Internal Revenue Bulletin 2019-27 (PDF rendition): IRS Announcements

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.

Bulletin No. 2019–27
July 1, 2019
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.
EMPLOYEE PLANS
NOT 2019-40, page 59.
This notice sets forth updates on the corporate bond month-
ly yield curve, the corresponding spot segment rates for
June 2019 used under § 417(e)(3)(D), the 24-month average
segment rates applicable for June 2019, and the 30-year
Treasury rates, as reflected by the application of § 430(h)(2)
(C)(iv).
EXEMPT ORGANIZATIONS
ANN 2019-07, page 62.
Revocation of IRC 501(c)(3) Organizations for failure to meet
the code section requirements. Contributions made to the
organizations by individual donors are no longer deductible
under IRC 170(b)(1)(A).
INCOME TAX
T.D. 9863, page 1.
The final regulations provide discounting rules for unpaid
losses and estimated salvage recoverable of insurance com-
panies for Federal income tax purposes. The final regulations
update and replace existing regulations under section 846
of the Internal Revenue Code to implement recent legislative
changes made by section 13523 of the Tax Cuts and Jobs
Act.
T.D. 9864, page 6.
The final regulations provide rules for governing the avail-
ability of charitable contribution deductions under section
170 when a taxpayer receives or expects to receive a cor-
responding state or local tax credit. Final regulations under
section 642(c) apply similar rules to payments made by a
trust or decedent’s estate.
T.D. 9865, page 27.
This document contains temporary regulations relating to the
addition of section 245A to the Internal Revenue Code by
the Tax Cuts and Jobs Act, which was enacted on December
22, 2017. The temporary regulations affect United States
persons that have undertaken certain transactions with re-
gards to a controlled foreign corporation or own a controlled
foreign corporation that has undertaken certain transactions.
NOT 2019-12, page 57.
Notice 2019-12 announces that the Department of the Trea-
sury (Treasury Department) and the Internal Revenue Service
(IRS) intend to publish a proposed regulation providing a safe
harbor under section 164 of the Internal Revenue Code for
certain individuals who make a payment to or for the use of
an entity described in section 170(c) in return for state or
local tax credit.
REG-105476-18, page 63.
Nonresident aliens and foreign corporations are taxable in
the United States on taxable income which is effectively
connected with the conduct of a trade or business within
the United States. REG-113604-18 published on December
27, 2018, would provide rules for determining under sec-
tion 864(c)(8) the amount of gain or loss recognized by a
nonresident alien individual or foreign corporation from the
sale or exchange of a partnership interest that is treated as
effectively connected with the conduct of a trade or business
within the United States. These proposed regulations would
provide the withholding and reporting requirements related to
these sales or exchanges.
Finding Lists begin on page ii.

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 of-
ficial rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, 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 sub-
stantive 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 inter-
nal management are not published; however, statements of
internal practices and procedures that affect the rights and
duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service
on the application of the law to the pivotal facts stated in
the revenue ruling. In those based on positions taken in rul-
ings to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature are
deleted to prevent unwarranted invasions of privacy and to
comply with statutory requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B,
Legislation 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
Rulings. Bank Secrecy Act Administrative Rulings are issued
by the Department of the Treasury’s Office of the Assistant
Secretary (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.
July 1, 2019 Bulletin No. 2019–27

Part I.
T.D. 9863
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Modification of Discounting
Rules for Insurance
Companies
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains fi-
nal regulations on discounting rules for
unpaid losses and estimated salvage re-
coverable of insurance companies for
Federal income tax purposes. The final
regulations update and replace existing
regulations to implement recent legisla-
tive changes to the Internal Revenue Code
(Code) and make a technical improvement
to the derivation of loss payment patterns
used for discounting. The final regulations
affect entities taxable as insurance compa-
nies.
DATES: Effective Date: These regulations
are effective June 17, 2019.
Applicability Date: For dates of applica-
bility, see §1.846-1(e)(2).
FOR FURTHER INFORMATION CON-
TACT: Kathryn M. Sneade, (202) 317-
6995 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments
to 26 CFR part 1 under section 846 of
the Code. Section 846 was added to the
Code by section 1023(c) of the Tax Re-
form Act of 1986, Public Law 99-514
(100 Stat. 2085, 2399). Final regula-
tions under section 846 were published
in the Federal Register (57 FR 40841)
on September 8, 1992 (T.D. 8433). See
§§1.846-0 through 1.846-4 (1992 Final
Regulations). The discounting rules un-
der section 846 were amended for tax-
able years beginning after December
31, 2017, by section 13523 of the Tax
Cuts and Jobs Act, Public Law 115-97
(131 Stat. 2054, 2152) (TCJA). The dis-
counting rules of section 846, both prior
to and after amendment by the TCJA,
are used to determine discounted unpaid
losses and estimated salvage recover-
able of property and casualty (P&C)
insurance companies and discounted un-
earned premiums of title insurance com-
panies for Federal income tax purposes
under section 832, as well as discount-
ed unpaid losses of life insurance com-
panies for Federal income tax purposes
under sections 805(a)(1) and 807(c)(2).
The Department of the Treasury (Trea-
sury Department) and the IRS published
proposed regulations under section 846
(REG-103163-18) in the Federal Regis-
ter
(83 FR 55646) on November 7, 2018
(Proposed Regulations). The Treasury
Department and the IRS received public
comments on the Proposed Regulations
and held a public hearing on December
20, 2018.
On January 7, 2019, the Treasury De-
partment and the IRS published Rev. Proc.
2019-06, 2019-02 I.R.B. 284, which pre-
scribes unpaid loss discount factors for
the 2018 accident year and earlier acci-
dent years for use in computing discount-
ed unpaid losses under section 846. The
unpaid loss discount factors also serve as
salvage discount factors for the 2018 acci-
dent year and earlier accident years for use
in computing discounted estimated sal-
vage recoverable under section 832. The
discount factors prescribed in Rev. Proc.
2019-06 were determined under section
846, as amended by section 13523 of the
TCJA, and the Proposed Regulations. In
Rev. Proc. 2019-06, the Treasury Depart-
ment and the IRS announced the intent to
publish revised unpaid loss discount fac-
tors, if necessary, following the publica-
tion of the Proposed Regulations as final
regulations. The Treasury Department
and the IRS also announced the intent to
issue guidance on the use of revised dis-
count factors, including the adjustment to
be taken into account by certain taxpayers
that used the discount factors prescribed
in Rev. Proc. 2019-06 in a taxable year
ending before the date of publication of fi-
nal regulations. The Treasury Department
and the IRS requested and received public
comments on Rev. Proc. 2019-06.
After consideration of all of the com-
ments on the Proposed Regulations and
Rev. Proc. 2019-06, the Proposed Regula-
tions are adopted as amended by this Trea-
sury decision (Final Regulations).
Summary of Comments and
Explanation of Revisions
This section discusses the public com-
ments received on the Proposed Regula-
tions and Rev. Proc. 2019-06, explains the
revisions adopted by the Final Regula-
tions in response to those comments, and
describes guidance the Treasury Depart-
ment and the IRS intend to issue following
publication of the Final Regulations in the
Federal Register.
1. Determination of Applicable Interest
Rate
Under section 846(a)(2) and (c)(1), the
“applicable interest rate” used to deter-
mine the discount factors associated with
any accident year and line of business is
the “annual rate” determined under sec-
tion 846(c)(2).
Before amendment by section 13523(a)
of the TCJA, section 846(c)(2) provid-
ed that the annual rate for any calendar
year was a rate equal to the average of
the applicable Federal mid-term rates (as
defined in section 1274(d) but based on
annual compounding) effective as of the
beginning of each of the calendar months
in the most recent 60-month period ending
before the beginning of the calendar year
for which the determination is made. The
applicable Federal mid-term rate is deter-
mined by the Secretary based on the aver-
age market yield on outstanding market-
able obligations of the United States with
remaining periods of over three years but
Bulletin No. 2019–27 1 July 1, 2019

not over nine years. See section 1274(d)
(1).
As amended by section 13523(a) of
the TCJA, section 846(c)(2) provides that
the annual rate for any calendar year will
be determined by the Secretary based on
the corporate bond yield curve (as defined
in section 430(h)(2)(D)(i), determined
by substituting “60-month period” for
“24-month period” therein). The corporate
bond yield curve, commonly referred to as
the high quality market (HQM) corporate
bond yield curve, is published on a month-
ly basis by the Treasury Department and
the IRS. It reflects the average of month-
ly yields on investment grade corporate
bonds with varying maturities that are in
the top three quality levels available, and
it consists of spot interest rates for each
stated time to maturity. See, for example,
Notice 2019-13, 2019-8 I.R.B. 580. The
spot rate for a given time to maturity rep-
resents the yield on a bond that gives a sin-
gle payment at that maturity. For the stated
yield curve, times to maturity are specified
at half-year intervals from one-half year
through 100 years. Section 846(c)(2) does
not specify how the Secretary is to deter-
mine the annual rate for any calendar year
based on the corporate bond yield curve.
Section 1.846-1(c) of the Proposed
Regulations provides that the “applicable
interest rate” used to determine the dis-
count factors associated with any accident
year and line of business is the “annual
rate” determined by the Secretary for any
calendar year on the basis of the corporate
bond yield curve (as defined in section
430(h)(2)(D)(i), determined by substi-
tuting “60-month period” for “24-month
period” therein). The annual rate for any
calendar year is the average of the cor-
porate bond yield curve’s monthly spot
rates with times to maturity of not more
than seventeen and one-half years (that is,
when applied to the HQM corporate bond
yield curve, times to maturity from one-
half year to seventeen and one-half years),
computed using the most recent 60-month
period ending before the beginning of the
calendar year for which the determination
is made.
Consistent with the text of section 846,
as amended by the TCJA, and the statutory
structure as a whole, the Proposed Regula-
tions provide for the use of a single annu-
al rate applicable to all lines of business,
as was the case under section 846 prior
to amendment by the TCJA. Comment-
ers agreed with this approach. One com-
menter asserted that a single rate approach
continues to be mandated by the statutory
language and Congressional intent. This
commenter also noted that the use of a
single rate is a continuance of longstand-
ing practice related to the discounting of
insurance loss reserves, and the TCJA did
not specify a change to this practice.
The preamble to the Proposed Regu-
lations states that the change from a rate
based on the applicable Federal mid-term
rates to a rate based on the corporate bond
yield curve indicates that the annual rate
should be determined in a manner that
more closely matches the investments in
bonds used to fund the undiscounted loss-
es to be paid in the future by insurance
companies. Several commenters agreed
that the annual rate should be determined
in a manner that more closely matches the
investments of insurance companies.
The maturity range in the Proposed
Regulations (that is, times to maturi-
ty from one-half year to seventeen and
one-half years) was selected to produce
a single discount rate that would provide
approximately the same present value of
taxable income, in the aggregate, as would
be obtained by applying the 60-month av-
erage corporate bond yield curve (forecast
through 2028) directly to the future loss
payments expected for each line of busi-
ness (determined using the loss payment
patterns applicable to the 2018 accident
year). That is, the selected maturity range
approximates, in terms of the present val-
ue of taxable income, the overall result of
discounting each projected loss payment
using the spot rate from the corporate
bond yield curve with a time to maturity
that matches the time between the end of
the accident year and the middle of the
year of the projected loss payment.
Several commenters expressed concern
with the selection of the maturity range
used to determine the single rate applica-
ble to all unpaid losses for all lines of busi-
ness under the Proposed Regulations. A
commenter addressing the application of
the Proposed Regulations to certain non-
life insurance reserves held by life insur-
ance companies requested a single section
846 discount rate determined by reference
to shorter maturities than those speci-
fied in the Proposed Regulations to more
clearly reflect the income of life insurance
companies related to these reserves. Sev-
eral commenters addressing the applica-
tion of the Proposed Regulations to P&C
insurance companies requested that the
discount rate instead be determined by
reference to the maturity range of three
and one-half to nine years that was used
under section 846 prior to amendment
by the TCJA. Some of the commenters
asserted a lack of clear congressional in-
tent to use a different maturity range than
the maturity range used under section 846
prior to amendment by the TCJA. The
commenters also asserted that the short-
er range with a lower average maturity
would more closely match the maturity of
the P&C insurance industry’s investments
and offered alternative approaches to se-
lecting a maturity range should a different
maturity range be selected.
Some of the commenters addressing the
application of the Proposed Regulations to
P&C insurance companies acknowledged
that the annual rate calculated under the
Proposed Regulations approximates the
P&C industry’s current investment yield
in the current bond market. However, the
commenters generally asserted that an an-
nual rate based on the maturity range in
the Proposed Regulations would overstate
the industry’s investment yield in other
interest rate environments because the
average maturity and average duration
of the bonds reflected in that segment of
the HQM corporate bond yield curve are
longer than both the average maturity and
average duration of the industry’s actual
bond investments. The commenters assert-
ed that the weighted average maturities of
bonds held by P&C insurance companies
are notably lower than the nine-year av-
erage of the maturity range suggested in
the Proposed Regulations. According to
one commenter, the weighted average ma-
turities of bonds held by P&C insurance
companies have ranged between 6.4 and
7.1 years since 2008. The commenters as-
serted that P&C companies generally do
not seek to match the maturities of their
investments with the expected payment
dates of their liabilities. One commenter
stated that P&C insurers’ bond portfolios
are more skewed to the short end of the
curve to ensure sufficient liquidity to pay
claims, especially for catastrophic events.
July 1, 2019 2 Bulletin No. 2019–27

Bulletin No. 2019–27 3 July 1, 2019
The commenters also explained that
the average duration of bond payments
held by P&C insurance companies (five to
six years, according to data from one com-
menter) is shorter than the nine-year aver-
age payment duration of the bonds under-
lying the maturity range in the Proposed
Regulations because P&C insurance com-
panies typically invest in coupon bonds.
Unlike the zero-coupon bonds reflected
in the HQM corporate bond yield curve,
coupon bonds have an average payment
duration that is less than their maturity
because of the periodic interest payments.
Commenters asserted that the duration
difference between coupon bonds and ze-
ro-coupon bonds is more pronounced in
an environment with higher interest rates
and a steeper yield curve.
One of the commenters requesting the
use of a shorter maturity range (three and
one-half to nine years) suggested that the
annual rate should be determined in a man-
ner that more closely matches the P&C in-
surance industry’s investment yield. The
commenter asserted that, in a rising rate
environment, especially if there is a larger
spread between the short-term and long-
term rates, the longer maturity range in
the Proposed Regulations would overstate
the P&C insurance industry’s investment
yield. The commenter also asserted that
the shorter maturity range would result
in a better approximation of the P&C in-
surance industry’s investment yield over a
longer period of time and in different in-
terest rate environments. The commenter
suggested that if the shorter maturity range
is not adopted, another approach would be
to periodically adjust the maturity range.
Under this approach, every five years (that
is, for each determination year under sec-
tion 846(d)(4)), the Secretary would select
the maturity range that best approximates
the industry’s investment yield based on
publicly available P&C insurance industry
aggregate investment yield data. Howev-
er, other commenters expressed a prefer-
ence for a fixed range.
Two of the commenters requesting
the use of a shorter maturity range (three
and one-half to nine years) suggested that
the maturity range selected should more
closely match the average maturity of the
P&C insurance industry’s bond invest-
ments. The commenters asserted that the
average maturity of a range consisting
of three and one-half to nine years more
closely matches the six to seven-year av-
erage maturity of the industry’s bond in-
vestments over the past decade than the
nine-year average of the longer range in
the Proposed Regulations. One comment-
er suggested that if the shorter maturity
range is not adopted, an alternative could
be to use the maturity range from one-
half to thirteen years because that range
also reflects average maturities that more
closely match the investments in bonds
used to fund the undiscounted losses of
P&C insurance companies. Both com-
menters suggested that if the range in
the Proposed Regulations is retained, a
“guardrail” should place an upper limit
on the maturities that are used when the
bond yield curve is unusually steep. The
commenters assert that use of the maturity
range in the Proposed Regulations in such
conditions would result in an annual rate
that overstates the P&C insurance indus-
try’s investment yield due to the duration
and maturity differences between the in-
dustry’s bond investments and the bonds
reflected in the HQM corporate bond yield
curve segment selected in the Proposed
Regulations. The commenters expressed
particular concern that use of the maturity
range in the Proposed Regulations would
pose a threat to the industry’s financial
viability in times of economic stress be-
cause steep yield curves historically have
occurred during or immediately after a
recession and often coincide with a down-
turn in the underwriting cycle.
One commenter provided recommen-
dations regarding the “guardrail” adjust-
ment to be made to the annual rate and the
circumstances in which it would apply.
The commenter suggested that a guard-
rail adjustment should be made when the
spread between the HQM corporate bond
yields at the lower end (one-half year to
maturity) and upper end (seventeen and
one-half years to maturity) of the matu-
rity range proposed in the Proposed Reg-
ulations, measured on the basis of the
12-month average, is greater than 2.75
percentage points. The commenter ex-
plained that this “trigger” was selected be-
cause, compared to the other possible trig-
gers considered by the commenter, it has
the highest correlation to recession-related
stress periods, it is simple to implement,
and it does not result in undue volatility.
The commenter suggested that the “guard-
rail” be an annual interest rate based on
the 60-month average of a narrower range
of bond maturities of one-half year to thir-
teen years. The commenter asserted that
this trigger and guardrail adjustment pro-
posal is reasonably simple, easily admin-
istrable, and predictable (for both the IRS
and taxpayers) in its application.
After consideration of the comments
received on the Proposed Regulations, the
Treasury Department and the IRS have de-
termined to use a single annual rate based
on a narrower range of maturities. Specifi-
cally, the annual rate for any calendar year
is the average of the corporate bond yield
curve’s monthly spot rates with times to
maturity from four and one-half years to
ten years, computed using the most re-
cent 60-month period ending before the
beginning of the calendar year for which
the determination is made. In response to
comments expressing a preference for a
fixed range, the Final Regulations do not
provide for periodic redetermination of
the maturity range used to determine the
annual rate.
The maturity range of four and one-half
years to ten years was selected in response
to comments requesting the adoption of a
narrower maturity range with an average
maturity that more closely matches the
six- to seven-year average maturity of the
P&C insurance industry’s bond invest-
ments. Commenters expressed concern
about the inclusion of the times-to-matu-
rity at the upper end of the range in the
Proposed Regulations, particularly when
the bond yield curve is unusually steep.
Therefore, the Final Regulations provide
for a narrower maturity range than in the
Proposed Regulations (from one-half year
to seventeen and one-half years). Use of
the narrower range eliminates yields for
times-to-maturity at the lower and upper
ends of the range in the Proposed Regu-
lations from the calculation of an average
annual rate.
The selected maturity range has an av-
erage maturity of seven and one-quarter
years, which is closer to the average ma-
turity of the industry’s bond investments
than the nine-year average maturity of the
maturity range in the Proposed Regula-
tions. The Final Regulations do not adopt
either of the maturity ranges suggested
by commenters (three and one-half to

July 1, 2019 4 Bulletin No. 2019–27
nine years and one-half to thirteen years)
because the suggested ranges would typ-
ically understate the P&C industry’s in-
vestment yield as compared to the range
adopted in the Final Regulations. P&C
industry investment portfolios include
assets other than high quality bonds, and
the higher returns on those other assets
typically result in the industry earning a
higher rate of return. Therefore, the Final
Regulations adopt a maturity range that
has an average maturity that is slightly
greater than the average maturity of the
industry’s bond investments.
The Treasury Department and the IRS
intend to publish guidance in the Internal
Revenue Bulletin that will provide revised
unpaid loss discount factors based on the
Final Regulations for each property and
casualty line of business for all accident
years ending with or before calendar year
2018. The guidance will also provide
that taxpayers may use either the revised
discount factors or the discount factors
published in Rev. Proc. 2019-06 for tax-
able years beginning after December 31,
2017, and ending before June 17, 2019.
The guidance will describe the adjustment
to be taken into account by any taxpayer
that uses the discount factors prescribed
in Rev. Proc. 2019-06 in a taxable year.
See Rev. Proc. 2019-06. Taxpayers must
use the revised discount factors in taxable
years ending on or after June 17, 2019.
2. Discontinuance of Composite Method
The Treasury Department and the IRS
proposed, in the preamble to the Proposed
Regulations, to discontinue the use of the
“composite method” described in sec-
tion 3.01 of Rev. Proc. 2002-74, 2002–2
C.B. 980, and section V of Notice 88-100,
1988-2 C.B. 439.
Commenters suggested that the cur-
rent rules permitting use of the compos-
ite method should be retained. The com-
menters explained that if the composite
method were discontinued, compiling the
data required to compute discounted un-
paid losses with respect to accident years
not separately reported on the National
Association of Insurance Commissioners
(NAIC) annual statement would prove to
be difficult for some insurers given the
limitations of company data for older ac-
cident years and legacy information tech-
nology systems. One of the commenters
added that discontinuance of the compos-
ite method would cause burdensome re-
porting requirements for insurers.
In response to these comments, the
Treasury Department and the IRS have
determined to continue to permit the use
of the composite method and to continue
to publish composite discount factors an-
nually.
3. Smoothing Adjustments
Section 1.846-1(d)(1) of the Proposed
Regulations provides that the loss pay-
ment pattern determined by the Secretary
for each line of business generally is de-
termined by reference to the historical loss
payment pattern applicable to such line of
business. However, under §1.846-1(d)(1)
and (2) of the Proposed Regulations, the
Secretary may adjust the loss payment
pattern for any line of business using a
methodology described by the Secretary
in other published guidance if necessary
to avoid negative payment amounts and
otherwise produce a stable pattern of pos-
itive discount factors less than one. As
explained in section 2.03(4) of Rev. Proc.
2019-06, for the 2017 determination year,
one line of business required adjustments
under the Proposed Regulations.
Commenters expressed support for
the smoothing adjustments described in
the Proposed Regulations and Rev. Proc.
2019-06. Accordingly, the Final Regula-
tions adopt §1.846-1(d) as proposed.
4. Determination of Estimated
Discounted Salvage Recoverable
Section 1.832-4(c) provides that, ex-
cept as otherwise provided in guidance
published by the Commissioner of In-
ternal Revenue (Commissioner) in the
Internal Revenue Bulletin, estimated
salvage recoverable must be discounted
either (1) by using the applicable dis-
count factors published by the Commis-
sioner for estimated salvage recoverable;
or (2) by using the loss payment pattern
for a line of business as the salvage re-
covery pattern for that line of business
and by using the applicable interest rate
for calculating unpaid losses under sec-
tion 846(c). The Treasury Department
and the IRS proposed, in the preamble to
the Proposed Regulations, that estimat-
ed salvage recoverable be discounted by
using the published discount factors ap-
plicable to unpaid losses. Section 4.02 of
Rev. Proc. 2019-06 provides that the un-
paid loss discount factors set forth there-
in also serve as salvage discount factors
for the 2018 accident year and all prior
accident years for use in computing dis-
counted estimated salvage recoverable
under section 832.
Commenters expressed support for the
proposed use of the discount factors ap-
plicable to unpaid losses as the discount
factors for salvage. This method is per-
mitted under section 832(b)(5)(A) and
§1.832-4(c), and it should reduce compli-
ance complexity and costs. Accordingly,
future guidance published in the Internal
Revenue Bulletin will continue to provide
that estimated salvage recoverable is to be
discounted using the published discount
factors applicable to unpaid losses.
In the preamble to the Proposed Regu-
lations, the Treasury Department and the
IRS requested comments on whether net
payment data (loss payments less salvage
recovered) and net losses incurred data
(losses incurred less salvage recoverable)
should be used to compute loss discount
factors. No commenters responded to this
request. The Treasury Department and the
IRS will continue to use payment data un-
reduced by salvage recovered and losses
incurred data unreduced by salvage recov-
erable to compute loss discount factors.
5. Reinsurance and International Lines of
Business
As described in the preamble to the
Proposed Regulations, as a result of the
repeal of former section 846(d)(3)(E)
and (F) by section 13523 of the TCJA,
section 846 no longer explicitly provides
for the determination of loss payment pat-
terns for non-proportional reinsurance and
international lines of business extending
beyond three calendar years following the
accident year. The Proposed Regulations
would remove §1.846-1(b)(3)(iv) (ap-
plicable to non-proportional reinsurance
business) and (b)(4) (applicable to inter-
national business) of the 1992 Final Reg-
ulations due to the repeal of former sec-
tion 846(d)(3)(E) and (F). The Proposed
Regulations would retain §1.846-1(b)(3)

Bulletin No. 2019–27 5 July 1, 2019
(i) and (b)(3)(ii)(A) (applicable to propor-
tional and non-proportional reinsurance,
respectively) of the 1992 Final Regula-
tions, however, because these rules are not
affected by the repeal of former section
846(d)(3)(E) and (F).
Commenters agreed that the repeal of
former section 846(d)(3)(E) and (F) means
that the statute requires non-proportion-
al reinsurance and international lines of
business to be treated as short-tail lines
of business with three-year loss payment
patterns. The treatment of the non-propor-
tional reinsurance and international lines
of business as short-tail lines of business
in Rev. Proc. 2019-06 is consistent with
these comments.
Accordingly, §1.846-1(b)(3)(iv) and
(b)(4) of the 1992 Final Regulations are
removed as proposed in the Proposed
Regulations.
6. Other Changes
The Proposed Regulations would (1)
remove §1.846-1(a)(2) of the 1992 Final
Regulations because the examples are no
longer relevant; (2) remove §1.846-1(b)
(3)(ii)(B) and (b)(3)(iii) of the 1992 Final
Regulations because these provisions ap-
ply only to accident years before 1992; (3)
remove §1.846-2 of the 1992 Final Regu-
lations because section 13523 of the TCJA
repealed the section 846(e) election; (4)
remove §1.846-3 because the “fresh start”
and reserve strengthening rules therein
are no longer applicable; (5) make con-
forming changes to §1.846-1(a) and (b) of
the 1992 Final Regulations to reflect the
removal of various §1.846-1 provisions,
as well as the removal of §§1.846-2 and
1.846-3 of the 1992 Final Regulations; (6)
remove §1.846-4 of the 1992 Final Regu-
lations, which provides applicability dates
for §§1.846-1 through 1.846-3 of the 1992
Final Regulations, and adopt proposed
§1.846-1(e), which provides applicabil-
ity dates for §1.846-1; and (7) remove
§1.846-0 of the 1992 Final Regulations,
which provides a list of the headings in
§§1.846-1 through 1.846-4 of the 1992 Fi-
nal Regulations.
Additionally, the Proposed Regulations
would remove §§1.846-2T and 1.846-4T
from the Code of Federal Regulations
(CFR) because they are obsolete. On
April 10, 2006, the Treasury Department
and the IRS published in the Federal Reg-
ister (71 FR 17990) a Treasury decision
(T.D. 9257) containing §§1.846-2T and
1.846-4T. On January 23, 2008, the Trea-
sury Department and the IRS published
in the Federal Register (73 FR 3868) a
Treasury decision (T.D. 9377) that final-
ized the rules contained in §1.846-2T in
§1.846-2 and finalized the rules contained
in §1.846-4T in §1.846-4. T.D. 9377,
however, did not remove §§1.846-2T and
1.846-4T from the CFR.
No comments were received regarding
any of these changes in the Proposed Reg-
ulations. Accordingly, these changes are
adopted as proposed.
7. Change in Method of Accounting
The Treasury Department and the IRS
plan to publish guidance in the Internal
Revenue Bulletin that provides simplified
procedures under section 446 and §1.446-
1(e) for an insurance company to obtain
automatic consent of the Commissioner to
change its method of accounting to com-
ply with section 846, as amended by the
TCJA, for the first taxable year beginning
after December 31, 2017.
Special Analyses
I. Regulatory Planning and Review and
Regulatory Flexibility Act
This regulation is not subject to review
under section 6(b) of Executive Order
12866 pursuant to the Memorandum of
Agreement (April 11, 2018) between the
Treasury Department and the Office of
Management and Budget regarding re-
view of tax regulations.
Under the Regulatory Flexibility Act
(RFA) (5 U.S.C. chapter 6), it is hereby
certified that these final regulations will
not have a significant economic impact
on a substantial number of small entities
that are directly affected by the final reg-
ulations. These final regulations update
the 1992 Final Regulations to reflect stat-
utory changes made by the TCJA, includ-
ing the applicable interest rate to be used
for purposes of section 846(c) based on a
statutorily prescribed corporate bond yield
curve. In addition, these final regulations
do not impose a collection of information
on any taxpayers, including small entities.
Accordingly, this rule will not have a sig-
nificant economic impact on a substantial
number of small entities.
Pursuant to section 7805(f) of the
Code, the notice of proposed rulemaking
preceding this regulation was submitted
to the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business, and
no comments were received.
II. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates
Reform Act of 1995 (UMRA) requires
that agencies assess anticipated costs and
benefits and take certain other actions be-
fore issuing a final rule that includes any
Federal mandate that may result in expen-
ditures in any one year by a state, local, or
tribal government, in the aggregate, or by
the private sector, of $100 million in 1995
dollars, updated annually for inflation.
In 2018, that threshold is approximately
$150 million. This rule does not include
any Federal mandate that may result in ex-
penditures by state, local, or tribal govern-
ments, or by the private sector in excess of
that threshold.
III. Executive Order 13132: Federalism
Executive Order 13132 (titled “Feder-
alism”) prohibits an agency from publish-
ing any rule that has federalism implica-
tions if the rule either imposes substantial,
direct compliance costs on state and lo-
cal governments, and is not required by
statute, or preempts state law, unless the
agency meets the consultation and fund-
ing requirements of section 6 of the Exec-
utive Order. This final rule does not have
federalism implications and does not im-
pose substantial direct compliance costs
on state and local governments or preempt
state law within the meaning of the Exec-
utive Order.
Drafting Information
The principal author of these regula-
tions is Kathryn M. Sneade, Office of As-
sociate Chief Counsel (Financial Institu-
tions and Products), IRS. However, other
personnel from the Treasury Department
and the IRS participated in their develop-
ment.

July 1, 2019 6 Bulletin No. 2019–27
Statement of Availability of IRS
Documents
The IRS notices and revenue proce-
dures cited in this preamble are published
in the Internal Revenue Bulletin (or Cu-
mulative Bulletin) and are available from
the Superintendent of Documents, U.S.
Government Publishing Office, Wash-
ington, DC 20402, or by visiting the IRS
website at http://www.irs.gov.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amend-
ed as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by removing the entry
for §1.846-2(d), removing the entry for
§§1.846-1 through 1.846-4, and adding an
entry in numerical order for §1.846-1. The
addition reads in part as follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Section 1.846-1 also issued under 26
U.S.C. 846.
* * * * *
§1.846-0 [Removed]
Par. 2. Section 1.846-0 is removed.
Par. 3. Section 1.846-1 is amended by:
1. In the first sentence of paragraph (a)
(1), removing “section 846(f)(3)” and
adding in its place “section 846(e)
(3)”.
2. In the third sentence of paragraph (a)
(1), removing the phrase “and §1.846-
3(b) contains guidance relating to dis-
count factors applicable to accident
years prior to the 1987 accident year”.
3. In paragraph (a)(1), removing the last
sentence.
4. Removing paragraph (a)(2) and re-
designating paragraphs (a)(3) and (4)
as paragraphs (a)(2) and (3), respec-
tively.
5. In the first sentence of paragraph (b)
(1), removing “section 846(f)(6)”
and adding “section 846(e)(6)” in its
place; and removing “, in §1.846-2
(relating to a taxpayer’s election to
use its own historical loss payment
pattern)”.
6. In paragraph (b)(3)(i), removing “for
accident years after 1987” from the
heading.
7. In paragraph (b)(3)(ii), removing the
designation “—(A)” and the para-
graph heading “Accident years after
1991”.
8. Removing paragraphs (b)(3)(ii)(B),
and (b)(3)(iii) and (iv).
9. Removing paragraph (b)(4) and re-
designating paragraph (b)(5) as para-
graph (b)(4).
10. Adding paragraphs (c), (d), and (e).
The additions read as follows:
§1.846-1 Application of discount fac-
tors.
* * * * *
(c) Determination of annual rate. The
applicable interest rate is the annual rate
determined by the Secretary for any cal-
endar year on the basis of the corporate
bond yield curve (as defined in section
430(h)(2)(D)(i), determined by substi-
tuting “60-month period” for “24-month
period” therein). The annual rate for any
calendar year is determined on the basis
of a yield curve that reflects the aver-
age, for the most recent 60-month period
ending before the beginning of the cal-
endar year, of monthly yields on corpo-
rate bonds described in section 430(h)(2)
(D)(i). The annual rate is the average of
that yield curve’s monthly spot rates with
times to maturity from four and one-half
years to ten years.
(d) Determination of loss payment pat-
tern—(1) In general. Under section 846(d)
(1), the loss payment pattern determined
by the Secretary for each line of business
is determined by reference to the historical
loss payment pattern applicable to such
line of business determined in accordance
with the method of determination set forth
in section 846(d)(2) and the computation-
al rules prescribed in section 846(d)(3) on
the basis of the annual statement data from
annual statements described in section
846(d)(2)(A) and (B). However, the Sec-
retary may adjust the loss payment pattern
for any line of business as provided in
paragraph (d)(2) of this section.
(2) Smoothing adjustments. The Secre-
tary may adjust the loss payment pattern
for any line of business using a method-
ology described by the Secretary in other
published guidance if necessary to avoid
negative payment amounts and otherwise
produce a stable pattern of positive dis-
count factors less than one.
(e) Applicability dates. (1) Except as
provided in paragraph (e)(2) of this sec-
tion, this section applies to taxable years
beginning after December 31, 1986.
(2) Paragraphs (c) and (d) of this sec-
tion apply to taxable years beginning after
December 31, 2017.
§1.846-2 [Removed]
Par. 4. Section 1.846-2 is removed.
§1.846-2T [Removed]
Par. 5. Section 1.846-2T is removed.
§1.846-3 [Removed]
Par. 6. Section 1.846-3 is removed.
§1.846-4 [Removed]
Par. 7. Section 1.846-4 is removed.
§1.846-4T [Removed]
Par. 8. Section 1.846-4T is removed.
Kirsten Wielobob,
Deputy Commissioner for Services
and Enforcement.
Approved: May 21, 2019.
David J. Kautter,
Assistant Secretary of the Treasury
(Tax Policy).
(Filed by the Office of the Federal Register on June
13, 2019, 4:15 p.m., and published in the issue of the
Federal Register for June 17, 2019, 84 F.R. 27947)

26 CFR 1.170A-1(h)(3)(viii): Payments resulting in
state and local tax benefits
T.D. 9864
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Contributions in Exchange
for State or Local Tax
Credits
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.

Bulletin No. 2019–27 7 July 1, 2019
SUMMARY: This document contains a
final regulation under section 170 of the
Internal Revenue Code (Code). The fi-
nal regulation provides rules governing
the availability of charitable contribution
deductions under section 170 when a tax-
payer receives or expects to receive a cor-
responding state or local tax credit. This
document also provides a final regulation
under section 642(c) to apply similar rules
to payments made by a trust or decedent’s
estate.
DATES: Effective date: These regulations
are effective August 12, 2019.
Applicability dates: For dates of appli-
cability, see §1.170A-1(h)(3)(viii) and
§1.642(c)-3(g)(2).
FOR FURTHER INFORMATION CON-
TACT: Mon L. Lam or Richard C. Gano
IV at (202) 317-4059 (not a toll-free num-
ber).
SUPPLEMENTARY INFORMATION:
Background
Section 170(a)(1) generally allows an
itemized deduction for any “charitable
contribution” paid within the taxable year.
Section 170(c) defines “charitable con-
tribution” as a “contribution or gift to or
for the use of” any entity described in that
section. Under section 170(c)(1), such an
entity includes a State, a possession of the
United States, or any political subdivision
of the foregoing, or the District of Colum-
bia. Entities described in section 170(c)
(2) include certain corporations, trusts, or
community chests, funds, or foundations,
organized and operated exclusively for
religious, charitable, scientific, literary, or
educational purposes, or to foster national
or international amateur sports compe-
tition, or for the prevention of cruelty to
children or animals.
To be deductible as a charitable contri-
bution under section 170, a transfer to an
entity described in section 170(c) must be
a contribution or gift. A contribution or gift
for this purpose is a voluntary transfer of
money or property without the receipt of
adequate consideration, made with chari-
table intent. In Rev. Rul. 67-246, 1967-2
C.B. 104, the Internal Revenue Service
(IRS) addressed the taxpayer’s burden
of proof for establishing charitable intent
when the taxpayer receives a privilege or
benefit in conjunction with its contribu-
tion. In this revenue ruling, the IRS set out
a two-part test for determining whether
the taxpayer is entitled to a charitable con-
tribution deduction under these circum-
stances. First, the taxpayer has the burden
of proving that its payment to the charity
exceeds the market value of the privileg-
es or other benefits received. Second, the
taxpayer must show that it paid the excess
with the intention of making a gift.
In United States v. American Bar En-
dowment, 477 U.S. 105, 116-18 (1986),
the Supreme Court elaborated on the test
set out in Rev. Rul. 67-246. The Court
interpreted the phrase “charitable con-
tribution” in section 170 as it relates to
the donor’s receipt of consideration, and
stated that the “sine qua non of a charita-
ble contribution is a transfer of money or
property without adequate consideration.”
Id. at 118. The Court concluded that “[a]
payment of money generally cannot con-
stitute a charitable contribution if the con-
tributor expects a substantial benefit in re-
turn,” (id. at 116), (hereinafter referred to
as the “quid pro quo principle”). The Court
recognized that some payments may have
a “dual character” — part charitable con-
tribution and part return benefit. Id. at 117.
The Court reasoned that in dual character
cases “it would not serve the purposes of
section 170 to deny a deduction altogeth-
er”; therefore, a charitable deduction is
allowed, but only to the extent the amount
donated or the fair market value of the
property transferred by the taxpayer ex-
ceeds the fair market value of the benefit
received in return, and only if the excess
amount was transferred with the intent of
making a gift. Id. See also Hernandez v.
Commissioner, 490 U.S. 680, 690 (1989)
(stating that Congress intended to differ-
entiate between unrequited payments and
payments made in return for goods or ser-
vices). Because this inquiry focuses on the
donor’s expectation of a benefit, it does
not matter whether the donor expects the
benefit from the recipient of the payment
or transfer, or from a third party. See, for
example, Singer Co. v. United States, 449
F.2d 413, 422-23 (Ct. Cl. 1971); cited with
approval in American Bar Endowment,
477 U.S. at 116-17.
In Hernandez, 490 U.S. at 690-91, the
Supreme Court reaffirmed the quid pro
quo standard articulated in American Bar
Endowment. Specifically, the Court held
that payments to a charity that entitled the
taxpayers to receive an identifiable benefit
in return for their money were part of a
“quintessential quid pro quo exchange,”
and thus, were not contributions or gifts
within the meaning of section 170. Id. at
691. In making this determination, the
Court noted the importance of examining
the “external features of a transaction,”
thereby “obviating the need for the IRS
to conduct imprecise inquiries into the
motivations of individual taxpayers.” Id.
at 690-91. Thus, both American Bar En-
dowment and Hernandez indicate that ob-
jective considerations guide the determi-
nation of whether the taxpayer purposely
contributed money or property in excess
of the value of any benefit received in re-
turn. In addition, these cases continue to
recognize the requirement that the taxpay-
er have charitable intent. See American
Bar Endowment, 477 U.S. at 118; Her-
nandez, 490 U.S. at 691.
Section 164 generally allows an item-
ized deduction for the payment of certain
taxes, including state and local, and for-
eign, real property taxes; state and local
personal property taxes; and state and lo-
cal, and foreign, income, war profits, and
excess profits taxes. Section 164(b)(6),
as added by section 11042 of “An Act to
provide for reconciliation pursuant to ti-
tles II and V of the concurrent resolution
on the budget for fiscal year 2018” (“the
Act”), Pub. L. 115-97, limits an individu-
al’s deduction for the aggregate amount of
state and local taxes paid during the cal-
endar year to $10,000 ($5,000 in the case
of a married individual filing a separate
return). This limitation applies to taxable
years beginning after December 31, 2017,
and before January 1, 2026. This limita-
tion does not apply to foreign taxes de-
scribed in section 164(a)(3) or to any tax-
es described in section 164(a)(1) and (2)
that are paid and incurred in carrying on a
trade or business or an activity described
in section 212.
In response to the new limitation un-
der section 164(b)(6), some taxpayers are
seeking to pursue tax planning strategies
with the goal of avoiding or mitigating
the limitation. These strategies rely on

July 1, 2019 8 Bulletin No. 2019–27
state and local tax credit programs under
which states provide tax credits in return
for contributions by taxpayers to or for the
use of certain entities described in section
170(c). The use of state or local tax cred-
its to incentivize charitable giving has be-
come increasingly common over the past
20 years. Moreover, since the enactment
of the limitation under section 164(b)(6),
states and local governments have creat-
ed additional programs intended to work
around the new limitation on the deduc-
tion of state and local taxes.
The new limitation, and the resulting
efforts by states and taxpayers to devise
alternate means for deducting the disal-
lowed portion of their state and local tax-
es, has generated increased interest in the
question of whether a state or local tax
credit should be treated as a return ben-
efit – a quid pro quo – when received in
return for making a payment or transfer
to an entity described in section 170(c).
The Treasury Department and the IRS
did not publish formal guidance on this
question before the enactment of the lim-
itation under section 164(b)(6). In 2010,
however, the IRS Chief Counsel advised
that, under certain circumstances, a tax-
payer may take a deduction under section
170 for the full amount of a contribution
made in exchange for a state tax credit,
without subtracting the value of the credit
received in return. See CCA 201105010
(Oct. 27, 2010) (“the 2010 CCA”). IRS
Chief Counsel has also taken the position
in Tax Court litigation that the amount of
a state or local tax credit that reduces a
tax liability is not an accession to wealth
includible in income under section 61 or
an amount realized for purposes of section
1001. In these cases, the Tax Court agreed
with the Chief Counsel’s position. See, for
example, Maines v. Commissioner, 144
T.C. 123, 134 (2015); Tempel v. Commis-
sioner, 136 T.C. 341, 351-54 (2011); aff ’d
sub nom. Esgar Corp. v. Commissioner,
744 F.3d 648 (10th Cir. 2014).
Upon reviewing the authorities under
section 170, the Treasury Department
and the IRS questioned the reasoning of
the 2010 CCA. On June 11, 2018, the
Treasury Department and the IRS issued
Notice 2018-54, 2018-24 I.R.B. 750, an-
nouncing the intention to propose regu-
lations addressing the federal income tax
treatment of contributions pursuant to
state and local tax credit programs. On
August 27, 2018, the proposed regulations
(REG-112176-18) were published in the
Federal Register (83 FR 43563).
The proposed regulations generally
stated that if a taxpayer makes a payment
or transfers property to or for the use of
an entity listed in section 170(c), and the
taxpayer receives or expects to receive a
state or local tax credit in return for such
payment, the tax credit constitutes a return
benefit, or quid pro quo, to the taxpayer
and reduces the taxpayer’s charitable con-
tribution deduction. The proposed regula-
tions included a separate rule for state and
local tax deductions, providing that they
do not constitute a quid pro quo unless
they exceed the amount of the donor’s
payment or transfer. The proposed regu-
lations also included an exception under
which a state or local tax credit is not
treated as a quid pro quo if the credit does
not exceed 15 percent of the taxpayer’s
payment or 15 percent of the fair market
value of the property transferred by the
taxpayer. Finally, the proposed regulations
would amend §1.642(c)-3 to provide sim-
ilar rules for payments made for a purpose
specified in section 170(c) by a trust or
decedent’s estate.
The Treasury Department and the IRS
received over 7,700 comments respond-
ing to the proposed regulations and 25
requests to speak at the public hearing,
which was held on November 5, 2018.
Copies of written comments received
and the list of speakers at the public hear-
ing are available for public inspection at
www.regulations.gov or upon request.
The comments and revisions are discussed
generally in this preamble. After consider-
ing the comments received and the con-
cerns expressed at the public hearing, the
Treasury Department and the IRS adopt
the proposed regulations with certain re-
visions explained subsequently.
Additionally, in response to concerns
raised in comments, the Treasury Depart-
ment and the IRS have issued other guid-
ance providing safe harbors on certain is-
sues. On December 28, 2018, the Treasury
Department and the IRS issued Rev. Proc.
2019-12, 2019-04 I.R.B. 401, providing a
safe harbor under section 162 for certain
payments made by a C corporation or
specified passthrough entity to or for the
use of an organization described in section
170(c) if the C corporation or specified
passthrough entity receives or expects to
receive a state or local tax credit in return
for such payment. On June 11, 2019, the
Treasury Department and the IRS will
have issued Notice 2019-12, 2019-27
I.R.B. 57, providing a safe harbor for pay-
ments made by certain individuals. Under
the safe harbor, an individual who itemiz-
es deductions and makes a payment to a
section 170(c) entity in return for a state
or local tax credit may treat the portion of
such payment that is or will be disallowed
as a charitable contribution deduction un-
der section 170 as a payment of state or
local tax for purposes of section 164. This
disallowed portion of the payment may be
treated as a payment of state or local tax
under section 164 when and to the extent
an individual applies the state or local tax
credit to offset the individual’s state or lo-
cal tax liability. Notice 2019-12 requests
comments for purposes of incorporating
the safe harbor into anticipated proposed
regulations under section 164. In general,
the Treasury Department and the IRS will
continue to consider comments and pro-
vide additional guidance in this area as
needed.
Explanation of Provisions and
Summary of Comments
Explanation of Provisions
The final regulations generally retain
the proposed amendments set forth in the
proposed regulations, with certain clarify-
ing and technical changes. First, the final
regulations retain the general rule that if
a taxpayer makes a payment or transfers
property to or for the use of an entity de-
scribed in section 170(c), and the taxpayer
receives or expects to receive a state or lo-
cal tax credit in return for such payment,
the tax credit constitutes a return benefit
to the taxpayer, or quid pro quo, reducing
the taxpayer’s charitable contribution de-
duction.
Second, the Treasury Department and
the IRS have concluded that state tax
credits and state tax deductions should be
treated differently in light of policy and
tax administration considerations identi-
fied in the preamble of the proposed regu-
lations. Accordingly, the final regulations
retain the rule that a taxpayer generally

Bulletin No. 2019–27 9 July 1, 2019
is not required to reduce its charitable
contribution deduction on account of its
receipt of state or local tax deductions.
However, the final regulations also retain
the exception to this rule for excess state
or local tax deductions. Specifically, the
taxpayer must reduce its charitable contri-
bution deduction if it receives or expects
to receive state or local tax deductions in
excess of the taxpayer’s payment or the
fair market value of property transferred
by the taxpayer.
Third, the final regulations retain the
15-percent exception, under which a tax-
payer may disregard state and local tax
credits as a return benefit where such cred-
its do not exceed 15 percent of the taxpay-
er’s payment. However, the final regula-
tions clarify that this 15-percent exception
applies only if the sum of the taxpayer’s
state and local tax credits received, or
expected to be received, does not exceed
15 percent of the taxpayer’s payment or
15 percent of the fair market value of the
property transferred by the taxpayer.
Fourth, the final regulations reflect
the correction of a typographical error in
§1.170A-1(h)(3)(i) of the proposed regu-
lations. The introductory clause should re-
fer to the 15-percent exception set forth in
paragraph (h)(3)(vi), not paragraph (h)(3)
(v). In addition, the final regulations clar-
ify the terms used to describe entities that
may receive charitable contributions un-
der section 170(c). Specifically, the final
regulations refer to entities “described” in
section 170(c), rather than entities “listed”
under section 170(c).
Finally, the final regulations include
the proposed amendments to §1.642(c)-
3 providing that the final rules under
§1.170A-1(h)(3) apply to payments made
by a trust or decedent’s estate in determin-
ing its charitable contribution deduction
under section 642(c).
Summary of Comments
1. Comments in Support of the Proposed
Regulations
Approximately 70 percent of com-
menters recommended that the Treasury
Department and the IRS finalize the pro-
posed regulations without change. Some
commenters characterized state and local
tax credit programs as tax shelters and
explained how taxpayers could use the
programs to generate profits. A substantial
number of commenters expressed concerns
regarding the effect of these programs on
public functions, including public edu-
cation. Many commenters stated that the
proposed regulations apply section 170
fairly. Many commenters noted that the
proposed regulations applied to donations
to organizations fulfilling both private and
public purposes and applied to tax credit
programs created both before and after the
enactment of the Act. Some commenters
stated that state tax credit programs are
unfair to individuals who cannot afford
to make the contributions and receive the
benefit of the credits. Some commenters
generally supported the proposed regula-
tions, but provided more substantive com-
ments regarding additional issues posed
by the proposed regulations and requested
additional guidance on those issues, either
when finalizing the proposed regulations
or in other guidance.
2. Section 170 Regulations in Response to
a Section 164 Amendment
Many commenters wrote that it was
improper for the Treasury Department and
the IRS to issue regulations under section
170 in response to the enactment of sec-
tion 164(b)(6). Commenters stated that
any regulations must be issued under sec-
tion 164 because an amendment to section
164 is driving the regulatory change.
The limitation under section 164(b)
(6) is the impetus for the Treasury De-
partment’s and the IRS’s consideration of
the tax treatment of contributions made in
exchange for state and local tax credits.
Prior to the enactment of that limitation,
the proper treatment of such contributions
was of limited significance from a federal
revenue perspective and tax administra-
tion perspective and was therefore nev-
er addressed in formal guidance. Upon
careful review of the issue, the Treasury
Department and the IRS have determined
that longstanding principles under sec-
tion 170 should guide the tax treatment
of these contributions. Section 170 pro-
vides a deduction for taxpayers’ gratuitous
payments to qualifying entities, not for
transfers that result in receipt of valuable
economic benefits. In applying section
170 and the quid pro quo principle, the
Treasury Department and the IRS do not
believe it is appropriate to categorically
exempt state or local tax benefits from the
normal rules that apply to other benefits
received or expected to be received by a
taxpayer in exchange for a contribution.
The final regulations are consistent with
longstanding principles under section 170
and sound tax policy. Therefore, the regu-
lations are issued under section 170, and
not section 164.
3. Treatment of State and Local Tax
Credits as Return Benefits
Commenters expressed differing views
of the proposed regulation’s requirement
that a taxpayer reduce the taxpayer’s
charitable contribution deduction under
section 170 by the total amount of state
and local tax credits received or expected
to be received. Many commenters agreed
with the Treasury Department and the IRS
that the quid pro quo principle should be
applied to the receipt or expectation of re-
ceipt of state and local tax credits. How-
ever, some commenters questioned the
application and effect of the quid pro quo
principle under section 170 and the tax
consequences of such application.
The Treasury Department and the IRS
have determined that it is appropriate to
apply longstanding principles under sec-
tion 170 that require a taxpayer to reduce
the amount treated as a charitable contri-
bution by the value of the return benefit
received. As discussed earlier in this pre-
amble and in the preamble of the proposed
regulations, the final regulations are con-
sistent with the principle that a “payment
of money generally cannot constitute a
charitable contribution if the contributor
expects a substantial benefit in return.”
American Bar Endowment, 477 U.S. at
116. While the Supreme Court has not ad-
dressed the specific issue of contributions
in exchange for state or local tax credits,
the final regulations are a reasonable inter-
pretation of section 170 that accords with
the logic of American Bar Endowment
and Hernandez. The final regulations are
also supported by important tax policy
considerations, including the need to pre-
vent revenue loss from the erosion of the
limitation under section 164(b)(6). Thus,
the final regulations adopt the rule that the
amount otherwise deductible as a charita-

July 1, 2019 10 Bulletin No. 2019–27
ble contribution under section 170 must
generally be reduced by the total amount
of state and local tax credits received or
expected to be received.
a. Prior Chief Counsel Advice
Memoranda and case law
Many commenters noted that the pro-
posed regulations reflect a change in the
IRS’s treatment of charitable contribu-
tions that result in state or local tax credits.
The commenters pointed to several CCAs
issued by IRS Chief Counsel from 2002 to
2010. See, for example, the 2010 CCA (ad-
dressing contributions of money or prop-
erty to governments or charitable entities
under several state tax credit programs);
CCA 200435001 (July 28, 2004) (review-
ing a program issuing state tax credits in
return for contributions to certain child
care organizations); CCA 200238041
(July 24, 2002) (considering a program is-
suing tax credits in return for the transfer
of conservation easements). The preamble
to the proposed regulations noted that, in
each of these CCAs, IRS Chief Counsel
recognized the complexity of the federal
tax law issues involving the tax treatment
of the receipt or expectation of receipt of
state tax credits, particularly where the tax
credits are granted for transfers to section
170(c) entities. The preamble also noted
that two of the CCAs declined to provide
specific guidance on the availability of
the charitable contribution deduction, and
suggested the issuance of formal guidance
to address this question. Although CCAs
are released to the public under section
6110, they are not official rulings or po-
sitions of the IRS, and cannot be cited as
precedent. See sections 6110(b)(1)(A) and
6110(k)(3).
The Treasury Department and the IRS
acknowledge that the proposed and final
regulations depart from the conclusion of
the 2010 CCA in important respects. As
noted in the Background section of this
preamble, the 2010 CCA concluded that a
taxpayer may take a deduction under sec-
tion 170 for the full amount of a contribu-
tion made in exchange for a state tax credit,
without subtracting the value of the credit
received in return. The 2010 CCA, how-
ever, failed to persuasively explain why
state and local tax credits should not count
as return benefits for purposes of applying
the quid pro quo principle. The 2010 CCA
cited cases in which courts had found that
a donor’s subjective motivation to mini-
mize taxes is not a basis for disallowing a
charitable deduction, but these cases did
not specifically address whether the val-
ue of state or local tax credits should be
treated as a quid pro quo that reduces the
amount of the deduction. See McLennan
v. United States, 24 Cl. Ct. 102,106 n.8
(1991); Skripak v. Commissioner, 84 T.C.
285, 319; Allen v. Commissioner, 92 T.C.
1, 7 (1989). The 2010 CCA also cited a
case in which the value of a tax deduction
was not treated as income under section
61, but that case did not address the appli-
cation of the quid pro quo principle under
section 170. See Browning v. Commis-
sioner, 109 T.C. 303 (1997). Furthermore,
the analysis in the 2010 CCA assumed that
after the taxpayer applied the state or local
tax credit to reduce the taxpayer’s state
or local tax liability, the taxpayer would
receive a smaller deduction for state and
local taxes under section 164. With the en-
actment of section 164(b)(6), that assump-
tion no longer holds true for the vast ma-
jority of taxpayers. The changes in the tax
laws reduce the number of taxpayers who
will itemize deductions, and for taxpayers
who itemize and have state and local tax
liabilities above the new limitation, the
use of the tax credit would not reduce the
deduction for state and local taxes.
In light of the section 164(b)(6) limita-
tion, the Treasury Department and the IRS
have specifically considered the applica-
tion of the quid pro quo principle to state
and local tax credit programs. After care-
ful consideration of comments submitted
in response to the proposed regulations,
the Treasury Department and the IRS have
determined that it is appropriate to treat
the receipt or the expectation of receipt of
state and local tax credits as return ben-
efits. As discussed previously in this pre-
amble, the final regulations are supported
by the Supreme Court’s interpretation of
the term “charitable contribution” under
section 170. In American Bar Endowment,
477 U.S. at 118, the Court stated that the
“sine qua non of a charitable contribution
is a transfer of money or property without
adequate consideration”—that is, without
the expectation of a quid pro quo. Thus,
the Court held that a “payment of money
generally cannot constitute a charitable
contribution if the contributor expects a
substantial benefit in return.” Id. at 116.
The Supreme Court reaffirmed this prin-
ciple in Hernandez, 490 U.S. at 690-91,
and this principle has been consistently
applied by the courts in subsequent de-
cisions. See, for example, Rolfs v. Com-
missioner, 135 T.C. 471 (2010), aff ’d,
668 F.3d 888 (7th Cir. 2012) (holding that
taxpayers were not entitled to a charitable
contribution deduction for the donation
of their lake house because they did not
show that the market value of the property
they donated exceeded the market value
of the benefit (demolition services) they
received in return); Triumph Mixed Use
Investments III, LLC v. Commissioner,
T.C. Memo. 2018-65 (holding that value
of real property and development credits
transferred by taxpayer to city in return
for development plan approvals was not
deductible under section 170 because tax-
payer expected a return benefit); Pollard
v. Commissioner, T.C. Memo. 2013-38
(holding that petitioner’s granting of con-
servation easements to the county was
part of a quid pro quo exchange for the
county’s approval of the taxpayer’s sub-
division exemption request, a substantial
benefit to the taxpayer).
This treatment is consistent not only
with the purpose of section 170, but also
with the section 164(b)(6) limitation. If
the Treasury Department and the IRS
were to allow taxpayers to claim a full
charitable contribution deduction for
contributions made in exchange for state
tax credits, this treatment would result in
significant federal tax revenue losses that
would undermine the limitation on the de-
duction for state and local taxes in section
164(b)(6). Such an approach would enable
taxpayers to characterize payments as ful-
ly deductible charitable contributions for
federal income tax purposes, while using
the same payments to satisfy their state tax
liabilities. As a result, the final regulations
reject the 2010 CCA’s conclusion that the
contribution deduction does not need to
be reduced by the value of the state and
local tax credit received or expected to be
received.
Commenters also cited recent cases,
such as Maines v. Commissioner and Te m-
pel v. Commissioner, to conclude that the
receipt of a state or local tax credit is, for
federal tax purposes, a reduction or po-

Bulletin No. 2019–27 11 July 1, 2019
tential reduction in the taxpayer’s state
or local tax liability and not a payment
includible in the taxpayer’s gross income.
Maines, 144 T.C. at 134 (citing Randall v.
Loftsgaarden, 478 U.S. 647, 657 (1986));
Tempel, 136 T.C. at 350; see also Rev.
Rul. 79-315, 1979-2 C.B. 27 (Holding
(3) (amounts credited against unpaid tax
is neither includible in taxpayer’s income
nor deductible as a state income tax paid)).
The analysis for determining whether an
item is included in gross income is sepa-
rate and distinct from the analysis for de-
termining whether a payment or transfer
is a deductible contribution under section
170. Section 61(a) provides that gross in-
come “means all income from whatever
source derived” unless otherwise provided
in Subtitle A, Income Taxes. In contrast, to
be deductible as a charitable contribution
under section 170, a transfer to an enti-
ty described in section 170(c) must be a
contribution or gift, without the expecta-
tion or receipt of a return benefit. Neither
Maines nor Tempel addressed whether a
taxpayer’s expectation or receipt of a state
or local tax credit may reduce a taxpayer’s
charitable contribution deduction under
section 170, and therefore, these cases are
not relevant for purposes of interpreting
section 170.
Some commenters cited Arizona Chris-
tian School Tuition Organization v. Winn,
563 U.S. 125, 142-44 (2011), to support
their position that the regulations should
permit a full charitable contribution de-
duction when amounts are contributed to a
charitable organization, even if the donor
receives tax credits in return. While that
case involved the types of contributions
affected by the proposed regulations, the
Court did not address whether such con-
tributions are deductible under section
170 or whether the contributors received
a substantial benefit in exchange for their
contributions.
b. Tax consequences of quid pro quo
benefits
Some commenters pointed out that the
proposed regulations failed to fully ad-
dress the tax consequences of treating tax
credits as quid pro quo benefits and sug-
gested that additional guidance is needed.
For example, commenters noted that the
proposed regulations did not address the
tax treatment of the sale, use, or lapse of
the credits. In particular, commenters sug-
gested that additional guidance may be
needed to clarify application of the rules
under sections 61, 164, 1001, and 1012 to
the receipt, expectation of receipt, or use
of tax credits. The Treasury Department
and the IRS agree with commenters that
additional guidance is necessary to ad-
dress these complex issues.
Regarding the treatment of return
benefits under section 164, the Treasury
Department and the IRS issued Notice
2019-12 on June 11, 2019. As discussed
previously in this preamble, Notice 2019-
12 provides a safe harbor under section
164 for an individual who itemizes de-
ductions and who makes a payment to a
section 170(c) entity in return for a state
or local tax credit. The Treasury Depart-
ment and the IRS will continue to consid-
er comments regarding other tax conse-
quences of treating tax credits as quid pro
quo benefits and will provide additional
guidance as needed.
c. Application of substance over form
doctrine
Some commenters suggested that the
proposed regulations should have relied
in whole or in part on the substance over
form doctrine rather than the quid pro
quo principle. Under a substance over
form approach, commenters explained,
the proposed regulations could treat con-
tributions to funds established by state or
local government entities in exchange for
tax credits as, in substance, a payment of
taxes to those government entities. These
commenters stated that by relying on the
substance over form doctrine, the pro-
posed regulations could have been more
easily tailored to address only those con-
tributions paid to funds established to as-
sist taxpayers in avoiding the limitation
on state and local tax deductions. The
commenters also stated that a focus on
contributions to funds established by state
and local government entities would more
directly target the potential revenue loss.
The Treasury Department and the IRS
have considered the substance over form
doctrine in analyzing the proper tax treat-
ment of contributions in exchange for tax
credits, but have ultimately decided that,
as a general matter, the application of the
quid pro quo principle provides a more
sound, comprehensive, and administra-
ble approach. While a payment made to
a state (or to an entity designated by the
state) in exchange for a tax credit might
in some circumstances seem similar to
a payment of tax under section 164, the
analysis raises additional issues and finds
less support under other substance over
form authorities. Specifically, this ap-
proach would result in the significant
expansion in the definition of “tax” un-
der section 164, would raise questions
involving the proper timing of deductions
for such payments, and would result in
different treatments for similarly situated
taxpayers. Furthermore, even if the sub-
stance over form doctrine were applied
to treat payments or transfers to certain
organizations as a payment of taxes, the
proper treatment of these amounts under
section 170, including the application of
the quid pro quo principle, would contin-
ue to be relevant for taxpayers that make
payments or transfers to certain charities
in return for tax credits. The Treasury De-
partment and the IRS have determined
that the tax laws and sound tax policy sup-
port the treatment of a state tax credit as
a return benefit that reduces the amount
of the taxpayer’s charitable contribution
deduction under section 170, regardless of
whether the entity to which the contribu-
tion is made is controlled by a state or lo-
cal government. The quid pro quo princi-
ple is applicable to contributions made to
all types of donee entities. Section 170(c)
provides an expansive list of the types of
entities to which a taxpayer may contrib-
ute and receive a charitable contribution
deduction. This list includes organizations
controlled by state or local governments.
If a contribution is made to or for the use
of any such entity, the contribution may
qualify as a charitable contribution, pro-
vided it meets all other requirements.
Moreover, a substance over form ap-
proach would not fully address concerns
raised by commenters regarding state and
local tax credit programs. Such programs
can be used to generate tax benefits in ex-
cess of the amount the taxpayer contrib-
utes to the charitable organization, regard-
less of whether the contribution is made to
an entity controlled by a state or local gov-
ernment. Finally, the Treasury Department
and the IRS have serious concerns about

July 1, 2019 12 Bulletin No. 2019–27
the practicability of delineating clear and
administrable criteria for distinguishing
between state and local government en-
tities and section 170(c)(2) organizations
that are closely connected to state and lo-
cal governments.
d. Quid pro quo provided by third party
Some commenters expressed a belief
that under current law a quid pro quo
received or expected to be received by a
taxpayer does not reduce the taxpayer’s
charitable contribution deduction if the
quid pro quo comes from a party that is
not the donee. Based on that belief, these
commenters concluded that a tax credit
from a state or local government should
not reduce the charitable contribution de-
duction for a payment to a section 170(c)
(2) organization. At least one commenter
recommended that where contributions
are made to section 170(c)(2) entities in
exchange for tax credits provided by the
state or local government, the benefit
should be treated as income to the donor.
In support of this position, many com-
menters referred to §1.170A-1(h)(1) (pay-
ment in exchange for consideration) and
§1.170A-13(f)(6) (defining “in consider-
ation for” as a donee organization provid-
ing goods and services in consideration
for taxpayer’s payment). One commenter
expressed the view that the quid pro quo
analysis cannot be applied to contribu-
tions to charitable organizations other
than state or government entities because
when a taxpayer makes a contribution to
a charity, but receives consideration from
a third party such as the state, the trans-
action cannot be characterized as a pur-
chase. Commenters suggested that the
language in the proposed regulations at
§1.170A-1(h)(3)(iii) creating an exception
from the “in consideration for” language
of §1.170A-13(f)(6) for state or local tax
credits provided by third parties is evi-
dence that the proposed regulations depart
from established law. Commenters sug-
gested, as an alternative, that the final reg-
ulations set forth a general rule applying
quid pro quo principles to benefits a tax-
payer receives from any source, regardless
of whether the benefits are provided by the
donee or a third party. That rule would be
applicable in determining if there is any
quid pro quo under section 170 in all con-
texts, not just when a taxpayer receives
state or local tax credits.
Section 1.170A-1(h)(1) provides that
no part of a payment that a taxpayer makes
to or for the use of an organization de-
scribed in section 170(c) that is in consid-
eration for (as defined in §1.170A-13(f)
(6)) goods or services (as defined in
§1.170A-13(f)(5)) is a contribution or
gift within the meaning of section 170(c)
unless the taxpayer (i) intends to make
a payment in an amount that exceeds the
fair market value of the goods or services;
and (ii) makes a payment in an amount
that exceeds the fair market value of the
goods or services. Section 1.170A-1(h)
(2) states that the charitable contribution
deduction under section 170(a) may not
exceed the amount of cash paid or the fair
market value of property transferred to an
organization over the fair market value of
goods or services the organization pro-
vides in return. Section 1.170A-13(f)(5)
defines goods or services as cash, proper-
ty, services, benefits, and privileges, and
§1.170A-13(f)(6) provides that a donee
provides goods or services in consider-
ation for a taxpayer’s payment if, at the
time the taxpayer makes a payment to the
donee, the taxpayer receives or expects to
receive goods or services in exchange for
that payment.
The Treasury Department and the IRS
acknowledge that the current regulations
do not address situations in which the
benefits a donor receives or expects to re-
ceive come from a third party. While the
proposed regulations modify the existing
regulations to address the specific case
of payments in exchange for tax credits,
the Treasury Department and the IRS in-
tend to propose additional regulations
setting forth a general rule for all benefits
received or expected to be received from
third parties, not just tax credits. In the in-
terim, the final regulations regarding tax
credits specify an exception to the existing
definition of “in consideration for.” How-
ever, the application of the quid pro quo
principle to benefits received or expected
to be received from third parties is consis-
tent with existing law.
In American Bar Endowment and Her-
nandez, the Supreme Court made clear
that a payment is not a charitable contribu-
tion if the donor expects to receive a sub-
stantial benefit in return. American Bar
Endowment, 477 U.S. at 116-17; Hernan-
dez, 490 U.S. at 691-92. The source of the
return benefit is immaterial from the do-
nor’s financial perspective. The quid pro
quo principle is thus equally applicable
regardless of whether the donor expects to
receive the benefit from the donee or from
a third party. In either case, the donor’s
payment is not a charitable contribution
or gift to the extent the donor expects a
substantial benefit in return.
The Supreme Court in American Bar
Endowment and Hernandez did not di-
rectly address the question of third party
benefits because the return benefits at is-
sue in those cases were provided by the
donees. The Court derived its quid pro
quo principle in part from a lower court
decision and a revenue ruling that had
addressed the question. See American
Bar Endowment, 477 U.S. at 117 (citing
Singer, 449 F.2d 413 (Ct. Cl. 1971) and
Rev. Rul. 67-246); Hernandez, 490 U.S.
at 691 (citing Singer). In Singer v. United
States, the appellate division of the Court
of Claims (the predecessor to the Feder-
al Circuit) held that a sewing machine
company was not eligible for a charitable
contribution deduction for selling sewing
machines to schools at a discount because
the company “expected a return in the na-
ture of future increased sales” to students.
Singer, 449 F.2d at 423–24. In so holding,
the court expressly rejected the company’s
argument that this expected benefit should
be ignored because it came from the stu-
dents (i.e., third parties), rather than di-
rectly from the schools. Id. at 422-23. The
court stated, “Obviously, we cannot agree
with plaintiff’s distinction.” Id. Similarly,
in Rev. Rul. 67-246, Example 11, a local
department store agreed to award a tran-
sistor radio, worth $15, to each person
who contributed $50 or more to a specific
charity. The ruling concluded that if a tax-
payer received a $15 radio as a result of
a $100 payment to the charity, only $85
qualified as a charitable contribution de-
duction. It did not matter that the donor
received the $15 radio from the depart-
ment store, a third party, rather than from
the charity. This understanding guides the
IRS’s audit practices. See IRS Conserva-
tion Easement Audit Techniques Guide
(Rev. Jan. 24, 2018, p. 16) (stating that a
“quid pro quo contribution is a transfer of
money or property partly in exchange for

Bulletin No. 2019–27 13 July 1, 2019
goods or services in return from the char-
ity or a third party”, and “a quid pro quo
may be in the form of an indirect benefit
from a third party”).
The Treasury Department and the IRS
conclude that, under the most logical and
consistent application of existing law, a
charitable contribution deduction is re-
duced by any consideration a donor re-
ceives or expects to receive, regardless of
whether the donee is the party from whom
consideration is received or expected to
be received. To conclude otherwise would
provide incentives for taxpayers, chari-
table organizations, states, and localities
to structure transactions involving third
party benefits to bypass the requirements
to reduce contribution deductions by the
value of benefits received or expected to
be received. Accordingly, the Treasury
Department and the IRS do not adopt the
recommendation of the commenters to
limit application of the final regulations
to circumstances in which a tax credit is
provided by the donee, and as noted pre-
viously, the Treasury Department and the
IRS intend to propose amendments to the
existing regulations to make clear that the
quid pro quo principle applies regardless
of whether the party providing the quid
pro quo is the donee.
4. Comments on Section 164(b)(6)
A number of commenters stated that
the section 164(b)(6) limitation favors
low-tax states, is a form of double taxa-
tion, or infringes on states’ rights. These
comments regarding the statutory limita-
tion itself are beyond the scope of the pro-
posed regulations.
5. Conservation Easement Contributions
A large number of comments from
conservation easement donors, land trusts,
and government entities involved in con-
servation easement donations were specif-
ic to conservation easements. Conserva-
tion easement comments that relate to the
applicability date of the regulations are
addressed under the “Applicability Dates”
heading later in this section.
1
One group of comments relating to con-
servation easements expressed the view
that donations of conservation easements
to land trusts should be excluded from the
rules in the final regulations because of the
importance of land conservation, because
Congress has provided extra incentives for
contributions of conservation easements
over the years, and because easement do-
nations are not intended as section 164(b)
(6) workarounds. The Treasury Depart-
ment and the IRS recognize that conser-
vation easements provide unique and per-
petual benefits that are accorded favorable
tax treatment by state governments as well
as by Congress. Specifically, Congress
treats deductions for conservation ease-
ment contributions more favorably than
other charitable contribution deductions
in some contexts, such as the percentage
limitation and carryover rules.
The final regulations do not adopt this
suggestion. These regulations are based on
longstanding rules of general applicability
relating to quid pro quo and charitable in-
tent, and there is no authority under sec-
tion 170 that would void the application of
the quid pro quo principle and charitable
intent doctrine to donors of conservation
easements.
A second group of comments state that
determining the value of a conservation
easement tax credit may be difficult for
donors and also for donees who prepare
contemporaneous written acknowledg-
ments. In at least one state, easement do-
nors receive a property tax credit for each
of the years that they continue to own the
underlying property. Commenters stated
that it is unknowable at the time of the do-
nation how many years the donor would
be eligible for the property tax credit or
how to value a right to a tax credit that
could continue many years into the future.
Also, an expected credit may not nec-
essarily be granted, may be granted in a
subsequent tax year, may be subsequently
reduced, or might never be used or trans-
ferred. The Treasury Department and the
IRS understand that in some cases tax-
payers may never receive the maximum
credit. Nevertheless, it is well settled that
an expectation of a return benefit negates
the requisite charitable intent, and the
regulations apply that rule. The final reg-
ulations at §1.170A-1(h)(3)(iv) state that
the reduction in the amount treated as a
charitable contribution is an amount equal
to the maximum credit allowable that cor-
responds to the amount of the taxpayer’s
payment or transfer. If there is no clear
maximum credit allowable, taxpayers
may reduce their charitable contribution
deduction using a good faith estimate of
the value of the credit.
A third group of comments noted that
conservation easement donors who sell
their credit should get basis in the credit
equal to the amount of the reduction in the
charitable contribution deduction. A num-
ber of states have conservation easement
tax credit programs that allow the donor
to sell the credit. Under existing case law,
an easement donor has no gain or loss on
receipt of a credit but recognizes capital
gain upon its sale. See, for example, Te m-
pel v. Commissioner, 136 T.C. at 354-55
(concluding that conservation easement
donors had no basis in the tax credits that
they sold). The Treasury Department and
the IRS agree with this comment that this
basis issue warrants additional consider-
ation. Although the basis issue is beyond
the scope of these regulations, the Trea-
sury Department and the IRS intend to
consider this issue for future guidance.
6. Taxpayers at or Below the Section
164(b)(6) Limit
A number of commenters recommend-
ed that the Treasury Department and the
IRS revise how the proposed regulations
apply to taxpayers whose state and local
tax deduction is at or below the $10,000
limit in section 164(b)(6). Under the pro-
posed regulations, a taxpayer who item-
izes and is not subject to the alternative
minimum tax (AMT), and whose state or
local tax deduction is at or below $10,000,
may have adverse federal tax consequenc-
es. This taxpayer may have made a non-
deductible contribution (in exchange for
state or local tax credits) in lieu of a fully
or partially deductible payment of state or
local tax. Accordingly, some commenters
1
Although commenters used the term “effective date,” it is clear that commenters were referring to the “applicability date” as the term is used herein.

