Internal Revenue Bulletin 2015-40 (PDF rendition): IRS Notices

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

# INTERNAL REVENUE BULLETIN

4
IRS

Bulletin No. 2015-40
October 5, 2015

## 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

### REG-139483-13, page 475.

The proposed regulations under section 367 primarily narrow
the exception to section 367(a) for property transferred to a
foreign corporation for use in the conduct of an active trade or
business by limiting the exception to only certain classes of
property, and eliminate the exception to section 367(d) for
transfers of foreign goodwill or going concern value. The
regulations also reorganize the regulations under section
367(a) and update cross-references where appropriate.

### Rev. Rul. 2015-21, page 447.

Federal rates; adjusted federal rates; adjusted federal long-
term rate and the long-term exempt rate. For purposes of
sections 382, 642, 1274, 1288, and other sections of the
Code, tables set forth the rates for October 2015.

### Rev. Proc. 2015-43, page 467.

This revenue procedure supplements Rev. Proc. 2015-3,
2015-1 I.R.B. 129, which sets forth areas of the Internal Revenue
Code (Code) on which the Internal Revenue Service will not issue
letter rulings or determination letters (no-rule areas). The revenue
procedure adds to the list of no-rule areas any issue relating to the
qualification, under § 355 and related provisions of the Code, of
certain distributions in which property becomes the property of a
regulated investment company or a real estate investment trust,
the active business is small relative to other assets, or there is a
substantial amount of investment assets.

### Rev. Proc. 2015-48, page 469.

The Tax Increase Prevention Act of 2014 generally extends the
application of § 168(k) 50% bonus depreciation, § 168(k)(4)
"extension property," and § 179(f) real property, for property
placed in service in 2014. This revenue procedure provides
guidance to taxpayers for making certain elections and filing
amended returns to avail themselves of these extenders.

### Notice 2015-59, page 459.

This notice is issued concurrently with Rev. Proc. 2015-43,
page 467, this Bulletin, and announces that the Treasury De-
partment and the Internal Revenue Service (Service) are study-
ing issues under §§ 337(d) and 355 of the Internal Revenue
Code (Code) relating to certain distributions, described in
§ 355 of the Code, in which property becomes the property of
a regulated investment company or a real estate investment
trust, the active business is small relative to other assets, or
there is a substantial amount of investment assets. The notice
describes the transactions that concern the Treasury Depart-
ment and the Service and requests comments concerning
those transactions.

### Notice 2015-64, page 464.

2015 Section 43 Inflation Adjustment: The notice announces
the inflation adjustment factor and phase-out amount for the
enhanced oil recovery credit for taxable years beginning in the
2015 calendar year. The format of the notice is identical to the
format of previously published notices on this issue. The notice
concludes that because the reference price for the 2014
calendar year ($87.39) exceeds $28 multiplied by the inflation
adjustment factor for the 2014 calendar year ($28 multiplied
by 1.6245 = $45.49) by $41.90, the enhanced oil recovery
credit for qualified costs paid or incurred in 2015 is phased out
completely. The notice also contains the previously published
figures for taxable years beginning in the 1991 through 2014
calendar years.

### Notice 2015-65, page 466.

2015 Marginal Production Rates: The notice announces that
under § 613A(c)(6)(C) of the Internal Revenue Code, the appli-
cable percentage for purposes of determining percentage
depletion on marginal properties for calendar year 2015 is 15
percent. The format of the notice is identical to the format of
notices previously published on this issue.

(Continued on the next page)

Finding Lists begin on page ii.

<!-- PageBreak -->

### T.D. 9737, page 449.

This document contains final rules with revisions to examples
that illustrate the controlled group rules applicable to regulated
investment companies (RICs). The revised examples illustrate
how the controlled group rules affect the RIC asset diversifica-
tion tests.

### T.D. 9738, page 453.

Temporary regulations clarify the coordination of transfer pric-
ing rules with other Internal Revenue Code provisions.

## ADMINISTRATIVE

### Notice 2015-63, page 461.

Optional special per diem rates. This notice provides the
2015-2016 special per diem rates for taxpayers to use in
substantiating the amount of ordinary and necessary business
expenses incurred while traveling away from home. The notice
includes (1) the special transportation industry rate, (2) the rate
for the incidental expenses only deduction, and (3) the rates
and list of high-cost localities for the high-low substantiation
method.

<!-- PageBreak -->

## 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.

<!-- PageFooter="October 5, 2015" -->
<!-- PageFooter="Bulletin No. 2015-40" -->
<!-- PageBreak -->

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

Section 1274 .-
Determination of Issue
Price in the Case of
Certain Debt Instruments
Issued for Property

(Also Sections 42, 280G, 382, 412, 467, 468, 482,
483, 642, 807, 846, 1288, 7520, 7872.)

### Rev. Rul. 2015-21

This revenue ruling provides various
prescribed rates for federal income tax

purposes for October 2015 (the current
month). Table 1 contains the short-term,
mid-term, and long-term applicable fed-
eral rates (AFR) for the current month for
purposes of section 1274(d) of the Internal
Revenue Code. Table 2 contains the short-
term, mid-term, and long-term adjusted
applicable federal rates (adjusted AFR)
for the current month for purposes of sec-
tion 1288(b). Table 3 sets forth the ad-
justed federal long-term rate and the long-
term tax-exempt rate described in section
382(f). Table 4 contains the appropriate
percentages for determining the low-

income housing credit described in sec-
tion 42(b)(1) for buildings placed in ser-
vice during the current month. However,
under section 42(b)(2), the applicable per-
centage for non-federally subsidized new
buildings placed in service after July 30,
2008, with respect to housing credit dollar
amount allocations made before January
1, 2015, shall not be less than 9%. Finally,
Table 5 contains the federal rate for de-
termining the present value of an annuity,
an interest for life or for a term of years, or
a remainder or a reversionary interest for
purposes of section 7520.

REV. RUL. 2015-21 TABLE 1 Applicable Federal Rates (AFR) for October 2015

Period for Compounding

Annual

Semiannual Short-term

Quarterly

Monthly

AFR

.55%

.55%

.55%

.55%

110% AFR

.61%

.61%

.61%

.61%

120% AFR

.66%

.66%

.66%

.66%

130% AFR

.72%

.72%

.72%

.72%

Mid-term

AFR

1.67%

1.66%

1.66%

1.65%

110% AFR

1.84%

1.83%

1.83%

1.82%

120% AFR

2.00%

1.99%

1.99%

1.98%

130% AFR

2.17%

2.16%

2.15%

2.15%

150% AFR

2.51%

2.49%

2.48%

2.48%

175% AFR

2.93%

2.91%

2.90%

2.89%

Long-term

AFR

2.58%

2.56%

2.55%

2.55%

110% AFR

2.84%

2.82%

2.81%

2.80%

120% AFR

3.09%

3.07%

3.06%

3.05%

130% AFR

3.36%

3.33%

3.32%

3.31%

REV. RUL. 2015-21 TABLE 2 Adjusted AFR for October 2015

Short-term adjusted AFR

Period for Compounding

Annual

Semiannual

Quarterly

Monthly

.42%

.42%

.42%

.42%

Mid-term adjusted AFR

1.58%

1.57%

1.57%

1.56%

Long-term adjusted AFR

2.58%

2.56%

2.55%

2.55%

<!-- PageFooter="Bulletin No. 2015-40" -->

<!-- PageFooter="October 5, 2015" -->
<!-- PageBreak -->

# REV. RUL. 2015-21 TABLE 3 Rates Under Section 382 for October 2015

## Adjusted federal long-term rate for the current month

2.58%

Long-term tax-exempt rate for ownership changes during the current month (the highest of
the adjusted federal long-term rates for the current month and the prior two months.)

2.82%

# REV. RUL. 2015-21 TABLE 4 Appropriate Percentages Under Section 42(b)(1) for October 2015

Note: Under section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after
July 30, 2008, with respect to housing credit dollar amount allocations made before January 1, 2015 shall not be less than
9%.

Appropriate percentage for the 70% present value low-income housing credit

7.49%

Appropriate percentage for the 30% present value low-income housing credit

3.21%

## REV. RUL. 2015-21 TABLE 5 Rate Under Section 7520 for October 2015

Applicable federal rate for determining the present value of an annuity, an interest for
life or a term of years, or a remainder or reversionary interest

2.0%

### Section 42 .- Low-Income Housing Credit

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of October 2015. See Rev. Rul. 2015-21, page 447.

### Section 280G .- Golden Parachute Payments

Federal short-term, mid-term, and long-term
rates are set forth for the month of October 2015. See
Rev. Rul. 2015-21, page 447.

### Section 382 .- Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change

The adjusted applicable federal long-term rate is
set forth for the month of October 2015. See Rev.
Rul. 2015-21, page 447.

## Section 412 .- Minimum Funding Standards

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of October 2015. See Rev. Rul. 2015-21, page 447.

## Section 467 .- Certain Payments for the Use of Property or Services

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of October 2015. See Rev. Rul. 2015-21, page 447.

## Section 468 .- Special Rules for Mining and Solid Waste Reclamation and Closing Costs

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of October 2015. See Rev. Rul. 2015-21, page 447.

## Section 482 .- Allocation of Income and Deductions Among Taxpayers

Federal short-term, mid-term, and long-term
rates are set forth for the month of October 2015. See
Rev. Rul. 2015-21, page 447.

## Section 483 .- Interest on Certain Deferred Payments

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of October 2015. See Rev. Rul. 2015-21, page 447.

## Section 642 .- Special Rules for Credits and Deductions

Federal short-term, mid-term, and long-term
rates are set forth for the month of October 2015. See
Rev. Rul. 2015-21, page 447.

## Section 807 .- Rules for Certain Reserves

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of October 2015. See Rev. Rul. 2015-21, page 447.

## Section 846 .- Discounted Unpaid Losses Defined

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of October 2015. See Rev. Rul. 2015-21, page 447.

## Section 1288 .- Treatment of Original Issue Discount on Tax-Exempt Obligations

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of October 2015. See Rev. Rul. 2015-21, page 447.

<!-- PageFooter="October 5, 2015" -->

<!-- PageFooter="Bulletin No. 2015-40" -->
<!-- PageBreak -->

# Section 7520 .- Valuation Tables

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of October 2015. See Rev. Rul. 2015-21, page 447.

# Section 7872 .- Treatment of Loans With Below- Market Interest Rates

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of October 2015. See Rev. Rul. 2015-21, page 447.

## T.D. 9737

DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1

## Controlled Group Regulation Examples

AGENCY: Internal Revenue Service (IRS),
Treasury.

ACTION: Final regulations.

SUMMARY: This document contains fi-
nal rules with revisions to examples that
illustrate the controlled group rules appli-
cable to regulated investment companies
(RICs). The revised examples illustrate
how the controlled group rules affect the
RIC asset diversification tests.

DATES: Effective Date: These regula-
tions are effective on September 15, 2015.

Applicability Dates: For dates of appli-
cability, see §§ 1.851-3(b), 1.851-5(b).

FOR FURTHER INFORMATION

CONTACT: Julanne Allen or Susan
Baker of the Office of Associate Chief
Counsel (Financial Institutions and Prod-
ucts) at (202) 317-6945 (Julanne Allen) or
(202) 317-7053 (Susan Baker) (not toll-
free numbers).

SUPPLEMENTARY INFORMATION:

## Background

This document contains amendments
to the Income Tax Regulations (26 CFR,

part 1) relating to the application of the
controlled group rules under section
851(c) to RICs.

To qualify as a RIC, a taxpayer must
meet asset diversification tests pursuant to
which, at the close of each quarter of the
RIC's taxable year, not more than 25 per-
cent of the value of the taxpayer's total
assets may be invested in (i) the securities
(other than Government securities or the
securities of other RICs) of any one is-
suer; (ii) the securities (other than the se-
curities of other RICs) of two or more
issuers that the taxpayer controls and that
are determined, under regulations pre-
scribed by the Secretary, to be engaged in
the same or similar trades or businesses or
related trades or businesses; or (iii) the
securities of one or more qualified pub-
licly traded partnerships (as defined in
section 851(h)) (the 25 percent tests). See
section 851(b)(3)(B).

Section 851(c) provides special rules
applicable to the asset diversification re-
quirements of section 851(b)(3), including
the 25 percent tests. The controlled group
rules in section 851(c)(1) provide that,
when ascertaining the value of a taxpay-
er's investment in the securities of an is-
suer for purposes of determining whether
the 25 percent tests have been met, the
taxpayer's proper proportion of any in-
vestment in the securities of such issuer
that are held by a member of the taxpay-
er's "controlled group" must be aggre-
gated with the taxpayer's investment in
such issuer, as determined under regula-
tions.

Section 851(c)(3) defines a controlled
group as one or more chains of corpora-
tions connected through stock ownership
with the taxpayer if (i) 20 percent or more
of the total combined voting power of all
classes of stock entitled to vote of each of
the corporations (except the taxpayer) is
owned directly by one or more of the
other corporations, and (ii) the taxpayer
owns directly at least 20 percent or more
of the total combined voting power of all
classes of stock entitled to vote of at least
one of the other corporations.

On August 2, 2013, the Treasury De-
partment and the IRS published in the
Federal Register a notice of proposed
rulemaking (REG-114122-12 at 78 FR
46851) (NPRM). The proposed regula-
tions would revise certain examples in

§ 1.851-5 to clarify that a RIC and its
controlled subsidiary are a controlled
group even if the group consists of only
that RIC and its subsidiary.

No public hearing was requested or
held. Written comments responding to the
NPRM were received. The written com-
ments are available for public inspection
at http://www.regulations.gov or upon re-
quest. After consideration of all the com-
ments, these final regulations adopt the
provisions of the proposed regulations
with certain clarifications. The comments
and clarifications are discussed in this
preamble.

## Summary of Comments and Explanation of Revisions

Comments received in response to the
NPRM's request for comments addressed
three general categories of issues: (1) ap-
plication of the proposed changes to a
parent RIC investing in the stock of sub-
sidiary RICs (a Fund of Funds structure);
(2) application of the proposed changes to
a RIC's indirect investment in qualified
publicly traded partnerships, as defined in
section 851(h) (QPTPs); and (3) clarifica-
tion of existing regulatory language im-
plementing the controlled group rules of
section 851(c).

### 1. Fund of Funds

changes to the examples in § 1.851-5
apply to structures in which the invest-
ments of a RIC (Upper RIC) include stock
of one or more subsidiary RICs (Lower
RICs). Commenters noted that there may
be uncertainty in determining whether an
Upper RIC satisfies its 25 percent tests
when what might otherwise be a quarter-
end violation by the Lower RIC is saved
from being a violation by one or both of
the relief provisions in section 851(d)(1)
(sometimes called the "market value ex-
ception" and the "30-day cure provision")
or when the Upper RIC and a Lower RIC
have different quarter end testing dates.

To resolve this uncertainty, comment-
ers urged the Treasury Department and
the IRS either to provide a safe harbor for
Fund of Funds structures or to exempt
these structures from the controlled group
rules. Commenters noted that securities of
RICs are listed as qualifying assets for

<!-- PageFooter="Bulletin No. 2015-40" -->

<!-- PageFooter="October 5, 2015" -->
<!-- PageBreak -->

purposes of the "good asset" 50 percent
test of section 851(b)(3)(A) and are cor-
respondingly excluded from the catego-
ries of assets listed in the 25 percent tests
set forth in sections 851(b)(3)(B)(i) and
(ii). In response to these requests, the
Treasury Department and the IRS are is-
suing Revenue Procedure 2015-45
(2015-39 IRB dated September 28, 2015),
which describes conditions under which
the IRS will treat an Upper RIC that in-
vests in one or more Lower RICs as sat-
isfying the 25 percent tests and provides
procedures to lessen the burden of dem-
onstrating compliance with the 25 percent
tests, applying the market value exception
and the 30-day cure provision, and dealing
with different quarter-end testing dates.

### 2. QPTPs

Comments were received both on the
revised language in Example 1 and on
proposed Example 7. Example 7 illustrates
the application of the controlled group
rules to a RIC's indirect investment in
securities of QPTPs.

In 2004, Congress enacted section
851(b)(2)(B), which facilitated investment
by RICs in equity interests of QPTPs by
providing that net income from an interest in
a QPTP would be treated as qualifying in-
come under the RIC income test set forth in
section 851(b)(2) without regard to the char-
acter of the income earned by the QPTP.
Congress provided for this new ability of
RICs to invest in QPTPs to improve QPTP
access to U.S. capital markets.1

At the same time, however, Congress
enacted section 851(b)(3)(B)(iii), which
limits a RIC's investment in securities of
one or more QPTPs to not more than 25
percent of the value of the RIC's assets. The
Ways and Means Committee report explained
the rationale for this limitation by stating:

[T]he Committee bill requires that
present-law limitations on owner-
ship and composition of assets of
mutual funds apply to any invest-
ment in a publicly traded partner-
ship by a mutual fund. The Commit-
tee believes that these limitations
will serve to limit the use of mutual

funds as conduits for avoidance of
unrelated business income tax or
withholding rules [for effectively
connected income] that would oth-
erwise apply with respect to pub-
licly traded partnership income.

H.R. Rep. No. 108-548, pt. 1 at 152
(2004). Commenters relied on this legis-
lative history in support of their position
that the section 851(b)(3)(B)(iii) QPTP
test (which focuses on a RIC's holdings of
securities of a category of issuers) is fun-
damentally different from the section
851(b)(3)(B)(i) and (ii) tests (which focus
on a RIC's holdings of securities of par-
ticular issuers). These commenters con-
tended that an interest in a QPTP should
not be subject to the clarified controlled
group rules in the NPRM when the inter-
est in the QPTP is held by a corporation
that is not a RIC.

The Treasury Department and the IRS
do not find this argument sufficiently per-
suasive to overcome the plain language of
section 851(c) regarding the application of
the controlled group rules. Pursuant to its
introductory language, section 851(c) ap-
plies generally "[f]or purposes of subsec-
tion 851(b)(3)," and pursuant to section
851(c)(1), the look-through rule for con-
trolled group members applies specifically
"for purposes of subparagraph (B)" of
section 851(b)(3), in each case without
distinguishing between the various 25 per-
cent tests. Moreover, the Treasury Depart-
ment and the IRS note that Congress, in
the same legislation in which it enacted
section 851(b)(3)(B)(iii), had the opportu-
nity to amend these rules in the manner
urged by the commenters. In that legisla-
tion, Congress made other changes to con-
form section 851(c) to the changes relat-
ing to QPTPs by redesignating former
section 851(c)(5) as section 851(c)(6) and
adding a new section 851(c)(5), which
defines the term "outstanding voting secu-
rities of such issuer" to include equity
securities of QPTPs. Congress made no
changes, however, to limit the application
of the section 851(c) controlled group
rules to solely the 25 percent tests under
section 851(b)(3)(i) and (ii).

Thus, the Treasury Department and the
IRS believe, consistent with the statutory
language, that the controlled group rules
should apply to section 851(b)(3)(B)(iii) be-
cause (1) Congress specifically provided
that a RIC's investment in QPTP securities
should be limited to 25 percent of the RIC's
total asset value; (2) the controlled group
rules of section 851(c) by their terms apply
to all of section 851(b)(3), including section
851(b)(3)(B)(iii); and (3) Congress did not
carve out section 851(b)(3)(B)(iii) when it
updated section 851(c).

### 3. Clarifying regulatory language

Some practitioners have interpreted
section 851(c)(3) to require the presence
of at least two levels of controlled entities
for a controlled group to exist and have
relied on certain of the examples in the
existing regulations to support this inter-
pretation. These final regulations clarify,
through revisions to the existing exam-
ples, that as few as two corporations are
enough to constitute a controlled group if
the ownership requirements of section
851(c)(3) are met.

The Treasury Department and the IRS
believe that the interpretation of the con-
trolled group rules reflected in these final
regulations is consistent with both the
statutory language of section 851(c)(3)
and the well-established interpretation of
analogous Code provisions. For example,
for purposes of the consolidated return
rules, the IRS has consistently treated a
parent and its directly owned subsidiary as
"affiliated" within the meaning of section
1504(a)(1). Similarly, in limiting certain
tax benefits for affiliated corporations, the
IRS treats a parent and its subsidiary as a
"controlled group" under section 1563,
which uses language similar to section
1504(a). See section 1563(a)(1) and
§ 1.1563-1(a)(2)(ii), Example 1. The in-
terpretation reflected in these final regula-
tions is also consistent with the purpose of
section 851(c)(3), which is to aggregate the
investments of a RIC's related corporations
for purposes of determining whether the
RIC satisfies its 25 percent tests.

1"The Congress understood that . . . [p]ublicly traded partnerships with specified types of income are not treated as corporations, however, for the reason that if the income is from sources
that are commonly considered to be passive investments, then there is less reason to treat the publicly traded partnership as a corporation. The Congress understood that these types of publicly
traded partnerships may have improved access to capital markets if their interests were permitted investments of mutual funds. Therefore, the Act treats publicly traded partnership interests
as permitted investments for mutual funds ('RICs')." Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 108th Congress at 249 (JCS-5-05), May 2005
(footnote omitted).

<!-- PageFooter="October 5, 2015" -->

<!-- PageFooter="Bulletin No. 2015-40" -->
<!-- PageBreak -->

As stated in the preamble to the NPRM,
the Treasury Department and the IRS be-
lieve that the language in the examples in
the existing regulations was intended merely
to simplify the description of certain fact
patterns and not to articulate a legal inter-
pretation that is inconsistent with the statu-
tory language of section 851(c) and the con-
struction of substantially similar language
elsewhere in the Code.

Commenters noted that § 1.851-3
states that "[i]n determining the value of
the taxpayer's investment in the securities
of any one issuer, for the purposes of
subparagraph (B) of section 851(b)[(3)],
there shall be included its proper propor-
tion of the investment of any other corpo-
ration, a member of a controlled group, in
the securities of such issuer" (emphasis
added). Commenters cited the phrase "any
one issuer" in support of the proposition
that the controlled group rules should not
be applied for purposes of section
851(b)(3)(B)(iii), which addresses not the
value of a RIC's direct and indirect hold-
ings of securities of any single issuer but
rather a RIC's aggregate direct and indi-
rect holdings of securities of a category of
issuers (that is, QPTPs). While the Trea-
sury Department and the IRS do not be-
lieve that the use of "any one issuer" in
§ 1.851-3 bears the weight these com-
menters attribute to it, in order to respond
to the comment and more closely align
§ 1.851-3 with the statutory language of
section 851(c)(1), these final regulations
update the language of § 1.851-3 by
changing "any one issuer" to "an issuer."

Commenters similarly maintained that
because section 851(c)(1) refers to use of
the controlled group rules "in ascertaining
the value of the taxpayer's investment in
the securities of an issuer" (emphasis
added), the rules should not apply for pur-
poses of a limitation that applies to hold-
ings of securities in a category of issuers,
such as the section 851(b)(3)(B)(iii) limi-
tation on investment in QPTPs. The Trea-
sury Department and the IRS do not agree
with this reading of the statute. As noted
above, the controlled group rules ex-
pressly apply for purposes of section
851(b)(3)(B) without qualification. The
Treasury Department and the IRS believe
that the more natural reading of the stat-
utory language is that, in assessing com-
pliance with section 851(b)(3), a RIC ap-

plies the controlled group rules to
determine its indirect holdings in each in-
dividual issuer (including each QPTP),
and the RIC then aggregates its direct and
indirect holdings in each individual issuer
for purposes of applying the test in section
851(b)(3)(B)(i); aggregates its direct and
indirect holdings of securities of issuers
engaged in the same or similar trades or
businesses or related trades or businesses
for purposes of applying the test in section
851(b)(3)(B)(ii); and aggregates its direct
and indirect holdings of securities of issu-
ers that are QPTPs for purposes of apply-
ing the test in section 851(b)(3)(B)(iii).

Finally, commenters suggested that op-
erative rules should be set forth in sub-
stantive rules in addition to being demon-
strated in the examples. They urged the
Treasury Department and the IRS to pro-
vide regulatory text setting forth general
rules, with the examples in § 1.851-5
demonstrating the application of those
rules. The Treasury Department and the
IRS believe that the revised examples are
intended to, and do, make sufficiently
clear how the statutory rules are to be
interpreted and applied, and accordingly
no changes are being made in response to
this comment.

## Applicability Date

The final regulations apply to quarters
that begin on or after December 14, 2015.
Under section 851(d)(1), whether a tax-
payer loses status as a RIC in one quarter
may depend on whether the taxpayer sat-
isfied section 851(b)(3) and (c) at the
close of one or more prior quarters. For
purposes of applying the first sentence of
section 851(d)(1) to a quarter that begins
on or after March 14, 2016, these final
regulations apply in determining whether
the taxpayer met the requirements of sec-
tion 851(b)(3) and (c) at the close of prior
quarters.

## 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 has also been determined
that section 553(b) of the Administrative
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 Regula-
tory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Pursuant to section 7805(f)
of the Code, the proposed regulations pre-
ceding these final regulations were submit-
ted to the Chief Counsel for Advocacy of
the Small Business Administration for com-
ment on their impact on small businesses.
No comments were received.

## Drafting Information

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

* * * * *

## List of Subjects in 26 CFR Part 1

Income taxes, Reporting and record
keeping requirements.

## Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is
amended as follows:amended as follows:

# PART 1-INCOME TAXES

Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *

Sections 1.851-3 and 1.851-5 are also
issued under 26 U.S.C. 851(c).

* * * * *

Par. 2. Section 1.851-3 is revised to
read as follows:

§ 1.851-3 Rules applicable to section
851(b)(3).

(a) In general. In determining the value
of the taxpayer's investment in the secu-
rities of an issuer, for purposes of subpara-
graph (B) of section 851(b)(3), there shall
be included its proper proportion of the
investment of any other corporation, a
member of a controlled group, in the se-
curities of such issuer. See Example 4 in
§ 1.851-5. For purposes of §§ 1.851-2,
1.851-4, 1.851-5, and 1.851-6, the terms
"controls," "controlled group," and

<!-- PageFooter="Bulletin No. 2015-40" -->

<!-- PageFooter="October 5, 2015" -->
<!-- PageBreak -->

"value" have the meaning assigned to
them by section 851(c). All other terms
used in these sections have the same
meaning as when used in the Investment
Company Act of 1940 (15 U.S.C., chapter
2D), as amended.

(b) Effective/applicability dates. The
rules of this section apply to quarters that
begin on or after December 14, 2015. For
purposes of applying the first sentence of
section 851(d)(1) to a quarter that begins
on or after March 14, 2016, the rules of
this section apply in determining whether
the taxpayer met the requirements of sec-
tion 851(b)(3) and (c) at the close of prior
quarters.

Par. 3. Section 1.851-5 is revised to
read as follows:

§ 1.851-5 Examples.

(a) Examples. The provisions of section 851 may
be illustrated by the following examples:

Example 1. (i) Investment Company W at the
close of its first quarter of its taxable year has its
assets invested as follows:

Percent

Cash

5

Government securities

10

Securities of regulated investment companies

20

Securities of Corporation A

10

Securities of Corporation B

15

Securities of Corporation C

20

Securities of various corporations (not exceeding 5 percent of its assets in any one company)

20

Total

100

(ii) Investment Company W owns all of the vot-
ing stock of Corporations A and B, 15 percent of the
voting stock of Corporation C, and less than 10
percent of the voting stock of regulated investment
companies and various other corporations. Neither
Corporation A nor Corporation B owns:

(A) 20 percent or more of the voting stock of any
other corporation;

(B) Securities issued by Corporation C; or

(C) Securities issued by any of the regulated
investment companies or various corporations whose
securities are owned by Investment Company W.
Except for Corporation A and Corporation B, none
of the corporations (including the regulated invest-
ment companies) is a member of a controlled group
with Investment Company W.

(iii) Investment Company W meets the require-
ments under section 851(b)(3) at the end of its first
quarter. It complies with subparagraph (A) of section
851(b)(3) because it has 55 percent of its assets
invested as provided in that subparagraph. It com-
plies with subparagraph (B) of section 851(b)(3)
because it does not have more than 25 percent of its
assets invested in the securities of any one issuer, of

two or more issuers that it controls, or of one or more
qualified publicly traded partnerships (as defined in
section 851(h)).

Example 2. (i) Investment Company V at the
close of a particular quarter of the taxable year has
its assets invested as follows:

Percent

Cash

10

Government securities

35

Securities of Corporation A

7

Securities of Corporation B

12

Securities of Corporation C

15

Securities of Corporation D

21

Total

100

(ii) Investment Company V fails to meet the
requirements of subparagraph (A) of section
851(b)(3) since its assets invested in Corporations A,
B, C, and D exceed in each case 5 percent of the
value of the total assets of the company at the close
of the particular quarter.

Example 3. (i) Investment Company X at the
close of a particular quarter of the taxable year has
its assets invested as follows:

Percent

Cash and Government securities

20

Securities of Corporation A

5

Securities of Corporation B

10

Securities of Corporation C

25

Securities of various corporations (not exceeding 5 percent of its assets in any one company)

40

Total

100

(ii) Investment Company X owns more than 20
percent of the voting power of Corporations B and C
and less than 10 percent of the voting power of all of
the other corporations. Corporation B manufactures
radios and Corporation C acts as its distributor and
also distributes radios for other companies. Invest-
ment Company X fails to meet the requirements of
subparagraph (B) of section 851(b)(3) since it has 35
percent of its assets invested in the securities of two
issuers which it controls and which are engaged in
related trades or businesses.

Example 4. (i) Investment Company Y at the
close of a particular quarter of its taxable year has its
assets invested as follows:

Percent

Cash and Government securities

15

Securities of Corporation K (a regulated investment company)

30

Securities of Corporation A

10

Securities of Corporation B

20

Securities of various corporations (not exceeding 5 percent of its assets in any one company)

25

Total

100

(ii) Corporation K has 20 percent of its assets
invested in Corporation L, and Corporation L has 40
percent of its assets invested in Corporation B. Cor-
poration A also has 30 percent of its assets invested
in Corporation B. Investment Company Y owns
more than 20 percent of the voting power of Corpo-
rations A and K. Corporation K owns more than 20
percent of the voting power of Corporation L.

(iii) At the end of that quarter, Investment Com-
pany Y is disqualified under subparagraph (B)(i) of
section 851(b)(3) because, after applying section
851(c)(1), more than 25 percent of the value of
Investment Company Y's total assets is invested in
the securities of Corporation B. This result is shown
by the following calculation:

Percentage of assets invested directly in Corporation B

Percent 20.0

Percentage invested indirectly through K and L (30% × 20%×40%)

2.4

Percentage invested indirectly through A (10% × 30%)

3.0

Total percentage of assets of Investment Company Y invested in Corporation B

25.4

Example 5. Investment Company Z, which keeps
its books and makes its returns on the basis of the
calendar year, at the close of the first quarter of 2016
meets the requirements of section 851(b)(3) and has
20 percent of its assets invested in Corporation A.
Later during the taxable year it makes distributions
to its shareholders and because of such distributions,
it finds at the close of the taxable year that it has
more than 25 percent of its remaining assets invested
in Corporation A. Investment Company Z does not
lose its status as a regulated investment company for
the taxable year 2016 because of such distributions,
nor will it lose its status as a regulated investment
company for any subsequent year solely as a result
of such distributions. See section 851(d)(1).

