(3)(ii)(C) of this section,
F’s annualized required contribution for the period
January 2016 through June 2016 is $4,750 ($2,375
paid for premiums in 2016 x 12/6). Under paragraph
(e)(1) of this section, F hasaffordable coverage for
January 2016 through June 2016 because F’s annual-
ized required contribution ($4,750) does not exceed
8% of F’s household income ($4,800).
(iii) Under paragraph (e)(3)(ii)(C) of this section,
F’s annualized required contribution for the period
July 2016 to December 2016 is $5,000 ($2,500 paid
for premiums in 2016 x 12/6). Under paragraph (e)(1)
of this section, F lacks affordable coverage for July
2016 through December 2016 because F’s annual-
ized required contribution ($5,000) exceeds 8% of F’s
household income ($4,800).
Example 4.
Eligibility for coverage under an el-
igible employer-sponsored plan and under govern-
ment sponsored coverage
. Taxpayer G is unmarried
and has one child, H. In November 2015, H is eligi-
ble to enroll in family coverage under a plan offered
by G’s employer for 2016. H is also eligible to en-
roll in the CHIP program for 2016. Under paragraph
(e)(3)(i) of this section, H is treated as eligible for
coverage under an eligible employer-sponsored plan
for each month in 2016, notwithstanding that H is eli-
gible to enroll in government sponsored coverage for
thesameperiod.
(4)Individuals ineligible for cover-
age under eligible employer-sponsored
plans—(i)Eligibility for coverage other
than an eligible employer-sponsored plan.
An individual is treated as ineligible for
coverage under an eligible employer-spon-
sored plan for a month that is not described
in paragraph (e)(3)(i) of this section.
(ii)Required contribution for individu-
als ineligible for coverage under eligible
employer-sponsored plans—(A)In gen-
eral. In the case of an individual who is
ineligible for coverage under an eligible
employer-sponsored plan, the required
contribution is the premium for the ap-
plicable plan, reduced by the maximum
amount of any credit allowable under sec-
tion 36B for the taxable year, determined
as if the individual was covered for the en-
tire taxable year by a qualified health plan
offered through the Exchange serving the
rating area where the individual resides.
(B)Applicable plan—(1)In gen-
eral. Except as provided in paragraph
(e)(4)(ii)(B)(2) of this section,applicable
planmeans the single lowest cost bronze
plan available in the individual market
through the Exchange serving the rating
area in which the individual resides (with-
out regard to whether the individual pur-
chased a qualified health plan through the
Exchange) that would cover all individu-
als in the individual’s nonexempt family.
For purposes of this paragraph (e)(4), an
individual’snonexempt familymeans the
family (as defined in§1.5000A–1(d)(4))
that includes the individual, excluding
any family members who are otherwise
exempt under section1.5000A–3orare
treated as eligible for coverage under an
eligible employer-sponsored plan under
paragraph (e)(3)(i) of this section. The
premium for the applicable plan takes into
account rating factors (for example, an
individual’s age or tobacco use) that an
Exchange would use to determine the cost
of coverage.
(2)Lowest cost bronze plan does not
cover all individuals included in the tax-
payer’s nonexempt family—(i)In general.
If the Exchange serving the rating area
where the individual resides does not of-
fer a single bronze plan covering all indi-
viduals included in the individual’s nonex-
empt family, the premium for the applica-
ble plan is the sum of the premiums for the
lowest cost bronze plans that are offered
through the Exchanges serving the rating
areas where one or more of the individu-
als reside that would cover in the aggre-
gate all the individuals in the individual’s
nonexempt family. For instance, coverage
offered through the Exchange in a rating
area might not cover a family member liv-
ing in different rating area or a single pol-
icy might not cover all the members in a
taxpayer’s household.
(ii)Optional simplified method for ap-
plicable plan identification. [Reserved]
(C)Credit allowable under section 36B.
For purposes of paragraph (e)(4)(ii)(A)
of this section,maximum amount of any
credit allowable under section 36Bmeans
the maximum amount of the credit that
would be allowable to the individual, or to
the taxpayer who can properly claim the
individual as a dependent, under section
36B if all members of the individual’s
nonexempt family enrolled in a qualified
health plan through the Exchange serv-
ing the rating area where the individual
resides.
(D)Required contribution for part-year
period. For each individual described in
paragraph (e)(4)(ii)(A) of this section, af-
fordability under paragraph (e)(4) of this
section is determined separately for each
period described in paragraph (e)(4)(ii)(E)
of this section that is less than a 12-month
period. Coverage under a plan is afford-
able for a part-year period if the annual-
ized required contribution for coverage un-
der the plan for the part-year period does
not exceed the required contribution per-
centage of the individual’s household in-
come for the taxable year. The annual-
ized required contribution is the required
contribution determined under paragraph
(e)(4)(ii)(A) of this section for the part-
year period times a fraction, the numer-
ator of which is 12 and the denomina-
tor of which is the number of months in
the part-year period during the individual’s
taxable year. Only full calendar months
are included in the computation under this
paragraph (e)(4)(ii)(D).
(iii)Examples. The following exam-
ples illustrate the provisions of this para-
graph (e)(4). Unless stated otherwise, in
each example the taxpayer’s taxable year
is a calendar year, the rate of premium
growth has not exceeded the rate of in-
come growth since 2013, and the taxpayer
is ineligible for any of the exemptions de-
scribed in paragraphs (b) through (i) of this
section for a month.
Example 1.Unmarried employee with no depen-
dents
. (i) Taxpayer G is an unmarried individual with
no dependents. G is ineligible to enroll in any min-
imum essential coverage other than coverage in the
individual market for all months in 2016. The annual
premium for the lowest cost bronze self-only plan in
G’s rating area (G’s applicable plan) is $5,000. The
adjusted annual premium for the second lowest cost
silver self-only plan in G’s rating area (G’s applicable
benchmark plan within the meaning of §1.36B–3(f))
is $5,500. In 2016 G’s household income is $40,000,
which is 358% of the Federal poverty line for G’s
family size for the taxable year.
(ii) Under paragraph (e)(4)(ii)(C) of this section,
the credit allowable under section 36B is determined
pursuant to section 36B. With household income at
358% of the Federal poverty line, G’s applicable per-
centage is 9.5. Because each month in 2016 is a cov-
erage month (within the meaning of §1.36B–3(c)),
G’s maximum credit allowable under section 36B is
the excess of G’s premium for the applicable bench-
mark plan over the product of G’s household income
and G’s applicable percentage ($1,700). Therefore,
under paragraph (e)(4)(ii)(A) of this section, G’s re-
quired contribution is $3,300. Under paragraph (e)(1)
of this section, G lacks affordable coverage for 2016
because G’s required contribution ($3,300) exceeds
8% of G’s household income ($3,200).
Example 2.Family. (i) In 2016 Taxpayers M and
N are married and file a joint return. M and N have
two children, P and Q. M, N, P, and Q are ineligible to
enroll in minimum essential coverage other than cov-
erage in the individual market for a month in 2016.
The annual premium for M, N, P, and Q’s applicable
2013–39 I.R.B.257September 23, 2013

plan is $20,000. The adjusted annual premium for
M, N, P, and Q’s applicable benchmark plan (within
the meaning of §1.36B–3(f)) is $25,000. M and N’s
household income is $80,000, which is 347% of the
Federal poverty line for a family size of 4 for the tax-
able year.
(ii) Under paragraph (e)(4)(ii)(C) of this section,
the credit allowable under section 36B is determined
pursuant to section 36B. With household income at
347% of the Federal poverty line, the applicable per-
centage is 9.5. Because each month in 2016 is a cov-
erage month (within the meaning of §1.36B–3(c)),
the maximum credit allowable under section 36B is
the excess of the premium for the applicable bench-
mark plan over the product of the household income
and the applicable percentage ($17,400). Therefore,
under paragraph (e)(4)(ii)(A) of this section, the re-
quired contribution for M, N, P, and Q is $2,600. Un-
der paragraph (e)(1) of this section, M, N, P, and Q
have affordable coverage for 2016 because their re-
quired contribution ($2,600) does not exceed 8% of
their household income ($6,400).
Example 3.Family with some members eligible
for government-sponsored coverage
. (i) In 2016 Tax-
payers U and V are married and file a joint return. U
and V have two children, W and X. U and V are inel-
igible to enroll in minimum essential coverage other
than coverage in the individual market for all months
in 2016; however, W and X are eligible for cover-
age under CHIP for 2016. The annual premium for
U, V, W, and X’s applicable plan is $20,000. The ad-
justed annual premium for the second lowest cost sil-
ver plan that would cover U and V (the applicable
benchmark plan within the meaning of §1.36B–3(f))
is $12,500. U and V’s household income is $50,000,
which is 217% of the Federal poverty line for a family
size of 4 for the taxable year. W and X do not enroll
in CHIP coverage.
(ii) Under paragraph (e)(4)(ii)(C) of this section,
the credit allowable under section 36B is determined
pursuant to section 36B. With household income at
217% of the Federal poverty line, the applicable per-
centage is 6.89. Each month in 2016 is a coverage
month (within the meaning of §1.36B–3(c)) for U and
V, but no months in 2016 are coverage months for
W and X because they are eligible for CHIP cover-
age. The maximum credit allowable under section
36B is the excess of the premium for the applicable
benchmark plan over the product of the household in-
come and the applicable percentage ($9,055). There-
fore, under paragraph (e)(4)(ii)(A) of this section, the
required contribution is $10,945. Under paragraph
(e)(1) of this section, U,V, W, and X lack affordable
coverage for 2016 because their required contribu-
tion ($10,945) exceeds 8% of their household income
($4,000).
Example 4.Family with some members enrolled
in government-sponsored minimum essential cover-
age
. The facts are the same asExample 3,exceptW
and X enroll in CHIP coverage on January 1, 2016.
Under paragraph (e)(4)(ii)(B), U, V, W, and X are
members of U and V’s nonexempt family for 2016.
Therefore, the annual premium for the applicable plan
is the same as in
Example 3($20,000). The maximum
credit allowable under section 36B is also the same as
in
Example 3($9,055). Under paragraph (e)(4)(ii)(A)
of this section, the required contribution is $10,945.
Under paragraph (e)(1) of this section, U and V lack
affordable coverage for 2016 because their required
contribution ($10,945) exceeds 8% of their household
income ($4,000).
(f)Household income below filing
threshold—(1)In general. An individual
is an exempt individual for any taxable
year for which the individual’s household
income is less than the applicable filing
threshold.
(2)Applicable filing threshold—(i)In
general. For purposes of this section,ap-
plicable filing thresholdmeans the amount
of gross income that would trigger an in-
dividual’s requirement to file a Federal in-
come tax return undersection 6012(a)(1).
(ii)Certain dependents. The applica-
ble filing threshold for an individual who
is properly claimed as a dependent by an-
other taxpayer is equal to the other tax-
payer’s applicable filing threshold.
(3)Manner of claiming the exemption.
A taxpayer is not required to file a Federal
income tax return solely to claim the ex-
emption described in this paragraph (f). If
a taxpayer has a household income below
the applicable filing threshold and never-
theless files a Federal income tax return,
the taxpayer may claim the exemption de-
scribed in this paragraph (f) on the return.
(g)Members of Indian tribes. An indi-
vidual is an exempt individual for a month
that includes a day on which the individual
is a member of an Indian tribe. For pur-
poses of this section,Indian tribemeans a
group or community described in section
45A(c)(6).
(h)Individuals with hardship exemption
certification—(1)In general. An individ-
ual is an exempt individual for a month that
includes a day on which the individual has
in effect a hardship exemption certification
described in paragraph (h)(2) of this sec-
tion.
(2)Hardship exemption certification.
A hardship exemption certification is
issued by an Exchange under section
1311(d)(4)(H) of the Affordable Care
Act (42 U.S.C. 18031(d)(4)(H)), 45 CFR
155.605(g)(1), (g)(2), (g)(4) and (g)(6), 45
CFR 155.610(i), and 45 CFR 155.615(f),
and certifies that an individual has suffered
a hardship (as that term is defined in 45
CFR 155.605(g)) affecting the capability
to obtain minimum essential coverage.
(3)Hardship exemptions that may
be claimed on a return. A taxpayer
who meets the requirements of 45 CFR
155.605(g)(3) or 45 CFR 155.605(g)(5)
may claim a hardship exemption for a cal-
endar year on a Federal income tax return.
(i) [Reserved]
(j)Individuals with certain short cover-
age gaps—(1)In general. An individual is
an exempt individual for a month the last
day of which is included in a short cover-
age gap.
(2)Short coverage gap—(i)In general.
Short coverage gapmeans a continuous
period of less than three months in which
the individual is not covered under mini-
mum essential coverage. If the individual
does not have minimum essential coverage
for a continuous period of three or more
months, none of the months included in the
continuous period aretreated as included
in a short coverage gap.
(ii)Coordination with other exemp-
tions. For purposes of this paragraph (j),
an individual is treated as having mini-
mum essential coverage for a month in
which an individual is exempt under any
of paragraphs (a) through (h) of this sec-
tion.
(iii)More than one short coverage gap
during calendar year. If a calendar year
includes more than one short coverage gap,
the exemption provided by this paragraph
(j) only applies to the earliest short cover-
age gap.
(3)Continuous period—(i)In general.
Except as provided in paragraph (j)(3)(ii)
of this section, the number of months
included in a continuous period is deter-
mined without regard to the calendar years
in which months included in that period
occur. For purposes of paragraph (j) of
this section, a continuous period begins no
earlier than January 1, 2014.
(ii)Continuous period straddling more
than one taxable year. If an individual
does not have minimum essential coverage
for a continuous period that begins in one
taxable year and ends in the next, for pur-
poses of applying this paragraph (j) to the
first taxable year, the months in the second
taxable year included in the continuous pe-
riod are disregarded. For purposes of ap-
plying this paragraph (j) to the second tax-
able year, the months in the first taxable
year included in the continuous period are
taken into account.
(4)Examples. The following examples
illustrate the provisions of this paragraph
(j). Unless stated otherwise, in each exam-
ple the taxpayer’s taxable year is a calendar
year and the taxpayer is ineligible for any
September 23, 20132582013–39 I.R.B.

