IRB 2016-52 (Rev. December 27, 2016)

HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

INCOME TAX

REG–122855–15, page 922.Proposed regulations incorporate the text of temporary regula-tions (TD 9788) concerning a partner’s share of partnership lia-bilities for purposes of section 707 of the Code and the treatmentof certain payment obligations under section 752. In addition, theproposed regulations address (1) when certain obligations torestore a deficit balance in a partner’s capital account are disre-garded under section 704 and (2) when partnership liabilities aretreated as recourse liabilities under section 752.

REG–129128–14, page 931.The proposed regulations provide rules under section 901(m)for determining the amount of foreign taxes that are disquali-fied for foreign tax credit purposes with respect to certaincovered asset acquisitions that result in a basis step-up forU.S. income tax purposes but not foreign tax purposes.

Rev. Rul. 2016–29, page 875.This revenue ruling relates to allocations of low-income housingcredits to qualified low-income buildings. Specifically, the revenueruling clarifies that section 42(m)(1)(A)(ii) neither requires nor en-courages State housing credit agencies to reject the proposeddevelopment of a low-income housing project that does not obtainthe approval of the locality where the project is proposed to bedeveloped.

Rev. Rul. 2016–30, page 876.Section 1274A – inflation adjusted numbers for 2017. Thisruling provides the dollar amounts, increased by the 2017inflation adjustments, for section 1274A of the Code. RevenueRuling 2015–24 supplemented and superseded.

Rev. Proc. 2016–56, page 920.This revenue procedure provides an updated list of countrieswith which the reporting requirement of §§1.6049–8(a) and1.6049–4(b)(5) of the Income Tax Regs. applies (Section 3), as

well as a list of countries with which the Treasury Department andthe IRS have determined that it is appropriate to have an auto-matic exchange relationship with respect to that interest incomeinformation under §§1.6049–8(a) and 1.6049–4(b)(5) (Section4). This rev proc adds one country (Saint Lucia) to the list set forthin Section 3 and three countries (Israel, the Republic of Korea, andSaint Lucia) to the list set forth in Section 4.

Notice 2016–73, page 908.The notice provides rules relating to the treatment of propertyused to acquire parent stock or securities in certain triangularreorganizations involving one or more foreign corporations. Inaddition, the notice announces that the Treasury and IRS willrevise the regulations under section 367 in the manner describedin the notice, and states our view that the IRS intends to challengethe purported tax consequences of these transactions undercurrent law.

Notice 2016–77, page 914.This notice relates to a preference needed in a qualified allo-cation plan (QAP) for certain areas. Specifically, the noticereminds taxpayers that a project located in a qualified censustract (as defined in section 42(d)(5)) is not described in section42(m)(1)(B)(ii)(III) (i.e., was not given a preference required in aQAP) unless the development of the project contributes to aconcerted community revitalization plan.

Notice 2016–79, page 918.This notice provides the optional 2017 standard mileage ratesfor taxpayers to use in computing the deductible costs ofoperating an automobile for business, charitable, medical, ormoving expense purposes. This notice also provides theamount taxpayers must use in calculating reductions to basisfor depreciation taken under the business standard mileagerate, and the maximum standard automobile cost that may beused in computing the allowance under a fixed and variable rate(FAVR) plan.

(Continued on the next page)

Finding Lists begin on page ii.

Bulletin No. 2016–52December 27, 2016

T.D. 9787, page 878.Final regulations under section 707 of the Code relate todisguised sales of property to or by a partnership. The regu-lations address certain deficiencies and technical ambiguitiesin the existing section 707 regulations, including issues indetermining a partner’s share of liabilities under section1.752–3 for disguised sale purposes.

T.D. 9788, page 889.Final and temporary regulations provide guidance concerning apartner’s share of partnership liabilities for purposes of section707 of the Code and the treatment of certain payment obliga-tions under section 752.

T.D. 9800, page 899.The temporary regulations provide rules under section 901(m)for determining the amount of foreign taxes that are disquali-fied for foreign tax credit purposes with respect to certaincovered asset acquisitions that result in a basis step up forU.S. income tax purposes but not foreign tax purposes.

EMPLOYEE PLANS

Notice 2016–78, page 914.This notice sets forth updates on the corporate bond monthlyyield curve, the corresponding spot segment rates for Decem-ber 2016 used under § 417(e)(3)(D), the 24-month averagesegment rates applicable for December 2016, and the 30-yearTreasury rates. These rates reflect the application of§ 430(h)(2)(C)(iv), which was added by the Moving Ahead forProgress in the 21st Century Act, Public Law 112–141 (MAP-21) and amended by section 2003 of the Highway and Trans-portation Funding Act of 2014 (HATFA).

Notice 2016–80, page 918.This notice contains the 2016 Required Amendments List forindividually-designed qualified retirement plans. The list identi-fies certain changes in qualification requirements that becameeffective in 2016 that may require a retirement plan to beamended in order to remain qualified, and establishes the dateby which any necessary amendment must be made.

The IRS MissionProvide America’s taxpayers top-quality service by helpingthem understand and meet their tax responsibilities and en-force the law with integrity and fairness to all.

IntroductionThe Internal Revenue Bulletin is the authoritative instrument ofthe Commissioner of Internal Revenue for announcing officialrulings and procedures of the Internal Revenue Service and forpublishing Treasury Decisions, Executive Orders, Tax Conven-tions, legislation, court decisions, and other items of generalinterest. It is published weekly.

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

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

Rulings and procedures reported in the Bulletin do not have theforce and effect of Treasury Department Regulations, but theymay be used as precedents. Unpublished rulings will not berelied on, used, or cited as precedents by Service personnel inthe disposition of other cases. In applying published rulings andprocedures, 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 unlessthe 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 ofthe Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows: Subpart A, TaxConventions and Other Related Items, and Subpart B, Legisla-tion and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references to thesesubjects are contained in the other Parts and Subparts. Alsoincluded in this part are Bank Secrecy Act Administrative Rul-ings. Bank Secrecy Act Administrative Rulings are issued bythe Department of the Treasury’s Office of the Assistant Sec-retary (Enforcement).

Part IV.—Items of General Interest.This part includes notices of proposed rulemakings, disbar-ment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative index forthe matters published during the preceding months. Thesemonthly indexes are cumulated on a semiannual basis, and arepublished 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.

December 27, 2016 Bulletin No. 2016–52

Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 42.—Low-IncomeHousing Credit26 CFR 1.42–14: Allocation rules for post-2000State housing credit ceiling amount.

Rev. Rul. 2016–29

ISSUE

When state housing credit agencies al-locate housing credit dollar amounts, does§ 42(m)(1)(A)(ii) of the Internal RevenueCode (Code) require or encourage theseagencies to reject any proposal that doesnot obtain the approval of the localitywhere the project developer proposes toplace the project?1

FACTS

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

This QAP contains provisions thatstrongly favor applications from afford-able housing projects that demonstrate af-firmative local support. For example, un-der the point system that Agency uses injudging among applicant projects, pointsare granted to projects that—

• Manifest quantifiable community par-ticipation with respect to the project,especially as evidenced by writtenstatements from neighborhood organi-zations in the area of the proposedproject.

• Receive a commitment of develop-ment funding by the local politicalsubdivision.

• Receive community support for theapplication, as evidenced by a writtenstatement from the state legislatorelected from the district in which theproject is proposed to be developed.

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

In State X, local approval is much morelikely to be secured for proposed LIHTCdevelopments in areas with greater pro-portions of minority residents and fewereconomic opportunities than in higher-opportunity, non-minority communities.Agency’s practice of requiring local ap-proval has created a pattern of allocatinghousing credit dollar amounts to projectsin the predominantly lower-income or mi-nority areas, with the result of perpetuat-ing residential racial and economic segre-gation in State X.

LAW

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

Under § 42(h), however, the LIHTCsdetermined in any year with respect to abuilding may not exceed the housingcredit dollar amount that a State housingcredit agency has allocated to the build-ing.

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

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

Section 42(m)(1)(A)(ii) prevents ahousing credit dollar amount from beingallocated to a building unless the allocat-ing “agency notifies the chief executiveofficer (or the equivalent) of the local ju-risdiction within which the building is lo-cated of such project and provides suchindividual a reasonable opportunity tocomment on the project.”

ANALYSIS

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

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

The Code requires that each local ju-risdiction have a “reasonable opportunity”to comment on any proposal to allocate ahousing credit dollar amount to a projectwithin that jurisdiction. This requirementis not the same as requiring the jurisdic-tion’s approval. The clear meaning of“reasonable opportunity to comment” isthat the jurisdiction has a chance to weighin, or even object, but not that every ob-jection will be honored.

Thus, § 42(m)(1)(A)(ii) ensures onlythe opportunity for local input to the allo-cation decision. It does not authorize anallocating agency to abandon the respon-sibility to exercise its own judgment. Inparticular, it does not require or encourageallocating agencies to bestow veto powerover LIHTC projects either on local com-munities or on local public officials.

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

Bulletin No. 2016–52 December 27, 2016875

2. General Federal Fair-Housing Policy

Agency’s practice of requiring local ap-proval has created a pattern of allocatinghousing credit dollar amounts that hasperpetuated residential racial segregationin State X. Agency’s practice, therefore,has a discriminatory effect based on race,which is a protected characteristic under42 USC 3604. Thus, the practice is incon-sistent with at least the policy2 of the FairHousing Act of 1968 (the Act), 42 USC3601–3619.

Nevertheless, Agency interprets § 42(m)(1)(A)(ii) as forcing Agency to requirelocal approval, despite the discriminatoryeffect of that practice in State X. Thisinterpretation assumes that, in creatingLIHTCs, Congress silently reversed well-established, fundamental Federal fair-housing policy. Eighteen years before the1986 enactment of § 42, the Act hadfirmly established this policy. See 42 USC3601 (“Declaration of policy. It is thepolicy of the United States to provide,within constitutional limitations, for fairhousing throughout the United States.”).Without legislative commentary or otherpersuasive evidence, one cannot concludethat Congress intended to reverse thiswell-established policy.

In the summer of 2015, the UnitedStates Department of Housing and UrbanDevelopment (HUD) issued new final reg-ulations regarding obligations under theAct to Affirmatively Further Fair Housing(AFFH). See 80 Fed. Reg. 42272 (2015)(issuing HUD’s AFFH final rule, which iscodified at various locations in 24 CFRParts 5, 91, 92, 570, 574, 576, and 903).Discussing the many decades duringwhich AFFH had been firmly establishedFederal policy, HUD states in the pream-ble, “From its inception [in 1968], the[Act] . . . has not only prohibited discrim-ination in housing related activities andtransactions but has also provided,through the duty to affirmatively furtherfair housing . . . , for meaningful actions tobe taken to overcome the legacy of segre-gation, unequal treatment, and historiclack of access to opportunity in housing.”Id. at 42272 (emphasis added).

AFFH was firmly established Federalhousing policy when § 42 was enacted,

and there is no suggestion that Congressintended § 42 to diverge from that policy.Section 42(m)(1)(A)(ii), therefore, doesnot require or even encourage conductinconsistent with that policy.

HOLDING

When state housing credit agencies al-locate housing credit dollar amounts,§ 42(m)(1)(A)(ii) does not require or en-courage these agencies to reject all pro-posals that do not obtain the approval ofthe locality where the project developerproposes to place the project. That is, itneither requires nor encourages housingcredit agencies to honor local vetoes.

DRAFTING INFORMATION

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

Rev. Rul. 2016–30

This revenue ruling provides the dollaramounts, increased by the 2017 inflationadjustment, for § 1274A of the InternalRevenue Code.

BACKGROUND

In general, §§ 483 and 1274 determinethe principal amount of a debt instrumentgiven in consideration for the sale or ex-change of nonpublicly traded property. Inaddition, any interest on a debt instrumentsubject to § 1274 is taken into accountunder the original issue discount provi-sions of the Code. Section 1274A, how-ever, modifies the rules under §§ 483 and1274 for certain types of debt instruments.

In the case of a “qualified debt instru-ment,” the discount rate used for purposesof §§ 483 and 1274 may not exceed ninepercent, compounded semiannually. Sec-tion 1274A(b) defines a qualified debt in-strument as any debt instrument given inconsideration for the sale or exchange ofproperty (other than new § 38 propertywithin the meaning of § 48(b), as in effect

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

In the case of a “cash method debtinstrument,” as defined in § 1274A(c), theborrower and lender may elect to use thecash receipts and disbursements methodof accounting. In particular, for any cashmethod debt instrument, § 1274 does notapply, and interest on the instrument isaccounted for by both the borrower andthe lender under the cash receipts anddisbursements method of accounting. Acash method debt instrument is a qualifieddebt instrument that meets the followingadditional requirements: (A) in the case ofa debt instrument arising out of a sale orexchange before January 1, 1990, thestated principal amount does not exceed$2,000,000; (B) the lender does not use anaccrual method of accounting and is not adealer with respect to the property sold orexchanged; (C) § 1274 would have ap-plied to the debt instrument but for anelection under § 1274A(c); and (D) anelection under § 1274A(c) is jointly madewith respect to the debt instrument bythe borrower and the lender. Section1.1274A–1(c)(1) of the Income Tax Reg-ulations provides rules concerning thetime for, and manner of, making this elec-tion.

Section 1274A(d)(2) provides that, forany debt instrument arising out of a sale orexchange during any calendar year after1989, the dollar amounts stated in§ 1274A(b) and § 1274A(c)(2)(A) are in-creased by the inflation adjustment forthe calendar year. Any increase due to theinflation adjustment is rounded to thenearest multiple of $100 (or, if the in-crease is a multiple of $50 and not of$100, the increase is increased to the near-est multiple of $100). The inflation adjust-ment for any calendar year is the percent-age (if any) by which the CPI for thepreceding calendar year exceeds the CPIfor calendar year 1988. Section1274A(d)(2)(B) defines the CPI for anycalendar year as the average of the Con-

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


sumer Price Index as of the close of the12-month period ending on September 30of that calendar year.

INFLATION-ADJUSTED AMOUNTSUNDER § 1274A

For debt instruments arising out ofsales or exchanges after December 31,

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

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

Calendar Year ofSale or Exchange

1274A(b) Amount(qualified debt instrument)

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

debt instrument)

1990 $2,933,200 $2,095,100

1991 $3,079,600 $2,199,700

1992 $3,234,900 $2,310,600

1993 $3,332,400 $2,380,300

1994 $3,433,500 $2,452,500

1995 $3,523,600 $2,516,900

1996 $3,622,500 $2,587,500

1997 $3,723,800 $2,659,900

1998 $3,823,100 $2,730,800

1999 $3,885,500 $2,775,400

2000 $3,960,100 $2,828,700

2001 $4,085,900 $2,918,500

2002 $4,217,500 $3,012,500

2003 $4,280,800 $3,057,700

2004 $4,381,300 $3,129,500

2005 $4,483,000 $3,202,100

2006 $4,630,300 $3,307,400

2007 $4,800,800 $3,429,100

2008 $4,913,400 $3,509,600

2009 $5,131,700 $3,665,500

2010 $5,115,100 $3,653,600

2011 $5,201,300 $3,715,200

2012 $5,339,300 $3,813,800

2013 $5,468,200 $3,905,900

2014 $5,557,200 $3,969,500

2015 $5,647,300 $4,033,800

2016 $5,664,800 $4,046,300

2017 $5,717,400 $4,083,800

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

EFFECT ON OTHER DOCUMENTS

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


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

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


Section 483.—Interest onCertain DeferredPayments.

This ruling provides the dollar amounts, in-creased by the 2017 inflation adjustment, for section1274A of the Code. Rev. Rul. 2015–24 supple-mented and superseded. See Rev. Rul. 2016–30,page 876.

Section 1274.—Determina-tion of Issue Price in theCase of Certain DebtInstruments Issued forProperty.

This ruling provides the dollar amounts, in-creased by the 2017 inflation adjustment, for section1274A of the Code. Rev. Rul. 2015–24 supple-mented and superseded. See Rev. Rul. 2016–30,page 876.

26 CFR 1.704–2; 1.707–3 through 1.707–6, and1.707–9; and 1.752–3: Section 707 regarding dis-guised sales, generally.

T.D. 9787DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part 1

Section 707 RegardingDisguised Sales, Generally

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains fi-nal regulations under sections 707 and752 of the Internal Revenue Code (Code).The final regulations under section 707provide guidance relating to disguisedsales of property to or by a partnershipand the final regulations under section 752provide guidance relating to allocations ofexcess nonrecourse liabilities of a partner-ship to partners for disguised sale pur-poses. The final regulations affect partner-ships and their partners.

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

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

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

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–122855–15), room5203, Internal Revenue Service, PO Box7604, Ben Franklin Station, Washington,DC 20044. Submissions may be hand-delivered Monday through Friday be-tween the hours of 8 a.m. and 4 p.m. to:CC:PA:LPD:PR (REG–122855–15), Couri-er’s Desk, Internal Revenue Service, 1111Constitution Avenue, N.W., Washington,DC, or sent electronically, via the FederaleRulemaking Portal site at http://www.regulations.gov (indicate IRS and REG–122855–15).

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

SUPPLEMENTARY INFORMATION:In addition to these final regulations, theTreasury Department and the IRS are pub-lishing temporary regulations concerninga partner’s share of partnership liabilitiesfor purposes of section 707 (the 707 Tem-porary Regulations) and the treatment ofcertain payment obligations under section752 (the 752 Temporary Regulations) inthe Rules and Regulations section in thisissue of the Bulletin, and, in the ProposedRules section in this issue of the Bulletin,proposed regulations (REG–122855–15)that incorporate the text of the temporaryregulations, withdraw a portion of a noticeof proposed rulemaking (REG–119305–11) to the extent not adopted by the finalregulations, and contain new proposedregulations (the 752 Proposed Regula-tions) addressing (1) when certain obliga-tions to restore a deficit balance in a part-ner’s capital account are disregardedunder section 704 and (2) when a partner-ship’s liabilities are treated as recourseliabilities under section 752.

Paperwork Reduction Act

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

and Budget under control number 1545-0889.

The collection of information in thesefinal regulations under section 707 is in§ 1.707–5(a)(7)(ii) (regarding a liabilityincurred within two years prior to a trans-fer of property) and is reported on Form8275, Disclosure Statement. This infor-mation is required by the IRS to ensurethat section 707(a)(2)(B) of the Code andapplicable regulations are properly ap-plied to transfers between a partner and apartnership.

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

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

Background

1. Overview

This Treasury decision containsamendments to the Income Tax Regula-tions (26 CFR part 1) under sections 707and 752 of the Code related to a notice ofproposed rulemaking published on Janu-ary 30, 2014 in the Federal Register(REG–119305–11, 79 FR 4826) to amendregulations under sections 707 and 752(the 2014 Proposed Regulations). A pub-lic hearing on the 2014 Proposed Regula-tions was not requested or held, but theTreasury Department and the IRS re-ceived written comments. After full con-sideration of the comments, the final reg-ulations contained in this Treasurydecision substantially adopt the 2014 Pro-posed Regulations under section 707 withrevisions to certain proposed rules in re-sponse to comments. The revisions to the2014 Proposed Regulations under section707 adopted in these final regulations arediscussed in the Summary of Commentsand Explanation of Revisions section ofthis preamble. In addition, after consider-ing comments on the 2014 Proposed Reg-ulations under section 752, this Treasurydecision adopts as final regulations provi-sions of the 2014 Proposed Regulations


that amend § 1.752–3, revised in responseto the comments received. Finally, thesefinal regulations adopt provisions of the2014 Proposed Regulations revising§ 1.704–2(d)(2)(ii) and (m) Example 1, tocomport with the provisions in the 752Proposed Regulations and the 752 Tem-porary Regulations relating to “bottomdollar payment obligations.”

However, based on a comment receivedon the 2014 Proposed Regulations request-ing that guidance regarding a partner’s shareof partnership liabilities apply solely for dis-guised sale purposes, the Treasury Depart-ment and the IRS have reconsidered therules under § 1.707–5(a)(2) of the 2014 Pro-posed Regulations for determining a part-ner’s share of partnership liabilities for pur-poses of section 707. Accordingly, in aseparate Treasury decision (TD 9788), theTreasury Department and the IRS are alsopublishing the 707 Temporary Regulationsthat require a partner to apply the samepercentage used to determine the partner’sshare of excess nonrecourse liabilities under§ 1.752–3(a)(3) (with certain limitations) indetermining the partner’s share of partner-ship liabilities for disguised sale purposes.That Treasury decision also contains the 752Temporary Regulations providing guidanceon the treatment of “bottom dollar paymentobligations.” Cross-referencing proposedregulations providing additional opportunityfor comment are contained in the relatednotice of proposed rulemaking (REG–122855–15) published in the ProposedRules section in this issue of the Bulletin.

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

2. Summary of Applicable Law

A. Section 707

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

to and by a partnership that, when viewedtogether, are more properly characterizedas a sale or exchange of property, will betreated either as a transaction between thepartnership and one who is not a partneror between two or more partners actingother than in their capacity as partners.Generally under § 1.707–3, a transfer ofproperty by a partner to a partnership fol-lowed by a transfer of money or otherconsideration from the partnership to thepartner will be treated as a sale of propertyby the partner to the partnership (a dis-guised sale), if based on all the facts andcircumstances, the transfer of money orother consideration would not have beenmade but for the transfer of property and,for non-simultaneous transfers, the subse-quent transfer is not dependent on theentrepreneurial risks of the partnership.

The existing regulations under section707, however, provide several exceptions.One exception is in § 1.707–4(d) for re-imbursements of capital expenditures.Section 1.707–4(d) excepts transfers ofmoney or other consideration from a part-nership to reimburse a partner for certaincapital expenditures and costs incurred bythe partner from being treated as part of adisguised sale of property under § 1.707–3(exception for preformation capital expen-ditures). The exception for preformationcapital expenditures generally appliesonly to the extent that the reimbursed cap-ital expenditures do not exceed 20 percentof the fair market value of the propertytransferred by the partner to the partner-ship (the 20-percent limitation). The 20-percent limitation, however, does not ap-ply if the fair market value of thetransferred property does not exceed 120percent of the partner’s adjusted basis inthe property at the time of the transfer (the120-percent test).

Another exception is in § 1.707–5(b),which generally provides that if a partnertransfers property to a partnership, thepartnership incurs a liability and all or aportion of the proceeds of that liability aretraceable to a transfer of money or otherconsideration to the partner, the transfer ofmoney or other consideration is taken intoaccount for purposes of § 1.707–3 only tothe extent that the amount of money or thefair market value of other considerationexceeds the partner’s allocable share of

the partnership liability (the debt-financeddistribution exception).

In addition to the exception for prefor-mation capital expenditures and the debt-financed distribution exception, the dis-guised sale rules generally exclude certaintypes of liabilities from disguised saletreatment. Generally under § 1.707–5(a)(5), a partnership’s assumption of aqualified liability, or a partnership’s tak-ing property subject to a qualified liability,in connection with a transfer of propertyby a partner to the partnership is nottreated as part of a disguised sale. Section1.707–5(a)(6) of the existing regulationsdefines four types of liabilities that arequalified liabilities. One type of qualifiedliability is a liability that is allocable un-der the rules of § 1.163–8T to capitalexpenditures with respect to the propertytransferred to the partnership. Anothertype is one incurred in the ordinary courseof the trade or business in which propertytransferred to the partnership was used orheld, but only if all of the assets that arematerial to that trade or business are trans-ferred to the partnership. The other twotypes of qualified liabilities are liabilitiesincurred more than two years before thetransfer of property to the partnership andliabilities incurred within two years of thetransfer of the property to the partnership,but not in anticipation of transfer to thepartnership. In order to qualify as one ofthese types of liabilities, it is required thatthe liability encumber the transferredproperty.

B. Determining a partner’s share ofliability for disguised sale purposes

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


plying the same percentage used to deter-mine the partner’s share of the excessnonrecourse liabilities under § 1.752–3(a)(3). Generally, a partner’s share ofexcess nonrecourse liabilities is deter-mined in accordance with the partner’sshare of partnership profits taking into ac-count all facts and circumstances relatingto the economic arrangement of the part-ners. A partnership liability is a nonre-course liability under section 707 to theextent that the obligation is a nonrecourseliability under § 1.752–1(a)(2). Also forpurposes of the rules under section 707, apartner’s share of a liability assumed ortaken subject to by a partnership is deter-mined by taking into account certain sub-sequent reductions in the partner’s shareof the liability under an anticipated reduc-tion rule.

C. Section 752 allocation of excessnonrecourse liabilities

Section 1.752–3(a)(3) provides variousmethods to determine a partner’s share ofexcess nonrecourse liabilities. Under onemethod, a partner’s share of excess non-recourse liabilities of the partnership isdetermined in accordance with the part-ner’s share of partnership profits, whichtakes into account all facts and circum-stances relating to the economic arrange-ment of the partners. For this purpose, thepartnership agreement may specify thepartners’ interests in partnership profits solong as the interests so specified are rea-sonably consistent with allocations (thathave substantial economic effect underthe section 704(b) regulations) of someother significant item of partnership in-come or gain (the significant itemmethod). Alternatively, excess nonre-course liabilities may be allocated amongpartners in a manner that deductions at-tributable to those liabilities are reason-ably expected to be allocated (alternativemethod). Additionally, the partnershipmay first allocate an excess nonrecourseliability to a partner up to the amount ofbuilt-in gain that is allocable to the partneron section 704(c) property (as defined un-der § 1.704–3(a)(3)(ii)) or property forwhich reverse section 704(c) allocationsare applicable (as described in § 1.704–3(a)(6)(i)) where such property is subjectto the nonrecourse liability, to the extent

that such built-in gain exceeds the gaindescribed in § 1.752–3(a)(2) with respectto such property (additional method). Thisadditional method does not apply in de-termining a partner’s share of a liabilityfor disguised sale purposes.

3. The 2014 Proposed Regulations

As discussed in greater detail in theSummary of Comments and Explanationof Provisions section of this preamble, the2014 Proposed Regulations, as they per-tained to section 707, were intended toaddress certain deficiencies and ambigui-ties under existing regulations §§ 1.707–3,1.707–4, and 1.707–5. The 2014 Pro-posed Regulations, among other things,provided rules that (1) clarified that in thecase of multiple property contributions toa partnership, the exception for preforma-tion capital expenditures applies on aproperty-by-property basis, (2) clarifiedthe definition of capital expendituresfor the purpose of the exception for pre-formation capital expenditures, (3) coor-dinated the exception for preformationcapital expenditures and the rules regard-ing liabilities traceable to capital expendi-tures, (4) added a new type of qualifiedliability, (5) prescribed an ordering rulefor applying the debt-financed distributionexception where other exceptions also po-tentially applied, (6) specified that a re-duction that is subject to the entrepreneur-ial risks of the partnership is not ananticipated reduction for purposes of therule taking into account an anticipated re-duction in a partner’s share of a liability,(7) clarified, with respect to tiered partner-ships, the application of the debt-financeddistribution exception and the applicationof the rules for qualified liabilities, and (8)extended the principles of § 1.752–1(f)providing for netting of increases and de-creases in a partner’s share of liabilitiesresulting from a single transaction to thedisguised sale rules.

Summary of Comments andExplanation of Revisions

1. Preformation Capital Expenditures

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

and costs incurred by the partner frombeing treated as part of a disguised sale ofproperty under § 1.707–3, subject to the20 percent limitation and the 120 percenttest.

The 2014 Proposed Regulations undersection 707 provided that the determina-tion of whether the 20 percent limitationand the 120 percent test apply to reim-bursements of capital expenditures ismade, in the case of multiple propertytransfers, separately for each property thatqualifies for the exception (property-by-property rule). Commenters generallysupported the property-by-property rulebut noted that in some circumstances theapproach may be burdensome and recom-mended limited aggregation of certainproperty. After considering the comments,the Treasury Department and the IRShave determined that limited aggregationof property is warranted in certain cases toreduce the burden of separately account-ing for each property under the property-by-property rule. Thus, the final regula-tions adopt the proposed rule but permitaggregation to the extent: (i) the total fairmarket value of the aggregated property(of which no single property’s fair marketvalue exceeds 1 percent of the total fairmarket value of such aggregated property)is not greater than the lesser of 10 percentof the total fair market value of all prop-erty, excluding money and marketable se-curities (as defined under section 731(c)),transferred by the partner to the partner-ship, or $1,000,000; (ii) the partner uses areasonable aggregation method that isconsistently applied; and (iii) the aggrega-tion of property is not part of a plan aprincipal purpose of which is to avoid§§ 1.707–3 through 1.707–5. Addition-ally, the final regulations add an exampleto illustrate the application of theproperty-by-property rule when a partnertransfers both tangible and intangibleproperty to a partnership.

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


property transferred to the partnership bythe partner is a qualified liability (capitalexpenditure qualified liability). Generallyunder § 1.707–5(a)(5), a partnership’s as-sumption of a qualified liability, or a part-nership’s taking property subject to aqualified liability, in connection with atransfer of property by a partner to thepartnership is not treated as part of a dis-guised sale. To coordinate the exceptionfor preformation capital expenditures andthe capital expenditure qualified liabilityrule under § 1.707–5(a)(6)(i)(C), the 2014Proposed Regulations provided that to theextent a partner funded a capital expendi-ture through a capital expenditure quali-fied liability and economic responsibilityfor that borrowing shifts to another part-ner, the exception for preformation capitalexpenditures would not apply becausethere is no outlay by the partner to reim-burse.

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

Finally, it has come to the attention ofthe Treasury Department and the IRS thatsome partners have taken the position thatthe disclosure requirements of § 1.707–3(c)(2) are not applicable to situations inwhich the partners believe that one or

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

Notwithstanding the final regulations,the Treasury Department and the IRS con-tinue to study the appropriateness of theexception for preformation capital expen-ditures. Specifically, because the receiptof “boot” in the context of other nonrec-ognition transactions, for example, trans-fers of property to corporations in section351 transactions, is generally taxable tothe transferor, the Treasury Departmentand the IRS are considering whether theexception for preformation capital expen-ditures is appropriate and request com-ments on whether the regulations shouldcontinue to include the exception, in-cluding any policy justifications forkeeping the exception, and on the ef-fects that removing the exception mayhave. In addition, the Treasury Depart-ment and the IRS are concerned thatpartners and partnerships may be at-tempting to apply the exception in anunintended manner such that the excep-tion may be subject to potential abusesin certain circumstances that could ef-fectively refresh expenditures not in-curred within the two-year period pre-ceding a contribution to a partnership(for example, where an entity treats as acapital expenditure an issuance of itsown interest in exchange for propertycontributed to it in a nonrecognitiontransaction). Also, the Treasury Depart-ment and the IRS are aware that a con-tribution to a partnership of an intangi-ble such as goodwill, may, in certaincircumstances, give rise to an unin-tended benefit under the exception. TheTreasury Department and the IRS arestudying the potential for abuse underthe exception for preformation capitalexpenditures, including any unintendedbenefits with respect to intangibles, forwhich the final regulations reserve a sec-tion under the exception.

2. Partner’s Share of PartnershipLiabilities

As is discussed in the preamble to the707 Temporary Regulations, after consid-ering the comments on the 2014 ProposedRegulations under both sections 707 and752, the Treasury Department and the IRShave determined that, for disguised salepurposes only, it is appropriate for part-ners to determine their share of any liabil-ity, whether recourse or nonrecourse, inthe manner in which excess nonrecourseliabilities are allocated under § 1.752–3(a)(3). Accordingly, under the 707 Tem-porary Regulations a partner’s share ofany partnership liability for disguised salepurposes is determined using the samepercentage used to determine the partner’sshare of the partnership’s excess nonre-course liabilities under § 1.752–3(a)(3)based on the partner’s share of partnershipprofits. Thus, the 707 Temporary Regula-tions treat all partnership liabilities,whether recourse or nonrecourse, as non-recourse liabilities solely for disguisedsale purposes under section 707. Thesefinal regulations, however, provide limita-tions on the available allocation methodsunder § 1.752–3(a)(3), applicable solelyfor disguised sale purposes under section707, for determining a partner’s share ofexcess nonrecourse liabilities.

For purposes of allocating excess non-recourse liabilities under § 1.752–3(a)(3),proposed § 1.752–3(a)(3) removed thesignificant item method and the alterna-tive method, but provided a new approachbased on a partner’s liquidation value per-centage. Under the 2014 Proposed Regu-lations, a partner’s liquidation value per-centage was a ratio (expressed as apercentage) of the liquidation value of thepartner’s interest in the partnership to theliquidation value of all of the partners’interests in the partnership. The liquida-tion value of a partner’s interest in a part-nership was defined as the amount of cashthe partner would receive with respect tothe interest if, immediately after formationof the partnership or the occurrence of anevent described in § 1.704–1(b)(2)(iv)(f)(5), as the case may be, the partnershipsold all of its assets for cash equal to thefair market value of such property (takinginto account section 7701(g)), satisfied allof its liabilities (other than those described


in § 1.752–7), paid an unrelated thirdparty to assume all of its § 1.752–7 liabil-ities in a fully taxable transaction, andthen liquidated.

Commenters expressed concerns withthe scope of changes to § 1.752–3(a)(3) inthe 2014 Proposed Regulations and sug-gested that such changes should be ad-opted, if at all, for disguised sale purposesonly. Additionally, one commenter notedthat in all but the simplest of partnershipsthe liquidation value percentage may havelittle or no relationship to the partners’share of profits and therefore is inconsis-tent with the general rule for allocatingexcess nonrecourse liabilities. Anothercommenter thought the liquidation valuepercentage approach could be subject tomanipulation. Partially in response tocommenters’ concerns about both the liq-uidation value percentage and the rela-tionship between the methods and certainrules under § 1.704–2, the final regula-tions under § 1.752–3 retain the signifi-cant item method and the alternativemethod, but do not adopt the liquidationvalue percentage approach for determin-ing partners’ interests in partnership prof-its. However, the Treasury Departmentand the IRS have concluded that the allo-cation of excess nonrecourse liabilities inaccordance with the significant itemmethod and the alternative method hasbeen abused by partnerships and theirpartners for disguised sale purposes undersection 707. Therefore, as suggested bysome commenters, the final regulationsunder § 1.752–3 provide that, along withthe additional method, the significant itemmethod and the alternative method do notapply for purposes of determining a part-ner’s share of a partnership liability fordisguised sale purposes.

In addition to the changes to § 1.752–3,the final regulations revise Example 1 un-der § 1.707–5(f) and Example 2 under§ 1.707–6(d) to update some of the crossreferences to the liability allocation rule inthe 707 Temporary Regulations. The finalregulations also revise Examples 5 and 6under § 1.707–5(f) and Examples 10 and12 under proposed § 1.707–5(f) to removethe assumption that the liability is a re-course liability.

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

poses is based on the partner’s share ofpartnership profits, a partner cannot beallocated 100 percent of the liabilities forpurposes of section 707. As a result, someamount of the liabilities, both qualifiedliabilities and nonqualified liabilities, mayshift among partners. The shifting of evena minimal amount of a nonqualified lia-bility that triggers a disguised sale cancause a portion of the qualified liability tobe treated as consideration under § 1.707–5(a)(5). Section 1.707–5(a)(5) provides aspecial rule when a partnership’s assump-tion of, or taking property subject to, aqualified liability is treated as a transfer ofconsideration made pursuant to a sale duesolely to the partnership’s assumption of,or taking property subject to, a liabilityother than a qualified liability. To mitigatethe effect of the allocation method fordisguised sales, the final regulations in-clude a rule under § 1.707–5(a)(5) thatdoes not take into account qualified liabil-ities as consideration in transfers of prop-erty treated as a sale when the totalamount of all liabilities other than quali-fied liabilities that the partnership assumesor takes subject to is the lesser of 10percent of the total amount of all qualifiedliabilities the partnership assumes or takessubject to, or $1,000,000.

3. Step-in-the-Shoes Rule RegardingPreformation Capital Expenditures andLiabilities Incurred by Another Person

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

preformation capital expenditures and de-termining whether a liability is a qualifiedliability under § 1.707–5(a)(6). Similar toa corporation that acquires assets in a sec-tion 381(a) transaction, a partner that ac-quires property, assumes a liability, ortakes property subject to a liability fromanother person in connection with certainother nonrecognition transactions shouldsucceed to the status of the other personfor purposes of applying the exception forpreformation capital expenditures and de-termining whether a liability is a qualifiedliability under § 1.707–5(a)(6). Thus, thefinal regulations provide a “step-in-the-shoes” rule for applying the exception forpreformation capital expenditures and fordetermining whether a liability is a qual-ified liability under § 1.707–5(a)(6) whena partner acquires property, assumes a li-ability, or takes property subject to a lia-bility from another person in connectionwith a nonrecognition transaction undersection 351, 381(a), 721, or 731. As aresult, Rev. Rul. 2000–44, relating to pre-formation capital expenditures and quali-fied liabilities involved in a transactiondescribed in section 381(a), is supersededby these final regulations.

4. Anticipated Reduction

Under the existing regulations, for pur-poses of the rules under section 707, apartner’s share of a liability assumed ortaken subject to by a partnership is deter-mined by taking into account certain sub-sequent reductions in the partner’s shareof the liability. See § 1.707–5(a)(3) and(b)(2)(iii). The 2014 Proposed Regula-tions provided that if, within two years ofthe partnership assuming, taking propertysubject to, or incurring a liability, a part-ner’s share of the liability is reduced dueto a decrease in the partner’s or a relatedperson’s net value, then the reduction willbe presumed to be anticipated and must bedisclosed under § 1.707–8, unless thefacts and circumstances clearly establishthat the decrease in the net value was notanticipated. Because the 707 TemporaryRegulations provide that a partner’s shareof any liability for disguised sale purposesis determined in accordance with the part-ner’s interest in partnership profits under§ 1.752–3(a)(3), net value is not relevantin determining a partner’s share of part-


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

5. Tiered Partnerships

The existing regulations in § 1.707–5(e), and § 1.707–6(b) by applying rulessimilar to § 1.707–5(e), provide only alimited tiered-partnership rule for cases inwhich a partnership succeeds to a liabilityof another partnership. The 2014 Pro-posed Regulations added additional rulesregarding tiered partnerships. One rule re-lated to the characterization of liabilitiesattributable to a contributed partnershipinterest. Under that proposed rule, a con-tributing partner’s share of a liability froma lower-tier partnership is treated as aqualified liability to the extent the liabilitywould be a qualified liability had the lia-bility been assumed or taken subject to bythe upper-tier partnership in connectionwith a transfer of all of the lower-tierpartnership’s property to the upper-tierpartnership by the lower-tier partnership.The final regulations retain this proposedrule but, in response to comments, addresswhose intent, the partner’s or the lower-tier partnership’s, is relevant when apply-ing the anticipated transfer of propertyrule in § 1.707–5(a)(6) for purposes ofdetermining whether a liability constitutesa qualified liability. The comments sug-gested that it should be the intent of thepartner as to whether the partner antici-pated transferring its interest in the lower-tier partnership to the upper-tier partner-ship at the time the lower-tier partnershipincurred the liability.

The Treasury Department and the IRSagree that the intent of the partner is theappropriate inquiry in applying the antic-ipated transfer of property rule under§ 1.707–5(a)(6) in the context of contri-butions of a partnership interest. Thus, thefinal regulations provide that in determin-ing whether a liability would be a quali-fied liability under § 1.707–5(a)(6)(i)(B)or (E), the determination of whether theliability was incurred in anticipation of thetransfer of property to the upper-tier part-nership is based on whether the partner inthe lower-tier partnership anticipatedtransferring the partner’s interest in the

lower-tier partnership to the upper-tierpartnership at the time the liability wasincurred by the lower-tier partnership.

Commenters also requested that the fi-nal regulations allow for the application ofthe exception for preformation capital ex-penditures when a person incurs capitalexpenditures with respect to property,transfers the property to a partnership(lower-tier partnership), and then transfersan interest in the lower-tier partnership toanother partnership (upper-tier partner-ship) within the two-year period in whichthe person incurred the capital expendi-tures. The Treasury Department and theIRS have determined that such a rule iswarranted, subject to certain limitations.Therefore, the final regulations providethat, in such circumstances, and providedsuch expenditures are not otherwise reim-bursed to the person, the upper-tier part-nership “steps in the shoes” of the personwith respect to the property for which thecapital expenditures were incurred andmay be reimbursed for the capital expen-ditures by the lower-tier partnership to thesame extent that the person could havebeen reimbursed by the lower-tier partner-ship. In addition, the person is deemed tohave transferred the property, rather thanthe partnership interest, to the upper-tierpartnership for purposes of the exceptionfor preformation capital expenditures and,accordingly, may be reimbursed by theupper-tier partnership to the extent theperson could have been previously reim-bursed by the lower-tier partnership. Theaggregate reimbursements for capital ex-penditures under this rule cannot exceedthe amount that the person could havebeen reimbursed for such capital expendi-tures under § 1.707–4(d)(1).

6. Treatment of Liabilities in Assets-Over Merger

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

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

ment of liabilities in an assets-over mergeris needed in § 1.707–5. In many instances,liabilities involved in such a merger willconstitute qualified liabilities, especiallygiven that the final regulations adopt a“step-in-the-shoes” rule for liabilities ac-quired by a partner from another person incertain nonrecognition transactions. Incases in which liabilities involved in anassets-over merger do not constitute qual-ified liabilities, the facts and circum-stances test in § 1.707–3 should reach theproper result. Thus, the final regulationsdo not retain the proposed rule for part-nership assets-over mergers or consolida-tions.

7. Disguised Sales of Property by aPartnership to a Partner

Under § 1.707–6, rules similar to thoseprovided in § 1.707–3 apply in determin-ing whether a transfer of property by apartnership to a partner and one or moretransfers of money or other considerationby that partner to the partnership aretreated as a disguised sale of property, inwhole or in part, to the partner. The Trea-sury Department and the IRS requested inthe preamble to the 2014 Proposed Regu-lations comments on whether, for pur-poses of § 1.707–6, it is inappropriate totake into account a transferee partner’sshare of a partnership liability immedi-ately prior to a distribution if the trans-feree partner did not have economic ex-posure with respect to the partnershipliability for a meaningful period of timebefore appreciated property is distributedto that partner subject to the liability.Commenters suggested that § 1.707–6should be amended to take into accountthe transitory nature of a partner’s share ofnonqualified liabilities.

Because under the 707 TemporaryRegulations a partner’s share of all liabil-ities is determined for disguised sale pur-poses in accordance with the partner’sinterest in partnership profits under§ 1.752–3(a)(3), the transitory nature of apartner’s share of nonqualified liabilitiesis no longer an issue. Under that allocationmethod, an allocation of a 100 percentshare of a liability to a partner immedi-ately before a transfer of property by thepartnership to the partner in which thetransferee partner assumes the liability


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

Effective/Applicability Dates

With respect to amendments to §§ 1.707–3 through 1.707–6, the final regulationsunder section 707 apply to any transactionwith respect to which all transfers occuron or after October 5, 2016.

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

Effect on Other Documents

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

Special Analyses

Certain IRS regulations, including thisone, are exempt from the requirements ofExecutive Order 12866, as supplementedand reaffirmed by Executive Order 13563.Therefore, a regulatory impact assessmentis not required. It also has been deter-mined that section 553(b) of the Admin-istrative Procedure Act (5 U.S.C. chapter5) does not apply to these regulations. It ishereby certified that the collection of in-formation in these regulations will nothave a significant economic impact on asubstantial number of small entities. Thiscertification is based on the fact that theamount of time necessary to report therequired information will be minimal inthat it requires partners to provide infor-mation they already maintain or can easilyobtain to the IRS. Moreover, it shouldtake a partner no more than 1 hour tosatisfy the information requirement inthese regulations. Accordingly, a Regula-tory Flexibility Analysis under the Regu-latory Flexibility Act (5 U.S.C. chapter 6)

does not apply. Pursuant to section7805(f) of the Code, the notice of pro-posed rulemaking preceding these regula-tions was submitted to the Chief Counselfor Advocacy of the Small Business Ad-ministration for comment on its impact onsmall business.

Drafting Information

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

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR part 1 isamended as follows:

PART 1—INCOME TAXES

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

Authority: 26 U.S.C. 7805 * * *Sections 1.707–2 through 1.707–9 also

issued under 26 U.S.C. 707(a)(2)(B).

§ 1.704–2 [Amended]

Par. 2. Section 1.704–2 is amended by:1. Removing the language “and (vii)”

in paragraph (d)(2)(ii).2. Removing the language “Example

(1)(viii) and (ix)” in paragraph (i)(2) andadding the language “Example (1)(vii)and (viii)” in its place.

3. Removing the language “Example(1)(viii)” in paragraph (i)(5) and addingthe language “Example (1)(vii)” in itsplace.

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

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

Par. 3. Section 1.707–0 is amended by:1. Adding entries for §§ 1.707–4(d)(1),

(d)(2) through (4), (d)(4)(i) and (ii), (d)(5)and (6), and (f).

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

The additions read as follows:

§ 1.707–0 Table of contents.

* * * * *

§ 1.707–4 Disguised sales of property topartnership; special rules applicable toguaranteed payments, preferred returns,operating cash flow distributions, andreimbursements of preformationexpenditures.

* * * * *(d) * * *(1) In general.(2) Capital expenditures incurred by an-other person.(3) Contribution of a partnership interestwith capital expenditures property.(4) Special rule for qualified liabilities.(i) In general.(ii) Anti-abuse rule.(5) Scope of capital expenditures.(6) Example.* * * * *(f) Ordering rule cross reference.* * * * *

§ 1.707–5 Disguised sales of property topartnership; special rules relating toliabilities.

(a) * * *(8) Liability incurred by another person.(b) * * *(3) Ordering rule.* * * * *

Par. 4. Section 1.707–4 is amended by:1. Redesignating the text of paragraph

(d) introductory text after its subject head-ing as paragraph (d)(1) and adding a para-graph (d)(1) subject heading.

2. Redesignating paragraph (d)(1) asparagraph (d)(1)(i).

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

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

5. Redesignating paragraph (d)(2)(ii)as paragraph (d)(1)(ii)(B) and revising it.

6. Adding reserved paragraph (d)(1)(ii)(C) and paragraphs (d)(2) through(6) and (f).

The additions and revisions read as fol-lows:


§ 1.707–4 Disguised sales of property topartnership; special rules applicable toguaranteed payments, preferred returns,operating cash flow distributions, andreimbursements of preformationexpenditures.

* * * * *(d) * * *(1) In general. * * *(ii) * * *(B) Property transferred to the partner-

ship by the partner, but only to the extentthe reimbursed capital expenditures do notexceed 20 percent of the fair market valueof such property at the time of the transfer(the 20-percent limitation). However, the20-percent limitation of this paragraph(d)(1)(ii)(B) does not apply if the fair mar-ket value of the transferred property doesnot exceed 120 percent of the partner’sadjusted basis in the transferred propertyat the time of the transfer (the 120-percenttest). This paragraph (d)(1)(ii)(B) shall beapplied on a property-by-property basis,except that a partner may aggregate any ofthe transferred property under this para-graph (d)(1) to the extent—

(1) The total fair market value of suchaggregated property (of which no singleproperty’s fair market value exceeds 1percent of the total fair market value ofsuch aggregated property) is not greaterthan the lesser of 10 percent of the totalfair market value of all property, exclud-ing money and marketable securities (asdefined under section 731(c)), transferredby the partner to the partnership, or$1,000,000;

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

(3) Such aggregation of property is notpart of a plan a principal purpose of whichis to avoid §§ 1.707–3 through 1.707–5.

(C) [Reserved].(2) Capital expenditures incurred by

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

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

(3) Contribution of a partnership inter-est with capital expenditures property. If aperson transfers property with respect towhich the person incurred capital expen-ditures (capital expenditures property) to apartnership (lower-tier partnership) and,within the two-year period beginning onthe date upon which the person incurredthe capital expenditures, transfers an in-terest in the lower-tier partnership to an-other partnership (upper-tier partnership)in a nonrecognition transaction under sec-tion 721, the upper-tier partnership stepsin the shoes of the person who transferredthe capital expenditures property to thelower-tier partnership with respect to thecapital expenditures that are not otherwisereimbursed to the person. The upper-tierpartnership may be reimbursed by thelower-tier partnership under paragraph(d)(1) of this section to the extent theperson could have been reimbursed for thecapital expenditures by the lower-tierpartnership under paragraph (d)(1) of thissection. In addition, for purposes of para-graph (d)(1) of this section, the person isdeemed to have transferred the capital ex-penditures property to the upper-tier part-nership and may be reimbursed by theupper-tier partnership under paragraph(d)(1) of this section to the extent theperson could have been reimbursed for thecapital expenditures by the lower-tierpartnership under paragraph (d)(1) of thissection and has not otherwise been previ-ously reimbursed. The aggregate reim-bursements for capital expenditures underthis paragraph (d)(3) shall not exceed theamount that the person could have beenreimbursed for such capital expendituresunder paragraph (d)(1) of this section.

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

to the partner exceeds the partner’s shareof the qualified liability (as determinedunder § 1.707–5(a)(2), (3), and (4)). Cap-ital expenditures are treated as funded bythe proceeds of a qualified liability to theextent the proceeds are either traceable tothe capital expenditures under § 1.163–8Tor were actually used to fund the capitalexpenditures, irrespective of the tracingrequirements under § 1.163–8T.

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

(5) Scope of capital expenditures. Forpurposes of this section and § 1.707–5, theterm capital expenditures has the samemeaning as the term capital expenditureshas under the Internal Revenue Code andapplicable regulations, except that it in-cludes capital expenditures taxpayerselect to deduct, and does not include de-ductible expenses taxpayers elect to treatas capital expenditures.

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

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

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


* * * * *(f) Ordering rule cross reference. For

payments or transfers by a partnership to apartner to which the rules under this sec-tion and § 1.707–5(b) apply, see the or-dering rule under § 1.707–5(b)(3).

Par. 5. Section 1.707–5 is amended by:1. Revising paragraph (a)(3).2. Adding paragraph (a)(5)(iii).3. Revising paragraph (a)(6)(i)(C).4. Removing “and” at the end of para-

graph (a)(6)(i)(D) and adding “or” in itsplace.

5. Adding paragraph (a)(6)(i)(E).6. Revising paragraph (a)(7)(ii).7. Adding paragraph (a)(8).8. Adding a sentence at the end of

paragraph (b)(1).9. Removing the word “property” in

paragraph (b)(2)(i)(A) and adding theword “consideration” in its place.

10. Revising paragraph (b)(2)(iii).11. Adding paragraph (b)(3).12. Designating the text of paragraph

(e) after its subject heading as paragraph(e)(1) and adding paragraph (e)(2).

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

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

The additions and revisions read as fol-lows:


(a) * * *(3) Reduction of partner’s share of li-

ability. For purposes of this section, apartner’s share of a liability, immediatelyafter a partnership assumes or takes prop-erty subject to the liability, is determinedby taking into account a subsequent re-duction in the partner’s share if—

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

(ii) The anticipated reduction is notsubject to the entrepreneurial risks of part-nership operations; and

(iii) The reduction of the partner’sshare of the liability is part of a plan thathas as one of its principal purposes mini-

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

(5) * * *(iii) Notwithstanding paragraph (a)(5)

(i) of this section, in connection with atransfer of property by a partner to a part-nership that is treated as a sale due solelyto the partnership’s assumption of or tak-ing property subject to a liability otherthan a qualified liability, the partnership’sassumption of or taking property subjectto a qualified liability is not treated as atransfer of consideration made pursuant tothe sale if the total amount of all liabilitiesother than qualified liabilities that thepartnership assumes or takes subject to isthe lesser of 10 percent of the total amountof all qualified liabilities the partnershipassumes or takes subject to, or$1,000,000.

(6) * * *(i) * * *(C) A liability that is allocable under

the rules of § 1.163–8T to capital expen-ditures (as described under § 1.707–4(d)(5)) with respect to the property;* * * * *

(E) A liability that was not incurred inanticipation of the transfer of the propertyto a partnership, but that was incurred inconnection with a trade or business inwhich property transferred to the partner-ship was used or held but only if all theassets related to that trade or business aretransferred other than assets that are notmaterial to a continuation of the trade orbusiness (see paragraph (a)(7) of this sec-tion for further rules regarding a liabilityincurred within two years of a transferpresumed to be in anticipation of thetransfer); and* * * * *

(7) * * *(ii) Disclosure of transfers of property

subject to liabilities incurred within twoyears of the transfer. A partner that treatsa liability assumed or taken subject to bya partnership in connection with a transferof property as a qualified liability underparagraph (a)(6)(i)(B) of this section orunder paragraph (a)(6)(i)(E) of this sec-tion (if the liability was incurred by thepartner within the two-year period prior tothe earlier of the date the partner agrees in

writing to transfer the property or the datethe partner transfers the property to thepartnership) must disclose such treatmentto the Internal Revenue Service in accor-dance with § 1.707–8.

(8) Liability incurred by another per-son. Except as provided in paragraph(e)(2) of this section, a partner steps in theshoes of a person for purposes of para-graph (a) of this section with respect to aliability the person incurred or assumed tothe extent the partner assumed or tookproperty subject to the liability from theperson in a nonrecognition transaction de-scribed in section 351, 381(a), 721, or731.

(b) * * *(1) * * * For purposes of paragraph (b)

of this section, an upper-tier partnership’sshare of the liability of a lower-tier part-nership as described under § 1.707–5(a)(2) that is treated as a liability of theupper-tier partnership under § 1.752–4(a)shall be treated as a liability of the upper-tier partnership incurred on the same daythe liability was incurred by the lower-tierpartnership.

(2) * * *(iii) Reduction of partner’s share of

liability. For purposes of paragraph (b)(2)of this section, a partner’s share of a lia-bility immediately after a partnership in-curs the liability is determined by takinginto account a subsequent reduction in thepartner’s share if—

(A) At the time that the partnershipincurs the liability, it is anticipated that thepartner’s share of the liability that is allo-cable to a transfer of money or other con-sideration to the partner will be reducedsubsequent to the transfer;

(B) The anticipated reduction is notsubject to the entrepreneurial risks of part-nership operations; and

(C) The reduction of the partner’s shareof the liability is part of a plan that has asone of its principal purposes minimizingthe extent to which the partnership’s dis-tribution of the proceeds of the borrowingis treated as part of a sale.