Example 6. Investment Company Q, which keeps
its books and makes its returns on the basis of the
calendar year, at the close of the first quarter of 2016
meets the requirements of section 851(b)(3) and has
20 percent of its assets invested in Corporation P. At
the close of the taxable year 2016, it finds that it has
more than 25 percent of its assets invested in Cor-
poration P. This situation results entirely from fluc-
tuations in the market values of the securities in
Investment Company Q's portfolio and is not due in
whole or in part to the acquisition of any security or
other property. Investment Company Q does not lose
its status as a regulated investment company for the
taxable year 2016 because of such fluctuations in the
market values of the securities in its portfolio, nor
will it lose its status as a regulated investment com-
pany for any subsequent year solely as a result of
such market value fluctuations. See section
851(d)(1).

Example 7. (i) Investment Company T at the
close of a particular quarter of its taxable year has its
assets invested as follows:

<!-- PageFooter="October 5, 2015" -->

<!-- PageFooter="Bulletin No. 2015-40" -->
<!-- PageBreak -->

Percent

Cash and Government securities

40

Securities of Corporation A

20

Securities of various qualified publicly traded partnerships (within the meaning of sections 851(b)(3) and 851(h))

15

Securities of various corporations (not exceeding 5 percent of its assets in any one company)

25

Total

100

(ii) Investment Company T owns more than 20
percent of the voting power of Corporation A and
less than 10 percent of the voting power of all of the
other corporations. Corporation A has 80 percent of
its assets invested in qualified publicly traded part-
nerships.

(iii) Investment Company T is disqualified under
subparagraph (B)(iii) of section 851(b)(3), because,
after applying section 851(c)(1), more than 25 per-
cent of the value of Investment Company T's total
assets is invested in the securities of one or more
qualified publicly traded partnerships. This result is
shown by the following calculation:

Percent

Percentage of assets invested directly in qualified publicly traded partnerships

15.0

Percentage invested in qualified publicly traded partnerships in- directly through A (20% X 80%)

16.0

Total percentage of assets of Investment Company T invested in qualified publicly traded part- nerships

31.0

(b) Effective/applicability dates. The
rules of this section apply to quarters that
begin on or after December 14, 2015. For
purposes of applying the first sentence of
section 851(d)(1) to a quarter that begins
on or after March 14, 2016, the rules of
this section apply in determining whether
the taxpayer met the requirements of sec-
tion 851(b)(3) and (c) at the close of prior
quarters.

John Dalrymple,
Deputy Commissioner for
Services and Enforcement.

Approved: September 2, 2015.

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

(Filed by the Office of the Federal Register on September
14, 2015, 8:45 a.m., and published in the issue of the Federal
Register for September 15, 2015, 80 F.R. 23137)

T.D. 9738

DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1

## Clarification of the Coordination of the Transfer Pricing Rules with Other Code Provisions

AGENCY: Internal Revenue Service (IRS),
Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains
temporary regulations that clarify the co-
ordination of the application of the arm's
length standard and the best method rule
under section 482 of the Internal Revenue
Code (Code) in conjunction with other
provisions of the Code. The text of the
temporary regulations also serves in part
as the text of the proposed regulations
(REG-139483-13) published in the Pro-
posed Rules section of this issue of the
Federal Register. This document also
contains final regulations that add cross-
references in the existing final regulations
under section 482 to relevant sections of
these temporary regulations.

DATES: Effective date: These regulations
are effective on September 14, 2015.

Applicability date: For dates of appli-
cability, see § 1.482-1T(j)(7)(i).

FOR FURTHER INFORMATION

CONTACT: Frank W. Dunham III, (202)
317-6939 (not a toll-free number).

SUPPLEMENTARY INFORMATION:
Background

Regulations under section 482 pub-
lished in the Federal Register (33 FR
5848) on April 16, 1968, provided guid-
ance on methods for applying the arm's
length standard to evaluate controlled
transactions, including transfers of tangi-
ble and intangible property, the provision
of services, and loans or advances. Sub-
sequent revisions and updates of the trans-
fer pricing regulations were published in
the Federal Register on July 8, 1994,
Dec. 20, 1995, May 13, 1996, Aug. 26,

2003, Aug. 4, 2009, Dec. 22, 2011, and
Aug. 27, 2013 (59 FR 34971, 60 FR
65553, 61 FR 21955, 68 FR 51171, 74 FR
38830, 76 FR 80082, and 78 FR 52854,
respectively).

## Explanation of Provisions

I. Overview - Consistent Valuation of
Controlled Transactions for All Code
Purposes

Section 482 authorizes the Secretary,
and the regulations under section 482 au-
thorize the IRS, to adjust the results of
controlled transactions to clearly reflect
the income of commonly controlled tax-
payers in accordance with the arm's
length standard and, in the case of the
transfer of intangible property (within the
meaning of section 936(h)(3)(B)), so as to
be commensurate with the income attrib-
utable to the intangible. While the deter-
mination of arm's length prices for con-
trolled transactions is governed by section
482, the tax treatment of controlled trans-
actions is also governed by other Code
and regulatory rules applicable to both
controlled and uncontrolled transactions.
Controlled transactions always remain
subject to section 482 in addition to these
generally applicable provisions. These
temporary regulations clarify the coordi-
nation of section 482 and the regulations
thereunder with such other Code and reg-
ulatory provisions.

The coordination rules in these tempo-
rary regulations apply to controlled trans-
actions, including controlled transactions
that are subject in whole or part to both
sections 367 and 482. Transfers of prop-
erty subject to section 367 that occur be-
tween controlled taxpayers require a con-
sistent and coordinated application of
sections 367 and 482 to the controlled
transfer of property and any related trans-
actions between controlled taxpayers. The
controlled transactions may include trans-
fers of property subject to section 367(a)
or (e), transfers of intangible property sub-
ject to section 367(d) or (e), and the pro-
vision of services that contribute signifi-
cantly to maintaining, exploiting, or
further developing the transferred proper-
ties. All of the transactions (and any ele-
ments thereof) must be analyzed and val-
ued on a consistent basis under section

<!-- PageFooter="Bulletin No. 2015-40" -->

<!-- PageFooter="October 5, 2015" -->
<!-- PageBreak -->

482 in order to achieve the intended pur-
poses of sections 367 and 482.

The consistent analysis and valuation
of transactions subject to multiple Code
and regulatory provisions is required un-
der the best method rule described in
§ 1.482-1(c). A best method analysis un-
der section 482 begins with a consider-
ation of the facts and circumstances re-
lated to the functions performed, the
resources employed, and the risks as-
sumed in the actual transaction or trans-
actions among the controlled taxpayers, as
well as in any uncontrolled transactions
used as comparables. See § 1.482-
1(c)(2)(i) and (d)(3). For example, if con-
sideration of the facts and circumstances
reveals synergies among interrelated
transactions, an aggregate evaluation un-
der section 482 may provide a more reli-
able measure of an arm's length result
than a separate evaluation of the transac-
tions. In contrast, an inconsistent or unco-
ordinated application of section 482 to
interrelated controlled transactions that
are subject to tax under different Code and
regulatory provisions may lead to inap-
propriate conclusions.

The best method rule requires a deter-
mination of the arm's length result of con-
trolled transactions under the method, and
particular application of that method, that
provides the most reliable measure of an
arm's length result. Under the regulations,
the reliability of the measure depends on
the economics of the controlled transac-
tions, not their formal character. See, e.g.,
§§ 1.482-2A(e)(3)(vii) and 1.482-
3(c)(3)(ii)(D) (use of sales agent's com-
mission as comparable for reseller's ap-
propriate markup under the resale price
method); §§ 1.482-2A(e)(4)(iv) and
1.482-3(d)(3)(ii)(D) (use of purchasing
agent's commission as comparable for
producer's appropriate gross profit per-
centage under the cost-plus method); and
§ 1.482-9(i)(4) and (5), Examples 1 and 3
(reference to charges for transfers of prop-
erty as relevant to the determination of a
contingent-payment services charge). Re-
alistic alternative transactions that, on a
risk-adjusted basis, reflect arrangements
that are economically equivalent to those
in the controlled transactions may provide
the basis for application of unspecified
methods to determine the most reliable
measure of an arm's length result in the

controlled transactions. See, e.g.,
§§ 1.482-1(f)(2)(ii)(A), 1.482-3(e)(1),
1.482-4(d)(1), 1.482-7(g)(8), and 1.482-
9(h). Thus, although a taxpayer may
choose among different transactional
forms-for example, a long-term license,
research and development services, a cost
sharing arrangement, or a transfer subject
to section 367-specified and unspecified
methods applicable to each form will pro-
vide consistent arm's length results for
economically equivalent transactions.

Based upon taxpayer positions that the
IRS has encountered in examinations and
controversy, the Treasury Department and
the IRS are concerned that certain results
reported by taxpayers reflect an asserted
form or character of the parties' arrange-
ment that involves an incomplete assess-
ment of relevant functions, resources, and
risks and an inappropriately narrow anal-
ysis of the scope of the transfer pricing
rules. In particular, the Treasury Depart-
ment and the IRS are concerned about
situations in which controlled groups
evaluate economically integrated transac-
tions involving economically integrated
contributions, synergies, and interrelated
value on a separate basis in a manner that
results in a misapplication of the best
method rule and fails to reflect an arm's
length result. Taxpayers may assert that,
for purposes of section 482, separately
evaluating interrelated transactions is ap-
propriate simply because different statutes
or regulations apply to the transactions
(for example, where section 367 and the
regulations thereunder apply to one trans-
action and the general recognition rules of
the Code apply to another related transac-
tion). These positions are often combined
with inappropriately narrow interpreta-
tions of § 1.482-4(b)(6), which provides
guidance on when an item is considered
similar to the other items identified as
constituting intangibles for purposes of
section 482. The interpretations purport to
have the effect, contrary to the arm's
length standard, of requiring no compen-
sation for certain value provided in con-
trolled transactions despite the fact that
compensation would be paid if the same
value were provided in uncontrolled trans-
actions.

As discussed in the following portion
of this preamble, these temporary regula-
tions address the aforementioned concerns

by clarifying the coordination of the ap-
plication of section 482 in conjunction
with other Code and regulatory provisions
in determining the proper tax treatment of
controlled transactions.

### II. Detailed Explanation of Provisions

A. Compensation Independent of the
Form or Character of Controlled
Transaction - § 1.482-1T(f)(2)(i)(A)

New § 1.482-1T(f)(2)(i)(A) provides
that arm's length compensation must be
consistent with, and must account for all
of, the value provided between the parties
in a controlled transaction, without regard
to the form or character of the transaction.
For this purpose, it is necessary to con-
sider the entire arrangement between the
parties, as determined by the contractual
terms, whether written or imputed in ac-
cordance with the economic substance of
the arrangement, in light of the actual
conduct of the parties. This requirement is
consistent with the principles underlying
the arm's length standard, which require
arm's length compensation in controlled
transactions equal to the compensation
that would have occurred if a similar
transaction had occurred between simi-
larly situated uncontrolled taxpayers. See
§ 1.482-1(b)(1). Accordingly, no infer-
ence may be drawn from any provision in
the section 482 regulations that any trans-
fer of value may be made without arm's
length compensation.

B. Aggregate or Separate Analysis,
Depending on Economic Interrelatedness
of Controlled Transactions, including
Synergies - § 1.482-1T(f)(2)(i)(B)

Section 1.482-1T(f)(2)(i)(B) clarifies
§ 1.482-1(f)(2)(i)(A), which provided that
the combined effect of two or more sepa-
rate transactions (whether before, during,
or after the year under review) may be
considered if such transactions, taken as a
whole, are so interrelated that an aggre-
gate analysis of such transactions provides
the most reliable measure of an arm's
length result determined under the best
method rule of § 1.482-1(c). Specifically,
a new clause is added to clarify that this
aggregation principle also applies for pur-
poses of an analysis under multiple provi-
sions of the Code or regulations. In addi-

<!-- PageFooter="October 5, 2015" -->

<!-- PageFooter="Bulletin No. 2015-40" -->
<!-- PageBreak -->

tion, a new sentence elaborates on the
aggregation principle by noting that con-
sideration of the combined effect of two
or more transactions may be appropriate
to determine whether the overall compen-
sation is consistent with the value pro-
vided, including any synergies among
items and services provided. Finally,
§ 1.482-1T(f)(2)(i)(B) does not retain the
statement in § 1.482-1(f)(2)(i)(A) that
transactions generally will be aggregated
only when they involve "related products
or services, as defined in § 1.6038A-
3(c)(7)(vii)." The eliminated sentence had
the unintended potential to be miscon-
strued by taxpayers as limiting the aggre-
gation analysis pursuant to the best
method rule.

C. Aggregation and Allocation for
Purposes of Coordinated Analysis under
Multiple Code or Regulatory Provisions
\- §§ 1.482-1T(f)(2)(i)(C) and 1.482-
1T(f)(2)(i)(D)

Section 1.482-1T(f)(2)(i)(C) provides
that, for one or more controlled transac-
tions governed by more than one provi-
sion of the Code and regulations, a coor-
dinated best method analysis and
evaluation of the transactions may be nec-
essary to ensure that the overall value
provided (including any synergies) is
properly taken into account. A coordi-
nated best method analysis of the transac-
tions includes a consistent consideration
of the facts and circumstances of the func-
tions performed, resources employed, and
risks assumed, and a consistent measure
of the arm's length results, for purposes of
all relevant Code and regulatory provi-
sions. For example, situations in which a
coordinated best method analysis and
evaluation may be necessary include (1)
two or more interrelated transactions
when either all such transactions are gov-
erned by one regulation under section 482
or all such transactions are governed by
one subsection of section 367, (2) two or
more interrelated transactions governed
by two or more regulations under section
482, (3) a transfer of property subject to
section 367(a) and an interrelated transfer
of property subject to section 367(d), (4)
two or more interrelated transactions
where section 367 applies to one transac-
tion and the general recognition rules of

the Code apply to another interrelated
transaction, and (5) other circumstances in
which controlled transactions require
analysis under multiple Code and regula-
tory provisions.

Section 1.482-1T(f)(2)(i)(D) provides
that it may be necessary to allocate the
arm's length result that was properly de-
termined under a coordinated best method
analysis described in § 1.482-
1T(f)(2)(i)(C) among the interrelated
transactions. Any such allocation must be
made using the method that, under the
facts and circumstances, provides the
most reliable measure of an arm's length
result for each allocated amount.

D. Examples of Coordinated Best
Method Analysis under Multiple Code or
Regulatory Provisions -
§ 1.482-1T(f)(2)(i)(E)

Section 1.482-1T(f)(2)(i)(E) provides
eleven examples to illustrate the guidance
in § 1.482-1T(f)(2)(i)(A) through (D). Ex-
amples 1 through 4 are materially the
same as the Examples in § 1.482-
1(f)(2)(i)(B). The Treasury Department
and the IRS do not intend for the revisions
to those examples to be interpreted as
substantive. The rest of the examples are
new.

Section 1.482-1T(f)(2)(ii)(B) replaces
§ 1.482-1(f)(2)(ii)(B). The Example in-
cluded in § 1.482-1T(f)(2)(ii)(B) is mate-
rially the same as the old example and has
been updated to replace the term "district
director" and to include cross-references
to Examples 7 and 8 in § 1.482-
1T(f)(2)(i)(E). The Treasury Department
and the IRS do not intend for the revisions
to this example to be interpreted as sub-
stantive.

No inference is intended as to the ap-
plication of the provisions amended by
these temporary regulations under current
law. The IRS may, where appropriate,
challenge transactions, including those
described in these temporary regulations
and this preamble, under currently appli-
cable Code or regulatory provisions or
judicial doctrines.

## Effective/Applicability Date

These regulations apply to taxable
years ending on or after September 14,
2015.

## 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 has been determined that
section 553(b) of the Administrative Pro-
cedure Act (5 U.S.C. chapter 5) does not
apply to this regulation. For applicability
of the Regulatory Flexibility Act (5
U.S.C. chapter 6), refer to the cross-
referenced notice of proposed rulemaking
published elsewhere in this issue of the
Federal Register. Pursuant to section
7805(f) of the Internal Revenue Code,
these regulations have been submitted to
the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on their impact on small business.

## Drafting Information

The principal author of these regula-
tions is Frank W. Dunham III of the Office
of the Associate Chief Counsel (Interna-
tional). However, other personnel from
the Treasury Department and the IRS par-
ticipated in the development of the regu-
lations.

* * * * *

## Amendments to the Regulations

Accordingly, 26 CFR part 1 is
amended as follows:

### PART 1-INCOME TAXES

Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *

Sections 1.482-1 and 1.482-1T are
also issued under 26 U.S.C. 482. * * *

Par. 2. Section 1.482-0 is amended by
revising the entries for § 1.482-1(f)(2)(i)
and (ii)(B) to read as follows:

§ 1.482-0 Outline of regulations under
section 482.

** * * *

<!-- PageFooter="Bulletin No. 2015-40" -->

<!-- PageFooter="October 5, 2015" -->
<!-- PageBreak -->

§ 1.482-1 Allocation of income and
deductions among taxpayers.

* * * * *

(f) * * *

(2)* * *

(i) [Reserved]

(ii) * * *

(B) [Reserved]

* * * * *

Par. 3. Section 1.482-1 is amended by
revising paragraphs (f)(2)(i) and (ii)(B)
and adding paragraph (j)(7) to read as
follows:

§ 1.482-1 Allocation of income and
deductions among taxpayers.

* * * * *

(f) * * *

(2) * * *

(i)(A) through (E) [Reserved]. For fur-
ther guidance see § 1.482-1T(f)(2)(i)(A)
through (E).

(ii) * * *

(B) [Reserved]. For further guidance
see § 1.482-1T(f)(2)(ii)(B).

* * * * *

(j) ***

(7) [Reserved]. For further guidance
see § 1.482-1T(j)(7).

Par. 4. Section 1.482-1T is added to
read as follows:

§ 1.482-1T Allocation of income and
deductions among taxpayers
(temporary).

(a) through (f)(2) [Reserved]. For fur-
ther guidance see § 1.482-1(a) through
(f)(2).

(i) Compensation independent of the
form or character of controlled transac-
tion-(A) In general. All value provided
between controlled taxpayers in a con-
trolled transaction requires an arm's
length amount of compensation deter-
mined under the best method rule of
§ 1.482-1(c). Such amount must be con-
sistent with, and must account for all of,
the value provided between the parties in
the transaction, without regard to the form
or character of the transaction. For this
purpose, it is necessary to consider the
entire arrangement between the parties, as
determined by the contractual terms,
whether written or imputed in accordance
with the economic substance of the ar-

rangement, in light of the actual conduct
of the parties. See, e.g., § 1.482-
1(d)(3)(ii)(B) (identifying contractual
terms) and (f)(2)(ii)(A) (regarding refer-
ence to realistic alternatives).

(B) Aggregation. The combined effect
of two or more separate transactions
(whether before, during, or after the year
under review), including for purposes of
an analysis under multiple provisions of
the Code or regulations, may be consid-
ered if the transactions, taken as a whole,
are so interrelated that an aggregate anal-
ysis of the transactions provides the most
reliable measure of an arm's length result
determined under the best method rule of
§ 1.482-1(c). Whether two or more trans-
actions are evaluated separately or in the
aggregate depends on the extent to which
the transactions are economically interre-
lated and on the relative reliability of the
measure of an arm's length result pro-
vided by an aggregate analysis of the
transactions as compared to a separate
analysis of each transaction. For example,
consideration of the combined effect of
two or more transactions may be appro-
priate to determine whether the overall
compensation in the transactions is con-
sistent with the value provided, including
any synergies among items and services
provided.

(C) Coordinated best method analysis
and evaluation. Consistent with the prin-
ciples of paragraphs (f)(2)(i)(A) and (B)
of this section, a coordinated best method
analysis and evaluation of two or more
controlled transactions to which one or
more provisions of the Code or regula-
tions apply may be necessary to ensure
that the overall value provided, including
any synergies, is properly taken into ac-
count. A coordinated best method analysis
would include a consistent consideration
of the facts and circumstances of the func-
tions performed, resources employed, and
risks assumed in the relevant transactions,
and a consistent measure of the arm's
length results, for purposes of all relevant
statutory and regulatory provisions.

(D) Allocations of value. In some
cases, it may be necessary to allocate one
or more portions of the arm's length result
that was properly determined under a co-
ordinated best method analysis described
in paragraph (f)(2)(i)(C) of this section.
Any such allocation of the arm's length

result determined under the coordinated
best method analysis must be made using
the method that, under the facts and cir-
cumstances, provides the most reliable
measure of an arm's length result for each
allocated amount. For example, if the full
value of compensation due in controlled
transactions whose tax treatment is gov-
erned by multiple provisions of the Code
or regulations has been most reliably de-
termined on an aggregate basis, then that
full value must be allocated in a manner
that provides the most reliable measure of
each allocated amount.

(E) Examples. The following examples
illustrate the provisions of this paragraph
(f)(2)(i). For purposes of the examples in
this paragraph (E), P is a domestic corpo-
ration, and S1, S2, and S3 are foreign
corporations that are wholly owned by P.

Example 1. Aggregation of interrelated licens-
ing, manufacturing, and selling activities. P enters
into a license agreement with S1 that permits S1 to
use a proprietary manufacturing process and to sell
the output from this process throughout a specified
region. S1 uses the manufacturing process and sells
its output to S2, which in turn resells the output to
uncontrolled parties in the specified region. In eval-
uating whether the royalty paid by S1 to P is an
arm's length amount, it may be appropriate to eval-
uate the royalty in combination with the transfer
prices charged by S1 to S2 and the aggregate profits
earned by S1 and S2 from the use of the manufac-
turing process and the sale to uncontrolled parties of
the products produced by S1.

Example 2. Aggregation of interrelated manufac-
turing, marketing, and services activities. S1 is the
exclusive Country Z distributor of computers man-
ufactured by P. S2 provides marketing services in
connection with sales of P computers in Country Z
and in this regard uses significant marketing intan-
gibles provided by P. S3 administers the warranty
program with respect to P computers in Country Z,
including maintenance and repair services. In eval-
uating whether the transfer prices paid by S1 to P,
the fees paid by S2 to P for the use of P marketing
intangibles, and the service fees earned by S2 and S3
are arm's length amounts, it would be appropriate to
perform an aggregate analysis that considers the
combined effects of these interrelated transactions if
they are most reliably analyzed on an aggregated
basis.

Example 3. Aggregation and reliability of com-
parable uncontrolled transactions. The facts are the
same as in Example 2. In addition, U1, U2, and U3
are uncontrolled taxpayers that carry out functions
comparable to those of S1, S2, and S3, respectively,
with respect to computers produced by unrelated
manufacturers. R1, R2, and R3 constitute a con-
trolled group of taxpayers (unrelated to the P con-
trolled group) that carry out functions comparable to
those of S1, S2, and S3 with respect to computers
produced by their common parent. Prices charged to
uncontrolled customers of the R group differ from

<!-- PageFooter="October 5, 2015" -->

<!-- PageFooter="Bulletin No. 2015-40" -->
<!-- PageBreak -->

the prices charged to customers of U1, U2, and U3.
In determining whether the transactions of U1, U2,
and U3, or the transactions of R1, R2, and R3, would
provide a more reliable measure of the arm's length
result, it is determined that the interrelated R group
transactions are more reliable than the wholly inde-
pendent transactions of U1, U2, and U3, given the
interrelationship of the P group transactions.

Example 4. Non-aggregation of transactions that
are not interrelated. P enters into a license agree-
ment with S1 that permits S1 to use a proprietary
process for manufacturing product X and to sell
product X to uncontrolled parties throughout a spec-
ified region. P also sells to S1 product Y, which is
manufactured by P in the United States and unrelated
to product X. Product Y is resold by S1 to uncon-
trolled parties in the specified region. There is no
connection between product X and product Y other
than the fact that they are both sold in the same
specified region. In evaluating whether the royalty
paid by S1 to P for the use of the manufacturing
process for product X and the transfer prices charged
for unrelated product Y are arm's length amounts, it
would not be appropriate to consider the combined
effects of these separate and unrelated transactions.

Example 5. Aggregation of interrelated patents.
P owns 10 individual patents that, in combination,
can be used to manufacture and sell a successful
product. P anticipates that it could earn profits of
$25x from the patents based on a discounted cash
flow analysis that provides a more reliable measure
of the value of the patents exploited as a bundle
rather than separately. P licenses all 10 patents to S1
to be exploited as a bundle. Evidence of uncontrolled
licenses of similar individual patents indicates that,
exploited separately, each license of each patent
would warrant a price of $1x, implying a total price
for the patents of $10x. Under paragraph (f)(2)(i)(B)
of this section, in determining the arm's length roy-
alty for the license of the bundle of patents, it would
not be appropriate to use the uncontrolled licenses as
comparables for the license of the bundle of patents,
because, unlike the discounted cash flow analysis,
the uncontrolled licenses considered separately do
not reliably reflect the enhancement to value result-
ing from the interrelatedness of the 10 patents ex-
ploited as a bundle.

Example 6. Consideration of entire arrangement,
including imputed contractual terms-(i) P conducts
a business ("Business") from the United States, with
a worldwide clientele, but until Date X has no for-
eign operations. The success of Business signifi-
cantly depends on intangibles (including marketing,
manufacturing, technological, and goodwill or going
concern value intangibles, collectively the "IP"), as
well as ongoing support activities performed by P
(including related research and development, central
marketing, manufacturing process enhancement, and
oversight activities, collectively "Support"), to main-
tain and improve the IP and otherwise maximize the
profitability of Business.

(ii) On Date X, Year 1, P contributes the foreign
rights to conduct Business, including the foreign
rights to the IP, to newly incorporated S1. S1, uti-
lizing the IP of which it is now the owner, com-
mences foreign operations consisting of local mar-
keting, manufacturing, and back office activities in

order to conduct and expand Business in the foreign
market.

(iii) Later, on Date Y, Year 1, P and S1 enter into
a cost sharing arrangement ("CSA") to develop and
exploit the rights to conduct the Business. Under the
CSA, P is entitled to the U.S. rights to conduct the
Business, and S1 is entitled to the rest-of-the-world
("ROW") rights to conduct the Business. P continues
after Date Y to perform the Support, employing
resources, capabilities, and rights that as a factual
matter were not contributed to S1 in the Date X
transaction, for the benefit of the Business world-
wide. Pursuant to the CSA, P and S1 share the costs
of P's Support in proportion to their reasonably
anticipated benefit shares from their respective rights
to the Business.

(iv) P treats the Date X transaction as a transfer
described in section 351 that is subject to 367 and
treats the Date Y transaction as the commencement
of a CSA subject to section 482 and § 1.482-7. P
takes the position that the only platform contribution
transactions ("PCTs") in connection with the Date Y
CSA consist of P's contribution of the U.S. Business
IP rights and S1's contribution of the ROW Business
IP rights of which S1 had become the owner on
account of the prior Date X transaction.

(v) Pursuant to paragraph (f)(2)(i)(A) of this sec-
tion, in determining whether an allocation of income
is appropriate in Year 1 or subsequent years, the
Commissioner may consider the economic substance
of the entire arrangement between P and S1, includ-
ing the parties' actual conduct throughout their rela-
tionship, regardless of the form or character of the
contractual arrangement the parties have expressly
adopted. The Commissioner determines that the par-
ties' formal arrangement fails to reflect the full scope
of the value provided between the parties in accor-
dance with the economic substance of their arrange-
ment. Therefore, the Commissioner may impute one
or more agreements between P and S1, consistent
with the economic substance of their arrangement,
that fully reflect their respective reasonably antici-
pated commitments in terms of functions performed,
resources employed, and risks assumed over time.
For example, because P continues after Date Y to
perform the Support, employing resources, capabil-
ities, and rights not contributed to S1, for the benefit
of the Business worldwide, the Commissioner may
impute another PCT on Date Y pursuant to which P
commits to so continuing the Support. See § 1.482-
7(b)(1)(ii). The taxpayer may present additional facts
that could indicate whether this or another alterna-
tive agreement best reflects the economic substance
of the underlying transactions and course of conduct,
provided that the taxpayer's position fully reflects
the value of the entire arrangement consistent with
the realistic alternatives principle.

Example 7. Distinguishing provision of value
from characterization-(i) P developed a collection
of resources, capabilities, and rights ("Collection")
that it uses on an interrelated basis in ongoing re-
search and development of computer code that is
used to create a successful line of software products.
P can continue to use the Collection on such inter-
related basis in the future to further develop com-
puter code and, thus, further build on its successful
line of software products. Under § 1.482-7(g)(2)(ix),
P determines that the interquartile range of the net

present value of its own use of the Collection in
future research and development and software prod-
uct marketing is between $1000x and $1100x, and
this range provides the most reliable measure of the
value to P of continuing to use the Collection on an
interrelated basis in future research, development,
and exploitation. Instead, P enters into an exchange
described in section 351 in which it transfers certain
intangible property related to the Collection to S1 for
use in future research, development, and exploitation
but continues to perform the same development
functions that it did prior to the exchange, now on
behalf of S1, under express or implied commitments
in connection with S1's use of the intangible prop-
erty. P takes the position that a portion of the Col-
lection, consisting of computer code and related in-
struction manuals and similar intangible property
(Portion 1), was transferrable intangible property and
was the subject of the section 351 exchange and
compensable under section 367(d). P claims that
another portion of the Collection consists of items
that either do not constitute property for purposes of
section 367 or are not transferrable (Portion 2). P
then takes the position that the value of Portion 2
does not give rise to income under section 367(d) or
gain under section 367(a).

(ii) Under paragraphs (f)(2)(i)(A) and (C) of this
section, any part of the value in Portion 2 that is not
taken into account in an exchange under section 367
must nonetheless be evaluated under section 482 and
the regulations thereunder to determine arm's length
compensation for any value provided to S1. Accord-
ingly, even if P's assertion that certain items were
either not property or not capable of being trans-
ferred were correct, arm's length compensation is
nonetheless required for all of the value associated
with P's contributions under the section 482 regula-
tions. Alternatively, the Commissioner may deter-
mine under all the facts and circumstances that P's
assertion is incorrect and that the transaction in fact
constitutes an exchange of property subject to, and
therefore to be taken into account under, section 367.
Thus, whether any item that P identifies as being
within Portion 2 is properly characterized as prop-
erty under section 367 (transferable or otherwise) is
irrelevant because any value in Portion 2 that is
provided to S1 must be compensated by S1 in a
manner consistent with the $1000x to $1100x inter-
quartile range of the overall value.

Example 8. Arm's length compensation for
equivalent provisions of intangibles under sections
351 and 482. P owns the worldwide rights to man-
ufacturing and marketing intangibles that it uses to
manufacture and market a product in the United
States ("US intangibles") and the rest of the world
("ROW intangibles"). P transfers all the ROW in-
tangibles to S1 in an exchange described in section
351 and retains the US intangibles. Immediately
after the exchange, P and S1 entered into a CSA
described in § 1.482-7(b) that covers all research
and development of intangibles conducted by the
parties. A realistic alternative that was available to P
and that would have involved the controlled parties
performing similar functions, employing similar re-
sources, and assuming similar risks as in the con-
trolled transaction, was to transfer all ROW intangi-
bles to S1 upon entering into the CSA in a platform
contribution transaction described in § 1.482-7(c),

<!-- PageFooter="Bulletin No. 2015-40" -->

<!-- PageFooter="October 5, 2015" -->
<!-- PageBreak -->

rather than in an exchange described in section 351
immediately before entering into the CSA. Under
paragraph (f)(2)(i)(A) of this section, the arm's
length compensation for the ROW intangibles must
correspond to the value provided between the par-
ties, regardless of the form of the transaction. Ac-
cordingly, the arm's length compensation for the
ROW intangibles is the same in both scenarios, and
the analysis of the amount to be taken into account
under section 367(d) pursuant to §§ 1.367(d)-1T(c)
and 1.482-4 should include consideration of the
amount that P would have charged for the realistic
alternative determined under § 1.482-7(g) (and
§ 1.482-4, to the extent of any make-or-sell rights
transferred). See §§ 1.482-1(b)(2)(iii) and 1.482-
4(g).