of the exemptions described in paragraphs
(a) through (h) of this section for a month.
Example 1.Short coverage gap. Taxpayer D
has minimum essential coverage in 2016 from Jan-
uary 1 through March 2. After March 2, D does not
have minimum essential coverage until D enrolls in
an eligible employer-sponsored plan effective June
15. Under §1.5000A–1(b), for purposes of section
5000A, D has minimum essential coverage for Jan-
uary, February, March, and June through December.
D’s continuous period without coverage is 2 months,
April and May. April and May constitute a short cov-
erage gap under paragraph (j)(2)(i) of this section.
Example 2.Continuous period of 3 months or
more
. The facts are the same as inExample 1,except
D’s coverage is not effective until July 1. D’s con-
tinuous period without coverage is 3 months, April,
May, and June. Under paragraph (j)(2)(i) of this sec-
tion, April, May, and June are not included in a short
coverage gap.
Example 3.Short coverage gap following ex-
empt period
. Taxpayer E is incarcerated from Jan-
uary 1 through June 2. E enrolls in an eligible em-
ployer-sponsored plan effective September 15. Un-
der paragraph (d) of this section, E is exempt for
the period January through June. Under paragraph
(j)(2)(ii) of this section, E is treated as having mini-
mum essential coverage for this period, and E’s con-
tinuous period without minimum essential coverage
is 2 months, July and August. July and August con-
stitute a short coverage gap under paragraph (j)(2)(i)
of this section.
Example 4.Continuous period covering more
than one taxable year
. Taxpayer F, an unmarried in-
dividual with no dependents, has minimum essential
coverage for the period January 1 through October
15, 2016. F is without coverage until February 15,
2017. F files his Federal income tax return for 2016
on March 10, 2017. Under paragraph (j)(3)(ii) of this
section, November and December of 2016 are treated
as a short coverage gap. However, November and
December of 2016 are included in the continuous pe-
riod that includes January 2017. The continuous pe-
riod for 2017 is not less than 3 months and, therefore,
January is not a part of ashort coverage gap.
Example 5.Enrollment following loss of cover-
age
. The facts are the same as inExample 4ex-
cept F loses coverage on June 15, 2017. F enrolls
in minimum essential coverage effective September
15, 2017. The continuous period without minimum
essential coverage in July and August of 2017 is two
months and, therefore, is a short coverage gap. Be-
cause January 2017 was not part of a short coverage
gap, the earliest short coverage gap occurring in 2017
is the gap that includes July and August.
Example 6.Multiple coverage gaps. (i) The facts
are the same as in
Example 5except F has mini-
mum essential coverage for November 2016. Under
paragraph (j)(3)(ii) of this section, December 2016 is
treated as a short coverage gap.
(ii) December 2016 is included in the continuous
period that includes January 2017. This continuous
period is two months and, therefore, January 2017 is
the earliest month in 2017 that is included in a short
coverage gap. Under paragraph (j)(2)(iii) of this sec-
tion, the exemption under this paragraph (j) applies
only to January 2017. Thus, the continuous period
without minimum essential coverage in July and Au-
gust of 2017 is not a short coverage gap.
§1.5000A–4 Computation of shared
responsibility payment.
(a)In general. For each taxable year the
shared responsibility payment is the lesser
of—
(1) The sum of the monthly penalty
amounts for each individual in the shared
responsibility family; or
(2) The sum of the monthly national av-
eragebronzeplanpremiumsfortheshared
responsibility family.
(b)Monthly penalty amount—(1)In
general.Monthly penalty amountmeans,
for a month that a nonexempt individual
is not covered under minimum essential
coverage, 1/12 multiplied by the greater
of—
(i) The flat dollar amount; or
(ii) The excess income amount.
(2)Flat dollar amount—(i)In general.
Flat dollar amountmeans the lesser of—
(A) The sum of the applicable dollar
amounts for all individuals included in the
taxpayer’s shared responsibility family; or
(B) 300 percent of the applicable dol-
lar amount (determined without regard to
paragraph (b)(2)(iii) of this section) for the
calendar year with or within which the tax-
able year ends.
(ii)Applicable dollar amount. Except
as provided in paragraphs (b)(2)(iii) and
(b)(2)(iv) of this section, the applicable
dollar amount is—
(A) $95 in 2014;
(B) $325 in 2015; or
(C) $695 in 2016.
(iii)Special applicable dollar amount
for individuals under age 18. If an indi-
vidual has not attained the age of 18 be-
fore the first day of a month, the applicable
dollar amount for the individual is equal
to one-half of the applicable dollar amount
(as expressed in paragraph (b)(2)(ii) of this
section) for the calendar year in which the
month occurs. For purposes of this para-
graph (b)(2)(iii), an individual attains the
age of 18 on the anniversary of the date
when the individual was born. For exam-
ple, an individual born on March 1, 1999,
attains the age of 18 on March 1, 2017.
(iv)Indexing of applicable dollar
amount. In any calendar year after 2016,
the applicable dollar amount is $695 as
increased by the product of $695 and
the cost-of-living adjustment determined
under section 1(f)(3) for the calendar
year. For purposes of this paragraph
(b)(2)(iv), the cost-of-living adjustment is
determined by substituting “calendar year
2015” for “calendar year 1992” in section
1(f)(3)(B). If any increase under this para-
graph (b)(2)(iv) is not a multiple of $50,
the increase is rounded down to the next
lowest multiple of $50.
(3)Excess income amount—(i)In gen-
eral.Excess income amountmeans the
product of—
(A) The excess of the taxpayer’s
household income over the taxpayer’s
applicable filing threshold (as defined in
§1.5000A–3(f)(2)); and
(B) The income percentage.
(ii)Income percentage. For purposes of
this section,income percentagemeans—
(A) 1.0 percent for taxable years begin-
ning in 2013;
(B) 1.0 percent for taxable years begin-
ning in 2014;
(C) 2.0 percent for taxable years begin-
ning in 2015; or
(D) 2.5 percent for taxable years begin-
ning after 2015.
(c)Monthly national average bronze
plan premium.Monthly national average
bronze plan premiummeans, for a month
for which a shared responsibility payment
is imposed, 1/12 of the annual national av-
erage premium for qualified health plans
that have a bronze level of coverage, would
provide coverage for the taxpayer’s shared
responsibility family members who do not
have minimum essential coverage for the
month, and are offered through Exchanges
for plan years beginning in the calendar
year with or within which the taxable year
ends.
(d)Examples. The following examples
illustrate the provisions of this section. In
each example the taxpayer’s taxable year
is a calendar year and all members of the
taxpayer’s shared responsibility family are
ineligible for any of the exemptions de-
scribed in §1.5000A–3 for a month.
Example 1.Unmarried taxpayer without mini-
mum essential coverage
. (i) In 2016, Taxpayer G is an
unmarried individual with no dependents. G does not
have minimum essential coverage for any month in
2016. G’s household income is $120,000. G’s appli-
cable filing threshold is $12,000. The annual national
average bronze plan premium for G is $5,000.
(ii) For each month in 2016, under paragraph
(b)(2)(ii) of this section, G’s applicable dollar amount
is $695. Under paragraph (b)(2) of this section,
G’s flat dollar amount is $695 (the lesser of $695
and$2,085($695x3)). Underparagraph(b)(3)of
this section, G’s excess income amount is $2,700
(($120,000 - $12,000) x 0.025). Therefore, under
2013–39 I.R.B.259September 23, 2013

