Internal Revenue Bulletin 2016-52 (PDF rendition): IRS Revenue Procedures

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

IRS

Bulletin No. 2016-52
December 27, 2016

## 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-122855-15, page 922.

Proposed regulations incorporate the text of temporary regula-
tions (TD 9788) concerning a partner's share of partnership lia-
bilities for purposes of section 707 of the Code and the treatment
of certain payment obligations under section 752. In addition, the
proposed regulations address (1) when certain obligations to
restore a deficit balance in a partner's capital account are disre-
garded under section 704 and (2) when partnership liabilities are
treated as recourse liabilities under section 752.

### REG-129128-14, page 931.

The proposed regulations provide rules under section 901(m)
for determining the amount of foreign taxes that are disquali-
fied for foreign tax credit purposes with respect to certain
covered asset acquisitions that result in a basis step-up for
U.S. income tax purposes but not foreign tax purposes.

### Rev. Rul. 2016-29, page 875.

This revenue ruling relates to allocations of low-income housing
credits to qualified low-income buildings. Specifically, the revenue
ruling clarifies that section 42(m)(1)(A)(ii) neither requires nor en-
courages State housing credit agencies to reject the proposed
development of a low-income housing project that does not obtain
the approval of the locality where the project is proposed to be
developed.

### Rev. Rul. 2016-30, page 876.

Section 1274A - inflation adjusted numbers for 2017. This
ruling provides the dollar amounts, increased by the 2017
inflation adjustments, for section 1274A of the Code. Revenue
Ruling 2015-24 supplemented and superseded.

### Rev. Proc. 2016-56, page 920.

This revenue procedure provides an updated list of countries
with which the reporting requirement of §§1.6049-8(a) and
1.6049-4(b)(5) of the Income Tax Regs. applies (Section 3), as

well as a list of countries with which the Treasury Department and
the IRS have determined that it is appropriate to have an auto-
matic exchange relationship with respect to that interest income
information under §§1.6049-8(a) and 1.6049-4(b)(5) (Section
4). This rev proc adds one country (Saint Lucia) to the list set forth
in Section 3 and three countries (Israel, the Republic of Korea, and
Saint Lucia) to the list set forth in Section 4.

### Notice 2016-73, page 908.

The notice provides rules relating to the treatment of property
used to acquire parent stock or securities in certain triangular
reorganizations involving one or more foreign corporations. In
addition, the notice announces that the Treasury and IRS will
revise the regulations under section 367 in the manner described
in the notice, and states our view that the IRS intends to challenge
the purported tax consequences of these transactions under
current law.

### Notice 2016-77, page 914.

This notice relates to a preference needed in a qualified allo-
cation plan (QAP) for certain areas. Specifically, the notice
reminds taxpayers that a project located in a qualified census
tract (as defined in section 42(d)(5)) is not described in section
42(m)(1)(B)(ii)(III) (i.e., was not given a preference required in a
QAP) unless the development of the project contributes to a
concerted community revitalization plan.

### Notice 2016-79, page 918.

This notice provides the optional 2017 standard mileage rates
for taxpayers to use in computing the deductible costs of
operating an automobile for business, charitable, medical, or
moving expense purposes. This notice also provides the
amount taxpayers must use in calculating reductions to basis
for depreciation taken under the business standard mileage
rate, and the maximum standard automobile cost that may be
used in computing the allowance under a fixed and variable rate
(FAVR) plan.

(Continued on the next page)

Finding Lists begin on page ii.

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### T.D. 9787, page 878.

Final regulations under section 707 of the Code relate to
disguised sales of property to or by a partnership. The regu-
lations address certain deficiencies and technical ambiguities
in the existing section 707 regulations, including issues in
determining a partner's share of liabilities under section
1.752-3 for disguised sale purposes.

### T.D. 9788, page 889.

Final and temporary regulations provide guidance concerning a
partner's share of partnership liabilities for purposes of section
707 of the Code and the treatment of certain payment obliga-
tions under section 752.

### T.D. 9800, page 899.

The temporary regulations provide rules under section 901(m)
for determining the amount of foreign taxes that are disquali-
fied for foreign tax credit purposes with respect to certain
covered asset acquisitions that result in a basis step up for
U.S. income tax purposes but not foreign tax purposes.

## EMPLOYEE PLANS

### Notice 2016-78, page 914.

This notice sets forth updates on the corporate bond monthly
yield curve, the corresponding spot segment rates for Decem-
ber 2016 used under § 417(e)(3)(D), the 24-month average
segment rates applicable for December 2016, and the 30-year
Treasury rates. These rates reflect the application of
§ 430(h)(2)(C)(iv), which was added by the Moving Ahead for
Progress in the 21st Century Act, Public Law 112-141 (MAP-
21) and amended by section 2003 of the Highway and Trans-
portation Funding Act of 2014 (HATFA).

### Notice 2016-80, page 918.

This notice contains the 2016 Required Amendments List for
individually-designed qualified retirement plans. The list identi-
fies certain changes in qualification requirements that became
effective in 2016 that may require a retirement plan to be
amended in order to remain qualified, and establishes the date
by which any necessary amendment must be made.

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## The IRS Mission

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

## Introduction

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

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

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

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

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

The Bulletin is divided into four parts as follows:

### Part I .- 1986 Code.

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

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

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

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

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

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

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

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

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

## Section 42 .- Low-Income Housing Credit

26 CFR 1.42-14: Allocation rules for post-2000
State housing credit ceiling amount.

## Rev. Rul. 2016-29 ISSUE

When state housing credit agencies al-
locate housing credit dollar amounts, does
§ 42(m)(1)(A)(ii) of the Internal Revenue
Code (Code) require or encourage these
agencies to reject any proposal that does
not obtain the approval of the locality
where the project developer proposes to
place the project?1

## FACTS

Agency, a housing credit agency in
State X, is responsible for allocating hous-
ing credit dollar amounts to applicants
that seek to develop affordable housing
projects that will be eligible to earn low-
income housing tax credits (LIHTCs). To
guide Agency in making these allocations,
Agency adopted, and the relevant govern-
mental unit approved, a qualified alloca-
tion plan (QAP).

This QAP contains provisions that
strongly favor applications from afford-
able housing projects that demonstrate af-
firmative local support. For example, un-
der the point system that Agency uses in
judging among applicant projects, points
are granted to projects that-

· Manifest quantifiable community par-
ticipation with respect to the project,
especially as evidenced by written
statements from neighborhood organi-
zations in the area of the proposed
project.

· Receive a commitment of develop-
ment funding by the local political
subdivision.

· Receive community support for the
application, as evidenced by a written
statement from the state legislator
elected from the district in which the
project is proposed to be developed.

Agency believes that § 42(m)(1)(A)(ii) re-
quires that allocations be made only to
proposals that receive the approval of the
locality where the proposed project is to
be located. Accordingly, Agency will re-
ject an application if evidence of affirma-
tive local support is lacking, and Agency
uses factors such as the ones in its QAP to
determine whether or not that support ex-
ists. Requiring local approval empowers
jurisdictions to exercise what some call a
"local veto."

In State X, local approval is much more
likely to be secured for proposed LIHTC
developments in areas with greater pro-
portions of minority residents and fewer
economic opportunities than in higher-
opportunity, non-minority communities.
Agency's practice of requiring local ap-
proval has created a pattern of allocating
housing credit dollar amounts to projects
in the predominantly lower-income or mi-
nority areas, with the result of perpetuat-
ing residential racial and economic segre-
gation in State X.

## LAW

If a building is constructed and oper-
ated consistent with the requirements of
§ 42, the building's owners generally re-
ceive a 10-year stream of LIHTCs.

Under § 42(h), however, the LIHTCs
determined in any year with respect to a
building may not exceed the housing
credit dollar amount that a State housing
credit agency has allocated to the build-
ing.

Section 42(m) requires these alloca-
tions to be made pursuant to a QAP. Each
QAP must contain certain preferences,

and selection criteria, specified in the
Code, but other factors may be added.

Section 42(m)(1)(A)(ii) prevents a
housing credit dollar amount from being
allocated to a building unless the allocat-
ing "agency notifies the chief executive
officer (or the equivalent) of the local ju-
risdiction within which the building is lo-
cated of such project and provides such
individual a reasonable opportunity to
comment on the project."

## ANALYSIS

Although Agency believes that the lo-
cal veto provisions in its QAP respond to
the requirement in § 42(m)(1)(A)(ii),
Agency misinterprets this provision.
Agency's interpretation is inconsistent
with (1) the language of § 42(m)(1)(A)(ii)
and (2) general Federal fair-housing pol-
icy.

1\. The Language of Section 42(m)(1)
(A)(ii)

The Code requires that each local ju-
risdiction have a "reasonable opportunity"
to comment on any proposal to allocate a
housing credit dollar amount to a project
within that jurisdiction. This requirement
is not the same as requiring the jurisdic-
tion's approval. The clear meaning of
"reasonable opportunity to comment" is
that the jurisdiction has a chance to weigh
in, or even object, but not that every ob-
jection will be honored.

Thus, § 42(m)(1)(A)(ii) ensures only
the opportunity for local input to the allo-
cation decision. It does not authorize an
allocating agency to abandon the respon-
sibility to exercise its own judgment. In
particular, it does not require or encourage
allocating agencies to bestow veto power
over LIHTC projects either on local com-
munities or on local public officials.

1Section 147(f) requires public approval for all issuances of proposed qualified private activity bonds, including bonds used to finance qualified residential rental projects. These bond
issuances must be approved both (a) by the governmental unit which is to issue the bonds or on behalf of which they are to be issued (issuer approval) and (b) by a governmental unit the
geographic jurisdiction of which includes the site of the facility to be financed (host approval). Although the host-approval component of public approval means approval by a governmental
unit whose jurisdiction includes the site of the financed facility, "public approval" (including "host approval") does not include "local approval." To illustrate, bonds issued by (or on behalf
of) a State may be approved by the State alone in its capacities as issuer and as a host governmental unit whose jurisdiction includes the site of the financed facility. So there is no requirement
for local approval by the county or municipality in which the financed facility is to be located. See § 5f.103-2(c) of the Temporary Income Tax Regulations Under the Tax Equity and Fiscal
Responsibility Act of 1982. Thus, § 42(m)(1)(A)(ii) neither requires nor encourages local approval for these bond-financed projects, although § 147 does require public approval for issuing
the bonds.

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### 2. General Federal Fair-Housing Policy

Agency's practice of requiring local ap-
proval has created a pattern of allocating
housing credit dollar amounts that has
perpetuated residential racial segregation
in State X. Agency's practice, therefore,
has a discriminatory effect based on race,
which is a protected characteristic under
42 USC 3604. Thus, the practice is incon-
sistent with at least the policy2 of the Fair
Housing Act of 1968 (the Act), 42 USC
3601-3619.

Nevertheless, Agency interprets § 42
(m)(1)(A)(ii) as forcing Agency to require
local approval, despite the discriminatory
effect of that practice in State X. This
interpretation assumes that, in creating
LIHTCs, Congress silently reversed well-
established, fundamental Federal fair-
housing policy. Eighteen years before the
1986 enactment of § 42, the Act had
firmly established this policy. See 42 USC
3601 ("Declaration of policy. It is the
policy of the United States to provide,
within constitutional limitations, for fair
housing throughout the United States.").
Without legislative commentary or other
persuasive evidence, one cannot conclude
that Congress intended to reverse this
well-established policy.

In the summer of 2015, the United
States Department of Housing and Urban
Development (HUD) issued new final reg-
ulations regarding obligations under the
Act to Affirmatively Further Fair Housing
(AFFH). See 80 Fed. Reg. 42272 (2015)
(issuing HUD's AFFH final rule, which is
codified at various locations in 24 CFR
Parts 5, 91, 92, 570, 574, 576, and 903).
Discussing the many decades during
which AFFH had been firmly established
Federal policy, HUD states in the pream-
ble, "From its inception [in 1968], the
[Act] ... has not only prohibited discrim-
ination in housing related activities and
transactions but has also provided,
through the duty to affirmatively further
fair housing .. . , for meaningful actions to
be taken to overcome the legacy of segre-
gation, unequal treatment, and historic
lack of access to opportunity in housing."
Id. at 42272 (emphasis added).

AFFH was firmly established Federal
housing policy when § 42 was enacted,

and there is no suggestion that Congress
intended § 42 to diverge from that policy.
Section 42(m)(1)(A)(ii), therefore, does
not require or even encourage conduct
inconsistent with that policy.

## HOLDING

When state housing credit agencies al-
locate housing credit dollar amounts,
§ 42(m)(1)(A)(ii) does not require or en-
courage these agencies to reject all pro-
posals that do not obtain the approval of
the locality where the project developer
proposes to place the project. That is, it
neither requires nor encourages housing
credit agencies to honor local vetoes.

## DRAFTING INFORMATION

The principal author of this revenue
ruling is James W. Rider of the Office of
Associate Chief Counsel (Passthroughs
and Special Industries). For further infor-
mation regarding this revenue ruling,
please contact Mr. Rider at (202) 317-
4137 (not a toll-free number).

## Rev. Rul. 2016-30

This revenue ruling provides the dollar
amounts, increased by the 2017 inflation
adjustment, for § 1274A of the Internal
Revenue Code.

## BACKGROUND

In general, §§ 483 and 1274 determine
the principal amount of a debt instrument
given in consideration for the sale or ex-
change of nonpublicly traded property. In
addition, any interest on a debt instrument
subject to § 1274 is taken into account
under the original issue discount provi-
sions of the Code. Section 1274A, how-
ever, modifies the rules under §§ 483 and
1274 for certain types of debt instruments.

In the case of a "qualified debt instru-
ment," the discount rate used for purposes
of §§ 483 and 1274 may not exceed nine
percent, compounded semiannually. Sec-
tion 1274A(b) defines a qualified debt in-
strument as any debt instrument given in
consideration for the sale or exchange of
property (other than new § 38 property
within the meaning of § 48(b), as in effect

on the day before the date of enactment of
the Revenue Reconciliation Act of 1990)
if the stated principal amount of the in-
strument does not exceed the amount
specified in § 1274A(b). For debt instru-
ments arising out of sales or exchanges
before January 1, 1990, this amount is
$2,800,000.

In the case of a "cash method debt
instrument," as defined in § 1274A(c), the
borrower and lender may elect to use the
cash receipts and disbursements method
of accounting. In particular, for any cash
method debt instrument, § 1274 does not
apply, and interest on the instrument is
accounted for by both the borrower and
the lender under the cash receipts and
disbursements method of accounting. A
cash method debt instrument is a qualified
debt instrument that meets the following
additional requirements: (A) in the case of
a debt instrument arising out of a sale or
exchange before January 1, 1990, the
stated principal amount does not exceed
$2,000,000; (B) the lender does not use an
accrual method of accounting and is not a
dealer with respect to the property sold or
exchanged; (C) § 1274 would have ap-
plied to the debt instrument but for an
election under § 1274A(c); and (D) an
election under § 1274A(c) is jointly made
with respect to the debt instrument by
the borrower and the lender. Section
1.1274A-1(c)(1) of the Income Tax Reg-
ulations provides rules concerning the
time for, and manner of, making this elec-
tion.

Section 1274A(d)(2) provides that, for
any debt instrument arising out of a sale or
exchange during any calendar year after
1989, the dollar amounts stated in
§ 1274A(b) and § 1274A(c)(2)(A) are in-
creased by the inflation adjustment for
the calendar year. Any increase due to the
inflation adjustment is rounded to the
nearest multiple of $100 (or, if the in-
crease is a multiple of $50 and not of
$100, the increase is increased to the near-
est multiple of $100). The inflation adjust-
ment for any calendar year is the percent-
age (if any) by which the CPI for the
preceding calendar year exceeds the CPI
for calendar year 1988. Section
1274A(d)(2)(B) defines the CPI for any
calendar year as the average of the Con-

2The practice may also violate specific nondiscrimination provisions of the Act. See Tex. Dep't of Hous. & Cmty. Affairs v. Inclusive Cmtys. Project, Inc., 135 S. Ct. 2507 (2015).

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sumer Price Index as of the close of the
12-month period ending on September 30
of that calendar year.

## INFLATION-ADJUSTED AMOUNTS UNDER § 1274A

For debt instruments arising out of
sales or exchanges after December 31,

1989, the inflation-adjusted amounts un-
der § 1274A are shown in Table 1.

Rev. Rul. 2016-30 Table 1 Inflation-Adjusted Amounts Under Section 1274A

Calendar Year of Sale or Exchange

1274A(b) Amount (qualified debt instrument)

1274A(c)(2)(A) Amount (cash method debt instrument)

1990

$2,933,200

$2,095,100

1991

$3,079,600

$2,199,700

1992

$3,234,900

$2,310,600

1993

$3,332,400

$2,380,300

1994

$3,433,500

$2,452,500

1995

$3,523,600

$2,516,900

1996

$3,622,500

$2,587,500

1997

$3,723,800

$2,659,900

1998

$3,823,100

$2,730,800

1999

$3,885,500

$2,775,400

2000

$3,960,100

$2,828,700

2001

$4,085,900

$2,918,500

2002

$4,217,500

$3,012,500

2003

$4,280,800

$3,057,700

2004

$4,381,300

$3,129,500

2005

$4,483,000

$3,202,100

2006

$4,630,300

$3,307,400

2007

$4,800,800

$3,429,100

2008

$4,913,400

$3,509,600

2009

$5,131,700

$3,665,500

2010

$5,115,100

$3,653,600

2011

$5,201,300

$3,715,200

2012

$5,339,300

$3,813,800

2013

$5,468,200

$3,905,900

2014

$5,557,200

$3,969,500

2015

$5,647,300

$4,033,800

2016

$5,664,800

$4,046,300

2017

$5,717,400

$4,083,800

Note: These inflation adjustments were computed using the All-Urban, Consumer Price Index, 1982-1984 base, published
by the Bureau of Labor Statistics.

### EFFECT ON OTHER DOCUMENTS

Rev. Rul. 2015-24, 2015-48 I.R.B.
687, is supplemented and superseded.

### DRAFTING INFORMATION

The author of this revenue ruling is
Bernard Audet of the Office of Associate
Chief Counsel (Financial Institutions &
Products). For further information regard-
ing this revenue ruling, contact Bernard

Audet at (202) 317-7053 (not a toll-free
number).

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## Section 483 .- Interest on Certain Deferred Payments.

This ruling provides the dollar amounts, in-
creased by the 2017 inflation adjustment, for section
1274A of the Code. Rev. Rul. 2015-24 supple-
mented and superseded. See Rev. Rul. 2016-30,
page 876.

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

This ruling provides the dollar amounts, in-
creased by the 2017 inflation adjustment, for section
1274A of the Code. Rev. Rul. 2015-24 supple-
mented and superseded. See Rev. Rul. 2016-30,
page 876.

26 CFR 1.704-2; 1.707-3 through 1.707-6, and
1.707-9; and 1.752-3: Section 707 regarding dis-
guised sales, generally.

T.D. 9787

DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1

### Section 707 Regarding Disguised Sales, Generally

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains fi-
nal regulations under sections 707 and
752 of the Internal Revenue Code (Code).
The final regulations under section 707
provide guidance relating to disguised
sales of property to or by a partnership
and the final regulations under section 752
provide guidance relating to allocations of
excess nonrecourse liabilities of a partner-
ship to partners for disguised sale pur-
poses. The final regulations affect partner-
ships and their partners.

DATES: Effective date: These regulations
are effective on October 5, 2016.

Comment date: Comments will be ac-
cepted until January 3, 2017.

Applicability dates: For dates of appli-
cability, see §§ 1.707-9(a)(1) and 1.752-
3(d).

ADDRESSES: Send submissions to: CC:
PA:LPD:PR (REG-122855-15), room
5203, Internal Revenue Service, PO Box
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand-
delivered Monday through Friday be-
tween the hours of 8 a.m. and 4 p.m. to:
CC:PA:LPD:PR (REG-122855-15), Couri-
er's Desk, Internal Revenue Service, 1111
Constitution Avenue, N.W., Washington,
DC, or sent electronically, via the Federal
eRulemaking Portal site at http://www.
regulations.gov (indicate IRS and REG-
122855-15).

FOR FURTHER INFORMATION CON-
TACT: Deane M. Burke or Caroline E.
Hay at (202) 317-5279 (not a toll-free
number).

SUPPLEMENTARY INFORMATION:
In addition to these final regulations, the
Treasury Department and the IRS are pub-
lishing temporary regulations concerning
a partner's share of partnership liabilities
for purposes of section 707 (the 707 Tem-
porary Regulations) and the treatment of
certain payment obligations under section
752 (the 752 Temporary Regulations) in
the Rules and Regulations section in this
issue of the Bulletin, and, in the Proposed
Rules section in this issue of the Bulletin,
proposed regulations (REG-122855-15)
that incorporate the text of the temporary
regulations, withdraw a portion of a notice
of proposed rulemaking (REG-119305-
11) to the extent not adopted by the final
regulations, and contain new proposed
regulations (the 752 Proposed Regula-
tions) addressing (1) when certain obliga-
tions to restore a deficit balance in a part-
ner's capital account are disregarded
under section 704 and (2) when a partner-
ship's liabilities are treated as recourse
liabilities under section 752.

### Paperwork Reduction Act

The collection of information con-
tained in these final regulations has been
reviewed in accordance with the Paper-
work Reduction Act (44 U.S.C. 3507) and
approved by the Office of Management

and Budget under control number 1545-
0889.

The collection of information in these
final regulations under section 707 is in
§ 1.707-5(a)(7)(ii) (regarding a liability
incurred within two years prior to a trans-
fer of property) and is reported on Form
8275, Disclosure Statement. This infor-
mation is required by the IRS to ensure
that section 707(a)(2)(B) of the Code and
applicable regulations are properly ap-
plied to transfers between a partner and a
partnership.

An agency may not conduct or sponsor,
and a person is not required to respond to, a
collection of information unless it displays a
valid control number assigned by the Office
of Management and Budget.

Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by section 6103.

### Background

#### 1. Overview

This Treasury decision contains
amendments to the Income Tax Regula-
tions (26 CFR part 1) under sections 707
and 752 of the Code related to a notice of
proposed rulemaking published on Janu-
ary 30, 2014 in the Federal Register
(REG-119305-11, 79 FR 4826) to amend
regulations under sections 707 and 752
(the 2014 Proposed Regulations). A pub-
lic hearing on the 2014 Proposed Regula-
tions was not requested or held, but the
Treasury Department and the IRS re-
ceived written comments. After full con-
sideration of the comments, the final reg-
ulations contained in this Treasury
decision substantially adopt the 2014 Pro-
posed Regulations under section 707 with
revisions to certain proposed rules in re-
sponse to comments. The revisions to the
2014 Proposed Regulations under section
707 adopted in these final regulations are
discussed in the Summary of Comments
and Explanation of Revisions section of
this preamble. In addition, after consider-
ing comments on the 2014 Proposed Reg-
ulations under section 752, this Treasury
decision adopts as final regulations provi-
sions of the 2014 Proposed Regulations

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that amend § 1.752-3, revised in response
to the comments received. Finally, these
final regulations adopt provisions of the
2014 Proposed Regulations revising
§ 1.704-2(d)(2)(ii) and (m) Example 1, to
comport with the provisions in the 752
Proposed Regulations and the 752 Tem-
porary Regulations relating to "bottom
dollar payment obligations."

However, based on a comment received
on the 2014 Proposed Regulations request-
ing that guidance regarding a partner's share
of partnership liabilities apply solely for dis-
guised sale purposes, the Treasury Depart-
ment and the IRS have reconsidered the
rules under § 1.707-5(a)(2) of the 2014 Pro-
posed Regulations for determining a part-
ner's share of partnership liabilities for pur-
poses of section 707. Accordingly, in a
separate Treasury decision (TD 9788), the
Treasury Department and the IRS are also
publishing the 707 Temporary Regulations
that require a partner to apply the same
percentage used to determine the partner's
share of excess nonrecourse liabilities under
§ 1.752-3(a)(3) (with certain limitations) in
determining the partner's share of partner-
ship liabilities for disguised sale purposes.
That Treasury decision also contains the 752
Temporary Regulations providing guidance
on the treatment of "bottom dollar payment
obligations." Cross-referencing proposed
regulations providing additional opportunity
for comment are contained in the related
notice of proposed rulemaking (REG-
122855-15) published in the Proposed
Rules section in this issue of the Bulletin.

Finally, after considering comments on
the 2014 Proposed Regulations under sec-
tion 752, the Treasury Department and the
IRS are withdrawing § 1.752-2 of the 2014
Proposed Regulations and are publishing
the new 752 Proposed Regulations con-
tained in the related notice of proposed rule-
making (REG-122855-15) published in the
Proposed Rules section in this issue of the
Bulletin.

#### 2. Summary of Applicable Law

#### A. Section 707

Section 707 provides rules concerning
"disguised sales" of property to or by a
partnership. Section 707(a)(2)(B) gener-
ally provides that, under regulations pre-
scribed by the Secretary, related transfers

to and by a partnership that, when viewed
together, are more properly characterized
as a sale or exchange of property, will be
treated either as a transaction between the
partnership and one who is not a partner
or between two or more partners acting
other than in their capacity as partners.
Generally under § 1.707-3, a transfer of
property by a partner to a partnership fol-
lowed by a transfer of money or other
consideration from the partnership to the
partner will be treated as a sale of property
by the partner to the partnership (a dis-
guised sale), if based on all the facts and
circumstances, the transfer of money or
other consideration would not have been
made but for the transfer of property and,
for non-simultaneous transfers, the subse-
quent transfer is not dependent on the
entrepreneurial risks of the partnership.

The existing regulations under section
707, however, provide several exceptions.
One exception is in § 1.707-4(d) for re-
imbursements of capital expenditures.
Section 1.707-4(d) excepts transfers of
money or other consideration from a part-
nership to reimburse a partner for certain
capital expenditures and costs incurred by
the partner from being treated as part of a
disguised sale of property under § 1.707-3
(exception for preformation capital expen-
ditures). The exception for preformation
capital expenditures generally applies
only to the extent that the reimbursed cap-
ital expenditures do not exceed 20 percent
of the fair market value of the property
transferred by the partner to the partner-
ship (the 20-percent limitation). The 20-
percent limitation, however, does not ap-
ply if the fair market value of the
transferred property does not exceed 120
percent of the partner's adjusted basis in
the property at the time of the transfer (the
120-percent test).

Another exception is in § 1.707-5(b),
which generally provides that if a partner
transfers property to a partnership, the
partnership incurs a liability and all or a
portion of the proceeds of that liability are
traceable to a transfer of money or other
consideration to the partner, the transfer of
money or other consideration is taken into
account for purposes of § 1.707-3 only to
the extent that the amount of money or the
fair market value of other consideration
exceeds the partner's allocable share of

the partnership liability (the debt-financed
distribution exception).

In addition to the exception for prefor-
mation capital expenditures and the debt-
financed distribution exception, the dis-
guised sale rules generally exclude certain
types of liabilities from disguised sale
treatment. Generally under § 1.707-
5(a)(5), a partnership's assumption of a
qualified liability, or a partnership's tak-
ing property subject to a qualified liability,
in connection with a transfer of property
by a partner to the partnership is not
treated as part of a disguised sale. Section
1.707-5(a)(6) of the existing regulations
defines four types of liabilities that are
qualified liabilities. One type of qualified
liability is a liability that is allocable un-
der the rules of § 1.163-8T to capital
expenditures with respect to the property
transferred to the partnership. Another
type is one incurred in the ordinary course
of the trade or business in which property
transferred to the partnership was used or
held, but only if all of the assets that are
material to that trade or business are trans-
ferred to the partnership. The other two
types of qualified liabilities are liabilities
incurred more than two years before the
transfer of property to the partnership and
liabilities incurred within two years of the
transfer of the property to the partnership,
but not in anticipation of transfer to the
partnership. In order to qualify as one of
these types of liabilities, it is required that
the liability encumber the transferred
property.

#### B. Determining a partner's share of liability for disguised sale purposes

In determining a partner's share of a
partnership liability for disguised sale pur-
poses, the existing regulations under sec-
tion 707 prescribe separate rules for a
partnership's recourse liability and a part-
nership's nonrecourse liability. Under
§ 1.707-5(a)(2)(i), a partner's share of a
partnership's recourse liability equals the
partner's share of the liability under sec-
tion 752 and the regulations thereunder. A
partnership liability is a recourse liability
under section 707 to the extent that the
obligation is a recourse liability under
§ 1.752-1(a)(1). Under § 1.707-5(a)(2)
(ii), a partner's share of a partnership's
nonrecourse liability is determined by ap-

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plying the same percentage used to deter-
mine the partner's share of the excess
nonrecourse liabilities under § 1.752-
3(a)(3). Generally, a partner's share of
excess nonrecourse liabilities is deter-
mined in accordance with the partner's
share of partnership profits taking into ac-
count all facts and circumstances relating
to the economic arrangement of the part-
ners. A partnership liability is a nonre-
course liability under section 707 to the
extent that the obligation is a nonrecourse
liability under § 1.752-1(a)(2). Also for
purposes of the rules under section 707, a
partner's share of a liability assumed or
taken subject to by a partnership is deter-
mined by taking into account certain sub-
sequent reductions in the partner's share
of the liability under an anticipated reduc-
tion rule.

#### C. Section 752 allocation of excess nonrecourse liabilities

Section 1.752-3(a)(3) provides various
methods to determine a partner's share of
excess nonrecourse liabilities. Under one
method, a partner's share of excess non-
recourse liabilities of the partnership is
determined in accordance with the part-
ner's share of partnership profits, which
takes into account all facts and circum-
stances relating to the economic arrange-
ment of the partners. For this purpose, the
partnership agreement may specify the
partners' interests in partnership profits so
long as the interests so specified are rea-
sonably consistent with allocations (that
have substantial economic effect under
the section 704(b) regulations) of some
other significant item of partnership in-
come or gain (the significant item
method). Alternatively, excess nonre-
course liabilities may be allocated among
partners in a manner that deductions at-
tributable to those liabilities are reason-
ably expected to be allocated (alternative
method). Additionally, the partnership
may first allocate an excess nonrecourse
liability to a partner up to the amount of
built-in gain that is allocable to the partner
on section 704(c) property (as defined un-
der § 1.704-3(a)(3)(ii)) or property for
which reverse section 704(c) allocations
are applicable (as described in § 1.704-
3(a)(6)(i)) where such property is subject
to the nonrecourse liability, to the extent

that such built-in gain exceeds the gain
described in § 1.752-3(a)(2) with respect
to such property (additional method). This
additional method does not apply in de-
termining a partner's share of a liability
for disguised sale purposes.

#### 3. The 2014 Proposed Regulations

As discussed in greater detail in the
Summary of Comments and Explanation
of Provisions section of this preamble, the
2014 Proposed Regulations, as they per-
tained to section 707, were intended to
address certain deficiencies and ambigui-
ties under existing regulations §§ 1.707-3,
1.707-4, and 1.707-5. The 2014 Pro-
posed Regulations, among other things,
provided rules that (1) clarified that in the
case of multiple property contributions to
a partnership, the exception for preforma-
tion capital expenditures applies on a
property-by-property basis, (2) clarified
the definition of capital expenditures
for the purpose of the exception for pre-
formation capital expenditures, (3) coor-
dinated the exception for preformation
capital expenditures and the rules regard-
ing liabilities traceable to capital expendi-
tures, (4) added a new type of qualified
liability, (5) prescribed an ordering rule
for applying the debt-financed distribution
exception where other exceptions also po-
tentially applied, (6) specified that a re-
duction that is subject to the entrepreneur-
ial risks of the partnership is not an
anticipated reduction for purposes of the
rule taking into account an anticipated re-
duction in a partner's share of a liability,
(7) clarified, with respect to tiered partner-
ships, the application of the debt-financed
distribution exception and the application
of the rules for qualified liabilities, and (8)
extended the principles of § 1.752-1(f)
providing for netting of increases and de-
creases in a partner's share of liabilities
resulting from a single transaction to the
disguised sale rules.

### Summary of Comments and Explanation of Revisions

#### 1. Preformation Capital Expenditures

As explained above, § 1.707-4(d) ex-
cepts transfers of money or other consid-
eration from a partnership to reimburse a
partner for certain capital expenditures

and costs incurred by the partner from
being treated as part of a disguised sale of
property under § 1.707-3, subject to the
20 percent limitation and the 120 percent
test.

The 2014 Proposed Regulations under
section 707 provided that the determina-
tion of whether the 20 percent limitation
and the 120 percent test apply to reim-
bursements of capital expenditures is
made, in the case of multiple property
transfers, separately for each property that
qualifies for the exception (property-by-
property rule). Commenters generally
supported the property-by-property rule
but noted that in some circumstances the
approach may be burdensome and recom-
mended limited aggregation of certain
property. After considering the comments,
the Treasury Department and the IRS
have determined that limited aggregation
of property is warranted in certain cases to
reduce the burden of separately account-
ing for each property under the property-
by-property rule. Thus, the final regula-
tions adopt the proposed rule but permit
aggregation to the extent: (i) the total fair
market value of the aggregated property
(of which no single property's fair market
value exceeds 1 percent of the total fair
market value of such aggregated property)
is not greater than the lesser of 10 percent
of the total fair market value of all prop-
erty, excluding money and marketable se-
curities (as defined under section 731(c)),
transferred by the partner to the partner-
ship, or $1,000,000; (ii) the partner uses a
reasonable aggregation method that is
consistently applied; and (iii) the aggrega-
tion of property is not part of a plan a
principal purpose of which is to avoid
§§ 1.707-3 through 1.707-5. Addition-
ally, the final regulations add an example
to illustrate the application of the
property-by-property rule when a partner
transfers both tangible and intangible
property to a partnership.

In addition to the property-by-property
rule, the 2014 Proposed Regulations pro-
vided a rule coordinating the exception for
preformation capital expenditures with a
rule regarding one type of qualified liabil-
ity (within the meaning of § 1.707-
5(a)(6)) under § 1.707-5(a)(6)(i)(C). Un-
der § 1.707-5(a)(6)(i)(C), a liability that is
allocable under the rules of § 1.163-8T to
capital expenditures with respect to the

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property transferred to the partnership by
the partner is a qualified liability (capital
expenditure qualified liability). Generally
under § 1.707-5(a)(5), a partnership's as-
sumption of a qualified liability, or a part-
nership's taking property subject to a
qualified liability, in connection with a
transfer of property by a partner to the
partnership is not treated as part of a dis-
guised sale. To coordinate the exception
for preformation capital expenditures and
the capital expenditure qualified liability
rule under § 1.707-5(a)(6)(i)(C), the 2014
Proposed Regulations provided that to the
extent a partner funded a capital expendi-
ture through a capital expenditure quali-
fied liability and economic responsibility
for that borrowing shifts to another part-
ner, the exception for preformation capital
expenditures would not apply because
there is no outlay by the partner to reim-
burse.

A commenter suggested that the final
regulations broaden this proposed rule to
include any qualified liability under
§ 1.707-5(a)(6) used to fund capital ex-
penditures, not just a capital expenditure
qualified liability under § 1.707-5(a)
(6)(i)(C). The final regulations adopt the
suggestion and provide that to the extent
any qualified liability under § 1.707-
5(a)(6) is used by a partner to fund capital
expenditures and economic responsibility
for that borrowing shifts to another part-
ner, the exception for preformation capital
expenditures does not apply. Under the
final regulations, capital expenditures are
treated as funded by the proceeds of a
qualified liability to the extent the pro-
ceeds are either traceable to the capital
expenditures under § 1.163-8T or are ac-
tually used to fund the capital expendi-
tures, irrespective of the tracing require-
ments under § 1.163-8T. However, under
an anti-abuse provision, if capital expen-
ditures and a qualified liability are in-
curred under a plan a principal purpose of
which is to avoid the requirements of this
coordinating rule, the capital expenditures
are deemed funded by the qualified liabil-
ity.

Finally, it has come to the attention of
the Treasury Department and the IRS that
some partners have taken the position that
the disclosure requirements of § 1.707-
3(c)(2) are not applicable to situations in
which the partners believe that one or

more of the exceptions for disguised sale
treatment are applicable, including the ex-
ception for preformation capital expendi-
tures. The Treasury Department and the
IRS remind taxpayers that disclosure is
required whenever money or other consid-
eration is transferred by a partnership to a
partner within two years of the transfer of
property by the partner to the partnership,
except in the limited situations described
in § 1.707-3(c)(2)(iii).

Notwithstanding the final regulations,
the Treasury Department and the IRS con-
tinue to study the appropriateness of the
exception for preformation capital expen-
ditures. Specifically, because the receipt
of "boot" in the context of other nonrec-
ognition transactions, for example, trans-
fers of property to corporations in section
351 transactions, is generally taxable to
the transferor, the Treasury Department
and the IRS are considering whether the
exception for preformation capital expen-
ditures is appropriate and request com-
ments on whether the regulations should
continue to include the exception, in-
cluding any policy justifications for
keeping the exception, and on the ef-
fects that removing the exception may
have. In addition, the Treasury Depart-
ment and the IRS are concerned that
partners and partnerships may be at-
tempting to apply the exception in an
unintended manner such that the excep-
tion may be subject to potential abuses
in certain circumstances that could ef-
fectively refresh expenditures not in-
curred within the two-year period pre-
ceding a contribution to a partnership
(for example, where an entity treats as a
capital expenditure an issuance of its
own interest in exchange for property
contributed to it in a nonrecognition
transaction). Also, the Treasury Depart-
ment and the IRS are aware that a con-
tribution to a partnership of an intangi-
ble such as goodwill, may, in certain
circumstances, give rise to an unin-
tended benefit under the exception. The
Treasury Department and the IRS are
studying the potential for abuse under
the exception for preformation capital
expenditures, including any unintended
benefits with respect to intangibles, for
which the final regulations reserve a sec-
tion under the exception.

#### 2. Partner's Share of Partnership Liabilities

As is discussed in the preamble to the
707 Temporary Regulations, after consid-
ering the comments on the 2014 Proposed
Regulations under both sections 707 and
752, the Treasury Department and the IRS
have determined that, for disguised sale
purposes only, it is appropriate for part-
ners to determine their share of any liabil-
ity, whether recourse or nonrecourse, in
the manner in which excess nonrecourse
liabilities are allocated under § 1.752-
3(a)(3). Accordingly, under the 707 Tem-
porary Regulations a partner's share of
any partnership liability for disguised sale
purposes is determined using the same
percentage used to determine the partner's
share of the partnership's excess nonre-
course liabilities under § 1.752-3(a)(3)
based on the partner's share of partnership
profits. Thus, the 707 Temporary Regula-
tions treat all partnership liabilities,
whether recourse or nonrecourse, as non-
recourse liabilities solely for disguised
sale purposes under section 707. These
final regulations, however, provide limita-
tions on the available allocation methods
under § 1.752-3(a)(3), applicable solely
for disguised sale purposes under section
707, for determining a partner's share of
excess nonrecourse liabilities.

For purposes of allocating excess non-
recourse liabilities under § 1.752-3(a)(3),
proposed § 1.752-3(a)(3) removed the
significant item method and the alterna-
tive method, but provided a new approach
based on a partner's liquidation value per-
centage. Under the 2014 Proposed Regu-
lations, a partner's liquidation value per-
centage was a ratio (expressed as a
percentage) of the liquidation value of the
partner's interest in the partnership to the
liquidation value of all of the partners'
interests in the partnership. The liquida-
tion value of a partner's interest in a part-
nership was defined as the amount of cash
the partner would receive with respect to
the interest if, immediately after formation
of the partnership or the occurrence of an
event described in § 1.704-1(b)(2)(iv)
(f)(5), as the case may be, the partnership
sold all of its assets for cash equal to the
fair market value of such property (taking
into account section 7701(g)), satisfied all
of its liabilities (other than those described

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in § 1.752-7), paid an unrelated third
party to assume all of its § 1.752-7 liabil-
ities in a fully taxable transaction, and
then liquidated.

Commenters expressed concerns with
the scope of changes to § 1.752-3(a)(3) in
the 2014 Proposed Regulations and sug-
gested that such changes should be ad-
opted, if at all, for disguised sale purposes
only. Additionally, one commenter noted
that in all but the simplest of partnerships
the liquidation value percentage may have
little or no relationship to the partners'
share of profits and therefore is inconsis-
tent with the general rule for allocating
excess nonrecourse liabilities. Another
commenter thought the liquidation value
percentage approach could be subject to
manipulation. Partially in response to
commenters' concerns about both the liq-
uidation value percentage and the rela-
tionship between the methods and certain
rules under § 1.704-2, the final regula-
tions under § 1.752-3 retain the signifi-
cant item method and the alternative
method, but do not adopt the liquidation
value percentage approach for determin-
ing partners' interests in partnership prof-
its. However, the Treasury Department
and the IRS have concluded that the allo-
cation of excess nonrecourse liabilities in
accordance with the significant item
method and the alternative method has
been abused by partnerships and their
partners for disguised sale purposes under
section 707. Therefore, as suggested by
some commenters, the final regulations
under § 1.752-3 provide that, along with
the additional method, the significant item
method and the alternative method do not
apply for purposes of determining a part-
ner's share of a partnership liability for
disguised sale purposes.

In addition to the changes to § 1.752-3,
the final regulations revise Example 1 un-
der § 1.707-5(f) and Example 2 under
§ 1.707-6(d) to update some of the cross
references to the liability allocation rule in
the 707 Temporary Regulations. The final
regulations also revise Examples 5 and 6
under § 1.707-5(f) and Examples 10 and
12 under proposed § 1.707-5(f) to remove
the assumption that the liability is a re-
course liability.

Finally, because, under the 707 Tem-
porary Regulations, a partner's share of a
partnership liability for disguised sale pur-

poses is based on the partner's share of
partnership profits, a partner cannot be
allocated 100 percent of the liabilities for
purposes of section 707. As a result, some
amount of the liabilities, both qualified
liabilities and nonqualified liabilities, may
shift among partners. The shifting of even
a minimal amount of a nonqualified lia-
bility that triggers a disguised sale can
cause a portion of the qualified liability to
be treated as consideration under § 1.707-
5(a)(5). Section 1.707-5(a)(5) provides a
special rule when a partnership's assump-
tion of, or taking property subject to, a
qualified liability is treated as a transfer of
consideration made pursuant to a sale due
solely to the partnership's assumption of,
or taking property subject to, a liability
other than a qualified liability. To mitigate
the effect of the allocation method for
disguised sales, the final regulations in-
clude a rule under § 1.707-5(a)(5) that
does not take into account qualified liabil-
ities as consideration in transfers of prop-
erty treated as a sale when the total
amount of all liabilities other than quali-
fied liabilities that the partnership assumes
or takes subject to is the lesser of 10
percent of the total amount of all qualified
liabilities the partnership assumes or takes
subject to, or $1,000,000.

#### 3. Step-in-the-Shoes Rule Regarding Preformation Capital Expenditures and Liabilities Incurred by Another Person

For purposes of applying the exception
for preformation capital expenditures and
determining whether a liability is a qual-
ified liability under § 1.707-5(a)(6), com-
menters suggested that the final regula-
tions clarify how the rules under
§§ 1.707-4(d) and 1.707-5 apply if the
transferor partner acquired the transferred
property in a nonrecognition transaction,
assumed a liability in a nonrecognition
transaction, or took property subject to a
liability in a nonrecognition transaction
from a person who incurred the preforma-
tion capital expenditures or the liability.
Commenters noted that Rev. Rul. 2000-
44 (2000-2 CB 336) allowed “step-in-
the-shoes" treatment when a corporation
that acquires assets in a transaction de-
scribed in section 381(a) succeeds to the
status of the transferor corporation for
purposes of applying the exception for

preformation capital expenditures and de-
termining whether a liability is a qualified
liability under § 1.707-5(a)(6). Similar to
a corporation that acquires assets in a sec-
tion 381(a) transaction, a partner that ac-
quires property, assumes a liability, or
takes property subject to a liability from
another person in connection with certain
other nonrecognition transactions should
succeed to the status of the other person
for purposes of applying the exception for
preformation capital expenditures and de-
termining whether a liability is a qualified
liability under § 1.707-5(a)(6). Thus, the
final regulations provide a "step-in-the-
shoes" rule for applying the exception for
preformation capital expenditures and for
determining whether a liability is a qual-
ified liability under § 1.707-5(a)(6) when
a partner acquires property, assumes a li-
ability, or takes property subject to a lia-
bility from another person in connection
with a nonrecognition transaction under
section 351, 381(a), 721, or 731. As a
result, Rev. Rul. 2000-44, relating to pre-
formation capital expenditures and quali-
fied liabilities involved in a transaction
described in section 381(a), is superseded
by these final regulations.

#### 4. Anticipated Reduction

Under the existing regulations, for pur-
poses of the rules under section 707, a
partner's share of a liability assumed or
taken subject to by a partnership is deter-
mined by taking into account certain sub-
sequent reductions in the partner's share
of the liability. See § 1.707-5(a)(3) and
(b)(2)(iii). The 2014 Proposed Regula-
tions provided that if, within two years of
the partnership assuming, taking property
subject to, or incurring a liability, a part-
ner's share of the liability is reduced due
to a decrease in the partner's or a related
person's net value, then the reduction will
be presumed to be anticipated and must be
disclosed under § 1.707-8, unless the
facts and circumstances clearly establish
that the decrease in the net value was not
anticipated. Because the 707 Temporary
Regulations provide that a partner's share
of any liability for disguised sale purposes
is determined in accordance with the part-
ner's interest in partnership profits under
§ 1.752-3(a)(3), net value is not relevant
in determining a partner's share of part-

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nership liabilities for disguised sale pur-
poses. Accordingly, the final regulations
do not retain the net value component of
the anticipated reduction of share of lia-
bilities rule.

#### 5. Tiered Partnerships

The existing regulations in § 1.707-
5(e), and § 1.707-6(b) by applying rules
similar to § 1.707-5(e), provide only a
limited tiered-partnership rule for cases in
which a partnership succeeds to a liability
of another partnership. The 2014 Pro-
posed Regulations added additional rules
regarding tiered partnerships. One rule re-
lated to the characterization of liabilities
attributable to a contributed partnership
interest. Under that proposed rule, a con-
tributing partner's share of a liability from
a lower-tier partnership is treated as a
qualified liability to the extent the liability
would be a qualified liability had the lia-
bility been assumed or taken subject to by
the upper-tier partnership in connection
with a transfer of all of the lower-tier
partnership's property to the upper-tier
partnership by the lower-tier partnership.
The final regulations retain this proposed
rule but, in response to comments, address
whose intent, the partner's or the lower-
tier partnership's, is relevant when apply-
ing the anticipated transfer of property
rule in § 1.707-5(a)(6) for purposes of
determining whether a liability constitutes
a qualified liability. The comments sug-
gested that it should be the intent of the
partner as to whether the partner antici-
pated transferring its interest in the lower-
tier partnership to the upper-tier partner-
ship at the time the lower-tier partnership
incurred the liability.

The Treasury Department and the IRS
agree that the intent of the partner is the
appropriate inquiry in applying the antic-
ipated transfer of property rule under
§ 1.707-5(a)(6) in the context of contri-
butions of a partnership interest. Thus, the
final regulations provide that in determin-
ing whether a liability would be a quali-
fied liability under § 1.707-5(a)(6)(i)(B)
or (E), the determination of whether the
liability was incurred in anticipation of the
transfer of property to the upper-tier part-
nership is based on whether the partner in
the lower-tier partnership anticipated
transferring the partner's interest in the

lower-tier partnership to the upper-tier
partnership at the time the liability was
incurred by the lower-tier partnership.

Commenters also requested that the fi-
nal regulations allow for the application of
the exception for preformation capital ex-
penditures when a person incurs capital
expenditures with respect to property,
transfers the property to a partnership
(lower-tier partnership), and then transfers
an interest in the lower-tier partnership to
another partnership (upper-tier partner-
ship) within the two-year period in which
the person incurred the capital expendi-
tures. The Treasury Department and the
IRS have determined that such a rule is
warranted, subject to certain limitations.
Therefore, the final regulations provide
that, in such circumstances, and provided
such expenditures are not otherwise reim-
bursed to the person, the upper-tier part-
nership "steps in the shoes" of the person
with respect to the property for which the
capital expenditures were incurred and
may be reimbursed for the capital expen-
ditures by the lower-tier partnership to the
same extent that the person could have
been reimbursed by the lower-tier partner-
ship. In addition, the person is deemed to
have transferred the property, rather than
the partnership interest, to the upper-tier
partnership for purposes of the exception
for preformation capital expenditures and,
accordingly, may be reimbursed by the
upper-tier partnership to the extent the
person could have been previously reim-
bursed by the lower-tier partnership. The
aggregate reimbursements for capital ex-
penditures under this rule cannot exceed
the amount that the person could have
been reimbursed for such capital expendi-
tures under § 1.707-4(d)(1).

#### 6. Treatment of Liabilities in Assets- Over Merger

The 2014 Proposed Regulations ex-
tended the netting principles of § 1.752-
1(f) in a provision for determining the
effect of an assets-over merger or consol-
idation under the disguised sale rules. Al-
though comments were generally favor-
able, they did request clarification on the
specific rule provided.

Upon further consideration of the area,
the Treasury Department and the IRS
have determined that no rule on the treat-

ment of liabilities in an assets-over merger
is needed in § 1.707-5. In many instances,
liabilities involved in such a merger will
constitute qualified liabilities, especially
given that the final regulations adopt a
"step-in-the-shoes" rule for liabilities ac-
quired by a partner from another person in
certain nonrecognition transactions. In
cases in which liabilities involved in an
assets-over merger do not constitute qual-
ified liabilities, the facts and circum-
stances test in § 1.707-3 should reach the
proper result. Thus, the final regulations
do not retain the proposed rule for part-
nership assets-over mergers or consolida-
tions.

#### 7. Disguised Sales of Property by a Partnership to a Partner

Under § 1.707-6, rules similar to those
provided in § 1.707-3 apply in determin-
ing whether a transfer of property by a
partnership to a partner and one or more
transfers of money or other consideration
by that partner to the partnership are
treated as a disguised sale of property, in
whole or in part, to the partner. The Trea-
sury Department and the IRS requested in
the preamble to the 2014 Proposed Regu-
lations comments on whether, for pur-
poses of § 1.707-6, it is inappropriate to
take into account a transferee partner's
share of a partnership liability immedi-
ately prior to a distribution if the trans-
feree partner did not have economic ex-
posure with respect to the partnership
liability for a meaningful period of time
before appreciated property is distributed
to that partner subject to the liability.
Commenters suggested that § 1.707-6
should be amended to take into account
the transitory nature of a partner's share of
nonqualified liabilities.

Because under the 707 Temporary
Regulations a partner's share of all liabil-
ities is determined for disguised sale pur-
poses in accordance with the partner's
interest in partnership profits under
§ 1.752-3(a)(3), the transitory nature of a
partner's share of nonqualified liabilities
is no longer an issue. Under that allocation
method, an allocation of a 100 percent
share of a liability to a partner immedi-
ately before a transfer of property by the
partnership to the partner in which the
transferee partner assumes the liability

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will not be taken into account. Therefore,
the final regulations do not make any
changes to the rules under § 1.707-6,
other than revising Example 2 under
§ 1.707-6(d) to update a cross reference
to the liability allocation rule in the 707
Temporary Regulations.

### Effective/Applicability Dates

With respect to amendments to §§ 1.707-
3 through 1.707-6, the final regulations
under section 707 apply to any transaction
with respect to which all transfers occur
on or after October 5, 2016.

With respect to amendments to
§ 1.752-3, the final regulations under sec-
tion 752 apply to liabilities that are in-
curred by a partnership, that a partnership
takes property subject to, or that are as-
sumed by a partnership on or after Octo-
ber 5, 2016, other than liabilities incurred
by a partnership, that a partnership takes
property subject to, or that are assumed by
a partnership pursuant to a written binding
contract in effect prior to that date.

### Effect on Other Documents

The following publication is super-
seded on October 5, 2016: Rev. Rul.
2000-44 (2000-2 CB 336).

### Special Analyses

Certain IRS regulations, including this
one, are exempt from the requirements of
Executive Order 12866, as supplemented
and reaffirmed by Executive Order 13563.
Therefore, a regulatory impact assessment
is not required. It also has been deter-
mined that section 553(b) of the Admin-
istrative Procedure Act (5 U.S.C. chapter
5) does not apply to these regulations. It is
hereby certified that the collection of in-
formation in these regulations will not
have a significant economic impact on a
substantial number of small entities. This
certification is based on the fact that the
amount of time necessary to report the
required information will be minimal in
that it requires partners to provide infor-
mation they already maintain or can easily
obtain to the IRS. Moreover, it should
take a partner no more than 1 hour to
satisfy the information requirement in
these regulations. Accordingly, a Regula-
tory Flexibility Analysis under the Regu-
latory Flexibility Act (5 U.S.C. chapter 6)

does not apply. Pursuant to section
7805(f) of the Code, the notice of pro-
posed rulemaking preceding these regula-
tions was submitted to the Chief Counsel
for Advocacy of the Small Business Ad-
ministration for comment on its impact on
small business.

### Drafting Information

The principal authors of these regula-
tions are Deane M. Burke and Caroline E.
Hay of the Office of the Associate Chief
Counsel (Passthroughs & Special Indus-
tries), IRS. However, other personnel
from the Treasury Department and the
IRS participated in their development.

* * * * *

### Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is
amended as follows:

PART 1-INCOME TAXES

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

Sections 1.707-2 through 1.707-9 also
issued under 26 U.S.C. 707(a)(2)(B).

§ 1.704-2 [Amended]

Par. 2. Section 1.704-2 is amended by:
1\. Removing the language "and (vii)"
in paragraph (d)(2)(ii).

2\. Removing the language "Example
(1)(viii) and (ix)" in paragraph (i)(2) and
adding the language "Example (1)(vii)
and (viii)" in its place.

3\. Removing the language "Example
(1)(viii)" in paragraph (i)(5) and adding
the language "Example (1)(vii)" in its
place.

4\. Removing Example (1)(vii) in para-
graph (m) and redesignating Examples
(1)(viii) and (ix) as Examples (1)(vii) and
(viii) respectively.

5\. Removing the language "Example
(1)(viii)" in newly redesignated Example
(1)(viii) in paragraph (m) and adding the
language "Example (1)(vii)" in its place.

Par. 3. Section 1.707-0 is amended by:

1\. Adding entries for §§ 1.707-4(d)(1),
(d)(2) through (4), (d)(4)(i) and (ii), (d)(5)
and (6), and (f).

2\. Adding entries for §§ 1.707-5(a)(8)
and (b)(3).

The additions read as follows:

§ 1.707-0 Table of contents.

* * * * *

§ 1.707-4 Disguised sales of property to
partnership; special rules applicable to
guaranteed payments, preferred returns,
operating cash flow distributions, and
reimbursements of preformation
expenditures.

* * * * *

(d) * * *

(1) In general.

(2) Capital expenditures incurred by an-
other person.

(3) Contribution of a partnership interest
with capital expenditures property.

(4) Special rule for qualified liabilities.

(i) In general.

(ii) Anti-abuse rule.

(5) Scope of capital expenditures.

(6) Example.

* * * * *

(f) Ordering rule cross reference.

* * * * *

§ 1.707-5 Disguised sales of property to
partnership; special rules relating to
liabilities.

(a) * * *

(8) Liability incurred by another person.

(b) * * *

(3) Ordering rule.

* * * * *

Par. 4. Section 1.707-4 is amended by:
1\. Redesignating the text of paragraph
(d) introductory text after its subject head-
ing as paragraph (d)(1) and adding a para-
graph (d)(1) subject heading.

2\. Redesignating paragraph (d)(1) as
paragraph (d)(1)(i).

3\. Redesignating paragraph (d)(2) in-
troductory text as paragraph (d)(1)(ii).

4\. Redesignating paragraph (d)(2)(i) as
paragraph (d)(1)(ii)(A).

5\. Redesignating paragraph (d)(2)(ii)
as paragraph (d)(1)(ii)(B) and revising it.
6\. Adding reserved paragraph (d)
(1)(ii)(C) and paragraphs (d)(2) through
(6) and (f).

The additions and revisions read as fol-
lows:

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§ 1.707-4 Disguised sales of property to
partnership; special rules applicable to
guaranteed payments, preferred returns,
operating cash flow distributions, and
reimbursements of preformation
expenditures.

* * * * *

(d) * * *

(1) In general. * * *

(ii) * * *

(B) Property transferred to the partner-
ship by the partner, but only to the extent
the reimbursed capital expenditures do not
exceed 20 percent of the fair market value
of such property at the time of the transfer
(the 20-percent limitation). However, the
20-percent limitation of this paragraph
(d)(1)(ii)(B) does not apply if the fair mar-
ket value of the transferred property does
not exceed 120 percent of the partner's
adjusted basis in the transferred property
at the time of the transfer (the 120-percent
test). This paragraph (d)(1)(ii)(B) shall be
applied on a property-by-property basis,
except that a partner may aggregate any of
the transferred property under this para-
graph (d)(1) to the extent-

(1) The total fair market value of such
aggregated property (of which no single
property's fair market value exceeds 1
percent of the total fair market value of
such aggregated property) is not greater
than the lesser of 10 percent of the total
fair market value of all property, exclud-
ing money and marketable securities (as
defined under section 731(c)), transferred
by the partner to the partnership, or
$1,000,000;

(2) The partner uses a reasonable ag-
gregation method that is consistently ap-
plied; and

(3) Such aggregation of property is not
part of a plan a principal purpose of which
is to avoid §§ 1.707-3 through 1.707-5.
(C) [Reserved].

(2) Capital expenditures incurred by
another person. For purposes of para-
graph (d)(1) of this section, a partner steps
in the shoes of a person (to the extent the
person was not previously reimbursed un-
der paragraph (d)(1) of this section) with
respect to capital expenditures the person
incurred with respect to property trans-
ferred to the partnership by the partner to
the extent the partner acquired the prop-
erty from the person in a nonrecognition

transaction described in section 351,
381(a), 721, or 731.

(3) Contribution of a partnership inter-
est with capital expenditures property. If a
person transfers property with respect to
which the person incurred capital expen-
ditures (capital expenditures property) to a
partnership (lower-tier partnership) and,
within the two-year period beginning on
the date upon which the person incurred
the capital expenditures, transfers an in-
terest in the lower-tier partnership to an-
other partnership (upper-tier partnership)
in a nonrecognition transaction under sec-
tion 721, the upper-tier partnership steps
in the shoes of the person who transferred
the capital expenditures property to the
lower-tier partnership with respect to the
capital expenditures that are not otherwise
reimbursed to the person. The upper-tier
partnership may be reimbursed by the
lower-tier partnership under paragraph
(d)(1) of this section to the extent the
person could have been reimbursed for the
capital expenditures by the lower-tier
partnership under paragraph (d)(1) of this
section. In addition, for purposes of para-
graph (d)(1) of this section, the person is
deemed to have transferred the capital ex-
penditures property to the upper-tier part-
nership and may be reimbursed by the
upper-tier partnership under paragraph
(d)(1) of this section to the extent the
person could have been reimbursed for the
capital expenditures by the lower-tier
partnership under paragraph (d)(1) of this
section and has not otherwise been previ-
ously reimbursed. The aggregate reim-
bursements for capital expenditures under
this paragraph (d)(3) shall not exceed the
amount that the person could have been
reimbursed for such capital expenditures
under paragraph (d)(1) of this section.

(4) Special rule for qualified liabili-
ties-(i) In general. For purposes of para-
graph (d)(1) of this section, if capital ex-
penditures were funded by the proceeds of
a qualified liability defined in § 1.707-
5(a)(6)(i) that a partnership assumes or
takes property subject to in connection
with a transfer of property to the partner-
ship by a partner, a transfer of money or
other consideration by the partnership to
the partner is not treated as made to reim-
burse the partner for such capital expen-
ditures to the extent the transfer of money
or other consideration by the partnership

to the partner exceeds the partner's share
of the qualified liability (as determined
under § 1.707-5(a)(2), (3), and (4)). Cap-
ital expenditures are treated as funded by
the proceeds of a qualified liability to the
extent the proceeds are either traceable to
the capital expenditures under § 1.163-8T
or were actually used to fund the capital
expenditures, irrespective of the tracing
requirements under § 1.163-8T.

(ii) Anti-abuse rule. If capital expendi-
tures and a qualified liability are incurred
under a plan a principal purpose of which
is to avoid the requirements of paragraph
(d)(4)(i) of this section, the capital expen-
ditures are deemed funded by the qualified
liability.

(5) Scope of capital expenditures. For
purposes of this section and § 1.707-5, the
term capital expenditures has the same
meaning as the term capital expenditures
has under the Internal Revenue Code and
applicable regulations, except that it in-
cludes capital expenditures taxpayers
elect to deduct, and does not include de-
ductible expenses taxpayers elect to treat
as capital expenditures.

(6) Example. The following example
illustrates the application of paragraph (d)
of this section:

Example. Intangible treated as separate prop-
erty. (i) Z transfers to a partnership a business the
material assets of which include a tangible asset and
goodwill from the reputation of the business. At the
time Z transfers the business to the partnership, the
tangible asset has a fair market value of $550,000
and an adjusted basis of $450,000. The goodwill is a
section 197 intangible with a fair market value of
$100,000 and an adjusted basis of $0. Z incurred
$130,000 of capital expenditures with respect to
improvements to the tangible asset (which amount is
reflected in its adjusted basis) one year preceding the
transfer. Z would like to be reimbursed by the part-
nership for the capital expenditures with an amount
that qualifies for the exception for reimbursement of
preformation expenditures under paragraph (d)(1) of
this section.

(ii) Under paragraph (d)(1)(ii)(B) of this section,
the 20-percent limitation on reimbursed capital ex-
penditures applies on a property-by-property basis.
The 120-percent test also applies on a property-by-
property basis. Accordingly, the tangible asset and
the goodwill each constitutes a separate property. Z
incurred the capital expenditures with respect to the
tangible asset only. The $550,000 fair market value
of the tangible asset exceeds 120 percent of Z's
$450,000 adjusted basis in the asset at the time of the
transfer (120 percent x $450,000 = $540,000). Thus,
the 20-percent limitation applies so that the reim-
bursement of Z's $130,000 of capital expenditures is
limited to 20 percent of the fair market value of the
tangible asset, or $110,000 (20 percent x $550,000).

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* * * * *

(f) Ordering rule cross reference. For
payments or transfers by a partnership to a
partner to which the rules under this sec-
tion and § 1.707-5(b) apply, see the or-
dering rule under § 1.707-5(b)(3).

Par. 5. Section 1.707-5 is amended by:

1\. Revising paragraph (a)(3).

2\. Adding paragraph (a)(5)(iii).

3\. Revising paragraph (a)(6)(i)(C).

4\. Removing "and" at the end of para-
graph (a)(6)(i)(D) and adding "or" in its
place.

5\. Adding paragraph (a)(6)(i)(E).

6\. Revising paragraph (a)(7)(ii).

7\. Adding paragraph (a)(8).

8\. Adding a sentence at the end of
paragraph (b)(1).

9\. Removing the word "property" in
paragraph (b)(2)(i)(A) and adding the
word "consideration" in its place.

10\. Revising paragraph (b)(2)(iii).

11\. Adding paragraph (b)(3).

12\. Designating the text of paragraph
(e) after its subject heading as paragraph
(e)(1) and adding paragraph (e)(2).

13\. Revising Examples 1, 5, 6, and 10
in paragraph (f).

14\. Redesignating Example 11 in para-
graph (f) as Example 13 and adding new
Examples 11 and 12.

The additions and revisions read as fol-
lows:

§ 1.707-5 Disguised sales of property to
partnership; special rules relating to
liabilities.

(a) * * *

(3) Reduction of partner's share of li-
ability. For purposes of this section, a
partner's share of a liability, immediately
after a partnership assumes or takes prop-
erty subject to the liability, is determined
by taking into account a subsequent re-
duction in the partner's share if-

(i) At the time that the partnership as-
sumes or takes property subject to the
liability, it is anticipated that the transfer-
ring partner's share of the liability will be
subsequently reduced;

(ii) The anticipated reduction is not
subject to the entrepreneurial risks of part-
nership operations; and

(iii) The reduction of the partner's
share of the liability is part of a plan that
has as one of its principal purposes mini-

mizing the extent to which the assumption
of or taking property subject to the liabil-
ity is treated as part of a sale under
§ 1.707-3.