July 1, 2019 14 Bulletin No. 2019–27
recommended that taxpayers whose state
and local tax liabilities fall at or below
the $10,000 limit be allowed to deduct
contributions made in exchange for state
or local tax credits up to $10,000. Some
commenters recommended allowing these
taxpayers to deduct the contributions only
when the taxpayers’ contributions are to
the state (as opposed to an entity described
in section 170(c)(2)). Other commenters
recommended allowing the deduction
only when the taxpayers’ contributions are
to a state or local tax credit program that
was in existence as of December 22, 2017,
the date of the enactment of the Act. Many
commenters cited case law, legislative
intent, and general principles of fairness.
Several commenters suggested further
study or exceptions for taxpayers with
state and local tax liabilities below the
$10,000 limit. These commenters were
concerned that the impact to these tax-
payers may be greater than the Treasury
Department forecasted. After considering
these comments, the Treasury Department
and the IRS published a notice of intent
to propose regulations, Notice 2019-12,
providing a safe harbor, as discussed pre-
viously in this preamble.
7. Application of Section 162 for Business
Taxpayers
Some commenters stated that business
taxpayers are treated more favorably than
others because business taxpayers may
be able to claim deductions for payments
to section 170(c) entities as ordinary
and necessary business expenses under
section 162. These commenters are cor-
rect that taxpayers engaged in a trade or
business may be permitted a section 162
deduction for amounts paid to charitable
organizations in some circumstances. See,
for example, Marquis v. Commissioner,
49 T.C. 695 (1968) (taxpayer’s cash pay-
ments to clients that were charitable enti-
ties furthered her travel agency business
and were therefore not subject to the lim-
itations of section 170). However, some
commenters raised questions regarding
whether a payment for a tax credit would
always bear a direct relationship to a tax-
payer’s business.
A few commenters opined that the
proposed regulations further escalate the
disparate treatment of charitable contri-
butions by individual wage earners as
compared to similar contributions by
passthrough entities and their members
who are individuals. These commenters
noted that the limitation imposed by sec-
tion 164(b)(6) does not apply to state or
local real or personal property taxes paid
or accrued in carrying on a trade or busi-
ness or an activity described in section
212. As a result of this exception to the
limitation under section 164 and the avail-
ability of business expense deductions
under section 162, commenters stated that
a taxpayer-owner of a passthrough entity
will continue to receive the benefits of an
allocable share of tax credits received by
the passthrough entity. In addition, com-
menters pointed out that several states
have enacted or considered enacting legis-
lation that shifts state taxes from individu-
als to passthrough entities and entitles the
owners to claim a credit on the owner’s
state tax return for the amount of the own-
er’s distributive share of taxes paid by the
passthrough entity.
The proposed and final regulations
apply to charitable contributions by busi-
ness taxpayers. Specifically, a business
taxpayer, like an individual taxpayer,
must reduce the charitable contribution
deduction by the amount of any return
benefit received or expected to be re-
ceived. Thus, the commenters’ concerns
do not result from disparate treatment of
business taxpayers under section 170, but
rather result from the application of sec-
tions 162 and 164, including application
of the limitation under section 164(b)(6)
to passthrough entities and their owners.
The Treasury Department and the IRS
recognize that the final regulations may
raise additional questions regarding the
application of sections 162 and 164 to
business entities that make payments to
section 170(c) entities and that receive or
expect to receive state or local tax credits
in return for such payments. In response
to these questions, the Treasury Depart-
ment and the IRS published Rev. Proc.
2019-12, as previously discussed in this
preamble, which provides safe harbors
under section 162 for certain payments
made by C corporations or specified
passthrough entities. Neither the final
regulations nor the safe harbors in the
revenue procedure otherwise affect the
availability of a business expense deduc-
tion under section 162 for payments that
are ordinary and necessary expenses in-
curred in carrying on a trade or business.
The Treasury Department and the IRS
will continue to study comments involv-
ing the effect of the final regulation on
various business entities and will provide
additional guidance as needed.
8. Disclaiming the Tax Credit
If a taxpayer properly declines receipt
of a benefit, the taxpayer will not be treat-
ed as receiving or expecting to receive the
benefit, and the charitable contribution de-
duction will not be reduced by the amount
of the benefit. See Rev. Rul. 67-246, 1967-
2 C.B. 104, 108, Example 3 (taxpayer
who wants to support charity, but does
not intend to use the ticket offered in re-
turn for his donation, may refuse to accept
the ticket and receive a charitable contri-
bution deduction unreduced by the value
of the ticket). A number of commenters
asked for guidance on how a taxpayer may
decline receipt of state or local tax credits.
Although not specifically stated in the reg-
ulations, taxpayers who prefer to claim an
unreduced charitable contribution deduc-
tion have the option of not applying for
a state or local income tax credit where
such an application is required in order to
receive the credit. Alternatively, taxpay-
ers may apply for a lesser amount of the
credit. The Treasury Department and the
IRS request comments as to how taxpay-
ers may decline state or local tax credits in
other situations.
9. Cliff Effect of the 15-Percent Exception
The proposed regulations include an
exception under which a taxpayer may
disregard a state or local tax credit if the
credit does not exceed 15 percent of the
taxpayer’s payment or 15 percent of the
fair market value of the property trans-
ferred by the taxpayer. A number of com-
menters stated that the 15-percent ex-
ception results in an unfair “cliff effect”
because credits above 15 percent do not
receive the benefit of this exception. The
commenters note that this unfairness is
most significant where credits only exceed
15 percent by a small amount. A number
of commenters suggested that an amount
equal to the first 15 percent of all credits

Bulletin No. 2019–27 15 July 1, 2019
should be disregarded. Commenters also
noted that the proposed regulations penal-
ized donors of smaller amounts because
15 percent of a large payment results in a
much larger amount covered by the excep-
tion than 15 percent of a small payment.
Commenters also noted that a 15-percent
exception would typically permit a deduc-
tion for an amount that is more than the
amount treated as de minimis under the
rules of section 170. See, for example,
Rev. Proc. 90-12, 1990-1 C.B. 471 (pro-
viding guidelines for determining whether
the provision of small items or benefits of
token value in return for a contribution
have insubstantial value such that the con-
tribution is fully deductible under section
170). On the other hand, some comment-
ers requested that a higher percentage be
treated as de minimis.
The suggestion to disregard an amount
equal to 15 percent of the donor’s transfer
or otherwise change the 15-percent ex-
ception was not adopted. The 15-percent
exception was designed to provide consis-
tent treatment for state or local tax deduc-
tions and state or local tax credits that pro-
vide a benefit that is generally equivalent
to a deduction. The 15-percent exception
is intended to reflect the combined benefit
of state and local tax deductions, that is,
the combined top marginal state and local
tax rates, which the Treasury Department
and the IRS understand currently do not
exceed 15 percent. The Treasury Depart-
ment and the IRS considered tailoring this
exception to the combined marginal state
and local tax rates applicable for a tax-
payer’s particular jurisdiction. The Trea-
sury Department and the IRS determined
that using a single rate sufficient to cover
the highest existing marginal rates would
avoid the complexity and burden that
would arise if a taxpayer had to compute
the sum of the taxpayer’s state and local
marginal tax rates to determine whether
the tax credit received exceeded the ben-
efit that the taxpayer would have received
as a deduction. The exception ensures that
taxpayers in states offering state tax de-
ductions and taxpayers in states offering
economically equivalent credits are treat-
ed similarly. This exception is not intend-
ed to be an application of the de minimis
standard for insubstantial or inconsequen-
tial benefits under Rev. Proc. 90-12, 1990-
1 C.B. 471.
10. Application to State and Local Tax
Deductions
Some commenters expressed concern
that the proposed regulations do not apply
the quid pro quo analysis to state and local
tax deductions. These concerns reflect the
view that the quid pro quo analysis under
section 170 is equally applicable to tax
benefits in the form of state or local tax de-
ductions as it is to state or local tax credits.
As noted in the preamble to the proposed
regulations, the Treasury Department and
the IRS believe that considerations of tax
policy and sound tax administration do not
support the application of quid pro quo
principles in the case of dollar-for-dollar
state or local tax deductions. The econom-
ic benefit of a dollar-for-dollar deduction
is limited because it is based on a taxpay-
er’s state and local marginal rate. There-
fore, the risk of a taxpayer using such de-
ductions to circumvent section 164(b)(6),
and the potential revenue loss, is compar-
atively low. This is true even in high tax
states. In addition, if state and local tax de-
ductions for charitable contributions were
treated as return benefits, it would make
the accurate calculation of federal taxes
and state and local taxes difficult for both
taxpayers and the IRS. For example, the
value of a deduction would vary based on
the taxpayer’s marginal state and local tax
rates, making for more complex computa-
tions and adding to administrative and tax-
payer burden. Also, many states use feder-
al taxable income as the starting point for
computing state taxable income, and the
amount reported as a charitable contribu-
tion deduction on a taxpayer’s federal tax
return is typically the amount of the de-
duction on the taxpayer’s state tax return.
Allowing an unreduced federal charitable
contribution deduction even though a state
provides a similar deduction in measuring
state taxable income would avoid admin-
istrative complications. Accordingly, a
dollar-for-dollar state or local tax deduc-
tion does not raise the same concerns as
a state or local tax credit, and it would
produce unique complications if it were to
be subject to the quid pro quo principle.
Thus, the final regulations allow taxpayers
to calculate their federal tax deductions
without regard to their dollar-for-dollar
state and local tax deductions. Howev-
er, the Treasury Department and the IRS
are concerned that the granting of state
or local tax deductions in excess of the
amounts paid or the fair market value of
property transferred to an entity described
in section 170(c) could result in more sub-
stantial economic benefits to the taxpayer
and should be treated as a quid pro quo.
Accordingly, the final regulations also re-
tain the exception to general rule for ex-
cess state or local tax deductions.
Some commenters also contended that
the proposed regulations disfavor state
and local governments relative to the
federal government. These commenters
noted that the proposed regulations do
not require a taxpayer to reduce the tax-
payer’s charitable contribution deduction
by the value of the federal tax deduction.
However, as discussed in the prior para-
graph, the final regulations do not treat
state charitable contribution deductions
any differently than federal charitable
contribution deductions. Under the final
regulations neither state nor federal char-
itable contribution deductions are treated
as return benefits in determining the tax-
payer’s charitable contribution deduction
under section 170. The economic benefit
of a state or federal charitable contribu-
tion deduction is limited because both are
based on a taxpayer’s marginal tax rate. In
addition, there is minimal risk that a tax-
payer will use either of these deductions to
circumvent section 164(b)(6), and the po-
tential revenue loss, in both cases, is com-
paratively low. Furthermore, unlike state
or local governments, Congress would
not be motivated to enact a provision en-
abling an excess charitable contribution
to circumvent its other federal tax laws.
Thus, the final regulations specifically
address the workarounds stemming from
taxpayer’s use of state and local tax credit
programs, but continue to provide parallel
treatment of both federal and state charita-
ble contributions deductions.
11. Contributions to Foreign Charitable
Organizations
A small number of commenters ex-
pressed the view that the proposed regula-
tions favor payments to foreign charities.
Charitable contributions made to foreign
organizations generally are not deductible
for federal income tax purposes. See sec-
tion 170(c)(2). Moreover, in the limited

July 1, 2019 16 Bulletin No. 2019–27
situations where these deductions are al-
lowed, taxpayers are treated as if they are
making such contributions to entities that
are organized in the United States, and
accordingly, such contributions would be
subject to the rules and regulations under
section 170. As a result, while tax credits
provided by foreign governments for con-
tributions to foreign charities are outside
the scope of the final regulation, if the tax-
payer is seeking to deduct such charitable
contributions under section 170, the quid
pro quo principle set out under section
170 would be equally applicable.
12. Valuation and Substantiation of the
Credits
Commenters expressed concerns about
the challenges for taxpayers and donees in
determining the value of a state or local
tax credit. Under the proposed regula-
tions, a taxpayer needs to know the “max-
imum credit allowable” that corresponds
to the amount of the taxpayer’s transfer
to the donee. This amount would typical-
ly be the stated amount of the credit, and
unless the 15-percent exception applies,
the taxpayer’s charitable contribution de-
duction would generally be reduced by
this amount. However, if the credit does
not have a clear maximum credit allow-
able, a taxpayer’s good faith estimate of
the value will satisfy the rules of the final
regulations.
Commenters have also expressed con-
cerns about substantiation of a charitable
contribution when the donee does not
know whether the donor expects to receive
a state or local tax credit. If a donee is not
the entity providing the credit, the con-
temporaneous written acknowledgment
rules do not require that the amount of the
credit be reported in the acknowledgment.
See section 170(f)(8) (stating that a con-
temporaneous written acknowledgment
includes a statement of whether the donee
provided goods and services and if so, in-
cludes a good faith estimate of the value
of those goods or services). Further, under
§1.170A-13(f)(5), goods and services in-
clude benefits.
One commenter asked about compli-
ance with section 6115, which generally
requires donee disclosures in connection
with quid pro quo contributions (as de-
fined in section 6115(b)), and specifically
requires section 170(c) organizations (but
not section 170(c)(1) entities) to provide
donors with a good faith estimate of the
value of goods or services they provide.
If a section 170(c)(2) organization is not
providing the state or local tax credit to
the donor, section 6115 does not apply.
Accordingly, there is no section 6115 re-
quirement for section 170(c)(2) organiza-
tions to disclose information about a tax
credit provided by a state or local govern-
ment.
13. Regulatory Flexibility Act
Some commenters stated that the Reg-
ulatory Flexibility Act (5 U.S.C. chapter
6) (“RFA”) applies to the regulations be-
cause small tax-exempt organizations and
small governmental jurisdictions would be
affected by the proposed regulations due
to a potential reduction in contributions.
These commenters recommended that the
final regulations contain a RFA analysis.
Other commenters noted that some do-
nors may be small entities affected by the
regulation. The Treasury Department and
the IRS do not agree that a RFA analysis
is required. The organizations and small
governmental jurisdictions that receive
deductible contributions as part of a state
or local tax credit program are not subject
to the proposed regulations, and any po-
tential effect on contributions to these or-
ganizations is an indirect effect of the reg-
ulation. The RFA does not apply to entities
indirectly affected by the regulation. See,
for example, Cement Kiln Recycling Coa-
lition v. EPA, 255 F.3d 855, 868 (D.C. Cir.
2001); Mid-Tax Elec. Coop v. FERC, 773
F.2d 327 (D.C. Cir. 1985). For small enti-
ties that are donors, and potentially sub-
ject to the regulations, the regulations do
not impose more than nominal costs and
do not impose a collection of information
requirement.
14. Concerns About Reduced Charitable
Giving
A large number of commenters ex-
pressed concern that the proposed regula-
tions would result in an overall decline in
charitable giving. Many of the commenters
expressed concern about the impact of the
regulations on particular charities or types
of charities. A large number of comments
were received on tax credit programs that
encourage contributions to organizations
that help fund public and private school
programs. A number of commenters were
concerned that the proposed regulations
would decrease education opportunities
for impoverished and special needs chil-
dren in grades K-12. Some commenters
suggested that the final regulations apply
only to contributions to governments or
government entities and not to private
school organizations, while others sug-
gested postponing the applicability date
of final regulations to allow time to study
the effects on scholarship granting orga-
nizations. A few commenters expressed a
concern that the proposed regulations may
result in a decrease in donations to schol-
arship granting organizations and increase
the burden on public schools, given that
private schools may not be able to provide
as many scholarships to low-income stu-
dents. Other commenters expressed con-
cern that some state or local tax credit pro-
grams unfairly incentivize contributions
to private organizations, thus diverting
resources from public functions, such as
public schools.
Other commenters recommended that
donations of conservation easements
should be exempted from the rules in
the regulations. Commenters represent-
ing land trusts expressed concern that the
regulations would reduce the number of
donated conservation easements, thereby
reducing the ability of the federal govern-
ment, state and local governments, and
land trusts to conserve in perpetuity sig-
nificant natural lands, water, and habitats.
A commenter noted the needs of strug-
gling farmers and other landowners who
might not be able to afford to donate a
conservation easement without a state tax
credit. Some commenters observed that
because of the significance of land con-
servation, Congress has already provided
special incentives for conservation ease-
ment donations under section 170, and the
commenters suggested the Treasury De-
partment and the IRS follow Congress’s
lead by making an exception in the final
regulations for donations of conservation
easements.
Commenters from health care organi-
zations, such as rural hospital foundations,
expressed concern that the proposed regu-
lations would reduce charitable giving for

Bulletin No. 2019–27 17 July 1, 2019
health care, reducing the ability of health
care organizations to offset rising medical
costs and declining patient revenue. Other
commenters expressed concerns that the
proposed regulations would undermine
state programs that offer tax credits for
contributions supporting a variety of local
initiatives, including public arts, educa-
tion, health, human services, environment,
enterprise zones, and community better-
ment. Other commenters were concerned
about the effect of the regulations on child
care programs. A few commenters opined
that the proposed regulations would fur-
ther strain state and local finances that are
already adversely impacted by the new
limitation on deductions of state or local
taxes. The commenters stated that the new
limitation would potentially force states
and localities to confront difficult choices
regarding tax rates and public services. In
addition, several commenters suggested
that the Treasury Department and the IRS
adopt a facts-and-circumstances test to
differentiate between tax credit programs
that are consistent with state and federal
policy goals and those that are designed
for tax avoidance.
The Treasury Department and the IRS
recognize the importance of the federal
charitable contribution deduction, as well
as state tax credit programs, in encourag-
ing charitable giving. The final regulations
continue to allow a charitable contribution
deduction for the portion of a taxpayer’s
charitable contribution that is a gratuitous
transfer, and the regulations also leave un-
changed the state-level benefit provided
by state tax credits. In combination with
Notice 2019-12, the regulations will not
alter the charitable giving incentives for
the overwhelming majority of taxpayers
as compared to the incentives under fed-
eral tax law prior to enactment of section
164(b)(6). As discussed previously in this
preamble, Notice 2019-12 provides a safe
harbor for certain individual taxpayers
who itemize deductions and who make
payments to a section 170(c) entity in re-
turn for a state or local tax credit. Under
the safe harbor, these individuals may
treat the portion of such payment that is
or will be disallowed as a charitable con-
tribution deduction under section 170 as a
payment of state or local tax for purposes
of section 164. Notice 2019-12 will mit-
igate the impact of the final regulations
on state or local tax credit programs that
incentivize giving to all section 170(c)
entities, including entities supporting edu-
cational scholarship programs, child care,
public health, and other important goals.
Thus, the impact on taxpayers’ choices
will be small.
The final regulations apply longstand-
ing principles regarding charitable intent
and quid pro quo, and therefore treat all
contributions to entities described in sec-
tion 170(c) similarly. Those principles ap-
ply equally to all charitable contributions,
regardless of the charitable purpose or
type of donee. Accordingly, the final reg-
ulations do not adopt a facts-and-circum-
stances test or a test based on the type of
section 170(c) organization.
15. Programs in Existence Before the Act
A large number of commenters sug-
gested that the final regulations exempt
tax credit programs that were established
before the date of the enactment of sec-
tion 164(b)(6). The commenters noted that
the pre-existing programs could not have
been intended as section 164(b)(6) work-
arounds. Other commenters explained that
many taxpayers made payments or trans-
fers to existing programs in anticipation of
receiving state or local tax credits as well
as deductions, and the regulations would
cause financial hardships. Further, some
commenters expressed an opinion that the
regulations are politically motivated, al-
legedly targeting states and localities with
high tax rates. Commenters also stated that
exempting pre-existing programs would
not lead to an unanticipated revenue loss
because revenue implications were known
when the Act was enacted.
The regulations are based on longstand-
ing federal tax law principles that apply
equally to all taxpayers. To ensure fair and
consistent treatment, the final regulations
do not distinguish between taxpayers who
make transfers to state and local tax credit
programs enacted after the Act and those
who make transfers to tax credit programs
existing prior to the enactment of the Act.
Neither the intent of the section 170(c) or-
ganization, nor the date of enactment of
a particular state tax credit program, are
relevant to the application of the quid pro
quo principle. Accordingly, the final regu-
lations apply the rules equally to all state
and local tax credit programs, and the final
regulations do not adopt commenter rec-
ommendations to create exceptions to the
general rule for various types of state tax
credit programs.
Regarding the comment on revenue
implications for pre-existing programs,
state and local governments have the abil-
ity to change the parameters, including
the aggregate dollar amount of credits, of
these programs. In addition, as noted pre-
viously, some states and taxpayers have
pursued tax planning strategies through
the use of pre-existing state or local tax
credit programs that would have the ef-
fect of allowing taxpayers to deduct their
payments of state and local taxes in excess
of the limitation under section 164(b)(6).
These strategies would increase the reve-
nue loss to the federal government beyond
estimates when the Act was enacted.
16. Applicability Date
A number of commenters requested
a delayed applicability date, or in the al-
ternative, a phased-in implementation of
the proposed regulations. The majority of
these commenters requested an applicabil-
ity date of January 1, 2019. Others sug-
gested dates of up to five years after the
enactment of the Act, and still others did
not propose a specific date. Some com-
menters requested a delayed applicabili-
ty date with respect to all tax credit pro-
grams, while others requested a delayed
applicability date for only certain tax
credit programs.
Many commenters requesting a de-
layed applicability date expressed concern
about the adverse impact on state scholar-
ship tax credit programs. Some comment-
ers noted that a phased-in implementation
or delayed applicability date may mini-
mize uncertainty for students. Comment-
ers also described the application process
for certain state tax credit programs, re-
questing a delayed applicability date of
October 31, 2018, or December 31, 2018,
to ensure that states would have sufficient
time to inform applicants as to whether
their applications were accepted, and to
provide applicants with sufficient time to
make contributions prior to the date of ap-
plicability of the proposed regulations.
Some commenters requested a delayed
applicability date of January 1, 2019 or

July 1, 2019 18 Bulletin No. 2019–27
2020, for conservation easement dona-
tions. These commenters stated that do-
nations of conservation easements are
unique in that they are time-consuming
and costly for donors to plan for and fi-
nalize. For example, a conservation ease-
ment donor may have to expend tens of
thousands of dollars to hire an appraiser,
an attorney, a surveyor, and in some ju-
risdictions, pay an application fee. Also,
it takes many months, sometimes more
than a year, for the donor to take all the
necessary steps to contribute an easement
that is deductible under section 170(h) and
also creditable under state law, and many
easements are donated at the end of the
calendar year. The commenters stated that
the mid-year applicability date in the pro-
posed regulations has created complexity
for taxpayers.
These suggestions were not adopted.
The Treasury Department and the IRS
continue to believe that the proposed ap-
plicability date of August 27, 2018, pro-
vides maximum certainty for taxpayers
making contributions in exchange for
state and local tax credits and minimizes
revenue loss. If the proposed applicability
date had not been contemporaneous with
the proposed regulations, the Treasury
Department and the IRS believe that tax-
payers would have engaged in significant
tax planning in advance of the regulations
being finalized, resulting in a significant
loss of revenue. Additionally, Notice
2018-54, released May 23, 2018, gave
taxpayers timely notice that formal guid-
ance was forthcoming. It would be inequi-
table to revise the applicability date at this
point, as some taxpayers have made deci-
sions regarding their charitable contribu-
tions based on the applicability date in the
proposed regulations. Finally, any delay in
applying the rules of the final regulation
would potentially undermine the purposes
of the limitation in section 164(b)(6).
Special Analyses
Executive Orders 12866 and 13563
direct agencies to assess costs and ben-
efits of available regulatory alternatives
and, if regulation is necessary, to select
regulatory approaches that maximize net
benefits (including potential economic,
environmental, public health and safety
effects, distributive impacts, and equity).
Executive Order 13563 emphasizes the
importance of quantifying both costs and
benefits, of reducing costs, of harmoniz-
ing rules, and of promoting flexibility.
This rule has been designated as subject
to review under Executive Order 12866
(EO 12866) pursuant to the Memorandum
of Agreement (April 11, 2018) between
the Treasury Department and the Office of
Management and Budget (OMB) regard-
ing review of tax regulations. OMB has
determined that the rule is economically
significant and therefore subject to review
under section 1(c) of the Memorandum of
Agreement (MOA). Elsewhere in the Spe-
cial Analyses, the economic effects of the
rule are analyzed in conjunction with No-
tice 2019-12, which provides a safe harbor
that taxpayers may immediately rely upon
and that likely diminishes the effects of
the rule. OMB has made its determination
based only on the economic effects of the
rule. This rule is a regulatory action under
Executive Order 13771.
The following analysis provides further
detail regarding the anticipated impacts of
the rule. Part I explains the need for the
rule. Part II specifies the baseline for the
economic analysis. Part III summarizes
the economic effects of the rulemaking,
relative to this baseline. Part IV provides
illustrative scenarios. Part IV.A describes
the tax effects of charitable contributions
prior to enactment of the statutory lim-
itation on deductions for state and local
taxes under section 164(b)(6) (the “SALT
limitation”) in the Act. Part IV.B provides
examples comparing the tax effects of
charitable contributions after enactment
of the SALT limitation, but absent the rule
(the baseline) to the tax effects under the
rule and notice. Finally, Part V provides
a qualitative assessment of the potential
costs and benefits of the rule and notice
compared to the baseline.
I. Need for Regulation
This regulation provides guidance on
the deductibility of charitable contribu-
tions when a taxpayer receives or expects
to receive a corresponding state or local
tax credit. The regulation is intended to
clarify the relationship between the fed-
eral charitable contribution deduction un-
der section 170 and the recently enacted
SALT limitation. Compelling policy con-
siderations reinforce the interpretation and
application of section 170 in this context.
Disregarding the value of state and local
tax credits received or expected to be re-
ceived in return for charitable contribu-
tions would precipitate revenue losses that
would undermine the limitation on the de-
duction for state and local taxes adopted
by Congress under the Act.
In this regard, the Treasury Department
and the IRS note that the Joint Commit-
tee on Taxation (JCT) estimated that the
limitation on state and local tax deduc-
tions along with certain other reforms of
itemized deductions would raise $668 bil-
lion over ten years. See Joint Committee
on Taxation, “Estimated Budget Effects
of the Conference Agreement for H.R. 1,
The ‘Tax Cuts and Jobs Act,’” JCX-67-
17, December 18, 2017, at https://www.
jct.gov/publications.html?func=start-
down&id=5053. A substantial amount of
this revenue would be lost if state tax ben-
efits received in exchange for charitable
contributions were ignored in determin-
ing the charitable contribution deduction.
This estimate is not a revenue estimate of
the rule, in part because it includes other
reforms of itemized deductions but does
not reflect certain other provisions of the
Act. In addition, this does not represent
an estimate of the non-revenue economic
effects of the rule. Still, the JCT estimate
provides a rough upper bound of the po-
tential revenue loss and individual contri-
bution choices at stake in this rulemaking.
II. Baseline
Prior to the proposed and final regu-
lation, the Treasury Department and the
IRS had not issued formal guidance on
the deductibility of contributions to enti-
ties described in section 170(c) that give
rise to state or local tax credits. There was
also no guidance, aside from Notice 2018-
54, addressing the interaction between
section 170 and the newly enacted SALT
limitation. As a result, there was a degree
of taxpayer uncertainty as to whether state
and local tax credits were a return benefit
that reduces a taxpayer’s charitable con-
tribution deduction, and absent further
guidance, taxpayers would likely have
taken different filing positions. For infor-
mational and analytical purposes, howev-
er, this analysis assumes as a baseline that

Bulletin No. 2019–27 19 July 1, 2019
state and local tax credits are generally not
treated as a return benefit or consideration
and therefore do not reduce the taxpayer’s
charitable contribution deduction under
section 170(a). The illustrative scenarios
presented below make use of alternative
baseline scenarios to provide clarity on
the incremental impacts arising out of the
rule and notices.
III. Summary of Economic Effects
Section 2 of the MOA stipulates that
tax regulations that are likely to have a
non-revenue effect on the economy of
$100 million or more (identified in section
1(c) of the MOA) will be subject to the
analytical requirements applicable to sig-
nificant regulations under section 6(a)(3)
(B) of EO 12866, as well as the additional
requirements applicable to economically
significant regulations under section 6(a)
(3)(C) of EO 12866. Those requirements
entail an assessment of potential costs
and benefits of significant regulatory ac-
tions. Section 6(a)(3)(C) of EO 12866 also
states that to the extent feasible, quantita-
tive assessments including the underlying
analyses for a non-inclusive list of factors
shall be provided for the costs and benefits
of rules that have an annual effect on the
economy of $100 million or more or ad-
versely affect in a material way the econo-
my or certain aspects of the economy.
At the proposed rule stage, the Treasury
Department and the IRS determined that
the proposed rulemaking would not result
in costs, benefits, or non-revenue transfers
in excess of $100 million per year, and
thus would not be economically signifi-
cant. However, the Treasury Department
and the IRS acknowledge that there is lim-
ited quantitative data available for purpos-
es of evaluating economic effects. Given
the level of public interest and engage-
ment, and possible economic and/or be-
havioral impact, including to individuals’
contribution choices, beyond what can be
reasonably anticipated with quantitative
methods and available data, the final rule
has been designated by OMB as economi-
cally significant, and it is therefore subject
to the analytical requirements for an eco-
nomically significant rule.
The Treasury Department and the IRS
note, however, that the non-revenue im-
pacts of the final rule could be below the
economically significant threshold, espe-
cially when the potential effects are con-
sidered in conjunction with Notice 2019-
12, which is to be issued with the final
rule. The requirements in the Notice have
not been finalized or incorporated into this
final rulemaking, but as noted earlier in
this preamble, the Treasury Department
and the IRS anticipate issuing a proposed
rule formalizing the guidance in the No-
tice shortly after this final rule is issued.
The Treasury Department and the
IRS expect that the main effect of this
rulemaking with Notice 2019-12 would
be to reduce the incentive for individu-
al taxpayers to reallocate state and local
taxes from general public funds to funds
designated for specific public purposes,
solely to generate a charitable gift for fed-
eral tax purposes. These transfers from
one public fund to another would not be
substantive in nature and therefore are not
anticipated to generate real economic ef-
fects. The rulemaking with Notice 2019-
12 would also increase compliance and
administrative costs for some taxpayers
and charitable entities but decrease them
for others. As discussed in Part V of the
Special Analyses, the Treasury Depart-
ment and the IRS expect these effects are
likely small and, on net, expect a reduc-
tion in compliance burdens (because few-
er transactions performed solely for tax
avoidance will be undertaken).
The rulemaking with Notice 2019-12
may also marginally reduce the incentive
to make contributions to charitable orga-
nizations that result in state and local tax
credits, which may have the effect of re-
ducing aggregate contributions. But the
Treasury Department and the IRS expect
this effect to be small. For example, for an
individual taxpayer who claims itemized
deductions on a Federal income tax return,
has more than $10,000 of state and local
tax liability, and has a Federal marginal tax
rate of 24%, a $1,000 contribution to an
organization described in section 170(c)
that gives rise to a dollar-for-dollar state
tax credit in exchange for the contribution
yields a combined $1,240 of tax benefits
under the baseline ($240 from the deduc-
tion under section 170(a) and $1,000 from
the state tax credit). Under the rulemak-
ing with Notice 2019-12, the same $1,000
contribution yields only $1,000 in tax ben-
efits. A substantial incentive to give to the
organization still exists (as the cost of giv-
ing is $0), though that incentive is reduced
because of the rulemaking.
In addition, the direct incentive to
make contributions to organizations that
do not give rise to state or local tax credits
is unchanged by the rulemaking with No-
tice 2019-12. The reduction in the relative
benefit of contributing to organizations
that result in state or local credits might
induce some taxpayers to contribute to
other organizations instead. However,
this effect may be modest because the tax
benefit of donating to an organization el-
igible for a large state tax or local credit
is still greater than the benefit of donating
to another charitable organization. (See
column A versus column B for each ex-
ample in Table 1.) Moreover, transfers
between similar charitable organizations
(or between the state and a charitable or-
ganization generating a state or local tax
credit) might have little or no effect on
the ultimate beneficiaries of the charitable
organizations or on consumers of public
goods.
As noted earlier, EO 12866 calls for
quantitative analysis to the extent feasi-
ble. One commenter to the proposed regu-
lations also stated that the analyses should
have included quantitative estimates of
the costs and benefits of the rule, includ-
ing estimates of the potential size of state
and local tax credits, federal revenue loss-
es, and efficiency losses. The commenter
further stated that without quantitative
estimates it is not known “whether the
potential problem is significant enough to
justify this change in tax regulations.”
The Treasury Department and the IRS
provide in this Special Analyses an eco-
nomic analysis, including to the extent
feasible, quantitative estimates that offer
context regarding the scope of possible im-
pacts arising out of these final regulations.
In particular the Treasury Department and
the IRS provide examples of how different
types of taxpayers would or would not be
affected by this rulemaking as well as esti-
mates of the shares of taxpayers potential-
ly affected by the rulemaking with Notice
2019-12. However, because taxpayers do
not report whether a charitable donation
has given rise to a state or local tax cred-
it, the extent to which states would create
new tax credit programs and taxpayers
would make contributions to such pro-

July 1, 2019 20 Bulletin No. 2019–27
grams under the baseline or regulations is
uncertain, and the extent to which the wel-
fare of the ultimate beneficiaries of such
charitable contributions or state spending
is uncertain, the Treasury Department and
the IRS have not quantified the non-reve-
nue economic effects of the rule.
IV. Illustrative Scenarios
2
For the following illustrative scenarios,
assume the following facts: Charitable or-
ganizations A and B are entities described
in section 170(c) and are equally efficient
in providing similar public goods. Con-
tributions to charity A are eligible for a
dollar-for-dollar state tax credit. Contri-
butions to charity B are ineligible for this
credit but are deductible from state tax-
able income. The taxpayer itemizes de-
ductions, and these itemized deductions
in aggregate are at least $1,000 more than
the standard deduction. The taxpayer has
the choice to contribute $1,000 to charity
A, and this $1,000 contribution generates
a state tax credit of $1,000.
3
That is, the
tax credit is dollar-for-dollar but does not
otherwise figure into the calculation of the
taxpayer’s state tax liability. The taxpayer
has more than $1,000 of state tax liability,
so that the taxpayer’s state tax liability is
reduced by the entire $1,000 of the state
tax credit. Finally, if the taxpayer makes
the $1,000 contribution that generates a
state tax credit of $1,000, the taxpayer
reduces by $1,000 the withholding and
payments of state tax during the taxable
year in question. The state tax liability is
therefore reduced by the full amount of
the state tax credit in the same taxable
year as the contribution is made.
4
Further
assume a taxpayer is in the 24 percent
federal tax bracket, itemizes federal tax
deductions, and has a state tax rate of 5
percent. If the taxpayer is subject to the
AMT, assume an AMT marginal tax rate
of 26 percent.
The Act, this rule, and the safe harbor
for certain individuals described in Notice
2019-12 alter the incentives some taxpay-
ers face about whether and how much to
give to organizations that receive chari-
table contributions, as well as to which
organizations. This is illustrated in the
following scenarios, which are also sum-
marized in Table 1.
A. Prior law: Section 170 Charitable
Contributions Prior to the Act
The tax effects of contributions prior to
enactment of the Act are illustrated in the
columns labeled “Prior Law” in Table 1.
1. Taxpayer not subject to the AMT
Prior to enactment of the Act, if the tax-
payer made a $1,000 contribution to char-
ity A that generated a state tax credit of
$1,000, the deduction for charitable con-
tributions under section 170(a) increased
by $1,000, and the taxpayer’s liability for
state and local taxes deductible under sec-
tion 164 decreased by $1,000. The taxpay-
er’s itemized deductions, taxable income,
and federal tax liability were unchanged
from what they would have been in the ab-
sence of the contribution.
5
The taxpayer’s
state tax liability decreased by $1,000 be-
cause of the state tax credit. The combined
federal and state tax benefits of the $1,000
contribution were therefore $1,000, and
the cost to the taxpayer and to the feder-
al government of making the contribution
was $0. This is shown in column A under
Prior Law for Example 1 in Table 1 and
replicated in the same column for Exam-
ple 2.
2. Taxpayer subject to the AMT
If the taxpayer were subject to the
AMT under section 55, however, there
was a net benefit to the taxpayer from
contributions to charity A, which provid-
ed state tax credits. State and local taxes
are not deductible in determining taxable
income under the AMT, but charitable
contributions are deductible in determin-
ing taxable income under the AMT. If
the taxpayer contributed $1,000, taxable
income under the AMT was reduced by
$1,000 due to the charitable contribution
deduction under section 170, but there
was no corresponding reduction in the de-
duction for state and local taxes. Under an
AMT marginal tax rate of 26 percent, the
federal tax benefit of this $1,000 contribu-
tion would be $260. Because of the dol-
lar-for-dollar state tax credit, the taxpayer
received a combined federal and state tax
benefit of $1,260 for a $1,000 contribu-
tion; that is, the taxpayer received $260
more in tax benefits than the amount of the
contribution. This is shown in column A
under Prior Law for Example 3 in Table 1.
3. Comparison of contributions to
different organizations under prior law
In combination, state and federal tax
laws generally provide a greater incentive
to contribute to organizations eligible for
state tax credits (charity A) than to other
organizations (charity B). The effects of a
contribution to charity A are described in
Parts IV.A1 and IV.A2 previously.
Prior to enactment of the Act, for a tax-
payer not subject to the AMT, a $1,000
contribution to charity B yielded a small-
er combined federal and state tax benefit
than to charity A. The state tax benefit was
$50 ($1,000 multiplied by the 5 percent
state tax rate). The taxpayer’s itemized de-
ductions at the federal level increased by
$950 (the $1,000 charitable contribution
deduction less the $50 reduction in state
taxes paid). The federal tax benefit of this
increase was $228 ($950 multiplied by the
24 percent federal tax rate), resulting in
a combined federal and state tax benefit
2
While the illustrative scenarios and the analysis that follow focus on individual taxpayers, the final regulations also apply to business taxpayers. Businesses making payments to entities
described in section 170(c), however, may deduct certain of these payments as ordinary and necessary business expenses under section 162. In addition, Rev. Proc. 2019-12, 2019-04 I.R.B.
401, provides safe harbors under section 162 for certain payments by businesses. Therefore, the Treasury Department and the IRS expect that few business donors would be impacted by the
final regulations.
3
Note that this analysis only addresses state tax credits offering a 100% benefit. The results may differ for credits offering a lower benefit, but the comparative results of the illustrative ex-
amples would be similar.
4
The results of the examples are generally unchanged if the taxpayer instead receives the credit as a refund of state taxes paid that were deducted from federal taxable income, as such refund
would be includible in federal taxable income in the following year.
5
This assumes the taxpayer was not subject to limitations such as the overall limitation on itemized deductions under section 68 or subject to a percentage limitation for the deduction under
section 170, an assumption that is maintained throughout the succeeding discussion.

Bulletin No. 2019–27 21 July 1, 2019
of $278. The net cost to the taxpayer of
the $1,000 contribution was $722. This is
shown in column B under Prior Law for
Example 1 in Table 1 and replicated in the
same column for Example 2.
For a taxpayer subject to the AMT, a
$1,000 contribution to charity B yielded
a combined federal and state benefit of
$310—the $1,000 contribution multiplied
by the taxpayer’s marginal tax rate under
the AMT of 26 percent, or $260, plus the
value of the deduction from state tax, or
$50 ($1,000 multiplied by the 5 percent
state tax rate). The net cost to the taxpayer
of the $1,000 contribution was $690. This
is shown in column B under Prior Law for
Example 3 in Table 1.
Contributing to either charity A or
charity B reduced the taxpayer’s com-
bined federal and state tax liability, but the
existence of the state tax credit for con-
tributions to charity A made contributions
to that organization more attractive. This
is seen by comparing the Total Tax Ben-
efit in column A under Prior Law to the
corresponding value in column B for each
of the three examples. For taxpayers not
subject to the AMT, contributions to char-
ity A yielded a combined federal and state
tax benefit of $1,000, compared to a com-
bined federal and state tax benefit of $278
for a contribution to charity B. The AMT
increased the disparity for contributions to
charity A versus charity B, resulting in a
combined federal and state tax benefit of
$1,260 for a contribution to charity A ver-
sus $310 for a contribution to charity B.
B. Examples of current law and practices
under the Act and final rule with
Notice 2019-12
The enactment of the SALT limitation
in the Act has, in limited circumstances,
altered the federal tax effects of charitable
contributions as described in the follow-
ing examples. These are illustrated in the
columns labeled “Baseline” and “Final
Rule with Notice 2019-12” in Table 1.
1. Example 1: Taxpayer is above the SALT
limitation and not subject to the AMT
a. Baseline
If a taxpayer who has a state tax liabil-
ity of more than $1,000 above the SALT
limitation and is not subject to the AMT
makes a $1,000 contribution to charity A,
the deduction for charitable contributions
under section 170(a) increases by $1,000,
but the deduction for state and local tax-
es paid under section 164 is unchanged.
Consequently, itemized deductions in-
crease by $1,000, and taxable income
decreases by $1,000. If the taxpayer is
in the 24 percent bracket, federal liabil-
ity will decrease by $240, and state tax
liability will decrease by the $1,000 state
tax credit. The combined federal and
state tax benefits of the $1,000 contribu-
tion are therefore $1,240, and the taxpay-
er receives a $240 net benefit while the
federal government has a loss of $240.
This is shown in column A under Base-
line for Example 1 in Table 1.
b. Final Rule with Notice 2019-12
If the same taxpayer makes the $1,000
contribution to charity A under the rule
with Notice 2019-12, the entire $1,000
contribution is not deductible under sec-
tion 170(a), and the deduction for state
and local taxes paid under section 164 is
unchanged due to the SALT limitation.
The taxpayer’s itemized deductions, tax-
able income, and federal tax liability are
unchanged from what they would be in the
absence of the contribution. The taxpay-
er’s state tax liability decreases by $1,000
because of the state tax credit. The com-
bined federal and state tax benefits of the
$1,000 contribution are therefore $1,000,
or $240 less than under the baseline. This
is shown by comparing the Total Tax Ben-
efit in column A under Final Rule with No-
tice 2019-12 with the corresponding value
in column A under Baseline for Example
1 in Table 1. However, the benefit of the
contribution for this taxpayer is the same
as the taxpayer faced prior to enactment of
the Act. This is shown by comparing the
Total Tax Benefit under column A under
Final Rule with Notice 2019-12 with the
corresponding value in column A under
Prior Law for Example 1 in Table 1.
c. Comparison of contributions to
different organizations and final rule
with Notice 2019-12
Under the baseline and this rule with
Notice 2019-12, for a taxpayer with state
and local taxes paid over the SALT lim-
itation, the value of a contribution to
charity B, that is a contribution that re-
sults in a one-for-one state income tax
deduction and not a state tax credit, is
slightly higher than it was pre-Act. This
increase is because the state deduction
does not reduce the federal deduction for
state and local taxes for a taxpayer above
the SALT limitation. As shown in the
Total Tax Benefit row under the B col-
umns for Example 1, under the baseline
and this rule with Notice 2019-12, the
value of a $1,000 contribution to chari-
ty B is $290—the charitable contribution
deduction from federal tax ($1,000 mul-
tiplied by the 24 percent federal tax rate,
or $240), plus the value of the deduction
from state tax ($1,000 multiplied by the 5
percent state tax rate, or $50)—compared
to $278 for contributions under prior law
(described in Part IV.A3 previously).
By comparison, as shown in the Total
Tax Benefit row under the A columns
for Example 1, a contribution to charity
A, eligible for a state tax credit, yields a
$1,240 tax benefit under the baseline and
a $1,000 benefit under this rule with No-
tice 2019-12.
2. Example 2: Taxpayer is below the
SALT limitation and not subject to the
AMT
a. Baseline
If a taxpayer who has state and local
taxes paid below the SALT limitation
and is not subject to the AMT makes the
$1,000 contribution to charity A, the de-
duction for charitable contributions under
section 170(a) increases by $1,000, and
the deduction for state and local taxes paid
under section 164 decreases by $1,000.
The taxpayer’s itemized deductions, tax-
able income, and federal tax liability are
unchanged from what they would be in the
absence of the contribution. The taxpay-
er’s state tax liability decreases by $1,000
because of the state tax credit. The com-
bined federal and state tax benefits of the
$1,000 contribution are therefore $1,000,
and the cost to the taxpayer and to the
federal government of making the contri-
bution is $0. This situation is identical to
prior law or what the taxpayer faced prior
to enactment of the Act. This is shown is

July 1, 2019 22 Bulletin No. 2019–27
column A under Baseline and Prior Law
for Example 2 in Table 1.
b. Final rule with Notice 2019-12
If the same taxpayer makes the $1,000
contribution to charity A under the pro-
posed rule, the entire $1,000 contribution
is not deductible under section 170(a),
but the deduction for state and local tax-
es paid under section 164 still decreases
by $1,000 because of the $1,000 state tax
credit. If the taxpayer is in the 24 percent
bracket, the federal tax liability will in-
crease by $240. The taxpayer’s state tax
liability decreases by the $1,000 state tax
credit. The combined federal and state tax
benefits of the $1,000 contribution are
therefore $760, or $240 less than the base-
line. This is shown by comparing the Total
Tax Benefit in column A under Proposed
Rulemaking with the corresponding value
in column A under Baseline for Example
2. In this case, the proposed rule has the
effect of increasing the taxpayer’s federal
taxable income compared to the baseline
if the taxpayer makes a contribution to
charity A.
One commenter to the proposed reg-
ulations suggested that Example 2 be re-
vised to indicate that the purported dona-
tion is a tax for purposes of section 164
if the state is the donee. As noted earlier
in the preamble, that issue is outside of
the scope of these regulations, but the
Treasury Department and the IRS have
issued Notice 2019-12, which provides a
safe harbor for certain individuals. As de-
scribed earlier in the preamble, under the
safe harbor, an individual who itemizes
deductions and who makes a payment to
a section 170(c) entity in return for a state
or local tax credit may treat the portion of
such payment that is disallowed as a chari-
table contribution deduction under section
170 as a payment of state or local tax for
purposes of section 164. This disallowed
portion of the payment may be treated as a
payment of state or local tax under section
164 when the individual applies the credit
to offset the individual’s state or local tax
liability.
Under the final rule with Notice 2019-
12, if the same taxpayer makes the $1,000
contribution to charity A, the entire $1,000
contribution is not deductible under sec-
tion 170(a), but the deduction for state and
local taxes paid under section 164 is un-
changed because of the safe harbor. The
taxpayer’s federal liability is unchanged.
The taxpayer’s state tax liability decreases
by the $1,000 state tax credit. The com-
bined federal and state tax benefits of the
$1,000 contribution are therefore $1,000,
the same as under prior law and the base-
line. This is shown by comparing the Total
Tax Benefit in column A under Final Rule
with Notice 2019-12 with the correspond-
ing value in column A under Baseline for
Example 2.
c. Comparison of contributions to
different organizations, under prior
law, baseline, and final rule with
Notice 2019-12
Under the baseline scenario and this fi-
nal rule with Notice 2019-12, the tax bene-
fit of charitable contributions to charity B,
which are not eligible for a state tax credit
but are deductible from both federal and
state taxable income, is unchanged from
prior law for taxpayers below the SALT
limitation. Thus, in this example, the ben-
efit of making a contribution to charity B
remains $278, as described previously.
This is shown in the Total Tax Benefit row
under the B columns for Example 2. By
comparison, as shown in the Total Tax
Benefit row under the A columns for Ex-
ample 2, a $1,000 contribution to charity
A, eligible for a state tax credit, yields a
$1,000 tax benefit under the baseline and
under the final rule with Notice 2019-12.
Under the final rule with Notice 2019-12
contributions to charity A are less costly
than contributions to charity B in the same
manner as under prior law for taxpayers
with itemized state and local tax deduc-
tions of $10,000 or less.
3. Example 3: Taxpayer is subject to the
AMT
6
a. Baseline
If a taxpayer subject to the AMT
makes a $1,000 contribution to charity
A, the contribution reduces the taxpay-
er’s taxable income under the AMT by
$1,000. Using an AMT marginal tax rate
of 26 percent, the federal tax benefit of
this $1,000 contribution is $260. Because
of the dollar-for-dollar state tax credit,
the taxpayer would receive a combined
federal and state tax benefit of $1,260 for
a $1,000 contribution, or a $260 net ben-
efit. This result is identical to the result
under prior law (prior to enactment of the
Act). This is shown in the A columns un-
der Baseline and Prior Law for Example
3 in Table 1.
b. Final Rule with Notice 2019-12
If the same taxpayer makes the $1,000
contribution to charity A under the fi-
nal rule with Notice 2019-12, the entire
$1,000 is not deductible under section
170(a). Therefore, the taxpayer’s tax-
able income and federal tax liability un-
der the AMT would be unchanged from
what they would be in the absence of the
contribution. The taxpayer’s state tax li-
ability decreases by $1,000 because of
the state tax credit. The combined federal
and state tax benefits of the $1,000 con-
tribution are therefore $1,000, or $260
less than under the baseline and under
the law prior to enactment of the Act.
This is shown by comparing the A col-
umns of Example 3 in Table 1. However,
under the rule, taxpayers subject to the
AMT are in the same position as other
taxpayers making a $1,000 contribution
to charity A. This is shown by compar-
ing the Total Tax Benefit amount under
column A for the Final Rule with Notice
2019-12 for Example 3 to that for Exam-
ples 1 and 2.
c. Comparison of contributions to
different organizations, under prior
law, baseline and final rule with Notice
2019-12
Under the baseline and the final rule
with Notice 2019-12, the treatment of
charitable contributions that are deduct-
ible from both federal and state taxable in-
come is unchanged from prior law for tax-
payers subject to the AMT. This is shown
6
The Act increased the amount of income exempt from AMT. The Treasury Department estimates that in 2018 only about 150,000 taxpayers will be subject to the AMT under the Act, com-
pared to more than 5 million under prior law.

Bulletin No. 2019–27 23 July 1, 2019
in the B columns for Example 3 in Table
1. In this example, the benefit of making a
contribution to charity B remains $310, as
described previously for contributions un-
der prior law. By comparison, a contribu-
tion to a charity A, eligible for a state tax
credit, yields a $1,260 tax benefit under
the baseline and a $1,000 benefit under
the final rule with Notice 2019-12. This
is shown in column A under Baseline and
Final Rule with Notice 2019-12 for Exam-
ple 3 in Table 1.
4. Example 4: State tax credit of 15
percent or less
Suppose, for this example only, that
contributions to charity A generate a
state tax credit with a rate of 10 per-
cent, instead of 100 percent as described
in Examples 1 through 3. If a taxpayer
makes the $1,000 contribution to charity
A under the final rule with Notice 2019-
12, the deduction for charitable contri-
butions under section 170(a) increases
by $1,000. The deduction under section
170(a) is not reduced by the value of
the credit because it does not exceed 15
percent. Thus, the taxpayer’s federal tax
liability is the same under the final regu-
lations as under the baseline. The result
is also the same as it would have been
if the taxpayer’s marginal state tax rate
were 10 percent and the taxpayer were
allowed a dollar-for-dollar deduction
from state taxable income instead of a
credit.
If the taxpayer is above the SALT lim-
itation or subject to the AMT, the taxpay-
er’s taxable income under the regular tax
and under the AMT decreases by $1,000.
If the taxpayer is not subject to the AMT
and is in the 24 percent bracket, federal
tax liability will decrease by $240, and
state tax liability will decrease by $100.
The combined federal and state tax ben-
efits of the $1,000 contribution are there-
fore $340. If the taxpayer is subject to the
AMT and has an AMT marginal tax rate
of 26 percent, federal tax liability will de-
crease by $260, and state tax liability will
decrease by $100, yielding a combined
federal and state benefit of $360 for the
$1,000 contribution.
If the taxpayer is below the SALT
limitation, the taxpayer’s deduction for
state and local taxes treated as paid under
section 164 decreases by $100, and the
taxpayer’s taxable income decreases by
$900. If the taxpayer is in the 24 percent
bracket, federal tax liability will decrease
by $216, and state tax liability will de-
crease by $100. The combined federal and
state tax benefits of the $1,000 contribu-
tion are therefore $316.
V. Expected Benefits and Costs
A. Benefits
This regulation likely reduces eco-
nomically inefficient choices motivated
by the potential tax benefits available if
this regulation were not promulgated.
Under the prior law and baseline scenar-
ios, state and local governments have an
incentive to fund governmental activities
through entities that are eligible to receive
deductible contributions and to establish
tax credits. This incentive is particularly
strong under a SALT limitation scenario
where state and local governments may
do so solely to enable some taxpayers to
circumvent the SALT limitation. The fi-
nal rule with Notice 2019-12 substantial-
ly diminishes this incentive to engage in
economically inefficient tax-avoidance
behavior. As a result, it is expected that
fewer such credit programs would be es-
tablished in the future under the rule than
under the baseline.
To the extent this result occurs, the
Treasury Department and the IRS estimate
that this rule would reduce the overall com-
plexity burden for states and for taxpayers
who would otherwise make charitable
contributions solely for the purpose of re-
ducing their state and local tax liability. In
addition, the Treasury Department and the
IRS anticipate that the rule will also spare
some taxpayers compliance costs associ-
ated with complex tax planning designed
to avoid the SALT limitation.
In addition, the rule is expected to make
the federal tax system more neutral to tax-
payers’ decisions regarding making dona-
tions to state and local tax credit programs
versus making donations to other, similar
charitable organizations that do not give
rise to state or local tax credits. Under the
baseline scenarios, the combined federal
and state tax benefits favor contributions
to organizations that give rise to a state
tax credit for taxpayers, particularly for
taxpayers above the SALT limitation. Un-
der the final rule and Notice 2019-12, this
economic distortion is expected to be re-
duced.
The proposed regulations requested
comments from the public on the po-
tential extent of this expected reduction
in economic distortion. One commenter
responded that increased neutrality in
the treatment of contributions to orga-
nizations that qualify for tax credits and
those that do not is not a benefit of the
rule. The commenter argued that such a
conclusion ignores the possibility that
tax credit programs provide a social
benefit. The conclusion in the proposed
regulations does not ignore the social
benefits that tax credit programs might
provide. The Treasury Department and
the IRS have clarified in Part IV previ-
ously that their analysis was specific to
cases where two organizations, one el-
igible for tax credits and the other not,
are equally efficient in their provision of
similar public goods. That is, both pro-
vide the same social benefit given the
same level of contributions.
Finally, the final rule provides more
certainty to taxpayers by clarifying the
rules governing the amount that they can
claim as a charitable contribution deduc-
tion when they receive or expect to re-
ceive a state or local tax credit or a state
or local tax deduction in exchange for the
contribution.
One commenter asserted that increased
certainty is not a benefit of this rule be-
cause other possible rules could also have
provided certainty. While the commenter
is correct that rules other than the pro-
posed and final rule could also provide
certainty, it remains the case that the pro-
posed and final rule provide the benefit of
certainty, relative to the baseline of no reg-
ulatory guidance at all.
One commenter suggested that the pro-
posed rule would be beneficial because it
would promote more efficient state and
local spending decisions by making tax-
payers bear more of the true cost of those
decisions. The SALT limitation imposed
by the Act reduced the federal subsidy
of state and local spending, and the rule
is consistent with this purpose of the Act
provision. The reduction in the subsidy
has the potential to make state spending
decisions more efficient.

July 1, 2019 24 Bulletin No. 2019–27
B. Costs
The rule may result in some increase
in compliance costs for taxpayers who
make contributions that generate state or
local tax credits. Under the baseline, for
purposes of the charitable contribution
deduction under section 170(a), taxpayers
did not need to address state or local tax
credits received or expected to be received
for purposes of claiming a charitable con-
tribution; however, they would know the
amount of credits received as part of the
filing process for state returns. In contrast,
under the final rule with Notice 2019-12,
taxpayers making a contribution to an or-
ganization described in section 170(c) will
need to determine the amount of any state
or local tax credits they received or expect
to receive in order to reduce their chari-
table contribution deduction under section
170(a). This additional step will generate
some additional compliance costs.
The compliance burden for recipi-
ent organizations that directly issue tax
credits may increase under the rule. Un-
der section 170(f)(8), in order to take
a charitable contribution deduction of
$250 or more, a taxpayer must have
a contemporaneous written acknowl-
edgment (CWA) from the donee entity,
usually provided in the form of a letter.
The CWA includes the amount received
by the entity or a description of prop-
erty received. The CWA must also dis-
close whether the donee provided any
goods or services in consideration for
the contribution and a description and
good faith estimate of the value of those
goods or services. State and local tax
credits are not generally provided by the
donee entity, but there may be situations
in which the entity would be providing
the credit and would need to disclose the
credit amount in the CWA provided to
the donor. The proposed regulations re-
quested comments on whether additional
guidance is needed on substantiation and
reporting requirements for donors and
donees making or receiving payments or
transfers of property in return for state
and local tax credits and the extent to
which entities do provide tax credits un-
der certain circumstances. As mentioned
earlier in this preamble, some comment-
ers expressed concerns about substanti-
ation of a charitable contribution when
the donee does not know whether the
donor receives or expects to receive a
state or local tax credit. If a donee is not
the entity providing the credit, the CWA
rules do not require that the amount of
the credit be reported in the acknowl-
edgment. This mitigates the compliance
burden for these entities.
The proposed regulations requested
comments as to how the rule might al-
ter incentives regarding contributions to
state and local tax credit programs. As
mentioned previously in the preamble,
many commenters expressed concern
that the rule would result in an overall de-
cline in charitable giving and in declines
in charitable giving to entities or causes
they deem to be particularly meritorious.
One commenter expressed concern about
the lack of evidence provided in support
of the statement that this rule will have
at most a highly limited, marginal effect
on taxpayer decisions to donate to tax
credit programs, and the statement that
most taxpayers have never contributed
to such programs. Another commenter
asserted that the rule would cause states
to drop tax credit programs that support
conservation easements. The commenter
noted that this was particularly likely to
occur in low-tax states, where more tax-
payers will have SALT deductions under
$10,000. Several other commenters as-
serted that a substantial share of donors
to tax credit organizations would be af-
fected by the rule.
Based on an analysis of confidential
taxpayer return data and forecasts using
that data, the Treasury Department and
the IRS estimate that this rule will leave
charitable giving incentives entirely un-
changed for the vast majority of taxpay-
ers. The Treasury Department and the
IRS estimate that, after passage of the Act
(which significantly increased the stan-
dard deduction), 90 percent of taxpayers
will not claim itemized deductions of any
kind. Those taxpayers are entirely unaf-
fected by this rule.
Approximately five percent of taxpay-
ers are projected to claim itemized de-
ductions and have state and local income
tax deductions in excess of the SALT
limitation. Under the rule and Notice
2019-12, taxpayers in this group who are
not subject to the AMT will receive the
same federal tax treatment for donating
to organizations providing tax credits as
they received prior to the Act, as shown
in Example 1 in Table 1 of this special
analysis.
Approximately five percent of taxpay-
ers are projected to claim itemized deduc-
tions and have SALT deductions below
the limitation. Taxpayers in this group
who are not subject to the AMT would
have faced smaller incentives to donate to
organizations resulting in state or local tax
credits in excess of 15 percent under the
proposed rule. However, these taxpayers
will receive the same federal tax benefits
for cash contributions under the final rule
and Notice 2019-12 as they received prior
to the Act and under the baseline, as de-
scribed in Example 2 in Table 1 of this
special analysis.
7

It is the case that, for taxpayers subject
to the AMT, the cost of giving to state and
local credit organizations is higher under
the rule with Notice 2019-12 than under
the baseline and under prior law. The Trea-
sury Department and the IRS estimate that
fewer than 150,000 taxpayers (less than
0.1 percent of taxpayers) will be subject
to the AMT and claim itemized deductions
after enactment of the Act. These taxpay-
ers could be affected by the final rule, but
only if they contribute to programs that
entitle them to state and local tax credits
of greater than 15 percent. (The tax data
do not indicate whether a taxpayer has
made a contribution that generated a state
or local tax credit.) However, as described
in Example 3 in Table 1 of this special
analysis, the cost of contributing to an or-
ganization resulting in a 100 percent state
tax credit will be zero for these taxpayers,
as it is for other taxpayers under the final
rule with Notice 2019-12.
7
Taxpayers who contribute property do not satisfy the requirements of the safe harbor provided in Notice 2019-12 and may be impacted by the final regulations.