paragraph (b)(1) of this section, the monthly penalty
amount is $225 (the greater of $58 ($695/12) or $225
($2,700/12)).
(iii) The sum of the monthly penalty amounts is
$2,700 ($225 x 12). The sum of the monthly national
average bronze plan premiums is $5,000 ($5,000/12
x 12). Therefore, under paragraph (a) of this section,
the shared responsibility payment imposed on G for
2016 is $2,700 (the lesser of $2,700 or $5,000).
Example 2.Part-year coverage. The facts are the
same as in
Example 1, except G has minimum essen-
tial coverage for January through June. The sum of
the monthly penalty amounts is $1,350 ($225 x 6).
The sum of the monthly national average bronze plan
premiums is $2,500 ($5,000/12 x 6). Therefore, un-
der paragraph (a) of this section, the shared responsi-
bility payment imposed on G for 2016 is $1,350 (the
lesser of $1,350 or $2,500).
Example 3.Family without minimum essential
coverage
. (i) In 2016, Taxpayers H and J are mar-
ried and file a joint return. H and J have three chil-
dren: K, age 21, L, age 15, and M, age 10. No mem-
ber of the family has minimum essential coverage for
any month in 2016. H and J’s household income is
$250,000. H and J’s applicable filing threshold is
$24,000. The annual national average bronze plan
premium for a family of 5 (3 adults, 2 children) is
$15,000.
(ii) For each month in 2016, under paragraphs
(b)(2)(ii) and (b)(2)(iii) of this section, the applicable
dollar amount is $2,780 (($695 x 3 adults) + (($695/2)
x 2 children)). Under paragraph (b)(2)(i) of this sec-
tion, the flat dollar amount is $2,085 (the lesser of
$2,780 and $2,085 ($695 x 3)). Under paragraph
(b)(3) of this section, the excess income amount is
$5,650 (($250,000 - $24,000) x 0.025). Therefore,
under paragraph (b)(1) of this section, the monthly
penalty amount is $470.83 (the greater of $173.75
($2,085/12) or $470.83 ($5,650/12)).
(iii) The sum of the monthly penalty amounts
is $5,650 ($470.83 x 12). The sum of the monthly
national average bronze plan premiums is $15,000
($15,000/12 x 12). Therefore, under paragraph (a)
of this section, the shared responsibility payment
imposed on H and J for 2016 is $5,650 (the lesser of
$5,650 or $15,000).
Example 4.Change in shared responsibility fam-
ily during the year
. (i) The facts are the same as in
Example 3, except J has minimum essential coverage
for January through June. The annual national aver-
age bronze plan premium for a family of 4 (2 adults,
2 children) is $10,000.
(ii) For the period January through June 2016, un-
der paragraphs (b)(2)(ii) and (b)(2)(iii) of this sec-
tion the applicable dollar amount is $2,085 (($695
x 2 adults) + (($695/2) x 2 children)). Under para-
graph (b)(2)(i) of this section, the flat dollar amount
is $2,085 (the lesser of $2,085 or $2,085 ($695 x 3)).
(iii) For the period Julythrough December 2016,
the applicable dollar amount is $2,780 (($695 x 3
adults) + (($695/2) x 2 children)). Under paragraph
(b)(2) of this section, the flat dollar amount is $2,085
(the lesser of $2,780 or $2,085 ($695 x 3)). Under
paragraph (b)(3) of this section, the excess income
amount is $5,650 (($250,000 - $24,000) x 0.025).
Therefore, under paragraph (b)(1) of this section, for
January through June the monthly penalty amount
is $470.83 (the greater of $173.75 ($2,085/12) or
$470.83 ($5,650/12)). The monthly penalty amount
for July through December is $470.83 (the greater of
$173.75 ($2,085/12) or $470.83 ($5,650/12)).
(iv) The sum of the monthly penalty amounts
is $5,650 ($470.83 x 12). The sum of the monthly
national average bronze plan premiums is $12,500
((($10,000/12) x 6) + (($15,000/12) x 6))). There-
fore, under paragraph (a) of this section, the shared
responsibility payment imposed on H and J for 2016
is $5,650 (the lesser of $5,650 or $12,500).
Example 5.Eighteenth birthday during the year.
(i) In 2016 Taxpayers S and T are married and file a
joint return. S and T have one child, U, who turns 18
years old on June 28. S, T, and U do not enroll in,
and as a result are not eligible to receive benefits un-
der, affordable employer-sponsored coverage offered
by T’s employer for 2016. S and T’s household in-
come is $60,000. S and T’s applicable filing thresh-
old is $24,000. The annual national average bronze
plan premium for a family of 3 (2 adults, 1 child) is
$11,000.
(ii) For the period January through June 2016, un-
der paragraphs (b)(2)(ii) and (b)(2)(iii) of this section,
the applicable dollar amount is $1,737.50 (($695 x 2
adults) + ($695/2) x 1 child)). Under paragraph (b)(2)
of this section, the flat dollar amount is $1,737.50 (the
lesser of $1,737.50 or $2,085 ($695 x 3)).
(iii) For the period July through December 2016,
the applicable dollar amount is $2,085 ($695 x 3).
Under paragraph (b)(2) of this section, the flat dollar
amount is $2,085 (the lesser of $2,085 or $2,085
($695 x 3)). Under paragraph (b)(3) of this sec-
tion, the excess income amount is $900 (($60,000
- $24,000) x 0.025). Therefore, under paragraph
(b)(1) of this section, for January through June the
monthly penalty amount is $144.79 (the greater of
$144.79 ($1,737.50/12) or $75 ($900/12)). The
monthly penalty amount for July through December
is $173.75 (the greater of $173.75 ($2,085/12) or $75
($900/12)).
(iv) The sum of the monthly penalty amounts is
$1,911.24 (($144.79 x 6) + ($173.75 x 6)). The sum
of the monthly national average bronze plan premi-
ums is $11,000 ($11,000/12 x 12). Therefore, under
paragraph (a) of this section, the shared responsibil-
ity payment imposed on H and J for 2016 is $1,911.24
(the lesser of $1,911.24 or $11,000).
§1.5000A–5 Administration and
procedure.
(a)In general. A taxpayer’s liability
for the shared responsibility payment for a
monthmustbereportedonthetaxpayer’s
Federal income tax return for the taxable
year that includes the month. The period
of limitations for assessing the shared re-
sponsibility payment is the same as that
prescribed by section 6501 for the tax-
able year to which the Federal income tax
return on which the shared responsibility
payment is to be reported relates. The
shared responsibilitypayment is payable
upon notice and demand by the Secretary,
and except as provided in paragraph (b) of
this section, is assessed and collected in the
same manner as an assessable penalty un-
der subchapter B of chapter 68 of the Inter-
nal Revenue Code. The shared responsi-
bility payment is not subject to deficiency
procedures of subchapter B of chapter 63
of the Internal Revenue Code. Interest on
this payment accrues in accordance with
the rules in section 6601.
(b)Special rules. Notwithstanding any
other provision of law—
(1)Waiver of criminal penalties.Inthe
case of a failure by a taxpayer to timely pay
the shared responsibility payment, the tax-
payer is not subject to criminal prosecution
or penalty for the failure.
(2)Limitations on liens and levies.If
a taxpayer fails to pay the shared respon-
sibility payment imposed by this section
and §§1.5000A–1 through 1.5000A–4, the
Secretary will not file notice of lien on any
property of the taxpayer, or levy on any
property of the taxpayer for the failure.
(3)Authority to offset against overpay-
ment. Nothing in this section prohibits the
Secretary from offsetting any liability for
the shared responsibility payment against
any overpayment due the taxpayer, in ac-
cordance with section 6402(a) and its cor-
responding regulations.
(c)Effective/applicability date.This
section and §§1.5000A–1 through
1.5000A–4 apply for months beginning
after December 31, 2013.
PART 602—OMB CONTROL
NUMBERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 5. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 6. In §602.101, paragraph (b) is
amended by adding an entry in numerical
order to the table to read as follows:
§602.101 OMB Control numbers.
*****
(b) * * *
September 23, 20132602013–39 I.R.B.

CFR part or section where
identified and described
Current OMB
Control No.
*****
1.5000A–3
...........................................................
1545–0074
1.5000A–4
...........................................................
1545–0074
*****
Heather C. Malo
y,
Acting Deputy
Commissioner
for Services a
nd Enforcement.
Approved Augu
st 26, 2013
Mark J. Mazur,
Assistant Sec
retary
of the Treasur
y(TaxPolicy).
(Filed by the Of
fice of the Federal Register on August 27,
2013, 11:15 a.m., and published in the issue of the Federal
Register for August 30, 2013, 78 F.R. 53646)
2013–39 I.R.B.261September 23, 2013

Part III. Administrative, Procedural, and Miscellaneous
Transitional Penalty Relief
and Schedule for Notices
of Incorrect Name/TIN
Combinations for Information
Returns Relating to Payment
Card and Third Party Network
Transactions
Notice 2013–56
PURPOSE
This notice provides transitional relief
from penalties for a section 6050W filer
reporting incorrect taxpayer identification
number (TIN) information on information
returns (Form 1099–K) and payee state-
ments filed under section 6050W of the
Internal Revenue Code. The relief pro-
vided by this notice is available for certain
errors on information returns and payee
statements required to be filed or furnished
in 2013, based on payments made in cal-
endar year 2012, as well as certain re-
turns and statements that are required to be
filed or furnished in 2014, based on pay-
ments made in calendar year 2013, pro-
vided that the section 6050W filer makes
a good faith effort to accurately file the
appropriate information return and the ac-
companying payee statement.
In addition, this notice informs section
6050W filers that Internal Revenue Ser-
vice (IRS) notices informing payors that
payee name and TIN combinations are in-
correct (CP2100/CP2100A Notices) will
not be sent based on incorrect name and
TIN combinations on Forms 1099–K due
before January 1, 2014. The first CP2100
and CP2100A Notices with respect to pay-
ments subject to section 6050W will be
sent in late 2014 based on incorrect name
and TIN combinations on Forms 1099–K
filed in 2014 for calendar year 2013 pay-
ments.
BACKGROUND
Section 6050W, added by section 3091
of the Housing Assistance Tax Act of
2008, Div. C of Pub. L. No. 110–289, 122
Stat. 2653 (the Act),requires that a pay-
ment settlement entity (“payor”) making
payment to a participating payee (“payee”)
in settlement of reportable payment trans-
actions must make an information return
for each calendar year to be filed with the
IRS setting forth the gross amount of such
reportable payment transactions, as well as
the name, address, and TIN of the payee.
A similar statement must be furnished to
the payee setting forth the gross amount
of such reportable payment transactions,
as well as the name, address and phone
number of the information contact of the
person required to make such return.
Section 6050W applies to two types
of transactions: (1) payment card trans-
actions and (2) third party network trans-
actions. All payments made in settlement
of payment card transactions must be re-
ported in the manner described above.
Payments made in settlement of third party
network transactions need be reported
only if gross payments to a payee exceed
$20,000 and the number of such trans-
actions exceeds 200 with respect to the
participating payee. The information is to
be reported to the IRS on Form 1099–K,
Payment Card and Third Party Network
Payments.
Section 6721 imposes penalties on a
person for, among other things, failing
to include all required information or
including incorrect information on an in-
formation return. Section 6722 imposes
penalties on a person for, among other
things, failing to include all required infor-
mation or including incorrect information
on a payee statement. Notice 2011–89,
2011–46 I.R.B. 748, provided transi-
tional penalty relief from penalties for a
section 6050W filer reporting incorrect
information on information returns (Form
1099–K) and payee statements filed under
section 6050W of the Code. This relief
was available for information returns and
payee statements to be filed in 2012, based
on payments made in calendar year 2011,
provided that the section 6050W filer
made a good faith effort to accurately file
the appropriate information return and the
accompanying payee statement.
Pursuant to section 3406 and the reg-
ulations thereunder, a payor must backup
withhold from reportable payments made
to a payee that has provided an incorrect
name and TIN combination with respect
to an account for which an information re-
turn was filed. Section 3406(a)(1)(B) re-
quires that the IRS notify the payor that
the payee has provided an incorrect name
and TIN combination. The IRS notifies a
payor of an incorrect name and TIN com-
bination by sending the payor a CP2100
Notice or a CP2100A Notice, listing the
incorrect name and TIN combinations re-
ported on information returns filed by the
payor. Upon receiving a CP2100 Notice
or a CP2100A Notice, payors must send
a copy of the notice identifying the TIN
mismatch to the payee and attempt to ob-
tain a correct TIN before beginning backup
withholding (“B Notice procedures”).See
Treas. Reg. § 31.3406(d)–5 (describing
the B Notice procedures).
The Act amended section 3406(b)(3)
by including payments required to be
reported under section 6050W as re-
portable payments potentially subject
to backup withholding. Treas. Reg.
§ 31.3406(b)(3)–5(e) requires that backup
withholding apply to section 6050W pay-
ments made after December 31, 2011, if a
payee has not furnished a correct TIN to a
section 6050W payor.
Notice 2011–88, 2011–46 I.R.B. 748,
postponed for one year the effective date
for potential backup withholding obliga-
tions imposed under section 3406 for sec-
tion 6050W payments. Accordingly, the
backup withholding requirements of sec-
tion 3406 apply to section 6050W pay-
ments made after December 31, 2012.
DISCUSSION
1.Penalty Relief
Sections 6721 and 6722 are applicable
to section 6050W payors that must file
information returnsfor payments made in
settlement of reportable payment transac-
tions. Prior to the enactment of section
6050W, payors were not required to file
the specific type of information return or
to furnish the specific type of payee state-
ment now required by section 6050W. In
order to provide additional time to develop
appropriate procedures for compliance
with these new reporting requirements,
Notice 2011–89 provided that the IRS
would not impose penalties under sec-
tions 6721 and 6722 on payors that must
file information returns and furnish payee
September 23, 20132622013–39 I.R.B.