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

(e) * * *


(2) If an interest in a partnership thathas one or more liabilities (the lower-tierpartnership) is transferred to another part-nership (the upper-tier partnership), theupper-tier partnership’s share of any lia-bility of the lower-tier partnership that istreated as a liability of the upper-tier part-nership under § 1.752–4(a) is treated as aqualified liability under paragraph (a)(6)(i) of this section to the extent the lia-bility would be a qualified liability underparagraph (a)(6)(i) of this section had theliability been assumed or taken subject toby the upper-tier partnership in connec-tion with a transfer of all of the lower-tierpartnership’s property to the upper-tierpartnership by the lower-tier partnership.For purposes of determining whether theliability constitutes a qualified liability un-der paragraphs (a)(6)(i)(B) and (E) of thissection, a determination that the liabilitywas not incurred in anticipation of thetransfer of property to the upper-tier part-nership is based on whether the partnerin the lower-tier partnership anticipatedtransferring its interest in the lower-tierpartnership to the upper-tier partnership atthe time the liability was incurred by thelower-tier partnership.

(f) * * *Example 1. Partnership’s assumption of nonre-

course liability encumbering transferred property.(i) A and B form partnership AB, which will engagein renting office space. A transfers $500,000 in cashto the partnership, and B transfers an office buildingto the partnership. At the time it is transferred to thepartnership, the office building has a fair marketvalue of $1,000,000, has an adjusted basis of$400,000, and is encumbered by a $500,000 nonre-course liability, which B incurred 12 months earlierto finance the acquisition of other property andwhich the partnership assumed. No facts rebut thepresumption that the liability was incurred in antic-ipation of the transfer of the property to the partner-ship. Assume that this liability is a nonrecourseliability of the partnership within the meaning ofsection 752 and the regulations thereunder. The part-nership agreement provides that partnership itemswill be allocated equally between A and B, includingexcess nonrecourse liabilities under § 1.752–3(a)(3).The partnership agreement complies with the re-quirements of § 1.704–1(b)(2)(ii)(b).

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

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

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

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

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

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

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

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

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

(iii) F’s net equity percentage with respect toproperty Z equals the fraction determined by divid-ing—

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

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

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

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

(ii) Because a portion of the transfer made to Kon November 17, 2017, is allocable under§ 1.163–8T to proceeds of a partnership liability thatwas incurred by the partnership within 90 days ofthat transfer, K is required to take the transfer intoaccount in applying the rules of this section and§ 1.707–3 only to the extent that the amount of thetransfer exceeds K’s allocable share of the liabilityused to fund the transfer. K’s allocable share of the$20,000 liability used to fund $10,000 of the transferto K is $5,000 (K’s share of the liability ($10,000)multiplied by the fraction obtained by dividing—

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

(B) The total amount of such liability ($20,000)).(iii) Therefore, K is required to take into account

$15,000 of the $20,000 partnership transfer to K forpurposes of this section and § 1.707–3. Under thesefacts, assuming no other exception applies and thewithin-two-year presumption is not rebutted, this$15,000 transfer will be treated under the rule in§ 1.707–3 as part of a sale by K of property Z to thepartnership.

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


transfer to K is allocable under the rules of § 1.163–8Tto proceeds of the partnership liability incurred onSeptember 13, 2017. In addition, the partnership agree-ment provides that K is to receive a guaranteed pay-ment for the use of K’s capital in the amount of$10,000 in each of the three years following the trans-fer of property Z. Ten thousand dollars of the transfermade to K on November 17, 2017, is pursuant to thisprovision of the partnership agreement. Assume thatthe guaranteed payment to K constitutes a reasonableguaranteed payment within the meaning of § 1.707–4(a)(3).

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

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

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

(iii) The remaining $10,000 amount of the trans-fer to K that exceeds K’s allocable share of theliability is tested to determine whether an exceptionunder § 1.707–4 applies. Because $10,000 of thepayment to K is a reasonable guaranteed payment forcapital under § 1.707–4(a)(1)(ii), the $10,000 trans-fer will not be treated as part of a sale by K ofproperty Z to the partnership under § 1.707–3.

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

(ii) Because the partnership transferred pursuantto a plan a portion of the proceeds of the two liabil-ities to O and P, paragraph (b)(1) of this section isapplied by treating Liability 1 and Liability 2 as asingle $12,000 liability. Pursuant to paragraph(b)(2)(ii)(A) of this section, each partner’s allocableshare of the $12,000 liability equals the amountobtained by multiplying the sum of the partner’sshare of Liability 1 and Liability 2 ($6,000) ($4,000for Liability 1 plus $2,000 for Liability 2) by thefraction obtained by dividing—

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

(B) The total amount of such liability ($12,000).(iii) Therefore, O’s and P’s allocable share of the

$12,000 liability is $2,000 each. Accordingly, be-cause a portion of the proceeds of the $12,000 lia-bility are allocable under § 1.163–8T to the $2,000transfer made to each of O and P within 90 days ofincurring the liability, and the $2,000 transfer doesnot exceed O’s or P’s $2,000 allocable share of thatliability, each is required to take into account $0 ofthe $2,000 transfer for purposes of this section and§ 1.707–3. Under these facts, no part of the transfersto O and P will be treated as part of a sale of propertyX by O or of property Y by P.

* * * * *Par. 6. Section 1.707–6 is amended by

revising Example 2(i) in paragraph (d) toread as follows:

§ 1.707–6 Disguised sales of propertyby partnership to partner; general rules.

* * * * *(d) * * *Example 2. Assumption of liability by partner. (i)

B is a member of an existing partnership. The part-nership transfers property Y to B. On the date of thetransfer, property Y has a fair market value of$1,000,000 and is encumbered by a nonrecourseliability of $600,000. B takes the property subject tothe liability. The partnership incurred the nonre-course liability six months prior to the transfer ofproperty Y to B and used the proceeds to purchase anunrelated asset. Assume that under § 1.707–5(a)(2),B’s share of the nonrecourse liability immediatelybefore the transfer of property Y was $100,000.

* * * * *Par. 7. Section 1.707–9 is amended by

revising paragraph (a)(1) to read as fol-lows:

§ 1.707–9 Effective dates andtransitional rules.

(a) * * *(1) In general. Except as otherwise

provided in this paragraph (a), §§ 1.707–3through 1.707–6 apply to any transactionwith respect to which all transfers occuron or after October 5, 2016. For any trans-action with respect to which all transfersthat are part of a sale of an item of prop-erty occur after April 24, 1991, but beforeOctober 5, 2016, §§ 1.707–3 through1.707–6 as contained in 26 CFR part 1revised as of April 1, 2016, apply.* * * * *

Par. 8. Section 1.752–3 is amended by:1. Revising the third, fourth, fifth, and

sixth sentences in paragraph (a)(3).

2. Adding paragraph (d).The revisions and addition read as fol-

lows:

§ 1.752–3 Partner’s share ofnonrecourse liabilities.

(a) * * *(3) * * * The partnership agreement

may specify the partners’ interests in part-nership profits for purposes of allocatingexcess nonrecourse liabilities provided theinterests so specified are reasonably con-sistent with allocations (that have substan-tial economic effect under the section704(b) regulations) of some other signifi-cant item of partnership income or gain(significant item method). Alternatively,excess nonrecourse liabilities may be al-located among the partners in accordancewith the manner in which it is reasonablyexpected that the deductions attributableto those nonrecourse liabilities will be al-located (alternative method). Addition-ally, the partnership may first allocate anexcess nonrecourse liability to a partnerup to the amount of built-in gain that isallocable to the partner on section 704(c)property (as defined under § 1.704–3(a)(3)(ii)) or property for which reversesection 704(c) allocations are applicable(as described in § 1.704–3(a)(6)(i)) wheresuch property is subject to the nonre-course liability to the extent that suchbuilt-in gain exceeds the gain described inparagraph (a)(2) of this section withrespect to such property (additionalmethod). The significant item method, al-ternative method, and additional methoddo not apply for purposes of § 1.707–5(a)(2). * * ** * * * *

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


John Dalrymple,Deputy Commissioner

for Services and Enforcement.

Approved: August 29, 2016.

Mark M. Mazur,Assistant Secretary of

the Treasury (Tax Policy).

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

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

T.D. 9788

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part 1

Liabilities Recognized asRecourse PartnershipLiabilities Under Section 752


ACTION: Final and temporary regulations.

SUMMARY: This document contains fi-nal and temporary regulations concerninghow liabilities are allocated for purposesof section 707 of the Internal RevenueCode (Code) and when certain obligationsare recognized for purposes of determin-ing whether a liability is a recourse part-nership liability under section 752. Theseregulations affect partnerships and theirpartners. The text of these temporary reg-ulations serves as part of the text ofproposed regulations (REG–122855–15)published in the Proposed Rules section inthis issue of the Bulletin.

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

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

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

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

SUPPLEMENTARY INFORMATION:In addition to these final and temporaryregulations, the Treasury Department andthe IRS are publishing in the Rules andRegulations section in this issue of theBulletin, final regulations under section707 concerning disguised sales and undersection 752 regarding the allocation ofexcess nonrecourse liabilities of a partner-ship to a partner, and, in the ProposedRules section in this issue of the Bulletin,proposed regulations (REG–122855–15)that incorporate the text of these tempo-rary regulations, withdraw a portion of anotice of proposed rulemaking (REG–119305–11) to the extent not adopted bythe final regulations, and contain new pro-posed regulations addressing (1) whencertain obligations to restore a deficit bal-ance in a partner’s capital account aredisregarded under section 704 and (2)when partnership liabilities are treated asrecourse liabilities under section 752.


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

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

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

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

tax return information are confidential, asrequired by section 6103.

Background

1. Overview

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

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

Based on a comment received on the2014 Proposed Regulations requestingthat guidance provided under section 752regarding a partner’s share of partnershipliabilities apply instead solely for dis-guised sale purposes, the Treasury Depart-ment and the IRS have reconsidered therules under § 1.707–5(a)(2) of the 2014Proposed Regulations for determining apartner’s share of partnership liabilitiesfor purposes of section 707. Accordinglyand as recommended by that commenter,this Treasury decision contains temporaryregulations under section 707 (the 707Temporary Regulations) that require apartner to apply the same percentage usedto determine the partner’s share of excessnonrecourse liabilities under § 1.752–3(a)(3) (with certain limitations) in deter-mining the partner’s share of partnershipliabilities for disguised sale purposes. ThisTreasury decision also contains temporaryregulations under section 752 (the 752Temporary Regulations) providing guid-ance on the treatment of “bottom dollarpayment obligations.” Cross-referencing


proposed regulations providing additionalopportunity for comment are contained inthe related notice of proposed rulemaking(REG–122855–15) published in the Pro-posed Rules section in this issue of theBulletin. The Summary of Comments andExplanation of Provisions section of thepreamble of this Treasury decision dis-cusses the changes for determining a part-ner’s share of partnership liabilities fordisguised sale purposes and also the rulesrelating to certain “bottom dollar paymentobligations.”

The Treasury Department and the IRSare also publishing final regulations undersection 707 (the 707 Final Regulations) ina separate Treasury decision (TD 9787)published in the Rules and Regulationssection in this issue of the Bulletin thatadopt the remaining provisions of the2014 Proposed Regulations under section707. That Treasury decision also containsfinal regulations under section 752 (the752 Final Regulations) concerning the al-location of a partnership’s excess nonre-course liabilities as explained in the Sum-mary of Comments and Explanation ofProvisions sections of that Treasury deci-sion.

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


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

nonrecourse liability is determined by ap-plying the same percentage used to deter-mine the partner’s share of the excessnonrecourse liability under § 1.752–3(a)(3). Generally, a partner’s share of theexcess nonrecourse liability is determinedin accordance with the partner’s share ofpartnership profits taking into account allfacts and circumstances relating to theeconomic arrangement of the partners. Apartnership liability is a nonrecourse lia-bility under section 707 to the extent thatthe obligation is a nonrecourse liabilityunder § 1.752–1(a)(2). In addition, theexisting regulations under section 707provide that a partnership liability is arecourse or nonrecourse liability to theextent the liability would be recourse un-der § 1.752–1(a)(1) or nonrecourse under§ 1.752–1(a)(2), respectively, if the liabil-ity was treated as a partnership liabilityfor purposes of section 752 (§ 1.752–7contingent liabilities).

Section 1.752–1(a)(1) provides that apartnership liability is a recourse liabilityto the extent that a partner or related per-son bears the economic risk of loss(EROL) for that liability under § 1.752–2.Section 1.752–2(a) provides that a part-ner’s share of a recourse partnership lia-bility equals the portion of the liability, ifany, for which the partner or related per-son bears the EROL. Section 1.752–1(a)(2) provides that a partnership liabilityis a nonrecourse liability to the extent thatno partner or related person bears theEROL for that liability under § 1.752–2.A partner generally bears the EROL for apartnership liability if the partner or re-lated person has an obligation to make apayment under § 1.752–2(b). A partnergenerally has an obligation to make a pay-ment to the extent that the partner or re-lated person would have to make a pay-ment if, upon a constructive liquidation ofthe partnership, the partnership’s assetswere worthless and the liability becamedue and payable (constructive liquidationtest). Section 1.752–2(b)(6) presumespartners and related persons will satisfytheir payment obligations irrespective oftheir net worth, unless the facts and cir-cumstances indicate a plan to circumventor avoid the obligation.

Summary of Comments andExplanation of Provisions

1. Partner’s Share of PartnershipLiabilities for Purposes of Section 707

The withdrawn portions of the 2014Proposed Regulations included proposedchanges to § 1.752–2 that were intendedto ensure that only genuine commercialpayment obligations, including guaranteesand indemnities, affected the allocation ofpartnership liabilities. Although the 2014Proposed Regulations received some un-favorable comments, one commenter ex-pressed support for the overall objectiveof those proposed rules. According to thecommenter, the clear effect of the 2014Proposed Regulations under section 752was to make it more likely that liabilitieswould be treated as nonrecourse liabili-ties, and thus allocable under § 1.752–3.The commenter noted that such an effectseems appropriate as an economic matter,because, contrary to the constructive liq-uidation test in § 1.752–2(b)(1), lenders,borrowers, and credit support providersgenerally do not expect that the assets ofthe partnership will become worthless.Rather, lenders, borrowers and credit sup-port providers generally expect borrowers(including partnerships) to satisfy theirobligations (in the case of a partnership,with partnership profits). However, thecommenter expressed concerns with theproposed section 752 rules. The com-menter suggested that the regulationsadopt a more narrowly tailored approachthat treats all liabilities as nonrecourseliabilities for section 707 disguised salepurposes only.

Other commenters also suggested thatchanges to the liability allocation rules belimited to the context of disguised salesunder section 707 to specifically addressthe abuses that concern the Treasury De-partment and the IRS. One abuse relatingto disguised sales within the meaning of§ 1.707–3 concerns the debt-financed dis-tribution exception under § 1.707–5(b).Under this exception, a distribution ofmoney to a partner by a partnership is nottaken into account for purposes of§ 1.707–3 to the extent that the distribu-tion is traceable to a partnership borrow-ing and the amount of the distributiondoes not exceed the partner’s allocable


share of the liability incurred to fund thedistribution. The legislative history to sec-tion 707, upon which the debt-financeddistribution exception in § 1.707–5(b) isbased, contemplates a contributing partnerborrowing through the partnership ratherthan engaging in a disguised sale when thepartner, in substance, retains liability forrepayment of the borrowed amounts. SeeH.R. Rep. No. 861, 98th Cong., 2d Sess.859 (1984). This exception, however, hasbeen abused through leveraged partner-ship transactions in which the contributingpartners or related persons enter into pay-ment obligations that are not commercialsolely to achieve an allocation of the part-nership liability to the partner, with theobjective of avoiding a disguised sale.See, for example, Canal Corp. v. Commis-sioner, 135 T.C. 199, 216 (2010) (“Wehave carefully considered the facts andcircumstances and find that the indemnityagreement should be disregarded becauseit created no more than a remote possibil-ity that [the indemnitor] would actually beliable for payment.”).

After considering the comments on the2014 Proposed Regulations suggestingthat the regulations be narrowly tailored toaddress abuse concerns relating to dis-guised sales, the Treasury Department andthe IRS have concluded that, for disguisedsale purposes only, it is appropriate forpartners to determine their share of anypartnership liability, whether recourse ornonrecourse under section 752, in themanner in which excess nonrecourse lia-bilities are allocated under § 1.752–3(a)(3), as limited for disguised sale pur-poses in the 752 Final Regulations. Forpurposes of the disguised sale rules, thisallocation method reflects the overall eco-nomic arrangement of the partners moreaccurately than the current regulations orthe 2014 Proposed Regulations. In mostcases, a partnership will satisfy its liabil-ities with partnership profits, the partner-ship’s assets do not become worthless,and the payment obligations of partners orrelated persons are not called upon. This istrue whether: (1) a partner’s liability isassumed by a partnership in connectionwith a transfer of property to the partner-ship or by a partner in connection with atransfer of property by the partnership tothe partner; (2) a partnership takes prop-erty subject to a liability in connection

with a transfer of property to the partner-ship or a partner takes property subject toa liability in connection with a transfer ofproperty by the partnership to the partner;or (3) a liability is incurred by the part-nership to make a distribution to a partnerunder the debt-financed distribution ex-ception in § 1.707–5(b). Accordingly, un-der the 707 Temporary Regulations, apartner’s share of any partnership liabilityfor disguised sale purposes is the samepercentage used to determine the partner’sshare of the partnership’s excess nonre-course liabilities under § 1.752–3(a)(3), aslimited for disguised sale purposes underthe 752 Final Regulations.

Commenters also suggested that a part-ner’s share of a partnership liability fordisguised sale purposes should not includeany portion of the liability for which an-other partner bears the EROL, as theseliabilities would not be allocated to a part-ner without EROL under general princi-ples of subchapter K. The Treasury De-partment and the IRS agree with thecommenter that this change should notcreate a liability allocation not otherwiseallowed under general subchapter K prin-ciples. Therefore, the 707 TemporaryRegulations provide that for purposes of§ 1.707–5, a partner’s share of a liabilityof a partnership, as defined in § 1.752–1(a) (whether a recourse liability or a non-recourse liability) is determined by apply-ing the same percentage used to determinethe partner’s share of the excess nonre-course liability under § 1.752–3(a)(3) (aslimited in its application to § 1.707–5T(a)(2)), but such share shall not exceedthe partner’s share of the partnership lia-bility under section 752 and applicableregulations (as limited in the applicationof § 1.752–3(a)(3) to § 1.707–5T(a)(2)).

The liability allocation approach fordisguised sale purposes in the 707 Tem-porary Regulations does not conflict withCongress’s directive relating to section752, which had been raised as a potentialconcern by some commenters with respectto the 2014 Proposed Regulations. Section79 of the Deficit Reduction Act of 1984(Public Law 98–369) overruled the deci-sion in Raphan v. United States, 3 Cl. Ct.457 (1983) (holding that a guarantee by ageneral partner of an otherwise nonre-course liability of the partnership did notrequire the partner to be treated as person-

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

Finally, in addition to the rule for de-termining a partner’s share of a § 1.752–1(a) partnership liability for disguised salepurposes, the 707 Temporary Regulationsreserve with respect to the treatment of§ 1.752–7 contingent liabilities for dis-guised sale purposes. The 2014 ProposedRegulations proposed removing the“would be treated” language in § 1.707–5(a)(2)(i) and (ii) of the existing regula-tions relating to contingent liabilities. The707 Temporary Regulations replace theproposed provisions with the previouslydiscussed rule for determining a partner’sshare of a partnership liability as definedin § 1.752–1(a). Because the 2014 Pro-posed Regulations would have removedlanguage relating to § 1.752–7 contingentliabilities, some commenters suggestedthat the regulations specifically clarifyhow contingent liabilities are treated forpurposes of the disguised sale rules. TheTreasury Department and the IRS agreethat clarification of the treatment of§ 1.752–7 contingent liabilities for dis-guised sale purposes is warranted.

In many cases, § 1.752–7 contingentliabilities may constitute qualified liabili-ties that would not be taken into accountfor purposes of determining a disguisedsale. However, some commenters notedthat there may be circumstances in whichcertain transfers of § 1.752–7 contingentliabilities to a partnership may be abusive.Thus, the Treasury Department and theIRS will continue to study the issue of theeffect of contingent liabilities with respectto section 707, as well as other sections ofthe Code, in connection with future guid-ance projects.


2. Determining Whether a Liability Is aRecourse Liability of a Partnership

The 752 Temporary Regulations amend§ 1.752–2 to address certain payment obli-gations of a partner or related person. TheTreasury Department and the IRS con-tinue to have concerns that partners andrelated persons are entering into paymentobligations that are not commercial solelyto achieve an allocation of a partnershipliability.

Under the 2014 Proposed Regulations,a partner’s or related person’s paymentobligation with respect to a partnershipliability would not have been recognizedunder § 1.752–2(b)(3) unless seven fac-tors (recognition factors) were satisfied.Two of the seven recognition factors im-posed certain additional requirements oncontractual obligations outside a partner-ship agreement, such as guarantees,indemnifications, reimbursement agree-ments, and other obligations running di-rectly to creditors, other partners, or to thepartnership (guarantee and indemnity rec-ognition factors). In the case of a guaran-tee or similar arrangement, the 2014 Pro-posed Regulations would have requiredthe partner or related person to be liableup to the full amount of such partner’s orrelated person’s payment obligation, if,and to the extent that, any amount of thepartnership liability is not otherwise satis-fied. In the case of an indemnity, reim-bursement agreement, or similar arrange-ment, the 2014 Proposed Regulationswould have required the partner or relatedperson to be liable up to the full amount ofsuch partner’s or related person’s paymentobligation if, and to the extent that, anyamount of the indemnitee’s or other ben-efited party’s payment obligation is satis-fied. The terms of the guarantee, indem-nity, or reimbursement agreement wouldbe treated as modified by any right ofindemnity, reimbursement agreement, orsimilar arrangement. However, a right ofproportionate contribution running be-tween partners or related persons whowere co-obligors with respect to a pay-ment obligation for which each of themwas jointly and severally liable would notmodify a guarantee, indemnity, or reim-bursement agreement. If the partner’s orrelated person’s payment obligation failedto satisfy any of the recognition factors,

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

In addition to the guarantee and indem-nity recognition factors, a partner’s or re-lated person’s payment obligation with re-spect to a partnership liability would notbe recognized under an anti-abuse rule inthe 2014 Proposed Regulations if the factsand circumstances indicated that the part-nership liability was part of a plan orarrangement involving the use of tieredpartnerships, intermediaries, or similar ar-rangements to convert a single liabilityinto multiple liabilities with a principalpurpose of circumventing the guaranteeand indemnity recognition factors.

The Treasury Department and the IRScontinue to believe that certain obliga-tions, such as certain so-called “bottom-dollar guarantees,” should generally notbe recognized as payment obligations un-der § 1.752–2(b)(3) because they gener-ally lack a significant non-tax commercialbusiness purpose. No commenters sug-gested that bottom-dollar guarantees wererelevant to loan risk underwriting. Ac-cordingly, the 752 Temporary Regula-tions retain the restriction on certain guar-antees and indemnities and provide thatthese payment obligations are not recog-nized under § 1.752–2(b)(3). In addition,these regulations remove the Example in§ 1.752–2(j)(4) to comport with the pro-visions in the 752 Temporary Regulationsrelating to bottom dollar payment obliga-tions. However, after considering thecomments received on the 2014 ProposedRegulations, the 752 Temporary Regula-tions provide for an exception as well asan anti-abuse rule to address arrangementsthat are not intended to be subject to thisrule.

A. General rule: bottom dollar paymentobligations

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

was confusing. In addition, with respect tothe anti-abuse rule in the 2014 ProposedRegulations, one commenter believed that“tranches” of debt could be used to effectarrangements that are economically simi-lar to “bottom-dollar guarantees” and rec-ommended that the regulations strengthenthe anti-abuse rule. This commenter sug-gested that two or more liabilities betreated as a single liability if: (1) the lia-bilities are incurred pursuant to a commonplan, as part of a single transaction, or aspart of a series of related transactions; (2)the liabilities have the same counterpartyor counterparties (or substantially thesame group of counterparties); or (3) theguarantee or similar arrangement wouldfail the guarantee recognition factor if theliabilities were treated as a single liability;and (4) multiple liabilities (rather than asingle liability) were incurred with a prin-cipal purpose of avoiding the guaranteerecognition factor.

In response to comments, the 752 Tem-porary Regulations clarify the descriptionof so-called “bottom-dollar guaranteesand indemnities” by consolidating thesenon-commercial obligations under oneterm: bottom-dollar payment obligations.In addition, instead of having an anti-abuse rule to address arrangements thatuse tiered partnerships, intermediaries, se-nior and subordinate liabilities, or similararrangements, the 752 Temporary Regu-lations define these arrangements as bot-tom dollar payment obligations if certainfactors, taking into account the comment-er’s suggestion, exist. Therefore, underthe 752 Temporary Regulations, the term“bottom dollar payment obligation” in-cludes (subject to certain exceptions): (1)any payment obligation other than one inwhich the partner or related person is orwould be liable up to the full amount ofsuch partner’s or related person’s paymentobligation if, and to the extent that (A) anyamount of the partnership liability is nototherwise satisfied in the case of an obli-gation that is a guarantee or other similararrangement, or (B) any amount of theindemnitee’s or benefited party’s paymentobligation is satisfied in the case of anobligation which is an indemnity or sim-ilar arrangement; and (2) an arrangementwith respect to a partnership liability thatuses tiered partnerships, intermediaries,senior and subordinate liabilities, or sim-


ilar arrangements to convert what wouldotherwise be a single liability into multi-ple liabilities if, based on the facts andcircumstances, the liabilities were in-curred (A) pursuant to a common plan, aspart of a single transaction or arrange-ment, or as part of a series of relatedtransactions or arrangements, and (B) witha principal purpose of avoiding having atleast one of such liabilities or paymentobligations with respect to such liabilitiesbeing treated as a bottom dollar paymentobligation. Any payment obligation under§ 1.752–2, including an obligation tomake a capital contribution and to restorea deficit capital account upon liquidationof the partnership as described in§ 1.704–1(b)(2)(ii)(b)(3), may be a bot-tom dollar payment obligation if it meetsthe requirements set forth above.

The preamble of the 2014 ProposedRegulations requested comments onwhether and under what circumstancesregulations should permit recognition of apayment obligation for a portion, ratherthan 100 percent, of each dollar of a part-nership liability to which the payment re-lates (a “vertical slice” of a partnershipliability). The commenters believed thatregulations under section 752 should rec-ognize a vertical slice of a partnershipliability because these payment obliga-tions represent the same economic risk asa guarantee, for example, of the entirepartnership liability.

The Treasury Department and the IRSagree with the commenters that certainobligations, including a vertical slice of apartnership liability, should not cause apayment obligation to be a bottom dollarpayment obligation and, thus, not recog-nized under § 1.752–2(b)(3). In addition,the Treasury Department and the IRShave determined that, as long as a partneror related person is or would be liable forthe full amount of a payment obligation,such obligation is not a bottom dollar pay-ment obligation merely because a maxi-mum amount is placed on the partner’s orrelated person’s obligation. Accordingly,the 752 Temporary Regulations specifi-cally except certain payment obligationswithin those parameters, including obliga-tions with joint and several liability, frombeing treated as bottom dollar paymentobligations.

B. Exception from treatment as a bottomdollar payment obligation

In addition to comments relating to thedescription of “bottom-dollar guarantees”and the anti-abuse rule in the 2014 Pro-posed Regulations, commenters expressedconcerns that the guaranty and indemnityrecognition factors would deprive a part-ner from being allocated a liability even insituations where there is real EROL. Onecommenter described the 2014 ProposedRegulations as prejudging all payment ob-ligations to be remote and fictitious if theobligations did not cover 100 percent ofany shortfall in repayment. The com-menter believed EROL could exist even if100 percent of the liability was not cov-ered.

Another commenter appreciated themerits of a bright-line rule that would lookto every dollar of a liability, but thoughtthat the 100 percent threshold was toohigh. This commenter recommended thata payment obligation should be respectedif a partner or related person (i) is orwould be liable up to the full amount ofsuch partner’s or related person’s paymentobligation if, and to the extent that, lessthan 80 percent of the partnership liabilityis not otherwise satisfied and (ii) either(A) the taxpayer or the IRS clearly estab-lishes that the credit support materiallydecreased the partnership’s borrowingcosts with respect to the liability or mate-rially enhanced the other terms of the bor-rowing, or (B) the partners (or personsrelated to one or more of the partners), inthe aggregate, are or would be liable up tothe full amount of their payment obliga-tions if, and to the extent that, any amountof the partnership liability is not otherwisesatisfied. The commenter believed thatthis lower threshold incorporates the ideathat a person may have meaningful riskwith respect to the underlying liability,while protecting the legitimate interests ofthe government in ensuring that the lowerthreshold is not abused by taxpayers.

The Treasury Department and the IRSrecognize that, in certain circumstances, itmight be appropriate to treat a partner asbearing EROL with respect to a paymentobligation that would be characterized asa bottom dollar payment obligation underthe general rule. What otherwise would bea bottom dollar payment obligation can be

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

C. Anti-abuse rule

Some commenters noted that partnerscould manipulate contractual arrange-ments to achieve a federal income taxresult that is not consistent with the eco-nomics of an arrangement. For example, apartner could deliberately fail one of therecognition factors in the 2014 ProposedRegulations (including the guarantee orindemnity recognition factor) to cause apartnership liability to be treated as non-recourse even when one partner has trueEROL. Just as the 752 Temporary Regu-lations provide an exception for certainobligations that meet the definition of abottom dollar payment obligation but give


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

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

D. Disclosure requirement

The 752 Temporary Regulations re-quire the partnership to disclose to the IRSall bottom dollar payment obligationswith respect to a partnership liability on acompleted Form 8275, Disclosure State-ment, attached to the partnership returnfor the taxable year in which the bottomdollar payment obligation is undertaken ormodified. That disclosure must identifythe payment obligation with respect towhich disclosure is made including theamount of the payment obligation and theparties to the payment obligation. If abottom dollar payment obligation meetsthe exception, the partnership must alsodisclose to the IRS on Form 8275 the factsand circumstances that clearly establishthat a partner or related person is liable forup to 90 percent of the partner’s or relatedperson’s initial payment obligation and,but for an indemnity, reimbursement

agreement, or similar arrangement, thepartner’s or related person’s payment ob-ligation would have been recognized.

Effective/Applicability Date

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

The 2014 Proposed Regulations pro-vided for an effective date similar to theone in these final and temporary regula-tions. A commenter recommended thatpartnerships be permitted to elect to applyall, but not less than all, of the provisionsof the final regulations to all of its liabil-ities and payment obligations with respectto its liabilities after the effective date ofthe final regulations. These 752 Tempo-rary Regulations adopt that change; there-fore, partnerships may apply all the pro-visions contained in the 752 TemporaryRegulations to all of their liabilities as ofthe beginning of the first taxable year ofthe partnership ending on or after October5, 2016.

Commenters on the 2014 ProposedRegulations also recommended that part-nership liabilities or payment obligationsthat are modified or refinanced continue tobe subject to the provisions of the existingregulations to the extent of the amountand duration of the pre-modification (orrefinancing) liability or payment obliga-tion. The 752 Temporary Regulations donot adopt this recommendation as theterms of the partnership liabilities andpayment obligations could be changed,which would affect the determination ofwhether or not an obligation is a bottomdollar payment obligation.

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

the date the temporary regulations are fi-nalized. Under this transitional relief, thepartner can continue to apply the existingregulations under § 1.752–2 with respectto a partnership liability for a seven-yearperiod to the extent that the partner’s al-locable share of partnership liabilities ex-ceeds the partner’s adjusted basis in itspartnership interest on October 5, 2016.The amount of partnership liabilities sub-ject to transitional relief will be reducedfor certain reductions in the amount ofliabilities allocated to that partner underthe transition rules and, upon the sale ofany partnership property, for any tax gain(including section 704(c) gain) allocatedto the partner less that partner’s share ofamount realized.

Special Analyses

Certain IRS regulations, including thisone, are exempt from the requirements ofExecutive Order 12866, as supplementedand reaffirmed by Executive Order 13563.Therefore, a regulatory impact assessmentis not required. It also has been deter-mined that section 553(b) of the Admin-istrative Procedure Act (5 U.S.C. chapter5) does not apply to these regulations.

Although the temporary regulationsunder sections 707 and 752 respond tocomments received in response to the2014 Proposed Regulations, the TreasuryDepartment and the IRS have determinedthat the regulations would benefit fromadditional notice and comment instead ofbeing published as final regulations. Inaddition, decisions made in the final reg-ulations under section 707 contained in aseparate Treasury decision (TD 9787)published in the Rules and Regulationssection in this issue of the Bulletin inter-act with the changes in the 707 TemporaryRegulations regarding how liabilities areallocated for disguised sale purposes. Fi-nally, pursuant to authority under section7805(b) of the Code, the temporary regu-lations under sections 707 and 752 arenecessary to address particular abuses asdescribed in the Summary of Commentsand the Explanation of Provisions sectionof the preamble of this Treasury decision.For these reasons, good cause also existspursuant to 5 U.S.C. 553 to issue tempo-rary regulations.

For applicability of the RegulatoryFlexibility Act, please refer to the cross-


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


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

* * * * *

Adoption of Amendments to theRegulations





issued under 26 U.S.C. 707(a)(2)(B).Par. 2. Section 1.707–5 is amended by

revising paragraph (a)(2) and Examples 2,3, 7, and 8 in paragraph (f) to read asfollows:


(a) * * *(2) [Reserved]. For further guidance,

see § 1.707–5T(a)(2).* * * * *

(f) * * *Example 2. [Reserved]. For further

guidance, see § 1.707–5T(f) Example 2.Example 3. [Reserved]. For further

guidance, see § 1.707–5T(f) Example 3.* * * * *

Example 7. [Reserved]. For furtherguidance, see § 1.707–5T(f) Example 7.

Example 8. [Reserved]. For furtherguidance, see § 1.707–5T(f) Example 8.* * * * *

Par. 3. Section 1.707–5T is added toread as follows:

§ 1.707–5T Disguised sales of propertyto partnership; special rules relating toliabilities (temporary).

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

(2) Partner’s share of liability—(i) Ingeneral. For purposes of § 1.707–5, apartner’s share of a liability of a partner-ship, as defined in § 1.752–1(a) (whether arecourse liability or a nonrecourse liabil-ity) is determined by applying the samepercentage used to determine the partner’sshare of the excess nonrecourse liabilityunder § 1.752–3(a)(3) (as limited in itsapplication to this paragraph (a)(2)), butsuch share shall not exceed the partner’sshare of the partnership liability undersection 752 and applicable regulations (aslimited in the application of § 1.752–3(a)(3) to this paragraph (a)(2)).

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

(a)(3) through (e) [Reserved]. Forfurther guidance, see § 1.707–5(a)(3)through (e).

(f) Example 1 [Reserved]. For furtherguidance, see § 1.707–5(f) Example 1.

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

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

Example 3. Subsequent reduction of transferringpartner’s share of liability. (i) The facts are the sameas in Example 2. In addition, property Y is a fullyleased office building, the rental income from prop-erty Y is sufficient to meet debt service, and theremaining term of the liability is ten years. It isanticipated that, three years after the partnership’sassumption of the liability, C’s share of the liabilityunder paragraph (a)(2) of this section will be reducedto $2,000,000 because of a shift in the allocation ofpartnership profits pursuant to the terms of the part-nership agreement which provide that C’s share ofthe partnership profits will be 25 percent at that time.Under the partnership agreement, this shift in theallocation of partnership profits is dependent solelyon the passage of time.

(ii) Under § 1.707–5(a)(3), if the reduction in C’sshare of the liability was anticipated at the time ofC’s transfer, was not subject to the entrepreneurialrisks of partnership operations, and was part of aplan that has as one of its principal purposes mini-mizing the extent of sale treatment under § 1.707–3(that is, a principal purpose of allocating a largerpercentage of profits to C in the first three yearswhen profits were not likely to be realized was tominimize the extent to which C’s transfer would betreated as part of a sale), C’s share of the liabilityimmediately after the partnership’s assumption istreated as equal to C’s reduced share of $2,000,000.Therefore, the amount of consideration to C is$6,000,000 (the excess of the liability assumed bythe partnership ($8,000,000) over C’s share of theliability for purposes of § 1.707–5(a) immediatelyafter the assumption ($2,000,000)), taking into ac-count the anticipated reduction in C’s share of theliability pursuant to the terms of the partnershipagreement. See § 1.707–5(a)(1) and (3) and para-graph (a)(2) of this section.

Examples 4 through 6 [Reserved]. For furtherguidance, see § 1.707–5(f) Examples 4 through 6.

Example 7. Partnership’s assumptions of liabil-ities encumbering properties transferred pursuant toa plan. (i) Pursuant to a plan, G and H transferproperty 1 and property 2, respectively, to an exist-ing partnership in exchange for a one-third interesteach in the partnership. At the time the properties aretransferred to the partnership, property 1 has a fairmarket value of $10,000 and an adjusted tax basis of$6,000, and property 2 has a fair market value of$10,000 and an adjusted tax basis of $4,000. At thetime properties 1 and 2 are transferred to the part-nership, a $6,000 nonrecourse liability (liability 1) issecured by property 1 and a $9,000 recourse liabilityof H (liability 2) is secured by property 2. Properties1 and 2 are transferred to the partnership, and thepartnership takes property 1 subject to liability 1 andassumes liability 2. After the transfer of liability 2 tothe partnership, H bears the economic risk of loss forthe entire amount of liability 2 under § 1.752–2. Gand H incurred liabilities 1 and 2 immediately priorto transferring properties 1 and 2 to the partnershipand used the proceeds for personal expenditures. Theliabilities are not qualified liabilities. For disguisedsale purposes, assume that G’s and H’s share ofliability 1 is $2,000 each in accordance with para-graph (a)(2) of this section (which determines apartner’s share of a liability using the percentageunder § 1.752–3(a)(3), but not exceeding the part-


ner’s share of the liability under section 752 andapplicable regulations). Also, in accordance withparagraph (a)(2) of this section, G’s share of liability2 is zero and H’s share of liability 2 is $3,000.

(ii) G and H transferred properties 1 and 2 to thepartnership pursuant to a plan. Accordingly, pursu-ant to § 1.707–5(a)(1) and (4), the partnership’staking property 1 subject to liability 1 is treated as atransfer of only $4,000 of consideration to G (theamount by which liability 1 ($6,000) exceeds G’sshare of liabilities 1 and 2 ($2,000)), and the part-nership’s assumption of liability 2 is treated as atransfer of only $4,000 of consideration to H (theamount by which liability 2 ($9,000) exceeds H’sshare of liabilities 1 and 2 ($5,000)). Under the rulein § 1.707–3, G is treated as having sold $4,000 ofthe fair market value of property 1 in exchange forthe partnership’s taking property 1 subject to liability1, and H is treated as having sold $4,000 of the fairmarket value of property 2 in exchange for thepartnership’s assumption of liability 2.

Example 8. Partnership’s assumption of liabilitypursuant to a plan to avoid sale treatment of part-nership assumption of another liability. (i) The factsare the same as in Example 7, except that—

(A) Liability 2 is a nonrecourse liability;(B) H transferred the proceeds of liability 2 to the

partnership; and(C) H incurred liability 2 in an attempt to reduce

the extent to which the partnership’s taking of prop-erty 1 subject to liability 1 would be treated as atransfer of consideration to G (and thereby reducethe portion of G’s transfer of property 1 to thepartnership that would be treated as part of a sale).

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

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

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

Par. 4. Section 1.707–9 is amended byadding paragraphs (a)(4) and (5) to read asfollows:


(a) * * *(4) Section 1.707–5(a)(2) and (f) Ex-

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

contained in 26 CFR part 1 revised as ofApril 1, 2016, apply to any transactionwith respect to which any transfers occurbefore January 3, 2017. For any transac-tion with respect to which all transfersoccur on or after January 3, 2017, see§ 1.707–9T(a)(5).

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

Par. 5. Section 1.707–9T is added toread as follows:

§ 1.707–9T Effective dates andtransitional rules (temporary).

(a)(1) through (a)(4) [Reserved]. Forfurther guidance, see § 1.707–9(a)(1)through (4).

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

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

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

Par. 6. Section 1.752–2 is amended by:1. Revising paragraph (b)(3).2. Adding Examples 9, 10, and 11 to

paragraph (f).3. Revising paragraph (j)(2).4. Removing paragraph (j)(4).5. Redesignating paragraph (l) as (l)(1)

and revising the heading to paragraph(l).

6. Adding paragraphs (l)(2) and (3).The revisions and additions read as fol-

lows:

§ 1.752–2 Partner’s share of recourseliabilities.

* * * * *(b) * * *(3) [Reserved]. For further guidance,

see § 1.752–2T(b)(3).* * * * *

(f) * * *Example 9. [Reserved].

Example 10. [Reserved]. For furtherguidance, see § 1.752–2T(f) Example 10.

Example 11. [Reserved]. For furtherguidance, see § 1.752–2T(f) Example 11.* * * * *

(j) * * *(2) [Reserved]. For further guidance,

see § 1.752–2T(j)(2).* * * * *

(l) Effective/applicability dates. * * ** * * * *(2) [Reserved]. For further guidance,

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

see § 1.752–2T(l)(3).Par. 7. Section 1.752–2T is added to

read as follows:

§ 1.752–2T Partner’s share of recourseliabilities (temporary).

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

(3) Obligations recognized—(i) Ingeneral. The determination of the extentto which a partner or related person has anobligation to make a payment under§ 1.752–2(b)(1) is based on the facts andcircumstances at the time of the determi-nation. To the extent that the obligation ofa partner or related person to make a pay-ment with respect to a partnership liabilityis not recognized under this paragraph(b)(3), § 1.752–2(b) is applied as if theobligation did not exist. All statutory andcontractual obligations relating to thepartnership liability are taken into accountfor purposes of applying this section, in-cluding—

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

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

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


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

(ii) Special rules for bottom dollar pay-ment obligations—(A) In general. Forpurposes of § 1.752–2, a bottom dollarpayment obligation (as defined in para-graph (b)(3)(ii)(C) of this section) is notrecognized under this paragraph (b)(3).

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

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

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

(ii) With respect to an indemnity orsimilar arrangement, any payment obliga-tion other than one in which the partner orrelated person is or would be liable up tothe full amount of such partner’s or re-lated person’s payment obligation, if, andto the extent that, any amount of the in-demnitee’s or benefited party’s paymentobligation that is recognized under thisparagraph (b)(3) is satisfied.

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

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

(2) Exceptions. A payment obligationis not a bottom dollar payment obligationmerely because a maximum amount isplaced on the partner’s or related person’spayment obligation, a partner’s or relatedperson’s payment obligation is stated as afixed percentage of every dollar of thepartnership liability to which such obliga-tion relates, or there is a right of propor-tionate contribution running betweenpartners or related persons who are co-obligors with respect to a payment obli-gation for which each of them is jointlyand severally liable.

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

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

(1) A caption identifying the statementas a disclosure of a bottom dollar paymentobligation under section 752.

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

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

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

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

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

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

(iii) Special rule for indemnities andreimbursement agreements. An indem-nity, reimbursement agreement, or similararrangement will be recognized under thisparagraph (b)(3) only if, before taking intoaccount the indemnity, reimbursementagreement, or similar arrangement, the in-demnitee’s or other benefited party’s pay-ment obligation is recognized under thisparagraph (b)(3), or would be recognizedunder this paragraph (b)(3) if such personwere a partner or related person.

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

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

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

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

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

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

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


(ii) The determination of whether C’s indemnityis recognized under paragraph (b)(3) of this sectionis made without regard to whether C’s indemnityitself causes A’s guarantee not to be recognized.Because A’s obligation would be recognized but forthe effect of C’s indemnity and C is obligated to payA up to the full amount of C’s indemnity if A paysany amount on its guarantee of ABC’s liability, C’sindemnity of A’s guarantee is not a bottom dollarpayment obligation under paragraph (b)(3)(ii)(C) ofthis section and, therefore, is recognized under para-graph (b)(3) of this section. The amount of C’seconomic risk of loss under § 1.752–2(b)(1) for itsindemnity of A’s guarantee is $100.

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

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

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

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

(2) Arrangements tantamount to aguarantee—(i) In general. Irrespective ofthe form of a contractual obligation, theCommissioner may treat a partner as bear-ing the economic risk of loss with respectto a partnership liability, or a portionthereof, to the extent that—

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

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

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

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

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

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

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

(j)(3) through (l)(1) [Reserved]. Forfurther guidance, see § 1.752–2(j)(3)through (l)(1).

(2) Paragraph (b)(3), paragraph (f) Ex-amples 10 and 11, and paragraph (j)(2) ofthis section apply to liabilities incurred orassumed by a partnership and paymentobligations imposed or undertaken withrespect to a partnership liability on or afterOctober 5, 2016, other than liabilities in-curred or assumed by a partnership andpayment obligations imposed or under-taken pursuant to a written binding con-tract in effect prior to that date. Partner-ships may apply paragraph (b)(3),paragraph (f) Examples 10 and 11, andparagraph (j)(2) of this section to all oftheir liabilities as of the beginning of thefirst taxable year of the partnership endingon or after October 5, 2016. The rulesapplicable to liabilities incurred or as-sumed (or subject to a written bindingcontract in effect) prior to October 5, 2016are contained in § 1.752–2 in effect priorto October 5, 2016 (see 26 CFR part 1revised as of April 1, 2016).

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

the extent the amount of the TransitionPartner’s share of liabilities under§ 1.752–2(a) as a result of bearing theeconomic risk of loss under § 1.752–2(b)immediately prior to October 5, 2016 ex-ceeds the amount of the Transition Part-ner’s adjusted basis in its partnership in-terest as determined under § 1.705–1 atsuch time (Grandfathered Amount). ATransition Partner that is a partnership, Scorporation, or a business entity disre-garded as an entity separate from itsowner under section 856(i) or 1361(b)(3)or §§ 301.7701–1 through 301.7701–3 ofthis chapter ceases to qualify as a Transi-tion Partner if the direct or indirect own-ership of that Transition Partner changesby 50 percent or more. The TransitionPartnership may continue to apply therules under § 1.752–2 in effect prior toOctober 5, 2016, with respect to a Tran-sition Partner for payment obligations de-scribed in § 1.752–2(b) to the extent of theTransition Partner’s adjusted Grandfa-thered Amount for the seven-year periodbeginning October 5, 2016. The termina-tion of a Transition Partnership under sec-tion 708(b)(1)(B) and applicable regula-tions does not affect the GrandfatheredAmount of a Transition Partner that re-mains a partner in the new partnership (asdescribed in § 1.708–1(b)(4)), and thenew partnership is treated as a continua-tion of the Transition Partnership for pur-poses of this paragraph (l)(3). However,a Transition Partner’s GrandfatheredAmount is reduced (not below zero), butnever increased by—

(i) Upon the sale of any property by theTransition Partnership, an amount equal tothe excess of any gain allocated for fed-eral income tax purposes to the TransitionPartner by the Transition Partnership (in-cluding amounts allocated under section704(c) and applicable regulations) overthe product of the total amount realized bythe Transition Partnership from the prop-erty sale multiplied by the Transition Part-ner’s percentage interest in the partner-ship; and

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

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


John Dalrymple,Deputy Commissioner

for Services and Enforcement.

Approved: August 29, 2016.

Mark J. Mazur,Assistant Secretary of the

Treasury (Tax Policy).

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

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part 1

T.D. 9800

Covered Asset Acquisitions


ACTION: Temporary regulations.

SUMMARY: This document containstemporary Income Tax Regulations undersection 901(m) of the Internal RevenueCode (Code) with respect to transactionsthat generally are treated as asset acquisi-tions for U.S. income tax purposes andeither are treated as stock acquisitions orare disregarded for foreign income taxpurposes. These regulations are necessaryto provide guidance on applying section901(m). The text of the temporary regula-tions also serves in part as the text ofthe proposed regulations under section901(m) (REG–129128–14) published inthe Proposed Rules section of this issue ofthe Bulletin.

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

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

SUPPLEMENTARY INFORMATION:

Background

I. Section 901(m)

Section 212 of the Education Jobs andMedicaid Assistance Act (EJMAA), en-acted on August 10, 2010 (Public Law111–226), added section 901(m) to theCode. Section 901(m)(1) provides that, inthe case of a covered asset acquisition(CAA), the disqualified portion of anyforeign income tax determined with re-spect to the income or gain attributable torelevant foreign assets (RFAs) will not betaken into account in determining the for-eign tax credit allowed under section901(a), and in the case of foreign incometax paid by a section 902 corporation (asdefined in section 909(d)(5)), will not betaken into account for purposes of section902 or 960. Instead, the disqualified por-tion of any foreign income tax (the dis-qualified tax amount) is permitted as adeduction. See section 901(m)(6).

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

Section 901(m)(3)(A) provides that theterm “disqualified portion” means, withrespect to any CAA, for any taxable year,the ratio (expressed as a percentage) of (i)the aggregate basis differences (but notbelow zero) allocable to such taxable yearwith respect to all RFAs; divided by (ii)the income on which the foreign incometax referenced in section 901(m)(1) isdetermined. If the taxpayer fails to sub-stantiate the income on which the foreignincome tax is determined to the satisfac-tion of the Secretary, such income will bedetermined by dividing the amount ofsuch foreign income tax by the highestmarginal tax rate applicable to the taxpay-er’s income in the relevant jurisdiction.

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

taxable years using the applicable costrecovery method for U.S. income tax pur-poses. Section 901(m)(3)(B)(ii) providesthat, except as otherwise provided by theSecretary, if there is a disposition of anRFA, the basis difference allocated to thetaxable year of the disposition will be theexcess of the basis difference of such assetover the aggregate basis difference ofsuch asset that has been allocated to allprior taxable years. The statute furtherprovides that no basis difference with re-spect to such asset will be allocated to anytaxable year thereafter.

Section 901(m)(3)(C)(i) provides thatbasis difference means, with respect toany RFA, the excess of (i) the adjustedbasis of such asset immediately after theCAA, over (ii) the adjusted basis of suchasset immediately before the CAA. If theadjusted basis of an RFA immediately be-fore the CAA exceeds the adjusted basisof the RFA immediately after the CAA(that is, where the adjusted basis of anasset with a built-in loss is reduced in aCAA), such excess is taken into accountas a basis difference of a negative amount.See section 901(m)(3)(C)(ii).

Section 901(m)(4) provides that anRFA means, with respect to a CAA, anasset (including goodwill, going concernvalue, or other intangible) with respect tosuch acquisition if income, deduction,gain, or loss attributable to such asset istaken into account in determining the for-eign income tax referenced in section901(m)(1).

Section 901(m)(7) provides that theSecretary may issue regulations or otherguidance as is necessary or appropriate tocarry out the purposes of section 901(m).

II. Notices 2014–44 and 2014–45

The Department of the Treasury (Trea-sury Department) and the IRS issued No-tice 2014–44 (2014–32 I.R.B 270 (July21, 2014)) and Notice 2014–45 (2014–34I.R.B. 388 (July 29, 2014)), announcingthe intent to issue regulations addressingthe application of section 901(m) to dis-positions of RFAs following CAAs and toCAAs described in section 901(m)(2)(C)(regarding section 754 elections).

The notices were issued in response tocertain taxpayers engaging in transactionsshortly after a CAA with the intention ofinvoking the application of the statutory


disposition rule under section 901(m)(3)(B)(ii) to avoid the purposes of section901(m). To address these transactions,Notice 2014–44 described the definitionof disposition that would be set forth infuture regulations, as well as the rules fordetermining the portion of basis differ-ence that would be taken into accountupon a disposition of an RFA (the dispo-sition amount). In addition, Notice2014–44 described the computation ofbasis difference and disposition amountwith respect to an RFA that is subject to asection 743(b) CAA. Notice 2014–44also announced that future regulationswould provide successor rules for the con-tinued application of section 901(m) aftera subsequent transfer of an RFA with re-maining basis difference. Notice 2014–44further provided that future regulationswould provide that, if an asset is an RFAwith respect to two section 743(b) CAAsinvolving the same partnership interest,the RFA will be treated as having noremaining basis difference with respect tothe first section 743(b) CAA if the basisdifference with respect to the second sec-tion 743(b) CAA is determined indepen-dently from the first section 743(b) CAA.In this regard, see generally § 1.743–1(f)and proposed § 1.743–1(f)(2).

Notice 2014–44 provided that the fu-ture regulations described therein wouldapply (i) concerning dispositions, to dis-positions occurring on or after July 21,2014 (the date Notice 2014–44 was is-sued), (ii) concerning section 743(b)CAAs, to section 743(b) CAAs occurringon or after July 21, 2014, unless a tax-payer consistently applied those provi-sions to all section 743(b) CAAs occur-ring on or after January 1, 2011, and (iii)concerning successor rules, to remainingbasis difference with respect to an RFA asof July 21, 2014, and any basis differencewith respect to an RFA that arises in aCAA occurring on or after July 21, 2014.Notice 2014–45 provided that the futureregulations described in Notice 2014–44also would apply to determine the taxconsequences under section 901(m) of anentity classification election made under§ 301.7701–3 that is filed on or after July29, 2014 (the date Notice 2014–45 wasissued), including whether a dispositionresults from the election for purposes ofsection 901(m) and the treatment of any

remaining basis difference that resultsfrom such an election.

III. Proposed Regulations Under Section901(m)

Proposed regulations under section901(m) are being issued at the same timeas these temporary regulations. In additionto cross-referencing these temporary reg-ulations, the proposed regulations provideguidance under section 901(m) concern-ing issues not addressed in the temporaryregulations. Consulting the preamble tothe proposed regulations is recommendedfor a better understanding of how thesetemporary regulations are intended towork.

Explanation of Provisions

I. Overview

Section 1.901(m)–1T provides defini-tions that apply for purposes of the tem-porary regulations. Section 1.901(m)–2Tidentifies the transactions that are CAAsand the assets that are RFAs with respectto a CAA. Section 1.901(m)–4T providesthe general rule for determining basis dif-ference with respect to an RFA under sec-tion 901(m)(3)(C), as well as a specialrule for determining basis difference withrespect to an RFA that arises as a result ofan acquisition of an interest in a partner-ship that has made a section 754 election(section 743(b) CAA). Section 1.901(m)–5T provides rules for taking into ac-count basis difference under the applica-ble cost recovery method or as a result ofa disposition of an RFA. Section1.901(m)–6T provides successor rules forapplying section 901(m) to subsequenttransfers of RFAs that have basis differ-ence that has not yet been fully taken intoaccount.

