Internal Revenue Bulletin 2016-39 (PDF rendition): IRS Announcements

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# INTERNAL REVENUE BULLETIN

IRS

## HIGHLIGHTS OF THIS ISSUE

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

## INCOME TAX

### Rev. Rul. 2016-23, page 382

Interest rates: underpayments and overpayments. The rates
for interest determined under section 6621 of the code for the
calendar quarter beginning October 1, 2016, will be 4 percent
for overpayments (3 percent in the case of a corporation), 4
percent for underpayments, and 6 percent for large corporate
underpayments. The rate of interest paid on the portion of a
corporate overpayment exceeding $10,000 will be 1.5 percent.

### Rev. Rul. 2016-24, page 395.

Fringe benefits aircraft valuation formula. For purposes of
section 1.61-21(g) of the Income Tax Regulations, relating to
the rule for valuing non-commercial flights on employer-
provided aircraft, the Standard Industry Fare Level (SIFL) cents-
per-mile rates and terminal charge in effect for the second half
of 2016 are set forth.

### Announcement 2016-33, page 422.

Announcement of Certification Resulting from the 2012-2013
Phase III Allocation Round of the Qualifying Advanced Coal
Project Program. The announcement discloses the certification
resulting from the 2012-13 Phase III allocation round of the
qualifying advanced coal project program of § 48A of the
Internal Revenue Code.

### Announcement 2016-34, page 422.

Announcement of the Results of the Phase III Allocation Round of
the Qualifying Gasification Project Program. The proposed an-
nouncement discloses the results of the Phase III allocation round
under the qualifying gasification project program of § 48B of the
Internal Revenue Code. This announcement also serves as notice
to applicants that no additional allocation rounds will be conducted
under the qualifying gasification project program.

Bulletin No. 2016-39
September 26, 2016

### Notice 2016-53, page 421.

Section 2016 Section 45Q Inflation Adjustment Factor. This
notice publishes the inflation adjustment factor for the carbon
dioxide (CO2) sequestration credit under § 45Q for calendar
year 2016.

### T.D. 9784, page 402.

Real estate investment trusts (REITs) have certain REIT qualifi-
cation requirements. At least 75 percent of a REIT's assets
must be in real estate assets, cash and cash items, and
government securities. A real estate asset includes real prop-
erty and interests in real property. These regulations define
real property for REIT purposes.

## EMPLOYEE PLANS

### T.D. 9783, page 396.

These final regulations change the regulations regarding the
minimum present value requirements for defined benefit plan
distributions to permit plans to simplify the treatment of certain
optional forms of benefit that are paid partly in the form of an
annuity and partly in a more accelerated form.

(Continued on the next page)

Finding Lists begin on page ii.

## EXEMPT ORGANIZATIONS

Announcement 2016-35, page 423.
Serves notice to potential donors of a stipulated decision by
the United States Tax Court in declaratory judgment proceed-
ings under Section 7428.

Announcement 2016-36, page 423.

Serves notice to potential donors of a stipulated decision by
the United States Tax Court in declaratory judgment proceed-
ings under Section 7428.

Announcement 2016-37, page 423.

Serves notice to potential donors of a stipulated decision by
the United States Tax Court in declaratory judgment proceed-
ings under Section 7428.

## The IRS Mission

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

## Introduction

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

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

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

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

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

The Bulletin is divided into four parts as follows:

### Part I .- 1986 Code.

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

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

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

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

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

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

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

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

## Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

### Section 6621 .- Determination of Rate of Interest

26 CFR 301.6621-1: Interest rate.

### Rev. Rul. 2016-23

Section 6621 of the Internal Revenue
Code establishes the interest rates on
overpayments and underpayments of tax.
Under section 6621(a)(1), the overpay-
ment rate is the sum of the federal short-
term rate plus 3 percentage points (2 per-
centage points in the case of a
corporation), except the rate for the por-
tion of a corporate overpayment of tax
exceeding $10,000 for a taxable period is
the sum of the federal short-term rate plus
0.5 of a percentage point. Under section
6621(a)(2), the underpayment rate is the
sum of the federal short-term rate plus 3
percentage points.

Section 6621(c) provides that for pur-
poses of interest payable under section
6601 on any large corporate underpay-
ment, the underpayment rate under section
6621(a)(2) is determined by substituting
"5 percentage points" for "3 percentage
points." See section 6621(c) and section
301.6621-3 of the Regulations on Proce-
dure and Administration for the definition
of a large corporate underpayment and
for the rules for determining the applica-
ble date. Section 6621(c) and section
301.6621-3 are generally effective for pe-
riods after December 31, 1990.

Section 6621(b)(1) provides that the
Secretary will determine the federal short-
term rate for the first month in each cal-
endar quarter. Section 6621(b)(2)(A) pro-
vides that the federal short-term rate
determined under section 6621(b)(1) for
any month applies during the first calen-
dar quarter beginning after that month.
Section 6621(b)(3) provides that the fed-
eral short-term rate for any month is the
federal short-term rate determined during
that month by the Secretary in accordance
with section 1274(d), rounded to the near-
est full percent (or, if a multiple of 1/2 of
1 percent, the rate is increased to the next
highest full percent).

Notice 88-59, 1988-1 C.B. 546, an-
nounced that in determining the quarterly
interest rates to be used for overpayments
and underpayments of tax under section
6621, the Internal Revenue Service will
use the federal short-term rate based on
daily compounding because that rate is
most consistent with section 6621 which,
pursuant to section 6622, is subject to
daily compounding.

The federal short-term rate determined
in accordance with section 1274(d) during
July 2016 is the rate published in Revenue
Ruling 2016-18, 2016-31 IRB 194, to
take effect beginning August 1, 2016. The
federal short-term rate, rounded to the
nearest full percent, based on daily com-
pounding determined during the month of
July 2016 is 1 percent. Accordingly, an
overpayment rate of 4 percent (3 percent
in the case of a corporation) and an un-
derpayment rate of 4 percent are estab-

lished for the calendar quarter beginning
October 1, 2016. The overpayment rate
for the portion of a corporate overpayment
exceeding $10,000 for the calendar quar-
ter beginning October 1, 2016 is 1.5 per-
cent. The underpayment rate for large cor-
porate underpayments for the calendar
quarter beginning October 1, 2016, is 6
percent. These rates apply to amounts
bearing interest during that calendar quar-
ter.

Pursuant to section 6654(a)(1), the 4
percent rate also applies to estimated tax
underpayments for the fourth calendar
quarter in 2016. In addition, pursuant to
section 6603(d)(4), the rate of interest on
section 6603 deposits is 1 percent for the
fourth calendar quarter in 2016.

Interest factors for daily compound in-
terest for annual rates of 1.5 percent, 3
percent, 4 percent and 6 percent are pub-
lished in Tables 56, 59, 61 and 65 of Rev.
Proc. 95-17, 1995-1 C.B. 610, 613, 615
and 619.

Annual interest rates to be com-
pounded daily pursuant to section 6622
that apply for prior periods are set forth in
the tables accompanying this revenue rul-
ing.

## DRAFTING INFORMATION

The principal author of this revenue
ruling is Sarah McLemore of the Office of
Associate Chief Counsel (Procedure &
Administration). For further information
regarding this revenue ruling, contact Ms.
McLemore at (202) 317-6844 (not a toll-
free number).

### APPENDIX A

365 Day Year 0.5% Compound Rate 184 Days Days Factor Days Factor Days Factor

0.000013699

0.000863380

125

0.001713784

0.000027397

0.000877091

126

0.001727506

0.000041096

0.000890801

127

0.001741228

0.000054796

0.000904512

128

0.001754951

0.000068495

0.000918223

129

0.001768673

0.000082195

0.000931934

130

0.001782396

0.000095894

0.000945646

131

0.001796119

365 Day Year 0.5% Compound Rate 184 Days Days Factor Days Factor Days Factor

0.000109594

0.000959357

132

0.001809843

0.000123294

0.000973069

133

0.001823566

0.000136995

0.000986781

134

0.001837290

0.000150695

0.001000493

135

0.001851013

0.000164396

0.001014206

136

0.001864737

0.000178097

0.001027918

137

0.001878462

0.000191798

0.001041631

138

0.001892186

0.000205499

0.001055344

139

0.001905910

0.000219201

0.001069057

140

0.001919635

0.000232902

0.001082770

141

0.001933360

0.000246604

0.001096484

142

0.001947085

0.000260306

0.001110197

143

0.001960811

0.000274008

0.001123911

144

0.001974536

0.000287711

0.001137625

145

0.001988262

0.000301413

0.001151339

146

0.002001988

0.000315116

0.001165054

147

0.002015714

0.000328819

0.001178768

148

0.002029440

0.000342522

0.001192483

149

0.002043166

0.000356225

0.001206198

150

0.002056893

0.000369929

0.001219913

151

0.002070620

0.000383633

0.001233629

152

0.002084347

0.000397336

0.001247344

153

0.002098074

0.000411041

0.001261060

154

0.002111801

0.000424745

0.001274776

155

0.002125529

0.000438449

0.001288492

156

0.002139257

0.000452154

0.001302208

157

0.002152985

0.000465859

0.001315925

158

0.002166713

0.000479564

0.001329641

159

0.002180441

0.000493269

0.001343358

160

0.002194169

0.000506974

0.001357075

161

0.002207898

0.000520680

100

0.001370792

162

0.002221627

0.000534386

101

0.001384510

163

0.002235356

0.000548092

102

0.001398227

164

0.002249085

0.000561798

103

0.001411945

165

0.002262815

0.000575504

104

0.001425663

166

0.002276544

0.000589211

105

0.001439381

167

0.002290274

0.000602917

106

0.001453100

168

0.002304004

0.000616624

107

0.001466818

169

0.002317734

0.000630331

108

0.001480537

170

0.002331465

0.000644039

109

0.001494256

171

0.002345195

0.000657746

110

0.001507975

172

0.002358926

0.000671454

111

0.001521694

173

0.002372657

0.000685161

112

0.001535414

174

0.002386388

0.000698869

113

0.001549133

175

0.002400120

0.000712578

114

0.001562853

176

0.002413851

365 Day Year 0.5% Compound Rate 184 Days Days Factor Days Factor Days Factor

0.000726286

115

0.001576573

177

0.002427583

0.000739995

116

0.001590293

178

0.002441315

0.000753703

117

0.001604014

179

0.002455047

0.000767412

118

0.001617734

180

0.002468779

0.000781121

119

0.001631455

181

0.002482511

0.000794831

120

0.001645176

182

0.002496244

0.000808540

121

0.001658897

183

0.002509977

0.000822250

122

0.001672619

184

0.002523710

0.000835960

123

0.001686340

0.000849670

124

0.001700062

Days

366 Day Year 0.5% Compound Rate 184 Days Factor Days Factor Days Factor

0.000013661

0.000861020

125

0.001709097

0.000027323

0.000874693

126

0.001722782

0.000040984

0.000888366

127

0.001736467

0.000054646

0.000902040

128

0.001750152

0.000068308

0.000915713

129

0.001763837

0.000081970

0.000929387

130

0.001777522

0.000095632

0.000943061

131

0.001791208

0.000109295

0.000956735

132

0.001804893

0.000122958

0.000970409

133

0.001818579

0.000136620

0.000984084

134

0.001832265

0.000150283

0.000997758

135

0.001845951

0.000163947

0.001011433

136

0.001859638

0.000177610

0.001025108

137

0.001873324

0.000191274

0.001038783

138

0.001887011

0.000204938

0.001052459

139

0.001900698

0.000218602

0.001066134

140

0.001914385

0.000232266

0.001079810

141

0.001928073

0.000245930

0.001093486

142

0.001941760

0.000259595

0.001107162

143

0.001955448

0.000273260

0.001120839

144

0.001969136

0.000286924

0.001134515

145

0.001982824

0.000300590

0.001148192

146

0.001996512

0.000314255

0.001161869

147

0.002010201

0.000327920

0.001175546

148

0.002023889

0.000341586

0.001189223

149

0.002037578

0.000355252

0.001202900

150

0.002051267

0.000368918

0.001216578

151

0.002064957

0.000382584

0.001230256

152

0.002078646

0.000396251

0.001243934

153

0.002092336

0.000409917

0.001257612

154

0.002106025

0.000423584

0.001271291

155

0.002119715

TABLE OF INTEREST RATES PERIODS BEFORE JUL. 1, 1975-PERIODS ENDING DEC. 31, 1986 OVERPAYMENTS AND UNDERPAYMENTS

366 Day Year 0.5% Compound Rate 184 Days Days Factor Days Factor Days Factor

0.000437251

0.001284969

156

0.002133405

0.000450918

0.001298648

157

0.002147096

0.000464586

0.001312327

158

0.002160786

0.000478253

0.001326006

159

0.002174477

0.000491921

0.001339685

160

0.002188168

0.000505589

0.001353365

161

0.002201859

0.000519257

100

0.001367044

162

0.002215550

0.000532925

101

0.001380724

163

0.002229242

0.000546594

102

0.001394404

164

0.002242933

0.000560262

103

0.001408085

165

0.002256625

0.000573931

104

0.001421765

166

0.002270317

0.000587600

105

0.001435446

167

0.002284010

0.000601269

106

0.001449127

168

0.002297702

0.000614939

107

0.001462808

169

0.002311395

0.000628608

108

0.001476489

170

0.002325087

0.000642278

109

0.001490170

171

0.002338780

0.000655948

110

0.001503852

172

0.002352473

0.000669618

111

0.001517533

173

0.002366167

0.000683289

112

0.001531215

174

0.002379860

0.000696959

113

0.001544897

175

0.002393554

0.000710630

114

0.001558580

176

0.002407248

0.000724301

115

0.001572262

177

0.002420942

0.000737972

116

0.001585945

178

0.002434636

0.000751643

117

0.001599628

179

0.002448331

0.000765315

118

0.001613311

180

0.002462025

0.000778986

119

0.001626994

181

0.002475720

0.000792658

120

0.001640678

182

0.002489415

0.000806330

121

0.001654361

183

0.002503110

0.000820003

122

0.001668045

184

0.002516806

0.000833675

123

0.001681729

0.000847348

124

0.001695413

PERIOD

RATE

In 1995-1 C.B. DAILY RATE TABLE

Before Jul. 1, 1975

Table 2, pg. 557

Jul. 1, 1975-Jan. 31, 1976

Table 4, pg. 559

Feb. 1, 1976-Jan. 31, 1978

Table 3, pg. 558

Feb. 1, 1978-Jan. 31, 1980

Table 2, pg. 557

Feb. 1, 1980-Jan. 31, 1982

12%

Table 5, pg. 560

Feb. 1, 1982-Dec. 31, 1982

20%

Table 6, pg. 560

Jan. 1, 1983-Jun. 30, 1983

16%

Table 37, pg. 591

Jul. 1, 1983-Dec. 31, 1983

11%

Table 27, pg. 581

Jan. 1, 1984-Jun. 30, 1984

11%

Table 75, pg. 629

# TABLE OF INTEREST RATES PERIODS BEFORE JUL. 1, 1975-PERIODS ENDING DEC. 31, 1986 OVERPAYMENTS AND UNDERPAYMENTS

PERIOD

RATE

In 1995-1 C.B. DAILY RATE TABLE

Jul. 1, 1984-Dec. 31, 1984

11%

Table 75, pg. 629

Jan. 1, 1985-Jun. 30, 1985

13%

Table 31, pg. 585

Jul. 1, 1985-Dec. 31, 1985

11%

Table 27, pg. 581

Jan. 1, 1986-Jun. 30, 1986

10%

Table 25, pg. 579

Jul. 1, 1986-Dec. 31, 1986

Table 23, pg. 577

TABLE OF INTEREST RATES FROM JAN. 1, 1987-Dec. 31, 1998 OVERPAYMENTS 1995-1 C.B. RATE TABLE PG

UNDERPAYMENTS 1995-1 C.B. RATE TABLE PG

Jan. 1, 1987-Mar. 31, 1987

575

577

Apr. 1, 1987-Jun. 30, 1987

575

577

Jul. 1, 1987-Sep. 30, 1987

575

577

Oct. 1, 1987-Dec. 31, 1987

577

10%

579

Jan. 1, 1988-Mar. 31, 1988

10%

627

11%

629

Apr. 1, 1988-Jun. 30, 1988

625

10%

627

Jul. 1, 1988-Sep. 30, 1988

625

10%

627

Oct. 1, 1988-Dec. 31, 1988

10%

627

11%

629

Jan. 1, 1989-Mar. 31, 1989

10%

579

11%

581

Apr. 1, 1989-Jun. 30, 1989

11%

581

12%

583

Jul. 1, 1989-Sep. 30, 1989

11%

581

12%

583

Oct. 1, 1989-Dec. 31, 1989

10%

579

11%

581

Jan. 1, 1990-Mar. 31, 1990

10%

579

11%

581

Apr. 1, 1990-Jun. 30, 1990

10%

579

11%

581

Jul. 1, 1990-Sep. 30, 1990

10%

579

11%

581

Oct. 1, 1990-Dec. 31, 1990

10%

579

11%

581

Jan. 1, 1991-Mar. 31, 1991

10%

579

11%

581

Apr. 1, 1991-Jun. 30, 1991

577

10%

579

Jul. 1, 1991-Sep. 30, 1991

577

10%

579

Oct. 1, 1991-Dec. 31, 1991

577

10%

579

Jan. 1, 1992-Mar. 31, 1992

623

625

Apr. 1, 1992-Jun. 30, 1992

621

623

Jul. 1, 1992-Sep. 30, 1992

621

623

Oct. 1, 1992-Dec. 31, 1992

619

621

Jan. 1, 1993-Mar. 31, 1993

571

573

Apr. 1, 1993-Jun. 30, 1993

571

573

Jul. 1, 1993-Sep. 30, 1993

571

573

Oct. 1, 1993-Dec. 31, 1993

571

573

Jan. 1, 1994-Mar. 31, 1994

571

573

Apr. 1, 1994-Jun. 30, 1994

571

573

Jul. 1, 1994-Sep. 30, 1994

573

575

Oct. 1, 1994-Dec. 31, 1994

575

577

Jan. 1, 1995-Mar. 31, 1995

575

577

TABLE OF INTEREST RATES FROM JANUARY 1, 1999-PRESENT NONCORPORATE OVERPAYMENTS AND UNDERPAYMENTS

TABLE OF INTEREST RATES FROM JAN. 1, 1987-Dec. 31, 1998 OVERPAYMENTS

UNDERPAYMENTS 1995-1 C.B. RATE TABLE PG

RATE

1995-1 C.B. TABLE

Apr. 1, 1995-Jun. 30, 1995

577

10%

579

Jul. 1, 1995-Sep. 30, 1995

575

577

Oct. 1, 1995-Dec. 31, 1995

575

577

Jan. 1, 1996-Mar. 31, 1996

623

625

Apr. 1, 1996-Jun. 30, 1996

621

623

Jul. 1, 1996-Sep. 30, 1996

623

625

Oct. 1, 1996-Dec. 31, 1996

623

625

Jan. 1, 1997-Mar. 31, 1997

575

577

Apr. 1, 1997-Jun. 30, 1997

575

577

Jul. 1, 1997-Sep. 30, 1997

575

577

Oct. 1, 1997-Dec. 31, 1997

575

577

Jan. 1, 1998-Mar. 31, 1998

575

577

Apr. 1, 1998-Jun. 30, 1998

573

575

Jul. 1, 1998-Sep. 30, 1998

573

575

Oct. 1, 1998-Dec. 31, 1998

573

575

RATE

1995-1 C.B. TABLE

PAGE

Jan. 1, 1999-Mar. 31, 1999

573

Apr. 1, 1999-Jun. 30, 1999

575

Jul. 1, 1999-Sep. 30, 1999

575

Oct. 1, 1999-Dec. 31, 1999

575

Jan. 1, 2000-Mar. 31, 2000

623

Apr. 1, 2000-Jun. 30, 2000

625

Jul. 1, 2000-Sep. 30, 2000

625

Oct. 1, 2000-Dec. 31, 2000

625

Jan. 1, 2001-Mar. 31, 2001

577

Apr. 1, 2001-Jun. 30, 2001

575

Jul. 1, 2001-Sep. 30, 2001

573

Oct. 1, 2001-Dec. 31, 2001

573

Jan. 1, 2002-Mar. 31, 2002

571

Apr. 1, 2002-Jun. 30, 2002

571

Jul. 1, 2002-Sep. 30, 2002

571

Oct. 1, 2002-Dec. 31, 2002

571

Jan. 1, 2003-Mar. 31, 2003

569

Apr. 1, 2003-Jun. 30, 2003

569

Jul. 1, 2003-Sep. 30, 2003

569

Oct. 1, 2003-Dec. 31, 2003

567

Jan. 1, 2004-Mar. 31, 2004

615

Apr. 1, 2004-Jun. 30, 2004

617

Jul. 1, 2004-Sep. 30, 2004

615

## TABLE OF INTEREST RATES FROM JANUARY 1, 1999-PRESENT NONCORPORATE OVERPAYMENTS AND UNDERPAYMENTS

RATE

1995-1 C.B. TABLE

PAGE

Oct. 1, 2004-Dec. 31, 2004

617

Jan. 1, 2005-Mar. 31, 2005

569

Apr. 1, 2005-Jun. 30, 2005

571

Jul. 1, 2005-Sep. 30, 2005

571

Oct. 1, 2005-Dec. 31, 2005

573

Jan. 1, 2006-Mar. 31, 2006

573

Apr. 1, 2006-Jun. 30, 2006

573

Jul. 1, 2006-Sep. 30, 2006

575

Oct. 1, 2006-Dec. 31, 2006

575

Jan. 1, 2007-Mar. 31, 2007

575

Apr. 1, 2007-Jun. 30, 2007

575

Jul. 1, 2007-Sep. 30, 2007

575

Oct. 1, 2007-Dec. 31, 2007

575

Jan. 1, 2008-Mar. 31, 2008

621

Apr. 1, 2008-Jun. 30, 2008

619

Jul. 1, 2008-Sep. 30, 2008

617

Oct. 1, 2008-Dec. 31, 2008

619

Jan. 1, 2009-Mar. 31, 2009

569

Apr. 1, 2009-Jun. 30, 2009

567

Jul. 1, 2009-Sep. 30, 2009

567

Oct. 1, 2009-Dec. 31, 2009

567

Jan. 1, 2010-Mar. 31, 2010

567

Apr. 1, 2010-Jun. 30, 2010

567

Jul. 1, 2010-Sep. 30, 2010

567

Oct. 1, 2010-Dec. 31, 2010

567

Jan. 1, 2011-Mar. 31, 2011

565

Apr. 1, 2011-Jun. 30, 2011

567

Jul. 1, 2011-Sep. 30, 2011

567

Oct. 1, 2011-Dec. 31, 2011

565

Jan. 1, 2012-Mar. 31, 2012

613

Apr. 1, 2012-Jun. 30, 2012

613

Jul. 1, 2012-Sep. 30, 2012

613

Oct. 1, 2012-Dec. 31, 2012

613

Jan. 1, 2013-Mar. 31, 2013

565

Apr. 1, 2013-Jun. 30, 2013

565

Jul. 1, 2013-Sep. 30, 2013

565

Oct. 1, 2013-Dec. 31, 2013

565

Jan. 1, 2014-Mar. 31, 2014

565

Apr. 1, 2014-Jun. 30, 2014

565

Jul. 1, 2014-Sep. 30, 2014

565

Oct. 1, 2014-Dec. 31, 2014

565

Jan. 1, 2015-Mar. 31, 2015

565

Apr. 1, 2015-Jun. 30, 2015

565

# TABLE OF INTEREST RATES FROM JANUARY 1, 1999-PRESENT NONCORPORATE OVERPAYMENTS AND UNDERPAYMENTS

RATE

1995-1 C.B. TABLE

PAGE

Jul. 1, 2015-Sep. 30, 2015

565

Oct. 1, 2015-Dec. 31, 2015

565

Jan. 1, 2016-Mar. 31, 2016

613

Apr. 1, 2016-Jun. 30, 2016

615

Jul. 1, 2016-Sep. 30, 2016

615

Oct. 1, 2016-Dec. 31, 2016

615

TABLE OF INTEREST RATES FROM JANUARY 1, 1999-PRESENT CORPORATE OVERPAYMENTS AND UNDERPAYMENTS

OVERPAYMENTS 1995-1 C.B.

UNDERPAYMENTS 1995-1 C.B.

RATE

TABLE

RATE

TABLE

Jan. 1, 1999-Mar. 31, 1999

571

573

Apr. 1, 1999-Jun. 30, 1999

573

575

Jul. 1, 1999-Sep. 30, 1999

573

575

Oct. 1, 1999-Dec. 31, 1999

573

575

Jan. 1, 2000-Mar. 31, 2000

621

623

Apr. 1, 2000-Jun. 30, 2000

623

625

Jul. 1, 2000-Sep. 30, 2000

623

625

Oct. 1, 2000-Dec. 31, 2000

623

625

Jan. 1, 2001-Mar. 31, 2001

575

577

Apr. 1, 2001-Jun. 30, 2001

573

575

Jul. 1, 2001-Sep. 30, 2001

571

573

Oct. 1, 2001-Dec. 31, 2001

571

573

Jan. 1, 2002-Mar. 31, 2002

569

571

Apr. 1, 2002-Jun. 30, 2002

569

571

Jul. 1, 2002-Sep. 30, 2002

569

571

Oct. 1, 2002-Dec. 31, 2002

569

571

Jan. 1, 2003-Mar. 31, 2003

567

569

Apr. 1, 2003-Jun. 30, 2003

567

569

Jul. 1, 2003-Sep. 30, 2003

567

569

Oct. 1, 2003-Dec. 31, 2003

565

567

Jan. 1, 2004-Mar. 31, 2004

613

615

Apr. 1, 2004-Jun. 30, 2004

615

617

Jul. 1, 2004-Sep. 30, 2004

613

615

Oct. 1, 2004-Dec. 31, 2004

615

617

Jan. 1, 2005-Mar. 31, 2005

567

569

Apr. 1, 2005-Jun. 30, 2005

569

571

Jul. 1, 2005-Sep. 30, 2005

569

571

Oct. 1, 2005-Dec. 31, 2005

571

573

Jan. 1, 2006-Mar. 31, 2006

571

573

Apr. 1, 2006-Jun. 30, 2006

571

573

## TABLE OF INTEREST RATES FROM JANUARY 1, 1999-PRESENT CORPORATE OVERPAYMENTS AND UNDERPAYMENTS

OVERPAYMENTS 1995-1 C.B.