* * * * *

#### (5) * * *

(iii) Notwithstanding paragraph (a)(5)
(i) of this section, in connection with a
transfer of property by a partner to a part-
nership that is treated as a sale due solely
to the partnership's assumption of or tak-
ing property subject to a liability other
than a qualified liability, the partnership's
assumption of or taking property subject
to a qualified liability is not treated as a
transfer of consideration made pursuant to
the sale if the total amount of all liabilities
other than qualified liabilities that the
partnership assumes or takes subject to is
the lesser of 10 percent of the total amount
of all qualified liabilities the partnership
assumes or takes subject to, or
$1,000,000.

(6) * * *

(i) * * *

(C) A liability that is allocable under
the rules of § 1.163-8T to capital expen-
ditures (as described under § 1.707-
4(d)(5)) with respect to the property;
* * * * *

(E) A liability that was not incurred in
anticipation of the transfer of the property
to a partnership, but that was incurred in
connection with a trade or business in
which property transferred to the partner-
ship was used or held but only if all the
assets related to that trade or business are
transferred other than assets that are not
material to a continuation of the trade or
business (see paragraph (a)(7) of this sec-
tion for further rules regarding a liability
incurred within two years of a transfer
presumed to be in anticipation of the
transfer); and

* * * * *

(7) * * *

(ii) Disclosure of transfers of property
subject to liabilities incurred within two
years of the transfer. A partner that treats
a liability assumed or taken subject to by
a partnership in connection with a transfer
of property as a qualified liability under
paragraph (a)(6)(i)(B) of this section or
under paragraph (a)(6)(i)(E) of this sec-
tion (if the liability was incurred by the
partner within the two-year period prior to
the earlier of the date the partner agrees in

writing to transfer the property or the date
the partner transfers the property to the
partnership) must disclose such treatment
to the Internal Revenue Service in accor-
dance with § 1.707-8.

(8) Liability incurred by another per-
son. Except as provided in paragraph
(e)(2) of this section, a partner steps in the
shoes of a person for purposes of para-
graph (a) of this section with respect to a
liability the person incurred or assumed to
the extent the partner assumed or took
property subject to the liability from the
person in a nonrecognition transaction de-
scribed in section 351, 381(a), 721, or
731.

(b) * * *

(1) * * * For purposes of paragraph (b)
of this section, an upper-tier partnership's
share of the liability of a lower-tier part-
nership as described under § 1.707-
5(a)(2) that is treated as a liability of the
upper-tier partnership under § 1.752-4(a)
shall be treated as a liability of the upper-
tier partnership incurred on the same day
the liability was incurred by the lower-tier
partnership.

(2) * * *

(iii) Reduction of partner's share of
liability. For purposes of paragraph (b)(2)
of this section, a partner's share of a lia-
bility immediately after a partnership in-
curs the liability is determined by taking
into account a subsequent reduction in the
partner's share if-

(A) At the time that the partnership
incurs the liability, it is anticipated that the
partner's share of the liability that is allo-
cable to a transfer of money or other con-
sideration to the partner will be reduced
subsequent to the transfer;

(B) The anticipated reduction is not
subject to the entrepreneurial risks of part-
nership operations; and

(C) The reduction of the partner's share
of the liability is part of a plan that has as
one of its principal purposes minimizing
the extent to which the partnership's dis-
tribution of the proceeds of the borrowing
is treated as part of a sale.

(3) Ordering rule. The treatment of a
transfer of money or other consideration
under paragraph (b) of this section is de-
termined before applying the rules under
§ 1.707-4.

** * * *

(e) * * *

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(2) If an interest in a partnership that
has one or more liabilities (the lower-tier
partnership) is transferred to another part-
nership (the upper-tier partnership), the
upper-tier partnership's share of any lia-
bility of the lower-tier partnership that is
treated as a liability of the upper-tier part-
nership under § 1.752-4(a) is treated as a
qualified liability under paragraph (a)
(6)(i) of this section to the extent the lia-
bility would be a qualified liability under
paragraph (a)(6)(i) of this section had the
liability been assumed or taken subject to
by the upper-tier partnership in connec-
tion with a transfer of all of the lower-tier
partnership's property to the upper-tier
partnership by the lower-tier partnership.
For purposes of determining whether the
liability constitutes a qualified liability un-
der paragraphs (a)(6)(i)(B) and (E) of this
section, a determination that the liability
was not incurred in anticipation of the
transfer of property to the upper-tier part-
nership is based on whether the partner
in the lower-tier partnership anticipated
transferring its interest in the lower-tier
partnership to the upper-tier partnership at
the time the liability was incurred by the
lower-tier partnership.

##### (f) * * *

Example 1. Partnership's assumption of nonre-
course liability encumbering transferred property.
(i) A and B form partnership AB, which will engage
in renting office space. A transfers $500,000 in cash
to the partnership, and B transfers an office building
to the partnership. At the time it is transferred to the
partnership, the office building has a fair market
value of $1,000,000, has an adjusted basis of
$400,000, and is encumbered by a $500,000 nonre-
course liability, which B incurred 12 months earlier
to finance the acquisition of other property and
which the partnership assumed. No facts rebut the
presumption that the liability was incurred in antic-
ipation of the transfer of the property to the partner-
ship. Assume that this liability is a nonrecourse
liability of the partnership within the meaning of
section 752 and the regulations thereunder. The part-
nership agreement provides that partnership items
will be allocated equally between A and B, including
excess nonrecourse liabilities under § 1.752-3(a)(3).
The partnership agreement complies with the re-
quirements of § 1.704-1(b)(2)(ii)(b).

(ii) The nonrecourse liability secured by the of-
fice building is not a qualified liability within the
meaning of paragraph (a)(6) of this section. B would
be allocated 50 percent of the excess nonrecourse
liability under the partnership agreement. Accord-
ingly, immediately after the partnership's assump-
tion of that liability, B's share of the liability as
determined under paragraph (a)(2) of this section is
$250,000 (B's 50 percent share of the partnership's
excess nonrecourse liability as determined in accor-

dance with B's share of partnership profits under
§ 1.752-3(a)(3)).

(iii) The partnership's assumption of the liability
encumbering the office building is treated as a trans-
fer of $250,000 of consideration to B (the amount by
which the liability ($500,000) exceeds B's share of
that liability immediately after the partnership's as-
sumption of the liability ($250,000)). B is treated as
having sold $250,000 of the fair market value of the
office building to the partnership in exchange for the
partnership's assumption of a $250,000 liability.
This results in a gain of $150,000 ($250,000 minus
($250,000/$1,000,000 multiplied by $400,000)).
* * * * *

Example 5. Partnership's assumption of a qual-
ified liability as sole consideration. (i) F purchases
property Z in 2012. In 2017, F transfers property Z to
a partnership. At the time of its transfer to the part-
nership, property Z has a fair market value of
$165,000 and an adjusted tax basis of $75,000. Also,
at the time of the transfer, property Z is subject to a
$75,000 nonrecourse liability that F incurred more
than two years before transferring property Z to the
partnership. The liability has been secured by prop-
erty Z since it was incurred by F. Upon the transfer
of property Z to the partnership, the partnership
assumed the liability encumbering that property. The
partnership made no other transfers to F in consid-
eration for the transfer of property Z to the partner-
ship. Assume that immediately after the partner-
ship's assumption of the liability encumbering
property Z, F's share of that liability for disguised
sale purposes is $25,000 in accordance with § 1.707-
5(a)(2).

(ii) The $75,000 liability secured by property Z is
a qualified liability of F because F incurred the
liability more than two years prior to the partner-
ship's assumption of the liability and the liability
has encumbered property Z for more than two years
prior to F's transfer. See paragraph (a)(6) of this
section. Therefore, since no other transfer to F was
made as consideration for the transfer of property Z,
under paragraph (a)(5) of this section, the partner-
ship's assumption of the qualified liability of F en-
cumbering property Z is not treated as part of a sale.

Example 6. Partnership's assumption of a qual-
ified liability in addition to other consideration. (i)
The facts are the same as in Example 5, except that
the partnership makes a transfer to F of $30,000 in
money that is consideration for F's transfer of prop-
erty Z to the partnership under § 1.707-3.

(ii) As in Example 5, the $75,000 liability se-
cured by property Z is a qualified liability of F. Since
the partnership transferred $30,000 to F in addition
to assuming the qualified liability under paragraph
(a)(5) of this section, assuming no other exception to
disguised sale treatment applies to the transfer of the
$30,000, the partnership's assumption of this quali-
fied liability is treated as a transfer of additional
consideration to F to the extent of the lesser of-

(A) The amount that the partnership would be
treated as transferring to F if the liability were not a
qualified liability ($50,000 (that is, the excess of the
$75,000 qualified liability over F's $25,000 share of
that liability)); or

(B) The amount obtained by multiplying the
qualified liability ($75,000) by F's net equity per-
centage with respect to property Z (one-third).

(iii) F's net equity percentage with respect to
property Z equals the fraction determined by divid-
ing-

(A) The aggregate amount of money or other
consideration (other than the qualified liability)
transferred to F and treated as part of a sale of
property Z under § 1.707-3(a) ($30,000 transfer of
money); by

(B) F's net equity in property Z ($90,000 (that is,
the excess of the $165,000 fair market value over the
$75,000 qualified liability)).

(iv) Accordingly, the partnership's assumption of
the qualified liability of F encumbering property Z is
treated as a transfer of $25,000 (one-third of
$75,000) of consideration to F pursuant to a sale.
Therefore, F is treated as having sold $55,000 of the
fair market value of property Z to the partnership in
exchange for $30,000 in money and the partnership's
assumption of $25,000 of the qualified liability. Ac-
cordingly, F must recognize $30,000 of gain on the
sale (the excess of the $55,000 amount realized over
$25,000 of F's adjusted basis for property Z (that is,
one-third of F's adjusted basis for the property, be-
cause F is treated as having sold one-third of the
property to the partnership)).
* * * * *

Example 10. Treatment of debt-financed trans-
fers of consideration by partnership. (i) K transfers
property Z to partnership KL in exchange for a 50
percent interest therein on April 9, 2017. On Sep-
tember 13, 2017, the partnership incurs a nonre-
course liability of $20,000. On November 17, 2017,
the partnership transfers $20,000 to K, and $10,000
of this transfer is allocable under the rules of
§ 1.163-8T to proceeds of the partnership liability
incurred on September 13, 2017. The remaining
$10,000 is paid from other partnership funds. As-
sume that on November 17, 2017, for disguised sale
purposes, K's share of the $20,000 liability incurred
on September 13, 2017, is $10,000 in accordance
with § 1.707-5(a)(2).

(ii) Because a portion of the transfer made to K
on November 17, 2017, is allocable under
§ 1.163-8T to proceeds of a partnership liability that
was incurred by the partnership within 90 days of
that transfer, K is required to take the transfer into
account in applying the rules of this section and
§ 1.707-3 only to the extent that the amount of the
transfer exceeds K's allocable share of the liability
used to fund the transfer. K's allocable share of the
$20,000 liability used to fund $10,000 of the transfer
to K is $5,000 (K's share of the liability ($10,000)
multiplied by the fraction obtained by dividing-

(A) The amount of the liability that is allocable to
the distribution to K ($10,000); by

(B) The total amount of such liability ($20,000)).
(iii) Therefore, K is required to take into account
$15,000 of the $20,000 partnership transfer to K for
purposes of this section and § 1.707-3. Under these
facts, assuming no other exception applies and the
within-two-year presumption is not rebutted, this
$15,000 transfer will be treated under the rule in
§ 1.707-3 as part of a sale by K of property Z to the
partnership.

Example 11. Treatment of debt-financed transfers
of consideration and transfers characterized as guar-
anteed payments by a partnership. (i) The facts are the
same as in Example 10, except that the entire $20,000

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transfer to K is allocable under the rules of § 1.163-8T
to proceeds of the partnership liability incurred on
September 13, 2017. In addition, the partnership agree-
ment provides that K is to receive a guaranteed pay-
ment for the use of K's capital in the amount of
$10,000 in each of the three years following the trans-
fer of property Z. Ten thousand dollars of the transfer
made to K on November 17, 2017, is pursuant to this
provision of the partnership agreement. Assume that
the guaranteed payment to K constitutes a reasonable
guaranteed payment within the meaning of § 1.707-
4(a)(3).

(ii) Under these facts, the rules under both
§ 1.707-4(a) and § 1.707-5(b) apply to the Novem-
ber 17, 2017 transfer to K by the partnership. Thus,
the ordering rule in § 1.707-5(b)(3) requires that the
§ 1.707-5(b) debt-financed distribution rules apply
first to determine the treatment of the $20,000 trans-
fer. Because the entire transfer made to K on No-
vember 17, 2017, is allocable under § 1.163-8T to
proceeds of a partnership liability that was incurred
by the partnership within 90 days of that transfer, K
is required to take the transfer into account in apply-
ing the rules of this section and § 1.707-3 only to the
extent that the amount of the transfer exceeds K's
allocable share of the liability used to fund the trans-
fer. K's allocable share of the $20,000 liability used
to fund the transfer to K is $10,000 (K's share of the
liability ($10,000) multiplied by the fraction ob-
tained by dividing-

(A) The amount of the liability that is allocable
to the distribution to K ($20,000); by

(B) The total amount of such liability
($20,000)).

(iii) The remaining $10,000 amount of the trans-
fer to K that exceeds K's allocable share of the
liability is tested to determine whether an exception
under § 1.707-4 applies. Because $10,000 of the
payment to K is a reasonable guaranteed payment for
capital under § 1.707-4(a)(1)(ii), the $10,000 trans-
fer will not be treated as part of a sale by K of
property Z to the partnership under § 1.707-3.

Example 12. Treatment of debt-financed trans-
fers of consideration by partnership made pursuant
to plan. (i) O transfers property X, and P transfers
property Y, to partnership OP in exchange for equal
interests therein on June 1, 2017. On October 1,
2017, the partnership incurs two nonrecourse liabil-
ities: Liability 1 of $8,000 and Liability 2 of $4,000.
On December 15, 2017, the partnership transfers
$2,000 to each of O and P pursuant to a plan. The
transfers made to O and P on December 15, 2017 are
allocable under § 1.163-8T to the proceeds of either
Liability 1 or Liability 2. Assume that under
§ 1.707-5(a)(2), O's and P's share of Liability 1 is
$4,000 each and of Liability 2 is $2,000 each on
December 15, 2017.

(ii) Because the partnership transferred pursuant
to a plan a portion of the proceeds of the two liabil-
ities to O and P, paragraph (b)(1) of this section is
applied by treating Liability 1 and Liability 2 as a
single $12,000 liability. Pursuant to paragraph
(b)(2)(ii)(A) of this section, each partner's allocable
share of the $12,000 liability equals the amount
obtained by multiplying the sum of the partner's
share of Liability 1 and Liability 2 ($6,000) ($4,000
for Liability 1 plus $2,000 for Liability 2) by the
fraction obtained by dividing-

(A) The amount of the liability that is allocable
to the distribution to O and P pursuant to the plan
($4,000); by

(B) The total amount of such liability ($12,000).

(iii) Therefore, O's and P's allocable share of the
$12,000 liability is $2,000 each. Accordingly, be-
cause a portion of the proceeds of the $12,000 lia-
bility are allocable under § 1.163-8T to the $2,000
transfer made to each of O and P within 90 days of
incurring the liability, and the $2,000 transfer does
not exceed O's or P's $2,000 allocable share of that
liability, each is required to take into account $0 of
the $2,000 transfer for purposes of this section and
§ 1.707-3. Under these facts, no part of the transfers
to O and P will be treated as part of a sale of property
X by O or of property Y by P.

* * * * *

Par. 6. Section 1.707-6 is amended by
revising Example 2(i) in paragraph (d) to
read as follows:

#### § 1.707-6 Disguised sales of property by partnership to partner; general rules.

* * * * *

(d) * * *

Example 2. Assumption of liability by partner. (i)
B is a member of an existing partnership. The part-
nership transfers property Y to B. On the date of the
transfer, property Y has a fair market value of
$1,000,000 and is encumbered by a nonrecourse
liability of $600,000. B takes the property subject to
the liability. The partnership incurred the nonre-
course liability six months prior to the transfer of
property Y to B and used the proceeds to purchase an
unrelated asset. Assume that under § 1.707-5(a)(2),
B's share of the nonrecourse liability immediately
before the transfer of property Y was $100,000.
* * * * *

Par. 7. Section 1.707-9 is amended by
revising paragraph (a)(1) to read as fol-
lows:

##### § 1.707-9 Effective dates and transitional rules.

(a) * * *

(1) In general. Except as otherwise
provided in this paragraph (a), §§ 1.707-3
through 1.707-6 apply to any transaction
with respect to which all transfers occur
on or after October 5, 2016. For any trans-
action with respect to which all transfers
that are part of a sale of an item of prop-
erty occur after April 24, 1991, but before
October 5, 2016, §§ 1.707-3 through
1.707-6 as contained in 26 CFR part 1
revised as of April 1, 2016, apply.

* * * * *

Par. 8. Section 1.752-3 is amended by:
1\. Revising the third, fourth, fifth, and
sixth sentences in paragraph (a)(3).

2\. Adding paragraph (d).

The revisions and addition read as fol-
lows:

§ 1.752-3 Partner's share of
nonrecourse liabilities.

(a) * * *

(3) * * * The partnership agreement
may specify the partners' interests in part-
nership profits for purposes of allocating
excess nonrecourse liabilities provided the
interests so specified are reasonably con-
sistent with allocations (that have substan-
tial economic effect under the section
704(b) regulations) of some other signifi-
cant item of partnership income or gain
(significant item method). Alternatively,
excess nonrecourse liabilities may be al-
located among the partners in accordance
with the manner in which it is reasonably
expected that the deductions attributable
to those nonrecourse liabilities will be al-
located (alternative method). Addition-
ally, the partnership may first allocate an
excess nonrecourse liability to a partner
up to the amount of built-in gain that is
allocable to the partner on section 704(c)
property (as defined under § 1.704-
3(a)(3)(ii)) or property for which reverse
section 704(c) allocations are applicable
(as described in § 1.704-3(a)(6)(i)) where
such property is subject to the nonre-
course liability to the extent that such
built-in gain exceeds the gain described in
paragraph (a)(2) of this section with
respect to such property (additional
method). The significant item method, al-
ternative method, and additional method
do not apply for purposes of § 1.707-
5(a)(2). * * *

* * * * *

(d) Effective/applicability dates. The
third, fourth, fifth, and sixth sentences of
paragraph (a)(3) of this section apply to
liabilities that are incurred, taken subject
to, or assumed by a partnership on or after
October 5, 2016, other than liabilities in-
curred, taken subject to, or assumed by a
partnership pursuant to a written binding
contract in effect prior to October 5, 2016.
For liabilities that are incurred, taken sub-
ject to, or assumed by a partnership before
October 5, 2016, the third, fourth, fifth,
and sixth sentences of paragraph (a)(3) of
this section as contained in 26 CFR part 1
revised as of April 1, 2016, apply.

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John Dalrymple,
Deputy Commissioner
for Services and Enforcement.

Approved: August 29, 2016.

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

(Filed by the Office of the Federal Register on October 4,
2016, 8:45 a.m., and published in the issue of the Federal
Register for October 5, 2016, 81 F.R.69291)

26 CFR 1.707-5T; 1.707-9T; and 1.752-2T: Liabil-
ities Recognized as Recourse Partnership Liabilities
Under Section 752.

T.D. 9788

DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1

### Liabilities Recognized as Recourse Partnership Liabilities Under Section 752

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains fi-
nal and temporary regulations concerning
how liabilities are allocated for purposes
of section 707 of the Internal Revenue
Code (Code) and when certain obligations
are recognized for purposes of determin-
ing whether a liability is a recourse part-
nership liability under section 752. These
regulations affect partnerships and their
partners. The text of these temporary reg-
ulations serves as part of the text of
proposed regulations (REG-122855-15)
published in the Proposed Rules section in
this issue of the Bulletin.

DATES: Effective date: These regulations
are effective on October 5, 2016.

Applicability dates: For dates of appli-
cability, see §§ 1.707-9T(a)(4) and 1.752-
2T(l)(2).

FOR FURTHER INFORMATION CON-
TACT: Concerning the final and tempo-
rary regulations, Caroline E. Hay or

Deane M. Burke, (202) 317-5279 (not a
toll-free number).

SUPPLEMENTARY INFORMATION:
In addition to these final and temporary
regulations, the Treasury Department and
the IRS are publishing in the Rules and
Regulations section in this issue of the
Bulletin, final regulations under section
707 concerning disguised sales and under
section 752 regarding the allocation of
excess nonrecourse liabilities of a partner-
ship to a partner, and, in the Proposed
Rules section in this issue of the Bulletin,
proposed regulations (REG-122855-15)
that incorporate the text of these tempo-
rary regulations, withdraw a portion of a
notice of proposed rulemaking (REG-
119305-11) to the extent not adopted by
the final regulations, and contain new pro-
posed regulations addressing (1) when
certain obligations to restore a deficit bal-
ance in a partner's capital account are
disregarded under section 704 and (2)
when partnership liabilities are treated as
recourse liabilities under section 752.

### Paperwork Reduction Act

The collection of information related to
these final and temporary regulations un-
der section 752 is reported on Form 8275,
Disclosure Statement, and has been re-
viewed in accordance with the Paperwork
Reduction Act (44 U.S.C. 3507) and ap-
proved by the Office of Management and
Budget under control number 1545-0889.

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

For further information concerning this
collection of information, and where to
submit comments on the collection of in-
formation and the accuracy of the esti-
mated burden, and suggestions for reduc-
ing this burden, please refer to the
preamble to the cross-referencing notice
of proposed rulemaking published in
the Proposed Rules section in this issue of
the Bulletin.

Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any internal
revenue law. Generally, tax returns and

tax return information are confidential, as
required by section 6103.

### Background

#### 1. Overview

This Treasury decision contains final
and temporary regulations that amend the
Income Tax Regulations (26 CFR part 1)
under sections 707 and 752 of the Code.
On January 30, 2014, the Treasury De-
partment and the IRS published a notice
of proposed rulemaking in the Federal
Register (REG-119305-11, 79 FR 4826)
to amend the then existing regulations un-
der section 707 relating to disguised sales
of property to or by a partnership and
under section 752 concerning the treat-
ment of partnership liabilities (the 2014
Proposed Regulations). The 2014 Pro-
posed Regulations provided certain tech-
nical rules intended to clarify the applica-
tion of the disguised sale rules under
section 707 and also contained rules re-
garding the sharing of partnership re-
course and nonrecourse liabilities under
section 752.

A public hearing on the 2014 Proposed
Regulations was not requested or held, but
the Treasury Department and the IRS re-
ceived written comments.

Based on a comment received on the
2014 Proposed Regulations requesting
that guidance provided under section 752
regarding a partner's share of partnership
liabilities apply instead solely for dis-
guised sale purposes, the Treasury Depart-
ment and the IRS have reconsidered the
rules under § 1.707-5(a)(2) of the 2014
Proposed Regulations for determining a
partner's share of partnership liabilities
for purposes of section 707. Accordingly
and as recommended by that commenter,
this Treasury decision contains temporary
regulations under section 707 (the 707
Temporary Regulations) that require a
partner to apply the same percentage used
to determine the partner's share of excess
nonrecourse liabilities under § 1.752-
3(a)(3) (with certain limitations) in deter-
mining the partner's share of partnership
liabilities for disguised sale purposes. This
Treasury decision also contains temporary
regulations under section 752 (the 752
Temporary Regulations) providing guid-
ance on the treatment of "bottom dollar
payment obligations." Cross-referencing

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proposed regulations providing additional
opportunity for comment are contained in
the related notice of proposed rulemaking
(REG-122855-15) published in the Pro-
posed Rules section in this issue of the
Bulletin. The Summary of Comments and
Explanation of Provisions section of the
preamble of this Treasury decision dis-
cusses the changes for determining a part-
ner's share of partnership liabilities for
disguised sale purposes and also the rules
relating to certain "bottom dollar payment
obligations."

The Treasury Department and the IRS
are also publishing final regulations under
section 707 (the 707 Final Regulations) in
a separate Treasury decision (TD 9787)
published in the Rules and Regulations
section in this issue of the Bulletin that
adopt the remaining provisions of the
2014 Proposed Regulations under section
707. That Treasury decision also contains
final regulations under section 752 (the
752 Final Regulations) concerning the al-
location of a partnership's excess nonre-
course liabilities as explained in the Sum-
mary of Comments and Explanation of
Provisions sections of that Treasury deci-
sion.

Finally, after considering comments on
the 2014 Proposed Regulations under sec-
tion 752, the Treasury Department and the
IRS are withdrawing proposed § 1.752-2
and are issuing new proposed regulations
(the 752 Proposed Regulations) contained
in the related notice of proposed rulemak-
ing (REG-122855-15) published in the
Proposed Rules section in this issue of the
Bulletin.

#### 2. Summary of Applicable Law

In determining a partner's share of a
partnership liability for disguised sale pur-
poses, the existing regulations under sec-
tion 707 prescribe separate rules for a
partnership's recourse liability and a part-
nership's nonrecourse liability. Under
§ 1.707-5(a)(2)(i), a partner's share of a
partnership's recourse liability equals the
partner's share of the liability under sec-
tion 752 and the regulations thereunder. A
partnership liability is a recourse liability
under section 707 to the extent that the
obligation is a recourse liability under
§ 1.752-1(a)(1). Under § 1.707-5(a)(2)
(ii), a partner's share of a partnership's

nonrecourse liability is determined by ap-
plying the same percentage used to deter-
mine the partner's share of the excess
nonrecourse liability under § 1.752-
3(a)(3). Generally, a partner's share of the
excess nonrecourse liability is determined
in accordance with the partner's share of
partnership profits taking into account all
facts and circumstances relating to the
economic arrangement of the partners. A
partnership liability is a nonrecourse lia-
bility under section 707 to the extent that
the obligation is a nonrecourse liability
under § 1.752-1(a)(2). In addition, the
existing regulations under section 707
provide that a partnership liability is a
recourse or nonrecourse liability to the
extent the liability would be recourse un-
der § 1.752-1(a)(1) or nonrecourse under
§ 1.752-1(a)(2), respectively, if the liabil-
ity was treated as a partnership liability
for purposes of section 752 (§ 1.752-7
contingent liabilities).

Section 1.752-1(a)(1) provides that a
partnership liability is a recourse liability
to the extent that a partner or related per-
son bears the economic risk of loss
(EROL) for that liability under § 1.752-2.
Section 1.752-2(a) provides that a part-
ner's share of a recourse partnership lia-
bility equals the portion of the liability, if
any, for which the partner or related per-
son bears the EROL. Section 1.752-
1(a)(2) provides that a partnership liability
is a nonrecourse liability to the extent that
no partner or related person bears the
EROL for that liability under § 1.752-2.
A partner generally bears the EROL for a
partnership liability if the partner or re-
lated person has an obligation to make a
payment under § 1.752-2(b). A partner
generally has an obligation to make a pay-
ment to the extent that the partner or re-
lated person would have to make a pay-
ment if, upon a constructive liquidation of
the partnership, the partnership's assets
were worthless and the liability became
due and payable (constructive liquidation
test). Section 1.752-2(b)(6) presumes
partners and related persons will satisfy
their payment obligations irrespective of
their net worth, unless the facts and cir-
cumstances indicate a plan to circumvent
or avoid the obligation.

## Summary of Comments and Explanation of Provisions

### 1. Partner's Share of Partnership Liabilities for Purposes of Section 707

The withdrawn portions of the 2014
Proposed Regulations included proposed
changes to § 1.752-2 that were intended
to ensure that only genuine commercial
payment obligations, including guarantees
and indemnities, affected the allocation of
partnership liabilities. Although the 2014
Proposed Regulations received some un-
favorable comments, one commenter ex-
pressed support for the overall objective
of those proposed rules. According to the
commenter, the clear effect of the 2014
Proposed Regulations under section 752
was to make it more likely that liabilities
would be treated as nonrecourse liabili-
ties, and thus allocable under § 1.752-3.
The commenter noted that such an effect
seems appropriate as an economic matter,
because, contrary to the constructive liq-
uidation test in § 1.752-2(b)(1), lenders,
borrowers, and credit support providers
generally do not expect that the assets of
the partnership will become worthless.
Rather, lenders, borrowers and credit sup-
port providers generally expect borrowers
(including partnerships) to satisfy their
obligations (in the case of a partnership,
with partnership profits). However, the
commenter expressed concerns with the
proposed section 752 rules. The com-
menter suggested that the regulations
adopt a more narrowly tailored approach
that treats all liabilities as nonrecourse
liabilities for section 707 disguised sale
purposes only.

Other commenters also suggested that
changes to the liability allocation rules be
limited to the context of disguised sales
under section 707 to specifically address
the abuses that concern the Treasury De-
partment and the IRS. One abuse relating
to disguised sales within the meaning of
§ 1.707-3 concerns the debt-financed dis-
tribution exception under § 1.707-5(b).
Under this exception, a distribution of
money to a partner by a partnership is not
taken into account for purposes of
§ 1.707-3 to the extent that the distribu-
tion is traceable to a partnership borrow-
ing and the amount of the distribution
does not exceed the partner's allocable

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share of the liability incurred to fund the
distribution. The legislative history to sec-
tion 707, upon which the debt-financed
distribution exception in § 1.707-5(b) is
based, contemplates a contributing partner
borrowing through the partnership rather
than engaging in a disguised sale when the
partner, in substance, retains liability for
repayment of the borrowed amounts. See
H.R. Rep. No. 861, 98th Cong., 2d Sess.
859 (1984). This exception, however, has
been abused through leveraged partner-
ship transactions in which the contributing
partners or related persons enter into pay-
ment obligations that are not commercial
solely to achieve an allocation of the part-
nership liability to the partner, with the
objective of avoiding a disguised sale.
See, for example, Canal Corp. v. Commis-
sioner, 135 T.C. 199, 216 (2010) (“We
have carefully considered the facts and
circumstances and find that the indemnity
agreement should be disregarded because
it created no more than a remote possibil-
ity that [the indemnitor] would actually be
liable for payment.").

After considering the comments on the
2014 Proposed Regulations suggesting
that the regulations be narrowly tailored to
address abuse concerns relating to dis-
guised sales, the Treasury Department and
the IRS have concluded that, for disguised
sale purposes only, it is appropriate for
partners to determine their share of any
partnership liability, whether recourse or
nonrecourse under section 752, in the
manner in which excess nonrecourse lia-
bilities are allocated under § 1.752-
3(a)(3), as limited for disguised sale pur-
poses in the 752 Final Regulations. For
purposes of the disguised sale rules, this
allocation method reflects the overall eco-
nomic arrangement of the partners more
accurately than the current regulations or
the 2014 Proposed Regulations. In most
cases, a partnership will satisfy its liabil-
ities with partnership profits, the partner-
ship's assets do not become worthless,
and the payment obligations of partners or
related persons are not called upon. This is
true whether: (1) a partner's liability is
assumed by a partnership in connection
with a transfer of property to the partner-
ship or by a partner in connection with a
transfer of property by the partnership to
the partner; (2) a partnership takes prop-
erty subject to a liability in connection

with a transfer of property to the partner-
ship or a partner takes property subject to
a liability in connection with a transfer of
property by the partnership to the partner;
or (3) a liability is incurred by the part-
nership to make a distribution to a partner
under the debt-financed distribution ex-
ception in § 1.707-5(b). Accordingly, un-
der the 707 Temporary Regulations, a
partner's share of any partnership liability
for disguised sale purposes is the same
percentage used to determine the partner's
share of the partnership's excess nonre-
course liabilities under § 1.752-3(a)(3), as
limited for disguised sale purposes under
the 752 Final Regulations.

Commenters also suggested that a part-
ner's share of a partnership liability for
disguised sale purposes should not include
any portion of the liability for which an-
other partner bears the EROL, as these
liabilities would not be allocated to a part-
ner without EROL under general princi-
ples of subchapter K. The Treasury De-
partment and the IRS agree with the
commenter that this change should not
create a liability allocation not otherwise
allowed under general subchapter K prin-
ciples. Therefore, the 707 Temporary
Regulations provide that for purposes of
§ 1.707-5, a partner's share of a liability
of a partnership, as defined in § 1.752-
1(a) (whether a recourse liability or a non-
recourse liability) is determined by apply-
ing the same percentage used to determine
the partner's share of the excess nonre-
course liability under § 1.752-3(a)(3) (as
limited in its application to § 1.707-
5T(a)(2)), but such share shall not exceed
the partner's share of the partnership lia-
bility under section 752 and applicable
regulations (as limited in the application
of § 1.752-3(a)(3) to § 1.707-5T(a)(2)).

The liability allocation approach for
disguised sale purposes in the 707 Tem-
porary Regulations does not conflict with
Congress's directive relating to section
752, which had been raised as a potential
concern by some commenters with respect
to the 2014 Proposed Regulations. Section
79 of the Deficit Reduction Act of 1984
(Public Law 98-369) overruled the deci-
sion in Raphan v. United States, 3 Cl. Ct.
457 (1983) (holding that a guarantee by a
general partner of an otherwise nonre-
course liability of the partnership did not
require the partner to be treated as person-

ally liable for that liability) and directed
the Secretary of the Treasury to amend the
regulations under section 752 to reflect the
overruling of the Raphan decision. At is-
sue in the Raphan case was debt alloca-
tion under section 752; accordingly, Con-
gress's directive related to regulations
under section 752 only. As noted, the 707
Temporary Regulations treat all partner-
ship liabilities, whether recourse or non-
recourse, as nonrecourse liabilities solely
for purposes of section 707. Thus, the
approach adopted in the 707 Temporary
Regulations does not conflict with the ap-
proach directed by Congress after the
Raphan case.

Finally, in addition to the rule for de-
termining a partner's share of a § 1.752-
1 (a) partnership liability for disguised sale
purposes, the 707 Temporary Regulations
reserve with respect to the treatment of
§ 1.752-7 contingent liabilities for dis-
guised sale purposes. The 2014 Proposed
Regulations proposed removing the
"would be treated" language in § 1.707-
5(a)(2)(i) and (ii) of the existing regula-
tions relating to contingent liabilities. The
707 Temporary Regulations replace the
proposed provisions with the previously
discussed rule for determining a partner's
share of a partnership liability as defined
in § 1.752-1(a). Because the 2014 Pro-
posed Regulations would have removed
language relating to § 1.752-7 contingent
liabilities, some commenters suggested
that the regulations specifically clarify
how contingent liabilities are treated for
purposes of the disguised sale rules. The
Treasury Department and the IRS agree
that clarification of the treatment of
§ 1.752-7 contingent liabilities for dis-
guised sale purposes is warranted.

In many cases, § 1.752-7 contingent
liabilities may constitute qualified liabili-
ties that would not be taken into account
for purposes of determining a disguised
sale. However, some commenters noted
that there may be circumstances in which
certain transfers of § 1.752-7 contingent
liabilities to a partnership may be abusive.
Thus, the Treasury Department and the
IRS will continue to study the issue of the
effect of contingent liabilities with respect
to section 707, as well as other sections of
the Code, in connection with future guid-
ance projects.

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2\. Determining Whether a Liability Is a
Recourse Liability of a Partnership

The 752 Temporary Regulations amend
§ 1.752-2 to address certain payment obli-
gations of a partner or related person. The
Treasury Department and the IRS con-
tinue to have concerns that partners and
related persons are entering into payment
obligations that are not commercial solely
to achieve an allocation of a partnership
liability.

Under the 2014 Proposed Regulations,
a partner's or related person's payment
obligation with respect to a partnership
liability would not have been recognized
under § 1.752-2(b)(3) unless seven fac-
tors (recognition factors) were satisfied.
Two of the seven recognition factors im-
posed certain additional requirements on
contractual obligations outside a partner-
ship agreement, such as guarantees,
indemnifications, reimbursement agree-
ments, and other obligations running di-
rectly to creditors, other partners, or to the
partnership (guarantee and indemnity rec-
ognition factors). In the case of a guaran-
tee or similar arrangement, the 2014 Pro-
posed Regulations would have required
the partner or related person to be liable
up to the full amount of such partner's or
related person's payment obligation, if,
and to the extent that, any amount of the
partnership liability is not otherwise satis-
fied. In the case of an indemnity, reim-
bursement agreement, or similar arrange-
ment, the 2014 Proposed Regulations
would have required the partner or related
person to be liable up to the full amount of
such partner's or related person's payment
obligation if, and to the extent that, any
amount of the indemnitee's or other ben-
efited party's payment obligation is satis-
fied. The terms of the guarantee, indem-
nity, or reimbursement agreement would
be treated as modified by any right of
indemnity, reimbursement agreement, or
similar arrangement. However, a right of
proportionate contribution running be-
tween partners or related persons who
were co-obligors with respect to a pay-
ment obligation for which each of them
was jointly and severally liable would not
modify a guarantee, indemnity, or reim-
bursement agreement. If the partner's or
related person's payment obligation failed
to satisfy any of the recognition factors,

the payment obligation was not recog-
nized and the partner would not bear
EROL for the partnership liability.

In addition to the guarantee and indem-
nity recognition factors, a partner's or re-
lated person's payment obligation with re-
spect to a partnership liability would not
be recognized under an anti-abuse rule in
the 2014 Proposed Regulations if the facts
and circumstances indicated that the part-
nership liability was part of a plan or
arrangement involving the use of tiered
partnerships, intermediaries, or similar ar-
rangements to convert a single liability
into multiple liabilities with a principal
purpose of circumventing the guarantee
and indemnity recognition factors.

The Treasury Department and the IRS
continue to believe that certain obliga-
tions, such as certain so-called "bottom-
dollar guarantees," should generally not
be recognized as payment obligations un-
der § 1.752-2(b)(3) because they gener-
ally lack a significant non-tax commercial
business purpose. No commenters sug-
gested that bottom-dollar guarantees were
relevant to loan risk underwriting. Ac-
cordingly, the 752 Temporary Regula-
tions retain the restriction on certain guar-
antees and indemnities and provide that
these payment obligations are not recog-
nized under § 1.752-2(b)(3). In addition,
these regulations remove the Example in
§ 1.752-2(j)(4) to comport with the pro-
visions in the 752 Temporary Regulations
relating to bottom dollar payment obliga-
tions. However, after considering the
comments received on the 2014 Proposed
Regulations, the 752 Temporary Regula-
tions provide for an exception as well as
an anti-abuse rule to address arrangements
that are not intended to be subject to this
rule.

### A. General rule: bottom dollar payment obligations

Although the 752 Temporary Regula-
tions retain the restriction relating to cer-
tain guarantees and indemnities, these
temporary regulations refine the descrip-
tion of non-commercial obligations in re-
sponse to comments. Commenters ex-
pressed concerns with the 2014 Proposed
Regulations' description of so-called
"bottom-dollar guarantees and indemni-
ties." Commenters thought the language

was confusing. In addition, with respect to
the anti-abuse rule in the 2014 Proposed
Regulations, one commenter believed that
"tranches" of debt could be used to effect
arrangements that are economically simi-
lar to "bottom-dollar guarantees" and rec-
ommended that the regulations strengthen
the anti-abuse rule. This commenter sug-
gested that two or more liabilities be
treated as a single liability if: (1) the lia-
bilities are incurred pursuant to a common
plan, as part of a single transaction, or as
part of a series of related transactions; (2)
the liabilities have the same counterparty
or counterparties (or substantially the
same group of counterparties); or (3) the
guarantee or similar arrangement would
fail the guarantee recognition factor if the
liabilities were treated as a single liability;
and (4) multiple liabilities (rather than a
single liability) were incurred with a prin-
cipal purpose of avoiding the guarantee
recognition factor.

In response to comments, the 752 Tem-
porary Regulations clarify the description
of so-called "bottom-dollar guarantees
and indemnities" by consolidating these
non-commercial obligations under one
term: bottom-dollar payment obligations.
In addition, instead of having an anti-
abuse rule to address arrangements that
use tiered partnerships, intermediaries, se-
nior and subordinate liabilities, or similar
arrangements, the 752 Temporary Regu-
lations define these arrangements as bot-
tom dollar payment obligations if certain
factors, taking into account the comment-
er's suggestion, exist. Therefore, under
the 752 Temporary Regulations, the term
"bottom dollar payment obligation" in-
cludes (subject to certain exceptions): (1)
any payment obligation other than one in
which the partner or related person is or
would be liable up to the full amount of
such partner's or related person's payment
obligation if, and to the extent that (A) any
amount of the partnership liability is not
otherwise satisfied in the case of an obli-
gation that is a guarantee or other similar
arrangement, or (B) any amount of the
indemnitee's or benefited party's payment
obligation is satisfied in the case of an
obligation which is an indemnity or sim-
ilar arrangement; and (2) an arrangement
with respect to a partnership liability that
uses tiered partnerships, intermediaries,
senior and subordinate liabilities, or sim-

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ilar arrangements to convert what would
otherwise be a single liability into multi-
ple liabilities if, based on the facts and
circumstances, the liabilities were in-
curred (A) pursuant to a common plan, as
part of a single transaction or arrange-
ment, or as part of a series of related
transactions or arrangements, and (B) with
a principal purpose of avoiding having at
least one of such liabilities or payment
obligations with respect to such liabilities
being treated as a bottom dollar payment
obligation. Any payment obligation under
§ 1.752-2, including an obligation to
make a capital contribution and to restore
a deficit capital account upon liquidation
of the partnership as described in
§ 1.704-1(b)(2)(ii)(b)(3), may be a bot-
tom dollar payment obligation if it meets
the requirements set forth above.

The preamble of the 2014 Proposed
Regulations requested comments on
whether and under what circumstances
regulations should permit recognition of a
payment obligation for a portion, rather
than 100 percent, of each dollar of a part-
nership liability to which the payment re-
lates (a "vertical slice" of a partnership
liability). The commenters believed that
regulations under section 752 should rec-
ognize a vertical slice of a partnership
liability because these payment obliga-
tions represent the same economic risk as
a guarantee, for example, of the entire
partnership liability.

The Treasury Department and the IRS
agree with the commenters that certain
obligations, including a vertical slice of a
partnership liability, should not cause a
payment obligation to be a bottom dollar
payment obligation and, thus, not recog-
nized under § 1.752-2(b)(3). In addition,
the Treasury Department and the IRS
have determined that, as long as a partner
or related person is or would be liable for
the full amount of a payment obligation,
such obligation is not a bottom dollar pay-
ment obligation merely because a maxi-
mum amount is placed on the partner's or
related person's obligation. Accordingly,
the 752 Temporary Regulations specifi-
cally except certain payment obligations
within those parameters, including obliga-
tions with joint and several liability, from
being treated as bottom dollar payment
obligations.

B. Exception from treatment as a bottom
dollar payment obligation

In addition to comments relating to the
description of "bottom-dollar guarantees"
and the anti-abuse rule in the 2014 Pro-
posed Regulations, commenters expressed
concerns that the guaranty and indemnity
recognition factors would deprive a part-
ner from being allocated a liability even in
situations where there is real EROL. One
commenter described the 2014 Proposed
Regulations as prejudging all payment ob-
ligations to be remote and fictitious if the
obligations did not cover 100 percent of
any shortfall in repayment. The com-
menter believed EROL could exist even if
100 percent of the liability was not cov-
ered.

Another commenter appreciated the
merits of a bright-line rule that would look
to every dollar of a liability, but thought
that the 100 percent threshold was too
high. This commenter recommended that
a payment obligation should be respected
if a partner or related person (i) is or
would be liable up to the full amount of
such partner's or related person's payment
obligation if, and to the extent that, less
than 80 percent of the partnership liability
is not otherwise satisfied and (ii) either
(A) the taxpayer or the IRS clearly estab-
lishes that the credit support materially
decreased the partnership's borrowing
costs with respect to the liability or mate-
rially enhanced the other terms of the bor-
rowing, or (B) the partners (or persons
related to one or more of the partners), in
the aggregate, are or would be liable up to
the full amount of their payment obliga-
tions if, and to the extent that, any amount
of the partnership liability is not otherwise
satisfied. The commenter believed that
this lower threshold incorporates the idea
that a person may have meaningful risk
with respect to the underlying liability,
while protecting the legitimate interests of
the government in ensuring that the lower
threshold is not abused by taxpayers.

The Treasury Department and the IRS
recognize that, in certain circumstances, it
might be appropriate to treat a partner as
bearing EROL with respect to a payment
obligation that would be characterized as
a bottom dollar payment obligation under
the general rule. What otherwise would be
a bottom dollar payment obligation can be

distinguished in a situation where the part-
ners have allocated the risk among them-
selves, and the person making the bottom
dollar payment obligation is liable for at
least 90 percent of the person's payment
obligation (because the person is not en-
titled to indemnification or reimbursement
for more than 10 percent of the person's
payment obligation). For example, if one
partner (Partner A) guarantees 100 per-
cent of a partnership liability and another
partner (Partner B) indemnifies Partner A
for the first one percent of Partner A's
obligation, Partner A's obligation would
be characterized as a bottom dollar pay-
ment obligation under the general rule be-
cause Partner A would not be liable to the
full extent of the guarantee if any amount
of the partnership liability is not otherwise
satisfied (because Partner A would be re-
imbursed due to Partner B's indemnity).
To address this concern, the 752 Tempo-
rary Regulations provide an exception if a
partner or related person has a payment
obligation that would be recognized (ini-
tial payment obligation) under § 1.752-
2T(b)(3) but for the effect of an indem-
nity, reimbursement agreement, or similar
arrangement. Such bottom dollar payment
obligation is recognized under § 1.752-
2T(b)(3) if, taking into account the indem-
nity, reimbursement agreement, or similar
arrangement, the partner or related person
is liable for at least 90 percent of the
initial payment obligation. This obliga-
tion, like any other payment obligation,
must otherwise be recognized under
§ 1.752-2, including under the anti-abuse
rules in § 1.752-2(j).

### C. Anti-abuse rule

Some commenters noted that partners
could manipulate contractual arrange-
ments to achieve a federal income tax
result that is not consistent with the eco-
nomics of an arrangement. For example, a
partner could deliberately fail one of the
recognition factors in the 2014 Proposed
Regulations (including the guarantee or
indemnity recognition factor) to cause a
partnership liability to be treated as non-
recourse even when one partner has true
EROL. Just as the 752 Temporary Regu-
lations provide an exception for certain
obligations that meet the definition of a
bottom dollar payment obligation but give

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rise to EROL, the 752 Temporary Regu-
lations also provide an anti-abuse rule in
§ 1.752-2T(j)(2) that the Commissioner
may apply to ensure that if a partner ac-
tually bears EROL for a partnership lia-
bility, partners may not agree among
themselves to create a bottom dollar pay-
ment obligation so that the liability will be
treated as nonrecourse.

Section 1.752-2(j)(2) of the existing
regulations currently provides that, irre-
spective of the form of a contractual ob-
ligation, a partner is considered to bear the
EROL with respect to a partnership liabil-
ity, or a portion thereof, to the extent that:
(A) the partner or related person under-
takes one or more contractual obligations
so that the partnership may obtain a loan;
(B) the contractual obligations of the part-
ner or related person eliminate substan-
tially all the risk to the lender that the
partnership will not satisfy its obligations
under the loan; and (C) one of the princi-
pal purposes of using the contractual ob-
ligations is to attempt to permit partners
(other than those who are directly or indi-
rectly liable for the obligation) to include
a portion of the loan in the basis of their
partnership interests. The 752 Temporary
Regulations expand § 1.752-2(j)(2) to in-
clude situations in which a partner is con-
sidered to bear the EROL irrespective of a
bottom dollar payment obligation.

### D. Disclosure requirement

The 752 Temporary Regulations re-
quire the partnership to disclose to the IRS
all bottom dollar payment obligations
with respect to a partnership liability on a
completed Form 8275, Disclosure State-
ment, attached to the partnership return
for the taxable year in which the bottom
dollar payment obligation is undertaken or
modified. That disclosure must identify
the payment obligation with respect to
which disclosure is made including the
amount of the payment obligation and the
parties to the payment obligation. If a
bottom dollar payment obligation meets
the exception, the partnership must also
disclose to the IRS on Form 8275 the facts
and circumstances that clearly establish
that a partner or related person is liable for
up to 90 percent of the partner's or related
person's initial payment obligation and,
but for an indemnity, reimbursement

agreement, or similar arrangement, the
partner's or related person's payment ob-
ligation would have been recognized.

## Effective/Applicability Date

With respect to changes under
§ 1.707-5, the 707 Temporary Regula-
tions apply to any transaction with respect
to which all transfers occur on or after
January 3, 2017. In addition, with respect
to the changes under § 1.752-2, the 752
Temporary Regulations apply to liabilities
incurred or assumed by a partnership and
payment obligations imposed or under-
taken with respect to a partnership liabil-
ity on or after October 5, 2016, other than
liabilities incurred or assumed by a part-
nership and payment obligations imposed
or undertaken pursuant to a written bind-
ing contract in effect prior to that date.

The 2014 Proposed Regulations pro-
vided for an effective date similar to the
one in these final and temporary regula-
tions. A commenter recommended that
partnerships be permitted to elect to apply
all, but not less than all, of the provisions
of the final regulations to all of its liabil-
ities and payment obligations with respect
to its liabilities after the effective date of
the final regulations. These 752 Tempo-
rary Regulations adopt that change; there-
fore, partnerships may apply all the pro-
visions contained in the 752 Temporary
Regulations to all of their liabilities as of
the beginning of the first taxable year of
the partnership ending on or after October
5, 2016.

Commenters on the 2014 Proposed
Regulations also recommended that part-
nership liabilities or payment obligations
that are modified or refinanced continue to
be subject to the provisions of the existing
regulations to the extent of the amount
and duration of the pre-modification (or
refinancing) liability or payment obliga-
tion. The 752 Temporary Regulations do
not adopt this recommendation as the
terms of the partnership liabilities and
payment obligations could be changed,
which would affect the determination of
whether or not an obligation is a bottom
dollar payment obligation.

The 752 Temporary Regulations do,
however, provide transition relief for any
partner whose allocable share of partner-
ship liabilities under § 1.752-2 exceeds its
adjusted basis in its partnership interest on

the date the temporary regulations are fi-
nalized. Under this transitional relief, the
partner can continue to apply the existing
regulations under § 1.752-2 with respect
to a partnership liability for a seven-year
period to the extent that the partner's al-
locable share of partnership liabilities ex-
ceeds the partner's adjusted basis in its
partnership interest on October 5, 2016.
The amount of partnership liabilities sub-
ject to transitional relief will be reduced
for certain reductions in the amount of
liabilities allocated to that partner under
the transition rules and, upon the sale of
any partnership property, for any tax gain
(including section 704(c) gain) allocated
to the partner less that partner's share of
amount realized.

## Special Analyses

Certain IRS regulations, including this
one, are exempt from the requirements of
Executive Order 12866, as supplemented
and reaffirmed by Executive Order 13563.
Therefore, a regulatory impact assessment
is not required. It also has been deter-
mined that section 553(b) of the Admin-
istrative Procedure Act (5 U.S.C. chapter
5) does not apply to these regulations.

Although the temporary regulations
under sections 707 and 752 respond to
comments received in response to the
2014 Proposed Regulations, the Treasury
Department and the IRS have determined
that the regulations would benefit from
additional notice and comment instead of
being published as final regulations. In
addition, decisions made in the final reg-
ulations under section 707 contained in a
separate Treasury decision (TD 9787)
published in the Rules and Regulations
section in this issue of the Bulletin inter-
act with the changes in the 707 Temporary
Regulations regarding how liabilities are
allocated for disguised sale purposes. Fi-
nally, pursuant to authority under section
7805(b) of the Code, the temporary regu-
lations under sections 707 and 752 are
necessary to address particular abuses as
described in the Summary of Comments
and the Explanation of Provisions section
of the preamble of this Treasury decision.
For these reasons, good cause also exists
pursuant to 5 U.S.C. 553 to issue tempo-
rary regulations.

For applicability of the Regulatory
Flexibility Act, please refer to the cross-

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referencing notice of proposed rulemak-
ing published in the Proposed Rules sec-
tion in this issue of the Bulletin. Pursuant
to section 7805(f) of the Code, these reg-
ulations have been submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its
impact on small business.

## Drafting Information

The principal authors of these regula-
tions are Caroline E. Hay and Deane M.
Burke of the Office of the Associate Chief
Counsel (Passthroughs & Special Indus-
tries), IRS. However, other personnel
from the Treasury Department and the
IRS participated in their development.

* * * * *

## Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is
amended as follows:

## PART 1-INCOME TAXES

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

Sections 1.707-2 through 1.707-9 also
issued under 26 U.S.C. 707(a)(2)(B).

Par. 2. Section 1.707-5 is amended by
revising paragraph (a)(2) and Examples 2,
3, 7, and 8 in paragraph (f) to read as
follows:

§ 1.707-5 Disguised sales of property to
partnership; special rules relating to
liabilities.

(a) * * *

(2) [Reserved]. For further guidance,
see § 1.707-5T(a)(2).

* * * * *

(f) * * *

Example 2. [Reserved]. For further
guidance, see § 1.707-5T(f) Example 2.

Example 3. [Reserved]. For further
guidance, see § 1.707-5T(f) Example 3.
* * * * *

Example 7. [Reserved]. For further
guidance, see § 1.707-5T(f) Example 7.

Example 8. [Reserved]. For further
guidance, see § 1.707-5T(f) Example 8.
* * * * *

Par. 3. Section 1.707-5T is added to
read as follows:

§ 1.707-5T Disguised sales of property
to partnership; special rules relating to
liabilities (temporary).

(a)(1) [Reserved]. For further guid-
ance, see § 1.707-5(a)(1).

(2) Partner's share of liability-(i) In
general. For purposes of § 1.707-5, a
partner's share of a liability of a partner-
ship, as defined in § 1.752-1(a) (whether a
recourse liability or a nonrecourse liabil-
ity) is determined by applying the same
percentage used to determine the partner's
share of the excess nonrecourse liability
under § 1.752-3(a)(3) (as limited in its
application to this paragraph (a)(2)), but
such share shall not exceed the partner's
share of the partnership liability under
section 752 and applicable regulations (as
limited in the application of § 1.752-
3(a)(3) to this paragraph (a)(2)).

(ii) Partner's share of § 1.752-7 lia-
bility. [Reserved].

(a)(3) through (e) [Reserved]. For
further guidance, see § 1.707-5(a)(3)
through (e).

(f) Example 1 [Reserved]. For further
guidance, see § 1.707-5(f) Example 1.

Example 2. Partnership's assumption of re-
course liability encumbering transferred property.
(i) C transfers property Y to a partnership in which C
has a 50 percent interest. At the time of its transfer to
the partnership, property Y has a fair market value of
$10,000,000 and is subject to an $8,000,000 liability
that C incurred and guaranteed, immediately before
transferring property Y to the partnership, in order to
finance other expenditures. Upon the transfer of
property Y to the partnership the partnership as-
sumed the liability encumbering that property. Under
section 752 and the regulations thereunder, immedi-
ately after the partnership's assumption of the liabil-
ity encumbering property Y, the liability is a re-
course liability of the partnership and C's share of
that liability is $8,000,000.

(ii) Under the facts of this example, the liability
encumbering property Y is not a qualified liability.
Accordingly, the partnership's assumption of the
liability results in a transfer of consideration to C in
connection with C's transfer of property Y to the
partnership. Notwithstanding C's share of the liabil-
ity for section 752 purposes, for disguised sale pur-
poses, C's share of the liability immediately after the
partnership's assumption is $4,000,000 (50 percent
of $8,000,000) under paragraph (a)(2) of this section
(which determines a partner's share of a liability
using the percentage under § 1.752-3(a)(3)). There-
fore, the amount of consideration to C is $4,000,000
(the excess of the liability assumed by the partner-
ship ($8,000,000) over C's share of the liability for
purposes of § 1.707-5(a) immediately after the as-
sumption ($4,000,000)). See § 1.707-5(a)(1) and
paragraph (a)(2) of this section.

Example 3. Subsequent reduction of transferring
partner's share of liability. (i) The facts are the same
as in Example 2. In addition, property Y is a fully
leased office building, the rental income from prop-
erty Y is sufficient to meet debt service, and the
remaining term of the liability is ten years. It is
anticipated that, three years after the partnership's
assumption of the liability, C's share of the liability
under paragraph (a)(2) of this section will be reduced
to $2,000,000 because of a shift in the allocation of
partnership profits pursuant to the terms of the part-
nership agreement which provide that C's share of
the partnership profits will be 25 percent at that time.
Under the partnership agreement, this shift in the
allocation of partnership profits is dependent solely
on the passage of time.

(ii) Under § 1.707-5(a)(3), if the reduction in C's
share of the liability was anticipated at the time of
C's transfer, was not subject to the entrepreneurial
risks of partnership operations, and was part of a
plan that has as one of its principal purposes mini-
mizing the extent of sale treatment under § 1.707-3
(that is, a principal purpose of allocating a larger
percentage of profits to C in the first three years
when profits were not likely to be realized was to
minimize the extent to which C's transfer would be
treated as part of a sale), C's share of the liability
immediately after the partnership's assumption is
treated as equal to C's reduced share of $2,000,000.
Therefore, the amount of consideration to C is
$6,000,000 (the excess of the liability assumed by
the partnership ($8,000,000) over C's share of the
liability for purposes of § 1.707-5(a) immediately
after the assumption ($2,000,000)), taking into ac-
count the anticipated reduction in C's share of the
liability pursuant to the terms of the partnership
agreement. See § 1.707-5(a)(1) and (3) and para-
graph (a)(2) of this section.

Examples 4 through 6 [Reserved]. For further
guidance, see § 1.707-5(f) Examples 4 through 6.

Example 7. Partnership's assumptions of liabil-
ities encumbering properties transferred pursuant to
a plan. (i) Pursuant to a plan, G and H transfer
property 1 and property 2, respectively, to an exist-
ing partnership in exchange for a one-third interest
each in the partnership. At the time the properties are
transferred to the partnership, property 1 has a fair
market value of $10,000 and an adjusted tax basis of
$6,000, and property 2 has a fair market value of
$10,000 and an adjusted tax basis of $4,000. At the
time properties 1 and 2 are transferred to the part-
nership, a $6,000 nonrecourse liability (liability 1) is
secured by property 1 and a $9,000 recourse liability
of H (liability 2) is secured by property 2. Properties
1 and 2 are transferred to the partnership, and the
partnership takes property 1 subject to liability 1 and
assumes liability 2. After the transfer of liability 2 to
the partnership, H bears the economic risk of loss for
the entire amount of liability 2 under § 1.752-2. G
and H incurred liabilities 1 and 2 immediately prior
to transferring properties 1 and 2 to the partnership
and used the proceeds for personal expenditures. The
liabilities are not qualified liabilities. For disguised
sale purposes, assume that G's and H's share of
liability 1 is $2,000 each in accordance with para-
graph (a)(2) of this section (which determines a
partner's share of a liability using the percentage
under § 1.752-3(a)(3), but not exceeding the part-

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ner's share of the liability under section 752 and
applicable regulations). Also, in accordance with
paragraph (a)(2) of this section, G's share of liability
2 is zero and H's share of liability 2 is $3,000.

(ii) G and H transferred properties 1 and 2 to the
partnership pursuant to a plan. Accordingly, pursu-
ant to § 1.707-5(a)(1) and (4), the partnership's
taking property 1 subject to liability 1 is treated as a
transfer of only $4,000 of consideration to G (the
amount by which liability 1 ($6,000) exceeds G's
share of liabilities 1 and 2 ($2,000)), and the part-
nership's assumption of liability 2 is treated as a
transfer of only $4,000 of consideration to H (the
amount by which liability 2 ($9,000) exceeds H's
share of liabilities 1 and 2 ($5,000)). Under the rule
in § 1.707-3, G is treated as having sold $4,000 of
the fair market value of property 1 in exchange for
the partnership's taking property 1 subject to liability
1, and H is treated as having sold $4,000 of the fair
market value of property 2 in exchange for the
partnership's assumption of liability 2.

Example 8. Partnership's assumption of liability
pursuant to a plan to avoid sale treatment of part-
nership assumption of another liability. (i) The facts
are the same as in Example 7, except that-

(A) Liability 2 is a nonrecourse liability;

(B) H transferred the proceeds of liability 2 to the
partnership; and

(C) H incurred liability 2 in an attempt to reduce
the extent to which the partnership's taking of prop-
erty 1 subject to liability 1 would be treated as a
transfer of consideration to G (and thereby reduce
the portion of G's transfer of property 1 to the
partnership that would be treated as part of a sale).

(ii) Because the partnership assumed liability 2
with a principal purpose of reducing the extent to
which the partnership's taking of property 1 subject
to liability 1 would be treated as a transfer of con-
sideration to G, liability 2 is ignored in applying
§ 1.707-5(a)(1). See § 1.707-5(a)(4). Accordingly,
the partnership's taking of property 1 subject to
liability 1 is treated as a transfer of $4,000 of con-
sideration to G (the amount by which liability 1
($6,000) exceeds G's share of liability 1 ($2,000)).
Under § 1.707-5(d), the partnership's assumption of
liability 2 is not treated as a transfer of any consid-
eration to H because the amount of liability 2 that the
partnership is treated as assuming is reduced by the
money H transferred to the partnership ($9,000).

Examples 9 through 13 [Reserved]. For
further guidance, see § 1.707-5(f) Exam-
ples 9 through 13.

(g) Expiration date. This section ex-
pires on October 4, 2019.

Par. 4. Section 1.707-9 is amended by
adding paragraphs (a)(4) and (5) to read as
follows:

§ 1.707-9 Effective dates and
transitional rules.

(a) * * *

(4) Section 1.707-5(a)(2) and (f) Ex-
amples 2, 3, 7, and 8. Section 1.707-
5(a)(2) and (f) Examples 2, 3, 7, and 8, as

contained in 26 CFR part 1 revised as of
April 1, 2016, apply to any transaction
with respect to which any transfers occur
before January 3, 2017. For any transac-
tion with respect to which all transfers
occur on or after January 3, 2017, see
§ 1.707-9T(a)(5).

(5) [Reserved]. For further guidance,
see § 1.707-9T(a)(5).

* * * * *

Par. 5. Section 1.707-9T is added to
read as follows:

§ 1.707-9T Effective dates and
transitional rules (temporary).

(a)(1) through (a)(4) [Reserved]. For
further guidance, see § 1.707-9(a)(1)
through (4).

(5) Section 1.707-5T(a)(2) and (f) Ex-
amples 2, 3, 7, and 8. Section 1.707-
5T(a)(2) and (f) Examples 2, 3, 7, and 8
apply to any transaction with respect to
which all transfers occur on or after Jan-
uary 3, 2017. For any transaction with
respect to which any transfers occur be-
fore January 3, 2017, see § 1.707-5(a)(2)
and (f) Examples 2, 3, 7, and 8 as con-
tained in 26 CFR part 1, revised as of
April 1, 2016.

(b) [Reserved]. For further guidance,
see § 1.707-9(b).

(c) Expiration date. This section ex-
pires on October 4, 2019.

Par. 6. Section 1.752-2 is amended by:

1\. Revising paragraph (b)(3).

2\. Adding Examples 9, 10, and 11 to
paragraph (f).

3\. Revising paragraph (j)(2).

4\. Removing paragraph (j)(4).

5\. Redesignating paragraph (l) as (l)(1)
and revising the heading to paragraph
(l).

6\. Adding paragraphs (l)(2) and (3).

The revisions and additions read as fol-
lows:

§ 1.752-2 Partner's share of recourse
liabilities.

* * * * *

(b) * * *

(3) [Reserved]. For further guidance,
see § 1.752-2T(b)(3).

* * * * *

(f) * * *

Example 9. [Reserved].

Example 10. [Reserved]. For further
guidance, see § 1.752-2T(f) Example 10.

Example 11. [Reserved]. For further
guidance, see § 1.752-2T(f) Example 11.
* * * * *

(j) ** *

(2) [Reserved]. For further guidance,
see § 1.752-2T(j)(2).

* * * * *

(1) Effective/applicability dates.

* * * * *

(2) [Reserved]. For further guidance,
see § 1.752-2T(1)(2).

(3) [Reserved]. For further guidance,
see § 1.752-2T(1)(3).

Par. 7. Section 1.752-2T is added to
read as follows:

§ 1.752-2T Partner's share of recourse
liabilities (temporary).

(a) through (b)(2) [Reserved]. For fur-
ther guidance, see § 1.752-2(a) through
(b)(2).