II. Effective/Applicability Dates

The applicability dates of the tempo-rary regulations relate back to the issuanceof Notices 2014–44 and 2014–45. Ac-cordingly, the temporary regulations ap-ply to CAAs occurring on or after July 21,2014, and to CAAs occurring before thatdate resulting from an entity classificationelection made under § 301.7701–3 that isfiled on or after July 29, 2014, and that iseffective on or before July 21, 2014 (re-

ferred to as the general applicability date).The temporary regulations also apply toCAAs occurring on or after January 1,2011, and before the general applicabilitydate (the transition period), but only if thebasis difference within the meaning ofsection 901(m)(3)(C)(i) (statutory basisdifference) in one or more RFAs withrespect to such a CAA had not been fullytaken into account under section901(m)(3)(B) either as of July 21, 2014,or, in the case of an entity classificationelection made under § 301.7701–3 that isfiled on or after July 29, 2014, and that iseffective on or before July 21, 2014, priorto the transactions that are deemed to oc-cur under § 301.7701–3(g) as a result ofthe change in classification.

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

III. CAAs and RFAs

Section 1.901(m)–2T(b) identifies thetransactions that are CAAs under section901(m)(2)(A) through (C). Section 1.901(m)–2T(c) provides that, with respect to aforeign income tax and a CAA, an RFA isany asset (including goodwill, going con-cern value, or other intangible) subject tothe CAA that is relevant in determiningforeign income for purposes of the foreignincome tax. An asset is subject to a CAA,if, for example (i) in the case of a qualifiedstock purchase of a target corporation (asdefined in section 338(d)(3)) to which sec-tion 338(a) applies, “new” target is treatedas purchasing the asset from “old” target;(ii) in the case of a taxable acquisition ofa disregarded entity that is treated as anacquisition of stock for foreign income taxpurposes, the asset is owned by the disre-gard entity at that time of the purchase andtherefore the buyer is treated as purchas-ing the asset from the seller; and (iii) inthe case of a section 743(b) CAA, theasset is attributable to the partnership in-terest transferred in the section 743(b)CAA.

Section 1.901(m)–2T(d) provides thatthe statutory definitions under section901(m)(2) and 901(m)(4) apply to deter-mine whether a transaction that occurredduring the transition period is a CAA and


which assets are RFAs with respect tothose CAAs, respectively.

IV. Determining Basis Difference withRespect to an RFA

A basis difference is computed sepa-rately with respect to each foreign incometax for which an asset is an RFA. Consis-tent with section 901(m)(3)(C), § 1.901(m)–4T(b) provides the general rule thatbasis difference with respect to an RFA isthe U.S. basis in the RFA immediatelyafter the CAA, less the U.S. basis in theRFA immediately before the CAA. If,however, an asset is an RFA with respectto a section 743(b) CAA, § 1.901(m)–4T(d) provides that basis difference withrespect to the RFA is the resulting basisadjustment under section 743(b) that isallocated to the RFA under section 755.

Section 1.901(m)–2T(e) “resets” thebasis difference in an RFA with respect toa CAA that occurred during the transitionperiod by defining basis difference in theRFA as the portion of statutory basis dif-ference that had not been taken into ac-count under section 901(m)(3)(B) eitheras of July 21, 2014, or, in the case of anentity classification election made under§ 301.7701–3 that is filed on or after July29, 2014, and that is effective on or beforeJuly 21, 2014, prior to the transactionsthat are deemed to occur under§ 301.7701–3(g) as a result of the changein classification. This is the basis differ-ence in the RFA for the period to whichthe temporary regulations apply.

V. Basis Difference Taken into Account

Section 1.901(m)–5T provides rulesfor determining the amount of basis dif-ference with respect to an RFA that istaken into account in a given U.S. taxableyear (allocated basis difference). Theamount of basis difference taken into ac-count in a U.S. taxable year is used tocompute a disqualified tax amount for theU.S. taxable year. Basis difference istaken into account in two ways: under anapplicable cost recovery method or as aresult of a disposition of the RFA. If anasset is an RFA with respect to more thanone foreign income tax, basis differencewith respect to each foreign income tax isseparately taken into account under§ 1.901(m)–5T.

A. Determining cost recovery amounts

Consistent with section 901(m)(3)(B)(i), § 1.901(m)–5T(b)(2) provides thata cost recovery amount for an RFA isdetermined by applying an applicable costrecovery method to the basis differencerather than to the U.S. basis of the RFA.

B. Determining disposition amounts

1. Overview

Section 901(m)(3)(B)(ii) provides that,except as otherwise provided by the Sec-retary, if there is a disposition of an RFA,the basis difference allocated to the U.S.taxable year of the disposition shall be theexcess of the basis difference of such RFAover the total amount of such basis differ-ence that has been allocated to all priorU.S. taxable years (unallocated basis dif-ference). This result is appropriate whenall the gain or loss from the disposition isrecognized for both U.S. and foreign in-come tax purposes. In other cases, how-ever, a disposition may not be the appro-priate time for all of the unallocated basisdifference to be taken into account. Forexample, it may not be appropriate for allof the unallocated basis difference to betaken into account upon a disposition thatis fully taxable for U.S. income tax pur-poses but not for foreign income tax pur-poses. Accordingly, under the specific au-thority granted to the Secretary withrespect to dispositions, these temporaryregulations provide rules to determinewhen less than all of the unallocated basisdifference is taken into account as a resultof a disposition.

2. Definition of disposition

Section 1.901(m)–1T(a)(10) defines adisposition for purposes of section 901(m)as an event that results in gain or lossbeing recognized with respect to an RFAfor purposes of U.S. income tax or foreignincome tax, or both. Thus, the definitionexcludes certain transfers that might oth-erwise be considered dispositions underthe ordinary meaning of that term. Forexample, an entity classification electionby an RFA owner that results in a tax-freedeemed liquidation for U.S. income taxpurposes but that is disregarded for for-

eign income tax purposes does not resultin a disposition of the RFAs under section901(m), because no gain or loss is recog-nized for U.S. or foreign income tax pur-poses with respect to the distribution ofthe RFAs in the deemed liquidation. Thisis the case even though the deemed liqui-dation might otherwise be considered a“disposition” of assets under other provi-sions of the Code.

3. Determining a disposition amount

Section 1.901(m)–5T(c)(2) providesrules for determining a dispositionamount. If a disposition of an RFA is fullytaxable for U.S. and foreign income taxpurposes, the disposition amount will beany remaining unallocated basis differ-ence with respect to that RFA. This isbecause there generally will no longer bea disparity in the U.S. basis and the for-eign basis of the RFA.

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

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


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

For the avoidance of doubt, the deter-mination of whether there is a dispositionfor U.S. income tax purposes, and theamount of U.S. disposition gain or U.S.disposition loss, is made without regard towhether gain or loss is deferred or disal-lowed or otherwise not taken into accountcurrently (for example, see section 267,which defers or disallows certain recog-nized losses, and § 1.1502–13, which pro-vides rules for taking into account itemsof income, gain, deduction, and loss ofmembers of a U.S. consolidated groupfrom intercompany transactions). Thisprinciple also applies if foreign law has anequivalent concept whereby gain or lossthat is realized and recognized is deferredor disallowed.

If an asset is an RFA by reason of asection 743(b) CAA and subsequentlythere is a disposition of the RFA, then forpurposes of determining the dispositionamount, foreign disposition gain or for-eign disposition loss means the amount ofgain or loss recognized for purposes of aforeign income tax on the disposition ofthe RFA that is allocable to the partner-ship interest that was transferred in thesection 743(b) CAA. See § 1.901(m)–5T(c)(2)(iii). In addition, U.S. dispositiongain or U.S. disposition loss means theamount of gain or loss recognized for U.S.income tax purposes on the disposition ofthe RFA that is allocable to the partner-ship interest that was transferred in thesection 743(b) CAA, taking into accountthe basis adjustment under section 743(b)that was allocated to the RFA under sec-tion 755 in the section 743(b) CAA. Seeid.

VI. Successor Rules for UnallocatedBasis Difference

A. General rules

Section 1.901(m)–6T(b) provides thatsection 901(m) continues to apply to anyunallocated basis difference with respectto an RFA after there is a transfer of theRFA for U.S. income tax purposes (suc-cessor transaction), regardless of whetherthe transfer is a disposition, a CAA, or anon-taxable transaction. A successortransaction does not occur if, as a result ofthe transfer of an RFA, the entire unallo-cated basis difference is taken into ac-count because, for example, the transferresults in all realized gain or loss in theRFA being recognized for U.S. and for-eign income tax purposes.

Notice 2014–44 stated that the Trea-sury Department and the IRS are continu-ing to study whether and to what extentsection 901(m) should apply to an assetreceived in exchange for an RFA in atransaction in which the U.S. basis of theasset is determined by reference to theU.S. basis of the transferred RFA. TheTreasury Department and the IRS havedetermined that an asset should not be-come an RFA solely because the U.S.basis of that asset is determined by refer-ence to the U.S. basis of an RFA forwhich the asset is exchanged in a succes-sor transaction. Accordingly, for example,if, in a successor transaction, an RFAowner transfers an RFA to a corporationin a transfer to which section 351 applies,the stock of the transferee corporation re-ceived is not an RFA even though the U.S.basis of the stock is determined undersection 358 by reference to the U.S. basisof the RFA transferred.

B. Successor transactions that are CAAs

An asset may be an RFA with respectto multiple CAAs if a successor transac-tion is also a CAA (subsequent CAA). Inthis case, the subsequent CAA may giverise to additional basis difference. Section1.901(m)–6T(b)(4)(i) provides generallythat the unallocated basis difference withrespect to a CAA that occurred prior to thesubsequent CAA (referred to in the regu-lations as a “prior CAA”) will continue to

be taken into account under section901(m) after the subsequent CAA.

Section 1.901(m)–6T(b)(4)(iii) pro-vides an exception to the general rule if anRFA is subject to two section 743(b)CAAs (referred to in the regulations as a“prior section 743(b) CAA” and a “sub-sequent section 743(b) CAA”). In thiscase, to the extent the same partnershipinterest is transferred in the section 743(b)CAAs, the RFA will be treated as havingno unallocated basis difference with re-spect to the prior section 743(b) CAA ifbasis difference for the subsequent section743(b) CAA is determined independentlyfrom the prior section 743(b) CAA. In thisregard, see generally § 1.743–1(f) andproposed § 1.743–1(f)(2). If the subse-quent section 743(b) CAA results fromthe acquisition of only a portion of thepartnership interest acquired in the priorsection 743(b) CAA, the transferor mustequitably apportion the unallocated basisdifference attributable to the prior section743(b) CAA between the portion of theinterest retained and the portion of the in-terest transferred. With respect to the por-tion transferred, the RFA will be treated ashaving no unallocated basis difference at-tributable to the prior section 743(b)CAA.

VII. Definition of Foreign Income Tax

For purposes of section 901(m), thetemporary regulations define “foreign in-come tax” as any income, war profits, orexcess profits tax for which a credit isallowable under section 901 or 903, otherthan any withholding tax determined on agross basis as described in section901(k)(1)(B). The Treasury Departmentand the IRS have determined that a with-holding tax should not be subject to dis-allowance under section 901(m) because awithholding tax is a gross basis tax that isgenerally unaffected by changes in assetbasis.

Effect on Other Documents

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

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


Special Analyses

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


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

* * * * *

Amendments to the Regulations



Paragraph 1. The authority citation forpart 1 is amended by adding entries innumerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *Sections 1.901(m)–1T through –8T

also issued under 26 U.S.C. 901(m)(7).Section 1.901(m)–5T also issued under

26 U.S.C. 901(m)(3)(B)(ii). * * *Par. 2. Section 1.901(m)–1T is added

to read as follows:

§ 1.901(m)–1T Definitions (temporary).

(a) Definitions. For purposes of section901(m), this section, and §§ 1.901(m)–2Tthrough 1.901(m)–8T, the following def-initions apply:

(1)–(5) [Reserved].(6) The term basis difference has the

meaning provided in § 1.901(m)–4T.

(7) The term cost recovery amount hasthe meaning provided in § 1.901(m)–5T(b)(2).

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

(9) [Reserved].(10) The term disposition means an

event (for example, a sale, abandonment,or mark-to-market event) that results ingain or loss being recognized with respectto an RFA for purposes of U.S. incometax or a foreign income tax, or both.

(11) The term disposition amount hasthe meaning provided in § 1.901(m)–5T(c)(2).

(12) [Reserved].(13) The term disregarded entity

means an entity that is disregarded as anentity separate from its owner, as de-scribed in § 301.7701–2(c)(2)(i) of thischapter.

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

(15)–(17) [Reserved].(18) The term foreign disposition gain

means, with respect to a foreign incometax, the amount of gain recognized on adisposition of an RFA in determining for-eign income, regardless of whether thegain is deferred or otherwise not takeninto account currently. Notwithstandingthe foregoing, if after a section 743(b)CAA there is a disposition of an asset thatis an RFA with respect to that section743(b) CAA, foreign disposition gain hasthe meaning provided in § 1.901(m)–5T(c)(2)(iii).

(19) The term foreign disposition lossmeans, with respect to a foreign incometax, the amount of loss recognized on adisposition of an RFA in determining for-eign income, regardless of whether theloss is deferred or disallowed or otherwisenot taken into account currently. Notwith-standing the foregoing, if after a section743(b) CAA there is a disposition of anasset that is an RFA with respect to thatsection 743(b) CAA, foreign dispositionloss has the meaning provided in§ 1.901(m)–5T(c)(2)(iii).

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

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

(21) The term foreign income taxmeans an income, war profits, or excessprofits tax for which a credit is allowableunder section 901 or 903, except that itdoes not include any withholding tax de-termined on a gross basis as described insection 901(k)(1)(B).

(22)–(25) [Reserved].(26) The term prior CAA has the mean-

ing provided in § 1.901(m)–6T(b)(2).(27) The term prior section 743(b)

CAA has the meaning provided in§ 1.901(m)–6T(b)(4)(iii).

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

(29–(32) [Reserved].(33) The term section 338 CAA has the

meaning provided in § 1.901(m)–2T(b)(1).

(34) The term section 743(b) CAA hasthe meaning provided in § 1.901(m)–2T(b)(3).

(35) [Reserved].(36) The term subsequent CAA has the

meaning provided in § 1.901(m)–6T(b)(4)(i).

(37) The term subsequent section743(b) CAA has the meaning provided in§ 1.901(m)–6T(b)(4)(iii).

(38) The term successor transactionhas the meaning provided in § 1.901(m)–6T(b)(2).

(39) [Reserved].(40) The term unallocated basis differ-

ence means, with respect to an RFA and aforeign income tax, the basis differencereduced by the sum of the cost recoveryamounts and the disposition amounts thathave been computed under § 1.901(m)–5T.


(41) The term U.S. basis means theadjusted basis of an asset determined forU.S. income tax purposes.

(42) [Reserved].(43) The term U.S. disposition gain

means the amount of gain recognized forU.S. income tax purposes on a dispositionof an RFA, regardless of whether the gainis deferred or otherwise not taken intoaccount currently. Notwithstanding theforegoing, if after a section 743(b) CAAthere is a disposition of an asset that is anRFA with respect to that section 743(b)CAA, U.S. disposition gain has the mean-ing provided in § 1.901(m)–5T(c)(2)(iii).

(44) The term U.S. disposition lossmeans the amount of loss recognized forU.S. income tax purposes on a dispositionof an RFA, regardless of whether the lossis deferred or disallowed or otherwise nottaken into account currently. Notwith-standing the foregoing, if after a section743(b) CAA there is a disposition of anasset that is an RFA with respect to thatsection 743(b) CAA, U.S. disposition losshas the meaning provided in § 1.901(m)–5T(c)(2)(iii).

(45) The term U.S. taxable year meansa taxable year as defined in section7701(a)(23).

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

(2) Paragraphs (a)(6), (7), (8), (10),(11), (13), (14), (18), (19), (20), (21), (26),(27), (28), (33), (34), (36), (37), (38), (40),(41), (43), (44), and (45) of this sectionapply to CAAs occurring on or after July21, 2014, and to CAAs occurring beforethat date resulting from an entity classifi-cation election made under § 301.7701–3that is filed on or after July 29, 2014, andthat is effective on or before July 21,2014. Paragraphs (a)(6), (7), (8), (10),(11), (13), (14), (18), (19), (20), (21), (26),(27), (28), (33), (34), (36), (37), (38), (40),(41), (43), (44), and (45) of this sectionalso apply to CAAs occurring on or afterJanuary 1, 2011, and before July 21, 2014,other than CAAs occurring before July 21,2014, resulting from an entity classifica-tion election made under § 301.7701–3that is filed on or after July 29, 2014, andthat is effective on or before July 21,2014, but only if the basis difference(within the meaning of section 901(m)(3)(C)(i)) in one or more RFAs with re-spect to the CAA had not been fully taken

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

(3) [Reserved].(c) Expiration date. The applicability

of this section expires on December 6,2019.

Par. 3. Section 1.901(m)–2T is addedto read as follows:

§ 1.901(m)–2T Covered assetacquisitions and relevant foreign assets(temporary).

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

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

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

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

(3) Any acquisition of an interest in apartnership that has an election in effectunder section 754 (section 743(b) CAA);

(4)–(6) [Reserved].(c) Relevant foreign asset—(1) In gen-

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

cern value, or other intangible) subject tothe CAA that is relevant in determiningforeign income for purposes of the foreignincome tax.

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

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

(d) Identifying covered asset acquisi-tions and relevant foreign assets to whichparagraphs (b) and (c) of this section donot apply. For transactions occurring on orafter January 1, 2011, and before July 21,2014, other than transactions occurringbefore July 21, 2014, resulting from anentity classification election made under§ 301.7701–3 of this chapter that is filedon or after July 29, 2014, and that iseffective on or before July 21, 2014, thetransactions set forth under section901(m)(2) are CAAs and the assets thatare relevant foreign assets with respect tothe CAA under section 901(m)(4) areRFAs.

(e) Examples. [Reserved].(f) Effective/applicability date—(1)

Paragraphs (a), (b)(1) through (3), and(c)(1) of this section apply to transactionsoccurring on or after July 21, 2014, and totransactions occurring before that date re-sulting from an entity classification elec-tion made under § 301.7701–3 of thischapter that is filed on or after July 29,2014, and that is effective on or beforeJuly 21, 2014. Paragraph (d) of this sec-tion applies to transactions occurring onor after January 1, 2011, and before July21, 2014, other than transactions occur-ring before July 21, 2014, resulting froman entity classification election made un-der § 301.7701–3 of this chapter that isfiled on or after July 29, 2014, and that iseffective on or before July 21, 2014.

(2)–(3) [Reserved].(g) Expiration date. The applicability


Par. 4. Section 1.901(m)–3T is addedand reserved to read as follows:

§ 1.901(m)–3T Disqualified tax amountand aggregate basis difference carryover(temporary). [Reserved].



§ 1.901(m)–4T Determination of basisdifference (temporary).

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

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

(c) Foreign basis election. [Reserved].(d) Determination of basis difference

in a section 743(b) CAA—(1) In general.Except as provided in paragraphs (d)(2)and (e) of this section, if there is a section743(b) CAA, basis difference is the result-ing basis adjustment under section 743(b)that is allocated to the RFA under section755.

(2) Foreign basis election. [Reserved].(e) Determination of basis difference in

an RFA with respect to a CAA with re-spect to which paragraphs (b), (c), and (d)of this section do not apply. For CAAsoccurring on or after January 1, 2011, andbefore July 21, 2014, other than CAAsoccurring before July 21, 2014, resultingfrom an entity classification election madeunder § 301.7701–3 of this chapter that is

filed on or after July 29, 2014, and that iseffective on or before July 21, 2014, basisdifference in an RFA with respect to theCAA is the amount of any basis difference(within the meaning of section 901(m)(3)(C)(i)) that had not been taken intoaccount under section 901(m)(3)(B) eitheras of July 21, 2014, or, in the case of anentity classification election made under§ 301.7701–3 of this chapter that is filedon or after July 29, 2014, and that iseffective on or before July 21, 2014, priorto the transactions that are deemed to oc-cur under § 301.7701–3(g) as a result ofthe change in classification.

(f) Examples. [Reserved].(g) Effective/applicability date. (1)

Paragraphs (a), (b), and (d)(1) of this sec-tion apply to CAAs occurring on or afterJuly 21, 2014, and to CAAs occurringbefore that date resulting from an entityclassification election made under§ 301.7701–3 that is filed on or after July29, 2014, and that is effective on or beforeJuly 21, 2014. Paragraph (e) of this sec-tion applies to CAAs occurring on or afterJanuary 1, 2011, and before July 21, 2014,other than CAAs occurring before July 21,2014, resulting from an entity classifica-tion election made under § 301.7701–3 ofthis chapter that is filed on or after July29, 2014, and that is effective on or beforeJuly 21, 2014. Taxpayers may, however,consistently apply paragraph (d)(1) of thissection to all section 743(b) CAAs occur-ring on or after January 1, 2011. For thispurpose, persons that are related (withinthe meaning of section 267(b) or 707(b))will be treated as a single taxpayer.

(2)–(3) [Reserved].(h) Expiration date. The applicability



§ 1.901(m)–5T Basis difference takeninto account (temporary).

(a) In general. [Reserved].(b) Basis difference taken into account

under applicable cost recovery method—(1) In general. [Reserved].

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

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

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

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

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

(2) Determining a disposition amount—(i) Disposition is fully taxable for pur-poses of both U.S. income tax and theforeign income tax. If a disposition of anRFA is fully taxable (that is, results in allgain or loss, if any, being recognized withrespect to the RFA) for purposes of bothU.S. income tax and the foreign incometax, the disposition amount is equal to theunallocated basis difference with respectto the RFA.

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

(A) Positive basis difference. If the dis-position of an RFA is not fully taxable forpurposes of both U.S. income tax and theforeign income tax, and the RFA has apositive basis difference, the dispositionamount equals the lesser of:

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

(2) Unallocated basis difference withrespect to the RFA.

(B) Negative basis difference. If thedisposition of an RFA is not fully taxablefor purposes of both U.S. income tax andthe foreign income tax, and the RFA has anegative basis difference, the dispositionamount equals the greater of:

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

(2) Unallocated basis difference withrespect to the RFA.

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


a section 743(b) CAA and subsequentlythere is a disposition of the RFA, then, forpurposes of determining the dispositionamount, foreign disposition gain or for-eign disposition loss are specially definedto mean the amount of gain or loss recog-nized for purposes of the foreign incometax on the disposition of the RFA that isallocable to the partnership interest thatwas transferred in the section 743(b)CAA. In addition, U.S. disposition gain orU.S. disposition loss are specially definedto mean the amount of gain or loss recog-nized for U.S. income tax purposes on thedisposition of the RFA that is allocable tothe partnership interest that was trans-ferred in the section 743(b) CAA, takinginto account the basis adjustment undersection 743(b) that was allocated to theRFA under section 755.

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

(e) Special rules for certain section743(b) CAAs. [Reserved].

(f) Mid-year transactions. [Reserved].(g) Reverse hybrids. [Reserved].(h) Examples. [Reserved].(i) Effective/applicability date. (1) [Re-

served].(2) Paragraphs (b)(2)(i) and (c)(2) of

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

(3) [Reserved].(j) Expiration date. The applicability of

this section expires on December 6, 2019.Par. 7. Section 1.901(m)–6T is added

to read as follows:

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

(a) In general. This section providessuccessor rules applicable to section901(m). Paragraph (b) of this section pro-vides rules for the continued applicationof section 901(m) after an RFA that hasunallocated basis difference has beentransferred, including special rules appli-cable to successor transactions that arealso CAAs or that involve partnerships.Paragraph (c) of this section providesrules for determining when an aggregatebasis difference carryover of a section901(m) payor either becomes an aggre-gate basis difference carryover of the sec-tion 901(m) payor with respect to anotherforeign payor or is transferred to anothersection 901(m) payor. Paragraph (d) ofthis section provides the effective/applica-bility date, and paragraph (e) of this sec-tion provides the expiration date.

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

(2) Definition of a successor transac-tion. A successor transaction occurs withrespect to an RFA if, after a CAA (priorCAA), there is a transfer of the RFA forU.S. income tax purposes and the RFAhas unallocated basis difference with re-spect to the prior CAA, determined imme-diately after the transfer. A successortransaction may occur regardless ofwhether the transfer of the RFA is a dis-position, a CAA, or a non-taxable trans-action for purposes of U.S. income tax. Ifthe RFA was subject to multiple priorCAAs, a separate determination must bemade with respect to each prior CAA as towhether the transfer is a successor trans-action.

(3) Special considerations. [Reserved].(4) Successor transaction is a CAA—

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

subsequent CAA, unallocated basis differ-ence with respect to any prior CAAs willcontinue to be taken into account undersection 901(m) after the subsequent CAA.Furthermore, the subsequent CAA maygive rise to additional basis differencesubject to section 901(m).

(ii) Foreign basis election. [Reserved].(iii) Multiple section 743(b) CAAs. If

an RFA is subject to two section 743(b)CAAs (prior section 743(b) CAA and sub-sequent section 743(b) CAA) and thesame partnership interest is acquired inboth the CAAs, the RFA will be treated ashaving no unallocated basis differencewith respect to the prior section 743(b)CAA if the basis difference for the section743(b) CAA is determined independentlyfrom the prior section 743(b) CAA. In thisregard, see generally § 1.743–1(f). If thesubsequent section 743(b) CAA resultsfrom the acquisition of only a portion ofthe partnership interest acquired in theprior section 743(b) CAA, then the trans-feror will be required to equitably appor-tion the unallocated basis difference at-tributable to the prior section 743(b) CAAbetween the portion retained by the trans-feror and the portion transferred. In thiscase, with respect to the portion trans-ferred, the RFAs will be treated as havingno unallocated basis difference with re-spect to the prior section 743(b) CAA ifbasis difference for the subsequent section743(b) CAA is determined independentlyfrom the prior section 743(b) CAA.

(5) Example. The following exampleillustrates the rules of paragraph (b) of thissection.

Example. (i) Facts. USP, a domestic corporation,wholly owns CFC, a foreign corporation organizedin Country A and treated as a corporation for bothU.S. and Country A tax purposes. FT is an unrelatedforeign corporation organized in Country A andtreated as a corporation for both U.S. and Country Atax purposes. FT owns one asset, a parcel of land(Asset). Country A imposes a single tax that is aforeign income tax. On January 1, Year 1, CFCacquires all of the stock of FT in exchange for 300uin a qualified stock purchase (as defined in section338(d)(3)) to which section 338(a) applies (Acquisi-tion). Immediately before the Acquisition, Asset hada U.S. basis of 100u, and immediately after theAcquisition, Asset had a U.S. basis of 300u. Effec-tive on February 1, Year 1, FT elects to be a disre-garded entity pursuant to § 301.7701–3. As a resultof the election, FT is deemed, for U.S. income taxpurposes, to distribute Asset to CFC in liquidation(Deemed Liquidation) immediately before the clos-ing of the day before the election is effective pursu-ant to § 301.7701–3(g)(1)(iii) and (3)(ii). The


Deemed Liquidation is disregarded for Country Atax purposes. No gain or loss is recognized on theDeemed Liquidation for either U.S. or Country A taxpurposes.

(ii) Result. Under § 1.901(m)–2T(b)(1), the Ac-quisition by CFC of the stock of FT is a section 338CAA. Under § 1.901(m)–2T(c)(1), Asset is an RFAwith respect to Country A tax and the Acquisition,because immediately after the Acquisition, Asset isrelevant in determining foreign income of FT forCountry A tax purposes, and FT owned Asset whenthe Acquisition occurred. Under § 1.901(m)–4T(b),the basis difference with respect to Asset is 200u(300u – 100u). Under § 1.901(m)–2T(b)(2), theDeemed Liquidation is a CAA (subsequent CAA)because the Deemed Liquidation is treated as anacquisition of assets for U.S. income tax purposesand is disregarded for Country A tax purposes. Be-cause the U.S. basis in Asset is 300u immediatelybefore and after the Deemed Liquidation, the subse-quent CAA does not give rise to any additional basisdifference. The Deemed Liquidation is not a dispo-sition under § 1.901(m)–1T(a)(10) because it did notresult in gain or loss being recognized with respect toAsset for U.S. or Country A tax purposes. Accord-ingly, no basis difference with respect to Asset istaken into account under § 1.901(m)–5T as a resultof the Deemed Liquidation, and the unallocated basisdifference with respect to Asset immediately afterthe Deemed Liquidation is 200u (200u – 0u). Underparagraph (b)(2) of this section, the Deemed Liqui-dation is a successor transaction because there is atransfer of Asset for U.S. income tax purposes fromFT to CFC and Asset has unallocated basis differ-ence with respect to the Acquisition immediately

after the Deemed Liquidation. Accordingly, underparagraph (b)(1) of this section, section 901(m) willcontinue to apply to the unallocated basis differencewith respect to Asset until the entire 200u basisdifference has been taken into account under§ 1.901(m)–5T.

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

(d) Effective/applicability date. (1)Paragraphs (a), (b)(1), (b)(2), (b)(4)(i),(b)(4)(iii), and (b)(5) of this section applyto CAAs occurring on or after July 21,2014, and to CAAs occurring before thatdate resulting from an entity classificationelection made under § 301.7701–3 of thischapter that is filed on or after July 29,2014, and that is effective on or beforeJuly 21, 2014. Paragraphs (a), (b)(1),(b)(2), (b)(4)(i), (b)(4)(iii), and (b)(5) ofthis section also apply to CAAs occurringon or after January 1, 2011, and beforeJuly 21, 2014, other than CAAs occurringbefore July 21, 2014, resulting from anentity classification election made under§ 301.7701–3 that is filed on or after July29, 2014, and that is effective on or beforeJuly 21, 2014, but only with respect tobasis difference determined under§ 1.901(m)–4T(e) with respect to theCAA.

(2)–(3) [Reserved].

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

Par. 8. Sections 1.901(m)–7T and 1.901(m)–8T are added and reserved to read asfollows:

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

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

John Dalrymple,Deputy Commissioner for

Services and Enforcement.

Approved: November 4, 2016.

Mark J. Mazur,Assistant Secretary of

the Treasury (Tax Policy).

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


Part III. Administrative, Procedural, and MiscellaneousTreatment of CertainTriangular ReorganizationsInvolving ForeignCorporations; Amount ofIncome Inclusion in CertainInbound NonrecognitionTransactions

Notice 2016–73

SECTION 1. OVERVIEW

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

SECTION 2. BACKGROUND

.01 Section 367(a)

Section 367(a)(1) provides that if, inconnection with any exchange describedin section 332, 351, 354, 356, or 361, aUnited States person (U.S. person) trans-fers property to a foreign corporation, theforeign corporation shall not, for purposesof determining the extent to which gainshall be recognized on such transfer, beconsidered to be a corporation. Sections367(a)(2), (3), and (6) provide exceptionsto the general rule of section 367(a)(1)and grant regulatory authority to the Sec-retary to provide additional exceptionsand to limit the statutory exceptions.

.02 Section 367(b)

Section 367(b)(1) provides that, in thecase of an exchange described in section332, 351, 354, 355, 356, or 361 in con-

nection with which there is no transfer ofproperty described in section 367(a)(1), aforeign corporation shall be considered tobe a corporation except to the extent pro-vided in regulations prescribed by theSecretary that are necessary or appropriateto prevent the avoidance of U.S. federalincome taxes. Section 367(b)(2) providesthat the regulations prescribed pursuant tosection 367(b)(1) shall include (but shallnot be limited to) regulations dealing withthe sale or exchange of stock or securitiesin a foreign corporation by a U.S. person,including regulations providing the cir-cumstances under which gain is recog-nized or deferred, amounts are included ingross income as a dividend, adjustmentsare made to earnings and profits, or ad-justments are made to the basis of stock orsecurities.

.03 Section 1.367(b)–10

(a) In General

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

When applicable to a triangular reorga-nization, the final regulations require thatadjustments be made that have the effectof a distribution of property from S to Punder section 301 (deemed distribution).§ 1.367(b)–10(b)(1). For this purpose, theamount of the deemed distribution gener-ally is the amount of property that wastransferred by S to acquire the P stock andsecurities in the P acquisition. Id. For pur-poses of making the required adjustments,the final regulations treat the deemed dis-tribution as a separate transaction that oc-curs before the P acquisition or, if P doesnot control S at the time of the P acquisi-tion, immediately after P acquires control

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

The term property for purposes of thefinal regulations has the meaning set forthin section 317(a) (that is, money, securi-ties, and any other property, other thanstock in the corporation making the distri-bution), as modified to take into accountcertain assumed liabilities and S stock orrights used by S to acquire P stock orsecurities from a person other than P.§ 1.367(b)–10(a)(3)(ii).

(b) Priority Rules

Section 1.367(b)–10(a)(2)(iii) providesthat the final regulations do not apply to atriangular reorganization if, in an ex-change under section 354 or 356, one ormore U.S. persons exchange stock or se-curities of T and the amount of gain in theT stock or securities recognized by suchU.S. persons under section 367(a)(1) isequal to or greater than the sum of theamount of the deemed distribution thatwould be treated by P as a dividend undersection 301(c)(1) and the amount of suchdeemed distribution that would be treatedby P as gain from the sale or exchange ofproperty under section 301(c)(3) (to-gether, section 367(b) income) if the finalregulations otherwise would apply to thetriangular reorganization (section 367(a)priority rule).

Section 1.367(a)–3(a)(2)(iv) provides asimilar priority rule that turns off the ap-plication of section 367(a)(1) to an ex-change under section 354 or 356 that oc-curs in connection with a triangularreorganization described in the final reg-ulations if the amount of gain that other-wise would be recognized under section367(a)(1) (without regard to any excep-tions thereto) is less than the amount ofthe section 367(b) income recognized un-der the final regulations (section 367(b)priority rule).

(c) Anti-Abuse Rule

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


regulations (anti-abuse rule). § 1.367(b)–10(d). The anti-abuse rule sets forth oneexample, which provides that the earningsand profits of S will be deemed to includethe earnings and profits of a corporationrelated to P or S for purposes of determin-ing the consequences of the adjustmentsprovided in the final regulations, if S iscreated, organized, or funded to avoid theapplication of the final regulations withrespect to the earnings and profits of thatrelated corporation. Id.

(d) Notice 2014–32

On April 25, 2014, the Treasury De-partment and the IRS issued Notice2014–32 (2014–20 IRB 1006) (2014 no-tice), which announced the intention toissue regulations modifying and clarifyingthe final regulations. The 2014 notice ad-dressed, in part, certain inversion transac-tions that were structured to be subject tothe final regulations in order to avoidshareholder-level gain recognition undersection 367(a)(1) by reason of the section367(b) priority rule, notwithstanding thatonly a minimal amount of income wassubject to U.S. tax by reason of a deemeddistribution under the final regulations.The 2014 notice announced that the finalregulations would be modified to providethat section 367(b) income includes a sec-tion 301(c)(1) dividend or section301(c)(3) gain that would arise if the finalregulations applied to the triangular reor-ganization only to the extent such divi-dend income or gain would be subject toU.S. tax or would give rise to an incomeinclusion under section 951(a)(1)(A) thatwould be subject to U.S. tax.

The 2014 notice also announced thatthe anti-abuse rule would be clarified toprovide that S’s acquisition of P stock orsecurities in exchange for a note may in-voke the anti-abuse rule, and that the earn-ings and profits of a corporation (or asuccessor corporation) may be taken intoaccount for purposes of determining theconsequences of the adjustments providedin the final regulations, as modified by therules announced in the notice, regardlessof whether such corporation is related to Por S before the triangular reorganization.

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

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

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

Sections 1.367(b)–4 and 1.367(b)–4Tapply to certain acquisitions by a foreigncorporation of the stock or assets of aforeign corporation (referred to in thoseregulations and this notice as the “foreignacquired corporation”) in an exchangedescribed in section 351 or in a reorgani-zation described in section 368(a)(1). Sec-tions 1.367(b)–4T(b) and 1.367(b)–4(b)(1) provide that, if the potential applica-tion of section 1248 cannot be preservedfollowing the acquisition of the stock orassets of a foreign corporation by anotherforeign corporation in an exchange sub-ject to section 367(b), then certain ex-changing shareholders of the foreign ac-quired corporation must include in incomeas a dividend the section 1248 amountattributable to the stock of the foreignacquired corporation exchanged. How-ever, the scope and purpose of the grant ofauthority in section 367(b) are not limitedto the preservation of section 1248amounts, and the regulations thereunderare not limited to requiring an inclusion ofthe section 1248 amount with respect tothe stock of a foreign acquired corporationexchanged. Section 367(b) provides theTreasury Department and the IRS broadauthority to issue regulations applicable tononrecognition transactions that are “nec-essary or appropriate to prevent the avoid-ance of Federal income taxes,” includingregulations that prescribe “the circum-stances under which gain shall be recog-nized currently, or amounts included ingross income currently as a dividend, orboth.”

.05 Inbound Transactions and the AllEarnings and Profits Amount

Section 1.367(b)–3 applies when a for-eign corporation transfers assets to a do-mestic corporation pursuant to either aliquidation described in section 332 or anasset reorganization described in section368 (in each case, an “inbound transac-tion”). Section 1.367(b)–3(a) and this no-tice refer to such foreign corporation asthe “foreign acquired corporation” and

such domestic corporation as the “domes-tic acquiring corporation.” When there isan inbound transaction, in general,§ 1.367(b)–3 requires certain shareholders(including certain foreign corporate share-holders) of the foreign acquired corpora-tion to include in income as a deemeddividend the all earnings and profitsamount with respect to their stock. Under§ 1.367(b)–2(d), the all earnings and prof-its amount of a foreign acquired corpora-tion is determined under the principles ofsection 1248 for computing the amount ofearnings and profits attributable to stock,with certain modifications. For example,the all earnings and profits amount doesnot take into account earnings and profitsof foreign subsidiaries of the foreign ac-quired corporation, notwithstanding sec-tion 1248(c)(2). § 1.367(b)–2(d)(3)(ii).

Section 1.367(b)–3 is intended to en-sure that a domestic acquiring corporationdoes not succeed to the basis in the assetsof the foreign acquired corporation exceptto the extent that a U.S. person that is ashareholder (including indirect ownershipthrough certain foreign corporate share-holders) of the foreign acquired corpora-tion has been subject to U.S. tax on itsshare of the earnings and profits that gaverise, in whole or in part, to the basis. See,for example, the discussion concerning in-bound transactions in the preambles to TD8862 (65 FR 3589–01, 2000–1 CB 466)and proposed regulations issued in 1991(56 FR 41993, 1991–2 CB 1070). Thedefinition of the all earnings and profitsamount, in particular its limitation withrespect to the earnings and profits of sub-sidiaries, is premised on an assumptionthat the basis in the assets of the foreignacquired corporation reflects solely theearnings and profits of the foreign ac-quired corporation, the liabilities of theforeign acquired corporation, and capitalacquired from a shareholder.

.06 Nonqualified Preferred Stock

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


SECTION 3. TRANSACTIONS ATISSUE

The Treasury Department and the IRSare aware that taxpayers are engaging intransactions designed to repatriate earn-ings and basis of foreign corporationswithout incurring U.S. tax by exploitingthe section 367(a) priority rule, as modi-fied by the 2014 notice. In one such trans-action, USP, a domestic corporation,wholly owns FP, a foreign corporation,which, in turn, wholly owns FS, anotherforeign corporation. FP has no earningsand profits, but FS has substantial earn-ings and profits. A dividend from FS to FPwould qualify for the exception to foreignpersonal holding company income undersection 954(c)(6). USP also wholly ownsUSS, a domestic corporation, which, inturn, wholly owns FT, a foreign corpora-tion. Pursuant to a transaction undertakenfor the purported business purpose of in-tegrating FT into the FP-FS ownershipchain, FS acquires FP stock from FP inexchange for cash, a note, or other prop-erty (the FP acquisition) and uses the FPstock to acquire all of the stock of FTfrom USS in a transaction intended toqualify as a reorganization described insection 368(a)(1)(B) (FT reorganization).On a later date, and purportedly unrelatedto the FT reorganization, FP engages in aninbound transaction described in § 1.367(b)–3, for example, a transfer of all ofFP’s assets, including the cash, note, orother property received from FS, to USPor a domestic subsidiary of USP.

In this transaction, the transfer by USSof the FT stock to FS in exchange forstock of FP pursuant to the FT reorgani-zation is an indirect stock transfer de-scribed in § 1.367(a)–3(d)(1)(iii)(A). Pur-suant to § 1.367(a)–3(b), the taxpayer filesa gain recognition agreement under§ 1.367(a)–8 with respect to USS’s trans-fer of FT stock on all but a de minimisamount of FT stock, and, with respect tothat de minimis amount of FT stock, rec-ognizes a small amount of gain under sec-tion 367(a)(1). Furthermore, the taxpayerapplies the priority rules by comparing thesection 367(b) income to the de minimisamount of gain under section 367(a)(1) todetermine whether the final regulationsapply to the FP acquisition. In computingthe amount of section 367(b) income for

purposes of the section 367(a) priorityrule, the taxpayer takes the position that adeemed distribution from FS to FP wouldnot result in section 367(b) income, asdescribed in the 2014 notice, because anydividend income to FP would not be sub-ject to U.S. tax and would not give rise toan income inclusion under section951(a)(1)(A) by reason of section 954(c)(6). Accordingly, the taxpayer takes theposition that the section 367(b) income(which, under this position, is zero) doesnot exceed the section 367(a) gain and,therefore, the final regulations do not ap-ply to the FP acquisition by reason of thesection 367(a) priority rule. Furthermore,the taxpayer takes the position that thesubsequent inbound transaction with re-spect to FP results in no income inclusionto USP under § 1.367(b)–3 because FP’searnings and profits are not increased un-der the final regulations and thus FP’s allearnings and profits amount is zero. Fi-nally, the taxpayer takes the position thatthe anti-abuse rule does not apply in thiscase for various reasons that may include:(1) the FP acquisition is not engaged inwith a view to avoid the purpose of thefinal regulations because it is engaged infor the purpose of integrating FT into theFP-FS chain; (2) the FP acquisition is nota transaction that occurs in connectionwith the FT reorganization because theacquisition is specifically contemplated bythe final regulations; (3) the inboundtransaction with respect to FP does notoccur in connection with the FT reorgani-zation because it does not occur pursuantto the same plan as the FT reorganization;or (4) the anti-abuse rule only applies toadjust the earnings and profits of FS totake into account the earnings and profitsof another corporation and, in this regard,FS is not created, organized, or funded toavoid the purpose of the final regulationswith respect to the earnings and profits ofanother corporation.

The Treasury Department and the IRSalso are aware of a similar transaction inwhich taxpayers take advantage of therule in section 951(a)(1)(A) that requires aU.S. shareholder to include in its grossincome its pro rata share of the subpart Fincome of a foreign corporation only if theforeign corporation has been a controlledforeign corporation for an uninterruptedperiod of 30 days or more during the

taxable year (the 30-day rule). In this formof the transaction, FP is formed, and theFP acquisition occurs, during the final 29days of FP’s taxable year. In computingthe amount of section 367(b) income forpurposes of the section 367(a) priorityrule in this transaction, the taxpayer takesthe position that a deemed distributionfrom FS to FP would not result in anysection 367(b) income, as described in the2014 notice, because any income recog-nized by FP (including capital gain undersection 301(c)(3)) would not be subject toU.S. tax and would not give rise to anincome inclusion under section 951(a)(1)(A) by reason of the 30-day rule.

The Treasury Department and the IRSalso are aware of another variation of thetransaction intended to repatriate earningsof a foreign corporation without U.S. taxthrough the use of nonqualified preferredstock. In one such transaction, USP, adomestic corporation, wholly owns bothFP, a foreign corporation, and USS, adomestic corporation. USS wholly ownsFT, a foreign corporation, which has sub-stantial earnings and profits. FP has noearnings and profits. FP acquires newly-issued stock of USP from USP in ex-change for nonqualified preferred stock ofFP, and then FP uses the USP stock asconsideration to acquire all of the stock ofFT from USS in a transaction intended toqualify as a reorganization described insection 368(a)(1)(B). On a subsequentdate, when FP still has no earnings andprofits, FP redeems the FP nonqualifiedpreferred stock held by USP in exchangefor cash or a note.

The taxpayer takes the position thatFP’s acquisition of USP stock is not sub-ject to the final regulations because the FPnonqualified preferred stock is not “prop-erty” within the meaning of § 1.367(b)–10(a)(3)(ii). Furthermore, the taxpayertakes the position that USP’s transfer ofits own stock to FP in exchange for non-qualified preferred stock does not qualifyas an exchange described in section 351pursuant to section 351(g)(2) and, there-fore, USP takes a basis in the FP nonquali-fied preferred stock equal to its fair marketvalue under § 1.1032–1(d). In addition,the taxpayer takes the position that theredemption of the FP nonqualified pre-ferred stock does not result in dividendincome or capital gain to USP under sec-


tion 301(c) because FP does not haveearnings and profits and the redemption isapplied against and reduces USP’s basisin the FP stock under section 301(c)(2).Finally, the taxpayer takes the positionthat the anti-abuse rule does not apply insuch a case for reasons similar to thosediscussed above in the context of thetransaction involving section 954(c)(6).

The Treasury Department and the IRShave determined that these transactionsraise significant policy concerns and thatthe revisions to the regulations describedin Section 4 of this notice are necessary orappropriate to prevent the avoidance ofU.S. federal income taxes. The TreasuryDepartment and the IRS intend to revisethe regulations under section 367 accord-ingly.

SECTION 4. REGULATIONS TO BEISSUED

.01 Priority Rules

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

The Treasury Department and the IRSintend to modify the section 367(b) prior-ity rule to provide that, in an exchangeunder section 354 or 356 that occurs inconnection with a transaction described inthe final regulations, to the extent one ormore U.S. persons exchange stock or se-curities of a foreign corporation for Pstock or securities acquired by S in ex-change for property (as defined in§ 1.367(b)–10(a)(3)(ii), as modified by theregulations described in this notice) in theP acquisition, section 367(a)(1) will notapply to such U.S. persons with respect tothe exchange of the stock or securities ofthe foreign corporation. Instead, the ex-change will be subject to §§ 1.367(b)–4and 1.367(b)–4T, as modified by the reg-ulations described in this notice. The sec-tion 367(b) priority rule, as modified bythe regulations described in the 2014 no-tice, will continue to apply when T is adomestic corporation. In addition, section

367(a) will apply to the exchange of stockor securities of a foreign corporation tothe extent such T stock or securities areexchanged for P stock or securities thatare not acquired by S in exchange forproperty (as defined in § 1.367(b)–10(a)(3)(ii), as modified by this notice) inconnection with a transaction described in§ 1.367(b)–10.

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

The Treasury Department and the IRSintend to modify §§ 1.367(b)–4 and1.367(b)–4T to provide that, in an ex-change under section 354 or 356 that oc-curs in connection with a transaction de-scribed in the final regulations, to theextent an exchanging shareholder ex-changes stock or securities of a foreignacquired corporation for P stock or secu-rities acquired by S in exchange for prop-erty (defined in § 1.367(b)–10(a)(3)(ii), asmodified by the regulations described inthis notice) in the P acquisition, then suchshareholder must:

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

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

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

.03 All Earnings and Profits Amount

(a) General Rule

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

shareholder to which § 1.367(b)–3(b)(3)applies, the all earnings and profitsamount with respect to the stock in theforeign acquired corporation that it ex-changes will be increased by the specifiedearnings with respect to such stock (ifany).

(b) Excess Asset Basis

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

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

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

(iii) The aggregate amount of liabilitiesof the foreign acquired corporation thatare assumed by the domestic acquiringcorporation in the inbound transaction de-termined under the principles of section357(d).

(c) Inside Asset Basis

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


(d) Specified Earnings

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

(i) The sum of the earnings and profits(including a deficit) with respect to eachforeign subsidiary of the foreign acquiredcorporation that are attributable under sec-tion 1248(c)(2) to the stock of the foreignacquired corporation exchanged. For pur-poses of the preceding sentence, the mod-ifications described in § 1.367(b)–2(d)(2)and (d)(3)(i) apply. Thus, for example, theamount of the earnings and profits of aforeign subsidiary that are attributable tostock of the foreign acquired corporationis determined without regard to whetherthe foreign subsidiary was a controlledforeign corporation at any time during thefive years preceding the inbound transac-tion. The amount described in this Section4.03(d)(i) is referred to in this notice asthe “lower-tier earnings.”

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

(iii) The amount of gain that would berealized by the exchanging shareholder if,immediately before the inbound transac-tion, the exchanging shareholder had soldthe stock of the foreign acquired corpora-tion for fair market value, reduced by theexchanging shareholder’s all earnings andprofits amount (for this purpose, deter-mined without regard to the modificationsdescribed in this notice). The amount de-scribed in this Section 4.03(d)(iii) is re-ferred to in this notice as the “specifiedstock gain.”

(e) Specified Percentage

The term specified percentage means,with respect to an exchanging share-holder, a fraction (expressed as a percent-age), the numerator of which is theamount of the exchanging shareholder’sspecified stock gain, and the denominatorof which is the sum of the aggregate of thespecified stock gain with respect to allexchanging shareholders to which § 1.367(b)–3(b)(3) applies and the aggregate ofthe gain realized (regardless of whether

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

(f) Source of Specified Earnings

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

(g) Adjustments to Excess Asset Basis

If there is excess asset basis with re-spect to a foreign acquired corporation,as determined under Section 4.03(b) ofthis notice, a taxpayer may reduce theexcess asset basis to the extent that theexcess asset basis is not attributable, di-rectly or indirectly, to property providedby a foreign subsidiary of the foreign ac-quired corporation. For example, if therewas a transfer of property to the foreignacquired corporation described in section362(e)(2), and the election described insection 362(e)(2)(C) was made to limit thebasis in the stock received in the foreignacquired corporation to its fair marketvalue, then, for purposes of determiningexcess asset basis, the basis in the stock ofthe foreign acquiring corporation may bedetermined without regard to the applica-tion of section 362(e)(2).

For purposes of this Section 4.03(g),property used by a foreign subsidiary topurchase the stock of the foreign acquiredcorporation in connection with a triangu-lar reorganization is treated as propertyprovided by the foreign subsidiary. In ad-dition, the term property has the meaningprovided in § 1.367(b)–10(a)(3)(ii), asmodified by this notice. Finally, a refer-ence to a foreign acquired corporation orforeign subsidiary includes a predecessorof the foreign acquired corporation or for-eign subsidiary.(h) Anti-Abuse Rule

The regulations to be issued under§ 1.367(b)–3 will include an anti-abuserule to address transactions engaged inwith a view to avoid the purposes of the

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

.04 Nonqualified Preferred Stock

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

.05 Examples

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

Example 1. (i) Facts. USP, a domestic corpora-tion, wholly owns FP and USS. FP is a foreigncorporation that wholly owns FS, a foreign corpora-tion. USS is a domestic corporation that wholly ownsFT, a foreign corporation. USS owns 100 shares ofFT stock, which constitutes a single block of stockwith a fair market value of $100x, an adjusted basisof $20x, and a section 1248 amount of $50x. FS hasearnings and profits of $60x. A dividend from FS toFP would qualify for the exception to foreign per-sonal holding company income under section954(c)(6). FP issues 100 shares of voting stock witha fair market value of $100x to FS in exchange for$40x of common stock of FS and $60x cash. FSacquires all of the stock of FT held by USS solely inexchange for the $100x of FP voting stock in atriangular reorganization described in section368(a)(1)(B).

(ii) Analysis. The triangular reorganization is de-scribed in § 1.367(b)–10(a). Pursuant to § 1.367(b)–10(b)(1), as modified by the rules announced in the2014 notice, adjustments must be made that have theeffect of a distribution of property in the amount of$60x from FS to FP under section 301. The $60xdeemed distribution is treated as separate from, andoccurring immediately before, FS’s acquisition ofthe $60x of FP stock used in the triangular reorga-nization. The $60x deemed distribution from FS toFP results in $60x dividend income to FP undersection 301(c)(1) that is not subpart F income undersection 954(c)(6). Pursuant to Section 4.01 of thisnotice, § 1.367(b)–4 (as modified by Section 4.02 of


this notice), rather than section 367(a)(1), appliesto the $60x of FT stock exchanged for the $60x ofFP stock acquired by FS from FP in exchange for$60x cash. Thus, USS must include in income a$30x deemed dividend ($50x section 1248 amountx 60%) with respect to the FT stock exchanged forFP stock that was acquired by FS from FP for$60x cash. In addition, USS must recognize theremaining $18x gain ($48x gain (($80x gain x60%) - $30x deemed dividend) realized with re-spect to such FT stock. If USS properly files a gainrecognition agreement pursuant to §§ 1.367(a)–3(b)(2) and 1.367(a)– 8, USS does not recognizegain under section 367(a)(1) with respect to the$40x of FT stock exchanged for FP stock that wasacquired by FS from FP in exchange for the $40xof FS common stock.

Example 2. (i) Facts. USP, a domestic corpo-ration, owns 90% of the stock of FP, a foreigncorporation. The remaining 10% of the stock of FPis owned by FI, a nonresident alien individualunrelated to USP. FP is a foreign corporation thatwholly owns FS1, a foreign corporation, which, inturn, wholly owns FS2, a foreign corporation. TheFP stock owned by USP has a fair market value of$90x and an adjusted basis of $17x. The FP stockowned by FI has a fair market value of $10x andan adjusted basis of $6x. The all earnings andprofits amount with respect to USP’s FP stock,determined without regard to this notice, is $27x.The assets of FP have an adjusted basis of $78x,FP has no liabilities, and the earnings and profitsof FP attributable to the outstanding FP stock is$30x (in this case, as determined under the prin-ciples of § 1.367(b)–2(d) but without regard towhether USP and FI are exchanging shareholdersdescribed in § 1.367(b)–3(b)(1) or U.S. or foreignpersons). The earnings and profits of FS1 and FS2attributable to the FP stock owned by USP undersection 1248(c)(2) (as determined under the prin-ciples of § 1.367(b)–2(d)(2) and (d)(3)(i)) are$80x and ($20x) respectively. In a reorganizationdescribed in section 368(a)(1)(F), US Newco, anewly-formed domestic corporation that is whollyowned by USP, acquires all of the assets of FPsolely in exchange for stock of US Newco. Noadjustment under Section 4.03(g) of this notice isappropriate.

(ii) Analysis—(A) All earnings and profitsamount. Under § 1.367(b)–3(b)(3), USP must in-clude in income as a deemed dividend the allearnings and profits amount with respect to its FPstock. Pursuant to Section 4.03 of this notice, theall earnings and profits amount of $27x, deter-mined without regard to this notice, is increasedby the specified earnings of FP, because there isexcess asset basis with respect to FP determined asfollows.