statements in 2012 based on payments
made in calendar year 2011, provided that
they make good-faith efforts in filing ac-
curate Forms 1099–K and furnishing the
accompanying payee statements. Since
that time, the IRS has been made aware
that payors subject to section 6050W re-
porting continue to experience greater than
usual difficulty in obtaining correct name
and TIN information from payees and
in resolving name and TIN mismatches.
Payors have requested additional transi-
tion penalty relief in order to enable them
to resolve these issues.
After careful consideration of these
comments, the Treasury Department and
the IRS have decided to extend the penalty
relief provided in Notice 2011–89 to cer-
tain errors on information returns and
payee statements required to be filed and
furnished in 2013 and 2014. Specifically,
this notice provides relief from penalties
under sections 6721 and 6722 for returns
and statements required to be filed and
furnished in 2013 based on payments
made in calendar year 2012 if they have
missing TINs, obviously incorrect TINs
(as described in section 3406(h)(1))
1
,and
incorrect name and TIN combinations. In
addition, this notice provides relief from
penalties under sections 6721 and 6722 for
returns and statements required to be filed
and furnished in 2014 based on payments
made in 2013, but only in cases where the
2013 Form 1099–K contains an incorrect
name and TIN combination. Limiting
penalty relief for 2013 Forms 1099–K to
incorrect name and TIN combinations is
warranted because more expansive penalty
relief (i.e., relief from penalties for miss-
ing or obviously incorrect TINs) would
be inconsistent with the payor’s backup
withholding obligations, which were first
effective for payments made on or after
January 1, 2013.
This notice does not apply to a payor
who erroneously fails to file an informa-
tion return or payee statement.
2.Schedule for CP2100/CP2100A Notices
Payors have asked for guidance re-
garding when the IRS will begin send-
ing CP2100/CP2100A Notices with re-
spect to Forms 1099–K. This notice in-
forms payors that the IRS will not issue
CP2100/CP2100A Notices based on incor-
rect name and TIN combinations reported
on Forms 1099–K due before 2014. The
IRS will begin sending CP2100/CP2100A
Notices with respect to Forms 1099–K
in late 2014. These CP2100/CP2100A
Notices will be based on incorrect name
and TIN combinationsreported on Forms
1099–K required to be filed in 2014 for
calendar year 2013 payments.
CP2100/CP 2100A Notices are not nec-
essary to trigger backup withholding if the
payee either did not provide a TIN or pro-
vided an obviously incorrect TIN. Payors
should continue to backup withhold on cal-
endar year 2013 payments to payees who
failed to provide a TIN or who provided
an obviously incorrect TIN.
DRAFTING INFORMATION
The principal authors of this notice
are Adrienne Griffin and Girish Prasad
of the Office of Associate Chief Counsel
(Procedure & Administration). For further
information regarding this notice contact
Adrienne Griffin or Girish Prasad at (202)
622–4910 (not a toll-free call).
1
An obviously incorrect TIN is a TIN that has more or less than nine numbers, or has an alpha character as one of the nine positions.
2013–39 I.R.B.263September 23, 2013

Part IV. Items o
fGeneralInterest
Notice of Proposed
Rulemaking and Notice of
Public Hearing
User Fees for Processing
Installment Agreements and
Offers in Compromise
REG–144990–12
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
SUMMARY: This document contains pro-
posed amendments to the regulations that
provide user fees for installment agree-
ments and offers in compromise. The pro-
posed amendments affect taxpayers who
wish to pay their liabilities through install-
ment agreements and offers in compro-
mise. This document also provides a no-
tice of public hearing on these proposed
amendments to the regulations.
DATES: Written or electronic comments
must be received by September 30, 2013.
Outlines of topics to be discussed at the
public hearing scheduled for October 1,
2013, at 10 a.m. must be received by
September 30, 2013.
ADDRESSES: Send submissions to: In-
ternal Revenue Service, CC:PA:LPD:PR
(REG–144990–12), Room 5203, Post
Office Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may
be hand-delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (REG–144990–12),
Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue, N.W.,
Washington, DC 20044, or sent elec-
tronically via the Federal eRulemak-
ing Portal athttp://www.regulations.gov
(indicate IRS and REG–144990–12). The
public hearing will be held in the IRS
Auditorium beginning at 10 a.m. at the
Internal Revenue Service Building, 1111
Constitution Avenue, N.W., Washington,
DC 20044.
FOR FURTHER INFORMATION
CONTACT: Concerning submissions
and/or to be placed on the build-
ing access list to attend the hearing,
Oluwafunmilayo (Funmi) Taylor, at (202)
622–7180; concerning cost methodology,
Eva Williams, at (202) 435–5514;
concerning the proposed regulations,
Girish Prasad, at (202) 622–3620 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background and Explanation of
Provisions
The Independent Offices Appropria-
tions Act (IOAA), which is codified at 31
U.S.C. 9701, authorizes agencies to pre-
scribe regulations that establish charges
for services provided by the agencies (user
fees). The charges must be fair and must
be based on the costs to the government,
the value of the service to the recipient, the
public policy or interest served, and other
relevant facts. The IOAA provides that
regulations implementing user fees are
subject to policies prescribed by the Presi-
dent. Those policies are currently set forth
in the Office of Management and Budget
(OMB) Circular A–25, 58 FR 38142 (July
15, 1993) (the OMB Circular).
The OMB Circular encourages agen-
cies to charge user fees for govern-
ment-provided services that confer ben-
efits on identifiablerecipients over and
above those benefits received by the gen-
eral public. Under the OMB Circular, an
agency that seeks to impose a user fee
for government-provided services must
calculate its full cost of providing those
services. In general, the amount of a user
fee should recover the cost of providing
the service, unless OMB grants an excep-
tion.
Installment Agreements
Section 6159 of the Internal Revenue
Code (Code) authorizes the IRS to enter
into an agreement with any taxpayer for
the payment of tax in installments. 26 CFR
301.6159–1. Before entering into an in-
stallment agreement, the IRS may exam-
ine the taxpayer’s financial position to de-
termine whether such an agreement is ap-
propriate. Once the agreement is in effect,
the IRS must process the payments and
monitor compliance. Section 6331(k)(2)
of the Code generally prohibits the IRS
from levying to collect taxes while a re-
quest to enter into an installment agree-
ment is pending, and if rejected for 30 days
thereafter, and, if a timely appeal of rejec-
tion is filed, for the duration of the appeal.
Section 6331(k)(2) of the Code also gener-
ally prohibits the IRS from levying to col-
lect taxes while an installment agreement
is in effect. A taxpayer that enters into an
installment agreement therefore receives a
special benefit of being allowed to pay an
outstanding tax obligation over time.
Under sections 300.1 and 300.2 of the
Treasury Regulations, the IRS currently
charges $105 for entering into an install-
ment agreement, except that the fee is $52
for a direct debit installment agreement,
which is an agreement whereby the tax-
payer authorizes the IRS to request the
monthly electronic transfer of funds from
the taxpayer’s bank account to the IRS,
and the fee is $43 if the taxpayer is a
low-income taxpayer (notwithstanding the
method of payment). Also, the IRS cur-
rently charges $45 for restructuring or re-
instating an installment agreement that is
in default. The amount of the fees has not
changed since 2007. As required by the
OMB Circular, the IRS recently completed
a routine review of theinstallment agree-
ment program and determined that the full
cost of an installment agreement is $282,
except that the cost is only $122 for a direct
debit installment agreement. The IRS also
determined that the full cost of restructur-
ing or reinstating aninstallment agreement
is $85.
In accordance with the OMB Circular,
these proposed amendments to the regu-
lations increase the installment agreement
fees to recover more of the costs associ-
ated with such agreements. The proposed
regulations propose to charge less than full
cost. While agencies are generally re-
quired to charge full cost, the OMB Circu-
lar permits exceptionsto this requirement
when the cost of collecting the fees would
represent an unduly large part of the fee for
the activity or any other condition exists
that, in the opinion of the agency head or
his designee, justifies an exception. OMB
has granted an exception to the full cost
requirement of the OMB Circular. After
discussions with OMB, the proposed fee
September 23, 20132642013–39 I.R.B.