(3) Obligations recognized-(i) In
general. The determination of the extent
to which a partner or related person has an
obligation to make a payment under
§ 1.752-2(b)(1) is based on the facts and
circumstances at the time of the determi-
nation. To the extent that the obligation of
a partner or related person to make a pay-
ment with respect to a partnership liability
is not recognized under this paragraph
(b)(3), § 1.752-2(b) is applied as if the
obligation did not exist. All statutory and
contractual obligations relating to the
partnership liability are taken into account
for purposes of applying this section, in-
cluding-

(A) Contractual obligations outside the
partnership agreement such as guarantees,
indemnifications, reimbursement agree-
ments, and other obligations running di-
rectly to creditors, to other partners, or to
the partnership;

(B) Obligations to the partnership that
are imposed by the partnership agreement,
including the obligation to make a capital
contribution and to restore a deficit capital
account upon liquidation of the partner-
ship as described in § 1.704-1(b)(2)
(ii)(b)(3) (taking into account § 1.704-
1(b)(2)(ii)(c)); and

(C) Payment obligations (whether in
the form of direct remittances to another
partner or a contribution to the partner-

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ship) imposed by state or local law, in-
cluding the governing state or local law
partnership statute.

(ii) Special rules for bottom dollar pay-
ment obligations-(A) In general. For
purposes of § 1.752-2, a bottom dollar
payment obligation (as defined in para-
graph (b)(3)(ii)(C) of this section) is not
recognized under this paragraph (b)(3).

(B) Exception. If a partner or related
person has a payment obligation that
would be recognized under this paragraph
(b)(3) (initial payment obligation) but for
the effect of an indemnity, reimbursement
agreement, or similar arrangement, such
bottom dollar payment obligation is rec-
ognized under this paragraph (b)(3) if,
taking into account the indemnity, reim-
bursement agreement, or similar arrange-
ment, the partner or related person is lia-
ble for at least 90 percent of the partner's
or related person's initial payment obliga-
tion.

(C) Definition of bottom dollar pay-
ment obligation-(1) In general. Except
as provided in paragraph (b)(3)(ii)(C)(2)
of this section, a bottom dollar payment
obligation is a payment obligation that is
the same as or similar to a payment obli-
gation or arrangement described in this
paragraph (b)(3)(ii)(C)(1).

(i) With respect to a guarantee or sim-
ilar arrangement, any payment obligation
other than one in which the partner or
related person is or would be liable up to
the full amount of such partner's or re-
lated person's payment obligation if, and
to the extent that, any amount of the part-
nership liability is not otherwise satisfied.

(ii) With respect to an indemnity or
similar arrangement, any payment obliga-
tion other than one in which the partner or
related person is or would be liable up to
the full amount of such partner's or re-
lated person's payment obligation, if, and
to the extent that, any amount of the in-
demnitee's or benefited party's payment
obligation that is recognized under this
paragraph (b)(3) is satisfied.

(iii) An arrangement with respect to a
partnership liability that uses tiered part-
nerships, intermediaries, senior and sub-
ordinate liabilities, or similar arrange-
ments to convert what would otherwise be
a single liability into multiple liabilities if,
based on the facts and circumstances, the
liabilities were incurred pursuant to a

common plan, as part of a single transac-
tion or arrangement, or as part of a series
of related transactions or arrangements,
and with a principal purpose of avoiding
having at least one of such liabilities or
payment obligations with respect to such
liabilities being treated as a bottom dollar
payment obligation as described in para-
graph (b)(3)(ii)(C)(1)(i) or (ii) of this sec-
tion.

(2) Exceptions. A payment obligation
is not a bottom dollar payment obligation
merely because a maximum amount is
placed on the partner's or related person's
payment obligation, a partner's or related
person's payment obligation is stated as a
fixed percentage of every dollar of the
partnership liability to which such obliga-
tion relates, or there is a right of propor-
tionate contribution running between
partners or related persons who are co-
obligors with respect to a payment obli-
gation for which each of them is jointly
and severally liable.

(3) Benefited party defined. For pur-
poses of § 1.752-2, a benefited party is the
person to whom a partner or related per-
son has the payment obligation.

(D) Disclosure of bottom dollar pay-
ment obligations. A partnership must dis-
close to the Internal Revenue Service a
bottom dollar payment obligation (includ-
ing a bottom dollar payment obligation
that is recognized under paragraph
(b)(3)(ii)(B) of this section) with respect
to a partnership liability on a completed
Form 8275, Disclosure Statement, or suc-
cessor form, attached to the return of the
partnership for the taxable year in which
the bottom dollar payment obligation is
undertaken or modified, that includes all
of the following information:

(1) A caption identifying the statement
as a disclosure of a bottom dollar payment
obligation under section 752.

(2) An identification of the payment
obligation with respect to which disclo-
sure is made.

(3) The amount of the payment obliga-
tion.

(4) The parties to the payment obliga-
tion.

(5) A statement of whether the pay-
ment obligation is treated as recognized
for purposes of this paragraph (b)(3).

(6) If the payment obligation is recog-
nized under paragraph (b)(3)(ii)(B) of this

section, the facts and circumstances that
clearly establish that a partner or related
person is liable for up to 90 percent of the
partner's or related person's initial pay-
ment obligation and, but for an indemnity,
reimbursement agreement, or similar ar-
rangement, the partner's or related per-
son's initial payment obligation would
have been recognized under this para-
graph (b)(3).

(iii) Special rule for indemnities and
reimbursement agreements. An indem-
nity, reimbursement agreement, or similar
arrangement will be recognized under this
paragraph (b)(3) only if, before taking into
account the indemnity, reimbursement
agreement, or similar arrangement, the in-
demnitee's or other benefited party's pay-
ment obligation is recognized under this
paragraph (b)(3), or would be recognized
under this paragraph (b)(3) if such person
were a partner or related person.

(b)(4) through (e) [Reserved]. For fur-
ther guidance, see § 1.752-2(b)(4)
through (e).

(f) Examples 1 through 9 [Reserved].
For further guidance, see § 1.752-2(f) Ex-
amples 1 through 9.

Example 10. Guarantee of first and last dollars.
(i) A, B, and C are equal members of a limited
liability company, ABC, that is treated as a partner-
ship for federal tax purposes. ABC borrows $1,000
from Bank. A guarantees payment of up to $300 of
the ABC liability if any amount of the full $1,000
liability is not recovered by Bank. B guarantees
payment of up to $200, but only if the Bank other-
wise recovers less than $200. Both A and B waive
their rights of contribution against each other.

(ii) Because A is obligated to pay up to $300 if,
and to the extent that, any amount of the $1,000
partnership liability is not recovered by Bank, A's
guarantee is not a bottom dollar payment obligation
under paragraph (b)(3)(ii)(C) of this section. There-
fore, A's payment obligation is recognized under
paragraph (b)(3) of this section. The amount of A's
economic risk of loss under § 1.752-2(b)(1) is $300.

(iii) Because B is obligated to pay up to $200
only if and to the extent that the Bank otherwise
recovers less than $200 of the $1,000 partnership
liability, B's guarantee is a bottom dollar payment
obligation under paragraph (b)(3)(ii)(C) of this sec-
tion and, therefore, is not recognized under para-
graph (b)(3)(ii)(A) of this section. Accordingly, B
bears no economic risk of loss under § 1.752-2(b)(1)
for ABC's liability.

(iv) In sum, $300 of ABC's liability is allocated
to A under § 1.752-2(a), and the remaining $700
liability is allocated to A, B, and C under § 1.752-3.

Example 11. Indemnification of guarantees. (i)
The facts are the same as in Example 10, except that,
in addition, C agrees to indemnify A up to $100 that
A pays with respect to its guarantee and agrees to
indemnify B fully with respect to its guarantee.

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(ii) The determination of whether C's indemnity
is recognized under paragraph (b)(3) of this section
is made without regard to whether C's indemnity
itself causes A's guarantee not to be recognized.
Because A's obligation would be recognized but for
the effect of C's indemnity and C is obligated to pay
A up to the full amount of C's indemnity if A pays
any amount on its guarantee of ABC's liability, C's
indemnity of A's guarantee is not a bottom dollar
payment obligation under paragraph (b)(3)(ii)(C) of
this section and, therefore, is recognized under para-
graph (b)(3) of this section. The amount of C's
economic risk of loss under § 1.752-2(b)(1) for its
indemnity of A's guarantee is $100.

(iii) Because C's indemnity is recognized under
paragraph (b)(3) of this section, A is treated as liable
for $200 only to the extent any amount beyond $100
of the partnership liability is not satisfied. Thus, A is
not liable if, and to the extent, any amount of the
partnership liability is not otherwise satisfied, and
the exception in paragraph (b)(3)(ii)(B) of this sec-
tion does not apply. As a result, A's guarantee is a
bottom dollar payment obligation under paragraph
(b)(3)(ii)(C) of this section and is not recognized
under paragraph (b)(3)(ii)(A) of this section. There-
fore, A bears no economic risk of loss under
§ 1.752-2(b)(1) for ABC's liability.

(iv) Because B's obligation is not recognized
under paragraph (b)(3)(ii) of this section indepen-
dent of C's indemnity of B's guarantee, C's indem-
nity is not recognized under paragraph (b)(3)(iii) of
this section. Therefore, C bears no economic risk of
loss under § 1.752-2(b)(1) for its indemnity of B's
guarantee.

(v) In sum, $100 of ABC's liability is allocated
to C under § 1.752-2(a) and the remaining $900
liability is allocated to A, B, and C under § 1.752-3.

(g) through (j)(1) [Reserved]. For fur-
ther guidance, see § 1.752-2(g) through
(j)(1).

(2) Arrangements tantamount to a
guarantee-(i) In general. Irrespective of
the form of a contractual obligation, the
Commissioner may treat a partner as bear-
ing the economic risk of loss with respect
to a partnership liability, or a portion
thereof, to the extent that-

(A) The partner or related person un-
dertakes one or more contractual obliga-
tions so that the partnership may obtain or
retain a loan;

(B) The contractual obligations of the
partner or related person significantly re-
duce the risk to the lender that the part-
nership will not satisfy its obligations un-
der the loan, or a portion thereof; and

(C) With respect to the contractual ob-
ligations described in paragraphs (j)(2)
(i)(A) and (B) of this section-

(1) One of the principal purposes of
using the contractual obligations is to at-
tempt to permit partners (other than those
who are directly or indirectly liable for the

obligation) to include a portion of the loan
in the basis of their partnership interests;
or

(2) Another partner, or a person related
to another partner, enters into a payment
obligation and a principal purpose of the
arrangement is to cause the payment ob-
ligation described in paragraphs (j)(2)
(i)(A) and (B) of this section to be disre-
garded under paragraph (b)(3) of this sec-
tion.

(ii) Economic risk of loss. For purposes
of this paragraph (j)(2), partners are con-
sidered to bear the economic risk of loss
for a liability in accordance with their
relative economic burdens for the liability
pursuant to the contractual obligations.
For example, a lease between a partner
and a partnership that is not on commer-
cially reasonable terms may be tanta-
mount to a guarantee by the partner of the
partnership liability.

(j)(3) through (l)(1) [Reserved]. For
further guidance, see § 1.752-2(j)(3)
through (l)(1).

(2) Paragraph (b)(3), paragraph (f) Ex-
amples 10 and 11, and paragraph (j)(2) of
this section apply to liabilities incurred or
assumed by a partnership and payment
obligations imposed or undertaken with
respect to a partnership liability on or after
October 5, 2016, other than liabilities in-
curred or assumed by a partnership and
payment obligations imposed or under-
taken pursuant to a written binding con-
tract in effect prior to that date. Partner-
ships may apply paragraph (b)(3),
paragraph (f) Examples 10 and 11, and
paragraph (j)(2) of this section to all of
their liabilities as of the beginning of the
first taxable year of the partnership ending
on or after October 5, 2016. The rules
applicable to liabilities incurred or as-
sumed (or subject to a written binding
contract in effect) prior to October 5, 2016
are contained in § 1.752-2 in effect prior
to October 5, 2016 (see 26 CFR part 1
revised as of April 1, 2016).

(3) If a partner has a share of a recourse
partnership liability under § 1.752-2(a) as
a result of bearing the economic risk of
loss under § 1.752-2(b) immediately prior
to October 5, 2016 (Transition Partner),
the partnership (Transition Partnership)
may choose not to apply paragraph (b)(3),
paragraph (f) Examples 10 and 11, and
paragraph (j)(2)(i)(C)(2) of this section to

the extent the amount of the Transition
Partner's share of liabilities under
§ 1.752-2(a) as a result of bearing the
economic risk of loss under § 1.752-2(b)
immediately prior to October 5, 2016 ex-
ceeds the amount of the Transition Part-
ner's adjusted basis in its partnership in-
terest as determined under § 1.705-1 at
such time (Grandfathered Amount). A
Transition Partner that is a partnership, S
corporation, or a business entity disre-
garded as an entity separate from its
owner under section 856(i) or 1361(b)(3)
or §§ 301.7701-1 through 301.7701-3 of
this chapter ceases to qualify as a Transi-
tion Partner if the direct or indirect own-
ership of that Transition Partner changes
by 50 percent or more. The Transition
Partnership may continue to apply the
rules under § 1.752-2 in effect prior to
October 5, 2016, with respect to a Tran-
sition Partner for payment obligations de-
scribed in § 1.752-2(b) to the extent of the
Transition Partner's adjusted Grandfa-
thered Amount for the seven-year period
beginning October 5, 2016. The termina-
tion of a Transition Partnership under sec-
tion 708(b)(1)(B) and applicable regula-
tions does not affect the Grandfathered
Amount of a Transition Partner that re-
mains a partner in the new partnership (as
described in § 1.708-1(b)(4)), and the
new partnership is treated as a continua-
tion of the Transition Partnership for pur-
poses of this paragraph (l)(3). However,
a Transition Partner's Grandfathered
Amount is reduced (not below zero), but
never increased by-

(i) Upon the sale of any property by the
Transition Partnership, an amount equal to
the excess of any gain allocated for fed-
eral income tax purposes to the Transition
Partner by the Transition Partnership (in-
cluding amounts allocated under section
704(c) and applicable regulations) over
the product of the total amount realized by
the Transition Partnership from the prop-
erty sale multiplied by the Transition Part-
ner's percentage interest in the partner-
ship; and

(ii) An amount equal to any decrease in
the Transition Partner's share of liabilities
to which the rules of this paragraph (l)(3)
apply, other than by operation of para-
graph (l)(3)(i) of this section.

(m) Expiration date. This section ex-
pires on October 4, 2019.

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John Dalrymple,
Deputy Commissioner
for Services and Enforcement.

Approved: August 29, 2016.

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

(Filed by the Office of the Federal Register on October 4,
2016, 8:45 a.m., and published in the issue of the Federal
Register for October 5, 2016, 81 F.R.69282)

DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1

T.D. 9800

### Covered Asset Acquisitions

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Temporary regulations.

SUMMARY: This document contains
temporary Income Tax Regulations under
section 901(m) of the Internal Revenue
Code (Code) with respect to transactions
that generally are treated as asset acquisi-
tions for U.S. income tax purposes and
either are treated as stock acquisitions or
are disregarded for foreign income tax
purposes. These regulations are necessary
to provide guidance on applying section
901(m). The text of the temporary regula-
tions also serves in part as the text of
the proposed regulations under section
901(m) (REG-129128-14) published in
the Proposed Rules section of this issue of
the Bulletin.

DATES: Effective date: These regulations
are effective on December 7, 2016.
Applicability dates: For dates of applica-
bility, see §§ 1.901(m)-1T(b), 1.901(m)-
2T(f), 1.901(m)-4T(g), 1.901(m)-5T(i),
and 1.901(m)-6T(d).

FOR FURTHER INFORMATION CON-
TACT: Jeffrey L. Parry, (202) 317-6936
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

I. Section 901(m)

Section 212 of the Education Jobs and
Medicaid Assistance Act (EJMAA), en-
acted on August 10, 2010 (Public Law
111-226), added section 901(m) to the
Code. Section 901(m)(1) provides that, in
the case of a covered asset acquisition
(CAA), the disqualified portion of any
foreign income tax determined with re-
spect to the income or gain attributable to
relevant foreign assets (RFAs) will not be
taken into account in determining the for-
eign tax credit allowed under section
901(a), and in the case of foreign income
tax paid by a section 902 corporation (as
defined in section 909(d)(5)), will not be
taken into account for purposes of section
902 or 960. Instead, the disqualified por-
tion of any foreign income tax (the dis-
qualified tax amount) is permitted as a
deduction. See section 901(m)(6).

Under section 901(m)(2), a CAA is (i)
a qualified stock purchase (as defined in
section 338(d)(3)) to which section 338(a)
applies; (ii) any transaction that is treated
as an acquisition of assets for U.S. income
tax purposes and as the acquisition of
stock of a corporation (or is disregarded)
for purposes of a foreign income tax; (iii)
any acquisition of an interest in a partner-
ship that has an election in effect under
section 754; and (iv) to the extent pro-
vided by the Secretary, any other similar
transaction.

Section 901(m)(3)(A) provides that the
term "disqualified portion" means, with
respect to any CAA, for any taxable year,
the ratio (expressed as a percentage) of (i)
the aggregate basis differences (but not
below zero) allocable to such taxable year
with respect to all RFAs; divided by (ii)
the income on which the foreign income
tax referenced in section 901(m)(1) is
determined. If the taxpayer fails to sub-
stantiate the income on which the foreign
income tax is determined to the satisfac-
tion of the Secretary, such income will be
determined by dividing the amount of
such foreign income tax by the highest
marginal tax rate applicable to the taxpay-
er's income in the relevant jurisdiction.

Section 901(m)(3)(B)(i) provides the
general rule that the basis difference with
respect to any RFA will be allocated to

taxable years using the applicable cost
recovery method for U.S. income tax pur-
poses. Section 901(m)(3)(B)(ii) provides
that, except as otherwise provided by the
Secretary, if there is a disposition of an
RFA, the basis difference allocated to the
taxable year of the disposition will be the
excess of the basis difference of such asset
over the aggregate basis difference of
such asset that has been allocated to all
prior taxable years. The statute further
provides that no basis difference with re-
spect to such asset will be allocated to any
taxable year thereafter.

Section 901(m)(3)(C)(i) provides that
basis difference means, with respect to
any RFA, the excess of (i) the adjusted
basis of such asset immediately after the
CAA, over (ii) the adjusted basis of such
asset immediately before the CAA. If the
adjusted basis of an RFA immediately be-
fore the CAA exceeds the adjusted basis
of the RFA immediately after the CAA
(that is, where the adjusted basis of an
asset with a built-in loss is reduced in a
CAA), such excess is taken into account
as a basis difference of a negative amount.
See section 901(m)(3)(C)(ii).

Section 901(m)(4) provides that an
RFA means, with respect to a CAA, an
asset (including goodwill, going concern
value, or other intangible) with respect to
such acquisition if income, deduction,
gain, or loss attributable to such asset is
taken into account in determining the for-
eign income tax referenced in section
901(m)(1).

Section 901(m)(7) provides that the
Secretary may issue regulations or other
guidance as is necessary or appropriate to
carry out the purposes of section 901(m).

II. Notices 2014-44 and 2014-45

The Department of the Treasury (Trea-
sury Department) and the IRS issued No-
tice 2014-44 (2014-32 I.R.B 270 (July
21, 2014)) and Notice 2014-45 (2014-34
I.R.B. 388 (July 29, 2014)), announcing
the intent to issue regulations addressing
the application of section 901(m) to dis-
positions of RFAs following CAAs and to
CAAs described in section 901(m)(2)(C)
(regarding section 754 elections).

The notices were issued in response to
certain taxpayers engaging in transactions
shortly after a CAA with the intention of
invoking the application of the statutory

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disposition rule under section 901(m)
(3)(B)(ii) to avoid the purposes of section
901(m). To address these transactions,
Notice 2014-44 described the definition
of disposition that would be set forth in
future regulations, as well as the rules for
determining the portion of basis differ-
ence that would be taken into account
upon a disposition of an RFA (the dispo-
sition amount). In addition, Notice
2014-44 described the computation of
basis difference and disposition amount
with respect to an RFA that is subject to a
section 743(b) CAA. Notice 2014-44
also announced that future regulations
would provide successor rules for the con-
tinued application of section 901(m) after
a subsequent transfer of an RFA with re-
maining basis difference. Notice 2014-44
further provided that future regulations
would provide that, if an asset is an RFA
with respect to two section 743(b) CAAs
involving the same partnership interest,
the RFA will be treated as having no
remaining basis difference with respect to
the first section 743(b) CAA if the basis
difference with respect to the second sec-
tion 743(b) CAA is determined indepen-
dently from the first section 743(b) CAA.
In this regard, see generally § 1.743-1(f)
and proposed § 1.743-1(f)(2).

Notice 2014-44 provided that the fu-
ture regulations described therein would
apply (i) concerning dispositions, to dis-
positions occurring on or after July 21,
2014 (the date Notice 2014-44 was is-
sued), (ii) concerning section 743(b)
CAAs, to section 743(b) CAAs occurring
on or after July 21, 2014, unless a tax-
payer consistently applied those provi-
sions to all section 743(b) CAAs occur-
ring on or after January 1, 2011, and (iii)
concerning successor rules, to remaining
basis difference with respect to an RFA as
of July 21, 2014, and any basis difference
with respect to an RFA that arises in a
CAA occurring on or after July 21, 2014.
Notice 2014-45 provided that the future
regulations described in Notice 2014-44
also would apply to determine the tax
consequences under section 901(m) of an
entity classification election made under
§ 301.7701-3 that is filed on or after July
29, 2014 (the date Notice 2014-45 was
issued), including whether a disposition
results from the election for purposes of
section 901(m) and the treatment of any

remaining basis difference that results
from such an election.

III. Proposed Regulations Under Section
901(m)

Proposed regulations under section
901(m) are being issued at the same time
as these temporary regulations. In addition
to cross-referencing these temporary reg-
ulations, the proposed regulations provide
guidance under section 901(m) concern-
ing issues not addressed in the temporary
regulations. Consulting the preamble to
the proposed regulations is recommended
for a better understanding of how these
temporary regulations are intended to
work.

### Explanation of Provisions

#### I. Overview

Section 1.901(m)-1T provides defini-
tions that apply for purposes of the tem-
porary regulations. Section 1.901(m)-2T
identifies the transactions that are CAAs
and the assets that are RFAs with respect
to a CAA. Section 1.901(m)-4T provides
the general rule for determining basis dif-
ference with respect to an RFA under sec-
tion 901(m)(3)(C), as well as a special
rule for determining basis difference with
respect to an RFA that arises as a result of
an acquisition of an interest in a partner-
ship that has made a section 754 election
(section 743(b) CAA). Section 1.901
(m)-5T provides rules for taking into ac-
count basis difference under the applica-
ble cost recovery method or as a result of
a disposition of an RFA. Section
1.901(m)-6T provides successor rules for
applying section 901(m) to subsequent
transfers of RFAs that have basis differ-
ence that has not yet been fully taken into
account.

#### II. Effective/Applicability Dates

The applicability dates of the tempo-
rary regulations relate back to the issuance
of Notices 2014-44 and 2014-45. Ac-
cordingly, the temporary regulations ap-
ply to CAAs occurring on or after July 21,
2014, and to CAAs occurring before that
date resulting from an entity classification
election made under § 301.7701-3 that is
filed on or after July 29, 2014, and that is
effective on or before July 21, 2014 (re-

ferred to as the general applicability date).
The temporary regulations also apply to
CAAs occurring on or after January 1,
2011, and before the general applicability
date (the transition period), but only if the
basis difference within the meaning of
section 901(m)(3)(C)(i) (statutory basis
difference) in one or more RFAs with
respect to such a CAA had not been fully
taken into account under section
901(m)(3)(B) either as of July 21, 2014,
or, in the case of an entity classification
election made under § 301.7701-3 that is
filed on or after July 29, 2014, and that is
effective on or before July 21, 2014, prior
to the transactions that are deemed to oc-
cur under § 301.7701-3(g) as a result of
the change in classification.

Taxpayers also may choose to consis-
tently apply § 1.901(m)-4T(d)(1) (regard-
ing the determination of basis difference
in an RFA with respect to a section 743(b)
CAA) to all section 743(b) CAAs occur-
ring on or after January 1, 2011.

## III. CAAs and RFAs

Section 1.901(m)-2T(b) identifies the
transactions that are CAAs under section
901(m)(2)(A) through (C). Section 1.901
(m)-2T(c) provides that, with respect to a
foreign income tax and a CAA, an RFA is
any asset (including goodwill, going con-
cern value, or other intangible) subject to
the CAA that is relevant in determining
foreign income for purposes of the foreign
income tax. An asset is subject to a CAA,
if, for example (i) in the case of a qualified
stock purchase of a target corporation (as
defined in section 338(d)(3)) to which sec-
tion 338(a) applies, "new" target is treated
as purchasing the asset from "old" target;
(ii) in the case of a taxable acquisition of
a disregarded entity that is treated as an
acquisition of stock for foreign income tax
purposes, the asset is owned by the disre-
gard entity at that time of the purchase and
therefore the buyer is treated as purchas-
ing the asset from the seller; and (iii) in
the case of a section 743(b) CAA, the
asset is attributable to the partnership in-
terest transferred in the section 743(b)
CAA.

Section 1.901(m)-2T(d) provides that
the statutory definitions under section
901(m)(2) and 901(m)(4) apply to deter-
mine whether a transaction that occurred
during the transition period is a CAA and

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which assets are RFAs with respect to
those CAAs, respectively.

IV. Determining Basis Difference with
Respect to an RFA

A basis difference is computed sepa-
rately with respect to each foreign income
tax for which an asset is an RFA. Consis-
tent with section 901(m)(3)(C), § 1.901
(m)-4T(b) provides the general rule that
basis difference with respect to an RFA is
the U.S. basis in the RFA immediately
after the CAA, less the U.S. basis in the
RFA immediately before the CAA. If,
however, an asset is an RFA with respect
to a section 743(b) CAA, § 1.901(m)-
4T(d) provides that basis difference with
respect to the RFA is the resulting basis
adjustment under section 743(b) that is
allocated to the RFA under section 755.

Section 1.901(m)-2T(e) "resets" the
basis difference in an RFA with respect to
a CAA that occurred during the transition
period by defining basis difference in the
RFA as the portion of statutory basis dif-
ference that had not been taken into ac-
count under section 901(m)(3)(B) either
as of July 21, 2014, or, in the case of an
entity classification election made under
§ 301.7701-3 that is filed on or after July
29, 2014, and that is effective on or before
July 21, 2014, prior to the transactions
that are deemed to occur under
§ 301.7701-3(g) as a result of the change
in classification. This is the basis differ-
ence in the RFA for the period to which
the temporary regulations apply.

### V. Basis Difference Taken into Account

Section 1.901(m)-5T provides rules
for determining the amount of basis dif-
ference with respect to an RFA that is
taken into account in a given U.S. taxable
year (allocated basis difference). The
amount of basis difference taken into ac-
count in a U.S. taxable year is used to
compute a disqualified tax amount for the
U.S. taxable year. Basis difference is
taken into account in two ways: under an
applicable cost recovery method or as a
result of a disposition of the RFA. If an
asset is an RFA with respect to more than
one foreign income tax, basis difference
with respect to each foreign income tax is
separately taken into account under
§ 1.901(m)-5T.

A. Determining cost recovery amounts

Consistent with section 901(m)(3)
(B)(i), § 1.901(m)-5T(b)(2) provides that
a cost recovery amount for an RFA is
determined by applying an applicable cost
recovery method to the basis difference
rather than to the U.S. basis of the RFA.

## B. Determining disposition amounts

### 1. Overview

Section 901(m)(3)(B)(ii) provides that,
except as otherwise provided by the Sec-
retary, if there is a disposition of an RFA,
the basis difference allocated to the U.S.
taxable year of the disposition shall be the
excess of the basis difference of such RFA
over the total amount of such basis differ-
ence that has been allocated to all prior
U.S. taxable years (unallocated basis dif-
ference). This result is appropriate when
all the gain or loss from the disposition is
recognized for both U.S. and foreign in-
come tax purposes. In other cases, how-
ever, a disposition may not be the appro-
priate time for all of the unallocated basis
difference to be taken into account. For
example, it may not be appropriate for all
of the unallocated basis difference to be
taken into account upon a disposition that
is fully taxable for U.S. income tax pur-
poses but not for foreign income tax pur-
poses. Accordingly, under the specific au-
thority granted to the Secretary with
respect to dispositions, these temporary
regulations provide rules to determine
when less than all of the unallocated basis
difference is taken into account as a result
of a disposition.

### 2. Definition of disposition

Section 1.901(m)-1T(a)(10) defines a
disposition for purposes of section 901(m)
as an event that results in gain or loss
being recognized with respect to an RFA
for purposes of U.S. income tax or foreign
income tax, or both. Thus, the definition
excludes certain transfers that might oth-
erwise be considered dispositions under
the ordinary meaning of that term. For
example, an entity classification election
by an RFA owner that results in a tax-free
deemed liquidation for U.S. income tax
purposes but that is disregarded for for-

eign income tax purposes does not result
in a disposition of the RFAs under section
901(m), because no gain or loss is recog-
nized for U.S. or foreign income tax pur-
poses with respect to the distribution of
the RFAs in the deemed liquidation. This
is the case even though the deemed liqui-
dation might otherwise be considered a
"disposition" of assets under other provi-
sions of the Code.

## 3. Determining a disposition amount

Section 1.901(m)-5T(c)(2) provides
rules for determining a disposition
amount. If a disposition of an RFA is fully
taxable for U.S. and foreign income tax
purposes, the disposition amount will be
any remaining unallocated basis differ-
ence with respect to that RFA. This is
because there generally will no longer be
a disparity in the U.S. basis and the for-
eign basis of the RFA.

If a disposition is not fully taxable for
both U.S. and foreign income tax pur-
poses, generally there will continue to be
a disparity in the U.S. basis and the for-
eign basis following the disposition, and it
will be appropriate for the RFA to con-
tinue to have unallocated basis difference.
To the extent that the disparity in the U.S.
basis and the foreign basis is reduced as a
result of the disposition, however, a por-
tion of the unallocated basis difference
(or, in certain cases, all of the unallocated
basis difference) should be taken into ac-
count. Whether the disposition reduces the
basis disparity will depend on whether the
basis difference is positive or negative and
the jurisdiction in which gain or loss is
recognized.

If an RFA has a positive basis differ-
ence, a reduction in basis disparity gener-
ally will occur upon a disposition of the
RFA if (i) a foreign disposition gain is
recognized, which generally results in an
increase in the foreign basis of the RFA,
or (ii) a U.S. disposition loss is recog-
nized, which generally results in a de-
crease in the U.S. basis of the RFA. Ac-
cordingly, if an RFA has a positive basis
difference, the disposition amount equals
the lesser of (i) any foreign disposition
gain plus any U.S. disposition loss (for
this purpose, expressed as a positive
amount), or (ii) unallocated basis differ-
ence. See § 1.901(m)-5T(c)(2)(ii)(A).

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If an RFA has a negative basis differ-
ence, a reduction in basis disparity gener-
ally will occur upon a disposition of the
RFA if (i) a foreign disposition loss is
recognized, which generally results in a
decrease in the foreign basis of the RFA,
or (ii) a U.S. disposition gain is recog-
nized, which generally results in an in-
crease in the U.S. basis of the RFA. Ac-
cordingly, if an RFA has a negative basis
difference, the disposition amount equals
the greater of (i) any U.S. disposition gain
(for this purpose, expressed as a negative
amount) plus any foreign disposition loss,
or (ii) unallocated basis difference. See
§ 1.901(m)-5T(c)(2)(ii)(B).

For the avoidance of doubt, the deter-
mination of whether there is a disposition
for U.S. income tax purposes, and the
amount of U.S. disposition gain or U.S.
disposition loss, is made without regard to
whether gain or loss is deferred or disal-
lowed or otherwise not taken into account
currently (for example, see section 267,
which defers or disallows certain recog-
nized losses, and § 1.1502-13, which pro-
vides rules for taking into account items
of income, gain, deduction, and loss of
members of a U.S. consolidated group
from intercompany transactions). This
principle also applies if foreign law has an
equivalent concept whereby gain or loss
that is realized and recognized is deferred
or disallowed.

If an asset is an RFA by reason of a
section 743(b) CAA and subsequently
there is a disposition of the RFA, then for
purposes of determining the disposition
amount, foreign disposition gain or for-
eign disposition loss means the amount of
gain or loss recognized for purposes of a
foreign income tax on the disposition of
the RFA that is allocable to the partner-
ship interest that was transferred in the
section 743(b) CAA. See § 1.901(m)-
5T(c)(2)(iii). In addition, U.S. disposition
gain or U.S. disposition loss means the
amount of gain or loss recognized for U.S.
income tax purposes on the disposition of
the RFA that is allocable to the partner-
ship interest that was transferred in the
section 743(b) CAA, taking into account
the basis adjustment under section 743(b)
that was allocated to the RFA under sec-
tion 755 in the section 743(b) CAA. See
id.

VI. Successor Rules for Unallocated
Basis Difference

### A. General rules

Section 1.901(m)-6T(b) provides that
section 901(m) continues to apply to any
unallocated basis difference with respect
to an RFA after there is a transfer of the
RFA for U.S. income tax purposes (suc-
cessor transaction), regardless of whether
the transfer is a disposition, a CAA, or a
non-taxable transaction. A successor
transaction does not occur if, as a result of
the transfer of an RFA, the entire unallo-
cated basis difference is taken into ac-
count because, for example, the transfer
results in all realized gain or loss in the
RFA being recognized for U.S. and for-
eign income tax purposes.

Notice 2014-44 stated that the Trea-
sury Department and the IRS are continu-
ing to study whether and to what extent
section 901(m) should apply to an asset
received in exchange for an RFA in a
transaction in which the U.S. basis of the
asset is determined by reference to the
U.S. basis of the transferred RFA. The
Treasury Department and the IRS have
determined that an asset should not be-
come an RFA solely because the U.S.
basis of that asset is determined by refer-
ence to the U.S. basis of an RFA for
which the asset is exchanged in a succes-
sor transaction. Accordingly, for example,
if, in a successor transaction, an RFA
owner transfers an RFA to a corporation
in a transfer to which section 351 applies,
the stock of the transferee corporation re-
ceived is not an RFA even though the U.S.
basis of the stock is determined under
section 358 by reference to the U.S. basis
of the RFA transferred.

## B. Successor transactions that are CAAs

An asset may be an RFA with respect
to multiple CAAs if a successor transac-
tion is also a CAA (subsequent CAA). In
this case, the subsequent CAA may give
rise to additional basis difference. Section
1.901(m)-6T(b)(4)(i) provides generally
that the unallocated basis difference with
respect to a CAA that occurred prior to the
subsequent CAA (referred to in the regu-
lations as a "prior CAA") will continue to

be taken into account under section
901(m) after the subsequent CAA.

Section 1.901(m)-6T(b)(4)(iii) pro-
vides an exception to the general rule if an
RFA is subject to two section 743(b)
CAAs (referred to in the regulations as a
"prior section 743(b) CAA" and a "sub-
sequent section 743(b) CAA"). In this
case, to the extent the same partnership
interest is transferred in the section 743(b)
CAAs, the RFA will be treated as having
no unallocated basis difference with re-
spect to the prior section 743(b) CAA if
basis difference for the subsequent section
743(b) CAA is determined independently
from the prior section 743(b) CAA. In this
regard, see generally § 1.743-1(f) and
proposed § 1.743-1(f)(2). If the subse-
quent section 743(b) CAA results from
the acquisition of only a portion of the
partnership interest acquired in the prior
section 743(b) CAA, the transferor must
equitably apportion the unallocated basis
difference attributable to the prior section
743(b) CAA between the portion of the
interest retained and the portion of the in-
terest transferred. With respect to the por-
tion transferred, the RFA will be treated as
having no unallocated basis difference at-
tributable to the prior section 743(b)
CAA.

### VII. Definition of Foreign Income Tax

For purposes of section 901(m), the
temporary regulations define "foreign in-
come tax" as any income, war profits, or
excess profits tax for which a credit is
allowable under section 901 or 903, other
than any withholding tax determined on a
gross basis as described in section
901(k)(1)(B). The Treasury Department
and the IRS have determined that a with-
holding tax should not be subject to dis-
allowance under section 901(m) because a
withholding tax is a gross basis tax that is
generally unaffected by changes in asset
basis.

## Effect on Other Documents

The following publications are obso-
lete as of December 7, 2016:

Notice 2014-44 (2014-32 I.R.B. 270)
and Notice 2014-45 (2014-34 I.R.B.
388).

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## Special Analyses

Certain IRS regulations, including
these, are exempt from the requirements
of Executive Order 12866, as supple-
mented and reaffirmed by Executive Or-
der 13563. Therefore, a regulatory impact
assessment is not required. For the appli-
cability of the Regulatory Flexibility Act
(5 U.S.C. chapter 6), refer to the Special
Analyses section of the preamble of the
cross-referenced notice of proposed rule-
making published in this issue of the Fed-
eral Register. Pursuant to section 7805(f)
of the Internal Revenue Code, these reg-
ulations has been submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its
impact on small businesses.

## Drafting Information

The principal author of these regula-
tions is Jeffrey L. Parry of the Office of
Associate Chief Counsel (International).
However, other personnel from the Trea-
sury Department and the IRS participated
in their development.

* * * * *

## 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 entries in
numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *
Sections 1.901(m)-1T through -8T
also issued under 26 U.S.C. 901(m)(7).
Section 1.901(m)-5T also issued under
26 U.S.C. 901(m)(3)(B)(ii). * * *

Par. 2. Section 1.901(m)-1T is added
to read as follows:

### § 1.901(m)-1T Definitions (temporary).

(a) Definitions. For purposes of section
901(m), this section, and §§ 1.901(m)-2T
through 1.901(m)-8T, the following def-
initions apply:

(1)-(5) [Reserved].

(6) The term basis difference has the
meaning provided in § 1.901(m)-4T.

(7) The term cost recovery amount has
the meaning provided in § 1.901(m)-
5T(b)(2).

(8) The term covered asset acquisition
(or CAA) has the meaning provided in
§ 1.901(m)-2T.

(9) [Reserved].

(10) The term disposition means an
event (for example, a sale, abandonment,
or mark-to-market event) that results in
gain or loss being recognized with respect
to an RFA for purposes of U.S. income
tax or a foreign income tax, or both.

(11) The term disposition amount has
the meaning provided in § 1.901(m)-
5T(c)(2).

(12) [Reserved].

(13) The term disregarded entity
means an entity that is disregarded as an
entity separate from its owner, as de-
scribed in § 301.7701-2(c)(2)(i) of this
chapter.

(14) The term fiscally transparent en-
tity means an entity, including a disre-
garded entity, that is fiscally transparent
under the principles of § 1.894-1(d)(3)
for purposes of U.S. income tax or a for-
eign income tax (or both).

(15)-(17) [Reserved].

(18) The term foreign disposition gain
means, with respect to a foreign income
tax, the amount of gain recognized on a
disposition of an RFA in determining for-
eign income, regardless of whether the
gain is deferred or otherwise not taken
into account currently. Notwithstanding
the foregoing, if after a section 743(b)
CAA there is a disposition of an asset that
is an RFA with respect to that section
743(b) CAA, foreign disposition gain has
the meaning provided in § 1.901(m)-
5T(c)(2)(iii).

(19) The term foreign disposition loss
means, with respect to a foreign income
tax, the amount of loss recognized on a
disposition of an RFA in determining for-
eign income, regardless of whether the
loss is deferred or disallowed or otherwise
not taken into account currently. Notwith-
standing the foregoing, if after a section
743(b) CAA there is a disposition of an
asset that is an RFA with respect to that
section 743(b) CAA, foreign disposition
loss has the meaning provided in
§ 1.901(m)-5T(c)(2)(iii).

(20) The term foreign income means,
with respect to a foreign income tax, the

taxable income (or loss) reflected on a
foreign tax return (as properly amended or
adjusted), even if the taxable income (or
loss) is reported by an entity that is a
fiscally transparent entity for purposes of
the foreign income tax. If, however, for-
eign law imposes tax on the combined
income (within the meaning of § 1.901-
2(f)(3)(ii)) of two or more foreign payors,
foreign income means the combined tax-
able income (or loss) of such foreign pay-
ors, regardless of whether such income (or
loss) is reflected on a single foreign tax
return.

(21) The term foreign income tax
means an income, war profits, or excess
profits tax for which a credit is allowable
under section 901 or 903, except that it
does not include any withholding tax de-
termined on a gross basis as described in
section 901(k)(1)(B).

(22)-(25) [Reserved].

(26) The term prior CAA has the mean-
ing provided in § 1.901(m)-6T(b)(2).

(27) The term prior section 743(b)
CAA has the meaning provided in
§ 1.901(m)-6T(b)(4)(iii).

(28) The term relevant foreign asset
(or RFA) has the meaning provided in
§ 1.901(m)-2T.

(29-(32) [Reserved].

(33) The term section 338 CAA has the
meaning provided in § 1.901(m)-
2T(b)(1).

(34) The term section 743(b) CAA has
the meaning provided in § 1.901(m)-
2T(b)(3).

(35) [Reserved].

(36) The term subsequent CAA has the
meaning provided in § 1.901(m)-
6T(b)(4)(i).

(37) The term subsequent section
743(b) CAA has the meaning provided in
§ 1.901(m)-6T(b)(4)(iii).

(38) The term successor transaction
has the meaning provided in § 1.901(m)-
6T(b)(2).

(39) [Reserved].

(40) The term unallocated basis differ-
ence means, with respect to an RFA and a
foreign income tax, the basis difference
reduced by the sum of the cost recovery
amounts and the disposition amounts that
have been computed under § 1.901(m)-
5T.

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(41) The term U.S. basis means the
adjusted basis of an asset determined for
U.S. income tax purposes.

(42) [Reserved].

(43) The term U.S. disposition gain
means the amount of gain recognized for
U.S. income tax purposes on a disposition
of an RFA, regardless of whether the gain
is deferred or otherwise not taken into
account currently. Notwithstanding the
foregoing, if after a section 743(b) CAA
there is a disposition of an asset that is an
RFA with respect to that section 743(b)
CAA, U.S. disposition gain has the mean-
ing provided in § 1.901(m)-5T(c)(2)(iii).

(44) The term U.S. disposition loss
means the amount of loss recognized for
U.S. income tax purposes on a disposition
of an RFA, regardless of whether the loss
is deferred or disallowed or otherwise not
taken into account currently. Notwith-
standing the foregoing, if after a section
743(b) CAA there is a disposition of an
asset that is an RFA with respect to that
section 743(b) CAA, U.S. disposition loss
has the meaning provided in § 1.901(m)-
5T(c)(2)(iii).

(45) The term U.S. taxable year means
a taxable year as defined in section
7701(a)(23).

(b) Effective/applicability date. (1)
[Reserved].

(2) Paragraphs (a)(6), (7), (8), (10),
(11), (13), (14), (18), (19), (20), (21), (26),
(27), (28), (33), (34), (36), (37), (38), (40),
(41), (43), (44), and (45) of this section
apply to CAAs occurring on or after July
21, 2014, and to CAAs occurring before
that date resulting from an entity classifi-
cation election made under § 301.7701-3
that is filed on or after July 29, 2014, and
that is effective on or before July 21,
2014. Paragraphs (a)(6), (7), (8), (10),
(11), (13), (14), (18), (19), (20), (21), (26),
(27), (28), (33), (34), (36), (37), (38), (40),
(41), (43), (44), and (45) of this section
also apply to CAAs occurring on or after
January 1, 2011, and before July 21, 2014,
other than CAAs occurring before July 21,
2014, resulting from an entity classifica-
tion election made under § 301.7701-3
that is filed on or after July 29, 2014, and
that is effective on or before July 21,
2014, but only if the basis difference
(within the meaning of section 901(m)
(3)(C)(i)) in one or more RFAs with re-
spect to the CAA had not been fully taken

into account under section 901(m)(3)(B)
either as of July 21, 2014, or, in the case
of an entity classification election made
under § 301.7701-3 that is filed on or after
July 29, 2014, and that is effective on or
before July 21, 2014, prior to the transac-
tions that are deemed to occur under
§ 301.7701-3(g) as a result of the change
in classification.

(3) [Reserved].

(c) Expiration date. The applicability
of this section expires on December 6,
2019.

Par. 3. Section 1.901(m)-2T is added
to read as follows:

§ 1.901(m)-2T Covered asset

acquisitions and relevant foreign assets
(temporary).

(a) In general. Paragraph (b) of this
section sets forth the transactions that are
covered asset acquisitions (or CAAs).
Paragraph (c) of this section provides
rules for identifying assets that are rele-
vant foreign assets (or RFAs) with respect
to a CAA. Paragraph (d) of this section
provides special rules for identifying
CAAs and RFAs with respect to transac-
tions to which paragraphs (b) and (c) of
this section do not apply. Paragraph (e)
of this section provides examples illustrat-
ing the rules of this section. Paragraph (f)
of this section provides the effective/ap-
plicability date, and paragraph (g) of this
section provides the expiration date.

(b) Covered asset acquisitions. Except
as provided in paragraph (d) of this sec-
tion, the transactions set forth in this para-
graph (b) are CAAs.

(1) A qualified stock purchase (as de-
fined in section 338(d)(3)) to which sec-
tion 338(a) applies (section 338 CAA);

(2) Any transaction that is treated as an
acquisition of assets for U.S. income tax
purposes and as an acquisition of stock of
a corporation (or the transaction is disre-
garded) for foreign income tax purposes;

(3) Any acquisition of an interest in a
partnership that has an election in effect
under section 754 (section 743(b) CAA);

(4)-(6) [Reserved].

(c) Relevant foreign asset-(1) In gen-
eral. Except as provided in paragraph (d)
of this section, an RFA means, with re-
spect to a foreign income tax and a CAA,
any asset (including goodwill, going con-

cern value, or other intangible) subject to
the CAA that is relevant in determining
foreign income for purposes of the foreign
income tax.

(2) RFA status with respect to a foreign
income tax [Reserved].

(3) Subsequent RFA status with respect
to another foreign income tax [Reserved].

(d) Identifying covered asset acquisi-
tions and relevant foreign assets to which
paragraphs (b) and (c) of this section do
not apply. For transactions occurring on or
after January 1, 2011, and before July 21,
2014, other than transactions occurring
before July 21, 2014, resulting from an
entity classification election made under
§ 301.7701-3 of this chapter that is filed
on or after July 29, 2014, and that is
effective on or before July 21, 2014, the
transactions set forth under section
901(m)(2) are CAAs and the assets that
are relevant foreign assets with respect to
the CAA under section 901(m)(4) are
RFAs.

(e) Examples. [Reserved].

(f) Effective/applicability date-(1)
Paragraphs (a), (b)(1) through (3), and
(c)(1) of this section apply to transactions
occurring on or after July 21, 2014, and to
transactions occurring before that date re-
sulting from an entity classification elec-
tion made under § 301.7701-3 of this
chapter that is filed on or after July 29,
2014, and that is effective on or before
July 21, 2014. Paragraph (d) of this sec-
tion applies to transactions occurring on
or after January 1, 2011, and before July
21, 2014, other than transactions occur-
ring before July 21, 2014, resulting from
an entity classification election made un-
der § 301.7701-3 of this chapter that is
filed on or after July 29, 2014, and that is
effective on or before July 21, 2014.

(2)-(3) [Reserved].

(g) Expiration date. The applicability
of this section expires on December 6,
2019.

Par. 4. Section 1.901(m)-3T is added
and reserved to read as follows:

§ 1.901(m)-3T Disqualified tax amount
and aggregate basis difference carryover
(temporary). [Reserved].

Par. 5. Section 1.901(m)-4T is added
to read as follows:

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§ 1.901(m)-4T Determination of basis
difference (temporary).

(a) In general. This section provides
rules for determining for each RFA the
basis difference that arises as a result of a
CAA. A basis difference is computed sep-
arately with respect to each foreign in-
come tax for which an asset subject to a
CAA is an RFA. Paragraph (b) of this
section provides the general rule for de-
termining basis difference that references
only U.S. basis in the RFA. Paragraph (c)
of this section provides for an election to
determine basis difference by reference to
foreign basis and sets forth the procedures
for making the election. Paragraph (d) of
this section provides special rules for de-
termining basis difference in the case of a
section 743(b) CAA. Paragraph (e) of this
section provides a special rule for deter-
mining basis difference in an RFA with
respect to a CAA to which paragraphs (b)
through (d) of this section do not apply.
Paragraph (f) of this section provides ex-
amples illustrating the rules of this sec-
tion. Paragraph (g) of this section provides
the effective/applicability date, and para-
graph (h) of this section provides the ex-
piration date.

(b) General rule. Except as otherwise
provided in paragraphs (c), (d), and (e) of
this section, basis difference is the U.S.
basis in the RFA immediately after the
CAA, less the U.S. basis in the RFA im-
mediately before the CAA. Basis differ-
ence is an attribute that attaches to an
RFA.

(c) Foreign basis election. [Reserved].

(d) Determination of basis difference
in a section 743(b) CAA-(1) In general.
Except as provided in paragraphs (d)(2)
and (e) of this section, if there is a section
743(b) CAA, basis difference is the result-
ing basis adjustment under section 743(b)
that is allocated to the RFA under section
755.

(2) Foreign basis election. [Reserved].

(e) Determination of basis difference in
an RFA with respect to a CAA with re-
spect to which paragraphs (b), (c), and (d)
of this section do not apply. For CAAs
occurring on or after January 1, 2011, and
before July 21, 2014, other than CAAs
occurring before July 21, 2014, resulting
from an entity classification election made
under § 301.7701-3 of this chapter that is

filed on or after July 29, 2014, and that is
effective on or before July 21, 2014, basis
difference in an RFA with respect to the
CAA is the amount of any basis difference
(within the meaning of section 901
(m)(3)(C)(i)) that had not been taken into
account under section 901(m)(3)(B) either
as of July 21, 2014, or, in the case of an
entity classification election made under
§ 301.7701-3 of this chapter that is filed
on or after July 29, 2014, and that is
effective on or before July 21, 2014, prior
to the transactions that are deemed to oc-
cur under § 301.7701-3(g) as a result of
the change in classification.

(f) Examples. [Reserved].

(g) Effective/applicability date. (1)
Paragraphs (a), (b), and (d)(1) of this sec-
tion apply to CAAs occurring on or after
July 21, 2014, and to CAAs occurring
before that date resulting from an entity
classification election made under
§ 301.7701-3 that is filed on or after July
29, 2014, and that is effective on or before
July 21, 2014. Paragraph (e) of this sec-
tion applies to CAAs occurring on or after
January 1, 2011, and before July 21, 2014,
other than CAAs occurring before July 21,
2014, resulting from an entity classifica-
tion election made under § 301.7701-3 of
this chapter that is filed on or after July
29, 2014, and that is effective on or before
July 21, 2014. Taxpayers may, however,
consistently apply paragraph (d)(1) of this
section to all section 743(b) CAAs occur-
ring on or after January 1, 2011. For this
purpose, persons that are related (within
the meaning of section 267(b) or 707(b))
will be treated as a single taxpayer.

(2)-(3) [Reserved].

(h) Expiration date. The applicability
of this section expires on December 6,
2019.

Par. 6. Section 1.901(m)-5T is added
to read as follows:

§ 1.901(m)-5T Basis difference taken
into account (temporary).

(a) In general. [Reserved].

(b) Basis difference taken into account
under applicable cost recovery method-
(1) In general. [Reserved].

(2) Determining a cost recovery
amount-(i) General rule. A cost recov-
ery amount for an RFA is determined by
applying the applicable cost recovery

method to the basis difference rather than
to the U.S. basis.

(ii) U.S. basis subject to multiple cost
recovery methods. [Reserved].

(3) Applicable cost recovery method.
[Reserved].

(c) Basis difference taken into account
as a result of a disposition-(1) In gen-
eral. [Reserved].

(2) Determining a disposition amount-
(i) Disposition is fully taxable for pur-
poses of both U.S. income tax and the
foreign income tax. If a disposition of an
RFA is fully taxable (that is, results in all
gain or loss, if any, being recognized with
respect to the RFA) for purposes of both
U.S. income tax and the foreign income
tax, the disposition amount is equal to the
unallocated basis difference with respect
to the RFA.

(ii) Disposition is not fully taxable for
purposes of U.S. income tax or the foreign
income tax (or both). If the disposition of
an RFA is not fully taxable for purposes
of both U.S. income tax and the foreign
income tax, the disposition amount is de-
termined under this paragraph (c)(2)(ii).
See § 1.901(m)-6T for rules regarding the
continued application of section 901(m) if
the RFA has any unallocated basis differ-
ence after determining the disposition
amount under paragraph (c)(2)(ii)(A) or
(B) of this section, as applicable.

(A) Positive basis difference. If the dis-
position of an RFA is not fully taxable for
purposes of both U.S. income tax and the
foreign income tax, and the RFA has a
positive basis difference, the disposition
amount equals the lesser of:

(1) Any foreign disposition gain plus
any U.S. disposition loss (for this purpose,
expressed as a positive amount), or

(2) Unallocated basis difference with
respect to the RFA.

(B) Negative basis difference. If the
disposition of an RFA is not fully taxable
for purposes of both U.S. income tax and
the foreign income tax, and the RFA has a
negative basis difference, the disposition
amount equals the greater of:

(1) Any U.S. disposition gain (for this
purpose, expressed as a negative amount)
plus any foreign disposition loss, or

(2) Unallocated basis difference with
respect to the RFA.

(iii) Disposition of an RFA after a sec-
tion 743(b) CAA. If an RFA was subject to

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a section 743(b) CAA and subsequently
there is a disposition of the RFA, then, for
purposes of determining the disposition
amount, foreign disposition gain or for-
eign disposition loss are specially defined
to mean the amount of gain or loss recog-
nized for purposes of the foreign income
tax on the disposition of the RFA that is
allocable to the partnership interest that
was transferred in the section 743(b)
CAA. In addition, U.S. disposition gain or
U.S. disposition loss are specially defined
to mean the amount of gain or loss recog-
nized for U.S. income tax purposes on the
disposition of the RFA that is allocable to
the partnership interest that was trans-
ferred in the section 743(b) CAA, taking
into account the basis adjustment under
section 743(b) that was allocated to the
RFA under section 755.

(d) General rules for allocating and
assigning a cost recovery amount or a
disposition amount when the RFA owner
(U.S.) is a fiscally transparent entity. [Re-
served].

(e) Special rules for certain section
743(b) CAAs. [Reserved].

(f) Mid-year transactions. [Reserved].

(g) Reverse hybrids. [Reserved].

(h) Examples. [Reserved].

(i) Effective/applicability date. (1) [Re-
served].

(2) Paragraphs (b)(2)(i) and (c)(2) of
this section apply to CAAs occurring on
or after July 21, 2014, and to CAAs oc-
curring before that date resulting from an
entity classification election made under
§ 301.7701-3 of this chapter that is filed
on or after July 29, 2014, and that is
effective on or before July 21, 2014. Para-
graphs (b)(2)(i) and (c)(2) of this section
also apply to CAAs occurring on or after
January 1, 2011, and before July 21, 2014,
other than CAAs occurring before July 21,
2014, resulting from an entity classifica-
tion election made under § 301.7701-3
that is filed on or after July 29, 2014, and
that is effective on or before July 21,
2014, but only with respect to basis dif-
ference determined under § 1.901(m)-
4T(e) with respect to the CAA.

(3) [Reserved].

(j) Expiration date. The applicability of
this section expires on December 6, 2019.

Par. 7. Section 1.901(m)-6T is added
to read as follows:

§ 1.901(m)-6T Successor rules
(temporary).

(a) In general. This section provides
successor rules applicable to section
901(m). Paragraph (b) of this section pro-
vides rules for the continued application
of section 901(m) after an RFA that has
unallocated basis difference has been
transferred, including special rules appli-
cable to successor transactions that are
also CAAs or that involve partnerships.
Paragraph (c) of this section provides
rules for determining when an aggregate
basis difference carryover of a section
901(m) payor either becomes an aggre-
gate basis difference carryover of the sec-
tion 901(m) payor with respect to another
foreign payor or is transferred to another
section 901(m) payor. Paragraph (d) of
this section provides the effective/applica-
bility date, and paragraph (e) of this sec-
tion provides the expiration date.

(b) Successor rules for unallocated ba-
sis difference-(1) In general. Except as
provided in paragraph (b)(4) of this sec-
tion, section 901(m) continues to apply
after a successor transaction to any unal-
located basis difference attached to a
transferred RFA until the entire basis dif-
ference has been taken into account as a
cost recovery amount or a disposition
amount (or both) under § 1.901(m)-5T.

(2) Definition of a successor transac-
tion. A successor transaction occurs with
respect to an RFA if, after a CAA (prior
CAA), there is a transfer of the RFA for
U.S. income tax purposes and the RFA
has unallocated basis difference with re-
spect to the prior CAA, determined imme-
diately after the transfer. A successor
transaction may occur regardless of
whether the transfer of the RFA is a dis-
position, a CAA, or a non-taxable trans-
action for purposes of U.S. income tax. If
the RFA was subject to multiple prior
CAAs, a separate determination must be
made with respect to each prior CAA as to
whether the transfer is a successor trans-
action.

(3) Special considerations. [Reserved].

(4) Successor transaction is a CAA-
(i) In general. An asset may be an RFA
with respect to multiple CAAs if a suc-
cessor transaction is also a CAA (subse-
quent CAA). Except as otherwise pro-
vided in this paragraph (b)(4), if there is a

subsequent CAA, unallocated basis differ-
ence with respect to any prior CAAs will
continue to be taken into account under
section 901(m) after the subsequent CAA.
Furthermore, the subsequent CAA may
give rise to additional basis difference
subject to section 901(m).

(ii) Foreign basis election. [Reserved].

(iii) Multiple section 743(b) CAAs. If
an RFA is subject to two section 743(b)
CAAs (prior section 743(b) CAA and sub-
sequent section 743(b) CAA) and the
same partnership interest is acquired in
both the CAAs, the RFA will be treated as
having no unallocated basis difference
with respect to the prior section 743(b)
CAA if the basis difference for the section
743(b) CAA is determined independently
from the prior section 743(b) CAA. In this
regard, see generally § 1.743-1(f). If the
subsequent section 743(b) CAA results
from the acquisition of only a portion of
the partnership interest acquired in the
prior section 743(b) CAA, then the trans-
feror will be required to equitably appor-
tion the unallocated basis difference at-
tributable to the prior section 743(b) CAA
between the portion retained by the trans-
feror and the portion transferred. In this
case, with respect to the portion trans-
ferred, the RFAs will be treated as having
no unallocated basis difference with re-
spect to the prior section 743(b) CAA if
basis difference for the subsequent section
743(b) CAA is determined independently
from the prior section 743(b) CAA.

(5) Example. The following example
illustrates the rules of paragraph (b) of this
section.

Example. (i) Facts. USP, a domestic corporation,
wholly owns CFC, a foreign corporation organized
in Country A and treated as a corporation for both
U.S. and Country A tax purposes. FT is an unrelated
foreign corporation organized in Country A and
treated as a corporation for both U.S. and Country A
tax purposes. FT owns one asset, a parcel of land
(Asset). Country A imposes a single tax that is a
foreign income tax. On January 1, Year 1, CFC
acquires all of the stock of FT in exchange for 300u
in a qualified stock purchase (as defined in section
338(d)(3)) to which section 338(a) applies (Acquisi-
tion). Immediately before the Acquisition, Asset had
a U.S. basis of 100u, and immediately after the
Acquisition, Asset had a U.S. basis of 300u. Effec-
tive on February 1, Year 1, FT elects to be a disre-
garded entity pursuant to § 301.7701-3. As a result
of the election, FT is deemed, for U.S. income tax
purposes, to distribute Asset to CFC in liquidation
(Deemed Liquidation) immediately before the clos-
ing of the day before the election is effective pursu-
ant to § 301.7701-3(g)(1)(iii) and (3)(ii). The

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Deemed Liquidation is disregarded for Country A
tax purposes. No gain or loss is recognized on the
Deemed Liquidation for either U.S. or Country A tax
purposes.

(ii) Result. Under § 1.901(m)-2T(b)(1), the Ac-
quisition by CFC of the stock of FT is a section 338
CAA. Under § 1.901(m)-2T(c)(1), Asset is an RFA
with respect to Country A tax and the Acquisition,
because immediately after the Acquisition, Asset is
relevant in determining foreign income of FT for
Country A tax purposes, and FT owned Asset when
the Acquisition occurred. Under § 1.901(m)-4T(b),
the basis difference with respect to Asset is 200u
(300u - 100u). Under § 1.901(m)-2T(b)(2), the
Deemed Liquidation is a CAA (subsequent CAA)
because the Deemed Liquidation is treated as an
acquisition of assets for U.S. income tax purposes
and is disregarded for Country A tax purposes. Be-
cause the U.S. basis in Asset is 300u immediately
before and after the Deemed Liquidation, the subse-
quent CAA does not give rise to any additional basis
difference. The Deemed Liquidation is not a dispo-
sition under § 1.901(m)-1T(a)(10) because it did not
result in gain or loss being recognized with respect to
Asset for U.S. or Country A tax purposes. Accord-
ingly, no basis difference with respect to Asset is
taken into account under § 1.901(m)-5T as a result
of the Deemed Liquidation, and the unallocated basis
difference with respect to Asset immediately after
the Deemed Liquidation is 200u (200u - Ou). Under
paragraph (b)(2) of this section, the Deemed Liqui-
dation is a successor transaction because there is a
transfer of Asset for U.S. income tax purposes from
FT to CFC and Asset has unallocated basis differ-
ence with respect to the Acquisition immediately

after the Deemed Liquidation. Accordingly, under
paragraph (b)(1) of this section, section 901(m) will
continue to apply to the unallocated basis difference
with respect to Asset until the entire 200u basis
difference has been taken into account under
§ 1.901(m)-5T.

(c) Successor rules for aggregate basis
difference carryover [Reserved].

(d) Effective/applicability date. (1)
Paragraphs (a), (b)(1), (b)(2), (b)(4)(i),
(b)(4)(iii), and (b)(5) of this section apply
to CAAs occurring on or after July 21,
2014, and to CAAs occurring before that
date resulting from an entity classification
election made under § 301.7701-3 of this
chapter that is filed on or after July 29,
2014, and that is effective on or before
July 21, 2014. Paragraphs (a), (b)(1),
(b)(2), (b)(4)(i), (b)(4)(iii), and (b)(5) of
this section also apply to CAAs occurring
on or after January 1, 2011, and before
July 21, 2014, other than CAAs occurring
before July 21, 2014, resulting from an
entity classification election made under
§ 301.7701-3 that is filed on or after July
29, 2014, and that is effective on or before
July 21, 2014, but only with respect to
basis difference determined under
§ 1.901(m)-4T(e) with respect to the
CAA.

(2)-(3) [Reserved].

(e) Expiration date. The applicability
of this section expires on December 6,
2019.

Par. 8. Sections 1.901(m)-7T and 1.901
(m)-8T are added and reserved to read as
follows:

§ 1.901(m)-7T De minimis rules.
[Reserved].

§ 1.901(m)-8T Miscellaneous.
[Reserved].

John Dalrymple,
Deputy Commissioner for
Services and Enforcement.

Approved: November 4, 2016.

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

(Filed by the Office of the Federal Register on December 6,
2016, 8:45 a.m., and published in the issue of the Federal
Register for December 7, 2016, 81 F.R. 88103)

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# Part III. Administrative, Procedural, and Miscellaneous

Treatment of Certain
Triangular Reorganizations
Involving Foreign
Corporations; Amount of
Income Inclusion in Certain
Inbound Nonrecognition
Transactions

Notice 2016-73

## SECTION 1. OVERVIEW

This notice announces that the Depart-
ment of the Treasury (Treasury Depart-
ment) and the Internal Revenue Service
(IRS) intend to issue regulations under
section 367 of the Internal Revenue Code
(Code) to modify the rules relating to the
treatment of property used to acquire par-
ent stock or securities in certain triangular
reorganizations involving one or more
foreign corporations, and the conse-
quences to persons that receive parent
stock or securities pursuant to such trian-
gular reorganizations. This notice also an-
nounces that the Treasury Department and
the IRS intend to issue regulations under
section 367 to modify the amount of an
income inclusion required in certain in-
bound nonrecognition transactions.