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

(C) Specified earnings. The specified earningswith respect to the stock of FP exchanged by USPequals $23x, the lesser of the following amounts (butnot below zero) (i) $60x, the sum of the earnings andprofits (including deficits) with respect to FS1 andFS2 attributable under section 1248(c)(2) to thestock of FP exchanged by USP; (ii) $23x, the prod-uct of the excess asset basis with respect to FP($25x), multiplied by USP’s specified percentage(92%), determined based on a fraction, the numera-tor of which is USP’s specified stock gain ($46x),and the denominator of which is the sum of theaggregate of the specified stock gain and gain real-ized with respect to FP stock ($50x), and (iii) $46x,USP’s specified stock gain, which is the amount ofgain that would be realized by USP if immediatelybefore the inbound transaction USP had sold thestock of FP for fair market value ($73x), reduced byUSP’s all earnings and profits amount (determinedwithout regard to the modifications described in thisnotice) ($27x).

(D) All earnings and profits amount, as modifiedby this notice. The all earnings and profits amountthat USP must include in income as a deemed divi-dend is $50x ($27x � $23). Under § 1.367(b)–2(e)(2), $23x of the deemed dividend is determinedby reference to the earnings and profits of FS1 and isconsidered as having been paid by FS1 to USPthrough FP. Under § 1.367(b)–2(e)(3)(ii), immedi-ately before the exchange, USP’s basis in the stockof FP is increased by the amount of the $50x deemeddividend for purposes of determining USP’s basis inits stock of US Newco. However, the basis increaseunder § 1.367(b)–2(e)(3)(ii) is not taken into accountfor purposes of calculating USP’s all earnings andprofits amount, as modified by Section 4.03 of thisnotice.

SECTION 5. EFFECTIVE DATE

The regulations described in Section 4of this notice will apply to transactionscompleted on or after December 2, 2016,and to any inbound transactions treated ascompleted before December 2, 2016 as aresult of an entity classification electionmade under § 301.7701–3 of this chapterthat is filed on or after December 2, 2016.No inference is intended regarding thetreatment of transactions described in Sec-tion 3 of this notice under current law. Forexample, these transactions are currentlysubject to challenge under the anti-abuserule.

SECTION 6. COMMENTS

The Treasury Department and the IRSrequest comments on the rules describedin this notice. In particular, § 1.367(b)–10(b)(3) currently provides that thedeemed distribution described in§ 1.367(b)–10(b)(1) is treated as occurringimmediately before the P acquisition.

Comments are requested on whether, inlight of the modifications announced bythis notice, it may be more appropriate (inparticular, when T is a foreign corpora-tion) to treat the deemed distribution asoccurring immediately after, rather thanbefore, the triangular reorganization. Inaddition, comments are requested as towhether any specific adjustments to ex-cess asset basis should be allowed, ornot allowed, consistent with the princi-ples underlying Section 4.03 of this no-tice. Finally, comments are requested asto whether there are transactions otherthan those described in Section 3 of thisnotice that may give rise to excess assetbasis.

Written comments may be submittedto the Office of Associate Chief Counsel(International), Attention: LynleeBaker, Internal Revenue Service, IR–4554, 1111 Constitution Avenue, NW,Washington, DC 20224. Alternatively,taxpayers may submit commentselectronically to [email protected]. Comments will beavailable for public inspection andcopying. Written or electronic com-ments must be received by March 2,2017.

SECTION 7. DRAFTINGINFORMATION

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


Satisfying the RequiredQualified Allocation PlanPreference in Section42(m)(1)(B)(ii)(III)(Concerning ConcertedCommunity RevitalizationPlans)Notice 2016–77

PURPOSE

This notice reminds taxpayers that aproject is not described in § 42(m)(1)(B)(ii)(III) of the Internal Revenue Codeunless its development contributes to aconcerted community revitalization plan.

BACKGROUND

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

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

Section 42(m) requires every alloca-tion of housing credit dollar amount to bemade pursuant to a qualified allocationplan (QAP). The Code specifies certainpreferences and selection criteria that eachQAP must contain.

Section 42(m)(1)(B)(ii) requires everyQAP to contain three preferences. Underthe third of these, the QAP must give“preference in allocating housing creditdollar amounts among selected projectsto . . . projects which are located in qual-ified census tracts . . . and the developmentof which contributes to a concerted com-munity revitalization plan. . . .” Section42(m)(1)(B)(ii)(III) (emphasis added).Qualified census tracts are designated bythe U.S. Department of Housing and Ur-ban Development and are characterizedby either the percentage of householdsbelow a certain income threshold or by apoverty rate above a certain threshold.

In some cases, state or local agenciesallocating housing credit dollar amountshave given preference to projects that arelocated in qualified census tracts withoutregard to whether the projects contributeto a concerted community revitalization

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

DISCUSSION

Placing LIHTC projects in qualifiedcensus tracts risks exacerbating concen-trations of poverty. Therefore, § 42(m)(1)(B)(ii)(III) grants a preference to thatplacement only when there is an addedbenefit to the neighborhood in the form ofthe project’s contribution to a concertedcommunity revitalization plan.

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

REQUEST FOR COMMENTS

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

Internal Revenue ServiceAttn: CC:PA:LPD:PR (Notice 2016–77)Room 5203P.O. Box 7604Ben Franklin StationWashington, D.C. 20044

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

Courier’s DeskInternal Revenue ServiceAttn: CC:PA:LPD:PR (Notice 2016–77)1111 Constitution Avenue, N.W.Washington, D.C. 20224

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

[email protected] should include “Notice 2016–77”

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


The principal author of this notice isJames W. Rider, Office of the AssociateChief Counsel (Passthroughs and SpecialIndustries). For further information re-garding this notice, please contact Mr.Rider at (202) 317-4137 (not a toll-freenumber).

Update for WeightedAverage Interest Rates,Yield Curves, and SegmentRatesNotice 2016–78

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

YIELD CURVE AND SEGMENTRATES

Generally, except for certain plans un-der sections 104 and 105 of the PensionProtection Act of 2006 and CSEC plansunder § 414(y), § 430 of the Code speci-fies the minimum funding requirementsthat apply to single-employer plans pursu-ant to § 412. Section 430(h)(2) specifiesthe interest rates that must be used todetermine a plan’s target normal cost andfunding target. Under this provision, pres-ent value is generally determined usingthree 24-month average interest rates(“segment rates”), each of which appliesto cash flows during specified periods. Tothe extent provided under § 430(h)(2)(C)(iv), these segment rates are adjustedby the applicable percentage of the 25-year average segment rates for the periodending September 30 of the year preced-


ing the calendar year in which the planyear begins.1 However, an election maybe made under § 430(h)(2)(D)(ii) to usethe monthly yield curve in place of thesegment rates.

Notice 2007–81, 2007–44 I.R.B. 899,provides guidelines for determining themonthly corporate bond yield curve, andthe 24-month average corporate bond seg-ment rates used to compute the target nor-mal cost and the funding target. Consis-tent with the methodology specified inNotice 2007–81, the monthly corporatebond yield curve derived from November2016 data is in Table I at the end of this

notice. The spot first, second, and thirdsegment rates for the month of November2016 are, respectively, 1.79, 3.80, and4.71.

The 24-month average segment ratesdetermined under § 430(h)(2)(C)(i) through(iii) must be adjusted pursuant to § 430(h)(2)(C)(iv) to be within the applicable min-imum and maximum percentages of thecorresponding 25-year average segmentrates. For plan years beginning before2021, the applicable minimum percentageis 90% and the applicable maximum per-centage is 110%. The 25-year averagesegment rates for plan years beginning in

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

24-MONTH AVERAGECORPORATE BOND SEGMENTRATES

The three 24-month average corporatebond segment rates applicable for Decem-ber 2016 without adjustment for the 25-year average segment rate limits are asfollows:

ApplicableMonth

FirstSegment

SecondSegment

ThirdSegment

December 2016 1.55 3.76 4.73

Based on § 430(h)(2)(C)(iv), the 24-month averages applicable for December

2016 adjusted to be within the applicableminimum and maximum percentages of

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

For PlanYears

BeginningIn

Adjusted 24-Month AverageSegment Rates

ApplicableMonth

FirstSegment

SecondSegment

ThirdSegment

2015 December 2016 4.72 6.11 6.81

2016 December 2016 4.43 5.91 6.65

2017 December 2016 4.16 5.72 6.48

30-YEAR TREASURY SECURITIESINTEREST RATES

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

purpose must be no more than 5 percentabove and no more than 10 percent belowthe weighted average of the rates of inter-est on 30-year Treasury securities duringthe four-year period ending on the last daybefore the beginning of the plan year.Notice 88–73, 1988–2 C.B. 383, providesguidelines for determining the weightedaverage interest rate. The rate of intereston 30-year Treasury securities for No-vember 2016 is 2.86 percent. The Servicedetermined this rate as the average of thedaily determinations of yield on the 30-

year Treasury bond maturing in August2046 determined each day through No-vember 9, 2016 and the yield on the 30-year Treasury bond maturing in Novem-ber 2046 determined each day for thebalance of the month. For plan years be-ginning in the month shown below, theweighted average of the rates of intereston 30-year Treasury securities and thepermissible range of rate used to calculatecurrent liability are as follows:

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


For Plan YearsBeginning in

30-YearTreasuryWeightedAverage

Permissible Range

Month Year 90% to 105%

December 2016 2.91 2.61 3.05

MINIMUM PRESENT VALUESEGMENT RATES

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

computed without regard to a 24-monthaverage. Notice 2007–81 provides guide-lines for determining the minimum pres-ent value segment rates. Pursuant to thatnotice, the minimum present value seg-

ment rates determined for November 2016are as follows:

FirstSegment

SecondSegment

ThirdSegment

1.79 3.80 4.71


The principal author of this notice isTom Morgan of the Office of the Associ-

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

information regarding this notice, contactMr. Morgan at 202-317-6700 or TonyMontanaro at 202-317-8698 (not toll-freenumbers).


Table IMonthly Yield Curve for November 2016

Derived from November 2016 Data.

Maturity Yield Maturity Yield Maturity Yield Maturity Yield Maturity Yield

0.5 0.97 20.5 4.46 40.5 4.74 60.5 4.84 80.5 4.89

1.0 1.24 21.0 4.47 41.0 4.74 61.0 4.84 81.0 4.89

1.5 1.48 21.5 4.48 41.5 4.75 61.5 4.84 81.5 4.89

2.0 1.67 22.0 4.50 42.0 4.75 62.0 4.84 82.0 4.89

2.5 1.82 22.5 4.51 42.5 4.75 62.5 4.85 82.5 4.89

3.0 1.94 23.0 4.52 43.0 4.76 63.0 4.85 83.0 4.89

3.5 2.04 23.5 4.53 43.5 4.76 63.5 4.85 83.5 4.89

4.0 2.14 24.0 4.54 44.0 4.76 64.0 4.85 84.0 4.90

4.5 2.25 24.5 4.55 44.5 4.77 64.5 4.85 84.5 4.90

5.0 2.36 25.0 4.55 45.0 4.77 65.0 4.85 85.0 4.90

5.5 2.48 25.5 4.56 45.5 4.77 65.5 4.85 85.5 4.90

6.0 2.60 26.0 4.57 46.0 4.77 66.0 4.86 86.0 4.90

6.5 2.73 26.5 4.58 46.5 4.78 66.5 4.86 86.5 4.90

7.0 2.87 27.0 4.59 47.0 4.78 67.0 4.86 87.0 4.90

7.5 3.00 27.5 4.60 47.5 4.78 67.5 4.86 87.5 4.90

8.0 3.13 28.0 4.60 48.0 4.79 68.0 4.86 88.0 4.90

8.5 3.25 28.5 4.61 48.5 4.79 68.5 4.86 88.5 4.90

9.0 3.37 29.0 4.62 49.0 4.79 69.0 4.86 89.0 4.90

9.5 3.48 29.5 4.63 49.5 4.79 69.5 4.86 89.5 4.90

10.0 3.58 30.0 4.63 50.0 4.80 70.0 4.87 90.0 4.91

10.5 3.67 30.5 4.64 50.5 4.80 70.5 4.87 90.5 4.91

11.0 3.76 31.0 4.65 51.0 4.80 71.0 4.87 91.0 4.91

11.5 3.84 31.5 4.65 51.5 4.80 71.5 4.87 91.5 4.91

12.0 3.92 32.0 4.66 52.0 4.81 72.0 4.87 92.0 4.91

12.5 3.98 32.5 4.66 52.5 4.81 72.5 4.87 92.5 4.91

13.0 4.04 33.0 4.67 53.0 4.81 73.0 4.87 93.0 4.91

13.5 4.10 33.5 4.68 53.5 4.81 73.5 4.87 93.5 4.91

14.0 4.14 34.0 4.68 54.0 4.81 74.0 4.88 94.0 4.91

14.5 4.19 34.5 4.69 54.5 4.82 74.5 4.88 94.5 4.91

15.0 4.22 35.0 4.69 55.0 4.82 75.0 4.88 95.0 4.91

15.5 4.26 35.5 4.70 55.5 4.82 75.5 4.88 95.5 4.91

16.0 4.29 36.0 4.70 56.0 4.82 76.0 4.88 96.0 4.91

16.5 4.32 36.5 4.71 56.5 4.82 76.5 4.88 96.5 4.91

17.0 4.34 37.0 4.71 57.0 4.83 77.0 4.88 97.0 4.91

17.5 4.36 37.5 4.71 57.5 4.83 77.5 4.88 97.5 4.92

18.0 4.38 38.0 4.72 58.0 4.83 78.0 4.88 98.0 4.92

18.5 4.40 38.5 4.72 58.5 4.83 78.5 4.89 98.5 4.92

19.0 4.42 39.0 4.73 59.0 4.83 79.0 4.89 99.0 4.92

19.5 4.43 39.5 4.73 59.5 4.84 79.5 4.89 99.5 4.92

20.0 4.45 40.0 4.73 60.0 4.84 80.0 4.89 100.0 4.92


2017 Standard MileageRates

Notice 2016–79

SECTION 1. PURPOSE

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


Rev. Proc. 2010–51, 2010–51 I.R.B.883, provides rules for computing the de-ductible costs of operating an automobilefor business, charitable, medical, or mov-ing expense purposes, and for substantiat-ing, under § 274(d) of the Internal Reve-nue Code and § 1.274–5 of the IncomeTax Regulations, the amount of ordinaryand necessary business expenses of localtransportation or travel away from home.Taxpayers using the standard mileagerates must comply with Rev. Proc. 2010–51. However, a taxpayer is not required touse the substantiation methods describedin Rev. Proc. 2010–51, but instead maysubstantiate using actual allowable ex-pense amounts if the taxpayer maintainsadequate records or other sufficient evi-dence.

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

SECTION 3. STANDARD MILEAGERATES

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

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

The standard mileage rate is 14 centsper mile for use of an automobile in ren-dering gratuitous services to a charitableorganization under § 170. See section 5 ofRev. Proc. 2010–51.

The standard mileage rate is 17 centsper mile for use of an automobile (1) formedical care described in § 213, or (2) aspart of a move for which the expenses aredeductible under § 217. See section 5 ofRev. Proc. 2010–51.

SECTION 4. BASIS REDUCTIONAMOUNT

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

SECTION 5. MAXIMUM STANDARDAUTOMOBILE COST

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


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

SECTION 7. EFFECT ON OTHERDOCUMENTS

Notice 2016–01 is superseded.


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

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

2016 RequiredAmendments List forQualified Retirement Plans

Notice 2016–80

I. PURPOSE

This notice contains the RequiredAmendments List for 2016 (2016 RAList). Section 5.05(3) of Rev. Proc. 2016–37, 2016–29 I.R.B. 136, provides that, inthe case of an individually designed plan,the remedial amendment period for a dis-qualifying provision arising as a result ofa change in qualification requirementsgenerally is extended to the end of thesecond calendar year that begins after theissuance of the Required AmendmentsList (RA List) in which the change inqualification requirements appears. Pursu-ant to section 5.05(3) of Rev. Proc. 2016–37, this notice provides that December 31,2018 is the last day of the remedialamendment period with respect to a dis-qualifying provision arising as a result ofa change in qualification requirements thatappears on this 2016 RA List. As a result,under sections 8.01 and 5.05(3) of Rev.Proc. 2016–37, December 31, 2018 isalso the plan amendment deadline for adisqualifying provision arising as a resultof a change in qualification requirementsthat appears on the 2016 RA List. How-ever, a later date may apply to a govern-mental plan (as defined in section 414(d))pursuant to sections 8.01 and 5.06(3) ofRev. Proc. 2016–37.

II. BACKGROUND

Section 401(b) of the Internal RevenueCode provides a remedial amendment pe-riod during which a plan may be amendedretroactively to comply with the qualifica-tion requirements under section 401(a).Section 1.401(b)–1 of the Income TaxRegulations describes the disqualifyingprovisions that may be amended retroac-tively and the remedial amendment periodduring which retroactive amendmentsmay be adopted. Those regulations alsogrant the Commissioner the discretion todesignate certain plan provisions as dis-


qualifying provisions and to extend theremedial amendment period.

Rev. Proc. 2016–37 eliminates, as ofJanuary 1, 2017, the five-year remedialamendment cycle system for individuallydesigned plans that was set forth in Rev.Proc. 2007–44, 2007–2 C.B. 54.

Sections 5.05(3) and 5.06(3) of Rev.Proc. 2016–37 extend the remedialamendment period for individually de-signed plans to correct disqualifying pro-visions that arise as a result of a change inqualification requirements. Under section5.05(3), the remedial amendment period isextended to the end of the second calendaryear that begins after the issuance of theRA List on which the change in qualifi-cation requirements appears. Section5.06(3) provides a special rule for govern-mental plans (as defined in section 414(d))that could further extend the remedialamendment period in some cases.

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

Section 9 of Rev. Proc. 2016–37 pro-vides that the Department of the Treasury(the Treasury Department) and the Inter-nal Revenue Service (IRS) intend to pub-lish annually an RA List. In general, achange in qualification requirements willnot appear on an RA List until guidancewith respect to that change (including, incertain cases, model amendments) hasbeen provided in regulations or in otherguidance published in the Internal Reve-nue Bulletin. However, in the discretionof the Treasury Department and the IRS, achange in qualification requirements maybe included on an RA List in other cir-cumstances, such as in cases in which astatutory change is enacted and the Trea-sury Department and the IRS anticipatethat no guidance will be issued.

III. CONTENT AND ORGANIZATIONOF RA LIST

In general, an RA List includes statu-tory and administrative changes in quali-fication requirements that are first effec-tive during the plan year in which the listis published. However, an RA List doesnot include guidance issued or legislationenacted after the list has been prepared1

and also does not include:

• Statutory changes in qualification re-quirements for which the Treasury De-partment and the IRS expect to issueguidance (which would be included onan RA List issued in a future year);

• Changes in qualification requirementsthat permit (but do not require) op-tional plan provisions (in contrast tochanges in the qualification require-ments that cause existing plan provi-sions, which may include optionalplan provisions previously adopted, tobecome disqualifying provisions);2 or

• Changes in the tax laws affecting qual-ified plans that do not change the qual-ification requirements under section401(a) (such as changes to the taxtreatment of plan distributions, orchanges to the funding requirementsfor qualified plans).

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

Part B includes changes in qualifica-tion requirements that the Treasury De-partment and the IRS anticipate will notrequire amendments in most plans, butmight require an amendment because ofan unusual plan provision in a particularplan. If a change affects a particular qual-ification requirement that most plans in-corporate by reference, Part B would in-clude the change because a particular planmight not incorporate the qualification re-quirement by reference and thus, mightcontain language inconsistent with thechange. For example, if a defined benefitplan incorporates the limitation of section436(d)(2) by reference to the statute or

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

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

The fact that a change in a qualificationrequirement is included on the RA Listdoes not mean that a plan must beamended as a result of that change. Eachplan sponsor must determine whether aparticular change in a qualification re-quirement requires an amendment to itsplan.

IV. 2016 REQUIRED AMENDMENTSLIST

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

• NonePart B. Other changes in qualification re-

quirements that may require anamendment.

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

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

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


V. DRAFTING INFORMATION

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

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

December 2016Supplement to Rev. Proc.2014–64, Implementationof Nonresident AlienDeposit InterestRegulations

Rev. Proc. 2016–56

SECTION 1. PURPOSE

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

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


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

which the United States has in force aninformation exchange agreement, suchthat interest paid to residents of suchcountries must be reported by payors tothe extent required under §§ 1.6049–4(b)(5) and 1.6049–8(a). Section 4 of thatrevenue procedure identified the countrieswith which the Treasury Department andthe IRS had determined that it was appro-priate to have an automatic exchange re-lationship with respect to the informationcollected under §§ 1.6049–4(b)(5) and1.6049–8(a). Rev. Proc. 2012–24 was up-dated and superseded by Rev. Proc.2014–64, Sections 3 and 4 of which con-tained updated lists of countries. Rev.Proc. 2014–64 was supplemented by Rev.Proc. 2015–50 and Rev. Proc. 2016–18,each of which added countries to the listin Section 4 of Rev. Proc. 2014–64. Thisrevenue procedure supplements Rev.Proc. 2014–64 by adding Saint Lucia tothe list of countries in Section 3 of Rev.Proc. 2014–64, and by adding Israel, Re-public of Korea, and Saint Lucia to the listof countries in Section 4 of Rev. Proc.2014–64.

SECTION 3. SUPPLEMENT TOSECTION 3 OF REV. PROC.2014–64

Section 3 of Rev. Proc. 2014–64 issupplemented to read as follows:

The following are the countries withwhich the United States has in effect anincome tax or other convention or bilat-eral agreement relating to the exchange oftax information within the meaning ofsection 6103(k)(4) pursuant to which theUnited States agrees to provide, as well asreceive, information and under which thecompetent authority is the Secretary of theTreasury or his delegate:

Antigua & BarbudaArubaAustraliaAustriaAzerbaijanBangladeshBarbadosBelgiumBermudaBrazilBritish Virgin IslandsBulgariaCanadaCayman Islands

ChinaColombiaCosta RicaCroatiaCuracaoCyprusCzech RepublicDenmarkDominicaDominican RepublicEgyptEstoniaFinlandFranceGermanyGibraltarGreeceGrenadaGuernseyGuyanaHondurasHong KongHungaryIcelandIndiaIndonesiaIrelandIsle of ManIsraelItalyJamaicaJapanJerseyKazakhstanKorea, Republic ofLatviaLiechtensteinLithuaniaLuxembourgMaltaMarshall IslandsMauritiusMexicoMonacoMoroccoNetherlandsNetherlands island territories: Bonaire,

Saba, and St. EustatiusNew ZealandNorwayPakistanPanamaPeruPhilippinesPolandPortugalRomania


Russian FederationSaint LuciaSlovak RepublicSloveniaSouth AfricaSpainSri LankaSt. Maarten (Dutch part)SwedenSwitzerlandThailandTrinidad and TobagoTunisiaTurkeyUkraineUnited KingdomVenezuela

SECTION 4. SUPPLEMENT TOSECTION 4 OF REV. PROC. 2014–64

Section 4 of Rev. Proc. 2014–64, assupplemented by Rev. Proc. 2015–50 andRev. Proc. 2016–18, is further supple-mented to read as follows:

The following list identifies the coun-tries with which the automatic exchangeof the information collected under§§ 1.6049–4(b)(5) and 1.6049–8 has beendetermined by the Treasury Department andthe IRS to be appropriate:

Australia

AzerbaijanBrazilCanadaCzech RepublicDenmarkEstoniaFinlandFranceGermanyGibraltarGuernseyHungaryIcelandIndiaIrelandIsle of ManIsraelItalyJamaicaJerseyKorea, Republic ofLatviaLiechtensteinLithuaniaLuxembourgMaltaMauritiusMexicoNetherlandsNew ZealandNorway

PolandSaint LuciaSlovak RepublicSloveniaSouth AfricaSpainSwedenUnited Kingdom

SECTION 5. EFFECT ON OTHERDOCUMENTS

Rev. Proc. 2014–64, as supplementedby Rev. Proc. 2015–50 and Rev. Proc.2016–18, is further supplemented.


With respect to the additional countrylisted in Section 3, this revenue procedureis effective for interest paid on or afterJanuary 1, 2017.

SECTION 7. DRAFTINGINFORMATION

The principal author of this revenueprocedure is Jackie Bennett Manasterli ofthe Office of Associate Chief Counsel (In-ternational). For further information re-garding this revenue procedure contactMs. Manasterli at (202) 317-6941 (not atoll-free number).


Part IV. Items of General InterestLiabilities Recognized asRecourse PartnershipLiabilities Under Section752

REG–122855–15


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

SUMMARY: This document containsproposed regulations that incorporate thetext of related temporary regulations andwithdraws a portion of a notice of pro-posed rulemaking (REG–119305–11) tothe extent not adopted by final regulations.This document also contains new pro-posed regulations addressing when certainobligations to restore a deficit balance in apartner’s capital account are disregardedunder section 704 of the Internal RevenueCode (Code) and when partnership liabil-ities are treated as recourse liabilities un-der section 752. These regulations wouldaffect partnerships and their partners.

DATES: The notice of proposed rulemak-ing under sections 707 and 752 that waspublished in the Federal Register on Jan-uary 30, 2014 (REG–119305–11, 79 FR4826), is partially withdrawn as of Octo-ber 5, 2016. Written or electronic com-ments and requests for a public hearingmust be received by January 3, 2017.

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

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

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

SUPPLEMENTARY INFORMATION:In addition to these proposed regulations,the Treasury Department and the IRS arepublishing in the Rules and Regulationssection in this issue of the Bulletin.: (1)final regulations under section 707 con-cerning disguised sales and under section752 regarding the allocation of excessnonrecourse liabilities and (2) temporaryregulations concerning a partner’s shareof partnership liabilities for purposes ofsection 707 and the treatment of certainpayment obligations under section 752.


The collection of information related tothese proposed regulations under section752 is reported on Form 8275, DisclosureStatement, and has been reviewed in ac-cordance with the Paperwork ReductionAct (44 U.S.C. 3507) and approved by theOffice of Management and Budget undercontrol number 1545-0889. Commentsconcerning the collection of informationand the accuracy of estimated average an-nual burden and suggestions for reducingthis burden should be sent to the Office ofManagement and Budget, Attn: Desk Of-ficer for the Department of the Treasury,Office of Information and Regulatory Af-fairs, Washington, DC 20503, with copiesto the Internal Revenue Service, IRS Re-ports Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 20224. Com-ments on the burden associated with thiscollection of information should be re-ceived by December 5, 2016.

The collection of information in theseproposed regulations is in proposed§ 1.752–2(b)(3)(ii)(D) (which cross refer-ences the requirement in § 1.752–2T(b)(3)(ii)(D)). This information is re-quired by the IRS to ensure that section752 of the Code and applicable regula-tions are properly applied for allocationsof partnership liabilities. The respondentswill be partners and partnerships.

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

spond to, a collection of information un-less it displays a valid control numberassigned by the Office of Managementand Budget.

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

Background

1. Overview

This document contains proposedamendments to the Income Tax Regula-tions (26 CFR part 1) under sections 704,707, and 752 of the Code. On January 30,2014, the Treasury Department and theIRS published a notice of proposed rule-making in the Federal Register (REG–119305–11, 79 FR 4826) to amend thethen existing regulations under section707 relating to disguised sales of propertyto or by a partnership and under section752 concerning the treatment of partner-ship liabilities (the 2014 Proposed Regu-lations). The 2014 Proposed Regulationsprovided certain technical rules intendedto clarify the application of the disguisedsale rules under section 707. The 2014Proposed Regulations also contained rulesregarding the sharing of partnership re-course and nonrecourse liabilities undersection 752.

A public hearing on the 2014 ProposedRegulations was not requested or held, butthe Treasury Department and the IRS re-ceived written comments. After consider-ation of, and in response to, the commentson the 2014 Proposed Regulations, theTreasury Department and the IRS arewithdrawing the 2014 Proposed Regula-tions under § 1.752–2 and publishing newproposed regulations under § 1.752–2, aswell as proposed regulations under section704. Concurrently in this issue of the Bul-letin, the Treasury Department and theIRS are also publishing final regulationsthat adopt, as modified, the 2014 ProposedRegulations under section 707 and§ 1.752–3, and temporary regulations un-der sections 707 and 752.



Section 752 separates partnership lia-bilities into two categories: recourse lia-bilities and nonrecourse liabilities. Section1.752–1(a)(1) provides that a partnershipliability is a recourse liability to the extentthat any partner or related person bears theeconomic risk of loss (EROL) for thatliability under § 1.752–2. Section 1.752–1(a)(2) provides that a partnership liabilityis a nonrecourse liability to the extent thatno partner or related person bears theEROL for that liability under § 1.752–2.

A partner generally bears the EROLfor a partnership liability if the partner orrelated person has an obligation to make apayment to any person within the meaningof § 1.752–2(b). For purposes of deter-mining the extent to which a partner orrelated person has an obligation to make apayment, an obligation to restore a deficitcapital account upon liquidation of thepartnership under the section 704(b) reg-ulations is taken into account. Further, forthis purpose, § 1.752–2(b)(6) of the exist-ing regulations presumes that partners andrelated persons who have payment obliga-tions actually perform those obligations,irrespective of their net worth, unless thefacts and circumstances indicate a plan tocircumvent or avoid the obligation (thesatisfaction presumption). However, thesatisfaction presumption is subject to ananti-abuse rule in § 1.752–2(j) pursuant towhich a payment obligation of a partner orrelated person may be disregarded ortreated as an obligation of another personif facts and circumstances indicate that aprincipal purpose of the arrangement is toeliminate the partner’s EROL with respectto that obligation or create the appearanceof the partner or related person bearing theEROL when the substance is otherwise.Under the existing rules, the satisfactionpresumption is also subject to a disre-garded entity net value requirement under§ 1.752–2(k) pursuant to which, for pur-poses of determining the extent to which apartner bears the EROL for a partnershipliability, a payment obligation of a disre-garded entity is taken into account only tothe extent of the net value of the disre-garded entity as of the allocation date thatis allocated to the partnership liability.

3. 2014 Proposed Regulations

As discussed in greater detail in theSummary of Comments and Explanationof Provisions section of this preamble,§ 1.752–2 of the 2014 Proposed Regula-tions generally, among other things, (1)provided that a partner’s or related per-son’s obligation to make a payment withrespect to a partnership liability (exclud-ing those imposed by state law) would notbe recognized for purposes of section 752unless each recognition factor was satis-fied; (2) applied the list of recognitionfactors to all payment obligations under§ 1.752–2(b), including a partner’s obli-gation to restore a deficit capital accountupon liquidation of a partnership (deficitrestoration obligations, or DROs) as pro-vided under the section 704(b) regula-tions; and (3) provided generally that apayment obligation would be recognizedto the extent of the net value of a partneror related person as of the allocation date.

After consideration of the commentsreceived on the 2014 Proposed Regula-tions, the Treasury Department and theIRS are reconsidering the rules under sec-tion 752 regarding payment obligationsthat are recognized under § 1.752–2(b)(3),the satisfaction presumption under § 1.752–2(b)(6), the anti-abuse rule provided in§ 1.752–2(j), and the net value require-ment as provided in § 1.752–2(k). Ac-cordingly, the Treasury Department andthe IRS are withdrawing § 1.752–2 of the2014 Proposed Regulations and publish-ing these new proposed regulations thatwould amend existing regulations undersections 704 and 752. These new provi-sions, and comments received on the 2014Proposed Regulations that are pertinent tothese new provisions, are discussed in theSummary of Comments and Explanationof Provisions section of the preamble thatfollows.

4. Final and Temporary RegulationsUnder Section 707 and Requests forComments

As previously mentioned, the TreasuryDepartment and the IRS are concurrentlypublishing temporary regulations undersection 707 (concerning disguised sales)(the 707 Temporary Regulations) and sec-tion 752 (concerning recourse liabilities,

in particular bottom dollar payment obli-gations) (the 752 Temporary Regula-tions), and final regulations under section707 and § 1.752–3. The temporary regu-lations are incorporated by cross referencein these proposed regulations. Notably,the 707 Temporary Regulations providethat, for disguised sale purposes, partnersdetermine their share of any partnershipliability in the manner in which excessnonrecourse liabilities are allocated under§ 1.752–3(a)(3) (with certain limitations).Generally, a partner’s share of the excessnonrecourse liability is determined in ac-cordance with the partner’s share of part-nership profits taking into account all thefacts and circumstances relating to theeconomic arrangement of the partners.The Treasury Department and the IRSrecognize that taxpayers may require fur-ther guidance regarding reasonable meth-ods for determining a partner’s share ofpartnership profits under § 1.752–3(a)(3)for disguised sale purposes, especiallygiven that a partner’s share may changefrom year to year or differ with respect todifferent partnership assets and believe itmay be appropriate to issue administrativeguidance for this purpose. Accordingly,comments are requested regarding possi-ble safe harbors and reasonable methodsfor determining a partner’s share of prof-its, taking into account all of the relevantfacts and circumstances relating to theeconomic arrangement of the partners.The preamble to the temporary regula-tions describes the provisions in greaterdetail. In addition, the final regulationsunder section 707 also include a requestfor comments concerning the exceptionfor reimbursements of preformation capi-tal expenditures under § 1.707–4(d),which is described in greater detail in thepreamble to the final regulations.

Summary of Comments andExplanation of Provisions

1. Rights of Reimbursement

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


liability becomes due and payable and thepartner or related person would not be enti-tled to reimbursement from another partneror a person that is a related person to anotherpartner. Section 1.752–2(b)(1) presumesthat, in the constructive liquidation, the part-nership has a value of zero with which topay its liabilities. Under the 2014 ProposedRegulations, a partner would not bear theEROL under § 1.752–2(b)(1) if the partneror related person is entitled to a reimburse-ment from “any person.” Commenters notedthat a reimbursement from “any person”would include a reimbursement from thepartnership, which is contrary to the intentof the regulations under section 752. A rightto be reimbursed by the partnership shouldbe disregarded, as § 1.752–2(b)(1) presumesthat the partnership would not be able to paythe liability or reimburse the partner. TheTreasury Department and the IRS agreewith the concerns expressed in the com-ments; therefore, these proposed regulationsdo not include the changes to § 1.752–2(b)(1) that were in the 2014 Proposed Reg-ulations.

2. Arrangements Part of a Plan toCircumvent or Avoid an Obligation

The 2014 Proposed Regulations pro-vided that a partner’s or related person’sobligation to make a payment with respectto a partnership liability (excluding thoseimposed by state law) will not be recog-nized for purposes of section 752 unless:(1) the partner or related person is (A)required to maintain a commercially rea-sonable net worth throughout the term ofthe payment obligation or (B) subject tocommercially reasonable contractual re-strictions on transfers of assets for inade-quate consideration; (2) the partner or re-lated person is required periodically toprovide commercially reasonable docu-mentation regarding the partner’s or re-lated person’s financial condition; (3) theterm of the payment obligation does notend prior to the term of the partnershipliability; (4) the payment obligation doesnot require that the primary obligor or anyother obligor with respect to the partner-ship liability directly or indirectly holdmoney or other liquid assets in an amountthat exceeds the reasonable needs of suchobligor; (5) the partner or related personreceived arm’s length consideration for

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

Commenters expressed concerns withthe all-or-nothing approach in the 2014Proposed Regulations. One commenternoted that a partner could cause an obli-gation to deliberately fail one of the rec-ognition factors so as to cause a liability tobe treated as nonrecourse if such charac-terization potentially would be beneficialto such partner, even if that partner did, infact, bear the EROL. This commenter alsonoted that commercial arrangementsrarely satisfy each and every one of therecognition factors and commercial prac-tices tend to change over time, therebyrendering the recognition factors out ofdate. This commenter recommended thatregulations instead provide a nonexclu-sive list of facts and circumstances con-taining as factors many of the items iden-tified in the 2014 Proposed Regulations.

The Treasury Department and the IRSbelieve that the concerns expressed by thecommenters are valid and thus propose tomove the list of factors to an anti-abuserule in § 1.752–2(j), other than the recog-nition factors concerning bottom dollarguarantees and indemnities, which are ad-dressed in the 752 Temporary Regula-tions. Under the anti-abuse rule, factorsare weighed to determine whether a pay-ment obligation should be respected. Thelist of factors in the anti-abuse rule inthese proposed regulations is nonexclu-sive, and the weight to be given to anyparticular factor depends on the particularcase. Furthermore, the presence or ab-sence of any particular factor, in itself, isnot necessarily indicative of whether ornot a payment obligation is recognizedunder § 1.752–2(b).

In addition to comments addressing therecognition factor approach in the 2014Proposed Regulations, the Treasury De-partment and the IRS received specificcomments regarding the individual recog-nition factors. With respect to the firstrecognition factor regarding commerciallyreasonable net worth or restrictions ontransfers, one commenter agreed that anobligor should have the wherewithal tomake a payment to the extent required forthe entire duration of its obligation, butbelieved that this concern is alleviated bythe anti-abuse rule in the current regula-

tions under § 1.752–2(j). This commentersuggested that the anti-abuse rule in§ 1.752–2(j) contain additional examplesto illustrate abusive or problematic situa-tions. Another commenter noted that the2014 Proposed Regulations did not ad-dress the consequences if a partner or re-lated person breaches its payment obliga-tion under an agreement regarding networth or restrictions on transfers and sug-gested that the regulations address suchconsequences in an anti-abuse rule (forexample, a partner’s or related person’spayment obligation may be disregarded ifit is determined that the creditor lackedthe intent to enforce its rights under theagreement).

With respect to the first two recogni-tion factors, commenters expressed con-cerns with the use of the terms “commer-cially reasonable” and “commerciallyreasonable documentation.” One com-menter believed that these terms are vagueand subjective and would require partner-ships to make difficult judgments as towhether these recognition factors havebeen met prior to allocating any partner-ship liability. Another commenter notedthat the “commercially reasonable docu-mentation” recognition factor did notspecify who should receive the documen-tation and that such documentation shouldbe provided to the lender.

Moving the list of factors to an anti-abuse rule should alleviate some of theconcerns expressed regarding bothwhether a payment obligor has the where-withal to pay and the use of the term“commercially reasonable.” The proposedregulations also revise the first two factorsto provide clarity by limiting the first fac-tor to examine solely whether the partneror related person is subject to commer-cially reasonable contractual restrictionsthat protect the likelihood of payment,such as restrictions on transfers for inad-equate consideration or equity distribu-tions. In addition, the proposed regula-tions do not retain the subjectivecommercially reasonable net worth factor,but instead include a new factor that ex-amines whether the payment obligationrestricts the creditor from promptly pursu-ing payment following a default on thepartnership liability or whether there areother arrangements that indicate a plan todelay collection.


The proposed regulations retain the useof the “commercially reasonable” stan-dard, however, because different facts mayrequire a different standard of whether con-tractual restrictions and documentationare “commercially reasonable” with re-spect to a particular industry, and the flex-ible nature of the term is helpful in in-forming partnerships and their partnersthat obligations should be consistent withwhat is customary in the marketplace.With respect to the second recognitionfactor regarding documentation, theseproposed regulations also clarify that thefactor examines whether commerciallyreasonable documentation was providedto the party that benefits from the paymentobligation (for example, the creditor in thecase of a guarantee or the indemnifiedparty in the case of an indemnificationarrangement).

Commenters also noted that certainrecognition factors do not take into ac-count industry specific practices. Onecommenter pointed out that the require-ment that a payment obligation lastthroughout the full term of the partner-ship’s loan is contrary to commercialpractice in some cases. In particular, thecommenter noted that, in the real estateindustry context, it is common for a con-struction loan to be guaranteed until theproperty reaches a required level of stabi-lization. This commenter did believe,however, that a payment obligation shouldbe disregarded if the guarantor or other ob-ligor has an unrestricted unilateral right toterminate the obligation at will, includingimmediately before the obligation be-comes due and payable. Commenters alsonoted that the recognition factor thatwould require arm’s length considerationis not commercial, as a partner is oftenwilling to enter into a guarantee or otherpayment obligation with respect to a part-nership liability because the partner willbenefit from the liability in the obligor’scapacity as a partner. The Treasury De-partment and the IRS agree with theserecommendations; thus, these proposedregulations take into account industrypractice with respect to terminations ofpayment obligations and do not includethe arm’s length consideration factor.

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

other obligor with respect to the partner-ship liability is required to hold assets inan amount that exceeds the reasonableneeds of the obligor. The commenternoted that partnership agreements ofteninclude restrictions on distributions beforecertain hurdles are satisfied for a varietyof reasons, such as to protect the interestsof preferred partners or for prudent busi-ness management. Another commenteragreed with the legal theory underpinningthe recognition factor (to address fact pat-terns in which the taxpayer intended andacted to ensure the partnership maintainedsufficient collateral to repay the creditorwithout exposing the obligor to meaning-ful liability) but suggested that commer-cially required or prudent reserves not beconsidered. Both commenters suggestedthat an example illustrating the restric-tions that violate this factor would behelpful.

The commenters’ concerns should belargely addressed by making this recogni-tion factor one of many examined underthe anti-abuse rule that looks to whetherthere is a plan to circumvent or avoid theobligation. Under the anti-abuse rule, anobligor’s retention of assets for its reason-able foreseeable needs (such as for com-mercial or prudent business reasons) gen-erally would not, on its own, indicate thatthere is a plan to circumvent or avoid theobligation.

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

3. Deficit Restoration Obligations

The 2014 Proposed Regulations ap-plied the list of recognition factors dis-cussed in Section 2 of this Summary ofComments and Explanation of Provisionsto all payment obligations under § 1.752–2(b), including a DRO, as provided underthe section 704(b) regulations. Comment-ers explained that not all of the recogni-tion factors could be satisfied with respectto a DRO. In addition, commenters sug-gested that the regulations under section704(b) be amended to clarify that if aDRO is not given effect under section752, it should not be given effect undersection 704(b).

A DRO is an obligation to the partner-ship that is imposed by the partnershipagreement. In contrast, a guarantee or in-demnity is a contractual obligation outsidethe partnership agreement. As a result ofthis difference and based on the commentson the 2014 Proposed Regulations, theproposed regulations refine the list of fac-tors applicable to DROs and clarify theinteraction of section 752 with section 704regarding DROs. Under § 1.704–1(b)(2)(ii)(c)(2) of the existing regulations, apartner’s DRO is not respected if the factsand circumstances indicate a plan to cir-cumvent or avoid the partner’s DRO.These proposed regulations add a list offactors to § 1.704–1(b)(2)(ii)(c) that aresimilar to the factors in the proposed anti-abuse rule under § 1.752–2(j), but specificto DROs, to indicate when a plan to cir-cumvent or avoid an obligation exists. Un-der the proposed regulations, the follow-ing factors indicate a plan to circumventor avoid an obligation: (1) the partner isnot subject to commercially reasonableprovisions for enforcement and collectionof the obligation; (2) the partner is notrequired to provide (either at the time theobligation is made or periodically) com-mercially reasonable documentation re-garding the partner’s financial conditionto the partnership; (3) the obligation endsor could, by its terms, be terminated be-fore the liquidation of the partner’s inter-est in the partnership or when the part-ner’s capital account as provided in§ 1.704–1(b)(2)(iv) is negative; and (4)the terms of the obligation are not pro-vided to all the partners in the partnershipin a timely manner.


Notwithstanding the proposed factors,the Treasury Department and the IRShave concerns with whether and to whatextent it is appropriate to recognize DROs(and certain partner notes treated asDROs) as meaningful payment obliga-tions. Many DROs are triggered only onthe liquidation of a partnership. However,some partnerships are intended to haveperpetual life and other partnerships caneffectively cease operations but not actu-ally liquidate; therefore, a partner’s DROmay never be required to be satisfied. Inaddition, some DROs can be terminated orsignificantly reduced in a manner that maynot be appropriate, and therefore, theDRO similarly may never be triggered.The Treasury Department and the IRS re-quest comments on the extent to whichsuch DROs should be recognized. In ad-dition, certain partner notes are treated asDROs under § 1.704–1(b)(2)(ii)(c)(1) and(3) of these proposed regulations. TheTreasury Department and the IRS alsorequest comments concerning whetherthese obligations should continue to betreated as DROs.

4. Exculpatory Liabilities

One commenter suggested that the2014 Proposed Regulations would resultin more liabilities being characterized asnonrecourse liabilities, in particular, so-called, “exculpatory liabilities,” and urgedthe Treasury Department and the IRS toprovide guidance with respect to such li-abilities. An exculpatory liability is a lia-bility that is recourse to an entity understate law and section 1001, but no partnerbears the EROL within the meaning ofsection 752. Thus, the liability is treatedas nonrecourse for section 752 purposes.The Treasury Department and the IRS arestudying the treatment of exculpatory lia-bilities under sections 704 and 752 andagree that guidance is warranted in thisarea. However, the treatment of exculpa-tory liabilities is beyond the scope of theseproposed regulations. The Treasury De-partment and the IRS seek additionalcomments regarding the proper treatmentof an exculpatory liability under regula-tions under section 704(b) and the effectof such a liability’s classification undersection 1001. Further, the Treasury De-partment and the IRS request additional

comments addressing the allocation of anexculpatory liability among multiple as-sets and possible methods for calculatingminimum gain with respect to such liabil-ity, such as the so-called “floating lien”approach (whereby all the assets in theentity, including cash, are considered tobe subject to the exculpatory liability) or aspecific allocation approach.

5. Net Value

Section 1.752–2(b)(6) of the existingregulations provides that, for purposes ofdetermining the extent to which a partneror related person has a payment obligationand the EROL, it is assumed that all part-ners and related persons who have obliga-tions to make payments actually performthose obligations, irrespective of their ac-tual net worth, unless the facts and cir-cumstances indicate a plan to circumventor avoid the obligation. See § 1.752–2(b)(6), cross referencing § 1.752–2(j)and (k). Under the anti-abuse rule in§ 1.752–2(j), a payment obligation is dis-regarded if there is a plan to circumvent oravoid such obligation. Section 1.752–2(k)(1) provides that, when determiningthe extent to which a partner bears theEROL for a partnership liability, a pay-ment obligation of a business entity that isdisregarded as an entity separate from itsowner under section 856(i), section1361(b)(3), or §§ 301.7701–1 through301.7701–3 of the Procedure and Admin-istration Regulations (a disregarded en-tity) is taken into account only to theextent of the net value of the disregardedentity as of the allocation date that isallocated to the partnership liability. Sec-tion 1.752–2(k)(2)(i) provides, in part,that net value is the fair market value ofall assets owned by the disregarded entitythat may be subject to creditors’ claimsunder local law less all obligations of thedisregarded entity that do not constitute§ 1.752–2(b)(1) payment obligations ofthe disregarded entity.

The 2014 Proposed Regulations pro-vided that, in determining the extent towhich a partner or related person otherthan an individual or a decedent’s estatebears the EROL for a partnership liabilityother than a trade payable, a payment ob-ligation is recognized only to the extent ofthe net value of the partner or related

person that, as of the allocation date, isallocated to the liability, as determinedunder § 1.752–2(k). The 2014 ProposedRegulations also provided that the partnermust provide a statement concerning thenet value of the payment obligor to thepartnership. The preamble to the 2014Proposed Regulations requested com-ments concerning whether the net valuerule should also apply to individuals andestates and whether the regulations shouldconsolidate these rules under § 1.752–2(k).

Commenters expressed concerns thatan expansion of the net value rule wouldadd considerable burden and expense totaxpayers and would likely lead to timeconsuming and costly disputes regardingvaluations. Another commenter explainedthat taxpayers have often avoided the netvalue regulations (by not using disre-garded entities) or have applied the regu-lations only when the disregarded entityhas minimal or no assets.

Commenters suggested that if the netvalue rule is retained, § 1.752–2(k) shouldbe extended to all partners and relatedpersons other than individuals. One com-menter expressed concerns that a partnerwho may be treated as bearing the EROLwith respect to a partnership liabilitywould have to provide information re-garding the net value of the payment ob-ligor, which is unnecessarily intrusive.Another commenter believed that if therules requiring net value were extended toall partners in partnerships, the attempt toachieve more realistic substance would beaccompanied by a corresponding increasein the potential for manipulation.

The Treasury Department and the IRSremain concerned with ensuring that apartner or related person only be pre-sumed to satisfy its payment obligation tothe extent that such partner or related per-son would be able to pay on the obliga-tion. After consideration of the comments,however, the Treasury Department andthe IRS agree that expanding the applica-tion of the net value rules under § 1.752–2(k) may lead to more litigation and mayunduly burden taxpayers. Furthermore,net value as provided in § 1.752–2(k) maynot accurately take into account the futureearnings of a business entity, which nor-mally factor into lending decisions. There-fore, the Treasury Department and the IRS


propose to remove § 1.752–2(k) and in-stead create a new presumption under theanti-abuse rule in § 1.752–2(j). Under thepresumption in the proposed regulations,evidence of a plan to circumvent or avoidan obligation is deemed to exist if thefacts and circumstances indicate that thereis not a reasonable expectation that thepayment obligor will have the ability tomake the required payments if the pay-ment obligation becomes due and payable.A payment obligor includes disregardedentities (including grantor trusts). Theseproposed regulations also add an exampleto illustrate the application of the anti-abuse rule when the payment obligor is anunderfunded entity. Under these proposedregulations, § 1.752–2(b)(6) continues topresume that payment obligations with re-spect to a partnership liability will be sat-isfied unless evidence of a plan to circum-vent or avoid the obligation exists asdetermined under § 1.752–2(j). If evi-dence of a plan to circumvent or avoid theobligation exists or is deemed to exist, theobligation is not recognized under§ 1.752–2(b) and therefore the partnershipliability is treated as a nonrecourse liabil-ity under § 1.752–1(a)(2).

Proposed Applicability Dates

The amendments to § 1.704–1 are pro-posed to apply on or after the date theseregulations are published as final regula-tions in the Federal Register. The amend-ments to § 1.752–2 are proposed to applyto liabilities incurred or assumed by apartnership and to payment obligationsimposed or undertaken with respect to apartnership liability on or after the datethese regulations are published as finalregulations in the Federal Register. Part-nerships and their partners may rely onthese proposed regulations prior to thedate they are published as final regulationsin the Federal Register. However, therules in § 1.752–2(k) still apply to disre-garded entities until the proposed regula-tions are published as final regulations inthe Federal Register.

Some commenters were concerned thatthe 2014 Proposed Regulations “delinked”the regulations under sections 704 and 752concerning DROs, that is, that a DROmay somehow still be recognized undersection 704 despite not meeting the re-quirements to be recognized as a payment

obligation under section 752. DROs aresubject to the bottom dollar payment ob-ligation rules in the 752 Temporary Reg-ulations, but the rules in these proposedregulations concerning DROs will not beeffective prior to the date they are pub-lished as final regulations in the FederalRegister. However, these proposed regu-lations allow partnerships and their part-ners to rely on the proposed regulations,which should address this concern.

Special Analyses

Certain IRS regulations, including thisone, are exempt from the requirements ofExecutive Order 12866, as supplementedand reaffirmed by Executive Order 13563.Therefore, a regulatory impact assessmentis not required. It also has been deter-mined that section 553(b) of the Admin-istrative Procedure Act (5 U.S.C. chapter5) does not apply to these regulations. It ishereby certified that the collection of in-formation in these regulations will nothave a significant economic impact on asubstantial number of small entities. Thiscertification is based on the fact that theamount of time necessary to report therequired information will be minimal inthat it requires partnerships (includingpartnerships that may be small entities) toprovide information they already maintainor can easily obtain to the IRS. Moreover,it should take a partnership no more than2 hours to satisfy the information require-ment in these regulations. Accordingly, aRegulatory Flexibility Analysis under theRegulatory Flexibility Act (5 U.S.C.chapter 6) does not apply. Pursuant tosection 7805(f) of the Code, this notice ofproposed rulemaking has been submittedto the Chief Counsel for Advocacy of theSmall Business Administration for com-ment on its impact on small business.

Comments and Requests for a PublicHearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any written comments (asigned original and eight (8) copies) orelectronic comments that are submittedtimely to the IRS. The Treasury Depart-ment and the IRS request comments on allaspects of the proposed regulations. Allcomments will be available for public in-

spection and copying at www.regulations.gov or upon request. A public hearing willbe scheduled if requested in writing by aperson who timely submits written com-ments. If a public hearing is scheduled,notice of the date, time, and place of thehearing will be published in the FederalRegister.


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

Withdrawal of Proposed Regulations

Accordingly, under the authority of 26U.S.C. 7805, § 1.752–2 of the notice ofproposed rulemaking (REG–119305–11)that was published in the Federal Regis-ter on January 30, 2014 (79 FR 4826) iswithdrawn.

* * * * *

Proposed Amendments to theRegulations

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




issued under 26 U.S.C. 707(a)(2)(B).Par. 2. Section 1.704–1 is amended by:1. Adding two sentences to the end of

paragraph (b)(1)(ii)(a).2. Adding a sentence to the end of

paragraph (b)(2)(ii)(b)(3) introductorytext.

3. Removing the undesignated para-graph following paragraph (b)(2)(ii)(b)(3).

4. Adding paragraphs (b)(2)(ii)(b)(4)through (7).

5. Revising paragraph (b)(2)(ii)(c).The additions and revisions read as fol-

lows:


§ 1.704–1 Partner’s distributive share.

* * * * *(b) * * *(1) * * *(ii) * * *(a) * * * Furthermore, the last sentence

of paragraph (b)(2)(ii)(b)(3) of this sectionand paragraphs (b)(2)(ii)(b)(4) through (7)and (b)(2)(ii)(c) of this section apply on orafter the date these regulations are pub-lished as final regulations in the FederalRegister. However, taxpayers may relyon the last sentence of paragraph(b)(2)(ii)(b)(3) of this section and para-graphs (b)(2)(ii)(b)(4) through (7) and(b)(2)(ii)(c) of this section on or after Oc-tober 5, 2016 and before the date theseregulations are published as final regula-tions in the Federal Register.* * * * *

(2) * * *(ii) * * *(b) * * *(3) * * * Notwithstanding the partner-

ship agreement, an obligation to restore adeficit balance in a partner’s capital ac-count, including an obligation describedin paragraph (b)(2)(ii)(c)(1) of this sec-tion, will not be respected for purposes ofthis section to the extent the obligation isdisregarded under paragraph (b)(2)(ii)(c)(4) of this section.

(4) For purposes of paragraphs (b)(2)(ii)(b)(1) through (3) of this section, apartnership taxable year shall be deter-mined without regard to section 706(c)(2)(A).

(5) The requirements in paragraphs(b)(2)(ii)(b)(2) and (3) of this section arenot violated if all or part of the partnershipinterest of one or more partners is pur-chased (other than in connection with theliquidation of the partnership) by the part-nership or by one or more partners (or oneor more persons related, within the mean-ing of section 267(b) (without modifica-tion by section 267(e)(1)) or section 707(b)(1), to a partner) pursuant to an agree-ment negotiated at arm’s length by per-sons who at the time such agreement isentered into have materially adverse inter-ests and if a principal purpose of suchpurchase and sale is not to avoid the prin-ciples of the second sentence of paragraph(b)(2)(ii)(a) of this section.