for entering into an installment agreement
is $120, and the proposed fee for restruc-
turing or reinstating an installment agree-
ment is $50. The fee for a direct debit in-
stallment agreement remains $52, and low
income taxpayers, as defined in 26 CFR
300.1(b)(2), would continue to pay $43
for any new installment agreement, includ-
ing a direct debit installment agreement.
The proposed regulations do not increase
the fee for direct debit installment agree-
ments because these agreements have a
significantly higher completion rate. The
proposed fees balance the need to recover
costs with the goals of encouraging the use
of installment agreements in general and
direct debit installment agreements in par-
ticular.
Offers in Compromise
Section 7122 of the Internal Revenue
Code gives the Secretary the authority to
compromise any civilor criminal case aris-
ing under the internal revenue laws, prior
to the referral of that case to the Depart-
ment of Justice. An offer to compromise
may be accepted if there is doubt as to li-
ability, if there is doubt as to collectibility,
or if acceptance will promote effective tax
administration. 26CFR 301.7122–1(b).
Before accepting an offer to compromise,
the IRS must examine the taxpayer’s fi-
nancial position to determine whether such
a compromise is appropriate unless it is
an offer under section 7122(d)(3)(B) (re-
garding offers relating only to issues of li-
ability). Once the IRS accepts an offer
to compromise, the IRS must process the
payments and monitor compliance. When
the IRS accepts an offer to compromise,
the taxpayer receives the benefit of re-
solving its tax liabilities for a compro-
mised amount, provided the taxpayer com-
plies with the terms of the compromise
agreement. Further, section 6331(k)(1) of
the Code generally prohibits the IRS from
levying to collect taxes while a request to
enter into an offer to compromise is pend-
ing, and if rejected for 30 days thereafter,
and, if a timely appeal of a rejection is
filed, for the duration of the appeal.
Under section 300.3 of the Treasury
Regulations, the IRS currently charges
$150 for processing an offer to compro-
mise, except that no fee is charged if an
offer is based solely on doubt as to liabil-
ity, or made by a low income taxpayer, as
defined in 26 CFR 300.3(b)(1)(ii). Also,
the fee is generally applied to the unpaid
taxes if the offer is accepted to promote
effective tax administration or accepted
based on doubt as to collectibility (in this
latter case, a determination must be made
that collection of an amount greater than
the amount offered would create economic
hardship). The amount of the fee has not
changed since 2003. As required by the
OMB Circular, the IRS recently completed
a routine review of the offer to compro-
mise program and determined that the full
cost of an offer to compromise is $2,718.
In accordance with the OMB Circular,
this proposed amendment to the regula-
tions increases the offer to compromise
fee to recover more of the costs associated
with such offers. These proposed regula-
tions propose to charge less than full cost.
While agencies are generally required to
charge full cost, the OMB Circular per-
mits exceptions to this requirement when
the cost of collecting the fees would rep-
resent an unduly large part of the fee for
the activity or any other condition exists
that, in the opinion of the agency head or
his designee, justifies an exception. As
with the installment agreement fees, OMB
has granted an exception to the full cost
requirement of the OMB Circular. After
discussions with OMB, the proposed fee
for processing an offer to compromise is
$186. Low-income taxpayers and taxpay-
ers making offers based solely on doubt
as to liability will continue to pay no fee.
Also, as now, the fee is generally applied
to the unpaid taxes if the offer is accepted
to promote effective tax administration or
accepted based on doubt asto collectibility
(in this latter case, a determination must be
made that collection of an amount greater
than the amount offered would create eco-
nomic hardship). The proposed fee bal-
ances the need to recover costs with the
goal of encouraging offers in compromise.
The new fee rate for both installment
agreements and offers in compromise will
be effective January 1, 2014.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a significant
regulatory action as defined in Executive
Order 12866, as supplemented by Execu-
tive Order 13563. Therefore, a regulatory
assessment is not required. It is hereby cer-
tified that these regulations will not have a
significant economic impact on a substan-
tial number of small entities. Accordingly,
a regulatory flexibility analysis is not re-
quired. This certification is based on the
information that follows. The economic
impact of these regulations on any small
entity would result from the entity being
required to pay a fee prescribed by these
regulations in order to obtain a particular
service. The dollar amount of the fee is
not, however, substantial enough to have
a significant economic impact on any en-
tity subject to the fee. Pursuant to sec-
tion 7805(f) of the Code, this notice of pro-
posed rulemaking will be submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business.
Comments and Public Hearing
Before these proposed amendments to
the regulations are adopted as final regu-
lations, consideration will be given to any
comments that are submitted timely to the
IRS as prescribed in this preamble under
the “Addresses” heading. The IRS and
Treasury Department request comments
on all aspects of the proposed regula-
tions. All comments will be available at
www.regulations.govor upon request.
A public hearing has been scheduled for
October 1, 2013, beginning at 10 a.m. in
the IRS Auditorium of the Internal Rev-
enue Service Building, 1111 Constitution
Avenue N.W., Washington, D.C. 20044.
Due to building security procedures, vis-
itors must enter at the Constitution Av-
enue entrance. In addition, all visitors
must present photo identification to enter
the building. Because of access restric-
tions, visitors will not be admitted beyond
the immediate entrance area more than 30
minutes before the hearing starts. For in-
formation about having your name placed
on the building access list to attend the
hearing, see the “FOR FURTHER INFOR-
MATION CONTACT” section of this pre-
amble.
The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing. Persons who wish
to present oral comments at the hearing
must submit written or electronic com-
ments and submit an outline of the topics
to be discussed and the amount of time to
be devoted to each topic (a signed orig-
inal and eight (8) copies) by September
2013–39 I.R.B.265September 23, 2013

30, 2013. A period of 10 minutes will be
allotted to each person for making com-
ments. An agenda showing the scheduling
of the speakers will be prepared after the
deadline for receiving outlines has passed.
Copies of the agenda will be available free
of charge at the hearing.
Drafting Information
The principal author of these regula-
tionsisKimberlyBarsaoftheOfficeof
Associate Chief Counsel (Procedure and
Administration).
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 300 is pro-
posed to be amended as follows:
PART 300—USER FEES
Paragraph 1. The authority citation for
part 300 continues to read as follows:
Authority: 31 U.S.C. 9701.
Par. 2. In §300.1, paragraphs (b) intro-
ductory text and (d) are revised to read as
follows:
§300.1 Installment agreement fee.
*****
(b)Fee. The fee for entering into an
installment agreement before January 1,
2014, is $105. The fee for entering into an
installment agreement on or after January
1, 2014, is $120. A reduced fee applies in
the following situations:
*****
(d)Effective/applicability date.This
section is applicable beginning January 1,
2014.
Par. 3. In §300.2, paragraphs (b) and
(d) are revised to read as follows:
§300.2 Restructuring or reinstatement of
installment agreement fee.
*****
(b)Fee. The fee for restructuring or
reinstating an installment agreement be-
fore January 1, 2014, is $45. The fee for
restructuring or reinstating an installment
agreement on or after January 1, 2014, is
$50.
*****
(d)Effective/applicability date.This
section is applicable beginning January 1,
2014.
Par. 4. In §300.3, paragraphs (b)(1)
introductory text and (d) are revised to read
as follows:
§300.3 Offer to compromise fee.
*****
(b)Fee. (1) The fee for processing
an offer to compromise before January 1,
2014, is $150. The fee for processing an
offer to compromise on or after January 1,
2014, is $186. No fee will be charged if an
offer is—
*****
(d)Effective/applicability date.This
section is applicable beginning January 1,
2014.
Beth Tucker,
Deputy Commissioner for
Operations Support.
(Filed by the Office of the Federal Register on August 29,
2013, 8:45 a.m., and published in the issue of the Federal
Register for August 30, 2013, 78 F.R. 53702)
Notice of Proposed
Rulemaking
Employee Retirement Benefit
Plan Returns Required on
Magnetic Media
REG–111837–13
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document contains
proposed regulations relating to the re-
quirements for filing certain employee
retirement benefit plan statements, re-
turns, and reports on magnetic media.
The term magnetic media includes elec-
tronic filing, as well as other magnetic
media specifically permitted under ap-
plicable regulations, revenue procedures,
publications, forms, instructions, or other
guidance on the IRS.gov Internet website.
These regulations would affect plan ad-
ministrators and employers maintaining
retirement plans that are subject to various
employee benefit reporting requirements
under the Internal Revenue Code (Code).
DATES: Comments and requests for a
public hearing must be received by Octo-
ber 29, 2013.
ADDRESSES: Send submissions re-
lating to the proposed regulations to:
CC:PA:LPD:PR (REG–111837–13), room
5205, Internal Revenue Service, PO Box
7604, Ben Franklin Station, Washington
DC, 20044. Submissions may be hand
delivered Monday through Friday, be-
tween the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (REG–111837–13),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW., Washing-
ton, DC.
Alternately, taxpayers may submit
comments relating to the proposed regula-
tions electronically via the Federal eRule-
making Portal atwww.regulations.gov
(IRS REG–111837–13).
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed reg-
ulations, William Gibbs or Pamela Kinard
at (202) 622–6060; concerning the
submission of comments or to request a
public hearing, Oluwafunmilayo Taylor at
(202) 622–7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
Electronic filing of tax returns bene-
fits taxpayers and the IRS by reducing
errors that are more likely to occur dur-
ing the manual preparation and process-
ing of paper returns.Electronic filing re-
sults in faster settling of accounts and bet-
ter customer service. Requiring that em-
ployee retirement benefit plan statements,
returns, and reports be filed electronically
improves the timeliness and accuracy of
the information for both the public and the
employee retirement benefit plan commu-
nity.
Section 6011(e)(1) authorizes the Sec-
retary to prescribe regulations providing
the standards for determining which re-
turns must be filed on magnetic media or
in other machine-readable form. Section
6011(e)(2)(A) provides that the Secretary
may not require any person to file returns
September 23, 20132662013–39 I.R.B.