## SECTION 2. BACKGROUND

### .01 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. person) trans-
fers property to a foreign corporation, the
foreign corporation shall not, for purposes
of determining the extent to which gain
shall be recognized on such transfer, be
considered to be a corporation. Sections
367(a)(2), (3), and (6) provide exceptions
to the general rule of section 367(a)(1)
and grant regulatory authority to the Sec-
retary to provide additional exceptions
and to limit the statutory exceptions.

.02 Section 367(b)

Section 367(b)(1) provides that, in the
case of an exchange described in section
332, 351, 354, 355, 356, or 361 in con-

nection with which there is no transfer of
property described in section 367(a)(1), a
foreign corporation shall be considered to
be a corporation except to the extent pro-
vided in regulations prescribed by the
Secretary that are necessary or appropriate
to prevent the avoidance of U.S. federal
income taxes. Section 367(b)(2) provides
that the regulations prescribed pursuant to
section 367(b)(1) shall include (but shall
not be limited to) regulations dealing with
the sale or exchange of stock or securities
in a foreign corporation by a U.S. person,
including regulations providing the cir-
cumstances under which gain is recog-
nized or deferred, amounts are included in
gross income as a dividend, adjustments
are made to earnings and profits, or ad-
justments are made to the basis of stock or
securities.

### .03 Section 1.367(b)-10

### (a) In General

Section 1.367(b)-10 (final regulations)
applies to certain triangular reorganiza-
tions in which a subsidiary (S) acquires
stock or securities of its parent corpora-
tion (P) in exchange for property (the P
acquisition), and S exchanges the P stock
or securities so acquired for stock, securi-
ties, or property of a target corporation
(T). The final regulations do not apply
unless P or S (or both) is a foreign corpo-
ration. The application of the final regula-
tions is also subject to certain exceptions,
including the section 367(a) priority rule
discussed below.

When applicable to a triangular reorga-
nization, the final regulations require that
adjustments be made that have the effect
of a distribution of property from S to P
under section 301 (deemed distribution).
§ 1.367(b)-10(b)(1). For this purpose, the
amount of the deemed distribution gener-
ally is the amount of property that was
transferred by S to acquire the P stock and
securities in the P acquisition. Id. For pur-
poses of making the required adjustments,
the final regulations treat the deemed dis-
tribution as a separate transaction that oc-
curs before the P acquisition or, if P does
not control S at the time of the P acquisi-
tion, immediately after P acquires control

of S, but before the triangular reorganiza-
tion. § 1.367(b)-10(b)(3).

The term property for purposes of the
final regulations has the meaning set forth
in section 317(a) (that is, money, securi-
ties, and any other property, other than
stock in the corporation making the distri-
bution), as modified to take into account
certain assumed liabilities and S stock or
rights used by S to acquire P stock or
securities from a person other than P.
§ 1.367(b)-10(a)(3)(ii).

### (b) Priority Rules

Section 1.367(b)-10(a)(2)(iii) provides
that the final regulations do not apply to a
triangular reorganization if, in an ex-
change under section 354 or 356, one or
more U.S. persons exchange stock or se-
curities of T and the amount of gain in the
T stock or securities recognized by such
U.S. persons under section 367(a)(1) is
equal to or greater than the sum of the
amount of the deemed distribution that
would be treated by P as a dividend under
section 301(c)(1) and the amount of such
deemed distribution that would be treated
by P as gain from the sale or exchange of
property under section 301(c)(3) (to-
gether, section 367(b) income) if the final
regulations otherwise would apply to the
triangular reorganization (section 367(a)
priority rule).

Section 1.367(a)-3(a)(2)(iv) provides a
similar priority rule that turns off the ap-
plication of section 367(a)(1) to an ex-
change under section 354 or 356 that oc-
curs in connection with a triangular
reorganization described in the final reg-
ulations if the amount of gain that other-
wise would be recognized under section
367(a)(1) (without regard to any excep-
tions thereto) is less than the amount of
the section 367(b) income recognized un-
der the final regulations (section 367(b)
priority rule).

### (c) Anti-Abuse Rule

The final regulations provide that ap-
propriate adjustments shall be made if, in
connection with a triangular reorganiza-
tion, a transaction is engaged in with a
view to avoid the purpose of the final

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regulations (anti-abuse rule). § 1.367(b)-
10(d). The anti-abuse rule sets forth one
example, which provides that the earnings
and profits of S will be deemed to include
the earnings and profits of a corporation
related to P or S for purposes of determin-
ing the consequences of the adjustments
provided in the final regulations, if S is
created, organized, or funded to avoid the
application of the final regulations with
respect to the earnings and profits of that
related corporation. Id.

(d) Notice 2014-32

On April 25, 2014, the Treasury De-
partment and the IRS issued Notice
2014-32 (2014-20 IRB 1006) (2014 no-
tice), which announced the intention to
issue regulations modifying and clarifying
the final regulations. The 2014 notice ad-
dressed, in part, certain inversion transac-
tions that were structured to be subject to
the final regulations in order to avoid
shareholder-level gain recognition under
section 367(a)(1) by reason of the section
367(b) priority rule, notwithstanding that
only a minimal amount of income was
subject to U.S. tax by reason of a deemed
distribution under the final regulations.
The 2014 notice announced that the final
regulations would be modified to provide
that section 367(b) income includes a sec-
tion 301(c)(1) dividend or section
301(c)(3) gain that would arise if the final
regulations applied to the triangular reor-
ganization only to the extent such divi-
dend income or gain would be subject to
U.S. tax or would give rise to an income
inclusion under section 951(a)(1)(A) that
would be subject to U.S. tax.

The 2014 notice also announced that
the anti-abuse rule would be clarified to
provide that S's acquisition of P stock or
securities in exchange for a note may in-
voke the anti-abuse rule, and that the earn-
ings and profits of a corporation (or a
successor corporation) may be taken into
account for purposes of determining the
consequences of the adjustments provided
in the final regulations, as modified by the
rules announced in the notice, regardless
of whether such corporation is related to P
or S before the triangular reorganization.

Finally, the 2014 notice announced that
the anti-abuse rule would be clarified to
provide that a funding of S may occur

after the triangular reorganization and that
a funding of S could include capital con-
tributions, loans, and distributions.

.04 Sections 1.367(b)-4 and 1.367(b)-
4T

Sections 1.367(b)-4 and 1.367(b)-4T
apply to certain acquisitions by a foreign
corporation of the stock or assets of a
foreign corporation (referred to in those
regulations and this notice as the "foreign
acquired corporation") in an exchange
described in section 351 or in a reorgani-
zation described in section 368(a)(1). Sec-
tions 1.367(b)-4T(b) and 1.367(b)-4(b)
(1) provide that, if the potential applica-
tion of section 1248 cannot be preserved
following the acquisition of the stock or
assets of a foreign corporation by another
foreign corporation in an exchange sub-
ject to section 367(b), then certain ex-
changing shareholders of the foreign ac-
quired corporation must include in income
as a dividend the section 1248 amount
attributable to the stock of the foreign
acquired corporation exchanged. How-
ever, the scope and purpose of the grant of
authority in section 367(b) are not limited
to the preservation of section 1248
amounts, and the regulations thereunder
are not limited to requiring an inclusion of
the section 1248 amount with respect to
the stock of a foreign acquired corporation
exchanged. Section 367(b) provides the
Treasury Department and the IRS broad
authority to issue regulations applicable to
nonrecognition transactions that are "nec-
essary or appropriate to prevent the avoid-
ance of Federal income taxes," including
regulations that prescribe "the circum-
stances under which gain shall be recog-
nized currently, or amounts included in
gross income currently as a dividend, or
both."

#### .05 Inbound Transactions and the All Earnings and Profits Amount

Section 1.367(b)-3 applies when a for-
eign corporation transfers assets to a do-
mestic corporation pursuant to either a
liquidation described in section 332 or an
asset reorganization described in section
368 (in each case, an "inbound transac-
tion"). Section 1.367(b)-3(a) and this no-
tice refer to such foreign corporation as
the "foreign acquired corporation" and

such domestic corporation as the "domes-
tic acquiring corporation." When there is
an inbound transaction, in general,
§ 1.367(b)-3 requires certain shareholders
(including certain foreign corporate share-
holders) of the foreign acquired corpora-
tion to include in income as a deemed
dividend the all earnings and profits
amount with respect to their stock. Under
§ 1.367(b)-2(d), the all earnings and prof-
its amount of a foreign acquired corpora-
tion is determined under the principles of
section 1248 for computing the amount of
earnings and profits attributable to stock,
with certain modifications. For example,
the all earnings and profits amount does
not take into account earnings and profits
of foreign subsidiaries of the foreign ac-
quired corporation, notwithstanding sec-
tion 1248(c)(2). § 1.367(b)-2(d)(3)(ii).

Section 1.367(b)-3 is intended to en-
sure that a domestic acquiring corporation
does not succeed to the basis in the assets
of the foreign acquired corporation except
to the extent that a U.S. person that is a
shareholder (including indirect ownership
through certain foreign corporate share-
holders) of the foreign acquired corpora-
tion has been subject to U.S. tax on its
share of the earnings and profits that gave
rise, in whole or in part, to the basis. See,
for example, the discussion concerning in-
bound transactions in the preambles to TD
8862 (65 FR 3589-01, 2000-1 CB 466)
and proposed regulations issued in 1991
(56 FR 41993, 1991-2 CB 1070). The
definition of the all earnings and profits
amount, in particular its limitation with
respect to the earnings and profits of sub-
sidiaries, is premised on an assumption
that the basis in the assets of the foreign
acquired corporation reflects solely the
earnings and profits of the foreign ac-
quired corporation, the liabilities of the
foreign acquired corporation, and capital
acquired from a shareholder.

### .06 Nonqualified Preferred Stock

Section 351(g)(1) provides, in relevant
part, that section 351(a) does not apply to
a transfer of property in exchange for non-
qualified preferred stock, as defined in
section 351(g)(2).

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## SECTION 3. TRANSACTIONS AT ISSUE

The Treasury Department and the IRS
are aware that taxpayers are engaging in
transactions designed to repatriate earn-
ings and basis of foreign corporations
without incurring U.S. tax by exploiting
the section 367(a) priority rule, as modi-
fied by the 2014 notice. In one such trans-
action, USP, a domestic corporation,
wholly owns FP, a foreign corporation,
which, in turn, wholly owns FS, another
foreign corporation. FP has no earnings
and profits, but FS has substantial earn-
ings and profits. A dividend from FS to FP
would qualify for the exception to foreign
personal holding company income under
section 954(c)(6). USP also wholly owns
USS, a domestic corporation, which, in
turn, wholly owns FT, a foreign corpora-
tion. Pursuant to a transaction undertaken
for the purported business purpose of in-
tegrating FT into the FP-FS ownership
chain, FS acquires FP stock from FP in
exchange for cash, a note, or other prop-
erty (the FP acquisition) and uses the FP
stock to acquire all of the stock of FT
from USS in a transaction intended to
qualify as a reorganization described in
section 368(a)(1)(B) (FT reorganization).
On a later date, and purportedly unrelated
to the FT reorganization, FP engages in an
inbound transaction described in § 1.367
(b)-3, for example, a transfer of all of
FP's assets, including the cash, note, or
other property received from FS, to USP
or a domestic subsidiary of USP.

In this transaction, the transfer by USS
of the FT stock to FS in exchange for
stock of FP pursuant to the FT reorgani-
zation is an indirect stock transfer de-
scribed in § 1.367(a)-3(d)(1)(iii)(A). Pur-
suant to § 1.367(a)-3(b), the taxpayer files
a gain recognition agreement under
§ 1.367(a)-8 with respect to USS's trans-
fer of FT stock on all but a de minimis
amount of FT stock, and, with respect to
that de minimis amount of FT stock, rec-
ognizes a small amount of gain under sec-
tion 367(a)(1). Furthermore, the taxpayer
applies the priority rules by comparing the
section 367(b) income to the de minimis
amount of gain under section 367(a)(1) to
determine whether the final regulations
apply to the FP acquisition. In computing
the amount of section 367(b) income for

purposes of the section 367(a) priority
rule, the taxpayer takes the position that a
deemed distribution from FS to FP would
not result in section 367(b) income, as
described in the 2014 notice, because any
dividend income to FP would not be sub-
ject to U.S. tax and would not give rise to
an income inclusion under section
951(a)(1)(A) by reason of section 954(c)
(6). Accordingly, the taxpayer takes the
position that the section 367(b) income
(which, under this position, is zero) does
not exceed the section 367(a) gain and,
therefore, the final regulations do not ap-
ply to the FP acquisition by reason of the
section 367(a) priority rule. Furthermore,
the taxpayer takes the position that the
subsequent inbound transaction with re-
spect to FP results in no income inclusion
to USP under § 1.367(b)-3 because FP's
earnings and profits are not increased un-
der the final regulations and thus FP's all
earnings and profits amount is zero. Fi-
nally, the taxpayer takes the position that
the anti-abuse rule does not apply in this
case for various reasons that may include:
(1) the FP acquisition is not engaged in
with a view to avoid the purpose of the
final regulations because it is engaged in
for the purpose of integrating FT into the
FP-FS chain; (2) the FP acquisition is not
a transaction that occurs in connection
with the FT reorganization because the
acquisition is specifically contemplated by
the final regulations; (3) the inbound
transaction with respect to FP does not
occur in connection with the FT reorgani-
zation because it does not occur pursuant
to the same plan as the FT reorganization;
or (4) the anti-abuse rule only applies to
adjust the earnings and profits of FS to
take into account the earnings and profits
of another corporation and, in this regard,
FS is not created, organized, or funded to
avoid the purpose of the final regulations
with respect to the earnings and profits of
another corporation.

The Treasury Department and the IRS
also are aware of a similar transaction in
which taxpayers take advantage of the
rule in section 951(a)(1)(A) that requires a
U.S. shareholder to include in its gross
income its pro rata share of the subpart F
income of a foreign corporation only if the
foreign corporation has been a controlled
foreign corporation for an uninterrupted
period of 30 days or more during the

taxable year (the 30-day rule). In this form
of the transaction, FP is formed, and the
FP acquisition occurs, during the final 29
days of FP's taxable year. In computing
the amount of section 367(b) income for
purposes of the section 367(a) priority
rule in this transaction, the taxpayer takes
the position that a deemed distribution
from FS to FP would not result in any
section 367(b) income, as described in the
2014 notice, because any income recog-
nized by FP (including capital gain under
section 301(c)(3)) would not be subject to
U.S. tax and would not give rise to an
income inclusion under section 951(a)(1)
(A) by reason of the 30-day rule.

The Treasury Department and the IRS
also are aware of another variation of the
transaction intended to repatriate earnings
of a foreign corporation without U.S. tax
through the use of nonqualified preferred
stock. In one such transaction, USP, a
domestic corporation, wholly owns both
FP, a foreign corporation, and USS, a
domestic corporation. USS wholly owns
FT, a foreign corporation, which has sub-
stantial earnings and profits. FP has no
earnings and profits. FP acquires newly-
issued stock of USP from USP in ex-
change for nonqualified preferred stock of
FP, and then FP uses the USP stock as
consideration to acquire all of the stock of
FT from USS in a transaction intended to
qualify as a reorganization described in
section 368(a)(1)(B). On a subsequent
date, when FP still has no earnings and
profits, FP redeems the FP nonqualified
preferred stock held by USP in exchange
for cash or a note.

The taxpayer takes the position that
FP's acquisition of USP stock is not sub-
ject to the final regulations because the FP
nonqualified preferred stock is not "prop-
erty" within the meaning of § 1.367(b)-
10(a)(3)(ii). Furthermore, the taxpayer
takes the position that USP's transfer of
its own stock to FP in exchange for non-
qualified preferred stock does not qualify
as an exchange described in section 351
pursuant to section 351(g)(2) and, there-
fore, USP takes a basis in the FP nonquali-
fied preferred stock equal to its fair market
value under § 1.1032-1(d). In addition,
the taxpayer takes the position that the
redemption of the FP nonqualified pre-
ferred stock does not result in dividend
income or capital gain to USP under sec-

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tion 301(c) because FP does not have
earnings and profits and the redemption is
applied against and reduces USP's basis
in the FP stock under section 301(c)(2).
Finally, the taxpayer takes the position
that the anti-abuse rule does not apply in
such a case for reasons similar to those
discussed above in the context of the
transaction involving section 954(c)(6).

The Treasury Department and the IRS
have determined that these transactions
raise significant policy concerns and that
the revisions to the regulations described
in Section 4 of this notice are necessary or
appropriate to prevent the avoidance of
U.S. federal income taxes. The Treasury
Department and the IRS intend to revise
the regulations under section 367 accord-
ingly.

## SECTION 4. REGULATIONS TO BE ISSUED

### .01 Priority Rules

The Treasury Department and the IRS
intend to modify the section 367(a) prior-
ity rule to apply only when T is a domestic
corporation. Accordingly, when T is a for-
eign corporation, the final regulations, as
modified by the rules described in this
notice, will apply to a triangular reorgani-
zation described in § 1.367(b)-10(a)(1),
unless an exception in § 1.367(b)-10(a)
(2)(i) or (ii) applies.

The Treasury Department and the IRS
intend to modify the section 367(b) prior-
ity rule to provide that, in an exchange
under section 354 or 356 that occurs in
connection with a transaction described in
the final regulations, to the extent one or
more U.S. persons exchange stock or se-
curities of a foreign corporation for P
stock or securities acquired by S in ex-
change for property (as defined in
§ 1.367(b)-10(a)(3)(ii), as modified by the
regulations described in this notice) in the
P acquisition, section 367(a)(1) will not
apply to such U.S. persons with respect to
the exchange of the stock or securities of
the foreign corporation. Instead, the ex-
change will be subject to §§ 1.367(b)-4
and 1.367(b)-4T, as modified by the reg-
ulations described in this notice. The sec-
tion 367(b) priority rule, as modified by
the regulations described in the 2014 no-
tice, will continue to apply when T is a
domestic corporation. In addition, section

367(a) will apply to the exchange of stock
or securities of a foreign corporation to
the extent such T stock or securities are
exchanged for P stock or securities that
are not acquired by S in exchange for
property (as defined in § 1.367(b)-
10(a)(3)(ii), as modified by this notice) in
connection with a transaction described in
§ 1.367(b)-10.

.02 Sections 1.367(b)-4 and 1.367(b)-
4T

The Treasury Department and the IRS
intend to modify §§ 1.367(b)-4 and
1.367(b)-4T to provide that, in an ex-
change under section 354 or 356 that oc-
curs in connection with a transaction de-
scribed in the final regulations, to the
extent an exchanging shareholder ex-
changes stock or securities of a foreign
acquired corporation for P stock or secu-
rities acquired by S in exchange for prop-
erty (defined in § 1.367(b)-10(a)(3)(ii), as
modified by the regulations described in
this notice) in the P acquisition, then such
shareholder must:

(i) Include in income as a deemed div-
idend the section 1248 amount attribut-
able to the stock of the foreign acquired
corporation that it exchanges; and

(ii) After taking into account the in-
crease in basis provided in § 1.367(b)-
2(e)(3)(ii) resulting from the deemed div-
idend (if any), recognize all realized gain
with respect to the stock or securities of
the foreign acquired corporation ex-
changed that would not otherwise be rec-
ognized.

For purposes of the preceding para-
graph, an exchanging shareholder is a
U.S. person or foreign person that ex-
changes stock of a foreign acquired cor-
poration in a prescribed exchange, regard-
less of whether such U.S. person is a
section 1248 shareholder or such foreign
person is a foreign corporation in which a
U.S. person is a section 1248 shareholder.

### .03 All Earnings and Profits Amount

### (a) General Rule

The Treasury Department and the IRS
intend to modify § 1.367(b)-2(d)(3)(ii) to
provide that, if there is excess asset basis
with respect to a foreign acquired corpo-
ration, then, in the case of an exchanging

shareholder to which § 1.367(b)-3(b)(3)
applies, the all earnings and profits
amount with respect to the stock in the
foreign acquired corporation that it ex-
changes will be increased by the specified
earnings with respect to such stock (if
any).

### (b) Excess Asset Basis

The term excess asset basis means,
with respect to a foreign acquired corpo-
ration, the amount by which the inside
asset basis of the foreign acquired corpo-
ration exceeds the sum of the following
amounts:

(i) The earnings and profits of the for-
eign acquired corporation attributable to
the outstanding stock of the foreign ac-
quired corporation. For this purpose, the
earnings and profits attributable to stock
of the foreign acquired corporation is de-
termined under the principles of § 1.367
(b)-2(d) but without regard to whether the
exchanging shareholder is described in
§ 1.367(b)-3(b)(1) or is a U.S. person or a
foreign person. Furthermore, the earnings
and profits of the foreign acquired corpo-
ration will include amounts described in
section 1248(d)(3) or 1248(d)(4).

(ii) The aggregate basis in the out-
standing stock of the foreign acquired cor-
poration determined immediately before
the inbound transaction and without re-
gard to any basis increase described in
§ 1.367(b)-2(e)(3)(ii) resulting from such
inbound transaction.

(iii) The aggregate amount of liabilities
of the foreign acquired corporation that
are assumed by the domestic acquiring
corporation in the inbound transaction de-
termined under the principles of section
357(d).

### (c) Inside Asset Basis

The term inside asset basis means,
with respect to a foreign acquired corpo-
ration, the adjusted basis of the assets of
the foreign acquired corporation in the
hands of the domestic acquiring corpora-
tion determined immediately after the in-
bound transaction.

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#### (d) Specified Earnings

The term specified earnings means,
with respect to the stock of a foreign ac-
quired corporation that is exchanged by an
exchanging shareholder, the lesser of the
following amounts (but not below zero):

(i) The sum of the earnings and profits
(including a deficit) with respect to each
foreign subsidiary of the foreign acquired
corporation that are attributable under sec-
tion 1248(c)(2) to the stock of the foreign
acquired corporation exchanged. For pur-
poses of the preceding sentence, the mod-
ifications described in § 1.367(b)-2(d)(2)
and (d)(3)(i) apply. Thus, for example, the
amount of the earnings and profits of a
foreign subsidiary that are attributable to
stock of the foreign acquired corporation
is determined without regard to whether
the foreign subsidiary was a controlled
foreign corporation at any time during the
five years preceding the inbound transac-
tion. The amount described in this Section
4.03(d)(i) is referred to in this notice as
the "lower-tier earnings."

(ii) The product of the excess asset
basis of the foreign acquired corporation,
multiplied by the exchanging sharehold-
er's specified percentage.

(iii) The amount of gain that would be
realized by the exchanging shareholder if,
immediately before the inbound transac-
tion, the exchanging shareholder had sold
the stock of the foreign acquired corpora-
tion for fair market value, reduced by the
exchanging shareholder's all earnings and
profits amount (for this purpose, deter-
mined without regard to the modifications
described in this notice). The amount de-
scribed in this Section 4.03(d)(iii) is re-
ferred to in this notice as the "specified
stock gain."

### (e) Specified Percentage

The term specified percentage means,
with respect to an exchanging share-
holder, a fraction (expressed as a percent-
age), the numerator of which is the
amount of the exchanging shareholder's
specified stock gain, and the denominator
of which is the sum of the aggregate of the
specified stock gain with respect to all
exchanging shareholders to which § 1.367
(b)-3(b)(3) applies and the aggregate of
the gain realized (regardless of whether

such gain is recognized) with respect to
the stock exchanged by all other exchang-
ing shareholders.

### (f) Source of Specified Earnings

If the specified earnings attributable to
the stock of a foreign acquired corporation
exchanged by an exchanging shareholder
is less than the lower-tier earnings attrib-
utable to the stock exchanged, the speci-
fied earnings of the exchanging share-
holder will be sourced from lower-tier
earnings of foreign subsidiaries of the for-
eign acquired corporation under the prin-
ciples of § 1.1248-1(d)(3).

### (g) Adjustments to Excess Asset Basis

If there is excess asset basis with re-
spect to a foreign acquired corporation,
as determined under Section 4.03(b) of
this notice, a taxpayer may reduce the
excess asset basis to the extent that the
excess asset basis is not attributable, di-
rectly or indirectly, to property provided
by a foreign subsidiary of the foreign ac-
quired corporation. For example, if there
was a transfer of property to the foreign
acquired corporation described in section
362(e)(2), and the election described in
section 362(e)(2)(C) was made to limit the
basis in the stock received in the foreign
acquired corporation to its fair market
value, then, for purposes of determining
excess asset basis, the basis in the stock of
the foreign acquiring corporation may be
determined without regard to the applica-
tion of section 362(e)(2).

For purposes of this Section 4.03(g),
property used by a foreign subsidiary to
purchase the stock of the foreign acquired
corporation in connection with a triangu-
lar reorganization is treated as property
provided by the foreign subsidiary. In ad-
dition, the term property has the meaning
provided in § 1.367(b)-10(a)(3)(ii), as
modified by this notice. Finally, a refer-
ence to a foreign acquired corporation or
foreign subsidiary includes a predecessor
of the foreign acquired corporation or for-
eign subsidiary.

#### (h) Anti-Abuse Rule

The regulations to be issued under
§ 1.367(b)-3 will include an anti-abuse
rule to address transactions engaged in
with a view to avoid the purposes of the

rules described in this Section 4.03. Under
the anti-abuse rule, adjustments must be
made, including by disregarding the ef-
fects of transactions, to carry out the pur-
poses of this section. Thus, as one exam-
ple, if a transaction is engaged in with a
view to reduce excess asset basis, includ-
ing by increasing the basis in the stock of
the foreign acquired corporation without a
corresponding increase in the basis in the
assets of the foreign acquired corporation,
that increase in the basis in the stock of
the foreign acquired corporation will be
disregarded for purposes of computing ex-
cess asset basis.

### .04 Nonqualified Preferred Stock

The definition of property provided in
§ 1.367(b)-10(a)(3)(ii) will be modified to
include S stock that is nonqualified pre-
ferred stock (as defined in section 351
(g)(2)).

### .05 Examples

The following examples illustrate cer-
tain modifications to the final regulations
described in this Section 4:

Example 1. (i) Facts. USP, a domestic corpora-
tion, wholly owns FP and USS. FP is a foreign
corporation that wholly owns FS, a foreign corpora-
tion. USS is a domestic corporation that wholly owns
FT, a foreign corporation. USS owns 100 shares of
FT stock, which constitutes a single block of stock
with a fair market value of $100x, an adjusted basis
of $20x, and a section 1248 amount of $50x. FS has
earnings and profits of $60x. A dividend from FS to
FP would qualify for the exception to foreign per-
sonal holding company income under section
954(c)(6). FP issues 100 shares of voting stock with
a fair market value of $100x to FS in exchange for
$40x of common stock of FS and $60x cash. FS
acquires all of the stock of FT held by USS solely in
exchange for the $100x of FP voting stock in a
triangular reorganization described in section
368(a)(1)(B).

(ii) Analysis. The triangular reorganization is de-
scribed in § 1.367(b)-10(a). Pursuant to § 1.367(b)-
10(b)(1), as modified by the rules announced in the
2014 notice, adjustments must be made that have the
effect of a distribution of property in the amount of
$60x from FS to FP under section 301. The $60x
deemed distribution is treated as separate from, and
occurring immediately before, FS's acquisition of
the $60x of FP stock used in the triangular reorga-
nization. The $60x deemed distribution from FS to
FP results in $60x dividend income to FP under
section 301(c)(1) that is not subpart F income under
section 954(c)(6). Pursuant to Section 4.01 of this
notice, § 1.367(b)-4 (as modified by Section 4.02 of

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this notice), rather than section 367(a)(1), applies
to the $60x of FT stock exchanged for the $60x of
FP stock acquired by FS from FP in exchange for
$60x cash. Thus, USS must include in income a
$30x deemed dividend ($50x section 1248 amount
x 60%) with respect to the FT stock exchanged for
FP stock that was acquired by FS from FP for
$60x cash. In addition, USS must recognize the
remaining $18x gain ($48x gain (($80x gain x
60%) - $30x deemed dividend) realized with re-
spect to such FT stock. If USS properly files a gain
recognition agreement pursuant to §§ 1.367(a)-
3(b)(2) and 1.367(a)-8, USS does not recognize
gain under section 367(a)(1) with respect to the
$40x of FT stock exchanged for FP stock that was
acquired by FS from FP in exchange for the $40x
of FS common stock.

Example 2. (i) Facts. USP, a domestic corpo-
ration, owns 90% of the stock of FP, a foreign
corporation. The remaining 10% of the stock of FP
is owned by FI, a nonresident alien individual
unrelated to USP. FP is a foreign corporation that
wholly owns FS1, a foreign corporation, which, in
turn, wholly owns FS2, a foreign corporation. The
FP stock owned by USP has a fair market value of
$90x and an adjusted basis of $17x. The FP stock
owned by FI has a fair market value of $10x and
an adjusted basis of $6x. The all earnings and
profits amount with respect to USP's FP stock,
determined without regard to this notice, is $27x.
The assets of FP have an adjusted basis of $78x,
FP has no liabilities, and the earnings and profits
of FP attributable to the outstanding FP stock is
$30x (in this case, as determined under the prin-
ciples of § 1.367(b)-2(d) but without regard to
whether USP and FI are exchanging shareholders
described in § 1.367(b)-3(b)(1) or U.S. or foreign
persons). The earnings and profits of FS1 and FS2
attributable to the FP stock owned by USP under
section 1248(c)(2) (as determined under the prin-
ciples of § 1.367(b)-2(d)(2) and (d)(3)(i)) are
$80x and ($20x) respectively. In a reorganization
described in section 368(a)(1)(F), US Newco, a
newly-formed domestic corporation that is wholly
owned by USP, acquires all of the assets of FP
solely in exchange for stock of US Newco. No
adjustment under Section 4.03(g) of this notice is
appropriate.

(ii) Analysis-(A) All earnings and profits
amount. Under § 1.367(b)-3(b)(3), USP must in-
clude in income as a deemed dividend the all
earnings and profits amount with respect to its FP
stock. Pursuant to Section 4.03 of this notice, the
all earnings and profits amount of $27x, deter-
mined without regard to this notice, is increased
by the specified earnings of FP, because there is
excess asset basis with respect to FP determined as
follows.

(B) Excess asset basis. The amount of the
excess asset basis is $25x, the amount that the
inside asset basis of FP ($78x) exceeds the sum of
(i) the earnings and profits of FP ($30x), (ii) the
aggregate basis in all of the FP stock ($23x), and
(iii) the liabilities of FP assumed by US Newco
($0x).

(C) Specified earnings. The specified earnings
with respect to the stock of FP exchanged by USP
equals $23x, the lesser of the following amounts (but
not below zero) (i) $60x, the sum of the earnings and
profits (including deficits) with respect to FS1 and
FS2 attributable under section 1248(c)(2) to the
stock of FP exchanged by USP; (ii) $23x, the prod-
uct of the excess asset basis with respect to FP
($25x), multiplied by USP's specified percentage
(92%), determined based on a fraction, the numera-
tor of which is USP's specified stock gain ($46x),
and the denominator of which is the sum of the
aggregate of the specified stock gain and gain real-
ized with respect to FP stock ($50x), and (iii) $46x,
USP's specified stock gain, which is the amount of
gain that would be realized by USP if immediately
before the inbound transaction USP had sold the
stock of FP for fair market value ($73x), reduced by
USP's all earnings and profits amount (determined
without regard to the modifications described in this
notice) ($27x).

(D) All earnings and profits amount, as modified
by this notice. The all earnings and profits amount
that USP must include in income as a deemed divi-
dend is $50x ($27x + $23). Under § 1.367(b)-
2(e)(2), $23x of the deemed dividend is determined
by reference to the earnings and profits of FS1 and is
considered as having been paid by FS1 to USP
through FP. Under § 1.367(b)-2(e)(3)(ii), immedi-
ately before the exchange, USP's basis in the stock
of FP is increased by the amount of the $50x deemed
dividend for purposes of determining USP's basis in
its stock of US Newco. However, the basis increase
under § 1.367(b)-2(e)(3)(ii) is not taken into account
for purposes of calculating USP's all earnings and
profits amount, as modified by Section 4.03 of this
notice.

## SECTION 5. EFFECTIVE DATE

The regulations described in Section 4
of this notice will apply to transactions
completed on or after December 2, 2016,
and to any inbound transactions treated as
completed before December 2, 2016 as a
result of an entity classification election
made under § 301.7701-3 of this chapter
that is filed on or after December 2, 2016.
No inference is intended regarding the
treatment of transactions described in Sec-
tion 3 of this notice under current law. For
example, these transactions are currently
subject to challenge under the anti-abuse
rule.

## SECTION 6. COMMENTS

The Treasury Department and the IRS
request comments on the rules described
in this notice. In particular, § 1.367(b)-
10(b)(3) currently provides that the
deemed distribution described in
§ 1.367(b)-10(b)(1) is treated as occurring
immediately before the P acquisition.

Comments are requested on whether, in
light of the modifications announced by
this notice, it may be more appropriate (in
particular, when T is a foreign corpora-
tion) to treat the deemed distribution as
occurring immediately after, rather than
before, the triangular reorganization. In
addition, comments are requested as to
whether any specific adjustments to ex-
cess asset basis should be allowed, or
not allowed, consistent with the princi-
ples underlying Section 4.03 of this no-
tice. Finally, comments are requested as
to whether there are transactions other
than those described in Section 3 of this
notice that may give rise to excess asset
basis.

Written comments may be submitted
to the Office of Associate Chief Counsel
(International), Attention: Lynlee
Baker, Internal Revenue Service, IR-
4554, 1111 Constitution Avenue, NW,
Washington, DC 20224. Alternatively,
taxpayers may submit comments
electronically to Notice.comments@
irscounsel.treas.gov. Comments will be
available for public inspection and
copying. Written or electronic com-
ments must be received by March 2,
2017.

## SECTION 7. DRAFTING INFORMATION

The principal author of this notice is
Lynlee Baker of the Office of Associate
Chief Counsel (International). However,
other personnel from the Treasury Depart-
ment and the IRS participated in its devel-
opment. For further information regarding
this notice, contact Ms. Baker at (202)
317-6937 (not a toll-free number).

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## Satisfying the Required Qualified Allocation Plan Preference in Section 42(m)(1)(B)(ii)(III) (Concerning Concerted Community Revitalization Plans) Notice 2016-77 PURPOSE

This notice reminds taxpayers that a
project is not described in § 42(m)(1)
(B)(ii)(III) of the Internal Revenue Code
unless its development contributes to a
concerted community revitalization plan.

### BACKGROUND

Section 42 sets forth rules for deter-
mining a building's amount of the low-
income housing credit (LIHTC), which
§ 38 allows as a credit against income tax.

Section 42(h)(1)(A) provides that the
amount of the credit determined under
§ 42 for any taxable year for any building
may not exceed the housing credit dollar
amount allocated to the building.

Section 42(m) requires every alloca-
tion of housing credit dollar amount to be
made pursuant to a qualified allocation
plan (QAP). The Code specifies certain
preferences and selection criteria that each
QAP must contain.

Section 42(m)(1)(B)(ii) requires every
QAP to contain three preferences. Under
the third of these, the QAP must give
"preference in allocating housing credit
dollar amounts among selected projects
to ... projects which are located in qual-
ified census tracts . . . and the development
of which contributes to a concerted com-
munity revitalization plan. .. . " Section
42(m)(1)(B)(ii)(III) (emphasis added).
Qualified census tracts are designated by
the U.S. Department of Housing and Ur-
ban Development and are characterized
by either the percentage of households
below a certain income threshold or by a
poverty rate above a certain threshold.

In some cases, state or local agencies
allocating housing credit dollar amounts
have given preference to projects that are
located in qualified census tracts without
regard to whether the projects contribute
to a concerted community revitalization

plan. In some other cases, because devel-
opment of new multifamily housing ben-
efits a neighborhood, the development of a
LIHTC project, without more, has been
treated as if it were such a plan.

### DISCUSSION

Placing LIHTC projects in qualified
census tracts risks exacerbating concen-
trations of poverty. Therefore, § 42(m)(1)
(B)(ii)(III) grants a preference to that
placement only when there is an added
benefit to the neighborhood in the form of
the project's contribution to a concerted
community revitalization plan.

Although the Department of the Trea-
sury and the Internal Revenue Service (the
Service) have not issued guidance defin-
ing the term "concerted community revi-
talization plan," the preference fails to
apply unless, not later than the allocation,
a plan exists that contains more compo-
nents than the LIHTC project itself.

### REQUEST FOR COMMENTS

The Department of the Treasury and
the Service are considering providing
guidance to clarify the preference in
§ 42(m)(1)(B)(ii)(III), and they request
comments from the public regarding the
contents of that guidance. Comments
should be submitted by February 10,
2017. Comments may be mailed to:

Internal Revenue Service
Attn: CC:PA:LPD:PR (Notice 2016-
77)

Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044

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

Courier's Desk
Internal Revenue Service
Attn: CC:PA:LPD:PR (Notice 2016-
77)

1111 Constitution Avenue, N.W.
Washington, D.C. 20224

Alternatively, persons may submit com-
ments electronically via e-mail to the fol-
lowing address:

Notice.Comments@irscounsel.treas.gov.
Persons should include "Notice 2016-77"

in the subject line. All comments submit-
ted by the public will be available for
public inspection and copying in their en-
tirety.

### DRAFTING INFORMATION

The principal author of this notice is
James W. Rider, Office of the Associate
Chief Counsel (Passthroughs and Special
Industries). For further information re-
garding this notice, please contact Mr.
Rider at (202) 317-4137 (not a toll-free
number).

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

### Notice 2016-78

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

### YIELD CURVE AND SEGMENT RATES

Generally, except for certain plans un-
der sections 104 and 105 of the Pension
Protection Act of 2006 and CSEC plans
under § 414(y), § 430 of the Code speci-
fies the minimum funding requirements
that apply to single-employer plans pursu-
ant to § 412. Section 430(h)(2) specifies
the interest rates that must be used to
determine a plan's target normal cost and
funding target. Under this provision, pres-
ent value is generally determined using
three 24-month average interest rates
("segment rates"), each of which applies
to cash flows during specified periods. To
the extent provided under § 430(h)(2)
(C)(iv), these segment rates are adjusted
by the applicable percentage of the 25-
year average segment rates for the period
ending September 30 of the year preced-

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ing the calendar year in which the plan
year begins.1 However, an election may
be made under § 430(h)(2)(D)(ii) to use
the monthly yield curve in place of the
segment rates.

Notice 2007-81, 2007-44 I.R.B. 899,
provides guidelines for determining the
monthly corporate bond yield curve, and
the 24-month average corporate bond seg-
ment rates used to compute the target nor-
mal cost and the funding target. Consis-
tent with the methodology specified in
Notice 2007-81, the monthly corporate
bond yield curve derived from November
2016 data is in Table I at the end of this

notice. The spot first, second, and third
segment rates for the month of November
2016 are, respectively, 1.79, 3.80, and
4.71.

The 24-month average segment rates
determined under § 430(h)(2)(C)(i) through
(iii) must be adjusted pursuant to § 430(h)
(2)(C)(iv) to be within the applicable min-
imum and maximum percentages of the
corresponding 25-year average segment
rates. For plan years beginning before
2021, the applicable minimum percentage
is 90% and the applicable maximum per-
centage is 110%. The 25-year average
segment rates for plan years beginning in

2015, 2016, and 2017 were published in
Notice 2014-50, 2014-40 I.R.B. 590,
Notice 2015-61, 2015-39 I.R.B. 408,
and Notice 2016-54, 2016-40 I.R.B.
429, respectively.

## 24-MONTH AVERAGE CORPORATE BOND SEGMENT RATES

The three 24-month average corporate
bond segment rates applicable for Decem-
ber 2016 without adjustment for the 25-
year average segment rate limits are as
follows:

Applicable Month

First Segment

Second Segment

Third Segment

December 2016

1.55

3.76

4.73

Based on § 430(h)(2)(C)(iv), the 24-
2016 adjusted to be within the applicable
minimum and maximum percentages of

month averages applicable for December

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

For Plan Years Beginning In

Adjusted 24-Month Average Segment Rates

Applicable Month

First Segment

Second Segment

Third Segment

2015

December

2016

4.72

6.11

6.81

2016

December

2016

4.43

5.91

6.65

2017

December

2016

4.16

5.72

6.48

## 30-YEAR TREASURY SECURITIES INTEREST RATES

Generally for plan years beginning af-
ter 2007, § 431 specifies the minimum
funding requirements that apply to mul-
tiemployer plans pursuant to § 412. Sec-
tion 431(c)(6)(B) specifies a minimum
amount for the full-funding limitation de-
scribed in § 431(c)(6)(A), based on the
plan's current liability. Section 431(c)(6)
(E)(ii)(I) provides that the interest rate
used to calculate current liability for this

purpose must be no more than 5 percent
above and no more than 10 percent below
the weighted average of the rates of inter-
est on 30-year Treasury securities during
the four-year period ending on the last day
before the beginning of the plan year.
Notice 88-73, 1988-2 C.B. 383, provides
guidelines for determining the weighted
average interest rate. The rate of interest
on 30-year Treasury securities for No-
vember 2016 is 2.86 percent. The Service
determined this rate as the average of the
daily determinations of yield on the 30-

year Treasury bond maturing in August
2046 determined each day through No-
vember 9, 2016 and the yield on the 30-
year Treasury bond maturing in Novem-
ber 2046 determined each day for the
balance of the month. For plan years be-
ginning in the month shown below, the
weighted average of the rates of interest
on 30-year Treasury securities and the
permissible range of rate used to calculate
current liability are as follows:

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

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For Plan Years Beginning in

30-Year Treasury Weighted Average

Permissible Range

Month

Year

90%

to

105%

December

2016

2.91

2.61

3.05

# MINIMUM PRESENT VALUE SEGMENT RATES

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

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

ment rates determined for November 2016
are as follows:

First Segment

Second Segment

Third Segment

1.79

3.80

4.71

## DRAFTING INFORMATION

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

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

information regarding this notice, contact
Mr. Morgan at 202-317-6700 or Tony
Montanaro at 202-317-8698 (not toll-free
numbers).

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Table I Monthly Yield Curve for November 2016 Derived from November 2016 Data.

Maturity

Yield

Maturity

Yield

Maturity

Yield

Maturity

Yield

Maturity

Yield

0.5

0.97

20.5

4.46

40.5

4.74

60.5

4.84

80.5

4.89

1.0

1.24

21.0

4.47

41.0

4.74

61.0

4.84

81.0

4.89

1.5

1.48

21.5

4.48

41.5

4.75

61.5

4.84

81.5

4.89

2.0

1.67

22.0

4.50

42.0

4.75

62.0

4.84

82.0

4.89

2.5

1.82

22.5

4.51

42.5

4.75

62.5

4.85

82.5

4.89

3.0

1.94

23.0

4.52

43.0

4.76

63.0

4.85

83.0

4.89

3.5

2.04

23.5

4.53

43.5

4.76

63.5

4.85

83.5

4.89

4.0

2.14

24.0

4.54

44.0

4.76

64.0

4.85

84.0

4.90

4.5

2.25

24.5

4.55

44.5

4.77

64.5

4.85

84.5

4.90

5.0

2.36

25.0

4.55

45.0

4.77

65.0

4.85

85.0

4.90

5.5

2.48

25.5

4.56

45.5

4.77

65.5

4.85

85.5

4.90

6.0

2.60

26.0

4.57

46.0

4.77

66.0

4.86

86.0

4.90

6.5

2.73

26.5

4.58

46.5

4.78

66.5

4.86

86.5

4.90

7.0

2.87

27.0

4.59

47.0

4.78

67.0

4.86

87.0

4.90

7.5

3.00

27.5

4.60

47.5

4.78

67.5

4.86

87.5

4.90

8.0

3.13

28.0

4.60

48.0

4.79

68.0

4.86

88.0

4.90

8.5

3.25

28.5

4.61

48.5

4.79

68.5

4.86

88.5

4.90

9.0

3.37

29.0

4.62

49.0

4.79

69.0

4.86

89.0

4.90

9.5

3.48

29.5

4.63

49.5

4.79

69.5

4.86

89.5

4.90

10.0

3.58

30.0

4.63

50.0

4.80

70.0

4.87

90.0

4.91

10.5

3.67

30.5

4.64

50.5

4.80

70.5

4.87

90.5

4.91

11.0

3.76

31.0

4.65

51.0

4.80

71.0

4.87

91.0

4.91

11.5

3.84

31.5

4.65

51.5

4.80

71.5

4.87

91.5

4.91

12.0

3.92

32.0

4.66

52.0

4.81

72.0

4.87

92.0

4.91

12.5

3.98

32.5

4.66

52.5

4.81

72.5

4.87

92.5

4.91

13.0

4.04

33.0

4.67

53.0

4.81

73.0

4.87

93.0

4.91

13.5

4.10

33.5

4.68

53.5

4.81

73.5

4.87

93.5

4.91

14.0

4.14

34.0

4.68

54.0

4.81

74.0

4.88

94.0

4.91

14.5

4.19

34.5

4.69

54.5

4.82

74.5

4.88

94.5

4.91

15.0

4.22

35.0

4.69

55.0

4.82

75.0

4.88

95.0

4.91

15.5

4.26

35.5

4.70

55.5

4.82

75.5

4.88

95.5

4.91

16.0

4.29

36.0

4.70

56.0

4.82

76.0

4.88

96.0

4.91

16.5

4.32

36.5

4.71

56.5

4.82

76.5

4.88

96.5

4.91

17.0

4.34

37.0

4.71

57.0

4.83

77.0

4.88

97.0

4.91

17.5

4.36

37.5

4.71

57.5

4.83

77.5

4.88

97.5

4.92

18.0

4.38

38.0

4.72

58.0

4.83

78.0

4.88

98.0

4.92

18.5

4.40

38.5

4.72

58.5

4.83

78.5

4.89

98.5

4.92

19.0

4.42

39.0

4.73

59.0

4.83

79.0

4.89

99.0

4.92

19.5

4.43

39.5

4.73

59.5

4.84

79.5

4.89

99.5

4.92

20.0

4.45

40.0

4.73

60.0

4.84

80.0

4.89

100.0

4.92

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# 2017 Standard Mileage Rates

## Notice 2016-79

### SECTION 1. PURPOSE

This notice provides the optional 2017
standard mileage rates for taxpayers to use
in computing the deductible costs of op-
erating an automobile for business, chari-
table, medical, or moving expense pur-
poses. This notice also provides the
amount taxpayers must use in calculating
reductions to basis for depreciation taken
under the business standard mileage rate,
and the maximum standard automobile
cost that may be used in computing the
allowance under a fixed and variable rate
(FAVR) plan.

### SECTION 2. BACKGROUND

Rev. Proc. 2010-51, 2010-51 I.R.B.
883, provides rules for computing the de-
ductible costs of operating an automobile
for business, charitable, medical, or mov-
ing expense purposes, and for substantiat-
ing, under § 274(d) of the Internal Reve-
nue Code and § 1.274-5 of the Income
Tax Regulations, the amount of ordinary
and necessary business expenses of local
transportation or travel away from home.
Taxpayers using the standard mileage
rates must comply with Rev. Proc. 2010-
51. However, a taxpayer is not required to
use the substantiation methods described
in Rev. Proc. 2010-51, but instead may
substantiate using actual allowable ex-
pense amounts if the taxpayer maintains
adequate records or other sufficient evi-
dence.

An independent contractor conducts an
annual study for the Internal Revenue Ser-
vice of the fixed and variable costs of
operating an automobile to determine the
standard mileage rates for business, med-
ical, and moving use reflected in this no-
tice. The standard mileage rate for chari-
table use is set by § 170(i).

### SECTION 3. STANDARD MILEAGE RATES

The standard mileage rate for transpor-
tation or travel expenses is 53.5 cents per
mile for all miles of business use (busi-

ness standard mileage rate). See section 4
of Rev. Proc. 2010-51.

The standard mileage rate is 14 cents
per mile for use of an automobile in ren-
dering gratuitous services to a charitable
organization under § 170. See section 5 of
Rev. Proc. 2010-51.

The standard mileage rate is 17 cents
per mile for use of an automobile (1) for
medical care described in § 213, or (2) as
part of a move for which the expenses are
deductible under § 217. See section 5 of
Rev. Proc. 2010-51.

### SECTION 4. BASIS REDUCTION AMOUNT

For automobiles a taxpayer uses for
business purposes, the portion of the busi-
ness standard mileage rate treated as de-
preciation is 23 cents per mile for 2013,
22 cents per mile for 2014, 24 cents per
mile for 2015, 24 cents per mile for 2016,
and 25 cents per mile for 2017. See sec-
tion 4.04 of Rev. Proc. 2010-51.

### SECTION 5. MAXIMUM STANDARD AUTOMOBILE COST

For purposes of computing the allow-
ance under a FAVR plan, the standard
automobile cost may not exceed $27,900
for automobiles (excluding trucks and
vans) or $31,300 for trucks and vans. See
section 6.02(6) of Rev. Proc. 2010-51.

### SECTION 6. EFFECTIVE DATE

This notice is effective for (1) deduct-
ible transportation expenses paid or in-
curred on or after January 1, 2017, and (2)
mileage allowances or reimbursements
paid to an employee or to a charitable
volunteer (a) on or after January 1, 2017,
and (b) for transportation expenses the
employee or charitable volunteer pays or
incurs on or after January 1, 2017.

### SECTION 7. EFFECT ON OTHER DOCUMENTS

Notice 2016-01 is superseded.

### DRAFTING INFORMATION

The principal author of this notice is
Bernard P. Harvey of the Office of Asso-
ciate Chief Counsel (Income Tax and Ac-
counting). For further information on this

notice contact Bernard P. Harvey on (202)
317-7005 (not a toll-free number).

# 2016 Required Amendments List for Qualified Retirement Plans

## Notice 2016-80

### I. PURPOSE

This notice contains the Required
Amendments List for 2016 (2016 RA
List). Section 5.05(3) of Rev. Proc. 2016-
37, 2016-29 I.R.B. 136, provides that, in
the case of an individually designed plan,
the remedial amendment period for a dis-
qualifying provision arising as a result of
a change in qualification requirements
generally is extended to the end of the
second calendar year that begins after the
issuance of the Required Amendments
List (RA List) in which the change in
qualification requirements appears. Pursu-
ant to section 5.05(3) of Rev. Proc. 2016-
37, this notice provides that December 31,
2018 is the last day of the remedial
amendment period with respect to a dis-
qualifying provision arising as a result of
a change in qualification requirements that
appears on this 2016 RA List. As a result,
under sections 8.01 and 5.05(3) of Rev.
Proc. 2016-37, December 31, 2018 is
also the plan amendment deadline for a
disqualifying provision arising as a result
of a change in qualification requirements
that appears on the 2016 RA List. How-
ever, a later date may apply to a govern-
mental plan (as defined in section 414(d))
pursuant to sections 8.01 and 5.06(3) of
Rev. Proc. 2016-37.

### II. BACKGROUND

Section 401(b) of the Internal Revenue
Code provides a remedial amendment pe-
riod during which a plan may be amended
retroactively to comply with the qualifica-
tion requirements under section 401(a).
Section 1.401(b)-1 of the Income Tax
Regulations describes the disqualifying
provisions that may be amended retroac-
tively and the remedial amendment period
during which retroactive amendments
may be adopted. Those regulations also
grant the Commissioner the discretion to
designate certain plan provisions as dis-

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qualifying provisions and to extend the
remedial amendment period.

Rev. Proc. 2016-37 eliminates, as of
January 1, 2017, the five-year remedial
amendment cycle system for individually
designed plans that was set forth in Rev.
Proc. 2007-44, 2007-2 C.B. 54.

Sections 5.05(3) and 5.06(3) of Rev.
Proc. 2016-37 extend the remedial
amendment period for individually de-
signed plans to correct disqualifying pro-
visions that arise as a result of a change in
qualification requirements. Under section
5.05(3), the remedial amendment period is
extended to the end of the second calendar
year that begins after the issuance of the
RA List on which the change in qualifi-
cation requirements appears. Section
5.06(3) provides a special rule for govern-
mental plans (as defined in section 414(d))
that could further extend the remedial
amendment period in some cases.

Section 8.01 of Rev. Proc. 2016-37
provides that the plan amendment dead-
line with respect to a disqualifying provi-
sion described in section 5 of Rev. Proc.
2016-37 is the date on which the remedial
amendment period ends with respect to
that disqualifying provision.

Section 9 of Rev. Proc. 2016-37 pro-
vides that the Department of the Treasury
(the Treasury Department) and the Inter-
nal Revenue Service (IRS) intend to pub-
lish annually an RA List. In general, a
change in qualification requirements will
not appear on an RA List until guidance
with respect to that change (including, in
certain cases, model amendments) has
been provided in regulations or in other
guidance published in the Internal Reve-
nue Bulletin. However, in the discretion
of the Treasury Department and the IRS, a
change in qualification requirements may
be included on an RA List in other cir-
cumstances, such as in cases in which a
statutory change is enacted and the Trea-
sury Department and the IRS anticipate
that no guidance will be issued.

### III. CONTENT AND ORGANIZATION OF RA LIST

In general, an RA List includes statu-
tory and administrative changes in quali-
fication requirements that are first effec-
tive during the plan year in which the list
is published. However, an RA List does
not include guidance issued or legislation
enacted after the list has been prepared1
and also does not include:

· Statutory changes in qualification re-
quirements for which the Treasury De-
partment and the IRS expect to issue
guidance (which would be included on
an RA List issued in a future year);

· Changes in qualification requirements
that permit (but do not require) op-
tional plan provisions (in contrast to
changes in the qualification require-
ments that cause existing plan provi-
sions, which may include optional
plan provisions previously adopted, to
become disqualifying provisions);2 or

· Changes in the tax laws affecting qual-
ified plans that do not change the qual-
ification requirements under section
401(a) (such as changes to the tax
treatment of plan distributions, or
changes to the funding requirements
for qualified plans).

The RA List is divided into two parts.
Part A covers changes in qualification re-
quirements that generally would require
an amendment to most plans or to most
plans of the type affected by the change.

Part B includes changes in qualifica-
tion requirements that the Treasury De-
partment and the IRS anticipate will not
require amendments in most plans, but
might require an amendment because of
an unusual plan provision in a particular
plan. If a change affects a particular qual-
ification requirement that most plans in-
corporate by reference, Part B would in-
clude the change because a particular plan
might not incorporate the qualification re-
quirement by reference and thus, might
contain language inconsistent with the
change. For example, if a defined benefit
plan incorporates the limitation of section
436(d)(2) by reference to the statute or

regulations (or through the use of the sam-
ple amendment in Notice 2011-96,
2011-52 I.R.B. 915), no amendment to
the plan would be required to comply with
the changes made by section 2003 of the
Highway Transportation and Funding Act
of 2014. P.L. 113-159.

Annual, monthly, or other periodic
changes to (1) the various dollar limits
that are adjusted for cost of living in-
creases as provided in section 415(d), etc.,
(2) the spot segment rates used to deter-
mine the applicable interest rate under
section 417(e)(3), and (3) the applicable
mortality table under section 417(e)(3),
are treated as included on the RA List for
the year in which such changes are effec-
tive even though they are not directly ref-
erenced on such RA List. The Treasury
Department and the IRS anticipate that
few plans have language that will need to
be amended on account of these changes.

The fact that a change in a qualification
requirement is included on the RA List
does not mean that a plan must be
amended as a result of that change. Each
plan sponsor must determine whether a
particular change in a qualification re-
quirement requires an amendment to its
plan.

### IV. 2016 REQUIRED AMENDMENTS LIST

Part A. Changes in qualification require-
ments that generally would re-
quire an amendment to most plans
or to most plans of the type af-
fected by the change.

· None

Part B. Other changes in qualification re-
quirements that may require an
amendment.

· Collectively-bargained defined benefit
plans: Restrictions on accelerated dis-
tributions from underfunded single-
employer plans in employer bank-
ruptcy under § 436. (Highway and
Transportation Funding Act of 2014,
P.L. 113-159, § 2003)

1RA Lists may include changes in qualification requirements that were first effective in a prior year that were not included on a prior RA List under certain circumstances, such as changes
in qualification requirements that were issued or enacted after the prior year's RA List was prepared.

2The remedial amendment period and plan amendment deadline for discretionary changes to the terms of a plan are governed by sections 5.05(2), 5.06(2), and 8.02 of Rev. Proc. 2016-37,
and are not affected by the inclusion of a change in qualification requirements on an RA List.

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## V. DRAFTING INFORMATION

The principal author of this notice is
Anne Bolling of the Office of Associate
Chief Counsel (Tax Exempt and Govern-
ment Entities). For further information re-
garding this notice, contact Ms. Bolling at
(202) 317-6799 (not a toll-free number).

26 CFR 1.6049.00-00: Returns Relating to Pay-
ments of Interest(Also: 1.3406.07-00 Exceptions to
Backup Withholding)

December 2016

Supplement to Rev. Proc.
2014-64, Implementation
of Nonresident Alien
Deposit Interest
Regulations

Rev. Proc. 2016-56

SECTION 1. PURPOSE

This revenue procedure supplements
the listing in Section 3 of Revenue Proce-
dure 2014-64, 2014-53 I.R.B. 1022, of
the countries with respect to which the
reporting requirement of §§ 1.6049-
4(b)(5) and 1.6049-8(a) of the Income
Tax Regulations applies, effective for in-
terest paid on or after January 1, 2017.

This revenue procedure also supple-
ments the listing in Section 4 of Revenue
Procedure 2014-64, as previously sup-
plemented by Rev. Proc. 2015-50,
2015-42 I.R.B. 583, and Rev. Proc.
2016-18, 2016-17 I.R.B. 635, of the
countries with which the Department of
the Treasury (Treasury Department) and
the Internal Revenue Service (IRS) have
determined that it is appropriate to have
an automatic exchange relationship with
respect to the information collected under
§§ 1.6049-4(b)(5) and 1.6049-8(a).

## SECTION 2. BACKGROUND

Sections 1.6049-4(b)(5) and 1.6049-
8(a), as revised by TD 9584, require the
reporting of certain deposit interest paid to
nonresident alien individuals on or after
January 1, 2013. Rev. Proc. 2012-24,
2012-20 I.R.B. 913, was published con-
temporaneously with the publication of
TD 9584. Section 3 of that revenue pro-
cedure identified those countries with

which the United States has in force an
information exchange agreement, such
that interest paid to residents of such
countries must be reported by payors to
the extent required under §§ 1.6049-
4(b)(5) and 1.6049-8(a). Section 4 of that
revenue procedure identified the countries
with which the Treasury Department and
the IRS had determined that it was appro-
priate to have an automatic exchange re-
lationship with respect to the information
collected under §§ 1.6049-4(b)(5) and
1.6049-8(a). Rev. Proc. 2012-24 was up-
dated and superseded by Rev. Proc.
2014-64, Sections 3 and 4 of which con-
tained updated lists of countries. Rev.
Proc. 2014-64 was supplemented by Rev.
Proc. 2015-50 and Rev. Proc. 2016-18,
each of which added countries to the list
in Section 4 of Rev. Proc. 2014-64. This
revenue procedure supplements Rev.
Proc. 2014-64 by adding Saint Lucia to
the list of countries in Section 3 of Rev.
Proc. 2014-64, and by adding Israel, Re-
public of Korea, and Saint Lucia to the list
of countries in Section 4 of Rev. Proc.
2014-64.

## SECTION 3. SUPPLEMENT TO SECTION 3 OF REV. PROC. 2014-64

Section 3 of Rev. Proc. 2014-64 is
supplemented to read as follows:

The following are the countries with
which the United States has in effect an
income tax or other convention or bilat-
eral agreement relating to the exchange of
tax information within the meaning of
section 6103(k)(4) pursuant to which the
United States agrees to provide, as well as
receive, information and under which the
competent authority is the Secretary of the
Treasury or his delegate:

Antigua & Barbuda

Aruba

Australia

Austria

Azerbaijan

Bangladesh

Barbados

Belgium

Bermuda

Brazil

British Virgin Islands

Bulgaria

Canada

Cayman Islands

China
Colombia

Costa Rica
Croatia

Curacao
Cyprus
Czech Republic

Denmark
Dominica

Dominican Republic

Egypt
Estonia

Finland

France

Germany

Gibraltar
Greece

Grenada

Guernsey

Guyana

Honduras

Hong Kong

Hungary

Iceland

India

Indonesia

Ireland

Isle of Man
Israel
Italy

Jamaica

Japan
Jersey

Kazakhstan

Korea, Republic of

Latvia

Liechtenstein

Lithuania

Luxembourg

Malta

Marshall Islands

Mauritius

Mexico

Monaco

Morocco

Netherlands

Netherlands island territories: Bonaire,
Saba, and St. Eustatius

New Zealand

Norway

Pakistan

Panama

Peru

Philippines

Poland

Portugal

Romania

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Russian Federation

Azerbaijan

Poland

Saint Lucia

Brazil

Saint Lucia

Slovak Republic

Canada

Slovak Republic

Slovenia

Czech Republic

Slovenia

South Africa

Denmark

South Africa

Spain

Estonia

Spain

Sri Lanka

Finland

Sweden

St. Maarten (Dutch part)

France

United Kingdom

Sweden

Germany

SECTION 5. EFFECT ON OTHER DOCUMENTS

Switzerland

Gibraltar

Thailand

Guernsey

Trinidad and Tobago

Hungary

Rev. Proc. 2014-64, as supplemented

Tunisia

Iceland

by Rev. Proc. 2015-50 and Rev. Proc.

Turkey

India

2016-18, is further supplemented.

Ukraine

Ireland

United Kingdom

Isle of Man

SECTION 6. EFFECTIVE DATE

Venezuela

Israel

SECTION 4. SUPPLEMENT TO

Italy

With respect to the additional country

SECTION 4 OF REV. PROC. 2014-64

Jamaica

listed in Section 3, this revenue procedure

Jersey

is effective for interest paid on or after January 1, 2017.

Section 4 of Rev. Proc. 2014-64, as

Korea, Republic of

supplemented by Rev. Proc. 2015-50 and

Latvia

SECTION 7. DRAFTING

Rev. Proc. 2016-18, is further supple-

Liechtenstein

INFORMATION

mented to read as follows:

Lithuania

The following list identifies the coun-

Luxembourg

The principal author of this revenue

tries with which the automatic exchange

Malta

procedure is Jackie Bennett Manasterli of

of the information collected under

Mauritius

the Office of Associate Chief Counsel (In-

§§ 1.6049-4(b)(5) and 1.6049-8 has been

Mexico

ternational). For further information re-

determined by the Treasury Department and

Netherlands

garding this revenue procedure contact

the IRS to be appropriate:

New Zealand

Ms. Manasterli at (202) 317-6941 (not a

Australia

Norway

toll-free number).

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## Part IV. Items of General Interest

Liabilities Recognized as
Recourse Partnership
Liabilities Under Section
752

### REG-122855-15

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Partial withdrawal of notice of
proposed rulemaking and notice of pro-
posed rulemaking, including by cross ref-
erence to temporary regulations.

SUMMARY: This document contains
proposed regulations that incorporate the
text of related temporary regulations and
withdraws a portion of a notice of pro-
posed rulemaking (REG-119305-11) to
the extent not adopted by final regulations.
This document also contains new pro-
posed regulations addressing when certain
obligations to restore a deficit balance in a
partner's capital account are disregarded
under section 704 of the Internal Revenue
Code (Code) and when partnership liabil-
ities are treated as recourse liabilities un-
der section 752. These regulations would
affect partnerships and their partners.

DATES: The notice of proposed rulemak-
ing under sections 707 and 752 that was
published in the Federal Register on Jan-
uary 30, 2014 (REG-119305-11, 79 FR
4826), is partially withdrawn as of Octo-
ber 5, 2016. Written or electronic com-
ments and requests for a public hearing
must be received by January 3, 2017.

ADDRESSES: Send submissions to: CC:
PA:LPD:PR (REG-122855-15), room 5203,
Internal Revenue Service, PO Box 7604, Ben
Franklin Station, Washington, DC 20044.
Submissions may be hand-delivered Mon-
day through Friday between the hours of 8
a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
122855-15), Courier's Desk, Internal Rev-
enue Service, 1111 Constitution Avenue,
N.W., Washington, DC, or sent electron-
ically, via the Federal eRulemaking Portal
site at http://www.regulations.gov (indi-
cate IRS and REG-122855-15).

FOR FURTHER INFORMATION CON-
TACT: Concerning the proposed regula-

tions, Caroline E. Hay or Deane M.
Burke, (202) 317-5279; concerning sub-
missions of comments and requests for a
public hearing, Regina L. Johnson, (202)
317-6901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:
In addition to these proposed regulations,
the Treasury Department and the IRS are
publishing in the Rules and Regulations
section in this issue of the Bulletin .: (1)
final regulations under section 707 con-
cerning disguised sales and under section
752 regarding the allocation of excess
nonrecourse liabilities and (2) temporary
regulations concerning a partner's share
of partnership liabilities for purposes of
section 707 and the treatment of certain
payment obligations under section 752.