Example 9. Aggregation of interrelated manufac-
turing and marketing intangibles governed by differ-
ent statutes and regulations. The facts are the same
as in Example 8 except that P transfers only the
ROW intangibles related to manufacturing to S1 in
an exchange described in section 351 and, upon
entering into the CSA, then transfers the ROW in-
tangibles related to marketing to S1 in a platform
contribution transaction described in § 1.482-7(c)
(rather than transferring all ROW intangibles only
upon entering into the CSA or only in a prior ex-
change described in section 351). The value of the
ROW intangibles that P transferred in the two trans-
actions is greater in the aggregate, due to synergies
among the different types of ROW intangibles, than
if valued as two separate transactions. Under para-
graph (f)(2)(i)(B) of this section, the arm's length
standard requires these synergies to be taken into
account in determining the arm's length results for
the transactions.

Example 10. Services provided using intangi-
bles .- (i) P's worldwide group produces and mar-
kets Product X and subsequent generations of prod-
ucts, which result from research and development
performed by P's R&D Team. Through this collab-
oration with respect to P's proprietary products, the
members of the R&D Team have individually and as
a group acquired specialized knowledge and exper-
tise subject to non-disclosure agreements (collec-
tively, "knowhow").

(ii) P arranges for the R&D Team to provide
research and development services to create a new
line of products, building on the Product X platform,
to be owned and exploited by S1 in the overseas
market. P asserts that the arm's length charge for the
services is only reimbursement to P of its associated
R&D Team compensation costs.

(iii) Even though P did not transfer the platform
or the R&D Team to S1, P is providing value asso-
ciated with the use of the platform, along with the
value associated with the use of the knowhow, to S1
by way of the services performed by the R&D Team

for S1 using the platform and the knowhow. The
R&D Team's use of intangible property, and any
other valuable resources, in P's provision of services
(regardless of whether the service effects a transfer
of intangible property or valuable resources and re-
gardless of whether the property is relatively high or
low value) must be evaluated under the section 482
regulations, including the regulations specifically ap-
plicable to controlled services transactions in
§ 1.482-9, to ensure that P receives arm's length
compensation for any value (attributable to such
property or services) provided to S1 in a controlled
transaction. See §§ 1.482-4 and 1.482-9(m). Under
paragraph (f)(2)(i)(A) of this section, the arm's
length compensation for the services performed by
the R&D Team for S1 must be consistent with the
value provided to S1, including the value of the
knowhow and any synergies with the platform. Un-
der paragraphs (f)(2)(i)(B) and (C) of this section,
the best method analysis may determine that the
compensation is most reliably determined on an ag-
gregate basis reflecting the interrelated value of the
services and embedded value of the platform and
knowhow.

(iv) In the alternative, the facts are the same as
above, except that P assigns to S1 all or a pertinent
portion of the R&D Team and the relevant rights in
the platform. P takes the position that, although the
transferred platform rights must be compensated, the
knowhow does not have substantial value indepen-
dent of the services of any individual on the R&D
Team and therefore is not an intangible within the
meaning of § 1.482-4(b). In P's view, S1 owes no
compensation to P on account of the R&D Team, as
S1 will directly bear the cost of the relevant R&D
Team compensation. However, in assembling and
arranging to assign the relevant R&D Team, and
thereby making available the value of the knowhow
to S1, rather than other employees without the know-
how, P is performing services for S1 under imputed
contractual terms based on the parties' course of
conduct. Therefore, even if P's position were correct
that the knowhow is not an intangible under § 1.482-
4(b), a position that the Commissioner may chal-
lenge, arm's length compensation is required for all
of the value that P provides to S1 through the inter-
related provision of platform rights, knowhow, and
services under paragraphs (f)(2)(i)(A), (B), and (C)
of this section.

Example 11. Allocating arm's length compensa-
tion determined under an aggregate analysis -(i) P
provides services to S1, which is incorporated in
Country A. In connection with those services, P
licenses intellectual property to S2, which is incor-
porated in Country B. S2 sublicenses the intellectual
property to S1.

(ii) Under paragraph (f)(2)(i)(B) of this section,
if an aggregate analysis of the service and license

transactions provides the most reliable measure of an
arm's length result, then an aggregate analysis must
be performed. Under paragraph (f)(2)(i)(D) of this
section, if an allocation of the value that results from
such an aggregate analysis is necessary, for example,
for purposes of sourcing the services income that P
receives from S1 or determining deductible expenses
incurred by S1, then the value determined under the
aggregate analysis must be allocated using the
method that provides the most reliable measure of
the services income and deductible expenses.

(ii)(A) [Reserved]. For further guidance see
§ 1.482-1(f)(2)(ii)(A).

(B) Example. The following example illustrates
this paragraph (f)(2)(ii):

Example. P and S are controlled taxpayers. P
licenses a proprietary process to S for S's use in
manufacturing product X. Using its sales and mar-
keting employees, S sells product X to related and
unrelated customers outside the United States. If the
license between P and S has economic substance, the
Commissioner ordinarily will not restructure the tax-
payer's transaction to treat P as if it had elected to
exploit directly the manufacturing process. How-
ever, because P could have directly exploited the
manufacturing process and manufactured product X
itself, this realistic alternative may be taken into
account under § 1.482-4(d) in determining the arm's
length consideration for the controlled transaction.
For examples of such an analysis, see Examples 7
and 8 in paragraph (f)(2)(i)(E) of this section and the
Example in § 1.482-4(d)(2).

(iii) through (j)(6) [Reserved]. For further guid-
ance see § 1.482-1(f)(2)(iii) through (j)(6).

(7) Certain effective/applicability dates-(i)
Paragraphs (f)(2)(i)(A) through (E) and (f)(2)(ii)(B)
of this section apply to taxable years ending on or
after September 14, 2015.

(ii) Expiration date. The applicability of para-
graphs (f)(2)(i)(A) through (E) and (f)(2)(ii)(B) of
this section expires on or before September 14, 2018.

John Dalrymple,
Deputy Commissioner for
Services and Enforcement.

Approved: September 10, 2015.

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

(Filed by the Office of the Federal Register on September
14, 2015, 11:15 a.m., and published in the issue of the
Federal Register for September 16, 2015, 80 F.R. 23278)

<!-- PageFooter="October 5, 2015" -->

<!-- PageFooter="Bulletin No. 2015-40" -->
<!-- PageBreak -->

# Part III. Administrative, Procedural, and Miscellaneous

## Request for Comments; Areas Under Study Relating to §§ 337(d) and 355 of the Internal Revenue Code Notice 2015-59

### SECTION 1. PURPOSE

The Treasury Department and the In-
ternal Revenue Service (Service) are
studying issues under §§ 337(d) and 355
of the Internal Revenue Code (Code) re-
lating to transactions having one or more
of the following characteristics: (i) own-
ership by the distributing corporation or
the controlled corporation of investment
assets, within the meaning of § 355(g)(2)(B),
with modifications (Investment Assets),
having substantial value in relation to (a)
the value of all of such corporation's as-
sets and (b) the value of the assets of the
active trade(s) or business(es) on which
the distributing corporation or the con-
trolled corporation relies to satisfy the re-
quirements of § 355(b) (a Qualifying
Business or Qualifying Business Assets);
(ii) a significant difference between the
distributing corporation's ratio of Invest-
ment Assets to assets other than Invest-
ment Assets and such ratio of the con-
trolled corporation; (iii) ownership by the
distributing corporation or the controlled
corporation of a small amount of Qualifying
Business Assets in relation to all of its as-
sets; and (iv) an election by the distributing
corporation or the controlled corporation
(but not both) to be a regulated investment
company (RIC), within the meaning of
§ 851, or a real estate investment trust
(REIT), within the meaning of § 856.

Concurrently with the issuance of this
notice, the Service is issuing Rev. Proc.
2015-43, page 467, this Bulletin, which
supplements Rev. Proc. 2015-3, 2015-1
I.R.B. 129, by adding certain of these
transactions to the list of no-rule areas.
This notice describes transactions that
concern the Treasury Department and the
Service, including transactions on which,
while the relevant areas are under study,
the Service ordinarily will not rule under
sections 4.01(57) and (58) of Rev. Proc.
2015-3 (section 3.01 of Rev. Proc. 2015-
43) and transactions on which the Service

will not rule under section 5.01(26) of
Rev. Proc. 2015-3 (section 3.02 of Rev.
Proc. 2015-43). This notice also requests
comments concerning the transactions de-
scribed in this notice.

## SECTION 2. DISCUSSION

### Background

Section 355 of the Code generally pro-
vides that, if certain requirements are sat-
isfied, a distributing corporation may dis-
tribute the stock (or stock and securities)
of a controlled corporation to its share-
holders and security holders without the
distributing corporation, its shareholders,
or its security holders recognizing income,
gain, or loss on the distribution. However,
§ 355 does not apply to a distribution if
the transaction is used principally as a
device for the distribution of the earnings
and profits of the distributing corporation
or the controlled corporation or both (a
device). Section 355(a)(1)(B). Numerous
other requirements also must be satisfied
for § 355 to apply to a distribution.

One such requirement is that the dis-
tributing corporation and the controlled
corporation each be engaged in the active
conduct of a trade or business immedi-
ately after the distribution (active trade or
business requirement). Section
355(a)(1)(C) and (b)(1)(A). For this pur-
pose, § 355(b)(3)(A) provides that all
members of a corporation's separate affil-
iated group are treated as one corporation.
Another such requirement is that the
transaction must be carried out for one or
more corporate business purposes (busi-
ness purpose requirement). Section
1.355-2(b)(1).

The Treasury Department and the Ser-
vice have become aware, in part through
requests for letter rulings, that some tax-
payers are taking the position that certain
distributions that have one or more of the
characteristics described in section 1 of
this notice satisfy the requirements of
§ 355. The Treasury Department and the
Service believe that these transactions
may present evidence of device for the
distribution of earnings and profits, may
lack an adequate business purpose or a
Qualifying Business, or may violate other
§ 355 requirements. In addition, these

transactions may circumvent the purposes
of Code provisions intended to repeal the
Supreme Court's decision in General
Utilities & Operating Co. v. Helvering,
296 U.S. 200 (1935) (General Utilities
repeal). See, e.g., §§ 311(b), 337(d),
367(a)(5), and 367(e); H.R. Rep. No.
100-391, at 1080-1084 (1987).

### Nature of Assets of Distributing Corporation and Controlled Corporation

The Treasury Department and the Ser-
vice are most concerned about transac-
tions that result in (i) the distributing cor-
poration or the controlled corporation
owning a substantial amount of cash, port-
folio stock or securities, or other Invest-
ment Assets, in relation to the value of all
of its assets and its Qualifying Business
Assets, and (ii) one of the corporations
having a significantly higher ratio of In-
vestment Assets to Non-Investment As-
sets than the other corporation. While
these matters are under study, the Service
will not rule on any issue that relates to
the qualification of a distribution under
§ 355 and related provisions and is pre-
sented in a distribution described in sec-
tion 5.01(26) of Rev. Proc. 2015-3.

### Small Amounts of Qualifying Business Assets

The Treasury Department and the Ser-
vice are also concerned about transactions in
which the distributing corporation or the
controlled corporation owns a small amount
of Qualifying Business Assets compared to
its other assets (non-Qualifying Business
Assets). Before enactment of § 355(b)(3),
such transactions were common due to the
restrictive nature of the "holding company"
rule (§ 355(b)(2)(A) prior to its amendment
by the Technical Corrections Act of 2007,
Pub. L. No. 110-172, § 4(b)(1), 121 Stat.
2473, 2476 (2007)). The Treasury Depart-
ment and the Service have concluded that,
under current law, distributions involving
small Qualifying Businesses may have be-
come less justifiable. Accordingly, the Ser-
vice ordinarily will not rule on any issue that
relates to the qualification of a distribution
under § 355 and related provisions and is
presented in a distribution described in sec-

<!-- PageFooter="Bulletin No. 2015-40" -->

<!-- PageFooter="October 5, 2015" -->
<!-- PageBreak -->

tion 4.01(58) of Rev. Proc. 2015-3, but will
consider ruling in unique and compelling
circumstances.

In determining whether unique and
compelling circumstances exist to justify
the issuance of a ruling or determination
letter, the Service will consider all facts
and circumstances, including whether a
substantial portion of the non-Qualifying
Business Assets would be Qualifying
Business Assets but for the five-year re-
quirement of § 355(b)(2)(B) and whether
there is a relationship between the busi-
ness purpose for the distribution and the
Qualifying Business of the distributing
corporation or the controlled corporation.

### Exception for Certain Intra-Group Distributions

The Treasury Department and the Ser-
vice generally are more concerned about
transactions in which the stock of a con-
trolled corporation is distributed outside
an affiliated group (within the meaning of
§ 243(b)(2)(A)), including a distribution
which is part of a series of related trans-
actions in which the stock of a controlled
corporation (including, for example, a
controlled corporation that was a distrib-
uting corporation with respect to a lower-
tier distribution) is distributed outside an
affiliated group. Accordingly, while these
matters are under study, the Service will
continue to follow its current ruling prac-
tice with respect to distributions within
affiliated groups if there is no plan or
intention for stock of any corporation to
be distributed outside the affiliated group
in a distribution described in section
4.01(57), 4.01(58), or 5.01(26) of Rev.
Proc. 2015-3. The Treasury Department
and the Service request comments concern-
ing whether these transactions should be
treated differently from other transactions,
and whether other classes of transactions
should be subject to similar exceptions.

### Distributions Involving RICs or REITs

The Treasury Department and the Ser-
vice also have become concerned that an
increasing number of distributions in-
tended to qualify under § 355 involve a
distributing corporation or a controlled
corporation that elects to be a REIT.
These distributions may involve corpora-
tions that, prior to the distribution, do not

meet the requirements to be REITs and
intend to separate REIT-qualifying assets
from non-qualifying assets so that the dis-
tributing corporation or the controlled cor-
poration can meet the requirements to be a
REIT. In some situations, a REIT election
may be made or become effective within a
short period of time before the distribu-
tion. These transactions may involve rel-
atively small Qualifying Businesses and
retention of control over or use of the
REIT's assets through long-term leases or
other arrangements. As with the other
transactions described in this notice and in
Rev. Proc. 2015-43, these transactions,
and similar transactions involving RICs,
involve significant concerns relating to the
device prohibition, and the business pur-
pose and active trade or business require-
ments under § 355, as well as the Code
provisions intended to repeal the General
Utilities decision. Accordingly, the Ser-
vice ordinarily will not rule on any issue
that relates to the qualification of a distri-
bution under § 355 and related provisions
and is presented in such distributions, but
will consider ruling in unique and com-
pelling circumstances.

The Treasury Department and the Ser-
vice generally are not concerned about
transactions in which both the distributing
corporation and the controlled corporation
will be and will continue to be RICs or
will be and will continue to be REITs, or
transactions in which the distributing cor-
poration has been a RIC or REIT for a
substantial period of time, whether or not
the controlled corporation will be a RIC or
REIT after the distribution. The Service
will continue to consider these transac-
tions under its current ruling practice.

### Pro Rata Distributions and Non-Pro Rata Exchanges of Stock Treated Similarly

The Treasury Department and the Ser-
vice understand that, in many instances, a
publicly traded corporation may structure
a distribution intended to qualify under
§ 355 as either a pro rata distribution with
respect to its stock or a non-pro rata ex-
change of the stock of the controlled cor-
poration for some shareholders' stock in
the distributing corporation. If the distri-
bution is structured as a pro rata distribu-
tion, § 355(g) will not disqualify the dis-
tribution from nonrecognition treatment.

Furthermore, in most instances, even if
the distribution is structured as a non-pro
rata exchange, § 355(g) will not disqualify
the distribution from nonrecognition treat-
ment because no single shareholder or
group of related shareholders will own 50
percent or more of the stock of either the
distributing corporation or the controlled
corporation after the distribution. In this
regard, the Treasury Department and the
Service have considered § 1.355-
2(d)(3)(iii) ("The fact that the distributing
corporation is publicly traded and has no
shareholder who is directly or indirectly
the beneficial owner of more than five
percent of any class of stock is evidence
of nondevice.") and § 1.355-2(d)(5)(iv)
("A distribution is ordinarily considered
not to have been used principally as a
device, if, in the absence of section 355,
with respect to each shareholder distribu-
tee, the distribution would be a redemp-
tion to which section 302(a) applied.").

The Treasury Department and the Ser-
vice believe, however, that certain charac-
teristics of a transaction may overcome
both the nondevice factor of public trad-
ing and the non-pro rata structure of a
distribution. These characteristics include,
as described above, (i) the distributing
corporation or the controlled corporation
owning Investment Assets with substan-
tial value in relation to the value of all of
the corporation's assets and the value of
its Qualifying Business Assets, together
with a disparity of such relationships be-
tween the distributing corporation and the
controlled corporation (see § 1.355-
2(d)(2)(iv), relating to the nature and use
of assets); (ii) in certain situations, the
distributing corporation or the controlled
corporation owning a small amount of
Qualifying Business Assets in relation to
all of its assets; and (iii) a prompt or
planned RIC or REIT election by the dis-
tributing corporation or the controlled cor-
poration. In addition, the Treasury Depart-
ment and the Service believe that these
characteristics may make it less likely that
a nontax business purpose for the distri-
bution will satisfy the independent busi-
ness purpose requirement set forth in
§ 1.355-2(b) or will qualify as a strong
corporate business purpose constituting a
nondevice factor. See § 1.355-2(d)(3)(ii)
(relationship between business purpose
and device). Thus, sections 4.01(57),

<!-- PageFooter="October 5, 2015" -->

<!-- PageFooter="Bulletin No. 2015-40" -->
<!-- PageBreak -->

4.01(58), and 5.01(26) of Rev. Proc.
2015-3 do not distinguish between trans-
actions involving distributing corpora-
tions the stock of which is or is not pub-
licly traded or between pro rata and non-
pro rata distributions.

## SECTION 3. REQUEST FOR COMMENTS

The Treasury Department and the Ser-
vice request comments concerning the
transactions described in this notice. In
particular, comments are requested with
respect to: (i) the facts and circumstances
relevant to whether the transactions sat-
isfy the requirements of § 355 and/or cir-
cumvent the purposes of General Utilities
repeal; (ii) whether investment assets,
within the meaning of § 355(g)(2)(B), as
modified by section 5.01(26) of Rev. Proc.
2015-3, are the appropriate assets to con-
sider in addressing the concerns raised by
the transactions; (iii) whether the treat-
ment of transactions solely within an af-
filiated group should differ from the treat-
ment of transactions in which stock of one
or more corporations will be distributed
outside the affiliated group; (iv) whether
the Service should rule on issues pre-
sented in distributions in which the dis-
tributing corporation or the controlled cor-
poration owns a relatively small amount
of Qualifying Business Assets, and if so in
what circumstances; and (v) whether other
classes of transactions subject to section
4.01(57), 4.01(58), or 5.01(26) of Rev.
Proc. 2015-3 should be excepted there-
from.

Written comments may be submitted to
the Internal Revenue Service, CC:PA:
LPD (Notice 2015-59), Room 5207, P.O.
Box 7604, Ben Franklin Station, Wash-
ington, D.C. 20044. Comments also may
be hand-delivered Monday through Friday
between the hours of 8:00 a.m. to 4:00
p.m. to the Courier's Desk, Internal Rev-
enue Service, 1111 Constitution Avenue,
NW, Washington, DC. Attn: CC:PA:LP-
D:PR (Notice 2015-59). Comments also
may be submitted electronically to
notice.comments@irscounsel.treas.gov.
Please include "Notice 2015-59" in the
subject line of any electronic submis-
sion. Comments will be available for
public inspection and copying.

## SECTION 4. DRAFTING INFORMATION

The principal author of this notice is
Stephanie D. Floyd of the Office of Asso-
ciate Chief Counsel (Corporate). For fur-
ther information regarding this notice,
contact Stephanie D. Floyd at (202) 317-
6848 (not a toll-free number).

## 2015-2016 Special Per Diem Rates

### Notice 2015-63

#### SECTION 1. PURPOSE

This annual notice provides the 2015-
2016 special per diem rates for taxpayers
to use in substantiating the amount of or-
dinary and necessary business expenses
incurred while traveling away from home,
specifically (1) the special transportation
industry meal and incidental expenses
(M&IE) rates, (2) the rate for the inciden-
tal expenses only deduction, and (3) the
rates and list of high-cost localities for
purposes of the high-low substantiation
method.

#### SECTION 2. BACKGROUND

Rev. Proc. 2011-47, 2011-42 I.R.B.
520, provides rules for using a per diem
rate to substantiate, under § 274(d) of the
Internal Revenue Code and § 1.274-5 of
the Income Tax Regulations, the amount
of ordinary and necessary business ex-
penses paid or incurred while traveling
away from home. Taxpayers using the
rates and list of high-cost localities pro-
vided in this notice must comply with
Rev. Proc. 2011-47. Notice 2014-57,
2014-42 I.R.B. 723, provides the rates
and list of high-cost localities for the pe-
riod October 1, 2014, to September 30,
2015.

Section 3.02(3) of Rev. Proc. 2011-47
provides that the term "incidental ex-
penses" has the same meaning as in the
Federal Travel Regulations, 41 C.F.R.
300-3.1, and that future changes to the
definition of incidental expenses in the
Federal Travel Regulations would be an-
nounced in the annual per diem notice.
Subsequent to the publication of Rev.
Proc. 2011-47, the General Services Ad-

ministration published final regulations
revising the definition of incidental ex-
penses under the Federal Travel Regula-
tions to include only fees and tips given to
porters, baggage carriers, hotel staff, and
staff on ships. Transportation between
places of lodging or business and places
where meals are taken, and the mailing
cost of filing travel vouchers and paying
employer-sponsored charge card billings,
are no longer included in incidental ex-
penses. Accordingly, taxpayers using the
per diem rates may separately deduct or
be reimbursed for transportation and mail-
ing expenses.

## SECTION 3. SPECIAL M&IE RATES FOR TRANSPORTATION INDUSTRY

The special M&IE rates for taxpayers
in the transportation industry are $63 for
any locality of travel in the continental
United States (CONUS) and $68 for any
locality of travel outside the continental
United States (OCONUS). See section
4.04 of Rev. Proc. 2011-47.

## SECTION 4. RATE FOR INCIDENTAL EXPENSES ONLY DEDUCTION

The rate for any CONUS or OCONUS
locality of travel for the incidental ex-
penses only deduction is $5 per day. See
section 4.05 of Rev. Proc. 2011-47.

## SECTION 5. HIGH-LOW SUBSTANTIATION METHOD

1\. Annual high-low rates. For purposes
of the high-low substantiation method, the
per diem rates in lieu of the rates de-
scribed in Notice 2014-57 (the per diem
substantiation method) are $275 for travel
to any high-cost locality and $185 for
travel to any other locality within CO-
NUS. The amount of the $275 high rate
and $185 low rate that is treated as paid
for meals for purposes of § 274(n) is $68
for travel to any high-cost locality and $57
for travel to any other locality within CO-
NUS. See section 5.02 of Rev. Proc.
2011-47. The per diem rates in lieu of the
rates described in Notice 2014-57 (the
meal and incidental expenses only sub-
stantiation method) are $68 for travel to
any high-cost locality and $57 for travel to
any other locality within CONUS.

<!-- PageFooter="Bulletin No. 2015-40" -->

<!-- PageFooter="October 5, 2015" -->
<!-- PageBreak -->

2\. High-cost localities. The following
localities have a federal per diem rate of

$230 or more, and are high-cost localities
for all of the calendar year or the portion

of the calendar year specified in parenthe-
ses under the key city name.

Key city

County or other defined location

California

Mono

Mammoth Lakes

(December 1-February 29)

Monterey

Monterey

(July 1-August 31)

Napa

Napa

(October 1-October 31 and May 1-September 30)

San Francisco

San Francisco

San Mateo/Foster City/Belmont

San Mateo

Santa Barbara

Santa Barbara

Santa Monica

City limits of Santa Monica

Sunnyvale/Palo Alto/San Jose

Santa Clara

Colorado

Aspen

Pitkin

(December 1-March 31 and June 1-August 31)

Denver/Aurora

Denver, Adams, Arapahoe, and Jefferson

Grand Lake

Grand

(December 1-March 31)

Silverthorne/Breckenridge

Summit

(December 1-March 31)

Steamboat Springs

Routt

(December 1-March 31)

Telluride

San Miguel

(December 1-March 31 and June 1-August 31)

Vail

Eagle

(December 1-March 31 and July 1-August 31)

District of Columbia

Washington D.C. (also the cities of Alexandria, Falls Church, and Fairfax, and the counties of Arlington and Fairfax, in
Virginia; and the counties of Montgomery and Prince George's in Maryland) (See also Maryland and Virginia)

Florida

Boca Raton/Delray Beach/Jupiter (January 1-April 30)

Palm Beach and Hendry

Fort Lauderdale

Broward

(January 1-March 31)

Fort Walton Beach/De Funiak Springs (June 1-July 31)

Okaloosa and Walton

Key West

Monroe

Miami

Miami-Dade

(December 1-March 31)

Naples

Collier

(January 1-April 30)

Illinois

Chicago

Cook and Lake

(October 1-November 30 and March 1-September 30)

<!-- PageFooter="October 5, 2015" -->

<!-- PageFooter="Bulletin No. 2015-40" -->
<!-- PageBreak -->

Key city

County or other defined location

Maine

Bar Harbor

Hancock

(July 1-August 31)

Maryland

Ocean City

Worcester

(June 1-August 31)

Washington, DC Metro Area

Montgomery and Prince George's

Massachusetts

Boston/Cambridge

Suffolk, City of Cambridge

Falmouth

City limits of Falmouth

(July 1-August 31)

Martha's Vineyard

Dukes

(June 1-September 30)

Nantucket

Nantucket

(October 1-December 31 and June 1-September 30)

Michigan

Traverse City/Leland

Grand Traverse/Leelanau

(July 1-August 31)

New York

Lake Placid

Essex

(July 1-August 31)

New York City

Bronx, Kings, New York, Queens, and Richmond

Saratoga Springs/Schenectady

Saratoga and Schenectady

(July 1-August 31)

Pennsylvania

Hershey

Hershey

(June 1-August 31)

Philadelphia

Philadelphia

(October 1-November 30, March 1-June 30, and September

1-September 30)

Rhode Island

Jamestown/Middletown/Newport

Newport

(June 1-August 31)

South Carolina

Charleston

Charleston, Berkeley and Dorchester

(October 1-November 30 and March 1-September 30)

Texas

Midland

Midland

Utah

Park City

Summit

(December 1-March 31)

Virginia

Virginia Beach

City of Virginia Beach

(June 1-August 31)

Wallops Island

Accomack

(July 1-August 31)

<!-- PageFooter="Bulletin No. 2015-40" -->

<!-- PageFooter="October 5, 2015" -->
<!-- PageBreak -->

Key city
Washington, DC Metro Area

Washington
Seattle
Wyoming
Jackson/Pinedale
(June 1-September 30)

County or other defined location
Cities of Alexandria, Fairfax, and Falls Church;
counties of Arlington and Fairfax

King

Teton and Sublette

3\. Changes in high-cost localities. The
list of high-cost localities in this notice
differs from the list of high-cost localities
in section 5 of Notice 2014-57.

a. The following localities have been
added to the list of high-cost localities:
Mammoth Lakes, California; Grand Lake,
Colorado; Silverthorne/Breckenridge,
Colorado; Traverse City/Leland, Michi-
gan; Hershey, Pennsylvania; Wallops Is-
land, Virginia.

b. The following localities have
changed the portion of the year in which
they are high-cost localities: Napa, Cali-
fornia; Telluride, Colorado; Miami, Flor-
ida; Martha's Vineyard, Massachusetts;
Nantucket, Massachusetts; Jamestown/
Middletown/Newport, Rhode Island;
Charleston, South Carolina; Jackson/
Pinedale, Wyoming.

c. The following localities have been
removed from the list of high-cost locali-
ties: Sedona, Arizona; Santa Cruz, Cali-
fornia; New Orleans, Louisiana; Balti-
more City, Maryland; Cambridge/St.
Michaels, Maryland; Glendive/Sidney,
Montana; Conway, New Hampshire;
Glens Falls, New York; Tarrytown/White
Plains/New Rochelle, New York; Kill
Devil, North Carolina; Williston, North
Dakota.

## SECTION 6. EFFECTIVE DATE

This notice is effective for per diem
allowances for lodging, meal and inciden-

tal expenses, or for meal and incidental
expenses only, that are paid to any em-
ployee on or after October 1, 2015, for
travel away from home on or after Octo-
ber 1, 2015. For purposes of computing
the amount allowable as a deduction for
travel away from home, this notice is ef-
fective for meal and incidental expenses
or for incidental expenses only paid or
incurred on or after October 1, 2015. See
sections 4.06 and 5.04 of Rev. Proc.
2011-47 for transition rules for the last 3
months of calendar year 2015.

## SECTION 7. EFFECT ON OTHER DOCUMENTS

Notice 2014-57 is superseded.
DRAFTING INFORMATION

The principal author of this notice is
Kari Fisher of the Office of Associate
Chief Counsel (Income Tax & Account-
ing). For further information regarding
this notice contact Kari Fisher at (202)
317-7007 (not a toll-free number).

# 2015 Section 43 Inflation Adjustment

Notice 2015-64

Section 43(b)(3)(B) of the Internal
Revenue Code requires the Secretary to

publish an inflation adjustment factor. The
enhanced oil recovery credit under § 43
for any taxable year is reduced if the "ref-
erence price," determined under
§ 45K(d)(2)(C), for the calendar year pre-
ceding the calendar year in which the tax-
able year begins is greater than $28 mul-
tiplied by the inflation adjustment factor
for that year. The credit is phased out in
any taxable year in which the reference
price for the preceding calendar year ex-
ceeds $28 (as adjusted) by at least $6.

The term "inflation adjustment factor"
means, with respect to any calendar year,
a fraction the numerator of which is the
GNP implicit price deflator for the preced-
ing calendar year and the denominator of
which is the GNP implicit price deflator
for 1990.

Because the reference price for the
2014 calendar year ($87.39) exceeds $28
multiplied by the inflation adjustment fac-
tor for the 2014 calendar year ($28 mul-
tiplied by 1.6245 = $45.49) by $41.90,
the enhanced oil recovery credit for qual-
ified costs paid or incurred in 2015 is
phased out completely.

Table 1 contains the GNP implicit
price deflator used for the 2015 calendar
year, as well as the previously published
GNP implicit price deflators used for the
1991 through 2014 calendar years.