UNDERPAYMENTS 1995-1 C.B.

RATE

TABLE

RATE

TABLE

Jul. 1, 2006-Sep. 30, 2006

573

575

Oct. 1, 2006-Dec. 31, 2006

573

575

Jan. 1, 2007-Mar. 31, 2007

573

575

Apr. 1, 2007-Jun. 30, 2007

573

575

Jul. 1, 2007-Sep. 30, 2007

573

575

Oct. 1, 2007-Dec. 31, 2007

573

575

Jan. 1, 2008-Mar. 31, 2008

619

621

Apr. 1, 2008-Jun. 30, 2008

617

619

Jul. 1, 2008-Sep. 30, 2008

615

617

Oct. 1, 2008-Dec. 31, 2008

617

619

Jan. 1, 2009-Mar. 31, 2009

567

569

Apr. 1, 2009-Jun. 30, 2009

565

567

Jul. 1, 2009-Sep. 30, 2009

565

567

Oct. 1, 2009-Dec. 31, 2009

565

567

Jan. 1, 2010-Mar. 31, 2010

565

567

Apr. 1, 2010-Jun. 30, 2010

565

567

Jul. 1, 2010-Sep. 30, 2010

565

567

Oct. 1, 2010-Dec. 31, 2010

565

567

Jan. 1, 2011-Mar. 31, 2011

563

565

Apr. 1, 2011-Jun. 30, 2011

565

567

Jul. 1, 2011-Sep. 30, 2011

565

567

Oct. 1, 2011-Dec. 31, 2011

563

565

Jan. 1, 2012-Mar. 31, 2012

611

613

Apr. 1, 2012-Jun. 30, 2012

611

613

Jul. 1, 2012-Sep. 30, 2012

611

613

Oct. 1, 2012-Dec. 31, 2012

611

613

Jan. 1, 2013-Mar. 31, 2013

563

565

Apr. 1, 2013-Jun. 30, 2013

563

565

Jul. 1, 2013-Sep. 30, 2013

563

565

Oct. 1, 2013-Dec. 31, 2013

563

565

Jan. 1, 2014-Mar. 31, 2014

563

565

Apr. 1, 2014-Jun. 30, 2014

563

565

Jul. 1, 2014-Sep. 30, 2014

563

565

Oct. 1, 2014-Dec. 31, 2014

563

565

Jan. 1, 2015-Mar. 31, 2015

563

565

Apr. 1, 2015-Jun. 30, 2015

563

565

Jul. 1, 2015-Sep. 30, 2015

563

565

Oct. 1, 2015-Dec. 31, 2015

563

565

Jan. 1, 2016-Mar. 31, 2016

611

613

Apr. 1, 2016-Jun. 30, 2016

613

615

Jul. 1, 2016-Sep. 30, 2016

613

615

Oct. 1, 2016-Dec. 31, 2016

613

615

# TABLE OF INTEREST RATES FOR LARGE CORPORATE UNDERPAYMENTS FROM JANUARY 1, 1991-PRESENT

RATE

1995-1 C.B. TABLE

Jan. 1, 1991-Mar. 31, 1991

13%

585

Apr. 1, 1991-Jun. 30, 1991

12%

583

Jul. 1, 1991-Sep. 30, 1991

12%

583

Oct. 1, 1991-Dec. 31, 1991

12%

583

Jan. 1, 1992-Mar. 31, 1992

11%

629

Apr. 1, 1992-Jun. 30, 1992

10%

627

Jul. 1, 1992-Sep. 30, 1992

10%

627

Oct. 1, 1992-Dec. 31, 1992

625

Jan. 1, 1993-Mar. 31, 1993

577

Apr. 1, 1993-Jun. 30, 1993

577

Jul. 1, 1993-Sep. 30, 1993

577

Oct. 1, 1993-Dec. 31, 1993

577

Jan. 1, 1994-Mar. 31, 1994

577

Apr. 1, 1994-Jun. 30, 1994

577

Jul. 1, 1994-Sep. 30, 1994

10%

579

Oct. 1, 1994-Dec. 31, 1994

11%

581

Jan. 1, 1995-Mar. 31, 1995

11%

581

Apr. 1, 1995-Jun. 30, 1995

12%

583

Jul. 1, 1995-Sep. 30, 1995

11%

581

Oct. 1, 1995-Dec. 31, 1995

11%

581

Jan. 1, 1996-Mar. 31, 1996

11%

629

Apr. 1, 1996-Jun. 30, 1996

10%

627

Jul. 1, 1996-Sep. 30, 1996

11%

629

Oct. 1, 1996-Dec. 31, 1996

11%

629

Jan. 1, 1997-Mar. 31, 1997

11%

581

Apr. 1, 1997-Jun. 30, 1997

11%

581

Jul. 1, 1997-Sep. 30, 1997

11%

581

Oct. 1, 1997-Dec. 31, 1997

11%

581

Jan. 1, 1998-Mar. 31, 1998

11%

581

Apr. 1, 1998-Jun. 30, 1998

10%

579

Jul. 1, 1998-Sep. 30, 1998

10%

579

Oct. 1, 1998-Dec. 31, 1998

10%

579

Jan. 1, 1999-Mar. 31, 1999

577

Apr. 1, 1999-Jun. 30, 1999

10%

579

Jul. 1, 1999-Sep. 30, 1999

10%

579

Oct. 1, 1999-Dec. 31, 1999

10%

579

Jan. 1, 2000-Mar. 31, 2000

10%

627

Apr. 1, 2000-Jun. 30, 2000

11%

629

Jul. 1, 2000-Sep. 30, 2000

11%

629

Oct. 1, 2000-Dec. 31, 2000

11%

629

Jan. 1, 2001-Mar. 31, 2001

11%

581

Apr. 1, 2001-Jun. 30, 2001

10%

579

Jul. 1, 2001-Sep. 30, 2001

577

Oct. 1, 2001-Dec. 31, 2001

577

# TABLE OF INTEREST RATES FOR LARGE CORPORATE UNDERPAYMENTS FROM JANUARY 1, 1991-PRESENT

RATE

1995-1 C.B. TABLE

Jan. 1, 2002-Mar. 31, 2002

575

Apr. 1, 2002-Jun. 30, 2002

575

Jul. 1, 2002-Sep. 30, 2002

575

Oct. 1, 2002-Dec. 31, 2002

575

Jan. 1, 2003-Mar. 31, 2003

573

Apr. 1, 2003-Jun. 30, 2003

573

Jul. 1, 2003-Sep. 30, 2003

573

Oct. 1, 2003-Dec. 31, 2003

571

Jan. 1, 2004-Mar. 31, 2004

619

Apr. 1, 2004-Jun. 30, 2004

621

Jul. 1, 2004-Sep. 30, 2004

619

Oct. 1, 2004-Dec. 31, 2004

621

Jan. 1, 2005-Mar. 31, 2005

573

Apr. 1, 2005-Jun. 30, 2005

575

Jul. 1, 2005-Sep. 30, 2005

575

Oct. 1, 2005-Dec. 31, 2005

577

Jan. 1, 2006-Mar. 31, 2006

577

Apr. 1, 2006-Jun. 30, 2006

577

Jul. 1, 2006-Sep. 30, 2006

10%

579

Oct. 1, 2006-Dec. 31, 2006

10%

579

Jan. 1, 2007-Mar. 31, 2007

10%

579

Apr. 1, 2007-Jun. 30, 2007

10%

579

Jul. 1, 2007-Sep. 30, 2007

10%

579

Oct. 1, 2007-Dec. 31, 2007

10%

579

Jan. 1, 2008-Mar. 31, 2008

625

Apr. 1, 2008-Jun. 30, 2008

623

Jul. 1, 2008-Sep. 30, 2008

621

Oct. 1, 2008-Dec. 31, 2008

623

Jan. 1, 2009-Mar. 31, 2009

573

Apr. 1, 2009-Jun. 30, 2009

571

Jul. 1, 2009-Sep. 30, 2009

571

Oct. 1, 2009-Dec. 31, 2009

571

Jan. 1, 2010-Mar. 31, 2010

571

Apr. 1, 2010-Jun. 30, 2010

571

Jul. 1, 2010-Sep. 30, 2010

571

Oct. 1, 2010-Dec. 31, 2010

571

Jan. 1, 2011-Mar. 31, 2011

569

Apr. 1, 2011-Jun. 30, 2011

571

Jul. 1, 2011-Sep. 30, 2011

571

Oct. 1, 2011-Dec. 31, 2011

569

Jan. 1, 2012-Mar. 31, 2012

617

Apr. 1, 2012-Jun. 30, 2012

617

Jul. 1, 2012-Sep. 30, 2012

617

Oct. 1, 2012-Dec. 31, 2012

617

## TABLE OF INTEREST RATES FOR LARGE CORPORATE UNDERPAYMENTS FROM JANUARY 1, 1991-PRESENT

RATE

1995-1 C.B. TABLE

Jan. 1, 2013-Mar. 31, 2013

569

Apr. 1, 2013-Jun. 30, 2013

569

Jul. 1, 2013-Sep. 30, 2013

569

Oct. 1, 2013-Dec. 31, 2013

569

Jan. 1, 2014-Mar. 31, 2014

569

Apr. 1, 2014-Jun. 30, 2014

569

Jul. 1, 2014-Sep. 30, 2014

569

Oct. 1, 2014-Dec. 31, 2014

569

Jan. 1, 2015-Mar. 31, 2015

569

Apr. 1, 2015-Jun. 30, 2015

569

Jul. 1, 2015-Sep. 30, 2015

569

Oct. 1, 2015-Dec. 31, 2015

569

Jan. 1, 2016-Mar. 31, 2016

617

Apr. 1, 2016-Jun. 30, 2016

619

Jul. 1, 2016-Sep. 30, 2016

619

Oct. 1, 2016-Dec. 31, 2016

619

TABLE OF INTEREST RATES FOR CORPORATE OVERPAYMENTS EXCEEDING $10,000

FROM JANUARY 1, 1995-PRESENT 1995-1 C.B. RATE TABLE PG

Jan. 1, 1995-Mar. 31, 1995

6.5%

572

Apr. 1, 1995-Jun. 30, 1995

7.5%

574

Jul. 1, 1995-Sep. 30, 1995

6.5%

572

Oct. 1, 1995-Dec. 31, 1995

6.5%

572

Jan. 1, 1996-Mar. 31, 1996

6.5%

620

Apr. 1, 1996-Jun. 30, 1996

5.5%

618

Jul. 1, 1996-Sep. 30, 1996

6.5%

620

Oct. 1, 1996-Dec. 31, 1996

6.5%

620

Jan. 1, 1997-Mar. 31, 1997

6.5%

572

Apr. 1, 1997-Jun. 30, 1997

6.5%

572

Jul. 1, 1997-Sep. 30, 1997

6.5%

572

Oct. 1, 1997-Dec. 31, 1997

6.5%

572

Jan. 1, 1998-Mar. 31, 1998

6.5%

572

Apr. 1, 1998-Jun. 30, 1998

5.5%

570

Jul. 1. 1998-Sep. 30, 1998

5.5%

570

Oct. 1, 1998-Dec. 31, 1998

5.5%

570

Jan. 1, 1999-Mar. 31, 1999

4.5%

568

Apr. 1, 1999-Jun. 30, 1999

5.5%

570

Jul. 1, 1999-Sep. 30, 1999

5.5%

570

Oct. 1, 1999-Dec. 31, 1999

5.5%

570

Jan. 1, 2000-Mar. 31, 2000

5.5%

618

Apr. 1, 2000-Jun. 30, 2000

6.5%

620

Jul. 1, 2000-Sep. 30, 2000

6.5%

620

Oct. 1, 2000-Dec. 31, 2000

6.5%

620

## TABLE OF INTEREST RATES FOR CORPORATE OVERPAYMENTS EXCEEDING $10,000 FROM JANUARY 1, 1995-PRESENT

RATE

1995-1 C.B. TABLE

Jan. 1, 2001-Mar. 31, 2001

6.5%

572

Apr. 1, 2001-Jun. 30, 2001

5.5%

570

Jul. 1, 2001-Sep. 30, 2001

4.5%

568

Oct. 1, 2001-Dec. 31, 2001

4.5%

568

Jan. 1, 2002-Mar. 31, 2002

3.5%

566

Apr. 1, 2002-Jun. 30, 2002

3.5%

566

Jul. 1, 2002-Sep. 30, 2002

3.5%

566

Oct. 1, 2002-Dec. 31, 2002

3.5%

566

Jan. 1, 2003-Mar. 31, 2003

2.5%

564

Apr. 1, 2003-Jun. 30, 2003

2.5%

564

Jul. 1, 2003-Sep. 30, 2003

2.5%

564

Oct. 1, 2003-Dec. 31, 2003

1.5%

562

Jan. 1, 2004-Mar. 31, 2004

1.5%

610

Apr. 1, 2004-Jun. 30, 2004

2.5%

612

Jul. 1, 2004-Sep. 30, 2004

1.5%

610

Oct. 1, 2004-Dec. 31, 2004

2.5%

612

Jan. 1, 2005-Mar. 31, 2005

2.5%

564

Apr. 1, 2005-Jun. 30, 2005

3.5%

566

Jul. 1, 2005-Sep. 30, 2005

3.5%

566

Oct. 1, 2005-Dec. 31, 2005

4.5%

568

Jan. 1, 2006-Mar. 31, 2006

4.5%

568

Apr. 1, 2006-Jun. 30, 2006

4.5%

568

Jul. 1, 2006-Sep. 30, 2006

5.5%

570

Oct. 1, 2006-Dec. 31, 2006

5.5%

570

Jan. 1, 2007-Mar. 31, 2007

5.5%

570

Apr. 1, 2007-Jun. 30, 2007

5.5%

570

Jul. 1, 2007-Sep. 30, 2007

5.5%

570

Oct. 1, 2007-Dec. 31, 2007

5.5%

570

Jan. 1, 2008-Mar. 31, 2008

4.5%

616

Apr. 1, 2008-Jun. 30, 2008

3.5%

614

Jul. 1, 2008-Sep. 30, 2008

2.5%

612

Oct. 1, 2008-Dec. 31, 2008

3.5%

614

Jan. 1, 2009-Mar. 31, 2009

2.5%

564

Apr. 1, 2009-Jun. 30, 2009

1.5%

562

Jul. 1, 2009-Sep. 30, 2009

1.5%

562

Oct. 1, 2009-Dec. 31, 2009

1.5%

562

Jan. 1, 2010-Mar. 31, 2010

1.5%

562

Apr. 1, 2010-Jun. 30, 2010

1.5%

562

Jul. 1, 2010-Sep. 30, 2010

1.5%

562

Oct. 1, 2010-Dec. 31, 2010

1.5%

562

Jan. 1, 2011-Mar. 31, 2011

0.5%*

Apr. 1, 2011-Jun. 30, 2011

1.5%

562

Jul. 1, 2011-Sep. 30, 2011

1.5%

562

Oct. 1, 2011-Dec. 31, 2011

0.5%*

TABLE OF INTEREST RATES FOR CORPORATE OVERPAYMENTS EXCEEDING $10,000
FROM JANUARY 1, 1995-PRESENT

RATE

1995-1 C.B. TABLE

Jan. 1, 2012-Mar. 31, 2012

0.5%*

Apr. 1, 2012-Jun. 30, 2012

0.5%*

Jul. 1, 2012-Sep. 30, 2012

0.5%*

Oct. 1, 2012-Dec. 31, 2012

0.5%*

Jan. 1, 2013-Mar. 31, 2013

0.5%*

Apr. 1, 2013-Jun. 30, 2013

0.5%*

Jul. 1, 2013-Sep. 30, 2013

0.5%*

Oct. 1, 2013-Dec. 31, 2013

0.5%*

Jan. 1, 2014-Mar. 31, 2014

0.5%*

Apr. 1, 2014-Jun. 30, 2014

0.5%*

Jul. 1, 2014-Sep. 30, 2014

0.5%*

Oct. 1, 2014-Dec. 31, 2014

0.5%*

Jan. 1, 2015-Mar. 31, 2015

0.5%*

Apr. 1, 2015-Jun. 30, 2015

0.5%*

Jul. 1, 2015-Sep. 30, 2015

0.5%*

Oct. 1, 2015-Dec. 31, 2015

0.5%*

Jan. 1, 2016-Mar. 31, 2016

0.5%*

Apr. 1, 2016-Jun. 30, 2016

1.5%

610

Jul. 1, 2016-Sep. 30, 2016

1.5%

610

Oct. 1, 2016-Dec. 31, 2016

1.5%

610

* The asterisk reflects the interest factors for daily compound interest for annual rates of 0.5 percent are published in Appendix A of this Revenue Ruling.

### Section 61 Gross Income Defined

26 CFR 1.61-21: Taxation of fringe benefits.

#### Rev. Rul. 2016-24

For purposes of the taxation of fringe
benefits under section 61 of the Internal
Revenue Code, section 1.61-21(g) of the

Income Tax Regulations provides a rule
for valuing noncommercial flights on
employer-provided aircraft. Section 1.61-
21(g)(5) provides an aircraft valuation
formula to determine the value of such
flights. The value of a flight is determined
under the base aircraft valuation formula
(also known as the Standard Industry Fare
Level formula or SIFL) by multiplying the
SIFL cents-per-mile rates applicable for

the period during which the flight was
taken by the appropriate aircraft multiple
provided in section 1.61-21(g)(7) and
then adding the applicable terminal
charge. The SIFL cents-per-mile rates in
the formula and the terminal charge are
calculated by the Department of Transpor-
tation and are reviewed semi-annually.

The following chart sets forth the ter-
minal charge and SIFL mileage rates:

Period During Which the Flight Is Taken

Terminal Charge

SIFL Mileage Rates

7/1/16-12/31/16

$37.68

Up to 500 miles = $.2061 per mile 501-1500 miles = $.1572 per mile Over 1500 miles = $.1511 per mile

##### DRAFTING INFORMATION

The principal author of this revenue
ruling is Kathleen Edmondson of the

Office of Associate Chief Counsel (Tax
Exempt/Government Entities). For fur-
ther information regarding this revenue

ruling, contact Ms. Edmondson at (202)
317-6798 (not a toll-free number).

26 CFR 1.417(e)-1: Restrictions and valuations of
distributions from plans subject to sections
401(a)(11) and 417

##### T.D. 9783

### DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

#### Modifications to Minimum Present Value Requirements for Partial Annuity Distribution Options under Defined Benefit Pension Plans

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains fi-
nal regulations providing guidance relat-
ing to the minimum present value require-
ments applicable to certain defined benefit
pension plans. These regulations change
the regulations regarding the minimum
present value requirements for defined
benefit plan distributions to permit plans
to simplify the treatment of certain op-
tional forms of benefit that are paid partly
in the form of an annuity and partly in a
single sum or other more accelerated
form. These regulations affect partici-
pants, beneficiaries, sponsors, and admin-
istrators of defined benefit pension plans.

DATES: Effective date: These regulations
are effective on September 9, 2016.

Applicability date: These regulations
apply to distributions with annuity starting
dates in plan years beginning on or after
on or after January 1, 2017. In addition, a
taxpayer can elect to apply these regula-
tions with respect to any earlier period.

FOR FURTHER INFORMATION
CONTACT: Neil S. Sandhu or Linda S. F.
Marshall at (202) 317-6700 (not a toll-free
number).

SUPPLEMENTARY INFORMATION:
Background

This document contains amendments
to the Income Tax Regulations (26 CFR
part 1) under section 417(e) of the Internal
Revenue Code (Code). These final regu-
lations amend §1.417(e)-1 of the Treasury
regulations.

Section 401(a)(11) of the Code pro-
vides that, in order for a defined benefit
plan to qualify under section 401(a), and
except as provided under section 417, in
the case of a vested participant who does
not die before the annuity starting date,
the accrued benefit payable to such partic-
ipant must be provided in the form of a
qualified joint and survivor annuity
(QJSA), as defined in section 417(b).

Section 417(e)(1) provides that a plan
may provide that the present value of a
QJSA or a qualified preretirement survi-
vor annuity (QPSA), as defined in 417(c),
will be immediately distributed if that
present value does not exceed the amount
that can be distributed without the partic-
ipant's consent under section 411(a)(11).
Section 417(e)(2) provides that, if the
present value of the QJSA or QPSA ex-
ceeds the amount that can be distributed
without the participant's consent under
section 411(a)(11), then a plan may im-
mediately distribute the present value of
that annuity only if the participant and the
spouse of the participant (or if the partic-
ipant has died, the surviving spouse) con-
sent in writing to the distribution.

Section 417(e)(3)(A) provides that the
present value shall not be less than the
present value calculated by using the ap-
plicable mortality table and the applicable
interest rate.1 Section 417(e)(3)(B) and
(C) define the terms "applicable mortality
table" and "applicable interest rate," re-
spectively.

Section 411(a)(13) of the Code, as
added by section 701(b) of PPA '06, pro-
vides that an "applicable defined benefit
plan," as defined by section
411(a)(13)(C), is not treated as failing to
meet the requirements of section 417(e)
with respect to accrued benefits derived
from employer contributions solely be-
cause the present value of a participant's

accrued benefit (or any portion thereof)
may be, under the terms of the plan, equal
to the amount expressed as the hypothet-
ical account balance or as an accumulated
percentage of such participant's final av-
erage compensation.

Section 411(d)(6)(B) provides that a
plan amendment that has the effect of
eliminating or reducing an early retire-
ment benefit or a retirement-type subsidy,
or eliminating an optional form of benefit,
with respect to benefits attributable to ser-
vice before the amendment is treated as
impermissibly reducing accrued benefits.
However, the last sentence of section
411(d)(6)(B) provides that the Secretary
may by regulations provide that section
411(d)(6)(B) does not apply to a plan
amendment that eliminates an optional
form of benefit (other than a plan amend-
ment that has the effect of eliminating or
reducing an early retirement benefit or a
retirement-type subsidy).

Final regulations under section 417 re-
lating to the QJSA and QPSA require-
ments were issued on August 22, 1988.
The final regulations were amended on
April 3, 1998, to reflect changes enacted
by the Uruguay Round Agreements Act,
Public Law 103-465 (108 Stat. 4809
(1994)).

Section 1.417(e)-1(d)(1) provides that
a defined benefit plan generally must pro-
vide that the present value of any accrued
benefit and the amount of any distribution,
including a single sum, must not be less
than the amount calculated using the spec-
ified applicable interest rate and the spec-
ified applicable mortality table. The pres-
ent value of any optional form of benefit
cannot be less than the present value of
the accrued benefit determined in accor-
dance with the preceding sentence.

Section 1.417(e)-1(d)(6) provides an
exception from the minimum present
value requirements of section 417(e) and
§ 1.417(e)-1(d). This exception applies to
the amount of a distribution paid in the
form of an annual benefit that either does
not decrease during the life of the partic-
ipant (or, in the case of a QPSA, the life of
the participant's spouse), or that decreases
during the life of the participant merely
because of the death of the survivor annu-

1Under section 411(a)(11)(B), the same applicable mortality table and applicable interest rate are used for purposes of determining whether the present value of a participant's nonforfeitable
accrued benefit exceeds the maximum amount that can be immediately distributed without the participant's consent.

itant (but only if the reduction is to a level
not below 50 percent of the annual benefit
payable before the death of such survivor
annuitant) or the cessation or reduction of
Social Security supplements or qualified
disability benefits.

Sections 204(g) and 205(g) of the Em-
ployee Retirement Income Security Act of
1974, Public Law 93-406 (88 Stat. 829
(1974)), as amended (ERISA), contain
rules that are parallel to Code sections
411(d)(6) and 417(e), respectively. Under
section 101 of Reorganization Plan No. 4
of 1978 (43 FR 47713), the Secretary of
the Treasury has interpretive jurisdiction
over the subject matter addressed in these
regulations for purposes of ERISA, as
well as the Code. Thus, these regulations
apply for purposes of the Code and the
corresponding provisions of ERISA.

In the case of a defined benefit plan that
offers a single-sum distribution or other
form of accelerated distribution as an op-
tional form of benefit in addition to the
required QJSA, many participants have
been reluctant to elect lifetime payments
to insure against unexpected longevity,
choosing instead an accelerated distribu-
tion form in order to maximize their li-
quidity. However, participants who elect a
single sum or other accelerated form of
distribution may face greater challenges in
protecting against the risk of outliving
their retirement savings. The Treasury De-
partment and the IRS believe that many
participants are better served by having
the opportunity to elect to receive a por-
tion of their retirement benefits in annuity
form (which provides financial protection
against unexpected longevity) while re-
ceiving accelerated payments for the re-
mainder of their benefits to provide in-
creased liquidity during retirement.

In order to permit plans to simplify the
treatment of certain optional forms of ben-
efit that are paid partly in the form of an
annuity and partly in a more accelerated
form, the IRS issued proposed regulations
under section 417(e)(3) (77 FR 5454) on
February 3, 2012, that would have modi-
fied existing final regulations regarding
the minimum present value requirements
for defined benefit plan distributions. A
number of comments were received on the
proposed regulations, and a public hearing
was held on June 1, 2012. After consider-
ation of the comments received, the Trea-

sury Department and the IRS are issuing
these final regulations to adopt the rules
set forth in the proposed regulations with
modifications in response to the com-
ments received.