### Paperwork Reduction Act

The collection of information related to
these proposed regulations under section
752 is reported on Form 8275, Disclosure
Statement, and has been reviewed in ac-
cordance with the Paperwork Reduction
Act (44 U.S.C. 3507) and approved by the
Office of Management and Budget under
control number 1545-0889. Comments
concerning the collection of information
and the accuracy of estimated average an-
nual burden and suggestions for reducing
this burden should be sent to the Office of
Management and Budget, Attn: Desk Of-
ficer for the Department of the Treasury,
Office of Information and Regulatory Af-
fairs, Washington, DC 20503, with copies
to the Internal Revenue Service, IRS Re-
ports Clearance Officer, SE:W:CAR:MP:
T:T:SP, Washington, DC 20224. Com-
ments on the burden associated with this
collection of information should be re-
ceived by December 5, 2016.

The collection of information in these
proposed regulations is in proposed
§ 1.752-2(b)(3)(ii)(D) (which cross refer-
ences the requirement in § 1.752-
2T(b)(3)(ii)(D)). This information is re-
quired by the IRS to ensure that section
752 of the Code and applicable regula-
tions are properly applied for allocations
of partnership liabilities. The respondents
will be partners and partnerships.

An agency may not conduct or spon-
sor, and a person is not required to re-

spond to, a collection of information un-
less it displays a valid control number
assigned by the Office of Management
and Budget.

Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by section 6103.

### Background

#### 1. Overview

This document contains proposed
amendments to the Income Tax Regula-
tions (26 CFR part 1) under sections 704,
707, and 752 of the Code. On January 30,
2014, the Treasury Department and the
IRS published a notice of proposed rule-
making in the Federal Register (REG-
119305-11, 79 FR 4826) to amend the
then existing regulations under section
707 relating to disguised sales of property
to or by a partnership and under section
752 concerning the treatment of partner-
ship liabilities (the 2014 Proposed Regu-
lations). The 2014 Proposed Regulations
provided certain technical rules intended
to clarify the application of the disguised
sale rules under section 707. The 2014
Proposed Regulations also contained rules
regarding the sharing of partnership re-
course and nonrecourse liabilities under
section 752.

A public hearing on the 2014 Proposed
Regulations was not requested or held, but
the Treasury Department and the IRS re-
ceived written comments. After consider-
ation of, and in response to, the comments
on the 2014 Proposed Regulations, the
Treasury Department and the IRS are
withdrawing the 2014 Proposed Regula-
tions under § 1.752-2 and publishing new
proposed regulations under § 1.752-2, as
well as proposed regulations under section
704. Concurrently in this issue of the Bul-
letin, the Treasury Department and the
IRS are also publishing final regulations
that adopt, as modified, the 2014 Proposed
Regulations under section 707 and
§ 1.752-3, and temporary regulations un-
der sections 707 and 752.

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2\. Summary of Applicable Law

Section 752 separates partnership lia-
bilities into two categories: recourse lia-
bilities and nonrecourse liabilities. Section
1.752-1(a)(1) provides that a partnership
liability is a recourse liability to the extent
that any partner or related person bears the
economic risk of loss (EROL) for that
liability under § 1.752-2. Section 1.752-
1(a)(2) provides that a partnership liability
is a nonrecourse liability to the extent that
no partner or related person bears the
EROL for that liability under § 1.752-2.

A partner generally bears the EROL
for a partnership liability if the partner or
related person has an obligation to make a
payment to any person within the meaning
of § 1.752-2(b). For purposes of deter-
mining the extent to which a partner or
related person has an obligation to make a
payment, an obligation to restore a deficit
capital account upon liquidation of the
partnership under the section 704(b) reg-
ulations is taken into account. Further, for
this purpose, § 1.752-2(b)(6) of the exist-
ing regulations presumes that partners and
related persons who have payment obliga-
tions actually perform those obligations,
irrespective of their net worth, unless the
facts and circumstances indicate a plan to
circumvent or avoid the obligation (the
satisfaction presumption). However, the
satisfaction presumption is subject to an
anti-abuse rule in § 1.752-2(j) pursuant to
which a payment obligation of a partner or
related person may be disregarded or
treated as an obligation of another person
if facts and circumstances indicate that a
principal purpose of the arrangement is to
eliminate the partner's EROL with respect
to that obligation or create the appearance
of the partner or related person bearing the
EROL when the substance is otherwise.
Under the existing rules, the satisfaction
presumption is also subject to a disre-
garded entity net value requirement under
§ 1.752-2(k) pursuant to which, for pur-
poses of determining the extent to which a
partner bears the EROL for a partnership
liability, a payment obligation of a disre-
garded entity is taken into account only to
the extent of the net value of the disre-
garded entity as of the allocation date that
is allocated to the partnership liability.

#### 3. 2014 Proposed Regulations

As discussed in greater detail in the
Summary of Comments and Explanation
of Provisions section of this preamble,
§ 1.752-2 of the 2014 Proposed Regula-
tions generally, among other things, (1)
provided that a partner's or related per-
son's obligation to make a payment with
respect to a partnership liability (exclud-
ing those imposed by state law) would not
be recognized for purposes of section 752
unless each recognition factor was satis-
fied; (2) applied the list of recognition
factors to all payment obligations under
§ 1.752-2(b), including a partner's obli-
gation to restore a deficit capital account
upon liquidation of a partnership (deficit
restoration obligations, or DROs) as pro-
vided under the section 704(b) regula-
tions; and (3) provided generally that a
payment obligation would be recognized
to the extent of the net value of a partner
or related person as of the allocation date.

After consideration of the comments
received on the 2014 Proposed Regula-
tions, the Treasury Department and the
IRS are reconsidering the rules under sec-
tion 752 regarding payment obligations
that are recognized under § 1.752-2(b)(3),
the satisfaction presumption under § 1.752-
2(b)(6), the anti-abuse rule provided in
§ 1.752-2(j), and the net value require-
ment as provided in § 1.752-2(k). Ac-
cordingly, the Treasury Department and
the IRS are withdrawing § 1.752-2 of the
2014 Proposed Regulations and publish-
ing these new proposed regulations that
would amend existing regulations under
sections 704 and 752. These new provi-
sions, and comments received on the 2014
Proposed Regulations that are pertinent to
these new provisions, are discussed in the
Summary of Comments and Explanation
of Provisions section of the preamble that
follows.

#### 4. Final and Temporary Regulations Under Section 707 and Requests for Comments

As previously mentioned, the Treasury
Department and the IRS are concurrently
publishing temporary regulations under
section 707 (concerning disguised sales)
(the 707 Temporary Regulations) and sec-
tion 752 (concerning recourse liabilities,

in particular bottom dollar payment obli-
gations) (the 752 Temporary Regula-
tions), and final regulations under section
707 and § 1.752-3. The temporary regu-
lations are incorporated by cross reference
in these proposed regulations. Notably,
the 707 Temporary Regulations provide
that, for disguised sale purposes, partners
determine their share of any partnership
liability in the manner in which excess
nonrecourse liabilities are allocated under
§ 1.752-3(a)(3) (with certain limitations).
Generally, a partner's share of the excess
nonrecourse liability is determined in ac-
cordance with the partner's share of part-
nership profits taking into account all the
facts and circumstances relating to the
economic arrangement of the partners.
The Treasury Department and the IRS
recognize that taxpayers may require fur-
ther guidance regarding reasonable meth-
ods for determining a partner's share of
partnership profits under § 1.752-3(a)(3)
for disguised sale purposes, especially
given that a partner's share may change
from year to year or differ with respect to
different partnership assets and believe it
may be appropriate to issue administrative
guidance for this purpose. Accordingly,
comments are requested regarding possi-
ble safe harbors and reasonable methods
for determining a partner's share of prof-
its, taking into account all of the relevant
facts and circumstances relating to the
economic arrangement of the partners.
The preamble to the temporary regula-
tions describes the provisions in greater
detail. In addition, the final regulations
under section 707 also include a request
for comments concerning the exception
for reimbursements of preformation capi-
tal expenditures under § 1.707-4(d),
which is described in greater detail in the
preamble to the final regulations.

### Summary of Comments and Explanation of Provisions

1\. Rights of Reimbursement

Section 1.752-2(b)(1) provides that,
except as otherwise provided in § 1.752-
2, a partner bears the EROL for a partner-
ship liability to the extent that, if the
partnership constructively liquidated, the
partner or related person would be obligated
to make a payment to any person (or a
contribution to the partnership) because that

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liability becomes due and payable and the
partner or related person would not be enti-
tled to reimbursement from another partner
or a person that is a related person to another
partner. Section 1.752-2(b)(1) presumes
that, in the constructive liquidation, the part-
nership has a value of zero with which to
pay its liabilities. Under the 2014 Proposed
Regulations, a partner would not bear the
EROL under § 1.752-2(b)(1) if the partner
or related person is entitled to a reimburse-
ment from "any person." Commenters noted
that a reimbursement from "any person"
would include a reimbursement from the
partnership, which is contrary to the intent
of the regulations under section 752. A right
to be reimbursed by the partnership should
be disregarded, as § 1.752-2(b)(1) presumes
that the partnership would not be able to pay
the liability or reimburse the partner. The
Treasury Department and the IRS agree
with the concerns expressed in the com-
ments; therefore, these proposed regulations
do not include the changes to § 1.752-
2(b)(1) that were in the 2014 Proposed Reg-
ulations.

#### 2. Arrangements Part of a Plan to Circumvent or Avoid an Obligation

The 2014 Proposed Regulations pro-
vided that a partner's or related person's
obligation to make a payment with respect
to a partnership liability (excluding those
imposed by state law) will not be recog-
nized for purposes of section 752 unless:
(1) the partner or related person is (A)
required to maintain a commercially rea-
sonable net worth throughout the term of
the payment obligation or (B) subject to
commercially reasonable contractual re-
strictions on transfers of assets for inade-
quate consideration; (2) the partner or re-
lated person is required periodically to
provide commercially reasonable docu-
mentation regarding the partner's or re-
lated person's financial condition; (3) the
term of the payment obligation does not
end prior to the term of the partnership
liability; (4) the payment obligation does
not require that the primary obligor or any
other obligor with respect to the partner-
ship liability directly or indirectly hold
money or other liquid assets in an amount
that exceeds the reasonable needs of such
obligor; (5) the partner or related person
received arm's length consideration for

assuming the payment obligation; and (6)
the obligation is not a bottom dollar guar-
antee or indemnity (recognition factors).

Commenters expressed concerns with
the all-or-nothing approach in the 2014
Proposed Regulations. One commenter
noted that a partner could cause an obli-
gation to deliberately fail one of the rec-
ognition factors so as to cause a liability to
be treated as nonrecourse if such charac-
terization potentially would be beneficial
to such partner, even if that partner did, in
fact, bear the EROL. This commenter also
noted that commercial arrangements
rarely satisfy each and every one of the
recognition factors and commercial prac-
tices tend to change over time, thereby
rendering the recognition factors out of
date. This commenter recommended that
regulations instead provide a nonexclu-
sive list of facts and circumstances con-
taining as factors many of the items iden-
tified in the 2014 Proposed Regulations.

The Treasury Department and the IRS
believe that the concerns expressed by the
commenters are valid and thus propose to
move the list of factors to an anti-abuse
rule in § 1.752-2(j), other than the recog-
nition factors concerning bottom dollar
guarantees and indemnities, which are ad-
dressed in the 752 Temporary Regula-
tions. Under the anti-abuse rule, factors
are weighed to determine whether a pay-
ment obligation should be respected. The
list of factors in the anti-abuse rule in
these proposed regulations is nonexclu-
sive, and the weight to be given to any
particular factor depends on the particular
case. Furthermore, the presence or ab-
sence of any particular factor, in itself, is
not necessarily indicative of whether or
not a payment obligation is recognized
under § 1.752-2(b).

In addition to comments addressing the
recognition factor approach in the 2014
Proposed Regulations, the Treasury De-
partment and the IRS received specific
comments regarding the individual recog-
nition factors. With respect to the first
recognition factor regarding commercially
reasonable net worth or restrictions on
transfers, one commenter agreed that an
obligor should have the wherewithal to
make a payment to the extent required for
the entire duration of its obligation, but
believed that this concern is alleviated by
the anti-abuse rule in the current regula-

tions under § 1.752-2(j). This commenter
suggested that the anti-abuse rule in
§ 1.752-2(j) contain additional examples
to illustrate abusive or problematic situa-
tions. Another commenter noted that the
2014 Proposed Regulations did not ad-
dress the consequences if a partner or re-
lated person breaches its payment obliga-
tion under an agreement regarding net
worth or restrictions on transfers and sug-
gested that the regulations address such
consequences in an anti-abuse rule (for
example, a partner's or related person's
payment obligation may be disregarded if
it is determined that the creditor lacked
the intent to enforce its rights under the
agreement).

With respect to the first two recogni-
tion factors, commenters expressed con-
cerns with the use of the terms "commer-
cially reasonable" and "commercially
reasonable documentation." One com-
menter believed that these terms are vague
and subjective and would require partner-
ships to make difficult judgments as to
whether these recognition factors have
been met prior to allocating any partner-
ship liability. Another commenter noted
that the "commercially reasonable docu-
mentation" recognition factor did not
specify who should receive the documen-
tation and that such documentation should
be provided to the lender.

Moving the list of factors to an anti-
abuse rule should alleviate some of the
concerns expressed regarding both
whether a payment obligor has the where-
withal to pay and the use of the term
"commercially reasonable." The proposed
regulations also revise the first two factors
to provide clarity by limiting the first fac-
tor to examine solely whether the partner
or related person is subject to commer-
cially reasonable contractual restrictions
that protect the likelihood of payment,
such as restrictions on transfers for inad-
equate consideration or equity distribu-
tions. In addition, the proposed regula-
tions do not retain the subjective
commercially reasonable net worth factor,
but instead include a new factor that ex-
amines whether the payment obligation
restricts the creditor from promptly pursu-
ing payment following a default on the
partnership liability or whether there are
other arrangements that indicate a plan to
delay collection.

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The proposed regulations retain the use
of the "commercially reasonable" stan-
dard, however, because different facts may
require a different standard of whether con-
tractual restrictions and documentation
are "commercially reasonable" with re-
spect to a particular industry, and the flex-
ible nature of the term is helpful in in-
forming partnerships and their partners
that obligations should be consistent with
what is customary in the marketplace.
With respect to the second recognition
factor regarding documentation, these
proposed regulations also clarify that the
factor examines whether commercially
reasonable documentation was provided
to the party that benefits from the payment
obligation (for example, the creditor in the
case of a guarantee or the indemnified
party in the case of an indemnification
arrangement).

Commenters also noted that certain
recognition factors do not take into ac-
count industry specific practices. One
commenter pointed out that the require-
ment that a payment obligation last
throughout the full term of the partner-
ship's loan is contrary to commercial
practice in some cases. In particular, the
commenter noted that, in the real estate
industry context, it is common for a con-
struction loan to be guaranteed until the
property reaches a required level of stabi-
lization. This commenter did believe,
however, that a payment obligation should
be disregarded if the guarantor or other ob-
ligor has an unrestricted unilateral right to
terminate the obligation at will, including
immediately before the obligation be-
comes due and payable. Commenters also
noted that the recognition factor that
would require arm's length consideration
is not commercial, as a partner is often
willing to enter into a guarantee or other
payment obligation with respect to a part-
nership liability because the partner will
benefit from the liability in the obligor's
capacity as a partner. The Treasury De-
partment and the IRS agree with these
recommendations; thus, these proposed
regulations take into account industry
practice with respect to terminations of
payment obligations and do not include
the arm's length consideration factor.

A commenter also expressed concerns
regarding the recognition factor that ex-
amines whether a primary obligor or any

other obligor with respect to the partner-
ship liability is required to hold assets in
an amount that exceeds the reasonable
needs of the obligor. The commenter
noted that partnership agreements often
include restrictions on distributions before
certain hurdles are satisfied for a variety
of reasons, such as to protect the interests
of preferred partners or for prudent busi-
ness management. Another commenter
agreed with the legal theory underpinning
the recognition factor (to address fact pat-
terns in which the taxpayer intended and
acted to ensure the partnership maintained
sufficient collateral to repay the creditor
without exposing the obligor to meaning-
ful liability) but suggested that commer-
cially required or prudent reserves not be
considered. Both commenters suggested
that an example illustrating the restric-
tions that violate this factor would be
helpful.

The commenters' concerns should be
largely addressed by making this recogni-
tion factor one of many examined under
the anti-abuse rule that looks to whether
there is a plan to circumvent or avoid the
obligation. Under the anti-abuse rule, an
obligor's retention of assets for its reason-
able foreseeable needs (such as for com-
mercial or prudent business reasons) gen-
erally would not, on its own, indicate that
there is a plan to circumvent or avoid the
obligation.

Finally, the proposed regulations pro-
vide two additional factors that indicate
when a plan to circumvent or avoid an
obligation exists. The first provides that,
in the case of a guarantee or similar ar-
rangement, the terms of the liability would
be substantially the same had the partner
or related person not agreed to provide the
guarantee. This factor indicates that the
guarantee was not required by the lender,
presumably because the partnership had
sufficient assets to satisfy its obligation.
The second additional factor examines
whether the creditor or other party bene-
fiting from the obligation received exe-
cuted documents with respect to the pay-
ment obligation from the partner or
related person before, or within a com-
mercially reasonable time after, the cre-
ation of the obligation.

#### 3. Deficit Restoration Obligations

The 2014 Proposed Regulations ap-
plied the list of recognition factors dis-
cussed in Section 2 of this Summary of
Comments and Explanation of Provisions
to all payment obligations under § 1.752-
2(b), including a DRO, as provided under
the section 704(b) regulations. Comment-
ers explained that not all of the recogni-
tion factors could be satisfied with respect
to a DRO. In addition, commenters sug-
gested that the regulations under section
704(b) be amended to clarify that if a
DRO is not given effect under section
752, it should not be given effect under
section 704(b).

A DRO is an obligation to the partner-
ship that is imposed by the partnership
agreement. In contrast, a guarantee or in-
demnity is a contractual obligation outside
the partnership agreement. As a result of
this difference and based on the comments
on the 2014 Proposed Regulations, the
proposed regulations refine the list of fac-
tors applicable to DROs and clarify the
interaction of section 752 with section 704
regarding DROs. Under § 1.704-1(b)(2)
(ii)(c)(2) of the existing regulations, a
partner's DRO is not respected if the facts
and circumstances indicate a plan to cir-
cumvent or avoid the partner's DRO.
These proposed regulations add a list of
factors to § 1.704-1(b)(2)(ii)(c) that are
similar to the factors in the proposed anti-
abuse rule under § 1.752-2(j), but specific
to DROs, to indicate when a plan to cir-
cumvent or avoid an obligation exists. Un-
der the proposed regulations, the follow-
ing factors indicate a plan to circumvent
or avoid an obligation: (1) the partner is
not subject to commercially reasonable
provisions for enforcement and collection
of the obligation; (2) the partner is not
required to provide (either at the time the
obligation is made or periodically) com-
mercially reasonable documentation re-
garding the partner's financial condition
to the partnership; (3) the obligation ends
or could, by its terms, be terminated be-
fore the liquidation of the partner's inter-
est in the partnership or when the part-
ner's capital account as provided in
§ 1.704-1(b)(2)(iv) is negative; and (4)
the terms of the obligation are not pro-
vided to all the partners in the partnership
in a timely manner.

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Notwithstanding the proposed factors,
the Treasury Department and the IRS
have concerns with whether and to what
extent it is appropriate to recognize DROs
(and certain partner notes treated as
DROs) as meaningful payment obliga-
tions. Many DROs are triggered only on
the liquidation of a partnership. However,
some partnerships are intended to have
perpetual life and other partnerships can
effectively cease operations but not actu-
ally liquidate; therefore, a partner's DRO
may never be required to be satisfied. In
addition, some DROs can be terminated or
significantly reduced in a manner that may
not be appropriate, and therefore, the
DRO similarly may never be triggered.
The Treasury Department and the IRS re-
quest comments on the extent to which
such DROs should be recognized. In ad-
dition, certain partner notes are treated as
DROs under § 1.704-1(b)(2)(ii)(c)(1) and
(3) of these proposed regulations. The
Treasury Department and the IRS also
request comments concerning whether
these obligations should continue to be
treated as DROs.

#### 4. Exculpatory Liabilities

One commenter suggested that the
2014 Proposed Regulations would result
in more liabilities being characterized as
nonrecourse liabilities, in particular, so-
called, "exculpatory liabilities," and urged
the Treasury Department and the IRS to
provide guidance with respect to such li-
abilities. An exculpatory liability is a lia-
bility that is recourse to an entity under
state law and section 1001, but no partner
bears the EROL within the meaning of
section 752. Thus, the liability is treated
as nonrecourse for section 752 purposes.
The Treasury Department and the IRS are
studying the treatment of exculpatory lia-
bilities under sections 704 and 752 and
agree that guidance is warranted in this
area. However, the treatment of exculpa-
tory liabilities is beyond the scope of these
proposed regulations. The Treasury De-
partment and the IRS seek additional
comments regarding the proper treatment
of an exculpatory liability under regula-
tions under section 704(b) and the effect
of such a liability's classification under
section 1001. Further, the Treasury De-
partment and the IRS request additional

comments addressing the allocation of an
exculpatory liability among multiple as-
sets and possible methods for calculating
minimum gain with respect to such liabil-
ity, such as the so-called "floating lien"
approach (whereby all the assets in the
entity, including cash, are considered to
be subject to the exculpatory liability) or a
specific allocation approach.

#### 5. Net Value

Section 1.752-2(b)(6) of the existing
regulations provides that, for purposes of
determining the extent to which a partner
or related person has a payment obligation
and the EROL, it is assumed that all part-
ners and related persons who have obliga-
tions to make payments actually perform
those obligations, irrespective of their ac-
tual net worth, unless the facts and cir-
cumstances indicate a plan to circumvent
or avoid the obligation. See § 1.752-
2(b)(6), cross referencing § 1.752-2(j)
and (k). Under the anti-abuse rule in
§ 1.752-2(j), a payment obligation is dis-
regarded if there is a plan to circumvent or
avoid such obligation. Section 1.752-
2(k)(1) provides that, when determining
the extent to which a partner bears the
EROL for a partnership liability, a pay-
ment obligation of a business entity that is
disregarded as an entity separate from its
owner under section 856(i), section
1361(b)(3), or §§ 301.7701-1 through
301.7701-3 of the Procedure and Admin-
istration Regulations (a disregarded en-
tity) is taken into account only to the
extent of the net value of the disregarded
entity as of the allocation date that is
allocated to the partnership liability. Sec-
tion 1.752-2(k)(2)(i) provides, in part,
that net value is the fair market value of
all assets owned by the disregarded entity
that may be subject to creditors' claims
under local law less all obligations of the
disregarded entity that do not constitute
§ 1.752-2(b)(1) payment obligations of
the disregarded entity.

The 2014 Proposed Regulations pro-
vided that, in determining the extent to
which a partner or related person other
than an individual or a decedent's estate
bears the EROL for a partnership liability
other than a trade payable, a payment ob-
ligation is recognized only to the extent of
the net value of the partner or related

person that, as of the allocation date, is
allocated to the liability, as determined
under § 1.752-2(k). The 2014 Proposed
Regulations also provided that the partner
must provide a statement concerning the
net value of the payment obligor to the
partnership. The preamble to the 2014
Proposed Regulations requested com-
ments concerning whether the net value
rule should also apply to individuals and
estates and whether the regulations should
consolidate these rules under § 1.752-
2(k).

Commenters expressed concerns that
an expansion of the net value rule would
add considerable burden and expense to
taxpayers and would likely lead to time
consuming and costly disputes regarding
valuations. Another commenter explained
that taxpayers have often avoided the net
value regulations (by not using disre-
garded entities) or have applied the regu-
lations only when the disregarded entity
has minimal or no assets.

Commenters suggested that if the net
value rule is retained, § 1.752-2(k) should
be extended to all partners and related
persons other than individuals. One com-
menter expressed concerns that a partner
who may be treated as bearing the EROL
with respect to a partnership liability
would have to provide information re-
garding the net value of the payment ob-
ligor, which is unnecessarily intrusive.
Another commenter believed that if the
rules requiring net value were extended to
all partners in partnerships, the attempt to
achieve more realistic substance would be
accompanied by a corresponding increase
in the potential for manipulation.

The Treasury Department and the IRS
remain concerned with ensuring that a
partner or related person only be pre-
sumed to satisfy its payment obligation to
the extent that such partner or related per-
son would be able to pay on the obliga-
tion. After consideration of the comments,
however, the Treasury Department and
the IRS agree that expanding the applica-
tion of the net value rules under § 1.752-
2(k) may lead to more litigation and may
unduly burden taxpayers. Furthermore,
net value as provided in § 1.752-2(k) may
not accurately take into account the future
earnings of a business entity, which nor-
mally factor into lending decisions. There-
fore, the Treasury Department and the IRS

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propose to remove § 1.752-2(k) and in-
stead create a new presumption under the
anti-abuse rule in § 1.752-2(j). Under the
presumption in the proposed regulations,
evidence of a plan to circumvent or avoid
an obligation is deemed to exist if the
facts and circumstances indicate that there
is not a reasonable expectation that the
payment obligor will have the ability to
make the required payments if the pay-
ment obligation becomes due and payable.
A payment obligor includes disregarded
entities (including grantor trusts). These
proposed regulations also add an example
to illustrate the application of the anti-
abuse rule when the payment obligor is an
underfunded entity. Under these proposed
regulations, § 1.752-2(b)(6) continues to
presume that payment obligations with re-
spect to a partnership liability will be sat-
isfied unless evidence of a plan to circum-
vent or avoid the obligation exists as
determined under § 1.752-2(j). If evi-
dence of a plan to circumvent or avoid the
obligation exists or is deemed to exist, the
obligation is not recognized under
§ 1.752-2(b) and therefore the partnership
liability is treated as a nonrecourse liabil-
ity under § 1.752-1(a)(2).

### Proposed Applicability Dates

The amendments to § 1.704-1 are pro-
posed to apply on or after the date these
regulations are published as final regula-
tions in the Federal Register. The amend-
ments to § 1.752-2 are proposed to apply
to liabilities incurred or assumed by a
partnership and to payment obligations
imposed or undertaken with respect to a
partnership liability on or after the date
these regulations are published as final
regulations in the Federal Register. Part-
nerships and their partners may rely on
these proposed regulations prior to the
date they are published as final regulations
in the Federal Register. However, the
rules in § 1.752-2(k) still apply to disre-
garded entities until the proposed regula-
tions are published as final regulations in
the Federal Register.

Some commenters were concerned that
the 2014 Proposed Regulations "delinked"
the regulations under sections 704 and 752
concerning DROs, that is, that a DRO
may somehow still be recognized under
section 704 despite not meeting the re-
quirements to be recognized as a payment

obligation under section 752. DROs are
subject to the bottom dollar payment ob-
ligation rules in the 752 Temporary Reg-
ulations, but the rules in these proposed
regulations concerning DROs will not be
effective prior to the date they are pub-
lished as final regulations in the Federal
Register. However, these proposed regu-
lations allow partnerships and their part-
ners to rely on the proposed regulations,
which should address this concern.

### Special Analyses

Certain IRS regulations, including this
one, are exempt from the requirements of
Executive Order 12866, as supplemented
and reaffirmed by Executive Order 13563.
Therefore, a regulatory impact assessment
is not required. It also has been deter-
mined that section 553(b) of the Admin-
istrative Procedure Act (5 U.S.C. chapter
5) does not apply to these regulations. It is
hereby certified that the collection of in-
formation in these regulations will not
have a significant economic impact on a
substantial number of small entities. This
certification is based on the fact that the
amount of time necessary to report the
required information will be minimal in
that it requires partnerships (including
partnerships that may be small entities) to
provide information they already maintain
or can easily obtain to the IRS. Moreover,
it should take a partnership no more than
2 hours to satisfy the information require-
ment in these regulations. Accordingly, a
Regulatory Flexibility Analysis under the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to
section 7805(f) of the Code, this notice of
proposed rulemaking has been submitted
to the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business.

### Comments and Requests for a Public Hearing

Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments (a
signed original and eight (8) copies) or
electronic comments that are submitted
timely to the IRS. The Treasury Depart-
ment and the IRS request comments on all
aspects of the proposed regulations. All
comments will be available for public in-

spection and copying at www.regulations.
gov or upon request. A public hearing will
be scheduled if requested in writing by a
person who timely submits written com-
ments. If a public hearing is scheduled,
notice of the date, time, and place of the
hearing will be published in the Federal
Register.

### Drafting Information

The principal authors of these regula-
tions are Caroline E. Hay and Deane M.
Burke of the Office of the Associate Chief
Counsel (Passthroughs & Special Indus-
tries), IRS. However, other personnel
from the Treasury Department and the
IRS participated in their development.

### Withdrawal of Proposed Regulations

Accordingly, under the authority of 26
U.S.C. 7805, § 1.752-2 of the notice of
proposed rulemaking (REG-119305-11)
that was published in the Federal Regis-
ter on January 30, 2014 (79 FR 4826) is
withdrawn.

* * * * *

### 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 1.707-2 through 1.707-9 also
issued under 26 U.S.C. 707(a)(2)(B).

Par. 2. Section 1.704-1 is amended by:

1\. Adding two sentences to the end of
paragraph (b)(1)(ii)(a).

2\. Adding a sentence to the end of
paragraph (b)(2)(ii)(b)(3) introductory
text.

3\. Removing the undesignated para-
graph following paragraph (b)(2)(ii)
(b)(3).

4\. Adding paragraphs (b)(2)(ii)(b)(4)
through (7).

5\. Revising paragraph (b)(2)(ii)(c).

The additions and revisions read as fol-
lows:

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§ 1.704-1 Partner's distributive share.

* * * * *

(b) * * *

(1) * * *

(ii) * * *

(a) * * * Furthermore, the last sentence
of paragraph (b)(2)(ii)(b)(3) of this section
and paragraphs (b)(2)(ii)(b)(4) through (7)
and (b)(2)(ii)(c) of this section apply on or
after the date these regulations are pub-
lished as final regulations in the Federal
Register. However, taxpayers may rely
on the last sentence of paragraph
(b)(2)(ii)(b)(3) of this section and para-
graphs (b)(2)(ii)(b)(4) through (7) and
(b)(2)(ii)(c) of this section on or after Oc-
tober 5, 2016 and before the date these
regulations are published as final regula-
tions in the Federal Register.

* * * * *

(2) * * *

(ii) * * *

(b) * * *

(3) * * * Notwithstanding the partner-
ship agreement, an obligation to restore a
deficit balance in a partner's capital ac-
count, including an obligation described
in paragraph (b)(2)(ii)(c)(1) of this sec-
tion, will not be respected for purposes of
this section to the extent the obligation is
disregarded under paragraph (b)(2)(ii)
(c)(4) of this section.

(4) For purposes of paragraphs (b)(2)
(ii)(b)(1) through (3) of this section, a
partnership taxable year shall be deter-
mined without regard to section 706(c)
(2)(A).

(5) The requirements in paragraphs
(b)(2)(ii)(b)(2) and (3) of this section are
not violated if all or part of the partnership
interest of one or more partners is pur-
chased (other than in connection with the
liquidation of the partnership) by the part-
nership or by one or more partners (or one
or more persons related, within the mean-
ing of section 267(b) (without modifica-
tion by section 267(e)(1)) or section 707
(b)(1), to a partner) pursuant to an agree-
ment negotiated at arm's length by per-
sons who at the time such agreement is
entered into have materially adverse inter-
ests and if a principal purpose of such
purchase and sale is not to avoid the prin-
ciples of the second sentence of paragraph
(b)(2)(ii)(a) of this section.

(6) The requirement in paragraph (b)
(2)(ii)(b)(2) of this section is not violated
if, upon the liquidation of the partnership,
the capital accounts of the partners are
increased or decreased pursuant to para-
graph (b)(2)(iv)(f) of this section as of the
date of such liquidation and the partner-
ship makes liquidating distributions
within the time set out in the requirement
in paragraph (b)(2)(ii)(b)(2) of this section
in the ratios of the partners' positive cap-
ital accounts, except that it does not dis-
tribute reserves reasonably required to
provide for liabilities (contingent or oth-
erwise) of the partnership and installment
obligations owed to the partnership, so
long as such withheld amounts are distrib-
uted as soon as practicable and in the
ratios of the partners' positive capital ac-
count balances.

(7) See examples (1)(i) and (ii), (4)(i),
(8)(i), and (16)(i) of paragraph (b)(5) of
this section for issues concerning para-
graph (b)(2)(ii)(b) of this section.

(c) Obligation to restore deficit-(1)
Other arrangements treated as obliga-
tions to restore deficits. If a partner is not
expressly obligated to restore the deficit
balance in such partner's capital account,
such partner nevertheless will be treated
as obligated to restore the deficit balance
in his capital account (in accordance with
the requirement in paragraph (b)(2)(ii)
(b)(3) of this section and subject to para-
graph (b)(2)(ii)(c)(2) of this section) to the
extent of-

(A) The outstanding principal balance
of any promissory note (of which such
partner is the maker) contributed to the
partnership by such partner (other than a
promissory note that is readily tradable on
an established securities market), and

(B) The amount of any unconditional
obligation of such partner (whether im-
posed by the partnership agreement or by
state or local law) to make subsequent
contributions to the partnership (other
than pursuant to a promissory note of
which such partner is the maker).

(2) Satisfaction requirement. For pur-
poses of paragraph (b)(2)(ii)(c)(1) of this
section, a promissory note or uncondi-
tional obligation is taken into account
only if it is required to be satisfied at a
time no later than the end of the partner-
ship taxable year in which such partner's
interest is liquidated (or, if later, within 90

days after the date of such liquidation). If
a promissory note referred to in paragraph
(b)(2)(ii)(c)(1) of this section is negotia-
ble, a partner will be considered required
to satisfy such note within the time period
specified in this paragraph (b)(2)(ii)(c)(2)
if the partnership agreement provides that,
in lieu of actual satisfaction, the partner-
ship will retain such note and such partner
will contribute to the partnership the ex-
cess, if any, of the outstanding principal
balance of such note over its fair market
value at the time of liquidation. See para-
graph (b)(2)(iv)(d)(2) of this section. See
examples (1)(ix) and (x) of paragraph
(b)(5) of this section.

(3) Related party notes. For purposes
of paragraph (b)(2) of this section, if a
partner contributes a promissory note to
the partnership during a partnership tax-
able year beginning after December 29,
1988, and the maker of such note is a
person related to such partner (within the
meaning of § 1.752-4(b)(1)), then such
promissory note shall be treated as a
promissory note of which such partner is
the maker.

(4) Obligations disregarded-(A) Gen-
eral rule. A partner in no event will be
considered obligated to restore the deficit
balance in his capital account to the part-
nership (in accordance with the require-
ment in paragraph (b)(2)(ii)(b)(3) of this
section) to the extent such partner's obli-
gation is a bottom dollar payment obliga-
tion that is not recognized under § 1.752-
2(b)(3) or is not legally enforceable, or the
facts and circumstances otherwise indi-
cate a plan to circumvent or avoid such
obligation. See paragraphs (b)(2)(ii)(f),
(b)(2)(ii)(h), and (b)(4)(vi) of this section
for other rules regarding such obligation.
To the extent a partner is not considered
obligated to restore the deficit balance in
the partner's capital account to the part-
nership (in accordance with the require-
ment in paragraph (b)(2)(ii)(b)(3) of this
section), the obligation is disregarded and
paragraph (b)(2) of this section and
§ 1.752-2 are applied as if the obligation
did not exist.

(B) Factors indicating plan to circum-
vent or avoid obligation. In the case of an
obligation to restore a deficit balance in a
partner's capital account upon liquidation
of a partnership, paragraphs (b)(2)(ii)
(c)(4)(B)(i) through (iv) of this section

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provide a non-exclusive list of factors that
may indicate a plan to circumvent or
avoid the obligation. For purposes of mak-
ing determinations under this paragraph
(b)(2)(ii)(c)(4), the weight to be given to
any particular factor depends on the par-
ticular case and the presence or absence of
any particular factor is not, in itself, nec-
essarily indicative of whether or not the
obligation is respected. The following fac-
tors are taken into consideration for pur-
poses of this paragraph (b)(2):

(i) The partner is not subject to com-
mercially reasonable provisions for en-
forcement and collection of the obligation.

(ii) The partner is not required to pro-
vide (either at the time the obligation is
made or periodically) commercially rea-
sonable documentation regarding the part-
ner's financial condition to the partner-
ship.

(iii) The obligation ends or could, by
its terms, be terminated before the liqui-
dation of the partner's interest in the part-
nership or when the partner's capital ac-
count as provided in § 1.704-1(b)(2)(iv)
is negative.

(iv) The terms of the obligation are not
provided to all the partners in the partner-
ship in a timely manner.

* * * * *

Par. 3. Section 1.707-0 is amended by
revising the entries for § 1.707-5(a)(2)(i)
and (ii) to read as follows:

§ 1.707-0 Table of contents.

* * * * *

§ 1.707-5 Disguised sales of property to
partnership; special rules relating to
liabilities.

(a) * * *

(2) * * *

(i) In general.

(ii) Partner's share of § 1.752-7 liabil-
ity.

* * * * *

Par. 4. Section 1.707-5 is amended by
revising paragraph (a)(2) and Examples 2,
3, 7, and 8 of paragraph (f) to read as
follows:

§ 1.707-5 Disguised sales of property to
partnership; special rules relating to
liabilities.

(a) * * *

(2) [The text of proposed § 1.707-
5(a)(2) is the same as the text of § 1.707-
5T(a)(2) published elsewhere in this issue
of the Bulletin].

* * * * *

(f) * * *

Example 2. [The text of proposed
§ 1.707-5(f) Example 2 is the same as the
text of § 1.707-5T(f) Example 2 published
elsewhere in this issue of the Bulletin].

Example 3. [The text of proposed
§ 1.707-5(f) Example 3 is the same as the
text of § 1.707-5T(f) Example 3 published
elsewhere in this issue of the Bulletin].
* * * * *

Example 7. [The text of proposed
§ 1.707-5(f) Example 7 is the same as the
text of § 1.707-5T(f) Example 7 published
elsewhere in this issue of the Bulletin].

Example 8. [The text of proposed
§ 1.707-5(f) Example 8 is the same as the
text of § 1.707-5T(f) Example 8 published
elsewhere in this issue of the Bulletin].
* * * * *

Par. 5. Section 1.707-9 is amended by
adding paragraph (a)(5) to read as fol-
lows:

§ 1.707-9 Effective dates and
transitional rules.

(a) * * *

(5) [The text of proposed § 1.707-
9(a)(5) is the same as the text of § 1.707-
9T(a)(5) published elsewhere in this issue
of the Bulletin].

* * * * *

Par. 6. Section 1.752-0 is amended by:

1\. Adding entries for § 1.752-2(b)
(3)(i) and (ii), (b)(3)(ii)(A) and (B), (b)(3)
(ii)(C),(b)(3)(ii)(C)(1) through (3),(b)(3)
(ii)(D), and (b)(3)(iii).

2\. Adding entries for § 1.752-2(j)(2)(i)
and (ii).

3\. Adding entries for § 1.752-2(j)(3)(i)
through (iii).

4\. Revising the entries for § 1.752-
2(j)(3) and (4).

5\. Adding an entry for § 1.752-2(k).

The revisions and additions read as fol-
lows:

§ 1.752-0 Table of contents.

* * * * *

§ 1.752-2 Partner's share of recourse
liabilities.

* * * * *

(b) * * *

(3) * * *

(i) In general.

(ii) Special rules for bottom dollar pay-
ment obligations.

(A) In general.

(B) Exception.

(C) Definition of bottom dollar payment
obligation.

(1) In general.

(2) Exceptions.

(3) Benefited party defined.

(D) Disclosure of bottom dollar payment
obligations.

(iii) Special rule for indemnities and re-
imbursement agreements.

* * * * *

(j) ***

(2) * * *

(i) In general.

(ii) Economic risk of loss.

(3) Plan to circumvent or avoid an obli-
gation.

(i) General rule.

(ii) Factors indicating plan to circumvent
or avoid an obligation.

(iii) Deemed plan to circumvent or avoid
an obligation.

(4) Examples.

(k) Effective/applicability dates.

* * * * *

Par. 7. Section 1.752-2 is amended by:

1\. Revising the last sentence of para-
graph (a).

2\. Revising paragraph (b)(3) and the
last sentence of paragraph (b)(6).

3\. Adding a sentence to the end of para-
graph (f) introductory text and adding
Examples 10 and 11 to paragraph (f).

4\. Revising paragraphs (j)(2) and (3).

5\. Adding paragraph (j)(4).

6\. Removing paragraph (k).

7\. Redesignating paragraph (l) as para-
graph (k) and revising it.

The revisions and additions read as fol-
lows:

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§ 1.752-2 Partner's share of recourse
liabilities.

(a) * * * The determination of the
extent to which a partner bears the eco-
nomic risk of loss for a partnership liabil-
ity is made under the rules in paragraphs
(b) through (j) of this section.

(b) * * *

(3) [The text of proposed § 1.752-
2(b)(3) is the same as the text of § 1.752-
2T(b)(3) published elsewhere in this issue
of the Bulletin].

(6) * * * See paragraph (j) of this
section.

(f) Examples. * * * Unless otherwise
provided, for purposes of the following
examples, assume that any obligation of a
partner or related person to make a pay-
ment is recognized under paragraph (b)(3)
of this section.

Example 10. [The text of proposed
§ 1.752-2(f) Example 10 is the same as
the text of § 1.752-2T(f) Example 10 pub-
lished elsewhere in this issue of the Bul-
letin].

Example 11. [The text of proposed
§ 1.752-2(f) Example 11 is the same as
the text of § 1.752-2T(f) Example 11 pub-
lished elsewhere in this issue of the Bul-
letin].

(j)

(2) [The text of proposed § 1.752-
2(j)(2) is the same as the text of § 1.752-
2T(j)(2) published elsewhere in this issue
of the Bulletin].

(3) Plan to circumvent or avoid an
obligation-(i) General rule. An obliga-
tion of a partner or related person to make
a payment is not recognized under para-
graph (b) of this section if the facts and
circumstances evidence a plan to circum-
vent or avoid the obligation.

(ii) Factors indicating plan to circum-
vent or avoid an obligation. In the case of
a payment obligation, other than an obli-
gation to restore a deficit capital account
upon liquidation of a partnership, para-
graphs (j)(3)(ii)(A) through (G) of this
section provide a non-exclusive list of fac-
tors that may indicate a plan to circumvent
or avoid the payment obligation. The pres-
ence or absence of a factor is based on all

of the facts and circumstances at the time
the partner or related person makes the
payment obligation or if the obligation is
modified, at the time of the modification.
For purposes of making determinations
under this paragraph (j)(3), the weight to
be given to any particular factor depends
on the particular case and the presence or
absence of a factor is not necessarily in-
dicative of whether a payment obligation
is or is not recognized under paragraph (b)
of this section.

(A) The partner or related person is not
subject to commercially reasonable con-
tractual restrictions that protect the likeli-
hood of payment, including, for example,
restrictions on transfers for inadequate
consideration or distributions by the part-
ner or related person to equity owners in
the partner or related person.

(B) The partner or related person is not
required to provide (either at the time the
payment obligation is made or periodi-
cally) commercially reasonable documen-
tation regarding the partner's or related
person's financial condition to the bene-
fited party.

(C) The term of the payment obligation
ends prior to the term of the partnership
liability, or the partner or related person
has a right to terminate its payment obli-
gation, if the purpose of limiting the du-
ration of the payment obligation is to ter-
minate such payment obligation prior to
the occurrence of an event or events that
increase the risk of economic loss to the
guarantor or benefited party (for example,
termination prior to the due date of a
balloon payment or a right to terminate
that can be exercised because the value of
loan collateral decreases). This factor typ-
ically will not be present if the termination
of the obligation occurs by reason of an
event or events that decrease the risk of
economic loss to the guarantor or bene-
fited party (for example, the payment ob-
ligation terminates upon the completion of
a building construction project, upon the
leasing of a building, or when certain in-
come and asset coverage ratios are satis-
fied for a specified number of quarters).

(D) There exists a plan or arrangement
in which the primary obligor or any other
obligor (or a person related to the obligor)
with respect to the partnership liability
directly or indirectly holds money or other
liquid assets in an amount that exceeds the

reasonable foreseeable needs of such ob-
ligor.

(E) The payment obligation does not
permit the creditor to promptly pursue
payment following a payment default on
the partnership liability, or other arrange-
ments with respect to the partnership lia-
bility or payment obligation otherwise in-
dicate a plan to delay collection.

(F) In the case of a guarantee or similar
arrangement, the terms of the partnership
liability would be substantially the same
had the partner or related person not
agreed to provide the guarantee.

(G) The creditor or other party benefit-
ing from the obligation did not receive
executed documents with respect to the
payment obligation from the partner or
related person before, or within a com-
mercially reasonable period of time after,
the creation of the obligation.

(iii) Deemed plan to circumvent or
avoid an obligation. Evidence of a plan to
circumvent or avoid an obligation is
deemed to exist if the facts and circum-
stances indicate that there is not a reason-
able expectation that the payment obligor
will have the ability to make the required
payments if the payment obligation be-
comes due and payable. For purposes of
this section, a payment obligor includes an
entity disregarded as an entity separate
from its owner under section 856(i), sec-
tion 1361(b)(3), or §§ 301.7701-1
through 301.7701-3 of this chapter (a dis-
regarded entity), and a trust to which sub-
part E of part I of subchapter J of chapter
1 of the Code applies.

(4) Examples. The following examples
illustrate the principles of paragraph (j) of
this section.

Example 1. Gratuitous guarantee. (i) In 2016, A,
B, and C form a domestic limited liability company
(LLC) that is classified as a partnership for federal
tax purposes. Also in 2016, LLC receives a loan
from a bank. A, B, and C do not bear the economic
risk of loss with respect to that partnership liability,
and, as a result, the liability is treated as nonrecourse
under § 1.752-1(a)(2) in 2016. In 2018, A guaran-
tees the entire amount of the liability. The bank did
not request the guarantee and the terms of the loan
did not change as a result of the guarantee. A did not
provide any executed documents with respect to A's
guarantee to the bank. The bank also did not require
any restrictions on asset transfers by A and no such
restrictions exist.

(ii) Under paragraph (j)(3) of this section, A's
2018 guarantee (payment obligation) is not recog-
nized under paragraph (b)(3) of this section if the
facts and circumstances evidence a plan to circum-

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vent or avoid the payment obligation. In this case,
the following factors indicate a plan to circumvent or
avoid A's payment obligation: (1) the partner is not
subject to commercially reasonable contractual re-
strictions that protect the likelihood of payment, such
as restrictions on transfers for inadequate consider-
ation or equity distributions; (2) the partner is not
required to provide (either at the time the payment
obligation is made or periodically) commercially
reasonable documentation regarding the partner's or
related person's financial condition to the benefited
party; (3) in the case of a guarantee or similar ar-
rangement, the terms of the liability are the same as
they would have been without the guarantee; and (4)
the creditor did not receive executed documents with
respect to the payment obligation from the partner or
related person at the time the obligation was created.
Absent the existence of other facts or circumstances
that would weigh in favor of respecting A's guaran-
tee, evidence of a plan to circumvent or avoid the
obligation exists and, pursuant to paragraph (j)(3)(i)
of this section, A's guarantee is not recognized under
paragraph (b) of this section. As a result, LLC's
liability continues to be treated as nonrecourse.

Example 2. Underfunded disregarded entity pay-
ment obligor. (i) In 2016, A forms a wholly owned
domestic limited liability company, LLC, with a
contribution of $100,000. A has no liability for
LLC's debts, and LLC has no enforceable right to a
contribution from A. Under § 301.7701-3(b)(1)(ii)
of this chapter, LLC is a treated for federal tax
purposes as a disregarded entity. Also in 2016, LLC
contributes $100,000 to LP, a limited partnership
with a calendar year taxable year, in exchange for a
general partnership interest in LP, and B and C each
contributes $100,000 to LP in exchange for a limited
partnership interest in LP. The partnership agree-
ment provides that only LLC is required to restore
any deficit in its capital account. On January 1, 2017,
LP borrows $300,000 from a bank and uses
$600,000 to purchase nondepreciable property. The
$300,000 is secured by the property and is also a
general obligation of LP. LP makes payments of
only interest on its $300,000 debt during 2017. LP
has a net taxable loss in 2017, and, under §§ 1.705-
1(a) and 1.752-4(d), LP determines its partners'
shares of the $300,000 debt at the end of its taxable
year, December 31, 2017. As of that date, LLC holds
no assets other than its interest in LP.

(ii) Because LLC is a disregarded entity, A is
treated as the partner in LP for federal income tax
purposes. Only LLC has an obligation to make a
payment on account of the $300,000 debt if LP were
to constructively liquidate as described in paragraph
(b)(1) of this section. Therefore, paragraph (j)(3)(iii)
of this section is applied to the LLC and not to A.
LLC has no assets with which to pay if the payment
obligation becomes due and payable. As such, evi-
dence of a plan to circumvent or avoid the obligation
is deemed to exist and, pursuant to paragraph
(j)(3)(i) of this section, LLC's obligation to restore
its deficit capital account is not recognized under
paragraph (b) of this section. As a result, LP's
$300,000 debt is characterized as nonrecourse under
§ 1.752-1(a)(2) and is allocated among A, B, and C
under § 1.752-3.

(k) Effective/applicability dates. (1)
Paragraph (h)(3) of this section applies to

liabilities incurred or assumed by a part-
nership on or after October 11, 2006,
other than liabilities incurred or assumed
by a partnership pursuant to a written
binding contract in effect prior to that
date. The rules applicable to liabilities in-
curred or assumed (or pursuant to a writ-
ten binding contract in effect) prior to
October 11, 2006, are contained in
§ 1.752-2 in effect prior to October 11,
2006, (see 26 CFR part 1 revised as of
April 1, 2006). The last sentence of para-
graphs (a), (b)(6), and (f) of this section
and paragraphs (j)(3) and (4) of this sec-
tion apply to liabilities incurred or as-
sumed by a partnership and to payment
obligations imposed or undertaken with
respect to a partnership liability on or after
the date these regulations are published as
final regulations in the Federal Register,
other than liabilities incurred or assumed
by a partnership and payment obligations
imposed or undertaken pursuant to a writ-
ten binding contract in effect prior to that
date. Taxpayers may rely on these regula-
tions for the period between October 5,
2016 and the date these regulations are
published as final regulations in the Fed-
eral Register.

(2) [The text of proposed § 1.752-
2(k)(2) is the same as the text of § 1.752-
2T(l)(2) published elsewhere in this issue
of the Bulletin].

(3) [The text of proposed § 1.752-
2(k)(3) is the same as the text of § 1.752-
2T(l)(3) published elsewhere in this issue
of the Bulletin].

John Dalrymple,
Deputy Commissioner for
Services and Enforcement.

(Filed by the Office of the Federal Register on October 4,
2016, 8:45 a.m., and published in the issue of the Federal
Register for October 5, 2016, 81 F.R. 69301)

# Covered Asset Acquisitions REG 129128-14

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Notice of proposed rulemaking
by cross-reference in part to temporary
regulations.

SUMMARY: This document contains
proposed Income Tax Regulations under
section 901(m) of the Internal Revenue
Code (Code) with respect to transactions
that generally are treated as asset acquisi-
tions for U.S. income tax purposes and
either are treated as stock acquisitions or
are disregarded for foreign income tax
purposes. In the Rules and Regulations
section of this issue of the Bulletin, tem-
porary regulations are being issued under
section 901(m) (the temporary regula-
tions), the text of which serves as the text
of a portion of these proposed regulations.
These regulations are necessary to provide
guidance on applying section 901(m).
These regulations affect taxpayers claim-
ing foreign tax credits.

DATES: Comments and requests for a
public hearing must be received by March
7, 2017.

ADDRESSES: Send submissions to CC:
PA:LPD:PR (REG-129128-14), room
5205, Internal Revenue Service, PO Box
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand de-
livered Monday through Friday between
the hours of 8 a.m. and 4 p.m. to CC:PA:
LPD:PR (REG-129128-14), Courier's
desk, Internal Revenue Service, 1111
Constitution Avenue, NW., Washington,
DC 20044, or sent electronically, via the
Federal eRulemaking Portal at www.
regulations.gov (IRS REG-129128-14).

FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations, Jef-
frey L. Parry, (202) 317-6936; concerning
submissions of comments, Regina John-
son, (202) 317-6901 (not toll-free num-
bers).

SUPPLEMENTARY INFORMATION:
Background

I. Section 901(m)

Section 212 of the Education Jobs and
Medicaid Assistance Act (EJMAA), en-
acted on August 10, 2010 (Public Law
111-226), added section 901(m) to the
Code. Section 901(m)(1) provides that, in
the case of a covered asset acquisition
(CAA), the disqualified portion of any
foreign income tax determined with re-
spect to the income or gain attributable to

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relevant foreign assets (RFAs) will not be
taken into account in determining the for-
eign tax credit allowed under section
901(a), and, in the case of foreign income
tax paid by a section 902 corporation (as
defined in section 909(d)(5)), will not be
taken into account for purposes of section
902 or 960. Instead, the disqualified por-
tion of any foreign income tax (the dis-
qualified tax amount) is permitted as a
deduction. See section 901(m)(6).

Under section 901(m)(2), a CAA is (i)
a qualified stock purchase (as defined in
section 338(d)(3)) to which section 338(a)
applies; (ii) any transaction that is treated
as an acquisition of assets for U.S. income
tax purposes and as the acquisition of
stock of a corporation (or is disregarded)
for purposes of a foreign income tax; (iii)
any acquisition of an interest in a partner-
ship that has an election in effect under
section 754; and (iv) to the extent pro-
vided by the Secretary, any other similar
transaction. The Joint Committee on Tax-
ation's technical explanation of EJMAA
states that it is anticipated that the Secre-
tary will issue regulations identifying
other similar transactions that result in an
increase to the basis of assets for U.S.
income tax purposes without a corre-
sponding increase for foreign income tax
purposes. Staff of the Joint Committee on
Taxation, Technical Explanation of the
Revenue Provisions of the Senate Amend-
ment to the House Amendment to the Sen-
ate Amendment to H.R. 1586, Scheduled
for Consideration by the House of Repre-
sentatives on August 10, 2010, at 14 (Aug.
10, 2010) (JCT Explanation).

Section 901(m)(3)(A) provides that the
term "disqualified portion" means, with
respect to any CAA, for any taxable year,
the ratio (expressed as a percentage) of (i)
the aggregate basis differences (but not
below zero) allocable to such taxable year
with respect to all RFAs; divided by (ii)
the income on which the foreign income
tax referenced in section 901(m)(1) is
determined. If the taxpayer fails to sub-
stantiate the income on which the foreign
income tax is determined to the satisfac-
tion of the Secretary, such income will be
determined by dividing the amount of
such foreign income tax by the highest
marginal tax rate applicable to the taxpay-
er's income in the relevant jurisdiction.
The JCT Explanation states that for this

purpose the income on which the foreign
income tax is determined is the income as
determined under the law of the relevant
jurisdiction. See JCT Explanation at 14.

Section 901(m)(3)(B)(i) provides the
general rule that the basis difference with
respect to any RFA will be allocated to
taxable years using the applicable cost
recovery method for U.S. income tax pur-
poses. Section 901(m)(3)(B)(ii) provides
that, except as otherwise provided by the
Secretary, if there is a disposition of an
RFA, the basis difference allocated to the
taxable year of the disposition will be the
excess of the basis difference of such asset
over the aggregate basis difference of
such asset that has been allocated to all
prior taxable years. The statute further
provides that no basis difference with re-
spect to such asset will be allocated to any
taxable year thereafter.

Section 901(m)(3)(C)(i) provides that
basis difference means, with respect to
any RFA, the excess of: (i) the adjusted
basis of such asset immediately after the
CAA, over (ii) the adjusted basis of such
asset immediately before the CAA. If the
adjusted basis of an RFA immediately be-
fore the CAA exceeds the adjusted basis
of the RFA immediately after the CAA
(that is, where the adjusted basis of an
asset with a built-in loss is reduced in a
CAA), such excess is taken into account
as a basis difference of a negative amount.
See section 901(m)(3)(C)(ii).

The JCT Explanation states that, for
purposes of determining basis difference,
it is the tax basis for U.S. income tax
purposes that is relevant and not the tax
basis as determined under the law of the
relevant jurisdiction. See JCT Explanation
at 14. However, the JCT Explanation fur-
ther states that it is anticipated that the
Secretary will issue regulations identify-
ing those circumstances in which, for pur-
poses of determining the adjusted basis of
such assets immediately before the CAA,
it may be acceptable to use foreign basis
or another reasonable method. Id.

Section 901(m)(4) provides that an
RFA means, with respect to a CAA, any
asset (including goodwill, going concern
value, or other intangible) with respect to
such acquisition if income, deduction,
gain, or loss attributable to such asset is
taken into account in determining the for-

eign income tax referenced in section
901(m)(1).

Section 901(m)(7) provides that the
Secretary may issue regulations or other
guidance as is necessary or appropriate to
carry out the purposes of section 901(m),
including to exempt from its application
certain CAAs and RFAs with respect to
which the basis difference is de minimis.
The JCT Explanation states that regula-
tions may also exclude from the applica-
tion of section 901(m) CAAs that are
not taxable for U.S. income tax purposes,
or in which the basis of the RFAs is also
increased for purposes of the law of the
relevant foreign jurisdiction. See JCT Ex-
planation at 16.

Section 901(m) generally applies to
CAAs occurring after December 31, 2010.
Section 901(m), however, does not apply
to any CAA with respect to which the
transferor and transferee are not related
if the acquisition is made pursuant to a
written agreement that was binding on
January 1, 2011, and at all times thereaf-
ter; described in a ruling request submit-
ted to the IRS on or before July 29, 2010;
or described on or before January 1, 2011,
in a public announcement or in a filing
with the Securities and Exchange Com-
mission. See EJMAA, section 212(b).

II. Notices 2014-44 and 2014-45

The Department of the Treasury (Trea-
sury Department) and the IRS issued No-
tice 2014-44 (2014-32 I.R.B. 270 (July
21, 2014)) and Notice 2014-45 (2014-34
I.R.B. 388 (July 29, 2014)), announcing
the intent to issue regulations addressing
the application of section 901(m) to dis-
positions of RFAs following CAAs and to
CAAs described in section 901(m)(2)(C)
(regarding section 754 elections). In addi-
tion, the notices announced the intent to
issue regulations providing successor
rules for the continued application of sec-
tion 901(m) after subsequent transfers of
RFAs with remaining basis difference.
The temporary regulations issued in the
Rules and Regulations section of this is-
sue of the Bulletin provide the rules de-
scribed in those Notices.

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# Explanation of Provisions

## I. Overview

These proposed regulations provide
rules for computing the disqualified por-
tion of foreign income taxes under section
901(m). Proposed § 1.901(m)-1 provides
definitions that apply for purposes of the
proposed regulations. Proposed § 1.901
(m)-2 identifies the transactions that are
CAAs, including additional categories of
transactions that are identified as CAAs
pursuant to the authority granted in sec-
tion 901(m)(2)(D), and provides rules for
identifying assets that are RFAs with re-
spect to a CAA. Proposed § 1.901(m)-3
provides rules for computing the disqual-
ified portion of foreign income taxes, de-
scribes the treatment under section
901(m)(1) of the disqualified portion, and
provides rules for determining whether
and to what extent basis difference that is
assigned to a given taxable year is carried
over to subsequent taxable years. Pro-
posed § 1.901(m)-4 provides rules for
determining the basis difference with re-
spect to an RFA, including an election to
use foreign basis for purposes of this de-
termination. Proposed § 1.901(m)-5 pro-
vides rules for taking into account basis
difference under an applicable cost recov-
ery method or as a result of a disposition
of an RFA, rules for allocating that basis
difference, when necessary, to one or
more persons subject to section 901(m),
and rules for assigning that basis differ-
ence to a U.S. taxable year. Proposed
§ 1.901(m)-6 provides successor rules for
applying section 901(m) to subsequent
transfers of RFAs that have basis differ-
ence that has not yet been fully taken into
account, as well as for transferring an
aggregate basis difference carryover of a
person subject to section 901(m) either to
another aggregate basis difference carry-
over account of such person or to another
person subject to section 901(m). Pro-
posed § 1.901(m)-7 provides de minimis
rules under which certain basis differ-
ences are not taken into account under
section 901(m). Proposed § 1.901(m)-8
provides guidance on the application of
section 901(m) to pre-1987 foreign in-
come taxes and anti-abuse rules relating to
built-in loss assets.

II. Relevance of the Terms Section
901(m) Payor, Foreign Payor, RFA
Owner (U.S.), and RFA Owner (foreign)

As provided under proposed § 1.901
(m)-1, a section 901(m) payor is a person
that is eligible to claim the foreign tax
credit allowed under section 901(a), re-
gardless of whether the person chooses to
claim the foreign tax credit, as well as a
section 902 corporation. Therefore, a sec-
tion 901(m) payor is the person required
to compute a disqualified tax amount
when section 901(m) applies. The foreign
payor is the individual or entity (including
a disregarded entity) subject to a foreign
income tax. The RFA owner (U.S.) is the
person that owns one or more RFAs for
U.S. income tax purposes and therefore is
required to report, or otherwise track,
items of income, deduction, gain, or loss
attributable to the RFAs for purposes of
computing the U.S. taxable income of the
RFA owner (U.S.). Similarly, the RFA
owner (foreign) is the individual or entity
(including a disregarded entity) that owns
one or more RFAs for purposes of a for-
eign income tax and that therefore gener-
ally would report, or otherwise track,
items of income, deduction, gain, or loss
attributable to the RFAs for purposes of
determining income reported on a foreign
income tax return.

The section 901(m) payor may also be
the foreign payor, the RFA owner (U.S.),
or the RFA owner (foreign), or any com-
bination thereof; alternatively, the section
901(m) payor may not be any of them
depending upon the application of the en-
tity classification rules for U.S. income
tax purposes. Further, the foreign payor
and the RFA owner (foreign) may or may
not be the same person for purposes of a
foreign income tax depending upon
whether the RFA owner (foreign) is a
fiscally transparent entity for purposes of
the foreign income tax. For example, if a
foreign corporation, which is a section
902 corporation, owns RFAs and is the
entity that is subject to a foreign income
tax under the relevant foreign law, the
foreign corporation is the section 901(m)
payor, foreign payor, RFA owner (U.S.),
and RFA owner (foreign). As another ex-
ample, if two U.S. corporations each own
a 50 percent interest in a partnership and
the partnership owns a disregarded entity

that is subject to a foreign income tax
and that, for purposes of the foreign in-
come tax, owns one or more RFAs, the
corporate partners are each a section
901(m) payor, the disregarded entity is the
foreign payor and the RFA owner (for-
eign), and the partnership is the RFA
owner (U.S.).

Finally, because the computation of a
section 901(m) payor's disqualified tax
amount is based on items determined at
the level of the foreign payor, the RFA
owner (U.S.), and the RFA owner (for-
eign), the regulations provide rules for
allocating those items when the section
901(m) payor is not the foreign payor, the
RFA owner (U.S.), or the RFA owner
(foreign), or any combination thereof.

III. CAAs and RFAs

## A. CAAs

Proposed § 1.901(m)-2(b) identifies
six categories of transactions that consti-
tute CAAs, three of which are specified in
the statute (incorporated by cross refer-
ence to the temporary regulations) and
three of which are additional categories of
transactions that are identified as CAAs
pursuant to the authority granted under
section 901(m)(2)(D). In addition, for
transactions that occurred on or after Jan-
uary 1, 2011, and before the general ap-
plicability date of the temporary regula-
tions (referred to as the "transition period"
in the preamble to the temporary regula-
tions and in this preamble), proposed
§ 1.901(m)-2(d) (incorporated by cross
reference to the temporary regulations)
defines CAAs by reference to the statutory
definition under section 901(m)(2). Trans-
actions are CAAs regardless of whether
any gain, income, loss, or deduction real-
ized in connection with the transaction is
taken into account for U.S. income tax
purposes. However, basis difference re-
sulting from a CAA may not be taken into
account under section 901(m) pursuant to
de minimis rules in proposed § 1.901
(m)-7.