Notice 2015-64 TABLE 1 GNP IMPLICIT PRICE DEFLATORS

Calendar Year

GNP Implicit Price Deflator

1990

112.9 (used for 1991)

1991

117.0 (used for 1992)

1992

120.9 (used for 1993)

<!-- PageFooter="October 5, 2015" -->

<!-- PageFooter="Bulletin No. 2015-40" -->
<!-- PageBreak -->

Notice 2015-64 TABLE 1 GNP IMPLICIT PRICE DEFLATORS

Calendar Year

GNP Implicit Price Deflator

1993

124.1 (used for 1994)

1994

126.0 (used for 1995)*

1995

107.5 (used for 1996)

1996

109.7 (used for 1997) **

1997

112.35 (used for 1998)

1998

112.64 (used for 1999) ***

1999

104.59 (used for 2000)

2000

106.89 (used for 2001)

2001

109.31 (used for 2002)

2002

110.63 (used for 2003)

2003

105.67 (used for 2004) ****

2004

108.23 (used for 2005)

2005

112.129 (used for 2006)

2006

116.036 (used for 2007)

2007

119.656 (used for 2008)

2008

122.407 (used for 2009)

2009

109.764 (used for 2010) *****

2010

110.654 (used for 2011)

2011

113.347 (used for 2012) ******

2012

115.387 (used for 2013)

2013

106.710 (used for 2014) *******

2014

108.407 (used for 2015):

\* Beginning in 1995, the GNP implicit price deflator was rebased relative to 1992. The 1990 GNP implicit price deflator
used to compute the 1996 § 43 inflation adjustment factor is 93.6.

** Beginning in 1997, two digits follow the decimal point in the GNP implicit price deflator. The 1990 GNP price defla-
tor used to compute the 1998 § 43 inflation adjustment factor is 93.63.

*** Beginning in 1999, the GNP implicit price deflator was rebased relative to 1996. The 1990 GNP implicit price defla-
tor used to compute the 2000 § 43 inflation adjustment factor is 86.53.

**** Beginning in 2003, the GNP implicit price deflator was rebased, and the 1990 GNP implicit price deflator used to
compute the 2004 § 43 inflation adjustment factor is 81.589.

Beginning in 2009, the GNP implicit price deflator was rebased, and the 1990 GNP implicit price deflator used to
compute the 2010 § 43 inflation adjustment factor is 72.199.

****** Beginning in 2011, the 1990 GNP implicit price deflator used to compute the 2012 § 43 inflation adjustment fac-
tor is 72.260.

Beginning in 2013, the GNP implicit price deflator was rebased, and the 1990 GNP implicit price deflator used
to compute the 2014 § 43 inflation adjustment factor is 66.803.

Beginning in 2014, the 1990 GNP implicit price deflator used to compute the 2015 § 43 inflation adjustment
factor is 66.732.

Table 2 contains the inflation adjust-
ment factor and the phase-out amount for
taxable years beginning in the 2015 cal-

endar year as well as the previously pub-
lished inflation adjustment factors and
phase-out amounts for taxable years be-

ginning in the 1991 through 2014 calendar
years.

<!-- PageFooter="Bulletin No. 2015-40" -->

<!-- PageFooter="October 5, 2015" -->
<!-- PageBreak -->

Notice 2015-64 TABLE 2 INFLATION ADJUSTMENT FACTORS AND PHASE-OUT AMOUNTS

Calendar Year

Inflation Adjustment Factor

Phase-out Amount

1991

1.0000

0

1992

1.0363

0

1993

1.0708

0

1994

1.0992

0

1995

1.1160

0

1996

1.1485

0

1997

1.1720

0

1998

1.1999

0

1999

1.2030

0

2000

1.2087

0

2001

1.2353

0

2002

1.2633

0

2003

1.2785

0

2004

1.2952

0

2005

1.3266

0

2006

1.3743

100 percent

2007

1.4222

100 percent

2008

1.4666

100 percent

2009

1.5003

100 percent

2010

1.5203

100 percent

2011

1.5326

100 percent

2012

1.5686

100 percent

2013

1.5968

100 percent

2014

1.5974

100 percent

2015

1.6245

100 percent

# DRAFTING INFORMATION

The principal author of this notice is
Martha M. Garcia of the Office of Associate
Chief Counsel (Passthroughs and Special
Industries). For further information regard-
ing this notice, contact Ms. Garcia at (202)
317-6853 (not a toll-free number).

## 2015 Marginal Production Rates Notice 2015-65

This notice announces the applicable
percentage under § 613A of the Internal
Revenue Code to be used in determining
percentage depletion for marginal proper-
ties for the 2015 calendar year.

Section 613A(c)(6)(C) defines the
term "applicable percentage" for pur-
poses of determining percentage deple-
tion for oil and gas produced from mar-
ginal properties. The applicable

percentage is the percentage (not greater
than 25 percent) equal to the sum of 15
percent, plus one percentage point for
each whole dollar by which $20 exceeds
the reference price (determined under
§ 45K(d)(2)(C)) for crude oil for the
calendar year preceding the calendar
year in which the taxable year begins.
The reference price determined under
§ 45K(d)(2)(C) for the 2014 calendar
year is $87.39.

The following table contains the appli-
cable percentages for marginal production
for taxable years beginning in calendar
years 1991 through 2015.

<!-- PageFooter="October 5, 2015" -->

<!-- PageFooter="Bulletin No. 2015-40" -->
<!-- PageBreak -->

# Notice 2015-65 APPLICABLE PERCENTAGE FOR MARGINAL PRODUCTION

Calendar Year

Applicable Percentage

1991

15 percent

1992

18 percent

1993

19 percent

1994

20 percent

1995

21 percent

1996

20 percent

1997

16 percent

1998

17 percent

1999

24 percent

2000

19 percent

2001

15 percent

2002

15 percent

2003

15 percent

2004

15 percent

2005

15 percent

2006

15 percent

2007

15 percent

2008

15 percent

2009

15 percent

2010

15 percent

2011

15 percent

2012

15 percent

2013

15 percent

2014

15 percent

2015

15 percent

The principal author of this notice is
Martha M. Garcia of the Office of Asso-
ciate Chief Counsel (Passthroughs and
Special Industries). For further information
regarding this notice contact Ms. Garcia at
(202) 317-6853 (not a toll-free number).

26 CFR 601.201: Rulings and determination letters.
(Also Part I, §§ 337, 355, 851, 856.)

## Rev. Proc. 2015-43 SECTION 1. PURPOSE

This revenue procedure supplements
Rev. Proc. 2015-3, 2015-1 I.R.B. 129,
which sets forth areas of the Internal Rev-
enue Code (Code) on which the Internal
Revenue Service (Service) will not issue
letter rulings or determination letters (no-
rule areas).

## SECTION 2. BACKGROUND

In the interest of sound tax administra-
tion, the Service answers inquiries from
individuals and organizations regarding
their status for tax purposes and the tax
effects of their acts or transactions before
the filing of returns or reports that are
required by the Code. See Rev. Proc.
2015-1, 2015-1 I.R.B. 1. There are, how-
ever, areas in which the Service will not
issue letter rulings or determination letters
because the issues are inherently factual
or for other reasons. The Service pub-
lishes guidance setting forth these no-rule
areas throughout the year and incorporates
them annually into the third revenue pro-
cedure of the year, currently Rev. Proc.
2015-3.

Section 4 of Rev. Proc. 2015-3 sets
forth areas in which the Service ordinarily

will not issue letter rulings or determina-
tion letters. "Not ordinarily" means that
unique and compelling reasons must be
demonstrated to justify the issuance of a
letter ruling or determination letter. Sec-
tion 2.01 of Rev. Proc. 2015-3.

Section 5 of Rev. Proc. 2015-3 sets
forth areas in which the Service temporar-
ily will not issue letter rulings or determi-
nation letters because those areas are un-
der study.

Section 2.01 of Rev. Proc. 2015-3 pro-
vides that the Service may decline to issue
a letter ruling or a determination letter,
including a letter ruling on a significant
issue requested under section 6.03 of Rev.
Proc. 2015-1, when appropriate in the in-
terest of sound tax administration, includ-
ing due to resource constraints, or on other
grounds whenever warranted by the facts
or circumstances of a particular case.

<!-- PageFooter="Bulletin No. 2015-40" -->

<!-- PageFooter="October 5, 2015" -->
<!-- PageBreak -->

# SECTION 3. PROCEDURE

.01 Rev. Proc. 2015-3 is supplemented
by adding new paragraphs (57) and (58) to
section 4.01 to read as follows:

(57) Section 355 .- Distribution of
Stock and Securities of a Controlled Cor-
poration .- Any issue relating to the qual-
ification, under § 355 and related provi-
sions, of a distribution, or another
distribution which is part of the same plan
or series of related transactions, if prop-
erty owned by any distributing corpora-
tion or any controlled corporation be-
comes the property of a regulated
investment company (RIC), within the
meaning of § 851, or a real estate invest-
ment trust (REIT), within the meaning of
§ 856, in a "conversion transaction" (as
defined in § 1.337(d)-7(a)(2)(ii)) with re-
spect to which no deemed sale election
described in § 1.337(d)-7(c) is made, and
the conversion transaction and the distri-
bution are parts of a plan or series of
related transactions. This paragraph (57)
shall not apply if, immediately after the
date of the distribution, both the distribut-
ing corporation and the controlled corpo-
ration will be RICs, or both of such cor-
porations will be REITs, and there is no
plan or intention on the date of the distri-
bution for either the distributing corpora-
tion or the controlled corporation to cease
to be a RIC or a REIT.

(58) Section 355 .- Distribution of
Stock and Securities of a Controlled Cor-
poration .- Any issue relating to the qual-
ification, under § 355 and related provi-
sions, of a distribution, or another
distribution which is part of the same plan
or series of related transactions, if, imme-
diately after any such distribution, the fair
market value of the gross assets of the
trade(s) or business(es) on which the dis-
tributing corporation or the controlled cor-
poration relies to satisfy the active trade or
business requirement of § 355(b) is less
than five percent of the total fair market
value of the gross assets of such corporation.

For purposes of determining the fair
market value of the gross assets of such
corporation and of the gross assets of such
trade(s) or business(es), (i) all members of
a separate affiliated group, within the
meaning of § 355(b)(3)(B), shall be
treated as one corporation; and (ii) if the
distributing corporation or the controlled

corporation relies on an active trade or
business of a partnership for purposes of
§ 355(b), such corporation shall be treated
as owning its ratable share of the gross
assets of the partnership.

This paragraph (58) shall not apply if
(i) all the stock of the controlled corporation
that is distributed in the distribution is dis-
tributed to one or more members of the
affiliated group, as defined in § 243(b)(2)(A),
of which the distributing corporation is a
member; and (ii) such distribution is not
part of a plan or series of related transac-
tions pursuant to which stock of any cor-
poration will be distributed outside such
affiliated group in a distribution described
in this paragraph (58), in paragraph (57)
of section 4.01 of this revenue procedure,
or in paragraph (26) of section 5.01 of this
revenue procedure.

.02 Rev. Proc. 2015-3 is supplemented
by adding new paragraph (26) to section
5.01 to read as follows:

(26) Section 355 .- Distribution of
Stock and Securities of a Controlled Cor-
poration .- Any issue relating to the qual-
ification, under § 355 and related provi-
sions, of a distribution, or another
distribution which is part of the same plan
or series of related transactions, if, imme-
diately after any such distribution, all of
the following conditions exist: (i) the fair
market value of the investment assets of
the distributing corporation or the con-
trolled corporation is two-thirds or more
of the total fair market value of its gross
assets; (ii) the fair market value of the
gross assets of the trade(s) or business(es)
on which the distributing corporation or
the controlled corporation relies to satisfy
the active trade or business requirement of
§ 355(b) is less than 10 percent of the fair
market value of its investment assets; and
(iii) the ratio of the fair market value of
the investment assets to the fair market
value of the assets other than investment
assets of the distributing corporation or
the controlled corporation is three times or
more of such ratio for the other corpora-
tion (i.e., the controlled corporation or the
distributing corporation, respectively).

For purposes of determining the fair mar-
ket value of the distributing corporation's
and the controlled corporation's investment
assets, assets other than investment assets,
assets of the trade or business, and total
assets, all members of such corporation's

separate affiliated group, within the mean-
ing of § 355(b)(3)(B), shall be treated as one
corporation.

If the distributing corporation or the
controlled corporation relies on an active
trade or business of a partnership for pur-
poses of § 355(b), then for purposes of
determining the fair market value of the
gross assets of the trade(s) or business(es)
on which the distributing corporation or
the controlled corporation relies to satisfy
the active trade or business requirement of
§ 355(b), such corporation shall be treated
as owning its ratable share of the gross
assets of the partnership.

For purposes of this paragraph (26),
"investment assets" has the meaning
given such term by § 355(g)(2)(B), except
as follows: (i) in the case of stock or
securities in a corporation any stock of
which is traded on (or subject to the rules
of) an established financial market within
the meaning of § 1.1092(d)-1(b) (publicly
traded stock), § 355(g)(2)(B)(iv) shall be
applied by substituting "50-percent" for
"20-percent;" (ii) except as provided in
clause (iv) of this sentence, an interest in
a publicly traded partnership (as defined
in § 7704(b), regardless of whether such
partnership is treated as a corporation pur-
suant to § 7704(a)) shall be treated in the
same manner as publicly traded stock; (iii)
except as provided in clause (iv) of this
sentence, an interest in a partnership that
is not a publicly traded partnership shall
be treated in the same manner as stock
which is not publicly traded stock; and
(iv) in the case of an interest in a partner-
ship (other than a publicly traded partner-
ship treated as a corporation pursuant to
§ 7704(a)), the active trade or business of
which is taken into account by the distrib-
uting corporation or the controlled corpo-
ration for purposes of § 355(b), or would
be taken into account without regard to the
five-year requirement of § 355(b)(2)(B),
clauses (ii) and (iii) of this sentence shall not
apply.

The Service also will not rule on any
issue relating to the qualification, under
§ 355 and related provisions, of a distri-
bution if, as part of a plan or series of
related transactions, investment assets are
disposed of, or property, including prop-
erty qualifying as an active trade or busi-
ness within the meaning of § 355(b), is

<!-- PageFooter="October 5, 2015" -->

<!-- PageFooter="Bulletin No. 2015-40" -->
<!-- PageBreak -->

acquired with a principal purpose of
avoiding this paragraph (26).

This paragraph (26) shall not apply if
(i) all the stock of the controlled corpora-
tion that is distributed in the distribution is
distributed to one or more members of the
affiliated group, as defined in § 243(b)(2)(A),
of which the distributing corporation is a
member; and (ii) such distribution is not
part of a plan or series of related transac-
tions pursuant to which stock of any cor-
poration will be distributed outside such
affiliated group in a distribution described
in this paragraph (26), or in paragraph
(57) or (58) of section 4.01 of this revenue
procedure.

# SECTION 4. EFFECTIVE DATE

This revenue procedure applies to all
ruling requests that are postmarked or, if
not mailed, received on or after September
14, 2015, and relate to distributions that
occur after such date.

# SECTION 5. EFFECT ON OTHER REVENUE PROCEDURE

Rev. Proc. 2015-3 is supplemented.

# SECTION 6. DRAFTING INFORMATION

The principal author of this revenue
procedure is Stephanie D. Floyd of the
Office of Associate Chief Counsel (Cor-
porate). For further information regarding
this revenue procedure, contact Stephanie
D. Floyd at (202) 317-6848 (not a toll-free
number).

26 CFR 1.168(k)-1: Additional first year depreciation.
(Also Part 1, § 179.)

# Rev. Proc. 2015-48 SECTION 1. PURPOSE

This revenue procedure provides guid-
ance for issues related to the enactment of
§ 125(a), § 125(c)(2), and § 127(d) of the
Tax Increase Prevention Act of 2014, Pub.
L. No. 113-295, 128 Stat. 4010 (Decem-
ber 19, 2014) (TIPA). Section 125(a) of
the TIPA amended § 168(k)(2) of the In-
ternal Revenue Code (Code) by extending
the placed-in-service date for property to
qualify for the 50-percent additional first

year depreciation deduction. Section
125(c)(2) of the TIPA amended
§ 168(k)(4) by allowing corporations to
elect not to claim the 50-percent addi-
tional first year depreciation deduction for
certain property placed in service gener-
ally after December 31, 2013, and before
January 1, 2015, and instead to increase
their alternative minimum tax (AMT)
credit limitation under § 53(c). Section
127(d) of the TIPA amended § 179(f) by
extending the application of § 179(f) from
any taxable year beginning after 2009 and
before 2014 to any taxable year beginning
after 2009 and before 2015.

# SECTION 2. BACKGROUND

.01 Extension of 50-Percent
Additional First Year Depreciation
Deduction.

(1) Prior to amendment by the TIPA,
§ 168(k)(1) allowed a 50-percent addi-
tional first year depreciation deduction for
qualified property acquired by a taxpayer
after 2007 and placed in service by the
taxpayer before 2014 (before 2015 in the
case of property described in
§ 168(k)(2)(B) and (C)). Section 125(a) of
the TIPA amended § 168(k)(2) by extend-
ing the placed-in-service date to before
2015 (before 2016 in the case of property
described in § 168(k)(2)(B) and (C)), and
extending other dates in § 168(k)(2) by
changing "2014" to "2015" or "January 1,
2014" to "January 1, 2015" (for example,
the self-constructed property rules in
§ 168(k)(2)(E)(i)).

(2) Section 168(k)(2)(D)(iii) provides
that a taxpayer may elect not to deduct
additional first year depreciation for any
class of property placed in service by the
taxpayer during the taxable year. The term
"class of property" is defined in
§ 1.168(k)-1(e)(2)(i) of the Income Tax
Regulations to mean, in general, each
class of property described in § 168(e)
(for example, 5-year property). If the tax-
payer makes this election, it applies to all
qualified property that is in the same class
and placed in service in the same taxable
year.

(3) Section 1.168(k)-1(e)(3)(i) pro-
vides that the election not to deduct addi-
tional first year depreciation must be made
by the due date, including extensions, of
the federal tax return for the taxable year

in which the taxpayer places the property
in service. Section 1.168(k)-1(e)(3)(ii)
provides that this election generally must
be made in the manner prescribed on
Form 4562, Depreciation and Amortiza-
tion, and its instructions. The instructions
to Form 4562 for the 2013 and 2014 tax-
able years provide that the election is
made by attaching a statement to the tax-
payer's timely filed tax return indicating
that the taxpayer is electing not to deduct
the additional first year depreciation and
the class of property for which the tax-
payer is making the election. Section
1.168(k)-1(e)(7)(i) provides that once the
election is made, it generally may be re-
voked only with the written consent of the
Commissioner of Internal Revenue.

(4) Taxpayers with a taxable year be-
ginning in 2013 and ending in 2014 that
filed their 2013 federal tax returns before
the enactment of the TIPA may be uncer-
tain how to claim the 50-percent addi-
tional first year depreciation for qualified
property placed in service after December
31, 2013, in taxable years ending in 2014.
Section 3 of this revenue procedure pro-
vides the procedures for claiming or not
claiming the 50-percent additional first
year depreciation for this property.

.02 TIPA Amendment of § 168(k)(4).

(1) Prior to amendment by the Tax
Relief, Unemployment Insurance Reau-
thorization, and Job Creation Act of 2010,
Pub. L. No. 111-312, 124 Stat. 3296 (De-
cember 17, 2010) (TRUIRJCA),
§ 168(k)(4) allowed a corporation or an S
corporation to elect not to claim the addi-
tional first year depreciation deduction al-
lowable under § 168(k) for eligible qual-
ified property or extension property and
instead increase the business credit limi-
tation under § 38(c) and the AMT credit
limitation under § 53(c). As a result, a
corporation or S corporation was able to
claim unused credits from taxable years
beginning before January 1, 2006, that
were allocable to research expenditures or
AMT liabilities, and accelerate such cred-
its as refundable credits. With the excep-
tion of revised dates, eligible qualified
property or extension property is property
eligible for the additional first year depre-
ciation deduction under § 168(k)(1).

(2) Section 401(c) of TRUIRJCA
amended § 168(k)(4) by adding § 168(k)(4)(I)

<!-- PageFooter="Bulletin No. 2015-40" -->

<!-- PageFooter="October 5, 2015" -->
<!-- PageBreak -->

to the Code. Section 168(k)(4)(I) applied
to property placed in service generally
after 2010 and before 2013 (round 2 ex-
tension property). Section 331(c) of the
American Taxpayer Relief Act of 2012,
Pub. L. No. 112-240, 126 Stat. 2313 (January
2, 2013) (ATRA), amended § 168(k)(4) by
adding § 168(k)(4)(J) to the Code. Section
168(k)(4)(J) applied to property placed in
service generally after 2012 and before 2014
(round 3 extension property). With the ex-
ception of revised dates, round 2 extension
property or round 3 extension property is
property eligible for the additional first year
depreciation deduction under § 168(k)(1).
Pursuant to § 168(k)(4)(I)(i) and (J)(i),
§ 168(k)(4) increased only the AMT credit
limitation under § 53(c) for round 2 exten-
sion property and round 3 extension prop-
erty. As a result, § 168(k)(4) allowed a cor-
poration or an S corporation to elect not to
claim the additional first year depreciation
deduction allowable under § 168(k) for
round 2 extension property and round 3
extension property and instead increase the
AMT credit limitation under § 53(c). Ac-
cordingly, a corporation or S corporation
was able to claim unused credits from tax-
able years beginning before January 1,
2006, that were allocable to AMT liabilities
and accelerate such credits as refundable
credits.

(3) With the extension of the additional
first year depreciation deduction by
§ 125(a) of the TIPA, § 168(k)(4) is cor-
respondingly extended to apply to "round
4 extension property." Section 125(c)(2)
of the TIPA amended § 168(k)(4) by add-
ing § 168(k)(4)(K) to the Code. Section
168(k)(4)(K)(iii) defines the term "round
4 extension property" as meaning prop-
erty that is eligible qualified property
solely by reason of the extension of
§ 168(k)(2) by the TIPA. Section 4.01 of
this revenue procedure clarifies which el-
igible qualified property is round 4 exten-
sion property.

(4) Pursuant to § 168(k)(4)(K)(i)(I),
§ 168(k)(4) increases only the AMT credit
limitation under § 53(c) for round 4 ex-
tension property. As a result, § 168(k)(4)
allows a corporation or an S corporation
to elect not to claim the additional first
year depreciation deduction allowable un-
der § 168(k) for round 4 extension prop-
erty and instead increase the AMT credit
limitation under § 53(c). Accordingly, a

corporation or S corporation is able to
claim unused credits from taxable years
allocable to AMT liabilities and accelerate
such credits as refundable credits.

(5) Section 168(k)(4)(K)(ii)(I) pro-
vides that if a corporation has an election
in effect under § 168(k)(4) for round 3
extension property and the corporation
does not make the election not to apply
§ 168(k)(4) to round 4 extension property,
the corporation is treated as having an
election in effect for round 4 extension
property. Section 4.02 of this revenue pro-
cedure provides guidance regarding the
time and manner for making an election
not to apply § 168(k)(4) to round 4 exten-
sion property.

(6) Section 168(k)(4)(K)(ii)(II) pro-
vides that if a corporation does not have
an election in effect under § 168(k)(4) for
round 3 extension property, the corpora-
tion may elect to apply § 168(k)(4) to
round 4 extension property. Section 4.03
of this revenue procedure provides guid-
ance regarding the time and manner for
making this election.

.03 Extension of Application of § 179(f).

(1) Section 179(a) allows a taxpayer to
elect to treat the cost (or a portion of the
cost) of any § 179 property as an expense
for the taxable year in which the taxpayer
places the property in service. Section
179(b)(1) and section 179(b)(2) prescribe
a dollar limitation on the aggregate cost of
§ 179 property that can be treated as an
expense under § 179(a). The dollar limi-
tation is the amount under § 179(b)(1) (the
§ 179(b)(1) limitation), reduced (but not
below zero) by the amount by which the
cost of § 179 property placed in service
during the taxable year exceeds the
amount under § 179(b)(2) (the § 179(b)(2)
limitation). Prior to amendment by the
TIPA, the § 179(b)(1) limitation was $500,000
for taxable years beginning in 2010, 2011,
2012, or 2013, and $25,000 for taxable
years beginning after 2013. The § 179(b)(2)
limitation was $2,000,000 for taxable
years beginning in 2010, 2011, 2012, or
2013, and $200,000 for taxable years be-
ginning after 2013. Section 127(a) of the
TIPA extended the $500,000 § 179(b)(1)
limitation to taxable years beginning after
2009 and before 2015 and the $2,000,000

§ 179(b)(2) limitation to taxable years be-
ginning after 2009 and before 2015.

(2) Section 179(b)(3)(A) provides that
a taxpayer's § 179 deduction for any tax-
able year, after application of the
§ 179(b)(1) and (2) limitations, is limited
to the taxpayer's taxable income for that
taxable year that is derived from the tax-
payer's active conduct of any trade or
business during that taxable year (taxable
income limitation). Section 179(b)(3)(B)
provides that the amount of any cost of
§ 179 property elected to be expensed in a
taxable year that is disallowed as a § 179
deduction under the taxable income limi-
tation may be carried forward for an un-
limited number of years and may be de-
ducted under § 179(a) in a future year
subject to the same limitations.

(3) If a taxpayer elects to apply
§ 179(f), § 179 property includes qualified
real property (as defined in § 179(f)(1)
and(2)). Prior to amendment by the TIPA,
§ 179(f) applied to qualified real property
placed in service in any taxable year be-
ginning in 2010, 2011, 2012, or 2013.
Section 127(d)(1) of the TIPA extended
the application of § 179(f) to qualified real
property placed in service in any taxable
year beginning after 2009 and before
2015.

(4) For purposes of applying the
§ 179(b)(1) limitation ($500,000) for any
taxable year beginning after 2009 and be-
fore 2015, § 179(f)(3) provides that not
more than $250,000 of the aggregate cost
(as defined in § 179(d)(3) and § 1.179-
4(d)) of § 179 property that is treated as an
expense under § 179(a) for the taxable
year can be attributable to qualified real
property. Thus, the maximum amount of
qualified real property that may be ex-
pensed under § 179(a) for any taxable
year beginning after 2009 and before 2015
is $250,000.

(5) Prior to amendment by the TIPA,
§ 179(f)(4) provided that, notwithstanding
§ 179(b)(3)(B), a taxpayer that elected to
apply § 179(f) and elected to expense un-
der § 179(a) the cost (or a portion of the
cost) of qualified real property placed in
service during any taxable year beginning
in 2010, 2011, 2012, or 2013 could not
carryover to any taxable year beginning
after 2013 the amount of any cost of such
property that was disallowed as a § 179
deduction under the taxable income limi-

<!-- PageFooter="October 5, 2015" -->

<!-- PageFooter="Bulletin No. 2015-40" -->
<!-- PageBreak -->

tation of § 179(b)(3)(A) (2010, 2011,
2012, or 2013 disallowed § 179 deduc-
tion). To the extent that any § 179 deduc-
tion attributable to qualified real property
was not allowed to be carried over to a
taxable year beginning after 2013, that
amount was required to be treated as an
amount for which an election under § 179
was not made and as property placed in
service on the first day of the taxpayer's
last taxable year beginning in 2013 for
purposes of computing depreciation. Sec-
tion 127(d)(2) of the TIPA amended
§ 179(f)(4) by striking "2013" each place
it appeared and inserting "2014".

(6) The Treasury Department and the
Internal Revenue Service recognize that a
taxpayer that treated the amount of a
2010, 2011, 2012, or 2013 disallowed
§ 179 deduction for qualified real property
as property placed in service on the first
day of the taxpayer's last taxable year
beginning in 2013 may want to carryover
that amount to any taxable year beginning
in 2014 in accordance with § 179(f)(4), as
amended by the TIPA. Section 5 of this
revenue procedure provides the proce-
dures to do this.

# SECTION 3. TIPA RETROACTIVE APPLICATION OF 50-PERCENT ADDITIONAL FIRST YEAR DEPRECIATION DEDUCTION

.01 Scope. This section 3 applies to a
taxpayer that did not claim the 50-percent
additional first year depreciation for some
or all qualified property placed in service
by the taxpayer after December 31, 2013,
on its federal tax return for its taxable year
beginning in 2013 and ending in 2014
(2013 taxable year) or its taxable year of
less than 12 months beginning and ending
in 2014 (2014 short taxable year). For
purposes of this section 3:

(1) The term "qualified property" has
the same meaning as that term is defined
in § 168(k)(2), as amended by the TIPA;

(2) The term "2013 qualified property"
means qualified property placed in service
by the taxpayer before January 1, 2014, in
its 2013 taxable year; and

(3) The term "2014 qualified property"
means qualified property placed in service
by the taxpayer after December 31, 2013,
in its 2013 taxable year or 2014 short
taxable year, as applicable.

.02 No Election Made To Not Deduct
50-Percent Additional First Year Depre-
ciation. If, on its timely filed federal tax
return for the 2013 taxable year or the
2014 short taxable year (both as defined in
section 3.01 of this revenue procedure), as
applicable, a taxpayer did not deduct the
50-percent additional first year deprecia-
tion for a class of property that is qualified
property or for some or all of its 2014
qualified property, and did not make an
election within the time and in the manner
described in either section 2.01(3) or sec-
tion 3.04(2) of this revenue procedure not
to deduct the 50-percent additional first
year depreciation deduction for the class
of property in which the qualified property
or the 2014 qualified property, as applica-
ble, is included, the taxpayer may claim
the 50-percent additional first year depre-
ciation for that class by filing either:

(1) An amended federal tax return for
the 2013 taxable year or the 2014 short
taxable year, as applicable, before the tax-
payer files its federal tax return for the
first taxable year succeeding the 2013 tax-
able year or the 2014 short taxable year, as
applicable. If the taxpayer has both a 2013
taxable year and a 2014 short taxable year,
and has timely filed federal tax returns for
both such years, the amended federal tax
returns for both the 2013 taxable year and
the 2014 short taxable year must be filed
before the taxpayer files its federal tax
return for the first taxable year succeeding
the 2014 short taxable year; or

(2) A Form 3115, Application for
Change in Accounting Method, under sec-
tion 6.01 of Rev. Proc. 2015-14, 2015-5
I.R.B. 450, 459, with the taxpayer's
timely filed federal tax return for the first
or second taxable year succeeding the
2013 taxable year or the 2014 short tax-
able year, as applicable, if the taxpayer
owns the property as of the first day of the
year of change (as defined in section 3.19
of Rev. Proc. 2015-13, 2015-5 I.R.B.
419, 429). If the taxpayer has both a 2013
taxable year and a 2014 short taxable year,
and has timely filed federal tax returns for
both such years, the Form 3115 must be
filed with the taxpayer's timely filed fed-
eral tax return for the first or second tax-
able year succeeding the 2014 short tax-
able year if the taxpayer owns the
property as of the first day of the year of
change.

.03 Consent Granted to Revoke Elec-
tion to Not Deduct 50-Percent Additional
First Year Depreciation. If, on its timely
filed federal tax return for the 2013 tax-
able year or the 2014 short taxable year, as
applicable, a taxpayer made an election
within the time and in the manner de-
scribed in section 2.01(3) of this revenue
procedure to not deduct the 50-percent
additional first year depreciation for a
class of property that is qualified property,
the Commissioner grants the taxpayer
consent to revoke that election, provided
the taxpayer files an amended federal tax
return for the 2013 taxable year or the
2014 short taxable year, as applicable, in a
manner that is consistent with the revoca-
tion of the election and by the later of (1)
December 4, 2015, or (2) before the tax-
payer files its federal tax return for the
first taxable year succeeding the 2013 tax-
able year or the 2014 short taxable year.

.04 Election To Not Deduct 50-Percent
Additional First Year Depreciation.