on magnetic media unless the person is re-
quired to file at least 250 returns during
the calendar year. Section 6011(e)(2)(B)
requires that the Secretary, prior to issu-
ing regulations requiring these entities to
file returns on magnetic media, take into
account (among other relevant factors) the
ability of the taxpayer to comply at rea-
sonable cost with the requirements of such
regulations.
A statement, return, or report filed
electronically with an electronic return
transmitter in the manner and time pre-
scribed by the Commissioner is deemed
to be filed on the date of the electronic
postmark given by the return transmitter
(that is, a record of the date and time that
an authorized electronic return transmitter
receives the transmission of a taxpayer’s
electronically filed document on its host
system). Accordingly,if the electronic
postmark is timely, the document is con-
sidered filed timely although it is received
by the IRS after the last date prescribed
for filing. See §301.7502–1(d).
Section 414(g) defines a plan admin-
istrator as a person specifically so des-
ignated by the terms of the plan or, in
the event no one is designated: (a) an
employer for a single employer plan; (b)
an association, committee, joint board of
trustees, or other similar group of repre-
sentatives for a plan maintained by two or
more employers or jointly by one or more
employers and one or more employee or-
ganizations; or (c) such other person as
the Secretary of Treasury may prescribe in
regulations.
Section 6057(a) requires the plan ad-
ministrator (within the meaning of section
414(g)) of each plan to which the vesting
standards of section 203 of part 2 of subti-
tle B of title I of the Employee Retirement
Income Security Act of 1974 (ERISA) ap-
plies for a plan year to file, within the
time prescribed by regulations, a registra-
tion statement with the Secretary of the
Treasury. The registration statement must
set forth the following information relat-
ing to the plan: (1) the name of the plan;
(2) the name and address of the plan ad-
ministrator; (3) the name and identifying
information of plan participants who sepa-
rated from service covered by the plan and
are entitled to deferred vested retirement
benefits; and (4) the nature, amount, and
form of deferred vested retirement bene-
fits to which the plan participants are enti-
tled. The form used to file this registration
statement is Form 8955–SSA,Annual Reg-
istration Statement Identifying Separated
Participants with Deferred Vested Benefits.
Section 6057(b) requires that the plan ad-
ministrator notify theSecretary of certain
changes in the plan, including the name of
the plan, the name and address of the plan
administrator, the termination of the plan,
or any merger or consolidation of the plan
with another plan (or the plan’s division
into two or more plans).
Section 6058(a) generally requires that
every employer maintaining a pension, an-
nuity, stock bonus, profit-sharing, or other
funded plan of deferred compensation, or
the plan administrator within the mean-
ing of section 414(g) of the plan, file an
annual return stating such information as
the Secretary may by regulations prescribe
with respect to the qualification, finan-
cial condition, and operations of the plan.
The reporting requirement under section
6058(a) is satisfied by filing a return on
the Form 5500 series. The Form 5500,
Annual Return/Report of Employee Ben-
efit Plan, the Form 5500–SF,Short Form
Annual Return/Report of Small Employee
Benefit Plan, and Form 5500–EZ,Annual
Return of One-Participant (Owners and
Their Spouses) Retirement Plan,makeup
the Form 5500 series.
Section 6059(a) generally requires that
a plan administrator of each defined ben-
efit plan to which section 412 applies
file the actuarial report described in sec-
tion 6059(b) for the first plan year for
which section 412 applies to the plan
and for each third plan year thereafter
(or more frequently if the Secretary de-
termines that more frequent reports are
necessary). The schedules used to file
these actuarial reports are the Schedule
SB,Single-Employer Defined Benefit Plan
Actuarial Information, and the Schedule
MB,Multiemployer Defined Benefit Plan
and Certain Money Purchase Plan Actu-
arial Information, which are required to
be filed as part of the Form 5500 or Form
5500–SF.
On July 21, 2006, the Department of
Labor (DOL) published a final rule in the
Federal Register(71 FR 41359) requir-
ing electronic filing of the Form 5500 and
Form 5500–SF for plans covered by Title
I of ERISA for plan years beginning on or
after January 1, 2008. On November 16,
2007, the DOL published a final rule in
theFederal Register(72 FR 64710) post-
poning the effective date of the electronic
filing mandate so thatthe mandate applies
to plan years beginning on or after January
1, 2009. See 29 CFR §2520.104a–2. The
electronic filing system mandated by DOL
is the computerized ERISA Filing Accep-
tance System (EFAST2).
Filers of the Form 5500 and Form
5500–SF are required to file electronically
through EFAST2. Currently, electronic fil-
ing is not available for the Form 5500–EZ.
However, certain filers that would other-
wise file the Form 5500–EZ on paper may
instead file the Form 5500–SF electroni-
cally through EFAST2. Under the current
requirements, plans that are eligible to
use the Form 5500–SF to file electroni-
cally include plans that cover fewer than
100 participants at the beginning of the
plan year and satisfy certain other require-
ments. See the Instructions to the Form
5500–EZ for information about filing the
Form 5500–EZ.
In order to implement DOL’s mandate
for electronic filing of the Form 5500 and
Form 5500–SF, certain items on these
forms that relate solely to Code require-
ments were eliminated. Information on
the forms, schedules, and attachments that
were eliminated was used by the IRS for
compliance purposes. By mandating elec-
tronic filing of information, the IRS can
obtain valuable plan information that is
not currently required to be filed through
EFAST2.
1
In coordination with DOL, the
IRS anticipates adding items on the Form
5500 and Form 5500–SF relating solely
to Code requirements. For those filers
that are not subject to IRS electronic filing
requirements, the IRS plans to provide a
paper-only form containing those Code-re-
lated items and an alternative method of
filing with the IRS.
1
In its published report on September 20, 2011, the Treasury Inspector General for Tax Administration (TIGTA) recommended that the IRS explore regulatory options for mandating electronic
filings of annual employee benefit returns for employee benefit retirementplans. TIGTA believed that this would assist the IRS in satisfying its taxadministration responsibilities. See “The
Employee Plans Function Should Continue Its Efforts to Obtain Needed Retirement Plan Information,” Reference Number 2011–10–108 (September 20, 2011).
2013–39 I.R.B.267September 23, 2013

Explanation of Provisions
I.In General
These regulations provide that a plan
administrator (or, incertain situations, an
employer maintaining a plan) required by
the Code or regulations to file at least 250
returns during the calendar year that in-
cludes the first day of the plan year must
use magnetic media to file certain state-
ments, returns, and reports under sections
6057, 6058, and 6059. Magnetic media
is defined as electronic filing or other me-
dia specifically permitted under applicable
regulations, revenue procedures, publica-
tions, forms, instructions, or other guid-
ance on the IRS.gov Internet website. (See
§601.601(d)(2)(ii)(b) of this chapter.)
Filers of the Form 5500 and Form
5500–SF are already required to file the
returns electronically through EFAST2.
In addition, many filers of the Form
8955–SSA already voluntarily file elec-
tronically with the IRS and also are re-
quired to file the Form 5500 and Form
5500–SF electronically through EFAST2.
The IRS and the Treasury Department
have determined that taxpayers should be
able to comply at a reasonable cost with
the requirement to file statements, returns,
and reports on magnetic media.
The determination of whether a filer is
required to file at least 250 returns is made
by aggregating all returns, regardless of
type, that the filer is required to file, in-
cluding for example, income tax returns,
returns required under section 6033, infor-
mation returns, excise tax returns, and em-
ployment tax returns.
II.Registration Statements and
Notifications Required Under Section
6057(a) and (b)
The proposed regulations under section
6057 provide that a registration statement
under section 6057(a) or notification re-
quired under section 6057(b) must be filed
on magnetic media if the filer is required
by the Code or regulations to file at least
250 returns during the calendar year that
includes the first day of the plan year. For
purposes of the regulations under section
6057, the term filer means the plan ad-
ministrator within the meaning of section
414(g).
The proposed regulations under section
6057 provide that if a filer that is required
to file electronically fails to do so, the
filer is deemed to have failed to file the
registration statement or other notifica-
tion required under section 6057. Section
6652(d)(1) imposes a penalty on the plan
administrator for the failure to file a reg-
istration statement required under section
6057(a). Section 6652(d)(2) imposes a
penalty on the plan administrator for the
failure to file a notification required under
section 6057(b). Theproposed regulations
under section 6057 provide that rules un-
der §301.6652–3(b) apply for purposes
of determining whether there is reason-
able cause for failure to file a registration
statement requiredunder section 6057(a)
or notification required under section
6057(b). In addition, rules similar to the
rules in §301.6724–1(c)(3)(ii), regarding
undue economic hardship relating to filing
on magnetic media, will apply.
III.Form 5500 Series
The proposed regulations under section
6058 provide that a return required under
section 6058 must be filed on magnetic
media if the filer is required by the Code or
regulations to file at least 250 returns dur-
ing the calendar year that includes the first
day of the plan year. The term filer means
the employer or employers maintaining the
plan and the plan administrator within the
meaning of section 414(g). Thus, in apply-
ing the 250-return requirement, the returns
of the employer or employers maintaining
the plan and of the plan administrator are
aggregated.
The proposed regulations under section
6058 also provide that, in determining the
250-return requirement, the aggregation
rules of section 414(b), (c), (m), and (o)
apply to a filer that is, or includes, an
employer. Thus, for example, a filer that
is a member of a controlled group of cor-
porations within the meaning of section
414(b) must file the Form 5500 series on
magnetic media if the aggregate number
of returns required to be filed by the con-
trolled group of corporations is at least
250. These aggregation rules also apply
to the regulations under sections 6057 and
6059 if the plan administrator is the em-
ployer.
The proposed regulations under section
6058 provide that if the filer is required
to file electronically but fails to do so,
the filer is deemed to have failed to file
the Form 5500 series. For a failure to
file the Form 5500 series, a penalty under
section 6652(e) applies. The proposed
regulations under section 6058 provide
that rules under §301.6652–3(b) apply for
purposes of determining whether there is
reasonable cause for failure to file a return.
In addition, rules similar to the rules in
§301.6724–1(c)(3)(ii), regarding undue
economic hardship relating to filing on
magnetic media, will apply.
IV.Actuarial Reports
The proposed regulations under section
6059 provide that an actuarial report re-
quired under section 6059 must be filed
on magnetic media if the filer is required
by the Code or regulations to file at least
250 returns during the calendar year that
includes the first day of the plan year. For
purposes of the regulations under section
6059, the term filer means the plan ad-
ministrator within the meaning of section
414(g).
The proposed regulations under sec-
tion 6059 provide that if a filer that is
required to file electronically fails to do
so, the filer is deemed to have failed to
file the actuarial report required under
section 6059. Section 6692 provides that
a plan administrator that fails to file the
report required under section 6059 shall
pay a penalty for each such failure, unless
it is shown that there is reasonable cause
for the failure. The proposed regulations
under section 6059 provide that rules un-
der §301.6692–1(c) apply for purposes of
determining whether there is reasonable
cause for failure to file an actuarial report.
In addition, rules similar to the rules in
§301.6724–1(c)(3)(ii), regarding undue
economic hardship relating to filing on
magnetic media, will apply.
V.Economic Hardship Waiver
These proposed regulations also pro-
vide that the Commissioner may waive the
requirement to file electronically in cases
of undue economic hardship. Because the
Treasury Department and the IRS believe
that electronic filing will not impose sig-
nificant burdens on the taxpayers covered
by these regulations, the Commissioner
anticipates granting waivers of the elec-
tronic filing requirement in only excep-
tional cases. Waivers are anticipated to
be particularly rare for the filers of Form
September 23, 20132682013–39 I.R.B.