Bulletin No. 2019–27 25 July 1, 2019
Table 1: Tax Treatment of $1,000 Contribution to (A) Organization that Gives Rise to $1,000 State Tax Credit and (B)
Organization for Which Contribution is Deductible at the State Level
Example 1: Taxpayer Above the SALT Limitation, Not Subject to the AMT; Taxpayer Remains Above SALT Limitation
After Contribution
Prior LawBaseline
Proposed
Rulemaking
Final Rule with
Notice 2019-12
Change inABABABAB
State Income Tax Liability–1,000–50–1,000–50–1,000–50–1,000–50
Federal Income Tax
Charitable Contribution Deduction1,0001,0001,0001,00001,00001,000
Deduction for State and Local Taxes–1,000–50000000
Itemized Deductions09501,0001,00001,00001,000
Taxable Income0–950–1,000–1,0000–1,0000–1,000
Federal Tax Liability0–228–240–2400–2400–240
Total Tax Benefit (Federal + State)1,0002781,2402901,0002901,000290
Net Cost to Taxpayer of $1,000 Contribution0722–24071007100710
Example 2: Taxpayer Below the SALT Limitation, Not Subject to the AMT
Prior LawBaseline
Proposed
Rulemaking
Final Rule with
Notice 2019-12
Change inABABABAB
State Income Tax Liability–1,000–50–1,000–50–1,000–50–1,000–50
Federal Income Tax
Charitable Contribution Deduction1,0001,0001,0001,00001,00001,000
Deduction for State and Local Taxes–1,000–50–1,000–50–1,000–500–50
Itemized Deductions09500950–1,0009500950
Taxable Income0–9500–9501,000–9500–950
Federal Tax Liability0–2280–228240–2280–228
Total Tax Benefit (Federal + State)1,0002781,0002787602781,000278
Net Cost to Taxpayer of $1,000 Contribution072207222407220722
Example 3: Taxpayer Subject to the AMT
Prior LawBaseline
Proposed
Rulemaking
Final Rule with
Notice 2019-12
Change inABABABAB
State Income Tax Liability–1,000–50–1,000–50–1,000–50–1,000–50
Federal Income Tax
Alternative Minimum Taxable Income–1,000–1,000–1,000–1,0000–1,0000–1,000
Federal Tax Liability–260–260–260–2600–2600–260
Total Tax Benefit (Federal + State)1,2603101,2603101,0003101,000310
Net Cost to Taxpayer of $1,000 Contribution–260690–26069006900690
Assumptions: The taxpayer itemizes deductions and has more than $1,000 of state tax liability. Under prior law, the taxpayer is
not subject to the overall limitation on itemized deductions under section 68. The taxpayer faces a 24 percent marginal rate under
the Federal income tax. If the taxpayer is subject to the AMT, the taxpayer faces a 26 percent marginal rate. A $1,000 contribution
to charitable organization A generates a $1,000 state tax credit. A $1,000 contribution to charitable organization B is ineligible
for a state tax credit but is deductible under the state’s income tax. The taxpayer faces a 5 percent marginal rate under the state’s
income tax. The baseline assumes continuation of the IRS administrative position that state and local tax credits are not reflected
as a return benefit or consideration and therefore do not reduce the taxpayer’s charitable contribution deduction under section
170(a). Total Tax Benefit refers to the absolute value of the reduction of the taxpayer’s combined federal and state tax liability.

July 1, 2019 26 Bulletin No. 2019–27
Regulatory Flexibility Act
As noted previously, pursuant to the
RFA (5 U.S.C. chapter 6), it is hereby
certified that this rule will not have a sig-
nificant economic impact on a substantial
number of small entities. This certification
is based on the fact that the regulations
primarily affect individuals. It is possible
for a small business donor to be affected
by this rule. However, small entities will
often be able to claim a business expense
deduction instead of a charitable donation,
and would therefore be unaffected by the
rule. For the very few small entity donors
that might nevertheless choose to claim a
charitable donation deduction and might
be directly affected by the regulation, there
is no significant economic impact. The
rule would impose only nominal costs of
subtracting the amount of the credit from
the amount contributed, in order to deter-
mine the deduction allowed under section
170. There is no collection of information
requirement on small entities. Therefore,
a regulatory flexibility analysis is not re-
quired. Pursuant to section 7805(f), the
proposed regulations were submitted to
the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small businesses,
and no comments were received.
Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates
Reform Act of 1995 (UMRA) requires
that agencies assess anticipated costs and
benefits and take certain other actions be-
fore issuing a final rule that includes any
Federal mandate that may result in expen-
ditures in any one year by a state, local, or
tribal government, in the aggregate, or by
the private sector, of $100 million in 1995
dollars, updated annually for inflation.
In 2018, that threshold is approximately
$150 million. This rule does not include
any Federal mandate that may result in ex-
penditures by state, local, or tribal govern-
ments, or by the private sector in excess of
that threshold.
Executive Order 13132: Federalism
Executive Order 13132 (entitled
“Federalism”) prohibits an agency from
publishing any rule that has federalism
implications if the rule either imposes
substantial, direct compliance costs on
state and local governments, and is not
required by statute, or preempts state law,
unless the agency meets the consultation
and funding requirements of section 6 of
the Executive Order. This final rule does
not have federalism implications and does
not impose substantial direct compliance
costs on state and local governments or
preempt state law within the meaning of
the Executive Order.
Congressional Review Act
The Administrator of the Office of In-
formation and Regulatory Affairs of the
Office of Management and Budget has de-
termined that this is a major rule for pur-
poses of the Congressional Review Act
(CRA) (5 U.S.C. 801 et seq.).
Drafting Information
The principal authors of these regula-
tions are personnel from the Office of the
Associate Chief Counsel (Income Tax and
Accounting). However, other personnel
from the IRS and the Treasury Depart-
ment participated in their development.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amend-
ed as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.170A-1 is amended by
redesignating paragraphs (h)(3) through
(5) as paragraphs (h)(4) through (6), and
adding a new paragraph (h)(3) to read as
follows:
§1.170A-1 Charitable, etc., contribu-
tions and gifts; allowance of deduction.
* * * * *
(h) * * *
(3) Payments resulting in state or local
tax benefits—(i) State or local tax credits.
Except as provided in paragraph (h)(3)(vi)
of this section, if a taxpayer makes a pay-
ment or transfers property to or for the use
of an entity described in section 170(c),
the amount of the taxpayer’s charitable
contribution deduction under section
170(a) is reduced by the amount of any
state or local tax credit that the taxpayer
receives or expects to receive in consider-
ation for the taxpayer’s payment or trans-
fer.
(ii) State or local tax deductions—(A)
In general. If a taxpayer makes a payment
or transfers property to or for the use of
an entity described in section 170(c), and
the taxpayer receives or expects to receive
state or local tax deductions that do not
exceed the amount of the taxpayer’s pay-
ment or the fair market value of the prop-
erty transferred by the taxpayer to the en-
tity, the taxpayer is not required to reduce
its charitable contribution deduction under
section 170(a) on account of the state or
local tax deductions.
(B) Excess state or local tax deduc-
tions. If the taxpayer receives or expects
to receive a state or local tax deduction
that exceeds the amount of the taxpayer’s
payment or the fair market value of the
property transferred, the taxpayer’s chari-
table contribution deduction under section
170(a) is reduced.
(iii) In consideration for. For purposes
of paragraph (h)(3)(i) of this section, the
term in consideration for shall have the
meaning set forth in §1.170A-13(f)(6), ex-
cept that the state or local tax credit need
not be provided by the donee organization.
(iv) Amount of reduction. For purposes
of paragraph (h)(3)(i) of this section, the
amount of any state or local tax credit is
the maximum credit allowable that cor-
responds to the amount of the taxpayer’s
payment or transfer to the entity described
in section 170(c).
(v) State or local tax. For purposes of
paragraph (h)(3) of this section, the term
state or local tax means a tax imposed by
a State, a possession of the United States,
or by a political subdivision of any of the
foregoing, or by the District of Columbia.
(vi) Exception. Paragraph (h)(3)(i) of
this section shall not apply to any payment
or transfer of property if the total amount
of the state and local tax credits received
or expected to be received by the taxpay-
er is 15 percent or less of the taxpayer’s
payment, or 15 percent or less of the fair
market value of the property transferred
by the taxpayer.

Bulletin No. 2019–27 27 July 1, 2019
(vii) Examples. The following exam-
ples illustrate the provisions of this para-
graph (h)(3). The examples in paragraph
(h)(6) of this section are not illustrative for
purposes of this paragraph (h)(3).
(A) Example 1. A, an individual, makes a pay-
ment of $1,000 to X, an entity described in section
170(c). In exchange for the payment, A receives or
expects to receive a state tax credit of 70 percent of
the amount of A’s payment to X. Under paragraph
(h)(3)(i) of this section, A’s charitable contribution
deduction is reduced by $700 (0.70 x $1,000). This
reduction occurs regardless of whether A is able to
claim the state tax credit in that year. Thus, A’s char-
itable contribution deduction for the $1,000 payment
to X may not exceed $300.
(B) Example 2. B, an individual, transfers a paint-
ing to Y, an entity described in section 170(c). At the
time of the transfer, the painting has a fair market
value of $100,000. In exchange for the painting, B
receives or expects to receive a state tax credit equal
to 10 percent of the fair market value of the painting.
Under paragraph (h)(3)(vi) of this section, B is not
required to apply the general rule of paragraph (h)
(3)(i) of this section because the amount of the tax
credit received or expected to be received by B does
not exceed 15 percent of the fair market value of the
property transferred to Y. Accordingly, the amount of
B’s charitable contribution deduction for the transfer
of the painting is not reduced under paragraph (h)(3)
(i) of this section.
(C) Example 3. C, an individual, makes a pay-
ment of $1,000 to Z, an entity described in section
170(c). In exchange for the payment, under state
M law, C is entitled to receive a state tax deduction
equal to the amount paid by C to Z. Under paragraph
(h)(3)(ii)(A) of this section, C’s charitable contribu-
tion deduction under section 170(a) is not required to
be reduced on account of C‘s state tax deduction for
C’s payment to Z.
(viii) Effective/applicability date. This
paragraph (h)(3) applies to amounts paid
or property transferred by a taxpayer after
August 27, 2018.
* * * * *
§1.170A-13 [Amended]
Par. 3. Section 1.170A-13 is amend-
ed in paragraph (f)(7) by removing the
cross-reference “§1.170A-1(h)(4)” and
adding in its place “§1.170A-1(h)(5)”.
Par. 4. Section 1.642(c)-3 is amended
by adding paragraph (g) to read as fol-
lows:
§1.642(c)-3 Adjustments and other
special rules for determining unlimited
charitable contributions deduction.
* * * * *
(g) Payments resulting in state or local
tax benefits—(1) In general. If the trust
or decedent’s estate makes a payment of
gross income for a purpose specified in
section 170(c), and the trust or decedent’s
estate receives or expects to receive a state
or local tax benefit in consideration for
such payment, §1.170A-1(h)(3) applies
in determining the charitable contribution
deduction under section 642(c).
(2) Effective/applicability date. Para-
graph (g)(1) of this section applies to pay-
ments of gross income after August 27,
2018.
Kirsten Wielobob,
Deputy Commissioner for Services
and Enforcement.
Approved: June 3, 2019
David J. Kautter,
Assistant Secretary of the Treasury
(Tax Policy).
(Filed by the Office of the Federal Register on June
11, 2019, 4:15 p.m., and published in the issue of the
Federal Register for June 13, 2019, 84 F.R. 27513)

T.D. 9865
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Limitation on Deduction
for Dividends Received
from Certain Foreign
Corporations and Amounts
Eligible for Section 954
Look-Through Exception
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final temporary regulations.
SUMMARY: This document contains
temporary regulations under section
245A of the Internal Revenue Code (the
“Code”) that limit the dividends received
deduction available for certain dividends
received from current or former controlled
foreign corporations. This document also
contains temporary regulations that limit
the applicability of the exception to for-
eign personal holding company income
for certain dividends received by upper-ti-
er controlled foreign corporations from
lower-tier controlled foreign corporations
and temporary regulations under section
6038 to facilitate administration of certain
rules in the temporary regulations. The
temporary regulations affect certain U.S.
persons that are domestic corporations that
receive certain dividends from current or
former controlled foreign corporations or
are United States shareholders of upper-ti-
er controlled foreign corporations that
receive certain dividends from lower-tier
controlled foreign corporations. The text
of the temporary regulations also serves
as the text of the proposed regulations set
forth in a notice of proposed rulemaking
published in the Proposed Rules section of
this issue of the Federal Register.
DATES: Effective date: These regulations
are effective on June 18, 2019.
Applicability dates: For dates of applica-
bility, see §§1.245A-5T(k), 1.954(c)(6)-
1T(b), and 1.6038-2T(m).
FOR FURTHER INFORMATION
CONTACT: Logan M. Kincheloe at
(202) 317-6937 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
I. In General
This document contains amendments
to 26 CFR part 1 under sections 245A,
954(c)(6), and 6038 (the “temporary reg-
ulations”). Any terms used but not defined
in this preamble have the meanings given
them in the temporary regulations. Add-
ed to the Code by section 14101(a) of the
Tax Cuts and Jobs Act (the “Act”), section
245A generally allows a domestic corpo-
ration a 100-percent dividends received
deduction (the “section 245A deduction”)
for the foreign-source portion of a divi-
dend received after December 31, 2017,
from a specified 10 percent-owned for-
eign corporation (an “SFC”). Section 954,
which predates the Act and remains in
effect, generally provides that a dividend
received by a controlled foreign corpora-

July 1, 2019 28 Bulletin No. 2019–27
tion (a “CFC”), as defined in section 957,
is included in the CFC’s foreign person-
al holding company income (“FPHCI”),
as defined in section 954(c). Pursuant to
section 954(c)(6), however, a dividend re-
ceived by a CFC from a related CFC is not
included in the CFC’s FPHCI if certain
requirements are satisfied (the “section
954(c)(6) exception”).
The temporary regulations limit the
availability of the section 245A deduc-
tion and the section 954(c)(6) exception
in specific and narrow cases where the
deduction or exception, respectively, ef-
fectively eliminates subpart F income or
income subject to tax under section 951A
from the U.S. tax system. Specifically, the
temporary regulations address transac-
tions that have the effect of avoiding tax
under section 965, 951A, or 951 by inap-
propriately converting income that should
have been subject to U.S. tax into non-
taxed income. The temporary regulations
also include rules under section 6038 to
facilitate administration of certain rules in
the temporary regulations. The temporary
regulations do not include general rules
relating to dividends eligible for the sec-
tion 245A deduction; those rules will be
included in separate guidance.
II. Scope of Participation Exemption
In order to transition to the new partic-
ipation exemption system provided under
section 245A and certain other provisions
of the Act, the Act imposed a tax on certain
earnings and profits of a U.S.-owned for-
eign corporation that had not previously
been subject to U.S. tax. See section 965.
Section 965 was designed to ensure that
previously untaxed foreign income of the
foreign corporation that accrued before
the advent of the participation exemption
system generally is subject to U.S. tax
(although at a reduced rate). This transi-
tion tax applied to the last taxable year of
the foreign corporation beginning before
January 1, 2018, and generally increased
the subpart F income of the foreign cor-
poration by the amount of its previously
untaxed earnings as of no later than De-
cember 31, 2017.
The Act’s legislative history indicates
congressional concern that the new par-
ticipation exemption could heighten the
incentive to shift profits to low-taxed
foreign jurisdictions or tax havens ab-
sent base erosion protections. See Senate
Committee on the Budget, 115th Cong.,
Reconciliation Recommendations Pursu-
ant to H. Con. Res. 71, at 365 (Comm.
Print 2017) (“Senate Explanation”). For
example, without appropriate limits,
domestic corporations might be incen-
tivized to shift income to low-taxed for-
eign affiliates, “where the income could
potentially be distributed back to the
[domestic] corporation with no U.S. tax
imposed.” See id.
This risk of base erosion is acute with
respect to certain types of income, such as
passive or mobile income and income de-
rived from intangible property, which his-
torically have posed transfer pricing chal-
lenges. To prevent base erosion, the Act
retained the subpart F regime (section 951
et. seq.) and enacted a new regime under
section 951A for global intangible lowed-
taxed income (the “GILTI regime”), both
of which subject certain foreign income
of a CFC to current U.S. taxation in the
hands of the CFC’s United States share-
holders (within the meaning of section
951(b)) (each shareholder, a “U.S. share-
holder”). In order to avoid double taxa-
tion when a CFC distributes earnings and
profits that have been taxed on a current
basis to a U.S. shareholder, the earnings
and profits are designated as “previously
taxed earnings and profits” (also known as
“PTEP”) under section 959. Section 959
generally provides that PTEP are not sub-
ject to U.S. tax when distributed to a U.S.
shareholder.
The subpart F regime, which was es-
tablished under the Revenue Act of 1962,
Pub. L. No. 87–834, sec. 12, 76 Stat. at
1006, subjects certain income earned by a
CFC to U.S. taxation in the hands of the
CFC’s U.S. shareholders on a current ba-
sis at the full ordinary tax rate, regardless
of whether the CFC distributes the earn-
ings attributable to such income. H.R.
Rep. No. 1447 at 58 (1962). In general,
the subpart F regime applies to certain
passive or highly mobile income in order
to address base erosion concerns. Thus,
for example, section 954(c) provides that
subpart F income includes FPHCI. FPHCI
includes certain types of passive or mobile
income that are relatively easy to situate in
tax-advantaged jurisdictions, such as divi-
dends, interest, rents, and royalties.
The GILTI regime generally subjects
a CFC’s U.S. shareholders to current
taxation on intangible income earned by
the CFC in a manner similar to the treat-
ment of a CFC’s subpart F income. See
section 951A; see also Senate Explana-
tion at 366 (explaining that such income
is often associated with profit shifting).
Intangible income is determined for this
purpose on an aggregate basis at the U.S.
shareholder level and is based on a for-
mulaic approach under which a “normal
return” equal to 10 percent of the basis
of certain tangible assets is calculated
and then each dollar of income above the
“normal return” is effectively treated as
intangible income (regardless of wheth-
er such income is actually attributable to
intangible property). See Senate Expla-
nation at 366. However, for purposes of
this determination, certain income of the
CFC – such as income taxed under an-
other Code provision (for example, under
the rules for subpart F income in sections
951 through 964 or under section 882 in
the case of income effectively connected
with the conduct of a U.S. trade or busi-
ness), immobile income (such as foreign
oil and gas extraction income), or highly
taxed income that is excluded from sub-
part F income by reason of the high-tax
exception of section 954(b)(4) – is not
taken into account. See also id. (“[C]
ertain items of income earned by CFCs
should be excluded from the GILTI, ei-
ther because they should be exempt from
U.S. tax – as they are generally not the
type of income that is the source of base
erosion concerns – or are already taxed
currently by the United States”). The
CFC’s U.S. shareholders are subject to
current U.S. tax on the CFC’s income in
excess of the CFC’s normal return, po-
tentially at a reduced rate through a de-
duction under section 250, at the corpo-
rate U.S. shareholder level. The differing
treatment under the GILTI regime with
respect to excess returns (taxed current-
ly, though potentially at a reduced rate)
versus normal returns (exempt from tax)
generally has the effect of differentiating
between income that poses base erosion
concerns and income that does not pose
such concerns. The GILTI regime applies
in the first taxable year of a CFC begin-
ning on or after January 1, 2018. Section
245A applies to distributions made by

Bulletin No. 2019–27 29 July 1, 2019
SFCs (which include CFCs) on or after
that date.
The rules under section 959 generally
treat PTEP (including PTEP that arise by
reason of the subpart F regime, the GILTI
regime, or the transition tax under section
965) as being distributed before non-pre-
viously taxed earnings and profits and
also prevent section 245A from applying
to PTEP. See section 959(c) (providing
ordering rules that treat PTEP as being
distributed first) and section 959(d) (pro-
viding that a distribution of PTEP to a
U.S shareholder is not treated as a divi-
dend). Thus, both the interaction of the
definitions of subpart F income and tested
income with the ordering rules for distri-
butions of PTEP and the overall structure
of the international provisions of the Act
contemplate that only residual earnings
remaining after the potential application
of sections 951(a), 951A, and 965 gener-
ally are eligible for the section 245A de-
duction. That is, section 245A(a) applies
only to certain “dividends” received from
foreign corporations. Therefore, sections
951(a), 951A, and 965 generally have
priority over section 245A because, when
they apply to a foreign corporation’s earn-
ings, distributions of those earnings do not
qualify as dividends under section 959(d),
and, therefore, section 245A does not ap-
ply.
The statutory text of the participation
exemption system under section 245A,
the GILTI regime, the subpart F regime,
and the PTEP rules collectively operate as
a comprehensive framework with respect
to a CFC’s foreign earnings after the ap-
plication of the transition tax under sec-
tion 965. A central feature of this regime
is that income derived by CFCs is eligible
for the section 245A deduction only if the
earnings being distributed have not been
first subject to the subpart F or GILTI re-
gimes. The scope of the section 245A de-
duction (and the authority set forth in sec-
tion 245A(g)) is thus informed not only
by the text of section 245A in isolation,
but also by the role of section 245A in the
overall structure of the international pro-
visions and its interaction with the subpart
F and GILTI provisions.
Section 245A(g) provides that the Sec-
retary shall issue such regulations as are
necessary or appropriate to carry out the
provisions of section 245A.
III. Scope of Section 954(c)(6)
Section 954(c)(6) was enacted by the
Tax Increase Prevention and Reconcilia-
tion Act of 2005, Pub. L. No. 109-222. In
general, and subject to certain limitations,
the section 954(c)(6) exception is intended
to facilitate intragroup foreign-to-foreign
funds flows by providing that dividends,
interest, rents, and royalties received or
accrued by a CFC from another related
CFC are not treated as FPHCI to the ex-
tent attributable or properly allocable to
income of the related person which is nei-
ther subpart F income nor income treated
as effectively connected with the conduct
of a trade or business in the United States.
See H.R. Rep. No. 109-304 at 45 (2005).
Section 954(c)(6)(A) also provides that
the Secretary shall prescribe such regula-
tions as may be necessary or appropriate
to carry out the provision, including reg-
ulations to prevent the abuse of the pur-
poses of the provision. As most recently
extended by the Consolidated Appropria-
tions Act of 2016, Pub. L. No. 114-113,
section 954(c)(6) applies to taxable years
of foreign corporations beginning after
December 31, 2005, and before January 1,
2020, and to taxable years of U.S. share-
holders with or within which such taxable
years of foreign corporations end.
Notice 2007-9, 2007-5 I.R.B. 401, pro-
vides guidance under section 954(c)(6).
The notice describes additional guidance
that the Treasury Department and the IRS
intend to issue regarding the application
of section 954(c)(6), including certain an-
ti-abuse rules.
Explanation of Provisions
I. Overview
The transition tax, the subpart F and
GILTI regimes, and the participation ex-
emption under section 245A together form
a comprehensive and closely integrated set
of tax rules with respect to the earnings of
foreign corporations with requisite levels
of U.S. ownership. These related provi-
sions must be read and interpreted togeth-
er in order to ensure that each provision
functions as part of a coherent whole, as
intended. Although the section 245A de-
duction is generally available for untaxed
foreign-source earnings, read collectively
this integrated set of statutory rules can be
reasonably understood to require that the
deduction not apply to earnings and prof-
its attributable to income of a type that is
properly subject to the subpart F or GILTI
regimes, which address base erosion-type
income. Otherwise, as explained in Part II
of this Explanation of Provisions, the sec-
tion 245A deduction could undermine the
anti-base erosion measures that Congress
intended to prevent income shifting. Ac-
cordingly, and consistent with the coher-
ent functioning of the interlocking statu-
tory scheme for taxation of CFC earnings,
the section 245A deduction generally will
not apply to distributions of earnings and
profits that are attributable to subpart F in-
come or tested income. The interpretation
reflected in these rules ensures that these
provisions will operate compatibly with,
not contradictorily to, each other.
Section 245A is designed to operate
residually, such that the section 245A de-
duction generally applies to any earnings
of a CFC to the extent that they are not first
subject to the subpart F regime, the GILTI
regime, or the exclusions provided in sec-
tion 245A(c)(3) (and were not subject to
section 965). That is, the text of the sub-
part F and GILTI rules explicitly defines
the types of income to which they apply,
and section 245A applies to any remaining
untaxed foreign earnings. Under ordinary
circumstances, this formulation works ap-
propriately, as earnings are first subject to
the subpart F or GILTI regimes before the
determination of dividends to which sec-
tion 245A could potentially apply. How-
ever, in certain atypical circumstances, a
literal application of section 245A (read in
isolation) could result in the section 245A
deduction applying to earnings and profits
of a CFC attributable to the types of in-
come addressed by the subpart F or GILTI
regimes – the specific types of earnings
that Congress described as presenting base
erosion concerns. These circumstances
arise when a CFC’s fiscal year results in
a mismatch between the effective date for
GILTI and the final measurement date un-
der section 965 or involve unanticipated
interactions between section 245A and the
rules for allocating subpart F income and
GILTI when there is a change in owner-
ship of a CFC. Moreover, the Treasury
Department and the IRS are aware that
some taxpayers are undertaking transac-

July 1, 2019 30 Bulletin No. 2019–27
tions with a view to eliminating current or
future taxation of all foreign earnings of
a CFC, including earnings attributable to
base erosion-type income, by structuring
into these situations. These transactions
have the potential to substantially under-
mine the anti-base erosion framework for
post-2017 foreign earnings.
Based on the structure and history of
the international provisions of the Code,
including changes made by the Act, the
Treasury Department and the IRS have
concluded that section 245A was not in-
tended to eliminate taxation with respect
to the foreign earnings of a CFC that are
attributable to income of a type that is
subject to taxation under the subpart F
or GILTI regimes. In these cases where
the literal effect of section 245A would
reverse the intended effect of the subpart
F and GILTI regimes, this conflict is best
resolved, and the structure of the statuto-
ry scheme is best preserved, by limiting
section 245A’s effect. The Treasury De-
partment and the IRS do not believe Con-
gress intended section 245A to defeat the
purposes of subpart F and GILTI regimes
in these instances. Accordingly, given the
authority in section 245A(g) directing
the Secretary to issue such regulations
as are necessary or appropriate to carry
out the provisions of section 245A, and
the authority under section 7805(a) to is-
sue rules and regulations made necessary
by reason of changes in the tax laws, the
temporary regulations under section 245A
are designed to ensure that the section
245A deduction operates properly within
the context of a closely coordinated set
of rules and, as a result, is not available
to eliminate the taxation of subpart F in-
come and tested income in these limited
circumstances. However, consistent with
the broad application of section 245A, the
temporary regulations apply only to cer-
tain well-defined circumstances in which
subpart F or tested income earned by a
CFC would otherwise escape taxation
to its U.S. shareholders as a result of the
unanticipated interaction of section 245A
and certain rules applicable to the inclu-
sion of subpart F income and GILTI under
sections 951(a) and 951A, respectively.
To prevent the avoidance of U.S. tax in
these specific and narrow circumstances,
the temporary regulations limit the sec-
tion 245A deduction only with respect to
certain dividends received by a domestic
corporation in connection with specific
transactions that facilitate the avoidance
of taxation of subpart F income or tested
income and that, in many cases, may have
been entered into with a purpose of avoid-
ing the consequences of the new interna-
tional tax regime as adopted by Congress
in the Act. This limited denial ensures that
the section 245A deduction will continue
to apply to earnings and profits that are
attributable to all other classes of income
to which Congress intended them to ap-
ply. The Treasury Department and the
IRS emphasize, however, that when the
requirements of section 245A as proper-
ly construed are satisfied, it would not be
permissible under the statute for the sec-
tion 245A deduction to be denied for these
other classes of income — even if, for ex-
ample, taxpayers choose to generate such
income to avail themselves of the benefits
of the deduction. The Treasury Depart-
ment and the IRS furthermore do not be-
lieve it would be permissible to modify
the definition of subpart F income or test-
ed income, or to recharacterize income as
subpart F income or tested income, under
the authority of section 245A(g).
Similar to section 245A, the exemp-
tion from subpart F income under section
954(c)(6) can be used in the context of
certain transactions to avoid taxation of
income that would otherwise be taxed un-
der the subpart F or GILTI regimes. Such
transactions are not dependent upon the
availability of section 245A at the level of
the United States shareholder. This type of
concern was first generally described in
Notice 2007-9, but has been exacerbated
by the enactment of section 951A as part
of the Act because (1) dividends qualify-
ing for section 954(c)(6) generally are not
treated as tested income pursuant to section
951A(c)(2)(A)(i)(IV); and (2) the same
structured transactions used to avoid sub-
part F inclusions can also be used to avoid
GILTI inclusions. Given the authority in
section 954(c)(6)(A) for the Treasury De-
partment and the IRS to issue regulations
preventing the abuse of section 954(c)(6),
the temporary regulations under section
954(c)(6) are designed to ensure that the
section 954(c)(6) exception is not used to
erode the U.S. tax base through certain
transactions preventing the taxation of in-
come that would otherwise be taxed under
the subpart F or GILTI regimes. Consis-
tent with the temporary regulations issued
under section 245A, these rules are tar-
geted to ensure that the section 954(c)(6)
exception is not available for this limited
category of earnings.
II. Limitation of Amounts Eligible for
Section 245A Deduction
A. Scope
In the case of a dividend received by
a domestic corporation from an SFC, the
temporary regulations limit the amount of
the section 245A deduction to the portion
of a dividend not constituting an “ineligi-
ble amount.” See §1.245A-5T(b). In gen-
eral, the ineligible amount is the sum of
(i) 50 percent of the portion of a dividend
attributable to certain earnings and profits
resulting from transactions between relat-
ed parties during a period after the mea-
surement date under section 965(a)(2) and
in which the SFC was a CFC but during
which section 951A did not apply to it (re-
ferred to as the “extraordinary disposition
amount”) and (ii) the portion of a dividend
attributable to certain earnings and profits
generated during any taxable year ending
after December 31, 2017, in which the do-
mestic corporation reduces its ownership
of the CFC (referred to as the “extraordi-
nary reduction amount”).
B. Extraordinary Disposition Amount
Under the Act, there may be a gap be-
tween when section 951A first applies to
the U.S. shareholders of a CFC (as of its
first taxable year beginning after Decem-
ber 31, 2017) and the last date on which
the earnings and profits of the CFC are
measured for purposes of section 965,
which, under section 965(a), is December
31, 2017 (such period, the “disqualified
period”). For example, a fiscal year CFC
with a taxable year ending November 30
would have a disqualified period from
January 1, 2018, the day after its final
E&P measurement date under section 965,
to November 30, 2018, the last date before
section 951A applies with respect to its in-
come. The Treasury Department and the
IRS are aware that during the disqualified
period, CFCs may have engaged in certain
transactions with related parties with a

Bulletin No. 2019–27 31 July 1, 2019
goal of creating stepped-up basis for the
buyer, while generating earnings and prof-
its for the seller CFC that are not subject
to any current tax and may be eligible for
the section 245A deduction. Because the
transactions generally are structured to
avoid creating subpart F income and occur
during the disqualified period, the income
from these transactions generally is not
subject to U.S. tax under the transition tax
under section 965, the subpart F regime,
or the GILTI regime. Such earnings and
profits could, for example, reduce taxable
gain that would otherwise be recognized
on the subsequent disposition of stock of
the CFC, thus potentially allowing the
CFC and its future earnings to be removed
from the U.S. tax system without the im-
position of any U.S. tax.
The Treasury Department and the IRS
have determined that it would be incon-
sistent with the closely interdependent
set of international tax rules implemented
by the Act, specifically the transition tax,
the GILTI regime, and the participation
exemption, for the earnings and prof-
its resulting from these transactions to
be eligible for a section 245A deduction
even if the other requirements of section
245A are otherwise satisfied. Thus, the
temporary regulations limit the amount
of the section 245A deduction allowed to
a section 245A shareholder (as defined in
§1.245A-5T(i)(21)) with respect to a div-
idend received from an SFC. Specifical-
ly, the deduction is limited to 50 percent
of the extraordinary disposition amount,
which is the portion of a dividend received
by a section 245A shareholder from an
SFC that is paid out of the section 245A
shareholder’s “extraordinary disposition
account.” See §1.245A-5T(b)(2) and (c)
(1). In general, this account represents the
shareholder’s pro rata share of the SFC’s
“extraordinary disposition E&P,” reduced
by the section 245A shareholder’s pri-
or extraordinary disposition amounts, if
any. See §1.245A-5T(c)((3)(i)(C)(1)). Ex-
traordinary disposition E&P is an amount
equal to the earnings of an SFC arising
from gain recognized by reason of one
or more “extraordinary dispositions.” See
§1.245A-5T(c)(3)(i)(C).
The section 245A deduction is lim-
ited to 50 percent of the extraordinary
disposition amount to reflect the fact that
taxpayers generally would have been
eligible for a deduction under either (i)
section 250(a)(1)(B) had section 951A
applied to the SFC during the disquali-
fied period or (ii) section 965(c) had the
net gain been subject to the transition tax
under section 965.
For a disposition by an SFC to be an
extraordinary disposition, the disposition
must (i) be of specified property (defined
in §1.245A-5T(c)(3)(iv) as any property
other than property that produces gross
income described in section 951A(c)(2)
(A)(i)(I) through (V)), (ii) occur during
the SFC’s disqualified period (as de-
fined in §1.245A-5T(c)(3)(iii)) and when
the SFC was a CFC, (iii) be outside of
the ordinary course of the SFC’s activ-
ities, and (iv) be to a related party. See
§1.245A-5T(c)(3)(ii). For these pur-
poses, a disposition by an SFC includes
certain indirect dispositions by the SFC
through a partnership or other pass-
through entities (including through own-
ership structures involving tiered pass-
through entities). See id.
In addition, pursuant to an exception
intended to limit compliance and adminis-
trative burdens, no dispositions by an SFC
are considered to be an extraordinary dis-
position if they do not exceed a threshold
of the lesser of $50 million or 5 percent of
the gross value of the SFC’s property. See
§1.245A-5T(c)(3)(ii)(E).
The temporary regulations provide a
facts-and-circumstances rule for deter-
mining whether a disposition occurs out-
side of the ordinary course of an SFC’s
activities. The temporary regulations also
provide a per se rule that a disposition is
treated as outside of the ordinary course
of an SFC’s activities if the disposition
is undertaken with a principal purpose of
generating earnings and profits during the
disqualified period or if the disposition is
of intangible property, within the meaning
of section 367(d)(4). See id. The tempo-
rary regulations include this latter rule be-
cause the disposition of intangible prop-
erty is not an ordinary course transaction
(relative to, for example, a routine sale of
raw materials from one SFC to another for
manufacturing); moreover, during the dis-
qualified period taxpayers may have had a
particularly strong incentive to dispose of
intangible property (which often has low
basis) to generate significant amounts of
earnings and profits to the seller (without
being subject to current tax) that may be
eligible for the section 245A deduction.
As described, the Treasury Department
and the IRS have determined that the ex-
traordinary disposition rules should not
apply to all earnings and profits generated
by a CFC during the disqualified period.
Rather, the temporary regulations focus
on a narrowly and objectively defined
class of earnings and profits in circum-
stances that are inconsistent with the in-
ternational tax regime adopted by the Act.
The Treasury Department and the IRS re-
quest comments on whether there should
be any further refining of these rules.
The temporary regulations provide
shareholder account rules to ensure that
a section 245A shareholder’s extraor-
dinary disposition account is properly
tracked and reduced in appropriate cases
(for example, for prior extraordinary dis-
position amounts). See §1.245A-5T(c)(3)
(i). These shareholder account rules also
contain successor rules for a section 245A
shareholder that acquires stock of an SFC
from another section 245A shareholder
with respect to which there is an extraor-
dinary disposition account and for certain
section 381 transactions and distributions
involving section 355 (or so much as sec-
tion 356 as relates to section 355). See
§1.245A-5T(c)(4).
To address cases in which the section
245A deduction might be available for
an SFC held through a pass-through en-
tity or foreign corporation, the temporary
regulations provide that a section 245A
shareholder is treated as owning a pro rata
share of stock of an SFC that is owned
by a partnership, trust, or estate (domes-
tic or foreign), or a foreign corporation in
which the section 245A shareholder owns
an interest or stock, as applicable. See
§1.245A-5T(g)(3)(i) (providing rules for
stock ownership and transfers).
The Treasury Department and the IRS
request comments as to how the extraor-
dinary disposition account rules should
apply in circumstances in which an SFC
is transferred to a partnership, including
the extent to which principles similar to
section 704(c)(1)(B) apply to prevent
the use of partnerships to circumvent the
purposes of the temporary regulations,
such as where an SFC is subsequently
transferred to a non-contributing part-
ner. As a general matter, the Treasury

July 1, 2019 32 Bulletin No. 2019–27
Department and the IRS believe that
§1.701-2(b), as well as the judicial doc-
trines of economic substance, substance
over form, and step transaction, prevent
taxpayers from forming or availing of
partnerships with a principal purpose of
avoiding the application of these rules.
The treatment of partnerships under sec-
tion 245A will be addressed in separate
guidance; and it is anticipated that this
guidance will provide rules ensuring
that partnerships may not be formed or
availed of to avoid the purposes of the
temporary regulations.
The Treasury Department and the IRS
further request comments on the treatment
of consolidated groups under the tempo-
rary regulations, including for purposes of
maintaining extraordinary disposition ac-
counts. The Treasury Department and the
IRS believe that consolidated groups gen-
erally should be treated in the same man-
ner as a single taxpayer for the purposes of
§1.245A-5T(c). Subject to any comments
received, it is expected that future rules
will provide that consolidated groups gen-
erally should not be advantaged or disad-
vantaged as a result of owning directly or
indirectly stock of an SFC through multi-
ple members relative to a standalone cor-
poration owning the same stock.
The Treasury Department and the IRS
also request comments on whether and
how the rules applicable to disqualified
basis in proposed §1.951A-2(c)(5) should
be coordinated with §1.245A-5T(c). In
this regard, proposed §1.951A-2(c)(5)
provides rules for the allocation and ap-
portionment of deductions and losses at-
tributable to disqualified basis, which is
asset basis created in certain disqualified
transfers during the disqualified period.
These deductions and losses are allocated
and apportioned solely to gross income
that is not tested income, subpart F in-
come, or effectively connected income
(defined as “residual CFC gross income”),
thereby ensuring that such “costless” tax
basis does not inappropriately reduce fu-
ture tax liability. Thus, the Treasury De-
partment and the IRS are considering the
extent to which it would be appropriate
to coordinate the two sets of rules, tak-
ing into account the ability of the IRS to
administer and taxpayers to comply with
such rules, and request comments on this
issue.
C. Extraordinary Reduction Amount
The Treasury Department and the
IRS are aware that certain transactions
in which a section 245A shareholder of a
CFC transfers stock of the CFC, or certain
transactions in which the shareholder’s
ownership of the CFC is diluted, could
give rise to results that would be incon-
sistent with the integrated structure of the
U.S. tax system for the taxation of CFC
earnings, including section 245A, the sub-
part F regime, and the GILTI regime. In
these cases, absent proper limitation, the
section 245A deduction might be allowed
inappropriately with respect to a CFC’s
current year income that, but for the own-
ership changes, would have been subject
to tax under the subpart F or GILTI re-
gimes. Unlike the transactions described
in Part II.B of this Explanation of Provi-
sions, the transactions giving rise to these
results can occur in any taxable year end-
ing after the Act (and particularly section
245A) is in effect.
These results could arise, for example,
as a consequence of the application of
section 951(a)(2)(B). Section 951(a)(2)
(B), a longstanding provision in the sub-
part F regime, prevents double taxation
of the same earnings by reducing a U.S.
shareholder’s pro rata share of subpart F
income (or, following the Act, tested in-
come as defined in section 951A(c)(2)(A))
of a CFC by dividends received by anoth-
er person with respect to the same share of
stock. However, if section 245A were to
apply without limitation to dividends from
a CFC that reduce another U.S. sharehold-
er’s pro rata share of subpart F income or
tested income of the CFC under section
951(a)(2)(B), earnings that would other-
wise be subject to the subpart F or GILTI
regimes would escape U.S. taxation to the
extent of the reduction. For example, in
the case of a transfer of CFC stock from
one section 245A shareholder (the trans-
feror) to another section 245A shareholder
(the transferee), a dividend (including by
reason of section 1248) from the CFC to
the transferor during the tax year of the
transfer might both (i) be excluded from
the transferor’s income by reason of the
section 245A deduction and (ii) reduce
the transferee’s pro rata share of subpart
F income or tested income of the CFC by
reason of section 951(a)(2)(B). The Trea-
sury Department and the IRS have deter-
mined that it would be inconsistent with
the residual definition of section 245A
eligible earnings and the interaction of
section 245A and the subpart F and GILTI
regimes, which form an integrated set of
rules to tax post-2017 foreign earnings,
to allow a section 245A deduction for a
dividend paid out of earnings and profits
attributable to subpart F income or tested
income where such dividends, by opera-
tion of section 951(a)(2)(B), and could
result in double non-taxation of such in-
come. Such a result would also be con-
trary to the legislative intent underlying
the interaction of these provisions. See
Senate Explanation at 365 (noting, in the
absence of rules such as the new GILTI
regime, the incentive to shift income to
low-taxed foreign affiliates, “where the in-
come could potentially be distributed back
to the [domestic] corporation with no U.S.
tax imposed.”).
Similar results can arise in other cases
where the stock of a CFC is transferred
during a CFC’s tax year by a U.S. share-
holder to a foreign person where, after
the transfer, the CFC remains a CFC but
has no U.S. shareholder that owns (with-
in the meaning of section 958(a)) stock of
the CFC. Before the Act, section 958(b)
(4) prevented certain attribution of stock
under section 318 from a foreign person
to a U.S. person. However, the Act re-
pealed section 958(b)(4) such that a for-
eign corporation may be treated as a CFC
despite having no direct or indirect U.S.
shareholder that owns (within the mean-
ing of section 958(a)) stock of the CFC
and that accordingly can recognize an
income inclusion under section 951 or
951A. In general, a U.S. shareholder that
owns stock in a CFC on the last day with-
in the foreign corporation’s year that it is
a CFC is taxable on its pro rata share of
the CFC’s subpart F income or tested in-
come for purposes of the GILTI regime.
However, by reason of the Act’s repeal of
section 958(b)(4), a U.S. shareholder may
transfer a CFC to a person that will not be
taxed with respect to an inclusion under
the subpart F or GILTI regimes without
itself being subject to such an inclusion.
Absent any specific limitation in these
circumstances, any earnings and profits
of the CFC distributed as a dividend (in-
cluding by reason of section 1248) to the

Bulletin No. 2019–27 33 July 1, 2019
transferor U.S. shareholder during the
CFC’s taxable year might be eligible for
the section 245A deduction. However, had
the transfer not occurred (or had the CFC
ceased to be a CFC as a result of the trans-
fer), the earnings and profits may have
been subject to tax under the subpart F or
GILTI regimes and, therefore, would not
have been eligible for the section 245A
deduction.
In the circumstances described in this
section, a broad application of section
245A would present taxpayers with a
planning opportunity to completely avoid
the application of the subpart F and GILTI
regimes on an annual basis. The Treasury
Department and the IRS have determined
that this result would undermine the in-
tegrated provisions constituting the Act’s
framework for taxing post-2017 CFC
earnings and would contravene legisla-
tive intent. To address this concern, the
temporary regulations limit the amount
of the section 245A deduction allowed to
a “controlling section 245A shareholder”
with respect to a dividend from a CFC to
the portion of the dividend that is paid out
of earnings other than the “extraordinary
reduction amount.” See §1.245A-5T(b)
(1) and (e). A controlling section 245A
shareholder of a CFC is a section 245A
shareholder of the CFC that, taking into
account ownership of the CFC by certain
other persons (such as related persons),
owns more than 50 percent of the stock
of the CFC. See §1.245A-5T(i)(2). For
purposes of applying these rules, a con-
trolling section 245A shareholder also in-
cludes any other shareholder who would
not otherwise be a controlling section
245A shareholder but acts in concert with
the controlling section 245A shareholder.
This includes shareholders that sell their
shares of the same CFC to the same buyer
or buyers (or a related party with respect
to the buyer or buyers) as part of the same
plan as the controlling section 245A share-
holder’s extraordinary reduction.
Under the temporary regulations, for
an extraordinary reduction amount to
exist with respect to a controlling sec-
tion 245A shareholder of a CFC, an “ex-
traordinary reduction” must occur during
the CFC’s taxable year with respect to
the shareholder’s ownership of the CFC.
See §1.245A-5T(e). An extraordinary re-
duction generally occurs when either (i)
the controlling section 245A shareholder
transfers more than 10 percent of its stock
of the CFC (for example, an extraordi-
nary reduction occurs if the shareholder
owns 90 percent of the stock of the CFC
and it transfers stock representing more
than nine percent of the stock of the CFC)
or (ii) there is a greater than ten percent
change in the controlling section 245A
shareholder’s overall ownership of the
CFC (for example, if the shareholder
owns 90 percent of the stock of the CFC
and, as a result of an issuance to a foreign
person, the shareholder’s ownership of
the CFC is reduced such that it no longer
owns at least 81 percent of the stock of the
CFC). See §1.245A-5T(e)(2)(i)(A). The
temporary regulations include the first
prong because if, for example, a section
245A shareholder of a CFC were to trans-
fer shares of stock of the CFC to anoth-
er section 245A shareholder of the CFC
and the other shareholder were to transfer
an equal number of similar shares to the
first shareholder, neither of the sharehold-
ers’ overall ownership of the CFC would
change, but the amount taken into account
by each of the shareholders by reason of
section 951(a)(2)(B) might be reduced as
a result of dividends paid with respect to
shares transferred by the other.
An extraordinary reduction amount
is earnings and profits representing the
amount of dividends paid by the corpora-
tion that are attributable to subpart F in-
come or tested income with respect to a
CFC, to the extent such subpart F income
or tested income (i) would have been tak-
en into account by the controlling section
245A shareholder under section 951 or
951A had the extraordinary reduction not
occurred and (ii) is not taken into account
by a domestic corporation or a citizen or
resident of the United States (that is, a
person described in section 7701(a)(30)
(A) or (C)). See §1.245A-5T(e)(1) and (2).
The limitation of the section 245A de-
duction in the case of an extraordinary
reduction will generally result in a divi-
dend being included in the income of the
controlling section 245A shareholder and
not offset by a section 245A deduction. In
cases where the CFC has tested income
during its taxable year that would have
been subject to the GILTI regime but for
the extraordinary reduction, a controlling
section 245A shareholder might prefer to
have an income inclusion under section
951A, potentially benefitting from the
deduction available under section 250.
Therefore, the temporary regulations pro-
vide an election under which a controlling
section 245A shareholder is not required
to reduce its section 245A deduction if it
elects (and, in some cases, certain other
United States persons also agree) to close
the CFC’s taxable year for all purposes of
the Code on the date of the extraordinary
reduction. See §1.245A-5T(e)(3)(i). The
closing of the taxable year of the CFC
results in all U.S. shareholders that own
(within the meaning of section 958(a))
stock of the CFC on such date taking into
account their pro rata share of subpart F
income or tested income earned by the
CFC as of that date.
In addition, pursuant to an exception
intended to limit compliance and admin-
istrative burdens, for a taxable year in
which an extraordinary reduction occurs,
no amount is considered an extraordi-
nary reduction amount if the sum of the
CFC’s subpart F income and tested in-
come for the taxable year does not exceed
the lesser of $50 million or 5 percent of
the CFC’s total income for the year. See
§1.245A-5T(e)(3)(ii).
D. Coordination Rules
To address cases in which a dividend
could qualify as either a hybrid dividend
under the rules of section 245A(e) or an
ineligible amount under the temporary reg-
ulations, the temporary regulations provide
a coordination rule pursuant to which a div-
idend is first subject to the hybrid dividend
rules of section 245A(e) and then, to the ex-
tent not a hybrid dividend, is subject to the
temporary regulations. See §1.245A-5T(g)
(3)(iv). In future guidance relating to pro-
posed regulations under section 245A(e)
and certain other sections (83 FR 67612),
the Treasury Department and the IRS antic-
ipate modifying those regulations to reflect
this coordination rule.
In addition, to address cases in which a
dividend might be either an extraordinary
disposition amount under §1.245A-5T(c)
or an extraordinary reduction amount un-
der §1.245A-5T(e), the temporary regula-
tions provide a coordination rule pursuant
to which a dividend is first subject to the
rules of §1.245A-5T(e) and then, to the ex-

July 1, 2019 34 Bulletin No. 2019–27
tent not an extraordinary reduction amount,
is subject to the rules of §1.245A-5T(c).
See §1.245A-5T(g)(5). Because of this or-
dering rule, the extraordinary disposition
amount with respect to a dividend will
not exceed the amount by which the div-
idend exceeds the extraordinary reduction
amount with respect to the dividend.
E. Transactions Described in Section
964(e)(4)
The rules in these temporary regulations
for determining eligibility for the section
245A deduction also apply to deemed div-
idends arising by reason of section 964(e)
(4), which the Act added to the Code. Sec-
tion 964(e)(4) provides in certain cases that
a sale by a CFC of stock of another foreign
corporation is treated as a dividend from
the target foreign corporation to the selling
CFC that is, in turn, treated as subpart F in-
come of the selling CFC and included in the
gross income of the U.S. shareholders of
the selling CFC. Pursuant to section 964(e)
(4)(A)(iii), the section 245A deduction is
allowed to any U.S. shareholder with re-
spect to such subpart F income included in
gross income in the same manner as if such
subpart F income were a dividend received
by the shareholder from the selling CFC.
Thus, section 964(e)(4) presents the same
concerns as direct dividends; absent a rule
to the contrary, taxpayers might use section
964(e)(4) to avoid the results applicable
to actual distributions from an upper-tier
CFC to a U.S. shareholder or to construc-
tive dividends under section 1248 that are
addressed elsewhere by these temporary
regulations. Therefore, the rules in these
temporary regulations for determining eli-
gibility for the section 245A deduction also
apply to deemed dividends arising by rea-
son of section 964(e)(4). Moreover, all U.S.
shareholders of the selling CFC are deemed
to act in concert for purposes of the tempo-
rary regulations with respect to transactions
described in section 964(e)(4).
III. Limitation of Amount Eligible for
Section 954(c)(6) Exception with
Respect to Certain Dividends
A. In General
As described in Part I of this Expla-
nation of Provisions, the section 954(c)
(6) exception may cause dividends from
one CFC to another to result in tax con-
sequences similar to, but not dependent
upon, those that can be effectuated using
section 245A in conjunction with the dis-
qualified period, section 951(a)(2)(B), or
the repeal of section 958(b)(4).
To protect against avoidance of the
rules for extraordinary dispositions (de-
scribed in Part II.B of this Explanations
of Provisions), the temporary regulations
rely on authority under section 954(c)(6)
(A) to prevent the section 954(c)(6) ex-
ception from applying in cases where a
dividend from a lower-tier CFC to an up-
per-tier CFC would be an extraordinary
disposition amount if distributed directly
to the section 245A shareholders of the
lower-tier CFC. See §1.245A-5T(d). In
these cases, the section 954(c)(6) ex-
ception applies only to the extent that
the amount of the dividend exceeds the
sum of each section 245A shareholder’s
extraordinary disposition account with
respect to the lower-tier CFC, divided by
the aggregate ownership of all U.S. tax
residents of the upper-tier CFC that have
section 951(a) inclusions and multiplied
by 50 percent. The amount is divided by
the aggregate ownership of these U.S.
tax residents to take into account the fact
that the U.S. tax residents (including in-
dividuals) will include in gross income a
pro rata share of the portion of the div-
idend not eligible for the section 954(c)
(6) exception. The amount is multiplied
by 50 percent in order to provide simi-
lar treatment for a dividend received by
a section 245A shareholder from a CFC
and a dividend received by an upper-tier
CFC from a lower-tier CFC. In both cas-
es, the 50 percent reduction of the sec-
tion 245A deduction approximates the
reduced tax rate by reason of the deduc-
tion provided under section 250(a)(1)(B)
with respect to section 951A inclusions
or section 965(c) with respect to the tran-
sition tax.
Unlike the disallowance of the section
245A deduction under §1.245A-5T(b)
with respect to an extraordinary disposi-
tion amount, which applies only to corpo-
rate U.S. shareholders, the limitation to the
application of the section 954(c)(6) excep-
tion with respect to a dividend received by
an upper-tier CFC can result in a subpart F
inclusion to any U.S. shareholder, includ-
ing individuals. In addition, the temporary
regulations limit the section 954(c)(6) ex-
ception in these cases, rather than limiting
the application of section 245A only when
the lower-tier CFC earnings and profits are
distributed through intervening CFCs to a
section 245A shareholder. This approach
prevents deferral of tax with respect to
the applicable subpart F income or tested
income and minimizes the administrative
and compliance burdens that would be
created by continuing to track the relevant
earnings at the upper-tier CFC.
Similarly, to prevent these inappropri-
ate uses of the section 954(c)(6) excep-
tion to avoid the rules for extraordinary
reductions (described in Part II.C of this
Explanation of Provisions), the tempo-
rary regulations apply to limit the amount
of any distribution from that CFC out of
earnings and profits attributable to subpart
F income or tested income that can qual-
ify for the section 954(c)(6) exception in
a taxable year in which an extraordinary
reduction occurs with respect to the stock
of a CFC. Similar to the rules relating to
extraordinary disposition amounts, the
limitation to the section 954(c)(6) excep-
tion with respect to a dividend received
by an upper-tier CFC can result in a sub-
part F inclusion to any U.S. sharehold-
er, including individuals. To the extent
a CFC-to-CFC dividend otherwise sat-
isfies the requirements of section 954(c)
(6), it is eligible for the section 954(c)(6)
exception only to the extent it exceeds
the distributing lower-tier CFC’s “tiered
extraordinary reduction amount,” taking
into account certain prior inclusions un-
der section 951(a). See §1.245A-5T(f)
(1). Such amount is equal to the up-
per-tier CFC’s ownership percentage
in the lower-tier CFC multiplied by the
lower-tier CFC’s subpart F income and
tested income for the taxable year, with
the resulting product reduced by four
amounts. The first amount is the pro rata
share of the lower-tier CFC’s subpart F
income and tested income for the taxable
year that is taken into account by U.S. tax
residents and attributable to the shares
of the lower-tier CFC owned by the up-
per-tier CFC. The second amount is the
amount included in an upper-tier CFC’s
subpart F income resulting from prior
dividends paid by the lower-tier CFC
giving rise to tiered extraordinary reduc-

Bulletin No. 2019–27 35 July 1, 2019
tion amounts or the application of section
245A(e). The third amount is for certain
prior extraordinary reduction amounts
with respect to the lower-tier CFC aris-
ing in cases in which the lower-tier CFC
was a first-tier CFC at some point in the
taxable year and paid a dividend to one
or more controlling section 245A share-
holders at that time. The fourth amount is
for subpart F income and tested income
taken into account by a U.S. tax resi-
dent as a result of an issuance of stock
directly by the lower-tier CFC during
the taxable year. See §1.245A-5T(f)(2).
Comments are requested as to whether
a lower-tier CFC’s tiered extraordinary
reduction amount should be reduced for
a pro rata portion of a dividend paid on
stock of the lower-tier CFC that was held
by non-U.S. shareholders before and af-
ter an extraordinary reduction. For pur-
poses of applying §1.245A-5T(f)(1) and
(2) in taxable years of a lower-tier CFC
beginning on or after January 1, 2018,
and ending before June 14, 2019, a tran-
sition rule is provided such that the tiered
extraordinary reduction amount of a low-
er-tier CFC is determined by treating
the lower-tier CFC’s subpart F income
for the taxable year as if it were neither
subpart F income nor tested income. See
§1.245A-5T(f)(3).
The rule in §1.245A-5T(f)(1) applies
to both actual distributions and deemed
distributions that occur by reason of stock
dispositions subject to section 964(e)(1)
but not section 964(e)(4). Dispositions
subject to section 964(e)(1) but not section
964(e)(4) are treated as dividends from
the target foreign corporation (or other
entity whose earnings and profits gave
rise to a dividend under section 964(e)
(1)) to the selling CFC and, thus, must be
tested for eligibility under section 954(c)
(6). Additionally, ordering and coordina-
tion rules apply with respect to the rules
relating to the availability of the section
954(c)(6) exception and generally mirror
the rules for the section 245A deduction
by giving priority to §1.245A-5T(f) over
§1.245A-5T(d). See §1.245A-5T(g)(4)
(ii). As in the rules relating to extraordi-
nary reduction amounts, a controlling sec-
tion 245A shareholder of a lower-tier CFC
may elect to close the taxable year of the
CFC in cases where an extraordinary re-
duction occurs and the CFC would have
a tiered extraordinary reduction amount.
See §1.245A-5T(e).
Finally, the Treasury Department
and the IRS are studying whether
§1.245A-5T(f), or a similar rule, should
also apply to dividends received by an
upper-tier CFC from a lower-tier CFC
where such CFCs are owned by individ-
uals and there may be a reduction in the
individuals’ ownership of the lower-tier
CFC. Individuals are not eligible to claim
deductions under section 245A and, there-
fore, dividends subject to section 954(c)
(6) do not present the risk of permanently
eliminating items of subpart F income, in-
vestments in United States property taxed
under section 951(a)(1)(B), or tested in-
come from the U.S. tax base. At the same
time, section 954(c)(6) dividends might
result in a reduction of a U.S. sharehold-
er’s pro rata share of a CFC’s subpart F
income or tested income, thereby result-
ing in deferred taxation of items that oth-
erwise would have been taxed currently.
Therefore, comments are requested as to
whether §1.245A-5T(f), or a similar rule,
should be extended to CFCs owned by in-
dividuals.
B. Dividends Received by CFCs
Ineligible for Section 245A Deduction
Section 245A(a), by its terms, applies
only to certain dividends received by “a
domestic corporation.” Section 1.952-2,
however, which sets forth rules for deter-
mining gross income and taxable income
of a foreign corporation, provides that
for these purposes a foreign corporation
is treated as a domestic corporation. See
§1.952-2(a)(1) and (b)(1). According-
ly, questions have arisen as to whether
§1.952-2 could be interpreted such that
a foreign corporation could claim a sec-
tion 245A deduction despite the statutory
restriction in section 245A(a) expressly
limiting the deduction to domestic cor-
porations. See H.R. Rep. No. 115-466, at
599, fn. 1486 (2017).
The Treasury Department and the IRS
intend to address issues related to the ap-
plication of §1.952-2, taking into account
various comments received in connection
with the Act, including in connection with
the proposed section 951A regulations, in
a future guidance project. This guidance
will clarify that, in general, any provision
that is expressly limited in its application
to domestic corporations does not apply to
CFCs by reason of §1.952-2. The Treasury
Department and the IRS continue to study
whether, and to what extent, proposed reg-
ulations should be issued that provide that
dividends received by a CFC are eligible
for a section 245A deduction. The Trea-
sury Department and the IRS have deter-
mined, however, that in no case would any
person, including a foreign corporation,
be allowed a section 245A deduction di-
rectly or indirectly for the portion of a div-
idend paid to a CFC that is not eligible for
the section 954(c)(6) exception as a result
of these temporary regulations. Permitting
the deduction in such a case would under-
mine the application of the rule that reduc-
es the amount of the dividend eligible for
the section 954(c)(6) exception (discussed
in Part III.A of this Explanation of Provi-
sions).
IV. Information Reporting Under
Section 6038
Under section 6038(a)(1), U.S. per-
sons that control foreign business entities
must file certain information returns with
respect to those entities, which includes
information listed in section 6038(a)(1)
(A) through (a)(1)(E), as well as infor-
mation that “the Secretary determines to
be appropriate to carry out the provisions
of this title.” The temporary regulations
provide that ineligible amounts, tiered
extraordinary disposition amounts, and
tiered extraordinary reduction amounts
must be reported on the appropriate in-
formation reporting form in accordance
with section 6038. See §1.6038-2T(f)(16).
Because transactions subject to these tem-
porary regulations may have occurred in
taxable years for which returns have been
filed before the issuance of these regula-
tions, or for which returns will be filed
before revision of forms and instructions
for reporting the information required by
§1.6038-2T(f)(16), the temporary regula-
tions provide a transition rule. The tran-
sition rule mandates that taxpayers report
the required information on the first return
filed following the issuance of revised
forms, instructions, or other guidance with
respect to reporting such information. The
transition rule also requires a corporation
to report the information with respect to

July 1, 2019 36 Bulletin No. 2019–27
a predecessor corporation (such as a low-
er-tier foreign corporation that distributes
its assets to the corporation in a liquidation
described in section 332) to ensure that all
of the amounts are properly reported not-
withstanding any intervening transactions.
V. Applicability Dates
Consistent with the applicability date
of section 245A, and pursuant to section
7805(b)(2), the rules in the temporary reg-
ulations relating to eligibility of distribu-
tions for the section 245A deduction apply
to distributions occurring after December
31, 2017.
Pursuant to section 7805(b)(1) and (2),
the rules in the temporary regulations re-
lating to the eligibility of dividends for the
section 954(c)(6) exception also apply to
distributions occurring after December
31, 2017, subject to the transition rule in
§1.245A-5T(f)(3) for determining tiered
extraordinary reduction amounts.
VI. Good Cause
The Treasury Department and the IRS
are issuing these temporary regulations
without prior notice and the opportunity
for public comment pursuant to section
553(b)(3)(B) of the Administrative Pro-
cedure Act (the “APA”), which provides
that advance notice and the opportunity
for public comment are not required with
respect to a rulemaking when an “agen-
cy for good cause finds (and incorpo-
rates the finding and a brief statement of
reasons therefor in the rules issued) that
notice and public procedure thereon are
impracticable, unnecessary, or contrary
to the public interest.” Under the “pub-
lic interest” prong of 5 U.S.C. 553(b)(3)
(B), the good cause exception appropri-
ately applies where notice-and-comment
would harm, defeat, or frustrate the public
interest, rather than serving it. The Trea-
sury Department and the IRS are similarly
utilizing the good cause exception in sec-
tion 553(d)(3) of the APA to issue these
temporary regulations with an immediate
effective date, rather than an effective date
no earlier than 30 days after the date of
publication.
Among the circumstances in which the
good cause exception may be invoked for
impracticability or to serve the public in-
terest are situations where the timing and
disclosure requirements of the usual pro-
cedures would defeat the purpose of the
proposal, including if announcement of
a proposed rule would enable or increase
the sort of financial manipulation the
rule sought to prevent. Good cause may
also apply where a delayed effective date
would have a significant deleterious effect
upon the parties to which the regulation
applies. Additionally, the good cause ex-
ception may apply when the regulations
are by their nature short term and there
is an opportunity to comment before final
rules are introduced. Finally, good cause is
supported where regulations are required
to be issued and effective by a certain stat-
utory deadline, and in light of the circum-
stances affecting the agency and its func-
tions leading up to that statutory deadline,
the agency is unable during that time-
frame to conduct a timely and fulsome
notice-and-comment process. Here, these
rationales, separately and in combination,
provide good cause for the Treasury De-
partment and the IRS’s decision to bypass
the notice-and-comment and delayed ef-
fective date requirements with respect to
these temporary regulations. Each ratio-
nale is discussed below in turn.
First, good cause exists with respect to
these temporary regulations because any
period for notice and comment, as well as
a delayed effective date, would provide
taxpayers with the opportunity to engage
in the transactions to which these rules re-
late with confidence that they achieve the
intended tax avoidance results absent the
applicability of the regulations. The Trea-
sury Department and the IRS are aware
that taxpayers have considered engaging
in the transactions described in these tem-
porary regulations, but some may have
been deterred from doing so because of
uncertainty about the operation and inter-
action of the various provisions of the Act.
By limiting the deduction under section
245A for these transactions, these tempo-
rary regulations remove that uncertainty
and – if subjected to notice-and-comment
and a delayed effective date – could em-
bolden some taxpayers to engage in ag-
gressive tax planning to take advantage
of the unintended interactions among the
Act’s provisions, with the comfort that
their actions were not subject to the rules
of the temporary regulations during the
period of notice and comment and before
the regulations’ effective date. This con-
cern applies with respect to both the ex-
traordinary disposition and extraordinary
reduction rules for an ongoing period. For
the extraordinary reduction rules, both the
extraordinary reduction and the associat-
ed use of section 245A can occur at any
time going forward, and although the gap
period for entering into extraordinary dis-
positions has closed, the ability to utilize
the section 245A deduction for earnings
generated in the extraordinary disposition
would apply indefinitely absent these tem-
porary regulations.
For example, a taxpayer who became
aware of the tax effects achievable using
the transactions described in these tempo-
rary regulations could, with confidence,
utilize extraordinary disposition E&P or
engage in an extraordinary reduction to
exit the U.S. taxing jurisdiction without
paying any tax during a period of notice
and comment and delayed effectiveness.
The proliferation of these types of transac-
tions would cause the regulations to exac-
erbate the very financial manipulation that
they are intended to prevent, and accord-
ingly, this rationale supports a finding of
good cause for dispensing with pre-prom-
ulgation notice and public comment, as
well as foregoing a delayed effective date,
for these temporary regulations pursuant
to 5 U.S.C. 553(b) and (d).
The second reason for a finding of good
cause arises from the fact that these tem-
porary regulations, as applied retroactive-
ly, will affect taxable years of certain tax-
payers ending in 2018. As a result, these
regulations can apply to taxable years for
which tax returns have been or may be due
during a period of comment and delayed
effectiveness. Deferring the effectiveness
of the temporary regulations until after
such a period could increase taxpayer
compliance costs because certain taxpay-
ers would only be able to come into com-
pliance with the regulations by amending
and refiling returns and paying additional
taxes owed with interest.
Third, good cause is supported where a
regulation is temporary, with public com-
ment permitted and meaningfully consid-
ered before finalization of the temporary
rule. In this regard, the temporary regula-
tions have a fixed expiration date and are
cross-referenced in a notice of proposed

Bulletin No. 2019–27 37 July 1, 2019
rulemaking published in the Proposed
Rules section of this issue of the Fed-
eral Register. Comments are requested
on all aspects of these rules, and specific
comment requests contained in this pre-
amble are incorporated by reference into
the cross-referenced notice of proposed
rulemaking. The Treasury Department
and the IRS will consider all written com-
ments properly and timely submitted when
finalizing these temporary regulations.
Finally, these temporary regulations
are part of an effort to implement the pro-
visions of the Act, which effected sweep-
ing and complex statutory changes to the
international tax regime. In conjunction
with developing and issuing these tempo-
rary regulations, the Treasury Department
and the IRS have also been tasked with
issuing regulations implementing the nu-
merous provisions enacted or modified by
the Act, along with attendant changes to
forms and other sub-regulatory guidance
and attention to the orderly administration
of the U.S. tax system.
Good cause exists for the issuance
of temporary regulations relating to the
transactions affected by these temporary
regulations partially because of the statu-
tory deadline in section 7805(b)(2), which
provides (among other rules) that a reg-
ulation may be applied retroactively if it
is issued within 18 months of the date of
enactment of the statutory provision to
which it relates. The rules in these tempo-
rary regulations relate to sections 245A,
951A, and 965, which were enacted as
part of the Act on December 22, 2017.
Thus, to qualify for retroactivity under
section 7805(b)(2), a regulation retroac-
tive to the enactment of these provisions
must be effective no later than June 22,
2019. These temporary regulations need
to apply retroactively from the date of the
underlying statutory provisions to ensure
that the international tax regime enacted
by Congress in the Act, and its interaction
with existing tax rules, functions correct-
ly for all affected periods. Retroactivity is
also required to prevent treating taxpay-
ers comparatively advantageously if they
have engaged in the types of transactions
described in these temporary regulations
prior to the issuance date of these tempo-
rary regulations.
The discussion of good cause with
respect to the temporary regulations in
this Part VI is consistent with the Policy
Statement on the Tax Regulatory Process
issued on March 5, 2019, by the Trea-
sury Department and the IRS (the “State-
ment”). The Statement emphasized the
Treasury Department and the IRS’s obli-
gation under the APA to issue interim final
regulations without prior notice and com-
ment only in conjunction with “a state-
ment of good cause explaining the basis
for that finding.” The Statement further
explains that good cause for interim final
regulations may exist, for example, where
“such regulations may be necessary and
appropriate to stop abusive practices or to
immediately resolve an injurious incon-
sistency between existing regulations and
a new statute or judicial decision.” As the
discussion in this Part VI illustrates, this
is the case with respect to these temporary
regulations.
Special Analyses
I. Regulatory Planning and Review —
Economic Analysis
Executive Orders 13563 and 12866
direct agencies to assess costs and ben-
efits of available regulatory alternatives
and, if regulation is necessary, to select
regulatory approaches that maximize net
benefits (including potential economic,
environmental, public health and safety
effects, distributive impacts, and equity).
Executive Order 13563 emphasizes the
importance of quantifying both costs and
benefits, of reducing costs, of harmoniz-
ing rules, and of promoting flexibility.
These temporary regulations have been
designated by the Office of Management
and Budget’s Office of Information and
Regulatory Affairs (OIRA) as subject to
review under Executive Order 12866 pur-
suant to the Memorandum of Agreement
(April 11, 2018) between the Treasury
Department and the Office of Manage-
ment and Budget regarding review of tax
regulations. OIRA has determined that the
proposed rulemaking is significant and
subject to review under Executive Order
12866 and section 1(b) of the Memoran-
dum of Agreement. Accordingly, the pro-
posed regulations have been reviewed by
the Office of Management and Budget.
A. Background
The Tax Cuts and Jobs Act (the Act)
transitioned the United States from a pri-
marily deferral-based international tax
system (subject to the immediate taxation
of generally mobile or passive income un-
der the subpart F regime) to a participation
exemption system coupled with immedi-
ate taxation of certain offshore earnings
(in some cases, at a reduced rate of tax).
8

This transition was effected through sev-
eral interlocking provisions of the Code –
sections 245A, 951A, and 965. All three
provisions have different effective dates
and thus the Act created periods in which
some but not all of them apply. The new
system also operates alongside the pre-
Act subpart F regime that taxes certain
offshore earnings using a longstanding
rule for attributing pro rata shares of a
foreign corporation’s earnings to its U.S.
shareholders.
1. Background: Section 245A—
Dividends Received Deduction
The Act included section 245A, which
provides a participation exemption system
for repatriation of certain offshore earn-
ings. Prior to the Act, dividends paid by
foreign corporations to their U.S. share-
holders were generally taxable. Section
245A(a) reverses this result in the case of
corporate U.S. shareholders by providing,
subject to certain exceptions, a 100-per-
cent deduction for any dividend received
by a corporate U.S. shareholder from a
specified 10-percent owned foreign corpo-
ration.
9
A 100-percent deduction for divi-
8
A deferral-based system is a system in which taxable foreign-source income generally is taxed only when it is repatriated to the United States. A participation exemption system is one in
which foreign-source income is generally not taxed by the resident country (in this case, the United States). As explained further below, in the United States the participation exemption
system is coupled with immediate taxation of certain types of earnings to avoid erosion of the U.S. tax base. These taxed foreign earnings can then be repatriated to the United States without
further tax.
9
A specified 10-percent owned foreign corporation is any foreign corporation, other than a passive foreign investment corporation with respect to a shareholder that is not also a CFC, with at
least one corporate U.S. shareholder. Section 245A(b).