(1) In general. A taxpayer that timely
filed its federal tax return for the 2013
taxable year or the 2014 short taxable
year, as applicable, has made the election
to not deduct the 50-percent additional
first year depreciation for a class of prop-
erty that is qualified property if the tax-
payer made the election within the time
and in the manner provided in section
2.01(3) of this revenue procedure and did
not revoke that election within the time
and in the manner provided in section 3.03
of this revenue procedure.

(2) Deemed election. If section 3.04(1)
of this revenue procedure does not apply,
a taxpayer that timely filed its federal tax
return for the 2013 taxable year or the
2014 short taxable year, as applicable,
will be treated as making the election to
not deduct the 50-percent additional first
year depreciation for a class of property
that is qualified property if the taxpayer:

(a) On that return, did not deduct the
50-percent additional first year deprecia-
tion for that class of property but did
deduct depreciation; and

(b) Does not file an amended federal
tax return or a Form 3115 within the time
and in the manner provided in section 3.02
or section 3.03 of this revenue procedure,
as applicable, to claim the 50-percent ad-
ditional first year depreciation for the
class of property.

<!-- PageFooter="Bulletin No. 2015-40" -->

<!-- PageFooter="October 5, 2015" -->
<!-- PageBreak -->

(3) Application. If the taxpayer makes
the election under section 3.04(1) or (2) of
this revenue procedure for its 2013 tax-
able year, the election applies to both
2013 qualified property and 2014 quali-
fied property in the same class of property
for which the election is made. If the
taxpayer makes the election under section
3.04(1) or (2) of this revenue procedure
for its 2014 short taxable year, the election
applies to 2014 qualified property in the
same class of property for which the elec-
tion is made.

# SECTION 4. ROUND 4 EXTENSION PROPERTY

## .01 Definition of Round 4 Extension Property.

(1) In general. Under § 168(k)(4)(K)(iii),
round 4 extension property means prop-
erty that is eligible qualified property
solely by reason of the extension of
§ 168(k)(2) by the TIPA. Pursuant to
§ 168(k)(4)(D), as amended by the TIPA,
the term "eligible qualified property"
means qualified property under § 168(k)(2),
except that in applying § 168(k)(2), (1)
"March 31, 2008" is substituted for "De-
cember 31, 2007" each place it appears in
§ 168(k)(2)(A) and § 168(k)(2)(E)(i) and
(ii), (2) "April 1, 2008" is substituted for
"January 1, 2008" in § 168(k)(2)(A)(iii)(I),
and (3) only adjusted basis attributable to
manufacture, construction, or production
after March 31, 2008, and before January
1, 2010, and after December 31, 2010, and
before January 1, 2015, is taken into ac-
count under § 168(k)(2)(B)(ii). However,
the binding contract requirement in
§ 168(k)(2)(A)(iii)(I) does not apply for
determining whether a passenger aircraft
is eligible qualified property. Section
168(k)(4)(G)(iii). See section 3 of Rev.
Proc. 2008-65, 2008-2 C.B. 1082 (as
modified by section 7.01 of Rev. Proc.
2009-33, 2009-29 I.R.B. 150) and sec-
tion 3.02 of Rev. Proc. 2009-33 for addi-
tional guidance on the definition of eligi-
ble qualified property that is not extension
property for purposes of § 168(k)(4).

(2) Round 4 extension property de-
fined. Round 4 extension property is eli-
gible qualified property (as defined in
§ 168(k)(4)(D), as amended by the TIPA)
that:

(a) Is acquired by the taxpayer after
March 31, 2008, is placed in service by
the taxpayer after December 31, 2013, and
before January 1, 2015, and is not de-
scribed in § 168(k)(2)(B) (long-production
period property or transportation prop-
erty) or § 168(k)(2)(C) (certain aircraft)
that is placed in service by the taxpayer
after December 31, 2013, and before Jan-
uary 1, 2015;

(b) Meets the requirements of
§ 168(k)(2)(B) (long production period
property or transportation property), is ac-
quired by the taxpayer after March 31,
2008, and is placed in service by the tax-
payer after December 31, 2014, and be-
fore January 1, 2016; or

(c) Meets the requirements of
§ 168(k)(2)(C) (certain aircraft), is ac-
quired by the taxpayer after March 31,
2008, and is placed in service by the tax-
payer after December 31, 2014, and be-
fore January 1, 2016.

.02 Election Not to Apply § 168(k)(4) to
Round 4 Extension Property.

(1) In general. If a corporate taxpayer
has an election in effect under § 168(k)(4)
for round 3 extension property (as defined
in § 168(k)(4)(J)(iv)), the taxpayer may
make an election not to apply § 168(k)(4)
to round 4 extension property placed in
service by the taxpayer in its first taxable
year ending after December 31, 2013, and
in any subsequent taxable year. Even if
the taxpayer does not place in service any
round 4 extension property in its first tax-
able year ending after December 31, 2013,
the taxpayer must make the election not to
apply § 168(k)(4) to round 4 extension
property for that taxable year if the tax-
payer wishes to apply such election to
round 4 extension property placed in ser-
vice in a subsequent taxable year. Failure
to comply with all of the applicable re-
quirements of section 4.02(2) of this rev-
enue procedure will nullify a taxpayer's
attempted election not to apply § 168(k)(4)
to round 4 extension property.

(2) Time and Manner for Making the
Election Not to Apply § 168(k)(4) to
Round 4 Extension Property.

(a) In general. A corporate taxpayer
that timely files its federal income tax
return for its first taxable year ending after
December 31, 2013, makes the election
not to apply § 168(k)(4) to round 4 exten-

sion property by applying the election
procedures in section 4.02 or 4.03 of Rev.
Proc. 2009-33, as applicable, or by meet-
ing the deemed election requirements in
section 4.02(b) or (c) of this revenue pro-
cedure, as applicable. If the taxpayer has
timely filed such federal income tax return
and did not make the election not to apply
§ 168(k)(4) to round 4 extension property
but wants to do so, see section 4.04 of
Rev. Proc. 2009-33 for how to make a
late election. In applying section 4.02,
4.03, or 4.04 of Rev. Proc. 2009-33, as
applicable, the taxpayer should make the
following substitutions:

(i) "round 4 extension property" is sub-
stituted for "extension property";

(ii) "December 31, 2013" is substituted
for "December 31, 2008"; and

(iii) "The TIPA" is substituted for "The
Act".

(b) Deemed election for taxpayers that
are not members of a controlled group of
corporations. This section 4.02(2)(b) ap-
plies to a corporate taxpayer that is not a
member of a controlled group of corpora-
tions (as defined in § 168(k)(4)(C)(iv) and
in section 2.05 of Rev. Proc. 2009-16,
2009-6 I.R.B. 449). If that taxpayer
timely filed its original federal income tax
return for its first taxable year ending after
December 31, 2013, on or before Decem-
ber 4, 2015, the taxpayer will be treated as
making the election not to apply § 168(k)(4)
to round 4 extension property if the tax-
payer:

(i) Filed, with its original federal in-
come tax return for the taxpayer's first
taxable year ending after December 31,
2013, the Form 4562, Depreciation and
Amortization (Including Information on
Listed Property), indicating that the tax-
payer: (A) claimed the additional first year
depreciation deduction for all round 4 ex-
tension property placed in service by the
taxpayer during that taxable year (unless
the taxpayer made the election under
§ 168(k)(2)(D)(iii) for the class of prop-
erty in which the round 4 extension prop-
erty is included); and (B) used the appli-
cable depreciation method for such
property under § 168(b) (unless the tax-
payer elected the alternative depreciation
system under § 168(g)(7) for the class of
property in which the round 4 extension
property is included); and

<!-- PageFooter="October 5, 2015" -->

<!-- PageFooter="Bulletin No. 2015-40" -->
<!-- PageBreak -->

(ii) Provides written notification, if no-
tification has not previously been pro-
vided, to any partnership in which the
taxpayer is a partner that the taxpayer is
making the election not to apply § 168(k)(4) to
round 4 extension property. This notifica-
tion must be made to the applicable part-
nership(s) by December 4, 2015.

(c) Deemed election for taxpayers that
are members of a controlled group of cor-
porations.

(i) In general. If any member of a
controlled group of corporations (herein-
after such group is referred to as a "con-
trolled group") is treated as making the
election not to apply § 168(k)(4) to round
4 extension property under section
4.02(2)(c)(ii) or (iii) of this revenue pro-
cedure, such election is binding on all
other members of the controlled group.
See section 4.03(1) of Rev. Proc. 2009-33.

(ii) All members of a controlled group
constitute a single consolidated group.
This section 4.02(2)(c)(ii) applies when
all members of a controlled group are
members of a consolidated group. If the
common parent (within the meaning of
§ 1.1502-77(a)(1)(i)) of the consolidated
group timely filed the original consoli-
dated federal income tax return for its first
taxable year ending after December 31,
2013, on or before December 4, 2015, all
members of the consolidated group will
be treated as making an election not to
apply § 168(k)(4) to all round 4 extension
property if the common parent complies
with the procedures in section 4.02(2)(b)
of this revenue procedure for all members
of the consolidated group (for example,
the written notification required in section
4.02(2)(b)(ii) of this revenue procedure is
provided to all partnerships in which any
member is a partner).

(iii) All members of a controlled group
do not constitute a single consolidated
group. This section 4.02(2)(c)(ii) applies
when separate federal income tax returns
are filed by some or all members of a
controlled group. If a controlled group
includes, but is not limited to, members of
a consolidated group, the consolidated
group is treated as a single member of the
controlled group. If a member of the con-
trolled group timely filed its original fed-
eral income tax return for its first taxable
year ending after December 31, 2013, on
or before December 4, 2015, such mem-

ber will be treated as making the election
not to apply § 168(k)(4) to all round 4
extension property if the member:

(A) Complies with the procedures in
section 4.02(2)(b) of this revenue proce-
dure; and

(B) Provides written notification, if noti-
fication has not previously been provided, to
all other members of the controlled group
that the election not to apply § 168(k)(4) to
round 4 extension property will be made.
This notification must be made to the other
members by December 4, 2015.

.03 Section 168(k)(4) Round 4 Extension
Property Election.

(1) In general. If a corporate taxpayer
does not have an election in effect under
§ 168(k)(4) for round 3 extension property
(as defined in § 168(k)(4)(J)(iv)), the tax-
payer may make an election to apply
§ 168(k)(4) to round 4 extension property
(§ 168(k)(4) round 4 extension property
election). If the § 168(k)(4) round 4 ex-
tension property election is made, the
election applies to all round 4 extension
property placed in service by the taxpayer
in its first taxable year ending after De-
cember 31, 2013, and in any subsequent
taxable year. Even if the taxpayer does not
place in service any round 4 extension
property in its first taxable year ending
after December 31, 2013, the taxpayer
must make the § 168(k)(4) round 4 exten-
sion property election for that taxable year
if the taxpayer wishes to apply the elec-
tion to round 4 extension property placed
in service in a subsequent taxable year.
Failure to comply with all of the applica-
ble requirements of section 4.03(2) of this
revenue procedure will nullify a taxpay-
er's attempted § 168(k)(4) round 4 exten-
sion property election.

(2) Time and Manner for Making the
§ 168(k)(4) Round 4 Extension Property
Election.

(a) In general. A corporate taxpayer
that timely files its federal income tax
return for its first taxable year ending after
December 31, 2013, makes the
§ 168(k)(4) round 4 extension property
election by applying the election proce-
dures in section 6.02, 6.03, or 6.04 of Rev.
Proc. 2009-33, as applicable, or by meet-
ing the deemed election requirements in
section 4.03(b) or (c) of this revenue pro-
cedure, as applicable. If the taxpayer has

timely filed such federal income tax return
and did not make the § 168(k)(4) round 4
extension property election but wants to
do so, see section 6.06 of Rev. Proc.
2009-33 for how to make a late election.
In applying section 6.02, 6.03, 6.04, or
6.06 of Rev. Proc. 2009-33, as applica-
ble, the taxpayer should make the follow-
ing substitutions:

(i) "round 4 extension property" is sub-
stituted for "extension property";

(ii) "§ 168(k)(4) round 4 extension
property election" is substituted for
"§ 168(k)(4) extension property election";

(iii) "December 31, 2013" is substi-
tuted for "December 31, 2008";

(iii) "2014" is substituted for "2008";

(iv) In section 6.02(2)(a)(i), strike the
language "(for example, Line 32g of the
2008 Form 1120)" and replace with the fol-
lowing: "(for example, Line 32 of the 2014
Form 1120)";

(v) Strike the language in section
6.02(2)(a)(ii) and replace with the follow-
ing: "Filing, with the Form 1120, the Form
8827, Credit for Prior Year Minimum Tax -
Corporations, for the taxpayer's first tax-
able year ending after December 31, 2013;"

(vi) Strike the word "Stimulus" in sec-
tions 6.02(2)(a)(iii) and 6.02(2)(b)(iii);

(vii) Strike the language in section
6.02(2)(b)(ii) and replace with the follow-
ing: "Attaching to the Form 1120S for the
taxpayer's first taxable year ending after
December 31, 2013, a statement indicat-
ing that the taxpayer is making the
§ 168(k)(4) round 4 extension property
election and a statement showing the com-
putation of the increase to the AMT credit
limitation under § 53(c) resulting from
making the § 168(k)(4) round 4 extension
property election;"

(viii) In section 6.03, strike the lan-
guage "If a corporate taxpayer did not
make the § 168(k)(4) election for its first
taxable year ending March 31, 2008, and
the taxpayer" and replace with the follow-
ing: "If a corporate taxpayer";

(ix) In section 6.04(2)(c)(iv), strike the
language "(excluding extensions)" and re-
place with the following: “(including ex-
tensions)"; and

(x) "December 31, 2014" is substituted
for "December 31, 2009".

(b) Deemed election for taxpayers that
are not members of a controlled group.
This section 4.03(2)(b) applies to a corporate

<!-- PageFooter="Bulletin No. 2015-40" -->

<!-- PageFooter="October 5, 2015" -->
<!-- PageBreak -->

taxpayer that is not a member of a controlled
group (as defined in § 168(k)(4)(C)(iv) and in
section 2.05 of Rev. Proc. 2009-16). If that
taxpayer timely filed its original federal in-
come tax return for its first taxable year
ending after December 31, 2013, on or be-
fore December 4, 2015, the taxpayer will be
treated as making the § 168(k)(4) round 4
extension property election if:

(i) In the case of a C corporation, the
taxpayer claimed the refundable credit on
the appropriate line of the original Form
1120, U.S. Corporation Income Tax Re-
turn, for its first taxable year ending after
December 31, 2013 (for example, Line 32
of the 2014 Form 1120);

(ii) In the case of a S corporation, the
taxpayer made appropriate adjustments to
the appropriate line of the original Form
1120S, U.S. Income Tax Return for an S
Corporation, for the taxpayer's first tax-
able year ending after December 31, 2013,
to reflect the results described in section
6.05(3) of Rev. Proc. 2009-33 from mak-
ing the § 168(k)(4) round 4 extension
property election (for example, Line 22b
of the 2014 Form 1120S). In applying
section 6.05(3) of Rev. Proc. 2009-33,
the taxpayer should substitute
"§ 168(k)(4) round 4 extension property
election" for "§ 168(k)(4) extension prop-
erty election";

(iii) The taxpayer filed, with the origi-
nal Form 1120 or Form 1120S, as appli-
cable, for the taxpayer's first taxable year
ending after December 31, 2013, the Form
4562 indicating that the taxpayer used the
straight line method of depreciation under
§ 168(b)(3) and did not claim the addi-
tional first year depreciation deduction for
all round 4 extension property placed in
service during that taxable year; and

(iv) The taxpayer provides written no-
tification, if notification has not previ-
ously been provided, to any partnership in
which the taxpayer is a partner that the
taxpayer is making the § 168(k)(4) round
4 extension property election. This notifi-
cation must be made to the applicable
partnership(s) by December 4, 2015.

(c) Deemed election for taxpayers that
are members of a controlled group.

(i) In general. If any member of a
controlled group is treated as making the
§ 168(k)(4) round 4 extension property
election under section 4.03(2)(c)(ii) or
(iii) of this revenue procedure, such elec-

tion is binding on all other members of the
controlled group. See section 4.03(1) of
Rev. Proc. 2009-33.

(ii) All members of a controlled group
constitute a single consolidated group.
This section 4.03(2)(c)(ii) applies when
all members of a controlled group are
members of a consolidated group. If the
common parent (within the meaning of
§ 1.1502-77(a)(1)(i)) of the consolidated
group timely filed the original consoli-
dated federal income tax return for its first
taxable year ending after December 31,
2013, on or before December 4, 2015, all
members of the consolidated group will
be treated as making the § 168(k)(4)
round 4 extension property election if the
common parent complies with the proce-
dures in section 4.03(2)(b) of this revenue
procedure for all members of the consol-
idated group (for example, the written no-
tification required in section
4.03(2)(b)(iv) of this revenue procedure is
provided to all partnerships in which any
member is a partner).

(iii) All members of a controlled group
do not constitute a single consolidated
group. This section 4.03(2)(c)(iii) applies
when separate federal income tax returns are
filed by some or all members of a controlled
group. If a controlled group includes, but is
not limited to, members of a consolidated
group, the consolidated group is treated as a
single member of the controlled group. If a
member of the controlled group timely filed
its original federal income tax return for its
first taxable year ending after December 31,
2013, on or before December 4, 2015, such
member will be treated as making the
§ 168(k)(4) round 4 extension property elec-
tion if the member:

(A) Complies with the procedures in sec-
tion 4.03(2)(b) of this revenue procedure; and

(B) Provides written notification, if no-
tification has not previously been pro-
vided, to all other members of the con-
trolled group that the § 168(k)(4) round 4
extension property election will be made.
This notification must be made to the
other members by December 4, 2015.

### SECTION 5. CARRYOVER OF 2010, 2011, 2012, OR 2013 DISALLOWED § 179 DEDUCTION FOR QUALIFIED REAL PROPERTY

.01 In General. A taxpayer that treated
the amount of a 2010, 2011, 2012, or 2013

disallowed § 179 deduction for qualified
real property as property placed in service
on the first day of the taxpayer's last tax-
able year beginning in 2013 may either (1)
continue that treatment, or (2) if the period
of limitations for assessment under
§ 6501(a) is open, amend its federal tax
return for the last taxable year beginning
in 2013 to carryover the 2010, 2011, 2012,
or 2013 disallowed § 179 deduction to any
taxable year beginning in 2014. However,
if the taxpayer's last taxable year begin-
ning in 2013 is open under the period of
limitations for assessment under § 6501(a)
and an affected succeeding taxable year is
closed under the period of limitations for
assessment under § 6501(a), the taxpayer
must continue to treat the amount of a
2010, 2011, 2012, or 2013 disallowed
§ 179 deduction as property placed in
service on the first day of the taxpayer's
last taxable year beginning in 2013.

.02 Time and Manner of Filing
Amended Federal Tax Return. The
amended federal tax return for the taxpay-
er's last taxable year beginning in 2013
must include any collateral adjustments to
taxable income or the tax liability (for
example, the amount of depreciation al-
lowed or allowable in the last taxable year
beginning in 2013 for the amount of the
2010, 2011, 2012, or 2013 disallowed
§ 179 deduction). Such collateral adjust-
ments must also be made on amended
federal tax returns for any affected suc-
ceeding taxable years. The amended re-
turns for the taxpayer's last taxable year
beginning in 2013 and for any affected
succeeding taxable years must be filed
within the time prescribed by law for fil-
ing an amended return for such taxable
years.

# SECTION 6. EFFECTIVE DATE

This revenue procedure is effective
September 15, 2015.

# SECTION 7. DRAFTING INFORMATION

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

<!-- PageFooter="October 5, 2015" -->

<!-- PageFooter="Bulletin No. 2015-40" -->
<!-- PageBreak -->

# Part IV. Items of General Interest

Notice of proposed
rulemaking; notice of
proposed rulemaking by
cross-reference to
temporary regulation.

## Treatment of Certain Transfers of Property to Foreign Corporations

### REG-139483-13

AGENCY: Internal Revenue Service (IRS),
Treasury.

ACTION: Notice of proposed rulemak-
ing; notice of proposed rulemaking by
cross-reference to temporary regulation.

SUMMARY: This document contains pro-
posed regulations relating to certain trans-
fers of property by United States persons to
foreign corporations. The proposed regula-
tions affect United States persons that trans-
fer certain property, including foreign good-
will and going concern value, to foreign
corporations in nonrecognition transactions
described in section 367 of the Internal Rev-
enue Code (Code). The proposed regula-
tions also combine portions of the existing
regulations under section 367(a) into a sin-
gle regulation. In addition, in the Rules and
Regulations section of this issue of the Bul-
letin, temporary regulations are being is-
sued under section 482 to clarify the coor-
dination of the transfer pricing rules with
other Code provisions. The text of those
temporary regulations serves as the text of a
portion of these proposed regulations.

DATES: Written or electronic comments
and requests for a public hearing must be
received by December 15, 2015.

ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG-139483-13), In-
ternal Revenue Service, Room 5203, P.O.
Box 7604, Ben Franklin Station, Wash-
ington, DC 20044. Submissions may be
hand-delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m. to
CC:PA:LPD:PR (REG-139483-13), Cou-
rier's Desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Wash-
ington, DC 20224; or sent electronically

via the Federal eRulemaking Portal at
http://www.regulations.gov (IRS REG-
139483-13).

FOR FURTHER INFORMATION

CONTACT: Concerning the proposed
regulations, Ryan A. Bowen, (202) 317-
6937; concerning submissions of com-
ments or requests for a public hearing,
Regina Johnson, (202) 317-6901 (not a
toll-free number).

## SUPPLEMENTARY INFORMATION: Paperwork Reduction Act

The collections of information con-
tained in the regulations have been sub-
mitted for review and approved by the
Office of Management and Budget in ac-
cordance with the Paperwork Reduction
Act of 1995 (44 U.S.C. 3507 (d)) under
control number 1545-0026.

The collections of information are in
§ 1.6038B-1(c)(4) and (d)(1). The collec-
tions of information are mandatory. The
likely respondents are domestic corpora-
tions. Burdens associated with these re-
quirements will be reflected in the burden
for Form 926. Estimates for completing
the Form 926 can be located in the form
instructions.

An agency may not conduct or spon-
sor, and a person is not required to re-
spond to, a collection of information un-
less it displays a valid control number.

Books and records relating to a collec-
tion of information must be retained as
long as their contents might become ma-
terial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.

### Background

I. Current Law

A. Section 367(a)

Section 367(a)(1) provides that if, in
connection with any exchange described
in section 332, 351, 354, 356, or 361, a
United States person (U.S. transferor)
transfers property to a foreign corporation
(outbound transfer), the transferee foreign
corporation will not, for purposes of de-

termining the extent to which gain shall be
recognized on such transfer, be considered
to be a corporation. As a result, under
section 367(a)(1), the U.S. transferor rec-
ognizes any gain (but not loss) on the
outbound transfer of the property. Section
367(a)(2) provides an exception to the ap-
plication of section 367(a)(1) for certain
transfers of stock or securities, and section
367(a)(3) provides an exception for trans-
fers of certain property used in a trade or
business.

Specifically, section 367(a)(3)(A) pro-
vides that, except as provided in regula-
tions prescribed by the Secretary, the gen-
eral rule of section 367(a)(1) will not
apply to any property transferred to a for-
eign corporation for use by such foreign
corporation in the active conduct of a
trade or business outside of the United
States (ATB exception). Section
367(a)(3)(B) provides that, except as pro-
vided in regulations prescribed by the
Secretary, certain property is not eligible
for the ATB exception. The statute de-
scribes five categories of property that are
not eligible for the ATB exception: (i)
property described in paragraph (1) or (3)
of section 1221(a) (relating to inventory
and copyrights, etc.); (ii) installment obli-
gations, accounts receivable, or similar
property; (iii) foreign currency or other
property denominated in foreign currency;
(iv) intangible property within the mean-
ing of section 936(h)(3)(B); and (v) prop-
erty with respect to which the U.S. trans-
feror is a lessor at the time of the transfer,
unless the foreign corporation was the
lessee.

Section 367(a)(3)(C) provides that, ex-
cept as provided in regulations prescribed
by the Secretary, the ATB exception will
not apply to gain realized on an outbound
transfer of the assets of a foreign branch to
the extent that previously deducted losses
of the branch exceed the taxable income
earned by the branch after the losses were
incurred (branch loss recapture rule).
However, any realized gain in the prop-
erty transferred that exceeds the branch
losses that must be recaptured under this
rule may qualify for the ATB exception.

Section 367(a)(6) provides that section
367(a)(1) will not apply to an outbound
transfer of any property that the Secretary,

<!-- PageFooter="Bulletin No. 2015-40" -->

<!-- PageFooter="October 5, 2015" -->
<!-- PageBreak -->

in order to carry out the purposes of sec-
tion 367(a), designates by regulation.

Sections 1.367(a)-2 and 1.367(a)-2T
provide general rules for determining
whether property is transferred for use by
a transferee foreign corporation in the ac-
tive conduct of a trade or business outside
of the United States for purposes of the
ATB exception.

Sections 1.367(a)-4 and 1.367(a)-4T
provide special rules for determining
whether certain property satisfies the ATB
exception, including rules that apply to (i)
property to be leased by the transferee
foreign corporation, (ii) oil and gas work-
ing interests, (iii) compulsory transfers of
property, and (iv) property to be sold by
the foreign corporation. Section
1.367(a)-4T also provides special rules
requiring the recapture of depreciation
upon an outbound transfer of U.S. depre-
ciated property and exempting outbound
transfers of property to a FSC (within the
meaning of section 922(a)) from the ap-
plication of paragraphs (a) and (d) of sec-
tion 367.

Sections 1.367(a)-5 and 1.367(a)-5T
address the five categories of property in-
eligible for the ATB exception that are
described in section 367(a)(3)(B) and pro-
vide narrow exceptions to certain of those
categories. Section 1.367(a)-5T(d) (which
addresses foreign currency and other
property denominated in a foreign cur-
rency) allows certain property denomi-
nated in the foreign currency of the coun-
try in which the foreign corporation is
organized to qualify under the ATB ex-
ception if that property was acquired in
the ordinary course of the business of the
U.S. transferor that will be carried on by
the foreign corporation. Section 1.367(a)-
5T(e) (which addresses intangible prop-
erty) contains a deadwood reference to the
application of section 367(a)(1) to a trans-
fer of intangible property pursuant to sec-
tion 332. In this regard, see § 1.367(e)-
2(a)(2), providing that section 367(a) does
not apply to a liquidation described in
section 332 of a U.S. subsidiary into a
foreign parent corporation. Section
1.367(a)-5T(e) also provides a cross ref-
erence to section 367(d) for transfers of
intangible property described in section
351 or 361.

Sections 1.367(a)-6 and 1.367(a)-6T
provide rules for applying the branch loss
recapture rule of section 367(a)(3)(C).

B. Section 367(d)

Section 367(d) provides rules for cer-
tain outbound transfers of intangible prop-
erty. Section 367(d)(1) provides that, ex-
cept as provided in regulations, if a U.S.
transferor transfers any intangible prop-
erty, within the meaning of section
936(h)(3)(B), to a foreign corporation in
an exchange described in section 351 or
361, section 367(d) (and not section
367(a)) applies to such transfer.

Section 936(h)(3)(B) defines intangible
property broadly to mean any:

(i) patent, invention, formula, process,
design, pattern, or know-how;

(ii) copyright, literary, musical, or ar-
tistic composition;

(iii) trademark, trade name, or brand
name;

(iv) franchise, license, or contract;

(v) method, program, system, proce-
dure, campaign, survey, study, forecast,
estimate, customer list, or technical data;
or

(vi) any similar item,

which has substantial value indepen-
dent of the services of any individual (sec-
tion 936(h)(3)(B) intangible property).

Section 367(d)(2)(A) provides that a
U.S. transferor that transfers intangible
property subject to section 367(d) is
treated as having sold the property in
exchange for payments that are contin-
gent upon the productivity, use, or dis-
position of the property. Specifically,
the U.S. transferor is treated as receiv-
ing amounts that reasonably reflect the
amounts that would have been received
annually in the form of such payments
over the useful life of such property
(section 367(d)(2)(A)(ii)(I)), or in the
case of a disposition of the intangible
property following such transfer (whether
direct or indirect), at the time of the dis-
position (section 367(d)(2)(A)(ii)(II)).
The amounts taken into account under
section 367(d)(2)(A)(ii) must be commen-
surate with the income attributable to the
intangible. Section 367(d)(2)(A) (flush
language).

Section 1.367(d)-1T(b) generally pro-
vides that section 367(d) and

§ 1.367(d)-1T apply to the transfer of any
intangible property, but not to the transfer
of foreign goodwill or going concern
value, as defined in § 1.367(a)-
1T(d)(5)(iii) (foreign goodwill exception).
Section 1.367(a)-1T(d)(5)(i) generally
defines "intangible property," for pur-
poses of section 367, as knowledge,
rights, documents, and any other intangi-
ble item within the meaning of section
936(h)(3)(B) that constitutes property for
purposes of section 332, 351, 354, 355,
356, or 361, as applicable. The regulation
further provides that a working interest in
oil and gas property will not be considered
to be intangible property for purposes of
section 367 and the regulations thereunder.

Section 1.367(a)-1T(d)(5)(iii) defines
"foreign goodwill or going concern value"
as the residual value of a business opera-
tion conducted outside of the United
States after all other tangible and intangi-
ble assets have been identified and valued.
Section 1.367(a)-1T(d)(5)(iii) also pro-
vides that, for purposes of section 367 and
the regulations thereunder, the value of a
right to use a corporate name in a foreign
country is treated as foreign goodwill or
going concern value.

In addition to providing the foreign
goodwill exception, § 1.367(d)-1T(b) also
excepts from section 367(d) property that
is described in § 1.367(a)-5T(b)(2),
which, in general, consists of copyrights
and other items described in section
1221(a)(3). Those items, however, are not
eligible for the ATB exception by reason
of § 1.367(a)-5T.

For purposes of § 1.367(d)-1T, the
useful life of intangible property is limited
to 20 years under § 1.367(d)-1T(c)(3).

#### C. Legislative History of Section 367(d)

Congress amended section 367 in 1984
to create objective statutory rules because,
among other reasons, the IRS was experi-
encing challenges administering the prior
version of the statute. The prior version
provided that certain outbound transfers
of property qualified for tax-free treatment
only if the U.S. transferor established that
the outbound transfer was "not in pursu-
ance of a plan having as one its principal
purposes the avoidance of Federal income
taxes."

<!-- PageFooter="October 5, 2015" -->

<!-- PageFooter="Bulletin No. 2015-40" -->
<!-- PageBreak -->

In amending section 367, Congress
also noted that "specific and unique prob-
lems exist" with respect to outbound
transfers of intangible property and en-
acted section 367(d) in substantially its
present form to address these transfers. S.
Rep. No. 169, 98th Cong., 2d Sess., at 360
(1984); H.R. Rep. No. 432, 98th Cong., 2d
Sess., at 1315 (1984). Congress identified
problems as arising when "transferor U.S.
companies hope to reduce their U.S. tax-
able income by deducting substantial re-
search and experimentation expenses as-
sociated with the development of the
transferred intangible and, by transferring
the intangible to a foreign corporation at
the point of profitability, to ensure deferral
of U.S. tax on the profits generated by the
intangible." Id.