##### Explanation of Provisions

###### Treatment of bifurcated accrued benefits

In order to facilitate the payment of
benefits partly in the form of an annuity
and partly as a single sum (or other accel-
erated form), this document amends the
regulations under section 417(e) to permit
plans to simplify the treatment of certain
optional forms of benefit that are paid to a
participant partly in the form of an annuity
that is excepted from the minimum pres-
ent value requirements of section
417(e)(3) pursuant to § 1.417(e)-1(d)(6)
and partly in a more accelerated form.
Like the proposed regulations, these final
regulations provide rules under which the
participant's accrued benefit can be bifur-
cated so that the minimum present value
requirements of section 417(e)(3) and
§ 1.417(e)-1(d) apply to only the portion
of the participant's accrued benefit that is
paid in an accelerated form.

The proposed regulations would have
provided for three different approaches to
bifurcating the accrued benefit so that the
minimum present value requirements ap-
ply to only a portion of the accrued ben-
efit. Under the first approach in the pro-
posed regulations, a plan could have
provided for two separate portions of the
accrued benefit that were determined
without regard to any election of optional
form of benefit and permitted a participant
to select different distribution options
with respect to each of those portions of
the accrued benefit. Under the second ap-
proach, a plan could have provided for
proportionate benefits with respect to each
distribution option equal to the pro rata
portion of the amount of the distribution
that would be determined if that distribu-
tion option had been applied to the entire
accrued benefit. Finally, under the third
approach, a plan could have provided for
a specified amount to be distributed as a
single sum, but only if the plan satisfied a
minimum benefit requirement with re-
spect to the distribution that was not paid
in a single sum.

Commenters generally supported the
adoption of the rules in the proposed reg-
ulations, but raised several specific issues.
Several commenters stated that it was
sometimes difficult to determine which
approach for bifurcating the accrued ben-
efit applied to a particular plan design.
These commenters suggested that certain
plan designs appeared to fit within more
than one approach, while other plan de-
signs that were consistent with the intent
of the proposed regulations did not seem
to fit within any approach. In response to
comments received, the rules providing
for the bifurcation of the accrued benefit
have been simplified and clarified in these
final regulations.

The final regulations combine the first
two bifurcation approaches from the pro-
posed regulations into a single, more
broadly applicable rule. Under the rule in
these final regulations, a plan is permitted
to explicitly bifurcate the accrued benefit
so that the plan provides that the require-
ments of § 1.417(e)-1(d) apply to a spec-
ified portion of a participant's accrued
benefit as if that portion were the partici-
pant's entire accrued benefit. This rule
does not impose any requirements with
respect to the distribution options for the
remaining portion of the accrued benefit.

An alternative rule is provided in the
final regulations under which a plan that
distributes a specified single-sum amount
to a participant satisfies the requirements
of § 1.417(e)-1(d) with respect to that
payment, provided the remaining portion
of the participant's accrued benefit satis-
fies a minimum requirement. This rule is
essentially the same as the third bifurca-
tion approach from the proposed regula-
tions. Under this alternative rule, the por-
tion of the participant's accrued benefit,
expressed in the normal form of benefit
under the plan and commencing at normal
retirement age (or at the current date, if
later), that is not settled by the single-sum
payment must be no less than the excess
of: (1) the participant's total accrued ben-
efit expressed in that form; over (2) the
annuity payable in that form that is actu-
arially equivalent to the single-sum pay-
ment, determined using the applicable in-
terest rate and the applicable mortality
table. Thus, the portion of the partici-
pant's accrued benefit that is settled by the
payment of a specified single-sum amount

is implicitly determined as the actuarial
equivalent of that single-sum amount.

The regulations provide a number of
rules of operation that apply to one or both
of the rules for bifurcating the accrued
benefit. In particular, the regulations pro-
vide that if a participant selects different
distribution options with respect to two
separate portions of the participant's ac-
crued benefit that were determined under
the rules in these regulations, then the two
different distribution options are treated as
two separate optional forms of benefit for
purposes of applying the requirements of
section 417(e)(3) and § 1.417(e)-1(d),
even if the distribution options have the
same annuity starting date. Thus, if one of
those separate optional forms of benefit is
exempt from the requirement to use the
section 417(e)(3) assumptions, the plan is
required to apply the section 417(e)(3)
assumptions only to the other optional
form of benefit. This would permit a plan
to use its usual annuity equivalence fac-
tors for the annuity portion (rather than
being required to make a special calcula-
tion of the annuity portion using the sec-
tion 417(e)(3) assumptions). The ap-
proach set forth in these regulations is
simpler than applying the section
417(e)(3) assumptions to the entire op-
tional form of benefit, and yields an intu-
itive result that is consistent with plan
sponsor and participant expectations.

The regulations provide that explicit
bifurcation must be used in specified
cases. One such case is the situation in
which a plan has been amended to elimi-
nate an optional form of benefit (but, in
accordance with section 411(d)(6), retains
the optional form of benefit with respect
to benefits accrued as of the applicable
amendment date). Commenters indicated
that it was unclear which bifurcation ap-
proach would apply to this situation under
the proposed regulations. In response to
these comments, the final regulations
specify that if the amount of a distribution
in an optional form of benefit to which
§ 1.417(e)-1(d) applies is determined by
reference to the portion of a participant's
accrued benefit as of the applicable
amendment date, then the plan is not per-
mitted to use the alternative rule under
which the amount of the benefit that is
settled by the single-sum payment is im-
plicitly determined but could use the ex-

plicit bifurcation rule in order to avoid
application of section 417(e) to both op-
tional forms of benefit. The implicit bifur-
cation rule also is not available in a situ-
ation in which a single-sum distribution is
available to settle a participant's entire
accrued benefit and the plan permits a
portion of the benefit to be paid as a lump
sum.

Under the regulations, if a plan pro-
vides for an early retirement benefit, a
retirement-type subsidy, an optional form
of benefit, or an ancillary benefit, that
applies only to a portion of a participant's
accrued benefit, and the plan provides for
an accelerated form of distribution that
settles some, but not all, of the partici-
pant's accrued benefit, then the plan must
specify which portion of the participant's
total accrued benefit is settled by that dis-
tribution. This is necessary in order to
determine the extent to which the early
retirement benefit, retirement-type sub-
sidy, optional form of benefit, or ancillary
benefit applies with respect to the remain-
ing portion of the accrued benefit. For
example, if a plan had one set of early
retirement factors that applied to the ac-
crued benefit as of December 31, 2005,
but a different set of early retirement fac-
tors that applied to benefit accruals earned
after that date, and the plan provides for a
single-sum distribution that settles only a
portion of a participant's accrued benefit,
then the plan must specify which portion
of the accrued benefit is settled by that
distribution (in order to determine which
early retirement factors apply to the re-
maining portion of the accrued benefit).

The regulations provide for limited
section 411(d)(6) relief in the case of a
plan that, for plan years beginning before
January 1, 2017, uses the section
417(e)(3) applicable interest rate and ap-
plicable mortality table to calculate the
amount of a distribution that is made to
settle a portion of the accrued benefit if,
pursuant to these final regulations, the re-
quirements of section 417(e)(3) need not
apply to the distribution. In such a case,
section 411(d)(6) is not violated solely
because, in accordance with these final
regulations, the plan is amended on or
before December 31, 2017, to provide that
the amount of the distribution described in
the preceding sentence to which the re-
quirements of section 417(e)(3) need not

apply is determined for an annuity starting
date on or after the applicable amendment
date (within the meaning of § 1.411(d)-
3(g)(4)) using the same actuarial assump-
tions that would apply to calculate the
amount of a distribution in that same form
of benefit if the participant elected to re-
ceive the entire accrued benefit in that
form.

The final regulations include a number
of examples in order to illustrate the bi-
furcation rules of the regulations and the
rules of operation with respect to these
rules.

#### Effective/Applicability Date

These regulations are effective on Sep-
tember 9, 2016.

The changes under these regulations
apply to distributions with annuity starting
dates in plan years beginning on or after
January 1, 2017. However, taxpayers may
apply these rules to earlier periods.

#### Special Analyses

Certain IRS regulations, including this
one, are exempt from the requirements of
Executive Order 12866, as supplemented
and reaffirmed by Executive Order 13563.
Therefore, a regulatory assessment is not
required. It also has been determined that
section 553(b) of the Administrative Pro-
cedure Act (5 U.S.C. chapter 5) does not
apply to these regulations, and because the
regulation does not impose a collection of
information on small entities, the Regula-
tory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Pursuant to section
7805(f) of the Code, the proposed regula-
tions preceding these final regulations
were submitted to the Chief Counsel for
Advocacy of the Small Business Admin-
istration for comment on its impact on
small business.

#### Drafting Information

The principal authors of these regula-
tions are Neil S. Sandhu and Linda S. F.
Marshall, Office of Division Counsel/As-
sociate Chief Counsel (Tax Exempt and
Government Entities). However, other
personnel from the IRS and the Treasury
Department participated in the develop-
ment of these regulations.
* * * * *

#### Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is
amended as follows:

#### PART 1-INCOME TAXES

Paragraph 1. The authority citation for
part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.417(e)-1 is amended
by:

1\. Redesignating paragraph (d)(1) as
paragraph (d)(1)(i) and revising the head-
ing of the newly redesignated paragraph
(d)(1)(i).

2\. Adding a heading for paragraph
(d)(1).

3\. In the first sentence of newly redes-
ignated paragraph (d)(1)(i), removing "A
defined benefit plan" and adding "Except
as provided in section 411(a)(13) and the
regulations thereunder, a defined benefit
plan" in its place.

4\. Adding paragraph (d)(1)(ii).

5\. Revising paragraph (d)(7), the head-
ing for paragraph (d)(8), and paragraph
(d)(8)(i).

6\. Adding paragraph (d)(8)(v).

The additions and revisions read as fol-
lows:

§ 1.417(e)-1 Restrictions and valuations
of distributions from plans subject to
sections 401(a)(11) and 417.

* * * * *

(d) Present value requirement-(1)
General rule-(i) Defined benefit plans. *

(ii) Defined contribution plans. Be-
cause the accrued benefit under a defined
contribution plan equals the account bal-
ance, a defined contribution plan is not
subject to the requirements of this para-
graph (d), regardless of whether the re-
quirements of section 401(a)(11) apply to
the plan.

** * * *

(7) Application to portion of a partici-
pant's benefit-(i) In general. This para-
graph (d)(7) provides rules under which
the requirements of this paragraph (d) ap-
ply to the distribution of only a portion of
a participant's accrued benefit. Paragraph
(d)(7)(ii) of this section provides rules for
how a participant's accrued benefit may

be bifurcated into separate components
for purposes of applying this paragraph
(d). Paragraph (d)(7)(iii) of this section
provides rules of application. Paragraph
(d)(7)(iv) of this section provides certain
limited section 411(d)(6) relief, and para-
graph (d)(7)(v) of this section provides
examples of the application of the rules of
this paragraph (d)(7).

(ii) Bifurcation of accrued benefit-
(A) Explicit plan-specified bifurcation. A
plan is permitted to provide that the re-
quirements of this paragraph (d) apply to a
specified portion of a participant's ac-
crued benefit as if that portion were the
participant's entire accrued benefit. For
example, a plan is permitted to provide
that a distribution in the form of a single-
sum payment described in this paragraph
(d)(7)(ii)(A) is made to settle a specified
percentage of the participant's accrued
benefit. As another example, a plan is
permitted to provide that a distribution in
the form of a single-sum payment de-
scribed in this paragraph (d)(7)(ii)(A) is
made to settle the accrued benefit derived
from contributions made by an employee.
In both examples, the distribution must
satisfy the requirements of this paragraph
(d) with respect to the specified portion of
the accrued benefit, and the remaining
portion of the accrued benefit (the partic-
ipant's total accrued benefit less the por-
tion of the accrued benefit settled by the
single-sum payment) can be paid in some
other form of distribution that is available
under the plan.

(B) Distribution of specified amount. A
plan that provides for a distribution of a
single-sum payment that is not described
in paragraph (d)(7)(ii)(A) of this section
satisfies the requirements of this para-
graph (d) with respect to that distribution
if the portion of the participant's accrued
benefit, expressed in the normal form of
benefit under the plan and commencing at
normal retirement age (or at the current
date, if later), that is not settled by the
distribution is no less than the excess of-

(1) The participant's total accrued ben-
efit expressed in that form; over

(2) The annuity payable in that form that
is actuarially equivalent to the single-sum
payment, determined using the applicable
interest rate and the applicable mortality
table.

(iii) Rules of operation-(A) Multiple
distribution options. If a participant se-
lects different distribution options with re-
spect to two separate portions of the par-
ticipant's accrued benefit that were
determined in accordance with paragraph
(d)(7)(ii) of this section, then the two dif-
ferent distribution options are treated as
two separate optional forms of benefit for
purposes of applying the requirements of
section 417(e)(3) and this paragraph (d),
even if the distribution options have the
same annuity starting date. Thus, if the
exception from the requirements of sec-
tion 417(e)(3) and this paragraph (d) that
is contained in paragraph (d)(6) of this
section applies to one of those optional
forms of benefit, then this paragraph (d)
applies only to the other optional form of
benefit.

(B) Repeated application of rule. If a
participant's accrued benefit has been bi-
furcated in accordance with paragraph
(d)(7)(ii) of this section, then the provi-
sions of paragraph (d)(7)(ii) of this section
may be applied again to bifurcate the re-
maining accrued benefit.

(C) Requirement to use explicit plan-
specified bifurcation in certain cases-(1)
Section 411(d)(6)-protected optional
form. If the amount of a distribution in an
optional form of benefit to which this
paragraph (d) applies is determined by
reference to the portion of a participant's
accrued benefit as of the applicable
amendment date for an amendment that
eliminates that optional form of benefit
(but, in accordance with section
411(d)(6), retains the optional form of
benefit with respect to benefits accrued as
of the applicable amendment date), then
the plan must provide for explicit bifurca-
tion of the accrued benefit as described in
paragraph (d)(7)(ii)(A) of this section.

(2) Single-sum available with respect
to entire accrued benefit. If a plan pro-
vides that a single-sum distribution is
available to settle a participant's entire
accrued benefit, then, in order to also pro-
vide for a distribution in the form of a
single-sum payment that settles only a
portion of a participant's accrued benefit,
the plan must provide for explicit bifurca-
tion of the accrued benefit as described in
paragraph (d)(7)(ii)(A) of this section.

(D) Application of different factors to
different portions of the accrued benefit. If

a plan provides for an early retirement
benefit, a retirement-type subsidy, an op-
tional form of benefit, or an ancillary ben-
efit, that applies only to a portion of a
participant's accrued benefit, and the plan
provides for a distribution that settles
some, but not all, of the participant's ac-
crued benefit, then the plan must specify
which portion of the participant's total
accrued benefit is settled by that distribu-
tion. For example, if a plan had one set of
early retirement factors that applied to the
accrued benefit as of December 31, 2005,
but a different set of early retirement fac-
tors that applied to benefit accruals earned
after that date, and the plan provides for a
single-sum distribution that settles only a
portion of a participant's accrued benefit,
then the plan must specify which portion
of the accrued benefit is settled by that
distribution (in order to determine which
early retirement factors apply to the re-
maining portion of the accrued benefit).

(iv) Limited section 411(d)(6) anti-
cutback relief. This paragraph (d)(7)(iv)
applies in the case of a plan that, for plan
years beginning before January 1, 2017,
uses the section 417(e)(3) applicable in-
terest rate and applicable mortality table
to calculate the amount of a distribution
that is made to settle a portion of the
accrued benefit if, pursuant to this para-
graph (d)(7), the requirements of section
417(e)(3) and this paragraph (d) need not
apply to the distribution. In such a case,
section 411(d)(6) is not violated merely
because, in accordance with this para-
graph (d)(7), the plan is amended on or
before December 31, 2017, to provide that
the amount of a distribution described in the
preceding sentence is determined for an an-
nuity starting date on or after the applicable
amendment date (within the meaning of
§ 1.411(d)-3(g)(4)) using the same actuarial
assumptions that apply to calculate the
amount of a distribution in the same form of
benefit that is made to settle the participant's
entire accrued benefit.

(v) Examples. The following examples
illustrate the rules of this paragraph (d)(7).
Unless otherwise indicated, these exam-
ples are based on the following assump-
tions: The taxpayers elect to apply the
rules of this paragraph (d)(7) in 2016;
each plan is a noncontributory defined
benefit plan with a calendar-year plan year
and a normal retirement age of age 65; a

one-year stability period coinciding with
the calendar year and a two-month look-
back are used for determining the appli-
cable interest rate; and all participant elec-
tions are made with proper spousal
consent. The November 2015 segment
rates are 1.76%, 4.15% and 5.13%.

Example 1. (i) Plan A offers a number of optional
forms of payment, including a qualified joint and
survivor annuity and a single-sum payment. The
single-sum payment is equal to the present value of
the participant's immediate benefit (but not less than
the present value of the participant's accrued benefit
payable at normal retirement age) using the applica-
ble interest and mortality rates under section
417(e)(3). The amount of the joint and survivor
annuity is determined using plan factors that are not
based on the applicable interest and mortality rates
under section 417(e)(3). Plan A permits a participant
to elect to receive a percentage of the accrued benefit
as a single sum and the remainder in any annuity
form provided under the plan, with the amount of the
single-sum payment determined by multiplying the
amount that would be payable if the entire benefit
were paid as a single sum by the percentage of the
accrued benefit settled by the single-sum payment.

(ii) Participant S retires at age 62 in 2016, with
an accrued benefit of $1,000 per month payable as a
straight life annuity at normal retirement age. Par-
ticipant S is eligible for an unreduced early retire-
ment benefit and can therefore collect a straight life
annuity benefit of $1,000 per month beginning im-
mediately. Alternatively, Participant S can elect to
receive the benefit in other forms, including a single-
sum payment of $168,516 (based on the applicable
interest and mortality rates under section 417(e),
which are the November 2015 segment rates and the
2016 applicable mortality table), or a 100% joint and
survivor annuity of $850 per month (based on the
plan's actuarial equivalence factors). Participant S
elects to receive 25% of the accrued benefit in the
form of a single-sum payment and the remaining
75% of the accrued benefit as a 100% joint and
survivor annuity.

(iii) Participant S receives a single-sum payment
with respect to 25% of the accrued benefit. Accord-
ingly, this single-sum payment is equal to 25% of the
full single-sum amount, or $42,129. The remaining
portion of the accrued benefit is 75% of the total
accrued benefit, or $750 per month payable as a
straight life annuity at normal retirement age.

(iv) To settle the remaining portion of the ac-
crued benefit, in addition to the single-sum payment
of $42,129, Participant S receives a 100% joint and
survivor annuity in the amount of $637.50 per
month, which is determined by applying the plan's
unreduced early retirement and actuarial equivalence
factors to the remaining portion of the accrued ben-
efit of $750 per month payable as a straight life
annuity at normal retirement age. The joint and sur-
vivor annuity benefit is not subject to the minimum
present value requirements of section 417(e)(3) be-
cause it is treated as a separate optional form of
benefit under paragraph (d)(7)(iii)(A) of this section.

Example 2. (i) Plan B is a contributory defined
benefit plan that permits a participant to elect a single
sum distribution equal to the participant's employee

contributions, accumulated with interest, with the re-
mainder payable as an annuity. Plan B provides that the
probability of death before normal retirement age is not
taken into account for purposes of determining actuar-
ial equivalence between the single-sum payment and an
annuity at normal retirement age. Based on the appli-
cable mortality table for 2016 and the November 2015
segment rates, the deferred annuity factor at age 60 for
lifetime payments commencing at age 65 (determined
without taking mortality before age 65 into account) is
10.209.

(ii) Participant T retires at age 60 in 2016 with an
accrued benefit of $1,500 per month payable as a
straight life annuity commencing at normal retire-
ment age. For benefits commencing at age 60, Plan B
provides for an early retirement reduction factor of
75% and an actuarial equivalence factor of 98% for
adjusting a straight life annuity to a 10-year certain
and life annuity, neither of which is based on the
applicable interest and mortality rates under section
417(e)(3). Participant T's benefit commencing at age
60 in the form of a 10-year certain and life annuity
would be $1,500 x 75% x 98% = $1,102.50 per
month. Participant T elects to receive a single sum
payment of $32,000 equal to T's accumulated con-
tributions with interest, and the remainder as a 10-
year certain and life annuity.

(iii) The single-sum payment elected by Partici-
pant T is a distribution that is determined by refer-
ence to Participant T's contributions and interest,
and not by reference to a specified portion of the
participant's accrued benefit. Therefore, the single-
sum payment is not described in paragraph
(d)(7)(ii)(A) of this section. In order to satisfy para-
graph (d)(7)(ii)(B) of this section, the portion of the
participant's accrued benefit that is not settled by the
single-sum payment must be no less than the excess
of (A) the participant's total accrued benefit over (B)
the annuity that is actuarially equivalent to the
single-sum payment, (determined using the applica-
ble interest and mortality rates under section
417(e)(3) as applicable), both expressed in the nor-
mal form of benefit commencing at normal retire-
ment age. The amount of that actuarially equivalent
annuity is determined by dividing Participant T's
single-sum payment of $32,000 by the deferred an-
nuity factor for lifetime payments commencing at
age 65 under the terms of Plan B (10.209, not con-
sidering mortality for the deferral period) and divid-
ing by 12 for an actuarially equivalent monthly ben-
efit commencing at age 65 of $261.21. Thus, in order
to satisfy paragraph (d)(7)(ii)(B) of this section, the
remaining portion of T's accrued benefit must be at
least $1,238.79 per month ($1,500.00 - $261.21) pay-
able as a straight life annuity at normal retirement age.

(iv) Based on Plan B's early retirement and op-
tional form factors applied to the remaining portion, the
annuity benefit payable to Participant T in the form of
a 10-year certain and life annuity beginning at age 60
cannot be less than $910.51 per month ($1,238.79 x
75% x 98%). Participant T receives this in addition to
the single-sum payment of $32,000. The 10-year cer-
tain and life benefit is not subject to the minimum
present value requirements of section 417(e)(3) be-
cause it is treated as a separate optional form of benefit
under paragraph (d)(7)(iii)(A) of this section.

(v) If, instead, Plan B's terms had provided for a
single-sum payment equal to the present value of the

participant's employee-provided accrued benefit as
determined under section 411(c)(3), then the plan is
determining the single-sum payment as the present
value of a specified portion of the accrued benefit. In
such a case, the plan is using explicit bifurcation as
described in paragraph (d)(7)(ii)(A) of this section
and the single-sum payment would have to be set
equal to the present value, determined under Plan
B's terms, of T's employee-provided accrued benefit
(which may or may not be equal to T's accumulated
contributions and interest, depending on the plan's
terms). The remaining annuity benefit payable to
Participant T would have been based on an accrued
benefit equal to $1,500 per month minus the amount
of T's employee-provided accrued benefit.

Example 3. (i) The facts are the same as in
Example 2 of this paragraph (d)(7)(v), except that
Plan B also offers a single-sum payment option with
respect to a participant's entire benefit. The single-
sum payment is determined as the present value of
the participant's early retirement benefit (but no less
than the present value of the participant's accrued
benefit) using the applicable interest and mortality
rates under section 417(e)(3). Based on the applica-
ble mortality table for 2016 and the November 2015
segment rates, the immediate annuity factor for life-
time payments commencing at age 60 is 14.632.
Under the terms of the plan, the early retirement
benefit payable as a straight life annuity to Partici-
pant T at age 60 with respect to T's full accrued
benefit is $1,125 ($1,500 x 75%), and the corre-
sponding single-sum amount payable to T is $1,125
x 14.632 × 12=$197,532. (Note that this amount is
larger than the age-60 present value of T's accrued
benefit without taking mortality before age 65 into
account, $1,500 x 10.209 x 12 = $183,762.) Partic-
ipant T elects to receive a partial single-sum pay-
ment of $32,000, equal to T's accumulated contri-
butions with interest and to take the remaining
accrued benefit in the form of a 10-year certain and
life annuity commencing at age 60.

(ii) Because the plan also provides for a single-
sum payment option with respect to a participant's
entire benefit, pursuant to paragraph (d)(7)(iii)(C)(2)
of this section the partial single-sum payment must
be determined pursuant to the explicit bifurcation
rules of paragraph (d)(7)(ii)(A) of this section.

(iii) The portion of the participant's accrued ben-
efit that is settled by the single-sum payment of
$32,000 is determined as the amount that bears the
same ratio to the total accrued benefit as that single-
sum payment bears to the single-sum payment with
respect to the entire accrued benefit (($32,000 +
$197,532) x $1,500), which is $243 per month pay-
able as a straight life annuity at normal retirement
age. Thus, the remaining portion of the accrued
benefit is $1,257.00 per month payable as a straight
life annuity at normal retirement age.

(iv) Based on Plan B's early retirement and op-
tional form factors applied to the remaining portion,
the annuity benefit payable to Participant T in the
form of a 10-year certain and life annuity beginning
at age 60 is $923.90 per month ($1,257 x 75% x
98%). Participant T receives this benefit in addition
to the single sum payment of $32,000. The 10-year
certain and life benefit is not subject to the minimum
present value requirements of section 417(e)(3) be-

cause it is treated as a separate optional form of
benefit under paragraph (d)(7)(iii)(A) of this section.

Example 4. (i) Plan C was amended to freeze
benefits under a traditional defined benefit formula
as of December 31, 2016, and to provide benefits
under a cash balance formula beginning January 1,
2017. The plan provides that participants may elect
separate distribution options for the portion of the
benefit accrued under the traditional formula as of
December 31, 2016, and the portion of the benefit
earned under the cash balance formula. Furthermore,
the plan provides that a participant may elect to
receive a single-sum payment only with respect to
the portion of the benefit earned under the cash
balance formula.