July 1, 2019 38 Bulletin No. 2019–27
dends essentially means that this income
is not taxed in the United States at the cor-
porate level. The existing rules in sections
951(a) and 959 continue to apply, mean-
ing that generally only earnings associ-
ated with income that is not taxed under
the subpart F regime (or under the GILTI
regime, discussed below) can, upon distri-
bution, give rise to a dividend eligible for
the section 245A deduction. Because sub-
part F (and GILTI) taxation is not reduced
by distributions made during the year
(except in the case of certain transfers of
stock of a CFC during a taxable year), any
distribution of earnings and profits that
is taxed under the subpart F regime (or
GILTI regime) is a distribution of PTEP
(that is, a distribution of previously taxed
earnings and profits) that is not treated as a
dividend by reason of section 959(d), and
thus cannot qualify for section 245A. Sec-
tion 245A applies to distributions made
after December 31, 2017.
Because the pre-Act international tax
regime imposed U.S. tax on most non-mo-
bile, non-passive earnings and profits only
when those earnings were repatriated, a
significant amount of untaxed earnings
and profits had been accumulated offshore
when the Act was passed. The enactment
of section 245A by the Act thus presented
a potential windfall, allowing taxpayers
who had held earnings and profits offshore
to distribute all of those earnings back to
the United States tax-free. Congress did
not intend for section 245A to apply to
such pre-Act earnings, and thus included a
so-called transition tax (section 965) “[t]o
avoid a potential windfall for corporations
that deferred income, and to ensure that all
distributions from foreign subsidiaries are
treated in the same manner under the par-
ticipation exemption system.” H. Rep. No.
115-409 at 375.
2. Background: Section 965 – Transition
Tax
Section 965 imposed a transition tax on
the post-1986 earnings and profits of for-
eign corporations that had gone untaxed
under the pre-Act international tax regime
and would not be subject to the GILTI re-
gime because the income was earned in a
year prior to that regime being in effect.
Absent section 965, such earnings and
profits would have been eligible for tax-
free distribution under section 245A. Spe-
cifically, section 965(a) increases certain
foreign corporations’ subpart F income
for their last taxable year beginning be-
fore January 1, 2018, by the amount of
their non-previously taxed earnings and
profits computed as of no later than De-
cember 31, 2017. This has the effect of
subjecting all offshore post-1986 untaxed
earnings of most U.S. shareholders as of
no later than December 31, 2017, to U.S.
tax (albeit at a reduced rate by reason of
section 965(c)), turning all such earnings
into PTEP under section 959. As a result,
none of those earnings and profits are eli-
gible for the section 245A deduction, and
such earnings and profits, once taxed un-
der section 965, are instead treated in the
same way as if they had been taxed under
the pre-Act subpart F regime.
For a calendar year CFC, the transi-
tion tax generally provides a mechanism
for ensuring that only earnings and profits
subject to the new international tax system
can qualify for the dividends received de-
duction under section 245A. This appears
to be the intended purpose of section
965(a), as the legislative history of the Act
provides that “[t]he [transition tax applies
in] the last taxable year of a deferred for-
eign income corporation that begins be-
fore January 1, 2018, which is that foreign
corporation’s last taxable year before the
transition to the new corporate tax regime
elsewhere in the bill goes into effect.” H.
Rep. 115-466 at 613. This is not the case,
however, for fiscal year CFCs (i.e., CFCs
with a taxable year other than the calendar
year) as there is a gap period with respect
to such entities during which certain of
their earnings may escape taxation.
3. Background: Section 951A – GILTI
Regime
By subjecting post-1986 earnings and
profits to a transition tax, section 965 was
generally intended to ensure that only
earnings first subjected to the anti-base
erosion provisions of the Act could qualify
for section 245A. While the Act preserved
the existing subpart F regime, legislative
history shows congressional concern that
the participation exemption system could
heighten the incentive to shift profits to
low-taxed foreign jurisdictions or tax ha-
vens after the Act. See Senate Explanation
at 365. For example, Congress expressed
concern that a domestic corporation might
allocate income susceptible to base ero-
sion to certain foreign affiliates “where
the income could potentially be distrib-
uted back to the [domestic] corporation
with no U.S. tax imposed.” See id. As a
result of these concerns, the Act added an-
other, complementary regime to address
the additional base erosion incentives en-
gendered by the participation exemption.
This regime taxes a U.S. shareholder on
its global intangible low-taxed income, or
GILTI, with respect to its CFCs at a re-
duced rate (by reason of section 250) un-
der new section 951A.
Section 951A(a) generally subjects
a U.S. shareholder to current taxation
each year on its GILTI with respect to its
CFCs. The GILTI of a U.S. shareholder is
generally defined as its pro rata share of
its CFCs’ taxable income for the year in
excess of a normal return – a formulaic
amount equal to 10 percent of the tax ba-
sis of the CFCs’ tangible assets. See sec-
tion 951A(b), (c), (d). For purposes of this
determination, specific types of income of
a CFC, including income taxed under an-
other Code provision (including the sub-
part F regime), certain immobile income,
or certain highly taxed income, are not
taken into account. See Senate Explana-
tion at 366 (explaining that such income
is either already taxed or does not present
base erosion concerns). The GILTI regime
applies in the first taxable year of a CFC
beginning after December 31, 2017. Thus,
in the case of calendar year CFCs, the ap-
plication of the GILTI regime generally
must be taken into account with respect
to all new earnings and profits of a CFC
earned immediately after section 965 has
caused all of the CFC’s pre-Act earnings
to be taxed. See Pub. L. No. 115-97, sec.
14201(d).
As is the case with respect to the sub-
part F regime, the tax base subject to the
GILTI regime is not reduced by distribu-
tions made by a CFC during a taxable year
(except in the case of certain transfers of
stock of a CFC during a taxable year), and
section 951A(f)(1)(A) provides that an in-
come inclusion under the GILTI regime is
treated in the same manner as an inclusion
of subpart F income under the subpart F
regime for purposes of section 959. These
rules cause a CFC’s earnings attributable

Bulletin No. 2019–27 39 July 1, 2019
to GILTI to be taxed under the GILTI re-
gime in section 951A regardless of wheth-
er those earnings and profits are distrib-
uted before the end of the CFC’s year,
thus converting such earnings into PTEP
and turning distributions (including those
made before the end of the year in which
the earnings and profits were earned) by
the CFC into PTEP distributions that do
not constitute dividends eligible for sec-
tion 245A. Section 959(c), (d). Section
951(a)(2) also applies for purposes of
determining a U.S. shareholder’s pro rata
share of its CFCs’ income and other rele-
vant items for purposes of section 951A.
Section 951A(e).
B. Need for the temporary regulations
Sections 245A, 965, and 951A general-
ly act to tax foreign source income equiv-
alently across taxpayers and sources so
long as a U.S. shareholder owns the same
amount of stock of a calendar year CFC
throughout the CFC’s entire taxable year.
Deviations from that condition, however,
potentially allow taxpayers to avoid tax by
claiming a section 245A deduction in sit-
uations where otherwise identical income
would be subject to U.S. tax. This circum-
stance is inconsistent with the purposes of
the new international tax regime enacted
by Congress.
10
These temporary regula-
tions are needed to limit section 245A to
its intended scope and, thereby, prevent
the provision from converting income that
should be subject to U.S. tax into non-tax-
able dividends.
There are two situations in which de-
viations from the condition described in
this section can give rise to these results.
These are where (1) a U.S. corporation is
the shareholder of a fiscal year CFC during
2018 and (2) a CFC pays a dividend and
experiences a direct or indirect change in
ownership during a taxable year.
The differing application of the GILTI
regime with respect to fiscal year and
calendar year CFCs creates one scenario
where the interaction of section 245A with
other new international tax provisions
might be used to avoid tax. For a calendar
year CFC, any earnings and profits accu-
mulated as of no later than December 31,
2017, that had not been taxed under the
subpart F regime generally were taxed un-
der section 965 in the CFC’s 2017 taxable
year, turning such earnings and profits into
PTEP. Then, starting in the calendar year
CFC’s taxable year beginning on January
1, 2018, the CFC’s income became sub-
ject to the complementary subpart F and
new GILTI regimes, and any income taxed
under those provisions now also becomes
PTEP. Concurrent with the applicability
date of the GILTI regime, section 245A
applies to dividends distributed after De-
cember 31, 2017, out of earnings that have
not been taxed under the subpart F and
GILTI regimes. These interlocking pro-
visions create a cohesive regime in which
the section 245A deduction applies only
for distributions of post-2017 earnings
and profits that are properly not taxed as
the subpart F income or GILTI regimes.
Operating in tandem, these provisions ad-
dress Congress’s concerns with section
245A by applying that provision (1) with-
out granting windfalls for taxpayers that
had historically kept earnings and profits
offshore (by taxing all such earnings and
profits under section 965 immediately be-
fore section 245A applies) and (2) without
allowing a section 245A deduction for in-
come susceptible to a heightened risk of
base erosion. As a result of these provi-
sions, only post-2017 earnings and prof-
its that are not subject to the subpart F or
GILTI regimes can qualify for a dividends
received deduction under section 245A
upon distribution from a calendar year
CFC. Such earnings and profits are gener-
ally the normal return on a CFC’s proper-
ty (i.e., 10 percent of tax basis in tangible
property), certain immobile income, or
certain highly-taxed income that Congress
believed would not raise windfall or base
erosion concerns.
By contrast, the provisions that apply
harmoniously to a calendar year CFC fail
to form a cohesive regime when applied
to a fiscal year CFC for its first taxable
year that ends in 2018. Consider a CFC
with a taxable year ending November 30.
This CFC’s income is still subject to the
subpart F regime for all relevant taxable
years. Section 965 also applies to the
CFC’s historical earnings and profits as of
no later than December 31, 2017, and sec-
tion 245A applies to distributions made by
the CFC after December 31, 2017. How-
ever, the GILTI regime does not begin to
apply to the CFC’s income until the first
taxable year of the CFC beginning after
December 31, 2017, and thus does not
first apply until the CFC’s taxable year
that begins on December 1, 2018. As a re-
sult of the gap in these effective dates, (1)
the ordinary earnings of the CFC during
the gap period avoid tax (which is a di-
rect outgrowth of the effective dates); and
(2) assets can be transferred between re-
lated parties in non-ordinary course trans-
actions during that time period in such a
way that current and future earnings and
profits associated with the built-in gain in
those assets can permanently avoid taxa-
tion by the United States because they are
not subject to the GILTI regime and are
not subject to the transition tax under sec-
tion 965. Such earnings and profits might
nevertheless be eligible to be distributed
tax-free under section 245A. Such in-
come, however, is economically identical
to income earned by a calendar year CFC.
Absent the temporary regulations, similar
income from CFCs that differ only in their
taxable year would be subject to different
taxation. This difference between calendar
year and fiscal year CFCs is significant
and presents the potential for substantial
tax avoidance when utilized to artificially
generate earnings and profits in non-ordi-
nary course transactions between related
parties.
These temporary regulations refer to
the portion of a dividend attributable to
earnings and profits arising from such a
transaction during this period as an “ex-
traordinary disposition amount.” An ex-
traordinary disposition amount consists
of certain earnings and profits resulting
from transactions between related parties
during the disqualified period. See the
Explanation of Provisions section of this
preamble for definitions of all relevant
terms and conditions. Although the period
during which extraordinary dispositions
may have occurred has passed, the regu-
10
The discussion herein assumes that the transactions at issue would otherwise withstand scrutiny under section 7701(o) (i.e., the economic substance doctrine) and related judicial doctrines.
Taxpayers should draw no inferences from this assumption, however, as the IRS may challenge such transactions on these and other grounds.

July 1, 2019 40 Bulletin No. 2019–27
lations will potentially apply to any dis-
tributions of the associated earnings and
profits after 2017.
The second issue occurs because the
application of the allocation rules under
sections 951(a) and 951A (which deter-
mine a U.S. shareholder’s pro rata share
of a CFC’s subpart F income or tested in-
come for GILTI purposes) together with
section 245A creates situations in which
earnings and profits may not be properly
subject to the new international tax regime
that Congress enacted to prevent the inap-
propriate application of the section 245A
deduction. For example, this situation
may arise because of the “dividend offset”
rule in section 951(a)(2)(B), which, sub-
ject to certain limitations, reduces a U.S.
shareholder’s pro rata share of subpart F
income or tested income for dividends
paid to another owner of the same stock
of the CFC during the taxable year (such
reduction being a rough approximation of
the portion of subpart F income and tested
income for the year that is properly attrib-
utable to the other owner).
In order to illustrate this concern, con-
sider the following example. A corporate
U.S. shareholder generally is taxed with
respect to a CFC’s subpart F income as
of the end of the CFC’s taxable year. Sup-
pose, however, that the U.S. shareholder
received a dividend from the CFC in an
amount equal to its subpart F income and
thereafter transferred ownership of the
CFC to a new U.S. shareholder shortly
before the end of the CFC’s taxable year.
If a section 245A deduction applied to the
dividend, the corporate U.S. shareholder
would not be taxed on the distribution.
Furthermore, the second U.S. sharehold-
er’s subpart F inclusion for the CFC’s
taxable year may be reduced to approxi-
mately zero as a result of the dividend off-
set rule. As a consequence, absent the ap-
plication of these temporary regulations,
income that should have been subject to
U.S. taxation under the subpart F regime
could escape taxation altogether.
In contrast to the first issue, this sec-
ond issue implicates the interlocking pro-
visions of the international tax regime on
an ongoing basis. As described in Part
II.C of the Explanation of Provisions sec-
tion of this preamble, section 245A could
facilitate the avoidance of the subpart F
and GILTI regimes by allowing a U.S.
shareholder to transfer, before the end of
a CFC’s taxable year, stock of the CFC to
a new shareholder who will not be taxed
on the CFC’s subpart F income or tested
income. As a consequence of the repeal
of section 958(b)(4), this new sharehold-
er might be a foreign person who is not
taxable with respect to the CFC’s subpart
F income or tested income. Alternatively,
the new shareholder may not be taxable
with respect to these amounts as a re-
sult of the dividend offset rule of section
951(a)(2)(B), notwithstanding the fact
that if the prior owner of the stock is a
corporate U.S. shareholder, the section
245A deduction may apply to dividends
received by such prior owner. In these
cases, current year subpart F income and
GILTI could escape taxation altogether, a
result that would undermine the post-Act
system for taxing foreign earnings. These
temporary regulations refer to earnings
and profits representing the portion of a
dividend of a CFC attributable to subpart
F income or tested income of the CFC
that, absent a transfer of stock of the CFC
pursuant to an extraordinary reduction,
would have been subject to the subpart
F or GILTI regimes as an “extraordinary
reduction amount.” An extraordinary re-
duction amount consists of certain earn-
ings and profits generated during a CFC’s
taxable year beginning after 2017 in
which a domestic corporate U.S. share-
holder reduces its ownership of the CFC
by certain threshold amounts (e.g., a de-
crease in ownership of more than 10 per-
cent). For this purpose, “certain earnings
and profits” refers to income generally
subject to inclusion under the subpart F
or GILTI regimes. See the Explanation
of Provisions section of this preamble
for definitions of all relevant terms and
conditions.
Results similar to the ones described
in this section for extraordinary disposi-
tion amounts and extraordinary reduction
amounts can be achieved using the exemp-
tion from subpart F income under section
954(c)(6) and lower-tier CFC dividends
to upper-tier CFCs. Accordingly, the tem-
porary regulations limit the application of
the section 954(c)(6) exception in order to
prevent similar results in circumstances in
which a lower-tier CFC pays a dividend to
another CFC, instead of directly to a U.S.
shareholder.
C. Overview of the temporary
regulations
The Treasury Department and the IRS
have determined that it is appropriate to
limit the section 245A deduction to dis-
tributions of earnings and profits that are
attributable to certain normal return, high-
taxed, or immobile income, which will en-
sure that similar income is taxed similarly.
The temporary regulations do not permit
section 245A deductions for the portions
of dividends made by CFCs that are attrib-
utable to ineligible amounts, which com-
prise extraordinary reduction amounts and
50percent of any extraordinary disposition
amounts.
To accomplish this, the temporary reg-
ulations disallow a deduction for transac-
tions that have the effect of avoiding tax
under section 951, 951A, or 965. The ex-
traordinary disposition rules accomplish
this by denying the deduction under sec-
tion 245A for a narrowly and objectively
defined class of earnings and profits gen-
erated by transactions undertaken in the
disqualified period in circumstances that
raise abuse concerns. The extraordinary
reduction rules accomplish this by deny-
ing the deduction under section 245A for
certain earnings distributed in the same
year as reductions in ownership of CFC
stock by a controlling section 245A share-
holder. The temporary regulations contain
similar rules with respect to section 954(c)
(6).
D. Economic analysis of the temporary
regulations
1. Baseline
The Treasury Department and the IRS
have assessed the benefits and costs of the
temporary regulations relative to a no-ac-
tion baseline reflecting anticipated Feder-
al income tax-related behavior in the ab-
sence of these temporary regulations.
2. Summary of Economic Effects
To assess the economic effects of these
regulations, the Treasury Department and
the IRS considered the economic effects
of disallowing the 245A deduction for (i)
extraordinary disposition amounts and (ii)
extraordinary reduction amounts.

Bulletin No. 2019–27 41 July 1, 2019
The disallowance of the dividends re-
ceived deduction for extraordinary dispo-
sition amounts applies, in plain language,
only to earnings and profits accrued prior
to issuance of the temporary regulations.
Thus, no substantive economic activities
can be affected by this disallowance and
the economic decisions affected are only
those associated with taxpayers’ financing
of their tax liability.
The Treasury Department and the IRS’s
analysis therefore focuses on those pro-
visions of the temporary regulations that
disallow the dividends received deduction
for extraordinary reduction amounts. Ab-
sent the temporary regulations, U.S. taxa-
tion of income of a CFC that would other-
wise be subject to the subpart F or GILTI
regime could be avoided by a transfer of
ownership of the CFC to other entities in
such a way that the income of the CFC
would not be subject to U.S. tax. Thus, the
economic effects stem from those trans-
fers that would give rise to an extraordi-
nary reduction amount (“ER transfers”)
and that would not be undertaken as a
result of the temporary regulations. The
Treasury Department and the IRS proj-
ect that a substantial portion of these ER
transfers would have been undertaken for
tax avoidance purposes only and would
have negative effects on economic perfor-
mance (giving rise to a positive economic
effect from the temporary regulations) but
that those effects would be minor because
the transfers would take place among re-
lated parties and over short time frames.
Thus, there would be only negligible loss-
es in economic performance due to inef-
ficient changes in management, risk-bear-
ing, or other economic activity. Instead,
the primary economic losses due to these
transfers (and thus gains from the tempo-
rary regulations) are likely to consist of
resources that would be expended in car-
rying out such tax planning activities. The
Treasury Department and the IRS project
that these saved resource costs would be
small.
The Treasury Department and the IRS
considered that at least some ER transfers
that would not be pursued as a result of the
temporary regulations would have provid-
ed positive economic benefits, such as
through more efficient risk-bearing or oth-
er managerial control benefits. The Trea-
sury Department and the IRS project that
the aggregate value of these foregone ben-
efits will be minimal because the transfers
for which a deduction is disallowed and
that are likely not to be undertaken as a
result of the temporary regulations are
not generally associated with productive
economic activities. In this regard, the
Treasury Department and the IRS expect
that economically-motivated transfers of
CFCs should not be inhibited by the tem-
porary regulations because the temporary
regulations, taking into account the elec-
tion to close a CFC’s taxable year, often
will result in the same or similar tax lia-
bility to a seller as if the transfer had not
occurred. Thus, the temporary regulations
should not discourage economically-mo-
tivated transfers of CFCs. If anything,
the temporary regulations will discourage
transfers of CFCs that would not have oc-
curred absent the tax results the temporary
regulations seek to prevent. These trans-
fers, which would be motivated by tax
avoidance, likely would not be economi-
cally productive.
The temporary regulations will require
taxpayers to compute, track, and report
information relevant for determination of
extraordinary dispositions and extraordi-
nary reductions. The compliance burden
component of the Treasury Department
and the IRS’s estimate of the economic
effects of the temporary regulations re-
flects only those record-keeping and re-
lated compliance activities that would not
have been undertaken in the absence of
the temporary regulations. The Treasury
Department and the IRS project that these
additional costs, relative to the baseline,
will be modest. In general, with respect
to the initial year of an extraordinary dis-
position or any extraordinary reduction,
taxpayers are already required to keep
track of the required information for other
purposes. For example, to the extent that a
U.S. taxpayer sells stock in its CFC, earns
income in its CFC, or receives a dividend
from a CFC, the taxpayer would otherwise
record the information needed to deter-
mine eligibility for the section 245A de-
duction under the temporary regulations.
Additionally, once calculated the costs to
track amounts related to extraordinary dis-
positions in future years are expected to
be minimal. For all of these reasons, the
Treasury Department and the IRS expect
the non-revenue economic effects of these
temporary regulations to be small.
11

The Treasury Department and the IRS
have not undertaken a quantitative es-
timate of the economic benefits arising
from avoided transactions that constitute
extraordinary reductions. Any such esti-
mates would be highly uncertain because
these tax provisions are new and because
the transfers would be between related
parties and primarily of short duration,
both of which factors make estimation dif-
ficult. The tax planning costs of effecting
these transfers are also highly uncertain
because these specific tax planning efforts
are new.
While it is not currently feasible for the
Treasury Department and the IRS to quan-
tify these economic effects, part I.D.3 of
these Special Analyses explains the ratio-
nale behind the provisions of these tempo-
rary regulations and provides a qualitative
assessment of the alternatives considered.
The Treasury Department and the IRS
solicit comments on this assessment of the
economic effects of the temporary regu-
lations.
3. Analysis of Specific Provisions
i. Ordering of Distributions of Earnings
and Profits With Respect to Extraordinary
Disposition Amounts
a. Background and Alternatives
Considered
Any transaction that gave rise to an ex-
traordinary disposition has already taken
place because the disqualified period has
closed for all taxpayers. Thus, the tempo-
rary regulations should have no economic
effect with respect to these transactions.
Nevertheless, the denial of a section 245A
deduction with respect to the related ex-
traordinary disposition E&P may in some
cases lead CFCs to retain earnings rather
than distribute them in order to defer the
associated U.S. tax. The undistributed
earnings in this case may lead to a so-
called “lockout effect” pursuant to which
some portion of the offshore capital re-
11
This claim refers solely to the economic benefit arising from this provision and does not refer to any estimate of the tax revenue effects of the provision.

July 1, 2019 42 Bulletin No. 2019–27
mains in less productive ventures than
would otherwise be the case had the earn-
ings and profits been eligible for a section
245A deduction.
The temporary regulations address this
potential concern by providing an order-
ing rule such that extraordinary distribu-
tion E&P generally are the last earnings
and profits deemed distributed by a CFC.
As a result, CFCs generally may distribute
all other earnings and profits that are eli-
gible for a section 245A deduction before
extraordinary disposition E&P for which
a section 245A deduction is not allowed.
This rule will generally minimize the cap-
ital allocation inefficiencies stemming
from a potential lockout effect by defer-
ring the application of the temporary regu-
lations to the latest extent possible. More-
over, the Treasury Department and the
IRS expect that the extraordinary disposi-
tion E&P will not often be associated with
liquid assets, such as cash. An extraordi-
nary disposition requires a non-ordinary
course transaction among related parties.
The Treasury Department and the IRS
are aware that transactions giving rise to
an extraordinary disposition typically in-
volve the issuance of related party debt or
stock. These instruments are not the sort
of assets that implicate lockout effect con-
cerns because they would rarely be used
as consideration for making a payment to
a third party.
The Treasury Department and the IRS
considered as an alternative not providing
an ordering rule. For the reasons men-
tioned above, this alternative was not ad-
opted. In particular, the lack of an order-
ing rule would have inhibited taxpayers
from accessing future offshore earnings
that had been appropriately subject to tax
under Act, which would have frustrated
the congressional purpose underlying the
participation exemption. By essentially
reviving the lockout effect that had moti-
vated certain international aspects of the
Act, this alternative approach may have
trapped capital in suboptimal offshore
uses.
b. Affected Taxpayers
The taxpayers potentially affected by
this aspect of the temporary regulations
are direct or indirect U.S. shareholders
of certain foreign corporations that are
eligible for the section 245A deduction
or the section 954(c)(6) exception with
respect to distributions from the foreign
corporation, and the foreign corporation
uses a fiscal year, as opposed to the cal-
endar year, as its taxable year. The for-
eign corporation must have engaged in
a sale of property to a related party (1)
during the period between January 1,
2018, and the end of the foreign corpora-
tion’s last taxable year beginning before
2018, (2) outside the ordinary course of
the foreign corporation’s activities, and
(3) generally, while the corporation was
a CFC. Additionally, the property sold
must give rise to tested income and the
value of the property sold must exceed
the lesser of $50 million or 5 percent of
the total value of the property of the for-
eign corporation.
The Treasury Department and the IRS
have not estimated how many taxpayers
are likely to be affected by these regula-
tions because data on the taxpayers that
may have engaged in these particular
transactions is not readily available. How-
ever, based on tabulations of the 2014 Sta-
tistics of Income Study file the Treasury
Department and the IRS estimate that
there are approximately 5,000 domestic
corporations with at least one fiscal year
CFC. The actual number of affected tax-
payers is smaller than the number of do-
mestic corporations with at least one fiscal
year CFC, because a domestic corporation
will not be affected unless its fiscal year
CFC engages in a non-routine sale with
a related party that is of sufficient mag-
nitude that the temporary regulations to
apply.
ii. Definition of Extraordinary Reduction
a. Background and Alternatives
Considered
The temporary regulations limit the
amount of the 245A deduction whenever
there is an “extraordinary reduction.” The
temporary regulations generally define an
extraordinary reduction, subject to certain
conditions, as when either the controlling
section 245A shareholder transfers more
than 10 percent of its stock of the CFC or
there is a greater than 10 percent change in
the controlling section 245A shareholder’s
overall ownership of the CFC.
The Treasury Department and the IRS,
in defining an extraordinary reduction,
considered other percentage thresholds.
They expect that the ownership change
threshold provides an effective balance
of compliance costs for taxpayers, effec-
tive administration of section 245A, and
revenue considerations. The Treasury
Department and the IRS do not have ap-
propriate data or models to precisely com-
pute an optimal percentage threshold. The
Treasury Department and the IRS solicit
comments on the economic and revenue
consequences of the ownership change
threshold and alternative thresholds. The
Treasury Department and the IRS partic-
ularly solicit comments that provide data,
models, or analysis suitable for evaluating
alternative thresholds.
b. Affected Taxpayers
The taxpayers potentially affected by
this aspect of the temporary regulations
are U.S. shareholders that own directly
or indirectly stock of a CFC that has a
controlling U.S. shareholder that owns 50
percent or more of the stock of the CFC.
Additionally, during the taxable year, the
controlling U.S. shareholder generally
must directly or indirectly sell stock in
the CFC that exceeds 10 percent of the
controlling U.S. shareholder’s interest in
the CFC and 5 percent of the total value
of the stock of the CFC. Furthermore, in
the year of the ownership reduction, the
subpart F income and tested income of the
CFC must exceed the lesser of $50 million
or 5 percent of the CFC’s total income for
the year.
The Treasury Department and the IRS
have not estimated how many taxpayers
are likely to be affected by these regula-
tions because data on the taxpayers that
may have engaged or would engage in
these particular transactions is not readily
available. However, based on 2014 Statis-
tics of Income tax data, the Treasury De-
partment and the IRS estimate that there
are approximately 15,000 domestic cor-
porations with CFCs. The Treasury De-
partment and the IRS project that the ac-
tual number of affected taxpayers is likely
much smaller than the number of domes-
tic corporations with CFCs, given that the
controlling U.S. shareholder must engage
in a sale of stock of a CFC in a year in

Bulletin No. 2019–27 43 July 1, 2019
which the CFC pays a dividend in order
for the temporary regulations to apply.
iii. Election to Avoid Taxable Dividend
by Closing the CFC’s Taxable Year
a. Background and Alternatives
Considered
The Treasury Department and the IRS
provide taxpayers with an election to avoid
having a taxable dividend with respect to
an extraordinary reduction amount by
closing the taxable year of the CFC for all
purposes of the Code on the date of the
extraordinary reduction. Such an election
would subject the earnings and profits
that, absent the election, would give rise
to an extraordinary reduction amount in-
stead to taxation under the subpart F or
GILTI regimes, and therefore, exemption
under section 245A for any remaining
earnings is appropriate. By providing this
election, the Treasury Department and
the IRS allow taxpayers to choose the tax
treatment that would have been imposed
in the absence of the interactions among
provisions.
In addition to ensuring that similar
income is taxed similarly, this election
increases the choices available to taxpay-
ers, thus increasing flexibility and there-
by minimizing the burden imposed by
these regulations. To the extent taxpayers
choose this election, tax burdens could be
reduced relative to tax burdens under the
temporary regulations in the absence of
the election, because denying the section
245A deduction could result in higher tax
(i.e., at ordinary corporate rates) than im-
position of a reduced tax under the GILTI
regime. The Treasury Department and the
IRS chose to allow such election because
if the election were not allowed, some tax-
payers would be taxed more heavily than
the Treasury Department and the IRS have
determined is intended under the Act.
b. Affected Taxpayers
The taxpayers potentially affected by
this aspect of the temporary regulations
are described in Part I.D.3.ii.b of this Spe-
cial Analyses.
II. Paperwork Reduction Act
The collections of information
in the temporary regulations are in
§§1.245A-5T(e)(3) and 1.6038-2T(f)(16).
The collection of information in
§1.245A-5T(e)(3) is elective for a domes-
tic corporation that is a controlling U.S.
shareholder of a CFC receiving a divi-
dend from the CFC and wants to elect to
have none of the dividend considered an
extraordinary reduction amount by clos-
ing the CFC’s tax year. The collection of
information is satisfied by timely filing of
the “Elective Section 245A Year-Closing
Statement” with the domestic corpora-
tion’s original Form 1120, U.S. Corpora-
tion Income Tax Return, for the taxable
year in which the dividend is received.
For purposes of the Paperwork Reduction
Act, the reporting burden associated with
§1.245A-5T will be reflected in the Pa-
perwork Reduction Act submission asso-
ciated with Form 1120 (OMB control no.
1545-0123).
The collection of information in
§1.6038-2T(f)(16) is mandatory for ev-
ery U.S. person that controls a foreign
corporation that has paid a dividend for
which a deduction under section 245A
was limited by an ineligible amount un-
der § 1.245A-5T(b) or paid a dividend
for which the section 954(c)(6) exception
was limited by a tiered extraordinary dis-
position amount or tiered extraordinary
reduction amount under §1.245A-5T(d)
and (f), respectively, during an annual ac-
counting period and files Form 5471 for
that period (OMB control number 1545-
0123 in the case of business taxpayers,
formerly, OMB control number 1545-
0704). The collection of information in
§1.6038-2T(f)(16) is satisfied by pro-
viding information about the ineligible
amount, tiered extraordinary disposition
amount, or tiered extraordinary reduction
amount for the corporation’s accounting
period as Form 5471 and its instructions
may prescribe. For purposes of the Pa-
perwork Reduction Act, the reporting
burden associated with §1.6038-2T(f)
(16) will be reflected in the applicable
Paperwork Reduction Act submission,
associated with Form 5471. As provided
below, the estimated number of respon-
dents for the reporting burden associat-
ed with §1.6038-2T(f)(16) is 12,000-
18,000, based on estimates provided by
the Research, Applied Analytics and Sta-
tistics Division of the IRS.
The related new or revised tax form is
as follows:
NewRevision of existing formNumber of respondents (estimate)
Schedule to Form 5471

12,000–18,000
The current status of the Paperwork
Reduction Act submissions related to the
new revised Form 5471 as a result of the
information collections in the temporary
regulations is provided in the accompa-
nying table. The reporting burdens asso-
ciated with the information collections
in §§1.245A-5T-(e)(3) and 1.6038-2T(f)
(16) are included in the aggregated burden
estimates for OMB control number 1545-
0123, which represents a total estimated
burden time for all forms and schedules
for corporations of 3.157 billion hours
and total estimated monetized costs of
$58.148 billion ($2017). The overall
burden estimates provided in 1545-0123
are aggregate amounts that relate to the
entire package of forms associated with
the OMB control number and will in the
future include but not isolate the estimat-
ed burden of the tax forms that will be re-
vised as a result of the information collec-
tions in the proposed regulations. These
numbers are therefore unrelated to the
future calculations needed to assess the
burden imposed by the temporary regu-
lations. The Treasury Department and the
IRS urge readers to recognize that these
numbers are duplicates of estimates pro-
vided for informational purposes in other
proposed and final regulatory actions and
to guard against over-counting the burden
that international tax provisions imposed
prior to the Act.
In September 2018, the IRS released
and invited comment on drafts of new
revised Form 5471 in order to give mem-
bers of the public the opportunity to
benefit from certain specific provisions

July 1, 2019 44 Bulletin No. 2019–27
made to the Code. The IRS received
no comments on the draft revised Form
5471 on the portions of the form that re-
late to section 245A during the comment
period. Consequently, the IRS made the
form available in December 2018 for use
by the public. The IRS is contemplating
making additional changes to Form 5471
to implement these temporary regula-
tions.
No burden estimates specific to the
temporary regulations are currently
available. The Treasury Department and
the IRS have not identified any burden
estimates, including those for new infor-
mation collections, related to the require-
ments under the temporary regulations.
Those estimates would capture both
changes made by the Act and those that
arise out of discretionary authority exer-
cised in the temporary regulations. The
Treasury Department and the IRS request
comments on all aspects of information
collection burdens related to the tempo-
rary regulations, including estimates for
how much time it would take to comply
with the paperwork burdens described
above for each relevant form and ways
for the IRS to minimize the paperwork
burden. Proposed revisions to these
forms that reflect the information collec-
tions contained in these temporary regu-
lations will be made available for public
comment at www.irs.gov/draftforms and
will not be finalized until after approved
by OMB under the PRA.
Information CollectionType of FilerOMB Number(s)Status
Form 5471
Business
(NEW Model)
1545-0123Approved by OMB on 12/21/2018.
Link: https://www.federalregister.gov/documents/2018/12/21/2018-27735/agency-information-
collection-activities-submission-for-omb-review-comment-request-multiple-irs
III. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates
Reform Act of 1995 requires that agencies
assess anticipated costs and benefits and
take certain other actions before issuing a
final rule that includes any Federal man-
date that may result in expenditures in any
one year by a state, local, or tribal govern-
ment, in the aggregate, or by the private
sector, of $100 million in 1995 dollars,
updated annually for inflation. In 2019,
that threshold is approximately $154 mil-
lion. These temporary regulations do not
include any Federal mandate that may re-
sult in expenditures by state, local, or trib-
al governments, or by the private sector in
excess of that threshold.
IV. Executive Order 13132: Federalism
Executive Order 13132 (entitled
“Federalism”) prohibits an agency from
publishing any rule that has federalism
implications if the rule either imposes
substantial, direct compliance costs on
state and local governments, and is not
required by statute, or preempts state law,
unless the agency meets the consultation
and funding requirements of section 6 of
the Executive Order. These temporary
regulations do not have federalism im-
plications and do not impose substantial
direct compliance costs on state and local
governments or preempt state law within
the meaning of the Executive Order.
Drafting Information
The principal author of the temporary
regulations is Logan M. Kincheloe, Office
of Associate Chief Counsel (Internation-
al). However, other personnel from the
Treasury Department and the IRS partic-
ipated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recording
keeping requirements.
Amendments to the Regulations
Accordingly, 26 CFR part 1 is amend-
ed as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 is amended by adding a section-
al authority for §1.245A-5 to read in part
as follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Section 1.245A-5 also issued under 26
U.S.C. 245A(g), 951A(a), 954(c)(6)(A),
and 965(o).
* * * * *
Par. 2. Reserved sections 1.245A-1
through 4 and § 1.245A-5T are added
to read as follows:
Sec.
1.245A-1 [Reserved].
1.245A-2 [Reserved].
1.245A-3 [Reserved].
1.245A-4 [Reserved].
1.245A-5T Limitation of section 245A
deduction and section 954(c)(6) exception
(temporary).
§1.245A-5T Limitation of section
245A deduction and section 954(c)(6)
exception (temporary).
(a) Overview. This section provides
rules that limit a deduction under section
245A(a) to the portion of a dividend that
exceeds the ineligible amount of such div-
idend or the applicability of section 954(c)
(6) when a portion of a dividend is paid out
of an extraordinary disposition account or
when an extraordinary reduction occurs.
Paragraph (b) of this section provides rules
regarding ineligible amounts. Paragraph (c)
of this section provides rules for determin-
ing ineligible amounts attributable to an
extraordinary disposition. Paragraph (d) of
this section provides rules that limit the ap-
plication of section 954(c)(6) when one or
more section 245A shareholders of a low-
er-tier CFC have an extraordinary disposi-
tion account. Paragraph (e) of this section
provides rules for determining ineligible
amounts attributable to an extraordinary
reduction. Paragraph (f) of this section pro-
vides rules that limit the application of sec-
tion 954(c)(6) when a lower-tier CFC has
an extraordinary reduction amount. Para-
graph (g) of this section provides special
rules for purposes of applying this section.

Bulletin No. 2019–27 45 July 1, 2019
Paragraph (h) of this section provides an
anti-abuse rule. Paragraph (i) of this section
provides definitions. Paragraph (j) of this
section provides examples illustrating the
application of this section. Paragraph (k) of
this section provides the applicability date
of this section. Paragraph (l) of this section
provides the expiration date of this section.
(b) Limitation of deduction under sec-
tion 245A—(1) In general. A section 245A
shareholder is allowed a section 245A de-
duction for any dividend received from
an SFC (provided all other applicable re-
quirements are satisfied) only to the extent
that the dividend exceeds the ineligible
amount of the dividend. See paragraphs
(j)(2), (4), and (5) of this section for ex-
amples illustrating the application of this
paragraph (b)(1).
(2) Definition of ineligible amount.
The term ineligible amount means, with
respect to a dividend received by a sec-
tion 245A shareholder from an SFC, an
amount equal to the sum of—
(i) 50 percent of the extraordinary dis-
position amount (as determined under
paragraph (c) of this section), and
(ii) The extraordinary reduction
amount (as determined under paragraph
(e) of this section).
(c) Rules for determining extraordinary
disposition amount—(1) Definition of ex-
traordinary disposition amount. The term
extraordinary disposition amount means
the portion of a dividend received by a
section 245A shareholder from an SFC
that is paid out of the extraordinary dispo-
sition account with respect to the section
245A shareholder. See paragraph (j)(2) of
this section for an example illustrating the
application of this paragraph (c).
(2) Determination of portion of divi-
dend paid out of extraordinary disposition
account—(i) In general. For purposes
of determining the portion of a dividend
received by a section 245A shareholder
from an SFC that is paid out of the ex-
traordinary disposition account with re-
spect to the section 245A shareholder, the
following rules apply—
(A) The dividend is first considered
paid out of non-extraordinary disposition
E&P with respect to the section 245A
shareholder; and
(B) The dividend is next considered
paid out of the extraordinary disposition
account to the extent of the section 245A
shareholder’s extraordinary disposition
account balance.
(ii) Definition of non-extraordinary
disposition E&P. The term non-extraordi-
nary disposition E&P means, with respect
to a section 245A shareholder and an SFC,
an amount of earnings and profits of the
SFC equal to the excess, if any, of—
(A) The product of—
(1) The amount of the SFC’s earnings
and profits described in section 959(c)
(3), determined as of the end of the SFC’s
taxable year (for this purpose, without
regard to distributions during the taxable
year other than as provided in this para-
graph (c)(2)(ii)(A)(1)), but, if during the
taxable year the SFC pays more than one
dividend, reduced (but not below zero) by
the amounts of any dividends paid by the
SFC earlier in the taxable year; and
(2) The percentage of the stock (by
value) of the SFC that the section 245A
shareholder owns directly or indirectly
immediately after the distribution (taking
into account all transactions related to the
distribution); over
(B) The balance of the section 245A
shareholder’s extraordinary disposition
account with respect to the SFC, deter-
mined immediately before the distribu-
tion.
(3) Definitions with respect to extraor-
dinary disposition accounts—(i) Extraor-
dinary disposition account—(A) In gen-
eral. The term extraordinary disposition
account means, with respect to a section
245A shareholder of an SFC, an account
the balance of which is equal to the prod-
uct of the extraordinary disposition own-
ership percentage and the extraordinary
disposition E&P, reduced (but not below
zero) by the prior extraordinary dispo-
sition amount, and adjusted under para-
graph (c)(4) of this section, as applicable.
(B) Extraordinary disposition owner-
ship percentage. The term extraordinary
disposition ownership percentage means
the percentage of stock (by value) of a
SFC that a section 245A shareholder owns
directly or indirectly at the beginning of
the disqualified period or, if later, on the
first day during the disqualified period
on which the SFC is a CFC, regardless
of whether the section 245A shareholder
owns directly or indirectly such stock of
the SFC on the date of an extraordinary
disposition giving rise to extraordinary
disposition E&P; if not, see paragraph (c)
(4) of this section.
(C) Extraordinary disposition E&P.
The term extraordinary disposition E&P
means an amount of earnings and profits
of an SFC equal the sum of the net gain
recognized by the SFC with respect to
specified property in each extraordinary
disposition. In the case of an extraordinary
disposition with respect to the SFC aris-
ing as a result of a disposition of specified
property by a specified entity (other than a
foreign corporation), an interest of which
is owned directly or indirectly (through
one or more other specified entities that
are not foreign corporations) by the SFC,
the net gain taken into account for purpos-
es of the preceding sentence is the SFC’s
distributive share of the net gain recog-
nized by the specified entity with respect
to the specified property.
(D) Prior extraordinary disposition
amount—(1) General rule. The term prior
extraordinary disposition amount means,
with respect to an SFC and a section 245A
shareholder, the sum of the extraordinary
disposition amount of each prior dividend
received by the section 245A sharehold-
er from the SFC by reason of paragraph
(c) of this section and 200 percent of the
sum of the amounts included in the section
245A shareholder’s gross income under
section 951(a) by reason of paragraph (d)
of this section (in the case in which the
SFC is, or has been, a lower-tier CFC). A
section 245A shareholder’s prior extraor-
dinary disposition amount also includes—
(i) A prior dividend received by the
section 245A shareholder from the SFC to
the extent not an extraordinary reduction
amount and to the extent the dividend was
not eligible for the section 245A deduc-
tion by reason of section 245A(e) or the
holding period requirement of section 246
not being satisfied but would have been
an extraordinary disposition amount had
paragraph (c) of this section applied to the
dividend;
(ii) The portion of a prior dividend (to
the extent not a tiered extraordinary dispo-
sition amount by reason of paragraph (d)
of this section) received by an upper-tier
CFC from the SFC that by reason of sec-
tion 245A(e) was included in the upper-ti-
er CFC’s foreign personal holding com-
pany income and was included in gross
income by the section 245A shareholder

July 1, 2019 46 Bulletin No. 2019–27
under section 951(a) but would have been
a tiered extraordinary disposition amount
by reason of paragraph (d) of this section
had paragraph (d) applied to the dividend;
(iii) If a prior dividend received by an
upper-tier CFC from a lower-tier CFC
gives rise to a tiered extraordinary dispo-
sition amount with respect to the section
245A shareholder by reason of paragraph
(d) of this section, the qualified portion.
(2) Definition of qualified portion—(i)
In general. The term qualified portion
means, with respect to a tiered extraordi-
nary disposition amount of a section 245A
shareholder and a lower-tier CFC, 200
percent of the portion of the disqualified
amount with respect to the tiered extraor-
dinary disposition amount equal to the
sum of the amounts included in gross in-
come by each U.S. tax resident under sec-
tion 951(a) in the taxable year in which the
tiered extraordinary disposition amount
arose with respect to the lower-tier CFC
by reason of paragraph (d) of this section.
For purposes of the preceding sentence,
the reference to a U.S. tax resident does
not include any section 245A sharehold-
er with a tiered extraordinary disposition
amount with respect to the lower-tier CFC.
(ii) Determining a qualified portion if
multiple section 245A shareholders have
tiered extraordinary disposition amounts.
For the purposes of applying paragraph
(c)(3)(i)(D)(2)(i) of this section, if more
than one section 245A shareholder has a
tiered extraordinary disposition amount
with respect to a dividend received by an
upper-tier CFC from a lower-tier CFC,
then the qualified portion with respect to
each section 245A shareholder is equal
to the amount described in paragraph (c)
(3)(i)(D)(2)(i) of this section, without re-
gard to this paragraph (c)(3)(i)(D)(2)(ii),
multiplied by a fraction, the numerator of
which is the section 245A shareholder’s
tiered extraordinary disposition amount
with respect to the lower-tier CFC and the
denominator of which is the sum of the
tiered extraordinary disposition amounts
with respect to each section 245A share-
holder and the lower-tier CFC.
(ii) Extraordinary disposition—(A) In
general. Except as provided in paragraph
(c)(3)(ii)(E) of this section, the term ex-
traordinary disposition means, with re-
spect to an SFC, any disposition of spec-
ified property by the SFC on a date on
which it was a CFC and during the SFC’s
disqualified period to a related party if the
disposition occurs outside of the ordinary
course of the SFC’s activities. An extraor-
dinary disposition also includes a dispo-
sition during the disqualified period on
a date on which the SFC is not a CFC if
there is a plan, agreement, or understand-
ing involving a section 245A shareholder
to cause the SFC to recognize gain that
would give rise to an extraordinary dispo-
sition if the SFC were a CFC.
(B) Facts and circumstances. A deter-
mination as to whether a disposition is
undertaken outside of the ordinary course
of an SFC’s activities is made on the basis
of facts and circumstances, taking into ac-
count whether the transaction is consistent
with the SFC’s past activities, including
with respect to quantity and frequency. In
addition, a disposition of specified prop-
erty by an SFC to a related party may be
considered outside of the ordinary course
of the SFC’s activities notwithstanding
that the SFC regularly disposes of prop-
erty of the same type of, or similar to, the
specified property to persons that are not
related parties.
(C) Per se rules. A disposition is treated
as occurring outside of the ordinary course
of an SFC’s activities if the disposition is
undertaken with a principal purpose of
generating earnings and profits during the
disqualified period or if the disposition is
of intangible property, as defined in sec-
tion 367(d)(4).
(D) Treatment of dispositions by cer-
tain specified entities. For purposes of
paragraph (c)(3)(ii)(A) of this section, an
extraordinary disposition with respect to
an SFC includes a disposition by a spec-
ified entity other than a foreign corpora-
tion, provided that immediately before or
immediately after the disposition the spec-
ified entity is a related party with respect
to the SFC, the SFC directly or indirectly
(through one or more other specified enti-
ties other than foreign corporations) owns
an interest in the specified entity, and the
disposition would have otherwise quali-
fied as an extraordinary disposition had
the specified entity been a foreign corpo-
ration.
(E) De minimis exception to extraor-
dinary disposition. If the sum of the net
gain recognized by an SFC with respect
to specified property in all dispositions
otherwise described in paragraph (c)(3)
(ii)(A) of this section does not exceed the
lesser of $50 million or 5 percent of the
gross value of all of the SFC’s property
held immediately before the beginning of
its disqualified period, then no disposition
of specified property by the SFC is an ex-
traordinary disposition.
(iii) Disqualified period. The term dis-
qualified period means, with respect to an
SFC that is a CFC on any day during the
taxable year that includes January 1, 2018,
the period beginning on January 1, 2018,
and ending as of the close of the taxable
year of the SFC, if any, that begins before
January 1, 2018, and ends after December
31, 2017.
(iv) Specified property. The term spec-
ified property means any property if gain
recognized with respect to such proper-
ty during the disqualified period is not
described in section 951A(c)(2)(A)(i)
(I) through (V). If only a portion of the
gain recognized with respect to property
during the disqualified period is gain that
is not described in section 951A(c)(2)(A)
(i)(I) through (V), then a portion of the
property is treated as specified property
in an amount that bears the same ratio to
the value of the property as the amount
of gain not described in section 951A(c)
(2)(A)(i)(I) through (V) bears to the total
amount of gain recognized with respect
to such property during the disqualified
period.
(4) Successor rules for extraordinary
disposition accounts. This paragraph (c)
(4) applies with respect to an extraordi-
nary disposition account upon certain
direct or indirect transfers of stock of an
SFC by a section 245A shareholder.
(i) Another section 245A shareholder
succeeds to all or portion of account. Ex-
cept for a transfer described in §1.1248-
8(a)(1), paragraphs (c)(4)(i)(A) through
(C) of this section apply when a section
245A shareholder of an SFC (the trans-
feror) transfers directly or indirectly a
share of stock (or a portion of a share of
stock) of the SFC that it owns directly or
indirectly (the share or portion thereof, a
transferred share).
(A) If immediately after the transfer
(taking into account all transactions re-
lated to the transfer) another person is a
section 245A shareholder of the SFC, then
such other person’s extraordinary dispo-

Bulletin No. 2019–27 47 July 1, 2019
sition account with respect to the SFC is
increased by the person’s proportionate
share of the amount allocated to the trans-
ferred share.
(B) For purposes of paragraph (c)(4)(i)
(A) of this section, the amount allocated to
a transferred share is equal to the product
of—
(1) The balance of the transferor’s
extraordinary disposition account with
respect to the SFC, determined after any
reduction pursuant to paragraph (c)(3) of
this section by reason of dividends and be-
fore the application of this paragraph (c)
(4)(i)(B); and
(2) A fraction, the numerator of which
is the value of the transferred share and
the denominator of which is the value of
all of the stock of the SFC that the trans-
feror owns directly or indirectly immedi-
ately before the transfer.
(C) For purposes of paragraph (c)(4)
(i)(A) of this section, a person’s propor-
tionate share of the amount allocated to a
transferred share under paragraph (c)(4)(i)
(B) of this section is equal to the product
of—
(1) The amount allocated to the share;
and
(2) The percentage (expressed as a dec-
imal) of the share (by value) that the per-
son owns directly or indirectly immediate-
ly after the transfer (taking into account all
transactions related to the transfer).
(D) The transferor’s extraordinary dis-
position account with respect to the SFC is
decreased by the amount by which anoth-
er person’s extraordinary disposition ac-
count with respect to the SFC is increased
pursuant to paragraph (c)(4)(i)(A) of this
section.
(E) If a principal purpose of the trans-
fer is to shift, or to avoid, an amount in
the transferor’s extraordinary disposition
account with respect to the SFC to another
person, then for purposes of this section,
the transfer may be disregarded or other
appropriate adjustments may be made.
(ii) Certain section 381 transactions.
If assets of an SFC (the acquired cor-
poration) are acquired by another SFC
(the acquiring corporation) pursuant to
a transaction described in section 381(a)
in which the acquired corporation is the
transferor corporation for purposes of
section 381, then a section 245A share-
holder’s extraordinary disposition account
with respect to the acquiring corporation
is increased by the balance of its extraor-
dinary disposition account with respect to
the acquired corporation, determined after
any reduction pursuant to paragraph (c)(3)
of this section by reason of dividends and
before the application of this paragraph
(c)(4)(ii).
(iii) Certain distributions involving
section 355 or 356. If, pursuant to a reor-
ganization described in section 368(a)(1)
(D) involving a distribution under section
355 (or so much of section 356 as it relates
to section 355) by an SFC (the distribut-
ing corporation) of stock of another SFC
(the controlled corporation), earnings and
profits of the distributing corporation are
allocated between the distributing corpo-
ration and the controlled corporation, then
a section 245A shareholder’s extraordi-
nary disposition account with respect to
the distributing corporation is allocated
on a similar basis between the distributing
corporation and the controlled corpora-
tion.
(iv) Certain transfers of stock of low-
er-tier CFCs by upper-tier CFCs. If an up-
per-tier CFC directly or indirectly transfers
stock of a lower-tier CFC and if as a result
of the transfer a section 245A shareholder
ceases to be a section 245A shareholder
with respect to the lower-tier CFC, then
the section 245A shareholder’s extraor-
dinary disposition account with respect
to the upper-tier CFC is increased by the
balance of the section 245A shareholder’s
extraordinary disposition account with re-
spect to the lower-tier CFC, determined
after any reduction pursuant to paragraph
(c)(3) of this section by reason of divi-
dends and after application of paragraph
(c)(4)(i) of this section, if applicable. If a
section 245A shareholder ceases to be a
section 245A shareholder with respect to
a lower-tier CFC by reason of a direct or
indirect transfer of stock of the lower-ti-
er CFC by multiple upper-tier CFCs that
occur pursuant to a plan (or series of re-
lated transactions), then the balance of the
section 245A shareholder’s extraordinary
disposition account is allocated among
the upper-tier CFCs. The portion of the
balance of the account allocated to each
upper-tier CFC is equal to the balance of
the account multiplied by a fraction, the
numerator of which is the value of the
stock of the lower-tier CFC transferred di-
rectly or indirectly by the upper-tier CFC,
and the denominator of which is the sum
of the value of the stock of the lower-tier
CFC transferred directly or indirectly by
all upper-tier CFCs.
(d) Limitation of amount eligible for
section 954(c)(6) when there is an extraor-
dinary disposition account with respect to
a lower-tier CFC—(1) In general. If an
upper-tier CFC receives a dividend from
a lower-tier CFC, the dividend is eligible
for the exception to foreign personal hold-
ing company income under section 954(c)
(6) only to the extent that the amount that
would be eligible for the section 954(c)
(6) exception (determined without regard
to this paragraph (d)) exceeds the disqual-
ified amount, which is 50 percent of the
quotient of the following—
(i) The sum of each section 245A
shareholder’s tiered extraordinary disposi-
tion amount with respect to the lower-tier
CFC; and
(ii) The percentage (expressed as a dec-
imal) of stock of the upper-tier CFC (by
value) owned, in the aggregate, by U.S.
tax residents that include in gross income
their pro rata share of the upper-tier CFC’s
subpart F income under section 951(a) on
the last day of the upper-tier CFC’s tax-
able year. If a U.S. tax resident is a direct
or indirect partner in a domestic partner-
ship that is a United States shareholder of
the upper-tier CFC, the amount of stock
owned by the U.S. tax resident for purpos-
es of the preceding sentence is determined
under the principles of paragraph (g)(3) of
this section.
(2) Definition of tiered extraordinary
disposition amount—(i) In general. The
term tiered extraordinary disposition
amount means, with respect to a dividend
received by an upper-tier CFC from a low-
er-tier CFC and a section 245A sharehold-
er, the portion of the dividend that would
be an extraordinary disposition amount if
the section 245A shareholder received as a
dividend its pro rata share of the dividend
from the lower-tier CFC. The preceding
sentence does not apply to an amount
treated as a dividend received by an up-
per-tier CFC from a lower-tier CFC by
reason of section 964(e)(4) (in such case,
see paragraphs (b)(1) and (g)(2) of this
section).
(ii) Section 245A shareholder’s pro
rata share of a dividend received by an

July 1, 2019 48 Bulletin No. 2019–27
upper-tier CFC. For the purposes of para-
graph (d)(2)(i) of this section, a section
245A shareholder’s pro rata share of the
amount of a dividend received by an up-
per-tier CFC from a lower-tier CFC equals
the amount by which the dividend would
increase the section 245A shareholder’s
pro rata share of the upper-tier CFC’s sub-
part F income under section 951(a)(2) and
§1.951-1(b) and (e) if the dividend were
included in the upper-tier CFC’s foreign
personal holding company income under
section 951(a)(1), determined without
regard to section 952(c) and as if the up-
per-tier CFC had no deductions properly
allocable to the dividend under section
954(b)(5).
(e) Extraordinary reduction amount—
(1) In general. Except as provided in
paragraph (e)(3) of this section, the term
extraordinary reduction amount means,
with respect to a dividend received by a
controlling section 245A shareholder from
a CFC during a taxable year of the CFC
ending after December 31, 2017, in which
an extraordinary reduction occurs with
respect to the controlling section 245A
shareholder’s ownership of the CFC, the
lesser of the amounts described in para-
graph (e)(1)(i) or (ii) of this section. See
paragraphs (j)(4) through (6) of this sec-
tion for examples illustrating the applica-
tion of this paragraph (e).
(i) The amount of the dividend.
(ii) The amount equal to the sum of the
controlling section 245A shareholder’s
pre-reduction pro rata share of the CFC’s
subpart F income (as defined in section
952(a)) and tested income (as defined in
section 951A(c)(2)(A)) for the taxable
year, reduced, but not below zero, by the
prior extraordinary reduction amount.
(2) Rules regarding extraordinary re-
duction amounts—(i) Extraordinary re-
duction—(A) In general. Except as pro-
vided in paragraph (e)(2)(i)(C) of this
section, an extraordinary reduction oc-
curs, with respect to a controlling section
245A shareholder’s ownership of a CFC
during a taxable year of the CFC, if either
of the conditions described in paragraph
(e)(2)(i)(A)(1) or (2) of this section is sat-
isfied. See paragraphs (j)(4) and (5) of this
section for examples illustrating an ex-
traordinary reduction.
(1) The condition of this paragraph (e)
(2)(i)(A)(1) requires that during the tax-
able year, the controlling section 245A
shareholder transfers directly or indirectly
(other than by reason of a transfer occur-
ring pursuant to an exchange described in
section 368(a)(1)(E) or (F)), in the aggre-
gate, more than 10 percent (by value) of
the stock of the CFC that the section 245A
shareholder owns directly or indirectly
as of the beginning of the taxable year of
the CFC, provided the stock transferred,
in the aggregate, represents at least 5 per-
cent (by value) of the outstanding stock of
the CFC as of the beginning of the taxable
year of the CFC; or
(2) The condition of this paragraph (e)
(2)(i)(A)(2) requires that, as a result of
one or more transactions occurring during
the taxable year, the percentage of stock
(by value) of the CFC that the controlling
section 245A shareholder owns directly or
indirectly as of the close of the last day of
the taxable year of the CFC is less than
90 percent of the percentage of stock (by
value) that the controlling section 245A
shareholder owns directly or indirectly on
either of the dates described in paragraphs
(e)(2)(i)(B)(1) and (2) of this section
(such percentage, the initial percentage),
provided the difference between the initial
percentage and percentage at the end of
the year is at least five percentage points.
(B) Dates for purposes of the initial
percentage. For purposes of paragraph (e)
(2)(i)(A)(2) of this section, the dates de-
scribed in paragraphs (e)(2)(i)(B)(1) and
(2) of this section are—
(1) The day of the taxable year on
which the controlling section 245A share-
holder owns directly or indirectly its high-
est percentage of stock (by value) of the
CFC; and
(2) The day immediately before the
first day on which stock was transferred
directly or indirectly in the preceding tax-
able year in a transaction (or a series of
transactions) occurring pursuant to a plan
to reduce the percentage of stock (by val-
ue) of the CFC that the controlling section
245A shareholder owns directly or indi-
rectly.
(C) Transactions pursuant to which
CFC’s taxable year ends. A controlling
section 245A shareholder’s direct or in-
direct transfer of stock of a CFC that but
for this paragraph (e)(2)(i)(B) would give
rise to an extraordinary reduction under
paragraph (e)(2)(i)(A) of this section does
not give rise to an extraordinary reduction
if the taxable year of the CFC ends im-
mediately after the transfer, provided that
the controlling section 245A shareholder
directly or indirectly owns the stock on the
last day of such year. Thus, for example,
if a controlling section 245A shareholder
exchanges all the stock of a CFC pursuant
to a complete liquidation of the CFC, the
exchange does not give rise to an extraor-
dinary reduction.
(ii) Rules for determining pre-reduc-
tion pro rata share—(A) In general. Ex-
cept as provided in paragraph (e)(2)(ii)(B)
of this section, the term pre-reduction pro
rata share means, with respect to a con-
trolling section 245A shareholder and the
subpart F income or tested income of a
CFC, the controlling section 245A share-
holder’s pro rata share of the CFC’s sub-
part F income or tested income under sec-
tion 951(a)(2) and §1.951-1(b) and (e) or
section 951A(e)(1) and §1.951A-1(d)(1),
respectively, determined based on the con-
trolling section 245A shareholder’s direct
or indirect ownership of stock of the CFC
immediately before the extraordinary re-
duction (or, if the extraordinary reduction
occurs by reason of multiple transactions,
immediately before the first transaction)
and without regard to section 951(a)(2)
(B) and §1.951-1(b)(1)(ii), but only to the
extent that such subpart F income or tested
income is not included in the controlling
section 245A shareholder’s pro rata share
of the CFC’s subpart F income or test-
ed income under section 951(a)(2) and
§1.951-1(b) and (e) or section 951A(e)(1)
and §1.951A-1(d)(1), respectively.
(B) Decrease in section 245A share-
holder’s pre-reduction pro rata share
for amounts taken into account by U.S.
tax resident. A controlling section 245A
shareholder’s pre-reduction pro rata share
of subpart F income or tested income of a
CFC for a taxable year is reduced by an
amount equal to the sum of the amounts
by which each U.S. tax resident’s pro rata
share of the subpart F income or tested in-
come is increased as a result of a transfer
directly or indirectly of stock of the CFC
by the controlling section 245A share-
holder or an issuance of stock by the CFC
(such an amount with respect to a U.S.
tax resident, a specified amount), in either
case, during the taxable year in which the
extraordinary reduction occurs. For pur-