The favorable treatment of foreign
goodwill and going concern value avail-
able under existing law is premised on
statements in the legislative history of sec-
tion 367(d). "The committee contemplates
that, ordinarily, no gain will be recognized
on the transfer of goodwill or going con-
cern value for use in an active trade or
business." S. Rep. No. 169, 98th Cong.,
2d Sess., at 364; H.R. Rep. No. 432, 98th
Cong., 2d Sess., at 1319. The Senate Fi-
nance Committee and the House Commit-
tee on Ways and Means each noted, with-
out explanation, that it "does not
anticipate that the transfer of goodwill or
going concern value developed by a for-
eign branch to a newly organized foreign
corporation will result in abuse of the U.S.
tax system." S. Rep. No. 169, 98th Cong.,
2d Sess., at 362; H.R. Rep. No. 432, 98th
Cong., 2d Sess., at 1317. However, nei-
ther section 367 nor its legislative history
defines goodwill or going concern value
of a foreign branch or discusses how
goodwill or going concern value is attrib-
uted to a foreign branch.

#### D. Taxpayer Interpretations Regarding Foreign Goodwill and Going Concern Value Under Section 367

In general, taxpayers interpret section
367 and the regulations under section 367(a)
and (d) in one of two alternative ways when
claiming favorable treatment for foreign
goodwill and going concern value.

Under one interpretation, taxpayers
take the position that goodwill and going

concern value are not section 936(h)(3)(B) in-
tangible property and therefore are not sub-
ject to section 367(d) because section 367(d)
applies only to section 936(h)(3)(B) intan-
gible property. Under this interpretation,
taxpayers assert that the foreign goodwill
exception has no application. Furthermore,
these taxpayers assert that gain realized with
respect to the outbound transfer of goodwill
or going concern value is not recognized
under the general rule of section 367(a)(1)
because the goodwill or going concern
value is eligible for, and satisfies, the ATB
exception under section 367(a)(3)(A).

Under a second interpretation, tax-
payers take the position that, although
goodwill and going concern value are
section 936(h)(3)(B) intangible prop-
erty, the foreign goodwill exception ap-
plies. These taxpayers also assert that
section 367(a)(1) does not apply to for-
eign goodwill or going concern value,
either because of section 367(d)(1)(A)
(providing that, except as provided in
regulations, section 367(d) and not
section 367(a) applies to section
936(h)(3)(B) intangible property) or be-
cause of the ATB exception.

#### II. Reasons for Change

The Treasury Department and the IRS
are aware that, in the context of outbound
transfers, certain taxpayers attempt to avoid
recognizing gain or income attributable to
high-value intangible property by asserting
that an inappropriately large share (in many
cases, the majority) of the value of the prop-
erty transferred is foreign goodwill or going
concern value that is eligible for favorable
treatment under section 367.

Specifically, the Treasury Department
and the IRS are aware that some taxpayers
value the property transferred in a manner
contrary to section 482 in order to mini-
mize the value of the property transferred
that they identify as section 936(h)(3)(B)
intangible property for which a deemed
income inclusion is required under section
367(d) and to maximize the value of the
property transferred that they identify as
exempt from current tax. For example,
some taxpayers (i) use valuation methods
that value items of intangible property on
an item-by-item basis, when valuing the
items on an aggregate basis would achieve
a more reliable result under the arm's
length standard of the section 482 regula-

tions, or (ii) do not properly perform a full
factual and functional analysis of the busi-
ness in which the intangible property is
employed.

The Treasury Department and the IRS
also are aware that some taxpayers
broadly interpret the meaning of foreign
goodwill and going concern value for pur-
poses of section 367. Specifically, al-
though the existing regulations under sec-
tion 367 define foreign goodwill or going
concern value by reference to a business
operation conducted outside of the United
States, some taxpayers have asserted that
they have transferred significant foreign
goodwill or going concern value when a
large share of that value was associated
with a business operated primarily by em-
ployees in the United States, where the
business simply earned income remotely
from foreign customers. In addition, some
taxpayers take the position that value cre-
ated through customer-facing activities
occurring within the United States is for-
eign goodwill or going concern value.

The Treasury Department and the IRS
have concluded that the taxpayer positions
and interpretations described in this sec-
tion of the preamble raise significant pol-
icy concerns and are inconsistent with the
expectation, expressed in legislative his-
tory, that the transfer of foreign goodwill
or going concern value developed by a
foreign branch to a foreign corporation
was unlikely to result in abuse of the U.S.
tax system. See S. Rep. No. 169, 98th
Cong., 2d Sess., at 362; H.R. Rep. No.
432, 98th Cong., 2d Sess., at 1317. The
Treasury Department and the IRS consid-
ered whether the favorable treatment for
foreign goodwill and going concern value
under current law could be preserved
while protecting the U.S. tax base through
regulations expressly prescribing parame-
ters for the portion of the value of a busi-
ness that qualifies for the favorable treat-
ment. For example, regulations could
require that, to be eligible for the favor-
able treatment, the value must have been
created by activities conducted outside of
the United States through an actual for-
eign branch that had been in operation for
a minimum number of years and be attrib-
utable to unrelated foreign customers. The
Treasury Department and the IRS ultimately
determined, however, that such an ap-
proach would be impractical to administer.

<!-- PageFooter="Bulletin No. 2015-40" -->

<!-- PageFooter="October 5, 2015" -->
<!-- PageBreak -->

In particular, while the temporary regula-
tions under section 482 that are published in
the Rules and Regulations section of this
issue of the Federal Register clarify the
proper application of section 482 in impor-
tant respects, there will continue to be chal-
lenges in administering the transfer pricing
rules whenever the transfer of different
types of intangible property gives rise to
significantly different tax consequences.
Given the amounts at stake, as long as for-
eign goodwill and going concern value are
afforded favorable treatment, taxpayers will
continue to have strong incentives to take
aggressive transfer pricing positions to inap-
propriately exploit the favorable treatment
of foreign goodwill and going concern
value, however defined, and thereby erode
the U.S. tax base.

For the reasons discussed in this sec-
tion of the preamble, the Treasury Depart-
ment and the IRS have determined that
allowing intangible property to be trans-
ferred outbound in a tax-free manner is
inconsistent with the policies of section
367 and sound tax administration and
therefore will amend the regulations under
section 367 as described in the Explanation
of Provisions section of this preamble.

## III. Coordination with Section 482

The temporary regulations under sec-
tion 482 published in the Rules and Reg-
ulations section of this issue of the Bulle-
tin clarify the coordination of the
application of the arm's length standard
and the best method rule in the regulations
under section 482 in conjunction with
other Code provisions, including section
367, in determining the proper tax treat-
ment of controlled transactions. The text
of the temporary regulations under section
482 also serves as the text of a portion of
these proposed regulations. The preamble
to the temporary regulations explains the
temporary regulations and the correspond-
ing proposed regulations.

## Explanation of Provisions

I. Eliminating the Foreign Goodwill
Exception and Limiting the Scope of the
ATB Exception

### A. In General

The proposed regulations eliminate the for-
eign goodwill exception under § 1.367(d)-1T

and limit the scope of property that is
eligible for the ATB exception generally
to certain tangible property and financial
assets. Accordingly, under the proposed
regulations, upon an outbound transfer of
foreign goodwill or going concern value, a
U.S. transferor will be subject to either
current gain recognition under section
367(a)(1) or the tax treatment provided
under section 367(d).

### B. Modifications to § 1.367(d)-1T

Proposed § 1.367(d)-1(b) provides that
section 367(d) and § 1.367(d)-1 apply to
an outbound transfer of intangible prop-
erty, as defined in proposed § 1.367(a)-
1(d)(5). Proposed § 1.367(d)-1(b) does
not provide an exception for any intangi-
ble property. Rather, as described in part
II. of the Explanation of Provisions section of
this preamble, proposed § 1.367(a)-1(d)(5)
modifies the definition of intangible prop-
erty that applies for purposes of section
367(a) and (d). The modified definition
facilitates both the elimination of the for-
eign goodwill exception as well as the
addition of a rule under which U.S. trans-
ferors may apply section 367(d) with re-
spect to certain outbound transfers of
property that otherwise would be subject
to section 367(a) under the U.S. transfer-
or's interpretation of section 936(h)(3)(B).
The proposed regulations make certain
coordinating changes to § 1.367(d)-1T to
take into account the elimination of the
foreign goodwill exception and the re-
vised definition of intangible property.
The proposed regulations also eliminate
the definition of foreign goodwill and go-
ing concern value under existing
§ 1.367(a)-1T(d)(5)(iii) because it is no
longer needed.

In addition, the proposed regulations
eliminate the existing rule under
§ 1.367(d)-1T(c)(3) that limits the useful
life of intangible property to 20 years.
When the useful life of the intangible
property transferred exceeds 20 years, the
limitation might result in less than all of
the income attributable to the property
being taken into account by the U.S. trans-
feror. Accordingly, proposed § 1.367(d)-
1(c)(3) provides that the useful life of
intangible property is the entire period
during which the exploitation of the intan-
gible property is reasonably anticipated to

occur, as of the time of transfer. For this
purpose, exploitation includes use of the
intangible property in research and devel-
opment. Consistent with the guidance for
cost sharing arrangements in § 1.482-
7(g)(2)(ii)(A), if the intangible property is
reasonably anticipated to contribute to its
own further development or to developing
other intangibles, then the period includes
the period, reasonably anticipated at the
time of the transfer, of exploiting (includ-
ing use in research and development) such
further development. Consequently, de-
pending on the facts, the cessation of ex-
ploitation activity after a specific period of
time may or may not be reasonably antic-
ipated. See, e.g., § 1.482-7(g)(4)(viii), Ex-
amples 1 (cessation anticipated after 15
years) and 7 (cessation not anticipated at
any determinable date).

### C. Modifications Relating to the ATB Exception

The rules for determining whether
property is eligible for the ATB exception
and whether the property satisfies the ATB
exception currently are found in numerous
regulations, namely §§ 1.367(a)-2, 1.367(a)-
2T, 1.367(a)-4, 1.367(a)-4T, 1.367(a)-5,
and 1.367(a)-5T (collectively, the ATB
regulations). To make the regulations
more accessible, the proposed regulations
combine the ATB regulations, other than
the depreciation recapture rule, into a single
regulation under proposed § 1.367(a)-2.
The proposed regulations retain a coordina-
tion rule pursuant to which a transfer of
stock or securities in an exchange subject to
§ 1.367(a)-3 is not subject to § 1.367(a)-2.
See § 1.367(a)-2(a)(1). The proposed regu-
lations make conforming changes to the de-
preciation recapture rule, which is moved
from § 1.367(a)-4T to § 1.367(a)-4, and
the branch loss recapture rule, which re-
mains under §§ 1.367(a)-6 and 1.367(a)-
6T. Although minor wording changes have
been made to certain aspects of the ATB
regulations as part of consolidating them
into a single regulation, the proposed regu-
lations are not intended to be interpreted as
making substantive changes to the ATB reg-
ulations except as otherwise described in
this section of the preamble.

Under existing regulations, all property
is eligible for the ATB exception, unless
the property is specifically excluded. Un-

<!-- PageFooter="October 5, 2015" -->

<!-- PageFooter="Bulletin No. 2015-40" -->
<!-- PageBreak -->

der this structure, taxpayers have an in-
centive to take the position that certain
intangible property is not described in sec-
tion 936(h)(3)(B) and therefore not sub-
ject to section 367(d) and is instead sub-
ject to section 367(a) but eligible for the
ATB exception because the intangible
property is not specifically excluded from
the ATB exception. The Treasury Depart-
ment and the IRS have concluded that
providing an exclusive list of property el-
igible for the ATB exception will reduce
the incentives for taxpayers to undervalue
intangible property subject to section
367(d).

Thus, the proposed regulations provide
that only certain types of property (as de-
scribed in the next paragraph) are eligible
for the ATB exception. However, in order
for eligible property to satisfy the ATB
exception, that property must also be con-
sidered transferred for use in the active
conduct of a trade or business outside of
the United States. Specifically, proposed
§ 1.367(a)-2(a)(2) provides the general
rule that an outbound transfer of property
satisfies the ATB exception if (i) the prop-
erty constitutes eligible property, (ii) the
property is transferred for use by the for-
eign corporation in the active conduct of a
trade or business outside of the United
States, and (iii) certain reporting require-
ments under section 6038B are satisfied.

Under proposed § 1.367(a)-2(b), eligi-
ble property is tangible property, working
interests in oil and gas property, and cer-
tain financial assets, unless the property is
also described in one of four categories of
ineligible property. Proposed § 1.367(a)-
2(c) lists four categories of property not
eligible for the ATB exception, which, in
general, are (i) inventory or similar prop-
erty; (ii) installment obligations, accounts
receivable, or similar property; (iii) for-
eign currency or certain other property
denominated in foreign currency; and (iv)
certain leased tangible property. These
four categories of property not eligible for
the ATB exception include four of the five
categories described in existing regula-
tions under §§ 1.367(a)-5 and 1.367-5T.
The category for intangible property is not
retained because it is not relevant: Intan-
gible property transferred to a foreign cor-
poration pursuant to section 351 or 361 is
not eligible property under proposed

§ 1.367(a)-2(b) without regard to the ap-
plication of proposed § 1.367(a)-2(c).

The proposed regulations also elimi-
nate the exception in existing § 1.367(a)-
5T(d)(2) that allows certain property de-
nominated in the foreign currency of the
country in which the foreign corporation
is organized to qualify under the ATB
exception if that property was acquired in
the ordinary course of the business of the
U.S. transferor that will be carried on by
the foreign corporation. The Treasury De-
partment and the IRS have determined
that removing the exception is consistent
with the general policy of section
367(a)(3)(B)(iii) to require gain to be rec-
ognized on an outbound transfer of for-
eign currency denominated property. Re-
moving the exception will preserve the
character, source, and amount of gain at-
tributable to section 988 transactions that
otherwise could be lost or changed if such
gain were not immediately recognized but
instead were reflected only in the U.S.
transferor's basis in the stock of the for-
eign corporation.

The general rules for determining
whether eligible property is transferred for
use in the active conduct of a trade or
business outside of the United States are
described in proposed § 1.367(a)-2(d).
Also, paragraphs (e) through (h) of pro-
posed § 1.367(a)-2 provide special rules
for certain property to be leased after the
transfer, a working interest in oil and gas
property, property that is re-transferred by
the transferee foreign corporation to an-
other person, and certain compulsory
transfers of property, respectively. The
proposed regulations also combine exist-
ing § 1.367(a)-2T(c) (relating to property
that is re-transferred by the foreign corpo-
ration) and a portion of § 1.367(a)-4T(d)
(relating to property to be sold by the for-
eign corporation) into proposed § 1.367(a)-
2(g), because both of these existing provi-
sions relate to subsequent transfers of
property by the foreign corporation. See
proposed § 1.367(a)-2(g)(1) and (2), respec-
tively. Proposed § 1.367(a)-2(g)(2) does not
retain the portion of existing § 1.367(a)-
4T(d) that applies to certain transfers of
stock or securities. The Treasury Depart-
ment and the IRS have determined that
§§ 1.367(a)-3 and 1.367(a)-8 (generally re-
quiring U.S. transferors that own five-
percent or more of the stock of the foreign

corporation to enter into a gain recognition
agreement to avoid recognizing gain under
section 367(a)(1) upon the outbound trans-
fer of stock or securities) adequately carry
out the policy of section 367(a) with respect
to the transfer of stock or securities.

The proposed regulations modify the
scope of the term U.S. depreciated prop-
erty for purposes of the depreciation re-
capture rule to include section 126 prop-
erty (as defined in section 1255(a)(2)).

The proposed regulations eliminate the
special rules for outbound transfers of
property to a FSC, because the FSC pro-
visions have been repealed. Tax Increase
Prevention and Reconciliation Act of
2005, Pub L. No. 109-222, § 513, 120
Stat. 366 (2006); FSC Repeal and Extra-
territorial Income Exclusion Act of 2000,
Pub. L. No. 106-519, § 2, 114 Stat. 2423
(2000).

Finally, the proposed regulations make
conforming changes to the reporting re-
quirements under § 1.6038B-1(c)(4) to
take into account the proposed regulations
under § 1.367(a)-2. The proposed regula-
tions retain a rule providing relief for cer-
tain failures to comply with the reporting
requirements of section 6038B and the
regulations thereunder for qualification
under the ATB exception, but that rule is
moved to proposed § 1.367(a)-2(j).

#### II. Treatment of Certain Property as Subject to Section 367(d)

Taxpayers take different positions as to
whether goodwill and going concern
value are section 936(h)(3)(B) intangible
property, as discussed in part I.D. of the
Background section of this preamble. The
proposed regulations do not address this
issue. However, the proposed regulations
under § 1.367(a)-1(b)(5) provide that a
U.S. transferor may apply section 367(d)
to a transfer of property, other than certain
property described below, that otherwise
would be subject to section 367(a) under
the U.S. transferor's interpretation of sec-
tion 936(h)(3)(B). Under this rule, a U.S.
transferor that takes the position that
goodwill and going concern value are not
section 936(h)(3)(B) intangible property
may nonetheless apply section 367(d) to
goodwill and going concern value. This
rule furthers sound tax administration by
reducing the consequences of uncertainty
as to whether value is attributable to prop-

<!-- PageFooter="Bulletin No. 2015-40" -->

<!-- PageFooter="October 5, 2015" -->
<!-- PageBreak -->

erty subject to section 367(a) or property
subject to section 367(d). The application
of section 367(d) in lieu of section 367(a)
is available only for property that is not
eligible property, as defined in proposed
§ 1.367(a)-2(b) but, for this purpose, de-
termined without regard to § 1.367(a)-
2(c) (which describes four categories of
property explicitly excluded from the
ATB exception). A U.S. transferor must
disclose whether it is applying section
367(a) or (d) to a transfer of such property.
See proposed §§ 1.6038B-1(c)(4)(vii) and
-1(d)(1)(iv).

To implement this new rule under pro-
posed § 1.367(a)-1(b)(5) and the removal
of the foreign goodwill exception, the pro-
posed regulations revise the definition of
"intangible property" that applies for pur-
poses of sections 367(a) and (d). As re-
vised, the term means either property de-
scribed in section 936(h)(3)(B) or
property to which a U.S. transferor applies
section 367(d) (in lieu of applying section
367(a)). However, for this purpose and
consistent with existing regulations, intan-
gible property does not include property
described in section 1221(a)(3) (generally
relating to certain copyrights) or a work-
ing interest in oil and gas property.

The regulations under § 1.367(a)-7
(concerning outbound transfers of prop-
erty subject to section 367(a) in certain
asset reorganizations) use the term "sec-
tion 367(d) property" to describe property
that is not subject to section 367(a) and is
therefore not subject to § 1.367(a)-7. The
proposed regulations modify the defini-
tion of section 367(d) property in
§ 1.367(a)-7(f)(11) (which currently de-
fines section 367(d) property as property
described in section 936(h)(3)(B)) by ref-
erence to the new definition of "intangible
property" under the proposed regulations.
When the Treasury Department and the
IRS issue regulations to implement the
guidance described in Notice 2012-39
(IRB 2012-31) (announcing regulations
to be issued addressing outbound transfers
of intangible property subject to section
367(d) in certain asset reorganizations),
the definition of "section 367(d) property"
provided in section 4.05(3) of the notice
will be similarly modified.

III. Modifications to § 1.367(a)-1T

Section 1.482-1T(f)(2)(i) of the tem-
porary regulations published elsewhere in
the Rules and Regulations section of this
issue of the Bulletin clarify the coordina-
tion of the application of the arm's length
standard and the best method rule in the
regulations under section 482 in conjunc-
tion with other Code provisions, including
section 367, in determining the proper tax
treatment of controlled transactions. Pro-
posed § 1.367(a)-1(b)(3) provides that, in
cases where an outbound transfer of prop-
erty subject to section 367(a) constitutes a
controlled transaction, as defined in
§ 1.482-1(i)(8), the value of the property
transferred is determined in accordance
with section 482 and the regulations there-
under. This rule replaces existing
§ 1.367(a)-1T(b)(3), which includes three
rules.

First, § 1.367(a)-1T(b)(3)(i) provides
that "the gain required to be recognized
... shall in no event exceed the gain that
would have been recognized on a taxable
sale of those items of property if sold
individually and without offsetting indi-
vidual losses against individual gains"
(emphasis added). The Treasury Depart-
ment and the IRS are concerned that in
controlled transactions, taxpayers might
have interpreted the wording "if sold in-
dividually" as inconsistent with § 1.482-
1T(f)(2)(i)(B) (as clarified in temporary
regulations published elsewhere in the
Rules and Regulations section in this issue
of the Bulletin), which provides that an
aggregate analysis of transactions may
provide the most reliable measure of an
arm's length result in certain circum-
stances.

Second, § 1.367(a)-1T(b)(3)(ii) pro-
vides that no loss may be recognized by
reason of section 367. That rule duplicates
a loss disallowance rule in § 1.367(a)-
1T(b)(1), which provides that section
367(a)(1) denies nonrecognition only to
transfers of items of property on which
gain is realized and that losses do not
affect the amount of the gain recognized
because of section 367(a)(1).

Third, § 1.367(a)-1T(b)(3)(iii) provides
a rule to address a scenario in which ordi-
nary income and capital gain could exceed
the amount described in § 1.367(a)-
1T(b)(3)(i). Because these regulations re-

place § 1.367(a)-1T(b)(3)(i), § 1.367(a)-
1T(b)(3)(iii) is no longer necessary.

### IV. Proposed Effective/Applicability Dates

The proposed regulations are proposed
to apply to transfers occurring on or after
September 14, 2015 and to transfers oc-
curring before September 14, 2015 result-
ing from entity classification elections
made under § 301.7701-3 that are filed on
or after September 14, 2015. However, the
removal of the exception currently pro-
vided in § 1.367(a)-5T(d)(2) will apply to
transfers occurring on or after the date that
the rules proposed in this section are ad-
opted as final regulations in a Treasury
decision published in the Federal Regis-
ter and to transfers occurring before that
date resulting from entity classification
elections made under § 301.7701-3 that
are filed on or after that date. For proposed
dates of applicability, see § 1.367(a)-1(g)(5),
-2(k), -4(b), -6(k), -7(j)(2), 1.367(d)-1(j),
and 1.6038B-1(g)(7). No inference is in-
tended as to the application of the provisions
proposed to be amended by these proposed
regulations under current law. The IRS may,
where appropriate, challenge transactions un-
der applicable provisions or judicial doctrines.

## 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 has been determined that
section 553(b) and (d) of the Administra-
tive Procedure Act (5 U.S.C. chapter 5)
does not apply to these regulations. It is
hereby certified that the collection of in-
formation contained in this regulation will
not have a significant economic impact on
a substantial number of small entities. Ac-
cordingly, a regulatory flexibility analysis
is not required. This certification is based
on the fact that the proposed regulations
under section 367(a) and (d) simplify ex-
isting regulations, and the regulations un-
der section 6038B make relatively minor
changes to existing information reporting
requirements. Moreover, these regulations
primarily will affect large domestic cor-
porations filing consolidated returns. In
addition, the Regulatory Flexibility Act (5

<!-- PageFooter="October 5, 2015" -->

<!-- PageFooter="Bulletin No. 2015-40" -->
<!-- PageBreak -->

U.S.C. chapter 6) does not apply to the
regulations under section 482 that are pro-
posed herein, and published as temporary
regulations in the Rules and Regulations
section of this issue of the Bulletin, be-
cause those regulations do not impose a
collection of information requirement on
small entities. Pursuant to section 7805(f)
of the Code, these regulations have been
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administra-
tion for comment on their impact on small
business.

## Comments and Requests for Public Hearing

Before these proposed regulations are
adopted as final regulations, consideration
will be given to any comments that are
submitted timely to the IRS as prescribed
in this preamble under the "Addresses"
heading. The Treasury Department and
the IRS request comments on all aspects
of the proposed rules. In particular, com-
ments are requested on whether, with re-
spect to the proposed elimination of the
foreign goodwill exception and narrowing
of the scope of the ATB exception, a
limited exception should be provided for
certain narrow cases where there is lim-
ited potential for abuse. One such case, for
example, might be a financial services
business that operates in true branch form
and for which there is regulatory pressure
or compulsion to incorporate the assets of
the branch in a foreign corporation. Com-
ments should discuss how the IRS would
administer any such exception. With re-
spect to the ATB exception, comments are
requested as to whether the definition of
"financial asset" under proposed § 1.367(a)-
2(b)(3) should be expanded to include other
items. With respect to the proposed elimi-
nation of the 20-year limitation on the useful
life of intangible property under § 1.367(d)-
1T(c)(3), comments are requested on ways
to simplify the administration of inclusions
that section 367(d) requires for property
with a very long useful life. All comments
will be available at www.regulations.gov or
upon request. A public hearing will be
scheduled if requested in writing by any
person that timely submits written com-
ments. If a public hearing is scheduled, no-
tice of the date, time, and place for the
public hearing will be published in the Fed-
eral Register.

## Drafting information

The principal author of these proposed
regulations is Ryan Bowen, Office of As-
sociate Chief Counsel (International).
However, other personnel from the Trea-
sury Department and the IRS participated
in their development.

* * * * *

## Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:

### PART 1-INCOME TAXES

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

Sections 1.367(a)-1 through
1.367(a)-7 also issued under 26 U.S.C.
367(a). * * *

Section 1.367(d)-1 also issued under
26 U.S.C. 367(d). * * *

Section 1.482-1 also issued under 26
U.S.C. 482.

Section 1.6038B-1 also issued under

26 U.S.C. 6038B. * * *

Par. 2. Section 1.367(a)-0 is added to
read as follows:

§ 1.367(a)-0 Table of Contents.

This section lists the paragraphs con-
tained in §§ 1.367(a)-1 through
1.367(a)-8.

§ 1.367(a)-1 Transfers to foreign cor-
porations subject to section 367(a): In
general.

(a) Scope.

(b) General rules.

(1) Foreign corporation not considered

a corporation for purposes of certain
transfers.

(2) Cases in which foreign corporate
status is not disregarded.

(3) Determination of value.

(b)(4)(i)(A) [Reserved].

(b)(4)(ii) [Reserved].

(5) Treatment of certain property as
subject to section 367(d).

(c) [Reserved].

(d) Definitions.

(d)(1) through (d)(2) [Reserved].

(3) Transfer.

(d)(4) [Reserved].

(5) Intangible property.

(6) Operating intangibles.

(e) Close of taxable year in certain
section 368(a)(1)(F) reorganizations.

(f) Exchanges under sections 354(a)
and 361(a) in certain section 368(a)(1)(F)
reorganizations.

(1) Rule

(2) Rule applies regardless of whether
a continuance under applicable law.

(g) Effective date of certain sections.

(1) In general.

(4)
(g)(2) through (3) [Reserved].

(5) Effective/applicability dates.

§ 1.367(a)-2 Exceptions for transfers of
property for use in the active conduct of
a trade or business.

(a) Scope and general rule.

(1) Scope.

(2) General rule.

(b) Eligible property.

(c) Exception for certain property.

(1) Inventory.

(2) Installment obligations, etc.

(3) Foreign currency, etc.

(4) Certain leased tangible property.

(d) Active conduct of a trade or busi-
ness outside the United States.

(1) In general.

(2) Trade or business.

(3) Active conduct.

(4) Outside of the United States.

(5) Use in the trade or business.

(6) Active leasing and licensing.

(e) Special rules for certain property to
be leased.

(1) Leasing business of the foreign cor-
poration.

(2) De minimis leasing by the foreign
corporation.

(3) Aircraft and vessels leased in for-
eign commerce.

(f) Special rules for oil and gas work-
ing interests.

(1) In general.

(2) Active use of working interest.

(3) Start-up operations.

(4) Other applicable rules.

(g) Property retransferred by the for-
eign corporation.

(1) General rule.

(2) Exception.

(h) Compulsory transfers of property.

(i) [Reserved].

<!-- PageFooter="Bulletin No. 2015-40" -->

<!-- PageFooter="October 5, 2015" -->
<!-- PageBreak -->

(j) Failure to comply with reporting

securities after December 16, 1987, and

(2) Relief for certain failures to comply

requirements of section 6038B.

prior to July 20, 1998.

that are not willful.

(1) Failure to comply.

(1) Scope.

(3) Anti-abuse rule.

(2) Relief for certain failures to comply

(2) Transfers of domestic or foreign

(4) Certain income inclusions under

that are not willful.

stock or securities: additional substantive

§ 1.367(b)-4.

(k) Effective/applicability dates.

rules.

(5) Certain gain under § 1.367(a)-6.

(1) In general.

(k) [Reserved].

(f) Definitions.

(2) Foreign currency exception.

(g) Examples.

§ 1.367(a)-4 Special rule applicable to

(h) Applicable cross-references.

§ 1.367(a)-3 Treatment of transfers of

U.S. depreciated property.

(i) [Reserved].

stock or securities to foreign

(j) Effective/applicability dates.

corporations.

(a) Depreciated property used in the

(1) In general.

United States.

(2) Section 367(d) property.

(a) In general.

(1) In general.

(1) Overview.

(2) U.S. depreciated property.

(2) Exceptions for certain exchanges of

(3) Property used within and without

§ 1.367(a)-8 Gain recognition

stock or securities.

the United States.

agreement requirements.

(3) Cross-references.

(b) Effective/applicability dates.

(a) Scope.

(b) Transfers of stock or securities of

(b) Definitions and special rules.

foreign corporations.

§ 1.367(a)-5 [Reserved].

(1) Definitions.

(1) General rule.

(2) Special rules.

(2) Certain transfers subject to sections

§ 1.367(a)-6 Transfer of foreign

(c) Gain recognition agreement.

367(a) and (b).

branch with previously deducted losses.

(1) Terms of agreement.

(c) Transfers of stock or securities of

(2) Content of gain recognition agree-

domestic corporations.

(a) through (b)(1) [Reserved].

ment.

(1) General rule.

(2) No active conduct exception.

(3) Description of transferred stock or

(2) Ownership presumption.

(c)(1) [Reserved].

securities and other information.

(3) Active trade or business test.

(2) Gain limitation.

(4) Basis adjustments for gain recog-

(4) Special rules.

(3) [Reserved].

nized.

(5) Definitions.

(c)(4) through (j) [Reserved].

(5) Terms and conditions of a new gain

(6) Reporting requirements of U.S. tar-

(k) Effective/applicability dates.

recognition agreement.

get company.

(6) Cross-reference.

(7) Ownership statements.

§ 1.367(a)-7 Outbound transfers of

(d) Filing requirements.

(8) Certain transfers in connection with

property described in section 361(a) or

(1) General rule.

performance of services.

(b).

(2) Special requirements.

(9) Private letter ruling option.

(3) Common parent as agent for U.S.

(10) Examples.

(a) Scope and purpose.

transferor.

(11) Effective date.

(b) General rule.

(e) Signatory.

(1) Nonrecognition exchanges enumer-

(1) General rule.

(d) Indirect stock transfers in certain

ated in section 367(a)(1).

(2) Signature requirement.

nonrecognition transfers.

(2) Nonrecognition exchanges not enu-

(f) Extension of period of limitations

(1) In general.

merated in section 367(a)(1).

on assessments of tax.

(2) Special rules for indirect transfers.

(c) Elective exception.

(1) General rule.

(3) Examples.

(1) Control.

(2) New gain recognition agreement.

(e) [Reserved].

(2) Gain recognition.

(g) Annual certification.

(f) Failure to file statements.

(3) Basis adjustments required for con-

(h) Use of security.