(ii) In accordance with paragraph (d)(7)(ii)(A) of
this section, Plan C provides for an explicitly bifur-
cated accrued benefit because the portion of the
accrued benefit settled by a distribution is deter-
mined separately for the portion under the traditional
formula and the portion under the cash balance for-
mula. As provided under paragraph (d)(7)(iii)(A) of
this section, a single-sum payment under the cash
balance formula and a distribution option under the
traditional formula are treated as two separate op-
tional forms of benefit for purposes of applying the
provisions of the plan implementing the require-
ments of section 417(e)(3) and this paragraph (d).
Therefore, whether a participant elects to receive a
single-sum payment of the portion of the benefit
earned under the cash balance formula does not
affect whether the distribution elected with respect to
the portion of the benefit earned as of December 31,
2016, is subject to the minimum present value re-
quirements of section 417(e)(3).

Example 5. (i) The facts are the same as in
Example 4 of this paragraph (d)(7)(v), except that
Plan C also permits a participant to elect, with re-
spect to the cash balance portion of the benefit, to
receive a percentage of that portion as a single sum
and the remainder in any annuity form provided
under the plan, with the amount of the single-sum
payment determined by multiplying the amount that
would be payable if the entire cash balance portion
were paid as a single sum by the percentage of the
cash balance portion settled by the single-sum pay-
ment. Participant W retires at age 65, with an ac-
crued benefit under the traditional defined benefit
formula (earned as of December 31, 2016) of $500
per month payable as a straight life annuity at normal
retirement age and a cash balance hypothetical ac-
count balance of $45,000. Based on Plan C's actu-
arial equivalence factors, Participant W's accrued
benefit derived from the cash balance hypothetical
account is $320 per month, payable as a straight life
annuity at normal retirement age. Participant W
elects to receive 1/3 or $15,000 of the current hypo-
thetical account balance in the form of a single sum
and to receive the remainder of the total accrued
benefit as a straight life annuity.

(ii) Under the analysis set forth in Example 4 of
this paragraph (d)(7)(v), Plan C provides for an
explicitly bifurcated accrued benefit with respect to
the traditional defined benefit portion and the cash
balance portion because the portion of the accrued
benefit settled by a distribution is determined sepa-
rately for the portion under the traditional formula
and the portion under the cash balance formula. As

provided under paragraph (d)(7)(iii)(A) of this sec-
tion, a single-sum payment under the cash balance
formula and a distribution option under the tradi-
tional formula are treated as two separate optional
forms of benefit for purposes of applying the provi-
sions of the plan implementing the requirements of
section 417(e)(3) and this paragraph (d). Thus, a
separate distribution option may be chosen for each
of these two portions, and section 417(e)(3) applies
separately to each portion.

(iii) In accordance with paragraph (d)(7)(ii)(A)
of this section, Plan C also provides for an explicitly
bifurcated accrued benefit with respect to the cash
balance benefit because the plan provides that a
distribution in the form of a single-sum payment is
made to settle a specified percentage of the cash
balance benefit. As provided under paragraph
(d)(7)(iii)(A) of this section, the single-sum payment
and the annuity selected by Participant W with re-
spect to the cash balance benefit are treated as two
separate optional forms of benefit for purposes of
applying the provisions of the plan implementing the
requirements of section 417(e)(3) and this paragraph
(d). Thus, in accordance with paragraph (d)(7)(ii)(A)
of this section, 1/3 of the cash balance hypothetical
account is settled by the distribution paid out as a
single sum (that is, $15,000 + $45,000). After the
single-sum payment, the remaining portion of the
accrued benefit derived from the cash balance ac-
count is 2/3 of the initial accrued benefit derived
from the cash balance account, or a straight life
annuity at normal retirement age of $213.33 per
month (2/3 x $320).

(iv) To settle the remaining portion of the entire
accrued benefit (the portion of the benefit attribut-
able to service as of December 31, 2016 plus the
remaining portion of the cash balance benefit), Par-
ticipant W receives a monthly life annuity of
$713.33 per month payable as a straight life annuity
at normal retirement age (equal to the $500 straight
life annuity at normal retirement age earned as of
December 31, 2016 plus the remaining benefit de-
rived from the cash balance portion of a straight life
annuity payable at normal retirement age of $213.33
per month). Participant W's election to receive a
single-sum payment of part of the benefit earned
under the cash balance formula does not affect
whether the remainder of Participant W's distribu-
tion is subject to the minimum present value require-
ments of section 417(e)(3).

Example 6. (i) Plan D permits participants to
elect a single-sum payment of up to $10,000 with the
remaining benefit payable in the form of an annuity.
Participant X retires in 2016 at age 55 with an
accrued benefit of $1,000 per month payable as a
straight life annuity at normal retirement age. Par-
ticipant X is eligible for an unreduced early retire-
ment benefit of $1,000 per month payable as a
straight life annuity. Alternatively, based on Plan
D's definition of actuarial equivalence (which is not
based on the applicable interest and mortality rates
under section 417(e)(3)), Participant X can receive
an immediate benefit in the form of a 100% joint and
survivor annuity of $800 per month. Participant X
elects to receive a single-sum payment of $10,000,
with the balance of the benefit payable as a 100%
joint and survivor annuity beginning at age 55.
Based on the applicable mortality table for 2016 and

the November 2015 segment rates, the deferred an-
nuity factor at age 55 for lifetime payments com-
mencing at age 65 is 7.602.

(ii) Plan D provides for a single-sum distribution
of a portion of the participant's accrued benefit but,
because the plan initially specifies the amount of the
single-sum distribution (rather than the portion of the
accrued benefit that is being settled by that distribu-
tion), Plan D is described in paragraph (d)(7)(ii)(B)
of this section. As provided under paragraph
(d)(7)(iii)(A) of this section, the single-sum payment
and the joint-and-survivor annuity selected by Par-
ticipant X are treated as two separate optional forms
of benefit for purposes of applying the provisions of
the plan implementing the requirements of section
417(e)(3) and this paragraph (d).

(iii) A straight life annuity of $109.62 per month
payable at normal retirement age is actuarially
equivalent to the $10,000 single-sum payment, de-
termined using the applicable mortality table for
2016 and the November 2015 segment rates
($10,000 + 12 + 7.602). Therefore, pursuant to
paragraph (d)(7)(ii)(B) of this section, in order to
satisfy this paragraph (d) the remaining portion of
the accrued benefit after the single-sum payment of
$10,000 must be no less than $890.38 per month
payable as a straight life annuity at normal retire-
ment age ($1,000.00 - $109.62).

(iv) Based on Plan D's early retirement and op-
tional form factors, in order to satisfy this paragraph
(d), the annuity benefit payable to Participant X in
the form of a 100% joint-and-survivor annuity be-
ginning at age 55 must be no less than $712.30 per
month ($890.38 x .8). Participant X receives this
benefit in addition to the single sum payment of
$10,000. The joint and survivor annuity benefit is not
subject to the minimum present value requirements
of section 417(e)(3) because it is treated as a separate
optional form of benefit under paragraph
(d)(7)(iii)(A) of this section.

Example 7. (i) Plan E provides for an unreduced
early retirement benefit for participants who have
met certain age and service requirements. Prior to
amendment, Plan E permitted participants to elect a
single-sum payment equal to the present value of the
participant's unreduced early retirement benefit, de-
termined using the applicable interest rate and appli-
cable mortality table under section 417(e)(3). Plan E
did not permit participants to elect a single-sum
payment with respect to only a portion of their
benefits. Effective December 31, 2012, Plan E was
amended to eliminate the single-sum payment with
respect to benefits accrued after that date.

(ii) Participant Y retires on December 31, 2016,
at age 60, after meeting Plan E's age and service
requirements for an unreduced early retirement ben-
efit. Participant Y's accrued benefit is $1,000 per
month payable as a straight life annuity commencing
at normal retirement age, of which $800 per month
was accrued as of December 31, 2012. Participant Y
elects to take a single-sum payment based on the
benefit accrued as of December 31, 2012, with the
remainder paid as a lifetime annuity commencing at
age 60. Based on the applicable mortality table for
2016 and the November 2015 segment rates, the
immediate annuity factor for lifetime payments com-
mencing at age 60 is 14.632, so Y's single-sum
payment is $800 x 12 x 14.632 = $140,467.20.

iii) In accordance with paragraph AC
(d)(7)(iii)(C)(1) of this section, Plan E provides for
explicit bifurcation of the accrued benefit as de-
scribed in paragraph (d)(7)(ii)(A) of this section.
Therefore, Participant Y must receive an annuity of
$200 earned after December 31, 2012 in addition to
the single-sum payment of $140,467. Plan E is not
permitted to use the approach described in paragraph
(d)(7)(ii)(B) of this section to reduce or eliminate the
$200 annuity earned after December 31, 2012.

(8) Effective/applicability date-(i) In
general. Except as otherwise provided in
this paragraph (d)(8), this paragraph (d)
applies to distributions with annuity start-
ing dates in plan years beginning on or
after January 1, 1995.

* * * * *

(v) Effective date for special rules ap-
plicable to the payment of a portion of a
participant's benefit. Paragraph (d)(7) of
this section applies to distributions with
annuity starting dates in plan years begin-
ning on or after January 1, 2017. How-
ever, taxpayers may elect to apply the
rules of paragraph (d)(7) of this section to
earlier periods.

* * * * *

John M. Dalrymple,
Deputy Commissioner for
Services and Enforcement.

Approved: August 3, 2016.

Mark J. Mazur,
Assistant Secretary of
the Treasury (Tax Policy).

Filed by the Office of the Federal Reg-
ister on September 8, 2016, 8:45 a.m., and
published in the issue of the Federal Regis-
ter for September 9, 2016, 81 F.R. 62359)

26 CFR 1.856-10: Definition of real property;
26 CFR 1.856-3: Definitions

T.D. 9784

DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1

##### Definition of Real Estate Investment Trust Real Property

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains fi-
nal regulations that clarify the definition
of real property for purposes of the real
estate investment trust provisions of the
Internal Revenue Code (Code). These
final regulations provide guidance to
real estate investment trusts and their
shareholders.

DATES: Effective date: These regulations
are effective on August 31, 2016.

Applicability date: For dates of appli-
cability, see §1.856-10(h).

#### FOR FURTHER INFORMATION

CONTACT: Julanne Allen of the Office
of Associate Chief Counsel (Financial In-
stitutions and Products) at (202) 317-6945
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

##### Background

This document contains amendments
to the Income Tax Regulations (26 CFR
part 1) relating to real estate investment
trusts (REITs). Section 856 of the Code
defines a REIT by setting forth various
requirements. One of the requirements for
a taxpayer to qualify as a REIT is that at
the close of each quarter of the taxable
year at least 75 percent of the value of its
total assets is represented by real estate
assets, cash and cash items (including
receivables), and Government securities.
See section 856(c)(4). Section 856(c)(5)(B)
defines real estate assets to include real
property (including interests in real prop-
erty and interests in mortgages on real
property). Section 856(c)(5)(C) defines
interests in real property to include fee
ownership and co-ownership of "land or
improvements thereon." Prior to these fi-
nal regulations, § 1.856-3(d) of the In-
come Tax Regulations, promulgated in
1962 in TD 6598 (the 1962 Regulations),
defined real property for purposes of the
regulations under sections 856 through
859. Under § 1.856-3(d) of the 1962 Reg-
ulations, the term real property means
land or improvements thereon, such as
buildings or other inherently permanent
structures thereon (including items which
are structural components of such build-
ings or structures). In addition, the term
"real property" includes interests in real

property. Local law definitions will not be
controlling for purposes of determining
the meaning of the term "real property" as
used in section 856 and the regulations
thereunder. The term includes, for exam-
ple, the wiring in a building, plumbing
systems, central heating, or central air-
conditioning machinery, pipes or ducts,
elevators or escalators installed in the
building, or other items which are struc-
tural components of a building or other
permanent structure. The term does not
include assets accessory to the operation
of a business, such as machinery, printing
press, transportation equipment which is
not a structural component of the building,
office equipment, refrigerators, individual
air-conditioning units, grocery counters,
furnishings of a motel, hotel, or office
building, etc., even though such items
may be termed fixtures under local law.

The IRS issued revenue rulings be-
tween 1969 and 1975 addressing whether
certain assets qualify as real property for
purposes of section 856. Specifically, the
published rulings address whether assets
such as railroad properties,1 mobile home
units permanently installed in a planned
community,2 air rights over real property,"
interests in mortgage loans secured by to-
tal energy systems,4 and mortgage loans
secured by microwave transmission prop-
erty5 qualify as either real property or
interests in real property under section
856. After these published rulings were
issued, REITs invested in various types of
assets that are not directly addressed by
the regulations or the published rulings,
and some of these REITs received letter
rulings from the IRS concluding that cer-
tain of these various assets qualified as
real property. A letter ruling, however,
may not be relied upon by taxpayers other
than the taxpayer that received the letter
ruling6 and is limited to its particular
facts. The Treasury Department and the

IRS recognized the need to provide up-
dated published guidance on the definition
of real property under sections 856
through 859. On May 14, 2014, the Trea-
sury Department and the IRS published in
the Federal Register a notice of proposed
rulemaking (REG-150760-13 at 79 FR
27508) (NPRM) to define "real property"
solely for purposes of sections 856
through 859 and provisions that reference
the definition of real property in section
856 and the regulations thereunder.

Written and electronic comments re-
sponding to the NPRM were received. The
written comments are available for public
inspection at http://www.regulations.gov or
upon request. A public hearing was held on
September 18, 2014.

After consideration of all the com-
ments, these final regulations adopt the
proposed regulations as revised by this
Treasury decision.7 The comments and re-
visions are discussed in this preamble.

##### Summary of Comments and Explanation of Revisions

###### I. The Definition of Land

The proposed regulations defined the
term "land" to include water and air space
superjacent to land and natural products
and deposits that are unsevered from the
land. A commenter requested clarification
that land includes water space and air
space above ground that the taxpayer does
not own. For example, a taxpayer may
own a building and purchase air rights
superjacent to one or more neighboring
buildings to enhance the value of the
building the taxpayer owns, or a taxpayer
may purchase air rights in anticipation of
using those rights to facilitate the future
acquisition or development of property.
The Treasury Department and the IRS
agree that air space or water space super-
jacent to land each qualify as land even if

the taxpayer owns only the air space or
water space and does not own an interest
in the underlying land. The proposed reg-
ulations stated that superjacent water and
air space qualify as land, and these final
regulations retain the language of the pro-
posed regulations.

###### II. The Definition of Improvements to Land

The proposed regulations generally de-
fined the term "improvements to land" to
mean inherently permanent structures
(IPSs) and their structural components. A
commenter recommended that these final
regulations clarify that clearing, grading,
landscaping, and earthen dams should be
treated as improvements to land. The
Treasury Department and the IRS believe
that, to the extent these assets are distinct
assets that have value apart from the land,
the REIT must analyze these assets sepa-
rately under these final regulations. For
example, if landscaping includes shrubs
planted in the ground, the shrubs are
within the definition of land in these final
regulations so long as the shrubs remain
unsevered natural products of the land. If,
however, landscaping includes a bench
that is a distinct asset, the bench is ana-
lyzed under the factors for an IPS in these
final regulations to determine whether the
bench is real property.

###### III. The Definition of IPS

###### A. Passive function requirement and active function prohibition

###### 1. In General

Under the proposed regulations, IPSs
include buildings and other inherently
permanent structures (OIPSs). To qualify
as an OIPS under the proposed regula-
tions, a structure must serve a passive

1Rev. Rul. 69-94 (1969-1 CB 189).

2Rev. Rul. 71-220 (1971-1 CB 210).

3Rev. Rul. 71-286 (1971-2 CB 263).

4Rev. Rul. 73-425 (1973-2 CB 222).

5Rev. Rul. 75-424 (1975-2 CB 269).

6Rev. Proc. 2016-1 (2016-1 IRB 1), section 11.02; see section 6110(k)(3) of the Code.

7Under section 856(c)(2) and (3), in order for an entity to qualify as a REIT, certain prescribed percentages of that entity's gross income must be derived from certain types of income (which
include "rents from real property" and "interest on obligations secured by mortgages on real property or on interests in real property"). The definition of real property in these final regulations
applies for purposes of section 856(c)(2) and (3), but these final regulations provide neither explicit nor implicit guidance regarding whether various types of income are described in section
856(c)(2) and (3).

function, such as contain, support, shelter,
cover, or protect, and not serve an active
function, such as manufacture, create, pro-
duce, convert, or transport. Commenters
suggested that use of the terms active and
passive may cause confusion because, for
example, REITs may be engaged in the
active conduct of a trade or business
within the meaning of section 355(b)
solely by virtue of functions with respect
to rental activity that produce income
qualifying as rents from real property
within the meaning of section 856(d).8

During the hearing, a commenter stated
that REITs may perform certain services
and that the requirement that an IPS serve
a passive function may be at odds with
this permissible activity. This commenter
suggested that the requirement be revised to:
(1) State that OIPSs serve a real estate-
related function; (2) require that the asset
not primarily contribute to the production of
income other than for the use, occupancy, or
financing of space; or (3) not include the
terms passive and active when describing
permissible and prohibited functions. Other
commenters suggested that the function of a
distinct asset not be considered in determin-
ing whether the distinct asset is an OIPS.
These commenters maintained that inherent
permanence should be the only requirement
for a distinct asset to qualify as an OIPS.

These final regulations do not adopt
these suggestions. These final regula-
tions address whether the asset itself has
a passive function, not whether the asset
is used in an active trade or business or
whether income from the asset is in-
come from an active trade or business.
The requirement in the proposed regu-
lations and in these final regulations that
an asset serve a passive function is in-
tended to be a more precise statement of
the distinction previously set forth in
§ 1.856-3(d) of the 1962 Regulations,
which treated as real property certain
passive assets but not assets accessory
to the operation of a business, including
machinery. The Treasury Department
and the IRS believe that the terms pas-
sive and active, when taken together
with the examples in these final regula-
tions, appropriately clarify and illustrate

the permissible functions of an OIPS.
The passive function requirement nei-
ther prohibits a tenant from using a pas-
sive asset, such as an office building, in
the tenant's active business nor limits a
REIT's ability to perform either
the services excepted under section
856(d)(7)(C)(ii) or the trustee or direc-
tor functions permitted by § 1.856-
4(b)(5)(ii).

The Treasury Department and the IRS
believe that the commenters' suggested
real estate-related standard is circular and
might support real property treatment for
assets that serve active functions. Further,
the Treasury Department and the IRS do
not agree that inherent permanence alone
is a sufficient basis for a distinct asset to
be treated as an IPS. For example, the
Treasury Department and the IRS con-
tinue to believe that some inherently per-
manent assets, such as large, heavy ma-
chinery, do not qualify as real property for
purposes of section 856.

A commenter suggested replacing the
passive function requirement with a test that
focuses on an asset's human factor, which
the commenter defined as whether, and the
extent to which, human involvement is
needed for an asset to function. This com-
menter contended that human involvement
is a characteristic of an active function and,
therefore, should be taken into account in
determining whether a particular asset is
active or passive. The Treasury Department
and the IRS disagree and continue to believe
that machinery, including automated ma-
chinery that functions with little or no hu-
man involvement, does not qualify as real
property for purposes of section 856.

###### 2. Transport as a Prohibited Active Function

The proposed regulations listed trans-
port as an active function. Commenters
noted that this active function differs from
the other four active functions (manufac-
ture, create, produce, and convert) that
involve changing the physical nature or
character of a commodity or good. Com-
menters also suggested that some of the
assets on the list of types of OIPSs in the

proposed regulations, such as railroad
tracks and tunnels, help to transport a
good or a commodity.9

The Treasury Department and the IRS
agree that the term transport could be inter-
preted to describe functions of both passive
conduits used for transportation and ma-
chines that push or pull items through or
along a conduit. The Treasury Department
and the IRS intend the term transport to
mean to cause to move, and these final reg-
ulations retain transport as a prohibited ac-
tive function of an OIPS. To provide clarity,
these final regulations include providing a
conduit (such as in the case of a pipeline or
electrical wire) or route (as in the case of a
road or railroad track) as a permitted passive
function of an OIPS.

###### 3. Assets with Both Active and Passive Functions

In addition to other requirements,
§1.856-10(d)(2)(i) of the proposed regu-
lations stated that a distinct asset that
serves an active function, such as machin-
ery or equipment, is not a building or
OIPS.

Commenters suggested that solar pan-
els can perform dual functions, including
a passive function (that is, to shelter) and
an active function (that is, to convert (en-
ergy)). Commenters stated that solar pan-
els may be used to protect pastures, park-
ing lots, buildings, and other structures
from the detrimental effects of solar radi-
ation and to manage temperature through
shading. The structures to which solar
panels are attached-or even into which
they are integrated-may qualify as IPSs
under the proposed regulations.

The Treasury Department and the IRS
note that the example given by the com-
menters presumes that the solar panel
structure is a single distinct asset that
serves a passive function of sheltering and
an active function of converting energy
for sale to third parties. If this were the
case, the solar panel structure would fail
to qualify as an IPS under § 1.856-
10(d)(2)(i) of the proposed regulations as
a result of the structure's active function.
If, however, a solar panel structure is

8See Rev. Rul. 2001-29 (2001-1 CB 1348).

9Commenters also noted that several assets listed as structural components, such as elevators and escalators, transport objects or occupants of a building. A structural component may have
an active function if the structural component serves the passive function of the IPS of which it is constituent.

composed of multiple distinct assets, then
each of those distinct assets would be an-
alyzed under the proposed regulations to
determine whether it qualifies as an IPS or
as a structural component of an IPS.10
Because these final regulations retain the
requirement that an IPS not serve an ac-
tive function, machinery and equipment
that may serve both passive and active
functions are excluded from the definition
of an IPS.

###### B. Definition of building

Section 1.856-10(d)(2)(ii)(A) of the
proposed regulations stated that a building
encloses a space within its walls and is
covered by a roof. Examples given in
§ 1.856-10(d)(2)(ii)(B) of the proposed
regulations were permanently affixed
houses, apartments, hotels, factory and of-
fice buildings, warehouses, barns, en-
closed garages, enclosed transportation
stations and terminals, and stores.

During the hearing, a commenter stated
that for appraisal purposes, buildings are
considered to be buildings regardless of
their permanence. This commenter sug-
gested that these final regulations should
adopt standards published by an appraisal
organization to define real property.

Section 1.856-3(d) of the 1962 Regu-
lations indicates that inherent permanence
is important in determining whether a
structure qualifies as real property. A tent,
for example, may satisfy the portion of the
definition of a building in the proposed
regulations that referenced enclosing
within its walls a space that is covered by
a roof, but the impermanent nature of the
tent would prevent it from qualifying as a
building for purposes of section 856. The
purposes of definitions used by appraisal
organizations, which focus on valuation,
differ from the purposes of definitions used
for REIT qualification purposes. For exam-
ple, although both permanent and imperma-
nent property may be appraised, perma-
nence is of crucial importance in defining
real property for REIT qualification pur-
poses. Therefore, these final regulations do
not adopt standards published by an ap-
praisal organization.

Another commenter urged the Trea-
sury Department and the IRS to change

the definition of building in these final
regulations so that the definition does not
depend on whether a space is completely
enclosed by its walls and covered by a
roof. The commenter stated that even an
outdoor sports stadium or amphitheater
and an unenclosed parking garage that are
permanently affixed to land or another IPS
may fail to qualify as buildings under the
proposed regulations.

The Treasury Department and the IRS
agree that these structures may fail to
meet the definition of building under the
proposed regulations. The Treasury De-
partment and the IRS believe, however,
that many outdoor sports stadiums, am-
phitheaters, and unenclosed parking ga-
rages would satisfy the definition of an
OIPS in § 1.856-10(d)(2)(iii) of the pro-
posed regulations and that this definition
is more appropriate for these structures.
Therefore, the definition of building in the
proposed regulations is retained in these
final regulations.

###### C. Clarification of the term indefinitely

The proposed regulations stated that, to
qualify as an IPS, a distinct asset must be
permanently affixed and that if the affix-
ation is reasonably expected to last indef-
initely based on all the facts and circum-
stances, the affixation is considered
permanent.

Commenters indicated that the term in-
definitely as used in determining whether
an asset is an IPS was unclear. A com-
menter suggested using an asset's useful
life as an alternate to indefinitely. The
Treasury Department and the IRS have
concluded that relying on the useful life of
an asset as the measure for permanence
would have the effect of treating certain
impermanent assets as real property. For
example, if an asset has a useful life of
two years, it would be inappropriate for
the asset to be treated as permanently af-
fixed solely because the asset was reason-
ably expected to remain in place for two
years.

Another commenter provided the ex-
ample of a REIT that constructs a building
on land on which the REIT holds a 99-
year ground lease. Upon expiration of the
lease, the building is subject to removal.

In this case, the building may not be on
the land in 100 years. Another commenter
provided the example of a building that is
subject to condemnation and that will be
torn down in the future.

Another commenter suggested that
whether an asset is inherently permanent
should be based upon an objective analy-
sis of the physical nature of the manner of
affixation, rather than on a particular tax-
payer's subjective intent. This commenter
recommended that if the manner of affix-
ation is of a permanent nature and is con-
sistent with the distinct asset remaining in
place indefinitely based on all the facts
and circumstances, the affixation is con-
sidered permanent. Commenters also
urged the Treasury Department and the
IRS to provide a statement in the pream-
ble to these final regulations that indefi-
nitely does not mean forever but rather
means for the foreseeable future.

The Treasury Department and the IRS
do not intend the term indefinitely to mean
forever. The proposed regulations stated
that whether affixation is reasonably ex-
pected to last indefinitely is based on all
the facts and circumstances. Section
1.856-10(d)(2)(iv) provides factors that
must be taken into account to determine
whether a distinct asset is an IPS if that
distinct asset is not included in the lists
of types of buildings in § 1.856-
10(d)(2)(ii)(B) or types of OIPSs in
§ 1.856-10(d)(2)(iii)(B). These factors
provide additional guidance on the
meaning of permanent affixation. The
primary focus of these factors is on
the nature of the distinct asset and the
affixation, including the manner in
which the distinct asset is affixed,
whether the distinct asset is designed to
be removed, the damage that removal
would cause, and the time and expense
required to move the distinct asset. Al-
though one factor includes any circum-
stances that suggest the expected period
of affixation is not indefinite and pro-
vides as an example a lease that requires
or permits removal of the distinct asset
upon the expiration of the lease, the
determination of whether a distinct asset
is an IPS is based on all of the facts and
circumstances.