5500 and Form 5500–SF (as well as the
schedules attached to those forms), be-
cause these filers are already required to
file electronically under EFAST2.
Proposed Effective Date
These regulations are proposed to ap-
ply for employee retirement benefit plan
statements, notifications, returns, and re-
ports required to be filed under sections
6057, 6058, and 6059 for plan years that
begin on or after January 1, 2014, but only
for filings with a filing deadline (not tak-
ing into account extensions) after Decem-
ber 31, 2014.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Ex-
ecutive Order 12866. Therefore, a regu-
latory assessment is not required. It has
also been determined that 5 U.S.C. 533(b)
of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these
regulations. In addition, it is hereby certi-
fied that any collection of information con-
tained in this regulation will not have a
significant economic impact on a substan-
tial number of small entities, and therefore
no flexibility analysis under the Regula-
tory Flexibility Act (5 U.S.C. chapter 6)
is required. Pursuant to section 7805(f) of
the Internal Revenue Code, these regula-
tions have been submitted to the Office of
Chief Counsel for Advocacy of the Small
Business Administration for comments on
its impact on small businesses.
The certification is based on the fact
that §§301.6057–1, 301.6058–1, and
301.6059–1 currently require filing with
the IRS of information under sections
6057, 6058, and 6059in accordance with
applicable forms, schedules, and accom-
panying instructions. These proposed
regulations merely require that this infor-
mation be filed electronically by persons
required to file at least 250 returns for
the calendar year, consistent with section
6011(e)(2)(A), which provides that, in pre-
scribing regulations providing standards
for determining which returns must be
filed on magnetic media or in other ma-
chine-readable form, the Secretary shall
not require any person to file returns on
magnetic media unless the person is re-
quired to file at least 250 returns during
the calendar year. Many small entities
are unlikely to file 250 returns or more
during the calendar year. Filers of the
Form 5500 and Form 5500–SF are already
required to file the returns electronically
through EFAST2 pursuant to DOL reg-
ulations. In addition, many filers of the
Form 8955–SSA already voluntarily file
electronically with the IRS.
Further, if a taxpayer’s operations are
computerized, reporting in accordance
with the regulations should be less costly
than filing on paper. The IRS and the
Treasury Department have determined
that taxpayers should be able to comply
at a reasonable cost with the requirement
in these regulations to file employee re-
tirement statements, returns, and reports
on magnetic media. In addition, the pro-
posed regulations provide that the IRS
may waive the electronic filing require-
ments upon a showing of hardship.
Comments a
nd Requests for Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any comments that are
submitted timely to the IRS as prescribed
in this preamble under the “Addresses”
heading. The IRS and the Treasury De-
partment request comments on all aspects
of the rules. All comments are available
atwww.regulations.govor upon request.
A public hearing will be scheduled if
requested in writing by any person who
timely submits written comments. If a
public hearing is scheduled, notice of the
date, time, and place of the public hearing
will be published in theFederal Register.
Drafting Information
The principal authors of these
regulations are William Gibbs and
Pamela R. Kinard, Office of Division
Counsel/Associate Chief Counsel (Tax
Exempt and Government Entities).
However, other personnel from the IRS
and the Treasury Department participated
in the development of these regulations.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 301 is pro-
posed to be amended as follows:
Part 301—PROCEDURE AND
ADMINISTRATION
Par. 1. The authority for part 301 con-
tinues to read in part as follows: Authority:
26 U.S.C. 7508***
Par. 2. Section 301.6057–3 is added to
read as follows:
§301.6057–3 Required use of magnetic
media for filing requirements relating to
deferred vested retirement benefit.
(a)Magnetic media filing require-
ments under section 6057. A registration
statement requiredunder section 6057(a)
or a notification required under section
6057(b) with respect to an employee ben-
efit plan must be filed on magnetic media
if the filer is required by the Internal Rev-
enue Code or regulations to file at least
250 returns during the calendar year that
includes the first day of the plan year.
Returns filed on magnetic media must
be made in accordance with applicable
revenue procedures, publications, forms,
instructions, or other guidance on the
IRS.gov Internet website. In prescribing
revenue procedures, publications, forms,
instructions, or other guidance on the
IRS.gov Internet website, the Commis-
sioner may direct the type of magnetic
media filing. (See §601.601(d)(2)(ii)(b)
of this chapter.)
(b)Economic hardship waiver.The
Commissioner may waive the require-
ments of this section in cases of undue
economic hardship. The principal fac-
tor in determining hardship will be the
amount, if any, by which the cost of filing
the registration statements or notifications
on magnetic media in accordance with
this section exceeds the cost of filing the
registration statements or notifications
on paper or other media. A request for
a waiver must be made in accordance
with applicable published guidance, pub-
lications, forms, instructions, or other
guidance on the IRS.gov Internet website.
(See §601.601(d)(2)(ii)(b)ofthischapter.)
The waiver will specify the type of filing
(that is, a registration statement or notifi-
cation under section 6057), and the period
to which it applies, and will be subject to
such terms and conditions regarding the
method of filing as may be prescribed by
the Commissioner.
2013–39 I.R.B.269September 23, 2013

(c)Failure to file. Ifafilerrequired
to file a registration statement or other
notification under section 6057 fails to
file the statement or other notification
on magnetic media when required to do
so by this section, the filer is deemed to
have failed to file the statement or other
notification. See section 6652(d) for the
amount imposed for the failure to file a
registration statement or other notifica-
tion under section 6057. In determining
whether there is reasonable cause for
the failure to file the registration state-
ment or notification under section 6057,
§301.6652–3(b) and rules similar to the
rules in §301.6724–1(c)(3)(ii) (regarding
undue economic hardship related to filing
information returns on magnetic media)
will apply.
(d)Meaning of terms. The following
definitions apply for purposes of this sec-
tion.
(1)Magnetic media.Thetermmag-
netic mediameans electronic filing, as well
as other media specifically permitted un-
der applicable regulations, revenue proce-
dures, or publications, forms, instructions,
or other guidance on the IRS.gov Internet
website. (See §601.601(d)(2)(ii)(b)ofthis
chapter.)
(2)Registration statement required un-
der section 6057(a).Thetermregistration
statement required under section 6057(a)
means a Form 8955–SSA (or its succes-
sor).
(3)Notification required under section
6057(b).Thetermnotification required
under section 6057(b)means either a Form
8955–SSA (or its successor) or a Form
5500 series (or its successor).
(4)Determination of 250 returns—(i)
In general. For purposes of this section, a
filer is required to file at least 250 returns
if, during the calendar year that includes
the first day of the plan year, the filer is
required to file at least 250 returns of any
type, including information returns (for ex-
ample, Forms W–2 and Forms 1099), in-
come tax returns, employment tax returns,
and excise tax returns.
(ii)Definition of filer. For purposes
of this section, the termfilermeans the
plan administrator within the meaning
of section 414(g). If the plan admin-
istrator within the meaning of section
414(g) is the employer, the special rules in
§1.6058–2(d)(3)(iii) will apply.
(e)Example. The following example il-
lustrates the provisions of paragraph (d)(4)
of this section:
Example. In 2014, P, the plan administrator of
Plan B, is required to file 252 returns (including
Forms 1099–R,
Distributions From Pensions, An-
nuities, Retirement or Profit-Sharing Plans, IRAs,
Insurance Contracts, etc.
, Form 8955–SSA,Annual
Registration Statement Identifying Separated Par-
ticipants with Deferred Vested Benefits
, Form 5500,
Annual Return/Report of Employee Benefit Plan,
and Form 945,
Annual Return of Withheld Federal
Income Tax
). Plan B’s plan year is the calendar year.
Because P is required to file at least 250 returns
during the 2014 calendar year, P must file the 2014
Form 8955–SSA for Plan B electronically.
(f)Effective/applicability date.This
section is applicable for registration state-
ments and other notifications required to
be filed under section 6057 for plan years
that begin on or after January 1, 2014, but
only for filings with a filing deadline (not
taking into account extensions) after De-
cember 31, 2014.
Par. 3. Section 301.6058–2 is added to
read as follows:
§301.6058–2 Required use of magnetic
media for filing requirements relating to
informationrequiredinconnectionwith
certain plans of deferred compensation.
(a)Magnetic media filing requirements
under section 6058. A return required
under section 6058 with respect to an
employee benefit plan must be filed on
magnetic media if the filer is required by
the Internal Revenue Code or regulations
to file at least 250 returns during the cal-
endar year that includes the first day of the
plan year. Returns filed on magnetic media
must be made in accordance with appli-
cable revenue procedures, publications,
forms, instructions, or other guidance
on the IRS.gov Internet website. In pre-
scribing revenue procedures, publications,
forms, and instructions, or other guidance
on the IRS.gov Internet site, the Commis-
sioner may direct the type of magnetic
media filing. (See §601.601(d)(2)(ii)(b)
of this chapter.)
(b)Economic hardship waiver.The
Commissioner may waive the require-
ments of this section in cases of undue
economic hardship. The principal factor in
determining hardship will be the amount,
if any, by which the cost of filing the return
on magnetic media in accordance with
this section exceeds the cost of filing the
returns on paper or other media. A request
for a waiver must be made in accordance
with applicable published guidance, pub-
lications, forms, instructions, or other
guidance on the IRS.gov Internet website.
(See §601.601(d)(2)(ii)(b)ofthischapter.)
The waiver will specify the type of filing
(that is, a return required under section
6058) and the period to which it applies,
and will be subject to such terms and con-
ditions regarding the method of filing as
may be prescribed by the Commissioner.
(c)Failure to file. Ifafilerrequired
to file a return under section 6058 fails to
file the return on magnetic media when
required to do so by this section, the
filer is deemed to have failed to file the
return. See section 6652(e) for the ad-
dition to tax for failure to file a return.
In determining whether there is reason-
able cause for failure to file the return,
§301.6652–3(b) and rules similar to the
rules in §301.6724–1(c)(3)(ii) (regarding
undue economic hardship related to filing
information returns on magnetic media)
will apply.
(d)Meaning of terms. The following
definitions apply for purposes of this sec-
tion.
(1)Magnetic media.Thetermmag-
netic mediameans electronic filing, as well
as other media specifically permitted un-
der applicable regulations, revenue proce-
dures, or publications, forms, instructions,
or other guidance on the IRS.gov Internet
website. (See §601.601(d)(2)(ii)(b)ofthis
chapter.)
(2)Return required under section 6058.
The termreturn required under section
6058means the Form 5500 series (or its
successor).
(3)Determination of 250 returns—(i)
In general. For purposes of this section, a
filer is required to file at least 250 returns
if, during the calendar year that includes
the first day of the plan year, the filer is
required to file at least 250 returns of any
type, including information returns (for ex-
ample, Forms W–2 and Forms 1099), in-
come tax returns, employment tax returns,
and excise tax returns.
(ii)Definition of filer. For purposes
of this section, the termfilermeans the
employer or employers maintaining the
plan and the plan administrator within the
meaning of section 414(g).
(iii)Special rules relating to determin-
ing 250 returns. For purposes of applying
paragraph (d)(3)(ii) of this section, the ag-
September 23, 20132702013–39 I.R.B.