(6) The requirement in paragraph (b)(2)(ii)(b)(2) of this section is not violatedif, upon the liquidation of the partnership,the capital accounts of the partners areincreased or decreased pursuant to para-graph (b)(2)(iv)(f) of this section as of thedate of such liquidation and the partner-ship makes liquidating distributionswithin the time set out in the requirementin paragraph (b)(2)(ii)(b)(2) of this sectionin the ratios of the partners’ positive cap-ital accounts, except that it does not dis-tribute reserves reasonably required toprovide for liabilities (contingent or oth-erwise) of the partnership and installmentobligations owed to the partnership, solong as such withheld amounts are distrib-uted as soon as practicable and in theratios of the partners’ positive capital ac-count balances.

(7) See examples (1)(i) and (ii), (4)(i),(8)(i), and (16)(i) of paragraph (b)(5) ofthis section for issues concerning para-graph (b)(2)(ii)(b) of this section.

(c) Obligation to restore deficit—(1)Other arrangements treated as obliga-tions to restore deficits. If a partner is notexpressly obligated to restore the deficitbalance in such partner’s capital account,such partner nevertheless will be treatedas obligated to restore the deficit balancein his capital account (in accordance withthe requirement in paragraph (b)(2)(ii)(b)(3) of this section and subject to para-graph (b)(2)(ii)(c)(2) of this section) to theextent of—

(A) The outstanding principal balanceof any promissory note (of which suchpartner is the maker) contributed to thepartnership by such partner (other than apromissory note that is readily tradable onan established securities market), and

(B) The amount of any unconditionalobligation of such partner (whether im-posed by the partnership agreement or bystate or local law) to make subsequentcontributions to the partnership (otherthan pursuant to a promissory note ofwhich such partner is the maker).

(2) Satisfaction requirement. For pur-poses of paragraph (b)(2)(ii)(c)(1) of thissection, a promissory note or uncondi-tional obligation is taken into accountonly if it is required to be satisfied at atime no later than the end of the partner-ship taxable year in which such partner’sinterest is liquidated (or, if later, within 90

days after the date of such liquidation). Ifa promissory note referred to in paragraph(b)(2)(ii)(c)(1) of this section is negotia-ble, a partner will be considered requiredto satisfy such note within the time periodspecified in this paragraph (b)(2)(ii)(c)(2)if the partnership agreement provides that,in lieu of actual satisfaction, the partner-ship will retain such note and such partnerwill contribute to the partnership the ex-cess, if any, of the outstanding principalbalance of such note over its fair marketvalue at the time of liquidation. See para-graph (b)(2)(iv)(d)(2) of this section. Seeexamples (1)(ix) and (x) of paragraph(b)(5) of this section.

(3) Related party notes. For purposesof paragraph (b)(2) of this section, if apartner contributes a promissory note tothe partnership during a partnership tax-able year beginning after December 29,1988, and the maker of such note is aperson related to such partner (within themeaning of § 1.752–4(b)(1)), then suchpromissory note shall be treated as apromissory note of which such partner isthe maker.

(4) Obligations disregarded—(A) Gen-eral rule. A partner in no event will beconsidered obligated to restore the deficitbalance in his capital account to the part-nership (in accordance with the require-ment in paragraph (b)(2)(ii)(b)(3) of thissection) to the extent such partner’s obli-gation is a bottom dollar payment obliga-tion that is not recognized under § 1.752–2(b)(3) or is not legally enforceable, or thefacts and circumstances otherwise indi-cate a plan to circumvent or avoid suchobligation. See paragraphs (b)(2)(ii)(f),(b)(2)(ii)(h), and (b)(4)(vi) of this sectionfor other rules regarding such obligation.To the extent a partner is not consideredobligated to restore the deficit balance inthe partner’s capital account to the part-nership (in accordance with the require-ment in paragraph (b)(2)(ii)(b)(3) of thissection), the obligation is disregarded andparagraph (b)(2) of this section and§ 1.752–2 are applied as if the obligationdid not exist.

(B) Factors indicating plan to circum-vent or avoid obligation. In the case of anobligation to restore a deficit balance in apartner’s capital account upon liquidationof a partnership, paragraphs (b)(2)(ii)(c)(4)(B)(i) through (iv) of this section


provide a non-exclusive list of factors thatmay indicate a plan to circumvent oravoid the obligation. For purposes of mak-ing determinations under this paragraph(b)(2)(ii)(c)(4), the weight to be given toany particular factor depends on the par-ticular case and the presence or absence ofany particular factor is not, in itself, nec-essarily indicative of whether or not theobligation is respected. The following fac-tors are taken into consideration for pur-poses of this paragraph (b)(2):

(i) The partner is not subject to com-mercially reasonable provisions for en-forcement and collection of the obligation.

(ii) The partner is not required to pro-vide (either at the time the obligation ismade or periodically) commercially rea-sonable documentation regarding the part-ner’s financial condition to the partner-ship.

(iii) The obligation ends or could, byits terms, be terminated before the liqui-dation of the partner’s interest in the part-nership or when the partner’s capital ac-count as provided in § 1.704–1(b)(2)(iv)is negative.

(iv) The terms of the obligation are notprovided to all the partners in the partner-ship in a timely manner.* * * * *

Par. 3. Section 1.707–0 is amended byrevising the entries for § 1.707–5(a)(2)(i)and (ii) to read as follows:


* * * * *


(a) * * *(2) * * *(i) In general.(ii) Partner’s share of § 1.752–7 liabil-

ity.* * * * *

Par. 4. Section 1.707–5 is amended byrevising paragraph (a)(2) and Examples 2,3, 7, and 8 of paragraph (f) to read asfollows:


(a) * * *(2) [The text of proposed § 1.707–

5(a)(2) is the same as the text of § 1.707–5T(a)(2) published elsewhere in this issueof the Bulletin].* * * * *

(f) * * *Example 2. [The text of proposed

§ 1.707–5(f) Example 2 is the same as thetext of § 1.707–5T(f) Example 2 publishedelsewhere in this issue of the Bulletin].

Example 3. [The text of proposed§ 1.707–5(f) Example 3 is the same as thetext of § 1.707–5T(f) Example 3 publishedelsewhere in this issue of the Bulletin].* * * * *

Example 7. [The text of proposed§ 1.707–5(f) Example 7 is the same as thetext of § 1.707–5T(f) Example 7 publishedelsewhere in this issue of the Bulletin].

Example 8. [The text of proposed§ 1.707–5(f) Example 8 is the same as thetext of § 1.707–5T(f) Example 8 publishedelsewhere in this issue of the Bulletin].* * * * *

Par. 5. Section 1.707–9 is amended byadding paragraph (a)(5) to read as fol-lows:


(a) * * *(5) [The text of proposed § 1.707–

9(a)(5) is the same as the text of § 1.707–9T(a)(5) published elsewhere in this issueof the Bulletin].* * * * *

Par. 6. Section 1.752–0 is amended by:1. Adding entries for § 1.752–2(b)

(3)(i) and (ii), (b)(3)(ii)(A) and (B), (b)(3)(ii)(C), (b)(3)(ii)(C)(1) through (3), (b)(3)(ii)(D), and (b)(3)(iii).

2. Adding entries for § 1.752–2(j)(2)(i)and (ii).

3. Adding entries for § 1.752–2(j)(3)(i)through (iii).

4. Revising the entries for § 1.752–2(j)(3) and (4).

5. Adding an entry for § 1.752–2(k).The revisions and additions read as fol-

lows:


* * * * *


* * * * *(b) * * *(3) * * *(i) In general.(ii) Special rules for bottom dollar pay-ment obligations.(A) In general.(B) Exception.(C) Definition of bottom dollar paymentobligation.(1) In general.(2) Exceptions.(3) Benefited party defined.(D) Disclosure of bottom dollar paymentobligations.(iii) Special rule for indemnities and re-imbursement agreements.* * * * *(j) * * *(2) * * *(i) In general.(ii) Economic risk of loss.(3) Plan to circumvent or avoid an obli-gation.(i) General rule.(ii) Factors indicating plan to circumventor avoid an obligation.(iii) Deemed plan to circumvent or avoidan obligation.(4) Examples.(k) Effective/applicability dates.* * * * *

Par. 7. Section 1.752–2 is amended by:1. Revising the last sentence of para-

graph (a).2. Revising paragraph (b)(3) and the

last sentence of paragraph (b)(6).3. Adding a sentence to the end of para-

graph (f) introductory text and addingExamples 10 and 11 to paragraph (f).

4. Revising paragraphs (j)(2) and (3).5. Adding paragraph (j)(4).6. Removing paragraph (k).7. Redesignating paragraph (l) as para-

graph (k) and revising it.The revisions and additions read as fol-

lows:



(a) * * * The determination of theextent to which a partner bears the eco-nomic risk of loss for a partnership liabil-ity is made under the rules in paragraphs(b) through (j) of this section.

(b) * * *(3) [The text of proposed § 1.752–

2(b)(3) is the same as the text of § 1.752–2T(b)(3) published elsewhere in this issueof the Bulletin].* * * * *

(6) * * * See paragraph (j) of thissection.* * * * *

(f) Examples. * * * Unless otherwiseprovided, for purposes of the followingexamples, assume that any obligation of apartner or related person to make a pay-ment is recognized under paragraph (b)(3)of this section.* * * * *

Example 10. [The text of proposed§ 1.752–2(f) Example 10 is the same asthe text of § 1.752–2T(f) Example 10 pub-lished elsewhere in this issue of the Bul-letin].

Example 11. [The text of proposed§ 1.752–2(f) Example 11 is the same asthe text of § 1.752–2T(f) Example 11 pub-lished elsewhere in this issue of the Bul-letin].* * * * *

(j) * * *(2) [The text of proposed § 1.752–

2(j)(2) is the same as the text of § 1.752–2T(j)(2) published elsewhere in this issueof the Bulletin].

(3) Plan to circumvent or avoid anobligation—(i) General rule. An obliga-tion of a partner or related person to makea payment is not recognized under para-graph (b) of this section if the facts andcircumstances evidence a plan to circum-vent or avoid the obligation.

(ii) Factors indicating plan to circum-vent or avoid an obligation. In the case ofa payment obligation, other than an obli-gation to restore a deficit capital accountupon liquidation of a partnership, para-graphs (j)(3)(ii)(A) through (G) of thissection provide a non-exclusive list of fac-tors that may indicate a plan to circumventor avoid the payment obligation. The pres-ence or absence of a factor is based on all

of the facts and circumstances at the timethe partner or related person makes thepayment obligation or if the obligation ismodified, at the time of the modification.For purposes of making determinationsunder this paragraph (j)(3), the weight tobe given to any particular factor dependson the particular case and the presence orabsence of a factor is not necessarily in-dicative of whether a payment obligationis or is not recognized under paragraph (b)of this section.

(A) The partner or related person is notsubject to commercially reasonable con-tractual restrictions that protect the likeli-hood of payment, including, for example,restrictions on transfers for inadequateconsideration or distributions by the part-ner or related person to equity owners inthe partner or related person.

(B) The partner or related person is notrequired to provide (either at the time thepayment obligation is made or periodi-cally) commercially reasonable documen-tation regarding the partner’s or relatedperson’s financial condition to the bene-fited party.

(C) The term of the payment obligationends prior to the term of the partnershipliability, or the partner or related personhas a right to terminate its payment obli-gation, if the purpose of limiting the du-ration of the payment obligation is to ter-minate such payment obligation prior tothe occurrence of an event or events thatincrease the risk of economic loss to theguarantor or benefited party (for example,termination prior to the due date of aballoon payment or a right to terminatethat can be exercised because the value ofloan collateral decreases). This factor typ-ically will not be present if the terminationof the obligation occurs by reason of anevent or events that decrease the risk ofeconomic loss to the guarantor or bene-fited party (for example, the payment ob-ligation terminates upon the completion ofa building construction project, upon theleasing of a building, or when certain in-come and asset coverage ratios are satis-fied for a specified number of quarters).

(D) There exists a plan or arrangementin which the primary obligor or any otherobligor (or a person related to the obligor)with respect to the partnership liabilitydirectly or indirectly holds money or otherliquid assets in an amount that exceeds the

reasonable foreseeable needs of such ob-ligor.

(E) The payment obligation does notpermit the creditor to promptly pursuepayment following a payment default onthe partnership liability, or other arrange-ments with respect to the partnership lia-bility or payment obligation otherwise in-dicate a plan to delay collection.

(F) In the case of a guarantee or similararrangement, the terms of the partnershipliability would be substantially the samehad the partner or related person notagreed to provide the guarantee.

(G) The creditor or other party benefit-ing from the obligation did not receiveexecuted documents with respect to thepayment obligation from the partner orrelated person before, or within a com-mercially reasonable period of time after,the creation of the obligation.

(iii) Deemed plan to circumvent oravoid an obligation. Evidence of a plan tocircumvent or avoid an obligation isdeemed to exist if the facts and circum-stances indicate that there is not a reason-able expectation that the payment obligorwill have the ability to make the requiredpayments if the payment obligation be-comes due and payable. For purposes ofthis section, a payment obligor includes anentity disregarded as an entity separatefrom its owner under section 856(i), sec-tion 1361(b)(3), or §§ 301.7701–1through 301.7701–3 of this chapter (a dis-regarded entity), and a trust to which sub-part E of part I of subchapter J of chapter1 of the Code applies.

(4) Examples. The following examplesillustrate the principles of paragraph (j) ofthis section.

Example 1. Gratuitous guarantee. (i) In 2016, A,B, and C form a domestic limited liability company(LLC) that is classified as a partnership for federaltax purposes. Also in 2016, LLC receives a loanfrom a bank. A, B, and C do not bear the economicrisk of loss with respect to that partnership liability,and, as a result, the liability is treated as nonrecourseunder § 1.752–1(a)(2) in 2016. In 2018, A guaran-tees the entire amount of the liability. The bank didnot request the guarantee and the terms of the loandid not change as a result of the guarantee. A did notprovide any executed documents with respect to A’sguarantee to the bank. The bank also did not requireany restrictions on asset transfers by A and no suchrestrictions exist.

(ii) Under paragraph (j)(3) of this section, A’s2018 guarantee (payment obligation) is not recog-nized under paragraph (b)(3) of this section if thefacts and circumstances evidence a plan to circum-


vent or avoid the payment obligation. In this case,the following factors indicate a plan to circumvent oravoid A’s payment obligation: (1) the partner is notsubject to commercially reasonable contractual re-strictions that protect the likelihood of payment, suchas restrictions on transfers for inadequate consider-ation or equity distributions; (2) the partner is notrequired to provide (either at the time the paymentobligation is made or periodically) commerciallyreasonable documentation regarding the partner’s orrelated person’s financial condition to the benefitedparty; (3) in the case of a guarantee or similar ar-rangement, the terms of the liability are the same asthey would have been without the guarantee; and (4)the creditor did not receive executed documents withrespect to the payment obligation from the partner orrelated person at the time the obligation was created.Absent the existence of other facts or circumstancesthat would weigh in favor of respecting A’s guaran-tee, evidence of a plan to circumvent or avoid theobligation exists and, pursuant to paragraph (j)(3)(i)of this section, A’s guarantee is not recognized underparagraph (b) of this section. As a result, LLC’sliability continues to be treated as nonrecourse.

Example 2. Underfunded disregarded entity pay-ment obligor. (i) In 2016, A forms a wholly owneddomestic limited liability company, LLC, with acontribution of $100,000. A has no liability forLLC’s debts, and LLC has no enforceable right to acontribution from A. Under § 301.7701–3(b)(1)(ii)of this chapter, LLC is a treated for federal taxpurposes as a disregarded entity. Also in 2016, LLCcontributes $100,000 to LP, a limited partnershipwith a calendar year taxable year, in exchange for ageneral partnership interest in LP, and B and C eachcontributes $100,000 to LP in exchange for a limitedpartnership interest in LP. The partnership agree-ment provides that only LLC is required to restoreany deficit in its capital account. On January 1, 2017,LP borrows $300,000 from a bank and uses$600,000 to purchase nondepreciable property. The$300,000 is secured by the property and is also ageneral obligation of LP. LP makes payments ofonly interest on its $300,000 debt during 2017. LPhas a net taxable loss in 2017, and, under §§ 1.705–1(a) and 1.752–4(d), LP determines its partners’shares of the $300,000 debt at the end of its taxableyear, December 31, 2017. As of that date, LLC holdsno assets other than its interest in LP.

(ii) Because LLC is a disregarded entity, A istreated as the partner in LP for federal income taxpurposes. Only LLC has an obligation to make apayment on account of the $300,000 debt if LP wereto constructively liquidate as described in paragraph(b)(1) of this section. Therefore, paragraph (j)(3)(iii)of this section is applied to the LLC and not to A.LLC has no assets with which to pay if the paymentobligation becomes due and payable. As such, evi-dence of a plan to circumvent or avoid the obligationis deemed to exist and, pursuant to paragraph(j)(3)(i) of this section, LLC’s obligation to restoreits deficit capital account is not recognized underparagraph (b) of this section. As a result, LP’s$300,000 debt is characterized as nonrecourse under§ 1.752–1(a)(2) and is allocated among A, B, and Cunder § 1.752–3.

(k) Effective/applicability dates. (1)Paragraph (h)(3) of this section applies to

liabilities incurred or assumed by a part-nership on or after October 11, 2006,other than liabilities incurred or assumedby a partnership pursuant to a writtenbinding contract in effect prior to thatdate. The rules applicable to liabilities in-curred or assumed (or pursuant to a writ-ten binding contract in effect) prior toOctober 11, 2006, are contained in§ 1.752–2 in effect prior to October 11,2006, (see 26 CFR part 1 revised as ofApril 1, 2006). The last sentence of para-graphs (a), (b)(6), and (f) of this sectionand paragraphs (j)(3) and (4) of this sec-tion apply to liabilities incurred or as-sumed by a partnership and to paymentobligations imposed or undertaken withrespect to a partnership liability on or afterthe date these regulations are published asfinal regulations in the Federal Register,other than liabilities incurred or assumedby a partnership and payment obligationsimposed or undertaken pursuant to a writ-ten binding contract in effect prior to thatdate. Taxpayers may rely on these regula-tions for the period between October 5,2016 and the date these regulations arepublished as final regulations in the Fed-eral Register.

(2) [The text of proposed § 1.752–2(k)(2) is the same as the text of § 1.752–2T(l)(2) published elsewhere in this issueof the Bulletin].

(3) [The text of proposed § 1.752–2(k)(3) is the same as the text of § 1.752–2T(l)(3) published elsewhere in this issueof the Bulletin].



(Filed by the Office of the Federal Register on October 4,2016, 8:45 a.m., and published in the issue of the FederalRegister for October 5, 2016, 81 F.R. 69301)

Covered Asset Acquisitions

REG 129128–14


ACTION: Notice of proposed rulemakingby cross-reference in part to temporaryregulations.

SUMMARY: This document containsproposed Income Tax Regulations undersection 901(m) of the Internal RevenueCode (Code) with respect to transactionsthat generally are treated as asset acquisi-tions for U.S. income tax purposes andeither are treated as stock acquisitions orare disregarded for foreign income taxpurposes. In the Rules and Regulationssection of this issue of the Bulletin, tem-porary regulations are being issued undersection 901(m) (the temporary regula-tions), the text of which serves as the textof a portion of these proposed regulations.These regulations are necessary to provideguidance on applying section 901(m).These regulations affect taxpayers claim-ing foreign tax credits.

DATES: Comments and requests for apublic hearing must be received by March7, 2017.

ADDRESSES: Send submissions to CC:PA:LPD:PR (REG–129128–14), room5205, Internal Revenue Service, PO Box7604, Ben Franklin Station, Washington,DC 20044. Submissions may be hand de-livered Monday through Friday betweenthe hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG–129128–14), Courier’sdesk, Internal Revenue Service, 1111Constitution Avenue, NW., Washington,DC 20044, or sent electronically, via theFederal eRulemaking Portal at www.regulations.gov (IRS REG–129128–14).

FOR FURTHER INFORMATION CON-TACT: Concerning the regulations, Jef-frey L. Parry, (202) 317-6936; concerningsubmissions of comments, Regina John-son, (202) 317-6901 (not toll-free num-bers).

SUPPLEMENTARY INFORMATION:

Background

I. Section 901(m)

Section 212 of the Education Jobs andMedicaid Assistance Act (EJMAA), en-acted on August 10, 2010 (Public Law111–226), added section 901(m) to theCode. Section 901(m)(1) provides that, inthe case of a covered asset acquisition(CAA), the disqualified portion of anyforeign income tax determined with re-spect to the income or gain attributable to


relevant foreign assets (RFAs) will not betaken into account in determining the for-eign tax credit allowed under section901(a), and, in the case of foreign incometax paid by a section 902 corporation (asdefined in section 909(d)(5)), will not betaken into account for purposes of section902 or 960. Instead, the disqualified por-tion of any foreign income tax (the dis-qualified tax amount) is permitted as adeduction. See section 901(m)(6).

Under section 901(m)(2), a CAA is (i)a qualified stock purchase (as defined insection 338(d)(3)) to which section 338(a)applies; (ii) any transaction that is treatedas an acquisition of assets for U.S. incometax purposes and as the acquisition ofstock of a corporation (or is disregarded)for purposes of a foreign income tax; (iii)any acquisition of an interest in a partner-ship that has an election in effect undersection 754; and (iv) to the extent pro-vided by the Secretary, any other similartransaction. The Joint Committee on Tax-ation’s technical explanation of EJMAAstates that it is anticipated that the Secre-tary will issue regulations identifyingother similar transactions that result in anincrease to the basis of assets for U.S.income tax purposes without a corre-sponding increase for foreign income taxpurposes. Staff of the Joint Committee onTaxation, Technical Explanation of theRevenue Provisions of the Senate Amend-ment to the House Amendment to the Sen-ate Amendment to H.R. 1586, Scheduledfor Consideration by the House of Repre-sentatives on August 10, 2010, at 14 (Aug.10, 2010) (JCT Explanation).

Section 901(m)(3)(A) provides that theterm “disqualified portion” means, withrespect to any CAA, for any taxable year,the ratio (expressed as a percentage) of (i)the aggregate basis differences (but notbelow zero) allocable to such taxable yearwith respect to all RFAs; divided by (ii)the income on which the foreign incometax referenced in section 901(m)(1) isdetermined. If the taxpayer fails to sub-stantiate the income on which the foreignincome tax is determined to the satisfac-tion of the Secretary, such income will bedetermined by dividing the amount ofsuch foreign income tax by the highestmarginal tax rate applicable to the taxpay-er’s income in the relevant jurisdiction.The JCT Explanation states that for this

purpose the income on which the foreignincome tax is determined is the income asdetermined under the law of the relevantjurisdiction. See JCT Explanation at 14.

Section 901(m)(3)(B)(i) provides thegeneral rule that the basis difference withrespect to any RFA will be allocated totaxable years using the applicable costrecovery method for U.S. income tax pur-poses. Section 901(m)(3)(B)(ii) providesthat, except as otherwise provided by theSecretary, if there is a disposition of anRFA, the basis difference allocated to thetaxable year of the disposition will be theexcess of the basis difference of such assetover the aggregate basis difference ofsuch asset that has been allocated to allprior taxable years. The statute furtherprovides that no basis difference with re-spect to such asset will be allocated to anytaxable year thereafter.

Section 901(m)(3)(C)(i) provides thatbasis difference means, with respect toany RFA, the excess of: (i) the adjustedbasis of such asset immediately after theCAA, over (ii) the adjusted basis of suchasset immediately before the CAA. If theadjusted basis of an RFA immediately be-fore the CAA exceeds the adjusted basisof the RFA immediately after the CAA(that is, where the adjusted basis of anasset with a built-in loss is reduced in aCAA), such excess is taken into accountas a basis difference of a negative amount.See section 901(m)(3)(C)(ii).

The JCT Explanation states that, forpurposes of determining basis difference,it is the tax basis for U.S. income taxpurposes that is relevant and not the taxbasis as determined under the law of therelevant jurisdiction. See JCT Explanationat 14. However, the JCT Explanation fur-ther states that it is anticipated that theSecretary will issue regulations identify-ing those circumstances in which, for pur-poses of determining the adjusted basis ofsuch assets immediately before the CAA,it may be acceptable to use foreign basisor another reasonable method. Id.

Section 901(m)(4) provides that anRFA means, with respect to a CAA, anyasset (including goodwill, going concernvalue, or other intangible) with respect tosuch acquisition if income, deduction,gain, or loss attributable to such asset istaken into account in determining the for-

eign income tax referenced in section901(m)(1).

Section 901(m)(7) provides that theSecretary may issue regulations or otherguidance as is necessary or appropriate tocarry out the purposes of section 901(m),including to exempt from its applicationcertain CAAs and RFAs with respect towhich the basis difference is de minimis.The JCT Explanation states that regula-tions may also exclude from the applica-tion of section 901(m) CAAs that arenot taxable for U.S. income tax purposes,or in which the basis of the RFAs is alsoincreased for purposes of the law of therelevant foreign jurisdiction. See JCT Ex-planation at 16.

Section 901(m) generally applies toCAAs occurring after December 31, 2010.Section 901(m), however, does not applyto any CAA with respect to which thetransferor and transferee are not relatedif the acquisition is made pursuant to awritten agreement that was binding onJanuary 1, 2011, and at all times thereaf-ter; described in a ruling request submit-ted to the IRS on or before July 29, 2010;or described on or before January 1, 2011,in a public announcement or in a filingwith the Securities and Exchange Com-mission. See EJMAA, section 212(b).

II. Notices 2014–44 and 2014–45

The Department of the Treasury (Trea-sury Department) and the IRS issued No-tice 2014–44 (2014–32 I.R.B. 270 (July21, 2014)) and Notice 2014–45 (2014–34I.R.B. 388 (July 29, 2014)), announcingthe intent to issue regulations addressingthe application of section 901(m) to dis-positions of RFAs following CAAs and toCAAs described in section 901(m)(2)(C)(regarding section 754 elections). In addi-tion, the notices announced the intent toissue regulations providing successorrules for the continued application of sec-tion 901(m) after subsequent transfers ofRFAs with remaining basis difference.The temporary regulations issued in theRules and Regulations section of this is-sue of the Bulletin provide the rules de-scribed in those Notices.


Explanation of Provisions

I. Overview

These proposed regulations providerules for computing the disqualified por-tion of foreign income taxes under section901(m). Proposed § 1.901(m)–1 providesdefinitions that apply for purposes of theproposed regulations. Proposed § 1.901(m)–2 identifies the transactions that areCAAs, including additional categories oftransactions that are identified as CAAspursuant to the authority granted in sec-tion 901(m)(2)(D), and provides rules foridentifying assets that are RFAs with re-spect to a CAA. Proposed § 1.901(m)–3provides rules for computing the disqual-ified portion of foreign income taxes, de-scribes the treatment under section901(m)(1) of the disqualified portion, andprovides rules for determining whetherand to what extent basis difference that isassigned to a given taxable year is carriedover to subsequent taxable years. Pro-posed § 1.901(m)–4 provides rules fordetermining the basis difference with re-spect to an RFA, including an election touse foreign basis for purposes of this de-termination. Proposed § 1.901(m)–5 pro-vides rules for taking into account basisdifference under an applicable cost recov-ery method or as a result of a dispositionof an RFA, rules for allocating that basisdifference, when necessary, to one ormore persons subject to section 901(m),and rules for assigning that basis differ-ence to a U.S. taxable year. Proposed§ 1.901(m)–6 provides successor rules forapplying section 901(m) to subsequenttransfers of RFAs that have basis differ-ence that has not yet been fully taken intoaccount, as well as for transferring anaggregate basis difference carryover of aperson subject to section 901(m) either toanother aggregate basis difference carry-over account of such person or to anotherperson subject to section 901(m). Pro-posed § 1.901(m)–7 provides de minimisrules under which certain basis differ-ences are not taken into account undersection 901(m). Proposed § 1.901(m)–8provides guidance on the application ofsection 901(m) to pre-1987 foreign in-come taxes and anti-abuse rules relating tobuilt-in loss assets.

II. Relevance of the Terms Section901(m) Payor, Foreign Payor, RFAOwner (U.S.), and RFA Owner (foreign)

As provided under proposed § 1.901(m)–1, a section 901(m) payor is a personthat is eligible to claim the foreign taxcredit allowed under section 901(a), re-gardless of whether the person chooses toclaim the foreign tax credit, as well as asection 902 corporation. Therefore, a sec-tion 901(m) payor is the person requiredto compute a disqualified tax amountwhen section 901(m) applies. The foreignpayor is the individual or entity (includinga disregarded entity) subject to a foreignincome tax. The RFA owner (U.S.) is theperson that owns one or more RFAs forU.S. income tax purposes and therefore isrequired to report, or otherwise track,items of income, deduction, gain, or lossattributable to the RFAs for purposes ofcomputing the U.S. taxable income of theRFA owner (U.S.). Similarly, the RFAowner (foreign) is the individual or entity(including a disregarded entity) that ownsone or more RFAs for purposes of a for-eign income tax and that therefore gener-ally would report, or otherwise track,items of income, deduction, gain, or lossattributable to the RFAs for purposes ofdetermining income reported on a foreignincome tax return.

The section 901(m) payor may also bethe foreign payor, the RFA owner (U.S.),or the RFA owner (foreign), or any com-bination thereof; alternatively, the section901(m) payor may not be any of themdepending upon the application of the en-tity classification rules for U.S. incometax purposes. Further, the foreign payorand the RFA owner (foreign) may or maynot be the same person for purposes of aforeign income tax depending uponwhether the RFA owner (foreign) is afiscally transparent entity for purposes ofthe foreign income tax. For example, if aforeign corporation, which is a section902 corporation, owns RFAs and is theentity that is subject to a foreign incometax under the relevant foreign law, theforeign corporation is the section 901(m)payor, foreign payor, RFA owner (U.S.),and RFA owner (foreign). As another ex-ample, if two U.S. corporations each owna 50 percent interest in a partnership andthe partnership owns a disregarded entity

that is subject to a foreign income taxand that, for purposes of the foreign in-come tax, owns one or more RFAs, thecorporate partners are each a section901(m) payor, the disregarded entity is theforeign payor and the RFA owner (for-eign), and the partnership is the RFAowner (U.S.).

Finally, because the computation of asection 901(m) payor’s disqualified taxamount is based on items determined atthe level of the foreign payor, the RFAowner (U.S.), and the RFA owner (for-eign), the regulations provide rules forallocating those items when the section901(m) payor is not the foreign payor, theRFA owner (U.S.), or the RFA owner(foreign), or any combination thereof.

III. CAAs and RFAs

A. CAAs

Proposed § 1.901(m)–2(b) identifiessix categories of transactions that consti-tute CAAs, three of which are specified inthe statute (incorporated by cross refer-ence to the temporary regulations) andthree of which are additional categories oftransactions that are identified as CAAspursuant to the authority granted undersection 901(m)(2)(D). In addition, fortransactions that occurred on or after Jan-uary 1, 2011, and before the general ap-plicability date of the temporary regula-tions (referred to as the “transition period”in the preamble to the temporary regula-tions and in this preamble), proposed§ 1.901(m)–2(d) (incorporated by crossreference to the temporary regulations)defines CAAs by reference to the statutorydefinition under section 901(m)(2). Trans-actions are CAAs regardless of whetherany gain, income, loss, or deduction real-ized in connection with the transaction istaken into account for U.S. income taxpurposes. However, basis difference re-sulting from a CAA may not be taken intoaccount under section 901(m) pursuant tode minimis rules in proposed § 1.901(m)–7.

Proposed § 1.901(m)–2(b)(1) through(4) describes four specific types of trans-actions that are generally expected to re-sult in an increase in the basis of assets forU.S. income tax purposes without a cor-responding increase in basis for foreignincome tax purposes. This is because


these transactions generally are treated asan acquisition of assets for U.S. incometax purposes and either are treated as anacquisition of stock or of a partnershipinterest or are disregarded for foreign in-come tax purposes. The other two catego-ries of transactions described in proposed§ 1.901(m)–2(b)(5) and (6), which in-volve an acquisition of assets for bothU.S. and foreign income tax purposes, areCAAs only if the transaction results in anincrease in the basis of an asset for U.S.income tax purposes but not for foreignincome tax purposes. Such transactionsmay include, for example, an acquisitionof assets that is structured to avoid theapplication of the Code’s corporate non-recognition provisions, such as section332, 351, or 361, while still qualifying fornonrecognition treatment for foreign in-come tax purposes.

B. RFAs

Proposed § 1.901(m)–2(c)(1) incorpo-rates by cross reference to the temporaryregulations the general definition of anRFA, which provides that an RFA means,with respect to a foreign income tax and aCAA, any asset (including goodwill, go-ing concern value, or other intangible)subject to the CAA that is relevant indetermining foreign income for purposesof the foreign income tax. In addition, forCAAs that occurred during the transitionperiod, proposed § 1.901(m)–2(d) (incor-porated by cross reference to the tempo-rary regulations) defines RFAs by refer-ence to the statutory definition undersection 901(m)(4).

Proposed § 1.901(m)–2(c)(2) generallyprovides that an asset is relevant in deter-mining foreign income if income, deduc-tion, gain, or loss attributable to such assetis or would be taken into account in de-termining foreign income immediately af-ter the CAA. Proposed § 1.901(m)–2(c)(3) provides, however, that, after aCAA, an asset will become an RFA withrespect to another foreign income tax if,pursuant to a plan or series of relatedtransactions that have a principal purposeof avoiding the application of section901(m), an asset that is not relevant indetermining foreign income for purposesof that foreign income tax immediatelyafter the CAA later becomes relevant in

determining such foreign income. A prin-cipal purpose of avoiding section 901(m)will be deemed to exist if income, deduc-tion, gain, or loss attributable to the assetis taken into account in determining suchforeign income within the one-year periodfollowing the CAA.

IV. Disqualified Tax Amount andAggregate Basis Difference Carryover

A. Disqualified tax amount

Proposed § 1.901(m)–3 sets forth therules for computing the disqualified por-tion of foreign income taxes (referred to inthe regulations as the “disqualified taxamount”). Proposed § 1.901(m)–3 alsosets forth the treatment under section901(m)(1) of the disqualified tax amountand provides rules for determiningwhether and to what extent basis differ-ence that is assigned to a given U.S. tax-able year is carried over to subsequentU.S. taxable years (referred to in the reg-ulations as “aggregate basis differencecarryover”).

In general, a disqualified tax amount iscomputed separately for each foreign taxreturn that takes into account income,gain, deduction, or loss from one or moreRFAs in computing the foreign taxableincome and for each section 901(m) payorthat pays or accrues, or that is consideredto pay or accrue, a portion of the foreignincome taxes reflected on the foreign taxreturn. Furthermore, if the foreign incometaxes relate to more than one separatecategory described in § 1.904–4(m) (in-cluding section 904(d) categories), a sep-arate disqualified tax amount computationis done for each such separate category.Members of a U.S. affiliated group ofcorporations (as defined in section 1504)that file a consolidated return are eachtreated as a separate section 901(m) pay-or; therefore, disqualified tax amounts arecomputed at the member-level.

The proposed regulations refer to thetotal taxable income (or loss) that is com-puted under foreign law for a foreign tax-able year and reflected on a foreign taxreturn as “foreign income” and the totalamount of tax reflected on a foreign taxreturn as a “foreign income tax amount.”Thus, foreign income does not includeincome that is exempt from the foreign

income tax. The proposed regulations usethe term “foreign country creditabletaxes” (or “FCCTs”) to refer to any for-eign income taxes imposed by anotherforeign country or possession of theUnited States that were allowed under therelevant foreign law as a credit to reducethe foreign income tax amount and forwhich a credit is allowed under section901 or 903. In addition, the proposed reg-ulations define “foreign income tax” (bycross reference to the temporary regula-tions) to mean any income, war profits, orexcess profits tax for which a credit isallowable under section 901 or 903, otherthan any withholding tax determined on agross basis as described in section901(k)(1)(B).

The foreign income, foreign incometax amount, and any FCCTs are deter-mined at the foreign-payor level. If theforeign payor is not a section 901(m)payor, current law provides rules for de-termining the person that is considered topay or accrue a foreign income taxamount for purposes of the foreign taxcredit (see, for example, §§ 1.702–1(a)(6)and 1.901–2(f)). Those rules are notchanged by these proposed regulationsand therefore apply for purposes of deter-mining the extent to which a foreign in-come tax amount is paid or accrued by, orconsidered paid or accrued by, a section901(m) payor for purposes of section901(m).

Proposed § 1.901(m)–3(b) sets forththe treatment of the disqualified taxamount and the computation of the dis-qualified tax amount. Pursuant to section901(m)(1) and proposed § 1.901(m)–3(b)(1), the disqualified tax amount is nottaken into account for purposes of deter-mining foreign tax credits under section901, 902, or 960. A section 901(m) payormust compute a disqualified tax amountfor any U.S. taxable year for which it isassigned a portion of the basis differencewith respect to one or more RFAs.

The disqualified tax amount is thelesser of the tentative disqualified taxamount and the foreign income taxamount paid or accrued by, or consideredpaid or accrued by, a section 901(m)payor. The tentative disqualified taxamount is determined using a modifiedversion of the formula provided in section901(m)(3). To determine the tentative dis-


qualified tax amount, the foreign incometax amount paid or accrued by, or consid-ered paid or accrued by, the section901(m) payor for its U.S. taxable year(multiplicand) is multiplied by a ratio(disqualified ratio), the numerator ofwhich is the sum of the portion of thebasis difference for all RFAs that is takeninto account and assigned to the U.S. tax-able year of the section 901(m) payor, andthe denominator of which is the portion ofthe foreign income reflected on the for-eign tax return that relates to the foreignincome tax amount included in the multi-plicand. The numerator and the denomi-nator of the disqualified ratio are referredto in the proposed regulations as the “ag-gregate basis difference” and “allocableforeign income,” respectively.

Allocable foreign income (the denom-inator of the disqualified ratio) and theforeign income tax amount (the multipli-cand) are determined using the totalamount of foreign income and foreign in-come tax amount reflected on the foreignincome tax return that are allocable to thesection 901(m) payor, instead of by refer-ence only to the amounts determined withrespect to the RFAs. The Treasury Depart-ment and the IRS have determined thatthis approach appropriately carries out thepurposes of section 901(m) while avoid-ing the administrative and complianceburdens that would result from a require-ment to trace amounts of income to RFAsand identify the portion of foreign incometaxes imposed on that income.

If a foreign income tax amount is com-puted taking into account an FCCT, themultiplicand of the tentative disqualifiedtax amount computation is the sum of theforeign income tax amount and anyFCCTs paid or accrued by, or consideredpaid or accrued by, the section 901(m)payor. The Treasury Department and theIRS have determined that it is appropriateto include any FCCTs in the multiplicandto better reflect the effective tax rate im-posed on the aggregate basis difference.However, the tentative disqualified taxamount is reduced (but not below zero) tothe extent any portion of the FCCTs isitself treated as a disqualified tax amountof the section 901(m) payor with respectto a different foreign income tax.

The aggregate basis difference in thenumerator includes cost recovery amounts

and disposition amounts taken into ac-count with respect to RFAs and assignedto the U.S. taxable year of the section901(m) payor under proposed § 1.901(m)–5, as discussed in section VI. of thisthe Explanation of Provisions of this pre-amble. When the numerator and denomi-nator are both positive amounts, theamount of aggregate basis difference in-cluded in the numerator is limited to theamount of foreign income in the denomi-nator of the disqualified ratio (in otherwords, the allocable foreign income). Thislimitation ensures that multiplying the for-eign income tax amount included in themultiplicand by the disqualified ratiowould not produce a disqualified taxamount greater than 100 percent of theforeign income tax amount. See sectionIV.B. of the Explanation of Provisionssection of this preamble for the treatmentof any excess of the aggregate basis dif-ference over the allocable foreign incomeas an aggregate basis difference carryover.

The denominator of the disqualified ra-tio is the allocable foreign income. Whenthe entire foreign income tax amount re-flected on a foreign tax return is paid oraccrued by, or considered paid or accruedby, a single section 901(m) payor for U.S.income tax purposes, the allocable foreignincome is simply the total foreign incomereflected on the foreign tax return. In gen-eral, this will be the case when the section901(m) payor is the foreign payor or ownsa disregarded entity that is the foreignpayor, unless there is a change in owner-ship or a change in entity classification inthe foreign payor requiring an allocationof the foreign income tax amount of theforeign payor (a mid-year transaction).

If, however, the foreign income taxamount reflected on a foreign tax return isallocated to more than one person for U.S.income tax purposes, the allocable foreignincome in the denominator of the disqual-ified ratio for a particular section 901(m)payor is equal to the portion of the foreignincome reflected on the foreign tax returnthat relates to the foreign income taxamount allocated to, and considered paidor accrued by, that section 901(m) payor(and therefore that is included in the mul-tiplicand of the tentative disqualified taxamount computation). Proposed § 1.901(m)–3(b)(2)(iii)(C) provides guidance onhow to determine the allocable foreign

income in three types of cases: (i) theforeign income tax amount is allocated toa section 901(m) payor because the for-eign payor is involved in a mid-year trans-action, such as the transfer of a disre-garded entity during the disregardedentity’s foreign taxable year or acquisi-tions involving elections under section338 or 336(e); (ii) the foreign income taxamount is allocated to a section 901(m)payor that is a partner because the foreignpayor is a partnership for U.S. income taxpurposes that is legally liable for the for-eign income tax amount under § 1.901–2(f)(4)(i) (or the foreign payor is a disre-garded entity and its assets are owned forU.S. income tax purposes by an entity thatis treated as a partnership for U.S. incometax purposes and that is legally liable forthe foreign income tax amount under§ 1.901–2(f)(4)(ii)); and (iii) the foreignincome tax amount is allocated to a sec-tion 901(m) payor under § 1.901–2(f)(3)(i) because the section 901(m)payor is a member of a group whose in-come is taxed on a combined basis forforeign income tax purposes.

Notwithstanding the rules described inthe two preceding paragraphs for deter-mining allocable foreign income, if a sec-tion 901(m) payor fails to substantiate itsallocable foreign income to the satisfac-tion of the Secretary, then proposed§ 1.901(m)–3(b)(2)(iii)(D) provides thatallocable foreign income will equal theamount determined by dividing the sum ofthe foreign income tax amount and theFCCTs that are paid or accrued by, orconsidered paid or accrued by, the section901(m) payor, by the highest marginal taxrate applicable to income of the foreignpayor under the relevant foreign incometax. See section 901(m)(3)(A).

If the numerator is less than zero, thedenominator is less than or equal to zero,or the multiplicand is zero, the tentativedisqualified tax amount (and thereforethe disqualified tax amount) is zero. If thedisqualified tax amount for a year either iszero or is limited by the foreign incometax amount paid or accrued by, or consid-ered paid or accrued by, a section 901(m)payor, there will be an aggregate basisdifference carryover as described in thenext section.


B. Aggregate basis difference carryover

Proposed § 1.901(m)–3(c) providesrules for determining the amount of ag-gregate basis difference carryover for agiven U.S. taxable year of a section901(m) payor that will be included in thesection 901(m) payor’s aggregate basisdifference for the next U.S. taxable year(and therefore included in the numeratorof the disqualified ratio for purposes of thenext year’s disqualified tax amount com-putation). The carryover reflects the extentto which the aggregate basis difference fora U.S. taxable year has not yet given riseto a disqualified tax amount.

If the disqualified tax amount is zero,none of the aggregate basis differencegives rise to a disqualified tax amount andtherefore the full amount of the section901(m) payor’s aggregate basis differencefor that year will be reflected in an aggre-gate basis difference carryover (positiveor negative).

If the disqualified tax amount is notzero, an aggregate basis difference carry-over may still arise in two situations. First,if the aggregate basis difference exceedsthe section 901(m) payor’s allocable for-eign income (the denominator of the dis-qualified ratio) and therefore the amountof the aggregate basis difference includedin the numerator is limited, the excess isreflected in an aggregate basis differencecarryover. Second, if the tentative disqual-ified tax amount (which takes into accountFCCTs) exceeds the foreign income taxamount paid or accrued by the section901(m) payor (which does not includeFCCTs), that excess tax amount is con-verted into an equivalent amount of ag-gregate basis difference that is reflected inan aggregate basis difference carryover.See Prop. § 1.901(m)–3(c)(2)(ii)(B).

V. Determination of Basis Difference

Proposed § 1.901(m)–4 incorporatesby cross reference the general rules in thetemporary regulations for determining ba-sis difference. Under these rules, basisdifference is determined separately withrespect to each foreign income tax forwhich an asset is an RFA.

Proposed § 1.901(m)–4(c)(1) providesfor a foreign basis election, pursuant towhich basis difference is equal to the U.S.

basis in the RFA immediately after theCAA less the foreign basis in the RFAimmediately after the CAA (including anyadjustments to the foreign basis resultingfrom the CAA). Proposed § 1.901(m)–4(c)(2) through (4) provide rules for mak-ing a foreign basis election. A foreignbasis election generally is made by theRFA owner (U.S.). For example, in a sec-tion 338 CAA, the foreign basis election ismade by the corporation that is the subjectof the qualified stock purchase (new targetas defined in § 1.338–2(c)(17)). If theRFA owner (U.S.) is a partnership, how-ever, each partner in the partnership (andnot the partnership) may independentlymake a foreign basis election. A foreignbasis election is made separately for eachCAA and with respect to each foreignincome tax and each foreign payor. Forthis purpose, a series of CAAs occurringas part of a plan (referred to in the regu-lations as an “aggregated CAA transac-tion”) are treated as a single CAA. Theproposed regulations contain examples il-lustrating the scope of the foreign basiselection.

The election is made by using foreignbasis to determine the basis differencesfor purposes of computing a disqualifiedtax amount and an aggregate basis differ-ence carryover. The election generallymust be reflected on a timely filed originalfederal income tax return for the first U.S.taxable year that the foreign basis electionis relevant. Proposed § 1.901(m)–4(c)(5)provides an exception for certain cases inwhich the RFA owner (U.S.) is a partner-ship. This exception generally providesrelief when one or more partners and thepartnership have agreed that the partner-ship would determine whether to providethe partners with information to apply sec-tion 901(m) based on foreign basis and, infact, the partnership provided the informa-tion to the partner using foreign basis, butwhen the partner timely filed its tax returnit failed to report the application of section901(m). The purpose of the relief is toaddress situations in which a partner mustfile an amended return in order to properlyreflect the application of section 901(m)but does not have access to the necessaryinformation to apply section 901(m) usingU.S. basis. The criteria for qualifying forthis relief should prevent partners from

using hindsight in determining whether tomake the foreign basis election.

Proposed § 1.901(m)–4(c)(6) providesanother exception to the requirement tomake the election in a timely filed originalfederal income tax return that applies if ataxpayer chooses to consistently applythese proposed regulations retroactively toall CAAs occurring before the regulationsare issued in final form, including CAAsfor which the taxpayer chooses not tomake a foreign basis election. In this case,a foreign basis election may be reflectedon a timely filed amended federal incometax return (or tax returns, as appropriate),provided that all amended returns are filedno later than one year following the dateof publication of the Treasury decisionadopting these rules as final regulations inthe Federal Register.

VI. Basis Difference Taken into Account

Section 1.901(m)–5 provides rules fordetermining the amount of basis differ-ence with respect to an RFA that is takeninto account in a given U.S. taxable year(referred to in the regulations as “allo-cated basis difference”). This allocatedbasis difference is used to compute a dis-qualified tax amount for a U.S. taxableyear. Basis difference is taken into ac-count in two ways: under an applicablecost recovery method or as a result of adisposition of the RFA.

For purposes of the discussion underthis section VI of the Explanation of Pro-visions section of the preamble, unlessotherwise indicated, a reference to directownership of an interest in an entity refersto direct ownership for U.S. income taxpurposes, which includes ownershipthrough one or more disregarded entities.A reference to indirect ownership of aninterest in an entity refers to ownershipthrough one or more entities that aretreated as fiscally transparent for U.S. in-come tax purposes, at least one of which isnot a disregarded entity. Finally, a refer-ence to indirect ownership of an interest inan entity for foreign income tax purposesmeans ownership through one or moreentities that are treated as fiscally trans-parent for foreign income tax purposes.


A. Cost recovery rules

1. Determining a cost recovery amount

Proposed § 1.901(m)–5(b)(2)(i) incor-porates by cross reference the general rulein the temporary regulations that a costrecovery amount for an RFA is deter-mined by applying an applicable cost re-covery method to the basis differencerather than to the U.S. basis of the RFA.

Proposed § 1.901(m)–5(b)(2)(ii) pro-vides that if the entire U.S. basis of theRFA is not subject to the same cost recov-ery method, the applicable cost recoverymethod for determining the cost recoveryamount is the cost recovery method thatapplies to the portion of the U.S. basis thatcorresponds to the basis difference.

Proposed § 1.901(m)–5(b)(3) providesthat, for purposes of section 901(m), anapplicable cost recovery method includesany method for recovering the cost ofproperty over time for U.S. income taxpurposes (each application of a methodgiving rise to a “U.S. basis deduction”).Such methods include depreciation, amor-tization, or depletion, as well as a methodthat allows the cost (or a portion of thecost) of property to be expensed in theyear of acquisition or in the placed-in-service year, such as under section 179.Applicable cost recovery methods do notinclude any provision allowing for the re-covery of U.S. basis upon a disposition ofan RFA.

2. Attributing or allocating a costrecovery amount to a section 901(m)payor

Under proposed § 1.901(m)–5(b)(1),when an RFA owner (U.S.) is a section901(m) payor, all of the cost recoveryamount is attributed to the section 901(m)payor and assigned to the U.S. taxableyear of the section 901(m) payor in whichthe corresponding U.S. basis deductionwith respect to the RFA is taken intoaccount under the applicable cost recov-ery method. This is the case regardless ofwhether the deduction is deferred or dis-allowed under other Code provisions (forexample, see section 263A, which re-quires the capitalization of certain costsand expenses).

If instead the RFA owner (U.S.) is nota section 901(m) payor but a fiscallytransparent entity for U.S. income tax pur-poses in which a section 901(m) payordirectly or indirectly owns an interest,proposed § 1.901(m)–5(d)(2) allocates allor a portion of the cost recovery amount tothe section 901(m) payor. Under thoserules, a cost recovery amount is allocatedto the section 901(m) payor to the extentthe U.S. basis deduction that correspondsto the cost recovery amount (both ofwhich are determined at the level of theRFA owner (U.S.)) is (or will be) includedin the section 901(m) payor’s distributiveshare of the income of the RFA owner(U.S.) for U.S. income tax purposes. Pro-posed § 1.901(m)–5(d)(6) assigns an allo-cated cost recovery amount to the U.S.taxable year of the section 901(m) payorthat includes the last day of the U.S. tax-able year of the RFA owner (U.S.) inwhich the RFA owner (U.S.) takes intoaccount the corresponding U.S. basis de-duction (without regard to whether thededuction is deferred or disallowed underother Code provisions).

Special rules under proposed § 1.901(m)–5(e), discussed in section VI.D of theExplanation of Provisions section of thispreamble, allocate a cost recovery amountthat arises from an RFA with respect tocertain section 743(b) CAAs. In addition,special rules under proposed § 1.901(m)–5(g), discussed in section VI.F of the Ex-planation of Provisions section of this pre-amble, allocate a cost recovery amount toa section 901(m) payor in certain cases inwhich the RFA owner (U.S.) either is areverse hybrid or is a fiscally transparententity for both U.S. and foreign incometax purposes that is directly or indirectlyowned by a reverse hybrid. A reverse hy-brid is an entity that is treated as a corpo-ration for U.S. income tax purposes but asa fiscally transparent entity for foreignincome tax purposes.

B. General disposition rules

1. Definition of disposition anddetermining a disposition amount

Proposed § 1.901(m)–1(a)(10) defines(by cross reference to the temporary reg-ulations) a disposition for purposes of sec-tion 901(m) as an event that results in gain

or loss being recognized with respect to anRFA for purposes of U.S. income tax, aforeign income tax, or both. Proposed§ 1.901(m)–5(c)(2) incorporates by crossreference the rules provided in the tempo-rary regulations for determining theamount of basis difference taken into ac-count upon a disposition of an RFA (thedisposition amount). Section 1.901(m)–5T(c)(2) provides that, if a disposition ofan RFA is fully taxable for U.S. and for-eign income tax purposes, the dispositionamount will be any remaining unallocatedbasis difference (positive or negative).Section 1.901(m)–5T(c)(2) further pro-vides that, if a disposition of an RFA isnot fully taxable for both U.S. and foreignincome tax purposes and the RFA has apositive basis difference, the dispositionamount is based solely on the amount, ifany, of foreign disposition gain and U.S.disposition loss. If, on the other hand, adisposition of an RFA is not fully taxablefor both U.S. and foreign income tax pur-poses and the RFA has a negative basisdifference, the temporary regulations pro-vide that the disposition amount is basedsolely on the amount, if any, of foreigndisposition loss and U.S. disposition gain.See section V.B of the preamble to thetemporary regulations for a further discus-sion of these provisions.

2. Attributing or allocating a dispositionamount to a section 901(m) payor

Under proposed § 1.901(m)–5(c)(1),when the RFA owner (U.S.) is a section901(m) payor, all of the dispositionamount is attributed to the section 901(m)payor and assigned to the U.S. taxableyear of the section 901(m) payor in whichthe disposition occurs.

If instead the RFA owner (U.S.) is nota section 901(m) payor but a fiscallytransparent entity for U.S. income tax pur-poses in which a section 901(m) payordirectly or indirectly owns an interest,proposed § 1.901(m)–5(d), discussed insection VI.C of the Explanation of Provi-sions section of this preamble, allocatesall or a portion of a disposition amount tothe section 901(m) payor and assigns it toa U.S. taxable year of the section 901(m)payor.

Special rules under proposed § 1.901(m)–5(e), discussed in section VI.D of the


Explanation of Provisions section of thispreamble, allocate a disposition amount toa section 901(m) payor and assign it to aU.S. taxable year of the section 901(m)payor when the disposition amount arisesfrom an RFA with respect to certain sec-tion 743(b) CAAs. Special rules underproposed § 1.901(m)–5(f), discussed insection VI.E of the Explanation of Provi-sions section of this preamble, allocate adisposition amount attributable to foreigndisposition gain or foreign disposition lossto a section 901(m) payor and assign it toa U.S. taxable year of the section 901(m)payor when there is a mid-year transac-tion. Special rules under proposed§ 1.901(m)–5(g), discussed in sectionVI.F of the Explanation of Provisions sec-tion of this preamble, allocate a disposi-tion amount to a section 901(m) payor andassign it to a U.S. taxable year of thesection 901(m) payor in certain cases inwhich the RFA owner (U.S.) either is areverse hybrid or is a fiscally transparententity for both U.S. and foreign incometax purposes that is directly or indirectlyowned by a reverse hybrid.