1ºA similar analysis was applied to the solar energy site assets in §1.856-10(g), Example 8, of the proposed regulations.

These final regulations do not adopt
these suggestions and, because the Trea-
sury Department and the IRS do not be-
lieve additional guidance regarding inher-
ent permanence is necessary, retain the
definition of IPS as proposed.

D. Suggested presumption for structures
with a certificate of occupancy or
similar license

A commenter agreed that state or local
definitions of property should not control
for purposes of the definition of real prop-
erty under section 856, but suggested that
when a certificate of occupancy or similar
license or certification is granted with re-
spect to a structure, the structure be pre-
sumed to constitute real property for pur-
poses of section 856 unless the facts and
circumstances clearly indicate that the
structure is not permanent.

Local law standards for a certificate of
occupancy or similar license or certifica-
tion might be inconsistent with the defini-
tion of real property for purposes of
section 856. For example, local law might
permit issuance of a certificate of occu-
pancy for a tent that is not inherently
permanent. In addition, this presumption
might lead to inconsistent results. For ex-
ample, two identical assets located in lo-
calities that use different standards for li-
censing might be treated differently for
purposes of section 856 because a certif-
icate of occupancy has been granted to
one of the assets and not to the other. For
these reasons, we believe the suggested
presumption would create confusion and
administrative difficulty, and, therefore,
these final regulations do not adopt this
comment.

###### IV. The Definition of Structural Component

###### A. Income produced by a structural component

In generally defining the term struc-
tural component, §1.856-10(d)(3)(i) of
the proposed regulations stated, in part,
that a structural component is any distinct
asset that is a constituent part of and in-
tegrated into an IPS, serves the IPS in its
passive function, and, even if capable of
producing income other than consider-
ation for the use or occupancy of space,

does not produce or contribute to the pro-
duction of such income.

A commenter requested that the words
"and related services" be added to the
language of § 1.856-10(d)(3)(i). If that
request were adopted, structural compo-
nents would include assets that serve the
IPS and even if capable of producing in-
come other than consideration for the use
or occupancy of space and related ser-
vices, do not produce or contribute to the
production of such income (emphasis
added to indicate commenter's suggested
language). The commenter stated that
REITs use property such as the systems
that supply utilities to a building to pro-
vide services to tenants. The commenter
explained that a REIT may receive addi-
tional compensation to cover utilities that
the REIT provides to the tenant when the
tenant uses space in the building outside
of specified business hours.

The Treasury Department and the IRS
have concluded that the definition of
structural component in the proposed reg-
ulations adequately accounts for the con-
cerns raised by the commenter, and ac-
cordingly these final regulations do not
incorporate the commenter's suggested
revision.

###### B. Proposed utility safe harbor for structural components

A commenter recommended that these
final regulations adopt a safe harbor for
distinct assets that provide utilities to
IPSs. The commenter recognized that the
utility-like function aspect of the defini-
tion in the proposed regulations under-
scores the importance of that type of
structural component and suggested that a
distinct asset that serves a utility-like
function with respect to an IPS should be
conclusively presumed to be a structural
component of that IPS.

The Treasury Department and the IRS
note that the list of types of structural
components in the proposed regulations
included several utility-like systems, such
as plumbing systems, central heating and
air-conditioning systems, fire suppression
systems, central refrigeration systems, and
humidity control systems. The Treasury
Department and the IRS may add other
systems that satisfy the factors in §1.856-
10(d)(3)(iii) to the structural component

list through future guidance published in
the Internal Revenue Bulletin. The pro-
posed regulations differentiated systems
that perform utility-like functions from
other distinct assets to permit analysis of
these systems as a whole. Under the pro-
posed regulations, once it has been deter-
mined that an asset or assets function as a
utility-like system, the system is analyzed
as a distinct asset basing the determination
of whether the system is real property on
all of the facts and circumstances and us-
ing the factors listed under § 1.856-
10(d)(3)(iii) for structural components. A
system or asset that provides a utility but
that does not qualify as a structural com-
ponent under the facts and circumstances
test under § 1.856-10(d)(3)(iii) (for ex-
ample, a window air-conditioning unit) is
not a structural component.

Because the Treasury Department and
the IRS believe that the factors listed un-
der § 1.856-10(d)(3)(iii) for structural
components are important to the analysis
of systems that provide a utility-like func-
tion these final regulations decline to
adopt the blanket rule suggested by the
commenter.

###### C. The equivalent interest requirement for structural components

Section 1.856-10(d)(3)(i) of the pro-
posed regulations stated that a distinct as-
set is a structural component if the interest
held therein is included with an equivalent
interest held by the taxpayer in the IPS to
which the structural component is func-
tionally related. Commenters suggested
that the equivalent interest requirement
for structural components be deleted or
amended because the requirement: (1) Is
inconsistent with industry practices and an
asset should qualify as a structural com-
ponent even if the REIT owns the asset
but leases from another party the building
served by the structural component; (2)
may negatively affect investment in en-
ergy efficient and renewable energy as-
sets; (3) was not explained in the proposed
regulations and seemingly serves no tax
policy purpose; and (4) is contrary to con-
gressional intent, case law, and the treat-
ment of structural components by the IRS
in other contexts.

The Treasury Department and the IRS
intended that the equivalent interest re-

quirement in the proposed regulations en-
sure that an asset did not qualify as a
structural component unless that asset
served real property in which the REIT
also had an interest. The Treasury Depart-
ment and the IRS set forth a similar re-
quirement in Rev. Rul. 73-425, which
addresses notes secured by a total energy
system. Rev. Rul. 73-425 holds that ob-
ligations secured by a mortgage covering
a total energy system and the building that
the system served qualify as real estate
assets. The revenue ruling also holds that
an obligation secured only by the total
energy system does not qualify as a real
estate asset.

The Treasury Department and the IRS
believe that, to treat an asset as a structural
component, a REIT must hold its interest
in the structural component together with
a real property interest with respect to the
space in the IPS that the structural com-
ponent serves. For example, a central air-
conditioning system is a machine that
does not separately qualify as an IPS. A
central air-conditioning system that is
wholly owned by a REIT may, however,
qualify as a structural component if the
REIT also holds a real property interest,
such as a leasehold interest, with respect
to the space in the IPS served by the
central air-conditioning system. Limiting
the definition of structural component to
assets that serve an IPS in which the REIT
has a real property interest is consistent
with the statutory requirement that REITs
invest in real property or interests in real
property.

For these reasons, these final regula-
tions provide that a distinct asset qualifies
as a structural component only if the REIT
holds its interest in the distinct asset to-
gether with a real property interest with
respect to the space in the IPS that the
distinct asset serves. In addition, as illus-
trated by Rev. Rul. 73-425, for a mort-
gage that is secured by a structural com-
ponent to qualify as a real estate asset
under these final regulations, the mortgage
also must be secured by the IPS served by
the structural component.

###### D. Suggested standard for structural components

Section 1.856-10(3)(i) of the proposed
regulations defined a structural compo-

nent to include a distinct asset that serves
the IPS in its passive function, and, even if
capable of producing income other than
consideration for the use or occupancy of
space, does not produce or contribute to
the production of such income. Section
1.856-10(d)(3)(ii) of the proposed regu-
lations furnished a list of distinct assets
that are structural components. The pro-
posed regulations also stated that a dis-
tinct asset that was not on this list might
still be a structural component based on
all of the facts and circumstances. In
particular, the proposed regulations re-
quired the factors listed under § 1.856-
10(d)(3)(iii) to be taken into account.

A commenter suggested that the stan-
dard for a structural component should be
revised so that a structural component is
defined as a distinct asset that is intended
to protect, preserve, secure, or support the
safe operation of the IPS. The commenter
suggested that satisfying this standard
should be sufficient to determine if a dis-
tinct asset is a structural component and,
therefore, the structural component factor
test under § 1.856-10(d)(3)(iii) of the
proposed regulations is unnecessary.

These final regulations do not adopt the
commenter's suggestion because the stan-
dard suggested would in some circum-
stances unduly limit the functions a struc-
tural component may serve and in other
circumstances unduly expand the func-
tions a structural component may serve.
The Treasury Department and the IRS do
not believe this modification is necessary
given these final regulations' requirement
that a structural component serve the IPS
to which the structural component is con-
stituent in the IPS's passive function. In
addition, the Treasury Department and the
IRS have concluded that adopting a stan-
dard that takes into account a taxpayer's
intent regarding an asset may lead to in-
consistent results because different tax-
payers may have different intentions re-
garding the same type of distinct asset.

V. Requested Additions to the Lists of
Qualifying Assets

###### A. General suggestions

Sections 1.856-10(d)(2)(ii)(B), 1.856-
10(d)(2)(iii)(B), and 1.856-10(d)(3)(ii) of
the proposed regulations furnished lists of

types of distinct assets that would qualify as
buildings, OIPSs, and structural compo-
nents, respectively. A commenter requested
that certain other distinct assets be included
on these lists. These other distinct assets
included car charging stations, healthcare
facilities, storage facilities, timber, electrical
distribution and redundancy systems, tele-
communication systems, and equipment
comprising a building management system.

The Treasury Department and the IRS
have considered the proposed additions to
the lists of qualifying assets and believe
that the proposed regulations already ad-
dressed the tax treatment of certain of
these assets, such as storage facilities and
timber. In addition, the Treasury Depart-
ment and the IRS are not persuaded that
the other assets will in all cases satisfy the
relevant definition. Therefore, these final
regulations do not include these suggested
additions to the lists of qualifying assets.

###### B. Additions to the lists for types of IPSs

###### 1. Additions to the List for Types of Buildings

Commenters suggested adding motels,
casinos, health care facilities, storage fa-
cilities, greenhouses, enclosed stadiums,
enclosed shopping malls, museums, mu-
nicipal buildings, other housing (such as
assisted living), parking garages (whether
or not fully enclosed), and mixed-use
properties combining one or more of the
foregoing to the list for buildings under
§ 1.856-10(d)(2)(ii)(B) of the proposed
regulations.

These assets would not always qualify
as buildings as defined under the proposed
regulations and in these final regulations.
For example, casinos may be on an unaf-
fixed barge or riverboat, health care facil-
ities may be in tents, storage facilities may
include movable pods, and greenhouses
may be structures that are not permanently
affixed. Unenclosed parking garages were
not within the definition of a building un-
der the proposed regulations but were in-
cluded in the list of types of OIPSs in
§ 1.856-10(d)(2)(iii)(B) of the proposed
regulations (which included permanently
affixed parking facilities). Museums may
exist on unaffixed boats, in a room inside
a building, or in the open air.

A mixed-use building would still qual-
ify as a building because it encloses space
within its walls and is covered by a roof.
On the other hand, a mixed-use property
comprised of several structures would re-
quire a separate analysis of each structure.
The suggestions to include municipal
buildings and assisted-living facilities fo-
cus on the use, rather than the type, of
structure. In addition, office buildings,
apartments, and houses were already in-
cluded on the proposed regulations' list.

A distinct asset not on the list may
nevertheless qualify as a building, because
the list for types of buildings in the pro-
posed regulations is not exclusive. More-
over, many of the requested assets are
already included in that list. For these
reasons, these final regulations do not in-
clude all the requested assets on the list
for types of buildings. However, these fi-
nal regulations include as types of build-
ings permanently affixed motels, enclosed
stadiums and arenas, and enclosed shop-
ping malls.

###### 2. Additions to the List for Types of OIPSs

Some commenters requested certain
assets be added to the list under § 1.856-
10(d)(2)(iii)(B) of the proposed regula-
tions for types of OIPSs, including energy
storage components, solar photovoltaic
(PV) panels, related wiring and function-
ally related transformers, power condi-
tioning equipment, and electrical power
inverters and related wiring.

The Treasury Department and the IRS
have determined that adding these assets
to the list for types of OIPSs is not war-
ranted. Inclusion of these assets would be
inconsistent with the requirements that
OIPSs serve a passive function and do not
serve an active function.11 Therefore,
these final regulations do not include these
assets on the list for types of OIPSs.

###### C. Additions to the list for types of structural components

One commenter suggested that the list
under § 1.856-10(d)(3)(ii) of the pro-
posed regulations for types of structural
components should include special floor-

ing for data centers. The proposed regula-
tions stated that customization of a dis-
tinct asset in connection with the rental of
space in or on an IPS to which the distinct
asset relates does not affect whether the
distinct asset qualifies as a structural com-
ponent. The list of types of structural com-
ponents in § 1.856-10(d)(3)(ii) of the pro-
posed regulations included permanent
coverings of floors. The commenter's sug-
gestion of specifically including special
flooring in a data center is an example of
customization of a distinct asset in con-
nection with the rental of space in an IPS.
These final regulations, like the proposed
regulations, permit the customization of
distinct assets in connection with the
rental of space in or on an IPS, provided
that the customized asset is integrated into
the IPS and is held together with a real
property interest in the space in the IPS
that is served by the asset. Accordingly,
these final regulations do not include spe-
cial flooring in a data center on the list of
types of structural components.

Another commenter recommended that
the list for types of structural components be
expanded to include solar energy generating
and heating systems and related energy stor-
age equipment. The Treasury Department
and the IRS do not believe that solar energy
generating and heating systems and related
energy storage equipment necessarily sat-
isfy the definition of structural components
in § 1.856-10(d)(3) of the proposed regula-
tions but rather believe these assets should
be analyzed using all the facts and circum-
stances and taking into account the factors
provided in § 1.856-10(d)(3)(iii) of these
final regulations. For these reasons, these
final regulations do not adopt the recom-
mendation.

VI. Recommended Changes to the
Factor Lists in § 1.856-10(d)(2)(iii) and
(3)(iv) of the Proposed Regulations

###### A. Recommended change to the factors used to determine whether a distinct asset is an IPS

The proposed regulations listed factors
to be considered in determining whether a
distinct asset (other than a type of building
or type of OIPS listed in § 1.856-

10(d)(2)(ii)(B) of the proposed regula-
tions or §1.856-10(d)(2)(iii)(B) of the
proposed regulations, respectively) is an
IPS. One factor is whether there are any
circumstances that suggest the expected
period of affixation is not indefinite (for
example, a lease that requires or permits
removal of the distinct asset upon the ex-
piration of the lease).

One commenter stated that buildings
constructed on land subject to a long-term
ground lease arguably would not satisfy
this factor. Another commenter stated that
removal provisions are common in com-
mercial leases and, as a practical matter,
such provisions may not be determinative
as to whether the asset is ultimately re-
moved by the lessee at the expiration of
the lease. This commenter recommended
that the factor be changed to any circum-
stance that suggests the manner of affixa-
tion is temporary in nature rather than
permanent.

As previously discussed in this pream-
ble, for purposes of section 856, the Trea-
sury Department and the IRS do not in-
tend the term indefinitely to mean forever.
Whether a distinct asset qualifies as an
IPS depends on all the facts and circum-
stances including an analysis of the fac-
tors in § 1.856-10(d)(2)(iv). For these
reasons, this factor is not modified in these
final regulations.

###### B. Recommended change to the factors used to determine whether a distinct asset is a structural component

For distinct assets other than those
listed in § 1.856-10(d)(3)(ii) of the pro-
posed regulations as structural compo-
nents, the proposed regulations listed fac-
tors under § 1.856-10(d)(3)(iii) that must
be taken into account in determining
whether the distinct asset qualifies as a
structural component of an IPS. One of
those factors was whether the owner of
the property was also the legal owner
of the distinct asset. A commenter noted
that a REIT may have a leasehold interest
in real property and may own a structural
component that it installs as part of the
real property. An example provided by the
commenter is a REIT that leases the shell
of a building and then engages indepen-

11Depending on all the facts and circumstances, however, some or all of these assets may qualify as structural components of an IPS.

dent contractors to complete internal
build-outs to customize the shell of the
building into a shopping mall.

The Treasury Department and the IRS
have considered this comment, along with
the comments received regarding the
equivalent interest requirement, as dis-
cussed in this preamble. Accordingly,
these final regulations require that, for a
distinct asset to be a structural component,
a REIT must hold a legally enforceable
real property interest in the space in the
IPS that the structural component serves.

###### VII. Intangible Assets

A. Intangibles derived from the trade or
business of earning revenues for the use
of real property or related services

Under §1.856-10(f) of the proposed
regulations, an intangible asset is real
property or an interest in real property if
the asset derives its value from real prop-
erty or an interest in real property, is in-
separable from that real property or inter-
est in real property, and does not produce
or contribute to the production of income
other than consideration for the use or
occupancy of space. Commenters re-
quested inclusion of intangible assets de-
rived from services that produce income
other than consideration for the use or oc-
cupancy of space, which would include
workforce-in-place and customer-based in-
tangibles. The Treasury Department and the
IRS believe that intangible assets that are
separable from real property or an interest in
real property should not qualify as real prop-
erty. The final regulations clarify that intan-
gible assets that are related to services and
that are separable from the real property do
not qualify as real property.

###### B. In-place above and below-market leases

Commenters requested that intangible
assets related to in-place above-market
leases in which the REIT is the lessor and
below-market leases in which the REIT is
the lessee be treated as qualifying real
property. Under section 856(c)(5)(C), a
lease of land or improvements thereon is
an interest in real property and, therefore,
a lease of land or improvements thereon
is a real estate asset under section
856(c)(5)(B). A lease of real property that

produces both rents from real property
under section 856(d)(1) and other income
that does not so qualify is, in part, an
interest in real property under section
856(c)(5)(C) and, in part, an asset other than
an interest in real property. To the extent the
portion of the lease that is an interest in real
property has value, that portion is a real
estate asset under section 856(c)(5)(B).
These final regulations have been modified
to clarify that an intangible asset may be, in
part, an interest in real property and, in part,
an asset other than an interest in real prop-
erty. In addition, these final regulations in-
clude an example illustrating the application
of these final regulations to an in-place
above-market lease that produces both in-
come that qualifies as rents from real prop-
erty under section 856(d)(1) and other in-
come that does not so qualify.

C. Intangible assets that result from
mergers, certain business combinations,
and stock or asset acquisitions

Section 1.856-10(f)(1) of the proposed
regulations generally defined an intangi-
ble asset to include certain intangible as-
sets established under generally accepted
accounting principles (GAAP) as a result
of an acquisition of real property or an
interest in real property. Commenters
noted that intangible assets may result
from mergers, certain business combina-
tions, and stock or asset acquisitions. The
commenters urged that the final regula-
tions acknowledge that REITs may ac-
quire intangible assets in both asset and
stock transactions.

The proposed regulations used the acqui-
sition of real property or an interest in real
property as an example of a type of trans-
action in which an intangible asset may be
established under GAAP. Under § 1.856-
2(d)(3), the term total assets means the gross
assets of the REIT determined in accor-
dance with GAAP. Thus, an intangible asset
that, in accordance with GAAP, results from
a merger, business combination, or stock or
asset acquisition may qualify as real prop-
erty. Because the proposed regulations did
not preclude real property treatment of in-
tangible assets resulting from mergers, cer-
tain business combinations, or stock or asset
acquisitions, the Treasury Department and
the IRS have concluded that no change is

necessary to the final regulations to accom-
modate the commenter's concern.

D. Use permits and leases requiring
property to be operated for a specific
use

Section 856(c)(5)(C) defines interests
in real property to include leaseholds of
land or improvements thereon. Section
1.856-10(f)(2) of the proposed regula-
tions stated that, if a license, permit, or
other similar right solely for the use, en-
joyment, or occupation of land or an IPS
is in the nature of a leasehold or easement,
that right generally is an interest in real
property. However, a license or permit to
engage in or operate a business generally
is not real property or an interest in real
property because the license or permit
produces or contributes to the production
of income other than consideration for the
use or occupancy of space.

Section 1.856-10(g), Example 12, of
the proposed regulations concluded that a
special use permit from a government
that, under governmental regulations, was
not a lease of the land but was a permit to
use the land for a cell tower was an inter-
est in real property. Section 1.856-10(g),
Example 13, of the proposed regulations
illustrated that a license from a govern-
ment to operate a casino in a specific
building is a license to engage in the busi-
ness of operating a casino and is not real
property.

A commenter noted that many leases
require property to be operated for a spe-
cific use. A property owner has an interest
in requiring its property to be operated for
its intended purpose. The commenter sug-
gested that a specific-purpose lease should
not be excluded from the definition of real
property as an operating license.

The Treasury Department and the IRS
generally agree that a requirement in a
lease agreement that property be operated
for a specific use does not cause the lease
to fail to be treated as an interest in real
property. A specific use requirement in a
lease is distinguishable from a license or
permit to operate a business. Such a re-
quirement is generally a term or condition
of a lease requiring that real property be
used in the manner permitted by the prop-
erty owner or landlord and does not con-
stitute a separate grant by a governmental

entity of the right to operate a business.
Example 12 concludes that a special use
permit to use land for a specific purpose, a
cell tower, is an interest in real property.
Consistent with Example 13, if the special
use permit in Example 12 included a gov-
ernmental authorization required to con-
duct a business that would produce in-
come other than consideration for the use
or occupancy of space, that portion of the
special use permit would not be real prop-
erty for purposes of these rules. Therefore,
the Treasury Department and the IRS do
not believe that any change in the pro-
posed regulations is needed to address the
commenter's concern.

###### E. Treatment of intangible assets in another context

A commenter noted that goodwill is
not considered real property for appraisal
purposes. The commenter recommended
that goodwill be characterized as some-
thing other than real property, but never-
theless be provided the same tax treatment
as real property. The Treasury Department
and the IRS do not agree with this recom-
mendation. Section 856 governs the deter-
mination of whether an asset is real prop-
erty for REIT qualification purposes.
Under §1.856-2(d)(3), the gross assets of
the REIT are determined in accordance
with GAAP. Therefore an asset deter-
mined in accordance with GAAP, such as
GAAP goodwill, must for purposes of
sections 856 through 859 be accounted for
either as real property or as property that
is not real property. Although section
856(c)(5)(J)(ii) permits the Secretary to
determine that an item of income that is
not otherwise qualifying REIT income is
considered as gross income that is quali-
fying REIT income, section 856 does not
include a similar provision to permit an
asset that is not otherwise real property to
be treated as real property.

VIII. Procedural and Administrative
Matters

###### A. Previously issued letter rulings

A commenter requested that the final
regulations provide that taxpayers may

continue to rely on previously issued letter
rulings. Section 11.04 of Rev. Proc.
2016-112 states that a letter ruling may be
revoked or modified by the issuance of
temporary or final regulations that are in-
consistent with that letter ruling. Accord-
ingly, to the extent a previously issued
letter ruling is inconsistent with these final
regulations, the letter ruling is revoked
prospectively from the applicability date
of these final regulations.

###### B. Revised applicability date and election to apply these final regulations to earlier quarters

The proposed regulations' applicability
date was for calendar quarters beginning
after the date that the proposed regulations
are published as final regulations in the
Federal Register. Commenters requested
that the final regulations apply to taxable
years beginning after the date that final
regulations are published in the Federal
Register and that taxpayers be permitted
to apply the final regulations to earlier
taxable years and quarters.

The Treasury Department and the IRS
understand that an applicability date based
on a calendar quarter may have unin-
tended consequences in applying the gross
income tests in section 856(c)(2) and (3)
because those tests apply on an annual
basis. For example, for rents to qualify as
rents from interests in real property, the
asset from which the rents are derived
must qualify as real property. An asset
that qualifies as real property before the
applicability date, but not on or after the
applicability date, would generate rents
from real property only during quarters
before the applicability date. These final
regulations adopt this suggestion and ap-
ply to taxable years that begin after the
date that the final regulations are pub-
lished as final regulations in the Federal
Register. In addition, because the Trea-
sury Department and the IRS intend these
final regulations generally to be a clarifi-
cation of current law, taxpayers are per-
mitted to rely on the final regulations for
periods beginning on or before the appli-
cability date. The applicability date for
these final regulations is discussed further

in this preamble in the "Effective/Appli-
cability Date" section.

IX. Interaction of the Definition of Real
Property for Purposes of Sections 856
through 859 with Other Code Provisions

A. Interaction of the final regulations
with other provisions that cross-
reference the definition of real property
for REIT purposes

A commenter noted that §1.860G-
2(a)(4) references the definition of real
property found in § 1.856-3(d) of the
1962 Regulations for purposes of deter-
mining whether an obligation is "princi-
pally secured by an interest in real prop-
erty" for regulated mortgage investment
conduit qualification purposes. The pro-
posed regulations were proposed to revise
§ 1.856-3(d) to read as follows: "See
§ 1.856-10 for the definition of real prop-
erty." To the extent other Treasury regu-
lations reference the definition of real
property in §1.856-3(d), § 1.856-3(d), as
proposed in the NPRM and as amended
by these final regulations, directs taxpay-
ers to apply the definition found in
§ 1.856-10.

###### B. Reconciling definitions of real property

The preamble to the proposed regula-
tions discussed various Code provisions in
which the term real property appears. Not-
ing the diverse contexts and varying leg-
islative purposes of the Code provisions in
which the term real property appears, the
Treasury Department and the IRS re-
quested comments on the extent to which
the various meanings of real property that
appear in the Treasury regulations should
be reconciled.

Several commenters were concerned
that the term real property has different
meanings as the term is applied for pur-
poses of different Code provisions, which
could lead to confusion and inconsistent
treatment of taxpayers. A commenter
noted that there is no Federal definition of
real property and suggested that another
Code provision's restrictions on the use of
real property should not preclude a REIT
from investing in or financing such real

12Rev. Proc. 2016-1 (2016-1 IRB at 59).

property so long as the property is other-
wise inherently permanent. Another com-
menter noted that under section 197, cer-
tain intangible assets are amortized as
separate assets not associated with another
asset. A third commenter requested clari-
fication that the final regulations apply
only to the definition of real property for
purposes of sections 856 through 859, so
that there is no conflict between the REIT
provisions and other provisions of the
Code that govern the investment tax credit
and depreciation.