Bulletin No. 2019–27 49 July 1, 2019
poses of this paragraph (e)(2)(ii)(B), if
there are extraordinary reductions with
respect to more than one controlling sec-
tion 245A shareholder during the CFC’s
taxable year, then a U.S. tax resident’s
specified amount attributable to an acqui-
sition of stock from the CFC is prorated
with respect to each controlling section
245A shareholder based on its relative de-
crease in ownership of the CFC. See para-
graph (j)(5) of this section for an example
illustrating a decrease in a section 245A
shareholder’s pre-reduction pro rata share
for amounts taken into account by a U.S.
tax resident.
(C) Prior extraordinary reduction
amount. The term prior extraordinary re-
duction amount means, with respect to a
CFC and section 245A shareholder and a
taxable year of the CFC in which an ex-
traordinary reduction occurs, the sum of
the extraordinary reduction amount of
each prior dividend received by the sec-
tion 245A shareholder from the CFC
during the taxable year. A section 245A
shareholder’s prior extraordinary reduc-
tion amount also includes—
(1) A prior dividend received by the
section 245A shareholder from the CFC
during the taxable year to the extent the
dividend was not eligible for the section
245A deduction by reason of section
245A(e) or the holding period require-
ment of section 246 not being satisfied but
would have been an extraordinary reduc-
tion amount had this paragraph (e) applied
to the dividend;
(2) If the CFC is a lower-tier CFC for
a portion of the taxable year during which
the lower-tier CFC pays any dividend to
an upper tier-CFC, the portion of a prior
dividend received by an upper-tier CFC
from the lower-tier CFC during the tax-
able year of the lower-tier CFC that, by
reason of section 245A(e), was included
in the upper-tier CFC’s foreign person-
al holding company income and that by
reason of section 951(a) was included in
income of the section 245A shareholder,
and that would have given rise to a tiered
extraordinary reduction amount by reason
of paragraph (f) of this section had para-
graph (f) applied to the dividend of which
the section 245A shareholder would have
included a pro rata share of the tiered ex-
traordinary reduction amount in income
by reason of section 951(a); and
(3) If the CFC is a lower-tier CFC for
a portion of the taxable year during which
the lower-tier CFC pays any dividend to
an upper-tier CFC, the sum of the por-
tion of the tiered extraordinary reduction
amount of each prior dividend received
by an upper-tier CFC from the lower-tier
CFC during the taxable year that is includ-
ed in income of the section 245A share-
holder by reason of section 951(a).
(3) Exceptions—(i) Elective excep-
tion to close CFC’s taxable year—(A)
In general. For a taxable year of a CFC
in which an extraordinary reduction oc-
curs with respect to a controlling section
245A shareholder and for which, absent
this paragraph (e)(3), there would be an
extraordinary reduction amount or tiered
extraordinary reduction amount greater
than zero, no amount is considered an ex-
traordinary reduction amount or tiered ex-
traordinary reduction amount with respect
to the controlling section 245A sharehold-
er if each controlling section 245A share-
holder elects, pursuant to this paragraph
(e)(3), to close the CFC’s taxable year
for all purposes of the Internal Revenue
Code (and, therefore, as to all sharehold-
ers of the CFC) as of the end of the date on
which the extraordinary reduction occurs,
or, if the extraordinary reduction occurs
by reason of multiple transactions, as of
the end of each date on which a transac-
tion forming a part of the extraordinary re-
duction occurs. For purposes of applying
this paragraph (e)(3), a controlling section
245A shareholder that has an extraordi-
nary reduction (or a transaction forming a
part thereof) with respect to a CFC is treat-
ed as owning the same amount of stock it
owned in the CFC immediately before the
extraordinary reduction (or a transaction
forming a part thereof) on the end of the
date on which the extraordinary reduction
occurs (or such transaction forming a part
thereof occurs). To the extent that stock of
a CFC is treated as owned by a controlling
section 245A shareholder as of the close
of the CFC’s taxable year pursuant to the
preceding sentence, such stock is treated
as not being owned by any other person as
of the close of the CFC’s taxable year. If
each controlling section 245A sharehold-
er elects to close the CFC’s taxable year,
that closing will be treated as a change
in accounting period for the purposes of
§1.964-1(c).
(B) Allocation of foreign taxes. If an
election is made pursuant to this para-
graph (e)(3) to close a CFC’s taxable year
and the CFC’s taxable year under foreign
law (if any) does not close at the end of
the date on which the CFC’s taxable year
closes as a result of the election, foreign
taxes paid or accrued with respect to such
foreign taxable year are allocated between
the period of the foreign taxable year that
ends with, and the period of the foreign
taxable year that begins after, the date on
which the CFC’s taxable year closes as a
result of the election. If there is more than
one date on which the CFC’s taxable year
closes as a result of the election, foreign
taxes paid or accrued with respect to the
foreign taxable year are allocated to all
such periods. The allocation is made based
on the respective portions of the taxable
income of the CFC (as determined under
foreign law) for the foreign taxable year
that are attributable under the principles
of §1.1502-76(b) to the periods during the
foreign taxable year. Foreign taxes allo-
cated to a period under this paragraph (e)
(3)(i)(B) are treated as paid or accrued by
the CFC as of the close of that period.
(C) Time and manner of making elec-
tion—(1) General rule. An election pur-
suant to this paragraph (e)(3) is made
and effective if the statement required
by paragraph (e)(3)(iv) of this section is
timely filed (including extensions) by
each controlling section 245A shareholder
making the election with its original U.S.
tax return for the taxable year in which
the extraordinary reduction occurs. Be-
fore the filing of the statement described
in paragraph (e)(3)(iv) of this section,
each controlling section 245A sharehold-
er and each U.S. tax resident that on the
end of the date on which the extraordinary
reduction occurs (or, if the extraordinary
reduction occurs by reason of multiple
transactions, each U.S. tax resident that on
the end of each date on which a transac-
tion forming a part of the extraordinary re-
duction occurs) owns directly or indirectly
stock of the CFC and is a United States
shareholder with respect to the CFC must
enter into a written, binding agreement
agreeing that each controlling section
245A shareholder will elect to close the
taxable year of the CFC. If a controlling
section 245A shareholder is a member of a
consolidated group (within the meaning of

July 1, 2019 50 Bulletin No. 2019–27
§1.1502-1(h)) and participates in the ex-
traordinary reduction, the agent for such
group (within the meaning of §1.1502-
77(c)(1)) must file the election described
in this paragraph (e)(3) on behalf of such
member.
(2) Transition rule. In the case of an
extraordinary reduction occurring before
the date these regulations are filed as final
regulations in the Federal Register, the
statement required by paragraph (e)(3)(iv)
of this section is considered timely filed if
it is attached by each controlling section
245A shareholder to an original or amend-
ed return for the taxable year in which the
extraordinary reduction occurs.
(D) Form and content of statement. The
statement required by paragraph (e)(3)(iii)
of this section is to be titled “Elective Sec-
tion 245A Year-Closing Statement.” The
statement must—
(1) Identify (by name and tax identi-
fication number, if any) each controlling
section 245A shareholder, each U.S tax
resident described in paragraph (e)(3)(iii)
of this section, and the CFC;
(2) State the date of the extraordinary
reduction (or, if the extraordinary reduc-
tion includes transactions on more than
one date, the dates of all such transac-
tions) to which the election applies;
(3) State the filing controlling section
245A shareholder’s pro rata share of the
subpart F income, tested income, and for-
eign taxes described in section 960 with
respect to the stock of the CFC subject
to the extraordinary reduction, and the
amount of earnings and profits attribut-
able to such stock within the meaning of
section 1248, as of the date of the extraor-
dinary reduction;
(4) State that each controlling section
245A shareholder and each U.S tax resi-
dent described in paragraph (e)(3)(iii) of
this section have entered into a written,
binding agreement to elect to close the
CFC’s taxable year in accordance with
paragraph (e)(3)(iii) of this section; and
(5) Be filed in the manner prescribed
by forms, publications, or other guidance
published in the Internal Revenue Bulle-
tin.
(E) Consistency requirements. If mul-
tiple extraordinary reductions occur with
respect to one or more controlling section
245A shareholders’ ownership in a single
CFC during one or more taxable years of
the CFC, then to the extent those extraor-
dinary reductions occur pursuant to a plan
or series of related transactions, the elec-
tion described in this paragraph (e)(3) sec-
tion may be made only if it is made for all
such extraordinary reductions with respect
to the CFC. Furthermore, if an extraordi-
nary reduction occurs with respect to a
controlling section 245A shareholder’s
ownership in multiple CFCs, then, to the
extent those extraordinary reductions oc-
cur pursuant to a plan or series of related
transactions, the election described in this
paragraph (e)(3) may be made only if it is
made for all such extraordinary reductions
with respect to all of the CFCs that have
the same or related (within the meaning of
section 267(b) or 707(b)) controlling sec-
tion 245A shareholders.
(ii) De minimis subpart F income and
tested income. For a taxable year of a CFC
in which an extraordinary reduction oc-
curs, no amount is considered an extraor-
dinary reduction amount with respect to a
controlling section 245A shareholder of
the CFC if the sum of the CFC’s subpart
F income and tested income (as defined
in section 951A(c)(2)(A)) for the taxable
year does not exceed the lesser of $50 mil-
lion or 5 percent of the CFC’s total income
for the taxable year.
(f) Limitation of amount eligible for
section 954(c)(6) where extraordinary re-
duction occurs with respect to lower-tier
CFCs—(1) In general. If an extraordi-
nary reduction occurs with respect to a
lower-tier CFC and an upper-tier CFC re-
ceives a dividend from the lower-tier CFC
in the taxable year in which the extraor-
dinary reduction occurs, then the amount
of the dividend that would otherwise be
eligible for the exception to foreign per-
sonal holding company income under sec-
tion 954(c)(6) (determined without regard
to this paragraph (f)) is eligible for such
exception only to the extent the dividend
exceeds the tiered extraordinary reduction
amount. The preceding sentence does not
apply to an amount treated as a dividend
received by an upper-tier CFC by reason
of section 964(e)(4) (in this case, see para-
graphs (b) and (g)(2) of this section). See
paragraph (j)(7) of this section for an ex-
ample illustrating the application of this
paragraph (f)(1).
(2) Definition of tiered extraordinary
reduction amount. The term tiered ex-
traordinary reduction amount means,
with respect to the portion of a dividend
received by an upper-tier CFC from a low-
er-tier CFC during a taxable year of the
lower-tier CFC that would be eligible for
the exception to foreign personal holding
company income under section 954(c)(6)
(determined without regard to this para-
graph (f)), the amount of such dividend
equal to the excess, if any, of—
(i) The product of—
(A) The sum of the amount of the sub-
part F income and tested income of the
lower-tier CFC for the taxable year; and
(B) The percentage (by value) of stock
of the lower-tier CFC owned (within the
meaning of section 958(a)(2)) by the up-
per-tier CFC immediately before the ex-
traordinary reduction (or the first transac-
tion forming a part thereof); over
(ii) The following amounts—
(A) The sum of each U.S. tax resident’s
pro rata share of the lower-tier CFC’s sub-
part F income and tested income under
section 951(a) or 951A(a), respectively,
that is attributable to shares of the low-
er-tier CFC owned (within the meaning of
section 958(a)(2)) by the upper-tier CFC
immediately prior to the extraordinary re-
duction (or the first transaction forming a
part thereof), computed without the appli-
cation of this paragraph (f);
(B) The sum of each prior tiered ex-
traordinary reduction amount and sum
of each amount included in an upper-ti-
er CFC’s subpart F income by reason of
section 245A(e) with respect to prior divi-
dends from the lower-tier CFC during the
taxable year;
(C) The sum of the prior extraordinary
reduction amounts (but, for this purpose,
computed without regard to amounts de-
scribed in paragraphs (e)(2)(ii)(C)(2) and
(3) of this section) of each controlling
section 245A shareholder with respect to
shares of the lower-tier CFC that were
owned by such controlling section 245A
shareholder (including indirectly through
a specified entity other than a foreign
corporation) for a portion of the taxable
year but are owned by an upper-tier CFC
(including indirectly through a specified
entity other than a foreign corporation)
at the time of the distribution of the div-
idend; and
(D) The product of the amount de-
scribed in paragraph (f)(2)(i)(B) of this

Bulletin No. 2019–27 51 July 1, 2019
section and the sum of the amounts of
each U.S. tax resident’s pro rata share
of subpart F income and tested income
for the taxable year under section 951(a)
or 951A(a), respectively, attributable to
shares of the lower-tier CFC directly or
indirectly acquired by the U.S. tax resi-
dent from the lower-tier CFC during the
taxable year.
(3) Transition rule for computing tiered
extraordinary reduction amount. Solely
for purposes of applying this paragraph
(f) in taxable years of a lower-tier CFC
beginning on or after January 1, 2018,
and ending before June 14, 2019, a tiered
extraordinary reduction amount is deter-
mined by treating the lower-tier CFC’s
subpart F income for the taxable year as if
it were neither subpart F income nor tested
income.
(g) Special rules. The following rules
apply for purposes of this section.
(1) Source of dividends. A dividend
received by any person is considered re-
ceived directly by such person from the
foreign corporation whose earnings and
profits give rise to the dividend. Therefore,
for example, if a section 245A shareholder
sells or exchanges stock of an upper-tier
CFC and the gain recognized on the sale
or exchange is included in the gross in-
come of the section 245A shareholder as
a dividend under section 1248(a), then, to
the extent the dividend is attributable un-
der section 1248(c)(2) to the earnings and
profits of a lower-tier CFC owned, within
the meaning of section 958(a)(2), by the
section 245A shareholder through the up-
per-tier CFC, the dividend is considered
received directly by the section 245A
shareholder from the lower-tier CFC.
(2) Certain section 964(e) inclusions
treated as dividends. An amount in-
cluded in the gross income of a section
245A shareholder under section 951(a)
(1)(A) by reason of section 964(e)(4) is
considered a dividend received by the
section 245A shareholder directly from
the foreign corporation whose earnings
and profits give rise to the amount de-
scribed in section 964(e)(1). Therefore,
for example, if an upper-tier CFC sells
or exchanges stock of a lower-tier CFC,
and, as a result of the sale or exchange, a
section 245A shareholder with respect to
the upper-tier CFC includes an amount in
gross income under section 951(a)(1)(A)
by reason of section 964(e)(4), then the
inclusion is treated as a dividend received
directly by the section 245A shareholder
from the lower-tier CFC whose earnings
and profits give rise to the dividend, and
the section 245A shareholder is not al-
lowed a section 245A deduction for the
dividend to the extent of the ineligible
amount of such dividend.
(3) Rules regarding stock ownership
and stock transfers—(i) Determining in-
direct ownership of stock of an SFC or a
CFC. For purposes of this section, if a per-
son owns an interest in, or stock of, a spec-
ified entity, including through a chain of
ownership of one or more other specified
entities, then the person is considered to
own indirectly a pro rata share of stock of
an SFC or a CFC owned by the specified
entity. To determine a person’s pro rata
share of stock owned by a specified enti-
ty, the principles of section 958(a) apply
without regard to whether the specified
entity is foreign or domestic.
(ii) Determining indirect transfers for
stock owned indirectly. If, under para-
graph (g)(3)(i) of this section, a person is
considered to own indirectly stock of an
SFC or CFC that is owned by a specified
entity, then the following rules apply in
determining if the person transfers stock
of the SFC or CFC—
(A) To the extent the specified entity
transfers stock that is considered owned
indirectly by the person immediately be-
fore the transfer, the person is considered
to transfer indirectly such stock;
(B) If the person transfers an interest
in, or stock of, the specified entity, then
the person is considered to transfer indi-
rectly the stock of the SFC or CFC attrib-
utable to the interest in, or the stock of, the
specified entity that is transferred; and
(C) In the case in which the person
owns the specified entity through a chain
of ownership of one or more other spec-
ified entities, if there is a transfer of an
interest in, or stock of, another specified
entity in the chain of ownership, then the
person is considered to transfer indirectly
the stock of the SFC or CFC attributable
to the interest in, or the stock of, the other
specified entity transferred.
(iii) Definition of specified entity. The
term specified entity means any partner-
ship, trust, or estate (in each case, domes-
tic or foreign), or any foreign corporation.
(4) Coordination rules—(i) General
rule. A dividend is first subject to sec-
tion 245A(e).. To the extent the dividend
is not a hybrid dividend or tiered hybrid
dividend under section 245A(e), the div-
idend is subject to paragraph (e) or (f) of
this section, as applicable, and then, to the
extent the dividend is not subject to para-
graph (e) or (f) of this section, it is subject
to paragraph (c) or (d) of this section, as
applicable.
(ii) Coordination rule for paragraphs
(c) and (d) and (e) and (f) of this section,
respectively. If an SFC or CFC pays a div-
idend (or simultaneous dividends), a por-
tion of which may be subject to paragraph
(c) or (e) of this section and a portion of
which may be subject to paragraph (d) or
(f) of this section, the rules of this section
apply by treating the portion of the divi-
dend or dividends that may be subject to
paragraph (c) or (e) of this section as if
it occurred immediately before the por-
tion of the dividend or dividends that may
be subject to paragraph (d) or (f) of this
section. For example, if a dividend arising
under section 964(e)(4) occurs at the same
time as a dividend that would be eligible
for the exception to foreign personal hold-
ing company income under section 954(c)
(6) but for the potential application of
paragraph (d) this section, then the tiered
extraordinary disposition amount with re-
spect to the other dividend is determined
as if the dividend arising under section
964(e)(4) occurs immediately prior to the
other dividend.
(5) Ordering rule for multiple divi-
dends made by an SFC or a CFC during
a taxable year. If an SFC or a CFC pays
dividends on more than one date during
its taxable year or at different times on the
same date, this section applies based on
the order in which the dividends are paid.
(6) Partner’s distributive share of a
domestic partnership’s pro rata share of
subpart F income. If a section 245A share-
holder or a U.S. tax resident is a direct or
indirect partner in a domestic partnership
that is a United States shareholder with
respect to a CFC and includes in gross
income its pro rata share of the CFC’s
subpart F income under section 951(a),
then, solely for purposes of this section,
a reference to the section 245A sharehold-
er’s or U.S. tax resident’s pro rata share
of the CFC’s subpart F income included

July 1, 2019 52 Bulletin No. 2019–27
in gross income under section 951(a) in-
cludes such person’s distributive share of
the domestic partnership’s pro rata share
of the CFC’s subpart F income. A person
is an indirect partner with respect to a do-
mestic partnership if the person indirectly
owns the domestic partnership through
one or more specified entities (other than
a foreign corporation).
(h) Anti-abuse rule. The Commissioner
may make appropriate adjustments to any
amounts determined under this section if a
transaction is engaged in with a principal
purpose of avoiding the purposes of this
section.
(i) Definitions. The following defini-
tions apply for purposes of this section.
(1) Controlled foreign corporation.
The term controlled foreign corporation
(or CFC) has the meaning provided in
section 957.
(2) Controlling section 245A share-
holder. The term controlling section
245A shareholder means, with respect
to a CFC, any section 245A shareholder
that owns directly or indirectly more than
50 percent (by vote or value) of the stock
of the CFC. For purposes of determining
whether a section 245A shareholder is
a controlling section 245A shareholder
with respect to a CFC, all stock of the
CFC owned by a related party with re-
spect to the section 245A shareholder or
by other persons acting in concert with
the section 245A shareholder to undertake
an extraordinary reduction is considered
owned by the section 245A shareholder.
If section 964(e)(4) applies to a sale or
exchange of a lower-tier CFC with re-
spect to a controlling section 245A share-
holder, all United States shareholders of
the CFC are considered to act in concert
with regard to the sale or exchange. In
addition, if all persons selling stock in a
CFC, held directly, sell such stock to the
same buyer or buyers (or a related party
with respect to the buyer or buyers) as
part of the same plan, all sellers will be
considered to act in concert with regard
to the sale or exchange.
(3) Disqualified amount. The term dis-
qualified amount has the meaning set forth
in paragraph (d)(1) of this section.
(4) Disqualified period. The term dis-
qualified period has the meaning set forth
in paragraph (c)(3)(iii) of this section.
(5) Extraordinary disposition. The
term extraordinary disposition has the
meaning set forth in paragraph (c)(3)(ii)
of this section.
(6) Extraordinary disposition ac-
count. The term extraordinary disposition
amount has the meaning set forth in para-
graph (c)(3)(i) of this section.
(7) Extraordinary disposition amount.
The term extraordinary disposition
amount has the meaning set forth in para-
graph (c)(1) of this section.
(8) Extraordinary disposition E&P.
The term extraordinary E&P has the
meaning set forth in paragraph (c)(3)(i)
(C) of this section.
(9) Extraordinary disposition owner-
ship percentage. The term extraordinary
disposition ownership percentage has the
meaning set forth in paragraph (c)(3)(i)
(B) of this section.
(10) Extraordinary reduction. The term
extraordinary reduction has the meaning
set forth in paragraph (e)(2)(i)(A) of this
section.
(11) Extraordinary reduction amount.
The term extraordinary reduction amount
has the meaning set forth in paragraph (e)
(1) of this section.
(12) Ineligible amount. The term ineli-
gible amount has the meaning set forth in
paragraph (b)(2) of this section.
(13) Lower-tier CFC. The term low-
er-tier CFC means a CFC whose stock
is owned (within the meaning of section
958(a)(2)), in whole or in part, by another
CFC.
(14) Non-extraordinary disposition
E&P. The term non-extraordinary dispo-
sition E&P has the meaning set forth in
paragraph (c)(2)(ii) of this section.
(15) Pre-reduction pro rata share. The
term pre-reduction pro rata share has the
meaning set forth in paragraph (e)(2)(ii)
of this section.
(16) Prior extraordinary disposition
amount. The term prior extraordinary dis-
position amount has the meaning set forth
in paragraph (c)(3)(i)(D) of this section.
(17) Prior extraordinary reduction
amount. The term prior extraordinary re-
duction amount has the meaning set forth
in paragraph (e)(2)(ii)(C) of this section.
(18) Qualified portion. The term qual-
ified portion has the meaning set forth in
paragraph (c)(3)(i)(D)(2)(i) of this sec-
tion.
(19) Related party. The term related
party means, with respect to a person,
another person bearing a relationship de-
scribed in section 267(b) or 707(b) to the
person, in which case such persons are
related.
(20) Section 245A deduction. The term
section 245A deduction means, with re-
spect to a dividend received by a sec-
tion 245A shareholder from an SFC, the
amount of the deduction allowed to the
section 245A shareholder by reason of the
dividend.
(21) Section 245A shareholder. The
term section 245A shareholder means
a domestic corporation that is a United
States shareholder with respect to an SFC
that owns directly or indirectly stock of
the SFC.
(22) Specified 10-percent owned for-
eign corporation (SFC). The term speci-
fied 10-percent owned foreign corporation
(or SFC) has the meaning provided in sec-
tion 245A(b)(1).
(23) Specified entity. The term spec-
ified entity has the meaning set forth in
paragraph (g)(3)(iii) of this section.
(24) Specified property. The term spec-
ified property has the meaning set forth in
paragraph (c)(3)(iv) of this section.
(25) Tiered extraordinary disposition
amount. The term tiered extraordinary
disposition amount has the meaning set
forth in paragraph (d)(2)(i) of this section.
(26) Tiered extraordinary reduction
amount. The term tiered extraordinary re-
duction amount has the meaning set forth
in paragraph (f)(2) of this section.
(27) United States shareholder. The
term United States shareholder has the
meaning provided in section 951(b).
(28) Upper-tier CFC. The term up-
per-tier CFC means a CFC that owns
(within the meaning of section 958(a)(2))
stock in another CFC.
(29) U.S. tax resident. The term U.S.
tax resident means a United States person
described in section 7701(a)(30)(A) or
(C).
(j) Examples. The application of this
section is illustrated by the examples in
this paragraph (j).
(1) Facts. Except as otherwise stated,
the following facts are assumed for pur-
poses of the examples:
(i) US1 and US2 are domestic corpo-
rations, each with a calendar taxable year,

Bulletin No. 2019–27 53 July 1, 2019
and are not related parties with respect to
each other.
(ii) CFC1 and CFC2 are foreign corpo-
rations that are SFCs and CFCs.
(iii) Each entity uses the U.S. dollar as
its functional currency.
(iv) Year 2 begins on or after January 1,
2018, and has 365 days.
(v) Absent application of this section,
the dividends received by US1 and US2
from CFC1 meet the requirements to qual-
ify for the section 245A deduction.
(vi) The de minimis rules in paragraphs
(c)(3)(ii)(E) and (e)(3)(ii) of this section
do not apply.
(2) Example 1. Extraordinary disposition—(i)
Facts. US1 and US2 own 60% and 40%, respective-
ly, of the single class of stock of CFC1. CFC1 owns
all of the single class of stock of CFC2. CFC1 and
CFC2 use the taxable year ending November 30 as
their taxable year. On November 1, 2018, CFC1 sells
specified property to CFC2 in exchange for $200x of
cash (the “Property Transfer”). The Property Trans-
fer is outside of CFC1’s ordinary course of activities.
The transferred property has a basis of $100x in the
hands of CFC1. CFC1 recognizes $100x of gain as a
result of the Property Transfer ($200x - $100x). On
December 1, 2018, CFC1 distributes $80x pro rata to
US1 ($48x) and US2 ($32x), all of which is a divi-
dend within the meaning of section 316 and treated
as a distribution out of earnings described in section
959(c)(3). No other distributions are made by CFC1
to either US1 or US2 in CFC1’s taxable year ending
November 30, 2019. For its taxable year ending on
November 30, 2019, CFC1 has $110x of earnings
and profits described in section 959(c)(3), without
regard to any distributions during the taxable year.
(ii) Analysis—(A) Identification of extraordinary
disposition. Because CFC1 is a CFC and uses the
taxable year ending on November 30, under para-
graph (c)(3)(iii) of this section, it has a disqualified
period beginning on January 1, 2018, and ending on
November 30, 2018. In addition, under paragraph (c)
(3)(ii) of this section, the Property Transfer is an ex-
traordinary disposition because it (i) is a disposition
of specified property by CFC1 on a date on which it
was a CFC and during CFC1’s disqualified period,
(ii) is to CFC2, a related party with respect to CFC1,
(iii) occurs outside of the ordinary course of CFC1’s
activities, and (iv) is not subject to the de minimis
rule in paragraph (c)(3)(ii)(E) of this section.
(B) Determination of section 245A shareholders
and their extraordinary disposition accounts. Be-
cause CFC1 undertook an extraordinary disposition,
under paragraph (c)(3)(i) of this section, a portion of
CFC1’s earnings and profits are extraordinary dis-
position E&P and, therefore, give rise to an extraor-
dinary disposition account with respect to each of
CFC1’s section 245A shareholders. Under paragraph
(i)(21) of this section, US1 and US2 are both sec-
tion 245A shareholders with respect to CFC1. The
amount of the extraordinary disposition account with
respect to US1 is $60x, which is equal to the product
of the extraordinary disposition E&P (the amount of
the net gain recognized by CFC1 as a result of the
Property Transfer ($100x)) and the extraordinary
disposition ownership percentage (the percentage of
the stock of CFC1 owned directly or indirectly by
US1 on January 1, 2018 (60%)), reduced by the pri-
or extraordinary disposition amount ($0). See para-
graph (c)(3)(i) of this section. Similarly, the amount
of the extraordinary disposition account with respect
to US2 is $40x, which is equal to the product of the
extraordinary disposition E&P (the net gain recog-
nized by CFC1 as a result of the Property Transfer
($100x)) and extraordinary disposition ownership
percentage (the percentage of the stock of CFC1
owned directly or indirectly by US2 on January 1,
2018 (40%)), reduced by the prior extraordinary dis-
position amount ($0).
(C) Determination of extraordinary disposition
amount with respect to US1. The dividend of $48x
paid to US1 on December 1, 2018, is an extraordi-
nary disposition amount to the extent the dividend is
paid out of the extraordinary disposition account with
respect to US1. See paragraph (c)(1) of this section.
Under paragraph (c)(2)(i) of this section, the divi-
dend is first considered paid out of non-extraordinary
disposition E&P with respect to US1, to the extent
thereof. With respect to US1, $6x of CFC1’s earnings
and profits is non-extraordinary disposition E&P, cal-
culated as the excess of $66x (the product of $110x
of earnings and profits described in section 959(c)(3),
without regard to the $80x distribution, and 60%) over
$60x (the balance of US1’s extraordinary disposition
account with respect to CFC1, immediately before the
distribution). See paragraph (c)(2)(ii) of this section.
Thus, $6x of the dividend is considered paid out of
non-extraordinary disposition E&P with respect to
US1. Under paragraph (c)(2)(i)(B) of this section, the
remaining $42x of the dividend is next considered paid
out of US1’s extraordinary disposition account with
respect to CFC1, to the extent thereof. Accordingly,
$42x of the dividend is considered paid out of the ex-
traordinary disposition account with respect to CFC1
and gives rise to $42x of an extraordinary disposition
amount. As a result, US1’s prior extraordinary dispo-
sition amount is increased by $42x under paragraph
(c)(3)(i)(D) of this section, and US1’s extraordinary
disposition account is reduced to $18x ($60x - $42x)
under paragraph (c)(3)(i)(A) of this section.
(D) Determination of extraordinary disposition
amount with respect to US2. The dividend of $32x
paid to US2, on December 1, 2018, is an extraordi-
nary disposition amount to the extent the dividend
is paid out of extraordinary disposition E&P with
respect to US2. See paragraph (c)(1) of this sec-
tion. Under paragraph (c)(2)(i) of this section, the
dividend is first considered paid out of non-extraor-
dinary disposition E&P with respect to US2, to the
extent thereof. With respect to US2, $4x of CFC1’s
earnings and profits is non-extraordinary disposition
E&P, calculated as the excess of $44x (the product
of $110x of earnings and profits described in section
959(c)(3), without regard to the $80x distribution,
and 40%) over $40x (the balance of US2’s extraor-
dinary disposition account with respect to CFC1,
immediately before the distribution). See paragraph
(c)(2)(ii) of this section. Thus, $4x of the dividend is
considered paid out of non-extraordinary disposition
E&P with respect to US2. Under paragraph (c)(2)(i)
(B) of this section, the remaining $28x of the divi-
dend is next considered paid out of US2’s extraordi-
nary disposition account with respect to CFC1, to the
extent thereof. Accordingly, $28x of the dividend is
considered paid out of the extraordinary disposition
account with respect to US2 and gives rise to $28x
of an extraordinary disposition amount. As a result,
US2’s prior extraordinary disposition amount is in-
creased by $28x under paragraph (c)(3)(i)(D) of this
section, and US2’s extraordinary disposition account
is reduced to $12x ($40x - $28x) under paragraph (c)
(3)(i)(A) of this section.
(E) Determination of ineligible amount with re-
spect to US1 and US2. Under paragraph (b)(2) of
this section, with respect to US1 and the dividend
of $48x, the ineligible amount is $21x, the sum of
50 percent of the extraordinary disposition amount
($42x) and extraordinary reduction amount ($0).
Therefore, with respect to the dividend received by
US1 of $48x, $27x is eligible for a section 245A
deduction. With respect to US2 and the dividend
of $32x, the ineligible amount is $14x, the sum of
50% of the extraordinary disposition amount ($28x)
and extraordinary reduction amount ($0). Therefore,
with respect to the dividend received by US2 of
$32x, $18x is eligible for a section 245A deduction.
(3) Example 2. Application of section 954(c)(6)
exception with extraordinary disposition account—
(i) Facts. The facts are the same as in paragraph (j)
(2)(i) of this section (the facts in Example 1) except
that the Property Transfer is a sale by CFC2 to CFC1
instead of a sale by CFC1 to CFC2, the $80x distri-
bution is by CFC2 to CFC1 in a separate transac-
tion that is unrelated to the Property Transfer, and
the description of the earnings and profits of CFC1 is
applied to CFC2. Additionally, absent the application
of this section, section 954(c)(6) would apply to the
distribution by CFC2 to CFC1. Under section 951(a)
(2) and §1.951-1(b) and (e), US1’s pro rata share of
any subpart F income of CFC1 is 60% and US2’s pro
rata share of any subpart F income of CFC2 is 40%.
(ii) Analysis—(A) Identification of extraordinary
disposition. The Property Transfer is an extraordi-
nary disposition under the same analysis as provided
in paragraph (j)(2)(ii)(A) of this section (the analysis
in Example 1).
(B) Determination of section 245A shareholders
and their extraordinary disposition accounts. Both
US1 and US2 are section 245A shareholders with re-
spect to CFC2, US1 has an extraordinary disposition
account of $60x with respect to CFC2, and US2 has
an extraordinary disposition account of $40x with
respect to CFC2 under the same analysis as provided
in paragraph (j)(2)(ii)(B) of this section (the analysis
in Example 1).
(C) Determination of tiered extraordinary dispo-
sition amount—(1) In general. US1 and US2 each
have a tiered extraordinary disposition amount with
respect to the $80x dividend paid by CFC2 to CFC1
to the extent that US1 and US2 would have an ex-
traordinary disposition amount if each had received
as a dividend its pro rata share of the dividend from
CFC2. See paragraph (d)(2)(i) of this section. Under
paragraph (d)(2)(ii) of this section, US1’s pro rata
share of the dividend is $48x (60% x $80x), that is,
the increase to US1’s pro rata share of the subpart
F income if the dividend were included in CFC1’s
foreign personal holding company income, without
regard to section 952(c) and the allocation of expens-
es. Similarly, US2’s pro rata share of the dividend is
$32x (40% x $80x).
(2) Determination of tiered extraordinary dispo-
sition amount with respect to US1. The extraordinary

July 1, 2019 54 Bulletin No. 2019–27
disposition amount with respect to US1 is $42x, un-
der the same analysis provided in paragraph (j)(2)
(ii)(C) of this section (the analysis in Example 1).
Accordingly, the tiered extraordinary disposition
amount with respect to US1 is $42x.
(3) Determination of extraordinary disposition
amount with respect to US2. The extraordinary
disposition amount with respect to US2 is $28x, un-
der the same analysis provided in paragraph (j)(2)
(ii)(D) of this section (the analysis in Example 1).
Accordingly, the tiered extraordinary disposition
amount with respect to US2 is $28x.
(D) Limitation of section 954(c)(6) exception.
The sum of US1 and US2’s tiered extraordinary dis-
position amounts is $70x ($42x + $28x). The portion
of the stock of CFC1 (by value) owned (within the
meaning of section 958(a)) by U.S. tax residents on
the last day of CFC1’s taxable year is 100%. Under
paragraph (d)(1) of this section, the disqualified
amount with respect to the dividend is $35x (50% x
($70x/100%)). Accordingly, the portion of the $80x
dividend from CFC2 to CFC1 that is eligible for the
exception to foreign personal holding company in-
come under section 954(c)(6) is $45x ($80x - $35x).
Under section 951(a)(2) and §1.951-1(b) and (e),
US1 includes $21x (60% x $35x) and US2 includes
$14x (60% x $35x) in income under section 951(a).
(E) Changes in extraordinary disposition ac-
count of US1. Under paragraph (c)(3)(i)(D)(1) of
this section, US1’s prior extraordinary disposition
amount with respect to CFC2 is increased by $42x,
or 200% of $21x, the amount US1 included in in-
come under section 951(a) with respect to CFC1.
Under paragraph (c)(3)(i)(D)(1)(iii) of this section,
US1 has no qualified portion because all of the own-
ers of CFC2 are section 245A shareholders with a
tiered extraordinary disposition amount with respect
to CFC2. As a result, US1’s extraordinary disposi-
tion account is reduced to $18x ($60x - $42x) under
paragraph (c)(3)(i)(A) of this section.
(F) Changes in extraordinary disposition ac-
count of US2. Under paragraph (c)(3)(i)(D)(1) of
this section, US2’s prior extraordinary disposition
amount with respect to CFC2 is increased by $28x,
or 200% of $14x, the amount US2 included in in-
come under section 951(a) with respect to CFC1.
Under paragraph (c)(3)(i)(D)(1)(iii) of this section,
US2 has no qualified portion because all of the own-
ers of CFC2 are section 245A shareholders with a
tiered extraordinary disposition amount with respect
to CFC2. As a result, US2’s extraordinary disposi-
tion account is reduced to $12x ($40x - $28x) under
paragraph (c)(3)(i)(A) of this section.
(4) Example 3. Extraordinary reduction—(i)
Facts. At the beginning of CFC1’s taxable year end-
ing on December 31, Year 2, US1 owns all of the
single class of stock of CFC1, and no person trans-
ferred any CFC1 stock directly or indirectly in Year
1 pursuant to a plan to reduce the percentage of stock
(by value) of CFC1 owned by US1. Also as of the be-
ginning of Year 2, CFC1 has no earnings and profits
described in section 959(c)(1) or (2), and US1 does
not have an extraordinary disposition account with
respect to CFC1. As of the end of Year 2, CFC1 has
$160x of tested income and no other income. CFC1
has $160x of earnings and profits for Year 2. On Oc-
tober 19, Year 2, US1 sells all of its CFC1 stock to
US2 for $100x in a transaction (the “Stock Sale”)
in which US1 recognizes $90x of gain. Under sec-
tion 1248(a), the entire $90x of gain is included in
US1’s gross income as a dividend and, pursuant to
section 1248(j), the $90x is treated as a dividend for
purposes of applying section 245A. At the end of
Year 2, under section 951A, US2 takes into account
$70x of tested income, calculated as $160x (100% of
the $160x of tested income) less $90x, the amount
described in section 951(a)(2)(B). The amount de-
scribed in section 951(a)(2)(B) is the lesser of $90x,
the amount of dividends received by US1 with re-
spect to the transferred stock, and $128x, the amount
of tested income attributable to the transferred stock
($160x) multiplied by 292/365 (the ratio of the num-
ber of days in Year 2 that US2 did not own the trans-
ferred stock to the total number of days in Year 2).
US1 does not make an election pursuant to paragraph
(e)(3)(i) of this section.
(ii) Analysis—(A) Determination of controlling
section 245A shareholder and extraordinary reduc-
tion of ownership. Under paragraph (i)(2) of this sec-
tion, US1 is a controlling section 245A shareholder
with respect to CFC1. In addition, the Stock Sale
results in an extraordinary reduction with respect to
US1’s ownership of CFC1. See paragraph (e)(2)(i)
of this section. The extraordinary reduction occurs
because during Year 2, US1 transferred 100% of the
CFC1 stock it owned at the beginning of the year and
such amount is more than 5% of the total value of
the stock of CFC1 at the beginning of Year 2; it also
occurs because on the last day of the year the per-
centage of stock (by value) of CFC1 that US1 owns
directly or indirectly (0%) (the end of year percent-
age) is less than 90% of the stock (by value) of CFC1
that US1 owns directly or indirectly on the day of the
taxable year when it owned the highest percentage of
CFC1 stock by value (100%) (the initial percentage),
no transactions occurred in the preceding year pursu-
ant to a plan to reduce the percentage of CFC1 stock
owned by US1, and the difference between the initial
percentage and the end of year percentage (100 per-
centage points) is at least 5 percentage points.
(B) Determination of extraordinary reduction
amount. Under paragraph (e)(1) of this section, the
entire $90x dividend to US1 is an extraordinary
reduction amount with respect to US1 because the
dividend is at least equal to US1’s pre-reduction pro
rata share of CFC1’s Year 2 tested income described
in paragraph (e)(2)(ii)(A) of this section ($160x), re-
duced by the amount of tested income taken into ac-
count by US2, a U.S. tax resident, under paragraphs
(e)(2)(ii)(B) and (i)(29) of this section ($70x).
(C) Determination of ineligible amount. Under
paragraph (b)(2) of this section, with respect to US1
and the dividend of $90x, the ineligible amount is
$90x, the sum of 50% of the extraordinary disposi-
tion amount ($0) and extraordinary reduction amount
($90x). Therefore, with respect to the dividend re-
ceived of $90x, no portion is eligible for the dividends
received deduction allowed under section 245A(a).
(iii) Alternative facts – election to close CFC’s
taxable year. The facts are the same as in paragraph
(j)(4)(i) of this section (the facts of this Example 3),
except that, pursuant to paragraph (e)(3)(i) of this
section, US1 elects to close CFC1’s Year 2 taxable
year for all purposes of the Internal Revenue Code as
of the end of October 19, Year 2, the date on which
the Stock Sale occurs; in addition, US1 and US2 en-
ter into a written, binding agreement that US1 will
elect to close CFC1’s Year 2 taxable year. Accord-
ingly, under section 951A(a), US1 takes into account
100% of CFC1’s tested income for the taxable year
beginning January 1, Year 2, and ending October 19,
Year 2, and US2 takes into account 100% of CFC1’s
tested income for the taxable year beginning October
20, Year 2, and ending December 31, Year 2. Under
paragraph (e)(3)(i)(A) of this section, no amount is
considered an extraordinary reduction amount with
respect to US1.
(5) Example 4. Extraordinary reduction; de-
crease in section 245A shareholder’s pre-reduction
pro rata share for amounts taken into account by
U.S. tax residents—(i) Facts. At the beginning of
CFC1’s taxable year ending December 31, Year 2,
US1 owns all of the single class of stock of CFC1,
and no person transferred any CFC1 stock directly
or indirectly in Year 1 pursuant to a plan to reduce
the percentage of stock (by value) of CFC1 owned
by US1. CFC1 generates $120x of subpart F income
during its taxable year ending on December 31, Year
2. On October 1, Year 2, CFC1 distributes a $120x
dividend to US1. On October 19, Year 2, US1 sells
100% of its stock of CFC1 to PRS, a domestic part-
nership, in a transaction in which no gain or loss is
realized (the “Stock Sale”). PRS is owned 50% each
by A, an individual who is a citizen of the United
States, and B, a foreign individual who is not a U.S.
tax resident. On December 1, Year 2, US2 and FP, a
foreign corporation, contribute property to CFC1; in
exchange, each of US2 and FP receives 25% of the
stock of CFC1. PRS owns the remaining 50% of the
stock of CFC1. US1 does not make an election pur-
suant to paragraph (e)(3)(i) of this section.
(ii) Analysis—(A) Determination of controlling
section 245A shareholder and extraordinary reduc-
tion. Under paragraph (i)(2) of this section, US1 is
a controlling section 245A shareholder with respect
to CFC1. In addition, the Stock Sale results in an ex-
traordinary reduction with respect to US1’s owner-
ship of CFC1. See paragraph (e)(2)(i) of this section.
The extraordinary reduction occurs because during
Year 2, US1 transferred 100% of the CFC1 stock it
owns on the first day of Year 2, and that amount is
more than 5% of the total value of the stock of CFC1
at the beginning of Year 2; it also occurs because on
the last day of Year 2 the percentage of stock (by
value) of CFC1 that US1 owns directly or indirectly
(0%) (the end of year percentage) is less than 90% of
the highest percentage of stock (by value) of CFC1
that US1 owns directly or indirectly on the day of the
taxable year when it owned the highest percentage of
CFC1 stock by value (100%) (the initial percentage),
no transactions occurred in the preceding year pursu-
ant to a plan to reduce the percentage of CFC1 stock
owned by US1, and the difference between the initial
percentage and the end of year percentage (100 per-
centage points) is at least 5 percentage points.
(B) Determination of pre-reduction pro rata
share. Before the extraordinary reduction, US1
owned 100% of the stock of CFC1. Thus, under
paragraph (e)(2)(ii)(A) of this section, the tentative
amount of US1’s pre-reduction pro rata share of
CFC1’s subpart F income is $120x. A and US2 are
U.S. tax residents pursuant to paragraph (i)(29) of
this section because they are United States persons
described in section 7701(a)(30)(A) or (C). Thus,
US1’s pre-reduction pro rata share amount is subject
to the reduction described in paragraph (e)(2)(ii)(B)
of this section because U.S. tax residents directly or

Bulletin No. 2019–27 55 July 1, 2019
indirectly acquire stock of CFC1 from US1 or CFC1
during the taxable year in which the extraordinary
reduction occurs. With respect to US1’s pre-reduc-
tion pro rata share of CFC1’s subpart F income, the
reduction equals the amount of subpart F income of
CFC1 taken into account under section 951(a) by
these U.S. tax residents.
(C) Determination of decrease in pre-reduction
pro rata share for amounts taken into account by
U.S. tax resident. On December 31, Year 2, both PRS
and US2 will be United States shareholders with re-
spect to CFC1 and will include in gross income their
pro rata share of CFC1’s subpart F income under
section 951(a). With respect to US2, this amount will
be $30x, which is equal to 25% of CFC1’s subpart
F income for the taxable year. With respect to PRS,
its pro rata share of $60x under section 951(a)(2)(A)
(50% of $120x) will be reduced under section 951(a)
(2)(B) by $48x. The section 951(a)(2)(B) reduction
is equal to the lesser of the $120x dividend paid with
respect to those shares to US1 or $48x (50% x $120x
x 292/365, the period during the taxable year that
PRS did not own CFC1 stock). Thus, PRS includes
$12x in gross income pursuant to section 951(a). Of
this amount, $6x is allocated to A (as a 50% partner
of PRS) and, therefore, treated as taken into account
by A under paragraphs (e)(2)(ii)(B) and (g)(6) of this
section. Thus, A and US2 take into account a total
of $36x of CFC1’s subpart F income under section
951(a). This amount reduces US1’s pre-reduction
pro rata share of CFC1’s subpart F income to $84x
($120x - $36x) under paragraph (e)(2)(ii)(B) of this
section. CFC1 did not generate tested income during
the taxable year and, therefore, no amount is tak-
en into account under section 951A with respect to
CFC1, and US1 has no pre-reduction pro rata share
with respect to tested income of CFC1.
(D) Determination of extraordinary reduction
amount. Under paragraph (e)(1) of this section, the
extraordinary reduction amount equals $84x, which
is the lesser of the amount of the dividend received
by US1 from CFC1 during Year 2 ($120x) and the
sum of US1’s pre-reduction pro rata share of CFC1’s
subpart F income ($84x) and tested income ($0).
(E) Determination of ineligible amount. Under
paragraph (b)(2) of this section, with respect to US1
and the dividend of $120x, the ineligible amount
is $84x, the sum of 50% of the extraordinary dis-
position amount ($0) and extraordinary reduction
amount ($84x). Therefore, with respect to the div-
idend received by US1 from CFC1, $36x ($120x -
$84x) is eligible for a section 245A deduction.
(6) Example 5. Controlling section 245A share-
holder—(i) Facts. US1 and US2 own 30% and 25% of
the stock of CFC1, respectively. FP, a foreign corpo-
ration that is not a CFC, owns all of the stock of US1
and US2. FP owns the remaining 45% of the stock of
CFC1. On September 30, Year 2, US1 sells all of its
stock of CFC1 to US3, a domestic corporation that is
not a related party with respect to FP, US1, or US2. No
person transferred any stock of CFC1 directly or indi-
rectly in Year 1 pursuant to a plan to reduce the per-
centage of stock (by value) of CFC1 owned by US1.
(ii) Analysis. Under paragraph (i)(21) of this sec-
tion, US1 is a section 245A shareholder with respect
to CFC1, an SFC. Because US1 owns, together with
US2 and FP (related persons with respect to US1),
more than 50% of the stock of CFC1, US1 is a con-
trolling section 245A shareholder of CFC1. The sale
of US1’s CFC1 stock results in an extraordinary re-
duction occurring with respect to US1’s ownership of
CFC1. The extraordinary reduction occurs because
during Year 2, US1 transferred 100% of the stock of
CFC1 that it owned at the beginning of the year and
that amount is more than 5% of the total value of the
stock of CFC1 at the beginning of Year 2; it also oc-
curs because on the last day of the year the percent-
age of stock (by value) of CFC1 that US1 directly or
indirectly owns (0%) (the end of year percentage) is
less than 90% of the stock (by value) of CFC1 that
US1 directly or indirectly owned on the day of the
taxable year when it owned the highest percentage of
CFC1 stock by value (30%) (the initial percentage),
no transactions occurred in the preceding year pursu-
ant to a plan to reduce the percentage of CFC1 stock
owned by US1, and the difference between the initial
percentage and end of year percentage (30 percent-
age points) is at least 5 percentage points.
(7) Example 6. Limitation of section 954(c)(6)
exception with respect to an extraordinary reduction.
(i) Facts. At the beginning of CFC1 and CFC2’s tax-
able year ending on December 31, Year 2, US1 and
A, an individual who is a citizen of the United States,
own 80% and 20% of the single class of stock of
CFC1, respectively. CFC1 owns 100% of the stock of
CFC2. Both US1 and A are United States sharehold-
ers with respect to CFC1 and CFC2, and US1 and A
are not related parties with respect to each other. No
person transferred CFC2 stock directly or indirectly
in Year 2 pursuant to a plan to reduce the percentage
of stock (by value) of CFC2 owned by US1, and US1
does not have an extraordinary disposition account
with respect to CFC2. At the end of Year 2, and with-
out regard to any distributions during Year 2, CFC2
had $150x of tested income and no other income, and
CFC1 had no income or expenses. On June 30, Year
2, CFC2 distributed $150x as a dividend to CFC1,
which would qualify for the exception from foreign
personal holding company income under section
954(c)(6) but for the application of this section. On
August 7, Year 2, CFC1 sells all of its CFC2 stock to
US2 for $100x in a transaction (the “Stock Sale”) in
which CFC1 realizes no gain or loss. At the end of
Year 2, under section 951A, US2 takes into account
$60x of tested income, calculated as $150x (100% of
the $150x of tested income) less $90x, the amount
described in section 951(a)(2)(B). The amount de-
scribed in section 951(a)(2)(B) is the lesser of $150x,
the amount of dividends received by CFC1 during
Year 2 with respect to the transferred stock, and
$90x, the amount of tested income attributable to the
transferred stock ($150x) multiplied by 219/365 (the
ratio of the number of days in Year 2 that US2 did not
own the transferred stock to the total number of days
in Year 2). US1 does not make an election pursuant
to paragraph (e)(3)(i) of this section.
(ii) Analysis—(A) Determination of controlling
section 245A shareholder and extraordinary reduc-
tion of ownership. Under paragraph (i)(2) of this sec-
tion, US1 is a controlling section 245A shareholder
with respect to CFC2, but A is not. In addition, the
Stock Sale results in an extraordinary reduction with
respect to US1’s ownership of CFC2. See paragraph
(e)(2)(i) of this section. The extraordinary reduction
occurs because during Year 2, US1 transferred indi-
rectly 100% of the CFC2 stock it owned at the begin-
ning of the year and such amount is more than 5% of
the total value of the stock of CFC2 at the beginning
of Year 2; it also occurs because on the last day of
the year the percentage of stock (by value) of CFC2
that US1 owns directly or indirectly (0%) (the end
of year percentage) is less than 90% of the stock (by
value) of CFC2 that US1 owns directly or indirect-
ly on the day of the taxable year when it owned the
highest percentage of CFC2 stock by value (80%)
(the initial percentage), no transactions occurred in
the preceding year pursuant to a plan to reduce the
percentage of CFC2 stock owned by US1, and the
difference between the initial percentage and the end
of year percentage (80 percentage points) is at least 5
percentage points. Because there is an extraordinary
reduction with respect to CFC2 in Year 2 and CFC1
received a dividend from CFC2 in Year 2, under
paragraph (f)(1) of this section, it is necessary to de-
termine the limitation on the amount of the dividend
eligible for the exception under section 954(c)(6).
(B) Determination of tiered extraordinary re-
duction amount. The limitation on the amount of
the dividend eligible for the exception under section
954(c)(6) is based on the tiered extraordinary re-
duction amount. The sum of the amount of subpart
F income and tested income of CFC2 for Year 2 is
$150x, and immediately before the extraordinary
reduction, CFC1 held 100% of the stock of CFC2.
Additionally, US2 is a U.S. tax resident as defined in
paragraph (i)(29) of this section because it is a Unit-
ed States person described in section 7701(a)(30)(A)
or (C), and US2 has a pro rata share of $60x of tested
income under section 951A with respect to CFC2.
Accordingly, under paragraph (f)(2) of this section,
the tiered extraordinary reduction amount is $90x
(($150x x 100%) - $60x).
(C) Limitation of section 954(c)(6) exception. Un-
der paragraph (f)(1) of this section, the portion of the
$150x dividend from CFC2 to CFC1 that is eligible
for the exception to foreign personal holding compa-
ny income under section 954(c)(6) is $60x ($150x -
$90x). To the extent that the $90x that does not qualify
for the exception gives rise to additional subpart F in-
come to CFC1, both US1 and A will take into account
their pro rata share of that subpart F income under sec-
tion 951(a)(2) and §1.951-1(b) and (e).
(k) Applicability date. This section ap-
plies to distributions occurring after De-
cember 31, 2017.
(l) Expiration date. The applicability of
this section expires June 14, 2022.
Par. 3. Section 1.954(c)(6)-1T is add-
ed to read as follows:
§1.954(c)(6)-1T Certain cases in
which section 954(c)(6) exception not
available (temporary).
(a) Cross-references to other rules. For
a non-exclusive list of rules that limit the
applicability of the exception to foreign
personal holding company income under
section 954(c)(6), see—
(1) Section 1.245A-5T(d) (rules re-
garding the application of section 954(c)
(6) to extraordinary disposition amounts);

July 1, 2019 56 Bulletin No. 2019–27
(2) Section 1.245A-5T(f) (rules regard-
ing the application of section 954(c)(6) to
tiered extraordinary reduction amounts)
(3) Section 1.245A(e)-1(c) (rules re-
garding tiered hybrid dividends);
(4) Section 1.367(b)-4(e)(4) (rules re-
garding income inclusion and gain recog-
nition in certain exchanges following an
inversion transaction);
(5) Section 964(e)(4)(A) (rules regard-
ing certain gain from the sale or exchange
of stock that is recharacterized as a divi-
dend); and
(6) Section 1.7701(l)-4(e) (rules re-
garding recharacterization of certain
transactions following an inversion trans-
action).
(b) Applicability date. This section ap-
plies on or after June 14, 2019.
(c) Expiration date. The applicability
of this section expires June 14, 2022.
Par. 4. Section 1.6038-2T is added to
read as follows:
§1.6038-2T Information returns re-
quired of United States persons with
respect to annual accounting periods of
certain foreign corporations beginning
after December 31, 1962 (temporary).
(a) through (e) [Reserved]
(f)(1) through (15) [Reserved]
(16) Dividends for which section 245A
deduction or section 954(c)(6) exception is
limited—(i) General rule. If for the annu-
al accounting period, the corporation dis-
tributes or receives a dividend that gives
rise to an ineligible amount (as defined
in §1.245A-5T((i)(12)), a tiered extraor-
dinary disposition amount (as defined in
§1.245A-5T(i)(25)), or a tiered extraor-
dinary reduction amount (as defined in
§1.245A-5T(i)(26)), then Form 5471 (or a
successor form) must contain such infor-
mation about the ineligible amount, tiered
extraordinary disposition amount, or tiered
extraordinary reduction amount, as appli-
cable, in the form and manner and to the
extent prescribed by the form, instructions
to the form, publication, or other guidance
published in the Internal Revenue Bulletin.
(ii) Transition rule. If the corporation
(or predecessor corporation) distributed
or received a dividend that gave rise to an
ineligible amount, a tiered extraordinary
disposition amount, or a tiered extraordi-
nary reduction amount in an annual ac-
counting period for which the Form 5471
(or successor form) has been filed before
the date of publication of these Temporary
regulations, the corporation must provide
the information described in paragraph
(f)(16)(i) of this section on the first Form
5471 (or successor form) filed by the cor-
poration after the issuance of guidance
setting forth the form and manner of re-
porting such information.
(g) through (l) [Reserved].
(m)(1) [Reserved].
(2)Special rule for paragraph (f)(16).
Paragraph (f)(16) applies with respect to
information for annual accounting periods
in which a dividend subject to §1.245A-
5T is paid.
(n) Expiration date. The applicability
of paragraphs (f)(16) and (m) of this sec-
tion expires June 14, 2022.
KIRSTEN WIELOBOB
Deputy Commissioner for Services and
Enforcement.
Approved: June 4, 2019
DAVID J KAUTTER
Assistant Secretary of the Treasury (Tax
Policy).
(Filed by the Office of the Federal Register on June
14, 2019, 4:15 p.m., and published in the issue of the
Federal Register for June 18, 2019, 84 F.R. 28398)

Part III.
Guidance Providing a Safe
Harbor Under Section 164
for Certain Individuals
Who Make a Payment to
or for the Use of an Entity
Described in Section
170(c) in Return for a State
or Local Tax Credit
Notice 2019-12
SECTION 1. PURPOSE
This notice announces that the De-
partment of the Treasury (Treasury De-
partment) and the Internal Revenue Ser-
vice (IRS) intend to publish a proposed
regulation providing a safe harbor under
section 164 of the Internal Revenue Code
(Code) for certain individuals who make
a payment to or for the use of an entity
described in section 170(c) in return for
a state or local tax credit. Under the safe
harbor, an individual may treat as a pay-
ment of state or local tax for purposes of
section 164 the portion of a payment for
which a charitable contribution deduc-
tion under section 170 is or will be dis-
allowed under Treas. Reg. § 1.170A-1(h)
(3) (T.D. 9864). This treatment as a pay-
ment of state or local tax under section
164 is allowed in the taxable year in
which the payment is made to the extent
the resulting credit is applied, consistent
with applicable state or local law, to off-
set the individual’s state or local tax lia-
bility for such taxable year or the preced-
ing taxable year. In states and localities
that permit an individual to carry forward
an excess credit amount to a subsequent
taxable year, an individual may treat the
carryforward amount as a state or local
tax payment under section 164 for the
taxable year or years to which the cred-
it is applied, consistent with applicable
state or local law, to offset a state or local
tax liability. Prior to issuance of the pro-
posed regulation, taxpayers may rely on
the provisions of this notice with respect
to payments described in this notice.
SECTION 2. BACKGROUND
Section 170(a)(1) generally allows an
itemized deduction for any “charitable
contribution” paid within the taxable year.
Section 170(c) defines “charitable con-
tribution” as a contribution or gift to or
for the use of any entity described in that
section. Under section 170(c)(1), such an
entity includes a State, a possession of the
United States, or any political subdivision
of the foregoing, including the District
of Columbia. Section 170(c)(2) includes
certain corporations, trusts, or community
chests, funds, or foundations, organized
and operated exclusively for religious,
charitable, scientific, literary, or educa-
tional purposes, or to foster national or
international amateur sports competition,
or for the prevention of cruelty to children
or animals.
Section 164(a) allows a deduction for
the payment of certain taxes, including:
(1) state and local, and foreign, real prop-
erty taxes; (2) state and local personal
property taxes; and (3) state and local, and
foreign, income, war profits, and excess
profits taxes. Section 164(b)(6), as added
by section 11042(a) of “An Act to provide
for reconciliation pursuant to titles II and
V of the concurrent resolution on the bud-
get for fiscal year 2018” (“the Act”), Pub.
L. 115-97, provides that deductions for
foreign real property taxes are not allow-
able under section 164(a)(1) and limits an
individual’s deduction to $10,000 ($5,000
in the case of a married individual filing a
separate return) for the aggregate amount
of the following state and local taxes paid
during the calendar year: (1) real property
taxes; (2) personal property taxes; (3) in-
come, war profits, and excess profits taxes;
and (4) general sales taxes. This limitation
applies to taxable years beginning after
December 31, 2017, and before January 1,
2026, and does not apply to foreign taxes
described in section 164(a)(3) or to any
taxes described in section 164(a)(1) and
(2) that are paid and incurred in carrying
on a trade or business or an activity de-
scribed in section 212. Section 164(b)(2)
provides that for purposes of section 164,
a “state or local tax” includes only a tax
imposed by a state, a United States territo-
ry, or a political subdivision of any of the
foregoing, or by the District of Columbia.
Due to the potential for taxpayers to
use state or local tax credit programs to
avoid the limitation on the deductibility of
state and local taxes, the Treasury Depart-
ment and the IRS have issued guidance on
the federal income tax treatment of trans-
fers to entities described in section 170(c)
when the taxpayer receives or expects to
receive a state or local tax credit in return.
On June 11, 2018, the Treasury Depart-
ment and the IRS issued Notice 2018-54,
2018-24 I.R.B. 750, announcing the in-
tention to propose regulations addressing
the federal income tax treatment of trans-
fers pursuant to state and local tax credit
programs. On August 27, 2018, proposed
regulations under sections 170 and 642(c)
were published in the Federal Register (83
FR 43563). The proposed regulations gen-
erally state that if a taxpayer makes a pay-
ment or transfers property to or for the use
of an entity described in section 170(c),
and the taxpayer receives or expects to re-
ceive a state or local tax credit in return for
such payment, the tax credit constitutes a
return benefit, or quid pro quo, to the tax-
payer and reduces the taxpayer’s chari-
table contribution deduction under sec-
tion 170(a). On December 28, 2018, the
Treasury Department and the IRS issued
Rev. Proc. 2019-12, 2019-04 I.R.B. 401,
providing a safe harbor under section 162
for certain payments made by C corpora-
tions and specified passthrough entities to
or for the use of an organization described
in section 170(c) if the C corporation or
specified passthrough entity receives or
expects to receive a state or local tax cred-
it in return for such payment. On June 11,
2019, the Treasury Department and the
IRS published T.D. 9864, Contributions
in Exchange for State or Local Tax Cred-
its, 2019-27 I.R.B. 6 (effective August 12,
2019 and applicable to amounts paid or
property transferred by a taxpayer after
August 27, 2018), providing rules govern-
ing the availability of charitable contribu-
tion deductions under section 170 when a
Bulletin No. 2019–27 57 July 1, 2019

taxpayer receives or expects to receive a
corresponding state or local tax credit, as
well as providing similar rules under sec-
tion 642(c) for payments made by a trust
or decedent’s estate.
In the Special Analyses section of the
proposed regulations, the Treasury De-
partment and the IRS explained that the
proposed regulations “will leave charita-
ble giving incentives entirely unchanged
for the vast majority of taxpayers.” The
Treasury Department and the IRS ac-
knowledged, however, that a small frac-
tion of taxpayers could see a reduction in
their financial incentives to donate to state
and local tax credit programs compared
to their pre-Act incentives and requested
comments on this important consider-
ation. After the publication of the pro-
posed regulations, stakeholders expressed
concern, through comments and through
testimony at the public hearing, that the
proposed regulations would create unfair
consequences for certain individuals who
receive state or local tax credits in return
for payments to section 170(c) entities.
Specifically, donors to such tax credit pro-
grams who itemize deductions for federal
income tax purposes and have total state
and local tax liability for the year under
$10,000 would be precluded from taking
charitable contribution deductions for
payments to section 170(c) entities to the
extent the donors receive state or local
tax credits even though the donors would
have been able to deduct equivalent pay-
ments of state and local taxes offset by
such credits. As a result of the proposed
regulations, if these individuals chose to
make a payment to a section 170(c) entity
instead of paying tax to the state or local
government, they would lose a deduction
to which they would otherwise have been
entitled.
These state tax credit programs effec-
tively offer taxpayers a choice of paying
tax to the state or local government or
making a payment to a section 170(c) en-
tity and receiving a tax credit that offsets
the taxpayer’s state or local tax liability.
This situation can be analogized to situ-
ations in which a party entitled to receive
a payment from a second party directs or
permits the second party to satisfy its pay-
ment obligation by making a payment to
a third party. In such situations, the pay-
ment may be treated, for federal income
tax purposes, as a payment by the payor to
the party entitled to receive payment. Cf.
Rev. Rul. 74-75, 1974-1 C.B. 19 (payment
made by an employer to a third party to
discharge an obligation of an employee
treated for federal income tax purposes as
made by the employer to the employee);
Rev. Rul. 86-14, 1986-1 C.B. 304 (same).
SECTION 3. SAFE HARBOR FOR
INDIVIDUALS
The Treasury Department and the IRS
take seriously the concern that the pro-
posed regulations could create unfair con-
sequences for individuals who (i) itemize
deductions for federal income tax purpos-
es, (ii) make a payment to a section 170(c)
entity in return for a state or local tax cred-
it, and (iii) would have been able to de-
duct a payment of tax to the state or local
government in the amount of the credit. A
safe harbor is appropriate to mitigate the
consequences of the proposed regulations
in the situation described above.
Accordingly, the Treasury Department
and the IRS intend to publish a proposed
regulation amending Treasury Regulation
§ 1.164-3 to provide a safe harbor for
certain individuals who make a payment
to or for the use of an entity described in
section 170(c) in return for a state or local
tax credit. Under this safe harbor, an indi-
vidual who itemizes deductions and who
makes a payment to a section 170(c) en-
tity in return for a state or local tax credit
may treat as a payment of state or local tax
for purposes of section 164 the portion of
such payment for which a charitable con-
tribution deduction under section 170 is or
will be disallowed under final regulations.
This treatment as a payment of state or
local tax under section 164 is allowed in
the taxable year in which the payment is
made to the extent the resulting credit is
applied, consistent with applicable state or
local law, to offset the individual’s state or
local tax liability for such taxable year or
the preceding taxable year.
12
To the extent
the resulting credit is not applied to offset
the individual’s state or local tax liability
for the taxable year of the payment or the
preceding taxable year, any excess credit
permitted to be carried forward may be
treated as a payment of state or local tax
under section 164 in the taxable year or
years for which the carryover credit is ap-
plied, consistent with applicable state or
local law, to offset the individual’s state
or local tax liability. This safe harbor shall
not apply to a transfer of property.
Nothing in this notice may be con-
strued as permitting a taxpayer who ap-
plies this safe harbor to treat the amount
of any payment as deductible under more
than one provision of the Code or Trea-
sury regulations.
Nothing in this notice may be con-
strued as permitting a taxpayer who ap-
plies this safe harbor to avoid the limita-
tions of section 164(b)(6) for any amount
paid as a tax or treated under this notice as
a payment of tax.
SECTION 4. EXAMPLES
In the examples below, assume that the
taxpayer’s application of the state or lo-
cal tax credit is consistent with applicable
state or local law and that the taxpayer is
an individual who itemizes deductions for
federal income tax purposes.
Example 1. In year 1, Taxpayer A makes a pay-
ment of $500 to an entity described in section 170(c).
In return for the payment, A receives a dollar-for-dol-
lar state income tax credit. Prior to application of the
credit, A’s state income tax liability for year 1 was
$500 or more; A applies the $500 credit to A’s year 1
state income tax liability. Under section 3 of this no-
tice, A treats the $500 payment as a payment of state
income tax in year 1 for purposes of section 164. To
determine A’s deduction amount, A must apply the
provisions of section 164 applicable to payments of
state and local taxes, including the limitation under
section 164(b)(6).
Example 2. In year 1, Taxpayer B makes a pay-
ment of $7,000 to an entity described in section
170(c). In return for the payment, B receives a dol-
lar-for-dollar state income tax credit, which under
state law may be carried forward for three taxable
years. Prior to application of the credit, B’s state in-
come tax liability for year 1 was $5,000; B applies
$5,000 of the $7,000 credit to B’s year 1 state income
tax liability. Under section 3 of this notice, B treats
$5,000 of the $7,000 payment as a payment of state
income tax in year 1 for purposes of section 164. Pri-
or to application of the remaining credit, B’s state
income tax liability for year 2 exceeds $2,000; B ap-
plies the excess credit of $2,000 to B’s year 2 state
income tax liability. For year 2, B treats the $2,000 as
a payment of state income tax for purposes of section
164. To determine B’s deduction amounts in years 1
and 2, B must apply the provisions of section 164
12
Some state or local tax credit programs allow an individual to apply the state or local tax credit to offset a prior year’s state or local tax liability.
July 1, 2019 58 Bulletin No. 2019–27