Proposed § 1.901(m)-2(b)(1) through
(4) describes four specific types of trans-
actions that are generally expected to re-
sult in an increase in the basis of assets for
U.S. income tax purposes without a cor-
responding increase in basis for foreign
income tax purposes. This is because

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these transactions generally are treated as
an acquisition of assets for U.S. income
tax purposes and either are treated as an
acquisition of stock or of a partnership
interest or are disregarded for foreign in-
come tax purposes. The other two catego-
ries of transactions described in proposed
§ 1.901(m)-2(b)(5) and (6), which in-
volve an acquisition of assets for both
U.S. and foreign income tax purposes, are
CAAs only if the transaction results in an
increase in the basis of an asset for U.S.
income tax purposes but not for foreign
income tax purposes. Such transactions
may include, for example, an acquisition
of assets that is structured to avoid the
application of the Code's corporate non-
recognition provisions, such as section
332, 351, or 361, while still qualifying for
nonrecognition treatment for foreign in-
come tax purposes.

## B. RFAs

Proposed § 1.901(m)-2(c)(1) incorpo-
rates by cross reference to the temporary
regulations the general definition of an
RFA, which provides that an RFA means,
with respect to a foreign income tax and a
CAA, any asset (including goodwill, go-
ing concern value, or other intangible)
subject to the CAA that is relevant in
determining foreign income for purposes
of the foreign income tax. In addition, for
CAAs that occurred during the transition
period, proposed § 1.901(m)-2(d) (incor-
porated by cross reference to the tempo-
rary regulations) defines RFAs by refer-
ence to the statutory definition under
section 901(m)(4).

Proposed § 1.901(m)-2(c)(2) generally
provides that an asset is relevant in deter-
mining foreign income if income, deduc-
tion, gain, or loss attributable to such asset
is or would be taken into account in de-
termining foreign income immediately af-
ter the CAA. Proposed § 1.901(m)-
2(c)(3) provides, however, that, after a
CAA, an asset will become an RFA with
respect to another foreign income tax if,
pursuant to a plan or series of related
transactions that have a principal purpose
of avoiding the application of section
901(m), an asset that is not relevant in
determining foreign income for purposes
of that foreign income tax immediately
after the CAA later becomes relevant in

determining such foreign income. A prin-
cipal purpose of avoiding section 901(m)
will be deemed to exist if income, deduc-
tion, gain, or loss attributable to the asset
is taken into account in determining such
foreign income within the one-year period
following the CAA.

## IV. Disqualified Tax Amount and Aggregate Basis Difference Carryover

## A. Disqualified tax amount

Proposed § 1.901(m)-3 sets forth the
rules for computing the disqualified por-
tion of foreign income taxes (referred to in
the regulations as the "disqualified tax
amount"). Proposed § 1.901(m)-3 also
sets forth the treatment under section
901(m)(1) of the disqualified tax amount
and provides rules for determining
whether and to what extent basis differ-
ence that is assigned to a given U.S. tax-
able year is carried over to subsequent
U.S. taxable years (referred to in the reg-
ulations as "aggregate basis difference
carryover").

In general, a disqualified tax amount is
computed separately for each foreign tax
return that takes into account income,
gain, deduction, or loss from one or more
RFAs in computing the foreign taxable
income and for each section 901(m) payor
that pays or accrues, or that is considered
to pay or accrue, a portion of the foreign
income taxes reflected on the foreign tax
return. Furthermore, if the foreign income
taxes relate to more than one separate
category described in § 1.904-4(m) (in-
cluding section 904(d) categories), a sep-
arate disqualified tax amount computation
is done for each such separate category.
Members of a U.S. affiliated group of
corporations (as defined in section 1504)
that file a consolidated return are each
treated as a separate section 901(m) pay-
or; therefore, disqualified tax amounts are
computed at the member-level.

The proposed regulations refer to the
total taxable income (or loss) that is com-
puted under foreign law for a foreign tax-
able year and reflected on a foreign tax
return as "foreign income" and the total
amount of tax reflected on a foreign tax
return as a "foreign income tax amount."
Thus, foreign income does not include
income that is exempt from the foreign

income tax. The proposed regulations use
the term "foreign country creditable
taxes" (or "FCCTs") to refer to any for-
eign income taxes imposed by another
foreign country or possession of the
United States that were allowed under the
relevant foreign law as a credit to reduce
the foreign income tax amount and for
which a credit is allowed under section
901 or 903. In addition, the proposed reg-
ulations define "foreign income tax" (by
cross reference to the temporary regula-
tions) to mean any income, war profits, or
excess profits tax for which a credit is
allowable under section 901 or 903, other
than any withholding tax determined on a
gross basis as described in section
901(k)(1)(B).

The foreign income, foreign income
tax amount, and any FCCTs are deter-
mined at the foreign-payor level. If the
foreign payor is not a section 901(m)
payor, current law provides rules for de-
termining the person that is considered to
pay or accrue a foreign income tax
amount for purposes of the foreign tax
credit (see, for example, §§ 1.702-1(a)(6)
and 1.901-2(f)). Those rules are not
changed by these proposed regulations
and therefore apply for purposes of deter-
mining the extent to which a foreign in-
come tax amount is paid or accrued by, or
considered paid or accrued by, a section
901(m) payor for purposes of section
901(m).

Proposed § 1.901(m)-3(b) sets forth
the treatment of the disqualified tax
amount and the computation of the dis-
qualified tax amount. Pursuant to section
901(m)(1) and proposed § 1.901(m)-
3(b)(1), the disqualified tax amount is not
taken into account for purposes of deter-
mining foreign tax credits under section
901, 902, or 960. A section 901(m) payor
must compute a disqualified tax amount
for any U.S. taxable year for which it is
assigned a portion of the basis difference
with respect to one or more RFAs.

The disqualified tax amount is the
lesser of the tentative disqualified tax
amount and the foreign income tax
amount paid or accrued by, or considered
paid or accrued by, a section 901(m)
payor. The tentative disqualified tax
amount is determined using a modified
version of the formula provided in section
901(m)(3). To determine the tentative dis-

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qualified tax amount, the foreign income
tax amount paid or accrued by, or consid-
ered paid or accrued by, the section
901(m) payor for its U.S. taxable year
(multiplicand) is multiplied by a ratio
(disqualified ratio), the numerator of
which is the sum of the portion of the
basis difference for all RFAs that is taken
into account and assigned to the U.S. tax-
able year of the section 901(m) payor, and
the denominator of which is the portion of
the foreign income reflected on the for-
eign tax return that relates to the foreign
income tax amount included in the multi-
plicand. The numerator and the denomi-
nator of the disqualified ratio are referred
to in the proposed regulations as the "ag-
gregate basis difference" and "allocable
foreign income," respectively.

Allocable foreign income (the denom-
inator of the disqualified ratio) and the
foreign income tax amount (the multipli-
cand) are determined using the total
amount of foreign income and foreign in-
come tax amount reflected on the foreign
income tax return that are allocable to the
section 901(m) payor, instead of by refer-
ence only to the amounts determined with
respect to the RFAs. The Treasury Depart-
ment and the IRS have determined that
this approach appropriately carries out the
purposes of section 901(m) while avoid-
ing the administrative and compliance
burdens that would result from a require-
ment to trace amounts of income to RFAs
and identify the portion of foreign income
taxes imposed on that income.

If a foreign income tax amount is com-
puted taking into account an FCCT, the
multiplicand of the tentative disqualified
tax amount computation is the sum of the
foreign income tax amount and any
FCCTs paid or accrued by, or considered
paid or accrued by, the section 901(m)
payor. The Treasury Department and the
IRS have determined that it is appropriate
to include any FCCTs in the multiplicand
to better reflect the effective tax rate im-
posed on the aggregate basis difference.
However, the tentative disqualified tax
amount is reduced (but not below zero) to
the extent any portion of the FCCTs is
itself treated as a disqualified tax amount
of the section 901(m) payor with respect
to a different foreign income tax.

The aggregate basis difference in the
numerator includes cost recovery amounts

and disposition amounts taken into ac-
count with respect to RFAs and assigned
to the U.S. taxable year of the section
901(m) payor under proposed § 1.901
(m)-5, as discussed in section VI. of this
the Explanation of Provisions of this pre-
amble. When the numerator and denomi-
nator are both positive amounts, the
amount of aggregate basis difference in-
cluded in the numerator is limited to the
amount of foreign income in the denomi-
nator of the disqualified ratio (in other
words, the allocable foreign income). This
limitation ensures that multiplying the for-
eign income tax amount included in the
multiplicand by the disqualified ratio
would not produce a disqualified tax
amount greater than 100 percent of the
foreign income tax amount. See section
IV.B. of the Explanation of Provisions
section of this preamble for the treatment
of any excess of the aggregate basis dif-
ference over the allocable foreign income
as an aggregate basis difference carryover.

The denominator of the disqualified ra-
tio is the allocable foreign income. When
the entire foreign income tax amount re-
flected on a foreign tax return is paid or
accrued by, or considered paid or accrued
by, a single section 901(m) payor for U.S.
income tax purposes, the allocable foreign
income is simply the total foreign income
reflected on the foreign tax return. In gen-
eral, this will be the case when the section
901(m) payor is the foreign payor or owns
a disregarded entity that is the foreign
payor, unless there is a change in owner-
ship or a change in entity classification in
the foreign payor requiring an allocation
of the foreign income tax amount of the
foreign payor (a mid-year transaction).

If, however, the foreign income tax
amount reflected on a foreign tax return is
allocated to more than one person for U.S.
income tax purposes, the allocable foreign
income in the denominator of the disqual-
ified ratio for a particular section 901(m)
payor is equal to the portion of the foreign
income reflected on the foreign tax return
that relates to the foreign income tax
amount allocated to, and considered paid
or accrued by, that section 901(m) payor
(and therefore that is included in the mul-
tiplicand of the tentative disqualified tax
amount computation). Proposed § 1.901
(m)-3(b)(2)(iii)(C) provides guidance on
how to determine the allocable foreign

income in three types of cases: (i) the
foreign income tax amount is allocated to
a section 901(m) payor because the for-
eign payor is involved in a mid-year trans-
action, such as the transfer of a disre-
garded entity during the disregarded
entity's foreign taxable year or acquisi-
tions involving elections under section
338 or 336(e); (ii) the foreign income tax
amount is allocated to a section 901(m)
payor that is a partner because the foreign
payor is a partnership for U.S. income tax
purposes that is legally liable for the for-
eign income tax amount under § 1.901-
2(f)(4)(i) (or the foreign payor is a disre-
garded entity and its assets are owned for
U.S. income tax purposes by an entity that
is treated as a partnership for U.S. income
tax purposes and that is legally liable for
the foreign income tax amount under
§ 1.901-2(f)(4)(ii)); and (iii) the foreign
income tax amount is allocated to a sec-
tion 901(m) payor under § 1.901-
2(f)(3)(i) because the section 901(m)
payor is a member of a group whose in-
come is taxed on a combined basis for
foreign income tax purposes.

Notwithstanding the rules described in
the two preceding paragraphs for deter-
mining allocable foreign income, if a sec-
tion 901(m) payor fails to substantiate its
allocable foreign income to the satisfac-
tion of the Secretary, then proposed
§ 1.901(m)-3(b)(2)(iii)(D) provides that
allocable foreign income will equal the
amount determined by dividing the sum of
the foreign income tax amount and the
FCCTs that are paid or accrued by, or
considered paid or accrued by, the section
901(m) payor, by the highest marginal tax
rate applicable to income of the foreign
payor under the relevant foreign income
tax. See section 901(m)(3)(A).

If the numerator is less than zero, the
denominator is less than or equal to zero,
or the multiplicand is zero, the tentative
disqualified tax amount (and therefore
the disqualified tax amount) is zero. If the
disqualified tax amount for a year either is
zero or is limited by the foreign income
tax amount paid or accrued by, or consid-
ered paid or accrued by, a section 901(m)
payor, there will be an aggregate basis
difference carryover as described in the
next section.

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## B. Aggregate basis difference carryover

Proposed § 1.901(m)-3(c) provides
rules for determining the amount of ag-
gregate basis difference carryover for a
given U.S. taxable year of a section
901(m) payor that will be included in the
section 901(m) payor's aggregate basis
difference for the next U.S. taxable year
(and therefore included in the numerator
of the disqualified ratio for purposes of the
next year's disqualified tax amount com-
putation). The carryover reflects the extent
to which the aggregate basis difference for
a U.S. taxable year has not yet given rise
to a disqualified tax amount.

If the disqualified tax amount is zero,
none of the aggregate basis difference
gives rise to a disqualified tax amount and
therefore the full amount of the section
901(m) payor's aggregate basis difference
for that year will be reflected in an aggre-
gate basis difference carryover (positive
or negative).

If the disqualified tax amount is not
zero, an aggregate basis difference carry-
over may still arise in two situations. First,
if the aggregate basis difference exceeds
the section 901(m) payor's allocable for-
eign income (the denominator of the dis-
qualified ratio) and therefore the amount
of the aggregate basis difference included
in the numerator is limited, the excess is
reflected in an aggregate basis difference
carryover. Second, if the tentative disqual-
ified tax amount (which takes into account
FCCTs) exceeds the foreign income tax
amount paid or accrued by the section
901(m) payor (which does not include
FCCTs), that excess tax amount is con-
verted into an equivalent amount of ag-
gregate basis difference that is reflected in
an aggregate basis difference carryover.
See Prop. § 1.901(m)-3(c)(2)(ii)(B).

## V. Determination of Basis Difference

Proposed § 1.901(m)-4 incorporates
by cross reference the general rules in the
temporary regulations for determining ba-
sis difference. Under these rules, basis
difference is determined separately with
respect to each foreign income tax for
which an asset is an RFA.

Proposed § 1.901(m)-4(c)(1) provides
for a foreign basis election, pursuant to
which basis difference is equal to the U.S.

basis in the RFA immediately after the
CAA less the foreign basis in the RFA
immediately after the CAA (including any
adjustments to the foreign basis resulting
from the CAA). Proposed § 1.901(m)-
4(c)(2) through (4) provide rules for mak-
ing a foreign basis election. A foreign
basis election generally is made by the
RFA owner (U.S.). For example, in a sec-
tion 338 CAA, the foreign basis election is
made by the corporation that is the subject
of the qualified stock purchase (new target
as defined in § 1.338-2(c)(17)). If the
RFA owner (U.S.) is a partnership, how-
ever, each partner in the partnership (and
not the partnership) may independently
make a foreign basis election. A foreign
basis election is made separately for each
CAA and with respect to each foreign
income tax and each foreign payor. For
this purpose, a series of CAAs occurring
as part of a plan (referred to in the regu-
lations as an "aggregated CAA transac-
tion") are treated as a single CAA. The
proposed regulations contain examples il-
lustrating the scope of the foreign basis
election.

The election is made by using foreign
basis to determine the basis differences
for purposes of computing a disqualified
tax amount and an aggregate basis differ-
ence carryover. The election generally
must be reflected on a timely filed original
federal income tax return for the first U.S.
taxable year that the foreign basis election
is relevant. Proposed § 1.901(m)-4(c)(5)
provides an exception for certain cases in
which the RFA owner (U.S.) is a partner-
ship. This exception generally provides
relief when one or more partners and the
partnership have agreed that the partner-
ship would determine whether to provide
the partners with information to apply sec-
tion 901(m) based on foreign basis and, in
fact, the partnership provided the informa-
tion to the partner using foreign basis, but
when the partner timely filed its tax return
it failed to report the application of section
901(m). The purpose of the relief is to
address situations in which a partner must
file an amended return in order to properly
reflect the application of section 901(m)
but does not have access to the necessary
information to apply section 901(m) using
U.S. basis. The criteria for qualifying for
this relief should prevent partners from

using hindsight in determining whether to
make the foreign basis election.

Proposed § 1.901(m)-4(c)(6) provides
another exception to the requirement to
make the election in a timely filed original
federal income tax return that applies if a
taxpayer chooses to consistently apply
these proposed regulations retroactively to
all CAAs occurring before the regulations
are issued in final form, including CAAs
for which the taxpayer chooses not to
make a foreign basis election. In this case,
a foreign basis election may be reflected
on a timely filed amended federal income
tax return (or tax returns, as appropriate),
provided that all amended returns are filed
no later than one year following the date
of publication of the Treasury decision
adopting these rules as final regulations in
the Federal Register.

## VI. Basis Difference Taken into Account

Section 1.901(m)-5 provides rules for
determining the amount of basis differ-
ence with respect to an RFA that is taken
into account in a given U.S. taxable year
(referred to in the regulations as "allo-
cated basis difference"). This allocated
basis difference is used to compute a dis-
qualified tax amount for a U.S. taxable
year. Basis difference is taken into ac-
count in two ways: under an applicable
cost recovery method or as a result of a
disposition of the RFA.

For purposes of the discussion under
this section VI of the Explanation of Pro-
visions section of the preamble, unless
otherwise indicated, a reference to direct
ownership of an interest in an entity refers
to direct ownership for U.S. income tax
purposes, which includes ownership
through one or more disregarded entities.
A reference to indirect ownership of an
interest in an entity refers to ownership
through one or more entities that are
treated as fiscally transparent for U.S. in-
come tax purposes, at least one of which is
not a disregarded entity. Finally, a refer-
ence to indirect ownership of an interest in
an entity for foreign income tax purposes
means ownership through one or more
entities that are treated as fiscally trans-
parent for foreign income tax purposes.

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## A. Cost recovery rules

### 1. Determining a cost recovery amount

Proposed § 1.901(m)-5(b)(2)(i) incor-
porates by cross reference the general rule
in the temporary regulations that a cost
recovery amount for an RFA is deter-
mined by applying an applicable cost re-
covery method to the basis difference
rather than to the U.S. basis of the RFA.

Proposed § 1.901(m)-5(b)(2)(ii) pro-
vides that if the entire U.S. basis of the
RFA is not subject to the same cost recov-
ery method, the applicable cost recovery
method for determining the cost recovery
amount is the cost recovery method that
applies to the portion of the U.S. basis that
corresponds to the basis difference.

Proposed § 1.901(m)-5(b)(3) provides
that, for purposes of section 901(m), an
applicable cost recovery method includes
any method for recovering the cost of
property over time for U.S. income tax
purposes (each application of a method
giving rise to a "U.S. basis deduction").
Such methods include depreciation, amor-
tization, or depletion, as well as a method
that allows the cost (or a portion of the
cost) of property to be expensed in the
year of acquisition or in the placed-in-
service year, such as under section 179.
Applicable cost recovery methods do not
include any provision allowing for the re-
covery of U.S. basis upon a disposition of
an RFA.

### 2. Attributing or allocating a cost recovery amount to a section 901(m) payor

Under proposed § 1.901(m)-5(b)(1),
when an RFA owner (U.S.) is a section
901(m) payor, all of the cost recovery
amount is attributed to the section 901(m)
payor and assigned to the U.S. taxable
year of the section 901(m) payor in which
the corresponding U.S. basis deduction
with respect to the RFA is taken into
account under the applicable cost recov-
ery method. This is the case regardless of
whether the deduction is deferred or dis-
allowed under other Code provisions (for
example, see section 263A, which re-
quires the capitalization of certain costs
and expenses).

If instead the RFA owner (U.S.) is not
a section 901(m) payor but a fiscally
transparent entity for U.S. income tax pur-
poses in which a section 901(m) payor
directly or indirectly owns an interest,
proposed § 1.901(m)-5(d)(2) allocates all
or a portion of the cost recovery amount to
the section 901(m) payor. Under those
rules, a cost recovery amount is allocated
to the section 901(m) payor to the extent
the U.S. basis deduction that corresponds
to the cost recovery amount (both of
which are determined at the level of the
RFA owner (U.S.)) is (or will be) included
in the section 901(m) payor's distributive
share of the income of the RFA owner
(U.S.) for U.S. income tax purposes. Pro-
posed § 1.901(m)-5(d)(6) assigns an allo-
cated cost recovery amount to the U.S.
taxable year of the section 901(m) payor
that includes the last day of the U.S. tax-
able year of the RFA owner (U.S.) in
which the RFA owner (U.S.) takes into
account the corresponding U.S. basis de-
duction (without regard to whether the
deduction is deferred or disallowed under
other Code provisions).

Special rules under proposed § 1.901
(m)-5(e), discussed in section VI.D of the
Explanation of Provisions section of this
preamble, allocate a cost recovery amount
that arises from an RFA with respect to
certain section 743(b) CAAs. In addition,
special rules under proposed § 1.901(m)-
5(g), discussed in section VI.F of the Ex-
planation of Provisions section of this pre-
amble, allocate a cost recovery amount to
a section 901(m) payor in certain cases in
which the RFA owner (U.S.) either is a
reverse hybrid or is a fiscally transparent
entity for both U.S. and foreign income
tax purposes that is directly or indirectly
owned by a reverse hybrid. A reverse hy-
brid is an entity that is treated as a corpo-
ration for U.S. income tax purposes but as
a fiscally transparent entity for foreign
income tax purposes.

## B. General disposition rules

### 1. Definition of disposition and determining a disposition amount

Proposed § 1.901(m)-1(a)(10) defines
(by cross reference to the temporary reg-
ulations) a disposition for purposes of sec-
tion 901(m) as an event that results in gain

or loss being recognized with respect to an
RFA for purposes of U.S. income tax, a
foreign income tax, or both. Proposed
§ 1.901(m)-5(c)(2) incorporates by cross
reference the rules provided in the tempo-
rary regulations for determining the
amount of basis difference taken into ac-
count upon a disposition of an RFA (the
disposition amount). Section 1.901(m)-
5T(c)(2) provides that, if a disposition of
an RFA is fully taxable for U.S. and for-
eign income tax purposes, the disposition
amount will be any remaining unallocated
basis difference (positive or negative).
Section 1.901(m)-5T(c)(2) further pro-
vides that, if a disposition of an RFA is
not fully taxable for both U.S. and foreign
income tax purposes and the RFA has a
positive basis difference, the disposition
amount is based solely on the amount, if
any, of foreign disposition gain and U.S.
disposition loss. If, on the other hand, a
disposition of an RFA is not fully taxable
for both U.S. and foreign income tax pur-
poses and the RFA has a negative basis
difference, the temporary regulations pro-
vide that the disposition amount is based
solely on the amount, if any, of foreign
disposition loss and U.S. disposition gain.
See section V.B of the preamble to the
temporary regulations for a further discus-
sion of these provisions.

2\. Attributing or allocating a disposition
amount to a section 901(m) payor

Under proposed § 1.901(m)-5(c)(1),
when the RFA owner (U.S.) is a section
901(m) payor, all of the disposition
amount is attributed to the section 901(m)
payor and assigned to the U.S. taxable
year of the section 901(m) payor in which
the disposition occurs.

If instead the RFA owner (U.S.) is not
a section 901(m) payor but a fiscally
transparent entity for U.S. income tax pur-
poses in which a section 901(m) payor
directly or indirectly owns an interest,
proposed § 1.901(m)-5(d), discussed in
section VI.C of the Explanation of Provi-
sions section of this preamble, allocates
all or a portion of a disposition amount to
the section 901(m) payor and assigns it to
a U.S. taxable year of the section 901(m)
payor.

Special rules under proposed § 1.901
(m)-5(e), discussed in section VI.D of the

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Explanation of Provisions section of this
preamble, allocate a disposition amount to
a section 901(m) payor and assign it to a
U.S. taxable year of the section 901(m)
payor when the disposition amount arises
from an RFA with respect to certain sec-
tion 743(b) CAAs. Special rules under
proposed § 1.901(m)-5(f), discussed in
section VI.E of the Explanation of Provi-
sions section of this preamble, allocate a
disposition amount attributable to foreign
disposition gain or foreign disposition loss
to a section 901(m) payor and assign it to
a U.S. taxable year of the section 901(m)
payor when there is a mid-year transac-
tion. Special rules under proposed
§ 1.901(m)-5(g), discussed in section
VI.F of the Explanation of Provisions sec-
tion of this preamble, allocate a disposi-
tion amount to a section 901(m) payor and
assign it to a U.S. taxable year of the
section 901(m) payor in certain cases in
which the RFA owner (U.S.) either is a
reverse hybrid or is a fiscally transparent
entity for both U.S. and foreign income
tax purposes that is directly or indirectly
owned by a reverse hybrid.

C. Rules for allocating and assigning a
disposition amount when the RFA owner
(U.S.) is a fiscally transparent entity

This section describes the rules for al-
locating a disposition amount to a section
901(m) payor when the RFA owner (U.S.)
is a fiscally transparent entity for U.S.
income tax purposes in which a section
901(m) payor directly or indirectly owns
an interest, as well as rules for assigning
the allocated amount to a U.S. taxable
year of the section 901(m) payor.

The allocation rules (discussed in sec-
tions VI.C.1 and 2 of the Explanation of
Provisions section of this preamble) vary
depending on whether the disposition
amount is attributable to foreign disposi-
tion gain or loss or U.S. disposition gain
or loss. The rules for determining the ex-
tent to which a disposition amount is at-
tributable to foreign or U.S. disposition
gain or loss are discussed in section
VI.C.3 of the Explanation of Provisions
section of this preamble. The rules for
assigning allocated disposition amounts to
a U.S. taxable year of a section 901(m)
payor are discussed in section VI.C.4 of

the Explanation of Provisions section of
this preamble.

1\. Allocation of a disposition amount
attributable to foreign disposition gain or
foreign disposition loss

Proposed § 1.901(m)-5(d)(3) addresses
the allocation of a disposition amount at-
tributable to foreign disposition gain or
foreign disposition loss of an RFA. These
rules should be interpreted and applied in
a manner consistent with the principle that
a disposition amount attributable to for-
eign disposition gain or foreign disposi-
tion loss should be allocated to a section
901(m) payor in the same proportion that
the gain or loss is taken into account in
computing a foreign income tax amount
that is paid or accrued by, or considered
paid or accrued by, the section 901(m)
payor. This is because, for example, if an
RFA has a positive basis difference, a
disposition amount attributable to foreign
disposition gain represents an amount of
gain in years following the CAA that is
included in foreign income but never in-
cluded in U.S. taxable income or earnings
and profits because of the step-up in the
U.S. basis of the RFA that occurred as a
result of the CAA. Accordingly, to the
extent a foreign disposition gain is taken
into account in computing a foreign in-
come tax amount, a portion of that foreign
income tax amount should be disallowed
as a foreign tax credit under section
901(m). Similarly, if an RFA has a nega-
tive basis difference and a foreign dispo-
sition loss is taken into account in com-
puting a foreign income tax amount, this
should result in an offset to the amount of
the foreign income tax that otherwise
would be disallowed as a foreign tax
credit under section 901(m) as a result of
a positive basis difference with respect to
one or more other RFAs.

There are two separate rules for iden-
tifying the extent to which a foreign dis-
position gain or foreign disposition loss is
taken into account in computing a foreign
income tax amount that is paid or accrued
by, or considered paid or accrued by, a
section 901(m) payor that directly or in-
directly owns an interest in an RFA owner
(U.S.) that is a fiscally transparent entity
for U.S. income tax purposes. The first
rule, which is described in proposed

§ 1.901(m)-5(d)(3)(ii), applies when the
foreign income tax amount is not allo-
cated, for example, when the foreign
payor is the section 901(m) payor. The
second rule, which is described in pro-
posed § 1.901(m)-5(d)(3)(iii), applies
when the foreign income tax amount is
allocated, for example, under § 1.704-
1(b)(4)(viii) when the foreign payor is a
partnership for U.S. income tax purposes
in which the section 901(m) payor is a
partner.

## a. First allocation rule

The first allocation rule applies when a
section 901(m) payor, or a disregarded
entity directly owned by a section 901(m)
payor, is a foreign payor whose foreign
income includes a distributive share of the
foreign income (that includes the foreign
disposition gain or foreign disposition
loss) of the RFA owner (foreign). In this
structure, the entire foreign income tax
amount reflected on the foreign income
tax return of the foreign payor is paid or
accrued by, or considered paid or accrued
by, the section 901(m) payor. This will be
the case when the RFA owner (U.S.) is
treated as a fiscally transparent entity not
just for U.S. income tax purposes, but also
for foreign income tax purposes, and the
section 901(m) payor directly or indirectly
owns an interest in the RFA owner (U.S.),
provided that, in the case of indirect own-
ership, any entities in the ownership chain
between the section 901(m) payor and the
RFA owner (U.S), or, when one or more
disregarded entities are directly owned by
the section 901(m) payor, between the
lowest-tier disregarded entity and the
RFA owner (U.S.), are fiscally transparent
for both U.S. and foreign income tax pur-
poses. In these cases, the RFA owner
(U.S.) and the RFA owner (foreign) are
the same entity, except in the unusual case
where the RFA owner (U.S.) is an entity
that is disregarded as separate from its
owner for foreign income tax purposes.

The first allocation rule allocates a por-
tion of a disposition amount attributable to
foreign disposition gain or foreign dispo-
sition loss, as applicable, to the section
901(m) payor proportionally to the
amount of the foreign disposition gain or
foreign disposition loss that is included in
the foreign payor's (in other words, the

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section 901(m) payor or the disregarded
entity, as the case may be) distributive
share of the foreign income of the RFA
owner (foreign) for foreign income tax
purposes.

The following example illustrates the
first allocation rule. A domestic entity that
is a corporation for both U.S. and foreign
income tax purposes (corporate partner)
directly owns, for both U.S. and foreign
income tax purposes, an interest in a for-
eign entity that is a partnership for both
U.S. and foreign income tax purposes and
that is the RFA owner (U.S.) and the RFA
owner (foreign). In this case, when the
partnership recognizes foreign disposition
gain with respect to an RFA, the foreign
income tax amount with respect to such
gain is paid by the partners on their dis-
tributive shares of the foreign income of
the partnership that includes the foreign
disposition gain. The corporate partner,
and not the partnership, is therefore a for-
eign payor and a section 901(m) payor.
Accordingly, under the first allocation
rule, a disposition amount attributable to
foreign disposition gain is allocated to the
corporate partner proportionally to the
amount of the foreign disposition gain that
is included in the corporate partner's dis-
tributive share of the foreign income of
the partnership. Thus, for example, if the
partnership recognizes $100 of foreign
disposition gain and 50 percent of that
gain is included in the corporate partner's
distributive share of the foreign income of
the partnership, and the disposition
amount attributable to the foreign dispo-
sition gain is $40, the corporate partner
would be allocated $20 of that amount (50
percent of $40). The same result would
apply if the corporate partner directly
owned the partnership interest through a
disregarded entity that is the foreign
payor.

## b. Second allocation rule

The second allocation rule applies
when, instead of a section 901(m) payor
or a disregarded entity directly owned by
a section 901(m) being a foreign payor, a
section 901(m) payor directly or indirectly
owns an interest in a fiscally transparent
entity for U.S. income tax purposes (other
than a disregarded entity directly owned
by the section 901(m) payor) that is a

foreign payor whose foreign income in-
cludes all or a portion of the foreign in-
come (that includes the foreign disposi-
tion gain or foreign disposition loss) of the
RFA owner (foreign). Therefore, the sec-
tion 901(m) payor is considered to pay or
accrue only an allocated portion of the
foreign income tax amount reflected on
the foreign income tax return of the for-
eign payor. This will be the case when a
section 901(m) payor directly or indirectly
owns an interest in the foreign payor, and
the foreign payor is (i) the RFA owner
(U.S.), (ii) another fiscally transparent en-
tity for U.S. income tax purposes (other
than a disregarded entity directly owned
by a section 901(m) payor) that directly or
indirectly owns an interest in the RFA
owner (U.S.) for both U.S. and foreign
income tax purposes, or (iii) a disregarded
entity directly owned by the RFA owner
(U.S.). In each of these cases, the entity
subject to tax for purposes of the foreign
income tax (that is, the foreign payor) is
treated as a fiscally transparent entity for
U.S. income tax purposes.

The mechanics of the second allocation
rule are different than those of the first
allocation rule. This is because the second
allocation rule applies when neither the
section 901(m) payor, nor a disregarded
entity directly owned by a section 901(m)
payor, is a foreign payor that takes into
account a foreign disposition gain or for-
eign disposition loss for purposes of cal-
culating a foreign income tax amount, but
instead, for U.S. income tax purposes, a
foreign income tax amount of the foreign
payor is allocated to, and considered paid
or accrued by, the section 901(m) payor.
Accordingly, the second allocation rule
allocates a portion of a disposition amount
attributable to foreign disposition gain or
foreign disposition loss, as applicable, to
the section 901(m) payor proportionally to
the amount of the foreign disposition gain
or foreign disposition loss that is included
in the allocable foreign income of the sec-
tion 901(m) payor. As described in section
IV.A of the Explanation of Provisions sec-
tion of this preamble, allocable foreign
income is generally the portion of foreign
income of a foreign payor that relates to
the portion of the foreign income tax
amount of that foreign payor that is allo-
cated to and considered paid or accrued by
a section 901(m) payor.

The following example illustrates the
second allocation rule. A domestic entity
that is a corporation for both U.S. and
foreign income tax purposes (corporate
partner) directly owns an interest in a for-
eign entity, the RFA owner (U.S.) and
RFA owner (foreign), that is a partnership
for U.S. income tax purposes but a corpo-
ration for purposes of a foreign income
tax (a hybrid partnership). In this case,
when the hybrid partnership recognizes
foreign disposition gain with respect to an
RFA, it is the hybrid partnership, rather
than the partners, that takes the gain into
account for purposes of calculating a for-
eign income tax amount. The hybrid part-
nership is therefore the foreign payor. For
U.S. income tax purposes, a foreign in-
come tax amount of the hybrid partnership
is allocated to, and considered paid or
accrued by, its partners, including the cor-
porate partner that is a section 901(m)
payor (see §§ 1.702-1(a)(6), 1.704-
1(b)(4)(viii), and 1.901-2(f)(4)(i)). Under
the second allocation rule, a disposition
amount attributable to foreign disposition
gain is allocated to the corporate partner
proportionally to the amount of the for-
eign disposition gain that is included in
the corporate partner's allocable foreign
income. Thus, for example, if the hybrid
partnership pays a foreign income tax
amount of $30 on $200 of foreign income
that includes $100 of foreign disposition
gain and $15 of the foreign income tax
amount (50 percent of $30) is allocated to
and considered paid by the corporate part-
ner, the corporate partner's allocable for-
eign income would be $100 (50 percent of
the $200 foreign income to which the for-
eign income tax amount relates), which
would include $50 of foreign disposition
gain (50 percent of $100). If the disposi-
tion amount attributable to the foreign dis-
position gain is $60, the corporate partner
would be allocated $30 of that amount
($60 multiplied by 50 percent, the portion
of the total foreign disposition gain that is
included in the corporate partner's alloca-
ble foreign income).

In this example, the analysis would be
similar if the corporate partner instead in-
directly owned the partnership interest
(for example through an upper-tier part-
nership), because the corporate partner
would continue to be the section 901(m)
payor and the hybrid partnership would

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continue to be the RFA owner (U.S.), the
RFA owner (foreign), and the foreign
payor.

## 2. Allocation of a disposition amount attributable to U.S. disposition gain or U.S. disposition loss

Proposed § 1.901(m)-5(d)(4) addresses
the allocation of a disposition amount attrib-
utable to U.S. disposition gain or U.S. dis-
position loss. Such disposition amounts
are allocated to a section 901(m) payor
based on the portion of the U.S. disposi-
tion gain or U.S. disposition loss (which
are determined at the level of the RFA
owner (U.S.)) that is (or will be) included
in the section 901(m) payor's distributive
share of the income of the RFA owner
(U.S.) for U.S. income tax purposes.

3\. Determining the extent to which a
disposition amount is attributable to
foreign or U.S. disposition gain or loss

## a. Positive basis difference

When an RFA has a positive basis dif-
ference, a disposition amount arises from
a disposition of the RFA only if the dis-
position results in a foreign disposition
gain or a U.S. disposition loss (or both).
To allocate such a disposition amount to a
section 901(m) payor, it is necessary to
determine the extent to which the dispo-
sition amount is attributable to foreign
disposition gain or U.S. disposition loss.

Proposed § 1.901(m)-5(d)(5)(i) pro-
vides that if the disposition results in ei-
ther a foreign disposition gain or a U.S.
disposition loss, but not both, the entire
disposition amount is attributable to
foreign disposition gain or U.S. disposi-
tion loss, as applicable, even if the dispo-
sition amount exceeds the foreign dispo-
sition gain or the absolute value of the
U.S. disposition loss. If the disposition
results in both a foreign disposition gain
and a U.S. disposition loss, the disposition
amount is attributable first to foreign dis-
position gain to the extent thereof, and the
excess disposition amount, if any, is at-
tributable to the U.S. disposition loss,
even if the excess disposition amount ex-
ceeds the absolute value of the U.S. dis-
position loss. In the case of a disposition
that is fully taxable for both U.S. and
foreign income tax purposes, a disposition

amount may exceed the sum of the foreign
disposition gain and the absolute value of
the U.S. disposition loss if, immediately
before the CAA, the foreign basis in the
RFA was greater than the U.S basis, and a
foreign basis election was not made.

## b. Negative basis difference

When an RFA has a negative basis
difference, a disposition amount arises
from a disposition of the RFA only if the
disposition results in a foreign disposition
loss or a U.S. disposition gain (or both).
To allocate such a disposition amount to a
section 901(m) payor, it is necessary to
determine the extent to which the dispo-
sition amount is attributable to foreign
disposition loss or U.S. disposition gain.

Proposed § 1.901(m)-5(d)(5)(ii) pro-
vides rules for making this determination
when there is a negative basis difference
that are similar to those provided in pro-
posed § 1.901(m)-5(d)(5)(i) for a positive
basis difference.

## 4. Assigning a disposition amount to a U.S. taxable year of a section 901(m) payor

When a disposition amount is allocated
to a section 901(m) payor under proposed
§ 1.901(m)-5(d), proposed § 1.901(m)-
5(d)(6) provides that the disposition
amount is assigned to the U.S. taxable
year of the section 901(m) payor that in-
cludes the last day of the U.S. taxable year
of the RFA owner (U.S.) in which the
disposition occurs.

## D. Special allocation rules for certain section 743(b) CAAs

Proposed § 1.901(m)-5(e) provides
that when a section 901(m) payor acquires
a partnership interest in a section 743(b)
CAA, including a section 743(b) CAA
with respect to a lower-tier partnership
that results from a direct acquisition by
the section 901(m) payor of an interest in
an upper-tier partnership, a cost recovery
amount or a disposition amount that arises
from an RFA with respect to that CAA is
allocated to the acquiring section 901(m)
payor. These amounts are assigned to the
U.S. taxable year of the section 901(m)
payor that includes the last day of the U.S.
taxable year of the partnership in which,

in the case of a cost recovery amount, the
partnership takes into account the corre-
sponding U.S. basis deduction, or, in the
case of a disposition amount, the disposi-
tion occurs.

This special rule does not apply if it is
another partnership, and not a section
901(m) payor, that acquires a partnership
interest in a section 743(b) CAA. In that
case, the general rules for allocating a cost
recovery amount or disposition amount
when the RFA owner (U.S.) is a fiscally
transparent entity apply.

## E. Special allocation rules for certain mid-year transactions

Proposed § 1.901(m)-5(f) provides rules
for allocating a disposition amount when
there is a disposition of an RFA during a
foreign taxable year in which the foreign
payor is involved in a mid-year transac-
tion, and the disposition results in foreign
disposition gain or foreign disposition loss
that is allocated under the principles of
§ 1.1502-76(b) to the persons involved in
the mid-year transaction for purposes of
allocating the foreign income tax amount
of the foreign payor. A typical example is
when a section 901(m) payor owns a dis-
regarded entity that is both an RFA owner
(foreign) and the foreign payor, and the
disregarded entity sells the RFA in the
same year that the section 901(m) payor
sells the disregarded entity to another sec-
tion 901(m) payor. If the RFA has positive
unallocated basis difference and there is
foreign disposition gain on the sale of the
RFA, the sale will give rise to a disposi-
tion amount that will be used by the sec-
tion 901(m) payors to calculate a disqual-
ified portion of the foreign income tax
amount reflected on the foreign income
tax return of the disregarded entity. Pur-
suant to § 1.901-2(f)(4)(ii), that foreign
income tax amount must be allocated be-
tween the buyer and seller of the disre-
garded entity based on the respective
portions of foreign income that are attrib-
utable under the principles of § 1.1502-
76(b) to the buyer's and seller's respective
periods of ownership of the disregarded
entity during its foreign taxable year. Un-
der proposed § 1.901(m)-5(f)(2), the dis-
position amount attributable to foreign
disposition gain is similarly allocated be-
tween the buyer and the seller based on

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the principles in proposed § 1.901(m)-
5(d), discussed in section VI.C of the Ex-
planation of Provisions section of this pre-
amble, that apply to allocate a disposition
amount when the RFA owner (U.S.) is a
fiscally transparent entity for U.S. income
tax purposes.

## F. Special allocation rules for certain reverse hybrids

Proposed § 1.901(m)-5(g) addresses
the allocation of cost recovery amounts
and disposition amounts when the RFA
owner (U.S.) is either a reverse hybrid or
a fiscally transparent entity for both U.S.
and foreign income tax purposes that is
directly or indirectly owned by a reverse
hybrid for U.S. and foreign income tax
purposes, and in either case, a foreign
payor directly or indirectly owns an inter-
est in the reverse hybrid for foreign in-
come tax purposes and therefore includes
in its foreign income a distributive share
of the foreign income (that includes the
foreign disposition gain or foreign dispo-
sition loss) of the RFA owner (foreign).
These allocation rules are similar to the
allocation rules discussed in section
VI.C.1 of the Explanation of Provisions
section of this preamble that apply to al-
locate a disposition amount attributable to
foreign disposition gain or foreign dispo-
sition loss when the RFA owner (U.S.) is
a fiscally transparent entity for U.S. in-
come tax purposes. These rules are
broader in scope, however, because they
apply to allocate not just foreign disposi-
tion gain or foreign disposition loss, but
rather, both cost recovery amounts and
entire disposition amounts (which may be
attributable, in whole or in part, to U.S.
disposition gain or U.S. disposition loss).
This is because the basis difference giving
rise to such amounts may not be taken into
account in computing U.S. taxable income
or earnings and profits of the owners of
the reverse hybrid until one or more sub-
sequent U.S. taxable years (for example,
upon the receipt of a distribution of prop-
erty from the reverse hybrid).

These rules should be interpreted and
applied in a manner consistent with the
principle that a cost recovery amount or a
disposition amount (or both) should be
allocated to a section 901(m) payor pro-
portionally to the amount of the foreign

income of the RFA owner (foreign) that is
taken into account in computing a foreign
income tax amount of a foreign payor that
is paid or accrued by, or considered paid
or accrued by, the section 901(m) payor.

There are two separate rules for allo-
cating a cost recovery amount or disposi-
tion amount to a section 901(m) payor
when the RFA owner (U.S.) either is a
reverse hybrid or a fiscally transparent
entity for both U.S. and foreign income
tax purposes that is directly or indirectly
owned by a reverse hybrid for U.S. and
foreign income tax purposes. The first
rule, which is described in § 1.901(m)-
5(g)(2), applies when the foreign income
tax amount is not allocated, for example,
when the foreign payor is the section
901(m) payor. The second rule, which is
described in § 1.901(m)-5(g)(3), applies
when the foreign income tax amount is
allocated, for example, under § 1.704-
1(b)(4)(viii) when the foreign payor is a
partnership for U.S. income tax purposes
in which the section 901(m) payor is a
partner.

## 1. First allocation rule

The first allocation rule applies when a
section 901(m) payor, or a disregarded
entity directly owned by a section 901(m)
payor, is the foreign payor whose foreign
income includes a distributive share of the
foreign income of the RFA owner (for-
eign). In this structure, the entire foreign
income tax amount reflected on the for-
eign income tax return of the foreign
payor is paid or accrued by, or considered
paid or accrued by, the section 901(m)
payor. This will be the case when a sec-
tion 901(m) payor directly or indirectly
owns an interest in the reverse hybrid,
provided that in the case of indirect own-
ership, any entities in the ownership chain
between the section 901(m) payor and the
reverse hybrid, or, when one or more dis-
regarded entities are directly owned by the
section 901(m) payor, between the lowest-
tier disregarded entity and the reverse hy-
bird, are fiscally transparent for both U.S.
and foreign income tax purposes. In these
cases, the RFA owner (U.S.) and the RFA
owner (foreign) are the same entity, ex-
cept in the unusual case where the RFA
owner (U.S.) is an entity that is disre-

garded as separate from its owner for for-
eign income tax purposes.

The first allocation rule allocates a por-
tion of a cost recovery amount or a dispo-
sition amount to the section 901(m) payor
proportionally to the amount of the for-
eign income of the RFA owner (foreign)
that is included in the foreign income of
the foreign payor (in other words, the sec-
tion 901(m) payor or the disregarded en-
tity, as the case may be).

The following example illustrates the
first allocation rule. A domestic entity that
is a corporation for both U.S. and foreign
income tax purposes (corporate owner)
owns an interest in a reverse hybrid that is
the RFA owner (U.S.) and the RFA owner
(foreign). A foreign income tax amount
with respect to the foreign income of the
reverse hybrid is paid by the owners of the
reverse hybrid on their distributive shares
of such foreign income. The corporate
owner, and not the reverse hybrid, is
therefore a foreign payor and a section
901(m) payor. Under the first allocation
rule, a cost recovery amount or a disposi-
tion amount is allocated to the corporate
owner proportionally to the amount of the
foreign income of the reverse hybrid that
is included in the foreign income of the
corporate owner. Thus, for example, if 50
percent of the foreign income of the re-
verse hybrid is included in the foreign
income of the corporate owner, the corpo-
rate owner would be allocated 50 percent
of a cost recovery amount or a disposition
amount with respect to an RFA owned by
the reverse hybrid. The same result would
apply if the corporate owner directly
owned the interest in the reverse hybrid
through a disregarded entity that is the
foreign payor.

Alternatively, if the reverse hybrid was
not the RFA owner (foreign) but instead
the reverse hybrid owned an interest in the
RFA owner (U.S.) and RFA owner (for-
eign), which is a partnership for both U.S.
and foreign income tax purposes, and 60
percent of the foreign income of the part-
nership is included in the foreign income
of the reverse hybrid (and therefore 30
percent (50 percent of 60 percent) of the
foreign income of the partnership is in-
cluded in the foreign income of the cor-
porate owner), the corporate owner would
be allocated 30 percent of a cost recovery

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amount or a disposition amount with re-
spect to an RFA owned by the partnership.

## 2. Second allocation rule

The second allocation rule applies
when instead of a section 901(m) payor,
or a disregarded entity directly owned by
a section 901(m) payor, being a foreign
payor, a section 901(m) payor directly or
indirectly owns an interest in the foreign
payor whose foreign income includes a
distributive share of the foreign income of
the RFA owner (foreign). Therefore, the
section 901(m) payor is considered to pay
or accrue only an allocated portion of the
foreign income tax amount reflected on
the foreign income tax return of the for-
eign payor. This will be the case when the
foreign payor is a fiscally transparent en-
tity for U.S. income tax purposes (other
than a disregarded entity directly owned
by the section 901(m) payor) that either
directly or indirectly owns an interest in
the RFA owner (foreign) for foreign in-
come tax purposes. In these cases, the
RFA owner (U.S.) and the RFA owner
(foreign) are the same entity, except in the
unusual case where the RFA owner (U.S.)
is an entity that is disregarded as separate
from its owner for foreign income tax
purposes.

The mechanics of the second allocation
rule are different than those of the first
allocation rule. This is because the second
allocation rule applies when neither a sec-
tion 901(m) payor, nor a disregarded en-
tity directly owned by a section 901(m)
payor, is a foreign payor that takes into
account the foreign income of the RFA
owner (foreign) for purposes of calculat-
ing a foreign income tax amount, but in-
stead, for U.S. income tax purposes, a
foreign income tax amount of the entity
that is the foreign payor is allocated to,
and considered paid or accrued by, the
section 901(m) payor. Accordingly, the
second allocation rule allocates a portion
of cost recovery amounts and disposition
amounts proportionally to the amount of
the foreign income of the RFA owner
(foreign) that is included in the foreign
income of the foreign payor that is then
included in the allocable foreign income
of the section 901(m) payor. As described
in section IV.A of the Explanation of Pro-
visions section of this preamble, allocable

foreign income is generally the portion of
foreign income of a foreign payor that
relates to the portion of the foreign in-
come tax amount of that foreign payor
that is allocated to and considered paid or
accrued by a section 901(m) payor.

The following example illustrates the
second allocation rule. A domestic entity
that is a corporation for both U.S. and
foreign income tax purposes (corporate
partner) owns an interest in an entity that
is a partnership for U.S. income tax pur-
poses but a corporation for foreign income
tax purposes (hybrid partnership), which,
in turn, owns an interest in a reverse hy-
brid that is the RFA owner (U.S.) and the
RFA owner (foreign). A foreign income
tax amount with respect to the foreign
income of the reverse hybrid is paid by the
owners of the reverse hybrid on their dis-
tributive shares of such foreign income.
Therefore, the hybrid partnership, rather
than its partners, is the foreign payor. For
U.S. income tax purposes, the foreign in-
come tax amount paid or accrued by the
hybrid partnership is allocated to, and
considered paid or accrued by, the corpo-
rate partner that is the section 901(m)
payor (see §§ 1.702-1(a)(6), 1.704-
1(b)(4)(viii), and 1.901-2(f)(4)(i)). Under
the second allocation rule, a cost recovery
amount or a disposition amount with
respect to an RFA owned by the reverse
hybrid is allocated to the corporate partner
proportionally to the amount of foreign
income of the reverse hybrid that is taken
into account in determining the foreign
income of the hybrid partnership and then
the allocable foreign income of the corpo-
rate partner. Thus, for example, if the re-
verse hybrid has $500 of foreign income
and the hybrid partnership pays a foreign
income tax amount of $30 on $200 of
foreign income that includes a $100 dis-
tributive share of the foreign income of
the reverse hybrid (20 percent of $500)
and $15 of the foreign income tax amount
(50 percent of $30) is allocated to and
considered paid by the corporate partner,
then the corporate partner's allocable for-
eign income would be $100 (50 percent of
the $200 foreign income to which the for-
eign income tax amount relates). A cost
recovery amount or disposition amount
with respect to the RFAs owned by the
reverse hybrid would be allocated 10 per-
cent to the corporate partner (the corpo-

rate partner's 50 percent share of the hy-
brid partnership's 20 percent share of the
reverse hybrid's foreign income).

### VII. Successor Rules

Proposed § 1.901(m)-6 provides suc-
cessor rules for applying section 901(m)
following a transfer of RFAs that have
basis difference that has not yet been fully
taken into account (referred to in the reg-
ulations as "unallocated basis difference")
as well as for determining when an aggre-
gate basis difference carryover of a sec-
tion 901(m) payor either becomes an ag-
gregate basis difference carryover of the
section 901(m) payor with respect to an-
other foreign payor or is transferred to
another section 901(m) payor.

#### A. Unallocated basis difference

Proposed § 1.901(m)-6(b)(1) and (2)
incorporate by cross reference the succes-
sor rules set forth in the temporary regu-
lations, which provide generally that sec-
tion 901(m) continues to apply to an RFA
after it has been transferred for U.S. in-
come tax purposes if the RFA continues to
have unallocated basis difference follow-
ing the transfer (a successor transaction).

Proposed § 1.901(m)-6(b)(3) sets forth
two clarifications for applying the succes-
sor rules. First, if an asset is an RFA with
respect to more than one foreign income
tax, the successor rules apply separately
with respect to each foreign income tax.
Second, any subsequent cost recovery
amount for an RFA transferred in a suc-
cessor transaction will be determined
based on the applicable cost recovery
method that applies to the U.S. basis (or
portion thereof) that corresponds to the
unallocated basis difference. Thus, if a
successor transaction restarts the depreci-
ation schedule for an RFA, the transaction
may result in unallocated basis difference
being taken into account at a different
recovery rate than otherwise would have
applied.

Proposed § 1.901(m)-6(b)(4)(iii) also
incorporates by cross reference the rule
set forth in the temporary regulations that
provides an exception to the general rule
when an RFA is subject to multiple sec-
tion 743(b) CAAs. See section VI.B. of
the Explanation of Provisions section of

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the preamble to the temporary regulations
for a discussion of those provisions.

Proposed § 1.901(m)-6(b)(4)(ii), which
is not included in the temporary regula-
tions, provides an exception to the general
successor rule if a foreign basis election is
made under proposed § 1.901(m)-4(c)
with respect to a subsequent CAA that
otherwise would trigger the rules for suc-
cessor transactions. If a foreign basis elec-
tion is made with respect to a foreign
income tax, the only basis difference that
will be taken into account after the subse-
quent CAA with respect to that foreign
income tax is the basis difference deter-
mined for the subsequent CAA.

## B. Aggregate basis difference carryover

Proposed § 1.901(m)-6 provides suc-
cessor rules for aggregate basis difference
carryovers, the computation of which is
described in section IV.B of the Explana-
tion of Provisions section of this pream-
ble. An aggregate basis difference carry-
over is treated as a tax attribute of the
section 901(m) payor that retains its char-
acter as an aggregate basis difference car-
ryover with respect to a foreign income
tax and a foreign payor and with respect to
a separate category, as described in
§ 1.904-4(m) (including the section
904(d) categories). When a section
901(m) payor transfers its assets in a
transaction to which section 381 applies,
proposed § 1.901(m)-6(c)(1) provides
that any aggregate basis difference carry-
overs of the section 901(m) payor are
transferred to the corporation that suc-
ceeds to the earnings and profits, if any.
When substantially all of the assets of one
foreign payor are transferred to another
foreign payor, both of which are directly
or indirectly owned by the same section
901(m) payor, proposed § 1.901(m)-
6(c)(2) provides that an aggregate basis
difference carryover of the section 901(m)
payor with respect to the transferor for-
eign payor becomes an aggregate basis
difference carryover of the section 901(m)
payor with respect to the transferee for-
eign payor.

Proposed § 1.901(m)-6(c)(3) provides
an anti-abuse rule that would transfer an
aggregate basis difference carryover
when, with a principal purpose of avoid-
ing the application of section 901(m),

there is a transfer of assets or a change in
either the allocation of foreign income for
foreign income tax purposes or the allo-
cation of foreign income tax amounts for
U.S. income tax purposes that is intended
to separate foreign income tax amounts
from the related aggregate basis differ-
ence carryover. This anti-abuse rule
would apply, for example, if, with the
principal purpose of avoiding the applica-
tion of section 901(m), a partnership
agreement is amended in order to reduce
the allocation of foreign income to a part-
ner that is a section 901(m) payor with an
aggregate basis difference carryover.

## VIII. De Minimis Rules

Proposed § 1.901(m)-7 describes de
minimis rules under which certain basis
differences are not taken into account for
purposes of section 901(m). This determi-
nation is made when an asset subject to a
CAA first becomes an RFA. If that same
asset is also an RFA by reason of being
subject to a subsequent CAA, the de mi-
nimis tests are applied only to the addi-
tional basis difference, if any, that results
from the subsequent CAA. Accordingly,
any unallocated basis difference that arose
from the prior CAA that did not qualify
for the de minimis exemption at the time
of the prior CAA will not be retested at
the time of the subsequent CAA.

In general, a basis difference with re-
spect to an RFA is not taken into account
for purposes of section 901(m) if either (i)
the sum of the basis differences for all
RFAs with respect to the CAA is less than
the greater of $10 million or 10 percent of
the total U.S. basis of all RFAs immedi-
ately after the CAA; or (ii) the RFA is part
of a class of RFAs for which the sum of
the basis differences of all RFAs in the
class is less than the greater of $2 million
or 10 percent of the total U.S. basis of all
RFAs in the class. For this purpose, the
classes of RFAs are the seven asset
classes defined in § 1.338-6(b).

The Treasury Department and the IRS
decided that transactions between related
parties should be more tightly regulated,
and therefore, the threshold dollar
amounts and percentages to meet the de
minimis exemptions for related party
CAAs are lower than those for unrelated
party CAAs, replacing the terms "$10 mil-

lion," "10 percent," and "$2 million"
wherever they occur with the terms "$5
million," "5 percent," and "$1 million,"
respectively. In addition, an anti-abuse
provision at proposed § 1.901(m)-7(e) de-
nies application of the de minimis exemp-
tions to CAAs between related parties that
are entered into or structured with a prin-
cipal purpose of avoiding the application
of section 901(m).

## IX. Miscellaneous

Proposed § 1.901(m)-8(b) provides
that, when a foreign corporation becomes
a section 902 corporation for the first time,
as part of the required reconstruction of
the U.S. tax history of the pre-1987 for-
eign income taxes of the foreign corpora-
tion, section 901(m) and these regulations
must be applied to determine any disqual-
ified tax amounts or aggregate basis dif-
ference carryovers that apply to the for-
eign corporation.

Proposed § 1.901(m)-8(c) provides an
anti-abuse rule that applies to disregard an
RFA with a built-in loss to the extent it
relates to any asset acquisition structured
with a principal purpose to use that RFA
to avoid the application of section 901(m).
This rule may apply, for example, if, with
a principal purpose of avoiding the appli-
cation of section 901(m), an asset is ac-
quired in a transaction that preserves a
built-in loss in the asset for U.S. income
tax purposes but not for foreign income
tax purposes.

X. Modifications to the Section 704(b)
Regulations Related to Section 901(m)

Section 1.704-1(b)(4)(viii) provides a
safe harbor under which allocations of
creditable foreign tax expenditures
(CFTEs) (as defined in § 1.704-1(b)
(4)(viii)(b)) by a partnership to its partners
are deemed to be in accordance with the
partners' interests in the partnership. In
general, the purpose of the safe harbor is
to match allocations of CFTEs with the
income to which the CFTEs relate. In
order to apply the safe harbor, a partner-
ship must (1) determine the partnership's
"CFTE categories," (2) determine the
partnership's net income in each CFTE
category, and (3) allocate the partner-
ship's CFTEs to each category. In order to

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satisfy the safe harbor, partnership alloca-
tions of CFTEs in a CFTE category must
be proportionate to the allocations of the
partnership's net income in the CFTE cat-
egory.

A CFTE may be subject to section
901(m) because it is a foreign income tax
amount that is paid or accrued by a part-
nership. Specifically, if a partnership
owns an RFA with respect to a foreign
income tax and that RFA has a basis dif-
ference subject to section 901(m), a por-
tion of a foreign income tax amount paid
or accrued by the partnership that relates
to that foreign income tax may be disal-
lowed as a foreign tax credit under section
901(m) in the hands of section 901(m)
payors to whom the foreign income tax
amount is allocated. The disqualified tax
amount is determined by taking into ac-
count cost recovery amounts and disposi-
tion amounts with respect to the RFA that
are allocated to those section 901(m) pay-
ors pursuant to the rules provided in pro-
posed § 1.901(m)-5. In order to ensure
that the proper portion of a foreign income
tax amount paid or accrued by a partner-
ship is disallowed under section 901(m),
adjustments to the net income (and the
allocations of that income) in a CFTE
category that includes items attributable to
the RFA are necessary in certain cases.

To illustrate such a case, assume a do-
mestic entity that is a partnership for U.S.
income tax purposes but a corporation for
purposes of a foreign income tax (a hybrid
partnership) is owned by partner A and
partner B, each of which is a domestic
entity that is a corporation for both U.S.
and foreign income tax purposes. In this
case, the hybrid partnership is the foreign
payor and partners A and B are section
901(m) payors. The hybrid partnership is
the RFA owner (U.S.) and the RFA owner
(foreign) with respect to a single asset that
is an RFA. Assume that in a given year the
hybrid partnership has 110u of gross in-
come for both U.S. and foreign tax pur-
poses and a 10u depreciation deduction
solely for U.S. income tax purposes,
which gives rise to a cost recovery amount
with respect to the RFA (as determined
under proposed § 1.901(m)-5(b)(2)). All
partnership items are allocated equally to
partners A and B, except that the entire
10u U.S. depreciation deduction is allo-
cated to partner A. Thus, partner A's dis-

tributive share of income is 45u (110u x
50%, less 10u) and partner B's distribu-
tive share of income is 55u (110u x 50%).
Because the entire U.S. depreciation de-
duction is (or will be included) in partner
A's distributive share of income for U.S.
income tax purposes, the entire cost re-
covery amount that corresponds to the
U.S. depreciation deduction of 10u is al-
located to partner A. See proposed
§ 1.901(m)-5(d)(2). As a result, Partner A
will take into account the 10u cost recov-
ery amount in calculating a disqualified
tax amount with respect to the portion of
the relevant foreign income tax amount
paid or accrued by the hybrid partnership
and allocated to partner A under the CFTE
allocation rules. In order to ensure that the
portion of the foreign income tax amount
paid or accrued by the hybrid partnership
that is attributable to the 10u basis differ-
ence is properly subject to section 901(m),
the U.S. depreciation deduction should
not be taken into account under the CFTE
allocation rules so that the portion of the
foreign income tax amount attributable to
the 10u basis difference is allocated to
partner A. Accordingly, the net income of
the CFTE category that includes the U.S.
basis deduction should be increased by
10u (from 100u to 110u) to back out the
portion of the U.S. depreciation deduction
that corresponds to the cost recovery
amount, and partner A's share of that net
income should be increased by 10u (from
45u to 55u). In this example, as a result of
the adjustment, the foreign income tax
amount paid or accrued by the hybrid
partnership will be allocated equally be-
tween partner A and partner B, because
they each will have a 50-percent share of
the net income in the CFTE category, as
adjusted. Absent the adjustment, a portion
of the foreign income tax amount attrib-
utable to the 10u basis difference would
be allocated to partner B, a person that is
not subject to section 901(m) (because no
cost recovery amount is allocated to part-
ner B).

No modification to the safe harbor is
necessary to address cost recovery amounts
and disposition amounts attributable to sec-
tion 743(b) adjustments that are allocated
to partners under proposed § 1.901(m)-
5(e) (which applies when a section
901(m) payor acquires a partnership inter-
est in a section 743(b) CAA), because, in

these cases, § 1.704-1T(b)(4)(viii)(c)(3)
(i) already provides that the partnership
determines net income in a CFTE cate-
gory without regard to section 743(b) ad-
justments that its partners may have to the
basis of property of the partnership. How-
ever, as discussed in section VI.D of the
Explanation of Provisions section of this
preamble, proposed § 1.901(m)-5(e) does
not apply when another partnership
(which by definition cannot be a section
901(m) payor) acquires a partnership in-
terest in a section 743(b) CAA. Thus,
modification to the safe harbor is neces-
sary for all CAAs other than those section
743(b) CAAs described in proposed
§ 1.901(m)-5(e).

Accordingly, these proposed regula-
tions add special rules under proposed
§ 1.704-1(b)(4)(viii)(c)(4)(v), (vi), and
(vii) to address partnership items that give
rise to cost recovery amounts and dispo-
sition amounts attributable to CAAs
(other than section 743(b) CAAs de-
scribed in proposed § 1.901(m)-5(e)).
Specifically, these rules provide that, if an
RFA has a positive basis difference, net
income in a CFTE category that takes into
account partnership items of income, de-
duction, gain, or loss attributable to the
RFA (applicable CFTE category) is in-
creased by the sum of the cost recovery
amounts and disposition amounts attribut-
able to U.S. disposition loss that corre-
spond to those partnership items. Further-
more, to the extent a partner is allocated
those cost recovery amounts or disposi-
tion amounts attributable to U.S. disposi-
tion loss, that partner's share of the net
income in the CFTE category is increased
by the same amount. Alternatively, if an
RFA has a negative basis difference, the
net income in the applicable CFTE cate-
gory is decreased by the sum of the cost
recovery amounts and disposition
amounts attributable to U.S. disposition
gain that correspond to partnership items
in that CFTE category. Furthermore, to
the extent a partner is allocated those cost
recovery amounts or disposition amounts
attributable to U.S. disposition gain, that
partner's share of the net income in the
CFTE category is decreased by the same
amount.