As discussed in the preamble to the
proposed regulations, in drafting the pro-
posed regulations, the Treasury Depart-
ment and the IRS sought to balance (1) the
general principle that common terms used
in different provisions should have com-
mon meanings with (2) the particular pol-
icies underlying the definition used in the
REIT provisions. These final regulations
retain the language in § 1.856-10(a) of
the proposed regulations stating that
§ 1.856-10 provides definitions for pur-
poses of part II, subchapter M, chapter 1
of the Code. This language addresses the
commenters' concerns by limiting the ap-
plication of the definition of real property
under these final regulations to sections
856 through 859.

###### X. Environmental Concerns

Some commenters suggested that the
proposed regulations would encourage
building in, on, or above water, which
these commenters suggested is dangerous
to water ecosystems and fish habitats. The
commenters also suggested that the after-
math of hurricanes such as Katrina and
Sandy should have demonstrated to the
Government that development near or on
water is dangerous to humans and ex-
tremely costly.

Neither section 856 nor the regulations
thereunder override any environmental
rules or regulations that may restrict de-
velopment in these areas. In defining land,
the Treasury Department and the IRS
have concluded that it is important to in-
clude water space superjacent to land be-
cause rights to this water space are ana-
lytically indistinguishable from rights to
air space superjacent to land, which, as
discussed in this preamble, are treated as
real property. See Rev. Rul. 71-286.

XI. Renewable Energy

A. Consequence of net metering on an
asset's qualification as real property

Under § 1.856-10(d)(3)(i) of the pro-
posed regulations, to qualify as real prop-
erty, a structural component must serve an
IPS and, even if capable of producing
income other than consideration for the
use or occupancy of space, must not pro-
duce or contribute to the production of
such income. The preamble to the pro-
posed regulations indicated that the Trea-
sury Department and the IRS are consid-
ering guidance to address the treatment of
any income earned when a system that
provides electricity to an IPS held by a
REIT also transfers excess electricity to a
utility company. Commenters questioned
whether a structural component would
maintain its qualification as real property
if the structural component served an IPS
in its passive function but also produced a
product, such as electricity, that was pro-
vided to third parties. One commenter
suggested that the relevant test should be
whether or not the property has net sales
of electricity to the grid. Another com-
menter noted that the amount of electricity
a building may net meter is regulated by
the marketplace because utility companies
often limit the percentage or amount of
electricity that a building may net meter.

The Treasury Department and the IRS
are considering whether additional guid-
ance is necessary to address the circum-
stances under which a distinct asset that
serves an IPS may produce electricity that
is also sold to third parties and qualify as
a structural component of the IPS for
REIT purposes. Until additional guidance
is published in the Internal Revenue Bul-
letin, in any taxable year in which (1) the
quantity of excess electricity transferred
to the utility company during the taxable
year from such distinct assets does not
exceed (2) the quantity of electricity pur-
chased from the utility company during
the taxable year to serve the IPS, the IRS
(x) will not treat the transfer of such ex-
cess electricity as affecting the qualifica-
tion of such distinct assets as structural
components of the IPS for REIT purposes,
(y) will exercise its authority under sec-
tion 856(c)(5)(J)(i) to treat any income
resulting from the transfer of such excess

electricity as not constituting gross in-
come for purposes of section 856(c)(2)
and (3), and (z) will not treat any net
income resulting from the transfer of such
excess electricity as constituting net in-
come derived from a prohibited transac-
tion under section 857(b)(6).

B. Qualification of renewable energy
credits as real property for purposes of
sections 856 though 859

Commenters requested that the final
regulations address the qualification of re-
newable energy credits (RECs) as real
property. Renewable energy credits are
credits issued to a provider of renewable
energy and may be freely bought and sold.
The owner of a system that produces re-
newable energy may sell RECs without
selling the system or the electricity pro-
duced by the system.

Because RECs are intangible assets,
the Treasury Department and the IRS
have determined that RECs should be an-
alyzed as such under § 1.856-10(f) of
these final regulations. Thus, RECs do not
qualify as intangible real property assets
under these final regulations because
RECs may be sold separately from any
real property to which they relate.

C. Treatment of renewable energy assets
as real property as a matter of public
policy

Commenters urged the Treasury De-
partment and the IRS to allow REITs to
invest in solar energy sites as a means of
furthering clean energy objectives. These
commenters requested that investors in
solar energy have the same access to
REIT financing as investors in conven-
tional energy sources such as natural gas,
oil, and other fossil and electric energy
property. Other commenters noted that
private investment would be encouraged
by treating certain electricity generating
assets as real property.

Congress has not provided for solar
energy assets to be treated differently
from other assets for purposes of deter-
mining whether the assets qualify as real
property under the REIT provisions. For
this reason, the final regulations do not
adopt this suggestion.

###### D. Treatment of sunlight and wind rights as interests in land

Commenters suggested that sunlight
used to power a solar energy site should
be considered either real property or an
interest in real property. One commenter
analogized sunlight and wind to rights to
air space, suggested that a REIT should be
allowed to sell the rights to the sunlight or
wind enjoyed on its property to third par-
ties, and further suggested that a REIT
should be able to treat income from the
sale of such rights as qualifying income.
This commenter posited that the process
used to convert sunlight into electricity is
analogous to the process inherent in fruit-
bearing plants, which are discussed in
§ 1.856-10(g), Example 1, of the pro-
posed regulations, and that the sunlight,
like the plants in Example 1, should be
treated as real property. Another com-
menter characterized sunlight as a re-
source analogous to oil, gas, and mineral
resources inherent in land.

The Treasury Department and the IRS
agree that a REIT may lease the air space
superjacent to its land, which is an interest
in its land, and may allow its tenants ac-
cess to sunlight and wind. The Treasury
Department and the IRS, however, are not
aware of an approach that could be used to
enable a REIT to rent or grant an interest
in sunlight or wind separate from its in-
terest in the land or the air space superja-
cent to the land. Therefore, these final
regulations do not adopt these sugges-
tions.

E. Qualification of a concentrating solar
power system and its associated assets
as real property for purposes of sections
856 through 859

A commenter suggested that a concen-
trating solar power system uses assets that
differ from PV panels to harvest solar
energy. This commenter suggested that a
concentrating solar power system, includ-
ing, for example, a parabolic trough sys-
tem, should be considered real property
under these final regulations.

The Treasury Department and the IRS
have concluded that this type of system is

comprised of many distinct assets that
may serve different functions. As illus-
trated in § 1.856-10(g), Examples 8 and
9, these distinct assets may be analyzed
using the standards provided in the final
regulations for OIPSs and structural com-
ponents. Accordingly, concentrating solar
power systems and their associated assets
are not added to the lists of qualifying
assets in these final regulations.

###### XII. Examples

Section 1.856-10(g) of the proposed
regulations provided thirteen examples il-
lustrating the application of the proposed
regulations in a variety of factual scenar-
ios.

###### A. References to net leases

Each of § 1.856-10(g), Examples 1, 5,
6, 7, 8, and 10, of the proposed regulations
stated that the REIT enters into a long
term, triple-net lease of property. A com-
menter noted that the term "net lease" is
not defined for purposes of section 856
and, therefore, may encompass different
economic arrangements, the variations in
which are not relevant to whether property
is real property. The commenter further
contended that many REITs do not net
lease their assets. The commenter sug-
gested that if it is necessary to describe the
underlying facts, the term "lease" is suf-
ficient and avoids the implication that a
REIT must net lease its asset.

Each of Examples 1, 5, 6, 7, 8, and 10
of the proposed regulations stated that the
assets are net leased to avoid any potential
implication that the REIT is operating the
property. Examples 1, 5, 6, 7, 8, and 10
are revised in these final regulations to
provide that the REIT neither operates the
property nor provides services to the les-
see.

###### B. Example 4

Section 1.856-10(g), Example 4, of the
proposed regulations analyzed whether a
bus shelter is an IPS. One commenter
suggested that Example 4 be deleted be-

cause it was uncertain if a REIT would
make a section 1033(g)13 election with
respect to the bus shelter. Additionally,
the commenter was not aware of any
REIT that leases or intends to lease bus
shelters to a transit authority and believed
that such shelters are rarely relocated. For
these reasons, the commenter recom-
mended that the example be stricken. No
commenters, however, disagreed with the
conclusion in the example.

The Treasury Department and the IRS
believe that Example 4 is helpful because
it describes a structure that is not perma-
nently affixed and thus does not qualify as
an IPS under the standards provided in the
regulations. Therefore, these final regula-
tions do not adopt this suggestion.

###### C. Example 6

Section 1.856-10(g), Example 6, of the
proposed regulations illustrated the defi-
nition of structural component in the con-
text of a data center. One commenter sug-
gested changes to Example 6 including
clarification that the electrical system and
telecommunication infrastructure systems
are (1) embedded in significant part within
the walls and floors of the building, (2)
would be difficult to remove, and (3) are
intended to remain in place indefinitely.
Although suggestions (1) and (2) would
clarify the example and would not affect
the analysis or conclusion of the example,
suggestion (3) is not relevant because the
structural component factors in § 1.856-
10(d)(3)(ii)(B) of the proposed regula-
tions do not include the intent of the
owner of the asset. Accordingly, these fi-
nal regulations revise Example 6 to accu-
rately reflect the integration of these assets
into the data center building.14

Another commenter suggested that
cross-connects used in a data center
should not be considered real property
because the cross-connects produce in-
come that is not for the use or occupancy
of space and this income is significant in
comparison to the income produced by
other assets in a data center. Example 6
did not, and was not intended to, address
every distinct asset that may be part of a
data center. Distinct assets that are not

13Section 1033(g)(3) provides that a taxpayer may elect to treat property that constitutes an outdoor advertising display as real property for purposes of chapter 1 of the Code.

14For consistency and clarity, similar revisions have been made to other examples illustrating the definition of structural component.

addressed in the example may be analyzed
by applying the standards set forth in the
proposed regulations. Accordingly, no
change was made to the final regulation in
response to this comment.

###### E. Example 8

Section 1.856-10(g), Example 8, of the
proposed regulations analyzed a solar en-
ergy site that includes land, photovoltaic
modules (PV modules), mounts and an exit
wire. The solar energy site was triple-net
leased to an operator who uses the assets to
produce and transmit energy to an electrical
power grid for sale to third parties. The
example concluded that the land, mounts,
and exit wire qualify as real property and
that the PV modules do not qualify as IPSs
because they convert solar energy into elec-
tricity, which is an active function.

One commenter requested that the
Treasury Department and the IRS update
Example 8 to include an analysis of in-
verters, which the commenter contended
serve an active function compared to PV
modules, which the commenter contended
are relatively passive. Another commenter
elaborated on the function of the PV mod-
ules, above ground wiring, and inverters.
The commenter proposed adding lan-
guage to Example 8 to state that these
assets have no moving parts and are there-
fore passive.

The Treasury Department and the IRS
have concluded that PV modules and in-
verters that are used in the generation of
energy for sale to third parties do not
qualify as IPSs under the proposed regu-
lations. The Treasury Department and the
IRS do not believe the inclusion of above
ground wiring in Example 8, which al-
ready analyzes an exit wire, is necessary
to illustrate the application of the rules in
§1.856-10 to above ground wiring. For
these reasons, the final regulations do not
adopt these suggestions.

###### F. Example 9

Section 1.856-10(g), Example 9, of the
proposed regulations described a solar en-
ergy site similar to the solar energy site in
Example 8, except that the solar energy
site in Example 9 is mounted on land
adjacent to an office building owned by
the REIT. Other than occasional transfers

of electricity to the grid, the solar energy
site in Example 9 serves only the REIT's
office building to which it is constituent.
The solar energy site in Example 9 of the
proposed regulations qualifies as a struc-
tural component.

A commenter recommended revisions
to the statements in Example 9 that the
solar energy site was (1) designed specif-
ically for the particular office building of
which it is a part and (2) expensive and
time consuming to install and remove.
The commenter stated that most materials
used for solar rooftop and other smaller-
scale installations are mass-produced and
standardized and can be removed and re-
installed without major complications or
damage. These final regulations revise Ex-
ample 9 to state that the size and other
specifications of the solar energy system
were established to serve the needs of the
office building and that no facts indicate
that the solar energy system will not re-
main in place indefinitely.

Another commenter requested clarifi-
cation of the term "occasionally trans-
fers." This commenter recommended
changing "occasionally transfers" to "reg-
ularly transfers" in describing the transfer
of energy from the solar energy site to a
utility company. As discussed in section
XI.A. of this preamble, the Treasury De-
partment and the IRS are considering
whether additional guidance is necessary
to address this commenter's concern. Un-
til the issuance of such additional guid-
ance, the Treasury Department and the
IRS (1) will not treat the transfer of the
excess electricity as affecting the qualifi-
cation of the distinct assets as structural
components of the IPS for REIT purposes,
(2) will exercise its authority under sec-
tion 856(c)(5)(J)(i) to treat any income
resulting from the transfer of the excess
electricity as not constituting gross in-
come for purposes of section 856(c)(2)
and (3), and (3) will not treat any net
income resulting from the transfer of the
excess electricity as constituting net in-
come derived from a prohibited transac-
tion under section 857(b)(6).

A commenter noted that even when a
building uses all of the solar electricity
produced by a solar energy site, such as
the one in Example 9, the tenant of the
building may earn income through the
sale of RECs awarded under a local re-

newable portfolio standard. The Treasury
Department and the IRS believe that in-
come earned by a tenant from RECs in
this situation would not affect the qualifi-
cation of the solar energy site as a struc-
tural component. The tax consequences of
income earned by a REIT from RECs are
beyond the scope of this guidance.

Another commenter requested that Ex-
ample 9 be modified to address wind facil-
ities rather than solar facilities. The Trea-
sury Department and the IRS believe that
the components of wind facilities may sim-
ilarly be analyzed using the standards pro-
vided in §1.856-10(d)(3) of the proposed
regulations. For these reasons, the final reg-
ulations do not adopt these recommendations.

###### G. Example 10

Section 1.856-10(g), Example 10, of
the proposed regulations addressed appli-
cation of the proposed regulations to a
pipeline transmission system. Distinct as-
sets of the pipeline transmission system in-
clude underground pipelines, storage tanks,
valves, vents, meters, and compressors. The
example stated that the pipeline transmis-
sion system serves a passive function, con-
taining oil, and an active function, transport-
ing oil. The example further stated that,
even though the pipeline transmission sys-
tem serves an active function, a distinct as-
set within the system may nevertheless be
an IPS if that asset does not perform an
active function.

One commenter noted that whether the
entire system performs an active function
is not relevant because the system is com-
posed of distinct assets, each of which
must be separately analyzed. The Trea-
sury Department and the IRS believe that
Example 10 is helpful because it demon-
strates that a distinct asset within a system
may still qualify as an IPS, or a structural
component thereof, even though the sys-
tem serves an active function.

As discussed in section III.A.2. of this
preamble, these final regulations include
providing a conduit or route as a permitted
passive function and retain transport,
which has been clarified to mean cause to
move, as a prohibited active function. The
Treasury Department and the IRS have
revised Example 10 to illustrate that
the pipelines in Example 10 serve the pas-
sive function of providing a conduit.

Another commenter suggested revising
Example 10 so that the pipeline transmis-
sion system transports natural gas rather
than oil and suggested changing the vents
and valves to isolation valves and vents,
pressure control valves, relief valves, and
pressure regulating stations. The com-
menter also suggested that Example 10 be
revised to apply the factors set forth in the
regulations to determine whether these as-
sets are structural components. These final
regulations incorporate this commenter's
suggestions.

In addition, commenters argued that the
compressors within a pipeline transmission
system are analogous to elevators and esca-
lators within a building, with the function of
moving things or people within an IPS. One
commenter noted that compressors may be
viewed as performing a propelling function.
Another commenter suggested that eleva-
tors and escalators serve a building by en-
abling access to taller buildings, higher lev-
els of occupancy, and more efficient usage.
Another commenter suggested that com-
pressors enable the efficient use of space
within a pipeline.

To qualify as a structural component, a
distinct asset must serve an IPS in its
passive function. The compressors that
transport natural gas through the pipeline
transmission system in Example 10 do not
serve the underground pipelines in their
passive function of providing a conduit
but rather cause the natural gas to move
through the conduit, which is an active
function. For this reason, these final reg-
ulations do not adopt these suggestions.

###### H. Example 11

Section 1.856-10(g), Example 11,
of the proposed regulations addressed
whether goodwill established under
GAAP as a result of the acquisition of
stock of a corporation that owned a hotel
qualifies as real property for purposes of
sections 856 through 859. This example
stated that the amount of the acquisition
cost allocated to the hotel was limited to
the hotel's depreciated replacement cost.
The example also stated that the differ-
ence between the amount paid for the ac-
quired corporation's stock and the depre-
ciated replacement cost of the hotel was
treated as goodwill attributable to the ac-
quired hotel. The Treasury Department

and the IRS have been advised that depre-
ciated replacement cost is no longer the
standard under GAAP for valuing prop-
erty such as the hotel. The Treasury De-
partment and the IRS have therefore re-
moved this example.

###### I. Example 13

Section 1.856-10(g), Example 13, of
the proposed regulations addressed
whether a license to operate a casino is
real property. Example 13 concluded that
because the license permits the holder to
engage in the business of operating a ca-
sino the license is not real property even
though the license applies only to the
REIT's building and cannot be transferred
to another location.

One commenter stated that in some
foreign jurisdictions, a casino license may
be more in the nature of a zoning permit
that may be transferred to a subsequent
buyer. This commenter suggested that a
license that runs with the land is more in
the nature of a zoning permit. The com-
menter recommended either deleting Ex-
ample 13 or revising it to distinguish
transferable zoning-based or similar real
estate-based licenses.

Another commenter noted that the per-
mitted use of a facility for gaming purposes
may enhance its value as real estate, apart
from the value of the gaming license itself.
The commenter also remarked that zoning
laws frequently restrict gaming activities or
liquor sales to particular geographical areas
or locations, which restrictions, in general,
favorably affect the value of real estate in
these areas or locations.

These final regulations do not adopt
these recommendations. Under §1.856-
10(f) of the proposed regulations, whether a
license runs with the land is not dispositive
in determining whether the license is real
property for purposes of sections 856
through 859. The valuation of real property,
including any effect that zoning may have
on the value of real property, are beyond the
scope of these final regulations.

###### J. Additional examples

The Treasury Department and the IRS
received requests to add additional exam-
ples to the final regulations.

Section VII.B. of this preamble de-
scribes comments received requesting
clarification that intangible assets related
to in-place above-market leases in which
the REIT is the lessor and below-market
leases in which the REIT is the lessee be
treated as qualifying real property. As dis-
cussed in section VII.B., these final regu-
lations include § 1.856-10(g), Example
11, which illustrates the application of
these final regulations to an in-place
above-market lease that produces both
rents from real property under section
856(d)(1) and other income that does not
qualify as rents from real property under
section 856(d)(1).

A commenter suggested adding an ex-
ample applying these final regulations to
an electric transmission and distribution
system. The Treasury Department and the
IRS believe that the distinct assets of an
electric transmission and distribution sys-
tem are similar in many respects to the
distinct assets of the solar energy site ad-
dressed by § 1.856-10(g), Example 8 of
the proposed regulations, and may be an-
alyzed using the standards provided in
§ 1.856-10(d)(2) and (3) of the proposed
regulations. Accordingly, these final reg-
ulations adequately address the distinct
assets that may be part of an electrical
transmission and distribution system.

Another commenter suggested that the
final regulations include an example illus-
trating the components of an in-ground
swimming pool. (The proposed regula-
tions listed the pool itself as an OIPS.)
The Treasury Department and the IRS are
not aware that there have been significant
questions concerning whether the various
components qualify as real property.
Therefore, these final regulations do not
include an example addressing whether
these components qualify as real property
for purposes of sections 856 through 859.

###### XIII. Additional Comments

###### A. Potential tax inequality among taxpayers

Three commenters viewed the pro-
posed regulations as a substantial expan-
sion of the definition of real property. The
Treasury Department and the IRS believe
that the proposed regulations and these
final regulations generally clarify existing

law. These commenters also called for
equal application of the tax laws and ap-
pear to believe that REITs are a vehicle
that some corporations use to avoid taxes.
The REIT structure was established by
Congress in 1960, and it is not within the
scope of these final regulations to change
the REIT structure as these commenters
suggest.

###### B. Clarification that buildings can be on or inside of other buildings or IPSs

A commenter requested that the final
regulations clarify that buildings can be
on or inside of other buildings or IPSs.
The Treasury Department and the IRS be-
lieve that this comment was adequately
addressed by the proposed regulations,
which provided that the affixation of an
IPS (which may be a building) may be to
land or to another IPS. In addition,
§ 1.856-10(g), Example 3, concludes that
a large sculpture inside an office building
qualifies as an IPS. A building inside an-
other building is not analytically different
from the sculpture inside the building in
Example 3. Accordingly, the proposed
regulations, as finalized by this Treasury
decision, adequately address this com-
menter's concern.

###### C. Qualification of appurtenances and zoning and similar rights

A commenter suggested that appurte-
nances should be included in the defini-
tion of land. The commenter suggested
that real estate law provides that an appur-
tenance encompasses easements and
rights of way over another's land to access
one's own land. In addition, this com-
menter suggested that zoning and similar
rights should be included in the definition
of real property.

Taxpayers should apply § 1.856-
10(f)(2) of these final regulations, which
addresses the treatment of rights for the
use, enjoyment, or occupation of land, to
determine whether an appurtenance qual-
ifies as real property for purposes of sec-
tions 856 through 859. Zoning rights may
increase the value of real property. Con-
sistent with § 1.856-2(d)(3), if a zoning
right is considered a separate asset under
GAAP, then the zoning right should be

analyzed as an intangible asset under
§ 1.856-10(f) of these final regulations.

###### D. Additional comments

A commenter suggested that the final
regulations address the definition of rents
from real property, eliminate the standard
requiring that total assets be based on
GAAP, and regulate the type of services
that a taxable REIT subsidiary may pro-
vide. These issues are beyond the scope of
these final regulations.

##### Effective/Applicability Date

These final regulations apply to taxable
years that begin after August 31, 2016.
Under section 856(c)(4), whether a tax-
payer loses status as a REIT in one quarter
may depend on whether the taxpayer sat-
isfied section 856(c)(4) at the close of one
or more prior quarters. For purposes of
applying the first sentence of the flush
language in section 856(c)(4) to a quarter
in a taxable year that begins after August
31, 2016, these final regulations apply in
determining whether the taxpayer met the
requirements of section 856(c)(4) at the
close of prior quarters. Taxpayers may
rely on these final regulations for quarters
that end before the applicability date.

#### Special Analyses

Certain IRS regulations, including this
one, are exempt from the requirements of
Executive Order 12866, as supplemented
and reaffirmed by Executive Order 13563.
Therefore, a regulatory impact assessment
is not required. It also has been deter-
mined that section 553(b) of the Admin-
istrative Procedure Act (5 U.S.C. chapter
5) does not apply to these regulations, and
because the regulations do not impose a
collection of information on small entities,
the Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to
section 7805(f) of the Internal Revenue
Code, the proposed regulations preceding
these final regulations were submitted to
the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on their impact on small business.
No comments were received.

#### Drafting Information

The principal author of these regula-
tions is Julanne Allen, Office of Associate
Chief Council (Financial Institutions and
Products). However, other personnel from
the Treasury Department and the IRS par-
ticipated in their development.

#### Statement of Availability of IRS Documents

The IRS revenue rulings and revenue
procedure cited in this preamble are pub-
lished in the Internal Revenue Bulletin (or
Cumulative Bulletin) and are available
from the Superintendent of Documents,
U.S. Government Publishing Office,
Washington, DC 20402, or by visiting the
IRS website at www.irs.gov.

* * * * *

#### Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is
amended as follows:

#### PART 1-INCOME TAXES

Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.856-3(d) is revised to
read as follows:

§ 1.856-3 Definitions.

* * * * *

(d) Real property. See §1.856-10 for
the definition of real property. A regula-
tion that adopts the definition of real prop-
erty in this paragraph is to be interpreted
as if it had referred to §1.856-10.
* * * * *

Par. 3. Section 1.856-10 is added to
read as follows:

§ 1.856-10 Definition of real property.

(a) In general. This section provides
definitions for purposes of part II, sub-
chapter M, chapter 1 of the Internal Rev-
enue Code. Paragraph (b) of this section
defines real property, which includes land
as defined under paragraph (c) of this sec-
tion and improvements to land as defined
under paragraph (d) of this section. Im-
provements to land include inherently per-

manent structures as defined under para-
graph (d)(2) of this section and structural
components of inherently permanent
structures as defined under paragraph
(d)(3) of this section. Paragraph (e) of this
section provides rules for determining
whether an item is a distinct asset for
purposes of applying the definitions in
paragraphs (b), (c), and (d) of this section.
Paragraph (f) of this section identifies in-
tangible assets that are real property or
interests in real property. Paragraph (g) of
this section provides examples illustrating
the rules of paragraphs (b) through (f) of
this section. Paragraph (h) of this section
provides the effective/applicability date
for this section.

(b) Real property. The term real prop-
erty means land and improvements to
land. Local law definitions are not control-
ling for purposes of determining the
meaning of the term real property.

(c) Land. Land includes water and air
space superjacent to land and natural
products and deposits that are unsevered
from the land. Natural products and de-
posits, such as crops, water, ores, and
minerals, cease to be real property when
they are severed, extracted, or removed
from the land. The storage of severed or
extracted natural products or deposits,
such as crops, water, ores, and minerals,
in or upon real property does not cause the
stored property to be recharacterized as
real property.