Bulletin No. 2019–27 59 July 1, 2019
applicable to payments of state and local taxes, in-
cluding the limitation under section 164(b)(6).
Example 3. In year 1, Taxpayer C makes a pay-
ment of $7,000 to an entity described in section
170(c). In return for the payment, C receives a lo-
cal real property tax credit equal to 25 percent of the
amount of this payment ($1,750). Prior to applica-
tion of the credit, C’s local real property tax liability
in year 1 was $3,500; C applies the $1,750 credit to
C’s year 1 local real property tax liability. Under sec-
tion 3 of this notice, for year 1, C treats $1,750 as a
payment of local real property tax for purposes of
section 164. To determine C’s deduction amount, C
must apply the provisions of section 164 applicable
to payments of state and local taxes, including the
limitation under section 164(b)(6).
SECTION 5. APPLICABILITY DATE
The proposed regulation setting forth
the safe harbor described in this notice will
apply to payments made to section 170(c)
entities after August 27, 2018. Prior to the
issuance of that proposed regulation, tax-
payers may rely on the provisions of this
notice with respect to such payments.
SECTION 6. REQUEST FOR
COMMENTS
The Treasury Department and the IRS
request comments on the safe harbor de-
scribed in this notice by July 11, 2019.
Taxpayers may submit comments elec-
tronically via the Federal eRulemaking
Portal at www.regulations.gov (type IRS-
2019-0020 in the search field on the www.
regulations.gov homepage to find this no-
tice and submit comments). Alternative-
ly, taxpayers may submit comments to:
CC:PA:LPD:PR (Notice 2019-12), Room
5203, Internal Revenue Service, P.O. Box
7604, Ben Franklin Station, Washing-
ton, D.C., 20044. Submissions may be
hand-delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m. to
CC:PA:LPD:PR (Notice 2019-12), Couri-
er’s Desk, Internal Revenue Service, 1111
Constitution Avenue, N.W., Washington,
D.C. 20224. All comments received will
be available for public inspection on www.
regulations.gov.
SECTION 7. DRAFTING
INFORMATION
The principal authors of this notice are
personnel from the Office of the Associate
Chief Counsel (Income Tax and Account-
ing). However, other personnel from the
Treasury Department and the IRS partic-
ipated in its development. For further in-
formation regarding this notice, contact
Mon L. Lam at (202) 317-4059 (not a toll-
free number).
Update for Weighted
Average Interest Rates,
Yield Curves, and Segment
Rates
Notice 2019-40
This notice provides guidance on the
corporate bond monthly yield curve, the
corresponding spot segment rates used
under § 417(e)(3), and the 24-month aver-
age 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 under
§ 431(c)(6)(E)(ii)(I).
YIELD CURVE AND SEGMENT
RATES
Section 430 specifies the minimum
funding requirements that apply to sin-
gle-employer plans (except for CSEC
plans under § 414(y)) pursuant to § 412.
Section 430(h)(2) specifies the inter-
est rates that must be used to determine
a plan’s target normal cost and funding
target. Under this provision, present val-
ue is generally determined using three
24-month average interest rates (“seg-
ment 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 end-
ing September 30 of the year preceding
the calendar year in which the plan year
begins.
13
However, an election may be
made under § 430(h)(2)(D)(ii) to use the
monthly yield curve in place of the seg-
ment 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
segment rates used to compute the target
normal cost and the funding target. Con-
sistent with the methodology specified in
Notice 2007-81, the monthly corporate
bond yield curve derived from May 2019
data is in Table 2019-5 at the end of this
notice. The spot first, second, and third
segment rates for the month of May 2019
are, respectively, 2.72, 3.76, 4.33.
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 appli-
cable minimum and maximum percentag-
es of the corresponding 25-year average
segment rates. For plan years beginning
before 2021, the applicable minimum per-
centage is 90% and the applicable maxi-
mum percentage is 110%. The 25-year
average segment rates for plan years be-
ginning in 2018 and 2019 were published
in Notice 2017-50, 2017-41 I.R.B. 280,
and Notice 2018-73, 2018-40 I.R.B. 526,
respectively.
24-MONTH AVERAGE CORPORATE
BOND SEGMENT RATES
The three 24-month average corporate
bond segment rates applicable for June
2019 without adjustment for the 25-year
average segment rate limits are as follows:
24-Month Average Segment Rates Without 25-Year Average Adjustment
Applicable Month First Segment Second SegmentThird Segment
June 2019 2.743.964.44
of the full funding limitation under § 433(c)(7)(C)).
13
Pursuant to § 433(h)(3)(A), the 3
rd
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

July 1, 2019 60 Bulletin No. 2019–27
Based on § 430(h)(2)(C)(iv), the
24-month averages applicable for Sep-
tember 2018 adjusted to be within the
applicable minimum and maximum per-
centages of the corresponding 25-Based
on § 430(h)(2)(C)(iv), the 24-month av-
erages applicable for June 2019, adjusted
to be within the applicable minimum and
maximum percentages of the correspond-
ing 25-year average segment rates, are as
follows:
Adjusted 24-Month Average Segment Rates
For Plan Years
Beginning InApplicable MonthFirst SegmentSecond SegmentThird Segment
2018June 20193.925.526.29
2019June 20193.745.356.11
30-YEAR TREASURY SECURITIES
INTEREST RATES
Section 431 specifies the minimum
funding requirements that apply to multi-
employer plans pursuant to § 412. Section
431(c)(6)(B) specifies a minimum amount
for the full-funding limitation described in
§ 431(c)(6)(A), based on the plan’s current
liability. Section 431(c)(6)(E)(ii)(I) pro-
vides that the interest rate used to calcu-
late 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 interest 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 Trea-
sury securities for May 2019 is 2.82 per-
cent. The Service determined this rate as
the average of the daily determinations of
yield on the 30-year Treasury bond matur-
ing in February 2049 determined each day
through May 8, 2019 and the yield on the
30-year Treasury bond maturing in May
2049 determined each day for the balance
of the month. For plan years beginning in
June 2019, the weighted average of the
rates of interest on 30-year Treasury se-
curities and the permissible range of rates
used to calculate current liability are as
follows:
Treasury Weighted Average Rates
For Plan Years
Beginning In
30-Year Treasury
Weighted Average
Permissible Range
90% to 105%
June 20192.942.64 to 3.08
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 May 2019 are
as follows:
Minimum Present Value Segment Rates
Month First Segment Second SegmentThird Segment
May 20192.723.764.33
DRAFTING INFORMATION
The principal author of this notice is
Tom Morgan of the Office of the Asso-
ciate Chief Counsel (Employee Benefits,
Exempt Organizations, and Employment
Taxes). However, other personnel from
the IRS participated in the development
of this guidance. For further information
regarding this notice, contact Mr. Morgan
at 202-317-6700 or Paul Stern at 202-317-
8702 (not toll-free calls).

Bulletin No. 2019–27 61 July 1, 2019
Table 2019-5
Monthly Yield Curve for May 2019
Derived from May 2019 Data
MaturityYieldMaturityYieldMaturityYieldMaturityYieldMaturityYield
0.52.6020.54.1840.54.3560.54.4180.54.44
1.02.6321.04.1841.04.3561.04.4181.04.45
1.52.6621.54.1941.54.3561.54.4181.54.45
2.02.6822.04.2042.04.3662.04.4282.04.45
2.52.7022.54.2042.54.3662.54.4282.54.45
3.02.7223.04.2143.04.3663.04.4283.04.45
3.52.7423.54.2243.54.3663.54.4283.54.45
4.02.7824.04.2244.04.3664.04.4284.04.45
4.52.8224.54.2344.54.3764.54.4284.54.45
5.02.8725.04.2345.04.3765.04.4285.04.45
5.52.9425.54.2445.54.3765.54.4285.54.45
6.03.0126.04.2446.04.3766.04.4286.04.45
6.53.0826.54.2546.54.3766.54.4286.54.45
7.03.1627.04.2647.04.3867.04.4387.04.45
7.53.2427.54.2647.54.3867.54.4387.54.45
8.03.3228.04.2648.04.3868.04.4388.04.45
8.53.4028.54.2748.54.3868.54.4388.54.45
9.03.4729.04.2749.04.3869.04.4389.04.45
9.53.5429.54.2849.54.3869.54.4389.54.45
10.03.6130.04.2850.04.3970.04.4390.04.45
10.53.6730.54.2950.54.3970.54.4390.54.46
11.03.7331.04.2951.04.3971.04.4391.04.46
11.53.7831.54.3051.54.3971.54.4391.54.46
12.03.8332.04.3052.04.3972.04.4392.04.46
12.53.8732.54.3052.54.3972.54.4392.54.46
13.03.9133.04.3153.04.3973.04.4393.04.46
13.53.9433.54.3153.54.4073.54.4493.54.46
14.03.9734.04.3154.04.4074.04.4494.04.46
14.54.0034.54.3254.54.4074.54.4494.54.46
15.04.0335.04.3255.04.4075.04.4495.04.46
15.54.0535.54.3255.54.4075.54.4495.54.46
16.04.0736.04.3356.04.4076.04.4496.04.46
16.54.0836.54.3356.54.4076.54.4496.54.46
17.04.1037.04.3357.04.4077.04.4497.04.46
17.54.1137.54.3357.54.4177.54.4497.54.46
18.04.1338.04.3458.04.4178.04.4498.04.46
18.54.1438.54.3458.54.4178.54.4498.54.46
19.04.1539.04.3459.04.4179.04.4499.04.46
19.54.1639.54.3459.54.4179.54.4499.54.46
20.04.1740.04.3560.04.4180.04.44100.04.46

July 1, 2019 62 Bulletin No. 2019–27
Part IV.
Deletions From Cumulative
List of Organizations,
Contributions to Which are
Deductible Under Section
170 of the Code
Announcement 2019-07
The Internal Revenue Service has re-
voked its determination that the organi-
zations listed below qualify as organiza-
tions described in sections 501(c)(3) and
170(c)(2) of the Internal Revenue Code
of 1986.
Generally, the IRS will not disallow
deductions for contributions made to a
listed organization on or before the date
of announcement in the Internal Revenue
Bulletin that an organization no longer
qualifies. However, the IRS is not pre-
cluded from disallowing a deduction for
any contributions made after an organi-
zation ceases to qualify under section
170(c)(2) if the organization has not
timely filed a suit for declaratory judg-
ment under section 7428 and if the con-
tributor (1) had knowledge of the revoca-
tion of the ruling or determination letter,
(2) was aware that such revocation was
imminent, or (3) was in part responsible
for or was aware of the activities or omis-
sions of the organization that brought
about this revocation.
If on the other hand a suit for declar-
atory judgment has been timely filed,
contributions from individuals and orga-
nizations described in section 170(c)(2)
that are otherwise allowable will continue
to be deductible. Protection under section
7428(c) would begin on July 1, 2019 and
would end on the date the court first de-
termines the organization is not described
in section 170(c)(2) as more particularly
set for in section 7428(c)(1). For individ-
ual contributors, the maximum deduction
protected is $1,000, with a husband and
wife treated as one contributor. This ben-
efit is not extended to any individual, in
whole or in part, for the acts or omissions
of the organization that were the basis for
revocation.
NAME OF ORGANIZATIONEffective Date of RevocationLOCATION
Evansville Otters Booster Club Inc1/1/2015Evansville, IN
Firemen’s Benevolent Association of the Village of Leroy Inc4/1/2015LeRoy, NY
Fit Kids1/1/2015Forney, TX
Franklin County Memorial Hospital1/1/2010Meadville, MS
Global Multicultural Business1/1/2015Boca Raton, FL
Grace Heritage Corporation1/1/2010Davie, FL
Greater Ontario Convention and Visitors Bureau7/1/2014Ontario, CA
Grooming for Greatness Youth & Family Services1/1/2016Peachtree, GA
Homeward Society Foster Family Agency1/1/2015Agoura Hills, CA
Indiana Endowment Fund1/1/2011Fort Branch, IN
International Medical Interpreters1/1/2014Lexington, MA
Kingdom Victories Outreach Ministries1/1/2016Inkster, MI
Kokopelli Concepts Housing Association Inc1/1/2015Houston, TX
Lebanon Stem Foundation Inc1/1/2015Lebanon, IN
Light of the World Inc1/1/2015Unionville, CT
Magans Light1/1/2016Forth Worth, TX
Magnolia Regional Health Center10/1/2009Corinth, MS
Marcs Place Inc1/1/2015Lake City, AR
Middle Tennessee Clean Fuels Inc12/31/2015Nashville, TN
National Association of College Auxiliary Services1/1/2013Charlottesville, VA
New School Baseball Academy1/1/2014Mission Viejo, CA
No Child Unloved1/1/2015Gifford, IL
Northern Illinois Home Medical Supply NFP1/1/2014 Sterling, IL
NW Somaliland Society1/1/2014Lynnwood, WA
Perkinsville Fundraisers Inc7/1/2014Springfield, VT
Professional Fire Fighters of Arizona1/1/2015 Phoenix, AZ

Bulletin No. 2019–27 63 July 1, 2019
Project Walk Recovery Foundation Inc1/1/2014Carlsbad, CA
Rehobooth McKinley Christian Health Inc1/1/2014Gallup, NM
Rescue A Vet1/1/2015Cleveland, OH
SDQ Foundation3/27/2012Houston, TX
Sigma Theta Tau International Inc1/1/2014Mayaguez, PR
Sims Chiropractic Clinic Ministering Health1/1/2014Gunnison, CO
Society For Mind Brain Sciences1/1/2014Santa Monica, CA
Somerset County Farmers’ Market Inc1/1/2016Somerset, PA
Sons of the American Legion9/22/2014Blessing, TX
Sustainable Travel International1/1/2013Boulder, CO
The Breast Cancer Society Inc1/1/2014Nashville, TN
The Center for Optimal Adult Development12/31/2015Austin, TX
The Redi Foundation Inc6/1/2014Boca Raton, FL
The Wright Touch Athletics1/1/2014Country Club Hills, IL
Thirty Thousand Feet Booster Club1/1/2015Travis AFB, CA
Trust and Faith Community Outreach Inc1/1/2015Ocoee, FL
University Urology Foundation Inc1/1/2015Louisville, KY
Uplift Individuals in Christ1/1/2015Ft. Washington, MD
Usangule Food For Thought Inc1/1/2015Palo Alto, CA
VMU-1 Wardroom Fund1/1/2015Yuma, AZ
We Adopt Kids1/1/2016Carson City, NV
Western Conservatory of the Arts & Sciences1/1/2014Nunnelly, TN
Wingate Community Improvement Inc1/1/2015Wingate, IN
You Are Loved Inc1/1/2016Mandeville, LA
Yuen Foundation Incorporated1/1/2015Washington, DC
Notice of Proposed
Rulemaking
Withholding of Tax and
Information Reporting with
Respect to Interests in
Partnerships Engaged in
the Conduct of a U.S. Trade
or Business
REG-105476-18
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document contains
proposed regulations implementing cer-
tain sections of the Internal Revenue
Code, including sections added to the In-
ternal Revenue Code by the Tax Cuts and
Jobs Act, that relate to the withholding of
tax and information reporting with respect
to certain dispositions of interests in part-
nerships engaged in the conduct of a trade
or business within the United States. The
proposed regulations affect certain foreign
persons that recognize gain or loss from
the sale or exchange of an interest in a
partnership that is engaged in the conduct
of a trade or business within the United
States, and persons that acquire those in-
terests. The proposed regulations also af-
fect partnerships that, directly or indirect-
ly, have foreign persons as partners.
DATES: Written or electronic comments
and requests for a public hearing must be
received by July 12, 2019.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG-105476-18), In-
ternal Revenue Service, Room 5203, P.O.
Box 7604, Ben Franklin Station, Wash-
ington, DC 20044. Submissions may be
hand-delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (REG-105476-18),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue NW., Washing-
ton, DC 20224, or sent electronically via
the Federal eRulemaking Portal at http://
www.regulations.gov (IRS REG-105476-
18).

July 1, 2019 64 Bulletin No. 2019–27
FOR FURTHER INFORMATION CON-
TACT: Concerning the proposed regula-
tions, Chadwick Rowland, 202-317-6937;
concerning submissions of comments or
requests for a public hearing, Regina L.
Johnson (202) 317-6901 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Background
I. Section 1446(f)
Section 1446(f), which was added to
the Internal Revenue Code (the “Code”)
by section 13501 of the Tax Cuts and
Jobs Act, Public Law 115-97 (2017) (the
“Act”), provides rules for withholding
on the transfer of a partnership interest
described in section 864(c)(8). Section
1446(f)(1) provides that, except as oth-
erwise provided in section 1446(f), if a
portion of the gain (if any) on any dispo-
sition of an interest in a partnership would
be treated under section 864(c)(8) as ef-
fectively connected with the conduct of a
trade or business within the United States,
the transferee is required to deduct and
withhold a tax equal to 10 percent of the
amount realized on the disposition.
Section 1446(f)(2)(A) provides an
exception to the general withholding re-
quirement described in section 1446(f)(1)
if the transferor furnishes an affidavit to
the transferee stating, under penalties of
perjury, the transferor’s United States tax-
payer identification number and that the
transferor is not a foreign person. Section
1446(f)(2)(B)(i) provides that the excep-
tion to withholding described in section
1446(f)(2)(A) will not apply if the trans-
feree has actual knowledge that the affi-
davit furnished is false, or if the transferee
receives a notice from a transferor’s agent
or transferee’s agent that the affidavit is
false.
Section 1446(f)(3) provides that, at
the request of the transferor or transfer-
ee, the Secretary may prescribe a reduced
amount to be withheld under this section if
the Secretary determines that reducing the
amount to be withheld will not jeopardize
the collection of tax on gain treated under
section 864(c)(8) as effectively connect-
ed with the conduct of a trade or business
within the United States.
Section 1446(f)(4) provides that if a
transferee fails to withhold any amount
required to be withheld under section
1446(f)(1) then the partnership must de-
duct and withhold from distributions to
the transferee a tax in an amount equal to
the amount the transferee failed to with-
hold, plus interest.
Section 1446(f)(6) generally provides
that the Secretary shall prescribe such reg-
ulations as may be necessary to carry out
the purposes of section 1446(f), including
regulations providing for exceptions from
the provisions of section 1446(f). Section
1446(f) is effective for sales, exchanges,
and other dispositions after December 31,
2017.
On December 29, 2017, the Depart-
ment of the Treasury (the “Treasury De-
partment”) and the Internal Revenue Ser-
vice (the “IRS”) released Notice 2018-08,
2018-7 I.R.B. 352, which temporarily
suspends the requirement to withhold on
amounts realized in connection with the
sale, exchange, or disposition of certain
interests in a publicly traded partnership
not treated as a corporation under section
7704 and the regulations thereunder. On
April 2, 2018, the Treasury Department
and the IRS released Notice 2018-29,
2018-16 I.R.B. 495, which provides tem-
porary guidance and announces an in-
tent to issue proposed regulations under
section 1446(f) with respect to the sale,
exchange, or disposition of certain inter-
ests in non-publicly traded partnerships.
Notice 2018-29, and section 1446(f)(1)
generally, rely on the principles contained
within the section 1445 withholding re-
gime. Under section 1445, if a foreign
person disposes of a United States real
property interest (“U.S. real property in-
terest”), as defined in section 897(c), a
withholding obligation is imposed on the
transferee of the interest.
On December 27, 2018, the Trea-
sury Department and the IRS published
in the Federal Register a notice of pro-
posed rulemaking at 83 FR 66647 (REG-
113604-18) under section 864(c)(8) (the
“proposed section 864(c)(8) regulations”).
The proposed section 864(c)(8) regula-
tions provide rules for determining the
amount of gain or loss treated as effective-
ly connected with the conduct of a trade
or business within the United States (“ef-
fectively connected gain” or “effective-
ly connected loss”) described in section
864(c)(8), including rules coordinating
section 864(c)(8) with sections 741 and
751 (relating to the character of gain or
loss realized in connection with the sale or
exchange of an interest in a partnership).
They also provide rules for coordination
of section 864(c)(8) with section 897
(relating to amounts treated as effective-
ly connected gain or loss with respect to
U.S. real property interests), tiered part-
nerships, and U.S. income tax treaties.
II. Rules for Withholding under Section
1446(a) on Distributions by Publicly
Traded Partnerships
Generally, withholding under section
1446(a) is required by a partnership when
effectively connected taxable income
(“ECTI”) is allocable to a foreign person.
See §§1.1446-2 and 1.1446-3. However,
withholding on ECTI earned by a pub-
licly traded partnership is required when
the ECTI is distributed to the foreign per-
son. See §1.1446-4. Often, an interest in
the publicly traded partnership is held by
a nominee, such as a domestic financial
institution that holds the publicly traded
partnership interest as a custodian for a
foreign partner. Section 1.1446-4 provides
rules for applying the withholding tax
under section 1446(a) to distributions by
publicly traded partnerships. Under those
rules, when a publicly traded partnership
provides a qualified notice (within the
meaning of §1.1446-4(b)(4)), a nominee,
which must be a domestic person, may be
treated as a withholding agent with respect
to a distribution. See §1.1446-4(b)(4) and
1.1446-4(d). The qualified notice must be
given in accordance with notice require-
ments with respect to dividends under
regulations under the Securities Exchange
Act of 1934. Section 1.1445-8(f) provides
similar qualified notice rules that apply to
certain distributions subject to withhold-
ing when attributable to the disposition of
a U.S. real property interest.
Section 1.1446-4(f)(3) provides an or-
dering rule for situations in which the dis-
tribution is attributable to multiple types
of income (such as amounts attributable to
income described in section 1441 or 1442
or amounts subject to withholding under
section 1446). However, no rule is provid-
ed for situations in which a qualified no-

Bulletin No. 2019–27 65 July 1, 2019
tice does not provide information regard-
ing the types of income being distributed.
Explanation of Provisions
The proposed regulations provide rules
for withholding, reporting, and paying tax
under section 1446(f) upon the sale, ex-
change, or other disposition of an inter-
est in a partnership described in section
864(c)(8) and proposed §1.864(c)(8)-1.
14

The proposed regulations would, when
finalized, adopt many of the rules that
were described in Notice 2018-29, with
certain modifications provided, in part,
in response to comments. In addition, the
proposed regulations provide reporting
rules relating to section 864(c)(8) and
rules implementing withholding under
section 1446(f)(4). They also contain rules
clarifying the reporting rules applicable to
transfers of partnership interests subject to
section 6050K. Further, the proposed reg-
ulations provide rules implementing with-
holding by brokers on transfers of certain
interests in publicly traded partnerships
subject to section 1446(f)(1), and make
related changes to the reporting rules and
procedures for adjusting withholding un-
der sections 1461, 1463, and 1464. They
also make changes to the rules regarding
withholding on distributions by publicly
traded partnerships under §1.1446-4, in-
cluding the rules that apply to qualified
notices and nominees. Finally, the pro-
posed regulations provide rules coordi-
nating withholding under section 1446(f)
with other withholding regimes to prevent
overwithholding of tax.
I. Reporting Requirements for Foreign
Transferors and Partnerships with
Foreign Transferors
A partnership that is engaged in the
conduct of a trade or business within the
United States is required to file an annual
information return, Form 1065, U.S. Re-
turn of Partnership Income, and also pro-
vide information to its partners on Sched-
ule K-1 (Form 1065), Partner’s Share of
Income, Deductions, Credits, etc., with
respect to each partner’s distributive share
of partnership items and other informa-
tion. See section 6031 and §§1.6031(a)-
1 and 1.6031(b)-1T. Domestic partners
generally report the information from the
Schedule K-1 (Form 1065) on their in-
come tax return, typically Form 1040, U.S.
Individual Income Tax Return, for an indi-
vidual, or Form 1120, U.S. Corporation
Income Tax Return, for a corporation. A
foreign partner with a U.S. income tax re-
turn filing obligation generally files Form
1040NR, U.S. Nonresident Alien Income
Tax Return, or Form 1120-F, U.S. Income
Tax Return of a Foreign Corporation.
A partner (foreign or domestic) that
transfers an interest in a partnership in an
exchange described in section 751(a) (relat-
ing to an exchange of an interest in a part-
nership that holds unrealized receivables or
inventory) generally has an obligation both
to inform the partnership of the transfer
and to include a statement with respect to
the exchange on the partner’s income tax
return under §1.751-1(a)(3). See section
6050K(c) and §1.6050K-1(d). A partner-
ship also has an obligation to provide in-
formation with respect to the exchange to
the transferee and transferor under section
6050K(c) and §1.6050K-1(c). See also
Form 8308, Report of a Sale or Exchange
of Certain Partnership Interests.
Because section 864(c)(8) requires a
deemed sale at the partnership level to
determine a foreign partner’s effectively
connected gain or loss, a foreign person
that transfers its partnership interest gen-
erally will not be able to compute its in-
come tax liability under section 864(c)(8)
unless the partnership provides certain in-
formation to the foreign partner. The pro-
posed regulations therefore provide rules
that facilitate the transfer of information
between a foreign partner and the partner-
ship for purposes of section 864(c)(8).
The proposed regulations generally
provide that a notifying transferor (gen-
erally, any foreign person and certain
domestic partnerships that have a foreign
person as a direct or indirect partner) that
transfers (within the meaning of proposed
§1.864(c)(8)-1(g)(5)) an interest in a part-
nership (other than certain interests in a
publicly traded partnership) in a transac-
tion described in section 864(c)(8) must
notify the partnership within 30 days of
the transfer by providing a statement that
includes information relevant to the part-
nership for making calculations under
section 864(c)(8), including the date on
which the notifying transferor transferred
its interest, and other identifying informa-
tion regarding the transferor and transfer-
ee. See proposed §1.864(c)(8)-2(a). This
rule generally parallels §1.6050K-1, in-
cluding the content of the information and
when it must be provided.
Proposed §1.864(c)(8)-2(b) requires a
specified partnership (generally, a partner-
ship that is engaged in the conduct of a
trade or business within the United States
or a partnership that owns, directly or
indirectly, an interest in a partnership so
engaged) to furnish to a notifying trans-
feror the information necessary for the
transferor to comply with section 864(c)
(8) by the due date of the Schedule K-1
(Form 1065) for the tax year of the part-
nership in which the transfer occurred.
Proposed §1.864(c)(8)-2(b) applies if a
specified partnership receives the notifica-
tion described in proposed §1.864(c)(8)-
2(a), or otherwise knows that a relevant
transfer has occurred, and the notifying
transferor would have had a distributive
share of deemed sale EC gain or deemed
sale EC loss (within the meaning of pro-
posed §1.864(c)(8)-1(c)) at the time of the
transfer. For these purposes, a notifying
transferor that is a partnership is treated
as a nonresident alien. Proposed §1.864(c)
(8)-2(b) provides that, for purposes of the
reporting requirements described in pro-
posed §1.864(c)(8)-2, a partnership that
makes a distribution to a transferor that
qualifies as a transfer under section 864(c)
(8) and proposed §1.864(c)(8)-1(b) will
be treated as having actual knowledge
that a transfer occurred, thereby trigger-
ing the reporting requirement of proposed
§1.864(c)(8)-2(b) to the extent that the
transferee would have had a distributive
share of deemed sale EC gain or deemed
sale EC loss within the meaning of pro-
posed §1.864(c)(8)-1(c).
Relatedly, the proposed regulations
clarify that the information a partnership
must provide under section 6050K upon
being notified of a transfer includes the
information necessary for a transferor
14
§ 1.864(c)(8)-1 was proposed to be added on December 27, 2018; 83 FR 66647, 66651.

July 1, 2019 66 Bulletin No. 2019–27
to make the transferor’s required state-
ment under §1.751-1(a)(3). See proposed
§1.6050K-1(c)(2).
II. Definitions and General Rules of
Applicability
A. Definitions
For purposes of the proposed regu-
lations under section 1446(f), the term
“transfer” means a sale, exchange, or oth-
er disposition, and includes a distribution
from a partnership to a partner. See pro-
posed §1.1446(f)-1(b)(9). A “transferee”
is any person, foreign or domestic, that
acquires a partnership interest through a
transfer. See proposed §1.1446(f)-1(b)(10).
The term “transferor” generally means any
person, foreign or domestic, that transfers a
partnership interest, and therefore refers to
the person that directly owns the interest in
the partnership. For a trust, to the extent all
or a portion of the trust is treated as owned
by the grantor or another person under
sections 671 through 679 (such trust, “a
grantor trust”), the term “transferor” means
the grantor or other person. See proposed
§1.1446(f)-1(b)(11). See also Rev. Rul. 85-
13, 1985-1 C.B. 184.
B. Certifications and Books and Records
Similar to the approach described in
Notice 2018-29, the proposed regulations
provide various exceptions to withhold-
ing and procedures for determining the
amount to withhold. Under these rules,
the person required to withhold may gen-
erally rely on information provided in cer-
tifications that it receives or that is con-
tained in its own books and records. The
general rules of applicability provide the
requirements for providing a valid certi-
fication and for retaining certifications or
information in books and records. See pro-
posed §1.1446(f)-1(c)(2). A certification
includes any documents associated with
the certification, such as statements from
the partnership, IRS forms, withholding
certificates, withholding statements, certi-
fications, or other documentation. Id.
C. Determination Dates
Notice 2018-29 required determina-
tions to be made as of the date of trans-
fer when applying many of its rules and
exceptions. Because it may be difficult to
make these determinations on the precise
date of transfer, the proposed regulations
generally allow the choice of one of sev-
eral dates solely for purposes of making
determinations under section 1446(f)(1)
with regard to a transfer. This date is re-
ferred to as the determination date. It is
chosen on a transfer-by-transfer basis and
must be used for a transfer for all purposes
of section 1446(f). The determination date
must be one of the following: the date of
the transfer, any date no more than 60 days
before the transfer, or, with respect to a
transferor that is not a controlling partner,
the later of either the first day of the part-
nership’s taxable year in which the trans-
fer occurs or the date before the transfer
of the most recent revaluation described
in §1.704-1(b)(2)(iv)(f)(5) or 1.704-1(b)
(2)(iv)(s)(1). See proposed §1.1446(f)-
1(c)(4). As the determination date applies
only for purposes of determining the with-
holding obligation under section 1446(f),
the calculation of tax resulting from the
application of section 864(c)(8) and the
reporting requirements under proposed
§1.864(c)(8)-2 are determined based on
the date of the transfer.
D. IRS Forms and Instructions
Proposed §1.1446(f)-1(c)(5) provides
that any reference in the proposed regula-
tions to an IRS form includes its successor
form and that any form must be filed in the
manner provided in the instructions to the
forms or in other guidance. The IRS in-
tends to modify publications, instructions
and forms (including forms discussed in
this Explanation of Provisions) as appro-
priate to take into account sections 864(c)
(8) and 1446(f).
E. Coordination with Other Withholding
Rules
Proposed §1.1446(f)-1(d) provides a
rule coordinating section 1446(f)(1) with
section 1445. Specifically, the rule provides
that if a transferee is required to withhold
under section 1445(e)(5) or §1.1445-
11T(d)(1) and section 1446(f)(1), then the
transferee will be subject to the payment
and reporting requirements of section 1445
only. This rule clarifies that even though
proposed §1.864(c)(8)-1(d) provides that
section 897(g) does not apply to a transfer
that is also subject to section 864(c)(8), the
withholding regime provided in section
1445 and the regulations thereunder applies
under these circumstances, rather than the
rules described in section 1446(f)(1). Thus,
if a foreign transferor disposes of an interest
in a partnership that is engaged in the con-
duct of a trade or business within the Unit-
ed States (not taking into account the appli-
cation of section 897(a)) and in which fifty
percent or more of the value of the gross as-
sets consist of U.S. real property interests,
and ninety percent or more of the value of
the gross assets consist of U.S. real proper-
ty interests plus any cash or cash equiva-
lents, a transferee must generally withhold
under section 1445(a) (at 15 percent of the
amount realized) and not section 1446(f).
However, this rule applies only if the trans-
feror has not applied for a withholding cer-
tificate under §1.1445-11T(d)(1). See pro-
posed §1.1446(f)-1(d). If the transferor has
applied for a withholding certificate, then
the transferee must withhold the greater of
the amounts required under section 1445(e)
(5) or section 1446(f)(1).
Because gain that an upper-tier partner-
ship recognizes on the transfer of an inter-
est in a lower-tier partnership engaged in
the conduct of a trade or business within
the United States is included when calcu-
lating the upper-tier partnership’s ECTI,
the proposed regulations also provide a
coordination rule that allows a partner-
ship that is withheld upon under section
1446(f)(1) (in its capacity as a transferor)
to claim a credit for the amount withheld
against its withholding tax liability under
section 1446(a) (if any). See proposed
§1.1446-3(c)(4). See also §1.1446-3(d)
(2) for rules on how the partnership or its
partners may claim a credit or refund for
tax paid under section 1446.
III. Withholding on the Transfer of a Non-
Publicly Traded Partnership Interest
by a Foreign Person
A. In General
Under section 1446(f)(1), a transferee
of a partnership interest must withhold
a tax equal to 10 percent of the amount
realized on any disposition when the dis-
position results in gain that is treated as

Bulletin No. 2019–27 67 July 1, 2019
effectively connected with the conduct
of a trade or business within the United
States under section 864(c)(8). Proposed
§1.1446(f)-2(a) implements this rule by
requiring any transferee to withhold a tax
equal to 10 percent of the amount realized
on any transfer of a partnership interest
(other than certain publicly traded part-
nership interests) under section 1446(f)
(1), unless an exception to withholding
applies under proposed §1.1446(f)-2(b). If
an exception does not apply and withhold-
ing is required, proposed §1.1446(f)-2(c)
provides rules for determining and adjust-
ing the amount required to be withheld
under section 1446(f)(1). The exceptions
and determination procedures in the pro-
posed regulations apply solely for purpos-
es of section 1446(f)(1) and do not affect
a foreign person’s filing obligation under
the Code or a foreign person’s tax liability
resulting from the application of section
864(c)(8).
B. Exceptions to Withholding
1. In General
The proposed regulations provide six
exceptions to withholding by a transferee
under section 1446(f)(1). These excep-
tions generally allow the transferee to rely
on certain certifications that it receives
from the transferor or partnership unless
it has actual knowledge that the certifica-
tions are incorrect or unreliable. See pro-
posed §1.1446(f)-2(b)(1). When the part-
nership is a transferee because it makes
a distribution, it may instead rely on its
books and records unless it knows, or has
reason to know, that the information is in-
correct or unreliable. Id.
2. Certification of Non-Foreign Status by
Transferor
Consistent with section 6.01 of Notice
2018-29, proposed §1.1446(f)-2(b)(2)
provides the requirements for a certifica-
tion of non-foreign status (including the
requirement that it include the transfer-
or’s TIN), and clarifies that a valid Form
W-9, Request for Taxpayer Identification
Number and Certification, may be used
for this purpose, including a Form W-9 for
the transferor that is already in the trans-
feree’s possession. The proposed regula-
tions also clarify that a Form W-9 may be
used to establish non-foreign status of a
transferor for purposes of section 1445.
See proposed §§1.1445-2(b)(2)(v) and
1.1445-5(b)(3)(iv).
3. No Realized Gain by Transferor
Section 1446(f)(1) applies only when
there is gain described in section 864(c)
(8) on the transfer of a partnership inter-
est. Consistent with section 6.02 of Notice
2018-29, the proposed regulations provide
that a transferee is not required to with-
hold if the transferor provides the trans-
feree with a certification stating that the
transferor would not realize any gain on
the transfer of the partnership interest de-
termined as if the transfer occurred on the
determination date. Proposed §1.1446(f)-
2(b)(3)(i) provides that this certification
of no realized gain must take into account
any ordinary income arising from applica-
tion of section 751(a) and the regulations
thereunder. Therefore, a transferor may
not provide the certification if section
751(a) and the regulations thereunder re-
quire the transferor to realize ordinary in-
come, even if the transferor would realize
an overall loss on the transfer.
A similar rule in proposed §1.1446(f)-
2(b)(3)(ii) applies to partnership distri-
butions. Section 731 generally provides
that if a distribution of money to a partner
exceeds the partner’s adjusted basis in its
interest in the partnership, then gain will
be recognized to the extent of the differ-
ence between the money distributed and
the partner’s basis. That gain or loss is
considered as gain or loss from the sale
or exchange of the partnership interest of
the distributee partner. See section 731(a).
Consistent with section 9 of Notice 2018-
29, proposed §1.1446(f)-2(b)(3)(ii) pro-
vides that for purposes of determining
whether withholding is required on a
distribution, a partnership is permitted to
rely on its books and records or on a cer-
tification provided by the transferor (the
distributee partner) to determine if there
is realized gain to the distributee partner.
4. Effectively Connected Gain upon a
Partnership’s Deemed Sale
To make the determination of whether
there is a transfer to which withholding
applies more administrable for transferors
and transferees, proposed §1.1446(f)-2(b)
(4) provides that no withholding is re-
quired if the transferee receives a certi-
fication from the partnership stating that
if the partnership sold all of its assets at
fair market value, the amount of net ef-
fectively connected gain resulting from
the deemed sale would be less than 10
percent of the total net gain. Section 6.04
of Notice 2018-29 provided a similar rule,
but at a threshold of 25 percent. Proposed
§1.1446(f)-2(b)(4) lowers the percentage
threshold in accordance with section 2
of Notice 2018-29, which stated that the
Treasury Department and the IRS intend
to provide future guidance reducing the
percentage threshold provided in section
6.04 of Notice 2018-29. The proposed
regulations also allow a partnership that is
a transferee because it makes a distribu-
tion to use this exception when it deter-
mines that the 10-percent test is satisfied
from its books and records.
To make it easier for the partnership
to calculate its effectively connected gain
from the deemed sale, the proposed regu-
lations allow this amount to be determined
as of the determination date. Further, the
proposed regulations allow a partnership
to make this determination when no gain
on the deemed sale would have been ef-
fectively connected with the conduct
of a trade or business within the United
States (for example, when the deemed
sale would result in a loss that would have
been effectively connected with the con-
duct of a trade or business within the Unit-
ed States). See proposed §1.1446(f)-2(b)
(4)(i)(B).
5. Allocable Share of ECTI
Section 6.03 of Notice 2018-29 pro-
vided an exception to withholding under
section 1446(f)(1) for situations in which
a transferor’s distributive share of ECTI
during the previous three taxable years
was less than 25 percent of the transferor’s
total distributive share of income in each
year (the “three-year ECTI exception”).
Section 2 of Notice 2018-29 provided that
the Treasury Department and the IRS in-
tended to lower the three-year ECTI ex-
ception’s 25 percent threshold in proposed
regulations, and that other limitations for
this rule were under consideration. See

July 1, 2019 68 Bulletin No. 2019–27
also section III.B.4 of this Explanation of
Provisions (describing modifications to
the threshold set forth in section 6.04 of
Notice 2018-29).
The three-year ECTI exception was
intended to relieve potentially significant
overwithholding that could arise when a
partner transfers an interest in a partner-
ship, recognizes relatively little effective-
ly connected gain under section 864(c)
(8), but cannot obtain information from
the partnership at the time of the transfer
necessary to qualify for the deemed sale
exception described in section III.B.4 of
this Explanation of Provisions. The three-
year ECTI exception uses a transferor’s
allocable share of ECTI as a proxy for
distributive share of effectively connect-
ed gain recognized in connection with a
deemed sale described in section 864(c)
(8)(B). The Treasury Department and the
IRS are aware that the amount of a part-
ner’s recent allocable share of ECTI may
not accurately indicate whether, and to
what extent, the partner would recognize
gain taxable under section 864(c)(8) and
proposed §1.864(c)(8)-1. For example, a
partnership may recognize relatively little
effectively connected income for several
years while nonetheless holding assets
with significant built-in gain that would be
taxable as effectively connected gain. The
three-year ECTI exception may in certain
cases increase compliance and collection
risks if foreign partners with limited con-
nections to the United States and signifi-
cant tax liability under section 864(c)(8)
are not withheld on under section 1446(f)
(1).
In the interest of striking the appropri-
ate balance between the risk of noncom-
pliance and the potential for overwithhold-
ing, the proposed regulations adopt the
three-year ECTI exception from Notice
2018-29 with the modifications described
in this section III.B.5 of this Explanation
of Provisions. The Treasury Department
and the IRS continue to study whether the
three-year ECTI exception is appropriate
in light of the risk of noncompliance, and
request comments on the utility of the rule
and modifications to the rule that would
reduce that risk.
Accordingly, proposed §1.1446(f)-
2(b)(5)(i) provides that no withholding is
required if a transferee receives a certifi-
cation from a transferor stating that the
transferor was at all times a partner in
the partnership for the immediately pri-
or taxable year and the two taxable years
that precede it and that the transferor’s
allocable share of ECTI for each of those
taxable years was less than 10 percent of
the transferor’s total distributive share of
the partnership’s net income for that year.
See proposed §1.1446(f)-2(b)(5)(i)(A)
and (C). In addition, a transferor must
certify that, in the immediately prior tax-
able year and the two that preceded it, the
transferor’s allocable share of ECTI was
less than $1 million (including ECTI al-
located to certain persons related to the
transferor). See proposed §1.1446(f)-2(b)
(5)(i)(B). A transferor must also certify
that its distributive share of income or
gain that is effectively connected with
the conduct of a trade or business within
the United States or deductions or loss-
es properly allocated and apportioned to
that income in each of the taxable years
described in proposed §1.1446(f)-2(b)
(5)(i)(A) has been reported on a Federal
income tax return (filed on or before the
due date (including extensions) for filing
the return (and all amounts due with re-
spect to the return are timely paid)) for
each of the three preceding taxable years,
if required to be filed, before the date on
which the transferor furnishes the certi-
fication. See proposed §1.1446(f)-2(b)(5)
(i)(D). For this purpose, if the transferor
is a nonresident alien individual or for-
eign corporation, the Federal income tax
return is the transferor’s Form 1040NR
or Form 1120-F; if the transferor is a
partnership, the Federal income tax re-
turns are the Forms 1040NR or 1120-F
of the direct or indirect partners of the
transferor.
For purposes of this rule, the immedi-
ately prior taxable year is the transferor’s
most recent taxable year with or within
which a taxable year of the partnership
ended and for which a Schedule K-1 (Form
1065) was due or furnished (if earlier) be-
fore the date of the transfer. See proposed
§1.1446(f)-2(b)(5)(ii). Consistent with the
three-year ECTI exception described in
Notice 2018-29, a transferor does not sat-
isfy this requirement if for any of the rel-
evant years it did not receive Form 8805,
Foreign Partner’s Information Statement
of Section 1446 Withholding Tax, unless
the transferor was allocated an item of de-
duction or loss that is effectively connect-
ed with the conduct of a trade or business
within the United States, in which case it
is treated as having an allocable share of
ECTI for that year of zero. See proposed
§1.1446(f)-2(b)(5)(iii).
When a transferor has had neither
ECTI nor a net distributive share of in-
come allocated to it in the previous three
taxable years, the composition of the
income the partnership allocates to the
transferor does not provide any indication
of the amount of effectively connected
gain realized by the transferor in connec-
tion with the transfer. Accordingly, the
proposed regulations also provide that
a transferor does not qualify for the ex-
ception provided in proposed §1.1446(f)-
2(b)(5) if the transferor did not have a
net distributive share of income allocated
to it in any of its previous three taxable
years. See proposed §1.1446(f)-2(b)(5)
(iv).
Section 6.03 of Notice 2018-29 pro-
vided that the three-year ECTI exception
does not apply when a partnership is a
transferee by reason of making a distri-
bution. Comments noted that, particu-
larly in tiered partnership structures, a
distributing partnership may not be able
to obtain the information necessary to
use the deemed sale exception described
in section 6.04 of Notice 2018-29, such
that the partnership would be required
to withhold under section 1446(f)(1) in
cases in which there was relatively lim-
ited effectively connected income earned
by the partnership. In response to the
comments, the proposed regulations al-
low a distributing partnership to use this
exception when it determines that the
three-year ECTI exception is applicable
based on its books and records, provided
that it receives a representation from the
transferor stating that income tax returns
have been filed, and tax has been paid,
for each of the relevant years for which
the transferor was allocated effectively
connected income (or loss). See proposed
§1.1446(f)-2(b)(5)(v).
Finally, proposed §1.1446(f)-2(b)(5)
(vi) provides that a transferor may not
make the certification if it has actual
knowledge that the information relevant
to the certification that is reported by the
partnership on any Form 8805 or Sched-
ule K-1 (Form 1065) is incorrect.

Bulletin No. 2019–27 69 July 1, 2019
6. Nonrecognition by Transferor
Section 864(c)(8) and proposed
§1.864(c)(8)-1 provide that gain from the
transfer of a partnership interest that is
treated as effectively connected with the
conduct of a trade or business within the
United States is limited to gain otherwise
recognized under the Code. If a nonrec-
ognition provision of the Code applies
to all of the gain realized on a transfer,
withholding under section 1446(f)(1)
does not apply. Accordingly, section 6.05
of Notice 2018-29 provided an exception
to withholding for certain nonrecognition
transactions if the transferee receives a
notice from the transferor describing the
application of a nonrecognition provision.
This exception was based on the rules in
§1.1445-2(d)(2).
Consistent with the rule provided in
Notice 2018-29, the proposed regulations
generally permit a transferee to rely on a
certification of nonrecognition from the
transferor. See proposed §1.1446(f)-2(b)
(6). The certification provided by the
transferor must include a brief description
of the transfer and the relevant law and
facts relating to the application of the non-
recognition provision.
If only a portion of the gain realized on
the transfer is subject to a nonrecognition
provision, an adjustment to the amount
required to be withheld may be permit-
ted under proposed §1.1446(f)-2(c)(4),
discussed in section III.C.4 of this Expla-
nation of Provisions (describing the rules
in proposed §1.1446(f)-2(c)(4)(vi) for the
certification of maximum tax liability that
may be relied upon in these situations).
7. Claim of Treaty Benefits
Notice 2018-29 did not contain specif-
ic rules addressing the application of in-
come tax treaties, instead including them
in section 6.05 by adopting a modified
version of §1.1445-2(d) (providing an ex-
ception from withholding under section
1445 when the transferor certifies that it
is not required to recognize gain either
under a provision of the Code or under a
treaty). The proposed regulations provide
an exception to withholding under section
1446(f)(1) when a transferor certifies that
it is not subject to tax on any gain from the
transfer pursuant to an income tax treaty
in effect between the United States and a
foreign country. See proposed §1.1446(f)-
2(b)(7)(i). This exception applies only
when a transferor (as opposed to owners
of an interest in the transferor, including
partners in a partnership that is a transfer-
or) qualifies for the benefits of an income
tax treaty in order to reduce the burden on
a transferee of reviewing documentation
from multiple persons. The certification to
the transferee must include a valid Form
W-8BEN, Certificate of Foreign Status of
Beneficial Owner for United States Tax
Withholding and Reporting (Individu-
als), or W-8BEN-E, Certificate of Status
of Beneficial Owner for United States Tax
Withholding and Reporting (Entities) (as
applicable), that contains the information
necessary to support the claim for treaty
benefits, and the transferee must mail a
copy of the certification to the IRS by the
30th day after the date of the transfer in or-
der to rely upon it. Id. See also Form 8833,
Treaty-Based Return Position Disclosure
Under Section 6114 or 7701(b), and the
instructions to the form regarding the re-
quirement for the transferor to disclose a
claim for treaty benefits with a return.
To ensure that these procedures are fol-
lowed for claims involving treaty benefits,
this exception is the sole method by which
a transferor may claim an exception to
withholding by reason of a claim of treaty
benefits. See proposed §1.1446(f)-2(b)(7)
(iii). For claims involving transfers with
respect to which treaty benefits apply to
only a portion of the gain from the trans-
fer, see section III.C.4 of this Explanation
of Provisions (describing the rules in pro-
posed §1.1446(f)-2(c)(4)(vi) for the certi-
fication of maximum tax liability that that
may be relied upon in these situations).
C. Determining the Amount to Withhold
1. In General
The proposed regulations provide
certain procedures for determining the
amount to withhold under section 1446(f)
(1). The rules are intended to provide ad-
ministrable procedures for transferees to
determine the amount to withhold, and in
some cases, provide procedures intended
to better reflect the amount of the trans-
feror’s actual tax liability under section
864(c)(8). When applicable, these pro-
cedures generally allow the transferee to
rely on certifications that it receives from
the transferor (or, in certain cases, from
the partnership) to determine the amount
to withhold unless it has actual knowledge
that the certification is incorrect or unreli-
able. See proposed §1.1446(f)-2(c)(1). In
cases in which a partnership is the trans-
feree because it makes a distribution, it
may instead rely on its books and records
unless it knows, or has reason to know,
that the information is incorrect or unre-
liable. Id.
2. Amount Realized
i. In General
The amount required to be withheld
under section 1446(f)(1) is determined by
reference to the transferor’s amount real-
ized on the transfer. See section 1446(f)
(1). The proposed regulations provide that
the amount realized for purposes of pro-
posed §1.1446(f)-2 is determined under
section 1001 and the regulations thereun-
der and section 752 and the regulations
thereunder. See proposed §1.1446(f)-2(c)
(2)(i); see also §§1.752-1(h) and 1.1001-
2.
The proposed regulations also clar-
ify that in the case of a distribution, the
amount realized is the sum of the amount
of cash distributed (or to be distributed),
the fair market value of property distribut-
ed (or to be distributed), and the reduction
in the transferor’s share of partnership li-
abilities. Id.
ii. Procedures to Determine Share of
Partnership Liabilities
Comments stated that the allocation of
liabilities to a partner under section 752 is
not information that normally would be
available to a transferee and may be diffi-
cult for a transferor to determine as of the
date of transfer. To address these issues,
section 7.02 of Notice 2018-29 provid-
ed that a transferee may in certain cases
rely on a certification from the transferor
as to the amount of the transferor’s share
of partnership liabilities reported on the
transferor’s most recently received Sched-
ule K-1 (Form 1065), provided that the
form was for a partnership taxable year
that closed no more than 10 months be-

July 1, 2019 70 Bulletin No. 2019–27
fore the date of transfer and the transferor
is not a controlling partner. Section 7.03
of Notice 2018-29 allowed a transferee
to rely on a certification from the partner-
ship that provided the transferor’s share
of partnership liabilities as reflected on
the most recently prepared Schedule K-1
(Form 1065).
The proposed regulations provide pro-
cedures similar to sections 7.02 and 7.03
of Notice 2018-29 that allow a trans-
feree to rely on a certification from the
transferor or the partnership. Proposed
§1.1446(f)-2(c)(2)(ii)(B) provides that a
transferee may generally rely on a certi-
fication from a transferor that provides
the amount of the transferor’s share of
partnership liabilities reported on the
most recent Schedule K-1 (Form 1065)
issued by the partnership. In response to
comments stating that a transferor may
not possess a Schedule K-1 (Form 1065)
that satisfies the 10 month requirement in
Notice 2018-29 because of the timing of
the extended due date for Schedule K-1
(Form 1065), the proposed regulations
provide that a transferee may generally
rely on a certification if the last day of
the partnership taxable year for which the
Schedule K-1 (Form 1065) was provid-
ed was no more than 22 months before
the date of the transfer. See proposed
§1.1446(f)-2(c)(2)(ii)(B). Consistent
with Notice 2018-29, a transferor that is
a controlling partner may not provide this
certification because it will generally be
able to require the partnership to provide
a partnership-level certification as to the
controlling partner’s share of partnership
liabilities. Id.
Proposed §1.1446(f)-2(c)(2)(ii)(C)
allows a transferee to rely on a certifica-
tion from the partnership that provides the
amount of the transferor’s share of part-
nership liabilities. However, unlike the
rule in Notice 2018-29, the partnership is
required to make this determination as of
the determination date rather than relying
on its most recently prepared Schedule
K-1 (Form 1065). Id. The proposed regu-
lations also provide a new procedure that
allows a partnership that is a transferee
because it makes a distribution to rely
on its books and records to determine the
transferor’s share of partnership liabilities
as of the determination date. See proposed
§1.1446(f)-2(c)(2)(iii).
If a transferee does not use one of these
determination procedures, the reduction in
the transferor’s share of partnership liabil-
ities must be determined as of the date of
the transfer for purposes of computing the
amount realized.
iii. Modified Amount Realized for
Foreign Partnerships
As discussed in section III.B of this
Explanation of Provisions, section 1446(f)
(2) and proposed §1.1446(f)-2(b)(2) pro-
vide an exception to withholding when the
transferor is not a foreign person. A trans-
feror that is a foreign partnership may not
rely on this exception even though it may
have U.S. persons (which are not subject
to tax under section 864(c)(8)) as its part-
ners. To avoid overwithholding when a
foreign partnership transfers its interest
in a partnership, proposed §1.1446(f)-2(c)
(2)(iv) provides a procedure to limit the
amount realized for withholding purposes
to the portion of the amount realized that
is attributable to foreign persons. For this
purpose, the portion of the amount realized
attributable to a direct or indirect partner
is determined based on the percentage of
gain allocable to that partner. Any partner
that does not provide a valid certification
of non-foreign status (including a Form
W-9) is treated as a foreign person for this
purpose.
To make the certification for a mod-
ified amount realized, the transferor
must provide to the transferee a Form
W-8IMY, Certificate of Foreign Inter-
mediary, Foreign Flow-Through Enti-
ty, or Certain U.S. Branches for United
States Tax Withholding and Reporting,
that includes a certification of non-for-
eign status for each partner that is treated
as a U.S. person. It must also include a
withholding statement that provides the
percentage of gain allocable to each di-
rect or indirect partner and that indicates
whether that person is a U.S. person or is
treated as a foreign person.
3. Lack of Money or Property or Lack of
Knowledge Regarding Liabilities
As described in section 8 of Notice
2018-29, in some cases, a reduction in
the transferor’s share of partnership lia-
bilities may cause the amount otherwise
required to be withheld to exceed the cash
or other property that the transferee actu-
ally pays to the transferor. In other cases,
a transferee may have not received, or
cannot rely upon, a certification regard-
ing the transferor’s share of partnership
liabilities, and may not otherwise know
the transferor’s share of partnership lia-
bilities. In these situations, the proposed
regulations generally provide that the
amount required to be withheld is equal
to the amount realized determined with-
out regard to the decrease in the transfer-
or’s share of partnership liabilities. See
proposed §1.1446(f)-2(c)(3).
4. Certification of Maximum Tax
Liability
To more closely align the amount to
withhold with the transferor’s tax liability
under section 864(c)(8), the proposed reg-
ulations provide a procedure to determine
the amount to withhold that is intended to
estimate the amount of tax the transferor
is required to pay under section 864(c)(8).
See proposed §1.1446(f)-2(c)(4).
For this procedure to apply, a transfer-
ee must receive a certification from the
transferor containing certain information
relating to the transferor and the transfer.
See proposed §1.1446(f)-2(c)(4)(iii). One
of the requirements for this certification is
for the transferor to identify the amount of
outside capital gain and outside ordinary
gain that would be treated as effectively
connected gain on the determination date.
See proposed §1.1446(f)-2(c)(4)(iii)(E).
Further, to provide this certification, the
transferor must represent that it has ob-
tained a statement from the partnership
that includes, among other things, infor-
mation relating to the transferor’s distribu-
tive share of effectively connected gain in
connection with a deemed sale described
in section 864(c)(8)(B) as of the determi-
nation date. See proposed §1.1446(f)-2(c)
(4)(iii)(G).
When a transferor provides a transfer-
ee this information, proposed §1.1446(f)-
2(c)(4)(i) allows the transferee to with-
hold based on the transferor’s maximum
tax liability on the transfer. The transfer-
or’s maximum tax liability is the amount
of the transferor’s effectively connected
gain multiplied by the applicable percent-
age. See section 1446(b) and §1.1446-3(a)

Bulletin No. 2019–27 71 July 1, 2019
(2). The applicable percentage applies the
highest rate of tax for each particular type
of income or gain allocable to a foreign
person. Id.
Special rules apply for a transfer in
which only a portion of the gain is subject
to tax under section 864(c)(8) because a
nonrecognition provision of the Code or
an income tax treaty in effect between the
United States and a foreign country ap-
plies (for example, when the partnership
carries on one trade or business through
a U.S. permanent establishment, and an-
other trade or business that is not carried
on through a U.S. permanent establish-
ment). See proposed §1.1446(f)-2(c)(4)
(v) and (vi). These rules provide that the
transferor must, in addition to providing
the maximum tax liability certification,
comply with the procedural requirements
that would otherwise apply when claiming
a full exception to withholding based on
a nonrecognition provision or treaty ben-
efits.
D. Reporting and Paying Withheld
Amounts
1. In General
A transferee required to withhold
must report and pay any tax withheld by
the 20th day after the date of the trans-
fer. See proposed §1.1446(f)-2(d)(1). To
report and pay the amount withheld, the
proposed regulations direct the transferee
to use Forms 8288, U.S. Withholding Tax
Return for Dispositions by Foreign Per-
sons of U.S. Real Property Interests, and
8288-A, Statement of Withholding on Dis-
positions by Foreign Persons of U.S. Real
Property Interests. The IRS will stamp a
valid Form 8288-A to show receipt and
mail a copy to the transferor.
2. Transferee’s Obligation to Certify the
Amount Withheld to the Partnership
As discussed in section IV of this
Explanation of Provisions, a partner-
ship must withhold on distributions to
a transferee under section 1446(f)(4) to
the extent the transferee fails to proper-
ly withhold under section 1446(f)(1) and
proposed §1.1446(f)-2(a). See proposed
§1.1446(f)-3. In order for the partnership
to determine whether it must withhold un-
der these rules, proposed §1.1446(f)-2(d)
(2) requires a transferee to timely furnish
certain information regarding its compli-
ance with section 1446(f)(1) to the part-
nership.
Specifically, proposed §1.1446(f)-
2(d)(2) requires a transferee (other than a
partnership that is a transferee because it
makes a distribution) to furnish, no later
than 10 days after the transfer, a certifica-
tion to the partnership that either includes
a copy of the Form 8288-A that it files
with the IRS, or states the amount real-
ized on the transfer and any amount with-
held by the transferee. The certification
must also include any underlying certifi-
cations that the transferee has relied upon
that claim an exception or adjustment
to withholding. As discussed in section
IV.B of this Explanation of Provisions,
the partnership must conduct its own
review of the certification provided by
the transferee, including any underlying
certifications. Therefore, a transferee that
has relied on a certification claiming an
exception or adjustment to withholding
may want to ensure that the partnership
has determined the certification to be cor-
rect and reliable before the due date for
payment of any withheld amounts to the
IRS.
E. Effect of Withholding on Transferor
Proposed §1.1446(f)-2(e) states that
a foreign person must file a U.S. tax re-
turn and pay any tax due with respect to a
transfer that is subject to section 864(c)(8)
regardless of whether there is withholding
under section 1446(f)(1) and proposed
§1.1446(f)-2. To claim a credit under sec-
tion 33, a transferor that is an individual
or corporation must attach to its return the
stamped copy of Form 8288-A, as refer-
enced in section III.D of this Explanation
of Provisions. See proposed §1.1446(f)-
2(e)(2)(i). If a stamped copy of Form 8288-
A has not been provided to the transferor
by the IRS, proposed §1.1446(f)-2(e)(3)
provides that a transferor may establish
the amount of tax withheld by furnishing
substantial evidence of the amount. For a
discussion of the rule regarding a trans-
feror that is a foreign partnership claim-
ing a credit for withholding under section
1446(f)(1), see section II.E of this Expla-
nation of Provisions.
IV. Partnership’s Requirement to
Withhold under Section 1446(f)(4) on
Distributions to Transferee
A. In General
Proposed §1.1446(f)-3 provides rules
under section 1446(f)(4) that would im-
plement the partnership’s requirement to
withhold on distributions to a transferee
on any amount that the transferee failed to
properly withhold under section 1446(f)
(1), plus any interest on this amount.
The rules, when made applicable as final
rules, would end the suspension of section
1446(f)(4) withholding provided in sec-
tion 11 of Notice 2018-29.
B. Requirement to Withhold
The proposed regulations provide
that, if a transferee fails to withhold any
amount required to be withheld under pro-
posed §1.1446(f)-2 in connection with the
transfer of a partnership interest, the part-
nership must withhold from any distribu-
tions made to the transferee in accordance
with the rules in proposed §1.1446(f)-3.
Under the general rule, a partnership de-
termines whether a transferee has with-
held the amount required to be withheld
under proposed §1.1446(f)-2 by relying
on the certification described in proposed
§1.1446(f)-2(d)(2) that it receives from
the transferee. See proposed §1.1446(f)-
3(a)(1). The partnership may rely on this
certification unless it knows, or has rea-
son to know, that the certification is in-
correct or unreliable. Id. Therefore, the
partnership must review the certification
received from the transferee, which in-
cludes any underlying certifications that
the transferee relied on to reduce or elimi-
nate withholding. Because the partnership
may have information that may not be
available to the transferee (for example,
information in its books and records), a
partnership may know, or have reason to
know, that an underlying certification is
incorrect or unreliable even though the
transferee properly relied on the certifi-
cation. In this case, the partnership would
be required to withhold on the transferee
under section 1446(f)(4) to the extent re-
quired in proposed §1.1446(f)-3.
If the partnership timely receives
(within 10 days from the transfer), and