C. Rules for allocating and assigning adisposition amount when the RFA owner(U.S.) is a fiscally transparent entity

This section describes the rules for al-locating a disposition amount to a section901(m) payor when the RFA owner (U.S.)is a fiscally transparent entity for U.S.income tax purposes in which a section901(m) payor directly or indirectly ownsan interest, as well as rules for assigningthe allocated amount to a U.S. taxableyear of the section 901(m) payor.

The allocation rules (discussed in sec-tions VI.C.1 and 2 of the Explanation ofProvisions section of this preamble) varydepending on whether the dispositionamount is attributable to foreign disposi-tion gain or loss or U.S. disposition gainor loss. The rules for determining the ex-tent to which a disposition amount is at-tributable to foreign or U.S. dispositiongain or loss are discussed in sectionVI.C.3 of the Explanation of Provisionssection of this preamble. The rules forassigning allocated disposition amounts toa U.S. taxable year of a section 901(m)payor are discussed in section VI.C.4 of

the Explanation of Provisions section ofthis preamble.

1. Allocation of a disposition amountattributable to foreign disposition gain orforeign disposition loss

Proposed § 1.901(m)–5(d)(3) addressesthe allocation of a disposition amount at-tributable to foreign disposition gain orforeign disposition loss of an RFA. Theserules should be interpreted and applied ina manner consistent with the principle thata disposition amount attributable to for-eign disposition gain or foreign disposi-tion loss should be allocated to a section901(m) payor in the same proportion thatthe gain or loss is taken into account incomputing a foreign income tax amountthat is paid or accrued by, or consideredpaid or accrued by, the section 901(m)payor. This is because, for example, if anRFA has a positive basis difference, adisposition amount attributable to foreigndisposition gain represents an amount ofgain in years following the CAA that isincluded in foreign income but never in-cluded in U.S. taxable income or earningsand profits because of the step-up in theU.S. basis of the RFA that occurred as aresult of the CAA. Accordingly, to theextent a foreign disposition gain is takeninto account in computing a foreign in-come tax amount, a portion of that foreignincome tax amount should be disallowedas a foreign tax credit under section901(m). Similarly, if an RFA has a nega-tive basis difference and a foreign dispo-sition loss is taken into account in com-puting a foreign income tax amount, thisshould result in an offset to the amount ofthe foreign income tax that otherwisewould be disallowed as a foreign taxcredit under section 901(m) as a result ofa positive basis difference with respect toone or more other RFAs.

There are two separate rules for iden-tifying the extent to which a foreign dis-position gain or foreign disposition loss istaken into account in computing a foreignincome tax amount that is paid or accruedby, or considered paid or accrued by, asection 901(m) payor that directly or in-directly owns an interest in an RFA owner(U.S.) that is a fiscally transparent entityfor U.S. income tax purposes. The firstrule, which is described in proposed

§ 1.901(m)–5(d)(3)(ii), applies when theforeign income tax amount is not allo-cated, for example, when the foreignpayor is the section 901(m) payor. Thesecond rule, which is described in pro-posed § 1.901(m)–5(d)(3)(iii), applieswhen the foreign income tax amount isallocated, for example, under § 1.704–1(b)(4)(viii) when the foreign payor is apartnership for U.S. income tax purposesin which the section 901(m) payor is apartner.

a. First allocation rule

The first allocation rule applies when asection 901(m) payor, or a disregardedentity directly owned by a section 901(m)payor, is a foreign payor whose foreignincome includes a distributive share of theforeign income (that includes the foreigndisposition gain or foreign dispositionloss) of the RFA owner (foreign). In thisstructure, the entire foreign income taxamount reflected on the foreign incometax return of the foreign payor is paid oraccrued by, or considered paid or accruedby, the section 901(m) payor. This will bethe case when the RFA owner (U.S.) istreated as a fiscally transparent entity notjust for U.S. income tax purposes, but alsofor foreign income tax purposes, and thesection 901(m) payor directly or indirectlyowns an interest in the RFA owner (U.S.),provided that, in the case of indirect own-ership, any entities in the ownership chainbetween the section 901(m) payor and theRFA owner (U.S), or, when one or moredisregarded entities are directly owned bythe section 901(m) payor, between thelowest-tier disregarded entity and theRFA owner (U.S.), are fiscally transparentfor both U.S. and foreign income tax pur-poses. In these cases, the RFA owner(U.S.) and the RFA owner (foreign) arethe same entity, except in the unusual casewhere the RFA owner (U.S.) is an entitythat is disregarded as separate from itsowner for foreign income tax purposes.

The first allocation rule allocates a por-tion of a disposition amount attributable toforeign disposition gain or foreign dispo-sition loss, as applicable, to the section901(m) payor proportionally to theamount of the foreign disposition gain orforeign disposition loss that is included inthe foreign payor’s (in other words, the


section 901(m) payor or the disregardedentity, as the case may be) distributiveshare of the foreign income of the RFAowner (foreign) for foreign income taxpurposes.

The following example illustrates thefirst allocation rule. A domestic entity thatis a corporation for both U.S. and foreignincome tax purposes (corporate partner)directly owns, for both U.S. and foreignincome tax purposes, an interest in a for-eign entity that is a partnership for bothU.S. and foreign income tax purposes andthat is the RFA owner (U.S.) and the RFAowner (foreign). In this case, when thepartnership recognizes foreign dispositiongain with respect to an RFA, the foreignincome tax amount with respect to suchgain is paid by the partners on their dis-tributive shares of the foreign income ofthe partnership that includes the foreigndisposition gain. The corporate partner,and not the partnership, is therefore a for-eign payor and a section 901(m) payor.Accordingly, under the first allocationrule, a disposition amount attributable toforeign disposition gain is allocated to thecorporate partner proportionally to theamount of the foreign disposition gain thatis included in the corporate partner’s dis-tributive share of the foreign income ofthe partnership. Thus, for example, if thepartnership recognizes $100 of foreigndisposition gain and 50 percent of thatgain is included in the corporate partner’sdistributive share of the foreign income ofthe partnership, and the dispositionamount attributable to the foreign dispo-sition gain is $40, the corporate partnerwould be allocated $20 of that amount (50percent of $40). The same result wouldapply if the corporate partner directlyowned the partnership interest through adisregarded entity that is the foreignpayor.

b. Second allocation rule

The second allocation rule applieswhen, instead of a section 901(m) payoror a disregarded entity directly owned bya section 901(m) being a foreign payor, asection 901(m) payor directly or indirectlyowns an interest in a fiscally transparententity for U.S. income tax purposes (otherthan a disregarded entity directly ownedby the section 901(m) payor) that is a

foreign payor whose foreign income in-cludes all or a portion of the foreign in-come (that includes the foreign disposi-tion gain or foreign disposition loss) of theRFA owner (foreign). Therefore, the sec-tion 901(m) payor is considered to pay oraccrue only an allocated portion of theforeign income tax amount reflected onthe foreign income tax return of the for-eign payor. This will be the case when asection 901(m) payor directly or indirectlyowns an interest in the foreign payor, andthe foreign payor is (i) the RFA owner(U.S.), (ii) another fiscally transparent en-tity for U.S. income tax purposes (otherthan a disregarded entity directly ownedby a section 901(m) payor) that directly orindirectly owns an interest in the RFAowner (U.S.) for both U.S. and foreignincome tax purposes, or (iii) a disregardedentity directly owned by the RFA owner(U.S.). In each of these cases, the entitysubject to tax for purposes of the foreignincome tax (that is, the foreign payor) istreated as a fiscally transparent entity forU.S. income tax purposes.

The mechanics of the second allocationrule are different than those of the firstallocation rule. This is because the secondallocation rule applies when neither thesection 901(m) payor, nor a disregardedentity directly owned by a section 901(m)payor, is a foreign payor that takes intoaccount a foreign disposition gain or for-eign disposition loss for purposes of cal-culating a foreign income tax amount, butinstead, for U.S. income tax purposes, aforeign income tax amount of the foreignpayor is allocated to, and considered paidor accrued by, the section 901(m) payor.Accordingly, the second allocation ruleallocates a portion of a disposition amountattributable to foreign disposition gain orforeign disposition loss, as applicable, tothe section 901(m) payor proportionally tothe amount of the foreign disposition gainor foreign disposition loss that is includedin the allocable foreign income of the sec-tion 901(m) payor. As described in sectionIV.A of the Explanation of Provisions sec-tion of this preamble, allocable foreignincome is generally the portion of foreignincome of a foreign payor that relates tothe portion of the foreign income taxamount of that foreign payor that is allo-cated to and considered paid or accrued bya section 901(m) payor.

The following example illustrates thesecond allocation rule. A domestic entitythat is a corporation for both U.S. andforeign income tax purposes (corporatepartner) directly owns an interest in a for-eign entity, the RFA owner (U.S.) andRFA owner (foreign), that is a partnershipfor U.S. income tax purposes but a corpo-ration for purposes of a foreign incometax (a hybrid partnership). In this case,when the hybrid partnership recognizesforeign disposition gain with respect to anRFA, it is the hybrid partnership, ratherthan the partners, that takes the gain intoaccount for purposes of calculating a for-eign income tax amount. The hybrid part-nership is therefore the foreign payor. ForU.S. income tax purposes, a foreign in-come tax amount of the hybrid partnershipis allocated to, and considered paid oraccrued by, its partners, including the cor-porate partner that is a section 901(m)payor (see §§ 1.702–1(a)(6), 1.704–1(b)(4)(viii), and 1.901–2(f)(4)(i)). Underthe second allocation rule, a dispositionamount attributable to foreign dispositiongain is allocated to the corporate partnerproportionally to the amount of the for-eign disposition gain that is included inthe corporate partner’s allocable foreignincome. Thus, for example, if the hybridpartnership pays a foreign income taxamount of $30 on $200 of foreign incomethat includes $100 of foreign dispositiongain and $15 of the foreign income taxamount (50 percent of $30) is allocated toand considered paid by the corporate part-ner, the corporate partner’s allocable for-eign income would be $100 (50 percent ofthe $200 foreign income to which the for-eign income tax amount relates), whichwould include $50 of foreign dispositiongain (50 percent of $100). If the disposi-tion amount attributable to the foreign dis-position gain is $60, the corporate partnerwould be allocated $30 of that amount($60 multiplied by 50 percent, the portionof the total foreign disposition gain that isincluded in the corporate partner’s alloca-ble foreign income).

In this example, the analysis would besimilar if the corporate partner instead in-directly owned the partnership interest(for example through an upper-tier part-nership), because the corporate partnerwould continue to be the section 901(m)payor and the hybrid partnership would


continue to be the RFA owner (U.S.), theRFA owner (foreign), and the foreignpayor.

2. Allocation of a disposition amountattributable to U.S. disposition gain orU.S. disposition loss

Proposed § 1.901(m)–5(d)(4) addressesthe allocation of a disposition amount attrib-utable to U.S. disposition gain or U.S. dis-position loss. Such disposition amountsare allocated to a section 901(m) payorbased on the portion of the U.S. disposi-tion gain or U.S. disposition loss (whichare determined at the level of the RFAowner (U.S.)) that is (or will be) includedin the section 901(m) payor’s distributiveshare of the income of the RFA owner(U.S.) for U.S. income tax purposes.

3. Determining the extent to which adisposition amount is attributable toforeign or U.S. disposition gain or loss

a. Positive basis difference

When an RFA has a positive basis dif-ference, a disposition amount arises froma disposition of the RFA only if the dis-position results in a foreign dispositiongain or a U.S. disposition loss (or both).To allocate such a disposition amount to asection 901(m) payor, it is necessary todetermine the extent to which the dispo-sition amount is attributable to foreigndisposition gain or U.S. disposition loss.

Proposed § 1.901(m)–5(d)(5)(i) pro-vides that if the disposition results in ei-ther a foreign disposition gain or a U.S.disposition loss, but not both, the entiredisposition amount is attributable toforeign disposition gain or U.S. disposi-tion loss, as applicable, even if the dispo-sition amount exceeds the foreign dispo-sition gain or the absolute value of theU.S. disposition loss. If the dispositionresults in both a foreign disposition gainand a U.S. disposition loss, the dispositionamount is attributable first to foreign dis-position gain to the extent thereof, and theexcess disposition amount, if any, is at-tributable to the U.S. disposition loss,even if the excess disposition amount ex-ceeds the absolute value of the U.S. dis-position loss. In the case of a dispositionthat is fully taxable for both U.S. andforeign income tax purposes, a disposition

amount may exceed the sum of the foreigndisposition gain and the absolute value ofthe U.S. disposition loss if, immediatelybefore the CAA, the foreign basis in theRFA was greater than the U.S basis, and aforeign basis election was not made.

b. Negative basis difference

When an RFA has a negative basisdifference, a disposition amount arisesfrom a disposition of the RFA only if thedisposition results in a foreign dispositionloss or a U.S. disposition gain (or both).To allocate such a disposition amount to asection 901(m) payor, it is necessary todetermine the extent to which the dispo-sition amount is attributable to foreigndisposition loss or U.S. disposition gain.

Proposed § 1.901(m)–5(d)(5)(ii) pro-vides rules for making this determinationwhen there is a negative basis differencethat are similar to those provided in pro-posed § 1.901(m)–5(d)(5)(i) for a positivebasis difference.

4. Assigning a disposition amount to aU.S. taxable year of a section 901(m)payor

When a disposition amount is allocatedto a section 901(m) payor under proposed§ 1.901(m)–5(d), proposed § 1.901(m)–5(d)(6) provides that the dispositionamount is assigned to the U.S. taxableyear of the section 901(m) payor that in-cludes the last day of the U.S. taxable yearof the RFA owner (U.S.) in which thedisposition occurs.

D. Special allocation rules for certainsection 743(b) CAAs

Proposed § 1.901(m)–5(e) providesthat when a section 901(m) payor acquiresa partnership interest in a section 743(b)CAA, including a section 743(b) CAAwith respect to a lower-tier partnershipthat results from a direct acquisition bythe section 901(m) payor of an interest inan upper-tier partnership, a cost recoveryamount or a disposition amount that arisesfrom an RFA with respect to that CAA isallocated to the acquiring section 901(m)payor. These amounts are assigned to theU.S. taxable year of the section 901(m)payor that includes the last day of the U.S.taxable year of the partnership in which,

in the case of a cost recovery amount, thepartnership takes into account the corre-sponding U.S. basis deduction, or, in thecase of a disposition amount, the disposi-tion occurs.

This special rule does not apply if it isanother partnership, and not a section901(m) payor, that acquires a partnershipinterest in a section 743(b) CAA. In thatcase, the general rules for allocating a costrecovery amount or disposition amountwhen the RFA owner (U.S.) is a fiscallytransparent entity apply.

E. Special allocation rules for certainmid-year transactions

Proposed § 1.901(m)–5(f) provides rulesfor allocating a disposition amount whenthere is a disposition of an RFA during aforeign taxable year in which the foreignpayor is involved in a mid-year transac-tion, and the disposition results in foreigndisposition gain or foreign disposition lossthat is allocated under the principles of§ 1.1502–76(b) to the persons involved inthe mid-year transaction for purposes ofallocating the foreign income tax amountof the foreign payor. A typical example iswhen a section 901(m) payor owns a dis-regarded entity that is both an RFA owner(foreign) and the foreign payor, and thedisregarded entity sells the RFA in thesame year that the section 901(m) payorsells the disregarded entity to another sec-tion 901(m) payor. If the RFA has positiveunallocated basis difference and there isforeign disposition gain on the sale of theRFA, the sale will give rise to a disposi-tion amount that will be used by the sec-tion 901(m) payors to calculate a disqual-ified portion of the foreign income taxamount reflected on the foreign incometax return of the disregarded entity. Pur-suant to § 1.901–2(f)(4)(ii), that foreignincome tax amount must be allocated be-tween the buyer and seller of the disre-garded entity based on the respectiveportions of foreign income that are attrib-utable under the principles of § 1.1502–76(b) to the buyer’s and seller’s respectiveperiods of ownership of the disregardedentity during its foreign taxable year. Un-der proposed § 1.901(m)–5(f)(2), the dis-position amount attributable to foreigndisposition gain is similarly allocated be-tween the buyer and the seller based on


the principles in proposed § 1.901(m)–5(d), discussed in section VI.C of the Ex-planation of Provisions section of this pre-amble, that apply to allocate a dispositionamount when the RFA owner (U.S.) is afiscally transparent entity for U.S. incometax purposes.

F. Special allocation rules for certainreverse hybrids

Proposed § 1.901(m)–5(g) addressesthe allocation of cost recovery amountsand disposition amounts when the RFAowner (U.S.) is either a reverse hybrid ora fiscally transparent entity for both U.S.and foreign income tax purposes that isdirectly or indirectly owned by a reversehybrid for U.S. and foreign income taxpurposes, and in either case, a foreignpayor directly or indirectly owns an inter-est in the reverse hybrid for foreign in-come tax purposes and therefore includesin its foreign income a distributive shareof the foreign income (that includes theforeign disposition gain or foreign dispo-sition loss) of the RFA owner (foreign).These allocation rules are similar to theallocation rules discussed in sectionVI.C.1 of the Explanation of Provisionssection of this preamble that apply to al-locate a disposition amount attributable toforeign disposition gain or foreign dispo-sition loss when the RFA owner (U.S.) isa fiscally transparent entity for U.S. in-come tax purposes. These rules arebroader in scope, however, because theyapply to allocate not just foreign disposi-tion gain or foreign disposition loss, butrather, both cost recovery amounts andentire disposition amounts (which may beattributable, in whole or in part, to U.S.disposition gain or U.S. disposition loss).This is because the basis difference givingrise to such amounts may not be taken intoaccount in computing U.S. taxable incomeor earnings and profits of the owners ofthe reverse hybrid until one or more sub-sequent U.S. taxable years (for example,upon the receipt of a distribution of prop-erty from the reverse hybrid).

These rules should be interpreted andapplied in a manner consistent with theprinciple that a cost recovery amount or adisposition amount (or both) should beallocated to a section 901(m) payor pro-portionally to the amount of the foreign

income of the RFA owner (foreign) that istaken into account in computing a foreignincome tax amount of a foreign payor thatis paid or accrued by, or considered paidor accrued by, the section 901(m) payor.

There are two separate rules for allo-cating a cost recovery amount or disposi-tion amount to a section 901(m) payorwhen the RFA owner (U.S.) either is areverse hybrid or a fiscally transparententity for both U.S. and foreign incometax purposes that is directly or indirectlyowned by a reverse hybrid for U.S. andforeign income tax purposes. The firstrule, which is described in § 1.901(m)–5(g)(2), applies when the foreign incometax amount is not allocated, for example,when the foreign payor is the section901(m) payor. The second rule, which isdescribed in § 1.901(m)–5(g)(3), applieswhen the foreign income tax amount isallocated, for example, under § 1.704–1(b)(4)(viii) when the foreign payor is apartnership for U.S. income tax purposesin which the section 901(m) payor is apartner.

1. First allocation rule

The first allocation rule applies when asection 901(m) payor, or a disregardedentity directly owned by a section 901(m)payor, is the foreign payor whose foreignincome includes a distributive share of theforeign income of the RFA owner (for-eign). In this structure, the entire foreignincome tax amount reflected on the for-eign income tax return of the foreignpayor is paid or accrued by, or consideredpaid or accrued by, the section 901(m)payor. This will be the case when a sec-tion 901(m) payor directly or indirectlyowns an interest in the reverse hybrid,provided that in the case of indirect own-ership, any entities in the ownership chainbetween the section 901(m) payor and thereverse hybrid, or, when one or more dis-regarded entities are directly owned by thesection 901(m) payor, between the lowest-tier disregarded entity and the reverse hy-bird, are fiscally transparent for both U.S.and foreign income tax purposes. In thesecases, the RFA owner (U.S.) and the RFAowner (foreign) are the same entity, ex-cept in the unusual case where the RFAowner (U.S.) is an entity that is disre-

garded as separate from its owner for for-eign income tax purposes.

The first allocation rule allocates a por-tion of a cost recovery amount or a dispo-sition amount to the section 901(m) payorproportionally to the amount of the for-eign income of the RFA owner (foreign)that is included in the foreign income ofthe foreign payor (in other words, the sec-tion 901(m) payor or the disregarded en-tity, as the case may be).

The following example illustrates thefirst allocation rule. A domestic entity thatis a corporation for both U.S. and foreignincome tax purposes (corporate owner)owns an interest in a reverse hybrid that isthe RFA owner (U.S.) and the RFA owner(foreign). A foreign income tax amountwith respect to the foreign income of thereverse hybrid is paid by the owners of thereverse hybrid on their distributive sharesof such foreign income. The corporateowner, and not the reverse hybrid, istherefore a foreign payor and a section901(m) payor. Under the first allocationrule, a cost recovery amount or a disposi-tion amount is allocated to the corporateowner proportionally to the amount of theforeign income of the reverse hybrid thatis included in the foreign income of thecorporate owner. Thus, for example, if 50percent of the foreign income of the re-verse hybrid is included in the foreignincome of the corporate owner, the corpo-rate owner would be allocated 50 percentof a cost recovery amount or a dispositionamount with respect to an RFA owned bythe reverse hybrid. The same result wouldapply if the corporate owner directlyowned the interest in the reverse hybridthrough a disregarded entity that is theforeign payor.

Alternatively, if the reverse hybrid wasnot the RFA owner (foreign) but insteadthe reverse hybrid owned an interest in theRFA owner (U.S.) and RFA owner (for-eign), which is a partnership for both U.S.and foreign income tax purposes, and 60percent of the foreign income of the part-nership is included in the foreign incomeof the reverse hybrid (and therefore 30percent (50 percent of 60 percent) of theforeign income of the partnership is in-cluded in the foreign income of the cor-porate owner), the corporate owner wouldbe allocated 30 percent of a cost recovery


amount or a disposition amount with re-spect to an RFA owned by the partnership.

2. Second allocation rule

The second allocation rule applieswhen instead of a section 901(m) payor,or a disregarded entity directly owned bya section 901(m) payor, being a foreignpayor, a section 901(m) payor directly orindirectly owns an interest in the foreignpayor whose foreign income includes adistributive share of the foreign income ofthe RFA owner (foreign). Therefore, thesection 901(m) payor is considered to payor accrue only an allocated portion of theforeign income tax amount reflected onthe foreign income tax return of the for-eign payor. This will be the case when theforeign payor is a fiscally transparent en-tity for U.S. income tax purposes (otherthan a disregarded entity directly ownedby the section 901(m) payor) that eitherdirectly or indirectly owns an interest inthe RFA owner (foreign) for foreign in-come tax purposes. In these cases, theRFA owner (U.S.) and the RFA owner(foreign) are the same entity, except in theunusual case where the RFA owner (U.S.)is an entity that is disregarded as separatefrom its owner for foreign income taxpurposes.

The mechanics of the second allocationrule are different than those of the firstallocation rule. This is because the secondallocation rule applies when neither a sec-tion 901(m) payor, nor a disregarded en-tity directly owned by a section 901(m)payor, is a foreign payor that takes intoaccount the foreign income of the RFAowner (foreign) for purposes of calculat-ing a foreign income tax amount, but in-stead, for U.S. income tax purposes, aforeign income tax amount of the entitythat is the foreign payor is allocated to,and considered paid or accrued by, thesection 901(m) payor. Accordingly, thesecond allocation rule allocates a portionof cost recovery amounts and dispositionamounts proportionally to the amount ofthe foreign income of the RFA owner(foreign) that is included in the foreignincome of the foreign payor that is thenincluded in the allocable foreign incomeof the section 901(m) payor. As describedin section IV.A of the Explanation of Pro-visions section of this preamble, allocable

foreign income is generally the portion offoreign income of a foreign payor thatrelates to the portion of the foreign in-come tax amount of that foreign payorthat is allocated to and considered paid oraccrued by a section 901(m) payor.

The following example illustrates thesecond allocation rule. A domestic entitythat is a corporation for both U.S. andforeign income tax purposes (corporatepartner) owns an interest in an entity thatis a partnership for U.S. income tax pur-poses but a corporation for foreign incometax purposes (hybrid partnership), which,in turn, owns an interest in a reverse hy-brid that is the RFA owner (U.S.) and theRFA owner (foreign). A foreign incometax amount with respect to the foreignincome of the reverse hybrid is paid by theowners of the reverse hybrid on their dis-tributive shares of such foreign income.Therefore, the hybrid partnership, ratherthan its partners, is the foreign payor. ForU.S. income tax purposes, the foreign in-come tax amount paid or accrued by thehybrid partnership is allocated to, andconsidered paid or accrued by, the corpo-rate partner that is the section 901(m)payor (see §§ 1.702–1(a)(6), 1.704–1(b)(4)(viii), and 1.901–2(f)(4)(i)). Underthe second allocation rule, a cost recoveryamount or a disposition amount withrespect to an RFA owned by the reversehybrid is allocated to the corporate partnerproportionally to the amount of foreignincome of the reverse hybrid that is takeninto account in determining the foreignincome of the hybrid partnership and thenthe allocable foreign income of the corpo-rate partner. Thus, for example, if the re-verse hybrid has $500 of foreign incomeand the hybrid partnership pays a foreignincome tax amount of $30 on $200 offoreign income that includes a $100 dis-tributive share of the foreign income ofthe reverse hybrid (20 percent of $500)and $15 of the foreign income tax amount(50 percent of $30) is allocated to andconsidered paid by the corporate partner,then the corporate partner’s allocable for-eign income would be $100 (50 percent ofthe $200 foreign income to which the for-eign income tax amount relates). A costrecovery amount or disposition amountwith respect to the RFAs owned by thereverse hybrid would be allocated 10 per-cent to the corporate partner (the corpo-

rate partner’s 50 percent share of the hy-brid partnership’s 20 percent share of thereverse hybrid’s foreign income).

VII. Successor Rules

Proposed § 1.901(m)–6 provides suc-cessor rules for applying section 901(m)following a transfer of RFAs that havebasis difference that has not yet been fullytaken into account (referred to in the reg-ulations as “unallocated basis difference”)as well as for determining when an aggre-gate basis difference carryover of a sec-tion 901(m) payor either becomes an ag-gregate basis difference carryover of thesection 901(m) payor with respect to an-other foreign payor or is transferred toanother section 901(m) payor.

A. Unallocated basis difference

Proposed § 1.901(m)–6(b)(1) and (2)incorporate by cross reference the succes-sor rules set forth in the temporary regu-lations, which provide generally that sec-tion 901(m) continues to apply to an RFAafter it has been transferred for U.S. in-come tax purposes if the RFA continues tohave unallocated basis difference follow-ing the transfer (a successor transaction).

Proposed § 1.901(m)–6(b)(3) sets forthtwo clarifications for applying the succes-sor rules. First, if an asset is an RFA withrespect to more than one foreign incometax, the successor rules apply separatelywith respect to each foreign income tax.Second, any subsequent cost recoveryamount for an RFA transferred in a suc-cessor transaction will be determinedbased on the applicable cost recoverymethod that applies to the U.S. basis (orportion thereof) that corresponds to theunallocated basis difference. Thus, if asuccessor transaction restarts the depreci-ation schedule for an RFA, the transactionmay result in unallocated basis differencebeing taken into account at a differentrecovery rate than otherwise would haveapplied.

Proposed § 1.901(m)–6(b)(4)(iii) alsoincorporates by cross reference the ruleset forth in the temporary regulations thatprovides an exception to the general rulewhen an RFA is subject to multiple sec-tion 743(b) CAAs. See section VI.B. ofthe Explanation of Provisions section of


the preamble to the temporary regulationsfor a discussion of those provisions.

Proposed § 1.901(m)–6(b)(4)(ii), whichis not included in the temporary regula-tions, provides an exception to the generalsuccessor rule if a foreign basis election ismade under proposed § 1.901(m)–4(c)with respect to a subsequent CAA thatotherwise would trigger the rules for suc-cessor transactions. If a foreign basis elec-tion is made with respect to a foreignincome tax, the only basis difference thatwill be taken into account after the subse-quent CAA with respect to that foreignincome tax is the basis difference deter-mined for the subsequent CAA.

B. Aggregate basis difference carryover

Proposed § 1.901(m)–6 provides suc-cessor rules for aggregate basis differencecarryovers, the computation of which isdescribed in section IV.B of the Explana-tion of Provisions section of this pream-ble. An aggregate basis difference carry-over is treated as a tax attribute of thesection 901(m) payor that retains its char-acter as an aggregate basis difference car-ryover with respect to a foreign incometax and a foreign payor and with respect toa separate category, as described in§ 1.904–4(m) (including the section904(d) categories). When a section901(m) payor transfers its assets in atransaction to which section 381 applies,proposed § 1.901(m)–6(c)(1) providesthat any aggregate basis difference carry-overs of the section 901(m) payor aretransferred to the corporation that suc-ceeds to the earnings and profits, if any.When substantially all of the assets of oneforeign payor are transferred to anotherforeign payor, both of which are directlyor indirectly owned by the same section901(m) payor, proposed § 1.901(m)–6(c)(2) provides that an aggregate basisdifference carryover of the section 901(m)payor with respect to the transferor for-eign payor becomes an aggregate basisdifference carryover of the section 901(m)payor with respect to the transferee for-eign payor.

Proposed § 1.901(m)–6(c)(3) providesan anti-abuse rule that would transfer anaggregate basis difference carryoverwhen, with a principal purpose of avoid-ing the application of section 901(m),

there is a transfer of assets or a change ineither the allocation of foreign income forforeign income tax purposes or the allo-cation of foreign income tax amounts forU.S. income tax purposes that is intendedto separate foreign income tax amountsfrom the related aggregate basis differ-ence carryover. This anti-abuse rulewould apply, for example, if, with theprincipal purpose of avoiding the applica-tion of section 901(m), a partnershipagreement is amended in order to reducethe allocation of foreign income to a part-ner that is a section 901(m) payor with anaggregate basis difference carryover.

VIII. De Minimis Rules

Proposed § 1.901(m)–7 describes deminimis rules under which certain basisdifferences are not taken into account forpurposes of section 901(m). This determi-nation is made when an asset subject to aCAA first becomes an RFA. If that sameasset is also an RFA by reason of beingsubject to a subsequent CAA, the de mi-nimis tests are applied only to the addi-tional basis difference, if any, that resultsfrom the subsequent CAA. Accordingly,any unallocated basis difference that arosefrom the prior CAA that did not qualifyfor the de minimis exemption at the timeof the prior CAA will not be retested atthe time of the subsequent CAA.

In general, a basis difference with re-spect to an RFA is not taken into accountfor purposes of section 901(m) if either (i)the sum of the basis differences for allRFAs with respect to the CAA is less thanthe greater of $10 million or 10 percent ofthe total U.S. basis of all RFAs immedi-ately after the CAA; or (ii) the RFA is partof a class of RFAs for which the sum ofthe basis differences of all RFAs in theclass is less than the greater of $2 millionor 10 percent of the total U.S. basis of allRFAs in the class. For this purpose, theclasses of RFAs are the seven assetclasses defined in § 1.338–6(b).

The Treasury Department and the IRSdecided that transactions between relatedparties should be more tightly regulated,and therefore, the threshold dollaramounts and percentages to meet the deminimis exemptions for related partyCAAs are lower than those for unrelatedparty CAAs, replacing the terms “$10 mil-

lion,” “10 percent,” and “$2 million”wherever they occur with the terms “$5million,” “5 percent,” and “$1 million,”respectively. In addition, an anti-abuseprovision at proposed § 1.901(m)–7(e) de-nies application of the de minimis exemp-tions to CAAs between related parties thatare entered into or structured with a prin-cipal purpose of avoiding the applicationof section 901(m).

IX. Miscellaneous

Proposed § 1.901(m)–8(b) providesthat, when a foreign corporation becomesa section 902 corporation for the first time,as part of the required reconstruction ofthe U.S. tax history of the pre-1987 for-eign income taxes of the foreign corpora-tion, section 901(m) and these regulationsmust be applied to determine any disqual-ified tax amounts or aggregate basis dif-ference carryovers that apply to the for-eign corporation.

Proposed § 1.901(m)–8(c) provides ananti-abuse rule that applies to disregard anRFA with a built-in loss to the extent itrelates to any asset acquisition structuredwith a principal purpose to use that RFAto avoid the application of section 901(m).This rule may apply, for example, if, witha principal purpose of avoiding the appli-cation of section 901(m), an asset is ac-quired in a transaction that preserves abuilt-in loss in the asset for U.S. incometax purposes but not for foreign incometax purposes.

X. Modifications to the Section 704(b)Regulations Related to Section 901(m)

Section 1.704–1(b)(4)(viii) provides asafe harbor under which allocations ofcreditable foreign tax expenditures(CFTEs) (as defined in § 1.704–1(b)(4)(viii)(b)) by a partnership to its partnersare deemed to be in accordance with thepartners’ interests in the partnership. Ingeneral, the purpose of the safe harbor isto match allocations of CFTEs with theincome to which the CFTEs relate. Inorder to apply the safe harbor, a partner-ship must (1) determine the partnership’s“CFTE categories,” (2) determine thepartnership’s net income in each CFTEcategory, and (3) allocate the partner-ship’s CFTEs to each category. In order to


satisfy the safe harbor, partnership alloca-tions of CFTEs in a CFTE category mustbe proportionate to the allocations of thepartnership’s net income in the CFTE cat-egory.

A CFTE may be subject to section901(m) because it is a foreign income taxamount that is paid or accrued by a part-nership. Specifically, if a partnershipowns an RFA with respect to a foreignincome tax and that RFA has a basis dif-ference subject to section 901(m), a por-tion of a foreign income tax amount paidor accrued by the partnership that relatesto that foreign income tax may be disal-lowed as a foreign tax credit under section901(m) in the hands of section 901(m)payors to whom the foreign income taxamount is allocated. The disqualified taxamount is determined by taking into ac-count cost recovery amounts and disposi-tion amounts with respect to the RFA thatare allocated to those section 901(m) pay-ors pursuant to the rules provided in pro-posed § 1.901(m)–5. In order to ensurethat the proper portion of a foreign incometax amount paid or accrued by a partner-ship is disallowed under section 901(m),adjustments to the net income (and theallocations of that income) in a CFTEcategory that includes items attributable tothe RFA are necessary in certain cases.

To illustrate such a case, assume a do-mestic entity that is a partnership for U.S.income tax purposes but a corporation forpurposes of a foreign income tax (a hybridpartnership) is owned by partner A andpartner B, each of which is a domesticentity that is a corporation for both U.S.and foreign income tax purposes. In thiscase, the hybrid partnership is the foreignpayor and partners A and B are section901(m) payors. The hybrid partnership isthe RFA owner (U.S.) and the RFA owner(foreign) with respect to a single asset thatis an RFA. Assume that in a given year thehybrid partnership has 110u of gross in-come for both U.S. and foreign tax pur-poses and a 10u depreciation deductionsolely for U.S. income tax purposes,which gives rise to a cost recovery amountwith respect to the RFA (as determinedunder proposed § 1.901(m)–5(b)(2)). Allpartnership items are allocated equally topartners A and B, except that the entire10u U.S. depreciation deduction is allo-cated to partner A. Thus, partner A’s dis-

tributive share of income is 45u (110u x50%, less 10u) and partner B’s distribu-tive share of income is 55u (110u x 50%).Because the entire U.S. depreciation de-duction is (or will be included) in partnerA’s distributive share of income for U.S.income tax purposes, the entire cost re-covery amount that corresponds to theU.S. depreciation deduction of 10u is al-located to partner A. See proposed§ 1.901(m)–5(d)(2). As a result, Partner Awill take into account the 10u cost recov-ery amount in calculating a disqualifiedtax amount with respect to the portion ofthe relevant foreign income tax amountpaid or accrued by the hybrid partnershipand allocated to partner A under the CFTEallocation rules. In order to ensure that theportion of the foreign income tax amountpaid or accrued by the hybrid partnershipthat is attributable to the 10u basis differ-ence is properly subject to section 901(m),the U.S. depreciation deduction shouldnot be taken into account under the CFTEallocation rules so that the portion of theforeign income tax amount attributable tothe 10u basis difference is allocated topartner A. Accordingly, the net income ofthe CFTE category that includes the U.S.basis deduction should be increased by10u (from 100u to 110u) to back out theportion of the U.S. depreciation deductionthat corresponds to the cost recoveryamount, and partner A’s share of that netincome should be increased by 10u (from45u to 55u). In this example, as a result ofthe adjustment, the foreign income taxamount paid or accrued by the hybridpartnership will be allocated equally be-tween partner A and partner B, becausethey each will have a 50-percent share ofthe net income in the CFTE category, asadjusted. Absent the adjustment, a portionof the foreign income tax amount attrib-utable to the 10u basis difference wouldbe allocated to partner B, a person that isnot subject to section 901(m) (because nocost recovery amount is allocated to part-ner B).

No modification to the safe harbor isnecessary to address cost recovery amountsand disposition amounts attributable to sec-tion 743(b) adjustments that are allocatedto partners under proposed § 1.901(m)–5(e) (which applies when a section901(m) payor acquires a partnership inter-est in a section 743(b) CAA), because, in

these cases, § 1.704–1T(b)(4)(viii)(c)(3)(i) already provides that the partnershipdetermines net income in a CFTE cate-gory without regard to section 743(b) ad-justments that its partners may have to thebasis of property of the partnership. How-ever, as discussed in section VI.D of theExplanation of Provisions section of thispreamble, proposed § 1.901(m)–5(e) doesnot apply when another partnership(which by definition cannot be a section901(m) payor) acquires a partnership in-terest in a section 743(b) CAA. Thus,modification to the safe harbor is neces-sary for all CAAs other than those section743(b) CAAs described in proposed§ 1.901(m)–5(e).

Accordingly, these proposed regula-tions add special rules under proposed§ 1.704–1(b)(4)(viii)(c)(4)(v), (vi), and(vii) to address partnership items that giverise to cost recovery amounts and dispo-sition amounts attributable to CAAs(other than section 743(b) CAAs de-scribed in proposed § 1.901(m)–5(e)).Specifically, these rules provide that, if anRFA has a positive basis difference, netincome in a CFTE category that takes intoaccount partnership items of income, de-duction, gain, or loss attributable to theRFA (applicable CFTE category) is in-creased by the sum of the cost recoveryamounts and disposition amounts attribut-able to U.S. disposition loss that corre-spond to those partnership items. Further-more, to the extent a partner is allocatedthose cost recovery amounts or disposi-tion amounts attributable to U.S. disposi-tion loss, that partner’s share of the netincome in the CFTE category is increasedby the same amount. Alternatively, if anRFA has a negative basis difference, thenet income in the applicable CFTE cate-gory is decreased by the sum of the costrecovery amounts and dispositionamounts attributable to U.S. dispositiongain that correspond to partnership itemsin that CFTE category. Furthermore, tothe extent a partner is allocated those costrecovery amounts or disposition amountsattributable to U.S. disposition gain, thatpartner’s share of the net income in theCFTE category is decreased by the sameamount.


XI. Effective/Applicability Dates

These proposed regulations will applyto CAAs occurring on or after the date ofpublication of the Treasury decisionadopting these rules as final regulations inthe Federal Register. Taxpayers may,however, rely on the proposed regulationsprior to the date the regulations are appli-cable provided that they both consistentlyapply proposed § 1.901(m)–2 (excluding§ 1.901(m)–2(d)) to all CAAs occurringon or after December 7, 2016 and consis-tently apply proposed § 1.901(m)–1 and§§ 1.901(m)–3 through 1.901(m)–8 (ex-cluding § 1.901(m)–4(e)) to all CAAs oc-curring on or after January 1, 2011. Forthis purpose, persons that are related(within the meaning of section 267(b) or707(b)) will be treated as a single tax-payer.

Special Analyses

Certain IRS regulations, includingthese, are exempt from the requirementsof Executive Order 12866, as supple-mented and reaffirmed by Executive Or-der 13563. Therefore, a regulatory impactassessment is not required. It has alsobeen determined that the Regulatory Flex-ibility Act (5 U.S.C. chapter 6) does notapply because the regulations do not im-pose a collection of information on smallentities. Pursuant to section 7805(f), theseregulations will be submitted to the ChiefCounsel for Advocacy of the Small Busi-ness Administration for comment on itsimpact on small business.

Comments and Requests for PublicHearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any comments that aresubmitted timely to the IRS as prescribedin this preamble under “Addresses.” TheTreasury Department and the IRS requestcomments on all aspects of the proposedrules. All comments will be available atwww.regulations.gov or upon request. Apublic hearing will be scheduled if re-quested in writing by any person thattimely submits comments. If a publichearing is scheduled, notice of the date,time, and place for the public hearing willbe published in the Federal Register.


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

* * * * *

Proposed Amendments to theRegulations

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


Paragraph 1. The authority citation forpart 1 is amended by adding entries innumerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *Sections 1.901(m)–1 through –8 also

issued under 26 U.S.C. 901(m)(7). * * *Section 1.901(m)–5 also issued under

26 U.S.C. 901(m)(3)(B)(ii). * * *Par. 2. Section 1.704–1, as proposed to

be amended at 81 FR 5967, February 4,2016, is further amended by adding twosentences at the end of paragraph(b)(1)(ii)(b)(1) and by adding paragraphs(b)(4)(viii)(c)(4)(v) through (b)(4)(viii)(c)(4)(vii) to read as follows:

§ 1.704–1 Partner’s distributive share.

* * * * *(b) * * *(1) * * *(ii) * * *(b) * * *(1) * * * Paragraphs (b)(4)(viii)(c)

(4)(v) through (vii) of this section apply tocovered asset acquisitions (CAAs) (as de-fined in § 1.901(m)–1(a)(8)) occurring onor after the date of publication of a Trea-sury decision adopting these rules as finalregulations in the Federal Register. Tax-payers may, however, rely on paragraphs(b)(4)(viii)(c)(4)(v) through (vii) of thissection prior to the date paragraphs(b)(4)(viii)(c)(4)(v) through (vii) of thissection are applicable provided that theyconsistently apply paragraphs (b)(4)(viii)(c)(4)(v) through (vii) of this section,§ 1.901(m)–1, and §§ 1.901(m)–3 through1.901(m)–8 (excluding § 1.901(m)–4(e))to all CAAs occurring on or after January

1, 2011, and consistently apply § 1.901(m)–2 (excluding § 1.901(m)–2(d)) to all CAAsoccurring on or after December 7, 2016.* * * * *

(4) * * *(viii) * * *(c) * * *(4) * * *(v) Adjustments related to section

901(m). If one or more assets owned by apartnership are relevant foreign assets (orRFAs) with respect to a foreign incometax , then, solely for purposes of applyingthe safe harbor provisions of paragraph(b)(4)(viii)(a)(1) of this section to alloca-tions of CFTEs with respect to that for-eign income tax , the net income in aCFTE category that includes partnershipitems of income, deduction, gain, or lossattributable to the RFA shall be increasedby the amount described in paragraph(b)(4)(viii)(c)(4)(vi) of this section and re-duced by the amount described in para-graph (b)(4)(viii)(c)(4)(vii) of this section.Similarly, a partner’s CFTE categoryshare of income shall be increased by theportion of the amount described in para-graph (b)(4)(viii)(c)(4)(vi) of this sectionthat is allocated to the partner under§ 1.901(m)–5(d) and reduced by the por-tion of the amount described in paragraph(b)(4)(viii)(c)(4)(vii) of this section that isallocated to the partner under § 1.901(m)–5(d). The principles of this paragraph(b)(4)(viii)(c)(4)(v) apply similarly whena partnership owns an RFA indirectlythrough one or more other partnerships.For purposes of paragraphs (b)(4)(viii)(c)(4)(v), (b)(4)(viii)(c)(4)(vi), and (b)(4)(viii)(c)(4)(vii) of this section, basis dif-ference is defined in § 1.901(m)–4, costrecovery amount is defined in § 1.901(m)–5(b)(2), disposition amount is defined in§ 1.901(m)–5(c)(2), foreign income tax isdefined in § 1.901(m)–1(a)(21), RFA isdefined in § 1.901(m)–2(c), U.S. disposi-tion gain is defined in § 1.901(m)–1(a)(43), and U.S. disposition loss is de-fined in § 1.901(m)–1(a)(44).

(vi) Adjustment amounts for RFAs witha positive basis difference. With respect toRFAs with a positive basis difference, theamount referenced in (b)(4)(viii)(c)(4)(v)is the sum of any cost recovery amountsand disposition amounts attributable toU.S. disposition loss that correspond topartnership items that are included in the


net income in the CFTE category and thatare taken into account for the U.S. taxableyear of the partnership under § 1.901(m)–5(d).

(vii) Adjustment amounts for RFAswith a negative basis difference. With re-spect to RFAs with a negative basis dif-ference, the amount referenced in(b)(4)(viii)(c)(4)(v) is the sum of any costrecovery amounts and disposition amountsattributable to U.S. disposition gain thatcorrespond to partnership items that areincluded in the net income in the CFTEcategory and that are taken into accountfor the U.S. taxable year of the partnershipunder § 1.901(m)–5(d).* * * * *

Par. 3. Section 1.901(m)–1 is added toread as follows:

§ 1.901(m)–1 Definitions.

(a) Definitions. [The text of proposed§ 1.901(m)–1(a) is the same as the text of§ 1.901(m)–1T(a) published elsewhere inthis issue of the Bulletin.]

(1) The term aggregate basis differ-ence means, with respect to a foreign in-come tax and a foreign payor, the sum ofthe allocated basis differences for a U.S.taxable year of a section 901(m) payor,plus any aggregate basis difference carry-over from the immediately preceding U.S.taxable year of the section 901(m) payorwith respect to the foreign income tax andforeign payor, as adjusted under§ 1.901(m)–6(c). For purposes of this def-inition, if foreign law imposes tax on thecombined income (within the meaning of§ 1.901–2(f)(3)(ii)) of two or more foreignpayors, all foreign payors whose items ofincome, deduction, gain, or loss are in-cluded in the U.S. taxable income or earn-ings and profits of the section 901(m)payor are treated as a single foreign payor.Aggregate basis difference is determinedwith respect to each separate category de-scribed in § 1.904–4(m).

(2) The term aggregate basis differ-ence carryover has the meaning providedin § 1.901(m)–3(c).

(3) The term aggregated CAA transac-tion means a series of related CAAs oc-curring as part of a plan.

(4) The term allocable foreign incomemeans the portion of foreign income of aforeign payor that relates to the foreign

income tax amount of the foreign payorthat is paid or accrued by, or consideredpaid or accrued by, a section 901(m)payor.

(5) The term allocated basis differencemeans, with respect to an RFA and aforeign income tax, the sum of the costrecovery amounts and disposition amountsassigned to a U.S. taxable year of the section901(m) payor under § 1.901(m)–5.

(6) through (8) [The text of proposed§§ 1.901(m)–1(a)(6) through (8) is thesame as the text of §§ 1.901(m)–1T(a)(6)through (8) published elsewhere in thisissue of the Bulletin.]

(9) The term cumulative basis differ-ence exemption has the meaning providedin § 1.901(m)–7(b)(2).


(12) The term disqualified tax amounthas the meaning provided in § 1.901(m)–3(b).


(15) The term foreign basis means theadjusted basis of an asset determined forpurposes of a foreign income tax.

(16) The term foreign basis electionhas the meaning provided in § 1.901(m)–4(c).

(17) The term foreign country credit-able tax (or FCCT) means, with respect toa foreign income tax amount, the amountof income, war profits, or excess profitstax paid or accrued to a foreign country orpossession of the United States andclaimed as a foreign tax credit for pur-poses of determining the foreign incometax amount. To qualify as a FCCT, the taximposed by the foreign country or posses-sion must be a foreign income tax or awithholding tax determined on a grossbasis as described in section 901(k)(1)(B).


(22) The term foreign income taxamount means, with respect to a foreign

income tax, the amount of tax (includingan amount of tax that is zero) reflected ona foreign tax return (as properly amendedor adjusted). If foreign law imposes tax onthe combined income (within the meaningof § 1.901–2(f)(3)(ii)) of two or moreforeign payors, however, a foreign incometax amount means the amount of tax im-posed on the combined income, regardlessof whether the tax is reflected on a singleforeign tax return. (23) The term foreignpayor means an individual or entity (in-cluding a disregarded entity) subject to aforeign income tax. If a foreign incometax imposes tax on the combined income(within the meaning of § 1.901–2(f)(3)(ii)) of two or more individuals or en-tities, each such individual or entity is aforeign payor. An individual or entity maybe a foreign payor with respect to morethan one foreign income tax for purposesof applying section 901(m).

(24) The term foreign taxable yearmeans a taxable year for purposes of aforeign income tax.

(25) The term mid-year transactionmeans a transaction in which a foreignpayor that is a corporation or a disre-garded entity has a change in ownershipor makes an election pursuant to§ 301.7701–3 to change its entity classi-fication, or a transaction in which a for-eign payor that is a partnership terminatesunder section 708(b)(1), provided in eachcase that the foreign payor’s foreign tax-able year does not close as a result of thetransaction, and, if the foreign payor is acorporation or a partnership, the foreignpayor’s U.S. taxable year closes.


(29) The term reverse hybrid has themeaning provided in § 1.909–2(b)(1)(iv).

(30) The term RFA class exemption hasthe meaning provided in § 1.901(m)–7(b)(3).

(31) The term RFA owner (U.S.) meansa person that owns an RFA for U.S. in-come tax purposes.

(32) The term RFA owner (foreign)means an individual or entity (including adisregarded entity ) that owns an RFA forpurposes of a foreign income tax.



(35) The term section 901(m) payormeans a person eligible to claim the for-eign tax credit allowed under section901(a), regardless of whether the personchooses to claim the foreign tax credit, aswell as a section 902 corporation (as de-fined in section 909(d)(5)). If members ofa U.S. affiliated group of corporations (asdefined in section 1504) file a consoli-dated return, each member is a separatesection 901(m) payor. If individuals file ajoint return, those individuals are treatedas a single section 901(m) payor.


(39) The term tentative disqualified taxamount has the meaning provided in§ 1.901(m)–3(b)(2).


(42) The term U.S. basis deduction hasthe meaning provided in § 1.901(m)–5(b)(3).


(b) Effective/applicability date. (1)Paragraphs (a)(1), (2), (3), (4), (5), (9),(12), (15), (16), (17), (22), (23), (24), (25),(29), (30), (31), (32), (35), (39), and (42)of this section apply to CAAs occurringon or after the date of publication of theTreasury decision adopting these rules asfinal regulations in the Federal Register.

(2) [The text of proposed § 1.901(m)–1(b)(2) is the same as the text of§ 1.901(m)–1T(b)(2) published elsewherein this issue of the Bulletin.]

(3) Taxpayers may, however, rely onthis section prior to the date this section isapplicable provided that they both consis-tently apply this section, § 1.704–1(b)(4)(viii)(c)(4)(v) through (vii), and §§ 1.901(m)–3 through 1.901(m)–8 (excluding

§ 1.901(m)–4(e)) to all CAAs occurringon or after January 1, 2011, and consis-tently apply § 1.901(m)–2 (excluding§ 1.901(m)–2(d)) to all CAAs occurringon or after December 7, 2016. For thispurpose, persons that are related (withinthe meaning of section 267(b) or 707(b))will be treated as a single taxpayer.


§ 1.901(m)–2 Covered asset acquisitionsand relevant foreign assets.

(a) through (b)(3) [The text of pro-posed §§ 1.901(m)–2(a) through (b)(3) isthe same as the text of §§ 1.901(m)–2T(a)through (b)(3) published elsewhere in thisissue of the Bulletin.]

(4) Any transaction (or series of trans-actions occurring pursuant to a plan) tothe extent it is treated as an acquisition ofassets for purposes of U.S. income tax andas the acquisition of an interest in a fis-cally transparent entity for purposes of aforeign income tax;

(5) Any transaction (or series of trans-actions occurring pursuant to a plan) tothe extent it is treated as a partnershipdistribution of one or more assets the U.S.basis of which is determined by section732(b) or 732(d) or which causes the U.S.basis of the partnership’s remaining assetsto be adjusted under section 734(b), pro-vided the transaction results in an increasein the U.S. basis of one or more of theassets distributed by the partnership orretained by the partnership without a cor-responding increase in the foreign basis ofsuch assets; and

(6) Any transaction (or series of trans-actions occurring pursuant to a plan) tothe extent it is treated as an acquisition ofassets for purposes of both U.S. incometax and a foreign income tax, provided thetransaction results in an increase in theU.S. basis without a corresponding in-crease in the foreign basis of one or moreassets.

(c) Relevant foreign asset—(1) [Thetext of proposed § 1.901(m)–2(c)(1) is thesame as the text of § 1.901(m)–2T(c)(1)published elsewhere in this issue of theBulletin.]

(2) RFA status with respect to a foreignincome tax. An asset is relevant in deter-mining foreign income if income, deduc-

tion, gain, or loss attributable to the assetis taken into account in determining for-eign income immediately after the CAA,or would be taken into account in deter-mining foreign income immediately afterthe CAA if the asset were to give rise toincome, deduction, gain, or loss at suchtime.

(3) Subsequent RFA status with respectto another foreign income tax. After aCAA, an asset will become an RFA withrespect to another foreign income tax if,pursuant to a plan or series of relatedtransactions that have a principal purposeof avoiding the application of section901(m), an asset that was not relevant indetermining foreign income for purposesof that foreign income tax immediatelyafter the CAA becomes relevant in deter-mining such foreign income. A principalpurpose of avoiding section 901(m) willbe deemed to exist if income, deduction,gain, or loss attributable to the asset istaken into account in determining suchforeign income within the one-year periodfollowing the CAA, or would be takeninto account in determining such foreignincome during such time if the asset wereto give rise to income, deduction, gain, orloss within the one-year period.

(d) [The text of proposed § 1.901(m)–2(d) is the same as the text of § 1.901(m)–2T(d) published elsewhere in this issue ofthe Bulletin.]

(e) Examples. The following examplesillustrate the rules of this section:

Example 1. CAA involving an acquisition of apartnership interest for foreign income tax purpos-es—(i) Facts. (A) FPS is an entity organized inCountry F that is treated as a partnership for bothU.S. and Country F income tax purposes. FPS isowned 50/50 by FC1 and FC2, each of which is acorporation organized in Country F and treated as acorporation for both U.S. and Country F income taxpurposes. FPS has a single asset, Asset A. USP, adomestic corporation, owns all the interests in DE, adisregarded entity.