(d) Improvements to land-(1) In gen-
eral. The term improvements to land
means inherently permanent structures
and their structural components.

(2) Inherently permanent structure-
(i) In general. The term inherently perma-
nent structure means any permanently af-
fixed building or other permanently
affixed structure. Affixation may be to
land or to another inherently permanent
structure and may be by weight alone. If
the affixation is reasonably expected to
last indefinitely based on all the facts and
circumstances, the affixation is considered
permanent. A distinct asset that serves an
active function, such as an item of ma-
chinery or equipment, is not a building or
other inherently permanent structure.

(ii) Building-(A) In general. A build-
ing encloses a space within its walls and is
covered by a roof.

(B) Types of buildings. Buildings in-
clude the following distinct assets if per-
manently affixed: houses; apartments; ho-
tels; motels; enclosed stadiums and
arenas; enclosed shopping malls; factory
and office buildings; warehouses; barns;
enclosed garages; enclosed transportation
stations and terminals; and stores.

(iii) Other inherently permanent struc-
tures-(A) In general. Other inherently
permanent structures serve a passive func-
tion, such as to contain, support, shelter,
cover, protect, or provide a conduit or a
route, and do not serve an active function,
such as to manufacture, create, produce,
convert, or transport.

(B) Types of other inherently perma-
nent structures. Other inherently perma-
nent structures include the following dis-
tinct assets if permanently affixed:
microwave transmission, cell, broadcast,
and electrical transmission towers; tele-
phone poles; parking facilities; bridges;
tunnels; roadbeds; railroad tracks; trans-
mission lines; pipelines; fences; in-ground
swimming pools; offshore drilling plat-
forms; storage structures such as silos and
oil and gas storage tanks; and stationary
wharves and docks. Other inherently per-
manent structures also include outdoor ad-
vertising displays for which an election
has been properly made under section
1033(g)(3).

(iv) Facts and circumstances determi-
nation. If a distinct asset (within the
meaning of paragraph (e) of this section)
does not serve an active function as de-
scribed in paragraph (d)(2)(iii)(A) of this
section and is not otherwise listed in
paragraph (d)(2)(ii)(B) or (d)(2)(iii)(B) of
this section or in guidance published in
the Internal Revenue Bulletin (see
§601.601(d)(2)(ii) of this chapter), the de-
termination of whether that asset is an
inherently permanent structure is based on
all the facts and circumstances. In partic-
ular, the following factors must be taken
into account:

(A) The manner in which the distinct
asset is affixed to real property;

(B) Whether the distinct asset is de-
signed to be removed or to remain in place
indefinitely;

(C) The damage that removal of the
distinct asset would cause to the item it-
self or to the real property to which it is
affixed;

(D) Any circumstances that suggest the
expected period of affixation is not indef-
inite (for example, a lease that requires or
permits removal of the distinct asset upon
the expiration of the lease); and

(E) The time and expense required to
move the distinct asset.

(3) Structural components-(i) In gen-
eral. The term structural component
means any distinct asset (within the mean-
ing of paragraph (e) of this section) that is
a constituent part of and integrated into an
inherently permanent structure, serves the
inherently permanent structure in its pas-
sive function, and, even if capable of pro-
ducing income other than consideration
for the use or occupancy of space, does
not produce or contribute to the produc-
tion of such income. If interconnected as-
sets work together to serve an inherently
permanent structure with a utility-like
function (for example, systems that pro-
vide a building with electricity, heat, or
water), the assets are analyzed together as
one distinct asset that may be a structural
component. A structural component may
qualify as real property only if the real
estate investment trust (REIT) holds its
interest in the structural component to-
gether with a real property interest in the
space in the inherently permanent struc-
ture served by the structural component. A
mortgage secured by a structural compo-
nent is a real estate asset only if the mort-
gage is also secured by a real property
interest in the inherently permanent struc-
ture served by the structural component. If
a distinct asset is customized in connec-
tion with the rental of space in or on an
inherently permanent structure to which
the asset relates, the customization does
not affect whether the distinct asset is a
structural component.

(ii) Types of structural components.
Structural components include the fol-
lowing distinct assets and systems if in-
tegrated into the inherently permanent
structure and held together with a real
property interest in the space in the in-
herently permanent structure served by
that distinct asset or system: wiring;
plumbing systems; central heating and
air-conditioning systems; elevators or
escalators; walls; floors; ceilings; per-
manent coverings of walls, floors, and
ceilings; windows; doors; insulation;
chimneys; fire suppression systems,

such as sprinkler systems and fire
alarms; fire escapes; central refrigera-
tion systems; security systems; and hu-
midity control systems.

(iii) Facts and circumstances determi-
nation. If an interest in a distinct asset
(within the meaning of paragraph (e) of
this section) is held together with a real
property interest in the space in the in-
herently permanent structure served by
that distinct asset and that asset is not
otherwise listed in paragraph (d)(3)(ii)
of this section or in guidance published
in the Internal Revenue Bulletin (see
§601.601(d)(2)(ii) of this chapter), the
determination of whether that asset is a
structural component is based on all the
facts and circumstances. In particular,
the following factors must be taken into
account:

(A) The manner, time, and expense of
installing and removing the distinct asset;

(B) Whether the distinct asset is de-
signed to be moved;

(C) The damage that removal of the
distinct asset would cause to the item it-
self or to the inherently permanent struc-
ture to which it is affixed;

(D) Whether the distinct asset serves a
utility-like function with respect to the
inherently permanent structure;

(E) Whether the distinct asset serves
the inherently permanent structure in its
passive function;

(F) Whether the distinct asset produces
income from consideration for the use or
occupancy of space in or upon the inher-
ently permanent structure;

(G) Whether the distinct asset is in-
stalled during construction of the inher-
ently permanent structure; and

(H) Whether the distinct asset will re-
main if the tenant vacates the premises.

(e) Distinct asset-(1) In general. A
distinct asset is analyzed separately from
any other assets to which the asset relates
to determine if the asset is real property,
whether as land, an inherently permanent
structure, or a structural component of an
inherently permanent structure.

(2) Facts and circumstances. The de-
termination of whether a particular sepa-
rately identifiable item of property is a
distinct asset is based on all the facts and
circumstances. In particular, the following
factors must be taken into account:

(i) Whether the item is customarily
sold or acquired as a single unit rather
than as a component part of a larger asset;

(ii) Whether the item can be separated
from a larger asset, and if so, the cost of
separating the item from the larger asset;

(iii) Whether the item is commonly
viewed as serving a useful function inde-
pendent of a larger asset of which it is a
part; and

(iv) Whether separating the item from
a larger asset of which it is a part impairs
the functionality of the larger asset.

(f) Intangible assets-(1) In general.
To the extent that an intangible asset, in-
cluding an intangible asset established un-
der generally accepted accounting princi-
ples (GAAP) as a result of an acquisition
of real property or an interest in real prop-
erty, derives its value from real property
or an interest in real property, is insepa-
rable from that real property or interest in
real property, and does not produce or
contribute to the production of income
other than consideration for the use or
occupancy of space, the intangible asset is
real property or an interest in real prop-
erty.

(2) Licenses and permits. A license,
permit, or other similar right that is solely
for the use, enjoyment, or occupation of
land or an inherently permanent structure
and that is in the nature of a leasehold or
easement generally is an interest in real
property. A license or permit to engage
in or operate a business is not real prop-
erty or an interest in real property if the
license or permit produces or contributes
to the production of income other than
consideration for the use or occupancy of
space.

(g) Examples. The following exam-
ples demonstrate the rules of this sec-
tion. Examples 1 and 2 illustrate the
definition of land as provided in para-
graph (c) of this section. Examples 3
through 10 illustrate the definition of
improvements to land as provided in
paragraph (d) of this section. Finally,
Examples 11 through 13 illustrate
whether certain intangible assets are real
property or interests in real property as
provided in paragraph (f) of this section.

Example 1. Natural products of land. A is a
REIT. REIT A owns land with perennial fruit-
bearing plants. REIT A leases the fruit-bearing
plants to a tenant and grants the tenant an easement
to enter the land to cultivate the plants and to harvest

the fruit. The lease and easement are long-term and
REIT A provides no services to the tenant. The
unsevered plants are natural products of the land and
are land within the meaning of paragraph (c) of this
section. The tenant annually harvests fruit from the
plants. Upon severance from the land, the harvested
fruit ceases to qualify as land. Storage of the har-
vested fruit upon or within real property does not
cause the harvested fruit to be real property.

Example 2. Water space superjacent to land.
REIT B leases a marina from a governmental
entity. The marina is comprised of U-shaped boat
slips and end ties. The U-shaped boat slips are
spaces on the water that are surrounded by a dock
on three sides. The end ties are spaces on the water
at the end of a slip or on a long, straight dock.
REIT B rents the boat slips and end ties to boat
owners. The boat slips and end ties are water space
superjacent to land that is land within the meaning
of paragraph (c) of this section and, therefore, are
real property.

Example 3. Indoor sculpture. (i) REIT C owns an
office building and a large sculpture in the atrium of
the building. The sculpture measures 30 feet tall by
18 feet wide and weighs five tons. The building was
specifically designed to support the sculpture, which
is permanently affixed to the building by supports
embedded in the building's foundation. The sculp-
ture was constructed within the building. Removal
would be costly and time consuming and would
destroy the sculpture. The sculpture is reasonably
expected to remain in the building indefinitely. The
sculpture does not manufacture, create, produce,
convert, transport, or serve any similar active func-
tion.

(ii) The sculpture is not an asset listed in para-
graph (d)(2)(iii)(B) of this section, and, therefore, the
sculpture is an asset that must be analyzed to deter-
mine whether it is an inherently permanent structure
using the factors provided in paragraph (d)(2)(iv) of
this section. The sculpture-

(A) Is permanently affixed to the building by
supports embedded in the building's foundation;

(B) Is not designed to be removed and is de-
signed to remain in place indefinitely;

(D) Will remain affixed to the building after any
tenant vacates the premises and will remain affixed
to the building indefinitely; and

(E) Would require significant time and expense
to move.

(iii) The factors described in this paragraph (g)
Example 3 (ii)(A) through (E) all support the con-
clusion that the sculpture is an inherently permanent
structure within the meaning of paragraph (d)(2) of
this section and, therefore, is real property.

Example 4. Bus shelters. (i) REIT D owns 400
bus shelters, each of which consists of four posts, a
roof, and panels enclosing two or three sides. REIT
D enters into a long-term lease with a local transit
authority for use of the bus shelters. Each bus shelter
is prefabricated from steel and is bolted to the side-
walk. Bus shelters are disassembled and moved
when bus routes change. Moving a bus shelter takes
less than a day and does not significantly damage
either the bus shelter or the real property to which it
was affixed.

(ii) The bus shelters are not permanently affixed
enclosed transportation stations or terminals and do
not otherwise meet the definition of a building in
paragraph (d)(2)(ii) of this section nor are they listed
as types of other inherently permanent structures in
paragraph (d)(2)(iii)(B) of this section. Therefore,
the bus shelters must be analyzed to determine
whether they are inherently permanent structures
using the factors provided in paragraph (d)(2)(iv) of
this section. The bus shelters-

(A) Are not permanently affixed to the land or an
inherently permanent structure;

(B) Are designed to be removed and are not
designed to remain in place indefinitely;

(D) Will not remain affixed after the local transit
authority vacates the site and will not remain affixed
indefinitely; and

(E) Would not require significant time and ex-
pense to move.

(iii) The factors described in this paragraph (g)
Example 4 (ii)(A) through (E) all support the con-
clusion that the bus shelters are not inherently per-
manent structures within the meaning of paragraph
(d)(2) of this section. Although the bus shelters serve
a passive function of sheltering, the bus shelters are
not permanently affixed, which means the bus shel-
ters are not inherently permanent structures within
the meaning of paragraph (d)(2) of this section and,
therefore, are not real property.

Example 5. Cold storage warehouse. (i) REIT E
owns a refrigerated warehouse (Cold Storage Ware-
house). REIT E enters into a long-term lease with a
tenant. REIT E neither operates the Cold Storage
Warehouse nor provides services to its tenant. The
tenant uses the Cold Storage Warehouse to store
perishable products. Certain components and utility
systems that are integrated into the Cold Storage
Warehouse have been customized to accommodate
the tenant's need for refrigerated storage space. For
example, the Cold Storage Warehouse has custom-
ized freezer walls and a central refrigeration system.
Freezer walls within the Cold Storage Warehouse
are specifically designed to maintain the desired tem-
perature within the Cold Storage Warehouse. The
freezer walls and central refrigeration system com-
prise a series of interconnected assets that work
together to serve a utility-like function within the
Cold Storage Warehouse, were installed during con-
struction of the building, and will remain in place
when the tenant vacates the premises. The freezer
walls and central refrigeration system were designed
to remain permanently in place.

(ii) Walls and central refrigeration systems are
listed as structural components in paragraph
(d)(3)(ii) of this section and, therefore, are real prop-
erty. The customization of the freezer walls does not
affect their qualification as structural components of
REIT E's Cold Storage Warehouse within the mean-
ing of paragraph (d)(3) of this section. Therefore, the
freezer walls and central refrigeration system are
structural components of REIT E's Cold Storage
Warehouse.

Example 6. Data center. (i) REIT F owns a
building that it leases to a tenant under a long-term
lease. REIT F neither operates the building nor pro-

vides services to its tenant. To accommodate the
particular requirements for housing computer serv-
ers, certain interior components and utility systems
within the building have been customized to provide
a higher level of functionality than a conventional
office building. These customized systems are
owned by REIT F and include an electrical distribu-
tion and redundancy system (Electrical System), a
central heating and air-conditioning system, a tele-
communication infrastructure system, an integrated
security system, a fire suppression system, and a
humidity control system (each, a System). In addi-
tion, the space for computer servers in REIT F's
building has been constructed with raised flooring
that is integrated into the building to accommodate
the Systems. Each System is comprised of a series of
interconnected assets that work together to serve a
utility-like function within the building. The Systems
are integrated into the office building, were installed
during construction of the building, and will remain
in place when the tenant vacates the premises. Each
of the Systems was customized to enhance the ca-
pacity of the System in connection with the rental of
space within the building.

(ii) The central heating and air-conditioning sys-
tem, integrated security system, fire suppression sys-
tem, and humidity control system are listed as struc-
tural components in paragraph (d)(3)(ii) of this
section and, therefore, are real property. The cus-
tomization of these Systems does not affect the qual-
ification of these Systems as structural components
of REIT F's building within the meaning of para-
graph (d)(3) of this section. Therefore, these Systems
are structural components of REIT F's building.

(iii) In addition to wiring and flooring, which are
listed as structural components in paragraph
(d)(3)(ii) of this section and, therefore, are real prop-
erty, the Electrical System and telecommunication
infrastructure system include equipment used to en-
sure that the tenant is provided with uninterruptable,
stable power and telecommunication services. The
Electrical System and telecommunication infrastruc-
ture system are not listed in paragraph (d)(3)(ii) of
this section, and, therefore, they must be analyzed to
determine whether they are structural components of
the building using the factors provided in paragraph
(d)(3)(iii) of this section. The Electrical System and
telecommunication infrastructure system-

(A) Are embedded within the walls and floors of
the building and would be costly to remove;

(B) Are not designed to be moved and are de-
signed specifically for the particular building of
which they are a part;

(C) Would not be significantly damaged upon
removal and, although removing them would dam-
age the walls and floors in which they are embedded,
their removal would not significantly damage the
building;

(D) Serve a utility-like function with respect to
the building;

(E) Serve the building in its passive functions of
containing, sheltering, and protecting computer serv-
ers;

(F) Produce income as consideration for the use
or occupancy of space within the building;

(G) Were installed during construction of the
building; and

(H) Will remain in place when the tenant vacates
the premises.

(iv) The factors described in this paragraph (g)
Example 6 (iii)(A), (B), and (D) through (H) all
support the conclusion that the Electrical System and
telecommunication infrastructure system are struc-
tural components of REIT F's building within the
meaning of paragraph (d)(3) of this section and,
therefore, are real property. The factor described in
this paragraph (g) Example 6 (iii)(C) would support
a conclusion that the Electrical System and telecom-
munication infrastructure system are not structural
components. However this factor does not outweigh
the factors supporting the conclusion that the Elec-
tric System and telecommunication infrastructure
system are structural components.

Example 7. Partitions. (i) REIT G owns an office
building that it leases to tenants under long-term
leases. REIT G neither operates the office building
nor provides services to its tenants. Partitions are
owned by REIT G and are used to delineate space
between tenants and within each tenant's space. The
office building has two types of interior, non-load-
bearing drywall partition systems: a conventional
drywall partition system (Conventional Partition
System) and a modular drywall partition system
(Modular Partition System). Neither the Conven-
tional Partition System nor the Modular Partition
System was installed during construction of the of-
fice building. Conventional Partition Systems are
comprised of fully integrated gypsum board parti-
tions, studs, joint tape, and covering joint compound.
Modular Partition Systems are comprised of assem-
bled panels, studs, tracks, and exposed joints. Both
the Conventional Partition System and the Modular
Partition System reach from the floor to the ceiling.

(ii) Depending on the needs of a new tenant, the
Conventional Partition System may remain in place
when a tenant vacates the premises. The Conven-
tional Partition System is integrated into the office
building and is designed and constructed to remain
in areas not subject to reconfiguration or expansion.
The Conventional Partition System can be removed
only by demolition, and, once removed, neither the
Conventional Partition System nor its components
can be reused. Removal of the Conventional Parti-
tion System causes substantial damage to the Con-
ventional Partition System itself but does not cause
substantial damage to the building.

(iii) Modular Partition Systems are typically re-
moved when a tenant vacates the premises. Modular
Partition Systems are not designed or constructed to
remain permanently in place. Modular Partition Sys-
tems are designed and constructed to be movable.
Each Modular Partition System can be readily re-
moved, remains in substantially the same condition
as before, and can be reused. Removal of a Modular
Partition System does not cause any substantial dam-
age to the Modular Partition System itself or to the
building. The Modular Partition System may be
moved to accommodate the reconfigurations of the
interior space within the office building for various
tenants that occupy the building.

(iv) The Conventional Partition System is com-
prised of walls that are integrated into an inherently
permanent structure, and thus are listed as structural
components in paragraph (d)(3)(ii) of this section.

The Conventional Partition System, therefore, is real
property.

(v) The Modular Partition System is not inte-
grated into the building and, therefore, is not listed in
paragraph (d)(3)(ii) of this section. Thus, the Mod-
ular Partition System must be analyzed to determine
whether it is a structural component using the factors
provided in paragraph (d)(3)(iii) of this section. The
Modular Partition System-

(A) Is installed and removed quickly and with
little expense;

(B) Is designed to be moved and is not designed
specifically for the particular building of which it is
a part;

(D) Does not serve a utility-like function with
respect to the building;

(E) Serves the building in its passive functions of
containing and protecting the tenants' assets;

(F) Produces income only as consideration for
the use or occupancy of space within the building;

(G) Was not installed during construction of the
building; and

(H) Will not remain in place when a tenant
vacates the premises.

(vi) The factors described in this paragraph (g)
Example 7 (v)(A) through (D), (G) and (H) all sup-
port the conclusion that the Modular Partition Sys-
tem is not a structural component of REIT G's
building within the meaning of paragraph (d)(3) of
this section and, therefore, is not real property. The
factors described in this paragraph (g) Example 7
(v)(E) and (F) would support a conclusion that the
Modular Partition System is a structural component.
These factors, however, do not outweigh the factors
supporting the conclusion that the Modular Partition
System is not a structural component.

Example 8. Solar energy site. (i) REIT H owns a
solar energy site, among the components of which
are land, photovoltaic modules (PV Modules),
mounts and an exit wire. REIT H enters into a
long-term lease with a tenant for the solar energy
site. REIT H neither operates the solar energy site
nor provides services to its tenant. The mounts sup-
port the PV Modules. The racks are affixed to the
land through foundations made from poured con-
crete. The mounts will remain in place when the
tenant vacates the solar energy site. The PV Modules
convert solar photons into electric energy (electric-
ity). The exit wire is buried underground, is con-
nected to equipment that is in turn connected to the
PV Modules, and transmits the electricity produced
by the PV Modules to an electrical power grid,
through which the electricity is distributed for sale to
third parties.

(ii) REIT H's PV Modules, mounts, and exit wire
are each separately identifiable items. Separation
from a mount does not affect the ability of a PV
Module to convert photons to electricity. Separation
from the equipment to which it is attached does not
affect the ability of the exit wire to transmit electric-
ity to the electrical power grid. The types of PV
Modules and exit wire that REIT H owns are each
customarily sold or acquired as single units. Re-
moval of the PV Modules from the mounts that
support them does not damage the function of the
mounts as support structures and removal is not

costly. The PV Modules serve the active function of
converting photons to electricity. Disconnecting the
exit wire from the equipment to which it is attached
does not damage the function of that equipment, and
the disconnection is not costly. The PV Modules,
mounts, and exit wire are each distinct assets within
the meaning of paragraph (e) of this section.

(iii) The land is real property as defined in para-
graph (c) of this section.

(iv) The mounts are designed and constructed to
remain in place indefinitely, and they have a passive
function of supporting the PV Modules. The mounts
are not listed in paragraph (d)(2)(iii)(B) of this sec-
tion, and, therefore, the mounts are assets that must
be analyzed to determine whether they are inherently
permanent structures using the factors provided in
paragraph (d)(2)(iv) of this section. The mounts-

(A) Are permanently affixed to the land through
the concrete foundations or molded concrete anchors
(which are part of the mounts);

(B) Are not designed to be removed and are
designed to remain in place indefinitely;

(D) Will remain affixed to the land after the
tenant vacates the premises and will remain affixed
to the land indefinitely; and

(E) Would require significant time and expense
to move.

(v) The factors described in this paragraph (g)
Example 8 (iv)(A) through (E) all support the con-
clusion that the mounts are inherently permanent
structures within the meaning of paragraph (d)(2) of
this section and, therefore, are real property.

(vi) The PV Modules convert solar photons into
electricity that is transmitted through an electrical
power grid for sale to third parties. The conversion is
an active function. Thus, the PV Modules are items
of machinery or equipment and therefore are not
inherently permanent structures within the meaning
of paragraph (d)(2) of this section and, so, are not
real property. The PV Modules do not serve the
mounts in their passive function of providing sup-
port; instead, the PV Modules produce electricity for
sale to third parties, which is income other than
consideration for the use or occupancy of space.
Thus, the PV Modules are not structural components
of REIT H's mounts within the meaning of para-
graph (d)(3) of this section and, therefore, are not
real property.

(vii) The exit wire is buried under the ground and
transmits the electricity produced by the PV Mod-
ules to the electrical power grid. The exit wire was
installed during construction of the solar energy site
and is designed to remain permanently in place. The
exit wire is permanently affixed and is a transmission
line, which is listed as an inherently permanent struc-
ture in paragraph (d)(2)(iii)(B) of this section. There-
fore, the exit wire is real property.

Example 9. Solar-powered building. (i) REIT I
owns a solar energy site similar to that described in
Example 8, except that REIT I's solar energy site
assets (Solar Energy Site Assets) are mounted on
land adjacent to an office building owned by REIT I.
REIT I leases the office building and the solar energy
site to a single tenant. REIT I does not operate the
office building or the solar energy site and does not
provide services to its tenant. Although the tenant
occasionally transfers excess electricity produced by

the Solar Energy Site Assets to a utility company, the
Solar Energy Site Assets are designed and intended
to produce electricity only to serve the office build-
ing. The size and specifications of the Solar Energy
Site Assets were designed to be appropriate to serve
only the electricity needs of the office building.
Although the Solar Energy Site Assets were not
installed during construction of the office building,
no facts indicate either that the Solar Energy Site
Assets will not remain in place indefinitely or that
they may be removed if the tenant vacates the prem-
ises.

(ii) With the exception of the occasional transfers
of excess electricity to a utility company, the Solar
Energy Site Assets serve the office building to which
they are adjacent, and, therefore, the Solar Energy
Site Assets are analyzed to determine whether they
are a structural component using the factors provided
in paragraph (d)(3)(iii) of this section. The Solar
Energy Site Assets-

(A) Are expensive and time consuming to install
and remove;

(B) Were designed with the size and specifica-
tions needed to serve only the office building;

(D) Serve a utility-like function with respect to
the office building;

(E) Serve the office building in its passive func-
tions of containing, sheltering, and protecting the
tenant and the tenant's assets;

(F) Produce income from consideration for the
use or occupancy of space within the office building;

(G) Were not installed during construction of the
office building; and

(H) Will remain in place when the tenant vacates
the premises.

(iii) The factors described in this paragraph (g)
Example 9 (ii)(A) through (C) (in part), (ii)(D)
through (F), and (ii)(H) all support the conclusion
that the Solar Energy Site Assets are a structural
component of REIT I's office building within the
meaning of paragraph (d)(3) of this section and,
therefore, are real property. The factors described in
this paragraph (g) Example 9 (ii)(C) (in part) and
(ii)(G) would support a conclusion that the Solar
Energy Site Assets are not a structural component,
but these factors do not outweigh the factors sup-
porting the conclusion that the Solar Energy Site
Assets are a structural component.

(iv) The result in this Example 9 would not
change if, instead of the Solar Energy Site Assets,
solar shingles were used as the roof of REIT I's
office building. Solar shingles are roofing shingles
like those commonly used for residential housing,
except that they contain built-in PV modules. The
solar shingle installation was specifically designed
and constructed to serve only the needs of REIT I's
office building, and the solar shingles were installed
as a structural component to provide solar energy to
REIT I's office building (although REIT I's tenant
occasionally transfers excess electricity produced by
the solar shingles to a utility company). The analysis
of the application of the factors provided in para-
graph (d)(3)(ii) of this section would be similar to
the analysis of the application of the factors to the
Solar Energy Site Assets in this paragraph (g) Ex-
ample 9 (ii) and (iii).