July 1, 2019 72 Bulletin No. 2019–27
may rely on, a certification from the
transferee stating that an exception to
withholding applies or establishing that
the transferee has withheld the amount
required to be withheld under proposed
§1.1446(f)-2, then the partnership is not
required to withhold under the general
rule in proposed §1.1446(f)-3(a)(1). See
proposed §1.1446(f)-3(b)(1). For this
purpose, the amount required to be with-
held may take into account any adjust-
ment procedures under §1.1446(f)-2(c)
(for which any documents, including un-
derlying certifications, are attached to the
certification provided by the transferee).
The proposed regulations thus reduce the
burden imposed by section 1446(f)(4) by
allowing transferees and partnerships to
rely on the information produced under
the regulations implementing section
1446(f)(1).
The proposed regulations provide an
additional rule that allows the IRS, in
limited circumstances, to require a part-
nership to withhold under section 1446(f)
(4) when the IRS notifies the partnership
that it has determined that the transferee
has provided incorrect information on
the certification described in proposed
§1.1446(f)-2(d)(2) regarding the amount
realized or the amount withheld, or that
the transferee failed to pay the amounts
reported as withheld to the IRS. See pro-
posed §1.1446(f)-3(a)(2). This rule is
meant to induce the transferee to properly
determine the amount realized on transfer
(in accordance with the rules in proposed
§1.1446(f)-2(c)(2)), and to correctly re-
port to the partnership the amount of tax
withheld and paid to the IRS.
Under the proposed regulations, with-
holding under section 1446(f)(4) does not
apply when a partnership is a transferee
because it makes a distribution. See pro-
posed §1.1446(f)-3(b)(3). Section 1446(f)
(4) imposes a withholding obligation on
a secondary party, the partnership, when
the transferee fails to withhold under sec-
tion 1446(f)(1). When the partnership is
the transferee because it made a distribu-
tion and failed to withhold under section
1446(f)(1) and proposed §1.1446(f)-2,
imposing a section 1446(f)(4) withhold-
ing obligation on it does not provide an
additional party to ensure the 1446(f) lia-
bility is paid. Furthermore, the partnership
remains liable for its failure to withhold
in its capacity as a transferee. See section
VI.A of this Explanation of Provisions.
A publicly traded partnership generally
is also not required to withhold on distri-
butions made to a transferee under section
1446(f)(4). See proposed §1.1446(f)-3(b)
(2)(i). As described in section V of this
Explanation of Provisions, it would be
administratively difficult for a publicly
traded partnership to determine when a
transfer of its interest has occurred, and
whether the correct amount has been
withheld under section 1446(f)(1). How-
ever, the proposed regulations do require
a publicly traded partnership to withhold
under section 1446(f)(4) in certain limited
instances. Specifically, a publicly traded
partnership may publish a qualified notice
that states that withholding under section
1446(f)(1) does not apply with respect to
a distribution. See section V.B.2 and 3 of
this Explanation of Provisions. To ensure
that publicly traded partnerships exercise
due diligence when publishing these qual-
ified notices, proposed §1.1446(f)-3(b)
(2)(ii) provides that the exception from
section 1446(f)(4) withholding applica-
ble to publicly traded partnerships does
not apply if a publicly traded partnership
determines (including by reason of having
received notification from the IRS) that it
has published a qualified notice that false-
ly states that an exemption applied. When
a publicly traded partnership makes this
determination, it must withhold on distri-
butions to the transferees an amount equal
to the amount that any brokers failed to
withhold under proposed §1.1446(f)-4
due to reliance on the qualified notice,
plus interest.
C. Withholding Rules
A partnership that does not receive,
or cannot rely on, a timely certification
from a transferee stating that an exception
to withholding applies or that the proper
amount has been withheld must begin to
withhold under the general rule on distri-
butions made to the transferee on the later
of the date that is 30 days after the transfer
or the date that is 15 days after the part-
nership acquires actual knowledge of the
transfer. See proposed §1.1446(f)-3(c)(1)
(i).
The partnership must withhold on the
entire amount of each distribution made to
the transferee until it may rely on a certi-
fication from the transferee that states that
an exception to withholding applies or
that provides the information necessary to
determine the amount required to be with-
held. See proposed §1.1446(f)-3(c)(1)(ii).
The partnership may rely on this certifica-
tion to determine its withholding obliga-
tion regardless of whether it is provided
within the time prescribed in proposed
§1.1446(f)-2(d)(2). If the partnership has
not already satisfied the amount required
to be withheld, as determined from the
certification from the transferee, it must
continue to withhold on distributions
to the transferee until it has done so. Id.
However, the partnership may stop with-
holding if the transferee disposes of all of
its interest in the partnership, unless the
partnership has actual knowledge that any
successor to the transferee is related to the
transferee or the transferor from which the
transferee acquired the interest. Id.
The amount required to be withheld
under proposed §1.1446(f)-3(a)(1), as de-
termined from the certification provided
by the transferee, is a tax equal to 10 per-
cent of the amount realized on the transfer,
reduced by any amount already withheld
by the transferee, plus any computed in-
terest. See proposed §1.1446(f)-3(c)(2)
(i). The proposed regulations provide that
a partnership that is required to withhold
under proposed §1.1446(f)-3(a)(1) may
not take into account any adjustment pro-
cedures that would otherwise affect the
amount required to be withheld under
proposed §1.1446(f)-2(c)(2)(i). See pro-
posed §1.1446(f)-3(c)(2)(i)(A). Thus, for
example, a partnership may not reduce the
amount that it is required to withhold un-
der the procedures described in proposed
§1.1446(f)-2(c)(4) (adjusting the amount
subject to withholding based on a transfer-
or’s maximum tax liability). The Treasury
Department and the IRS have determined
that it would be inappropriate to permit
adjustments that may reduce the amount
required to be withheld under section
1446(f)(4). Withholding on distributions
to transferees under section 1446(f)(4)
applies only after the transferee has either
failed to properly withhold under section
1446(f)(1) or has not complied with the
applicable procedural requirements in the
proposed regulations. Accordingly, per-
mitting adjustments to the amount a part-

Bulletin No. 2019–27 73 July 1, 2019
nership is required to withhold under sec-
tion 1446(f)(4) would reduce transferees’
incentive to comply with their obligations
under section 1446(f)(1) while potentially
increasing the partnership’s administrative
burden associated with that withholding.
Proposed §1.1446(f)-3(c)(2)(ii) pro-
vides rules for the partnership to compute
interest on the amount that the transferee
failed to withhold. Proposed §1.1446(f)-
3(c)(3) provides that any amount required
to be withheld on a distribution under any
other withholding provision in the Code is
not required to be withheld under section
1446(f)(4). For example, if a partnership
is required to withhold $30 under section
1441 on a $100 distribution, the maxi-
mum amount required to be withheld on
that distribution under section 1446(f)(4)
is $70.
Proposed §1.1446(f)-3(d) provides that
a partnership required to withhold under
section 1446(f)(4) must report and pay
the tax withheld using Forms 8288, U.S.
Withholding Tax Return for Dispositions
by Foreign Persons of U.S. Real Prop-
erty Interests, and 8288-C, Statement of
Withholding Under Section 1446(f)(4)
for Withholding on Dispositions by For-
eign Persons of Partnership Interests, as
provided in forms, instructions, or other
guidance.
D. Effect of Withholding on the
Transferor and Transferee
The withholding of tax under section
1446(f)(4) does not relieve a nonresi-
dent alien individual or foreign corpora-
tion subject to tax under section 864(c)
(8) from filing a U.S. income tax return
with respect to the transfer and paying
any tax due with the return. See proposed
§1.1446(f)-3(e)(1). Because this tax is
withheld from the transferee rather than
from the transferor, the transferor is not
allowed a credit under section 33. Id.
However, the proposed regulations clar-
ify that tax will not be collected from
the transferor to the extent it has already
been collected from another person un-
der these rules. See section VI.A of this
Explanation of Provisions. Therefore, the
transferor will not be required to pay tax
to the extent the tax (but not any portion
treated as interest) has been paid through
withholding on the transferee.
A transferee remains liable under sec-
tion 1446(f)(1) even when the partner-
ship is required to withhold under section
1446(f)(4). However, the transferee is
treated as satisfying this withholding tax
liability under section 1446(f)(1) to the
extent that it is withheld upon under sec-
tion 1446(f)(4). See proposed §1.1446(f)-
3(e)(2). Any amount withheld that is treat-
ed as interest is not treated as satisfying
the transferee’s liability under section
1446(f)(1), but that amount will instead
be treated as interest paid by the transfer-
ee with respect to its section 1446(f)(1)
liability. Id. Under the proposed regula-
tions, if the amount of tax withheld from
the transferee exceeds its liability under
section 1446(f)(1), only the partnership
may claim a refund on behalf of the trans-
feree for the excess amount. Id. This rule
is meant to make the refund process more
administrable by having the partnership
act on behalf of each of its transferees for
purposes of claiming any excess amounts
withheld under section 1446(f)(4). The
Treasury Department and the IRS antici-
pate that partnerships and transferees will
make arrangements by contract so that
the transferees may be reimbursed for
amounts refunded to the partnership. The
Treasury Department and the IRS request
comments on this issue.
V. Withholding on the Transfer of a
Publicly Traded Partnership Interest
by a Foreign Person
The proposed regulations provide
rules for withholding and reporting on the
transfer of an interest in a publicly traded
partnership if the interest is publicly trad-
ed on an established securities market or is
readily tradable on a secondary market or
the substantial equivalent thereof (such in-
terests, “PTP interests”). The rules, when
made applicable as final rules, would end
the suspension of section 1446(f)(1) with-
holding on the disposition of PTP interests
provided in Notice 2018-08.
A. In General
A transfer of a PTP interest raises
unique issues for withholding under sec-
tion 1446(f). For example, when a transfer
of a PTP interest is effected through one or
more brokers, the transferee will generally
not know the identity of the transferor. Ac-
cordingly, the Conference Report for the
Act acknowledged that transfers involv-
ing PTP interests could require withhold-
ing rules different from those that apply
to transfers involving non-PTP interests.
See Conference Report on H.R. 1, Tax
Cuts and Jobs Act, H.Rep. No. 115-466, at
511 (“[T]he Secretary may provide guid-
ance permitting a broker, as agent of the
transferee, to deduct and withhold the tax
... such guidance may provide that if an
interest in a publicly traded partnership is
sold by a foreign partner through a broker,
the broker may deduct and withhold the
10-percent tax on behalf of the transfer-
ee.”).
Consistent with the Conference Report,
proposed §1.1446(f)-4(a)(1) provides that
if a transfer of a PTP interest is effected
through one or more brokers, the trans-
feree is not required to withhold, and the
withholding obligation is instead imposed
on certain brokers involved with the trans-
fer. Generally, the proposed regulations
define a broker to include any person,
foreign or domestic, that in the ordinary
course of a trade or business during the
calendar year stands ready to effect sales
made by others, and that, in connection
with a transfer of a PTP interest, receives
all or a portion of the amount realized
on behalf of the transferor. See proposed
§1.1446(f)-1(b)(1). For example, when a
transfer of a PTP interest occurs through
a cash on delivery account, a delivery ver-
sus payment account, or other similar ac-
count or transaction, this definition would
include a broker that receives an amount
realized from the sale against delivery of
the PTP interest and any other broker that
receives an amount realized from that bro-
ker. Therefore, the withholding obligation
under proposed §1.1446(f)-4 is generally
limited to brokers that receive proceeds
from the sale and act on behalf of the
transferor. The definition of broker also
includes any clearing organization that ef-
fects a transfer of a PTP interest on behalf
of the transferor. While comments have
stated that clearing organizations may not
have the capability to complete the with-
holding required under section 1446(f),
the Treasury Department and the IRS an-
ticipate that clearing organizations will
make arrangements to ensure that, when
effecting the transfer of a PTP interest on

July 1, 2019 74 Bulletin No. 2019–27
behalf of foreign brokers, they act on be-
half of brokers that assume withholding
responsibility when clearing sales of PTP
interests (such as a qualified intermediary
(“QI”)).
If a transfer of a PTP interest is effect-
ed through multiple brokers, proposed
§1.1446(f)-4(a)(2) provides rules that
specify which broker or brokers have a
withholding obligation. Under proposed
§1.1446(f)-4(a)(2)(i), a broker that pays
the amount realized to a foreign broker
is required to withhold unless the foreign
broker is either a U.S branch treated as
a U.S. person or a QI that assumes pri-
mary withholding responsibility for the
payment. Consistent with this rule, the
Treasury Department and the IRS intend
to modify the QI agreement provided in
Revenue Procedure 2017-15, 2017-3
I.R.B. 437, to allow QIs to assume pri-
mary withholding responsibility on the
amount realized. Proposed §1.1446(f)-
4(a)(2)(ii) provides an additional rule re-
quiring the broker that effects a transfer
for the transferor as its customer to satisfy
the withholding obligation. This rule en-
sures that withholding will be completed
on payment of the amount realized to the
transferor when another broker has not al-
ready satisfied the withholding.
To avoid withholding by multiple bro-
kers, proposed §1.1446(f)-4(a)(2)(iii)
provides the general rule that a broker is
not required to withhold when it knows
that the withholding obligation has been
satisfied by another broker. Proposed
§1.1446(f)-4(a)(2)(iv) provides that a bro-
ker must treat another broker as a foreign
person unless it obtains documentation
(including a certification of non-foreign
status) establishing that the other broker is
a U.S. person.
If the transfer of a PTP interest is not
effected through one or more brokers, then
proposed §1.1446(f)-4 does not apply, and
the general rules of section 1446(f)(1) and
proposed §1.1446(f)-2 apply. A transfer
that is effected through a broker includes a
distribution with respect to a PTP interest
held through an account with a broker.
B. Exceptions to Withholding
The proposed regulations provide five
exceptions to withholding that apply to
the transfer of a PTP interest. The ex-
ceptions are intended to both reduce the
compliance burden placed on brokers and
provide rules that are administrable.
1. Certification of Non-Foreign Status
As mentioned in section III.B.2 of
this Explanation of Provisions, withhold-
ing under section 1446(f)(1) is limited to
transfers by foreign partners. According-
ly, a broker is not required to withhold to
the extent that it relies on a certification of
non-foreign status that it receives from the
transferor that claims an exception to with-
holding. See proposed §1.1446(f)-4(b)(2).
For purposes of proposed §1.1446(f)-4, a
certification of non-foreign status means a
Form W-9, or valid substitute form, that
meets the requirements of §1.1441-1(d)
(2). A broker may rely on a valid Form
W-9 that it already possesses, and in cer-
tain cases, may instead rely on a certifi-
cation that it receives from another bro-
ker that states the TIN and status of the
transferor when that other broker acts as
an agent for the transferor and possesses
the Form W-9 (for example, from an in-
troducing broker). A broker will not qual-
ify for the exception provided in proposed
§1.1446(f)-4(b)(2) if it has actual knowl-
edge that the certification is incorrect or
unreliable.
2. 10-Percent Exception
The proposed regulations include an
exception to withholding that may apply
if, on a deemed sale of the assets of the
publicly traded partnership the interest in
which is transferred, the amount of effec-
tively connected gain would be less than
10 percent of the total gain. Specifically,
proposed §1.1446(f)-4(b)(3) provides that
a broker is not required to withhold under
proposed §1.1446(f)-4 if it properly re-
lies on a qualified notice stating that the
10-percent exception applies.
The 10-percent exception applies if a
hypothetical sale by the publicly traded
partnership of all of its assets at fair mar-
ket value on a specified date would result
in an amount of gain effectively connect-
ed with the conduct of a trade or business
within the United States that is less than
10 percent of the total gain. The specified
date must be a date designated by the pub-
licly traded partnership that is within the
92-day period ending on the date that it
posts a qualified notice. Unlike the simi-
lar exception described in section III.B.4
of this Explanation of Provisions that ap-
plies to transfers of non-PTP interests, this
rule requires a publicly traded partnership
to designate a date for this purpose that
generally occurs within the most recent
calendar quarter. Cf. proposed §1.1446(f)-
2(b)(4) (permitting the deemed sale com-
putation to occur on a determination date,
which would allow the deemed sale date
to be determined as of the first day of a
partnership’s taxable year in which the
transfer occurred in certain cases). The
Treasury Department and the IRS have
determined that it is appropriate to limit
the availability of this exception to cases
in which a publicly traded partnership has
designated a deemed sale date occurring
within the most recent calendar quarter
because publicly traded partnerships are in
a better position to determine the value of
their assets, and in some cases determine
the basis of their assets, on a quarterly
basis. The proposed regulations limit reli-
ance on a qualified notice depending on its
date of posting. See proposed §1.1446(f)-
4(b)(3)(iii).
For a discussion of rules regarding
when a publicly traded partnership may be
liable under section 1446(f)(4) because it
falsely states on a qualified notice that this
exception applies, see section IV.B of this
Explanation of Provisions. For a discus-
sion of the proposed changes to existing
qualified notice rules, see section VII of
this Explanation of Provisions.
3. Qualified Current Income Distributions
As discussed in section III.B.3 of this
Explanation of Provisions, the proposed
regulations allow a transferor of a non-
PTP interest to provide a certification stat-
ing that the transferor would not realize
any gain on the transfer. Because it would
be administratively difficult for a broker
to timely obtain this type of certification
from the transferor of a PTP interest, and
difficult for the transferor to determine its
basis in the PTP interest, the proposed reg-
ulations do not provide a similar exception
for transfers of PTP interests.
The Treasury Department and the IRS
have determined, however, that it would
be appropriate to eliminate withholding

Bulletin No. 2019–27 75 July 1, 2019
under section 1446(f)(1) on distributions
(the full amount of which is generally
treated as an amount realized under the
proposed regulations) by a publicly traded
partnership when it is likely that the trans-
feror would realize no gain. In general, un-
der section 705(a)(1), a partner’s basis in
its interest is increased by its distributive
share of income for the taxable year, such
that a distribution by the partnership not in
excess of that income generally does not
result in the recognition of gain under sec-
tion 731(a)(1). Accordingly, the proposed
regulations provide that when a qualified
notice posted by a publicly traded part-
nership indicates that the distribution does
not exceed the net income the partnership
earned since the record date of the part-
nership’s last distribution, no withholding
is required with respect to the distribution.
See proposed §1.1446(f)-4(b)(4).
4. Proceeds Subject to Withholding under
Section 3406
A broker may also be required to with-
hold on gross proceeds from the transfer
of a PTP interest under section 3406 when
a payment is treated as being made to a
non-exempt U.S. recipient. To prevent
withholding twice on the same payment,
proposed §1.1446(f)-4(b)(5) provides an
exception to withholding under section
1446(f)(1) if the amount realized is sub-
ject to withholding under section 3406.
5. Claim of Treaty Benefits
The proposed regulations provide an
exception similar to the one described in
section III.B.6 of this Explanation of Pro-
visions when a transferor states that it is
not subject to tax on any gain from the
transfer pursuant to an income tax treaty
in effect between the United States and a
foreign country. See proposed §1.1446(f)-
4(b)(6). The exception also requires the
transferor to furnish a valid Form W-8
with the information necessary to sup-
port the claim. Id. Unlike the exception
for non-PTP interests, a broker is not re-
quired to mail the certification to the IRS
because under the proposed regulations
brokers are required to file a Form 1042-
S, Foreign Person’s U.S. Source Income
Subject to Withholding, to report a transfer
of a PTP interest that includes information
about the claim of treaty benefits. See sec-
tion V.D of this Explanation of Provisions
for reporting requirements with respect to
transfers of PTP interests.
C. Determining the Amount to Withhold
1. Amount Realized
i. In General
A broker that is required to withhold
under proposed §1.1446(f)-4(a) must
withhold 10 percent of the amount real-
ized on the transfer of a PTP interest. As
explained in section III.C.2 of this Ex-
planation of Provisions, a reduction in a
partner’s share of partnership liabilities is
treated as an amount realized under pro-
posed §1.1446(f)-2(c). However, because
of the difficulties involved with requiring
a broker to timely determine a transferor’s
share of partnership liabilities, proposed
§1.1446(f)-4(c)(2)(i) provides a special
rule that treats the amount realized on the
transfer of a PTP interest as the amount
of gross proceeds (as defined in §1.6045-
1(d)(5)) paid or credited to the customer
or another broker (as applicable). If a pub-
licly traded partnership makes a distribu-
tion to a partner, the amount realized is
the amount of cash distributed (or to be
distributed) and the fair market value of
property distributed (or to be distributed).
ii. Modified Amount Realized for Foreign
Partnerships
Consistent with the rule described in
section III.C.2.iii of this Explanation of
Provisions that applies to transfers of non-
PTP interests, the proposed regulations
include a rule that allows brokers to rely
on a certification from a foreign partner-
ship to modify the amount realized based
on the extent to which the amount realized
is attributable to persons who are (or are
presumed to be) foreign persons. See pro-
posed §1.1446(f)-4(c)(2)(ii).
D. Reporting and Paying Withheld
Amounts
A broker required to withhold under
§1.1446(f)-4 must pay the withheld tax
pursuant to the deposit rules in §1.6302-
2, and report the withholding on Forms
1042, Annual Withholding Tax Return for
U.S. Source Income of Foreign Persons,
and 1042-S pursuant to the procedures
in §1.1461-1(b) and (c). The proposed
regulations treat as a recipient for Form
1042-S reporting purposes a partner that
receives an amount realized from a trans-
fer of a PTP interest subject to §1.1446(f)-
4. See proposed §1.1461-1(c)(1)(ii)(A)
(8). This rule also clarifies that a foreign
partnership is treated as a recipient for this
purpose to ensure that the foreign partner-
ship receives a Form 1042-S that it may
use to claim credit for any withholding un-
der proposed §1.1446(f)-4 against its tax
liability under section 1446(a). See sec-
tion II.E of this Explanation of Provisions
for discussion of the general coordination
rule.
To implement the reporting require-
ments, the proposed regulations add to
the list of amounts subject to reporting
on Form 1042-S an amount realized on
the transfer of a PTP interest subject to
§1.1446(f)-4 (with limited exceptions).
See proposed §1.1461-1(c)(2). The pro-
posed regulations also add to this list any
distributions of effectively connected in-
come by a publicly traded partnership
subject to §1.1446-4 to clarify that these
amounts are reportable on Form 1042-S.
Id.
E. Effect of Withholding on Transferor
As mentioned in section III.E of this
Explanation of Provisions, the proposed
regulations neither relieve a transferor of
its substantive tax liability under section
864(c)(8), nor relieve a transferor subject
to section 864(c)(8) from its filing obli-
gation. See proposed §1.1446(f)-4(e)(1).
However, a transferor is allowed a credit
under section 33 for the amount withheld
under section 1446(f)(1) and proposed
§1.1446(f)-4. Id. To claim the credit, the
transferor must attach to its return a copy
of the Form 1042-S that includes the
transferor’s TIN. Id. For a discussion of
the rules regarding a transferor that is a
foreign partnership claiming a credit for
withholding under section 1446(f)(1), see
section II.E of this Explanation of Provi-
sions.

July 1, 2019 76 Bulletin No. 2019–27
F. Procedures to Adjust Overwithholding
Section 1.1461-2(a) allows a withhold-
ing agent that overwithheld under chapter
3 of the Code, and made a deposit of tax
as provided in §1.6302-2(a), to adjust the
overwithheld amount using either a reim-
bursement or a set-off procedure. Because
these rules are meant to allow withholding
agents to adjust overwithholding for any
deposited amounts that are reportable on
Forms 1042 and 1042-S, the proposed reg-
ulations modify §1.1461-2(a) to allow use
of the adjustment procedures for amounts
withheld by a broker pursuant to proposed
§1.1446(f)-4 (which are reported on Forms
1042 and 1042-S, as noted in section V.D.
of this Explanation of Provisions).
G. Procedures to Adjust
Underwithholding
In general, §1.1461-2(b) allows a with-
holding agent that underwithheld on a
beneficial owner under chapter 3 of the
Code to withhold from future payments
made to the beneficial owner, or satisfy
the tax from property or additional contri-
butions of the beneficial owner, before the
earlier of the due date for filing Form 1042
or the date on which the form is actually
filed. The proposed regulations amend this
provision to allow the use of this proce-
dure by brokers that underwithheld under
proposed §1.1446(f)-4 on the transfer of a
PTP interest.
H. Refunds and Credits
Section 1.1464-1 generally provides that
if an overpayment of tax has actually been
withheld from the beneficial owner of the
income, any refund or credit will be made
to that beneficial owner. If, however, the tax
was not withheld at source, but was instead
paid by the withholding agent, the refund
or credit will be made to the withholding
agent. The proposed regulations clarify that
these rules apply for purposes of section
1446(f). See proposed §1.1464-1(a).
VI. Liability for Failure to Withhold
A. In General
Proposed §1.1446(f)-5(a) provides that
every person required to deduct and with-
hold tax under section 1446(f), including
under proposed §§1.1446(f)-2 through
1.1446(f)-4, but that fails to do so is lia-
ble under section 1461. If the tax required
to be withheld is paid by another person
required to withhold, or by the nonresi-
dent alien individual or foreign corpora-
tion subject to tax under section 864(c)(8),
section 1463 and the proposed regulations
clarify that the tax will only be collected
once. However, the satisfaction of this lia-
bility does not relieve a person that failed
to withhold under section 1446(f) from
any interest, penalties, or additions to tax
that would otherwise apply. The proposed
regulations also provide that a partner-
ship that fails to withhold under proposed
§1.1446(f)-3 is liable under section 1461
only for the amount of tax that it failed to
withhold, and not any interest computed
under §1.1446(f)-3(c)(2)(ii). This rule en-
sures that interest will be computed and
assessed only once with respect to the
same underlying tax liability.
B. Liability of Agents
Proposed §1.1446(f)-5(b) provides
rules for the liability of agents, which gen-
erally require an agent of a transferor or
transferee to notify the transferee (or oth-
er person required to withhold) if it has
knowledge that a certification furnished to
that person is false. A person that receives
notice from an agent may not rely on the
certification to apply an exception to with-
holding or for determining the amount to
withhold. Proposed §1.1446(f)-5(b)(2)
provides procedural rules regarding the
timing and content of the notice, and re-
quires the agent to furnish a copy of the
notice to the IRS. An agent that fails to
provide the required notice is liable for
the tax that the person that should have
received the notice would have been re-
quired to withhold under section 1446(f).
However, under proposed §1.1446(f)-5(b)
(4), this liability is limited to the amount of
compensation that the agent derives from
the transaction (and any civil or criminal
penalties that may apply). The proposed
regulations clarify that brokers required to
withhold under §1.1446(f)-4 are not treat-
ed as agents for purposes of this rule, and
are instead liable for any failure to with-
hold under the rules described in section V
of this Explanation of Provisions.
VII. Amendments to Existing Section
1446 Regulations Relating to
Distributions by Publicly Traded
Partnerships
In response to comments received out-
side the context of section 1446(f), the
proposed regulations also contain changes
to the existing qualified notice rules that
apply to distributions that publicly trad-
ed partnerships make to foreign partners.
The Treasury Department and the IRS are
aware that in certain cases nominees re-
ceive notices of distribution from publicly
traded partnerships that do not provide de-
tailed information regarding the amounts
of income comprising the distribution
as specified in §1.1446-4(f)(3) (such as
amounts described in section 1441 or sec-
tion 1442 or subject to withholding under
section 1446). The term “qualified notice”
under §1.1446-4(b)(4) is currently defined
by reference to the reporting requirements
of 17 CFR 240.10b-17(b)(1) or (3), which
do not include a requirement to report in-
formation regarding the types of income
comprising the distribution. Unless a no-
tice provides that information, however,
a nominee will not have the information
necessary to apply the ordering rule of
§1.1446-4(f)(3) to the distribution for pur-
poses of determining the amount required
to be withheld.
The proposed regulations make two
changes to resolve this issue. First, pro-
posed §1.1446-4(b)(4) revises the meth-
od for a publicly traded partnership to
provide a nominee a qualified notice by
requiring that the notice be posted in a
readily accessible format in an area of
the primary public Web site of the pub-
licly traded partnership that is dedicat-
ed to this purpose. Second, proposed
§1.1446-4(d) creates a default withhold-
ing rule subjecting gross distributions to
the higher of the withholding percentage
required under sections 1441 and 1442
or the applicable percentage under sec-
tion 1446(b)(2), unless a qualified notice
provides the nominee sufficient detail to
determine the types of income distributed
and the appropriate withholding rates to
apply. Thus, if a publicly traded partner-
ship is unable to determine the makeup of
a distribution when it is made, the nom-
inee must withhold at the highest appli-
cable rate.

Bulletin No. 2019–27 77 July 1, 2019
The proposed regulations also expand
the definition of a nominee for withhold-
ing under §1.1446-4 to include certain for-
eign persons that agree to assume primary
withholding responsibility. Therefore, a
QI or a U.S. branch treated as a U.S. per-
son that assumes primary withholding
responsibility for a distribution by a pub-
licly traded partnership under proposed
§1.1446-4(b)(3) can act as a nominee with
respect to the distribution. The Treasury
Department and the IRS intend to modi-
fy the QI agreement provided in Revenue
Procedure 2017-15 to allow QIs to assume
primary withholding responsibility for
distributions by publicly traded partner-
ships under section 1446(a).
The proposed regulations also make
changes to the qualified notice rules appli-
cable to publicly traded partnerships, pub-
licly traded trusts, and real estate invest-
ment trusts (“REITs”) under section 1445
that conform to proposed §1.1446-4(b)(4)
so that those rules also provide more read-
ily available information for nominees.
See proposed §1.1445-8(f).
As discussed in sections V.F and V.G
of this Explanation of Provisions, the pro-
posed regulations modify §1.1461-2(a)
and (b) to allow use of procedures to adjust
overwithholding and underwithholding
for amounts withheld by a broker pursuant
to proposed §1.1446(f)-4. The proposed
regulations also amend §1.1461-2(a) to al-
low the use of reimbursement and set-off
procedures with respect to amounts with-
held under section 1446(a) on distribu-
tions of ECTI by publicly traded partner-
ships (which are reported on Forms 1042
and 1042-S, as opposed to Forms 8804,
Annual Return for Partnership Withhold-
ing Tax (Section 1446), and 8805 used by
non-publicly traded partnerships to report
withholding on ECTI allocable to foreign
partners). They also amend §1.1461-2(b)
to clarify that the existing reference to
“distributions of effectively connected
income under section 1446” is meant to
apply only to those distributions that are
made by publicly traded partnerships.
Applicability Dates
Proposed §1.864(c)(8)-2(a) and pro-
posed §1.6050K-1(d)(3) apply to transfers
that occur on or after the date that these
regulations are published as final regula-
tions in the Federal Register (the “final-
ization date”). Proposed §1.864(c)(8)-2(b)
and (c) and proposed §1.6050K-1(c)(2)
and (c)(3) apply to returns filed on or after
the finalization date. Proposed §1.864(c)
(8)-2(d) applies beginning on the finaliza-
tion date.
Proposed §§1.1445-2(b)(2)(v) and
1.1445-5(b)(3)(iv) apply to certifications
provided on or after May 7, 2019, except
that a taxpayer may apply those provisions
with respect to certifications provided be-
fore that date. A taxpayer may rely on the
proposed amendments to §§1.1445-2 and
1.1445-5 with respect to any period before
the finalization date. Proposed §1.1445-
8(f)(1) applies to distributions made on
or after the date that is 60 days after the
finalization date.
Proposed §1.1446-3(c)(4) applies to
partnership taxable years that include
transfers that occur on or after the date
that is 60 days after the finalization date.
Proposed §1.1446-4(b)(2), (b)(3), (c), (d),
and (f) apply to distributions made on or
after the date that is 60 days after the fi-
nalization date.
Proposed §§1.1446(f)-1 through
1.1446(f)-5 apply to transfers that occur
on or after the date that is 60 days after
the finalization date. For transfers that
occur before the date that is 60 days after
the finalization date, taxpayers may apply
the rules described in Notice 2018-08 and
Notice 2018-29. Alternatively, instead of
applying the rules described in Notice
2018-29, taxpayers and other affected per-
sons may choose to apply §§1.1446(f)-1,
1.1446(f)-2, and 1.1446(f)-5 of the pro-
posed regulations in their entirety to all
transfers as if they were final regulations.
The proposed amendments to §1.1461-
1(a)(1), (c)(1)(i), (c)(1)(ii), (c)(2)(i) and
(c)(4) apply with respect to returns for
transfers occurring on or after the date that
is 60 days after the finalization date. The
proposed amendments to §1.1461-2(a)(1)
and (b) apply to transfers occurring on or
after the date that is 60 days after the final-
ization date. The proposed amendments
to §1.1461-3 apply to returns for transfers
occurring on or after the date that is 60
days after the finalization date.
The proposed amendments to §1.1463-
1(a) apply to transfers that occur on or
after the date that is 60 days after the fi-
nalization date.
The proposed amendments to §1.1464-
1(a) apply to transfers that occur on or
after the date that is 60 days after the fi-
nalization date.
The Treasury Department and the IRS
intend to obsolete Notice 2018-08 and
Notice 2018-29 effective on the date that
is 60 days after the finalization date.
Special Analyses
I. Regulatory Planning and Review
This regulation is not subject to review
under section 6(b) of Executive Order
12866 pursuant to the Memorandum of
Agreement (April 11, 2018) between the
Treasury Department and the Office of
Management and Budget regarding re-
view of tax regulations.
II. Paperwork Reduction Act
The collection of information in these
proposed regulations is in proposed
§1.864(c)(8)-2 regarding reporting for
transactions described in section 864(c)(8)
and proposed §1.864(c)(8)-1, and proposed
§§1.1446(f)-1, 1.1446(f)-2, 1.1446(f)-3,
and 1.1446(f)-4 regarding the withholding,
reporting, and paying of tax under section
1446(f) following the transfer of an inter-
est described in section 864(c)(8) and pro-
posed §1.864(c)(8)-1. Section II.1 of this
Special Analyses discusses the collections
of information that will be conducted us-
ing IRS forms. The information collections
that will not be conducted through IRS
forms are discussed in section II.2 of this
Special Analyses.
A. Collections of Information – Forms
1042, 1042-S, 8288, 8288-A, 8288-C,
W-8IMY, W-8BEN, and W-8BEN-E
Under proposed §§1.1446(f)-2(b)(2)
and 1.1446(f)-4(b)(2), a transferor quali-
fies for an exception from withholding if it
provides to the transferee or broker (as ap-
plicable) a certification of non-foreign sta-
tus, which includes a valid Form W-9 (at
the transferor’s option). The IRS has de-
termined that Form W-9 is not a collection
of information under 5 CFR 1320.3(h)(1)
and is exempt from the Paperwork Re-
duction Act of 1995 (44 U.S.C. 3507(d))
(“PRA”).

July 1, 2019 78 Bulletin No. 2019–27
The collection of information in pro-
posed §1.1446(f)-2(b)(7) is provided by
the transferor by submitting a certification
and Form W-8BEN or W-8BEN-E to the
transferee and is optional. The informa-
tion will be used by the transferor to deter-
mine whether an exception to withholding
applies based on an income tax treaty.
The information in proposed
§1.1446(f)-2(c)(2)(iv)(C) by the transfer-
or to the transferee is provided on Form
W-8IMY and is optional. This information
will be used by the transferee to determine
the modified amount realized.
The collection of information in pro-
posed §1.1446(f)-2(d)(1) will be provided
on Forms 8288 and 8288-A by the trans-
feree to the IRS and is mandatory if the
transferee withholds tax under section
1446(f)(1). These forms will be used by
the transferee to report and pay any tax
under section 1446(f)(1) and proposed
§1.1446(f)-2.
The information provided in proposed
§1.1446(f)-3(d) by the partnership to the
IRS will be used by the partnership to re-
port and pay any tax under section 1446(f)
(4) and proposed §1.1446(f)-3 and will
be provided on new Form 8288-C. The
IRS anticipates that the burden associated
with this collection of information will be
reflected in OMB control number 1545-
0902.
The collection of information provid-
ed in proposed §1.1446(f)-4(a)(2)(i) from
certain U.S. branches of foreign persons
and qualified intermediaries to the broker
that effected the transfer of an interest de-
scribed in section 864(c)(8) and proposed
§1.1446(f)-4 will be provided on Form
W-8IMY. This information will be used
by the broker to determine its withholding
obligation under section 1446(f)(1) and
proposed §1.1446(f)-4.
The collection of information in pro-
posed §1.1446(f)-4(b)(6) is provided by
the transferor by submitting a certification
and Form W-8BEN or W-8BEN-E to the
broker and is optional. The information
will be used by the broker to determine
whether an exception to withholding ap-
plies based on an income tax treaty.
The information in proposed
§1.1446(f)-4(c)(2)(ii)(C) by the trans-
feror to the broker is provided on Form
W-8IMY and is optional. This information
will be used by the broker to determine the
modified amount realized.
The information in proposed
§1.1446(f)-4(d) will be provided on Forms
1042 and 1042-S submitted by the broker
to the IRS and is mandatory if the broker
withholds tax under section 1446(f)(1)
or if it applies the exception described
in proposed §1.1446(f)-4(b)(6). These
forms will be used to report and pay any
tax under section 1446(f)(1) and proposed
§1.1446(f)-4.
The information in proposed
§1.1446(f)-4(e)(2) provided by the trans-
feror to the IRS will be used to claim a
credit for an amount withheld under sec-
tion 1446(f)(1) and proposed §1.1446(f)-
4, and will be satisfied by submitting
Form 1042-S with an income tax return
(Form 1040NR or 1120-F) to the IRS.
The Treasury Department and the IRS
intend that the information collection re-
quirements described in this section II.1
will be set forth in the forms and instruc-
tions identified in the Revision of Existing
Forms and New Forms table. As a result,
for purposes of the PRA, the reporting
burdens associated with the collections
of information in those forms will be re-
flected in the PRA submissions associated
with those forms.
Revision of Existing Forms and New Forms
NewRevision of existing form
Number of additional respondents
(estimated, rounded to nearest 1,000)
Form 1042-SY< 6,000
Form 8288Y< 70,000
Form 8288-AY< 70,000
Form 8288-CY<70,000
Form W-8BENY< 70,000
Form W-8BEN-EY< 70,000
Form W-8IMYY< 70,000
Source: RAAS:CDW and SOI
The numbers of respondents in the Re-
vision of Existing Forms and New Forms
table were estimated by the Research, Ap-
plied Analytics and Statistics Division of
the IRS from the Compliance Data Ware-
house and Statistics of Income, using tax
years 2013 through 2015. Data for each
of the Forms 1042, 1042-S, 8288, 8288-
A, W-8BEN, W-8BEN-E, and W-8IMY
represent preliminary estimates of the to-
tal number of additional taxpayers that are
expected to file these forms. The tax data
for 2016 and 2017 are not yet available.
Data for Forms 8288, 8288-A, W-8BEN,
W-8BEN-E, and W-8IMY represent pre-
liminary estimates of the total number of
interests in partnerships, other than pub-
licly traded partnership interests, engaged
in the conduct of a trade or business in the
United States that will be transferred by
foreign persons. Data for Form 8288-C
represent preliminary estimates of the to-
tal number of transferees on whom part-
nerships must withhold tax under section
1446(f)(4) if the transferees do not fully
withhold tax under section 1446(f)(1).
Data for Form 1042-S represent prelimi-
nary estimates of the total number of inter-
ests in publicly traded partnership engaged
in the conduct of a trade or business in the

Bulletin No. 2019–27 79 July 1, 2019
United States that will be transferred by
foreign persons.
The current status of the PRA sub-
missions related to the tax forms that
will be used to conduct the information
collections in the proposed regulations
is provided in the Current Status of PRA
Submissions table. The overall burden
estimates provided for the OMB control
numbers below are aggregate amounts
that relate to the entire package of forms
associated with the applicable OMB
control number and will in the future in-
clude, but not isolate, the estimated bur-
den of the tax forms that will be created
or revised as a result of the information
collections in the proposed regulations.
These numbers are therefore unrelated to
the future calculations needed to assess
the burden imposed by the proposed reg-
ulations. No burden estimates specific to
the forms affected by the proposed regu-
lations are currently available. The Trea-
sury Department and the IRS have not es-
timated the burden, including that of any
new information collections, related to
the requirements under the proposed reg-
ulations. The Treasury Department and
the IRS request comments on all aspects
of information collection burdens related
to the proposed regulations, including es-
timates for how much time it would take
to comply with the paperwork burdens
described above for each relevant form
and ways for the IRS to minimize the pa-
perwork burden.
Current Status of PRA Submissions
Type of FilerOMB Number(s)Status
Form 1042,
Form 1042-S
All filers (Legacy Model)1545-0096Approved 12/27/2016 until 12/31/2019.
Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201606-1545-025
Form 8288,
Form 8288-A
All filers (Legacy system)1545-0902Approved 1/2/2017 until 1/31/2020.
Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201608-1545-015
Form W-8BEN,
Form W-8BEN-E,
Form W-8IMY
Business (NEW Model)1545-0123Approved 12/21/2018 until 12/31/2019.
Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201805-1545-019
All other filers (Legacy system)1545-1621Approved 12/19/18 until 12/31/2021.
Link: https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201708-1545-002
B. Collections of Information – Proposed
§§1.864(c)(8)-2(a) and (b), 1.1446(f)-
1(c)(3), 1.1446(f)-2(b)(2) through (7),
(c)(2), and (c)(4), 1.1446(f)-4(b)(2)
and (6), 1.1446(f)-4(b)(3) and (4), and
1.1446(f)-2(d)(2)
These proposed regulations contain
collections of information that are not on
existing or new IRS forms. These collec-
tions of information include:
(a) Notification by a transferor to a part-
nership that a transfer has occurred
(proposed §1.864(c)(8)-2(a));
(b) Statement provided by a partnership
to a transferor necessary for the trans-
feror to calculate its tax liability (pro-
posed §1.864(c)(8)-2(b));
(c) Retention of information by partner-
ship in its books and records (pro-
posed §1.1446(f)-1(c)(3));
(d) Certifications from a transferor (or
partnership) to a transferee for an ex-
ception from withholding or adjust-
ment to amount realized (proposed
§1.1446(f)-2(b)(2) through (7), (c)
(2), and (c)(4));
(e) Certification from a transferee to
partnership regarding the transferee’s
withholding (proposed §1.1446(f)-
2(d)(2)).
(f) Certifications from a transferor to a
broker to apply an exception from
withholding (proposed §1.1446(f)-
4(b)(2) and (6)); and
(g) Information provided by a publicly
traded partnership to a broker (pro-
posed §1.1446(f)-4(b)(3) and (4)).
The collections of information
contained in this notice of proposed
rulemaking has been submitted to the
Office of Management and Budget for
review in accordance with the PRA.
Comments on the collection of infor-
mation 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
Affairs, Washington, DC 20503, with
copies to the Internal Revenue Service,
Attn: IRS Reports Clearance Officer,
SE:W:CAR:MP:T:T:SP, Washington, DC
20224. Comments on the collection of in-
formation should be received by July 12,
2019. Comments are specifically request-
ed concerning:
Whether the proposed collection of in-
formation is necessary for the proper per-
formance of the IRS, including whether
the information will have practical utility;
The accuracy of the estimated burden
associated with the proposed collection
of information (including underlying as-
sumptions and methodology);
How the quality, utility, and clarity of
the information to be collected may be en-
hanced;
How the burden of complying with
the proposed collections of information
may be minimized, including through the
application of automated collection tech-
niques or other forms of information tech-
nology; and
Estimates of capital or start-up costs
and costs of operation, maintenance, and
purchase of service to provide informa-
tion.
The collections of information pro-
vided in proposed §1.864(c)(8)-2 will be
used by both the partnership engaged in
the conduct of a trade or business in the

July 1, 2019 80 Bulletin No. 2019–27
United States and the foreign partner that
transfers an interest in the partnership and
are mandatory. The notification provided
to the partnership by the foreign transferor
in proposed §1.864(c)(8)-2(a) will serve
as notice to the partnership that a transfer
described in section 864(c)(8) and pro-
posed §1.864(c)(8)-1 occurred. The state-
ment provided to the foreign transferor by
the partnership in proposed §1.864(c)(8)-
2(b) is necessary for the foreign transferor
to determine its effectively connected gain
or loss as described in proposed §1.864(c)
(8)-1(b) and (c).
The collection of information provided
in proposed §1.1446(f)-1(c)(3) requires a
partnership to retain certain identified in-
formation in its books and records regard-
ing its obligation to withhold under sec-
tion 1446(f). The identified information
will be used by a partnership to determine
the application, and the extent, of with-
holding under section 1446(f).
The collections of information pro-
vided in proposed §1.1446(f)-2(b)(2)
through (7), (c)(2), and (c)(4) from the
transferor of an interest described in
section 1446(f), or from the partner-
ship whose interest is transferred, to the
transferee of the interest will be used by
the transferee to determine whether an
exception applies or to determine the
amount realized. These collections of in-
formation are optional. The certification
in proposed §1.1446(f)-2(b)(7) includes
the submission of Form W-8BEN or
W-8BEN-E and is also discussed in sec-
tion II.1 of this Special Analyses.
The information provided in proposed
§1.1446(f)-2(d)(2) by the transferee to the
partnership will be used by the partnership
to determine whether it has a withholding
obligation under section 1446(f)(4) and
proposed §1.1446(f)-3.
The collection of information provid-
ed in proposed §1.1446(f)-4(b)(6) by the
transferor to the broker will be used by the
broker to determine if an exception ap-
plies that relieves the broker from its with-
holding obligation under section 1446(f)
(1) and proposed §1.1446(f)-4. The certi-
fication in proposed §1.1446(f)-4(b)(6) in-
cludes the submission of Form W-8BEN
or W-8BEN-E and is also discussed in
section II.1 of this Special Analyses.
Estimated total annual reporting bur-
den: 50,920 hours.
Estimated average annual burden
hours per respondent: Approximately
0.67 hours (40 minutes).
Estimated cost per respondent ($2016):
$26.00.
Estimated total annual monetized cost
($2016): $1,827,938.00.
Estimated number of respondents:
76,000.
Estimated annual frequency of re-
sponses: 0.4 (as the collections of infor-
mation do not occur on an annual basis).
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless it dis-
plays 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 re-
quired by 26 U.S.C. 6103.
III. Regulatory Flexibility Act
It is hereby certified that this notice of
proposed rulemaking will not have a sig-
nificant economic impact on a substantial
number of small entities within the mean-
ing of section 601(6) of the Regulatory
Flexibility Act (5 U.S.C. chapter 6).
The proposed regulations affect (i)
foreign persons that recognize gain or
loss from the sale or exchange of an in-
terest in a partnership that is engaged in
the conduct of a trade or business within
the United States, and who are not sub-
ject to the Regulatory Flexibility Act, (ii)
U.S. persons that are transferors providing
Forms W-9 to transferees to certify that
they are not foreign persons, (iii) persons
who acquire those interests, (iv) partner-
ships that, directly or indirectly, have for-
eign persons as partners, and (v) brokers
that effect transfers of interests in publicly
traded partnerships.
The Treasury Department and the
IRS do not have data readily available
to assess the number of small entities
potentially affected by the proposed reg-
ulations. However, entities potentially af-
fected by these proposed regulations are
generally not small entities, because of the
resources and investment necessary to ac-
quire a partnership interest from a foreign
person or to directly, or indirectly, have
foreign persons as partners. Therefore, the
Treasury Department and the IRS do not
believe that a substantial number of do-
mestic small entities will be subject to the
proposed regulation’s information collec-
tions. Consequently, the Treasury Depart-
ment and the IRS certify that the proposed
regulations will not have a significant eco-
nomic impact on a substantial number of
small entities. The IRS invites the public
to comment on the impact of these regula-
tions on small entities.
Pursuant to section 7805(f) of the Code,
these regulations will be submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
their impact on small businesses.
Comments and Requests for Public
Hearing
Before the proposed regulations are
adopted as final regulations, consideration
will be given to any comments that are
submitted timely to the IRS as prescribed
in this preamble under the “ADDRESS-
ES” heading. The Treasury Department
and the IRS request comments on all as-
pects of the proposed rules. All comments
will be available at www.regulations.gov
or upon request. A public hearing will be
scheduled if requested in writing by any
person that timely submits written com-
ments. If a public hearing is scheduled,
notice of the date, time, and place for the
public hearing will be published in the
Federal Register.
Drafting Information
The principal authors of the proposed
regulations are Subin Seth, Ronald M.
Gootzeit, and Chadwick Rowland, Office
of Associate Chief Counsel (Internation-
al). However, other personnel from the
Treasury Department and the IRS partic-
ipated in their development.
Statement of Availability of IRS
Documents
IRS Revenue Procedures, Revenue
Rulings, notices, and other guidance cited
in this document are published in the In-
ternal Revenue Bulletin and are available
from the Superintendent of Documents,

Bulletin No. 2019–27 81 July 1, 2019
U.S. Government Printing Office, Wash-
ington, DC 20402, or by visiting the IRS
website at http://www.irs.gov.
* * * * *
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 sectional
authorities for §§1.864(c)(8)-2, 1.1445-
5, 1.1445-8, 1.1446-3 through 1.1446-
4, 1.1446(f)-1 through 1.1446(f)-5, and
1.6050K-1 in numerical order to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.864(c)(8)-2 also issued under
26 U.S.C. 864(c)(8)(E), 6001 and 6031(b).
* * * * *
Section 1.1445-5 also issued under 26
U.S.C. 1445(e)(7).
* * * * *
Section 1.1445-8 also issued under 26
U.S.C. 1445(e)(7).
* * * * *
Section 1.1446-3 also issued under 26
U.S.C. 1446(g).
* * * * *
Section 1.1446-4 also issued under 26
U.S.C. 1446(g).
* * * * *
Section 1.1446(f)-1 also issued under
26 U.S.C. 1446(f)(6) and 1446(g).
* * * * *
Section 1.1446(f)-2 also issued under
26 U.S.C. 1446(f)(6) and 1446(g).
* * * * *
Section 1.1446(f)-3 also issued under
26 U.S.C. 1446(f)(6) and 1446(g).
* * * * *
Section 1.1446(f)-4 also issued under
26 U.S.C. 1446(f)(6) and 1446(g).
* * * * *
Section 1.1446(f)-5 also issued under
26 U.S.C. 1446(f)(6) and 1446(g).
* * * * *
Section 1.6050K-1 also issued under
26 U.S.C. 6050K(a).
* * * * *
Par. 2. Section 1.864(c)(8)-2 is added
to read as follows:
§1.864(c)(8)-2 Notification and report-
ing requirements.
(a) Notification by foreign transfer-
or—(1) In general. Except as provided in
paragraph (a)(2) of this section, a notify-
ing transferor that transfers an interest in a
specified partnership must notify the part-
nership of the transfer in writing within 30
days of the transfer. The notification must
include—
(i) The names and addresses of the
notifying transferor and the transferee or
transferees;
(ii) The U.S. taxpayer identification
number (TIN) of the notifying transferor
and, if known, of the transferee or trans-
ferees; and
(iii) The date of the transfer.
(2) Exceptions—(i) Certain interests
in publicly traded partnerships. Para-
graph (a)(1) of this section does not apply
to a notifying transferor that transfers an
interest in a publicly traded partnership if
the interest is publicly traded on an estab-
lished securities market or is readily trad-
able on a secondary market (or the sub-
stantial equivalent thereof).
(ii) Certain distributions. Paragraph (a)
(1) of this section does not apply to a noti-
fying transferor that is treated as transfer-
ring an interest in a specified partnership
because it received a distribution from
that specified partnership.
(3) Section 6050K. The notification de-
scribed in paragraph (a)(1) of this section
may be combined with or provided at the
same time as the notification described in
§1.6050K-1(d), provided that it satisfies
the requirements of both sections.
(4) Other guidance. The notification
described in paragraph (a)(1) of this sec-
tion must also include any information
required in forms, instructions, or other
guidance.
(b) Reporting by specified partnerships
with notifying transferor—(1) In general.
(i) A specified partnership must provide
to a notifying transferor the statement de-
scribed in paragraph (b)(2) of this section
if—
(A) The partnership receives the notice
described in paragraph (a) of this section,
or otherwise has actual knowledge that
there has been a transfer of an interest in
the partnership by a notifying transferor;
and
(B) At the time of the transfer, the no-
tifying transferor would have had a dis-
tributive share of deemed sale EC gain or
deemed sale EC loss within the meaning
of §1.864(c)(8)-1(c).
(ii) Distributions. For purposes of
paragraph (b)(1)(i)(B) of this section, a
partnership that is a transferee because it
makes a distribution is treated as having
actual knowledge of that transfer.
(2) Contents of statement. The state-
ment required to be furnished by the spec-
ified partnership under paragraph (b)(1) of
this section must include—
(i) The items described in §1.864(c)
(8)-1(c)(3)(ii) (foreign transferor’s ag-
gregate deemed sale EC items, which in-
cludes items derived from lower-tier part-
nerships); and
(ii) Any other information as provided
in forms, instructions, or other guidance.
(3) Time for furnishing statement. The
specified partnership must furnish the re-
quired information on or before the due
date (with extensions) for issuing Sched-
ule K-1 (Form 1065), Partner’s Share of
Income, Deductions, Credits, etc., or its
successor, to the transferor for the year of
the transfer. See §1.6031(b)-1T(b).
(4) Manner of furnishing statement. No
specific format is required for the infor-
mation except as provided in any forms,
instructions, or other guidance.
(5) Partnership notifying transferor.
For purposes of this paragraph (b), a spec-
ified partnership must treat a notifying
transferor that is a partnership as a nonres-
ident alien individual.
(c) Statement may be provided to
agent. A partnership may provide a state-
ment required under paragraph (b)(2) of
this section to a person other than the noti-
fying transferor if the person is described
in §1.6031(b)-1T(c).
(d) Definitions. The following defini-
tions apply for purposes of this section.
(1) Notifying transferor. The term no-
tifying transferor means any foreign per-
son, any domestic partnership that has
a foreign person as a direct partner, and
any domestic partnership that has actual
knowledge that a foreign person indirectly
holds, through one or more partnerships,
an interest in the domestic partnership.
(2) Specified partnership. The term
specified partnership means a partnership
that is engaged in the conduct of a trade

July 1, 2019 82 Bulletin No. 2019–27
or business within the United States or
that owns (directly or indirectly) an inter-
est in a partnership that is engaged in the
conduct of a trade or business within the
United States, and may include a public-
ly traded partnership as defined in section
7704 and §§1.7704-1 through 1.7704-
4, but does not include a publicly traded
partnership treated as a corporation under
that section.
(3) Transfer. The term transfer has the
meaning provided in §1.864(c)(8)-1(g)(5).
(e) Applicability dates. Paragraph (a)
of this section applies to transfers that oc-
cur on or after the date that these regula-
tions are published as final regulations in
the Federal Register. Paragraphs (b) and
(c) of this section apply to returns filed
on or after the date that these regulations
are published as final regulations in the
Federal Register. Paragraph (d) of this
section applies beginning on the date that
these regulations are published as final
regulations in the Federal Register.
Par. 3. Section 1.1445-2 is amended by
adding paragraph (b)(2)(v) and a sentence
to the end of paragraph (e) to read as fol-
lows:
§1.1445-2 Situations in which with-
holding is not required under section
1445(a).
* * * * *
(b) * * *
(2) * * *
(v) Form W-9. For purposes of para-
graph (b)(2)(i) of this section, a certifica-
tion of non-foreign status includes a valid
Form W-9, Request for Taxpayer Identi-
fication Number and Certification, or its
successor, submitted to the transferee by
the transferor.
* * * * *
(e) Applicability dates. * * * Paragraph
(b)(2)(v) of this section applies to certifi-
cations provided on or after May 7, 2019,
except that a taxpayer may apply it with
respect to certifications provided before
that date.
Par. 4. Section 1.1445-5 is amended
by adding paragraph (b)(3)(iv) and a sen-
tence to the end of paragraph (h) to read
as follows:
§1.1445-5 Special rules concerning
distributions and other transactions by
corporations, partnerships, trusts, and
estates.
* * * * *
(b) * * *
(3) * * *
(iv) Form W-9. For purposes of para-
graph (b)(3)(i) of this section, a certifica-
tion of non-foreign status includes a valid
Form W-9, Request for Taxpayer Identi-
fication Number and Certification, or its
successor, submitted to the transferee by
the transferor.
* * * * *
(h) Applicability dates. * * * Paragraph
(b)(3)(iv) of this section applies to certifi-
cations provided on or after May 7, 2019,
except that a taxpayer may apply it with
respect to certifications provided before
that date.
Par. 5. Section 1.1445-8 is amended by
revising paragraph (f) to read as follows:
§1.1445-8 Special rules regarding pub-
licly traded partnerships, publicly traded
trusts and real estate investment trusts
(REITs).
* * * * *
(f) Qualified notice—(1) In general. A
qualified notice for purposes of paragraph
(b)(3)(iv) of this section is a notice pro-
vided in the manner described in §1.1446-
4(b)(4) by a partnership, trust, or REIT
regarding a distribution that is attributable
to the disposition of a United States real
property interest. In the case of a REIT, a
qualified notice is only a notice of a dis-
tribution, all or any portion of which the
REIT actually designates, or characterizes
in accordance with paragraph (c)(2)(ii)(C)
of this section, as a capital gain dividend
in the manner described in §1.1446-4(b)
(4), with respect to each share or certifi-
cate of beneficial interest. A deemed des-
ignation under paragraph (c)(2)(ii)(A) of
this section may not be the subject of a
qualified notice under this paragraph (f).
A person described in paragraph (b)(3) of
this section is treated as receiving a quali-
fied notice when the notice is provided in
accordance with §1.1446-4(b)(4).
(2) Applicability dates. Paragraph (f)
(1) of this section applies to distributions
made on or after the date that is 60 days
after the date that these regulations are
published as final regulations in the Fed-
eral Register.
* * * * *
Par. 6. Section 1.1446-3 is amended:
1. In the first sentence of paragraph (a)
(2)(i), by removing “section 11(b)(1)” and
adding in its place “section 11(b)”.
2. By adding paragraph (c)(4).
The addition reads as follows:
§1.1446-3 Time and manner of calcu-
lating and paying the 1446 tax.
* * * * *
(c) * * *
(4) Coordination with section 1446(f).
A partnership that is directly or indirect-
ly subject to withholding under section
1446(f)(1) during its taxable year may
credit the amount withheld under section
1446(f)(1) against its section 1446 tax
liability for that taxable year only to the
extent the amount is allocable to foreign
partners.
* * * * *
Par. 7. Section 1.1446-4 is amended by:
1. By revising paragraphs (b)(3) and
(4).
2. By removing the second sentence of
paragraph (c).
3. By revising paragraphs (d) and (f)
(3).
The revisions and additions read as fol-
lows:
§1.1446-4 Publicly traded partnerships.
* * * * *
(b) * * *
(3) Nominee. For purposes of this sec-
tion, the term nominee means a person
that holds an interest in a publicly traded
partnership on behalf of a foreign person
and that is either a U.S. person, a qualified
intermediary (as defined in §1.1441-1(e)
(5)(ii)) that assumes primary withholding
responsibility for a payment, or a U.S.
branch of a foreign person that agrees to
be treated as a U.S. person (as described
in §1.1441-1(b)(2)(iv)) with respect to a
payment.
(4) Qualified notice. For purposes of
this section, a qualified notice is a notice
posted by a publicly traded partnership
that states the amount of a distribution
that is attributable to each type of income
described in paragraphs (f)(3)(i) through
(v) of this section. A qualified notice may
also include the information described
in §1.1446(f)-4(b)(3), relating to an ex-
ception from withholding under section
1446(f)(1) for transfers of certain partner-
ship interests. The notice must be posted
in a readily accessible format in an area of
the primary public Web site of the public-
ly traded partnership that is dedicated to
this purpose. A qualified notice must be
posted by the date required for providing

Bulletin No. 2019–27 83 July 1, 2019
notice with respect to dividends described
in 17 CFR 240.10b-17(b)(1) or (3) (or any
successor regulation) issued pursuant to
the Securities Exchange Act of 1934 (15
U.S.C. 78a) and contain the information
described therein as it would relate to the
distribution. The publicly traded partner-
ship must keep the notice accessible to the
public for ten years on its primary public
Web site or the primary public Web site
of any successor organization. No spe-
cific format is required unless provided
in forms, instructions, or other guidance.
See paragraph (d) of this section regard-
ing when a nominee is considered to have
received a qualified notice.
* * * * *
(d) Rules for designation of nominees
to withhold tax under section 1446. A
nominee that receives a distribution from
a publicly traded partnership subject to
withholding under this section, and which
is to be paid to (or for the account of) any
foreign person, may be treated as a with-
holding agent under this section. A nomi-
nee is treated as receiving a qualified no-
tice on the date that the notice is posted in
accordance with paragraph (b)(4) of this
section. When a nominee is treated as a
withholding agent with respect to a foreign
partner of the partnership, the obligation
to withhold on distributions to the foreign
partner in accordance with the rules of this
section is imposed solely on the nominee.
A nominee responsible for withholding
under the rules of this section is subject to
liability under sections 1461 and 6655, as
well as all applicable penalties and inter-
est, as if the nominee were a partnership
responsible for withholding under this
section. A nominee may rely on a qualified
notice that meets the requirements in para-
graph (b)(4) of this section to determine
the amounts on which it must withhold.
If a notice a publicly traded partnership
issues relating to its distribution does not
meet the requirements in paragraph (b)(4)
of this section, the nominee must withhold
on the distribution with respect to—
(1) Foreign partners that are corpora-
tions, at the greater of the highest rate of
tax specified in section 11(b) or section
881; and
(2) Foreign partners that are not corpo-
rations, at the greater of the highest rate of
tax specified in section 1 or section 871.
* * * * *
(f) * * *
(3) Ordering rule relating to distribu-
tions. Distributions from publicly traded
partnerships are deemed to be paid out of
the following types of income in the order
indicated—
(i) Amounts attributable to income de-
scribed in section 1441 or 1442 that are
not effectively connected with the conduct
of a trade or business in the United States
but are subject to withholding, before tak-
ing into account any treaty exemptions;
(ii) Amounts attributable to income de-
scribed in section 1441 or 1442 that are
not effectively connected with the conduct
of a trade or business in the United States
and are not subject to withholding because
of an exemption under a provision of the
Code;
(iii) Amounts attributable to income
effectively connected with the conduct
of a trade or business in the United States
that are not subject to withholding under
§§1.1446-1 through 1.1446-6 (for exam-
ple, amounts exempt by treaty);
(iv) Amounts subject to withholding
under §§1.1446-1 through 1.1446-6; and
(v) Amounts not listed in paragraphs (f)
(3)(i) through (iv) of this section.
* * * * *
Par. 8. Section 1.1446-7 is amended by
revising the section heading and adding
two sentences at the end of the section to
read as follows:
§1.1446-7 Applicability dates.
* * * The addition of §1.1446-3(c)
(4) applies to partnership taxable years
that include transfers that occur on or af-
ter the date that is 60 days after the date
that these regulations are published as
final regulations in the Federal Regis-
ter. The revisions to §1.1446-4(b)(3) and
(4), the removal of the second sentence
of §1.1446-4(c), and the revisions to
§1.1446-4(d) and (f)(3) apply to distribu-
tions made on or after the date that is 60
days after the date that these regulations
are published as final regulations in the
Federal Register.
Par. 9. Sections 1.1446(f)-1 through
1.1446(f)-5 are added to read as follows:
Sec.
* * * * *
1.1446(f)-1 General rules.
1.1446(f)-2 Withholding on the trans-
fer of a non-publicly traded partnership
interest.
1.1446(f)-3 Partnership’s requirement
to withhold under section 1446(f)(4) on
distributions to transferee.
1.1446(f)-4 Withholding on the trans-
fer of a publicly traded partnership inter-
est.
1.1446(f)-5 Liability for failure to
withhold.
* * * * *
§1.1446(f)-1 General rules.
(a) Overview. These regulations pro-
vide rules for withholding, reporting, and
paying tax under section 1446(f) upon
the sale, exchange, or other disposition of
certain interests in partnerships. This sec-
tion provides definitions and general rules
of applicability that apply for purposes
of section 1446(f). Section 1.1446(f)-2
provides withholding rules for the trans-
fer of a non-publicly traded partnership
interest under section 1446(f)(1). Sec-
tion 1.1446(f)-3 provides rules that apply
when a partnership is required to withhold
under section 1446(f)(4) on distributions
made to the transferee in an amount equal
to the amount that the transferee failed to
withhold plus interest. Section 1.1446(f)-
4 provides special rules for the sale, ex-
change, or disposition of publicly traded
partnership interests, for which the with-
holding obligation under section 1446(f)
(1) is generally imposed on certain bro-
kers that act on behalf of the transferor.
Section 1.1446(f)-5 provides rules that
address the liability for failure to withhold
under section 1446(f) and rules regarding
the liability of a transferor’s or transfer-
ee’s agent.
(b) Definitions. This paragraph (b) pro-
vides definitions that apply for purposes
of §§1.1446(f)-1 through 1.1446(f)-5.
(1) The term broker means any person,
foreign or domestic, that, in the ordinary
course of a trade or business during the
calendar year, stands ready to effect sales
made by others, and that, in connection
with a transfer of a PTP interest, receives
all or a portion of the amount realized on
behalf of the transferor. The term broker
also includes any clearing organization (as
defined in §1.1471-1(b)(21)) that effects
the transfer of a PTP interest on behalf of
the transferor. The term broker does not
include an escrow agent that effects no
sales other than such transactions that are
incidental to the purpose of escrow (such
as sales to collect on collateral).