(B) Pursuant to the same transaction, USP ac-quires FC1’s interest in FPS, and DE acquires FC2’sinterest in FPS. For U.S. income tax purposes, withrespect to USP, the acquisition of the interests in FPSis treated as the acquisition of Asset A by USP. SeeRev. Rul. 99–6, 1999–1 C.B. 432. For Country Ftax purposes, the acquisitions of the interests of FPSby USP and DE are treated as acquisitions of part-nership interests.

(ii) Result. The transaction is a CAA under para-graph (b)(4) of this section because it is treated as theacquisition of Asset A for U.S. income tax purposesand the acquisition of interests in a partnership forCountry F tax purposes.


Example 2. CAA involving an asset acquisitionfor purposes of both U.S. income tax and a foreignincome tax—(i) Facts. (A) USP, a domestic corpo-ration, wholly owns CFC1, a foreign corporation,and CFC1 wholly owns CFC2, also a foreign corpo-ration. CFC1 and CFC2 are organized in Country F.CFC1 owns Asset A.

(B) In an exchange described in section 351,CFC1 transfers Asset A to CFC2 in exchange forCFC2 common stock and cash. CFC1 recognizesgain on the exchange under section 351(b). Undersection 362(a), CFC2’s U.S. basis in Asset A isincreased by the gain recognized by CFC1. ForCountry F tax purposes, gain or loss is not recog-nized on the transfer of Asset A to CFC2, andtherefore there is no increase in the foreign basis inAsset A.

(ii) Result. The transaction is a CAA under para-graph (b)(6) of this section because it is treated as anacquisition of Asset A by CFC2 for both U.S. andCountry F income tax purposes, and it results in anincrease in the U.S. Basis of Asset A without acorresponding increase in the foreign basis of Asset A.

Example 3. RFA status determined immediatelyafter CAA; application of principal purpose rule—(i) Facts. (A) USP1 and USP2 are unrelated domes-tic corporations. USP1 wholly owns USSub, also adomestic corporation. On January 1 of Year 1, USP2acquires all of the stock of USSub from USP1 in aqualified stock purchase (as defined in section338(d)(3)) to which section 338(a) applies. Immedi-ately after the acquisition, none of the income, de-duction, gain, or loss attributable to any of the assetsof USSub is taken into account in determining for-eign income for purposes of a foreign income tax norwould such items be taken into account in determin-ing foreign income for purposes of a foreign incometax immediately after the acquisition if such assetswere to give rise to income, deduction, gain, or lossimmediately after the acquisition.

(B) On December 1 of Year 1, USSub contrib-utes all its assets to FSub, its wholly owned subsid-iary, which is a corporation for both U.S. and Coun-try X income tax purposes, in a transfer described insection 351 (subsequent transfer). USSub recognizesno gain or loss for U.S. or Country X income taxpurposes as a result of the subsequent transfer. As aresult of the subsequent transfer, income, deduction,gain, or loss attributable to the assets of USSub thatwere transferred to FSub is taken into account indetermining foreign income of FSub for Country Xtax purposes.

(ii) Result. (A) Under paragraph (b)(1) of thissection, the acquisition by USP2 of the stock ofUSSub is a section 338 CAA. Under paragraph(c)(1) of this section, none of the assets of USSub areRFAs immediately after the CAA, because none ofthe income, deduction, gain, or loss attributable tosuch assets is taken into account for purposes ofdetermining foreign income with respect to any for-eign income tax immediately after the CAA (norwould such items be taken into account for purposesof determining foreign income immediately after theCAA if such assets were to give rise to income,deduction, gain, or loss at such time).

(B) Although the subsequent transfer is not aCAA under paragraph (b) of this section, the subse-quent transfer causes the assets of USSub to become

relevant in the hands of FSub in determining foreignincome for Country X tax purposes. Because thesubsequent transfer occurred within the one-year pe-riod following the CAA, it is presumed to have aprincipal purpose of avoiding section 901(m). Ac-cordingly, under paragraph (c)(2) of this section, theassets of USSub with respect to the CAA occurringon January 1 of Year 1 become RFAs with respect toCountry X tax as a result of the subsequent transfer.Thus, a basis difference with respect to Country Xtax must be computed for the RFAs and taken intoaccount under section 901(m).

(f) Effective/applicability date. (1) [Thetext of proposed § 1.901(m)–2(f)(1) is thesame as the text of § 1.901(m)–2T(f)(1)published elsewhere in this issue of the Bul-letin.]

(2) Paragraphs (b)(4) through (b)(6),(c)(2), (c)(3), and (e) of this section applyto CAAs occurring on or after the date ofpublication of the Treasury decisionadopting these rules as final regulations inthe Federal Register.

(3) Taxpayers may, however, rely onthis section prior to the date this section isapplicable provided that they both consis-tently apply this section (excluding para-graph (d) of this section) to all CAAsoccurring on or after December 7, 2016and consistently apply § 1.704–1(b)(4)(viii)(c)(4)(v) through (vii), § 1.901(m)–1,and §§ 1.901(m)–3 through 1.901(m)–8(excluding § 1.901(m)–4(e)) to all CAAsoccurring on or after January 1, 2011. Forthis purpose, persons that are related(within the meaning of section 267(b) or707(b)) will be treated as a single tax-payer.


§ 1.901(m)–3 Disqualified tax amount andaggregate basis difference carryover.

(a) In general. If a section 901(m)payor has an aggregate basis difference,with respect to a foreign income tax and aforeign payor, for a U.S. taxable year, thesection 901(m) payor must determine theportion of a foreign income tax amountthat is disqualified under section 901(m)(disqualified tax amount). Paragraph (b)of this section provides rules for determin-ing the disqualified tax amount. Paragraph(c) of this section provides rules for de-termining what portion, if any, of aggre-gate basis difference will be carried for-ward to the next U.S. taxable year(aggregated basis difference carryover).

Paragraph (d) of this section provides theeffective/applicability date.

(b) Disqualified tax amount—(1) Ingeneral. A section 901(m) payor’s dis-qualified tax amount is not taken into ac-count in determining the credit allowedunder section 901(a). If the section901(m) payor is a section 902 corporation,the disqualified tax amount is not takeninto account for purposes of section 902or 960. Sections 78 and 275 do not applyto the disqualified tax amount. The dis-qualified tax amount is allowed as a de-duction to the extent otherwise deductible(see sections 164, 212, and 964 and theregulations under those sections).

(2) Determination of disqualified taxamount—(i) In general. Except as pro-vided in paragraph (b)(2)(iv) of this sec-tion, the disqualified tax amount is equalto the lesser of the foreign income taxamount that is paid or accrued by, or con-sidered paid or accrued by, the section901(m) payor for the U.S. taxable year orthe tentative disqualified tax amount. Allcalculations are determined with respectto each separate category described in§ 1.904–4(m).

(ii) Tentative disqualified tax amount.The tentative disqualified tax amount isequal to the amount determined underparagraph (b)(2)(ii)(A) of this section re-duced (but not below zero) by the amountdescribed in paragraph (b)(2)(ii)(B) of thissection.

(A) The product of—(1) The sum of the foreign income tax

amount and the FCCTs that are paid oraccrued by, or considered paid or accruedby, the section 901(m) payor, and

(2) A fraction, the numerator of whichis the aggregate basis difference, but notin excess of the allocable foreign income,and the denominator of which is the allo-cable foreign income.

(B) The amount of the FCCT that is adisqualified tax amount of the section901(m) payor with respect to another for-eign income tax.

(iii) Allocable foreign income—(A) Noallocation required. Except as provided inparagraph (b)(2)(iii)(D) of this section, ifthe entire foreign income tax amount ispaid or accrued by, or considered paid oraccrued by, a single section 901(m) payor,then the allocable foreign income is equalto the entire foreign income, determined


with respect to each separate category de-scribed in § 1.904–4(m).

(B) Allocation required. Except as pro-vided in paragraph (b)(2)(iii)(D) of thissection, if the foreign income tax amountis allocated to, and considered paid oraccrued by, more than one person, a sec-tion 901(m) payor’s allocable foreign in-come is equal to the portion of the foreignincome that relates to the foreign incometax amount allocated to that section901(m) payor, determined with respect toeach separate category described in§ 1.904–4(m).

(C) Rules for allocations. This para-graph (b)(2)(iii)(C) provides allocationrules that apply to determine allocable for-eign income in certain cases.

(1) If the foreign payor is involved in amid-year transaction and the foreign in-come tax amount is allocated under§ 1.336–2(g)(3)(ii), 1.338–9(d), or 1.901–2(f)(4), then, to the extent any portion ofthe foreign income tax amount is allocatedto, and considered paid or accrued by, asection 901(m) payor, the allocable for-eign income of the section 901(m) payoris determined in accordance with the prin-ciples of § 1.1502–76(b). To the extent theforeign income tax amount is allocated toan entity that is a partnership for U.S.income tax purposes, a portion of the for-eign income is first allocated to the part-nership in accordance with the principlesof § 1.1502–76(b), which is then allocatedunder the rules of paragraph (b)(2)(iii)(C)(2) of this section to determine theallocable foreign income of a section901(m) payor that owns an interest in thepartnership directly or indirectly throughone or more other partnerships for U.S.income tax purposes.

(2) If the foreign income tax amount isconsidered paid or accrued by a section901(m) payor for a U.S. taxable year un-der § 1.702–1(a)(6), the determination ofthe allocable foreign income must be con-sistent with the allocation of the foreignincome tax amount that relates to the for-eign income. See § 1.704–1(b)(4)(viii).

(3) If the foreign income tax amountthat is allocated to, and considered paid oraccrued by, a section 901(m) payor for aU.S. taxable year is determined under§ 1.901–2(f)(3)(i), the allocable foreignincome is determined in accordance with§ 1.901–2(f)(3)(iii).

(D) Failure to substantiate allocableforeign income. If, pursuant to section901(m)(3)(A), a section 901(m) payorfails to substantiate its allocable foreignincome to the satisfaction of the Secretary,then allocable foreign income will equalthe amount determined by dividing thesum of the foreign income tax amount andthe FCCTs that are paid or accrued by, orconsidered paid or accrued by, the section901(m) payor, by the highest marginal taxrate applicable to income of the foreignpayor under foreign tax law.

(iv) Special rule. A section 901(m)payor’s disqualified tax amount is zero fora U.S. taxable year if:

(A) The section 901(m) payor’s aggre-gate basis difference for the U.S. taxableyear is a negative amount;

(B) Foreign income is less than orequal to zero for the foreign taxable yearof the foreign payor; or

(C) The foreign income tax amountthat is paid or accrued by, or consideredpaid or accrued by, the section 901(m)payor for the U.S. taxable year is zero.

(3) Examples. The following examplesillustrate the rules of paragraph (b)(2) ofthis section. For purposes of all the exam-ples, unless otherwise specified: USP is adomestic corporation. CFC1, CFC2, DE1,and DE2 are organized in Country F andare treated as corporations for Country Ftax purposes. CFC1 and CFC2 are section902 corporations (as defined in section909(d)(5)). DE1 and DE2 are disregardedentities. USP, CFC1, and CFC2 have acalendar year for both U.S. and Country Fincome tax purposes, and DE1 and DE2have a calendar year for Country F taxpurposes. Country F and Country G eachimpose a single tax that is a foreign in-come tax. CFC1, CFC2, DE1, and DE2each have a functional currency of the uwith respect to all activities. At all rele-vant times, 1u equals $1. All amounts arestated in millions. The examples assumethat the applicable cost recovery methodfor property results in basis being recov-ered ratably over the life of the propertybeginning on the first day of the U.S.taxable year in which the property is ac-quired or placed into service; there is asingle § 1.904–4(m) separate categorywith respect to a foreign income and for-eign income tax amount; and a section901(m) payor properly substantiates its

allocable foreign income to the satisfac-tion of the Secretary.

Example 1. Determining aggregate basis differ-ence; multiple foreign payors—(i) Facts. CFC1wholly owns CFC2 and DE1. DE1 wholly ownsDE2. Assume that the tax laws of Country F do notallow combined income reporting or the filing ofconsolidated income tax returns. Accordingly,CFC1, CFC2, DE1, and DE2 file separate tax returnsfor Country F tax purposes. USP acquires all of thestock of CFC1 in a qualified stock purchase (asdefined in section 338(d)(3)) to which section 338(a)applies for both CFC1 and CFC2.

(ii) Result. (A) The acquisition of CFC1 givesrise to four separate CAAs under § 1.901(m)–2(b).The acquisition of the stock of CFC1 and the deemedacquisition of the stock of CFC2 under section338(h)(3)(B) is each a Section 338 CAA under§ 1.901(m)–2(b)(1). Furthermore, because thedeemed acquisition of the assets of DE1 and DE2 forU.S. income tax purposes is disregarded for CountryF tax purposes, each acquisition is a CAA under§ 1.901(m)–2(b)(2). Because these four CAAs occurpursuant to a plan, under § 1.901(m)–1(a)(3) they arepart of an aggregated CAA transaction. Under§ 1.901(m)–1(a)(31), CFC1 is the RFA owner (U.S.)with respect to its assets and those of DE1 and DE2.CFC2 is the RFA owner (U.S.) with respect to itsassets. Under § 1.901(m)–1(a)(23), CFC1, CFC2,DE1, and DE2 are each a foreign payor for CountryF tax purposes. Under § 1.901(m)–1(a)(35), CFC1 isthe section 901(m) payor with respect to foreignincome tax amounts for which CFC1, DE1, and DE2are the foreign payors (see §§ 1.901–2(f)(1) and1.901–2(f)(4)(ii)). CFC2 is the section 901(m) payorwith respect to foreign income tax amounts forwhich CFC2 is the foreign payor (see § 1.901–2(f)(1)).

(B) In determining aggregate basis differenceunder § 1.901(m)–1(a)(1) for a U.S. taxable year ofCFC1, CFC1 has three computations with respect toCountry F tax, because there are three foreign payorsfor Country F tax purposes whose foreign incometax amount, if any, is considered paid or accrued byCFC1 as the section 901(m) payor. Furthermore, foreach U.S. taxable year, CFC1 will compute a sepa-rate disqualified tax amount and aggregate basis dif-ference Carryover (if any) under paragraph (b)(2) ofthis section, with respect to each foreign payor.

(C) In determining aggregate basis difference fora U.S. taxable year of CFC2 under § 1.901(m)–1(a)(1), CFC2 has a single computation with respectto Country F tax, because there is a single foreignpayor (CFC2) for Country F tax purposes whoseforeign income tax amount, if any, is considered paidor accrued by CFC2 as the section 901(m) payor.Furthermore, for each U.S. taxable year, CFC2 willcompute a disqualified tax amount and aggregatebasis difference Carryover (if any) under paragraph(b)(2) of this section.

(iii) Alternative facts. Assume the same facts asin paragraph (i) of this Example 1, except that for-eign income for Country F tax purposes is based oncombined income (within the meaning of § 1.901–2(f)(3)(ii)) of CFC1, CFC2, DE1, and DE2. Forpurposes of determining an aggregate basis differ-ence for a U.S. taxable year of CFC1 under§ 1.901(m)–1(a)(1), CFC1, DE1, and DE2 are


treated as a single foreign payor because all of theitems of income, deduction, gain, or loss with respectto CFC1, DE1, and DE2 are included in the earningsand profits of CFC1 for U.S. income tax purposes.For each U.S. taxable year, CFC1 will thereforecompute a single aggregate basis difference, disqual-ified tax amount, and aggregate basis difference car-ryover. The result for CFC2 under the alternativefacts is the same as in paragraph (ii)(C) of thisExample 1.

Example 2. Computation of disqualified taxamount—(i) Facts. On December 31 of Year 0, USPacquires all of the stock of CFC1 in a qualified stockpurchase (as defined in section 338(d)(3)) to whichsection 338(a) applies (Acquisition). CFC1 ownsfour assets (Asset A, Asset B, Asset C, and Asset D,and collectively, Assets) and conducts activities inCountry F and in a Country G branch. The activitiesconducted by CFC1 in Country G are not subject totax in Country F. The tax rate is 25% in Country Fand 30% in Country G. For Country F tax purposes,

CFC1’s foreign income and foreign income taxamount for each foreign taxable year 1 through 15 is100u and $25 (25u translated at the exchange rate of$1 � 1u), respectively. For Country G tax purposes,CFC1’s foreign income and foreign income taxamount for each foreign taxable year 1 through 5 is400u and $120 (120u translated at the exchange rateof $1 � 1u), respectively. No dispositions occur forany of the Assets during the applicable cost recoveryperiod. Additional facts relevant to each of the As-sets are summarized below.

AssetsRelevant foreign

income taxBasis

DifferenceApplicable CostRecovery Period Cost Recovery Amount

Asset A Country F tax 150u 15 years 10u (150u/15)

Asset B Country F tax 50u 5 years 10u (50u/5)

Asset C Country G tax 300u 5 years 60u (300u/5)

Asset D Country G tax (100u) 5 years negative 20u (negative 100/5)

(ii) Result. (A) Under § 1.901(m)–2(b)(1), theAcquisition of the stock of CFC1 is a Section 338CAA. Under § 1.901(m)–2(c)(1), Assets A and B areRFAs with respect to Country F tax, because they arerelevant in determining foreign income of CFC1 forCountry F tax purposes and were owned by CFC1when the Acquisition occurred. Assets C and D areRFAs with respect to Country G tax, because theyare relevant in determining foreign income of CFC1for Country G tax purposes and were owned byCFC1 when the Acquisition occurred. Under§ 1.901(m)–1(a)(31), CFC1 is the RFA owner (U.S.)with respect to all of the RFAs. Under § 1.901(m)–1(a)(35) and (a)(23), CFC1 is the section 901(m)payor and the foreign payor for Country F and Coun-try G tax purposes.

(B) In determining aggregate basis difference fora U.S. taxable year of CFC1, CFC1 has two compu-tations, one with respect to Country F tax and onewith respect to Country G tax. Under § 1.901(m)–1(a)(1), the aggregate basis difference for a U.S.taxable year with respect to Country F tax is equal tothe sum of the allocated basis differences with re-spect to Assets A and B for the U.S. taxable year.Under § 1.901(m)–1(a)(5), allocated basis differ-ences are comprised of cost recovery amounts anddisposition amounts. Because there are no disposi-tions, the only allocated basis differences taken intoaccount in determining an aggregate basis differenceare cost recovery amounts. Under § 1.901(m)–5(b),any cost recovery amounts are attributed to CFC1,because CFC1 is the section 901(m) payor and RFAowner (U.S.) with respect to all of the Assets. Foreach U.S. taxable year, CFC1 will compute a sepa-rate disqualified tax amount and aggregate basis dif-ference carryover (if any) with respect to Country Ftax and Country G tax under paragraph (b)(2) of thissection. For purposes of both disqualified tax amountcomputations, because CFC1 is the section 901(m)payor and foreign payor, the foreign income taxamount paid or accrued by CFC1 with respect toCountry F tax and Country G tax, respectively, willbe the entire foreign income tax amount and CFC1’sallocable foreign income will be the entire foreignincome.

(C) With respect to Country F tax, in U.S. tax-able years 1 through 5, CFC1 has an aggregate basisdifference of 20u each year (10u cost recoveryamount with respect to Asset A plus 10u cost recov-ery amount with respect to Asset B). For U.S. tax-able years 1 through 5, under paragraph (b)(2) of thissection, the disqualified tax amount each year is $5,the lesser of two amounts: the tentative disqualifiedtax amount, in this case, $5 ($25 foreign incometax amount x (20u aggregate basis difference/100uallocable foreign income)), or the foreign income taxamount paid or accrued by CFC1, in this case, $25.After U.S. taxable year 5, Asset B has no unallocatedbasis difference with respect to Country F tax. Ac-cordingly, in U.S. taxable years 6 through 15, CFC1has an aggregate basis difference of 10u each year.Accordingly, for U.S. taxable years 6 through 15, thedisqualified tax amount each year is $2.50, the lesserof two amounts: the tentative disqualified taxamount, in this case, $2.50 ($25 foreign income taxamount x (10u aggregate basis difference/100u allo-cable foreign income)), or the foreign income taxamount paid or accrued by CFC1, in this case, $25.After U.S. taxable year 15, Asset A has no unallo-cated basis difference with respect to Country F taxand, therefore, CFC1 has no disqualified tax amountwith respect to Country F Tax.

(D) With respect to Country G tax, in U.S. tax-able years 1 through 5, CFC1 has an aggregate basisdifference of 40u each year (60u cost recoveryamount with respect to Asset C � (20u) cost recov-ery amount with respect to Asset D). For U.S. tax-able years 1 through 5, under paragraph (b)(2) of thissection, the disqualified tax amount each year is $12,the lesser of two amounts: the tentative disqualifiedtax amount, in this case, $12 ($120 foreign incometax amount x (40u aggregate basis difference/400uallocable foreign income)), or the foreign income taxamount paid or accrued by CFC1, in this case, $120.After U.S. taxable year 5, Asset C and Asset D haveno unallocated basis difference with respect to Coun-try G tax. Accordingly, in U.S. taxable years 6through 15, CFC1 has no disqualified tax amountwith respect to Country G Tax.

Example 3. FCCT—(i) Facts. In U.S. taxableyear 1, USP acquires all of the interests in DE1 in a

transaction (Transaction) that is treated as a stockacquisition for Country F tax purposes. Immediatelyafter the Transaction, DE1 owns assets (Pre-Transaction Assets), all of which are used in a Coun-try G branch and give rise to income that is takeninto account for Country F tax and Country G taxpurposes. After the Transaction, DE1 acquires addi-tional assets (Post-Transaction Assets), which arenot used by the Country G branch. Both Country Fand Country G have a tax rate of 30%. Country Fimposes worldwide tax on its residents and providesa foreign tax credit for taxes paid to other jurisdic-tions. In foreign taxable year 3, 100u of income isattributable to DE1’s Post-Transaction Assets and100u of income is attributable to DE1’s Pre-Transaction Assets. For Country G tax purposes, theforeign income is 100u and foreign income taxamount is 30u (30% x 100u). For Country F taxpurposes, the foreign income is 200u and the pre-foreign tax credit tax is 60u (30% x 200u). The 60uof Country F pre-foreign tax credit tax is reduced bythe 30u foreign income tax amount imposed forCountry G tax purposes. Thus, the foreign incometax amount for Country F tax purposes is $30 (30utranslated into dollars at the exchange rate of $1 �1u). Assume that for U.S. taxable year 3 USP has100u aggregate basis difference with respect toCountry F tax and 100u aggregate basis differencewith respect to Country G tax. USP does not disposeof DE1 or any assets of DE1 in U.S. taxable year 3.

(ii) Result. (A) Under § 1.901(m)–2(b)(2), theTransaction is a CAA. Under § 1.901(m)–2(c)(1),the Pre-Transaction Assets are RFAs with respect toboth Country F tax and Country G tax, because theyare relevant in determining the foreign income ofDE1 for Country F tax and Country G tax purposesand were owned by DE1 when the Transaction oc-curred. Under § 1.901(m)–1(a)(31), USP is the RFAowner (U.S.) with respect to the RFAs. Under§ 1.901(m)–1(a)(23), DE1 is a foreign payor forCountry F tax and Country G tax purposes. Under§ 1.901(m)–1(a)(35), USP is the section 901(m)payor with respect to foreign income tax amounts forwhich DE1 is the foreign payor (see § 1.901–2(f)(4)(ii)). Because the Country G foreign incometax amount is claimed as a credit for purposes of


determining the Country F foreign income taxamount, the Country G foreign income tax amount isan FCCT under § 1.901(m)–1(a)(17).

(B) Under § 1.901(m)–1(a)(1), for each U.S.taxable year, USP will separately compute the ag-gregate basis difference with respect to Country Ftax and with respect to Country G tax, and will usethose amounts to separately compute a disqualifiedtax amount and aggregate basis difference carryover(if any) with respect to each foreign income tax.Because DE1 is a disregarded entity owned by USPduring the entire U.S. taxable year 3, the foreignincome tax amount paid or accrued by DE1 is notsubject to allocation. Accordingly, for purposes ofeach of the disqualified tax amount computations,the foreign income tax amount paid or accrued byUSP with respect to Country F tax and Country Gtax, respectively, is the entire foreign income taxamount paid or accrued by DE1, and, under para-graph (b)(2)(iii)(A) of this section, USP’s allocableforeign income will be equal to DE1’s entire foreignincome.

(C) As stated in paragraph (i) of this Example 3,for U.S. taxable year 3 USP has 100u aggregate basisdifference with respect to Country F tax and 100uaggregate basis difference with respect to Country Gtax. With respect to Country G tax, in U.S. taxableyear 3, under paragraph (b)(2) of this section, thedisqualified tax amount is $30, the lesser of the twoamounts: the tentative disqualified tax amount, inthis case, $30 ($30 foreign income tax amount x(100u aggregate basis difference/100u allocable for-eign income)), or the foreign income tax amountconsidered paid or accrued by USP, in this case, $30.

(D) With respect to Country F tax, in U.S. tax-able year 3, under paragraph (b)(2) of this section,the disqualified tax amount is $0, the lesser of twoamounts: the tentative disqualified tax amount, inthis case $0 (($30 foreign income tax amount � $30Country G FCCT) x (100u aggregate basis differ-ence/200u foreign income) � $30 reduced by $30Country G FCCT that is a disqualified tax amount ofUSP), or the foreign income tax amount consideredpaid or accrued by USP, in this case, $30.

(c) Aggregate basis difference carry-over—(1) In general. If a section 901(m)payor has an aggregate basis differencecarryover for a U.S. taxable year, as de-termined under this paragraph (c), the ag-gregate basis difference carryover is takeninto account in computing the section901(m) payor’s aggregate basis differencefor the next U.S. taxable year. For succes-sor rules that apply to an aggregate basisdifference carryover, see § 1.901(m)–6(c).

(2) Amount of aggregate basis differ-ence carryover. (i) If a section 901(m)payor’s disqualified tax amount is zero, allof the section 901(m) payor’s aggregatebasis difference (positive or negative) forthe U.S. taxable year gives rise to an ag-gregate basis difference carryover to thenext U.S. taxable year.

(ii) If a section 901(m) payor’s disqual-ified tax amount is not zero, then aggre-gate basis difference carryover can arisein either or both of the following twosituations:

(A) If a section 901(m) payor’s aggre-gate basis difference for the U.S. taxableyear exceeds its allocable foreign income,the excess gives rise to an aggregate basisdifference carryover.

(B) If the tentative disqualified taxamount exceeds the disqualified taxamount, the excess tentative disqualifiedtax amount is converted into aggregatebasis difference carryover by multiplyingsuch excess by a fraction, the numeratorof which is the allocable foreign income,and the denominator of which is the sumof the foreign income tax amount and theFCCTs that are paid or accrued by, orconsidered paid or accrued by, the section901(m) payor.

(3) Example. The following exampleillustrates the rule of paragraph (c) of thissection.

Example. Aggregate basis difference carryover;section 901(m) payor’s U.S. taxable year differsfrom the foreign taxable year of foreign payor —(i)Facts. (A) On July 1 of Year 1, CFC1 acquires all ofthe interests of DE1 in a transaction (Transaction)that is treated as a stock acquisition for Country F taxpurposes. CFC1 and DE1 are organized in Country Fand are treated as corporations for Country F taxpurposes. CFC1 is a section 902 corporation (asdefined in section 909(d)(5)), and DE1 is a disre-garded entity. CFC1 has a calendar year for U.S.income tax purposes, and DE1 has a June 30 year-end for Country F tax purposes. Country F imposesa single tax that is a foreign income tax. CFC1 andDE1 each have a functional currency of the u withrespect to all activities. Immediately after the Trans-action, DE1 owns one asset, Asset A, that gives riseto income that is taken into account for Country Ftax purposes. For the first U.S. taxable year (U.S.taxable year 1) there is a cost recovery amount withrespect to Asset A of 9u, and for each subsequentU.S. taxable year until the U.S. basis is fully recov-ered, there is a cost recovery amount with respect toAsset A of 18u. There is no disposition of Asset A.

(ii) Result. (A) Under § 1.901(m)–2(b)(2), theTransaction is a CAA. Under § 1.901(m)–2(c)(1),Asset A is an RFA with respect to Country F taxbecause it is relevant in determining the foreignincome of DE1 for Country F tax purposes and wasowned by DE1 when the Transaction occurred. Un-der § 1.901(m)–1(a)(31), CFC1 is the RFA owner(U.S.) with respect to Asset A. Under § 1.901(m)–1(a)(23), DE1 is a foreign payor for Country F taxpurposes. Under § 1.901(m)–1(a)(35), CFC1 is thesection 901(m) payor with respect to foreign incometax amounts for which DE1 is the foreign payor (see§ 1.901–2(f)(4)(ii)).

(B) Under § 1.901(m)–1(a)(1), in determiningthe aggregate basis difference for U.S. taxable year1, CFC1 has one computation with respect to Coun-try F tax. Under § 1.901(m)–1(a)(1), aggregate basisdifference with respect to Country F tax is equal tothe sum of allocated basis differences with respect toall RFAs, which, in this case, is only Asset A. Under§ 1.901(m)–1(a)(5), allocated basis differences arecomprised of cost recovery amounts and dispositionamounts. Because there is no disposition of Asset A,the only allocated basis difference taken into accountin determining an aggregate basis difference are costrecovery amounts with respect to Asset A. Under§ 1.901(m)–5(b), any cost recovery amounts areassigned to a U.S taxable year of CFC1, becauseCFC1 is the section 901(m) payor and RFA owner(U.S.) with respect to Asset A. Under paragraph(b)(2) of this section, for each U.S. taxable year,CFC1 will compute a disqualified tax amount andaggregate basis difference carryover with respect tothe aggregate basis difference. Because DE1 is adisregarded entity owned by CFC1, the foreign in-come tax amount paid or accrued by DE1 is notsubject to allocation. Accordingly, for purposes ofthe disqualified tax amount computation, the foreignincome tax amount paid or accrued by CFC1 withrespect to Country F tax is the entire foreign incometax amount paid or accrued by DE1, and underparagraph (b)(2)(iii)(A) of this section, CFC1’s al-locable foreign income will be equal to DE1’s entireforeign income.

(C) In U.S. taxable year 1, CFC1 has an aggre-gate basis difference of 9u (the 9u cost recoveryamount with respect to Asset A for U.S. taxable year1). However, because the foreign taxable year ofDE1, the foreign payor, will not end between July 1and December 31, there will not be a foreign incometax amount for U.S. taxable year 1. Because theforeign income tax amount considered paid or ac-crued by CFC1 for U.S. taxable year 1 is zero, underparagraph (b)(2)(iv) of this section, the disqualifiedtax amount for U.S. taxable year 1 of CFC1 is alsozero. Furthermore, because the disqualified taxamount is zero, under paragraph (c)(2)(i) of thissection, CFC1 has an aggregate basis difference car-ryover equal to 9u, the entire amount of the aggre-gate basis difference for U.S. taxable year 1. Underparagraph (c)(1) of this section, the 9u aggregatebasis difference carryover is taken into account incomputing CFC1’s aggregate basis difference forU.S. taxable year 2. Accordingly, in U.S. taxableyear 2, CFC1 has an aggregate basis difference of27u (18u cost recovery amount for U.S. taxable year2, plus 9u aggregate basis difference carryover fromU.S. taxable year 1).

(d) Effective/applicability date. Thissection applies to CAAs occurring on orafter the date of publication of the Trea-sury decision adopting these rules as finalregulations in the Federal Register. Tax-payers may, however, rely on this sectionprior to the date this section is applicableprovided that they both consistently applythis section, § 1.704–1(b)(4)(viii)(c)(4)(v)through (vii), § 1.901(m)–1, and §§ 1.901(m)–4 through 1.901(m)–8 (excluding


§ 1.901(m)–4(e)) to all CAAs occurringon or after January 1, 2011, and consis-tently apply § 1.901(m)–2 (excluding§ 1.901(m)–2(d)) to all CAAs occurringon or after December 7, 2016. For thispurpose, persons that are related (withinthe meaning of section 267(b) or 707(b))will be treated as a single taxpayer.


§ 1.901(m)–4 Determination of basisdifference.

(a) through (b) [The text of proposed§§ 1.901(m)–4(a) through (b) is the sameas the text of §§ 1.901(m)–4T(a) through(b) published elsewhere in this issue of theBulletin.]

(c) Foreign basis election. (1) An elec-tion (foreign basis election) may be madeto apply section 901(m)(3)(C)(i)(II) byreference to the foreign basis immediatelyafter the CAA instead of the U.S. basisimmediately before the CAA. Accord-ingly, if a foreign basis election is made,basis difference is the U.S. basis in theRFA immediately after the CAA, less theforeign basis in the RFA immediately af-ter the CAA. For this purpose, the foreignbasis immediately after the CAA takesinto account any adjustment to that for-eign basis resulting from the CAA forpurposes of the foreign income tax.

(2) Except as otherwise provided inthis paragraph (c), a foreign basis electionis made by the RFA owner (U.S.). If,however, the RFA owner (U.S.) is a part-nership, each partner in the partnership(and not the partnership) may indepen-dently make a foreign basis election. Inthe case of one or more tiered partner-ships, the foreign basis election is made atthe level at which a partner is not also apartnership.

(3) The election may be made sepa-rately for each CAA, and with respect toeach foreign income tax and each foreignpayor. For purposes of making the foreignbasis election, all CAAs that are part of anaggregated CAA transaction are treated asa single CAA. Furthermore, for purposesof making the foreign basis election, ifforeign law imposes tax on the combinedincome (within the meaning of § 1.901–2(f)(3)(ii)) of two or more foreign payors,all foreign payors whose items of income,

deduction, gain, or loss for U.S. incometax purposes are included in the U.S. tax-able income or earnings and profits of asingle section 901(m) payor are treated asa single foreign payor.

(4) A foreign basis election is made byusing foreign basis to determine basis dif-ference for purposes of computing a dis-qualified tax amount and an aggregate ba-sis difference carryover for the U.S.taxable year, as provided under§ 1.901(m)–3. A separate statement orform evidencing the foreign basis electionneed not be filed. Except as provided inparagraph (c)(5) and (6) of this section, inorder for a foreign basis election to beeffective, the election must be reflected ona timely filed original federal income taxreturn (including extensions) for the firstU.S. taxable year that the foreign basiselection is relevant to the computation ofany amounts reported on such return, in-cluding on any required schedules.

(5) If the RFA owner (U.S.) is a part-nership, a foreign basis election reflectedon a partner’s timely filed amended fed-eral income tax return is also effective ifall of the following conditions are satis-fied:

(i) The partner’s timely filed originalfederal income tax return (including ex-tensions) for the first U.S. taxable year ofthe partner in which a foreign basis elec-tion is relevant to the computation of anyamounts reported on such return, includ-ing on any required schedules, does notreflect the application of section 901(m);

(ii) The information provided by thepartnership to the partner for purposes ofapplying section 901(m) and any informa-tion required to be reported by the part-nership is based solely on computationsthat use foreign basis to determine basisdifference; and

(iii) Prior to the due date of the originalfederal income tax return (including ex-tensions) described in paragraph (c)(5)(i)of this section, the partner delegated theauthority to the partnership to choosewhether to provide the partner with infor-mation to apply section 901(m) using for-eign basis, either pursuant to a writtenpartnership agreement (within the mean-ing of § 1.704–1(b)(2)(ii)(h)) or writtennotice provided by the partner to the part-nership.

(6) If, pursuant to paragraph (g)(3) ofthis section, a taxpayer chooses to havethis section apply to CAAs occurring onor after January 1, 2011, a foreign basiselection will be effective if the election isreflected on a timely filed amended fed-eral income tax return (or tax returns, asapplicable) filed no later than one yearfollowing the date of publication of theTreasury decision adopting these rules asfinal regulations in the Federal Register.

(7) The foreign basis election is irrevo-cable. Relief under § 301.9100–1 is notavailable for the foreign basis election.

(d) Determination of basis differencein a section 743(b) CAA—(1) [The text ofproposed § 1.901(m)–4(d)(1) is the sameas the text of § 1.901(m)–4T(d)(1) pub-lished elsewhere in this issue of the Bul-letin.]

(2) Foreign basis election. If a foreignbasis election is made with respect to asection 743(b) CAA, then, for purposes ofparagraph (d)(1) of this section, the sec-tion 743(b) adjustment is determined byreference to the foreign basis of the RFA,determined immediately after the CAA.

(e) [The text of proposed § 1.901(m)–4(e) is the same as the text of § 1.901(m)–4T(e) published elsewhere in this issue ofthe Bulletin.]

(f) Examples. The following examplesillustrate the rules of this section:

Example 1. Scope of basis choice; identifyingseparate CAAs, RFA owners (U.S.), and foreign pay-ors in an aggregated CAA transaction—(i) Facts.CFC1 wholly owns CFC2, both of which are section902 corporations (as defined in section 909(d)(5)),organized in Country F, and treated as corporationsfor Country F tax purposes. CFC1 also wholly ownsDE1, and DE1 wholly owns DE2. DE1 and DE2 areentities organized in Country F treated as corpora-tions for Country F tax purposes and as disregardedentities for U.S. income tax purposes. Country Fimposes a single tax that is a foreign income tax. Allof the stock of CFC1 is acquired in a qualified stockpurchase (within the meaning of section 338(d)(3))to which section 338(a) applies for both CFC1 andCFC2. For Country F tax purposes, the transaction istreated as an acquisition of the stock of CFC1.

(ii) Result. (A) The acquisition of CFC1 givesrise to four separate CAAs described in§ 1.901(m)–2. Under § 1.901(m)–2(b)(1), the acqui-sition of the stock of CFC1 and the deemed acqui-sition of the stock of CFC2 under section338(h)(3)(B) are each a section 338 CAA. Further-more, because the deemed acquisition of the assetsof each of DE1 and DE2 for U.S. income tax pur-poses is disregarded for Country F tax purposes, thedeemed acquisitions are CAAs under § 1.901(m)–2(b)(2). Because the four CAAs occurred pursuant toa plan, under § 1.901(m)–1(a)(3), all of the CAAs


are part of an aggregated CAA transaction. Under§ 1.901(m)–1(a)(31), CFC1 is the RFA owner (U.S.)with respect to its assets and the assets of DE1 andDE2 that are RFAs. CFC2 is the RFA owner (U.S.)with respect to its assets that are RFAs. Under§ 1.901(m)–1(a)(23), CFC1, CFC2, DE1, and DE2are each a foreign payor for Country F tax purposes.

(B) Under paragraph (c) of this section, a foreignbasis election may be made by the RFA owner(U.S.). The election is made separately with respectto each CAA (for this purpose, treating all CAAs thatare part of an aggregated CAA transaction as a singleCAA) and with respect to each foreign income taxand foreign payor. Thus, in this case, CFC1 canmake a separate foreign basis election for one ormore of the following three groups of RFAs: RFAsthat are relevant in determining foreign income ofCFC1; RFAs that are relevant in determining foreignincome of DE1; and RFAs that are relevant in de-termining foreign income of DE2. Furthermore,CFC2 can make a foreign basis election for all of itsRFAs that are relevant in determining its foreignincome.

Example 2. Scope of basis choice; RFA owner(U.S.) is a partnership—(i) Facts. USPS is a domes-tic partnership for which a section 754 election is ineffect. USPS owns two assets, the stock of DE1 andDE2. DE1 is an entity organized in Country X andtreated as a corporation for Country X tax purposes.DE2 is an entity organized in Country Y and treatedas a corporation for Country Y tax purposes. DE1and DE2 are disregarded entities. Country X andCountry Y each impose a single tax that is a foreignincome tax. US1 and US2, unrelated domestic cor-porations, and FP, a foreign person unrelated to US1and US2, acquire partnership interests in USPS fromexisting partners of USPS pursuant to the same plan.

(ii) Result. Under § 1.901(m)–2(b)(3), the acqui-sitions of the partnership interests in USPS by US1,US2, and FP each give rise to separate section 743(b)CAAs, but under § 1.901(m)–1(a)(3), they aretreated as an aggregated CAA transaction becausethey occur as part of a plan. Under § 1.901(m)–1(a)(31), USPS is the RFA owner (U.S.) with respectto the assets of DE1 and DE2 that are RFAs. Under§ 1.901(m)–1(a)(23), DE1 is a foreign payorfor Country X tax purposes and DE2 is a foreignpayor for Country Y tax purposes. Because the RFAowner (U.S.) is a partnership, paragraph (c)(2) of thissection provides that US1, US2, and FP (the relevantpartners in USPS) separately choose whether tomake a foreign basis election for purposes of deter-mining basis difference. Furthermore, under para-graph (c)(3) of this section, the choice to make theelection is made separately by each partner withrespect to each foreign payor. Thus, in this case, eachpartner may make separate elections for the RFAsthat are relevant in determining foreign income ofDE1 for Country X tax purposes and the RFAs thatare relevant in determining foreign income of DE2for Country Y tax purposes.

(g) Effective/applicability date—(1)[The text of proposed § 1.901(m)–4(g)(1)is the same as the text of § 1.901(m)–4T(g)(1) published elsewhere in this issueof the Bulletin.]

(2) Except for paragraphs (a), (b),(d)(1), and (e) of this section, this sectionapplies to CAAs occurring on or after thedate of publication of the Treasury deci-sion adopting these rules as final regula-tions in the Federal Register.

(3) Taxpayers may, however, rely onthis section prior to the date this section isapplicable provided that they both consis-tently apply this section (excluding para-graph (e) of this section), § 1.704–1(b)(4)(viii)(c)(4)(v) through (vii), § 1.901(m)–1, § 1.901(m)–3, and §§ 1.901(m)–5through 1.901(m)–8 to all CAAs occur-ring on or after January 1, 2011, and con-sistently apply § 1.901(m)–2 (excluding§ 1.901(m)–2(d)) to all CAAs occurringon or after December 7, 2016. For thispurpose, persons that are related (withinthe meaning of section 267(b) or 707(b))will be treated as a single taxpayer.


§ 1.901(m)–5 Basis difference taken intoaccount.

(a) In general. This section providesrules for determining the amount of basisdifference with respect to an RFA that istaken into account in a U.S. taxable yearfor purposes of determining the disquali-fied portion of a foreign income taxamount. Paragraph (b) of this section pro-vides rules for determining a cost recov-ery amount and assigning that amount to aU.S. taxable year of a single section901(m) payor when the RFA owner (U.S.)is the section 901(m) payor. Paragraph (c)of this section provides rules for determin-ing a disposition amount and assigningthat amount to a U.S. taxable year of asingle section 901(m) payor when theRFA owner (U.S.) is the section 901(m)payor. Paragraph (d) of this section pro-vides rules for allocating cost recoveryamounts and disposition amounts whenthe RFA owner (U.S.) is a fiscally trans-parent entity for U.S. income tax pur-poses. Paragraph (e) of this section pro-vides special rules for allocating costrecovery amounts and disposition amountswith respect to certain section 743(b)CAAs. Paragraph (f) of this section pro-vides special rules for allocating certaindisposition amounts when a foreign payoris transferred in a mid-year transaction.

Paragraph (g) of this section provides spe-cial rules for allocating both cost recoveryamounts and disposition amounts in cer-tain cases in which the RFA owner (U.S.)either is a reverse hybrid or a fiscallytransparent entity for both U.S. and for-eign income tax purposes that is directlyor indirectly owned by a reverse hybrid.Paragraph (h) of this section provides ex-amples illustrating the application of thissection. Paragraph (i) of this section pro-vides the effective/applicability date.

(b) Basis difference taken into accountunder applicable cost recovery method—(1) In general. When the RFA owner(U.S.) is a section 901(m) payor, all of acost recovery amount is attributed to thesection 901(m) payor and assigned to theU.S. taxable year of the section 901(m)payor in which the corresponding U.S.basis deduction is taken into account un-der the applicable cost recovery method.This is the case regardless of whether thededuction is deferred or disallowed forU.S. income tax purposes. If instead theRFA owner (U.S.) is a fiscally transparententity for U.S. income tax purposes, a costrecovery amount is allocated to one ormore section 901(m) payors under para-graph (d) of this section, except as pro-vided in paragraphs (e) and (g) of thissection. If a cost recovery amount arisesfrom an RFA with respect to a section743(b) CAA, in certain cases the cost re-covery amount is allocated to a section901(m) payor under paragraph (e) of thissection. In certain cases in which the RFAowner (U.S.) either is a reverse hybrid ora fiscally transparent entity for both U.S.and foreign income tax purposes that isdirectly or indirectly owned by a reversehybrid, a cost recovery amount is allo-cated to one or more section 901(m) pay-ors under paragraph (g) of this section.

(2) Determining a cost recovery amount—(i) [The text of proposed § 1.901(m)–5(b)(2)(i) is the same as the text of§ 1.901(m)–5T(b)(2)(i) published else-where in this issue of the Bulletin.]

(ii) U.S. basis subject to multiplecost recovery methods. If the entire U.S.basis is not subject to the same cost re-covery method, the applicable cost recov-ery method for determining the cost re-covery amount is the cost recoverymethod that applies to the portion of the


U.S. basis that corresponds to the basisdifference.

(3) Applicable cost recovery method.For purposes of section 901(m), an appli-cable cost recovery method includes anymethod for recovering the cost of propertyover time for U.S. income tax purposes(each application of a method giving riseto a “U.S. basis deduction”). Such meth-ods include depreciation, amortization, ordepletion, as well as a method that allowsthe cost (or a portion of the cost) of prop-erty to be expensed in the year of acqui-sition or in the placed-in-service year,such as under section 179. Applicable costrecovery methods do not include any pro-vision allowing the U.S. basis to be recov-ered upon a disposition of an RFA.

(c) Basis difference taken into accountas a result of a disposition—(1) In gen-eral. Except as provided in paragraph (f)of this section, when the RFA owner(U.S.) is a section 901(m) payor, all of adisposition amount is attributed to the sec-tion 901(m) payor and assigned to theU.S. taxable year of the section 901(m)payor in which the disposition occurs. Ifinstead the RFA owner (U.S.) is a fiscallytransparent entity for U.S. income tax pur-poses, except as provided in paragraphs(e), (f), and (g) of this section, a disposi-tion amount is allocated to one or moresection 901(m) payors under paragraph(d) of this section. If a disposition amountarises from an RFA with respect to asection 743(b) CAA, in certain cases thedisposition amount is allocated to a sec-tion 901(m) payor under paragraph (e) ofthis section. If there is a disposition of anRFA in a foreign taxable year of a foreignpayor during which there is a mid-yeartransaction, in certain cases a dispositionamount is allocated under paragraph (f) ofthis section. In certain cases in which theRFA owner (U.S.) either is a reverse hy-brid or a fiscally transparent entity forboth U.S. and foreign income tax pur-poses that is directly or indirectly ownedby a reverse hybrid, a disposition amountis allocated to one or more section 901(m)payors under paragraph (g) of this section.

(2) [The text of proposed § 1.901(m)–5(c)(2) is the same as the text of§ 1.901(m)–5T(c)(2) published elsewherein this issue of the Bulletin.]

(d) General rules for allocating andassigning a cost recovery amount or a

disposition amount when the RFA owner(U.S.) is a fiscally transparent entity—(1)In general. Except as provided in para-graphs (e), (f), and (g) of this section, thisparagraph (d) provides rules for allocatinga cost recovery amount or a dispositionamount when the RFA owner (U.S.) is afiscally transparent entity for U.S. incometax purposes in which a section 901(m)payor directly or indirectly owns an inter-est, as well as for assigning the allocatedamount to a U.S. taxable year of the sec-tion 901(m) payor. For purposes of thisparagraph (d), unless otherwise indicated,a reference to direct or indirect ownershipin an entity means for U.S. income taxpurposes. For purposes of this paragraph(d), a person indirectly owns an interest inan entity for U.S. income tax purposes ifthe person owns the interest through oneor more fiscally transparent entities forU.S. income tax purposes, and at least oneof the fiscally transparent entities is not adisregarded entity. For purposes of thisparagraph (d), a person indirectly owns aninterest in an entity for foreign income taxpurposes if the person owns the interestthrough one or more fiscally transparententities for foreign income tax purposes. Ifthe RFA owner (U.S.) is a lower-tier fis-cally transparent entity for U.S. incometax purposes in which the section 901(m)payor indirectly owns an interest, the rulesof this section apply in a manner consis-tent with the application of these ruleswhen the section 901(m) payor directlyowns an interest in the RFA owner (U.S.).

(2) Allocation of a cost recoveryamount. A cost recovery amount is allo-cated to a section 901(m) payor that di-rectly or indirectly owns an interest in theRFA owner (U.S.) to the extent the U.S.basis deduction that corresponds to thecost recovery amount is (or will be) in-cluded in the section 901(m) payor’s dis-tributive share of the income of the RFAowner (U.S.) for U.S. income tax pur-poses.

(3) Allocation of a disposition amountattributable to foreign disposition gain orforeign disposition loss—(i) In general.Except as provided in paragraph (f) of thissection, a disposition amount attributableto foreign disposition gain or foreign dis-position loss (as determined under para-graph (d)(5) of this section) is allocatedunder paragraph (d)(3)(ii) or (d)(3)(iii) of

this section to a section 901(m) payor thatdirectly or indirectly owns an interest inthe RFA owner (U.S.).

(ii) First allocation rule. This para-graph (d)(3)(ii) applies when a section901(m) payor, or a disregarded entity di-rectly owned by a section 901(m) payor, isthe foreign payor whose foreign incomeincludes a distributive share of the foreignincome of the RFA owner (foreign) and,therefore, all of the foreign income taxamount of the foreign payor is paid oraccrued by, or considered paid by, thesection 901(m) payor. Thus, this para-graph (d)(3)(ii) applies when the RFAowner (U.S.) is a fiscally transparent en-tity for both U.S. and foreign income taxpurposes and a section 901(m) payor ei-ther directly owns an interest in the RFAowner (U.S.) or directly owns an interestin another fiscally transparent entity forU.S. and foreign income tax purposes,which, in turn, directly or indirectly ownsan interest in the RFA owner (U.S.) forboth U.S. and foreign income tax pur-poses. In these cases, the section 901(m)payor is allocated the portion of a dispo-sition amount that is equal to the productof the disposition amount attributable toforeign disposition gain or foreign dispo-sition loss, as applicable, and a fraction,the numerator of which is the portion ofthe foreign disposition gain or foreign dis-position loss recognized by the RFAowner (foreign) for foreign income taxpurposes that is (or will be) included inthe foreign payor’s distributive share ofthe foreign income of the RFA owner(foreign), and the denominator of which isthe foreign disposition gain or foreign dis-position loss.

(iii) Second allocation rule. This para-graph (d)(3)(iii) applies when neither asection 901(m) payor nor a disregardedentity directly owned by a section 901(m)payor is the foreign payor with respect tothe foreign income of the RFA owner(foreign). Instead, a section 901(m) payordirectly or indirectly owns an interest inthe foreign payor, which is a fiscally trans-parent entity for U.S. income tax purposes(other than a disregarded entity directlyowned by the section 901(m) payor), and,therefore, the section 901(m) payor is con-sidered to pay or accrue only its allocatedportion of the foreign income tax amountof the foreign payor. This will be the case


when the foreign payor is either the RFAowner (U.S.), another fiscally transparententity for U.S. income tax purposes (otherthan a disregarded entity directly ownedby a section 901(m) payor) that directly orindirectly owns an interest in the RFAowner (U.S.) for both U.S. and foreignincome tax purposes, or a disregarded en-tity directly owned by the RFA owner(U.S.). In these cases, the section 901(m)payor is allocated the portion of a dispo-sition amount that is equal to the productof the disposition amount attributable toforeign disposition gain or foreign dispo-sition loss, as applicable, and a fraction,the numerator of which is the portion ofthe foreign disposition gain or foreign dis-position loss that is included in the allo-cable foreign income of the section901(m) payor, and the denominator ofwhich is the foreign disposition gain orforeign disposition loss. If allocable for-eign income is not otherwise required tobe determined because there is no foreignincome tax amount, the numerator is theportion of the foreign disposition gain orforeign disposition loss that would be in-cluded in the allocable foreign income ofthe section 901(m) payor if there were aforeign income tax amount.

(4) Allocation of a disposition amountattributable to U.S. disposition gain orU.S. disposition loss. A section 901(m)payor that directly or indirectly owns aninterest in the RFA owner (U.S.) is allo-cated the portion of a disposition amountthat is equal to the product of the dispo-sition amount attributable to U.S. disposi-tion gain or U.S. disposition loss (as de-termined under paragraph (d)(5) of thissection), as applicable, and a fraction, thenumerator of which is the portion of theU.S. disposition gain or U.S. dispositionloss that is (or will be) included in thesection 901(m) payor’s distributive shareof income of the RFA owner (U.S.) forU.S. income tax purposes, and the denom-inator of which is the U.S. dispositiongain or U.S. disposition loss.

(5) Determining the extent to which adisposition amount is attributable to for-eign or U.S. disposition gain or loss—(i)RFA with a positive basis difference.When there is a disposition of an RFAwith a positive basis difference and thedisposition results in either a foreign dis-position gain or a U.S. disposition loss,

but not both, the entire disposition amountis attributable to foreign disposition gainor U.S. disposition loss, as applicable,even if the disposition amount exceeds theforeign disposition gain or the absolutevalue of the U.S. disposition loss. If thedisposition results in both a foreign dispo-sition gain and a U.S. disposition loss, thedisposition amount is attributable first toforeign disposition gain to the extentthereof, and the excess dispositionamount, if any, is attributable to the U.S.disposition loss, even if the excess dispo-sition amount exceeds the absolute valueof the U.S. disposition loss.

(ii) RFA with a negative basis differ-ence. When there is a disposition of anRFA with a negative basis difference andthe disposition results in either a foreigndisposition loss or a U.S. disposition gain,but not both, the entire disposition amountis attributable to foreign disposition lossor U.S. disposition gain, as applicable,even if the absolute value of the disposi-tion amount exceeds the absolute value ofthe foreign disposition loss or the U.S.disposition gain. If the disposition resultsin both a foreign disposition loss and aU.S. disposition gain, the dispositionamount is attributable first to foreign dis-position loss to the extent thereof, and theexcess disposition amount, if any, is at-tributable to the U.S. disposition gain,even if the absolute value of the excessdisposition amount exceeds the U.S. dis-position gain.

(6) U.S. taxable year of a section901(m) payor to which an allocated costrecovery amount or disposition amount isassigned. A cost recovery amount or adisposition amount allocated to a section901(m) payor under paragraph (d) of thissection is assigned to the U.S. taxable yearof the section 901(m) payor that includesthe last day of the U.S. taxable year of theRFA owner (U.S.) in which, in the case ofa cost recovery amount, the RFA owner(U.S.) takes into account the correspond-ing U.S. basis deduction (without regardto whether the deduction is deferred ordisallowed for U.S. income tax purposes),or in the case of a disposition amount, thedisposition occurs.