Example 10. Pipeline transmission system. (i)
REIT J owns a natural gas pipeline transmission
system that provides a conduit to transport natural
gas from unrelated third-party producers and gather-
ing facilities to unrelated third-party distributors and
end users. REIT J enters into a long-term lease with
a tenant for the pipeline transmission system. REIT
J neither operates the pipeline transmission system
nor provides services to its tenant. The pipeline
transmission system is comprised of underground
pipelines, isolation valves and vents, pressure con-
trol and relief valves, meters, and compressors. Al-
though the pipeline transmission system as a whole
serves an active function (transporting natural gas),
one or more distinct assets within the system may
nevertheless be inherently permanent structures that
do not themselves perform active functions. Each of
these distinct assets was installed during construc-
tion of the pipeline transmission system and will
remain in place when the tenant vacates the pipeline
transmission system. Each of these assets was de-
signed to remain permanently in place.

(ii) The pipelines are permanently affixed and are
listed as other inherently permanent structures in
paragraph (d)(2)(iii)(B) of this section. Therefore,
the pipelines are real property.

(iii) Isolation valves and vents are placed at reg-
ular intervals along the pipelines to isolate and evac-
uate sections of the pipelines in case there is need for
a shut-down or maintenance of the pipelines. Pres-
sure control and relief valves are installed at regular
intervals along the pipelines to provide overpressure
protection. The isolation valves and vents and pres-
sure control and relief valves are not listed in para-
graph (d)(3)(ii) and, therefore, must be analyzed to
determine whether they are structural components
using the factors provided in paragraph (d)(3)(iii) of
this section. The isolation valves and vents and pres-
sure control and relief valves-

(A) Are time consuming and expensive to install
and remove from the pipelines;

(B) Are designed specifically for the particular
pipelines for which they are a part;

(D) Do not serve a utility-like function with
respect to the pipelines;

(E) Serve the pipelines in their passive function
of providing a conduit for natural gas;

(F) Produce income only from consideration for
the use or occupancy of space within the pipelines;

(G) Were installed during construction of the
pipelines; and

(H) Will remain in place when the tenant vacates
the premises.

(iv) The factors described in this paragraph (g)
Example 10 (iii)(A) through (C) and (iii)(E) through
(H) support the conclusion that the isolation valves

and vents and pressure control and relief valves are
structural components of REIT J's pipelines within
the meaning of paragraph (d)(3) of this section and,
therefore, are real property. The factor described in
this paragraph (g) Example 10 (iii)(D) would support
a conclusion that the isolation valves and vents and
pressure control and relief valves are not structural
components, but this factor does not outweigh the
factors that support the conclusion that the isolation
valves and vents and pressure control and relief
valves are structural components.

(v) Meters are used to measure the natural gas
passing into or out of the pipeline transmission sys-
tem for purposes of determining the end users' con-
sumption. Over long distances, pressure is lost due to
friction in the pipeline transmission system. Com-
pressors are required to add pressure to transport
natural gas through the entirety of the pipeline trans-
mission system. The meters and compressors do not
serve the pipelines in their passive function of pro-
viding a conduit for the natural gas, and are used in
connection with the production of income from the
sale and transportation of natural gas, rather than as
consideration for the use or occupancy of space
within the pipelines. The meters and compressors are
not structural components within the meaning of
paragraph (d)(3) of this section and, therefore, are
not real property.

Example 11. Above-market lease. REIT K ac-
quires an office building from an unrelated third
party subject to a long-term lease with a single tenant
under which the tenant pays above-market rents. The
above-market lease is an intangible asset under
GAAP. Seventy percent of the value of the above-
market lease asset is attributable to income from the
long-term lease that qualifies as rents from real prop-
erty, as defined in section 856(d)(1). The remaining
thirty percent of the value of the above-market lease
asset is attributable to income from the long-term
lease that does not qualify as rents from real prop-
erty. The portion of the value of the above-market
lease asset that is attributable to rents from real
property (here, seventy percent) derives its value
from real property, is inseparable from that real
property, does not produce or contribute to the pro-
duction of income other than consideration for the
use or occupancy of space, and, therefore, is an
interest in real property under section 856(c)(5)(C)
and a real estate asset under section 856(c)(5)(B).
The remaining portion of the above-market lease
asset does not derive its value from real property
and, therefore, is not a real estate asset.

Example 12. Land use permit. REIT L receives a
special use permit from the government to place
a cell tower on Federal Government land that abuts
a federal highway. Government regulations provide
that the permit is not a lease of the land, but is a
permit to use the land for a cell tower. Under the

permit, the government reserves the right to cancel
the permit and compensate REIT L if the site is
needed for a higher public purpose. REIT L leases
space on the tower to various cell service providers.
Each cell service provider installs its equipment on a
designated space on REIT L's cell tower. The permit
does not produce, or contribute to the production of,
any income other than REIT L's receipt of payments
from the cell service providers in consideration for
their being allowed to use space on the tower. The
permit is in the nature of a leasehold that allows
REIT L to place a cell tower in a specific location on
government land. Therefore, the permit is an interest
in real property.

Example 13. License to operate a business. REIT
M owns a building and receives a license from State
to operate a casino in the building. The license
applies only to REIT M's building and cannot be
transferred to another location. REIT M's building is
an inherently permanent structure under paragraph
(d)(2)(i) of this section and, therefore, is real prop-
erty. However, REIT M's license to operate a casino
is not a right for the use, enjoyment, or occupation of
REIT M's building but is rather a license to engage
in the business of operating a casino in the building.
Therefore, the casino license is not real property.

(h) Effective/applicability date. The
rules of this section apply for taxable years
beginning after August 31, 2016. For pur-
poses of applying the first sentence of the
flush language of section 856(c)(4) to a
quarter in a taxable year that begins after
August 31, 2016, the rules of this section
apply in determining whether the taxpayer
met the requirements of section 856(c)(4) at
the close of prior quarters. Taxpayers may
rely on this section for quarters that end
before the applicability date.

John Dalrymple,
Deputy Commissioner for
Services and Enforcement.

Approved: August 8, 2016

Mark J. Mazur,
Assistant Secretary of
the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on August 30,
2016, 8:45 a.m., and published in the issue of the Federal
Register for August 31, 2016, 81 F.R. 59849)

# Part III. Administrative, Procedural, and Miscellaneous

## Credit for Carbon Dioxide Sequestration 2016 Section 45Q Inflation Adjustment Factor

## Notice 2016-53

### SECTION 1. PURPOSE

This notice publishes the inflation ad-
justment factor for the credit for carbon
dioxide (CO2) sequestration under § 45Q
of the Internal Revenue Code (§ 45Q
credit) for calendar year 2016. The infla-
tion adjustment factor is used to determine
the amount of the credit allowable under
§ 45Q. This notice also publishes the ag-
gregate amount of qualified CO2 taken
into account for purposes of § 45Q.

## SECTION 2. BACKGROUND

Section 45Q(a)(1) allows a credit of
$20 per metric ton of qualified CO2 that is
captured by the taxpayer at a qualified
facility, disposed of by the taxpayer in
secure geological storage, and not used by
the taxpayer as a tertiary injectant. Section
45Q(a)(2) allows a credit of $10 per met-
ric ton of qualified CO2 that is captured by
the taxpayer at a qualified facility, used by
the taxpayer as a tertiary injectant in a
qualified enhanced oil or natural gas re-
covery project, and disposed of by the
taxpayer in secure geological storage.

Section 45Q(b)(1) defines the term
"qualified carbon dioxide" as CO2 cap-
tured from an industrial source that would
otherwise be released into the atmosphere
as industrial emission of greenhouse gas,
and that is measured at the source of cap-
ture and verified at the point of disposal or
injection. Qualified CO2includes the ini-
tial deposit of captured CO2used as a ter-
tiary injectant but does not include
CO2that is re-captured, recycled, or other-
wise re-injected as part of the enhanced
oil and natural gas recovery process.

Section 45Q(c) defines the term "qual-
ified facility" as an industrial facility that
is owned by the taxpayer, where carbon
capture equipment is placed in service,
and where at least 500,000 metric tons of
CO2 is captured during the taxable year.

Section 45Q(d)(2) provides that the
Secretary, in consultation with the Admin-
istrator of the Environmental Protection
Agency (EPA), the Secretary of Energy,
and the Secretary of the Interior, shall
establish regulations for determining ade-
quate security measures for the geological
storage of CO2 under § 45Q(a)(1)(B) or
(a)(2)(C) such that the CO2 does not es-
cape into the atmosphere. See section 5 of
Notice 2009-83, 2009-2 C.B. 588, for
procedures regarding secure geological
storage.

Section 45Q(d)(5) allows the § 45Q
credit to the person that captures and
physically or contractually ensures the
disposal of or the use as a tertiary injectant
of the qualified CO2.

Under § 45Q(d)(7), for taxable years
beginning in a calendar year after 2009,
the dollar amount contained in § 45Q(a)
must be adjusted for inflation by multiply-
ing such dollar amount by the inflation
adjustment factor for such calendar year
determined under § 43(b)(3)(B), deter-
mined by substituting "2008" for "1990."

Section 43(b)(3)(B) defines the term
"inflation adjustment factor" as, with re-
spect to any calendar year, a fraction the
numerator of which is the GNP implicit
price deflator for the preceding calendar
year and the denominator of which is the
GNP implicit price deflator for 1990. For
purposes of § 45Q(d)(7), with respect to
2016 calendar year, the inflation adjust-
ment factor is a fraction the numerator of
which is the GNP implicit price deflator
for 2015 (109.868) and the denominator
of which is the GNP implicit price deflator
for 2008 (99.239).

Section 45Q(e) provides that the § 45Q
credit will apply with respect to qualified

CO2 before the end of the calendar year in
which the Secretary, in consultation with
the EPA, certifies that 75,000,000 metric
tons of qualified CO2have been taken into
account in accordance with § 45Q(a).

## SECTION 3. INFLATION ADJUSTMENT FACTOR

The inflation adjustment factor for cal-
endar year 2016 is 1.1071. The § 45Q
credit for calendar year 2016 is $22.14 per
metric ton of qualified CO2 under
§ 45Q(a)(1) and $11.07 per metric ton of
qualified CO2 under § 45Q(a)(2).

### SECTION 4. TAX CREDIT UTILIZATION

Section 6 of Notice 2009-83 requires
taxpayers to file annual reports that pro-
vide (among other information) the
amounts (in metric tons) of qualified CO2
for the taxable year that has been taken
into account for purposes of claiming the
§ 45Q credit. The annual reports must be
filed with the Service not later than the
last day of the second calendar month
following the month during which the tax
return on which the § 45Q credit is
claimed was due (including extensions).

Based on the annual reports filed with
the Service as of September 26, 2016, the
aggregate amount of qualified CO2taken
into account for purposes of § 45Q is
44,590,130 metric tons.

## SECTION 5. DRAFTING INFORMATION

The principal author of this notice is
Jennifer C. Bernardini of the Office of
Associate Chief Counsel (Passthroughs &
Special Industries). For further informa-
tion regarding this notice contact Jennifer
C. Bernardini on (202) 317-6853 (not a
toll-free number).

## Part IV. Items of General Interest

Announcement of
Certification Resulting from
the 2012-2013 Phase III
Allocation Round of the
Qualifying Advanced Coal
Project Program

### Announcement 2016-33

This announcement discloses the certi-
fication resulting from the 2012-2013
Phase III allocation round of the qualify-
ing advanced coal project program pro-
vided by § 48A of the Internal Revenue
Code.

### SECTION 1. QUALIFYING ADVANCED COAL PROJECT PROGRAM

Pursuant to § 48A(d)(4), on August 13,
2012, the Internal Revenue Service (the
"Service") published Notice 2012-51,
2012-2 C.B. 150 (the "Notice") to estab-
lish the § 48A Phase III qualifying ad-
vanced coal project program (the "Phase
III program") to allocate § 48A credits
(the "Phase III credits").

The Notice provides that the credit for
a taxable year under the Phase III program
is an amount equal to 30 percent of the
qualified investment for that taxable year
in a qualifying advanced coal project that
uses integrated gasification combined cy-
cle technology or other advanced coal-
based generation technology. To receive
an allocation of the Phase III credits, a
qualifying advanced coal project must in-

clude equipment that separates and se-
questers at least 70 percent of such proj-
ect's total carbon dioxide emissions.

Section 48A(d)(5) provides that the
Secretary shall, upon making a certifica-
tion under § § 48A(d) or 48B(d), publicly
disclose the identity of the applicant and
the amount of the credit certified with
respect to such applicant. Section 10.01 of
the Notice further provides that the Ser-
vice intends to publish the results of the
Phase III allocation round, and disclose
the following information in the event the
Phase III credit is allocated to the taxpay-
er's project: (a) the name of the taxpayer
and (b) the amount of the Phase III credit
allocated to the project.

Accordingly, the certification resulting
from the 2012-2013 Phase III allocation
round of the qualifying advanced coal
project program provided by § 48A is as
follows:

Program

Taxpayer

Amount of Credit Certified

Phase III

STCE Holdings, LLC

$324,000,000

#### SECTION 2. DRAFTING INFORMATION

The principal author of this announce-
ment is Jennifer C. Bernardini of the Of-
fice of Associate Chief Counsel (Pass-
throughs & Special Industries). For
further information regarding this an-
nouncement, contact Ms. Bernardini at
(202) 317-5118 (not a toll-free number).

## Announcement of the Results of the Phase III Allocation Round of the Qualifying Gasification Project Program

### Announcement 2016-34

This announcement discloses the re-
sults of the Phase III allocation round un-

der the qualifying gasification project pro-
gram of § 48B of the Internal Revenue
Code. This announcement also serves as
notice to applicants that no additional al-
location rounds will be conducted under
the qualifying gasification project pro-
gram.

## SECTION 1. QUALIFYING GASIFICATION PROJECT PROGRAM

On December 29, 2014, the Internal
Revenue Service ("Service") published
Notice 2014-81, 2014-53 I.R.B. 1001
("the Notice"), to announce the beginning
of the § 48B Phase III allocation round
under the qualifying gasification project
program (the "Phase III program").

The Notice provides that the credit for
a taxable year under the Phase III program
is an amount equal to 20 percent of the
qualified investment (as defined in
§ 48B(b)) for that taxable year in qualify-

ing gasification projects (as defined in
§ 48B(c)(1)) for which the credit is allo-
cated under § 48B(d)(1)(A).

Section 48A(d)(5) provides that the
Secretary shall, upon making a certifica-
tion under § 48B(d), publicly disclose the
identity of the applicant and the amount of
the credit certified with respect to such
applicant. Section 9.01 of the Notice fur-
ther provides that the Service intends to
publish the results of Phase III allocation
round, and disclose the following return
information in the event the Phase III
credit is allocated to the taxpayer's proj-
ect: (a) the name of the taxpayer and (b)
the amount of the Phase III credit allo-
cated to the project.

Accordingly, the results of the Phase
III allocation round of the qualifying gas-
ification program provided by § 48B are
as follows:

Program

Taxpayer

Credit Allocated

Total Credit Allocated

Phase III

Clean Energy Resources, LLC

$130,000,000

Lake Charles Resources, LLC

$130,000,000

$260,000,000

Additionally, § 48B(d)(2) provides that
certificates of eligibility for credit award-
ees may be issued under the § 48B pro-
gram only during the 10-year period be-
ginning on October 1, 2005. As a result,
the Service may only reallocate as Phase
III credits any available § 48B credits
prior to October 1, 2015. Accordingly, the
Service will not conduct additional allo-
cations under Phase III of the qualifying
gasification program.

## SECTION 2. DRAFTING INFORMATION

The principal author of this announce-
ment is Jennifer C. Bernardini of the Of-
fice of Associate Chief Counsel (Pass-
throughs & Special Industries). For
further information regarding this an-
nouncement contact Jennifer C. Bernar-
dini at (202) 317-5118 (not a toll-free
number).

## Section 7428(c) Validation of Certain Contributions Made During Pendency of Declaratory Judgment Proceedings

### Announcement 2016-35

This announcement serves notice to
potential donors that the organization
listed below has recently filed a timely
declaratory judgment suit under section
7428 of the Code, challenging revocation
of its status as an eligible donee under
section 170(c)(2).

Protection under section 7428(c) of the
Code begins on the date that the notice of
revocation is published in the Internal
Revenue Bulletin and ends on the date on
which a court first determines that an or-
ganization is not described in section

170(c)(2), as more particularly set forth in
section 7428(c)(1).

In the case of individual contributors, the
maximum amount of contributions pro-
tected during this period is limited to
$1,000.00, with a husband and wife being
treated as one contributor. This protection is
not extended to any individual who was
responsible, in whole or in part, for the acts
or omissions of the organization that were
the basis for the revocation. This protection
also applies (but without limitation as to
amount) to organizations described in sec-
tion 170(c)(2) which are exempt from tax
under section 501(a). If the organization ul-
timately prevails in its declaratory judgment
suit, deductibility of contributions would be
subject to the normal limitations set forth
under section 170.

Name of Organization

Date Suit Filed

Effective Date of Revocation

Location

Faith's Hope Foundation

8/26/2016

7/1/2010

Fullerton, CA

Modest Needs Foundation

4/13/2016

1/1/2011

New York NY

## Notice of Disposition of Declaratory Judgment Proceedings under Section 7428

### Announcement 2016-36

This announcement serves notice to
donors that on February 1, 2016, the
United States Tax Court entered a stipu-
lated decision that, effective January 15,
2016, the organization listed below is not
qualified as an organization described in
section 501(c)(3), is not exempt from tax-
ation under section 501(a), and is not an

organization described in section
170(c)(2).

Foundation for Harmony and Happi-
ness
Santa Barbara, CA

Notice of Disposition of
Declaratory Judgment
Proceedings under Section
7428

Announcement 2016-37

This announcement serves notice to
donors that on April 21, 2016, the United

States Tax Court entered a stipulated de-
cision that, effective August 21, 2014, the
organization listed below is not qualified
as an organization described in section
501(c)(3) and is not exempt from taxation
under section 501(a).

America Housing Foundation
Amarillo, TX

# Definition of Terms

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

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

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

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

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

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

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

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

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

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

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

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

# Abbreviations

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

A-Individual.

Acq .- Acquiescence.

B-Individual.

BE-Beneficiary.

F.R .- Federal Register.

FUTA-Federal Unemployment Tax Act.

FX-Foreign corporation.

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

GE-Grantee.

TFE-Transferee.

TFR-Transferor.

CI-City.

GR-Grantor.

IC-Insurance Company.

TP-Taxpayer.

Ct.D .- Court Decision.

I.R.B .- Internal Revenue Bulletin.

TR-Trust.

CY-County.

LE-Lessee.

TT-Trustee.

D-Decedent.

LP-Limited Partner.

DC-Dummy Corporation.

LR-Lessor.

M-Minor.

Nonacq .- Nonacquiescence.

O Organization.

DR-Donor.

P-Parent Corporation.

PHC-Personal Holding Company.

PO-Possession of the U.S.

PR-Partner.

PRS-Partnership.

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

REIT-Real Estate Investment Trust.

Rev. Proc .- Revenue Procedure.

Rev. Rul .- Revenue Ruling.

S-Subsidiary.

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

Stat .- Statutes at Large.

T-Target Corporation.

T.C .- Tax Court.

C-Individual.

T.D .- Treasury Decision.

C.B .- Cumulative Bulletin.

CFR-Code of Federal Regulations.

GP-General Partner.

T.I.R .- Technical Information Release.

U.S.C .- United States Code.

X-Corporation.

DE-Donee.

Del. Order-Delegation Order.

DISC-Domestic International Sales Corporation.

E-Estate.

EE-Employee.

E.O .- Executive Order.

ER-Employer.

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

F-Fiduciary.

FC-Foreign Country.

FICA-Federal Insurance Contributions Act.

FISC-Foreign International Sales Company.

FPH-Foreign Personal Holding Company.

BK-Bank.

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

COOP-Cooperative.

Y-Corporation.

Z-Corporation.

## Numerical Finding List1

Bulletin 2016-27 through 2016-39

### Action on Decision:

2016-01, 2016-16 I.R.B. 580
2016-02, 2016-31 I.R.B. 193

### Announcements:

2016-21, 2016-27 I.R.B. 8
2016-23, 2016-27 I.R.B. 10

2016-24, 2016-30 I.R.B. 170
2016-25, 2016-31 I.R.B. 205
2016-26, 2016-38 I.R.B. 389
2016-27, 2016-33 I.R.B. 238
2016-28, 2016-34 I.R.B. 272
2016-29, 2016-34 I.R.B. 272
2016-30, 2016-37 I.R.B. 355
2016-31, 2016-38 I.R.B. 392
2016-33, 2016-39 I.R.B. 422
2016-34, 2016-39 I.R.B. 422
2016-35, 2016-39 I.R.B. 423
2016-36, 2016-39 I.R.B. 423
2016-37, 2016-39 I.R.B. 423

### Notices:

2016-40, 2016-27 I.R.B. 4

2016-41, 2016-27 I.R.B. 5

2016-42, 2016-29 I.R.B. 67

2016-43, 2016-29 I.R.B. 132
2016-44, 2016-29 I.R.B. 132
2016-45, 2016-29 I.R.B. 135
2016-47, 2016-35 I.R.B. 276
2016-46, 2016-31 I.R.B. 202
2016-48, 2016-33 I.R.B. 235
2016-49, 2016-34 I.R.B. 265
2016-50, 2016-38 I.R.B. 384
2016-51, 2016-37 I.R.B. 344
2016-53, 2016-39 I.R.B. 421

### Proposed Regulations:

REG-101689-16, 2016-30

I.R.B. 170

REG-102516-15, 2016-32

I.R.B. 231

REG-103058-16, 2016-33

I.R.B. 238

REG-105005-16, 2016-38

I.R.B. 393

REG-108792-16, 2016-36

I.R.B. 320

REG-109086-15, 2016-30

I.R.B. 171

REG-123854-12, 2016-28

I.R.B. 15

REG-131418-14, 2016-33

I.R.B. 248

REG-134016-15, 2016-31

I.R.B. 205

REG-147196-07, 2016-29

I.R.B. 32

REG-163113-02, 2016-36

I.R.B. 329

### Revenue Procedures:

2016-37, 2016-29 I.R.B. 136
2016-39, 2016-30 I.R.B. 164

2016-40, 2016-32 I.R.B. 228

## Revenue Procedures :- Continued

2016-41, 2016-30 I.R.B. 165
2016-42, 2016-34 I.R.B. 269
2016-43, 2016-36 I.R.B. 316
2016-44, 2016-36 I.R.B. 316
2016-45, 2016-37 I.R.B. 344
2016-46, 2016-37 I.R.B. 345

2016-47, 2016-37 I.R.B. 346
2016-48, 2016-37 I.R.B. 348

## Revenue Rulings:

2016-17, 2016-27 I.R.B. 1
2016-18, 2016-31 I.R.B. 194
2016-19, 2016-35 I.R.B. 273
2016-20, 2016-36 I.R.B. 279
2016-23, 2016-39 I.R.B. 382
2016-24, 2016-39 I.R.B. 395

## Treasury Decisions:

9773, 2016-29 I.R.B. 56
9774, 2016-30 I.R.B. 151

9775, 2016-30 I.R.B. 159
9776, 2016-32 I.R.B. 222
9777, 2016-36 I.R.B. 282
9778, 2016-31 I.R.B. 196
9779, 2016-33 I.R.B. 233
9780, 2016-38 I.R.B. 357
9781, 2016-35 I.R.B. 274
9782, 2016-36 I.R.B. 301
9783, 2016-39 I.R.B.396
9784, 2016-38 I.R.B. 402
9785, 2016-38 I.R.B. 375

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2016-01 through 2016-26 is in Internal Revenue Bulletin
2016-26, dated June 27, 2016.

## Finding List of Current Actions on Previously Published Items1

Bulletin 2016-27 through 2016-39

Notices:

2009-89
Modified by
Notice 2016-51, 2016-37 I.R.B. 344

2012-54
Obsoleted by
Notice 2016-51, 2016-37 I.R.B. 344

2013-1
Modified by
Notice 2016-41, 2016-27 I.R.B. 5
2013-1
Superseded by
Notice 2016-41, 2016-27 I.R.B. 5

2013-67
Modified by
Notice 2016-51, 2016-37 I.R.B. 344

### Revenue Procedures:

2003-16
Modified by
Rev. Proc. 2016-47, 2016-37 I.R.B. 346

2007-44
Clarified by
Rev. Proc. 2016-37, 2016-29 I.R.B. 136

2007-44
Modified by
Rev. Proc. 2016-37, 2016-29 I.R.B. 136

2007-44
Superseded by
Rev. Proc. 2016-37, 2016-29 I.R.B. 136

2009-33
Modified by
Rev. Proc. 2016-48, 2016-37 I.R.B. 348
2015-36
Modified by
Rev. Proc. 2016-37, 2016-29 I.R.B. 136

2016-3
Modified by
Rev. Proc. 2016-40, 2016-32 I.R.B. 228

2016-3
Modified by
Rev. Proc. 2016-45, 2016-37 I.R.B. 228

## Revenue Procedures :- Continued

2016-29
Modified by
Rev. Proc. 2016-39, 2016-30 I.R.B. 164

Treasury Decisions:

2013-17
Obsoleted by
T.D. 9785 2016-38 I.R.B. 375

2014-12
Modified by
T.D. 9776 2016-32 I.R.B. 222

# Internal Revenue Service Washington, DC 20224

Official Business
Penalty for Private Use, $300

# INTERNAL REVENUE BULLETIN

The Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue
Bulletins are available at www.irs.gov/irb/.

# We Welcome Comments About the Internal Revenue Bulletin

If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we
would be pleased to hear from you. You can email us your suggestions or comments through the IRS Internet Home Page
(www.irs.gov) or write to the Internal Revenue Service, Publishing Division, IRB Publishing Program Desk, 1111 Constitution Ave.
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