(1) Failure to file.

trol group members.

(i) [Reserved].

(2) Relief for certain failures to file that

(4) Agreement to amend or file a U.S.

(j) Triggering events.

are not willful.

income tax return.

(1) Disposition of transferred stock or

(g) Effective/applicability dates.

(5) Election and reporting require-

securities.

(1) Rules of applicability.

ments.

(2) Disposition of substantially all of

(2) Election.

(d) Section 361 exchange followed by

the assets of the transferred corporation.

(h) Former 10-year gain recognition

successive distributions to which section

(3) Disposition of certain partnership

agreements.

355 applies.

interests.

(i) [Reserved].

(e) Other rules.

(4) Disposition of stock of the trans-

(j) Transition rules regarding certain

(1) Section 367(a) property with re-

feree foreign corporation.

transfers of domestic or foreign stock or

spect to which gain is recognized.

(5) Deconsolidation.

<!-- PageFooter="October 5, 2015" -->

<!-- PageFooter="Bulletin No. 2015-40" -->
<!-- PageBreak -->

(6) Consolidation.

(7) Death of an individual; trust or es-
tate ceases to exist.

(8) Failure to comply.

(9) Gain recognition agreement filed in
connection with indirect stock transfers
and certain triangular asset reorganiza-
tions.

(10) Gain recognition agreement filed
pursuant to paragraph (k)(14) of this sec-
tion.

(k) Triggering event exceptions.

(1) Transfers of stock of the transferee
foreign corporation to a corporation or
partnership.

(2) Complete liquidation of U.S. trans-
feror under sections 332 and 337.

(3) Transfers of transferred stock or
securities to a corporation or partnership.

(4) Transfers of substantially all of the
assets of the transferred corporation.

(5) Recapitalizations and section 1036
exchanges.

(6) Certain asset reorganizations.

(7) Certain triangular reorganizations.

(8) Complete liquidation of transferred
corporation.

(9) Death of U.S. transferor.

(10) Deconsolidation.

(11) Consolidation.

(12) Intercompany transactions.

(13) Deemed asset sales pursuant to
section 338(g) elections.

(14) Other dispositions or events.

(l) [Reserved].

(m) Receipt of boot in nonrecognition
transactions.

(1) Dispositions of transferred stock or
securities.

(2) Dispositions of assets of transferred
corporation.

(n) Special rules for distributions with
respect to stock.

(1) Certain dividend equivalent re-
demptions treated as dispositions.

(2) Gain recognized under section
301(c)(3).

(o) Dispositions or other events that
terminate or reduce the amount of gain
subject to the gain recognition agreement.

(1) Taxable disposition of stock of the
transferee foreign corporation.

(2) Gain recognized in connection with
certain nonrecognition transactions.

(3) Gain recognized under section
301(c)(3).

(4) Dispositions of substantially all of
the assets of a domestic transferred corpo-
ration.

(5) Certain distributions or transfers of
transferred stock or securities to U.S. per-
sons.

(6) Dispositions or other event follow-
ing certain intercompany transactions.

(7) Expropriations under foreign law.

(p) Relief for certain failures to file or
failures to comply that are not willful.

(1) In general.

(2) Procedures for establishing that a
failure to file or failure to comply was not
willful.

(3) Examples.

(q) Examples.

(1) Presumed facts and references.

(2) Examples.

(r) Effective/applicability date.

(1) General rule.

(2) Applicability to transfers occurring
before March 13, 2009.

(3) Applicability to requests for relief
submitted before November 19, 2014.

Par. 3. Section 1.367(a)-1 is amended
by revising paragraphs (a), (b)(1) through
(3), (b)(4)(i)(B), (b)(5), (c)(3)(ii), (d) in-
troductory text, (d)(5), (d)(6), and (g)(1)
and (5) to read as follows:

§ 1.367(a)-1 Transfers to foreign

corporations subject to section 367(a):
In general.

(a) Scope. Section 367(a)(1) provides
the general rule concerning certain trans-
fers of property by a United States person
(referred to at times in this section as the
"U.S. person" or "U.S. transferor") to a
foreign corporation. Paragraph (b) of this
section provides general rules explaining
the effect of section 367(a)(1). Paragraph
(c) of this section describes transfers of
property that are described in section
367(a)(1). Paragraph (d) of this section
provides definitions that apply for pur-
poses of sections 367(a) and (d) and the
regulations thereunder. Paragraphs (e) and
(f) of this section provide rules that apply
to certain reorganizations described in
section 368(a)(1)(F). Paragraph (g) of this
section provides dates of applicability. For
rules concerning the reporting require-
ments under section 6038B for certain
transfers of property to a foreign corpora-
tion, see § 1.6038B-1.

(b) General rules-(1) Foreign corpo-
ration not considered a corporation for
purposes of certain transfers. If a U.S.
person transfers property to a foreign cor-
poration in connection with an exchange
described in section 351, 354, 356, or 361,
then, pursuant to section 367(a)(1), the
foreign corporation will not be considered
to be a corporation for purposes of deter-
mining the extent to which gain is recog-
nized on the transfer. Section 367(a)(1)
denies nonrecognition treatment only to
transfers of items of property on which
gain is realized. Thus, the amount of gain
recognized because of section 367(a)(1) is
unaffected by the transfer of items of
property on which loss is realized (but not
recognized).

(2) Cases in which foreign corporate
status is not disregarded. For circum-
stances in which section 367(a)(1) does
not apply to a U.S. transferor's transfer of
property to a foreign corporation, and thus
the foreign corporation is considered to be
a corporation, see §§ 1.367(a)-2, 1.367(a)-3,
and 1.367(a)-7.

(3) Determination of value. In cases in
which a U.S. transferor's transfer of prop-
erty to a foreign corporation constitutes a
controlled transaction as defined in
§ 1.482-1(i)(8), the value of the property
transferred is determined in accordance
with section 482 and the regulations there-
under.

(4)(i)(A) [Reserved]. For further guid-
ance, see § 1.367(a)-1T(b)(4)(i)(A).

(B) Appropriate adjustments to earn-
ings and profits, basis, and other affected
items will be made according to otherwise
applicable rules, taking into account the
gain recognized under section 367(a)(1).
For purposes of applying section 362, the
foreign corporation's basis in the property
received is increased by the amount of
gain recognized by the U.S. transferor un-
der section 367(a) and the regulations is-
sued pursuant to that section. To the ex-
tent the regulations provide that the U.S.
transferor recognizes gain with respect to
a particular item of property, the foreign
corporation increases its basis in that item
of property by the amount of such gain
recognized. For example, §§ 1.367(a)-2,
1.367(a)-3, and 1.367(a)-4, provide that
gain is recognized with respect to partic-
ular items of property. To the extent the
regulations do not provide that gain rec-

<!-- PageFooter="Bulletin No. 2015-40" -->

<!-- PageFooter="October 5, 2015" -->
<!-- PageBreak -->

ognized by the U.S. transferor is with re-
spect to a particular item of property, such
gain is treated as recognized with respect
to items of property subject to section
367(a) in proportion to the U.S. transfer-
or's gain realized in such property, after
taking into account gain recognized with
respect to particular items of property
transferred under any other provision of
section 367(a). For example, § 1.367(a)-6
provides that branch losses must be recap-
tured by the recognition of gain realized
on the transfer but does not associate the
gain with particular items of property. See
also § 1.367(a)-1(c)(3) for rules concern-
ing transfers by partnerships or of partner-
ship interests.

* * * * *

(b)(4)(ii) [Reserved]. For further guid-
ance, see § 1.367(a)-1T(b)(4)(ii).

(5) Treatment of certain property as
subject to section 367(d). A U.S. trans-
feror may apply section 367(d) and
§ 1.367(d)-1, rather than section 367(a)
and the regulations thereunder, to a trans-
fer of property to a foreign corporation
that otherwise would be subject to section
367(a), provided that the property is not
eligible property, as defined in § 1.367(a)-
2(b) but determined without regard to
§ 1.367(a)-2(c). A U.S. transferor and any
other U.S. transferor that is related (within
the meaning of section 267(b) or
707(b)(1)) to the U.S. transferor must con-
sistently apply this paragraph (b)(5) to all
property described in this paragraph (b)(5)
that is transferred to one or more foreign
corporations pursuant to a plan. A U.S.
transferor applies the provisions of this
paragraph (b)(5) in the form and manner
set forth in § 1.6038B-1(d)(1)(iv) and (v).

(c)(1) through (3)(i) [Reserved]. For
further guidance, see § 1.367(a)-1T(c)(1)
through (3)(i).

(c)(3)(ii) Transfer of partnership inter-
est treated as transfer of proportionate
share of assets-(A) In general. If a U.S.
person transfers an interest as a partner in
a partnership (whether foreign or domes-
tic) in an exchange described in section
367(a)(1), then that person is treated as
having transferred a proportionate share
of the property of the partnership in an
exchange described in section 367(a)(1).
Accordingly, the applicability of the ex-
ception to section 367(a)(1) provided in
§ 1.367(a)-2 is determined with refer-

ence to the property of the partnership
rather than the partnership interest itself.
A U.S. person's proportionate share of
partnership property is determined un-
der the rules and principles of sections
701 through 761 and the regulations
thereunder.

(c)(3)(ii)(B) through (7) [Reserved].
For further guidance, see § 1.367(a)-
1T(c)(3)(ii)(B) through (7).

* * * * *

(d) Definitions. The following defini-
tions apply for purposes of sections 367(a)
and (d) and the regulations thereunder.

(1) and (2) [Reserved]. For further
guidance, see § 1.367(a)-1T(d)(1) and (2).
* * * * *

(4) [Reserved]. For further guidance,
see § 1.367(a)-1T(d)(4).

(5) Intangible property. The term "in-
tangible property" means either property
described in section 936(h)(3)(B) or prop-
erty to which a U.S. person applies section
367(d) pursuant to paragraph (b)(5) of this
section, but does not include property de-
scribed in section 1221(a)(3) or a working
interest in oil and gas property.

(6) Operating intangibles. An operat-
ing intangible is any property described in
section 936(h)(3)(B) of a type not ordinar-
ily licensed or otherwise transferred in
transactions between unrelated parties for
consideration contingent upon the licens-
ee's or transferee's use of the property.
Examples of operating intangibles may
include long-term purchase or supply con-
tracts, surveys, studies, and customer lists.

* * * * *

(g) Effective date of certain sections-
(1) In general. Except as specifically pro-
vided to the contrary elsewhere in these
sections, §§ 1.367(a)-1T and 1.367(a)-6T
apply to transfers occurring after Decem-
ber 31, 1984.

(2) and (3) [Reserved]. For further
guidance, see § 1.367(a)-1T(g)(2) and (3).
* * * * *

(5) Effective/applicability dates. Para-
graphs (a), (b)(1), (b)(2), (b)(3), (b)(5), (d)
introductory text, (d)(5), and (d)(6) of this
section apply to transfers occurring on or
after September 14, 2015, and to transfers
occurring before September 14, 2015, re-
sulting from entity classification elections
made under § 301.7701-3 that are filed on
or after September 14, 2015. For transfers
occurring before this section is applicable,

see §§ 1.367(a)-1 and 1.367(a)-1T as
contained in 26 CFR part 1 revised as of
April 1, 2015.

Par. 4. Section 1.367(a)-2 is amended
by:

1\. Revising paragraphs (a) through (d).

2\. Redesignating paragraph (e)(1) as
paragraph (d)(6) and revising, and remov-
ing paragraph (e)(2).

3\. Redesignating paragraph (f) as para-
graph (j), and revising newly redesignated
paragraphs (j)(1), (j)(2)(i), the first sen-
tence of paragraph (j)(2)(ii)(B), and (j)(3)
and (4).

4\. Adding paragraphs (e) through (i)
and (k).

The revisions and additions read as fol-
lows:

§ 1.367(a)-2 Exceptions for transfers of
property for use in the active conduct of
a trade or business.

(a) Scope and general rule-(1) Scope.
Paragraph (a)(2) of this section provides
the general exception to section 367(a)(1)
for certain property transferred for use in
the active conduct of a trade or business.
Paragraph (b) of this section describes
property that is eligible for the exception
provided in paragraph (a)(2) of this sec-
tion. Paragraph (c) of this section de-
scribes property that is not eligible for the
exception provided in paragraph (a)(2) of
this section. Paragraph (d) of this section
provides general rules, and paragraphs (e)
through (h) of this section provide special
rules, for determining whether property is
used in the active conduct of a trade or
business outside of the United States.
Paragraph (i) of this section is reserved.
Paragraph (j) of this section provides re-
lief for certain failures to comply with the
reporting requirements under paragraph
(a)(2)(iii) of this section that are not will-
ful. Paragraph (k) of this section provides
dates of applicability. The rules of this
section do not apply to a transfer of stock
or securities in an exchange subject to
§ 1.367(a)-3.

(2) General rule. Except as otherwise
provided in §§ 1.367(a)-4, 1.367(a)-6,
and 1.367(a)-7, section 367(a)(1) does not
apply to property transferred by a United
States person (U.S. transferor) to a foreign
corporation if-

<!-- PageFooter="October 5, 2015" -->

<!-- PageFooter="Bulletin No. 2015-40" -->
<!-- PageBreak -->

(i) The property constitutes eligible
property;

(ii) The property is transferred for use
by the foreign corporation in the active
conduct of a trade or business outside of
the United States, as determined under
paragraph (d), (e), (f), (g), or (h) of this
section, as applicable; and

(iii) The U.S. transferor complies with
the reporting requirements of section
6038B and the regulations thereunder.

(b) Eligible property. Except as pro-
vided in paragraph (c) of this section, el-
igible property means-

(1) Tangible property;

(2) A working interest in oil and gas
property; and

(3) A financial asset. For purposes of
this section, a financial asset is-

(i) a cash equivalent;

(ii) a security within the meaning of
section 475(c)(2), without regard to the
last sentence of section 475(c)(2) (refer-
encing section 1256) and without regard
to section 475(c)(4), but excluding an in-
terest in a partnership;

(iii) a commodities position described
in section 475(e)(2)(B), 475(e)(2)(C), or
475(e)(2)(D); and

(iv) a notional principal contract de-
scribed in § 1.446-3(c)(1).

(c) Exception for certain property.
Notwithstanding paragraph (b) of this sec-
tion, property described in paragraph
(c)(1), (2), (3), or (4) of this section does
not constitute eligible property.

(1) Inventory. Stock in trade of the
taxpayer or other property of a kind which
would properly be included in the inven-
tory of the taxpayer if on hand at the close
of the taxable year, or property held by the
taxpayer primarily for sale to customers in
the ordinary course of its trade or business
(including raw materials and supplies,
partially completed goods, and finished
products).

(2) Installment obligations, etc. Install-
ment obligations, accounts receivable, or
similar property, but only to the extent
that the principal amount of any such ob-
ligation has not previously been included
by the taxpayer in its taxable income.

(3) Foreign currency, etc .- (i) In gen-
eral. Foreign currency or other property
denominated in foreign currency, includ-
ing installment obligations, futures con-
tracts, forward contracts, accounts receiv-

able, or any other obligation entitling its
payee to receive payment in a currency
other than U.S. dollars.

(ii) Limitation of gain required to be
recognized. If section 367(a)(1) applies to
a transfer of property described in para-
graph (c)(3)(i) of this section, then the
gain required to be recognized is limited
to the gain realized as part of the same
transaction upon the transfer of property
described in paragraph (c)(3)(i) of this
section, less any loss realized as part of
the same transaction upon the transfer of
property described in paragraph (c)(3)(i)
of this section. This limitation applies in
lieu of the rule in § 1.367(a)-1(b)(1). No
loss is recognized with respect to property
described in this paragraph (c)(3).

(4) Certain leased tangible property.
Tangible property with respect to which
the transferor is a lessor at the time of the
transfer, unless either the foreign corpora-
tion is the lessee at the time of the transfer
or the foreign corporation will lease the
property to third persons.

(d) Active conduct of a trade or busi-
ness outside the United States-(1) In
general. Except as provided in paragraphs
(e), (f), (g), and (h) of this section, to
determine whether property is transferred
for use by the foreign corporation in the
active conduct of a trade or business out-
side of the United States, four factual de-
terminations must be made:

(i) What is the trade or business of the
foreign corporation (see paragraph (d)(2)
of this section);

(ii) Do the activities of the foreign cor-
poration constitute the active conduct of
that trade or business (see paragraph
(d)(3) of this section);

(iii) Is the trade or business conducted
outside of the United States (see para-
graph (d)(4) of this section); and

(iv) Is the transferred property used or
held for use in the trade or business (see
paragraph (d)(5) of this section)?

(2) Trade or business. Whether the ac-
tivities of the foreign corporation consti-
tute a trade or business is determined
based on all the facts and circumstances.
In general, a trade or business is a specific
unified group of activities that constitute
(or could constitute) an independent eco-
nomic enterprise carried on for profit. For
example, the activities of a foreign selling
subsidiary could constitute a trade or busi-

ness if they could be independently car-
ried on for profit, even though the subsid-
iary acts exclusively on behalf of, and has
operations fully integrated with, its parent
corporation. To constitute a trade or busi-
ness, a group of activities must ordinarily
include every operation which forms a
part of, or a step in, a process by which an
enterprise may earn income or profit. In
this regard, one or more of such activities
may be carried on by independent con-
tractors under the direct control of the
foreign corporation. (However, see para-
graph (d)(3) of this section.) The group of
activities must ordinarily include the col-
lection of income and the payment of ex-
penses. If the activities of the foreign cor-
poration do not constitute a trade or
business, then the exception provided by
this section does not apply, regardless of
the level of activities carried on by the
corporation. The following activities are
not considered to constitute by themselves
a trade or business for purposes of this
section:

(i) Any activity giving rise to expenses
that would be deductible only under sec-
tion 212 if the activities were carried on
by an individual; or

(ii) The holding for one's own account
of investments in stock, securities, land, or
other property, including casual sales
thereof.

(3) Active conduct. Whether a trade or
business is actively conducted by the for-
eign corporation is determined based on
all the facts and circumstances. In general,
a corporation actively conducts a trade or
business only if the officers and employ-
ees of the corporation carry out substantial
managerial and operational activities. A
corporation may be engaged in the active
conduct of a trade or business even though
incidental activities of the trade or busi-
ness are carried out on behalf of the cor-
poration by independent contractors. In
determining whether the officers and em-
ployees of the corporation carry out sub-
stantial managerial and operational activ-
ities, however, the activities of
independent contractors are disregarded.
On the other hand, the officers and em-
ployees of the corporation are considered
to include the officers and employees of
related entities who are made available to
and supervised on a day-to-day basis by,
and whose salaries are paid by (or reim-

<!-- PageFooter="Bulletin No. 2015-40" -->

<!-- PageFooter="October 5, 2015" -->
<!-- PageBreak -->

bursed to the lending related entity by),
the foreign corporation. See paragraph
(d)(6) of this section for the standard that
applies to determine whether a trade or
business that produces rents or royalties is
actively conducted. The rule of this para-
graph (d)(3) is illustrated by the following
example.

Example. X, a domestic corporation, and Y, a
foreign corporation not related to X, transfer prop-
erty to Z, a newly formed foreign corporation orga-
nized for the purpose of combining the research
activities of X and Y. Z contracts all of its opera-
tional and research activities to Y for an arm's-
length fee. Z's activities do not constitute the active
conduct of a trade or business.

(4) Outside of the United States.
Whether the foreign corporation conducts
a trade or business outside of the United
States is determined based on all the facts
and circumstances. Generally, the primary
managerial and operational activities of
the trade or business must be conducted
outside the United States and immediately
after the transfer the transferred assets
must be located outside the United States.
Thus, the exception provided by this sec-
tion would not apply to the transfer of the
assets of a domestic business to a foreign
corporation if the domestic business con-
tinued to operate in the United States after
the transfer. In such a case, the primary
operational activities of the business
would continue to be conducted in the
United States. Moreover, the transferred
assets would be located in the United
States. However, it is not necessary that
every item of property transferred be used
outside of the United States. As long as
the primary managerial and operational
activities of the trade or business are con-
ducted outside of the United States and
substantially all of the transferred assets
are located outside the United States, in-
cidental items of transferred property lo-
cated in the United States may be consid-
ered to have been transferred for use in the
active conduct of a trade or business out-
side of the United States.

(5) Use in the trade or business.
Whether property is used or held for use
by the foreign corporation in a trade or
business is determined based on all the
facts and circumstances. In general, prop-
erty is used or held for use in the foreign
corporation's trade or business if it is-

(i) Held for the principal purpose of
promoting the present conduct of the trade
or business;

(ii) Acquired and held in the ordinary
course of the trade or business; or

(iii) Otherwise held in a direct relation-
ship to the trade or business. Property is
considered held in a direct relationship to
a trade or business if it is held to meet the
present needs of that trade or business and
not its anticipated future needs. Thus,
property will not be considered to be held
in a direct relationship to a trade or busi-
ness if it is held for the purpose of pro-
viding for future diversification into a new
trade or business, future expansion of
trade or business activities, future plant
replacement, or future business contin-
gencies.

(6) Active leasing and licensing. For
purposes of paragraph (d)(3) of this sec-
tion, whether a trade or business that pro-
duces rents or royalties is actively con-
ducted is determined under the principles
of section 954(c)(2)(A) and the regula-
tions thereunder, but without regard to
whether the rents or royalties are received
from an unrelated party. See §§ 1.954-
2(c) and (d).

(e) Special rules for certain property to
be leased-(1) Leasing business of the
foreign corporation. Except as otherwise
provided in this paragraph (e), tangible
property that will be leased to another
person by the foreign corporation will be
considered to be transferred for use by the
foreign corporation in an active trade or
business outside the United States only
if-

(i) The foreign corporation's leasing of
the property constitutes the active conduct
of a leasing business, as determined under
paragraph (d)(6) of this section;

(ii) The lessee of the property is not
expected to, and does not, use the property
in the United States; and

(iii) The foreign corporation has a need
for substantial investment in assets of the
type transferred.

(2) De minimis leasing by the foreign
corporation. Tangible property that will
be leased to another person by the foreign
corporation but that does not satisfy the
conditions of paragraph (e)(1) of this sec-
tion will, nevertheless, be considered to be
transferred for use in the active conduct of
a trade or business if either-

(i) The property transferred will be
used by the foreign corporation in the
active conduct of a trade or business but
will be leased during occasional brief pe-
riods when the property would otherwise
be idle, such as an airplane leased during
periods of excess capacity; or

(ii) The property transferred is real
property located outside the United States
and-

(A) The property will be used primar-
ily in the active conduct of a trade or
business of the foreign corporation; and

(B) Not more than ten percent of the
square footage of the property will be
leased to others.

(3) Aircraft and vessels leased in for-
eign commerce. For purposes of satisfying
paragraph (e)(1) of this section, an aircraft
or vessel, including component parts such
as an engine leased separately from the
aircraft or vessel, that will be leased to
another person by the foreign corporation
will be considered to be transferred for
use in the active conduct of a trade or
business if-

(i) The employees of the foreign cor-
poration perform substantial managerial
and operational activities of leasing air-
craft or vessels outside the United States;
and

(ii) The leased property is predomi-
nantly used outside the United States, as
determined under § 1.954-2(c)(2)(v).

(f) Special rules for oil and gas work-
ing interests-(1) In general. A working
interest in oil and gas property will be
considered to be transferred for use in the
active conduct of a trade or business if-

(i) The transfer satisfies the conditions
of paragraph (f)(2) or (f)(3) of this sec-
tion;

(ii) At the time of the transfer, the
foreign corporation has no intention to
farm out or otherwise transfer any part of
the transferred working interest; and

(iii) During the first three years after
the transfer there are no farmouts or other
transfers of any part of the transferred
working interest as a result of which the
foreign corporation retains less than a 50-
percent share of the transferred working
interest.

(2) Active use of working interest. A
working interest in oil and gas property
that satisfies the conditions in paragraphs
(f)(1)(ii) and (iii) of this section will be

<!-- PageFooter="October 5, 2015" -->

<!-- PageFooter="Bulletin No. 2015-40" -->
<!-- PageBreak -->

considered to be transferred for use in the
active conduct of a trade or business if-

(i) The U.S. transferor is regularly and
substantially engaged in exploration for
and extraction of minerals, either directly
or through working interests in joint ven-
tures, other than by reason of the property
that is transferred;

(ii) The terms of the working interest
transferred were actively negotiated
among the joint venturers;

(iii) The working interest transferred
constitutes at least a five percent working
interest;

(iv) Before and at the time of the trans-
fer, through its own employees or officers,
the U.S. transferor was regularly and ac-
tively engaged in-

(A) Operating the working interest, or

(B) Analyzing technical data relating
to the activities of the venture;

(v) Before and at the time of the trans-
fer, through its own employees or officers,
the U.S. transferor was regularly and ac-
tively involved in decision making with
respect to the operations of the venture,
including decisions relating to explora-
tion, development, production, and mar-
keting; and

(vi) After the transfer, the foreign cor-
poration will for the foreseeable future
satisfy the requirements of subparagraphs
(iv) and (v) of this paragraph (f)(2).

(3) Start-up operations. A working in-
terest in oil and gas property that satisfies
the conditions in paragraphs (f)(1)(ii) and
(iii) of this section but that does not satisfy
all the requirements of paragraph (f)(2) of
this section will, nevertheless, be consid-
ered to be transferred for use in the active
conduct of a trade or business if-

(i) The working interest was acquired
by the U.S. transferor immediately before
the transfer and for the specific purpose of
transferring it to the foreign corporation;

(ii) The requirements of paragraphs
(f)(2)(ii) and (iii) of this section are satis-
fied; and

(iii) The foreign corporation will for
the foreseeable future satisfy the require-
ments of paragraph (f)(2)(iv) and (v) of
this section.

(4) Other applicable rules. A working
interest in oil and gas property that is not
described in paragraph (f)(1) of this sec-
tion may nonetheless qualify for the ex-
ception to section 367(a)(1) contained in

this section depending upon the facts and
circumstances.

(g) Property retransferred by the for-
eign corporation-(1) General rule.
Property will not be considered to be
transferred for use in the active conduct of
a trade or business outside of the United
States if-

(i) At the time of the transfer, it is
reasonable to believe that, in the reason-
ably foreseeable future, the foreign corpo-
ration will sell or otherwise dispose of any
material portion of the property other than
in the ordinary course of business; or

(ii) Except as provided in paragraph
(g)(2) of this section, the foreign corpora-
tion receives the property in an exchange
described in section 367(a)(1), and, as part
of the same transaction, transfers the prop-
erty to another person. For purposes of the
preceding sentence, a subsequent transfer
within six months of the initial transfer
will be considered to be part of the same
transaction, and a subsequent transfer
more than six months after the initial
transfer may be considered to be part of
the same transaction under step-
transaction principles.

(2) Exception. Notwithstanding para-
graph (g)(1)(ii) of this section, property
will be considered to be transferred for
use in the active conduct of a trade or
business outside of the United States if-

(i) The initial transfer to the foreign
corporation is followed by one or more
subsequent transfers described in section
351 or 721; and

(ii) Each subsequent transferee is either
a partnership in which the preceding
transferor is a general partner or a corpo-
ration in which the preceding transferor
owns common stock; and

(iii) The ultimate transferee is consid-
ered to use the property in the active con-
duct of a trade or business outside of the
United States, as determined by applying
paragraph (d), (e), or (f) of this section, as
applicable, with respect to the ultimate
transferee rather than the foreign corpora-
tion.

(h) Compulsory transfers of property.
Property is presumed to be transferred for
use in the active conduct of a trade or
business outside of the United States, if-

(1) The property was previously in use
in the country in which the foreign corpo-
ration is organized; and

(2) The transfer is either:

(i) Legally required by the foreign gov-
ernment as a necessary condition of doing
business; or

(ii) Compelled by a genuine threat of
immediate expropriation by the foreign
government.

(i) [Reserved].

(j) Failure to comply with reporting
requirements of section 6038B-(1) Fail-
ure to comply. For purposes of the excep-
tion to the application of section 367(a)(1)
provided in paragraph (a)(2) of this sec-
tion, a failure to comply with the reporting
requirements of section 6038B and the
regulations thereunder (failure to comply)
has the meaning set forth in § 1.6038B-
1(f)(2).

(2) Relief for certain failures to comply
that are not willful-(i) In general. A
failure to comply described in paragraph
(j)(1) of this section will be deemed not to
have occurred for purposes of satisfying
the requirements of this section if the tax-
payer demonstrates that the failure was
not willful using the procedure set forth in
this paragraph (j)(2). For this purpose,
willful is to be interpreted consistent with
the meaning of that term in the context of
other civil penalties, which would include
a failure due to gross negligence, reckless
disregard, or willful neglect. Whether a
failure to comply was a willful failure will
be determined by the Director of Field
Operations International, Large Business
& International (or any successor to the
roles and responsibilities of such position,
as appropriate) (Director) based on all the
facts and circumstances. The taxpayer
must submit a request for relief and an
explanation as provided in paragraph
(j)(2)(ii)(A) of this section. Although a
taxpayer whose failure to comply is deter-
mined not to be willful will not be subject
to gain recognition under this section, the
taxpayer will be subject to a penalty under
section 6038B if the taxpayer fails to dem-
onstrate that the failure was due to reason-
able cause and not willful neglect. See
§ 1.6038B-1(b)(1) and (f). The determi-
nation of whether the failure to comply
was willful under this section has no ef-
fect on any request for relief made under
§ 1.6038B-1(f).

(ii) * * *

(B) Notice requirement. In addition to
the requirements of paragraph (j)(2)(ii)(A)

<!-- PageFooter="Bulletin No. 2015-40" -->

<!-- PageFooter="October 5, 2015" -->
<!-- PageBreak -->

of this section, the taxpayer must comply
with the notice requirements of this para-
graph (j)(2)(ii)(B). *

(3) For illustrations of the application of the
willfulness standard of this paragraph (j), see
the examples in § 1.367(a)-8(p)(3).

(4) Paragraph (j) applies to requests for
relief submitted on or after November 19,
2014.

(k) Effective/applicability dates-(1)
In general. Except as provided in para-
graph (k)(2) of this section, the rules of
this section apply to transfers occurring on
or after September 14, 2015, and to trans-

fers occurring before September 14, 2015,
resulting from entity classification elec-
tions made under § 301.7701-3 that are
filed on or after September 14, 2015. For
transfers occurring before this section is
applicable, see § §1.367(a)-2, -2T, -4,
-4T, -5, and -5T as contained in 26 CFR
part 1 revised as of April 1, 2015.

(2) Foreign currency exception. Not-
withstanding paragraph (c)(3)(i) of this sec-
tion, § 1.367(a)-5T(d)(2) as contained in 26
CFR part 1 revised as of April 1, 2015,
applies to transfers of property denominated
in a foreign currency occurring before the

date that the rules proposed in this section
are adopted as final regulations in a Trea-
sury decision published in the Federal Reg-
ister, other than transfers occurring before
that date resulting from entity classification
elections made under § 301.7701-3 that are
filed on or after that date.

## § 1.367(a)-3 [Amended]

Par. 5. For each section listed in fol-
lowing the table, remove the language in
the "Remove" column and add in its place
the language in the "Add" column.