July 1, 2019 84 Bulletin No. 2019–27
(2) The term controlling partner means
a partner that, together with any person
that bears a relationship described in sec-
tions 267(b) or 707(b)(1) to the partner,
owns directly or indirectly a 50 percent
or greater interest in the capital, profits,
deductions, or losses of the partnership in
the 12 months before the determination
date.
(3) The term effect has the meaning
provided in §1.6045-1(a)(10).
(4) The term foreign person means a
person that is not a United States person.
(5) The term PTP interest means an
interest in a publicly traded partnership if
the interest is publicly traded on an estab-
lished securities market or is readily trad-
able on a secondary market (or the sub-
stantial equivalent thereof).
(6) The term publicly traded partner-
ship has the same meaning as in section
7704 and §§1.7704-1 through 1.7704-
4 but does not include a publicly traded
partnership treated as a corporation under
that section.
(8) The term TIN means the tax identi-
fying number assigned to a person under
section 6109.
(9) The term transfer means a sale, ex-
change, or other disposition, and includes
a distribution from a partnership to a part-
ner.
(10) The term transferee means any
person, foreign or domestic, that acquires
a partnership interest through a transfer,
and includes a partnership that makes a
distribution.
(11) Except as otherwise provided in
this paragraph, the term transferor means
any person, foreign or domestic, that
transfers a partnership interest. In the case
of a trust, to the extent all or a portion of
the income of the trust is treated as owned
by the grantor or another person under
sections 671 through 679 (such trust, a
grantor trust), the term transferor means
the grantor or other person.
(12) The term transferor’s agent or
transferee’s agent means any person who
represents the transferor or transferee
(respectively) in any negotiation with
another person relating to the transaction
or in settling the transaction. A person
will not be treated as a transferor’s agent
or a transferee’s agent solely because it
performs one or more of the activities
described in §1.1445-4(f)(3) (relating to
activities of settlement officers and cleri-
cal personnel).
(13) The term United States person or
U.S. person means a person described in
section 7701(a)(30).
(c) General rules of applicability—(1)
In general. This paragraph (c) provides
general rules that apply for purposes of
§§1.1446(f)-1 through 1.1446(f)-5.
(2) Certifications—(i) In general. This
paragraph (c)(2) provides rules that are
applicable to certifications described in
§§1.1446(f)-1 through 1.1446(f)-5, ex-
cept as otherwise provided therein, or in
forms, instructions, or other guidance. A
certification must provide the name and
address of the person providing it. A cer-
tification must also be signed under pen-
alties of perjury and, if the certification is
provided by the transferor, must include
a TIN if the transferor has, or is required
to have, a TIN. A transferee (or other per-
son required to withhold) may not rely on
a certification if it knows that a transfer-
or has, or is required to have, a TIN, and
that TIN has not been provided with the
certification. A certification includes any
documents associated with the certifica-
tion, such as statements from the partner-
ship, IRS forms, withholding certificates,
withholding statements, certifications, or
other documentation. Documents associ-
ated with the certification form an integral
part of the certification, and the penalties
of perjury statement provided on the cer-
tification also applies to the documents. A
certification (other than the certification
described in §1.1446(f)-2(d)(2)) may not
be relied upon if it is obtained earlier than
30 days before the transfer or any time af-
ter the transfer.
(ii) Penalties of perjury. A certification
signed under penalties of perjury must
provide the following: “Under penalties
of perjury, I declare that I have examined
the information on this document, and to
the best of my knowledge and belief, it is
true, correct, and complete.”
(iii) Authority to sign certifications on
behalf of a business entity. A certifica-
tion provided by a business entity must
be signed by an individual who is an of-
ficer, director, general partner, or manag-
ing member of the entity, or, if the gen-
eral partner or managing member is itself
a business entity, an individual who is an
officer, director, or managing member of
the entity that is the general partner or
managing member.
(iv) Electronic submission. A certifica-
tion may be sent electronically, including
as text in an email, an image embedded in
an email, or a Portable Document Format
(.pdf) attached to an email. An electronic
certification, however, may not be relied
upon if the person receiving the submis-
sion knows that the certification was
transmitted by a person not authorized to
do so by the person required to execute the
certification.
(v) Retention period. Any person
that relies on a certification pursuant to
§§1.1446(f)-1 through 1.1446(f)-5 must
retain the certification (including any doc-
umentation) for the longer of five calendar
years following the close of the last calen-
dar year in which it relied on the certifica-
tion or for as long as it may be relevant to
the determination of its withholding obli-
gation under section 1446(f) or its with-
holding tax liability under section 1461.
(vi) Submission to IRS. Except as pro-
vided in §1.1446(f)-2(b)(7) and 1.1446(f)-
2(c)(4)(vi) (involving certifications re-
lating to an income tax treaty), or in any
forms, instructions, or other guidance, the
recipient of a certification is not required
to mail a copy to the IRS.
(vii) Grantor trusts. A certification
provided by a transferor that is a grant-
or or other owner of a grantor trust must
identify the portion of the amount realized
that is attributable to the grantor or other
owner.
(3) Books and records. A partnership
that relies on its books and records pursu-
ant to §§1.1446(f)-1 through 1.1446(f)-5
(including for purposes of providing a
certification or other statement) must
identify in its books and records the date
on which the transfer occurred, the in-
formation on which the partnership re-
lied, and the provisions of §§1.1446(f)-1
through 1.1446(f)-5 supporting an excep-
tion from, or adjustment to, the partner-
ship’s obligation to withhold. The identi-
fication required by this paragraph (c)(3)
must be made no later than 30 days after
the date of the transfer. The partnership
must retain the identified information in
its books and records for the longer of
five calendar years following the close
of the last calendar year in which it re-
lied on the information or for as long as

Bulletin No. 2019–27 85 July 1, 2019
it may be relevant to the determination of
its withholding obligation under section
1446(f) or its withholding tax liability
under section 1461.
(4) Determination date—(i) In general.
This paragraph (c)(4) provides rules for
the determination date. The same determi-
nation date must be used for all purposes
with respect to a transfer. Any statement,
certification, or books and records with
regard to a transfer must state the deter-
mination date. The determination date of
a transfer must be one of the following—
(A) The date of the transfer;
(B) Any date that is no more than 60
days before the date of the transfer; or
(C) The date that is the later of—
(1) The first day of the partnership’s
taxable year in which the transfer occurs,
as determined under section 706; or
(2) The date, before the date of the
transfer, of the most recent event described
in §1.704-1(b)(2)(iv)(f)(5) or §1.704-1(b)
(2)(iv)(s)(1) (revaluation event), irrespec-
tive of whether the capital accounts of the
partners are adjusted in accordance with
§1.704-1(b)(2)(iv)(f).
(ii) Controlling partner. The determi-
nation date for a transferor that is a con-
trolling partner is determined without
regard to paragraph (c)(4)(i)(C) of this
section.
(5) IRS forms and instructions. Any
reference to an IRS form includes its suc-
cessor form. Any form must be filed in the
manner provided in the instructions to the
forms or in other guidance.
(d) Coordination with section 1445.
A transferee that is otherwise required
to withhold under section 1445(e)(5) or
§1.1445-11T(d)(1) with respect to the
amount realized, as well as under section
1446(f)(1), will be subject to the payment
and reporting requirements of section
1445 only, and not section 1446(f)(1),
with respect to that amount. However, if
the transferor has applied for a withhold-
ing certificate under the last sentence of
§1.1445-11T(d)(1), the transferee must
withhold the greater of the amounts re-
quired under section 1445(e)(5) or section
1446(f)(1). A transferee that has complied
with the withholding requirements un-
der either section 1445(e)(5) or section
1446(f)(1), as applicable under this para-
graph (d), will be deemed to satisfy the
other withholding requirement.
(e) Applicability date. This section ap-
plies to transfers that occur on or after the
date that is 60 days after the date that these
regulations are published as final regula-
tions in the Federal Register.
§1.1446(f)-2 Withholding on the trans-
fer of a non-publicly traded partnership
interest.
(a) Transferee’s obligation to withhold.
Except as otherwise provided in this sec-
tion, a transferee is required to withhold
under section 1446(f)(1) a tax equal to
10 percent of the amount realized on any
transfer of a partnership interest. This
section does not apply to a transfer of a
PTP interest that is effected through one
or more brokers, including a distribution
made with respect to a PTP interest held
in an account with a broker. For rules re-
garding those transfers, see §1.1446(f)-4.
(b) Exceptions to withholding—(1) In
general. A transferee is not required to
withhold under this section if it properly
relies on a certification or its books and
records as described in this paragraph (b).
A transferee may not rely on a certification
if it has actual knowledge that the certifi-
cation is incorrect or unreliable. A partner-
ship that is a transferee because it makes
a distribution may not rely on its books
and records if it knows, or has reason to
know, that the information is incorrect or
unreliable.
(2) Certification of non-foreign status
by transferor. A transferee may rely on a
certification of non-foreign status from the
transferor that states that the transferor is
not a foreign person, states the transferor’s
name, TIN, and address, and is signed un-
der penalties of perjury. For this purpose, a
certification of non-foreign status includes
a valid Form W-9, Request for Taxpayer
Identification Number and Certification.
For purposes of this paragraph (b)(2), a
transferee may rely on a valid Form W-9
from the transferor that it already possess-
es if the form meets these requirements.
(3) No realized gain by transferor—
(i) In general. A transferee (other than a
partnership that is a transferee because it
makes a distribution) may rely on a cer-
tification from the transferor that states
that the transfer of the partnership inter-
est would not result in any realized gain
(including ordinary income arising from
application of section 751 and §1.751-1
to the transferor as of the determination
date. See paragraph (b)(6) of this section
for rules that apply when the transferor re-
alizes gain but is not required to recognize
the gain under a provision of the Internal
Revenue Code.
(ii) Partnership distributions. A part-
nership that is a transferee because it
makes a distribution may rely on its books
and records, or on a certification from the
transferor, to determine that the distribu-
tion would not result in any realized gain
to the transferor as of the determination
date.
(4) Less than 10 percent effectively
connected gain—(i) In general. A trans-
feree (other than a partnership that is a
transferee because it makes a distribution)
may rely on a certification from the part-
nership that states that if the partnership
sold all of its assets at fair market value
as of the determination date in the manner
described in §1.864(c)(8)-1(c), either—
(A) The amount of net gain that would
have been effectively connected with the
conduct of a trade or business within the
United States would be less than 10 per-
cent of the total net gain; or
(B) No gain would have been effective-
ly connected with the conduct of a trade or
business within the United States.
(ii) Partnership distributions. A part-
nership that is a transferee because it
makes a distribution may rely on its books
and records to determine that as of the de-
termination date either paragraph (b)(4)(i)
(A) or (B) of this section is satisfied.
(5) Less than 10 percent effectively
connected taxable income—(i) In gener-
al. A transferee (other than a partnership
making a distribution) may rely on a cer-
tification from the transferor that states
that—
(A) For the transferor’s immediately
prior taxable year and the two preceding
taxable years, the transferor was at all
times a partner in the partnership;
(B) The transferor’s allocable share of
effectively connected taxable income de-
termined under §1.1446-2 (as provided
on Form 8805, Foreign Partner’s Infor-
mation Statement of Section 1446 With-
holding Tax) (ECTI), including any ECTI
allocable to a partner that bears a relation-
ship to the transferor described in sections
267(b) or 707(b)(1), was less than $1 mil-
lion in each of the taxable years described
in paragraph (b)(5)(i)(A) of this section;

July 1, 2019 86 Bulletin No. 2019–27
(C) The transferor’s allocable share
of ECTI in each of the taxable years de-
scribed in paragraph (b)(5)(i)(A) of this
section was less than 10 percent of the
transferor’s total distributive share of net
income from the partnership for that year
as determined under subchapter K of the
Internal Revenue Code (as provided on
Schedule K-1 (Form 1065), Partner’s
Share of Income, Deductions, Credits,
etc.); and
(D) The transferor’s distributive share
of income or gain that is effectively con-
nected with the conduct of a trade or
business within the United States or de-
ductions or losses properly allocated and
apportioned to that income in each of the
taxable years described in paragraph (b)
(5)(i)(A) of this section has been reported
on a Federal income tax return (either filed
by the transferor or, in the case of transfer-
or that is a partnership, filed by its direct
or indirect nonresident alien individual or
foreign corporate partners) on or before
the due date (including extensions), and
all amounts due with respect to the report-
ed amounts has been timely paid to the
IRS, provided that the return was required
to be filed when the transferor furnishes
the certification (taking into account any
extensions of time to file).
(ii) Immediately prior taxable year—
(A) In general. The transferor’s immedi-
ately prior taxable year is the transferor’s
most recent taxable year—
(1) With or within which a taxable year
of the partnership ended; and
(2) For which a Schedule K-1 (Form
1065) was due (including extensions) or
furnished (if earlier) before the transfer.
(B) Limitation. A transferee may not
rely on a certification that is provided be-
fore the transferor’s receipt of the Sched-
ule K-1 (Form 1065) described in para-
graph (b)(5)(ii)(A) of this section.
(iii) No Form 8805—(A) In general.
Except as provided in paragraph (b)(5)
(iii)(B) of this section, a transferor that
does not receive Form 8805 because it
had no ECTI for which the partnership
paid section 1446 tax (within the mean-
ing in §1.1446-2(a)) in any of the years
described in paragraph (b)(5)(i)(A) of this
section may not make the certification
provided in this paragraph (b)(5).
(B) Exception. If, in any of the years
described in paragraph (b)(5)(i)(A) of this
section, a transferor has an allocable share
of loss that is effectively connected with
the conduct of a trade or business within
the United States, or has deductions prop-
erly allocated and apportioned to income
that is effectively connected with the con-
duct of a trade or business within the Unit-
ed States from the partnership, paragraph
(b)(5)(iii)(A) of this section does not ap-
ply by reason of a lack of Form 8805 with
respect to that year, and the transferor is
treated as having an allocable share of
ECTI of zero in that year for purposes of
paragraph (b)(5)(i)(C) of this section.
(iv) No net distributive share of in-
come. A transferor that did not have a net
distributive share of income in any year
described in paragraph (b)(5)(i)(A) of this
section cannot provide the certification
described in this paragraph (b)(5).
(v) Partnership distributions. A part-
nership that is a transferee by reason
of making a distribution may rely on its
books and records to determine that the
requirements in paragraphs (b)(5)(i)(A)
through (C) of this section have been sat-
isfied (subject to the rules in paragraphs
(b)(5)(ii) through (iv) of this section). The
partnership must also obtain a represen-
tation from the transferor stating that the
requirement in paragraph (b)(5)(i)(D) of
this section has been satisfied.
(vi) No certification when reporting is
incorrect. A transferor may not make the
certification described in this paragraph
(b)(5) if it has actual knowledge that the
information relevant to the certification
that is reported by the partnership on any
Form 8805 or Schedule K-1 (Form 1065)
is incorrect.
(6) Certification of nonrecognition by
transferor—(i) In general. A transferee
may rely on a certification from the trans-
feror that states that by reason of the oper-
ation of a nonrecognition provision of the
Internal Revenue Code the transferor is
not required to recognize any gain or loss
with respect to the transfer. The certifica-
tion must briefly describe the transfer and
provide the relevant law and facts relating
to the certification.
(ii) Partial nonrecognition. Paragraph
(b)(6)(i) of this section does not apply
if only a portion of the gain realized on
the transfer is subject to a nonrecognition
provision. However, see paragraph (c)(4)
(v) of this section for rules applicable to
a transferor’s claim for partial nonrecog-
nition.
(7) Income tax treaties—(i) In gener-
al. A transferee may rely on a certifica-
tion from the transferor that states that the
transferor is not subject to tax on any gain
from the transfer pursuant to an income
tax treaty in effect between the United
States and a foreign country if the require-
ments of this paragraph (b)(7) are met. The
transferor must include with the certifica-
tion a withholding certificate (on a Form
W-8BEN, Certificate of Foreign Status of
Beneficial Owner for United States Tax
Withholding and Reporting (Individuals),
or Form W-8BEN-E, Certificate of Status
of Beneficial Owner for United States Tax
Withholding and Reporting (Entities)) that
meets the requirements for validity under
§1.1446-1(c)(2)(iv) (or an applicable sub-
stitute form that meets the requirements
under §1.1446-1(c)(5)) and that contains
the information necessary to support the
claim for treaty benefits. A transferee may
rely on a certification of treaty benefits
only if, within 30 days after the date of the
transfer, the transferee mails a copy of the
certification to the Internal Revenue Ser-
vice, at the address provided in §1.1445-
1(g)(10), together with a cover letter pro-
viding the name, TIN, and address of the
transferee and the partnership in which an
interest was transferred.
(ii) Treaty claim for less than all of the
gain. Paragraph (b)(7)(i) of this section
does not apply if treaty benefits apply to
only a portion of the gain from the trans-
fer. However, see paragraph (c)(4)(vi) of
this section for rules applicable to situa-
tions in which treaty benefits apply to only
a portion of the gain.
(iii) Exclusive means to claim an ex-
ception from withholding based on treaty
benefits. A transferor claiming treaty ben-
efits with respect to all of the gain from
the transfer must use the exception in this
paragraph (b)(6) and not any other excep-
tion or determination procedure in para-
graphs (b) and (c) of this section to claim
an exception to withholding by reason of
a claim of treaty benefits.
(c) Determining the amount to with-
hold—(1) In general. A transferee that is
required to withhold under this section
must withhold 10 percent of the amount
realized on the transfer of the partnership
interest, except as otherwise provided in

Bulletin No. 2019–27 87 July 1, 2019
this paragraph (c). Any procedures in this
paragraph (c) apply solely for purposes of
determining the amount to withhold un-
der section 1446(f)(1) and this section. A
transferee may not rely on a certification
if it has actual knowledge that the certifi-
cation is incorrect or unreliable. A partner-
ship that is a transferee because it makes
a distribution may not rely on its books
and records if it knows, or has reason to
know, that the information is incorrect or
unreliable.
(2) Amount realized—(i) In general.
The amount realized on the transfer of
the partnership interest is determined un-
der section 1001 (including §§1.1001-1
through 1.1001-5) and section 752 (in-
cluding §1.752-1 through 1.752-7). Thus,
the amount realized includes the amount
of cash paid (or to be paid), the fair mar-
ket value of other property transferred (or
to be transferred), the amount of any li-
abilities assumed by the transferee or to
which the partnership interest is subject,
and the reduction in the transferor’s share
of partnership liabilities. In the case of a
distribution, the amount realized is the
sum of the amount of cash distributed (or
to be distributed), the fair market value of
property distributed (or to be distributed),
and the reduction in the transferor’s share
of partnership liabilities.
(ii) Alternative procedures for trans-
feree to determine share of partnership
liabilities—(A) In general. A transferee
(other than a partnership that is a trans-
feree because it makes a distribution), as
an alternative to determining the share of
partnership liabilities under paragraph (c)
(2)(i) of this section, may use the proce-
dures of this paragraph (c)(2)(ii) to deter-
mine the extent to which a reduction in
partnership liabilities is included in the
amount realized.
(B) Certification of liabilities by trans-
feror. Except as otherwise provided in this
section, a transferee may rely on a certifi-
cation from a transferor, other than a con-
trolling partner, that provides the amount
of the transferor’s share of partnership lia-
bilities reported on the most recent Sched-
ule K-1 (Form 1065) issued by the part-
nership. If the transferor’s actual share of
liabilities at the time of the transfer differs
from the amount reported on that Sched-
ule K-1 (Form 1065), the certification will
not be treated as incorrect or unreliable if
the transferor also certifies that it does not
have actual knowledge of any events oc-
curring after receiving the Schedule K-1
(Form 1065) that would cause the amount
of the transferor’s share of partnership lia-
bilities at the time of the transfer to differ
by more than 25 percent from the amount
shown on the Schedule K-1 (Form 1065).
A transferee may not rely on a certification
if the last day of the partnership taxable
year for which the Schedule K-1 (Form
1065) was provided was more than 22
months before the date of the transfer.
(C) Certification of liabilities by part-
nership. A transferee may rely on a certi-
fication from a partnership that provides
the amount of the transferor’s share of
partnership liabilities on the determina-
tion date. If the transferor’s actual share of
liabilities at the time of the transfer differs
from the amount on the certification, the
certification will not be treated as incorrect
or unreliable if the partnership also certi-
fies that it does not have actual knowledge
of any events occurring after the determi-
nation date that would cause the amount
of the transferor’s share of partnership lia-
bilities at the time of the transfer to differ
by more than 25 percent from the amount
shown on the certification by the partner-
ship for the determination date.
(iii) Partnership’s determination of
partnership liabilities for distributions. A
partnership that is a transferee because it
makes a distribution may rely on its books
and records to determine the extent to
which the transferor’s share of partnership
liabilities on the determination date are in-
cluded in the amount realized. The infor-
mation in the books and records will not
be treated as incorrect or unreliable unless
the partnership has actual knowledge, on
or before the date of the distribution, of
any events occurring after the determina-
tion date that would cause the amount of
the transferor’s share of partnership lia-
bilities at the time of the transfer to differ
by more than 25 percent from the amount
determined by the partnership as of the de-
termination date.
(iv) Certification by a foreign part-
nership of non-foreign status of its part-
ners—(A) In general. When a transferor
is a foreign partnership, a transferee may
use the procedures of this paragraph (c)(2)
(iv) to determine the amount realized. For
this purpose, the transferee may rely on a
certification from the transferor providing
the modified amount realized, and may
treat the modified amount realized as the
amount realized.
(B) Determining modified amount re-
alized. The modified amount realized is
determined by multiplying the amount re-
alized (as determined under this paragraph
(c)(2), without regard to this paragraph (c)
(2)(iv)) by the aggregate percentage com-
puted as of the determination date. The ag-
gregate percentage is the percentage of the
gain (if any) arising from the transfer that
would be allocated to presumed foreign
persons. For this purpose, a presumed
foreign person is any direct or indirect
partner of the transferor that has not pro-
vided a certification of non-foreign status
that meets the requirements of paragraph
(b)(2) of this section. For purposes of this
paragraph (c)(2)(iv), an indirect partner is
a person that owns an interest in the trans-
feror indirectly through one or more for-
eign partnerships.
(C) Certification. The certification is
made by providing a withholding cer-
tificate (on Form W-8IMY, Certificate
of Foreign Intermediary, Foreign Flow-
Through Entity, or Certain U.S. Branches
for United States Tax Withholding and Re-
porting) and a withholding statement that
provides the percentage of gain allocable
to each direct or indirect partner and that
provides whether each such person is a
United States person or presumed foreign
person. The certification must also include
a certification of non-foreign status that
meets the requirements of paragraph (b)
(2) of this section from each of the United
States persons that are direct or indirect
partners of the transferor that are identi-
fied as a United States person on the with-
holding statement.
(3) Lack of money or property or lack
of knowledge regarding liabilities. The
amount to withhold equals the amount
realized determined without regard to any
decrease in the transferor’s share of part-
nership liabilities if—
(i) The amount otherwise required to be
withheld under this paragraph (c) would
exceed the amount realized determined
without regard to the decrease in the trans-
feror’s share of partnership liabilities; or
(ii) The transferee is unable to deter-
mine the amount realized because it does
not have actual knowledge of the transfer-

July 1, 2019 88 Bulletin No. 2019–27
or’s share of partnership liabilities (and
has not received or cannot rely on a cer-
tification described in paragraph (c)(2)(ii)
(B) or (C) of this section).
(4) Certification of maximum tax lia-
bility—(i) In general. A transferee may
use the procedures of this paragraph (c)
(4) for determining the amount to with-
hold for purposes of section 1446(f)
(1) and paragraph (a) of this section. A
transferee (other than a partnership that
is a transferee because it makes a distri-
bution) may rely on a certification from
a transferor that is a foreign corporation,
a nonresident alien individual or a for-
eign partnership regarding the transfer-
or’s maximum tax liability as described
in paragraph (c)(4)(ii) of this section. A
partnership that is a transferee because
it makes a distribution may instead rely
on its books and records to determine the
transferor’s maximum tax liability if the
books and records includes the informa-
tion required by paragraphs (c)(4)(iii)
and (c)(4)(iv) of this section. A transferor
that is a foreign partnership is treated as a
nonresident alien individual for purposes
of determining the transferor’s maximum
tax liability.
(ii) Maximum tax liability. For purpos-
es of this paragraph (c)(4), the term maxi-
mum tax liability means the amount of the
transferor’s effectively connected gain (as
determined under paragraph (c)(4)(iii)(E)
of this section) multiplied by the applica-
ble percentage, as defined in §1.1446-3(a)
(2).
(iii) Required information. The certifi-
cation must include—
(A) A statement that the transferor is ei-
ther a nonresident alien individual, a for-
eign corporation, or a foreign partnership;
(B) The transferor’s adjusted basis in
the transferred interest on the determina-
tion date;
(C) The transferor’s amount realized
(determined in accordance with paragraph
(c)(2) of this section) on the determination
date;
(D) Whether the transferor remains a
partner immediately after the transfer;
(E) The amount of outside ordinary
gain and outside capital gain that would
be recognized and treated as effectively
connected gain under §1.864(c)(8)-1(b)
on the determination date (effectively
connected gain);
(F) The transferor’s maximum tax lia-
bility on the determination date;
(G) A representation from the trans-
feror that the transferor determined the
amounts described in paragraph (c)(4)(iii)
(E) of this section based on the statement
described in paragraph (c)(4)(iv) of this
section; and
(H) A representation from the transfer-
or that it has provided the transferee with
a copy of the statement described in para-
graph (c)(4)(iv) of this section.
(iv) Partnership statement. A transfer-
or may make the representation in para-
graph (c)(4)(iii)(G) of this section only if
the partnership provides to the transferor
a statement (that meets the requirements
for a certification under the general rules
for applicability in §1.1446(f)-1(c)) that
includes—
(A) The partnership’s name, address,
and TIN; and
(B) The transferor’s aggregate deemed
sale EC ordinary gain, within the mean-
ing of §1.864(c)(8)-1(c)(3)(ii)(A) (if any)
and the transferor’s aggregate deemed
sale EC capital gain, within the meaning
of §1.864(c)(8)-1(c)(3)(ii)(B) (if any), in
each case, on the determination date.
(v) Partial nonrecognition. If a nonrec-
ognition provision applies to only a por-
tion of the gain realized on the transfer, a
certification described in this paragraph
(c)(4) may be relied upon only if the cer-
tification also includes the information re-
quired in paragraph (b)(6) of this section.
(vi) Income tax treaties. If only a por-
tion of the gain on the transfer is not sub-
ject to tax pursuant to an income tax treaty
in effect between the United States and a
foreign country, a certification described
in paragraph (c)(4)(i) of this section may
be relied upon only if the certification also
complies with the requirements of para-
graph (b)(7) of this section, including the
requirement that the determination that
gain from the transfer is not subject to tax
pursuant to an income tax treaty be made
with respect to the transferor, and that the
transferee mail a copy of the relevant cer-
tification described in this paragraph (c)
(4) to the IRS.
(d) Reporting and paying withheld
amounts—(1) In general. A transferee
required to withhold under this section
must report and pay any tax withheld by
the 20th day after the date of the transfer
using Forms 8288, U.S. Withholding Tax
Return for Dispositions by Foreign Per-
sons of U.S. Real Property Interests, and
8288-A, Statement of Withholding on Dis-
positions by Foreign Persons of U.S. Real
Property Interests, in accordance with
the instructions to those forms. The IRS
will stamp Form 8288-A to show receipt
and mail a stamped copy to the transfer-
or (at the address reported on the form).
See paragraph (e)(2) of this section for the
procedures for the transferor to claim a
credit for amounts withheld. Forms 8288
and 8288-A must include the TINs of both
the transferor and the transferee. If any re-
quired TIN is not provided, the transferee
must still report and pay any tax withheld
on Form 8288.
(2) Certification of withholding to part-
nership for purposes of section 1446(f)(4).
A transferee (other than a partnership that
is a transferee because it makes a distribu-
tion) must certify to the partnership the ex-
tent to which it has satisfied its obligation
to withhold under this section no later than
10 days after the transfer. The certification
must either include a copy of Form 8288-
A that the transferee files with respect to
the transfer, or state the amount realized
and the amount withheld on the transfer of
the partnership interest. The certification
must also include any certifications that
the transferee relied on to apply an excep-
tion to withholding under paragraph (b) of
this section or to determine the amount to
withhold under paragraph (c) of this sec-
tion. See §1.1446(f)-3 for rules regarding
a partnership’s obligation to withhold on
distributions to a transferee when this cer-
tification establishes only partial satisfac-
tion of the required amount, is not provid-
ed, or cannot be relied upon.
(e) Effect of withholding on transfer-
or—(1) In general. The withholding of
tax by a transferee under this section does
not relieve a foreign person from filing a
U.S. tax return with respect to the trans-
fer. See §§1.6012-1(b)(1), 1.6012-2(g)(1),
and 1.6031(a)-1. Further, the withholding
of tax by a transferee does not relieve a
nonresident alien individual or foreign
corporation subject to tax under section
864(c)(8) from paying any tax due with
the return that has not been fully satisfied
through withholding.
(2) Manner of obtaining credit—(i) In-
dividuals and corporations. Except as pro-

Bulletin No. 2019–27 89 July 1, 2019
vided in paragraph (e)(3) of this section,
an individual or corporation may claim
a credit under section 33 for the amount
withheld under this section by attaching
to its applicable return the stamped copy
of Form 8288-A provided to it under
paragraph (d)(1) of this section. See also
§1.1462-1.
(ii) Partnerships. For a rule allowing a
foreign partnership that is a transferor to
claim a credit for the amount withheld un-
der this section against its tax liability un-
der section 1446(a), see §1.1446-3(c)(4).
(3) Failure to receive Form 8288-A. If
a stamped copy of Form 8288-A has not
been provided to the transferor by the IRS,
the transferor may establish the amount of
tax withheld by the transferee by attach-
ing to its return substantial evidence of the
amount. The transferor must attach to its
return a statement that includes all of the
information otherwise required to be pro-
vided on Form 8288-A.
(f) Applicability date. This section ap-
plies to transfers that occur on or after the
date that is 60 days after the date that these
regulations are published as final regula-
tions in the Federal Register.
§1.1446(f)-3 Partnership’s require-
ment to withhold under section 1446(f)(4)
on distributions to transferee.
(a) Partnership’s obligation to with-
hold amounts not withheld by the transfer-
ee—(1) In general. If a transferee fails to
withhold any amount required to be with-
held under §1.1446(f)-2, the partnership
in which the interest was transferred must
withhold from any distributions made to
the transferee pursuant to this section. To
determine its withholding obligation un-
der this paragraph (a)(1), a partnership
may rely on a certification received from
the transferee described in §1.1446(f)-
2(d)(2) unless it knows, or has reason to
know, that the certification is incorrect or
unreliable.
(2) Notification by IRS. A partnership
that receives notification from the IRS
that a transferee has provided incorrect
information regarding the amount realized
or amount withheld on the certification
described in §1.1446(f)-2(d)(2), or has
failed to pay the IRS the amount report-
ed as withheld on the certification, must
withhold the amount prescribed in the no-
tification on distributions to the transferee
made on or after the date that is 15 days
after it receives the notification. For this
purpose, the amount realized is not treat-
ed as incorrect if the transferee properly
relied on a certification to compute the
amount realized pursuant to §1.1446(f)-
2(c)(2).
(b) Exceptions to withholding—(1)
Withholding has been satisfied by trans-
feree. A partnership is not required to with-
hold under paragraph (a)(1) of this section
if it relies on a certification described in
§1.1446(f)-2(d)(2) received from the
transferee (within the time prescribed in
that section) that states that an exception
to withholding described in §1.1446(f)-
2(b) applies or that the transferee withheld
the full amount required to be withheld
(taking into account any adjustments un-
der §1.1446(f)-2(c)) under §1.1446(f)-2.
(2) PTP interests—(i) In general. Ex-
cept as provided in paragraph (b)(2)(ii) of
this section, a partnership is not required
to withhold under this section on distribu-
tions made with respect to a PTP interest.
(ii) Exception for a false qualified no-
tice. If a publicly traded partnership deter-
mines (including by reason of notification
from the IRS) that it has published a qual-
ified notice that falsely states that either
the exception described in §1.1446(f)-
4(b)(3) (the 10-percent exception) or the
exception described in §1.1446(f)-4(b)(4)
(the qualified current income exception)
applies, the publicly traded partnership
must withhold under this section on dis-
tributions to the transferee in an amount
equal to the amount that a broker failed to
withhold under §1.1446(f)-4 due to reli-
ance on the qualified notice, plus interest.
(3) Distributing partnerships. A part-
nership that is a transferee because it
makes a distribution is not required to
withhold under this section.
(c) Withholding rules—(1) Timing of
withholding—(i) In general. A partnership
required to withhold under paragraph (a)
(1) of this section must withhold on distri-
butions made to the transferee beginning
on the later of—
(A) The date that is 30 days after the
date of transfer; or
(B) The date that is 15 days after the
date on which the partnership acquires
actual knowledge that the transfer has oc-
curred.
(ii) Satisfaction of withholding obliga-
tion. A partnership is treated as satisfying
its withholding obligation under para-
graph (a)(1) of this section and may stop
withholding on distributions to the trans-
feree on the earlier of—
(A) The date on which the partner-
ship completes withholding and paying
the amount required to be withheld under
paragraph (c)(2) of this section;
(B) The date on which the partner-
ship receives and may rely on a certifi-
cation from the transferee described in
§1.1446(f)-2(d)(2) (without regard to
whether the certification is received by
the time prescribed in that section) that
claims an exception to withholding under
§1.1446(f)-2(b); or
(C) If a partnership interest is not a PTP
interest, the date on which the transferee
no longer owns an interest in the part-
nership, unless the partnership has actual
knowledge that any successor to the trans-
feree is a person that bears a relationship
described in section 267(b) or 707(b)(1)
with respect to the transferee or the trans-
feror from which the transferee acquired
the interest.
(2) Amount to withhold—(i) In gener-
al. A partnership required to withhold un-
der paragraph (a)(1) of this section must
withhold the full amount of each distri-
bution made to the transferee until it has
withheld—
(A) A tax of 10 percent of the amount
realized (determined solely under
§1.1446(f)-2(c)(2)(i) or, in the case of a
publicly traded partnership, solely un-
der §1.1446(f)-4(c)(2)(i)) on the transfer,
reduced by any amount withheld by the
transferee, plus
(B) Any interest computed under para-
graph (c)(2)(ii) of this section.
(ii) Computation of interest. The
amount of interest required to be withheld
under paragraph (a)(1) of this section is
the amount of interest that would be re-
quired to be paid under section 6601 and
§301.6601-1 if the amount that should
have been withheld by the transferee was
considered an underpayment of tax. For
this purpose, interest is payable between
the date that is 20 days after the date of
the transfer and the date on which the tax
due under paragraph (a)(1) of this section
is paid to the IRS.
(iii) Certifications required. For pur-
poses of paragraph (c)(2)(i)(A) of this
section, a partnership must determine the

July 1, 2019 90 Bulletin No. 2019–27
amount realized on the transfer and any
amount withheld by the transferee based
on a certification from the transferee de-
scribed in §1.1446(f)-2(d)(2), without
regard to whether the certification is re-
ceived by the time prescribed in that sec-
tion. A partnership that does not receive
or cannot rely on a certification from the
transferee described in §1.1446(f)-2(d)(2)
must withhold tax equal to the full amount
of each distribution made to the transferee
until it receives a certification that it can
rely on.
(3) Coordination with other withhold-
ing provisions. Any amount required to be
withheld on a distribution under any other
provision of the Internal Revenue Code is
not also required to be withheld under sec-
tion 1446(f)(4) or this section.
(d) Reporting and paying withheld
amounts. The partnership must report and
pay the tax withheld using Forms 8288,
U.S. Withholding Tax Return for Dispo-
sitions by Foreign Persons of U.S. Real
Property Interests, and 8288-C, Statement
of Withholding Under Section 1446(f)(4)
for Withholding on Dispositions by For-
eign Persons of Partnership Interests, as
provided in forms, instructions, or other
guidance.
(e) Effect of withholding on transfer-
or and transferee—(1) Transferor. The
withholding of tax by a partnership un-
der this section does not relieve a foreign
person from filing a U.S. income tax
return with respect to the transfer. See
§§1.6012-1(b)(1), 1.6012-2(g)(1), and
1.6031(a)-1. Further, the withholding of
tax by a partnership does not relieve a
nonresident alien individual or foreign
corporation subject to tax under section
864(c)(8) from paying any tax due with
the return that has not been fully satis-
fied through withholding. An individual
or corporation is not allowed a credit un-
der section 33 for amounts withheld on
distributions to the transferee under this
section. See, however, §§1.1446(f)-5(a)
and 1.1463-1(a), which generally provide
that tax will not be recollected if paid by
another person.
(2) Transferee. A transferee is treated
as satisfying its withholding tax liability
under §1.1446(f)-2 to the extent that a
partnership withholds tax (which does not
include interest) from the transferee under
this section. Interest computed under para-
graph (c)(2)(ii) of this section that is with-
held by the partnership from the transferee
is treated as interest paid by the transferee
with respect to its withholding tax liabil-
ity under §1.1446(f)-2. A transferee may
not obtain a refund when the amount of
tax withheld under this section exceeds
the transferee’s withholding tax liability
under §1.1446(f)-2. Instead, only the part-
nership may claim a refund on behalf of
the transferee for the excess amount under
this section.
(f) Applicability date. This section ap-
plies to transfers that occur on or after the
date that is 60 days after the date that these
regulations are published as final regula-
tions in the Federal Register.
§1.1446(f)-4 Withholding on the trans-
fer of a publicly traded partnership inter-
est.
(a) Broker’s obligation to withhold
on a transfer of a PTP interest—(1) In
general. If a transfer of a PTP interest
is effected through one or more brokers,
the transferee is not required to withhold
under section 1446(f)(1) and §1.1446(f)-
2. Rather, any broker required to withhold
under paragraph (a)(2) of this section
must withhold a tax equal to 10 percent
of the amount realized (as defined in para-
graph (c)(2) of this section) on the transfer
of a PTP interest, except as otherwise pro-
vided in this section. For rules regarding
the application of section 1446(f)(4) and
§1.1446(f)-3 to a publicly traded partner-
ship, see §1.1446(f)-3(b)(2).
(2) Broker’s requirement to withhold—
(i) Payments to foreign brokers. A broker
that pays the amount realized from the
transfer of a PTP interest to another bro-
ker that is a foreign person must withhold
under this section unless the foreign per-
son is—
(A) A qualified intermediary (as de-
fined in §1.1441-1(e)(5)(ii)) that provides
a valid qualified intermediary withholding
certificate (as described in §1.1441-1(e)
(3)(ii)) that states that it assumes primary
withholding responsibility under chapter
3; or
(B) A U.S. branch of a foreign person
(as described in §1.1441-1(b)(2)(iv)) that
provides a valid U.S. branch withholding
certificate (as described in §1.1441-1(e)
(3)(v)) that states that it agrees to be treat-
ed as a U.S. person with respect to any
payment associated with the certificate.
(ii) Brokers with customer relationship
with transferor. A broker that effects the
transfer for the transferor as its customer
(as defined in §1.6045-1(a)(2)) is required
to withhold under this section.
(iii) Exception. A broker is not required
to withhold under this section if it knows
that the withholding obligation has al-
ready been satisfied.
(iv) Determination of foreign broker’s
status. For purposes of paragraph (a)(2)(i)
of this section, a broker must treat another
broker as a foreign person unless it obtains
documentation (including a certification
of non-foreign status) establishing that the
other broker is a U.S. person.
(b) Exceptions to withholding—(1) In
general. A broker is not required to with-
hold under this section if it properly relies
on a certification described in paragraph
(b)(2) or (b)(6) of this section, a qualified
notice described in paragraph (b)(3) or (b)
(4) of this section, or if the exception de-
scribed in paragraph (b)(5) of this section
applies. A broker may not rely on a certifi-
cation described in this paragraph (b) if it
has actual knowledge that the certification
is incorrect or unreliable.
(2) Certification of non-foreign status.
A broker may rely on a certification of
non-foreign status that it obtains from the
transferor. A certification of non-foreign
status under this section means a Form
W-9, Request for Taxpayer Identification
Number and Certification, or valid sub-
stitute form, that meets the requirements
of §1.1441-1(d)(2). For this purpose, a
broker may rely on a valid form that it
already possesses from the transferor.
A broker may instead rely on certifica-
tion from a second broker (as defined
in §1.6045-1(a)(1)) that acts as an agent
for the transferor when the second bro-
ker does not receive the amount realized
from the transfer of the PTP interest. This
certification must state that the second
broker has collected a valid certification
of non-foreign status (within the meaning
of this paragraph (b)(2)) from the trans-
feror, and it must include the transferor’s
TIN and status as a foreign or U.S. per-
son.
(3) Less than 10 percent effectively
connected gain by partnership—(i) In
general. A broker may rely on a qualified
notice described in paragraph (b)(3)(iii) of
this section that states that the 10-percent

Bulletin No. 2019–27 91 July 1, 2019
exception applies, as determined under
paragraph (b)(3)(ii) of this section.
(ii) 10-percent exception—(A) In gen-
eral. The 10-percent exception applies to
a transfer if, on the PTP designated date
described in paragraph (b)(3)(ii)(B) of this
section, had the publicly traded partner-
ship sold all of its assets at fair market val-
ue in the manner described in §1.864(c)
(8)-1(c), either—
(1) The amount of gain that would have
been effectively connected with the con-
duct of a trade or business within the Unit-
ed States would be less than 10 percent of
the total gain; or
(2) No gain would have been effective-
ly connected with the conduct of a trade or
business within the United States.
(B) PTP designated date. The PTP des-
ignated date for a transfer is any date for
a deemed sale determination that is desig-
nated by the publicly traded partnership in
a qualified notice described in paragraph
(b)(3)(iii) of this section, provided that
the PTP designated date occurs on or af-
ter the date that is 92 days before the date
on which the publicly traded partnership
posted the qualified notice naming the
PTP designated date.
(iii) Qualified notice—(A) In general.
Except as provided in paragraph (b)(3)(iii)
(B) and (C) of this section, a qualified no-
tice described in this paragraph (b)(3)(iii)
is the most recent qualified notice (within
the meaning of §1.1446-4(b)(4)) posted
by the publicly traded partnership.
(B) Qualified notice posting date re-
quirement. A qualified notice is described
in this paragraph (b)(3)(iii) only if the
publicly traded partnership has posted it
within the 92-day period ending on the
date of the transfer.
(C) Recent posting of qualified notice.
If the most recent qualified notice posted
by the publicly traded partnership was
posted during the 10-day period ending
on the date of the transfer, a broker may
instead rely on the immediately preceding
qualified notice (within the meaning of
§1.1446-4(b)(4)) posted by the publicly
traded partnership, provided that it satis-
fies the condition described in paragraph
(b)(3)(iii)(B) of this section.
(4) Distribution made from current in-
come—(i) In general. A broker is not re-
quired to withhold under this section on a
distribution by a publicly traded partner-
ship if the entire amount of a distribution
is designated, on a qualified notice (within
the meaning of §1.1446-4(b)(4)) posted
with respect to that distribution, as a qual-
ified current income distribution (within
the meaning of paragraph (b)(4)(ii) of this
section).
(ii) Qualified current income distribu-
tion. A qualified current income distribu-
tion is a distribution that does not exceed
the net income of the publicly traded part-
nership since the record date (within the
meaning of 17 CFR 240.14a-1(h) or its
successor provision) of the immediately
preceding distribution made by the pub-
licly traded partnership.
(5) Amount subject to withholding
under section 3406. A broker is not re-
quired to withhold under this section if the
amount realized from the transfer of the
PTP interest is subject to withholding un-
der §31.3406(b)(3)-2 of this chapter.
(6) Income tax treaties. A broker may
rely on a certification from the transferor
that states that the transferor is not sub-
ject to tax on any gain from the transfer
pursuant to an income tax treaty in effect
between the United States and a foreign
country if the requirements of this para-
graph (b)(6) are met. The transferor must
include with the certification a with-
holding certificate (on a Form W-8BEN,
Certificate of Foreign Status of Benefi-
cial Owner for United States Tax With-
holding and Reporting (Individuals), or
Form W-8BEN-E, Certificate of Status of
Beneficial Owner for United States Tax
Withholding and Reporting (Entities)) that
meets the requirements for validity under
§1.1446-1(c)(2)(iv) (or an applicable sub-
stitute form that meets the requirements
under §1.1446-1(c)(5)) and that contains
the information necessary to support the
claim for treaty benefits. For purposes of
this paragraph (b)(6), a broker may rely
on a withholding certificate that it already
possesses from the transferor unless it has
actual knowledge that the information is
incorrect or unreliable. This exception
does not apply if treaty benefits apply to
only a portion of the gain from the trans-
fer.
(c) Determining the amount to with-
hold—(1) In general. A broker that is
required to withhold under this section
must withhold 10 percent of the amount
realized on the transfer of the PTP inter-
est, except as provided in this paragraph
(c). Any procedures in this paragraph (c)
apply solely for purposes of determining
the amount to withhold under section
1446(f)(1) and this section. A broker may
not rely on a certification described in
this paragraph (c) if it has actual knowl-
edge that the certification is incorrect or
unreliable.
(2) Amount realized—(i) In general.
Solely for purposes of this section, the
amount realized is the amount of gross
proceeds (as defined in §1.6045-1(d)(5))
paid or credited upon the transfer to the
customer or other broker (as applicable),
or, in the case of a distribution, the amount
of cash distributed (or to be distributed)
and the fair market value of property dis-
tributed (or to be distributed).
(ii) Certification by a foreign part-
nership of non-foreign status of its part-
ners—(A) In general. When a transferor
is a foreign partnership, a broker may
use the procedures of this paragraph (c)
(2)(ii) to determine the amount realized.
For this purpose, the broker may rely on a
certification from the transferor providing
the modified amount realized, and may
treat the modified amount realized as the
amount realized.
(B) Determining modified amount re-
alized. The modified amount realized is
determined by multiplying the amount re-
alized (as determined under this paragraph
(c)(2), without regard to this paragraph (c)
(2)(ii)) by the aggregate percentage com-
puted as of the determination date. The ag-
gregate percentage is the percentage of the
gain (if any) arising from the transfer that
would be allocated to presumed foreign
persons. For this purpose, a presumed
foreign person is any direct or indirect
partner of the transferor that has not pro-
vided a certification of non-foreign status
that meets the requirements of paragraph
(b)(2) of this section. For purposes of this
paragraph (c)(2)(ii), an indirect partner is
a person that owns an interest in the trans-
feror indirectly through one or more for-
eign partnerships.
(C) Certification. The certification is
made by providing a withholding cer-
tificate (on Form W-8IMY, Certificate
of Foreign Intermediary, Foreign Flow-
Through Entity, or Certain U.S. Branches
for United States Tax Withholding and Re-
porting) and a withholding statement that

July 1, 2019 92 Bulletin No. 2019–27
provides the percentage of gain allocable
to each direct or indirect partner and that
provides whether each such person is a
United States person or presumed foreign
person. The certification must also include
a certification of non-foreign status that
meets the requirements of paragraph (b)
(2) of this section from each of the United
States persons that are direct or indirect
partners of the transferor that are identi-
fied as a United States person on the with-
holding statement. For purposes of this
paragraph (c)(2)(ii), a broker may rely on
a withholding certificate and withholding
statement that it already possesses from
the partnership unless it has actual knowl-
edge that the information is incorrect or
unreliable.
(d) Reporting and paying withheld
amounts. A broker that is required to
withhold under this section must pay
the withheld tax pursuant to the deposit
rules in §1.6302-2. For rules regarding
reporting on Forms 1042, Annual With-
holding Tax Return for U.S. Source In-
come of Foreign Persons, and 1042-S,
Foreign Person’s U.S. Source Income
Subject to Withholding, that apply to a
broker that withholds under this section,
see §1.1461-1(b) and (c). For rules re-
garding when an amount realized on the
transfer of a PTP interest is an amount
subject to reporting, see §1.1461-1(c)
(2)(i)(Q). A broker that pays the amount
realized to a foreign partnership must
issue a Form 1042-S directly to the part-
nership rather than issuing a form to
each of the partners of the partnership.
See §1.1461-1(c)(1)(ii)(A)(8) (treating
the foreign partnership as a recipient for
reporting purposes). A broker making a
payment to a U.S. branch treated as a
U.S. person must not treat the branch as
a U.S. person for purposes of reporting
the payment made to the branch. There-
fore, a payment to that U.S. branch
must be reported on Form 1042-S. See
§1.1461-1(c). A Form 1042-S issued di-
rectly to the transferor must include the
TIN of the transferor unless the broker
does not know the TIN at the time of is-
suance.
(e) Effect of withholding on transfer-
or—(1) In general. The withholding of
tax under this section does not relieve
a foreign person from filing a U.S. tax
return with respect to the transfer. See
§§1.6012-1(b)(1), 1.6012-2(g)(1), and
1.6031(a)-1. Further, the withholding of
tax by a broker does not relieve a non-
resident alien individual or foreign cor-
poration subject to tax under section
864(c)(8) from paying any tax due with
the return that has not been fully satisfied
through withholding.
(2) Manner of obtaining credit—(i) In-
dividuals and corporations. An individual
or corporation may claim a credit under
section 33 for the amount withheld under
this section by attaching to its applicable
return a copy of a Form 1042-S that in-
cludes its TIN.
(ii) Partnerships. For a rule allowing
a foreign partnership that is a transferor
to claim a credit for the amount withheld
under this section against its obligation
to withhold under section 1446(a), see
§1.1446-3(c)(4).
(f) Applicability date. This section ap-
plies to transfers that occur on or after the
date that is 60 days after the date that these
regulations are published as final regula-
tions in the Federal Register.
§1.1446(f)-5 Liability for failure to
withhold.
(a) Liability for failure to withhold.
Every person required to withhold and
pay tax under section 1446(f), but that
fails to do so, is liable for the tax under
section 1461. Under section 1463, if the
tax required to be withheld is paid by
another person required to withhold un-
der section 1446(f) or by the nonresident
alien individual or foreign corporation
subject to tax under section 864(c)(8), the
tax will not be recollected. However, any
person that failed to withhold under sec-
tion 1446(f) is in no case relieved from
liability for any interest, penalties, or
additions to tax that would otherwise ap-
ply. A partnership that failed to withhold
and pay tax under §1.1446(f)-3 is only
liable for the amount of tax that it failed
to collect (but not any interest computed
on that amount under §1.1446(f)-3(c)(2)
(ii)), plus any interest, penalties, or ad-
ditions to tax with regard to the partner-
ship’s failure to withhold.
(b) Liability of agents—(1) Duty to
provide notice of false certification. A
transferee’s or transferor’s agent (other
than a broker required to withhold un-
der §1.1446(f)-4) must provide notice to
a transferee (or other person required to
withhold) if that person is furnished with
a certification described in §§1.1446(f)-1
through 1.1446(f)-4 and the agent knows
that the certification is false. A person re-
quired to withhold may not rely on a cer-
tification if it receives the notice described
in this paragraph (b)(1).
(2) Procedural requirements. Any
agent who is required to provide notice
under paragraph (b)(1) of this section
must do so in writing (including by elec-
tronic submission) as soon as possible
after learning of the false certification. If
the agent first learns of the false certifi-
cation before the date of transfer, notice
must be given by the third day following
that discovery but no later than the date of
transfer (before the transferee’s payment
of consideration). If an agent first learns of
a false certification after the date of trans-
fer, notice must be given by the third day
following that discovery. The notice must
also explain the possible consequences to
the recipient of a failure to withhold. The
notice need not disclose the information
on which the agent’s statement is based.
The agent must also furnish a copy of the
notice to the IRS by the date on which
the notice is required to be given to the
recipient. The copy of the notice must
be delivered to the address provided in
§1.1445-1(g)(10) and must be accompa-
nied by a cover letter stating that the copy
is being filed pursuant to the requirements
of §1.1446(f)-5(b)(2).
(3) Failure to provide notice. Any
agent who is required to provide notice
under paragraph (b)(1) of this section,
but fails to do so in the manner required
in paragraph (b)(2) of this section, is lia-
ble for the tax that the person who should
have been provided notice in accordance
with paragraph (b)(2) of this section was
required to withhold under section 1446(f)
if the notice had been given.
(4) Limitation on liability. An agent’s
liability under paragraph (b)(3) of this
section is limited to the amount of com-
pensation that the agent derives from the
transaction. In addition, an agent that
assists in the preparation of, or fails to
disclose knowledge of, a false certifica-
tion may be liable for civil and criminal
penalties.
(c) Applicability date. This section ap-
plies to transfers that occur on or after the
date that is 60 days after the date that these

Bulletin No. 2019–27 93 July 1, 2019
regulations are published as final regula-
tions in the Federal Register.
Par. 10. Section 1.1461-1 is amended:
1. As proposed to be amended December
18, 2018, at 83 FR 64757:
i. Paragraph (a)(1) is further amended
by revising the sixth, seventh, and
eighth sentences.
ii. Paragraph (c)(1)(i)(A) is further
amended by revising the second and
third sentences.
2. By revising paragraph (c)(1)(ii)(A)(8).
3. By adding paragraph (c)(1)(ii)(B)(5).
4. In paragraph (c)(2)(i) introductory text,
by revising the first and second sen-
tences.
5. In paragraph (c)(2)(i)(N), by remov-
ing the word “and” that follows the
semi-colon.
6. In paragraph (c)(2)(i)(O), by removing
the period at the end of the paragraph
and adding “; and” in its place.
7. By adding paragraphs (c)(2)(i)(P) and
(Q).
8. By adding a sentence at the end of
paragraph (c)(4)(ii)(A).
9. Revising paragraph (i).
The revisions and additions read as fol-
lows:
§1.1461-1 Payment and returns of tax
withheld.
(a) * * *
(1) Deposits of tax. * * * With respect
to withholding under section 1446, this
section shall apply only to publicly traded
partnerships and nominees that withhold
under §1.1446-4 and brokers that with-
hold under §1.1446(f)-4 on transfers of
publicly traded partnership interests. See
§1.1461-3 for penalties that apply for fail-
ure to withhold under section 1446(a) on
effectively connected taxable income allo-
cable to foreign partners or under section
1446(f) on transfers of partnership inter-
ests by foreign partners. The references in
the previous two sentences to §1.1446(f)-
4 and section 1446(f) shall apply to trans-
fers of partnership interests that occur on
or after 60 days after the date that these
regulations are published as final regula-
tions in the Federal Register.
* * * * *
(c) * * *
(1) * * *
(i) * * *
(A) In general. * * * Notwithstand-
ing the preceding sentence, any person
that withholds or is required to withhold
an amount under sections 1441, 1442,
1443, §1.1446-4(a) (applicable to public-
ly traded partnerships required to pay tax
under section 1446(a) on distributions),
or §1.1446(f)-4(a) (applicable to brokers
required to withhold on transfers of pub-
licly traded partnership interests) must file
a Form 1042-S for the payment withheld
upon whether or not that person is engaged
in the conduct of a trade or business and
whether or not the payment is an amount
subject to reporting. The reference in the
previous sentence to §1.1446(f)-4(a) shall
apply with respect to returns for transfers
that occur on or after 60 days after the date
that these regulations are published as fi-
nal regulations in the Federal Register. *
* *
* * * * *
(ii) * * *
(A) * * *
(8) A partner (including a foreign part-
nership) receiving a distribution from
a publicly traded partnership subject to
withholding under section 1446(a) and
§1.1446-4 on distributions of effectively
connected income, and a partner (includ-
ing a foreign partnership) receiving an
amount realized from a transfer of a pub-
licly traded partnership interest subject to
withholding under section 1446(f)(1) and
§1.1446(f)-4. The references in this para-
graph (c)(1)(ii)(A)(8) to section 1446(f)
(1) and §1.1446(f)-4 shall apply with re-
spect to returns for transfers that occur on
or after 60 days after the date that these
regulations are published as final regula-
tions in the Federal Register.
* * * * *
(B) * * *
(5) A foreign broker withheld upon un-
der §1.1446(f)-4(a)(2)(i) by another bro-
ker paying an amount realized from the
transfer of a PTP interest.
* * * * *
(2) * * *
(i) In general. Subject to the excep-
tions described in paragraph (c)(2)(ii) of
this section, amounts subject to report-
ing on Form 1042-S are amounts paid
to a foreign payee or partner (including
persons presumed to be foreign) that are
amounts subject to withholding as defined
in §1.1441-2(a), §1.1446-4(a) (addressing
publicly traded partnerships required to
pay withholding tax under section 1446(a)
on distributions of effectively connected
income), or §1.1446(f)-4(a) (addressing
brokers required to withhold and pay tax
on the amount realized on the transfer of
an interest in a publicly traded partner-
ship). The reference in the previous sen-
tence to withholding under §1.1446-4(f)
shall apply with respect to returns for
transfers that occur on or after 60 days af-
ter the date that these regulations are pub-
lished as final regulations in the Federal
Register. * * *
* * * * *
(P) The amount of any distribution
made by a publicly traded partnership that
is an amount subject to withholding under
§1.1446-4, or that is paid to a qualified
intermediary that assumes primary with-
holding responsibility for the payment
or a U.S. branch of a foreign person that
agrees to be treated as a U.S. person de-
scribed in §1.1446-4(b)(2); and
(Q) An amount realized on the trans-
fer of a publicly traded partnership in-
terest subject to §1.1446(f)-4 (unless an
exception to withholding applies under
§1.1446(f)-4(b)(2) through (5)).
* * * * *
(4) * * *
(ii) * * *
(A) Amounts paid to a nonquali-
fied intermediary, a flow-through entity,
and certain U.S. branches. * * * For a
payment to a foreign partnership on the
transfer of a publicly traded partnership
interest subject to § 1.1446(f)-4(a), see
paragraph (c)(1)(ii)(A)(8) of this section
(treating the foreign partnership as a re-
cipient).
* * * * *
(i) Applicability date—(1) In general.
Except as provided in paragraph (i)(2) of
this section, this section applies to returns
required for payments made on or after
January 6, 2017. For payments made af-
ter June 30, 2014, and before January 6,
2017, see this section as in effect and con-
tained in 26 CFR part 1, as revised April 1,
2016. For payments made after December
31, 2000, and before July 1, 2014, see this
section as in effect and contained in 26
CFR part 1, as revised April 1, 2013.

July 1, 2019 94 Bulletin No. 2019–27
(2) Exceptions. Paragraphs (a)(1), (c)
(1)(i)(A), (c)(1)(ii)(A)(8), (c)(2)(i), and
(c)(2)(iii) of this section apply as provided
in those paragraphs. Paragraphs (c)(1)(ii)
(A)(11), (c)(1)(ii)(B)(5), (c)(2)(i)(P) and
(Q), and (c)(4)(ii)(A) apply with respect
to returns for transfers that occur on or
after 60 days after the date that these reg-
ulations are published as final regulations
in the Federal Register.
Par. 11. Section 1.1461-2 is amended:
1. By revising paragraph (a)(1).
2. As proposed to be amended April 13,
2016, at 81 FR 21795, by revising the
first and last sentences of paragraph
(b).
The revisions and addition read as fol-
lows:
§1.1461-2 Adjustments for overwith-
holding or underwithholding of tax.
(a) * * *
(1) In general. Except as otherwise
provided in this paragraph (a)(1), a with-
holding agent that has overwithheld un-
der chapter 3 of the Internal Revenue
Code, and made a deposit of the tax as
provided in §1.6302-2(a), may adjust the
overwithheld amount either pursuant to
the reimbursement procedure described
in paragraph (a)(2) of this section or pur-
suant to the set-off procedure described
in paragraph (a)(3) of this section. These
rules do not apply to partnerships or
nominees required to withhold under sec-
tion 1446(a), other than on a distribution
by a publicly traded partnership subject
to withholding under §1.1446-4(a) and
a payment of an amount realized on the
transfer of an interest in a publicly trad-
ed partnership subject to §1.1446(f)-4.
The reference in the previous sentence
to withholding under §1.1446-4(f) shall
apply with respect to returns for transfers
that occur on or after 60 days after the
date that these regulations are published
as final regulations in the Federal Reg-
ister.
* * * * *
(b) * * * A withholding agent may
withhold from future payments (includ-
ing distributions of effectively connect-
ed income subject to withholding under
§1.1446-4 and the amount realized from
the transfer of a partnership interest sub-
ject to §1.1446(f)-4) made to a benefi-
cial owner the tax that should have been
withheld from previous payments to that
beneficial owner under chapter 3 of the
Code. * * * The reference in this para-
graph (b) to withholding under §1.1446-
4(f)-4 shall apply with respect to returns
for transfers that occur on or after 60
days after the date that these regulations
are published as final regulations in the
Federal Register.
* * * * *
Par. 12. Section 1.1461-3 is amended
by revising the first sentence and last sen-
tences to read as follows:
§1.1461-3 Withholding under section
1446.
For rules relating to the withhold-
ing tax liability of a partnership, nom-
inee, or transferee under section 1446,
see §§1.1446-1 through 1.1446-7 and
1.1446(f)-1 through 1.1446(f)-5. * * * The
references in this section to §§1.1446-1
through 1.1446-7 apply to partnership tax-
able years beginning after May 18, 2005,
or such earlier time as the regulations un-
der §§1.1446-1 through 1.1446-5 apply
by reason of an election under §1.1446-
7, and the references in this section to
§1.1446(f)-1 through 1.1446(f)-5 shall
apply with respect to returns for transfers
that occur on or after 60 days after the date
that these regulations are published as fi-
nal regulations in the Federal Register.
Par. 13. Section 1.1463-1 is amended
by revising the fourth and fifth sentences
of paragraph (a) to read as follows:
§1.1463-1 Tax paid by recipient of in-
come.
(a) * * * See §§1.1446-3(e), 1.1446-
3(f) and 1.1446(f)-5(a) for application
of the rule of this paragraph (a), and for
additional rules, in which the withholding
tax was required to be paid under section
1446. The references in the previous sen-
tence to §1.1446-3(e) and 1.1446-3(f) ap-
ply to partnership taxable years beginning
after May 18, 2005, or such earlier time as
the regulations under §§1.1446-1 through
1.1446-5 apply by reason of an election
under §1.1446-7, and the reference in the
previous sentence to §1.1446(f)-5(a) shall
apply to the tax required to be withheld
under section 1446(f) for transfers that oc-
cur on or after 60 days after the date that
these regulations are published as final
regulations in the Federal Register.
* * * * *
Par. 14. Section 1.1464-1 is amended
by revising the last sentence of paragraph
(a) and by revising paragraph (c) to read
as follows:
§1.1464-1 Refunds or credits.
(a) In general. * * * With respect to
section 1446 (other than section 1446(f)),
this section applies only to a publicly trad-
ed partnership described in §1.1446-4.
* * * * *
(c) Applicability date. The last sentence
of paragraph (a) applies to publicly traded
partnerships described in §1.1446-4 for
partnership taxable years beginning after
April 29, 2008, and to brokers required to
withhold under §1.1446(f)-4 on transfers
that occur on or after the date that is 60
days after the date that these regulations
are published as final regulations in the
Federal Register.
Par. 15. Section 1.6050K-1 is amended
by:
1. Redesignating the introductory text of
paragraph (c) and paragraphs (c)(1)
through (3) as the introductory text of
paragraph (c)(1) and paragraphs (c)
(1)(i) through (iii), respectively.
2. Adding a subject heading to new-
ly-redesignated paragraph (c)(1).
3. Adding paragraphs (c)(2) and (3), (d)
(3), and (h).
The revision and additions read as fol-
lows:
§1.6050K-1 Returns relating to sales
or exchanges of certain partnership inter-
ests.
* * * * *
(c) Statements to be furnished to trans-
feror and transferee—(1) In general. * * *
(2) Information to be provided to trans-
ferors. The statement a partnership must
provide to a transferor partner pursuant
to paragraph (c)(1) of this section must
also include the information necessary for
the transferor to make the transferor’s re-
quired statement under §1.751-1(a)(3).
(3) Transfers of partnership interests
by foreign persons. For additional infor-
mation required to be provided by the
partnership if section 864(c)(8) applies to
the transfer of a partnership interest by a
foreign person, see §1.864(c)(8)-2(b).
(d) * * *
(3) Transfers of partnership interests
by foreign persons. For notifications re-

Bulletin No. 2019–27 95 July 1, 2019
quired by foreign transferors of partner-
ship interests, see §1.864(c)(8)-2(a).
* * * * *
(h) Applicability date. Paragraphs (c)
(2) and (3) of this section apply to returns
filed on or after the date that these regula-
tions are published as final regulations in
the Federal Register. Paragraph (d)(3) of
this section applies to transfers that occur
on or after the date that these regulations
are published as final regulations in the
Federal Register.
Kirsten Wielobob,
Deputy Commissioner for Services
and Enforcement.
(Filed by the Office of the Federal Register on May
7, 2019, 4:15 p.m., and published in the issue of the
Federal Register for May 13, 2019, 84 F.R. 21198)

Bulletin No. 2019–27 i July 1, 2019
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 be-
ing made clear because the language has
caused, or may cause, some confusion. It
is not used where a position in a prior rul-
ing 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 transactions.
This term is most commonly used in a ruling
that lists previously published rulings 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
period 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 previous-
ly 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 cas-
es in litigation, or the outcome of a Ser-
vice study.
Abbreviations
The following abbreviations in current use
and formerly used will appear in material
published in the Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—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.
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.
I.R.B.—Internal Revenue Bulletin.
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.
X—Corporation.
Y—Corporation.
Z—Corporation.

July 1, 2019 ii Bulletin No. 2019–27
Numerical Finding List
1
Bulletin 2019–27
Announcements:
2019-07, 2019-27 I.R.B. 62
Notices:
2019-12, 2019-27 I.R.B. 57
2019-40, 2019-27 I.R.B. 59
Proposed Regulations:
REG-105476-18, 2019-27 I.R.B. 63
Treasury Decisions:
9863, 2019-27 I.R.B. 1
9864, 2019-27 I.R.B. 6
9865, 2019-27 I.R.B. 27
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2018–27 through 2018–52 is in Internal Revenue Bulletin
2018–52, dated December 27, 2018.

Bulletin No. 2019–27 iii July 1, 2019
Finding List of Current Actions on
Previously Published Items
1
Bulletin 2019–27
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2018–27 through 2018–52 is in Internal Revenue Bulletin
2018–52, dated December 27, 2018.

Internal Revenue Service
Washington, DC 20224
Official Business
Penalty for Private Use, $300
INTERNAL REVENUE BULLETIN
The Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue
Bulletins are available at www.irs.gov/irb/.
We Welcome Comments About the Internal Revenue Bulletin
If you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it,
we would be pleased to hear from you. You can email us your suggestions or comments through the IRS Internet Home Page
www.irs.gov) or write to the Internal Revenue Service, Publishing Division, IRB Publishing Program Desk, 1111 Constitution Ave.
NW, IR-6230 Washington, DC 20224.