(e) Special rules for certain section743(b) CAAs. If a section 901(m) payoracquires a partnership interest in a section743(b) CAA, including a section 743(b)

CAA with respect to a lower-tier partner-ship that results from a direct acquisitionby the section 901(m) payor of an interestin an upper-tier partnership, and subse-quently there is a cost recovery amount ora disposition amount that arises from anRFA with respect to that section 743(b)CAA, all of the cost recovery amount orthe disposition amount is allocated to thatsection 901(m) payor. The U.S. taxableyear of the section 901(m) payor to whichthe cost recovery amount or the disposi-tion amount is assigned is the U.S. taxableyear in which, in the case of a cost recov-ery amount, the section 901(m) payortakes into account the corresponding U.S.basis deduction (without regard towhether the deduction is deferred or dis-allowed for U.S. income tax purposes), orin the case of a disposition amount, thedisposition occurs.

(f) Mid-year transactions—(1) In gen-eral. When a disposition of an RFA oc-curs in the same foreign taxable year thata foreign payor is involved in a mid-yeartransaction, the portion of the dispositionamount that is attributable to foreign dis-position gain or foreign disposition loss(as determined under paragraph (d)(5) ofthis section) is allocated to a section901(m) payor and assigned to a U.S. tax-able year of the section 901(m) payor un-der this paragraph (f). To the extent thedisposition amount is attributable to U.S.disposition gain or U.S. disposition loss(as determined under paragraph (d)(5) ofthis section), see paragraph (c)(1) or (d) ofthis section, as applicable.

(2) Allocation rule. To the extent adisposition amount is attributable to for-eign disposition gain or foreign disposi-tion loss, a section 901(m) payor is allo-cated the portion of the dispositionamount equal to the product of the dispo-sition amount attributable to foreign dis-position gain or foreign disposition loss,as applicable, and a fraction, the numera-tor of which is the portion of the foreigndisposition gain or foreign disposition lossthat is included in the allocable foreignincome of the section 901(m) payor, andthe denominator of which is the foreigndisposition gain or foreign dispositionloss. If allocable foreign income is nototherwise required to be determined be-cause there is no foreign income taxamount, the numerator is the portion of


the foreign disposition gain or foreign dis-position loss that would be included in theallocable foreign income of the section901(m) payor if there were a foreign in-come tax amount.

(3) Assignment to a U.S. taxable yearof a section 901(m) Payor. A dispositionamount allocated to a section 901(m)payor under paragraph (f)(2) of this sec-tion is assigned to the U.S. taxable year ofthe section 901(m) payor in which theforeign disposition gain or foreign dispo-sition loss (or portion thereof) is includedin allocable foreign income of the section901(m) payor or, if allocable foreign in-come is not otherwise required to be de-termined because there is no foreign in-come tax amount, the U.S. taxable year inwhich the foreign disposition gain or for-eign disposition loss would be included inallocable foreign income if there were aforeign income tax amount.

(g) Reverse hybrids—(1) In general.This paragraph (g) provides rules for al-locating a cost recovery amount or a dis-position amount when the RFA owner(U.S.) is either a reverse hybrid or a fis-cally transparent entity for U.S. and for-eign income tax purposes that is directlyor indirectly owned by a reverse hybridfor U.S. and foreign income tax purposes,and in each case, the foreign payor whoseforeign income includes a distributiveshare of the foreign income of the RFAowner (foreign) directly or indirectlyowns an interest in the reverse hybrid forforeign income tax purposes. Applicationof the allocation rules under paragraphs(g)(2) and (g)(3) of this section dependupon whether a section 901(m) payor or adisregarded entity directly owned by asection 901(m) payor is the foreign payor,or, instead, a section 901(m) payor di-rectly or indirectly owns an interest in theforeign payor. For purposes of this para-graph (g), unless otherwise indicated, areference to direct or indirect ownershipin an entity means for U.S. income taxpurposes. For purposes of this paragraph(g), a person indirectly owns an interest inan entity for U.S. income tax purposes ifthe person owns the interest through oneor more fiscally transparent entities forU.S. income tax purposes, and at least oneof the fiscally transparent entities is not adisregarded entity. For purposes of thisparagraph (g), a person indirectly owns an

interest in an entity for foreign income taxpurposes if the person owns the interestthrough one or more fiscally transparententities for foreign income tax purposes. Ifthe RFA owner (U.S.) is a lower-tier fis-cally transparent entity for U.S. incometax purposes in which the reverse hybridindirectly owns an interest, the rules ofthis section apply in a manner consistentwith the application of these rules whenthe reverse hybrid directly owns an inter-est in the RFA owner (U.S.).

(2) First allocation rule—(i) Alloca-tion to a section 901(m) payor. This para-graph (g)(2)(i) applies when a section901(m) payor, or a disregarded entity di-rectly owned by a section 901(m) payor, isthe foreign payor whose foreign incomeincludes a distributive share of the foreignincome of the RFA owner (foreign), and,therefore, all of the foreign income taxamount of the foreign payor is paid oraccrued by, or considered paid or accruedby, the section 901(m) payor. Thus, thisparagraph (g)(2)(i) applies when a section901(m) payor either directly owns an in-terest in the reverse hybrid or directlyowns an interest in a fiscally transparententity for U.S. and foreign income taxpurposes, which, in turn, directly or indi-rectly owns an interest in the reverse hy-brid for both U.S. and foreign income taxpurposes. In these cases, the section901(m) payor is allocated the portions ofcost recovery amounts or dispositionamounts (or both) with respect to RFAsthat are equal to the product of the sum ofthe cost recovery amounts and the dispo-sition amounts and a fraction, the numer-ator of which is the portion of the foreignincome of the RFA owner (foreign) that isincluded in the foreign income of the for-eign payor, and the denominator of whichis the foreign income of the RFA owner(foreign).

(ii) Assignment to a U.S. taxable yearof a section 901(m) Payor. This paragraph(g)(2)(ii) applies when a cost recoveryamount or a disposition amount, or por-tion thereof, is allocated to a section901(m) payor under paragraph (g)(2)(i) ofthis section. If the reverse hybrid is theRFA owner (U.S.), a cost recoveryamount or disposition amount, or portionthereof, is assigned to the U.S. taxableyear of the section 901(m) payor that in-cludes the last day of the U.S. taxable year

of the reverse hybrid in which, in the caseof a cost recovery amount, the reversehybrid takes into account the correspond-ing U.S. basis deduction (without regardto whether the deduction is deferred ordisallowed for U.S. income tax purposes),or, in the case of a disposition amount, thedisposition occurs. If the reverse hybrid isnot the RFA owner (U.S.) but instead thereverse hybrid directly or indirectly ownsan interest in the RFA owner (U.S.) forboth U.S. and foreign income tax pur-poses, a cost recovery amount or disposi-tion amount, or portion thereof, is as-signed to the U.S. taxable year of thesection 901(m) payor that includes the lastday of the U.S. taxable year of the reversehybrid, which, in turn, includes the lastday of the U.S. taxable year of the RFAowner (U.S.) in which, in the case of acost recovery amount, the RFA owner(U.S.) takes into account the correspond-ing U.S. basis deduction (without regardto whether the deduction is deferred ordisallowed for U.S. income tax purposes),or, in the case of a disposition amount, thedisposition occurs.

(3) Second allocation rule—(i) Alloca-tion to a section 901(m) payor. This para-graph (g)(3)(i) applies when neither a sec-tion 901(m) payor nor a disregarded entitydirectly owned by a section 901(m) payoris the foreign payor with respect to theforeign income of the RFA owner (for-eign). Instead, a section 901(m) payor di-rectly or indirectly owns an interest in theforeign payor, which is a fiscally transpar-ent entity for U.S. income tax purposes(other than a disregarded entity directlyowned by the section 901(m) payor), and,therefore, the section 901(m) payor is con-sidered to pay or accrue only its allocatedportion of the foreign income tax amountof the foreign payor. In these cases, thesection 901(m) payor is allocated the por-tions of cost recovery amounts or dispo-sition amounts (or both) with respect toRFAs that are equal to the product of thesum of the cost recovery amounts andthe disposition amounts and a fraction, thenumerator of which is the portion of theforeign income of the RFA owner (for-eign) that is included in the foreign in-come of the foreign payor and included inthe allocable foreign income of the section901(m) payor, and the denominator ofwhich is the foreign income of the RFA


owner (foreign). If allocable foreign in-come is not otherwise required to be de-termined for a section 901(m) payor be-cause there is no foreign income taxamount, the numerator is the foreign in-come of the RFA owner (foreign) that isincluded in the foreign income of the for-eign payor and that would be included inallocable foreign income of the section901(m) payor if there were a foreign in-come tax amount.

(ii) Assignment to a U.S. taxable yearof a section 901(m) payor. A cost recov-ery amount or a disposition amount, orportion thereof, that is allocated to a sec-tion 901(m) payor under paragraph(g)(3)(i) of this section is assigned to theU.S. taxable year of the section 901(m)payor in which the foreign income of theRFA owner (foreign) described in para-graph (g)(3)(i) of this section is includedin the allocable foreign income of the sec-tion 901(m) payor, or, if there is no for-eign income tax amount, the U.S. taxableyear of the section 901(m) payor in whichthe foreign income of the RFA owner(foreign) described in paragraph (g)(3)(i)of this section would be included in allo-cable foreign income if there were a for-eign income tax amount.

(h) Examples. The following examplesillustrate the rules of this section. In addi-tion to any facts described in a particularexample, the following facts apply to allthe examples unless otherwise specified:CFC1, CFC2, and DE are organized inCountry F and treated as corporations forCountry F tax purposes. CFC1 and CFC2are each a section 902 corporation (asdefined in section 909(d)(5)) that iswholly owned by the same U.S. corpora-tion, and DE is a disregarded entity. CFC1and CFC2 have a U.S. taxable year that isa calendar year, and CFC1, CFC2, and DEhave a foreign taxable year that is a cal-endar year. Country F imposes a single taxthat is a foreign income tax. CFC1, CFC2,and DE each have a functional currency ofthe u with respect to all activities. At allrelevant times, 1u equals $1. All amountsare stated in millions. The examples as-sume that the applicable cost recoverymethod for property results in basis beingrecovered ratably over the life of the prop-erty beginning on the first day of the U.S.taxable year in which the property is ac-quired or placed into service.

Example 1. CAA followed by disposition: fullytaxable for both U.S. income tax and foreign incometax purposes—(i) Facts. (A) On January 1, Year 1,USP acquires all of the stock of CFC1 in a qualifiedstock purchase (as defined in section 338(d)(3)) towhich section 338(a) applies (Section 338 Acquisi-tion). At the time of the Section 338 Acquisition,CFC1 owns a single asset (Asset A) that is located inCountry F. Asset A gives rise to income that is takeninto account for Country F tax purposes. Asset A istangible personal property that, under the applicablecost recovery method in the hands of CFC1, is de-preciable over 5 years. There are no cost recoverydeductions available for Country F tax purposes withrespect to Asset A. Immediately before the Section338 Acquisition, Asset A has a U.S. basis of 10u anda foreign basis of 40u. Immediately after the Section338 Acquisition, Asset A has a U.S. basis of 100uand foreign basis of 40u.

(B) On July 1, Year 2, Asset A is transferred toan unrelated third party in exchange for 120u in atransaction in which all realized gain is recognizedfor both U.S. income tax and Country F tax purposes(subsequent transaction). For U.S. income tax pur-poses, CFC1 recognizes U.S. disposition gain of 50u(amount realized of 120u, less U.S. basis of 70u(100u cost basis, less 30u of accumulated deprecia-tion)) with respect to Asset A. The 30u of accumu-lated depreciation is the sum of 20u of depreciationin Year 1 (100u cost basis/5 years) and 10u ofdepreciation in Year 2 ((100u cost basis/5 years) x6/12). For Country F tax purposes, CFC1 recognizesforeign disposition gain of 80u (amount realized of120u, less foreign basis of 40u) with respect to AssetA. Immediately after the subsequent transaction, As-set A has a U.S. basis and a foreign basis of 120u.

(ii) Result. (A) Under § 1.901(m)–2(b)(1), USP’sacquisition of the stock of CFC1 in the Section 338Acquisition is a section 338 CAA. Under§ 1.901(m)–2(c)(i), Asset A is an RFA with respectto Country F tax because it is relevant in determiningthe foreign income of CFC1 for Country F tax pur-poses. Under § 1.901(m)–4(b), the basis differencewith respect to Asset A is 90u (100u – 10u). UnderSection 901(m)–1(a)(31), CFC1 is the RFA owner(U.S.) with respect to Asset A. Under § 1.901(m)–1(a)(23), CFC1 is a foreign payor for Country F taxpurposes. Under § 1.901(m)–1(a)(35), CFC1 is thesection 901(m) payor with respect to a foreign in-come tax amount for which CFC1 is the foreignpayor (see § 1.901–2(f)(1)).

(B) Under § 1.901(m)–1(a)(5), allocated basisdifferences are comprised of cost recovery amountsand disposition amounts. In Year 1, Asset A has anallocated basis difference that includes only a costrecovery amount. Under paragraph (b)(2) of thissection, the cost recovery amount for Year 1 isdetermined by applying the applicable cost recoverymethod of Asset A in the hands of CFC1 to the basisdifference with respect to Asset A. Accordingly thecost recovery amount is 18u (90u basis difference/5years). Under paragraph (b)(1) of this section, all ofthe 18u cost recovery amount is attributed to CFC1and assigned to Year 1, because CFC1 is a section901(m) payor and RFA owner (U.S.) with respect toAsset A and Year 1 is the U.S. taxable year of CFC1in which it takes into account the corresponding 20uof depreciation. Immediately after Year 1, under

§ 1.901(m)–1(a)(40), unallocated basis difference is72u with respect to Asset A (90u – 18u).

(C) In Year 2, Asset A has an allocated basisdifference that includes both a cost recovery amountand a disposition amount. Under paragraph (b)(2) ofthis section, the cost recovery amount for Year 2, asof the date of the subsequent transaction, is 9u ((90ubasis difference/5 years) x 6/12). Under § 1.901(m)–1(a)(10), the subsequent transaction is a dispositionof Asset A, because the subsequent transaction is anevent that results in an amount of gain being recog-nized for U.S. income tax and Country F tax pur-poses. Because all realized gain in Asset A is rec-ognized for U.S. income tax and Country F taxpurposes, the rule in paragraph (c)(2)(i) of this sec-tion applies to determine the disposition amount.Under that rule, the disposition amount for Year 2 isthe unallocated basis difference of 63u (90u basisdifference, less total 27u taken into account as costrecovery amounts in Year 1 and Year 2). Accord-ingly, the allocated basis difference for Year 2 is 72u(9u of cost recovery amount, plus 63u of dispositionamount). Under paragraphs (b)(1) and (c)(1) of thissection, all of the 72u of allocated basis difference isattributed to CFC1 and assigned to Year 2, becauseCFC1 is a section 901(m) payor and the RFA owner(U.S.) with respect to Asset A and Year 2 is the U.S.taxable year of CFC1 in which it takes into accountthe corresponding 10u of depreciation and in whichthe disposition occurred.

(D) Unallocated basis difference with respect toAsset A, as determined immediately after the subse-quent transaction, is 0u (90u basis difference less90u basis difference taken into account as 27u totalcost recovery amount in Year 1 and Year 2 and as a63u disposition amount in Year 2). Accordingly,because there is no unallocated basis difference withrespect to Asset A attributable to the Section 338Acquisition, the subsequent transaction is not a suc-cessor transaction as defined in § 1.901(m)–6(b)(2).Furthermore, the subsequent transaction is not aCAA under § 1.901(m)–2(b). For these reasons, sec-tion 901(m) no longer applies to Asset A.

Example 2. CAA followed by Disposition: non-taxable for U.S. income tax purposes and taxable forforeign income tax purposes—(i) Facts. The factsare the same as in paragraph (i)(A) of Example 1 butthe facts in paragraph (i)(B) of Example 1 are insteadthat on July 1, Year 2, Asset A is transferred toCFC2, in exchange for 100u of stock of CFC2 (sub-sequent transaction). For U.S. income tax purposes,CFC1 does not recognize any U.S. disposition gainor U.S. disposition loss with respect to Asset A. ForCountry F tax purposes, CFC1 recognizes foreigndisposition gain of 60u (amount realized of 100u,less foreign basis of 40u) with respect to Asset A.Immediately after the subsequent transaction, AssetA has a U.S. basis of 70u (100u cost basis less 30uaccumulated depreciation) and a foreign basis of100u. The 30u of accumulated depreciation is thesum of 20u of depreciation in Year 1 (100u costbasis/5 years) and 10u in Year 2 ((100u cost basis/5years) x 6/12).

(ii) Result. (A) The results described in para-graph (ii)(A) of Example 1 also apply to this Exam-ple 2.

(B) The result for Year 1 is the same as inparagraph (ii)(B) of Example 1.


(C) In Year 2, Asset A has an allocated basisdifference that includes both a cost recovery amountand a disposition amount. Under paragraph (b)(2) ofthis section, the cost recovery amount for Year 2, asof the date of the subsequent transaction, is 9u ((90ubasis difference/5 years) x 6/12). Under § 1.901(m)–1(a)(10), the Transaction is a disposition of Asset A,because the subsequent transaction is an event thatresults in an amount of gain being recognized forCountry F tax purposes. Because the disposition isnot also fully taxable for U.S. income tax purposes,the rule in paragraph (c)(2)(ii) of this section appliesto determine the disposition amount. Under that rule,the disposition amount is 60u, the lesser of (i) 60u(60u foreign disposition gain plus absolute value of0u U.S. disposition loss), and (ii) 63u unallocatedbasis difference (90 basis difference less total 27utaken into account as cost recovery amounts, 18u inYear 1 and 9u in Year 2). Accordingly, the allocatedbasis difference for the first half of Year 2 is 69u (9uof cost recovery amount, plus 60u of dispositionamount). Under paragraphs (b)(1) and (c)(1) of thissection, all of the 69u of allocated basis difference isattributed to CFC1 and assigned to Year 2, becauseCFC1 is a section 901(m) payor and the RFA owner(U.S.) with respect to Asset A and Year 2 is the U.S.taxable year of CFC1 in which it takes into accountthe corresponding 10u of depreciation and in whichthe disposition occurred.

(D) Unallocated basis difference with respect toAsset A immediately after the subsequent transac-tion is 3u (90u basis difference less 87u basis differ-ence taken into account as a 27u total cost recoveryamount in Year 1 and Year 2 and as a 60u disposi-tion amount in Year 2). Accordingly, because thereis unallocated basis difference of 3u with respect toAsset A attributable to the Section 338 Acquisition,as determined immediately after the subsequenttransaction, the subsequent transaction is a successortransaction as defined in § 1.901(m)–6(b)(2). Fol-lowing the subsequent transaction, the unallocatedbasis difference of 3u must be taken into account ascost recovery amounts or disposition amounts (orboth) by CFC2, the new section 901(m) payor andRFA owner (U.S.) of Asset A. See § 1.901(m)–6(b)(3)(ii). Because the subsequent transaction is nota CAA under § 1.901(m)–2(b), there is no additionalbasis difference with respect to Asset A as a result ofthe subsequent transaction.

Example 3. CAA followed by disposition: non-taxable for both U.S. income tax and foreign incometax purposes—(i) Facts. The facts are the same as inparagraph (i)(A) of Example 1 but the facts in para-graph (i)(B) of Example 1 are instead that on July 1,Year 2, CFC1 transfers Asset A to CFC2, in ex-change for 110u of stock of CFC2 (subsequent trans-action). For U.S. income tax purposes, CFC1 doesnot recognize any U.S. disposition gain or U.S. dis-position loss with respect to Asset A as a result of thesubsequent transaction. Furthermore, for Country Ftax purposes, CFC1 recognizes no foreign disposi-tion gain or foreign disposition loss with respect toAsset A as a result of the subsequent transaction.Immediately after the subsequent transaction, AssetA has a U.S. basis of 70u (100u cost basis less 30uaccumulated depreciation) and a foreign basis of40u. The 30u of accumulated depreciation is the sumof 20u of depreciation in Year 1 (100u cost basis/5

years) and 10u in Year 2 ((100u cost basis/5 years) x6/12).

(ii) Result. (A) The result for Year 1 is the sameas in paragraph (ii)(A) of Example 1.

(B) The result for Year 1 is the same as inparagraph (ii)(B) of Example 1.

(C) In Year 2, Asset A has an allocated basisdifference that includes only a cost recovery amount.Under paragraph (b)(2) of this section, the cost re-covery amount for Year 2, as of the date of thesubsequent transaction, is 9u ((90u basis difference/5years) x 6/12). Under § 1.901(m)–1(a)(10), the sub-sequent transaction does not constitute a dispositionof Asset A, because the subsequent transaction is notan event that results in an amount of gain or lossbeing recognized for U.S. income tax or for CountryF tax purposes. Therefore, no disposition amount istaken into account for Asset A in Year 2. Underparagraph (b)(1) of this section, all of the 9u ofallocated basis difference is attributed to CFC1 andassigned to Year 2, because CFC1 is a section901(m) payor and RFA owner (U.S.) with respect toAsset A and Year 2 is the U.S. taxable year of CFC1in which it takes into account the corresponding 10uof depreciation.

(D) Unallocated basis difference with respect toAsset A immediately after the subsequent transac-tion is 63u (90u basis difference, less 27u total costrecovery amounts, 18u in Year 1 and 9u in Year 2).Accordingly, because there is unallocated basis dif-ference of 63u with respect to Asset A attributable tothe CAA, as determined immediately after the sub-sequent transaction, the subsequent transaction is asuccessor transaction as defined in § 1.901(m)–6(b)(2). Following the subsequent transaction, theunallocated basis difference of 63u must be takeninto account as cost recovery amounts or dispositionamounts (or both) by CFC2, the new section 901(m)payor and RFA owner (U.S.) of Asset A. See§ 1.901(m)–6(b)(3)(ii). Because the subsequenttransaction is not a CAA under § 1.901(m)–2(b),there is no additional basis difference with respect toAsset A as a result of the subsequent transaction.

(i) Effective/applicability date. (1) Ex-cept for paragraphs (b)(2)(i) and (c)(2) ofthis section, this section applies to CAAsoccurring on or after the date of publica-tion of the Treasury decision adoptingthese rules as final regulations in the Fed-eral Register.

(2) [The text of proposed § 1.901(m)–5(i)(2) is the same as the text of § 1.901(m)–5T(i)(2) published elsewhere in this issueof the Bulletin.]

(3) Taxpayers may, however, rely onthis section prior to the date this section isapplicable provided that they both consis-tently apply this section, § 1.704–1(b)(4)(viii)(c)(4)(v) through (vii), § 1.901(m)–1, § 1.901(m)–3, § 1.901(m)–4 (excluding§ 1.901(m)–4(e)), § 1.901(m)–6, § 1.901(m)–7, and § 1.901(m)–8 to all CAAs oc-curring on or after January 1, 2011, andconsistently apply § 1.901(m)–2 (excluding

§ 1.901(m)–2(d)) to all CAAs occurring onor after December 7, 2016. For this purpose,persons that are related (within the meaningof section 267(b) or 707(b)) will be treatedas a single taxpayer.


§ 1.901(m)–6 Successor rules.

(a) through (b)(2) [The text of pro-posed §§ 1.901(m)–6(a) through (b)(2) isthe same as the text of §§ 1.901(m)–6T(a)through (b)(2) published elsewhere in thisissue of the Bulletin.]

(3) Special considerations. (i) If an as-set is an RFA with respect to more thanone foreign income tax, this paragraph (a)applies separately with respect to eachforeign income tax.

(ii) Any subsequent cost recoveryamount for an RFA transferred in a suc-cessor transaction is determined based onthe post-transaction applicable cost recov-ery method, as described in § 1.901(m)–5(b)(3), that applies to the U.S. basis (orportion thereof) that corresponds to theunallocated basis difference.

(4)(i) [The text of proposed § 1.901(m)–6(b)(4)(i) is the same as the text of§ 1.901(m)–6T(b)(4)(i) published else-where in this issue of the Bulletin.]

(ii) Foreign basis election. If a foreignbasis election is made under § 1.901(m)–4(c) with respect to a foreign income taxin a subsequent CAA, any unallocatedbasis difference with respect to one ormore prior CAAs will not be taken intoaccount under section 901(m). The onlybasis difference that will be taken intoaccount after the subsequent CAA withrespect to that foreign income tax is thebasis difference with respect to the subse-quent CAA.

(b)(4)(iii) [The text of proposed§ 1.901(m)–6(b)(4)(iii) is the same as thetext of § 1.901(m)–6T(b)(4)(iii) publishedelsewhere in this issue of the Bulletin.]

(5) [The text of proposed § 1.901(m)–6(b)(5) is the same as the text of§ 1.901(m)–6T(b)(5) published elsewherein this issue of the Bulletin.]

(c) Successor rules for aggregate basisdifference carryover—(1) Transfers of asection 901(m) payor’s aggregate basisdifference carryover to another person. If acorporation acquires the assets of a section


901(m) payor in a transaction to which sec-tion 381 applies, that corporation succeedsto any aggregate basis difference carryoversof the section 901(m) payor.

(2) Transfers of a section 901(m) pay-or’s aggregate basis difference carryoverwith respect to a foreign payor to anotherforeign payor. If a section 901(m) payorhas an aggregate basis difference carry-over, with respect to a foreign income taxand a foreign payor, and substantially allof the assets of the foreign payor are trans-ferred to another foreign payor in whichthe section 901(m) payor owns an interest,the section 901(m) payor’s aggregate ba-sis difference carryover with respect to thefirst foreign payor is transferred to thesection 901(m) payor’s aggregate basisdifference carryover with respect to theother foreign payor. In such a case, thesection 901(m) payor’s aggregate basisdifference carryover with respect to thefirst foreign payor is reduced to zero.

(3) Anti-abuse rule. If a section 901(m)payor has an aggregate basis differencecarryover with respect to a foreign incometax and a foreign payor and, with a prin-cipal purpose of avoiding the applicationof section 901(m), assets of the foreignpayor are transferred to another foreignpayor in a transaction not describedin paragraph (c)(1) or (2) of this section,then a portion of the aggregate basis dif-ference carryover of the section 901(m)payor is transferred either to the aggregatebasis difference carryover of the section901(m) payor with respect to the otherforeign payor or to another section 901(m)payor, as appropriate. The portion of theaggregate basis difference carryover trans-ferred is determined based on the ratio offair market value of the assets transferred tothe fair market value of all of the assets ofthe foreign payor that transferred the assets.Similar principles apply when, with a prin-ciple purpose of avoiding the application ofsection 901(m), there is a change in theallocation of foreign income for foreign in-come tax purposes or the allocation of for-eign income tax amounts for U.S. incometax purposes that would otherwise separateforeign income tax amounts from the relatedaggregate basis difference carryover.

(4) Ownership. For purposes of thisparagraph (c), a section 901(m) payorowns an interest in a foreign payor if thesection 901(m) payor owns the interest

directly or indirectly through one or morefiscally transparent entities for U.S. in-come tax purposes.

(d) Effective/applicability date. (1)[The text of proposed § 1.901(m)–6(d)(1)is the same as the text of § 1.901(m)–6T(d)(1) published elsewhere in this issueof the Bulletin.]

(2) Paragraphs (b)(3), (b)(4)(ii), and (c)of this section apply to CAAs occurringon or after the date of publication of theTreasury decision adopting these rules asfinal regulations in the Federal Register.

(3) Taxpayers may, however, rely onthis section prior to the date this section isapplicable provided that they both consis-tently apply this section, § 1.704–1(b)(4)(viii)(c)(4)(v) through (vii), § 1.901(m)–1, §§ 1.901(m)–3 through 1.901(m)–5 (excluding § 1.901(m)–4(e)), § 1.901(m)–7, and § 1.901(m)–8 to all CAAsoccurring on or after January 1, 2011, andconsistently apply § 1.901(m)–2 (exclud-ing § 1.901(m)–2(d)) to all CAAs occur-ring on or after December 7, 2016. Forthis purpose, persons that are related (withinthe meaning of section 267(b) or 707(b))will be treated as a single taxpayer.


§ 1.901(m)–7 De minimis rules.

(a) In general. This section providesrules describing basis difference that isnot taken into account under section901(m) because a CAA results in a deminimis amount of basis difference. Para-graph (b) of this section sets forth thegeneral rule for determining whether thede minimis threshold is met. Paragraph (c)of this section provides modifications tothe general rule in the case of CAAs in-volving related persons and CAAs that arepart of an aggregated CAA transaction.Paragraph (d) of this section providesrules for applying this section, and para-graph (e) of this section provides an anti-abuse rule applicable to related persons.Paragraph (f) of this section provides ex-amples that illustrate the application ofthis section. Paragraph (g) of this sectionprovides the effective/applicability date.

(b) General rule—(1) In general. Abasis difference with respect to an RFAand a foreign income tax is not taken intoaccount under section 901(m) if the re-

quirements under either the cumulativebasis difference exemption or the RFAclass exemption are satisfied.

(2) Cumulative basis difference exemp-tion. Except as provided in paragraph (c)of this section, a basis difference, withrespect to an RFA and a foreign incometax, is not taken into account under section901(m) (cumulative basis difference ex-emption) if the sum of that basis differ-ence and all other basis differences (in-cluding negative basis differences), withrespect to a single CAA and a single RFAowner (U.S.), is less than the greater of:

(i) $10 million, or(ii) 10 percent of the total U.S. basis of

all the RFAs immediately after the CAA.(3) RFA class exemption—(i) Except

as provided in paragraph (c) of this sec-tion, a basis difference, with respect to anRFA and a foreign income tax, is nottaken into account under section 901(m)(RFA class exemption) if the RFA is partof a class of RFAs and the absolute valueof the sum of the basis differences (in-cluding negative basis differences), withrespect to a single CAA and a single RFAowner, for all the RFAs in that class is lessthan the greater of:

(A) $2 million, or(B) 10 percent of the total U.S. basis of

all the RFAs in that class of RFAs imme-diately after the CAA.

(ii) For purposes of this paragraph(b)(3), the classes of RFAs are the sevenasset classes defined in § 1.338–6(b), re-gardless of whether the CAA is a section338 CAA.

(c) Special rules—(1) Modification ofde minimis rules for related persons. If thetransferor and transferee in the CAA arerelated persons (as described in section267(b) or 707(b)), the cumulative basisdifference exemption and the RFA classexemption, as described in paragraph (b)of this section, are applied by replacingthe terms “$10 million,” “10 percent”, and“$2 million” wherever they occur in thatparagraph with the terms “$5 million,” “5percent,” and “$1 million,” respectively.

(2) CAA part of an aggregated CAAtransaction. If a CAA is part of an aggre-gated CAA transaction and a single RFAowner (U.S.) does not own all the RFAsattributable to the CAAs that are part ofthe aggregated CAA transaction, the cu-mulative basis difference exemption and


the RFA class exemption apply to suchCAA only if, in addition to satisfying therequirements of paragraph (b)(2) or (b)(3)of this section, respectively, determinedwithout regard to this paragraph (c)(2), thecumulative basis difference exemption orthe RFA class exemption, as modified bythis paragraph (c)(2), is satisfied. Solelyfor purposes of this paragraph (c)(2), thecumulative basis difference exemptionand the RFA class exemption are appliedtaking into account all the basis differ-ences with respect to all the RFAs ownedby all the RFA owners (U.S.) that areattributable to the CAAs that are part ofthe aggregated CAA transaction.

(d) Rules of application. The followingrules apply for purposes of this section.

(1) Whether a basis difference qualifiesfor the cumulative basis difference exemp-tion or the RFA class exemption is deter-mined when an asset first becomes an RFAwith respect to a CAA. In the case of asubsequent CAA described in § 1.901(m)–6(b)(4), the application of the cumula-

tive basis difference exemption and theRFA class exemption is based on basis dif-ference, if any, that results from the subse-quent CAA.

(2) If there is an aggregated CAAtransaction, the cumulative basis differ-ence exemption and each RFA class ex-emption are applied by treating all CAAsthat are part of the aggregated CAA trans-action as a single CAA.

(3) Basis difference is computed in ac-cordance with § 1.901(m)–4 except that aforeign basis election need not be evidencedif either the cumulative basis difference ex-emption or an RFA class exemption applyto all RFAs with respect to the CAA.

(4) Basis difference is translated intoU.S. dollars (if necessary) using the spotrate determined under the principles of§ 1.988–1(d) on the date of the CAA.

(e) Anti-abuse rule. The cumulative ba-sis difference exemption and an RFAclass exemption are not available if thetransferor and transferee in the CAA arerelated persons (as described in section

267(b) or 707(b)) and the CAA was en-tered into, or structured, with a principalpurpose of avoiding the application ofsection 901(m). See also § 1.901(m)–8(c),which provides that certain built-in lossassets are not taken into account for pur-poses of applying this section.

(f) Examples. The following examplesillustrate the rules of this section:

Example 1. De minimis; cumulative basis differ-ence exemption—(i) Facts. USP, a domestic corpora-tion, as part of a plan, purchases all of the stock ofCFC1 and CFC2 from a single seller. CFC1 and CFC2are section 902 corporations (as defined in section909(d)(5)), organized in Country F, and treated as cor-porations for Country F tax purposes. Country F im-poses a single tax that is a foreign income tax. Eachacquisition is a qualified stock purchase (as defined insection 338(d)(3)) to which section 338(a) applies. Aforeign basis election is not made under § 1.901(m)–4(c). Immediately after the acquisition of the stock ofCFC1 and CFC2, the assets of CFC1 and CFC2 giverise to income that is taken into account for Country Ftax purposes, and those assets are in a single class, asdefined in § 1.338–6(b). At all relevant times, 1uequals $1. All amounts are stated in millions. Theadditional facts are summarized below.

RelevantForeign Assets

Total U.S. BasisImmediately Before

Total U.S. BasisImmediately After

Total BasisDifference

Assets of CFC1 48u 60u 12u

Assets of CFC2 100u 96u (4)u

Total 148u 156u 8u

(ii) Result. (A) Under § 1.901(m)–2(b)(1), USP’sacquisitions of the stock of CFC1 and CFC2 are each asection 338 CAA. Under 1.901(m)–1(a)(3), the twosection 338 CAAs constitute an aggregated CAA trans-action because the acquisitions occur as part of a plan.Under § 1.901(m)–2(c)(1), the assets of CFC1 andCFC2 are RFAs for Country F tax purposes becausethey are relevant in determining foreign income ofCFC1 and CFC 2, respectively, for Country F taxpurposes. Under § 1.901(m)–1(a)(31), CFC1 is theRFA owner (U.S.) with respect to its assets, and CFC2is the RFA owner (U.S.) with respect to its assets.

(B) Under paragraph (b)(2) of this section, theapplication of the cumulative basis difference ex-emption is based on a single CAA and a single RFAowner (U.S.), subject to the requirements under para-graph (c)(2) of this section that apply when there isan aggregated CAA transaction. In the case of thesection 338 CAA with respect to CFC1, withoutregard to paragraph (c)(2) of this section, the require-ments of the cumulative basis difference exemptionare satisfied if the sum of the basis differences is lessthan the threshold of $10 million, the greater of $10million or $6 million (10% of the total U.S. basis of$60 million (60 million u translated into dollars atthe exchange rate of $1 � 1u)). In this case, the sumof the basis differences is $12 million (12 million utranslated into dollars at the exchange rate of $1 � 1 u).

Because the sum of the basis differences of $12million is not less than the threshold of $10 million,the requirements of the cumulative basis differenceexemption are not satisfied. Because the require-ments of the cumulative basis difference exemptionare not satisfied, without regard to paragraph (c)(2)of this section, paragraph (c)(2) of this section is notapplicable. Finally, the RFA class exemption is notrelevant because all of the RFAs of CFC1 are in asingle class. Accordingly, the basis differences withrespect to all of the RFAs of CFC1 must be takeninto account under section 901(m).

(C) In the case of the section 338 CAA with respectto CFC2, without regard to paragraph (c)(2) of thissection, the requirements of the cumulative basis dif-ference exemption are satisfied if the sum of the basisdifferences is less than the threshold of $10 million, thegreater of $10 million or $ 9.6 million (10% of the totalU.S. basis of $96 million (96 million u translated intodollars at the exchange rate of $1 � 1u)) In this case,the sum of the basis differences is ($4) million ((4)million u translated into dollars at the exchange rate of$1 � 1 u). Because the sum of the basis differences of($4) million is less than the threshold of $10 million,the requirements of the cumulative basis differenceexemption are satisfied. However, because the section338 CAA with respect to CFC2 is part of an aggregateCAA transaction that includes the section 338 CAA

with respect to CFC1, paragraph (c)(2) of this section isapplicable. Under paragraph (c)(2) of this section, therequirements of the cumulative basis difference exemp-tion must also be satisfied taking into account all of theRFAs of both CFC2 and CFC1. In this case, the re-quirements of the cumulative basis difference exemp-tion for purposes of paragraph (c)(2) of this section aresatisfied if the sum of the basis differences with respectto all of the RFAs of CFC2 and CFC1 is less than thethreshold of $15.6 million, the greater of $10 million or$15.6 million (10% of the total U.S. basis of $156million (156 million u translated into dollars at theexchange rate of $1 � 1u)) In this case, the sum of thebasis differences is $8 million (8 million u translatedinto dollars at the exchange rate of $1 � 1 u). Becausethe sum of the basis differences of $8 million is lessthan the threshold of $15.6 million, the requirements ofthe cumulative basis difference exemption are satisfiedin the case of the section 338 CAA with respect toCFC2. Accordingly, none of the basis differences withrespect to the RFAs of CFC2 are taken into accountunder section 901(m).

Example 2. De minimis; RFA Class Exemption—(i) Facts. USP, a domestic corporation, acquires all thestock of CFC, a section 902 corporation (as defined insection 909(d)(5)) organized in Country F and treatedas a corporation for Country F tax purposes, in aqualified stock purchase (as defined in section


338(d)(3)) to which section 338(a) applies. Country Fimposes a single tax that is a foreign income tax. Aforeign basis election is not made under § 1.901(m)–

4(c). Immediately after the acquisition of CFC, theassets of CFC give rise to income that is taken intoaccount for Country F tax purposes. At all relevant

times, 1u equals $1. All amounts are stated in millions.The additional facts are summarized below.

RelevantForeign Assets

Total U.S. BasisImmediately Before

Total U.S. BasisImmediately After

Total BasisDifference

Cash (Class I) 10u 10u 0u

Inventory (Class IV) 14u 15u 1u

Buildings (Class V) 19u 30u 11u

Total 43u 55u 12u

(ii) Result. (A) Under § 1.901(m)–2(b)(1), USP’sacquisition of the stock of CFC is a section 338CAA. Under § 1.901(m)–2(c)(1), the assets of CFCare RFAs for Country F tax purposes because theyare relevant in determining foreign income of CFCfor Country F tax purposes.

(B) Under paragraph (b)(2) of this section, therequirements of the cumulative basis difference exemp-tion are satisfied if the sum of the basis differences isless than the threshold of $10 million, the greater of $10million or $5.5 million (10% of the total U.S. basis of$55 million (55 million u translated into dollars at theexchange rate of $1 � 1u)). In this case, the sum of thebasis differences is $12 million (12 million u translatedinto dollars at the exchange rate of $1 � 1 u). Becausethe sum of the basis differences of $12 million is notless than the threshold of $10 million, the requirementsof the cumulative basis difference exemption are notsatisfied.

(C) Under paragraph (b)(3) of this section, each ofCFC’s assets is allocated to its class under § 1.338–6(b) for purposes of the RFA class exemption. Therequirements of the RFA class exemption with respectto the Class IV RFAs (in this case, inventory) aresatisfied if the absolute value of the sum of the basisdifferences with respect to the Class IV RFAs is lessthan the threshold of $2 million, the greater of $2million or $1.5 million (10% of the total U.S. basis ofClass IV RFAs of $15 million (15 million u translatedinto dollars at the exchange rate of $1 � 1u)) In thiscase, the absolute value of the sum of the basis differ-ences is $1 million (1 million u translated into dollars atthe exchange rate of $1 � 1 u). Because the sum of thebasis differences of $1 million is less than the thresholdof $2 million, the requirements of the RFA class ex-emption are satisfied. Accordingly, the basis differ-ences with respect to the Class IV RFAs are not takeninto account under section 901(m).

(D) The requirements of the RFA class exemp-tion with respect to the Class V RFAs (in this case,buildings) is satisfied if the absolute value of the sumof the basis differences with respect to the Class VRFAs is less than the threshold of $3 million, thegreater of $2 million or $3 million (10% of the totalU.S. basis of Class V RFAs of $30 million (30million u translated into dollars at the exchange rateof $1 � 1u)). In this case, the absolute value of thesum of the basis differences is $11 million (11 mil-lion u translated into dollars at the exchange rate of$1 � 1 u). Because the sum of the basis differencesof $11 million is not less than the threshold of $3million, the requirements of the RFA class exemp-tion are not satisfied. Accordingly, the basis differ-

ences with respect to the Class V RFAs are takeninto account under section 901(m).

(E) The Class I RFAs (in this case, cash) areirrelevant because there is no basis differences withrespect to those RFAs.

(g) Effective/applicability date. Thissection applies to CAAs occurring on orafter the date of publication of the Trea-sury decision adopting these rules as finalregulations in the Federal Register. Tax-payers may, however, rely on this sectionprior to the date this section is applicableprovided that they both consistently applythis section, § 1.704–1(b)(4)(viii)(c)(4)(v)through (vii), § 1.901(m)–1, §§ 1.901(m)–3through 1.901(m)–6 (excluding § 1.901(m)–4(e)), and § 1.901(m)–8 to all CAAsoccurring on or after January 1, 2011, andconsistently apply § 1.901(m)–2 (excluding§ 1.901(m)–2(d)) to all CAAs occurring onor after December 7, 2016. For this purpose,persons that are related (within the meaningof section 267(b) or 707(b)) will be treatedas a single taxpayer.

Par. 10. Section 1.901(m)–8 is addedto read as follows:

§ 1.901(m)–8 Miscellaneous.

(a) In general. This section providesguidance on other matters under section901(m). Paragraph (b) of this section pro-vides guidance on the application of sec-tion 901(m) to pre-1987 foreign incometaxes. Paragraph (c) of this section pro-vides anti-abuse rules relating to built-inloss assets. Paragraph (d) of this sectionprovides the effective/applicability date.

(b) Application of section 901(m) topre-1987 foreign income taxes. Section901(m) and §§ 1.901(m)–1 through –8apply to pre-1987 foreign income taxes(as defined in § 1.902–1(a)(10)(iii)) of asection 902 corporation.

(c) Anti-abuse rule for built-in lossRFAs. A basis difference with respect to

an RFA described in section 901(m)(3)(C)(ii) (built-in loss RFA) will not betaken into account for purposes of com-puting an allocated basis difference for aU.S. taxable year of a section 901(m)payor if any RFA, including an RFA otherthan built-in loss RFAs, is acquired with aprincipal purpose of using one or morebuilt-in loss RFAs to avoid the applicationof section 901(m). Furthermore, a basisdifference with respect to a built-in lossRFA will not be taken into account for pur-poses of the cumulative basis difference ex-emption or the RFA class exemption under§ 1.901(m)–7 if any RFAs, including RFAsother than built-in loss RFAs, are acquiredwith a principal purpose of avoiding theapplication of section 901(m).

(d) Effective/applicability date. This sec-tion applies to CAAs occurring on or afterthe date of publication of the Treasury de-cision adopting these rules as final regula-tions in the Federal Register. Taxpayersmay, however, rely on this section prior tothe date this section is applicable providedthat they both consistently apply this sec-tion, § 1.704–1(b)(4)(viii)(c)(4)(v) through(vii), § 1.901(m)–1, and §§ 1.901(m)–3through 1.901(m)–7 (excluding § 1.901(m)–4(e)) to all CAAs occurring on or after Jan-uary 1, 2011, and consistently apply§ 1.901(m)–2 (excluding § 1.901(m)–2(d))to all CAAs occurring on or after December7, 2016. For this purpose, persons that arerelated (within the meaning of section267(b) or 707(b)) will be treated as a singletaxpayer.



(Filed by the Office of the Federal Register on December 6,2016, 8:45 a.m., and published in the issue of the FederalRegister for December 7, 2016, 81 F.R. 88562)


Definition of TermsRevenue rulings and revenue procedures(hereinafter referred to as “rulings”) thathave an effect on previous rulings use thefollowing defined terms to describe theeffect:

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position isbeing extended to apply to a variation ofthe fact situation set forth therein. Thus, ifan earlier ruling held that a principle ap-plied to A, and the new ruling holds thatthe same principle also applies to B, theearlier ruling is amplified. (Compare withmodified, below).

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

Distinguished describes a situationwhere a ruling mentions a previously pub-lished ruling and points out an essentialdifference between them.

Modified is used where the substanceof a previously published position is beingchanged. Thus, if a prior ruling held that aprinciple applied to A but not to B, and thenew ruling holds that it applies to both A

and B, the prior ruling is modified becauseit corrects a published position. (Comparewith amplified and clarified, above).

Obsoleted describes a previously pub-lished ruling that is not considered deter-minative with respect to future transac-tions. This term is most commonly used ina ruling that lists previously published rul-ings that are obsoleted because of changesin laws or regulations. A ruling may alsobe obsoleted because the substance hasbeen included in regulations subsequentlyadopted.

Revoked describes situations where theposition in the previously published rulingis not correct and the correct position isbeing stated in a new ruling.

Superseded describes a situation wherethe new ruling does nothing more thanrestate the substance and situation of apreviously published ruling (or rulings).Thus, the term is used to republish underthe 1986 Code and regulations the sameposition published under the 1939 Codeand regulations. The term is also usedwhen it is desired to republish in a singleruling a series of situations, names, etc.,that were previously published over a pe-riod of time in separate rulings. If the newruling does more than restate the sub-

stance of a prior ruling, a combination ofterms is used. For example, modified andsuperseded describes a situation where thesubstance of a previously published rulingis being changed in part and is continuedwithout change in part and it is desired torestate the valid portion of the previouslypublished ruling in a new ruling that isself contained. In this case, the previouslypublished ruling is first modified and then,as modified, is superseded.

Supplemented is used in situations inwhich a list, such as a list of the names ofcountries, is published in a ruling and thatlist is expanded by adding further namesin subsequent rulings. After the originalruling has been supplemented severaltimes, a new ruling may be published thatincludes the list in the original ruling andthe additions, and supersedes all prior rul-ings in the series.

Suspended is used in rare situations toshow that the previous published rulingswill not be applied pending some futureaction such as the issuance of new oramended regulations, the outcome ofcases in litigation, or the outcome of aService study.

AbbreviationsThe following abbreviations in currentuse and formerly used will appear in ma-terial 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.

Bulletin No. 2016–52 December 27, 2016i

Numerical Finding List1

Bulletin 2016–27 through 2016–52

Action on Decision:

2016-01, 2016-16 I.R.B. 5802016-02, 2016-31 I.R.B. 1932016-03, 2016-40 I.R.B. 424

Announcements:

2016-21, 2016-27 I.R.B. 82016-23, 2016-27 I.R.B. 102016-24, 2016-30 I.R.B. 1702016-25, 2016-31 I.R.B. 2052016-26, 2016-38 I.R.B. 3892016-27, 2016-33 I.R.B. 2382016-28, 2016-34 I.R.B. 2722016-29, 2016-34 I.R.B. 2722016-30, 2016-37 I.R.B. 3552016-31, 2016-38 I.R.B. 3922016-32, 2016-40 I.R.B. 4342016-33, 2016-39 I.R.B. 4222016-34, 2016-39 I.R.B. 4222016-35, 2016-39 I.R.B. 4232016-36, 2016-39 I.R.B. 4232016-37, 2016-39 I.R.B. 4232016-38, 2016-43 I.R.B. 5232016-39, 2016-45 I.R.B. 7202016-40, 2016-49 I.R.B. 7912016-41, 2016-48 I.R.B. 7802016-42, 2016-49 I.R.B. 793

Notices:

2016-40, 2016-27 I.R.B. 42016-41, 2016-27 I.R.B. 52016-42, 2016-29 I.R.B. 672016-43, 2016-29 I.R.B. 1322016-44, 2016-29 I.R.B. 1322016-45, 2016-29 I.R.B. 1352016-46, 2016-31 I.R.B. 2022016-47, 2016-35 I.R.B. 2762016-48, 2016-33 I.R.B. 2352016-49, 2016-34 I.R.B. 2652016-50, 2016-38 I.R.B. 3842016-51, 2016-37 I.R.B. 3442016-52, 2016-40 I.R.B. 4252016-53, 2016-39 I.R.B. 4212016-54, 2016-40 I.R.B. 4292016-55, 2016-40 I.R.B. 4322016-57, 2016-40 I.R.B. 4322016-58, 2016-41 I.R.B. 4382016-59, 2016-42 I.R.B. 4572016-60, 2016-42 I.R.B. 4582016-61, 2016-46 I.R.B. 7222016-62, 2016-46 I.R.B. 7252016-63, 2016-45 I.R.B. 6832016-64, 2016-46 I.R.B. 7262016-65, 2016-48 I.R.B. 772

Notices:—Continued

2016-66, 2016-47 I.R.B. 7472016-67, 2016-47 I.R.B. 7512016-68, 2016-48 I.R.B. 7742016-69, 2016-51 I.R.B. 8322016-70, 2016-49 I.R.B. 7842016-72, 2016-50 I.R.B. 7942016-73, 2016-52 I.R.B. 9082016-75, 2016-51 I.R.B. 8322016-76, 2016-51 I.R.B. 8342016-77, 2016-52 I.R.B. 9142016-78, 2016-52 I.R.B. 9142016-79, 2016-52 I.R.B. 9182016-80, 2016-52 I.R.B. 918

Proposed Regulations:

REG-163113-02, 2016-36 I.R.B. 329REG-147196-07, 2016-29 I.R.B. 32REG-125946-10, 2016-51 I.R.B. 868REG-107424-12, 2016-51 I.R.B. 861REG-123854-12, 2016-28 I.R.B. 15REG-136978-12, 2016-50 I.R.B. 796REG-150992-13, 2016-44 I.R.B. 537REG-129128-14, 2016-52 I.R.B. 931REG-131418-14, 2016-33 I.R.B. 248REG-102516-15, 2016-32 I.R.B. 231REG-109086-15, 2016-30 I.R.B. 171REG-122855-15, 2016-52 I.R.B. 922REG-134016-15, 2016-31 I.R.B. 205REG-134122-15, 2016-46 I.R.B. 728REG-101689-16, 2016-30 I.R.B. 170REG-102952-16, 2016-51 I.R.B. 860REG-103058-16, 2016-33 I.R.B. 238REG-105005-16, 2016-38 I.R.B. 380REG-108792-16, 2016-36 I.R.B. 320REG-108934-16, 2016-44 I.R.B. 532REG-114734-16, 2016-48 I.R.B. 777REG-122387-16, 2016-48 I.R.B. 779REG-123600-16, 2016-43 I.R.B. 523REG-130314-16, 2016-45 I.R.B. 718

Revenue Procedures:

2016-37, 2016-29 I.R.B. 1362016-39, 2016-30 I.R.B. 1642016-40, 2016-32 I.R.B. 2282016-41, 2016-30 I.R.B. 1652016-42, 2016-34 I.R.B. 2692016-43, 2016-36 I.R.B. 3162016-44, 2016-36 I.R.B. 3162016-45, 2016-37 I.R.B. 3442016-46, 2016-37 I.R.B. 3452016-47, 2016-37 I.R.B. 3462016-48, 2016-37 I.R.B. 3482016-49, 2016-42 I.R.B. 4622016-50, 2016-43 I.R.B. 5222016-51, 2016-42 I.R.B. 4652016-52, 2016-42 I.R.B. 5202016-53, 2016-44 I.R.B. 530

Revenue Procedures:—Continued

2016-54, 2016-45 I.R.B. 6852016-55, 2016-45 I.R.B. 7072016-56, 2016-52 I.R.B. 9202016-57, 2016-49 I.R.B. 7862016-58, 2016-51 I.R.B. 8392016-59, 2016-51 I.R.B. 849

Revenue Rulings:

2016-17, 2016-27 I.R.B. 12016-18, 2016-31 I.R.B. 1942016-19, 2016-35 I.R.B. 2732016-20, 2016-36 I.R.B. 2792016-23, 2016-39 I.R.B. 3822016-24, 2016-39 I.R.B. 3952016-25, 2016-41 I.R.B. 4352016-26, 2016-45 I.R.B. 5382016-27, 2016-49 I.R.B. 7812016-28, 2016-51 I.R.B. 8052016-29, 2016-52 I.R.B. 8752016-30, 2016-52 I.R.B. 876

Treasury Decisions:

9772, 2016-28 I.R.B. 119773, 2016-29 I.R.B. 569774, 2016-30 I.R.B. 1519775, 2016-30 I.R.B. 1599776, 2016-32 I.R.B. 2229777, 2016-36 I.R.B. 2829778, 2016-31 I.R.B. 1969779, 2016-33 I.R.B. 2339780, 2016-38 I.R.B. 3579781, 2016-35 I.R.B. 2749782, 2016-36 I.R.B. 3019783, 2016-39 I.R.B. 3969784, 2016-39 I.R.B. 4029785, 2016-38 I.R.B. 3759786, 2016-42 I.R.B. 4429787, 2016-52 I.R.B. 8789788, 2016-52 I.R.B. 8899789, 2016-44 I.R.B. 5279790, 2016-45 I.R.B. 5409791, 2016-47 I.R.B. 7349792, 2016-48 I.R.B. 7519793, 2016-48 I.R.B. 7689797, 2016-51 I.R.B. 8199798, 2016-51 I.R.B. 8219799, 2016-51 I.R.B. 8279800, 2016-52 I.R.B. 899

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2016–01 through 2016–26 is in Internal Revenue Bulletin2016–26, dated June 27, 2016.

December 27, 2016 Bulletin No. 2016–52ii

Finding List of Current Actions onPreviously Published Items1

Bulletin 2016–27 through 2016–52

Notices:

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

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


2013-1Superseded byNotice 2016-41, 2016-27 I.R.B. 5





Revenue Procedures:

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

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


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


Revenue Procedures:—Continued




2016-3Supplemented byRev. Proc. 2016-50, 2016-43 I.R.B. 522


Treasury Decisions:

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

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

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2016–01 through 2016–26 is in Internal Revenue Bulletin2016–26, dated June 27, 2016.

Bulletin No. 2016–52 December 27, 2016iii

INTERNAL REVENUE BULLETINThe Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue

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