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### XI. Effective/Applicability Dates

These proposed regulations will apply
to CAAs occurring on or after the date of
publication of the Treasury decision
adopting these rules as final regulations in
the Federal Register. Taxpayers may,
however, rely on the proposed regulations
prior to the date the regulations are appli-
cable provided that they both consistently
apply proposed § 1.901(m)-2 (excluding
§ 1.901(m)-2(d)) to all CAAs occurring
on or after December 7, 2016 and consis-
tently apply proposed § 1.901(m)-1 and
§§ 1.901(m)-3 through 1.901(m)-8 (ex-
cluding § 1.901(m)-4(e)) to all CAAs oc-
curring on or after January 1, 2011. For
this purpose, persons that are related
(within the meaning of section 267(b) or
707(b)) will be treated as a single tax-
payer.

## Special Analyses

Certain IRS regulations, including
these, are exempt from the requirements
of Executive Order 12866, as supple-
mented and reaffirmed by Executive Or-
der 13563. Therefore, a regulatory impact
assessment is not required. It has also
been determined that the Regulatory Flex-
ibility Act (5 U.S.C. chapter 6) does not
apply because the regulations do not im-
pose a collection of information on small
entities. Pursuant to section 7805(f), these
regulations will be submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its
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 "Addresses." The
Treasury Department and the IRS request
comments on all aspects of the proposed
rules. All comments will be available at
www.regulations.gov or upon request. A
public hearing will be scheduled if re-
quested in writing by any person that
timely submits comments. If a public
hearing is scheduled, notice of the date,
time, and place for the public hearing will
be published in the Federal Register.

# Drafting Information

The principal author of these regula-
tions is Jeffrey L. Parry of the Office of
Associate 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 is amended by adding entries in
numerical order to read as follows:

Authority: 26 U.S.C. 7805
Sections 1.901(m)-1 through -8 also
issued under 26 U.S.C. 901(m)(7). * * *

Section 1.901(m)-5 also issued under
26 U.S.C. 901(m)(3)(B)(ii). * * *

Par. 2. Section 1.704-1, as proposed to
be amended at 81 FR 5967, February 4,
2016, is further amended by adding two
sentences at the end of paragraph
(b)(1)(ii)(b)(1) and by adding paragraphs
(b)(4)(viii)(c)(4)(v) through (b)(4)(viii)
(c)(4)(vii) to read as follows:

§ 1.704-1 Partner's distributive share.

* * * * *

(b) * * *

(1) * * *

(ii) * * *

(b) * * *

(1) * * * Paragraphs (b)(4)(viii)(c)
(4)(v) through (vii) of this section apply to
covered asset acquisitions (CAAs) (as de-
fined in § 1.901(m)-1(a)(8)) occurring on
or after the date of publication of a Trea-
sury decision adopting these rules as final
regulations in the Federal Register. Tax-
payers may, however, rely on paragraphs
(b)(4)(viii)(c)(4)(v) through (vii) of this
section prior to the date paragraphs
(b)(4)(viii)(c)(4)(v) through (vii) of this
section are applicable provided that they
consistently apply paragraphs (b)(4)
(viii)(c)(4)(v) through (vii) of this section,
§ 1.901(m)-1, and §§ 1.901(m)-3 through
1.901(m)-8 (excluding § 1.901(m)-4(e))
to all CAAs occurring on or after January

1, 2011, and consistently apply § 1.901(m)-

2 (excluding § 1.901(m)-2(d)) to all CAAs
occurring on or after December 7, 2016.
* * * * *

(4) * * *

(viii) * * *

(c) * * *

(4) * * *

(v) Adjustments related to section
901(m). If one or more assets owned by a
partnership are relevant foreign assets (or
RFAs) with respect to a foreign income
tax , then, solely for purposes of applying
the safe harbor provisions of paragraph
(b)(4)(viii)(a)(1) of this section to alloca-
tions of CFTEs with respect to that for-
eign income tax , the net income in a
CFTE category that includes partnership
items of income, deduction, gain, or loss
attributable to the RFA shall be increased
by the amount described in paragraph
(b)(4)(viii)(c)(4)(vi) of this section and re-
duced by the amount described in para-
graph (b)(4)(viii)(c)(4)(vii) of this section.
Similarly, a partner's CFTE category
share of income shall be increased by the
portion of the amount described in para-
graph (b)(4)(viii)(c)(4)(vi) of this section
that is allocated to the partner under
§ 1.901(m)-5(d) and reduced by the por-
tion of the amount described in paragraph
(b)(4)(viii)(c)(4)(vii) of this section that is
allocated to the partner under § 1.901(m)-
5(d). The principles of this paragraph
(b)(4)(viii)(c)(4)(v) apply similarly when
a partnership owns an RFA indirectly
through one or more other partnerships.
For purposes of paragraphs (b)(4)(viii)
(c)(4)(v), (b)(4)(viii)(c)(4)(vi), and (b)(4)
(viii)(c)(4)(vii) of this section, basis dif-
ference is defined in § 1.901(m)-4, cost
recovery amount is defined in § 1.901(m)-
5(b)(2), disposition amount is defined in
§ 1.901(m)-5(c)(2), foreign income tax is
defined in § 1.901(m)-1(a)(21), RFA is
defined in § 1.901(m)-2(c), U.S. disposi-
tion gain is defined in § 1.901(m)-
1(a)(43), and U.S. disposition loss is de-
fined in § 1.901(m)-1(a)(44).

(vi) Adjustment amounts for RFAs with
a positive basis difference. With respect to
RFAs with a positive basis difference, the
amount referenced in (b)(4)(viii)(c)(4)(v)
is the sum of any cost recovery amounts
and disposition amounts attributable to
U.S. disposition loss that correspond to
partnership items that are included in the

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net income in the CFTE category and that
are taken into account for the U.S. taxable
year of the partnership under § 1.901(m)-
5(d).

(vii) Adjustment amounts for RFAs
with a negative basis difference. With re-
spect to RFAs with a negative basis dif-
ference, the amount referenced in
(b)(4)(viii)(c)(4)(v) is the sum of any cost
recovery amounts and disposition amounts
attributable to U.S. disposition gain that
correspond to partnership items that are
included in the net income in the CFTE
category and that are taken into account
for the U.S. taxable year of the partnership
under § 1.901(m)-5(d).

* * * * *

Par. 3. Section 1.901(m)-1 is added to
read as follows:

§ 1.901(m)-1 Definitions.

(a) Definitions. [The text of proposed
§ 1.901(m)-1(a) is the same as the text of
§ 1.901(m)-1T(a) published elsewhere in
this issue of the Bulletin.]

(1) The term aggregate basis differ-
ence means, with respect to a foreign in-
come tax and a foreign payor, the sum of
the allocated basis differences for a U.S.
taxable year of a section 901(m) payor,
plus any aggregate basis difference carry-
over from the immediately preceding U.S.
taxable year of the section 901(m) payor
with respect to the foreign income tax and
foreign payor, as adjusted under
§ 1.901(m)-6(c). For purposes of this def-
inition, if foreign law imposes tax on the
combined income (within the meaning of
§ 1.901-2(f)(3)(ii)) of two or more foreign
payors, all foreign payors whose items of
income, deduction, gain, or loss are in-
cluded in the U.S. taxable income or earn-
ings and profits of the section 901(m)
payor are treated as a single foreign payor.
Aggregate basis difference is determined
with respect to each separate category de-
scribed in § 1.904-4(m).

(2) The term aggregate basis differ-
ence carryover has the meaning provided
in § 1.901(m)-3(c).

(3) The term aggregated CAA transac-
tion means a series of related CAAs oc-
curring as part of a plan.

(4) The term allocable foreign income
means the portion of foreign income of a
foreign payor that relates to the foreign

income tax amount of the foreign payor
that is paid or accrued by, or considered
paid or accrued by, a section 901(m)
payor.

(5) The term allocated basis difference
means, with respect to an RFA and a
foreign income tax, the sum of the cost
recovery amounts and disposition amounts
assigned to a U.S. taxable year of the section
901(m) payor under § 1.901(m)-5.

(6) through (8) [The text of proposed
§§ 1.901(m)-1(a)(6) through (8) is the
same as the text of §§ 1.901(m)-1T(a)(6)
through (8) published elsewhere in this
issue of the Bulletin.]

(9) The term cumulative basis differ-
ence exemption has the meaning provided
in § 1.901(m)-7(b)(2).

(10) through (11) [The text of proposed
§§ 1.901(m)-1(a)(10) through (11) is the
same as the text of §§ 1.901(m)-1T(a)(10)
through (11) published elsewhere in this
issue of the Bulletin.]

(12) The term disqualified tax amount
has the meaning provided in § 1.901(m)-
3(b).

(13) through (14) [The text of proposed
§§ 1.901(m)-1(a)(13) through (14) is the
same as the text of §§ 1.901(m)-1T(a)(13)
through (14) published elsewhere in this
issue of the Bulletin.]

(15) The term foreign basis means the
adjusted basis of an asset determined for
purposes of a foreign income tax.

(16) The term foreign basis election
has the meaning provided in § 1.901(m)-
4(c).

(17) The term foreign country credit-
able tax (or FCCT) means, with respect to
a foreign income tax amount, the amount
of income, war profits, or excess profits
tax paid or accrued to a foreign country or
possession of the United States and
claimed as a foreign tax credit for pur-
poses of determining the foreign income
tax amount. To qualify as a FCCT, the tax
imposed by the foreign country or posses-
sion must be a foreign income tax or a
withholding tax determined on a gross
basis as described in section 901(k)(1)(B).

(18) through (21) [The text of proposed
§§ 1.901(m)-1(a)(18) through (21) is the
same as the text of §§ 1.901(m)-1T(a)(18)
through (21) published elsewhere in this
issue of the Bulletin.]

(22) The term foreign income tax
amount means, with respect to a foreign

income tax, the amount of tax (including
an amount of tax that is zero) reflected on
a foreign tax return (as properly amended
or adjusted). If foreign law imposes tax on
the combined income (within the meaning
of § 1.901-2(f)(3)(ii)) of two or more
foreign payors, however, a foreign income
tax amount means the amount of tax im-
posed on the combined income, regardless
of whether the tax is reflected on a single
foreign tax return. (23) The term foreign
payor means an individual or entity (in-
cluding a disregarded entity) subject to a
foreign income tax. If a foreign income
tax imposes tax on the combined income
(within the meaning of § 1.901-2(f)
(3)(ii)) of two or more individuals or en-
tities, each such individual or entity is a
foreign payor. An individual or entity may
be a foreign payor with respect to more
than one foreign income tax for purposes
of applying section 901(m).

(24) The term foreign taxable year
means a taxable year for purposes of a
foreign income tax.

(25) The term mid-year transaction
means a transaction in which a foreign
payor that is a corporation or a disre-
garded entity has a change in ownership
or makes an election pursuant to
§ 301.7701-3 to change its entity classi-
fication, or a transaction in which a for-
eign payor that is a partnership terminates
under section 708(b)(1), provided in each
case that the foreign payor's foreign tax-
able year does not close as a result of the
transaction, and, if the foreign payor is a
corporation or a partnership, the foreign
payor's U.S. taxable year closes.

(26) through (28) [The text of proposed
§§ 1.901(m)-1(a)(26) through (28) is the
same as the text of §§ 1.901(m)-1T(a)(26)
through (28) published elsewhere in this
issue of the Bulletin.]

(29) The term reverse hybrid has the
meaning provided in § 1.909-2(b)(1)(iv).

(30) The term RFA class exemption has
the meaning provided in § 1.901(m)-7
(b)(3).

(31) The term RFA owner (U.S.) means
a person that owns an RFA for U.S. in-
come tax purposes.

(32) The term RFA owner (foreign)
means an individual or entity (including a
disregarded entity ) that owns an RFA for
purposes of a foreign income tax.

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(33) through (34) [The text of proposed
§§ 1.901(m)-1(a)(33) through (34) is the
same as the text of §§ 1.901(m)-1T(a)(33)
through (34) published elsewhere in this
issue of the Bulletin.]

(35) The term section 901(m) payor
means a person eligible to claim the for-
eign tax credit allowed under section
901(a), regardless of whether the person
chooses to claim the foreign tax credit, as
well as a section 902 corporation (as de-
fined in section 909(d)(5)). If members of
a U.S. affiliated group of corporations (as
defined in section 1504) file a consoli-
dated return, each member is a separate
section 901(m) payor. If individuals file a
joint return, those individuals are treated
as a single section 901(m) payor.

(36) through (38) [The text of proposed
§§ 1.901(m)-1(a)(36) through (38) is the
same as the text of §§ 1.901(m)-1T(a)(36)
through (38) published elsewhere in this
issue of the Bulletin.]

(39) The term tentative disqualified tax
amount has the meaning provided in
§ 1.901(m)-3(b)(2).

(40) through (41) [The text of proposed
§§ 1.901(m)-1(a)(40) through (41) is the
same as the text of §§ 1.901(m)-1T(a)(40)
through (41) published elsewhere in this
issue of the Bulletin.]

(42) The term U.S. basis deduction has
the meaning provided in § 1.901(m)-
5(b)(3).

(43) through (45) [The text of proposed
§§ 1.901(m)-1(a)(43) through (45) is the
same as the text of §§ 1.901(m)-1T(a)(43)
through (45) published elsewhere in this
issue of the Bulletin.]

(b) Effective/applicability date. (1)
Paragraphs (a)(1), (2), (3), (4), (5), (9),
(12), (15), (16), (17), (22), (23), (24), (25),
(29), (30), (31), (32), (35), (39), and (42)
of this section apply to CAAs occurring
on or after the date of publication of the
Treasury decision adopting these rules as
final regulations in the Federal Register.

(2) [The text of proposed § 1.901(m)-
1(b)(2) is the same as the text of
§ 1.901(m)-1T(b)(2) published elsewhere
in this issue of the Bulletin.]

(3) Taxpayers may, however, rely on
this section prior to the date this section is
applicable provided that they both consis-
tently apply this section, § 1.704-1(b)(4)
(viii)(c)(4)(v) through (vii), and §§ 1.901
(m)-3 through 1.901(m)-8 (excluding

§ 1.901(m)-4(e)) to all CAAs occurring
on or after January 1, 2011, and consis-
tently apply § 1.901(m)-2 (excluding
§ 1.901(m)-2(d)) to all CAAs occurring
on or after December 7, 2016. For this
purpose, persons that are related (within
the meaning of section 267(b) or 707(b))
will be treated as a single taxpayer.

Par. 4. Section 1.901(m)-2 is added to
read as follows:

§ 1.901(m)-2 Covered asset acquisitions
and relevant foreign assets.

(a) through (b)(3) [The text of pro-
posed §§ 1.901(m)-2(a) through (b)(3) is
the same as the text of §§ 1.901(m)-2T(a)
through (b)(3) published elsewhere in this
issue of the Bulletin.]

(4) Any transaction (or series of trans-
actions occurring pursuant to a plan) to
the extent it is treated as an acquisition of
assets for purposes of U.S. income tax and
as the acquisition of an interest in a fis-
cally transparent entity for purposes of a
foreign income tax;

(5) Any transaction (or series of trans-
actions occurring pursuant to a plan) to
the extent it is treated as a partnership
distribution of one or more assets the U.S.
basis of which is determined by section
732(b) or 732(d) or which causes the U.S.
basis of the partnership's remaining assets
to be adjusted under section 734(b), pro-
vided the transaction results in an increase
in the U.S. basis of one or more of the
assets distributed by the partnership or
retained by the partnership without a cor-
responding increase in the foreign basis of
such assets; and

(6) Any transaction (or series of trans-
actions occurring pursuant to a plan) to
the extent it is treated as an acquisition of
assets for purposes of both U.S. income
tax and a foreign income tax, provided the
transaction results in an increase in the
U.S. basis without a corresponding in-
crease in the foreign basis of one or more
assets.

(c) Relevant foreign asset-(1) [The
text of proposed § 1.901(m)-2(c)(1) is the
same as the text of § 1.901(m)-2T(c)(1)
published elsewhere in this issue of the
Bulletin.]

(2) RFA status with respect to a foreign
income tax. An asset is relevant in deter-
mining foreign income if income, deduc-

tion, gain, or loss attributable to the asset
is taken into account in determining for-
eign income immediately after the CAA,
or would be taken into account in deter-
mining foreign income immediately after
the CAA if the asset were to give rise to
income, deduction, gain, or loss at such
time.

(3) Subsequent RFA status with respect
to another foreign income tax. After a
CAA, an asset will become an RFA with
respect to another foreign income tax if,
pursuant to a plan or series of related
transactions that have a principal purpose
of avoiding the application of section
901(m), an asset that was not relevant in
determining foreign income for purposes
of that foreign income tax immediately
after the CAA becomes relevant in deter-
mining such foreign income. A principal
purpose of avoiding section 901(m) will
be deemed to exist if income, deduction,
gain, or loss attributable to the asset is
taken into account in determining such
foreign income within the one-year period
following the CAA, or would be taken
into account in determining such foreign
income during such time if the asset were
to give rise to income, deduction, gain, or
loss within the one-year period.

(d) [The text of proposed § 1.901(m)-
2(d) is the same as the text of § 1.901(m)-
2T(d) published elsewhere in this issue of
the Bulletin.]

(e) Examples. The following examples
illustrate the rules of this section:

Example 1. CAA involving an acquisition of a
partnership interest for foreign income tax purpos-
es-(i) Facts. (A) FPS is an entity organized in
Country F that is treated as a partnership for both
U.S. and Country F income tax purposes. FPS is
owned 50/50 by FC1 and FC2, each of which is a
corporation organized in Country F and treated as a
corporation for both U.S. and Country F income tax
purposes. FPS has a single asset, Asset A. USP, a
domestic corporation, owns all the interests in DE, a
disregarded entity.

(B) Pursuant to the same transaction, USP ac-
quires FC1's interest in FPS, and DE acquires FC2's
interest in FPS. For U.S. income tax purposes, with
respect to USP, the acquisition of the interests in FPS
is treated as the acquisition of Asset A by USP. See
Rev. Rul. 99-6, 1999-1 C.B. 432. For Country F
tax purposes, the acquisitions of the interests of FPS
by USP and DE are treated as acquisitions of part-
nership interests.

(ii) Result. The transaction is a CAA under para-
graph (b)(4) of this section because it is treated as the
acquisition of Asset A for U.S. income tax purposes
and the acquisition of interests in a partnership for
Country F tax purposes.

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Example 2. CAA involving an asset acquisition
for purposes of both U.S. income tax and a foreign
income tax-(i) Facts. (A) USP, a domestic corpo-
ration, wholly owns CFC1, a foreign corporation,
and CFC1 wholly owns CFC2, also a foreign corpo-
ration. CFC1 and CFC2 are organized in Country F.
CFC1 owns Asset A.

(B) In an exchange described in section 351,
CFC1 transfers Asset A to CFC2 in exchange for
CFC2 common stock and cash. CFC1 recognizes
gain on the exchange under section 351(b). Under
section 362(a), CFC2's U.S. basis in Asset A is
increased by the gain recognized by CFC1. For
Country F tax purposes, gain or loss is not recog-
nized on the transfer of Asset A to CFC2, and
therefore there is no increase in the foreign basis in
Asset A.

(ii) Result. The transaction is a CAA under para-
graph (b)(6) of this section because it is treated as an
acquisition of Asset A by CFC2 for both U.S. and
Country F income tax purposes, and it results in an
increase in the U.S. Basis of Asset A without a
corresponding increase in the foreign basis of Asset A.

Example 3. RFA status determined immediately
after CAA; application of principal purpose rule-
(i) Facts. (A) USP1 and USP2 are unrelated domes-
tic corporations. USP1 wholly owns USSub, also a
domestic corporation. On January 1 of Year 1, USP2
acquires all of the stock of USSub from USP1 in a
qualified stock purchase (as defined in section
338(d)(3)) to which section 338(a) applies. Immedi-
ately after the acquisition, none of the income, de-
duction, gain, or loss attributable to any of the assets
of USSub is taken into account in determining for-
eign income for purposes of a foreign income tax nor
would such items be taken into account in determin-
ing foreign income for purposes of a foreign income
tax immediately after the acquisition if such assets
were to give rise to income, deduction, gain, or loss
immediately after the acquisition.

(B) On December 1 of Year 1, USSub contrib-
utes all its assets to FSub, its wholly owned subsid-
iary, which is a corporation for both U.S. and Coun-
try X income tax purposes, in a transfer described in
section 351 (subsequent transfer). USSub recognizes
no gain or loss for U.S. or Country X income tax
purposes as a result of the subsequent transfer. As a
result of the subsequent transfer, income, deduction,
gain, or loss attributable to the assets of USSub that
were transferred to FSub is taken into account in
determining foreign income of FSub for Country X
tax purposes.

(ii) Result. (A) Under paragraph (b)(1) of this
section, the acquisition by USP2 of the stock of
USSub is a section 338 CAA. Under paragraph
(c)(1) of this section, none of the assets of USSub are
RFAs immediately after the CAA, because none of
the income, deduction, gain, or loss attributable to
such assets is taken into account for purposes of
determining foreign income with respect to any for-
eign income tax immediately after the CAA (nor
would such items be taken into account for purposes
of determining foreign income immediately after the
CAA if such assets were to give rise to income,
deduction, gain, or loss at such time).

(B) Although the subsequent transfer is not a
CAA under paragraph (b) of this section, the subse-
quent transfer causes the assets of USSub to become

relevant in the hands of FSub in determining foreign
income for Country X tax purposes. Because the
subsequent transfer occurred within the one-year pe-
riod following the CAA, it is presumed to have a
principal purpose of avoiding section 901(m). Ac-
cordingly, under paragraph (c)(2) of this section, the
assets of USSub with respect to the CAA occurring
on January 1 of Year 1 become RFAs with respect to
Country X tax as a result of the subsequent transfer.
Thus, a basis difference with respect to Country X
tax must be computed for the RFAs and taken into
account under section 901(m).

(f) Effective/applicability date. (1) [The
text of proposed § 1.901(m)-2(f)(1) is the
same as the text of § 1.901(m)-2T(f)(1)
published elsewhere in this issue of the Bul-
letin.]

(2) Paragraphs (b)(4) through (b)(6),
(c)(2), (c)(3), and (e) of this section apply
to CAAs occurring on or after the date of
publication of the Treasury decision
adopting these rules as final regulations in
the Federal Register.

(3) Taxpayers may, however, rely on
this section prior to the date this section is
applicable provided that they both consis-
tently apply this section (excluding para-
graph (d) of this section) to all CAAs
occurring on or after December 7, 2016
and consistently apply § 1.704-1(b)(4)
(viii)(c)(4)(v) through (vii), § 1.901(m)-1,
and §§ 1.901(m)-3 through 1.901(m)-8
(excluding § 1.901(m)-4(e)) to all CAAs
occurring on or after January 1, 2011. For
this purpose, persons that are related
(within the meaning of section 267(b) or
707(b)) will be treated as a single tax-
payer.

Par. 5. Section 1.901(m)-3 is added to
read as follows:

§ 1.901(m)-3 Disqualified tax amount and
aggregate basis difference carryover.

(a) In general. If a section 901(m)
payor has an aggregate basis difference,
with respect to a foreign income tax and a
foreign payor, for a U.S. taxable year, the
section 901(m) payor must determine the
portion of a foreign income tax amount
that is disqualified under section 901(m)
(disqualified tax amount). Paragraph (b)
of this section provides rules for determin-
ing the disqualified tax amount. Paragraph
(c) of this section provides rules for de-
termining what portion, if any, of aggre-
gate basis difference will be carried for-
ward to the next U.S. taxable year
(aggregated basis difference carryover).

Paragraph (d) of this section provides the
effective/applicability date.

(b) Disqualified tax amount-(1) In
general. A section 901(m) payor's dis-
qualified tax amount is not taken into ac-
count in determining the credit allowed
under section 901(a). If the section
901(m) payor is a section 902 corporation,
the disqualified tax amount is not taken
into account for purposes of section 902
or 960. Sections 78 and 275 do not apply
to the disqualified tax amount. The dis-
qualified tax amount is allowed as a de-
duction to the extent otherwise deductible
(see sections 164, 212, and 964 and the
regulations under those sections).

(2) Determination of disqualified tax
amount-(i) In general. Except as pro-
vided in paragraph (b)(2)(iv) of this sec-
tion, the disqualified tax amount is equal
to the lesser of the foreign income tax
amount that is paid or accrued by, or con-
sidered paid or accrued by, the section
901(m) payor for the U.S. taxable year or
the tentative disqualified tax amount. All
calculations are determined with respect
to each separate category described in
§ 1.904-4(m).

(ii) Tentative disqualified tax amount.
The tentative disqualified tax amount is
equal to the amount determined under
paragraph (b)(2)(ii)(A) of this section re-
duced (but not below zero) by the amount
described in paragraph (b)(2)(ii)(B) of this
section.

(A) The product of-

(1) The sum of the foreign income tax
amount and the FCCTs that are paid or
accrued by, or considered paid or accrued
by, the section 901(m) payor, and

(2) A fraction, the numerator of which
is the aggregate basis difference, but not
in excess of the allocable foreign income,
and the denominator of which is the allo-
cable foreign income.

(B) The amount of the FCCT that is a
disqualified tax amount of the section
901(m) payor with respect to another for-
eign income tax.

(iii) Allocable foreign income-(A) No
allocation required. Except as provided in
paragraph (b)(2)(iii)(D) of this section, if
the entire foreign income tax amount is
paid or accrued by, or considered paid or
accrued by, a single section 901(m) payor,
then the allocable foreign income is equal
to the entire foreign income, determined

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with respect to each separate category de-
scribed in § 1.904-4(m).

(B) Allocation required. Except as pro-
vided in paragraph (b)(2)(iii)(D) of this
section, if the foreign income tax amount
is allocated to, and considered paid or
accrued by, more than one person, a sec-
tion 901(m) payor's allocable foreign in-
come is equal to the portion of the foreign
income that relates to the foreign income
tax amount allocated to that section
901(m) payor, determined with respect to
each separate category described in
§ 1.904-4(m).

(C) Rules for allocations. This para-
graph (b)(2)(iii)(C) provides allocation
rules that apply to determine allocable for-
eign income in certain cases.

(1) If the foreign payor is involved in a
mid-year transaction and the foreign in-
come tax amount is allocated under
§ 1.336-2(g)(3)(ii), 1.338-9(d), or 1.901-
2(f)(4), then, to the extent any portion of
the foreign income tax amount is allocated
to, and considered paid or accrued by, a
section 901(m) payor, the allocable for-
eign income of the section 901(m) payor
is determined in accordance with the prin-
ciples of § 1.1502-76(b). To the extent the
foreign income tax amount is allocated to
an entity that is a partnership for U.S.
income tax purposes, a portion of the for-
eign income is first allocated to the part-
nership in accordance with the principles
of § 1.1502-76(b), which is then allocated
under the rules of paragraph (b)(2)(iii)
(C)(2) of this section to determine the
allocable foreign income of a section
901(m) payor that owns an interest in the
partnership directly or indirectly through
one or more other partnerships for U.S.
income tax purposes.

(2) If the foreign income tax amount is
considered paid or accrued by a section
901(m) payor for a U.S. taxable year un-
der § 1.702-1(a)(6), the determination of
the allocable foreign income must be con-
sistent with the allocation of the foreign
income tax amount that relates to the for-
eign income. See § 1.704-1(b)(4)(viii).

(3) If the foreign income tax amount
that is allocated to, and considered paid or
accrued by, a section 901(m) payor for a
U.S. taxable year is determined under
§ 1.901-2(f)(3)(i), the allocable foreign
income is determined in accordance with
§ 1.901-2(f)(3)(iii).

(D) Failure to substantiate allocable
foreign income. If, pursuant to section
901(m)(3)(A), a section 901(m) payor
fails to substantiate its allocable foreign
income to the satisfaction of the Secretary,
then allocable foreign income will equal
the amount determined by dividing the
sum of the foreign income tax amount and
the FCCTs that are paid or accrued by, or
considered paid or accrued by, the section
901(m) payor, by the highest marginal tax
rate applicable to income of the foreign
payor under foreign tax law.

(iv) Special rule. A section 901(m)
payor's disqualified tax amount is zero for
a U.S. taxable year if:

(A) The section 901(m) payor's aggre-
gate basis difference for the U.S. taxable
year is a negative amount;

(B) Foreign income is less than or
equal to zero for the foreign taxable year
of the foreign payor; or

(C) The foreign income tax amount
that is paid or accrued by, or considered
paid or accrued by, the section 901(m)
payor for the U.S. taxable year is zero.

(3) Examples. The following examples
illustrate the rules of paragraph (b)(2) of
this section. For purposes of all the exam-
ples, unless otherwise specified: USP is a
domestic corporation. CFC1, CFC2, DE1,
and DE2 are organized in Country F and
are treated as corporations for Country F
tax purposes. CFC1 and CFC2 are section
902 corporations (as defined in section
909(d)(5)). DE1 and DE2 are disregarded
entities. USP, CFC1, and CFC2 have a
calendar year for both U.S. and Country F
income tax purposes, and DE1 and DE2
have a calendar year for Country F tax
purposes. Country F and Country G each
impose a single tax that is a foreign in-
come tax. CFC1, CFC2, DE1, and DE2
each have a functional currency of the u
with respect to all activities. At all rele-
vant times, 1u equals $1. All amounts are
stated in millions. The examples assume
that the applicable cost recovery method
for property results in basis being recov-
ered ratably over the life of the property
beginning on the first day of the U.S.
taxable year in which the property is ac-
quired or placed into service; there is a
single § 1.904-4(m) separate category
with respect to a foreign income and for-
eign income tax amount; and a section
901(m) payor properly substantiates its

allocable foreign income to the satisfac-
tion of the Secretary.

Example 1. Determining aggregate basis differ-
ence; multiple foreign payors-(i) Facts. CFC1
wholly owns CFC2 and DE1. DE1 wholly owns
DE2. Assume that the tax laws of Country F do not
allow combined income reporting or the filing of
consolidated income tax returns. Accordingly,
CFC1, CFC2, DE1, and DE2 file separate tax returns
for Country F tax purposes. USP acquires all of the
stock of CFC1 in a qualified stock purchase (as
defined in section 338(d)(3)) to which section 338(a)
applies for both CFC1 and CFC2.

(ii) Result. (A) The acquisition of CFC1 gives
rise to four separate CAAs under § 1.901(m)-2(b).
The acquisition of the stock of CFC1 and the deemed
acquisition of the stock of CFC2 under section
338(h)(3)(B) is each a Section 338 CAA under
§ 1.901(m)-2(b)(1). Furthermore, because the
deemed acquisition of the assets of DE1 and DE2 for
U.S. income tax purposes is disregarded for Country
F tax purposes, each acquisition is a CAA under
§ 1.901(m)-2(b)(2). Because these four CAAs occur
pursuant to a plan, under § 1.901(m)-1(a)(3) they are
part of an aggregated CAA transaction. Under
§ 1.901(m)-1(a)(31), CFC1 is the RFA owner (U.S.)
with respect to its assets and those of DE1 and DE2.
CFC2 is the RFA owner (U.S.) with respect to its
assets. Under § 1.901(m)-1(a)(23), CFC1, CFC2,
DE1, and DE2 are each a foreign payor for Country
F tax purposes. Under § 1.901(m)-1(a)(35), CFC1 is
the section 901(m) payor with respect to foreign
income tax amounts for which CFC1, DE1, and DE2
are the foreign payors (see §§ 1.901-2(f)(1) and
1.901-2(f)(4)(ii)). CFC2 is the section 901(m) payor
with respect to foreign income tax amounts for
which CFC2 is the foreign payor (see § 1.901-
2(f)(1)).

(B) In determining aggregate basis difference
under § 1.901(m)-1(a)(1) for a U.S. taxable year of
CFC1, CFC1 has three computations with respect to
Country F tax, because there are three foreign payors
for Country F tax purposes whose foreign income
tax amount, if any, is considered paid or accrued by
CFC1 as the section 901(m) payor. Furthermore, for
each U.S. taxable year, CFC1 will compute a sepa-
rate disqualified tax amount and aggregate basis dif-
ference Carryover (if any) under paragraph (b)(2) of
this section, with respect to each foreign payor.

(C) In determining aggregate basis difference for
a U.S. taxable year of CFC2 under § 1.901(m)-
1(a)(1), CFC2 has a single computation with respect
to Country F tax, because there is a single foreign
payor (CFC2) for Country F tax purposes whose
foreign income tax amount, if any, is considered paid
or accrued by CFC2 as the section 901(m) payor.
Furthermore, for each U.S. taxable year, CFC2 will
compute a disqualified tax amount and aggregate
basis difference Carryover (if any) under paragraph
(b)(2) of this section.

(iii) Alternative facts. Assume the same facts as
in paragraph (i) of this Example 1, except that for-
eign income for Country F tax purposes is based on
combined income (within the meaning of § 1.901-
2(f)(3)(ii)) of CFC1, CFC2, DE1, and DE2. For
purposes of determining an aggregate basis differ-
ence for a U.S. taxable year of CFC1 under
§ 1.901(m)-1(a)(1), CFC1, DE1, and DE2 are

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treated as a single foreign payor because all of the
items of income, deduction, gain, or loss with respect
to CFC1, DE1, and DE2 are included in the earnings
and profits of CFC1 for U.S. income tax purposes.
For each U.S. taxable year, CFC1 will therefore
compute a single aggregate basis difference, disqual-
ified tax amount, and aggregate basis difference car-
ryover. The result for CFC2 under the alternative
facts is the same as in paragraph (ii)(C) of this
Example 1.

Example 2. Computation of disqualified tax
amount-(i) Facts. On December 31 of Year 0, USP
acquires all of the stock of CFC1 in a qualified stock
purchase (as defined in section 338(d)(3)) to which
section 338(a) applies (Acquisition). CFC1 owns
four assets (Asset A, Asset B, Asset C, and Asset D,
and collectively, Assets) and conducts activities in
Country F and in a Country G branch. The activities
conducted by CFC1 in Country G are not subject to
tax in Country F. The tax rate is 25% in Country F
and 30% in Country G. For Country F tax purposes,

CFC1's foreign income and foreign income tax
amount for each foreign taxable year 1 through 15 is
100u and $25 (25u translated at the exchange rate of
$1 = 1u), respectively. For Country G tax purposes,
CFC1's foreign income and foreign income tax
amount for each foreign taxable year 1 through 5 is
400u and $120 (120u translated at the exchange rate
of $1 = lu), respectively. No dispositions occur for
any of the Assets during the applicable cost recovery
period. Additional facts relevant to each of the As-
sets are summarized below.

Assets

Relevant foreign income tax

Basis Difference

Applicable Cost Recovery Period

Cost Recovery Amount

Asset A

Country F tax

150u

15 years

10u (150u/15)

Asset B

Country F tax

50u

5 years

10u (50u/5)

Asset C

Country G tax

300u

5 years

60u (300u/5)

Asset D

Country G tax

(100u)

5 years

negative 20u (negative 100/5)

(ii) Result. (A) Under § 1.901(m)-2(b)(1), the
Acquisition of the stock of CFC1 is a Section 338
CAA. Under § 1.901(m)-2(c)(1), Assets A and B are
RFAs with respect to Country F tax, because they are
relevant in determining foreign income of CFC1 for
Country F tax purposes and were owned by CFC1
when the Acquisition occurred. Assets C and D are
RFAs with respect to Country G tax, because they
are relevant in determining foreign income of CFC1
for Country G tax purposes and were owned by
CFC1 when the Acquisition occurred. Under
§ 1.901(m)-1(a)(31), CFC1 is the RFA owner (U.S.)
with respect to all of the RFAs. Under § 1.901(m)-
1(a)(35) and (a)(23), CFC1 is the section 901(m)
payor and the foreign payor for Country F and Coun-
try G tax purposes.

(B) In determining aggregate basis difference for
a U.S. taxable year of CFC1, CFC1 has two compu-
tations, one with respect to Country F tax and one
with respect to Country G tax. Under § 1.901(m)-
1(a)(1), the aggregate basis difference for a U.S.
taxable year with respect to Country F tax is equal to
the sum of the allocated basis differences with re-
spect to Assets A and B for the U.S. taxable year.
Under § 1.901(m)-1(a)(5), allocated basis differ-
ences are comprised of cost recovery amounts and
disposition amounts. Because there are no disposi-
tions, the only allocated basis differences taken into
account in determining an aggregate basis difference
are cost recovery amounts. Under § 1.901(m)-5(b),
any cost recovery amounts are attributed to CFC1,
because CFC1 is the section 901(m) payor and RFA
owner (U.S.) with respect to all of the Assets. For
each U.S. taxable year, CFC1 will compute a sepa-
rate disqualified tax amount and aggregate basis dif-
ference carryover (if any) with respect to Country F
tax and Country G tax under paragraph (b)(2) of this
section. For purposes of both disqualified tax amount
computations, because CFC1 is the section 901(m)
payor and foreign payor, the foreign income tax
amount paid or accrued by CFC1 with respect to
Country F tax and Country G tax, respectively, will
be the entire foreign income tax amount and CFC1's
allocable foreign income will be the entire foreign
income.

(C) With respect to Country F tax, in U.S. tax-
able years 1 through 5, CFC1 has an aggregate basis
difference of 20u each year (10u cost recovery
amount with respect to Asset A plus 10u cost recov-
ery amount with respect to Asset B). For U.S. tax-
able years 1 through 5, under paragraph (b)(2) of this
section, the disqualified tax amount each year is $5,
the lesser of two amounts: the tentative disqualified
tax amount, in this case, $5 ($25 foreign income
tax amount x (20u aggregate basis difference/100u
allocable foreign income)), or the foreign income tax
amount paid or accrued by CFC1, in this case, $25.
After U.S. taxable year 5, Asset B has no unallocated
basis difference with respect to Country F tax. Ac-
cordingly, in U.S. taxable years 6 through 15, CFC1
has an aggregate basis difference of 10u each year.
Accordingly, for U.S. taxable years 6 through 15, the
disqualified tax amount each year is $2.50, the lesser
of two amounts: the tentative disqualified tax
amount, in this case, $2.50 ($25 foreign income tax
amount x (10u aggregate basis difference/100u allo-
cable foreign income)), or the foreign income tax
amount paid or accrued by CFC1, in this case, $25.
After U.S. taxable year 15, Asset A has no unallo-
cated basis difference with respect to Country F tax
and, therefore, CFC1 has no disqualified tax amount
with respect to Country F Tax.

(D) With respect to Country G tax, in U.S. tax-
able years 1 through 5, CFC1 has an aggregate basis
difference of 40u each year (60u cost recovery
amount with respect to Asset C + (20u) cost recov-
ery amount with respect to Asset D). For U.S. tax-
able years 1 through 5, under paragraph (b)(2) of this
section, the disqualified tax amount each year is $12,
the lesser of two amounts: the tentative disqualified
tax amount, in this case, $12 ($120 foreign income
tax amount x (40u aggregate basis difference/400u
allocable foreign income)), or the foreign income tax
amount paid or accrued by CFC1, in this case, $120.
After U.S. taxable year 5, Asset C and Asset D have
no unallocated basis difference with respect to Coun-
try G tax. Accordingly, in U.S. taxable years 6
through 15, CFC1 has no disqualified tax amount
with respect to Country G Tax.

Example 3. FCCT-(i) Facts. In U.S. taxable
year 1, USP acquires all of the interests in DE1 in a

transaction (Transaction) that is treated as a stock
acquisition for Country F tax purposes. Immediately
after the Transaction, DE1 owns assets (Pre-
Transaction Assets), all of which are used in a Coun-
try G branch and give rise to income that is taken
into account for Country F tax and Country G tax
purposes. After the Transaction, DE1 acquires addi-
tional assets (Post-Transaction Assets), which are
not used by the Country G branch. Both Country F
and Country G have a tax rate of 30%. Country F
imposes worldwide tax on its residents and provides
a foreign tax credit for taxes paid to other jurisdic-
tions. In foreign taxable year 3, 100u of income is
attributable to DEI's Post-Transaction Assets and
100u of income is attributable to DEI's Pre-
Transaction Assets. For Country G tax purposes, the
foreign income is 100u and foreign income tax
amount is 30u (30% x 100u). For Country F tax
purposes, the foreign income is 200u and the pre-
foreign tax credit tax is 60u (30% x 200u). The 60u
of Country F pre-foreign tax credit tax is reduced by
the 30u foreign income tax amount imposed for
Country G tax purposes. Thus, the foreign income
tax amount for Country F tax purposes is $30 (30u
translated into dollars at the exchange rate of $1 =
1u). Assume that for U.S. taxable year 3 USP has
100u aggregate basis difference with respect to
Country F tax and 100u aggregate basis difference
with respect to Country G tax. USP does not dispose
of DE1 or any assets of DE1 in U.S. taxable year 3.

(ii) Result. (A) Under § 1.901(m)-2(b)(2), the
Transaction is a CAA. Under § 1.901(m)-2(c)(1),
the Pre-Transaction Assets are RFAs with respect to
both Country F tax and Country G tax, because they
are relevant in determining the foreign income of
DE1 for Country F tax and Country G tax purposes
and were owned by DE1 when the Transaction oc-
curred. Under § 1.901(m)-1(a)(31), USP is the RFA
owner (U.S.) with respect to the RFAs. Under
§ 1.901(m)-1(a)(23), DE1 is a foreign payor for
Country F tax and Country G tax purposes. Under
§ 1.901(m)-1(a)(35), USP is the section 901(m)
payor with respect to foreign income tax amounts for
which DE1 is the foreign payor (see § 1.901-
2(f)(4)(ii)). Because the Country G foreign income
tax amount is claimed as a credit for purposes of

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determining the Country F foreign income tax
amount, the Country G foreign income tax amount is
an FCCT under § 1.901(m)-1(a)(17).

(B) Under § 1.901(m)-1(a)(1), for each U.S.
taxable year, USP will separately compute the ag-
gregate basis difference with respect to Country F
tax and with respect to Country G tax, and will use
those amounts to separately compute a disqualified
tax amount and aggregate basis difference carryover
(if any) with respect to each foreign income tax.
Because DE1 is a disregarded entity owned by USP
during the entire U.S. taxable year 3, the foreign
income tax amount paid or accrued by DE1 is not
subject to allocation. Accordingly, for purposes of
each of the disqualified tax amount computations,
the foreign income tax amount paid or accrued by
USP with respect to Country F tax and Country G
tax, respectively, is the entire foreign income tax
amount paid or accrued by DE1, and, under para-
graph (b)(2)(iii)(A) of this section, USP's allocable
foreign income will be equal to DE1's entire foreign
income.

(C) As stated in paragraph (i) of this Example 3,
for U.S. taxable year 3 USP has 100u aggregate basis
difference with respect to Country F tax and 100u
aggregate basis difference with respect to Country G
tax. With respect to Country G tax, in U.S. taxable
year 3, under paragraph (b)(2) of this section, the
disqualified tax amount is $30, the lesser of the two
amounts: the tentative disqualified tax amount, in
this case, $30 ($30 foreign income tax amount x
(100u aggregate basis difference/100u allocable for-
eign income)), or the foreign income tax amount
considered paid or accrued by USP, in this case, $30.

(D) With respect to Country F tax, in U.S. tax-
able year 3, under paragraph (b)(2) of this section,
the disqualified tax amount is $0, the lesser of two
amounts: the tentative disqualified tax amount, in
this case $0 (($30 foreign income tax amount + $30
Country G FCCT) x (100u aggregate basis differ-
ence/200u foreign income) = $30 reduced by $30
Country G FCCT that is a disqualified tax amount of
USP), or the foreign income tax amount considered
paid or accrued by USP, in this case, $30.

(c) Aggregate basis difference carry-
over-(1) In general. If a section 901(m)
payor has an aggregate basis difference
carryover for a U.S. taxable year, as de-
termined under this paragraph (c), the ag-
gregate basis difference carryover is taken
into account in computing the section
901(m) payor's aggregate basis difference
for the next U.S. taxable year. For succes-
sor rules that apply to an aggregate basis
difference carryover, see § 1.901(m)-
6(c).

(2) Amount of aggregate basis differ-
ence carryover. (i) If a section 901(m)
payor's disqualified tax amount is zero, all
of the section 901(m) payor's aggregate
basis difference (positive or negative) for
the U.S. taxable year gives rise to an ag-
gregate basis difference carryover to the
next U.S. taxable year.

(ii) If a section 901(m) payor's disqual-
ified tax amount is not zero, then aggre-
gate basis difference carryover can arise
in either or both of the following two
situations:

(A) If a section 901(m) payor's aggre-
gate basis difference for the U.S. taxable
year exceeds its allocable foreign income,
the excess gives rise to an aggregate basis
difference carryover.

(B) If the tentative disqualified tax
amount exceeds the disqualified tax
amount, the excess tentative disqualified
tax amount is converted into aggregate
basis difference carryover by multiplying
such excess by a fraction, the numerator
of which is the allocable foreign income,
and the denominator of which is the sum
of the foreign income tax amount and the
FCCTs that are paid or accrued by, or
considered paid or accrued by, the section
901(m) payor.

(3) Example. The following example
illustrates the rule of paragraph (c) of this
section.

Example. Aggregate basis difference carryover;
section 901(m) payor's U.S. taxable year differs
from the foreign taxable year of foreign payor -(i)
Facts. (A) On July 1 of Year 1, CFC1 acquires all of
the interests of DE1 in a transaction (Transaction)
that is treated as a stock acquisition for Country F tax
purposes. CFC1 and DE1 are organized in Country F
and are treated as corporations for Country F tax
purposes. CFC1 is a section 902 corporation (as
defined in section 909(d)(5)), and DE1 is a disre-
garded entity. CFC1 has a calendar year for U.S.
income tax purposes, and DE1 has a June 30 year-
end for Country F tax purposes. Country F imposes
a single tax that is a foreign income tax. CFC1 and
DE1 each have a functional currency of the u with
respect to all activities. Immediately after the Trans-
action, DE1 owns one asset, Asset A, that gives rise
to income that is taken into account for Country F
tax purposes. For the first U.S. taxable year (U.S.
taxable year 1) there is a cost recovery amount with
respect to Asset A of 9u, and for each subsequent
U.S. taxable year until the U.S. basis is fully recov-
ered, there is a cost recovery amount with respect to
Asset A of 18u. There is no disposition of Asset A.

(ii) Result. (A) Under § 1.901(m)-2(b)(2), the
Transaction is a CAA. Under § 1.901(m)-2(c)(1),
Asset A is an RFA with respect to Country F tax
because it is relevant in determining the foreign
income of DE1 for Country F tax purposes and was
owned by DE1 when the Transaction occurred. Un-
der § 1.901(m)-1(a)(31), CFC1 is the RFA owner
(U.S.) with respect to Asset A. Under § 1.901(m)-
1(a)(23), DE1 is a foreign payor for Country F tax
purposes. Under § 1.901(m)-1(a)(35), CFC1 is the
section 901(m) payor with respect to foreign income
tax amounts for which DE1 is the foreign payor (see
§ 1.901-2(f)(4)(ii)).

(B) Under § 1.901(m)-1(a)(1), in determining
the aggregate basis difference for U.S. taxable year
1, CFC1 has one computation with respect to Coun-
try F tax. Under § 1.901(m)-1(a)(1), aggregate basis
difference with respect to Country F tax is equal to
the sum of allocated basis differences with respect to
all RFAs, which, in this case, is only Asset A. Under
§ 1.901(m)-1(a)(5), allocated basis differences are
comprised of cost recovery amounts and disposition
amounts. Because there is no disposition of Asset A,
the only allocated basis difference taken into account
in determining an aggregate basis difference are cost
recovery amounts with respect to Asset A. Under
§ 1.901(m)-5(b), any cost recovery amounts are
assigned to a U.S taxable year of CFC1, because
CFC1 is the section 901(m) payor and RFA owner
(U.S.) with respect to Asset A. Under paragraph
(b)(2) of this section, for each U.S. taxable year,
CFC1 will compute a disqualified tax amount and
aggregate basis difference carryover with respect to
the aggregate basis difference. Because DE1 is a
disregarded entity owned by CFC1, the foreign in-
come tax amount paid or accrued by DE1 is not
subject to allocation. Accordingly, for purposes of
the disqualified tax amount computation, the foreign
income tax amount paid or accrued by CFC1 with
respect to Country F tax is the entire foreign income
tax amount paid or accrued by DE1, and under
paragraph (b)(2)(iii)(A) of this section, CFC1's al-
locable foreign income will be equal to DE1's entire
foreign income.

(C) In U.S. taxable year 1, CFC1 has an aggre-
gate basis difference of 9u (the 9u cost recovery
amount with respect to Asset A for U.S. taxable year
1). However, because the foreign taxable year of
DE1, the foreign payor, will not end between July 1
and December 31, there will not be a foreign income
tax amount for U.S. taxable year 1. Because the
foreign income tax amount considered paid or ac-
crued by CFC1 for U.S. taxable year 1 is zero, under
paragraph (b)(2)(iv) of this section, the disqualified
tax amount for U.S. taxable year 1 of CFC1 is also
zero. Furthermore, because the disqualified tax
amount is zero, under paragraph (c)(2)(i) of this
section, CFC1 has an aggregate basis difference car-
ryover equal to 9u, the entire amount of the aggre-
gate basis difference for U.S. taxable year 1. Under
paragraph (c)(1) of this section, the 9u aggregate
basis difference carryover is taken into account in
computing CFC1's aggregate basis difference for
U.S. taxable year 2. Accordingly, in U.S. taxable
year 2, CFC1 has an aggregate basis difference of
27u (18u cost recovery amount for U.S. taxable year
2, plus 9u aggregate basis difference carryover from
U.S. taxable year 1).

(d) Effective/applicability date. This
section applies to CAAs occurring on or
after the date of publication of the Trea-
sury decision adopting these rules as final
regulations in the Federal Register. Tax-
payers may, however, rely on this section
prior to the date this section is applicable
provided that they both consistently apply
this section, § 1.704-1(b)(4)(viii)(c)(4)(v)
through (vii), § 1.901(m)-1, and §§ 1.901
(m)-4 through 1.901(m)-8 (excluding

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§ 1.901(m)-4(e)) to all CAAs occurring
on or after January 1, 2011, and consis-
tently apply § 1.901(m)-2 (excluding
§ 1.901(m)-2(d)) to all CAAs occurring
on or after December 7, 2016. For this
purpose, persons that are related (within
the meaning of section 267(b) or 707(b))
will be treated as a single taxpayer.

Par. 6. Section 1.901(m)-4 is added to
read as follows:

§ 1.901(m)-4 Determination of basis
difference.

(a) through (b) [The text of proposed
§§ 1.901(m)-4(a) through (b) is the same
as the text of §§ 1.901(m)-4T(a) through
(b) published elsewhere in this issue of the
Bulletin.]

(c) Foreign basis election. (1) An elec-
tion (foreign basis election) may be made
to apply section 901(m)(3)(C)(i)(II) by
reference to the foreign basis immediately
after the CAA instead of the U.S. basis
immediately before the CAA. Accord-
ingly, if a foreign basis election is made,
basis difference is the U.S. basis in the
RFA immediately after the CAA, less the
foreign basis in the RFA immediately af-
ter the CAA. For this purpose, the foreign
basis immediately after the CAA takes
into account any adjustment to that for-
eign basis resulting from the CAA for
purposes of the foreign income tax.

(2) Except as otherwise provided in
this paragraph (c), a foreign basis election
is made by the RFA owner (U.S.). If,
however, the RFA owner (U.S.) is a part-
nership, each partner in the partnership
(and not the partnership) may indepen-
dently make a foreign basis election. In
the case of one or more tiered partner-
ships, the foreign basis election is made at
the level at which a partner is not also a
partnership.

(3) The election may be made sepa-
rately for each CAA, and with respect to
each foreign income tax and each foreign
payor. For purposes of making the foreign
basis election, all CAAs that are part of an
aggregated CAA transaction are treated as
a single CAA. Furthermore, for purposes
of making the foreign basis election, if
foreign law imposes tax on the combined
income (within the meaning of § 1.901-
2(f)(3)(ii)) of two or more foreign payors,
all foreign payors whose items of income,

deduction, gain, or loss for U.S. income
tax purposes are included in the U.S. tax-
able income or earnings and profits of a
single section 901(m) payor are treated as
a single foreign payor.

(4) A foreign basis election is made by
using foreign basis to determine basis dif-
ference for purposes of computing a dis-
qualified tax amount and an aggregate ba-
sis difference carryover for the U.S.
taxable year, as provided under
§ 1.901(m)-3. A separate statement or
form evidencing the foreign basis election
need not be filed. Except as provided in
paragraph (c)(5) and (6) of this section, in
order for a foreign basis election to be
effective, the election must be reflected on
a timely filed original federal income tax
return (including extensions) for the first
U.S. taxable year that the foreign basis
election is relevant to the computation of
any amounts reported on such return, in-
cluding on any required schedules.

(5) If the RFA owner (U.S.) is a part-
nership, a foreign basis election reflected
on a partner's timely filed amended fed-
eral income tax return is also effective if
all of the following conditions are satis-
fied:

(i) The partner's timely filed original
federal income tax return (including ex-
tensions) for the first U.S. taxable year of
the partner in which a foreign basis elec-
tion is relevant to the computation of any
amounts reported on such return, includ-
ing on any required schedules, does not
reflect the application of section 901(m);

(ii) The information provided by the
partnership to the partner for purposes of
applying section 901(m) and any informa-
tion required to be reported by the part-
nership is based solely on computations
that use foreign basis to determine basis
difference; and

(iii) Prior to the due date of the original
federal income tax return (including ex-
tensions) described in paragraph (c)(5)(i)
of this section, the partner delegated the
authority to the partnership to choose
whether to provide the partner with infor-
mation to apply section 901(m) using for-
eign basis, either pursuant to a written
partnership agreement (within the mean-
ing of § 1.704-1(b)(2)(ii)(h)) or written
notice provided by the partner to the part-
nership.

(6) If, pursuant to paragraph (g)(3) of
this section, a taxpayer chooses to have
this section apply to CAAs occurring on
or after January 1, 2011, a foreign basis
election will be effective if the election is
reflected on a timely filed amended fed-
eral income tax return (or tax returns, as
applicable) filed no later than one year
following the date of publication of the
Treasury decision adopting these rules as
final regulations in the Federal Register.

(7) The foreign basis election is irrevo-
cable. Relief under § 301.9100-1 is not
available for the foreign basis election.

(d) Determination of basis difference
in a section 743(b) CAA-(1) [The text of
proposed § 1.901(m)-4(d)(1) is the same
as the text of § 1.901(m)-4T(d)(1) pub-
lished elsewhere in this issue of the Bul-
letin.]

(2) Foreign basis election. If a foreign
basis election is made with respect to a
section 743(b) CAA, then, for purposes of
paragraph (d)(1) of this section, the sec-
tion 743(b) adjustment is determined by
reference to the foreign basis of the RFA,
determined immediately after the CAA.

(e) [The text of proposed § 1.901(m)-
4(e) is the same as the text of § 1.901(m)-
4T(e) published elsewhere in this issue of
the Bulletin.]

(f) Examples. The following examples
illustrate the rules of this section:

Example 1. Scope of basis choice; identifying
separate CAAs, RFA owners (U.S.), and foreign pay-
ors in an aggregated CAA transaction-(i) Facts.
CFC1 wholly owns CFC2, both of which are section
902 corporations (as defined in section 909(d)(5)),
organized in Country F, and treated as corporations
for Country F tax purposes. CFC1 also wholly owns
DE1, and DE1 wholly owns DE2. DE1 and DE2 are
entities organized in Country F treated as corpora-
tions for Country F tax purposes and as disregarded
entities for U.S. income tax purposes. Country F
imposes a single tax that is a foreign income tax. All
of the stock of CFC1 is acquired in a qualified stock
purchase (within the meaning of section 338(d)(3))
to which section 338(a) applies for both CFC1 and
CFC2. For Country F tax purposes, the transaction is
treated as an acquisition of the stock of CFC1.

(ii) Result. (A) The acquisition of CFC1 gives
rise to four separate CAAs described in
§ 1.901(m)-2. Under § 1.901(m)-2(b)(1), the acqui-
sition of the stock of CFC1 and the deemed acqui-
sition of the stock of CFC2 under section
338(h)(3)(B) are each a section 338 CAA. Further-
more, because the deemed acquisition of the assets
of each of DE1 and DE2 for U.S. income tax pur-
poses is disregarded for Country F tax purposes, the
deemed acquisitions are CAAs under § 1.901(m)-
2(b)(2). Because the four CAAs occurred pursuant to
a plan, under § 1.901(m)-1(a)(3), all of the CAAs

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are part of an aggregated CAA transaction. Under
§ 1.901(m)-1(a)(31), CFC1 is the RFA owner (U.S.)
with respect to its assets and the assets of DE1 and
DE2 that are RFAs. CFC2 is the RFA owner (U.S.)
with respect to its assets that are RFAs. Under
§ 1.901(m)-1(a)(23), CFC1, CFC2, DE1, and DE2
are each a foreign payor for Country F tax purposes.

(B) Under paragraph (c) of this section, a foreign
basis election may be made by the RFA owner
(U.S.). The election is made separately with respect
to each CAA (for this purpose, treating all CAAs that
are part of an aggregated CAA transaction as a single
CAA) and with respect to each foreign income tax
and foreign payor. Thus, in this case, CFC1 can
make a separate foreign basis election for one or
more of the following three groups of RFAs: RFAs
that are relevant in determining foreign income of
CFC1; RFAs that are relevant in determining foreign
income of DE1; and RFAs that are relevant in de-
termining foreign income of DE2. Furthermore,
CFC2 can make a foreign basis election for all of its
RFAs that are relevant in determining its foreign
income.

Example 2. Scope of basis choice; RFA owner
(U.S.) is a partnership-(i) Facts. USPS is a domes-
tic partnership for which a section 754 election is in
effect. USPS owns two assets, the stock of DE1 and
DE2. DE1 is an entity organized in Country X and
treated as a corporation for Country X tax purposes.
DE2 is an entity organized in Country Y and treated
as a corporation for Country Y tax purposes. DE1
and DE2 are disregarded entities. Country X and
Country Y each impose a single tax that is a foreign
income tax. US1 and US2, unrelated domestic cor-
porations, and FP, a foreign person unrelated to US1
and US2, acquire partnership interests in USPS from
existing partners of USPS pursuant to the same plan.

(ii) Result. Under § 1.901(m)-2(b)(3), the acqui-
sitions of the partnership interests in USPS by US1,
US2, and FP each give rise to separate section 743(b)
CAAs, but under § 1.901(m)-1(a)(3), they are
treated as an aggregated CAA transaction because
they occur as part of a plan. Under § 1.901(m)-
1(a)(31), USPS is the RFA owner (U.S.) with respect
to the assets of DE1 and DE2 that are RFAs. Under
§ 1.901(m)-1(a)(23), DE1 is a foreign payor
for Country X tax purposes and DE2 is a foreign
payor for Country Y tax purposes. Because the RFA
owner (U.S.) is a partnership, paragraph (c)(2) of this
section provides that US1, US2, and FP (the relevant
partners in USPS) separately choose whether to
make a foreign basis election for purposes of deter-
mining basis difference. Furthermore, under para-
graph (c)(3) of this section, the choice to make the
election is made separately by each partner with
respect to each foreign payor. Thus, in this case, each
partner may make separate elections for the RFAs
that are relevant in determining foreign income of
DE1 for Country X tax purposes and the RFAs that
are relevant in determining foreign income of DE2
for Country Y tax purposes.

(g) Effective/applicability date-(1)
[The text of proposed § 1.901(m)-4(g)(1)
is the same as the text of § 1.901(m)-
4T(g)(1) published elsewhere in this issue
of the Bulletin.]

(2) Except for paragraphs (a), (b),
(d)(1), and (e) of this section, this section
applies to CAAs occurring on or after the
date of publication of the Treasury deci-
sion adopting these rules as final regula-
tions in the Federal Register.

(3) Taxpayers may, however, rely on
this section prior to the date this section is
applicable provided that they both consis-
tently apply this section (excluding para-
graph (e) of this section), § 1.704-1(b)
(4)(viii)(c)(4)(v) through (vii), § 1.901
(m)-1, § 1.901(m)-3, and §§ 1.901(m)-5
through 1.901(m)-8 to all CAAs occur-
ring on or after January 1, 2011, and con-
sistently apply § 1.901(m)-2 (excluding
§ 1.901(m)-2(d)) to all CAAs occurring
on or after December 7, 2016. For this
purpose, persons that are related (within
the meaning of section 267(b) or 707(b))
will be treated as a single taxpayer.

Par. 7. Section 1.901(m)-5 is added to
read as follows:

§ 1.901(m)-5 Basis difference taken into
account.

(a) In general. This section provides
rules for determining the amount of basis
difference with respect to an RFA that is
taken into account in a U.S. taxable year
for purposes of determining the disquali-
fied portion of a foreign income tax
amount. Paragraph (b) of this section pro-
vides rules for determining a cost recov-
ery amount and assigning that amount to a
U.S. taxable year of a single section
901(m) payor when the RFA owner (U.S.)
is the section 901(m) payor. Paragraph (c)
of this section provides rules for determin-
ing a disposition amount and assigning
that amount to a U.S. taxable year of a
single section 901(m) payor when the
RFA owner (U.S.) is the section 901(m)
payor. Paragraph (d) of this section pro-
vides rules for allocating cost recovery
amounts and disposition amounts when
the RFA owner (U.S.) is a fiscally trans-
parent entity for U.S. income tax pur-
poses. Paragraph (e) of this section pro-
vides special rules for allocating cost
recovery amounts and disposition amounts
with respect to certain section 743(b)
CAAs. Paragraph (f) of this section pro-
vides special rules for allocating certain
disposition amounts when a foreign payor
is transferred in a mid-year transaction.

Paragraph (g) of this section provides spe-
cial rules for allocating both cost recovery
amounts and disposition amounts in cer-
tain cases in which the RFA owner (U.S.)
either is a reverse hybrid or a fiscally
transparent entity for both U.S. and for-
eign income tax purposes that is directly
or indirectly owned by a reverse hybrid.
Paragraph (h) of this section provides ex-
amples illustrating the application of this
section. Paragraph (i) of this section pro-
vides the effective/applicability date.

(b) Basis difference taken into account
under applicable cost recovery method-
(1) In general. When the RFA owner
(U.S.) is a section 901(m) payor, all of a
cost recovery amount is attributed to the
section 901(m) payor and assigned to the
U.S. taxable year of the section 901(m)
payor in which the corresponding U.S.
basis deduction is taken into account un-
der the applicable cost recovery method.
This is the case regardless of whether the
deduction is deferred or disallowed for
U.S. income tax purposes. If instead the
RFA owner (U.S.) is a fiscally transparent
entity for U.S. income tax purposes, a cost
recovery amount is allocated to one or
more section 901(m) payors under para-
graph (d) of this section, except as pro-
vided in paragraphs (e) and (g) of this
section. If a cost recovery amount arises
from an RFA with respect to a section
743(b) CAA, in certain cases the cost re-
covery amount is allocated to a section
901(m) payor under paragraph (e) of this
section. In certain cases in which the RFA
owner (U.S.) either is a reverse hybrid or
a fiscally transparent entity for both U.S.
and foreign income tax purposes that is
directly or indirectly owned by a reverse
hybrid, a cost recovery amount is allo-
cated to one or more section 901(m) pay-
ors under paragraph (g) of this section.

(2) Determining a cost recovery amount-
(i) [The text of proposed § 1.901(m)-
5(b)(2)(i) is the same as the text of
§ 1.901(m)-5T(b)(2)(i) published else-
where in this issue of the Bulletin.]

(ii) U.S. basis subject to multiple
cost recovery methods. If the entire U.S.
basis is not subject to the same cost re-
covery method, the applicable cost recov-
ery method for determining the cost re-
covery amount is the cost recovery
method that applies to the portion of the

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U.S. basis that corresponds to the basis
difference.

(3) Applicable cost recovery method.
For purposes of section 901(m), an appli-
cable cost recovery method includes any
method for recovering the cost of property
over time for U.S. income tax purposes
(each application of a method giving rise
to a "U.S. basis deduction"). Such meth-
ods include depreciation, amortization, or
depletion, as well as a method that allows
the cost (or a portion of the cost) of prop-
erty to be expensed in the year of acqui-
sition or in the placed-in-service year,
such as under section 179. Applicable cost
recovery methods do not include any pro-
vision allowing the U.S. basis to be recov-
ered upon a disposition of an RFA.