Section

Remove

Add

§ 1.367(a)-3(a)(3), first sentence

§ 1.367(a)-1T(c)

§ 1.367(a)-1(c)

§ 1.367(a)-3(c)(4)(i), last sentence

§ 1.367(a)-1T(c)(3)

§ 1.367(a)-1(c)(3)

§ 1.367(a)-3(c)(4)(iv), first sentence

§ 1.367(a)-1T(d)(1)

§ 1.367(a)-1(d)(1)

§ 1.367(a)-3(c)(3)(i)(A)

§ 1.367(a)-2T(b)(2) and (3)

§ 1.367(a)-2(d)(2), (3), and (4)

§ 1.367(a)-3(c)(3)(ii)(B), last sentence

§ 1.367(a)-2T(b)(2) and (3)

§ 1.367(a)-2(d)(2) and (3)

§ 1.367(a)-3(d)(3) Example 7A(ii), penultimate sentence

§ 1.367(a)-2T(a)(2)

§ 1.367(a)-2(a)(2)(iii)

§ 1.367(a)-3(d)(3) Example 13(i), penultimate sentence

§ 1.367(a)-2T(c)(2)

§ 1.367(a)-2(g)(2)

Par. 6. Section 1.367(a)-4 is revised to
read as follows:

§ 1.367(a)-4 Special rule applicable to
U.S. depreciated property.

(a) Depreciated property used in the
United States-(1) In general. A U.S. per-
son that transfers U.S. depreciated prop-
erty (as defined in paragraph (a)(2) of this
section) to a foreign corporation in an
exchange described in section 367(a)(1),
must include in its gross income for the
taxable year in which the transfer occurs
ordinary income equal to the gain realized
that would have been includible in the
transferor's gross income as ordinary in-
come under section 617(d)(1), 1245(a),
1250(a), 1252(a), 1254(a), or 1255(a),
whichever is applicable, if at the time of
the transfer the U.S. person had sold the
property at its fair market value. Recap-
ture of depreciation under this paragraph
(a) is required regardless of whether the
exception to section 367(a)(1) provided
by § 1.367(a)-2(a)(2) applies to the trans-
fer of the U.S. depreciated property. How-
ever, the transfer of the U.S. depreciated
property may qualify for the exception
with respect to realized gain that is not

included in ordinary income pursuant to
this paragraph (a).

(2) U.S. depreciated property. U.S. de-
preciated property subject to the rules of
this paragraph (a) is any property that-

(i) Is either mining property (as defined
in section 617(f)(2)), section 1245 prop-
erty (as defined in section 1245(a)(3)),
section 1250 property (as defined in sec-
tion 1250(c)), farm land (as defined in
section 1252(a)(2)), section 1254 property
(as defined in section 1254(a)(3)), or sec-
tion 126 property (as defined in section
1255(a)(2)); and

(ii) Has been used in the United States
or has been described in section 168(g)(4)
before its transfer.

(3) Property used within and without
the United States. (i) If U.S. depreciated
property has been used partly within and
partly without the United States, then the
amount required to be included in ordi-
nary income pursuant to this paragraph (a)
is reduced to an amount determined in
accordance with the following formula:

Full recapture amount X
U.S use
Total use

(ii) For purposes of the fraction in para-
graph (a)(3)(i) of this section, the "full

recapture amount" is the amount that
would otherwise be included in the trans-
feror's income under paragraph (a)(1) of
this section. "U.S. use" is the number of
months that the property either was used
within the United States or qualified as
section 38 property by virtue of section
48(a)(2)(B), and was subject to deprecia-
tion by the transferor or a related person.
"Total use" is the total number of months
that the property was used (or available
for use), and subject to depreciation, by
the transferor or a related person. For pur-
poses of this paragraph (a)(3), property is
not considered to have been in use outside
of the United States during any period in
which such property was, for purposes of
section 48 or 168, treated as property not
used predominantly outside the United
States pursuant to the provisions of sec-
tion 48(a)(2)(B). For purposes of this
paragraph (a)(3) the term "related person"
has the meaning set forth in § 1.367(d)-1(h).

(b) Effective/applicability dates. The
rules of this section apply to transfers occur-
ring on or after September 14, 2015,] and to
transfers occurring before September 14,
2015, resulting from entity classification
elections made under § 301.7701-3 that are
filed on or after September 14, 2015. For

<!-- PageFooter="October 5, 2015" -->

<!-- PageFooter="Bulletin No. 2015-40" -->
<!-- PageBreak -->

transfers occurring before this section is ap-
plicable, see §§ 1.367(a)-4 and 1.367(a)-4T
as contained in 26 CFR part 1 revised as
of April 1, 2015.

§ 1.367(a)-5 [Removed and Reserved]
Par. 7. Section 1.367(a)-5 is removed
and reserved.

Par. 8. Section 1.367(a)-6 is added to
read as follows:

§ 1.367(a)-6 Transfer of foreign branch
with previously deducted losses.

(a) through (b)(1) [Reserved]. For further
guidance, see § 1.367(a)-6T(a) through
(b)(1).

(b)(2) No active conduct exception. The
rules of this paragraph (b) apply regardless
of whether any of the assets of the foreign
branch satisfy the active trade or business
exception of § 1.367(a)-2(a)(2).

(c)(1) [Reserved]. For further guid-
ance, see § 1.367(a)-6T(c)(1).

(2) Gain limitation. The gain required
to be recognized under paragraph (b)(1) of
this section will not exceed the aggregate
amount of gain realized on the transfer of
all branch assets (without regard to the
transfer of any assets on which loss is
realized but not recognized).

(3) [Reserved].

(c)(4) Transfers of certain intangible
property. Gain realized on the transfer of
intangible property (computed with refer-
ence to the fair market value of the intan-
gible property as of the date of the trans-
fer) that is an asset of a foreign branch is
taken into account in computing the lim-
itation on loss recapture under paragraph
(c)(2) of this section. For rules relating to the
crediting of gain recognized under this section
against income deemed to arise by operation
of section 367(d), see § 1.367(d)-1(g)(3).

(d) through (j) [Reserved]. For further
guidance, see § 1.367(a)-6T(d) through (j).

(k) Effective/applicability dates. The
rules of this section apply to transfers occur-
ring on or after September 14, 2015, and to
transfers occurring before September 14,
2015, resulting from entity classification
elections made under § 301.7701-3 that are
filed on or after September 14, 2015. For
transfers occurring before this section is ap-
plicable, see §§ 1.367(a)-6T as contained in
26 CFR part 1 revised as of April 1, 2015.

Par. 9. Section 1.367(a)-7 is amended by:

1\. Revising paragraph (f)(11).

2\. Redesignating paragraph (j) as (j)(1)
and revising the first sentence, and adding
paragraph (j)(2).

The revision and addition read as follows:

§ 1.367(a)-7 Outbound transfers of property
described in section 361(a) or (b).

* * * * *

(f) * * *

(11) Section 367(d) property is intan-
gible property as defined in § 1.367(a)-
1(d)(5).

* * * * *

(j) Effective/applicability dates-(1) In
general. Except as provided in paragraphs
(e)(2) and (j)(2) of this section, this sec-
tion applies to transfers occurring on or
after April 18, 2013. * * *

(2) Section 367(d) property. The defini-
tion provided in paragraph (f)(11) of this
section applies to transfers occurring on or
after September 14, 2015, and to transfers
occurring before September 14, 2015, re-
sulting from entity classification elections
made under § 301.7701-3 that are filed on
or after September 14, 2015. For transfers
occurring before this section is applicable,
see § 1.367(a)-7 as contained in 26 CFR
part 1 revised as of April 1, 2015.

## § 1.367(a)-7 [Amended]

Par. 10. For each section listed in the
following table, remove the language in
the "Remove" column and add in its place
the language in the "Add" column.

Section

Remove

Add

§ 1.367(a)-7(a), sixth sentence

§ 1.367(a)-6T

§ 1.367(a)-6

§ 1.367(a)-7(c), second sentence

§ 1.367(a)-2T

§ 1.367(a)-2

§ 1.367(a)-7(c), second sentence

§ 1.367(a)-4T, 1.367(a)-5T

§ 1.367(a)-4

§ 1.367(a)-7(c), second sentence

§ 1.367(a)-6T

§ 1.367(a)-6

§ 1.367(a)-7(c)(2)(i)(B)

§ 1.367(a)-6T

§ 1.367(a)-6

§ 1.367(a)-7(c)(2)(ii)(A)(2)

§ 1.367(a)-6T

§ 1.367(a)-6

§ 1.367(a)-7(e)(1), third sentence

§ 1.367(a)-2T

§ 1.367(a)-2

§ 1.367(a)-7(e)(1), third sentence

§ 1.367(a)-4T, 1.367(a)-5T

§ 1.367(a)-4

§ 1.367(a)-7(e)(1), third sentence

§ 1.367(a)-6T

§ 1.367(a)-6

§ 1.367(a)-7(e)(1), last sentence

§ 1.367(a)-1T(b)(4) and § 1.367(a)-1(b)(4)(i)(B)

§ 1.367(a)-1(b)(4)

§ 1.367(a)-7(e)(4)(ii), first and second sentences

§ 1.367(a)-6T

§ 1.367(a)-6

§ 1.367(a)-7(e)(5), heading

§ 1.367(a)-6T

§ 1.367(a)-6

§ 1.367(a)-7(e)(5)(i), first sentence

§ 1.367(a)-6T

§ 1.367(a)-6

§ 1.367(a)-7(e)(5)(ii), first sentence

§ 1.367(a)-6T

§ 1.367(a)-6

§ 1.367(a)-7(f)(4)(ii)

§ 1.367(a)-6T

§ 1.367(a)-6

§ 1.367(a)-7(g), last sentence

§ 1.367(a)-2T

§ 1.367(a)-2

§ 1.367(a)-7(g), Example 1 (ii)(A), last sentence

§ 1.367(a)-2T

§ 1.367(a)-2

§ 1.367(a)-7(g), Example 2 (ii)(A), last sentence

§ 1.367(a)-2T

§ 1.367(a)-2

<!-- PageFooter="Bulletin No. 2015-40" -->

<!-- PageFooter="October 5, 2015" -->
<!-- PageBreak -->

## § 1.367(a)-8 [Amended]

Par. 11. For each section listed in the following table, remove the language in the "Remove" column and add in its place the
language in the "Add" column.

Section

Remove

Add

§ 1.367(a)-8(b)(1)(xv), first sentence

§ 1.367(a)-1T(d)(1)

§ 1.367(a)-1(d)(1)

§ 1.367(a)-8(b)(1)(xv), second sentence

§ 1.367(a)-1T(c)(3)(i)

§ 1.367(a)-1(c)(3)(i)

§ 1.367(a)-8(c)(3)(viii)

§ 1.367(a)-1T(c)(3)(i) and

§ 1.367(a)-1(c)(3)(i) and

§ 1.367(a)-1T(c)(3)(ii)

§ 1.367(a)-1(c)(3)(ii)

§ 1.367(a)-8(c)(4)(iv)

§ 1.367(a)-1T(b)(4)

§ 1.367(a)-1(b)(4)

§ 1.367(a)-8(j)(3)

§ 1.367(a)-1T(c)(3)(ii)

§ 1.367(a)-1(c)(3)(ii)

Par. 12. Section 1.367(d)-1 is added to
read as follows:

§ 1.367(d)-1 Transfers of intangible
property to foreign corporations.

(a) [Reserved]. For further guidance,
see § 1.367(d)-1T(a).

(b) Property subject to section 367(d).
Section 367(d) and the rules of this sec-
tion apply to the transfer of intangible
property, as defined in § 1.367(a)-1(d)(5),
by a U.S. person to a foreign corporation
in an exchange described in section 351 or
361. See section 367(a) and the regula-
tions thereunder for the rules that apply to
the transfer of any property other than
intangible property.

(c)(1) through (2) [Reserved]. For fur-
ther guidance, see § 1.367(d)-1T(c)(1)
and (2).

(3) Useful life. For purposes of this
section, the useful life of intangible prop-
erty is the entire period during which ex-
ploitation of the intangible property is rea-
sonably anticipated to occur, as of the
time of transfer. Exploitation of intangible
property includes any direct or indirect
use or transfer of the intangible property,
including use without further develop-
ment, use in the further development of
the intangible property itself (and any ex-
ploitation of the further developed intan-
gible property), and use in the develop-
ment of other intangible property (and any
exploitation of the developed other intan-
gible property).

(c)(4) through (g)(2) [Reserved]. For
further guidance, see § 1.367(d)-1T(c)(4)
through (g)(2).

(g)(2)(i) The intangible property trans-
ferred constitutes an operating intangible,
as defined in § 1.367(a)-1(d)(6).

(g)(2)(ii) through (iii)(D) [Reserved].
For further guidance, see § 1.367(d)-
1T(g)(2)(ii) through (iii)(D).

(E) The transferred intangible property
will be used in the active conduct of a
trade or business outside of the United
States within the meaning of § 1.367(a)-2
and will not be used in connection with
the manufacture or sale of products in or
for use or consumption in the United
States.

* * * * *

(3) Intangible property transferred
from branch with previously deducted
losses. (i) If income is required to be rec-
ognized under section 904(f)(3) and the
regulations thereunder or under
§ 1.367(a)-6 upon the transfer of intangi-
ble property of a foreign branch that had
previously deducted losses, then the in-
come recognized under those sections
with respect to that property is credited
against amounts that would otherwise be
required to be recognized with respect to
that same property under paragraphs (c)
through (f) of this section in either the
current or future taxable years. The
amount recognized under section
904(f)(3) or § 1.367(a)-6 with respect to
the transferred intangible property is de-
termined in accordance with the following
formula:

Loss recapture income
gain from intangible property
gain from all branch assets

(ii) For purposes of the formula in para-
graph (g)(3)(i) of this section, the "loss re-
capture income" is the total amount required

to be recognized by the U.S. transferor pur-
suant to section 904(f)(3) or § 1.367(a)-6.
The "gain from intangible property" is the
total amount of gain realized by the U.S.
transferor pursuant to section 904(f)(3) and
§ 1.367(a)-6 upon the transfer of items of
property that are subject to section 367(d).
"Gain from intangible property" does not
include gain realized with respect to intan-
gible property by reason of an election un-
der paragraph (g)(2) of this section. The
"gain from all branch assets" is the total
amount of gain realized by the transferor
upon the transfer of items of property of the
branch for which gain is realized.

(g)(4) through (i) [Reserved]. For fur-
ther guidance, see § 1.367(d)-1T(g)(4)
through (i).

(j) Effective/applicability dates. This
section applies to transfers occurring on or
after September 14, 2015, and to transfers
occurring before September 14, 2015, re-
sulting from entity classification elections
made under § 301.7701-3 that are filed on
or after September 14, 2015. For transfers
occurring before this section is applicable,
see § 1.367(d)-1T as contained in 26 CFR
part 1 revised as of April 1, 2015.

Par. 13. Section 1.367(e)-2 is amended
by revising paragraph (b)(3)(iii) to read as
follows:

§ 1.367(e)-2 Distributions described in
section 367(e)(2).

* * * * *

(b) * * *

(3) * * *

(iii) Other rules. For other rules that
may apply, see sections 381, 897, 1248,
and § 1.482-1(f)(2)(i)(C).

* * * * *

<!-- PageFooter="October 5, 2015" -->

<!-- PageFooter="Bulletin No. 2015-40" -->
<!-- PageBreak -->

Par. 14. Section 1.482-1 is amended by
revising paragraphs (f)(2)(i) and (f)(2)(ii)(B)
and adding paragraph (j)(7) to read as fol-
lows:

### § 1.482-1 Allocation of income and deductions among taxpayers.

[The text of the proposed amendments
to § 1.482-1 is the same as the text of
§ 1.482-1T(f)(2)(i), (f)(2)(ii)(B), and
(j)(7) published elsewhere in this issue of
the Federal Register].

## § 1.884-5 [Amended]

Par. 15. Section 1.884-5 is amended in
paragraph (e)(3)(ii)(A) by removing the
citation "1.367(a)-2T(b)(5)," and adding
the citation "1.367(a)-2(d)(5)" in its
place.

### § 1.1248-8 [Amended]

Par. 16. Section 1.1248-8 is amended
in paragraph (b)(2)(iv)(B)(1)(ii) by re-
moving the citation "1.367(a)-6T," and
adding the citation "1.367(a)-6" in its
place.

### § 1.1248(f)-2 [Amended]

Par. 17. Section 1.1248(f)-2 is
amended in the last sentence of paragraph
(e) by removing the citation "1.367(a)-
2T," and adding the citation "1.367(a)-2"
in its place.

Par. 18. Section 1.6038B-1 is amended
by:

1\. Removing the citation "1.367(a)-
1T(c)," in the fourth sentence of para-
graph (b)(1)(i) and adding the citation
"1.367(a)-1(c)" in its place.

2\. Adding paragraphs (c)(4)(i) through
(vii), (c)(5), and (d)(1)(iv) and (vii)

3\. Revising the first sentence of para-
graph (g)(1).

4\. Adding paragraph (g)(7).

The additions and revision read as fol-
lows:

#### § 1.6038B-1 Reporting of certain transfers to foreign corporations.

* * * * *

(c) * * *

(1) through (4) [Reserved]. For further
guidance, see § 1.6038B-1T(c)(1) through (4).

(i) Active business property. Describe
any transferred property that qualifies un-
der § 1.367(a)-2(a)(2). Provide here a
general description of the business con-
ducted (or to be conducted) by the trans-
feree, including the location of the busi-
ness, the number of its employees, the
nature of the business, and copies of the
most recently prepared balance sheet and
profit and loss statement. Property listed
within this category may be identified by
general type. For example, upon the trans-
fer of the assets of a manufacturing oper-
ation, a reasonable description of the
property to be used in the business might
include the categories of office equipment
and supplies, computers and related
equipment, motor vehicles, and several
major categories of manufacturing equip-
ment. However, any property that is in-
cludible in both paragraphs (c)(4)(i) and
(iii) of this section (property subject to
depreciation recapture under § 1.367(a)-
4(a)) must be identified in the manner
required in paragraph (c)(4)(iii) of this
section. If property is considered to be
transferred for use in the active conduct of
a trade or business under a special rule in
paragraph (e), (f), or (g) of § 1.367(a)-2,
specify the applicable rule and provide
information supporting the application of
the rule.

(ii) Stock or securities. Describe any
transferred stock or securities, including
the class or type, amount, and character-
istics of the transferred stock or securities,
as well as the name, address, place of
incorporation, and general description of
the corporation issuing the stock or secu-
rities.

(iii) Depreciated property. Describe
any property that is subject to depreciation
recapture under § 1.367(a)-4(a). Property
within this category must be separately
identified to the same extent as was re-
quired for purposes of the previously
claimed depreciation deduction. Specify
with respect to each such asset the rele-
vant recapture provision, the number of
months that such property was in use
within the United States, the total number
of months the property was in use, the fair
market value of the property, a schedule
of the depreciation deduction taken with
respect to the property, and a calculation
of the amount of depreciation required to
be recaptured.

(iv) Property not transferred for use in
the active conduct of a trade or business.
Describe any property that is eligible
property, as defined in § 1.367(a)-2(b)
taking into account the application of
§ 1.367(a)-2(c), that was transferred to
the foreign corporation but not for use in
the active conduct of a trade or business
outside the United States (and was there-
fore not listed under paragraph (c)(4)(i) of
this section).

(v) Property transferred under com-
pulsion. If property qualifies for the ex-
ception of § 1.367(a)-2(a)(2) under the
rules of paragraph (h) of that section, pro-
vide information supporting the claimed
application of such exception.

(vi) Certain ineligible property. De-
scribe any property that is described in
§ 1.367(a)-2(c) and that therefore cannot
qualify under § 1.367(a)-2(a)(2) regard-
less of its use in the active conduct of a
trade or business outside of the United
States. The description must be divided
into the relevant categories, as follows:

(A) Inventory, etc. Property described
in § 1.367(a)-2(c)(1);

(B) Installment obligations, etc. Prop-
erty described in § 1.367(a)-2(c)(2);

(C) Foreign currency, etc. Property de-
scribed in § 1.367(a)-2(c)(3); and

(D) Leased property. Property de-
scribed in § 1.367(a)-2(c)(4).

(vii) Other property that is ineligible
property. Describe any property, other
than property described in § 1.367(a)-
2(c), that cannot qualify under § 1.367(a)-
2(a)(2) regardless of its use in the active
conduct of a trade or business outside of
the United States and that is not subject to
the rules of section 367(d) under
§ 1.367(a)-1(b)(5). Each item of property
must be separately identified.

(c)(4)(viii) [Reserved]. For further
guidance, see § 1.6038B-1T(c)(4)(viii).

(5) Transfer of foreign branch with
previously deducted losses. If the property
transferred is property of a foreign branch
with previously deducted losses subject to
§§ 1.367(a)-6 and -6T, provide the fol-
lowing information:

(i) through (iv) [Reserved]. For further
information, see § 1.6038B-1T(c)(5)(i)
through (iv).

* * * * *

<!-- PageFooter="Bulletin No. 2015-40" -->

<!-- PageFooter="October 5, 2015" -->
<!-- PageBreak -->

(d)(1) through (1)(iii) [Reserved]. For
further guidance, see § 1.6038B-1T(d)(1)
through (1)(iii).

(iv) Intangible property transferred.
Provide a description of the intangible
property transferred, including its ad-
justed basis. Generally, each item of in-
tangible property must be separately iden-
tified, including intangible property
described in § 1.367(d)-1(g)(2)(i) or that
is subject to the rules of section 367(d)
under § 1.367(a)-1(b)(5).

(d)(1)(v) through (d)(1)(vi) [Reserved].
For further guidance, see § 1.6038B-
1T(d)(1)(v) through (1)(vi).

(d)(1)(vii) Coordination with loss
rules. List any intangible property subject
to section 367(d) the transfer of which
also gives rise to the recognition of gain
under section 904(f)(3) or §§ 1.367(a)-6
or -6T. Provide a calculation of the gain

required to be recognized with respect to
such property, in accordance with the pro-
visions of § 1.367(d)-1(g)(4).

(d)(1)(viii) through (d)(2) [Reserved].
For further guidance, see § 1.6038B-
1T(d)(1)(viii) through (2).

* * * * *

(g) Effective/applicability dates. (1)
Except as provided in paragraphs (g)(2)
through (g)(7) of this section, this section
applies to transfers occurring on or after
July 20, 1998, except for transfers of cash
made in tax years beginning on or before
February 5, 1999 (which are not required
to be reported under section 6038B), and
except for transfers described in para-
graph (e) of this section, which applies to
transfers that are subject to §§ 1.367(e)-
1(f) and 1.367(e)-2(e). * * *

* * * * *

(7) Paragraphs (c)(4)(i) through (vii),
(c)(5), and (d)(1)(iv) and (vii) of this sec-
tion apply to transfers occurring on or
after September 14, 2015, and to transfers
occurring before September 14, 2015, re-
sulting from entity classification elections
made under § 301.7701-3 that are filed on
or after September 14, 2015. For guidance
with respect to paragraphs (c)(4), (c)(5),
and (d)(1) of this section before this sec-
tion is applicable, see §§ 1.6038B-1 and
1.6038B-1T as contained in 26 CFR part
1 revised as of April 1, 2015.

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

(Filed by the Office of the Federal Register on September
14, 2015, 11:15 a.m., and published in the issue of the
Federal Register for September 16, 2015, 80 F.R. 23279)

<!-- PageFooter="October 5, 2015" -->

<!-- PageFooter="Bulletin No. 2015-40" -->
<!-- PageBreak -->

# 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.

I.R.B .- Internal Revenue Bulletin.

TR-Trust.

CY-County.

LE-Lessee.

TT-Trustee.

D-Decedent.

LP-Limited Partner.

U.S.C .- United States Code.

DC-Dummy Corporation.

LR-Lessor.

X-Corporation.

DE-Donee.

Del. Order-Delegation Order.

Nonacq .- Nonacquiescence.

O Organization.

DR-Donor.

P-Parent Corporation.

PHC-Personal Holding Company.

PO-Possession of the U.S.

PR-Partner.

PRS-Partnership.

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

REIT-Real Estate Investment Trust.

Rev. Proc .- Revenue Procedure.

Rev. Rul .- Revenue Ruling.

S-Subsidiary.

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

Stat .- Statutes at Large.

BK-Bank.

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

T.C .- Tax Court.

C-Individual.

C.B .- Cumulative Bulletin.

CFR-Code of Federal Regulations.

GP-General Partner.

T.I.R .- Technical Information Release.

COOP-Cooperative.

TP-Taxpayer.

Ct.D .- Court Decision.

M-Minor.

Y-Corporation.

Z-Corporation.

DISC-Domestic International Sales Corporation.

E-Estate.

EE-Employee.

E.O .- Executive Order.

ER-Employer.

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

F-Fiduciary.

FC-Foreign Country.

FICA-Federal Insurance Contributions Act.

FISC-Foreign International Sales Company.

FPH-Foreign Personal Holding Company.

T-Target Corporation.

T.D .- Treasury Decision.

<!-- PageFooter="Bulletin No. 2015-40" -->

<!-- PageFooter="October 5, 2015" -->
<!-- PageBreak -->

## Numerical Finding List1

Bulletins 2015-27 through 2015-40

### Announcements:

2015-17, 2015-28 I.R.B. 67
2015-18, 2015-33 I.R.B. 198

2015-19, 2015-32 I.R.B. 157
2015-20, 2015-38 I.R.B. 375
2015-21, 2015-34 I.R.B. 220
2015-22, 2015-35 I.R.B. 288
2015-23, 2015-36 I.R.B. 311
2015-24, 2015-36 I.R.B. 313
2015-25, 2015-39 I.R.B. 412

### Notices:

2015-43, 2015-29 I.R.B. 73
2015-46, 2015-28 I.R.B. 64
2015-47, 2015-30 I.R.B. 76
2015-48, 2015-30 I.R.B. 77
2015-49, 2015-30 I.R.B. 79
2015-50, 2015-30 I.R.B. 81
2015-51, 2015-31 I.R.B. 133
2015-52, 2015-35 I.R.B. 227
2015-53, 2015-33 I.R.B. 190
2015-54, 2015-34 I.R.B. 210
2015-55, 2015-34 I.R.B. 217
2015-56, 2015-35 I.R.B. 235
2015-57, 2015-36 I.R.B. 294
2015-58, 2015-37 I.R.B. 322
2015-59, 2015-40 I.R.B. 459
2015-61, 2015-39 I.R.B. 408
2015-62, 2015-39 I.R.B. 411
2015-63, 2015-40 I.R.B. 461
2015-64, 2015-40 I.R.B. 464
2015-65, 2015-40 I.R.B. 466

## Revenue Procedures :- Continued

2015-40, 2015-35 I.R.B. 236
2015-41, 2015-35 I.R.B. 263

2015-42, 2015-36 I.R.B. 310
2015-43, 2015-40 I.R.B. 467
2015-44, 2015-38 I.R.B. 374
2015-45, 2015-39 I.R.B. 412
2015-46, 2015-39 I.R.B. 414
2015-47, 2015-39 I.R.B. 419
2015-48, 2015-40 I.R.B. 469

## Revenue Rulings:

2015-15, 2015-27 I.R.B. 1
2015-16, 2015-31 I.R.B. 130
2015-17, 2015-39 I.R.B. 358
2015-18, 2015-34 I.R.B. 209

2015-19, 2015-36 I.R.B. 291
2015-20, 2015-38 I.R.B. 373
2015-21, 2015-40 I.R.B. 447

## Treasury Decisions:

9723, 2015-31 I.R.B. 84

9726, 2015-31 I.R.B. 98

9727, 2015-32 I.R.B. 154

9728, 2015-33 I.R.B. 169
9729, 2015-35 I.R.B. 221
9730, 2015-35 I.R.B. 223
9731, 2015-37 I.R.B. 314
9732, 2015-39 I.R.B. 371
9735, 2015-37 I.R.B. 316
9736, 2015-39 I.R.B. 402
9737, 2015-40 I.R.B. 449
9738, 2015-40 I.R.B. 453

## Proposed Regulations:

REG-136459-09, 2015-37 I.R.B. 332
REG-109370-10, 2015-33 I.R.B. 198
REG-112997-10, 2015-39 I.R.B. 422
REG-103033-11, 2015-37 I.R.B. 325
REG-109813-11, 2015-37 I.R.B. 330
REG-139483-13, 2015-40 I.R.B. 475
REG-115452-14, 2015-32 I.R.B. 158
REG-132075-14, 2015-35 I.R.B. 288
REG-138526-14, 2015-28 I.R.B. 67
REG-143800-14, 2015-37 I.R.B. 347
REG-102648-15, 2015-31 I.R.B. 134
REG-102837-15, 2015-27 I.R.B. 43

REG-123640-15, 2015-37 I.R.B. 350

## Revenue Procedures:

2015-34, 2015-27 I.R.B. 4
2015-36, 2015-27 I.R.B. 20

2015-38, 2015-36 I.R.B. 295

2015-39, 2015-33 I.R.B. 195

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2015-01 through 2015-26 is in Internal Revenue Bulletin
2015-26, dated June 29, 2015.

<!-- PageFooter="October 5, 2015" -->

<!-- PageFooter="Bulletin No. 2015-40" -->
<!-- PageBreak -->

## Finding List of Current Actions on Previously Published Items1

Bulletins 2015-27 through 2015-40

Notices:

2014-4
Modified by
Notice 2015-51, 2015-31 I.R.B. 133

### Proposed Regulations:

2009-57
Obsoleted by
REG-112997-10 2015-39 I.R.B. 422

### Revenue Procedures:

1992-75
Clarified by
Rev. Proc. 2015-40, 2015-35 I.R.B. 236

2003-40
Modified by
Rev. Proc. 2015-40, 2015-35 I.R.B. 236

2003-78
Modified by
Rev. Proc. 2015-46, 2015-39 I.R.B. 414

2006-9
Modified by
Rev. Proc. 2015-41, 2015-35 I.R.B. 263

2006-9
Superseded by
Rev. Proc. 2015-41, 2015-35 I.R.B. 263

2006-54
Modified by
Rev. Proc. 2015-40, 2015-35 I.R.B. 236

2006-54
Superseded by
Rev. Proc. 2015-40, 2015-35 I.R.B. 236

2008-31
Modified by
Rev. Proc. 2015-41, 2015-35 I.R.B. 263

2008-31
Superseded by
Rev. Proc. 2015-41, 2015-35 I.R.B. 263

2011-49
Modified by
Rev. Proc. 2015-36, 2015-27 I.R.B. 20

2011-49
Superseded by
Rev. Proc. 2015-36, 2015-27 I.R.B. 20

Revenue Procedures :- Continued

2015-14
Modified by
Rev. Proc. 2015-39, 2015-33 I.R.B. 195

2015-40
Amplified by
Rev. Proc. 2015-41, 2015-35 I.R.B. 263

2015-41
Amplified by
Rev. Proc. 2015-40, 2015-35 I.R.B. 236

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2015-01 through 2015-26 is in Internal Revenue Bulletin
2015-26, dated June 29, 2015.

<!-- PageFooter="Bulletin No. 2015-40" -->
<!-- PageFooter="October 5, 2015" -->
<!-- PageBreak -->

# Internal Revenue Service Washington, DC 20224

Official Business
Penalty for Private Use, $300

# INTERNAL REVENUE BULLETIN

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

# We Welcome Comments About the Internal Revenue Bulletin

If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we
would be pleased to hear from you. You can email us your suggestions or comments through the IRS Internet Home Page
(www.irs.gov) or write to the Internal Revenue Service, Publishing Division, IRB Publishing Program Desk, 1111 Constitution Ave.
NW, IR-6230 Washington, DC 20224.