gregation rules of section 414(b), (c), (m),
and (o) will apply to a filer that is or in-
cludes an employer. Thus, for example, a
filerthatisamemberofacontrolledgroup
of corporations within the meaning of sec-
tion 414(b) must file the Form 5500 series
on magnetic media if the aggregate num-
ber of returns required to be filed by all
members of the controlled group of corpo-
rations is at least 250.
(e)Example. The following example il-
lustrates the provisions of paragraph (d)(3)
of this section:
Example. In 2014, Employer X (the plan sponsor
of Plan A) and P (the plan administrator of Plan A) are
required to file 267 returns. Employer X is required to
file the following: one Form 1120,
U.S. Corporation
Income Tax Return
, 195 Forms W–2,Wage and Tax
Statement
, 25 Forms 1099–DIV,Dividends and Dis-
tributions
, one Form 940,Employer’s Annual Federal
Unemployment (FUTA) Tax Return
, and four Forms
941,
Employer’s Quarterly Federal Tax Return.P
is required to file 40 Forms 1099–R,
Distributions
From Pensions, Annuities, Retirement, Profit-Sharing
Plans, IRAs, Insurance Contracts, etc
.PandEm-
ployer X are jointly required to file one Form 5500 se-
ries. Plan A’s plan year is the calendar year. Because
P and Employer X, in the aggregate, are required to
file at least 250 returns during the calendar year, the
2014 Form 5500 for Plan A must be filed electroni-
cally.
(f)Effective/applicability date.This
section is applicable for returns required to
be filed under section 6058 for plan years
that begin on or after January 1, 2014, but
only for filings with a filing deadline (not
taking into account extensions) after De-
cember 31, 2014.
Par. 4. Section 301.6059–2 is added to
read as follows:
§301.6059–2 Required use of magnetic
media for filing requirements relating to
periodic report of actuary.
(a)Magnetic media filing requirements
under section 6059. An actuarial report
required under section 6059 with respect
to an employee benefit plan must be filed
on magnetic media if the filer is required
by the Internal Revenue Code or regula-
tions to file at least 250 returns during
the calendar year that includes the first
day of the plan year. Actuarial reports
filed on magnetic media must be made in
accordance with applicable revenue pro-
cedures, publications, forms, instructions,
or other guidance on the IRS.gov Inter-
net website. In prescribing revenue pro-
cedures, publications, forms, instructions,
or other guidance on the IRS.gov Inter-
net website, the Commissioner may direct
thetypeofmagnetic media filing. (See
§601.601(d)(2)(ii)(b) of this chapter.)
(b)Economic hardship waiver.The
Commissioner may waive the require-
ments of this section in cases of undue
economic hardship. The principal factor in
determining hardship will be the amount,
if any, by which the cost of filing the re-
ports on magnetic media in accordance
with this section exceeds the cost of filing
the reports on paper or other media. A re-
quest for a waiver must be made in accor-
dance with applicable published guidance,
publications, forms, instructions, or other
guidance on the IRS.gov Internet website.
(See §601.601(d)(2)(ii)(b)ofthischapter.)
The waiver will specifythe type of filing
(that is, an actuarial report required under
section 6059) and the period to which it
applies, and will be subject to such terms
and conditions regarding the method of
filing as may be prescribed by the Com-
missioner.
(c)Failure to File.Ifafilerrequiredto
file an actuarial report under section 6059
fails to file the report on magnetic me-
dia when required to do so by this sec-
tion, the filer is deemed to have failed to
file the report. See section 6692 for the
penalty for the failure to file an actuarial
report. In determining whether there is
reasonable cause for failure to file the re-
port, §301.6692–1(c) and rules similar to
the rules in §301.6724–1(c)(3)(ii) (regard-
ing undue economic hardship related to fil-
ing information returns on magnetic me-
dia) will apply.
(d)Meaning of terms. The following
definitions apply forpurposes of this sec-
tion.
(1)Magnetic media.Thetermmag-
netic mediameans electronic filing, as well
as other media specifically permitted un-
der applicable regulations, revenue proce-
dures, or publications, forms, instructions,
or other guidance on the IRS.gov Internet
website. (See §601.601(d)(2)(ii)(b)ofthis
chapter.)
(2)Actuarial report required under sec-
tion 6059—(i)Single employer plans.For
a single employer plan, the termactuarial
report required under section 6059means
the Schedule SB,Single-Employer De-
fined Benefit Plan Actuarial Information,
of the Form 5500 series (or its successor).
(ii)Multiemployer and certain money
purchase plans. For multiemployer and
certain money purchase plans, the termac-
tuarial report required under section 6059
means the Schedule MB,Multiemployer
Defined Benefit Plan and Certain Money
Purchase Plan Actuarial Information,of
the Form 5500 series (or its successor).
(3)Determination of 250 returns—(i)
In general. For purposes of this section, a
filer is required to file at least 250 returns
if, during the calendar year that includes
the first day of the plan year, the filer is
required to file at least 250 returns of any
type, including information returns (for ex-
ample, Forms W–2 and Forms 1099), in-
come tax returns, employment tax returns,
and excise tax returns.
(ii)Definition of filer. For purposes
of this section, the termfiler
means the
plan administrator within the meaning
of section 414(g). If the plan admin-
istrator within the meaning of section
414(g) is the employer, the special rules in
§1.6058–2(d)(3)(iii) will apply.
(e)Example. The following example il-
lustrates the provisions of paragraph (d)(3)
of this section:
Example. In 2014, P, the plan administrator of
Plan B (a single employer defined benefit plan), is
required to file 266 returns (including Forms 1099–R,
Distributions From Pensions, Annuities, Retirement,
Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
and one Form 5500 series). Plan B’s plan year is the
calendar year. Because P is required to file at least
250 returns during the calendar year, P must file the
2014 Schedule SB of the Form 5500 series for Plan
B electronically.
(f)Effective/ applicability date.This
section is applicable for actuarial reports
required to be filed under section 6059 for
plan years that begin on or after January
1, 2014, but only for filings with a filing
deadline (not taking into account exten-
sions) after December 31, 2014.
Beth Tucker,
Deputy Commissioner for
Operations Support.
(Filed by the Office of the Federal Register on August 29,
2013, 8:45 a.m., and published in the issue of the Federal
Register for August 30, 2013, 78 F.R. 53704)
2013–39 I.R.B.271September 23, 2013

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 ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
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 withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis 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
withamplifiedandclarified, above).
Obsoleteddescribes 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.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes 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 pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis 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 rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis 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 fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
DC—Dummy Corporation.
DE—Donee.
Del. Order
—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
September 23, 2013i2013–39 I.R.B.

Numerical Finding List
1
Bulletins 2013–27 through 2013–39
Announcements:
2013-35, 2013-27 I.R.B.46
2013-36, 2013-33 I.R.B.142
2013-37, 2013-34 I.R.B.155
2013-38, 2013-36 I.R.B.185
2013-39, 2013-35 I.R.B.167
2013-40, 2013-38 I.R.B.226
Notices:
2013-41, 2013-29 I.R.B.60
2013-42, 2013-29 I.R.B.61
2013-43, 2013-31 I.R.B.113
2013-44, 2013-29 I.R.B.62
2013-45, 2013-31 I.R.B.116
2013-46, 2013-31 I.R.B.117
2013-47, 2013-31 I.R.B.120
2013-48, 2013-31 I.R.B.120
2013-49, 2013-32 I.R.B.127
2013-50, 2013-32 I.R.B.133
2013-51, 2013-34 I.R.B.153
2013-52, 2013-35 I.R.B.159
2013-53, 2013-36 I.R.B.173
2013-55, 2013-38 I.R.B.207
2013-56, 2013-39 I.R.B.262
Proposed Regulations:
REG-132251-11, 2013-37 I.R.B.191
REG-112815-12, 2013-35 I.R.B.162
REG-114122-12, 2013-35 I.R.B.163
REG-140789-12, 2013-32 I.R.B.136
REG-144990-12, 2013-39 I.R.B.264
REG-111837-13, 2013-39 I.R.B.266
REG-113792-13, 2013-38 I.R.B.211
REG-115300-13, 2013-37 I.R.B.197
Revenue Procedures:
2013-28, 2013-27 I.R.B.28
2013-29, 2013-33 I.R.B.141
2013-30, 2013-36 I.R.B.173
2013-31, 2013-38 I.R.B.208
2013-32, 2013-28 I.R.B.55
2013-33, 2013-38 I.R.B.209
Revenue Rulings:
2013-13, 2013-32 I.R.B.124
2013-15, 2013-28 I.R.B.47
2013-17, 2013-38 I.R.B.201
2013-18, 2013-37 I.R.B.186
2013-19, 2013-39 I.R.B.240
Treasury Decisions:
9620, 2013-27 I.R.B.1
Treasury Decisions— Continued:
9621, 2013-28 I.R.B.
49
9622, 2013-30 I.R.B.64
9623, 2013-30 I.R.B.73
9624, 2013-31 I.R.B.86
9625, 2013-34 I.R.B.147
9626, 2013-34 I.R.B.149
9627, 2013-35 I.R.B.156
9628, 2013-36 I.R.B.169
9629, 2013-37 I.R.B.188
9630, 2013-38 I.R.B.199
9631, 2013-38 I.R.B.205
9632, 2013-39 I.R.B.241
9633, 2013-39 I.R.B.227
1
A cumulative list of all revenue rulings, revenueprocedures, Treasury decisions, etc., publishedin Internal Revenue Bulletins 2013–1 through 2013–26 is in Internal Revenue Bulletin
2013–26, dated June 24, 2013.
2013–39 I.R.B.iiSeptember 23, 2013

Finding List of Current Actions on
Previously Published Items
1
Bulletins 2013–27 through 2013–39
Notices:
2005-70
Obsoleted by
T.D. 9633, 2013-39 I.R.B.
227
2012-74
Obsoleted by
Notice 2013-51, 2013-34 I.R.B.
153
2013-16
Superseded by
Notice 2013-55, 2013-38 I.R.B.
207
2013-36
Appendix updated by
Notice 2013-55, 2013-38 I.R.B.
207
Superseded by
Notice 2013-55, 2013-38 I.R.B.
207
2013-39
Amplified by
Notice 2013-47, 2013-31 I.R.B.
120
2013-40
Amplified by
Notice 2013-47, 2013-31 I.R.B.
120
Revenue Procedures:
81-60
Modified by
Rev. Proc. 2013-32, 2013-28 I.R.B.
55
83-59
Modified by
Rev. Proc. 2013-32, 2013-28 I.R.B.
55
86-42
Modified by
Rev. Proc. 2013-32, 2013-28 I.R.B.
55
90-52
Modified by
Rev. Proc. 2013-32, 2013-28 I.R.B.
55
96-30
Modified by
Rev. Proc. 2013-32, 2013-28 I.R.B.
55
97-48
Situation 1 superseded, Situation 2 obsoleted by
Rev. Proc. 2013-30, 2013-36 I.R.B.
173
2003-43
Modified and superseded by
Rev. Proc. 2013-30, 2013-36 I.R.B.
173
2003-48
Obsoleted in part and superseded in part by
Rev. Proc. 2013-32, 2013-28 I.R.B.
55
Revenue Procedures— Continued:
2004-34
Modified and clarified by
Rev. Proc. 2013-29, 2013-33 I.R.B.
141
2004-48
Modified and superseded by
Rev. Proc. 2013-30, 2013-36 I.R.B.
173
2004-49
Sections 4.01 & 4.02 modified and superseded,
Section 4.03 obsoleted by
Rev. Proc. 2013-30, 2013-36 I.R.B.
173
2007-44
Modified by
Ann. 2013-37, 2013-34 I.R.B.
155
2007-62
Modified and superseded by
Rev. Proc. 2013-30, 2013-36 I.R.B.
173
2009-25
Pilot program discontinued by
Rev. Proc. 2013-32, 2013-28 I.R.B.
55
2011-18
Modified and clarified by
Rev. Proc. 2013-29, 2013-33 I.R.B.
141
2011-49
Modified by
Ann. 2013-37, 2013-34 I.R.B.
155
2012-25
Obsoleted in part by
Rev. Proc. 2013-28, 2013-27 I.R.B.
28
2013-1
Amplified and modified by
Rev. Proc. 2013-32, 2013-28 I.R.B.
55
2013-3
Amplified and modified by
Rev. Proc. 2013-32, 2013-28 I.R.B.
55
Revenue Rulings:
58-66
Amplified and clarified by
Rev. Rul. 2013-17, 2013-38 I.R.B.
201
Treasury Decisions:
9612
Corrected by
Ann. 2013-35, 2013-27 I.R.B.
46
9622
Corrected by
Ann. 2013-39, 2013-35 I.R.B.
167
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2013–1 through 2013–26 is in Internal Revenue Bulletin 2013–26, dated June 24, 2013.
September 23, 2013iii2013–39 I.R.B.

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