(c) Basis difference taken into account
as a result of a disposition-(1) In gen-
eral. Except as provided in paragraph (f)
of this section, when the RFA owner
(U.S.) is a section 901(m) payor, all of a
disposition amount is attributed to the sec-
tion 901(m) payor and assigned to the
U.S. taxable year of the section 901(m)
payor in which the disposition occurs. If
instead the RFA owner (U.S.) is a fiscally
transparent entity for U.S. income tax pur-
poses, except as provided in paragraphs
(e), (f), and (g) of this section, a disposi-
tion amount is allocated to one or more
section 901(m) payors under paragraph
(d) of this section. If a disposition amount
arises from an RFA with respect to a
section 743(b) CAA, in certain cases the
disposition amount is allocated to a sec-
tion 901(m) payor under paragraph (e) of
this section. If there is a disposition of an
RFA in a foreign taxable year of a foreign
payor during which there is a mid-year
transaction, in certain cases a disposition
amount is allocated under paragraph (f) of
this section. In certain cases in which the
RFA owner (U.S.) either is a reverse hy-
brid or a fiscally transparent entity for
both U.S. and foreign income tax pur-
poses that is directly or indirectly owned
by a reverse hybrid, a disposition amount
is allocated to one or more section 901(m)
payors under paragraph (g) of this section.

(2) [The text of proposed § 1.901(m)-
5(c)(2) is the same as the text of
§ 1.901(m)-5T(c)(2) published elsewhere
in this issue of the Bulletin.]

(d) General rules for allocating and
assigning a cost recovery amount or a

disposition amount when the RFA owner
(U.S.) is a fiscally transparent entity-(1)
In general. Except as provided in para-
graphs (e), (f), and (g) of this section, this
paragraph (d) provides rules for allocating
a cost recovery amount or a disposition
amount when the RFA owner (U.S.) is a
fiscally transparent entity for U.S. income
tax purposes in which a section 901(m)
payor directly or indirectly owns an inter-
est, as well as for assigning the allocated
amount to a U.S. taxable year of the sec-
tion 901(m) payor. For purposes of this
paragraph (d), unless otherwise indicated,
a reference to direct or indirect ownership
in an entity means for U.S. income tax
purposes. For purposes of this paragraph
(d), a person indirectly owns an interest in
an entity for U.S. income tax purposes if
the person owns the interest through one
or more fiscally transparent entities for
U.S. income tax purposes, and at least one
of the fiscally transparent entities is not a
disregarded entity. For purposes of this
paragraph (d), a person indirectly owns an
interest in an entity for foreign income tax
purposes if the person owns the interest
through one or more fiscally transparent
entities for foreign income tax purposes. If
the RFA owner (U.S.) is a lower-tier fis-
cally transparent entity for U.S. income
tax purposes in which the section 901(m)
payor indirectly owns an interest, the rules
of this section apply in a manner consis-
tent with the application of these rules
when the section 901(m) payor directly
owns an interest in the RFA owner (U.S.).

(2) Allocation of a cost recovery
amount. A cost recovery amount is allo-
cated to a section 901(m) payor that di-
rectly or indirectly owns an interest in the
RFA owner (U.S.) to the extent the U.S.
basis deduction that corresponds to the
cost recovery amount is (or will be) in-
cluded in the section 901(m) payor's dis-
tributive share of the income of the RFA
owner (U.S.) for U.S. income tax pur-
poses.

(3) Allocation of a disposition amount
attributable to foreign disposition gain or
foreign disposition loss-(i) In general.
Except as provided in paragraph (f) of this
section, a disposition amount attributable
to foreign disposition gain or foreign dis-
position loss (as determined under para-
graph (d)(5) of this section) is allocated
under paragraph (d)(3)(ii) or (d)(3)(iii) of

this section to a section 901(m) payor that
directly or indirectly owns an interest in
the RFA owner (U.S.).

(ii) First allocation rule. This para-
graph (d)(3)(ii) applies when a section
901(m) payor, or a disregarded entity di-
rectly owned by a section 901(m) payor, is
the foreign payor whose foreign income
includes a distributive share of the foreign
income of the RFA owner (foreign) and,
therefore, all of the foreign income tax
amount of the foreign payor is paid or
accrued by, or considered paid by, the
section 901(m) payor. Thus, this para-
graph (d)(3)(ii) applies when the RFA
owner (U.S.) is a fiscally transparent en-
tity for both U.S. and foreign income tax
purposes and a section 901(m) payor ei-
ther directly owns an interest in the RFA
owner (U.S.) or directly owns an interest
in another fiscally transparent entity for
U.S. and foreign income tax purposes,
which, in turn, directly or indirectly owns
an interest in the RFA owner (U.S.) for
both U.S. and foreign income tax pur-
poses. In these cases, the section 901(m)
payor is allocated the portion of a dispo-
sition amount that is equal to the product
of the disposition amount attributable to
foreign disposition gain or foreign dispo-
sition loss, as applicable, and a fraction,
the numerator of which is the portion of
the foreign disposition gain or foreign dis-
position loss recognized by the RFA
owner (foreign) for foreign income tax
purposes that is (or will be) included in
the foreign payor's distributive share of
the foreign income of the RFA owner
(foreign), and the denominator of which is
the foreign disposition gain or foreign dis-
position loss.

(iii) Second allocation rule. This para-
graph (d)(3)(iii) applies when neither a
section 901(m) payor nor a disregarded
entity directly owned by a section 901(m)
payor is the foreign payor with respect to
the foreign income of the RFA owner
(foreign). Instead, a section 901(m) payor
directly or indirectly owns an interest in
the foreign payor, which is a fiscally trans-
parent entity for U.S. income tax purposes
(other than a disregarded entity directly
owned by the section 901(m) payor), and,
therefore, the section 901(m) payor is con-
sidered to pay or accrue only its allocated
portion of the foreign income tax amount
of the foreign payor. This will be the case

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when the foreign payor is either the RFA
owner (U.S.), another fiscally transparent
entity for U.S. income tax purposes (other
than a disregarded entity directly owned
by a section 901(m) payor) that directly or
indirectly owns an interest in the RFA
owner (U.S.) for both U.S. and foreign
income tax purposes, or a disregarded en-
tity directly owned by the RFA owner
(U.S.). In these cases, the section 901(m)
payor is allocated the portion of a dispo-
sition amount that is equal to the product
of the disposition amount attributable to
foreign disposition gain or foreign dispo-
sition loss, as applicable, and a fraction,
the numerator of which is the portion of
the foreign disposition gain or foreign dis-
position loss that is included in the allo-
cable foreign income of the section
901(m) payor, and the denominator of
which is the foreign disposition gain or
foreign disposition loss. If allocable for-
eign income is not otherwise required to
be determined because there is no foreign
income tax amount, the numerator is the
portion of the foreign disposition gain or
foreign disposition loss that would be in-
cluded in the allocable foreign income of
the section 901(m) payor if there were a
foreign income tax amount.

(4) Allocation of a disposition amount
attributable to U.S. disposition gain or
U.S. disposition loss. A section 901(m)
payor that directly or indirectly owns an
interest in the RFA owner (U.S.) is allo-
cated the portion of a disposition amount
that is equal to the product of the dispo-
sition amount attributable to U.S. disposi-
tion gain or U.S. disposition loss (as de-
termined under paragraph (d)(5) of this
section), as applicable, and a fraction, the
numerator of which is the portion of the
U.S. disposition gain or U.S. disposition
loss that is (or will be) included in the
section 901(m) payor's distributive share
of income of the RFA owner (U.S.) for
U.S. income tax purposes, and the denom-
inator of which is the U.S. disposition
gain or U.S. disposition loss.

(5) Determining the extent to which a
disposition amount is attributable to for-
eign or U.S. disposition gain or loss-(i)
RFA with a positive basis difference.
When there is a disposition of an RFA
with a positive basis difference and the
disposition results in either a foreign dis-
position gain or a U.S. disposition loss,

but not both, the entire disposition amount
is attributable to foreign disposition gain
or U.S. disposition loss, as applicable,
even if the disposition amount exceeds the
foreign disposition gain or the absolute
value of the U.S. disposition loss. If the
disposition results in both a foreign dispo-
sition gain and a U.S. disposition loss, the
disposition amount is attributable first to
foreign disposition gain to the extent
thereof, and the excess disposition
amount, if any, is attributable to the U.S.
disposition loss, even if the excess dispo-
sition amount exceeds the absolute value
of the U.S. disposition loss.

(ii) RFA with a negative basis differ-
ence. When there is a disposition of an
RFA with a negative basis difference and
the disposition results in either a foreign
disposition loss or a U.S. disposition gain,
but not both, the entire disposition amount
is attributable to foreign disposition loss
or U.S. disposition gain, as applicable,
even if the absolute value of the disposi-
tion amount exceeds the absolute value of
the foreign disposition loss or the U.S.
disposition gain. If the disposition results
in both a foreign disposition loss and a
U.S. disposition gain, the disposition
amount is attributable first to foreign dis-
position loss to the extent thereof, and the
excess disposition amount, if any, is at-
tributable to the U.S. disposition gain,
even if the absolute value of the excess
disposition amount exceeds the U.S. dis-
position gain.

(6) U.S. taxable year of a section
901(m) payor to which an allocated cost
recovery amount or disposition amount is
assigned. A cost recovery amount or a
disposition amount allocated to a section
901(m) payor under paragraph (d) of this
section is assigned to the U.S. taxable year
of the section 901(m) payor that includes
the last day of the U.S. taxable year of the
RFA owner (U.S.) in which, in the case of
a cost recovery amount, the RFA owner
(U.S.) takes into account the correspond-
ing U.S. basis deduction (without regard
to whether the deduction is deferred or
disallowed for U.S. income tax purposes),
or in the case of a disposition amount, the
disposition occurs.

(e) Special rules for certain section
743(b) CAAs. If a section 901(m) payor
acquires a partnership interest in a section
743(b) CAA, including a section 743(b)

CAA with respect to a lower-tier partner-
ship that results from a direct acquisition
by the section 901(m) payor of an interest
in an upper-tier partnership, and subse-
quently there is a cost recovery amount or
a disposition amount that arises from an
RFA with respect to that section 743(b)
CAA, all of the cost recovery amount or
the disposition amount is allocated to that
section 901(m) payor. The U.S. taxable
year of the section 901(m) payor to which
the cost recovery amount or the disposi-
tion amount is assigned is the U.S. taxable
year in which, in the case of a cost recov-
ery amount, the section 901(m) payor
takes into account the corresponding U.S.
basis deduction (without regard to
whether the deduction is deferred or dis-
allowed for U.S. income tax purposes), or
in the case of a disposition amount, the
disposition occurs.

(f) Mid-year transactions-(1) In gen-
eral. When a disposition of an RFA oc-
curs in the same foreign taxable year that
a foreign payor is involved in a mid-year
transaction, the portion of the disposition
amount that is attributable to foreign dis-
position gain or foreign disposition loss
(as determined under paragraph (d)(5) of
this section) is allocated to a section
901(m) payor and assigned to a U.S. tax-
able year of the section 901(m) payor un-
der this paragraph (f). To the extent the
disposition amount is attributable to U.S.
disposition gain or U.S. disposition loss
(as determined under paragraph (d)(5) of
this section), see paragraph (c)(1) or (d) of
this section, as applicable.

(2) Allocation rule. To the extent a
disposition amount is attributable to for-
eign disposition gain or foreign disposi-
tion loss, a section 901(m) payor is allo-
cated the portion of the disposition
amount equal to the product of the dispo-
sition amount attributable to foreign dis-
position gain or foreign disposition loss,
as applicable, and a fraction, the numera-
tor of which is the portion of the foreign
disposition gain or foreign disposition loss
that is included in the allocable foreign
income of the section 901(m) payor, and
the denominator of which is the foreign
disposition gain or foreign disposition
loss. If allocable foreign income is not
otherwise required to be determined be-
cause there is no foreign income tax
amount, the numerator is the portion of

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the foreign disposition gain or foreign dis-
position loss that would be included in the
allocable foreign income of the section
901(m) payor if there were a foreign in-
come tax amount.

(3) Assignment to a U.S. taxable year
of a section 901(m) Payor. A disposition
amount allocated to a section 901(m)
payor under paragraph (f)(2) of this sec-
tion is assigned to the U.S. taxable year of
the section 901(m) payor in which the
foreign disposition gain or foreign dispo-
sition loss (or portion thereof) is included
in allocable foreign income of the section
901(m) payor or, if allocable foreign in-
come is not otherwise required to be de-
termined because there is no foreign in-
come tax amount, the U.S. taxable year in
which the foreign disposition gain or for-
eign disposition loss would be included in
allocable foreign income if there were a
foreign income tax amount.

(g) Reverse hybrids-(1) In general.
This paragraph (g) provides rules for al-
locating a cost recovery amount or a dis-
position amount when the RFA owner
(U.S.) is either a reverse hybrid or a fis-
cally transparent entity for U.S. and for-
eign income tax purposes that is directly
or indirectly owned by a reverse hybrid
for U.S. and foreign income tax purposes,
and in each case, the foreign payor whose
foreign income includes a distributive
share of the foreign income of the RFA
owner (foreign) directly or indirectly
owns an interest in the reverse hybrid for
foreign income tax purposes. Application
of the allocation rules under paragraphs
(g)(2) and (g)(3) of this section depend
upon whether a section 901(m) payor or a
disregarded entity directly owned by a
section 901(m) payor is the foreign payor,
or, instead, a section 901(m) payor di-
rectly or indirectly owns an interest in the
foreign payor. For purposes of this para-
graph (g), unless otherwise indicated, a
reference to direct or indirect ownership
in an entity means for U.S. income tax
purposes. For purposes of this paragraph
(g), a person indirectly owns an interest in
an entity for U.S. income tax purposes if
the person owns the interest through one
or more fiscally transparent entities for
U.S. income tax purposes, and at least one
of the fiscally transparent entities is not a
disregarded entity. For purposes of this
paragraph (g), a person indirectly owns an

interest in an entity for foreign income tax
purposes if the person owns the interest
through one or more fiscally transparent
entities for foreign income tax purposes. If
the RFA owner (U.S.) is a lower-tier fis-
cally transparent entity for U.S. income
tax purposes in which the reverse hybrid
indirectly owns an interest, the rules of
this section apply in a manner consistent
with the application of these rules when
the reverse hybrid directly owns an inter-
est in the RFA owner (U.S.).

(2) First allocation rule-(i) Alloca-
tion to a section 901(m) payor. This para-
graph (g)(2)(i) applies when a section
901(m) payor, or a disregarded entity di-
rectly owned by a section 901(m) payor, is
the foreign payor whose foreign income
includes a distributive share of the foreign
income of the RFA owner (foreign), and,
therefore, all of the foreign income tax
amount of the foreign payor is paid or
accrued by, or considered paid or accrued
by, the section 901(m) payor. Thus, this
paragraph (g)(2)(i) applies when a section
901(m) payor either directly owns an in-
terest in the reverse hybrid or directly
owns an interest in a fiscally transparent
entity for U.S. and foreign income tax
purposes, which, in turn, directly or indi-
rectly owns an interest in the reverse hy-
brid for both U.S. and foreign income tax
purposes. In these cases, the section
901(m) payor is allocated the portions of
cost recovery amounts or disposition
amounts (or both) with respect to RFAs
that are equal to the product of the sum of
the cost recovery amounts and the dispo-
sition amounts and a fraction, the numer-
ator of which is the portion of the foreign
income of the RFA owner (foreign) that is
included in the foreign income of the for-
eign payor, and the denominator of which
is the foreign income of the RFA owner
(foreign).

(ii) Assignment to a U.S. taxable year
of a section 901(m) Payor. This paragraph
(g)(2)(ii) applies when a cost recovery
amount or a disposition amount, or por-
tion thereof, is allocated to a section
901(m) payor under paragraph (g)(2)(i) of
this section. If the reverse hybrid is the
RFA owner (U.S.), a cost recovery
amount or disposition amount, or portion
thereof, is assigned to the U.S. taxable
year of the section 901(m) payor that in-
cludes the last day of the U.S. taxable year

of the reverse hybrid in which, in the case
of a cost recovery amount, the reverse
hybrid takes into account the correspond-
ing U.S. basis deduction (without regard
to whether the deduction is deferred or
disallowed for U.S. income tax purposes),
or, in the case of a disposition amount, the
disposition occurs. If the reverse hybrid is
not the RFA owner (U.S.) but instead the
reverse hybrid directly or indirectly owns
an interest in the RFA owner (U.S.) for
both U.S. and foreign income tax pur-
poses, a cost recovery amount or disposi-
tion amount, or portion thereof, is as-
signed to the U.S. taxable year of the
section 901(m) payor that includes the last
day of the U.S. taxable year of the reverse
hybrid, which, in turn, includes the last
day of the U.S. taxable year of the RFA
owner (U.S.) in which, in the case of a
cost recovery amount, the RFA owner
(U.S.) takes into account the correspond-
ing U.S. basis deduction (without regard
to whether the deduction is deferred or
disallowed for U.S. income tax purposes),
or, in the case of a disposition amount, the
disposition occurs.

(3) Second allocation rule-(i) Alloca-
tion to a section 901(m) payor. This para-
graph (g)(3)(i) applies when neither a sec-
tion 901(m) payor nor a disregarded entity
directly owned by a section 901(m) payor
is the foreign payor with respect to the
foreign income of the RFA owner (for-
eign). Instead, a section 901(m) payor di-
rectly or indirectly owns an interest in the
foreign payor, which is a fiscally transpar-
ent entity for U.S. income tax purposes
(other than a disregarded entity directly
owned by the section 901(m) payor), and,
therefore, the section 901(m) payor is con-
sidered to pay or accrue only its allocated
portion of the foreign income tax amount
of the foreign payor. In these cases, the
section 901(m) payor is allocated the por-
tions of cost recovery amounts or dispo-
sition amounts (or both) with respect to
RFAs that are equal to the product of the
sum of the cost recovery amounts and
the disposition amounts and a fraction, the
numerator of which is the portion of the
foreign income of the RFA owner (for-
eign) that is included in the foreign in-
come of the foreign payor and included in
the allocable foreign income of the section
901(m) payor, and the denominator of
which is the foreign income of the RFA

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owner (foreign). If allocable foreign in-
come is not otherwise required to be de-
termined for a section 901(m) payor be-
cause there is no foreign income tax
amount, the numerator is the foreign in-
come of the RFA owner (foreign) that is
included in the foreign income of the for-
eign payor and that would be included in
allocable foreign income of the section
901(m) payor if there were a foreign in-
come tax amount.

(ii) Assignment to a U.S. taxable year
of a section 901(m) payor. A cost recov-
ery amount or a disposition amount, or
portion thereof, that is allocated to a sec-
tion 901(m) payor under paragraph
(g)(3)(i) of this section is assigned to the
U.S. taxable year of the section 901(m)
payor in which the foreign income of the
RFA owner (foreign) described in para-
graph (g)(3)(i) of this section is included
in the allocable foreign income of the sec-
tion 901(m) payor, or, if there is no for-
eign income tax amount, the U.S. taxable
year of the section 901(m) payor in which
the foreign income of the RFA owner
(foreign) described in paragraph (g)(3)(i)
of this section would be included in allo-
cable foreign income if there were a for-
eign income tax amount.

(h) Examples. The following examples
illustrate the rules of this section. In addi-
tion to any facts described in a particular
example, the following facts apply to all
the examples unless otherwise specified:
CFC1, CFC2, and DE are organized in
Country F and treated as corporations for
Country F tax purposes. CFC1 and CFC2
are each a section 902 corporation (as
defined in section 909(d)(5)) that is
wholly owned by the same U.S. corpora-
tion, and DE is a disregarded entity. CFC1
and CFC2 have a U.S. taxable year that is
a calendar year, and CFC1, CFC2, and DE
have a foreign taxable year that is a cal-
endar year. Country F imposes a single tax
that is a foreign income tax. CFC1, CFC2,
and DE each have a functional currency of
the u with respect to all activities. At all
relevant times, 1u equals $1. All amounts
are stated in millions. The examples as-
sume that the applicable cost recovery
method for property results in basis being
recovered ratably over the life of the prop-
erty beginning on the first day of the U.S.
taxable year in which the property is ac-
quired or placed into service.

Example 1. CAA followed by disposition: fully
taxable for both U.S. income tax and foreign income
tax purposes-(i) Facts. (A) On January 1, Year 1,
USP acquires all of the stock of CFC1 in a qualified
stock purchase (as defined in section 338(d)(3)) to
which section 338(a) applies (Section 338 Acquisi-
tion). At the time of the Section 338 Acquisition,
CFC1 owns a single asset (Asset A) that is located in
Country F. Asset A gives rise to income that is taken
into account for Country F tax purposes. Asset A is
tangible personal property that, under the applicable
cost recovery method in the hands of CFC1, is de-
preciable over 5 years. There are no cost recovery
deductions available for Country F tax purposes with
respect to Asset A. Immediately before the Section
338 Acquisition, Asset A has a U.S. basis of 10u and
a foreign basis of 40u. Immediately after the Section
338 Acquisition, Asset A has a U.S. basis of 100u
and foreign basis of 40u.

(B) On July 1, Year 2, Asset A is transferred to
an unrelated third party in exchange for 120u in a
transaction in which all realized gain is recognized
for both U.S. income tax and Country F tax purposes
(subsequent transaction). For U.S. income tax pur-
poses, CFC1 recognizes U.S. disposition gain of 50u
(amount realized of 120u, less U.S. basis of 70u
(100u cost basis, less 30u of accumulated deprecia-
tion)) with respect to Asset A. The 30u of accumu-
lated depreciation is the sum of 20u of depreciation
in Year 1 (100u cost basis/5 years) and 10u of
depreciation in Year 2 ((100u cost basis/5 years) x
6/12). For Country F tax purposes, CFC1 recognizes
foreign disposition gain of 80u (amount realized of
120u, less foreign basis of 40u) with respect to Asset
A. Immediately after the subsequent transaction, As-
set A has a U.S. basis and a foreign basis of 120u.

(ii) Result. (A) Under § 1.901(m)-2(b)(1), USP's
acquisition of the stock of CFC1 in the Section 338
Acquisition is a section 338 CAA. Under
§ 1.901(m)-2(c)(i), Asset A is an RFA with respect
to Country F tax because it is relevant in determining
the foreign income of CFC1 for Country F tax pur-
poses. Under § 1.901(m)-4(b), the basis difference
with respect to Asset A is 90u (100u - 10u). Under
Section 901(m)-1(a)(31), CFC1 is the RFA owner
(U.S.) with respect to Asset A. Under § 1.901(m)-
1(a)(23), CFC1 is a foreign payor for Country F tax
purposes. Under § 1.901(m)-1(a)(35), CFC1 is the
section 901(m) payor with respect to a foreign in-
come tax amount for which CFC1 is the foreign
payor (see § 1.901-2(f)(1)).

(B) Under § 1.901(m)-1(a)(5), allocated basis
differences are comprised of cost recovery amounts
and disposition amounts. In Year 1, Asset A has an
allocated basis difference that includes only a cost
recovery amount. Under paragraph (b)(2) of this
section, the cost recovery amount for Year 1 is
determined by applying the applicable cost recovery
method of Asset A in the hands of CFC1 to the basis
difference with respect to Asset A. Accordingly the
cost recovery amount is 18u (90u basis difference/5
years). Under paragraph (b)(1) of this section, all of
the 18u cost recovery amount is attributed to CFC1
and assigned to Year 1, because CFC1 is a section
901(m) payor and RFA owner (U.S.) with respect to
Asset A and Year 1 is the U.S. taxable year of CFC1
in which it takes into account the corresponding 20u
of depreciation. Immediately after Year 1, under

§ 1.901(m)-1(a)(40), unallocated basis difference is
72u with respect to Asset A (90u - 18u).

(C) In Year 2, Asset A has an allocated basis
difference that includes both a cost recovery amount
and a disposition amount. Under paragraph (b)(2) of
this section, the cost recovery amount for Year 2, as
of the date of the subsequent transaction, is 9u ((90u
basis difference/5 years) x 6/12). Under § 1.901(m)-
1(a)(10), the subsequent transaction is a disposition
of Asset A, because the subsequent transaction is an
event that results in an amount of gain being recog-
nized for U.S. income tax and Country F tax pur-
poses. Because all realized gain in Asset A is rec-
ognized for U.S. income tax and Country F tax
purposes, the rule in paragraph (c)(2)(i) of this sec-
tion applies to determine the disposition amount.
Under that rule, the disposition amount for Year 2 is
the unallocated basis difference of 63u (90u basis
difference, less total 27u taken into account as cost
recovery amounts in Year 1 and Year 2). Accord-
ingly, the allocated basis difference for Year 2 is 72u
(9u of cost recovery amount, plus 63u of disposition
amount). Under paragraphs (b)(1) and (c)(1) of this
section, all of the 72u of allocated basis difference is
attributed to CFC1 and assigned to Year 2, because
CFC1 is a section 901(m) payor and the RFA owner
(U.S.) with respect to Asset A and Year 2 is the U.S.
taxable year of CFC1 in which it takes into account
the corresponding 10u of depreciation and in which
the disposition occurred.

(D) Unallocated basis difference with respect to
Asset A, as determined immediately after the subse-
quent transaction, is 0u (90u basis difference less
90u basis difference taken into account as 27u total
cost recovery amount in Year 1 and Year 2 and as a
63u disposition amount in Year 2). Accordingly,
because there is no unallocated basis difference with
respect to Asset A attributable to the Section 338
Acquisition, the subsequent transaction is not a suc-
cessor transaction as defined in § 1.901(m)-6(b)(2).
Furthermore, the subsequent transaction is not a
CAA under § 1.901(m)-2(b). For these reasons, sec-
tion 901(m) no longer applies to Asset A.

Example 2. CAA followed by Disposition: non-
taxable for U.S. income tax purposes and taxable for
foreign income tax purposes-(i) Facts. The facts
are the same as in paragraph (i)(A) of Example 1 but
the facts in paragraph (i)(B) of Example 1 are instead
that on July 1, Year 2, Asset A is transferred to
CFC2, in exchange for 100u of stock of CFC2 (sub-
sequent transaction). For U.S. income tax purposes,
CFC1 does not recognize any U.S. disposition gain
or U.S. disposition loss with respect to Asset A. For
Country F tax purposes, CFC1 recognizes foreign
disposition gain of 60u (amount realized of 100u,
less foreign basis of 40u) with respect to Asset A.
Immediately after the subsequent transaction, Asset
A has a U.S. basis of 70u (100u cost basis less 30u
accumulated depreciation) and a foreign basis of
100u. The 30u of accumulated depreciation is the
sum of 20u of depreciation in Year 1 (100u cost
basis/5 years) and 10u in Year 2 ((100u cost basis/5
years) x 6/12).

(ii) Result. (A) The results described in para-
graph (ii)(A) of Example 1 also apply to this Exam-
ple 2.

(B) The result for Year 1 is the same as in
paragraph (ii)(B) of Example 1.

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(C) In Year 2, Asset A has an allocated basis
difference that includes both a cost recovery amount
and a disposition amount. Under paragraph (b)(2) of
this section, the cost recovery amount for Year 2, as
of the date of the subsequent transaction, is 9u ((90u
basis difference/5 years) x 6/12). Under § 1.901(m)-
1(a)(10), the Transaction is a disposition of Asset A,
because the subsequent transaction is an event that
results in an amount of gain being recognized for
Country F tax purposes. Because the disposition is
not also fully taxable for U.S. income tax purposes,
the rule in paragraph (c)(2)(ii) of this section applies
to determine the disposition amount. Under that rule,
the disposition amount is 60u, the lesser of (i) 60u
(60u foreign disposition gain plus absolute value of
0u U.S. disposition loss), and (ii) 63u unallocated
basis difference (90 basis difference less total 27u
taken into account as cost recovery amounts, 18u in
Year 1 and 9u in Year 2). Accordingly, the allocated
basis difference for the first half of Year 2 is 69u (9u
of cost recovery amount, plus 60u of disposition
amount). Under paragraphs (b)(1) and (c)(1) of this
section, all of the 69u of allocated basis difference is
attributed to CFC1 and assigned to Year 2, because
CFC1 is a section 901(m) payor and the RFA owner
(U.S.) with respect to Asset A and Year 2 is the U.S.
taxable year of CFC1 in which it takes into account
the corresponding 10u of depreciation and in which
the disposition occurred.

(D) Unallocated basis difference with respect to
Asset A immediately after the subsequent transac-
tion is 3u (90u basis difference less 87u basis differ-
ence taken into account as a 27u total cost recovery
amount in Year 1 and Year 2 and as a 60u disposi-
tion amount in Year 2). Accordingly, because there
is unallocated basis difference of 3u with respect to
Asset A attributable to the Section 338 Acquisition,
as determined immediately after the subsequent
transaction, the subsequent transaction is a successor
transaction as defined in § 1.901(m)-6(b)(2). Fol-
lowing the subsequent transaction, the unallocated
basis difference of 3u must be taken into account as
cost recovery amounts or disposition amounts (or
both) by CFC2, the new section 901(m) payor and
RFA owner (U.S.) of Asset A. See § 1.901(m)-
6(b)(3)(ii). Because the subsequent transaction is not
a CAA under § 1.901(m)-2(b), there is no additional
basis difference with respect to Asset A as a result of
the subsequent transaction.

Example 3. CAA followed by disposition: non-
taxable for both U.S. income tax and foreign income
tax purposes-(i) Facts. The facts are the same as in
paragraph (i)(A) of Example 1 but the facts in para-
graph (i)(B) of Example 1 are instead that on July 1,
Year 2, CFC1 transfers Asset A to CFC2, in ex-
change for 110u of stock of CFC2 (subsequent trans-
action). For U.S. income tax purposes, CFC1 does
not recognize any U.S. disposition gain or U.S. dis-
position loss with respect to Asset A as a result of the
subsequent transaction. Furthermore, for Country F
tax purposes, CFC1 recognizes no foreign disposi-
tion gain or foreign disposition loss with respect to
Asset A as a result of the subsequent transaction.
Immediately after the subsequent transaction, Asset
A has a U.S. basis of 70u (100u cost basis less 30u
accumulated depreciation) and a foreign basis of
40u. The 30u of accumulated depreciation is the sum
of 20u of depreciation in Year 1 (100u cost basis/5

years) and 10u in Year 2 ((100u cost basis/5 years) x
6/12).

(ii) Result. (A) The result for Year 1 is the same
as in paragraph (ii)(A) of Example 1.

(B) The result for Year 1 is the same as in
paragraph (ii)(B) of Example 1.

(C) In Year 2, Asset A has an allocated basis
difference that includes only a cost recovery amount.
Under paragraph (b)(2) of this section, the cost re-
covery amount for Year 2, as of the date of the
subsequent transaction, is 9u ((90u basis difference/5
years) x 6/12). Under § 1.901(m)-1(a)(10), the sub-
sequent transaction does not constitute a disposition
of Asset A, because the subsequent transaction is not
an event that results in an amount of gain or loss
being recognized for U.S. income tax or for Country
F tax purposes. Therefore, no disposition amount is
taken into account for Asset A in Year 2. Under
paragraph (b)(1) of this section, all of the 9u of
allocated basis difference is attributed to CFC1 and
assigned to Year 2, because CFC1 is a section
901(m) payor and RFA owner (U.S.) with respect to
Asset A and Year 2 is the U.S. taxable year of CFC1
in which it takes into account the corresponding 10u
of depreciation.

(D) Unallocated basis difference with respect to
Asset A immediately after the subsequent transac-
tion is 63u (90u basis difference, less 27u total cost
recovery amounts, 18u in Year 1 and 9u in Year 2).
Accordingly, because there is unallocated basis dif-
ference of 63u with respect to Asset A attributable to
the CAA, as determined immediately after the sub-
sequent transaction, the subsequent transaction is a
successor transaction as defined in § 1.901(m)-
6(b)(2). Following the subsequent transaction, the
unallocated basis difference of 63u must be taken
into account as cost recovery amounts or disposition
amounts (or both) by CFC2, the new section 901(m)
payor and RFA owner (U.S.) of Asset A. See
§ 1.901(m)-6(b)(3)(ii). Because the subsequent
transaction is not a CAA under § 1.901(m)-2(b),
there is no additional basis difference with respect to
Asset A as a result of the subsequent transaction.

(i) Effective/applicability date. (1) Ex-
cept for paragraphs (b)(2)(i) and (c)(2) of
this section, this section applies to CAAs
occurring on or after the date of publica-
tion of the Treasury decision adopting
these rules as final regulations in the Fed-
eral Register.

(2) [The text of proposed § 1.901(m)-
5(i)(2) is the same as the text of § 1.901(m)-
5T(i)(2) published elsewhere in this issue
of the Bulletin.]

(3) Taxpayers may, however, rely on
this section prior to the date this section is
applicable provided that they both consis-
tently apply this section, § 1.704-1(b)
(4)(viii)(c)(4)(v) through (vii), § 1.901(m)-
1, § 1.901(m)-3, § 1.901(m)-4 (excluding
§ 1.901(m)-4(e)), § 1.901(m)-6, § 1.901
(m)-7, and § 1.901(m)-8 to all CAAs oc-
curring on or after January 1, 2011, and
consistently apply § 1.901(m)-2 (excluding

§ 1.901(m)-2(d)) to all CAAs occurring on
or after December 7, 2016. For this purpose,
persons that are related (within the meaning
of section 267(b) or 707(b)) will be treated
as a single taxpayer.

Par. 8. Section 1.901(m)-6 is added to
read as follows:

§ 1.901(m)-6 Successor rules.

(a) through (b)(2) [The text of pro-
posed §§ 1.901(m)-6(a) through (b)(2) is
the same as the text of §§ 1.901(m)-6T(a)
through (b)(2) published elsewhere in this
issue of the Bulletin.]

(3) Special considerations. (i) If an as-
set is an RFA with respect to more than
one foreign income tax, this paragraph (a)
applies separately with respect to each
foreign income tax.

(ii) Any subsequent cost recovery
amount for an RFA transferred in a suc-
cessor transaction is determined based on
the post-transaction applicable cost recov-
ery method, as described in § 1.901(m)-
5(b)(3), that applies to the U.S. basis (or
portion thereof) that corresponds to the
unallocated basis difference.

(4)(i) [The text of proposed § 1.901
(m)-6(b)(4)(i) is the same as the text of
§ 1.901(m)-6T(b)(4)(i) published else-
where in this issue of the Bulletin.]

(ii) Foreign basis election. If a foreign
basis election is made under § 1.901(m)-
4(c) with respect to a foreign income tax
in a subsequent CAA, any unallocated
basis difference with respect to one or
more prior CAAs will not be taken into
account under section 901(m). The only
basis difference that will be taken into
account after the subsequent CAA with
respect to that foreign income tax is the
basis difference with respect to the subse-
quent CAA.

(b)(4)(iii) [The text of proposed
§ 1.901(m)-6(b)(4)(iii) is the same as the
text of § 1.901(m)-6T(b)(4)(iii) published
elsewhere in this issue of the Bulletin.]

(5) [The text of proposed § 1.901(m)-
6(b)(5) is the same as the text of
§ 1.901(m)-6T(b)(5) published elsewhere
in this issue of the Bulletin.]

(c) Successor rules for aggregate basis
difference carryover-(1) Transfers of a
section 901(m) payor's aggregate basis
difference carryover to another person. If a
corporation acquires the assets of a section

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901(m) payor in a transaction to which sec-
tion 381 applies, that corporation succeeds
to any aggregate basis difference carryovers
of the section 901(m) payor.

(2) Transfers of a section 901(m) pay-
or's aggregate basis difference carryover
with respect to a foreign payor to another
foreign payor. If a section 901(m) payor
has an aggregate basis difference carry-
over, with respect to a foreign income tax
and a foreign payor, and substantially all
of the assets of the foreign payor are trans-
ferred to another foreign payor in which
the section 901(m) payor owns an interest,
the section 901(m) payor's aggregate ba-
sis difference carryover with respect to the
first foreign payor is transferred to the
section 901(m) payor's aggregate basis
difference carryover with respect to the
other foreign payor. In such a case, the
section 901(m) payor's aggregate basis
difference carryover with respect to the
first foreign payor is reduced to zero.

(3) Anti-abuse rule. If a section 901(m)
payor has an aggregate basis difference
carryover with respect to a foreign income
tax and a foreign payor and, with a prin-
cipal purpose of avoiding the application
of section 901(m), assets of the foreign
payor are transferred to another foreign
payor in a transaction not described
in paragraph (c)(1) or (2) of this section,
then a portion of the aggregate basis dif-
ference carryover of the section 901(m)
payor is transferred either to the aggregate
basis difference carryover of the section
901(m) payor with respect to the other
foreign payor or to another section 901(m)
payor, as appropriate. The portion of the
aggregate basis difference carryover trans-
ferred is determined based on the ratio of
fair market value of the assets transferred to
the fair market value of all of the assets of
the foreign payor that transferred the assets.
Similar principles apply when, with a prin-
ciple purpose of avoiding the application of
section 901(m), there is a change in the
allocation of foreign income for foreign in-
come tax purposes or the allocation of for-
eign income tax amounts for U.S. income
tax purposes that would otherwise separate
foreign income tax amounts from the related
aggregate basis difference carryover.

(4) Ownership. For purposes of this
paragraph (c), a section 901(m) payor
owns an interest in a foreign payor if the
section 901(m) payor owns the interest

directly or indirectly through one or more
fiscally transparent entities for U.S. in-
come tax purposes.

(d) Effective/applicability date. (1)
[The text of proposed § 1.901(m)-6(d)(1)
is the same as the text of § 1.901(m)-
6T(d)(1) published elsewhere in this issue
of the Bulletin.]

(2) Paragraphs (b)(3), (b)(4)(ii), and (c)
of this section apply to CAAs occurring
on or after the date of publication of the
Treasury decision adopting these rules as
final regulations in the Federal Register.

(3) Taxpayers may, however, rely on
this section prior to the date this section is
applicable provided that they both consis-
tently apply this section, § 1.704-1(b)
(4)(viii)(c)(4)(v) through (vii), § 1.901
(m)-1, §§ 1.901(m)-3 through 1.901(m)-
5 (excluding § 1.901(m)-4(e)), § 1.901
(m)-7, and § 1.901(m)-8 to all CAAs
occurring on or after January 1, 2011, and
consistently apply § 1.901(m)-2 (exclud-
ing § 1.901(m)-2(d)) to all CAAs occur-
ring on or after December 7, 2016. For
this purpose, persons that are related (within
the meaning of section 267(b) or 707(b))
will be treated as a single taxpayer.

Par. 9. Section 1.901(m)-7 is added to
read as follows:

§ 1.901(m)-7 De minimis rules.

(a) In general. This section provides
rules describing basis difference that is
not taken into account under section
901(m) because a CAA results in a de
minimis amount of basis difference. Para-
graph (b) of this section sets forth the
general rule for determining whether the
de minimis threshold is met. Paragraph (c)
of this section provides modifications to
the general rule in the case of CAAs in-
volving related persons and CAAs that are
part of an aggregated CAA transaction.
Paragraph (d) of this section provides
rules for applying this section, and para-
graph (e) of this section provides an anti-
abuse rule applicable to related persons.
Paragraph (f) of this section provides ex-
amples that illustrate the application of
this section. Paragraph (g) of this section
provides the effective/applicability date.

(b) General rule-(1) In general. A
basis difference with respect to an RFA
and a foreign income tax is not taken into
account under section 901(m) if the re-

quirements under either the cumulative
basis difference exemption or the RFA
class exemption are satisfied.

(2) Cumulative basis difference exemp-
tion. Except as provided in paragraph (c)
of this section, a basis difference, with
respect to an RFA and a foreign income
tax, is not taken into account under section
901(m) (cumulative basis difference ex-
emption) if the sum of that basis differ-
ence and all other basis differences (in-
cluding negative basis differences), with
respect to a single CAA and a single RFA
owner (U.S.), is less than the greater of:

(i) $10 million, or

(ii) 10 percent of the total U.S. basis of
all the RFAs immediately after the CAA.

(3) RFA class exemption-(i) Except
as provided in paragraph (c) of this sec-
tion, a basis difference, with respect to an
RFA and a foreign income tax, is not
taken into account under section 901(m)
(RFA class exemption) if the RFA is part
of a class of RFAs and the absolute value
of the sum of the basis differences (in-
cluding negative basis differences), with
respect to a single CAA and a single RFA
owner, for all the RFAs in that class is less
than the greater of:

(A) $2 million, or

(B) 10 percent of the total U.S. basis of
all the RFAs in that class of RFAs imme-
diately after the CAA.

(ii) For purposes of this paragraph
(b)(3), the classes of RFAs are the seven
asset classes defined in § 1.338-6(b), re-
gardless of whether the CAA is a section
338 CAA.

(c) Special rules-(1) Modification of
de minimis rules for related persons. If the
transferor and transferee in the CAA are
related persons (as described in section
267(b) or 707(b)), the cumulative basis
difference exemption and the RFA class
exemption, as described in paragraph (b)
of this section, are applied by replacing
the terms "$10 million," "10 percent", and
"$2 million" wherever they occur in that
paragraph with the terms "$5 million," "5
percent," and "$1 million," respectively.

(2) CAA part of an aggregated CAA
transaction. If a CAA is part of an aggre-
gated CAA transaction and a single RFA
owner (U.S.) does not own all the RFAs
attributable to the CAAs that are part of
the aggregated CAA transaction, the cu-
mulative basis difference exemption and

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the RFA class exemption apply to such
CAA only if, in addition to satisfying the
requirements of paragraph (b)(2) or (b)(3)
of this section, respectively, determined
without regard to this paragraph (c)(2), the
cumulative basis difference exemption or
the RFA class exemption, as modified by
this paragraph (c)(2), is satisfied. Solely
for purposes of this paragraph (c)(2), the
cumulative basis difference exemption
and the RFA class exemption are applied
taking into account all the basis differ-
ences with respect to all the RFAs owned
by all the RFA owners (U.S.) that are
attributable to the CAAs that are part of
the aggregated CAA transaction.

(d) Rules of application. The following
rules apply for purposes of this section.

(1) Whether a basis difference qualifies
for the cumulative basis difference exemp-
tion or the RFA class exemption is deter-
mined when an asset first becomes an RFA
with respect to a CAA. In the case of a
subsequent CAA described in § 1.901
(m)-6(b)(4), the application of the cumula-

tive basis difference exemption and the
RFA class exemption is based on basis dif-
ference, if any, that results from the subse-
quent CAA.

(2) If there is an aggregated CAA
transaction, the cumulative basis differ-
ence exemption and each RFA class ex-
emption are applied by treating all CAAs
that are part of the aggregated CAA trans-
action as a single CAA.

(3) Basis difference is computed in ac-
cordance with § 1.901(m)-4 except that a
foreign basis election need not be evidenced
if either the cumulative basis difference ex-
emption or an RFA class exemption apply
to all RFAs with respect to the CAA.

(4) Basis difference is translated into
U.S. dollars (if necessary) using the spot
rate determined under the principles of
§ 1.988-1(d) on the date of the CAA.

(e) Anti-abuse rule. The cumulative ba-
sis difference exemption and an RFA
class exemption are not available if the
transferor and transferee in the CAA are
related persons (as described in section

267(b) or 707(b)) and the CAA was en-
tered into, or structured, with a principal
purpose of avoiding the application of
section 901(m). See also § 1.901(m)-8(c),
which provides that certain built-in loss
assets are not taken into account for pur-
poses of applying this section.

(f) Examples. The following examples
illustrate the rules of this section:

Example 1. De minimis; cumulative basis differ-
ence exemption-(i) Facts. USP, a domestic corpora-
tion, as part of a plan, purchases all of the stock of
CFC1 and CFC2 from a single seller. CFC1 and CFC2
are section 902 corporations (as defined in section
909(d)(5)), organized in Country F, and treated as cor-
porations for Country F tax purposes. Country F im-
poses a single tax that is a foreign income tax. Each
acquisition is a qualified stock purchase (as defined in
section 338(d)(3)) to which section 338(a) applies. A
foreign basis election is not made under § 1.901(m)-
4(c). Immediately after the acquisition of the stock of
CFC1 and CFC2, the assets of CFC1 and CFC2 give
rise to income that is taken into account for Country F
tax purposes, and those assets are in a single class, as
defined in § 1.338-6(b). At all relevant times, lu
equals $1. All amounts are stated in millions. The
additional facts are summarized below.

Relevant Foreign Assets

Total U.S. Basis Immediately Before

Total U.S. Basis Immediately After

Total Basis Difference

Assets of CFC1

48u

60u

12u

Assets of CFC2

100u

96u

(4)u

Total

148u

156u

8u

(ii) Result. (A) Under § 1.901(m)-2(b)(1), USP's
acquisitions of the stock of CFC1 and CFC2 are each a
section 338 CAA. Under 1.901(m)-1(a)(3), the two
section 338 CAAs constitute an aggregated CAA trans-
action because the acquisitions occur as part of a plan.
Under § 1.901(m)-2(c)(1), the assets of CFC1 and
CFC2 are RFAs for Country F tax purposes because
they are relevant in determining foreign income of
CFC1 and CFC 2, respectively, for Country F tax
purposes. Under § 1.901(m)-1(a)(31), CFC1 is the
RFA owner (U.S.) with respect to its assets, and CFC2
is the RFA owner (U.S.) with respect to its assets.

(B) Under paragraph (b)(2) of this section, the
application of the cumulative basis difference ex-
emption is based on a single CAA and a single RFA
owner (U.S.), subject to the requirements under para-
graph (c)(2) of this section that apply when there is
an aggregated CAA transaction. In the case of the
section 338 CAA with respect to CFC1, without
regard to paragraph (c)(2) of this section, the require-
ments of the cumulative basis difference exemption
are satisfied if the sum of the basis differences is less
than the threshold of $10 million, the greater of $10
million or $6 million (10% of the total U.S. basis of
$60 million (60 million u translated into dollars at
the exchange rate of $1 = 1u)). In this case, the sum
of the basis differences is $12 million (12 million u
translated into dollars at the exchange rate of $1 = 1 u).

Because the sum of the basis differences of $12
million is not less than the threshold of $10 million,
the requirements of the cumulative basis difference
exemption are not satisfied. Because the require-
ments of the cumulative basis difference exemption
are not satisfied, without regard to paragraph (c)(2)
of this section, paragraph (c)(2) of this section is not
applicable. Finally, the RFA class exemption is not
relevant because all of the RFAs of CFC1 are in a
single class. Accordingly, the basis differences with
respect to all of the RFAs of CFC1 must be taken
into account under section 901(m).

(C) In the case of the section 338 CAA with respect
to CFC2, without regard to paragraph (c)(2) of this
section, the requirements of the cumulative basis dif-
ference exemption are satisfied if the sum of the basis
differences is less than the threshold of $10 million, the
greater of $10 million or $ 9.6 million (10% of the total
U.S. basis of $96 million (96 million u translated into
dollars at the exchange rate of $1 = 1u)) In this case,
the sum of the basis differences is ($4) million ((4)
million u translated into dollars at the exchange rate of
$1 = 1 u). Because the sum of the basis differences of
($4) million is less than the threshold of $10 million,
the requirements of the cumulative basis difference
exemption are satisfied. However, because the section
338 CAA with respect to CFC2 is part of an aggregate
CAA transaction that includes the section 338 CAA

with respect to CFC1, paragraph (c)(2) of this section is
applicable. Under paragraph (c)(2) of this section, the
requirements of the cumulative basis difference exemp-
tion must also be satisfied taking into account all of the
RFAs of both CFC2 and CFC1. In this case, the re-
quirements of the cumulative basis difference exemp-
tion for purposes of paragraph (c)(2) of this section are
satisfied if the sum of the basis differences with respect
to all of the RFAs of CFC2 and CFC1 is less than the
threshold of $15.6 million, the greater of $10 million or
$15.6 million (10% of the total U.S. basis of $156
million (156 million u translated into dollars at the
exchange rate of $1 = 1u)) In this case, the sum of the
basis differences is $8 million (8 million u translated
into dollars at the exchange rate of $1 = 1 u). Because
the sum of the basis differences of $8 million is less
than the threshold of $15.6 million, the requirements of
the cumulative basis difference exemption are satisfied
in the case of the section 338 CAA with respect to
CFC2. Accordingly, none of the basis differences with
respect to the RFAs of CFC2 are taken into account
under section 901(m).

Example 2. De minimis; RFA Class Exemption-
(i) Facts. USP, a domestic corporation, acquires all the
stock of CFC, a section 902 corporation (as defined in
section 909(d)(5)) organized in Country F and treated
as a corporation for Country F tax purposes, in a
qualified stock purchase (as defined in section

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338(d)(3)) to which section 338(a) applies. Country F
imposes a single tax that is a foreign income tax. A
foreign basis election is not made under § 1.901(m)-

4(c). Immediately after the acquisition of CFC, the
assets of CFC give rise to income that is taken into
account for Country F tax purposes. At all relevant

times, 1u equals $1. All amounts are stated in millions.
The additional facts are summarized below.

Relevant Foreign Assets

Total U.S. Basis Immediately Before

Total U.S. Basis Immediately After

Total Basis Difference

Cash (Class I)

10u

10u

0u

Inventory (Class IV)

14u

15u

1u

Buildings (Class V)

19u

30u

11u

Total

43u

55u

12u

(ii) Result. (A) Under § 1.901(m)-2(b)(1), USP's
acquisition of the stock of CFC is a section 338
CAA. Under § 1.901(m)-2(c)(1), the assets of CFC
are RFAs for Country F tax purposes because they
are relevant in determining foreign income of CFC
for Country F tax purposes.

(B) Under paragraph (b)(2) of this section, the
requirements of the cumulative basis difference exemp-
tion are satisfied if the sum of the basis differences is
less than the threshold of $10 million, the greater of $10
million or $5.5 million (10% of the total U.S. basis of
$55 million (55 million u translated into dollars at the
exchange rate of $1 = 1u)). In this case, the sum of the
basis differences is $12 million (12 million u translated
into dollars at the exchange rate of $1 = 1 u). Because
the sum of the basis differences of $12 million is not
less than the threshold of $10 million, the requirements
of the cumulative basis difference exemption are not
satisfied.

(C) Under paragraph (b)(3) of this section, each of
CFC's assets is allocated to its class under § 1.338-
6(b) for purposes of the RFA class exemption. The
requirements of the RFA class exemption with respect
to the Class IV RFAs (in this case, inventory) are
satisfied if the absolute value of the sum of the basis
differences with respect to the Class IV RFAs is less
than the threshold of $2 million, the greater of $2
million or $1.5 million (10% of the total U.S. basis of
Class IV RFAs of $15 million (15 million u translated
into dollars at the exchange rate of $1 = 1u) In this
case, the absolute value of the sum of the basis differ-
ences is $1 million (1 million u translated into dollars at
the exchange rate of $1 = 1 u). Because the sum of the
basis differences of $1 million is less than the threshold
of $2 million, the requirements of the RFA class ex-
emption are satisfied. Accordingly, the basis differ-
ences with respect to the Class IV RFAs are not taken
into account under section 901(m).

(D) The requirements of the RFA class exemp-
tion with respect to the Class V RFAs (in this case,
buildings) is satisfied if the absolute value of the sum
of the basis differences with respect to the Class V
RFAs is less than the threshold of $3 million, the
greater of $2 million or $3 million (10% of the total
U.S. basis of Class V RFAs of $30 million (30
million u translated into dollars at the exchange rate
of $1 = 1u)). In this case, the absolute value of the
sum of the basis differences is $11 million (11 mil-
lion u translated into dollars at the exchange rate of
$1 = 1 u). Because the sum of the basis differences
of $11 million is not less than the threshold of $3
million, the requirements of the RFA class exemp-
tion are not satisfied. Accordingly, the basis differ-

ences with respect to the Class V RFAs are taken
into account under section 901(m).

(E) The Class I RFAs (in this case, cash) are
irrelevant because there is no basis differences with
respect to those RFAs.

(g) Effective/applicability date. This
section applies to CAAs occurring on or
after the date of publication of the Trea-
sury decision adopting these rules as final
regulations in the Federal Register. Tax-
payers may, however, rely on this section
prior to the date this section is applicable
provided that they both consistently apply
this section, § 1.704-1(b)(4)(viii)(c)(4)(v)
through (vii), § 1.901(m)-1, §§ 1.901(m)-3
through 1.901(m)-6 (excluding § 1.901
(m)-4(e)), and § 1.901(m)-8 to all CAAs
occurring on or after January 1, 2011, and
consistently apply § 1.901(m)-2 (excluding
§ 1.901(m)-2(d)) to all CAAs occurring on
or after December 7, 2016. For this purpose,
persons that are related (within the meaning
of section 267(b) or 707(b)) will be treated
as a single taxpayer.

Par. 10. Section 1.901(m)-8 is added
to read as follows:

§ 1.901(m)-8 Miscellaneous.

(a) In general. This section provides
guidance on other matters under section
901(m). Paragraph (b) of this section pro-
vides guidance on the application of sec-
tion 901(m) to pre-1987 foreign income
taxes. Paragraph (c) of this section pro-
vides anti-abuse rules relating to built-in
loss assets. Paragraph (d) of this section
provides the effective/applicability date.

(b) Application of section 901(m) to
pre-1987 foreign income taxes. Section
901(m) and §§ 1.901(m)-1 through -8
apply to pre-1987 foreign income taxes
(as defined in § 1.902-1(a)(10)(iii)) of a
section 902 corporation.

(c) Anti-abuse rule for built-in loss
RFAs. A basis difference with respect to

an RFA described in section 901(m)
(3)(C)(ii) (built-in loss RFA) will not be
taken into account for purposes of com-
puting an allocated basis difference for a
U.S. taxable year of a section 901(m)
payor if any RFA, including an RFA other
than built-in loss RFAs, is acquired with a
principal purpose of using one or more
built-in loss RFAs to avoid the application
of section 901(m). Furthermore, a basis
difference with respect to a built-in loss
RFA will not be taken into account for pur-
poses of the cumulative basis difference ex-
emption or the RFA class exemption under
§ 1.901(m)-7 if any RFAs, including RFAs
other than built-in loss RFAs, are acquired
with a principal purpose of avoiding the
application of section 901(m).

(d) Effective/applicability date. This sec-
tion applies to CAAs occurring on or after
the date of publication of the Treasury de-
cision adopting these rules as final regula-
tions in the Federal Register. Taxpayers
may, however, rely on this section prior to
the date this section is applicable provided
that they both consistently apply this sec-
tion, § 1.704-1(b)(4)(viii)(c)(4)(v) through
(vii), § 1.901(m)-1, and §§ 1.901(m)-3
through 1.901(m)-7 (excluding § 1.901(m)-
4(e)) to all CAAs occurring on or after Jan-
uary 1, 2011, and consistently apply
§ 1.901(m)-2 (excluding § 1.901(m)-2(d))
to all CAAs occurring on or after December
7, 2016. For this purpose, persons that are
related (within the meaning of section
267(b) or 707(b)) will be treated as a single
taxpayer.

John Dalrymple,
Deputy Commissioner for
Services and Enforcement.

(Filed by the Office of the Federal Register on December 6,
2016, 8:45 a.m., and published in the issue of the Federal
Register for December 7, 2016, 81 F.R. 88562)

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# Definition of Terms

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

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

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

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

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

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

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

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

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

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

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

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

# Abbreviations

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

A-Individual.

Acq .- Acquiescence.

B-Individual.

BE-Beneficiary.

F.R .- Federal Register.

FUTA-Federal Unemployment Tax Act.

FX-Foreign corporation.

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

GE-Grantee.

GP-General Partner.

GR-Grantor.

IC-Insurance Company.

Ct.D .- Court Decision.

I.R.B .- Internal Revenue Bulletin.

CY-County.

LE-Lessee.

LP-Limited Partner.

LR-Lessor.

M-Minor.

Nonacq .- Nonacquiescence.

O Organization.

P-Parent Corporation.

PHC-Personal Holding Company.

PO-Possession of the U.S.

PR-Partner.

PRS-Partnership.

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

REIT-Real Estate Investment Trust.

Rev. Proc .- Revenue Procedure.

Rev. Rul .- Revenue Ruling.

S-Subsidiary.

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

Stat .- Statutes at Large.

T-Target Corporation.

T.C .- Tax Court.

T.D .- Treasury Decision.

TFE-Transferee.

TFR-Transferor.

T.I.R .- Technical Information Release.

TP-Taxpayer.
TR-Trust.

TT-Trustee.

U.S.C .- United States Code.

DE-Donee.

Del. Order-Delegation Order.

DISC-Domestic International Sales Corporation.
DR-Donor.

E-Estate.

EE-Employee.

E.O .- Executive Order.

ER-Employer.

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

F-Fiduciary.

FC-Foreign Country.

FICA-Federal Insurance Contributions Act.

FISC-Foreign International Sales Company.

FPH-Foreign Personal Holding Company.

BK-Bank.

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

C-Individual.

C.B .- Cumulative Bulletin.

CFR-Code of Federal Regulations.

CI-City.

COOP-Cooperative.

D-Decedent.

DC-Dummy Corporation.

X-Corporation.

Y-Corporation.

Z-Corporation.

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Numerical Finding List1

Notices :- Continued

Revenue Procedures :- Continued

Bulletin 2016-27 through 2016-52

2016-66, 2016-47 I.R.B. 747

2016-54, 2016-45 I.R.B. 685

2016-67, 2016-47 I.R.B. 751

2016-55, 2016-45 I.R.B. 707

Action on Decision:

2016-68, 2016-48 I.R.B. 774

2016-56, 2016-52 I.R.B. 920

2016-69, 2016-51 I.R.B. 832

2016-57, 2016-49 I.R.B. 786

2016-01, 2016-16 I.R.B. 580

2016-70, 2016-49 I.R.B. 784

2016-58, 2016-51 I.R.B. 839

2016-02, 2016-31 I.R.B. 193

2016-72, 2016-50 I.R.B. 794

2016-59, 2016-51 I.R.B. 849

2016-03, 2016-40 I.R.B. 424

2016-73, 2016-52 I.R.B. 908

2016-75, 2016-51 I.R.B. 832

Revenue Rulings:

Announcements:

2016-76, 2016-51 I.R.B. 834

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

2016-77, 2016-52 I.R.B. 914

2016-17, 2016-27 I.R.B. 1

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

2016-78, 2016-52 I.R.B. 914

2016-18, 2016-31 I.R.B. 194

2016-24, 2016-30 I.R.B. 170

2016-79, 2016-52 I.R.B. 918

2016-19, 2016-35 I.R.B. 273 2016-20, 2016-36 I.R.B. 279

2016-25, 2016-31 I.R.B. 205

2016-80, 2016-52 I.R.B. 918

2016-23, 2016-39 I.R.B. 382

2016-26, 2016-38 I.R.B. 389

Proposed Regulations:

2016-24, 2016-39 I.R.B. 395

2016-27, 2016-33 I.R.B. 238

2016-25, 2016-41 I.R.B. 435

2016-28, 2016-34 I.R.B. 272

REG-163113-02, 2016-36 I.R.B. 329

2016-26, 2016-45 I.R.B. 538

2016-29, 2016-34 I.R.B. 272

REG-147196-07, 2016-29 I.R.B. 32

2016-27, 2016-49 I.R.B. 781

2016-30, 2016-37 I.R.B. 355

REG-125946-10, 2016-51 I.R.B. 868

2016-28, 2016-51 I.R.B. 805

2016-31, 2016-38 I.R.B. 392

REG-107424-12, 2016-51 I.R.B. 861

2016-29, 2016-52 I.R.B. 875

2016-32, 2016-40 I.R.B. 434

REG-123854-12, 2016-28 I.R.B. 15

2016-30, 2016-52 I.R.B. 876

2016-33, 2016-39 I.R.B. 422

REG-136978-12, 2016-50 I.R.B. 796

2016-34, 2016-39 I.R.B. 422

REG-150992-13, 2016-44 I.R.B. 537

Treasury Decisions:

2016-35, 2016-39 I.R.B. 423

REG-129128-14, 2016-52 I.R.B. 931

2016-36, 2016-39 I.R.B. 423

REG-131418-14, 2016-33 I.R.B. 248

9772, 2016-28 I.R.B. 11

2016-37, 2016-39 I.R.B. 423

REG-102516-15, 2016-32 I.R.B. 231

9773, 2016-29 I.R.B. 56

2016-38, 2016-43 I.R.B. 523

REG-109086-15, 2016-30 I.R.B. 171

9774, 2016-30 I.R.B. 151

2016-39, 2016-45 I.R.B. 720

REG-122855-15, 2016-52 I.R.B. 922

9775, 2016-30 I.R.B. 159

2016-40, 2016-49 I.R.B. 791

REG-134016-15, 2016-31 I.R.B. 205

9776, 2016-32 I.R.B. 222

2016-41, 2016-48 I.R.B. 780

REG-134122-15, 2016-46 I.R.B. 728

9777, 2016-36 I.R.B. 282

2016-42, 2016-49 I.R.B. 793

REG-101689-16, 2016-30 I.R.B. 170

9778, 2016-31 I.R.B. 196

REG-102952-16, 2016-51 I.R.B. 860

9779, 2016-33 I.R.B. 233

Notices:

REG-103058-16, 2016-33 I.R.B. 238

9780, 2016-38 I.R.B. 357

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

REG-105005-16, 2016-38 I.R.B. 380

9781, 2016-35 I.R.B. 274

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

REG-108792-16, 2016-36 I.R.B. 320

9782, 2016-36 I.R.B. 301

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

REG-108934-16, 2016-44 I.R.B. 532

9783, 2016-39 I.R.B. 396

2016-43, 2016-29 I.R.B. 132

REG-114734-16, 2016-48 I.R.B. 777

9784, 2016-39 I.R.B. 402

2016-44, 2016-29 I.R.B. 132

REG-122387-16, 2016-48 I.R.B. 779

9785, 2016-38 I.R.B. 375

2016-45, 2016-29 I.R.B. 135

REG-123600-16, 2016-43 I.R.B. 523

9786, 2016-42 I.R.B. 442

REG-130314-16, 2016-45 I.R.B. 718

9787, 2016-52 I.R.B. 878

2016-46, 2016-31 I.R.B. 202

9788, 2016-52 I.R.B. 889

2016-47, 2016-35 I.R.B. 276

Revenue Procedures:

9789, 2016-44 I.R.B. 527

2016-48, 2016-33 I.R.B. 235

9790, 2016-45 I.R.B. 540

2016-49, 2016-34 I.R.B. 265

2016-37, 2016-29 I.R.B. 136

9791, 2016-47 I.R.B. 734

2016-50, 2016-38 I.R.B. 384

2016-39, 2016-30 I.R.B. 164

9792, 2016-48 I.R.B. 751

2016-51, 2016-37 I.R.B. 344

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

9793, 2016-48 I.R.B. 768

2016-52, 2016-40 I.R.B. 425

2016-41, 2016-30 I.R.B. 165

9797, 2016-51 I.R.B. 819

2016-53, 2016-39 I.R.B. 421

2016-42, 2016-34 I.R.B. 269

9798, 2016-51 I.R.B. 821

2016-54, 2016-40 I.R.B. 429

2016-43, 2016-36 I.R.B. 316

9799, 2016-51 I.R.B. 827

2016-55, 2016-40 I.R.B. 432

2016-44, 2016-36 I.R.B. 316

9800, 2016-52 I.R.B. 899

2016-57, 2016-40 I.R.B. 432

2016-45, 2016-37 I.R.B. 344

2016-58, 2016-41 I.R.B. 438

2016-46, 2016-37 I.R.B. 345

2016-59, 2016-42 I.R.B. 457

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

2016-60, 2016-42 I.R.B. 458

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

2016-61, 2016-46 I.R.B. 722

2016-49, 2016-42 I.R.B. 462

2016-62, 2016-46 I.R.B. 725

2016-50, 2016-43 I.R.B. 522

2016-63, 2016-45 I.R.B. 683

2016-51, 2016-42 I.R.B. 465

2016-64, 2016-46 I.R.B. 726

2016-52, 2016-42 I.R.B. 520

2016-65, 2016-48 I.R.B. 772

2016-53, 2016-44 I.R.B. 530

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

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## Finding List of Current Actions on Previously Published Items1

Bulletin 2016-27 through 2016-52

Notices:

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

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

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

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

2013-1
Modified by
Notice 2016-65, 2016-47 I.R.B. 745

2013-1
Superseded by
Notice 2016-65, 2016-47 I.R.B. 745

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

2015-63
Superseded by
Notice 2016-58, 2016-41 I.R.B. 438

### Revenue Procedures:

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

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

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

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

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

Revenue Procedures :- Continued

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

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

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

2016-3
Supplemented by
Rev. Proc. 2016-50, 2016-43 I.R.B. 522

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

### Treasury Decisions:

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

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

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

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# 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
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